Carl Selenberg v. Dianne Bates

Case: 16-30649 Document: 00513982734 Page: 1 Date Filed: 05/08/2017
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
United States Court of Appeals
No. 16-30649
Fifth Circuit
FILED
May 8, 2017
In the Matter of CARL J. SELENBERG, Lyle W. Cayce
Clerk
Debtor.
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CARL J. SELENBERG,
Appellant,
v.
DIANNE BATES,
Appellee.
Appeal from the United States District Court
for the Eastern District of Louisiana
Before PRADO, HIGGINSON, and COSTA, Circuit Judges.
EDWARD C. PRADO, Circuit Judge:
This appeal involves a bankruptcy dispute between Debtor and
Appellant Carl J. Selenberg and Appellee Dianne P. Bates. The bankruptcy
court held that a promissory note Selenberg gave to Bates was a
nondischargeable debt under 11 U.S.C. § 523(a)(2)(A). The district court
affirmed. On appeal, Selenberg argues that the bankruptcy court erred in
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No. 16-30649
concluding that the requirements for nondischargeability under § 523(a)(2)(A)
were met. We AFFIRM.
I. BACKGROUND
In 2008, Bates was seriously injured in an accident. Bates retained an
attorney, Robert Faucheux, to represent her in bringing a personal injury
lawsuit, but Faucheux failed to file the suit before the prescriptive period had
run. Bates then retained another attorney, Selenberg, to represent her in
bringing a malpractice claim against Faucheux. But in another unfortunate
series of events, Selenberg failed to properly file Bates’s malpractice suit
against Faucheux before the prescriptive period had run, and the case was
ultimately dismissed.
In early December 2011, Selenberg informed Bates that her case had
been dismissed, and he told her that he had no malpractice insurance and no
money with which to compensate her. On December 15, 2011, Selenberg met
with Bates to discuss her potential malpractice claim against him. He only
agreed to this meeting after Bates assured him that she did not intend to hire
another attorney. Selenberg offered to give Bates a promissory note in the
amount of $275,000 plus attorneys’ fees of up to 25% of the value of the note.
He explained that one of his cases might pay out in the future and that he
might be able to compensate Bates for her loss at that point. According to
Selenberg, Bates would have five years to file suit to collect on the note,
whereas she would only have one year to bring a malpractice claim against
him. Selenberg also told Bates that if she filed an attorney disciplinary
complaint against him, she would never recover anything from him. Bates
accepted the offer, and shortly thereafter, Selenberg sent her the promissory
note.
Selenberg never made any payments on the note. On June 19, 2012,
Bates filed a disciplinary complaint against Selenberg with the Louisiana
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Office of Disciplinary Counsel. On November 19, 2013, almost two years after
she received the promissory note from Selenberg, Bates filed suit to collect on
the note in Louisiana state court. At that point, the prescription period for her
malpractice claim against Selenberg had run. On February 25, 2014, Selenberg
filed for Chapter 7 bankruptcy, staying the state court case. Bates then filed
this adversary proceeding seeking to have the promissory note declared
nondischargeable under 11 U.S.C. § 523(a)(2)(A)–(B). Following a bench trial,
the bankruptcy court held that the debt was nondischargeable under §
523(a)(2)(A). The district court affirmed, and Selenberg timely appealed.
II. STANDARD OF REVIEW
“When a court of appeals reviews the decision of a district court, sitting
as an appellate court, it applies the same standards of review to the bankruptcy
court’s findings of fact and conclusions of law as applied by the district court.”
In re Jacobsen, 609 F.3d 647, 652 (5th Cir. 2010) (quoting Kennedy v.
MindPrint (In re ProEducation Int’l, Inc.), 587 F.3d 296, 299 (5th Cir. 2009)).
“Accordingly, we review conclusions of law de novo and findings of fact for clear
error.” In re Ritz, 787 F.3d 312, 315 (5th Cir. 2015), rev’d and remanded on
other grounds sub nom. Husky Int’l Elecs., Inc. v. Ritz, 136 S. Ct. 1581 (2016).
“Under a clear error standard, this court will reverse only if, on the entire
evidence, we are left with the definite and firm conviction that a mistake has
been made.” In re Am. Hous. Found., 785 F.3d 143, 152 (5th Cir. 2015) (quoting
Morrison v. W. Builders of Amarillo, Inc. (In re Morrison), 555 F.3d 473, 480
(5th Cir. 2009)). In reviewing the bankruptcy court’s findings of fact, we must
also bear in mind that “the standard of proof for the dischargeability exceptions
in 11 U.S.C. § 523(a) is the ordinary preponderance-of-the-evidence standard.”
Grogan v. Garner, 498 U.S. 279, 291 (1991).
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III. DISCUSSION
Section 523(a)(2)(A) provides that an individual debtor will not be
discharged “from any debt . . . for money, property, services, or an extension,
renewal, or refinancing of credit, to the extent obtained by . . . false pretenses,
a false representation, or actual fraud, other than a statement respecting the
debtor’s or an insider’s financial condition.” The bankruptcy court found that
when Selenberg gave Bates the promissory note, the parties entered into an
“agreement or settlement that bought [Selenberg] almost two years of time
without being sued by Mrs. Bates.” The court also held that Selenberg had a
duty under Louisiana Rule of Professional Responsibility 1.8(h) to inform
Bates of the desirability of seeking independent legal counsel before entering
into this agreement. According to the bankruptcy court, by failing to disclose
this information to Bates, Selenberg engaged in actual fraud within the
meaning of § 523(a)(2)(A). Selenberg appears to make two basic contentions on
appeal: (1) he did not receive an extension of credit from Bates; and (2) he did
not use actual fraud to obtain any such extension of credit.
A. Extension of Credit
Selenberg first argues that he did not receive an extension of credit from
Bates. Courts have stated that “[a]n extension, within the meaning of
§ 523(a)(2), is ‘an indulgence by a creditor giving his debtor further time to pay
an existing debt.’” In re Gerlach, 897 F.2d 1048, 1050 (10th Cir. 1990) (quoting
Takeuchi Mfg. (U.S.), Ltd. v. Fields (In re Fields), 44 B.R. 322, 329 (Bankr. S.D.
Fla. 1984)); accord In re Rollins, No. 06-10549, 2007 WL 2319778, at *6 (Bankr.
E.D. La. Aug. 10, 2007). In other words, the Bankruptcy Code “protects the
creditor who is deceived into forbearing collection efforts.” In re Marx, 138 B.R.
633, 636 (Bankr. M.D. Fla. 1992); accord In re Gerlach, 897 F.2d at 1050; In re
Rollins, 2007 WL 2319778, at *6.
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In Marx, after a creditor demanded that a delinquent account be brought
current, the debtor gave the creditor “a promissory note secured by a mortgage
on commercial property” owned by the debtor. 138 B.R. at 635. In exchange for
the note, the creditor “agreed not to take legal action to collect [the debtor’s]
account and agreed to extend additional credit.” Id. The district court in that
case concluded that the creditor had received an extension of credit within the
meaning of § 523(a) when the debtor executed the promissory note. Id. at 636–
37. Similarly, in Gerlach, an owner of a John Deere dealership arranged for
various parties to enter sham purchase contracts for equipment. 897 F.2d at
1049. Though the contracts were ultimately rejected by John Deere, the
dealership received temporary credit for the sales against the dealership’s
debts to John Deere. Id. The Tenth Circuit held that each contract resulted in
an extension of credit under § 523(a) because the “fraudulent contract had its
intended effect of giving the dealership more time in which to pay the amount
of the . . . credit.” Id. at 1050.
Likewise, in the instant case, the promissory note that Selenberg
executed had its intended effect of giving him more time to pay. Selenberg
contends that he gave the promissory note to Bates as an “option”—Bates could
file a malpractice suit against him within one year, or she could wait up to five
years to collect on the promissory note. However, the bankruptcy court found
that Selenberg gave Bates the promissory note in order to induce her to forego
any attempts to pursue a malpractice claim against him. This was supported
by Selenberg’s testimony that he gave Bates the promissory note to “facilitate
the chance of [his] obtaining some money to pay her by extending the time that
she would have to file suit.” Accordingly, we hold that Selenberg received an
extension of credit from Bates when she agreed to accept the promissory note.
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B. Actual Fraud
Selenberg also argues that the bankruptcy and district courts erred in
concluding that the extension of credit was obtained by actual fraud. This
Court has stated that actual fraud may be proven by showing:
(1) the debtor made representations; (2) at the time they were
made the debtor knew they were false; (3) the debtor made the
representations with the intention and purpose to deceive the
creditor; (4) that the creditor relied on such representations; and
(5) that the creditor sustained losses as a proximate result of the
representations.
In re Ritz, 787 F.3d at 319 (emphasis removed) (quoting RecoverEdge L.P. v.
Pentecost, 44 F.3d 1284, 1293 (5th Cir. 1995)). 1 Selenberg contends that (1) he
did not make any false representations, (2) he did not intend to deceive Bates,
and (3) Bates did not sustain any losses as a proximate result of his
representations. 2
1. False Representation
Selenberg argues that he did not make any false representations to
Bates. For one, he notes that he accurately stated that he had no funds or
assets to pay Bates. But the bankruptcy court based its decision on Selenberg’s
failure to disclose material information, not on overt statements he made. This
Court and others “have overwhelmingly held that a debtor’s silence regarding
a material fact can constitute a false representation actionable under section
1 On appeal in Ritz, the Supreme Court held that “actual fraud” encompasses
“fraudulent conveyance schemes, even when those schemes do not involve a false
representation.” 136 S. Ct. at 1590. On remand, this Court stated that “[t]o the extent
that . . . prior Fifth Circuit cases required that a debtor make a representation in order for a
debt to be nondischargeable under § 523(a)(2)(A), those cases are effectively overruled by the
Supreme Court’s decision in this case.” In re Ritz, 832 F.3d 560, 565 n.3 (5th Cir. 2016).
Although a false representation is no longer required, actual fraud can still be proven by
showing that the debtor in fact made a false representation.
2 Selenberg does not appear to take issue with the bankruptcy court’s conclusion that
Bates relied on Selenberg’s representation.
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523(a)(2)(A).” In re Van Horne, 823 F.2d 1285, 1288 (8th Cir. 1987) (collecting
cases), abrogated on other grounds by Grogan, 498 U.S. at 291; accord In re
Mercer, 246 F.3d 391, 404 (5th Cir. 2001). “When one has a duty to speak, both
concealment and silence can constitute fraudulent misrepresentation; an overt
act is not required.” In re Mercer, 246 F.3d at 404.
The bankruptcy court found that Selenberg was Bates’s attorney, and
“as such, he was required to abide by the Louisiana Rules of Professional
Conduct.” Rule 1.8(h)(2) provides that a lawyer shall not “settle” an actual or
potential malpractice claim “with an unrepresented client or former client
unless that person is advised in writing of the desirability of seeking and is
given a reasonable opportunity to seek the advice of independent legal counsel
in connection therewith.” The bankruptcy court found that Selenberg
“concocted [an] agreement or settlement that bought him almost two years of
time without being sued by Mrs. Bates.” Because there was “absolutely no
evidence that [Selenberg] ever advised Mrs. Bates, either orally or in writing,
to seek independent counsel” prior to entering this agreement, the court held
that Selenberg failed to fulfill his duty to disclose under Rule 1.8(h) and
thereby made “a false representation for purposes of § 523(a)(2).”
The bankruptcy court’s approach is consistent with cases from other
circuits. In one case, an attorney received construction services from a client
and later gave the client a promissory note for the amount owed. In re Young,
91 F.3d 1367, 1370 (10th Cir. 1996). The Tenth Circuit held that the attorney
made false representations under § 523(a)(2)(A) by failing to inform the client
of “information that the New Mexico Rules of Professional Conduct required
him to disclose,” including “the potential conflicts of interest involved” in the
transaction. Id. at 1373–75. In another case, an attorney borrowed money from
his client without advising the client of “the adverse nature of their
relationship” or the client’s “right to seek independent legal advice.” In re
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Tallant, 218 B.R. 58, 61, 65 (B.A.P. 9th Cir. 1998). Because this conduct
violated California’s rules of professional responsibility and the attorney’s
fiduciary responsibilities to his client, the bankruptcy appellate panel held that
the attorney “misrepresented the legal protections afforded” to the client and
thereby made a “false representation” under § 523(a)(2)(A). Id. at 65–66.
Selenberg argues that he did not violate Rule 1.8(h)(2) because he did
not settle the malpractice claim with Bates. He contends that the promissory
note simply gave Bates an additional means of recovering from him. 3 It is true
that both Selenberg and Bates testified during trial that they never signed a
formal settlement agreement. However, evidence in the record supports a
finding that Selenberg and Bates effectively settled the malpractice claim. In
the letter notifying Bates that her case was dismissed, Selenberg stated, “I am
trying to come up with an idea so that I can pay you the value of the case.”
Bates later testified that during her meeting with Selenberg, they discussed
“what went wrong, what happened,” and “what was he going to do” to
“compensate [her] for [her] lost wages, the pain and suffering, the medication,
the hospital bills.” Selenberg also advised Bates that it was in her best interest
to accept the promissory note and that the promissory note would place her in
a better position than a malpractice suit.
After considering these facts, we conclude that the bankruptcy court did
not clearly err in finding that the parties effectively settled the malpractice
3 Selenberg does not cite any legal authority in support of his assertion that an
attorney and client must actually settle a malpractice claim in order to trigger Rule 1.8(h)(2)’s
disclosure obligations. On the contrary, Louisiana law suggests that attempts to settle a
malpractice claim trigger an attorney’s disclosure obligations. See, e.g., In re Lester, 26 So. 3d
735, 738, 744 (La. 2010); In re Petal, 972 So. 2d 1138, 1139–42 (La. 2008); In re Thompson,
712 So. 2d 72, 73–74 (La. 1998); In re Elbert, 698 So. 2d 949, 949–50 (La. 1997). Nevertheless,
because we hold that the district court did not clearly err in finding that the parties effectively
settled the claim, we need not reach the issue of whether the parties’ negotiations were
themselves sufficient to trigger Rule 1.8(h)(2).
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claim. Moreover, the district court was correct in concluding that Selenberg
had an ethical duty to advise Bates in writing of the desirability of seeking
independent legal counsel before settling the malpractice claim. He did not do
so. Thus, we hold that Selenberg violated Rule 1.8(h)(2) and thereby made a
false representation under § 523(a)(2)(A).
2. Intent to Deceive
Selenberg next contends that any false representations were not made
with the intent and purpose to deceive Bates. “An intent to deceive may be
inferred from ‘reckless disregard for the truth or falsity of a statement
combined with the sheer magnitude of the resultant misrepresentation.’” In re
Acosta, 406 F.3d 367, 373 (5th Cir. 2005) (quoting In re Norris, 70 F.3d 27, 30
n.12 (5th Cir. 1995)), abrogated on other grounds by Ritz, 136 S. Ct. at 1581.
After weighing the evidence, the bankruptcy court concluded that Selenberg’s
“main concern was to convince Mrs. Bates that taking the promissory note was
her only option” and that his “primary intent was to buy some time and to keep
himself out of trouble.”
Selenberg argues that he clearly did not have the requisite intent to
deceive because he was truthful in telling Bates that he had no assets with
which to pay her. We find this argument unpersuasive. Although Selenberg
was truthful with Bates about his financial situation at the time, he did not
advise her of the desirability of seeking independent counsel. On the contrary,
he only agreed to meet with Bates after being assured that she had not hired
another attorney. Furthermore, Selenberg suggested that Bates had few
options for recovering from him and thereby convinced her not to sue him for
malpractice. Yet as the district court noted, other options, such as a consent
judgment, “may very well have been available” and likely “would have put her
in a much better legal position than the unsecured note.” Selenberg also led
Bates to believe he might be able to pay her in the future, even though that
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possibility was remote. These actions all suggest that Selenberg intended to
deceive her.
Selenberg also contends that he “could not have made the statements
with the intent to deceive since the promissory note provided for Selenberg to
pay a 25% attorney fee,” “thereby insuring Bates that she would recover the
full amount of $275,000.00” even after paying attorneys to assist in collecting
on the note. But the fact that the promissory note provided for attorneys’ fees
was essentially meaningless given that Selenberg knew there was a significant
likelihood he would never be able to pay Bates the full $275,000, not to mention
the additional attorneys’ fees. Accordingly, we hold that the bankruptcy court
did not clearly err in finding that Selenberg acted with intent to deceive Bates.
3. Losses as a Proximate Result of Selenberg’s Representation
Finally, Selenberg argues the bankruptcy court erred in concluding that
Bates sustained a loss or that any loss suffered was a proximate result of
Selenberg’s representation. Yet Selenberg does not point to any authority in
support of his arguments. The bankruptcy court held that Bates “lost her
chance to pursue [Selenberg] on a malpractice action” because Selenberg
“persuaded her to take the note and . . . convinced her that pursuing a
malpractice action against him would be futile.” Thus, the court concluded that
Bates sustained a loss as a proximate result of Selenberg’s false
representation.
Selenberg first contends that the monetary value of the promissory note
exceeded the value of Bates’s malpractice claim against Selenberg because the
promissory note included an additional amount for attorneys’ fees. In this way,
Selenberg seems to suggest that Bates received a benefit (rather than
sustaining a loss) when she received the promissory note. But Bates did not
receive any benefit at all because Selenberg never obtained the funds to pay
her. Moreover, Selenberg subsequently sought to have the debt discharged in
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bankruptcy and to eliminate any rights bestowed by the promissory note. Next,
Selenberg points out that Bates testified that she did not give up anything in
accepting the promissory note. However, Bates’s opinion on this matter is not
dispositive. It seems clear from the record that Bates did not fully appreciate
that she was forgoing the opportunity to recover from Selenberg by accepting
the promissory note and declining to pursue a malpractice claim against him.
Selenberg also seems to argue that any loss Bates sustained actually
occurred as a result of Selenberg’s failure to properly litigate the malpractice
case against Faucheux, not as a result of Selenberg’s false representation.
However, case law directly contradicts this assertion. In Young, the Tenth
Circuit held that the client “sustained a loss, which satisfies the final element
under § 523(a)(2)(A),” because the client “never received payment on [the
attorney’s] promissory note.” 91 F.3d at 1375. Like the client in Young, Bates
never received payment on the promissory note. Furthermore, Bates lost the
opportunity to pursue her malpractice claim against Selenberg because she
relied on Selenberg’s advice that she would be more likely to recover if she
bypassed a malpractice suit and sought to collect on the promissory note at a
later date. Accordingly, the bankruptcy court correctly concluded that Bates
sustained a loss as a proximate result of Selenberg’s false representation.
IV. CONCLUSION
For the reasons discussed above, we hold that the bankruptcy court did
not err in holding that Selenberg obtained an extension of credit from Bates by
actual fraud. Therefore, we AFFIRM the bankruptcy court’s conclusion that
the debt was nondischargeable under § 523(a).
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