In re Ellison

• Decision Date: 11 July 2002
• Docket Number: No. 01-2277.,01-2277.
• Parties: In re Stanley Marshall ELLISON; Kay Dearing Ellison, Debtors. Airlines Reporting Corporation, Plaintiff-Appellee, v. Stanley Marshall Ellison; Kay Dearing Ellison, Defendants-Appellants.
• Court: U.S. Court of Appeals — Fourth Circuit

296 F.3d 266

In re Stanley Marshall ELLISON; Kay Dearing Ellison, Debtors.

Airlines Reporting Corporation, Plaintiff-Appellee, v. Stanley Marshall Ellison; Kay Dearing Ellison, Defendants-Appellants.

No. 01-2277.

United States Court of Appeals, Fourth Circuit.

Argued May 7, 2002.

Decided July 11, 2002.

COPYRIGHT MATERIAL OMITTED

ARGUED: James R. Sheatsley, Gorman, Sheatsley & Company, L.C., Beckley, West Virginia, for Appellants. R. Terrance Rodgers, Allen, Guthrie & McHugh, Charleston, West Virginia, for Appellee. ON BRIEF: Nicholas P. Mooney, II, Allen, Guthrie & McHugh, Charleston, West Virginia; C. Erik Gustafson, Leclair Ryan, P.C., Alexandria, Virginia, for Appellee.

Before WILKINSON, Chief Judge, and NIEMEYER and LUTTIG, Circuit Judges.

Affirmed in part, vacated in part, and remanded by published opinion. Judge NIEMEYER wrote the opinion, in which Chief Judge WILKINSON joined. Judge LUTTIG wrote a dissenting opinion.

OPINION

NIEMEYER, Circuit Judge.

Airlines Reporting Corporation ("ARC") commenced this adversary proceeding in the Chapter 7 bankruptcy of Stanley Marshall Ellison and Kay Dearing Ellison to establish the Ellisons' liability on their personal guarantees of their travel agency's indebtedness to ARC and to establish that this indebtedness is nondischargeable under 11 U.S.C. § 523(a)(4). The district court concluded that the Ellisons are indebted to ARC in the amount of $574,678 and that this indebtedness arose from the Ellisons' defalcation while acting in a fiduciary capacity and therefore is nondischargeable. On appeal, we affirm the district court's conclusion that the Ellisons' indebtedness on their personal guarantees is nondischargeable but remand for further factfinding with respect to the amount of indebtedness.

I

Stanley Ellison and his wife, Kay Ellison, were officers, directors, and shareholders of Sovereign World Travel, Ltd. ("Sovereign Travel"), a West Virginia corporation operating a travel agency in Charleston, West Virginia. To facilitate its business of selling airline tickets, Sovereign Travel entered into an Agent Reporting Agreement with ARC, a Delaware corporation owned by various airline carriers, that acted as the carriers' agent for issuing airline tickets and collecting the payment for those tickets from travel agents.

The Agent Reporting Agreement provided for a trust arrangement, under which Sovereign Travel collected payments for the sales of airline tickets, placed the proceeds of those sales in a trust account with the Whitesville State Bank for the benefit of ARC, and reported to ARC weekly on the ticket sales made to customers. The deposited proceeds, excluding Sovereign Travel's commissions, were designated as "the property of the carrier and [were to] be held in trust until accounted for to the carrier." After Sovereign Travel submitted its sales report to ARC, ARC paid itself with checks that ARC drew on the trust account. Sovereign Travel and ARC also executed a "Cushion Agreement," whereby Sovereign Travel agreed to keep a cushion of $100,000 in the same trust account and whereby the parties agreed that withdrawals would "be permitted by ARC drafts only."

In addition to Sovereign Travel's undertakings with ARC, ARC required, as a condition of allowing Sovereign Travel to remain on its approved agency list, the personal guarantees of the Ellisons. Accordingly, the Ellisons signed personal guarantees of performance under which they "promise[d] and guarantee[d] the unconditional payment by [Sovereign Travel]... of all indebtedness, liabilities and obligations of every nature and kind arising out of or in connection with the [Agent Reporting Agreement]" between ARC and Sovereign Travel.

In late 1993, Sovereign Travel began experiencing financial difficulties. It began to fail to deposit proceeds of the ticket sales into the trust account with Whitesville State Bank, and it began to fail to submit weekly sales reports to ARC. When ARC attempted to draw from the trust account, checks were returned for insufficient funds. These failures of performance by Sovereign Travel were the result of the Ellisons' personal decisions and conduct. The Ellisons were involved in the supervision and handling of the day-to-day operations of Sovereign Travel and the handling of the relationship between Sovereign Travel and ARC. And to the extent that Sovereign Travel in fact went out of trust in its relationship with ARC, the Ellisons acknowledge that they were the ones responsible for the corporation's actions.

In January 1994, Sovereign Travel filed a voluntary petition under Chapter 7 of the United States Bankruptcy Code.¹ And a few months later, in April 1994, the Ellisons followed, filing this Chapter 7 proceeding.

ARC filed a complaint against the Ellisons in this bankruptcy proceeding, seeking a judgment of $342,207 based on the Ellisons' personal guarantees of Sovereign Travel's indebtedness to ARC and a declaratory judgment that the Ellisons' indebtedness to ARC is non-dischargeable under 11 U.S.C. § 523(a). In its complaint, ARC alleged that because of the Ellisons' personal involvement in Sovereign Travel's defalcation to ARC, the liability of the Ellisons on their personal guarantees to ARC is nondischargeable on three grounds: (1) fraud under 11 U.S.C. § 523(a)(2)(A); (2) defalcation "while acting in a fiduciary capacity and/or embezzlement" under 11 U.S.C. § 523(a)(4); and (3) "willful and malicious injury ... to ARC" under 11 U.S.C. § 523(a)(6).

On ARC's motion filed in the adversary proceeding, the bankruptcy court granted ARC partial summary judgment, finding the Ellisons liable on their personal guarantees and declaring that indebtedness nondischargeable under 11 U.S.C. § 523(a)(4). The court concluded that the Ellisons defaulted while acting in a fiduciary capacity based on the following:

The fiduciary relationship between ARC and [Sovereign Travel] is clearly set out in the [Agency Reporting Agreements], and the defendants' liability for those obligations is equally clear from the two personal guarantees executed by each of them individually, and the fact that the defendants have both admitted responsibility for handling the weekly sales reports and the trust account at Whitesville State Bank.

The court explained its conclusions as follows:

The defendants had both a fiduciary duty to ARC in the execution of the [Agency Reporting Agreement] which created an express trust relationship with respect to the Traffic Documents and the trust account at the Whitesville State Bank, and a fiduciary duty to [Sovereign Travel] as officers and directors to ensure that [Sovereign Travel] complied with the terms of the [Agency Reporting Agreement] so as not to lose its agency listing. Defendants were instrumental in the actions which constituted the defalcation, and thus must be held personally liable for their breach of fiduciary duty.

Following the entry of the partial summary judgment on liability, the bankruptcy court conducted a hearing on damages and held that the Ellisons were obligated to ARC in the amount of $391,062 in principal and $183,616 in prejudgment interest, for a total of $574,678. In computing these damages, the court concluded that the Ellisons were responsible for reimbursing the airline carriers at the standard coach rates for tickets sold and not at the lower tour rates under which Sovereign Travel allegedly sold the tickets.

On appeal, the district court affirmed, entering judgment in favor of ARC on September 20, 2001. From the district court's judgment, this appeal followed.

II

The Ellisons contend that the district court erred in holding that their indebtedness to ARC, based on their personal guarantees of Sovereign Travel's obligations, was not dischargeable under 11 U.S.C. § 523(a)(4). The Ellisons point out that it was Sovereign Travel, not they, who had a fiduciary relationship with ARC and that, as officers and directors of Sovereign Travel, they owed no fiduciary duty to ARC. They also note that being guarantors of Sovereign Travel's indebtedness did not place them in a fiduciary relationship with ARC. They argue that their fiduciary duty to Sovereign Travel as its officers and directors is "irrelevant" and that Sovereign Travel's trust relationship with ARC was not imputable to them personally. In sum, the Ellisons contend that neither their fiduciary duty to Sovereign Travel, based on being officers and directors of Sovereign Travel, nor Sovereign Travel's fiduciary duty to ARC, based on the Agent Reporting Agreement, translates into a fiduciary relationship between the Ellisons and ARC. See, e.g., In re Long, 774 F.2d 875, 878 (8th Cir.1985) ("We question ... the propriety of opposing a corporation's fiduciary duties on a stockholder-employee in the absence of such a local rule"); In re Cross, 666 F.2d 873, 880-81 (5th Cir.1982) (concluding that the exception to discharge for defalcation while acting in a fiduciary capacity required a fiduciary obligation to the creditor, not just a fiduciary duty to the corporation for which the officer worked).

Thus, the issue that the Ellisons raise is whether the Ellisons' indebtedness to ARC, based on their personal guarantees, is "for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny." If it is, then under 11 U.S.C. § 523(a)(4), their indebtedness is not dischargeable in bankruptcy.

We begin by recognizing that by simply guaranteeing Sovereign Travel's debt to ARC, the Ellisons did not place themselves in a fiduciary relationship with ARC. See, e.g., In re Levitan, 46 B.R. 380, 386-87 (Bankr.E.D.N.Y.1985) (holding that an ordinary security agreement did not create a fiduciary relationship between debtor and creditor). But in this case, there are three additional facts that we must consider.

First, Sovereign Travels's indebtedness to ARC arose out of the breach of a fiduciary relationship between the two corporations. Under the Agent...