MARTIN v. JURGENSMARTIN v. JURGENS
INTRODUCTION
On June 30, 2015, Brenda K. Jurgens (“Debtor” or “Defendant“) filed a voluntary chapter 13 petition commencing Case No. 15-60592.1 At the time of the petition, Debtor was in litigation with her brother, Gary Martin (“Martin” or “Plaintiff“), which is described more completely below. On November 5, 2015, the bankruptcy case was converted to chapter 7. Doc. Nos. 124, 125.2
Martin and Debtor are two of three children of Alice Jean Martin (“Alice“) and John William (“Billy“) Martin. Both parents are deceased. Alice died on June 23, 2012. Debtor was the Personal Representative of Alice‘s Estate and, prior to Alice‘s death, Debtor held Alice‘s power of attorney. In 2014, Debtor filed a petition to probate Alice‘s will in Midland County, Texas (the “Probate Case“), and, in 2015, Martin filed a civil action against Debtor ancillary to the Probate Case (the “Texas Litigation“).3 The Probate Case and the Texas Litigation were pending when Debtor filed her 2015 bankruptcy petition. See Doc. No. 21 at 6-7, 15, 26.
On October 8, 2015, the Court granted relief from the
On February 9, 2016, Martin filed a complaint against Debtor and First American Title Company of Montana, Inc. (“FATCO“), commencing Adv. No. 16-00009, which seeks declaratory relief and the imposition of a constructive trust and equitable lien on Debtor‘s claimed homestead exemption in real property located at 748 Bumpy Lane, Victor, Ravalli County, Montana (the “Property“).5 Martin also objected
On May 20, 2016, Martin filed a complaint against Debtor commencing a second adversary proceeding, Adv. No. 16-00032. It seeks to deny Debtor‘s discharge under
The Texas Litigation concluded with entry of an Amended Final Judgment, as discussed in greater detail below.7 Martin then moved for summary judgment in both adversary proceedings. Debtor, as Defendant in each action, opposes those motions. The instant Decision resolves both summary judgment motions.8 It will be entered of record in each adversary proceeding along with appropriate orders.
JURISDICTION
Plaintiff‘s complaint in Adv. No. 16-00009 affirmatively asserts this Court has jurisdiction under
Plaintiff‘s complaint in Adv. No. 16-00032, made the same affirmative assertions of this Court‘s jurisdiction, and Plaintiff and Defendant agreed at pretrial conference that the Court has such jurisdiction over Adv. No. 16-00032 as it deals with core matters under
FACTS9
A. The Probate Case and the Texas Litigation
The parties’ mother, Alice, passed away on June 23, 2012. Prior to her passing, Defendant held a power of attorney for Alice, and after her passing Defendant was appointed personal representative of her estate. On March 19, 2014, Defendant filed an application for probate, commencing the Probate Case in Midland County, Texas. Martin contested the purported will in the Probate Case.
In the Probate Case, the court entered an agreed order on December 5, 2014, executed by both parties and their counsel, and by Greg Martin, the parties’ brother. Adv. Doc. No. 52-2 (“Agreed Order“). It required Defendant to provide “all property, estate and financial records of John William (Billy)10 and Alice Martin, from August 1, 2008 to the present date including without limitation the following categories of documents[.]” Id. at 1. It then listed a comprehensive, non-exclusive list of records and documents including those concerning: property of the estates that had
The Agreed Order also required a mediation within 90 days; set various other deadlines; ordered Defendant to comply with an accounting demand related to Billy Martin‘s estate by November 22, 2014; and required Defendant‘s compliance with the ordered document production by January 2, 2015. Id.
On March 4, 2015, Martin commenced the Texas Litigation, a civil action ancillary to the Probate Case. His petition alleged Defendant committed fraud, breach of fiduciary duty, conversion, and civil theft, and in addition to seeking damages for such actions, Martin sought any equitable relief the court deemed appropriate. Adv. Doc. No. 52-5.
On June 16, 2015, the Texas court entered a Contempt Order finding Defendant in contempt of court for failure to comply with the Agreed Order. Adv. Doc. No. 52-3. The court assessed a $1,000 fine and sentenced Defendant to 30 days incarceration but withheld that sentence on the condition that she produce full and complete copies of personal depository accounts by June 19, 2015, and comply with all other production under the Agreed Order and under a February 19, 2015 request by Martin for production of documents and records.
On February 24, 2016, the Texas court entered another Contempt Order, Adv. Doc. No. 52-4, following a contempt hearing on January 28, 2016.11 It found Defendant in contempt for failure to comply with the Agreed Order “and all of the other Court‘s orders regarding the production of discovery.” Id. It imposed a $2,500 fine to be paid to Martin before February 17, 2016, and it required Defendant to fully comply with all orders and rulings including production of bank documents by February 17, 2016. Id.
1. The Terminating Sanctions
On June 28, 2017, the Texas court entered its “[Proposed] Order Granting Plaintiff Gary Martin‘s Motion for Terminating Sanctions and Entry of Default Judgment Against Defendant Brenda Jurgens.” Adv. Doc. No. 52-7.12 The court found “Defendant has exhibited a long history of discovery abuse in this action” and detailed a chronology of such abuse spanning from 2014 to 2017. Id. at 2-6. The court then found and held that Defendant had not fully complied with its orders for production; abused her position as a fiduciary under the power of attorney and as executor of the estates of Billy and Alice Martin; misappropriated funds that would have become part of Alice‘s estate and other Estate funds to the detriment of Martin and other heirs and beneficiaries; committed fraud and fraud by non-disclosure by making false representations as to the assets of Alice and of the estates of
The court then outlined over several additional pages the reasons for imposing such sanctions, and explained that such sanctions had a direct relationship to Defendant‘s “offensive conduct,” “dilatory and obfuscatory tactics,” “false and misleading statements” and “other misrepresentations,” ultimately concluding that “[t]he imposition of death penalty sanctions is directly in relation to Defendant‘s misconduct” and that “lesser, yet extremely severe, contempt and sanction orders” failed to deter her “from engaging in ... misconduct nor secured her required compliance[.]” Id. at 7-10. It concluded that “striking Defendant‘s pleadings is appropriate and just” and that Defendant‘s misconduct “justifies a presumption that her defenses lack merit.” Id. at 10.
The decretal portion of the Order struck Defendant‘s pleadings including answers and affirmative defenses; granted the relief sought in Martin‘s petition; determined that judgment would be entered for Martin at a subsequent prove-up hearing which would include all principal, interest, and reasonable and necessary attorneys’ fees; prohibited Defendant from offering testimony or evidence on expenses paid from Alice‘s account absent “independent and disinterested witness corroboration or definitive documentary proof” that they were for Alice‘s direct benefit; and imposed a “constructive trust” in favor of Martin on Defendant‘s assets including the real property in Ravalli County, Montana. Id. at 11.
An Amended Final Judgment was entered on August 14, 2018. Adv. Doc. No. 52-9. It follows the June 27, 2018 Order‘s conclusions and holdings striking Defendant‘s pleadings, awarding Martin the relief requested in his petition, and imposing a constructive trust on all Defendant‘s assets including the Property in Ravalli County. Id. at 1-2. It established damages and awarded Martin judgment in the amount of $353,000 derived from amounts Defendant was unable to account for, and awarded Alice‘s estate damages of $79,978.38 representing 50% of amounts received by Defendant from specified estate assets. It did not award “exemplary damages.” Id. at 2. It awarded Martin judgment in the amount of $341,418 for attorneys’ fees. Id. And it held that, by reason of Defendant‘s fraud, any damages resulting from the fraud “shall be nondischargeable” in any bankruptcy proceeding of Defendant. Id.13
On October 24, 2018, the Texas court issued “Findings of Fact and Conclusions
In support of the terminating sanctions, the Texas court stated:
Defendant significantly interfered with this Court‘s legitimate exercise of its core functions of hearing full and accurate evidence and deciding issues of fact and law. The Court‘s prior order striking Defendant‘s pleadings bears a direct relationship to Defendant‘s offensive conduct in that each of the causes of action plead involves whether Defendant, in her fiduciary capacity, improperly used Alice Jean Martin‘s assets for Defendant‘s own benefit and to the detriment of Alice Jean Martin. Therefore, each expenditure made by Defendant from Alice Jean Martin‘s assets is at issue. Defendant had and has sole control over the information and documentation of Alice Jean Martin‘s estate and accounts as power of attorney for her mother and executor of her mother‘s estate.
Adv. Doc. No. 52-10 at 7-8.
Defendant also testified extensively in her deposition in this matter that several expenditures she made to a law firm in Montana were for Alice Jean Martin‘s benefit because those services allegedly related to securing legal advice about moving Alice Jean Martin to Montana. The attorney at that law firm testified under oath that his law firm had not done any work for Defendant relating to Alice Jean Martin.
Id. at 9.
23. The Court finds that Defendant abused her position as a fiduciary, both as power of attorney for Alice Jean Martin and also as the executor for the Estates of Alice Jean Martin and Billy Martin. Funds belonging to Alice Jean Martin, which would ultimately have become part of her estate and other Estate funds were misappropriated for Defendant‘s own benefit and to the detriment of Plaintiff and other heirs and beneficiaries of Alice Jean Martin and Billy Martin.
24. The Court finds that Defendant committed fraud and fraud by non-disclosure by knowingly making false representations about the assets of Alice Jean Martin and the Estates of Alice Jean Martin and Billy Martin.
25. The Court finds that Defendant knowingly misappropriated property, including but not limited to funds, belonging
to Alice Jean Martin and the Estates of Alice Jean Martin and Billy Martin with the intent to deprive others, including Plaintiff, of that property. Defendant converted and misappropriated substantial assets belonging to Alice Jean Martin and to the Estates of Alice Jean Martin and Billy Martin to her own use and enjoyment including, but not limited to, improving, maintaining and disposing of liens of Defendants former real property located in Ravalli County, Montana 26. The Court finds that as a result of Defendant‘s fraud and misappropriation of property, Defendant was unjustly enriched. It would be inequitable for Defendant to retain any portion of her claimed homestead exemption that resulted from his [sic, “her” or “this“] misappropriation of funds from Alice Jean Martin or the Estate of Alice Jean Martin and Billy Martin.
Id. at 11-12.
DISCUSSION AND DISPOSITION
A. Summary Judgment Authorities
Summary judgment authority and standards are clear. The Bankruptcy Court for the District of Montana has held:
Civil Rule 56(a) , incorporated in this adversary proceeding byRule 7056 , states: “The court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” “The proponent of a summary judgment motion bears a heavy burden to show that there are no disputed facts warranting disposition of the case on the law without trial.” Younie v. Gonya (In re Younie), 211 B.R. 367, 373 (9th Cir. BAP 1997) (quoting In re Aquaslide “N” Dive Corp., 85 B.R. 545, 547 (9th Cir. BAP 1987)). Once that burden has been met, “the opponent must affirmatively show that a material issue of fact remains in dispute.” Frederick S. Wyle P.C. v. Texaco, Inc., 764 F.2d 604, 608 (9th Cir. 1985). That is, the opponent cannot assert the “mere existence of some alleged factual dispute between the parties.” [Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986)]. Instead, to demonstrate that a genuine factual issue exists, the objector must produce affidavits which are based on personal knowledge and the facts set forth therein must be admissible in evidence. Aquaslide, 85 B.R. at 547.The moving party must initially identify those portions of the record before the Court which it believes establish an absence of material fact. T.W. Elec. Serv., Inc. v. Pac. Elec. Contractors Ass‘n, 809 F.2d 626, 630 (9th Cir. 1987). If the moving party adequately carries its burden, the party opposing summary judgment must then “set forth specific facts showing that there is a genuine issue for trial.” Kaiser Cement Corp. v. Fischback & Moore, Inc., 793 F.2d 1100, 1103-04 (9th Cir. 1986), cert. denied, 469 U.S. 949 (1986).
If a rational trier of fact might resolve disputes raised during summary judgment proceedings in favor of the nonmoving party, summary judgment must be denied. T.W. Elec. Serv., 809 F.2d at 630; Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). Thus, the Court‘s ultimate inquiry is to determine whether the “specific facts” set forth by the nonmoving party, viewed along with the undisputed background or contextual facts, are such that a rational or reasonable jury might return a verdict in its favor based on that evidence. T.W. Elec. Serv., 809 F.2d at 631. Additionally, “[c]redibility determinations, the weighing of the evidence, and
the drawing of legitimate inferences from the facts’ are inappropriate at the summary judgment stage.” Oswalt v. Resolute Indus., Inc., 642 F.3d 856, 861 (9th Cir. 2011) (alteration in original) (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986)). And all justifiable inferences must be drawn in favor of the non-moving party. Anderson, 477 U.S. at 255.
Consistent with Mont. LBR 7056-1(a), Plaintiff‘s Motion in each adversary proceeding is supported by a Statement of Uncontroverted Facts and related exhibits—Adv. No. 16-00009 at Adv. Doc. Nos. 114, 115; Adv. No. 16-00032 at Adv. Doc. Nos. 51, 52—and Defendant‘s objections are accompanied by a Statement of Genuine Issues of Material Fact and Defendant‘s Declaration—Adv. No. 16-00009 at Adv. Doc. Nos. 123, 124; Adv. No. 16-00032 at Adv. Doc. Nos. 60, 61.15
B. Issue Preclusion and Full Faith and Credit
Plaintiff asserts that the adjudication by the Texas court is on the merits and was fully and fairly litigated. Defendant disagrees and argues the Court cannot use a “default judgment” as a predicate for application of the doctrine of issue preclusion.
Issue preclusion or collateral estoppel may apply in nondischargeability litigation. See Grogan v. Garner, 498 U.S. 279, 284-85 (1991); Cal-Micro, Inc. v. Cantrell (In re Cantrell), 329 F.3d 1119, 1123 (9th Cir. 2003). As explained in Herrera v. Scott (In re Scott), 588 B.R. 122, 131 (Bankr. D. Idaho 2018):
As a matter of full faith and credit,
28 U.S.C. § 1738 requires federal courts to apply the pertinent state‘s issue preclusion laws to determine whether relitigation of an issue is precluded in a subsequent federal action. The party asserting issue preclusion bears the burden of proving its applicability under state law. Harmon v. Kobrin (In re Harmon), 250 F.3d 1240, 1245 (9th Cir. 2001). The party must also provide “a record sufficient to reveal the controlling facts and pinpoint the exact issues litigated in the prior action. Kelly v. Okoye (In re Kelly), 182 B.R. 255, 258 (9th Cir. BAP 1995), aff‘d., 100 F.3d 110 (9th Cir. 1996). Any reasonable doubts as to what was decided by a prior judgment should be resolved against a finding of issue preclusion. Id.
In other words, “[f]ederal courts refer to the preclusion law of the state in which the judgment was rendered to determine the preclusive effect of a state court judgment. Marrese v. American Academy of Orthopaedic Surgeons, 470 U.S. 373, 380 (1985); Diruzza v. City of Tehama, 323 F.3d 1147, 1152 (9th Cir. 2003).” Khionidi v. Cummins-Cobb (In re Cummins-Cobb), 2020 WL 634140, *5 (Bankr. C.D. Cal. Feb. 10, 2020).
Here, the underlying judgment comes from Texas, and issue preclusion “under Texas law prevents the relitigation of identical issues of law or fact that were actually litigated and were essential to the final judgment in a prior suit.” Helvetia Asset Recovery, Inc. v. Kahn (In re Kahn), 533 B.R. 576, 584 (Bankr. W.D. Tex. 2015).16 More specifically, Texas law precludes a party from relitigating an issue if “(1) the facts sought to be litigated in the second case were fully and fairly litigated in the first; (2)
those facts were essential to the prior judgment; and (3) the parties were cast as adversaries in the first case.” Id.; see also Plunk v. Yaquinto (In re Plunk), 481 F.3d 302, 307 (5th Cir. 2007); Khionidi, 2020 WL 634140, at *6.
C. Terminating (or “Death Penalty“) Sanctions
As noted, Defendant argues preclusion cannot apply to the Amended Final Judgment at issue here because it was a “default” judgment and there was no determination on the merits only a resolution of a discovery dispute. Plaintiff disagrees and, though referring to the result of the Texas Litigation as a death penalty sanction, argues that it is a ruling under Texas law that can be given preclusive effect.17
According to the Texas Court of Appeals:
A death penalty sanction is any sanction that adjudicates a claim or defense and precludes the presentation of the claim or defense on the merits. Chrysler Corp. v. Blackmon, 841 S.W.2d 844, 849 (Tex. 1992) (orig. proceeding). Any sanction that is case-determinative may constitute a death penalty sanction. GTE Comm. Sys. Corp. v. Tanner, 856 S.W.2d 725, 732 (Tex. 1993) (orig. proceeding).
Duncan v. Park Place Motorcars, LTD, 2020 WL 2847530, *6 (Texas Ct. App. June 2, 2020). The court in Duncan also stated:
In the context of discovery abuse, death penalty sanctions encompass the limitation of the power of the trial court to dismiss an action without allowing a hearing on the merits. TransAmerican Nat‘l Gas Corp. v. Powell, 811 S.W.2d 913, 918 (Tex. 1991) (orig. proceeding). In TransAmerican National Gas Corporation, the Texas Supreme Court held death penalty sanctions may not be applied just to punish or deter bad behavior “absent a party‘s flagrant bad faith or counsel‘s callous disregard for the responsibilities of discovery under the rules.” Id. “Bad faith is not simply bad judgment or negligence, but the conscious doing of a wrong for dishonest, discriminatory or malicious purpose.” Armstrong v. Collin Cty. Bail Bond Bd., 233 S.W.3d 57, 63 (Tex. App.-Dallas 2007, no pet.). Because the effect of death penalty sanctions is to dispose of claims or defenses not on their merits but on how a party conducts discovery, a trial court should impose case-determinative sanctions only in exceptional cases when circumstances clearly justify them and it is apparent that no lesser sanctions would promote compliance with the rules. GTE Communications Sys. Corp., 856 S.W.2d at 730. The offending party‘s discovery abuse must be such that, despite imposition of lesser sanctions, the court may presume the party‘s claims or defenses lack merit and it would be unjust to permit the party to present the substance of that position to the court. TransAmerican Natural Gas Corp., 811 S.W.2d at 918. “[I]f a party refuses to produce material evidence despite the imposition of lesser sanctions, the court may presume that an asserted claim or defense lacks merit and dispose of it.” Id. (emphasis added).
Id. at *7. See also In re Sw. Pub. Serv. Co., 2020 WL 1887762, *12-13 (Tex. Ct. App. Apr. 16, 2020) (“Discovery sanctions cannot be used to adjudicate the merits of a party‘s claims or defenses unless a party‘s hinderance of the discovery process justifies a presumption that its claims or defenses lack merit.” (citations omitted)).
Thus, death penalty sanctions resulting in default judgment are not the same as a default judgment based on a defendant‘s failure to answer a complaint. While not a decision on the merits, it is a decision that stems from a defendant‘s egregious conduct during discovery or in the case.
As noted in In re Sims, 479 B.R. 415, 421 (Bankr. S.D. Tex. 2012), although a party may not substantively litigate the issues, a post-answer, sanctions default judgment may still satisfy the fully and fairly litigated element under Texas law. See also Gober v. Terra + Corp. (In re Gober), 100 F.3d 1195, 1205-06 (5th Cir. 1996) (analyzing and approving preclusion principles in the face of a death-penalty sanction default and Texas law).
Consistent with the death-penalty sanction authority, the court in the Texas Litigation, entered the “Amended Final Judgment” stating that it had granted Martin‘s motion for terminating sanctions and entry of default judgment on June 27, 2018. Under that order and the Amended Final Judgment, all pleadings by Defendant, including answers and affirmative defenses were stricken, and all the relief sought by Martin in the Second Amended Petition was granted. Also, a constructive trust was imposed in favor of Martin on the assets of Defendant including the Property in Ravalli County, Montana, and the damages and attorneys’ fees, as itemized earlier in this Decision, were imposed.
Given the record, and consistent with Sims, the Court concludes the death penalty default judgment entered in the Texas Litigation satisfies the full and fair litigation element and collateral estoppel may apply to the current litigation to the extent the facts were at issue and essential to that litigation.
D. Adv. No. 16-00032-TLM
1. Contentions of the Parties
Plaintiff contends summary judgment is appropriate under
Plaintiff also contends summary judgment is appropriate under
Defendant contends, in regard to the
As to the
2. Nondischargeable Debt under § 523(a)(4)
Section
Defendant‘s exercise of the power of attorney prior to Alice‘s death qualifies. See Healey v. Healey (In re Healey), 2018 WL 4808362, *6-7 (Bankr. E.D. Tex. Oct. 2, 2018) (determining in a
Here, the FF/CL entered by the Texas court relevant to
The Court finds that Defendant abused her position as a fiduciary, both as power of attorney for Alice Jean Martin and also as the executor for the Estates of Alice Jean Martin and Billy Martin. Funds belonging to Alice Jean Martin, which would ultimately have become part of her estate and other Estate funds were misappropriated for Defendant‘s own benefit and to the detriment of Plaintiff and other heirs and beneficiaries of Alice Jean Martin and Billy Martin.
The Court finds that Defendant committed fraud and fraud by non-disclosure by knowingly making false representations about the assets of Alice Jean Martin and the Estates of Alice Jean Martin and Billy Martin.
The Court finds that Defendant knowingly misappropriated property, including but not limited to funds, belonging to Alice Jean Martin and the Estates of Alice Jean Martin and Billy Martin with the intent to deprive others, including Plaintiff, of that property. Defendant converted and misappropriated substantial assets belonging to Alice Jean Martin and to the Estates of Alice Jean Martin and Billy Martin to her own use and enjoyment including, but not limited to, improving, maintaining and disposing of liens of Defendants former real property located in Ravalli County, Montana.
Adv. No. 16-00032-TLM at Adv. Doc. No. 52-10, at 11–12.
The Texas court found Defendant‘s conduct caused injury and damages to Plaintiff and to the Estates of Alice Jean Martin and Billy Martin. Id. at 12–13. It concluded damages of $79,978.39 were suffered by, and had to be paid to, the Estates. Id. at 13–14. It further concluded that damages of $353,000, derived from $292,000 and $61,000 that Defendant could not account for, were suffered by and payable to Plaintiff. Id. at 14. And it further awarded Plaintiff attorneys’ fees of $341,418.00. Id.
The Court has fully considered Defendant‘s arguments regarding the imposition of summary judgment on the claims under
Liability for Plaintiff‘s attorneys’ fees in the Texas Litigation are also nondischargeable. Vrana v. Thornhill (In re Thornhill), 2019 WL 4795601, *9 (Bankr. E.D. Tex. Sept. 30, 2019) (quoting Cohen v. de la Cruz, 523 U.S. 213, 218 (1998) (“Once it is established that specific money or property has been obtained by fraud, … ‘any debt’ arising therefrom is excepted from discharge.“)). See also Correia–Sasser v. Rogone (In re Correia-Sasser), 2014 WL 4090837, *13 (9th Cir. BAP Aug. 19, 2014) (applying Cohen to
3. Denial of Discharge under § 727(a)(4)(A)
Plaintiff also contends Debtor‘s discharge should be denied in full under
The Court has carefully reviewed the voluminous documents submitted regarding the [competing] motions for summary judgment. Based on that review, the Court determines that to grant summary judgment to either party would require the Court to make impermissible credibility determinations, to make inappropriate inferences favoring the respective movant, or to disregard information provided by the opponent that creates disputed facts. Further, in certain instances, the moving party failed to carry its burden by establishing it was entitled to judgment as a matter of law.
Id. at *2. The Court also in that decision noted that, for prudential reasons, it would not elaborate on specific details of its review and analysis of the ungranted motion for summary judgment:
Much as the case where a motion for summary judgment is denied, a court that will later conduct a bench trial in that same cause is well advised to keep discussion of facts in its ruling to a minimum, thus avoiding commentary or characterization that might lead the parties to assume (erroneously, of course) that decisions have been reached on the facts prior to the presentation of evidence.
Id. at *3 (quoting Zazzali v. Goldsmith (In re DBSI Inc.), 2013 WL 1498365, *5 (Bankr. D. Idaho Apr. 11, 2013) (discussing denial of a motion for judgment on the pleadings under
These statements are apropos here, and the Court will not specify issues which lead it to the conclusion that the
Ε. Adv. No. 16-00009-TLM21
In this adversary proceeding, Martin seeks a declaratory judgment; imposition of a constructive trust on the funds remaining from the sale of the Ravalli County, Montana Property; and a ruling denying Defendant‘s claimed homestead exemption on that Property.
1. History and Events Regarding the Property
Defendant and her then-husband, Edwin Day (“Day“) received a Warranty Deed on the Property as joint tenants on August 29, 1995. Adv. Doc. No. 115-6. On November 29, 2007, Lolo Peak Landscaping & Supply, LLC (“LPLS“) placed a construction lien on the Property in the amount of $54,156.97. Adv. Doc. No. 115-26. In 2008, LPLS filed a state court complaint for damages and for judicial foreclosure of its lien. Adv. Doc. No. 115-30 (the Ravalli County District Court docket for Case No. DV-41-2008-0000269-DS). Trent Baker, a Montana attorney with Datsopoulos, MacDonald
& Lind, initially represented Defendant in the LPLS construction lien foreclosure lawsuit. Adv. Doc. No. 115-14 at 7 (March 10, 2016 transcript). Baker testified at a March 10, 2016 bankruptcy hearing that three checks received from
On April 12, 2011, Defendant deposited into her personal account a $60,000 check dated February 12, 2011, that she had written on Alice‘s account and made payable to herself. Adv. Doc. No. 115-27 at 1. On April 14, 2011, Defendant prepared a check in the amount of $50,000 on her personal account, payable to attorney Gail Goheen, who also represented Defendant in the LPLS litigation. Id. at 2. Judgment was entered in the construction lien lawsuit in June 2011, and the same was dismissed on stipulation of the parties in July 2011 following a satisfaction of judgment. Doc. No. 115-30 at 8.
In addition to the issues with the Property related to the removal of the LPLS construction lien, Defendant‘s husband, Day, received a divorce judgment and proceeded with foreclosure proceedings against the Property based on an asserted judgment lien. On June 27, 2012, the parties entered a stipulation in the divorce action which held the foreclosure proceedings in abeyance on the condition that Defendant “immediately”
tender $80,000 to Day‘s counsel in partial satisfaction of judgment and make an additional payment of $70,000 no later than September 27, 2012, which would result in full satisfaction of the judgment. Adv. Doc. No. 115-24 at 1–2. On that same day, Defendant wrote a $65,000 check to herself on Alice Jean Martin‘s account and deposited it into her personal account, Adv. Doc. No. 115-22, and then wrote Day an $80,000 check, Adv. Doc. No. 115-23. The payment to Day resulted in entry of a Partial Satisfaction of Judgment. Adv. Doc. No. 115-25.
These events preceded the commencement of the Probate Case in March 2014, and Defendant‘s bankruptcy filing in June 2015. In her bankruptcy, Defendant claimed a $250,000 homestead exemption in the Ravalli County Property under Montana law. Adv. Doc. No. 115-16 at 9.23 Martin objected to that exemption and filed this adversary proceeding. Both the objection to exemption and the adversary proceeding were held in abeyance pending the outcome of the Texas Litigation. See Adv. Doc. Nos. 115-33; 115-34 (Court orders).
In February 2016, the Property was sold by the chapter 7 trustee for $1,500,000. Adv. Doc. No. 115-20. After paying the costs and expenses of sale, and prior secured encumbrances, $367,439.26 remained for the estate. Adv. Doc. No. 115-21. The trustee‘s “interim final report,” Adv. Doc. No. 115-35, reflects payment of those secured claims, id. at 2, related administrative expenses and payment of priority unsecured claims, id. at 3, and distributions to unsecured creditors, id. at 4. Martin is among those
unsecured creditors and received $246,558.42 on his allowed $774,396.38 proof of claim. Id.
As noted, the Texas court made several findings in its FF/CL, Adv. Doc. No. 115-13,
23. The Court finds that Defendant abused her position as a fiduciary, both as power of attorney for Alice Jean Martin and also as the executor for the Estates of Alice Jean Martin and Billy Martin. Funds belonging to Alice Jean Martin, which would ultimately have become part of her estate and other Estate funds were misappropriated for Defendant‘s own benefit and to the detriment of Plaintiff and other heirs and beneficiaries of Alice Jean Martin and Billy Martin.
. . .
25. The Court finds that Defendant knowingly misappropriated property, including but not limited to funds, belonging to Alice Jean Martin and the Estates of Alice Jean Martin and Billy Martin with the intent to deprive others, including Plaintiff, of that property. Defendant converted and misappropriated substantial assets belonging to Alice Jean Martin and to the Estates of Alice Jean and Billy Martin to her own use and enjoyment including, but not limited to, improving, maintaining and disposing of liens of Defendants former real property located in Ravalli County, Montana.
26. The Court finds that as a result of Defendant‘s fraud and misappropriation of property, Defendant was unjustly enriched. It would be inequitable for Defendant to retain any portion of her claimed homestead exemption that resulted from his [sic] misappropriation of funds from Alice Jean Martin or the Estates of Alice Jean Martin and Billy Martin.
The Texas court also reached the following conclusions:
30. Constructive Trust and Unjust Enrichment. Because of the aforementioned breach of a special trust, fiduciary relationship, and actual fraud, the Defendant was unjustly enriched. Specifically, the Defendant converted and misappropriated substantial assets to her own use and enjoyment, including, but not limited to, improving, maintaining and
disposing of liens on the Defendant‘s Montana property (‘Property‘) to save the Property from foreclosure.
31. The Defendant claimed a homestead exemption on the Property in her Chapter 7 bankruptcy proceeding. Plaintiff objected to that exemption claiming that the Defendant‘s claimed exemption was funded with misappropriated funds and that the Defendant should not be entitled to shield such funds with the exemption. This Court understand [sic] that the bankruptcy court ordered that these homestead funds not be distributed to the Defendant for at least six months, after which the bankruptcy court will hold a status conference on this litigation. This Court concludes that it would be inequitable for the Defendant to retain any portion of her claimed homestead exemption that resulted from her misappropriation of funds from Alice Jean Martin or the Estate and Defendant would be unjustly enriched to the detriment of the heirs and beneficiaries of the Estate.
2. Contentions of the Parties
Martin seeks through his motion for summary judgment a declaratory judgment to the effect that a constructive trust arose from 2008 forward based on Defendant‘s conduct and the Texas court‘s Amended Final Judgment, FF/CL, and its related rulings regarding that conduct. Martin notes that Defendant failed to provide any proof that the misappropriated
establish Defendant used funds of the Estate of Alice Jean Martin in order to pay off liens on her Montana property. The second argument seeks denial of Defendant‘s ability to claim a homestead exemption due to her fraudulent conduct.
Defendant counters that full faith and credit does not compel this Court to apply the remedies or enforcement processes that might be available in the Texas court were it to address the enforcement or collection of a domestic Texas judgment. She also argues that the specific remedy of a constructive trust was not sought in Martin‘s initial Texas petition, Adv. Doc. No. 115-9, but only arose in his Third Amended Petition, Adv. Doc. No. 115-11, filed on June 5, 2018, a year after the entry of order granting the request for terminating sanctions and default judgment, Adv. Doc. No. 115-10. Defendant also observes that the Texas court did not specify precisely how much was misappropriated in relation to the Property from Alice or the Martin Estates, thus Defendant argues the Texas judgment does not support entry of a constructive trust which, she argues, is limited under Montana law to the amount derived from the misappropriation. Martin rejoins by observing, inter alia, (a) that liberal tracing of misappropriated funds is sufficient to support entry of a constructive trust, and (b) that the initial petition‘s prayer included a request for “[a]ll such other and further relief at law or in equity” to which the Texas court deemed Martin entitled. See Adv. Doc. No. 115-9 at 5.
3. Constructive Trust
The Montana Supreme Court set forth the requirements for imposition of a constructive trust in Bratton v. Sisters of Charity of Leavenworth Health System, Inc., 461 P.3d 127 (Mont. 2020):
A constructive trust is a remedy for unjust enrichment and arises under statute “when a person holding title to property is subject to an equitable duty to convey it to another on the ground that the person holding title would be unjustly enriched if he were permitted to retain it.”
Section 72-38-123, MCA ; Volk v. Goeser, [367 P.3d 378 (Mont. 2016)]. Additionally, this Court “has broad discretion afforded by principles of equity to impose a constructive trust despite lack of any wrongdoing by the person holding the property.” Volk [at 389, citing N. Cheyenne Tribe v. Roman Catholic Church, 296 P.3d 450 (Mont. 2013).] To succeed on a claim for unjust enrichment, in the context of a constructive trust, the plaintiff must prove three elements: “(1) a benefit conferred upon a defendant by another; (2) an appreciation or knowledge of the benefit by the defendant; and (3) the acceptance or retention of the benefit by the defendant under such circumstances that would make it inequitable for the defendant to retain the benefit without payment of its value.”
Volk is instructive. Simplifying the facts to a degree, Roy Volk (“Roy“) was married
While under the restraining order, Roy changed the beneficiary on certain insurance policies from Pamela to his sister, Valerie. Roy then died unexpectedly at age 45. Because of the change in beneficiaries, Valerie received over $2.3 million in insurance proceeds. The district court ruled in favor of Valerie, and it rejected Pamela‘s contention that Valerie had been unjustly enriched and that a constructive trust should be imposed. Id. at 382–83. The Montana Supreme reversed those holdings on appeal.
Volk recognized that “[a] constructive trust serves as a proper remedy to unjust enrichment. ‘A constructive trust arises when a person holding title to property is subject to an equitable duty to convey it to another on the ground that the person holding title would be unjustly enriched if he were permitted to retain it.‘” Id. at 388–89 (citing
The recognition of a constructive trust is not a matter of first impression. Issues of constructive trust have previously arisen in or in connection with Montana bankruptcy
cases. For example, in Torgenrud v. Smith (In re Agnew), Adv. No. 04-00103, (hereafter ”Agnew“), this Court faced multiple issues.24 Smith had a romantic relationship with the debtor, Agnew, prior to his bankruptcy. Though she and Agnew never married, they acquired certain Montana real property together using significant assets of Smith, with the idea that they would improve and sell it for a profit. Agnew persuaded Smith to transfer the property into his name for “tax advantages,” to which Smith agreed based on Agnew‘s written promise to sell the property, reimburse Smith, and split the profits. Agnew refused to perform, and subsequently he admitted he had no intention of performing
Smith sued Agnew in Montana state court to quiet title and to recover damages for fraud, constructive fraud, deceit, and breach of contract. Another count sought a constructive trust based on Agnew‘s breach of an equitable duty. The state court held for Smith, awarding a total of approximately $467,000 in damages. Agnew recorded a declaration of homestead two months after that judgment and, a month thereafter, filed a chapter 13 petition claiming a homestead exemption. Smith objected to the exemption, and the parties filed various other motions against the other.
An adversary proceeding was commenced by Agnew against Smith to avoid her judicial lien as a preference under
Following a flurry of additional motions and filings, Agnew converted his chapter 13 case to chapter 7, and Torgenrud was appointed trustee. The chapter 7 trustee sued Smith to avoid her judgment lien as a preferential transfer and raised several arguments opposing recognition of a constructive trust in favor of Smith. Id. at 10–11. The Court rejected the trustee‘s arguments and determined that:
Several circuit courts, including the Ninth Circuit, have concluded that under
§ 541(b) property that a debtor holds prepetition in a constructive trust does not enter the estate. In re Lucas, 300 B.R. 526, 533 (10th Cir. BAP 2003); Hill v. Kinzler (In re Foster), 275 F.3d 924, 926 (10th Cir. 2001); see also Poss v. Morris (In re Morris), 260 F.3d 654, 670 (6th Cir. 2001); Taylor Assocs. v. Diamant (In re Advent Mgmt. Corp.), 104 F.3d 293, 295 (9th Cir. 1997); Official Comm. Of Unsecured Creditors of Columbia Gas Transmission Corp. v. Columbia Gas Sys. (In re Columbia Gas Sys.), 997 F.2d 1039, 1059 (3d Cir. 1993).
Id. at 14–15. The Court specifically noted the following from Advent Mgmt. Corp.:
Under
§ 541(d) of the Bankruptcy Code, “property of the estate” includes all property in which the debtor has legal title except “to the extent of an equitable interest in such property that the debtor does not hold.”11 U.S.C. § 541(d) (West 1993).In the case of funds held by a debtor in constructive trust for another person, the equitable interest in the trust funds belongs to the trust beneficiary, not the debtor. Accordingly, this court held in Unicom that funds held by a debtor in constructive trust are neither “property of the estate” under
§ 541(d) , nor “an interest of the debtor in property” under§ 541(b) . [Mitsui
Mfrs. Bank v. Unicom Computer Corp. (In re Unicom Computer Corp.), 13 F.3d 321, 324 (9th Cir. 1994).]
In re Advent Mgmt. Corp., 104 F.3d at 293. Thus, Ninth Circuit law is no bar to the imposition of a constructive trust.
The Court found that the Montana state court did not grant or deny Smith‘s constructive trust claim, but that “otherwise the Findings and Conclusions and Judgment reflect an almost total victory for Smith” including substantial damages. Id. at 18. The absence of a clear determination of the constructive trust claim in state
The Court noted that imposition of a constructive trust is provided for under the Montana Code. Moreover, the Court cited United States v. Nava, 404 F.3d 1119, 1130–31 (9th Cir. 2005), and found “more than enough evidence of fraud, wrongful acts, and unjust enrichment if Agnew were allowed to retain the title to impose a constructive trust.” Id. at 22. And: “Under the evidence as shown in this record, a conclusion that a constructive trust arose is appropriate. Even if the established fraud and wrongful acts arising from the state court decision did not exist, the record of established facts reflecting unjust enrichment is more than sufficient to impose a constructive trust in this case.” Id. at 23.25
The bankruptcy court decision was affirmed on appeal by the District Court for the District of Montana, stating:
As Judge Kirscher ruled in his Order, Ninth Circuit case law precludes the inclusion of property held in constructive trust as an interest of the debtor or as property of the estate. Mitsui Mfrs. Bank v. Unicom Computer Corp. (In re Unicom Computer Corp.), 13 F.3d 321, 324 (9th Cir. 1994); Taylor Associates v. Diamant (In re Advent. Management Corp.), 104 F.3d 293, 295 (9th Cir 1997). I find the imposition of the constructive trust valid as both Montana law and Ninth Circuit case law support the formation of the constructive trust where as here, Agnew defrauded Smith of the property. As Judge Kirscher found, the trust existed as a matter of law from the point in time when Agnew defrauded Smith. See
Mont. Code Ann. § 72-33-219 ; Mitsui, 13 F.3d 321; United States v. $4,224,958.47, 392 F.3d 1002, 1004 (9th Cir. 2004).
Torgenrud v. Agnew (In re Agnew), 2006 WL 8435936, *2 (D. Mont. Aug. 31, 2006) (emphasis added).
Agnew imposed a constructive trust post-petition. There is authority to the effect that a constructive trust is a remedy which cannot affect rights in the res until it is imposed. See, e.g., Airwork Corp. v. Markair Express, Inc. (In re Markair, Inc.), 172
B.R. 638, 642 (9th Cir. BAP 1994) (“[A] constructive trust is a remedy which is inchoate prior to its imposition. In re North American Coin & Currency, Ltd., 767 F.2d 1573, 1575 (9th Cir. 1985).“). But while the remedy here is identified and imposed post-petition, it is fundamentally a declaration of the nature of and interests in the Property as of the commencement of Defendant‘s bankruptcy case. Such is the result of a declaratory judgment recognizing the unjust enrichment and constructive trust. See Marcus v. Horton (In re Horton), 2020 WL 3637881, *3–5 (Bankr. D. N.M. June 26, 2020) (citing Andrew Kull, Restitution in Bankruptcy: Reclamation and Constructive Trust, 72 Am. Bankr. L. J. 265, 277–82 (1998)) (concluding that “The Hortons argue that, for a constructive trust to be effective in a bankruptcy case, it must have been recognized pre-petition; post-petition recognition is ineffective. This argument must be overruled; a constructive trust arises on the date of the wrongful transfer, not the date a court recognizes it.. ... Whether a constructive trust is recognized pre- or post-petition is immaterial[;]” and recognizing the operation of
The nature of that interest as of the date of the bankruptcy filing is subject to
While the Bankruptcy Code does not define “an interest of the debtor in property,” the United States Supreme Court has interpreted the term to mean “that property that would have been part of the estate had it not been transferred before the commencement of bankruptcy proceedings.” Beiger v. I.R.S., 496 U.S. 53, 58 (1990).
Under
§ 541(d) of the Bankruptcy Code, “property of the estate” includes all property in which the debtor has legal title except “to the extent of an equitable interest in such property that the debtor does not hold.”11 U.S.C. § 541(d) (West 1993).In the case of funds held by a debtor in constructive trust for another person, the equitable interest in the trust funds belongs to the trust beneficiary, not the debtor. Accordingly, this court held in Unicom that funds held by a debtor in constructive trust are neither “property of the estate” under
§ 541(d) , nor “an interest of the debtor in property” under§ 547(b) [sic § 541(b)] .
Advent Mgmt. Corp., 104 F.3d at 295 (citing Mitsui Mfrs. Bank v. Unicom Computer Corp. (In re Unicom Computer Corp.), 13 F.3d 321, 324 (9th Cir. 1994)).
Here, Defendant‘s conduct fits squarely within the decisional law in Montana as recognized and discussed by this Court and the District Court in Agnew. The decision of the Texas court, which is entitled to full faith and credit and issue preclusive effect, established that Defendant misappropriated monies of Alice Jean Martin both while holding power of attorney and, later, while administering the Estates. In violation of her fiduciary duties, Defendant used funds to pay lawyers to assist her in eliminating liens on the Property. The taking and use of funds for personal benefit is wrongful, and retention of such benefit would be and is an unjust enrichment. Therefore, grounds exist for a declaratory judgment and the imposition of a constructive trust to the extent the record demonstrates the misappropriated funds were used to unjustly enrich Defendant through her Property.26 However,
Given the Texas court‘s FF/CL, it would be inequitable for Defendant to retain any interest in the Property attributable to funds fraudulently obtained or misappropriated from Alice‘s account. However, Defendant is correct that the Texas court‘s FF/CL did not make specific findings as to the amount of those funds, only a recognition that some of the funds Defendant took were used to improve, maintain or dispose of liens on the Property and that a constructive trust should be imposed related to any such funds. Adv. Doc. No. 115-13 at 12–13 (concluding that “it would be inequitable for the Defendant to retain any portion of her claimed homestead exemption that resulted from her misappropriation of funds“) (emphasis added).
Ordinarily in order to impose a constructive trust, strict tracing rules apply, and a plaintiff bears the burden to trace the alleged trust property “specifically and directly” back to the illegal transfers. See, e.g., Advent Mgmt. Corp., 104 F.3d at 296. However, as Plaintiff correctly argues, a liberal tracing rule may apply depending on the facts of the case. The Ninth Circuit BAP has recognized that “it is not an abuse of discretion to allow liberal tracing when no creditors will be harmed.” Goldberg v. Bank of Alex Brown (In re Goldberg), 168 B.R. 382, 385 (9th Cir. BAP 1994); see also Green v. Weinstein (In re Green), 2017 WL 957151, *8 (9th Cir. BAP March 20, 2017) (determining that dollar for dollar tracing was not required and affirming a more likely than not standard in imposing a constructive trust in the face of theft by a trust beneficiary). Here, a constructive trust on the homestead funds will not harm any other creditors, and the equities, as found by
the Texas court, would allow for such a liberal tracing approach. But a liberal tracing standard on this record would require the Court to make inferences. Such inferences may not be drawn in Plaintiff‘s favor at the summary judgment stage. Therefore, the lack of specificity regarding the transactions and the precise amounts either in the evidence before the Court or in the Texas FF/CL, precludes the Court from imposing a constructive trust under Plaintiff‘s summary judgment motion.
For example, Defendant‘s assertion that her payment to Defendant‘s Montana attorneys, Datsopoulos, MacDonald & Lind, from Alice‘s account was related to a possible move of Alice to Montana, was contradicted by one of the firm‘s attorneys under oath. While this Court would not normally weigh in on the credibility of such assertions at the summary judgment stage, the Texas court‘s FF/CL specifically found that Debtor‘s explanation of the purpose of those payments was a “false statement” and one of the many examples of her providing false, misleading and inaccurate information. Thus, for the purposes of summary judgment, given the testimony of Defendant‘s Montana counsel and the preclusive effect of the Texas FF/CL, those funds were used for representation in the LPLS matter and removal of the LPLS lien on the Property. Given the preclusion principles, a constructive trust for that amount would be appropriate. However, beyond the assertion that the three payments amounted to “almost $9,000,” see Adv. Doc. No. 115-38 at 3, the parties did not provide the exact amount involved.
Defendant wrote a $65,000 check on Alice‘s account on July 27, 2012, deposited those funds in her own account, and that same day wrote a $80,000 check to her ex-husband to satisfy a judgment lien against the Property. While the timing of these deposits and withdrawals may support a finding that those misappropriated funds were also utilized to create or maintain Debtor‘s interest in the Property, Plaintiff did not provide account balances, account transaction histories, or any other evidence to allow the Court to strictly trace the misappropriated funds, and drawing inferences from the current facts to allow liberal tracing is inappropriate at the summary judgment stage.
Under the present record, Defendant obtained a benefit by taking funds while acting as a fiduciary for Alice and applying some amount of those funds toward her Property; she had knowledge and appreciation of that benefit she obtained; and the acceptance or retention of that benefit would be inequitable without payment of its value. Given the active wrongdoing by Defendant here, as found by the Texas court, and giving—as explained above—full faith and credit to the Texas decision, the imposition of a constructive trust in order to prevent unjust enrichment is warranted, though the amount of such a constructive trust must be established through evidence.
The Court therefore finds and concludes that the motion for summary judgment will be granted in part as the funds remaining from the sale of the Property shall be impressed with a constructive trust to the benefit of Martin and any other heirs of Alice Jean Martin and/or the Estates of Alice Jean Martin and Billy Martin. However, the amount of such trust must be established at trial. Further, the Court finds and concludes that by virtue of the existence of such a trust, arising effective as of the time of the
misappropriations and misconduct by Defendant, the equitable interests of the trust beneficiaries removes such funds from property of the estate by reason of
CONCLUSION
Based on the Court‘s decision as articulated above, the Texas court‘s findings of fact and conclusions of law are entitled to preclusive effect. After reviewing those findings and conclusions and the undisputed facts presently before the Court, an order will be entered granting Plaintiff‘s motion for summary judgment in part in Adv. No. 16-00032 at Adv. Doc. No. 49, ordering entry of partial judgment in favor of Plaintiff declaring the debt owed to Plaintiff nondischargeable under
DATED: July 30, 2020
TERRY L. MYERS
U.S. BANKRUPTCY JUDGE
Notes
Since Defendant did not post a supersedeas bond nor obtain a stay pending appeal, the judgment is final and may be considered for preclusion purposes.Where a judgment is based on an earlier judgment and issue preclusion applies, the aggrieved party may seek relief from the later judgment through
Fed. R. Civ. P. 60(b)(5) (providing that “On motion and just terms, the court may relieve a party or its legal representative from a final judgment, order, or proceeding for the following reasons: . . . (5) . . .; it is based on an earlier judgment that has been reversed or vacated“); Tomlin v. McDaniel, 865 F.2d 209, 210-11 (9th Cir. 1989). Thus, the pendency of the Ninth Circuit appeal was not an impediment to imposition of preclusion, and the bankruptcy court did not abuse its discretion in applying issue preclusion in entering summary judgment determining that Frye‘s debts arising out of the District Court Judgment were excepted from discharge.