Fourth Circuit Affirms “Good-Faith Belief” Shield Against § 523(a)(4) Embezzlement Nondischargeability

Introduction

In Deborah Parker v. Dan Martin, No. 23-2084 (4th Cir. 2025), the United States Court of Appeals for the Fourth Circuit confronted a recurring tension in bankruptcy litigation: when does a debtor’s retention of funds rise to the level of “embezzlement” for purposes of nondischargeability under 11 U.S.C. § 523(a)(4)? The dispute grew out of an intimate family arrangement gone awry. After Deborah Parker’s father (Morton Poindexter) named her a joint owner/beneficiary on multiple accounts, Morton’s long-time partner’s son, Dan Martin, sued Deborah in Virginia state court and obtained a $151,501 judgment for breach of a “Post-Marital Agreement.” Deborah then sought Chapter 7 relief, prompting Dan to file an adversary proceeding insisting that his judgment was nondischargeable as “embezzlement.”

Although the bankruptcy court agreed with Dan, the district court reversed, finding no “fraudulent intent” on Deborah’s part. On further appeal, the Fourth Circuit affirmed the district court, holding that a debtor’s good-faith belief in her lawful entitlement to the property negates the fraudulent intent element of embezzlement under § 523(a)(4).

The opinion, authored by Judge DeAndrea Gist Benjamin and joined by Judges Wilkinson and Gregory, crystalizes a significant protection for debtors: creditors must do more than prove wrongful retention—they must also prove fraudulent intent, and such intent is defeated where the debtor demonstrates a bona fide belief of ownership.

Summary of the Judgment

The panel applied a dual standard of review—factual findings for clear error, legal conclusions de novo.
While the bankruptcy court found embezzlement, the district court highlighted undisputed testimony that Deborah disclosed the will and agreement to the bank and relied on the bank’s assurances that the accounts belonged to her.
The Fourth Circuit agreed that these facts established a good-faith belief, rendering fraudulent intent unproven by a preponderance of evidence.
Accordingly, the court affirmed the district court’s decision and held that Dan Martin’s state-court judgment is dischargeable.

Analysis

Precedents Cited and Their Influence

Bullock v. BankChampaign, N.A., 569 U.S. 267 (2013)
Defined the mens rea for fiduciary fraud and confirmed that “wrongful intent” (moral turpitude or felonious intent) is required under several § 523(a)(4) clauses. The Fourth Circuit borrowed this framework when stressing that embezzlement—like larceny—demands proof of wrongful intent.
In re Miller, 156 F.3d 598 (5th Cir. 1998)
Widely cited definition of embezzlement (“fraudulent appropriation of property by one to whom it was lawfully entrusted”). The Fourth Circuit reiterated this definition and adopted its focus on intent.
In re Cockey, 622 B.R. 178 (Bankr. D. Md. 2020)
Emphasized federal common-law elements of embezzlement and the need for “circumstances indicating fraud.” It supplied the specific three-part test used by the bankruptcy and circuit courts.
United States v. Stockton, 788 F.2d 210 (4th Cir. 1986)
A criminal case noting that a good-faith belief in ownership negates embezzlement. The panel analogized to Stockton as persuasive authority on fraudulent intent.
Grogan v. Garner, 498 U.S. 279 (1991)
Set the preponderance-of-the-evidence standard for dischargeability exceptions. Integral to evaluating whether Dan met his burden.
In re Heckert, 272 F.3d 253 (4th Cir. 2001)
Cited in dicta to caution district courts against recalculating state-court judgments in nondischargeability actions. Reflects the appellate court’s insistence on respecting state-court judgments while examining dischargeability only.

Legal Reasoning

The court’s analysis proceeds in three logical steps:

Define Embezzlement Elements (federal common law). Embezzlement under § 523(a)(4) requires:
1. Lawful possession of the property by the debtor;
2. Appropriation for an unauthorized purpose; and
3. Fraudulent intent.
Scrutinize the Bankruptcy Court’s Fact-Finding. The panel identified a “clear factual error”: the bankruptcy court assumed Deborah withheld information from the bank. Trial testimony—undisputed—showed she fully disclosed the will and agreement and was expressly told by bank officers the funds were hers.
Apply the Good-Faith Principle. Relying on Stockton and other cases, the Fourth Circuit held that a person who exercises dominion under a genuine belief in ownership (even if that belief is mistaken) lacks the fraudulent intent necessary for embezzlement. Because Dan offered no evidence undermining Deborah’s belief or proving intent to defraud him, he failed to carry the preponderance burden.

Impact of the Judgment

Elevated Burden on Creditors. Creditors invoking the embezzlement exception must marshal concrete evidence of the debtor’s subjective intent to defraud, not merely prove conversion or breach of contract.
Good-Faith Defense Codified in the Fourth Circuit. While criminal law has long recognized this defense, Parker firmly places it in the civil bankruptcy context, strengthening debtor protections in Maryland, Virginia, West Virginia, North Carolina, and South Carolina.
Guidance for Estate/Beneficiary Disputes. Where wills, trusts, or beneficiary designations conflict with side agreements, debtors who rely on professional advice (banks, lawyers) may escape nondischargeability so long as their reliance is genuine.
Procedure and Appellate Practice. The decision underscores the stringent “clear error” hurdle for overturning factual findings, but also shows the circuit’s willingness to deem findings clearly erroneous when critical facts are ignored.
Warning to Bankruptcy Courts. The footnote chastising the district court’s attempt to recalculate the judgment signals that bankruptcy courts must not relitigate the amount of a prior state judgment, only its dischargeability.

Complex Concepts Simplified

Chapter 7 Bankruptcy: Liquidation chapter of the Bankruptcy Code where a trustee sells non-exempt assets to pay creditors, followed by discharge of remaining debts.
Nondischargeability (§ 523): Certain debts (e.g., fraud, child support) are excluded from the discharge. Creditors must sue in an “adversary proceeding.”
§ 523(a)(4) – Embezzlement Exception: Debts arising from embezzlement cannot be wiped out if the creditor proves the debtor fraudulently appropriated property that was entrusted to them.
Good-Faith Belief: A sincere, honest conviction that one is entitled to the property—even if mistaken—negates the element of fraudulent intent.
Standards of Review: Clear Error: Deferential; appellate court overturns factual findings only if firmly convinced a mistake occurred.
De Novo: Non-deferential; appellate court decides the legal question anew.

Conclusion

Deborah Parker v. Dan Martin cements an important limitation on the reach of § 523(a)(4): a debtor’s subjective, demonstrably good-faith belief in her ownership of funds defeats an embezzlement claim. The decision places the onus squarely on creditors to produce explicit evidence of fraudulent intent. By aligning civil bankruptcy doctrine with longstanding criminal embezzlement principles, the Fourth Circuit strengthens the fresh-start policy underlying Chapter 7 while still preserving remedies for truly deceitful conduct. Practitioners should treat the opinion as controlling authority within the circuit and persuasive elsewhere when litigating nondischargeability actions involving disputed ownership or beneficiary designations.