REVISED

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

_____________________

No. 96-20242

_____________________

In The Matter Of: BRUCE BARTON SCHWAGER,

Debtor 

--------------------------- 

BRUCE BARTON SCHWAGER, 

Appellant,

v.

MEYER FALLAS; FRED FALLAS; WILLIAM CRAMER; 

MALCOLM MARCOE,

Appellees.

_________________________________________________________________

Appeal from the United States District Court

for the Southern District of Texas

_________________________________________________________________

August 22, 1997

Before KING, GARWOOD, and PARKER, Circuit Judges.

KING, Circuit Judge:

 Bruce Barton Schwager appeals the district court’s

affirming of the bankruptcy court’s ruling that his debt from a

state court judgment against him is nondischargeable under 11

U.S.C. § 523(a)(4). He argues, inter alia, that the bankruptcy

court improperly applied the doctrine of collateral estoppel to

the jury’s findings in the underlying state court judgment to
2

determine that his debt was nondischargeable. We agree that the

use of collateral estoppel was improper in this case, and thus,

we reverse and remand.

I. BACKGROUND

The full details of this case are set forth in the state

appellate court opinion, Schwager v. Texas Commerce Bank, N.A.,

827 S.W.2d 504 (Tex. App.—Houston [1st Dist.] 1992). We will

provide only a brief description of the facts that are pertinent

to this decision. 

In January 1984, Schwager, Fred Fallas, Meyer Fallas,

Malcolm Marcoe, William Cramer, and Harvey Resnick formed a Texas

limited partnership. Schwager served as managing partner, and

the others were limited partners. The partnership purchased land

in downtown Houston for the purpose of operating a restaurant. 

The partnership financed its purchase of the Houston property

with a loan from Interfirst Bank. The restaurant operated at a

loss, necessitating capital contributions from the limited

partners.

In September 1984, Texas Commerce Bank (TCB) loaned the

partnership $825,000. The partnership applied $700,000 of the

TCB loan to retire the Interfirst Bank loan and retained $125,000

as working capital. By March 1985, the working capital was

exhausted, and the limited partners were forced to make payments

on the TCB note. Eventually the limited partners stopped making

these payments.
3

In 1986, litigation ensued in Texas state court among

Schwager, the partnership, and the limited partners. Ultimately,

the trial court appointed a receiver. In January 1987, after

payments on the note again stopped, TCB accelerated the note. 

TCB then sued Schwager and the limited partners in Texas state

court. Schwager filed various counterclaims. The jury awarded

compensatory damages against Schwager, finding, inter alia, that

Schwager breached both the partnership agreement and his

fiduciary duty to the limited partners. Finding that Schwager’s

breach of fiduciary duty was “committed intentionally,

maliciously or with heedless and reckless disregard of the rights

of the limited partners,” the jury also awarded exemplary damages

in favor of the limited partners. Finally, the jury found that

Schwager fraudulently induced the limited partners to enter into

the partnership agreement. The trial court entered the judgment

on December 8, 1989 (“the 1989 judgment”).

Schwager appealed to the Court of Appeals for the First

District of Texas, which, after allowing two re-briefings, struck

forty-two of Schwager’s forty-four points of error for failure to

comply with the state appellate procedure rules. Finding the

remaining two claims to be without merit, the court of appeals

affirmed the Texas trial court. The Texas Supreme Court denied

discretionary review, and the United States Supreme Court denied

certiorari. Schwager v. Texas Commerce Bank, N.A., 827 S.W.2d

504 (Tex. App.—Houston [1st Dist.] 1992, writ denied), cert.

denied, 113 S. Ct. 1844 (1993).
 

1 Harvey Resnick was not a party to the adversary

proceeding.

 

2 Bankruptcy Code § 523 provides exceptions to the general

rule that all debts are dischargeable in bankruptcy. The three

nondischargeability provisions at issue in this case are in

§ 523(a):

(a) A discharge under section 727 . . . of this title

does not discharge an individual debtor from any debt

-- 

(2) for money, property, services, or an

extension, renewal, or refinancing of credit, to the

extent obtained by --

(A) false pretenses, a false representation,

or actual fraud, other than a statement respecting the

debtor’s or an insider’s financial condition . . . 

(4) for fraud or defalcation while acting in a

fiduciary capacity, embezzlement, or larceny . . . 

(6) for willful and malicious injury by the debtor

to another entity or to the property of another entity.

11 U.S.C. § 523(a).

 

3 Schwager argues that summary judgment should not be

permitted in the bankruptcy context because jury trials are not

allowed. This argument is wholly without merit. Schwager cites

no relevant authority for this novel proposition, and this court

has previously affirmed summary judgments in nondischargeability

proceedings many times. See, e.g., Gober v. Terra + Corp. (In re

Gober), 100 F.3d 1195, 1201 (5th Cir. 1996); Garner v. Lehrer (In

4

Schwager filed a petition for bankruptcy under chapter 7 in

the U.S. Bankruptcy Court for the Southern District of Texas. 

Four of the limited partners1 brought an adversary proceeding to

establish that the damages awarded in the 1989 judgment were

nondischargeable debts under 11 U.S.C. § 523(a)(2)(A),

§ 523(a)(4), or § 523(a)(6).2 On February 15, 1995, the

bankruptcy court granted summary judgment in favor of the limited

partners.3 The bankruptcy court concluded that Schwager was
re Garner), 56 F.3d 677, 679 (5th Cir. 1995).

5

collaterally estopped from relitigating any of the issues

determined in the 1989 judgment and, based on those facts,

concluded that the entire judgment (both compensatory and

exemplary damages) was nondischargeable under 11 U.S.C.

§ 523(a)(4). Fallas v. Schwager (In re Schwager), 178 B.R. 106

(Bankr. S.D. Tex. 1995).

Schwager appealed to the district court arguing, inter alia,

that use of collateral estoppel was improper and that exemplary

damages are dischargeable. The district court affirmed the

bankruptcy court. On appeal, Schwager argues that the use of

collateral estoppel is inappropriate, asserts that the court

erred in determining that he was a fiduciary to the limited

partners, and raises several other procedural arguments. We will

discuss each in turn.

II. DISCUSSION

A. Collateral Estoppel

The Supreme Court has explicitly stated that collateral

estoppel, or issue preclusion, principles apply in bankruptcy

dischargeability proceedings. Grogan v. Garner, 498 U.S. 279,

284 n.11 (1991). In such proceedings, “[p]arties may invoke

collateral estoppel in certain circumstances to bar relitigation

of issues relevant to dischargeability, although the bankruptcy

court retains jurisdiction to ultimately determine the

dischargeability of the debt.” Gober v. Terra + Corp. (In re

Gober), 100 F.3d 1195, 1201 (5th Cir. 1996). The preclusive
6

effect given to state court judgments under collateral estoppel

is a function of the full faith and credit statute. Garner v.

Lehrer (In re Garner), 56 F.3d 677, 679 (5th Cir. 1995)(citing 28

U.S.C. § 1738 (“[J]udicial proceedings of any court of any

[State] . . . shall have the same full faith and credit in every

court within the United States . . . as they have by law or usage

in the courts of such State . . . from which they are taken.”)). 

A bankruptcy court’s decision to give preclusive effect to a

state court judgment is a question of law that this court reviews

de novo. Gober, 100 F.3d at 1201; Garner, 56 F.3d at 679. 

Because Congress granted bankruptcy courts exclusive jurisdiction

to determine whether a debt is dischargeable based on the

bankruptcy courts’ expertise, Brown v. Felsen, 442 U.S. 127, 135-

36 (1979), “in only limited circumstances may bankruptcy courts

defer to the doctrine of collateral estoppel and thereby ignore

Congress’ mandate to provide plenary review of dischargeability

issues.” Dennis v. Dennis (In re Dennis), 25 F.3d 274, 278 (5th

Cir. 1994). 

Because the 1989 judgment was entered by a Texas state

court, Texas rules of preclusion apply. See Garner, 56 F.3d at

679 & n.2. “Under Texas law, collateral estoppel ‘bars

relitigation of any ultimate issue of fact actually litigated and

essential to the judgment in a prior suit, regardless of whether

the second suit is based upon the same cause of action.’” Id. at

679 (quoting Bonniwell v. Beech Aircraft Corp., 663 S.W.2d 816,
7

818 (Tex. 1984)); accord Gober, 100 F.3d at 1201. The elements

of collateral estoppel under Texas law are:

(1) the facts sought to be litigated in the second

action were fully and fairly litigated in the prior

action; (2) those facts were essential to the judgment

in the first action; and (3) the parties were cast as

adversaries in the first action.

Bonniwell v. Beech Aircraft Corp., 663 S.W.2d 816, 818 (Tex.

1984).

The bankruptcy court found, and the district court agreed,

that collateral estoppel applied, based on the jury’s findings in

the 1989 judgment. The jury found several facts that pertain to

this case. In response to Question No. 16, the jury found that

“Schwager breach[ed] his fiduciary duty to [the limited partners]

in the performance of his responsibilities, . . . which

proximately caused damages [to the limited partners].” In

response to Question No. 17, the jury determined that “Schwager

materially breach[ed] the limited partnership agreement, . . .

proximately causing damages to the [limited partners].” The

jurors were instructed to answer Question No. 18 only if they

answered “yes” to either Question No. 16 or Question No. 17. The

jury then awarded damages pursuant to Question No. 18, which is

as follows:

What sum of money . . . would fairly and

reasonably compensate [the limited partners] for

damages sustained, if any, as a result of breach of

fiduciary duty or the material breach of the

partnership agreement (which you previously found)?

(emphasis added). The jury also answered “yes” to Question No.

19, which is as follows:
 

4 This question also provided the following instructions:

“Maliciously” means (a) conduct that is

specifically intended to cause substantial injury or

damage; or (b) an act that is carried out with flagrant

disregard for the rights of others and with actual

awareness on the part of Bruce Schwager that the act

will, in reasonable probability, result in damages.

“Heedless and reckless disregard” means more than

momentary thoughtlessness, inadvertence or error of

judgment. It means such an entire want of care as to

indicate that the act or omission in question was a

result of concious [sic] indifference to the rights or

welfare of the persons affected by it.

 

5 The bankruptcy court determined that jury’s finding of

fraudulent inducement satisfied the elements of

nondischargeability under § 523(a)(2)(A), but did not find the

debt nondischargeable under that section because the jury did not

award any damages for any fraudulent conduct. The bankruptcy

court made no determination regarding nondischargeability under

§ 523(a)(6). Schwager complains that the bankruptcy court

incorrectly determined that he had engaged in willful and

malicious conduct under § 523(a)(6). However, this argument is

without merit because the bankruptcy court did not rule against

Schwager on this basis.

8

Was Bruce Schwager’s breach of fiduciary duty, if

any, committed intentionally, maliciously or with

heedless and reckless disregard of the rights of any of

the limited partners?4

After barring relitigation of these issues under the

doctrine of collateral estoppel, the bankruptcy court concluded

that Schwager’s debt based on the 1989 judgment was

nondischargeable under § 523(a)(4).5 Section 523(a)(4) provides

that a chapter 7 bankruptcy does not discharge any debt “for

. . . defalcation while acting in a fiduciary capacity,” with

defalcation being defined as “a willful neglect of duty, even if

not accompanied by fraud or embezzlement.” LSP Inv. Partnership
 

6 The substance of the defalcation requirement is discussed

in Part II.B infra.

 

7 None of the parties argue that the jury’s other finding

on breach of the partnership agreement alone would be sufficient

to make the debt nondischargeable under § 523(a)(4).

 

8 Schwager also argues that if any judgment is to be given

preclusive effect, it should not be the 1989 judgment but the

prior one appointing a receiver. This argument is without merit. 

Under Texas law, an order appointing a receiver is interlocutory. 

See TEX. CIV. PRAC. & REM.P. CODE ANN. § 51.014(1) (Vernon 1997);

Schwager, 827 S.W.2d at 506-07. An interlocutory order is not

entitled to preclusive effect under Texas law. Gober, 100 F.3d

at 1201.

Schwager further contends that the jury’s findings cannot be

the basis of collateral estoppel because they are based on a

preponderance of the evidence standard and the proper standard is

clear and convincing evidence. Because we conclude that

collateral estoppel cannot be applied in this case, the standard

used for the jury findings is irrelevant. However, to the extent

Schwager argues that the standard in bankruptcy dischargeability

proceedings is clear and convincing evidence, this argument is

without merit. See Grogan, 498 U.S. at 659 (holding that the

preponderance of the evidence, not the clear and convincing

evidence, standard applies in bankruptcy dischargeability

proceedings).

Schwager makes several arguments regarding the propriety of

using the 1989 judgment as a basis of collateral estoppel. He

argues that he raised issues regarding the jurisdictional nullity

of the 1989 judgment based on the finality of the previous

judgment appointing a receiver and complains that the bankruptcy

court did not hold an evidentiary hearing. Schwager also

basically argues that because the state appellate court dismissed

almost all of his points of error, the affirmance of the 1989

9

v. Bennett (In re Bennett), 989 F.2d 779, 790 (5th Cir. 1993).6

Thus, the jury must have found a breach of fiduciary duty and

awarded damages on that basis in order for collateral estoppel to

establish defalcation in a fiduciary capacity under § 523(a)(4).7

Schwager asserts that the bankruptcy court’s conclusion is

erroneous, inter alia, because collateral estoppel does not apply

in this circumstance.8 He argues that the jury findings
judgment should be given no weight for collateral estoppel

purposes. These issues are irrelevant given our holding that the

1989 judgment cannot be the basis for collateral estoppel in this

case.

 

9 Section 27 states:

When an issue of fact or law is actually litigated and

determined by a valid and final judgment, and the

determination is essential to the judgment, the

determination is conclusive in a subsequent action

between the parties, whether on the same or a different

claim.

10

incorporated into the 1989 judgment cannot support the

application of the collateral estoppel doctrine because the jury

found both breach of the partnership agreement and breach of

fiduciary duty. Schwager maintains that the conjunctive nature

of the jury’s damages finding means “it was impossible to

determine what was the basis for the issuance of the debt against

Schwager.” We agree with Schwager. 

Texas courts have adopted the Restatement (Second) of

Judgments § 27, which is the general rule on issue preclusion.9

Gober, 100 F.3d at 1203 n.6 (noting that “Texas courts follow

Restatement (Second) of Judgments § 27 in determining when to

allow issue preclusion” and citing cases). In Eagle Properties,

Inc. v. Scharbauer, 807 S.W.2d 714, 722 (Tex. 1991), the Texas

Supreme Court applied comment i to the Restatement, which states:

i. Alternative determinations by court of first

instance. If a judgment of a court of first instance

is based on determinations of two issues, either of

which standing independently would be sufficient to

support the result, the judgment is not conclusive with

respect to either issue standing alone.

The Texas Supreme Court explained the justification for the rule:
11

The rationale for this rule is that a determination in

the alternative may not have been as rigorously

considered as it would have been if necessary to the

result, and the losing party may be dissuaded from

appealing one determination because of the likelihood

that the other will be upheld.

807 S.W.2d at 722. 

The limited partners argue, and the bankruptcy and district

courts determined, that because the full amount of the jury’s

award can be upheld on either basis, collateral estoppel applies

to both. This argument is without merit because this case falls

directly under the rule of comment i. The limited partners seek

to use one issue in the judgment, the breach of fiduciary duty,

standing alone. However, the jury was asked in a single question

to award damages for either breach of fiduciary duty or breach of

the partnership agreement. Therefore, neither ground was

essential to the judgment awarding these damages to the limited

partners because the award can be upheld on either basis.

Comment o provides an exception to the rule in comment i:

If the judgment of the court of first instance was

based on a determination of two issues, either of which

standing independently would be sufficient to support

the result, and the appellate court upholds both of

these determinations as sufficient and accordingly

affirms the judgment, the judgment is conclusive as to

both determinations. In contrast to the case discussed

in Comment i, the losing party has here obtained an

appellate decision on the issue, and thus the balance

weighs in favor of preclusion.

Although Texas has not specifically addressed comment o, federal

circuit cases interpreting comment o clearly indicate that the

appellate court must have considered the specific issue before it

is barred by collateral estoppel. See Arab African Int’l Bank v.
12

Epstein, 958 F.2d 532, 537 (3d Cir. 1992) (concluding, in a legal

malpractice action, that collateral estoppel based on a previous

state court judgment did not apply because the state appellate

court did not specifically address the reliance element of the

legal malpractice claims); Hicks v. Quaker Oats Co., 662 F.2d

1158, 1168 (5th Cir. Unit A. Dec. 7, 1981) (noting the “general

rule” adopted in comment o that “if a judgment is appealed,

collateral estoppel only works as to those issues specifically

passed upon by the appellate court”). In the appeal of the 1989

judgment, the court gave Schwager three opportunities to brief

the appeal properly before eventually striking forty-two of his

forty-four points of error. See Schwager v. Texas Commerce Bank,

N.A., 827 S.W.2d at 506. Thus, the appellate court ultimately

considered only two issues: the trial court’s jurisdiction and

whether the trial court erroneously denied Schwager the right to

open and close the evidence. Id. at 507. The court did not pass

specifically on the issues of breach of fiduciary duty or breach

of the partnership agreement, and thus, the review provided by

the Texas appellate court does not take this case out of the

general rule of comment i and into the exception of comment o.

Therefore, the application of collateral estoppel in this

case was erroneous. We reverse and remand for a redetermination

of the dischargeability issues, with specific, independent

factual findings. The law governing some of these potential
 

10 We do not address the § 523(a)(2) and § 523(a)(6)

nondischargeability provisions because they were not briefed in

this appeal. However, because the limited partners raised these

grounds in their dischargeability pleading, the parties and the

court are free to consider them on remand.

13

factual findings in the § 523(a)(4) context will be discussed

below.10

B. Defalcation

The bankruptcy court, relying on collateral estoppel,

determined that the jury’s finding that Schwager’s breach of

fiduciary duty was “committed intentionally, maliciously or with

heedless and reckless disregard of the rights of the limited

partners” meets the “defalcation” element of § 523(a)(4). This,

in combination with the court’s conclusion that Schwager was a

fiduciary to the limited partners and the jury finding that

Schwager breached his fiduciary duty, led the bankruptcy court to

conclude that the compensatory damages are nondischargeable under

§ 523(a)(4). The bankruptcy court next considered the issue of

whether the punitive damages are also nondischargeable. While

the Fifth Circuit has not addressed the dischargeability of

punitive damages under § 523(a)(4), the bankruptcy court relied

on other Fifth Circuit precedent as well as precedent from other

circuits in concluding that the punitive damages are

nondischargeable because the underlying compensatory damages are

also nondischargeable. Because we have concluded that it was

error to apply collateral estoppel and rely on these jury

findings, whether the exact language of the jury’s findings meets

the elements of § 523(a)(4) defalcation no longer matters. The
 

11 The parties do not argue that if the compensatory

damages are dischargeable, then the punitive damages are

nondischargeable on some other theory. 

14

bankruptcy court, on remand, will make independent findings to

determine if the facts of Schwager’s debt meet § 523(a)(4). 

Schwager argues that even if the compensatory damages are

nondischargeable, the punitive damages may be dischargeable.11

While a discussion of the punitive damages issue is premature

because it is still unclear in this case whether the compensatory

element of Schwager’s debt qualifies under § 523(a)(4), a

discussion of the types of findings necessary to make this

determination of compensatory damages is in order.

A line of Fifth Circuit cases, beginning with Moreno v.

Ashworth (In re Moreno), 892 F.2d 417, 422 (5th Cir. 1990), have

defined defalcation as “a willful neglect of duty, even if not

accompanied by fraud or embezzlement.” Accord Sheerin v. Davis

(In re Davis), 3 F.3d 113, 115 (5th Cir. 1993); Bennett, 989 F.2d

at 790. Moreno involved the dischargeability of the debt of a

corporate president who was found to have improperly taken cash

advances from the company. Id. at 418. Davis concerned a

majority shareholder in a corporation who had, inter alia,

improperly received informal dividends to the exclusion of

Sheerin, the minority shareholder. 3 F.3d at 114. Bennett

involved the general partner of a limited partnership who

wrongfully charged the limited partners for expenses that should

have been charged to the partnership. 989 F.2d at 782. The

court in Bennett quoted the definition of defalcation and then
15

stated: “Therefore, any debts incurred by Bennett as a result of

the willful neglect of his [fiduciary] duties as the managing

partner of the [limited partnership] are not dischargeable [under

§ 523(a)(4)].” Id. at 790. These cases have all involved

financial misconduct by fiduciaries and have all consistently

applied the Fifth Circuit rule that defalcation is a willful

neglect of fiduciary duty.

A major issue among the circuits and commentators is what

type of intent or mental state is necessary to qualify as

defalcation. In the first major discussion of the issue, Judge

Learned Hand noted the lack of a definition of defalcation in the

Bankruptcy Code or its legislative history and then stated: 

“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.” Central Hanover Bank &

Trust Co. v. Herbst, 93 F.2d 510, 511 (2d Cir. 1937). As an

initial matter, it is clear that defalcation requires a lesser

standard than fraud, and thus defalcation does not require actual

intent, as does fraud. See id. at 512 (“[W]hen 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.’”); 4 COLLIER ON BANKRUPTCY § 523.10[1][b]

(Lawrence P. King ed., 15th rev. ed. 1997 (“Defalcation . . .

applies to conduct that does not necessarily reach the level of
 

12 The Fifth Circuit has not defined “willful neglect” in

the bankruptcy context, but it appears clear from usage in other

contexts that it is essentially a recklessness standard. See,

e.g., United States v. Boyle, 469 U.S. 241, 245 (1985) (defining

“willful neglect” in the statute regarding the penalty for late

filing of estate tax returns as “a conscious, intentional failure

or reckless indifference”); Smith v. Wade, 461 U.S. 30, 39 n.8

(1983) (defining “willful neglect” in the tort context as “that

degree of neglect arising where there is a reckless indifference

to the safety of human life, or an intentional failure to perform

a manifest duty to the public, in the performance of which the

public and the party injured has an interest” (internal quotation

omitted)).

The Fifth Circuit averted to a negligence standard in Carey

Lumber Co. v. Bell, 615 F.2d 370 (5th Cir. 1980). In Carey, the

court held that there is no requirement of intentional conduct

for nondischargeability under then § 17(a), now § 523(a)(4), of

the Bankruptcy Code. Id. at 375-76. The debtor had argued that

intent was required, relying on language in the Second Circuit

case of In re Bernard, 87 F.2d 705, 707 (2d Cir. 1937), that

conduct under § 17(a) “must be due to a known breach of the duty,

and not to mere negligence or mistake.” The Carey court

concluded that Bernard did not apply to the facts of the case

before it, but also noted that “there is doubt as to the

continued validity of the dicta in In re Bernard.” 615 F.2d at

376. We do not read Carey as deciding that negligence suffices

to meet the defalcation rule of § 523(a)(4). The discussion of

negligence in Carey is dicta in that its holding is clearly and

simply that intent is not required. Id. The court in Carey did

not resolve what level of culpability is required, but merely

held that intentional conduct is not always required.

16

fraud, embezzlement or misappropriation.”); 2 DAVID G. EPSTEIN ET

AL., BANKRUPTCY § 7-28 at 368 (1992) (“Note that defalcation and

fraud are not the same thing. Fraud requires some intent;

defalcation requires none.”). While defalcation may not require

actual intent, it does require some level of mental culpability. 

It is clear in the Fifth Circuit that a “willful neglect” of

fiduciary duty constitutes a defalcation -- essentially a

recklessness standard.12

C. Fiduciary Duty
 

13 The district court also affirmed on the basis of

collateral estoppel, reasoning that the state court jury

specifically found that Schwager had breached a fiduciary duty to

the limited partners. We have already concluded that the

bankruptcy and district court erred in applying collateral

estoppel based on these jury findings.

17

The bankruptcy court granted summary judgment on the basis

that Schwager’s debt arose from defalcation in a fiduciary

capacity under § 523(a)(4). Relying on LSP Inv. Partnership v.

Bennett (In re Bennett), 989 F.2d 779 (5th Cir. 1993), the

bankruptcy court held that, as a matter of law, Schwager was in a

fiduciary capacity with respect to the limited partners because

he was the general partner of a limited partnership. The

district court agreed with this determination.13 Schwager argues

that a fact issue exists as to whether he exercised sufficient

control over the affairs of the partnership to fall under the

rule of Bennett because the state court had appointed a receiver. 

We find Schwager’s argument to be without merit.

“The scope of the concept of fiduciary under 11 U.S.C.

§ 523(a)(4) is a question of federal law; however, state law is

important in determining whether or not a trust obligation

exists.” Id. at 784. The Fifth Circuit has held that the

concept of a fiduciary under § 523(a)(4) is narrowly defined,

applying only to “technical or express trusts.” Angelle v. Reed

(In re Angelle), 610 F.2d 1335 (5th Cir. 1980). 

Despite this narrow definition, Schwager’s duties to the

limited partners as general partner fall squarely within this

definition. In Bennett, the court concluded that “relationships
18

in which trust-type obligations are imposed pursuant to statute

or common law” qualify under this narrow standard. 989 F.2d at

785. After an examination of Texas partnership law, the Bennett

court concluded that “Texas law clearly and expressly imposes

trust obligations on managing partners of limited partnerships

and these obligations are sufficient to meet the narrow

requirements of section 523(a)(4).” Id. at 787.

Schwager argues that the state court’s appointment of a

receiver took control of the partnership away from him. He

suggests that because the general partner’s ability to control

the partnership was critical to Bennett’s rationale, see id. at

789, the rule in Bennett does not establish as a matter of law

that he had a fiduciary relationship with the limited partners. 

However, the receiver was only appointed to sell the property and

did not have control over the operations of the partnership. In

fact, the state court judgment appointing a receiver specifically

provided that Schwager was to continue to operate the restaurant. 

The order further directed the limited partners to continue with

their obligation to pay partnership costs and for Schwager to

account for the money in his management of the partnership

property. Thus, the mere fact that a receiver was appointed does

not indicate that Schwager did not control the partnership. We

conclude that the bankruptcy and district court did not err in

determining, as a matter of law, that Schwager was in a fiduciary

relationship with the limited partners under the rule in Bennett.

D. Other Issues
 

14 The limited partners pleaded that Schwager’s actions

litigated in the case leading to the 1989 judgment “constitute[d]

an exception under 11 U.S.C. Section 523(a)(4) to the

dischargeability of indebtedness owed by [Schwager] ... because

of [Schwager’s] fraud while acting in a fiduciary capacity.”

19

Schwager complains that the bankruptcy court erred when it

permitted the limited partners to file an amended complaint after

the expiration of the 60-day filing period set forth in

Bankruptcy Rule 4007(c) for filing a complaint to determine

dischargeability. The limited partners filed their

nondischargeability complaint in the bankruptcy court three days

before the filing deadline, and the bankruptcy court allowed them

to file an amended complaint approximately two weeks later. 

Bankruptcy Rule 7015 adopts Rule 15 of the Federal Rules of Civil

Procedure governing amendment of complaints, which provides that

“leave shall be freely given when justice so requires.” The

amended complaint did not allege new grounds for finding the 1989

judgment debt nondischargeable, but merely added specific facts

consistent with the nondischargeability grounds advanced in their

original complaint. The bankruptcy court did not abuse its

discretion in allowing this amendment. 

Schwager argues that the limited partners failed to raise

defalcation as a ground for nondischargeability because they did

not use the word “defalcation” in either their complaint or the

amended complaint.14 The district court held that the limited

partners raised the issue of defalcation by citing § 523(a)(4) as

a ground for nondischargeability. On claims of error based on

allegations of surprise and failure to plead, the standard of
20

review is abuse of discretion. Zielinski v. Hill (In re Hill),

972 F.2d 116, 122 (5th Cir. 1992); Beaubouef v. Beaubouef (In re

Beaubouef), 966 F.2d 174, 176-77 (5th Cir. 1992). There is no

reversible error if the complaining party had ample notice of the

issue. Hill, 972 F.2d at 122. Schwager had ample notice of a

defalcation claim because the limited partners pleaded

§ 523(a)(4) as a basis of nondischargeability. The bankruptcy

court did not abuse its discretion in reading the limited

partners’ pleading as raising defalcation. Furthermore, Schwager

never asserts that he had evidence he did not present or that he

would have proceeded differently in any way had the word

“defalcation” been in the pleading. Any error, therefore, was

harmless. Finally, even if Schwager had evidence he did not

present because of lack of notice of the defalcation issue, he

will have an opportunity to present it on remand to the

bankruptcy court.

Schwager makes much of the fact that bankruptcy

nondischargeability rules should be interpreted in favor of

debtors and that pro se litigants should be given liberal

treatment by the courts. See Haines v. Kerner, 404 U.S. 519,

520-21 (1972)(noting that pro se allegations are held to less

strict standards than those of lawyers); Boyce v. Greenway (In re

Greenway), 71 F.3d 1177, 1180 n.8 (5th Cir.) (“[W]e are bound to

construe the exceptions contained in § 523 of the Bankruptcy Code

narrowly and in favor of the debtor.”), cert. denied, 116 S. Ct.

2499 (1996). While both of these statements are true, Schwager
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has not explained how the bankruptcy or district court violated

either of these principles. He has neither identified any

ambiguous statute or rule that was interpreted in favor of the

limited partners nor claimed that any issue he arguably raised

was not adequately considered by the courts. We find no error in

the application of either of these two principles.

Schwager argues that res judicata, or claim preclusion, bars

the limited partners’ nondischargeability claim because they did

not raise the issue of defalcation while acting in a fiduciary

capacity before the state trial court. The doctrine of res

judicata does not apply in bankruptcy nondischargeability

proceedings. Fielder v. King (In re King), 103 F.3d 17, 19 (5th

Cir.) (citing Brown v. Felsen, 442 U.S. 127 (1979)), cert.

denied, 117 S. Ct. 2454 (1997).

III. CONCLUSION

For the foregoing reasons, we REVERSE the district court’s

judgment affirming the bankruptcy court’s judgment and REMAND to

the district court with instructions to remand to the bankruptcy

court for further proceedings consistent with this opinion. 

Costs shall be borne by the appellees.