634 B.R. 524
Bankr. S.D.W. Va.2021Background
- In 2004 Traci Nicewander paid $21,981 to purchase real estate using inherited funds, but title was placed in Russell Nicewander’s name as a nominee; West Virginia law created a resulting trust in Traci’s favor.
- The parties used and maintained the property for years; in 2014 the property sold for $72,500 and net proceeds after closing were $66,479.31.
- $16,020.24 of the proceeds were applied to satisfy tax liens against Russell; the closing agent issued Russell a $50,450.07 check, which he cashed. Russell kept $3,000 for taxes and Plaintiff alleges he retained the remaining $47,500; Russell says he handed that cash to Plaintiff but produced no receipt or witnesses.
- In 2020 the Mercer County Circuit Court, after a bench trial, found by clear and convincing evidence that Russell held title in trust for Traci and that Russell failed to prove he paid the sale proceeds to Traci, entering judgment for $63,479.31. Russell did not appeal.
- Russell later filed Chapter 7 bankruptcy; Traci brought an adversary seeking a §523(a)(4) determination that the debt is nondischargeable (defalcation or embezzlement).
- The bankruptcy court denied summary judgment on nondischargeability because the state-court judgment did not resolve the requisite culpable state-of-mind (knowledge or gross recklessness) for defalcation or embezzlement, but under Fed. R. Civ. P. 56(g) treated two facts as established: (1) a resulting trust existed in Traci’s favor; and (2) Russell failed to pay the $47,500 in proceeds to Traci.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Applicability of res judicata to bar relitigation and support nondischargeability | Res judicata binds bankruptcy court to state-court judgment; entitles Traci to summary judgment on nondischargeability | Res judicata is inapplicable in nondischargeability proceedings | Denied — res judicata does not apply to bankruptcy nondischargeability claims |
| Collateral estoppel effect of state-court findings | State-court findings (resulting trust; failure to pay) are preclusive and establish elements of §523(a)(4) | State-court findings do not resolve the state-of-mind elements required under §523(a)(4) | Partial: collateral estoppel applies to factual issues identical to those litigated; resulting trust and failure to pay are established facts |
| Whether §523(a)(4) fiduciary element (trust) is satisfied | The Circuit Court’s resulting-trust finding establishes Russell was a fiduciary when the debt arose | Does not dispute fiduciary element | Held — fiduciary element satisfied (resulting trust arose in 2004) |
| Whether §523(a)(4) defalcation/embezzlement (culpable state of mind) is established | Circuit Court’s findings imply conversion/embezzlement and thus nondischargeability | Circuit Court made no findings of knowledge or gross recklessness required by Bullock | Denied — genuine dispute remains as to intentional or reckless state of mind; not entitled to judgment on nondischargeability |
Key Cases Cited
- Brown v. Felsen, 442 U.S. 127 (1979) (res judicata limited in bankruptcy nondischargeability proceedings)
- Grogan v. Garner, 498 U.S. 279 (1991) (preponderance standard governs nondischargeability; collateral estoppel may be applied)
- Bullock v. BankChampaign, N.A., 569 U.S. 267 (2013) (defalcation requires knowledge or gross recklessness)
- Davis v. Aetna Acceptance Co., 293 U.S. 328 (1934) (§523(a)(4) protects only express or technical trusts existing before the wrongdoing)
- Celotex Corp. v. Catrett, 477 U.S. 317 (1986) (summary judgment burden-shifting framework)
- Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986) (genuine issue of material fact standard for summary judgment)
- Carter v. Walker, 121 W. Va. 81, 1 S.E.2d 483 (1939) (resulting trust arises where one pays purchase money and title is taken in another’s name)