Lopez Roofing Service, Inc. v. Baker

UNITED STATES BANKRUPTCY COURT
DISTRICT OF NEW MEXICO
In re:
Stacy Baker, 	Case No. 7-09-12115
Debtor.
Lopez Roofing Service, Inc.,
Plaintiff,
v. 	Adv. Pro. No. 09-01089
Stacy Baker,
Defendant.
MEMORANDUM OPINION ON THE AMOUNT OF PLAINTIFF’S § 523(a)(4)
NONDISCHARGEABLE DAMAGES
On October 21, 2013, Plaintiff filed a Motion For Summary Judgment on First
Amended Complaint, etc., doc. 67 (the “Motion”). The Court granted the Motion in part
on December 12, 2013, ruling that Plaintiff was entitled to a nondischargeability
judgment under § 523(a)(4) because of Defendant’s embezzlement,1 but that the amount
of the judgment could not be determined from the record.2
The Court conducted a final hearing on January 22, 2014, on the proper
nondischargeable judgment amount. Trace Rabern appeared for Plaintiff. The Defendant
appeared pro se. 	The Court heard the testimony of Plaintiff’s representative and
Defendant, admitted Plaintiff’s documents into evidence, and heard arguments of the
1 All statutory references are to 11 U.S.C.
2 Memorandum Opinion and Order on Plaintiff’s Motion for Summary Judgment, docs.
71 and 72.
Case 09-01089-t Doc 84 Filed 03/11/14 Entered 03/11/14 16:26:39 Page 1 of 12

-2-
parties. The Court believes that there is now a sufficient record upon which to base a
determination of the nondischargeable amount.
I. 	FACTS
The Court makes the following findings of fact:3
1. 	Plaintiff is in the residential and commercial roofing business.
2. 	Tricia Lopez is an Assistant Vice President and co-owner of Plaintiff. She
manages employees and handles financial accounting.
3. 	Ms. Lopez worked in Albuquerque from 1996 to 2008. 	She hired
Defendant in 2004 to be the office manager of Plaintiff’s Albuquerque office. Ms. Lopez
was her supervisor.
4. 	Defendant performed bookkeeping, accounting, and other administrative
tasks for the company.
5. 	Defendant was in a position of trust, dealing with payroll and management
of accounts.
6. 	Defendant had check-writing authority, and also had the authority to
charge purchases to Plaintiff’s bank account.4
7. 	Initially, Defendant had Ms. Lopez’ tacit or express approval for charges
that might reasonably be questioned. 	At some point, however, Defendant admitted that
3 The facts are found mostly from the hearing exhibits submitted by Plaintiff, and from
the testimony of Tricia Lopez, Plaintiff’s Vice President. 	However, the exhibit to Ms.
Lopez’ affidavit, Exhibit 1, is not as complete as the comparable exhibit to Ms. Lopez’
affidavit submitted in support of the Motion. The Court therefore referred at times to this
exhibit, which is also part of the record.
4 The charges are denoted “auto debits” on the list of questioned transactions submitted
by Plaintiff, so the Court assumes, but does not know, that Defendant used a debit card or
something similar, rather than a credit card. 	The method of payment is not crucial,
however.
Case 09-01089-t Doc 84 Filed 03/11/14 Entered 03/11/14 16:26:39 Page 2 of 12

-3-
her use of Plaintiff’s funds “got out of hand,” meaning that there was no colorable
argument that the expenses were business-related—they were solely to pay Defendant’s
personal expenses, were unauthorized, and constituted embezzlement.
8. 	Plaintiff’s accounting controls were lax or nonexistent. It is clear from the
evidence that Plaintiff did not review Defendant’s check-writing and debit/credit charges
until years later, even though the improper transactions were generally in “plain view” or
easy to discover.
9. 	Plaintiff closed the Albuquerque office in 2008, and Defendant was laid
off. 	Thereafter, Ms. Lopez reviewed the books of the Albuquerque office and realized
that there were problems. 	She conducted an internal audit of expenses and payments
between 2004 and 2008.
10. 	Ms. Lopez concluded that Defendant embezzled a total of $60,351.76.
11. 	Plaintiff 	claimed 	other 	losses 	caused 	by 	Defendant’s 	embezzlement,
including $15,200 for accounting and audit fees. 	Of this amount, $12,800 is for Ms.
Lopez’s time to conduct the audit, based on her salary, and $1,500 is for the time of
another employee, JoAnn (her last name was not provided).
12. 	Plaintiff also claimed consequential damages of $29,000 and attorney fees
of $1,578.05.
13. 	On January 26, 2009, Plaintiff commenced a collection action against
Defendant in state court, which resulted in a March 12, 2009 default judgment in the
amount of $106,351.11.
14. 	Ms. Lopez turned over the results of her internal audit to the New Mexico
State Police and the Bernalillo County District Attorney.
Case 09-01089-t Doc 84 Filed 03/11/14 Entered 03/11/14 16:26:39 Page 3 of 12

-4-
15. 	The State of New Mexico filed a criminal complaint against the Defendant
in the Second Judicial District Court, State of New Mexico, commencing State of New
Mexico v. Stacy Baker, cause no. CR10-00141 (the “Criminal Action”).
16. 	Defendant and the State of New Mexico entered into a plea agreement on
May 26, 2011. Defendant was represented by a public defender when the plea agreement
was negotiated.
17. 	In the plea agreement, Defendant plead guilty to two counts of criminal
embezzlement under New Mexico law, N.M.S.A. § 30-16-8.
18. 	As part of the plea agreement, Plaintiff agreed to pay restitution to Plaintiff
in 	the 	amount 	of 	$40,097.04. 	Defendant’s 	public 	defender 	reviewed 	the 	audit
information prepared by Ms. Lopez and agreed that $40,097.04 was a reasonable figure
for restitution.
19. 	Defendant paid $845 under the restitution agreement.
20. 	The following table compares what Plaintiff sought in the Motion and
what it asked for at the conclusion of the damages hearing:
Damages Category 	Motion 	Final Hearing
Embezzlement
amount
$60,351.76 	$60,351.76
Audit/accounting
fees
$15,200 	$14,300
Interest/lost econ.
opportunity costs
$29,000 	$0
Court costs 	$121.30 	$0
Attorney fees 	$1,578.05 	$0
Binding costs 	$0 	$900
Less restitution
payments
$0 	-$845
Punitive damages 	Unspecified 	$0
Total 	$106,351.11 plus
punitive damages
$74,706.76
Case 09-01089-t Doc 84 Filed 03/11/14 Entered 03/11/14 16:26:39 Page 4 of 12

-5-
21. 	Defendant is still on probation and still attempting to make restitution
payments. 	Initially, her mother made the required payments. 	In about December 2012,
Defendant’s mother was laid off, so she couldn’t make any additional payments.
22. 	Defendant is unemployed. 	She goes weekly to try and find employment,
but because of failed background checks she can’t get a job. She can’t even find work at
a fast food restaurant because of the embezzlement conviction.
23. 	Defendant has two children. She lives at a women’s shelter and has little
or no income. She is receiving food assistance from the State of New Mexico.
24. 	Defendant has made a few small restitution payments since her mother
was laid off, but has insufficient income to pay more. She is afraid that unless she pays
more money, she will violate the terms of her parole and be sent to jail.
25. 	The Court referred the matter to post-hearing mediation. A mediation was
scheduled for February 25, 2014. Defendant did not appear at the mediation.5
II. 	DISCUSSION
Based on the plea agreement and resulting conviction, the Court previously ruled
that Defendant had embezzled from Plaintiff. The Court must now determine the proper
nondischargeable amount.
In general, damages for nondischargeable debts include losses proximately caused
by the debtor’s conduct. The leading case is Cohen v. de la Cruz, 523 U.S. 213 (1998).
In Cohen, the debtor argued that nondischargeable damages for fraud under § 523(a)(2)
are limited to the amount obtained by the debtor from the fraudulent activity, and should
not include punitive damages. The Supreme Court ruled against the debtor, holding that
5 See the letter from the mediator, doc. 83, filed February 27, 2014.
Case 09-01089-t Doc 84 Filed 03/11/14 Entered 03/11/14 16:26:39 Page 5 of 12

-6-
a “debt for” money, property, or services obtained by fraud should be construed to mean
“all liability arising from fraud.” 523 U.S. at 222.
Although Cohen dealt with nondischargeable debt under § 523(a)(2)(A), its
holding likely applies to nondischargeable embezzlement debts as well. 	In In re
Musgrave, 2011 WL 312883 (10 th Cir. BAP 2011) (unpublished), the Tenth Circuit
Bankruptcy Appellate Panel discussed whether a nondischargeable judgment against the
debtor, a contractor, under § 523(a)(4) and (6) should include the cost to repair defective
work. 	To answer the question, the court extensively cited and quoted Cohen, and then
held that “[a]lthough Cohen involved a § 523(a)(2) claim, the Supreme Court’s analysis
of the text and structure of § 523(a) suggest its holding is not limited to § 523(a)(2).”
Musgrave, 2011 WL 312883, at *9.
Nondischargeable damages for embezzlement historically were more limited than
Cohen’s proximate cause standard. 	For example, the Musgrave court stated that
“damages for embezzlement and theft claims are generally limited to money or property
inappropriately used, the actual cost of accounting fees incurred to discover and verify
the sums involved, and punitive damages.” 	Musgrave, 2011 WL 312883, at *11
(footnotes omitted), citing Brookman v. Gibson (In re Gibson), 77 B.R. 829, 831 (Bankr.
D. Colo. 1987). 	See also Eau Claire County v. Loken (In re Loken), 32 B.R. 205, 208
(Bankr. W.D. Wis. 1983) (included audit fees that “proximately flowed from” debtor’s
wrongdoing 	in 	nondischargeable 	amount). 	Nevertheless, 	the 	Musgrave 	court
acknowledged 	that 	the 	Cohen 	decision 	likely 	expanded 	the 	prior 	types 	of
nondischargeable embezzlement damages:
… nor do we see any evidence in the record that would support a finding
the Repair Cost arose from embezzlement or larceny. 	We conclude the
Case 09-01089-t Doc 84 Filed 03/11/14 Entered 03/11/14 16:26:39 Page 6 of 12

-7-
bankruptcy 	court 	erred 	in 	determining 	that 	the 	Repair 	Cost 	was 	a
compensatory damage that resulted from either larceny or embezzlement
and, 	absent 	such 	evidence, 	these 	damages 	cannot 	be 	held
nondischargeable under the embezzlement or larceny exceptions.
Musgrave, 2011 WL 312883, at *11 (italics added). See also In re Houng, 499 B.R. 751,
775 (C.D. Cal. 2013) (citing Cohen for the proposition that embezzlement damages
would be treated under the same “arising from” standard); Heard v. Perkins, 	441 B.R.
701, 707 (N.D. Ala. 2010) (§ 523(a)(4) requires that the debt at issue resulted from the
debtor’s defalcation); In re Roussos, 251 B.R. 86, 94 (9th Cir. BAP 2000) (the Cohen
court read § 523(a)(2) in pari materia with other nondischargeability sections, including
§ 523(a)(4)).
The 	Court, 	following 	Cohen 	and 	Musgrave, 	will 	when 	determining 	the
appropriate nondischargeable amount consider the amount embezzled; accounting fees
incurred to discover and verify the embezzlement; any punitive damages awardable; and
other damages proximately caused by the embezzlement.6
A. 	The amount embezzled.
There is no question that the nondischargeable judgment should include the
amount actually embezzled. 	The restitution figure agreed to by Defendant, her criminal
defense 	counsel, 	and 	the 	State 	of 	New 	Mexico 	was 	$40,097.04. 	According 	to
Defendant’s testimony, the amount was agreed to by the parties after reviewing the
information Ms. Lopez compiled. 	Defendant’s counsel challenged a number of Ms.
6 Proximate causation requires both causation in fact and legal causation. 	Musgrave,
2011 WL 312883, at *9. 	Causation in fact requires that the debtor’s questioned actions
be a “substantial factor in determining the course of conduct that results in [the] loss. Id.,
quoting the Restatement (Second) of Torts (1976), § 546. Legal causation requires that a
creditor’s loss “reasonably be expected to result from” the debtor’s questioned actions.
Id. at *10, quoting Restatement, § 548A.
Case 09-01089-t Doc 84 Filed 03/11/14 Entered 03/11/14 16:26:39 Page 7 of 12

-8-
Lopez’ entries, and was able to reduce Ms. Lopez’ $60,351.76 figure to $40,097.04, a
reduction of 34%.
The Court finds that the $40,097.07 figure is reasonable and will adopt it.
B. 	Accounting Fees
Under Musgrave, Plaintiff is entitled to recover “the actual cost of accounting fees
incurred to discover and verify the sums involved.” Musgrave, 2011 WL 312883, at *11,
citing Brookman v. Gibson (In re Gibson), 77 B.R. at 831. See also Loken, 32 B.R. 205,
208 (Bankr. W.D. Wis. 1983) (audit fees properly includable in § 523(a)(4) judgment
amount). 	Here, Plaintiff claims $14,300 in audit fees, $12,800 for Ms. Lopez’ time and
$1,500 for time spent by JoAnn. This amounts come from the hours spent by Ms. Lopez
and JoAnn auditing Plaintiff’s books and records after the Albuquerque office was closed
in 2008.
Musgrave, Gibson, and Loken dealt with outside accounting fees, not time spent
by employees of the victimized business. 	The Court found no case law support for
including internal audit work in the nondischargeable amount. 	When an outside
accounting firm is retained, its fees are an out-of-pocket expense. 	The case is altered
with employee work, since no additional expense is incurred.7 The time spent by Ms.
Lopez and JoAnn was an administrative burden, to be sure, but is not a proper component
of a nondischargeable judgment.
Furthermore, there is insufficient evidence of the reasonableness of such amounts.
With outside accountants, the Court can review fee bills and determine whether the fee
was reasonable. No similar documentation was provided by Plaintiff.
7 There was no evidence that Plaintiff paid overtime to either Ms. Lopez or JoAnn.
Case 09-01089-t Doc 84 Filed 03/11/14 Entered 03/11/14 16:26:39 Page 8 of 12

-9-
The Court will not add the internal audit amount to the nondischargeable
judgment.
C. 	Binding 	and 	Copying 	Expenses. 	Plaintiff 	seeks 	to 	include 	in 	the
nondischargeable judgment $400 for the cost of binders and $500 for copying costs. The
Court finds that these amounts should not be included in the nondischargeable judgment,
because the evidence supporting the expenses is insufficient and lacking in detail. $400
for binders seems excessive to the Court, and the round numbers indicate that the figures
may not be accurate. 	No receipts were provided. 	It could be that, as with the internal
audit figure, the copy charges are for copies made with Plaintiff’s copy machine. 	If so,
there is no indication about the per page charge, and whether it is reasonable. Finally, it
is not clear that this cost was proximately caused by the embezzlement.
D. 	Other Amounts. 	Originally, Plaintiff had asked for additional sums
totaling about $31,500, plus punitive damages. 	At the final hearing on damages,
however, Plaintiff’s damages request excluded these amounts. 	The Court therefore will
not include any of them. 	The Court also finds that no other damages were proximately
caused by Defendant’s embezzlement.
E. 	Restitution Payments. 	Defendant, mostly acting through the good efforts
of her mother, paid a total of $845 to Plaintiff pursuant to the plea agreement. 	This
should be deducted from the nondischargeable amount.
F. 	Final Nondischargeable Amount. 	The Court finds that the appropriate
nondischargeable amount, given the record in this adversary proceeding, is $40,097.07,
less $845, or a net of $39,252.07.
Case 09-01089-t Doc 84 Filed 03/11/14 Entered 03/11/14 16:26:39 Page 9 of 12

-10-
III. 	CONCLUSION
This is an unfortunate case. Defendant clearly embezzled some amount of money
from Plaintiff. 	The most accurate figure available to the Court is $40,097.07. 	It could
be, however, that if Defendant had had the resources to mount a vigorous defense, the
figure could have been further reduced. 	It appears to the Court that many instances
labeled 	embezzlement 	by 	the 	Plaintiff 	simply 	had 	insufficient 	documentation 	to
demonstrate their legitimacy. 	A skilled accountant likely could have evaluated and
presented a better case for reducing the claimed embezzlement than a harried public
defender who possessed, perhaps, less knowledge of cost accounting.
Furthermore, Plaintiff is not entirely without blame in this situation, for two
reasons. 	First, much of what was later deemed embezzlement started out as purchases
and other charges specifically or tacitly approved by Ms. Lopez. As Defendant testified,
some initial questionable charges were permitted by Plaintiff, but eventually Defendant’s
payment of personal expenses with Plaintiff’s funds “got out of hand.” It does not appear
that Plaintiff gave Defendant sufficient early guidance about the difference between
acceptable and unacceptable use of company money for personal expenses.
Second, 	Plaintiff’s 	accounting 	controls 	were 	almost 	nonexistent. 	Most
embezzlers go to great lengths to conceal their theft, creating dummy bank accounts,
dummy expense accounts, false invoices, and the like. In this case, the improper charges
were easily discoverable by anyone taking the trouble to review Plaintiff’s bank account
statements, credit card statements, and similar books and records. 	No one took the
trouble. 	Had 	Plaintiffs’ 	financial 	controls 	been 	even 	marginally 	businesslike,
Defendant’s pattern of charging personal expenses to the company account would have
Case 09-01089-t Doc 84 Filed 03/11/14 Entered 03/11/14 16:26:39 Page 10 of 12

-11-
been detected early on, and Defendant would either have been fired or set straight. 	In
such an event, Plaintiff would have saved a lot of money and aggravation, and
Defendant’s life might not have been ruined.
Defendant of course deserves most of the blame. Although perhaps lulled into a
false sense that what her conduct was tolerated, she must have known that many of her
charges were way over the line. 	Defendant embezzled money from Plaintiff, and can
only blame herself for her terrible lapses of honesty and judgment.
When the matter got to the Court, the dire nature of the situation was clear. Her
embezzlement conviction rendered Defendant unemployable, homeless, unable to care
for her children, and unable to pay restitution to Defendant. 	The sole source of prior
restitution payments, Defendant’s mother, had lost her job. 	Proceeding with Plaintiff’s
nondischargeability action to judgment seemed certain to benefit no one.
It was for this reason the Court ordered the parties to mediate, thinking that a
much better solution might be (to give just one possible alternative outcome) to have the
embezzlement conviction satisfied or vacated, in exchange for Defendant’s agreement to
pay a portion of her future earnings to Plaintiff. 	The Court imposed upon James C.
Jacobsen, a well-respected local attorney, to mediate the matter free of charge. 	Mr.
Jacobsen, in the Court’s opinion, was well-situated to fashion a settlement that would
have been much better for both sides than anything the Court could achieve. 	In an
inexplicable 	(further) 	outburst 	of 	self-destructive 	behavior, 	Defendant 	refused 	to
participate in or even attend the mediation.
Case 09-01089-t Doc 84 Filed 03/11/14 Entered 03/11/14 16:26:39 Page 11 of 12

-12-
The 	Court 	will 	enter 	a 	separate 	judgment 	that 	Defendant 	owes 	Plaintiff
$39,252.07 that is nondischargeable under § 523(a)(4).
_____________________________________
Hon. David T. Thuma
United States Bankruptcy Judge
Entered on Docket: March 11, 2014.
Copies to:
Trace Rabern
119 East Marcy Street, #201
Santa Fe, NM87501
Mike Daniels
P.O. Box 1640
Albuquerque, NM 87103
Stacy Baker
3303 Shepard Place, NE
Albuquerque, NM 87106
Case 09-01089-t Doc 84 Filed 03/11/14 Entered 03/11/14 16:26:39 Page 12 of 12