In a published decision issued July 1, 2025, the U.S. Court of Appeals for the Fourth Circuit affirmed a district court's reversal of a bankruptcy court ruling that had deemed a state court judgment nondischargeable under the Bankruptcy Code's embezzlement exception. The opinion— Martin v. Parker1 —offers a detailed analysis of the evidentiary burden required to prove embezzlement under 11 U.S.C. § 523(a)(4), particularly focusing on the element of fraudulent intent.
Background
The case arose from a longstanding family arrangement involving reciprocal wills and a "Post Marital Agreement" between Morton Poindexter and his longtime partner, Peggy Martin. Their Agreement provided that, upon the survivor's death, two-thirds of their combined estate would pass to Peggy's son, Dan Martin, and one-third to Morton's children, including the appellee, Deborah Parker.
After Peggy's death, Morton designated Deborah as a joint account holder or beneficiary on multiple financial assets—including bank accounts, annuities, and life insurance policies—effectively transferring ownership to her upon his death. When Morton passed away, Deborah liquidated those accounts.
Dan Martin, serving as executor of Morton's estate, sued Deborah in Virginia state court and obtained a $151,501.00 judgment for breach of contract. Deborah filed for Chapter 7 bankruptcy, and Dan commenced an adversary proceeding arguing that the debt was nondischargeable under several provisions, including section 523(a)(4) for embezzlement.
Bankruptcy and District Court Proceedings
The bankruptcy court ruled for Deborah on all counts except embezzlement, finding that her refusal to turn over the funds—despite knowledge of the will and Agreement—demonstrated fraudulent intent. On appeal, the district court reversed, concluding that Deborah had acted under a good-faith belief, based on advice from financial institutions, that the assets belonged to her. The Court found insufficient evidence of fraudulent intent, a key element of embezzlement.
Fourth Circuit's Ruling
The Fourth Circuit affirmed the district court's decision. Writing for a unanimous panel, Judge DeAndrea Gist Benjamin emphasized that embezzlement under section 523(a)(4) requires the plaintiff to prove three elements:
- The debtor rightfully possessed the property;
- The debtor appropriated it for a use other than that for which it was entrusted; and
- The appropriation occurred under circumstances indicating fraud.
The Court found that while Deborah had possession of the assets lawfully (as a joint owner or beneficiary), there was no evidence that she acted with fraudulent intent. Importantly, she disclosed both the will and the Agreement to the financial institutions, which then assured her she had the right to the funds. That advice formed the basis for her good-faith belief in her entitlement.
The Court rejected the bankruptcy court's conclusion that simply knowing the will's terms amounted to fraudulent intent. "[O]ne can wrongfully appropriate property under a mistaken belief of entitlement without giving rise to a claim of embezzlement," the Court stated, citing Bullock v. BankChampaign, 569 U.S. 267 (2013) and In re Ghaemi, 492 B.R. 321 (Bankr. D. Colo. 2013).
Practical Implications
The Fourth Circuit's decision reinforces that embezzlement under section 523(a)(4) is not a strict liability offense. Creditors must prove not only unauthorized use of funds, but also that the debtor acted with actual fraudulent intent—an evidentiary burden that cannot be satisfied by showing mere breach of contract or conversion.
This ruling serves as a cautionary tale for creditors pursuing nondischargeability claims in bankruptcy: without clear evidence of bad faith or deceptive intent, debts arising from contested ownership claims or misunderstandings—even those memorialized in a state court judgment—may still be dischargeable.
Key Takeaway
Martin v. Parker underscores that good-faith reliance on third-party advice and lack of intent to deceive can be fatal to nondischargeability actions premised on embezzlement. The decision adds to a growing body of case law demanding a rigorous showing of wrongful intent under section 523(a)(4), particularly in familial or informal trust settings.
Nelson Mullins' Bankruptcy and Financial Restructuring attorneys possess extensive experience handling adversary proceedings and complex bankruptcy matters of all sizes. We are well-equipped to advise debtors, creditors, trustees, and other key stakeholders on both the legal nuances and practical considerations that arise in these critical proceedings.
Footnote
1. Martin v. Park (In re Parker), 141 F.4th 583 (4th Cir. 2025).
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