Opinion
Case No.: 02-36276 (DHS), Adv. No.: 02-04013 (DHS).
April 4, 2011
Seidman Pincus, LLC, Mitchell B. Seidman, Esq., Hasbrouck Heights, NJ, Counsel for Plaintiffs .
Commisa Campanile, Vincent Commisa, Esq., Livingston, NJ, Counsel for Defendant .
Hellring, Lindeman, Goldstein Siegal, Richard B. Honig, Esq., Newark, NJ, Counsel for the Trustee .
OPINION
Before the Court is a motion for summary judgment filed by Hilton L. Stein, the Debtor/Defendant ("Defendant"), seeking dismissal of the adversary complaint or, in the alternative, entry of an order permitting him to submit expert reports within forty-five (45) days of receipt of this Opinion. Dr. Monica Mehta, Physical Medicine Rehabilitation Services, Inc., and Monica Mehta, M.D., P.A. ("Plaintiffs") oppose the summary judgment motion. They seek to have the debt owed by the Defendant declared nondischargeable pursuant to 11 U.S.C. §§ 523(a)(4), (a)(2)(A), and (a)(2)(B), respectively. The Plaintiffs' Complaint alleges that (i) the Defendant committed fraud or defalcation while acting in a fiduciary capacity; (ii) the Defendant procured the debt through false pretenses, a false representation, or actual fraud; and (iii) the Defendant procured the debt through the use of materially false written statement respecting his financial condition. Also presently before the Court is the Plaintiffs' cross-motion to compel the Defendant to pay $632.24 for photocopying and duplicating costs incurred during discovery.
For the reasons stated below, the Defendant's motion for summary judgment is denied and the Defendant shall submit his expert reports within forty-five (45) days from the entry of the accompanying Order. The Plaintiffs' cross-motion to recover costs is denied at this time.
The Court has jurisdiction over this motion pursuant to 28 U.S.C. § 1334 and the Standing Order of Reference from the United States District Court for the District of New Jersey dated July 23, 1984. This matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) and (I). Venue is proper under 28 U.S.C. § 1409.
STATEMENT OF FACTS AND PROCEDURAL HISTORY
I. Defendant's Statement of Facts
In November 2001, the Plaintiffs retained the Defendant to pursue a legal malpractice claim against the law firm of Blume, Goldfaden, et al. and attorney Michael Wittenberg. (Def.'s R. 56.1 Statement of Facts, ¶ 2) ("Def's Stmt. of Facts") The parties negotiated a Retainer Agreement, including a cap on fees at $75,000.00. ( Id. at ¶ 4-6) The Plaintiffs paid the Defendant an initial sum of $40,000.00. ( Id.)
Approximately six months later, on June 10, 2002, the Defendant filed a voluntary petition under chapter 11 of the Bankruptcy Code. On September 30, 2002, the Court appointed a Chapter 11 Trustee. On November 18, 2002, upon motion by the Trustee, the case was converted to one under chapter 7. The Plaintiffs commenced the present adversary proceeding seeking nondischargeability of debts thereafter.
On July 23, 2003, Plaintiffs' counsel wrote a letter to the Essex County Prosecutor's Office requesting that a criminal complaint be filed against the Defendant. ( Id. at ¶ 9) The letter asserted that after the Defendant had deposited the Plaintiffs' retainer in his general account, he did little work on the file, failed to return the Plaintiffs' telephone calls, and shortly thereafter filed for bankruptcy. ( Id.) It further alleged that "At the time [the Defendant] accepted Dr. Mehta's money, [he] either knew or should have known that he would file shortly for bankruptcy and that he would not [pursue the malpractice claims] or return the client's money." ( Id.; see Ex. H) In addition, the Plaintiffs filed complaints with the Office of Attorney Ethics and the Client Security Fund. ( Id. at ¶ 8)
The Defendant alleges that the representations made to the Essex County Prosecutor's Office were false and/or inaccurate. ( Id.) He asserts that they were based on misrepresentations, lies, and deceit. (Def.'s Br. in Supp. of Mot. for Summ. J., p. 15) ("Def.'s Br.")
The Defendant claims that he performed services on behalf of the Plaintiffs, including, but not limited to, the initial review of the file, client meetings and letters, and conferences with an expert. ( Id. at 6) Further, he submits that at the time he was retained to represent the Plaintiffs' interest he was capable of handling such a case. ( Id. at 32) The Defendant claims that at the time he was actively involved in negotiating settlements in over a million dollars' worth of highly complex legal malpractice cases. ( Id. at 31)
The Defendant admits that in March 2002, approximately four months after being retained, he was referred to a psychiatrist and prescribed "a mild dose of an anti-depressant." ( Id.) He had to be persuaded to abandon his practice of law, which he asserts demonstrates his clear and unequivocal desire to persist in practicing law despite his difficult circumstances. ( Id.) Defendant voluntarily notified the Office of Attorney Ethics of his health-related issues. ( Id.) He was subsequently suspended from the practice of law by the New Jersey Supreme Court after being committed to confinement at Saint Barnabas Mental Health Center in June 2002 and placed on the "Disabled Inactive" list of lawyers the following month. (Def.'s Stmt. of Facts, ¶ 56)
II. Plaintiffs' Disputed and Additional Facts
The Plaintiffs first note that this is the Defendant's third motion for summary judgment in this adversary proceeding. Although discovery has been completed since the Court denied the previous motions, the Plaintiffs assert that the material facts have remained unchanged. The Plaintiffs submit to the Court that several questions of material fact remain in genuine dispute such that summary judgment is not appropriate.
Prior to January 1, 2001, the Defendant was a solo practitioner. (Pls.' Local R. 56.1 Statement of Facts in Opp'n to Def.'s Summ. J. Mot., ¶ 16) ("Pls.' Stmt. of Facts") On that date, the Defendant joined and became employed by the law firm of Stein, Thyne, LaGrotta, Roper Twardowsky, LLC ("Firm"). ( Id. at ¶ 17) He donated his cases to the firm and was compensated with an upfront payment in the amount of $500,000. ( Id.) By April of 2001, however, the Defendant separated from the Firm amid allegations that he had defrauded it. ( Id.) The Firm asserted a claim against the Defendant in excess of $500,000 and filed notices of attorneys liens on his files. ( Id. at ¶¶ 18-19, 22) The parties also filed competing complaints with the Ethics Committee concerning the separation. ( Id.)
In September 2001, the Defendant entered into a relationship with the law firm of Sommer, Engelhart, Pescatore ("Sommer Firm"). ( Id. at ¶ 21) The Plaintiffs argue that the relationship was, in reality, nothing more than a landlord-tenant relationship, rather than an attorney-law firm affiliation. ( Id. at ¶ 24) The Plaintiffs assert they were seeking the resources of a full-fledged law firm at the time they retained the Defendant and the Defendant misrepresented to them that he was an attorney with the Sommer Firm, with its full support and backing. ( Id.) Moreover, he made the misrepresentations in writing by using the letterhead of a phantom firm known as, "Stein, Sommer, Engelhart, Pescatore." ( Id.)
At the time the Defendant was retained, he had already admitted to a state court in October 2001, during the litigation of an unrelated matter, that he was suffering from a lack of financial resources. ( Id. at 25) The Defendant's poor financial condition resulted in his failure to contest a summary judgment motion in that matter. ( Id.) At some point during October/November 2001, the relationship with the Sommer Firm ended. ( Id.) In early 2002, following the negotiation of the Retention Agreement and the transfer of the initial $40,000 retainer, the Defendant made personal loans to his practice in the amount of $60,000, ostensibly to cure cash flow problems and to continue operating. ( Id. at ¶¶ 31-32)
The Plaintiffs also dispute the Defendant's timeline of his mental health issues. They note that the Defendant began seeing a psychologist for mental health and emotional issues in November 2001 not March 2002. ( Id. at ¶ 26; contra Def.'s Br., p. 31) According to the psychologist, the Defendant "entered therapy" at his "first session" in "November 2001" and was already "suffering from anxiety and depression." (Pls.' Stmt. of Facts, ¶ 27).
The Plaintiffs allege that the Defendant, "strapped for cash, suffering from anxiety and depression, working and practicing on his own without a law firm on the 400 banker's boxes covering 70 files which were in complete disarray, took a $40,000 refundable cash retainer from the Plaintiffs, deposited it into his general business account, and spent it on other things [unrelated to their case]." ( Id. at ¶ 28) The Plaintiffs assert that the Defendant took the $40,000.00 to cure his cash flow problems, rather than to represent the their interest. ( Id.) They assert that the Defendant was insolvent at the time, considering the $500,000 fraud and ethics claim asserted by the Stein, Thyne, LaGrotta, Roper Twardowsky Firm, the attorneys' liens on all of his files, and his own admissions in the state court. ( Id.)
Since the time of filing of the Defendant's second summary judgment motion, the Plaintiffs have supplemented their case with an expert report from Edward Wacks, Esq. ( Id. at ¶ 34) Mr. Wacks is a member of the Center for Professional Responsibility of the American Bar Association and served as Chair of the District X Ethics Committee in New Jersey during 1984 and 1985. ( Id. at ¶ 34). Mr. Wacks' opinion is that (i) the Defendant breached his fiduciary duty to the Plaintiffs and violated the Rules of Professional Conduct and (ii) the Defendant induced the Plaintiffs to retain his services under false pretenses. ( Id. at ¶ 35) Mr. Wacks believes that under the circumstances it is clear that the Defendant could not properly perform the services for which he was retained. ( Id. at p 36) In reaching these conclusions, he considered it significant that the Defendant had no law firm affiliation and meager financial resources. ( Id.) Mr. Wacks found it particularly noteworthy that the Defendant admitted as much to the state court only one month prior to accepting the Plaintiffs' case. ( Id.)
DISCUSSION
I. Summary Judgment Standard
A court may grant summary judgment under Federal Rule of Civil Procedure 56(c), made applicable to adversary proceedings pursuant to Federal Rule of Bankruptcy Procedure 7056, "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c); Fed.R.Bankr.P. 7056. At the summary judgment stage, the role of the court "is not to weigh the evidence, but to determine whether there is a genuine issue for trial." Knauss v. Dwek, 289 F. Supp. 2d 546, 549 (D.N.J. 2003) (citing Anderson v. Liberty, Inc. 477 U.S. 242, 249 (1986)). The court must construe facts and inferences in a light most favorable to the non-moving party. See Am. Marine Rail NJ, LLC v. City of Bayonne, 289 F. Supp. 2d 569, 578 (D.N.J. 2003) (citing Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587-88 (1986)). "Only evidence admissible at trial may be used to test a summary judgment motion. Thus, evidence whose foundation is deficient must be excluded from consideration." Williams v. Borough of West Chester, Pa., 891 F.2d 458, 471 (3d Cir. 1989) (citations omitted).
The moving party must make an initial showing that there is no genuine issue of material fact. See Knauss, 289 F. Supp. 2d at 549 (citing Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986)). The burden then shifts to the non-moving party to "make a showing sufficient to establish the existence of [every] element essential to the party's case, and on which that party will bear the burden of proof at trial." Cardenas v. Massey, 269 F.3d 251, 254-55 (3d Cir. 2001) (questioned on other grounds) (quoting Celotex Corp., 477 U.S. at 322). The "mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment; the requirement is that there be no genuine issue of material fact." Anderson, 477 U.S. at 247-48. An issue of fact is "genuine" if a reasonable juror could return a verdict for the non-moving party. See id. at 248. Furthermore, a material fact is determined by the substantive law at issue. See Crane v. Yurick, 287 F. Supp. 2d 553, 556 (D.N.J. 2003) (citing Anderson, 477 U.S. at 248). A fact is "material" if it might affect the outcome of the suit under governing law. Id. Disputes over irrelevant or unnecessary facts are insufficient to defeat a motion for summary judgment. Anderson, 477 U.S. at 248 (citation omitted).
However, even if material facts remain disputed, summary judgment may be proper if, after all inferences are drawn in the non-moving party's favor, the moving party is entitled to judgment as a matter of law. Id. at 248-50. Such a judgment is appropriate "as a matter of law" when the non-moving party has failed to make an adequate showing of an essential element of his or her case, as to which he or she has the burden of proof. See Celotex Corp., 477 U.S. at 322-23. When one moves the court for summary judgment, Federal Rules of Civil Procedure 54(c) and 56, taken together, permit the court to enter summary judgment on behalf of the non-movant, even if the non-movant has not filed a cross-motion for summary judgment. See Pfieffer v. Lebanon School Dist., 673 F. Supp. 147, 151-52 (M.D. Pa. 1987) (citation omitted). On the other hand, a court must deny a motion for summary judgment when a genuine issue of material fact remains to be tried or where the moving party is not entitled to judgment as a matter of law.
II. Nondischargeability under Section 523(a)(4)
Section 523(a)(4) of the Bankruptcy Code provides, in pertinent part, that "[a] discharge under . . . this title does not discharge an individual from any debt — . . . (4) for fraud or defalcation while acting in a fiduciary capacity . . ." 11 U.S.C. § 523(a)(4). The plaintiff bears the burden of proving nondischargeability and must do so by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 288-89 (1991). To successfully bar discharge, a plaintiff must show that "(1) there was a pre-existing fiduciary relationship between debtor and the creditor; (2) debtor acted in violation of that relationship; and (3) the creditor suffered an economic loss as a consequence." Pa. Lawyers Fund for Client Sec. v. Baillie (In re Baillie), 368 B.R. 458, 469 (Bankr. W.D. Pa. 2007) (citing Commonwealth Land Title Co. v. Blaszak (In re Blaszak), 397 F.3d 386, 390 (6th Cir. 2005)).
A. Fiduciary Capacity
In the dischargeability context, the definition of "fiduciary" should be narrowly construed. See, e.g., Goldberg v. New Jersey Lawyers' Fund for Client Protection, 932 F.2d 273, 278 (3d Cir. 1991) (citing In re Rausch, 49 Bankr. 562, 564 (Bankr. D.N.J. 1985) (general meaning of fiduciary as a person representing confidence, trust, and good faith is "far too broad for the purposes of bankruptcy law")). For the purposes of § 523(a)(4), "[t]he fiduciary (debtor) must hold an express or technical trust on behalf of the beneficiary (creditor)." Int'l Fid. Ins. Co. v. Marques (In re Marques), 358 B.R. 188, 194 (Bankr. E.D. Pa. 2006) (citing Harris v. Dawley (In re Dawley), 312 B.R. 764, 777 (Bankr. E.D. Pa. 2004)). In addition, the fiduciary relationship "must have existed prior to or independent of the particular transaction from which the debt arose. The debt must be due to the fiduciary acting in that capacity." Id. (citing Pa. Mfrs.' Assoc. Ins. Co. v. Desiderio (In re Desiderio), 213 B.R. 99, 102-03 (Bankr. E.D. Pa. 1997)).
Even under this narrow definition, the present facts, when viewed in a light most favorable to the Plaintiffs, lead to the conclusion that the Defendant was acting in a fiduciary capacity. Approximately six months prior to the bankruptcy filing, the Plaintiffs paid the Defendant a $40,000.00 retainer for legal representation. They further allege that this payment was refundable. Thus, as an attorney holding refundable client funds, the Defendant was in a pre-existing fiduciary relationship with the Plaintiffs within the scope § 523(a)(4).
B. Defalcation
The Bankruptcy Code does not define the term "defalcation." It is well-settled that the type of misconduct which constitutes "defalcation" is less than fraud. However, disagreement abounds as to the minimum degree of culpability which is required. The minority position is that "even an innocent mistake resulting in the failure to fully account for funds handled in a fiduciary capacity can constitute defalcation." 4 Collier on Bankruptcy ¶ 523.10[1][b] (Alan N. Resnick Henry J. Sommer eds. 16th ed.) (citations omitted). The majority requires at least some culpability, although there is a circuit split as to whether defalcation requires reckless conduct or mere negligence by the fiduciary. Id. (citations omitted).
As Judge Learned Hand wrote in Central Hanover Bank Trust Co. v. Herbst: "[D]efalcation may demand some portion of misconduct; we will assume arguendo that it does. All we decide is that when a fiduciary takes money upon a conditional authority which may be invoked and knows at the time it may, he is guilty of "defalcation" though it may not be a "fraud," or an "embezzlement," or perhaps not even a "misappropriation." 93 F.2d 510, 512 (2d. Cir. 1937).
Despite these varying interpretations, the Third Circuit has yet to weigh in on the matter. Nevertheless, this Court has previously held that "some showing of affirmative misconduct" is required. Buttimore v. Wolke (In re Wolke), 2008 Bankr. LEXIS 389, *19 (Bankr. D.N.J. Feb. 13, 2008) (quoting Chao v. Rizzi, 2007 U.S. Dist. LEXIS 57773 (W.D. Pa. Aug. 8, 2007)); see also Silver Care Ctr. v. Parks (In re Parks), 2007 Bankr. LEXIS 2372, *51 (Bankr. D.N.J. Jul. 10, 2007) ("negligence alone is not sufficient to establish defalcation . . . some affirmative showing of misconduct [is] necessary."). However, "no element of intent or bad faith need be shown." Id. (quoting Brown v. Colangelo (In re Colangelo), 206 B.R. 78, 85 (Bankr. M.D. Pa. 1996)).
In this case, the parties dispute the nature of the alleged misconduct. The Defendant maintains that the Retainer Agreement expressly authorized him to deposit the initial $40,000 into his general business account, as opposed to a segregated client account. (Def.'s Stmt. of Facts, ¶ 26) He asserts that his law practice was solvent at the time he undertook the Plaintiffs' representation and that he was actively litigating a "gold mine" of cases. ( Id. at ¶¶ 67-69) Moreover, he provides a detailed account of the work he allegedly performed for the Plaintiffs before his practice collapsed amid personal health and financial difficulties. ( Id. at ¶¶ 36-61)
In contrast, the Plaintiffs assert that the Defendant used the initial retainer as working capital for his struggling law practice rather than restrict it toward representation of the Plaintiffs' interest. (Pls.' Stmt. of Facts, ¶ 28) In support, they point to the Defendant's admission to the state court that his firm lacked the resources in October 2001 to contest a summary judgment motion. ( Id. at 25) They also note the $60,000 in loans made by the Defendant to his practice in the five months immediately following his retention as further evidence of his precarious financial position. ( Id. at ¶¶ 31-32) The Plaintiffs assert that these loans were necessary because the $40,000 retainer had been used up by the time of the first loan in January 2002, less than ninety (90) days after the Retainer Agreement was executed. (Id.)
Ultimately, the record is riddled with factual disputes between the parties. That the Plaintiffs have suffered an economic loss is clear. Whether that loss resulted from the Defendant's affirmative misconduct is not clear and remains in genuine dispute. Accordingly, summary judgment is denied as to Count I of the adversary complaint.
III. Nondischargeability under Section 523(a)(2)(A)
Section 523(a)(2)(A) of the Bankruptcy Code provides section provides, in pertinent part, that "[a] discharge under . . . this title does not discharge an individual debtor from any debt — . . . (2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by — (A) false pretenses, a false representation, or actual fraud other than a statement respecting a debtor's or an insider's financial condition." 11 U.S.C. § 523(a)(2)(A). Again, the plaintiff bears the burden of proving nondischargeability by a preponderance of the evidence. Grogan, 498 U.S. at 290. In evaluating a claim for false representations and actual fraud under § 523(a)(2)(A), the Third Circuit looks to the Poskanzer elements:
(1) the debtor obtained money, property or services through a material misrepresentation; (2) the debtor, at the time of the transaction, had knowledge of the falsity of the misrepresentation or reckless disregard or gross recklessness as to its truth; (3) the debtor made the misrepresentation with intent to deceive; (4) the plaintiff [justifiably] relied on the representation; and (5) the plaintiff suffered loss, which was proximately caused by the debtor's conduct.
De La Cruz v. Cohen (In re Cohen), 185 B.R. 180, 186 (Bankr. D.N.J. 1995) (citing Trump Plaza Assoc. v. Poskanzer (In re Poskanzer), 143 B.R. 991, 999 (Bankr. D.N.J. 1992)); see Field v. Mans, 516 U.S. 59, 74, 116 S. Ct. 437, 133 L. Ed. 2d 351 (1995) (for "justifiable" reliance).
As to the first element — obtaining money, property, or services through a material misrepresentation — words, both written and oral; conduct; and even omissions may all be found to constitute a material misrepresentation for the purposes of § 523(a)(2)(A). See Shaw v. Santos (In re Santos), 304 B.R. 639, 661 (Bankr. D.N.J. 2004). The Third Circuit has been clear on the issue of omissions, holding that "[A] debtor's silence regarding a material fact can constitute a false representation actionable under section 523(a)(2)(A)." Wolstein v. Docteroff (In re Docteroff), 133 F.3d 210, 216 (3d Cir. 1997) (quoting In re Van Horne, 823 F.2d 1285, 1288 (8th Cir. 1987)). Whether through affirmative conduct or omission, such misrepresentations must constitute "an important or substantial untruth" that touches "upon the essence of the transaction." Shaw, 304 B.R. at 662 (citations omitted).
The second and third elements require a plaintiff to prove that the defendant knew of the false nature of his statements and that he made them with an intent to mislead or deceive his potential lender. 11 U.S.C. § 523(a)(2); Poskanzer, 143 B.R. at 999; In re Hambley, 329 B.R. 382, 396 (Bankr. E.D.N.Y. 2005). Direct evidence is rarely useful in proving the knowledge and intent elements because the analysis goes to a defendant's subjective state of mind. De La Cruz v. Cohen (In re Cohen), 191 B.R. 599, 604 (D.N.J. 1996). "Proof of intent to deceive is measured by the debtor's subjective intention at the time the representation was made." Nicholson v. Nicolai et al. (In re Nicolai), 2007 Bankr. LEXIS 339, *8 (Bankr. D.N.J. Jan. 31, 2007) Therefore, knowledge of the falsity and intent not to repay, or intent to deceive, may be inferred from the "totality of the circumstances." Id. (citing Ins. Co. of Am. v. Cohn (In re Cohn), 54 F.3d 1108, 1118-19 (3d Cir. 1995)).
The appropriate standard for both elements is "gross recklessness." Cohen, 191 B.R. at 605 (citing Cohn, 54 F.3d at 1118) ("[P]roof of reckless indifference to the truth will satisfy both the knowledge and intent to deceive prongs of § 523(a)(2)(A)"); see also DiPietro et al. v. Drossel (In re Drossel), 2007 Bankr. LEXIS 3862, *19 (Bankr. D.N.J. Nov. 7, 2007). A defendant is reckless when he commits "unreasonable conduct in disregard of a known or obvious risk from which it is highly probably that harm would follow." Cohen, 191 B.R. at 605. This is distinguishable from negligence, which is "characterized as mere thoughtlessness or inadvertence or simple inattention." Id.
Count II of the adversary complaint alleges that the debt due and owing to the Plaintiffs "was incurred via [the] Defendant (i) making material misrepresentations to the Plaintiffs, or (ii) omitting to state material facts to the Plaintiffs, or (iii) committing a fraud on [the] Plaintiffs." (Adv. Compl., Docket No. 1) In their opposition brief, the Plaintiffs argue that even if the Defendant's conduct does not rise to the level of actual fraud, he nevertheless made false representations and omissions in procuring the $40,000 payment. (Pls.' Br. in Opp'n to Summ. J., p. 10) ("Pls.' Br.") Specifically, the Plaintiffs claim that the "Defendant falsely represented his ability to handle Plaintiffs' legal malpractice case (his financial condition, his emotional health, and his resources including misrepresenting his affiliation with the Sommer Firm)." ( Id.)
It is unclear from the conflicting factual accounts whether the Defendant, at the time he was retained, was unable to effectively represent the Plaintiffs. If, as he maintains, he was close to reaching settlement agreements in several lawsuits, then his overall financial condition may not have been as dire as the Plaintiffs suggest. On the other hand, it is undisputed that he misrepresented his affiliation with the Sommer Firm. In addition, the parties continue to dispute the timeline relating to the Defendant's mental health issues. The Defendant admits to being prescribed an anti-depressant in March 2002, however the Plaintiffs assert that he was already suffering adverse effects of his condition at the time of the Retainer Agreement.
All of these facts go to the issue of whether the misrepresentations were material, as well as whether the Defendant acted with reckless indifference to the truth. Accordingly, under section 523(a)(2)(A), the Plaintiffs raise triable issues of fact as to the material misrepresentations, the Defendant's knowledge of the false nature of those misrepresentations, and the Defendant's intent to deceive. Therefore, summary judgment is denied as to Count II.
IV. Nondischargeability under Section 523(a)(2)(B)
Under 11 U.S.C. § 523(a)(2)(B), "[a] discharge under . . . this title does not discharge an individual debtor from any debt — . . . (2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by — (B) use of a statement in writing — (i) that is materially false; (ii) respecting the debtor's or an insider's financial condition; (iii) on which the creditor to whom the debtor is liable for such [debt]; and (iv) that the debtor caused to be made or published with an intent to deceive . . ." 11 U.S.C. § 523(a)(2)(B). Once again, the plaintiff's burden of proof is by a preponderance of the evidence. Grogan, 498 U.S. at 290.
There is widespread disagreement among authorities on the scope of the phrase: "a statement respecting a debtor's or insider's financial condition." See Schneiderman v. Bogdanovich (In re Bogdanovich), 292 F.3d 104, 112-113 (2d Cir. N.Y. 2002) (collecting cases adopting broad versus narrow scope). To date, the Third Circuit has not taken a position on the issue. This Court, however, has looked to the type of information conveyed and its intended purpose in determining whether a statement is "respecting a debtor's financial condition." See also Goodman v. Kleiman (In re Kleiman), 2007 Bankr. LEXIS 1763, 11-12 (Bankr. D.N.J. May 18, 2007) (citing Nicholson, 2007 Bankr. LEXIS 339, at *3).
There are two writings at issue here. First, the Defendant used a letterhead bearing the law firm name of "Stein, Sommer, Engelhart Pescatore" in his correspondence with the Plaintiffs. Such a firm did not exist and the Plaintiffs allege that the Defendant used the letterhead to intentionally deceive them into believing that he was a member of a larger firm rather than a solo practitioner. (Pls.' Stmt. of Facts, ¶ 24) The Defendant asserts that his use of the letterhead was inadvertent and without intent to deceive, and furthermore, that the Plaintiffs were unreasonable in relying on the letterhead in their decision to enter the Retainer Agreement. (Def.'s Br., p. 31)
Second, the Plaintiffs point to the Retainer Agreement itself as containing affirmative misrepresentations in writing. The Defendant specified the actions he would take on behalf of the Plaintiffs and agreed to provide competent legal services. (Pls.' Br., p. 11) The Plaintiffs contend that these statements were materially false and constituted misrepresentations as to the Defendant's financial condition and ability to carry out the representation. ( Id.) The Defendant, of course, argues that he was capable of providing such services at the time he was retained. ("Def.'s Br., at pp. 31-32)
As such, several elements of § 523(a)(2)(B) remain in genuine dispute. Viewed in the light most favorable to the non-moving party, here the Plaintiffs, both statements can be construed so as to convey information respecting the Defendant's financial condition. As with the § 523(a)(2)(A) claim, the materiality and intent elements also remain in dispute. Thus, summary judgment is denied as to Count III.
V. The Plaintiff's Cross-Motion for Costs
The Plaintiffs cross-motion seeks to recover discovery costs related to photocopying. It is undisputed that the parties agreed to split all discovery costs. The record indicates that the parties disagree on the total amount of those costs. The Court will not reach the issue at this time other than to advise the parties to adhere to any earlier agreement.
CONCLUSION
There are genuine issues of material fact as to each of the three counts in the Plaintiff's Complaint. As such, the Defendant is not entitled to summary judgment and the motion is denied. The alternative relief sought, that the Defendant be permitted to submit expert reports, is granted.
An Order in conformance with this Opinion has been entered by the Court and a copy is attached.