In re Holdaway

• Decision Date: 12 May 2008
• Docket Number: Adversary No. 07-3321.,Bankruptcy No. 07-32597.
• Citation: 388 B.R. 767
• Parties: In re Nancy Shealy HOLDAWAY, Debtor. Betty Winn, Plaintiff, v. Nancy Shealy Holdaway, Defendant.
• Court: U.S. Bankruptcy Court — Southern District of Texas

388 B.R. 767

In re Nancy Shealy HOLDAWAY, Debtor Betty Winn, Plaintiff, v. Nancy Shealy Holdaway, Defendant.

Bankruptcy No. 07-32597.

Adversary No. 07-3321.

United States Bankruptcy Court, S.D. Texas, Houston Division.

May 12, 2008.

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Marilyn Denise McGuire, Attorney at Law, Houston, TX, for Debtor.

MEMORANDUM OPINION ON FINAL JUDGMENT

MARVIN ISGUR, Bankruptcy Judge.

For the reasons set forth below, the Court finds in favor of Plaintiff, Ms. Betty Winn. The Court has jurisdiction of this proceeding pursuant to 28 U.S.C § 1334. This is a core proceeding under 28 U.S.C. § 157(b)(2)(I).

Background

On April 17, 2007, Nancy Shealy Holdaway ("Holdaway") filed for Chapter 7 bankruptcy relief. On July 5, 2007, a complaint was filed against Holdaway, by her mother, Betty R. Winn ("Winn") seeking a judgment of non-dischargeability of certain debts pursuant to 11 U.S.C. §§ 523(a)(2)(A) and 523(a)(4). Holdaway's 82-year old mother, Winn, asserted that Holdaway had stolen and mismanaged Winn's assets that had been entrusted to Holdaway's care.

On December 13, 2007, Winn filed a notice of removal, removing to this Court a state court action filed July 7, 2006, in Harris County against Holdaway and a former husband of Holdaway's, Paul Buchanan. The state court suit asserted claims for breach of fiduciary duty and duty of good faith and fair dealing, conversion, negligence, gross negligence, securities law violations, fraud, breach of contract, alleged Holdaway was an Executor De Son Tort and requested an accounting. Holdaway moved to remand the state court suit.

On January 15, 2008, the Court signed an agreed order granting the motion for remand. The order remanded only the state law causes of action. The Court retained the § 523(a) claims. Winn filed a First Amended Complaint on February 18, 2008. She maintained her claims under §§ 523(a)(2)(A) and 523(a)(4). Trial of this adversary proceeding commenced on April 7, 2008. Holdaway asserted that the statute of limitations had expired on Winn's causes of action. For the reasons set forth below, the Court finds in favor of Winn on the § 523(a)(4) cause of action. The Court finds in favor of Holdaway on the § 523(a)(2)(A) claim.

11 U.S.C. § 523(a)(2)(A)

The discharge in bankruptcy is to protect the "honest but unfortunate debtor" and to give the debtor a fresh start. Grogan v. Garner, 498 U.S. 279, 287, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). There are several debts, however, that for public policy reasons are excepted from discharge. These are debts generally incurred due to malfeasant activity. See Cohen v. de la Cruz., 523 U.S. 213, 222, 118 S.Ct. 1212, 140 L.Ed.2d 341 (1998). Congress codified this principle in 11 U.S.C. § 523(a). Id. (quoting Grogan, 498 U.S. at 287, 111 S.Ct. 654) ("The various exceptions to discharge in § 523(a) reflect a conclusion on the part of Congress `that the creditors' interest in recovering full payment of debts in these categories out-weight[s] the debtors' interests in a complete fresh start.'").

Section 523(a)(2)(A) excepts from discharge debts "for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition." 11 U.S.C. § 523(a)(2)(A).

In defining the elements to be fulfilled under § 523(a)(2)(A), the Fifth Circuit has "distinguished between actual fraud on the one hand and false pretenses and representations on the other." RecoverEdge L.P. v. Pentecost, 44 F.3d 1284, 1292 (5th Cir.1995). The elements for each are "different but somewhat overlapping." In re Mercer, 246 F.3d 391, 404 (5th Cir.2001). Specifically, a false representation or pretense requires a knowing and fraudulent falsehood that describes past or current facts and is relied upon by the other party. See Recover-Edge, 44 F.3d at 1292; In re Allison, 960 F.2d 481, 483 (5th Cir.1992); In re Bercier, 934 F.2d 689, 692 (5th Cir.1991). For a past or current fact, the Fifth Circuit has held that "a promise to perform acts in the future is not considered a qualifying misrepresentation merely because the promise subsequently is breached." In re Allison, 960 F.2d 481, 484 (5th Cir.1992) (citing In re Bercier, 934 F.2d 689 (5th Cir.1991)). However, a debtor's misrepresentations of his intentions "may constitute a false representation within the meaning of the dischargeability provision if, when the representation is made, the debtor has no intention of performing as promised." In re Allison, 960 F.2d at 484. In contrast, for the purposes of non-dischargeability, actual fraud requires a creditor to prove that "(1) the debtor made representations; (2) at the time they were made the debtor knew they were false; (3) the debtor made the representation with the intention and purpose to deceive the creditor; (4) the creditor relied on such representations; and (5) the creditor sustained losses as a proximate result of the representations." RecoverEdge, 44 F.3d at 1293 (quoting In re Roeder, 61 B.R. 179, 181 (Bankr. W.D.Ky.1986)).

After Winn's case-in-chief, Holdaway moved for a judgment as a matter of law under Federal Rule of Civil Procedure 50.¹ The Court denied Holdaway's request as to the § 523(a)(4) claim, but granted Holdaway's request as to the § 523(a)(2)(A) claim. Section 523(a)(2)(A) requires that the debt subject to the dischargeability suit is "for money, property, [or] services ... to the extent obtained by—(A) false pretenses, a false representations, or actual fraud ..." 11 U.S.C. § 523(a)(2)(A) (emphasis added).

At trial, testimony was solicited from Winn, Holdaway, and Andrew Holdaway. Andrew Holdaway is Holdaway's current husband; however, they are seeking a divorce. The Court also heard deposition testimony from Paul Buchanan, a former husband of Holdaway's, who was married to Holdaway during the time period over which this trial concerns.

When Winn's husband passed away in July 1993, Winn asked either Holdaway or Paul Buchanan to manage her finances. Winn's testimony and Paul Buchanan's deposition testimony was that Holdaway was to manage the finances. Holdaway, however, testified that Paul Buchanan was to manage Winn's finances. Regardless of who was to manage Winn's accounts, all parties agree Winn voluntarily relinquished the handling of her finances.

There were two accounts set up by Holdaway on behalf of Winn, an E-Trade Account and a Merrill Lynch Account. Both of these accounts were funded entirely with Winn's funds, but set up in the names of Winn and Holdaway as joint tenants with rights of survivorship.

Winn presented into evidence checks totaling approximately $167,000.00 written from the E-Trade account. These checks appeared on E-Trade statements issued in 1999. Winn's signature appears on only one check for $1,478.90. The remainder of the checks were signed by Holdaway. Winn testified that while she knew of the existence of this account, she never received monthly account statements. Holdaway testified that Holdaway had always been the party to receive the statements pursuant to Winn's request. The Court finds that Winn trusted Holdaway and felt no need to monitor the account.

The Merrill Lynch account likewise demonstrates Winn's trust in Holdaway. Holdaway had a separate account with Merrill Lynch in addition to Winn's account. Holdaway stated that she had approximately eight or nine meetings a Merrill Lynch account representative to discuss these two accounts. Winn was not involved in any of these meetings.

At some point prior to August 2001, Holdaway learned that there had been a significant drop in the balance of Winn's account. Holdaway stated that she had informed the Merrill Lynch representative that if Winn's account dropped below $80,000, the account was to be cashed out. Merrill Lynch allegedly allowed the account to drop significantly below this amount. Holdaway informed Winn of this in August 2001 and informed Winn that the only recourse was to sue. Holdaway testified that Winn told her to do whatever she thought was best. A suit was brought against Merrill Lynch on June 3, 2002. At trial, it was clear that Winn did not know the basis of that suit. Furthermore, in preparing for the Merrill Lynch suit, Holdaway sent a letter to her attorney stating that "I have been the custodian of my mother's account since my dad died 8 years ago." Clearly, Winn entrusted her Merrill Lynch account to Holdaway.

Winn further testified that Holdaway would send her documents to sign. Winn stated she never questioned Holdaway when she signed these documents. For example, a letter from Holdaway to Winn was admitted into evidence in which Holdaway instructs Winn to write two checks for $45,000.00 and $85,000.00 to set up an investment account. The letter contains detailed instructions as to what forms to sign and how to deliver the checks.

In addition to handling Winn's investments, Winn testified that Holdaway handled new car purchases for Winn and the selling of Winn's home. This was supported by the testimony of Andrew Holdaway. He testified that Winn asked Holdaway and himself whether she should sell her house. He also testified that he and Holdaway purchased Winn a used car.

It is clear that Holdaway did not make any misrepresentations to obtain Winn's money or property. Winn relinquished her property into Holdaway's control. Any malfeasant activity which may have occurred arose after the time the property was transferred. The Court, therefore, finds for Holdaway on the § 523(a)(2)(A) claim.

11 U.S.C. § 523(a)(4): Fraud in a Fiduciary Capacity

Section 523(a)(4) applies to debts "for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny." 11 U.S.C. § 523(a)(4). In examining the standard for a claim under § 523(a)(4), the phrase "while acting in a...