A lawyer saddled with a judgment for taking unauthorized funds from his former firm will not be able to discharge the $125,000 debt in his Chapter 13 bankruptcy.

U.S. Bankruptcy Judge Donald Steckroth in Newark ruled on April 26 that Han-Hsien Tuan, now of Princeton-based Wong Fleming, committed a defalcation for which a discharge can be denied under the Bankruptcy Code.

Granting summary judgment on that basis, Steckroth rejected two alternate grounds advanced by Tuan’s former partner: breach of fiduciary duty and embezzlement.

According to the opinion in In re Tuan, No. 12-19848, Tuan and Dean Cho were 50-50 partners from 2004 until late 2008 in now-defunct Tuan & Cho (T&C), which was based in New York with offices in Oyster Bay, N.Y., and Millburn.

Cho claimed that Tuan, who was in charge of daily operations, charged personal expenses to T&C, set up bank accounts without Cho’s knowledge, diverted client fees to secret accounts and transferred client escrow funds to personal accounts.

Cho took his claims to arbitration, as called for in the partnership agreement, securing a $100,000 award, plus $11,478 in costs on June 17, 2010.

The arbitrator determined that Tuan was responsible for the firm’s books and records, which were "terribly lacking … and not kept in conformity with normal business standards" and that there were gaps in those records because of Tuan’s failure to fully cooperate with discovery.

The arbitrator found that Tuan "engaged in suspicious and unethical transactions with regards to T&C" and "showed a disregard for the normal business standards that any partner should follow."

Further, Tuan took more in distributions and fringe benefits from T&C than he was entitled to, the arbitrator held.

On Sept. 14, 2011, Cho obtained a New York judgment confirming the award in the amount of $125,536, with interest at 9 percent.

Tuan filed his Chapter 13 petition on April 16, 2012, around the time he joined Wong Fleming in its New York office. He listed more than $1.3 million in assets, chiefly his $1.16 million home in Short Hills, and $488,500 in liabilities, about half of which was $245,000 owed on his mortgage.

Cho’s judgment made up more than half the $243,500 in unsecured claims.

On May 12, 2012, Cho filed an adversary action, asserting that Tuan was making improper use of the bankruptcy process to evade paying the judgment.

He chiefly relied on the arbitration award but also had an affidavit from T&C’s former bookkeeper saying Tuan regularly charged thousands of dollars a month in personal expenses to the firm — for such things as car leases, family vacations and personal tax liability — to the point where T&C incurred overdraft fees and did not have sufficient funds to pay Cho his partnership draw.

Cho moved for summary judgment on Jan. 14, asking the court to apply res judicata or collateral estoppel to block the discharge.

Steckroth granted the motion, finding defalcation under 11 U.S.C. 523(a)(4).

The U.S. Court of Appeals for the Third Circuit has not defined the term, but Steckroth looked at what other courts had said and concluded that it requires "some showing of affirmative misconduct" but not intent or bad faith, and that Tuan’s actions rose to the requisite level.

Even without giving the arbitral award preclusive effect, Steckroth said there was sufficient evidence based on the award, the bookkeeper’s affidavit and the inability of Tuan’s counsel, during oral argument, to deny that he took more funds than those to which he was entitled.

Although Steckroth held that Tuan had a fiduciary duty to Cho — not just as his law partner but as the person in charge of the books — he refused collateral estoppel effect to the arbitral award and said without it, there was not enough evidence Tuan breached that duty. The same was true of embezzlement.

Tuan’s lawyer, David Stevens of Scura Mealey Wigfield & Heyer in Wayne, says the ruling is moot because Cho is being repaid under Tuan’s Chapter 13 plan, confirmed on Jan. 2.

He says that even with the debt deemed nondischargeable, Cho cannot seek to collect it outside the plan.

Cho says “it’s an important thing Mr. Tuan be held to account for his wrongdoing.” Tuan did not return a call.

Cho is now with DeHeng Chen in New York, which is litigating against Tuan for more than $440,000 in fees for patent work done on behalf of a Tuan client for which it was allegedly never paid.

DeHeng Chen claims that Tuan repeatedly told it the client had cash flow problems but later learned from Cho that tens of thousands of dollars were being wired each month into a T&C account to pay the fees and Tuan was using the money for himself and his family.

DeHeng Chen has appealed Steckroth’s dismissal of its proof of claim and adversary action as filed too late.

Its attorney, Stuart Nachbar of Livingston, says briefing is done and he is awaiting a ruling from U.S. District Judge William Martini.