Opinion
Case No. 97-14048-SSM, Adversary Proceeding No. 97-1328
December 1, 1997
Jodie L. Kelley, Esquire, Vienna, VA, Plaintiff pro se,
Robert R. Weed, Esquire, Falls Church, VA, of Counsel, for debtors
MEMORANDUM OPINION
A hearing was held in open court on November 4, 1997, on the cross-motions for summary judgment filed by the parties with respect to counts I and II of the plaintiff's complaint to determine the dischargeability of a debt. At the conclusion of the hearing, the court took the matter under advisement to review the exhibits and the applicable law. Additionally, defendant Cara Lament has moved in her answer for judgment on the pleadings, asserting that the plaintiff has alleged no connection between her and the transaction at issue. Although the latter motion has not been set for hearing, the court will rule upon it without an oral hearing in accordance with Local Bankruptcy Rule 9013-1(L). For the reasons stated, the court concludes that Cara Lamont must be dismissed as a defendant and that summary judgment must be entered dismissing Count I, but that Count II (as well as Count III, which is not implicated by the present motion), must be set for trial.
Following the hearing, the plaintiff filed a supplemental declaration on November 5, 1997. On November 7, 1997, the debtors filed a post-hearing memorandum of law, together with a motion seeking leave to file it. The debtor responded by filing on November 14, 1997, a memorandum in response to the debtor's post-hearing memorandum. The court grants the debtorsDmotion to file the post-hearing memorandum and has considered it, as well as the supplemental declaration and the response memorandum filed by the plaintiff.
Facts
The debtors in this case, James and Cara Lamont, filed a voluntary petition for relief under chapter 7 of the Bankruptcy Code in this court on May 30, 1997, and were granted a discharge of their dischargeable debts on September 18, 1997.
On September 8, 1997, the plaintiff, who is an attorney representing herself pro se, filed a timely complaint seeking a determination of dischargeability. The complaint is set forth in three counts, only two of which are at issue in the motions currently before the court. Counts I and II both assert that a debt in the amount of $5,091.67 owed to the plaintiff is nondischargeable under § 523(a)(4), Bankruptcy Code. Specifically, Count I alleges that James Lamont committed a defalcation while acting in a fiduciary capacity, while Count II alleges that he committed embezzlement. There are no allegations that the debtor Cara Lamont was involved in the transaction. Accordingly, references below to the "debtor" refer to James Lamont.
Count III asserts that the debt is nondischargeable under § 523(a)(2), Bankruptcy Code, on the ground that the plaintiff was induced to enter into a forbearance agreement with the debtor based on false representations and a false statement of financial condition.
This complaint has its genesis in a failed lease-purchase transaction. The plaintiff desired to purchase a residence, but discovered she would not qualify for financing. She was told, however, that if she paid down some of her other debt, she might qualify for a mortgage in approximately six months. Accordingly, her real estate agent approached the debtor, who was offering for sale a house located at 715 Center Street, Vienna, Virginia, and the plaintiff and the debtor entered into the agreements at issue.
The documents initially executed were a deed of lease and a sales contract, both dated March 13, 1995. The lease was for a 6-month term commencing April 1, 1995, and ending September 30, 1995, and required a monthly rent payment of $1,400 "of which $450 is to be credited to purchaser/tenant in the form of a down payment to purchase said property." The plaintiff, by declaration which is not controverted, asserts that she and the debtor agreed that the fair market rental for the property was $950.00 per month, based on his representation that such amount was approximately what the prior tenant had been paying. The lease also required a security deposit of $1,400.00 "to be held by REALTOR," but also subject to the following condition:
This $1,400 is to be credited in full towards down payment of purchase of this property [approximately 10 to 15 words illegible] SECURITY DEPOSIT CHECK FOR $1,400 TO THE LANDLORD AT THE TIME OF THE WALK-THROUGH.
Unfortunately, the copy of the deed of lease attached to the cross-motion for summary judgment cuts off part of the hand-written language in the right-hand margin of the document.
The sales contract, which was a separate document, was for $160,000, with $8,000 to be paid in cash and the balance ($152,000) to be paid by the proceeds of a conventional 30-year fixed rate first deed of trust loan at no more than 10.5% interest. Settlement was to occur "before/on September 30, 1995." Of The contract was contingent upon the plaintiff being able to obtain the specified financing, and, if the plaintiff were unable to do so, the contract would become voidable at the plaintiffQ option, in which event "the Deposit shall be refunded in full[.]" Carol Paris Brown, Inc. was listed as the "Selling Company" and would be entitled to a 3% sales commission, while the "Listing Company" was listed as "N/A." An addendum attached to the sales contract and dated the same date contained the following provision:
The debtor agreed to purchase a one-year home owner's warranty and to pay the purchaser's closing costs up to 3% of the purchase price.
The contract contained the following additional language: "This contract is the subject of a Lease Purchase Agreement and does not come into full force and effect until September 30, 1995[.]"
SELLER AGREES TO CREDIT THE $1,400 SECURITY DEPOSIT IN DEED OF LEASE TOWARD THE DOWN PAYMENT OF PURCHASE OF SAID PROPERTY. CREDIT TO APPEAR ON HUD #1 FORM. SELLER ALSO AGREES TO CREDIT $450 of the $1,400 monthly rent towards purchaser's downpayment.
Another addendum to the sales contract dated March 15, 1995, recites as follows:
This Addendum appears to be a re-working of a substantially-similar addendum dated March 13, 1997.
Deposit. The Purchaser has made a Deposit of $1,900 with Carol Paris Brown, Inc. by check dated March 15, 1995. Purchaser and Seller agree that the Deposit shall be used by Seller to pay for remodeling the upstairs bathroom of the Property, in accordance with the attached quote and in accordance with Section B of this Addendum. Purchaser and Seller agree that Carol Paris Brown, Inc. will release the Deposit to Seller upon walk-through. Purchaser and Seller further agree that the Deposit will be credited toward the Down Payment at settlement.
Section B of the Addendum required the seller, at his own expense prior to the plaintiff's occupancy, to paint the interior of the house, to replace a portion of the hardwood floor and to sand and refinish the living room floor and stairs"not to exceed $1,000 total cost," to remodel the upstairs bathroom, with the cost not to exceed $2,000, and to perform certain other clean up work. Additionally, Section C of the Addendum required the seller to perform certain other work "to be paid for by the seller" but with the "total actual cost" of the work "to be added to the original contract price of the property." This included kitchen remodeling at a cost not to exceed $5,500 and exterior painting at a cost not to exceed $600.
The debtor is a licensed real estate agent with ERA Realtors, and the parties entered into an addendum, dated March 16, 1995, to the sales contract stating that the "Purchaser hereby acknowledges that the Seller is an owner-agent." A final addendum to the sales contract was signed on March 30, 1995, reciting that the plaintiff had made a deposit "to pay an additional $100.00 (one hundred dollars) towards the cost of remodeling the upstairs bathroom," with the further language that "this deposit will be credited towards the down payment at settlement."
An intervening addendum had required the debtor to correct certain deficiencies noted on a home inspection report.
The plaintiff wrote checks to Carol Paris Brown, Inc., on March 13 and March 15, 1995, in the amounts of $1,400 and $1,900, respectively. By letter dated March 27, 1995, the plaintiff authorized Carol Paris Brown Realtors, Inc. to release the $1,400 security deposit to the debtor. There is no specific evidence as to what happened to the $1,900 check, but presumably it was released to the debtor at the walk-through as provided in the March 15, 1997, addendum. Similarly, the court assumes that the $100 additional deposit described in the March 30, 1995, addendum was delivered to the debtor.
On what was evidently a receipt given to Carol Paris Brown, Inc., for the $1,400 check, the debtor stated, "One thousand dollars of this check shall be used to pay the first installment of the remodeling of the upstairs bathroom to Scott Palmer, contractor, as agreed to by myself and Jodie Kelley. The balance of this amount, $400, shall be kept by me as an advance payment of the security deposit." (Emphasis added). This statement, dated March 27, 1995, is signed only by the debtor. The plaintiff, in her declaration in support of her motion, contends that she has never seen this document before.
The debtor, in a declaration filed in support of his motion, asserts that all of the deposits paid by the plaintiff were used to make the repairs and upgrades required by the March 15, 1995, addendum to the sales contracts. It clearly appears, however, that at least some of that work was not fully paid for, since on May 15, 1995, the contractor filed a memorandum of mechanic's lien against the property for the second $1,000 of the $2,000 bathroom remodeling contract.
The plaintiff was unable to obtain the required financing to purchase the house, and on November 4, 1995, she vacated the property. It appears that the debtor subsequently sold the property to an unrelated third person. The plaintiff requested that her deposits be returned to her, but the debtor refused. On March 4, 1996, the plaintiff filed a lawsuit in the Fairfax County General District Court seeking to recover $5,345 in compensatory damages and $4,655 in punitive damages on a theory of "Breach of Contract/Breach of Fiduciary Duty/Quantum Meruit." The debtor filed a counterclaim, the basis of which is not shown by the summary judgment record. On August 6, 1996, judgment was entered in favor of the plaintiff in the amount of $5,091.67, with interest at 9% from December 6, 1995, plus $600 in attorney's fees and $30 in costs, and dismissing the counterclaim. No appeal has been taken from the judgment, and as noted above, it was approximately ten months following the judgment that the debtor and his wife filed their chapter 7 petition.
The General District Court is not a court of record, and apparently no transcript or written opinion exists that would explain the basis upon which the court found for the plaintiff or how the judgment amount was calculated.
Conclusions of Law I.
This court has jurisdiction of this controversy under 28 U.S.C. § 1334 and 157(a) and the general order of reference entered by the United States District Court for the Eastern District of Virginia on August 15, 1984. Under 28 U.S.C. § 157(b)(2)(I), this is a core proceeding in which final orders and judgments may be entered by a bankruptcy judge, subject to the right of appeal under 28 U.S.C. § 158.
II.
The court first addresses the defendant Cara Lamont's motion for judgment on the pleadings as asserted in the answer to the complaint. As noted above, the court will rule upon the motion without a separate hearing.
Under Fed.R.Civ.P. 12(c), made applicable to adversary proceedings in bankruptcy by F.R.Bankr.P. 7012(b):
After the pleadings are closed but within such time as not to delay the trial, any party may move for judgment on the pleadings. If, on a motion for judgment on the pleadings, matters outside the pleadings are presented to and not excluded by the court, the motion shall be treated as one for summary judgment and disposed of as provided in Rule 56, and all parties shall be given reasonable opportunity to present all material made pertinent to such a motion by Rule 56.
Judgment on the pleadings is appropriate when the court looks only at the pleadings and determines that there is no issue as to a material fact and only matters of law remain. See Republic Ins. Co. v. Culbertson, 717 F. Supp. 415, 418 (E.D. Va. 1989); King v. Gemini Food Services, Inc., 438 F. Supp. 964, 966 (E.D. Va. 1976), aff'd on other grounds 562 F.2d 297 (4th Cir. 1977), cert. denied 434 U.S. 1065, 98 S.Ct. 1242, 55 L.Ed.2d 766 (1978); see also George v. Pacific-CSC Work Furlough, 91 F.3d 1227, 1229 (9th Cir. 1996), cert. denied, ___U.S. ___, 117 S.Ct. 746, 136 L.Ed.2d 684 (1997); Lion Oil Co. v. Tosco Corp., 90 F.3d 268, 270 (8th Cir. 1996); Herbert Abstract Co. v. Touchstone Properties, Ltd., 914 F.2d 74, 76 (5th Cir. 1990). A motion brought under Rule 12(c) is subject to the same standard as a motion to dismiss for failure to state a claim under Rule 12(b)(6). Accordingly, the court must accept all of the well-pleaded allegations in the complaint as true, and draw all reasonable inferences in favor of the non-moving party. See Lion Oil Co., 90 F.3d at 270; Sheppardv. Beerman, 18 F.3d 147, 150 (2d Cir. 1994), cert. denied, 513 U.S. 816, 115 S.Ct. 73, 130 L.Ed.2d 28 (1994); Craigs, Inc. v. General Elec. Capital Corp., 12 F.3d 686, 688 (7th Cir. 1993). In the present case there are no allegations whatsoever connecting Cara Lamont to the lease-purchase agreement. She is not a signatory to any of the agreements, and there is no evidence that she was an owner of the property. Indeed, the judgment obtained by the plaintiff is solely against James Lamont. Accordingly, judgment on the pleadings is appropriate and the court will dismiss this action as to Cara Lamont.
III.
The court now turns to the cross-motions for summary judgment. Under Fed.R.Civ.P. 56, made applicable to adversary proceedings by F.R.Bankr.P. 7056, a party may move, with or without supporting affidavits, for summary judgment at any time after the parties are at issue. Rule 56(c) provides:
The judgment sought shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law. A summary judgment, interlocutory in character, may be rendered on the issue of liability alone although there is a genuine issue as to the amount of damages.
The burden of establishing the nonexistence of a genuine issue of material fact rests on the moving party. Celotex Corp. v. Catrett, 477 U.S. 317, 325, 106 S.Ct. 2548, 88 L.Ed.2d 285 (1985). In considering a motion for summary judgment, the court should draw all inferences from the underlying facts in a light most favorable to the nonmoving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 106 S.Ct. 2505, 2513, 91 L.Ed.2d 202 (1986); Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 106 S.Ct. 1348, 89 L.Ed.2d 530 (1986). Nevertheless, not just any factual dispute is sufficient to bar summary judgment; the dispute must be as to a "material" fact. Id. at 247-248. This means that the dispute must concern a fact which, if established, would defeat a required element of the moving party's case or constitute an affirmative defense.
By its very terms, [Rule 56] provides that the mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment; the requirement is that there be no genuine issue of material fact.
As to materiality, the substantive law will identify which facts are material. Only disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment. Factual disputes that are irrelevant or unnecessary will not be counted.
Anderson, 477 U.S. at 247-48, 106 S.Ct. at 2510.
IV.
Under § 523(a)(4), a discharge under § 727(a), Bankruptcy Code does not discharge a debtor from any debt incurred by "fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny[.]" The plaintiff asserts two grounds of nondischargeability under this subsection: defalcation while acting in a fiduciary capacity, and embezzlement. The court addresses each in turn.
A.
For nondischargeability purposes, the term "fiduciary capacity "has been narrowly construed to include only public officers, executors, and trustees of technical or express trusts. See Sager v. Lewis (In re Lewis), 94 B.R. 406, 409 (Bankr. E.D. Va. 1988) (Shelley, J.); Clark v. Taylor (In re Toylor), 58 B.R. 849, 852 (Bankr. E.D. Va. 1986) (Bostetter, C.J.); Jarrel v. Weidman (In re Weidman), 18 B.R. 249, 251 (Bankr. E.D. Va. 1981) (Shelley, J.); 4 Collier on Bankruptcy ¶ 523.10[1][c], at p. 523-71 (Lawrence P. King, ed., 15th ed. Rev. 1997). This has come to mean that applicable state law, or the trust instrument itself, must define the fiduciary relationship. If state law does clearly impose fiduciary-like obligations on the parties, the court should not find that such duties exist, or for that matter, that a fiduciary relationship exists. See Merrywell v. Barwick (In re Barwick), 24 B.R. 703, 705 (Bankr. E.D. Va. 1982) (Shelley, J.); 4 Collier on Bankruptcy ¶ 523.10[1][c], at p. 523-72. Thus, bailees, brokers, factors, partners, and other similarly situated persons do not fall within the purview of a "fiduciary relationship" under 523(a)(4), absent some other fact. Lewis, 94 B.R. at 409; 4 Collier on Bankruptcy ¶ 523.10[1][c], at p. 523-72 to 73. Moreover, in order to be nondischargeable under § 523(a)(4), the debt must be directly related to the fiduciary relationship. 4 Collier on Bankruptcy ¶ 523.10[1][c], at p. 523-74.
It is clear from an examination of the relevant documents in this case that they create no express fiduciary relationship. There is no language in any of the contracts making the debtor a trustee of the funds paid by the plaintiff, or even requiring that they be held in escrow. Indeed, the $450 a month of the rent payment over and above the $950 per month fair market rental is not even termed a "deposit," but is simply denominated as a "credit" at settlement against the required cash down payment. Furthermore, it is clear that both parties expected that at least some of the funds were to be spent by the debtor to make repairs to the property prior to settlement. There is no general rule of Virginia law requiring a seller of real estate or landlord to segregate an earnest money deposit or security deposit. In short, while the payment of the deposits to the debtor unquestionably created a debtor-creditor relationship, nothing in the contract documents or in the nature of the transaction expressly created a fiduciary relationship.
B.
The plaintiff contends, however, that because the debtor was a licensed real estate agent, Virginia law imposed on him a fiduciary duty to account for the money she paid to him even when he was dealing on his own account. Under Virginia law, real estate brokers are subject to regulation by the Virginia Real Estate Board, which is expressly empowered to "do all things necessary and convenient for carrying into the provisions of this chapter and may promulgate necessary regulations." Va. Code Ann. §§ 54.1-2100 (defining "real estate broker") and 54.1-2005(A) (powers of board); Bodie v. Britt (In re Britt), 156 B.R. 511, 519 (Bankr. E.D. Va. 1993) (Shelley, J.) (recognizing the Board's authority to promulgate regulations). Although the statute regulating brokers seemingly excludes from its reach a person who sells or leases his or her own property, Va. Code Ann. § 54.1-2103(A)(1), the Virginia courts have held that the exclusion "merely exempted from the licensing requirement property owners who in the course of dealing with their own property perform acts customarily performed by licensed agents or brokers," but that "once an individual is licensed as an agent or broker, that person is subject to regulation by the Board in any real estate transaction in which he or she participates." Virginia Real Estate Board v. Clay, 384 S.E.2d 622, 625-26, 9 Va. App. 152, 158 (Ct.App. 1989), app. dism., 398 S.E.2d 78 (Va. 1990) (emphasis added). In this connection, the regulations adopted by the Real Estate Board provide that any licensed broker who fails to comply with the applicable statutes or regulations "may be charged with improper dealings, regardless of whether those acts are in the licensee's personal capacity or in his capacity as a real estate licensee." 18 Va. Admin. Code § 135-20-230 (emphasis added); Clay, 384 S.E.2d at 626, 9 Va. App. at 159 (holding that Board has broad discretion to decide how to regulate its licensees "including whether to regulate transactions involving their own real estate."); see also Mississippi Real Estate Commission v. Hennessee, 672 So.2d 1209, 1215-17 (Miss. 1996) (following Clay in holding that a real estate broker is held to the same standards when selling his or her own property as when selling another's).
The complaint itself makes no mention of the debtor's status as real estate agent, and the legal theory upon which the plaintiff is relying was first articulated in response to the debtor's summary judgment motion.
Among the duties of a licensed real estate broker is the maintenance of an escrow account into which
all down payments, earnest money deposits, money received upon final settlement, rental payments, rental security deposits, money advanced by a buyer or seller for the payment of expenses in connection with the closing of real estate transactions, or other escrow funds received by him . . . shall be deposited unless all principals to the transaction have agreed otherwise in writing.
18 Va. Admin. Code § 13-20-180(A)(1). Additionally, in connection with purchase transactions, "[u]pon acceptance of a contract (ratification), earnest money deposits and down payments received by the principal or supervising broker or his associates shall be placed in an escrow account and shall remain in that account until the transaction has been consummated or terminated." 18 Va. Admin. Code § 13-20-180(B)(1)(a). Finally, in connection with lease transactions, "[a]ny security deposit held by a broker shall be placed in an escrow account. . . ." Actions that violate the broker's duty to properly maintain an escrow account include the following:
3. Failing, within a reasonable period of time, to account for or to remit any moneys coming into a licensee's possession which belongs to others;
5. Commingling the funds of any person . . . with his own funds . . .;
6. Failure to deposit escrow funds in an account or accounts designated to receive only such funds as required by this chapter.
18 Va. Admin. Code § 135-20-320.
As a general rule, a person owes a fiduciary duty to maintain money or property in escrow when he or she comes into possession of property that is handled not for that person's benefit, but for the benefit of another. Hensel v. Barker (In re Barker), 40 B.R. 356, 359 (Bankr. D. Minn. 1984); Black's Law Dictionary 625 (6th ed. 1990) ("One is said to act in a `fiduciary capacity' . . . when the business which he transacts, or the money or property which he handles, is not his own or for his own benefit, but for the benefit of another person[.]"). In Virginia, when a real estate broker comes into possession of money that belongs to or is for the benefit of another, the broker must place such funds into an escrow account and the broker owes a fiduciary duty to properly account for and apply such funds. Hicks v. Howell, 203 Va. 32, 35-36, 121 S.E.2d 757, 759 (1961); see also Hamby v. St. Paul Mercury Indemnity Co., 217 F.2d 78, 80 (4th Cir. 1954); Bodie v. Britt (In re Britt), 156 B.R. 511, 519 (Bankr. E.D. Va. 1993) (Shelley, J.); Mostiler v. Couch (In re Couch), 100 B.R. 802, 808-09 (Bankr. E.D. Va. 1988) (Tice, J.) (reasoning that the principal of a real estate and property management corporation committed a defalcation while acting in a fiduciary capacity when he used funds from the corporation's escrow account for himself personally and for the corporation's general business expenses); Dempsey v. Lawrence (In re Lawrence), 10 B.R. 853, 856 (Bankr. E.D. Va. 1981) (Bonney, J.) (reasoning that the debtor, a real estate broker who spent escrowed funds for daily business expenses, had a "fiduciary responsibility to safeguard [the escrowed funds] and use them solely for the purpose intended"); cf. Shappy v. Scott (In re Scott), 201 B.R. 424, 435 (Bankr. E.D. Va. 1996) (Shelley, J.) (reasoning in dicta that "[h]ad [the plaintiff] asserted that [the debtor] had misapplied an earnest money deposit or escrow funds entrusted to him — activities controlled by the Virginia Real Estate Board Regulations — a sufficient fiduciary relationship would have existed."); Michie's Jurisprudence, Brokers § 19. Failure by a real estate broker to maintain funds in an escrow account can constitute a defalcation while acting in a fiduciary duty that renders the amount withdrawn from the escrow account nondischargeable in bankruptcy under § 523(a)(4), Bankruptcy Code. See Hamby, 217 F.2d at 80; Britt, 156 B.R. at 519; Feldman, 111 B.R. at 486-87; Mullin, 91 B.R. at 176-77; Wolfington, 48 B.R. at 925; Lawrence, 10 B.R. at 855-56.
A prime example of this is when an attorney acts as a settlement attorney in a real estate closing and no other attorney is involved. The Virginia Supreme Court has noted that:
When a lawyer acts as a closing or settlement attorney and no other lawyer is involved, the closing or settlement attorney represents all the parties and, in this limited sense, all the parties are his clients.
In such a situation, the settlement attorney assumes the duties of a fiduciary and must properly handle and dispose of any funds not his own which he may receive in connection with the settlement.
Pickus v. Virginia State Bar, 232 Va. 5, 15, 348 S.E.2d 202, 208 (1986).
This rule is clearly the law in other jurisdictions as well. See, e.g., Stone v. Feldman (In re Feldman), 111 B.R. 481, 486-87 (Bankr. E.D. Pa. 1990); Berry v. Mullin, (In re Mullin), 91 B.R. 175, 176-77 (Bankr. S.D. Fla. 1988) ("[T]he debtor, as escrow agent, failed to act in accordance with the escrow provision of the . . . contract. . . . [R]eal estate agents and real estate brokers have been held to occupy a fiduciary relationship with their clients. This is especially true where the real estate agent is handling funds which have been entrusted to him by his client." (Citations omitted)); Bellity v. Wolfmgton (In re Wolfington), 48 B.R. 920, 924-25 (Bankr. E.D. Pa. 1985) ([R]eal estate agents and real estate brokers have been held to occupy a fiduciary relationship with their clients. . . . [T]he debtor, while acting in a fiduciary capacity, misused the escrow funds, and . . . the underlying debt owed to the plaintiff as a result of his defalcation is nondischargeable[.]"); see also Richard T. Kiko Agency, Inc. v. Ohio Dep't of Commerce, 549 N.E.2d 509, 512 (Ohio 1990) ("The broker in this transaction is in a fiduciary relationship with all parties and has an obligation of good faith and fair dealing."); Kimbrough v. Gross, 268 S.W.2d 56, 59 (Ct. App. Mo. 1954) ("Defendant broker received the deposit in a fiduciary capacity. In his hands the deposit became a trust fund."); Lamb v. Bearman, 125 N.E.2d 743, 745 (Ct.App. Ohio 1953) ("This money was held by the broker in a fiduciary capacity, and upon the direction of the sellers should have been returned by the broker to the purchaser upon his demand[.]"). But see Ivester v. Raymond (In re Raymond), 44 B.R. 611, 612 (Bankr. D. Mass 1984) (holding that a seller's real estate broker owed no fiduciary duty to hold funds received as deposits from the buyer in escrow).
In Hamby, the debtor was a real estate agent who had misappropriated money entrusted to him by the purchaser of certain property to pay off the liens and other claims against the property. Hamby, 217 F.2d at 79. While the case was decided under the Bankruptcy Act of 1898, the reasoning is nevertheless persuasive and applicable to the present case. The Fourth Circuit held that an agent owes a fiduciary duty to those persons who have entrusted him or her with money that is earmarked for a specific purpose. The court reasoned:
Section 523(a)(4) is very similar to the relevant language under the Bankruptcy Act of 1898 which provided that "[a] discharge in bankruptcy shall release a bankrupt from all of his provable debts, whether allowable in full or in part, except [debts] such as . . . were created by his fraud, embezzlement, misappropriation or defalcation while acting as an officer or in any fiduciary capacity[.]" Hamby, 217 F.2d at 79.
Not all agents act in a fiduciary capacity; but, certainly, an agent is acting in such capacity when he is handling funds which have been entrusted to him to be applied to a specific purpose. The case of a real estate agent who misappropriates such funds cannot be distinguished in principle from that of an attorney at law who is guilty of such misappropriation.
Id. at 80.
In a case similar to the one before the court (although the debtor in that case was acting for another, rather than for himself), the debtor was a licensed real estate broker who acted both as agent for a lessor-seller and as escrow agent. Stone v. Feldman (In re Feldman), 111 B.R. 481, 483 (Bankr. E.D. Pa. 1990). The debtor, as the owner's agent, signed a lease-purchase agreement with the plaintiff, with settlement on the purchase agreement to take place some 3 months later, so that the plaintiff could obtain financing. Id. The lease provided that the plaintiff would make both a monthly rent payment and a monthly payment towards the eventual purchase of the property, with the latter amount to be paid into an escrow account. Id. Some two and a half years later (no explanation is given for the delay), with the plaintiff still leasing the premises, the plaintiff obtained an award from a work-related injury and deposited with the debtor $8,000 towards the purchase of the premises. Id. at 483-84. The plaintiff was ultimately unable to obtain a mortgage and demanded that the $8,000 deposit be returned to him. Id. at 484. The debtor, however, had sold the property in the meantime to a third party and failed to return the deposit, testifying that he spent the money on repairs to the property and other "various things" not related to the property. Id. The debtor failed to produce any accounting of the disposition of the $8,000 deposit. Id.
The bankruptcy court held that the debtor's failure to return the deposits given to him by the plaintiff was nondischargeable under § 523(a)(4), Bankruptcy Code, because it constituted a defalcation while acting in a fiduciary capacity. Id. at 487. The court found that any person who acts as an escrow agent and comes into possession of money under the escrow agreement must retain the funds in escrow until the specified condition occurs, at which time the agent may pay the funds in accordance with the applicable agreement. Id. at 486. The court also noted that under applicable state law, a real estate broker is obligated to properly accounts for funds deposited in escrow with the broker. Id. The court reasoned as follows:
We have little doubt that a depositary under an escrow agreement and, particularly, a real estate broker acting in the capacity as a depositary, is occupying a fiduciary relationship as to the depositor. . . .
The sums which the Debtor received from the Plaintiff in the nature of "deposits" and "escrows" were hence funds received by the Debtor while acting in a fiduciary capacity. His admitted failure to repay those sums to the Plaintiff, or even account for same, constitutes a defalcation.
Id. at 486-87.
C.
Debtors counsel, however, points to Alien v. Lindstrom, 237 Va. 489, 379 S.E.2d 450 (1989), cert. denied, 493 U.S. 849, 110 S.Ct. 145, 107 L.Ed.2d 104 (1989), for the proposition that the duties of a real estate broker run only to the person who employed the broker, and not to the other parties to a transaction, and that the regulations governing the conduct of brokers cannot be "bootstrapped" to provide a private cause of action for an aggrieved person. See, also, Carter v. Williams, 246 Va. 53, 60, 431 S.E.2d (1993) (trial court properly excluded evidence that defendant-attorney's conduct in preparing will that named his wife as beneficiary violated disciplinary rules adopted by the Virginia State Bar, since "[t]he Code of Professional Responsibility does not provide a basis for private causes of action."); Ayyildz v. Kidd, 220 Va. 1080, 266 S.E.2d 108 (1980) (doctor sued by attorney could not maintain negligence action based on attorney's violation of the Code of Professional Responsibility).
It is not clear, however, that Alien can be read quite so broadly. In Allen, the Virginia Supreme Court was confronted with the issue of whether the seller's real estate agent owes a duty to a prospective buyer to communicate a purchase offer. Id. at 492, 379 S.E.2d at 452. The court held that while the agent may have breached his duty to his client (the seller) there was simply no legal basis for finding that the agent owed any specific duty of care to the purchaser. Id. at 498, 379 S.E.2d at 456. In response to arguments that the administrative regulations applicable to real estate brokers imposed such a duty on the broker, the court noted:
The plaintiffs contended that "pursuant to the rules and regulations of the Virginia Real Estate Commission [now Virginia Real Estate Board], the Defendants had a duty to convey the Plaintiffs' offer to purchase the real property to the Sellers." The regulation relied upon by the plaintiffs provides for sanctions against real estate professionals who fail "to promptly tender to the seller every written offer to purchase." . . .
The defendants' primary and paramount duty, as broker and broker's agent, was to the sellers, with whom they had an exclusive contract. While there may be some type of general duty to the public owed by every realtor, it is not the type of duty that converts into a liability against a seller's agent for improper conduct to one in the adversary position of prospective purchaser, where there is no foreseeable reliance by the prospect on the agent's actions. . . .
[T]he public is protected adequately from the type of misconduct asserted by the plaintiffs by administrative regulation and policing of the real estate profession. The creation of a new legal duty giving rise to a private cause of action for damages should not be accomplished by judicial fiat.
Id. at 498-500, 379 S.E.2d 455-57; see also Van Deusen v. Snead, 247 Va. 324, 330, 441 S.E.2d 207, 210-11 (1994) (applying Alien); Andrie v. Chrystal-Anderson Associates Realtors, Inc., 466 N.W.2d 393, 394-95 (Ct.App.Mich. 1990), app. denied, 478 N.W.2d 652 (1991) (applying and foliowing Allen).
In the present case, the facts are significantly different. Unlike the disappointed purchaser in Alien, who had no contractual privity with the plaintiff, the plaintiff here has a direct contractual relationship with the debtor and plainly had a cause of action, independent of the regulations promulgated by the Real Estate Board, for the return of her deposit if she were unable to obtain the contemplated mortgage financing. She is not, therefore, in the position of relying on the regulations to create a right of recovery where one would otherwise not exist. Rather, she is using the regulations to show the character of an existing liability. Furthermore, Alien did not involve money paid to a broker as part of a real estate transaction, and this court is unwilling to assume that the Virginia Supreme Court would hold that, if a real estate broker receives funds from a party other than his or her own principal to be held in escrow in connection with a real estate contract, that person would be without a civil remedy if the broker subsequently misapplied those funds.
D.
Turning to the present case, even though the court concludes that the debtor, as a licensed real estate broker, was subject, in his dealings with the plaintiff, to the duties imposed by the regulations of the Virginia Real Estate Board, the court is nevertheless unable to conclude that the debtor was guilty of a fiduciary defalcation. The regulations, as quoted above, require a broker to place security deposits, earnest money deposits, and down payments into an escrow account "nless all principals to the transaction have agreed otherwise in writing" (emphasis added). In this case, the parties agreed in the written lease and in the March 15, 1996, addendum to the sales contract, that, prior to closing on the contract of sale, the landlord would undertake extensive repairs and renovations, and that, upon completion of the walk-through at the beginning of the lease, the security deposit and the earnest-money deposit would be "released" to the debtor. Two of the renovations the debtor agreed to make — the floor repairs and the bathroom renovations — were expected to cost $3,000. No price estimate was given for the others (the painting and the general clean-up). The $1,400 security deposit and the $1,900 earnest money deposit were, until completion of the walk-through, being held by a broker (Carol Paris Brown, Inc.) The choice of the word "released" with respect to those deposits is highly significant and is consistent with an understanding that the funds were not merely being transferred from one fiduciary (Carol Paris Brown, Inc.) to another (the debtor), but rather that the debtor would be using those funds to make the various required repairs and to bring the property up to snuff. Had it been expected or intended that the funds would be preserved in a segregated account until the repairs were made, the obvious and straight-forward way of accomplishing that goal would have been for Carol Paris Brown, Inc., to have continued to hold the deposits and to pay the contractors directly upon presentation of an appropriate invoice. Put another way, had there been an expectation that the funds were to be preserved inviolate, there would have been no point in their being released to the debtor.
With respect to the $450 per month rent that under the lease and the sales contract were to be credited against the purchase price at settlement, there is nothing in the lease that describes or characterizes such amounts as a "deposit." In this respect, the present case is unlike Feldman, where the lease provided for a monthly rent of $200, and a further clause required the tenant to pay, in addition to the rent, $300 "or more" per month " into the escrow account" (emphasis added) until the account held $2,500 (10% of the sales price). The lease here, by contrast, is totally devoid of any language suggestive of escrow. It simply states that the rent for the six-month lease term is $8,400, payable monthly in the amount of $1,400, with $450 of that amount "to be credited to purchaser/tenant in the form of a down payment" (emphasis added). The choice of the verb "credited," instead of, for example, "held" or even "applied," is hardly indicative of an understanding that such sums were to be segregated and preserved intact until closing, even accepting the plaintiff's declaration that she and the debtor had agreed that the fair market rent for the property was $950. That the additional $450 per month was to be "credited" at settlement on the sales contract unquestionably created a debt, but it is not the language of a technical or express trust.
For the foregoing reasons, the evidence before the court, taken in the light most favorable to the plaintiff, simply does not support a theory that the debtor was acting as a "fiduciary" in the restrictive sense given to that term by the cases decided under D 523(a)(4), Bankruptcy Code. As discussed below, the debtor may — an issue the court does not now decide — be guilty of embezzlement if, as the plaintiff contends and the debtor denies, he spent the security deposit and down payment funds released to him for some purpose other than to make the agreed repairs and renovations, but that is another issue.
Certainly, it seems rather clear that the $1,900 earnest money deposit and the $100 additional deposit were specifically earmarked for the bathroom renovation, which was supposed to cost $2,000. Since it appears that only $1,000 was spent for that purpose, a strong presumption arises that the remaining $1,000 was misapplied.
V.
The court next turns to the plaintiff embezzlement cause of action. Embezzlement has been defined as "the fraudulent misappropriation of property by a person to whom such property has been entrusted, or whose hands it has lawfully come." Weigend v. Chwat (In re Chwat), 203 B.R. 242, 248 (Bankr. E.D. Va. 1996) (Tice, J.); see also Hall v. Blanton (In re Blanton), 149 B.R. 393, 394 (Bankr. E.D. Va. 1992) (Tice, J.); Allman Wholesale Corp. v. Allman (In re Allman), 147 B.R. 122, 125 (Bankr. E.D. Va. 1992) (Tice, J.); Clark v. Taylor (In re Toylor), 58 B.R. 849, 854 (Bankr. E.D. Va. 1986) (Bostetter, C.J.); Commonwealth of Va. Comm. of Game and Inland Fisheries v. Myers (In re Myers), 52 B.R. 901, 905 (Bankr. E.D. Va. 1985) (Shelley, J.); 4 Collier on Bankruptcy ¶ 523.10[2], at p. 523-75 (Lawrence P. King, ed., 15th ed. Rev. 1997). The elements of embezzlement are: "(1) debtor's appropriation of property for debtor's benefit, and (2) appropriation with fraudulent intent or by deceit." Chwat, 203 B.R. at 248; 4 Collier on Bankruptcy ¶ 523.10[2], at p. 523-75. Crucial to prevailing under this section is that the plaintiff must prove that the debtor acted with a fraudulent intent to embezzle. Blanton, 149 B.R. at 394; Allman, 147 B.R. at 125. Such intent, however, may be inferred both by proof of the debtor's actions and the overall surrounding circumstances. Blanton, 149 B.R. at 394; Allman, 147 B.R. at 125.
Although the debtor requests summary judgment on Count II (embezzlement) as well as Count I (fiduciary defalcation), his brief discusses only the latter. The issues, however, are very different, since the reason courts have construed "fiduciary capacity" so narrowly in the dischargeability context is that a "Hefalcation" may be committed negligently and requires no proof of improper motive. Lewis, 94 B.R. at 409.
Whether the debtor possessed the requisite intent to commit embezzlement is an issue of fact not well suited for summary judgment. After carefully reviewing the respective declarations of the parties, the court concludes that, in order to make a factual finding on this issue, the court needs to receive evidence, hear testimony, and assess the credibility and demeanor of witnesses. Accordingly, the court will deny both parties' motions for summary judgment on Count II and will set that count for trial.
V.
A separate order will be entered dismissing Cara Lamont as a defendant; granting the debtor's motion, and denying the plaintiff's motion, for summary judgment on Count I; and denying both motions for summary judgment on Count II.