Lam v. Lam

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Oo A IN On OF FP W NN

NN NY NY NY NY NY BB RP BP RP RP BP RB
an OFF FF WD NY FP OO OO WAN DUH FP W NY FP CO

INFORMATION

Entered on Docket
March 08, 2007

GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA

Signed: March 07, 2007

at -

wh, fi NALS
LESLIE TCHAIKOVSKY
U.S. Bankruptcy J udge

UN TED STATES BANKRUPTCY COURT
NORTHERN DI STRI CI OF CALI FORN A

In re No. 05- 44314 TT
Chapter 7
RI CHARD CONRAD LAM
Debt or
ee /
CAROL A. LAM A.P. No. 05-4455 AT
Pl ai ntiff,
vs.
RI CHARD CONRAD LAM
Def endant .
ee /
BARRY L. SI DERS A.P. No. 05- 04447 AT
vs. (Consolidated for Trial )
RI CHARD CONRAD LAM
Def endant .
/

MEMORANDUM OF DECISION AFTER TRI AL
In one of the two above-captioned adversary proceedings, Carol
Lam (“Carol”), the forner spouse of the debtor Richard Conrad Lam

(“Richard”), seeks to except a debt in the anount of $208, 500 based

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on a state court judgment in the couple’s dissolution proceeding
(the “Conversion Debt”) from Richard’s chapter 7 bankruptcy
discharge pursuant to either 11 U.S.C. § 523(a)(4) or § 523(a)(15).
In the second adversary proceeding, Carol’s dissolution attorney
(“Siders”) seeks to except from Richard’s discharge pursuant to 11
U.S.C. § 523(a)(15) a $29,000 debt for attorneys’ fee that Richard
was ordered to pay to Siders as a sanction in the dissolution
proceeding (the “Attorneys’ Fee Debt”). 	For the reasons stated
below, the Court concludes that the Conversion Debt is
nondischargeable under 11 U.S.C. § 523(a)(4) and that the
Attorneys’ Fee Debt is nondischargeable under 11 U.S.C. §
523(a)(15).
SUMMARY OF FACTS
In 1999, a marital dissolution proceeding was commenced in
state court to dissolve Carol’s and Richard’s marriage. 	Various
evidentiary hearings were conducted during the proceeding. 	In one
of these hearings, the issue was whether Richard was liable to
reimburse Carol for $417,000 of community property that he had used
to pay a pre-marital debt: i.e., child support for his children
from a prior marriage.
The state court judge, the Honorable James H. Libbey (“Judge
Libbey”), concluded that Richard was liable to reimburse Carol on
this account. 	In November 2004, he issued a decision (the “Libbey
Decision”), ordering Richard to reimburse Carol for either one-half
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1 Cal. Fam. Code § 915 provides, in pertinent part, as
follows: “...a child or spousal support obligation of a married
person that does not arise out of the marriage shall be treated as
a debt incurred before marriage....(b) If property in the community
estate is applied to the satisfaction of a child or spousal support
obligation of a married person that does not arise out of the
marriage, at a time when nonexempt separate income of the person is
available but is not applied to the satisfaction of the obligation,
the community estate is entitled to reimbursement from the person
in the amount of the separate income,....” 	Cal. Fam. Code § 915
(2007).
2 As a result, Richard’s case and these adversary proceedings
are not governed in any pertinent aspect by the changes to the
Bankruptcy Code made by the Bankruptcy Abuse Prevention and
Consumer Protections Act of 2005 (“BAPCPA”).
3
of the $417,000, if he used his separate property to make the
reimbursement, or for the entire amount, if he used community
property. 	He based this decision on Cal. Fam. Code § 915 which
gives a spouse a right of reimbursement in a dissolution proceeding
when the other spouse has used community property to pay child or
spousal support from a prior marriage when he or she had separate
property income available. 1 	He found that, during the marriage,
Richard had separate property available to pay the child support
from his prior marriage in the form of separate property retirement
and investment accounts.
On August 4, 2005, Richard filed a bankruptcy petition,
commencing the above-captioned chapter 7 case. 2 	Thereafter, the
two above-captioned adversary proceedings were filed, seeking to
except the Conversion Debt and the Attorneys’ Fee Debt from
Richard’s discharge. 	The two proceedings were consolidated for
trial, were 	tried to the Court on February 12, 2007, and, at the
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conclusion of the trial, were taken under submission.
DISCUSSION
A. 	APPLICABLE LAW
The Bankruptcy Code is designed to afford individual debtors a
“fresh start.” 	In re Bugna, 33 F.3d 1054, 1059 (9th Cir. 1994).
Dischargeability provisions are generally construed liberally in
favor of debtors. 	Id. 	However, 11 U.S.C. § 523(a) limits the
scope of the “fresh start” by denying the debtor a discharge for
certain types of debts. 	In re Bammer, 131 F.3d 788, 793 (9th Cir.
1997) (en banc). 	In Cohen v. de la Cruz, 523 U.S. 213 (1998), the
Supreme Court explained that “[t]he various exceptions to discharge
in 523(a) reflect a conclusion on the part of Congress ‘that the
creditors’ interest in recovering full payment of debts in these
categories outweigh[s] the debtors’ interest in a complete fresh
start.’” Id. at 222 (quoting Grogan v. Garner, 498 U.S. 279, 287
(1991)).
Section 523(a)(4) excepts from an individual debtor’s chapter
7 discharge a debt for defalcation while acting in a fiduciary
capacity. 	See 11 U.S.C. § 523(a)(4); Banks v. Gill Distribution
Centers, Inc., 263 F.3d 862, 870 (9 th Cir. 2001). 	Defalcation has
been defined as the “misappropriation of trust funds or money held
in any fiduciary capacity; [the] failure to properly account for
such funds. 	Under § 523(a)(4), defalcation includes the innocent
default of a fiduciary who fails to account fully for money
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3 BAPCPA amended 11 U.S.C. § 523(a)(15) so that all
dissolution related debts are now nondischargeable. 	See 11 U.S.C.
§ 523(a)(15)(2005). 	However, as noted above, this proceeding is
not subject to BAPCPA.
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received.” 	In re Lewis, 97 F.3d 1182, 1186 (9th Cir. 1996) (quoted
in Banks at 870). 	Such a debt is nondischargeable under §
523(a)(4) only “where (1) an express trust existed, (2) the debt
was caused by fraud or defalcation, and (3) the debtor acted as a
fiduciary to the creditor at the time the debt was created.” 	In re
Niles, 106 F.3d 1456, 1459 (9th Cir. 1997).
Section 523(a)(15) excepts from an individual debtor’s chapter
7 discharge a nonsupport debt arising from a dissolution proceeding
under Section 523(a)(15) unless the debtor is either unable to pay
the debt or the debtor would suffer greater prejudice if the debt
were excepted from his discharge than the debtor’s former spouse
would suffer if the debt were discharged. 	See 11 U.S.C. §
523(a)(15). 3
Generally, the plaintiff in a nondischargeability action bears
the burden of proof on all elements of the claim by a preponderance
of the evidence. 	See Grogan v. Garner, 498 U.S. 279 (1991). 	Thus,
Carol has the burden to proof with respect to her claim to except
the Conversion Debt from Richard’s discharge pursuant to 11 U.S.C.
§ 523(a)(4). 	However, once the party seeking to except a debt
under 11 U.S.C. § 523(a)(15) meets her burden of proving that the
debt is a nonsupport debt arising from a dissolution proceeding,
the burden shifts to the debtor to prove that he is unable to pay
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the debt. 	In re Jodoin, 209 B.R. 132 (Bankr. 9th Cir. 1997); In re
Morris, 193 B.R. 949, 952 (Bankr. S.D. Cal. 1996).
B. 	DISCHARGEABILITY OF CONVERSION DEBT UNDER 11 U.S.C. §
523(a)(4)
As set forth above, 11 U.S.C. § 523(a)(4) renders
nondischargeable a debt for defalcation by a fiduciary. 	The
question of whether the debtor was a fiduciary with respect to the
claimant is governed by federal law. 	In re Cantrell, 329 F.3d
1119, 1125 (9th Cir. 2003); In re Gergely, 110 F.3d 1448, 1450 (9th
Cir. 1997). 	Under federal law, the fiduciary relationship must
arise from an express trust imposed before and without reference to
the wrongdoing that created the debt. 	Cantrell, 329 F.3d at 1125;
In re Lewis, 97 F.3d 1182, 1185 (9 th Cir. 1996). 	However, state
law is consulted to determine whether the requisite trust
relationship exists. 	Cantrell, 329 F.3d at 1125; Lewis, 97 F.3d at
1185.
Under the California law, spouses act as fiduciaries inter se
with respect to the management and control of the community assets.
Cal. Family Code §§ 1100(e), 1101(a) (2007). 	These provisions make
spouses fiduciaries with respect to community property in the
narrow sense required by 11 U.S.C. § 523(a)(4). 	Thus, a
defalcation by a debtor with respect to his use of the community
property will give rise to a nondischargeable debt under 11 U.S.C.
§ 523(a)(4).
As noted above, based on the evidence presented to him at
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trial in the dissolution proceeding, Judge Libbey found that
Richard used $417,000 of community property to pay child support
from a prior marriage at a time when he had separate property in
the form of retirement and investment accounts available to make
the payments. 	Based on this finding, Judge Libbey ordered Richard
to reimburse Carol for this use of their community property. 	He
based this order on the conclusion that Richard had breached Cal.
Fam. Code § 915(b) which requires a spouse to make such payments
first from separate property income if possible.
Richard contends that, although this order created a debt to
Carol, it did not constitute a debt arising from a breach of his
fiduciary duty. 	He notes that Cal. Fam. Code § 915(b) requires
only that separate property income be used first to make child
support payments from a prior marriage, not separate property. He
notes that the only evidence presented was that he had separate
property, not separate property income, at the time he made the
payments.
This argument might be persuasive if one was limited to an
examination of the plain language of the statute. 	However, the
comments to Cal. Fam. Code § 915 indicate that the the California
Legislature used the terms “income” and “property” interchangeably.
See Cal. Fam. Code § 915 cmt. (2007) (“the general rule is that the
separate property of the obligor spouse and the community estate of
the marriage is liable for the support obligation [of the prior
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4Carol asserted 11 U.S.C. § 523(a)(15) as an independent
ground for excepting the Conversion Debt from Richard’s discharge.
Since the Court concludes that the Conversion Debt is
nondischargeable under 11 U.S.C. § 523(a)(4), it need not consider
this alternative ground. 	However, the Court is mindful that, based
on its ruling, the Conversion Debt will survive Richard’s discharge
and thus affect his ability to pay the Attorneys’ Fee Debt.
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marriage], other than the earnings of the non-obligor spouse”).
Based on the foregoing, the Court concludes that Richard’s use of
the community property to pay child support from his prior marriage
constituted a breach of fiduciary duty under 11 U.S.C. § 523(a)(4).
Thus, the Conversion Debt is nondischargeable.
C. 	DISCHARGEABILIITY OF ATTORNEYS’ FEE DEBT UNDER 11 U.S.C. §
523(a)(15)
Siders seeks to except the $29,000 Attorneys’ Fee Debt pursuant
to 11 U.S.C. § 523(a)(15). 4 	As noted above, Siders has the initial
burden of establishing that the debt sought to be excepted from the
debtor’s discharge under 11 U.S.C. § 523(a)(15) is a nonsupport
debt arising in connection with a dissolution proceeding. 	This
burden was easily satisfied. 	The burden then shifted to Richard to
establish either that he is unable to pay the Attorneys’ Fee Debt
or that he would be more greatly prejudiced if the Attorneys’ Fee
Debt were excepted from his discharge than Carol would be if it
were discharged. 	Richard presented no evidence concerning Carol’s
financial condition nor did Carol. 	As a result, the Court has no
basis for balancing the equities. 	Thus, Richard was required to
prove, by a preponderance of the evidence, that he was unable to
pay the Attorneys’ Fee Debt. 	See 11 U.S.C. § 523(a)(15)(A).
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5Richard testified that he had some health problems. 	However,
the Court was not convinced that these problems were sufficiently
serious to interfere with his ability to work for the next ten
years or so.
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The evidence presented established that Richard is 63 years
old, in relatively good health, and is an experienced tax attorney
with a history of earning in excess of $200,000 a year. 5 	From 1998
to 2001, he was employed as an area director in the International
Tax Group with Ernst & Young LLP in Houston, Texas. 	Before that,
he was employed by Pricewaterhouse Coopers, Chevron Corporation,
and the Gulf Oil Corporation. 	According to Richard, in 2001, he
was terminated by Ernst & Young. 	He moved back to California and
attempted to obtain employment in the field of his tax specialty.
When he was unsuccessful, he took the California Bar Examination,
and began practicing law as a sole practitioner, primarily in the
area of family law, with which he had no prior experience.
Richard testified that his net income during 2005 was $23,317
and during 2006 $16,925. 	He testified that his income during 2006
is more indicative of his ability to pay his debts since in 2005 he
earned a one-time consulting fee of $18,000. 	His personal expenses
are approximately $21,000 per year. 	In addition to his personal
expenses, for the next three years, he is obligated to pay $1,171
per month in child support and $964 per month in alimony. 	He also
has nondischargeable debt for child support arrearages of $167,288,
tax debt of $38,718, and, now the $208,500 Conversion Debt,
for a total of $414,506. 	He contends that this is sufficient to
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meet his burden of proving by a preponderance of the evidence that
he is unable to pay the Attorneys’ Fee Claim.
The Court is not persuaded. 	The Court accepts as a
possibility that Richard’s financial circumstances will not improve
during the remainder of his working life or at least not
sufficiently to pay his other nondischargeable debt and the
Attorneys’ Fee Debt. 	However, the Court finds that it is equally
possible that Richard will continue to practice law for another ten
years and that his income will increase substantially. 	This could
occur in various ways. 	He could find employment at a creditable
law firm. 	The Court is unable to believe that an experienced tax
attorney, employed by a creditable firm, would be paid less than
$150,000 a year. 	With a salary of this amount, given a continued
working life of another ten years, Richard could easily pay all his
nondischargeable debt, including the Attorneys’ Fee Debt.
Alternatively, Richard could decide to continue to practice on his
own, perhaps even in the family law area. 	Again, it is not
unreasonable to expect a family law attorney to earn $150,000
annually.
Since the Court finds that either scenario is equally
possible, it is forced to conclude that Richard has failed to meet
his burden of proving an inability to pay the Attorneys’ Fee Claim.
Moreover, 11 U.S.C. § 523(a)(15) requires the Court to consider the
debtor’s property as well as his income in determining his ability
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to pay a nonsupport debt arising from a dissolution proceeding. 	It
was undisputed that Richard has approximately $186,900 in an
Individual Retirement Account. 	Although this amount would be
subject to taxation when withdrawn, even if it were reduced in this
fashion, it would still provide a substantial additional amount
with which Richard could either pay his personal expenses or his
nondischargeable debt. 	Based on these findings, the Court
concludes that the Attorneys’ Fee Debt is nondischargeable under 11
U.S.C. § 523(a)(15).
CONCLUSION
The Court concludes that the Conversion Debt is
nondischargeable under 11 U.S.C. § 523(a)(4). 	Carol’s right to
reimbursement pursuant to Cal. Fam. Code § 915(b) for half the
community property used by Richard to pay child support from his
prior marriage qualifies as a debt for defalcation by a fiduciary
within the meaning of 11 U.S.C. § 523(a)(4). 	The Court concludes
that the Attorneys’ Fee Claim is nondischargeable under 11 U.S.C. §
523(a)(15). 	While Richard has limited income at present and
substantial other nondischargeable debt, including now the
Conversion Debt, Richard failed to persuade the Court that, more
likely than not, his future income would not be sufficient to
enable him to pay the Attorneys’ Fee Debt. 	Counsel for Carol is
directed to submit a proposed form of judgment in accordance with
this decision.
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END OF DOCUMENT
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COURT SERVICE LIST
Chris D. Kuhner
Kornfield, Paul & Nyberg, P.C.
1999 Harrison Street, Suite 2675
Oakland, CA 94612
Richard C. Lam
1470 Creekside Drive, Unit 6
Walnut Creek, CA 94596
Jon R. Vaught
Law Offices of Vaught and Boutris
80 Swan Way #320
Oakland, CA 94621
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