Court Opinion

ID: 3007445
Source: CourtListenerOpinion
Date Created: 2015-10-06 17:00:40.443577+00
Date Added: 2024-06-11T15:03:17.225949
License: Public Domain

NOT PRECEDENTIAL

                       UNITED STATES COURT OF APPEALS
                            FOR THE THIRD CIRCUIT
                                 ____________

                                       No. 14-4638
                                      ____________

                                 In re: Ronald W. Grigg,

                                                  Debtor

                                BLAINE JOHN CHANEY

                                             v.

                                  RONALD W. GRIGG,

                                              Appellant
                                      ____________

                       On Appeal from United States District Court
                         for the Western District of Pennsylvania
                              (W.D. Pa. No. 3-13-cv-00292)
                        District Judge: Honorable Kim R. Gibson
                                      ____________

                    Submitted Pursuant to Third Circuit LAR 34.1(a)
                                 September 15, 2015

             Before: FISHER, CHAGARES and JORDAN, Circuit Judges.

                                 (Filed: October 6, 2015)
                                      ____________

                                        OPINION*
                                      ____________

       *
        This disposition is not an opinion of the full Court and pursuant to I.O.P. 5.7
does not constitute binding precedent.
FISHER, Circuit Judge.

          Ronald Grigg, a Chapter 7 debtor, appeals the District Court’s affirmance of

orders of the Bankruptcy Court that resulted in over three million dollars of debt being

declared nondischargeable pursuant to 11 U.S.C. § 523(a)(4). Blaine Chaney is the

creditor who holds this nondischargeable debt, which originated in a California state-

court judgment and ancillary obligations of attorneys’ fees, costs, and sanctions. We will

affirm.

                                                I.

          We write principally for the parties, who are familiar with the factual context and

legal history of this case. Therefore, we will set forth only those facts that are necessary

to our analysis.

          Ronald Grigg (“Grigg”), a lawyer, represented Blaine Chaney (“Chaney”) in

matters related to Chaney’s marital dissolution settlement. Grigg and Chaney entered

into a contingency fee agreement and an hourly fee agreement, both of which contained

arbitration clauses. Thereafter, Chaney and his former wife entered into a marital

settlement agreement, and Chaney began receiving funds pursuant to that agreement in

January 2006. Grigg paid himself approximately $2.2 million in fees from his client trust

account. Later in 2006, Chaney filed suit against Grigg and his employee, Mary Whitman

(“Whitman”), in the Los Angeles Superior Court, with Judge Aurelio Munoz presiding.

Chaney’s complaint in that action alleged various causes of action, but the essence of the

                                                2
lawsuit was a dispute over the fees that Grigg had taken in connection with his

representation of Chaney in the divorce matter.

       In late 2006, Grigg brought a motion to compel arbitration and to stay litigation,

which Judge Munoz granted. The case went to arbitration. In November 2008, the

arbitrator issued a final arbitration award for $2,389,969.31 in favor of Chaney.

Thereafter, Chaney filed a petition in the Los Angeles County Superior Court, Judge

Michael Stern presiding, to confirm the arbitration award, and Grigg and Whitman filed a

petition to vacate it. In March 2010, Judge Stern denied the motion of Grigg and

Whitman, granted Chaney’s motion to confirm the arbitration award, and ordered that

Chaney recover from Grigg a sum of $3,030,085.45. In June 2010, Judge Stern granted

Chaney’s motion for a permanent injunction to aid enforcement of the judgment.1

       Grigg appealed the judgment and the permanent injunction to the California Court

of Appeal, which affirmed the judgment and awarded Chaney costs on appeal. Grigg did

       1
          In part, the injunction required Grigg to turn over funds derived from Chaney
and to provide an accounting to Chaney of all assets acquired by Grigg from Grigg’s
client trust account and the location of the funds. Grigg failed to comply, and, on
September 16, 2011, he was found to be guilty of contempt of court. Grigg waived
sentencing until December 7, 2011, which was then continued until January 9, 2012.
Grigg was sentenced to three days in jail and fined $1000.

                                             3
not appeal the Court of Appeal decision to the California Supreme Court, and the order

became final on November 17, 2011.2

       Grigg filed a voluntary Chapter 7 bankruptcy petition on December 5, 2011, in the

Bankruptcy Court of the Western District of Pennsylvania. Chaney commenced an

adversary proceeding in the bankruptcy court by filing a complaint to determine the

dischargeability of debt in April 2012. Chaney’s complaint asserted that the debt Grigg

owed him should be nondischargeable on the basis of breach of fiduciary duty,

defalcation, and fraud, pursuant to 11 U.S.C. § 523(a)(4).

       The Bankruptcy Court found in Chaney’s favor and held that the debt Grigg owed

Chaney was nondischargeable. The Bankruptcy Court concluded that 11 U.S.C.

§ 523(a)(4) applied for the following reasons: Grigg owed Chaney a fiduciary duty as his

lawyer; Grigg violated that duty; and Chaney suffered resulting economic loss. In

reaching its conclusion that Grigg violated his fiduciary duty, the Bankruptcy Court

concluded that, at the least, Grigg consciously disregarded “a substantial and unjustifiable

risk” that his conduct would turn out to violate a fiduciary duty.3 Grigg was, as the

Bankruptcy Court explained, on notice by September 18, 2006 (the date of Chaney’s state

       2
          See Cal. Rules of Court, Rule 8.264(b)(1) (“[A] Court of Appeal decision in a
civil appeal, including an order dismissing an appeal involuntarily, is final in that court
30 days after filing.”).
        3
          See Bullock v. BankChampaign, N.A., 133 S. Ct. 1754, 1759 (2013) (“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 conduct will turn out to violate a fiduciary duty.” (internal quotation marks
omitted)).
                                                4
court complaint), that his legal fees were being disputed. Rather than returning the fees to

the client trust account (as he was obligated to under California law), Grigg continued to

spend the disputed funds. Accordingly, the Bankruptcy Court found that Grigg had the

state of mind required by Bullock and that therefore the debt owed Chaney fell within the

exception set forth in 11 U.S.C. § 523(a)(4). The Bankruptcy Court also ruled in

Chaney’s favor on Grigg’s counterclaims.

         Grigg appealed the Bankruptcy Court’s order on the summary judgment motions.4

The District Court affirmed the Bankruptcy Court’s order, and Grigg appealed to this

Court.

                                             II.

         The Bankruptcy Court had jurisdiction over this matter pursuant to a Chapter 7

bankruptcy filed on December 5, 2011. The District Court had jurisdiction over the

appeal from that decision under 28 U.S.C. § 158(a). We have jurisdiction pursuant to 28

U.S.C. § 158(d). In reviewing the orders of the Bankruptcy Court, we review factual

findings for clear error and exercise plenary review over questions of law.5 “In that sense,

our review duplicates that of the district court and we view the bankruptcy court decision

unfettered by the district court’s determination.”6

         4
         Grigg also submitted to the District Court a motion to withdraw the bankruptcy
reference, which was denied.
       5
         In re Graves, 33 F.3d 242, 246 (3d Cir. 1994).
       6
         Id. (quoting In re Brown, 951 F.2d 564, 567 (3d Cir. 1991)).
                                              5
                                               III.

       A debt may not be discharged in bankruptcy if the debtor committed “fraud or

defalcation while acting in a fiduciary capacity, embezzlement, or larceny.”7 Defalcation

may be shown in cases where the fiduciary engages in reckless conduct or “consciously

disregards . . . a substantial or unjustifiable risk that his conduct will turn out to violate a

fiduciary duty.”8 Furthermore, “[t]hat 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 law-

abiding person would observe in the actor’s situation.”9

       The Bankruptcy Court found that the undisputed facts in this case permitted such a

determination. The factual findings underlying that determination were not clearly

erroneous, and the determination itself is sound. Chaney filed suit on September 18,

2006, disputing Grigg’s fees and ultimately won that lawsuit. At arbitration, the arbitrator

found that Grigg had billed Chaney “an extravagant sum supported by dubious hours”

and that the contingent fee was “so exorbitant and wholly disproportionate to the services

performed as to shock the conscience . . . .”10 The Bankruptcy Court noted that Rule 4-

100 of the Rules of Professional Conduct for the State of California provides that, when

the right to funds in a client trust account is disputed, “the disputed portion shall not be

       7
         11 U.S.C. § 523(a)(4).
       8
         Bullock, 133 S. Ct. at 1759 (internal quotation marks omitted).
       9
         Id. at 1760 (internal quotation marks omitted).
       10
          Appellee’s App. 35–36.
                                              6
withdrawn until the dispute is finally resolved.”11 Grigg, knowing that the fees were in

dispute, continued to spend them. In fact, he spent $427,767 of the funds in dispute

defending the lawsuit Chaney had filed against him to recover those very funds. Grigg

also failed to comply with Judge Stern’s order that he produce an accounting, which the

Bankruptcy Court interpreted as conduct showing Grigg’s knowing willfulness under

§ 523(a)(4).

       The Bankruptcy Court provided a detailed analysis, which we need not further

expound here, and concluded (correctly) that Grigg acted in violation of his fiduciary

capacity with the state of mind required by Bullock. Accordingly, Grigg’s debt to Chaney

is nondischargeable pursuant to 11 U.S.C. § 523(a)(4).

       The Bankruptcy Court also found that ancillary obligations—court-ordered

attorneys’ fees and costs awarded in conjunction with the contempt proceeding, as well as

sanctions and costs against Grigg—were nondischargeable because they were incurred in

connection with a nondischargeable debt, the judgment.12 We agree with the Bankruptcy

Court’s reasoning: but for Grigg’s conduct, Chaney would not have incurred attorneys’

fees, and the sanctions and costs would not have been imposed. The ancillary obligations

are therefore, as the Bankruptcy Court explained, nondischargeable.

       11
          Id. at 89 (quoting Cal. Rules of Prof’l Conduct, rule 4-100(A)(2)).
       12
          See, e.g., Matter of Gober, 100 F.3d 1195, 1208 (5th Cir. 1996) (holding that
“the status of ancillary obligations such as attorney’s fees and interest depends on that of
the primary debt”); Klingman v. Levinson, 831 F.2d 1292, 1296–97 (7th Cir. 1987).

                                              7
       The Bankruptcy Court also properly granted summary judgment to Chaney on

Grigg’s counterclaims. Grigg’s counterclaims sought, among other things, to have the

Bankruptcy Court vacate unspecified prior orders of the California courts, but the

Bankruptcy Court explained that it was prohibited from doing so by the Rooker-Feldman

doctrine.13 “Rooker and Feldman established the principle that federal district courts lack

jurisdiction over suits that are essentially appeals from state-court judgments . . . .”14 We

have explained that, for the Rooker-Feldman doctrine to apply, four requirements must be

met: “(1) the federal plaintiff lost in state court; (2) the plaintiff ‘complains of injuries

caused by the state-court judgments’; (3) those judgments were rendered before the

federal suit was filed; and (4) the plaintiff is inviting the district court to review and reject

the state judgments.”15 The Bankruptcy Court appropriately found that all four elements

had been met in this case. In particular, Grigg’s argument that prong three was not met is

unpersuasive because the California Court of Appeal’s order became final on November

17, 2011, before Grigg’s bankruptcy was filed.

       Grigg also alleged that the contempt judgment entered on January 12, 2012,

violated the automatic stay provision of 11 U.S.C. § 362. The basis of this argument is

       13
          The doctrine takes its name from two cases: Rooker v. Fid. Trust Co., 263 U.S.
413 (1923), and District of Columbia Court of Appeals v. Feldman, 460 U.S. 462 (1983).
       14
          Great W. Mining & Mineral Co. v. Fox Rothschild LLP, 615 F.3d 159, 165 (3d
Cir. 2010).
       15
          Id. at 166 (quoting Exxon Mobil Corp. v. Saudi Basic Indus. Corp., 544 U.S.
280, 284 (2005)) (alterations omitted).

                                                8
that Grigg’s sentencing for contempt was scheduled for December 7, 2011, and Grigg

filed for bankruptcy two days earlier on December 5, 2011. Judge Ongkeko of the

Superior Court for the State of California made clear, however, that he was sentencing

Grigg with punitive sanctions to uphold the dignity of the court and not as an effort to

enforce the collection of a judgment. In any case, the Bankruptcy Court determined that

this counterclaim was barred by the principles of res judicata and collateral estoppel

because the issue of the alleged stay violation was raised in the contempt proceeding and

a final decision was rendered.

       Finally, Grigg alleged that additional fees should have been turned over to him

pursuant to 11 U.S.C. § 542. The Bankruptcy Court noted that the Final Arbitration

Award determined that no further fees were to be awarded to Grigg, and held that this

matter too was precluded by collateral estoppel and res judicata. The Bankruptcy Court

further explained that, had the claim not been so barred, Grigg would nevertheless have

lacked standing to pursue a turnover of estate property pursuant to 11 U.S.C. § 542.16

                                            IV.

       We will affirm the District Court’s order entered on November 10, 2014, which

affirmed the orders of the Bankruptcy Court.

       16
         Grigg has articulated a number of other arguments on appeal that tend to
obscure rather than clarify the actual issues in this case. We have considered these
contentions but need not address them here. The Bankruptcy Court’s orders were
correctly decided, as was the District Court’s order affirming them.
                                               9