In re Scarpello
| Citation | 272 B.R. 691 |
| Decision Date | 29 January 2002 |
| Docket Number | Bankruptcy No. 01 B 05890.,Adversary No. 01 A 00494. |
| Parties | In re Mary J. SCARPELLO, Debtor. Pamela Ann Rae, Plaintiff, v. Mary J. Scarpello, Defendant. |
| Court | United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Northern District of Illinois |
Gregory J. Martucci, Law Office of Gregory J. Martucci, P.C., Roselle, IL, for Plaintiff.
Karen Aldrich, Hoffman Estates, IL, for Debtor.
David E. Grochocinski, Grochocinski, Grochocinski & Lloyd, Ltd., Orland Park, IL, trustee.
This matter comes before the Court on the complaint filed by Pamela Ann Rae (the "Creditor") against the Debtor, Mary J. Scarpello (the "Debtor") to determine the dischargeability of a debt under 11 U.S.C. § 523(a)(2)(A), § 523(a)(4) and § 523(a)(6). For the reasons set forth herein, the Court finds the debt dischargeable.
The Court has jurisdiction to entertain this matter pursuant to 28 U.S.C. § 1334 and Internal Operating Procedure 15(a) of the United States District Court for the Northern District of Illinois. It is a core proceeding under 28 U.S.C. § 157(b)(2)(I).
Many of the facts are undisputed and have been stipulated by the parties. The Debtor and the Creditor are cousins. During 1999, the Creditor was experiencing marital difficulties. Her husband filed a petition for dissolution of marriage, which was subsequently dismissed in September, 1999 because the couple reconciled.
Prior thereto, the Creditor delivered to the Debtor, in several installments, proceeds totaling approximately $66,000.00, which the Creditor had received as part of a medical malpractice settlement. See Creditor's Group Exhibits H and K. At the time of the delivery of the funds, the Debtor agreed to hold the sum for the Creditor for the purpose of preventing the Creditor's husband from accessing and using the funds. Accordingly, on February 26, 1999, the Debtor deposited the funds into a certificate of deposit account solely in her name. Thereafter, contrary to the agreement between the parties, the Debtor expended all the funds without the Creditor's knowledge or consent.
On or about January 3, 2001, the Debtor informed the Creditor that she had spent all of the funds. The Creditor made demand for repayment of the funds and the Debtor signed an acknowledgment of her debt to the Creditor. See Creditor's Exhibit J. By this writing, the Debtor acknowledged that she owed $66,000.00 plus interest, to be payable upon the sale of her home, and any funds still owed after the sale of her home, were to be paid monthly to the Debtor until all the money was repaid. On January 17, 2001, the Creditor signed a judgment note dated February 26, 1999, again acknowledging the $66,000.00 debt to the Debtor plus interest of 6 1/2 % per annum due on demand. See Creditor's Exhibit I.
Thereafter, on February 22, 2001, the Debtor filed a Chapter 7 bankruptcy petition. At the 11 U.S.C. § 341 meeting of creditors, the Debtor acknowledged that at the time she received the funds from the Creditor, the funds were not in the nature of a loan. The Creditor filed her complaint to determine the dischargeability of the debt on May 25, 2001, seeking relief under 11 U.S.C. § 523(a)(2)(A). Just prior to trial, she sought to amend the complaint to include alternate theories of recovery under § 523(a)(4) and § 523(a)(6). Subsequently, the trial was held on January 11, 2002.
The principal witnesses at trial were the parties. The Debtor testified to the close personal relationship between the parties. The Debtor knew that in 1999 the Creditor was having marital difficulties, and that she was concerned with safeguarding the monies received from her malpractice litigation. According to the Debtor, she recalled the Creditor asking her to keep the money and admitted that she agreed to hold it for her and return it upon demand. The Debtor testified that the parties agreed that the funds would be held in a certificate of deposit. According to the Debtor, she showed the Creditor the papers from the bank which purportedly listed the Debtor as beneficiary on the account, as well as some of the statements on the account that were mailed in due course to the Debtor. The Debtor admitted that the Creditor never authorized her to borrow or use the money.
The Debtor began withdrawals from the account in November 1999. During the year 2000, she admittedly withdrew sums from the account from time to time for her household expenses, thus leaving a balance of less than $20,000.00 on deposit. Later, however, she made deposits from her severance pay in connection with the termination of her employment, and her 401(k) and retirement pension plans to increase the account balance in excess of $60,000.00 for a time. Thereafter, the remaining funds on deposit were expended by further withdrawals by the Debtor. According to the Debtor, notwithstanding the subsequent deposits of the above proceeds, the account was completely depleted by July 2000. The Debtor did not tell the Creditor that the account was depleted at that time, and did not show her statements on the account after she began making withdrawals. Shortly after January 1, 2001 the Debtor admitted to the Creditor that the money was gone. The Debtor told her all that happened, and stated that she always intended to return the money to her and still intends to repay her if and whenever she is able. The Debtor admitted signing the documents evidencing the indebtedness and agreeing to use the net equity in her home to repay the debt. She thought that the equity was sufficient to satisfy her debt to the Creditor. However, she did not sell her home because the anticipated equity was not there.
According to the Debtor, the Creditor never asked her to put the Creditor's name on the account. The unauthorized withdrawals were made because of the Debtor's financial problems, which contributed to her dissolution of marriage in December 2000. See Debtor's Exhibit No. 3. She also filed bankruptcy because she lost her job, her former husband ceased paying her his obligations under their dissolution of marriage, and he too filed bankruptcy. The Debtor's financial and marital problems partly arose because of her husband's gambling and the losses sustained. See Debtor's Group Exhibit Nos. 2A and 2B.
The Creditor testified that prior to the unauthorized expenditures by the Debtor, the parties had been as close as sisters. She entrusted the funds to the Debtor to be used for her children if something happened to her because of her marital problems. The Creditor never directly received any of the bank statements or tax statements on the subject account. The Debtor never asked permission to withdraw any of the proceeds.
On December 31, 2000, after the Creditor made demand for return of the funds and the bank records, the Debtor advised her that her marriage had been dissolved and that her husband had taken the money. The Debtor agreed to sell her home and use the equity to repay the funds to the Creditor. According to the Creditor, the Debtor told her during the summer of 2000, that the proceeds were safe in the account, and if anything would happen to the Creditor, she would see that the money was used to take care of the Creditor's children. The Debtor advised that she wanted to stay in her home and could not sell it because of the lack of equity. Instead, she offered a repayment plan of $100.00 a month in lieu of filing bankruptcy. This offer was rejected by the Creditor.
At the close of the evidence, the Debtor moved for directed findings under Federal Rule of Bankruptcy Procedure 7052, incorporating by reference Federal Rule of Civil Procedure 52(c).
The party seeking to establish an exception to the discharge of a debt bears the burden of proof. In re Harasymiw, 895 F.2d 1170, 1172 (7th Cir.1990); Banner Oil Co. v. Bryson (In re Bryson), 187 B.R. 939, 961 (Bankr.N.D.Ill.1995). The United States Supreme Court has held that the burden of proof required to establish an exception to discharge is a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 291, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). See also In re McFarland, 84 F.3d 943, 946 (7th Cir.), cert. denied, 519 U.S. 931, 117 S.Ct. 302, 136 L.Ed.2d 220 (1996); In re Thirtyacre, 36 F.3d 697, 700 (7th Cir.1994). To further the policy of providing a debtor a fresh start in bankruptcy, "exceptions to discharge are to be construed strictly against a creditor and liberally in favor of a debtor." In re Scarlata, 979 F.2d 521, 524 (7th Cir.1992) (quoting In re Zarzynski, 771 F.2d 304, 306 (7th Cir.1985)). Accord In re Reines, 142 F.3d 970, 972-73 (7th Cir.1998), cert. denied, 525 U.S. 1068, 119 S.Ct. 797, 142 L.Ed.2d 659 (1999).
Section 523 of the Bankruptcy Code enumerates specific, limited exceptions to the dischargeability of debts. Section 523(a)(2)(A) provides:
(a) A discharge under section 727 ... does not discharge an individual debtor from any debt —
(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained, by —
(A) 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). Section 523(a)(2)(A) lists three separate grounds for dischargeability: actual fraud, false pretenses and false representation. Bletnitsky v. Jairath (In re Jairath), 259 B.R. 308, 314 (Bankr.N.D.Ill.2001). A single test was applied to all three grounds even though the elements for each vary under common law. Id. (citations omitted). The Seventh Circuit, however, made clear that misrepresentation and reliance therein is not always required to establish fraud....
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