In re Banks, Case No. 04-38360-DOT (Bankr. E.D.Va. 3/4/2010)

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In re: NEDRA YVETTE BANKS, Chapter 7, Debtor.

LYNN L. TAVENNER, TRUSTEE FOR THE BANKRUPTCY ESTATE OF NEDRA YVETTE BANKS, Plaintiff. v. IVAN MORTON, et al. Defendants.

SHAHEEN & SHAHEEN, P.C. Cross-Claimant, v. IVAN MORTON Cross-Defendant.

Case No. 04-38360-DOT.

Adv. Proc. No. 07-03157-DOT.

United States Bankruptcy Court, E.D. Virginia, Richmond Division.

March 4, 2010.

Kevin A. Lake, Esquire, Vandeventer Black LLP, Richmond, Virginia, Counsel for Lynn L. Tavenner, Chapter 7 Trustee.

Ivan Morton, Richmond, Virginia, Pro Se Defendant and Cross-Defendant.

David R. Ruby, Esquire, Michele A. Mulligan, Esquire, Nathan A. Colarusso, Esquire, McSweeney Crump Childress & Temple, P.C. Richmond, Virginia, Counsel for Shaheen & Shaheen, P.C., Cross-Claimant.

Nedra Y. Banks, Chesterfield, Virginia, Pro Se Debtor/Defendant.

Robert Van Arsdale, Esquire, Office of the United States Trustee, Richmond, Virginia, Assistant United States Trustee.

BANKRUPTCY JUDGE'S REPORT AND RECOMMENDATION

DOUGLAS O. TICE, Jr., Chief Bankruptcy Judge

Trial was held October 1, 2009, on the cross-claim of Shaheen & Shaheen, P.C. (Shaheen), against Ivan Morton. (The court was advised that all other claims raised by the trustee's complaint had been previously resolved by agreement.) At the conclusion of trial, the court requested the parties to submit written briefs within 30 days. Shaheen has filed its post-trial memorandum of law. Defendant Morton has not filed a brief, nor has he asked the court for additional time.

Because the cross-claim at issue constitutes a "related to" matter, 28 U.S.C. § 157(c) requires the bankruptcy court to submit this report of proposed findings of fact and conclusions of law to the district court for its consideration and for the entry of a final order or judgment. For reasons stated in this report, the court recommends that Shaheen is entitled to judgment against cross-defendant Morton in the amount of the damages proved at trial, $60,600.00, and that Shaheen be given permission to amend the cross-claim.

Background and Procedural History.

Debtor Nedra Banks filed a chapter 13 petition on September 3, 2004. Her case was converted to chapter 7 on October 23, 2006. Plaintiff Lynn L. Tavenner, who was appointed debtor's chapter 7 trustee, filed the complaint initiating this adversary proceeding on November 22, 2007. The complaint was based upon defendant Morton's allegedly fraudulent structuring of an unauthorized post-petition sale of residential real property owned by debtor, from which Morton received the seller's proceeds. Among other relief, the trustee's complaint sought avoidance of the transfer, turnover of the sale proceeds to the trustee, and damages against Morton for actual fraud and breach of contractual and fiduciary duties. Count III of the complaint sought damages against Shaheen as the settlement agent for the unauthorized transfers of debtor's real property based upon Shaheen's alleged breach of escrow agreement or fiduciary duty. The trustee sought judgment against Shaheen pursuant to 11 U.S.C. § 542 in an amount not less than the aggregate of all proceeds from the sale of debtor's property that the firm controlled and distributed to other defendants and to itself.

Cross-Claim of Shaheen & Shaheen Against Defendant Morton.

The cross-claim alleges in substance that Morton held himself out as an attorney who was representing debtor Banks in the sale of her real property, that Shaheen issued the sale proceeds check to Morton according to his instructions, that the trustee alleges Shaheen breached its fiduciary duty and escrow agreement with debtor, that Morton made material misstatements of fact in representing that he was debtor's attorney, that Shaheen reasonably relied upon Morton's representations, and that Shaheen has been damaged based upon the claims asserted against it by the trustee. Shaheen seeks judgment against Morton for damages, including punitive damages, fees and costs.

Morton's answer to the cross-claim denies liability and states that at no time did he inform Shaheen he was a Virginia attorney or that he was representing debtor as her attorney. Morton also counterclaimed against Shaheen for his expenses and costs. On September 25, 2009, prior to trial, the bankruptcy court entered an order granting Shaheen's motion to dismiss Morton's counterclaim.

Following trial, Shaheen filed a motion for leave to amend paragraph 8 of its cross-claim to conform to the evidence at trial. The trial evidence demonstrated that Morton did not represent himself as an attorney to debtor or to Shaheen, but rather he relied upon the power of attorney given to him by debtor. Shaheen proposes to amend paragraph 8 to read as follows:

Morton held himself out as Banks' attorney in fact, acting pursuant to a Specific Power of Attorney, representing Banks in the sale of the Real Property.

The bankruptcy court recommends granting Shaheen's motion to amend pursuant to Fed. R. Civ. P. 15(b), made applicable to bankruptcy proceedings by Fed. R. Bankr. P. 7015.

Findings of Fact.

At the time she filed her bankruptcy petition, debtor Banks held title to real property located at 5107 Oak Forest Drive, Chesterfield County, Virginia. On March 15 and April 1, 2005, the bankruptcy court entered orders granting conditional relief from the automatic stay with respect to two deeds of trust on that same real property. After debtor failed to comply with the payment provisions of these conditional orders, the secured creditors commenced foreclosure proceedings against the property.

Morton, a former bankruptcy attorney who had been disbarred by the Virginia State Bar, learned of the pending foreclosure and contacted debtor.¹ In subsequent meetings between the two, Morton represented that he could help her avoid foreclosure by a sale of the property. Debtor advised Morton that she was in bankruptcy, that her bankruptcy attorneys had instructed her that her trustee's permission was needed to sell the property, and that Morton should contact her attorneys to obtain approval of the sale. Debtor further advised Morton that the proper protocol for the property to be sold required the seller to obtain permission from the bankruptcy court and for her bankruptcy trustee to be paid the proceeds. (Tr. at 17, 16, 24-26.)

At Morton's request, debtor signed several documents that included a specific power of attorney, a contract of sale, a deed of conveyance for debtor's property, and other papers necessary to a sale of the property. The power of attorney, dated November 22, 2005, appointed Morton as debtor's "true and lawful attorney-in-fact" and authorized Morton to sign debtor's name to all necessary papers relating to the sale or mortgage of debtor's property. There was no agreement between debtor and Morton that he was allowed to receive the proceeds of sale of the property. Neither did debtor authorize Morton to cash a check for the proceeds. (Tr. at 21-22.)

Morton arranged a sale of debtor's property to Mary Cary. The Shaheen law firm represented Cary in the closing of this sale, which was to be financed by a deed of trust loan from Countrywide Home Loans, Inc. Morton provided Shaheen with the power of attorney described above. During the settlement process Shaheen's only contact with debtor was through Morton. (Tr. at 39.) Morton represented to Shaheen that he had full authority to act on debtor's behalf. He sent a letter to Shaheen with the loan payoffs involved in the sale and requesting that the seller proceeds be made payable directly to him. (Ex. 6; Tr. at 42-43.) Morton did not inform Shaheen that the seller Banks was a debtor in a pending bankruptcy case. Although Shaheen obtained a title report on the property, the report did not reflect debtor's pending bankruptcy. Shaheen conducted the settlement on November 23, 2005, following which the firm issued a net proceeds check in the amount of $48,993.95 payable to " Ivan Morton f/b/o/ Nedra Banks." The check was delivered to Morton based on debtor's power of attorney and Morton's instructions to remit the seller's proceeds check payable to him for the benefit of debtor. Morton kept the proceeds for his own use, and no portion of these funds was received by the debtor or her trustee.

Morton did not contact debtor's bankruptcy lawyers prior to the closing or request approval for the sale of debtor's property from the trustee or the bankruptcy court. (Tr. at 79.) Accordingly, the sale was not authorized by the bankruptcy court. After debtor's case was converted to chapter 7, the chapter 7 trustee learned of the sale and filed a complaint initiating this adversary proceeding on November 22, 2007. Shaheen did not learn of debtor's bankruptcy or of the unauthorized nature of the sale until it was served with process of the trustee's complaint.

Additional facts are stated below.

Discussion and Conclusions of Law.

The trustee's counsel appeared in bankruptcy court on October 1, 2009, prior to commencement of trial, and advised the court that the trustee had reached an agreement of settlement of her claim against defendant Morton. Counsel requested that the court set the case down for a status conference so that the trustee could give notice of her compromise with Morton. Also, Shaheen's counsel advised that it had settled the trustee's claim against it by agreeing to pay the trustee the sum of $15,000.00. Morton's compromise settlement with the trustee has not been approved by the bankruptcy court. Moreover, trustee's counsel subsequently advised the bankruptcy court that Morton has failed to comply with the terms of the settlement.

DEFENDANT'S MOTION TO DISMISS SHAHEEN CROSS-CLAIM

Prior to trial, defendant Morton orally moved for dismissal of the Shaheen cross-claim on the following grounds:

1) the bankruptcy court lacks subject matter jurisdiction or "standing" over the cross-claim in light of Shaheen's settlement with the trustee ("[T]here's no federal...