In re Cochrane

• Citation: 179 BR 628
• Decision Date: 29 March 1995
• Docket Number: Bankruptcy No. 3-93-2056. Adv. No. 3-94-101.
• Parties: In re John Alexander COCHRANE, Debtor. TUDOR OAKS LIMITED PARTNERSHIP, Plaintiff, v. John A. COCHRANE, Defendant.
• Court: United States Bankruptcy Courts. Eighth Circuit. U.S. Bankruptcy Court — District of Minnesota

179 B.R. 628 (1995)

In re John Alexander COCHRANE, Debtor.

TUDOR OAKS LIMITED PARTNERSHIP, Plaintiff, v. John A. COCHRANE, Defendant.

Bankruptcy No. 3-93-2056. Adv. No. 3-94-101.

United States Bankruptcy Court, D. Minnesota, Third Division.

March 29, 1995.

Michael J. Iannacone, St. Paul, MN, for defendant.

William J. Fisher, Minneapolis, MN, for plaintiff.

ORDER GRANTING PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT

GREGORY F. KISHEL, Bankruptcy Judge.

This adversary proceeding came on before the Court on December 13, 1994, for hearing on the Plaintiff's motion for summary judgment. The Plaintiff appeared by its attorney, William J. Fisher. The Defendant appeared by his attorney, Michael J. Iannacone. Upon the moving and responsive documents and the arguments and legal memoranda submitted by counsel, the Court grants the motion.

The Defendant is a petitioner under Chapter 7 before this Court.¹ The Defendant scheduled the Plaintiff as a creditor in his original Schedule F. The Plaintiff's claim was first evidenced by a judgment that was entered in the Minnesota State District Court for the Fourth Judicial District, Hennepin County, after a trial by jury and pursuant to a July 7, 1992 order of that court.² Various post-judgment proceedings and an appeal by the Defendant then ensued. On appeal, the amount of the jury's award of damages to the Plaintiff was modified. On remand, the Hennepin County District Court liquidated the debt fully and finally, in a judgment entered pursuant to a February 24, 1994 order.³ Via this adversary proceeding, the Plaintiff seeks a determination that this debt is excepted from discharge in bankruptcy by operation of 11 U.S.C. § 523(a)(4).⁴

The Plaintiff now moves for summary judgment on this request for relief, pursuant to FED.R.BANKR.P. 7056.⁵

The first requirement of Rule 56 is, of course, a lack of triable fact issues — "no genuine issue of material fact." To establish this, the Plaintiff relies entirely on the doctrine of collateral estoppel, or "issue preclusion."

As the Supreme Court has recognized, collateral estoppel does lie in bankruptcy proceedings, as to previously-adjudicated fact issues that are common elements of a prior cause of action under nonbankruptcy law and of a nondischargeable debt under 11 U.S.C. § 523(a). Grogan v. Garner, 498 U.S. 279, 284-85 n. 11, 111 S.Ct. 654, 658 n. 11, 112 L.Ed.2d 755 (1991). Where prepetition litigation between a complaining creditor and a debtor has produced fact adjudications of adequate specificity, a creditor may move for summary judgment on the basis of the prior findings of fact. The issue in such a motion is purely one of law — whether the findings made by the nonbankruptcy tribunal meet the precise legal requirements of the theory of nondischargeability on which the creditor relies. The Plaintiff frames its motion in this fashion, and only in this fashion.⁶

It is necessary, then, to first recite the pertinent facts that were settled by the Minnesota state courts' decisions.⁷

At all relevant times, the Plaintiff was a limited partnership.⁸ It purchased certain real estate in Eden Prairie, Minnesota, planning to develop a residential condominium project there. Some lending entity within the First Bank system provided financing to the Plaintiff for acquisition and/or construction. The project financially failed, as did many such real estate developments in the mid- and late 1980s. First Bank foreclosed its mortgage, and bid in at the June 12, 1985 sheriff's sale for $5,600,000.00. It then prosecuted some sort of deficiency judgment action⁹ against the Plaintiff and its liable partners.

The Defendant is an attorney at law licensed to practice in the state of Minnesota and numerous federal courts. He has substantial experience in complex business litigation. Two out of the Plaintiff's three partners retained him to represent themselves and the Plaintiff in defending the deficiency judgment action. Under the terms of engagement, the Defendant was to charge them a flat fee of $20,000.00.

Apparently, at some point early in the deficiency-judgment litigation, First Bank made an overture of settlement to the Defendant's clients. It offered to release the deficiency claims if the Defendant's clients aided the Bank's ultimate recovery by facilitating a sale of the underlying property.¹⁰

The Defendant then assembled a group of investors to purchase First Bank's rights under the sheriff's certificate of sale. The investors incorporated under the name KSCS Properties, Inc. ("KSCS"). The Defendant did not disclose to his clients, the Plaintiff and its partners, that he was a principal in KSCS, to the extent of owning 25 percent of its outstanding shares.

The Plaintiff, the two client-partners, and the Defendant then arrived at separate terms of engagement for his services in connection with the contemplated sale of the rights under the sheriff's certificate. As this second phase of the retention went forward, the Plaintiff's partners all expected that the Plaintiff would retain a 20 percent fractional ownership in the post-closing configuration of property rights in the underlying real estate.¹¹ Ultimately, however, the Defendant brokered a transaction which led to the following results:

1. The Defendant\'s clients agreed that he would receive a 20 percent fractional ownership interest in the underlying real estate, as his fee for finding a purchaser and negotiating and closing the sale of the sheriff\'s certificate, and he did receive such a share;

2. KSCS took a 60 percent ownership interest in the real estate; and

3. Two of KSCS\'s other shareholders, Rolland Stinski and Bill Keifer, Sr., took title to the final 20 percent ownership interest in the real estate, in their individual right.

Apparently, the purchase of the sheriff's certificate and the reconfiguration of ownership interests in the real estate closed in fairly short order.

At some point after that closing, the Plaintiff's principals discovered the extent of the Defendant's involvement and interest in KSCS. In 1987, the Plaintiff and two of its partners sued the Defendant in the Hennepin County District Court. They alleged that they had suffered substantial damages as a result of a breach of fiduciary duty on the part of the Defendant. The action consumed years of litigation, including an abortive removal of the lawsuit to the United States District Court for this District, a remand, and several motions for summary judgment. Finally it went to trial in mid-1992. In its answers to special interrogatories, the jury found that the Defendant had breached a fiduciary duty to the Plaintiff in three instances: by personally participating in the purchase of the sheriff's certificate as a shareholder in KSCS, by his involvement in a transaction that defeated the Plaintiff's expectation that it would retain the 20 percent fractional interest in the real estate; and by charging a 20 percent contingency fee for his services in the second phase of the retention.

In its opinion, the Minnesota Court of Appeals analyzed the jury's award of damages at some length, and then reduced the award of damages to the Plaintiff from the Defendant by approximately $400,000.00.¹² It affirmed the jury's finding of causation between the Defendant's adjudged breach of fiduciary duty and the injury the Plaintiff suffered. After disposing of numerous other issues raised by the Defendant,¹³ it remanded. On remand, Judge Larson analyzed the jury's verdict and the extant evidence in light of the rulings of the Court of Appeals, and ordered entry of the judgment as to which dischargeability is in dispute here.

The issue presented on this motion is actually quite simple: do the facts as found by the state courts demonstrate a "defalcation while acting within a fiduciary capacity" within the meaning of § 523(a)(4)? If they do, the Plaintiff wins.

It has long been the law the that the "fiduciary" status in question under § 523(a)(4) must arise under an express, preexisting trust. Davis v. Aetna Acceptance Co., 293 U.S. 328, 333, 55 S.Ct. 151, 153-54, 79 L.Ed. 393 (1934) (decided under analog to § 523(a)(4) in Bankruptcy Act of 1898); In re Dloogoff, 600 F.2d 166, 170 (8th Cir.1979) (ditto); In re Long, 774 F.2d 875, 878 (8th Cir.1985); In re Koelfgen, 87 B.R. 993, 996 (Bankr.D.Minn.1988); In re Crea, 31 B.R. 239, 244 (Bankr.D.Minn.1983). "The Bankruptcy Code does not reach constructive trustees, designated as such because of misconduct." In re Long, 774 F.2d at 878. See also In re Crea, 31 B.R. at 244. The fiduciary relationship, then, must have been created before the acts complained of. In re Barker, 40 B.R. 356, 358-59 (Bankr.D.Minn.1984).

Federal bankruptcy law, then, limits the concept of "fiduciary" to persons acting under an objectively manifested, pre-existing, and binding relationship. However, the threshold existence of that relationship — whether arising under an indenture of trust or otherwise — is controlled by state law. In re Bennett, 989 F.2d 779, 784 (5th Cir.1993); Ragsdale v. Haller, 780 F.2d 794, 796 (9th Cir.1986); In re Interstate Agency, Inc., 760 F.2d 121, 124 (6th Cir.1985) (decided under Bankruptcy Act of 1898); In re Pedrazzini, 644 F.2d 756, 758 (9th Cir.1981) (ditto); In re Angelle, 610 F.2d 1335, 1341 (5th Cir.1980) (ditto).

Over eighty years ago, the Minnesota Supreme Court noted that

it is well settled that the obligation of fidelity which an attorney owes to his client is a continuing one, and that he cannot make use of any knowledge acquired from his client, or through his professional relation, for his own advantage, adverse to the interests of his client, or those claiming through him . . .

Sanford v. Flint, 108 Minn. 399, 401, 122 N.W. 315 (1909). More to the point, and more recently, it held:

The relation between an attorney and his client is a fiduciary one of the highest trust and confidence and, as long as the relationship or the influence thereof

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