Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-canb-4_05-ap-04455/USCOURTS-canb-4_05-ap-04455-1/pdf.json

Parties Involved:
Carol Lam
Plaintiff
Richard Conrad Lam
Defendant

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UNITED STATES BANKRUPTCY COURT

NORTHERN DISTRICT OF CALIFORNIA

In re No. 05-44314 TT 

Chapter 7

RICHARD CONRAD LAM,

Debtor.

__________________________________/

CAROL A. LAM, A.P. No. 05-4455 AT

Plaintiff,

vs.

RICHARD CONRAD LAM, 

Defendant.

__________________________________/

BARRY L. SIDERS A.P. No. 05-04447 AT

vs. (Consolidated for Trial)

RICHARD CONRAD LAM,

Defendant.

___________________________________/

MEMORANDUM OF DECISION AFTER TRIAL

 In one of the two above-captioned adversary proceedings, Carol

Lam (“Carol”), the former spouse of the debtor Richard Conrad Lam

(“Richard”), seeks to except a debt in the amount of $208,500 based

Signed: March 07, 2007

________________________________________

LESLIE TCHAIKOVSKY

U.S. Bankruptcy Judge

________________________________________

Entered on Docket 

March 08, 2007

GLORIA L. FRANKLIN, CLERK 

U.S BANKRUPTCY COURT 

NORTHERN DISTRICT OF CALIFORNIA

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on a state court judgment in the couple’s dissolution proceeding

(the “Conversion Debt”) from Richard’s chapter 7 bankruptcy

discharge pursuant to either 11 U.S.C. § 523(a)(4) or § 523(a)(15). 

In the second adversary proceeding, Carol’s dissolution attorney

(“Siders”) seeks to except from Richard’s discharge pursuant to 11

U.S.C. § 523(a)(15) a $29,000 debt for attorneys’ fee that Richard

was ordered to pay to Siders as a sanction in the dissolution

proceeding (the “Attorneys’ Fee Debt”). For the reasons stated

below, the Court concludes that the Conversion Debt is

nondischargeable under 11 U.S.C. § 523(a)(4) and that the

Attorneys’ Fee Debt is nondischargeable under 11 U.S.C. §

523(a)(15).

SUMMARY OF FACTS

 In 1999, a marital dissolution proceeding was commenced in

state court to dissolve Carol’s and Richard’s marriage. Various

evidentiary hearings were conducted during the proceeding. In one

of these hearings, the issue was whether Richard was liable to

reimburse Carol for $417,000 of community property that he had used

to pay a pre-marital debt: i.e., child support for his children

from a prior marriage. 

The state court judge, the Honorable James H. Libbey (“Judge

Libbey”), concluded that Richard was liable to reimburse Carol on

this account. In November 2004, he issued a decision (the “Libbey

Decision”), ordering Richard to reimburse Carol for either one-half

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1

 Cal. Fam. Code § 915 provides, in pertinent part, as

follows: “...a child or spousal support obligation of a married

person that does not arise out of the marriage shall be treated as

a debt incurred before marriage....(b) If property in the community

estate is applied to the satisfaction of a child or spousal support

obligation of a married person that does not arise out of the

marriage, at a time when nonexempt separate income of the person is

available but is not applied to the satisfaction of the obligation,

the community estate is entitled to reimbursement from the person

in the amount of the separate income,....” Cal. Fam. Code § 915

(2007).

2

 As a result, Richard’s case and these adversary proceedings

are not governed in any pertinent aspect by the changes to the

Bankruptcy Code made by the Bankruptcy Abuse Prevention and

Consumer Protections Act of 2005 (“BAPCPA”).

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of the $417,000, if he used his separate property to make the

reimbursement, or for the entire amount, if he used community

property. He based this decision on Cal. Fam. Code § 915 which

gives a spouse a right of reimbursement in a dissolution proceeding

when the other spouse has used community property to pay child or

spousal support from a prior marriage when he or she had separate

property income available.1

 He found that, during the marriage,

Richard had separate property available to pay the child support

from his prior marriage in the form of separate property retirement

and investment accounts. 

On August 4, 2005, Richard filed a bankruptcy petition,

commencing the above-captioned chapter 7 case.2 Thereafter, the

two above-captioned adversary proceedings were filed, seeking to

except the Conversion Debt and the Attorneys’ Fee Debt from

Richard’s discharge. The two proceedings were consolidated for

trial, were tried to the Court on February 12, 2007, and, at the

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conclusion of the trial, were taken under submission. 

DISCUSSION

A. APPLICABLE LAW

The Bankruptcy Code is designed to afford individual debtors a

“fresh start.” In re Bugna, 33 F.3d 1054, 1059 (9th Cir. 1994). 

Dischargeability provisions are generally construed liberally in

favor of debtors. Id. However, 11 U.S.C. § 523(a) limits the

scope of the “fresh start” by denying the debtor a discharge for

certain types of debts. In re Bammer, 131 F.3d 788, 793 (9th Cir.

1997) (en banc). In Cohen v. de la Cruz, 523 U.S. 213 (1998), the

Supreme Court explained that “[t]he various exceptions to discharge

in 523(a) reflect a conclusion on the part of Congress ‘that the

creditors’ interest in recovering full payment of debts in these

categories outweigh[s] the debtors’ interest in a complete fresh

start.’” Id. at 222 (quoting Grogan v. Garner, 498 U.S. 279, 287

(1991)).

Section 523(a)(4) excepts from an individual debtor’s chapter

7 discharge a debt for defalcation while acting in a fiduciary

capacity. See 11 U.S.C. § 523(a)(4); Banks v. Gill Distribution

Centers, Inc., 263 F.3d 862, 870 (9th Cir. 2001). Defalcation has

been defined as the “misappropriation of trust funds or money held

in any fiduciary capacity; [the] failure to properly account for

such funds. Under § 523(a)(4), defalcation includes the innocent

default of a fiduciary who fails to account fully for money

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 BAPCPA amended 11 U.S.C. § 523(a)(15) so that all

dissolution related debts are now nondischargeable. See 11 U.S.C.

§ 523(a)(15)(2005). However, as noted above, this proceeding is

not subject to BAPCPA.

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received.” In re Lewis, 97 F.3d 1182, 1186 (9th Cir. 1996) (quoted

in Banks at 870). Such a debt is nondischargeable under §

523(a)(4) only “where (1) an express trust existed, (2) the debt

was caused by fraud or defalcation, and (3) the debtor acted as a

fiduciary to the creditor at the time the debt was created.” In re

Niles, 106 F.3d 1456, 1459 (9th Cir. 1997). 

 Section 523(a)(15) excepts from an individual debtor’s chapter

7 discharge a nonsupport debt arising from a dissolution proceeding

under Section 523(a)(15) unless the debtor is either unable to pay

the debt or the debtor would suffer greater prejudice if the debt

were excepted from his discharge than the debtor’s former spouse

would suffer if the debt were discharged. See 11 U.S.C. §

523(a)(15).3

 

Generally, the plaintiff in a nondischargeability action bears

the burden of proof on all elements of the claim by a preponderance

of the evidence. See Grogan v. Garner, 498 U.S. 279 (1991). Thus,

Carol has the burden to proof with respect to her claim to except

the Conversion Debt from Richard’s discharge pursuant to 11 U.S.C.

§ 523(a)(4). However, once the party seeking to except a debt

under 11 U.S.C. § 523(a)(15) meets her burden of proving that the

debt is a nonsupport debt arising from a dissolution proceeding,

the burden shifts to the debtor to prove that he is unable to pay

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the debt. In re Jodoin, 209 B.R. 132 (Bankr. 9th Cir. 1997); In re

Morris, 193 B.R. 949, 952 (Bankr. S.D. Cal. 1996).

B. DISCHARGEABILITY OF CONVERSION DEBT UNDER 11 U.S.C. §

523(a)(4)

As set forth above, 11 U.S.C. § 523(a)(4) renders

nondischargeable a debt for defalcation by a fiduciary. The

question of whether the debtor was a fiduciary with respect to the

claimant is governed by federal law. In re Cantrell, 329 F.3d

1119, 1125 (9th Cir. 2003); In re Gergely, 110 F.3d 1448, 1450 (9th

Cir. 1997). Under federal law, the fiduciary relationship must

arise from an express trust imposed before and without reference to

the wrongdoing that created the debt. Cantrell, 329 F.3d at 1125;

In re Lewis, 97 F.3d 1182, 1185 (9th Cir. 1996). However, state

law is consulted to determine whether the requisite trust

relationship exists. Cantrell, 329 F.3d at 1125; Lewis, 97 F.3d at

1185. 

Under the California law, spouses act as fiduciaries inter se

with respect to the management and control of the community assets. 

Cal. Family Code §§ 1100(e), 1101(a) (2007). These provisions make

spouses fiduciaries with respect to community property in the

narrow sense required by 11 U.S.C. § 523(a)(4). Thus, a

defalcation by a debtor with respect to his use of the community

property will give rise to a nondischargeable debt under 11 U.S.C.

§ 523(a)(4). 

As noted above, based on the evidence presented to him at

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trial in the dissolution proceeding, Judge Libbey found that

Richard used $417,000 of community property to pay child support

from a prior marriage at a time when he had separate property in

the form of retirement and investment accounts available to make

the payments. Based on this finding, Judge Libbey ordered Richard

to reimburse Carol for this use of their community property. He

based this order on the conclusion that Richard had breached Cal.

Fam. Code § 915(b) which requires a spouse to make such payments

first from separate property income if possible. 

Richard contends that, although this order created a debt to

Carol, it did not constitute a debt arising from a breach of his

fiduciary duty. He notes that Cal. Fam. Code § 915(b) requires

only that separate property income be used first to make child

support payments from a prior marriage, not separate property. He

notes that the only evidence presented was that he had separate

property, not separate property income, at the time he made the

payments. 

This argument might be persuasive if one was limited to an

examination of the plain language of the statute. However, the

comments to Cal. Fam. Code § 915 indicate that the the California

Legislature used the terms “income” and “property” interchangeably. 

See Cal. Fam. Code § 915 cmt. (2007) (“the general rule is that the

separate property of the obligor spouse and the community estate of

the marriage is liable for the support obligation [of the prior

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Carol asserted 11 U.S.C. § 523(a)(15) as an independent

ground for excepting the Conversion Debt from Richard’s discharge. 

Since the Court concludes that the Conversion Debt is

nondischargeable under 11 U.S.C. § 523(a)(4), it need not consider

this alternative ground. However, the Court is mindful that, based

on its ruling, the Conversion Debt will survive Richard’s discharge

and thus affect his ability to pay the Attorneys’ Fee Debt. 

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marriage], other than the earnings of the non-obligor spouse”).

Based on the foregoing, the Court concludes that Richard’s use of

the community property to pay child support from his prior marriage

constituted a breach of fiduciary duty under 11 U.S.C. § 523(a)(4). 

Thus, the Conversion Debt is nondischargeable.

C. DISCHARGEABILIITY OF ATTORNEYS’ FEE DEBT UNDER 11 U.S.C. §

523(a)(15)

 Siders seeks to except the $29,000 Attorneys’ Fee Debt pursuant

to 11 U.S.C. § 523(a)(15).4 As noted above, Siders has the initial

burden of establishing that the debt sought to be excepted from the

debtor’s discharge under 11 U.S.C. § 523(a)(15) is a nonsupport

debt arising in connection with a dissolution proceeding. This

burden was easily satisfied. The burden then shifted to Richard to

establish either that he is unable to pay the Attorneys’ Fee Debt

or that he would be more greatly prejudiced if the Attorneys’ Fee

Debt were excepted from his discharge than Carol would be if it

were discharged. Richard presented no evidence concerning Carol’s

financial condition nor did Carol. As a result, the Court has no

basis for balancing the equities. Thus, Richard was required to

prove, by a preponderance of the evidence, that he was unable to

pay the Attorneys’ Fee Debt. See 11 U.S.C. § 523(a)(15)(A).

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Richard testified that he had some health problems. However,

the Court was not convinced that these problems were sufficiently

serious to interfere with his ability to work for the next ten

years or so.

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The evidence presented established that Richard is 63 years

old, in relatively good health, and is an experienced tax attorney

with a history of earning in excess of $200,000 a year.5 From 1998

to 2001, he was employed as an area director in the International

Tax Group with Ernst & Young LLP in Houston, Texas. Before that,

he was employed by Pricewaterhouse Coopers, Chevron Corporation,

and the Gulf Oil Corporation. According to Richard, in 2001, he

was terminated by Ernst & Young. He moved back to California and

attempted to obtain employment in the field of his tax specialty. 

When he was unsuccessful, he took the California Bar Examination,

and began practicing law as a sole practitioner, primarily in the

area of family law, with which he had no prior experience. 

Richard testified that his net income during 2005 was $23,317

and during 2006 $16,925. He testified that his income during 2006

is more indicative of his ability to pay his debts since in 2005 he

earned a one-time consulting fee of $18,000. His personal expenses

are approximately $21,000 per year. In addition to his personal

expenses, for the next three years, he is obligated to pay $1,171

per month in child support and $964 per month in alimony. He also

has nondischargeable debt for child support arrearages of $167,288,

tax debt of $38,718, and, now the $208,500 Conversion Debt, 

for a total of $414,506. He contends that this is sufficient to

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meet his burden of proving by a preponderance of the evidence that

he is unable to pay the Attorneys’ Fee Claim. 

The Court is not persuaded. The Court accepts as a

possibility that Richard’s financial circumstances will not improve

during the remainder of his working life or at least not

sufficiently to pay his other nondischargeable debt and the

Attorneys’ Fee Debt. However, the Court finds that it is equally

possible that Richard will continue to practice law for another ten

years and that his income will increase substantially. This could

occur in various ways. He could find employment at a creditable

law firm. The Court is unable to believe that an experienced tax

attorney, employed by a creditable firm, would be paid less than

$150,000 a year. With a salary of this amount, given a continued

working life of another ten years, Richard could easily pay all his

nondischargeable debt, including the Attorneys’ Fee Debt. 

Alternatively, Richard could decide to continue to practice on his

own, perhaps even in the family law area. Again, it is not

unreasonable to expect a family law attorney to earn $150,000

annually. 

Since the Court finds that either scenario is equally

possible, it is forced to conclude that Richard has failed to meet

his burden of proving an inability to pay the Attorneys’ Fee Claim.

Moreover, 11 U.S.C. § 523(a)(15) requires the Court to consider the

debtor’s property as well as his income in determining his ability

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to pay a nonsupport debt arising from a dissolution proceeding. It

was undisputed that Richard has approximately $186,900 in an

Individual Retirement Account. Although this amount would be

subject to taxation when withdrawn, even if it were reduced in this

fashion, it would still provide a substantial additional amount

with which Richard could either pay his personal expenses or his

nondischargeable debt. Based on these findings, the Court

concludes that the Attorneys’ Fee Debt is nondischargeable under 11

U.S.C. § 523(a)(15).

CONCLUSION

 The Court concludes that the Conversion Debt is

nondischargeable under 11 U.S.C. § 523(a)(4). Carol’s right to

reimbursement pursuant to Cal. Fam. Code § 915(b) for half the

community property used by Richard to pay child support from his

prior marriage qualifies as a debt for defalcation by a fiduciary

within the meaning of 11 U.S.C. § 523(a)(4). The Court concludes

that the Attorneys’ Fee Claim is nondischargeable under 11 U.S.C. §

523(a)(15). While Richard has limited income at present and

substantial other nondischargeable debt, including now the

Conversion Debt, Richard failed to persuade the Court that, more

likely than not, his future income would not be sufficient to

enable him to pay the Attorneys’ Fee Debt. Counsel for Carol is

directed to submit a proposed form of judgment in accordance with

this decision.

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END OF DOCUMENT 

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COURT SERVICE LIST

Chris D. Kuhner

Kornfield, Paul & Nyberg, P.C.

1999 Harrison Street, Suite 2675

Oakland, CA 94612

Richard C. Lam

1470 Creekside Drive, Unit 6

Walnut Creek, CA 94596

Jon R. Vaught

Law Offices of Vaught and Boutris

80 Swan Way #320

Oakland, CA 94621 

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