The U.S. Court of Appeals for the Ninth Circuit Aug. 2 held that a debtor's arbitration debt was nondischargeable in bankruptcy under Bankruptcy Code Sections 523(a)(3) and (a)(6), and the debtor's schedules did not provide a creditor with proper notice of his bankruptcy (Perle v. Fiero (In re Perle), 9th Cir., No. 11-60000, 8/2/13).
Affirming the ruling of the U.S. Bankruptcy Appellate Panel for the Ninth Circuit, Judge Larry A. Burns of the U.S. District Court for the Southern District of California, sitting by designation, concluded that the creditor's lawyer's knowledge could not be imputed to the creditor on an agency theory when the attorney learned of the bankruptcy during his representation of another client and after the completion of his representation of the creditor in relation to the debt.
The burden is on the debtor, the court explained, to list information correctly in his schedules. The debtor's “serial mischaracterization of known details of the 1998 arbitration award was far more egregious than the apparently inadvertent transposition of a single digit of a social security number” in Ellett v. Stanislaus, 506 F.3d 774 (9th Cir. 2007), the court said. Thus, the debtor's schedules did not provide the creditor with proper notice of the debtor's bankruptcy.
The court was also unwilling to impute the notice or actual knowledge of the debtor's bankruptcy filing to his former attorney because the attorney no longer represented the creditor on the debt matter and learned of the filing only in the course of representing another client.
The Fiero Brothers were represented in the arbitration by New York-based lawyer Martin Russo, but Russo did not continue to represent them in the matter after arbitration. Russo did, however, continue to represent the Fiero Brothers in other unrelated matters after the arbitration.
Subsequently, Corsair Capital Partners, a private equity firm, filed a nondischargeability complaint against the debtor relating to a default judgment that it had obtained against him. Corsair was represented in the bankruptcy matter by Russo. Although Russo was aware of the debtor's bankruptcy and was still representing the Fiero Brothers in other matters, he never informed the Fiero Brothers of the pending bankruptcy.
In March 2002, the debtor received a discharge of his debts and his case was closed. Four years later, the Fiero Brothers, who had assigned the arbitration award to Alfonso Fiero, filed a motion to reopen the debtor's bankruptcy in order to challenge the dischargeability of the arbitration award. The bankruptcy court granted the motion and declared the arbitration debt nondischargeable.
The U.S. Bankruptcy Appellate Panel for the Ninth Circuit upheld the bankruptcy court's ruling. The debtor appealed to the Ninth Circuit, arguing that the dischargeability of the arbitration debt was untimely.
The debtor did not quibble that his debt to the Fiero Brothers is of the type that is nondischargeable under Section 523(a)(3 and (a)(6), and therefore, must establish either that he adequately identified the debt on his schedules, or if not, that the Fiero Brothers had notice of or actual knowledge of his bankruptcy, the court said.
The debtor could not identify a single case, nor was the court able to find one, that imputed to a client knowledge that his lawyer gained while representing a different client, the court noted, citing Maldonado v. Ramirez, 757 F.2d 48 (3rd Cir. 1985). In Maldonado, the court noted, the Third Circuit held that an attorney given notice of the bankruptcy on behalf of a particular client is not called upon to review all of his or her files to ascertain whether any other client may also have a claim against the bankrupt debtor.
Because Russo no longer represented the Fiero Brothers on the debt matter when the debtor filed for Chapter 7, and learned of the bankruptcy filing only in the course of representing a different client, the appeals court was not willing to impute the notice or actual knowledge of the debtor's bankruptcy filing that he had to the Fiero Brothers.
Thus, the appeals court affirmed the BAP's ruling that the arbitration debt was nondischargeable under Sections 523(a)(3) and (a)(6). The court did not reach the question whether it was also dischargeable under Section 523(a)(19).
Judges Sandra S. Ikuta and Jacqueline H. Nguyen joined the opinion.
Janine R. Menhennet of Solana Beach, Calif., and Joseph Darrell Palmer of Law Offices of Darryll Palmer, Solana Beach, Calif., represented the appellant/debtor. Leslie Schwaebe Akins of Leslie Schwaebe Akins, A Law Corporation, Carlsbad, Calif., represented the appellee creditor.
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