Opinion
Bankruptcy 19-07390-LT7 Adversary 20-90050-LT
11-01-2021
In re: MICHAEL ROY SILVERTHORN, Debtor. v. MICHAEL ROY SILVERTHORN Defendant. RHONDA DAY, EXECUTOR OF WANDA G. SILVERTHORN, Plaintiff,
NOT FOR PUBLICATION
MEMORANDUM DECISION
LAURA S. TAYLOR, JUDGE
This opinion is intended only to resolve the dispute between these parties and is not intended for publication.
Wanda Silverthorn loved her twin sister Rhonda Day. After Wanda's divorce from Michael Silverthorn, she made Rhonda her heir and executed documents with her employer assigning her employee benefits to Rhonda. But included in the documents was a form designating a beneficiary for her employer-provided life insurance. Wanda completed the form to change her designated beneficiary with one critical omission - she failed to sign the document. After her death, the insurance administrator, thus, paid the benefits to Michael.
Rhonda sued and obtained a state court default judgment which provides that the decedent's estate (which she represents) is entitled to the benefits, ordered Michael to transfer the benefits to it, and imposed double damages and awarded attorneys' fees based on a finding that Michael "has in bad faith wrongfully taken, concealed and disposed of the Insurance Benefit[s] belonging to the Estate...".
Michael then filed bankruptcy, and Rhonda filed a complaint seeking a judgment that the probate judgment is nondischargeable under 11 U.S.C. § 523(a)(2), (4), & (6). She then moved for summary judgment on the § 523(a)(6) claim arguing that the probate judgment establishes the claim as a matter of issue preclusion.
Unless otherwise indicated, all chapter, section, and rule references are to the Bankruptcy Code, 11 U.S.C. §§101-1532, and to the Federal Rules of Bankruptcy Procedure, Rules 1001-9037.
On summary judgment, the Court found that probate judgment established that Michael had converted the benefits under California state law. The Court also found, however, that the probate judgment did not establish that he acted with the required malice and willfulness for the purposes of a nondischargeability claim under § 523(a)(6). The Court set the matter for trial on the state of mind issues.
The Court conducted a trial and heard the testimony of both Michael and Rhonda. For the reasons set forth below, the Court finds that Rhonda has not carried her burden of establishing that Michael acted with malice or willfulness for § 523(a)(6) purposes.
At the trial Rhonda also argued that Michael breached a fiduciary duty to her in support of her claim under § 523(a)(4). Alternatively, she argued embezzlement. For the reasons set forth below the Court finds that Rhonda has failed to establish that Michael acted with fraudulent intent or other state of mind as necessary to support a § 523(a)(4) claim.
Rhonda has not pursued the claim under § 523(a)(2). The Court has received no evidence supporting non-dischargeability on this theory; judgment for Michael on this claim is appropriate.
FACTS
Rhonda Day is the twin sister of Wanda Silverthorn and executor of Wanda's probate estate. Defendant Michael Silverthorn is Wanda's ex-husband. In 1985, Wanda executed a designation of beneficiary form naming Michael, her then husband, as the beneficiary with respect to her Federal Employees Group Life Insurance ("FEGLI").
In 1990, Michael and Wanda divorced. Their Marital Settlement Agreement ("MSA") was incorporated into a Dissolution Judgment. In relevant part, it states: "[e]ach party does hereby waive any and all right to inherit the estate of the other at his or her death, or to take property from the other by devise or bequest unless under a will executed subsequent to the date of this agreement..." The MSA, at paragraph 9(a)(4), also states that Wanda was awarded all of her right, title and interest in pension and retirement plans through her place of employment.
Even before her divorce was finalized, and consistent with the MSA, Wanda revised her Thrift Savings Plan and Civil Service Retirement beneficiary designation forms to remove Michael as the beneficiary and to designate Rhonda as primary beneficiary. Wanda filled out the forms completely, including having them witnessed where necessary. Wanda also filled out a form removing Michael as a beneficiary of her FEGLI policy. The FEGLI form bore the signatures of witnesses to her signature. But Wanda never signed the form. And in what may have been an extraordinary failure of oversight, Wanda's HR Administrator noted receipt of this incomplete document and filed it.
Consistent with her apparent intent to make Rhonda her heir and beneficiary, Wanda's will devised all of her assets to Rhonda and named Rhonda as her executor.
After Wanda's death, Rhonda attempted to collect the FEGLI insurance proceeds ("Insurance Benefits"). This proved impossible because of Wanda's failure to sign the FEGLI form. On or about September 18, 2017, Rhonda's attorney, Peter Haas, wrote to Metropolitan Life Insurance Company (MetLife), the FEGLI administrator, seeking payment of the Insurance Benefits to Rhonda. Eight days later, Adam Bice, the Case Management Specialist for MetLife, replied. MetLife denied Rhonda's claim on the ground that she was not the beneficiary because the insured, Wanda, had not signed the FEGLI form required to change the beneficiary designation.
And, within weeks of Wanda's death, on or about August 28, 2017, MetLife sent Michael a "beneficiary invite" letter and beneficiary claim form. MetLife acted pursuant to the FEGLI form.
Michael and Wanda had not been in regular, or even irregular, communication since their divorce. Michael learned that Wanda died from MetLife.
After being rebuffed by MetLife, Mr. Haas took another tack. On October 10, 2017, he wrote to Michael explaining that MetLife had denied Rhonda's claim for the Insurance Benefits, expressing his opinion that the Insurance Benefits belonged to Rhonda, and requesting Michael's cooperation. His brief letter also noted Michael's agreement at the time of the divorce that Wanda received all her pension and retirement plan rights in the Judgment of Dissolution and attached a copy of the document.
Upon receipt of Mr. Haas' letter, Michael called MetLife and spoke to Mr. Bice. Michael testified that on that call he was told that he was the beneficiary of the policy and that Rhonda's claim would be denied. Mr. Bice explained that Michael needed to submit a claim form, and Michael asked for another one. He called again on October 16, October 23, October 30, November 2, December 4, and December 8, of 2017. Michael credibly testified that in some or all of these calls Mr. Bice assured him that he was legally entitled to the Insurance Benefits and that MetLife had denied Rhonda's claim to the Insurance Benefits. He also testified that on the call on the 23rd, Mr. Bice helped Michael to fill out the claim form. Michael's testimony was believable.
On November 2, 2017, Rhonda's attorneys again wrote to Michael briefly asking for a response to the previous letter and threatening litigation.
At some point after having received the second Haas letter, and before November 14, 2017, Michael contacted attorney David Arietta regarding the correspondence from Mr. Haas. According to Michael, Mr. Arietta explained that in 98 percent of cases, the beneficiary was entitled to the proceeds of an insurance policy. He testified that Mr. Arietta sent him a retainer agreement, but that he did not believe he could afford the retainer requested, so he did not employ Mr. Arietta. His testimony was believable.
In December of 2017, Michael received the Insurance Benefits and deposited them in his bank account. In March of 2018, he purchased real property on Teakwood Way, Vista, CA ("Property") using some of the Insurance Benefits to make the down payment. He testified that he also used some of the Insurance Benefits to repair and maintain the Property.
On May 25, 2018, Rhonda, as executor of Wanda's estate, filed a Petition for Return of Property under Cal. P. Code §§ 850 & 859 ("Probate Petition"). Rhonda sought an order: "[Returning the property under Probate Code section 850(a)(2)(D)" and "double damages and attorney's fees and costs under Probate Code section 859..." Michael and MetLife were named as defendants. The summons was served on Michael on December 20, 2018.
MetLife removed the case to federal court. MetLife answered Rhonda's Probate Petition in federal court after the removal; it included affirmative defenses under the Supremacy Clause of the U.S. Constitution and preemption. MetLife took the position that its obligation under federal law was to pay the Insurance Benefits to the person named in the FEGLI form, in this case, Michael.
Rhonda's lawyers filed a motion to remand; the District Court granted it and remanded the matter back to state court.
MetLife then filed a motion for judgment on the pleadings. Rhonda's lawyers did not file an opposition. Instead, they dismissed MetLife out of the Probate Petition on September 20, 2019. The court docket states that the motion for judgment was "DROPPED BY COURT." So, the question of whether MetLife correctly paid the Insurance Benefits to Michael was not adjudicated in the probate action.
The Probate Court held a hearing on October 24, 2019. Michael, now the only defendant in that action, did not file an answer nor did he appear in the case. According to Michael, he thought MetLife was representing his interest in the case - that MetLife was still there for him. This testimony was believable.
Because Michael did not participate (and MetLife was out of the case), the sole evidence presented to the Probate Court at the dispositive hearing (as far as the record in this case shows) was Rhonda's Probate Petition and its attachments.
On October 24, 2019, the Probate Court entered an order in favor of Rhonda requiring Michael to transfer the entire Insurance Benefits totaling $78, 166.70 to Rhonda as Executor of the Estate of Wanda Silverthorn ("Probate Judgment"). The Probate Judgment further states that "Michael Silverthorn has in bad faith wrongfully taken, concealed and disposed of the Insurance Benefits belonging to the Estate and, under Probate Code Section 859, shall be liable for twice the value of the insurance benefit[s] totaling $156, 333.40. He is hereby ordered to pay said amount to the Executor." The Probate Court also ordered Michael to pay the Executor's attorneys' fees and costs totaling $10, 460.59.
There is no indication on the record as to when the Probate Judgment was served on Michael. Once it was, however, he reached out to an attorney.
Michael did not appeal the Probate Judgment. On December 9, 2019, he filed his chapter 7 petition. He obtained his discharge on March 17, 2020, and the case was closed on March 18, 2020.
On March 16, 2020, Rhonda filed a complaint seeking a judgment that the Probate Judgment is nondischargeable under Bankruptcy Code § 523(a)(2), (4), & (6) commencing this adversary proceeding.
On September 15, 2020, Michael sold the Property. The escrow documents indicate that Michael received $54, 343.55 from the sale. Debtor testified that he split the sales proceeds with his then girlfriend, Karen Davis.
On February 5, 2021, Rhonda moved for summary judgment on the § 523(a)(6) claim arguing that the Probate Judgment established the nondischargeability of the claim as a matter of issue preclusion.
As noted above, the Court found that the Probate Judgment established that Michael had committed the tort of conversion with respect to the Insurance Benefits under California law, which tort satisfied one element of a claim under § 523(a)(6). The Court, however, also held that the Probate Judgment did not establish the willful and maliciousness requirements of a claim under § 523(a)(6) as a matter of issue preclusion. The Court set the matter for trial on these state of mind elements.
Trial was held on August 18, 2021, and closing arguments were made the next day.
ANALYSIS
Section 523(a)(6)Exceptions to discharge are construed strictly against an objecting creditor and in favor of the debtor. Snoke v. Riso (In re Riso), 978 F.2d 1151, 1154 (9th Cir. 1992). This is because "[a] central purpose of the [Bankruptcy] Code is to provide a procedure by which certain insolvent debtors can reorder their affairs, make peace with their creditors, and enjoy a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt." Grogan v. Garner, 498 U.S. 279, 286 (1991) (internal quotation omitted). Consistent with this purpose, the objecting party bears the burden of proof, by a preponderance of the evidence, as to each element of the applicable subsection of 523. Id. at 290.
Section 523(a)(6) provides that a debtor may not discharge a 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); Albarran v. New Form, Inc. (In re Barboza), 545 F.3d 702, 706 (9th Cir. 2008). "[T]ortious conduct is a required element for a finding of nondischargeability under § 523(a)(6)." Lockerby v. Sierra, 535 F.3d 1038, 1040 (9th Cir. 2008). But not all tortious conduct suffices. "The Supreme Court in Kawaauhau v. Geiger (In re Geiger) made clear that for section 523(a)(6) to apply, the actor must intend the consequences of the act, not simply the act itself." Ormsby v. First Am. Title Co. (In re Ormsby), 591 F.3d 1199, 1206 (9th Cir. 2010) (internal citation and quotes omitted). Thus, both willfulness and maliciousness must be proven; the malicious injury requirement is separate from the willful injury requirement. Carrillo v. Su (In re Su), 290 F.3d 1140, 1146-47 (9th Cir. 2002) (conflating the two requirements is grounds for reversal).
Tort Requirement
As noted above, § 523(a)(6) nondischargeability must be based on a tort (or tort-like statutory injury). Rhonda's § 523(a)(6) claim is based on the theory that Michael converted the Insurance Benefits which were Rhonda's property. Under California law, "[conversion is the wrongful exercise of dominion over the property of another. The elements of a conversion claim are: (1) the plaintiffs ownership or right to possession of the property; (2) the defendant's conversion by a wrongful act or disposition of property right; and damages." Mendoza v. Continental Sales, Co., 140 Cal.App.4th 1395, 1405 (2006).
For the reasons set forth in the Summary Judgment Order, the Court found that the findings of the Probate Court as set forth in the Probate Court Judgment satisfied the elements of conversion and that issue preclusion as to this element was appropriate - the findings of the Probate Court established that Michael converted an interest in the Insurance Benefits.
Willful Injury
"In [the Ninth] Circuit, § 523(a)(6)'s willful injury requirement is met only when the debtor has a subjective motive to inflict injury or when the debtor believes that injury is substantially certain to result from his own conduct. The Debtor is charged with the knowledge of the natural consequences of his actions." Ormsby, 591 F.3d at 1206. "In addition to what a debtor may admit to knowing, the bankruptcy court may consider circumstantial evidence that tends to establish what the debtor must have actually known when taking the injury-producing action." In re Su, 290 F.3d at 1146.
The Probate Court made no finding that Michael intended to injure Rhonda when he accepted, deposited, and used the Insurance Benefits. Also, this is not a case in which it is obvious the injury was intended - Michael's position throughout has been that he thought he was entitled to the Insurance Benefits. On summary judgment the Court could not determine that Michael had the requisite intent to injure Rhonda when he converted the Insurance Benefits. Thus, the matter was tried.
Having considered the evidence, the Court finds that Rhonda has not met her burden to establish that Michael intended to injure her, or the probate estate, when he received, retained, and spent the Insurance Benefits nor that he was substantially certain that harm to Rhonda would occur. The Court is convinced that Michael's assertion that he thought he was the proper recipient of the Insurance Benefits is true. Michael testified that he was assured by Mr. Bice at MetLife that he was the lawful recipient. He also testified that he consulted with Mr. Arietta who told him that the beneficiary of an insurance policy was entitled to the proceeds 98 percent of the time:
Q. OKAY. AND HOW DID THAT MAKE YOU FEEL, THE 98 PERCENT COMMENT THAT HE MADE?
A. IT MADE ME FEEL MORE COMFORTABLE IN THINKING THAT ALL ALONG METROPOLITAN LIFE IS SAYING -- SAYING THAT I'M THE BENEFICIARY. WITH THE LETTERS COMING FROM RHONDA, I JUST HAD A SECOND OPINION SO I FELT MORE COMFORTABLE.
Dkt.No. 105 at 197:15-21.
The Court found Michael to be sincere and consistent in his story both on direct and under cross-examination. And the Court's belief in Michael's testimony is reinforced by evidence of his background and sophistication.
Michael is a retired 66 year-old. His education ended at high school. He spent his working life (30 years) as a forklift driver in a grocery warehouse for a single employer. He supplemented his retirement income before COVID as a part time school bus driver for children with special needs. See Defendant's Declaration in Opposition to Summary Judgment, Dkt. No. 58; Plaintiffs Trial Ex. 19. At trial, Michael came across as amiable, considerate (he wept when discussing his ex-wife), trustworthy, but not sophisticated with respect to business or legal matters.
Rhonda's own evidence, the declaration of Michael's former long-term girlfriend, Karen Davis, supports the Court's conclusion. Ms. Davis testified that she has known Michael for the last 12 years and that they lived together intimately for 10 of those years. In response to a request to describe his habits and customs in dealing with his business and personal matters, Ms. Davis declared:
4. Stated bluntly, Mike does simple. Mike does not do complicated.
5. What I mean by that is that if something is easy and obvious he has no problem. But if it requires reading directions or researching an issue he just gets frustrated and nervous and shuts down. He stops trying.
6. For example, Mike doesn't do email. I did my best to teach him. I let him use one of my old email addresses. I helped him buy a laptop and set it up for him. I taught him how to go online and read emails. But he still can't send emails or deal with attachments.
7. When trying to do something like operate a cell phone or deal with cable tv he always calls me and I do it for him. Even now.
8. In this lawsuit, I understand his zoom deposition was continued because he couldn't get on zoom. He called me to get him on zoom at the continued date and I did. Even though we are no longer living together he still calls on me for assistance on technical things frequently.
9. In our business dealings which I have observed, like leases and purchasing or selling a house he will look over the first page and immediate look for where he signs. He never reads important things much beyond the first page.
10. To be sure, Mike is not dumb. He is witty and fun to be with. He has many endearing qualities, but reading instructions or complex documents is not one of them.
Dkt. No. 56, Plaintiffs Ex. 29-1.
The evidence before the Court includes the October 10, 2017, Haas Letter, in which Rhonda's counsel opined that Wanda had intended to name Rhonda as the beneficiary under the FEGLI Policy and that Michael had waived any right to Wanda's "pension and/or retirement plans" under the terms of the Judgment of Dissolution. Plaintiffs Tr. Exhibit 6. Rhonda argues that Michael retained the proceeds willfully because he knew as of October 2017 that the Insurance Benefits belonged to Rhonda. There are several problems with this argument. First, Mr. Haas was Rhonda's lawyer - not Michael's. Michael was entitled to question his assertions. Second his assertions were contrary to what Michael was being told by MetLife and inconsistent with the probabilities as outlined by Mr. Arietta. That Michael failed to heed the demands of Rhonda's counsel is not conclusive evidence of willfulness. There is no evidence that Michael believed what he was told by Rhonda's counsel. And this is not unreasonable.
Furthermore, even if one assumes that Michael read and understood the Judgment of Dissolution and the MSA which it adopted it, a conclusion the Court does not reach, it does not state as Mr. Haas alleges. The MSA and the Haas Letter referred to Wanda's pension and retirement plans - the FEGLI policy in question was a life insurance policy. Second, in the MSA, upon which the Judgment of Dissolution was based, Michael waived his right to assert a claim to Wanda's retirement and pension plans (again not life insurance policies). Nothing in the MSA expressly discussed insurance. Nor did these documents expressly preclude Michael from retaining life insurance proceeds. That the Probate Court found to the contrary as to entitlement is not dispositive of the issue here which is what did Michael intend and believe.
Indeed, Michael testified that he believed that Wanda intentionally failed to sign the form in order to give him the Insurance Benefits. Rhonda argues that this is not believable. The Court heard Michael's testimony and concludes to the contrary. It may be a case of self-delusion, but his testimony appeared sincere. In Michael's mind it was consistent with the fact that Wanda had given him a truck and some gold coins when she had no obligation to do so. Furthermore, the point is not really on the mark.
As noted above, Michael testified that the MetLife representative assured him that he was the legal beneficiary of the policy and that they had denied Rhonda's claim. The Court found his testimony to be sincere.
Rhonda objected to the testimony on hearsay grounds, which objection the Court overruled. The statements of the MetLife representative were not being presented for the truth of the matter asserted - that Michael was the legal beneficiary - but rather to establish his state of mind and the reasonableness of his belief that he was the legal beneficiary.
Rhonda argues that Michael's testimony is belied by a lack of a record of the alleged statements in the MetLife phone slips prepared by representative Adam Bice. The Court has reviewed the phone slips (Rhonda's Trial Exhibit 12) and does not find them to be complete records of the phone calls. Rather they appear to be very brief summaries of the calls. Based on the nature of the phone slips, the Court would not expect Mr. Bice to have noted "I assured Mr. Silverthorn that he was the legal beneficiary of the Policy." The Court does not find that a lack of such a notation undermines Michael's testimony as to the content of the phone calls. Rhonda did not call Mr. Bice as a witness to refute Michael's claim.
Rhonda makes much of the fact that Michael decided not to retain Mr. Arietta. The Court does not find that this decision in any way weighs against Michael's testimony that he believed the Insurance Benefits were his. Further, the Court is not troubled by Michael's inability to recall the amount of the retainer Mr. Arietta requested. This lack of specificity does not undercut his testimony that he believed he could not afford it.
As noted above, Michael also testified that Mr. Arietta told him that 98 percent of the time the named beneficiary was entitled to the proceeds of the policy. The Court agrees with Rhonda that without more information this statement really means very little. The point, however, is not the legal merit of this comment. The point is what Michael heard and what it meant to him. The Court heard Michael's testimony and is convinced that he believed Mr. Arietta's statement to mean that he was 98 percent likely to be the legal recipient of the Insurance Benefits. Again, the Court also believes his testimony that between this assertion and those of Mr. Bice, he believed that he was the rightful owner of the Insurance Benefits.
Rhonda complains that Michael continues to convert the Insurance Benefits by failing to comply with the Probate Judgment. However, the Probate Judgment was entered in October of 2019, it is not clear when it was served on Michael, and Michael filed his petition shortly thereafter in December of 2019, seeking to discharge the obligation.
Michael used the Insurance Benefits, at least in part, to purchase the Property in March of 2018. But this is before Rhonda filed her Probate Petition and well before the Probate Judgment was entered. When Michael purchased the Property all he had was the knowledge that Rhonda and her attorneys asserted that the Insurance Benefits belonged to her, which was contrary to what he had been told by Mr. Arietta and Mr. Bice of MetLife.
Rhonda complains that Michael divided the sales proceeds with Karen Davis despite the fact that she had contributed little to the Property. The Court, however, finds that how Michael disposed of the Property sale proceeds does not indicate that he willfully retained or pocketed the Insurance Benefits. If anything, it is evidence of naivete. The Court ultimately concludes that Michael believed he had a right to Insurance Benefits that was superior to that of Rhonda or the probate estate. Given this conclusion, he did not intend to injure either when he took them.
Malice
In order to succeed under § 523(a)(6), a creditor must also establish that the debtor acted with malice. "A malicious injury involves (1) a wrongful act, (2) done intentionally, (3) which necessarily causes injury, and (4) is done without just cause or excuse. Malice may be inferred based on the nature of the wrongful act." Ormsby, F.3d at 1207 (internal citation and quote omitted).
As noted above, the Court has found based on the Probate Judgment that Michael committed a wrongful act - he converted the Insurance Benefits. He does not deny that he did so intentionally. Since the Probate Court determined that Rhonda was rightfully entitled to the Insurance Benefits, she was necessary injured by his continued use and possession of them.
Having heard the testimony, however, the Court finds that Michael converted the Insurance Benefits with a just excuse within the meaning of the § 523(a)(6) malice standard - he honestly believed that he was the rightful owner.
He testified that the MetLife representative consistently told him that he was the legally entitled recipient of the Insurance Benefits. This position was confirmed, at least in Michael's mind, by the comments of Mr. Arietta. He was also told, correctly, that Rhonda's claim had been rejected. Michael called MetLife seven times to check on the status of his claim, and he was consistently reassured that he was the lawful recipient.
Michael explained that he believed Wanda had failed to sign the amended form with the intent that he would receive the pay out of this policy. He testified that Wanda had given him a truck and some gold coins when she had no obligation to do so, so he was not surprised that she did not remove him as the beneficiary of the policy. Rhonda has not met her burden of persuading the Court that he was lying on this point.
At trial Rhonda made much of the fact that Michael had not contacted Rhonda's counsel. The Court finds this entitled to no weight. In response to the letters Michael contacted MetLife, and he reached out to an attorney. He had no obligation to contact Rhonda's counsel. This is also consistent with Michael's apparently long-standing approach to even moderately complex legal or business issues.
The Probate Court's Finding of Bad Faith
The Probate Court found, based on Rhonda's unchallenged evidence, that Michael had "in bad faith wrongfully taken, concealed and disposed of the Insurance Benefits belonging to the Estate," and based thereon awarded double damages under Probate Code § 859. However, the Probate Court made no finding that Michael acted either with malice or willfully within the § 523(a)(6) sense. In the motion for summary judgment, Rhonda provided no authority for the proposition that a finding of bad faith under § 859 necessarily establishes malice or willfulness under § 523(a)(6) as a matter of law.
As the Court explained in a prior tentative ruling, an award of punitive damages under the California Civil Code, if properly worded, might support a claim for relief under § 523 (a)(6). However, under California law, an award under Probate Code § 859 is not the equivalent of an award of punitive damages under Civil Code § 3294. As the Court in Hill v. Superior Court stated:
[T]o the extent the alternative bases of recovery under section 859 require proof of any such misconduct, the section requires only a showing of "bad faith," which is not the equivalent of malice required under Civil Code section 3294.
Finally, and not incidentally, section 859 ends with this sentence: "The remedies provided in this section shall be in addition to any other remedies available in law to a person authorized to bring an action pursuant to this part." .... section 859 double damages are not punitive damages, and the proof required for punitive damages is not required for section 859 damages.244 Cal.App.4th 1281, 1287-89 (2016), as modified (Feb. 25, 2016).
The Probate Judgment does not, on its own, establish that Michael converted Rhonda's property maliciously or willfully for the purposes of § 523(a)(6). It is ambiguous as to the basis for the bad faith determination.
Section 523(a)(4)In her trial brief, Rhonda also argued that her claim is non-dischargeable under § 523(a)(4). That section excepts from discharge debt "for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny..." 11 U.S.C. § 523(a)(4). Rhonda proposes two alternate theories: first that Michael embezzled the Insurance Benefits and second that Michael breached a fiduciary duty to the probate estate.
Embezzlement
Federal law, not state law, controls with respect to the definition of embezzlement pursuant to § 523(a)(4). First Delaware Life Ins. Co. v. Wada (In re Wada), 210 B.R. 572, 576 (9th Cir. BAP 1997). Embezzlement is defined as "the fraudulent appropriation of property by a person to whom such property has been [e]ntrusted or into whose hands it has lawfully come." Id.
To succeed on a claim of embezzlement, a creditor must prove: (1) the property was rightfully in the possession of a non-owner; (2) the non-owner appropriated the property to a use other than which it was entrusted; and (3) circumstances indicating fraud. Transamerica Commercial Finance Corporation v. Littleton (In re Littleton), 942 F.2d 551, 555 (9th Cir. 1991).
Thus, an element of embezzlement is that there are circumstances indicating fraud. Misik v. D'Arco, (In re D'Arco), 587 B.R. 722, 729 (CD. Cal. 2018), aff'd sub nom. Misik v. D'Arco, 777 Fed.Appx. 258 (9th Cir. 2019) (citing Transamerica Comm'l Fin. Corp. v. Littleton (In re Littleton), 942 F.2d 551, 555 (9th Cir. 1991)). This "requires a showing of fraud in fact involving moral turpitude or an intentional wrong or deceit." National Bank of Commerce v. Hoffman, (In re Hoffman), 70 B.R. 155, 162 (Bankr. W.D. Ark. 1986).
The Court has considered the evidence and does not find fraud on the part of Michael. Having considered all of the evidence including the testimony of the Michael and his responses on cross-examination, the Court finds that he believed that he was the rightful owner of the Insurance Benefits. There is no evidence that Michael misrepresented anything to anyone throughout this process. The Court finds that Michael acted in accordance with that belief throughout the case.
In addition, it is not clear that the other elements were met. The basis for the Probate Court's decision is far from clear, but there is no question that MetLife paid the Insurance Benefits to Michael for his benefit - not Rhonda's. Indeed, MetLife denied Rhonda's claim. There is nothing in the record supporting that Rhonda could have required MetLife to pay the Insurance Benefits to her - she did not pursue this theory in the probate action.
Breach of Fiduciary Duty
In order to render a claim nondischargeable under the breach of fiduciary duty portion of § 523(a)(4), claimant must establish: (1) an express (or technical) trust; (2) that the debt was caused by fraud or defalcation; and (3) that the debtor was a fiduciary to the creditor at the time the debt was created. Otto v. Niles (In re Niles), 106 F.3d 1456, 1459 (9th Cir. 1997); Lewis v. Scott (In re Lewis), 97 F.3d 1182, 1185 (9th Cir. 1996). The broad, general definition of fiduciary - a relationship involving confidence, trust and good faith -is inapplicable in the dischargeability context. Ragsdale v. Holler, 780 F.2d 794, 796 (9th Cir. 1986). Instead, § 523(a)(4) nondischargeability results only where the fiduciary relationship between the debtor and the creditor arises in relation to an express or technical trust that pre-dates the alleged defalcation. Lewis, 97 F.3d at 1185; Runnion v. Pedrazzini (In re Pedrazzini), 644 F.2d 756, 758 (9th Cir. 1981). Under section 523(a)(4), it "is not enough that, by the very act of wrongdoing out of which the contested debt arose, the bankrupt has become chargeable as a trustee ex maleficio." Davis v. Aetna Acceptance Co., 293 U.S. 328, 333 (1934); Honkanen v. Hopper (In re Honkanen), 446 B. R. 373, 378-379 (9th Cir. BAP 2011). Section 523(a)(4) does not render a claim nondischargeable where the fiduciary duty arises only after the defalcation. Blyler v. Hemmeter (In re Hemmeter), 242 F.3d 1186, 1189-90 (9th Cir. 2001). Whether the debtor was acting in a fiduciary capacity within the meaning of section 523(a)(4) is a question of federal law. Lewis, 97 F.3d at 1185. State law, however, determines whether the requisite trust relationship exists. Id.
Nondischargeability under § 523(a)(4) also requires proof of a particular state of mind; not all breaches of fiduciary duty suffice. In Bullock v. BankChampaign, N.A., 569 U.S. 267 (2013), the Supreme Court clarified the standard for defalcation under § 523(a)(4), holding that it requires "a culpable state of mind" with a "knowledge of, or gross recklessness in respect to, the improper nature of the relevant fiduciary behavior." Id. at 269. "[W]here the conduct at issue does not involve bad faith, moral turpitude, or other immoral conduct, [defalcation] requires an intentional wrong." Id. at 273. An intentional wrong includes "not only conduct that the fiduciary knows is improper but also reckless conduct of the kind that the criminal law often treats as the equivalent." Id. at 274. This includes "reckless conduct of the kind set forth in the Model Penal Code." Id. "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." Id. (quoting Model Penal Code § 2.02(2)(c), at 226 (Am. Law Inst. 1985)). A substantial and unjustifiable 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." Id. (quoting Model Penal Code § 2.02(2)(c), at 226).
As set forth above, a common thread throughout the Court's decision is the Court's finding that Rhonda has not met her burden to establish that Michael intended to injure her, or the probate estate, when he received, retained, and spent the Insurance Benefits, nor that he was substantially certain that harm to Rhonda would occur. The Court is convinced that Michael's assertion that he thought he was the proper recipient of the Insurance Benefits is true. Holding this belief, Michael did not consciously disregard "a substantial and unjustifiable risk" that his conduct would violate a fiduciary duty, even if one existed. Thus, the evidence does not support that he had the state of mind required for § 523(a)(4) breach of fiduciary duty nondischargeability.
And there are other potential problems with this theory of nondischargeability. Rhonda does not allege any trust agreement between her and the Michael. Rather, she argues that one is imposed by California Family Code § 721 which provides:
(b) Except as provided in Sections 143, 144, 146, 16040, 16047, and 21385 of the Probate Code, in transactions between themselves, spouses are subject to the general rules governing fiduciary relationships that control the actions of persons occupying confidential relations with each other. This confidential relationship imposes a duty of the highest good faith and fair dealing on each spouse, and neither shall take any unfair advantage of the other. This confidential relationship is a fiduciary relationship subject to the same rights and duties of nonmarital business
partners, as provided in Sections 16403, 16404, and 16503 of the Corporations Code, including, but not limited to, the following:
(1) Providing each spouse access at all times to any books kept regarding a transaction for the purposes of inspection and copying.
(2) Rendering upon request, true and full information of all things affecting any transaction that concerns the community property. Nothing in this section is intended to impose a duty for either spouse to keep detailed books and records of community property transactions.
(3) Accounting to the spouse, and holding as a trustee, any benefit or profit derived from any transaction by one spouse without the consent of the other spouse that concerns the community property.
Cal. Fam. Code § 721. She asserts that this fiduciary duty is extended beyond marital separation by Family Code § 2102, which provides:
(b) From the date that a valid, enforceable, and binding resolution of the disposition of the asset or liability in question is reached, until the asset or liability has actually been distributed, each party is subject to the standards provided in Section 721 as to all activities that affect the assets or liabilities of the other party. Once a particular asset or liability has been distributed, the duties and standards set forth in Section 721 shall end as to that asset or liability.
Rhonda's analysis is sound as far as it goes. Michael may have had a fiduciary duty in favor of his former spouse, Wanda, that extended through the distribution of the marital assets. But Rhonda, who has the burden on this point, has provided no authority extending the duty past the spouse's death to the probate estate. The Court does not decide the case on this basis but questions whether insurance proceeds are an asset within the meaning of the statute and whether Michael had a duty that stretched so far. Indeed, if there is a trust here, it might more properly be considered a trust ex maleficio. And such a trust would not support a § 523(a)(4) breach of fiduciary duty claim.
The Court determines that Rhonda has failed to establish a claim under Bankruptcy Code § 523(a)(4).
Bankruptcy Code § 523(a)(2)(A)Rhonda's complaint contains a claim under Bankruptcy Code § 523(a)(2)(A). However, Rhonda has not pursued this claim, and it was neither tried nor briefed. Judgment for Michael is appropriate.
CONCLUSION
For the reasons set forth above the Court finds for the Michael: that Rhonda has failed to establish her claim should be excepted from Debtor's discharge under any of the subsections of Bankruptcy Code § 523(a). The Court finds that the Probate Judgment was discharged in Michael's bankruptcy case.