IN RE: DONLEY (Bankr.N.D.Ohio 4-17-2014)

IN RE: MICHELE LEE DONLEY, Debtor. ALTERCARE OF NAVARRE CENTER FOR

REHABILITATION & NURSING CARE, INC., Plaintiff, v. MICHELE LEE DONLEY,

Defendant.

CASE NO. 13-60758, ADV. NO. 13-6085

United States Bankruptcy Court, N.D. Ohio

April 17, 2014.

  MEMORANDOM OF OPINION (NOT INTENDED FOR PUBLICATION)

  Russ Kendig, Bankruptcy Judge

  On July 15, 2013, Altercare of Navarre Center for Rehabilitation and
Nursing Care, Inc. ("Altercare") filed a complaint to deny the discharge of
Michele Lee Donley's ("Debtor") debt with Altercare under
11 U.S.C. § 523(a)(2)(A) or (a)(4). The debt represents Altercare's expenses
for the care of Virginia L. Carnes ("Carnes"), who is Debtor's grandmother.
Debtor is personally liable for the outstanding balance on Carnes' account.
Debtor filed a motion for summary judgment on March 4, 2014 arguing that
Altercare cannot prove the elements required to prevent discharge under §
523(a)(2)(A) or (a)(4). Altercare filed a brief in opposition on March 18,
2014.

Page 2

  The court has jurisdiction of this case under 28 U.S.C. § 1334 and the
general order of reference dated April 4, 2012. In accordance with
28 U.S.C. § 1409, venue in this district and division is proper. This is a
core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I).

  This opinion is not intended for publication or citation. The availability
of this opinion, in electronic or printed form, is not the result of a
direct submission by the court.

  Facts

  The majority of the facts are not in dispute. Carnes is Debtor's
grandmother and is an elderly woman in need of medical assistance. For a
significant period of time, Debtor was able to provide the necessary care to
Carnes. Because of deterioration in Carnes' health, on March 3, 2005, Carnes
executed a durable power of attorney naming Debtor as her attorney-in-fact.
By September of 2011 Carnes' health deteriorated to a point where Debtor was
no longer able to care for her. It was at that time that Debtor looked at
various care facilities, and eventually decided Carnes should be admitted to
Altercare. On October 6, 2011, Debtor, Carnes, and Altercare entered into an
agreement governing Carnes' care ("the Residency Agreement").

  The Residency Agreement is an eleven page contract that addresses Carnes'
stay at Altercare, as well as Debtor's liabilities and obligations. On
October 6, 2011 Debtor signed the Residency Agreement as Carnes'
"Representative." The Residency Agreement addresses: Debtor's ability to
access Carnes' assets if fees are owed to Altercare; Debtor's liability if
Carnes' assets are transferred while fees are owed to Altercare; the
requirement that Debtor cooperate in filing Carnes' Medicaid application;
Debtor's monetary liability if Medicaid coverage is denied; as well as many
other aspects of the relationship.

  Specifically relating to Medicaid eligibility, part (5)(b) of the
Residency Agreement is titled "Improper Transfers" and states:

      When applying for Medicaid, the government may examine all
    transfers of property and resources that the Resident has made (or
    that were made on his/her behalf). . . for the past five (5) years,
    to determine if any improper transfers were made. The government
    presumes that any transfer of property or resources five (5) years
    prior to a Medicaid application is improper if the transfer made the
    Resident Medicaid-eligible, divested the Resident of proceeds that
    would be available if the property were sold, or if the Resident
    transfers income producing property or resources. Examples of
    improper transfers could include: the transfer of the Resident's
    house, car and other personal property, the transfer of the
    Resident's bank accounts, stocks or bonds, the transfer of real
    estate, and the creation of certain trusts. If an improper transfer
    of the Resident's resources was made, then the Resident will not be
    eligible to receive Medicaid assistance for a designated period of
    time from the date the application for assistance is made.

Page 3

The Residency Agreement then asked if Debtor was aware of any improper
transfers that may affect Carnes' Medicaid eligibility. Debtor answered
"no." However, when Debtor's mother passed away in February of 2007, Carnes
made a $50,000.00 gift to Debtor that was used as a down payment on Debtor's
home.

  Also relating to Medicaid eligibility, Part (5)(d) of the Residency
Agreement is titled "Cooperation in the Application Process" and requires
Debtor to "make full and complete disclosures regarding all financial
resources and income during the Medicaid application process, and to
cooperate fully in providing all requested information." On or around
October of 2011, Debtor applied for Medicaid benefits on Carnes' behalf, but
was denied due to a failure to file all of the required documents. Once
Debtor received the missing documents she reapplied for Medicaid benefits.
The application was approved, but Carnes was not eligible for benefits until
February 28, 2013 due to the $50,000.00 transfer from Carnes to Debtor in
2007. The first and second Medicaid applications ask "has anyone
transferred/sold/given away resources in the last 5 years?" Similar to
Debtor's answer in the Residency Agreement, Debtor answered "no." Debtor has
admitted that she did in fact receive a transfer of $50,000.00 from Carnes
in 2007.

  On the same day as the execution of the Residency Agreement, Debtor also
signed an additional one-page contract title "Personal Guarantee of Payment"
("Personal Guarantee"). Debtor signer her name on the line above "Personal
Guarantor." Near the top of the Personal Guarantee the contract states that
"[Debtor] voluntarily guarantees payment to [Altercare] for all services and
supplies that have been provided, or will be provided in the future, to
[Carnes]. That is, [Debtor] agrees to be jointly and severally liable for
[Carnes'] financial obligations to [Altercare]." A few sentences later, the
Personal Guarantee also states that that Debtor "understands that he or she
is not required by law, or by [Altercare], to personally guarantee payment.
[Debtor] is agreeing to be liable along with and in addition to [Carnes] for
all charges incurred by [Carnes] at [Altercare] on a voluntary basis."

  Chris Paul is a representative of Altercare who often explains the
Residency Agreement and Personal Guarantee to incoming residents and their
representatives. Debtor states that Paul went over the Residency Agreement
and Personal Guarantee with her in approximately thirty minutes. While Paul
does not have any specific recollection of his discussion with Debtor, he
agrees that the process of signing admissions paperwork normally takes
thirty minutes. Paul also noted that he tells individuals that the Personal
Guarantee requires the guarantor to apply for Medicaid for the resident, but
if Medicaid is not available the guarantor will be personally liable for the
resident's expenses.

  According to Altercare, if Carnes was approved for Medicaid coverage,
Debtor and Carnes would owe very little, as Medicaid would make payments
directly to Altercare on Carnes' behalf. When Carnes was denied Medicaid
coverage she began to fall behind on her Altercare bills. According to
Bridget Bazzinotti, an Altercare customer service and collections
supervisor, Altercare continued to provide care to Carnes even though she
was behind on payments due to assurances from Debtor that Carnes would soon
be eligible for Medicaid. If approved without restriction, Altercare would
be reimbursed by Medicaid for past services. Debtor contends that because
she has no knowledge of the Medicaid application process, and
Page 4
therefore no opinion on whether or not Carnes would be approved for
coverage, she did not make any statements to Altercare regarding Carnes'
potential Medicaid eligibility.

  Altercare also alleges that beginning in September of 2011 Debtor began to
make improper transfers out of Carnes' bank accounts in violation of the
Residency Agreement, which prohibits transfers out of Carnes' account when a
balance is owed to Altercare. Specifically, Altercare notes that all of the
checks written on Carnes' account contain Debtor's signature. In addition to
a number of checks for questionable purchases, Debtor also made transfers
directly from Carnes' bank account into her own bank account. For example,
on September 28, 2011, Debtor made a $150.00 transfer from Carnes' account
to her own account and on October 4, 2011 wrote a check to Wal-Mart for
$79.69 from Carnes' account. Debtor made other allegedly questionable
transactions, but those transactions occurred after Debtor and Altercare
entered into the Residency Agreement.

  When Altercare learned that Carnes was not eligible for Medicaid coverage
until February 28, 2013, and that Debtor would not make full payments for
services rendered before Carnes' eligibility date, they began formal
eviction procedures on April 19, 2012. The reason indicated on the "30-Day
Discharge Notice" was that "[t]he resident has failed, after reasonable and
appropriate notice to pay, or to have the Medicare or Medicaid program pay
on his or her behalf, the care provided by the facility." While Debtor and
Carnes made payments totaling $12,155.00 to Altercare, an unpaid balance of
$17,441.50 remains. On June 1, 2012 Altercare instituted a state court
proceeding in the Stark County Court of Common Pleas seeking judgment on the
outstanding debt. On January 23, 2013, the state court granted summary
judgment to Altercare in the amount of $17,441.50 against Debtor. On March
28, 2013, Debtor filed for Chapter 7 bankruptcy protection. Altercare seeks
to have its $17,441.50 debt deemed nondischargeable under § 523(a)(2)(A) or
(a)(4). Debtor's bankruptcy petition lists $46,662.47 in unsecured claims,
approximately $17,000.00 of which is the debt with Altercare,[fn1]
$22,818.00 in student loans, $4,963.47 in credit card debt, $1,619.00 for
various medical bills, and $262.00 for utilities.

  Arguments

  Debtor's current motion for summary judgment addresses Altercare's
arguments that discharge should be denied on Debtor's debt with Altercare
under § 523(a)(2)(A) or (a)(4). Debtor argues that Altercare has not
provided sufficient evidence to survive her motion for summary judgment on
any of the elements under § 523(a)(2)(A). Similarly, according to Debtor,
because § 523(a)(4) requires a showing of fraud similar to § 523(a)(2)(A),
summary judgment should be granted to Debtor on Altercare's § 523(a)(4)
claim. Debtor also argues that § 523(a)(4) requires a fiduciary relationship
between Debtor and Altercare, and such a relationship does not exist.

  In response, Altercare's argument is that issues of fact remain relating
to Debtor's state of mind that are inappropriate for summary judgment.
Specifically, Debtor made at least one false representation to Altercare in
the Residency Agreement. Altercare also points to checks, withdrawals, and
transfers from Carnes' account, all of which were signed or authorized by
Page 5
Debtor, which Altercare believes are questionable uses of Carnes' assets.
Altercare believes the false statement and questionable transfers at least
raise a genuine issue of material fact as to Debtor's state of mind,
foreclosing summary judgment. Altercare also believes a denial of discharge
is appropriate under § 523(a)(4) as, counter to Debtor's argument, §
523(a)(4) does not only require a showing of fraud, but instead also allows
the lesser showing of defalcation in a fiduciary capacity.

  Law and Analysis

  On a motion for summary judgment, facts and reasonable inferences are
viewed in the light most favorable to the non-moving party. Matsushita Elec.
Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). If there are no
genuine issues of material fact, and the movant establishes it is entitled
to judgment as a matter of law, a court is instructed to grant summary
judgment. Fed. R. Bankr. P. 7056. "The moving party has the burden to show
that no genuine issue of material fact exists." S. Rehab. Grp., P.L.L.C. v.
Sec'y of Health & Human Servs., 732 F.3d 670, 676 (6th Cir. 2013). If the
moving party meets its burden, the burden shifts to the nonmoving party, who
"must do more than simply show that there is some metaphysical doubt as to
the material facts." Matsushita, 475 U.S. at 586.

  I. Summary Judgment is Inappropriate Under § 523(a)(2)(A)

  Section 523(a)(2)(A) provides for the denial of a bankruptcy discharge
"for money, property, [or] services . . . to the extent obtained by false
pretenses, a false representation, or actual fraud." "The function of this
provision is to assist in implementing one of the fundamental pillars of
bankruptcy jurisprudence: that bankruptcy relief should only be afforded to
the honest, but unfortunate debtor." Chase Bank v. Brumbaugh (In re
Brumbaugh), 383 B.R. 907, 912 (Bankr. N.D. Ohio 2007) (quoting Cohen v. de
la Cruz, 523 U.S. 213, 217 (1998)). The Sixth Circuit has summarized the
elements of a § 523(a)(2)(A) claim as follows:

      (1) the debtor obtained money through a material misrepresentation
    that, at the time, the debtor knew was false or made with gross
    recklessness as to its truth;

      (2) the debtor intended to deceive the creditor;

      (3) the creditor justifiably relied on the false representation;
    and

      (4) its reliance was the proximate cause of loss.

Rembert v. AT & T Universal Card Servs., Inc. (In re Rembert), 141 F.3d 277,
281 (6th Cir. 1998).[fn2] The burden of proof rests with the plaintiff, who
must prove each element by a preponderance of the evidence. Vicars v.
Freeman (In re Freeman), 2013 WL 4447007, at *5
Page 6
(Bankr. E.D. Tenn. 2013). Additionally, exceptions to discharge are to be
construed liberally in favor of the debtor and strictly against the
creditor. In re Rembert, 141 F.3d at 281.

  When making inquiries into the debtor's state of mind in elements (1) and
(2), and the creditor's state of mind in element (3), a subjective standard
should be used. In re Rembert, 141 F.3d at 281; Wilhelm v. Finnegan (In re
Finnegan), 428 B.R. 449, 455 (Bankr. N.D. Ohio 2010). This subjective
approach "requires that the trier-of-fact focus solely on the individual
characteristics of the debtor [or creditor], meaning that traits such as
ignorance, incompetency and ineptness may, if established, serve as a valid
defense to a § 523(a)(2)(A) action." In re Brumbaugh, 383 B.R. at 912.
However, because subjective intent is difficult to prove, courts often look
to circumstantial evidence, such as badges of fraud, to infer a party's
subjective intent. Mack v. Mills (In re Mills), 345 B.R. 598, 604 (Bankr.
N.D. Ohio 2006); In re Brumbaugh, 383 B.R. at 912-13. Courts should not
engage in "factor counting," but instead should evaluate all of the evidence
to determine if the party had the required intent. In re Rembert,
141 F.3d at 282.

  A. Issues of Fact Remain Regarding Debtor's Knowledge of the Material
Misrepresentation in the Residency Agreement

  The first element under § 523(a)(2)(A) requires that the debtor obtained
the money, property, or services through a false representation, false
pretenses, or actual fraud. The "obtained by" language in § 523(a)(2)(A)
requires that he fraudulent conduct occurred at the origination of the debt.
Silver Care Ctr. v. Parks (In re Parks), 2007 WL 2033380, at *11 (Bankr. D.
N.J. 2007). A false representation made after the money, property or
services were obtained is irrelevant, because such a false representation
could not have been the reason credit was extended. Id. In support of its §
523(a)(2)(A) claim, Altercare alleges that Debtor made a false
representation, defined as an expressed untrue representation, in the
Residency Agreement. Adam v. Fletcher (In re Fletcher), 345 B.R. 592, 597
(Bankr. N.D. Ohio 2006).

  In the current case, the Residency Agreement asked if Debtor is "aware of
any transfer of [Carnes'] property or resources, or of any trusts that have
been created, in the past five (5) years." Debtor initialed in the blank
next to the answer "No." Debtor admits the statement is untrue, as Carne
transferred $50,000.00 to Debtor in February of 2007. Altercare also argues
that Debtor made certain questionable withdrawals and transfers from Carnes'
accounts in violation of the Residency Agreement. It is unclear whether the
transfers between Carnes and Debtor, which started in September of 2011,
were material misrepresentation when not disclosed in the Residency
Agreement signed on October 11, 2011. However, as Debtor's failure to
disclose the $50,000.00 gift from Carnes in the Residency Agreement is a
material representation, the court need not dig deeper into Debtor's smaller
transfers.

  However, the first element of a § 523(a)(2)(A) claim essentially has two
parts, (1) a material misrepresentation and (2) that the debtor knew the
representation was false at the time it was made. The knowledge requirement
encompasses actual subjective knowledge of the material misrepresentation,
as well as statements made with gross recklessness as to their truth.
Rambush v. Tailford (In re Tailford), 2014 WL 1256038, at *3 (Bankr. N.D.
Ohio 2014). Altercare argues that Debtor must have known of the very large
$50,000.00 gift that she used to purchase a home, as such an event is not
something easily forgotten. Altercare points to Debtor's affidavit signed
Page 7
on December 30, 2013 which admits that Carnes was denied Medicaid coverage
due to an improper transfer of $50,000.00. While Debtor's admission
indicates that at the end of 2013 she was aware of the improper transfer, it
does not indicate that Debtor was aware of the transfer as of October 6,
2011, the date the Residency Agreement was signed. Debtor claims that she
did not know her statement regarding impermissible transfers in the
Residency Agreement was false at the time it was made. In support of this
position, Debtor asserts that a representative from Altercare spent only
thirty minutes going over the entire Residency Agreement. Debtor contends
that thirty minutes is not enough time for a normal person to understand all
of the legal terms in the contract. It is possible that Debtor did not
understand portions of the Residency Agreement, or believed that the
$50,000.00 gift would not qualify as an improper transfer under Medicaid
rules. Because the inquiry is based on the Debtor's subjective state of mind
(i.e. whether she actually knew the statement on the Residency Agreement was
false or was grossly reckless as to the truth of falsity of the
representation), the court finds that there exists a genuine issue of
material fact as to Debtor's knowledge of the improper transfer at the time
she signed the Residency Agreement.

  B. Issues of Fact Remain Regarding Debtor's Fraudulent Intent to Deceive
Altercare

  The second element asks if the debtor subjectively intended to deceive the
creditor. In re Rembert, 141 F.3d at 281. "Fraudulent intent requires the
actual intent to mislead, which is more than mere negligence." Gibbs v.
Nevels (In re Nevels), 2007 WL 2042449, at *8 (Bankr. E.D. Tenn. 2007). In
other words, "a dumb but honest debtor does not satisfy the test." Id.
(internal quotation marks omitted). Therefore, the second element requires
scienter, otherwise defined as "a mental state embracing intent to deceive,
manipulate, or defraud." AT&T Universal Card Servs. v. Mercer (In re
Mercer), 246 F.3d 391, 407 (5th Cir. 2001); see also Field v. Mans,
516 U.S. 59, 67-68 (1995). In order to succeed on a claim, the plaintiff
must present evidence that the debtor "made false representations that she
knew or should have known would convince the [p]laintiff to provide property
or services." In re Nevels, 2007 WL 2042449, at *8. When making such a
determination, bankruptcy courts should consider whether "the totality of
the circumstances presents a picture of deceptive conduct by the debtor
which indicates an intent to deceive creditors." Melhorn v. Copeland (In re
Copeland), 291 B.R. 740, 766 (Bankr. E.D. Tenn. 2003) (internal quotation
marks omitted). While the focus is on whether the debtor had the required
fraudulent intent at the time of the false representation, courts may
consider a debtor's actions after the false representation to the extent
such actions shed light on the debtor's state of mind when the false
representation was made. Id.

  Courts have often interpreted the second element to look to "whether the
debtor subjectively intended to repay the debt" when the debt was incurred.
In re Rembert, 141 F.3d at 282. Similarly, if a debtor signs a contract, but
at the time of formation had no intention of performing under the contract,
a false representation has been made. Stifter v. Orsine (In re Orsine),
254 B.R. 184, 189 (Bankr. N.D. Ohio 2000). However, simply because a debtor
fails to pay a debt as it becomes due is not proof of fraud at the debt's
inception. In re Freeman, 2013 WL 4447007, at *5. Holding otherwise would
result in every debt stemming from a breach of contract being
nondischargeable. Schroeder v. Bennett (In re Bennett), 430 B.R. 463, 468
(Bankr. N.D. Ohio 2010) ("It is well established that failure to fulfill a
promise, standing alone,
Page 8
is not a sufficient ground upon which to base a finding of fraudulent intent
for purposes of § 523(a)(2)(A)."); In re Fletcher, 345 B.R. at 597. When
evaluating subjective intent, a debtor who undertakes significant steps to
perform under the contract will generally not be found to have acted with
the necessary fraudulent intent. In re Mills, 345 B.R. at 605.

  A genuine issue of material fact exists as to Debtor's state of mind when
she made the false representation in the Residency Agreement. Debtor argues
that she had absolutely no knowledge of the Medicaid process, and therefore
could not have known the $50,000.00 transfer would make Carnes ineligible
for Medicaid. If Debtor was truly unaware of the Medicaid coverage
requirements, is seems unlikely that her false representation was made with
the subjective intent to fraudulently convince Altercare to provide services
to Carnes. Debtor also made payments to Altercare in the amounts of
$4,570.00, $2,957.00, $2,314.00, and $2,314.00 on December 12, 2011, January
6, 2012, February 7, 2012, and March 6, 2012, respectively. Debtor's four
payments total $12,155.00 and constitute significant steps to perform under
the Residency Agreement, which is strong evidence that Debtor did not have
the necessary fraudulent intent when entering into the contract. In re
Mills, 345 B.R. at 605. However, an Altercare employee stated in an
affidavit that Debtor repeatedly told Altercare employees that Carnes was
eligible for Medicaid. In addition to the false representation in the
Residency Agreement, Debtor also answered "no" on two separate Medicaid
applications to the question "has anyone transferred/sold/given away
resources in the last 5 years." While Debtor's misrepresentation in the
Residency Agreement may be attributed to allegedly being rushed through the
document, improperly answering the same question in two separate Medicaid
applications, completed months apart, increases the likelihood that Debtor
intentionally, or with reckless disregard for the truth, made a false
representation to Altercare with the intent to deceive.

  C. There is Evidence That Altercare's Reliance on Debtor's Statements was
Justifiable

  The third element requires that the creditor justifiably relied upon the
debtor's false representation at the time the material misrepresentation was
made. In re Rembert, 141 F.3d at 281. Justifiable reliance is a lower
standard than reasonable reliance, and should be determined based on the
creditor's subjective state of mind. In re Finnegan, 428 B.R. at 455.
According to the Supreme Court, a person may justifiably rely on the
representation of another even though the truth or falsity of the statement
could have been discovered through an investigation. Field, 516 U.S. at 70.
For example, a creditor may justifiable rely on the statement that a
particular piece of property is free of encumbrances, even though a quick
trip to the courthouse would show such a statement to be false. Id. at 70.
Justifiable reliance is not without limits though, as "a person is required
to use his senses, and cannot recover if he blindly relies upon a
misrepresentation the falsity of which would be patent to him if he had
utilized his opportunity to make a cursory examination or investigation."
Id. at 70. In Field, the Supreme Court uses the example of a horse with only
one eye. Id. at 71. If the one-eyed horse is shown to the purchaser before
the sale, the purchaser could not justifiably rely on any statement claiming
the horse has two eyes. Id.

Page 9

  Debtor argues that Altercare could not have justifiably relied on Debtor's
statements pertaining to Carnes' Medicaid coverage because Debtor personally
guaranteed any debt. Under the personal guarantee, Debtor argues that
Altercare contracted to provide care to Carnes regardless of her Medicaid
eligibility because Debtor would cover any missed payments. Therefore,
Altercare could not have relied on Debtor's statements pertaining to Carnes'
Medicaid eligibility if Altercare was contractually obligated to provide
services anyway. Debtor's argument misses the mark, as it addresses
proximate cause, not justifiable reliance. Justifiable reliance looks to the
subjective reasonableness of a creditor's reliance on a debtor's
representation, not whether such representation was the cause of any loss.

  The current case is similar to the example from Field, where a party made
the false representation that a piece of real property had no encumbrances
and the purchasing party failed to conduct a search to substantiate the
claim. 516 U.S. at 70. The court determined that an investigation was not
required and that the purchaser's reliance on the seller's statement was
justified. Id. In the current case, discovering the $50,000.00 transfer
between Carnes and Debtor would likely be significantly more difficult than
the simple encumbrance search from Field. Therefore, based on Supreme Court
precedent, Altercare may be justified in relying on Debtor's representations
in the Residency Agreement. Such an outcome may be different if Debtor made
allegations that Altercare was aware of Debtor and Carnes' $50,000.00
transfer, or gave other basis for the court to doubt Altercare's subjective
reliance on Debtor's statements in the Residency Agreement, but no such
evidence has been presented.

  D. Issues of Material Fact Remain Regarding Whether Debtor's False
Representation was the Proximate Cause of Altercare's Injury

  Element (4) requires that the creditor's reliance on the false
misrepresentation be the proximate cause of the loss. One bankruptcy court
has explained proximate cause as requiring a plaintiff "to prove that its
reliance on the [d]ebtor's representations was the proximate cause of its
losses, which depends on whether the [debtor's] conduct has been so
significant and important a cause that the [debtor] should be legally
responsible." Tweedie v. Hermoyian (In re Hermoyian), 466 B.R. 348, 370
(Bankr. E.D. Mich. 2012) (quoting WebMD Practice Servs., Inc. v. Sedlackek
(In re Sedlacek), 327 B.R. 872 (Bankr. E.D. Tenn. 2005). "There must be a
direct link between the alleged fraud and the creation of the debt." Id.
(internal quotation marks omitted).

  In the current case, Debtor argues that because she signed the Personal
Guarantee, and because the Personal Guarantee requires Altercare to provide
services to Carnes even if a third party (such as Medicaid) refuses payment,
the outcome of Carnes' Medicaid application cannot be the proximate cause of
Altercare's losses. However, even if Debtor personally guaranteed payment,
obtaining Medicaid coverage remains very important to Altercare. Medicaid is
a very secure payment stream, essentially eliminating the fear of
non-payment present with residents who privately pay for care. Altercare has
also provided an affidavit from an employee stating that Altercare relied on
Debtor's representations that Carnes would eventually be eligible for
Medicaid, and also continued to provide care based on Debtor's
representations. However, as noted above, there must be a "direct link
between the alleged fraud and the creation of the debt." Id. (emphasis
added). Therefore, the issue is whether the false representation in the
Residency Agreement was the source of Altercare's losses, not if Debtor's
later actions caused the losses.
Page 10
The court does not have sufficient evidence suggesting whether or not
Altercare would have entered into the Residency Agreement if the $50,000.00
transfer was properly disclosed. If Debtor had properly disclosed the
transfer, and Altercare would have still entered into the contract, Debtor's
misrepresentation was not the proximate cause of Altercare's loss. The court
does not have sufficient evidence to rule on element (4).

  II. Summary Judgment is Appropriate Under § 523(a)(4)

  Debtor argues she is entitled to summary judgment on Altercare's denial of
discharge claim brought under § 523(a)(4), which states that discharge
should be denied for a debt acquired through "fraud or defalcation while
acting in a fiduciary capacity, embezzlement, or larceny." While fraud and
defalcation require a fiduciary relationship, embezzlement and larceny do
not. Robinson v. Robinson (In re Robinson), 2012 WL 4715093, at *3-4 (Bankr.
N.D. Ohio 2012).

  A. Debtor is Entitled to Summary Judgment on Altercare's § 523(a)(4) Claim
for Defalcation in a Fiduciary Capacity

  Defalcation is not defined within the bankruptcy code, but has been used
in bankruptcy proceedings since at least 1867. Bullock v. BankChampaign,
N.A., 131 S.Ct. 1754, 1758 (2013). The Sixth Circuit has set out the
following elements required to show defalcation in a fiduciary capacity:
"(1) a pre-existing fiduciary relationship; (2) breach of that fiduciary
relationship; and (3) a resulting loss." Commonwealth Land Title Co. v.
Blaszak (In re Blaszak), 397 F.3d 386, 390 (6th Cir. 2005). Before there can
be a fiduciary duty, a trust must exist, and only express or technical
trusts are sufficient. In re Robinson, 2012 WL 4715093, at *5; Mut. Mgmt.
Servs. v. Fairgrieves (In re Fairgrieves), 426 B.R. 748, 755 (Bankr. N.D.
Ill. 2010). While the existence of an express or technical trust is a matter
of state law, federal law determines whether such a trust relationship has
been created for the purposes of § 523(a)(4). In re Blaszak,
397 F.3d at 390-91. To create a trust under federal law the following four
elements must be satisfied: "(1) an intent to create a trust; (2) a trustee;
(3) a trust res; and (4) a definite beneficiary." In re Blaszak,
397 F.3d at 391. Once a fiduciary duty towards a trust has been established,
the second element requires a breach of that duty. Id. at 390. A breach
requires more than a normal fiduciary breach, but instead requires a breach
indicating bad faith, moral turpitude, other immoral conduct, or an
intentional wrong. Bullock, 133 S.Ct. at 1759. An intentional wrong includes
conduct that the fiduciary knows is improper, as well as criminally reckless
conduct, such as being willfully blind to a substantial and unjustifiable
risk that the conduct will result in a breach of the fiduciary duty. Id.

  The court must first determine if Altercare is able bring a defalcation in
a fiduciary capacity claim against Debtor. While both parties agree that a
fiduciary relationship exists between Debtor and Carnes, the parties dispute
if the same relationship exists between Debtor and Altercare. Under §
523(c), a debt should be denied discharge under § 523 only if there is a
"request of the creditor to whom such debt is owed." 11 U.S.C. § 523(c).
Focusing on such language, courts have determined that "[o]bjection to
discharge under Section 523(a) must always be brought by the particular
creditor whose debt is claimed to be non-dischargeable." In re Parks,
2007 WL 2033380, at *12 (quoting Hass v. Hass (In re Hass), 273 B.R. 45, 49
(Bankr. S.D. N.Y. 2002)). Therefore, for a claim to be brought under §
523(a)(4) on a defalcation theory,
Page 11
the creditor must be the direct victim of the debtor's defalcation in a
fiduciary capacity. Consequently, "[a] threshold inquiry is whether a
fiduciary obligation runs from the debtor to the creditor." Charles Cnty.
Nursing & Rehab. Ctr. v. Marbury (In re Marbury), 2009 WL 4639599, at *2
(Bankr. D. Md. 2009); Buckeye Ret. Co. v. Kakde (In re Kakde), 382 B.R. 411,
431-32 (Bankr. S.D. Ohio 2008) ("[T]he premise of a nondischargeability
claim for fraud or defalcation under [§ 523(a)(4)] is that the debtor acted
in a fiduciary capacity" towards the creditor). "Put another way, a
plaintiff must prove two elements: a fiduciary relationship between it and
the debtor and fraud or defalcation committed by the debtor in the course of
that fiduciary relationship." In re Marbury, 2009 WL 4639599, at *2; see
also Fowler Bros. v. Young (In re Young), 91 F.3d 1367, 1371 (10th Cir.
1996); Lexington Health Care Ctr. Of Elmhurst, Inc. v. McDade (In re
McDade), 282 B.R. 650, 658-59 (Bankr. N.D. Ill. 2002); Klenda v. Hogue (In
re Hogue), 221 B.R. 786, 793 (Bankr. N.D. Ok. 1998); Kafantaris v. Signore,
2011 WL 1743416 (N.D. Ill. 2011).

  In order for Altercare to bring an action under § 523(a)(4), a fiduciary
relationship must exists between Debtor and Altercare. A case with facts
very similar to the current dispute is In re Parks, where the debtor owed
money to Silver Care Center (a nursing home) for services provided to the
debtor's mother. 2007 WL 2033380, at *1. The debtor was her mother's
powerof-attorney, signed an agreement admitting her mother to the nursing
home, and also signed a contract making her liable for all of her mother's
unpaid charges. Id. Debtor eventually fell behind on her payments to Silver
Care Center and filed bankruptcy, at which time the nursing home brought an
adversary proceeding under 523(a)(4) seeing to deny discharge based on the
debtor's breach of her fiduciary duty. Id. at 2. The court found in favor of
the debtor, reasoning that the various contracts with Silver Care Center
"merely created a debtor-creditor relationship, or simply a contractual
relationship which did not rise to the level of a fiduciary relationship"
between the debtor and Silver Care Center. Id. at *15. Additionally, simply
because the power of attorney created a fiduciary relationship between the
debtor and her mother it did not "extend or bootstrap that duty to
third-party creditors . . . of the person owed the duty." Id. at 15; see
also In re McDade, 282 B.R. 650 (holding that a fiduciary relationship
between the debtor and his father (who was a resident of a nursing home),
was not sufficient to create a fiduciary relationship between the debtor and
the nursing home even though the debtor was jointly and severally liable for
his father's nursing home debts); In re Marbury, 2009 WL 4639599. Similarly,
in the corporate context, if a fiduciary relationship exists between
shareholder "A" and a corporation, shareholder "B" of the same corporation
cannot bring a claim under § 523(a)(4) against "A" because there is no
direct fiduciary relationship between "A" and "B." Marshall v. McCaffrey (In
re McCaffrey), 216 B.R. 196 (Bankr. E.D. Mich. 1997); see also In re Kakde,
382 B.R. at 431-32; Hoffman v. Stamou (In re Stamou), 2009 WL 1025161
(Bankr. D. N.J. 2009); Blixseth v. Blixseth (In re Blixseth), 459 B.R. 444,
456-57 (Bankr. D. Mont. 2011); White v. Whittle (In re Whittle),
449 B.R. 427, 429-30 (Bankr. M.D. Fla. 2011).

  Altercare cites to the case of Woodland Oaks Manor, LLC v. Plybon (In re
Plybon), 2012 WL 827349 (Bankr. E.D. Ky. 2012), for support of the position
that discharge of Debtor's Altercare debt can be denied under § 523(a)(4).
The facts of In re Plybon are very similar to the current case. In In re
Plybon, the debtor's husband was admitted into a nursing home, the debtor
signed a contract making her personally liable for her husband's nursing
home expenses as well as obligating her to comply with obtaining Medicaid
coverage for her husband. Id. at *1.
Page 12
The debtor did not timely file her husband's Medicaid application, and when
she did file the application it was incomplete. Id. at *3. Due to the
debtor's inadequate filings, her husband's Medicaid application was denied
and the debtor became liable for $47,692.02 of her husband's expenses. Id.
The court determined that the debtor's "failure to obtain the Medicaid
benefits and the subsequent failure to meet the financial obligations of
[her husband's] care were a breach of her obligations under the [nursing
home contract] as the party responsible for [her husband's] financial assets
and liabilities." Id. The court then denied the debtor's discharge under §
523(a)(4). Id. Important to note, the court in In re Plybon did not
explicitly find the existence of a fiduciary relationship between the debtor
and the nursing home. Id. While not completely clear, the court seems to
have found the existence of a fiduciary relationship between the debtor and
her husband, that failing to file her husband's Medicaid paperwork was a
breach of the debtor's fiduciary relationship to her husband and contractual
duties to Silver Care Center, and that the husband's denial of Medicaid
coverage was due to the debtor's failings and also caused the nursing home's
losses. See id.; see also Valley Mem'l Homes v. Hrabik (In re Hrabik),
330 B.R. 765 (Bankr. D. N.D. 2005) (holding that a nursing home could bring
a claim under § 523(a)(4) against a resident's power-of-attorney for
defalcation in a fiduciary capacity without discussing the existence of a
fiduciary relationship between the nursing home and the power-of-attorney).

  Faced with two divergent lines of cases, with support for each side within
the Sixth Circuit, the court agrees with the reasoning of cases such as In
re Parks. Therefore, the court holds that a direct fiduciary link between
the debtor and creditor is required to bring a claim of defalcation in a
fiduciary capacity. One leading treatise agrees, stating that "for a debt to
be nondischargeable under section 523(a)(4), it must be directly related to
the fiduciary relationship between the debtor and the creditor." 4 Collier
on Bankruptcy, ¶ 523.10[1][d] (Alan N. Resnick & Henry J. Sommers eds., 16th
ed. 2013). While Debtor owes a debt to Altercare, such a debt is not based
on a defalcation in a fiduciary capacity. Significant in the court's
decision that a trust has not been created is the lack of the expressed
intent to create a trust between Debtor and Altercare in the Residency
Agreement, as evidenced by the lack of the word "trust" or corresponding
fiduciary language, which the Sixth Circuit has found to be very important
to the creation of a fiduciary relationship. Poynter v. Great Am. Ins. Co.
(In re Poynter), 535 F.App'x 479, 482 (6th Cir. 2013). Finally, because
exceptions to discharge "are to be strictly construed against the creditor
and liberally in favor of the debtor," expanding the scope of the denial of
discharge under § 523(a)(4) without clear guidance from the bankruptcy code
is inappropriate. In re Tailford, 2014 WL 1256038, at *3 (citing In re
Rembert, 141 F.3d at 281). Debtor's motion for summary judgment is granted
on Altercare's claim for a denial of discharge under § 523(a)(4) on a
defalcation in a fiduciary capacity theory.

  B. Debtor is Entitled to Summary Judgment on Altercare's Claim Under §
523(a)(4) for Larceny or Embezzlement

  As noted above, discharge can also be denied under § 523(a)(4) for
embezzlement or larceny, neither of which requires a showing of a fiduciary
relationship. Embezzlement is established by showing that the "(1) [the
creditor] entrusted his property to the debtor or debtor lawfully obtained
the property, (2) the debtor appropriated the property for a use other than
that for which it was intended, and (3) the circumstances indicate fraud."
In re Robinson, 2012 WL 4715093, at *4.
Page 13
The third element requires "fraud in fact, involving moral turpitude or
intentional wrong, for the purpose of permanently depriving another of
property." Id. Larceny is the "the fraudulent and wrongful taking and
carrying away of the property of another with intent to convert such
property to the taker's use without the consent of the owner." Id. at *3. An
argument has not been raised questioning Debtor's power of attorney, putting
Carnes' property legally within Debtor's control. Therefore, only
embezzlement is available.

  Before reaching the individual elements of embezzlement, the court must
determine if Altercare has standing to bring a § 523(a)(4) embezzlement
claim. As noted above, § 523(c) states that a debt should not be denied
discharge under § 523(a) unless there is a "request of the creditor to whom
such debt is owed." Therefore, to bring an embezzlement claim within the
meaning of § 523(a)(4), the creditor must have been the direct victim of an
embezzlement. In re Stamou, 2009 WL 1025161, at *6. Additionally, the
property that is the subject of the embezzlement claim must belong directly
to the creditor, as an indirect relationship, such as the creditor being
owed money by the victim of the embezzlement, is not sufficient. Id.
(holding that plaintiff, as a 40% owner of a corporation, could not bring a
§ 523(a)(4) claim on an embezzlement theory against the debtor because the
property that was the subject of the embezzlement belonged to the
corporation, not the plaintiff); Bankers Trust Co. v. Hoover, 301 B.R. 38,
53 (Bankr. S.D. Iowa 2003) ("This Court concurs with those decisions that
have held or implied there is a requirement that the embezzled property
belonged to the adversary complaint plaintiff. To hold otherwise would widen
the pool of creditors who could utilize the embezzlement prong of section
523(a)(4) beyond that contemplated by Congress."); Maloney v. Harte (In re
Harte), 440 B.R. 133, 143-44 (Bankr W.D. Mich 2010); IBA, Inc. v. Hoyt (In
re Hoyt), 326 B.R. 13 (Bankr. W.D. N.Y. 2005).

  In the current case, the funds Debtor allegedly improperly transferred
starting in September of 2011 belonged to Carnes, not Altercare. While it is
true that Altercare is a judgment creditor of Debtor, as well as having
language in the Residency Agreement restricting Debtor's ability to transfer
Carnes' assets, such an indirect relationship does not give Altercare
standing. See In re Fairgrieves, 426 B.R. 748; In re Stamou,
2009 WL 1025161, at *6. Because the property did not belong to Altercare,
the alleged embezzlement, and the debt arising out of any embezzlement, also
do not belong to Altercare. Only Carnes, as the potential victim of the
embezzlement, has standing. Therefore, Debtor's motion for summary judgment
on Altercare's § 523(a)(4) larceny and embezzlement claims are granted.

  Conclusion

  For the reasons outlined above, Debtor's Motion for Summary Judgment is
GRANTED IN PART and DENIED IN PART. Debtor's Motion for Summary Judgment is
DENIED as to Altercare's claims under § 523(a)(2)(A), but is GRANTED as to
Altercare's claims under § 523(a)(4). An order will be issued simultaneously
with this opinion.

  It is so ordered.

[fn1] Debtor also lists the debt with Altercare as partially secured in
Schedule D.

[fn2] Some Ohio courts have laid out the § 523(a)(2)(A) test in five
elements: "(1) the debtor made a false representation; (2) the debtor knew
such representation to be false at the time they were made; (3) the
representation was made with intent to deceive the creditor; (4) the
creditor justifiably relied on the representation; and (5) the creditor's
loss was the proximate result of the misrepresentation being made." In re
Finnegan, 428 B.R. 449, 453 (Bankr. N.D. Ohio 2010). The two tests are
functionally the same, with the In re Finnegan test essentially breaking the
first element into two parts.