Santa Ana Unified Sch. Dist. v. Montgomery (In re Montgomery)

• Decision Date: 28 March 2013
• Docket Number: Adversary No. 12–05109.,Bankruptcy No. 11–82598–MGD.
• Citation: 489 B.R. 609
• Parties: In re Kirk MONTGOMERY dba K.M. Employee Benefits Services, Debtor. Santa Ana Unified School District, Plaintiff, v. Kirk Montgomery dba K.M. Employee Benefits Services, Defendant.
• Court: U.S. Bankruptcy Court — Northern District of Georgia

489 B.R. 609

In re Kirk MONTGOMERY dba K.M. Employee Benefits Services, Debtor.Santa Ana Unified School District, Plaintiff,

v.Kirk Montgomery dba K.M. Employee Benefits Services, Defendant.

Bankruptcy No. 11–82598–MGD.

Adversary No. 12–05109.

United States Bankruptcy Court,

N.D. Georgia,

Atlanta Division.

March 28, 2013.

Bryan E. Bates, Gary W. Marsh, McKenna Long & Aldridge, LLP, Atlanta, GA, for Plaintiff.

Joycelyn R. Curry, J. Curry Law Group, LLC, Atlanta, GA, for Defendant.

ORDER GRANTING PLAINTIFF'S MOTIONS FOR PARTIAL SUMMARY JUDGMENT

MARY GRACE DIEHL, Bankruptcy Judge.

This action involves a consulting contract between a California school district and Debtor, in his capacity as a benefits specialist. The contract and other related causes of action between the parties were litigated in the California Superior Court, resulting in a judgment against debtor for $2 million(excluding interest and costs). The school district now seeks a determination that its judgment debt is nondischargeable. Additionally, the school district seeks a determination that a portion of Debtor's claimed exemptions, in the form of IRA accounts, are not property of the estate due to a constructive trust imposed upon funds as a result of the California Superior Court order and judgment. Debtor opposes the School District's claims and argues against any application of collateral estoppel or constructive trust.

Plaintiff Santa Ana Unified School District (“School District”) filed two motions for partial summary judgment. The first motion seeks a determination that its judgment debt is nondischargeable under §§ 523(a)(2)(A) and (a)(6). (Docket No. 7). The second motion seeks a declaratory judgment on Count III of its Complaint. (Docket No. 34). Count III requests a determination that $1,266,794 held in Debtor's IRA accounts is not property of the estate due to a constructive trust on the property for which School District is the beneficiary. The two Summary Judgment Motions address all counts in School District's complaint.

As to the Motion regarding non-dischargeability, Debtor filed a Response in opposition and brief in support, in addition to Debtor's affidavit, Exhibits in support of the brief, and statement of facts. (Docket Nos. 17–19 & 21). ¹ School District filed a Reply. (Docket No. 22). School District relies on its first Statement of Material Facts (Docket No. 8); the June 11, 2012 Affidavit of Michael Bishop, as Deputy Superintendent of the Santa Ana Unified School District (Docket No. 9); Debtor's responses to Requests for Admissions (Docket No. 10); the case record, including the Final Judgment of the Superior Court of California, County of Riverside, which is attached to the Complaint.

As to the second motion seeking a declaratory judgment regarding that certain funds in Debtor's IRA accounts are not property of the estate, School District relies on its second Statement of Material Facts (Docket No. 35), discovery responses, including the October 9, 2012 Deposition of Defendant Kirk Montgomery (Docket No. 38, Exhibit F); the Affidavit of Michael Bishop, Deputy Superintendent for School District; and the case record. Debtor filed a Response in opposition to the Motion and brief in support (Docket No. 43), response to the statement of undisputed facts (Docket No. 41), Affidavit of Debtor (Docket No. 40), and an amended Response (Docket No. 46). School District filed a Reply. (Docket No. 44).

For the reasons set forth below, School District has met its burden that no material facts are in genuine dispute and it is entitled to judgment that (1) the judgment debt is non-dischargeable and that (2) the identified $1,266,794 monies in Debtor's IRA accounts are not property of the estate because a constructive trust was imposed upon such funds for the benefit of School District. This matter is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (I), and (O), and jurisdiction over this action is set forth in 28 U.S.C. §§ 157(b) and 1334(b).

I. Facts

Debtor filed chapter 7 bankruptcy on November 10, 2011. (Case No. 11–82598–MGD). Chapter 7 Trustee, Robert Silliman, filed a no asset report on January 13, 2012. (Case No. 11–82598; Docket No. 10.) No discharge has been entered for Debtor. Debtor's Schedule C exemptions lists three IRA accounts: (1) Pacific Life ($794,368.12), (2) Western Reserve Life ($553,046.61), and (3) SEI ($255,378.95). Debtor later filed amended exemptions, yet the IRA accounts and amounts remained the same. (Case No. 11–82598; Docket No. 36).

Plaintiff School District exists under the laws of the state of California. (Docket No. 8, Plaintiff's Statement of Material Facts (“ SOF ”), ¶ 1). School District is a creditor of Kirk Montgomery (“Debtor”), dba K.M. Employee Benefits Services, evidenced by a judgment in the Superior Court of California, County of Riverside (“California Superior Court”). Id. at ¶ 4. Debtor included his debt to School District as an unsecured, non-priority liability in the amount of $3,023,767.56 on Schedule F of his bankruptcy schedules. Id. at ¶ 7.

The relationship between the parties began in July of 2000. School District issued a request for proposals to consultants in regard to its employee benefits plan, seeking assistance with the negotiation of rates and services with insurance carriers and administrators. Id. at ¶ 9. School District stated in its request that it would pay all compensation for services; consultants were not to receive compensation, fees, or commissions from carriers. Id. at ¶ 10; Debtor's Contested Matter Admissions (“ Admissions”), ¶ 4. Debtor submitted a proposal to School District in August of 2000. Id. at ¶ 12; Exhibit C to Complaint (“ Debtor's Proposal ”). Debtor's proposal included: “All compensation for services [would] be paid by the District with no compensation, fees, or commissions received by the consultant/broker from carriers or administrators.” Id. at ¶ 15; Debtor's Proposal. Debtor further represented that: “Certain carriers have as part of the underwriting process, built-in commissions that are not removed from the rating formula. In these cases, we are willing to remit any commissions, overrides, or other carrier compensation to Santa Ana Unified School District to 100% of the total fee.” Id. at ¶ 16; Debtor's Proposal.

Debtor was approved and appointed as School District's employee benefits consultant on October 10, 2000. Id. at ¶ 18. Debtor and School District executed the Employee Benefit Consultant Service Agreement (“Agreement”) sometime between November 2000 and the end of that calendar year. Id. at ¶ 19; Admissions, ¶ 15. The term under the Agreement began on November 1, 2000. SOF, ¶ 17; Exhibit D to Complaint (“ Agreement ”). Section 3 of the Agreement provided:

As per Consultant's [Debtor's] formal proposal dated August 18, 2000, the District [Plaintiff] will be required to pay $60,0000.00 per each contract year beginning November 1, 2000 and ending October 31, 2003, subject to annual review. Payment to be made monthly at the rate of $5,000.00 per month. All parties agree that certain carriers have as part of their underwriting process, built-in commissions that are not removed from the rating formula. In these cases, the Consultant [Debtor] will remit any commissions, overrides or other carrier compensation to the District [Plaintiff] to One Hundred Percent (100%) of the total fee.

Agreement, ¶ 3. School District wrote a letter dated October 27, 2000 advising of Debtor's November 1, 2000 retention and defining the scope of Debtor's work, as agent for School District. Debtor's Exhibit D (“ Debtor's Responsive Exhibits ”); Docket No. 21. The recipient of the letter is unknown. This letter also authorized Debtor to negotiate on behalf of School District on all matters relating to group insurance and employee benefits. Id. This same letter directs carriers to make commissions payable to Debtor. Docket No. 21, Exhibit D.

In early 2001, Debtor made requests for proposals (“RFPs”) to various insurance carriers. Montgomery Affidavit, ¶ 18 (Docket No. 18). The RFPs instructed each insurance carrier to add commissions into the quotes at the following rates: Medical 5% flat; Dental 10% flat; Vision 10% flat, and Life 10% flat. Id. at ¶ 18; Exhibit E to Complaint ( Kirk Montgomery Employee Benefits Service RFP “ KMEBS RFP ”). This instruction was provided in the “Specifications” section of the RFP, along with other requirements. Id. Accordingly, Blue Cross added in a 5% Medical charge to the quotes in its proposal and 10% Dental charge. Id. at ¶ 20; Exhibit F to Complaint (“ Blue Cross Proposal ”). Blue Cross's proposal identified these commission rates “as specified in the RFP.” Blue Cross Proposal, p. 11.

A few months later, Debtor recommended that School District switch from a self-funded insurance program to a fully funded program with Blue Cross. SOF, ¶ 35; Montgomery Affidavit ¶ 22. In August 2001, Plaintiff changed to a fully funded program with Blue Cross. SOF at ¶ 42. School District realized significant savings—estimated to lower premium payment obligation by $2 million—as a result of the switch recommended by Debtor. Montgomery Affidavit, ¶ 23.

Each Blue Cross renewal of the insurance policy included a 5% commission, which was designated in its own line item. Bishop Affidavit, ¶ 23; Exhibits G & H to Complaint (“ Blue Cross Renewals ”). Debtor sent School District renewal spreadsheets that were modified from the Blue Cross renewal form. Montgomery Affidavit ¶ 24; Exhibits I & J to Complaint (“ KM Renewal Reports ”).

Debtor's renewal report included all line items from Blue Cross with the exception of the commissions line item. Blue Cross Renewals; KM Renewal Reports. Debtor'srenewal submitted to School District combined the “Commissions” figure with the “Retention” figure, with the resulting sum listed on the “Retention” line. Id.; Bishop Affidavit ¶¶ 24–26. The 2002 renewal from Blue Cross to Debtor, the commission...