Opinion
BANKRUPTCY NO.: 5-00-02660, ADVERSARY NO.: 5-00-00237A
April 2, 2003
Nature of Proceeding: Complaint to Determine Dischargeability of Debt OPINION
Drafted with the assistance of Wendy Morris, Law Clerk.
Frederick Sauer ("Plaintiff") comes before this Court requesting a finding that certain debts owed by Conrad and Kathleen Sauer ("Debtors") are non-dischargeable under subsections 523(a)(2)(A) and (a)(4) of the Bankruptcy Code ("Code"). At the heart of this adversary is Plaintiff's claim that Debtors defrauded him of his interest in his home and in certain money deposited in a shared bank account.
The facts indicate the existence of a very close relationship between the parties prior to the alleged fraudulent incidents. In addition to being the father of Conrad Sauer, Frederick was the stepfather of Kathleen Sauer, having been married to her deceased mother, Mildred Sauer. Plaintiff was 85 years old at the time of trial and possesses a third or fourth grade education. He admitted to the Court that he is "poor in reading" and "can write but. . . . " Until retirement, he was employed as a milkman for thirty-six (36) years. He currently suffers from angina and takes doctor prescribed medication. Plaintiff relied on Kathleen to transport him to his doctor's appointments and administer his medication. Plaintiff watched the Debtors' dogs. He also picked up the Debtors' mail while they were at work.
The parties and Mildred moved from New York in 1986 with the intent of constructing a family home in Pennsylvania. They purchased land upon which one home was constructed in 1987. The home was built and secured by a $87,000.00 mortgage with MT Bank (f/n/a Franklin First Federal Savings and Loan). Plaintiff and Mildred lived on the first floor while Debtors occupied the second floor. Plaintiff and Mildred owned an undivided one-half (2) interest in the property as did the Debtors.
In addition to sharing a home, the parties also shared a bank account at MT Bank that allowed each depositor to make deposits and withdrawals without restriction. Plaintiff also maintained a separate checking account for his social security checks.
After Mildred's death in 1992, Plaintiff owned an undivided one-half (2) interest in the house. Plaintiff married his current wife, Marilyn, in October 1997. Debtors did not approve of the marriage. Kathleen's discomfort with Marilyn was apparent in her testimony and supported, as well, by Marilyn's testimony. This disapproval of the marriage was a strong accelerant to the breakdown in the parties' relationship.
Debtors started experiencing financial problems in 1990 and took out a second mortgage for $55,000.00. This loan also listed Plaintiff and Mildred as borrowers. The total monthly mortgage payments increased to approximately $2,100.00 as a result of the new loan. Still facing fiscal problems, the Debtors decided to refinance the home in 1998. Debtors claim they told Plaintiff about their financial problems and he agreed to convey his property interest when asked. Kathleen admitted on direct examination that they wanted Plaintiff's property interest because of their concern regarding the impact of Plaintiff's marriage to Marilyn. This concern was allegedly expressed to Plaintiff before the property transfer occurred and again sometime thereafter.
Plaintiff and Marilyn testified that Debtors used the threat of placement in a nursing home and seizure of his home by the state to satisfy unpaid future nursing bills to get him to convey his interest. Plaintiff said he signed the deed based on Debtors' assurances that he would still own the house and they would continue taking care of him. Both Debtors deny threatening Plaintiff.
The settlement agent in charge of Debtors' refinance said he presented the deed to Plaintiff for his signature and explained that he was "signing off the deed." Plaintiff maintains that no one explained what he was signing nor gave him a chance to read the documents.
For the purposes of the refinancing, the home was appraised at $184,000.00 in April 1998 and the refinance loan amounted to $147,200.00. Debtors netted $3,629.47 after the first and second mortgages ($80,243.02 and $42,955.80, respectively) were satisfied in addition to their credit card debt ($13,423.52). All of this money was presumably spent on accruing mortgage payments.
Plaintiff gave Debtors between $509-569 per month from May 1998 to June 1999. Whether this represented rent or Plaintiff's share of the mortgage was contested by the parties. Plaintiff assumed that these payments were applied to the original mortgage with MT Bank. The home was ultimately foreclosed in 1999 and sold at auction. Both parties admit that neither could have afforded the mortgage payments on their own.
In 1994, with respect to the bank account, Plaintiff claims Kathleen convinced him to deposit a total of $3,000.00 based on her promise to pay Mildred's $2,498.38 funeral bill. Bank records indicate that Debtors closed out this account in July 1998 and used the funds, $5,724.09, to open an "As Trustee For" ("ATF") account titled in such a way that Plaintiff could only gain access to the money if the Debtors died. Kathleen admitted that some of the funds transferred were owned by Plaintiff but she could not recall how much.
In 1998, Plaintiff realized that the funeral bill was not paid and attempted to withdraw his $3,000.00 but was informed by the bank that the original account was closed. Both Plaintiff and Marilyn argue that Kathleen privately offered to repay the money, a little at a time, when Plaintiff confronted her about the missing money. Plaintiff never received any payments and Kathleen does not remember making an offer to repay.
Testimony concerning the rationale for opening the ATF account suggested a myriad of reasons. The bank representative in charge of the transaction testified that Debtors informed her that they were opening an ATF account because they did not want Plaintiff's new wife (Marilyn) to have any of the money. Conrad testified that there was no particular reason why they closed the original account and that they thought it was better for just the two of them to be on the account. He then said they "just felt like moving our money to another account." The most conflicting testimony was offered by Kathleen. She first stated that it was closed because they did not have enough money to keep up the mortgage payments and that they were trying to keep up the payments. She then said that it was closed because they did not know what was going on in the house anymore and that `no one' would tell them. Reference was made to the occurrence of various changes in Plaintiff's life after his marriage that Debtors only became aware of after the fact. Kathleen testified on cross-examination that she did not recall what reason she gave the representative concerning her intent. When pressed further, she confirmed her deposition statement that the ATF account was opened to keep the money from Marilyn. She later stated that the account was opened so Plaintiff would have some money if something happened to either herself or Conrad. At the time of trial, the funeral bill was still unpaid and the ATF account had a negative balance of $1.60. Neither Debtor provided a credible explanation concerning Plaintiff's missing $3,000.00.
DISCUSSION
The Court must first find, under applicable law, that a debt exists before an issue of non-dischargeability under Section 523 is addressed. In this case, Plaintiff must show that his fraud claim is enforceable against Debtor under Pennsylvania's substantive law. See Pennsylvania Dept. of Pub. Welfare v. Davenport, 495 U.S. 552, 559 (1990); Grogan v. Garner, 498 U.S. 279, 283 (1991); 11 U.S.C. § 101(5), (12). While noting that a significant lapse of time occurred between the alleged fraud and the litigation, for the purposes of determining non-dischargeability and in the absence of a timely argued limitation defense by the Debtors, the Court concludes that Plaintiff's claim is a debt.
Pennsylvania law states that causes of actions based on a fraud allegation must be commenced within two (2) years of when the transaction occurred. See 42 Pa. Const. Stat. § 5524. The Court does not need to explore the issues of `when the statute of limitation began to run on Plaintiff's claims' or `whether it lapsed before Debtors filed their bankruptcy petition.' Debtors waived a statute of limitation defense by failing to raise it as early as practical in this proceeding. See generally Robinson v. Commonwealth, 313 F.3d 128 (3d Cir. 2002) (discussion of when a statute of limitations defense is waved); See also Bradford-White Corp. v. Ernest Whinney, 872 F.2d 1153, 1161 (3d Cir. 1989) (Court held that defendant's failure to argue statute of limitations as a defense either before or at the trial, although raised in its answer, was waived); Cf. Pa. R. Civ. Pro. 1032 (failure to plead statute of limitations as an affirmative defense constitutes a waiver of that defense).
Subsection 523(a)(2)(A) provides:
(a) A discharge under section 727, 1141, 1228(a), or 1328(b) of this title does not discharge an individual debtor from any debt —
(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by —
(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition;
To satisfy a subsection 523(a)(2)(A) complaint, Plaintiff must prove by a preponderance of the evidence that: (1) Debtors made a materially false representation; (2) Debtors knew it to be false, at the time made; (3) Debtors made the representation with the intention and purpose of deceiving Plaintiff; (4) Plaintiff justifiably relied on the false representation; and (5) Plaintiff sustained a loss as a result of his reliance. See Grogan, 498 U.S. at 288; Griffith, Strickler, Lerman, Solymos Calkins v. Taylor (In re Taylor), 195 B.R. 624, 627 (Bankr. M.D.Pa. 1996) (citations omitted).
A misrepresentation must be one sufficiently important to influence Plaintiff's decision to convey his property interest. See Mitchell v. Barnette, (In re Barnette), 281 B.R. 869, 874 (Bankr. W.D. Pa. 2002).
Debtors' intent to deceive may be gleaned from the totality of the circumstances. See In re Rembert, 141 F.3d 277, 282 (6th Cir. 1998). Debtors' claim that they wanted Plaintiff's property interest so they could refinance the mortgage and that they informed him of such. Debtors knew at the time when they made the representation to Plaintiff that it was false and that it masked their real intent to secure total control over the real estate. In fact, in 1990, the Debtors had secured a second mortgage with Plaintiff as a co-owner. Kathleen even acknowledged during her testimony that they had Plaintiff convey his interest because they were concerned about Marilyn's future role as a potential owner of the home. The only way to prevent Marilyn from obtaining a property interest would have been to have Plaintiff convey his property interest to them. The Court is unpersuaded by Debtors' claims and concludes that they could have refinanced the mortgage with Plaintiff's name still on the deed.
Plaintiff's reliance on Debtors' representations that the property would still be his home if he conveyed it is justifiable in light of the circumstances of this case and the characteristics of Plaintiff. See Field v. Man, 516 U.S. 59, 70(1995) (a discussion of justifiable reliance). Plaintiff, an older individual, had a close and intimate relationship with the Debtors. One based on trust. Plaintiff thought he could rely on the Debtors not to deceive him. I find that Plaintiff's reliance was justified.
The totality of the circumstances leads me to conclude that Debtors intended to defraud Plaintiff in securing the conveyance of his property interest. I am unpersuaded by Conrad's claim that Plaintiff just agreed to convey the property when asked. I am further convinced that the possibility of being placed in a nursing home and the threat of seizure by the state of his home was presented to Plaintiff as the alternative if Frederick did not sign over the house. Kathleen's testimony regarding this transaction skates on the rim of credibility.
Plaintiff's injury is measured by the equitable interest in the home. The property was encumbered by $123,198.82 in liens from the first and second mortgages when he transferred his interest on May 21, 1998. Plaintiff's expert testified that the fair market value as of May 1, 1998 was $132,452.00. Using Plaintiff's fair market value, the amount of equity in the property at the time of transfer was $9,253.18. Plaintiff's equitable share would have been $4,626.59. This value represents Plaintiff's actual damages and is hereby excepted from discharge based on subsection 523(a)(2)(A).
With respect to the $3,000 deposited in the original bank account, the Court finds that Plaintiff has not satisfied all of the elements of fraud by a preponderance of the evidence. Plaintiff did not provide any evidence that Kathleen knew when she made the promise in 1994 to pay the funeral bill that it was false. Granted, Plaintiff presented evidence showing the depletion of the ATF account since July 1998 and a current unpaid bill, but failed to show that Debtors lacked the intention of paying the bill at the time the representation was made. The Court fails to see a causal connection between the promise made in 1994 and the closing of the original account in 1998. This debt, therefore, is not excepted from discharge under subsection 523(a)(2)(A).
With regard to whether the fraudulent conveyance of Plaintiff's property is non-dischargeable based on a fiduciary relationship, subsection 523(a)(4) provides:
(a) A discharge under section 727, 1141, 1228(a), or 1328(b) of this title does not discharge an individual debtor from any debt —
(4) for fraud, or defalcation while acting in a fiduciary capacity, embezzlement, or larceny;
Plaintiff argues under subsection 523(a)(4) that Debtors committed fraud while acting within a fiduciary capacity. Relief based on subsection 523(a)(4) requires a showing by Plaintiff that: (1) a fiduciary relationship existed between Debtors and Plaintiff, and that the (2) fraud or defalcation was committed by Debtors in the course of the relationship. See 11 U.S.C. § 523(a)(4). The Court has already found the existence of fraud with respect to the transfer of the house, therefore, Plaintiff need but prove by a preponderance of the evidence that a fiduciary relationship existed and that the fraud occurred in the course of this relationship. See Grogan, 498 U.S. at 288.
While the issue of whether Debtors acted within a fiduciary capacity is based on federal law, the question of whether a trust relationship exists is answered under state law. See Windsor v. Librandi, (In re Librandi), 183 B.R. 379, 382 (M.D.Pa. 1995). The concept of a fiduciary under subsection 523(a)(4) is narrower than under common law. See Subich v. Verrone (In re Verrone), 277 B.R. 66, 71-72 (Bankr. W.D.Pa. 2002); Kayes v. Klippel (In re Klippel), 183 B.R. 252, 259 (Bankr. D.Kan. 1995). Because an individual may qualify as a fiduciary under state law does not mean that he is given the same label for the purposes of bankruptcy law.See Texas Lottery Comm'n v. Tran, 151 F.3d 339, 342 (5th Cir. 1998).
This fiduciary relationship is limited to instances involving either express or technical trusts. See Librandi, 183 B.R. at 382. Constructive or ex maleficio trusts do not qualify. See Verrone, 277 B.R. at 66;Taylor, 195 B.R. at 629. Most courts recognize that an express or technical trust includes not only arrangements based on formal documents executed by the parties but also relationships in which trust-type obligations are imposed under state statutes or common law. See e.g. Librandi, 183 B.R. 379; Loose v. Kohler (In re Kohler), 255 B.R. 666, 668 (Bankr. E.D.Pa. 2000). Establishing a trust relationship requires proof of: (1) a continuing relationship of trust existing prior to and irrespective of any particular act of wrongdoing; (2) a clearly defined trust res or property and (3) an intent to create a trust relationship.See Kohler, 255 B.R. at 668.
Based on Pennsylvania law, the Court finds that a valid trust was not created between the parties. Plaintiff's argument that such a trust was created based on Debtors' oral agreement to hold Plaintiff's property interest in trust conflicts with Pennsylvania law. Pennsylvania's statute of fraud provision requires trusts in land be reduced to a writing evidencing the creation of a trust in land and bear Debtors' signatures.See 33 Pa. Const. Stat. § 2. Plaintiff has not provided the Court with any evidence supporting the existence of a valid trust. This liability therefore is not excepted from discharge based on subsection 523(a)(4).
PUNITIVE DAMAGES
Subsumed within the question of whether punitive damages are appropriate, is the query if such is within the powers of this bankruptcy court. This case represents one of those rare situations where I have actually assessed damages after a dischargeability trial. Typically, I would either find the debt dischargeable or conclude that the debt is excepted from discharge and allow the state court to liquidate the quantitative impact of that ruling.
Pennsylvania's law allows punitive damage awards when a defendant's actions are of such an outrageous nature as to rise to the level of intentional, willful, wanton or reckless conduct. See SHV Coal, Inc. v. Continental Grain Co., 526 Pa. 489, 493, 587 A.2d 702, 704 (1991). Outrageous conduct is any act that creates insult or outrage and is committed with a view to oppress or is done in contempt of a plaintiff's rights. See Klinger v. State Farm Mut. Auto. Ins. Co., 115 F.3d 230, 235(3d Cir. 1997). Punitive damages under Pennsylvania law are measured against: (1) the character of the act; (2) the nature and extent of the harm; and (3) the wealth of the defendant. See Tunis Brothers Co., Inc. v. Ford Motor Co., 952 F.2d 715, 740-41 (3d Cir. 1991) (applying Pennsylvania law).
After reviewing this testimony and concluding that the fraud in question had a limited financial impact on the Plaintiff, I further conclude that punitive damages would not be appropriate even if I have the power to make such an assessment.
The Court will not award Plaintiff punitive damages.
CONSTRUCTIVE TRUST
Plaintiff asks this Court to reconsider its previous ruling dismissing Counts II and III of his complaint and granting judgment in favor of Defendants with respect to Count I based on a finding that the requested relief was not obtainable. In particular, Plaintiff attempts to argue in his post-trial brief that a constructive trust can be imposed on property not in existence. Plaintiff relies on a Pennsylvania appellate court's decision in Kimball v. Barr, 249 Pa. Super. 420, 378 A.2d 366 (Pa.Super. 1977) to advance his position. That decision affirmed a lower court's imposition of a constructive trust despite defendant's claim of no longer possessing the property at issue. See Id. at 427. Plaintiff's interpretation of this opinion is skewed and the Court is not persuaded to change its ruling based on Plaintiff's argument.
Plaintiff's Count II was titled "Recission, Cancellation, Reformation of Deed" and Count III was "Conversion." These Counts were dismissed based on the fact that the house in question had been sold at auction before trial. Plaintiff's prayer for relief under these Counts could not be awarded as a result. The Court awarded judgment in favor of Defendants on Count I-Constructive Trust based on the lack of trust corpus.
Plaintiff's argument fails to address the requirement under Pennsylvania law that a constructive trust is imposed on property that is identifiable. See City of Philadelphia v. Mancini, 431 Pa. 355, 364, 246 A.2d 320, 324 (1998). This Court cannot impose a constructive trust on something which is not in existence. It is important to note that the court in Kimball imposed a constructive trust on traceable funds. TheKimball court relied on the Pennsylvania Supreme Court decision of City of Philadelphia v. Mancini. Id. In Mancini, the court stated more than once that a constructive trust can only be imposed on property which is traceable to identifiable assets which would then represent the trust's property. Id.; Accord American Express Travel Related Services Co. c. Laughlin, 424 Pa. Super. 622, 628 (Pa.Super. 1993). Plaintiff has not proven the existence of trust property nor that it is traceable. The Court was not presented with any evidence suggesting that the debt at issue is traceable to an identifiable fund. Debtors are no longer in possession of the house and any money realized from the 1998 refinance loan went toward mortgage payments and credit card bills. Absent proof of a traceable and identifiable fund, this Court cannot impose a constructive trust.
My Order will follow.
ORDER
For the reasons stated in the foregoing Opinion, IT IS HEREBY ORDERED that judgment is entered in favor of the Plaintiff, Frederick Sauer, and against the Defendants, Conrad and Kathleen Sauer, under 11 U.S.C. § 523(a)(2)(A). Actual damages in the amount of $4,626.59 are awarded to Plaintiff and are hereby nondischargeable. It is also ordered that judgment is entered in favor of the Defendants and against the Plaintiff under 11 U.S.C. § 523(a)(4).