Morrison Supply Company v. Dalton

UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF NEW MEXICO
In re:
LAUREN DALTON,
Debtor. 	No. 7-09-10289 SA
MORRISON SUPPLY COMPANY,
Plaintiff,
v. 	Adv. No. 09-1046 S
LAUREN DALTON,
Defendant.
MEMORANDUM OPINION ON DEFENDANT’S
MOTION TO DISMISS COMPLAINT FOR
FAILURE TO STATE A CLAIM FOR RELIEF
This matter is before the Court on Defendant’s Motion to
Dismiss Complaint for Failure to State a Claim for Relief
(“Motion”) (doc 7). 	Defendant is represented by R. Trey Arvizu,
III. 	Plaintiff is represented by Calvert Menicucci, P.C. (Sean
R. Calvert). 	This is a core proceeding to determine the
dischargeability of a debt. 	28 U.S.C. § 157(b)(2)(I). 	The Court
will defer ruling on the Motion until a probate proceeding is
completed in state court and Plaintiff files an amended
complaint.
In ruling on a motion to dismiss for failure to state a
claim,
“[w]e must accept all the well-pleaded allegations of
the complaint as true and must construe them in the
light most favorable to the plaintiff.” 	Alvarado v.
KOB-TV, L.L.C., 493 F.3d 1210, 1215 (10 th Cir. 2007)
(citation and internal quotation marks omitted). 	In
addition, in determining whether to grant a motion to
dismiss for failure to state a claim, we “look to the
specific allegations in the complaint to determine
whether they plausibly support a legal claim for
relief.” 	Id. at 1215 n. 2.
Case 09-01046-s Doc 14 Filed 10/09/09 Entered 10/09/09 15:09:56 Page 1 of 10

1The Court assumes that John Dalton is Debtor’s late
husband.
2The complaint does not identify this entity or its relation
to John Dalton or Dalteck Heating & Air Conditioning, LLC.
Page -2-
Pace v. Swerdlow, 519 F.3d 1067, 1073 (10 th Cir. 2008).
The substantive allegations of the complaint include:
John Dalton 1 entered an open account agreement with Plaintiff in
2002 under the name Dalteck Heating & Air Conditioning (a sole
proprietorship)(¶ 6). 	He purchased materials from Plaintiff
between 2002 and December 27, 2007 (¶ 7). 	On August 24, 2007 he
organized Dalteck Heating & Air Conditioning, LLC (¶ 8). 	John
Dalton never opened a new open account agreement for the LLC with
Plaintiff (¶ 9). 	Between November 13, 2007 and December 27,
2007, John Dalton purchased materials from Plaintiff on the open
account agreement in the amount of $45,242.56 (¶ 10). 	John
Dalton was killed in a car accident on December 29, 2007 (¶ 11).
On April 7, 2008, Plaintiff commenced a state court lawsuit
in Eddy County, New Mexico against “Estate of John Dalton and
Dalteck Custom Sheetmetal & HVAC, LLC.” 2 	(¶ 12). 	On March 19,
2009 Plaintiff obtained a default judgment against the Estate of
John Dalton and Dalteck Custom Sheetmetal & HVAC, LLC, a copy of
which is attached to the adversary complaint (¶ 13).
The Estate of John Dalton has never been formally or
informally probated (¶ 14).
Case 09-01046-s Doc 14 Filed 10/09/09 Entered 10/09/09 15:09:56 Page 2 of 10

3Plaintiff’s amended complaint should address the fact that
a “technical conversion” does not fall within the § 523(a)(6)
exception to discharge. 	C.I.T. Financial Services, Inc. v. Posta
(In re Posta), 866 F.2d 364, 368 (10 th Cir. 1989)(citing Davis v.
Aetna Acceptance Co., 293 U.S. 328, 331-32 (1934). 	Only
conversions that are both “willful” and “malicious” are
nondischargeable. 	Id. at 367. 	See also Kawaauhau v. Geiger, 523
U.S. 57, 64 (1998)(Debts arising from recklessly or negligently
inflicted injuries do not fall within 523(a)(6).)
4Debtor filed a Chapter 7 bankruptcy in New Mexico on
January 28, 2009.
Page -3-
Count I is labeled “Conversion” and appears to assert a
claim under § 523(a)(4) or (a)(6). 3 	On December 29, 2007,
materials sold by Plaintiff remained in John Dalton’s possession
(¶ 17). 	Defendant claimed the assets of Dalteck Heating & Air
Conditioning, LLC as her personal property in her bankruptcy
petition. 4 (¶ 18). 	She claimed in her petition that she had no
supplies, equipment or business inventory, including the
materials sold by Plaintiff to John Dalton and in his possession
at the time of his death (¶ 19). 	Defendant intentionally
converted and sold or utilized the materials sold by Plaintiff to
John Dalton without having any interest therein and without
payment to Plaintiff for the materials so converted (¶ 20).
Defendant, in her petition, claims assets that belong to John
Dalton, including his 401k plan (¶ 21). 	Defendant has
intentionally seized and claimed dominion over the assets of the
Estate of John Dalton without probate as required by law and
without payment to the debtors [sic, should be creditors] of the
Case 09-01046-s Doc 14 Filed 10/09/09 Entered 10/09/09 15:09:56 Page 3 of 10

Page -4-
probate estate (¶ 22). 	Defendant’s acts regarding the assets of
the Estate of John Dalton without probate and distribution of the
assets constitutes conversion of the assets (¶ 23).
Count II is labeled “Fraud” and asserts a claim under §
523(a)(2). 	Defendant has an interest in the Estate of John
Dalton and may be entitled to be appointed as Personal
Representative (“P.R.”) of the Estate (¶ 25). 	No petition for
appointment as P.R. has been made (¶ 26). 	If Defendant was
acting as P.R. of the Estate of John Dalton in distributing
assets to herself, then her acts as P.R. constitute a fraudulent
conveyance contrary to the requirements of the Uniform Probate
Code (“U.P.C.”) (¶ 27).
Count III is labeled “Breach of Fiduciary Duty” and asserts
a claim under § 523(a)(4). 	Under the U.P.C., NMSA § 45-3-711,
P.R.’s are subject to a trust duty to creditors and others
interested in the estate (¶ 31). 	Under the U.P.C., NMSA § 45-3-
712, P.R.’s are liable to creditors of the Estate and interested
persons for damage or loss resulting from breach of the P.R.’s
fiduciary duty (¶ 32). 	If Defendant acted as P.R. and
transferred assets of the Estate of John Dalton, then Defendant
has breached her fiduciary duty to Plaintiff (¶ 33).
Count IV is labeled “Objection to Discharge under Section
523(a)(4).” 	To the extent the assets of the Estate of John
Dalton including the materials sold by Plaintiff and converted by
Case 09-01046-s Doc 14 Filed 10/09/09 Entered 10/09/09 15:09:56 Page 4 of 10

5There is no allegation that either LLC owned any of the
property or owed any of the debt.
Page -5-
Defendant or John Dalton’s 401k plan are the property of the
bankruptcy estate, they are in the bankruptcy estate only through
the fraud and breach of fiduciary duty by Defendant, and the
related debts are not dischargeable (¶ 36). 	Alternatively,
Defendant has mistakenly claimed assets of the Estate of John
Dalton as bankruptcy estate assets and Plaintiff should be
allowed to enforce its judgment against the Estate assets that
are in the bankruptcy estate (¶ 37). 	Essentially this count
recapitulates Counts I, II and III.
The complaint seeks an order allowing Plaintiff to proceed
against the assets of the Estate of John Dalton claimed to be
assets of the bankruptcy case, or, in the alternative, for a
judgment against Defendant denying discharge of any amounts owed
to Plaintiff.
DISCUSSION
Plaintiff describes two possible sources of Defendant’s
liability 5. 	First, Defendant has a liability by virtue of the
community property laws for the materials purchased by John
Dalton. 	This liability is not mentioned in the complaint, and
the Court assumes that Plaintiff is not claiming that liability
is nondischargeable under any subsection of § 523. 	The other
liability is completely bound up in the fact that no probate
Case 09-01046-s Doc 14 Filed 10/09/09 Entered 10/09/09 15:09:56 Page 5 of 10

Page -6-
proceedings were ever filed for John Dalton, e.g., Defendant
converted probate estate property to her own use, fraudulently
conveyed probate assets to herself, failed to file a probate,
failed to pay probate estate creditors. 	As a general rule, as
discussed below, federal courts lack jurisdiction over probate
matters. 	Therefore, the Court will suspend this case pending the
results of a probate action to be filed in the New Mexico state
courts.
It is true that a federal court has no
jurisdiction to probate a will or administer an estate,
the reason being that the equity jurisdiction conferred
by the Judiciary Act of 1789, 1 Stat. 73, and s 24(1)
of the Judicial Code, which is that of the English
Court of Chancery in 1789, did not extend to probate
matters. 	But it has been established by a long series
of decisions of this Court that federal courts of
equity have jurisdiction to entertain suits ‘in favor
of creditors, legatees and heris' [sic] and other
claimants against a decedent's estate ‘to establish
their claims' so long as the federal court does not
interfere with the probate proceedings or assume
general jurisdiction of the probate or control of the
property in the custody of the state court.
Markham v. Allen, 326 U.S. 490, 494 (1946). (Citations omitted.)
The Court of Appeals for the Second Circuit adopted a two-part
test to determine whether a particular lawsuit implicates
“probate matters.” 	Moser v. Pollin, 294 F.3d 335, 340 (2 nd Cir.
2002):
First, is the federal district court sitting in
diversity being asked to directly probate a will or
administer an estate? These functions are “purely
probate” in character and are considered to be
categorically outside the jurisdiction of the federal
courts. 	See Markham, 326 U.S. at 494, 66 S.Ct. 296;
Case 09-01046-s Doc 14 Filed 10/09/09 Entered 10/09/09 15:09:56 Page 6 of 10

Page -7-
Ashton [v. Josephine Bay Paul and C. Michael Paul
Foundation, Inc.], 918 F.2d [1065] at 1071 [(2 nd Cir.
1990)]. 	Of course, since few practitioners would be so
misdirected as to seek, for example, letters
testamentary or letters of administration from a
federal judge, the first prong of the probate exception
is rarely, if ever, violated.
On the other hand, it would not at all be
surprising for a diversity action filed in federal
district court to be indirectly related to the probate
of a will or the administration of an estate. 	The
instant appeal, as we determine infra, presents just
such a factual circumstance. 	In respect of lawsuits
that are “probate-related” rather than purely probate
in character, the Supreme Court has found that some but
not all such suits fall categorically within the
probate exception. 	Markham, 326 U.S. at 494, 66 S.Ct.
296. 	Thus, the second prong of the probate exception
asks whether entertaining the action would cause the
federal district court to “interfere with the probate
proceedings or assume general jurisdiction of the
probate or control of property in the custody of the
state court.” 	Id. 	Only in those three enumerated
situations must a probate-related case be dismissed
from federal court for lack of subject matter
jurisdiction. 	See Dulce v. Dulce, 233 F.3d 143, 145
(2d Cir.2000); Ashton, 918 F.2d at 1072. 	This
“interference prong” is in practice the workhorse of
the probate exception.
In this case, Plaintiff is not asking the bankruptcy court
to probate a will, but it is asking the court to assume general
jurisdiction over probate matters. 	Plaintiff seeks to declare
Defendant as the P.R., impose fiduciary duties upon her, seek a
determination of what property is in the probate estate, assess
penalties against her for any damages resulting from the alleged
breaches of fiduciary duty, and to receive payment as if a
probate had been filed. 	These matters are all things that
probate courts regularly do. 	The bankruptcy court does not have
Case 09-01046-s Doc 14 Filed 10/09/09 Entered 10/09/09 15:09:56 Page 7 of 10

6A person who presumes to act on behalf of an estate but
without authority to do so is known as an “executor de son tort.”
(continued...)
Page -8-
jurisdiction to perform these tasks. 	See also U.P.C., NMSA § 45-
1-302(A)(1) (“The district court has exclusive original
jurisdiction over all subject matter relating to: 1) formal
proceedings with respect to the estate of decedents, including
... distribution and closing of estates[.]”)(emphasis added).
Accord Litzinger v. Estate of Victor Litzinger (In re Litzinger),
322 B.R. 108, 113 (8 th Cir. B.A.P. 2005)(remanding case to allow
bankruptcy court to analyze whether resolution of the dispute lay
exclusively within the jurisdiction of the Michigan probate
court.); Lepard v. NBD Bank, 384 F.3d 232, 237 (6 th Cir. 2004)
(affirming District Court’s dismissal of a claim based on the
administration of a trust because the state statute read “The
[probate] court has exclusive legal and equitable jurisdiction
[over] ... (b) [a] proceeding that concerns ... the
administration ... of a trust[.]”)
In conclusion, the Court will suspend this case pending the
outcome of a probate case to be filed in the New Mexico state
court. 	That proceeding will necessarily determine who is the
P.R., what assets are in the probate estate, what assets are
Defendant’s, what assets were converted (if any), whether
Defendant could be liable for breach of fiduciary duties before
being appointed P.R. 6, whether Plaintiff’s claim was timely,
Case 09-01046-s Doc 14 Filed 10/09/09 Entered 10/09/09 15:09:56 Page 8 of 10

6(...continued)
An executor de son tort is subject to all of the liabilities of a
duly appointed P.R. but is not entitled to any of the privileges.
Albritton v. Estate of Albritton, 731 So.2d 154, 156 (Fla. Ct.
App. 1999).
7Under Florida statute § 733.309, an executor de son tort is
liable to the P.R. when appointed for any damages. 	Albritton,
731 So.2d at 156. 	Compare Ga. Code Ann. § 53-6-2 (Executor de
son tort is liable to the creditors and beneficiaries for double
the value of property converted in bad faith.) 	New Mexico does
not appear to have a similar statute.
Page -9-
whether Plaintiff was harmed by any transfer of assets by
Defendant, whether Defendant would be liable to the probate
estate or directly to any individual creditors for any alleged
conversion of assets 7, and the amount of distribution Plaintiff
would have received from the probate estate, if any. 	The probate
action should be filed by Plaintiff, which shall bear the costs
of the filing. 	If Plaintiff fails to file the probate proceeding
within 45 days of the entry of this Memorandum Opinion, upon
certification by Defendant’s lawyer that no probate has been
filed, this adversary proceeding will be dismissed without
further notice or hearing. 	Plaintiff should file a report at the
conclusion of the probate case and an amended complaint setting
forth the causes of action that remain.
Honorable James S. Starzynski
United States Bankruptcy Judge
Date Entered on Docket: 	October 9, 2009
Case 09-01046-s Doc 14 Filed 10/09/09 Entered 10/09/09 15:09:56 Page 9 of 10

Page -10-
Copies to:
Sean R Calvert
Calvert Menicucci, PC
8900 Washington St., Suite A
Albuquerque, NM 87113
R Trey Arvizu, III
PO Box 1479
Las Cruces, NM 88004-1479
Case 09-01046-s Doc 14 Filed 10/09/09 Entered 10/09/09 15:09:56 Page 10 of 10