Opinion
No. 03-83405, Adv. No. 03-8172.
October 20, 2004
OPINION
Porfirio Martinez, Sr., (PLAINTIFF), brought this adversary proceeding seeking a determination that a debt owed by his daughter, JUANITA GOODRICH, the Debtor (DEBTOR), is nondischargeable under Section 523(a)(4) for fraud or defalcation by a fiduciary. Presently before the Court is the PLAINTIFF'S Motion for Summary Judgment.
BACKGROUND
The following facts, drawn from the pleadings and attachments, appear to be undisputed. In the spring of 2001, the PLAINTIFF, a resident of Texas, was in his late eighties and had been in poor health for some time. He executed a "Codicil of Amendment" on May 23, 2001, which provided that he was "revoking power of attorney of Porfirio Martinez Jr. and giving he [sic] power of attorney to my daughter Juanita Goodrich." Sometime after executing that document, the PLAINTIFF opened a savings account in both his and the DEBTOR'S name. Set up as a joint account for "Porfirio Martinez or Juanita Goodrich or Margaret M. Prieto," it contained funds owned by the PLAINTIFF. On March 11, 2002, the DEBTOR withdrew $28,000 from the account, purchasing a Certificate of Deposit in her name alone. Also on that same date, the DEBTOR withdrew $10,300 from the account, leaving a balance of $8,265.56. On April 26, 2002, the PLAINTIFF brought suit against the DEBTOR in Texas state court, alleging a breach of fiduciary duty. A default judgment in the amount of $43,076 was entered against the DEBTOR on September 19, 2002. The PLAINTIFF recovered $29,616.91 from the DEBTOR.
The PLAINTIFF does not contend that the Texas judgment is to be given collateral estoppel effect in this adversary proceeding.
The DEBTOR filed a Chapter 7 petition on July 17, 2003. The DEBTOR scheduled the debt owing to her father in the amount of $13,881.08, and referenced the Texas litigation and the subsequent domestication of the Texas judgment in Illinois in her Statement of Affairs. The PLAINTIFF filed this adversary proceeding, seeking a determination that the balance remaining on his judgment was nondischargeable under Section 523(a)(4), for fraud or defalcation by a fiduciary. In her answer to the Complaint, the DEBTOR admitted acting as the PLAINTIFF'S attorney in fact, but denied that she was a fiduciary for purposes of Section 523(a)(4). She asserted that the $28,000 was invested in a Certificate of Deposit and was returned to the PLAINTIFF with interest, and asserted that the $10,300 withdrawal was in the nature of a loan from the PLAINTIFF to her. After taking the DEBTOR'S Rule 2004 exam, the PLAINTIFF filed a Motion for Summary Judgment, contending that the DEBTOR could not meet her burden of establishing the fairness of her dealings, by clear and convincing proof. The DEBTOR filed a response, asserting that summary judgment is not appropriate because the disputed issues of fact are material and require a trial.
At the hearing, the DEBTOR contended that there are three material questions of fact. First, whether there was a loan. Second, if there was a loan, whether the DEBTOR breached a fiduciary duty in obtaining that loan. The third issue of fact is the amount of money due on the loan. The Court took the matter under advisement.
SUMMARY JUDGMENT
Summary judgment is properly granted when the "pleadings, depositions, answers to interrogatories, and admissions on file, together with affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). Summary judgment will be granted only where it is clear that there is no dispute about the facts or inferences to be drawn therefrom. Central Nat. Life Ins. Co. v. Fidelity and Deposit Co. of Maryland, 626 F.2d 537 (7th Cir. 1980). On a motion for summary judgment, the court must view the evidence in the light most favorable to the nonmoving party. In re Chambers, 348 F.3d 650 (7th Cir. 2003). It is not the role of the trial court to weigh the evidence or to determine its credibility, and the moving party cannot prevail if any essential element of its claim for relief requires trial. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). If the nonmoving party bears the ultimate burden of proof on an issue at trial, the party moving for summary judgment need only show that the record lacks substantial evidence to support an essential element of the nonmoving party's defense, shifting to the nonmoving party the burden of establishing there is a material issue of fact that precludes summary judgment. Celetex, 477 U.S. at 322-26, 106 S.Ct. at 2553-55; In re Diagnostic Instrument Group, Inc., 283 B.R. 87 (Bankr.M.D.Fla. 2002). DISCHARGEABILITY STANDARD
In light of the bankruptcy goal of affording the debtor a fresh start, exceptions to discharge are narrowly construed against the creditor and liberally construed in favor of the debtor. Meyer v. Rigdon, 36 F.3d 1375, 1385 (7th Cir. 1994). The party seeking to establish an exception to the dischargeability of a debt bears the burden of proof. Matter of Bero, 110 F.3d 462 (7th Cir. 1997); Matter of Scarlata, 979 F.2d 521 (7th Cir. 1992). The burden of proof required is proof by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991).
ANALYSIS
Section 523(a)(4) provides that:
(a) A discharge . . . does not discharge an individual debtor from any debt —
(4) For fraud or defalcation while acting in a fiduciary capacity, embezzlement or larceny. . . .
11 U.S.C. Section 523(a)(4). In order to prevail, the PLAINTIFF must prove that (1) a fiduciary relationship existed between him and the DEBTOR, and (2) fraud or defalcation was committed by the DEBTOR in the course of that relationship. In re Monroe, 304 B.R. 349 (Bankr.N.D.Ill. 2004). The issue of whether a debtor is a fiduciary under this section is a question of federal law. In re Frain, 230 F.3d 1014 (7th Cir. 2000). The broad, traditional definition of fiduciary — as a relationship involving confidence, trust and good faith — is inapplicable in the dischargeability context. In re Cantrell, 329 F.3d 1119 (9th Cir. 2003). Instead, for purposes of Section 523(a)(4), a fiduciary relationship requires an express or technical trust. In re Cochrane, 124 F.3d 978 (8th Cir. 1997). Although federal law is determinative on the issue of what constitutes a "fiduciary capacity," state law is relevant in determining whether trust obligations exist. In re Dobrayel, 287 B.R. 3 (Bankr.S.D.N.Y. 2002). Where a state statute creates a fiduciary relationship, the court must look behind the provision to ascertain whether the relationship possesses the attributes required for purposes of Section 523(a)(4). Matter of Tran, 151 F.3d 339 (5th Cir. 1998). The central focus is whether the fiduciary exercises actual control over the creditor's money or property. Id.
The type of fraud required for purposes of Section 523(a)(4) does not differ from that required for purposes of Section 523(a)(2)(A). In re Verrone, 277 B.R. 66, 71 (Bankr.W.D.Pa. 2002). The Bankruptcy Code does not define defalcation. Generally, the term encompasses, among other actions, a misappropriation of trust funds or a failure to properly account for those funds. See, In re Zois, 201 B.R. 501, 506 (Bankr.N.D.Ill. 1996). Whether a defalcation occurred is determined by an objective standard, and the fiduciary need not have acted in bad faith, although defalcation cannot result from mere negligence. Meyer v. Rigdon, supra.
In the present case, although the DEBTOR does not dispute that the PLAINTIFF appointed her as his attorney in fact, she denies that such an appointment constitutes a fiduciary relationship under state law and for purposes of Section 523(a)(4). The PLAINTIFF alleges that "pursuant to Section 489B of the Texas Probate Code, a fiduciary relationship existed between the parties." Neither a copy of the state statute nor a complete citation has been provided, and the Court is unable to determine whether that statute creates a fiduciary relationship and, if so, the terms, conditions and parameters of that relationship. Although one might readily surmise that a child who is a joint owner of a bank account containing a parent's money occupies a fiduciary status, that is not what is alleged. Instead, the PLAINTIFF relies on the DEBTOR'S appointment as his attorney in fact in the "Codicil of Amendment" and Section 489B of the Texas Probate Code as the foundation of the fiduciary relationship.
Under certain circumstances, a power of attorney may give rise to a fiduciary relationship for purposes of Section 523(a)(4). In re McDade, 282 B.R. 650 (Bankr.N.D.Ill. 2002); In re Van De Water, 180 B.R. 283 (Bankr.D.N.M. 1995). Contra, In re Johnson, 174 B.R. 537 (Bankr.W.D.Mo. 1994). Although the PLAINTIFF'S will, the document which grants the power of attorney, is not part of the record, it is not disputed that the PLAINTIFF gave the DEBTOR the power to make transactions on his savings account based on her signature alone. Texas, like Illinois, has enacted a Durable Power of Attorney Act, which contains a statutory fill in the blank form. V.A.T.S. Probate Code, Section 482. The Court expects all documents relating to the fiduciary issue to be introduced at trial.
It is incumbent upon the PLAINTIFF, in future proceedings in this matter, to clarify the statutory and factual basis for the allegation that the DEBTOR was a fiduciary.
The DEBTOR also denies that she fraudulently appropriated the PLAINTIFF'S property, claiming that he willingly agreed to lend her the money. This assertion is part of her sworn testimony given in the Rule 2004 exam. In support of his motion, the PLAINTIFF has submitted his affidavit, in which he denies any agreement to loan any funds to the DEBTOR. Notwithstanding those conflicting accounts, the PLAINTIFF, continuing to rely on state law, contends that the DEBTOR, as a fiduciary engaging in a transaction with her principal, is required to prove the fairness of that transaction. The PLAINTIFF'S position is that the DEBTOR cannot, under any set of circumstances, show that she did not violate her fiduciary duties of loyalty, good faith and fair dealing.
This Court disagrees with the PLAINTIFF'S allocation of the burden of proof under Section 523(a)(4). In an action for fiduciary fraud or defalcation, the burden is initially on the creditor to establish that the debtor was a fiduciary to whom funds were entrusted pursuant to an express trust, and that the debtor misappropriated the funds thereby causing a financial loss to the creditor. In re Bauer, 290 B.R. 568 (Bankr.S.D.Ohio 2003). The creditor must prove the alleged fraud or defalcation by a preponderance of the evidence. In re Baylis, 313 F.3d 9 (1st Cir. 2002). Only if the creditor makes such a showing, does the burden then shift to the debtor to account fully for all funds received by presenting evidence that he complied with his fiduciary duties with respect to all questioned transactions. In re Storie, 216 B.R. 283 (10th Cir.BAP 1997); In re Schmanke, 263 B.R. 125 (Bankr.D.Colo. 2001); In re Merrill, 246 B.R. 906 (Bankr.N.D.Okla. 2000), aff'd, 252 B.R. 497 (10th Cir.BAP 2000); In re Hanes, 214 B.R. 786 (Bankr.E.D.Va. 1997); In re Young, 208 B.R. 189 (Bankr.S.D.Cal. 1997). Here, it appears that the PLAINTIFF wants to skip his burden and go directly to the DEBTOR'S burden of accounting. The Court not only rejects the PLAINTIFF'S position as contrary to law, but determines that the PLAINTIFF, at this stage, has failed to carry his burden to prove the existence of a fiduciary relationship and a breach of a fiduciary duty.
On a Motion for Summary Judgment, the Court must resolve all factual disputes and draw all inferences in favor of the non-moving party. Therefore, the Court accepts, for purposes of this Motion, the DEBTOR'S testimony (1) that she invested the $28,000 in a Certificate of Deposit and returned the principal and interest to the PLAINTIFF, and (2) that the $10,300 withdrawal was a loan authorized by the PLAINTIFF. Even assuming that the DEBTOR was a fiduciary, the PLAINTIFF is not entitled to judgment as a matter of law. There is nothing inherently unfair about either transaction assuming, as the Court must, that they occurred as the DEBTOR says. The PLAINTIFF has cited no authority to support the argument that a fiduciary is prohibited, as a matter of law, from accepting a loan from the one whose property is the subject of the trust.
In the present case, the default judgment obtained by the PLAINTIFF in Texas state court establishes the debt owing by the DEBTOR. The only issue here is the dischargeability of that debt, as determined by federal law. Section 523 of the Bankruptcy Code places the burden of proof upon the PLAINTIFF to establish each element of his claim. In her Rule 2004 examination, which the PLAINTIFF attaches to his motion, the DEBTOR testified that the PLAINTIFF agreed to make her a loan. That testimony gives rise to a genuine issue of fact, which cannot be resolved on summary judgment. The Court is required to assess the credibility of the witnesses. If, after hearing testimony, the Court determines that the PLAINTIFF agreed to loan the DEBTOR $10,300, and that the $28,000 was fully repaid, the PLAINTIFF will not prevail. Accordingly, the PLAINTIFF'S Motion for Summary Judgment will be denied.
Because state law governs the substance of claims, the burden of proof allocated under state law does not change simply because one of the parties is involved in a bankruptcy proceeding. Raleigh v. Illinois Depart. of Revenue, 530 U.S. 15, 20, 120 S.Ct. 1951, 147 L.Ed.2d 13 (2000).
This Opinion constitutes this Court's findings of fact and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052. A separate Order will be entered.