Memorandum of Decision Re: Defalcation

DO NOT PUBLISH This case disposition has no value as precedent and is not intended for publication. Any publication, either in print or electronically, is contrary to the intent and wishes of the court.
UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re GEORGE VOGELEI,                                     No. 99-10252      Debtor(s). ______________________________________/ ESTATE OF CENTENNIAL COMMUNICATIONS, INC.,      Plaintiff(s),    v.                                                                          A.P. No. 99-1087 GEORGE VOGELEI      Defendant(s). _______________________________________/
Memorandum of Decision
I. Introduction      Plaintiff in this adversary proceeding is a Chapter 11 bankruptcy estate in the District of Nebraska. Chapter 7 debtor and defendant George Vogelei is an attorney and an officer of the corporate debtor in that case. The issue is whether Vogelei has defalcated in his handling of monies belonging to the estate and entrusted to him, such that plaintiff's claim is nondischargeable pursuant to § 523(a)(4) of the Bankruptcy Code.      The facts relating to this case start in 1982, when the Nebraska Bankruptcy Court confirmed a Chapter 11 plan of reorganization for Centennial Communications, Inc. Under the terms of the plan, Centennial's radio stations would be sold and the proceeds used to pay creditors. Part of the proceeds was a large promissory note.      Some time after confirmation, the promissory note was paid off and the proceeds seized by the Internal Revenue Service. Centennial engaged Vogelei, its secretary, to obtain a refund from the IRS. He was eventually successful in recovering $904,277.78. Vogelei's handling of these funds is the basis for this adversary proceeding.      In late 1988, questions were raised in the Nebraska court relating to the estate's assets. During the next two and a half years, the Nebraska court issued numerous orders for an accounting. These finally culminated in a report showing that the tax refunds had been received by Vogelei and that he from them he had loaned $286,233.20 to a radio station, paid $387,400.00 to an entity called the "Sherwood Trust," and paid the remainder to individuals, many of whom were insiders. In April, 1992, the court authorized objecting creditors to file an adversary proceeding against Vogelei to recover corporate assets.      In the adversary proceeding, Vogelei failed to comply with numerous discovery requests related to what he had done with the funds. These failure stretched over a period of more than a year, and resulted in numerous hearings and orders. Finally, having given Vogelei every opportunity to supply the requested information, the court entered a default judgment against him for $904,000.00, plus interest, costs, and attorneys' fees on December 23, 1994.      On December 27, 1995, Vogelei filed a motion for relief from the default. In denying the motion, the Nebraska court issued a 23-page memorandum outlining the history of the case and Vogelei's conduct in detail. While the memorandum recited Vogelei's numerous failings and repeated chances to supply a proper accounting as justification for its denial, it also recited that the motion was denied as untimely. In a separate order entered a few weeks later, the court vacated the finding that the motion was untimely and made it clear that its denial of relief from default stood on the merits. II. Collateral Estoppel      A few months before the trial in this court, plaintiff moved for summary judgment based on the Nebraska default judgment and the court's lengthy memoranda. The court denied the motion on the grounds that the Nebraska court had ruled both on the merits and on grounds that the motion was untimely. This court was unaware of the subsequent order vacating the timeliness grounds. This court was also concerned that an injustice would result if, as Vogelei argued, he had acted properly and was a victim of abandonment by an attorney in another state.      Upon reconsideration, it appears that the doctrine of collateral estoppel does preclude Vogelei from defending this adversary proceeding. No injustice will result from the application of the doctrine because Vogelei did not act properly and is not an innocent victim.      Vogelei was a fiduciary for all of the funds he received from the IRS on behalf of the corporation, both because he was an officer of the corporation and because he was its attorney. Moreover, Vogelei deposited most of the funds in his attorney trust account. There can be no doubt that Vogelei was acting in a fiduciary capacity, such that any defalcation results in a debt nondischargeable under § 523(a)(4).      The simple failure of a fiduciary to properly account for trust funds constitutes defalcation. In re Niles, 106 F.3d 1456, 1460 (9th Cir.1997). It is defalcation even if the failure was innocent. In re Lewis, 97 F.3d 1182, 1186 (9th Cir.1996). The Nebraska court entered its default judgment not merely because Vogelei failed to comply with discovery orders, but because Vogelei failed, repeatedly, to comply with discovery orders seeking an accounting. Even though it was denominated a default judgment, it was nonetheless an adjudication on the merits that Vogelei had a fiduciary duty to properly account for the funds which passed through his hands and failed to do so. Accordingly, the judgment has collateral estoppel effect and precludes Vogelei from re-litigating the issue. III. The Merits      While the court concludes that collateral estoppel precludes Vogelei from defending on the merits, most of the debt in question would be nondischargeable even in the absence of the Nebraska judgment. Vogelei has not properly accounted for all but a small portion of the funds which passed through his hands.       Vogelei deposited $485,804.06 in corporate tax returns into his attorney trust account. Incredibly, he did not write checks to the alleged recipients from the account. Rather, he made almost all the checks out to a bank and had the bank wire funds. Thus, there is no paper trail for most of the money and we have only Vogelei's testimony as to where the money went and why it was sent. This is not a proper accounting.      From the $485,804.06, Vogelei paid $100,000.00 to Rae Sherwood. In addition, Vogelei endorsed the last IRS check of $257,399.37 directly to her. Vogelei had been Sherwood's attorney, and had been the trustee of a trust established for her benefit. Without her knowledge, Vogelei had taken large sums of money from the trust which he says were loans to Centennial. Vogelei justified the payment to her from Centennial funds on grounds that they were repayment of Centennial debt. However, most of these "loans" were made by wire transfer, so there is no paper trail showing to whom the payments were made or why. One of the payments, for $175,000.00, was made payable to "B.J. Leonard." The court has only Vogelei's explanation that B.J. Leonard was an employer of Richard Ostberg,(1) president of Centennial, and that Vogelei sent the $175,000.00 to B.J. Leonard for Osbtberg for Centennial. This is not a proper accounting.      Similarly, Vogelei says that he sent $160,500.00 to Ostberg for deposit into the corporate account. However, instead of making his trust account checks payable to Centennial he made them payable to the bank and then wired the funds to Ostberg. While the court believes that Ostberg received the money, there is no evidence other than Vogelei's explanation as to why the funds were being sent. Vogelei had the opportunity to protect the corporation by making out a check to it and mailing it to Ostberg. By wiring the money to Ostberg instead, Vogelei failed to properly protect the interests of his client and create documentation for a proper accounting. This was a defalcation.      Similarly, Vogelei wired $118,342.57 to a radio station in Oregon which Vogelei says the corporation owned. While the fact of the wire transfers was somewhat established, Vogelei has not established that the radio station was anything more than a private venture of himself and Ostberg. Vogelei had it within his power to protect himself by issuing checks to the corporation, which then could have properly loaned the funds to the radio station or paid its expenses. Vogelei failed to properly document the transfers, and by such failure is unable to meet his burden of showing proper use of the funds entrusted to him. IV. Conclusion      The Nebraska Bankruptcy Court entered a judgment against Vogelei based on Vogelei's failure to properly account for estate funds entrusted to him. Vogelei was afforded every opportunity to defend himself in that action and failed to do so. Vogelei's failure to produce a proper accounting was a defalcation in a fiduciary capacity. Accordingly, the Nebraska judgment is nondischargeable.      Even if there had been no Nebraska judgment, the court would still find a nondischargeable debt. Vogelei breached his fiduciary duties by failing to properly document his disposition of trust funds so that he was incapable of producing a proper accounting. Judgment would be entered against him, albeit in a slightly lesser amount, even if there had been no Nebraska judgment.(2)      For the foregoing reasons, the court will enter a judgment declaring that the Nebraska judgment is nondischargeable. Plaintiff shall recover costs of suit.      This memorandum constitutes the court's findings and conclusions pursuant to FRCP 52(a) and FRBP 7052. Counsel for plaintiff shall submit an appropriate form of judgment forthwith.
Dated: December 7, 1999                                                                          ________________________________                                                                                                                Alan Jaroslovsky                                                                                                                U.S. Bankruptcy Judge

1. Ostberg is the least credible witness ever to have testified before this court. The court is as certain as it can ever be that Ostberg perjured himself when he denied signing the numerous documents containing his signature. There is no doubt in the court's mind that Ostberg was fully aware of all of Vogelei's activities and was an active participant. This court believes that Ostberg is unfit for any fiduciary role and should not be entrusted with any estate funds.

2. In the absence of the judgment, the court would have assessed damages in the amount of $709,173.94. This represents the $485,804.06 Vogelei deposited into his trust account plus the $257,399.37 IRS check he endorsed over to Sherwood, less a conceded proper payment of $11,029.49 to Dennis Greene and $25,000.00 paid to Sherwood, as there is one check for that amount which was made out to Centennial and deposited into its account. Vogelei cannot properly document the rest of the loan amount from Sherwood to Cente