Sandow v. Burke

UNITED STATES BANKRUPTCY COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
In re : Chapter 7
DYLAN BURKE :
Debtor : Bankruptcy No. 08-11654bf
____________________________________
CLARANNE SANDOW :
Plaintiff :
v. :
DYLAN BURKE :
Defendant : Adversary No. 08-0135
.................................................
MEMORANDUM
.................................................
In the instant adversary proceeding, the plaintiff, Mrs. Claranne Sandow,
asserts that the defendant, Mr. Dylan Burke, owes her a nondischargeable debt pursuant
to 11 U.S.C. §523(a)(4) and (a)(6). The defendant denies that any claim held by the
plaintiff is nondischargeable under those statutory provisions.
As will be discussed below, Mrs. Sandow contends that the two parties
entered into an agreement wherein she sold her residence to Mr. Burke in exchange for
both monetary consideration as well as an oral agreement for the creation of a life estate
in the property in her favor. Mrs. Sandow asserts that in failing to honor this oral
agreement Mr. Burke obtained a substantial economic benefit to her detriment by way of
either willful and malicious conduct or through larcenous behavior, both of which are
grounds for nondischargeability in this chapter 7 bankruptcy case.
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Claim preclusion (res judicata) from pre-bankruptcy state court litigation does not1
apply to dischargeability disputes under section 523(a). See In re Graham, 973 F.2d 1089, 1095-
96 (3d Cir. 1992). Moreover, in order for issue preclusion (collateral estoppel) to arise, the
following elements must be proven:
(1) the issue sought to be precluded must be the same as that
involved in the prior action; (2) that issue must have been actually
litigated; (3) it must have been determined by a valid and final
judgment; and (4) the determination must have been essential to
the prior judgment.
Id., at 1097 (citing In re Braen, 900 F.2d 621, 628-29 n. 5 (3d Cir. 1990)). Pennsylvania state
court default judgments do not give rise to section 523 issue preclusion since issues are not
actually litigated. See, e.g., Matter of McMillan, 579 F.2d 289 (3d Cir. 1978); In re Kartman,
391 B.R. 281, 283 (Bankr. W.D. Pa. 2008); see also In re Graves, 33 F.3d 242, 248 (3d Cir.
1994) (“[D]efault judgments are not given preclusive effect in Pennsylvania’s courts.”).
Reference to the Notes of Testimony (“N.T.”) shall include the precise time of2
day that the testimony was given, as noted on the audio disc. Neither party ordered a transcript of
the trial.
2
As a preliminary matter, the parties agree that there was a state court default
judgment in the amount of $55,600 entered in favor of the plaintiff and against the
defendant. Thus, the only issue posed by this proceeding is whether the claim represented
by this judgment is nondischargable. Furthermore, the parties agree that neither claim
preclusion (res judicata) nor issue preclusion (collateral estoppel) is applicable.1
I.
After trial in this proceeding, and upon consideration of all the testimony
and exhibits offered into evidence, as well as upon the parties’ pretrial statement of
uncontested facts and jointly offered Statements of Admissions, I make the following
factual findings:2
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Defendant testified that he was engaged to Plaintiff’s adult daughter. N.T.3
10:30:45-10:31:00. Further, Plaintiff testified that defendant was “like a son-in-law” and was
otherwise “part of the family.” N.T. 9:52:05-9:52:25.
3
1. The chapter 7 debtor and defendant in this adversary proceeding is Mr.
Dylan Burke, who filed a voluntary petition on March 11, 2008, and who resides in
Jenkintown, Pennsylvania. Ex. J-1 (Statement of Admissions, #3).
2. The plaintiff is Mrs. Claranne Sandow, an individual residing at 13
Williams Lane, Hatboro, Montgomery County, Pennsylvania. Id., #1.
3. Prior to October 2002, Mrs. Sandow held title to the Hatboro property
and resided therein with members of her family. N.T. 9:40:40-9:40:50. Mr. Burke, who
was romantically involved with Mrs. Sandow’s adult daughter, also resided at the
Hatboro property since approximately 1999. N.T. 9:41:25-9:41:32; ex. J-1 (Statement of3
Admissions, ##7, 8).
4. Prior to October 2002, Mrs. Sandow borrowed approximately $50,000,
secured by a mortgage on the Hatboro realty. She intended to use the proceeds of this
loan to build an “in-law suite” for use by her father. N.T. 9:42:00-9:42:14.
5. By October 2002, Mrs. Sandow was delinquent in mortgage payments
and fearful of losing her home in foreclosure. N.T. 9:42:30-9:42:45.
6. To prevent such a foreclosure, Mrs. Sandow proposed to Mr. Burke that
he purchase the Hatboro realty. N.T. 9:42:45-9:42:55. Mr. Burke, who was employed,
agreed to this proposal. However, after investigation, he concluded that he would qualify
for no more than $100,000 of secured financing. Ex. J-1 (Statement of Admissions,
#15).
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Although the complaint, at ¶11, makes reference to a promised life estate, in her4
testimony, Mrs. Sandow testified that the understanding between the parties was that she “would
always have a place to live.” N.T 9:50:30-9:50:45.
4
7. The parties agree that, as of the time of the sale of the property to Mr.
Burke, the Hatboro realty had a fair market value of approximately $190,000. N.T.
10:32:00-10:32:30.
8. Mrs. Sandow and Mr. Burke initialed a form agreement of sale dated
October 8, 2002. Ex. D-1. The purchase price of the Hatboro property was listed as
$190,000, but the buyer was to tender only $100,000 in cash. The balance, $90,000, was
identified in the agreement as “seller gift of equity to buyer (family member).” Id.; see
also ex. J-1 (Statement of Admissions, #6).
9. On November 1, 2002, Mrs. Sandow transferred title to the Hatboro
realty to Mr. Burke. Ex. J-1 (Statement of Admissions, #4). The latter paid Mrs. Sandow
$100,000, from which (after deduction of certain closing costs) her mortgage obligation
was repaid in full and she received $42,438.36 in cash. Ex. J-1 (ex. P-2). Consistent
with the agreement of sale, the settlement sheet signed by Mrs. Sandow and by Mr. Burke
lists the sale price of the realty as $190,000, with $90,000 of that price represented by a
“gift of equity.” Id.
10. Mrs. Sandow testified that this $90,000 “gift” was actually in exchange
for Mr. Burke’s promise to permit plaintiff to live in the Hatboro realty for the rest of her
life. Mr. Burke denied making any such promise and testified that the price was listed as4
$190,000, rather than $100,000, due to concerns held by Mrs. Sandow involving creditors
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The “gift of equity” phrase was suggested by a real estate agent, Ruth Campbell,5
who was Mrs. Sandow’s friend. Ms. Campbell testified that she hoped the phrase would, in
some fashion, support Mrs. Sandow’s understanding of her continuing right to occupy the
Hatboro residence after its sale. She did not testify, however, that Mr. Burke made any
representations to her or that she had discussed this matter with him. N.T. 10:21:15-10:23:00.
Ms. Campbell was not present at the real estate closing. N.T. 10:24:29-10:23:33.
5
of her father’s estate. N.T. 10:32:45-10:32:54. No document was ever created5
purporting to grant a life estate to Mrs. Sandow by Mr. Burke, nor creating any other
interest in the Hatboro realty. N.T. 9:51:05-9:51:20.
11. Mr. Burke testified credibly of his intention in November 2002 that he,
along with Mrs. Sandow, her daughter and grandson, would continue to live at the
Hatboro property as a family, and that he would provide financial support to this
household including payment of the mortgage loan he executed. N.T. 10:33:05-10:33:20.
He also intended to renovate and ultimately sell the Hatboro residence and then move to
a more attractive home with Mrs. Sandow and her family. N.T. 10:38:20-10:38:46.
12. After November 1, 2002, Mr. Burke continued to reside in the Hatboro
realty with Mrs. Sandow, her daughter and grandson, although Mr. Burke and Mrs.
Sandow’s daughter never married. Ex. J-1 (Statement of Admissions, ##7, 8).
13. Mr. Burke credibly testified, without rebuttal, that after November 1,
2002, he provided the primary financial support to the residents of the household,
including payment of the new mortgage. N.T. 10:33:30-10:34:18.
14. In July 2003, while still residing at the Hatboro realty, Mr. Burke
refinanced the mortgage on the property by borrowing the sum of $132,500; he also took
out a second mortgage in the amount of $35,000. Ex. J-1 (Statement of Admissions, ##9,
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6
10). Some of the proceeds of these loans were used by Mr. Burke for his own personal
benefit. Some of the proceeds were used to begin renovations of the Hatboro realty.
N.T. 10:37:55-10:38:30; 10:54:00-10:55:28. Some of the proceeds were used for the
benefit of Mrs. Sandow’s daughter. N.T. 10:40:15-10:40:57. The net proceeds from
these two loans totaled about $57,000.
15. Mr. Burke continued to reside at the Hatboro realty along with Mrs.
Sandow and her other family members until approximately July 30, 2004. Ex. J-1
(Statement of Admissions, #11).
16. On or about July 30, 2004, Mr. Burke vacated the Hatboro residence
owing to the cessation of his relationship with Mrs. Sandow’s daughter, who became
romantically involved with another person and, Mr. Burke believes, ultimately married
that other individual. N.T. 10:35:30-10:35:35; 10:36:50-10:36:55; ex. J-1 (Statement of
Admissions, #11). After Mr. Burke left the residence, Mrs. Sandow, her daughter and
grandson, along with Mrs. Sandow’s mother, continued to live in the Hatboro realty. Ex.
J-1 (Statement of Admissions, #8).
17. In January 2005, Mr. Burke sent a written demand to Mrs. Sandow that
she begin tendering monthly payments to him in the amount equal to the amount of the
monthly mortgage payments (including escrows for taxes and insurance): $1700. See ex.
J-1 (Statement of Admissions, ##12, 18).
18. Mr. Burke made the monthly mortgage payments from July 2004
through January 2005, even though he was not living at the property at that time. N.T.
10:49:02-10:49:06.
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7
19. Mrs. Sandow tendered payments to Mr. Burke in the amount of $1,700
per month from January 2005 through October, 2007. Ex. J-1 (Statement of Admissions,
#12); Pretrial Statement of Uncontested Facts, at 2. Upon receipt, Mr. Burke made the
corresponding monthly mortgage payments. N.T. 10:49:24-10:49:54. The parties
characterize the $1,700 monthly payments from the plaintiff to the defendant as rent
payments, although there was no written lease agreement between the parties. Ex. J-1
(Statement of Admissions, #16).
20. In June 2006, Mr. Burke refinanced the two July 2003 mortgages on the
Hatboro realty by borrowing $184,300. Ex. J-1 (Statement of Admissions, #24). In
addition to using these loan proceeds to satisfy the two previous mortgages, Mr. Burke
received approximately $6,700 in cash proceeds from this transaction. N.T. 10:58.
21. Soon after he vacated the Hatboro residence, Mr. Burke proposed to
Mrs. Sandow that the property be sold to a third party, with the sale price being used to
satisfy the outstanding mortgages and the net proceeds payable to her. N.T. 10:47:05-
10:47:30. This proposal was not accepted. N.T. 10:47:39-10:47:45.
22. In October or November 2004, Mr. Burke offered to sell the realty to
Mrs. Sandow’s daughter for the exact amount that he owed on the outstanding mortgages.
N.T. 10:47:30-10:48:34. Mr. Burke credibly testified that this offer was initially
accepted, but that Mrs. Sandow's daughter never purchased the realty from him. N.T.
10:48:39-10:48:47.
23. In October or November of 2007, Mr. Burke decided that he did not
wish to continue the lessor/lessee relationship with Mrs. Sandow and her family, and
decide to seek a purchaser for the Hatboro realty. N.T. 11:00:30-11:00:58. He listed the
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This judgment amount likely would include the mortgagee’s costs and counsel6
fees.
8
Hatboro realty for sale with a real estate agent in November, 2007. Pretrial Statement of
Uncontested Facts, at 2.
24. In November 2007, Mr. Burke sent an undated letter to Mrs. Sandow
informing her that he had the listed the Hatboro property for sale with a real estate agent
and that Mrs. Sandow and her family could remain in the premises so long as they
continued to tender rent payments and cooperated with the real estate agent. Ex. J-1 (ex.
P-3); Pretrial Statement of Uncontested Facts, at 2.
25. Beginning November 2007, Mrs. Sandow ceased tendering monthly
payments to Mr. Burke. By letter dated January 7, 2008, Mr. Burke authorized an
attorney to send to Mrs. Sandow a notice to vacate the residence due to non-payment of
rent. Ex. J-1 (ex. P-4).
26. When Mrs. Sandow ceased tendering payments to Mr. Burke, the latter
ceased tendering mortgage payments. A mortgage foreclosure action was filed in
December 2007, and judgment by default was ultimately entered in an amount exceeding
$200,000. Pretrial Statement of Uncontested Facts, at 2.6
27. In December, 2007, Mrs. Sandow commenced a civil action against Mr.
Burke in the Montgomery County Court of Common Pleas. On January 29, 2008, a
default judgment was entered against the defendant on Count II of the state court
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Although a copy of the complaint was not admitted into evidence, it appears from7
the arguments of counsel that Count II of the complaint sought relief on the basis of unjust
enrichment. I also note that monthly payments of $1,700 from January 2005 until October 2007
would total $57,800 and not $55,600.
9
complaint, which count sought damages in the amount of the monthly payments made by
Mrs. Sandow, totaling $55,600. Ex. J-1 (Statement of Admissions, ##19, 20, 21).7
II.
Based upon the evidence presented, I reach the following legal conclusions:
1. The plaintiff did not meet her evidentiary burden to prove that any debt
owed to her by the debtor should be held nondischargeable under section 523(a)(4).
2. The plaintiff did not meet her evidentiary burden to prove that any debt
owed to her by the debtor should be held nondischargeable under section 523(a)(6).
III.
Plaintiff’s primary argument for nondischargeability is based on 11 U.S.C.
§523(a)(6). Section 523(a)(6) of the Bankruptcy Code provides:
A discharge under section 727, 1131, 1228(a), 1228(b), or
1328(b) of this title does not discharge an individual debtor
from any debt–
***
(6) for willful and malicious injury by the
debtor by another entity or to the property of
another entity.
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10
A plaintiff must establish nondischargeability under section 523(a)(6) by a
preponderance of the evidence. See, e.g., In re Keaty, 397 F.3d 264, 270 (5th Cir. 2005);
In re Scarborough, 171 F.3d 638, 641 (8th Cir. 1999); In re Antonious, 358 B.R. 172, 186
(Bankr. E.D. Pa. 2006); see generally Grogan v. Garner, 498 U.S. 279, 291 (1991).
Courts have concluded that, after passage of the 1978 Bankruptcy Code, Congress
intended that section 523(a)(6) have a higher standard than mere recklessness. See In re
Conte, 33 F.3d 303, 306 (3d Cir. 1994); In re Antonious, 358 B.R. at 186. The Supreme
Court has narrowly defined the phrase “willful and malicious” as used in section
523(a)(6) as limited in scope to intentional torts. Kawaauhau v. Geiger, 523 U.S. 57
(1998). Thus:
The word “willful” in (a)(6) modifies the word “injury,”
indicating that nondischargeability takes a deliberate or
intentional injury, not merely a deliberate or intentional act
that leads to injury. Had Congress meant to exempt debts
resulting from unintentionally inflicted injuries, it might have
described instead “willful acts that cause injury.” . . .
Moreover, as the Eighth Circuit observed, the (a)(6)
formulation triggers in the lawyer’s mind the category
“intentional torts,” as distinguished from negligent or reckless
torts. Intentional torts generally require that the actor intend
“the consequences of an act,” not simply “the act itself.”
Restatement (Second) of Torts § 8A, comment a, p. 15 (1964)
(emphasis added).
Geiger, 523 U.S. at 61-62; see also In re Markowitz, 190 F.3d 455, 464 (6th Cir.1999).
Further, the Third Circuit Court of Appeals has instructed:
[W]hen Congress required more than recklessness for
nondischargeability, it required that the debtor [had] engaged
in conduct more culpable than taking a deliberate action that
had a high probability of producing harm . . . . Rather, for the
injury to have been “willed” by the debtor, it must at least
have been substantially certain to result from the debtor’s act.
In re Conte, 33 F.3d at 307.
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Had he not done so, a foreclosure action would have been filed before December8
2007.
11
Under the instructions established by the Supreme Court and the Third
Circuit, the test for whether an injury is willful and malicious for purposes of section
523(a)(6) nondischargeability is whether “the actor purposefully inflicted the injury or
acted with substantial certainty that injury would result.” In re Conte, 33 F.3d at 305; see,
e.g., In re Antonious, 358 B.R. at 187. Applying this standard, I conclude that Mrs.
Sandow failed to prove that the actions of Mr. Burke that gave rise to Mrs. Sandow’s
state court judgment against him were willful and malicious.
First, the state court judgment awarded damages roughly equal to the rent
payments tendered to Mr. Burke from January 2005 through October 2007. To prove that
this debt is nondischargeable under section 523(a)(6), Mrs. Sandow needed to establish
that Mr. Burke’s demand for payment of rent constituted a purposely inflicted injury, or
was an action taken with substantial certainty that injury would result.
The evidence at trial demonstrated that Mr. Burke purchased the realty from
Mrs. Sandow in November 2002 to protect the property from foreclosure, and thereafter
he paid the refinanced mortgage obligations without assistance from her until January
2005. He left the Hatboro premises in July 2004 when Mrs. Sandow’s daughter ended
their relationship. Five months later, he demanded rent payments equal only to the
amount of the monthly mortgage payments. He then used the rent payments to pay his
mortgage obligation. Whether he had a legal right to demand such payments may be8
debated by the parties. But since Mrs. Sandow and her family were occupants of the
property and Mr. Burke was not, it was not willful or malicious that he should insist that
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12
the occupants pay the mortgage debt. Indeed, apparently Mrs. Sandow thought the
demand was appropriate since she complied with his request for almost two years.
Further lack of willfulness and malice is demonstrated by Mr. Burke’s
failure to demand compensation before January 2005, although he had vacated the
residence months earlier. Had Mr. Burke intended to injure Mrs. Sandow, he would have
acted immediately.
Second, to the extent that Mrs. Sandow is attempting to convert a breach of
an agreement for a life estate into an intentional tort, but see Hanna v. Sarris 2003 WL
24163522, at *4 (C.P. Bucks Co. 2003) (dispute involving sale of real estate did not state
any claims in tort), it is at least problematic that a life estate was created. Clearly, such an
interest was never memorialized in writing, as required by Pennsylvania’s Statute of
Frauds. See 33 P.S. § 1. Specifically, “the statute of frauds provides that all estate,
interests of freehold or term of years, or any uncertain interest of, in, or out of any
messuages, manors, lands tenements, or hereditaments will have the force and effect of
estates at will only, unless put in writing and signed by the parties so making or creating
the same, or their agents.” 16 Summ. Pa. Jur. 2d Commercial Law § 1:67 (October,
2008). Accordingly, under Pennsylvania law, a life estate must be in writing to be
enforceable. See Snyder v. Ziegler, 69 Pa. D. & C.2d 543, 545 (C.P. Montg. Co. 1974)
(“The agreement may be characterized as a contract for the conveyance of a life estate—
a freehold interest. As such, it is indeed controlled by the Statute of Frauds. . . .”).
Clearly, a document referring only to a “gift of equity” does not constitute such a writing.
I appreciate that Pennsylvania law “has been construed as permitting
recovery of damages for breach of an oral agreement to sell land.” Fannin v. Cratty, 331
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Mrs. Sandow does not assert that Mr. Burke committed fraud giving rise to a9
nondischargeable claim under section 523(a)(2). Had she done so, the evidence presented would
have been insufficient. See generally In re Hilley, 124 Fed. Appx. 81, 82 (3d Cir. 2005) (non-
precedential); In re Naimo, 1995 WL 163598 (E.D. Pa. 1995).
13
Pa. Super. 326, 334 (1984). Therefore, while the purported life estate here would not be
specifically enforceable due to the statute of frauds, arguably, if Mrs. Sandow could prove
the existence of an oral promise, state law may permit her to recover damages for the
breach of such oral promise. A claim, however, for breach of an oral promise does not
constitute an intentional tort and thus does not establish willful and malicious injury. See
generally In re Riso, 978 F.2d 1151, 1154 (9th Cir. 1992) (“It is well settled that a simple
breach of contract is not the type of injury addressed by § 523(a)(6).”); In re Jacobs, 381
B.R. 128, 138 (Bankr. E.D. Pa. 2008) (“[Section] 523(a)(6) is not intended to render
nondischargeable debts arising from simple breaches of contract.”).
In this adversary proceeding concerning nondischargeability, I need not
determine whether Mr. Burke indeed promised Mrs. Sandow that she could live in the
Hatboro realty without payment for the balance of her life, regardless of whether Mr.
Burke continued to reside at the premises. I need only conclude that any claims arising
from the breach of such a contested promise would not fall within the scope of section
523(a)(6).9
IV.
Alternatively, Mrs. Sandow seeks relief under 11 U.S.C. § 523(a)(4).
Section 523(a)(4) provides for the nondischargeability of any debt “for fraud or
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Indeed, she made no attempt to prove that a fiduciary relationship existed. One10
who grants a life estate is not considered a fiduciary. Conversely, one who is granted a life estate
may have certain duties to prevent waste and destruction of the property. See generally In re
Estate of Hewitt, 554 Pa. 486, 492 (1998).
14
defalcation while acting in a fiduciary capacity, embezzlement, or larceny.” 11 U.S.C.
§523(a)(4). Although Mrs. Sandow’s complaint states that she also bases her claim for
nondischargeability upon a breach of Mr. Burke’s fiduciary duty, at trial she focused on
the issue of larceny.10
By virtue of Fed. R. Bankr. P. 7054, incorporating Fed. R. Bankr. P. 54(c),
if the facts prove a claim for embezzlement rather than for larceny, relief under section
523(a)(4) may be warranted. See In re Salamone, 78 B.R. 74, 77 (Bankr. E.D. Pa. 1987).
Both embezzlement and larceny, as used in section 523(a)(4), are to be determined with
reference to federal common law. See In re Steele, 2005 WL 281154, at *3 (Bankr. E.D.
Pa. 2005); In re Jardula, 122 B.R. 649, 653 (Bankr. E.D.N.Y. 1990).
Embezzlement under § 523(a)(4) has been defined as the
“fraudulent appropriation of property by a person to whom
such property has been entrusted or into whose hands it has
lawfully come.” In re Weber, 892 F.2d 534, 538 (7th
Cir.1989) (quoting Moore v. United States, 160 U.S. 268, 269
(1895)). To prove embezzlement, the Creditor must show that
the debtor appropriated the subject funds for his own benefit
and did so with fraudulent intent or deceit. Weber, 892 F.2d
at 538. A fiduciary relationship or a trust relationship need
not be established in order to find a debt nondischargeable by
an act of embezzlement. Id. Larceny under § 523(a)(4)
necessitates a showing that the debtor wrongfully took
property from its rightful owner with fraudulent intent to
convert such property to its own use without the owner's
consent. In re Rose, 934 F.2d 901, 903 (7th Cir.1991).
Embezzlement differs from larceny only in that the original
taking was lawful, or at least with the consent of the owner,
unlike larceny, where there is a requirement that felonious
intent exists at the time of the taking. Id.
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15
In re House, 2007 WL 2126260, at *4 (Bankr. N.D. Ill. 2007); see also In re Salamone, 78
B.R. at 77. Both larceny and embezzlement involve fraudulent misappropriation of
property, but at different times:
In short, section 523(a)(4) excepts from discharge debts
resulting from the fraudulent appropriation of another's
property, whether the appropriation was unlawful at the
outset, and therefore a larceny, or whether the appropriation
took place unlawfully after the property was entrusted to the
debtor's care, and therefore was an embezzlement.
4 Collier on Bankruptcy, ¶ 523.10[2] (15th ed. rev. 2008).
As a commentator has similarly observed, “embezzlement, for purposes of
11 U.S.C.A. § 523(a)(4), is fraudulent appropriation of property of another by [a] person
to whom such property has been entrusted or into whose hands it has lawfully come.”
Bankruptcy Services, L. Ed., § 27:913 (2008). Therefore, to establish that a debt is
nondischargeable owing to embezzlement, a creditor must “prove that Debtor received
the [property] legally but subsequently misappropriated it for her own benefit with a
fraudulent intent or to deceive.” In re Steele, 2005 WL 281154, at *4.
Mrs. Sandow does not suggest that Mr. Burke obtained title to the Hatboro
realty through larceny; nor does she contend that he embezzled the real property from her.
She voluntarily conveyed the real estate to him in order to avoid mortgage foreclosure.
Accordingly, as mentioned earlier, Mrs. Sandow appears to concentrate upon the validity
of the rental payments made to Mr. Burke as they are the basis of her judgment against
him. Thus, I shall consider whether these payments were obtained by Mr. Burke either
through means of larceny or embezzlement.
The evidence at trial established that Mr. Burke demanded that the plaintiff
make rental payments beginning in January 2005, after he had vacated the realty, and in
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the amount equal to the mortgage payments due on the Hatboro residence. For almost
two years, the plaintiff acceded to this demand and made such payments. There was no
evidence presented that would demonstrate that the rental payments were initially
obtained through any kind of theft, fraud, or deception, as would be required for larceny.
As stated previously, the black letter test of embezzlement is “the fraudulent
appropriation of property by a person into whose hands it has lawfully come.” In re
Steele, 2005 WL 281154, at *4. In this proceeding, Mr. Burke credibly testified that he
originally agreed to purchase the realty from Mrs. Sandow as an accommodation: to
preclude foreclosure and enable the Sandow family and Mr. Burke to continue living
together in the Hatboro residence. He was viewed by Mrs. Sandow as a virtual son-in-
law. The amount he paid for the realty was a function of his income and the amount he
was able to borrow. Then, after conveyance, Mr. Burke paid the mortgage expense for
slightly more than two years. He later refinanced his original mortgage, obtaining some
cash proceeds. Those proceeds were used, in part, toward improving the realty property
for the benefit of all of the occupants. He intended after completing these improvements
to sell the realty and have all the Sandows move with him to a more attractive location.
Ultimately, Mr. Burke fell out of favor with Mrs. Sandow’s daughter and
moved out of the Hatboro residence. He continued to pay the mortgage for a few months
thereafter and then demanded that the Sandows bear that burden, as he no longer lived
there. He used their rent payments to pay his mortgage obligation. In those
circumstances, Mrs. Sandow has not proven that either the demand for rent payments nor
their use constitutes embezzlement.
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Accordingly, Mrs. Sandow did not prove her claim under section 523(a)(4).
See generally In re Belfry, 862 F.2d 661 (8th Cir. 1988); In re House, 2007 WL 2126260,
at *6.
V.
Mrs. Sandow obtained a default judgment against Mr. Burke to recover
payments made by her to him from January 2005 through October 2007, and
characterized by the parties as rent. Whether this default judgment was based upon a
claim of unjust enrichment or breach of an oral promise, sections 523(a)(4) and (a)(6)
require that a creditor establish more than mere liability on such claims. Under the
subsections of section 523(a) relied upon in this adversary proceeding, a claim is
nondischargeable only if the plaintiff can prove that the claim arose from a willful and
malicious injury, or from larceny or embezzlement. For the reasons stated above, Mrs.
Sandow only demonstrated that her claim was based upon a disputed understanding of her
right of free, lifetime occupancy upon the transfer of title to her residence. As such a
claim is outside the scope of subsections 523(a)(4) and (a)(6), Mr. Burke’s debt to her is
dischargeable.
An appropriate order shall be entered.
____________________
BRUCE FOX
United States Bankruptcy Judge
Dated: March 6, 2009.
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