Opinion
Case No. 18-31043 Adv. Proc. No. 18-3052
03-22-2021
In re: CLARENCE C. DEES, Debtor. Bethany Village, Plaintiff, v. Clarence C. Dees, Defendant.
Chapter 7
DECISION GRANTING PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT (DOC. 35)
I. Introduction
This adversary proceeding raises the issue of whether the Defendant Debtor's debt to Plaintiff is nondischargeable under 11 U.S.C. § 523(a)(2)(A) and (a)(6).
II. Factual and Procedural Background
Plaintiff, Bethany Village ("Bethany"), filed a complaint initiating this adversary proceeding to deny the dischargeability of a debt pursuant to § 523 of the Bankruptcy Code. Defendant and Debtor, Clarence Dees ("Dees"), filed an answer generally denying that the debt was nondischargeable. Bethany filed a Motion for Summary Judgment, to which Dees did not respond.
"Bethany Village" is a registered tradename of Graceworks Lutheran Services (See Exhibits 3 and 4 at 1), an Ohio corporation, with authority to pursue this proceeding under the tradename pursuant to Ohio Revised Code § 1329.01 et seq., particularly Ohio Revised Code § 1329.10. See MBA Realty v. Little G, Inc., 688 N.E.2d 39 (Ohio Ct. App. 1996).
Unless otherwise provided, all references to a statute shall be to the Bankruptcy Code of 1978, as amended, 11 U.S.C. § 101-1532.
In August 2015 Dees assisted in the admission of his brother and his sister-in-law ("Henry" and "Gloria") into Bethany's independent-living facility. Affidavit of Matt Groeber at ¶ 9 (the "Groeber Affidavit") (Doc. 39). Dees helped with the financial disclosure information and was the power of attorney for both Henry and Gloria. Id. at ¶ 1; Exhibit 1. At the time of the financial disclosure, Henry and Gloria had over $300,000 in cash funds available and they also received approximately $7,000 each month in income. Groeber Affidavit at ¶ 11. After their care needs increased, Gloria and Henry both moved into Bethany's nursing facility—Gloria in December 2015 and Henry in February 2016. Id. at ¶ 5. Dees executed a Nursing Facility Admission Agreement for both Henry and Gloria when they entered the nursing facility and he was recognized as the Responsible Party in these agreements. Id. at ¶ 14; Exhibits 2 and 3. These agreements made Dees contractually responsible for using Henry and Gloria's assets to pay for their nursing facility services. Exhibit 2 at 8; Exhibit 3 at 8. Nonpayment became an issue quickly and when asked about payment, Dees would "repeatedly indicate that he would make payment," but payments still were not made to Bethany. Groeber Affidavit at ¶¶ 17, 18. Ultimately, because of the nonpayment, Bethany filed a lawsuit in June 2016 asserting claims for breach of contract as well as a fraudulent transfer claim under Ohio's Uniform Fraudulent Transfer Act. Id. at ¶¶ 19, 20. By March 2017 Dees owed a debt over $200,000 to Bethany. Id. at ¶ 21. Bethany received a default judgment in its favor in the state court civil action. Montgomery County Court of Common Pleas, 2016 CV 03016 (Judgment Entry entered March 23, 2017).
As a result of discovery in the state court action, Bethany gained information that Dees had stolen a large amount of money from Henry and Gloria. Groeber Affidavit at ¶ 22. Due to this, Bethany reported Dees to the Centerville Police Department. Id. at ¶ 22. Gloria passed away in September 2016 and Henry remained in Bethany's facility until he passed away in May 2020. Id. at ¶ 24. Prior to his death, Bethany assisted Henry in getting approved for Medicaid to cover his care costs from April 2018 until his death. Id. at ¶ 25. In order to receive Medicaid, Henry had to demonstrate that he had $2,000 or less in available assets and with the assistance of Bethany and a court-appointed guardian, it was determined that Henry only had $2,000 or less in assets. Id. at ¶ 27. Following the deaths of Henry and Gloria and after all collection efforts, Dees still owed $93,094.19 to Bethany. Id. at ¶ 28; Exhibit 4.
Detective Daniel Osterfeld ("Osterfeld") conducted an investigation into Dees on behalf of the Centerville Police Department following Bethany's report of potential criminal activity. Affidavit of Daniel Osterfeld at ¶ 1, 2 (doc. 38). Osterfeld discovered that from October 2015 to June 2016, Dees withdrew $131,608.25 from Henry and Gloria's accounts. Id. at ¶ 7. Dees made five separate withdrawals of funds, and three of these withdrawals occurred at automatic teller machines located in casinos in Ohio. Id. at ¶ 7, 8. The withdrawals were as follows: (1) $6,315.55 from Henry and Gloria's account at Day Air Credit Union; (2) $9,023.90 from Henry and Gloria's trust account at Day Air Credit Union; (3) $49,548.80 from Henry and Gloria's account at Michigan First Credit Union; (4) $31,860.00 from Henry and Gloria's account at Day Air Credit Union; and (5) $34,860.00 from Henry and Gloria's trust account at Day Air Credit Union. Id. at ¶ 8. As a result of the investigation, the evidence was presented to a grand jury and Dees was indicted for felony theft. Dees ultimately pled guilty to theft from an elderly or disabled adult. Id. at ¶ 10. A Termination Entry was entered by the court on December 1, 2016 including an order of restitution against Dees for $131,608.25. Exhibit 6.
III. Positions of the Parties
Bethany asserts that it is owed a debt by Dees and that this debt is nondischargeable under §§ 523(a)(2) and (a)(6) because the debt was incurred as a result of Dees' fraud.
IV. Analysis
A. Jurisdiction
This court has jurisdiction pursuant to 28 U.S.C. § 1334, this is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I) and (O), and this court has constitutional authority to enter a final judgment.
B. Summary Judgment Standard
Federal Rule of Civil Procedure 56(a), made applicable to adversary proceedings through Federal Rule of Bankruptcy Procedure 7056, sets forth the standard to address the parties' filings. It states, in part, that a court must grant summary judgment to the moving party if the movant shows that there is no genuine issue as to any material fact and the movant is entitled to judgment as a matter of law. In order to prevail, the movant, if bearing the burden of persuasion at trial, must establish all elements of its claim. Celotex Corp. v. Catrett, 477 U.S. 317, 331 (1986). All inferences drawn from the underlying facts must be viewed in a light most favorable to the party opposing the motion. Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587-88 (1986).
C. The Legal Basis for Applying a § 523 Exception to Dischargeability
Before a creditor can show that a debt is nondischargeable under one of the § 523(a) exceptions, it must first be established that the debtor actually owes a debt to the creditor under state law. Conley v. Conley (In re Conley), 482 B.R. 191, 207 (Bankr. S.D. Ohio 2012) (citing Steed v. Shapiro (In re Shapiro), 180 B.R. 37, 38 (Bankr. E.D.N.Y. 1995)). This court takes judicial notice that Bethany obtained a default judgment against Dees in state court. F.R.E. 201. In addition, in his Preliminary Pretrial Statement, Dees acknowledges the existence of a debt in his Statement of the Case: "[d]ebts were incurred for the caretaking" of Henry and Gloria Dees and that on March 23, 2017 [Bethany] received a judgment against [Dees] in the underlying civil lawsuit." Doc. 14 at 2.
The state court judgment in the underlying civil action against Dees liquidated the debt and is binding upon this court under preclusion principles and, therefore, this court finds that Dees owes Bethany a debt which is subject to § 523. See CMCO Mortg., LLC v. Hill (In re Hill), 957 F.3d 704, 711 (6th Cir. 2020) (Federal courts must give the same preclusive effect to a state court judgment that the state would give to that judgment, including any determinations made relating to the dischargeability of a judgment.).
D. Exceptions to Dischargeability
Bethany has the burden to show by a preponderance of the evidence that each of the elements of the nondischargeability claims are met. Grogan v. Garner, 498 U.S. 279, 287-88 (1991). Bethany contends that the debt it is owed by Dees is nondischargeable under both §§ 523(a)(2)(A) and (a)(6).
Section 523(a)(2)(A) of the Code "implements the long-standing bankruptcy policy that only those debts which are honestly incurred are entitled to the benefits of a bankruptcy discharge." Schafer v. Rapp (In re Rapp), 375 B.R. 421, 429 (Bankr. S.D. Ohio 2007) (quoting Mack v. Mills (In re Mills), 345 B.R. 598, 603 (Bankr. N.D. Ohio 2006)). Additionally, because a policy of the Code is to provide debtors with a fresh start, "exceptions to discharge are to be strictly construed against the creditor." Rembert v. AT&T Universal Card Servs., Inc. (In re Rembert), 141 F.3d 277, 281 (6th Cir. 1998). Section 523(a)(2)(A) provides an exception to the dischargeability of a debt "for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by . . . false pretenses, a false misrepresentation, or actual fraud[.]" 11 U.S.C. § 523(a)(2)(A). To prove that a debt is nondischargeable under § 523(a)(2)(A), a creditor must show one of the three categories, i.e., false pretenses, a false misrepresentation, or actual fraud.
"A debt arising from a false representation or from false pretenses is nondischargeable if the creditor establishes, among other things, that 'the debtor intended to deceive the creditor.'" In re Wilson, 613 B.R. 907, 921 (Bankr. S.D. Ohio 2020) (quoting Rembert, 141 F.3d at 280). Actual fraud is different in that it "more broadly consists of 'any deceit, artifice, trick, or design involving direct and active operation of the mind, used to circumvent or cheat another.'" Id. (quoting Mellon Bank, N.A. v. Vitanovich (In re Vitanovich), 259 B.R. 873, 877 (B.A.P. 6th Cir. 2001). Also, with respect to actual fraud, the Supreme Court has held that "[t]he term 'actual fraud' in § 523(a)(A)(2) encompasses forms of fraud, like fraudulent conveyance schemes, that can be effected without a false representation." Husky Intern. Elecs., Inc. v. Ritz, 136 S. Ct. 1581, 1586 (2016). In Ritz, the Supreme Court makes clear that the court has "historically construed the terms in § 523(a)(2)(A) to contain the 'elements that the common law has defined them to include.'" Id. (quoting Field v. Mans, 516 U.S. 59, 69 (1995)). "The word 'actual' has a simple meaning in the context of common-law fraud: It denotes any fraud that 'involv[es] moral turpitude or intentional wrong.'" Id. (quoting Neal v. Clark, 95 U.S. 704 (1878)). "[A]nything that counts as 'fraud' and is done with wrongful intent is 'actual fraud.'" Id. Further, the Court stated that "a false representation has never been a required element of 'actual fraud[.]'" Id. at 1588. "[A] creditor may establish circumstances indicating a debtor's fraudulent intent, even if the debtor did not make a misrepresentation or misleading omission on which the creditor relied." In re Fox, 370 B.R. 104, 116 (B.A.P. 6th Cir. 2007).
Under Ohio Revised Code § 1336.04(A)(1), a creditor has the burden of showing "(1) a conveyance or incurring of a debt; (2) made with actual intent to defraud, hinder, or delay; (3) present or future creditors." Blood v. Nofzinger, 834 N.E.2d 358, 367 (Ohio Ct. App. 2005) (citations omitted). Ohio law recognizes that "direct evidence" of actual intent is not necessary. Id. at 368 (citing Wagner v. Galipo, 646 N.E.2d 844 (Ohio Ct. App. 1994)). Section 1336.04(A)(2) "permits claims for constructive fraud . . . ." Id. at 369. This section "focuses more on the effect of the transaction rather than the intent with which they were undertaken." Aristocrat Lakewood Nursing Home v. Mayne, 729 N.E.2d 768, 780 (Ohio Ct. App. 1999).
As Ritz established, a series of fraudulent conveyances or transfers without a misrepresentation can be considered actual fraud under § 523(a)(2)(A). Ritz at 1586. Here, Dees signed the contracts with Bethany agreeing to use Henry and Gloria's funds and assets to pay Bethany's bills. Dees held and used a power of attorney for Henry and Gloria. Upon the bills becoming delinquent, Bethany inquired with Dees and Dees assured Bethany that the bills would be paid. Instead of paying Bethany's bills for the services provided to Henry and Gloria, Dees withdrew funds from Henry and Gloria's accounts various times, including at casinos, used the money for other purposes, and failed to pay Bethany for Henry and Gloria's care as he was contracted to do. Additionally, Dees pled guilty to theft from an elderly or disabled person which establishes his "wrongful intent" in withdrawing the funds and failing to pay Bethany. See Ritz at 1583. These facts all establish actual fraud on the part of Dees both under Ohio law and § 523(a)(2)(A). See Wilmot v. Lyon, 34 N.E. 720 (Ohio 1892); Luhrig Coal Co. v. Ludlum, 69 N.E. 562 (Ohio 1903); Sunsational Patio & Sunrooms, Inc. v. Transflorida Structural Prods., No. CV-2007-09-6445, 2007 Ohio Misc. LEXIS 2917 (Ct. Com. Pl. Dec. 21, 2007) (all supporting a claim for fraud under Ohio law for the fraudulent procurement of goods or services). See also Gelzer Sys. Co., Inc. v. Indus. Mach. & Supply Co., No. 84AP-1156, 1986 WL 2488, at *5 (Ohio Ct. App. Feb. 20, 1986) (finding that a fraud claim may be established based upon a seller's receipt of funds for the purchase of goods without an intention to deliver the goods).
Therefore, the debt owed by Dees to Bethany is nondischargeable under § 523(a)(2)(A) of the Code.
Section 523(a)(6) of the Code provides that a "discharge under section 727 . . . of this title does not discharge an individual debtor from any debt . . . for willful and malicious injury by the debtor to another entity or to the property of another entity[.]" 11 U.S.C. § 523(a)(6). The Sixth Circuit has explicitly adopted a two-prong test to determine whether conduct constitutes "willful and malicious" under § 523(a)(6). In re Berge, 953 F.3d 907, 914 (6th Cir. 2020). In order to show a debt is nondischargeable under § 523(a)(6), the creditor must show that the debtor acted both willfully and maliciously. To act willfully, a debtor "must 'desire[] to cause consequences of his act, or . . . believe[] that the consequences are substantially certain to result from it.'" Id. at 915 (quoting Markowitz v. Campbell (In re Markowitz), 190 F.3d 455, 464 (6th Cir. 1999)). This required intent can be "inferred from the circumstances of the injury." Id. To act maliciously, a debtor acts "in conscious disregard of one's duties or without just cause or excuse." Id. (quoting Wheeler v. Laudani, 783 F.2d 610, 615 (6th Cir. 1986)) (internal quotation marks omitted). In contrast to the element of willfulness, it is not necessary to show specific intent to prove malicious conduct. The just cause component of the malicious element has been defined as "'[a] legally sufficient reason,' and 'excuse' as '[a] reason that justifies an act or omission or that relieves a person of a duty.'" Id. (quoting Black's Law Dictionary (11th ed. 2019)). The same facts of a case can often show both willful and malicious conduct. Id. at 916.
With respect to the willful aspect of § 523(a)(6), the facts show that Dees withdrew money a number of times from Henry and Gloria's account. The facts also show that at the time Dees entered into the contract to place Henry and Gloria into Bethany's facility, Henry and Gloria had over $300,000 cash funds and received $7,000 each month in income. Bethany sent Dees repeated notices of nonpayment during Henry and Gloria's stay and by March 2017, the debt to Bethany exceeded $200,000. The police investigation into Dees resulted in a showing that Dees repeatedly withdrew funds from Henry and Gloria's account, often making these withdrawals at casinos throughout Ohio. Based on Dees' actions, the willful element of § 523(a)(6) is met. In his Preliminary Pretrial Statement, Dees admitted that he was the power of attorney for Henry and Gloria and that he was their caretaker. Dees entered into a contract with Bethany as their power of attorney knowing he was responsible for Henry and Gloria's expenses based on the agreement, he did not make payments to Bethany, and was given notice of nonpayment. By entering into this contract and then withdrawing money, spending the funds from Henry and Gloria's accounts for his own personal purposes, and not paying Bethany, Dees was "substantially certain" consequences of nonpayment would arise. See Trost v. Trost, 735 Fed. Appx. 875, 882 (6th Cir. 2018) (Debtor's debt was nondischargeable under § 523(a)(6) based upon collateral estoppel when debtor was found liable in state court for conversion when the debtor knew the creditor owned the property and acted in "clear disregard for [the creditor]'s superior rights."); Kraus Anderson Capital, Inc. v. Bradley (In re Bradley), 507 B.R. 192, 205 (B.A.P. 6th Cir. 2014) (Company's principal's debt to lender was nondischargeable under § 523(a)(6) when the principal sold the creditor's collateral out of trust and failed to remit the proceeds from the sale to the creditor.). See also Monsanto Co. v. Trantham (In re Trantham), 304 B.R. 298, 307 (B.A.P. 6th Cir. 2004) (noting that the motive of a bank robber is to enrich himself, not to injure the bank; but nevertheless, the bank robber has committed an intentional tort and it is substantially certain that injury will result).
With respect to the malicious aspect of § 523(a)(6), as a result of Bethany contacting the police to look into Dees' actions, Dees was charged with felony theft and ultimately pled guilty to theft from an elderly or disabled adult. As malicious conduct is shown when a debtor acts without legally sufficient cause or justification, this element of § 523(a)(6) is met as Dees pled guilty to criminal theft and thus acted without legally sufficient cause or justification. See Roe v. Boland (In re Boland), 596 B.R. 532, 551-53 (B.A.P. 6th Cir. 2019) (malicious element established when debtor's assertions of legal excuse or justifications rejected in prior litigation).
Therefore, the debt owed by Dees to Bethany is nondischargeable under § 523(a)(6) of the Code.
V. Conclusion
Plaintiff Bethany Village is entitled to summary judgment because, as a matter of law, the debt of $93,094.19 owed to Bethany Village by Clarence Dees is nondischargeable under both §§ 523(a)(2)(A) and 523(a)(6). Plaintiff's Motion for Summary Judgment is granted. The court is concurrently entering judgment through a separate order in favor of Bethany Village.
This document has been electronically entered in the records of the United States Bankruptcy Court for the Southern District of Ohio.
IT IS SO ORDERED.
/s/ _________
Guy R. Humphrey
United States Bankruptcy Judge
Dated: March 22, 2021
Copies to: Counsel for the Plaintiff Counsel for the Defendant