Debtor’s ex-counsel denied unpaid fees

Listen to this article

A debtor who emptied an investment account mere hours before his former divorce attorney could attach the money to satisfy a debt did not inflict a “willful and malicious injury,” a U.S. District Court judge has ruled.

Boston attorney Danielle E. deBenedictis alleged that former client William M. Dougherty withdrew almost $150,000 from his investment account after he learned of an imminent hearing on her motion for a trustee process attachment, making his actions a violation of a court order and essentially a “conversion.” His debt to her should be ineligible for discharge under 11 U.S.C. section523(a)(6), she argued.

U.S. Bankruptcy Judge Joan N. Feeney disagreed. Feeney’s decision was upheld by U.S. District Court Judge George A. O’Toole Jr., who noted that it is highly debatable whether deBenedictis suffered a qualifying “injury,” since Dougherty was free to withdraw the money.

“Under Massachusetts law, property to be attached remains unencumbered until service of the attachment is made,” O’Toole wrote.

Even if Dougherty was trying to circumvent the attachment — another claim open to debate — “that did not necessarily establish that it was done with the intent, required by the statute, specifically to injure deBenedictis without cause or justification,” O’Toole said.

The five-page decision is deBenedictis v. Dougherty, Lawyers Weekly No. 02-321-15. The full text of the ruling can be found by clicking here.

Exceptions construed narrowly

In trying to avoid having the debt owed to her discharged, deBenedictis explored but abandoned attempts to squeeze her set of facts into a pair of other subsections of section523(a) dealing with fraud and payments related to a divorce or separation before ultimately settling on section523(a)(6).

But according to Dougherty’s attorney, Gary W. Cruickshank of Boston, that attempt was doomed from the outset, given the lack of a direct nexus between the debt, which was incurred in 2006 and early 2007, and the “injury,” which allegedly occurred in January 2008.

“The debt has to arise as a result of the injury,” he contended. “That’s the key to the whole scenario.”

Efforts to obtain comment from deBenedictis were unsuccessful.

Adam J. Ruttenberg, co-chairman of the Boston Bar Association’s Bankruptcy Section, said the decision is in keeping with a recent trend of judges applying “pretty tightly” the criteria for applying a non-discharge exception.

In deBenedictis, the standard is laid out in the U.S. Supreme Court’s 1998 decision in Kawaauhau v. Geiger. Specifically, as Feeney noted in her opinion, the court found that the term “willful” modifies “injury” — a mere deliberate or intentional act that leads to injury is not enough for a debt to avoid being discharged, nor are injuries that are inflicted recklessly or negligently.

In essence, the creditor has to show that animus has been directed at him or her, said Ruttenberg, of Posternak, Blankstein & Lund.

Had less than a year gone by between the alleged conversion and Dougherty’s bankruptcy filing, an objection under 11 U.S.C. section727(a)(2) might have helped deBenedictis, he added. But that option was unavailable due to the time lapse.

For Richard L. Levine of Devine, Millimet & Branch in Boston, the decisions raise and answer an interesting ethical question: Can an attorney who is aware of an upcoming hearing that could result in an attachment counsel a client to withdraw funds as Dougherty did, effectively thwarting the attachment?

The answer would appear to be “yes,” which will “startle some and relieve others,” Levine said.

He was quick to add, however, that the conduct of someone in Dougherty’s position will still be scrutinized under other applicable laws, including those dealing with fraudulent transfers and the granting of improper preferential treatment to certain creditors within 90 days of a bankruptcy filing. It was important that, rather than hand the money over to a relative or otherwise hide it, Dougherty brought it to the Probate Court to explore options for satisfying a crushing debt resulting from a post-divorce proceeding.

Bankruptcy lawyer John L. Whitlock of Locke Lord, who also chairs the Supreme Judicial Court’s Standing Advisory Committee on the Rules of Professional Conduct, agreed that Dougherty’s attorney, Justin G. Maiona of Wellesley, appears to have acted ethically.

“The lawyer is permitted to advise the client on the consequences of courses of conduct but cannot counsel the client to engage in criminal or fraudulent conduct,” he said. “Before a trustee process order is issued, the precedent here would appear to permit the lawyer to conclude that moving the funds was neither criminal nor fraudulent, nor an attempt to [convert], as the plaintiff has no interest in the funds until after the order is issued and served.”

The situation may have been different, he added, had there been a court order or injunctive relief granted, which would have brought contempt into play.

One takeaway, lawyers agreed, was that deBenedictis might have improved her position by seeking an injunction contemporaneously with the attachment.

John G. Loughnane of Nutter, McClennen & Fish, co-chairman of the BBA Bankruptcy Section, said another obvious lesson is that, whenever possible, lawyers should work on retainer (as deBenedictis did early in her representation of Dougherty).

“Lawyers are not banks,” he said. “You should not be a creditor to your client.”

Representation gone awry

Dougherty hired DeBenedictis to represent him in Suffolk Probate Court after his ex-wife filed a post-divorce complaint for modification of his alimony obligation. By fall 2007, Dougherty had racked up a legal bill of more than $80,000, due in part to his resistance to deBenedictis’ pleas to settle the case.

Lawyer and client tried and failed to resolve the debt, though Dougherty did at one point cut deBenedictis a pair of checks totaling $42,500, which deBenedictis withheld depositing in the hopes of reaching a final settlement.

After terminating deBenedictis and retaining new counsel, Dougherty received what he described as a “life-altering” blow: The Probate Court on Dec. 14, 2007, gave him less than four months to pay his ex-wife $528,914.20 — more than his net worth — after concluding that the sale of his business constituted income, not a marital asset. The ruling jeopardized deBenedictis’ ability to collect on her unpaid bill.

On Dec. 31, 2007, Dougherty emailed deBenedictis, telling her he would be stopping payment on the settlement checks until the “immediate crisis is under control.”

The following Thursday, Jan. 3, 2008, deBenedictis filed suit against Dougherty in the Suffolk Superior Court and simultaneously moved for approval of a trustee process attachment on Dougherty’s account at the investment firm Moors & Cabot for $116,665. A hearing was set for Jan. 7. Dougherty did not appear at the hearing, later claiming he received service by mail only after the fact, and deBenedictis’ motion was granted.

By the time the trustee summons was served on an officer of Moors & Cabot at 3:20 p.m. on Jan. 8, the balance in Dougherty’s account was only $170.25, as Dougherty had withdrawn $148,315 earlier the same day. Dougherty handed the money over to his lawyer, Maiona, and on Jan. 10 they went to Probate Court seeking advice on how the money should be distributed. As an affidavit from Dougherty makes clear, he and Maiona were by then aware of the Superior Court’s trustee process order.

DeBenedictis contended that Maiona’s actions were in violation of Rule 1.15(c) of the Massachusetts Rules of Professional conduct, but while testifying at a Probate & Family Court hearing Jan. 23, 2008, Maiona was adamant he had done nothing wrong.

“I did not assist Mr. Dougherty in any attempt to defraud anyone,” he testified. “In fact, [I] did quite the opposite and went to the Probate & Family Court and asked for their direction on what to do. That’s why we were there in front of the judge … to get his instruction on what to do with the funds.”

The court ordered $60,000 of the funds in Maiona’s possession be held in escrow. Dougherty distributed the “bulk” of the remaining $75,615 to his ex-wife, while also paying Maiona and other attorneys who had worked on his behalf.

DeBenedictis’ Superior Court collection action was stayed after Dougherty filed his bankruptcy petition on Sept. 24, 2009.

Contempt not enough

In addition to not seeking an injunction against Dougherty, deBenedictis also did not seek a contempt judgment against him in Superior Court.

“This is likely for the same reason that she cannot assert contempt against him here: he withdrew the funds before she served the Trustee Summons on him or Moors & Cabot,” Judge Feeney wrote.

Yet Feeney noted that, even if she had found Dougherty in contempt of the Bankruptcy Court, it may not have saved deBenedictis.

“[A] debtor’s failure or refusal to obey a court order, alone, is not necessarily determinative of a finding of willful and malicious injury under section523(a)(6),” she wrote.

Feeney pointed to a split in the case law regarding whether contempt judgments are non-dischargeable, noting that the analysis is “fact driven.”

She cited a case in which a debtor suffered “virtual paralysis;” he “buried his head in the sand and presumably hoped that the whole matter would go away.”

While Dougherty suffered no such “paralysis,” he similarly lacked “the requisite intent to injure and malice necessary for a determination of nondischargeability under section523(a)(6),” Feeney wrote.

Feeney found that Dougherty’s actions “were motivated more by his perceived need to quickly address the sizeable Judgment entered against him and to preserve his assets to satisfy it, rather than a desire to harm deBenedictis.”

Judge O’Toole called that a “reasonable” and “not clearly erroneous” interpretation, and thus not one subject to being disturbed on appeal.

“DeBenedictis’ argument that the evidence, fairly considered, supported only one conclusion and required a factual finding of a willful and malicious intent to injure is simply wrong,” he wrote.

deBenedictis v. Dougherty

THE ISSUE: Did a debtor who emptied an investment account mere hours before a creditor placed a lien on the money inflict the type of “willful and malicious injury” that would have excepted the debt owed from discharge in bankruptcy?

DECISION: No (U.S. District Court)

LAWYERS: Danielle E. deBenedictis of Miller & Blum, Boston (plaintiff); Gary W. Cruickshank, Boston (defense)