Bankrupt SNT Trustee Cannot Discharge Fraud Damages

Special Needs Answers case summary.The United States Bankruptcy Court for the Eastern District of Virginia holds that the entire money judgment against a trustee of a special needs trust who managed the trust fraudulently is non-dischargeable. In Brabson v. Janosik (U.S. Bankr. E.D. Va. Case No. 22-31913-KRH, June 8, 2023).

Sheri Janosik was the trustee of a special needs trust for Samuel Brabson. The Chesterfield County Circuit Court found that she was liable to the beneficiary for breach of fiduciary duty, breach of a trust agreement, conversion, and fraud.

After Ms. Janosik filed for Chapter 13 bankruptcy, Mr. Brabson brought an action in opposition. He asked the court to hold the judgment as non-dischargeable under section 523(a)(4) and section 727 of the Bankruptcy Code.

Both parties motioned for summary judgment on the section 523(a)(4) claim. Each argued that the doctrine of collateral estoppel should resolve the matter in their favor. Ms. Janosik motioned for summary judgment on the section 727 claim, arguing that it is irrelevant to this case.

The court finds that the following elements of collateral estoppel are met. The parties are the same. The findings were litigated. The State Court Judgment is a valid, final judgment.

As fraud, an intentional wrong, and embezzlement form the basis of the judgment, and Ms. Janosik was acting as a fiduciary, section 523(a)(4) applies. The judgment has a preclusive effect.

The state court gave compensatory damages, costs, interests, and attorneys fees to Mr. Brabson. Since the definition of debt in section 523 is broad, all damages are non-dischargeable, including attorneys fees.

Since section 727 governs a debtor’s right to discharge in a case under Chapter 7 of the Bankruptcy Code, it does not apply to this case.

The bankruptcy court grants summary judgment to Mr. Brabson for the section 523(a)(4) claim. Since section 727 does not apply, the bankruptcy court awards summary judgment for those claims to Ms. Janosik.

Read the full opinion.