Douglass v. Douglass (In re Stephen Charles Douglass XXX-Xx-7094 & Kimberly Ann Douglass XXX-Xx-3739)

Decision Date23 October 2015
Docket NumberCase No. 13-42079,Adversary No. 13-4106
CourtU.S. Bankruptcy Court — Eastern District of Texas
Chapter 7

Upon trial of the complaint filed by the Plaintiff, Sonia Douglass, seeking a determination of the existence and the alleged nondischargeable nature of a debt purportedly owed to her by the Defendant-Debtors, Stephen Douglass and Kimberly Douglass (collectively, the "Defendants" or "Debtors"), as well as upon consideration of a related objection of the Plaintiff to the Defendant-Debtors' First Amended Claim of Exemptions filed in the underlying bankruptcy case, the Court issues the following findings of fact and conclusions of law. The Plaintiff contends that her assertions of causes of action against the Defendants should not be subject to any limitations defenseotherwise applicable to such claims, that any liability arising from such claims is a nondischargeable debt pursuant to 11 U.S.C. § 523(a)(4),1 and that she is entitled to other equitable remedies, including the imposition of a constructive trust placed on the Defendant-Debtors' claimed homestead in Argyle, Texas. Because she claims an equitable title in the Debtors' Argyle homestead, the Plaintiff also objected to the Defendant-Debtors' claim of homestead exemption to that Argyle property and to certain exemption claims relating to personal property in the main bankruptcy case. Such objection was reassigned to the undersigned judge to be tried in conjunction with the dischargeability adversary. Following the trial and upon completion of the parties' opportunity to submit post-trial briefs, the Court took the matter under advisement. This decision disposes of all issues pending before the Court.


1. The Defendants, Stephen Charles Douglass ("Stephen")2 and Kimberly A. Douglass ("Kimberly") (collectively, the "Defendants") filed a joint petition for relief under Chapter 7 of the United States Bankruptcy Code on August 28, 2013.

2. The Plaintiff, Sonia Douglass ("Sonia"), is Stephen's 86-year-old mother and the mother-in-law of Kimberly.3

3. Sonia timely filed her Original Complaint Seeking Affirmative Relief and the Determination of Non-Dischargeability of Debt on November 26, 2013, seeking to liquidate her claims against Stephen and Kimberly and a determination that any such claim should be excepted from the scope of any discharge granted to either of the Defendants pursuant to 11 U.S.C. §523(a)(2)(A) and §523(a)(4).

4. Sonia was married to Dan Otto Douglass ("Mr. Douglass") for approximately 45 years. Mr. Douglass handled virtually every aspect of the couple's financial affairs during their marriage.

5. Stephen earned a college degree in banking and finance from the University of North Texas and began a career in the banking and financial services industry.

6. Stephen worked at various local banks through the 1980s. In 1989, he became employed by the Federal Reserve Bank of Dallas and served in various capacities from 1989 through 2011. He was an experienced banking professional.

7. It was in 1993 that Dan Douglass passed away, leaving his entire estate to his widow, Sonia.

8. Mr. Douglass died testate and his will was tendered for independent probate administration in Kaufman County, Texas.4 Sonia was named as the executrix of her husband's estate.

9. Attorney Tom M. Snow of Terrell served as the attorney for Sonia during the probate of her late husband's estate.

10. The inventory and appraisement revealed the existence of two pieces of real estate, a lakehouse in Henderson County, Texas valued at $120,000, and a home in Rowlett, Texas, valued at $80,000. It also revealed personal property valued at $306,491.29, which encompassed a number of financial accounts and certificates of deposit.5

11. Sonia was initially active in the formation of new cash accounts. For example, she opened a savings account ending in -3638 in April 1993, in her singular name atBank One. The mailing address for this account was Sonia's home in Rowlett.6

12. Two months later, Sonia similarly opened account -5761 in her name at the same bank.7

13. As time went by, however, Sonia increasingly felt ill-equipped to handle the investments alone because she had no real experience in managing financial assets or in determining the proper vehicles for the growth of such assets.

14. From the time of her husband's death, Sonia was consistently generous to her family members, particularly those who lived closer to her, and she was motivated not only to preserve and expand the asset base for her own use, but she also wanted to maximize the amount available for those periodic contributions to her family.

15. Sonia offered no pretense of knowledge regarding where her liquid assets should be invested in order to reach those goals and, due to her advancing age, she was reticent to travel outside her immediate area in order to facilitate those transfers.

16. As a result, Sonia increasingly sought and obtained the advice and assistance of the experienced banker in her family — her son, Stephen.

17. The only formal fiduciary relationship which Stephen undertook on behalf of his mother during the relevant time period was in 1996 when he was given a Special Durable Power of Attorney - Real Estate to effectuate the sale of his parents' lakehouse in Henderson County, Texas.8 That realty sale was completed in that year.

18. Otherwise, Stephen had no formal power of attorney to handle any of his mother's financial affairs.9

19. Notwithstanding the lack of formal authority, however, Stephen's active participation in the management of his mother's financial affairs increased incrementally from 1996 through December 2011.

20. Stephen began to advise her regarding the establishment of new accounts or when amounts should be shifted to new institutions or new types of investment vehicles.

21. Sonia increasingly deferred to Stephen with regard to the manner in which her funds were held due to her trust in his financial expertise.

22. For example, three years after the death of her husband, Stephen was added to Chase account -5761. However, rather than being added merely as an accommodation party with no ownership rights, the account was modified to list Stephen as a joint owner with rights of survivorship.10

23. As an experienced banker, Stephen would have known the ownership ramifications of the selection of a joint account and the significance of granting a right of survivorship.

24. Signature cards for multiple accounts indicate that (1) Stephen was added as a joint tenant to accounts already owned by Sonia, or (2) new accounts were opened with Sonia and Stephen listed as joint tenants. Many, if not all, of these accounts which were subsequently opened also provided Stephen with rights of survivorship.11

25. As time went by, Stephen's "restructuring" of his mother's cash accounts continued, providing him with ever-increasing access to the funds on deposit.

26. In June 2001, funds were shifted from Bank One to Farmers & Merchants State Bank ("F&M") to establish a checking account and to purchase a $50,000 Certificate of Deposit.12

27. Both Sonia and Stephen were listed on the F&M bank account and the ownership status was listed as multiple-party with right of survivorship. Sonia's address inRowlett was the designated address on the account.13

28. A similar multi-party account with right of survivorship [-6310] was opened at Jefferson Heritage Bank in June 2001.14

29. Stephen became a listed account owner on the money market account at First Bank and Trust - Denton [account -4637] in September 2002.15

30. Stephen wrote several checks on the First Bank and Trust - Denton account [-4637] during that year, totaling more than $11,500.16

31. Similar shifts to joint ownership with some type of direct survivorship rights in Stephen included a Chase Bank CD in December 2005,17 a Synergy Bank account [-4603] at least by October 2008,18 a Chase POD-savings account [-3638] in late 2009,19 a CD at First United Bank and Trust in 2010,20 and a Synergy Bank account [-0720] in 2010.21

32. All of these financial account "restructurings" were taken under Stephen's direction and influence.

33. The financial alterations provided Stephen with ongoing access to his mother'smoney and to utilize those funds arbitrarily to meet whatever financial needs he might face.

34. There were certainly transactions, such as certain gifts to particular family members, including extravagant gifts,22 which were initiated by Sonia.

35. Sonia acknowledged at trial that she at various times authorized Stephen to make withdrawals from designated accounts prior to the time that any withdrawal was made.

36. However, Stephen's testimony that he never withdrew funds from the various accounts without his mother's prior approval is not credible and, as set forth infra, unilateral withdrawals by Stephen, with subsequent discovery by Sonia, became more frequent as time passed.

37. It is certainly true that, with regard to those accounts, all of the transactions were discoverable by Sonia on a monthly basis based upon her systematic review of the respective bank statements and her journal entries triggered by that review.

38. While she may have rarely complained or taken punitive measures about the way in which her funds were being handled, perhaps due to fears, real or imagined, that she would be isolated from his family if she challenged his activities, Sonia was attentive to the activity occurring within her financial accounts.

39. For all of the relevant time periods, the bank statements regarding these various accounts and instruments were always tendered directly to Sonia at her residential address in Rowlett on a monthly basis.23

40. Stephen's wife and co-Defendant, Kimberly, was not a signatory or stated owner...

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