Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca9-13-15809/USCOURTS-ca9-13-15809-0/pdf.json

Parties Involved:
Double Bogey, L.P.
Appellant
Paul Joseph Enea
Appellee
Sylvester Frank Enea
Appellee

Document Text:

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

DOUBLE BOGEY, L.P., a California

limited partnership,

Plaintiff-Appellant,

v.

SYLVESTER FRANK ENEA; PAUL

JOSEPH ENEA,

Defendants-Appellees.

No. 13-15809

D.C. No.

3:12-cv-01877-SI

OPINION

Appeal from the United States District Court

for the Northern District of California

Susan Illston, District Judge, Presiding

Argued and Submitted

May 14, 2015—San Francisco, California

Filed July 22, 2015

Before: Diarmuid F. O’Scannlain and Sandra S. Ikuta,

Circuit Judges and Larry A. Burns,* District Judge.

Opinion by Judge O’Scannlain

* The Honorable Larry A. Burns, District Judge for the U.S. District

Court for the Southern District of California, sitting by designation.

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2 DOUBLE BOGEY V. ENEA

SUMMARY**

Bankruptcy

 The panel affirmed the district court’s affirmance of the

bankruptcy court’s judgment in a creditor’s adversary

proceeding claiming that a debt was not dischargeable in

bankruptcy under 11 U.S.C. § 523(a)(4) because it was a debt

for fraud or defalcation by a fiduciary.

The panel held that a finding that the debtors, who owned

and operated a fiduciary corporation, were the corporation’s

alter egos under California law was insufficient to show that

they therefore also were fiduciaries of the creditor under

§ 523(a)(4).

COUNSEL

Miriam Hiser, Law Offices of Miriam Hiser, San Francisco,

CA, argued the cause for the Appellant. With her on the

briefs was William H. Armstrong, Armstrong & Associates,

LLP, Oakland, California.

Lisa Lenherr, Tiemstra Law Group, PC, Oakland, CA, argued

the cause for Appellee Paul Enea.

** This summary constitutes no part of the opinion of the court. It has

been prepared by court staff for the convenience of the reader.

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DOUBLE BOGEY V. ENEA 3

OPINION

O’SCANNLAIN, Circuit Judge:

We must decide whether California’s alter ego doctrine

can create a “fiduciary” relationship under the Bankruptcy

Code.

I

This case arises from a dispute between two non-natural

persons, Double Bogey, L.P. and Appian Construction, Inc.,

regarding Appian’s alleged mismanagement of Double

Bogey’s investments in several real estate projects. However,

we are not presented with the question of Appian’s liability. 

Rather, we consider the liability of the two natural persons

who owned and operated it.

Appian was created by brothers Paul and Sylvester Enea,

who served as its only shareholders and officers.1 The

company managed several real estate development projects,

including the two projects relevant to this case: 1221

Monticello, L.L.P., of which Appian was a General Partner,

and Monterrosa, L.L.C., of which Appian was the Managing

Member. Double Bogey invested approximately $4 million

in Monticello as its Limited Partner, and approximately $1

million in Monterrosa as a non-managing member.

Double Bogey never recovered any of its investment in

Monterrosa. It also did not receive profits to which it argues

it was entitled from both Monticello and Monterrosa. After

1 The parties dispute whether Sylvester Enea was actually a shareholder

in Appian. We need not and do not resolve that dispute.

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4 DOUBLE BOGEY V. ENEA

Appian failed to provide an accounting of Double Bogey’s

investments, Double Bogey filed suit against Appian and the

Eneas in state court in September of 2008. Roughly a year

later, the Eneas separately filed for bankruptcy under Chapter

7 of the Bankruptcy Code (the “Code”). Appian also filed

under Chapter 7 in November of 2009.

Double Bogey brought an adversary proceeding in the

bankruptcy court, claiming, among other things, that:

(1) Appian was Double Bogey’s fiduciary with respect to the

real estate investments, (2) Appian was liable for Double

Bogey’s lost principal and profits in Monterrosa and its lost

profits in Monticello, (3) such liabilities were created by

Appian’s “defalcation,”2(4) liabilities created bya fiduciary’s

defalcation are not dischargeable in bankruptcyunder Section

523(a)(4) of the Code,3and—of most importance here—

2 The specific definition of “defalcation” is not easily ascertained. As

the Supreme Court has explained, “Congress first included the term

‘defalcation’ as an exception to discharge in a federal bankruptcy statute

in 1867,” and “legal authorities have disagreed about its meaning almost

ever since.” Bullock v. BankChampaign, N.A., 133 S. Ct. 1754, 1758

(2013).

Current legal dictionaries variously define it as “embezzlement,” “the

failure to meet an obligation; a nonfraudulent default,” “to misuse funds,”

“a fraudulent deficiency in money matters,” and “misappropriation of

money in one’s keeping.” Id. (collecting sources). For purposes of this

appeal we assume, without deciding, that Appian’s failure to provide an

accounting of Double Bogey’s investment constitutes “defalcation” by a

fiduciary under Section 523(a)(4).

3 Section 523(a) of the Code states, in relevant part, that, “[a] discharge

under section 727, 1141, 1228(a), 1228(b), or 1328(b) ofthis 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).

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DOUBLE BOGEY V. ENEA 5

(5) the Eneas were also liable for such non-dischargeable debt

either by way of their own defalcation or as alter egos of

Appian. After Double Bogey presented its case-in-chief, the

Eneas moved for Judgment on Partial Findings under

Bankruptcy Rule 7052.

The bankruptcy court entered judgment in favor of the

Eneas. The court noted that the Eneas conceded that Appian

was a fiduciary of Double Bogey for purposes of Section

523(a)(4) of the Code, and that—by presenting evidence that

the Eneas had failed to respect corporate formalities and used

corporate funds for personal expenses—Double Bogey had

made a “prima facie case” that the Eneas were Appian’s alter

egos. However, the court decided that merely finding the

Eneas were alter egos of Appian under California law was

insufficient to hold that they were “fiduciaries” of Double

Bogey, at least inasmuch as that term is narrowly defined in

Section 523(a)(4). Thus, Double Bogey’s claim that the

Eneas were liable for defalcation by a “fiduciary” failed.

The district court affirmed the bankruptcy court and

entered an order to that effect. See In re Enea, No. ADV

11-3017 DM, 2013 WL 1209479, at *3, *4 (N.D. Cal. Mar.

25, 2013). Double Bogey timely appealed.

II

On appeal, Double Bogey argues that because the Eneas

are the alter egos of Appian under California law—and

because Appian was a fiduciary of Double Bogey—the Eneas

are also “fiduciaries” of Double Bogey under

11 U.S.C. § 523(a)(4). We are thus confronted by a single

question of law: whether a debtor can be considered a

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6 DOUBLE BOGEY V. ENEA

“fiduciary” under Section 523(a)(4) solely by the application

of California’s alter ego doctrine.

“Because we are in as good a position as the district court

to review the findings of the bankruptcy court, we

independentlyreview the bankruptcycourt’s decision.” Pizza

of Hawaii, Inc. v. Sharkey’s, Inc., 761 F.2d 1374, 1377 (9th

Cir. 1985). Whether a relationship is a “fiduciary” one within

the scope of 11 U.S.C. § 523(a)(4) is a question of federal law

that we review de novo. Ragsdale v. Haller, 780 F.2d 794,

795 (9th Cir. 1986).

A

“[W]e have adopted a narrow definition of ‘fiduciary’ for

purposes of § 523(a)(4).” In re Cantrell, 329 F.3d 1119,

1125 (9th Cir. 2003). Under such definition, “[t]he broad,

general definition of fiduciary—a relationship involving

confidence, trust and good faith—is inapplicable.” Ragsdale,

780 F.2d at 796. As the pre-eminent bankruptcy treatise

explains, “[f]or purposes of section 523(a)(4), the definition

of ‘fiduciary’ is narrowly construed, meaning that the

applicable nonbankruptcy law that creates a fiduciary

relationship must clearly outline the fiduciary duties and

identify the trust property.” 4 Collier on Bankruptcy,

¶ 523.10 (Alan N. Resnick & Henry J. Sommer eds., 16th

ed.).

While we may consult state law—like the alter ego

doctrine—when interpreting whether an individual is a

“fiduciary” under Section 523(a)(4), we ultimately are

interpreting a federal statute, and the issue presented is one of

federal law. See Ragsdale, 780 F.2d at 796. Thus, “the mere

fact that state law places two parties in a relationship that may

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DOUBLE BOGEY V. ENEA 7

have some of the characteristics of a fiduciary relationship

does not necessarily mean that the relationship is a fiduciary

relationship under 11 U.S.C. § 523(a)(4).” 4 Collier on

Bankruptcy, ¶ 523.10 (Alan N. Resnick & Henry J. Sommer

eds., 16th ed.). Indeed, “[i]f applicable nonbankruptcy law

does not clearly and expressly impose trust-like obligations

on a party, [courts] will not assume that such duties exist and

will not find that there was a fiduciary relationship.” Id.

Further, “the fiduciary relationship must be one arising

from an express or technical trust that was imposed before

and without reference to the wrongdoing that caused the

debt.” In re Cantrell, 329 F.3d at 1125 (emphasis added)

(quoting Lewis v. Scott (In re Lewis), 97 F.3d 1182, 1185 (9th

Cir. 1996)). Thus, Section 523(a)(4) applies “only to a debt

created by a person who was already a fiduciary when the

debt was created.” Davis v. Aetna Acceptance Co., 293 U.S.

328, 333 (1934) (internal quotation marks omitted).

B

Common-law doctrines—like California’s alter ego

doctrine—rarely impose the trust-like obligations sufficient

to create a fiduciary relationship under Section 523(a)(4). 

Indeed the kinds of trusts typically created by operation of

law—constructive, resulting, or implied trusts—neversatisfy

Section 523(a)(4)’s rigorous requirements. See Ragsdale,

780 F.2d at 796. In the few instances where we have

recognized a fiduciary relationship in part based on commonlaw doctrines, such doctrines merely heightened—in clear

and express language—duties already imposed by statute.

Specifically, in Ragsdale, In re Short, and In re Lewis, we

concluded that California, Washington, and Arizona state

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8 DOUBLE BOGEY V. ENEA

courts respectively, had, through interpretation of state

partnership law, “raised the duties of partners beyond those

required by the literal wording” of the state partnership

statutes—and raised partners’ duties to such a degree that

they were trustees and “fiduciaries” over partnership assets

under Section 523(a)(4). Ragsdale, 780 F.2d at 796; see also

In re Lewis, 97 F.3d at 1186; In re Short, 818 F.2d 693, 695

(9th Cir. 1987). This was not a difficult conclusion to reach:

indeed in Ragsdale we noted that California courts stated,

quite simply, that “[p]artners are trustees for each other.” 

Ragsdale, 780 F.2d at 796 (quoting Leff v. Gunter, 658 P.2d

740, 744 (Cal. 1983) (internal quotation marks omitted)); see

also In re Short, 818 F.2d at 695 (“[T]he managing partner is

acting as a trustee for his firm.” (emphasis omitted) (quoting

In re Wilson’s Estate, 315 P.2d 287, 292 (Wash. 1957))

(internal quotation marks omitted)); In re Lewis, 97 F.3d at

1186 (“The relation of partnership is fiduciary in character

. . . .” (quoting DeSantis v. Dixon, 236 P.2d 38, 41 (Ariz.

1951)) (internal quotation marks omitted)).

We thus easily concluded that California, Washington,

and Arizona partnership law clearly and expressly imposed

trust-like obligations on partners—explicitly outlining

partner’s fiduciaries duties and identifying the assets of the

partnership as the trust res over which partners are

fiduciaries. See Ragsdale, 780 F.2d at 796 (describing

California law’s requirement that partners act as trustees and

“in the highest good faith” over “the assets of the

partnership”); 4 Collier on Bankruptcy, ¶ 523.10 (Alan N.

Resnick & Henry J. Sommer eds., 16th ed.) (“For purposes of

section 523(a)(4), the . . . applicable nonbankruptcy law . . .

must clearly outline the fiduciary duties and identify the trust

property.”). Further, because state law established that

partners were trustees over partnership assets “for all

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DOUBLE BOGEY V. ENEA 9

purposes” throughout the duration of the partnership, we

concluded such law made partners trustees prior to any

defalcation—as required bySection 523(a)(4). See Ragsdale,

780 F.2d at 796–97.

C

Here, by contrast, California’s alter ego doctrine does not

explicitly create a trust relationship, either by raising existing

legal duties or otherwise. Nor does it come into operation

prior to wrongdoing—rather it merely operates to hold an

individual liable for his corporation’s already-existing debt.

Instead of creating, enforcing, or expounding on

substantive duties, California’s alter ego doctrine merely acts

as a procedural mechanism by which an individual can be

held jointly liable for the wrongdoing of his or her corporate

alter ego. See Mesler v. Bragg Mgmt. Co., 702 P.2d 601, 607

(Cal. 1985); see also Ahcom, Ltd. v. Smeding, 623 F.3d 1248,

1251 (9th Cir. 2010) (“‘A claim against a defendant, based on

the alter ego theory, is not itself a claim for substantive relief,

e.g., breach of contract or to set aside a fraudulent

conveyance, but rather, procedural. . . .’” (quoting

Hennessey’s Tavern, Inc. v. Am. Air Filter Co., 251 Cal. Rptr.

859, 863 (Ct. App. 1988))).

D

We cannot conclude that California’s alter ego doctrine—

which, inasmuch as it can be defined,4 is a means for adding

4 California’s alter ego doctrine is broad and ambiguous—it is less a

single principle of law and more a broad, flexible device applied in

various ways to ensure “that justice be done.” Mesler, 702 P.2d at 607. 

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10 DOUBLE BOGEY V. ENEA

a corporation’s owners as judgment debtors for the

corporation’s liabilities—clearly and explicitly creates a trust

relationship in “that strict and narrow sense” required by the

Code. See In re Lewis, 97 F.3d at 1185 (quoting Davis,

293 U.S. at 333). Even if this broad procedural device could

have been used in a California court to hold the Eneas liable

for Appian’s alleged wrongdoing, it could not and did not

impose fiduciary duties “before and without reference to”

such wrongdoing. See In re Cantrell, 329 F.3d at 1125

(citing In re Lewis, 97 F.3d at 1185).

Double Bogey argues that, although the alter ego doctrine

is procedural in nature, in this case it operated to impose

specific substantive fiduciary duties over a specific trust res. 

It asserts that the Eneas owed the same duties as Appian over

the assets of Monterrosa and Monticello, because under the

alter ego doctrine the Eneas and Appian were, for a certain

period, legally the same entity.

But we cannot use California’s alter ego doctrine to hold

the Eneas and Appian were one and the same. See Mesler,

702 P.2d at 607 (“It is not that a corporation will be held

liable for the acts of another corporation because there is

really only one corporation.”). Although California’s alter

“What the [doctrine] comes down to, once shorn of verbiage about

control, instrumentality, agency, and corporate entity, is that liability is

imposed to reach an equitable result.” Id. (internal quotation marks

omitted). Indeed the “conditions under which the corporate entity may be

disregarded, or the corporation be regarded as the alter ego of the

stockholders, necessarily vary according to the circumstances in each case

inasmuch as the doctrine is essentially an equitable one and . . . [o]nly

general rules may be laid down for guidance.” Talbot v. Fresno-Pac.

Corp., 5 Cal. Rptr. 361, 366 (Ct. App. 1960) (internal quotation marks

omitted).

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DOUBLE BOGEY V. ENEA 11

ego doctrine may allow for a “a hole [to] be drilled in the wall

of limited liability erected by the corporate form” in order to

collect a particular debt, “for all purposes other than that for

which the hole was drilled, the wall still stands.” Id. When

an individual is held liable for an act of his corporate alter

ego under California law, it is not because the individual

inherited his corporation’s duties and breached them himself. 

See id. at 608. Indeed, the liable individual “has done nothing

affirmative to prejudice the [injured] party” but is held liable

for his corporation’s wrongdoing in order to provide an

additional source of relief to the aggrieved party. Id. (internal

quotation marks omitted).

A doctrine which merely supplies an additional judgment

defendant after liability exists does not clearly and expressly

impose trust-like obligations priorto the creation of that same

liability. See Davis, 293 U.S. at 333 (noting that for a debtor

to be a fiduciary under the Code, he “must have been a trustee

before the wrong and without reference thereto”). Therefore,

we cannot conclude, as a matter of federal law, that

California’s alter ego doctrine establishes that a corporate

debtor’s alter ego “is a trustee in that strict and narrow sense”

required by the Code. See In re Lewis, 97 F.3d at 1185

(quoting Davis, 293 U.S. at 333).

III

Regardless of the ends to which the alter ego “procedural

device” may be put in California state court, it does not

clearly and expressly impose trust obligations prior to

defalcation as required by Section 523(a)(4). The narrow

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12 DOUBLE BOGEY V. ENEA

issue presented is whether California’s alter ego doctrine

alone can create a “fiduciary” relationship under the Code. 

We must conclude that it cannot.

AFFIRMED.

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