Wimer & Associates, PC v. Thiel
Filing
8
MEMORANDUM AND OPINION that Bankruptcy Court's 6/18/2014 Order dismissing Wimer's Complaint in Adversary Proceeding No. 14-01016 [AP Doc. 11] is AFFIRMED. Further Ordered the appeal of the Bankruptcy Court's 6/ 18/2014 Order overruling the objection to the exemption [B Doc. 25] is DISMISSED; and Further Ordered that the portion of the Bankruptcy Court's 6/18/2014 Order denying Thiel attorney's fees is VACATED and REMANDED for further consideration by the Bankruptcy Court. Signed by District Judge Martin Reidinger on 2/24/2015. (khm)
IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF NORTH CAROLINA
ASHEVILLE DIVISION
CIVIL CASE NO. 1:14-CV-168
BANKRUPTCY CASE NO. 13-10808
IN RE:
)
)
EVA CHRISTINE THIEL
)
Debtor,
)
________________________________ )
)
WIMER & ASSOC., PC d/b/a
)
ASHEVILLE LAW GROUP,
)
Appellant,
)
)
vs.
)
)
EVA CHRISTINE THIEL,
)
Appellee.
)
________________________________ )
MEMORANDUM AND
OPINION
Wimer & Associates, PC (“Wimer”) appeals the Bankruptcy Court’s
Order dismissing its Adversary Proceeding No. 14-01016 brought against
Eva Christine Thiel (“Thiel”). The Bankruptcy Court determined that Thiel’s
debt to Wimer was dischargeable under Chapter 7 of the Bankruptcy Code
and thus Wimer’s non-dischargeability Complaint failed to state a claim
upon which relief can be granted.
Thiel cross appeals the Bankruptcy
Court’s Order denying her recovery of her legal fees and expenses incurred
in defending the Adversary Proceeding.
FACTUAL AND PROCEDURAL BACKGROUND
The allegations set forth in the Complaint in the Adversary
Proceeding (AP) below, taken in the light most favorable to Wimer, are as
follows.
In July, 2012, Thiel hired Wimer to represent her in the
prosecution of a claim of gender discrimination against her former
employer. [AP Doc. 1 at 4].1
No written fee agreement was executed by
the parties but Thiel agreed to pay Wimer on an hourly basis.
[Id.].
Wimer obtained a right to sue letter from the EEOC on behalf of Thiel and
thereafter filed a civil action against Thiel’s former employer. [Id.]. That
action was stayed and Thiel’s claims were submitted to arbitration in
December 2012. [Id.].
Throughout the course of representation, Wimer
sent Thiel monthly invoices, which she usually paid within 30 days, until
June, 2013. [Id.].
In June, 2013, Thiel informed Wimer that she was having financial
difficulties and asked Wimer if it would represent her on a contingency fee
basis instead of the hourly basis. [Id. at 5]. Wimer declined. Thiel then
informed Wimer that she could only pay $2,000 per month going forward
for legal fees. [Id.]. Wimer’s AP Complaint then alleges:
1
Citations to the record in Bankruptcy Case No. 13-10808 have the prefix letter B
before the document number referenced on the Docket Sheet. Citations to the record in
the Adversary Proceeding Case No. 14-01016 have the prefix letters AP before the
document number referenced. Citations to the record in this Court contain the relevant
document number referenced with no prefix letter.
2
20. This statement by Defendant [Thiel] came at a time when
Defendant already owed the firm substantial legal fees, and at a
time when the necessary legal work was going to increase as
the case progressed toward a hearing.
21. Plaintiff indicated to Defendant that without concrete
assurances from Defendant for payment of existing and future
legal invoices, Plaintiff would have to withdraw from
representing Plaintiff.
22. Defendant represented to Plaintiff that Defendant held
significant funds in a retirement account, and that she would
withdraw funds from her retirement account to pay the
outstanding fees and future invoices.
23. Based on this representation, Plaintiff continued to
represent Defendant in the litigation.
[AP Doc. 1 at 5].
In November, 2013, the arbitrator found against Thiel on her claims
and awarded her no recovery. [Id. at 7]. From June until December, 2013,
Thiel made payments to Wimer totaling only $3,941.70. [Id.]. In December,
2013, Wimer sent Thiel its final invoice for services rendered indicating an
amount outstanding of $60,118.09. [Id. at 7; 9].
On December 30, 2013, Thiel filed a voluntary Chapter 7 Petition. [B
Doc. 1]. Pertinent to this appeal, Thiel claimed two individual retirement
accounts held by T. Rowe Price as property exempt from her Bankruptcy
Estate and sought discharge of her debt to Wimer. [B Doc. 1 at 13]. On
3
May 14, 2014, Wimer timely filed an AP Complaint contesting the
dischargeability of Thiel’s debt owed to it. [AP Doc. 1].
Thiel moved to dismiss Wimer’s Adversary Proceeding pursuant to
Rule 12(b)(6) of the Federal Rules of Civil Procedure. [AP Docs. 4; 5]. The
Bankruptcy Court heard Thiel’s motion on June 17, 2014, and dismissed
Wimer’s action by Order entered June 18, 2014.2 [AP Doc. 11]. Wimer
2
Wimer also filed an objection to the claimed exemption of the retirement accounts in
the underlying bankruptcy proceeding. [B Doc. 20]. The Bankruptcy Court overruled
that objection on June 18, 2014. [B Doc. 25]. In its brief, Wimer argues that this Court
should reverse that Order overruling its objection. [Doc 5 at 4]. Rule 8002(a) of the
Federal Bankruptcy Rules provides that a Notice of Appeal must be filed within 14 days
of “the entry of the ... order ... appealed from.” An appellant’s failure to take any step –
“other than timely filing a notice of appeal” – will not affect the validity of the appeal.
Rule 8001(a) (emphasis added). The critical act, therefore, is the timely filing of a notice
of appeal particularly identifying the order appealed from. “This rule is jurisdictional and
must be strictly construed.” In re Starcher, 255 B.R. 292, 293 (S.D.W.Va. 2000) (citing
Smith v. Dairymen, Inc., 790 F.2d 1107 (4th Cir. 1986)). “Furthermore, an appellant
must file a separate notice of appeal for each bankruptcy court final order or judgment
with which the appellant disagrees.” In re Rozerk Farms, Inc., 139 B.R. 463 (E.D.Mo.
1992). In this matter, Wimer’s original Notice of Appeal (which was for some reason
filed twice) listed two separate Orders of the Bankruptcy Court Wimer wished to contest:
(1) the Order dismissing Wimer’s AP Complaint and (2) the Order overruling Wimer’s
objection to Thiel’s claim of exemptions. [AP Docs. 12; 13]. Wimer’s duplicative appeal
notice prompted the Bankruptcy Court to issue a “Notice of Defective Entry or Filing” to
Wimer directing that “[a] separate Notice of Appeal needs to be filed in the base case,
13−10808, relating to the Order Overruling Objection to Claim of Exemption.” [AP Doc.
14]. Despite the Bankruptcy Court’s clear instruction, Wimer filed no second Notice of
Appeal in the underlying Bankruptcy case “relating to the Order Overruling Objection to
Claim of Exemption.” Instead, Wimer amended its original Notice of Appeal to
reference only the Bankruptcy Court’s Order dismissing the Adversary Proceeding,
deleting the reference to the Order overruling Wimer’s objection to Thiel’s claim of
exemptions. [AP Doc. 15]. Given that Wimer has filed no Notice of Appeal separately
referencing the Bankruptcy Court’s Order overruling Wimer’s objection to Thiel’s claim
of exemptions, Wimer has failed to perfect an appeal from that Order. The Court,
therefore, is without jurisdiction to review the Bankruptcy Court’s June 18, 2014, Order
overruling Wimer’s objection to Thiel’s claim that her IRAs are exempt property. [B Doc.
4
now appeals the Bankruptcy Court’s Order dismissing the adversary
proceeding. [AP Doc. 15]. On July 9, 2014, the Bankruptcy Court granted
Thiel a discharge under 11 U.S.C. § 727.
[B Doc. 26].
Thiel cross
appealed the Bankruptcy Court’s denial of her request for attorneys’ fees
and costs by Notice filed July 11, 2014. [AP Doc. 20].
STANDARD OF REVIEW
This Court’s review of the Bankruptcy Court's Order dismissing
Wimer’s Adversary Proceeding, a purely legal determination, will be de
novo. In re Johnson, 960 F.2d 396, 399 (4th Cir. 1992).3
The Court reviews a Rule 12(b)(6) dismissal of a claim in a complaint
focusing only on the legal sufficiency of the complaint, and “accepting as
true the well-pled facts in the complaint and viewing them in the light most
favorable to the plaintiff[.]” Brockington v. Boykins, 637 F.3d 503, 505 (4th
25]. To the extent that Wimer’s original notice of appeal or its brief seeks review of the
order regarding the exemption issue, such appeal is dismissed.
3
Neither party contends that Wimer’s fraud claims asserted in the AP Complaint are
Stern claims – claims designated for final adjudication in the Bankruptcy Court as a
statutory matter, but prohibited from proceeding in that way as a constitutional matter.
Stern v. Marshall, 131 S. Ct. 2594 (2011). To the extent that Wimer’s fraud claims are
Stern claims, they are not “core” claims and are “related to a case under Title 11” since
Wimer’s position is that Thiel’s IRA money should not be protected from a creditor
(Wimer) as an exempt asset of Thiel’s bankruptcy estate. Executive Benefits Insurance
Agency v. Arkison, 134 S. Ct. 2165 (2014). Accordingly, because this Court is
reviewing de novo a purely legal determination made by the Bankruptcy Court, any error
of the Bankruptcy Court in entering a final order, as opposed to a memorandum and
recommendation, is cured by this Court’s independent and complete review of the
Bankruptcy Court’s decision. Id. at 2175.
5
Cir. 2011). To survive a motion to dismiss made pursuant to Rule 12(b)(6),
a party’s allegations, treated as true, are required to contain “enough facts
to state a claim to relief that is plausible on its face.” Bell Atlantic Corp. v.
Twombly, 550 U.S. 544, 570 (2007). On the one hand, the claim need not
contain overly “detailed factual allegations[.]” Id. at 555. On the other hand,
however, “a formulaic recitation of the elements of a cause of action will not
do[,]” nor will mere labels and legal conclusions suffice. Id. “A claim has
facial plausibility when the plaintiff pleads factual content that allows the
court to draw the reasonable inference that the defendant is liable for the
misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). The mere
possibility that the defendant acted unlawfully is not sufficient for a claim to
survive a motion to dismiss. Twombly, 550 U.S. at 570. The touchstone,
therefore, is plausibility and not possibility.
DISCUSSION
One of the purposes of the Bankruptcy Act is to “relieve the honest
debtor from the weight of oppressive indebtedness, and permit him to start
afresh free from the obligations and responsibilities consequent upon
business misfortunes.” Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934).
The benefit conferred upon a Chapter 7 debtor, who discloses and
surrenders all appropriate assets, is a discharge by the Bankruptcy Court
6
and the ability to begin her financial life anew.
The Bankruptcy Act
presumes a Chapter 7 debtor’s pre-petition obligations should be
dischargeable, and that she should be discharged under 11 U.S.C. § 727,
unless the debtor engaged in certain prohibited conduct.
In this case,
Wimer asserts Thiel engaged in prohibited conduct, specifically fraud, and
therefore the pre-petition legal fees she incurred and owed to Wimer should
not be dischargeable. Wimer advanced two non-dischargeability theories
before the Bankruptcy Court in its AP Complaint, one under 11 U.S.C. §
523(a)(2) and one under 11 U.S.C. § 523(a)(4). The Court will address
these theories in turn.
I.
Section 523(a)(2) - Fraud
Pursuant to 11 U.S.C. § 523(a)(2)(A), a general discharge pursuant
to § 727 of the bankruptcy code will “not discharge an individual debtor
from any debt … for … services … to the extent obtained by false
pretenses, a false representation, or actual fraud[.]”
Id.; Nunnery v.
Rountree (In re Rountree), 478 F.3d 215, 219 (4th Cir. 2007). There is no
question that Wimer has pleaded facts showing that Thiel’s debt to Wimer
is for legal services it rendered for her. [AP Doc. 1]. In order to plead a
claim that would overcome the dischargeability of Thiel’s debt owed to it,
however, Wimer must allege facts that permit the Court to draw the
7
reasonable inference that Thiel perpetrated a fraud upon Wimer, as the
term “fraud” is used in § 523. [See AP Doc. 1 at 9 (“The foregoing acts by
Defendant defrauded and caused monetary damage to Plaintiff….”)].
In order to examine Wimier’s fraud allegations, the Court must first
discern the definition of the “fraud” that Wimer must prove to make a claim
under § 523(a)(2). Wimer cites to cases from the North Carolina appellate
courts in arguing the proper fraud definition.
[Doc. 4 at 9 (“In North
Carolina, the elements of fraud are…”)]. While the broad principle that
“state law determines the rights and obligations of debtors and creditors
when the Bankruptcy Code fails to supply a federal rule is well
recognized[,]” Tidewater Finance Co. v. Kenney, 531 F.3d 312, 319 (4th
Cir. 2008), that principle is usually germane only with regard to property,
ownership,
and
security
interests
underlying
a
claim.
Lewis
v.
Manufacturers National Bank, 364 U.S. 603, 609 (1961) (uniform treatment
of property interests by both state and federal courts within a State serves
to reduce uncertainty, to discourage forum shopping, and to prevent a party
from receiving a windfall merely by reason of the happenstance of
bankruptcy).
The Supreme Court has made clear, however, that a
distinction exists between the standard of proof that a creditor must satisfy
in order to establish a valid claim against a bankrupt estate and the
8
standard that a creditor who has established a valid claim must still satisfy
in order to avoid dischargeability.
“The validity of a creditor's claim is
determined by rules of state law.” Grogan v. Garner, 498 U.S. 279, 283
(1991). “Since 1970, however, the issue of nondischargeability has been a
matter of federal law governed by the terms of the Bankruptcy Code.” Id. at
284. For this reason Wimer is incorrect that North Carolina law supplies the
proper fraud definition under the Code’s dischargeability section 523(a)(2).
Thiel argues that the Bankruptcy Court’s decision in In re Hill, 425
B.R. 766 (W.D.N.C. 2010) supplies the correct fraud definition. [Doc. 5 at
5]. The court in Hill relied upon the Fourth Circuit’s decision in Foley &
Lardner v. Biondo (In re Biondo), 180 F.3d 126 (4th Cir. 1999), which in
turn relied upon the Supreme Court’s decision in Field v. Mans, 516 U.S.
59 (1995). When faced with the issue of having to construe the reliance
component of section 523(a)(2)(A)’s fraud definition in Field, the Supreme
Court looked to “the most widely accepted distillation of the common law of
torts … the Restatement (Second) of Torts (1976)[.]” Field, 516 U.S. at 70.
Likewise, the Fourth Circuit in Biondo, 180 F.3d at 134, drew upon the
Restatement’s fraud definition, as did the Bankruptcy Court in Hill, 425 B.R.
at 775. But not all frauds are created equal, as Field, Biondo, and Hill
illustrate. Thiel focuses on fraud perpetrated by the misrepresentation of a
9
past or current fact. [Doc. 5 at 5]. That, however, is not what is alleged in
Wimer’s AP Complaint. There it is asserted that Thiel made a promise to
pay Wimer attorneys fees in the future from funds then held in her IRA.
[AP Doc. 1 at 8-9].
That, of course, is not a fraud; it is a promise, a
contract. “Appellant further alleged that when Respondent made these
promises, Respondent ‘had no present intention of paying Appellant from
her retirement funds[.]’ ” [Doc. 4 at 16 (citing AP Complaint at ¶¶ 35-36)].
The Restatement (Second) of Torts provisions regarding the representation
of intent to fulfill a future promise, therefore, will inform the Court’s analysis
as to whether such conduct falls within the non-dischargeability provisions
of § 523.
The Restatement, in pertinent part, states:
One who fraudulently makes a representation of … intention …
for the purpose of inducing another to act or to refrain from
action in reliance upon it, is subject to liability to the other in
deceit for the pecuniary loss caused to him by his justifiable
reliance upon the misrepresentation.
Restatement (Second) of Torts § 525 (1976). Addressing the salient point
in this appeal, § 530(1) explains that a “representation of the maker’s own
intention to do or not to do a particular thing is fraudulent if he does not
have that intention.” Accord, Hoyle v. Bagby, 253 N.C. 778, 781, 117
S.E.2d 760, 762 (1961) (for a future promise to be fraudulent, the intent not
10
to pay must have existed in the defendant's mind at the time he made the
promise which induced the plaintiff to do the work). In the AP Complaint,
Wimer alleges as follows:
34. Upon information and belief, in July 2013, [Thiel] knew
that her retirement funds would be protected from her creditors
under state law and exempt from her bankruptcy estate in the
event she entered bankruptcy.
35. Upon information and belief, contrary to her
representation to Plaintiff, Defendant had no present intention
of paying Plaintiff from her retirement funds.
**********
46. Upon information and belief, Defendant never intended to
pay Plaintiff from her retirement funds, a material fact that she
failed to disclose to Plaintiff.
**********
48. Upon information and belief, Defendant planned in the
summer of 2013, and perhaps earlier, to file bankruptcy and
attempt to escape her obligations if she lost the case.
[AP Doc. 1 at 6; 7 (emphasis added)].
The problem with these allegations is that they are conclusory. This is
a particular problem in light of the nature of the claim. If such conclusory
allegations were sufficient, then any breach of contract claim could be
converted into a fraud claim by simply asserting that the defendant never
intended to perform. This is precisely the sort of pleading Twombly and
Iqbal deem insufficient. Such “naked assertions devoid of further factual
11
enhancement” contribute nothing to the sufficiency of the AP Complaint.4
Iqbal, 556 U.S. at 678 (internal quotation marks and alteration omitted). In
order to make such a future-promise fraud claim, a plaintiff must allege
sufficient facts that would present a plausible claim that the defendant
actually had no intent to perform at the time the promise was made. The
Restatement also addresses this in the commentary to the section
concerning Misrepresentation of Intention:
d. Proof of intention not to perform agreement. The intention
that is necessary to make the rule stated in [§ 530(1)]
applicable is the intention of the promisor when the agreement
was entered into. The intention of the promisor not to perform
an enforceable or unenforceable agreement cannot be
established solely by proof of its nonperformance, nor does his
failure to perform the agreement throw upon him the burden of
showing that his nonperformance was due to reasons which
operated after the agreement was entered into.
Restatement (Second) of Torts § 530(1), comment. d. (1976). This
commentary is also consistent with the redemptive policy of bankruptcy.
The Fourth Circuit has explained that, when considering the applicability of
an exception to discharge, courts construe the exception narrowly “to
4
It is noted that even the conclusory allegations regarding future promise fraud are
made “on information and belief.” This is a lawyer shorthand expression of uncertainty,
and implies that the Plaintiff has no factual basis underlying the conclusory allegations
to put before the Court. See e.g., Southfield Ltd. P’ship v. Flagstar Bank, 727 F.3d 502
(6th Cir. 2013) (allegations of disparate treatment of similarly situated people made
“upon information and belief” insufficient to sustain plausible basis that such people
exist). As such, these “information and belief” allegations should be disregarded in an
Iqbal analysis, much as the conclusory allegations must be.
12
protect the purpose of providing debtors a fresh start.” Foley & Lardner v.
Biondo (In re Biondo ), 180 F.3d 126, 130 (4th Cir. 1999). Therefore, in
order to bring an adversary proceeding challenging the dischargeability of a
debt in bankruptcy, the creditor cannot simply allege the debt (i.e. the
promise to pay) and then make the conclusory assertion that there was
never any intent to pay. If such were allowed, it would serve to make
virtually all debts non-dischargeable (or at least render the discharge
questionable), and thus thwart the underlying purpose of the bankruptcy
proceeding.
There is yet another sound reason for drawing no inference of fraud
from the simple fact of Thiel’s nonperformance and holding Wimer to its
pleading burden:
If the statement is honestly made and the intention in fact
exists, one who acts in justifiable reliance upon it cannot
maintain an action of deceit if the maker for any reason
changes his mind and fails or refuses to carry his expressed
intention into effect. If the recipient wishes to have legal
assurance that the intention honestly entertained will be carried
out, he must see that it is expressed in the form of an
enforceable contract, and his action must be on the contract.
Restatement (Second) of Torts § 530(1), comment. b. (1976). Here, Wimer
did not formalize Thiel’s promise into any enforceable contract.
Irrespective of any such contract, Wimer could have required Thiel to
obtain the funds from her IRAs to make immediate payment, refusing to
13
further represent her if she chose not to do so. It did none of these things.
Instead, it challenged the dischargeability of her debt in bankruptcy with an
AP Complaint containing conclusory assertions of fraud buttressed by no
factual support.
“While legal conclusions can provide the complaint's
framework, they must be supported by factual allegations.” Iqbal, 556 U.S.
at 644. Such “threadbare” conclusions are not entitled to the assumption of
truth. Id. Wimer’s AP Complaint, therefore, does not plausibly allege any
future promise fraud by Thiel. Accordingly, the Bankruptcy Court’s Order
dismissing Wimer’s nondischargeability action premised upon 11 U.S.C. §
523(a)(2) is affirmed.
II.
Section 523(a)(4) – Fiduciary Duty
Pursuant to 11 U.S.C. § 523(a)(4), a general discharge under the
bankruptcy code will “not discharge an individual debtor from any debt …
for fraud or defalcation while acting in a fiduciary capacity[.]” Id. Wimer
alleged in its AP Complaint that Thiel became Wimer’s fiduciary upon her
promise to pay Wimer’s fees in the future from money contained in her
IRAs.
96. To induce Plaintiff to continue providing legal services to
Defendant, Defendant promised to utilize her retirement monies
to pay for Plaintiff's legal services.
14
97. In so doing, Defendant assumed a fiduciary duty to
safeguard and protect the monies in her retirement funds for
the benefit of Plaintiff.
[AP Doc. 1 at 12].
Having become a fiduciary in this way, according to
Wimer, Thiel’s debt to Wimer is nondischargeable due to her fraud or
defalcation while acting in this fiduciary capacity. [Doc 4 at 14].
Wimer’s theory of nondischargeability under § 523(a)(4) so pleaded is
without merit. The Supreme Court addressed and resolved this theory long
ago. In Davis v. Aetna Acceptance Co., 293 U.S. 328 (1934), Davis, the
debtor, operated a business selling cars financed by Aetna.
For each
vehicle acquired by Davis, he executed and delivered to Aetna four
documents: a promissory note, a chattel mortgage, a bill of sale, and a
“trust receipt, agreeing to hold [the vehicle] as the property of the
respondent for the purpose of storage, and not to sell, pledge, or otherwise
dispose of it except upon consent in writing[.]” Id. at 330. Davis would
thereafter sell the cars in his showroom to customers “without concealment
and in the ordinary course of business, though [sometimes] without written
consent.” Id. Even though he might have sold a vehicle without Aetna’s
approval, he would remit the proceeds thereafter to Aetna. Id. On August
3, 1929, Davis sold an automobile. As in the past, Davis promised to pay
Aetna from the proceeds of the sale to retire the debt but did not keep his
15
promise. Instead, he filed a petition in bankruptcy on September 13, 1929.
Id. Aetna sought the nondischargeability of Davis’ debt “created by his
fraud, embezzlement, misappropriation, or defalcation while acting as an
officer or in any fiduciary capacity[,]” the language of the Bankruptcy Code
in effect at the time and the precursor to § 523(a)(4). Specifically, Aetna
argued that Davis’ auto debt could not be discharged, “his liability arising, it
is said, from his fraud or misappropriation while acting in a fiduciary
capacity.”
Id. at 330. The Court, speaking through Justice Cardozo,
rejected Aetna’s argument.
The Court began by noting that “the statute speaks of technical trusts,
and not those which the law implies from the contract.” Id. (citation
omitted).
In ruling that the dischargeability exception at issue was
inapplicable to constructive trusts, the Court explained:
It is not enough that, by the very act of wrongdoing out of which
the contested debt arose, the bankrupt has become chargeable
as a trustee ex maleficio. He must have been a trustee before
the wrong and without reference thereto. In the words of
Blatchford, J.: “The language would seem to apply only to a
debt created by a person who was already a fiduciary when the
debt was created.”
Id. (citation omitted).
In holding that Davis was not a fiduciary as
contemplated by the Code, the Court illustrated its conclusion with the
following example: “A mortgagor in possession before condition broken is
16
not a trustee for the mortgagee within the meaning of this statute, though
he has charged himself with a duty to keep the security intact.” Id. at 334.
Turning to the facts of this case, there was no preexisting express or
technical trust in place before Thiel committed her alleged wrong.
Therefore, no fiduciary relationship necessarily existed to bring Thiel’s debt
within the § 523(a)(4) exception. At most, Theil was a debtor who bound
herself by covenant to pay Wimer’s legal fees from money on deposit in her
IRAs, not a trustee charged to preserve Wimer’s funds. Wimer’s AP
Complaint, therefore, fails to state a claim upon which relief can be granted.
See, e.g., Branch Banking & Trust Co. v. Thompson, 107 N.C. App. 53, 61,
418 S.E.2d 694, 699 (1992) (the mere existence of a debtor-creditor
relationship between the parties does not create a fiduciary relationship);
United Virginia Bank v. Air-Lift Assocs., Inc., 79 N.C. App. 315, 322, 339
S.E.2d 90, 94 (1986) (same, applying Virginia law, and explaining further
that parties to a contract do not thereby become each others' fiduciaries).
Accordingly,
the
Bankruptcy
Court’s
Order
dismissing
Wimer’s
nondischargeability action premised upon 11 U.S.C. § 523(a)(4) should be
affirmed.
17
III.
Thiel’s 11 U.S.C. § 523(d) Attorney’s Fees Claim.
Section 523(d) of the Bankruptcy Code states as follows:
If a creditor requests a determination of dischargeability of a
consumer debt under subsection (a)(2) of this section, and such
debt is discharged, the court shall grant judgment in favor of the
debtor for the costs of, and a reasonable attorney's fee for, the
proceeding if the court finds that the position of the creditor was
not substantially justified, except that the court shall not award
such costs and fees if special circumstances would make the
award unjust.
Id.
In order to prevail on a motion for attorney's fees under § 523(d), a
debtor must prove: (1) that the creditor requested a determination of the
dischargeability of the debt, (2) the debt is a consumer debt, and (3) the
debt was discharged. Once the debtor establishes these elements, the
burden shifts to the creditor to prove that its actions were substantially
justified or that special circumstances make an award unjust. In re
Machuca, 483 B.R. 726, 733 (9th Cir. BAP 2012); In re Strausbaugh, 376
B.R. 631, 636 (Bankr. S.D. Ohio 2007); In re Stine, 254 B.R. 244, 249 (9th
Cir. BAP 2000); In re McCarthy, 243 B.R. 203, 209 (1st Cir. BAP 2000).
Thiel cross appeals the Bankruptcy Court’s denial of her request for
attorneys’ fees and costs. [AP Doc. 20]. The Bankruptcy Court’s Order [AP
Doc. 11] directing that “Defendant and Plaintiff are to be responsible for
their own legal expenses incurred during this litigation[,]” was entered June
18
18, 2014, almost three weeks before the Court discharged Thiel on July 9,
2014. [B Doc. 26]. As such, the Bankruptcy Court’s Order denying Thiel’s
request for attorney’s fees and costs pursuant to § 523(d) was premature.
The third element under § 523(d) had not yet been established. Because
this Court sits as an appellate court in bankruptcy, this issue must be
remanded to the Bankruptcy Court for a determination based on the
present record.
ORDER
IT IS, THEREFORE, ORDERED that Bankruptcy Court’s June 18,
2014, Order dismissing Wimer’s Complaint in Adversary Proceeding No.
14-01016 [AP Doc. 11] is AFFIRMED.
IT IS FURTHER ORDERED that the appeal of the Bankruptcy Court’s
June 18, 2014, Order overruling the objection to the exemption [B Doc. 25]
is DISMISSED.
IT IS FURTHER ORDERED that the portion of the Bankruptcy
Court’s June 18, 2014, Order denying Thiel attorney’s fees is VACATED
and REMANDED for further consideration by the Bankruptcy Court.
IT IS SO ORDERED.
Signed: February 24, 2015
19
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