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In re Ruben

United States Court of Appeals, Seventh Circuit

December 23, 2014

IN RE: PHILIP E. RUBEN, Debtor-Appellant,

Argued October 28, 2014

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

For In the Matter of: PHILIP E. RUBEN, Debtor - Appellant: William Choslovsky, Attorney, NEAL, GERBER & EISENBERG LLP, Chicago, IL.

For LAURALEE K. BELL, not individually but solely as TRUSTEE OF THE LAURALEE K. BELL 1993 TRUST, Trustee - Appellee: Nathan F. Coco, Attorney, Megan E. Thibert-Ind, Attorney, MCDERMOTT, WILL & EMERY, Chicago, IL.

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 lawyer, 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,

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inflicting a loss on it of some $34 million. The defendants asked her to arbitrate her claims. She agreed, but before she initiated the arbitration Ruben filed for bankruptcy under Chapter 7 of the Bankruptcy Code (liquidation). After initiating the arbitration Bell filed an adversary complaint in the bankruptcy court opposing discharge of Ruben's fraud-based debt to her, pointing out tat a debt incurred 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, 118 S.Ct. 1212, 140 L.Ed.2d 341 (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 negligence 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 arbitration 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 administrative fees and expenses of the American Arbitration Association that were advanced by [Bell] totaling $21,200.00," and further ordered that " the compensation and expenses of 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 arbitration, 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 bankruptcy. 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 ...

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