Opinion
Case No. 96-16739-SSM, Adversary Proceeding No. 97-1089
August 7, 1997
Raighne Delaney, Esquire, Murray Jacobs, Alexandria, VA, of Counsel for the plaintiff
J. Jonathan Schraub, Esquire, Schraub Company, Chtd., Alexandria, VA, of Counsel for the debtor/defendant
MEMORANDUM OPINION
This matter is before the court on the debtor's motion to dismiss the plaintiff's nondischargeability complaint, or, in the alternative, to grant summary judgment. A hearing was held on May 7, 1997, at which the parties presented oral argument. At the conclusion of the hearing, the court granted the plaintiff additional time to augment the factual record and granted both parties leave to submit any additional legal authorities. The parties have done so, and the matter is now ripe for determination. For the reasons discussed in this memorandum opinion, the court will grant summary judgment in favor of the debtor on two of the three counts but will set the third count for trial.
Factual Background
The defendant, Lloyd A. Martin, II ("Martin" or the "debtor") is an attorney. He filed a voluntary petition under chapter 7 of the Bankruptcy Code in this court on December 3, 1996. At the time the petition was filed, he was the defendant in a malpractice action brought by Phoenix Printing, Inc. ("Phoenix"), a closely-held family corporation and former client. Phoenix commenced this proceeding on March 11, 1997, to determine the dischargeability of its claim against the debtor. The complaint alleges three grounds of nondischargeability: the first under § 523(a)(2), Bankruptcy Code, for false pretenses, false representations, or actual fraud; the second under § 523(a)(4) for defalcation by a fiduciary; and the third, under § 523(a)(6) for willful and malicious injury to property. The plaintiff's claim arises as a consequence of a dispute over ownership of the corporations stock, and in particular over a disputed transfer of half the corporations shares "allegedly effected with the corrupt assistance and connivance of Martin" that took place on April 3, 1989. That ownership dispute, Phoenix alleges, caused it to incur damages in the form of legal fees when it was made a party to a state court suit "against" the shareholder who acquired the disputed shares.
Although a number of key facts are controverted, the general sequence of events is not. In 1984, Lotfollah Khalaji ("Lotfollah"), who is now deceased, purchased 50% of the stock of Phoenix. His wife, Sorour Rezai-Khalaji ("Sorour") purchased the remaining 50% interest in 1986. On November 26, 1984, at or around the time he purchased his interest in Phoenix, Lotfollah, since he was leaving the country to return to Iran, granted his brother-in-law Cyrus Rezai ("Cyrus") a special power of attorney to manage Lotfollah's affairs with respect to Phoenix. This power of attorney gave Cyrus the authority to
The summary judgment record reflects that he died on April 29, 1993.
In the pleadings and the exhibits, Cyrus's name is at times alternatively spelled "Sirous." For consistency, the court will use the form "Cyrus."
act for me [Lotfollah] and in my behalf in all matters pertaining and relating to the conduct and management of. . . PHOENIX PRINGINT, INC., [sic] . . . with full power and authority for me and in my name, to sign and execute any necessary documents and to act in my behalf relative to any and all actions which in his judgment are desirable or necessary for the management and conduct of my business as a shareholder of Phoenix Printing, Inc. I specifically authorize my Attorney in Fact to do any action, receive any proceeds, sign any documents relating to my position as shareholder of Phoenix Printing, Inc., and I specifically empower said Attorney in Fact to vote my stock at any shareholder meeting, and to sell any of my interest in and to the stock in said company upon such terms as he deems appropriate.
(Emphasis added).
After Sorour purchased her shares, she apparently became estranged from Lotfollah, and in 1989, Cyrus (her brother) agreed to assist her and her son Kambiz in running the business. Cyrus told her he needed to have adequate authority to operate the business and also suggested that the corporation retain new corporate counsel to represent the corporation and bring its corporate records up to date. He recommended Martin for that position. On April 3, 1989, a meeting, arranged by Cyrus, was held at Martin's law office, with Cyrus and Sorour in attendance. At that meeting, various consents, share transfers, and minutes were signed that had the effect of transferring Lotfollah's shares to Cyrus, appointing Cyrus as the president of the corporation, and appointing Martin as the corporations registered agent. The documents effecting the transfer of Lotfollah's shares to Cyrus were signed by Cyrus using the power of attorney that Lotfollah had given him. Martin prepared the documents, caused the share transfer to be recorded in the corporate books, and prepared the new share certificate in Cyrus's name. What inquiries Martin made as to Lotfollah's awareness of the transaction and what explanations Martin made to Sorour as to the legal effect of the documents she signed is hotly contested. The plaintiff's position is that Martin knew that Lotfollah had not consented to the transfer and deliberately colluded with Cyrus to conceal from Sorour the true nature of the documents.
After the meeting, Cyrus managed the day-to-day operations of the printing business with the title of president. On March 21, 1991, approximately two years after the disputed documents were signed, Sorour had a bitter quarrel with Cyrus at the business. She was apparently upset because Cyrus had threatened to fire her son, Kambiz, and because Cyrus had not provided her with information she had requested concerning the finances of the business. Cyrus told her, "I own this company, there's nothing you can do." She asserts that this was the first time she had heard of any ownership claim by Cyrus. In any event, after some further argument, Cyrus signed and gave to Sorour that day a document, written in Farsi, stating, "I, Sirous Rezaei . . . obligate to transfer my shares in Phoenix Company, which are in my name, without any monetary claim to Mrs. Soror Rezaei, after I take out of the place of business the machines that I have signed for personally and accepted responsibility.D
At some point after the confrontation between Cyrus and Sorour, she and her sons Kambiz and Saeid contacted Martin to determine what could be done. He explained that Cyrus was the owner of 50% of the shares in the company and that there was nothing they could do. Sorour and her sons claim that Martin would not explain to them how Cyrus came to own the shares or show them the corporate records. In October or November, Martin did apparently deliver the corporate records to Sorour's attorney. Around that time or shortly thereafter, Lotfollah sent Martin a letter repudiating the power of attorney.
Cyrus, who by this time had set up his own printing business, could not reach agreement with Sorour and Kambiz concerning the Phoenix stock or the removal of the equipment from the business. On December 15, 1992, Martin wrote to Sorour's attorney stating, [T]his firm represents Sirous Rezai," and threatening legal action if the dispute could not be settled. In February 1993, Cyrus brought an action in state court against Sorour, Kambiz, and Phoenix seeking, among other relief, the judicial dissolution of the corporation. That suit was ultimately settled on terms that are not a part of the summary judgment record. Phoenix claims to have incurred approximately $60,000 in legal fees in connection with that suit.
On August 3, 1994, Phoenix commenced an action in the Circuit Court for the City of Alexandria, Virginia, against Martin seeking to recover attorneys fees incurred in the prior litigation. The motion for judgment set forth two causes of action "one sounding in fraud, the other in malpractice. By order entered on December 2, 1995, Judge William Plummer, who was hearing the case in the state court, entered an order granting summary judgment in favor of Martin on the fraud count on the basis that the two-year statute of limitations had expired. The state court held, however, that the claim for malpractice was not necessarily time-barred, reasoning that — there are alleged acts that occur within the three-year period prior to the filing of the motion for judgment, and on that basis he denied Martin's motion for summary judgment on the malpractice cause of action. The malpractice count was then set for trial. By order entered on March 8, 1996, Phoenix was granted a voluntary nonsuit of its action against Martin. The order states that — all judicial orders in this case will remain in effect when the plaintiff refiles the action." On August 8, 1996, Phoenix filed a second motion for judgment against Martin, setting forth only a legal malpractice claim. The state court action was stayed by the defendants bankruptcy filing on December 3, 1996.
As discussed below, legal malpractice actions in Virginia are governed by the statute of limitations for contract actions (3 years in the case of an oral or implied contract, and 5 years in the case of a written contract).
As noted above, the present adversary proceeding was commenced on March 11, 1997. The complaint alleges that the transfer of Lotfollah's stock to Cyrus was procured by Martin's "false pretenses, false representations, actual fraud, and intentional concealment." In particular, it is alleged that Martin "knew" that Lotfollah had not consented to the transfer of his shares to Cyrus; that Martin intentionally led Sorour to believe that the documents signed on April 3, 1989, were a routine matter to correct deficiencies in the corporate records; that Martin intentionally failed to explain the nature of the documents so as to conceal from Sorour that Lotfollah's shares were being transferred to Cyrus; that Martin intentionally concealed from Phoenix and its shareholders that the transfer of shares was presumptively fraudulent; and that after the transfer Martin intentionally concealed from Phoenix and its shareholders the fact that Lotfollah's shares had been transferred to Cyrus. The complaint further alleges that the defendant represented Cyrus "against Phoenix in December 1992 in connection with the dispute over the stock transfer.D The plaintiff pleads that its damages arose when it incurred attorneys fees and costs" related to a lawsuit against [sic] Cyrus Rezai involving the validity of his claim of ownership of Phoenix's stock."
Conclusions of Law and Discussion I.
This court has jurisdiction of this adversary proceeding under 28 U.S.C. § 1334 and 157(a) and the general order of reference entered by the United States District Court for the Eastern District of Virginia on August 15, 1984. Under 28 U.S.C. § 157(b)(2)(I), this is a core proceeding in which final orders and judgments may be entered by a bankruptcy judge, subject to the right of appeal under 28 U.S.C. § 158.
The defendant asserts essentially three grounds for having the complaint against him dismissed, or in the alternative, for entry of summary judgment in his favor. Specifically, the defendant asserts that the plaintiff's causes of action are barred either by the applicable statute of limitation or by collateral estoppel; that the plaintiff does not have standing; and that in any event the plaintiff has produced no evidence showing that it could prevail at trial on any of its three theories of nondischargeability. The court will address each of these arguments in turn.
II.
The court first considers the defendant's argument that any cause of action is barred by the Virginia statute of limitations for fraud.
A.
The debtor's statute of limitations argument is straight-forward. The alleged fraud or false representations occurred on April 3, 1989, when Lotfollah's shares were transferred on the books of the corporation. The state court has previously held that Sorour knew or should have known about the transfer in March 1991, more than two years before Phoenix first sued Martin in state court. Under Virginia law, the statute of limitations for actions grounded in fraud is two years from the discovery of the fraud. Since the present action was not brought by Phoenix until more than two years after the alleged fraud was discovered, and since the state court found the fraud claim to be time-barred, the defendant argues that there is no "debt" grounded in fraud that may be excepted from discharge under § 523(a)(2) of the Bankruptcy Code and that Phoenix cannot get around that bar simply by recasting its time-barred fraud claim as a dischargeability claim.
Va. Code Ann. § 8.01-243(A) ("Unless otherwise provided in this section or by other statute, . . . every action for damages resulting from fraud, shall be brought within two years after the cause of action accrues."). A cause of action for fraud accrues "when such fraud . . . is discovered or in the exercise of due diligence reasonably should have been discovered[.]" Va. Code Ann. § 8.01-249(1).
B.
The argument the debtor seeks to advance is most clearly articulated in In re Taylor, 137 B.R. 925 (Bankr. S.D. Ind. 1991). The court in that case held that a nondischargeability action by the United States under §§ 523(a)(2) and 523(a)(6) of the Bankruptcy Code based on payment of veteran's benefits to which the debtor was not entitled was barred by the applicable 6-year non-bankruptcy statute of limitations for tort actions brought by the United States. The erroneous payments were made in late 1975. The United States had brought a suit in contract against the debtor in 1983 for recovery of the overpayments and ultimately obtained a default judgment in 1985. The debtor filed his bankruptcy petition in 1991. The bankruptcy court noted that when the United States had brought its suit in 1983, the statute of limitations had already run on any tort cause of action and "all [the United States] had left was the contract claim, which was not time barred . . . (presumably because of partial payments or acknowledgment of debt)." Id. at 928. The bankruptcy court in Taylor recognized that under controlling Supreme Court precedent, a creditor's election to bring suit against a debtor only in contract did not bar it from later asserting one of the tort-type grounds for nondischargeability under § 523 of the Bankruptcy Code:
It is well established that if a creditor with both a contract and a fraud claim obtains judgment only on the contract claim in a pre-bankruptcy action, the creditor is not estopped from asserting, when the debtor later files for bankruptcy relief, that the debt is nondischargeable. See Brown v. Felsen, 442 U.S. 127, 99 S.Ct. 2205, 60 L.Ed.2d 767 (1979). Dischargeability is not an issue in a pre-bankruptcy action to liquidate a debt. As long as the debtor is solvent, the creditor may prefer a simple contract suit to complex tort litigation. See id. at 137 n. 8, 99 S.Ct. at 212 n. 8. A creditor is not required "to engage in hypothetical litigation in an inappropriate forum" to protect its right, in a later bankruptcy, to obtain a determination of nondischargeability. See id. at 137, 99 S.Ct. at 2212.
137 B.R. at 928. Nevertheless, the Taylor court went on to hold that "the premise of Brown v. Felsen is that a creditor should be free to choose between contract and tort remedies in a debt liquidation action without waiving its rights in a future hypothetical bankruptcy," and that Brown "does not suggest that a creditor who has only a viable contract claim at the time of the debt liquidation action may later resurrect a time-barred tort claim as a basis for nondischargeability after the debtor seeks bankruptcy relief." Id. (emphasis in original). On that basis, the Taylor court ruled that the nondischargeability complaint, which was grounded in fraud and conversion, was barred. See also In re Dunn, 50 B.R. 664 (Bankr. W.D.N.Y. 1985) (nondischargeability complaint under § 523(a)(6) based on conversion dismissed where New York statute of limitations on tort action had expired and only contract claim remained).
C.
The reasoning in Toylor, however, has been rejected "at least where the creditor has reduced its claim to judgment prior to the bankruptcy" by the only two federal courts of appeal to have considered the issue. RTC v. McKendry (In re McKendry), 40 F.3d 331 (10th Cir. 1994); Mills v. Gergely (In re Gergely), 110 F.3d 1448 (9th Cir. 1997). In McKendry, the Resolution Trust Corporation was the holder, as receiver for an insolvent savings and loan association, of a deficiency judgment against the debtor obtained after foreclosure of a mortgage. The debtor then filed a chapter 7 bankruptcy petition, and the RTC brought a nondischargeability complaint under § 523(a)(2) of the Bankruptcy Code. The debtor successfully moved in the bankruptcy court for dismissal on the ground that any action for fraud was barred by the Colorado 3-year statute of limitations for fraud. On appeal, the Court of Appeals reversed, holding that F.R.Bankr.P. 4007(c), rather than the state statute of limitations for fraud, governed the time within which a creditor could bring a nondischargeability action. Since the complaint in McKendry was filed within the 60-day period specified by F.R.Bankr.P. 4007(c), the Court of Appeals held that the state statute of limitations was not a bar. In reaching this conclusion, the court specifically rejected Taylor's analysis of Brown v. Felsen. Instead, it explained,
There is a fundamental flaw in the debtor's position in that it fails to recognize the distinction between a suit brought under state law to enforce state created rights and a suit filed in bankruptcy court to determine dischargeability issues under § 523(a) of the Bankruptcy Code. In bankruptcy court, there are two separate and distinct causes of action: "One cause of action is on the debt and the other cause of action is on the dischargeability of that debt, a cause of action that arises solely by virtue of the Bankruptcy Code and its discharge provisions." Brockenbrough v. Taylor (In re Taylor), 54 B.R. 515, 517-518 (Bankr. E.D. Va. 1985).
40 F.3d. at 336, quoting In re Moran, 152 B.R. 493, 495 (Bankr. S.D. Ohio 1993). The McKendry court therefore held, "[T]he establishment of the debt itself is governed by the state statute of limitations" if suit is not brought within the time period allotted under state law, the debt cannot be established, "but that — the question of the dischargeability of the debt under the Bankruptcy Code is a distinct issue governed solely by the limitations period established by bankruptcy law." 40 F.3d at 337.
The same conclusion was recently reached by the Ninth Circuit in In re Gergely, supra. Gergely held that a creditor could maintain a dischargeability action under § 523(a)(2) against a physician who had allegedly misrepresented the need for an amniocentesis, even though the applicable California statute of limitations for fraud had expired. In Gergely, the creditor had obtained a malpractice judgment against the debtor prior to the bankruptcy filing, and the Court held, following both McKendry and its own prior opinion in Matter of Gross, 654 F.2d 602 (9th Cir. 1981) (decided under former Bankruptcy Act of 1898) that "the expiration of a state statute of limitations on fraud actions does not affect an action for nondischargeability if there is a valid judgment" because the creditor "is not seeking a new money judgment based on fraud; he is litigating the issue of dischargeability . . . and the timeliness of the petition is governed by the Bankruptcy Rules." Id. at 1453 (internal quotes omitted).
D.
McKendry, Gergely, and Brown v. Felsen all involved situations where the creditor had obtained a judgment in a non-bankruptcy court prior to the filing of the bankruptcy petition. The premise of Brown v. Felsen, as noted above, was that a creditor should be free to choose between contract and tort remedies in a debt liquidation action without waiving its rights in a future hypothetical bankruptcy. It similarly follows, as McKendry and Gergely implicitly held, that a creditor who originally had claims against a debtor sounding both in fraud and some other (non-fraud) cause of action should not be required to rush to court prematurely and file suit before the statute of limitations expires on its fraud claim solely to preserve its rights in a future hypothetical bankruptcy. At least, therefore, where the creditor has reduced its debt to judgment prior to the filing of the bankruptcy petition, the time within which the creditor may seek a determination that the debt is non-dischargeable under one of the tort-type exceptions to discharge in § 523 of the Bankruptcy Code is governed by the Bankruptcy Rules and not by any non-bankruptcy statute of limitations. In particular, the fact that the state statute of limitations may have run on a potential fraud cause of action does not prevent the creditor from showing the true character of a debt that is otherwise still enforceable under state law so long as the complaint to determine dischargeability is filed within the period specified in F.R.Bankr.P. 4007(c).
The question is whether a different rule should apply where the creditor has not reduced its claim to judgment prior to the filing of the bankruptcy petition, and where, moreover, a state court has actually dismissed the creditorfl fraud claim on the ground that it is time-barred. Were fraud the creditor's only basis for recovery against the debtor, there can be no doubt that the state court's dismissal of the fraud claim would conclusively establish that there was no "debt." The state court orders in this case, however, left standing for trial the plaintiff's legal malpractice claim. Thus, there has been no state court judgment that a "debt" is not owed. Given the essential underpinning of Brown v. Felsen — that res judicata does not apply to bankruptcy discharge litigation "there is simply no basis in principle for distinguishing between a creditor who simply did not assert a fraud claim in reducing its debt to judgment and one whose fraud claim was judicially determined to be time-barred but who still has another available cause of action arising from the same facts.
In summary, the question as to whether on the date the bankruptcy petition is filed there is a "debt" legally owed by the debtor to the creditor is determined by non-bankruptcy (here, Virginia) law. If there is no enforceable debt, because the statute of limitations has run on every theory under which the creditor is entitled to recover, there is no liability to be discharged or to be excepted from discharge. If, on the other hand, a creditor still has a viable claim against the debtor" regardless of whether pleaded in contract or tort "at the time the debtor files a bankruptcy petition, the time within which the creditor may seek a determination that the debt is non-dischargeable under one of the exceptions in § 523 of the Bankruptcy Code is governed by bankruptcy law and not by any non-bankruptcy statute of limitations.
III.
Martin argues, however, that there is no debt because even the malpractice cause of action is time-barred, since the nondischargeability complaint was filed more than three years after the malpractice complained of. The plaintiff's complaint is poorly-pleaded, to say the least, and it is not clear, simply looking at the four corners of the pleading, to determine exactly what actions Phoenix is alleging as having constituted malpractice. However, it appears that the gist of Phoenix's complaint is that Martin owed a duty to Phoenix, as its attorney, to protect it from being fraudulently taken over by Cyrus, and that, in breach of that duty, he not only did not protect Phoenix but at all times was actually working for Cyrus to facilitate his control of the corporation, to the point where on December 15, 1992 "without having previously resigned as counsel for Phoenix" Martin undertook to represent Cyrus in his dispute with the other shareholders.
Count III of the complaint "the § 523(a)(6)" willful and malicious injury to property "cause of action" is apparently intended to set forth the malpractice cause of action. However, it merely incorporates by reference earlier paragraphs containing jurisdictional allegations and describing the parties and then simply asserts, in conclusory fashion, that MartinQ actions constituted a willful and malicious injury to Phoenix. By contrast, the motion for judgment filed in the state court is considerably more detailed.
In Virginia, the time for bringing an action for legal malpractice is governed by the statute of limitations for contract actions. Oleyar v. Kerr, Tr., 217 Va. 88, 90, 225 S.E.2d 398, 399 (1976) (contract statute of limitations governs actions for legal malpractice, although the action may sound in tort, because "[b]ut for the contract no duty . . . would have existed."). Where there is no written contract between the attorney and client with respect to the employment, the three year statute of limitations for oral or implied contracts applies. MacLellan v. Throckmorton, 235 Va. 341, 344, 367 S.E.2d 720, 721-22 (1988); Va. Code Ann. § 8.01-246. The statute of limitations begins to run when the attorney's services in connection with a particular transaction have terminated, notwithstanding the continuation of a general attorney-client relationship, and irrespective of the attorney's work on other undertakings for the same client. MacLellan, 235 Va. at 345, 367 S.E.2d at 722. Where a plaintiff has timely commenced an action and subsequently takes a voluntary nonsuit, Virginia law allows a new action to be filed within six months, even if the statute of limitations would have expired in the interim. Va. Code Ann. § 8.01-299(E)(3).
Applying these principles to the facts of the present case, it appears that Martin undertook at least an oral contract of employment as corporate counsel for Phoenix that did not terminate until December 15, 1992, when he wrote the other shareholders that he was now representing Cyrus. Phoenix commenced its action against Martin in state court on August 3, 1994, well within the three-year statute of limitations. Although Phoenix took a voluntary nonsuit of that action on March 8, 1996, it filed a new action on August 8, 1996, exactly five months from the date of the nonsuit, thereby bringing its claim within the savings provisions of Va. Code. Ann. § 8.01-229(E)(3). That action was still alive and pending on December 3, 1996, when the debtor filed his chapter 7 petition. Thus, on the date the debtor's petition was filed, Phoenix still had a legal malpractice claim that was not time-barred. The fact that Phoenix's complaint to determine dischargeability of that claim was not filed until March 11, 1997, is therefore of no import. The test, as discussed above, is whether a debt existed on the filing date of the debtor's petition. If so, the period within which a dischargeability complaint may be filed is governed by the applicable Bankruptcy Rules. There is no contention here that the complaint was not filed within the time specified by F.R.Bankr.P. 4007(c). Accordingly, the statute of limitations argument with respect to the legal malpractice cause of action is overruled.
IV.
Martin also argues that the claims of fraud are barred by collateral estoppel. Although the Supreme Court in Brown v. Felsen held that res judicata, or claim preclusion, does not apply to bankruptcy discharge litigation, the Court has held that collateral estoppel, or issue preclusion, does. Grogan v. Garner, 498 U.S. 279, 284 n. 11, 111 S.Ct. 654, 658 n. 11, 112 L.Ed.2d 755 (1991); Hagan v. McNallen (In re McNallen), 62 F.3d 619 (4th Cir. 1995) (jury verdict in Texas action for intentional infliction of emotional distress binding in § 523(a)(6) nondischargeability action). Here, however, the state court made no findings on the issue of fraud other than the finding that the claim was time-barred. Clearly, had the state court ruled for Martin on any of the underlying merits of the claim "or had it ruled he had no claim at all, whether grounded in fraud or malpractice" those issues could not be relitigated in this adversary proceeding. However, the state court made no such findings. Accordingly, the debtor's collateral estoppel argument is without merit.
V.
The court next considers the debtor's argument that Phoenix has not demonstrated the existence of evidence that would allow it to prevail at trial on the merits of any of its three grounds of nondischargeability. Under Fed.R.Civ.P. 56(b), made applicable to this adversary proceeding by F.R.Bankr.P. 7056, a defending party may at any time move with or without supporting affidavits for summary judgment in that party's favor. The judgment sought [s]hall be rendered forthwith if the pleadings, depositions, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law. § Fed.R.Civ.P. 56(c). When a motion for summary judgment is made and supported as provided in Rule 56, the adverse party may not rest on the mere allegations or denials of its pleading, but must set forth by affidavit, or by reference to discovery in the file, specific facts showing that there is a genuine issue for trial. Fed.R.Civ.P. 56(e); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256-57, 106 S.Ct. 2505, 2514, 91 L.Ed.2d 202 (1986) ("[T]he plaintiff must present affirmative evidence in order to defeat a properly supported motion for summary judgment."); Celotex Corp. v. Catrett, 447 U.S. 317, 322-23, 106 S.Ct. 2548, 2522, 91 L.Ed.2d 265 (1986) (Summary judgment is proper against a party who cannot show the existence of an element essential to that party's case, since there can be no "genuine issue as to a material fact" if there is a complete failure of proof concerning an essential element of the nonmoving party's case.) It is with this standard in mind that the court reviews the state of the evidence with respect to each of the three grounds of nondischargeability asserted by the plaintiff.
Phoenix filed no affidavits as such. Attached to its [S]upplemental Opposition to Defendant's Motion to Dismiss, Alternative Motion for Summary Judgment, "however, is a verification by Khambiz Khalaji in which he affirms, under penalty of perjury" that the facts set forth in this Supplemental Opposition . . . are true and accurate, as are the exhibits also contained therein." As to the exhibits, such verification is arguable adequate, but as to the "facts" stated in the opposition, the verification plainly fails to meet the requirement of Rule 56(e) that [a]ffidavits shall be made on personal knowledge, shall set forth such facts as would be admissible in evidence, and shall show affirmatively that the affiant is competent to testify to the matters stated therein."
A. Fraud Under § 523(a)(2)
Under § 523(a)(2), Bankruptcy Code, a chapter 7 discharge does not discharge an individual debtor from, among other liabilities, a debt
(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by —
(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition[.]
To establish fraud under § 523(a)(2)(A), the following five elements must be proven:
1. That the debtor made representations;
2. That at the time the representations were made the debtor knew them to be false;
3. That the debtor made the representations with the intention and purpose of deceiving the creditor;
4. That the creditor justifiably relied on the representations; and
5. That the creditor sustained the alleged injury as a proximate result of such representations.
Field v. Mans, — U.S. —, 116 S.Ct. 437, 440, n. 4, 133 L.Ed.2d 351 (1995). The standard of proof is preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 291, 111 S.Ct. 654, 661, 112 L.Ed.2d 755(1991).
The debtor argues that the deposition testimony of Phoenix's own witnesses shows that he made no representations at all in connection with the transfer of Lotfollah's shares to Cyrus. Because the articles of incorporation required that three-quarters of the shareholders consent to the transfer of any shares to a third party, Sorour's consent was required in order to effect the transfer. Martin prepared the documents evidencing that consent. The deposition testimony of Phoenix's witnesses was that Sorour did not read English with any facility, and that Cyrus explained to her, in Farsi, that the documents were purely formalities so that he could serve as "honorary" president of Phoenix. No explanation, according to Sorour, was provided by Martin, and there is no suggestion that Martin understood Farsi. Therefore, it is argued, the plaintiff fails to make out even a prima facie case that Martin made any representations at all, let alone false ones.
Martin denies this, but since Phoenix can hardly rise higher than the testimony of its own witnesses, the court assumes, for the purpose of deciding the motion for summary judgment, the truth of Sorour's account of the meeting.
However, false representations or false pretenses need not be express in order to constitute a basis of nondischargeability under § 523(a)(2). "Silence or concealment as to a material fact can constitute a false pretense or a false representation as surely as an overt act." Shappy v. Scott (In re Scott), 201 B.R. 424, 430-31 (Bankr. E.D. Va. 1996) (Shelley, J.) (quoting Community Hospital of Roanoke Valley, Inc. v. Musser (In re Musser), 24 B.R. 913, 918 (W.D.Va.1982)); See also H.C. Prange Co. v. Schnore (In re Schnore), 13 B.R. 249, 252 (Bankr. W.D. Wis. 1981) ("The general rule is that the misrepresentation required by § 523(a)(2)(A) may be one which is implied by the debtor's conduct or silence as well as an overt statement"). In the present case, whether Martin's silence as to the use being made of Lotfollah's power of attorney rose to the level of a misrepresentation is a factual determination ill-suited to summary judgment, since it requires the court to draw subtle inferences from all the circumstances.
Martin, however, contends that in any event, Lotfollah, and not Phoenix, was the victim of whatever misrepresentations were made, and that, for that reason, Phoenix lacks standing to assert a claim of fraud. Certainly, to the extent that Lotfollah had not authorized Cyrus to transfer the shares to himself, Lotfollah was the immediate victim of the fraud. The question is whether the corporation could also in some sense be said to be a victim, since the practical result, if the plaintiff's evidence is to be believed, is that an interloper, hired only to assist in managing the corporation, acquired record ownership of sufficient shares to block his removal from office and to create a managerial deadlock that might well have resulted in the corporations dissolution. While the question is not free from doubt, the court cannot find that any misrepresentations by Martin enabled Cyrus to acquire "money, property, services, or an extension, renewal, or refinancing of credit" from Phoenix. The shares acquired by Cyrus had already been issued by the corporation, and there is no evidence that the corporation paid Cyrus any dividends on the stock based on his record ownership of the shares. If Cyrus acquired "property" from anyone with the corrupt assistance of Martin, it was from Lotfollah. While it is true that acquisition of Lotfollah's shares effectively gave Cyrus control of the corporation, this court does not construe the term "property" as embracing the abstract right to control the corporations affairs in distinction to the economic interest represented by the shares themselves. As to the latter, it is clear that Lotfollah, not Phoenix, was the victim of whatever fraud occurred. For that reason, the court will enter summary judgment in favor of Martin on Count I, the § 523(a)(2) cause of action.
B. Fiduciary Defalcation
Section 523(a)(4), Bankruptcy Code, excepts from discharge debts arising from Dfraud or defalcation while acting in a fiduciary capacity.D Phoenix asserts that Martin, as its attorney, was in a fiduciary relationship to the corporation and its shareholders and breached his duty of loyalty by participating in the unauthorized transfer of Lotfollah's shares to Cyrus and subsequently covering up the details of the transfer.
The difficulty with this argument is that the term "fiduciary" as used in § 523(a)(4) is restricted to "the class of fiduciaries including trustees of specific written declarations of trust, guardians, administrators, executors or public officers and, absent special considerations, does not extend to the more general class of fiduciaries such as agents, bailees, brokers, factors, and partners." Sager v. Lewis (In re Lewis), 94 B.R. 406, 410 (Bankr. E.D. Va. 1988) (Shelley, J.); Matter of Marchiando, 13 F.3d 1111 (7th Cir. 1994), cert. denied sub nom Illinois Dept. of the Lottery v. Marchiando, — U.S. —, 114 S.Ct. 2675, 129 L.Ed.2d 810 (constructive, resulting, or implied trusts do not come within reach of § 523(a)(4); hence, lottery ticket seller not "fiduciary" within meaning of § 523(a)(4) so as to make debt from failure to turn over proceeds from ticket sales nondischargeable). Put another way, simply because an attorney at law owes his client a high degree of loyalty which is often described as being "fiduciary" in nature does not make an attorney, without more, a fiduciary in the narrow sense of § 523(a)(4). R.E. America, Inc. v. Garver (In re Garver), 116 F.3d 176 (6th Cir. 1997).
This is not to say that an attorney would never be considered a fiduciary. This court would have little difficulty, for example, in finding that an attorney entrusted with funds or property of his client was a fiduciary for the purpose of § 523(a)(4) with respect to such funds or property. Bailey v. Sonnier (In re Sonnier), 157 B.R. 976 (E.D. La. 1993) (attorney misappropriated condemnation award he received on behalf of his clients). But that is not the situation here. Martin was not entrusted with money or property. He was simply retained as general corporate counsel. Even accepting the plaintiff's contention that he breached his duty of loyalty to the corporation, that breach of duty, however else it may be characterized, simply does not constitute "fraud or defalcation by a fiduciary" for the purpose of nondischargeability. Accordingly, the court will enter summary judgment in Martin's favor on Count II, the § 523(a)(4) cause of action.
C. Willful and Malicious Injury
Finally, § 523(a)(6), Bankruptcy Code, excepts from discharge debts "for willful and malicious injury by the debtor to another entity or to the property of another entity." "Willful," as used in § 523(a)(6), means "deliberate or intentional." St. Paul Fire Marine Ins. Co. v. Vaughn, 779 F.2d 1003 (4th Cir. 1985). The requirement that the conduct be "malicious" does not require that a debtor bear subjective ill will toward, or specifically intend to injure, his or her creditor; it is sufficient that a debtor's injurious act is done [d]eliberately and intentionally in knowing disregard of the rights of another." First Nat'l Bank of Md. v. Stanley (In re Stanley), 66 F.3d 664 (4th Cir. 1995). Professional malpractice can constitute a "Willful and malicious injury" when the debtor knows his or her conduct will lead to harm. Alverio v. Muhammad (In re Muhammad), 135 B.R. 294 (Bankr. N.D. Ill. 1991) (lawyer's failure to pursue motions to set aside default judgments against client). See Conte v. Gautam (In re Conti), 33 F.3d 303 (3rd Cir. 1994) (remanding for factual finding whether attorney "failure to inform clients of the dismissal of their case had a [s]ubstantial certainty of producing injury"); Perkins v. Scharffe, 817 F.2d 392 (6th Cir. 1987) (doctor's "complete and total disregard of acceptable medical practice" made state court judgment for medical malpractice nondischargeable); Stanley v. Cole (In re Cole), 136 B.R. 453 (Bankr. N.D. Tex. 1992) (doctor misrepresented his qualifications and did not tell patient he had severed another patient's nerve while attempting the same procedure); Swanner v. Lazar (In re Lazar), 196 B.R. 381 (Bankr. E.D. Mich. 1996) (attorney's advice to disobey court order caused client to be arrested and incarcerated).
In this case, there is evidence in the record tending to show that Martin, although hired to represent Phoenix, was at all times actually in Cyrus's camp and sought to promote Cyrus's interest over that of Phoenix's. Although there is no direct evidence that he knew Cyrus's use of the power of attorney was unauthorized, his curious refusal, if the deposition testimony of Phoenix's witnesses is to be believed, to explain to Sorour and Kambiz how Cyrus acquired his 50% interest or to let them examine the corporate records gives rise to an inference that he was actively assisting Cyrus in concealing the misuse of the power of attorney. Because the transfer of the shares "accomplished through documents prepared by Martin" created a certainty of corporate deadlock if Cyrus and Sorour were to disagree on management of the corporation, a trier of fact could find that Martin" actions were undertaken with the requisite knowledge that they would cause injury to Phoenix. A trier of fact could also find that Martin knowingly put himself in a position of divided loyalties where he could not give Phoenix the type of independent advice that would protect it against the very controversy that came to pass.
Of course, a trial on the merits may show that none of this is true "that Martin in good faith believed that the transfer of shares was authorized, and that his ability to provide independent legal advice to Phoenix was not knowingly compromised by his loyalty to, or ongoing representation of, Cyrus. It is certainly true that there is no direct evidence of malice. Whether the circumstantial evidence, taken as a whole, is sufficient to make out a case of malice is an inquiry not well-suited for summary judgment. Accordingly, the court will deny the motion for summary judgment as it relates to Count III, the § 523(a)(6) cause of action, and will set that count down for trial.
VI.
A separate order will be entered granting summary judgment in the debtor's favor on Counts I and II and denying summary judgment on Count III.