Opinion
No. 13-00-12951 MR, Adv. Proc. No. 01-1260 M
February 26, 2003
W.T. Martin, Jr., Carlsbad, NM, for Plaintiff.
E.C. Mike Gomez, Roswell, NM, for Defendant.
FINDINGS OF FACT AND CONCLUSIONS OF LAW
THIS MATTER was taken under advisement by the Court after a trial on the merits held on January 30, 2003. Plaintiff filed this Complaint For Determination Excepting Debt From Dischargeability on December 10, 2001, by and through his counsel, W. T. Martin, Jr., Esq. Defendant is represented by E. G. "Mike" Gomez, Esq.
After reviewing the evidence presented, applicable law and being otherwise fully informed, the Court makes the following findings:
1. This bankruptcy was filed on May 30, 2000. On September 19, 2001 Sam Modrall died.
2. On or about September 10, 1995, Gerald Lucia (Lucia), Carol Modrall's (Modrall) father, and his wife Emily Lucia executed the Gerald Lucia and Emily Lucia Revocable Family Trust (the 1995 Trust). At the same time, they executed a general transfer of all of their assets to the 1995 Trust.
Article III of the 1995 Trust stated as follows:
After the death of the Surviving Spouse, the Successor Trustee shall distribute the trust estate equally between our five children, SHIRLEY LUCIA AKBAR, LINDA JEAN BERUMEN, SUE ELLEN BROWN, MARGORITE DEAN and CAROL MODRALL with the provision that any outstanding balances of loans to our children are to be considered as advancements so as to accomplish an equal division between our children.
Defendant's Ex. 5 p. 2. Plaintiff is the Successor Trustee.
3. Sometime in 1997 due to his failing health, Lucia, age 95, moved out of his home in California to Modrall's home in Carlsbad, New Mexico.
4. On or about June 15, 1998, Modrall borrowed from Lucia the principal amount of $12,150.00 plus interest at 4.5% payable in installments. This loan was unsecured. Plaintiff's Ex. 1. This loan was for the benefit of Modrall's business, Happy's Restaurant in Carlsbad, N.M.
5. On August 7, 1998 Lucia executed a Durable Power of Attorney granting Modrall authority to act as attorney-in-fact for Lucia in all of his affairs, such as dealing with Lucia's property, depositing or withdrawing funds from Lucia's bank accounts or safe deposit box, and initiating legal actions on Lucia's behalf (the Power of Attorney). Plaintiff's Ex. 2. The Court finds that Lucia's signature on the Power of Attorney was not forged and was valid. The Power of Attorney states that
My attorney-in-fact hereby accepts this appointment subject to its terms and agrees to act and perform in said fiduciary capacity consistent with my best interests as my attorney-in-fact in [sic] his/her best discretion deems advisable, and I affirm and ratify all acts so undertaken.
Plaintiff's Ex. 2 (emphasis added).
6. On or about August 7, 1998, Lucia executed a New Mexico Durable Power of Attorney for Health Care Decisions. Defendant's Ex. 6.
7. Modrall provided to Lucia several type-written notes all dated August 7, 1998 stating that she had permission for certain expenditures. Each note was initialed by Lucia. Plaintiff's Exs. 7, 10 and 11. The first note gave Modrall permission to write a check for $1,531.56 payable to Nathalie Jost, as a gift to enable her to obtain water service. Plaintiff's Ex. 7. Nathalie Jost is Lucia's ex-wife and; Modrall's mother. The second note states that Lucia "give[s] as a gift" a boat and trailer to Sam Modrall. Plaintiff's Ex. 10. The third note gave Modrall permission to write a check for $12,500.00 to purchase land and a mobile home for herself and her husband. Modrall testified that all of these documents, the Power of Attorney and the notes, were read to Lucia and then signed or initialed by him in a hospital in Carlsbad, New Mexico. Stephanie Moore, a friend of Modrall's, signed each note as a witness. The Court finds Lucia's signature on the notes was not forged and was therefore valid.
8. Sometime after the Power of Attorney and notes were executed, Modrall wrote a check from Lucia's account in the amount of $12,500.00 to purchase land and a mobile home for her own use and benefit. Modrall also wrote a check from Lucia's account in the amount of $1,531.56 to pay for water service for Nathalie Jost's benefit. She signed both checks pursuant to the Power of Attorney.
9. On or about October 13, 1998, Modrall refinanced a loan from Norwest Bank by executing a note in the principal amount of $10,055.00 at an interest rate of 7.25% payable in monthly installments. The note was due on January 15, requiring a balloon payment of $3,029.63. Plaintiff's Ex. 3. Modrall pledged a Certificate of Deposit owned by Lucia and valued at $10,000 to secure this loan. Modrall signed the security agreement pursuant to the Power of Attorney. Lucia had previously pledged the Certificate of Deposit as collateral for the original loan from Norwest initiated on January 8, 1998. Plaintiff's Ex. 3.
10. On or about October 13, 1998, Modrall refinanced another loan with Norwest Bank. Modrall signed a note in the principal amount of $25,055.00 at an interest rate of 7.55% payable in monthly installments. The note was due on June 18, 2002 requiring a balloon payment of $8,302.64. Modrall pledged another Certificate of Deposit owned by Lucia valued at $ 26,000 to secure this loan. Modrall signed the security agreement pursuant to the Power of Attorney. Lucia had previously pledged the Certificate of Deposit as collateral for the original loan initiated on June 18, 1997.
11. On or about March 5, 1999, Modrall signed a document entitled Revocation of Power of Attorney in which she intended to transfer the Power of Attorney to Plaintiff. Modrall testified that she voluntarily prepared and signed this document to enable Plaintiff to act on Lucia's behalf because Lucia was being moved to California into Plaintiff's care.
12. On September 27, 1999, Lucia executed the Gerald R. Lucia Revocable Living Trust (the 1999 Trust). At the same time, he executed a general transfer of all assets he might own to the Trust. The beneficiaries of the 1999 Trust were Lucia's four children excluding Modrall. Lucia specifically stated that he was disinheriting Modrall in the 1999 Trust.
13. Upon Lucia's death in 2000, Modrall stopped making payments on both of the Norwest loans, stating that she thought the outstanding balance due on the loans would be paid from her portion of the trust estate pursuant to the 1995 Trust. Plaintiff asks this Court to declare any money or property Modrall obtained from Lucia, which were trust assets, nondischargeable under 11 U.S.C. § 523(a)(2)(A), (4) or (6). These sections state as follows:
The Complaint only cites § 523 in general and does not indicate under which subsection the Court should use to determine nondischargeability, however, at trial it was determined that these subsections were applicable to the facts of this case.
(a) a discharge under section 727 . . . of this title 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;
. . .
(4) for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny;
. . .
(6) for willful and malicious injury by the debtor to another entity or to the property of another entity; . . . .11 U.S.C. § 523(a)(2), (4) and (6).
Section 523(a)(2)(A) requires Plaintiff to show that Modrall acquired money or property from Lucia using false representations, false pretenses, or actual fraud. To except a debt from discharge under section 523(a)(2)(A), the false representations giving rise to the debt must have been knowingly and fraudulently made. Van De Water v. Van De Water (In re Van De Water), 180 B.R. 283, 288 (Bankr.D.N.M. 1995). The Plaintiff's main assertion is that Modrall forged Lucia's signature on the Power of Attorney thereby obtaining Lucia's money by a false representation. The Court has found that Lucia's signature on the Power of Attorney was valid, therefore, Plaintiff has failed to show that Modrall made a false representation by acting pursuant to a forged Power of Attorney. There was no evidence that Modrall knowingly made false representations to induce Lucia to sign the Power of Attorney. The Court has found that Lucia's initialed signatures on the permission notes were valid, therefore, Modrall did not make false representations by acting pursuant to the permission notes. There was likewise no evidence that Modrall obtained Lucia's signature on the permission notes by false representations. Therefore, any money, property, or credit obtained by Modrall pursuant to the Power of Attorney or the permission notes is not nondischargeable pursuant to § 523(a)(2)(A).
Under Section 523(a)(6), a debtor may be denied a discharge "for willful and malicious injury by the debtor to another entity or to the property of another entity." 11 U.S.C. § 523(a)(6). The word "willful" in (a)(6) modifies the word "injury," indicating that nondischargeability requires a deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury. Kawaauhau v. Geiger, 523 U.S. 57, 118 S.Ct. 974, 140 L.Ed.2d 90 (1998). See also, In re Longley, 235 B.R. 651 (10th Cir. BAP 1999) (following Geiger and holding that intentional act is insufficient to satisfy the willfulness element of § 523(a)(6) for debtor's obligation to be nondischargeable; creditor was required to present evidence that debtor intended to injure it or its property interest).
In this case, the Plaintiff failed to show that Modrall intended to injure Lucia or his property in her dealings with Lucia's money or property acting pursuant to the Power of Attorney. Therefore, the Court will not deny the discharge under this section.
Section § 523(a)(4) excepts from discharge any debt "for fraud or defalcation while acting in a fiduciary capacity, . . ." Under § 523(a)(4), the creditor must show the following: "1) the existence of a fiduciary relationship between the debtor and the objecting party, and 2) a defalcation committed by the debtor in the course of that fiduciary relationship." Antlers Roof Truss Builders Supply v. Storie (In re Storie), 216 B.R. 283, 286 (10th Cir. BAP 1997), citing Fowler Bros. v. Young (In re Young), 91 F.3d 1367, 1371-72 (10th Cir. 1996).
While the existence of a fiduciary relationship under § 523(a)(4) is determined under federal law, state law is relevant to this inquiry. Van De Water, 180 B.R. at 289. A fiduciary relationship under this section, "must arise from an express or technical trust, and not a constructive trust." Rech v. Burgess (In re Burgess), 106 B.R. 612, 620 (Bankr.D.Neb. 1989) (citations omitted). Under New Mexico law, one who holds a power of attorney is in a trust relationship with the grantor and is under a fiduciary duty to exercise that power in the grantor's best interest. Bogle v. Bogle, 51 N.M. 474, 476-477, 188 P.2d 181, 183 (1947). Moreover, the Power of Attorney executed by Lucia expressly stated that Modrall agreed to act in a "fiduciary capacity consistent with [Lucia's] best interests as [Lucia's] attorney-in-fact . . ." Plaintiff's Ex. 2. In Burgess, the court held that the power of attorney at issue imposed a fiduciary duty under § 523(a)(4) because 1) it was a general power giving the agent control over all of the principal's assets; 2) it was durable; 3) it was for sole benefit of principal; 4) the principal gave up management of her affairs; and 5) the principal did not subsequently play an active role in managing her affairs. Id., 106 B.R. at 620. These are the facts here. Considering the express language of the Power of Attorney, the imposition of a fiduciary duty under New Mexico law, and the requirements of § 523(a)(4), this Court concludes that Modrall was under a fiduciary duty to act in Lucia's best interests from the time Lucia signed the Power of Attorney, August 7, 1998. If Modrall, acting pursuant to the Power of Attorney, used any of Lucia's funds or property to benefit herself, she was self-dealing and committed a breach of her fiduciary duty to Lucia. Self-dealing is per se a breach of fiduciary duty because it engenders conflicting interests and creates divided loyalty. Bogle, 188 P.2d at 183. Moreover, defalcation under § 523(a)(4) is defined as the "slightest misconduct, negligence or ignorance and it does not require intentional conduct." Burgess 106 B.R. at 621 (stating that a defalcation can be found if a debtor misapplied funds held by him under the belief that he was authorized to do so). Therefore, any of Lucia's funds expended by Modrall for her own benefit after August 7, 1998 but before the date she transferred the Power of Attorney on March 5, 1999, would be considered a nondischargeable debt under § 523(a)(4).
The Court finds that Modrall's use of Lucia's funds after the execution of the Power of Attorney to purchase a home for her benefit is a defalcation of her fiduciary duty. Even with the note granting her permission to purchase the home, Modrall breached her legal duty to Lucia to act only in his best interests. Bogle, 188 P.2d at 183. Modrall's use of Lucia's Certificates of Deposit as collateral to enable her to renew her personal loans with Norwest bank was also a breach of her fiduciary duty under § 523(a)(4). The Court finds that Lucia pledged the Certificates of Deposit for the original Norwest loans to Modrall, therefore, only the additional money obtained in the refinance is nondischargeable.
The note written on August 7, 1998 and signed by Lucia giving a boat and trailer to Modrall's husband was a present gift to him; therefore, the Court finds that this transfer was not a breach of Modrall's fiduciary duty. Modrall's use of Lucia's funds to benefit his ex-wife, Modrall's mother, are not for Modrall's direct benefit and therefore, are not a breach of her fiduciary duty.
In sum, to the extent that Modrall used any of Lucia's funds or property for her own benefit, after August 7, 1998 until March 5, 1999 while acting under the Power of Attorney, she is presumed in law to be in violation of her fiduciary duty to Lucia, regardless of whether she was given permission by Lucia through the notes initialed by him.
The Court will enter an appropriate judgment in accordance with these findings of fact and conclusions of law.