In re Librandi

• Decision Date: 22 June 1995
• Docket Number: Bankruptcy No. 1-93-00422. Adv. No. 1-93-00406. Civ. A. No. 1:CV-95-132.
• Citation: 183 BR 379
• Parties: In re Carmen Joseph LIBRANDI, Debtor. Joan WINDSOR, Plaintiff-Appellant, v. Carmen Joseph LIBRANDI, Defendant-Appellee.
• Court: U.S. District Court — Middle District of Pennsylvania

183 B.R. 379 (1995)

In re Carmen Joseph LIBRANDI, Debtor Joan WINDSOR, Plaintiff-Appellant, v. Carmen Joseph LIBRANDI, Defendant-Appellee.

Bankruptcy No. 1-93-00422. Adv. No. 1-93-00406. Civ. A. No. 1:CV-95-132.

United States District Court, M.D. Pennsylvania.

June 22, 1995.

COPYRIGHT MATERIAL OMITTED

Jack F. Ream, Kain, Brown & Roberts, York, PA, for Carmen Joseph Librandi.

Elliot A. Strokoff, Strokoff & Cowden, Harrisburg, PA, for Joan Windsor.

Steven M. Carr, Trustee, York, PA.

MEMORANDUM

CALDWELL, District Judge.

We are considering an appeal from an Order of the United States Bankruptcy Court for the Middle District of Pennsylvania, filed December 29, 1994, and exercise appellate jurisdiction pursuant to 28 U.S.C. § 158.

I. BACKGROUND

On March 8, 1993, Carmen Librandi filed a petition for relief under the Bankruptcy Code and a Chapter 13 bankruptcy plan, to which the Appellant, Joan Windsor, filed objections on April 23, 1993. After the case was converted to a Chapter 7 case, Windsor filed an objection to Librandi's list of exempt property, alleging that Librandi's residence was not held in a valid tenancy by the entireties. She also filed a complaint to ascertain the dischargeability of her claim against Librandi pursuant to 11 U.S.C. § 523(a)(4).¹

The Bankruptcy Court determined that: (1) the debt was not nondischargeable under section 523(a)(4) of the Bankruptcy Code because Librandi was not acting in a "fiduciary capacity" for purposes of that section; and (2) Librandi's residence was validly held as a tenancy by the entireties with his wife. On January 6, 1995, Windsor filed the present appeal.

II. LAW AND DISCUSSION

A. Standard of Review

A district court acts in an appellate capacity in reviewing a bankruptcy court's decision. We review conclusions of law de novo, In re Marcus Hook Development Park, Inc., 943 F.2d 261, 266 (3d Cir.1991), but may reverse findings of fact only if they are clearly erroneous. Bankruptcy Rule 8013; Goldberg v. New Jersey Lawyers' Fund for Client Protection, 932 F.2d 273, 277 (3d Cir. 1991). Factual findings are clearly erroneous if we are "left with the definite and firm conviction that a mistake has been committed." In re B. Cohen & Sons Caterers, Inc., 108 B.R. 482, 484 (E.D.Pa.1989) (citations omitted). "This standard precludes this Court from reversing the Bankruptcy Court's decision if its account of the evidence is plausible, even if this Court is convinced it would have weighed the evidence differently." Id. (citations omitted).

B. Dischargeability

Windsor contends that Librandi's debt to her is nondischargeable pursuant to 11 U.S.C. § 523(a)(4), which provides that

(a) 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, embezzlement or larceny;

11 U.S.C. § 523(a)(4). In order to prevail under this exception to discharge, Windsor must prove, by a preponderance of the evidence, that: (1) Librandi was acting in a fiduciary capacity; and (2) while acting in that capacity, he engaged in fraud or defalcation.

The Bankruptcy Court concluded that Librandi engaged in improper conduct in his dealings with Windsor. Memorandum Opinion at 14.² It also determined that although Librandi was likely a common law fiduciary, "Windsor failed to establish the existence of an express trust or technical trust relationship between herself and Librandi such as would be required to render him a `fiduciary' for purposes of section 523(a)(4)." Memorandum Opinion at 18-19. Windsor argues that the court applied an incorrect standard in finding that Librandi was not acting in a fiduciary capacity pursuant to 11 U.S.C. § 523(a)(4). We review this determination de novo.

While the issue of whether a debt is dischargeable under section 523(a)(4) is a question of federal law, courts also look to state law to determine whether the requisite trust relationship exists. Matter of Bennett, 989 F.2d 779, 784 (5th Cir), cert. denied sub nom., Bennett v. LSP Inv. Partnership, ___ U.S. ___, 114 S.Ct. 601, 126 L.Ed.2d 566 (1993). The traditional definition of fiduciary, involving a person who stands in a special relationship of trust, confidence, and good faith, is "far too broad for the purposes of bankruptcy law." Matter of Rausch, 49 B.R. 562, 564 (Bankr.D.N.J.1985); see also Ragsdale v. Haller, 780 F.2d 794, 796 (9th Cir. 1986). Rather, beginning with the Supreme Court decisions in Chapman v. Forsyth, 43 U.S. (2 How.) 202, 11 L.Ed. 236 (1844) and Davis v. Aetna Acceptance Co., 293 U.S. 328, 55 S.Ct. 151, 79 L.Ed. 393 (1934), courts have held that the fiduciary relationship referred to in section 523(a)(4) is limited to instances involving express and "technical" trusts. See, e.g., Matter of Angelle, 610 F.2d 1335, 1338-39 (5th Cir.1980).³ The reason for this narrow construction is to promote the bankruptcy law's "fresh start" policy. Id. "Most courts today, however, recognize the `technical' or `express' trust requirement is not limited to trusts that arise by virtue of a formal trust agreement, but includes relationships in which trust type obligations are imposed pursuant to statute or common law." Bennett, 989 F.2d at 784-85; see also In re Bagel, No. 92-11440F, 1992 WL 477052, *12 (Bankr. E.D.Pa. Dec. 17, 1992), aff'd without opinion, 22 F.3d 300 (3d Cir.1994).

There are three elements necessary to establish an express trust: (1) a declaration of trust; (2) a clearly defined trust res; and (3) an intent to create a trust relationship. In re Ballantyne, 166 B.R. 681, 686 (Bankr.E.D.Wis.1994); In re Janikowski, 60 B.R. 784, 788 (Bankr.N.D.Ill.1986). Windsor does not, and cannot, argue that the parties had an express trust agreement in this instance. The difficulty, however, lies with the determination of the definition and scope of "technical trusts". Quaif v. Johnson, 4 F.3d 950, 953 (11th Cir.1993). "An express or technical trust must be either one in which a formal document is executed which establishes the rights and duties of the parties, or one in which trust type obligations are imposed pursuant to state or common law." In re Johnson, 174 B.R. 537, 541 (Bankr. W.D.Mo.1994). Some courts have determined that state statutes can create a technical trust for purposes of section 523(a)(4). See, e.g., Quaif, 4 F.3d at 953; Carey Lumber Co. v. Bell, 615 F.2d 370, 374 (5th Cir. 1980). Other courts have held that state common law can create the requisite fiduciary relationship. See, e.g., Matter of Marchiando, 13 F.3d 1111, 1115 (7th Cir.), cert. denied sub nom., Illinois Dep't of Lottery v. Marchiando, ___ U.S. ___, 114 S.Ct. 2675, 129 L.Ed.2d 810 (1994); Bennett, 989 F.2d at 785.

Windsor contends that Librandi was a fiduciary for purposes of section 523(a)(4) because he was a fiduciary pursuant to the Pennsylvania Securities Act, 70 P.S. § 1-101 et seq., and the regulations promulgated thereunder, 64 Pa.Code § 305.019.⁴ A statutory fiduciary under state law is only considered a fiduciary for purposes of section 523 if the statute: (1) defines the trust res; (2) identifies the trustee's fund management duties and authority; and (3) imposes obligations on him prior to the alleged wrongdoing. In re Christian, 172 B.R. 490, 495 (Bankr.D.Mass.1994); In re Baird, 114 B.R. 198, 202 (9th Cir. BAP 1990). In this case, Librandi was clearly not a statutory fiduciary for purposes of section 523. The Pennsylvania statute does not define the trust res, and in fact precludes registered agents such as Librandi from "acting as a custodian for money. . . ." 64 Pa.Code § 305.019(c)(2). Thus, the Bankruptcy Court correctly concluded that although Librandi was a statutory fiduciary under Pennsylvania law, the same was not true with respect to section 523(a)(4).

Windsor also contends that Librandi was acting in a fiduciary capacity under section 523(a)(4) based on the "special relationship" between the parties. In support of this argument, she identifies a recent line of cases that expand the definition of fiduciary under section 523. In Sciscoe v. Leistner, 164 B.R. 86 (S.D.Ind.1993), the court stated that

the term `fiduciary\', as used in 11 U.S.C. § 523(a)(4) is limited to the class of fiduciaries including trustees of specific written declarations of trust, guardians, administrators, executors, or public officers, and, absent special considerations, does not extend to the more general class of fiduciaries such as agents, bailees, brokers, factors, and partners.

Id. at 88 (citing In re Krause, 114 B.R. 582, 597-98 (Bankr.N.D.Ind.1988)) (emphasis added). Additionally, in Matter of Marchiando, the Seventh Circuit indicated that debts are nondischargeable by virtue of section 523(a)(4) when they involve

either express trusts of a conventional variety or fiduciary relations of the kind just described — relations of inequality that justify the imposition on the fiduciary of a special duty, basically to treat his principal\'s affairs with all the solicitude that he would accord his own affairs.

Marchiando, 13 F.3d at 1116. Though not expressly stated by the courts, it appears that these situation create, in their view, "technical trusts".⁵

In the present case, the Bankruptcy Court did not expressly consider whether the "special considerations" or "special relationships" identified in Marchiando and Sciscoe are present in this action.⁶ However, we need not determine whether such circumstances existed since Windsor's claim has a fatal defect: there can be no fiduciary relationship for purposes of section 523(a)(4) because there is no trust res.

In every case cited by Windsor in support of her claim, the debtor was entrusted with the creditor's funds. See, e.g., Goldberg, 932 F.2d at 278 (debtor/lawyer misappropriated client funds which he was entrusted); Marchiando, 13 F.3d at 1116 (debtor failed to submit lottery proceeds); Quaif, 4 F.3d at 953 (insurance agent failed...