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Rennaker v. Davis Highlights What Cannot be Discharged in Bankruptcy

The recent Rennaker case involved various claims addressing what is dischargeable under both 11 U.S.C. section 523 and section 727. The Judge’s decision, in this case, provides a detailed examination of legal actions concerning what can be discharged in bankruptcy. 

How the Case Arose

The debtor in the proceeding was a lawyer who handled primarily divorces and was representing a woman divorcing her husband. The divorce was first initiated in a Texas court in 2008, at which point the attorney was retained as a divorce lawyer following a first consultation where the client assumed that the attorney could sufficiently resolve her divorce. 

In 2008, both parties entered into an engagement contract. A petition for divorce was first filed in June 2008. When she was hired, the lawyer had practiced as a licensed attorney for a few years. When the divorce trial concluded, the ex-wife received primary custody of children the couple had during the marriage as well as child support. 

Despite this outcome, the plaintiff was not happy with the representation provided by the lawyer for several reasons, including the lawyer’s representation during a 2009 mediation, the subsequent mediation agreement in August 2009, the agreement that was later executed in 2009, and the attorney’s failure to perform the necessary actions involving transferring assets from the ex-husband to the ex-wife. 

The Settlement Agreement between the couple ultimately involved three terms. These terms involved the couple’s home and additional property owned by the couple, as well as $8,500 of American Airlines Advantages Miles accrued by the ex-husband.

In 2009, the ex-husband and ex-wife entered into a divorce agreement addressing the retitling of the assets to the wife as her property. The attorney did not perform the necessary steps to transfer the assets to the ex-wife.  The wife learned of the attorney’s failure to effectuate the transfer of the asset when she tried selling the property in 2015. After the ex-wife interacted with her ex-husband to try to transfer his interests in the assets to her, the husband declined to cooperate. The wife subsequently defaulted. The lawyer then sought to obtain a judgment against the ex-husband. This action, however, was dismissed. 

The ex-wife then retained an attorney to guide her in receiving ownership of the assets that she was entitled to receive. In 2016, the new legal representation initiated a petition to enforce an order to receive ownership of the assets. The new legal representation successfully secured the assets as solely the ex-wife’s property.  

In 2018, the original attorney filed for bankruptcy. The debtor then filed the appropriate schedules and attended a 341 meeting. The wife’s complaint attempted to liquidate claims and obtain a finding that the lawyer had no right to discharge these debts under 11 U.S.C. section 727(a)(3) and (a)(5). 

The Counts Heard by the Case

The bankruptcy court ultimately resolved the case by deciding several issues, which include:

  • Negligence. Plaintiff’s complaint claimed the lawyer was negligent. The court held the attorney had been negligent to the woman and had caused financial damages. 
  • Fiduciary duty. The woman claimed that the attorney violated her fiduciary position in her role as the woman’s lawyer. The court determined that the lawyer violated her fiduciary obligation to the woman. 
  • The Deceptive Trade Practices Act (DTPA). The woman argued she constituted a “consumer” under Texas’s DTPA and that after acquiring the lawyer’s services, the attorney engaged in deceptive, false, or misleading practices including failing to share information involving services. The court held that the woman failed to prove this point. 
  • Dischargeability under section 727(a)(5). Non-dischargeability under section 727 differs from how dischargeability is treated under section 523 for one critical reason. A non-dischargeability finding under section 727 leads to the debtor not receiving a total discharge, while a ruling of not being able to discharge a debt under section 523 leads to a debtor’s inability to receive a discharge in regards to only debt owed by the creditor plaintiff. A party that wants to argue in favor of section 727(a)(5) must establish that the defendant held substantial and distinguishable assets are currently unavailable to be distributed to creditors. 
  • Dischargeability under section 727(a)(3). Courts can deny debtors discharges when a debtor hides, destroys, or alters any recorded details. The court noted that neither a Chapter 13 nor a Chapter 7 trustee brought up a matter or claimed that the attorney hid any critical details. The court then examined the Plaintiff’s argument that the attorney failed to provide certain financial documents from her office’s IOLTA account as evidence that the attorney had hidden details. The court determined the attorney had timely objected to matters and the ex-wife never pursued nor received a court order requiring submission of the corresponding documents. As a result, the court rejected the woman’s claim.
  • Dischargeability under 523(a)(2).  Addressing the dischargeability statute involving debts owed by the lawyer, the court began by analyzing the lawyer’s basis for action connected to financial obligations owed to the degree obtained by fraudulent methods. Despite complaints involving the debtor’s failure to share the length of time she had practiced law, the court decided the evidence failed to show that the attorney at any point lied or falsely conveyed her legal skills before representing the plaintiff. The court subsequently found that the plaintiff had failed to demonstrate any aspects of fraud or false pretenses. 
  • Dischargeability under section 523(a)(4). The court considered section 523 (a)(4), which addresses the dischargeability of a debt associated with fraudulent activity while a person was performing as a fiduciary. The court determined the plaintiff showed the lawyer had acted in a grossly reckless manner and as a result that the lawyer’s claim in liquidated damages constitutes a debt excluded from discharge. 

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