Judgment Order was invalid because under the antialienation provisions of ERISA, 29 U.S.C. §
1056(d)(1), Buscher could not assign or transfer his 401(k) funds to Trent. SBC Letter (dated
April 8, 2002). In an April 8, 2002 letter to Trent, the Plan explained that the only applicable
exception to the antialienation provisions is if the assignment is specified in a QDRO, 29 U.S.C.
§ 1056(d)(3), and the Consent Judgment Order did not qualify as a QDRO under ERISA. Jd.
The plan requested that Trent “dismiss [his] petitions for injunctive relief and rule to show
cause.” Jd. However, an Illinois circuit court judge issued a rule to show cause against Buscher
on July 22, 2002 for his refusal to execute the documents necessary for the transfer to Trent.
Order (dated July 22, 2002). The circuit court set the matter for hearing on September 11, 2002.
Id. Buscher filed a bankruptcy petition on September 10, 2002, and Trent filed an adversary
complaint against Buscher in the bankruptcy court.

Buscher testified at trial that he did not learn that his 401(k) plan could not be transferred
or assigned to Trent until he met with his bankruptcy attorney in September 2002.? July 25, 2003
tr. at 42-43. He testified that he intended to assign the account to Trent. Jd. at 43. But he
admitted that even though he had about $3000 available for a general distribution, he never
withdrew the money to pay Trent. Id. at 47. After hearing Buscher and Trent’s testimony and
considering the documents in the record, which are summarized above, the bankruptcy judge

concluded that neither 11 U.S.C. § 523(a)(2)(A) or (a)(2)(B) prevented discharge of the debt

? The Court notes that this may be why the state court sanctioned Buscher for not
complying with an agreement that violated federal law — that is, no one may have informed the
circuit court that the 401(k) account could not be assigned or transferred to Trent. Once the plan
put Trent on notice that ERISA prohibited the transfer of Buscher’s 401(k) account to Trent,
Trent should have at the very least informed the state court, if the plan had not already done so,
that the plan claimed the account could not be transferred.

4


unable to collect his fees. Given this situation, a reasonable person could conclude that fraud
was not the cause of the unpaid debt. The bankruptcy judge’s conclusion that Trent had not
proven by a preponderance of the evidence that Buscher intended to defraud him is not clearly
erroneous.

Conclusion
For the reasons stated above, the Clerk is directed to enter judgment affirming the decision of

the Bankruptcy Judge.

AY ECUW

MATTHEW F. KENNEY
United States District Judge

Date: March 5, 2004


But despite this narrow construction, the Seventh Circuit has noted the “vital functions” served
by this exception. McClellan v. Cantrell, 217 F.3d 890, 893 (7 Cir. 2000) (quoting In re Mayer,
51 F.3d 670, 674 (7" Cir. 1995)). The Seventh Circuit has said, “Congress concluded that
preventing fraud is more important than letting defrauders start over with a clean slate, and we
must respect that judgment.’” Jd. (quoting In re Mayer, 51 F.3d at 674).

Appellant argues that Buscher’s debt to his divorce attorney should not be discharged
because after Buscher stopped making payments in May 2001, he engaged in fraud to convince
Trent to continue representing him. The bankruptcy judge recognized that although “{t]he most
common type of fraud involves a deliberate misrepresentation or, what amounts to the same
thing, a deliberately misleading omission,” the Seventh Circuit has stated “section 523(a)(2)(A)
is not limited to ‘fraudulent misrepresentation.’” /d. at 892-93. In McClellan the Seventh Circuit

6

said actual fraud involves “‘any deceit, artifice, trick, or design involving direct and active
operation of the mind, used to circumvent and cheat another.’” Jd. at 893 (quoting 4 Collier on
Bankruptcy §] 523.08[1][e], p. 523-45 (15" ed., Lawrence P. King ed., 2000)). “{R]eliance is
relevant only when a fraud takes the form of a misrepresentation.” Id.

Despite this broad definition of actual fraud, the debtor must have intended to defraud the
creditor in order for the debt to fall within the § 523(a)(2)(A) exception to dischargeability. Id. at
894 (explaining that actual fraud — as opposed to constructive fraud — requires intent and “{tJhe
fraud exception to the dischargeability of debts in bankruptcy does not reach constructive frauds,
only actual ones”). After hearing the testimony of Buscher and Trent and considering several

exhibits, the bankruptcy judge concluded that Trent had failed to show by a preponderance of the

evidence that Buscher had intended to defraud his attorney. This finding of fact was not clearly


Buscher owed his former lawyer. Jd. at 95, 102. Trent challenges only the bankruptcy judge’s
determination that § 523(a)(2)(A) did not apply.
Analysis

The Court reviews the bankruptcy judge’s conclusions of law de novo but reviews his
factual findings for clear error. In re Sheridan, 57 F.3d 627, 633 (7" Cir. 1995); In re Bonnett,
895 F.2d 1155, 1157 (7 Cir. 1990) (citing Fed. R. Bankr. P. 8013). “The clearly erroneous
standard . . . does not permit a trier of fact to be overturned ‘simply because (the appellate court}
is convinced it would have decided the case differently.’” Jn re Bonnett, 895 F.2d at 1157
(quoting Anderson v. City of Bessemer City, 470 U.S. 564, 573 (1985)). Rather, if “two
permissible conclusions can be drawn, the factfinder’s choice cannot be clearly erroneous.” Jd.
(citing EEOC v. Sears, Roebuck & Co., 839 F.2d 302, 309 (7" Cir. 1988)).

The bankruptcy judge accurately stated the law pertaining to the § 523(a)(2){A) exception
to the discharge of debts:

(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title
does not discharge an individual debtor from any debt ~

(2) for money, property, services, or an extension, renewal, or refinancing of

credit, to the extent obtained by —~

(A) false pretenses, a false representation, or actual fraud, other than a statement

respecting the debtor’s or an insider’s financial condition; . . .
11 U.S.C. § 523(a)(2)(A). “In order to prove that a debt is nondischargeable, the creditor bears
the burden of proof by a preponderance of the evidence.” Jn re Bero, 110 F.3d 462, 465 (7" Cir.
1997) (citing Grogan v. Garner, 498 U.S. 279 (1991)). Furthermore, “exceptions to discharge of

a debt are construed strictly against a creditor and liberally in the debtor’s favor.” in re Reines,

142 F.3d 970, 972-73 (7" Cir. 1998) (citing Jn re Zarzynski, 771 F.2d 304, 306 (7° Cir. 1985)).


based on his determination that Buscher had testified credibly. We must pay “special deference”
to the credibility determinations made by the bankruptcy judge because “‘only the trial judge can
be aware of the variations in demeanor and tone of voice that bear so heavily on the listener’s
understanding and belief of what is said.”” Jn re Bonnett, 895 F.2d at 1157 (citing Anderson, 470
USS. at 575). We find no reason to second-guess the bankruptcy judge’s judgment. Buscher’s
decision to change his PIN number after giving it to Trent does not necessarily mean he did not
intend to assign his account to Trent ~ it may mean only that Buscher had second thoughts about
the appropriate procedure for making the transfer. The record makes clear that Trent sent the
Consent Judgment Order directly to the Plan administrator. Buscher may have thought his
participation was no longer necessary to make the transfer. Similarly, the fact that he did not
withdraw the $3000 available for general disbursement — when he owed Trent more than $22,000
~ does not necessarily mean he did not intend to pay off his debt. He may have thought
assignment of the entire account was the only payment that would be accepted because that was
what Trent sought.

Furthermore, there is no reason to believe that Buscher promised to assign the plan to
Trent knowing that such a transfer was a legal impossibility. As Buscher’s lawyer, Trent was in
a better position that Buscher to determine whether an attempt to assign or transfer the account
would be invalid. We have no doubt that Trent provided important and competent legal services

to Buscher, but he sought payment in a manner prohibited by federal law and, therefore, was

3 Given the state court order that Buscher had to do what was necessary to make the
transfer, his lack of participation is troubling. However, Buscher’s reluctance to help ~ short of
affirmatively blocking the transfer — does not prove he did not intend to assign the account to
Trent.


Minyte Order Form (06:97)

United States District Court, Northern District of Winois

a

ne of Assigned Judge
or Magistrate Judge

Matthew F, Kennelly

Sitting Judge if Other
than Assigned Judge

2
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|

CASE NUMBER 03 C 7244 DATE 3/5/2004
CASE Law Offices of Tent & Butcher vs. John Buscher
TITLE

MOTION:

[In the following box (a) indicate the party filing the motion, ¢.g., plaintiff, defendant, 3rd party plaintiff, and (b) state briefly the nature

of the motion being presented. ]

|

DOCKET ENTRY:

(1)

[For further detail see order attached to the original minute order.]

qd) o Filed motion of [ use listing in “Motion” box above.]

(2) Oo Brief in support of motion due

(3) a] Answer brief to motion due___. Reply to answer briefdue____.

(4) oO Ruling/Hearingon___ set for___—_att

6 a Status hearing[held/continued to] [set for/re-set for] on setfor___at

(6) o Pretrial conference[held/continued to] [set for/re-set for] on setfor at,

(7) oO Trial[set for/re-set for] on at

(8) Oo (BenclyJury trial] [Hearing] held/continued to at__

(9) im} This case is dismissed [with/without] prejudice and without costs[by/agreement/pursuant to}
GFRCP4(m) © Local Rule 41.1 OC FRCP41(a)(1) 0 FRCP41(a)(2).

(io) «of (Other docket entry] For the reasons set forth on the attached Memorandum Opinion and Order,

judgment is entered affirming the decision of the Bankruptcy Judge.

LL

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Notitied counsel by telephone.

SY | Docketing to mail notices.

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erroneous.

Appellant argues that given the facts, “no reasonable person could agree with the decision
of the [bankruptcy judge] that no fraud had occurred.” Appellant’s brief at 7. Specifically,
appellant argues that Buscher committed fraud by agreeing to assign or transfer his interest in the
401(k) plan to induce Trent to continue representing him while never taking steps to make the
transfer. Jd. at 6. Appellant further argues that Buscher “without question” intended to defraud
Trent because Buscher made no effort to transfer funds to Trent and changed his PIN number
after giving it to Trent. Jd. at 6. We conclude that a reasonable person could find, as the
bankruptcy judge did, that this evidence is not enough to prove by a preponderance that Buscher
intended to defraud Trent.

The bankruptcy judge recognized that the strongest evidence of intent to deceive was
Trent’s testimony that Buscher had given him his PIN number and changed it before Trent could
access the account. July 25, 2003 tr. at 98. But the bankruptcy judge said he was not “convinced
by a preponderance of the evidence that that was Mr. Buscher’s intent to defraud Mr. Trent and
his colleagues at the plaintiff law firm.” /d. at 98-99. He had “no reason to disbelieve
(Buscher’s] testimony that he believed that he had the ability to make the assignment of his
interest, whatever remained in the 401(k) account, at that point in time; that he did not follow up
in obtaining documents to obtain what may have been the approximate $3000 available balance
for nonhardship withdrawals, or whatever the function or equivalent of that was at the time. It is
not at all clear.” Jd. at 100. Furthermore, the bankruptcy judge said it was undisputed that the
plan was an ERISA qualified account that could not be assigned to Trent. /d. at 100.

The bankruptcy judge’s conclusion that Buscher did not intend to defraud Trent was


the PIN number to access the account, but when Trent tried to use it, he was told by the plan
administrator than the number had been changed. July 25, 2003 tr. at 58-59. Buscher testified
that he did not recall giving Trent his PIN number. Jd. at 22-23. He conceded that he had not
made efforts in writing to transfer the 401(k) plan to Trent. Jd, at 23. However, Buscher testified
that he did call his plan administrator on March 28, 2002, seeking to make a hardship withdrawal
from his account to pay Trent, but the plan administrator told him that he did not qualify for a
hardship withdrawal — that a hardship withdrawal was only available to pay for funeral expenses,
medical expenses or tuition, or to purchase a new home or prevent a foreclosure. Jd. at 37-38.
Had he qualified for a hardship withdrawal, he would have had access to almost $20,000.
Buscher estimated that he made five or six calls to the plan administrator seeking hardship funds
from his account to pay Trent, and he testified that at least once, Trent was on the phone with
him when he made the request. Jd. at 40. Buscher explained that he could not take out a loan
from the plan to pay Trent because he had two loans from the account outstanding and he was
allowed only two concurrent loans at a time. Jd. at 38-39.

Upon receipt of the Consent Judgment Order, the Qualified Domestic Relations Order
(QDRO”) processing group for the Ameritech plan wrote the law firm, explaining that “any
instrument which is submitted purporting to be a domestic relations order must be reviewed to
determine if it is a Qualified Domestic Relations Order, as defined in Section 414(p) of the
Internal Revenue Code of 1986, as amended, and Section 206(d) of the Employce Retirement
Income Security Act of 1974 (ERISA), as amended.” SBC Letter (dated Jan. 31, 2002). In the
meantime, Trent asked a state court to enjoin Buscher and the Plan from withdrawing any funds

from Buscher’s account. On March 22, 2002, the Plan informed Trent by letter that the Consent


Buscher could take general disbursements, loans and hardship withdrawals.!

The custody dispute proved contentious and lengthy, and Buscher continued making
payments to Trent through May 2001, although a large carryover balance accrued. Jd. at 55.
Then Buscher stopped making payments. Trent testified that Buscher brought him the statements
from his 401(k) plan as evidence that he could pay for Trent’s services, and Trent continued to
represent him. Jd. at 56. On November 15, 2000, Buscher had signed an affidavit stating that he
wanted to have “any proceeds [he] may receive, upon entry of a Judgment for Dissolution of
Marriage, from the distribution of my 401(k) account through my employment with Ameritech
be turned over to my attorney, Douglas P. Trent, Law Offices of Trent & Butcher as payment
toward attorney’s fees and costs owed in this matter.” Buscher Aff. (dated Nov. 15, 2000) 43.
On November 6, 2001, a state court finalized Buscher’s divorce and entered a consent judgment
ordering Buscher to pay Trent $22,590.50 in attorney’s fees and to “execute any and all
documents necessary to transfer and assign the proceeds of his Ameritech 401(k) Plan to Douglas
P. Trent of The Law Offices of Trent & Butcher for payment of the attorney’s fees outlined
herein.” Consent Judgment Order (dated Nov. 6, 2001) {| 1, 3. The plan administrator was
ordered to “immediately transfer and assign to Douglas P. Trent of The Law Offices of Trent &
Butcher the amount of $22,590.50 to satisfy the judgment herein.” Id. 4 2.

Trent testified that the day the Consent Judgment Order was entered, Buscher gave him

' Appellant states in his reply brief that “there is nothing in the record to suggest that it
was a 401(k) Plan.” Reply at 1. This claim is disingenuous. During Trent’s testimony before
the bankruptcy judge, Trent’s lawyer called the Ameritech Savings and Security Plan a 401(k)
plan. See, e.g., July 25, 2003 tr. at 61. But more importantly, the record includes a letter from
Ameritech to Trent dated April 8, 2002, which specifically states that the plan in question was a
401(k) ERISA-protected account and the Marital Settlement Agreement between Buscher and his
ex-wife prepared by Trent refers to the account as a “401(k) retirement plan.”

2


IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION
LAW OFFICES OF TRENT & BUTCHER, )
Appellant, )
* ‘ Case No. 03 C 7244
JOHN J. BUSCHER, } f! na
Appellee. )

MEMORANDUM OPINION AND ORDER

MATTHEW F. KENNELLY, District Judge:

Appellant, the Law Offices of Trent & Butcher (“Trent”), appeals from a bankruptcy
judge’s July 25, 2003 oral ruling finding the legal fees owed by appellee John Buscher to Trent
were a dischargeable debt. Trent argues that under 11 U.S.C. § 523(a)(2)(A), Buscher’s debt
cannot be discharged because he fraudulently induced Trent to continue representing him. For
the reasons stated below, we affirm the bankruptcy judge’s decision.

Background

Buscher retained Douglas Trent in January 1998 to represent him in divorce proceedings.
July 25, 2003 tr. at 4-5. Buscher entered into a written fee agreement and paid Trent about $3000
as aretainer. Jd. at 6. Buscher testified that he borrowed the $3000 from his father to pay Trent,
Id.; Trent testified that Buscher used a distribution from his Ameritech Savings and Security Plan
to pay the retainer and said he would make future payments from this same source. Id. at 53.

The Ameritech Savings and Security Plan was an ERISA-protected 401(k) account, from which

JO