In re Cooper, BAP No. CC-81-1103-VGH

• Decision Date: 01 October 1982
• Docket Number: BAP No. CC-81-1103-VGH,Adv. No. LA-80-2521-CA,LA-80-1615-CA.,Bankruptcy No. LA-80-06257-CA,CC-81-1157-VGH
• Citation: 30 BR 484
• Court: U.S. Bankruptcy Appellate Panel, Ninth Circuit
• Parties: In re Daphne COOPER, Debtor. Gordon C. HALL, Executor of the Estate of Katharine T. Cooper, and Katharine C. Barstow, Appellants, v. Daphne COOPER and Merrill Lynch, Pierce, Fenner & Smith, Inc., Appellees.

30 B.R. 484 (1982)

In re Daphne COOPER, Debtor Gordon C. HALL, Executor of the Estate of Katharine T. Cooper, and Katharine C. Barstow, Appellants, v. Daphne COOPER and Merrill Lynch, Pierce, Fenner & Smith, Inc., Appellees.

BAP Nos. CC-81-1103-VGH, CC-81-1157-VGH, Bankruptcy No. LA-80-06257-CA, Adv. Nos. LA-80-2521-CA, LA-80-1615-CA.

United States Bankruptcy Appellate Panels of the Ninth Circuit.

Argued April 15, 1982.

Decided October 1, 1982.

Philip C. Patterson, Philadelphia, Pa., for appellants.

No appearance for appellees.

Before VOLINN, GEORGE and HUGHES, Bankruptcy Judges.

OPINION

VOLINN, Bankruptcy Judge:

The primary issues in this appeal deal with a Bankruptcy Court's interpretation of a state court order and exception to dischargeability of a debt for defalcation while acting in a fiduciary capacity under 11 U.S.C. § 523(a)(4). This appeal is burdened with a voluminous record involving interplay between the Bankruptcy Court and extensive state court probate proceedings, and the inordinately lengthy briefs of the appellant to which the appellee has responded, in this appeal, only by filing her trial brief.¹

I. BACKGROUND FACTS

In March, 1976, Katharine Cooper (hereinafter "Katharine") became ill and enlisted the aid of her daughter, Katharine Barstow (hereinafter "Barstow"), to carry out certain daily financial transactions, apparently at her direction. When Barstow became ill in the summer of 1976, Katharine's granddaughter (Barstow's niece), Daphne Cooper (hereinafter "Daphne"), began to carry out these daily financial transactions for her grandmother, a number of which were carried out through two joint survivorship bank accounts, checking account 4395 and savings account 3782, both of which were funded by monies belonging to Katharine.

Katharine passed away on September 28, 1978. Administration of the probate estate was under the auspices of the Court of Common Pleas of Chester County, Pennsylvania, Orphans' Court Division (hereinafter "Orphans' Court"). The date of death balances in the bank accounts were $1,069.08 in checking account 4395 and $12,841.19 in savings account 3782. Katharine bequeathed her entire residuary estate (after bequests to Barstow of her tangible personal property) to be held in trust for the benefit of Barstow for life with the remainder to Barstow's issue, or in the event of their default, to Katharine's issue.

On September 29, 1978, the day after Katharine's death, Daphne transferred the entire balance of $12,841.19 from savings account 3782 and $400 from checking account 4395 into her personal savings account at the Germantown Savings Bank (hereinafter "GSB account"). Thereafter, Daphne made a number of deposits to and withdrawals from the GSB account.

Apparently, Katharine's will named Gordon C. Hall (hereinafter "Hall") and Katharine's son (Daphne's father), Leslie T. Cooper, as executors of her estate and as trustees of the residuary trust provided for in her will. Due to illness, Leslie T. Cooper announced the appointments and Daphne was appointed in his place.

A dispute arose concerning the ownership of funds in checking account 4395 and savings account 3782 at the time of Katharine's death. Daphne was of the view that the funds were her property pursuant to the joint survivorship nature of the accounts. Barstow objected to Daphne's possession of the funds and petitioned the Orphans' Court to compel Daphne to turn over the account balances to the estate. Barstow argued that under Pennsylvania case law, both of these accounts were "convenience accounts" which lacked the requisite donative intent to effectuate a transfer from Katharine to Daphne of a true joint ownership interest with a right of survivorship and that because Daphne was in a fiduciary relationship with Katharine which shifted the burden of proof to Daphne to prove that any joint ownership interest with a right of survivorship in the accounts was made voluntarily, intentionally and intelligently. On January 8, 1980 the Orphans' Court entered an adjudication finding that

"with respect to checking account 4395, there would seem but little doubt but that Daphne\'s name was added thereto on August 5, 1976, as a matter of convenience to decedent, and not with any donative intent on her part."

There was a dispute as to whether the savings account was a joint survivorship account. Ultimately the court found:

"The Auditing Judge accepts the testimony of Mrs. Dunn, the bank official, and hereby specifically finds as a fact that as between decedent and Daphne, at least, savings account 3782 in August, 1978, had been their joint account with right of survivorship by the execution of the signature cards by both, as she testified. This conclusion is fully justified by the unimpeached and uncontradicted testimony of this witness that she unequivocally identified decedent\'s signatures (plural) thereon."

The Orphans\' Court also found that

"a position of trust and confidence was assumed by Daphne toward decedent beyond any question on May 1, 1978 when the subject savings account was opened in her name alone, a transaction which, . . . unquestionably cast Daphne in the position of a fiduciary. In legal contemplation, she thereby became the trustee of a resulting trust in decedent\'s favor for all of the deposits therein made." (Emphasis added).

Daphne's failure to produce evidence of donative intent by Katharine for savings account 3782 caused the Orphans' Court to sustain Barstow's position. The Orphans' Court accordingly "directed" Daphne

"to pay into the estate, in due course, the sum of $252.21 (the balance of the checking account 4395 not already advanced to or accounted for herein by accountants) and the sum of $12,841.19 (the date of death balance in savings account 3782), together with legal interest thereon from September 28, 1978, the date of decedent\'s death."

These determinations became a final judgment of the Orphans' Court on April 29, 1980.

II. LITIGATION DURING BANKRUPTCY

On July 1, 1981, Daphne filed a bankruptcy petition under 11 U.S.C. Chapter 7. Daphne's schedule of debts included the amount which the Orphans' Court directed her to pay to Katharine's probate estate. On July 22, 1980, Daphne filed an adversary proceeding to invalidate the fixing of a judgment lien and for an order requiring the trustee and Merrill Lynch, Pierce, Fenner and Smith, Inc., to turn over funds claimed as exempt to the debtor under 11 U.S.C. § 522(f). This action was consolidated with an adversary proceeding concerning the same funds commenced by Barstow and Hall for reclamation of traceable proceeds of savings account 3782 and checking account 4894, for a deficiency judgment on proceeds which were not traceable, and for a determination that Daphne's debt to Katharine's probate estate is excepted from discharge under 11 U.S.C. § 523(a)(4). Hall and Barstow filed a motion for summary judgment which was not set for hearing. The case was submitted primarily on the basis of the Orphans' Court Determinations, live testimony of Daphne, and some depositions.

On March 11, 1981, the Bankruptcy Court below, by memorandum decision found and concluded that:

"The trust relationship set forth in the decision of the Orphan\'s Court was not the type of express trust which would give rise to a nondischargeable debt under Bankruptcy Code § 523(a)(4). As referred to by the Orphans\' Court, it was a resulting trust or a constructive trust. In the case of In re Thornton, 544 F.2d 1005 (9th Cir.1976) the court stated that constructive trusts or trusts which are merely implied in law do not impart a fiduciary relationship. The findings of the Orphans Court support this conclusion. Its order created a legal obligation to pay a sum of money into the decedent\'s estate and defined a debtor-creditor relationship between the decedent\'s estate and the bankruptcy debtor.

All but $2,864 of the funds in question were expended prior to the adjudication by the Orphans Court. The debtor learned of the adjudication some time after it was made. The debtor believed that the funds were her property and spent them in that good faith belief. (Emph. added).

I conclude that this debt is dischargeable under § 523(a)(4) of the Bankruptcy Code."

On April 3, 1981, Hall and Barstow moved for reconsideration and supplementation of the Bankruptcy Court's March 11, 1981 memorandum decision. On April 10, 1981, Hall and Barstow moved for a stay of a final decision of the Bankruptcy Court pending the outcome of a petition which they had filed with the Orphans' Court to discharge Daphne as executrix of Katharine's estate and as trustee of the testamentary trust and for an interpretation by the Orphan's Court with respect to ownership of the proceeds of the two bank accounts and its earlier decision. On April 27, 1981, the Bankruptcy Court entered a judgment consistent with the March 11, 1981 memorandum decision, ordering Merrill Lynch, Pierce, Fenner & Smith, Inc., to turn over to Daphne all funds or property held by it in her name. The Bankruptcy Court also denied the motions for reconsideration and supplementation, and by separate order, denied the motion to stay. In the latter order, the Bankruptcy Court stated that any request to the Orphans' Court to determine ownership of the two bank accounts and proceeds thereof was in violation of the automatic stay of 11 U.S.C. § 362. Hall and Barstow withdrew the portion of their petition to the Orphans' Court which the Bankruptcy Court held was in violation of the automatic stay, and filed another adversary proceeding in the Bankruptcy Court to lift the automatic stay so that they could obtain a determination from the Orphans Court concerning ownership of the proceeds of the two bank accounts.

On May 6, 1981, the Orphans' Court removed Daphne as executrix of Katharine's estate and on May 15, 1981, removed Daphne as trustee of the testamentary trust for dissipating assets belonging to the probate...