In a nondischargeability action under 11 U.S.C. §523(a)(2)(A) against an attorney by his client, the Tenth Circuit Court of Appeals held that attorney Harold Riebesell could not discharge a loan made to him by his client in his chapter 7 case where he failed to disclose his perilous financial condition to his client. Johnson v. Riebesell (In re Riebesell), 586 F.3d 782, (C.A.10 2009). In In re Riebesell, Riebesell, a Colorado attorney, had a continuing attorney-client relationship with client W.A. Johnson wherein legal services were occasionally provided by Riebesell to Johnson, and Johnson made two loans to Riebesell. At the time of the filing, Riebesell’s schedules disclosed that he owed almost $300,000 to Johnson and almost $1 million to Johnson and other clients combined.
Only Johnson objected to the discharge and claimed that the loans were not dischargeable because they were the product of Riebesell’s false representations, specifically Riebesell’s failure to meet disclosure obligations imposed by the Colorado Rules of Professional Responsibility. According to Johnson, the lending/borrowing activity between them failed to satisfy Colo. R. Prof. Conduct Rule 1.8(a), which requires that an attorney who is entering into a business transaction with a client must (1) notify the client that the use of independent counsel may be advisable and (2) disclose in writing the transaction and its terms in a reasonably-understood manner. The client must consent in writing to the transaction.
Riebesell and Johnson had known each other since high school and had occasionally socialized together. Johnson had a small business and hired Riebesell to do some legal work. A few months after completing that legal work, Riebesell approached Johnson and asked him for a $90,000 loan for personal purposes. Riebesell made none of the disclosures required by Rule 1.8(a) in connection with the loan transaction, including his precarious financial condition. On that point, the bankruptcy court found, “Johnson’s trust in Riebesell, his attorney, caused him, like so many others, to fall for Riebesell’s scheme of borrowing money from clients. Riebesell ensnared several other clients and he continued to do so until just three months before he filed his bankruptcy petition.” Johnson did not investigate Riebesell’s financial condition or consult with outside counsel in connection with the loan transaction. According to his later testimony, Johnson agreed to make the loan because Riebesell “was a long-term friend, he was my attorney [and] I relied on him.”
Riebesell never repaid any of the $90,000 loan and told Johnson that he had no funds with which to pay it. In an attempt to generate funds to pay the loan, Johnson agreed to help Riebesell form a consulting business and Johnson agreed to provide consulting services to assist the new business. Johnson loaned Riebesell an additional $45,000 for the business and rolled over the $90,000 personal loan. Riebesell never repaid the loans and filed for chapter 7 shortly after Johnson commenced collection actions on the loans.
After a nondischargeability trial, the bankruptcy court found the personal loan of $90,000 to be nondischargeable under §523(a)(2)(A). The second loan, along with corresponding interest, was discharged because Johnson was aware of Riebesell’s financial distress when he made that loan. The Tenth Circuit BAP affirmed. The Tenth Circuit Court of Appeals also affirmed, but remanded the case to address the rate of post-judgment interest assessed.
In the Tenth Circuit Court of Appeals, Riebesell claimed that no attorney-client relationship existed with Johnson when the loans were made and that Johnson did not “depend” on the relationship. In rejecting this defense, the Tenth Circuit pointed to Colorado law that (1) the relationship is established when “the client seeks and receives the advice of the lawyer,” (2) the relationship continues “unless and until the client clearly understands, or reasonably should understand,” that it is ended, and (3) the existence of the relationship is the important factor, not dependence on it.
Riebesell next argued that there was no “intent to deceive.” He did not hide his deteriorating financial condition from Johnson, who voluntarily agreed to loan the money. The Tenth Circuit determined that “intent to deceive” would be inferred from “the totality of circumstances.” It upheld the bankruptcy court’s finding of deceptive intent because Riebesell (1) used his position as an attorney to induce Johnson to loan him money, (2) behaved similarly toward other clients until shortly before filing for bankruptcy, (3) transferred title in his residence to his wife to shield it from creditors, and (4) gave testimony in the case that was found not to be credible.
The “reasonable reliance” element was held to be a subjective standard. Riebesell argued that Johnson was an astute businessman who made the loans as an investment, had access to other attorneys and knew of Riebesell’s financial condition. This argument prevailed as to the second loan where Riebesell’s declining financial condition was obvious to Johnson, but the court refused to extend the same rationale to the initial loan, and its subsequent extensions, because of Johnson’s testimony that he relied on the attorney-client relationship and because Riebesell defrauded other clients in a similar manner.
Riebesell finally claimed that the loans qualified for the “standard commercial transaction” exception identified in official comment number 1 to Rule 1.8. Under this exception, Rule 1.8(a) disclosures are not required when the business dealings between an attorney and a client are “standard commercial transactions” involving products or services that the client generally markets to others, such as banking or brokerage services. The Tenth Circuit characterized this defense as “little more than wishful thinking” because Johnson had never loaned money to anyone prior to making the loans to Riebesell.