In re Porter, BK. No. 03-700 (Bankr.N.D.W.Va. 1/10/2008)
| Decision Date | 10 January 2008 |
| Docket Number | BK. No. 03-700.,AP. No. 03-118. |
| Court | U.S. Bankruptcy Court — Northern District of West Virginia |
| Parties | IN RE: NOAH WILSON PORTER, JR., and DORA JEAN PORTER, CHAPTER 7, Debtors. CATHERINE D. OSTRUM, A. LORRAINE McGEE, and KENNETH C. PORTER, Plaintiffs, v. NOAH W. PORTER, JR., and DORA JEAN PORTER, Defendants. |
Catherine D. Ostrum, A. Lorraine McGee, and Kenneth C. Porter (the "Plaintiffs"), as representatives of the Estate of Mabel Margaret I. Porter ("Mabel"), seek a judgment excepting up to $200,000 incompensatory damages and up to $500,000 in punitive damages from the Chapter 7 discharge of Noah Wilson Porter Jr. ("Noah," or the "Debtor"), and his spouse, Dora Jean Porter, on the grounds that they committed defalcation while acting an behalf of Mabel pursuant to a power of attorney.
A trial was held in this case on February 2, 2007, in Clarksburg, West Virginia. During the trial, Dora made an oral motion for judgment as a matter of law on the grounds that she was not a fiduciary to Mabel, and, therefore, was not capable of committing defalcation. The court granted the motion, and the trial proceeded solely as to the Debtor. For the reasons set forth herein, the court finds that the Debtor owes a $3,000 debt to the Estate of Mabel Porter, which is excepted from his Chapter 7 discharge pursuant to 11 U.S.C. § 523(a)(4).
On May 9, 1994, Mabel, accompanied by Noah and Dora, went to the office of Mabel's attorney where Mabel executed both her Last Will and Testament (the "1994 Will"), and a durable power of attorney appointing the Debtor as her attorney-in-fact (the "POA"). The 1994 Will provides:
I hereby give and grant unto my grandson, ROY LEE PORTER, if living at my death, the absolute right and privilege to purchase my home property known as 1258 Woodland Circle, New Windsor, Maryland, at and for the price of Forty Thousand Dollars ($40,000.00) net to my estate, all settlement expenses to be paid by my grandson, ROY LEE PORTER. The exercise of the option shall be made by written notice to the Executors of my estate mailed or delivered within thirty (30) days after my will has been probated, and settlement shall be held within ninety (90) days thereafter.
(Def. Ex. 8).
1258 Woodland Circle (the "Property"), was cobbled together over a period of about fifty years. In 1949, Mabel owned a parcel of real property that was shaped like a pentagon(the "1949 Parcel"). In 1963, Mabel acquired a second parcel of real property (the "1963 Parcel"), that formed a horseshoe around the 1949 Parcel. Combined, Mabel owned slightly less than two acres. In 1976, Mabel divided the combined real property by half, and conveyed one of the parcels to the Debtor, who subsequently built a home on the land. The parcel retained by Mabel was used for a single-family home and a mobile home, which were assigned the postal addresses of 1258 and 1261 Woodland Circle, respectively.
In 1977, Mabel moved from the single-family home, at 1258 Woodland Circle, to the mobile home at 1261 Woodland Circle. She rented the single-family home to various tenants at a rate of $200 per month. In 1988, Roy Lee Porter, the Debtor's son, moved into the single-family home and also paid $200 per month in rent. While the single-family home was in livable condition in 1988, it was in extreme disrepair. Roy Lee Porter, together with the Debtor, made substantial repairs to the home from 1988 to 1995, including replacing the roof, furnace, and kitchen floor.
In 1993, Mabel was hospitalized with a broken hip. After being discharged from the hospital, she returned to her mobile home at 1261 Woodland Circle. Although Mabel was able to care for herself, the Debtor visited with her a few times each week to make sure that she was okay. In early 1994, Mabel was hospitalized again with a stroke. Rather than immediately returning to her mobile home after being discharged, Mabel decided to stay with Catherine Ostrum for a brief period. Eventually, Mabel moved back into her mobile home, but, as a result of her deteriorating health, she moved in with the Debtor and Dora in October 1994, where she remained until entering the nursing home in September 1995. Mabel died on November 9, 1996.
While Mabel was living with Dora and the Debtor, Dora wrote checks from Mabel's account payable to herself and the Debtor. The checks were appropriately signed by Mabel, and totaled about $1,800. The Debtor maintains that the funds were only used to satisfy Mabel's needs. By June 1995, the Debtor determined that Mabel's physical and mental condition had deteriorated to a point that required him to exercise his rights under the POA, and he began making preparations to transition Mabel into a nursing home. After speaking with a social worker, the Debtor believed that Mabel would have to sell her house to pay for her nursing home expenses. Rather than placing her real property and the mobile home on the open market, he offered his son Roy and his wife Tammy the opportunity to purchase them for the price specified in the 1994 Will. Roy and Tammy accepted, and in exchange for the July 20, 1995 deed, they paid Mabel $40,000.1
The Debtor deposited the $40,000 in a savings account held jointly by himself and Mabel. The day after the funds were deposited, the Debtor withdrew $10,000. Of this amount, he kept $7,000 to pay for Mabel's future funeral expenses, and no clear accounting exists regarding the disposition of the remaining $3,000.2
In December 1995, the Plaintiffs commenced an action in the Circuit Court for Carroll County, Maryland to have the Debtor removed as attorney in fact under the POA. In April 1996, the parties reached an agreement, and Linda Holmes was appointed as Mabel's guardian. Ms. Holmes investigated the Debtor's transactions on behalf of Mabel, and she noted that on January 11, 1996, the Debtor had deposited $7,000 in to Mabel's account, which represented a portion of the $10,000 that the Debtor withdrew in July 1995. However, she was unable to account for the remaining $3,000, which the Debtor claims to have deposited into Mabel Porter's account.
After Mabel's November 9, 1996 death, the Plaintiffs submitted a will for probate that pre-dated the 1994 Will. The Debtor subsequently filed the 1994 Will in that proceeding, and the Plaintiffs challenged its validity. Both the Orphans Court for Carroll County, Maryland, and the Circuit Court on appeal, upheld the validity of the 1994 Will. The Debtor's final accounting of Mabel's estate is being contested by the Plaintiffs on the grounds that it fails to account for the proceeds of the present litigation in this court, should this court determine that the Debtor owes Mabel's estate a debt that is excepted from his bankruptcy discharge. The Debtor received his Chapter 7 discharge from the bankruptcy court on June 11, 2003.
The Plaintiffs assert that the Debtor, acting under the POA, violated his fiduciary duty to Mabel by (1) selling the Property to his son and daughter-in-law for $40,000 when its fair market value was about $185,000, and (2) failing to produce a complete accounting for the disbursements of Mabel's funds. The Debtor contends that he acted in Mabel's best interests when he sold the Property and used the proceeds for her benefit.
Section 727(b) of the Bankruptcy Code provides that a Chapter 7 discharge relieves a debtor "from all debts" that arose before the filing of the bankruptcy petition. 11 U.S.C. § 727(b). Not every debt, however, is subject to being discharged; § 523(a) of the Bankruptcy Code provides nineteen exceptions whereby a pre-petition debt will remain valid after entry of a debtor's discharge order. Because these exceptions to discharge contravene the "fresh start" policy of the Bankruptcy Code, they are construed narrowly in favor of the debtor. E.g., United States v. Fegeley (In re Fegeley), 118 F.3d 979, 983 (3d Cir. 1997) (); Leneski v. Smith (In re Smith), No. 017-14, 2007 Bankr. LEXIS 4148 (Bankr. N.D.W. Va. Dec. 18, 2007) (same). The only enumerated exception to discharge that is applicable to this proceeding is § 523(a)(4), which provides:
A discharge under section 727, . . . of this title does not discharge an individual debtor from any debt —
. . .
(4) for fraud or defalcation while acting in a fiduciary capacity . . . .
11 U.S.C. § 523(a)(4).
To prevail on a § 523(a)(4) claim, the movant must establish, by a preponderance of the evidence, the existence of both: (A) a fiduciary relationship and, (B) a defalcation while acting in that fiduciary capacity. E.g., Grogan v. Garner, 498 U.S. 279, 282-83 (1991) (); Fowler Bros. v. Young (In re Young), 91 F.3d 1367, 1371 (10th Cir. 1996) (); 5 Collier on Bankruptcy ¶ 523.10 (Alan N. Resnick & Henry J. Sommer eds. 15th ed. Rev. 2004) ("[D]efalcation refers to a failure to produce funds entrusted to a fiduciary").
As an initial element of proving a § 523(a)(4) cause of action, the Plaintiffs must demonstrate that the Debtor acted in a fiduciary capacity to Mabel. The Plaintiffs contend that this element is satisfied on the basis that the Debtor exercised rights over Mabel's financial affairs pursuant to the POA.
In general, the concept of a "fiduciary duty" under § 523(a)(4) applies only to technical or express trusts; it does not generally apply to fiduciary duties implied by law from the contract. In re Bennett, 989 F.2d 779, 784 (5th Cir. 1983). The fiduciary duty must preexist...
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