In In re Uriostegui, the Ninth Circuit Bankruptcy Appellate Panel (“BAP”) held that bankruptcy code limitations on debtors’ state exemptions under § 522(q)(1)(B)(ii) require proof that the fiduciary relationship existed before, not as a result of, the fraudulent conduct that gave rise to the underlying judgment.
In 2018, a trial court entered judgment against Ms. Uriostegui for elder financial abuse involving Mr. Dowling. The court found that Ms. Uriostegui had fraudulently manipulated Mr. Dowling into disinheriting his family and naming her as sole trustee and beneficiary of Mr. Dowling’s family trust. Following Mr. Dowling’s death, his son successfully challenged the modified arrangement, resulting in the trial court setting aside the amended trust and imposing a constructive trust on the assets therein.
When Ms. Uriostegui subsequently filed for Chapter 7 bankruptcy and claimed a homestead exemption, Mr. Dowling’s son objected under 11 U.S.C. § 522(q)(1)(B)(ii), which provision limits a debtor’s exemption amounts when an underlying debt arises from fraud committed while acting in a fiduciary capacity. The key legal question here for the BAP to decide was whether Ms. Uriostegui acted in a fiduciary capacity when committing the fraud that gave rise to the judgment debt.
The BAP established two critical requirements for § 522(q)(1)(B)(ii) to apply: (1) the fraud must occur during the existence of the fiduciary relationship, and (2) the BAP applied a narrow federal definition of fiduciary capacity rather than broad state law. Drawing from Plyam v. Precision Dev. (In re Plyam), 530 B.R. 456, 471 (9th Cir. BAP 2015), the BAP established that a fiduciary relationship in the bankruptcy discharge context requires: (1) an express or technical trust imposed prior to the wrongdoing that gave way to the debt; (2) the trust relationship must exist independently of and before the fraudulent conduct; and (3) state law applies only to determine whether such an express trust exists under the federal framework.
The BAP found that, while Ms. Uriostegui was undisputedly a fraudster, she lacked the requisite antecedent fiduciary relationship under California law, because although Ms. Uriostegui committed fraud to obtain a fiduciary position, she did not commit fraud while already holding a legitimate fiduciary role, and thus the fiduciary role itself was the product of fraud, not a pre-existing arrangement. As such, the BAP held that a limitation could not be justified under § 522(q)(1)(B)(ii).
The BAP addressed a potential counterargument rooted in the fact that Ms. Uriostegui served as Mr. Dowling’s attorney-in-fact during her fraudulent conduct, which typically creates fiduciary duties. However the BAP reasoned that, despite the power of attorney creating some fiduciary obligations, such a relationship did not constitute the type of “express trust” contemplated by § 522(q)(1)(B)(ii), and the record was insufficient to establish that the attorney-in-fact relationship satisfied the federal standard for fiduciary capacity. The BAP concluded that the power of attorney relationship alone was insufficient to trigger the exemption limitations.