Yankowitz Law Firm, P.C. v. Tashlitsky (In re Tashlitsky)Yankowitz Law Firm, P.C. v. Tashlitsky (In re Tashlitsky)
Chapter 7
DECISION
This matter comes before the Court on the motion of Gary Tashlitsky a/k/a Igor Tashlitsky (the “Debtor”), seeking to dismiss, in part, the complaint (the “Complaint”) filed against him by Yankowitz Law Firm, P.C. (“Plaintiff’ or ‘Yankow-itz”), objecting to the dischargeability of a debt under § 523 of Title 11, U.S.C. (the “Bankruptcy Code”).
JURISDICTION
This Court has jurisdiction of this matter pursuant to 28 U.S.C. § 1334(b), and the Eastern District of New York standing order of reference dated August 28, 1996, as amended by order dated December 5, 2012. This matter is a core proceeding under 28 U.S.C. § 157(b)(2)(I). This decision constitutes the Court’s findings of fact and conclusions of law to the extent required by Bankruptcy Rule 7052.
BACKGROUND
The Debtor filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code on August 2, 2012. On Schedule F, which lists creditors holding unsecured
The Complaint alleges the following pertinent facts:
From 2001 until November 26, 2008, the Debtor, a law school graduate who was never licensed to practice law, was employed by the Plaintiffs personal injury law firm as its full time office manager. Compl. ¶¶ 12, 13, ECF No. 1 (“Compl.”). In this capacity, the Debtor was responsible for taking basic information from potential clients who contacted the Plaintiffs office. Compl. ¶ 15.
At some point between 2006 and 2008, the Debtor began diverting potential clients from Yankowitz to his own unauthorized law practice, or to one of two other law firms. Compl. ¶¶ 16, 17. The Debtor solicited the assistance of other Yankowitz employees in furtherance of this scheme, and used “firm resources, including but not limited to Plaintiffs phone system, computers, fax machines, photocopying resources, postage, federal express account, Department of Motor Vehicle account, and supplies.” Compl. ¶ 19.
The Complaint alleges that Debtor “did not comply with his agreement with The Yankowitz Law Firm that required him to give his full and undivided loyalty and efforts on the firm’s behalf, as a full time employee; and, instead, engaged in fraudulent and illegal efforts to benefit himself to the detriment of The Yankowitz Law Firm and assisted aforesaid attorneys ..., during business hours and while being compensated by The Yankowitz Law Firm.” Compl. ¶ 21. The Complaint further alleges that “[t]he defendant/debtor Tashlitsky, as an employee of The Yan-kowitz Law Firm, PC owed the firm a duty of loyalty and good faith and he breached his fiduciary duty by engaging in a secretive, fraudulent scheme to unlawfully solicit and divert potential clients of the firm to himself and/or other attorneys.” Compl. ¶ 25.
The Plaintiff commenced an action in state court against the Debtor and the other law firms on March 19, 2009, asserting causes of action for tortious interference, fraud, breach of fiduciary duty, and unjust enrichment. Compl. Ex. B. This litigation is currently pending, though stayed as to the Debtor.
Based on these allegations, Yankowitz seeks a determination that the Debtor’s liability to Yankowitz is non-dischargeable. Yankowitz claims that the debt is non-dischargeable under § 523(a)(4) because the debt is for “fraud or defalcation while acting in a fiduciary capacity,” and for “embezzlement.” Yankowitz also asserts that the debt is non-dischargeable under § 523(a)(6) because the debt is for “willful and malicious injury” to Yankowitz.
On December 14, 2012, the Debtor filed a motion to dismiss the claim predicated on § 523(a)(4). The Debtor argues that even if all allegations in the Complaint are true, Debtor, as office manager of a law firm, was not a fiduciary within the meaning of § 523(a)(4); that the diversion of potential clients does not constitute the taking of “property” as required to establish embezzlement; and that the Com
DISCUSSION
A. Standard for a Motion to Dismiss
Under Rule 12(b)(6) of the Federal Rules of Civil Procedure, made applicable in bankruptcy cases by Bankruptcy Rule 7012(b), a complaint may be dismissed for “failure to state a claim upon which relief can be granted.” Fed. R. Civ. Proc. 12(b)(6). “To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face.” Ashcroft v. Iqbal,
B. Section 523(a)(1)
The goal of the Bankruptcy Code is to provide a fresh start to the “honest but unfortunate” debtor. Cohen v. de la Cruz,
Because failure to obtain a discharge can often result in a debtor’s “financial death sentence ... exceptions to discharge are to be narrowly construed and genuine doubts should be resolved in favor of the debtor.” Denton v. Hyman (In re Hyman),
C.Fiduciary Capacity
Defendant first contends that as Yan-kowitz’s office manager, he did not stand in a “fiduciary capacity” to Yankowitz as that term is used in § 523(a)(4).
The term “fiduciary,” for the purpose of § 523(a)(4), is not defined in the Bankruptcy Code. See Andy Warhol Found. v. Hayes (In re Hayes),
Moreover, “the fiduciary relationship must exist prior to the act creating the debt; a trust relationship cannot be said to arise merely from the wrongful conduct itself.” Zohlman,
Although a fiduciary relationship under § 523(a)(4) is usually limited to the trust relationships noted above, other relationships may, in limited circumstances, also be within the scope of § 523(a)(4). See Hayes,
Thus, even in the absence of an express trust, the attorney-client relationship constitutes a fiduciary relationship under § 523(a)(4). See Hayes,
Conversely, no fiduciary relationship arises solely from an agency or employer-employee relationship. See West,
Here, the allegations relating to the Debtor’s pre-existing relationship with Yankowitz are that the Debtor was a full time office manager of the Plaintiffs law firm who was responsible for taking basic information from potential clients, Compl. ¶¶ 12, 13, 15; that the Debtor’s agreement with Yankowitz “required him to give his full and undivided loyalty and efforts on the firm’s behalf, as a full time employee,” Compl. ¶ 21; and that as its employee, the Debtor “owed the firm a duty of loyalty and good faith.” Compl. ¶ 25. These allegations, taken as true, do not support a finding that the Debtor stood in a fiduciary relationship to Yankowitz under § 523(a)(4).
While the Debtor’s position as a “full time office manager” or as a “full time employee,” responsible for handling client intake, may have imposed certain obligations on him, the position does not constitute a fiduciary capacity under § 523(a)(4). The allegations do not support the existence of an express, technical, or statutory trust, or a finding that the Debtor occupied a “position of ascendancy” over Yankowitz to warrant consideration of whether a fiduciary relationship exists absent a trust. See Hayes,
Nor can Plaintiff establish a fiduciary relationship based on an agreement that “required him to give his full and undivided loyalty and efforts on the firm’s behalf, as a full time employee.” As noted above, a relationship is not considered fiduciary in nature under § 523(a)(4) merely because it involves “confidence, trust, and good faith.” See Duncan,
D. Embezzlement
Defendant contends that the allegation that the Debtor diverted potential clients from Yankowitz does not state a claim for nondischargeability of a debt arising from “embezzlement” under § 523(a)(4).
Federal common law provides the elements of “embezzlement” for purposes of § 523(a)(4). See Central Islip Plumbing Supply v. Dooley, No. 10-CV-1627 (JFB),
In the absence of controlling federal law, courts have generally looked to the definition of “property” under state law when construing § 523(a). See One-On-One Fitness Pers. Training Serv., Inc.
In Digital Commerce Ltd. v. Sullivan (In re Sullivan), however, the bankruptcy court reached a different conclusion. Digital Commerce Ltd. v. Sullivan (In re Sullivan),
[i]t is at present the prevailing view that there can be no conversion of an ordinary debt not represented by a document, or of such intangible rights as the goodwill of a business or the names of customers. The process of extension has not, however, necessarily terminated; and nothing that is said in this Section is intended to indicate that in a proper case liability for intentional interference with some other kind of intangible rights may not be found.
The court then stated that
[i]n a nondischargeability context relating to embezzlement under § 523(a)(4), there is no cogent reason to exclude intangible property from the coverage of the statute. A creditor, in this instance an employer, can be cheated or deprived of intangible property just as easily as tangible personal property or money. In this modern society, with its great reliance upon intellectual property and commercial ideas, theft of intangible property is always possible. Although the undersigned judge believes that any expansion of the meaning of “property” to include intangibles in the embezzlement context may be subject to some criticism, the facts in this case warrant a conclusion that the Debtor appropriated to his own use property (a concrete corporate opportunity) that was entrusted to him (in his capacity as President) in a fraudulent (secretive and unwarranted) manner
Sullivan,
The extent to which intangible property may be considered “property” subject to conversion was recently clarified by the New York Court of Appeals in Thyroff v. Nationwide Mutual Insurance Company, answering a certified question from the Second Circuit, which asked whether electronic data may be converted under New York law. Thyroff v. Nationwide Mut. Ins. Co.,
It is clear that intangible property subject to conversion law in New York is limited to items that bear a substantial similarity to tangible property, like electronically stored data and other information, and that Thyroff does not affect the rule that expectancies alone do not suffice. Cases decided by courts applying New York law after Thyroff have adhered to the view that business opportunities cannot be converted. See Nelly de Vuyst, USA, Inc. v. Europe Cosmetiques Inc., No. 11 CV 1491CVB),
The Plaintiffs reliance on Alexander & Alexander of New York v. Fritzen,
For these reasons, the claim seeking a determination of nondischargeability under § 523(a)(4) based upon the Debtor’s diversion of potential clients of Yankowitz must also be dismissed.
Because the claims under § 523(A)(4) are dismissed based upon failure to state a claim, it is unnecessary to address whether this claim satisfies the requirements of Rule 9 of the Federal Rules of Civil Procedure.
CONCLUSION
For the reasons set forth above, the Defendant’s motion to dismiss is granted, and the claim seeking a determination of nondischargeability under § 523(a)(4) is dismissed, except to the extent that it alleges embezzlement of the Plaintiffs “firm resources.” A separate order will issue.
Notes
. Unless otherwise indicated, all statutory citations are to provisions of Title 11, U.S.C.
. The heading and opening paragraph of the Complaint purport to seek a determination of non-dischargeability under § 523(a)(2) as well, and to object to the Debtor’s discharge under provisions of § 727. However, only two counts, under § 523(a)(4) and (6), are alleged in the body of the Complaint.
. The court stated that "[w]e cannot conceive of any reason in law or logic why this process of virtual creation should be treated any differently from production by pen on paper or quill on parchment. A document stored on a computer hard drive has the same value as a paper document kept in a file cabinet .... it generally is not the physical nature of a document that determines its worth, it is the information memorialized in the document that has intrinsic value. A manuscript of a novel has the same value whether it is saved in a computer's memory or printed on paper.” Id. at 292,
. The Debtor’s motion to dismiss the embezzlement prong of the complaint seeks to dismiss the claims based on allegations that the Debtor diverted potential clients, but does not address the allegations that the Debtor utilized "firm resources, including but not limited to Plaintiff's phone system, computers, fax machines, photocopying resources, postage, federal express account, Department of Motor Vehicle account, and supplies.” Although the Debtor asserts in his reply that these are de minimis, the complaint, on its face, provides sufficient facts, taken as true and construed in a light most favorable to Plaintiff, to support a cause of action for embezzlement of firm resources. Thus, the § 523(a)(4) claim survives only to the extent of the value of "firm resources,” to the extent the elements of embezzlement exist as to that property.