Pa. Lawyers Fund for Client Sec. v. McKee (In re McKee)

648 B.R. 147

IN RE: Sharmil MCKEE, Debtor

Pennsylvania Lawyers Fund for Client Security, Plaintiff,

v.Sharmil McKee, Defendant.

Bankruptcy No. 17-10941-AMC

Adversary No. 20-00270-AMC

United States Bankruptcy Court, E.D. Pennsylvania.

Signed January 30, 2023

Entered January 31, 2023

Robert E. Chernicoff, Bruce Jeffrey Warshawsky, Cunningham & Chericoff, P.C., Harrisburg, PA, for Plaintiff.

Glenn A. Brown, Real World Law, P.C., Upper Darby, PA, for Defendant.

Ashely M. Chan, United States Bankruptcy Judge

I. INTRODUCTION

Prior to commencing this bankruptcy proceeding, Sharmil McKee ("Debtor"), a formerly licensed attorney, provided legal representation to three clients – Sansom Joseph ("Mr. Joseph"), Lisa Gregg ("Ms. Gregg"), and Martha Watkins ("Ms. Watkins," collectively with Mr. Joseph and Ms. Gregg, "Claimants"). Debtor subsequently faced disciplinary proceedings initiated against her by the Pennsylvania Office of Disciplinary Counsel ("Disciplinary Counsel") in connection with the legal representation she provided to the Claimants. Furthermore, dissatisfied with the representation that they had received in various respects, and contending that Debtor's representation caused them certain financial losses, Mr. Joseph, Ms. Gregg, and Ms. Watkins all filed claims for reimbursement with the Pennsylvania Lawyers Fund for Client Security ("Fund"). In exchange for reimbursement for their losses, all three Claimants subrogated to the Fund the right to pursue any claims against the Debtor which they may have.

The Fund subsequently filed this adversary proceeding which seeks to have the claims of Mr. Joseph, Ms. Gregg, and Ms. Watkins declared nondischargeable pursuant to 11 U.S.C. § 523(a)(2)(A), (a)(4), and/or (a)(7), based upon alleged misconduct the Debtor committed during her representation of the Claimants. As explained in more detail below, because Debtor obtained money from all three Claimants by false pretenses, their claims are nondischargeable pursuant to § 523(a)(2)(A). Additionally, because Debtor's mishandling of certain funds entrusted to her care as a fiduciary by Ms. Gregg and Mr. Joseph created a debt for defalcation while acting in a fiduciary capacity, portions of their claims, as described below, are nondischargeable pursuant to § 523(a)(4). Finally, because Debtor's state law obligation to reimburse the Fund for amounts it paid to her former clients, plus 10% interest per annum, to have her law license reinstated constitutes a penalty payable to a governmental entity that is not compensation for actual pecuniary loss, Mr. Joseph's claim, as the only claim the Fund paid pre-petition, plus 10% interest per annum, is also nondischargeable under § 523(a)(7).

II. FACTUAL AND PROCEDURAL BACKGROUND

In 2005, Debtor was admitted to practice law in the Commonwealth of Pennsylvania as a licensed attorney. Trial Tr. 105:17-20, Aug. 25, 2022 ("Trial Tr."); Pl. Ex. 5 ¶ 2. On February 16, 2016, the Disciplinary Counsel, which investigates and prosecutes complaints submitted regarding attorneys practicing law in Pennsylvania,¹ filed a petition charging the Debtor with professional misconduct in ten separate matters ("Attorney Discipline Petition"), including legal matters involving her representation of Mr. Joseph and Ms. Gregg. Pl. Ex. 5 ¶¶ 1, 5; Trial Tr. 43:17-22. On April 1, 2016, Debtor filed an answer to the Attorney Discipline Petition in which she admitted the factual allegations contained therein but requested to be heard in mitigation. Pl. Ex. 5 at 1-2. On June 30, 2016, a hearing was held before a District I Hearing Committee on the Attorney Discipline Petition where Debtor, represented by Glenn Brown, Esq. ("Attorney Brown"), testified and offered the testimony of an expert witness. Id. at 2. The Disciplinary Counsel offered into evidence at that hearing Debtor's admissions and documentary exhibits to satisfy its burden of establishing by a preponderance of clear and satisfactory evidence that Debtor's actions constituted professional misconduct. See id. at 18.

On August 16, 2016, Mr. Joseph signed a "Subrogation Agreement and Assignment of Claims" ("Joseph Subrogation Agreement") with the Fund, a body "created by the Supreme Court of Pennsylvania in order to recompense victims of attorneys who have misappropriated and converted client money or property during the course of an attorney/client relationship or a fiduciary relationship customary to the practice of law." Pl. Ex. 3; Trial Tr. 7:18-22. The Joseph Subrogation Agreement provides that

[t]he above-named Claimant presented a request to the Pennsylvania Lawyers Fund for Client Security Board of the Supreme Court of Pennsylvania...for payment by [the Fund] toward reimbursement of a loss sustained by Claimant by reason of the dishonest conduct of Sharmil D. McKee (hereinafter called the ‘Covered Attorney’), a member of the Bar of the Supreme Court of Pennsylvania, whom the Claimant had employed as his/her attorney in a transaction which is described in the Statement of Claim filed with [the Fund]. The amount of the loss alleged was $4,500.

[The Fund], after investigation, has approved the claim in the amount of $7,000 and has authorized payment of $7,000 to the Claimant.

...

In consideration of the foregoing, and only to the extent of payment received by me from [the Fund], and intending to be legally bound, I hereby subrogate [the Fund] to all of the rights, claims and interest which I may have against the Covered Attorney...and authorize [the Fund] to sue, compromise or settle in my name or otherwise all such claims and to execute and sign releases and acquittances and endorse checks or drafts given in settlement of such claims in my name, with the same force and effect as if I executed or endorsed them.

Pl. Ex. 3.

By way of background, when the Fund receives a claim from a former client of an attorney, the Fund provides notice to the attorney named on the claim form, gives the attorney an opportunity to respond, performs an independent investigation, and prepares the information from the investigation for review and disposition by the Board of the Fund.² Trial Tr. 7:23-8:8.

Meanwhile, by order dated October 5, 2016, effective November 4, 2016, the Supreme Court of Pennsylvania placed Debtor on administrative suspension for non-payment of her attorney license fee. Pl. Ex. 5 ¶ 3. On December 16, 2016, following the submission of post-hearing briefs by both Debtor and the Disciplinary Counsel, the Hearing Committee filed a report concluding that Debtor had violated the rules as contained in the Attorney Discipline Petition and recommending that she be suspended from the practice of law for two years. Id. at 2.

On February 9, 2017, Debtor filed a pro se voluntary petition for relief under chapter 7 of the Bankruptcy Code. Case No. 17-10941 ECF Doc. No. ("ECF") 1, 4. Debtor did not schedule any claims held by Mr. Joseph or Ms. Gregg and did not provide them with notice of the filing.³ See id. at ECF 15.

On April 28, 2017, the Disciplinary Board for the Supreme Court of Pennsylvania ("Disciplinary Board") "adjudicated" the Attorney Discipline Petition. Pl. Ex. 5 at 2. On June 8, 2017, an order was entered in Debtor's bankruptcy case granting her a discharge. Case No. 17-10941 ECF 50. On July 7, 2017, an order was entered approving the chapter 7 trustee's report of no distribution and closing the bankruptcy case. Id. at ECF 52.

Also on July 7, 2017, the Disciplinary Board issued a report and recommendation pursuant to Pa. R. D. E. 208(d)(2)(iii) in connection with the Attorney Discipline Petition to the Supreme Court of Pennsylvania making certain findings regarding the misconduct the Disciplinary Counsel had charged Debtor with, and recommending that Debtor be suspended from the practice of law for two years and that the expenses incurred in the investigation and prosecution be paid by her ("Report and Recommendation"). Pl. Ex. 5 at 1, 24. Ultimately, the Disciplinary Board concluded in the Report and Recommendation that the Disciplinary Counsel had met its burden through the submission of admissions, documentary evidence, and Debtor's testimony that Debtor violated the rules as charged in the Attorney Discipline Petition⁴ and that Debtor had not met her burden of establishing that her misconduct was caused by a psychiatric disorder. Id. at 18, 19.

With respect to Mr. Joseph, the Disciplinary Board found in the Report and Recommendation that:

31. [Debtor] agreed to represent Sansom Joseph pursuant to a written fee agreement dated July 24, 2009, for a fixed fee of $1,500.00.

32. On January 18, 2010, in the Court of Common Pleas of Philadelphia County, [Debtor] filed suit on behalf of her client in Joseph v. East West Realty Group, LLC et. al., 0110 No. 1902.

33. On September 1, 2010, [Debtor] took a default judgment against the defendant in the amount of $206,000.00 ["Joseph Default Judgment"].

34. [Debtor] told Mr. Joseph that she would agree to collect the judgment for an additional fee of $2,500.00 plus a contingency fee of 20% of the gross amount collected on the judgment.

35. On September 20, 2010, Mr. Joseph paid [Debtor] with a check for $2,500.00.

36. Thereafter, Mr. Joseph gave [Debtor] two checks noted in the memo section as ‘Sheriff fee.’ The first check, dated October 29, 2010, was for the amount of $2,500.00 The second check, dated March 3, 2011, in the amount of $2,000.00, was also identified on the instrument as ‘for Sheriff fee.’

37. [Debtor] deposited both checks in the Police and Fire Credit Union account, a non-IOLTA account.

38. On several occasions subsequent to March 3, 2011, Mr. Joseph sought information from [Debtor] concerning the status of his matter on the payment of the sheriff's fees. He received no information or response from [Debtor].

39. [Debtor] made no further efforts to enforce the judgment in favor of her client.

40. Mr. Joseph subsequently sought new counsel.

41. [Debtor] wrote to Mr. Joseph's new counsel that Mr. Joseph had not paid her

...