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Bankruptcy Court Denies Lawyer’s Request To Discharge Legal Malpractice Verdict

IN RE JAHRLING, Bankr. Court, ND Illinois 2014 – Google Scholar.

Jahrling is an Illinois lawyer who filed for bankruptcy protection. A creditor who had won a legal malpractice judgment against Jahrling sought to block the discharge of that obligation in the bankruptcy proceeding.

“The Estate seeks to except from discharge a $26,000 state court legal malpractice judgment entered against Jahrling in 2007. It also seeks to deny the Debtor a discharge. The Amended Complaint asserts causes of action under four Bankruptcy Code (“Code”) sections: § 523(a)(4) — denial of discharge of a particular debt due to defalcation by a fiduciary; § 523(a)(6) ….” In other words the creditor was claiming that Jahrling breached his fiduciary duty to the creditor and therefore could not discharge the debt in his bankruptcy proceeding.

In 2003, Jahrling became involved in a real estate transaction in which he was retained to represent Stanley Cora (aged 90 at the time) in a sale of his home to Bohdan Demkov (“Demkov”) and Nadja Koval (“Koval”). Cora wanted to sell the property, but wanted to retain a life estate so that he could continue to live in the property. After the home was sold for $35,000, Demkov and Koval moved to evict Cora from the property. Jahrling received $400 at the closing of the sale.

After the sale, Cora sued Demkov and Koval for rescission and sued Jahrling for legal malpractice.

The Circuit Court of Cook County entered judgment in favor of Cora and against Jahrling in the legal malpractice action because (a) Jahrling did not communicate with Cora who only spoke Polish; (b) Jahrling relied on the lawyer for the buyers to communicate with Cora; (c) the home was sold for one-third of its market value. In 2007, Cora was awarded a judgment of $26,000 against Jahrling.

Years later, Jahrling sought to discharge the $26,000 legal malpractice award in bankruptcy.

The Bankruptcy Court held that the debt was not dischargeable:

“Here, the Court finds that Jahrling’s substandard representation of Cora constitutes the kind of gross recklessness contemplated in Bullock. Jahrling, as Cora’s attorney, owed him the duties imposed by the Illinois Rules of Professional Conduct to prepare for the engagement, to conduct himself with diligence regarding the engagement and to communicate with Stanley Cora about the engagement. Jahrling’s conduct lacked even a scintilla of diligence — he did not discuss anything with Cora. He did nothing to prepare for the engagement and failed to communicate with his client about the engagement.

The Court finds that Jahrling’s conduct in representing Cora at the sale of his home without talking to him to discern what Cora wanted and how to accomplish his goal, was a gross deviation from the standard of conduct that a law-abiding person as well as any Illinois attorney would observe in Jahrling’s situation. Jahrling consciously disregarded a substantial and unjustifiable risk that his conduct would violate a fiduciary duty. SeePearson v. Howard, 339 B.R. 913, 921 (Bankr. N.D. Ill. 2006) (discharge of a legal malpractice debt was denied, in part, due to attorney’s failure to communicate with his client — “More importantly, Howard failed to communicate with his client.”). Jahrling acted recklessly and in brazen disregard of his fiduciary duty when he ignored his basic duty to communicate with the client, to prepare for the engagement and to pursue his client’s interests diligently. The Estate has carried its burden of proving by a preponderance of the evidence that Jahrling violated fiduciary duties owed Stanley Cora.Grogan v. Garner, 498 U.S. 279, 287-88 (1991) (“we hold that the standard of proof for the dischargeability exceptions in 11 U.S.C. § 523(a) is the ordinary preponderance-of-the evidence standard.”). The $26,000 legal malpractice debt will not be discharged because it is based on a defalcation of his fiduciary duty.”

Edward X. Clinton, Jr.