Opinion
No. 13-02-13215 MA
July 30, 2003
Gerald R. Velarde, Albuquerque, NM., Attorney for Debtor.
Roger Moore, Albuquerque, NM., Co-counsel for Roush.
Steve H. Mazer, Albuquerque, NM., Co-counsel for Roush.
FINDINGS OF FACT AND CONCLUSIONS OF LAW
THIS MATTER is before the Court on the Debtor's Objection to the Claim of Keith Carl Roush, Jr. ("Roush") filed on August 28, 2002 (the "Objection"). Roush filed a Response to Debtor's Objection to Claim (the "Response") on September 26, 2002. A final hearing was held on June 3, 2003 at which time the Court took the matter under advisement. After reviewing the pleadings, evidence and arguments of counsel, the Court finds:
1. This bankruptcy was filed on May 7, 2002. The Debtor, Robert R. Fuentes ("Fuentes") is an attorney licensed in New Mexico.
2. On June 21, 2002, Roush filed a proof of claim in the amount of $434,630.00.
3. On or about June 30, 1986, Keith Carl Roush, Sr., Roush's father (the"Decedent" or "Roush, Sr."), was killed in a motorcycle accident. At that time, Roush was nine years old. The Decedent did not have a will. At the time of his death, the Decedent was employed by Intel Corporation ("Intel").
4. On or about August 5, 1986, Intel sent a letter to Roush c/o Linda Freeman, Roush's mother, stating that the Decedent had life and accidental death insurance benefits naming Roush as the primary beneficiary. The letter stated that because Roush was a minor, it would remit the insurance proceeds only to Roush's court-appointed conservator.
5. Kris Gallegos, sister of the Decedent and Roush's aunt ("Gallegos"), hired Fuentes to help her fulfill the requirements to obtain the insurance benefits from Intel. She entered into a retainer agreement with Fuentes for such representation.
6. On or about October 6, 1986, Gallegos applied for and received an appointment as personal representative of the Decedent's estate in state district court, Sandoval County, New Mexico. Letters of administration were issued. In the Matter of the estate of Keith Carl Roush, No. SD-86-105-PB (the "Probate Action").
7. On or about February 6, 1987, Gallegos applied for and was appointed Roush's conservator.
On February 6, 1987, Linda Freeman, Roush's mother, filed a Consent to Petition for Appointment of Gallegos as Conservator in the state district court.
8. Gallegos then filed an interpleader action in the state district court to restrain Intel from disbursing the insurance proceeds to Roush's mother.
On February 6, 1987, Freeman filed a Consent of Payment of Insurance Proceeds to Personal Representative allowing Gallegos to collect the insurance proceeds from Intel.
9. Gallegos applied for and received as conservator all monthly Social Security benefits payable to Roush as a minor child of a deceased worker. The Social Security Administration paid Gallegos, as Roush's conservator, monthly benefits until Roush turned 18 years old.
In a letter dated February 3, 1987, Freeman, as Roush's natural mother, authorized the Social Security Administration to pay over to Gallegos, as Roush's Conservator, all Social Security benefits payable to Roush.
10. On October 14, 1986, the state district court issued a temporary restraining order requiring Intel to tender the insurance proceeds to Gallegos as personal representative of the estate into an interest-bearing account for disbursement by court order.
11. On or about March 16, 1987, Intel sent four checks to Gallegos as conservator for Roush in the following amounts: $36,000.00, $87,600.00 and $400.00 from CIGNA Insurance Co. and $37,384.77 from Equitable Life Assurance Society of the United States. In early February 1987, Intel sent Gallegos as personal representative of the estate of Roush, Sr., a check in the amount of $589.12 for back wages and vacation pay.
Specifically, the checks were made payable to "Kris Gallegos, As Conservator for the Estate of Keith C. Roush, Jr., a Minor." Ex. 2.
Roush does not seek recovery or an accounting of the $589.12 Gallegos received as personal representative of the Decedent's estate.
12. On February 27, 1989, an Order of Dismissal was filed in the Probate Action. During the Probate Action, Fuentes did not file a motion to withdraw as legal counsel for Gallegos.
13. The insurance proceeds and the Social Security benefits remitted to Gallegos are missing and no accounting has been submitted.
14. In October 1996, Roush contacted Fuentes and inquired about the location of the funds held by Gallegos. Fuentes asked Roush for documentation but eventually told him to contact Gallegos about the funds.
15. On September 2, 1997, Roush filed a Complaint for Fraud and Damages against Gallegos and Fuentes in the State District Court, Sandoval County, New Mexico, No. 97-D-1329-CV-1061, which was amended by the First Amended Complaint for Fraud and Damages on February 23, 1999 (the "Complaint"). Roush asks for an accounting of all money received by Gallegos as conservator of Roush and personal representative of the estate of Roush, Sr.; revocation of Gallegos' appointment as conservator and personal representative; judgment against both Gallegos and Fuentes for $250,000.00 plus interest, compensatory, special and punitive damages; plus attorneys' fees, costs and expenses of litigation.
The Complaint states that Fuentes helped carry out or concealed Gallegos' actions that were "contrary to her duty as the appointed personal representative and conservator" in managing the funds held in trust for Roush. The Court notes that Gallegos received only $589.12 as personal representative for the estate constituting the Decedent's back pay and vacation benefits over which there is no dispute. Roush's claims are for the loss of the insurance funds and the social security benefits. Gallegos received these funds as conservator of Roush. Consequently, the Court will discuss the possibility that Fuentes is liable for the alleged breach of Gallegos' duties as conservator and loss of those funds held by Gallegos in her capacity as conservator.
16. In Count I of the Complaint, Roush alleges that soon after receiving the insurance funds, Gallegos informed Fuentes that she intended to misappropriate the funds held in trust for Roush. Roush asserts that Fuentes fraudulently concealed Gallegos' anticipated breach of duty by failing to inform the state court of her intent to misuse the funds. Roush also alleges that Fuentes fraudulently concealed from Roush the misappropriation of the funds by Gallegos in October 1996 when Roush inquired about the location of the funds and asked Fuentes for his file on Gallegos. Additionally, Roush asserts in Count I that Fuentes had a fiduciary duty to Roush because Roush was as a third party beneficiary of the agreement to represent Gallegos.
17. Count II of the Complaint alleges gross negligence. Roush asserts that he, as sole beneficiary of the conservatorship funds, is a third party beneficiary of the agreement by Fuentes to represent Gallegos. Roush asserts that Fuentes had a legal duty to protect Roush's interests which he breached through "total indifference, lack of diligence or want of even scant care."
18. In Count III of the Complaint Roush alleges that Fuentes negligently failed to protect Roush's interest in the funds which were held solely for Roush's benefit.
19. In Count IV of the Complaint Roush asserts that Fuentes violated certain New Mexico statutory law designed to protect Roush; therefore, Fuentes should be held liable for negligence per se. The other counts of the Complaint for recklessness and carelessness and will be dealt with as types of negligence claims and will be discussed in the section of this opinion entitled "Malpractice Claims."
20. Fuentes filed three motions with this Court on June 3, 2003:1) Motion to Dismiss for Failure to Comply with Time Limitations (Doc. No. 62); 2) Motion to Dismiss for Failure to State a Claim Upon Which Relief Can be Granted (Doc. No. 61); and 3) Motion to Dismiss In That Fuentes Was Not the Proximate Cause of the Damage to Roush and Roush Failed to Mitigate His Damages (Doc. No. 60). Roush filed a responsive brief on June 18, 2003 (Doc. No. 63).
Discussion
In this proceeding, the Court is asked to determine whether Roush has a claim against Fuentes. A "claim" in bankruptcy is defined as follows:
(A) [a] right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured
If an objection to the claim is filed, "the court, after notice and a hearing, shall determine the amount of such claim . . . as of the date of the filing of the petition, and shall allow such claim in such amount . . ." 11 U.S.C. § 502(b). Generally, a proof of claim properly executed and filed constitutes prima facie evidence of the validity and amount of the claim. F.R.Bankr.P. 3001(f). However, an objector need only present evidence sufficient to overcome the prima facie validity of the claim. This leaves with the claimant the ultimate burden of proof respecting allowance and amount of the claim. 11 U.S.C. § 502(b); See generally, Lawrence P. King, Ed. Collier Vol. 3 (15th Ed. Rev.) ¶ 501.02[3][d]. Therefore, Roush has the burden of proof to show that he has a claim against Fuentes' bankruptcy estate and the amount of such claim. Id. The first step in this analysis is to determine whether Roush has a cause of action for either fraud, negligence or breach of fiduciary duty against Fuentes under New Mexico law.
Statutes of Limitation.
The Complaint was filed on September 2, 1997 in state court. Fuentes first argues that all claims have been barred by the statute of limitations for actions by minor plaintiffs. This statute sets a time limit of one year from the date of majority to bring causes of action that accrue while a plaintiff is a minor. N.M. Stat. Ann. § 37-1-10 (Michie 1978) (emphasis added). The tolling provision of N.M. Stat. Ann. § 37-1-10 extends the time for the minor to act for himself once the disability of minority age is removed. Slade v. Slade, 81 N.M. 462, 466 468 P.2d 627, 631 (1970). Roush turned 18 years of age on January 20, 1995; therefore, the end of the limitation period was approximately January 20, 1996 for all causes of action that accrued before Roush's 18th birthday. However, in this case the causes of action did not accrue until after Roush reached the age of majority; therefore, the statute governing actions by minors is not applicable.
The statute of limitations for fraud is four years from the time that the plaintiff learns of the fraud or is given information which would lead to the discovery of the fraud. N.M. Stat. Ann. § 37-1-7 (Michie 1978); Ramsey v. Culpepper, 738 F.2d 1092 (10th Cir. 1984) (statute begins to run when plaintiff learns of facts that should arouse his suspicion about defendant's statements or non disclosure). Roush contacted Fuentes in October 1996 about the location of the insurance proceeds. His suspicions were aroused when he failed to gain a satisfactory answer from Fuentes. Fuentes asserts that Roush became aware that Gallegos held funds for him as early as 1990, but the evidence shows that he did not become concerned about the funds until October 1996. Therefore, the time for Roush to bring a cause of action for fraud began to accrue during the month of October 1996 when Roush was 19 years old. Roush filed the Complaint well within the four-year period. The statute of limitations for legal malpractice claims is also four years, which also began to run in mid-October 1996. N.M. Stat. Ann. § 37-1-4 (Michie 1978); Jaramillo v. Hood, 93 N.M. 433, 434, 601 P.2d 66, 67 (1979) (claim for legal malpractice did not accrue until the harm or damage was ascertainable or discoverable). Thus, the negligence claims in the Complaint were filed within the limitations period for legal malpractice claims. The same is true for the claim for breach of fiduciary duty. Therefore, the causes of action for fraud, negligence and breach of fiduciary duty are not barred by the applicable statutes of limitation.
Fraud Claim.
Turning to the substance of the Complaint, the Court must determine whether Roush has a claim for fraud or fraudulent concealment against Fuentes. In order to prove fraud, the claimant must show by clear and convincing evidence that the defendant made a false representation to him with the intent to deceive, for the purpose of inducing him to act or not act, and that he relied and acted on it causing his injury. Wirth v. Commercial Resources, Inc., 96 N.M. 340, 345 630 P.2d 292, 297 (N.M.App. 1981) (citations omitted). An omission as well as an act, may constitute fraud. Id. When one is under the duty to speak, but remains silent and so fails to disclose a material fact, he may be liable for fraud. Id.
First, no evidence was presented showing that Fuentes made any misrepresentation directly to Roush. Because Fuentes made no direct misrepresentation to Roush, in order to prevail on his claim for fraud or fraudulent concealment, Roush must show that Fuentes knew that Gallegos intended to and in fact did misappropriate the funds, had a duty to disclose this to Roush, and knowingly or recklessly failed to disclose this to Roush. Azar v. Prudential Ins. Co. of America, ___ N.M. ___, 68 P.3d 909, 929 (N.M.App. 2003) (stating that courts typically consider a number of factors in determining whether there is a duty to disclose material facts, including the relationship between the parties, the relative knowledge of the parties, the reasonable expectations of the plaintiff, the practices or customs of the trade, and other relevant circumstances.). Under the circumstances present here, even if Fuentes was under a duty to disclose fraud to Roush, there is no evidence that either in1987 or in 1996 Fuentes knew of Gallegos intention, if any, to misappropriate the funds. In 1987, Fuentes assisted Gallegos in obtaining the appointment as conservator. He properly informed Gallegos of her fiduciary duty as a conservator under the New Mexico statutes to administer the funds prudently for the care and support of Roush while he was a minor. Later in 1996, Roush contacted Fuentes and inquired about the location of the funds and asked for a copy of Fuentes's file on this matter. Fuentes responded by asking for documentation from Roush showing his entitlement to the funds. Roush testified that he delivered documents to Fuentes who did not return his calls and did not provide a copy of his file. Roush testified that he then picked up his documents from Fuentes's office and sought other counsel. There is no evidence that in 1996 Fuentes knew whether Gallegos had misappropriated the funds and concealed such information. Therefore, even if Fuentes had a duty to disclose knowledge of fraud to Roush, Roush has failed to show that Fuentes had knowledge of possible fraud by Gallegos. Consequently, Roush's claim for fraud by omission or fraudulent concealment fails for lack of proof.
The Court will discuss the claims for gross negligence, negligence, negligence per se, carelessness, and recklessness as malpractice claims.
Whether Fuentes is liable for the negligence claims depends upon whether Fuentes owed a duty of care to Roush, a non-client and beneficiary of the funds held in conservatorship. Roush alleges that Fuentes owed a duty of care to him as the intended third party beneficiary of the attorney-client agreement under which Fuentes represented Gallegos. Roush cites Leyba v. Whitley, 120 N.M. 768, 778, 907 P.2d 172, 182 (1995) in which the Supreme Court of New Mexico held that an attorney representing a conservator in a wrongful death case owes a duty of care to a minor beneficiary. This duty includes ensuring that the conservator properly distributes the proceeds of the case to the minor beneficiary in accordance with the wrongful death statute. Id. In Leyba, the plaintiff alleged that the attorney failed to inform the conservator of her fiduciary duties, transferred the funds from his trust account to the conservator in her own name, and prepared a contract for the conservator to purchase of a $40,000.00 mobile home for her own use using the conservatorship funds. Id. at 770-71. The Court applied a balancing test to determine an attorney's duty to a non-client. The Court first analyzed "whether the plaintiff is an intended beneficiary of the transaction to which the [attorney's] advice pertained." Id. at 775. The Court found that the minor was the intended beneficiary of the attorney-client relationship between a conservator and the attorney retained to prosecute a wrongful death claim. After applying this and the other factors, the Court concluded that the attorney had a duty of care to the sole minor beneficiary to insure that he received the proceeds of the wrongful death case. The Court opened the door for other courts to impose a duty of care on attorneys for other fiduciaries such as personal representatives and conservators by stating, "[c]ertainly, an attorney who agrees to represent a parent or next friend in pursuit of a cause of action for a child would be similarly situated." Id. at 776 n. 5.
To prove legal malpractice based upon negligence a plaintiff must show the following: (1) the employment of the attorney, (2) the attorney's neglect of a reasonable duty, and (3) the negligence resulted in and was the proximate cause of loss to the plaintiff. Richter v. Van Amberg, 97 F. Supp.2d 1255, 1261 (D.N.M. 2000) (citation omitted).
The New Mexico Supreme Court adopted the following factors applied by the Washington Supreme Court in Trask v. Butler, 123 Wn.2d 835, 872 P.2d 1080 (1994) which stated that a the intent to benefit the plaintiff is the first and threshold inquiry in a modified multi-factor balancing test, which it construed to have the following elements:
(1) the extent to which the transaction was intended to benefit the plaintiff;
(2) the foreseeability of harm the plaintiff;
(3) the degree of certainty that the plaintiff suffered injury;
(4) the closeness of the connection between the defendant's conduct and the injury;
(5) the policy of preventing future harm; and
(6) the extent to which the profession would be unduly burdened by a finding of liability.
Id. 123 Wn.2d at 842-43, 872 P.2d at 1084.
According to a New Mexico Federal District Court, however, "Leyba is limited to the special situation of personal representatives appointed under the Wrongful Death Act who must comply with the Act; it does not apply to trustees or corporate management invested with discretion in performing various tasks." Richter v. Van Amberg, 97 F. Supp.2d 1255 (D.N.M. 2000), citing. Delta Automatic Systems, Inc. v. Bingham, 126 N.M. 717, 722, 974 P.2d 1174, 1179 (N.M.App. 1998); Leyba, 120 N.M. at 774 (noting difference between personal representative in wrongful death and trustee in traditional sense who has broad discretionary powers over the estate assets). Similarly, the New Mexico statutes governing conservators allow a conservator a wide range of discretion in managing property of another while holding conservators to the same duty as trustees. N.M. Stat. Ann. § 45-5-417(Michie 1995) (conservator's duty same as trustee's); N.M. Stat. Ann. § 45-7-302 (Michie 1995) (stating that trustee should deal with trust assets as a prudent man dealing with the property of another.).
The Wrongful Death Act requires the following: "The proceeds of any judgment . . . shall be distributed as follows: . . . if there be no husband or wife, but a child or children, or grandchild or grandchildren, then to such child or children and grandchild or grandchildren by right of representation[.]" N.M. Stat. Ann. § 41-2-3 (Michie 2002).
See also N.M. Stat. Ann. § 45-7-401 (Michie 1995) (duty of trustee to act with due regard to his obligation as a fiduciary).
In view of this distinction, it is not clear whether the New Mexico courts would impose a duty of care on the attorney of a conservator with discretion to manage assets, thereby extending to Fuentes the duty to ensure that Gallegos properly managed the assets for Roush's benefit. However, even if Fuentes had a duty of care to Roush under New Mexico law, the evidence does not show that Fuentes breached that duty. He informed Gallegos of her statutory fiduciary duty to use the funds for Roush's benefit only. Fuentes also discussed types of prudent investments available to Gallegos and advised her not to invest the funds in her own business. He was not involved in the ongoing administration of the funds after Gallegos received them. In fact, Gallegos severed ties with Fuentes soon after she received the proceeds. Fuentes testified that in mid 1987, Gallegos came to his office, was upset, and told him she no longer needed his services. Fuentes had no contact with Gallegos thereafter. Fuentes testified that he verbally informed the judge in the Probate Action that Gallegos had terminated his representation, but never filed a motion to withdraw as counsel for Gallegos. There was some evidence that Fuentes represented Freeman, Roush's mother, in a criminal matter and was paid by Gallegos for such services, but there was no evidence as to the source of the funds used to pay Fuentes. In sum, Roush presented no evidence that Fuentes was negligent in representing Gallegos in her application and appointment as conservator. No evidence was presented showing that Fuentes negligently transferred the funds to Gallegos. In fact, Fuentes never possessed the funds because Intel sent them directly to Gallegos as conservator. Once the funds were properly remitted to Gallegos, Fuentes was not required to periodically check whether Gallegos was properly using the funds for Roush's benefit. If the Court required Fuentes to oversee the administration of the funds, he would have had to look over Gallegos' shoulder in an attempt to detect any mismanagement for which he may be held liable. This Court will not find that Fuentes negligently failed to supervise Gallegos under these circumstances. Cf. Turpie v. Southwest Cardiology Associates, P.A. 955 P.2d 716, 720 N.M. App. 1998 (recognizing narrow scope of the duty owed by doctors to third parties injured by their patients and policy concerns in recognizing duty to third-party non-patient); and Trask v. Butler, 123 Wn.2d at 845, 872 P.2d at 1085 (recognizing policy against unduly burdening law profession in analyzing duty of attorney for personal representative to estate beneficiaries).
Breach of Fiduciary Duty Claim.
A claim for breach of fiduciary duty is also one for legal malpractice, but there is a distinction. See Richter, 97 F. Supp.2d at 1261 citing, 2 Mallen Smith, Legal Malpractice § 14.1.5 (4th ed. 1998 Supp.) ("The [breach of fiduciary obligations] tort is a wrong distinct from professional negligence but is still legal malpractice.)" "Legal malpractice based on negligence concerns violations of the standard of care; whereas legal malpractice based upon breach of duty concerns violations of a standard of conduct." Kilpatrick v. Wiley, Rein Fielding, 909 P.2d 1283, 1290 (Utah App. 1996), quoted in Richter, 97 F. Supp.2d at 1261. The standard of conduct applies to a lawyer's two fiduciary obligations: 1) undivided loyalty; and 2) confidentiality. Richter, 97 F. Supp.2d at 1261 (citation omitted). The elements are (1) the existence of a fiduciary relationship between the plaintiff and the attorney; (2) breach of that fiduciary relationship by the attorney; and (3) the breach of fiduciary relationship which is the proximate cause of loss to the plaintiff. See Richter, 97 F. Supp.2d at 1261, citing Kilpatrick, 909 P.2d at 1290.
Roush argues that Fuentes, like Gallegos, owed a fiduciary duty to Roush as the sole beneficiary of the conservatorship to ensure proper management of the funds. The Court finds that there was no fiduciary relationship between Fuentes and Roush. If this Court held that Fuentes has a fiduciary duty to Roush, then the Court will have effectively appointed Fuentes as Roush's conservator without either an application or appointment by the state court. This improperly re-characterizes the relationship between Fuentes and Roush. As Gallegos' attorney Fuentes was not under a fiduciary duty to Roush to make sure that Roush received the benefit of the funds held by Gallegos, the appointed fiduciary. See Richter, 97 F. Supp.2d at 1263 (attorney for partnership not fiduciary of partner when attorney dealt exclusively with managing partner who had full authority to act on behalf of partnership in matter for which attorney was hired); Hansen, Jones Leta, P.C. v. Segal, 220 B.R. 434, 457 (D.Utah 1998) (holding that counsel for Chapter 11 debtor-in-possession does not owe fiduciary duty to estate or its beneficiaries coextensive with the debtor-in-possession and criticizing courts that have imposed such a duty). See also Trask v. Butler, 123 Wn.2d at 843, 872 P.2d at 1085 (stating that personal representative first and foremost has a fiduciary duty to act in the estate's best interest, and estate beneficiaries may bring a cause of action against personal representative for breach of fiduciary duty).
In sum, the Court finds that Roush does not have a claim for fraud, negligence or breach of fiduciary duty against Fuentes. The evidence fails to show that Fuentes knew how Gallegos intended to manage the funds or whether she in fact mismanaged the funds. This lack of knowledge proves fatal to the fraud and fraudulent concealment claims. As for the negligence claims, although Fuentes may have had a duty of care to Roush as the intended beneficiary of the attorney-client agreement between Gallegos and Fuentes, there is no evidence that Fuentes breached that duty in any way. Roush's claim for breach of fiduciary fails because Fuentes was not Roush's fiduciary.
An appropriate order upholding Fuentes's objection to Roush's claim will be entered with these findings of fact and conclusions of law.