Juris Doctor Candidate, 2016
Valparaiso University Law
Lawyers will now have more reasons to avoid committing malpractice. In Estate of Cora v. Jahrling, the Seventh Circuit held that a lawyer filing for bankruptcy could not discharge a malpractice judgment if it constituted defalcation while acting in a fiduciary role.
Illinois attorney John Jahrling represented ninety-year-old Stanley Cora in a real estate transaction to sell his home. Unfortunately, Mr. Cora only spoke polish, and Jahrling was unable to communicate with his client. However, the opposing attorney was conversant in Polish so Jahrling relied on him to translate and communicate with his client.
The transaction ended in a windfall for the adverse parties, with Mr. Cora agreeing to sell his home for a mere $35,000. The home was actually valued at $106,000 and the buyers eventually resold the home for $145,000. Mr. Cora also believed one term of the transaction gave him a life estate that would allow him to live in the upstairs apartment of the house free of charge. This agreement was lost in translation either intentionally or accidentally, and it was not included in the sale contract.
Mr. Cora sued in state court for malpractice, but passed away before the suit could take place. His estate then continued the lawsuit on his behalf. The estate eventually received a malpractice award of $26,000 plus costs.
Jahrling later filed for Chapter 7 bankruptcy, and Mr. Cora’s estate argued that the judgment was not dischargeable in bankruptcy under 11 U.S.C. 523(a)(4), which prohibits discharging debts obtained “for fraud or defalcation while acting in a fiduciary capacity”. The bankruptcy court found in favor of Mr. Cora’s estate, holding that his conduct not only amounted to a defalcation of a fiduciary duty, but that he clearly disregarded a risk that he would violate this duty by relying on an adverse party to meet his client’s interests.
“Defalcation” is an abstruse term that courts have been struggling to define. The Seventh Circuit noted that it is, “a word only lawyers and judges could love”. But generally, it refers to the misappropriation of money when someone breaches a fiduciary duty.
The Seventh Circuit applied Supreme Court precedent Bullock v. Bank Champaign, which held that debts occurring from defalcation while acting in fiduciary manner are not dischargeable. Bullock also established the state of mind required to show whether defalcation occurred. Under Bullock, defalcation requires gross recklessness or knowledge of the improper nature of the fiduciary behavior.
The Seventh Circuit affirmed the bankruptcy court’s analysis under Bullock that Jahrling’s violation of the professional rules of conductwas circumstantial evidence that he acted with gross recklessness. The fact that Jahrling made no effort to communicate with Mr. Cora except through adverse counsel despite the obvious risks associated with this conduct was also sufficient circumstantial evidence of his recklessness.
Committing malpractice and violating rules of professional responsibility have now become even more significant through this ruling. Unlike with legal malpractice cases, violations of professional responsibility are not proof of legal breaches of duty. Nonetheless, both violations have been held to be permissible circumstantial evidence of recklessness that ultimately may leave bankrupt lawyers on the hook for non-dischargeable judgments.