Opinion ID: 506588
Heading Depth: 1
Heading Rank: 6

Heading: dischargeability of rodriguez's liability

Text: The last issue to be addressed is one raised by the following passage, which appears at the end of the district court's opinion and order in this case. Finally, we have examined, but do not pass upon, defendant's pending application for final compensation before the bankruptcy court in the total amount of $462,985, Addendum B to this opinion and findings. However, leaving dollars and cents aside, an examination of the allegations there contained, in light of the evidence received here, further convinces us that defendant's liability is of such magnitude that he would not be entitled to a discharge under the equitable principles supporting bankruptcy. 11 U.S.C. sec. 523(a)(4). The evidence received here is incompatible with the claims made there. To this paragraph was appended the following footnote: Under the former Bankruptcy Code of 1898, this exception to discharge was enacted at sec. 35(a)(4). It was adopted in the Bankruptcy Act of 1978, and followed into existence in the Bankruptcy Amendments and Federal Judgeship Act of July 10, 1984. This section does not apply automatically. It applies only when the bankrupt seeking discharge was acting as a trustee before the debt accrued; in other words, the fiduciary relationship had to exist prior to the accrual of the debt in controversy. Fraud or defalcation are grounds to deny discharge of a debt only when the debtor seeking discharge was the fiduciary of the creditor. Fraud justifying denial of discharge consists of deceit, bad faith or immorality. The required elements are clearly here. 71 B.R. at 428 & n. 12 (case citations omitted). Before addressing the parties' arguments regarding this passage, it should be noted that the issue of dischargeability discussed by the court was never raised by any of the parties. It was raised by the court sua sponte Rodriguez interprets the court's above-quoted statement to mean that, should Rodriguez decide personally to file for bankruptcy, his Mosser liability from this case would not be a dischargeable debt. Rodriguez maintains that the court erred by deciding this question, which was not before it. Lopez responds by arguing that the court did not actually decide the dischargeability issue, but merely made a pertinent observation: that the harm Rodriguez caused is not of the type that can be discharged in bankruptcy. Brief for Appellee at 49 n. 35. We are not sure that either of these interpretations is entirely correct and, indeed, it appears that the court actually may have confused two different concepts of discharge in the disputed paragraph. By referring to Rodriguez's outstanding application for compensation, the paragraph seems at first to refer to a trustee's formal discharge from liability, a concept we have discussed supra at 939-940. Then, switching gears and citing to section 523(a)(4), 28 the passage clearly seems to anticipate the possibility that Rodriguez may file for individual bankruptcy and seek to have all his outstanding debts discharged. Importantly, however, neither of these issues was before the district court and thus nothing in the district court's opinion can or should be treated as deciding them. With respect to Rodriguez's discharge from liability as a trustee, we interpret the court's statement that it was not passing upon the application for compensation as itself establishing that no decision was made. With respect to Rodriguez's ability to seek an individual discharge, we note that this issue has already been decided in our Connecticut General decision. As in this case, the district court in Connecticut General declared that the Mosser liability it imposed on Rodriguez was not dischargeable in bankruptcy. 838 F.2d at 623. As we wrote then and as is equally true here: The Rules of Bankruptcy Procedure provide that dischargeability is a question to be raised before a bankruptcy court only after bankruptcy proceedings have been initiated. Bankr.Rules 4004-08. At that time, a discharge shall be granted to individual debtors unless an objection is filed or the debtor waives the discharge. Bankr.Rule 4004(c). And the objector carries the burden of proof. Bankr.Rule 4005. Because Rodriguez has not filed for bankruptcy, the district court's decision regarding discharge is premature and must be vacated. Id. at 623 (emphasis in original).