In re Burton, Bankruptcy No. 08-01403.

• Decision Date: 18 September 2009
• Docket Number: Adversary No. 09-00034.,Bankruptcy No. 08-01403.
• Citation: 416 B.R. 539
• Court: U.S. Bankruptcy Court — Northern District of West Virginia
• Parties: In re Dennis BURTON, Debtor. Centra Bank, Inc. and Milan Puskar, Plaintiffs, v. Dennis M. Burton, Defendant.

416 B.R. 539

In re Dennis BURTON, Debtor Centra Bank, Inc. and Milan Puskar, Plaintiffs, v. Dennis M. Burton, Defendant.

Bankruptcy No. 08-01403.

Adversary No. 09-00034.

United States Bankruptcy Court, N.D. West Virginia.

September 18, 2009.

Ronald B. Roteman, The Stonecipher Law Firm, Pittsburgh, PA, for Debtor/Defendant.

William C. Ballard, William F. Dobbs, Jr., Jackson Kelly PLLC, Charleston, WV, for Plaintiffs.

MEMORANDUM OPINION

PATRICK M. FLATLEY, Bankruptcy Judge.

Centrua Bank, Inc. and Milan Puskar filed a three-count adversary complaint against Dennis M. Burton (the "Debtor") to except debts from the Debtor's discharge under 11 U.S.C. § 523(a)(4) on grounds of defalcation. The Debtor seeks to dismiss all counts of the adversary complaint on the grounds that the Bank and Mr. Puskar have failed to state a claim.

For the reasons stated herein, the court will grant in part and deny in part the Debtor's Motion to Dismiss.

I. STANDARD OF REVIEW

In adjudicating a motion to dismiss for failure to state a claim under Fed.R.Civ.P. 12(b)(6), a court must accept as true all of the factual allegations in the complaint as well as the reasonable inferences that can be drawn from them, and a court may dismiss the complaint "only if it is clear that no relief could be granted under any set of facts that could be proved consistent with the allegations." Hishon v. King & Spalding, 467 U.S. 69, 73, 104 S.Ct. 2229, 81 L.Ed.2d 59 (1984). This principle, however, is inapplicable to threadbare recitals of a cause of action's elements, supported by mere conclusory statements. Ashcroft v. Iqbal, ___ U.S. ___, ___, 129 S.Ct. 1937, 1950, 173 L.Ed.2d 868 (2009). Defeating a motion to dismiss under Rule 12(b)(6) requires the plaintiff to provide more in the complaint than "mere labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 1965, 167 L.Ed.2d 929 (2007). The factual allegations in the complaint "must be enough to raise a right of relief above the speculative level" id. at 1959, and be enough to "state a claim to relief that is plausible on its face." Ashcroft, 129 S.Ct. at 1949. Determining whether a complaint is "facially plausible" is context-specific, requiring the reviewing court to draw on its experience and common sense. Id. at 1950.

II. BACKGROUND

The Debtor specializes in radiology. In March 2004, the Debtor incorporated Amerirad, Inc., of which he is the president and sole stockholder, to provide radiology services. To obtain operating funds for Amerirad, the Debtor caused Amerirad to execute four notes with Centra Bank: (1) $1,000,000 on July 27, 2004, (2) $1,000,000 on October 3, 2005, (3) $298,000 on November 30, 2006, and (4) $750,000 on December 26, 2006. Each note is personally guaranteed by the Debtor. The fourth note is also guaranteed by Milan Puskar.

All four notes are secured by, among other things, Amerirad's accounts and receivables. Importantly, the security agreement accompanying the notes defines "Collateral" as including "[a]ll rights ... [Amerirad] now has or may have in the future to the payment of money[.]" The security agreement further provides that:

Upon the occurrence of any default under this Agreement, [Amerirad] hereby irrevocably ... appoints [Centra Bank] ... as [Amerirad's] true and lawful attorney-in-fact with full power of substitution ... to exercise the following powers with respect to the Collateral:

(1) To demand, sue for collection, receive, and give acquaintance for any and all monies due or owing with respect to the Collateral;

. . .

(3) To settle, compromise, prosecute, or defend any action or proceeding with respect to the Collateral;

(4) To sell, transfer, assign or otherwise deal in or with the Collateral or the proceeds thereof, as fully as if [Centra Bank] were the absolute owner thereof. ...

(Compl. ¶ 36.).

In August 2008, Amerirad defaulted on all four notes. On August 27, 2008, Centra Bank issued a default notice to Amerirad demanding that each of the notes be paid in full. On September 5, 2008, the Debtor filed his Chapter 7 bankruptcy petition. As a guarantor on the December 2006 note, Milan Puskar paid the $722,253.57 balance in full on September 29, 2008. As of February 13, 2009, Centra Bank was still owed $1,429,087.45.

III. DISCUSSION

Centra Bank and Milan Puskar assert that the Debtor took at least $400,000 from Amerirad for his personal use, which is reflected as an account receivable on Amerirad's books. In their request for relief, they ask the court to enter a money judgments in their favor and to declare both judgments excepted from the Debtor's discharge pursuant to 11 U.S.C. § 523(a)(4) on the grounds of defalcation.

Section 727(b) of the Bankruptcy Code provides that a Chapter 7 discharge relieves a debtor "from all debts" that arose before the filing of the bankruptcy petition. 11 U.S.C. § 727(b). Not every debt, however, is subject to being discharged; § 523(a) of the Bankruptcy Code provides nineteen exceptions whereby a pre-petition debt will remain valid after entry of a debtor's discharge order. Because these exceptions to discharge contravene the "fresh start" policy of the Bankruptcy Code, they are construed narrowly in favor of the debtor. E.g., United States v. Fegeley (In re Fegeley), 118 F.3d 979, 983 (3d Cir.1997) ("[E]xceptions to discharge are to be strictly construed in favor of the debtor."); Ostrum v. Porter, No. 03-118, 2008 WL 114914 at *3, 2008 Bankr.LEXIS 109 at *8 (Bankr.N.D.W.Va. Jan. 10, 2008) (same). In particular, § 523(a)(4) provides:

A discharge under section 727, ... of this title does not discharge an individual debtor from any debt —

. . .

(4) for fraud or defalcation while acting in a fiduciary capacity. ...

11 U.S.C. § 523(a)(4).

To prevail on a § 523(a)(4) claim, the movant must establish, by a preponderance of the evidence, the existence of both: (A) a fiduciary relationship and (B) a defalcation while acting in that fiduciary capacity. E.g., Grogan v. Garner, 498 U.S. 279, 282-83, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) (applying a preponderance of the evidence standard to § 523(a) causes of action); Fowler Bros. v. Young (In re Young), 91 F.3d 1367, 1371 (10th Cir.1996) ("[U]nder § 523(a)(4), Fowler Brothers had to establish the following two elements to prevent the discharge of Mr. Young's debt: a fiduciary relationship between Fowler Brothers and Mr. Young and fraud or defalcation committed by Mr. Young in the course of that fiduciary relationship.").

Regarding the existence of a fiduciary relationship, the definition of "fiduciary" for purposes of § 523(a)(4) is controlled by federal common law. Harrell v. Merchant's Express Money Order Co. (In re Harrell), 173 F.3d 850, 1999 WL 150278, *3 (4th Cir.1999) (citing Miller v. J.D. Abrams, Inc. (In re Miller), 156 F.3d 598, 602 (5th Cir.1998)). Under the federal common law, the term "fiduciary" includes express or technical trusts:

[The term "fiduciary capacity" as used in § 523(a)(4)] has been fixed by judicial construction for nearly a century. ... [T]he statute "speaks of technical trusts, and not those which the law implies from contract." The scope of the exception was to be limited accordingly. Through the intervening years that precept has been applied by this court in varied situations with unbroken continuity. It is not enough that by the very act of wrongdoing out of which the contested debt arose, the bankrupt has become chargeable as trustee ex maleficio. He must have been a trustee before the wrong and without reference thereto. ... "The language would seem to apply only to a debt created by a person who was already a fiduciary when the debt was created."

Davis v. Aetna Acceptance Co., 293 U.S. 328, 333, 55 S.Ct. 151, 79 L.Ed. 393 (1934) (citations omitted); see also R.E. Am., Inc., v. Garver (In re Garver), 116 F.3d 176, 180 (6th Cir.1997) ("[T]he defalcation provision of § 523(a)(4) is limited to only those situations involving an express or technical trust relationship arising from placement of a specific res in the hands of the debtor.").

Limiting the definition of "fiduciary" in § 523(a)(4) is important because to expand the definition of fiduciary to include all those upon whom the law imposes fiduciary duties would eviscerate the bankruptcy discharge. E.g., Chapman v. Forsyth, 43 U.S. 202, 208, 2 How. 202, 11 L.Ed. 236 (1844) ("If the act embrace such a debt, it will be difficult to limit its application. It must include all debts ... where the law implies an obligation from the trust reposed in the debtor. Such a construction would have left but few debts on which the law could operate. ... But this is not the relation spoken of in [§ 523(a)(4)]."). Thus, some courts hold that to be a "fiduciary" under § 523(a)(4), the debtor must have "either expressly signified his intention at the outset of the transaction, or was clearly put on notice by some document in existence at the outset, that he was undertaking the special responsibilities of a trustee to account for his actions over and above the normal obligations that contracting parties have to each other in a commercial transaction." BAMCO v. Reeves (In re Reeves), 124 B.R. 5, 10 (Bankr. D.N.H.1990).

Even in the absence of an express or technical trust, however, "the existence of a state statute or common law doctrine imposing trust-like obligations on a party may, at least in some circumstances, be sufficient to create a technical trust relationship for purposes of section 523(a)(4)." 4 Collier on Bankruptcy ¶ 523.10[1][d] (Alan N. Resnick & Henry J. Sommer, eds. 15th ed. rev.2009). Thus, certain fiduciary relationships exists that are determined to be so special that they fall within the meaning of "fiduciary" in § 523(a)(4) despite the absence of an express trust or other actual, preexisting notice to the debtor that he is holding property in trust for another....