In re James
| Decision Date | 21 September 1988 |
| Docket Number | Adv. No. 87-0834F.,Bankruptcy No. 87-00070F |
| Citation | 94 BR 350 |
| Parties | In re John JAMES a/k/a James Insurance Service, Debtor. Jessie GRAVES and Edward Graves Individually and Jess & Ron Corporation, Plaintiffs, v. John JAMES a/k/a James Insurance Service, Defendant. |
| Court | U.S. Bankruptcy Court — Eastern District of Pennsylvania |
Pierre B. Pie, II, Philadelphia, Pa., for plaintiffs, Jessie & Edward Graves, Individually and Jess & Ron Corp.
D. Bruce Hanes, Philadelphia, Pa., for debtor/defendant, John James a/k/a James Ins. Service.
Christopher Kuhn, Pincus, Bressler, Hahn, Reich & Weisberg, Philadelphia, Pa., Trustee.
The parties have presented their respective cases by stipulation in this proceeding to determine dischargeability of a debt and the relevant facts may be summarized as follows:1
I.
The debtor/defendant is a licensed insurance agent who operated James Insurance Service as a sole proprietorship at all times relevant to this dispute. During the relevant period, the defendant's brother, Charles James, was an employee of the agency.
The plaintiffs, Jessie and Edward Graves have owned and operated an unspecified business in West Philadelphia since prior to 1978. In 1978 and 1979 the plaintiffs paid defendant for an insurance policy covering the building containing their business and its contents. The defendant purchased a policy for the plaintiffs in 1978 and 1979 (for the periods 1979 and 1980) from the Insurance Placement Facility of Pennsylvania (the "FAIR plan"). In 1980, the defendant billed the plaintiffs for the same policy and the plaintiffs paid their premium. Nevertheless no insurance policy was purchased on the plaintiffs' behalf (covering 1981) and the payment was simply placed in the defendant's general operating account. Again in 1981, the plaintiffs were billed, they paid, but no policy was purchased by the defendant for 1982 coverage.2
It almost goes without saying that on September 23, 1982, a fire occurred at the plaintiffs' business "which caused damage to plaintiffs' building and the contents therein." (See N.T. 5/18/88 p. 2). No evidence was presented about the extent of the damage. Of course, the FAIR plan denied the plaintiffs' claim.
At a deposition held in 1984,3 Charles James, the defendant's brother, took responsibility for the failure to procure insurance for the plaintiffs. He admitted receiving the plaintiffs' premiums, and depositing them in the agency account. He further acknowledged that he neglected to forward either premium to the FAIR plan and that he "sat on it." Id. at 4.4 Defendant, John James, also testified at a deposition in 1984 that his brother handled the plaintiffs' account and that he (John James) was without knowledge that the monies for either policy period were not forwarded to the FAIR plan until the plan refused to pay the plaintiffs' claim.
II.
It is my understanding that I am not being asked to liquidate any claim which the plaintiffs have against the defendant, but only to determine whether it is nondischargeable.5 Compare In re Paolino, 89 B.R. 453 (Bankr.E.D.Pa.1988) (claim not liquidated) with In re Borbidge, 90 B.R. 728 (Bankr.E.D.Pa.1988) (claim liquidated). See also In re Stelweck, 86 B.R. 833 (Bankr.E.D.Pa.1988) (). No evidence was presented by which I could determine the amount of plaintiffs' damages.
The plaintiffs have chosen to proceed under subsection 523(a)(2)(A) for asserted false pretenses, false representation or actual fraud and under subsection 523(a)(4) for alleged fraud or defalcation in a fiduciary capacity.6
In re Paolino, at 461, quoting In re Paolino, 75 B.R. 641, 646 (Bankr.E.D.Pa.1987). Each element must be proved by the creditor by clear and convincing evidence. Id. See also, e.g., Matter of Van Horne, 823 F.2d 1285, 1287 (8th Cir.1987); In re Black, 787 F.2d 503, 505 (10th Cir.1986).
Here, the requisite intent to deceive was not proved by clear and convincing evidence. Although plaintiffs accurately point out that one year's failure to procure insurance may have been inadvertent, but two years failure suggest fraud, I conclude that the inference created is insufficient to establish intent, without more, by the requisite clear and convincing evidence. No corroborating evidence was presented that either Charles James or the defendant was aware of the failure to procure plaintiffs' policy prior to denial of the claim.7 Nothing was presented, for example, about the defendant's recordkeeping procedures, customary practices in procuring insurance or volume of business. Additionally, no evidence was presented that either Charles or John made use of the funds other than depositing them in the business bank account.
Absent the requisite evidence of fraudulent intent, a claim under subsection 523(a)(2)(A) must fail. Compare In re Koch, 83 B.R. 898 (Bankr.E.D.Pa.1988) ().
The plaintiffs' case under section 523(a)(4) is significantly different.
As I set out in In re Salamone, 78 B.R. 74, 76 (Bankr.E.D.Pa.1987):
11 U.S.C. § 523(a)(4) provides for the nondischargeability of any debt "for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny." Collier explains that section 523(a)(4) creates an exception based on (1) fraud or defalcation while acting in a fiduciary capacity or (2) embezzlement or larceny while not acting in a fiduciary capacity. 3 Collier on Bankruptcy 523.14 (15th ed. 1987) ("Collier"). Accord, In re Kapnison, 65 B.R. 221 (Bankr.D.Kan. 1983). Under the former ground, it is well established that the requirement that the debtor be acting in a fiduciary capacity refers to express trusts and not trusts ex maleficio which may be imposed due to the very wrongful act out of which the debt arose. In re Lane, 76 B.R. 1016, 1022 (Bankr.E.D.Pa.1987); In re Kapnison; In re Gould, 65 B.R. 87 (Bankr.N.D.N.Y.1986); In re Kwiat, 62 B.R. 818 (Bankr.D.Mass.1986); 3 Collier ¶ 523.141 at 523-93 to 523-96.
See also In re Napoli, 82 B.R. 378, 381 (Bankr.E.D.Pa.1988).
Plaintiffs proceed here alleging defendant's defalcation in a fiduciary capacity. As I held very recently, the plaintiff must prove the requisite fiduciary relationship by evidence that is clear, precise and unambiguous,8 but may prove defalcation by a preponderance of the evidence. In re Borbidge, 90 B.R. at 733 (Bankr.E.D.Pa.1988).
Central to that holding and to the judgment in that case is my conclusion that defalcation does not require proof of dishonest conduct, but may arise from negligence or ignorance. Id. at 734. Defalcation has been defined as failure by a trustee to properly account for the funds entrusted to him. Id. at 736. See Carey Lumber Co. v. Bell, 615 F.2d 370, 376 (5th Cir.1980); Central Hanover Bank & Trust Co. v. Herbst, 93 F.2d 510, 512 (2nd Cir. 1937); Kwiat v. Doucette, 81 B.R. 184, 190 (D.Mass.1987); In re Cowley, 35 B.R. 526, 529 (Bankr.D.Kan.1983); In re Levitt, 18 B.R. 598, 602 (Bankr.E.D.Pa.1982).9
Here the existence of an express trust has been admitted by the defendant. Defendant's Memorandum at 2. According to the parties, the fiduciary relationship of the parties emerges from Pennsylvania law, 40 P.S. § 273.1, entitled "Fiduciary Capacity of Agents and Brokers":
Every insurance agent and broker, acting as such in this Commonwealth, shall be responsible in a fiduciary capacity for all funds received or collected as insurance agent or broker and shall not, without the express consent of his or its principal, mingle any such funds with his or its own funds or with funds held by him or it in any other capacity. Nothing herein contained shall be deemed to require any such agent or broker to maintain a separate bank deposit for the funds of each such principal, if and as long as the funds so held for each such principal are reasonably ascertainable from the books of account and records of such agent or broker.
This language appears to create a specific fiduciary obligation on the part of the defendant as to the premiums paid by the plaintiffs. Compare In re Napoli, 82 B.R. at 382 (). Despite the contentions of both parties, however, I note that the fiduciary relationship contemplated by 40 P.S. § 273.1 appears to flow from insurance agent to insurer, rather than from agent to insured. See generally Minnick v. Commonwealth, 32 Pa.Commonwealth 225, 378 A.2d 1046 (1977). Cf. Morgan v. American Fidelity Fire Insurance Co., 210 F.2d 53 (8th Cir.1954) ().
Nevertheless, in the instant case, a fiduciary relationship was created between the defendant, as agent, and the plaintiffs because money was paid over by the plaintiffs to the insurance agency in express trust for the purpose of purchasing fire coverage from the insurer. Thus, even absent the statute, under such circumstances, the policy payment, less the defendant's commission, was the trust res. That res was to be used to purchase insurance for the plaintiffs' benefit. See Hamby v. Saint Paul Mercury Indemnity Co., 217 F.2d 78 (4th Cir.1954).
The more difficult question is whether a defalcation occurred for which the defendant is responsible. In In re Borbidge at 736, I concluded that a plaintiff under section 523(a)(4) ...
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