In re Hartman
| Decision Date | 01 November 2000 |
| Docket Number | Bankruptcy No. 99-20530T. Adversary No. 99-2210. |
| Citation | 254 BR 669 |
| Parties | In re Susan HARTMAN, Debtor. The Cadle Company, II, Inc., Plaintiff, v. Susan Hartman, Defendant. |
| Court | U.S. Bankruptcy Court — Eastern District of Pennsylvania |
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Robert M. Davison, Miller & Davison, Bethlehem, PA, for debtor/defendant.
Kevin T. Fogerty, Allentown, PA, for plaintiff.
David Eisenberg, Eisenberg & Van Horn, Allentown, PA, trustee.
Before the court is a complaint filed by Plaintiff, The Cadle Company, II, Inc. ("Plaintiff")1 objecting to the dischargeability of a debt owed to it by Debtor, Susan Hartman ("Debtor"). Plaintiff's complaint is based upon 11 U.S.C. § 523(a)(4) and (6). Because we find that Plaintiff has not met its burden of proof, we rule in favor of Debtor.
The parties have stipulated to the following facts. On February 3, 1999, Debtor filed a voluntary bankruptcy petition under Chapter 7 of the United States Bankruptcy Code. Debtor had been a principal shareholder as well as a member of the Board of Directors of S.S. Maxwell, Inc. ("Maxwell"), a Pennsylvania corporation. Maxwell traded under the name "Petite Shops" and at one time maintained five different retail clothing store locations throughout Pennsylvania.
On September 21, 1994, First Lehigh Bank entered into a loan agreement with Maxwell which was embodied in a Line of Credit Agreement and a Line of Credit Note. At that time, Maxwell was engaged in the retail clothing business and had equipment, inventory, and fixtures carried on its books at a value of $250,000.00 to $350,000.00. Pursuant to the Line of Credit Agreement and Line of Credit Note, First Lehigh Bank advanced the principal sum of $250,000.00 to Maxwell. Maxwell then executed a Security Agreement with First Lehigh Bank, along with related UCC-1 Financing Statements signed by the Debtor, as President of Maxwell.
Debtor was frequently forced to close her stores in the fall and winter months of 1997 due to severe weather conditions, which caused loss of sales and prevented Debtor from purchasing goods for the spring of 1998. In November of 1997, Debtor was hospitalized for stress related reasons. The Maxwell loan from First Lehigh Bank went into default in December of 1997 and thereafter the bank accelerated the loan and claimed a total due of $202,933.96, plus continuing interest at $53.63 per diem.
As of December 31, 1997, Debtor's inventory of $33,097.00 was reduced by sales of $3,153.00 and the balance was sold to a jobber for $5,000.00 by Sam Ninfo, Treasurer/Secretary of Maxwell. Debtor believed the $5000.00 price was reasonable for the sale. Debtor was at all relevant times a director and officer of Maxwell.
This court is asked to determine whether or not the debt owed by Debtor to Plaintiff is nondischargeable under 11 U.S.C. § 523(a)(4) and (a)(6). Section 523(a)(4) states, "a discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt — (4) for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny." Section 523(a)(4) deals with fraud or defalcation while acting in a fiduciary capacity and embezzlement or larceny while not acting in a fiduciary capacity. Collier on Bankruptcy, 15th Ed.Rev. ¶ 523.101c at 523-72; accord, Reiter v. Napoli (In re Napoli), 82 B.R. 378, 381 (Bankr.E.D.Pa. 1988). Under the first element, the definition of "fiduciary" for purposes of section 523(a)(4) is a question of federal law. See Tudor Oaks Ltd. Partnership v. Cochrane (In re Cochrane), 124 F.3d 978, 984 (8th Cir.1997), cert. denied, 522 U.S. 1112, 118 S.Ct. 1044, 140 L.Ed.2d 109 (1998); Spinoso v. Heilman (In re Heilman), 241 B.R. 137, 155 (Bankr.D.Md.1999). The term is limited to instances involving express or technical trusts which were "imposed before and without reference to the wrongdoing that caused the debt." Lewis v. Scott (In re Lewis), 97 F.3d 1182, 1185 (9th Cir.1996). In other words, to disqualify a debt from discharge under section 523(a)(4), the fiduciary duty must have existed prior to the transaction from which the debt arose and the debt must have arisen as a result of the fiduciary acting in that capacity. Lewis, 97 F.3d at 1185.
With respect to the provision's second element, the term "defalcation" is not defined in the Bankruptcy Code. However, in Central Hanover Bank & Trust Co. v. Herbst, 93 F.2d 510 (2nd Cir.1937), the court concluded that "when a fiduciary takes money upon a conditional authority which may be revoked and knows at the time it may, he is guilty of a `defalcation' though it may not be `fraud' or an `embezzlement,' or perhaps not even a `misappropriation'." Central Hanover, 93 F.2d at 511-12. Cases interpreting section 523(a)(4) have held that if the debtor misappropriates funds it is unnecessary to prove that the debtor committed an intentional wrong. Leeb v. Guy (In re Guy), 101 B.R. 961, 991 (Bankr.N.D.Ind.1988). See also Lewis, 97 F.3d at 1186.
Plaintiff argues that Debtor was acting in a fiduciary capacity for two reasons. First, Plaintiff contends that Debtor "as primary shareholder, director and President of Maxwell, owed a fiduciary duty to Maxwell and to Cadle regarding disposition of the collateral pledged to Cadle as security for loans extended to Cadle by First Lehigh Bank." Plaintiff's Brief at 10. We disagree because it is well established that "the term `fiduciary' as used in section 523(a)(4) does not `encompass ordinary commercial relationships such as those of principal/agent or debtor/creditor.'" Windsor v. Librandi (In re Librandi), Bankr.Nos. X-XX-XXXXX, X-XX-XXXXX A., 1994 WL 832019, at *5 (Bankr.M.D.Pa. Dec.29, 1994) (quoting In re Sawyer, 112 B.R. 386, 389 (D.Colo.1990)).
Second, Plaintiff argues that "the Security Agreement executed by Debtor, on Maxwell's behalf, created an express trust relationship . . . Debtor violated and sic committed a defalcation of her fiduciary responsibility/duty owed to Cadle, when she sold off Maxwell's collateral-particularly inventory —, and failed to remit those proceeds to be applied against the debt owed by Maxwell to First Lehigh Bank . . .".2 Plaintiff's Brief at 10. In Pennsylvania Manufacturers' Assoc. Ins. Co. v. Desiderio (In re Desiderio), 213 B.R. 99 (Bankr.E.D.Pa.1997), the court held that for purposes of establishing a fiduciary relationship, the Debtor must be a trustee under an express or technical trust3 and stated that:
In the instant case we find that the Security Agreement in question does not create an express trust. The Security Agreement executed by Debtor does not set forth an intent by the parties to create a trust; nor does it designate an ascertainable res, trustee or beneficiary. Without separate and express trust language, the Security Agreement creates no more than a debtor/creditor relationship. Absent evidence that indicates Debtor held funds or specific property in trust for Plaintiff, this court is unable to conclude that an express trust was created and therefore, we find that a fiduciary relationship for the purposes of section 523(a)(4) has not been established.4
Next, we turn to the question of whether Debtor embezzled funds. In Rolley v. Spector (In re Spector), 133 B.R. 733, 738-41 (Bankr.E.D.Pa.1991), the court defined embezzlement and larceny for the purposes of section 523(a)(4) as follows:
Embezzlement is the fraudulent appropriation of property by a person to whom such property has been entrusted or into whose hands it has lawfully come. It differs from larceny in the fact that the original taking of the property was lawful or with the consent of the owner, while in larceny the felonious intent must have existed at the time of the taking. 3 Collier on Bankruptcy, ¶ 523.143, at 523-113. See also In re Crosswhite, 91 B.R. 156, 159 (Bankr. M.D.Fla.1988); In re Ramonat, 82 B.R. 714, 720; and In re Salamone, 78 B.R. 74, 77 (Bankr.E.D.Pa.1987).
Spector, 133 B.R. at 741. In order to establish a claim of embezzlement under section 523(a)(4), the plaintiff must show that:
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