Robert Clauss v. Randall Hugh Church

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# United States Bankruptcy Appellate Panel FOR THE EIGHTH CIRCUIT

No. 05-6010 SI

In re: Randall Hugh Church,

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Debtor.

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Robert Clauss,

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Plaintiff-Appellant,

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V.

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Randall Hugh Church,

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Defendant-Appellee.

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Appeal from the United States
Bankruptcy Court for the Southern
District of Iowa

Submitted: July 18, 2005
Filed: July 26, 2005

Before KRESSEL, Chief Judge, FEDERMAN, and MAHONEY, Bankruptcy Judges.

FEDERMAN, Bankruptcy Judge.

Plaintiff Robert Clauss appeals an order of the bankruptcy court1 finding that
Clauss failed to prove that a debt owed him for attorney's fees is nondischargeable
pursuant to 11 U.S.C. § 523(a)(2)(A). We affirm.

"The Honorable Lee M. Jackwig, Chief Judge, United States Bankruptcy Court for the
Southern District of Iowa.

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## FACTUAL BACKGROUND

On April 25, 2002, Clauss agreed to represent Church in modifying a
previously entered dissolution decree. Church paid no retainer to Clauss. Church and
Clauss, instead, agreed upon a fee of $150 per hour, and Church agreed to pay Clauss
$600 per month until the bill was paid in full. On July 16, 2003, Clauss withdrew as
Church's attorney, at Church's request. The record indicates that Church authorized
Clauss to aggressively pursue issues for which there was little chance for success in
the modification proceeding. Indeed, Clauss testified that he soon realized that
Church's only intention in pursuing the modification was to harass his former spouse.
Clauss stated that because of Church's unreasonable behavior, he incurred substantial
attorney's fees. Despite Clauss' concerns about Church's motivation, he turned all of
the files over to Church when the relationship ended, thereby releasing his attorney's
lien.

At some point, Clauss claims that Church indicated that he was considering
bankruptcy, although there is a dispute about when this information became known
to Clauss. Clauss testified that Church assured him that, regardless of whether he filed
a bankruptcy case, he would not discharge the debt to Clauss, but would pay it in full.
Clauss argues that, thereafter, he only continued to provide legal services to Church
based on this representation. Church argues that he never made such a statement.

By July of 2003, when Church ended the relationship, he had paid Clauss the
agreed upon $600 per month for each of the 15 months of representation. On
September 23, 2003, Church filed for bankruptcy relief, and he scheduled a debt to
Clauss in the amount of $32,070.00, along with other unsecured debt in the amount
of $32,677.82. Church claimed that adverse conditions, including health problems,
car repairs, flooding in his apartment, creditors looking to him to pay some of his
former wife's debt, being off from work, and reduced income, led to his need to file
bankruptcy.

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Clauss timely filed a complaint to determine the dischargeability of his debt,
contending that Church had obtained the benefit of his legal services through false
representation, false pretenses, or actual fraud. At the conclusion of the trial the
bankruptcy court found that Clauss had failed to sustain his burden of proof as to
such cause of action and that any obligation was, therefore, dischargeable. This
appeal followed.

## STANDARD OF REVIEW

A bankruptcy appellate panel shall not set aside findings of fact unless clearly
erroneous, giving due regard to the opportunity of the bankruptcy court to judge the
credibility of the witnesses.2 We review the legal conclusions of the bankruptcy court
de novo.3

## DISCUSSION

Section 523(a)(2)(A) of the Bankruptcy Code (the Code) excepts a debt from
discharge if the debt was obtained by the debtor's misrepresentation:

(a) A discharge under section 727, 1141, 1228(b), or 1328(b) of this title
does not discharge an individual debtor from any debt-

2Gourley v. Usery (In re Usery), 123 F.3d 1089, 1093 (8th Cir. 1997); O'Neal v.
Southwest Mo. Bank (In re Broadview Lumber Co., Inc.), 118 F.3d 1246, 1250 (8th
Cir. 1997) (citing First Nat'l Bank of Olathe, Kansas v. Pontow, 111 F.3d 604, 609
(8th Cir.1997)). Fed. R. Bankr. P. 8013.

3First Nat'l Bank of Olathe, Kansas v. Pontow (In re Pontow), 111 F.3d 604, 609 (8th
Cir. 1997); Sholdan v. Dietz (In re Sholdan), 108 F.3d 886, 888 (8th Cir. 1997). See
also City Bank & Trust Co. v. Vann (In re Vann), 67 F.3d 277, 279 (11th Cir. 1995).
(construction of 11 U.S.C. § 523(a)(2)(A) given de novo review).

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(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.
4

The bankruptcy court correctly found that Clauss bore the burden of proving, by a
preponderance of the evidence, that his debt was nondischargeable.5 The court also
correctly held that Clauss needed to prove the elements of misrepresentation as
articulated by the Eighth Circuit in Thul v. Ophaug (In re Ophaug),6 and Caspers v.
Van Horne (In re Van Horne).7 In both cases the court held that, to succeed in a §
523(a)(2)(A) claim, the creditor must prove the following: (1) the debtor made false
representations; (2) at the time made, the debtor knew them to be false; (3) the
representations were made with the intention and purpose of deceiving the creditor;
(4) the creditor relied on the representations; and (5) the creditor sustained the alleged
injury as a proximate result of the representations.8 The court also noted that the
United States Supreme Court has more recently clarified that the creditor's reliance
must be justifiable in order to be actionable.9 In so doing, the Supreme Court defined
justifiable reliance as the standard applicable to a victim's conduct where, "under the

411 U.S.C. § 523(a)(2)(A).

5Grogan v. Garner, 498 U.S. 279,287, 111 S. Ct. 654, 659, 112 L. Ed. 2d 755 (1991).

6827 F.2d 340 (8th Cir. 1987).

7823 F.2d 1285 (8th Cir. 1987).

8Van Horne, 823 F.2d at 1287; Ophaug, 827 F.2d at 342, n. 1.

9Field v. Mans, 516 U.S. 59, 74, 116 S. Ct. 437, 446,133 L. Ed. 2d 351 (1995).

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circumstances, the facts should be apparent to one of his knowledge and intelligence
from a cursory glance, or he has discovered something which should serve as a
warning that he is being deceived, that he is required to make an investigation of his
own."10

We begin, therefore, with the distinction between a promise to pay and a
misrepresentation. Clauss claims that Church promised to pay this obligation even if
he filed for bankruptcy relief. But a promise to pay a debt in the future is not a
misrepresentation merely because the debtor fails to do so.11 Instead, Clauss was
obligated to prove that Church made an intentional misrepresentation, and that Clauss
justifiably relied on that misrepresentation to his detriment.12 It is not clear from the
record precisely when Church made the alleged representation that he would not
discharge Clauss' debt if he filed for bankruptcy relief. It is clear from the record,
however, that Church did, at the outset, promise to pay Clauss on a monthly basis,
and that he did so for 15 months. Clauss did not dispute that Church may have made
additional payments as well. And, as the court found, by the time Church indicated
he was considering a bankruptcy case, Clauss had provided all, or virtually all, of the
legal services for which payment is sought. The court found that Clauss failed to
prove that a representation was made; he failed to prove when the representation was
made; he failed to offer any evidence of the amount of the debt already incurred at the
time the alleged representation was made; he failed to prove that, at the time he
began the representation, Church had no intention of paying the debt; and he failed
to prove that under the circumstances, someone with Clauss' knowledge and expertise

10Field, 516 U.S. at 71, 116 S. Ct. at 444.

11Rust v. Tellam (In re Tellam), 323 B.R. 661, 664 (Bankr. N.D. Ohio 2005); In re
Shea, 221 B.R. 491, 497 (Bankr. D. Minn. 1998).

12 Id.

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could justifiably rely on such a promise.13 These findings are fully supported by the
record.14 We, therefore, affirm the judgment of the bankruptcy court.

13Clauss argued that Church never intended to pay all of the fees, and that he agreed
initially to make small monthly payments while intending to discharge the bulk of the
fees when the representation came to an end. There is, however, no evidence to
support this allegation, and the bankruptcy court did not err when it did not consider
it. Moreover, Clauss at all times could have protected himself by insisting upon a
retainer, or enforcing his attorney's lien as to the papers and records in his possession
at the end of the representation. Iowa Code Ann. § 602.10116(1) (West 2005) ("An
attorney has a lien for a general balance of compensation upon: (1) Any papers
belonging to a client which have come into the attorney's hands in the course of
professional employment").

14We note that the Bankruptcy Code allows a debtor to reaffirm a debt, and thus,
except it from discharge, if doing so does not impose an undue hardship on the
debtor. 11 U.S.C. § 524(c). The courts, however, will not enforce a prepetition
agreement that denies a debtor bankruptcy relief. In re Pease, 195 B.R. 431, 433
(Bankr. D. Neb. 1996).

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