In re Blumberg
| Decision Date | 15 March 1990 |
| Docket Number | Adv. No. 89 A 667.,Bankruptcy No. 89 B 10779 |
| Citation | 112 BR 236 |
| Parties | In re Marc BLUMBERG f/d/b/a Universal Insurance, Debtor. CORONET INSURANCE COMPANY, Plaintiff, v. Marc BLUMBERG, f/d/b/a Universal Insurance, Defendant. |
| Court | U.S. Bankruptcy Court — Northern District of Illinois |
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Steven D. Schneiderman, Dannen, Crane, Heyman & Simon, Chicago, Ill., for debtor-defendant.
Fisch, Lansky, Greenburg & Herman, Chicago, Ill., for plaintiff.
Marc Blumberg, formerly doing business as Universal Insurance ("Debtor"), filed a voluntary petition in bankruptcy on June 28, 1989 under Chapter 7 of the Bankruptcy Code. On December 1, 1989 Coronet Insurance Company ("Coronet") filed its Second Amended Complaint.1 The Complaint objects under 11 U.S.C. § 523(a)(4) to discharge of a debt claimed to be owed by Debtor to Coronet for insurance premiums Debtor allegedly collected on Coronet's behalf but failed to remit to Coronet. Debtor has moved to dismiss the Second Amended Complaint for failure to state a claim upon which relief can be granted. See Bankruptcy Rule 7012(b), adopting Federal Rule of Civil Procedure 12(b)(6). For the reasons stated herein, Debtor's motion is denied.
When ruling on a motion to dismiss for failure to state a claim, a court must presume that all well pleaded facts in the complaint are true. Gray v. County of Dane, 854 F.2d 179 (7th Cir.1988). The Second Amended Complaint alleges the following facts:
Coronet is an insurance company. Debtor is an independent, licensed insurance agent and broker who sold certain insurance policies to third parties and "placed" them with Coronet. Second Amended Complaint ¶ 5. Coronet "did write said insurance policies and did bill Debtor for the appropriate premiums." Id. at 6. Debtor collected the premiums from the third parties to whom the insurance was sold. The Second Amended Complaint alleges that pursuant to Illinois insurance law, Debtor held these premiums in a fiduciary capacity.
In payment of the amounts owed to Coronet, Debtor sent two checks to Coronet totalling approximately $31,917. These checks were drawn on Debtor's "premium fund trust account." Both checks were returned for insufficient funds.
Coronet sued Debtor in the Circuit Court of Cook County for the amounts owed from the insurance premiums which were not remitted. Judgment was eventually entered in Coronet's favor for $33,167.60. The court found that "malice is the gist of the action based upon misappropriation of fiduciary funds." From the briefs (but not the Complaint) it appears that the judgment was entered by default. The Second Amended Complaint seeks to have this judgment declared nondischargeable.
A proceeding to have a debt declared nondischargeable pursuant to 11 U.S.C. § 523(a)(4) "arises under" title 11 of the United States Code and is within the subject matter jurisdiction of the United States District Court. 28 U.S.C. § 1334(b). The district court under the authority granted in 28 U.S.C. § 157(b) has referred such proceedings to the bankruptcy court. Local Rule 2.33. "Determinations as to the dischargeability of particular debts" are core proceedings within 28 U.S.C. § 157(b)(2)(I). This court is therefore empowered to enter final orders and judgments in this proceeding. Id. at § 157(b)(1).
In order for Debtor to prevail on his motion to dismiss, it must clearly appear from the pleadings that Coronet can prove no set of facts in support of its claim which would entitle it to relief. Conley v. Gibson, 355 U.S. 41, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957); Swanson v. Wabash, Inc., 577 F.Supp. 1308 (N.D.Ill.1983). The issue is not whether Coronet will ultimately prevail, but whether it has pleaded a cause of action sufficient to entitle it to offer evidence in support of its claim. Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686, 40 L.Ed.2d 90 (1974). The Seventh Circuit has emphasized, however, that "despite their liberality on pleading matters, . . . the federal rules still require that a complaint allege facts that, if proven, would provide an adequate basis for each claim." Gray, 854 F.2d at 182. The court must consider both pleaded facts and reasonable inferences drawn from pleaded facts, in a light most favorable to the plaintiff when reviewing a defendant's motion to dismiss. Mescall v. Burrus, 603 F.2d 1266, 1269 (7th Cir.1979).
The basis for Coronet's objection to the discharge of its claim against Debtor is 11 U.S.C. § 523(a)(4). This provision provides in part:
11 U.S.C. § 523(a)(4).
To establish that a debt is nondischargeable under 11 U.S.C. § 523(a)(4), a creditor must establish three elements: (1) the existence of an express trust; (2) that the debt was caused by fraud or defalcation; and (3) debtor was acting as a fiduciary to the creditor at the time the debt was created. Klingman v. Levinson, 831 F.2d 1292, 1295 (7th Cir.1987); Harasymiw v. Selfreliance Federal Credit Union, 97 B.R. 924 (N.D.Ill.1989), aff'd on other grounds, 895 F.2d 1170 (7th Cir.1990). The basic policy underlying § 523(a)(4) was explained by the Sixth Circuit in In re Johnson, 691 F.2d 249, 256 (6th Cir.1982):
Although the "badness" of fraud, embezzlement or misappropriation is readily apparent, creating a debt by breaching a fiduciary duty is a sufficiently bad act to invoke the section 17(a)(4)2 exception even without a subjective mental state evidencing intent to breach a known fiduciary duty or bad faith in doing so. This is because the requisite "badness," to conform with the spirit of the bankruptcy laws, is supplied by an individual\'s special legal status with respect to another, with its attendant duties and high standards of dealing, and the act of breaching these duties.
Debtor argues that Coronet has failed to state a claim under § 523(a)(4) because Coronet has failed to allege facts establishing that Debtor was acting in a fiduciary capacity when he allegedly collected and failed to remit the insurance premiums underlying the debt. Debtor essentially argues that Coronet has alleged nothing more than a routine debtor-creditor relationship.
As an initial argument, Coronet asserts that the Illinois state court judgment collaterally estops Debtor from contesting that he was acting in a fiduciary capacity when he allegedly collected but failed to remit the insurance premiums to Coronet. The state court judgment provides in part that "malice is the gist of the action based upon misappropriation of fiduciary funds."
The Seventh Circuit has specifically addressed the issue of collateral estoppel in the context of 11 U.S.C. § 523(a)(4). In Klingman v. Levinson, 831 F.2d 1292, the court stated:
Where a state court determines factual questions using the same standards as the bankruptcy court would use, collateral estoppel should be applied to promote judicial economy by encouraging the parties to present their strongest arguments.
Id. at 1295 (emphasis added). The court also explained that four elements must be established for collateral estoppel to apply: (1) the issue sought to be precluded must be the same as that involved in the prior action; (2) the issue must actually have been litigated; (3) the determination of the issue must have been essential to the final judgment; and (4) the party against whom estoppel is invoked must have been fully represented in the prior action. Id.
In the present procedural status of the case Coronet has not yet demonstrated that collateral estoppel is applicable to the issue of whether Debtor was acting in a fiduciary capacity. The Second Amended Complaint alleges only that Coronet sued Debtor in state court for the amount of the premiums Debtor failed to remit and that judgment was entered against Debtor. There are no specific allegations as to the legal theories Coronet advanced in the state court. From the above quoted portion of the judgment it appears that the action was based on a misappropriation theory. Even assuming this, it is impossible to evaluate from the present record whether the apparent finding of misappropriating "fiduciary funds," as opposed to misappropriating other funds, was essential to the final judgment.3 Generally a full record of pleadings and procedures before the state court is required in order to make the requisite analysis. If that record is presented, we must then meet the question whether a default judgment can have collateral estoppel effect. See In re Herwig, 77 B.R. 662, 664 (Bankr.S.D.Ill.1987) and cases there cited. Coronet's collateral estoppel argument is therefore rejected for the present without prejudice to revisiting this issue at trial of this case.
The issue of whether a party is "acting in a fiduciary capacity" within 11 U.S.C. § 523(a)(4) is one of federal law, not state law. Johnson, 691 F.2d at 251; In re Janikowski, 60 B.R. 784, 788 (Bankr.N.D. Ill.1986). In order to be acting as a fiduciary, a party must be acting pursuant to an express or technical trust, not a trust which the law implies from a contract. Davis v. Aetna Acceptance Co., 293 U.S. 328, 333, 55 S.Ct. 151, 153-54, 79 L.Ed. 393 (1934) (); In re Sax, 106 B.R. 534, 539 (Bankr.N.D.Ill.1989). Further, the party must be acting as a trustee prior to the act giving rise to the debt underlying the dispute. Id.
In determining whether as a matter of federal law a debtor was acting as a fiduciary, courts have considered substantive state law as a central factor in the analysis. Johnson, 691 F.2d at 251; Janikowski, 60 B.R. at 788. In Johnson, for example, the Sixth Circuit held that...
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