Opinion ID: 2975282
Heading Depth: 3
Heading Rank: 1

Heading: Defalcation by a Fiduciary.

Text: The Bankruptcy Code excepts from discharge any debt “for fraud or defalcation while acting in a fiduciary capacity.” 11 U.S.C. § 523(a)(4). A finding of nondischargeability under § 523(a)(4) requires proof of three elements: “(1) a fiduciary relationship; (2) breach of that fiduciary 4 As discussed hereinbelow, the Debtor did not engage in tortious conduct that would render the debt to the Appellant nondischargeable in the Debtor’s individual bankruptcy case. Therefore, any potential personal liability for the debt owed to the Appellant by R.R. Fox is subject to the Debtor’s bankruptcy discharge. 11 U.S.C. § 727. The concurrence narrowly focuses upon whether the Debtor may be held personally liable for a breach of contract by R.R. Fox. However, this appeal necessarily encompasses a wider range of issues. The Appellant asserts that the Debtor engaged in nondischargeable tortious conduct. We must therefore review the record and the elements of the various alleged nondischargeable debts. See, e.g., Board of Trustees v. Bucci, 351 B.R. 826 (N.D. Ohio 2006) (appellate court discusses elements of defalcation while acting in a fiduciary capacity and embezzlement before agreeing that the debtor merely breached a contractual obligation). If the Appellant proved the Debtor committed an actionable tort, applicable Ohio law would provide the necessary bridge to hold the Debtor personally liable. -9- relationship; and (3) a resulting loss.” R.E. Am., Inc. v. Garver (In re Garver), 116 F.3d 176, 178 (6th Cir. 1997). The nature of the fiduciary relationship required to trigger liability under § 523(a)(4) is determined by federal law. Commonwealth Land Title Co. v. Blaszak (In re Blaszak), 397 F.3d 386, 390 (6th Cir. 2005) (citing Carlisle Cashway, Inc. v. Johnson (In re Johnson), 691 F.2d 249, 251 (6th Cir. 1982)). The Sixth Circuit Court of Appeals “construes the term ‘fiduciary capacity’” more narrowly for purposes of § 523(a)(4) than it does in other circumstances. Id. at 391; see BorgWarner Acceptance Corp. v. Miles (In re Miles), 5 B.R. 458, 460 (Bankr. E.D. Va. 1980) (“The Courts have attempted to avoid making the exception so broad that it reaches such ordinary commercial relationships as creditor-debtor and principal-agent.”) (citations omitted). It is noteworthy that the Sixth Circuit states that “[t]he mere failure to meet an obligation while acting in a fiduciary capacity . . . does not rise to the level of defalcation” under § 523(a)(4). In re Garver, 116 F.3d at 179. Rather, the requisite fiduciary relationship “turn[s] on the existence of a preexisting express or technical trust whose res encompasses the property at issue.” In re Blaszak, 397 F.3d at 391 (emphasis added). Construing the Agreement under Texas law,5 the bankruptcy court held that the Agreement did not create an express trust and, accordingly, did not give rise to the type of fiduciary relationship required under § 523(a)(4). We agree. Under Texas law, an express trust “is created ‘only if the settlor manifests an intention to create a trust.’” Chapman Children’s Trust v. Porter & Hedges, LLP, 32 S.W.3d 429, 438 (Tex. App. 2000) (quoting Tex. Prop. Code Ann. § 112.002 (Vernon 1995)). Absent ambiguity, this intent is discerned “from the language used in the written declaration or trust instrument.” City of Mesquite v. Malouf, 553 S.W.2d 639, 643 (Tex. App. 1977). When interpreting a written agreement, Texas law requires courts to “examine and consider the entire writing in an effort to harmonize and give effect to all the provisions of the contract so that none will be rendered meaningless.” J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223, 229 (Tex. 2003) (citing Univ. C.I.T. Credit Corp. v. Daniel, 243 S.W.2d 154, 158 (Tex. 1951)). “No single provision taken alone will be given controlling effect; rather all the provisions must be considered with reference to the whole 5 As previously noted, the Agreement states that it is governed by Texas law. The parties have not disputed which law governs. -10- instrument.” Id. (citing Myers v. Gulf Coast Minerals Mgmt. Corp., 361 S.W.2d 193, 196 (Tex. 1962)) (additional citation omitted). As the bankruptcy court correctly noted, paragraph 6 of the Agreement provides that proceeds from collections on the Accounts are to be held by R.R. Fox in a separate trust account “for the benefit of” the Appellant. Standing alone and without reference to the rest of the Agreement, this provision appears to establish an express trust and a resulting fiduciary relationship between R.R. Fox and the Appellant. This language, however, does not stand alone. Paragraph 13 of the Agreement specifically provides that neither party to the Agreement shall be deemed a “fiduciary” “for any purpose whatsoever.” This provision supplements and supersedes the “trust” language and explicitly prohibits either party from relying upon the Agreement to establish a fiduciary relationship. Reconciling these two provisions, one may readily discern that paragraph 6 requires R.R. Fox to follow certain contractual practices and procedures in collecting the Accounts. We agree with the bankruptcy court’s conclusion that paragraph 6 simply established a contractual obligation for R.R. Fox to maintain a trust account and to segregate funds, while paragraph 13 is determinative of the parties’ intent regarding the nature of their business relationship. This interpretation not only gives meaning to both provisions of the Agreement, but is also consistent with well-settled bankruptcy law. “It is the substance of a transaction, rather than the labels assigned by the parties, which determines whether there is a fiduciary relationship for bankruptcy purposes.” Barclays Am./Bus. Credit, Inc. v. Long (In re Long), 774 F.2d 875, 878-79 (8th Cir. 1985) (citing Davis v. Aetna Acceptance Co., 293 U.S. 328, 333, 55 S. Ct. 151 (1934)). Accordingly, in an analogous context, the United States Supreme Court has held that an ordinary security agreement does not create a fiduciary relationship for purposes of § 523(a)(4) simply because it uses trust language and imposed trust-like duties upon the debtor. Davis, 293 U.S. at 334; see also In re Miles, 5 B.R. at 460 (parties may not “cloak” a “transaction in the guise of a trust by the ‘magic words’ in the agreement, ‘in trust;’” “[v]erbal legerdemain does not impose a fiduciary duty on the debtor”). Here, paragraph 13 of the Agreement defined R.R. Fox as an independent contractor, not an agent or fiduciary. The nature of the parties’ relationship is not altered by the attempted “magic” trust language in paragraph 6. Because the Agreement did not create the type of fiduciary relationship between R.R. Fox and the Appellant required under § 523(a)(4), there could be no defalcation by R.R. Fox, and thus -11- no defalcation by the Debtor. The bankruptcy court properly rejected the Appellant’s defalcation claim.