Whittaker v. Whittaker (In re Whittaker)

564 B.R. 115

IN RE James B. WHITTAKER, Debtor

Benjamin H. Whittaker III, in his individual capacity and in his capacities as Administrator of the Estate of Benjamin H. Whittaker, Deceased; Administrator of the Estate of Mary S. Whittaker, Deceased; Co–Successor Trustee of the Benjamin H. Whittaker Trust u/a May 1, 1992; and Co–Successor Trustee of the Mary S. Whittaker Trust u/a May 1, 1992, Carol Bell, in her individual capacity and in her capacities as Co–Successor Trustee of the Benjamin H. Whittaker Trust u/a May 1, 1992; and Co–Successor Trustee of the Mary S. Whittaker Trust u/a May 1, 1992, and Joan Mummery, in her individual capacity and in her capacities as Co–Successor Trustee of the Benjamin H. Whittaker Trust u/a May 1, 1992; and Co–Successor Trustee of the Mary S. Whittaker Trust u/a May 1, 1992, Plaintiffs

v.James B. Whittaker, Defendant

Case No. 13–15310–FJB

Adversary Proceeding No. 14–1017

United States Bankruptcy Court, D. Massachusetts, Eastern Division .

Signed January 17, 2017

Jodi L. Hause, Reed Smith LLP, Arthur W. Zamosky, Bernstein–Burkley, P.C., Pittsburgh, PA, Scott J. Robinson, Schneider, Smeltz, Ranney & LaFond P.L.L, Cleveland, OH, for Plaintiffs.

Gary W. Cruickshank, Law Office of Gary W. Cruickshank, Boston, MA, for Defendant.

MEMORANDUM OF DECISION

Frank J. Bailey, United States Bankruptcy Judge

By their complaint in this adversary proceeding, the three plaintiffs, all siblings of the chapter 7 debtor, seek a determination that the claims they assert against him are excepted from discharge under 11 U.S.C. § 523(a)(2)(A), (a)(4), and (a)(6). Their underlying claims, which remain unadjudicated, are for breaches of the defendant's duties as trustee of two inter vivos trusts and as attorney in fact under durable powers of attorney from the parties' father and mother. After a trial on the merits, I now enter the following findings of fact and conclusions of law.

PROCEDURAL HISTORY

On September 5, 2013, defendant James B. Whittaker ("Jay" or "the Debtor") filed a petition for relief under Chapter 7 of the Bankruptcy Code. On January 21, 2014, and in the bankruptcy case thereby commenced, the plaintiffs filed the complaint that commenced the present adversary proceeding.¹ The complaint includes a count objecting to discharge under 11 U.S.C. § 727(a), and for that reason alone, the Debtor has not yet received a discharge. The plaintiffs have since withdrawn the count objecting to entry of discharge, and therefore upon resolution of this proceeding, the Debtor will receive a discharge. The purpose of the present proceeding is to determine whether the plaintiffs' claims will be excepted from that discharge.

The plaintiffs are Benjamin H. Whittaker III, Carol Bell, and Joan Mummery (collectively, "the Plaintiffs"), each appearing individually and as a co-successor trustee of the Benjamin H. Whittaker Trust u/a May 1, 1992 and of the Mary S. Whittaker Trust u/a May 1, 1992. Benjamin H. Whittaker III also appears as administrator of the estates of the parties' deceased parents, Benjamin H. Whittaker and Mary S. Whittaker ("the Parents"). The complaint is based on allegations that by a combination of risky investments and self-dealing, the Debtor, as trustee of two inter vivos trusts of which he and the Plaintiffs were beneficiaries, and as attorney-in-fact for each of the Parents, breached his fiduciary duties to the Plaintiffs and the Parents and thereby lost virtually all of the value in the trusts.

Their complaint is organized into four counts. In Count I, the Plaintiffs assert that their claims against the Debtor should be excepted from discharge under § 523(a)(2)(A), as debt arising from false pretenses, false representations, or actual fraud. This count is based on allegations that, by affirmative misrepresentations to the Plaintiffs of the financial health of the inter vivos trusts, and also by failure to apprise them of dramatic changes in his investment strategy, the Debtor prevented the Plaintiffs from intervening and thereby averting losses.

Count II contains four separate sub-counts, each for a determination of nondischargeability under § 523(a)(4). In the first ("Count II.i"), the Plaintiffs contend that the Debtor's liability to them for failing to invest the funds as a "prudent investor" is excepted from discharge under § 523(a)(4) as a debt for a defalcation while acting in a fiduciary capacity. In the second and third ("Counts II.ii and II.iii"), the Plaintiffs contend that the Debtor's liability to them for his unauthorized appropriation for his own use of $107,500 that he used to purchase a time share and $38,000 that he transferred to his personal investment account should be excepted from discharge under § 523(a)(4) as debts "for embezzlement or larceny" within the meaning of that subsection. And in the fourth ("Count II.iv"), the Plaintiffs contend that the Debtor's failure to inform them of the declining balances in his trust accounts amounted to, and should be excepted from discharge under § 523(a)(4) as, fraud or defalcation while acting in a fiduciary capacity.

Count III also contains four sub-counts, each for a determination that certain of the Plaintiffs' claims are excepted from discharge by § 523(a)(6), which excepts from discharge debts for "willful and malicious injury by the debtor to another entity or to the property of another entity." 11 U.S.C. § 523(a)(6). The Plaintiffs seek such a determination as to the Debtor's liability to them for failing to invest the funds as a prudent investor ("Count III.i"), for his unauthorized appropriation for his own use of $107,500 of entrusted monies ("Count III.ii"), for his unauthorized appropriation for his own use of another $38,000 of entrusted monies ("Count III.iii"), and for his failure to account for trust assets and false representations to the Plaintiffs about the state and management of the trust assets ("Count III.iv").

Count IV is the Plaintiffs' objection under 11 U.S.C. § 727(a) to the Debtor's receipt of a discharge. The Plaintiffs withdrew this count on the record at trial.²

Before trial, the Plaintiffs moved for partial summary judgment. The Court granted the motion as to Count II.ii and denied it as to the remainder of the relief sought. As to Count II.ii, the Court held that the Debtor's liability for his unauthorized appropriation for his own use of $107,500 of entrusted monies is excepted from discharge under § 523(a)(4) as a debt "for embezzlement" within the meaning of that subsection. The ruling applies to the $107,500 that the Debtor withdrew from the trust and used to purchase a timeshare unit for his and his wife's enjoyment.

The parties submitted a joint pretrial memorandum, which included an extensive stipulation of facts. The matter was tried in a single day. Three witnesses testified at trial: defendant James Whittaker and Plaintiffs Joan Mummery and Benjamin H. Whittaker III. All exhibits were admitted by agreement. After trial, the parties submitted proposed findings and conclusions, and the Court then heard closing arguments. After closing arguments the parties submitted supplemental briefing regarding the dischargeability of any attorney's fees to which the Plaintiffs would be entitled on claims deemed to be excepted from discharge.

FINDINGS OF FACT

A. Debtor's Background in Finance and Investments

1. The Debtor, James Whittaker, known to his siblings, as Jay, is the oldest of the four siblings. His siblings, all plaintiffs herein, are Benjamin H. Whittaker III ("Ben"), Carol Bell ("Carol"), and Joan Mummery ("Joan"). Jay, Ben, Carol, and Joan are the children of Benjamin H. Whittaker ("the Father") and Mary S. Whittaker ("the Mother").

2. The Debtor received a Bachelor of Science degree in Economics from Miami University of Ohio in 1965 (Stipulation of Facts, ¶ 1) and a Master in Business Administration degree in Economics from the same institution (Stipulation of Facts, ¶ 2).³ He completed all coursework and the exam for a Ph.D. in Economics from Case Western Reserve University but chose not to finish his dissertation. (Stipulation of Facts, ¶ 3) In 1974, he received an M.B.A. in Finance from Case Western Reserve. (Stipulation of Facts, ¶ 4) He is a Chartered Financial Analyst, which is a credential often held by people in the investment industry who oversee mutual and pension funds. (Stipulation of Facts, ¶ 5)

3. The Debtor was a Credit Manager for Medusa Cement Company from approximately 1971 to 1974 (Stipulation of Facts, ¶ 6) and then was employed by Digital Equipment Corporation from 1974 through 1991 (Stipulation of Facts, ¶ 7). He began his employment with Digital Equipment Corporation as a credit manager and subsequently headed up their computer leasing operation. (Stipulation of Facts, ¶ 8) The Debtor subsequently took a position as corporate finance manager, where he was involved with convertible bond issues, stock issues, financing of real estate and multi-million dollar purchases of equipment for the purposes of depreciation. (Stipulation of Facts, ¶ 9) In 1982, the Debtor was made Chief Economist for the company and held that position until 1991. (Stipulation of Facts, ¶ 10) He was also a security analyst for several industries during that time period. (Stipulation of Facts, ¶ 11)

4. In or about 1995, the Debtor decided to become a financial advisor so he went to Bentley College and got a certificate in Financial Planning. (Stipulation of Facts, ¶ 12) He then started a financial advisory firm for individuals called Alden Associates that operated from 1996 to 1997. (Stipulation of Facts, ¶ 13) Alden Associates did financial planning and managed investments by obtaining power of attorney from individuals to invest their money with larger investment firms such as Charles Schwab or Fidelity. (Stipulation of Facts, ¶ 14)

5. In the late 1990s the Debtor started a company called Deep Green Research with Glenn E. Frank. (Stipulation of Facts, ¶ 15) Deep Green Research was formed to develop...