When an agent steps into the shoes of a principal, does that require the agent to ensure every cent belonging to the principal go towards the principal’s care? What if the agent instead gifts that money to family? Is that fraudulent? This issue was explored in a recent case out of the United States Bankruptcy Court, District of Massachusetts, Eastern Division.
Doris named her son, Jonathan, as agent under a financial power of attorney. Doris’ health was failing and she entered into a nursing home, Pleasant Bay. The private pay rate for Pleasant Bay was nearly $8,000 per month. Doris did not have enough income to pay for her stay at Pleasant Bay, so Jonathan sold her condominium.
With the proceeds, Jonathan paid some of the outstanding debt to Pleasant Bay but also engaged in gifting to himself and other family members. Jonathan applied for Medicaid benefits for Doris, but was denied due to the gifting. After accruing more debt with Pleasant Bay, Doris moved to another facility.
Pleasant Bay sued Jonathan for Doris’ balance owed; he agreed to a judgment against him. Jonathan proceeded to file bankruptcy, and listed the Pleasant Bay debt on his bankruptcy schedules. Pleasant Bay gave two arguments as to why the debt should not be dischargeable. The first argument was that Jonathan incurred the debt by false representations and he should have used all of his mother’s assets to pay for her care. The second argument was that Jonathan breached his fiduciary duty by spending his mother’s assets on something other than her care. As a third-party beneficiary of that fiduciary relationship, Pleasant Bay argues that they have standing and suffered a financial loss. Jonathan, in turn, argued that he did not agree to spend all of Doris’ money on her care. He said that he spent the proceeds of the home sale in accordance with what Doris’ would have wished.
Pleasant Bay’s first argument hinges on 11 U.S.C. § 523(a)(2)(A), which states that a debt cannot be discharged in bankruptcy if it was obtained by “false pretenses, a false representation, or actual fraud…”. In the opinion, the court lays out the elements to meet this standard. In order to prevail, the plaintiff must prove that the debtor “1) made a knowingly false representation or made one in reckless disregard for the truth, or made an implied misrepresentation or created a false impression by his conduct, 2) intended to deceive, 3) intended to induce the creditor’s reliance; and the creditor 4) actually relied upon the misrepresentation or false pretense, 5) relied justifiably, and 6) suffered damage as a result.”
Pleasant Bay’s second argument hinges on 11 U.S.C. § 523(a)(4), which states that a debt cannot be discharged in bankruptcy if it was “for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny”. The court notes defalcation is akin to extreme recklessness and that “not every breach of fiduciary duty amounts to defalcation.” Notably, to meet this requirement, the fiduciary must have had culpable intent or knowledge of the improper conduct.
The court here first looked to the terms of the contract that Jonathan had signed with Pleasant Bay. The terms of the agreement did not justify a reading that said that every cent of Doris’ would be given to Pleasant Bay. Instead, the court found that Jonathan had intended that Pleasant Bay would be paid by Medicaid. Jonathan did not understand prior to his gifting that Doris’ Medicaid application would be adversely affected by his actions and ultimately denied.
The court did state that after Jonathan received notice that Doris’ Medicaid application was denied, he should have then given Doris’ monthly income to Pleasant Bay. But not doing so did not rise to the level of fraud, misrepresentation, or false pretenses. However, the court said, if Jonathan’s conduct had resulted in Doris not being able to get care, then an argument might be made that Jonathan’s spending of his mother’s funds rose to the level of defalcation. But that did not happen in this case.
As for the § 523(a)(4) claim, the court quoted Follett Higher Educ. Grp., Inc. v. Berman (In re Berman), 629 F.3d 761, 767 (7th Cir. 2011), which stated “Not all persons treated as fiduciaries under state law are considered to act in a fiduciary capacity for purposes of federal bankruptcy law.” Instead, what matters is if the debtor is acting as a fiduciary under federal law, which would require an express or technical trust. This is an elevated level of duty and creates a Trustee relationship. The court here examined the power of attorney document and did not see where this elevated duty was created. As such, Pleasant Bay’s claim failed on this count.
In the end, Pleasant Bay lost their case and Jonathan was able to discharge the debt in bankruptcy. However, Jonathan could have likely prevented the whole situation and obtained a better outcome had he sought legal advice from an elder law attorney when it was clear his mother needed long-term care. An elder law attorney could have planned properly so that Doris received the needed care, Jonathan fulfilled his obligations as agent, and Doris’ assets were best preserved for her loved ones. Instead, Jonathan spent his time, energy, and money on the back-end, defending his actions in bankruptcy court.