Cloninger v. Cloninger (In re Cloninger), 548 B.R. 839

Background

Decedent (Betty Cloninger) died owning a house encumbered by a CitiFinancial mortgage (~$108,000) and a $50,000 life policy naming CitiFinancial as primary (to the extent of the mortgage) and Michael Cloninger (the debtor) as secondary beneficiary.
Michael was appointed personal representative; probate counsel (Kahn) handled both the estate and the insurance claim.
The probate court authorized sale of the house; it closed Jan 31, 2005, mortgage paid from sale proceeds, and net sale proceeds were placed in counsel’s trust account for distribution to heirs.
AHLIC (insurer) processed the claim but, because it learned the mortgage had already been paid, reissued the death benefit check to Michael as secondary beneficiary on April 7, 2005 (about $51,000).
William (plaintiff/brother) claims Michael induced him to agree to the sale by representing the death benefit would go to the estate, and that Michael’s actions deprived William of one-quarter of the $51,000 (i.e., $12,750). William sued in adversary to except that debt from discharge under 11 U.S.C. § 523(a)(2), (4), and (6).
Parties stipulated most facts and agreed to determination on the record; plaintiff later filed two affidavits alleging an oral promise by Michael, which the court excluded as untimely and found not credible.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
§523(a)(2)(A) — actual fraud/false representation	William: Michael represented (or otherwise schemed) that insurance proceeds would go to the estate to induce assent to sale; debt is nondischargeable for fraud	Michael: No misrepresentation; sale was necessary to avoid foreclosure; he and counsel timely pursued the insurance claim and he lawfully received proceeds as secondary beneficiary	Court: Denied — plaintiff failed to prove representation or fraudulent intent by preponderance; late affidavits excluded and other record evidence negates intent to defraud
§523(a)(4) — fraud or defalcation in fiduciary capacity	William: Michael, as personal representative, breached fiduciary duty by causing sale pre-payment of insurance and personally benefiting; thus claim is a defalcation	Michael: Acted as fiduciary under counsel’s advice; sale was to prevent foreclosure; no conscious disregard or knowledge of wrongdoing	Court: Denied — fiduciary status acknowledged, but after Bullock court requires knowledge or gross recklessness for defalcation; plaintiff did not prove culpable state of mind
§523(a)(4) — embezzlement/larceny	William: Retention of proceeds is wrongful appropriation	Michael: He was contractually entitled to be paid as second beneficiary once mortgage was satisfied; no fraudulent appropriation	Court: Denied — no embezzlement or larceny; Michael lawfully received funds and fraudulent intent not shown
§523(a)(6) — willful and malicious injury	William: Michael’s conduct caused willful/malicious injury by depriving heirs of funds	Michael: Actions were intended to benefit estate and were not intended to injure; acted under counsel’s advice and without malice	Court: Denied — injury resulted from alleged breach of fiduciary duty, not an intentional or substantially certain-to-cause injury; no willful and malicious intent proven

Key Cases Cited

Equitable Bank v. Miller, 39 F.3d 301 (11th Cir. 1994) (exceptions to discharge construed narrowly)
St. Laurent v. Ambrose, 991 F.2d 672 (11th Cir. 1993) (creditor bears burden to prove nondischargeability)
Grogan v. Garner, 498 U.S. 279 (U.S. 1991) (preponderance of proof standard for nondischargeability)
McClellan v. Cantrell, 217 F.3d 890 (7th Cir. 2000) (actual fraud may include schemes beyond affirmative misrepresentations)
Quaif v. Johnson, 4 F.3d 950 (11th Cir. 1993) (§523(a)(4) limited to technical/express trusts)
Bullock v. BankChampaign, N.A., 133 S. Ct. 1754 (U.S. 2013) (defalcation requires knowledge or gross recklessness)
Kawaauhau v. Geiger, 523 U.S. 57 (U.S. 1998) (§523(a)(6) requires deliberate or intentional injury)