Can debts incurred through embezzlement be discharged in Bankruptcy?
Can debts incurred through embezzlement be discharged in Bankruptcy?
Brief edited by Dave Falvey ©
United States Bankruptcy Court
District of Connecticut
| IN RE: | ) | CASE NO. 08-32646 (LMW) |
| ) | ||
| DOUGLAS RICHARD BUDNICK a/k/a DOUGLAS R. BUDNICK |
) | CHAPTER 7 |
| ) | ||
DEBTOR |
) | |
| ---------------------------------------------------------- | ) |
| ADV. PRO. NO. INSURANCE COMPANY | ) | ADV. PRO. NO. 08-3117 |
| ) | ||
| ) | ECF NOS. 1 | |
| PLAINTIFFS | ) | |
| vs. | ) | |
| DOUGLAS RICHARD BUDNICK a/k/a DOUGLAS R. BUDNICK, |
) | |
| ) | ||
DEFENDANT |
) | |
| ---------------------------------------------------------- | ) |
ATTORNEY APPEARANCES
|
John B. Swanson, Esq. Nancy Gould, Esq. Title Insurance Company Gould, Killian & Wayne 280 Trumbull Street, 21st Floor Hartford, CT 06103-3514 |
Attorneys for Plaintiffs/Movants |
|
Joel M. Grafstein, Esq., Grafstein Law Offices 101 Melrose Drive Farmington, CT. 06032 |
Attorney for Defendant/Debtor |
Judge Lorraine Murphy Weil, Chief United States Bankruptcy. Dated: 20120409
MEMORANDUM OF DECISION (EXCEPT AS TO AMOUNT OF RELEVANT DEBT)
Introduction
I. PROCEDURAL BACKGROUND
The Debtor (“Budnick”) filed a chapter 7 petition on August 14, 2008. The Plaintiff (“CATIC”) filed a proof of claim of #3,390,306.26. Budnick was issued a discharge on November 14, 2008. CATIC filed this Complaint on October 10, 2008 seeking a determination that a judgment debt in its favor was not discharged in this chapter 7 proceeding.1 Trial was held and Budnick, his former wife, Denise Imbert (“Denise”) both testified.
II. FACTS
During their marriage, Budnick and Denise shared a joint bank account and had no separate bank accounts. Denise had control over household finances and she handled all of Budnick’s banking. Budnick owned two businesses and Denise was the accountant for both businesses. In 1996, Budnick and Denise decided to build a Skating Center. They obtained a small business loan of $2.5 million dollars.
They also contributed all their household funds. The Skating Center business was organized into a limited liability company and the other members of the LLC were five close relatives of Budnick. Denise did not own any stock and was not part-owner of the limited liability company.
As accountant and bookkeeper of the Skating Center LLC, Denise handled all the funds; she had signing authority for all checks. Budnick gave Denise this authority over the LLC’s financial matters because Denise was an accountant. Budnick and Denise were not paid salaries by the LLC; instead, Denise took money out of the profits of the LLC for household expenses.
The construction costs of building the Skating Center went beyond budget. Late in 1998, Denise informed Budnick that the Skating Center project was running out of money. Budnick failed to get additional investors. He asked Denise to ask her father for a loan. Denise told Budnick that her father agreed to extend them a loan although he had not.
When the Skating Center began operations, revenue was produced and Budnick thought that the revenues were sufficient to fund their operations. In truth, Denise had been funding the Skating Center from funds she embezzled from CATIC.
Denise was employed by CATIC as its assistant treasurer and accountant. She managed the financial accounts; she had control over the day-to-day and monthly accounting; she had authority over the financial records of CATIC; and, she had authority to sign and issue checks. Denise began issuing CATIC’s checks payable to herself and to the Skating Center LLC by forging the signature of the Vice-President of CATIC.
From November 1998 until December 2000, Denise issued thirty-five checks to herself and to the Skating Center LLC amounting to$3,000,000.00. Denise deposited these checks into the joint account shared by her and Budnick to pay for their household expenses; and, she deposited the checks for the Skating Center LLC into the account of the LLC to finance the operations of the Skating Center.
Denise made numerous false entries on the financial records of CATIC. When Denise went on vacation, the false accounting entries were discovered.
Budnick denied any knowledge of Denise’s embezzlements until 2000. Denise testified that she informed Budnick that the Skating Center funds were coming from CATIC sometime in January or February 2000 only. After 2000, Denise continued to issue checks to herself and to the Skating Center LLC after she told Budnick about her embezzlement.
Budnick denied having consented to any further embezzling of funds by Denise after he learned of it but Denise testified that Budnick knew and consented to the scheme to keep the Skating Center running until they had sold the Skating Center.
Budnick was criminally indicted for subscribing to a false tax return for 1999.
As part of his plea agreement, he signed a Stipulation of Offense Conduct. He served a prison term of six months and house arrest for four months. Denise was charged with mail fraud and tax fraud. Denise pleaded guilty to the charges and served a prison sentence of eighteen months. Over $800,000 was paid back by Budnick and Denise from December 29, 1999 to February 23, 2001.
CATIC filed a civil case for the repayment of the embezzled funds against the Skating Center LLC, Budnick and Denise on December 11, 2003. CATIC obtained a judgment in its favor in the amount of $2,268,604.16. CATIC wants the Judgment Debt to be excepted from the discharge of Budnick.
ISSUES:
- Whether or not the judgment debt was discharged in Budnick’s chapter 7 case;
- Whether or not there was actual fraud, false pretenses or false representations when Denise obtained the money from CATIC and used it to fund the operations of their household and the Skating Center;
- Whether or not all of Denise’s embezzlements can be imputed to Budnick such that the entirety of the Judgment Debt was not discharged in his chapter 7 case;
DECISION:
The judgment debt was not discharged in Budnick’s chapter 7 case. Denise unlawfully used, for her own personal benefit and for the benefit of the Skating Center, those funds which were entrusted to her by CATIC.
Denise’s embezzlements can be imputed to Budnick only to the extent that he had knowledge of the embezzlements and clothed Denise with authority as his agent to embezzle those funds.
REASONING:
11 U.S.C.A § 523(a)(2)(A) lists three separate grounds for non-dischargeability: actual fraud, false pretenses and a false representation in obtaining money, property or services. Fraud must be the method by which the embezzled funds were obtained.
The court concludes that Denise committed actual fraud against CATIC when she embezzled the funds. “Embezzlement” is the fraudulent appropriation of property by a person to whom such property has been entrusted, or into whose hands it has lawfully come. A debt may be excepted from discharge when the debtor personally commits actual, positive, and also when such actual fraud is imputed under vicarious liability principles.
Budnick is vicariously liable for Denise’s embezzlements. Vicarious liability is based on a public or social policy where because of the close relationship of two parties one party should be held to respond for the acts of the other. Spousal relationship does not automatically impose vicarious liability on Budnick for the wrongful acts of Denise, however.
The marital union must be coupled with a relationship of agency to serve as a basis for imputing fraud from Denise to Budnick.
As far as her accounting functions in the Skating Center LLC, Denise acted as Budnick’s agent. Budnick, the principal, is bound by and liable for the acts of his agent which she engaged in with authority from Budnick. Budnick and Denise agreed to engage in criminal or unlawful acts (the embezzlements) to pursue a scheme that resulted in damage to CATIC.
The act done by Denice renders Budnick liable for the damage done.
Fraud cannot be imputed to Budnick who did not know or had no reason to know of the fraud. Denise kept the earlier embezzlements a secret from Budnick. Denise embezzled funds from CATIC on her own.
Thus, the embezzlements prior to 2000 were not within the scope of Denise’s power as agent for Budnick. Since Budnick did not know about the embezzlements, there could not have been an express or implied authority from Budnick for Denise to commit the embezzlements prior to 2000. Budnick cannot be made vicariously liable for Denise’s embezzlements prior to 2000.
As for the embezzlements committed after January or February 2000 Budnick is vicariously liable on the theory of agency for then he already had knowledge of Denise’s actual fraud. They both agreed to continue embezzling CATIC’s funds to fund the Skating Center’s operations until it can be sold off. Denise’s actual fraud after January or February 2000 is imputed to Budnick. The Judgment Debt is nondischargeable only to the extent of the embezzlements after January or February 2000.
CONCLUSION:
The court concludes that the judgment debt was not discharged in this chapter 7 case pursuant to Section 523(a)(2)(A) but only to the extent that the debt relates to the embezzlements after January/February 2000.
The remainder of the Judgment Debt was discharged in this chapter 7 case. Since the record in this proceeding is insufficient for the court to liquidate the amount of the nondischargeable debt, the court will issue a separate order to schedule a status conference.