Oh No You Don't!Oh No You Don't!

John T. Brooks, partner, and Samantha E. Weissbluth, senior counsel, Foley & Lardner LLP, Chicago

Aside from the obvious lessons about how not to administer an estate (don't take estate assets that don't belong to you), we like the decision in In re Kurzon, because it appears that justice was served and a personal representative was not permitted to use the legal system to escape it.

In Kurzon, 399 B.R. 274 (Bankr.M.D.Fla. April 17, 2008), a Florida judge held that the former personal representative may not have a probate judgment against him discharged in bankruptcy.

Bankruptcy does not discharge an individual from any debt "for fraud or defalcation while acting in a fiduciary capacity, embezzlement or larceny," noted the court. And this is one personal representative who very clearly committed fraud.

Not A Model Fiduciary

Doris Daddario died in 2003 in Orlando, Fla. Her will designated her nephew, James Kurzon, as personal representative of her estate in the event that her husband did not survive her. He did not.

James was to receive Doris' Orlando home, all tools, a 1978 Lincoln Mark V, a 1981 Mercury station wagon, a Snapper tractor, and Doris' husband's jewelry. At the time that James was appointed personal representative of Doris' estate in 2003, the estate's value was at least $74,000, not including the residence.

The will also provided that Doris' niece, Pamela Cabana, was to receive all of the money in Doris' various accounts, certain items of jewelry, furs, clothes, furniture and home accessories.

It was unclear from the decision whether Pamela and James were brother and sister or simply first cousins. Either way, what happened next was sad.

James didn't exactly live up to Doris' expectations. He filed an initial inventory in May of 2004 (sworn under oath, of course) containing numerous material misstatements, including the omission and undervaluing of assets. He went on to commingle the estate's assets with his personal assets. He used estate assets to pay his personal expenses.

In December of 2005, James filed a final account that had no supporting documentation; it also contained material misstatements and omissions. Pamela objected, and after what appears to be almost two years of legal wrangling, the probate court sustained her objections in May of 2006.

The third time was not a charm for James. He soon filed an amended accounting that continued to omit assets and make material misstatements, though he did at least cop to the fact that $10,000 of the estate's assets were what he called "loans" and "advances" to himself (which he never repaid).

He also disclosed for the first time the existence of a 1993 Nissan truck, listing it as a distribution to himself and audaciously stating, "James Kurzon desires it be conveyed to him as part of his personal representative commission."

James continued to withdraw estate assets even after filing the amended accounting.

Standing Up For What's Right

Pamela objected to the amended accounting and eventually entered into a settlement agreement with James whereby James agreed to resign as personal representative, Pamela would become successor personal representative, and she would receive a final distribution of $60,000 from the estate to be paid by Nov. 8, 2006.

We're certain that our readers won't be shocked by what happened next: James failed to comply with the settlement agreement, forcing Pamela to file an emergency petition to remove him as personal representative in December of 2006.

The court had allowed James' counsel to withdraw, and James did not appear at the hearing on that motion. The probate court entered an order granting Pamela's emergency petition. Specifically, the order found that James had breached the settlement agreement, removed him as personal representative and directed him to immediately turn over all estate assets to Pamela as successor personal representative.

The order also entered judgment in Pamela's favor against James for $60,000.

As the new personal representative, Pamela soon learned of the extent of James' damage to the estate: No estate assets remained. Pamela initiated collection actions against James, who never paid any portion of his debt to her.

And then James' final coup: In May of 2007, he filed for Chapter 7 bankruptcy protection listing Doris and Pamela as creditors of an "unknown" amount, as well as additional unsecured debt of about $12,000.

Pamela instituted proceedings in the bankruptcy court against James seeking to have the judgment debt deemed non-dischargeable due to James' fraud or defalcation while acting as a fiduciary. James and Pamela disagreed as to whether the judgment should be entitled to preclusive effect.

The bankruptcy court essentially told James: Oh no you don't!

More specifically, the court's opinion focuses on 11 U.S.C. Section 524(a)(4), which is the section providing that a discharge in bankruptcy does not discharge an individual from any debt "for fraud or defalcation while acting in a fiduciary capacity, embezzlement or larceny."

The court stated that, as personal representative of Doris' estate, James was a fiduciary subject to the fiduciary standards of care under Florida law. James' dissipation, commingling, false statements to the court and failure to distribute the estate assets to a beneficiary clearly constituted a breach of those duties and thus a defalcation under bankruptcy law. Therefore, James could not get his debt to Pamela discharged by filing for bankruptcy protection.

Moreover, the bankruptcy court held that the judgment was a final order on the merits and was therefore entitled to preclusive effect pursuant to the doctrines of collateral estoppel and res judicata. In other words, James could not challenge in the bankruptcy proceedings the $60,000 judgment against him in the probate proceedings.

We doubt that Pamela is sitting on a hot stove waiting for James finally to pay her the $60,000.

But, given the fact that she has been restored to the status of judgment debtor, she will have all the rights and remedies accompanying that status. She will, for example, be able to garnish James' wages.

We hope that Pamela uses the legal system to ensure that justice, now ordered, is actually carried out.

Correction

In the Feb. 25, 2009, Wealth Watch e-letter by Anne Field, "The New Sexy," Bank of New York Mellon's total assets were incorrectly stated.

The article has been corrected online and now reads: "Case in point: Bank of New York Mellon. Total private client assets 'before all hell broke loose' were $162 billion, according to Fernandez, managing director. Although that money took a hit (Fernandez won't say by how much) total assets are now $158 billion because of the inflow of new accounts."