564 B.R. 115
Bankr. D. Mass.2017Background
- James B. Whittaker (Debtor) served as successor trustee (2006–2012) and attorney‑in‑fact for his parents’ inter vivos trusts that named the four siblings (including Debtor) as residual beneficiaries; trusts contained investment accounts later consolidated into a Fidelity account.
- Debtor, a CFA with prior option‑trading losses, sent three written reports (2007, 2008, ~2009) representing conservative investment but thereafter began trading trust funds in options by at least August 2009 and stopped reporting to siblings.
- Debtor withdrew $107,500 from the Fidelity account to purchase a timeshare and transferred $38,000 to a personal TradeStation account; neither amount was repaid and both were lost or used for personal benefit.
- From Aug. 2009–Dec. 2011 the Fidelity account dropped from ~$1.13M to $29.21 due predominantly to options trading and some distributions; Debtor admitted risky trades and later told siblings of ~ $700,000 in losses.
- Plaintiffs (siblings and co‑successor trustees) sued in the bankruptcy adversary proceeding to except their claims from discharge under 11 U.S.C. § 523(a)(2)(A), (a)(4), and (a)(6); § 727 objection was withdrawn.
- Court granted summary judgment as to embezzlement for the $107,500 timeshare withdrawal and, after trial, held additional liabilities nondischargeable as detailed below.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| 1. §523(a)(2)(A) — fraud/false representation nondischargeability | Whittaker’s nondisclosure/representations that investments remained conservative caused them to refrain from intervening and allowed misappropriations to continue | Debtor argues plaintiffs failed to show he obtained money/property by false representations | Dismissed: plaintiffs failed to plead/prove debt "obtained by" fraud; late‑filed fraud theories (re: $107,500 and $38,000) were not properly pleaded |
| 2. §523(a)(4) — defalcation for imprudent option trading | Trading in options was a breach of fiduciary duty (defalcation) because it was reckless and contrary to settlor’s conservative intent | Debtor relies on broad trust investment powers and lack of fraudulent intent; argues conduct was reckless at most | Granted in part: Court finds trustee acted in fiduciary capacity; options trading constituted defalcation (grossly reckless/intentional wrong) and is nondischargeable |
| 3. §523(a)(4) — embezzlement of $107,500 and $38,000 | Withdrawals were unauthorized conversions of trust property constituting embezzlement | Debtor claims transfers were to better administer investments, not to appropriate funds | Granted: $107,500 already ruled nondischargeable; $38,000 transfers found embezzlement and nondischargeable |
| 4. §523(a)(6) — willful and malicious injury for trading, misappropriations, and nondisclosure | Plaintiffs assert conduct was willful/malicious (intended or substantially certain to cause trust loss) | Debtor contends he did not intend to injure; hoped to benefit heirs and lacked substantial‑certainty to cause losses | Mixed: Nondischargeable for willful/malicious conversion of the $107,500 and $38,000; not nondischargeable for general investment losses or for nondisclosure claims (no willful intent established) |
Key Cases Cited
- Grogan v. Garner, 498 U.S. 279 (party seeking exception to discharge bears burden of proof)
- Palmacci v. Umpierrez, 121 F.3d 781 (exceptions to discharge construed narrowly)
- Bullock v. BankChampaign, N.A., 133 S. Ct. 1754 (defalcation requires moral turpitude or conscious disregard/gross deviation)
- Rutanen v. Baylis (In re Baylis), 313 F.3d 9 (defalcation requires breach of fiduciary duty)
- Kawaauhau v. Geiger, 523 U.S. 57 (willful and malicious standard for §523(a)(6))
- Cohen v. de la Cruz, 523 U.S. 213 (damages including attorney’s fees for nondischargeable debts can be excepted from discharge)
- Sherman v. Potapov (In re Sherman), 603 F.3d 11 (embezzlement definition for §523(a)(4): fraudulent conversion by one in lawful possession)