587 B.R. 750
Bankr. D. Mass.2018Background
- Elizabeth W. Ackerman ("Elizabeth") was settlor and beneficiary of an irrevocable Pennsylvania trust (created 1967); Jeffrey Ackerman (her son) became trustee in March 1998. The Trust held about $10.5 million when Jeffrey became trustee.
- Elizabeth granted Jeffrey a durable Colorado power of attorney in 1996; the POA did not mention the Trust or expressly authorize gifts from the Trust to Jeffrey.
- During his trusteeship (1998–2010) Jeffrey used Trust funds for many personal and business purposes (examples: funding Chair 5 restaurant ventures, Oak Creek real estate, Pavilion Ranch, Vail condo, Abbott/Livingston Road real estate and construction, nanny salary, private school tuition, a Jamaica trip). Total diversions were at least about $7.2 million.
- The Trust required the settlor’s written authorization filed with the trustee before making any distributions to or for the benefit of anyone other than the settlor (Article I.D.). Jeffrey frequently made distributions without such written authorizations.
- After beneficiaries learned of the transactions, Elizabeth revoked the POA, removed Jeffrey as trustee in 2010, successor co-trustees reconstructed the accounts and paid off the Trust’s line of credit; remaining Trust assets were substantially depleted. The Trust sued in bankruptcy court to have the debtor’s liability to the Trust declared nondischargeable under 11 U.S.C. §523(a)(2)(A) and §523(a)(4).
Issues
| Issue | Plaintiff's Argument (Trust) | Defendant's Argument (Ackerman) | Held |
|---|---|---|---|
| 1) §523(a)(2)(A) - fraud/false representation | Jeffrey’s failures to report and alleged misrepresentations supported nondischargeability for funds obtained by fraud | Denied adequate pleading particularity; omissions are not affirmative false representations causing the transfers | Court: Claim dismissed for failure to plead with particularity and on the merits — no §523(a)(2)(A) relief |
| 2) §523(a)(4) - defalcation while fiduciary | Jeffrey breached fiduciary duties by diverting Trust funds without the settlor’s required written authorization; these breaches meet Bullock culpability standard | Jeffrey contends settlor consent/ratification (oral or via POA), acted with authority to invest/hold in other names, and lacked scienter | Court: Jeffrey acted in a fiduciary capacity as trustee; many appropriations (nanny salary, Oak Creek, Chair 5, private tuition, Livingston Road transfers and subordination, Vail condo, Jamaica trip) were defalcations and are nondischargeable |
| 3) §523(a)(4) - embezzlement | Misappropriations were fraudulent conversions of Trust property in Jeffrey’s lawful possession | Jeffrey denies fraudulent intent; claims oral consent/POA authority or that transfers were investments/loans | Court: For same transactions found to be defalcations, embezzlement also established (knowledge of lack of authorization); debts excepted from discharge |
| 4) POA / written-authorization defense and UTC §7789 | Jeffrey: POA ratified or authorized distributions; settlor orally consented; UTC §7789 (Pa.) permits beneficiary ratification | Trust: Trust instrument requires written authorizations that control; POA did not reference Trust; Colorado law and UPAA limit agent’s authority; §7789 doesn't override trust terms and requires affirmative beneficiary act | Court: POA did not supply written authorization for Trust distributions nor validate post-facto ratification; oral consent unproved; §7789 not a defense to violations of express written trust provisions |
Key Cases Cited
- Palmacci v. Umpierrez, 121 F.3d 781 (1st Cir.) (burden to prove nondischargeability by preponderance; circumstantial evidence may show intent)
- Grogan v. Garner, 498 U.S. 279 (Sup. Ct.) (preponderance standard for nondischargeability)
- Bullock v. BankChampaign, N.A., 569 U.S. 267 (Sup. Ct.) (defalcation requires a culpable mental state: knowledge or gross recklessness)
- Sherman v. Novak (In re Sherman), 603 F.3d 11 (1st Cir.) (embezzlement requires fraudulent conversion; scienter element)
- Rutanen v. Baylis (In re Baylis), 313 F.3d 9 (1st Cir.) (defalcation may be presumed from breach of duty of loyalty)
- Stowe v. Bologna (In re Bologna), 206 B.R. 628 (Bankr. D. Mass.) (§523(a)(4) fiduciary capacity limited to express or technical trusts)