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Attorney’s Misrepresentation is not Dischargeable in Massachusetts Bankruptcy

What are dischargeable debts in Massachusetts bankruptcy? In a case recently decided by Federal Bankruptcy Court of Massachusetts, the issue of an attorney’s deliberate misrepresentation was considered non-dischargeable.
What happened?

In the case entitled In Re: Lambert, Patricia A. (Hoffman, J.) (USBC) (Chapter 7 Case No. 09-45047-MSH; Adversary Proceeding No. 10-04030) (Oct. 27, 2011), a client, Unger, filed suit against his former attorney, Patricia Lambert. The lawsuit was filed in Massachusetts Superior Court by Unger, alleging that his lawyer, Lambert, had induced him into an investment and made false promises, misrepresentations and breached her fiduciary duty to him.
The first step in a Massachusetts legal malpractice case is to determine if there was, indeed, any attorney client relationship. This is crystal clear sometimes. Other times it can be murky. If you make an investment with your attorney, in what capacity was the attorney acting in encouraging or inducing you to make the investment. Unger sought counsel in Lambert after inheriting money and needing investment and legal advice. Unger’s Massachusetts legal expert testified that Lambert, as an attorney, “violated her fiduciary obligations” to Unger. Lambert asserted that they were investors, and no attorney client relationship was established. Based on the testimony, the jury determined that there was an attorney client relationship.
The trial took seven days. The jury found that Lambert did misrepresent herself and reached a verdict that said that of the $230,000 that Mr. Unger lent to Attorney Lambert, $55,000 was an investment and the rest was a loan. There was a verdict of $170,488.
Following the jury verdict, the judge held a hearing on Unger’s Massachusetts Chapter 93A count and found that the jury verdict of false promises, misrepresentations, and breaching her fiduciary duty constituted “willful and knowing violations of General Laws Chapter 93A.” The Court determined that the Unger’s attorney fees were $120,000 and doubled that under 93A, added $130,409 in interest, and $25,000 in costs, entering a judgment in the amount of $566, 615. The Massachusetts Appeals Court affirmed the judgment and 93A finding, but changed the way it was calculated.
Wherefore, Lambert filed for bankruptcy protection. In bankruptcy court, creditors, such as Unger, can initiate an “adversary proceeding” seeking a determination that his debt is nondischargable. Federal Bankruptcy Law, Section 523(a)(2)(A) says a debt is not dischargable to the extent obtained by . . . false pretenses, a false representation, or actual fraud” and Section 523(a)(6) says that a debt is not dischargable if obtained by “willful and malicious injury by the debtor to another entity.” It was now the Bankruptcy judge’s decision to determine if the state court findings fit the federal court description of not dischargable.
The bankruptcy court used a six-prong test to determine if the debt to Unger was non-dischargeable: 1. did the debtor make knowing false representations, or one made in reckless disregard of the truth; 2. Did the debtor intended to deceive the creditor, Unger; 3. Did Lambert intend to induce Unger to rely upon false statements; 4. Did Unger actually rely on the false statements; 5. Lambert’s reliance was justifiable; and, 6. Unger’s reliance caused financial damage. The bankruptcy judge looked carefully at the lower court findings of intentional misrepresentations and determined that Unger was entitled to a judgment in his favor in the bankruptcy court. Wherefore, Lambert cannot discharge her debt, the state court judgment, and Unger may attempt to collect it notwithstanding the bankruptcy.