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#2013

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF KANSAS

In Re:

HOWARD E. BODNEY,

DEBTOR(S)

NO. 88-41424-7C

CHAPTER 7

SULLIVAN, BODNEY & HAMMOND, et al.,

PLAINTIFF(S),

v.

HOWARD E. BODNEY,

DEFENDANT(S)

ADV. NO. 93-7138

ORDER GRANTING SUMMARY JUDGMENT

This proceeding is before the Court on a motion for summary judgment filed by the defendant-debtor. The debtor appears by counsel Jan Hamilton of Hamilton, Peterson, Tipton & Keeshan. The plaintiffs appear by counsel John H. Stauffer, Jr., and Curtis S. Sneden of Goodell, Stratton, Edmonds & Palmer, Robert B. Sullivan of Polsinelli, White, Vardeman & Shalton, P.C., and Charles E. Hammond of Boddington & Brown. The Court has reviewed the relevant pleadings and is now ready to rule.

FACTS

Beginning in 1980, plaintiffs Robert B. Sullivan and Charles E. Hammond and debtor Howard E. Bodney practiced law as plaintiff Sullivan, Bodney & Hammond (SBH), a professional corporation which they owned in equal shares. They became disenchanted with their business and each other, and finally agreed to terminate SBH's operations effective July 31, 1985. At a meeting about ending the business, the attorneys each took notes indicating how they thought they had agreed to split up the pending cases and other assets, but each came away with a different understanding of their arrangements. They never produced any written agreement that might have clarified the terms of the firm's dissolution.

Sometime later, Mr. Bodney settled a lawsuit that had commenced before SBH ceased operations, and obtained a contingent fee of $250,000. He kept this money for his own use, paying quarterly estimated federal taxes and buying a new home. A few months later, Mr. Sullivan and Mr. Hammond sued him in state district court, on behalf of SBH as well as personally, seeking to resolve numerous issues arising from SBH's breakup.

Following a lengthy trial, a state court judge rendered a decision determining most of the contested issues in the suit. Many delays followed while the parties tried to resolve their disputes, but at a hearing in November 1988, the judge decided the remaining issues. The next day, Mr. Bodney filed a chapter 13 bankruptcy petition. This Court granted stay relief so the state court's ruling could be made final. That was done, and SBH, Mr. Sullivan, and Mr. Hammond appealed the final order. The Kansas Court of Appeals reversed part of the decision, and the district court modified its judgment to reflect the appellate court's ruling.

Mr. Bodney's bankruptcy case was converted to chapter 7, and SBH, Mr. Sullivan, and Mr. Hammond filed this proceeding, seeking to have Mr. Bodney's debts to them determined to be nondischargeable under 11 U.S.C.A. §523(a)(2)(A) and (a)(4). Mr. Bodney has now moved for summary judgment based on collateral estoppel. Initially, he claimed the state court had considered claims of fraud and defalcation as alleged in the dischargeability complaint and resolved them against the plaintiffs. The plaintiffs contended that those issues were not actually litigated and were not identical to those raised in this proceeding, and that any rulings that might have addressed them were not necessary to the decision. In his reply brief, Mr. Bodney added the assertion that count I of the complaint, based on §523(a)(2)(A), does not state a claim on which relief can be granted. The plaintiffs have not responded to this assertion.

Summarized (to the extent possible), count I of the complaint makes the following relevant allegations. As part of SBH's cessation of business, all fees generated by any of the three attorneys in cases that commenced before the firm closed belonged to SBH and were to be distributed to the shareholders according to their respective interests in the firm's income. Mr. Bodney told Mr. Hammond before February 7, 1986, that the "Fleming" case, the one that produced the $250,000 contingent fee, would be settled. Despite a request from Mr. Hammond for information about the status of pending contingent fee cases and fee collections, Mr. Bodney did not inform the plaintiffs when he received confirmation that the Fleming case would be settled. On February 7, "through various false pretenses and false statements made to the Honorable Scott Wright at the settlement hearing," Mr. Bodney obtained settlement drafts payable to him and his clients. He deposited the drafts in his personal account with the intent to deprive the plaintiffs of their share of the money, and after the drafts cleared, he "did convert" and "misappropriated" the contingent fee for his personal use. On February 15, Mr. Bodney continued to refuse to account to SBH's shareholders, "denied that any existing cases were continued," and refused to report on the status of any contingent fee cases. He did all these things "intentionally and purposely" in order to deceive the plaintiffs. The plaintiffs reasonably relied on Mr. Bodney "to handle the contingency fee cases in a professional manner," to report the status of cases, to disclose the collection of fees, and to distribute fees in accordance with applicable Missouri law.

Count II is simpler and makes the following allegations. Upon dissolution of SBH, each shareholder owed a fiduciary duty to the other shareholders and the corporation in winding up the corporation's affairs. While acting in his fiduciary capacity and handling SBH's funds, Mr. Bodney committed "fraud and defalcation by diverting" the money for his personal use. Count VI of the plaintiffs' state court complaint had similarly alleged that while serving as a fiduciary, Mr. Bodney committed a defalcation by failing to account for money and property which had been entrusted to him. In its original decision, the state court had ruled: "The Court finds that there is no basis in Kansas law nor recognized cause of action for 'defalcation' as proposed in Count V [sic] of plaintiffs' Second Amended Petition, and therefore relief requested therein is denied." Since Count V of that petition had asked for an equitable lien due to Mr. Bodney's "willful, intentional and unconscionable conduct . . . in his use of the [plaintiffs'] converted funds," the Court concludes the state court's ruling was intended to refer to count VI rather than Count V. By the argument made in their brief, the plaintiffs concede as much.

DISCUSSION AND CONCLUSIONS

To prevent a claim from being discharged under 11 U.S.C. §523(a)(2)(A), the creditor must prove the following:

1) the debtor made a representation;

2) the debtor knew the representation was false when made;

3) the debtor made the representation with the purpose and intent of deceiving the plaintiff;

4) the plaintiff reasonably relied on the representation; and

5) the plaintiff suffered a loss as a proximate result of the representation.

In re Pressgrove, 147 B.R. 244, 246-47 (Bankr.D.Kan. 1992). "False pretenses" and "false representations" are kinds of "fraud." 3 Collier on Bankruptcy ¶¶523.08[4] and [5] (15th ed. 1994); see also 5 Wright & Miller, Fed. Prac. & Pro.: Civil 2d, §1297 at 584-89 (1990) (stating textbook elements of fraud). Federal Rule of Civil Procedure 9(b), incorporated for bankruptcy adversary proceedings by Federal Rule of Bankruptcy Procedure 7009, provides: "In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, or other condition of mind of a person may be averred generally.". Merely reciting the elements of fraud does not satisfy the rule's requirement of pleading with particularity. See 5 Wright & Miller, Fed. Prac. & Pro.: Civil §1297 at 608-12 (2d ed. 1990).

For three reasons, the Court concludes the plaintiffs' count I, taking all the allegations as true, fails to state a claim for relief under §523(a)(2)(A).(1) First, the only allegation they make that Mr. Bodney obtained anything through false pretenses or false representations is that he employed one or the other before Judge Wright and thus obtained drafts for the contingent fees. Whatever else might be said, this Court is convinced allegations that simply quote the words of the statute cannot be sufficient to satisfy the requirement of FRCP 9(b) that fraud be pleaded "with particularity." Second, the plaintiffs have not alleged that Mr. Bodney knew that whatever he said or represented to Judge Wright was false. Third, the count fails to allege that the plaintiffs relied on whatever Mr. Bodney said or represented to Judge Wright. Instead, the only reliance alleged is their reliance on Mr. Bodney to provide them information about contingent fee cases he retained when the firm broke up. Their true complaint in this regard is that Mr. Bodney failed to provide them information about such cases, not that he provided false or misleading information.

The plaintiffs' second count is barred by collateral estoppel. They interpret the state court's ruling on "defalcation" to be one that Kansas law does not recognize any cause of action for defalcation, and suggest this Court can review the same facts that were presented to that court and decide whether they establish a "defalcation" under §523(a)(4). This Court believes the more reasonable interpretation is that the state court decided either that the facts the plaintiffs alleged in their petition did not state a claim for relief under Kansas law, or, more likely, that the evidence presented did not convince him, as the factfinder, that Mr. Bodney had committed any defalcation while acting in a fiduciary capacity. The Court does not believe §523(a)(4) establishes any new federal law on "defalcation while acting in a fiduciary capacity," but merely provides that any liability established under state (or other applicable substantive) law based on such an action is nondischargeable.

For these reasons, the Court concludes Mr. Bodney's motion for summary judgment should be granted. His personal liability on his debts to the plaintiffs is dischargeable in bankruptcy. This ruling is not intended to affect the plaintiffs' claim that they have a lien against his homestead, as granted by the state court. The debtor has questioned the continuing vitality of that lien through a motion to avoid it that is separate from this adversary proceeding, and apparently has not yet been resolved.

IT IS SO ORDERED.

Dated at Topeka, Kansas, this _____ day of April, 1994.













__________________________________

JAMES A. PUSATERI

CHIEF BANKRUPTCY JUDGE

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF KANSAS





In Re: )

)

HOWARD E. BODNEY, ) NO. 88-41424-7C

) CHAPTER 7

DEBTOR(S). )

)

SULLIVAN, BODNEY & HAMMOND, )

et al., )

PLAINTIFF(S), )

v. ) ADV. NO. 93-7138

)

HOWARD E. BODNEY, )

DEFENDANT(S). )

ORDER DENYING AMENDED MOTION TO RECONSIDER

This proceeding is before the Court on the plaintiffs' motion to reconsider the April 22, 1994, order granting summary judgment. The plaintiffs appear by counsel John H. Stauffer, Jr., and Curtis S. Sneden. The Court has reviewed the relevant pleadings and is now ready to rule.

The plaintiffs contend the Court erroneously concluded that collateral estoppel bars their claim that the debtor's obligation to them arose from a "defalcation" covered by 11 U.S.C.A. §523(a)(4). They had raised this claim in prior litigation in state court, and that court ruled: "The Court finds that there is no basis in Kansas law nor recognized cause of action for 'defalcation' as proposed in . . . plaintiffs' Second Amended Petition, and therefore relief requested therein is denied." In their present motion, the plaintiffs persist in arguing that the state court judge meant that Kansas does not recognize any cause of action based on a fiduciary's defalcation in the performance of his or her duties. This Court is convinced that the state court judge, had he been faced, for example, with a trust's trustee who had admittedly used trust money for his or her own benefit, would have agreed that improper action constituted a "defalcation" and would have imposed liability for it under Kansas law. This Court continues to believe that the state judge more likely meant either that the plaintiffs had failed to state a claim for relief for defalcation or to prove they were entitled to such relief.

In any event, even if the state court did rule that Kansas does not recognize a cause of action for defalcation, the plaintiffs did not question that ruling in their appeal and allowed it to become part of a final judgment. The claim is the same one they have raised before this Court. The state court ruled, rightly or wrongly, that the debtor was not liable to them for a "defalcation while acting in a fiduciary capacity" and so they are now collaterally estopped from relitigating that as a basis for his liability to them.

For these reasons, the plaintiffs' motion to reconsider must be denied.

IT IS SO ORDERED.

Dated at Topeka, Kansas, this _____ day of May, 1994.











__________________________________

JAMES A. PUSATERI

CHIEF BANKRUPTCY JUDGE

1. 1Although failure to state a claim on which relief can be granted may more commonly be raised by a motion to dismiss under FRCP 12(b)(6) or a motion for judgment on the pleadings under FRCP 12(c), both made applicable here by FRBP 7012, it is permissible to raise it in a motion for summary judgment. See 5A Wright & Miller, Fed. Prac. & Pro.: Civil 2d, §1369 (1990).

 

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