NGM Insurance Company v. Schek et al

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MARYLAND
IN RE: DAVID FRANKLIN SCHEK 	:
DAVID FRANKLIN SCHEK 	:
Appellant 	:
v. 	: Civil Action No. DKC 2008-2224
:
NGM INSURANCE COMPANY
:
Appellee
:
MEMORANDUM OPINION
Appellant 	David 	Franklin 	Schek 	challenges 	the 	order 	of 	the
U.S. Bankruptcy Court for the District of Maryland granting partial
summary judgment in favor of Appellee NGM Insurance Company. 	Oral
argument 	is 	deemed 	unnecessary 	because 	the 	facts 	and 	legal
arguments 	are 	adequately 	presented 	in 	the 	briefs 	and 	record, 	and
the 	decisional 	process 	would 	not 	be 	significantly 	aided 	by 	oral
argument. 	See 	Fed.R.Bankr.P. 	8012. 	For 	the 	reasons 	that 	follow,
the bankruptcy court’s order will be affirmed.
I. 	Background
The following facts are undisputed unless noted. 	On September
8, 	2003, 	the 	Montgomery 	County 	Office 	of 	Aging 	and 	Disability
(“Office 	of 	Aging”) 	filed 	a 	petition 	with 	the 	Circuit 	court 	for
Montgomery County to appoint a temporary guardian of the property
of Joseph Schek, Appellant’s father. 	Based on evaluations from a
psychiatrist and doctor, the Office of Aging determined that Joseph
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Schek, who was 84 years old at the time, was unable to manage his
property and affairs due to his physical and mental disability. 	On
February 	3, 	2004, 	Appellant 	was 	appointed 	as 	the 	guardian 	of 	his
father’s property. 	In connection with his appointment, Appellant
obtained a guardian bond of $675,000. 	A guardian bond is required
by statute to ensure that the guardian faithfully performs his or
her duties.
On March 30, 2004, Appellant filed a verified inventory of his
father’s 	assets. 	At 	the 	time, 	the 	guardianship 	estate 	totaled
$664,755.46, 	comprised 	of 	cash 	and 	cash 	equivalents. 	On 	June 	6,
2005, 	Appellant 	filed 	an 	annual 	fiduciary 	report 	for 	the 	period
February 	3, 	2004 	to 	February 	3, 	2005. 	According 	to 	the 	report,
Joseph Schek’s estate had a beginning value of $703,212.79 and an
end value of $256,600.79.
On July 19, 2005, the Trust Clerk for the circuit court filed
a report analyzing Appellant’s fiduciary report. 	The Trust Clerk
expressed 	concerns 	with 	Appellant’s 	accounting, 	including 	gifts
that 	had 	not 	been 	authorized 	by 	the 	court 	and 	insufficient
documentation 	of 	certain 	transactions. 	Specifically, 	the 	Trust
Clerk 	disputed 	gifts 	totaling 	$107,939.23, 	of 	which 	$102,439.04
Appellant 	had 	paid 	to 	himself. 	The 	Trust 	Clerk 	noted 	that 	these
gifts 	had 	not 	been 	authorized 	by 	the 	court 	pursuant 	to 	Md. 	Code
Est. 	& 	Trusts 	§ 	13-203(c)(2)(i), 	and 	that 	these 	gifts 	were
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significant 	in 	that 	they 	comprised 	40% 	of 	the 	total 	valuation 	of
the ending assets reported.
On 	October 	11, 	2005, 	the 	Director 	of 	the 	Montgomery 	County
Department of Health and Human Services filed an Emergency Petition
for 	the 	Removal 	of 	Appellant 	as 	the 	guardian 	of 	his 	father’s
property. 	The Department’s petition submitted that Appellant had
told numerous individuals that he was “out of money,” and that his
father 	had 	no 	funds 	left 	to 	pay 	for 	his 	personal 	expenses.
Furthermore, 	Appellant’s 	father 	had 	moved 	into 	Appellant’s 	home
because he no longer had the means to pay for his rent. 	According
to the petition, Appellant had spent the remaining $256,000 of his
father’s assets in less than one year.
On 	December 	2, 	2005, 	the 	circuit 	court 	removed 	Appellant 	as
guardian. 	The court then appointed attorney Robert M. McCarthy as
successor 	guardian, 	and 	requested 	that 	he 	investigate 	and 	file 	a
report 	with 	recommendations 	to 	the 	court 	regarding 	the
appropriateness 	of 	Appellant’s 	disbursements. 	As 	part 	of 	his
investigation, Mr. McCarthy retained the services of Thomas Roche,
a C.P.A. 	Based on Mr. Roche’s audit as well as his own analysis,
Mr. McCarthy determined that of the $761,478.21 in initial estate
assets that Appellant had to account for, only $57,472.03 had been
properly 	accounted 	for 	under 	guardianship 	accounting 	standards.
Mr. McCarthy concluded that the remaining $704,006.18 constituted
an unaccounted for defalcation. 	He went on to add that even if one
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were to give Appellant the full benefit of the doubt with respect
to 	additional 	documents 	that 	Appellant 	submitted 	to 	support 	his
disbursements, 	this 	would 	yield 	only 	an 	additional 	credit 	of
$253,009.82, leaving a defalcation of $450,996.36.
On 	March 	10, 	2006, 	Appellant, 	Appellee, 	and 	Mr. 	McCarthy
entered into a settlement agreement. 	On the same day, Appellant
executed a promissory note agreeing to repay Appellee $400,000, as
well 	as 	additional 	expenses 	that 	Appellee 	incurred 	in 	connection
with the bond.
In 	April 	of 	2007, 	Appellant 	and 	his 	wife 	Kathleen 	Maguire
filed a petition for voluntary bankruptcy, seeking to discharge the
debt 	that 	they 	owed 	to 	Appellee. 	Appellee 	filed 	a 	complaint 	in
bankruptcy 	court, 	alleging 	four 	counts 	against 	Appellant: 	(1)
Defalcation by Fiduciary, (2) Embezzlement by Fiduciary, (3) Fraud
by Fiduciary, and (4) Statements Concerning Financial Conditions.
Upon completion of discovery, Appellee filed a motion for partial
summary judgment on Count 1.
At 	a 	bankruptcy 	hearing 	on 	July 	24, 	2008, 	Bankruptcy 	Judge
Wendelin 	I. 	Lipp 	granted 	Appellee’s 	motion 	for 	partial 	summary
judgment. 	Judge 	Lipp 	focused 	on 	the 	affidavits 	of 	Mr. 	Roche 	and
Mr. McCarthy and found that both supported a finding that Appellant
had misappropriated funds. 	Upon such a finding, Judge Lipp pointed
out that the burden then shifted to Appellant to demonstrate that
he 	had 	properly 	accounted 	for 	his 	father’s 	assets 	and 	to 	come
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1 Judge Lipp dismissed Counts 2 and 3 as moot. 	Subsequently,
Appellee voluntarily dismissed Count 4 pursuant to the settlement
agreement. 	Therefore, Count 1 is the only issue on appeal.
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forward with evidence to establish a genuine issue necessitating a
trial. 	Judge Lipp found that Appellant failed to meet this burden,
and 	entered 	judgment 	against 	him 	in 	the 	amount 	of 	$400,000 	and
declared the debt to be non-dischargeable. 1 	On September 4, 2008,
Appellant appealed to this court.
II. 	Standard of Review
A district court reviews the grant of summary judgment by the
bankruptcy court de novo, applying the standards of Rule 56 of the
Federal 	Rules 	of 	Civil 	Procedure. 	A 	motion 	for 	summary 	judgment
will 	be 	granted 	only 	if 	there 	exists 	no 	genuine 	issue 	as 	to 	any
material 	fact 	and 	the 	moving 	party 	is 	entitled 	to 	judgment 	as 	a
matter of law. 	See Fed.R.Civ.P. 56(c); Celotex Corp. v. Catrett,
477 U.S. 317, 322 (1986); Emmett v. Johnson, 532 F.3d 291, 297 (4 th
Cir. 2008). 	In other words, if there clearly exists factual issues
“that 	properly 	can 	be 	resolved 	only 	by 	a 	finder 	of 	fact 	because
they may reasonably be resolved in favor of either party,” summary
judgment 	is 	inappropriate. 	Anderson 	v. 	Liberty 	Lobby, 	Inc., 	477
U.S. 	242, 	250 	(1986); 	JKC 	Holding 	Co. 	LLC 	v. 	Washington 	Sports
Ventures, Inc., 264 F.3d 459, 465 (4 th Cir. 2001).
When ruling on a motion for summary judgment, the court must
construe the facts alleged in the light most favorable to the party
opposing 	the 	motion. 	See 	Scott 	v. 	Harris, 	127 	S.Ct. 	1769, 	1774
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(2007); Emmett, 532 F.3d at 297. 	A party who bears the burden of
proof on a particular claim must factually support each element of
his or her claim. 	Celotex Corp., 477 U.S. at 323. 	“[A] complete
failure of proof concerning an essential element . . . necessarily
renders all other facts immaterial.” 	Id. 	Thus, on those issues on
which the nonmoving party will have the burden of proof, it is his
or her responsibility to confront the motion for summary judgment
with 	an 	affidavit 	or 	other 	similar 	evidence 	in 	order 	to 	show 	the
existence of a genuine issue for trial. 	See Anderson, 477 U.S. at
256; Celotex Corp., 477 U.S. at 324. 	“A mere scintilla of proof,
however, will not suffice to prevent summary judgment.” 	Peters v.
Jenney, 	327 	F.3d 	307, 	314 	(4 th 	Cir. 	2003). 	There 	must 	be
“sufficient 	evidence 	favoring 	the 	nonmoving 	party 	for 	a 	jury 	to
return 	a 	verdict 	for 	that 	party.” 	Anderson, 	477 	U.S. 	at 	249-50.
“If 	the 	evidence 	is 	merely 	colorable, 	or 	is 	not 	significantly
probative, 	summary 	judgment 	may 	be 	granted.” 	Id. 	(citations
omitted).
III. Analysis
A. 	Defalcation by a Fiduciary
Pursuant 	to 	11 	U.S.C. 	§ 	523(a)(4), 	a 	debt 	for 	“defalcation
while 	acting 	in 	a 	fiduciary 	capacity” 	is 	non-dischargeable. 	A
defalcation 	is 	the 	failure 	to 	meet 	an 	obligation 	or 	a 	non-
fraudulent default. 	Rwanda v. Uwimana, 274 F.3d 806, 811 (4 th Cir.
2001)(citing 	Black’s 	Law 	Dictionary 	427 	(7 th 	ed. 	1999)). 	For
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purposes of the dischargeability exception, a defalcation does not
need 	to 	“rise 	to 	the 	level 	of 	embezzlement 	or 	even
misappropriation.” 	Id. 	Rather, 	“negligence 	or 	even 	an 	innocent
mistake that results in misappropriation or failure to account is
sufficient.” 	Id.
Fiduciaries include administrators, guardians, executors, and
public 	officers. 	In 	Re 	Scott, 	203 	B.R. 	590, 	596 	(Bkrtcy. 	E.D.Va.
1996). 	“The 	fundamental 	duty 	of 	a 	guardian 	of 	property 	is 	to
preserve the property in the guardianship estate for the benefit of
the 	ward 	and 	other 	persons 	with 	an 	interest 	in 	that 	property.”
Seaboard 	Sur. 	Co. 	v. 	Boney, 	135 	Md. 	App. 	99, 	112 	(2000). 	A
guardian has a “sacred responsibility” to protect those who cannot
care 	for 	themselves, 	whether 	due 	to 	illness 	or 	other 	disability.
Id. at 113.
Appellant argues that the bankruptcy court erred in granting
partial summary judgment in favor of Appellee because there was a
factual 	dispute 	as 	to 	whether 	he 	committed 	a 	defalcation 	by
misappropriating assets for his own use. 	First, Appellant asserts
that his father consented freely to transfer money to him and that
the 	gifts 	that 	Appellant 	paid 	to 	himself 	were 	with 	his 	father’s
permission. 	(Paper 3, at 11). 	Appellee contends that Appellant’s
argument is unsupported by any reference to the record, and is thus
without merit. 	(Paper 6, at 12). 	Moreover, Appellee argues that
Appellant’s contention is undermined by his own affidavit, where he
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stated that he attempted to transfer his father’s funds to himself
on the advice of his attorney. 	(Paper 6, at 12).
First, regardless of whether Appellant’s father gave Appellant
permission 	to 	take 	some 	of 	the 	guardianship 	estate 	as 	a 	gift,
Appellant’s 	role 	as 	guardian 	required 	that 	he 	account 	for 	all
disbursements 	that 	he 	made. 	See 	Md. 	Code 	Ann., 	Est. 	& 	Trusts, 	§
13-209; 	Green 	v. 	Lombard, 	28 	Md.App. 	1,8 	(1975) 	(finding 	that
guardian’s 	failure 	to 	keep 	comprehensive 	and 	accurate 	financial
records 	constituted 	a 	violation 	of 	fiduciary 	duty). 	As 	the
guardian 	of 	his 	father’s 	property, 	Appellant 	was 	clearly 	a
fiduciary who was held to a “sacred responsibility” to oversee his
father’s 	estate. 	See 	Seabord 	Sur. 	Co, 	135 	Md. 	App. 	at 	112; 	Md.
Code Ann., Est. & Trusts, § 13-213 (noting that guardians have the
power of a fiduciary). 	Once it is established that Appellant is a
fiduciary 	to 	whom 	funds 	were 	entrusted, 	the 	burden 	shifted 	to
Appellant to account fully for all funds that he received for the
benefit of the beneficiary. 	Caldwell v. Hanes, 214 B.R. 786, 813-
14 	(E.D.Va. 	1997)(internal 	citations 	omitted); 	see 	also 	In 	re
Manzo, 106 B.R. 69, 72-73 (Bankr.E.D.Pa.1989) (“Once the plaintiff
establishes that the trust res was delivered to the fiduciary, the
burden 	shifts 	to 	the 	debtor 	to 	show 	that 	no 	defalcation
occurred.”). 	Appellant must present evidence that he complied with
the 	fiduciary 	duties 	with 	respect 	to 	all 	transactions. 	Id.
Appellant has not met this burden. 	The only relevant evidence that
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Appellant 	has 	submitted 	is 	his 	own 	affidavit, 	which 	fails 	to
account for the guardianship assets with any specificity.
Second, Appellant claims that the bankruptcy court should not
have granted partial summary judgment because Maryland’s statutory
provisions 	do 	not 	require 	a 	guardian 	to 	acquire 	court 	approval
before obtaining gifts from the guardianship account. (Paper 3, at
12). 	Md. Code. Ann., Est. & Trusts § 13-203(c)(2)(i) states:
(c)(1) Except for the limitations contained in
§ 	13-106 	of 	this 	title, 	after 	appointment 	of
the 	guardian, 	the 	court 	has 	all 	the 	powers
over 	the 	property 	of 	the 	minor 	or 	disabled
person 	that 	the 	person 	could 	exercise 	if 	not
disabled or a minor.
(2) The powers that a circuit court has under
paragraph (1) of this subsection includes the
power to authorize or direct the guardian to:
(i) 	Make 	gifts 	from 	the 	principal 	and 	income
of the estate. . . .
Appellant 	argues 	that 	this 	provision 	merely 	gives 	the 	court
authority 	to 	approve 	gifts, 	but 	does 	not 	mandate 	that 	gifts 	be
approved 	by 	the 	court. 	(Paper 	3, 	at 	12). 	Appellee, 	conversely,
argues 	that 	the 	governing 	statutes 	support 	the 	view 	that 	prior
court 	approval 	for 	gifts 	is 	in 	fact 	required. 	(Paper 	6, 	at 	26).
Appellee 	compares 	the 	language 	of 	§ 	13-203(c)(2)(i) 	stated 	above
with Md. Code. Ann., Est. & Trusts § 13-214(b)(1), which lists the
disbursements that a guardian can make without court authorization.
(Paper 6, at 26). 	Section 13-214(b)(1) states, in relevant part:
(2) A guardian of a disabled person may pay or
apply income and principal from the estate as
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needed 	for 	the 	clothing, 	support, 	care,
protection, welfare, and rehabilitation of the
disabled person.
Appellee points out that gifts, notably, are not included on
the list of permissible disbursements. 	Appellee suggests that this
language, 	combined 	with 	the 	authority 	given 	to 	the 	circuit 	court
under 	§ 	13-203(c)(2) 	to 	direct 	or 	authorize 	the 	guardian 	to 	make
gifts 	from 	the 	guardianship 	account, 	make 	clear 	that 	a 	guardian
must 	obtain 	court 	approval 	before 	taking 	gifts 	from 	the
guardianship estate.
The bankruptcy court concluded that Appellant “would have had
to have gained approval for – to receive the funds to – to himself.
And he’s admitted that they’ve gone to himself.” (Paper 1, #48, Tr.
at 36). 	That legal finding is correct. 	Although § 13-203 (c)(2)
is 	couched 	as 	authorizing 	the 	court 	to 	approve 	certain
disbursements, 	the 	section 	authorizing 	a 	fiduciary 	to 	make
disbursements without court approval does not include making gifts.
Thus, Maryland law does not authorize a fiduciary to make a gift,
particularly 	to 	the 	fiduciary 	himself, 	without 	court 	approval.
Moreover, even if court approval was not needed, the fact remains
that Appellant did not properly account for the disbursements that
he made.
Finally, 	Appellant 	raises 	several 	arguments 	that 	he 	did 	not
originally 	present 	to 	the 	bankruptcy 	court. 	These 	arguments
include: (1) the order appointing Appellant as the guardian of his
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father’s property gave his father the right to direct Appellant to
transfer 	funds 	to 	himself, 	(2) 	Mr. 	McCarthy 	breached 	the 	court’s
order by failing first to file his report with the court, and (3)
to the extent that Appellee suffered a loss, Mr. McCarthy is solely
responsible in his capacity as successor guardian.
An appellate court will ordinarily not consider issues raised
for the first time on appeal. 	United States v. Barge Shamrock, 635
F.2d 	1108, 	1111 	(4 th 	Cir. 	1980). 	However, 	if 	failing 	to 	consider
the 	issue 	on 	appeal 	would 	result 	in 	a 	denial 	of 	fundamental
justice, 	a 	court 	may 	decide 	on 	the 	issue 	even 	if 	it 	was 	not
initially 	raised 	in 	the 	lower 	court. 	Id. 	Appellant 	had 	ample
opportunity 	to 	raise 	all 	viable 	arguments 	at 	the 	bankruptcy
hearing. 	However, 	even 	when 	analyzing 	the 	additional 	arguments
that Appellant has presented, these arguments are without merit.
Appellant 	argues 	that 	the 	consent 	order 	appointing 	him 	as
guardian gave his father the right to direct Appellant to transfer
funds 	to 	himself. 	It 	is 	true 	that 	the 	consent 	order 	gave
Appellant’s 	father 	the 	right 	to 	“undertake 	appropriate 	estate
planning” 	and 	to 	“make 	arrangements 	to 	handle 	his 	personal
affairs.” 	However, as a guardian, Appellant still bore the burden
of 	accounting 	fully 	for 	all 	funds 	in 	the 	guardianship 	estate.
Caldwell, 214 B.R. at 813.
Appellant 	argues 	next 	that 	Mr. 	McCarthy 	breached 	the 	court
order 	by 	failing 	first 	to 	file 	his 	report 	with 	the 	court.
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Appellant’s contention has no merit. 	The circuit court issued an
order 	requesting 	Mr. 	McCarthy 	to 	file 	a 	report 	with 	the 	court
within 	90 	days 	of 	the 	date 	of 	the 	order, 	or 	March 	9, 	2006. 	Mr.
McCarthy filed his report with the court on February 21, 2006, well
within the 90 day time frame.
Finally, Appellant argues that Mr. McCarthy is responsible for
repayment of the debt because he is now the successor guardian of
Joseph 	Schek’s 	property 	and 	has 	sole 	control 	over 	his 	father’s
assets. 	The 	fact 	that 	Mr. 	McCarthy 	is 	serving 	as 	the 	successor
guardian 	does 	not 	extinguish 	Appellant’s 	responsibility 	to 	repay
the 	debt 	that 	he 	owes. 	Indeed, 	Appellant 	executed 	a 	Promissory
Note expressly agreeing to repay Appellee $400,000 plus additional
expenses and attorney’s fees that Appellee had incurred.
Once 	a 	party 	has 	filed 	a 	motion 	for 	summary 	judgment, 	the
opposing 	party 	has 	the 	burden 	of 	showing 	that 	a 	genuine 	dispute
exists. 	Hooven-Lewis 	v. 	Caldera, 	249 	F.3d 	259 	(4 th 	Cir. 	2001).
Appellant has failed to meet his burden. 	The circuit court Trust
Clerk, Mr. McCarthy, and Mr. Roche all concluded that Appellant had
failed to account for the guardianship assets and presented detail
reports 	to 	that 	effect. 	Appellant 	stated 	several 	times 	in 	his
answers 	to 	interrogatories 	that 	he 	had 	could 	not 	recall 	the
payments 	that 	he 	made 	or 	the 	amount 	of 	assets 	entrusted 	to 	him
without referring to specific documents. 	Furthermore, Judge Lipp
pointed 	out 	that 	Appellant 	made 	no 	attempt 	to 	account 	for 	his
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father’s funds and that based on the record, Appellant did not have
the 	ability 	to 	account 	for 	his 	disbursements. 	Taken 	together,
there 	is 	no 	genuine 	dispute 	of 	fact 	as 	to 	whether 	Appellant
properly 	accounted 	for 	his 	father’s 	assets, 	at 	least 	up 	to
$400,000. 	It is irrelevant whether Appellant acted fraudulently,
since Appellant remains liable for defalcation even if he made an
innocent mistake in managing the guardianship estate. 	Rwanda, 274
F.3d 	at 	811. 	Therefore, 	the 	bankruptcy 	court’s 	order 	granting
partial summary judgment to Appellee will be affirmed.
IV. 	Conclusion
For 	the 	foregoing 	reasons, 	the 	order 	of 	the 	U.S. 	Bankruptcy
Court 	for 	the 	District 	of 	Maryland 	will 	be 	affirmed. 	A 	separate
order will follow.
/s/
DEBORAH K. CHASANOW
United States District Judge
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