Burke v. DeFranco (In re DeFranco)

658 B.R. 470

IN RE: Leonard S. DEFRANCO, Debtor.

Margaret Burke, Plaintiff, v. Leonard S. DeFranco, Defendant.

Bankruptcy No. 22 B 02890

Adversary No. 22 A 00128

United States Bankruptcy Court, N.D. Illinois, Eastern Division

Signed March 15, 2024

Joel A. Schechter, ESQ, Law Offices Of Joel Schechter, Chicago, IL, for Plaintiff.

MEMORANDUM OPINION

Janet S. Baer, United States Bankruptcy Judge

Plaintiff Margaret Burke filed a three-count adversary complaint against debtor-defendant Leonard S. DeFranco, seeking a determination that a judgment debt owed to her by DeFranco is not dischargeable pursuant to 11 U.S.C. §§ 523(a)(2)(A), (a)(4), and (a)(6).¹ The matter is now before the Court on Burke's motion for partial summary judgment on the claims under § 523(a)(4) in Count II of her complaint. For the reasons set forth below, the Court finds that there are no genuine issues of material fact and that Burke is entitled to judgment as a matter of law on Count II. As such, Burke's motion will be granted, and judgment will be entered in her favor on Count II.

BACKGROUND

The material facts in this case are gleaned from the docket, the pleadings, and the summary judgment statement and response, as well as the exhibits attached thereto. Among those exhibits are an initial judgment order and a subsequent order awarding attorneys' fees as a measure of punitive damages, both entered in favor of Burke and against DeFranco by the Circuit Court of the Eighteenth Judicial Circuit in DuPage County, Illinois (the "state court") after conducting an evidentiary bench trial, as well as Burke's state court complaint and a transcript of the state court's ruling. (See Adv. 22-00128, Dkt. No. 1, Exs. A-C.²) Many of the facts that follow are drawn from these exhibits.

Burke and DeFranco met approximately ten years ago, and, over those years, the two of them developed and maintained a friendship. (Tr. at 13:5-16³; Dkt. 11 ¶ 8.) In addition to the social relationship that the parties had at that time, Burke asserts that she retained DeFranco—a self-described attorney "registered . . . on the rolls of the Illinois Supreme Court" (Dkt. 11 ¶ 6)—to legally represent her on three different occasions. First, Burke says, she retained DeFranco as her lawyer in mid-2014 to help her acquire an ownership interest in Sovereign Tap, a restaurant located in Plainfield, Illinois. (Dkt. 17 ¶ 6.) About three years later, in March or April 2017, Burke retained DeFranco again, she claims, to represent her as the plaintiff in litigation that was pending in Will County.⁴ (Id. ¶ 7.) Not long thereafter, in November 2017, Burke retained DeFranco once more, this time, she says, in connection with the purchase of the real estate on which Sovereign Tap was located. (Id. ¶ 8.)

Subsequently, in April 2018, the parties had a "conversation" during which they discussed the possibility of Burke providing DeFranco with a large sum of money. Specifically, DeFranco asked Burke whether she would be willing to provide him with a short-term loan of $180,000 to buy or lease real property on Summit Avenue in Oakbrook Terrace, Illinois (the "Summit Property"). (Tr. at 6:21-7:1, 11:22-24, 13:19-14:2; 14:19-22; see also Dkt. 17 ¶¶ 9, 10.) DeFranco told Burke that he needed the money to demonstrate his "financial wherewithal" to the seller and that, although he had sufficient funds in his various investment accounts, he did not want to liquidate those funds for that purpose. (Tr. 13:19-14:2, 14:19-22; see also Dkt. 17 ¶ 11.) DeFranco assured Burke that he would keep the loan funds in his bank account, repay her within three months, and execute a promissory note to document the loan. (Tr. at 14:19-22; see also Dkt. 17 ¶ 12.) Based on those representations, Burke wired $180,000 to DeFranco's account on May 3, 2018. (Dkt. 17 ¶¶ 13, 14; Dkt. 26 ¶ 14.) Shortly thereafter, DeFranco texted Burke to say that he had received the transfer and would execute a promissory note as the parties had discussed. (Tr. at 14:4-22; see also Dkt. 17 ¶ 15.) Despite the representations that DeFranco had made, he failed to keep the $180,000 in his bank account, to execute a promissory note, or to give the money back to Burke (within three months—or at all), despite her repeated demands for repayment. (Tr. at 14:4-22; see also Dkt. 17 ¶¶ 17, 18.)

On August 15, 2019, Burke commenced an action against DeFranco in the state court. (Dkt. 26 ¶ 19.) About five months later, on January 22, 2020, Burke filed a first amended complaint which contained four counts: breach of oral agreement (Count I), unjust enrichment (Count II), breach of fiduciary duty (Count III), and fraudulent inducement (Count IV). (Dkt. 1, Ex. A; Dkt. 26 ¶¶ 20, 21.)

On June 24, 2021, after conducting an evidentiary bench trial and considering the parties' testimony and all of the admitted evidence, the state court entered judgment in favor of Burke and against DeFranco on Count I (breach of oral agreement) and Count III (breach of fiduciary duty) in the amount of $180,000, plus punitive damages in the form of attorneys' fees, which were to be determined at a later date. (Dkt. 1, Exs. B, C; Dkt. 26 ¶ 22.) On the ground of fraudulent inducement in Count IV, the court found in favor of DeFranco and against Burke. (Dkt. 1, Ex. B.) The court did not enter judgment as to Burke's claim of unjust enrichment in Count II, because that count was pled in the alternative to Count I.⁵ (Id.)

In reaching its decision on Burke's claim of breach of oral agreement in Count I, the state court noted that its analysis was guided by three well-established presumptions under Illinois law (Tr. at 4:5-7): (1) "[w]hen an individual transfers funds to a person who is neither a spouse nor a relative, the law will presume that the parties engaged in a contractual transaction" (Tr. at 4:8-19); (2) "[t]he burden then shifts to the defendant to show by clear and convincing evidence that the funds constituted a gift" (Tr. at 4:20-5:3); and (3) even if a defendant successfully demonstrates that the funds were a gift, "a gift from a client to [her] attorney . . . raises a presumption of undue influence sufficient to establish a prima facie case" (Tr. at 5:10-20). Given these presumptions, and based on the parties' testimony and the evidence at trial, the state court found, in pertinent part, that the parties engaged in a contractual transaction, that the funds at issue constituted a loan, and that "an attorney-client relationship existed between the parties at the time of the loan transaction." (Tr. at 5:4-9:17.)

As to its decision on Burke's claim of breach of fiduciary duty in Count III, the one most relevant to the motion for partial summary judgment here, the state court found that a fiduciary relationship arose between the parties at the time of the transaction and that DeFranco's conduct constituted a breach of his fiduciary duty to Burke. (Tr. at 12:20-22, 15:1-4.) To provide context for and elaborate on its ruling on Count III, the court stated as follows:

To succeed on a claim for breach of fiduciary duty, the complaining party must prove, one, that a fiduciary duty exists, that the fiduciary duty was breached, and that such breach proximately caused the injury of which the party complains . . . .

A fiduciary relationship may arise as a matter of law from the existence of a particular relationship, such as an attorney-client relationship or a principal-agent relationship, or as a matter of fact, when one party reposes trust and confidence in another, such that the latter gains a resulting influence and a superiority over the former.

In this case, the Court finds that a fiduciary relationship arose between the parties, both as a matter of law and as a matter of fact.

First, [DeFranco] was [Burke's] attorney at the time of the loan transaction, as noted earlier in this decision. This is plainly demonstrated by [DeFranco's] concurrent representation of [Burke] in a case pending in Will County, where [DeFranco] did enter an appearance as [Burke's] counsel.

Second, the complaint alleges facts restated in all counts, suggesting [Burke] consider[ed] [DeFranco] a close friend, a legal expert, and a trusted confidant. These allegations were confirmed by [DeFranco's] answer, and later substantiated by clear and convincing evidence at trial, demonstrating that [Burke] typically sought [DeFranco's] advice on legal matters.

This Court finds[,] by reason of the parties' friendship[ ] [and] attorney-client relationship, [that Burke] reposed her trust and confidence in [DeFranco], allowing him to thereby gain influence [and] superiority over her.

This Court finds that [DeFranco] exploited his fiduciary position in relation to [Burke] and betrayed [Burke's] trust and confidence. Based on the credible evidence in the record, [DeFranco] persuaded [Burke] to loan him a large sum of money by reassuring her that, one, he possessed the value of the funds in a[n] illiquid account, and two, . . . his use of the funds would simply serve as a formality in a time-sensitive transaction concerning the Summit Property.

The evidence at trial demonstrated that [DeFranco] did not use the funds as promised. Moreover, upon receipt of [Burke's] funds, [DeFranco] reassured [Burke] he would draft and execute a promissory note, failed to do so, and later ignored or otherwise stonewalled upon [Burke's] repeated demands for repayment.

The Court finds the parties' understanding [was that DeFranco] would draft and execute the promissory note, evidenced by [DeFranco's] text message, compelling evidence that [DeFranco] was . . . acting as both the borrower and [Burke's] trusted advisor at the time of the loan transaction. As [Burke] testified at trial, [DeFranco] suggested a promissory note to protect [Burke] if anything happened to [DeFranco].

Moreover, the Court finds [Burke's] testimony credible with respect to the promissory note, and the conversations surrounding the loan transaction itself, and [DeFranco's] testimony not

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