In re Smith
| Decision Date | 11 March 1987 |
| Docket Number | No. C 85-4202.,C 85-4202. |
| Parties | In re Gary Lee SMITH, Debtor. Gary Lee SMITH, Appellant, v. M & M COMMODITIES, INC., Appellee. |
| Court | U.S. District Court — Northern District of Iowa |
Donald H. Molstad, Sioux City, Iowa, for appellant.
Kurt Hohenstein, Kurt Rager, South Sioux City, Neb., for appellee.
This matter comes before the Court on Debtor Gary Lee Smith's appeal from a decision by Bankruptcy Judge William Hill that Smith's debt to Appellee M & M Commodities is not dischargeable under § 523(a)(4) of the Bankruptcy Code. 11 U.S.C. § 523(a)(4) (1982). This appeal was heard on November 10, 1986. For reasons stated below, the Court affirms the Bankruptcy Court's decision.
The debtor was employed as a commodities broker for M & M Commodities from June 1982 to May 29, 1984. When hired, Smith was given a set of rules and regulations issued by the Geldermann clearinghouse, where M & M's orders would be sent after their brokers obtained them on behalf of clients. The rules and regulations prohibited "discretionary trades," which are trades made on behalf of a customer but without specific authority from the customer for that purchase.
Judge Hill found that Smith made five discretionary trades, all without written authority from customers as the rules required. These customers refused to pay their accounts to Gelderman. Because M & M was the guarantor for these accounts, it bore the cost of Smith's discretionary trading.
To repay M & M for this loss, Smith executed a note for $17,461.89 with M & M as the payee. This sum included the amount of the commissions Smith had received from the unauthorized trades. At the time Smith filed for bankruptcy, $11,335.61 was owing on the note.
M & M filed a complaint with the Bankruptcy Court seeking to have the debt declared non-dischargeable under § 523(a)(4), which states:
11 U.S.C. § 523(a)(4) (1984).
Judge Hill found that the debt in question would not be dischargeable under this section because Smith was acting as a fiduciary for both M & M and its customers. Because the losses resulted from Smith's failure to follow the rules for trading on discretionary accounts, they resulted from "defalcation" in a fiduciary capacity. Smith appeals.
The first question for the Court to resolve is whether Smith was "acting in a fiduciary capacity" in the proper sense of that term when he made the discretionary trades. As an agent for M & M, Smith owed certain fiduciary duties to his employer. Des Moines Bank and Trust Co. v. Bechtel and Co., 243 Iowa 1007, 51 N.W.2d 174, 215 (1952). As a broker, M & M in turn owed fiduciary duties to its customers. Menzel v. Morse, 362 N.W.2d 465 (Iowa 1985). However, the "fiduciary capacity" needed to make a debt non-dischargeable under § 523(a)(4) must arise from an express or technical trust. Davis v. Aetna Acceptance Co., 293 U.S. 328, 333, 55 S.Ct. 151, 153-54, 79 L.Ed. 393 (1934). In deciding whether an express or technical trust existed, courts must look to relevant non-bankruptcy law. In the Matter of Dloogoff, 600 F.2d 166, 169 (8th Cir.1979).
M & M presents several possible sources for a technical trust between Smith and M & M or its customers. The first source is the federal Commodity Exchange Act, 7 U.S.C. § 1, et seq., which regulates activities between commodity futures brokers and their customers. Section 6d(2) of the Act required Smith as a registered merchant to treat all money of his customers as belonging to the customer, without commingling it, and prohibited Smith from using customer funds as his own. Regulations promulgated by the Commodity Futures Trading Commission prohibited Smith from trading without specific authorization by the customer or prior written consent. 17 C.F.R. § 166.2 (1984).
The Court finds that the...
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