Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-akb-3_05-ap-90023/USCOURTS-akb-3_05-ap-90023-0/pdf.json

Parties Involved:
Bethel Native Corporation
Plaintiff
Bernd D. Hoffmann
Defendant

Document Text:

UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF ALASKA

In re: Case No. A05-00373-DMD

BERND D. HOFFMANN, 

Debtor. 

 

Chapter 7

BETHEL NATIVE CORPORATION, 

 Plaintiff and 

 Counter-defendant, 

v.

BERND D. HOFFMANN,

 Defendant and 

 Counter-claimant.

Adversary No. A05-90023-DMD

MEMORANDUM DECISION

This is an action for exception of a debt from discharge under 11 U.S.C. §

523(a)(4) and denial of discharge under 11 U.S.C. § 727(a)(2). It is a core proceeding

pursuant to 28 U.S.C. § 157(b)(2)(I) and (J). Jurisdiction arises from 28 U.S.C. § 1334(b)

and the district court’s order of reference. I find for the plaintiff on both claims.

Filed On

7/20/06

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1

When the original management contract was signed in 1995, HCI was known as Hoffmann

Commercial Management.

2

BNC had to pay Northrim over $411,000.00 to satisfy the loan.

2

Background

Defendant Bernd Hoffmann has been a property manager in Anchorage for

many years. He was the sole owner and director of Hoffmann Commercial, Inc. (“HCI”).

Plaintiff Bethel Native Corporation (“BNC”) owned Anchorage real property and was a

client of Hoffmann’s. BNC sought to diversify its real property holdings. Hoffmann

recommended that BNC invest in an income property located in Albuquerque, New Mexico,

named Central Park. The debtor and HCI served as general partner for the project. HCI was

also the property manager for the project.1

BNC invested in Central Park as a limited partner along with other native

corporations. Their collective initial investment totaled over $2.4 million. The project faired

very poorly. BNC lost its share of the initial investment as well as several large loans it made

to the partnership. BNC sued Hoffmann and HCI in state court, ultimately recovering a

judgment for $670,000.00. The judgment was based on damages from a variety of claims.

Hoffmann owed BNC rent from BNC’s Anchorage office building. Hoffmann also owed

BNC $350,000.00 for a Northrim bank loan to Central Park that was never repaid.2

 BNC

also made direct loans of $70,000.00 to Central Park that were never repaid. The state court

found in favor of BNC on all of these claims, and awarded BNC pre-judgment interest and

attorney’s fees as well.

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3

Case No. 03-00084-HAR.

4

HCI’s most valuable assets consisted of homeowner association management contracts. These

contracts generated monthly income of more than $27,500.00. 

3

HCI went in and out of chapter 11 proceedings. It filed a chapter 11 petition

on January 30, 2003.3

 HCI’s case was dismissed on motion of the United States Trustee on

May 6, 2004. On September 1, 2004, while BNC’s claim was still pending in state court,

HCI transferred all of its assets to AREC, LLC.4

 AREC is owned 100% by Hoffmann’s wife,

Christine. After the transfer to AREC, HCI ceased all business operations. Hoffmann filed

for personal chapter 7 relief on April 6, 2005. This adversary proceeding ensued.

Exception to Discharge

BNC alleges Hoffmann’s debts to it arise from fraud or defalcation while

Hoffmann was acting in a fiduciary capacity. 11 U.S.C. § 523(a)(4) excepts from discharge

debts “for fraud or defalcation while acting in a fiduciary capacity, embezzlement or

larceny.” 

The meaning of “fiduciary capacity” under section 523(a)(4) is

a question of federal law, which has consistently limited this

term to express or technical trust relationships. The broad

general definition of a fiduciary relationship – one involving

confidence, trust and good faith – is inapplicable in the

dischargeability context. The debt alleged to be nondischargeable must arise from a breach of trust obligations

imposed by law, separate and distinct from any breach of

contract. In addition, the requisite trust relationship must exist

prior to and without reference to the act of wrongdoing. This

requirement eliminates constructive, resulting or implied trusts.

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Woodworking Enter., Inc. v. Baird (In re Baird), 114 B.R. 198, 202 (B.A.P. 9th Cir. 1990) (citations

omitted).

6

Old Harbor Native Corp. v. Afognak Joint Venture, 30 P.3d 101, 106 n.18 (Alaska 2001); Munn v.

Thornton, 956 P.2d 1213, 1220 (Alaska 1998). Other courts have also found general partners to be fiduciaries

under § 523(a)(4). See Lewis v. Scott (In re Lewis), 97 F.3d 1182 (9th Cir. 1996) (Arizona partner was a

fiduciary); Bugna v. McArthur (In re Bugna), 33 F.3d. 1054 (9th Cir. 1994) (California partner and real estate

broker was a fiduciary); Abrams v. Sea Palms Assoc., Ltd. (In re Abrams), 229 B.R. 784 (B.A.P. 9th Cir.

1999) (California general partner of limited partnership was a fiduciary).

7

A.S. 08.88.341.

8

Black v. Dahl, 625 P.2d 876, 880 (Alaska 1981). 

4

Although the concept of “fiduciary” in the

dischargeability context is a narrowly defined question of

federal law, courts look to state law to determine whether the

requisite trust relationship exists. If state law creates an express

or technical trust relationship between the debtor and another

party and imposes trustee status upon the debtor, the debtor will

be a fiduciary under section 523(a)(4). The statute must define

the trust res, spell out the trustee’s fiduciary duties and impose

a trust prior to and without reference to the wrong which created

the debt.5

Under Alaska law, an express or a technical trust relationship existed between

the debtor and BNC. The debtor served as a general partner for the Central Park limited

partnership. Alaska case law recognizes a fiduciary relationship among partners.6

 A.S.

32.06.404(b)(1) further provides that a partner holds any property derived from partnership

business “as a trustee” for the partnership. 

Although HCI was property manager for BNC, property management contracts

must be in writing and signed by a real estate broker.7

 Hoffmann was the broker for HCI’s

contracts. A broker owes a fiduciary duty to clients under Alaska case law.8

 A.S.

08.88.351(3) requires brokers to keep separate trust accounts for rental receipts and other

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Lewis, 97 F.3d at 1186-87.

10Otto v. Niles (In re Niles), 106 F.3d 1456, 1461 (9th Cir. 1997).

5

money collected in trust. I conclude that Hoffmann, as a general partner and broker, was a

fiduciary within the meaning of 11 U.S.C. § 523(a)(4).

Did Hoffmann commit a defalcation while acting as a fiduciary? The Ninth

Circuit has stated:

Defalcation is defined as the “misappropriation of trust

funds or money held in any fiduciary capacity; [the] failure to

properly account for such funds.” Black’s Law Dictionary 417

(6th ed. 1990). Under section 523(a)(4), defalcation “includes

the innocent default of a fiduciary who fails to account fully for

money received.” In re Short, 818 F.2d at 694 (citation

omitted); In re Baird, 114 B.R. 198, 204 (9th Cir. BAP 1990)

(“In the context of section 523(a)(4), the term ‘defalcation’

includes innocent, as well as intentional or negligent defaults so

as to reach the conduct of all fiduciaries who were short in their

accounts”). To the extent In re Martin, 161 B.R. 672, 678 (9th

Cir. BAP 1993), conflicts with this standard, it is overruled. An

individual may be liable for defalcation without having the

intent to defraud.9

Hoffmann received $350,000.00 from a Northrim bank loan cosigned by BNC

and $70,000.00 in direct loans from BNC. Because BNC has shown that those funds were

entrusted to Hoffmann, the burden to render an accounting shifts to Hoffmann.10

Once the fiduciary relationship is established, the burden is on

the defendant to show that he has performed his duties properly

. . . The defendant thus could not escape liability simply by

remaining silent or by testifying generally that funds were not

misappropriated. Instead, the fiduciary was under a duty to

render an account that should show in detail the items expended

and show when, to whom, and for what purposes the payments

were made so the beneficiaries can make a reasonable test of the

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11Id. at 1461 n.4, citing Alexopoulos v. Dakouras, 48 Wis.2d 32, 179 N.W.2d 836, 841 (1970)

(citation omitted).

12Plaintiff’s Ex. 59 consists of Central Park balance sheets for March, April, August and December

of 2000, March, May, July, September and December of 2001, and August of 2002. There are cash flow

statements for December of 2000 and 2001 and January 2002. There are documents called “budget

comparisons” for March, April, August, and December 2000, and February, March, May, July, September

and December 2001.

13Plaintiff’s Ex. 63.

6

accuracy of the accounts. The accounts should be clear and

accurate and if they are not, all presumptions are against the

trustee and all obscurities and doubts are to be taken adversely

to him.11

Hoffmann denies any wrongdoing or misappropriation of funds. He has failed,

however, to accurately account for the $350,000.00 Northrim loan or the $70,000.00 in direct

loans from BNC. The Central Park balance sheets, cash flow statements and budget

comparisons12 do not provide a clear and accurate statement of account. The statements are

inconsistent, inaccurate and incomplete. They can’t be reconciled with the line of credit

history Hoffmann prepared.13 They don’t show when, to whom and for what purposes

payments were made. There is no clear explanation of how the $420,000.00 in loans was

spent. Hoffmann cannot show where the money went and has breached his fiduciary duty

to BNC. The debts, which totaled $507,340.47 as of August 22, 2003, are excepted from

discharge.

Objection to Discharge

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14MCorp. Mgmt. Solutions, Inc. v. Thurman (In re Thurman), 901 F.2d 839 (10th Cir. 1990) supports

his theory.

15224 B.R. 114 (Bankr. D. Alaska 1998). Other courts have also found that a transfer of assets of a

wholly owned corporation constitutes grounds for denial of discharge. Barclays/American Bus. Credit v.

Adams (In re Adams), 31 F.3d 389 (6th Cir. 1994); Bennett v. Hollingsworth (In re Hollingsworth), 224 B.R.

822 (Bankr. M.D.Fla. 1988); Ricnick’s Fitness Ctr., Inc. v. Hicks (In re Hicks), 71 B.R. 508 (Bankr. D.N.H.

1987); Eckard Brandes, Inc. v. Riley (In re Riley), 2004 WL 2370640 (Bankr. D. Hawaii 2004).

16Bonham, 224 B.R. at 116.

7

11 U.S.C. § 727(a)(2) precludes the grant of a discharge if a debtor, with the

intent to hinder, delay or defraud a creditor, has transferred property of the debtor within one

year of the date of the petition. Hoffmann filed for chapter 7 relief on April 6, 2005. His

corporation, HCI, transferred all of its assets to his wife’s corporation, AREC, LLC, within

one year of Hoffmann’s bankruptcy filing. I find the transfer was made to hinder BNC and

its claims against Hoffmann and HCI. Hoffmann contends that § 727(a)(2) does not apply

because corporate property rather than his own property was transferred.14 I disagree. 

 Judge Ross faced a similar situation in Compton v. Bonham (In re Bonham).15

Bonham made fraudulent transfers of corporate property from two corporations. She

disregarded corporate formalities and used corporate funds for her personal expenses. She

contended she was entitled to a chapter 7 discharge because she did not fraudulently transfer

her own personal property. Judge Ross denied her discharge, stating, “In Alaska, a person

who uses a corporation to commit fraud or engage in criminal activity should not be

permitted to hide behind the corporate veil. Rather, the person should be treated as the

corporation’s alter ego.”16 

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The same result is justified here. There are abundant grounds for piercing the

corporate veil in this case. Hoffmann was the sole shareholder and director of HCI. HCI had

grossly inadequate capital. Corporate formalities were ignored. Minutes of HCI’s annual

meetings were manufactured only after BNC was served with discovery requests in this case.

Hoffmann transferred HCI’s most valuable assets to his wife’s corporation for

nothing other than AREC’s promise to pay 941 taxes and fees due his attorney. His wife

paid nothing for her stock in AREC, LLC. She now draws a salary of $8,000.00 a month.

Hoffmann’s transfer of HCI’s assets perpetuated a fraud against BNC. It was made within

one year of the date his chapter 7 petition was filed, with the intent to hinder and defraud

BNC. Hoffmann’s discharge will be denied pursuant to 11 U.S.C. § 727(a)(2). 

Conclusion

Bernd Hoffmann has failed to properly account for loans his wholly owned

corporation received from BNC and Northrim Bank for investment in the Central Park

partnership. He also fraudulently transferred assets from his corporation to a corporation

wholly owned by his wife within one year of his bankruptcy filing. Hoffmann’s obligations

to BNC will be excepted from discharge and his discharge will be denied. An order and

judgment will be entered consistent with this memorandum.

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DATED: July 20, 2006.

BY THE COURT

 /s/ Donald MacDonald IV 

DONALD MacDONALD IV

United States Bankruptcy Judge

Serve: E. Sleeper, Esq.

W. Artus, Esq. 

P. Gingras, Adv. Case Mgr. - served 7/20/06 – pg.

7/20/06

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