Nelson v. Ishmael

1Because this proceeding involves the dischargeability of a
claim, it is within this Court’s core jurisdiction. 	See 28 U.S.C. §
157(b)(2)(I)
In 	the 	United 	States 	Bankruptcy 	Court
For 	the 	Eastern 	District 	of 	Pennsylvania
In re Robert W. Ishmael 	: Chapter 7
:
:
Debtor(s) 	: Bankruptcy No. 05-16306 SR
:
:
Richard Nelson 	:
:
Plaintiff 	:
:
v. 	:
:
:
Robert W. Ishmael 	:
:
Defendant 	: Adv. No. 07-287
:
:
Opinion
By: Stephen Raslavich, United States Bankruptcy Judge.
Introduction
Before the Court is the Complaint of Richard Nelson in
which he seeks to except his claim from the Debtor’s discharge.
The Debtor opposes such relief. 	A trial was held on October 21,
2008, after which the Court took the matter under advisement.
For the reasons set forth below, judgment will be entered in
favor of the Debtor. 1
The Record
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2In the insurance industry, comprehensive coverage insures a car
against damage caused by a collision as well as losses not related to
an accident (e.g., theft, fire, vandalism). 	See
www.insurance.com/article.aspx/Pennsylvania.
3Liability coverage is required by state law. 	See 75 P.S. § 1786
2
The Plaintiff owned a 2001 Nissan. 	He obtained insurance
for that vehicle through the Debtor. 	See Ex. C-3, C-4, C-5.
Because the Plaintiff had financed the purchase of that car, he
was required by the lender to have comprehensive insurance
coverage 2 in addition to liability coverage. 3 	Transcript (T-)
16. 	The Debtor obtained that coverage for Plaintiff via a
“split” policy. 	This meant that liability coverage and property
coverage were issued under separate policies and from different
insurers. 	T-19. 	Liability coverage was provided by Nationwide
and property coverage by Personal Surplus Lines, Inc. (PSL). 	Id.
On October 24, 2002, PSL sent Debtor a payment notice. 	The
notice informed Debtor that his payment in the amount of $215.79
was due on November 14. 	Ex. C-20; D-108. 	The Plaintiff
testified that two days prior to that due date, he contacted the
Debtor to discuss making this payment. 	T-22 	The Plaintiff
explained that he was out of town at the time and so could not
make the payment by the due date without the Debtor’s help. 	Id.
To assist Plaintiff in making that payment on time, the Debtor
faxed to him a power of attorney which he executed and sent back
to Debtor. 	Plaintiff also authorized Debtor to charge that
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payment to his credit card. 	T-22; Ex. C-1.
This is not how Debtor remembers that conversation: he
recalls that Plaintiff needed assistance in making the payment
for his liability policy. 	T-78 	As it turns out, the Debtor paid
the Plaintiff’s liability premium and not the comprehensive
premium. 	Ex. C-2; D-104; T-79. 	On November 14, 2002, PSL sent
Plaintiff a notice of cancellation of his property coverage. 	Ex.
C-24; D-109. 	Plaintiff claims never to have received that
notice. 	Ex. D-111, pp. 3-4.
One week later, Plaintiff traded in his Nissan for a Honda.
Ex. C-9. 	As before, the Plaintiff financed this purchase and so
needed comprehensive auto insurance coverage. 	He testified that
he called the Debtor from the Honda dealership to have the Debtor
confirm that the Plaintiff had auto insurance coverage. 	T-27 	He
recalled that the Honda sales representative asked the Debtor if
the Plaintiff had “full, transferrable coverage” and the Debtor
replied that transferring that insurance “[would not be] a
problem. 	T-28. 	For his part, the Debtor recalls being asked if
the Plaintiff had “current insurance” and he responded that he
did. 	T-84. 	According to the Debtor, the conversation does not
appear to have specified whether that coverage was limited to
liability or also included property coverage as well; they spoke
only in general terms. 	Id.
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After that conversation, Debtor prepared the necessary
paperwork to transfer coverage to the new car. 	The Debtor mailed
one form for liability coverage to Nationwide. 	Ex. C-15; D-105
He faxed another form for property coverage to PSL as per that
company’s requirement. 	Ex. C-14; D-107; T-85. 	PSL responded to
that fax immediately to inform Debtor that the property damage
policy had lapsed. 	Ex. D-107; T-85,86,98. 	Two things happened
next: first, Debtor testified that he immediately informed
Plaintiff who was in his office at the time that his property
coverage had lapsed. 	T-86. 	Debtor further testified that
Plaintiff responded that he would “take care of it.” Id. 	The
Plaintiff denies being in the Debtor’s office at all that day: he
maintains he was at the Honda dealership the entire time. 	T-26-
27. 	Second—and this is regardless of Plaintiff’s whereabouts on
that day—after being told that Plaintiff’s comprehensive coverage
had lapsed, the Debtor never called the Honda sales rep back to
inform him of that fact. 	T-98. 	As a result, Plaintiff took
delivery of the vehicle without the required insurance. 	Id.
About one week later, Plaintiff's Honda was stolen. T-29
Plaintiff notified Nationwide and the Debtor of the loss. 	Id.
Nationwide informed the Plaintiff that the car was not insured
for property damage. 	T-30 On December 2, Nationwide informed
Debtor of the same and sought confirmation that liability
coverage was in force. 	Ex. C-10 	The Plaintiff next contacted
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the Debtor for an explanation as to why the theft was not
covered. 	T-30. 	Debtor explained that his property insurance
coverage had lapsed due to non-payment. 	Id. 	The upshot of all
of this is that PSL denied coverage of any claim for theft
leaving Plaintiff liable to the lender (American Honda Finance)
for the balance due on the car. 	T-35
On December 19, 2002, the Plaintiff sought review of PSL’s
cancellation of his policy. 	Ex. C-26 	In May 2004, the Insurance
Commissioner denied that request based on untimeliness. 	Ex. D-
110. 	The Commissioner rejected Plaintiff’s purported excuse that
he had never received notice of cancellation from PSL. 	Id. 	To
the contrary, the Commissioner found that he had received notice.
Id. 	The result of all this is that the Plaintiff has been held
liable by American Honda Finance for his loan balance. 	Ex. D-
111. 	That, in turn, adversely affected his credit rating. 	T-35;
Ex. D-111. 	Plaintiff subsequently filed suit against the Debtor
and an arbitration award was entered in his favor. 	Ex. C-18
Actual Fraud
To the Plaintiff, this series of events demonstrates that he
was the victim of fraud. 	Section 523(a)(2)(A) of the Bankruptcy
Code provides that a debt will be held non-dischargeable if it
was “for money, property, services, or an extension, renewal, or
refinancing of credit, to the extent it was obtained by false
pretenses, a false representation or actual fraud.” 11 U.S.C. §
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523(a)(2)(A). The elements of a claim under § 523(a)(2)(A) for
fraud are the following: (1) the debtor made a representation
knowing at the time that it was false; (2) the debtor made the
representation with the intent and purpose of deceiving the
plaintiff; (3) the plaintiff justifiably relied on the debtor's
false representation; and (4) the plaintiff suffered a loss or
damage as a proximate consequence of the representation having
been made. Stevens v. Antonious (In re Antonious), 358 B.R. 172,
182 (Bankr.E.D.Pa.2006). 	“The party seeking to establish an
exception to the discharge of a debt [under § 523(a)(2)(A) ]
bears the burden of proof ... by a preponderance of the
evidence.” Grogan v. Garner, 498 U.S. 279, 291, 111 S.Ct. 654,
112 L.Ed.2d 755 (1991); In re McDonald, 177 B.R. 212, 215
(Bankr.E.D.Pa.1994)
The Alleged Frauds
Plaintiff sees a series of discrete frauds perpetrated by
the Debtor: first, promising to pay the property insurance
premium with the Plaintiff’s credit card but not doing so;
second, telling the Honda dealer that the Plaintiff’s auto
insurance was current when it was not; third, telling the
Plaintiff that he was an insurance agent when he was, in fact, a
broker; fourth, selling the Plaintiff a split policy; and fifth,
failing to notify the Plaintiff that he filed for bankruptcy. 	T-
9, 11-12
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Payment of the Premium
As to the first charge, the Court notes that there is a
premise that the Debtor and Plaintiff do not share. 	Plaintiff
maintains that Debtor was given the power of attorney and his
credit card number to pay all of the Plaintiff’s auto premiums.
T-23 	Debtor contends that he was instructed to pay only the
liability portion. 	T-78 	The premium for liability coverage was
$98 which is the amount Debtor charged to Plaintiff’s credit
card. 	Ex. C-2; D-104. 	If the Court accepts Debtor’s version
that only the liability premium was to be paid, there was no
misrepresentation.
But even accepting Plaintiff’s premise, it doesn’t
necessarily follow that the Debtor misrepresented anything. 	The
fact that Debtor charged to Plaintiff’s credit card only enough
to pay Plaintiff’s insurance belies fraudulent intent. 	In re
Cohn, 54 F.3d 1108, 1119 (3d Cir. 1995) (explaining that intent
is derived from a totality of the circumstances). 	It is the
Debtor’s undisputed testimony that he used Plaintiff’s credit
card one time to make a charge of $98; that such charge paid for
the Plaintiff’s liability premium and nothing else; that out of
that amount, Debtor stood to profit no more than $3.77; that the
Debtor would earn that commission only after the policy had been
in force for at least 13 months; and that because the policy
would be cancelled within two months he did not profit at all
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from this transaction. 	T-92. 	Needless to say, it is hard to
conceive of one designing the elaborate fraud the Plaintiff
posits with no profit to be had.
Rather than a “scheme” as Plaintiff would have the Court
find, the circumstances suggest the reasonable inference to be
that a mis-communication simply occurred: Plaintiff believed that
the Debtor knew which policy premium needed to be paid by
November 14, but, in fact, he did not. 	Alternatively, this could
be put down to something as simple as error on Debtor’s part: he
paid the wrong insurance premium. 	As the Court pointed out at
trial, the Debtor used Plaintiff’s credit card but one time and
such use was not for the Debtor’s benefit. 	T-104 	Whatever
Debtor’s thinking was, it does not suggest deception on his part.
Rather, it appears, at most, that a mistake was made.
Response to Dealer’s
Insurance Inquiry
The same can be said as to the second charge. 	When asked by
the Honda salesman about the state of Plaintiff’s insurance, the
Debtor undoubtedly gave incorrect information. 	But the Court
would not say that it was false information. 	Something that is
false is “intentionally untrue.” Black’s Law Dictionary, 540
(Fifth Ed.1979). 	Debtor assumed—wrongly as it turns out— that
Plaintiff had property insurance in force because the Debtor had
procured that coverage. 	When he responded affirmatively to the
question of coverage, the Court credits the Debtor with having
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4And it is not dispositive of anything that the Debtor’s version
of the events of November 21 differs from that of Mr. English, the
Honda sales rep who testified on behalf of the Plaintiff. 	The Debtor
testified that Plaintiff was in his office on that afternoon; that is,
when Debtor told Plaintiff that his insurance lapsed and Plaintiff,
according to the Debtor, told him that he “would take care of it.”
Mr. English recalls that the Plaintiff was at the dealership for the
whole afternoon. 	Mr. English does not say, however, whether the
Plaintiff ever left his sight during the long afternoon, and the
Debtor’s business office was only 20 to 30 minutes away by car. 	T-91.
For his own part, the Plaintiff never explains how his signature came
to be on the insurance transfer paperwork that Debtor prepared and
sent to the carriers, although it is dated November 21, 2008. 	See Ex.
D-105
9
honestly believed that insurance was in place. 	He was promptly
disabused of that belief by the carrier and could have promptly
corrected his error by calling the dealer back to explain what he
had just learned from the carrier. 	Debtor admits that he should
have done this but did not. 	T-98 	That, however, does not make
his first answer a misrepresentation. 	Again, it is more in the
way of negligence. 4
Broker or Agent
On the question of Debtor being an agent versus a broker,
the Court is similarly unpersuaded, albeit for different reasons.
Plaintiff testified that if the Debtor had told him that he was a
broker, and not an agent, then the Plaintiff would have obtained
insurance elsewhere. 	T-19 	While never saying so specifically,
Plaintiff appears to be implying that he was acting based on the
fundamental rule of agency law that the principal is responsible
for the acts of his agent. 	T-12,13. 	Here, that principal would
have been the insurer and the agent would have been the Debtor.
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The Debtor’s failure qua agent to have paid the correct premium
would have bound the insurer qua principal to cover the theft of
the Plaintiff’s car notwithstanding. 	See Wisniski v. Brown &
Brown Ins. Co., 906 A.2d 571, 578 (Pa.Super.2006) quoting Couch
on Insurance, § 45:1 (3d ed.2005)(explaining the an insurance
agent’s principal is the insurer while an insurance broker’s
principal is the insured); see also 31 Pa.Code § 37.1 (drawing
substantially the same distinction between “agent” and “broker”)
It comes as no surprise to the Court that the parties’
testimony on this question is at odds. 	The Plaintiff testified
that the Debtor represented himself to be an agent for the
insurers. 	T-18, 19. 	The Debtor’s testimony on this point is
contradictory. 	On direct examination, he stated that he was a
broker, but when cross-examined he stated that he was an agent.
Compare T-73 with T-93,94. 	The Debtor’s conflicting testimony is
unhelpful and so the Court has looked elsewhere in the record.
At the beginning of Plaintiff’s testimony, the Court finds what
it believes to be the most probative evidence as to why Plaintiff
actually took his business to the Debtor: the Plaintiff testified
that his father referred him to the Debtor; the Debtor and
Plaintiff’s father had been childhood friends. 	T-15. 	The
question of whether Debtor was an agent or a broker never came
up. 	Correspondingly, there is no evidence which would explain
why the Debtor would intentionally misrepresent his status to the
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Plaintiff. 	The profit Debtor stood to gain from this alleged
fraud–de minimis as it was—did not depend on whether the Debtor
was a broker or agent. 	Based on this, the Court finds that the
Plaintiff did not rely on any misrepresentation by the Debtor of
his status as an agent versus a broker.
Split Policy
The Plaintiff insists that the Debtor intended to harm him
by selling him a “split” policy. 	T-100. 	His counsel describes
this structuring of Plaintiff’s auto insurance as a “cockamamy
scheme.” Id. 	But the Debtor offered a logical explanation for
this arrangement: it saved Plaintiff some money. 	T-75,76. 	To be
sure, it was incumbent upon the Debtor to fully explain to the
Plaintiff that he would be paying two insurers. 	However, the
failure to have done so hardly establishes deceit.
Notice of Bankruptcy
Finally, while the Debtor should have notified the Plaintiff
of his bankruptcy when it was filed, which he did not, the
Plaintiff has pointed to no resulting prejudice. 	T-37 	The Court
granted Plaintiff’s Motion to Re-Open the Debtor’s bankruptcy so
that Plaintiff could file his claim for non-dischargeability.
And, in fact, the Plaintiff’s case has now been tried. 	While
this may be the one instance in this case where the Debtor may
have been less than honest, the Court does not see how Plaintiff
was harmed thereby. 	In short, the record in this case does not
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demonstrate fraud or misrepresentation on the Debtor’s part.
Section 523(a)(4)
In his opposition to Debtor’s Motion to Dismiss, the
Plaintiff explained that his alternative ground for
nondischargeability is § 523(a)(4). 	That section provides, in
pertinent part that “[a] discharge under section 727 … of this
title does not discharge an individual debtor from any debt … for
fraud or defalcation while acting in a fiduciary capacity,
embezzlement, or larceny.” 11 U.S.C. § 523(a)(4). 	The Court has
previously held that the Complaint stated a claim for both
fiduciary fraud as well as embezzlement. 	See In re Ishmael, 2008
WL 80040 *1 (Bankr.E.D.Pa.). 	However the Plaintiff has failed to
offer sufficient evidence to support those claims.
Fiduciary Fraud
Beginning with fiduciary fraud, the Court observes that
Pennsylvania law recognizes that a power of attorney establishes
a fiduciary relationship. 	See 20 P.S. § 5601(e) (“An agent
acting under a power of attorney has a fiduciary relationship
with the principal.”) 	The Plaintiff executed a Power of Attorney
charging Debtor with the duty of attending to his auto insurance
needs. 	Ex. C-1; D-103. 	That supports a finding of a fiduciary
relationship between the parties. 	See Graves v. James (In re
James), 94 B.R. 350, 353 (Bankr.E.D.Pa.1988) (finding that
insurance agent who misappropriated payments from client was a
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fiduciary)
But the second part of this claim requires fraud on the
agent’s part. 	This Court has found, supra, that no such fraud
occurred. 	As a result, while the Debtor may have been the
Plaintiff’s fiduciary, he did not defraud him.
Embezzlement
Equally wanting is any evidence to support a claim of
embezzlement. 	That tort is defined as the “‘fraudulent
appropriation of property by a person to whom such property has
been entrusted, or into whose hands it has lawfully come.’”
Borchardt v. Ferrell (In re Ferrell), 2006 WL 1997423 *9
(Bankr.E.D.Pa.) (quoting Moore v. United States, 160 U.S. 268,
269 (1895)). 	To prove a debtor committed embezzlement within the
meaning of § 523(a)(4), a plaintiff must establish that: (1) the
debtor was entrusted; (2) with property; (3) of another; (4)
which the debtor appropriated for his own use; and (5) with
fraudulent intent. 	Ginsburg v. Birenbaum (In re Birenbaum), 2006
WL 199478 *8 (Bankr.W.D.Pa.).
The record establishes the first three elements. 	Pursuant
to the Power of Attorney and their telephone conversation of
November 12, Plaintiff entrusted to the Debtor his credit card to
make the required payment. 	That, however, is as far as the
record goes in Plaintiff’s favor. 	The Court has already found
that the Debtor did not appropriate the card for his own use, but
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5The Court observes from the record that the arbitration award in
Plaintiff’s favor in the state court is based on breach of contract.
Ex. C-18. 	The Court underscores this to emphasize that as a
consequence the Court can ascribe no preclusive effect to that ruling
in this proceeding, which is based in tort.
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instead, used it, erroneously perhaps, to pay the wrong insurance
premium on behalf of the Plaintiff. 	Moreover, the Court has
found a lack of fraudulent intent on Debtor’s part in obtaining
the Power of Attorney and in using the credit card as he did.
There is simply insufficient evidence in the record to support a
claim of embezzlement.
Summary
The thread which runs through this record is Debtor’s
careless handling of the Plaintiff’s insurance needs. 	He appears
not to have clearly and fully explained to Plaintiff how that
insurance would be structured. 	He may have failed to ascertain
precisely which policy needed to be paid when Plaintiff asked for
his help in making a payment. 	He gave out incorrect information
as to the status of Plaintiff’s coverage without first checking
the accuracy of that information. 	And when he learned of that
mistake, he failed to correct it. 	Still, given all of this, his
conduct at worst indicates negligence. 5 	It does not support a
charge of fraud, fiduciary or actual, or embezzlement.
Plaintiff’s claims for non-dischargeability under either §
523(a)(2) or (4) of the Bankruptcy Code thus fail. 	Accordingly,
judgment shall be entered in favor of the Debtor and against the
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Plaintiff.
An appropriate Order follows.
By the Court:
_________________________________
Stephen Raslavich
United States Bankruptcy Judge
Dated: 	November 21, 2008
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