Valpo Law Blog

Analysis of current legal issues and cases in the Seventh Circuit Court of Appeals

Category: Trust and Estate Law

Legal Malpractice and Violations of Professional Rules Now Have Significant Bankruptcy Consequences

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Azariah Jelks
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.

Show Me The Money: Criminalizing (or Victimizing) Homeowners

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By: Faith E. Alvarez
Valparaiso University School of Law
J.D. Candidate, 2015

As a kid, I remember occasions where I would find my father squinting at a mess of wires in the ceiling and saying something under his breath about the idiots that built our house. As an adult, I now find myself in similar positions.

Homeownership.

When you sell your home, you generally assume that the person who buys it will take over whatever made it “special.” But what if the new owner could actually stick it to you instead?

The Indiana Supreme Court touched on this in Wysocki v. Johnson on Wednesday.

When the Johnsons sold their home, Mrs. Johnson signed a Seller’s Residential Real Estate Sales Disclosure Form, a standard preprinted checkbox form that most realtors use, disclosing any problems with the home to the new buyer. Mrs. Johnson signed that there were no problems with the house and the Wysockis subsequently bought it. However, after the Wysockis moved in, they discovered water leaks in the garage and the porch, structural problems with the porch, and substandard wiring going out to the swimming pool.

Notwithstanding the fact that their home inspection said nothing about these problems, the Wysockis sued the Johnsons for fraudulently failing to disclose those defects on the disclosure form after they had spent $1,200 on the pool wiring, $3,500 on the roof, and estimates of about $2,800 and $6,300 to fix the porch.

They won. After a bench trial, the trial court awarded them $13,805.95.

But how would they use this money for home repairs after paying $12,500 to their lawyer? So, they went back and asked for attorney’s fees under the Crime Victims Relief Act (CVRA). Following this move, the Johnsons decided to appeal – and in a turn of events, they won. The Court of Appeals found that the Wysockis had failed to show that the Johnsons actually knew about the defects. (the trial court merely found that they should have known about the defects, not that they had actual knowledge)

This brings us to the current case. The Wysockis argued that the Johnson’s failure to disclose their home’s defects was a crime and that they are victims entitled to compensation and attorneys fees under the CVRA. The Wysockis argued to the Indiana Supreme court that any knowing misrepresentation on a Sellers Disclosure Form is not just fraudulent misrepresentation, but criminal deception. And look at the similarities:

Fraudulent Misrepresentation Criminal Deception
a false representation a false or misleading written statement
made with actual knowledge of its falsity knowingly or intentionally made
which proximately caused the complaining party injury with intent to obtain property

 

While the appeals court had found the different elements were dispositive, the Supreme Court disagreed, holding that the facts of this case would have been sufficient to meet the elements of criminal deception and receive a CVRA award—if the trial court had actually included it.

What the Supreme Court clarified was that even though the Wysockis proved a predicate crime under the CVRA, the trial court maintains discretion to decide what damages to award after considering what conduct warranted punishment. In fact, the trial court has the discretion to find the predicate crime, but not to impose CVRA liability at all.

The result of the case was that the Supreme Court affirmed the trial court’s award to the Wysockis in the amount of $13,805.95 because it had acted within its discretion. Now, the Johnsons and the Wysockis both must pay their own respective attorneys’ fees.

My take? I’m better off as a lawyer than a homeowner.

But on a far more troubling note: Have Indiana’s real estate market and economy improved enough to withstand the ramifications of this decision? And does this open the door to holding realtors, who fill out the disclosure form, liable under an agency theory?

Death Certificates: Resurrecting an Issue

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By: Faith E. Alvarez
Valparaiso University School of Law
J.D. Candidate, 2015

Here’s a riddle: A guy is lying on a bed – dead. Next to the bed is a glass of ice cold, bloody water. The window is open, and it’s a cold day. How did he die?

None of your business!

Well, at least that was an acceptable answer until Tuesday when the Indiana Supreme Court decided that it actually could be your business.

In Evansville Courier & Press v. Vanderburgh County Health Dep’t, the Court held that certificates of death are public records that a county health department must give public access to under the Indiana Access to Public Records Act. (Oh, and how did he die? Someone threw an icicle through the window, it went through the guy, and landed in the glass.)

The facts of the legal case were pretty basic. In June 2012, the Vanderburgh County Health Department received a request from Rita Ward for death certificates from the prior month. The health department denied her request because she did not have “a direct interest in the matter” nor was “the certificate necessary for the determination of personal or property rights or for compliance with state or federal law.”

Unsatisfied, she got an advisory opinion from the Public Access Counselor of the State of Indiana, who explained that while the State Department of Health could deny her request, the local health department could not. The following day, the Evansville Courier & Press newspaper requested access to all Vanderburgh County death records from May 2012. The request was denied.

Naturally, Ward and the Courier & Press proceeded to sue the Vanderburgh County Health Department for access to those records. However, the trial court concluded that because the State Department of Health could deny the request and the State required the local health departments to retain death certificates, “clearly” the legislature’s intention was to allow local health departments to likewise deny requests for death certificates. The Indiana Court of Appeals affirmed the trial court in a unanimous panel.

But the Indiana Supreme Court reversed, applying a presumption in favor of disclosing public records. The county health department’s primary contention was that death certificates are not “public records,” rather confidential records, exempting them from disclosure. (Think of deaths that have been ruled suicides or homicides. Families generally want that information to stay private.)

The Supreme Court pointed to an eerily similar case from 1975 – Evansville Printing. In that case, an Evansville Press reporter requested a death certificate from the Evansville-Vanderburgh County Department of Health. The request was denied; the county said the cause of death was confidential. There however, the trial court concluded that the reporter’s request should have been granted and a unanimous Court of Appeals panel affirmed, concluding that local death certificates were not confidential records, but were in fact “public records.”

Fast-forward almost 40 years and the trial and appellate courts have done a complete 180°. The Indiana Supreme Court acknowledged this change of heart but reaffirmed the 1975 Indiana Court of Appeals holding. A death certificate request must be granted by a county health department. Only the State Department of Health can deny such a request.

The opinion recognized that public disclosure of the details of one’s death may cause pain to the family but declared that we must be mindful of the importance of open and transparent government, concluding that the public interest outweighs private.

Do you agree with this outcome?

Does that “public interest outweighs private” statement apply to other programs, like Indiana Medicaid?

Inheritance IRA…is it safe from 3rd parties?

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By: RG Skadberg
Valparaiso University Law School
J.D. Candidate, 2016

A concern for many parents in estate planning is whether part or all of an inheritance they leave for a beneficiary could be lost to divorce, lawsuit, or creditor.

In June, the United States Supreme Court sent a shudder down the spine of those parents with its unanimous decision in Clark v. Rameker, a case rising from the Seventh Circuit Court of Appeals. The decision of the Court made it the law of the Seventh’s land, but prior to the ruling, not all Circuits agreed.

The case resulted from Ruth Hefferon’s creation of an IRA in 2000, which named her daughter, Heidi Hefferon-Clark, as the sole beneficiary. When Ruth died in 2001, Heidi inherited the IRA worth $450,000. She elected to take monthly distributions. In 2010, Heidi and her husband filed Chapter 7 bankruptcy. In those proceedings, they claimed the Inherited IRA, then worth $300,000, was exempt from consideration. The creditors and bankruptcy trustee thought otherwise and the suit ensued.

Initially, the bankruptcy court ruled it was not exempt under 11 U. S. C. §522(b)(3)(C). The Western District of Wisconsin reversed that ruling.. The Seventh Circuit returned the volley in favor of the bankruptcy court citing the differences between an Inherited IRA and an IRA that is still a retirement vehicle.

The Seventh’s ruling conflicted with a 2012 ruling from the 5th Circuit (the two decisions are discussed in this article “Financial Planning: The Supremes Rule on Inherited IRAs”), which led to the Supreme Court appearance on March 24, 2014.

Justice Sotomayor delivered the unanimous decision clarifying the difference between IRA funds. The ruling distinguished funds from an Inherited IRA and IRA funds held by the person funding the IRA or the funder’s spouse. The Court found funds from an Inherited IRA were not encumbered with the same penalty provision for early withdrawal, and in fact, had to be withdrawn beginning in the year after the death of the IRA originator. Further distinguishing the IRA funds is the fact that the owner of an Inherited IRA cannot add any additional funds or mix the Inherited IRA with his or her own IRA accounts.

This was enough to show that the Inherited IRA did not retain a protected retirement status and therefore was subject to a creditor’s action.

The Clark ruling did not address state legislation already on the books. Texas, the state from which the 2012 Fifth Circuit Court of Appeals ruling originated, along with Alaska, Arizona, and Florida previously passed provisions that protect Inherited IRAs from bankruptcy. This leaves open the possibility a creditor in one of those states may challenge the state statute citing this Supreme Court ruling.

Short of moving to one of those four states, a way to protect IRA distribution in a proactive manner is to use an IRA Preservation or Beneficiary Trust. The Supreme Court may have opened a new marketing opportunity for estate planning attorneys who use these planning tools.

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