Opinion
CIVIL ACTION NO: 99-3701
August 4, 2000
ORDER AND REASONS
Before the Court is Stephen Hurstell's appeal from the bankruptcy court's order of August 30, 1999, granting Appellees a final judgment on the amount of a debt declared non-dischargeable in Appellant's bankruptcy, In re Hurstell, Bankr. No. 96-15509, Adv No. 97-1040. In accordance with the briefing schedule, the parties have briefed the matter, and the Court DENIES the appeal and AFFIRMS the bankruptcy court for the following reasons.
Although Appellant filed his brief on January 10, 2000, Appellees repeatedly requested leave to file their brief before ultimately filing it on April 18, 2000. Appellant then requested, and the Court granted, leave to file a reply brief until May 11, 2000, yet informed the Court by letter on that date that he had decided not to file one.
I. BACKGROUND
At the time of the underlying dispute, the debtor/Appellant, Hurstell, was an attorney admitted to practice law in Louisiana before both the state and federal courts. On September 1, 1987, Adrian LeBouef, Sr., established the Adrian E. LeBouef, Sr., Family Trust for his three children Lauren Clement, Elizabeth LeBouef, and Adrian LeBouef, Jr., (collectively "Appellees") as beneficiaries. Hurstell passed the act establishing the trust, served as the trust attorney, and, ultimately, became the trustee as well. Also on September 1, 1987, LeBouef donated to the trust a piece of real estate and 50 shares of stock in Gulf South Marine Transportation, Inc., ("GSMT").
The recitation of facts is largely taken from the bankruptcy court's Memorandum Opinion, In re Hurstell, No. 97-1040 (August 30, 1999). In his brief, Hurstell makes no objections to the bankruptcy court's factual findings.
Arta LeBouef, Adrian LeBouef Sr.'s mother, was the original trustee; however, by May 1995, Hurstell was the acting trustee.
Hurstell never delivered the certificate representing the stock to the trust, and he did not endorse the certificate to the trust on the date indicated on the certificate, September 1, 1987. Furthermore, Hurstell never transferred the stock on the books of GSMT.
In May of 1995, Hurstell, as trustee, initiated an action against GSMT in state court to attain control over GSMT, retaining another attorney to assist him. In the course of this litigation, Hurstell delivered the stock certificate to counsel for GSMT. In June of 1995, the Internal Revenue Service ("IRS") seized the stock pursuant to an outstanding lien for delinquent taxes owed by Adrian LeBouef, Sr. Ultimately, this suit was removed to this Court where it was consolidated with another action in which the trust sued the IRS for the unlawful seizure of the stock.
In the course of the consolidated litigation, the IRS deposed Hurstell who stated numerous times that he had signed the endorsement of the stock certificate to the trust on September 1, 1987 and that, following the endorsement, he placed the certificate in his files and left it there. Following the deposition, Hurstell's attorney wrote to the IRS informing it that Hurstell's answer as to when he endorsed the certificate is likely wrong and that he signed it later than September 1, 1987. The Attorney General's Office for the Tax Division of the Department of Justice then informed this Court by letter "that Hurstell backdated the endorsement of a stock certificate to reflect an earlier transfer of the certificate from a client, Adrian LeBouef, to the client's trust, LeBouef Family Trust. The letter also stated that Hurstell lied or was deliberately misleading under oath when deposed by the government about the date of the endorsement." In re Sealed Appellant, No. 98-31006, at 464 (5th Cir. 1999). In August of 1998, this Court en banc voted unanimously to disbar Hurstell, finding that backdating the endorsement was a material misrepresentation, that his deposition testimony was intentionally deceptive, and that this conduct violated Rules 4.1(a) and 8.4(c) of the Louisiana Rules of Professional Conduct. The Fifth Circuit affirmed. Id. at 470.
As an active investigation was being conducted by the Office of Disciplinary Counsel of the Louisiana State Bar Association, Hurstell voluntarily surrendered his license to practice law in Louisiana.
In January of 1996, the parties settled the consolidated litigation. In March of 1996, Hurstell paid from the trust to his law corporation 50% of the net settlement, $138,607, under a contingency fee contract he believed was in effect, although there was no written agreement. After Appellees objected to the fee by letter, Hurstell returned the money to the trust. However, less than a month later, Hurstell wrote to Appellees' attorney, informing them that he still believed that he was entitled to a contingency fee, and, in May of 1996, he withdrew $100,000 from the trust to pay his law firm. Hurstell has not repaid this money and has not accounted for its whereabouts. After Hurstell filed for Chapter 7 protection on November 12, 1996, Appellees filed a Complaint to Determine Dischargeability of Debt in bankruptcy court concerning the $100,000.
On January 28, 1998, the bankruptcy court issued findings of fact and conclusions of law on Appellees' motion for summary judgment on their Complaint to Determine Dischargeability of Debt, finding that any money Hurstell had taken from the trust was non-dischargeable. The bankruptcy court concluded that Hurstell acted in two different fiduciary capacities to the trust, one as trustee and one as attorney for the trust. The bankruptcy court then found that Hurstell breached his duty as the trust attorney by not timely effectuating the transfer of the stock to the trust and by not separating the settlement funds from his law corporation's funds after Appellees notified him that they disputed the fee. Hurstell's handling of the settlement funds also amounted to a breach of his duty as trustee. Hurstell's failure to separate the funds, the bankruptcy court found, also amounted to ethical violations, breaching Rules 1.15(a)(c) of the Rules of Professional Responsibility. However, the bankruptcy court ruled that Appellees needed to make an additional showing that the money was in fact a debt and, therefore, ordered an evidentiary hearing to determine what amount, if any, Hurstell owed them.
After the evidentiary hearing, the bankruptcy court issued a memorandum opinion on August 30, 1999. In its opinion, the bankruptcy court found that the $100,000 Hurstell withdrew from the trust to pay his law corporation was non-dischargeable under 11 U.S.C. § 523 (a)(4), refuting Hurstell's argument that the money was for attorneys' fees. The bankruptcy court found that Hurstell converted the money by commingling the money with his law corporation's funds and failing to return it. Alternatively, the bankruptcy court found that the evidence submitted by Hurstell was deficient and did not merit any award. Consequently, Hurstell was denied any award of attorneys' fees, and the $100,000 was found to be non-dischargeable.
II. STANDARD OF REVIEW
For a bankruptcy appeal, the applicable standard of review by a district court is the same as when the Court of Appeals reviews a district court proceeding. 28 U.S.C. § 158 (c). Findings of fact by the bankruptcy courts are to be reviewed under the clearly erroneous standard. In re Killebrew, 888 F.2d 1516, 1519 (5th Cir. 1989). Conclusions of law are reviewed de novo. In re Kennard, 970 F.2d 455 (5th Cir. 1991). Mixed questions of fact and law are also reviewed de novo. In re Bowyer, 916 F.2d 1056 (5th Cir. 1990).
III. DISCUSSION
In his appeal, Hurstell raises five issues: (1) whether the bankruptcy court erred by limiting or denying Hurstell's testimony at the hearings; (2) whether the bankruptcy court erred by considering Hurstell's disbarment; (3) whether the bankruptcy court erred by failing to give sufficient weight to Hurstell's time sheets and records; (4) whether the bankruptcy court erred by denying Hurstell's claim for attorneys' fees under quantum merit; and (5) whether the bankruptcy court penalized Hurstell by awarding Appellees a recovery exceeding Appellees' pleadings or the legal limits.
Preliminarily, the Court notes that, although Hurstell lists these issues in the "Statement of Issues" section of his brief, he only actually addresses those issues relating to whether the $100,000 is a non-dischargeable debt, namely, issues three and four. Hurstell does not brief the other three issues, and, therefore, the Court finds that he has abandoned them. Eldredge v. Martin Marietta Corp., 207 F.3d 737, 742 n. 5 (5th Cir. 2000) (finding that issues referred to in the Statement of Issues portion of the brief but not actually argued are abandoned). The remaining two issues will be addressed in the context of whether Hurstell was entitled to any attorneys' fees from his representation of the trust and, if not, whether the $100,000 he paid his law corporation is a non-dischargeable debt.
A. Whether the $100,000 constituted a debt.
The Court begins its discussion of these issues with whether Hurstell was entitled to attorneys' fees, since the issue of non-dischargeability is predicated upon the existence of a debt owed. If Hurstell is not entitled to attorneys' fees, then withdrawing the money from the trust would be a debt which may be considered non-dischargeable under 11 U.S.C. § 523 (a)(4).
In its August 30, 1999 memorandum opinion, the bankruptcy court made two alternative rulings concerning whether the $100,000 Hurstell withdrew from the trust and paid to his law corporation constituted a debt. First, the bankruptcy court determined that Hurstell's breach of his fiduciary duty to the trust in his capacity as trust attorney and his violation of the Louisiana Code of Professionalism constituted a forfeiture of any claim for attorneys' fees Hurstell may have had in connection with his representation of the trust. Tied to this holding is the bankruptcy court's finding that Hurstell committed the tort of conversion by failing to deposit the disputed attorneys' fees into a separate trust and failing to account for the funds. In the alternative, the bankruptcy court held that the "time sheets" and letters Hurstell submitted as evidence were so deficient as to warrant a complete denial of attorneys' fees.
This Court finds the bankruptcy court's reasoning persuasive and affirms.
1. Hurstell's ethical violations warrant forfeiture of any claim for attorneys' fees
Generally, under Louisiana law, an attorney is entitled to reasonable compensation on a quantum meruit basis even if the attorney is discharged or withdraws from representing his client. Simon v. Metayer, 383 So.2d 1321, 1324 (La.App. 3d Cir. 1980). However, when an attorney and client disagree on the reasonableness of the fee, the attorney is duty-bound to place the disputed fee into a trust account separate from the attorney's operating account until the dispute is resolved by a court or through competent arbitration. La. Rev. Stat. 37, Ch. 4, Art. 16, Rule 1.15(a)(f)(6). An attorney's failure to separate and never account for the disputed funds may result in disbarment and full restitution to the aggrieved client. In re Usprich, 712 So.2d 853 (La. 1998); In re White, 706 So.2d 964 (La. 1998); In re Caver, 693 So.2d ISO (La. 1997); In re Parker, 687 So.2d 96 (La. 1997); Ratcliff v. Boydell, 674 So.2d 272, 279-80 (La.App. 4th Cir. 1996).
In this case, Hurstell committed ethical violations and is not entitled to any possible compensable legal service he may have rendered for the trust. La State Bar. Assoc. v. McGovern, 481 So.2d 574, 580 (La. 1986) ("Because [attorney] caused inconvenience, risk, and possibly serious damage to his client, we concluded that he did not earn any part of the fee charged."). By withdrawing $100,000 from the trust and paying his law firm after being informed that Appellees contested his fee, Hurstell clearly, intentionally commingled funds in direct contravention of his ethical duties. Furthermore, Hurstell has made absolutely no attempt to account for the whereabouts of the money or suggest restitution. Cf. In re National Liguidators Inc., 182 B.R. 186, 196 (S.D. Ohio 1995) ("When an attorney fails to disclose an adverse interest, the Court is required to deny fees in toto."); Carter v. Schott, 707 So.2d 1048, 1050 (La.App. 1st Cir. 1998). Even in his brief, Hurstell does not contest the bankruptcy court's finding that he committed these ethical violations.
In his brief, Hurstell does not contest that he withdrew $100,000 from the trust and paid it to his law corporation.
The bankruptcy court's related holding that Hurstell's payment of the disputed attorneys' fees to his law corporation constituted conversion should also be affirmed. The tort of conversion is committed when any of the following occurs: "(1) possession is acquired in an unauthorized manner; (2) the chattel is removed from one place to another with the intent to exercise control over it; (3) possession of the chattel is transferred without authority; (4) possession is withheld from the owner or possessor; (5) the chattel is altered or destroyed; (6) the chattel is used improperly; or (7) ownership is asserted over the chattel." Dual Drilling Co. v. Mills Equipment Investments. Inc., 721 So.2d 853, 857 (La. 1998). Available damages for conversion consist of the return of the property or, if impossible, the value of the property at the time of the conversion. Id.; Bryant v. Sears Consumer Financial Corp., 617 So.2d 1191, 1194 (La.App. 3d Cir. 1993).
Here, there is little question Hurstell converted the $100,000 when he withdrew it from the trust and paid his law corporation. This act, and his subsequent failure to account for the money, qualifies as conversion under Louisiana law. Hurstell's withdrawal of the money was unauthorized, as he had been placed on notice by the Appellees prior to the withdrawal that he was not entitled to compensation; Hurstell indisputably removed the money from the trust and paid it to his law corporation; the transfer of money was conducted without authority, since Hurstell was obligated to deposit it in a separate trust; Appellees have not regained control of the money; Hurstell has failed to account for the money; and Hurstell asserted ownership over the money by paying it to his law corporation. The Louisiana Supreme Court has held in the disciplinary context that the unauthorized taking of client funds by attorneys constitutes conversion. In re Caver, 693 So.2d at 151; In re Parker, 687 So.2d at 97-98.
Lastly, in his brief, Hurstell does not contest the bankruptcy court's finding that he committed conversion. Consequently, the bankruptcy court's holding that Hurstell committed conversion and that he is liable for damages occasioned by Appellees, namely, the return of the $100,000, and that committing this tort forfeited Hurstell's right to claim any compensation as the trust's attorney should be affirmed.
Hurstell's brief largely focuses upon the benefit conferred upon the trust through his representation. Hurstell maintains that the trust benefitted tremendously from his efforts in asset protection and the settlement of the consolidated litigation. Due to his work, Hurstell seeks compensation at the rate of $250.00 an hour for 480-90 hours of work. Hurstell accuses the bankruptcy court of improperly denying him compensation because it relied solely on Hurstell's disbarment.
The Court finds this argument unpersuasive. The bankruptcy court based its findings in part on Hurstell's unethical conduct relating to Hurstell's withdrawal, and subsequent payment to his law corporation, of the money from the trust account, not Hurstell's unethical conduct which formed the basis of his disbarment, namely, his backdating the stock certificate and intentionally deceitful answers in his deposition with the IRS. This portion of the bankruptcy court's holding glossed over any alleged benefit the trust may have received through Hurstell's representation because Hurstell's conduct was so egregious that he forfeited any claim for attorneys' fees.
2. Whether Hurstell proved an entitlement to attorneys' fees
The bankruptcy court's alternative holding, that Hurstell failed to carry his burden that he is entitled to attorneys' fees, should also be affirmed. Based upon its experience in reviewing fee applications, the bankruptcy court held that Hurstell submitted insufficient evidence to support a claim for fees.
The Court seriously questions whether this issue was also actually argued in Hurstell's brief, as the only mention of it comes on the final page where he states that he testified at the evidentiary hearing that time sheets were kept contemporaneously with his work. However, out of an abundance of caution, the Court will address this issue.
An attorney seeking to recover fees on a quantum meruit basis assumes the burden of proving the value of services and extent of expenses.Johnson v. Ins. Co. of North America, 666 So.2d 1286, 1289 (La.App. 2d Cir. 1996). In this case, Hurstell's evidence was so deficient that this Court cannot disagree with the bankruptcy court. The Court, therefore, expressly adopts its reasoning:
[Hurstell's] typed fee bills were all contained in a letter dated May 21, 1996, even though they purport to be for services from January 20, 1995 though January 29, 1996, raising a question as to their contemporaneous nature. Further, these bills list only total fee amounts not time spent. Handwritten time sheets were also submitted, supposedly to supplement the typed bills. However, these indicate only days and months, but no years, for each service listed and much of the listings are not legible and are confusing.In re Hurstell, No. 96-15509, Adv. No. 97-1040, at 9 (Bankr. E.D. La. August 30, 1999). As for Hurstell's testimony at the evidentiary hearing that he kept time sheets "contemporaneously for the most part," Hurstell has not demonstrated that the bankruptcy court abused its discretion in refusing to give credence to this testimony. See In re Faden, 96 F.3d 792, 797 (5th Cir. 1996); In re Texas Extrusion Corp., 844 F.2d 1142, 1160 (5th Cir. 1988).
B. Whether the $100,000 debt is non-dischargeable
Finally, the bankruptcy court's holding that the debt is non-dischargeable should be affirmed In its January 28, 1998 order, the bankruptcy court held that any debt owed by Hurstell to the Appellees would be non-dischargeable under Section 523(a)(4), since the debt arose from Hurstell's breach of the fiduciary duty he owed as attorney for the trust to the Appellees as beneficiaries of the trust.
Although Hurstell does not contest the bankruptcy court's ruling that the debt was nondischargeable, instead focusing on whether the debt existed at all, the Court nonetheless briefly addresses the issue since it is so closely related to whether the debt in fact existed.
Debt is non-dischargeable in bankruptcy when the debt arises from "fraud or defalcation while acting in a fiduciary capacity. . . ." 11 U.S.C. § 523 (a)(4). The facts clearly indicate that Hurstell's unethical conduct amounted to defalcation, if not fraud, and that as attorney for the trust Hurstell had a fiduciary duty to the trust's beneficiaries, Appellees. Fraudulent intent and defalcation can be inferred from the Court's earlier findings that Hurstell committed numerous ethical violations and that he converted the money to his own use. In re Sonnier, 157 B.R. 976, 980 (E.D. La. 1993). Furthermore, Hurstell engaged in the unethical conduct and the conversion while acting in his capacity as trust attorney. As trust attorney Hurstell owed a fiduciary duty to Appellees as trust beneficiaries. Cf id. at 980-81 (finding that an attorney has a fiduciary duty, as intended under Section 523(a)(4), to his client); In re Bennett, 989 F.2d 779, 785-86 (5th Cir. 1993) (finding that a managing partner owes a fiduciary duty to his limited partners); In re Ducey, 160 B.R. 465, 470 (Bankr. D.N.H. 1993). As previously mentioned, Hurstell does not contest the bankruptcy court's finding that the debt was non-dischargeable.
C. Conclusion
In sum, the Court affirms the bankruptcy court's findings that the $100,000 Hurstell withdrew from the trust constituted a debt, not attorneys' fees, and that the debt was non-dischargeable. Accordingly,
IT IS ORDERED that this appeal should be and is hereby DENIED and that the bankruptcy court should be and is hereby AFFIRMED.