Rossi v. Morse (In re Morse)

In re: PATRICIA MORSE, Debtor.

ESTATE OF ALBERTA M. ROSSI,

by and through Robert Rossi, Executor, Plaintiff, v. PATRICIA MORSE, Defendant.

Case No. 17-61271

Adv. Pro. No. 18-80001

UNITED STATES BANKRUPTCY COURT NORTHERN DISTRICT OF NEW YORK

July 26, 2018

Chapter 7

APPEARANCES:

Lynn E'Elia Temes & Stanczyk

Attorneys for Plaintiff

100 Madison Street

Tower I - Suite 1905

Syracuse, New York 13202

David C. Temes, Esq.

David G. Goldbas, Esq.

Attorney for Debtor-Defendant

Adirondack Bank Building

185 Genesee Street, Suite 905

Utica, New York 13501

Honorable Diane Davis, United States Bankruptcy Judge

MEMORANDUM-DECISION AND ORDER

I. Introduction

Patricia A. Morse ("Debtor") filed a chapter 7 bankruptcy petition on October 4, 2017. On January 8, 2018, Robert F. Rossi, as Executor of the Estate of Alberta M. Rossi ("Plaintiff"), initiated this adversary proceeding by filing a complaint against Debtor seeking to except Plaintiff's debt from Debtor's discharge under 11 U.S.C. § 523(a)(2)(A), (a)(4), and (a)(6) (the "Complaint," ECF Adv. No. 1).¹ On February 2, 2018, Debtor filed a motion to dismiss the Complaint pursuant to Federal Rule of Civil Procedure 12(c) ("Rule 12(c)") (the "Motion," ECF Adv. No. 5). Plaintiff filed an objection to the Motion on March 1, 2018 (the "Objection," ECF Adv. No. 9), and Debtor filed a reply on March 6, 2018 (the "Reply," ECF Adv. No. 10). The Court heard oral argument on the Motion on March 8, 2018, and took the matter under advisement. For the reasons stated below, the Motion is granted in part and denied in part.

II. Jurisdiction

The Court has jurisdiction over this adversary proceeding and the Motion under 28 U.S.C. §§ 1334(a) and (b) and 157(a). This is a core proceeding under 28 U.S.C. § 157(b)(2)(I) in which the Court may enter a final order and judgment pursuant to 28 U.S.C. § 157(b)(1). This Memorandum-Decision and Order constitutes the Court's findings of fact and conclusions of law pursuant to Federal Rule of Bankruptcy Procedure 7052.

III. State Court Action

In 2012, Debtor's now deceased mother, Alberta M. Rossi ("Rossi"), commenced an action against Debtor in the New York State Supreme Court, County of Oneida, titled Alberta M. Rossi v. Patricia A. Morse, for the imposition of a constructive trust, which was assigned Civil Index Number CA2012-002228 (the "State Court Action"). The State Court Action was premised on events occurring over the course of nearly a decade. Beginning in 2003, Rossi began regularly transferring the ownership of certain financial accounts that were in her sole name to joint accounts in the name of herself and Debtor. From there, Debtor transferred monies to accounts solely in her name. Over time, some of the funds that originated from Rossi were co-mingled with Debtor'sown funds. At some point thereafter, the parties' relationship deteriorated and Rossi sued Debtor to recover monies that she claimed she entrusted to Debtor for her to use in connection with Rossi's care, benefit, and enjoyment.

On May 5, 2014, following a bench trial, the Honorable Patrick F. MacRae, Justice of the Supreme Court, issued a lengthy decision rejecting Debtor's defense that Rossi transferred the funds in question to Debtor as a gift, and dismissing Debtor's counterclaims (the "State Court Decision," Mot., Ex. 3.) Judge MacRae determined that, based on the record as a whole, Rossi's sole cause of action was founded on a theory of constructive trust. Under New York law, the requisite elements for the imposition of a constructive trust are: (1) a confidential or fiduciary relationship; (2) a promise; (3) a transfer in reliance thereon; and (4) unjust enrichment. (State Court Decision at 4 (citing Sharp v. Kosmalski, 40 NY2d 119, 121 (1976)). As to the first element, because Rossi and Debtor were mother and daughter, Judge MacRae found that a confidential relationship existed between the parties. With respect to certain transfers, Judge MacRae found that Debtor's "conduct demonstrate[d] that she knew the money was not hers and that she diverted it to her own account without the consent or permission of [Rossi]" and that she "knew that she did not have the ownership of the funds that title to the account[s] indicated, so she acted deceptively to avoid alerting [Rossi]." (State Court Decision at 15-16.) Upon examination of multiple transactions between the parties, Judge MacRae found that Debtor "implicitly promised to hold that money in trust for [Rossi]" and Rossi transferred the funds to Debtor in reliance on that promise. (State Court Decision at 17.) Finally, Judge McRae found that Debtor would be unjustly enriched unless she was denied access to monies in a comingled account that rightfully belonged to Rossi. (Id.)

On April 27, 2016, following the appointment of an expert to conduct a forensic accounting of the financial evidence adduced at trial and to render an advisory report to the state court, Judge MacRae issued an order adjudicating damages to Plaintiff, as the substituted plaintiff in the State Court Action following Rossi's death, in the amount of $404,634.52 and directing the immediate release of certain funds to Rossi (the "State Court Damages Order," Comp., Ex. B). Debtor appealed, and the New York State Appellate Division for the Fourth Department affirmed both the State Court Decision and the State Court Damages Order by Memorandum and Order issued September 29, 2017. (Obj., Ex. 1.)

IV. Adversary Proceeding

The Complaint asserts three counts and alleges in relevant part as follows. Count One of the Complaint alleges that Debtor was a trustee and therefore a fiduciary of the constructive trust established by the State Court Decision. It further alleges that Debtor knew the funds held in trust were not hers and she diverted them to her own personal financial and investment accounts without the consent or permission of Rossi. Because Debtor misappropriated trust funds by diverting the same to her personal accounts, she committed fraud or defalcation while acting in a fiduciary capacity, such that her debt to Plaintiff should be deemed nondischargeable pursuant to § 523(a)(4). Count Two of the Complaint alleges that, on the same facts, Debtor willfully and maliciously converted the trust funds to her own use, such that her debt to Plaintiff should be deemed nondischargeable pursuant to § 523(a)(2). Count Three of the Complaint alleges that, also on the same facts, Debtor willfully and maliciously converted the trust funds to her own use, such that her debt to Plaintiff should be deemed nondischargeable pursuant to § 523(a)(6).

V. Arguments

Procedurally, Debtor argues that the Rooker-Feldman doctrine prevents this Court from acting in an appellate capacity to modify or set aside the State Court Decision. Debtor also contends that Plaintiff is now bound by the findings and decisions rendered by Judge McRae. According to Debtor, none of her conduct, as examined and ruled upon within the context of the State Court Action, supports the nondischargeability relief that Plaintiff seeks here under § 523(a).

As to the merits of Count One, Debtor argues that Plaintiff cannot sustain a claim against her for fraud or defalcation while acting in a fiduciary capacity under § 523(a)(4) because Debtor's relationship with Rossi was a confidential relationship. As such, Debtor was not a "fiduciary" for purposes of this subsection. In her Reply, Debtor also argues that Plaintiff cannot sustain a claim against her for embezzlement or larceny under this subsection, because she never tricked or deceived Rossi into transferring the funds to her. Notwithstanding the State Court Decision, Debtor continues to assert that she believed Rossi gifted the funds to her. As to the merits of Count Two, Debtor contends that Plaintiff cannot sustain a claim against her for money obtained by false pretenses, false representation, or actual fraud under § 523(a)(2)(A) because Debtor is not guilty of moral turpitude or intentional wrongdoing. Finally, as to the merits of Count Three, Debtor asserts that Plaintiff cannot sustain a claim against her for willful and malicious injury under § 523(a)(6) because she did not act willfully or maliciously, namely, Debtor argues that she did not act with the specific intent of depriving Rossi of the funds needed for her care and well-being and she did not act without just cause or excuse because she believed the funds were gifted to her.

Conversely, as determined by Judge McRae and affirmed on appeal at the state court level, Plaintiff argues that Debtor undertook acts to deceive Rossi in order to transfer funds to her own accounts. According to Plaintiff, Judge McRae's findings and conclusions are relevant to thisnondischargeability proceeding, and Debtor's conduct is the type of conduct that violates the principals and express cited provisions of § 523(a). Moreover, Plaintiff contends that Debtor's pre-and post-bankruptcy conduct, i.e., her continued failure to comply with Judge McRae's directives to place certain funds in a joint account with Rossi and, ultimately, to account for the funds taken and turn over the same to Plaintiff, independently supports a determination of nondischargeability on the theories advanced by Plaintiff in this proceeding.

As to the merits of Count One, Plaintiff asserts that Debtor promised to hold Rossi's financial assets for her benefit and to use them only for that purpose, which qualifies Debtor as a fiduciary for purposes of § 523(a)(4), regardless of whether there was a written or express trust agreement. Further, as raised by Plaintiff for the first time in response to the Motion, even if Debtor could establish that she did not owe Rossi or Plaintiff a fiduciary duty, Plaintiff contends that it could recover against Debtor under the alternate theories of larceny or embezzlement. According to Plaintiff, Debtor wrongfully took funds from Rossi when she misrepresented to Rossi that she would deposit certain funds in Rossi's account but instead...