Opinion
No. 7-02-11161 MA, Adversary No. 03-1222 M.
August 3, 2004.
MEMORANDUM REGARDING DEFENDANT'S MOTION FOR SUMMARY JUDGMENT
THIS MATTER is before the Court on Defendant Wendy Sanchez's Motion for Summary Judgment ("Defendant's Motion for Summary Judgment"), filed by and through her attorney of record, Michael K. Daniels. Defendant's Motion for Summary Judgment seeks summary judgment on Plaintiffs' causes of action brought pursuant to 11 U.S.C. § 523(a)(2) and (a)(4). Plaintiffs, Vivian Markey, co-executor of the estate of Lois Madison, deceased, and Eric S. Madison, co-executor of the estate of Lois Madison, deceased, by and through their attorneys of record, Gordon H. Rowe III, filed a Response and Objection to the Defendant Sanchez's Motion for Summary Judgment ("Response"), to which Defendant filed a reply. See Defendant Sanchez's Reply in Support of Her Motion for Summary Judgment ("Reply"). After considering the Defendant's Motion for Summary Judgment, the Response, and the Reply, and being otherwise sufficiently informed, the Court finds for the reasons stated below that Defendant's Motion for Summary Judgment should be granted on the claims for non-dischargeability under 11 U.S.C. § 523(a)(2) and (4).
BACKGROUND AND ALLEGATIONS OF COMPLAINT
Plaintiffs filed their Complaint to Determine Dischargeability of Debts under 11 U.S.C. § 523(a)(2) and (4), for Imposition of Constructive Trust, and for Determination of Ownership of Property ("Complaint") against Defendant Wendy J. Sanchez, individually, and as trustee and beneficiary of the Wendy J. Sanchez and Lionel J. Sanchez Trust. The Chapter 7 Trustee, Philip J. Montoya, was later named as an additional Defendant to this proceeding as a necessary party. See Amended Complaint to Determine Dischargeability of Debts Under 11 U.S.C. § 523(a)(2) and (4), for Imposition of Constructive Trust and for Determination of Ownership of Property ("Amended Complaint") (Docket # 9). The Amended Complaint alleges, among other things, that Lois Madison, now deceased, invested in excess of $185,000.00 with Lionel Sanchez based upon his assurances that he would make safe investments with these funds on behalf of Lois Madison, but that in fact, the funds were used for unsuitable investments intended to benefit Lionel Sanchez and Defendant Wendy Sanchez, resulting in the loss of the entire $185,000.00. The Amended Complaint also alleges that Lionel Sanchez, acting with Defendant Wendy Sanchez, purchased 1,109,985 shares of Hatch Farms, Inc. stock using funds invested by Lois Madison and possibly others, and caused these shares to be issued in the name of Lionel Sanchez and Wendy Sanchez, as trustees of the Lionel Sanchez and Wendy Sanchez Trust.
The following facts are not in dispute:
1. Defendant never met Lois Madison or either of the Plaintiffs prior to the filing of the bankruptcy.
2. Defendant never spoke to Lois Madison or either of the Plaintiffs prior to the filing of the bankruptcy.
SUMMARY JUDGMENT STANDARD
Summary judgment is governed by Rule 56, Fed.R.Civ.P., incorporated into the Federal Rules of Bankruptcy Procedure by Rule 7056, Fed.R.Bankr.P. Summary judgment is appropriate when "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Rule 56(c), Fed.R.Civ.P., adopted by Rule 7056, Fed.R.Bankr.P. In considering a motion for summary judgment, the Court will view the record in the light most favorable to the party opposing summary judgment. Wolf v. Prudential Ins. Co. of America, 50 F.3d 793, 796 (10th Cir. 1995). The moving party bears the initial burden of showing an absence of genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). However, once the "movant carries the initial burden, the non-movant may not rest upon its pleadings, but must set forth specific facts showing a genuine issue of trial as to those dispositive matters for which it carries the burden of proof." Wolf, 50 F.3d at 796 (citations omitted).
DISCUSSION
Plaintiffs assert that the $185,000.00 which Lois Madison invested with Lionel Sanchez should be declared non-dischargeable under 11 U.S.C. § 523(a)(2)(A) as a debt obtained by false pretenses, a false representation or fraud. The Amended Complaint asserts that Defendant Wendy Sanchez either participated in Lionel Sanchez's alleged fraudulent conduct, or benefitted from such conduct so that she should be held liable for her husband's actions. Because Plaintiffs concede that Defendant never met or spoke to Lois Madison or either of the Plaintiffs prior to the filing of the bankruptcy, Plaintiffs' cause of action is necessarily based on a theory of imputed liability based on the alleged wrongdoing of Lionel Sanchez.
Courts have uniformly held that fraud cannot be imputed to a spouse based solely on the marital relationship. See, e.g., Tsurukawa v. Nikon Precision, Inc., (In re Tsurukawa), 258 B.R. 192, 198 (9th Cir. BAP 2001), appeal after remand, 287 B.R. 515 (9th Cir. BAP 2002) (holding "that a marital union alone, without a finding of a partnership or other agency relationship between spouses, cannot serve as a basis for imputing fraud from one spouse to the other."); In re Ellis, 310 B.R. 762, 771 (Bankr.W.D.Okla. 2004) ("A mere marital relationship is not sufficient to impute the actions of one spouse to another."); In re Vasile, 297 B.R. 893, 902 (Bankr.M.D.Fla. 2003) ("Fraudulent intent may not be imputed from one spouse to another simply based on the marital relationship of the parties.") (citation omitted). However, fraud under 11 U.S.C. § 523(a)(2) has been imputed to a debtor based on the spouse's wrongdoing when there is a business or partnership relationship between the spouses. See In re Banke, 275 B.R. 317, 329 (Bankr.N.D.Iowa 2002) (noting that "[g]enerally, in the absence of an agency relationship, such as a partnership, courts do not impute wrongdoing between spouses under § 523(a)(2)(A).") (citing Tsurukawa, 258 B.R. at 198); Ellis, 310 B.R. at 771 (noting that in cases which deny a discharge based on the actions of the other spouse, generally some business relationship between the spouses is present in addition to the marital relationship). These cases apply general agency principles to hold the principal liable for the agent's misrepresentations. See In re Tsurukawa, 287 B.R. 515, 520-523 (9th Cir. BAP 2002) (reviewing bankruptcy court's application of agency principles to determination that spouses also had a partnership relationship); Allison v. Roberts (In re Allison), 960 F.2d 481, 485 (5th Cir. 1992) (noting that "[t]he agency theory has been applied to impute the fraudulent acts of one spouse to the other in cases in which the other spouse was involved in a business or scheme.") (citations omitted). Some cases that impute fraud to an "innocent" spouse based on agency principles infer fraudulent intent on the part of the "innocent" spouse based on a finding that the "innocent" spouse knew or should have known of the wrongdoing, and benefitted from it. See Walker v. Citizens State Bank (In re Walker), 726 F.2d 452, 454 (8th Cir. 1984) (per curiam) (determining that wife's fraud could be imputed to husband if husband knew or should have known of his wife's fraud or was recklessly indifferent to it); Vasile, 297 B.R. at 902 ("the person to whom fraudulent intent is sought to be imputed must be aware of the spouse's misconduct and must participate in the use or enjoyment of the ill-gotten gains.") (citing Synod of S. Atlantic Presbyterian Church v. Maqpusao (In re Maqpusao), 265 B.R. 492, 498 (Bankr.M.D.Fla. 2001)). See also, In re Oliphant, 221 B.R. 506, 511 (Bankr.D.Ariz. 1998) (denying plaintiff's motion to dismiss, noting that "the nature and extent of the benefit conferred to the "innocent" spouse may be so great or unusual that it is reasonable to conclude that the "innocent" spouse engaged in fraudulent activity him or herself."). But see United States v. Towe (In re Towe), 147 B.R. 545, 551 (Bankr.D.Mont. 1992), aff'd, 97 F.3d 1461 (9th Cir. 1996) (concluding that "fraudulent intent under section 523(a)(2) or under 727(a)(2) cannot be imputed from mere fact that a wife derived benefit from her husband's conduct, or even that she had knowledge of his misconduct.").
Here, Defendant filed an affidavit in support of her Motion for Summary Judgment stating that she did not participate in any way in her husband's business, that she never met or spoke to Lois Madison or either of the Plaintiffs before the filing of her bankruptcy, that she never made any representations to Lois Madison or either of the Plaintiffs before the filing of her bankruptcy, that she never had possession of any money belonging to Lois Madison or the Plaintiffs, and that she believes Lois Madison and Plaintiffs may have been clients of her husband, Lionel Sanchez, but that she was not aware of such a relationship prior to the filing of her bankruptcy. Because Plaintiffs concede that Wendy Sanchez did not meet or speak with Lois Madison or either of the Plaintiffs prior to the filing of the bankruptcy, Wendy Sanchez's affidavit stating that she never worked at her husband's business in any capacity negates Plaintiffs' basis for imputing fraud to her based on her business or partnership relationship with Lionel Sanchez. Thus there is no agency relationship in addition to the marital relationship upon which to base a claim of non-dischargeability.
Plaintiffs' Response attempts to raise genuine issues of material fact by asserting that their Amended Complaint contains allegations that Defendant Wendy Sanchez participated in the alleged fraud of Lionel Sanchez, and by attaching uncertified copies of business documents purporting to show that Wendy Sanchez was a managing member of Highland Health and Fitness Investors, L.L.C. and R.W. Griffin Capital Group, LLC, as evidence that Wendy Sanchez, in fact, did actively participate in the business dealings of her husband Lionel Sanchez. See Exhibits 1, 2and 3 attached to Plaintiffs' Response. Plaintiffs' Response is insufficient to overcome Defendant's Motion for Summary Judgment.
Rule 56(e) specifically provides that
an adverse party may not rest upon the mere allegations or denials of the adverse party's pleading, but the adverse party's response, by affidavits or as otherwise provided in this rule, must set forth specific facts showing that there is a genuine issue for trial.
Rule 56(e), Fed.R.Civ.P., adopted by Rule 7056, Fed.R.Bankr.P.
Plaintiffs cannot rely solely on their pleadings to show that summary judgment is not proper. Defendant points out that the exhibits attached to the Response are not supported by affidavit, nor are they otherwise certified. "`Unauthenticated documents, once challenged, cannot be considered by a court in determining a summary judgment motion.'" Harris v. Beneficial Oklahoma, Inc., (In re Harris), 209 B.R. 990, 996 (10th Cir. BAP 1997) (quoting 11 James Wm. Moore et al, Moore's Federal Practice §§ 56.14 [2][c] (3d ed. 1997). In order to lay a proper foundation for a document which is not yet part of the record to be considered in opposition to a motion for summary judgment,
(1) the document must be attached to and authenticated by an affidavit which conforms to Rule 56(e); and (2) the affiant must be a competent witness through whom the document can be received into evidence . . .
Id. (quoting 11 James Wm. Moore et al, Moore's Federal Practice §§ 56.14 [2][c] (3d ed. 1997).
The exhibits purporting to show Wendy Sanchez's active participation in her husband's business are not certified copies, and are not self-authenticating business records because there is no way for the Court to test whether the exhibits genuinely are what they purport to be. See Harris, 209 B.R. at 997. These exhibits, therefore, do not comply with the requirements of Rule 56(e), Fed.R.Civ.P., and cannot be considered by the Court for purposes of summary judgment.
Plaintiffs also dispute that Wendy Sanchez did not have possession of any money belonging to Lois Madison. Plaintiffs' Response reasons that because Wendy Sanchez was a managing member of companies in which Plaintiffs allege Lois Madison invested, Wendy Sanchez had possession of money belonging to Lois Madison. However, as discussed above, there is no affidavit offered in support of the Response stating what companies Lois Madison invested in, nor are the exhibits purporting to show Wendy Sanchez's active participation in such businesses authenticated. Plaintiffs' opposition to Defendant's Motion for Summary Judgment, therefore, falls short of raising a genuine issue of material fact which would preclude summary judgment in favor of Defendant. Based on the foregoing, the Court concludes that there is no genuine issue of material fact, and Defendant Wendy Sanchez is entitled to judgment on Plaintiffs' cause of action under 11 U.S.C. § 523(a)(2) as a matter of law.
Plaintiffs' cause of action brought under 11 U.S.C. § 523(a)(4) also fails to withstand Defendant's Motion for Summary Judgment. Under 11 U.S.C. § 523(a)(4), debts "for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny" are excepted from discharge. 11 U.S.C. § 523(a)(4). "Fiduciary" within the meaning of 11 U.S.C. § 523(a)(4) is very narrow, and applies only to express or technical trusts. Fowler Bros. v. Young (In re Young), 91 F.3d 1367, 1371-72 (10th Cir. 1996). "[N]either a general fiduciary duty of confidence, trust, loyalty, and good faith, nor an inequality in the parties' knowledge or bargaining power is sufficient to establish a fiduciary relationship for the purposes of [non]-dischargeability." Miramar Resources, Inc. v. Shultz (In re Shultz), 205 B.R. 952, 955 (Bankr.D.N.M. 1997) (citing Young, 91 F.3d 1367). Section 523(a)(4) does not apply to trusts ex malificio, implied or constructive trusts that arise based on a party's wrongdoing. Griffiths v. Peterson (In re Peterson), 96 B.R. 314, 321 (Bankr.D.Colo. 1988). Only trusts that exist prior to the wrongdoing, with a res entrusted to the fiduciary, or technical trusts that arise by statute can support a claim for non-dischargeability under 11 U.S.C. § 523(a)(4). Id. (citing Davis v. Aetna Acceptance Co., 293 U.S. 328, 55 S.Ct. 151, 79 L.Ed. 393 (1934) (remaining citations omitted); In re Parker, 264 B.R. 685, 699 (10th Cir. BAP 2001), aff'd, 313 F.3d 1267 (10th Cir. 2002) (citing Allen v. Romero (In re Romero), 535 F.2d 618, 621 (10th Cir. 1976)).
Plaintiffs assert that because Lionel Sanchez was an investment advisor he had a fiduciary duty to Lois Madison which he breached. Some courts have held that investment advisors are fiduciaries within the meaning of 11 U.S.C. § 523(a)(4), finding that the Investment Advisors Act of 1940, 15 U.S.C. § 80b-1 et. seq., imposes fiduciary duties sufficient to create a technical trust for purposes of non-dischargeability. See, e.g., Peterson, 96 B.R. at 323. See also, In re Sawyer, 112 B.R. 386 (D.Colo. 1990) (finding fiduciary capacity within the meaning of § 523(a)(4) by virtue of Commodities Exchange Act, 7 U.S.C. §§ 1-26, et seq.). Plaintiffs have failed to allege that Defendant is subject to the Investment Advisors Act, or any other state or federal statute that might apply, except to allege that Lionel Sanchez held himself out to be an investment advisor, when, in fact, he was not, in violation of the New Mexico law. See Amended Complaint, ¶ 9. Plaintiffs have, therefore, failed to allege the existence of an express or technical trust within the meaning of 11 U.S.C. § 523(a)(4), and instead rely on allegations of a generalized fiduciary duty of loyalty and confidence based on Lionel Sanchez's relationship with Lois Madison as her investment advisor. See Amended Complaint, ¶¶ 6 and 7. Such allegations are insufficient for purposes of 11 U.S.C. § 523(a)(4). See Siscoe v. Leistner (In re Sciscoe), 164 B.R. 86, 88 (S.D.Ind. 1993), abrogated on other grounds, Cohen v. de la Cruz, 523 U.S. 213, 118 S.Ct. 1212, 140 L.Ed.2d 341 (1998) (noting that "the term `fiduciary' as used in11 U.S.C. § 523(a)(4) is limited to the class of fiduciaries including trustees of specific written declarations of trust, guardians, administrators, executors, ro public officers, and, absent special considerations, does not extend to the more general class of fiduciaries such as agents, bailees, brokers, factors, and partners.") (quoting In re Krause, 114 B.R. 582, 597-98 (Bankr.DN.D.Ind. 1988)). See also, Peterson, 96 B.R. at 321 (noting that "the traditional definition of fiduciary — a relationship involving confidence, trust and good faith, is inapplicable [to § 523(a)(4)].") (citation omitted).
More importantly, just as in their claims under 11 U.S.C. § 523(a)(2), Plaintiffs' allegations under 11 U.S.C. § 523(a)(4) center around Lionel Sanchez's relationship with Lois Madison. Only generally does Plaintiffs' Amended Complaint assert that Defendant Wendy Sanchez was acting with Lionel Sanchez in an attempt to implicate her as a fiduciary. See Amended Complaint, ¶ 15. Plaintiffs have failed to describe any direct relationship between Defendant Wendy Sanchez and Lois Madison. Based on the foregoing, the Court concludes as a matter of law that Defendant Wendy Sanchez was not acting as a fiduciary within the meaning of 11 U.S.C. § 523(a)(4). Therefore, summary judgment will be granted in favor of Defendant Wendy Sanchez on Plaintiffs' claim for non-dischargeability under 11 U.S.C. § 523(a)(4).
An appropriate order and judgment will be entered in accordance with this Memorandum.