In re Storie, BAP No. EO-97-008

• Decision Date: 03 December 1997
• Docket Number: Bankruptcy No. 95-71149,BAP No. EO-97-008,Adversary No. 95-7128.
• Citation: 216 BR 283
• Court: U.S. Bankruptcy Appellate Panel, Tenth Circuit
• Parties: In re Allen Jerry STORIE, also known as Jerry Storie, doing business as Driftwood Construction & Supply; and Kathleen Helleckson Storie, also known as Kathy Storie, Debtors. ANTLERS ROOF-TRUSS & BUILDERS SUPPLY, Plaintiff-Appellant, Caddo Ready Mix; Metal Sales Manufacturing Co.; Arkansas Agri-Equipment, Inc.; and S. & L. Hog & Poultry Supply, Plaintiffs, v. Allen Jerry STORIE, Kathleen Helleckson Storie, And Driftwood Construction & Supply, Defendants-Appellees.

216 B.R. 283 (1997)

In re Allen Jerry STORIE, also known as Jerry Storie, doing business as Driftwood Construction & Supply; and Kathleen Helleckson Storie, also known as Kathy Storie, Debtors.

ANTLERS ROOF-TRUSS & BUILDERS SUPPLY, Plaintiff-Appellant, Caddo Ready Mix; Metal Sales Manufacturing Co.; Arkansas Agri-Equipment, Inc.; and S. & L. Hog & Poultry Supply, Plaintiffs, v. Allen Jerry STORIE, Kathleen Helleckson Storie, And Driftwood Construction & Supply, Defendants-Appellees.

BAP No. EO-97-008, Bankruptcy No. 95-71149, Adversary No. 95-7128.

United States Bankruptcy Appellate Panel of the Tenth Circuit.

December 3, 1997.

Bradley H. Mallett, Dennis, Branam & Mallett, Antlers, OK, for Plaintiff-Appellant.

Thomas B. Webb, McAlester, OK, for Defendants-Appellees.

Before CLARK, ROBINSON, and MATHESON, Bankruptcy Judges.

OPINION

CLARK, Bankruptcy Judge.

Antlers Roof-Truss & Builders Supply ("Antlers") has appealed an order of the United States Bankruptcy Court for the Eastern District of Oklahoma determining that certain debts owed by Allen Jerry Storie and Kathleen Helleckson Storie (collectively, the "Debtors") to Antlers and four other entities(collectively, the "Plaintiffs") are dischargeable in the Debtors' chapter 7 bankruptcy case.¹ For the reasons set forth below, we REVERSE the order of the Bankruptcy Court as it applies to Antlers and REMAND this case to the Bankruptcy Court for further proceedings consistent with this opinion.

I. BACKGROUND

The facts are undisputed. The individual Debtors, doing business as Driftwood Construction & Supply, reside in Oklahoma. Although they were not licenced contractors, they agreed to construct eight hog barns in Arkansas. Antlers and the other Plaintiffs are materialmen and suppliers who furnished services and materials to the Debtors to construct the hog barns. The Plaintiffs' claims against the Debtors are in the total amount of $258,785, which includes Antlers's claim of $90,869.

The Debtors received $1,688,394 for the construction of the hog barns, but Antlers and the other Plaintiffs were not paid from the proceeds. The Debtors thereafter filed a petition seeking relief under chapter 7 of the Bankruptcy Code.

The Plaintiffs commenced an adversary proceeding in the Bankruptcy Court seeking an order that each of the debts owed by the Debtors to them was not dischargeable pursuant to section 523(a)(4) of the Bankruptcy Code. According to the Plaintiffs, their respective debts were the result of the Debtors' "defalcation" while acting in a fiduciary capacity as contractors under Oklahoma law. See 11 U.S.C. § 523(a)(4); 42 Okla. Stat. Ann. §§ 152(1) & 153(1). The Plaintiffs did not allege that the Debtors had engaged in fraud, embezzlement or larceny. See 11 U.S.C. § 523(a)(4).

The Debtors responded that the debts owed to the Plaintiffs were dischargeable because they had not engaged in any intentional wrong doing. Rather, they had simply underestimated their construction bid and were not paid for overruns incurred and, therefore, they were not able to pay Antlers or the other Plaintiffs.

At trial, the Debtors accounted for all but approximately $16,000 of the proceeds that they had received from construction of the hog barns. Part of that accounting revealed that the Debtors had paid themselves a salary in the approximate amount of $31,000 from the hog barn proceeds.

After the trial, the Bankruptcy Court entered an "Order Determining Debt Dischargeable."² The Bankruptcy Court concluded that since there was no evidence of moral dereliction or intentional wrong there was no "defalcation" as required under section 523(a)(4), and thus that the debts in question were dischargeable. This appeal followed.

II. DISCUSSION

The Bankruptcy Court's legal conclusions under section 523(a)(4) are reviewed de novo. Fowler Bros. v. Young (In re Young), 91 F.3d 1367, 1371 (10th Cir.1996) (determination under section 523(a)(4) reviewed de novo); see generally Pierce v. Underwood, 487 U.S. 552, 558, 108 S.Ct. 2541, 2546, 101 L.Ed.2d 490 (1988). Upon a review of the law, which is explained below, we conclude that the Bankruptcy Court erred in determining that "defalcation" under section 523(a)(4) requires some sort of moral dereliction or intentional wrong. We therefore reverse, but we remand this case to the Bankruptcy Court because it did not make any findings of fact or conclusions of law as to whether the Debtors acted in a "fiduciary capacity" as required under section 523(a)(4).

Section 523(a) of the Bankruptcy Code states, in relevant part, that: "A discharge under section 727 . . . of this title does not discharge an individual debtor from any debt . . . for . . . defalcation while acting in a fiduciary capacity." 11 U.S.C. § 523(a)(4). Accordingly, a finding of nondischargeability under section 523(a)(4) requires a showing of (1) the existence of a fiduciary relationship between the debtor and the objecting party, and (2) a defalcation committed by the debtor in the course of that fiduciary relationship. Young, 91 F.3d at 1371.

As noted, the Bankruptcy Court did not make any findings regarding the existence of a fiduciary relationship between the Debtors and the Plaintiffs. It held that the debts in question were dischargeable based on its legal conclusion that there was not a "defalcation" as required under section 523(a)(4). Thus, although the existence of a fiduciary relationship is the threshold issue under section 523(a)(4), we will first address the Bankruptcy Court's ruling on the"defalcation" element of that section.

The word "defalcation" is not defined in the Bankruptcy Code and the legislative history to section 523(a)(4) does not aid in its interpretation. The United States Court of Appeals for the Tenth Circuit has not defined "defalcation" under section 523(a)(4), and other courts that have addressed the issue are divided on its meaning.

In the seminal case on the issue, Central Hanover Bank & Trust Co. v. Herbst, 93 F.2d 510 (2nd Cir.1937), Judge Learned Hand traced the history of the use of the word "defalcation" in the Bankruptcy Act and attempted to define it, stating, in relevant part, that:

The word, `defalcation,\' first appears in section 1 of the Bankruptcy Act of 1841 (5 Stat. 440) and only as part of the definition of those who might become voluntary bankrupts; they were those who did not owe debts `created in consequence of a defalcation as a public officer; or as executor, administrator, guardian or trustee, or while action in any other fiduciary capacity.\' Colloquially perhaps the word, `defalcation,\' ordinarily implies some moral dereliction, but in this context it may have included innocent defaults, so as to include all fiduciaries who for any reason were short in their accounts. It must be remembered that the `fiduciary capacity\' was limited to `special\' or `technical\' fiduciaries. Section 11 of the Bankruptcy Act of 1867 (14 Stat. 521) removed the former limitations of the Act of 1841 upon voluntary bankruptcies. . . . However, for the first time not all debts were discharged, the exceptions appearing in section 33, 14 Stat. 533, which incorporated the old clause of section 1, compressed into the words, `defalcation as a public officer, or while acting in any fiduciary character,\' before which it interpolated the phrase, `the fraud or embezzlement of the bankrupt.\' Whatever was the original meaning of `defalcation,\' it must here have covered other defaults than deliberate malversations, else it added nothing to the words, `fraud or embezzlement.\' . . .

It does not seem to us, however, that this linkage of `fraud\' and `embezzlement\' to `defalcation\' need change its meaning in the Act of 1867. It is true that `embezzlement\' certainly, and perhaps `fraud\' too, become redundant when the suffix is attributed to them. . . . But that is no reason for going still further and reducing `embezzlement\' and `defalcation\' to synonyms, especially after the interpolation of `misappropriation\' between them, which, though indeed a baffling word at best in this context, may have been put in to avoid traditional limitations clinging to the word, `embezzlement.\'

We must give the words different meanings so far as we can, especially when a contrary interpretation would wrest `defalcation,\' if not from its original meaning, at least from that which it must have had in the Act of 1867. The authorities are not indeed very satisfactory, but so far as they go they uniformly accord with this view, and indeed go farther.

In the case at bar the bankrupt had not been entirely innocent — not, for instance like the victim of an employee — though possibly one may acquit him of deliberate wrongdoing. A judge had awarded him the money as a court-appointed receiver, and prima facie he was entitled to it; but he knew, or if he did not know, he was charged with notice (having held himself out as competent to be an officer of the court), that the order would not protect him if it were reversed; and that it might be reversed until the time to appeal had expired. . . . We do not hold that no possible deficiency in a fiduciary\'s accounts is dischargeable; In Re Bernard, 87 F.2d 705, 707 (2nd Cir.1937), we said that `the misappropriation must be due to a known breach of the duty, and not to mere negligence or mistake.\' Although that word probably carries a larger implication of misconduct than `defalcation,\' `defalcation\' may demand some portion of misconduct; we will assume arguendo that it does.

All we decide is that when a fiduciary takes money upon a conditional authority which may be revoked and knows at the time that it may, he is guilty of a `defalcation\' though it may not be a `fraud\' or an `embezzlement,\' or perhaps not even a `misappropriation.\'

93 F.2d at 511-12 (citations omitted) (emphasis added). In Central Hanover, therefore, Judge Hand concluded that although the language and the history of the Bankruptcy Act...