Opinion
Bankruptcy Case No. 11-40309-JDP No. 11-8034-JDP
03-26-2012
In re: MARTHA M. FORD, Debtor. MEDICAL RECOVERY SERVICES, LLC., Plaintiff, v. MARTHA M. FORD Defendant.
Bryan Zollinger, SMITH, DRISCOLL & ASSOCIATES, Idaho Falls, Idaho, Attorney for Plaintiff.
Adv. Proceeding
MEMORANDUM OF DECISION
Appearances:
Bryan Zollinger, SMITH, DRISCOLL & ASSOCIATES, Idaho Falls, Idaho, Attorney for Plaintiff.
Introduction
In this § 523(a)(4) adversary proceeding against chapter 7 debtor, Defendant Martha Ford ("Debtor"), Plaintiff Medical Recovery Services, LLC ("Creditor") has filed a motion for default judgment. Having considered the Creditor's submissions in support of its motion, and applicable law, the Court determines Creditor is not entitled to a default judgment. This Memorandum explains why.
Unless otherwise indicated, all chapter and section references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and all rule references are to the Federal Rules of Bankruptcy Procedure, Rules 1001-9037.
The Court sets forth its conclusions of law herein. Rule 7052, 9014.
Background
This background information is taken from Creditor's complaint, and Creditor's pleadings, affidavits, and exhibits submitted in support of its motion for default judgment.
In October 2006, Debtor apparently sought medical services for her minor son from Teton Clinical Pharmacy ("Teton"). Teton, in turn, was a subcontractor to Alliance Health Services, LLC ("Alliance"). To receive treatment on behalf of her son, Debtor was required to sign a Client Agreement and Consent for Health Care Products ("Agreement"). Included in the Agreement was an Assignment of Insurance Benefits, which provided:
I hereby assign and transfer to [Alliance] and/or [Teton], any and all rights to receive payment of insurance benefits. This assignment of benefits includes all . . . benefits, which are otherwise payable to me for products and services provided. . . . I understand that this document constitutes a legally binding assignment, and is not a mere authorization to collect benefits on my behalf. . . . In the event that my insurance carrier does not honor this assignment of benefits, I understand that all correspondence and payments for products or services provided by [Teton] may be sent directly to me. I agree that when such payments are received, I will promptly submit them to [Teton] for payment of my bill. I understand that I can make payment of services by either personal check or by endorsing the insurance payment to [Teton] and my signature.
Teton provided $30,274.89 worth of services on behalf of Debtor's son. Blue Cross of Idaho ("Blue Cross"), Debtor's insurance carrier, did not pay Teton, but, rather, paid $27,274.89 directly to Debtor. Although she had agreed to do so, Debtor did not turn those funds over to Teton or Alliance. In September 2010, Teton and Alliance assigned and transferred their claims against Debtor to Creditor.
Debtor filed a chapter 7 bankruptcy petition on March 11, 2011, Case No. 11-40309-JDP, and, on April 1, Creditor initiated this adversary proceeding to except its medical services debt from discharge under § 523(a)(4). Dkt No. 1. When Debtor did not respond to Creditor's properly-served complaint by early May 2011, Creditor sought and obtained entry of a default against Debtor from the Clerk of Court. Dkt No. 8. Creditor filed a motion for default judgment against Debtor on May 11, 2011. Dkt No. 9. After being unable to submit adequate proof of its right to a default judgment at a hearing conducted by the Court on July 12, 2011, the Court offered Creditor another opportunity to submit proof in support of its claim for relief, this time via written submissions. See Minutes, Dkt No. 16. Creditor then filed a second Motion for Default Judgment on February 6, 2012, together with a supporting affidavit and documents. Dkt Nos. 22, 23.
Creditor's motion for default judgment is made "pursuant to I.R.C.P. 55(b)(1) and/or I.R.C.P. 55(b)(2)." Of course, the Idaho Rules of Civil Procedure have no application in this federal litigation. The Court presumes Creditor intended to move for default judgment pursuant to Rule 7055 and Fed. R. Civ. P. 55(b).
Discussion
Upon entry of a clerk's default against a defendant, FED. R. CIV. P. 55(b), as incorporated by Rule 7055, allows the court to enter default judgment in a plaintiff's favor. Whether to grant default judgment is a matter submitted to the trial court's discretion. Aldabe v. Aldabe, 616 F.2d 1089, 1092 (9th Cir. 1980). In exercising that discretion, a court may consider several factors, including: "(1) the possibility of prejudice to the plaintiff, (2) the merits of [the] plaintiff's substantive claim, (3) the sufficiency of the complaint, (4) the sum of money at stake in the action, (5) the possibility of a dispute concerning material facts, (6) whether the default was due to excusable neglect, and (7) the strong policy underlying the Federal Rules of Civil Procedure favoring decisions on the merits." Eitel v. McCool, 782 F.2d 1470, 1471-72 (9th Cir. 1986). In this action, the balance of these factors weighs against granting Creditor's motion for default judgment.
At least for now, Creditor will not be prejudiced if default judgment is not entered. It will retain its claim against Debtor, and Creditor may continue to pursue Debtor's participation in the present adversary proceeding.
Debtor did not appear at a scheduled deposition, and the Court has relied upon her failure to cooperate in discovery as an additional basis for finding that Debtor is in default in this action. Creditor has not, however, taken any additional steps to compel Debtor to appear and testify in this litigation as a means of establishing grounds exist to except Creditor's debt from discharge.
Moreover, based upon the allegations of its complaint, and the proof offered by Creditor to date, Creditor has not shown it is entitled to relief on its § 523(a)(4) claim. Section 523(a)(4) provides:
(a) A discharge . . . does not discharge anThus, a debt may be excepted from discharge pursuant to § 523(a)(4) under any of three different theories. While Creditor's complaint asserts Debtor engaged in "wrongful conduct within the meaning of [§ 523(a)(4)]," it does not specify which § 523(a)(4) theory correlates to the asserted "wrongful conduct." The Court will therefore briefly address each.
individual debtor from any debt -
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(4) for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or
larceny;
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First, a creditor may prove a debt is excepted from discharge pursuant to § 523(a)(4), if "(1) an express trust existed, (2) the debt was caused by fraud or defalcation, and (3) the debtor acted as a fiduciary to the creditor at the time the debt was created." Banks v. Gill Distrib. Ctrs., Inc. (In re Banks), 263 F.3d 862, 870 (9th Cir. 2001) (quoting Otto v. Niles (In re Niles), 106 F.3d 1456, 1459 (9th Cir. 1997)). The term "fiduciary," in this context, is to be narrowly interpreted, covering only fiduciary relationships arising from express trusts imposed before the wrongdoing that caused the debt. Lewis v. Scott (In re Lewis), 97 F.3d 1182, 1185 (9th Cir. 1996). To create an express trust, two parties must intend to create a trust relationship, use appropriate "trust" language, and identify ascertained trust res. See Lovell v. Stanifer (In re Stanifer), 236 B.R. 709, 715 (9th Cir. BAP 1999).
Here, there is no proof of the existence of any express trust. While, in the Agreement, Debtor agreed to forward any insurance funds paid to her by her insurer on account of Teton's medical services, the Agreement's language does not evidence an intent to create a trust. The Agreement does not contain any reference to a trust, does not specify trust res, and Creditor's complaint does not otherwise plead the existence of an express trust. Based on the information in Creditor's complaint, it is unlikely an express trust was created, and it is also unlikely there was a § 523(a)(4) fiduciary relationship.
Second, under § 523(a)(4), a creditor can except from discharge a debt resulting from the debtor's embezzlement. In the nondischargeability context, embezzlement is defined as "the fraudulent appropriation of property by a person to whom such property has been entrusted or into whose hands it has lawfully come." Transam. Commercial Fin. Corp. v. Littleton (In re Littleton), 942 F.2d 551, 555 (9th Cir. 1991) (quoting Moore v. United States, 160 U.S. 268, 269 (1885)). Thus, there are three elements to embezzlement: "(1) property rightfully in the possession of a nonowner; (2) [the] nonowner's appropriation of the property to a use other than which [it] was entrusted; and (3) circumstances indicating fraud." Id. (quoting Nat'l Bank of Commerce of Pine Bluff v. Hoffman (In re Hoffman), 70 B.R. 155, 162 (Bankr. W.D. Ark. 1986)).
Creditor has not pled or otherwise demonstrated by proof that Debtor did not hold an ownership interest in the $27,274.89. Also, Creditor has not shown it "entrusted" the insurance money to Debtor for a particular use, and that Debtor applied the payments to another use.Finally, Creditor has not alleged circumstances indicating fraud; rather, it relies primarily on Debtor's apparent breach of contract.
While the Agreement's language recognizes insurance payments might be made directly to Debtor, there is no indication Creditor "entrusted" those payments to Debtor for a particular purpose.
Third, a debt may be excepted from discharge if it results from larceny. For § 523(a)(4) purposes, larceny is defined as a "felonious taking of another's personal property with intent to convert it or deprive the owner of the same." Ormsby v. First. Am. Title Co. of Nevada (In re Ormsby), 591 F.3d 1199, 1205 (9th Cir. 2010) (quoting 4 COLLIER ON BANKRUPTCY ¶ 523.10[2] (15th ed. rev. 2008)). "Felonious," in this context, means done with "an evil heart or purpose," maliciously, wrongfully, or out of villainy. Id. at n.4.
Creditor's complaint does not sufficiently allege conduct or acts showing Debtor committed larceny. Debtor did not "take" property belonging to Alliance or Teton; the $27,274.89 was given to Debtor by Blue Cross as the beneficiary of her insurance policy. There is also no indication Debtor acted "feloniously," or with malicious intent.
The lack of intent-related allegations in Creditor's complaint would also likely be fatal were Creditor to pursue amendment to state a claim for relief under § 523(a)(6). To obtain such an exception to discharge, a creditor must prove that, among other facts, the debtor deliberately and intentionally inflicted injury on the creditor. Kawaauhau v. Geiger, 523 U.S. 57, 61 (1998). Creditor's complaint does not state, or even imply, that, by failing to turn over the insurance proceeds, Debtor intended to injure Creditor.
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Section 523(a) exceptions to discharge are to be strictly construed in debtors' favor, consistent with the Code's general policy of favoring debtors' "fresh start." See Searcy v. Ada Cnty. Prosecuting Atty's Office (In re Searcy), 463 B.R. 888, 891 (9th Cir. BAP 2012) ("[E]ceptions to discharge generally are to be construed strictly in favor of the debtor and against those seeking to except debts from the debtor's discharge."); Raiman v. State Bd. of Equalization of the State of Cal. (In re Raiman), 172 B.R. 933, 938 (9th Cir. BAP 1994) ("[E]xceptions to discharge under Section 523(a) are strictly interpreted in favor of the "fresh start" policy of the Code."). In this instance, primarily because Creditor's complaint does not show Creditor would be successful on its substantive § 523(a)(4) claim, that policy clearly favors denying Creditor's motion for default judgment pursuant to § 523(a)(4).
Conclusion
Creditor's motion for default judgment will be denied in a separate order. In addition, because Creditor has been afforded at least two opportunities to prove up its right to relief, and has been unable to do so, the order will require Creditor to show cause why this action should not be dismissed.
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Honorable Jim D. Pappas
United States Bankruptcy Judge