Opinion
No. 03 Cv. 3408 (BSJ), Case No. 91 B 14332 (CB), Adversary Proceeding No. 92-8680A.
February 15, 2005
Opinion
Appellant Carole Owens ("Appellant") appeals from the unpublished August 28, 2002 order of United States Bankruptcy Judge Cornelius Blackshear (the "Order"). In the Order, Judge Blackshear held that Appellant had failed to meet her burden of proving that the debts Appellee Robert Owens ("Debtor") owed her, under their separation agreement (the "Separation Agreement"), were not dischargeable. Judge Blackshear also found that Appellant failed to prove that Debtor filed his Chapter 7 case in bad faith with the sole purpose of evading his obligations to her.
The issues presented on appeal are as follows:
(1) Did the Bankruptcy Court err in determining Debtor's obligations under the Separation Agreement to be dischargeable under 11 U.S.C. § 523(a)(2) (A)?
(2) Did the Bankruptcy Court err in determining Debtor's obligations under the Separation Agreement to be dischargeable under 11 U.S.C. § 523(a)(4)?
(3) Did the Bankruptcy Court err in determining Debtor's obligations under the Separation Agreement to be dischargeable under 11 U.S.C. § 523(a) (6)?
(4) Did the Bankruptcy Court err in determining that Debtor's Chapter 7 case should not be dismissed for lack of good faith?
For the reasons stated below, the Court answers all of these questions in the negative. Accordingly, the Order is affirmed.
BACKGROUND
Debtor and Appellant were married on October 5, 1975. While married, they purchased two houses, one at 100 Dwight Place ("Dwight Place") in New Jersey and the other on Prospect Hill Road ("Prospect Hill") in Massachusetts. On July 1, 1986, the couple entered into a separation agreement, which was superceded by a January 2, 1987 agreement and later amended on December 25, 1987. The post-December 25, 1987 form of the agreement is the document referred to as the Separation Agreement. Under the Separation Agreement, Appellant became the sole owner of the Dwight Place and Prospect Hill homes, but waived her right to alimony, maintenance or support from Debtor. In exchange, Debtor obligated himself to (1) pay Appellant the difference between the net proceeds of the sale of Dwight Place and $500,000 (in the event that the sale did not result in net proceeds in excess of $500,000 above any outstanding mortgages); (2) continue to make payments on a life insurance policy in Appellant's name until July 17, 1990, when the policy was to be paid in full; (3) pay for Appellant's medical insurance; (4) give her a 1988 Audi 5000; (5) take financial responsibility for any losses imposed on Cottage Press, Inc. ("CPI") arising out of certain real estate ventures; and (6) continue to provide financial support for Appellant's two sons from a previous marriage. The Separation Agreement also provided that both parties had not, and would not, assume debt in each other's names, or pledge each other's assets.
CPI is a corporation that Debtor and Appellant created during their marriage, apparently for the purposes of publishing a book that Appellant wrote. Appellant was CPI's sole shareholder; Debtor served as the corporation's treasurer.
Debtor filed a petition for relief under Chapter 7 in the United States Bankruptcy Court on September 27, 1991. After Debtor filed the underlying adversary proceeding against her, Appellant filed counterclaims against Debtor, claiming that the debts he owed her under the Separation Agreement were nondischargeable under 11 U.S.C. §§ 523 (a)(2)(A), (a)(4), and (a)(6). Specifically, Appellant argued that Debtor induced her to sign the Separation Agreement through false pretenses and fraud. In addition, Appellant moved to dismiss Debtor's bankruptcy filing, arguing that Debtor filed his Chapter 7 case in bad faith, with the sole purpose of avoiding his obligations under the Separation Agreement. After a bench trial, the Bankruptcy Court found that Appellant carried her burden on none of these claims. Judge Blackshear also ruled that all claims brought by Appellant on behalf of CPI were res judicata based on his order of July 14, 1995, where he had held that CPI's discharge claims were time-barred. On appeal, Appellant argues that the Bankruptcy Court's findings were in error. After discussing the standard of review, the Court will address each of Appellant's claims in turn.
STANDARD OF REVIEW
The Bankruptcy Court's findings of fact should not be disturbed without a finding of clear error. Bankruptcy Rule 8013. However, the Bankruptcy Court's conclusions of law, as well as its determinations of whether particular conduct satisfies a legal standard, are both reviewed de novo. In re Luthra, 182 B.R. 88, 91 (E.D.N.Y. 1995).
DISCUSSION
11 U.S.C. § 523(a)(2)(A)
Pursuant to 11 U.S.C. § 523(a)(2)(A), Appellant claims that Debtor obtained the release of her claims to alimony, maintenance and support through false representations. In particular, Appellant claims that Debtor falsely represented that he had not incurred debt in her name, namely, that he had not taken out second mortgages second mortgages in her name on Dwight Place and Prospect Hill, despite the fact that he had taken out those mortgages in her name before signing the Separation Agreement.
Essentially, Judge Blackshear found that Appellant had to know about Debtor's financial moves, and therefore cannot claim to have relied on any of his alleged misrepresentations. Specifically, Judge Blackshear wrote that "Debtor, with Ms. Owens's consent, merely continued to engage in a course of conduct that both Ms. Owens and the Debtor had been accustomed to." Order at 10. Judge Blackshear explained that during their marriage, "Debtor was the breadwinner, and he handled all of the family's finances," and that after they separated, Appellant "consented to the Debtor's continued control of his and her finances by opening a joint bank account with him to which they both had full access." Order at 8. Judge Blackshear found a "history of the Debtor's control over [Appellant's] finances and . . . actual and apparent authority granted to him by virtue of his being a joint account holder, officer of her company and co-liable with [Appellant] on various liabilities." Id. at 9. Under these circumstances, such a continued course of conduct cannot form the basis for a fraud claim.
On appeal, Appellant argues that Judge Blackshear misapplied the standard announced by Field v. Mans, 516 U.S. 59, 116 S. Ct. 437 (1995), relating to the element of reliance to prove fraud. Accordingly, argues Appellant, this Court must review his order de novo. The Court disagrees.
The elements of a false misrepresentation claim under 11 U.S.C. § 523(a)(2)(A) are that (1) the debtor made a representation; (2) the debtor knew the representation was false at the time it was made; (3) the representation was made with the intent to deceive the creditor; (4) the creditor relied on the representation; and (5) the creditor was injured by the representation and suffered damages as a result. The Bankruptcy Court found that Appellant's claim failed primarily due to the fourth element, reliance.
As Appellant points out, a creditor arguing for nondischarge under § 523(a)(2)(A) need not show reasonable reliance; rather, she need only prove justifiable reliance. When it provided for this more subjective standard of reliance, the Supreme Court instructed lower courts to consider "the qualities and characteristics of the particular plaintiff, and the circumstances of the particular case." Field, 516 U.S. at 71.
Citing the standard for justifiable reliance set out by the Supreme Court in Field, Judge Blackshear found that the facts, as alleged by Appellant, did not prove fraud. Rather than induce her reliance with false representations in the Separation Agreement, "Debtor, with [Appellant's] consent, merely continued to engage in a course of conduct that both [parties] had been accustomed to." Id. at 10. Judge Blackshear acknowledged that under the Field standard, Appellant did not "have to show that she fulfilled a general duty to investigate," but quite reasonably concluded that "having someone who you are separated from controlling your finances is enough to urge one to look into matters deeper. [Appellant's] professed complete unawareness of the Debtor's financial activities is dubious." Id. As a matter of law, Judge Blackshear enunciated and applied the correct standard of justifiable reliance.
Moreover, Appellant's argument misses the mark. After observing Appellant's testimony, Judge Blackshear found that her "professed complete unawareness of the Debtor's financial activities" to be "dubious." There is no clear error in Judge Blackshear's findings of fact. In short, Judge Blackshear found that Appellant's testimony, and, in turn, her version of the facts, lacked credibility. Thus the Court need not reach the question of whether Judge Blackshear applied the correct standard of justifiable reliance to the facts of the case; Appellant plainly failed to prove the facts themselves.
Appellant's arguments also overlook the fact that Judge Blackshear found that she failed to prove any of the other elements of fraud. Specifically, Appellant did not prove that Debtor intended to mislead her. Judge Blackshear wrote that the "evidence offered by [Appellant] tends to show that the Debtor failed to meet some of the obligations [under the Separation Agreement], not that he had the intent to never meet those obligations." Order at 10. Thus, even if it were to perform de novo review, the Court sees no reason to disturb the Bankruptcy Court's conclusions.
11 U.S.C. § 523 (a)(4)Under section 532(a)(4), debts that are based on fraud or defalcation are nondischargeable where the debtor owed the creditor a fiduciary duty. To prevail under this section, Appellant must first show that Debtor was her fiduciary.
Before the Bankruptcy Court, Appellant argued that Debtor was her fiduciary based on the fact that he served as CPI's treasurer, a company in which she was the sole shareholder. According to the law of corporations, therefore, as an officer of the corporation, Debtor owed Appellant a fiduciary duty. The Bankruptcy Court agreed with Appellant that as an officer, Debtor was a fiduciary of CPI, but ruled that all of Appellant's claims arising from Debtor's alleged wrongs to CPI are res judicata. The Court affirms that aspect of Judge Blackshear's ruling.
On appeal, Appellant does not dispute the fact that claims brought on behalf of CPI are res judicata. Instead, she makes two other arguments. Her first argument is that her claims based on Debtor's fiduciary duty to her as an individual CPI shareholder are not barred by res judicata, in contrast to claims brought on behalf of CPI. Her second argument is based on the premise that fiduciary duties can arise out of "informal relationship of trust and confidence," and that accordingly, Debtor owed her a fiduciary duty based on the fact that he "exerted a position of trust and confidence over" her, and that he "influenced and managed [her] financial affairs with enormous discretion and great trust and confidence." Reply at 26, 27.
As to the first of these arguments, Appellant's arguments are merely an attempt to make an end-run around the doctrine of res judicata. It is true that as treasurer of CPI, Debtor owes Appellant a fiduciary duty because she is a shareholder in the corporation. But Appellant's claims do not arise out of her position as a shareholder, which is the only context in which Debtor's CPI-based fiduciary duty can be breached. Rather, Appellant claims that Debtor breached the fiduciary duty he owes her as a shareholder by failing to pay his debts under the Separation Agreement. The Court fails to see how the duty Debtor owes Appellant as a shareholder in CPI applies to his obligations under the Separation Agreement. Appellant's arguments are merely an attempt to bootstrap Debtor's CPI-based fiduciary duty into a global one.
Appellant's second argument, based on Debtor's position of trust, misconstrues the scope of section 523(a)(4) and the standard for determining the existence of a fiduciary duty under it. This "dischargeability provision has for more than a century been construed narrowly and strictly by the Supreme Court." In re Gans, 75 B.R. 474, 488 (Bankr.S.D.N.Y. 1987). The Supreme Court has limited the definition of a fiduciary under section 523(a)(4) in order to preserve bankruptcy's effect as a "fresh start." Matter of Angelle, 610 F.2d 1335, 1339 (5th Cir. 1980). Thus the "`traditional' or general meaning of fiduciary, that is, a person who stands in a special relation of good faith, trust and confidence, is `far too broad for the purposes of bankruptcy law.'" In re Gans, 75 B.R. at 489 (quoting Matter of Rausch, 49 B.R. 562, 564 (Bankr.D.N.J. 1985). Rather, a fiduciary relationship under the bankruptcy laws requires that (1) the trust relationship existed before the act that created the debt, (2) the wrongful act creating the debt was done during the course of the fiduciary relationship, and (3) the "special debt" arising from the breach of a fiduciary duty must be based on an express, technical or statutory trust. See, e.g., In re Gans, 75 B.R. at 489; Davis v. Aetna Acceptance Co., 293 U.S. 328, 333, 55 S.Ct. 151, 154 (1934).
Appellant construes the term "trust" as a description of the emotion she must feel for Debtor. But "trust" under these circumstances denotes an agreement between two parties to impose a trust relationship, under which legal and equitable title to some property is divided. Appellant makes no claim that an express trust was created by the Separation Agreement. Indeed, she does not even contend that a fiduciary duty arose out of that agreement. There is no evidence in the record that Debtor and Appellant created a trust arrangement. Accordingly, the Court affirms the Bankruptcy Court's dismissal of Appellant's claims brought under section 523(a)(4).
Larceny under 11 U.S.C. § 523(a)(4)
Appellant also argues that Debtor committed larceny when he twice removed funds from the mortgage on the Dwight Place property and when he withdrew $2,375 from her checking account to pay her life insurance premiums. The Bankruptcy Court explicitly found that "on all three occasions, the Debtor removed the funds from a jointly held account to which the Debtor and Ms. Owens both had equal access. The Debtor never attempted to conceal the fact that he took the draws against the mortgage or any other funds that were in the account." Order at 12.
On appeal, Appellant makes a number of convoluted arguments regarding the distinction between knowledge and consent. In particular, citing to In re Brady, 101 F.3d 1165 (6th Cir. 1996), she claims that appropriating funds from a joint account can constitute embezzlement under section 523(a)(4). But in In re Brady, the Bankruptcy Court "found that debtor secretly took funds constituting part of creditor's individual share of the sale proceeds from an account held jointly by creditor and debtor and transferred those funds to a corporation controlled by debtor." In re Brady, 101 F.3d at 1173. By contrast, the Bankruptcy Court here found no such secretive activity on the party of Debtor, as both he and Appellant "had equal, lawful access to the account, and both the Debtor and [Appellant] had equal access to the transactional information regarding the account." Order at 13. Judge Blackshear also noted that Appellant admitted that Debtor controlled her finances, indicating "that she knew of the access that the Debtor had to the accounts [and lending] credence toward the notion that she knew that the Debtor used that access." Id.
The Bankruptcy Court's finding that Debtor's removal of these funds was not larcenous is not clearly erroneous. Accordingly, the Court affirms the Bankruptcy Court's finding that Debtor did not commit larceny against Appellant.
11 U.S.C. § 523(a)(6)The questions Appellant poses on appeal include whether or not the Bankruptcy Court correctly dismissed her claim under 11 U.S.C. § 523(a)(6), which prevents the discharge of a debt where such debt involved "willful and malicious injury by the debtor to another entity or the property of another entity." 11 U.S.C. § 523(a)(6). However, in neither her initial brief nor her reply to Debtor does Appellant make any mention of this issue. The Court has nonetheless reviewed the Bankruptcy Court's dismissal of this claim and finds that it is not clearly erroneous. It is undisputed that Debtor was actively involved in Appellant's finances both before and after they were separated. Based on that fact, the Bankruptcy Court reasonably concluded that Debtor's actions were made with the knowledge and consent of Appellant, without any willful or malicious desire to cause her injury. The Bankruptcy Court also rejected Appellant's second basis for this claim: that Debtor failed to pay insurance premiums as required under the Separation Agreement. The Bankruptcy Court found that Debtor had paid the insurance premiums for a number of years until, in what was likely a computational mistake, he failed to do so. The Bankruptcy Court reasonably concluded that Debtor's actions did not amount to willful and malicious injury. That conclusion is affirmed.
11 U.S.C. § 707(a)Finally, Appellant argues that Debtor's bankruptcy petition should be dismissed, pursuant to 11 U.S.C. § 707(a), for having been brought in bad faith. In particular, in the court below, Appellant argued that Debtor filed for bankruptcy only to avoid paying his debts to her, in a scheme to make her poor.
The Bankruptcy Court rejected this claim. Debtor filed for bankruptcy a number of years after he signed the Separation Agreement, and throughout those intervening years performed under the agreement. The Bankruptcy Court explained that to dismiss Debtor's filing would require it to conclude that "Debtor had contrived a plan years before his filing to avoid certain fiscal responsibilities assumed under the Separation Agreement." Order at 15. The court refused to do so, supported by the fact Debtor paid his obligations under the Separation Agreement "for a period of time and filed after he reached the point where he could no longer do so." Id.
On appeal, Appellant argues that the Bankruptcy Court overlooked three facts when it reached its conclusion: (1) Debtor made payments to Appellant under the Separation Agreement from Appellant's own property; (2) the record failed to explain how Debtor, allegedly earning $360,000 per year, would need to file for bankruptcy; and (3) Debtor engaged in certain tactics to prevent Appellant from presenting her case before the Bankruptcy Court.
The Court finds no reason to disturb the Bankruptcy Court's conclusions. As a preliminary matter, the standard for finding bad faith under section 707(a) is quite stringent. As the Sixth Circuit has explained, this provision
is generally utilized only in those egregious cases that entail concealed or misrepresented assets and/or sources of income, and excessive and continued expenditures, lavish lifestyle, and intention to avoid a large single debt based on conduct akin to fraud, misconduct, or gross negligence.In re Zick, 931 F.2d 1124, 1129 (6th Cir. 1991). Although the Second Circuit has not explicitly endorsed the Sixth Circuit's view of section 707, other courts in this district and the Eastern District of New York have cited it with approval. See, e.g., In re Werner, 91 Civ. 6868, 1992 WL 162637, at *3 (S.D.N.Y. Jun 23, 1992); In re Blumenberg, 263 B.R. 704, 713-714 (E.D.N.Y. 2001).
The facts of this case, as found by the Bankruptcy Court and reflected in the record, do not approach the level of egregiousness required to dismiss Debtor's filing under 707(a). As noted numerous times, Debtor did perform under the Separation Agreement for a number of years before filing. The Bankruptcy Court found, as a factual matter, that the payments Debtor allegedly made out of Appellant's property came from a bank account that he shared with Appellant. Because Appellant had equal access to both the funds and records of that account, Debtor's payments made from it can hardly ground a finding of concealment or misrepresentation. See, e.g., In re Marks, 174 B.R. 37, 41 (E.D. Pa. 1994). Debtor's income level serves as no evidence of his bad faith in filing for bankruptcy. Even if Appellant could show that Debtor is able to repay some of his debts under the Separation Agreement (a showing she failed to make), that would not prove that Debtor's filing was in bad faith. In re Keobapha, 279 B.R. 49, 53 (Bkrtcy.D.Conn. 2002) (holding "that a debtor's ability to pay in the future is not a factor a court should consider in a motion to dismiss pursuant to § 707(a)"). Finally, Appellant fails to prove the existence of any tactics on Debtor's part before the Bankruptcy Court. Her unfounded allegations provide no basis on which to disturb the Bankruptcy Court's findings.
CONCLUSION
For the reasons set forth above, the decision of the Bankruptcy Court is affirmed.