Court Opinion

ID: 2819212
Source: CourtListenerOpinion
Date Created: 2015-07-22 17:01:24.487228+00
Date Added: 2024-06-11T11:28:23.640148
License: Public Domain

FOR PUBLICATION

    UNITED STATES COURT OF APPEALS
         FOR THE NINTH CIRCUIT

 DOUBLE BOGEY, L.P., a California                  No. 13-15809
 limited partnership,
                   Plaintiff-Appellant,             D.C. No.
                                                3:12-cv-01877-SI
                     v.

 SYLVESTER FRANK ENEA; PAUL                          OPINION
 JOSEPH ENEA,
              Defendants-Appellees.

        Appeal from the United States District Court
          for the Northern District of California
          Susan Illston, District Judge, Presiding

                   Argued and Submitted
          May 14, 2015—San Francisco, California

                       Filed July 22, 2015

   Before: Diarmuid F. O’Scannlain and Sandra S. Ikuta,
    Circuit Judges and Larry A. Burns,* District Judge.

                 Opinion by Judge O’Scannlain

  *
    The Honorable Larry A. Burns, District Judge for the U.S. District
Court for the Southern District of California, sitting by designation.
2                    DOUBLE BOGEY V. ENEA

                           SUMMARY**

                            Bankruptcy

     The panel affirmed the district court’s affirmance of the
bankruptcy court’s judgment in a creditor’s adversary
proceeding claiming that a debt was not dischargeable in
bankruptcy under 11 U.S.C. § 523(a)(4) because it was a debt
for fraud or defalcation by a fiduciary.

    The panel held that a finding that the debtors, who owned
and operated a fiduciary corporation, were the corporation’s
alter egos under California law was insufficient to show that
they therefore also were fiduciaries of the creditor under
§ 523(a)(4).

                             COUNSEL

Miriam Hiser, Law Offices of Miriam Hiser, San Francisco,
CA, argued the cause for the Appellant. With her on the
briefs was William H. Armstrong, Armstrong & Associates,
LLP, Oakland, California.

Lisa Lenherr, Tiemstra Law Group, PC, Oakland, CA, argued
the cause for Appellee Paul Enea.

  **
     This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
                     DOUBLE BOGEY V. ENEA                              3

                             OPINION

O’SCANNLAIN, Circuit Judge:

   We must decide whether California’s alter ego doctrine
can create a “fiduciary” relationship under the Bankruptcy
Code.

                                    I

    This case arises from a dispute between two non-natural
persons, Double Bogey, L.P. and Appian Construction, Inc.,
regarding Appian’s alleged mismanagement of Double
Bogey’s investments in several real estate projects. However,
we are not presented with the question of Appian’s liability.
Rather, we consider the liability of the two natural persons
who owned and operated it.

    Appian was created by brothers Paul and Sylvester Enea,
who served as its only shareholders and officers.1 The
company managed several real estate development projects,
including the two projects relevant to this case: 1221
Monticello, L.L.P., of which Appian was a General Partner,
and Monterrosa, L.L.C., of which Appian was the Managing
Member. Double Bogey invested approximately $4 million
in Monticello as its Limited Partner, and approximately $1
million in Monterrosa as a non-managing member.

    Double Bogey never recovered any of its investment in
Monterrosa. It also did not receive profits to which it argues
it was entitled from both Monticello and Monterrosa. After

  1
    The parties dispute whether Sylvester Enea was actually a shareholder
in Appian. We need not and do not resolve that dispute.
4                     DOUBLE BOGEY V. ENEA

Appian failed to provide an accounting of Double Bogey’s
investments, Double Bogey filed suit against Appian and the
Eneas in state court in September of 2008. Roughly a year
later, the Eneas separately filed for bankruptcy under Chapter
7 of the Bankruptcy Code (the “Code”). Appian also filed
under Chapter 7 in November of 2009.

    Double Bogey brought an adversary proceeding in the
bankruptcy court, claiming, among other things, that:
(1) Appian was Double Bogey’s fiduciary with respect to the
real estate investments, (2) Appian was liable for Double
Bogey’s lost principal and profits in Monterrosa and its lost
profits in Monticello, (3) such liabilities were created by
Appian’s “defalcation,”2 (4) liabilities created by a fiduciary’s
defalcation are not dischargeable in bankruptcy under Section
523(a)(4) of the Code,3 and—of most importance here—

    2
    The specific definition of “defalcation” is not easily ascertained. As
the Supreme Court has explained, “Congress first included the term
‘defalcation’ as an exception to discharge in a federal bankruptcy statute
in 1867,” and “legal authorities have disagreed about its meaning almost
ever since.” Bullock v. BankChampaign, N.A., 133 S. Ct. 1754, 1758
(2013).

     Current legal dictionaries variously define it as “embezzlement,” “the
failure to meet an obligation; a nonfraudulent default,” “to misuse funds,”
“a fraudulent deficiency in money matters,” and “misappropriation of
money in one’s keeping.” Id. (collecting sources). For purposes of this
appeal we assume, without deciding, that Appian’s failure to provide an
accounting of Double Bogey’s investment constitutes “defalcation” by a
fiduciary under Section 523(a)(4).
    3
   Section 523(a) of the Code states, in relevant part, that, “[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, embezzlement, or
larceny.” 11 U.S.C. § 523(a)(4).
                  DOUBLE BOGEY V. ENEA                      5

(5) the Eneas were also liable for such non-dischargeable debt
either by way of their own defalcation or as alter egos of
Appian. After Double Bogey presented its case-in-chief, the
Eneas moved for Judgment on Partial Findings under
Bankruptcy Rule 7052.

    The bankruptcy court entered judgment in favor of the
Eneas. The court noted that the Eneas conceded that Appian
was a fiduciary of Double Bogey for purposes of Section
523(a)(4) of the Code, and that—by presenting evidence that
the Eneas had failed to respect corporate formalities and used
corporate funds for personal expenses—Double Bogey had
made a “prima facie case” that the Eneas were Appian’s alter
egos. However, the court decided that merely finding the
Eneas were alter egos of Appian under California law was
insufficient to hold that they were “fiduciaries” of Double
Bogey, at least inasmuch as that term is narrowly defined in
Section 523(a)(4). Thus, Double Bogey’s claim that the
Eneas were liable for defalcation by a “fiduciary” failed.

    The district court affirmed the bankruptcy court and
entered an order to that effect. See In re Enea, No. ADV
11-3017 DM, 2013 WL 1209479, at *3, *4 (N.D. Cal. Mar.
25, 2013). Double Bogey timely appealed.

                              II

    On appeal, Double Bogey argues that because the Eneas
are the alter egos of Appian under California law—and
because Appian was a fiduciary of Double Bogey—the Eneas
are also “fiduciaries” of Double Bogey under
11 U.S.C. § 523(a)(4). We are thus confronted by a single
question of law: whether a debtor can be considered a
6                 DOUBLE BOGEY V. ENEA

“fiduciary” under Section 523(a)(4) solely by the application
of California’s alter ego doctrine.

    “Because we are in as good a position as the district court
to review the findings of the bankruptcy court, we
independently review the bankruptcy court’s decision.” Pizza
of Hawaii, Inc. v. Sharkey’s, Inc., 761 F.2d 1374, 1377 (9th
Cir. 1985). Whether a relationship is a “fiduciary” one within
the scope of 11 U.S.C. § 523(a)(4) is a question of federal law
that we review de novo. Ragsdale v. Haller, 780 F.2d 794,
795 (9th Cir. 1986).

                               A

    “[W]e have adopted a narrow definition of ‘fiduciary’ for
purposes of § 523(a)(4).” In re Cantrell, 329 F.3d 1119,
1125 (9th Cir. 2003). Under such definition, “[t]he broad,
general definition of fiduciary—a relationship involving
confidence, trust and good faith—is inapplicable.” Ragsdale,
780 F.2d at 796. As the pre-eminent bankruptcy treatise
explains, “[f]or purposes of section 523(a)(4), the definition
of ‘fiduciary’ is narrowly construed, meaning that the
applicable nonbankruptcy law that creates a fiduciary
relationship must clearly outline the fiduciary duties and
identify the trust property.” 4 Collier on Bankruptcy,
¶ 523.10 (Alan N. Resnick & Henry J. Sommer eds., 16th
ed.).

    While we may consult state law—like the alter ego
doctrine—when interpreting whether an individual is a
“fiduciary” under Section 523(a)(4), we ultimately are
interpreting a federal statute, and the issue presented is one of
federal law. See Ragsdale, 780 F.2d at 796. Thus, “the mere
fact that state law places two parties in a relationship that may
                  DOUBLE BOGEY V. ENEA                       7

have some of the characteristics of a fiduciary relationship
does not necessarily mean that the relationship is a fiduciary
relationship under 11 U.S.C. § 523(a)(4).” 4 Collier on
Bankruptcy, ¶ 523.10 (Alan N. Resnick & Henry J. Sommer
eds., 16th ed.). Indeed, “[i]f applicable nonbankruptcy law
does not clearly and expressly impose trust-like obligations
on a party, [courts] will not assume that such duties exist and
will not find that there was a fiduciary relationship.” Id.

    Further, “the fiduciary relationship must be one arising
from an express or technical trust that was imposed before
and without reference to the wrongdoing that caused the
debt.” In re Cantrell, 329 F.3d at 1125 (emphasis added)
(quoting Lewis v. Scott (In re Lewis), 97 F.3d 1182, 1185 (9th
Cir. 1996)). Thus, Section 523(a)(4) applies “only to a debt
created by a person who was already a fiduciary when the
debt was created.” Davis v. Aetna Acceptance Co., 293 U.S.
328, 333 (1934) (internal quotation marks omitted).

                              B

    Common-law doctrines—like California’s alter ego
doctrine—rarely impose the trust-like obligations sufficient
to create a fiduciary relationship under Section 523(a)(4).
Indeed the kinds of trusts typically created by operation of
law—constructive, resulting, or implied trusts—never satisfy
Section 523(a)(4)’s rigorous requirements. See Ragsdale,
780 F.2d at 796. In the few instances where we have
recognized a fiduciary relationship in part based on common-
law doctrines, such doctrines merely heightened—in clear
and express language—duties already imposed by statute.

   Specifically, in Ragsdale, In re Short, and In re Lewis, we
concluded that California, Washington, and Arizona state
8                 DOUBLE BOGEY V. ENEA

courts respectively, had, through interpretation of state
partnership law, “raised the duties of partners beyond those
required by the literal wording” of the state partnership
statutes—and raised partners’ duties to such a degree that
they were trustees and “fiduciaries” over partnership assets
under Section 523(a)(4). Ragsdale, 780 F.2d at 796; see also
In re Lewis, 97 F.3d at 1186; In re Short, 818 F.2d 693, 695
(9th Cir. 1987). This was not a difficult conclusion to reach:
indeed in Ragsdale we noted that California courts stated,
quite simply, that “[p]artners are trustees for each other.”
Ragsdale, 780 F.2d at 796 (quoting Leff v. Gunter, 658 P.2d
740, 744 (Cal. 1983) (internal quotation marks omitted)); see
also In re Short, 818 F.2d at 695 (“[T]he managing partner is
acting as a trustee for his firm.” (emphasis omitted) (quoting
In re Wilson’s Estate, 315 P.2d 287, 292 (Wash. 1957))
(internal quotation marks omitted)); In re Lewis, 97 F.3d at
1186 (“The relation of partnership is fiduciary in character
. . . .” (quoting DeSantis v. Dixon, 236 P.2d 38, 41 (Ariz.
1951)) (internal quotation marks omitted)).

    We thus easily concluded that California, Washington,
and Arizona partnership law clearly and expressly imposed
trust-like obligations on partners—explicitly outlining
partner’s fiduciaries duties and identifying the assets of the
partnership as the trust res over which partners are
fiduciaries. See Ragsdale, 780 F.2d at 796 (describing
California law’s requirement that partners act as trustees and
“in the highest good faith” over “the assets of the
partnership”); 4 Collier on Bankruptcy, ¶ 523.10 (Alan N.
Resnick & Henry J. Sommer eds., 16th ed.) (“For purposes of
section 523(a)(4), the . . . applicable nonbankruptcy law . . .
must clearly outline the fiduciary duties and identify the trust
property.”). Further, because state law established that
partners were trustees over partnership assets “for all
                    DOUBLE BOGEY V. ENEA                             9

purposes” throughout the duration of the partnership, we
concluded such law made partners trustees prior to any
defalcation—as required by Section 523(a)(4). See Ragsdale,
780 F.2d at 796–97.

                                  C

    Here, by contrast, California’s alter ego doctrine does not
explicitly create a trust relationship, either by raising existing
legal duties or otherwise. Nor does it come into operation
prior to wrongdoing—rather it merely operates to hold an
individual liable for his corporation’s already-existing debt.

    Instead of creating, enforcing, or expounding on
substantive duties, California’s alter ego doctrine merely acts
as a procedural mechanism by which an individual can be
held jointly liable for the wrongdoing of his or her corporate
alter ego. See Mesler v. Bragg Mgmt. Co., 702 P.2d 601, 607
(Cal. 1985); see also Ahcom, Ltd. v. Smeding, 623 F.3d 1248,
1251 (9th Cir. 2010) (“‘A claim against a defendant, based on
the alter ego theory, is not itself a claim for substantive relief,
e.g., breach of contract or to set aside a fraudulent
conveyance, but rather, procedural. . . .’” (quoting
Hennessey’s Tavern, Inc. v. Am. Air Filter Co., 251 Cal. Rptr.
859, 863 (Ct. App. 1988))).

                                  D

   We cannot conclude that California’s alter ego doctrine—
which, inasmuch as it can be defined,4 is a means for adding

  4
    California’s alter ego doctrine is broad and ambiguous—it is less a
single principle of law and more a broad, flexible device applied in
various ways to ensure “that justice be done.” Mesler, 702 P.2d at 607.
10                    DOUBLE BOGEY V. ENEA

a corporation’s owners as judgment debtors for the
corporation’s liabilities—clearly and explicitly creates a trust
relationship in “that strict and narrow sense” required by the
Code. See In re Lewis, 97 F.3d at 1185 (quoting Davis,
293 U.S. at 333). Even if this broad procedural device could
have been used in a California court to hold the Eneas liable
for Appian’s alleged wrongdoing, it could not and did not
impose fiduciary duties “before and without reference to”
such wrongdoing. See In re Cantrell, 329 F.3d at 1125
(citing In re Lewis, 97 F.3d at 1185).

     Double Bogey argues that, although the alter ego doctrine
is procedural in nature, in this case it operated to impose
specific substantive fiduciary duties over a specific trust res.
It asserts that the Eneas owed the same duties as Appian over
the assets of Monterrosa and Monticello, because under the
alter ego doctrine the Eneas and Appian were, for a certain
period, legally the same entity.

    But we cannot use California’s alter ego doctrine to hold
the Eneas and Appian were one and the same. See Mesler,
702 P.2d at 607 (“It is not that a corporation will be held
liable for the acts of another corporation because there is
really only one corporation.”). Although California’s alter

“What the [doctrine] comes down to, once shorn of verbiage about
control, instrumentality, agency, and corporate entity, is that liability is
imposed to reach an equitable result.” Id. (internal quotation marks
omitted). Indeed the “conditions under which the corporate entity may be
disregarded, or the corporation be regarded as the alter ego of the
stockholders, necessarily vary according to the circumstances in each case
inasmuch as the doctrine is essentially an equitable one and . . . [o]nly
general rules may be laid down for guidance.” Talbot v. Fresno-Pac.
Corp., 5 Cal. Rptr. 361, 366 (Ct. App. 1960) (internal quotation marks
omitted).
                   DOUBLE BOGEY V. ENEA                       11

ego doctrine may allow for a “a hole [to] be drilled in the wall
of limited liability erected by the corporate form” in order to
collect a particular debt, “for all purposes other than that for
which the hole was drilled, the wall still stands.” Id. When
an individual is held liable for an act of his corporate alter
ego under California law, it is not because the individual
inherited his corporation’s duties and breached them himself.
See id. at 608. Indeed, the liable individual “has done nothing
affirmative to prejudice the [injured] party” but is held liable
for his corporation’s wrongdoing in order to provide an
additional source of relief to the aggrieved party. Id. (internal
quotation marks omitted).

    A doctrine which merely supplies an additional judgment
defendant after liability exists does not clearly and expressly
impose trust-like obligations prior to the creation of that same
liability. See Davis, 293 U.S. at 333 (noting that for a debtor
to be a fiduciary under the Code, he “must have been a trustee
before the wrong and without reference thereto”). Therefore,
we cannot conclude, as a matter of federal law, that
California’s alter ego doctrine establishes that a corporate
debtor’s alter ego “is a trustee in that strict and narrow sense”
required by the Code. See In re Lewis, 97 F.3d at 1185
(quoting Davis, 293 U.S. at 333).

                               III

    Regardless of the ends to which the alter ego “procedural
device” may be put in California state court, it does not
clearly and expressly impose trust obligations prior to
defalcation as required by Section 523(a)(4). The narrow
12               DOUBLE BOGEY V. ENEA

issue presented is whether California’s alter ego doctrine
alone can create a “fiduciary” relationship under the Code.
We must conclude that it cannot.

     AFFIRMED.