1 District Judge of the Western District of Texas, sitting by

designation.

1 UNITED STATES COURT OF APPEALS

for the Fifth Circuit

____________________________

NO. 91-1059

____________________________

IN THE MATTER OF: ARCHIE BENNETT, JR.,

Debtor,

LSP INVESTMENT PARTNERSHIP, A TEXAS PARTNERSHIP,

CHARLES SAPP, HOWARD BOYD, R. BRUCE LaBOON, THOMAS REIDY,

H. MICHAEL TYSON, JOHN C. NABORS, GEORGE CARAMEROS,

WILLIS WITT, WALTER P. ZIVLEY, CROSHAW INVESTMENT

PARTNERSHIP (BY ITS AGENT, FRED E. CROSHAW), W. ROBERT BROWN,

OBIE & CO., (BY ITS AGENT, FRANK A. LIDDELL, JR.), CARL GALLOWAY,

DON C. QUAST, and JOE E. McLEMORE,

Appellants,

VERSUS

ARCHIE BENNETT, JR.,

Appellee.

______________________________________________________ Appeal from the United States District Court

for the Northern District of Texas

______________________________________________________ April 19, 1993

ON PETITION FOR REHEARING

(Opinion September 2, 5th Cir., 1992 F2d .)

Before POLITZ, Chief Judge and HIGGINBOTHAM, Circuit Judges, and

PRADO 1 , District Judge.

PRADO, District Judge:

On the petition for reheari ng filed by LSP Investment

Partnership, we hereby withdraw our prior opinion, published as LSP2 The underlying bankruptcy proceeding, filed on November 23,

1988, by Archie Bennett, Jr., bears Case No. 388-37142 RCM-7. The

adversary proceeding is No. 389-3110.

2 Inv. Partnership v. Bennett (Matter of Bennett), 970 F.2d 138 (5th

Cir. 1992), and substitute the following opinion in its place.

This appeal arises out of an adversary proceeding in a

bankruptcy case 2

, in which the bankru ptcy court entered an order

granting a discharge to the Appellee, Archie Bennett, Jr., over the

objection of the Appellants that certain of Mr. Bennett's debts

were not discha rgeable. In support of their argument, the

Appellants rely solely on 11 U.S.C. § 523(a)(4), which provides

that debts resulting from a defalcation by the debtor while acting

in a fiduciary capacity are not dischargeable in bankruptcy. This

Court must decide whether Bennett, as the managing partner of the

managing partner of the limited partnership, owed a suffici ent

fiduciary duty to the limited par tners to satisfy the strict

requirements of 11 U.S.C. § 523(a)(4). This is a case of first

impression in this Circuit.

Standard of Review

Although this case has already been reviewed on appeal by the

district court, this Court reviews the bankruptcy court's findings

as if this were an appeal from a trial in the district court.

Killebrew v. Brewer

, 888 F.2d 1516, 1 519 (5th Cir. 1989). Thus,

the bankruptcy court's findings of fact are reviewed under the

clearly erroneous standard, and its conclusions of law are reviewed

de novo

. Id

.3 The Appellee expressly states that he rel ies on the

bankruptcy court's findings of fact. Appellee's Brief, p. 3. With

one partial exception, the Appellants agree that the bankruptcy

court's findings of fact are correct. Appellants' Brief, p. 7.

The exception, discussed below, is the Appellants' argument that

the bankruptcy court erred in failing to find that the $1 million

distribution by M/G to Bennett was a defalcation under 11 U.S.C. §

523(a)(4). Id . This is a mixed question of law and fact.

3 Background

1. Bankruptcy Court's Findings of Fact

.

The facts in this case are essentially undisputed. 3 In

approximately March of 1980, Bennett and the Appellants formed a

Texas limited partnership known as Mariner/Greenspoint, Ltd.

("MG"). The Appellants in this case are and were at all relevant

times, limited partners of MG. The sole general partner of MG was

another limited partnership, known as Mariner Interest No. 20, Ltd.

("No. 20"). The sole general partner of No. 20 was the Appellee,

Archie Bennett, Jr.

Under the terms of the MG partnership agreement, the general

partner, No. 20, was charged with management of the partnership and

had full, exclusive and complete authority and discretion to

manage, contr ol and make all decisions affecting the purposes of

the partnership and to take any action required to effectuate the

purpose of the partnership. Bennett, as the sole general partner

of No. 20, was the only individual with the power or authority to

direct the affairs of No. 20 and MG, and was prohibited by the MG

partnership agreement from voluntarily withdrawing as the general

partner of No. 20.

The purpose of the MG partnership was to construct and operate4

a Marriott hotel near the Greenspoint Mall in Houston, Texas. The

partnership obtained $22 million, in capital contri butions and

loans, to cover the cost of constructing the hotel. The MG

partnership agreement required the ge neral partner to contribute

cash, as necessary, for the costs of constructing, equipping and

furnishing the hotel, to the extent such costs exceeded the $22

million previously raised. As an incentive, the agreement also

provided that the general partner was eligible to receive a cash

distribution of up to $4 million if the project was completed for

less than the projected $22 million. However, prior to taking any

distribution for savings in the construction of the hotel, the

general partner was required both to construct the hotel and to

provide all equipment necessary so that it could operate as a

"first-class hotel".

At some point early on in the business venture, Bennett

retained a corporatio n, known as Mariner Corporation, to perform

his duties as the general partner of No. 20 and, in turn, its

duties as general partner of MG. Mariner Corporation was 100%

owned by Bennett. The officers and employees of Mariner

Corporation acted on Bennett's behalf in performing their duties

and were aware that, if the project was completed under budget, the

savings would be paid directly to Bennett.

Mariner Corporation obtained bids for the construction of the

h otel from a number of general contractors. All of the bids

initially submitted were at least $1 million over the budgeted

amount of $22 million. After these bids were received, Mariner4 "Negative pressure" in a buildi ng occurs when more air is

exhausted from the building than is made up with conditioned air.

The result is that warm, humid air will be drawn into the building

to equalize the pressure.

5 The record indicates that, prior to completion of the hotel,

in November of 1980, Bennett was made aware that another Marriott

hotel, the Brookhollow Marriott, which had substantially the same

HVAC system design as t he Greenspoint Marriott, had begun to

experience similar mildew problems.

5 Corporation entered into negotiations with one of the contractors,

Eaves Construction. Subsequently, Eaves dropped its bid price by

$1 million and was awarded the contract. Eaves was not able to

obtain a bond on the project, however, due to its lack of financial

strength and lack of a sufficient track record on large projects.

Bennett told Eaves that it could have the job without a bond, if it

reduced its general contractor's fee by one-half. Eaves agreed and

reduced its fee by an additional $250,000.

The hotel was completed on time, and opened in January of

1981. At that time Bennett made a $1 million distribution to

himself, for completing the project for less than the budgeted $22

million.

Subsequently, several problems with the hotel came to light.

First, in approximately April of 1981, mildew began to occur in the

guest rooms of the hotel. This mildew was evidently caused by a

"negative pressure" problem, which in turn was caused by the design

of the heating, ventilation, and air conditioning (HVAC) system in

the hotel. 4 As a result of the mildew problem, virtually all of

the guest rooms in the hotel had to be revinyled and resheetrocked

twice, during 1981 and 1982. 56

The bankruptcy court found that the mildew problem at the

hotel was a c ontinuous construction problem that the general

partner had an obligation to fix and pay for under the terms of the

MG partnership agreement. The court found that the first round of

repairs was performed at the expense of the general contractor.

The second round, however, was charged, by the general partner, to

the partnership earnings. The limited partners' share of this cost

was $72,000.

The bankruptcy court also reviewed numerous equipment leases

that were entered into by the general partner for the purpose of

providing various types of equipment to the hotel. The court found

that, under the partnership agreement, the general partner had an

obligation to equip and furnish the hotel with the $22 million

budgeted amount. The court found, with respect to some but not all

of these leases, that the general partner had charged them to the

partnership, instead of paying for them out of the con struction

budget. The court also found that Bennett had failed to properly

disclose these leases to the limited partners, or to obtain their

approval for them. The court determined that the amount wrongfully

charged to the limited partners for these equipment leases was

$832,204.40.

2. Bankruptcy Court's Conclusions of Law

.

The bankruptcy court concluded that the misapplication of

partnership funds to pay for the mildew repairs and the equipment

leases described above were the result of de falcations by the

general partner of MG in the tota l amount of $904,204.40. The7

court also found that No. 20, as the sole general partner of MG,

was a fiduciary to the limited partners of MG, for purposes of

section 523(a) (4). The bankruptcy court noted that while Texas

courts have not extended the partnership relationship generally to

encompass the type of fiduciary duty envisioned by section

523(a)(4), an exception exists for the managing partn er of a

partnership, who owes to his co-partners, "one of the highest

fiduciary duties recognized in law. " (Citing H uffington v.

Upchurch

, 532 S.W.2d 576 (Tex. 1976); Crenshaw v. Swenson

, 611

S.W.2d 886 (Tex.Civ.App.--Austin 1980, writ ref'd n.r.e.)).

The bankruptcy court also found, however, that Bennett, as the

general partner of the general partner, did not owe a fiduciary

duty to the limited partners of MG. The bankruptcy court stated:

No. 20 was the fiduciary of MG and only it had an express,

technical, preexisting trust relationship with MG, even though

Bennett was the managing partner of No. 20.

The bankruptcy court found that Bennett's individual liability

to the limited partners of MG came into effect only by re ason of

the breach by No. 20, and pursuant to the Uniform Partnership Act

(UPA) which provides, "[a]ll part ners are liable jointly and

severally for all debts, and obligations of the partnership . . .

." Tex.Rev.Civ.Stat.Ann. art. 6132b, § 15 (Vernon 1979). The court

reasoned that while the UPA made Bennett liable for No. 20's

partnership "obligations", it did not create a fiduciary

relationship between Bennett and the limited partners of MG.

Accordingly, the bankruptcy court granted a discharge to Bennett of

all debts, including those which it found to have resulted from8

defalcations by No. 20, while acting in a fiduciary capacity.

3. District Court's Order

.

The district court, in a brief opinion, affirmed the order of

the bankruptcy court granting a discharge to Bennett, but for a

different reason. The district court stated:

Though Bennett was the managing partner of the limited

partnership, and Texas courts have imposed a higher degree of

fiduciary duty on managing partners, they have done so in the

context of constructive, rather than technical, trusts.

(Citing Huffington v. Upchurch , 532 S.W.2d 576 (Tex. 1976);

Crenshaw v. Swenson

, 611 S.W.2d 886 (Tex.Civ.App.--Austin

1980, writ ref'd n.r.e.)).

Thus, the district court concluded that the high level of

fiduciary duty imposed on managing partners of a partnership under

Texas law, only arose in the context of a constructive trust and,

since constructive trusts are insufficient as a matter of law to

meet the express trust requirements of section 523(a)(4), the

district court affirmed the order of the bankruptcy court granting

a discharge to Bennett.

Analysis

1. Fiduciary Duty Under Section 523(a)(4)

The Bankruptcy Code provides in pertinent part as follows:

(a) A discharge under section 727, 1141, 1228(a), 1228(b), or

1328(b) of this title does not discharge an individual debtor

from any debt--

(4) for fraud or defalcation while acting in a fiduciary

capacity . . . .

11 U.S.C. § 523(a)(4).

The first issue that we address i s whether the scope of the

fiduciary duty owed by the managing general partner of a limited

partnership to the limited partners is sufficient to meet the6 See

, e.g.

, Lewis v. Short (In re Short), 818 F.2d 693,

6 95-96 (9th Cir.1987) (Washington law); R agsdale v. Haller

, 780

F.2d 794, 796 (9th Cir.1986) (California law); L ongo v. McLaren

(In re McLaren), 136 B.R. 705, 714 (Bankr. N.D. Ohio 1992); Gravel

v. Chris J. Roy, A Law Corp. (In re Chris J. Roy), 130 B.R. 214

(Bankr. W.D.La. 1991); Beebe v. Schwenn (In re Schwenn), 126 B.R.

351 (D. Colo. 1991); Getaz v. Stewart (In re Stewart), 123 B.R. 817

(Bankr.W.D.Tenn. 1991); B rown v. McKay (In re McKay), 110 B.R. 764

(Bankr.W.D.Pa. 1990); S usi v. Mailath (In re Mailath), 108 B.R.

290, 293-94 (Bankr. N.D.Okla. 1989); I n re Guy

, 101 B.R. 961,

986-91 (Bankr. N.D.Ind.1988) I n re Cramer

, 93 B.R. 764, 767-68

(M.D. Fla.1988) L ee v. Crosswhite (In re Crosswhite), 91 B.R. 156

(Bankr.M.D.Fla. 1988); Stone v. Stone (In re Stone), 90 B.R. 71,

79-80 (Bankr. S.D.N.Y.), aff'd

, 94 B.R. 298, 302-03 (S.D.N.Y.1988),

aff'd

, 880 F.2d 1318 (2nd Cir. 1989); I n re Dino

, 82 B.R. 184, 186

(Bankr. D.R.I.1988); I n re Owens

, 54 B.R. 162, 164-65 (Bankr.

D.S.C.1984); I n re Kraus

, 37 B.R. 126, 129 (Bankr.E.D.Mich.1984).

See also I n re Weiner

, 95 B.R. 204, 206-07 (Bankr.D. Kansas 1989)

(although no fiduciary relationship between partners generally, the

sole managing partner had responsibilities commonly associated with

trustee and was therefore a fiduciary under section 523(a)(4)); In

re Hurbace

, 61 B.R. 563, 565-66 (Bankr.W.D.Tex.1986) (holding that

there was insufficient fiduciary relationship between equal copartners to meet requirements of section 523(a)(4), but indicating,

in dicta, that managing part ner's fiduciary duties probably

sufficient).

7 Rolley v. Spector (In re Spector), 133 B.R. 733 (Bankr.

E.D.Penn 1991); Blashke v. Standard (In re Standard), 123 B.R. 444

(Bankr.N.D.Ga. 1991); S ulphur Part nership v. Piscioneri (In re

Piscioneri), 108 B.R. 595 (Bankr.N.D.Ohio 1989); S tahl v. Lang (In

re Lang), 108 B.R. 586 (Bankr.N.D.Ohio 1989); C oleman v. Choisnard

(In re Choisnard), 98 B.R. 37 (Bankr.N.D.Okl. 1989); M edved v.

Novak

, (In re Novak), 97 B.R. 47 (Bankr. D.Kan. 1987); I n re

Lewis

, 94 B.R. 406, 410 (Bankr. E.D.Va. 1988); I n re Stone

, 91

9 narrow requirements of section 523(a)(4). Next, we must decide if

such a duty also applies to t he managing partner of the managing

partner.

A number of courts have addressed the issue of whether a

partner generally owes the type of fiduciary duty contemplated by

section 523(a)(4) to his co-partners. The courts are split on this

issue with approximately half finding that such a fiduciary duty is

owed, 6 and the other half finding that it is not. 7B.R. 589, 594 (D.Utah 1988); D reyfoos v. Ryan (In re Ryan), 90

B.R. 554 (Bankr.S.D.Fla. 1988); I n re Braudis

, 86 B.R. 1001, 1004

(Bankr.W.D.Mo.1988); In re Clemens , 83 B.R. 945, 951 (Bankr.N.D.

Ohio 1988); I n re Napoli

, 82 B.R. 378, 382-83 (Bankr.E.D.Pa.1988);

In re Elliott

, 66 B.R. 466, 467 (Bankr.S.D.Fla.1986); I n re

Holman , 42 B.R. 848, 850-51 (Bankr.E.D.Mo.1984).

8 In the Angelle case we construed section 17a(4) of the former

Bankruptcy Act, 11 U.S.C. § 35(a)(4). We have previously noted

that while the language of section 523(a)(4) does not precisely

parallel that of the predecessor statute, 11 U.S.C. § 35(a)(4), the

two statues are similar enough that decisions construing the prior

statute are applicable to section 523(a)(4). B oyle v. Abilene

Lumber, Inc. , 819 F.2d 583, 587 (5th Cir. 1987).

10 The seminal case in this Circuit interpreti ng the discharge

provision at issue is Angelle v. Reed (I n re Angelle), 610 F.2d

1 335 (5th Cir. 1980). 8 In A ngelle we reviewed a line of Supreme

Court cases discussing and interpreting similar discharge

provisions contained in prior versions of the bankruptcy laws. We

held that the concept of fiduciary under 11 U.S.C. § 523(a)(4) is

narrowly defined, applying only to technical or express trusts, and

not those which the law implies from the contract. Id ., (quoting

Chapman v. Forsyth

, 2 U.S. (Ho w.) 202, 207, 11 L.Ed. 236, 238

(1844)). In addition, the requisite trust relationship must exist

prior to the act creating the deb t and without reference to that

act. Id ., (citing Upshur v. Briscoe , 138 U.S. 365, 378, 11 S.Ct.

313, 317, 34 L.Ed. 931, 936 (1890)). In other words, the trust

giving rise to the fiduciary relationship must be imposed prior to

any wrongdoing. The debtor must have been a trustee before the

wrong and without any reference to it. R agsdale v. Ha ller , 780

F.2d 794, 796 (9th Cir. 1986). Thus, a constructive trust is not11

sufficient to create a fiduciary relationship for purposes of the

discharge provisions of the Bankruptcy Act. Angelle , 610 F.2d at

1339; Ragsdale , 780 F.2d at 796.

In de termining whether a particular debtor was acting in a

fiduciary capacity for pu rposes of section 523(a)(4), the Court

must look to both state and federal law. 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. Angelle , 610 F.2d at 1339.

There has been some disagreement among the courts as to what

exactly is meant by the requirement that there be a "technical

trust" to satisfy section 523(a)(4). Most courts today, however,

recognize that the "technical" or "expres s" trust requirement is

not limited t o trusts that arise by virtue of a formal trust

agreement, but includes relationships in which trust-type

obligations are imposed pursuant to statute or common law. S ee

e.g. Moreno v. Ashworth

, 892 F.2d 417, 421 (5th Cir. 1990) ( officer

of a corporation owed common law fiduciary duty to corporation and

stockholders sufficient to satisfy requirements of section

523(a)(4)); Lewis v. Short (In re Short), 818 F.2d 693, 695-96 (9th

Cir.1987) (Washington common law imposed trustee-l ike duties on

partners of partnership) ; Ragsdale v. Haller , 780 F.2d 794, 796

(9th Cir.1986) (California common law imposed trustee-like duties

on all partners of a partnership); Carey Lumber Company v. Bell

,

615 F.2d 370, 374 (5th Cir. 1980) (Oklahoma Lien Trust statutes

created an express trust). Thus, the trust obligations necessary12

under section 523(a)(4) can arise pursuant to a statute, common law

or a formal trust agreement.

2. Fiduciary Duties of Managing Partners Under Texas Law

.

The controlling law in this case is Texas law. Therefore,

this Court mu st look to Texas law in order to determine what

obligations are imposed on the managing general partn er of a

limited partnership with respect to the limited partners. The

Court must then decide whether the obligations imposed under state

law are sufficient to meet the federal la w requirements of

"fiduciary capacity" under section 523(a)(4).

In addressing this issue, both the bankr uptcy court and the

distr ict court below referred to and relied on the case of I n re

Hurbace

, 61 B.R. 563 (Bankr. W.D.Tex. 1986). In that case,

involving a general partnership, the court addressed the issue of

whether the debtor s hould be denied a discharge under section

523(a)(4) for a judgment entered against him in state court for his

failure to account to one of his former partners for certain

partnership funds. I d

. at 564-65. The H urbace court looked to the

Texas version of the Uniform Partnership Act (UPA), in order to

determine whether the requisite trust relationship ex isted for

purposes of section 523(a)(4). The court focused on the following

language:

Every partner must account to the partnership for any benefit,

and hold as trustee for it any profits derived by him without

the c onsent of the other partners from any transaction

connected with the formation, conduct, or liquidation of the

partnership or from any use by him of its property.

T ex.Rev.Civ.Stat.Ann. art. 6132b, § 21 (Vernon 1979). The court13

stated that the phrase "hold as trustee" did not establish a

technical or express trust for purposes of section 523(a)(4). More

to the point, the court found that, "[u]nder the Texas statute, the

trust arises only when the partner derives profits without the

consent of the other partners. Therefore, the statute would fall

within the ambit of a trust ex maleficio specifically excluded from

the purview of nondischargeable debts under § 523(a)(4)." I n re

Hurbace

, 61 B.R. at 566. The H urbace court's interpretation of the

UPA is in accord with those decisions cited above in which this UPA

provision has been held not to satisfy the requirements of section

523(a)(4). S ee e.g.

, Medved v. N ovak , (In re Novak), 97 B.R. 47

(Bankr. D.Kan. 1987).

Only one circuit court has addr essed the issue of the

fiduciary obligations of a partner in the context of a section

523(a)(4) claim. In the case of Ragsdale v. Haller , 780 F.2d 794

(9th Cir. 1986), the Ninth Circuit held that, under California law,

the partners in a partnership did owe one another the type of

fiduciary duty contemplated by section 523(a)(4). I d

., at 796-97.

The court found that, while the California partnership statute only

created a trust ex maleficio

, th e California state courts had

imposed additional duties on the partners in a partnership:

In California, partners are trustees for each other and in all

proceedings connected with the conduct of the partnership

every partner is bound to act in the highest good faith to his

co-partner and may not obtain any advantage over him in the

partnership affairs by the slightest misrepresentation,

concealment, threat or adverse pressure of any kind.

Id . at 796. (Quoting Leff v. Gunter , 33 Cal.3d 508, 514, 658 P.2d

740, 744, 189 Cal.Rptr. 377, 381 (1983)). The court concluded that9 Subsequently, the Ninth Circuit held that, under Washington

law, partners w ere also fiduciaries for purposes of section

523(a)(4). L ewis v. Short (In re Short), 818 F.2d 693, 695-96 (9th

Cir.1987).

14 the obligations imposed by the California courts were "mo re than

just a fiduciary relationship created in response to some

wrongdoing; California has made all partners trustees over the

assets of the partnership." I d

. As a result, the court held that

the debtor's debt to his partner was not dischargeable. 9 Id

.

The Hurbace court declined to follow the R agsdale decision,

finding that the Texas courts had not imposed the same type of

fiduciary duties on partners as the California courts. I n re

Hurbace , 61 B.R. at 566. The court observed that:

It is only when viewing the position of managing partners do

Texas courts venture to impose the type of fiduciary duty

described in Ragsdale . (Citations omitted).

Id . The court concluded:

. . . in the present case dealing not with a managing partner

vis -a-vis general partners but with equal co-partners, the

scope of fiduciary duty described in Ragsdale is not

applicable

. . . [and]

. . . § 523(a)(4) insofar as it

relates to a debtor acting in a fiduciary capacity does not

apply to the failure of partners to account.

Id

. Therefore, the court in H urbace held that under Texas law,

there was not a sufficient fiduciary duty between equal co-partners

of a general partnership to satisfy the requirements of section

523(a)(4).

However, the case at bar does not involve equal co-partners,

as the Hurbace case did. In this case the Court must decide first

whether, un der Texas law, the scope of fiduciary duty owed by a

general partner to limited partners meets the expre ss trust1 0 In support of its holding, the district court relied in part

on the case of CRL of Maryland, Inc. v. Holmes

, 117 B .R. 848

(Bankr.D. Md. 1990). The court in H o lmes held that a statutory

trust cannot be a technical trust for purposes of section 523(a)(4)

in the absence of the execution of a formal trust agreement between

the parties because the creation of an express trust depends upon

the intention of the parties and can never be created by statute

alone. C RL of Maryland, Inc. v. Ho lmes , 117 B.R. at 853. This

Circuit has n ot taken such a technical approach to the

interpretation of section 523(a)(4), see e.g. Moreno v. Ashworth

, 892 F.2d 417, 421 (5th Cir. 1990), and does not find that such an

approach is warranted in this case.

15 requirements of section 523(a)(4), and second, whether such a duty

exists for or can be impu ted to the managing partner of the

managing partner.

The Appellants argue that the Texas courts have long held that

a partner in complete control of a partnership, whether the general

partner of a limited partnership or the managing partner of a

general partnership, owes one of the highest fiduciary duties known

at law to his partners. The Appellee, on the other hand, relying

on the opinion of the district court, argues that, while the Texas

courts have imposed a very high level of fiduciary duty on managing

partners, they have done so only in the context of constructive

trusts and, therefore, by definition these obligations are

insufficient to meet the express tr ust requirements of the

bankruptcy discharge provisions. 10

The Texas Supreme Court cas e of H uffington v. Upchurch

, 532

S.W.2d 576 (Tex. 1976), is generally cited as the primary authority

for the imposition of trustee-like duties on the managing partner

of a partnership. The Huffington case did involve the imposition

of a constructi ve trust. I d

. at 577. Likewise, the two cases16

cited by the court in Huffington in support of the proposition that

managing partners owe the highest level of fiduciary obligation to

their co-partners, were also constructive trust cases. See Smith

v. Bolin

, 153 Tex. 486, 271 S.W.2d 93 (1954); McDonald v. Follett

,

142 Tex. 616, 180 S.W.2d 334 (1944).

However, contrary to Bennett's contention, this principle has

not been limited to cases involving constructive trusts. In Cook

v. Peacock

, 154 S.W.2d 688 (Tex.Civ.App.--Eastland 1941, writ ref'd

w.o.m.), a case involving an action for a partnership accounting,

the court observed that "[t]he duty of a partner in control of

. .

. a business is analogous to that of a trustee." I d

., at 691. S ee

also Conrad v. Judson , 465 S.W.2d 819, 828 (Tex.Civ.App.--Dallas

197 1, writ ref'd n.r.e.), c ert

. denied

, 405 U.S. 1041 (1972);

Johnson v. Buck

, 540 S.W.2d 393, 412-13 (T e x.Civ.App.--Corpus

Christi 1976, writ ref'd n.r.e.); C f

. Johnson v. J. Hiram Moore

Ltd.

, 763 S.W.2d 496, 499 (Tex.App.--Austin 1988, writ denied);

Veale v. Rose

, 657 S.W.2d 834, 837 (Tex.App.--Corpus Christi 1983,

writ ref'd n.r.e.).

In Watson v. Limited Partners of WCKT, Ltd.

, 570 S.W.2d 179

(Tex.Civ.App.--Austin 1978, writ ref'd n.r.e.), a case brought for

breach of fiduciary duty, the court held:

In a limited partnership the general p artner, acting in

complete control, stands in the same fiduciary capacity to the

limited partners as a trustee stands to the beneficiaries of

the trust. (Citations omitted).

Id

., at 182. And in the C renshaw case, discussed at length below,

the court stated:

It is axiom atic that a managing partner in a general17

partnership owes his co-partners the highest fiduciary duty

recognized in the law.

Crenshaw v. Swenson

, 611 S.W.2d 886, 89 0 (Tex.Civ.App.--Austin

1980, writ ref'd n.r.e.).

This Court has previously observed, in deciding whether tax

attributes associated with certain commercial real estate should be

attributed to a corporation or a partnership, that the duty a

general partner owes to limited partners is analogous to that owed

by a trustee to trust beneficiaries. M oncrief v. United States

,

730 F.2d 276, 285 (5th Cir. 1984) (Citing Crenshaw v. Swenson

, 611

S.W.2d 886 (Tex.Civ.App.--Austin 1980, writ ref'd n.r.e.)).

Further, in Moreno v. Ashworth

, 892 F.2d 417, 421 (5th Cir.

1990), we held that the debtor, who was an officer of a

corporation, owed a fiduciary duty to that corporation and its

stockholders. We found that because the debtor had entered into

certain self-dealing transactio ns while an officer of the

corporation, the debts arising from these transactions were not

dischargeable under the provisions of 11 U.S.C. § 523(a)(4). Id

.

Because the rol e of an officer or director of a corporation with

respect to the shareholders is analogous to the role of managing

par tner of a limited partnership with respect to the limited

partners, Moreno

, by analogy, supports the argument that the

managing p artner of a limited partnership owes a sufficient

fiduciary duty to the limited partners to satisfy the requirements

of section 523(a)(4).

Significantly, the specific duties imposed by the Texas courts

on managing partners pursuant to this line of cases are the same as18

those imposed on trustees. They include the duty of loyalty,

H uffington , 532 S.W.2d at 579, and the duty to "deal with one

a nother with the utmost good faith and most scrupulous honesty."

Johnson

, 763 S.W.2d at 499. As the court in C renshaw stated, when

a general partner is in complete control of the assets and affairs

of a limited partnership:

[His] conduct must be measured by standards exacting the

utmost fidelity

. . . . Not only is it [the general partner's]

d uty to administer the partnership affairs solely for the

benefit of the partne rship, he is not permitted to place

himself in a position where it would be for his own benefit to

violate this duty.

Crenshaw , 611 S.W.2d at 890.

We find, as the Ninth Circuit did in Ragsdale

, that these

obligations are more than a fiduciary relationship created in

response to some wrongdoing. Texas law clearly and expressly

imposes trust obligations on managing partner s of limited

partnerships and these obligations are sufficient to meet the

narrow requirements of section 523(a)(4).

However, this is only the first step in the analysis, because

it is undisputed that Bennett was not the managing partner of MG.

He was instead, the managing partner of the managing partner of MG.

Therefore, this Court must now address the more difficult question

of whether Texas law imposes these same trust-type obligations on

the managing partner in a two-tiered partnership arrangement, i.e.

the managing partner of the managing partner.

In support of their argument that Bennett did owe a trustee's

fiduciary obligation to the limited partners of MG, the Appellants

rely on the case of Crenshaw v. Swenson

, 611 S.W.2d 88619

(Tex.Civ.App.--Austin 1980, writ ref'd n.r.e.). They argue that

both the facts and the court' s analysis in that case support the

proposition that under Texas law a general partner of a general

partner of a limited partnership owes a fiduciary duty of loyalty

to the li mited partners. Because C renshaw is the only case that

arguably supports the Appellants' contention it merits further

discussion.

The Crenshaw case was a suit for breach of fiduciary duty, and

involve d a limited partnership known as Rolling Hills Majestic

Homes (Group I), Ltd. This limited partnership was formed for the

purpose of constructing and selli ng four homes in Austin, Texas.

The general partner of this limited partnership was another

partnership, known as Occidental Syndicated Investments

(Occidental). The original partners in Occidental were Elizabeth

Swenson, Robert Johnson and James Cooper. I d

., at 888. Elizabeth

Swenson, the defendant in the Cre nshaw case, was therefore a

general partner of the general partner of a limited partnership; a

relationship clearly analogous to that of Archie Bennett vis-a-vis

the MG limited partnership.

In Crenshaw , the limited partnership agreement provided that

the limited partners would contribute capital to the partnership,

a portion of which was to be used to purchase tracts of land for

development. Title to these tracts was held by Swenson

Corporation, a corporation wholly owned by Elizabeth Swenson and

her husband, Vernor Swenson. After the lots were purchased from

Swenson Corporation, the limited partnership attempted to obtain a20

construction loan to finance the building of houses on the lots.

The lender refused to make the loan to the limited partnership, but

agreed to lend the money to Swenson Corporation. As a result, the

lots were transferred back to the Swenson Corporation so that the

property could be used as security for the construction loan. I d

.

Subsequently, a variety of problems developed with respect to

the construction and sale of the houses. The partnership sustained

losses, and the limited partners we re left empty-handed and

disgruntled. The limited partners then brought suit against

Elizabeth Swenson for breach of fiduciary duty. Id . at 888-889.

The Crenshaw court decided the case based on the law of trusts

stating:

It is axiomat ic that a managing partner in a general

partnership, owes his co-partners the highest fiduciary duty

recognized in the law. In a limited partnership, the general

partner actin g in complete control stands in the same

fiduciary capacity to the limited partners as a trustee stands

to the beneficiaries of the trust. We must then, in deciding

this case, do so under the laws applicable to trusts.

Crenshaw

, 611 S.W.2d at 890. The court phrased the legal issue as

whether "the trial court erred in failing to find that appellee,

E lizabeth Swenson, breached her fiduciary duty of loyalty to the

partnership and to the limited partners." Id

.

The court reviewed the particular facts of the case and

observed that, "a conveyance of partnership property was made and

the proceeds from the sale

. . . were depos ited in the Swenson

Corporation

. . . without the knowledge or consent of [the limited

partners]". I d

., at 891. The court also noted that, "the Swenson

Corporation was the general contractor in absolute control of the21

partnership's destiny and

. . . Elizabeth Swenson had the right to

the exclusive listing when th e finished product was sold . . . "

I d . Taking these facts together, the court concluded that "the

case takes on an aura of self-dealing which this Court is unable to

condone." Id . The court then held that Ms. Swenson had breached

her fiduciary duty of loyalty to the limited partners as a matter

of law, and that these limited partners were entitled to equitable

restitution of their investment in the limited partnership. Id

.

The Appellants assert that because Elizab eth Swenson was a

general partner of the general partner of the limited partnership,

and because the appellate court held that she owed the limited

partn ers the fiduciary obligations of a trustee, the case stands

for th e proposition that under Texas law a general partner of a

general partner owes fiduciary responsibili ties directly to the

underlying limited partners.

Bennett disagrees with the Appellants' interpretation of

Crenshaw . He argues that Crenshaw is distinguishable because,

[W]hen all of the other general partners of Occidental

Syndicated Investments resigned from the partnership, that

action effected a dissolution of the separate partnership

entity leaving only Swenson to act in an individual capacity

as the general partner of the limited partnership.

Brief of Appellee Archie Bennett, Jr., at pp. 18-19.

While the court in Crenshaw does note that "[s]ubsequent to

the execution of the partnership agreement, both Robert Johnson and

James Cooper resigned as general partners," it does n ot indicate

when this occurred. C renshaw

, 611 S.W.2d at 888. Nor does the

court suggest anywhere in its opinion that this fact was relevant22

to the conclusions it reached. In fact, in describing the critical

transfer of property that forms the basis for the conclusion that

Elizabeth Swenson breached her fiduciary duty to the limited

partners, the court states that "the general partners transferred

title to the lots back to the Swenson Corporation . . . ." I d

.

This indicates that, at least at the time the alleged breach

occurred, Ms. Swe nson was not acting individually as the general

partner of the limited partnership. To the contrary, the statement

that the "general partners transferred title

. . ." indicates that

the transfer was effected by Occidental, as the general partner of

the limited partnership. Therefore, Bennett's attempt to

distinguish Crenshaw is not persuasive.

What this Court finds significant is the C renshaw court's

analysis of why the managing partner of the managing partner in

that case owed a fiduciary obligation to the underlying limited

partners. In analyzing the duties that Ms. Swenson owed to the

limited partners, the Crenshaw court focused on the nature of the

business relationship as a wh ole, in which one person, Elizabeth

Swenson, in her various roles as general partner of the general

partner, owner of the corporation hired to accomplish the

construction project, and the real estate broker authorized to sell

the properties when completed, exercised almost total control over

the project. This high level of control, over the project and the

limited partners' investments, appe ars to have been critical in

persuadin g the C renshaw court that Ms. Swenson owed a fiduciary

duty to the limited partners.23

In reviewing the line of cases that gave rise to the rule in

Texas that the managing partn er of a partnership owes to his copartners the highest fiduciary obligations known at law, it is

clear that the issue of control has always been the critical fact

looked to by the courts in imposing this high level of

responsibility.

In Huffington v . Upchurch , 532 S.W.2d 576 (Tex. 1976), the

case generally cited as establishing the common law rule in Texas

that the managing partner of a partnership owes to his copartners

one of the highest fiduciary duties recognized at law, the Texas

Supreme Court cited three cases in support of its holding: Smith

v. Bolin

, 153 Tex. 486, 271 S.W.2d 93 (1954), MacDonald v. Follett

,

142 Tex. 616, 180 S.W.2d 334 (Tex. 1944), and Meinhard v. Salmon

,

249 N.Y. 458, 164 N.E. 545 (1928).

Smith v. Bolin involved a partnership in which the respondent,

Bolin, was the "business manager". Smith v. Bolin , 271 S.W.2d at

94. Bolin, individually, had entered into renewal leases of

certain oil and gas properties that had previously been leased by

the partnershi p. He was sued by his partners for breach of

fiduciary dut y. The parties disagreed about whether the

partnership was still in existence at the time Bolin entered into

the disputed transactions, but the court, in reversing the summary

judgment granted to Bolin by the trial court, quoted extensively

from the opinion in Meinhard v. Salmon

, and held that "[a]s

managing partner of their partnership enterprise, respondent owed

his partners even a greater duty of loyalty than is normally1 1 The Court located only one other case in which an issue

similar to the one at bar was decided in a bankruptcy context. In

Park v. Moorad , 132 B.R. 58 (Bankr.Okla.1991), the debtor was the

president, director and sole shareholder of a corporation, which in

turn was the general partner of a limited partnership. I d

. at 60.

At issue in Park was whether the debtor as an individual should be

granted a discharge of debts owed by the corporation to the limited

partners. The bankruptcy court was not persuaded by the argument

that only the corporation as the managing partner owed a fiduciary

duty to the l imited partners and denied the discharge, under

section 523(a)(4), stating that the debtor would not be allowed to

24 required." I d

. at 96. The critical fact underlying this "greater

duty of loyalty than is normally required," was the greater degree

of control that one partner (i.e., the managing or business

partner) had over the operation of the partnership and hence the

investment of the other partners.

Likewise, in Meinhard v. Salmon , a case cited extensively in

Texas and elsewhere for establishing the fundamental fiduciary duty

rules governing managing partners, Justice Cardozo focused on the

control that one "coadventurer" exercised over the business

enterprise at issue:

The very fact that Salmon was in control with exclusive powers of direction charged him the more obviously with the duty of

disclosure . . .

Meinhard v. Salmon

, 164 N.E. 545, 547 (N.Y. Court of Appeals 1928).

The court observed:

[T]here may be no abuse of special opportunities growing out

of a special trust as manager or agent

. . . . Salmon had put

himself in a position in which thought of s elf was to be

renounced, however hard the abegnation. He was much more than

a coadventurer. He was a managing coadventurer. For him and

for those like him the rule of undivided loyalty is relentless

and supreme. (Citations omitted).

Id

. at 548. Therefore, again in the M einhard case the fact of

control or management is vital to the court's analysis. 11"hide beneath a corporate shell when he so completely controlled

the corporate actions, representations and decisions that in effect

it had no life without him." I d

. at 63. Once again, the court

focused on the control exercised by one person over the investments

of others.

25 The Crenshaw court, analyzing the issue in a manner consistent

with the way in which Texas jurisprudence has developed in this

area, concluded that Ms. Swenson, the ma naging partner of the

managing partner of the limited partn ership, owed to the limited

partners the highest fiduciary duty known at law, a duty analogous

t o that owed by a trustee to the beneficiaries of the trust.

Crenshaw

, 611 S.W .2d at 890. Therefore, based on the holding in

Crenshaw and the cases cited therein, we find that Bennett, as the

managing partner of the managing partner, owed to the MG limited

partners "the highest fiduciary duty recognized in the law." We

find further that this fiduciary obligation is sufficient to meet

the requirements of Section 523(a)(4).

3. Defalcation and Damages

.

A defalcation is a willful neglect of duty, even if not

accompanied by fraud or embezzlement. M oreno v. Ashworth

, 892 F.2d

417, 421 (5th Cir. 1990). Therefore, any debts incurred by Bennett

as a result of the willful neglect of his duties as the m anaging

partner of the managing partner of the MG limited partnership are

not dischargeable. 11 U.S.C. § 523(a)(4).

The Appellants argue that the bankruptcy court erred in its

determination of the amount of Bennett's non-dischargeable debt in

several ways. First, they argue that the court erred in26

calculating the amount of debt not dischargeable based on actual

damages ( i.e. based on specific defa lcations found by the

bankruptcy cou rt) instead of granting them restitution of their

entir e investment. This argument is without merit. While

restitution is a permissible method of recovery for breac h of

fiduciary duty, it is not the only one. W atson v. Limited Partners

of WCKT, Ltd.

, 570 S.W.2d 179, 182 (Tex.Civ.App.--Austin 1978, writ

ref'd n.r.e.). Actual damages are also a permissible remedy for

breach of fiduciary duty, Preston Carter Co. v. Tatum , 708 S.W.2d

23 (Tex.App.--Dallas 1986, writ ref'd, n.r.e.), as is a suit for an

accounting and exemplary damages, Manges v. Guerra

, 673 S.W.2d 180

(Tex. 1984). We find that the method the bankruptcy court employed

to calculate Bennett's non-discharg eable debt in this case was

permissible under Texas law, and therefore, was not error.

In accordance with the findings and calculations of the

bankruptcy court, $72,000 worth of repairs on the HVAC system and

$832,204.40 worth of equipment leases were improperly cha rged to

th e limited partners. By making these improper charges Bennett

willfully neglected his duties to the limited partners and we find

that these charges constitute defalcations by Bennett while acting

in a fiduciary capacity, and as such are not dischargeable pursuant

to 11 U.S.C. § 523(a)(4).

The Appellants also argue that the bankruptcy court exceeded

its authority in calculating damages at all, since the Appellants

were only seeking a ruling on the dischargeability of the debt in

the adversary proceeding. This contention is also without merit.27

It is customary for a bankruptcy court to determine both liability

and the measure of damages in a proceeding to determine the

dischargeability of a debt. S ee e.g. Jordan v. Southeast National

Bank (Matter of Jordan), 927 F.2d 221 (5th Cir. 1991); Shaver

Motors, Inc. v. Mills (In re Mills), 111 B.R. 186 (Bankr. N.D. Ind.

1988); Medved v. Novak (In re Novak), 97 B.R. 47 (Bankr. D. Kans.

1987). In addition, in their Complaint to Determine

Dischargeability of Debt, the Appellants asked the bankruptcy court

to enter judgment for them in the full amount of their investment.

Thus, the issue of the amount of debt not dischargeable was

properly before the bankruptcy court and it was not error for it to

rule on that issue.

Finally, the Appellants argue that the bankruptcy court erred

in failing to find that the $1 million distribution to Bennett was

also a defalcation. On this point we agree with the Appellants.

Under Texas law, a fiduciary who breaches his duties forfeits his

right to compensation as a matter of law. K inzbach Tool Co., Inc.

v. Corbett-Wallace Corp.

, 160 S.W.2d 509, 514 (Tex. 1942); Douglas

v. Aztec Petroleum Corp.

, 695 S.W.2d 31 2, 318 (Tex.App.--Tyler,

1985, no writ); Anderson v. Griffith , 501 S.W.2d 695, 702

(Tex.Civ.App.--Fort Worth 1973, writ ref'd n.r.e.). In addition,

it wa s an act of self dealing and a breach of the duty of good

faith and fair dealing for Bennett to have paid himself the $1

million distribution when at the same time he imprope rly charged

more than $800,000 in equipment leases to the limited partners.

Thus, the $1 million distribution was also a defalcation by Bennett28

and is not dischargeable pursuant to 11 U.S.C. § 523(a)(4).29 Conclusion

In conclusion, we find that the question of the nondischargeability of Bennett's debts to the limited partners under

11 U.S.C. § 523(a)(4) was wrongly decided. We therefore reverse

the decisions of the bankruptcy and district courts on that issue

and render judgment in favor of the limited partners in the amount

of $1,904,204.40.

REVERSED and RENDERED.