Wadley et al v. Jacobs

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UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re 	No. 07-41427 TG
Chapter 13
MARK LYLE WADLEY and
DENISE MARIE WADLEY,
Debtors.
___________________________/
MARK LYLE WADLEY and 	A.P. No. 07-4158
DENISE MARIE WADLEY,
Plaintiffs,
vs.
STEVEN L. JACOBS
Defendant.
___________________________/
MEMORANDUM OF DECISION AFTER TRIAL
In the above-captioned adversary proceeding, Plaintiffs Mark and
Denise 	Wadley 	(the 	“Debtors”) 	seek 	a 	judgment 	for 	damages 	against
Defendant Steven Jacobs (“Jacobs”), their former bankruptcy counsel,
in the amount of $5,235.35 on grounds of legal malpractice. 	Having
considered 	the 	evidence 	and 	argument 	presented 	at 	trial, 	the 	Court
finds and concludes that, due to Jacobs’ negligence, the Debtors have
suffered damages in the amount of $543. 	Judgment will be entered in
favor of the Debtors in accordance with this decision.
Signed: May 29, 2008
________________________________________
LESLIE TCHAIKOVSKY
U.S. Bankruptcy Judge
________________________________________
Entered on Docket
May 29, 2008
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
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1Jacobs’ primary law office is in San Leandro, California. 	It
is staffed during normal business hours five days a week. 	He also
operates five satellite offices where he meets with clients by
appointment only. 	These offices are normally open only one day a
week for two to three hours. 	The office is not staffed at other
times although there is a general building receptionist who can
refer clients to Jacobs’ San Leandro office. Any telephone calls
that are made to a satellite office are received in Jacobs’ San
Leandro office.
2No evidence was presented that Jacobs warned the Debtors not
to stop paying their creditors if they delayed filing for
bankruptcy.
2
SUMMARY OF FACTS
In 	January 	2007, 	the 	Debtors 	contacted 	Jacobs 	about 	filing 	a
bankruptcy 	petition. 	On 	January 	13, 	2007, 	they 	met 	with 	Jacobs 	at
his San Leandro office 1 and paid him $200 as a retention fee. 	At this
meeting, Jacobs advised the Debtors to stop making payments to their
creditors. 	He told them to gather required documents and bring them
to his office along with a $300 processing fee. 2
Plaintiffs followed Jacobs’ advice and stopped making payments
to 	their 	creditors. 	However, 	for 	personal 	reasons 	and 	in 	order 	to
accumulate sufficient cash to pay him the additional $300, they did
not 	return 	to 	Jacobs’ 	office 	to 	proceed 	with 	the 	bankruptcy 	until
March 27, 2007. 	A member of Jacobs’ staff told the Debtors that they
would 	receive 	a 	phone 	call 	when 	their 	bankruptcy 	forms 	had 	been
prepared. 	An appointment would be made at that time for them to sign
the 	bankruptcy 	forms. 	They 	were 	told 	that 	the 	forms 	would 	be
completed and ready for their signatures in approximately two weeks.
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3Jacobs’ office manager testified that this was not the
office’s customary procedure. 	Normally, if a client advised
someone in Jacobs’ office that his car had been repossessed, an
appointment would be scheduled the same day, a skeleton petition
would be filed, and they were usually able to obtain a prompt
release of the car.
3
Exactly two weeks later, on April 10, 2007, the Debtors’ car was
repossessed. 	The 	Debtors 	had 	not 	yet 	received 	a 	phone 	call 	from
Jacobs 	advising 	them 	that 	their 	bankruptcy 	forms 	were 	ready 	to 	be
signed. 	Denise Wadley telephoned Jacobs’ office and spoke with one
of 	his 	employees. 	She 	told 	the 	employee 	that 	their 	car 	had 	been
repossessed 	and 	that 	she 	needed 	to 	speak 	with 	Jacobs 	immediately.
She 	was 	told 	that 	she 	needed 	an 	appointment 	to 	speak 	with 	him 	and
that the next available appointment was one week later, on April 17,
2007. 	An appointment was scheduled for that date. 3
In the meantime, the Debtors were able to obtain the return of
their car by borrowing sufficient funds from Mark Wadley’s mother to
pay off the balance due plus the towing fees and other repossession
charges. 	When they met with Jacobs on April 17, he told them that,
under the circumstances, there was nothing more than he could do for
them with respect to the car. 	The Debtors were advised that Jacobs’
office had not yet begun preparing their forms and that it would be
two more weeks before they were ready to be signed.
Again, the Debtors did not hear back from Jacobs’ office within
two more weeks. 	On May 7, 2007, the IRS levied on funds in Debtors’
bank 	accounts. 	As 	a 	result, 	Plaintiffs 	incurred 	several 	overdraft
charges. 	On May 10, 2007, the Debtors contacted Jacobs’ office for
assistance 	in 	obtaining 	the 	release 	of 	this 	levy. 	They 	met 	with
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26 4The evidence concerning this occurrence was somewhat confused
as the date on the faxed letter, May 24, 2007, preceded the date of
the IRS levy.
4
Jacobs at his San Leandro office on the same day. 	While present at
Jacobs’ 	office, 	Mark 	Wadley 	telephoned 	the 	IRS 	and 	got 	the 	levy
released. 	On 	the 	same 	day, 	Jacobs 	prepared 	and 	filed 	a 	skeleton
petition for the Debtors. 	Due to his office’s delay in filing their
petition, 	Jacobs 	voluntarily 	refunded 	to 	the 	Debtors 	the 	$500 	that
they had tendered to him for his services thus far. 	The balance of
the 	required 	documents, 	including 	the 	Debtors’ 	plan 	(the 	“Plan”),
were not filed until June 4, 2007.
After the bankruptcy petition was filed, in June 2007, the IRS
either 	levied 	on 	or 	purported 	to 	assert 	an 	offset 	against 	the
Debtors’ 	California 	state 	tax 	refund 	(the 	“State 	Tax 	Refund”) 	to
satisfy a portion of the Debtors’ federal tax liability. 	The Debtors
asked Jacobs’ office to assist them in obtaining a release of these
funds. 	Jacobs’ 	office 	faxed 	a 	letter 	to 	the 	IRS 	requesting 	the
return 	of 	the 	State 	Tax 	Refund. 4 	The 	IRS 	declined 	to 	return 	the
State Tax Refund. 	Nothing further was done to obtain its return.
On June 19, 2007, the Chapter 13 Trustee (the “Trustee”) filed
a 	motion 	asking 	the 	Court 	to 	review 	the 	reasonableness 	of 	Jacobs’
fees under 11 U.S.C. § 329. 	The motion was scheduled for hearing on
August 17, 2007. 	In the motion, the Trustee noted that a meeting of
creditors 	was 	scheduled 	in 	the 	Debtors’ 	case 	for 	June 	14, 	2007.
Local Rule 3015-1(b)(1) required that notice of the Plan be given to
creditors at least 25 days prior to this date. 	Because the Plan was
not 	filed 	with 	the 	petition, 	the 	Debtors 	were 	required 	to 	provide
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this notice. 	They failed to do so in time to permit the Plan to be
recommended for confirmation on June 14, 2008.
The motion also stated that the Trustee did not receive copies
of the Debtors’ most recently filed federal tax return or 60 days of
payment advices until June 12, 2007, two days before the meeting of
creditors. 	The motion noted that, at the meeting of creditors, the
Debtors testified that they had provided these documents to Jacobs’
office three weeks prior to the meeting of creditors. 	As a result,
she requested that Jacobs’ fees be reduced by an additional $300.
On July 11, 2007, the Court received a letter from the Debtors
expressing their dissatisfaction with the service provided to them by
Jacobs. 	In 	response, 	the 	Court 	issued 	an 	Order 	to 	Show 	Cause 	Re
Disgorgement of Fees (the “OSC”), which it scheduled for hearing on
the same date set for the Trustee’s motion. 	The OSC required Jacobs
to show why his fees should not be reduced by an amount greater than
the $300 reduction requested by the Trustee for the reasons stated in
the 	Debtors’ 	letter. 	Jacobs 	moved 	to 	withdraw 	as 	the 	Debtors’
attorney 	on 	August 	14, 	2007 	and 	agreed 	to 	accept 	any 	reduction 	in
fees that the Court found appropriate.
The hearing on the OSC was rescheduled for September 24, 2007,
at which time Jacobs’ motion to withdraw as the Debtors’ attorney was
granted. 	At 	that 	hearing, 	Jacobs’ 	counsel 	stated 	that 	Jacobs 	had
voluntarily 	refunded 	all 	of 	his 	fees 	to 	the 	Debtors. 	The 	Court
advised the Debtors that an adversary proceeding would be required if
they wished to seek affirmative relief, such as damages.
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On October 3, 2007, the Debtors filed this adversary proceeding,
seeking 	damages 	totaling 	$5,235.35, 	consisting 	of: 	(1) 	the 	amount
paid 	from 	funds 	borrowed 	from 	Mark 	Wadley’s 	mother 	to 	obtain 	the
return of the Debtors’ car in the amount of $3,313.35, (2) the amount
of the State Tax Refund in the amount of $1,379.00, (3) $300.00 for
phone calls made to the IRS to obtain a release of its pre-petition
levy 	on 	the 	Debtors’ 	bank 	account, 	and 	(4) 	$243.00 	in 	overdraft
charges 	incurred 	as 	a 	result 	the 	IRS 	pre-petition 	levy 	on 	the
Debtors’ bank account.
DISCUSSION
Applicable Law.
The applicable law in an action for legal malpractice is the law
of 	the 	state 	in 	which 	legal 	services 	were 	provided. 	In 	re 	Del-Met
Corp., 322 B.R. 781 (Bankr. M.D. Tenn. 2005). 	In this case, because
Jacobs 	provided 	legal 	services 	to 	the 	Debtors 	in 	California,
California 	law 	applies. 	Under 	California 	law, 	the 	elements 	of 	a
legal 	malpractice 	claim 	are: 	(1) 	the 	existence 	of 	a 	duty; 	(2) 	the
breach of the duty; (3) damages; and (4) proximate cause. 	Lazy Acres
Market, 	Inc. 	v. 	Tseng, 	152 	Cal. 	App. 	4th 	1431 	(2007). 	An 	attorney
who commits legal malpractice is liable for all damages directly and
proximately caused by his negligence. 	Ferguson v. Lieff, Cabraser,
Heimann & Bernstein, 30 Cal. 4th 1037, 1045 (2003).
Duty and Breach of Duty.
The 	Debtors 	retained 	Jacobs 	as 	their 	bankruptcy 	counsel 	in
January 	2007. 	At 	that 	point, 	an 	attorney-client 	relationship 	was
established. 	See 	Benninghoff 	v. 	Superior 	Court, 	136 	Cal. 	App. 	4th
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61, 72 (2006), (when a party seeks legal advice from an attorney and
the attorney provides that advice, an attorney-client relationship is
established 	prima 	facie). 	From 	that 	point 	on 	until 	his 	motion 	to
withdraw 	was 	granted, 	Jacobs 	owed 	the 	Debtors 	a 	duty 	to 	use 	such
“skill, prudence, and diligence as members of the profession commonly
possess and exercise.” 	Rose v. Hudson, 153 Cal. App. 4th 642, 649-50
(Cal. 	Ct. 	App. 	2007). 	This 	duty 	included 	preparing 	and 	filing 	the
required 	bankruptcy 	documents 	promptly 	and 	giving 	the 	Debtors
competent advice about how to conduct themselves in connection with
the bankruptcy both before and after filing the petition.
Jacobs breached this duty in several respects, either personally
or 	through 	the 	agency 	of 	his 	employees. 	First, 	he 	advised 	them 	to
stop paying their creditors without cautioning them that this advice
was 	conditioned 	on 	their 	completing 	their 	bankruptcy 	documents 	and
filing their bankruptcy within a short period of time. 	Second, his
office failed to prepare the Debtors’ bankruptcy documents promptly
after the Debtors paid the processing fee. 	Third, when informed that
the 	Debtors’ 	car 	had 	been 	repossessed, 	Jacobs’ 	office 	failed 	to
schedule 	an 	emergency 	appointment 	so 	that 	Jacobs 	could 	obtain 	its
release. 	Fourth, even after Jacobs learned of his office’s failure
to 	schedule 	an 	emergency 	appointment, 	he 	failed 	to 	have 	his 	office
prepare the Debtors’ bankruptcy documents promptly. 	This permitted
the 	IRS 	to 	levy 	on 	the 	Debtors’ 	bank 	account 	and 	gave 	rise 	to
overdraft 	charges 	and 	phone 	charges 	to 	obtain 	the 	release 	of 	the
levy.
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Proximate Cause and Damages.
The 	more 	difficult 	issues 	are 	whether 	any 	of 	these 	breaches
proximately caused the Debtors’ damages. 	The Court will examine each
of the items of damage claimed by the Debtors to determine whether it
was proximately caused by a breach of Jacobs’ duty of care.
Car Repossession Expenses.
The largest element of the Debtors’ damages claim is the payment
made 	from 	funds 	borrowed 	from 	Mr. 	Wadley’s 	mother 	to 	obtain 	the
release 	of 	their 	car 	after 	it 	had 	been 	repossessed. 	Based 	on 	the
evidence 	presented 	at 	trial, 	as 	recited 	above, 	the 	Court 	concludes
that 	Jacobs’ 	delay 	in 	preparing 	and 	filing 	the 	bankruptcy 	petition
for the Debtors was not the proximate cause of this alleged element
of damages.
It was not unreasonable, absent knowledge of an emergency, for
Jacobs’ office to take two weeks to prepare the bankruptcy documents.
The 	car 	was 	repossessed 	exactly 	two 	weeks 	after 	the 	Debtors 	were
promised that the papers would be ready. 	Although Jacobs’ office had
not 	yet 	started 	preparing 	the 	documents 	on 	the 	day 	the 	car 	was
repossessed, 	even 	if 	the 	papers 	had 	been 	completed 	by 	then 	and 	the
Debtors 	had 	signed 	them, 	more 	likely 	than 	not, 	the 	bankruptcy
petition would not have been filed until the following day.
Jacobs’ negligent advice to stop paying creditors without regard
to 	when 	the 	bankruptcy 	processing 	fee 	was 	paid 	may 	have 	been 	the
proximate 	cause 	of 	the 	repossession. 	However, 	given 	the 	Debtors’
testimony that they delayed going forward with the bankruptcy so as
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to save money for the processing fee, it is just as likely that they
stopped paying their car creditor due to lack of funds.
In any event, the Debtors failed to establish the amount of any
monetary 	damages 	that 	resulted 	from 	the 	repossession. 	The 	funds
borrowed from Mr. Wadley’s mother were used to pay off their debt to
the car creditor. 	Although they now owe a debt for the loan to Mr.
Wadley’s 	mother, 	they 	no 	longer 	owe 	the 	debt 	to 	the 	car 	creditor.
Jacobs’ negligent failure to schedule an emergency appointment so as
to 	obtain 	a 	prompt 	release 	of 	the 	car 	would 	have 	eliminated 	their
need to borrow the funds. 	However, they then still would have owed
the 	debt 	on 	the 	car. 	Thus, 	they 	are 	no 	worse 	off 	than 	they 	were
before.
State Tax Refund.
The second largest element of the Debtors’ damages claim is the
amount 	of 	the 	State 	Tax 	Refund 	levied 	upon 	or 	offset 	by 	the 	IRS.
Jacobs’ delay in preparing the Debtors’ bankruptcy documents was not
the cause of this event which occurred post-petition. 	The levy may
have 	been 	wrongful, 	and 	Jacobs’ 	efforts 	to 	obtain 	its 	release 	may
have 	been 	inadequate 	and 	constituted 	malpractice. 	However, 	the
Debtors failed to establish this element of their claim.
Phone Calls to the IRS.
The 	Debtors 	also 	claim 	$300 	in 	damages 	for 	the 	cost 	of 	phone
calls made on Mr. Wadley’s cellular phone from Jacobs’ office to the
IRS to obtain the release of the levy on the Debtors’ bank account.
The Court finds and concludes that Jacobs’ negligent delay in filing
the 	Debtors’ 	bankruptcy 	petition 	was 	the 	proximate 	cause 	of 	this
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element of damages. 	Jacobs has not contested that the charges were
actually 	incurred 	or 	the 	amount 	of 	the 	damages 	claimed. 	Thus, 	the
Debtors are entitled to judgment for this amount.
Overdraft Charges.
For 	the 	same 	reason, 	the 	Court 	concludes 	that 	the 	Debtors 	are
entitled to judgment for the $243.00 in overdraft charges incurred as
a result of the IRS levy on their bank account. 	Although Mr. Wadley
testified 	that 	the 	IRS 	released 	the 	levy 	because 	he 	was 	able 	to
convince 	them 	that 	it 	had 	been 	made 	by 	mistake, 	the 	Court 	is
persuaded 	that 	it 	is 	more 	probable 	than 	not 	that 	the 	mistake 	would
not have been made had the Debtors been able to file for bankruptcy
more promptly.
CONCLUSION
Jacobs committed legal malpractice by negligently delaying the
filing 	of 	the 	Debtors’ 	bankruptcy 	petition. 	Jacobs’ 	negligence
caused 	the 	Debtors 	to 	incur 	damages 	in 	the 	amount 	of 	$543.00.
Judgment will be entered for Plaintiffs in this amount.
END OF DOCUMENT
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COURT SERVICE LIST
Mark Wadley
Denise Wadley
4679 Sloan St.
Fremont, CA 94538
Steven L. Jacobs
Law Offices of Steven L. Jacobs
Sanwa Bldg. #350
14895 E 14th St.
San Leandro, CA 94578
James A. Pixton
Law Offices of James A. Pixton
1524-A Lincoln Ave.
Alameda, CA 94501
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