UNITED STATES BANKRUPTCY COURT

FOR THE EASTERN DISTRICT OF VIRGINIA

Alexandria Division

In re:

TIMOTHY ALLEN WARD, SR.,

Debtor.

Case No. 16-11676-KHK

(Chapter 7)

LIBERTY MUTUAL INSURANCE

COMPANY,

 Plaintiff,

vs.

TIMOTHY ALLEN WARD, SR.,

 Defendant.

 

Adv. Proc. No. 16-1174

MEMORANDUM OPINION

THIS CASE came before the court on February 7, 2017, on Liberty Mutual Insurance

Company’s (“Liberty”) Motion for Summary Judgment (Docket Entry 10). Liberty filed a

complaint against the debtor asserting that the debts owed were excepted from discharge under

11 U.S.C. § 523(a)(4).

Findings of Fact

I. The Estate of Paul Klein

The debtor, a licensed Virginia attorney, was appointed as administrator of the estate of

Paul Klein (“Klein Estate”) on May 28, 2002. The debtor posted bond in the amount of

$591,000.00, with surety provided by Liberty. On September 25, 2002, the debtor filed an

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inventory with Commissioner of Accounts for Fairfax County (“Commissioner”) in which he

reported Klein Estate assets totaling $590,941.86. The inventory was approved on February 23,

2003.

In March 2003, the debtor executed a Surety Application and Indemnity Agreement with

Liberty, whereby Liberty agreed to provide surety on the debtor’s bond and the debtor agreed to

“exonerate and indemnify [Liberty] from and against all claims, losses, liability, damages . . .

costs, fees, expenses, suits, orders, judgments, or adjudications” that Liberty may thereafter have

incurred in connection with the bond.

On November 30, 2003, the debtor filed a first account for the Klein Estate. Since the

debtor filed the first account in 2003, all of the subsequent accounts were and remained

delinquent. The debtor was ultimately removed as administrator of the Klein Estate on April 6,

2012. The Circuit Court of Fairfax County ordered that the debtor was to remain liable on his

bond until he had filed all required accounts for the Klein Estate, which he has yet to do. The

substitute administrator received statements from the IRS and Virginia Department of Taxation

indicating that the Klein Estate owed penalties and interest. On September 17, 2013, the Virginia

State Bar Disciplinary Board suspended the debtor’s license to practice law within Virginia for

two years. On September 5, 2014, a judgment was entered against the debtor in favor of Liberty

for $35,115.95 plus interest, fees, and costs.

II. The Estate of Paul Hamilton

On March 31, 2003, the debtor was appointed as administrator of the estate of Richard

Hamilton (“Hamilton Estate”). The debtor was required to post bond for $74,000.00, with surety

provided by Liberty, and he entered into an indemnity agreement similar to the one used in the

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Klein Estate. The debtor also executed a Fiduciary Acknowledgment Form, indicating that he

understood the extent of his duties and that he could be held liable for violations of the same.

After appointment as administrator, the debtor failed to respond to notices sent by the

Commissioner regarding deficiencies in the first filed accounting, failed to file the subsequent

accountings, and failed to pay the bond premiums, resulting in a claim against the Hamilton

Estate. The debtor was eventually removed as administrator of the Hamilton Estate. The

substitute administrator was able to resolve the deficiencies without a loss payment from Liberty;

however, Liberty did incur related attorney’s fees.

III. The Estate of Jillian Cho

On April 5, 2007, the debtor was appointed as substitute fiduciary for the estate of Jillian

Cho (“Cho Estate”). The debtor posted a bond for $580,000.00, with surety provided by Liberty,

through its wholly-owned subsidiary Ohio Casualty Insurance Company. Again, the debtor

entered into a similar indemnity agreement.

On December 6, 2010, based on a report from the Commissioner of Accounts for Prince

William County, the Prince William County Circuit Court ordered that the bond was to be

forfeited in the amount of $21,250.52 for debtor’s “misfeasance and/or malfeasance.” On the

same date, a judgment was entered in favor of Liberty against the debtor for $29,856.03 plus

interest. 

Standard of Law

Summary judgment is appropriate where there is no genuine dispute as to any material

fact, and the moving party is entitled to judgment as a matter of law. Fed. R. Bankr.P. 7056. The

moving party has the initial burden of showing that there are no material facts in dispute and that

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it is entitled to judgment as a matter of law. Celotex Corp. v. Catrett, 477 U.S. 317, 322–24

(1986). When the moving party has met its initial burden, the burden then shifts to the nonmoving party to present specific facts demonstrating that there is a genuine issue for trial.

Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586–87 (1986). Whether a fact

is material or not depends on the substantive law at issue in the case. Anderson v. Liberty Lobby,

Inc., 477 U.S. 242, 248 (1986). “Only disputes over facts that might affect the outcome of the

suit under the governing law will properly preclude the entry of summary judgment. Factual

disputes that are irrelevant or unnecessary will not be counted.” Id.

Conclusions of Law

Liberty argues that debts owed to it by the debtor are non-dischargeable due to alleged

defalcation against the estates administered by the debtor, as a fiduciary, pursuant to 11 U.S.C. §

523(a)(4). Section 523(a)(4) excepts from discharge “any debt . . . for fraud or defalcation while

acting in a fiduciary capacity, embezzlement, or larceny.” In the Fourth Circuit, a creditor

asserting non-dischargeability under § 523(a)(4) must prove (1) the debtor was acting in a

fiduciary capacity when the debt arose; and (2) the debt arose from the debtor’s defalcation. 

Kubota Tractor Corp. v. Strack (In re Strack), 524 F.3d 493, 497 (4th Cir. 2008). The case of

Bullock v. BankChampaign, N.A., 133 S.Ct. 1754 (2013), has since changed the law in the Fourth

Circuit with respect to the proof needed to sustain a claim under § 523(a)(4). Bullock raised the

standard from “negligence or even an innocent mistake which results in the failure to account” to

that of intentional misconduct, or at least reckless disregard of a known duty. The Supreme

Court held with respect to the term “defalcation:”

Thus, where the conduct at issue does not involve bad faith, moral turpitude, or other

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immoral conduct, the term requires an intentional wrong. We include as intentional

not only conduct that the fiduciary knows is improper but also reckless conduct of

the kind that the criminal law often treats as the equivalent. Thus, we include reckless

conduct of the kind set forth in the Model Penal Code. Where actual knowledge of

wrongdoing is lacking, we consider conduct as equivalent if the fiduciary

“consciously disregards” (or is willfully blind to) “a substantial and unjustifiable

risk” that his conduct will turn out to violate a fiduciary duty. ALI, Model Penal

Code § 2.02(2)(c), p. 226 (1985). See id., § 2.02 Comment 9, at 248 (explaining that

the Model Penal Code's definition of “knowledge” was designed to include “ ‘wilful

blindness' ”). That risk “must be of such a nature and degree that, considering the

nature and purpose of the actor's conduct and the circumstances known to him, its

disregard involves a gross deviation from the standard of conduct that a law-abiding

person would observe in the actor's situation.” Id., § 2.02(2)(c), at 226 (emphasis

added). Cf. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 194, n. 12, 96 S.Ct. 1375, 47

L.Ed.2d 668 (1976) (defining scienter for securities law purposes as “a mental state

embracing intent to deceive, manipulate, or defraud”).

Bullock, 133 S.Ct. at 1759–60.

To succeed in a claim under § 523(a)(4) Liberty must first establish that the debtor was

acting in a “fiduciary capacity” during his tenure as administrator or guardian of the estates. In

the Eastern District, courts restrict the term “fiduciary” as used in § 523(a)(4) to “the class of

fiduciaries including trustees of specific written declarations of trust, guardians, administrators,

executors or public officers and, absent special considerations, does not extend to the more

general class of fiduciaries such as agents, bailees, brokers, factors and partners.” Sager v. Lewis

(In re Lewis), 94 B.R. 406, 410 (Bankr. E.D. Va. 1988). Courts have held that estate

administrators and guardians fall under the purview of a fiduciary as the term is used in §

523(a)(4). See In re Reed, 155 B.R. 169 (Bankr. S.D. Ohio 1993) (finding that administrator of

probate estate was acting in a fiduciary capacity); Aetna Ins. Co. v. Byrd (In re Byrd), 15 B.R.

154 (Bankr. E.D. Va. 1981) (determining that debtor who was appointed as his father’s

committee stood in a fiduciary relationship to his father’s estate). As an administrator and

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guardian of the estates, the debtor was clearly acting in a “fiduciary capacity.” Thus, Liberty is

granted summary judgment as to the first element under § 523(a)(4). 

In reviewing the record, materials submitted by the parties, and arguments of counsel, the

Court determines that a dispute as to the debtor’s culpable state of mind exists, and, therefore,

Liberty is not entitled to summary judgment as to the second element required under § 523(a)(4). 

According to Bullock, defalcation under § 523(a)(4) requires a showing of a “culpable state of

mind requirement involving knowledge of, or gross recklessness in respect to, the improper

nature of the relevant fiduciary behavior.” Bullock, 133 S.Ct. at 1755. While Liberty

demonstrated, through its papers and counsel’s argument at the hearing, that the debtor shirked

his responsibilities as administrator and guardian of the various estates, it did not sufficiently

establish that the debtor’s actions rose to the heightened level of a “gross deviation” from the

expected standard of conduct required under Bullock. Considering all inferences in favor of the

non-moving party, there exists a dispute as to this element and Liberty is not entitled to judgment

as a matter of law as to the second element under § 523(a)(4).

Liberty’s motion for summary judgment is granted in part and denied in part. The Court

finds that a debt exists between Liberty and the debtor and that the debt arose from debtor’s

actions in his fiduciary capacity. As such, Liberty is entitled to summary judgment on these

elements of its § 523(a)(4) action. However, a dispute exists as to whether this debt arose from

the debtor’s alleged defalcation, as that term has been defined by the Supreme Court in Bullock. 

That issue must be reserved for trial. A contemporaneous order consistent with this

memorandum opinion will be entered.

DONE at Alexandria, Virginia, this 5 day of May, 2017. th

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Klinette H. Kindred

United States Bankruptcy Judge

Copy electronically to:

James R. Schroll

John P. Goetz

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May 12 2017 /s/ Klinette Kindred

eod 5/12/2017

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