Embezzlement Established by Collateral Estoppel

The following is a summary of a Minnesota bankruptcy case or a case relevant to Minnesota bankruptcy law.

Minnesota Bankruptcy Case:

Tri-State Ins. Co. of Minn. v. Stewart (In re Stewart), ADV 09-3092 (Bankr. D. Minn. 1/15/10) (O’Brien, J.).

Case Summary:

Embezzlement Established by Collateral Estoppel

Stewart was the former owner and operator of a debt collection business. Under her business’s agreements with clients, Stewart was to collect debts on the clients’ behalf, retain a 33% commission, and remit or refund the remaining 67% of collection funds. From 1992-2004, she knowingly diverted client funds and used the funds for personal and business expenses. Tri-State issued collection agency bonds to Stewart’s business pursuant to Minn. Stat. §§ 332.31-332.45. The bond applications included indemnification and hold harmless provisions. In 2004, the Minnesota Department of Commerce revoked her business’s license because it had not been remitting collected funds to creditors in amounts due. The state court appointed a receiver. The receiver’s audit concluded that Stewart had misappropriated $141,114.00 of client trust funds. Stewart pleaded guilty to and was convicted of theft and false representation, and was ordered to pay restitution.

Tri-State was obligated to indemnify the Department of Commerce for the damages stemming from Stewart’s misappropriation and conversion. Tri-State paid the full indemnification amount of $161,746.76 to the Department of Commerce pursuant to a Release and Assignment, which included a subrogation clause. Pursuant to Tri-State’s subrogation rights, Tri-State sued Stewart, her business, and her husband. Tri-State won a judgment for $152,295.71. The court found that Stewart had engaged in a pattern of illegal behavior, including misappropriation and conversion.

Stewart filed a chapter 7 petition. Tri-State filed a dischargeability complaint against her under 11 U.S.C. § 523(a)(2), (a)(4), and (a)(6). The court granted summary judgment to Tri-State. The court found that based on the undisputed facts of the case and the application of collateral estoppel to facts determined in prior litigation, Tri-State was entitled to summary judgment under § 523(a)(4) and (a)(6). The court found that the elements of embezzlement under § 523(a)(4) were established by the uncontested facts: Stewart was in lawful possession of the collection funds, exercised exclusive control over them, removed them from the trust account, and used them for her own benefit, which she was not entitled to do. The court found that the elements of § 523(a)(6) were also established by the uncontested facts: Stewart knowingly and intentionally took client trust funds, converted them for her personal use, and necessarily intended both the injury and the harm. The court rejected Stewart’s argument that Tri-State lacked standing to assert the claim, since Tri-State, as subrogee of the State’s rights, had the right to assert the State’s right to have the debt declared nondischargeable.

Credit: The preceding was a summary of a case relevant to Minnesota bankruptcy law. The case summary was prepared by the U.S. Bankruptcy Court through Judge Robert J. Kressel & attorney Faye Knowles.