583 B.R. 655
Bankr. N.D. Miss.2018Background
- Mid‑South discovered that office manager Kimberly Burk embezzled at least $1.4 million by directing payroll deposits into relatives’ accounts and falsifying records; Kimberly pleaded guilty and is incarcerated.
- Three related adversary proceedings were tried together: creditors sued debtor-defendants Zachary Burk, and Jessica and Stephen Smith, seeking nondischargeability of debts for funds embezzled from Mid‑South that flowed through the defendants’ accounts.
- Zachary (18 at relevant time) had never managed finances, never saw bank statements (Kimberly received them), testified he believed funds were his mother’s legitimate pay, and the court found him credible and unaware of the scheme.
- Stephen and Jessica were young but more financially aware; both questioned Kimberly about frequent large “paycheck” deposits, withdrew cash for Kimberly, and the court found them not credible and at least willfully blind to the origin of funds.
- The court found undisputed amounts that flowed through accounts and deducted legitimate earnings and specific cash withdrawals, concluding Jessica and Stephen spent $98,942.00 of Mid‑South’s embezzled funds.
- Procedural posture: bankruptcy court (Bankr. N.D. Miss.) trial; plaintiff Mid‑South sought nondischargeability under 11 U.S.C. §§ 523(a)(2)(A), (a)(4), and (a)(6).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether debts are nondischargeable under §523(a)(2)(A) (false pretenses/representations) | Mid‑South: defendants received and spent embezzled funds; nondischargeable as obtained by fraud/false representations | Defendants: they made no representations to Mid‑South and lacked knowledge | Court: No §523(a)(2)(A) liability on false pretenses/representations prong (no representations to Mid‑South) |
| Whether debts are nondischargeable under §523(a)(2)(A) (actual fraud) | Mid‑South: actual fraud includes knowingly receiving embezzled funds; defendants knowingly received/spent funds | Defendants: lacked knowledge or were merely negligent; Zachary had no reason to know | Court: Jessica and Stephen liable (knowingly received/spent or willfully blind); Zachary not liable (credible lack of knowledge) |
| Whether debts are nondischargeable under §523(a)(4) (fiduciary/embezzlement/larceny) | Mid‑South: claims fit §523(a)(4) categories | Defendants: no fiduciary relationship with Mid‑South; they did not take funds from Mid‑South (Kimberly did) | Court: §523(a)(4) not met — no express/technical fiduciary duty, not entrusted with funds, and defendants were not the original takers |
| Whether debts are nondischargeable under §523(a)(6) (willful and malicious injury) | Mid‑South: defendants’ receipt/spending of embezzled funds was willful/malicious | Defendants: lacked subjective intent or knowledge; mere negligence | Court: Jessica and Stephen liable (subjective intent or objective substantial certainty via willful blindness); Zachary not liable (honest mistaken belief) |
Key Cases Cited
- Grogan v. Garner, 498 U.S. 279 (burden of proof for nondischargeability is preponderance of the evidence)
- Husky Int'l Elecs., Inc. v. Ritz, 136 S. Ct. 1581 (2016) (actual fraud under §523(a)(2)(A) does not require a false representation)
- Cohen v. de la Cruz, 523 U.S. 213 (fraudulently obtained money or property gives rise to nondischargeable debts ‘arising from’ that fraud)
- Kawaauhau v. Geiger, 523 U.S. 57 (willful means deliberate or intentional injury under §523(a)(6))
- Miller v. Abrams (In re Miller), 156 F.3d 598 (5th Cir.) (interpretation of willful and malicious standard and fiduciary requirement under §523(a)(4))
- Field v. Mans, 516 U.S. 59 (reliance for fraud need not be objectively reasonable; subjective justifiable reliance suffices)