FILED 1 ORDERED PUBLISHED APR 15 2015
2 SUSAN M. SPRAUL, CLERK U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT 3 UNITED STATES BANKRUPTCY APPELLATE PANEL 4 OF THE NINTH CIRCUIT 5 6 In re: ) BAP Nos. NV-14-1468-DJuKu ) NV-14-1469-DJuKu 7 TONYA CAROL HEERS, ) (Related Appeals) ) 8 Debtor. ) Bk. No. 2:13-bk-19887-LED ) 9 ) Adv. Nos. 2:14-ap-01029-LED TONYA CAROL HEERS, ) 2:14-ap-01030-LED 10 ) Appellant, ) 11 ) v. ) O P I N I O N 12 ) DARRELL PARSONS, JR.; AMERICAN) 13 CONTRACTORS INDEMNITY COMPANY,) ) 14 Appellees. ) ______________________________) 15 Argued and Submitted on March 19, 2015 16 at Las Vegas, Nevada 17 Filed - April 15, 2015 18 Appeal from the United States Bankruptcy Court for the District of Nevada 19 Honorable Laurel E. Davis, Bankruptcy Judge, Presiding 20 21 Appearances: William L. McGimsey argued for appellant Tonya Carol Heers; Abran E. Vigil of Ballard Spahr LLP 22 argued for appellee Darrell Parsons, Jr.; Misty Perry Isaacson of Pagter and Perry Isaacson, 23 APLC, argued for appellee American Contractors Indemnity Company. 24 25 Before: DUNN, JURY and KURTZ, Bankruptcy Judges. 26 Opinion by Judge Dunn Dissent by Judge Kurtz 27 28 1 DUNN, Bankruptcy Judge: 2 3 Debtor defendant appellant Tonya Carol Heers (“Debtor”) 4 appeals summary judgment orders in two separate adversary 5 proceedings excepting debts from her discharge under 6 § 523(a)(4)1 for defalcations while acting in a fiduciary 7 capacity. We AFFIRM. 8 I. FACTUAL BACKGROUND 9 The facts in these two related appeals are not in dispute. 10 Darrell Parsons, Jr. (“Parsons”), was the sole heir of his 11 father, Darrell Parsons, Sr., who died intestate on November 1, 12 2008. Parsons’ father’s estate (“Estate”) initially was 13 estimated to be worth approximately $3 million2 and included 14 real estate in California and North Carolina; a business which 15 leased coin-operated lockers to corporate customers throughout 16 the United States; and bank accounts into which cash proceeds 17 from the business were deposited. 18 When his father died, Parsons had to choose an 19 administrator for the Estate. Parsons learned of his father’s 20 death from Thomas Warden (“Warden”), a friend and attorney for 21 his father. Warden handled a number of legal matters for 22 Parsons’ father, and on several occasions, Warden had drafted 23 24 1 Unless specified otherwise, all chapter and section 25 references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and all “Rule” references are to the Federal Rules of Bankruptcy 26 Procedure, Rules 1001-9037. All “Civil Rule” references are to the Federal Rules of Civil Procedure. 27 2 Ultimately, the gross Estate value was determined to be 28 $5,087,791.
-2- 1 testamentary documents for Parsons’ father, none of which were 2 executed. Warden advised Parsons that a probate proceeding 3 would need to be filed in California, and he volunteered to 4 serve as administrator and to refer the matter to a competent 5 probate attorney. 6 Parsons apparently was upset with Warden because he was not 7 notified of his father’s death until after the burial and was 8 unwilling to designate Warden to administer the Estate. Parsons 9 discussed the situation with the Debtor, who was a criminal 10 defense attorney who had handled traffic ticket matters for 11 Parsons. Debtor indicated that she was inexperienced in probate 12 matters, but she expressed interest in administering the Estate. 13 She told Parsons that her mother and law partner was a “probate 14 wizard,” and she advised Parsons that she could handle the 15 Estate matter for less than Warden. 16 Debtor in fact did not have any knowledge of probate law, 17 and prior to her involvement with the Estate, she had never been 18 involved in the administration of a decedent’s estate. She 19 likewise had never been involved in any estate planning. 20 Nevertheless, Parsons asked Debtor to administer the Estate, and 21 she accepted. On or about February 6, 2009, Debtor was 22 appointed as administrator of the Estate by the Los Angeles 23 County, California Superior Court (“Probate Court”). She was 24 issued general letters of administration on February 27, 2009. 25 On that same date, Debtor signed and filed with the Probate 26 Court a statement acknowledging her “Duties and Liabilities of 27 Personal Representative” (“Duties Statement”), which stated, 28 among other things, that “[w]ithin four months after Letters [of
-3- 1 administration] are first issued to you as personal 2 representative, you must file with the court an inventory and 3 appraisal of all the assets in the estate.” Upon her 4 appointment as Estate administrator, Debtor became a fiduciary 5 to the Estate. 6 In December 2008, Debtor had met with Parsons and Warden, 7 at which time Warden delivered to Debtor a Bekins box of records 8 including bank statements, notes and records showing bank 9 accounts and other information with respect to the decedent’s 10 assets. In addition, by that time, Warden had completed an 11 inventory of assets in Parsons’ father’s home. 12 The Debtor was bonded by American Contractors Indemnity 13 Company (“ACIC”). Thereafter, probate and estate administration 14 proceeded, but neither efficiently nor smoothly. 15 Debtor understood that her duties in administering the 16 Estate included the preparation and timely filing of tax 17 returns, including the estate tax return, and payment of any 18 taxes owed on behalf of the Estate, so long as the Estate had 19 funds available to pay the taxes. To assist her in performing 20 these duties, Debtor selected an accounting firm headed by D.K. 21 Wallin, a former controller for the state of Nevada (the “Wallin 22 Firm”). The Wallin Firm was licensed in both California and 23 Nevada. 24 Debtor met with the Wallin Firm in February 2009, but she 25 was not presented with an engagement letter and did not sign a 26 contract of any kind at that time. An engagement letter 27 eventually was presented to her in October 2009. Lorrie 28 Edelblute (“Edelblute”) was the Wallin Firm employee who was
-4- 1 assigned to the Estate matter. 2 Despite her knowledge of her non-delegable duty to do so, 3 Debtor took no steps on her own to ascertain when the estate tax 4 return for the Estate was due, which was no later than August 3, 5 2009 - nine months following the decedent’s date of death. 6 According to Debtor, she was advised by Edelblute that the 7 estate tax return was due by August 15, 2009. However, in 8 subsequent proceedings before the Probate Court, Edelblute was 9 never called to testify in support of Debtor’s contentions. On 10 August 11, 2009, Debtor signed and filed with the Internal 11 Revenue Service (“IRS”) a Form 4768 request for extension of the 12 Form 706 estate tax return deadline, which included an estimated 13 estate tax due of $825,000, as calculated by the Wallin Firm, 14 and further specifically referenced the past due deadline for 15 the estate tax return filing as August 3, 2009. With the Form 16 4768 extention request, Debtor included a tax payment of $10,000 17 because she thought she had only a total of $20,000 available in 18 the Estate bank account to which she had access. 19 Debtor eventually hired another accounting firm, Gamut and 20 King, to assist her with her Estate work. In April 2010, Debtor 21 received a notice from the IRS that they had not received the 22 estate tax return for the Estate. Debtor then paid an 23 additional $16,000 to the IRS, in spite of the estimate from the 24 Wallin Firm that the estate tax would actually be approximately 25 $825,000. Apparently, the estate tax return for the Estate was 26 finally filed on September 15, 2010. Debtor eventually sent 27 additional payments totaling approximately $1,300,000 to the IRS 28 on behalf of the Estate, but in November 2010, Debtor received a
-5- 1 letter from the IRS advising her that the Estate owed an 2 additional $397,000. 3 Upon inquiry to Gamut and King, Debtor learned that the 4 additional IRS claim represented penalties for failing to file 5 the estate tax return by the August 2009 deadline. Debtor 6 requested Gamut and King to appeal the IRS penalty assessment, 7 but the appeal was rejected. Late payment penalties plus 8 interest ultimately totaled $439,621.61. 9 Debtor filed her first inventory and appraisal for the 10 Estate in February 2010. A “corrected” inventory was filed on 11 June 22, 2010, and the final accounting also was filed in June 12 2010. 13 Debtor filed a Second Account in the probate proceeding on 14 July 11, 2011, to which Parsons objected. Specifically, Parsons 15 requested a finding that Debtor was personally liable for the 16 tax penalties and interest assessed by the IRS against the 17 Estate as a result of breaches by Debtor of her fiduciary duties 18 as administrator, focusing on the late filing of the estate tax 19 return and the late payment of the estate tax owed. 20 The Probate Court heard Parsons’ objection to Debtor’s 21 Second Account at a trial on March 25-26, 2012. Following the 22 presentation of testimony and argument and the admission of 23 numerous exhibits, the Probate Court took the matter under 24 advisement and issued a written decision on June 22, 2012 25 (“Second Account Findings”). 26 The Second Account Findings opened with a time line with 27 respect to the decedent’s death and the probate proceedings. 28 The Probate Court described the “most salient and undisputed”
-6- 1 facts of the matter as follows: 2 [Debtor] was the general administrator of this [Estate] with the sole responsibility to assure that 3 tax returns were filed and taxes owing were paid. The accounting firm she engaged did not file the estate 4 tax return by the August 3, 2009 deadline. As a result, interest and penalties became due and owing to 5 the IRS in the amount of $439,621.61. 6 The Probate Court was troubled that although Debtor blamed 7 the Wallin Firm for the missed estate tax deadline, no 8 engagement letter setting forth the respective duties of the 9 parties was signed with the Wallin Firm until October 2009. In 10 addition, although Debtor testified that she was unaware of the 11 missed deadline until she was notified by the IRS, she had 12 signed the Form 4768 extension request on August 11, 2009, which 13 clearly designated the estate tax return deadline as August 3, 14 2009. 15 The Probate Court determined that Debtor was dilatory in 16 gathering and organizing Estate asset information, which was 17 “illustrative of [Debtor’s] pattern of lethargy when it came to 18 working on this [Estate].” Under California Probate Code 19 § 8800(b), the Estate inventory was due in June 2009, within 20 four months after letters of administration issued, but was not 21 filed until February 2010. 22 The Probate Court further was mystified by Debtor’s failure 23 to pay most if not all of the estate tax liability as soon as 24 she became aware of the due date because the “inventory and 25 appraisals coupled with the accountings filed in this case show 26 that sufficient or close to sufficient monies existed in the 27 cash accounts of Darrell Parsons, Senior to pay almost all, if 28 not all, of the estimate[d] tax.” The Probate Court found that
-7- 1 Debtor’s decision to pay $10,000 as a down payment on an 2 estimated $825,000 estate tax liability “makes absolutely no 3 sense.” 4 The failure to explain why [Debtor] had not marshaled sufficient control over the cash assets in the 5 [Estate] that, if provided to the IRS, would have eliminated or at least, mitigated, the penalties and 6 interest, presents a mystery to this court and substantially supports that [Debtor] breached her duty 7 of care. 8 Second Account Findings, at 14. 9 In its order regarding Debtor’s Second Account (“Second 10 Account Order”), the Probate Court awarded what it characterized 11 as a surcharge against the Debtor in the amount of the IRS 12 estate tax late filing penalties and interest totaling 13 $439,621.61, plus interest “at the legal rate.” However, the 14 Probate Court further ordered that any subsequent award of 15 compensation to the Debtor as Estate administrator would be 16 offset against the surcharge amount and did not award Parsons 17 any attorneys fees. The Second Account Order was not appealed 18 and is final. 19 In an order entered on November 12, 2013, the Probate Court 20 determined the surcharge judgment (“Surcharge Judgment”) to be 21 $347,243.96 as of April 29, 2013, with interest accruing thereon 22 at a rate of $95.13 per day. The Surcharge Judgment, among 23 other things, reflects offsets of $150,000 from a settlement 24 payment (“Bond Payment”) by ACIC to Parsons on Debtor’s 25 fiduciary bonds and $65,262.07, representing Debtor’s statutory 26 commission/compensation as administrator of the Estate. The 27 Surcharge Judgment likewise is final. 28 Prior to that time, in July 2013, ACIC filed a motion in
-8- 1 the Probate Court to obtain judgment against Debtor for its Bond 2 Payment. Debtor did not oppose the motion, and on August 21, 3 2013, the Probate Court entered judgment in favor of ACIC for 4 the Bond Payment and $22,374.30 in attorneys fees, plus interest 5 at 10% (“Bond Judgment”). Debtor did not appeal the Bond 6 Judgment, and it is final. 7 Debtor filed for relief under chapter 7 on November 26, 8 2013.3 9 Both Parsons and ACIC filed timely adversary proceedings 10 against Debtor, seeking determinations that the Surcharge 11 Judgment and the Bond Judgment should be excepted from Debtor’s 12 discharge under § 523(a)(4) for defalcations by Debtor while 13 acting in a fiduciary capacity. Debtor filed answers to both 14 complaints denying that the subject debts should be excepted 15 from her discharge. Both Parsons and ACIC filed motions for 16 summary judgment in June 2014, supported by documentary evidence 17 and the declarations of one of ACIC’s in-house counsel and its 18 trial counsel. The centerpiece supporting both summary judgment 19 motions was the Probate Court’s Second Account Findings. Debtor 20 filed memoranda in opposition to both motions for summary 21 judgment, to which Parsons and ACIC replied. Both Parsons and 22 23 3 From the briefs and records filed in these appeals, there 24 is some question as to whether Debtor filed her chapter 7 petition on November 16 or 26, 2013. We have exercised our 25 discretion to take judicial notice of documents filed in Debtor’s main bankruptcy case and in the two adversary 26 proceedings from which these appeals arise to resolve this question, among others. See O’Rourke v. Seaboard Sur. Co. (In 27 re E.R. Fegert, Inc.), 887 F.2d 955, 957-58 (9th Cir. 1989); Atwood v. Chase Manhattan Mortg. Co. (In re Atwood), 293 B.R. 28 227, 233 n.9 (9th Cir. BAP 2003).
-9- 1 ACIC relied primarily on the asserted preclusive effects of the 2 Second Account Findings, coupled respectively with the final 3 Surcharge Judgment and Bond Judgment. 4 The bankruptcy court heard oral argument (“Hearing”) on 5 both summary judgment motions on August 6, 2014. At the 6 Hearing, while all parties unsurprisingly emphasized different 7 aspects of the undisputed facts, the focus of the argument was 8 on the impact of the recent Supreme Court decision in Bullock v. 9 BankChampaign, N.A., 133 S. Ct. 1754 (2013), interpreting 10 application of the “defalcation while acting in a fiduciary 11 capacity” standard in § 523(a)(4) cases. Following argument and 12 colloquy with counsel, the bankruptcy court announced its 13 conclusions orally. Initially, the bankruptcy court noted that 14 Debtor did not dispute the statements of undisputed facts 15 submitted by Parsons and ACIC and had submitted no declarations 16 in opposition. The bankruptcy court further pointed out that 17 the Supreme Court has recognized that bankruptcy courts can 18 apply issue preclusion to the findings of fact and conclusions 19 of law of other courts with respect to the elements of exception 20 to discharge claims. The bankruptcy court also noted that there 21 was no dispute that Debtor was a fiduciary of an express trust 22 for purposes of the plaintiffs’ § 523(a)(4) claims. The only 23 issue was whether Debtor had committed a defalcation(s) that 24 would except her debts to Parsons and ACIC from discharge. 25 Citing the Supreme Court’s Bullock decision, the bankruptcy 26 court characterized the applicable standard as “conduct that 27 would be deemed reckless, or recklessness to the point of 28 inferring a reckless disregard such as you would have in a
-10- 1 criminal situation.” Hr’g Tr. (Aug. 6, 2014) at 25:5-7. The 2 bankruptcy court then concluded that Debtor’s breaches of her 3 fiduciary duties met that standard and granted both summary 4 judgment motions. 5 Orders granting summary judgment in favor of ACIC and 6 Parsons against Debtor were entered on September 15 and 16, 7 2014, respectively. The order in favor of Parsons was 8 denominated a “judgment,” though it included a grant of the 9 summary judgment motion. The order in favor of ACIC was 10 denominated an “order granting summary judgment . . . ,” though 11 it included a statement that the debt was non-dischargeable 12 under § 523(a)(4).4 13 Debtor filed timely appeals from both summary judgment 14 decisions. 15 II. JURISDICTION 16 The bankruptcy court had jurisdiction under 28 U.S.C. 17 §§ 1334 and 157(b)(2)(I). We have jurisdiction under 28 U.S.C. 18 19 4 Each order/judgment might technically be considered to 20 violate the separate judgment rule. See Rule 7058, making Civil Rule 58 applicable in adversary proceedings. “Ordinarily there 21 should be a separate document embodying a final judgment that is distinct from and in addition to an order granting a motion for 22 summary judgment.” Gaughan v. Edward Dittlof Revocable Trust (In re Costas), 346 B.R. 198, 200 n.3 (9th Cir. BAP 2006). 23 However, the requirement for a separate judgment may be 24 considered waived by the parties where the bankruptcy court clearly evidenced its intent that an order from which an appeal 25 has been taken represented its final decision in the matter, and the prevailing party does not object to the taking of an appeal 26 in the absence of a separate judgment. Bankers Trust Co. v. Mallis, 435 U.S. 381, 387-88 (1978). These requirements are 27 satisfied in these cases, and the separate judgment requirement is deemed waived to the extent it was not otherwise satisfied by 28 the expiration of the 150-day period in Civil Rule 58(c)(2)(B).
-11- 1 § 158. 2 III. ISSUE 3 Whether the bankruptcy court erred in concluding that 4 Debtor’s conduct at issue met the standard for defalcation while 5 acting in a fiduciary capacity for purposes of § 523(a)(4). 6 IV. STANDARDS FOR REVIEW 7 We review bankruptcy court summary judgment orders de novo. 8 Shahrestani v. Alazzeh (In re Alazzeh), 509 B.R. 689, 692-93 9 (9th Cir. BAP 2014); Khaligh v. Hadaegh (In re Khaligh), 338 10 B.R. 817, 823 (9th Cir. BAP 2006), aff’d, 506 F.3d 956 (9th Cir. 11 2007). Summary judgment is appropriate only “if the movant 12 shows that there is no genuine dispute as to any material fact 13 and the movant is entitled to judgment as a matter of law.” 14 Civil Rule 56(a); Rule 7056; Anderson v. Liberty Lobby, Inc., 15 477 U.S. 242, 249 (1986). 16 We also review de novo the preclusive effects of state 17 court orders and judgments. Whether issue preclusion is 18 available is a mixed question of law and fact. Stephens v. 19 Bigelow (In re Bigelow), 271 B.R. 178, 183 (9th Cir. BAP 2001); 20 In re Khaligh, 338 B.R. at 823. If issue preclusion is 21 available, the decision of the bankruptcy court to apply it is 22 reviewed for abuse of discretion. Lopez v. Emergency Serv. 23 Restoration, Inc. (In re Lopez), 367 B.R. 99, 103 (9th Cir. BAP 24 2007). Under the abuse of discretion standard, reversal is 25 appropriate only where the bankruptcy court applied an incorrect 26 legal rule, or where its application of the law to the facts was 27 illogical, implausible or without support from inferences that 28 may be drawn from the record. Ahanchian v. Xenon Pictures,
-12- 1 Inc., 624 F.3d 1253, 1258 (9th Cir. 2010), citing United States 2 v. Hinkson, 585 F.3d 1247, 1262 (9th Cir. 2009) (en banc). When 3 a state’s preclusion law controls, the bankruptcy court is 4 required to exercise such discretion consistent with the 5 applicable state law.5 Gayden v. Nourbakhsh (In re Nourbakhsh), 6 67 F.3d 798, 800-01 (9th Cir. 1995); In re Khaligh, 338 B.R. at 7 823. 8 We can affirm the bankruptcy court on any basis supported 9 by the record. ASARCO, LLC v. Union Pac. R.R., 765 F.3d 999, 10 1004 (9th Cir. 2014); Shanks v. Dressel, 540 F.3d 1082, 1086 11 (9th Cir. 2008). 12 V. DISCUSSION 13 The only issue in these appeals is whether Debtor committed 14 a defalcation(s) while acting in a fiduciary capacity that 15 supports excepting her debts to Parsons and ACIC from discharge 16 for purposes of § 523(a)(4).6 We begin our analysis by noting 17 that we are bound by the principle that “exceptions to discharge 18 should be strictly construed against an objecting creditor and 19 20 5 Debtor does not contest or present any argument in either 21 of these appeals that the bankruptcy court misapplied California issue preclusion law. Accordingly, any such argument is deemed 22 waived. “We review only issues which are argued specifically and distinctly in a party’s opening brief.” Greenwood v. FAA, 23 28 F.3d 971, 977 (9th Cir. 1994), citing Miller v. Fairchild 24 Indus., Inc., 797 F.2d 727, 738 (9th Cir. 1986). 6 25 Section 523(a)(4) provides an exception to an individual chapter 7 debtor’s discharge for debts “for fraud or defalcation 26 while acting in a fiduciary capacity, embezzlement, or larceny.” As noted by the bankruptcy court at the Hearing, Debtor does not 27 contest that, considering her conduct that resulted in the subject judgment debts, she was acting as a fiduciary of an 28 express trust.
-13- 1 in favor of the debtor.” Snoke v. Riso (In re Riso), 978 F.2d 2 1151, 1154 (9th Cir. 1992); Mele v. Mele (In re Mele), 501 B.R. 3 357, 363 (9th Cir. BAP 2013). 4 The battle lines between the parties are drawn based on the 5 Supreme Court’s recent decision in Bullock v. BankChampaign, 6 N.A., 133 S. Ct. 1754 (2013). Prior to the Bullock decision, 7 courts, including courts of appeals, had disagreed about the 8 mental state required to support an exception to discharge based 9 on a defalcation of a fiduciary under § 523(a)(4). In fact, in 10 considering interpretation of § 523(a)(4), the Ninth Circuit had 11 held that the term “defalcation” included “even innocent acts of 12 failure to fully account for money received in trust.” Sherman 13 v. S.E.C. (In re Sherman), 658 F.3d 1009, 1017 (9th Cir. 2011), 14 quoting Blyler v. Hemmeter (In re Hemmeter), 242 F.3d 1186, 1190 15 (9th Cir. 2001). 16 In Bullock, the debtor had served as the trustee of a 17 family trust with a single asset, a life insurance policy on his 18 father’s life. Bullock, 133 S. Ct. at 1757. The trust 19 agreement allowed the trustee to borrow against the life 20 insurance policy’s value, with any such loans to be repaid at 21 the “insurance company-determined 6% interest rate.” Id. The 22 debtor, in fact, took out several such loans, using some of the 23 loan funds for transactions that benefitted him personally. Id. 24 However, all such loans were repaid in full with six percent 25 interest to the trust. Id. 26 The debtor later was sued by his brothers in Illinois state 27 court (“State Court”), and the State Court ultimately determined 28 that the debtor had breached his fiduciary duty, finding that,
-14- 1 although the debtor “does not appear to have had a malicious 2 motive in borrowing funds from the trust,” he nonetheless “was 3 clearly involved in self-dealing.” Id. Accordingly, the State 4 Court entered a judgment against the debtor that he sought to 5 discharge in bankruptcy. Id. 6 The successor trustee bank (“Bank”) filed an adversary 7 proceeding in bankruptcy to except the debtor’s judgment debt to 8 the trust from his discharge under § 523(a)(4). Id. As in 9 these appeals, the bankruptcy court granted summary judgment in 10 favor of the Bank, concluding that the debtor’s debt to the 11 trust was for defalcation while acting in a fiduciary capacity 12 and thus was excepted from his discharge under § 523(a)(4). Id. 13 at 1758. 14 The Supreme Court granted certiorari to consider the scope 15 of the term “defalcation” in the § 523(a)(4) context and 16 concluded that it included a “culpable state of mind 17 requirement” to align it with the other claims for discharge 18 exceptions included in § 523(a)(4), i.e., fraud while acting in 19 a fiduciary capacity, embezzlement and larceny. Id. at 1757 and 20 1760-61. Following Bullock, it is clear that a finding of 21 “defalcation while acting in a fiduciary capacity” does not 22 support an exception to discharge under § 523(a)(4) on a “no 23 fault” or strict liability basis. See id. at 1761. 24 What is not so clear is where to draw the line in 25 considering fiduciary defalcations that do not involve a 26 subjective intent to cause harm. The expansive language used by 27 the Supreme Court in setting forth new standards leaves us with 28 some difficult problems of interpretation in this case. The
-15- 1 Supreme Court described the standards for excepting a fiduciary 2 defalcation from a debtor’s discharge under § 523(a)(4) as 3 follows in Bullock: 4 [W]here the conduct at issue does not involve bad faith, moral turpitude, or other immoral conduct, the 5 term requires an intentional wrong. We include as intentional not only conduct that the fiduciary knows 6 is improper but also reckless conduct of the kind that the criminal law often treats as the equivalent. 7 Thus, we include reckless conduct of the kind set forth in the Model Penal Code. Where actual knowledge 8 of wrongdoing is lacking, we consider conduct as equivalent if the fiduciary “consciously disregards” 9 (or is willfully blind to) “a substantial and unjustifiable risk” that his conduct will turn out to 10 violate a fiduciary duty. ALI Model Penal Code § 2.02(2)(c), p. 226 (1985). See id., § 2.02 Comment 11 9, at 248 (explaining that the Model Penal Code’s definition of “knowledge” was designed to include 12 “‘wilful blindness’”). That risk “must be of such a nature and degree that, considering the nature and 13 purpose of the actor’s conduct and the circumstances known to him, its disregard involves a gross deviation 14 from the standard of conduct that a law-abiding person would observe in the actor’s situation.” Id., 15 § 2.02(2)(c), at 226 (emphasis added). 16 Bullock at 1759-60 (emphasis in original). 17 The quoted language from the Bullock decision, in effect, 18 states three bases for determining that a fiduciary defalcation 19 supports an exception from a debtor’s discharge for the subject 20 debt: 21 First, debts resulting from acts of bad faith, moral 22 turpitude or other immoral conduct are excepted from discharge 23 under the § 523(a)(4) defalcation standard. See Tomasi v. 24 Savannah N. Denoce Trust (In re Tomasi), No. CC-12-1401-KiTaD, 25 2013 WL 4399229, at *10 (9th Cir. BAP Aug. 15, 2013). In the 26 Surcharge Judgment, the Probate Court awarded Debtor her 27 statutory commission as Estate administrator in the amount of 28 $65,262.07 as an offset against the surcharge award. In
-16- 1 addition, in his objection to the Debtor’s Second Account, 2 Parsons requested attorneys fees and costs under California 3 Probate Code (“Probate Code”) § 11003(b). Noting that Probate 4 Code § 11003(b) required a finding that Debtor opposed Parsons’ 5 objection “without reasonable cause and in bad faith” to support 6 an award of fees and costs, the Probate Court declined to award 7 Parsons attorneys fees and costs. No party has suggested that 8 Debtor’s breaches of her fiduciary duties at issue in these 9 appeals were the products of moral turpitude or other immoral 10 conduct. 11 Second, the § 523(a)(4) defalcation standard covers 12 intentional improper conduct and criminally reckless conduct. 13 Neither Parsons nor ACIC have claimed either before the 14 bankruptcy court or in these appeals that Debtor intentionally 15 breached her fiduciary duties or acted with criminal intent. If 16 the Supreme Court had stopped after the first two sentences of 17 the above-quoted standards, we would be compelled to reverse the 18 bankruptcy court’s summary judgment decisions. 19 However, the Supreme Court went on to elaborate, in effect, 20 a third iteration of the defalcation standard under § 523(a)(4). 21 Citing the ALI Model Penal Code § 2.02(2)(c), the Supreme Court 22 determined that a fiduciary who breaches a fiduciary duty 23 without actual knowledge of wrongdoing but who consciously 24 disregards or is willfully blind to a substantial and 25 unjustifiable risk is subject to a § 523(a)(4) exception to 26 27 28
-17- 1 discharge for defalcation.7 We interpret this third iteration 2 of the defalcation standard as essentially a heightened 3 “recklessness” standard. 4 Debtor argues that she essentially was held liable for not 5 knowing the due date for the Estate’s estate tax return and not 6 filing the estate tax return timely, even though she had 7 retained an accounting firm to prepare the return. She further 8 argues that in these circumstances, excepting her judgment debts 9 to Parsons and ACIC as defalcations for purposes of § 523(a)(4) 10 amounts to a strict liability determination of criminal 11 culpability, contrary to the standards set forth in Bullock. 12 Parsons and ACIC assert that Debtor knowingly and/or 13 recklessly disregarded her fiduciary obligations in at least 14 three respects: (1) she failed to marshal and file an inventory 15 and appraisal of the Estate’s assets so that the estate tax 16 return could be timely filed and the estate tax liability could 17 be timely paid; (2) she failed to file the estate tax return 18 timely, even though it was her ultimate responsibility to file 19 the return and make sure that the deadline was met; and (3) even 20 after the estate tax return deadline had passed, the estate tax 21 22 7 ALI Model Penal Code § 2.02(2)(c) states: 23 Recklessly. A person acts recklessly with respect to 24 a material element of an offense when he consciously disregards a substantial and unjustifiable risk that 25 the material element exists or will result from his conduct. The risk must be of such a nature and degree 26 that considering the nature and purpose of the actor’s conduct and the circumstances known to him, its 27 disregard involves a gross deviation from the standard of conduct that a law-abiding person would observe in 28 the actor’s situation.
-18- 1 return was not completed and filed until many months after it 2 was due. In spite of having her accounting firm’s estimate of 3 the estate tax to be paid, she dribbled in payments over a 4 period of many months, thus exacerbating the penalties assessed 5 and the amount of accrued interest that had to be paid. In 6 these circumstances, Parsons and ACIC both contend that the 7 bankruptcy court’s summary judgment determinations were correct 8 that Debtor’s judgment debts to them resulting from defalcations 9 of her fiduciary duties were excepted from her discharge 10 pursuant to § 523(a)(4) under Bullock. 11 Our review of the undisputed facts in the record before us 12 leads us to the following conclusions: Prior to her appointment 13 as Estate administrator, Debtor sought to be retained for 14 substantial Estate work that she was not competent to perform. 15 We agree with the Probate Court’s conclusion that it is 16 inconceivable that a trained attorney who practiced outside the 17 probate area but had agreed to accept a position as the 18 administrator of a substantial California probate estate would 19 not have reviewed the duties of an estate administrator under 20 the Probate Code to ascertain the requirements to file an 21 inventory and appraisal timely. Debtor is not in the category 22 of “nonprofessional trustees, perhaps administering small family 23 trusts potentially immersed in intrafamily arguments,” for whom 24 the Supreme Court expressed particular concern in Bullock. See 25 Bullock, 133 S. Ct. at 1761 (emphasis in original). In any 26 event, when she signed and filed the Duties Statement with the 27 Probate Court, Debtor was aware that she had four months from 28 the date that letters of administration were issued to her (the
-19- 1 very same date) to file the Estate inventory and appraisal. 2 Yet, in a patent exhibition of Debtor’s “pattern of lethargy 3 when it came to working on” Estate matters, a partial inventory 4 and appraisal for the Estate was not filed until February 2, 5 2010, over seven months after it was due, and the final 6 inventory and appraisal was not filed until June 2010, four 7 months later. 8 Debtor’s dilatory filing of the inventory and appraisal had 9 two very adverse effects for the Estate. First, the estate tax 10 return could not be prepared and filed in the absence of the 11 inventory and appraisal information. Consequently, Debtor’s 12 late filing of the inventory and appraisal effectively 13 guaranteed that the estate tax return would be filed late. 14 Second, Debtor’s failure to inventory and appraise the Estate 15 until a date well beyond when the estate tax return was due 16 meant that she was caught flat-footed when she needed access to 17 Estate bank accounts to marshal assets and pay the estate tax, 18 as estimated by her accountants. As pointed out by the Probate 19 Court, Debtor was entitled to access to all Estate bank accounts 20 from the date that she received her letter of administration, 21 February 27, 2009. 22 As administrator of the Estate, Debtor had the sole 23 responsibility to make sure that the estate tax return was filed 24 on time and the estate tax was paid. Indeed, upon her 25 appointment as Estate administrator, Debtor knew that she bore 26 those responsibilities so long as the Estate had funds available 27 to pay the estate tax. Yet, she testified before the Probate 28 Court that she relied entirely on the Wallin Firm to handle
-20- 1 estate tax return issues, admitting that she had no expertise in 2 the tax area: “I don’t prepare my own taxes. I never have in my 3 entire life.” Cal. Sup. Ct. Hr’g Tr. (Mar. 26, 2012) at 33:26- 4 28 (Exh. 6, ECF No. 13, adv. no. 2:14-ap-01030). Debtor further 5 testified that she was advised by Edelblute that the estate tax 6 return was due by August 15, 2009, and she “vehemently” denied 7 that she ever was told that the estate tax return was due on 8 August 3, 2009. However, she did not present any corroborating 9 testimony from Edelblute, by declaration or otherwise, and 10 Debtor’s testimony was undercut by the late Form 4768 request 11 for extension that she signed, which noted the past due deadline 12 for the estate tax return of August 3, 2009. In any event, one 13 does not need to be an accountant or even an attorney to 14 calculate the deadline to file an estate tax return mandated by 15 26 U.S.C. § 6075(a), which requires that estate tax returns 16 “shall be filed within 9 months after the date of the decedent’s 17 death.” Even if there was some question as to the exact 18 deadline date, no accounting expertise was needed to calendar a 19 date comfortably in advance of the deadline either to make sure 20 that the return could be filed by that date or to request an 21 extension. 22 The reality was that the deadline was missed, and Debtor 23 made only a nominal $10,000 payment on an estate tax liability 24 that the Wallin Firm estimated would be $825,000. However, the 25 missed deadline to file the estate tax return and pay the estate 26 tax owed need not have been catastrophic for the Estate if 27 Debtor had diligently worked to get the estate tax return filed 28 and the tax liability paid as soon as possible thereafter.
-21- 1 However, the estate tax return apparently was not filed until 2 September 15, 2010, over thirteen months after the return was 3 due and after the IRS had sent a reminder that the estate tax 4 return had not been filed in April 2010, approximately five 5 months before. Debtor made further estate tax payments starting 6 in April 2010 through September 2010 totaling $1,316,000. 7 However, by that time, it was too late to avoid the imposition 8 of very large penalties and the accrual of substantial interest. 9 In these circumstances, we simply disagree with Debtor that 10 concluding that she committed a defalcation in breach of her 11 fiduciary duties excepted from her discharge under § 523(a)(4) 12 is imposing strict liability on her for missing an estate tax 13 return deadline of which she was unaware. The records in these 14 appeals reflect a pervasive and unjustified series of breaches 15 of fiduciary duties by Debtor in administering the Estate. The 16 records further reflect that she consciously and recklessly 17 disregarded the substantial risks to the Estate of not filing 18 the estate tax return and paying the estate tax owed timely, or 19 at least as soon after the deadline passed as possible. Debtor 20 was not merely negligent but was grossly negligent in performing 21 her duties as administrator of the Estate. The materiality of 22 the risks Debtor blindly disregarded is fully reflected in the 23 $439,621.61 in interest and penalties ultimately assessed by the 24 IRS for the late filing of the estate tax return and the late 25 payment of the estate taxes owed. We conclude that the 26 bankruptcy court did not err in granting summary judgments in 27 favor of Parsons and ACIC on their § 523(a)(4) adversary 28 proceeding claims based on Debtor’s multiple defalcations of her
-22- 1 fiduciary duties to the Estate. 2 VI. CONCLUSION 3 For the foregoing reasons, we AFFIRM the bankruptcy court’s 4 summary judgment decisions in both appeals. 5 6 7 8 9 10 Dissent begins on next page. 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
-23- 1 KURTZ, Bankruptcy Judge, dissenting: 2 3 While I appreciate the majority’s effort to make sense of 4 Bullock’s recklessness standard, I have a different view of that 5 standard. The majority quotes selected portions of Bullock and 6 concludes that, under Bullock, two different levels of 7 recklessness are subsumed within the term “defalcation” as used 8 in § 523(a)(4). According to the majority, the first level of 9 recklessness included consists of criminal recklessness. The 10 majority then suggests that a second level of recklessness is 11 included, which is higher than the objective recklessness 12 standard Bullock explicitly rejected but lower than criminal 13 recklessness. 14 Unlike the majority, I have trouble reconciling this 15 second, non-criminal level of recklessness with Bullock’s 16 statements tying the requisite level of recklessness to criminal 17 law, to the Model Penal Code, and to intentionally wrongful 18 conduct. See, e.g., Bullock, 133 S. Ct. at 1759 (“where the 19 conduct at issue does not involve bad faith, moral turpitude, or 20 other immoral conduct, the term [defalcation] requires an 21 intentional wrong. We include as intentional not only conduct 22 that the fiduciary knows is improper but also reckless conduct 23 of the kind that the criminal law often treats as the 24 equivalent.”). In short, I believe that Bullock identifies only 25 one level of recklessness as falling within the scope of 26 defalcation under § 523(a)(4), and that is a criminal level of 27 recklessness. 28 In this respect, and in several others, I prefer the
-1- 1 analysis of Bullock’s recklessness standard set forth in 2 MacArthur Co. v. Cupit (In re Cupit), 514 B.R. 42 (Bankr. D. 3 Colo. 2014). In my view, In re Cupit correctly identifies 4 Bullock’s standard as being closely connected to the criminal 5 law definition of recklessness. Id. at 50. Furthermore, In re 6 Cupit offers a number of crucial observations regarding the 7 applicable standard, which include the following: 8 • The applicable recklessness standard is predominantly 9 subjective in nature and, in the first instance, focuses on the 10 debtor’s actual awareness of the risk that his or her conduct 11 might turn out to violate his or her fiduciary duties. Id. at 12 50-51. 13 • The debtor is not reckless within the meaning of § 523(a)(4) 14 unless he or she consciously disregards or is willfully blind to 15 the risk of violating his or her fiduciary duties. Id. at 51- 16 52. 17 • Both conscious disregard and willful blindness focus on the 18 subjective state of mind of the debtor – what he or she actually 19 was aware of and actually believed regardless of the objective 20 reasonableness of that awareness or those beliefs. Id. 21 • If either of the above subjective elements are met, then the 22 court also must find that the risk ignored was both substantial 23 and unjustifiable. Unlike the conscious disregard and willful 24 blindness elements, this element is predominantly objective in 25 nature, and requires the court to assess whether, in 26 disregarding (or blinding himself or herself to) the risk, 27 debtor grossly deviated “from the standard of conduct that a 28 law-abiding person would observe in the actor’s situation.” Id.
-2- 1 at 52 (quoting Bullock, 133 S. Ct. at 1760). 2 In addition to In re Cupit, I also find persuasive 3 Cincinnati Ins. Co. v. Chidester (In re Chidester), 524 B.R. 4 656, 661-62 (Bankr. W.D. Va. 2015), which followed In re Cupit. 5 In re Chidester further refined Bullock’s recklessness standard 6 in order to correctly apply it in the summary judgment context. 7 In re Chidester held that, on summary judgment, it could rule in 8 favor of the plaintiff-creditor on the recklessness issue only 9 if, given the state of the record, no reasonable trier of fact 10 could have found in favor of the debtor: (1) regarding the 11 debtor’s subjective awareness of his or her fiduciary duties; 12 (2) regarding the debtor’s conscious disregard of (or willful 13 blindness to) the risk that his or her conduct might breach 14 those duties; and (3) regarding his or her subjective awareness 15 of the substantial and unjustified nature of that risk. Id. at 16 662. In re Chidester’s summary judgment standard is consistent 17 with Ninth Circuit precedent. See Soremekun v. Thrifty Payless, 18 Inc., 509 F.3d 978, 984 (9th Cir. 2007) (“Where the moving party 19 will have the burden of proof on an issue at trial, the movant 20 must affirmatively demonstrate that no reasonable trier of fact 21 could find other than for the moving party.”). 22 Given the predominantly subjective nature of Bullock’s 23 recklessness standard and its focus on what the debtor actually 24 was aware of and actually believed at the time, I am persuaded 25 that a reasonable trier fact could find in favor of Heers on the 26 recklessness issue. Indeed, when as here the defendant’s state 27 of mind is disputed and is properly at issue, I believe summary 28 judgment almost never will be appropriate. Determining a
-3- 1 party’s state of mind typically requires choosing between two or 2 more possible inferences as well as assessing the party’s 3 credibility. See, e.g., Wang v. Ke (In re Ke), 2013 WL 4170250, 4 at *13-14 (Bankr. N.D.N.Y. Aug. 14, 2013), aff’d, 2014 WL 5 4626329 (N.D.N.Y. Sept. 15, 2014); see also Hernandez v. New 6 York, 500 U.S. 352, 364 (1991) (noting that a litigant’s state 7 of mind, for purposes of determining intent, largely turns on 8 the court’s assessment of the litigant’s credibility). 9 Assessing credibility and choosing between two or more possible 10 inferences are tasks that simply cannot be performed properly in 11 the process of ruling on a summary judgment motion. Anderson v. 12 Liberty Lobby, Inc., 477 U.S. 242, 255 (1986). 13 I agree with the majority that Heers’ performance of her 14 duties was quite poor and that the explanations and excuses she 15 offered in the probate proceedings for her conduct were 16 unsatisfactory. I might even go so far as to characterize 17 Heers’ conduct as criminally negligent. Nonetheless, based on 18 my view of Bullock’s recklessness standard, I cannot transmute 19 even criminal negligence into a summary judgment ruling that 20 Heers’ conduct rose to the same level as criminal recklessness. 21 See generally In re Cupit, 514 B.R. at 50-51 (distinguishing 22 between criminal negligence and criminal recklessness). 23 Accordingly, I respectfully dissent. I would reverse the 24 bankruptcy court’s summary judgment ruling and would remand for 25 trial on the defalcation/recklessness issue. 26 27 28
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