Bankruptcy

M.D. Ga. - Collateral Estoppel For Probate Court Judgment; Defalcation While Acting In Fiduciary Capacity

By Scott Riddle

 RLI Ins. Co. v. Waters (In re Waters), Adv. No. 09-5014, 2009 Bankr. LEXIS 3865 (Bankr. M.D. Ga. Dec. 7, 2009) (J. Hershner). Debtor was the guardian of his minor son, who was injured in a car accident and received $15,522.74 in settlement proceeds.  Plaintiff was the issuer of a surety bond in the amount of $16,000 the probate case.

In 2003, the Probate Court determined that "After receiving said [settlement] funds, Teheran Waters [Defendant], guardian made numerous unauthorized expenditures or otherwise encroached upon the corpus without leave of the Court." The probate court determined that "[$ 11,755.09 of] expenditures itemized on the return are unauthorized and [are] the individual responsibility of the guardian [Defendant] and his wife."

Debtor subsequently filed a Chapter 13 case and Plaintiff filed an action to except the Probate Court award from Debtor's discharge pursuant to  § 523(a)(4), fraud or defalcation while acting in a fiduciary capacity.  Plaintiff filed a motion for summary judgment based on the Probate Court order, and Debtor did not respond.  The Court granted the motion.

The Court is persuaded that Plaintiff is the proper party to bring thisnondischargeability action. A surety who pays the debt of his principal is subrogated to all the rights of the creditor. The surety may proceed immediately against his principal for the debt paid. O.C.G.A. §§ 10-7-41,-56 (2009).

Plaintiff was called upon to honor its surety bond. Plaintiff is subrogated to all rights that the successor guardian could have asserted against Defendant. This includes the right to contend that Defendant's obligation is nondischargeable under § 523(a)(4)...  Defendant, as guardian, was already a fiduciary when he encroached upon the corpus of the settlement finds...The Court is persuaded that Defendant, as his minor son's guardian, was "acting in a fiduciary capacity" for purposes of § 523(a)(4).

Next, Plaintiff must show that Defendant committed a defalcation...The probate court, after a hearing where Defendant was represented by counsel, determined that Defendant, as guardian, "made numerous unauthorized expenditures or otherwise encroached upon the corpus without leave of the Court." A guardian, without leave of court, cannot spend money from the corpus of the ward's estate. Leigh v. Fears, 145 Ga. App. 644, 244 S.E.2d 616, 618 (1978). See O.C.G.A. § 29-2-2 (2003).

The Court is persuaded that collateral estoppel applies to the probate court's determination. The issue of mismanagement of funds was raised and litigated in the probate court proceeding and was necessary to the probate court's final decision. Defendant was represented by counsel. The probate court is a court of competent jurisidiction for purposes of collateral estoppel...

The Court is persuaded that Defendant, acting as a fiduciary, misappropriated funds of his ward for Defendant's personal use. The Court is persuaded that Defendant's obligation is nondischargeable under § 523(a)(4). The Court is persuaded that Plaintiff is entitled to summary judgment.

Scott Riddle's practice focuses on bankruptcy and litigation. Scott has represented Chapter 7 and 11 debtors, creditors, trustees and other interested parties in bankruptcy cases and bankruptcy litigation.  For more information, click here.

Full post as published by Georgia Bankruptcy Blog on January 02, 2010 (boomark / email).