Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca7-15-02252/USCOURTS-ca7-15-02252-0/pdf.json

Parties Involved:
Estate of Stanley Cora
Appellee
John C. Jahrling
Appellant

Document Text:

In the 

United States Court of Appeals 

For the Seventh Circuit ____________________ 

No. 15-2252 

IN RE: JOHN C. JAHRLING, 

Debtor. 

ESTATE OF STANLEY CORA, 

Plaintiff-Appellee, 

v.

JOHN C. JAHRLING , 

Defendant-Appellant. 

____________________ 

Appeal from the United States District Court for the 

Northern District of Illinois, Eastern Division. 

No. 14 C 8056 — James B. Zagel, Judge. 

____________________ 

ARGUED DECEMBER 11, 2015 — DECIDED MARCH 18, 2016 

____________________ 

Before KANNE, ROVNER, and HAMILTON, Circuit Judges. 

HAMILTON, Circuit Judge. A bankruptcy court held that a 

legal malpractice judgment against debtor-appellant John 

Jahrling was not dischargeable because the judgment was for 

a “defalcation while acting in a fiduciary capacity.” See 11 

U.S.C. § 523(a)(4). The district court affirmed, and so do we. 

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Appellant Jahrling acted as an attorney for a client who 

was selling his home. Because of language barriers, Jahrling 

could not communicate with his client except through the 

attorney for the buyers, the adverse parties in the sale. The 

result was that Jahrling’s client, an elderly man who could 

not speak English, sold his home for a pittance and then 

faced eviction from what he thought would be his home for 

the rest of his life. We agree with the bankruptcy court and 

the district court that Jahrling’s egregious breaches of his fiduciary duty to his client were reckless and that the resulting legal malpractice judgment is not dischargeable in bankruptcy. 

I. Factual and Procedural Background 

John Jahrling is an attorney in Illinois. Walter Rywak, another attorney, contacted Jahrling and asked him to prepare 

closing documents for a real estate transaction. Rywak paid 

Jahrling $400 for doing the closing work. The transaction 

was the sale of Stanley Cora’s home. Cora was 90 years old. 

He was approached by Rywak’s clients and offered $35,000 

for the property. That price was far below the fair market 

value of a fee simple title; the property was worth at least 

$106,000 and was later resold by the purchasers for $145,000. 

Cora later alleged he understood that one term of the deal 

was that he would keep a life estate that would have allowed 

him to live in the upstairs apartment of the home rent-free 

for the rest of his life. The problem was that the sale documents prepared by Jahrling did not include a life estate for 

Cora. 

The closing documents identified Jahrling as Cora’s attorney. Jahrling and Cora could not communicate directly 

and privately because Cora spoke only Polish and Jahrling 

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spoke no Polish. So instead of direct attorney-client communication about what the client wanted from the sale, the attorney relied on counsel for the adverse parties for all communication with his client. After the buyers tried to evict 

Cora because he did not have the life estate he expected, 

Cora sued Jahrling in state court for legal malpractice. Cora 

passed away in 2006 before the trial, but his estate pursued 

the case. 

After a bench trial, the state court judge (Hon. Mary 

Anne Mason, now a Justice of the Illinois Appellate Court) 

ruled that Jahrling had been Cora’s attorney and thus owed 

Cora a duty to know what he wanted from the sale. See In re 

Jahrling, 514 B.R. 565, 569 (Bankr. N.D. Ill. 2014) (summarizing state court’s findings). The state court found that Jahrling’s inability to communicate with his client, coupled with 

relying on opposing counsel for all his information about the 

transaction, was “unreasonable, per se.” Id. The court also 

found that Jahrling never talked with his client before the 

closing. Finally, the court pointed out the huge discrepancy 

between the value of the home and the sale price. After a 

partial settlement with a third party and offsets, the state 

court ultimately awarded Cora’s estate $26,000, plus costs. Id. 

at 569–70. 

Jahrling filed for bankruptcy protection under Chapter 7. 

Cora’s estate filed an adversary proceeding alleging that the 

state court judgment was not dischargeable in bankruptcy 

on several grounds, including under 11 U.S.C. § 523(a)(4) because the debt was the result of defalcation by the debtor acting as a fiduciary. The bankruptcy court found in favor of 

the estate on the § 523(a)(4) claim. In re Jahrling, 514 B.R. at 

578. The court found that Jahrling had been Cora’s attorney 

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and that his argument to the contrary was barred by collateral estoppel (issue preclusion). Id. at 570–71. The court then 

found that Jahrling violated at least three rules of professional responsibility—competence, diligence, and communication. Id. at 571–72. The court said that Jahrling’s handling 

of the sale without speaking with Cora was a “gross deviation from the standard of conduct that a law-abiding person 

as well as any Illinois attorney would observe in Jahrling’s 

situation.” Id. at 573. The court concluded that Jahrling “consciously disregarded a substantial and unjustifiable risk that 

his conduct would violate a fiduciary duty.” Id. The bankruptcy court concluded that his substandard representation 

of Cora amounted to the level of recklessness required by 

Bullock v. BankChampaign, N.A., 569 U.S. —, 133 S. Ct. 1754 

(2013). In re Jahrling, 514 B.R. at 573. Cora’s estate satisfied its 

burden of proving by a preponderance of the evidence under § 523(a)(4) that Jahrling committed defalcation as a fiduciary. Id. at 574. 

The district court affirmed in a concise and persuasive 

memorandum, noting: “When an interpreter is an attorney 

for the other party, interests are not aligned.” Jahrling v. Estate of Cora, 530 B.R. 679, 681 (N.D. Ill. 2015). Jahrling has appealed. We have jurisdiction under 28 U.S.C. § 158(d) because this is an appeal from a final judgment in an adversary 

action on the dischargeability of a debt. In re Crosswhite, 148 

F.3d 879, 881 (7th Cir. 1998). We review the bankruptcy 

court’s findings of fact for clear error and its legal conclusions de novo. Id. 

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II. Defalcation in a Fiduciary Capacity 

A. Governing Standard under Bullock

Federal bankruptcy law is aimed at providing fair and 

orderly relief for the “honest but unfortunate debtor,” who 

can obtain a “fresh start” by distributing available assets to 

creditors and discharging debts left unpaid. See Grogan v. 

Garner, 498 U.S. 279, 286–87 (1991). Excluded from discharge, 

however, are a number of categories of debts for which Congress has found that the interests of creditors outweigh the 

debtor’s interest in a fresh start. See 11 U.S.C. § 523. 

This case addresses the exception from discharge in 11 

U.S.C. § 523(a)(4) if the debt is “for fraud or defalcation 

while acting in a fiduciary capacity, embezzlement, or larceny.” To satisfy § 523(a)(4), a creditor must prove that (1) 

“the debtor acted as a fiduciary to the creditor at the time the 

debt was created,” and (2) “the debt was caused by fraud or 

defalcation.” In re Berman, 629 F.3d at 765–66, citing In re 

Frain, 230 F.3d 1014, 1019 (7th Cir. 2000); Klingman v. Levinson, 831 F.2d 1292, 1295 (7th Cir. 1987). 

The claim here is not for actual fraud but for “defalcation,” a word that only lawyers and judges could love. As 

Justice Breyer explained for the Supreme Court, Congress 

first used the term in a federal bankruptcy statute in 1867, 

and “legal authorities have disagreed about its meaning almost ever since.” Bullock, 133 S. Ct. at 1758. Before the Supreme Court provided its authoritative guidance in Bullock, 

we had explained that defalcation “can be distinguished 

from fraud and embezzlement on the basis that subjective, 

deliberate wrongdoing is not required to establish defalcation,” though some degree of fault greater than negligence 

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or mistake, but less than fraud, was required. In re Berman, 

629 F.3d at 765 n.3, citing Central Hanover Bank & Trust Co. v. 

Herbst, 93 F.2d 510, 512 (2d Cir. 1937) (L. Hand, J.), and Meyer 

v. Rigdon, 36 F.3d 1375, 1385 (7th Cir. 1994). 

The Supreme Court clarified the law in Bullock, holding 

that defalcation requires proof of “a culpable state of 

mind ... involving knowledge of, or gross recklessness in respect to, the improper nature of the relevant fiduciary behavior.” 133 S. Ct. at 1757. The objecting creditor bears the 

burden of proving by a preponderance of the evidence that 

an exception to discharge applies. See Grogan, 498 U.S. at 

286–87; see also In re Sheridan, 57 F.3d 627, 633 (7th Cir. 1995) 

(requiring creditor to meet preponderance of the evidence 

standard under § 523(a)(2)(B)). 

In Bullock the Court explained that the state-of-mind requirement requires at least a subjective, criminal level of 

recklessness: 

Thus, where the conduct at issue does not involve bad faith, moral turpitude, or other immoral conduct, the term requires an intentional 

wrong. We include as intentional not only conduct that the fiduciary knows is improper but 

also reckless conduct of the kind that the criminal law often treats as the equivalent. Thus we 

include reckless conduct of the kind set forth in 

the Model Penal Code. Where actual 

knowledge of wrongdoing is lacking, we consider conduct as equivalent if the fiduciary 

‘consciously disregards’ (or is willfully blind 

to) ‘a substantial and unjustifiable risk’ that his 

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conduct will turn out to violate a fiduciary duty. 

133 S. Ct. at 1759 (citation omitted). The Court said further 

that the risk “must be of such a nature and degree that, considering the nature and purpose of the actor’s conduct and 

the circumstances known to him, its disregard involves a

gross deviation from the standard of conduct that a lawabiding person would observe in the actor’s situation.” Id. at 

1760. (emphasis in original), quoting ALI, Model Penal Code 

§ 2.02(2)(c), at 226 (1985). The Court added that defalcation, 

unlike fraud, “may be used to refer to nonfraudulent breaches 

of fiduciary duty.” Id. (emphasis in original). 

B. Applying the Subjective Standard

Jahrling argues that the bankruptcy court committed a 

legal error by applying an objective test to decide defalcation. He also argues that the bankruptcy court erred by relying on the Illinois Rules of Professional Conduct for attorneys to determine the standard of care against which his 

conduct was judged. We reject both arguments. The bankruptcy court properly applied Bullock and made findings 

about Jahrling’s state of mind to find that he committed a defalcation while acting in a fiduciary capacity. The court did 

not err by taking into account his serious violations of fundamental rules of professional conduct in finding that his 

conduct was subjectively reckless.1

 

1 Jahrling also argues that the willfulness standard that a bankruptcy 

court articulated in In re Howard (Pearson v. Howard), 339 B.R. 913 (Bankr. 

N.D. Ill. 2006), could apply to this case. Howard is not precedential. It was 

also decided before the Supreme Court provided a definitive standard in 

Bullock. In any event, the Howard court correctly read our precedents, 

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Judges and juries rarely have access to direct evidence 

about a person’s state of mind at a prior time. Even the rare 

direct evidence, such as a contemporaneous expression by 

that person, is not necessarily reliable. Like almost any findings about a person’s state of mind, then, the bankruptcy 

court had to base its findings on circumstantial evidence. 

The court drew inferences about Jahrling’s state of mind 

based on the objective circumstances, but the court applied 

the correct subjective standard. 

The facts almost speak for themselves. Jahrling was 

Cora’s attorney, yet he could not and did not communicate 

with him except through counsel for the adverse party in the 

transaction. The result, according to the detailed findings of 

both the state court and the bankruptcy court, was that Jahrling did not include in the closing documents for the bargain-basement sale of the home the one term most important 

to Cora: retaining a life estate in one residence so that he 

could live there rent-free. And so, a few months later, the 90-

year-old Cora faced eviction by the buyers, whose own lawyer had been the sole channel for communication between 

attorney Jahrling and client Cora. 

Jahrling’s conduct amounted to at least negligence, but as 

Bullock shows, negligence is not sufficient to show defalcation within the meaning of § 523(a)(4). The bankruptcy 

court’s finding of subjective recklessness was a reasonable 

finding from the circumstantial evidence. In essence, the 

court found, Jahrling’s breaches of an attorney’s fiduciary 

 

and anticipated Bullock, in saying that defalcation required more than 

negligence but that either willfulness or recklessness could suffice. Id. at 

920. 

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duty to his client were so basic and the risk of harm to the 

client so obvious that Jahrling must have recognized them 

and proceeded despite the risk. We find no error in this 

analysis. 

A useful illustration of this reasoning comes from a quite 

different area of federal law that also applies a subjective 

recklessness standard. The Supreme Court has interpreted 

the Eighth Amendment to the Constitution to forbid prison 

officials from being deliberately indifferent to serious threats 

to the health and safety of inmates. The deliberate indifference standard requires proof that the prison official was subjectively aware of the risk: “the official must both be aware of 

facts from which the inference could be drawn that a substantial risk of serious harm exists, and he must also draw 

the inference.” Farmer v. Brennan, 511 U.S. 825, 837 (1994). 

That is a similar standard from criminal law, of recklessness 

involving actual, subjective knowledge of the risk, that the 

Supreme Court found to govern defalcation cases under 11 

U.S.C. § 523(a)(4) in Bullock, 133 S. Ct. at 1759–60. 

But the Supreme Court in Farmer added a helpful explanation for how such subjective recklessness may be shown: 

We doubt that a subjective approach will present prison officials with any serious motivation “to take refuge in the zone between ‘ignorance of obvious risks' and ‘actual knowledge 

of risks.’” Brief for Petitioner 27. Whether a 

prison official had the requisite knowledge of a 

substantial risk is a question of fact subject to 

demonstration in the usual ways, including inference from circumstantial evidence, cf. Hall[, 

General Principles of Criminal Law] 118 [2d 

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ed. 1960] (cautioning against “confusing a 

mental state with the proof of its existence”), 

and a factfinder may conclude that a prison official 

knew of a substantial risk from the very fact that the 

risk was obvious. 

511 U.S. at 842 (emphasis added). 

That was in essence the reasoning of the bankruptcy 

court in this case: the risks to client Cora were so obvious 

that Jahrling must have recognized them yet forged ahead 

recklessly, acting in a way that amounted to a “gross deviation” from the standards expected of an attorney in a fiduciary role. That state-of-mind finding satisfies the Bullock

standard under § 523(a)(4). See also In re Sheridan, 57 F.3d at 

634 (circumstantial evidence may be used to determine intent to deceive under § 523(a)(2)(B)). The bankruptcy court 

did not erroneously apply a purely objective standard. 

The bankruptcy court framed much of its analysis in 

terms of Jahrling’s violations of several basic rules of professional conduct for attorneys: the rules requiring competence 

and diligence on behalf of clients, and communication with 

clients. In re Jahrling, 514 B.R. at 571–72, quoting Illinois 

Rules of Professional Conduct 1.1, 1.3, & 1.4 (2002) (the version in effect at the time of Jahrling’s actions). The court 

found that Jahrling’s conduct was “a gross deviation from 

the standard of conduct that a law-abiding person as well as 

any Illinois attorney would observe in Jahrling’s situation.” 

Id. at 573. 

Jahrling argues that the bankruptcy court erred by confusing a violation of rules of professional conduct with the 

more demanding standard for “defalcation” under 

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§ 523(a)(4). As we have explained, the court did not confuse 

the objective criteria of the rules of professional conduct requiring competence, diligence, and communication with the 

subjective recklessness standard under Bullock. We also find 

no error in the bankruptcy court’s use of the rules of professional conduct to determine the baseline standard of care 

that Jahrling owed his client. 

To be clear, a finding that an attorney has violated a rule 

of professional conduct is not sufficient, by itself, to show 

defalcation by a fiduciary under § 523(a)(4). In applying the 

statutory standard, however, the rules of professional conduct can be relevant, as they were here. Jahrling points out 

that the preamble to the rules states: “Violation of a Rule 

should not itself give rise to a cause of action against a lawyer nor should it create any presumption in such a case that 

a legal duty has been breached.” Ill. Rules of Prof’l Conduct, 

Preamble at [20] (2002). But the preamble also explains that 

“since the Rules do establish standards of conduct by lawyers, a lawyer’s violation of a Rule may be evidence of 

breach of the applicable standard of conduct.” Id. That is 

precisely how the bankruptcy court in this case used these 

basic and obvious rules aimed at protecting the interests of 

clients. We have noted before that Illinois courts treat “the 

rules of professional responsibility, insofar as they are designed for the protection of lawyers’ clients (not all of the 

rules are),” as furnishing “potentially useful guidance to 

courts ... .” Maksym v. Loesch, 937 F.2d 1237, 1243–44 (7th Cir. 

1991). 

Finally, Jahrling argues that Cora’s estate did not present 

sufficient evidence of Jahrling’s failures. Cora’s estate was 

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lying the state court judgment for malpractice. Grogan v. 

Garner, 498 U.S. 279, 284 n.11 (1991) (collateral estoppel principles apply in discharge exception proceedings under 

§ 523(a)); In re Bulic, 997 F.2d 299, 304 (7th Cir. 1993) (bankruptcy courts give state court judgments full faith and credit 

under 28 U.S.C. § 1738). The estate was required to prove only the higher standard of subjective recklessness, which it 

did through circumstantial evidence as discussed above. 

The judgment of the district court is AFFIRMED. 

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