Court Opinion

ID: 2764257
Source: CourtListenerOpinion
Date Created: 2014-12-24 00:00:51.210797+00
Date Added: 2024-06-11T12:06:18.191864
License: Public Domain

In the

    United States Court of Appeals
                 For the Seventh Circuit
                     ____________________
No. 14-1475
IN RE: PHILIP E. RUBEN,
                                                   Debtor-Appellant,

                     ____________________

         Appeal from the United States District Court for the
           Northern District of Illinois, Eastern Division.
            No. 12 C 8311 — Thomas M. Durkin, Judge.
                     ____________________

  ARGUED OCTOBER 28, 2014 — DECIDED DECEMBER 23, 2014
                ____________________

   Before BAUER, POSNER, and TINDER, Circuit Judges.
    POSNER, Circuit Judge. In 2008 Lauralee Bell, on behalf of a
trust of which she was the trustee, sued Philip Ruben, a law-
yer, plus other persons and his former law firm, in an Illinois
state court. She charged the defendants, including Ruben,
with having both negligently and fraudulently mismanaged
her trust, inflicting a loss on it of some $34 million. The de-
fendants asked her to arbitrate her claims. She agreed, but
before she initiated the arbitration Ruben filed for bankrupt-
cy under Chapter 7 of the Bankruptcy Code (liquidation).
After initiating the arbitration Bell filed an adversary com-
plaint in the bankruptcy court opposing discharge of Ru-
2                                                 No. 14-1475

ben’s fraud-based debt to her, pointing out that a debt in-
curred in order to perpetrate a fraud is not dischargeable. 11
U.S.C. §§ 523(a)(2)(A), (4); Cohen v. de la Cruz, 523 U.S. 213,
222–23 (1998); In re Blaszak, 397 F.3d 386, 390–92 (6th Cir.
2005). The bankruptcy judge granted Ruben a discharge of
his other debts, but not of the fraud debt that was the subject
of Bell’s adversary claim.
   Ruben’s liability insurance covered negligence but not
fraud, which may have been why Bell had lodged negli-
gence as well as fraud claims against him in her original suit,
despite the close overlap between the two types of claim—
indeed many of the factual allegations underlying the two
were the same, the difference between them being largely
the doctrinal niche occupied by particular allegations. The
overlap may have been what persuaded Ruben to seek to
have the arbitration panel decide Bell’s fraud claims against
him rather than just her negligence claims. Bell agreed to let
the panel do that.
    Bell settled both her negligence claims against Ruben,
and all her claims against the other defendants, in the arbi-
tration proceeding. That left only her fraud claims against
Ruben for the arbitration panel to resolve. After a hearing
the panel ruled that because of Bell’s settlements with the
other respondents and her dismissal of some of her claims
against Ruben, her “damages proven to be attributable to the
actions of [Ruben] have been compensated and therefore
[Bell] shall take nothing against [Ruben] on her remaining
claims.” But the panel ordered Ruben to pay “the adminis-
trative fees and expenses of the American Arbitration Asso-
ciation that were advanced by [Bell] totaling $21,200.00,”
and further ordered that “the compensation and expenses of
No. 14-1475                                                   3

the arbitrators that were advanced by [Bell] totaling
$150,304.54 shall be borne by [Ruben].” Thus the panel ruled
that Ruben owed Bell a total of $171,504.54. The American
Arbitration Association, the rules of which governed the ar-
bitration, provide that the expenses of an arbitration “shall
be borne equally by the parties, unless they agree otherwise
or unless the arbitrator in the award assesses such expenses
or any part thereof against any specified party or parties.”
American Arbitration Association Rule No. R-50 (emphasis
added).
    When Ruben refused to pay, Bell amended the complaint
in her adversary proceeding to seek an order that Ruben pay
her the $171,504.54 that the arbitrators had ordered him to
pay. The bankruptcy judge refused, and entered summary
judgment in favor of Ruben. Bell appealed to the district
court, which reversed and entered summary judgment in
favor of Bell, precipitating Ruben’s appeal to us.
    Section 727(b) of the Bankruptcy Code provides that a
general discharge “discharges the debtor from all debts that
arose before the date” on which the debtor filed for bank-
ruptcy. Citing this section, Ruben argues that a debt that a
bankrupt incurs after his debts have been discharged in
bankruptcy, but that he wouldn’t have incurred had it not
been for a prepetition claim, is itself a prepetition claim, and
is therefore dischargeable if the prepetition claims (he would
say the other prepetition claims) against him have been dis-
charged. Had the negligence claims not been submitted to
arbitration, he would not have moved to have the fraud
claims added to the arbitration, and the arbitrators would
have had no occasion to assess costs against him. So, he con-
cludes, his debt for those costs is the effect of prepetition
4                                                  No. 14-1475

claims and therefore itself a prepetition claim. But the
“therefore” is incorrect. A cause and an effect are not the
same thing. The well-known proverbial rhyme “For want of
a nail … the kingdom was lost” attributes to the absence of a
nail in one of the horseshoes of Richard III’s horse at the Bat-
tle of Bosworth Field the loss of his kingdom. Nevertheless a
nail is not a kingdom. Neither need a claim arising from a
prepetition claim be itself a prepetition claim.
    What dooms (but not the only thing that dooms) Ruben’s
effort to escape the arbitrators’ assessment of expenses is
that the assessment was a result of his freely chosen decision
to participate in the arbitration. Had he not participated, Bell
would instead have pressed her fraud claims against him in
her adversary proceeding, and it is inconceivable that the
bankruptcy court—the host as it were of the adversary pro-
ceeding—would have assessed substantial costs against him.
The bulk of the $171,504.54 in costs assessed against Ruben
by the arbitration panel—$150,304.54 (87.6 percent)—was for
the expenses and compensation of the arbitrators. Courts
don’t make litigants pay judges’ salaries. But arbitrators, be-
ing secretive, wielding very broad discretion, being far less
rule-bound than courts—and not being paid for their work
by the government—charge their salaries to the parties to
the arbitration. By asking to be allowed into the arbitration,
Ruben voluntarily exposed himself to assessments the
amount of which he could not have calculated in advance. It
is odd to think that because Ruben chose to roll the dice, Bell
should be deprived of the costs that the arbitrators awarded
her.
   In tension with his assertion that postpetition activity
that arises out of prepetition claims may give rise only to a
No. 14-1475                                                 5

prepetition claim, Ruben asks us to distinguish between a
bankrupt who initiates an action in the postpetition period
and one who merely defends in that period against a prepe-
tition claim. He says that in the former case the postpetition
activity is the bankrupt’s choice, but in the latter case the
bankrupt is merely defending against a claim and anyone
should be entitled to do that without being penalized. If the
defense succeeds, he says, it would be unreasonable to re-
fuse to discharge the debt incurred by the bankrupt, since
the debt would have been exposed as the consequence of a
nonmeritorious claim by his adversary.
   But did the arbitrators find Bell’s claim against Ruben to
be nonmeritorious? They did not explain the basis for their
assessment of expenses against him, but by referring to
“damages proven to be attributable to [Ruben’s] actions”
they implied that he had committed fraud. They did not or-
der Ruben to pay damages to Bell, but such an order would
have been pointless because those damages had been paid
by other respondents in the arbitration. Assuming the panel
thought that Bell had proved fraud, requiring her rather
than Rubin to bear the costs of the arbitration proceeding
would have been tantamount to subtracting $171,504.54
from her damages award. Ordering Ruben to pay this
amount imposed a sanction on a wrongdoer intended to
make the victim whole. If deemed a dischargeable debt, the
sanction would evaporate.
    The inference that the order to pay the $171,504.54 in ex-
penses was indeed punitive in purpose is reinforced by the
findings of a Hearing Board of the Illinois Attorney Registra-
tion and Disciplinary Commission in In re Philip E. Ruben,
Commission No. 2012PR00120, at 1, Sept. 5, 2014, www.
6                                                  No. 14-1475

iardc.org/rd_database/disc_decisions_detail_print.asp?Grou
p=11421 (visited Dec. 22, 2014). The Board found that Ruben
had “altered a conflicts acknowledgement and two checks,
… falsif[ied] evidence and engag[ed] in conduct involving
dishonesty, fraud, deceit or misrepresentation”—mostly re-
lating to the Bell trust. Not only did the Board criticize Ru-
ben’s prepetition conduct; it also noted his obstinate postpe-
tition defense of that conduct, and cited as further aggravat-
ing factors that Bell “had to hire additional counsel, incurred
significant expense, and spent many years attempting to re-
coup her losses,” and that Ruben “was less than cooperative
during that litigation and contributed to the delay.”
     As if all this were not enough, the distinction between
pre- and postpetition claims, so far as relates to the discharge
of the cost award grounded on those claims, is artificial.
With respect to both types of claim the focus should be on
the relation between the pre- or postpetition activity and the
“fresh start” purpose of allowing a bankrupt to discharge his
debts. See In re Hadden, 57 B.R. 187, 190 (Bankr. W.D. Wis.
1986). Suppose the bankrupt’s postpetition activity, whether
aggressive or defensive, is wasteful, improvident; then deny-
ing discharge of the expense he incurs in that wasteful activi-
ty is a proper sanction, for “even if a cause of action arose
pre-petition, the discharge shield cannot be used as a sword
that enables a debtor to undertake risk-free [postpetition]
litigation at others’ expense.” In re Ybarra, 424 F.3d 1018,
1026 (9th Cir. 2005); see also In re Sure-Snap Corp., 983 F.2d
1015, 1018 (11th Cir. 1993). “A principal goal of bankruptcy
is to provide the debtor with reasonable exemptions and a
fresh start. Allowing the debtor to discharge attorney’s fees
incurred in the post-petition pursuit of dubious claims might
invite egregious abuses, while not allowing discharge of at-
No. 14-1475                                                7

torney’s fees might prevent debtors from pursuing ‘reasona-
ble exemptions’ which are in the form of lawsuits. The bal-
ance must be struck so that post-bankruptcy acts on the part
of the debtor cannot be undertaken with impunity. This fol-
lows from the general principle that only liabilities arising
from pre-petition acts are discharged in bankruptcy.” In re
Hadden, supra, 57 B.R. at 190.
    Last we note that Ruben did not seek judicial review of
the arbitrators’ award. He could not have thought that just
because the arbitration had originated in prepetition claims
against him he could disregard the arbitrators’ authority to
award fees and expenses by challenging the award in a col-
lateral proceeding, the bankruptcy proceeding.
   Ruben makes other arguments, but either they were
waived below or lack even arguable merit. The judgment of
the district court denying the discharge of Ruben’s debt for
the $171,504.54 in costs imposed by the arbitration panel is
                                                  AFFIRMED.