Failing To Prove “Intent” For “Embezzlement” Discharge Exception (In re Parker)

Here’s a refresher on the law of nondischargeability for “embezzlement” under § 523(a)(4):

Martin v. Parker (In re Parker), Case No. 23-2084 (4th Cir., decided July 1, 2025).

Facts

Morton and Peggy cohabit for years without marrying. But they do sign a “Post Marital Agreement,” under which they also sign reciprocal wills providing:

upon the first of them to die, the survivor inherits all the decedent’s property, with limits on annual gifts to children; and
upon the survivor’s death, two-thirds of the estate goes to Peggy’s son (the “Plaintiff”) and the remaining third goes to Morton’s daughter (the “Debtor”) and her two brothers.

Peggy dies first, so her entire estate passes to Morton.

Then, Morton designates Debtor as a joint account holder on all his financial assets, including a bank account, two certificates of deposit, two annuities and a life insurance policy.

Later, Morton dies, at which time Plaintiff tells Debtor of “a legal agreement” that she “might want to read.” Debtor had never before heard of the Post Marital Agreement or Morton’s will.

Upon reading the Post Marital Agreement and Morton’s will, Debtor learns that Plaintiff gets “two parts of everything.”

This leaves Debtor “confused.” So Debtor talks with representatives of the bank where Morton and Debtor are jointly named on the bank account and certificates of deposit. Debtor discloses to the bankers the existence of both Morton’s will and the Post Marital Agreement. Whereupon, the bankers tell Debtor something like:

Morton gave you his money when he was alive; and
Morton’s designation of Debtor as a joint account holder supersedes the terms of the Post Marital Agreement and will.

Debtor also talks with the financial institution that issued the annuities. And based on that discussion, Debtor believes that the annuities and insurance policy proceeds belong to her as well—because she is the designated “beneficiary” on those assets.

Then, Plaintiff (individually and as Executor of Morton’s estate) sues Debtor in state court, alleging:

Morton breached the Post Marital Agreement by designating Debtor as “co-owner of his accounts”; and
Debtor acquired money to which Plaintiff is legally entitled.

The state court enters judgment in Plaintiff’s favor on the breach of contract claim in the amount of $151,501.

Debtor then files a voluntary Chapter 7 petition, scheduling the judgment.

In response, Plaintiff brings an adversary proceeding against Debtor for a denial of discharge as to the judgment claim.

The Bankruptcy Court rules for Plaintiff, holding that Debtor’s liquidation of the joint account, certificates of deposit, annuities and insurance policy constitutes “embezzlement” under § 523(a)(4)’s exception to discharge.

Debtor appeals to the District Court, asserting that Plaintiff did not prove that Debtor had “fraudulent intent” in liquidating the joint accounts. The District Court agrees with Debtor, reverses, and enters judgment in Debtor’s favor.

Plaintiff appeals to the Fourth Circuit Court of Appeals.

Legal Standards

The Fourth Circuit’s opinion identifies the following legal standards for this case.

Section 523(a)(4) excepts from discharge “any debt” for “embezzlement.”

–Three Elements

The § 523(a)(4) elements for embezzlement are established by federal common law, not by state law. Embezzlement requires that the plaintiff prove:

the funds are rightfully in debtor’s possession;
debtor appropriated the funds for a use other than that for which it was entrusted; and
circumstances indicating fraud.

On the third element of fraud, there must be proof of the debtor’s fraudulent intent in taking the property—an actual, intentional fraud. Fraudulent intent means intent to defraud, to deceive, or to act in bad faith, and it requires a showing of moral turpitude, intentional wrong, or felonious intent—a criminal intent.

–Conversion Distinguished

It is not enough to show, for the third element of fraud, that debtor converted plaintiff’s property:

embezzlement differs from conversion because embezzlement requires criminal intent, while conversion requires only a specific intent to take property;
embezzlement requires proof of fraudulent intent directed at the owner, while conversion requires only the simple intent to exercise dominion or control over property that is inconsistent with the owner’s rights; and
where debtor’s dominant purpose is to benefit herself, rather than to harm the creditor, fraudulent intent is not established—for example,
- a debtor’s intent in withdrawing funds to recoup a capital investment and benefit debtor’s own property, rather than to harm the creditor, is not the requisite intent; and
- one can wrongfully appropriate property under a mistaken belief of entitlement without giving rise to a claim of embezzlement—even where the facts show a relation of trust requiring debtor to hold funds for another.

–Standard of Proof

The standard of proof in a discharge action is the ordinary preponderance of the evidence.

Legal Standards Applied

In this case, the Fourth Circuit says, the question is whether the evidence supports the Bankruptcy Court’s finding that Debtor had “fraudulent intent.”

Here is the Bankruptcy Court’s rationale for finding Debtor’s fraudulent intent for embezzlement:

Debtor lawfully came into possession of funds from bank accounts and certificates of deposit (as joint owner) and from annuities and the insurance policy (as designated beneficiary);
Debtor then refused to turn the money over to Plaintiff as Executor of Morton’s estate—in doing so, Debtor wrongfully exercised control and dominion over the funds because,
- Debtor had actual knowledge of the terms of Morton’s will; and
- Debtor knew of the provisions of the Post Marital Agreement;
such conduct “meets the very definition of embezzlement”; and
so, Debtor had fraudulent intent in not turning the property over to Plaintiff as Executor.

The Bankruptcy Court’s reasoning is erroneous, says the Fourth Circuit, because its rationale rests on a clear factual error:

the Bankruptcy Court erroneously implied that Debtor hid the existence of Morton’s will and the Post Marital Agreement from bank representatives in discussions about the joint bank accounts and certificates of deposit;
the evidence shows that Debtor did tell the bank about both documents—and it was with full knowledge of those documents that bank representatives reassured Debtor that the funds belonged to her, and not to Plaintiff; and
the same can be said of Debtor’s beliefs as to the annuities and life insurance policy.

Ruling

Therefore, the Fourth Circuit rules:

Debtor established a good faith belief that all the funds in question were hers, precluding an embezzlement finding; and
the Bankruptcy Court erred in finding that Debtor embezzled Plaintiff’s money.

Conclusion

Here’s a “thank you” to the Fourth Circuit Court of Appeals for this refresher on the law of intent for nondischargeability under § 523(a)(4) for “embezzlement.”

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