A state court judgment for breach of contract was dischargeable in the debtor’s chapter 7 bankruptcy where the breach occurred when the debtor, acting as Power of Attorney for her mother, entered into a contract with her mother’s nursing home and, acting upon advice from her mother’s legal counsel, failed to comply with its terms. The court found the debtor was not a fiduciary with respect to the nursing home and did not act with willfulness or malice. Presbyterian Home for Central NY, Inc. v. DeFazio, No. 20-80009 (June 23, 2022).
In an effort to qualify for Medicaid, the debtor’s mother transferred control of her funds to the debtor. The debtor, acting as her mother’s power of attorney, then entered into an “Admissions Agreement” with the Plaintiff nursing home, Presbyterian Home for Central NY. Under the terms of that agreement, if Medicaid declined to cover the cost of her mother’s care, the debtor would transfer the funds back to her mother to be used to pay the nursing home’s costs. In another agreement, the debtor agreed to make monthly payments to the nursing home. When Medicaid denied coverage, however, the debtor failed to comply with either of the agreements. Instead, she distributed her mother’s funds to her own children as her mother requested and at the instruction of her mother’s lawyer. The nursing home obtained a judgment against the debtor in state court for the unpaid balance of $43,367.71.
The debtor then filed for chapter 7 bankruptcy. The nursing home filed an adversary complaint seeking a finding that the state court judgment was nondischargeable under sections 523(a)(4) and (6). The debtor moved to dismiss.
Section 523(a)(4) provides that a debtor may not discharge a debt “for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny.” Importantly, the fiduciary relationship must run between the debtor and the creditor. In this case, however, the court found that the fiduciary relationship created by the debtor’s role as her mother’s Power of Attorney was between the debtor and her mother. The contract the debtor signed as her mother’s fiduciary did not create a separate fiduciary relationship between the debtor and the nursing home.
The court looked to whether other circumstances, such as an express or technical trust, existed that created the necessary fiduciary relationship between the debtor and the nursing home. In the absence of an express trust, the court turned to whether the relationship between the two was such that a fiduciary relationship existed. A mere commercial transaction between two parties does not create that relationship. Rather there must be “a formalized relationship with well understood duties and a high degree of sophistication.” Typically, the fiduciary is in a position of greater knowledge or power. Here, the debtor had little financial acumen and little understanding of the agreements she signed with the nursing home. In those matters, she relied on advice from her mother’s legal counsel in her actions.
The court went on to determine that even if the debtor were deemed to be a fiduciary her conduct did not establish “defalcation.” Defalcation, the court stated, requires a “culpable state of mind,” and conscious disregard of a substantial risk that her conduct would violate her fiduciary duty. Again, the debtor had little financial acumen and played little to no active role in her mother’s finances. She relied exclusively on instructions from her mother’s lawyer with no understanding of the ramifications of her actions with respect to the nursing home.
The court turned next to the nursing home’s argument that the debt was nondischargeable under section 523(a)(6) as a debt “for willful and malicious injury by the debtor to another entity or to the property of another entity.” Under this provision, willfulness and maliciousness must be proved separately.
To establish willfulness, the debtor must have intended to cause injury or acted with substantial certainty that injury would result from her conduct. It is not enough that the debtor merely intended the conduct that caused the injury. In this case, the debtor must have had the subjective knowledge that giving her mother’s funds to her own children would result in injury to the nursing home.
The nursing home did not present any evidence of such knowledge, while the debtor offered contrary evidence that she left all her mother’s financial decisions to her mother’s lawyer and did not know the ramifications of any particular decision.
Similarly, the nursing home failed to establish that the debtor acted with malice. That element applies to conduct that is “wrongful and without just cause or excuse, even in the absence of personal hatred, spite, or ill-will.” Malice may be implied when the debtor’s conduct is not in furtherance of any benefit to the debtor herself. Courts rarely find malice in conduct that amounts to breach of contract.
In this case, while the debtor’s conduct may have been a breach of contract, the nursing home did not point to any aggravating factors that would suggest that the debtor acted with malice outside the contract breach.
The court granted the debtor’s motion to dismiss the adversary complaint.
Tags: dischargeability
