Carl Selenberg v. Dianne Bates
856 F.3d 393
5th Cir.2017Background
- Bates’s original personal injury counsel missed the filing deadline; she then hired Selenberg for a malpractice claim, but he also failed to timely file, and the malpractice suit was dismissed.
- In December 2011, after informing Bates of the dismissal and that he lacked funds/insurance, Selenberg offered a $275,000 promissory note (plus up to 25% attorneys’ fees) in lieu of litigation and warned that pursuing a disciplinary complaint would preclude recovery.
- Bates accepted the note after being told she had five years to sue on the note versus one year for malpractice; Selenberg did not advise her in writing to seek independent counsel.
- Selenberg never paid under the note; Bates filed a disciplinary complaint and later sued to collect on the note; Selenberg filed Chapter 7, prompting Bates’s adversary complaint seeking nondischargeability under 11 U.S.C. § 523(a)(2)(A).
- The bankruptcy court found the note functioned to buy Selenberg time (an extension of credit) and that his silence/ failure to advise independent counsel violated Louisiana Rule of Professional Conduct 1.8(h)(2), constituting actual fraud; the district court affirmed and the Fifth Circuit affirmed.
Issues
| Issue | Bates's Argument | Selenberg's Argument | Held |
|---|---|---|---|
| Whether giving the promissory note constituted an "extension of credit" under § 523(a)(2)(A) | The note induced Bates to forbear a malpractice suit, giving Selenberg more time to pay — thus an extension | The note was merely an alternative recovery mechanism, not an extension of credit | Held: Note was an extension of credit because it induced forbearance and bought Selenberg time |
| Whether the extension was obtained by "actual fraud" (false representation/ concealment) | Selenberg, as counsel, had a duty under Rule 1.8(h) to advise in writing to seek independent counsel; his silence and inducement to accept the note constituted a false representation/ concealment | Selenberg argued he made no false statements, did not "settle" the malpractice claim, and therefore had no Rule 1.8(h) disclosure obligation | Held: Silence and failure to advise independent counsel—together with facts showing an effective settlement—satisfied false representation; Rule 1.8(h)(2) applied and was violated |
| Whether Selenberg acted with intent to deceive and caused proximate loss | Bates relied on his advice, lost the opportunity to pursue malpractice, and never paid on the note, so intent may be inferred and loss flowed from reliance | Selenberg contended he lacked intent (he disclosed his lack of assets, note included attorneys’ fees) and Bates suffered no proximate loss because the note’s face value exceeded malpractice damages | Held: Intent to deceive reasonably inferred from conduct; Bates sustained proximate loss (lost malpractice claim and never received payment) |
Key Cases Cited
- Grogan v. Garner, 498 U.S. 279 (preponderance standard for nondischargeability)
- Husky Int’l Elecs., Inc. v. Ritz, 136 S. Ct. 1581 (actual fraud covers schemes even without express misrepresentation)
- RecoverEdge L.P. v. Pentecost, 44 F.3d 1284 (elements of actual fraud under § 523(a)(2)(A))
- In re Mercer, 246 F.3d 391 (silence/concealment can constitute false representation)
- In re Van Horne, 823 F.2d 1285 (collecting cases where silence by duty holder is actionable under § 523(a)(2)(A))
- In re Young, 91 F.3d 1367 (attorney’s failure to disclose professional-conduct-required information can be false representation under § 523(a)(2)(A))