William M. Bryan, Inc. v. Brody

UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
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In re: 	Chapter 7
IRA LAWRENCE BRODY
Debtors. 	Case No. 17-22951 (RDD)
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WILLIAM M. BRYAN, INC.
Adversary Proceeding
Plaintiff
v.
IRA LAWRENCE BRODY
No. 17-08282 (SHL)
Defendants.
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POST-TRIAL DECISION
A P P E A R A N C E S:
Keith W. Berglund
Counsel for William M. Bryan, Inc.
149 South Barrington Ave
Los Angeles, CA 90049
Ira Lawrence Brody
Defendant/Debtor Pro Se
613 Purchase Street
Rye, NY 10580
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SEAN H. LANE
UNITED STATES BANKRUPTCY JUDGE
Before the Court are the merits of the above-captioned adversary proceeding commenced
by William M. Bryan, Inc. (“WMB”) in the Chapter 7 case of Debtor Ira Lawrence Brody.
WMB contends that Mr. Brody’s debt to WMB cannot be discharged in this bankruptcy case
pursuant to Sections 523(a)(2)(A), 523(a)(4), and 523(a)(6) of the Bankruptcy Code. Trial took
place in this case on November 28, 2018, and the parties subsequently submitted post-trial briefs.
See Post-Trial Brief of William M. Bryan, Inc. [ECF No. 21] (the “WMB Brief”); Statement of
Ira Lawrence Brody [ECF No. 22] (the “Brody Brief”). Based on the evidentiary record and for
the reasons set forth below, the Court finds that WMB has met its burden under Section
523(a)(4) of the Bankruptcy Code and the debt owed to it is non-dischargeable. This Decision
constitutes the Court’s findings of fact and conclusions of law.
FINDINGS OF FACT
Mr. Brody is both a highly intelligent and credentialed individual. Mr. Brody graduated
from Tulane University with a degree in political economy, American University with an
M.B.A., and Cardozo Law School with a J.D. Def. Exh. 1 (the “Brody Deposition”) at 5:2-7:9.
Mr. Brody is also licensed to practice law before the courts of the State of New York. Brody
Dep. at 58:16-59:2. Upon graduating from law school, Mr. Brody served in the administration of
New York City Mayor Rudolph Giuliani and in the administration of New York Governor
George Pataki. Brody Dep. at 8:10-12:8.
After his time in government service, he spent several years managing local newspapers
and a brief period working on the New York State Olympic Games Committee. Brody Dep. at
13:2-14:5. Mr. Brody then began working in the insurance premium finance industry with a
company known as InsCap. Brody Dep. at 14:13-21. In that industry, business entities arrange
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loans from various sources of funding—including banks, hedge funds, and individuals—to fund
the purchase of certain life insurance policies. Brody Dep. at 22:11-20, 35:4-8. As Mr. Brody
described the process, a capital aggregator takes out a loan with a bank, hedge fund, or individual
to buy a policy note from the insured and then pays the policy premiums. Brody Dep. at 127:6-
13. Those funds are then repaid, plus a commission, in around 30 days. Brody Dep. at 35:8-11.
These deals are profitable because “the commission on those life insurance policies [is] greater
than the premium paid.” Brody Dep. at 35:8-22. In an example given by Mr. Brody, a life
insurance premium of $100 could result in a return of principal plus commissions of up to $121,
or a net profit of up to $21. Brody Dep. at 35:12-22. Mr. Brody learned about the structure of
these transactions from others at InsCap, where he ultimately rose to the position of Chief
Operating Officer. Brody Dep. at 27:18-28:19.
Eventually, Mr. Brody left InsCap to start multiple limited liability companies in the
insurance premium finance industry, including Broad Park Capital, LLC (“BPC”) and Life
Finance Capital, LLC (“LFC”), both of which were organized under the laws of Tennessee.
Brody Dep. at 29:7-30:11, 79:14-80:8. LFC is a subsidiary of BPC. Brody Dep. at 79:14-23.
Mr. Brody was one of the few employees at BPC. Brody Dep. at 31:3-5 (stating that BPC only
had three employees during its existence). By 2012, Mr. Brody was the only employee at BPC.
Brody Dep. at 32:1-4. Mr. Brody saw himself, BPC, and LFC as acting akin to an “architect” or
facilitator of insurance premium financing transactions. Brody Dep. at 126:19-127:5. Mr. Brody
“designed” the entire “system” upon which these transactions were based, provided “generic
documents,” and created term sheets, but saw himself as divorced from the individual
transactions actually being effectuated. Brody Dep. at 126:21-128:7. Instead, individuals
including Joseph Bartholomew and Mark Goodman would source the policies and transfer the
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loaned funds as necessary. Brody Dep. at 113:16-116:6, 127:6-13. However, Mr. Brody also
testified that his usual role in insurance premium financing transactions was to transfer loaned
funds from the lender to the insurance carriers. Brody Dep. at 42:12-19.
As part of BPC’s and LFC’s business, Mr. Brody engaged in transactions with Plaintiff
WMB, a California corporation, and its principal and namesake, William M. Bryan, a California
resident. Pl. Exh. 47 ¶¶ 2-3, 5; Compl. ¶ 8. The parties completed at least one transaction
successfully. Pl. Exh. 47 ¶ 5. In that transaction, WMB loaned $279,560 to Mr. Brody, Mr.
Bartholomew, and other related parties, and WMB was repaid $290,742 after fees were
deducted. Id. After this successful transaction, the parties discussed another insurance premium
financing transaction involving four insurance policies and a loan from WMB of $552,475. Id.
Before WMB would agree to lend this amount, however, it proposed additional protections for
the transaction. More specifically, WMB requested that an escrow agent receive the funds—
rather than BPC, Mr. Brody, or Mr. Bartholomew—and that the escrow agent transfer the funds
directly to the insurance carriers. Id. WMB also requested that the escrow agent be required to
produce an acknowledgement to WMB that the insurance carriers received the funds. Id. If the
acknowledgements were not timely received by WMB, the escrow agent would deliver pre-
signed cancellation notices within a 30-day statutory “free look” period and return the loaned
money to WMB. Id. WMB requested these protections to “insure the security of the
transaction.” Pl. Exh. 47 ¶ 5.
Mr. Brody sent WMB a diagram outlining BPC’s role in the transaction, which included
the forwarding of the necessary documentation memorializing the transaction to WMB and BPC
forwarding the funds to the life insurance company. Id. ¶ 19; Pl. Exh. 44. The diagram also
classified the overall structure of the transaction as a specialty purpose trust. Pl. Exh. 44. Mr.
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Brody, on behalf of LFC, prepared a term sheet dated February 13, 2012, memorializing the
terms of the transaction that included WMB’s proposal to use an escrow agent. Pl. Exh. 1 (the
“February 13th Agreement”); Pl. Exh. 47 ¶ 6.
Despite the agreement among the parties and the language in the term sheet, the
transaction did not proceed as planned. WMB wired the funds to the agreed upon escrow agent,
David Nelson, pursuant to the terms of the February 13th Agreement. Pl. Exh. 5; Pl. Exh. 47 ¶ 7.
However, Mr. Brody then instructed Mr. Nelson to make wire transfers to accounts that he
personally controlled, rather than send the funds directly to the insurance carriers as required by
the February 13th Agreement. Pl. Exh. 9; Brody Dep. at 113:16-24. Mr. Brody then took
$50,000 for himself from these WMB funds, wired an additional $30,000 to Mr. Bartholomew,
and then wired the remaining funds to Mr. Goodman. Brody Dep. at 115:17-117:3. Despite
taking $50,000 of these WMB funds, Mr. Brody admits that he had only been entitled to a
success fee of $5,200 for this transaction. Brody Dep. at 128-14-22.
In the aftermath of these transfers, there was a great deal of confusion among the parties.
Despite deviating from the terms of the February 13th Agreement about how WMB’s funds
should be handled, Mr. Brody testified that he still expected the February 13th Agreement to be
successfully completed, and that he circulated documents to WMB indicating that the transfers
had been done in accordance with the February 13th Agreement. Brody Dep. at 107:14-108:2;
Pl. Exh. 47 ¶ 8; Pl. Exh. 4. Mr. Brody subsequently learned that the entire proposed transaction
was fraudulent and that the documents he was provided about the underlying insurance policies
were fake or outright forgeries created by Mr. Bartholomew and Evan Sarkopoulous. Brody
Dep. at 108:3-109:5; Pl. Exh. 8. Mr. Brody represented that he returned all of the money that he
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had taken—the $50,000— as did certain other parties. Brody Dep. at 109:12-19; Pl. Exh. 47 ¶ 9.
It is undisputed that at least $304,325 of the $552,475 loan was returned to WMB. 1 Id.
Eventually, Mr. Bartholomew was the subject of a criminal prosecution for his actions in
this transaction and other activities. As part of that criminal proceeding, Mr. Brody was
identified as a victim of Mr. Bartholomew’s crimes. See Letter of Diane Chavez,
Victim/Witness Assistance Program, Letter to Lawrence Brody, dated Sept. 20, 2016 (writing at
the request of Deputy District Attorney Nagy Marcos to notify Mr. Brody of his status as a
victim in People v. Joseph Bartholomew and Wendy King-Jackson and informing Mr. Brody of
his right to submit a victim impact statement) (Def. Exh. 5). Notwithstanding this letter, WMB
maintains that Mr. Brody was a knowing participant in the fraudulent scheme. See WMB Brief
at 3-4.
Mr. Brody filed for Chapter 7 bankruptcy on June 16, 2017, and this adversary
proceeding followed on September 6, 2017. This decision addresses only the dispute about the
dischargeability of the debt owed by Mr. Brody to WMB.
CONCLUSIONS OF LAW
I. Standard of Proof for a Denial of Discharge
“The basic policy animating the Bankruptcy Code is to afford the honest but unfortunate
debtor a fresh start.” Denton v. Hyman (In re Hyman), 502 F.3d 61, 66 (2d Cir. 2007) (citations
and internal quotations omitted). Under the Bankruptcy Code, therefore, the default outcome of
a Chapter 7 case is to grant a discharge to the debtor of his or her pre-petition debts. See 11
U.S.C. § 727. However, the right to receive a discharge is not absolute. Section 523 of the
1 Mr. Brody has argued that others involved in the transaction, including Richard Urbealis, have made subsequent
payments toward the outstanding debt owed to WMB and therefore reduced WMB’s damages. See Brody Brief at 5.
This decision does not address that issue, which will be addressed in subsequent proceedings if necessary.
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Bankruptcy Code excepts certain debts from discharge. See 11 U.S.C. § 523. “The party
seeking an exception to discharge bears the burden of proof by a preponderance of the evidence.”
Benzaquen v. Rabinowitz (In re Rabinowitz), 508 B.R. 874, 879 (Bankr. S.D.N.Y. 2014) (citing
Grogan v. Garner, 498 U.S. 279, 285 (1991)). Furthermore, exceptions to discharge are
construed narrowly. See id.; see also Andy Warhol Found. for Visual Arts, Inc. v. Hayes (In re
Hayes), 183 F.3d 162, 167 (2d Cir. 1999). This narrow construction effectuates the Bankruptcy
Code’s objective to provide “the debtor a new opportunity in life and a clear field for future
effort, unhampered by the pressure and discouragement of preexisting debt.” Sharmat v. Gallen
(In re Gallen), 559 B.R. 349, 355-56 (Bankr. S.D.N.Y. 2016) (internal quotations and citations
omitted). “Any ambiguities as to whether the debt satisfies an exception to discharge must be
resolved in favor of the debtor because, failure to obtain a discharge can result in a debtor’s
financial death sentence.” In re Rabinowitz, 508 B.R. at 879 (internal quotations and citations
omitted).
II. Non-Dischargeability Under 11 U.S.C. § 523(a)(4)
While WMB invokes three different subsections of 523(a), the one that best fits these
facts is Section 523(a)(4). Section 523(a)(4) excepts from discharge debts that were incurred by
means of “fraud or defalcation while acting in a fiduciary capacity . . . .” 11 U.S.C § 523(a)(4).
To find a debt non-dischargable under this section, a plaintiff must establish the following
elements: “first, that the debt was incurred in connection with an express or technical trust,
second, that the debtor acted in a fiduciary capacity with respect to that trust, and third, that the
debtor engaged in fraud or defalcation within the meaning of bankruptcy law.” VW Credit, Inc.
v. Salim (In re Salim), 2015 WL 1240000, at *14 (Bankr. E.D.N.Y. Mar. 16, 2015); see also
Parklex Assocs. v. Deutsch (In re Deutsch), 575 B.R. 590, 600 (Bankr. S.D.N.Y. 2017). The
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trust and fiduciary capacity elements are commonly addressed together. See First Am. Title Ins.
Co. v. Eberhart (In re Eberhart), 283 B.R. 97, 100 (Bankr. D. Conn. 2002).
Section 523(a)(4) of the Bankruptcy Code only applies to express or technical trusts. It
does not cover constructive or implied trusts, or any trust created “merely on the basis of
wrongful conduct (a trust ex maleficio).” Zohlman v. Zoldan (In re Zoldan), 226 B.R. 767, 772-
73 (S.D.N.Y. 1998) (citing OnBank & Trust Co. v. Siddell (In re Siddell), 191 B.R. 544, 551
(Bankr. N.D.N.Y. 1996); Peerless Ins. Co. v. Casey (In re Casey), 181 B.R. 763, 766 (Bankr.
S.D.N.Y. 1995); Schwalbe v. Gans (In re Gans), 75 B.R. 474, 489 (Bankr. S.D.N.Y. 1987)).
While state law is not dispositive, it remains relevant because bankruptcy courts “may look to
state law to determine whether a trust exists.” See Chitester v. Watterson (In re Watterson), 524
B.R. 445, 451 (Bankr. E.D.N.Y. 2015). Common examples of express or technical trusts include
those created by state statutes or by contract, and in relationships where there is a disparity in
knowledge or status between two parties that gives one party a position of ascendancy over the
other. See Havens v. Salman (In re Salman), 2016 Bankr. LEXIS 3912, at *18-26 (Bankr.
S.D.N.Y. Nov. 7, 2016) (denying a discharge where debtor failed to hold funds in trust pursuant
to state law); Kubota Tractor Corp. v. Strack, 524 F.3d 493, 499-501 (4th Cir. 2008) (denying a
discharge where debtor, as president and majority owner of a corporation, agreed to hold sales
proceeds in a contractual trust in favor of an equipment manufacturer but failed to do so, and
where debtor personally guaranteed the debts of the corporation under the contract); In re
Marchiando, 13 F.3d 1111, 1116 (7th Cir. 1994) (holding that Section 523(a)(4) applies in
situations where, generally speaking, there is “a difference in knowledge or power between
fiduciary and principal which . . . gives the former a position of ascendancy over the latter,” or
where “one party to the relation is incapable of monitoring the other’s performance of his
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undertaking, and therefore the law does not treat the relation as a relation at arm’s length
between equals.”).
As to the second element, whether a party has acted in a fiduciary capacity is a question
of federal law under the Bankruptcy Code. See In re Zoldan, 226 B.R. at 772. Courts have
observed that the “traditional” definition of acting as a fiduciary, such as under state law or the
common law, is “far too broad for the purposes of bankruptcy law.” In re Gans, 75 B.R. at 489
(citing In re Rausch, 49 B.R. 562, 564 (Bankr. D. N.J. 1985)). Instead, the Bankruptcy Code
restricts the range of conduct that would result in the denial of a discharge. See In re Gallen, 559
B.R. at 357 (citing Sandak v. Dobrayel (In re Dobrayel), 287 B.R. 3, 12 (Bankr. S.D.N.Y. 2002)
(“The meaning of ‘fiduciary capacity’ under Federal laws is more restricted than under the more
general common law or state definitions.”)). “[A] fiduciary relationship under the bankruptcy
laws requires that (1) the trust relationship existed before the act that created the debt, (2) the
wrongful act creating the debt was done during the course of the fiduciary relationship, and (3)
the ‘special debt’ arising from the breach of a fiduciary duty must be based on an express,
technical or statutory trust.” Owens v. Owens (In re Owens), 2005 WL 387258, at *4 (S.D.N.Y.
Feb. 17, 2005) (citing In re Gans, 75 B.R. at 489 (Bankr. S.D.N.Y. 1998); Davis v. Aetna
Acceptance Co., 293 U.S. 328, 333 (1934)).
If the first and second elements are satisfied that a debtor was acting in a fiduciary
capacity as to a trust, a plaintiff still must show the existence of fraud or defalcation. The
Bankruptcy Code incorporates the common law definition of fraud. See Mirarchi v. Nofer (In re
Nofer), 514 B.R. 346, 355-56 (Bankr. E.D.N.Y. 2014) (citing Evans v. Ottimo, 469 F.3d 278, 283
(2d Cir. 2006) (“The Bankruptcy Code incorporates the common law elements of fraud,
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‘includ[ing] a false representation, scienter, reliance, and harm.’”)). Fraud thus requires some
form of intentional deceit. Id. (citing Evans, 469 F.3d at 283).
On the other hand, defalcation encompasses conduct where the debtor commits some sort
of “intentional wrong” but there is an absence of “bad faith, moral turpitude, or other immoral
conduct.” See Bullock v. BankChampaign, N.A., 569 U.S. 267, 273-74 (2013). The term
“intentional wrong” includes both knowledge and recklessness. Id. A defalcation analysis
requires a subjective and objective evaluation of the fiduciary’s conduct. See In re Salman, 2016
Bankr. LEXIS 3912, at *22-23 (citing Fogg v. Pearl (In re Pearl), 502 B.R. 429, 441 (Bankr.
E.D. Pa. 2013) (“The court must consider the debtor’s actual knowledge and circumstances (i.e.,
the subjective) and then decide whether the related conduct constituted a gross deviation from
legal standards of conduct (i.e., the objective.”)). The most common form of defalcation is a
failure to account for trust property. See In re Hayes, 183 F.3d at 171 (citing Central Hanover
Bank & Trust Co. v. Herbst, 93 F.2d 510, 511-12 (2d Cir. 1937)).
Even though the non-dischargeability exceptions of Section 523(a)(4) exist, they are not
meant to remedy “garden variety” breaches of contract and the like. See Gore v. Kresner (In re
Kresner), 206 B.R. 303, 313-15 (Bankr. S.D.N.Y. 1997) (“Plaintiff has failed to establish that a
true fiduciary relationship existed by operation of law. At best, this is a breach of contract
claim.”); In re Gallen, 559 B.R. at 360 (Bankr. S.D.N.Y. 2016) (“[I]t appears that [the] joint
business venture was unsuccessful for the same reasons that many such ventures [fail]: lack of
planning, excessive optimism, insufficient time provided for the business to succeed, and
personal misfortune. But those reasons . . . do not satisfy the standards for nondischageability
under Section[] [523](a)(4).”).
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DISCUSSION
The Court concludes that the Plaintiff has satisfied its burden by a preponderance of the
evidence that the debt in question should be excepted from discharge under Section 523(a)(4) of
the Bankruptcy Code.
As to the first two elements, the February 13th Agreement and the actions of Mr. Brody
establish that the parties intended to create an express trust to benefit WMB and that Mr. Brody
acted as a fiduciary to that trust. An express trust is created where one entity transfers property
to another entity and where there is an intention to create a trust. See New York v. Suarez (In re
Suarez), 367 B.R. 332, 341-55 (Bankr. E.D.N.Y. 2007) (applying New York law).2 Here, the
evidence establishes that WMB transferred the funds to Mr. Nelson, with the intention of
transferring that money to the insurance carriers. See Pl. Exh. 1; Pl. Exh. 5; Pl. Exh. 44; Exh. 47
¶¶ 3, 5-7. More specifically, the term sheet indicates that WMB was transferring funds to Mr.
Brody and his compatriots for use in funding an insurance premium financing transaction, that
this was being done for the benefit of WMB, and that the funds were to be held in escrow until
2 The parties have not addressed what state law applies for purposes of considering whether an express trust exists.
However, the law of the states of New York, California, and Tennessee are substantially similar in their
requirements for establishing an express trust. See Gowan v. Patriot Group, LLC (In re Dreier LLP), 452 B.R. 391,
420 (Bankr. S.D.N.Y. 2011) (quoting In re Doman, 68 A.D.3d 862, 890 N.Y.S.2d 632, 634 (App. Div. 2d Dep't
2009)) (“[A] valid express trust requires (1) a designated beneficiary, (2) a designated trustee, (3) a fund or other
property sufficiently designated or identified to enable title of the property to pass to the trustee, and (4) actual
delivery of the fund or property, with the intention of vesting legal title in the trustee.”); Tomasi v. Savannah N.
Denoce Trust (In re Tomasi), 2013 WL 4399229, at *9 (BAP 9th Cir Aug. 15, 2013) (quoting Keitel v. Heubel, 103
Cal. App. 4th 324, 337, 126 Cal. Rptr. 2d 763, 773 (Cal. Ct. App. 2002)) (“[T]he five elements required to create an
express trust are (1) a competent trustor, (2) trust intent, (3) trust property, (4) trust purpose, and (5) a beneficiary.”);
Tenn. Educ. Lottery Corp. v. Cooper (In re Cooper), 430 B.R. 480, 494 (Bankr. E.D. Tenn. 2010) (quoting
Stevenson v. J.C. Bradford & Co. (In re Cannon), 277 F.3d 838, 849–50 (6th Cir.2002)) (stating that an express trust
is created under Tennessee law where the following exist: (1) a trustee who holds trust property and who is subject
to the equitable duties to deal with it for the benefit of another; (2) a beneficiary to whom the trustee owes the
equitable duties to deal with the trust property for his benefit; and (3) identifiable trust property); see also LFD
Operating, Inc. v. Ames Dep't Stores, Inc. (In re Ames Dep't Stores, Inc.), 274 B.R. 600, 623 (Bankr. S.D.N.Y. 2002)
(citing Restatement (Second) of Trusts § 2 (1959)). Given the lack of conflict in these three jurisdictions, the Court
will apply New York law. See IBM v. Liberty Mut. Ins. Co., 363 F.3d 137, 143 (2d Cir. 2004) (“In the absence of
substantive difference, however, a New York court will dispense with choice of law analysis; and if New York law
is among the relevant choices, New York courts are free to apply it.”).
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such time as transfers were made directly to the insurance carriers or the transaction was
cancelled in its entirety. Pl. Exh. 1. Mr. Brody was directly involved with negotiating the terms
of the February 13th Agreement, including those provisions regarding the use of an escrow
agent. Pl. Exh. 47 ¶ 5-6. The evidence in the record also establishes that WMB relied upon Mr.
Brody, in his individual capacity and as part of BPC and LFC, to ensure the success of the
February 13th Agreement. Brody Dep. at 32:1-4 (indicating that in 2012 Mr. Brody was the only
employee working for BPC); Pl. Exh. 4 (indicating that Mr. Brody was expected to take steps to
confirm that the February 13th Agreement was properly executed); see also Nuchief Sales, Inc. v.
Harper (In re Harper), 150 B.R. 416, 419 (Bankr. E.D. Tenn. 1993) (“The focus of fiduciary
liability is upon the actor responsible for the act rather than the corporate form. Liability is
premised upon the person who actually caused the harm.”) (citing Capitol Indem. Corp. v.
Interstate Agency (In re Interstate Agency), 760 F.2d 121, 125 (6th Cir. 1985); Citronell-Mobile
Gathering v. Herrington, 826 F.2d 16, 23-25 (11th Cir. 1987)). 3
Mr. Brody was also the considerably more knowledgeable and powerful individual in the
February 13th Agreement. As Mr. Brody stated himself, he was the “architect” that “designed”
these premium insurance financing transactions, and he repeatedly emphasized during the trial
that this was his “system.” Brody Dep. at 127:4-24. Given Mr. Brody’s expertise in this area, it
was not unreasonable for WMB to rely on Mr. Brody’s expertise in this transaction. See Artis v
West (In re West), 339 B.R. 557, 568 (Bankr. E.D.N.Y. 2006) (citing In re Marchiando, 13 F.3d
at 1116) (holding that plaintiffs reasonably relied upon the knowledge and representations of
3 There is conflicting evidence in the record as to whether Mr. Brody was negotiating on behalf of either BPC or
LFC. Compare Pl. Exh. 1 (indicating that the parties to the February 13th Agreement included WMB and LFC),
with Pl. Exh. 44. (indicating that BPC, rather than LFC, was involved in the February 13th Agreement). However,
Mr. Brody has testified that BPC and LFC are interchangeable entities that engaged in the same exact work. Brody
Dep. at 80:9-81:8. As Mr. Brody was the architect of the transaction and the party with whom WMB negotiated, the
Court finds it unnecessary to further distinguish between the corporate entities and Mr. Brody for purposes of its
decision.
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their attorney-in-fact when they transferred title to their homes to his church for the purpose of
refinancing their mortgages).
While Mr. Brody has denied he was acting as a trustee or had any role in the transaction
beyond acting as an “architect,” the evidence indicates otherwise. It was Mr. Brody that
ultimately sent the instructions to Mr. Nelson to execute the wire transfers to the accounts Mr.
Brody controlled. 113:16-24. Mr. Brody claims that he received the instructions to do so from
Mr. Goodman or someone in his office. Brody Dep. at 113:16-114:5, 116:13-21. But the fact
that Mr. Brody had the ability to order the escrow agent, Mr. Nelson, to make the transfer
indicates that he ultimately had direct control over the application of the trust funds. Brody Dep.
at 42:12-19; see also In re Harper, 150 B.R. at 419. Given the evidence in the record, the Court
concludes that Mr. Brody was acting in a fiduciary capacity when he improperly diverted the
trust funds to himself. See Scheidelman v. Henderson (In re Henderson), 423 B.R. 598, 622-24
(Bankr. N.D.N.Y. 2010) (holding that a knowing diversion of trust funds for personal use
constituted acting in a fiduciary capacity under Section 523(a)(4) of the Bankruptcy Code).
As to the third element of defalcation, the Court finds Mr. Brody’s conduct to be
subjectively and objectively unreasonable. The February 13th Agreement term sheet indicates
that Mr. Brody knew that any transfer other than direct a transfer to the insurance carriers was
not allowed under the agreement. Pl. Exh. 1. Indeed, it is undisputed that WMB explicitly
bargained for the funds to go directly to the insurance companies from the escrow agent and that
Mr. Brody knew that. Pl. Exh. 47 ¶¶ 5-6. Nevertheless, Mr. Brody forwarded Mr. Nelson
instructions to wire the funds WMB loaned to accounts that he personally controlled. Brody
Dep. at 113:16-114:1. Upon receipt of the WMB funds, Mr. Brody also took a greater
commission than he was otherwise entitled—$50,000 rather than $5,200—and transferred
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$30,000 directly to Mr. Bartholomew, which is further evidence of Mr. Brody’s improper intent.
Brody Dep. at 128:14-25. Even if he acted pursuant to Mr. Goodman’s instructions, as he claims
and the Court credits, he did or should have known that his actions were improper. This is
especially true given that Mr. Brody is a licensed attorney. Brody Dep. at 58:16-59:2. By
initiating these transfers, Mr. Brody set into motion the chain of events that caused WMB’s
losses. Pl. Exhs. 9-11. This breach of fiduciary duty is “so basic and the risk of harm . . . so
obvious that [the debtor] must have recognized them and proceeded despite the risk.” In re
Salman, 2016 Bankr. LEXIS 3912, at *23-24 (citing Cora v. Jahrling (In re Jahrling), 816 F.3d
921, 926 (7th Cir. 2016)).4
CONCLUSION
For all of the reasons stated above, WMB prevails on its claim that the debt owed to it is
nondischargeable under Section 523(a)(4) of the Bankruptcy Code. WMB is to settle an order on
seven days’ notice. The proposed order must be submitted by filing a notice of the proposed
order on the Case Management/Electronic Case Filing docket, with a copy of the proposed order
attached as an exhibit to the notice. A copy of the notice and proposed order shall also be served
upon the Mr. Brody.
4 The Court notes that WMB has persistently contended that Mr. Brody knew that the transaction was a fraud the
entire time and that he was acting in concert with Mr. Bartholomew. Mr. Brody vehemently disagrees credibly
pointing to his efforts to return money to WMB. Given that the Court has held that there was defalcation while
acting in a fiduciary capacity, it is not necessary for the Court to resolve the parties’ dispute about Mr. Brody’s
knowledge of the underlying fraud, nor is it necessary to address WMB’s other claims under Section 523.
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IT IS SO ORDERED.
Dated: New York, New York
September 30, 2019
/s/ Sean H. Lane
UNITED STATES BANKRUPTCY JUDGE
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