In re Koritz

• Decision Date: 03 July 1979
• Docket Number: Bankruptcy No. 78-1699-HL.
• Citation: 2 BR 408
• Parties: In re Harris I. KORITZ, Bankrupt. MIDDLESEX INSURANCE CO., Plaintiff, v. Harris I. KORITZ, Defendant.
• Court: U.S. Bankruptcy Court — District of Massachusetts

2 B.R. 408 (1979)

In re Harris I. KORITZ, Bankrupt.

MIDDLESEX INSURANCE CO., Plaintiff, v. Harris I. KORITZ, Defendant.

Bankruptcy No. 78-1699-HL.

United States Bankruptcy Court, D. Massachusetts.

July 3, 1979.

MEMORANDUM ON DISCHARGEABILITY

HAROLD LAVIEN, Bankruptcy Judge.

Plaintiff's amended complaint seeks a determination that a debt due it from the bankrupt is non-dischargeable under Bankruptcy Act Section 17a(4), 11 U.S.C. § 35(a)(4)¹ because of the bankrupt's fraud while acting in a fiduciary capacity towards the plaintiff.

The following facts are relevant to the procedural aspects of the case.

In the notice for first meeting of creditors the Court, in two distinct sentences, fixed November 20, 1978 as the last date for filing complaints for objecting to discharge and to determine dischargeability. On November 8, 1978 the Trustee, in a motion asserting Section 14 grounds, moved to extend the time for filing "Objections to Discharge." The Court granted the motion, extending the time for filing "Objections to Discharge" until December 22, 1978. Although the time for filing objections to discharge was enlarged, no extension was granted for Section 17 complaints to determine non-dischargeability of a particular debt.

On December 20, 1978, the plaintiff, Middlesex Insurance Company, filed a complaint (amended on February 7, 1979 after a pre-trial conference) alleging that the debtor's obligation to the plaintiff resulting from a state court default judgment was created by the debtor's fraudulent failure as a fiduciary to remit insurance premiums, making the debt non-dischargeable under Section 17a(4). The defendant raised four defenses by means of various motions and an answer, all of which were reserved for determination until after trial on the merits:

First, that the complaint was untimely because the extension of time was granted solely for Section 14 objections to discharge, not for Section 17 complaints;

Second, that there was no express or implied fiduciary relationship between the debtor and the creditor;

Third, even if there existed an implied fiduciary obligation imposed by statute, the debtor did not commit the type of fraud or defalcation that should bar discharge of the debt; and

Fourth, an issue raised orally at trial and subsequently by brief, that the plaintiff was not the real party in interest nor a proper plaintiff to this action because it is not a creditor in view of its having received payment of the bankrupt\'s obligation to it.

After hearings on various motions and a pre-trial conference, an evidentiary hearing was held without a stenographer. From the testimony adduced and exhibits introduced I find the facts as follows:

The Harris I. Koritz Insurance Agency, Inc. was a duly organized Massachusetts corporation which before its demise had been in the insurance brokerage business under appropriate licensing for many years. Its principal stockholder, officer, and manager Harris I. Koritz was also a duly licensed insurance broker. Throughout 1975 Harris I. Koritz Insurance Agency, Inc. conducted its business of insuring automobiles through a general agent. On December 9, 1975, the agency applied to the Massachusetts Motor Vehicle Reinsurance Facility, a state agency charged with assigning insurance carriers to brokers to ensure the availability of sufficient motor vehicle insurance coverage in this compulsory coverage state. The Facility assigned the Harris I. Koritz Insurance Agency, as a "Designated Agent" to the Middlesex Insurance Company. This business relationship, as explained to the court by Mr. Dana I. Jewell, Vice-President and Secretary of the Facility, is characterized by a limited role for the insurance company. All of the insurance business written by the "Designated Agent" is actually written on behalf of the Facility which receives all the premiums and pays for all losses. Companies such as Middlesex are merely granted a fee for handling the clerical work arising from the transactions. There was no written contract between Middlesex and its "Designated Agent" as there would be with its regularly appointed agents.

On December 24, 1975, Middlesex sent the Harris I. Koritz Insurance Agency, Inc. materials necessary for carrying on business as a Designated Agent, with a letter stating in pertinent part:

All policies will be written by the Company for your agency and will be direct billed to your insureds from our office. Your insureds are to remit premiums directly to the Company as indicated on the bill. Commissions will be paid to you when the insureds remit the premium to us.

You have no authority to act for the Company other than to place and service the automobile insurance within the purview of your designation, or as may be conferred by applicable statutes, rules and regulations.

At trial Middlesex conceded that the Harris I. Koritz Agency immediately took exception to this direct billing procedure in a letter which neither party is now able to present. The agency apparently objected on the grounds that under Mass.Gen.Laws Chap. 175 Sec. 162 the insurer could not impose a direct billing procedure without the assent of the agent. Furthermore, the Agency asserted the impossibility of a direct payment procedure by Middlesex since policies had already been sold, bills sent, and premiums collected by the Agency.² The Agency also felt that awaiting Middlesex billing would result in possible losses because of undue delay in collecting premiums since Middlesex was not prepared to commence billing until March in view of problems involving rate setting by the State Insurance Commissioner. Apparently this method was accepted by Middlesex for it took no action for at least three months regarding the Agency's rejection of the direct billing-direct payment method. In fact, the exhibits evidencing the first billings in March, 1976 which were not sent until April, 1976 indicate that Middlesex sent the Agency monthly statements and the Agency paid approximately $120,000 back to Middlesex by means of corporate checks. See Munro v. Bowers, 293 Mass. 514, 200 N.E. 393 (1936).

The Harris I. Koritz Insurance Agency, Inc. filed a Petition for an Arrangement under Chapter XI on April 14, 1976, and was subsequently adjudicated a bankrupt on June 7, 1976. Harris I. Koritz filed an individual bankruptcy petition on September 11, 1978.

The bankrupt, Harris I. Koritz, was never a broker, agent, or designated agent for Middlesex Insurance Company. No evidence was offered to prove that he appropriated or employed any premiums for his own personal benefit. Middlesex has not shown that any allegedly improperly collected premiums by the Agency were the result of any improper billing by the Agency after it received the Middlesex bills in March. All of the evidence offered indicated that the Agency billed its customers before the insurance company bills were received by the Agency. When the Agency received the Middlesex customer bills in March, they were not sent to the customers. Rather, the Agency used the Middlesex bills with its remittances to track their payments.

On September 30, 1977, the Massachusetts Motor Vehicle Facility paid or credited Middlesex with the unpaid balance due from the Koritz agency, $56,706.29, pursuant to a reimbursement agreement which provided as follows:

In consideration of reimbursement by the Facility of $56,706.29 the Company agrees to diligently and promptly pursue all reasonable means of recovery, including the institution of legal proceedings if necessary, of premiums due from the Agency.

To deal first with the bankrupt's fourth contention, it is clear that Middlesex was not a creditor³ of the bankrupt as of the date of the filing of the petition—September 11, 1978. The Massachusetts Motor Vehicle Reinsurance Facility had completely paid the obligation of the Agency to Middlesex. Furthermore, as explained by Mr. Jewell, the Facility was responsible for the payment of losses resulting from coverage; Middlesex merely rendered administrative services for the Facility. Thus, Middlesex cannot be considered the real party in interest⁴ capable of prosecuting this action.

However, since Middlesex would probably be entitled to a reasonable opportunity to substitute the Massachusetts Motor Vehicle Reinsurance Facility, see Matter of Bradford, 3 Bankr.Ct.Dec. 246 (S.D.N.Y.1977), had it made the appropriate motion, the other issues presented for determination will be considered in the order raised.

II.

Does the enlargement of time granted for filing Section 14 objections to discharge also serve to extend time for filing Section 17 complaints?

Section 14b(1) sets forth the time limits for filing § 14 and § 17 complaints:

The court shall make an order fixing a time for the filing of objections to the bankrupt\'s discharge and a time for the filing of applications pursuant to paragraph (2) of subdivision c of section 17 of this Act to determine the dischargeability of debts, which time or times shall be not less than thirty days nor more than ninety days after the first date set for the first meeting of creditors. Notice of such order shall be given to all parties in interest as provided in section 58b of this Act. The court may, upon its own motion or, for cause shown, upon motion of any party in interest, extend the time or times for filing such objections or applications.

Section 17c(2) supplements the previous provision:

A creditor who contends that his debt is not discharged under clause (2), (4), or (8) of subdivision a of this section must file an application for a determination of dischargeability within the time fixed by the court pursuant to paragraph (1) of subdivision b of section 14 of this Act and, unless an application is timely filed, the debt shall be discharged.

The Bankruptcy Rules also shed light on this issue. Rule 404(a) and (c) provide:

(a) Time for Filing Complaint Objecting to Discharge. The court shall make an order fixing a time

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