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FILED

APR 15 2015

SUSAN M. SPRAUL, CLERK

U.S. BKCY. APP. PANEL

OF THE NINTH CIRCUIT

ORDERED PUBLISHED

UNITED STATES BANKRUPTCY APPELLATE PANEL

OF THE NINTH CIRCUIT

In re: ) BAP Nos. NV-14-1468-DJuKu

) NV-14-1469-DJuKu

TONYA CAROL HEERS, ) (Related Appeals)

)

Debtor. ) Bk. No. 2:13-bk-19887-LED

 )

) Adv. Nos. 2:14-ap-01029-LED

TONYA CAROL HEERS, ) 2:14-ap-01030-LED

)

Appellant, )

)

v. ) O P I N I O N

)

DARRELL PARSONS, JR.; AMERICAN)

CONTRACTORS INDEMNITY COMPANY,)

)

Appellees. )

______________________________)

Argued and Submitted on March 19, 2015

at Las Vegas, Nevada

Filed - April 15, 2015

Appeal from the United States Bankruptcy Court

for the District of Nevada

Honorable Laurel E. Davis, Bankruptcy Judge, Presiding

 

Appearances: William L. McGimsey argued for appellant Tonya

Carol Heers; Abran E. Vigil of Ballard Spahr LLP

argued for appellee Darrell Parsons, Jr.; Misty

Perry Isaacson of Pagter and Perry Isaacson,

APLC, argued for appellee American Contractors

Indemnity Company.

 

Before: DUNN, JURY and KURTZ, Bankruptcy Judges.

Opinion by Judge Dunn

Dissent by Judge Kurtz
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DUNN, Bankruptcy Judge:

Debtor defendant appellant Tonya Carol Heers (“Debtor”)

appeals summary judgment orders in two separate adversary

proceedings excepting debts from her discharge under

§ 523(a)(4)1 for defalcations while acting in a fiduciary

capacity. We AFFIRM.

I. FACTUAL BACKGROUND

The facts in these two related appeals are not in dispute. 

Darrell Parsons, Jr. (“Parsons”), was the sole heir of his

father, Darrell Parsons, Sr., who died intestate on November 1,

2008. Parsons’ father’s estate (“Estate”) initially was

estimated to be worth approximately $3 million2 and included

real estate in California and North Carolina; a business which

leased coin-operated lockers to corporate customers throughout

the United States; and bank accounts into which cash proceeds

from the business were deposited.

When his father died, Parsons had to choose an

administrator for the Estate. Parsons learned of his father’s

death from Thomas Warden (“Warden”), a friend and attorney for

his father. Warden handled a number of legal matters for

Parsons’ father, and on several occasions, Warden had drafted

1Unless specified otherwise, all chapter and section

references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532,

and all “Rule” references are to the Federal Rules of Bankruptcy

Procedure, Rules 1001-9037. All “Civil Rule” references are to

the Federal Rules of Civil Procedure.

2Ultimately, the gross Estate value was determined to be

$5,087,791.

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testamentary documents for Parsons’ father, none of which were

executed. Warden advised Parsons that a probate proceeding

would need to be filed in California, and he volunteered to

serve as administrator and to refer the matter to a competent

probate attorney.

Parsons apparently was upset with Warden because he was not

notified of his father’s death until after the burial and was

unwilling to designate Warden to administer the Estate. Parsons

discussed the situation with the Debtor, who was a criminal

defense attorney who had handled traffic ticket matters for

Parsons. Debtor indicated that she was inexperienced in probate

matters, but she expressed interest in administering the Estate. 

She told Parsons that her mother and law partner was a “probate

wizard,” and she advised Parsons that she could handle the

Estate matter for less than Warden.

Debtor in fact did not have any knowledge of probate law,

and prior to her involvement with the Estate, she had never been

involved in the administration of a decedent’s estate. She

likewise had never been involved in any estate planning. 

Nevertheless, Parsons asked Debtor to administer the Estate, and

she accepted. On or about February 6, 2009, Debtor was

appointed as administrator of the Estate by the Los Angeles

County, California Superior Court (“Probate Court”). She was

issued general letters of administration on February 27, 2009. 

On that same date, Debtor signed and filed with the Probate

Court a statement acknowledging her “Duties and Liabilities of

Personal Representative” (“Duties Statement”), which stated,

among other things, that “[w]ithin four months after Letters [of

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administration] are first issued to you as personal

representative, you must file with the court an inventory and

appraisal of all the assets in the estate.” Upon her

appointment as Estate administrator, Debtor became a fiduciary

to the Estate.

In December 2008, Debtor had met with Parsons and Warden,

at which time Warden delivered to Debtor a Bekins box of records

including bank statements, notes and records showing bank

accounts and other information with respect to the decedent’s

assets. In addition, by that time, Warden had completed an

inventory of assets in Parsons’ father’s home.

The Debtor was bonded by American Contractors Indemnity

Company (“ACIC”). Thereafter, probate and estate administration

proceeded, but neither efficiently nor smoothly.

Debtor understood that her duties in administering the

Estate included the preparation and timely filing of tax

returns, including the estate tax return, and payment of any

taxes owed on behalf of the Estate, so long as the Estate had

funds available to pay the taxes. To assist her in performing

these duties, Debtor selected an accounting firm headed by D.K.

Wallin, a former controller for the state of Nevada (the “Wallin

Firm”). The Wallin Firm was licensed in both California and

Nevada.

Debtor met with the Wallin Firm in February 2009, but she

was not presented with an engagement letter and did not sign a

contract of any kind at that time. An engagement letter

eventually was presented to her in October 2009. Lorrie

Edelblute (“Edelblute”) was the Wallin Firm employee who was

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assigned to the Estate matter.

Despite her knowledge of her non-delegable duty to do so,

Debtor took no steps on her own to ascertain when the estate tax

return for the Estate was due, which was no later than August 3,

2009 - nine months following the decedent’s date of death. 

According to Debtor, she was advised by Edelblute that the

estate tax return was due by August 15, 2009. However, in

subsequent proceedings before the Probate Court, Edelblute was

never called to testify in support of Debtor’s contentions. On

August 11, 2009, Debtor signed and filed with the Internal

Revenue Service (“IRS”) a Form 4768 request for extension of the

Form 706 estate tax return deadline, which included an estimated

estate tax due of $825,000, as calculated by the Wallin Firm,

and further specifically referenced the past due deadline for

the estate tax return filing as August 3, 2009. With the Form

4768 extention request, Debtor included a tax payment of $10,000

because she thought she had only a total of $20,000 available in

the Estate bank account to which she had access.

Debtor eventually hired another accounting firm, Gamut and

King, to assist her with her Estate work. In April 2010, Debtor

received a notice from the IRS that they had not received the

estate tax return for the Estate. Debtor then paid an

additional $16,000 to the IRS, in spite of the estimate from the

Wallin Firm that the estate tax would actually be approximately

$825,000. Apparently, the estate tax return for the Estate was

finally filed on September 15, 2010. Debtor eventually sent

additional payments totaling approximately $1,300,000 to the IRS

on behalf of the Estate, but in November 2010, Debtor received a

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letter from the IRS advising her that the Estate owed an

additional $397,000.

Upon inquiry to Gamut and King, Debtor learned that the

additional IRS claim represented penalties for failing to file

the estate tax return by the August 2009 deadline. Debtor

requested Gamut and King to appeal the IRS penalty assessment,

but the appeal was rejected. Late payment penalties plus

interest ultimately totaled $439,621.61.

Debtor filed her first inventory and appraisal for the

Estate in February 2010. A “corrected” inventory was filed on

June 22, 2010, and the final accounting also was filed in June

2010.

Debtor filed a Second Account in the probate proceeding on

July 11, 2011, to which Parsons objected. Specifically, Parsons

requested a finding that Debtor was personally liable for the

tax penalties and interest assessed by the IRS against the

Estate as a result of breaches by Debtor of her fiduciary duties

as administrator, focusing on the late filing of the estate tax

return and the late payment of the estate tax owed.

The Probate Court heard Parsons’ objection to Debtor’s

Second Account at a trial on March 25-26, 2012. Following the

presentation of testimony and argument and the admission of

numerous exhibits, the Probate Court took the matter under

advisement and issued a written decision on June 22, 2012

(“Second Account Findings”).

The Second Account Findings opened with a time line with

respect to the decedent’s death and the probate proceedings. 

The Probate Court described the “most salient and undisputed”

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facts of the matter as follows:

[Debtor] was the general administrator of this

[Estate] with the sole responsibility to assure that

tax returns were filed and taxes owing were paid. The

accounting firm she engaged did not file the estate

tax return by the August 3, 2009 deadline. As a

result, interest and penalties became due and owing to

the IRS in the amount of $439,621.61.

The Probate Court was troubled that although Debtor blamed

the Wallin Firm for the missed estate tax deadline, no

engagement letter setting forth the respective duties of the

parties was signed with the Wallin Firm until October 2009. In

addition, although Debtor testified that she was unaware of the

missed deadline until she was notified by the IRS, she had

signed the Form 4768 extension request on August 11, 2009, which

clearly designated the estate tax return deadline as August 3,

2009.

The Probate Court determined that Debtor was dilatory in

gathering and organizing Estate asset information, which was

“illustrative of [Debtor’s] pattern of lethargy when it came to

working on this [Estate].” Under California Probate Code

§ 8800(b), the Estate inventory was due in June 2009, within

four months after letters of administration issued, but was not

filed until February 2010.

The Probate Court further was mystified by Debtor’s failure

to pay most if not all of the estate tax liability as soon as

she became aware of the due date because the “inventory and

appraisals coupled with the accountings filed in this case show

that sufficient or close to sufficient monies existed in the

cash accounts of Darrell Parsons, Senior to pay almost all, if

not all, of the estimate[d] tax.” The Probate Court found that

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Debtor’s decision to pay $10,000 as a down payment on an

estimated $825,000 estate tax liability “makes absolutely no

sense.”

The failure to explain why [Debtor] had not marshaled

sufficient control over the cash assets in the

[Estate] that, if provided to the IRS, would have

eliminated or at least, mitigated, the penalties and

interest, presents a mystery to this court and

substantially supports that [Debtor] breached her duty

of care.

Second Account Findings, at 14.

In its order regarding Debtor’s Second Account (“Second

Account Order”), the Probate Court awarded what it characterized

as a surcharge against the Debtor in the amount of the IRS

estate tax late filing penalties and interest totaling

$439,621.61, plus interest “at the legal rate.” However, the

Probate Court further ordered that any subsequent award of

compensation to the Debtor as Estate administrator would be

offset against the surcharge amount and did not award Parsons

any attorneys fees. The Second Account Order was not appealed

and is final.

In an order entered on November 12, 2013, the Probate Court

determined the surcharge judgment (“Surcharge Judgment”) to be

$347,243.96 as of April 29, 2013, with interest accruing thereon

at a rate of $95.13 per day. The Surcharge Judgment, among

other things, reflects offsets of $150,000 from a settlement

payment (“Bond Payment”) by ACIC to Parsons on Debtor’s

fiduciary bonds and $65,262.07, representing Debtor’s statutory

commission/compensation as administrator of the Estate. The

Surcharge Judgment likewise is final.

Prior to that time, in July 2013, ACIC filed a motion in

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the Probate Court to obtain judgment against Debtor for its Bond

Payment. Debtor did not oppose the motion, and on August 21,

2013, the Probate Court entered judgment in favor of ACIC for

the Bond Payment and $22,374.30 in attorneys fees, plus interest

at 10% (“Bond Judgment”). Debtor did not appeal the Bond

Judgment, and it is final.

Debtor filed for relief under chapter 7 on November 26,

2013.3

Both Parsons and ACIC filed timely adversary proceedings

against Debtor, seeking determinations that the Surcharge

Judgment and the Bond Judgment should be excepted from Debtor’s

discharge under § 523(a)(4) for defalcations by Debtor while

acting in a fiduciary capacity. Debtor filed answers to both

complaints denying that the subject debts should be excepted

from her discharge. Both Parsons and ACIC filed motions for

summary judgment in June 2014, supported by documentary evidence

and the declarations of one of ACIC’s in-house counsel and its

trial counsel. The centerpiece supporting both summary judgment

motions was the Probate Court’s Second Account Findings. Debtor

filed memoranda in opposition to both motions for summary

judgment, to which Parsons and ACIC replied. Both Parsons and

3From the briefs and records filed in these appeals, there

is some question as to whether Debtor filed her chapter 7

petition on November 16 or 26, 2013. We have exercised our

discretion to take judicial notice of documents filed in

Debtor’s main bankruptcy case and in the two adversary

proceedings from which these appeals arise to resolve this

question, among others. See O’Rourke v. Seaboard Sur. Co. (In

re E.R. Fegert, Inc.), 887 F.2d 955, 957-58 (9th Cir. 1989);

Atwood v. Chase Manhattan Mortg. Co. (In re Atwood), 293 B.R.

227, 233 n.9 (9th Cir. BAP 2003).

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ACIC relied primarily on the asserted preclusive effects of the

Second Account Findings, coupled respectively with the final

Surcharge Judgment and Bond Judgment.

The bankruptcy court heard oral argument (“Hearing”) on

both summary judgment motions on August 6, 2014. At the

Hearing, while all parties unsurprisingly emphasized different

aspects of the undisputed facts, the focus of the argument was

on the impact of the recent Supreme Court decision in Bullock v.

BankChampaign, N.A., 133 S. Ct. 1754 (2013), interpreting

application of the “defalcation while acting in a fiduciary

capacity” standard in § 523(a)(4) cases. Following argument and

colloquy with counsel, the bankruptcy court announced its

conclusions orally. Initially, the bankruptcy court noted that

Debtor did not dispute the statements of undisputed facts

submitted by Parsons and ACIC and had submitted no declarations

in opposition. The bankruptcy court further pointed out that

the Supreme Court has recognized that bankruptcy courts can

apply issue preclusion to the findings of fact and conclusions

of law of other courts with respect to the elements of exception

to discharge claims. The bankruptcy court also noted that there

was no dispute that Debtor was a fiduciary of an express trust

for purposes of the plaintiffs’ § 523(a)(4) claims. The only

issue was whether Debtor had committed a defalcation(s) that

would except her debts to Parsons and ACIC from discharge. 

Citing the Supreme Court’s Bullock decision, the bankruptcy

court characterized the applicable standard as “conduct that

would be deemed reckless, or recklessness to the point of

inferring a reckless disregard such as you would have in a

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criminal situation.” Hr’g Tr. (Aug. 6, 2014) at 25:5-7. The

bankruptcy court then concluded that Debtor’s breaches of her

fiduciary duties met that standard and granted both summary

judgment motions.

Orders granting summary judgment in favor of ACIC and

Parsons against Debtor were entered on September 15 and 16,

2014, respectively. The order in favor of Parsons was

denominated a “judgment,” though it included a grant of the

summary judgment motion. The order in favor of ACIC was

denominated an “order granting summary judgment . . . ,” though

it included a statement that the debt was non-dischargeable

under § 523(a)(4).4

Debtor filed timely appeals from both summary judgment

decisions.

II. JURISDICTION

The bankruptcy court had jurisdiction under 28 U.S.C.

§§ 1334 and 157(b)(2)(I). We have jurisdiction under 28 U.S.C.

4Each order/judgment might technically be considered to

violate the separate judgment rule. See Rule 7058, making Civil

Rule 58 applicable in adversary proceedings. “Ordinarily there

should be a separate document embodying a final judgment that is

distinct from and in addition to an order granting a motion for

summary judgment.” Gaughan v. Edward Dittlof Revocable Trust

(In re Costas), 346 B.R. 198, 200 n.3 (9th Cir. BAP 2006). 

However, the requirement for a separate judgment may be

considered waived by the parties where the bankruptcy court

clearly evidenced its intent that an order from which an appeal

has been taken represented its final decision in the matter, and

the prevailing party does not object to the taking of an appeal

in the absence of a separate judgment. Bankers Trust Co. v.

Mallis, 435 U.S. 381, 387-88 (1978). These requirements are

satisfied in these cases, and the separate judgment requirement

is deemed waived to the extent it was not otherwise satisfied by

the expiration of the 150-day period in Civil Rule 58(c)(2)(B).

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§ 158.

III. ISSUE

Whether the bankruptcy court erred in concluding that

Debtor’s conduct at issue met the standard for defalcation while

acting in a fiduciary capacity for purposes of § 523(a)(4).

IV. STANDARDS FOR REVIEW

We review bankruptcy court summary judgment orders de novo. 

Shahrestani v. Alazzeh (In re Alazzeh), 509 B.R. 689, 692-93

(9th Cir. BAP 2014); Khaligh v. Hadaegh (In re Khaligh), 338

B.R. 817, 823 (9th Cir. BAP 2006), aff’d, 506 F.3d 956 (9th Cir.

2007). Summary judgment is appropriate only “if the movant

shows that there is no genuine dispute as to any material fact

and the movant is entitled to judgment as a matter of law.” 

Civil Rule 56(a); Rule 7056; Anderson v. Liberty Lobby, Inc.,

477 U.S. 242, 249 (1986).

We also review de novo the preclusive effects of state

court orders and judgments. Whether issue preclusion is

available is a mixed question of law and fact. Stephens v.

Bigelow (In re Bigelow), 271 B.R. 178, 183 (9th Cir. BAP 2001);

In re Khaligh, 338 B.R. at 823. If issue preclusion is

available, the decision of the bankruptcy court to apply it is

reviewed for abuse of discretion. Lopez v. Emergency Serv.

Restoration, Inc. (In re Lopez), 367 B.R. 99, 103 (9th Cir. BAP

2007). Under the abuse of discretion standard, reversal is

appropriate only where the bankruptcy court applied an incorrect

legal rule, or where its application of the law to the facts was

illogical, implausible or without support from inferences that

may be drawn from the record. Ahanchian v. Xenon Pictures,

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Inc., 624 F.3d 1253, 1258 (9th Cir. 2010), citing United States

v. Hinkson, 585 F.3d 1247, 1262 (9th Cir. 2009) (en banc). When

a state’s preclusion law controls, the bankruptcy court is

required to exercise such discretion consistent with the

applicable state law.5 Gayden v. Nourbakhsh (In re Nourbakhsh),

67 F.3d 798, 800-01 (9th Cir. 1995); In re Khaligh, 338 B.R. at

823.

We can affirm the bankruptcy court on any basis supported

by the record. ASARCO, LLC v. Union Pac. R.R., 765 F.3d 999,

1004 (9th Cir. 2014); Shanks v. Dressel, 540 F.3d 1082, 1086

(9th Cir. 2008).

V. DISCUSSION

The only issue in these appeals is whether Debtor committed

a defalcation(s) while acting in a fiduciary capacity that

supports excepting her debts to Parsons and ACIC from discharge

for purposes of § 523(a)(4).6 We begin our analysis by noting

that we are bound by the principle that “exceptions to discharge

should be strictly construed against an objecting creditor and

5Debtor does not contest or present any argument in either

of these appeals that the bankruptcy court misapplied California

issue preclusion law. Accordingly, any such argument is deemed

waived. “We review only issues which are argued specifically

and distinctly in a party’s opening brief.” Greenwood v. FAA,

28 F.3d 971, 977 (9th Cir. 1994), citing Miller v. Fairchild

Indus., Inc., 797 F.2d 727, 738 (9th Cir. 1986).

6Section 523(a)(4) provides an exception to an individual

chapter 7 debtor’s discharge for debts “for fraud or defalcation

while acting in a fiduciary capacity, embezzlement, or larceny.” 

As noted by the bankruptcy court at the Hearing, Debtor does not

contest that, considering her conduct that resulted in the

subject judgment debts, she was acting as a fiduciary of an

express trust.

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in favor of the debtor.” Snoke v. Riso (In re Riso), 978 F.2d

1151, 1154 (9th Cir. 1992); Mele v. Mele (In re Mele), 501 B.R.

357, 363 (9th Cir. BAP 2013).

The battle lines between the parties are drawn based on the

Supreme Court’s recent decision in Bullock v. BankChampaign,

N.A., 133 S. Ct. 1754 (2013). Prior to the Bullock decision,

courts, including courts of appeals, had disagreed about the

mental state required to support an exception to discharge based

on a defalcation of a fiduciary under § 523(a)(4). In fact, in

considering interpretation of § 523(a)(4), the Ninth Circuit had

held that the term “defalcation” included “even innocent acts of

failure to fully account for money received in trust.” Sherman

v. S.E.C. (In re Sherman), 658 F.3d 1009, 1017 (9th Cir. 2011),

quoting Blyler v. Hemmeter (In re Hemmeter), 242 F.3d 1186, 1190

(9th Cir. 2001).

In Bullock, the debtor had served as the trustee of a

family trust with a single asset, a life insurance policy on his

father’s life. Bullock, 133 S. Ct. at 1757. The trust

agreement allowed the trustee to borrow against the life

insurance policy’s value, with any such loans to be repaid at

the “insurance company-determined 6% interest rate.” Id. The

debtor, in fact, took out several such loans, using some of the

loan funds for transactions that benefitted him personally. Id. 

However, all such loans were repaid in full with six percent

interest to the trust. Id.

The debtor later was sued by his brothers in Illinois state

court (“State Court”), and the State Court ultimately determined

that the debtor had breached his fiduciary duty, finding that,

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although the debtor “does not appear to have had a malicious

motive in borrowing funds from the trust,” he nonetheless “was

clearly involved in self-dealing.” Id. Accordingly, the State

Court entered a judgment against the debtor that he sought to

discharge in bankruptcy. Id.

The successor trustee bank (“Bank”) filed an adversary

proceeding in bankruptcy to except the debtor’s judgment debt to

the trust from his discharge under § 523(a)(4). Id. As in

these appeals, the bankruptcy court granted summary judgment in

favor of the Bank, concluding that the debtor’s debt to the

trust was for defalcation while acting in a fiduciary capacity

and thus was excepted from his discharge under § 523(a)(4). Id.

at 1758.

The Supreme Court granted certiorari to consider the scope

of the term “defalcation” in the § 523(a)(4) context and

concluded that it included a “culpable state of mind

requirement” to align it with the other claims for discharge

exceptions included in § 523(a)(4), i.e., fraud while acting in

a fiduciary capacity, embezzlement and larceny. Id. at 1757 and

1760-61. Following Bullock, it is clear that a finding of

“defalcation while acting in a fiduciary capacity” does not

support an exception to discharge under § 523(a)(4) on a “no

fault” or strict liability basis. See id. at 1761.

What is not so clear is where to draw the line in

considering fiduciary defalcations that do not involve a

subjective intent to cause harm. The expansive language used by

the Supreme Court in setting forth new standards leaves us with

some difficult problems of interpretation in this case. The

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Supreme Court described the standards for excepting a fiduciary

defalcation from a debtor’s discharge under § 523(a)(4) as

follows in Bullock:

[W]here the conduct at issue does not involve bad

faith, moral turpitude, or other 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).

Bullock at 1759-60 (emphasis in original).

The quoted language from the Bullock decision, in effect,

states three bases for determining that a fiduciary defalcation

supports an exception from a debtor’s discharge for the subject

debt:

First, debts resulting from acts of bad faith, moral

turpitude or other immoral conduct are excepted from discharge

under the § 523(a)(4) defalcation standard. See Tomasi v.

Savannah N. Denoce Trust (In re Tomasi), No. CC-12-1401-KiTaD,

2013 WL 4399229, at *10 (9th Cir. BAP Aug. 15, 2013). In the

Surcharge Judgment, the Probate Court awarded Debtor her

statutory commission as Estate administrator in the amount of

$65,262.07 as an offset against the surcharge award. In

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addition, in his objection to the Debtor’s Second Account,

Parsons requested attorneys fees and costs under California

Probate Code (“Probate Code”) § 11003(b). Noting that Probate

Code § 11003(b) required a finding that Debtor opposed Parsons’

objection “without reasonable cause and in bad faith” to support

an award of fees and costs, the Probate Court declined to award

Parsons attorneys fees and costs. No party has suggested that

Debtor’s breaches of her fiduciary duties at issue in these

appeals were the products of moral turpitude or other immoral

conduct.

Second, the § 523(a)(4) defalcation standard covers

intentional improper conduct and criminally reckless conduct. 

Neither Parsons nor ACIC have claimed either before the

bankruptcy court or in these appeals that Debtor intentionally

breached her fiduciary duties or acted with criminal intent. If

the Supreme Court had stopped after the first two sentences of

the above-quoted standards, we would be compelled to reverse the

bankruptcy court’s summary judgment decisions.

However, the Supreme Court went on to elaborate, in effect,

a third iteration of the defalcation standard under § 523(a)(4). 

Citing the ALI Model Penal Code § 2.02(2)(c), the Supreme Court

determined that a fiduciary who breaches a fiduciary duty

without actual knowledge of wrongdoing but who consciously

disregards or is willfully blind to a substantial and

unjustifiable risk is subject to a § 523(a)(4) exception to

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discharge for defalcation.7 We interpret this third iteration

of the defalcation standard as essentially a heightened

“recklessness” standard.

Debtor argues that she essentially was held liable for not

knowing the due date for the Estate’s estate tax return and not

filing the estate tax return timely, even though she had

retained an accounting firm to prepare the return. She further

argues that in these circumstances, excepting her judgment debts

to Parsons and ACIC as defalcations for purposes of § 523(a)(4)

amounts to a strict liability determination of criminal

culpability, contrary to the standards set forth in Bullock.

Parsons and ACIC assert that Debtor knowingly and/or

recklessly disregarded her fiduciary obligations in at least

three respects: (1) she failed to marshal and file an inventory

and appraisal of the Estate’s assets so that the estate tax

return could be timely filed and the estate tax liability could

be timely paid; (2) she failed to file the estate tax return

timely, even though it was her ultimate responsibility to file

the return and make sure that the deadline was met; and (3) even

after the estate tax return deadline had passed, the estate tax

7ALI Model Penal Code § 2.02(2)(c) states:

Recklessly. A person acts recklessly with respect to

a material element of an offense when he consciously

disregards a substantial and unjustifiable risk that

the material element exists or will result from his

conduct. The 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.

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return was not completed and filed until many months after it

was due. In spite of having her accounting firm’s estimate of

the estate tax to be paid, she dribbled in payments over a

period of many months, thus exacerbating the penalties assessed

and the amount of accrued interest that had to be paid. In

these circumstances, Parsons and ACIC both contend that the

bankruptcy court’s summary judgment determinations were correct

that Debtor’s judgment debts to them resulting from defalcations

of her fiduciary duties were excepted from her discharge

pursuant to § 523(a)(4) under Bullock.

Our review of the undisputed facts in the record before us

leads us to the following conclusions: Prior to her appointment

as Estate administrator, Debtor sought to be retained for

substantial Estate work that she was not competent to perform.

We agree with the Probate Court’s conclusion that it is

inconceivable that a trained attorney who practiced outside the

probate area but had agreed to accept a position as the

administrator of a substantial California probate estate would

not have reviewed the duties of an estate administrator under

the Probate Code to ascertain the requirements to file an

inventory and appraisal timely. Debtor is not in the category

of “nonprofessional trustees, perhaps administering small family

trusts potentially immersed in intrafamily arguments,” for whom

the Supreme Court expressed particular concern in Bullock. See

Bullock, 133 S. Ct. at 1761 (emphasis in original). In any

event, when she signed and filed the Duties Statement with the

Probate Court, Debtor was aware that she had four months from

the date that letters of administration were issued to her (the

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very same date) to file the Estate inventory and appraisal. 

Yet, in a patent exhibition of Debtor’s “pattern of lethargy

when it came to working on” Estate matters, a partial inventory

and appraisal for the Estate was not filed until February 2,

2010, over seven months after it was due, and the final

inventory and appraisal was not filed until June 2010, four

months later.

Debtor’s dilatory filing of the inventory and appraisal had

two very adverse effects for the Estate. First, the estate tax

return could not be prepared and filed in the absence of the

inventory and appraisal information. Consequently, Debtor’s

late filing of the inventory and appraisal effectively

guaranteed that the estate tax return would be filed late. 

Second, Debtor’s failure to inventory and appraise the Estate

until a date well beyond when the estate tax return was due

meant that she was caught flat-footed when she needed access to

Estate bank accounts to marshal assets and pay the estate tax,

as estimated by her accountants. As pointed out by the Probate

Court, Debtor was entitled to access to all Estate bank accounts

from the date that she received her letter of administration,

February 27, 2009.

As administrator of the Estate, Debtor had the sole

responsibility to make sure that the estate tax return was filed

on time and the estate tax was paid. Indeed, upon her

appointment as Estate administrator, Debtor knew that she bore

those responsibilities so long as the Estate had funds available

to pay the estate tax. Yet, she testified before the Probate

Court that she relied entirely on the Wallin Firm to handle

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estate tax return issues, admitting that she had no expertise in

the tax area: “I don’t prepare my own taxes. I never have in my

entire life.” Cal. Sup. Ct. Hr’g Tr. (Mar. 26, 2012) at 33:26-

28 (Exh. 6, ECF No. 13, adv. no. 2:14-ap-01030). Debtor further

testified that she was advised by Edelblute that the estate tax

return was due by August 15, 2009, and she “vehemently” denied

that she ever was told that the estate tax return was due on

August 3, 2009. However, she did not present any corroborating

testimony from Edelblute, by declaration or otherwise, and

Debtor’s testimony was undercut by the late Form 4768 request

for extension that she signed, which noted the past due deadline

for the estate tax return of August 3, 2009. In any event, one

does not need to be an accountant or even an attorney to

calculate the deadline to file an estate tax return mandated by

26 U.S.C. § 6075(a), which requires that estate tax returns

“shall be filed within 9 months after the date of the decedent’s

death.” Even if there was some question as to the exact

deadline date, no accounting expertise was needed to calendar a

date comfortably in advance of the deadline either to make sure

that the return could be filed by that date or to request an

extension.

The reality was that the deadline was missed, and Debtor

made only a nominal $10,000 payment on an estate tax liability

that the Wallin Firm estimated would be $825,000. However, the

missed deadline to file the estate tax return and pay the estate

tax owed need not have been catastrophic for the Estate if

Debtor had diligently worked to get the estate tax return filed

and the tax liability paid as soon as possible thereafter. 

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However, the estate tax return apparently was not filed until

September 15, 2010, over thirteen months after the return was

due and after the IRS had sent a reminder that the estate tax

return had not been filed in April 2010, approximately five

months before. Debtor made further estate tax payments starting

in April 2010 through September 2010 totaling $1,316,000. 

However, by that time, it was too late to avoid the imposition

of very large penalties and the accrual of substantial interest.

In these circumstances, we simply disagree with Debtor that

concluding that she committed a defalcation in breach of her

fiduciary duties excepted from her discharge under § 523(a)(4)

is imposing strict liability on her for missing an estate tax

return deadline of which she was unaware. The records in these

appeals reflect a pervasive and unjustified series of breaches

of fiduciary duties by Debtor in administering the Estate. The

records further reflect that she consciously and recklessly

disregarded the substantial risks to the Estate of not filing

the estate tax return and paying the estate tax owed timely, or

at least as soon after the deadline passed as possible. Debtor

was not merely negligent but was grossly negligent in performing

her duties as administrator of the Estate. The materiality of

the risks Debtor blindly disregarded is fully reflected in the

$439,621.61 in interest and penalties ultimately assessed by the

IRS for the late filing of the estate tax return and the late

payment of the estate taxes owed. We conclude that the

bankruptcy court did not err in granting summary judgments in

favor of Parsons and ACIC on their § 523(a)(4) adversary

proceeding claims based on Debtor’s multiple defalcations of her

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fiduciary duties to the Estate.

VI. CONCLUSION

For the foregoing reasons, we AFFIRM the bankruptcy court’s

summary judgment decisions in both appeals.

Dissent begins on next page.

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KURTZ, Bankruptcy Judge, dissenting:

While I appreciate the majority’s effort to make sense of

Bullock’s recklessness standard, I have a different view of that

standard. The majority quotes selected portions of Bullock and

concludes that, under Bullock, two different levels of

recklessness are subsumed within the term “defalcation” as used

in § 523(a)(4). According to the majority, the first level of

recklessness included consists of criminal recklessness. The

majority then suggests that a second level of recklessness is

included, which is higher than the objective recklessness

standard Bullock explicitly rejected but lower than criminal

recklessness.

Unlike the majority, I have trouble reconciling this

second, non-criminal level of recklessness with Bullock’s

statements tying the requisite level of recklessness to criminal

law, to the Model Penal Code, and to intentionally wrongful

conduct. See, e.g., Bullock, 133 S. Ct. at 1759 (“where the

conduct at issue does not involve bad faith, moral turpitude, or

other immoral conduct, the term [defalcation] 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.”). In short, I believe that Bullock identifies only

one level of recklessness as falling within the scope of

defalcation under § 523(a)(4), and that is a criminal level of

recklessness.

In this respect, and in several others, I prefer the

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analysis of Bullock’s recklessness standard set forth in

MacArthur Co. v. Cupit (In re Cupit), 514 B.R. 42 (Bankr. D.

Colo. 2014). In my view, In re Cupit correctly identifies

Bullock’s standard as being closely connected to the criminal

law definition of recklessness. Id. at 50. Furthermore, In re

Cupit offers a number of crucial observations regarding the

applicable standard, which include the following:

• The applicable recklessness standard is predominantly

subjective in nature and, in the first instance, focuses on the

debtor’s actual awareness of the risk that his or her conduct

might turn out to violate his or her fiduciary duties. Id. at

50-51.

• The debtor is not reckless within the meaning of § 523(a)(4)

unless he or she consciously disregards or is willfully blind to

the risk of violating his or her fiduciary duties. Id. at 51-

52.

• Both conscious disregard and willful blindness focus on the

subjective state of mind of the debtor – what he or she actually

was aware of and actually believed regardless of the objective

reasonableness of that awareness or those beliefs. Id.

• If either of the above subjective elements are met, then the

court also must find that the risk ignored was both substantial

and unjustifiable. Unlike the conscious disregard and willful

blindness elements, this element is predominantly objective in

nature, and requires the court to assess whether, in

disregarding (or blinding himself or herself to) the risk,

debtor grossly deviated “from the standard of conduct that a

law-abiding person would observe in the actor’s situation.” Id.

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at 52 (quoting Bullock, 133 S. Ct. at 1760).

In addition to In re Cupit, I also find persuasive

Cincinnati Ins. Co. v. Chidester (In re Chidester), 524 B.R.

656, 661-62 (Bankr. W.D. Va. 2015), which followed In re Cupit. 

In re Chidester further refined Bullock’s recklessness standard

in order to correctly apply it in the summary judgment context. 

In re Chidester held that, on summary judgment, it could rule in

favor of the plaintiff-creditor on the recklessness issue only

if, given the state of the record, no reasonable trier of fact

could have found in favor of the debtor: (1) regarding the

debtor’s subjective awareness of his or her fiduciary duties;

(2) regarding the debtor’s conscious disregard of (or willful

blindness to) the risk that his or her conduct might breach

those duties; and (3) regarding his or her subjective awareness

of the substantial and unjustified nature of that risk. Id. at

662. In re Chidester’s summary judgment standard is consistent

with Ninth Circuit precedent. See Soremekun v. Thrifty Payless,

Inc., 509 F.3d 978, 984 (9th Cir. 2007) (“Where the moving party

will have the burden of proof on an issue at trial, the movant

must affirmatively demonstrate that no reasonable trier of fact

could find other than for the moving party.”).

Given the predominantly subjective nature of Bullock’s

recklessness standard and its focus on what the debtor actually

was aware of and actually believed at the time, I am persuaded

that a reasonable trier fact could find in favor of Heers on the

recklessness issue. Indeed, when as here the defendant’s state

of mind is disputed and is properly at issue, I believe summary

judgment almost never will be appropriate. Determining a

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party’s state of mind typically requires choosing between two or

more possible inferences as well as assessing the party’s

credibility. See, e.g., Wang v. Ke (In re Ke), 2013 WL 4170250,

at *13-14 (Bankr. N.D.N.Y. Aug. 14, 2013), aff’d, 2014 WL

4626329 (N.D.N.Y. Sept. 15, 2014); see also Hernandez v. New

York, 500 U.S. 352, 364 (1991) (noting that a litigant’s state

of mind, for purposes of determining intent, largely turns on

the court’s assessment of the litigant’s credibility). 

Assessing credibility and choosing between two or more possible

inferences are tasks that simply cannot be performed properly in

the process of ruling on a summary judgment motion. Anderson v.

Liberty Lobby, Inc., 477 U.S. 242, 255 (1986).

I agree with the majority that Heers’ performance of her

duties was quite poor and that the explanations and excuses she

offered in the probate proceedings for her conduct were

unsatisfactory. I might even go so far as to characterize

Heers’ conduct as criminally negligent. Nonetheless, based on

my view of Bullock’s recklessness standard, I cannot transmute

even criminal negligence into a summary judgment ruling that

Heers’ conduct rose to the same level as criminal recklessness. 

See generally In re Cupit, 514 B.R. at 50-51 (distinguishing

between criminal negligence and criminal recklessness).

Accordingly, I respectfully dissent. I would reverse the

bankruptcy court’s summary judgment ruling and would remand for

trial on the defalcation/recklessness issue.

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