Does an agent have to make sure that every dollar that belongs to the principle goes toward the principal's care when acting in the principal's place? What if the agent gives the cash to family members instead? If so, is that dishonest? A case from the Eastern Division of the District of Massachusetts of the United States Bankruptcy Court examined this topic.

The Facts:

Jonathan was designated by Doris as her agent under a financial power of attorney. Due to her deteriorating health, Doris moved into Pleasant Bay Nursing Home. For Pleasant Bay, the private pay rate was close to $8,000 per month. Jonathan sold Doris' condo since she didn't have enough money to pay for her stay at Pleasant Bay.

Jonathan used the money to pay off part of the debt he owed to Pleasant Bay while also making gifts to his own family. Due to the donation, Jonathan's application for Doris' Medicaid coverage was rejected. Doris relocated to a different facility after racking up more debt with Pleasant Bay.

Jonathan consented to a judgment against him after Pleasant Bay sued him for the remainder of Doris' debt. As part of his bankruptcy filing, Jonathan disclosed the Pleasant Bay obligation on his schedules. Pleasant Bay made two justifications for why the loan shouldn't be forgiven. The initial response was that Jonathan should have utilized all of his mother's resources to pay for her treatment because he had obtained the debt through deceptive claims. The second claim was that by using his mother's money for purposes other than her care, Jonathan had violated his fiduciary obligation. Pleasant Bay claims they have standing since they were a third-party beneficiary of the fiduciary arrangement and experienced a monetary loss. Jonathan countered by saying he had not agreed to use all of Doris' money to pay for her care. He said that he followed Doris' wishes when it came to how the home sale money were used.

The Law:

According to 11 U.S.C. 523(a)(2)(A), a debt cannot be dismissed in bankruptcy if it was acquired via "false pretenses, a false representation, or real fraud." This is the foundation of Pleasant Bay's first defense. The court outlines the necessary components to satisfy this requirement in its ruling. The plaintiff must demonstrate that the debtor "1) made a knowingly false representation or made one in reckless disregard for the truth, or made an implied misrepresentation or created a false impression by his conduct, (2) intended to deceive, (3) intended to induce the creditor's reliance; and the creditor (4) actually relied upon the misrepresentation or false pretense, (5) relied justifiably, and (6) suffered damage as a result."

According to 11 U.S.C. 523(a)(4), a debt that was incurred "for fraud or defalcation while acting in a fiduciary role, embezzlement, or theft" cannot be discharged in bankruptcy. This is the foundation of Pleasant Bay's second claim. The court states that a breach of fiduciary responsibility does not always constitute defalcation and that defalcation is comparable to severe carelessness. Notably, the fiduciary must have had knowledge of the wrongful behavior or guilty intent in order to satisfy this condition.

Analysis & Conclusion:

The conditions of the agreement Jonathan had made with Pleasant Bay were the first thing the court in this case considered. The facts of the arrangement did not support the interpretation that Doris' whole estate would be donated to Pleasant Bay. The court concluded that Jonathan had meant for Pleasant Bay to receive Medicaid funding. Prior to his donation, Jonathan was unaware that his actions would negatively influence Doris' Medicaid application, which would ultimately result in its denial.

The court did rule that Jonathan was required to provide Doris' monthly salary to Pleasant Bay as soon as he learned that her Medicaid application had been rejected. However, failing to do so did not constitute fraud, misrepresentation, or false pretenses. The court clarified that a case may be made that Jonathan's use of his mother's money amounted to defalcation if his actions had prevented Doris from receiving treatment. But in this instance, that did not take place.

The court cited Follett Higher Educ. Grp., Inc. v. Berman (In re Berman), 629 F.3d 761, 767 (7th Cir. 2011), which stated that "Not all persons treated as fiduciaries under state law are considered to act in a fiduciary capacity for purposes of federal bankruptcy law." with regard to the 523(a)(4) claim. Instead, it is important to determine if the debtor is functioning in accordance with federal law as a fiduciary, which would call for an express or formal trust. This heightened degree of responsibility establishes a Trustee relationship. The court in this case looked at the power of attorney paperwork but was unable to determine how this higher responsibility came to be. Therefore, Pleasant Bay's claim was rejected on this basis.

Pleasant Bay ultimately lost their case, and Jonathan was able to get the debt discharged through bankruptcy. But if Jonathan had sought legal counsel from an elder law attorney as soon as it became apparent that his mother needed long-term care, he probably might have avoided the entire scenario and gotten a better result. Doris could have gotten the required care, Jonathan could have performed his duties as agent, and Doris' assets would have been best safeguarded for her loved ones if adequate planning had been done by an elder law attorney. As an alternative, Jonathan invested his time, effort, and resources in the background, defending his decisions in bankruptcy court.