## In the



# U n ited S ta tes Co urt o f Ap p ea ls

F o rth eS e v e n th C ir cu it
N o. 10

- 1882 I N RE : J AY B ERMAN, D ebto r. F OLLET T H IGH ER E DUCA T I ON G R OUP, I NC ., anI l l i no i s co r po r at i o n, Plai nt i f f

-Appe l l ant, v. J AY B ERMAN, D efend a nt-A pp ellee.

Appeal from the United States District Court fo r the N o rthernDi stricto f Illino is, Eas tern Div isi on. No . 1:09- cv-03377

—Rob ert M. Dow, Jr. , Judge .
A RG UE D O CT OB ER 22, 2010

— D ECI DE D J AN UA RY 21, 2011

Befo re K ANN E , T INDER, a nd H A MI L T ON, C ircu it Judges. H A MI L T ON, C ircu it J u dg e . T h e b an kr u p tc y c ou rth eld that a cr edito r failed to pr ove thata debt o w ed to i t was2 N o. 10

- 1882

non- disc harg eabl e under 11 U
. S. C. § 5 23( a) ( 4) , wh i ch provi des thata debt wil l notbe disc harg ed i n bankr up tcy w here thatdebtor h as com m i tte d “f ra ud o r defa l cati on w hi l e a cti ng i n a fi du ci ar y c apaci ty, em bezz l em ent, o r l ar ceny. ” C oncl ud i ng tha t the cr edi torhad not est abl i shed that the debt or ac ted i n any fi du ci ar y c apaci ty to war d the c r edi to r, the c o ur t enter ed j udg m en t f o r the deb to r . The di st r i ctc o ur t affi r m ed th e find ing th atthe deb t was di sc ha r g eabl e, a s do we. W e agr ee wi tho ur coll eagu es on th e b a n k r up tcy cou rt and district cou rt that the c re dit orf ai l ed to sho w thatthe debtoro w ed the c re dit ora fi du ci ar y duty.

I. The Facts P lain tiff-c re d ito r Fo llet t H igh er E d u c at ion G ro u p , In c ., an I l l i noi s co rpor ati on, m anage s m or e than 750 co l l ege boo kst or es nati onw i de. I n M ar ch 200 4, Fo l l etthired Berm an & A sso ci ate s, I nc ., an a dvert i si ng br oke ra ge fi rm al so loc at ed i n I l l i noi s, to pl ace advert i sem ents on Fol l ett ’ s be hal f

. U nd erthe ter m s o fthei r c on tr act, Fo l l ett paid B er m an & A sso ci ate s 1 10 perce nt o fthe cos t o f advert i sem ents that Berm an & A ss oc i ate s pl aced with m edi a o utl ets ar ound the co untry. Berm an & A ss oci ate s then di sburs ed paym ents f orthe adver ti sem ents to new spapers, r adio st ati ons, and bi l lboar d opera tor s a nd r eta in ed the extr a t en per cent as the fee f ori ts ser vi ces. The t wo c o r po r at i o ns r en e we d th i s ar r an g ement yea rl y unti l Fo l l ettl ear ned i n the s u m m ero f20 06 that Ber m an& A ss o ci at es ha d no t pai d s ev er alo ut standi ng ad ve rt isin g b ills . Folle tt w as forc ed to p ay so m e m ed iaN o. 10

- 1882 3

Berm a n & As s oc i a t e s c e a s e d o pe r a t i on s du r i ng the s umm er 1 of2006 a nd di s s ol ve d by the e nd of tha t ye a r . De f e nd a ntJ ay Ber m a n a nd his w ife aband oned or threw aw ay any p aper r e c o r d s o fB e r ma n & A s s o c i a t e s an d “ g o tr i d o fa l l th e c o mpu ter s” f oll ow ing the fir m ’ s diss oluti on. The b ankrup tc y court di d notat t ribut e any wei ghtt o Be rm an’ s d es t ru c t i on of the fir m ’ s rec ords. W e def er t o the disc ret ion ofthe bank ruptcy j udg e , a s t r i e r o ff a c t, i n thi s r e ga r d. R ule 7052 incor porates i nto bankru ptcy procedu re R ule 52 2 ofth e F e de r a l Ru l e s o fC i v i l P r o c e du r e . B e r man ’ s mo t i on inv ok ed section ( c) o f t h a t r u le: “If a p arty ha s be en fu lly he a r d o n a n i s s ue du ri ng a no nj ur y t r i a l a nd the c ou r tfi nd s 

### (continued...) outl ets di re ctl y without r eco ver i ng the sum s intended f orthem thati t had al re ady gi ven to Ber m an & A sso ci ate s f orthatpurpose. 1 On Augu st2 3, 20 06 , de fen dan t- deb to r J ayBe r m an, who ser ved as pre si dent, a dir ecto r, and so l e sh arehol der o f Berm an & A sso ci ate s, peti ti oned f orChapter 7 ba nkruptcy. I n hi s peti ti on, Berm an l i ste d d eb ts i ncurr ed by Berm an & A ss oc iat es , in c lu d in g t h e d eb t o w e d t o F olle tt, onh is schedule s o fo utsta nd i ng debts

. Fo l l ettthen fi l ed an advers ar y a cti on i n Berm an’ s ba nkruptcy proce edi ngs cl ai m i ng tha t Ber m an h ad bre ached a fi du ci ar y duty owed to Fo l l ettand that, as a re sult, t h e d ebt i t was o we d wa s n on- di s c ha r g e a b l e p ur s ua ntt o 1 1 U. S
. C. § 5 23( a) ( 4)
. A t the co ncl u sion ofFo l l ett ’ s pre senta ti on ofev i dence attr i al, Berm an m ove d for j ud gm ent o n parti alfi nd in gs und erFe deralRule o fBankruptcy Pro

ced ur e 7 0 52. Th e ban krup tcy j ud ge gran ted Be rm an ’s 24 N o. 10

- 1882



### (...continued) aga i ns tthe par t y onthati s s ue, the c ourtm ay en t erj udgm en t aga i ns tthe par t y ona c l ai m or defen s e that, unde r the c ontr oll ing l aw , can be m aint ained or def eate d on ly w ith a favora b le fin d in g o n th a t is su e.” F ed . R . C iv . P . 52 (c). m oti on, hol ding that Follet t had fa i l ed to pro ve that Ber m anwas a fi duci ar y a s r equi r ed bythe s ta tu te. The bankr up tcy cou rt ’ s deci si on o n the disc harg eabi l i ty of a debt i s a fi nal j ud gm ent forpurposes o fappel l ate j uri sd ict ion
. In reM ar ch i ando , 13 F. 3d 1111, 1113-14 (7 t h C ir. 1994 ). T h e d istri ct cou rt affirm ed the ba nk rup tcy cou rt’s j ud gm ent a nd thi s a pp ealf ol l owed

. W e have j uri sdic ti on to re vi ew the d i str i ct c ourt ’ s j ud gm ent purs uant to 28 U
. S. C
. § 158(d ).

II. Except i ons f

r om D i s ch argeU nde rSe ct i on 523(a) (4) U nd ers ec ti on 7 27 ofthe Bankruptcy Code, and subj ect to cer tai n condi ti ons to be fulfi l l ed by th e d eb tor, a bankruptcy cour t o rdi nari l y wil ldi schar ge a debto r’ s debt s, re l eas i ng the debtor f ro m l i abi l i ty f ortho se debts. S ee 11 U
. S. C. § 7 27. There a re , however, so m e e xcepti ons. Se cti on 5 23( a) o fthe Code excl ud es cer tai n debts f ro m disc harg e, o ften, but not al w ay s, w here the debt r esul ts f r o m s o m e so r t o fi nt en ti o na l wro ng do ing bythe d eb to r. C ou rt s c on st ru e t h es e e x c e p tio n s n ar ro w ly, in f avo r ofthe debtor, bea ri ng i n m i nd the goa l o fbank

ruptcy l aw to gi ve the debt ora f re sh st ar t. E
. g. , In re C ross w hite, 14 8 F
. 3d 879, 88 1 ( 7th Ci r. 19 98) ( “W hen deci ding w hethera parti cul ardebt f al l s withi n a § 52 3N o. 10

- 1882 5

B lack ’ s L aw D i c t i on ary d efines “d efalcatio n” as a “failu re to 3 m eetan o b ligati on” or “a nonf raud ulent default

. ” Bla ck’s Law D i cti on ary 479 ( 9 th ed. 2009)
. D ef alc ati on can be dist inguis hed f rom fraud and em bezzlem en t on the bas is thats ub j ect ive, delibera te w rongd oing is not r equire d to es tabli sh def alc at i on, tho ug h s ome de gr e e o ff a ul ti s r e q ui r e d. See C ent ra l H an over B an k & Trust C o. v. Herbst, 9 3 F. 2 d 5 1 0 , 5 1 2 ( 2d C ir
. 19 37 ) (L. H an d , J. ) (a fidu ciary w ho tak es m on ey u p on a con d iti onal authori ty that m ay be revoked , and w ho kno w s that t he aut h o r i t y ma y b e r e v o k e d, i s g u i l t y o fa “ de f a l c a t i o n” e v e n i ft h e wr o n g f a l l s s h o r to ffr a u d o r e mb e z z l e me n t )
. We have held t hat def alc ati on requir es s om ethi ng m ore than negli gence o r m istake, but le ss than fraud

. See M eye r v. R igdon , 36 F .3d 13 7 5 , 13 8 5 (7t h C ir . 19 9 4 ). ex c ep tio n, cou rt s g en er ally co n st ru e t h e s t a tu te st ric tly ag ains t th e o bj ec tingc r edi tor a nd l ibe r al l y i n f av o r o fthe deb to r . ”)
. Debts w i l l b e di sc ha r g ed unl es s pr o ve n n o ndisc harg eabl e bya preponderance o fthe evi dence. S ee G rog a n v . Ga rner, 498 U
. S. 279, 291 (1991 ). F o l l et t ar g ue s th atthe de bto wed t o i t sh o ul d b e ex ce pted f r o m di sc ha r g e o n the b as i s o fBe r m an ’ s an d Ber m an& Ass o ci at es ’ a l l eg ed “de f al ca ti o n whi l e ac ting i n a fi du ci ar y c apaci ty. ” 1 1 U
. S. C. § 5 23( a) ( 4)
. To e stab- 3 l i sh thata de b t is non- disc harg eabl e under sect i on 523( a) ( 4) , a cre dit or m ust show ( 1) that the debt oract ed as a fi du ci ar y t o the c re dit oratthe ti m e th e debt was cre ate d, and (2 ) thatthe debt wa s c au sed byfra ud o r defa l cati on. S ee In re Fra in , 230 F.3d 101 4, 1019 ( 7th Cir. 2 0 0 0); Kli ngman v. Le vi ns on , 831 F.2d 129 2, 1295 ( 7th Cir. 1987 )
. H er e, the parti es dispute the fi rs t re quir em ent:6 N o. 10

- 1882

w h et h er th er e e x ist ed a fid u c iar y re lat ion s h ip th at co u ld re nd er the debt to Fol l ett non- disc harg eabl e. Th e bankruptcy j ud ge fou n d none. Dis ti ngui shi ng thi s ca se f ro m pri or case s w here fi du ci ar y du ti es w er e f ound, Ju d ge Gol dgar deter m i ned th at Berm an & A sso ci ate s’ r ol e a s Fol l ett ’ s a gent i n purchasi ng ad ver ti si ng d i d not am ount t o a fi du ci ar y r el ati onshi p. The j ud ge als o concl ud ed that ev eni fthe c o r po r at e par ti es ’ r el ations hi p c o ul d b e co nsi der ed fi duci ar y, F o l l et t ha d no t es tabl i sh ed an y k i nd of ob liga tio n be tw ee n Folle tt an d Ja y B er m an , th e in d ivi dualde bt o r, no r h ad i t sh o wn th atBe r m an& As s o c i a t e s wa s B e r ma n ’ s a l t e r e g o . No tfi n d i n ga ny fi du ci ar y obl i gat i on o n Berm an’ s p ar t, the b ankr up tcy cou rt ente red j ud gm en t in Berm an ’s f avor. W e a pp ly th e s am e s tandard o fr evi ew as the dist ri ct cour t, exam in i ng the bank ruptcy cour t’ s l ega l fi nd i ngs d e n ov o a n d its find in g s o f fac t fo r c lea r er ro r. Oj e da v
. G o ldb erg, 59 9 F
. 3d 712, 71 6 ( 7th Ci r. 20 10) ; Frain , 23 0 F
. 3d at 10 17 ; P et erson v. Sco tt ( In r e Scott) , 17 2 F
. 3d 959, 96 6 ( 7th Ci r . 1 99 9)
. W he r e th e tr i alc ou rt c o r r ec tly s ta te s th e law , i ts deter m i nati on o fwh etherthe f acts m et the l ega l sta nd a r d wi l l b e di s t urb e d o nl y i fi ti s c l e a r l y e r r o ne o us. Se e P ink ston v. M a dry, 440 F.3d 879 , 888 (7th C ir. 2006). U nl i ke m ostcl ai m s o fnon -d ischar geabi l i ty, thi s ca se pr es en ts a n a dded ch al l en g e f o r F o l l et t be cau se i t co ntr ac te d with B er m an& A ss o ci at es , no t wi thJ ayBe r m an, th e i ndi vi dualde bt o r . Be r m an& A ss o ci ates i s no t th e d ebtor be fore us. Jay Berm an i s, an d his de bts are s ubj e c tt o di s c ha r g e u nl e s s F o l l e t th a s p r o v e n a n e xc e pti on. Fo l l etto ffer s tw o theor i es f orhol ding that the debt i s no t di schar geabl e. N ei theri s per suasi ve.N o. 10

- 1882 7 A. O f f i ce rof an Ins ol ve ntCorporat i on Foll ett argu es fi rst tha t Jay Berm an ow ed a fidu ciary du ty to the c re dit or s of B er m an & A sso ci ate s be cause he was an o ffi cerand dir ector o fan insol vent cor pora tio n . U n d er Il lin ois law , l ike th e la w of m a n y s t a te s, a cor pora te offi cero r d irecto r ass um es a fi du ci ar y duty to war d the c o r po r at i o n, i ts s ha reholde r s, a nd, upo n the c or p or at ion ’s in so l v e n c y, als o t o its cr ed ito rs . See , e . g. , Atwat e rv. Am e r i ca n Exc hang eNat i onal Bank o f Ch icag o , 38 N
. E
. 1017, 1022 (I ll

. 1893) (“directors .

. . occu p y a fidu ciary re l ati on t owards the cre dit or s when the co rpora ti on b ec om es ins olv en t” ); P a ul H . Sch w end en er, Inc . v. Jupiter Ele ct r i ci ty Co. , 82 9 N
. E.2 d 818, 82 8 ( I l l

. A pp . 2005 ) ( “once a cor pora tio n beco m es i nsol vent, the fi du ci ar y duty ofan office r i s ext en d ed to the cred itors ofthe corp oration”); see al so 5 W i lliam L. N or ton, J r. , N or ton Bankruptcy Law & Pract i ce § 96: 4 ( 3d ed. 2010 ) ( m aj or i ty vie w is that i nsol vency pla ces corpor ate as set s in tr ust f orco rpor ate cre dit or s, and i n so m e j uri sdic ti ons the fi du c iar y d uty of directors sh ifts to includ e cred itors). Fol l ettargu es thatthi s duty under sta te l aw am ounts to a fi du ci ar y duty f orpurposes o ffe d er albank ruptcy l aw u nd erse cti on 5 23( a) ( 4)
. A ccepti ng thi s a rgum ent, i n the abse nce o fpro ofo f fr aud, w oul d go a l ong w ay toward i m posi ng non- disc harg eabl e per sonall i abi l i ty on co rpor ate o fficers and dir ecto rs f orge nera l co rpor ate debts off al ter i ng co rpor ati ons. This theo ryhas divi ded bank rup tcy and dist ri ct cour ts. A doptingthe theo ry, f orexam ple , se e Sa lem Se r vi ces , Inc . v. H us s ai n (In reH us s ai n) , 30 8 B. R. 86 1, 86 7- 688 N o. 10

- 1882 ( Ban k r . N. D. I l l

. 2 00 4) ( ac ce ptingthe o r y b utfi ndi ngno d efalcation); E nergy P rod uc ts E ng ineerin g, Inc . v. Reu sch er (In re R eusch er) , 16 9 B. R. 39 8, 40 2- 03 ( S.D . Ill

. 19 94) ( acce pt i ngthe o r y a nd r e v e r s i ngb a nk r up t c y c o ur t ’ s di sm issa l o fco m pla i nt) ; se e a l so B erres v. B run ing (In re Bru ni ng) , 143 B. R. 25 3, 25 6 ( D. Col o. 19 92) ( hol ding that a fid u c iar y ob liga tio n aris es u p on ins olv e n c y an d falls w i th i n s e c t i o n 5 2 3 ( a ) ( 4 ) ’ s a mbi t )
. Othe r c o ur t s h ave adopted a mor e l i m i te d v i ew, r ec o g ni zingtha t th e S uprem e Cour t has co nstr ued the s cope o fa fi du ci ar y r el a t i o ns hi p un de r s e c t i o n 5 2 3 ( a ) ( 4 ) mor e na r r o wl y than s t a t e la w d oe s fo r ot h er p u rp os es . See , e . g. , M u rphy & R o binso n In vestm ent C o . v. C r o ss (In re Cro ss) , 66 6 F
. 2d 873, 88 0- 81 ( 5th Ci r. U ni t B 19 82) ( conclu d in g that an o ffi ce r di d no t o we th e co r po r at i o n’ s cr edi to r a ny fi d uc iary du ty w ithin th e m ean ing of sect ion 523(a)(4) ); E conom icD ev el o p m en t G ro w th E n te rp ri ses C o rp. v. M cD erm ott (In re M cD er m ott) , 4 34 B. R. 2 71 , 2 81 ( Ban k r . N. D. N
. Y. 20 10 ), a pp eal do ck eted, N o. 6: 10- CV

- 0696 ( N
. D.N.Y. J une 17, 2010 ) (det erm ining th at fi d uc iary obl igations of officers of ins olvent co rp orations are insu ffici en t f or the p urp os es of se c tio n 52 3(a )(4) ); Fi rs tO pt i ons of Chi cago , Inc . v. K a pla n (In reKapl an) , 1 6 2 B. R. 6 8 4 , 7 0 4

- 0 6 ( Ba nk r . E. D. P a. 19 93 ) (reje c tin g t h e p re m ise th at an offic er ’s d eb t w ou ld be n on-d ischa r g e a b le as a resu lt ofthe corp oration’s wro ng do i ng, de spi te s ta te l aw mak ing th e o ffi ce r a fi duciary). I n thi s ca se, the bankr up tcy c ou rt f ound that F ol l ett had not pr ove d that Ber m an & A sso ci ate s was i nsol vent, so th e co ur t di d no t r ea ch th e que st i o n whethe r Be r m an, as a di re cto r and offi cer, had a fi du ci ar y duty toN o. 10

- 1882 9

cre dit or s, l et al one w h et her any s uch fi du ci ar y duty quali fi ed Berm an’ s debtas non- disc harg eabl e under se ct i o n 5 23 (a)( 4)
. Be ar i ngi n mi nd Be r m an ’ s co nt r o l l i ng ro l e in the cor pora ti on, hi s o w n pers onal bankr up tcy, th e e nd o fthe c o r po r at i o n’ s bus i ne ss i n 2 00 6, a nd the cor pora ti on’ s in abi l i ty to pay wh at i t o w ed to Fo l l ett, w e beli eve th e bette r app roach i s to ad d res s Foll ett’s ar gum en t on the m er i ts, wh i ch can b e deci ded as a m att ero fl aw . W e ho ld that eve n i fthe evi dence showed thatBerm an & A sso ci ate s was i nsolv ent when all or so m e p ar t o f th e d eb t a ro se , so th at B er m an w ou ld have had a fi du ci ar y d u ty to w ar d cre dit or s under I l l i no i s l aw, thi s st at e l aw duty w o ul d no t ha ve c o nsti tuted a basi s f ornon- disc harg eabi l i ty ofthe debt ow ed to Fol lett un d er section 52 3(a)( 4). N ot al l per so n s t re ate d as fi du ci ar i es und erst ate l aw are con side red to “ac t i n a fidu ciary cap acity” for pu rpo se s of fede r alb an k r upt cyl aw. The e xi st en ce o fa fi duci ar y r el ati onshi p un der s ecti on 5 23( a) ( 4) i s a m att er of f e d e ra l law

. Frain , 230 F.3d at10 17 . A s w e o b se rv ed in In reM cG ee, bank ruptcy l aw “depends on, and i m ple

m ents, enti tl em ents defined by s tate l aw , but w hi ch of th ese en titl em en ts is subject to disch arge or a trustee ’s avo i ding pow eri s be yon d s tate co ntro l

. ” 3 53 F. 3d 537, 54 0 ( 7th Ci r. 2 00 3) ( ci ta ti o ns o m i tt ed)

. I t i s no t su ffi ci en t to show m erel y that a debto r w as a fi du ci ar y under appli cabl e s tat e l aw . A l though a n offi cero r dir ector o fan i nsol vent cor pora ti on m ay be dee m ed a fi du c i ar y for cre dit or s u n d erst ate l aw , the offi cero r dir ecto r m ay not be dee m ed, o n that basis al one, a fi du ci ar y under 11 U
. S. C
. § 523(a)( 4).10 N o. 10

- 1882

The D avis Co urt was i nter preti ng a pred ece ss or s tatute that 4 stated in relev an t p art: “A d ischa rg e in ba nk ru p tcy shall relea se a bank rupt f rom all hi s prov able debts, ex cept s uch as

. . . w ere c re at ed by hi s fra ud, e m bez zl em en t, m i s appr opr i at i on, or defal cat ion w hil e acti ng as an offic er or i n any fiduciary c apacity. ” Ba nkr upt c y Actof18 98 , § 17, 30 St at
. 54 4, 55 0, f or m erly co d ifie d at 11 U .S.C . § 3 5 (re p ea le d 19 7 8 ). The S upr eme Cou r t ta ug hti n D avis v. A et na A cceptance Co. , 29 3 U.S
. 32 8 ( 1934 ) , thatthe non- disc harg eabi li ty excepti on’ s r efer en ce t o fi du ci ar y c apaci ty w as “st ri ct and narr ow.” 29 3 U.S
. at33 3. A s J ustice C ardozo w ro te f orthe Court, the debtor“m ust have b ee n a tr ustee bef or e the wrong and w i thout re fer ence ther eto
. ” Id. 4 Those f acts ar e no t pr ese nt i n a sit uati on s uch as thi s, w here the cor pora ti on’ s br each o fi ts contr act cre ate d the de b t
. T he r e s ul t i ngo b l i g a t i o n t o the c r e di t o r i s not “t u rn ed int o” on e a ris in g fr o m a tr u st
. Id. at33 4. S uch obl i gat i ons ar e “ re m ote from the conve nti onaltr ust o r fid u c i a r y se tt in g, inw h ich so m eo n e . . . in w h om co n fid e n c e i s rep osed i s ent rus ted w ith an oth er pe rson ’s m oneyf orsa feke epi ng. ” S ee M ar ch i ando , 13 F. 3d at 1116
. A t l eas t in the abse nce o ffraud , we decl i ne to st re tch th e section 523(a)(4) exc e p tion so far as to m ake offi cers an d d ire c to rs of in so lve n t c or p or at ion s p er so n ally l i ab l e , wi tho utthe ab i l i t y t o s e c ur e di s c ha r g e i n b a nkruptcy, fora w i de ra nge o fco rpor ate debts

.
B. Expr e s s Tr us torIm pl i e d F i duc i ary S t at us U nd eri ts seco nd theo ry, Fo l l ettu rg es u s to hol d that Be rm an & A sso ci ate s o w ed i t a fi du ci ar y duty and thenN o. 10

- 1882 11

A s i n D a v is , th e C o u r t wa s i n t e r p r e t i n g a n e a r l i e r v e r s i on of 5 the e xc ept i on, w hich stat ed i n r el eva ntpar tthat“a l l pe rs ons what s oe ver, r es i di ng i n a ny s t at e, t errito ry or di s t ri c tofthe U nit ed Stat es o w ing debts which s hall not have been cr eate d in c onsequence ofa def alc ati on as a pu blic offic er, or as ex ec ut or, adm i ni s t ra t or, gua rdi an, or t ru s t ee , or whi le ac t i ng in an y oth er fidu ciary cap acity shall . .

. b e en titled t o a d ischarge. ” Fo rsy th , 43 U. S. at20 6 ( i nt er nalquo t at i on m ar ks o m itt ed ). to p ier c e t h e c or p or at e v eil to h old Jay B er m an p er so n ally r e s p o n s ib l e f o r th e d e b to fB e r ma n & A s s o c i a t e s . We agr ee w i th the bank rup tcy and dist ri ct c ourt s that F ol l ett fai led to p rove th at th e corp o r a tion ow ed i t a fi d uc iary du ty, so we do not re ach the ve i l

- pie rcing i ssue. Lo ngb efo r e it s di sc us si o n i n D avis v. Aetna Acceptance Co. , the S upr eme Co ur t addr es se d the s co pe ofthe no ndi sc ha r g eabl e deb t ex ce pti o n i n C hap m an v. Forsyth , 43 U
. S. ( 2 Ho w. ) 2 0 2 ( 1 8 4 4 )
. Th e r e , the Co ur t he l d that a cot ton “f acto r” ta ske d w i th se l l i ng 15 0 ba l es ofco tt on o n beh alfof his p rincipa l d id n ot fal l w ithin th e statu tory ex ce pti o n. The Cou r t ca ut i o ne d ab o ut th e im pl i ca ti o ns

5 ofa bro ad i nterpret ati on

— o ne tha t r i sk ed swa l l o wi ng the r ul e o fdi s c ha r g e a b i l i ty

— an d c o nc l ude d tha t th e ex c e p t i o n wa s i n t e n d e d t o b e l i mi t e d : “ I n a l mo s ta l l t he c o m m er c ial tr an sa c tio n s o f th e c ou n tr y, co n fid en c e is rep o s ed i n th e pu nc tu ali ty an d i nt egrity ofthe d ebtor, and a vi ol ati on o fthes e i s, i n a c om m er ci alse nse, a disr ega rd of a t ru st . B u t t h is i s no t th e rela tio n sp ok en of in

. . . the a ct. ” 4 3 U.S
. at20 7. The Courtr ei ter ate d i ts l i m i ted i nter preta ti on, and the consi ste ncy o f it s app l i cati o n, i n D avis
. S ee 293 U
. S. at33 3.12 N o. 10

- 1882 Our a ppl i ca ti o n o fthe Court’s g ui di ngpr i nc i pl e i s no d i ffe r e n t
. We h a v e r e c o g n i z e d th a t th e e x c e p t i o n e n c o mp as se s o n ly “ a s u b s e t” of fid u c iar y ob liga tio n s. In re Wol dm an , 92 F. 3d 546, 54 7 ( 7th Ci r. 19 96)
. A t the ti m e o f D avis , the subset w as l i m i ted to express tr usts, and d id not i nc lud e trus ts im p lie d b y l aw . See 293 U
. S. at 333. Si nc e the n, h o we v e r, c o ur t s h a v e e xp a nd e d the a pp l i cati on o fse cti on 5 23( a) ( 4) bey ond express t rust s t o certain rel ationsh ips w he re the law i m p oses fi d uc iary obl i gat i ons, suc h as the obl i gat i on a n att or ney o w es to a cl i ent o r a di re ctor owes to shar ehol ders. S ee M ar ch i ando , 11 F. 3d at 1115 ; se e a l so LSP Inve s t m e ntPar t ne rs hip v . B enne tt(In r e B enne tt) , 98 9 F
. 2d 779, 78 4- 85 ( 5th Ci r. 19 93) ( hol ding that the “ technic al” or“e xpress” tr ust r equi re m en t i s no l o ng er“ l i m i te d t o t r us ts tha t a rise b y v i r tu e o fa f o r ma l t r u s ta g r e e me n t, b u ti n c l u d e s r e l a t i o n s h i ps i n w hi ch tr ust- typ e obl i gat i ons ar e i m posed pursuant to statu te or com m on law ”). Th us , our th resh old in qu iry is w he th er Be rm an & A ssociates ow ed Fol lett a fidu ciary obl i gat i on thro ugh the prese nce o fei theran express tr u st or a n im p lied fid u c iar y s ta tu s a ris in g fro m th eir c o nt r a c t ua l r e l a t i o ns hi p.

1. N o E xp ress Trust Fol l ettm ai ntai ns thati t has sho w n suffi ci ent evi dence to dem onstrate the exi ste nce o fan e xpress tr ust s ett l ed byF o l l et t, wi thi ts el fa s the b en efi ci ar y a nd Be r m an& Asso ci at es as th e tr us te e, o ve r th e y ea r s o f th eir con tr ac tu al r el at i o ns hi p. W e di sa g r ee . I n M cG ee, we descr ibed the hal l m ar ks o f a tr ust t o i ncl ud e “ [ s] egr ega ti onN o. 10

- 1882 13

o ffunds , mana g ementb y fi na nc i ali nt er m edi ar i es , a nd re c o g ni t i o n tha t the e nt i t y i n c o nt r o l o f the a s s e t s has at m ost‘ bar e’ l ega l ti tl e t o them

. ” 3 53 F. 3d at 540- 41. These hal l m ar ks, as w el l as a dem onst ra ti on of cl ear i nt en t to cr ea te a tr us t, ca n di st i ng ui sh a tr us t relation

shi p f ro m an or dinar y c ontr actualr el ati onshi p. S ee Rober t E. Gins ber g, Robe rtD. M artin & S usan V. Kell ey, Ginsbe rg& M ar tin o n Bankruptcy § 1 1. 06 at 11- 112 ( 5th ed. 20 10) ( col l ecting ca ses )
. I m pli ed tr u sts l acking the se hal l m ar ks, such a s co nstr ucti ve orr esul ti ng tr usts i m posed on tr ansact i ons as a m att ero fequ ity , d o not f al l withi n the sta tutor y e xcepti on. S ee M ar ch i ando , 13 F
. 3d at1 11 5- 16
. Unl i k e ex pr es s tr us t ar r an g ement s, fiduci ar y duti es ar i si ng under co nstru c tive o r re sul ti ng tr usts ar e fo u n d to be im p lied by co u rt s o n l y a s a res u lt ofexi sti ng debts

. Fo r a s ecti on 5 23( a) ( 4) exce pti on t o ap p ly, the fi du ci ar y duti es m ust e xi st pr i orto the debt. Se e i d. ; Carl i s l eCas hw a y, Inc
. v. Johns on (In reJohns on) , 69 1 F
. 2d 24 9, 2 51

- 52 ( 6th Ci r . 1 98 2) ( no tingtha t th e t e r m “ fi du c i a r y ” i n the n o n- di s c ha r g e a b l e d ebt e xc e ption d oes not exte nd to i m p li ed trust s). The contr acts betw een Ber m an & A sso ci ate s and Fol l ett sta ted thatBerm an & A sso ci ate s would pro vi de Fo l l ett w i th bi l l

- payi ng se rv i ces. N othi ng i n thos e co ntra cts re flec te d an in t e n t t o cr ea te an ex p re ss tru st . N ot h in g in th e r ec o r d s ug g es ts tha t Ber m an& A ss o ci at es mai nta i ne d a ny s epa r at e fi duci ar y a ccoun t o r tha t th e co ntracts requ ired segrega tion of fun d s on Foll ett’ s beh alf

. W e a gr ee w i th the bank ruptcy and dist ri ct c ourt s that Fol l ettdi d not pro ve the e xi ste nce o fan e xpress tr ust.14 N o. 10

- 1882 2. N o Im pl i e d F i duc i ary S t at us I n the abse nce o fan e xpress tr ust, Fo l l ettf aces an up hi l l battl e t o prove a fi du ci ar y r el ati onshi p. Fo l l ett po i nt s to o urho l di ng s i n M a r ch i ando a nd M cG eet o a r g ue th at the nature ofthe thre e- yea r re l ati onshi p between th e tw o corp orations w a s suffi cient to i m p ly fi d uc iary du ti es w i thi n the m eani ng o fthe sta tute. Fo l l ett m i sr eads those cas es, wh i ch pro vi de useful gui dance on the i m pli ed fi du ci ar y theor y. I n M a rchi ando , the ow ne r ofa conv en ience store de c l a r e d b a nk r up t c y a ft e r f a i l i ngt o r e mi tthe p r oce e ds of s ta te lott er y t ick et sa les . 13 F .3d at11 13 . A n Il lin ois s t a t e s t a t u t e p r o v i d e d th a tl o t t e r y t i c k e tp r o c e e ds “shal l co nsti tute a tr ust fund ” unti l pai d to the s tat e. 20 I L C S § 1605/10.3. W e ackn ow ledge d that a fidu ciary re l at ionshi p m ay ar i se separ ate l y fro m an e xpress tr ust, but we h e l d tha tthe s t a t e s t a t ut e a l o ne di d n o tc r e a te a fi du ci ar y obl i gat i on withi n the m ea n i ng o fse cti on 52 3( a) ( 4)
. Non- di sc ha r g eabi l i tyr equi r es mor e. W e ex pla i ned th at th e n on -d isc h ar ge ab ility st an d ar d co u ld be m et w he re a fidu ciary rel ationsh ip involved a differ ence i n knowle dge o r pow er g ivi ng o ne par ty a p osi ti on o fas cendancy o verano ther

. 13 F. 3d at 1116
. Tho ug h the r el at i o ns hi p i n tha t ca se di d no t m ee t th e st an dar d, we des cr ibe d ho w the law , a nd the no ndisc harg eabi lity exce pti on i n part i cul ar, se parat es re l atio n sh ip s “ in w h ich on e p ar ty to th e rela tio n is in c ap ab le o fmoni to rin gthe o th er ’ s per f o r m an ce ” f r o m r el at i o nsh ip s b et w ee n eq u als

. Id. I n M cG ee, a ci ty or dinance cre ate d a fi du ci ar y obl i gat i on on the part of a l andlo rd to hol d a l l secur i ty d ep osi tsN o. 10

- 1882 15

Folle tt argues on app eal that the bank ruptcy court “ d isr e- 6 gard ed” M cG eean d that, ha d i tkno wn t he cour twoul d t ake thatapp roach, i t wou ld have argued i ts cl aim u nd er an em bezzl em en tthe or y ( whic h woul d notha ve re qui re d p roofof fiduciary c apacity) in the al ter nati ve. W e think the bank ruptcy c our t ’ s i nt er pre t at i on ofour pr i or c ase l aw was c or re c t
. And F ollett h ad ev ery op p or tu nity to ar g u e its claim un d er w ha teve r the or y or the or i es i tlik ed . It w as no te nt i t l ed t o t ry on e theory, l ose w ith it, and then s tar t over. separ ate fro m o therfund s. 35 3 F
. 3d at 540. In t h at case , agai n, the or dinance’ s l abelo fthe l andlo rd’ s o bl i gat i on as “fi du ci ar y” did notqual ify the par ti es’ r el ati onshi p as f al l i ng withi n the sect i on 5 23(a)(4) exce pti on. But i ts re quir em ent that the deposi t be se gr ega ted, as wellas the di spari ty i n pow ergo ver ni ng tho se fund s, l ed us to co nc l ude tha t th e “ econo m i c r el at i o n” c r ea te d b y the o r di na nc e i m po se d fi duci ar y o bl igati o ns wi th i n the m ea n in g of s ec tio n 52 3(a )(4)
. Id. at54 1. 6 This anal ysi s a pp l i es beyo nd cas es l i ke M ar ch iando a nd M c G ee, w h er e a st at u te or or d in an c e fo rm s t h e b as is ofa fi du ci ar y obl i gat i on, to tho se m or e clos el y r esem bl i ng thi s ca se, wh er e a co ntra ct i s necess ar y to est abl i sh a fi du ci ar y r el ati onshi p. Justi ce Car dozo w ro te f or the D avis Co ur t th ati t i s th e su bs ta nc e o fa t r an sa ct i o n, rath er t han the l abelas si gned to i t, thatdeter m i nes w hetherther e i s a fi du ci ar y rel ati onshi p f orbank ruptcy pu rpos es. 29 3 U.S
. at33 4. T h u s, i n such cas es, we have hel d th a tthe o b l i g a t i o ns o fthe c o nt r a c t, l i k e the l e g i s l ati ve l ab el s i n M ar ch i ando a nd M cG ee, d o n o ta l o ne es tabl i sha f iduc i ar y r el at i o ns hi p wi th i n the mean i ng16 N o. 10

- 1882 ofse ction 523( a) ( 4)
. S ee Frain , 23 0 F
. 3d at 1017; Wol dm an , 92 F. 3d at 547. W e ad d re ss ed th i s i ss ue i n Frain , i n w hi ch shar eho l de r s o fa c l o s e l y h e l d c o r po r a ti o n s o ughtt o e xc e pt f ro m d i s c ha r g e a de b to we d t o the m bythe c o r po r ati on’ s m aj ors h ar eh ol der o n the gr ound that he had vi olat ed p ro vis ion s of a s h ar eh old er ag re em en t. W e a c kn ow led ged th at Frain, th e d ebtor and th e corp oration’s chi efo perat i ng o ffi cer, had a “ natura l advantag e” ove r the o the r t wo s ha r e ho l de r s b e c a us e o f hi s k no wl e dg e o f the c or pora ti on’ s fi nances. That f act al one w as not enough to m ee t t h e h igh st an d ar d of se c ti on 52 3(a )(4) , bu t F ra in a l s o ma i n t a i n e d “ u l t i ma t e p o we r ” o v e r b o th h i s o wn em p loy m en t a n d th e d ire c tio n of th e c or p or at ion
. Id. at 1017

- 18. H i s “ contr olo verthe d ay-t o- day busi ness of the c or pora ti on a nd o w ners hi p of50 % o ft h e sh ares gave hi m s i g ni ficant f r ee do m t o r un the c o r po r at i o n a s he saw fi t. ” Id. at 1018
. Thi s s ubstanti alco ncentr ati on o f pow erunder the co rpor ati on’ s inter nal st ructur e cr eat ed a fi du ciar y d u ty that fel l withi n the m eani ng o f sect ion 523(a)(4)
. Our a na l y si s i n Wol dm an was si m i l ar , t h ough the o utcom e d iffered. T he re, tw o law yers agreed to sh are equal l y a ny at torney fees g en er ate d by a per sonal inj ury case th at one law yer ha d referred to t h e ot h e r. 92 F. 3d at 546. A l though under I l l i noi s l aw , partners o r j o i ntv en tu r er s o we e ac h o th era fi duci ar y o bl i g at i o n, w e d id n ot ext en d the sec tion 523(a)(4) ex cep t io n so far. Id. at 546-47. W e obser v e d t h a t, as he re, the d ebtor’s o nl y duty was t o ho no r the a g r eem en t. The r e was noN o. 10

- 1882 17 substa nti ali nequal i ty in p ower o r knowle dge be tw een the par ti es to dist i ngui sh the m as anythi ng o th er than equal partners . Thei r re l ati onshi p f el l “a t the o pp osi te end of th e br oad spect rum o ffi du ci ar y obl i gat i ons” from cas es w i thi n the m eani ng o fthe sect i on 5 23( a) ( 4) ex c ep tio n, su c h as th o s e i n vo lvin g a tru st ee an d ch ild b en efic iar y or a law ye r an d clie n t. Id. at54 7. H er e, the b an kr up tcy j ud ge cor re ctl y c oncl ud ed that a n o r di na r y pr i nc i pa l

- a g e nt o r b uy e r - s e l l e r r el a t i o ns hi p, w i thout m or e, is not a fi du ci ar y r el ati onshi p und er sect i on 5 23( a) ( 4)
. N othi ng i n the su bsta nce o fthe re l atio n sh ip be tw ee n F o l let t a n d B er m an & A ss oc iat es qu alifi ed i t a s a fi du ci ar y r el ati onshi p w i thi n the m eaning of sect ion 523( a) ( 4)
. Thei r cre dit or - debtorr el ati on di d not i nv o l ve an y “s pec i al co nfi den ce [ s] ” l i k e th o se pre se nt i n oth er t yp es ofr el ati onshi ps that w e a nd o therco urts have re cogni zed to fi t withi n the excepti on o n a c ase -byc as e b as is. M ar ch i ando , 13 F .3d at11 16 . See , e.g. , Johns v. Jo h n s (In re Joh ns) , 1 8 1 B. R. 9 6 5 , 9 7 0

- 7 3 ( Ba nk r . D. A ri z. 19 95 ) (p ar en t, a t ru st e e of fu n d s fo r th e b en efit of h is son, w as a fi d uc iary for pu rp oses of non -disch argeab il ity); Gri f f i t hs v. Pe t erson (In rePe t e rs on) , 96 B. R. 31 4, 32 1- 24 ( Ban k r . D. Co l o . 1 98 8) ( i nv estm enta dvi so r wi ths ta tu
tor y duti es quali fi ed as fi du ci ar y w ithi n the m eani ng o f sect ion 523(a)(4) ) ; Pu rc el l v. Janikow ski (In re Janikow ski) , 60 B.R. 78 4, 78 9 ( Bank r. N
. D. I l l

. 19 86) ( fi du ci ar y r el ati onshi p cre ate d b etween an att or ney and c l i en t u n der Illino is law fell w ith in se c tio n 52 3(a )(4) ex c ep tio n ); Eau Clai r eCounty v . L o k e n (In reLo ke n) , 32 B. R. 20 5, 21 0- 11 ( Ban k r . W
. D. W is. 1 98 3) ( publ i c r eg i st ero fde eds a nd18 N o. 10

- 1882 fee col l ecto r ser ved i n fi du c iar y c apaci ty f orpurposes of section 523(a)(4))

. A co m m erci alpri nci pal l i ke Fol l ett, o r l i ke the c ott on pr i nc i pall o nga g o i n F ors yt h , wh o see ks the pr ote cti on ofa tr ust in the eve nt o fbank ruptcy can cr eat e a n express tr ust byputti ng cl earr equi re m ents to that effect i n i t s c o nt r a c t s , s ucha s r e qu i r i ngs e g r e g a t i o n o ffun ds he ld in trus t for it. Ot h e r w ise, as the Su p rem e C ou rt observ ed , i f th e non -disch arg eable d ebt ex cep tion w ere to inc lu d e s u c h ord in ar y re lat ion sh ip s a s t h is on e , it w ou ld be d ifficu lt t o lim it its ap p lica tio n atall. Forsyth , 43 U
. S. at20 7.

III
. Concl us i on Fol l ettdi d not e stabl i sh thatBerm an & A ss ocia tes ac te d in a fid u c iar y c ap a c ity , un d er an y t h eo ry , w ith in th e m ean ing of 11 U
. S. C
. § 523(a)( 4 ). W e the refore affi rm the b ankr up tcy cour t’ s decis i on hol ding the debtto Fol l ettto be disc harg eabl e. A FFI RMED .

1- 21- 11