Welty, III v. Welty

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UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re No. 04-41166 TD
Chapter 7
JOHANNA P. WELTY,
Debtor.
___________________________/
FRANK A. WELTY, III, A.P. No. 04-4175 AT
Plaintiff,
vs.
JOHANNA P. WELTY,
Defendant.
___________________________/
MEMORANDUM OF DECISION
In the above-captioned adversary proceeding, Plaintiff Frank
A. Welty, III (“Welty”) seeks a judgment against Defendant Johanna
P. Welty (the “Debtor”), his former spouse, denying her chapter 7
discharge under 11 U.S.C. § 727(a)(2)(A) and/or excepting certain
claims from her chapter 7 discharge under 11 U.S.C. § 523(a)(4) or
(6). Trial of the adversary proceeding took place on August 10,
Signed: October 18, 2005
________________________________________
LESLIE TCHAIKOVSKY
U.S. Bankruptcy Judge
________________________________________
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2005. For the reasons stated below, the Court rules for the
Debtor on all three claims.
SUMMARY OF FACTS
During their marriage, the Debtor and Welty owned real
property in Alamo, California (the “Real Property”). The Real
Property had several rental units which were occupied by tenants
paying rent (the “Rents”). In addition, Welty had a series of
investment accounts in her sole name (the “Fidelity Accounts”).
Welty filed a dissolution petition against the Debtor in 2000.
Their marital relationship was severed in May 2002. Their
property disputes had been partially resolved by March 2004 when
the Debtor filed her chapter 7 bankruptcy petition. Among other
things, the family law judge, Judge Leslie Morgan (“Judge
Morgan”), had determined that the Real Property and the Fidelity
Accounts were community property.
The Debtor was permitted to remain in residence on the Real
Property during the dissolution proceeding. She was authorized to
collect the Rents but was required to use them to pay the expenses
of the Real Property. She was not awarded any spousal support.
The Real Property was marketed for sale, and several offers were
received prior to the commencement of the bankruptcy case.
However, none of the sales was consummated by the time the
bankruptcy was filed.
The Rents were less than the Real Property expenses. From
2000 through the Fall of 2003, Welty used the funds in the
Fidelity Accounts to make up the shortfall. She also used them to
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1The complaint also alleged a claim for denial of the
Debtor’s discharge under 11 U.S.C. § 727(a)(4)(A), alleging that
the Debtor lied under oath at the 11 U.S.C. § 341 meeting.
However, Welty failed to present admissible evidence of the
Debtor’s testimony at that meeting, and the claim was deemed
abandoned.
2The complaint also alleged a nondischargeable claim for
willful and malicious injury based on the Debtor’s alleged
refusal to permit Welty to remove his share of the furniture and
furnishings from the Real Property. However, no evidence in
support of this claim was presented at the trial. Thus, the
Court deemed the claim abandoned.
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pay some of her living expenses and the living expenses of her and
Welty’s adult daughter, Antonia (“Tia”).
After the Debtor filed her chapter 7 bankruptcy petition,
Welty filed a timely adversary proceeding seeking denial of the
Debtor’s discharge under 11 U.S.C. § 727(a)(2)(A) and seeking to
except certain claims against the Debtor under 11 U.S.C. §
523(a)(4) and (6).1 His claim for denial of the discharge under
§ 727(a)(2)(A) was based on the Debtor’s pre-petition transfer of
one-half of her interest in the Real Property to Tia. His claim
under 11 U.S.C. § 523(a)(4) alleged that the Debtor had embezzled
his share of the Fidelity Accounts and his share of the Rents used
to pay her and Tia’s living expenses rather than the Real Property
expenses (the “Rent Claim”). His claim under 11 U.S.C. §
523(a)(6) alleged that the Debtor had converted his share of the
Fidelity Accounts and that this conversion constituted a willful
and malicious injury to his property (the “Fidelity Account
Claim”).2
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APPLICABLE LAW
Section 727(a)(2)(A) of the Bankruptcy Code provides that an
individual chapter 7 debtor’s may be denied a discharge if:
(2) the debtor, with intent to hinder,
delay, or defraud a creditor...has
transferred...–- (A) property of the
debtor, within one year before the date of the
filing of the petition;....
A claim under 11 U.S.C. § 727(a)(2)(A) has two elements: “1) a
disposition of property, such as transfer or concealment, and 2)
a subjective intent on the debtor’s part to hinder, delay or
defraud a creditor through the act [of] disposing of the
property.” In re Lawson, 122 F.3d 1237, 1240 (9th Cir. 1997).
Section 523(a)(4) of the Bankruptcy Code excepts from a
individual chapter 7 debtor’s discharge a debt
“for...embezzlement....” Embezzlement, for purposes of 11 U.S.C.
§ 523(a)(4), has been 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.’” In re Littleton, 942
F.2d 551, 555 (9th Cir. 1991)(quoting Moore v. United States, 160
U.S. 268, 260 (1885)). Based on this definition, the Littleton
court observed that a claim for embezzlement has three elements:
“(1) property rightfully in the possession of a nonowner; (2)
nonowner’s appropriation of the property to a use other than [that
for] which [it] was entrusted, and (3) circumstances indicating
fraud.” Id.
Under California law, conversion is defined as “‘the wrongful
exercise of dominion over the personal property of another.’
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[Citation omitted.]” The act constituting conversion must be
intentional; wrongful intent is not required. In re Peklar, 260
F.3d 1035, 1037 (9th Cir. 2001). However, not all acts
constituting conversion under California law give rise to
nondischargeable claims under 11 U.S.C. § 523(a)(6).
Section 523(a)(6) of the Bankruptcy Code excepts from the
debtor’s discharge a claim “for willful and malicious injury by
the debtor to another entity or to the property of another
entity.” In Kawaauhau v. Geiger, 523 U.S. 57 (1998), the Supreme
Court held that the word “willful” in 11 U.S.C. § 523(a)(6)
modifies the word “injury.” Thus, for a claim to be
nondischargeable under § 523(a)(6), the debtor must have intended
to injure another entity or to injure the property of another
entity. In re Peklar, 260 F.3d at 1038.
Whether the debtor acted willfully for purposes of § 523(a)(6)
is governed by a subjective standard. In re Jercich, 238 F.3d
1202, 1208 (9th Cir.) cert. denied 533 U.S. 930 (2001). The Court
must find either that the debtor intended the injury or was
substantially certain that the injury would occur. Id.; see also
In re Su, 290 F.3d 1140, 1144-46 (9th Cir. 2002). As a separate
element, the Court must also determine that the act was malicious.
Malice requires: “(1) a wrongful act, (2) done intentionally, (3)
which necessarily causes injury, and (4) is done without just
cause and excuse." Jercich, 238 F.3d at 1209.
The plaintiff has the burden of proof on claims under both 11
U.S.C. § 727 and §523. The standard of proof is by the
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preponderance of the evidence. In re Scott, 172 F.3d 959, 966 (7th
Cir. 1999)(claim under 11 U.S.C. § 727); Grogan v. Garner, 498
U.S. 279, 286-87 (1991)(claim under 11 U.S.C. § 523).
DISCUSSION
A. OBJECTION TO DISCHARGE CLAIM
The complaint alleged that the Debtor’s discharge should be
denied because, approximately nine months before she filed her
bankruptcy petition, she transferred one-half of her interest in
the Real Property to Tia. It alleged that the transfer was made
with actual intent to hinder, delay, or defraud Welty’s interests
as a creditor. See 11 U.S.C. § 727(a)(2)(A). The Court began the
trial by hearing evidence and argument on this claim. It reasoned
that, if this claim were granted, there would be no need to try
the dischargeability claims.
Welty testified that the family court had ordered the Real
Property sold. He testified that several offers were made to
purchase the Real Property but that the Debtor interfered with
them and caused them to fail. He asserted that the Debtor’s
transfer of one-half of her interest in the Real Property to Tia
was designed to thwart one of these sales and that it succeeded in
doing so.
The Debtor’s testimony conflicted with Welty. She testified
that she transferred one-half of her interest in the Real Property
to Tia to “empower” her, not to prevent the Real Property from
being sold. She testified that Tia’s interest in the Real
Property would not have impeded the sale because Tia would have
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signed off on any sale documents. She testified that she
disclosed Tia’s interest in the Real Property to the buyers. The
Debtor also testified that she had no intent to hinder, delay, or
defraud Welty’s interests as her creditor because she did not
think of him as her creditor.
As stated at the conclusion of the evidence and argument on
this issue, the Court finds and concludes in favor of the Debtor
on this issue. Welty had the burden of proof and failed to carry
it. The principal evidence causing the Court to reach this
conclusion was the undisputed fact that the Debtor had produced at
least one of the offers to purchase the Real Property. This was
inconsistent with Welty’s theory that the Debtor was trying to
prevent a sale.
B. EXCEPTION TO DISCHARGE CLAIMS
Given the Court’s conclusion on the objection to discharge
claim, the Court proceeded to try the dischargeability claims.
The Court’s findings and conclusions as to each of these claims is
set forth below.
1. Rent Claim
As noted above, the complaint alleged that the Debtor’s use
of Welty’s share of the Rents for purposes other than to pay the
Real Property expenses constituted embezzlement, giving rise to a
nondischargeable claim under 11 U.S.C. § 523(a)(4). The elements
of a claim for embezzlement are: (1) property rightfully in the
possession of a nonowner, (2) the nonowner’s appropriation of the
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property to a use other than that for which it was intended, and
(3) circumstances involving fraud. Littleton, 942 F.2d at 555.
The Court concludes that the Rent Claim does not qualify as
an embezzlement. Welty is unable to establish the first element
of the claim: i.e., that the Rents were in the possession of a
nonowner. As stated above, Judge Morgan determined that the Real
Property was community property. It follows that the Rents, as
proceeds of the Real Property, were also community property.
Although, as discussed below, an order issued by Judge Morgan on
March 15, 2003 after several days of trial in December 2002 (the
“March 15 Order”) created a separate property interest in the Real
Property in favor of Welty, it did not divide the Rents. Thus,
the Rents remained community property. Although the Debtor was
rightfully in possession of the Rents, she was not a nonowner of
them as required by an embezzlement claim.
Welty did establish the second element of an embezzlement
claim. The Debtor admitted that, to some extent, the Rents were
used for a purpose other than that for which they were intended.
The Rents were less than the Real Property expenses. Thus, for
most of the period during which the Debtor was collecting them,
this element was not satisfied. However, the Debtor admitted that
she stopped making the mortgage payment in November 2003 because
she no longer had sufficient funds to make a complete payment and
the lenders would not accept a partial payment. She did not
testify that she stopped collecting and using the Rents. However,
the amount of the Rents collected and used for a purpose other
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than that for which they were intended was not established. It
was Welty’s burden to present sufficient evidence to establish
this amount.
In addition, Welty did not meet his burden of proof by
establishing circumstances indicating fraud. The Debtor testified
that both Welty and Judge Morgan knew she was using the Rents to
pay her living expenses at this time. She testified that she was
required to file reports with Judge Morgan monthly stating her
income and expenses, including the source of the income. She
testified that she had repeatedly asked for an award of spousal
support on the ground that she had insufficient income from other
sources at that time to pay her living expenses. She testified
that she expected there to be a reckoning concerning the uses of
the community property through the division of the Real Property
sale proceeds.
Based on the foregoing, the Court is unable to find by a
preponderance of the evidence that the Debtor’s use of the Rents
from November 2003 until March 2004, when she filed her bankruptcy
petition, was fraudulent. Thus, Welty has failed to establish the
first and third elements of a claim for embezzlement in connection
with the Rent Claim.
b. Fidelity Accounts Claim
The complaint also alleged that the Debtor’s use of Welty’s
share of the Fidelity Accounts constituted embezzlement, giving
rise to a nondischargeable claim under 11 U.S.C. § 523(a)(4) and
conversion qualifying as a willful and malicious injury, giving
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rise to a nondischargeable claim under 11 U.S.C. § 523(a)(6). As
stated above, the elements of a claim for embezzlement are (1)
property rightfully in the possession of a nonowner, (2) the
nonowner’s appropriation of the property to a use other than that
for which it was intended, and (3) circumstances involving fraud.
Littleton, 942 F.2d at 555.
The elements of a claim for conversion under state law are
“the wrongful exercise of dominion over the personal property of
another. [Citation omitted.]” Peklar, 260 F.3d at 1037. In
addition, to establish as a claim for conversion as a willful and
malicious injury, the creditor must prove that the conversion was
“willful”: i.e., that the debtor intended to injure the creditor
or his property or was substantially certain that injury would
occur. Jercich, 238 F.3d at 1208.; Su, 290 F.3d at 1144-46.
The creditor must also prove that the debtor acted with “malice”:
i.e., committed a wrongful act, intentionally, which necessarily
causes injury, without just cause and excuse. Jercich, 238 F.3d
at 1209.
The first element of a claim for embezzlement and a state law
conversion claim are essentially the same: i.e., the property used
wrongfully by the Debtor must belong to someone else. In
determining whether Welty has satisfied this element, the Court
divides Welty’s claim into two time periods. This first time
period relates to the Debtor’s use of the funds from the end of
February 2000 through March 15, 2003. February 27, 2000 was
determined to be the date of the Debtor’s and Welty’s legal
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3Judge Morgan clearly knew about the Debtor’s withdrawal of
some of these funds. In the March 15 Order, he charged the
Debtor with receiving (1) $23,354 from Account # 4394 and (2)
$16,000 from the sale of certain stock and $685 in funds held in
Account # 1230. After a further hearing, in a subsequent order
(the “April 19 Order”), Judge Morgan charged the Debtor with
having received an additional $23,708.29 in funds held in
Account #1230. Judge Morgan ordered these amounts reimbursed from
the sale proceeds of the Real Property. In another proceeding, the
Court has ruled that these rulings gave Welty a separate property
interest in the Real Property.
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separation. On March 15, 2003, Judge Morgan issued an order
dividing the Fidelity Accounts. Thus, during this period, the
Fidelity Accounts were community property. The second time period
relates to her use of the funds thereafter until they were
exhausted, in November 2003. During this period, the Debtor and
Welty owned the remaining contents of the Fidelity Accounts in
equal parts as their separate property.
According to account statements presented by Welty at the
bankruptcy court trial, at the end of February 2000, there were
five Fidelity Accounts containing stock or money market with a
total value of $98,672.78: i.e., Accounts ## 1230, 3617, 4394,
5851, and 6413. According to the account statements, on or about
March 15, 2003, the four accounts still in existence had a balance
of approximately $23,000. Thus, between the end of February 2000
and March 15, 2003, the Debtor consumed approximately $75,000 of
the funds in the accounts.3 In the March 15 Order, Judge Morgan
divided the contents of these four accounts: i.e., Accounts ##
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4Account # 1230 had apparently been closed by that time,
all the funds having been withdrawn and spent by the Debtor.
5Welty asserted that, under California law, during a
dissolution proceeding, each spouse is enjoined from
transferring or consuming any commmunity property assets and
that the Debtor’s consumption of the contents of the Fidelity
Accounts before March 15 Order was issued violated this
injunction. This assertion might support a claim of
nondischargeability on some other legal basis than those
asserted by Welty, who was acting pro se by the time of the
trial. However, the Court is unable to act as Welty’s advocate
in this proceeding by supplying alternative legal theories to
support his claim.
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3617, 4394, 5851, and 6413.4 However, until he did so, the
accounts and their contents constituted community property. As a
consequence, the Debtor’s use of the funds could not qualify as
either an embezzlement or conversion.5
Once the accounts were divided, however, the Debtor did not
own fifty percent of the remaining Fidelity Accounts. As noted
above, at that time, the accounts contained approximately $23,000.
Half of this amount, or approximately $11,500, belonged to Welty.
She was never expressly authorized to spend Welty’s share of the
remaining funds. Thus, Welty established the first two element of
an embezzlement claim in this amount: i.e., (1) property
rightfully in the possession of a nonowner and (2) the nonowner’s
appropriation of the property to a use other than that for which
it was intended. Littleton, 942 F.2d at 555. He also established
a state law claim for conversion: i.e., “the wrongful exercise of
dominion over the personal property of another.” Peklar, 260 F.3d
at 1037.
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However, in order to obtain a nondischargeable judgment on
embezzlement grounds with respect to this amount, Welty must also
establish circumstances indicating fraud. In order to obtain a
nondischargeable judgment on grounds of conversion qualifying as
a willful and malicious injury, Welty must also establish that the
Debtor subjectively intended to injure him or his property and
that she acted with “malice,” as defined above. The Court
concludes that Welty has failed to meet his burden of proof on
these remaining elements of each claim.
The Debtor testified that she had no choice but to use these
funds for her living expenses since she had no other source of
income. For a portion of the period in question, presumably, she
used some of the funds withdrawn to pay the Real Property
expenses. The Debtor testified that she did not intend to injure
Welty by using the contents of the Fidelity Accounts because she
always assumed an adjustment would be made in the distribution of
the Real Property sale proceeds. Given Judge Morgan’s rulings in
the March 15 Order, it was reasonable for her to make this
assumption. Moreover, as the Debtor’s counsel pointed out in
closing argument, by at least December 2002, Judge Morgan and
Welty knew that the Debtor had been depleting the Fidelity
Accounts. Yet, no order was issued prohibiting the further
withdrawal of their contents. Under these circumstances, the
Court is unable to find that the circumstances indicated fraud or
that the Debtor had the subjective intent to injure Welty or his
property or had the subjective knowledge that he or his property
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would be injured. As a result, the Fidelity Accounts Claim also
fails.
CONCLUSION
Welty failed to carry his burden of proving that the Debtor’s
discharge should be denied under 11 U.S.C. § 727(a)(2)(A). He
also failed to carry his burden of proving that the Rent Claim
constituted an embezzlement entitled to be excepted from the
Debtor’s discharge under 11 U.S.C. § 523(a)(4). Finally, Welty
failed to carry his burden of proving that the Fidelity Accounts
Claim constituted either an embezzlement under 11 U.S.C. §
523(a)(4) or a conversion qualifying as a willful and malicious
injury under 11 U.S.C. § 523(a)(6). Counsel for the Debtor is
directed to submit a proposed form of order in accordance with
this decision.
END OF DOCUMENT
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COURT SERVICE LIST
Frank A. Welty, III
133 W. Ramshorn St.
Dubois, WY 82513-0277
Malcolm Leader-Picone
Bartlett & Leader-Picone, LLP
2201 Broadway, Ste. 803
Oakland, CA 94612
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