Court Opinion

ID: 9490021
Source: CourtListenerOpinion
Date Created: 2023-08-05 13:30:42.631916+00
Date Added: 2024-06-11T17:53:51.456214
License: Public Domain

FERNANDEZ, Circuit Judge,
concurring and dissenting:
I concur in part, but I respectfully dissent in part. I agree that Niles was properly denied a discharge of the $8,914 amount, but that is not in issue. I also agree that by any standard the bankruptcy court erred when it decided against Otto on the $7,000 amount. However, Otto’s arguments regarding the $9,512.93 amount are seriously flawed, and I *1464dissent from the majority’s contrary determination.
In the first place, I do not think that discussions of the quantity and quality of the proof required when a creditor seeks to prevent discharge of a debt, are relevant to the issue of who has the burden of persuasion. Thus the Supreme Court’s decision in Grogan v. Garner, 498 U.S. 279, 281, 285-87, 111 S.Ct. 654, 656, 659, 112 L.Ed.2d 755 (1991), does not help us to decide this case.
What is more pertinent is the fact that the burden of preventing a debtor’s discharge has been held to fall upon the creditor, and not upon the debtor. That rule has been almost universally applied to the discharge exceptions contained in § 523,1 including the fiduciary exception in § 523(a)(4). See, e.g., Fowler Bros. v. Young (In re Young), 91 F.3d 1367, 1371 (10th Cir.1996) (creditor had to prove fiduciary relationship existed and defalcation occurred to prevail under § 523(a)(4)); Coburn Co. of Beaumont v. Nicholas (In re Nicholas), 956 F.2d 110, 114 (5th Cir.1992) (the ultimate burden is on creditor tó show that debt falls within § 523(a)(4) exception for defalcation by fiduciary); In re Thomas, 729 F.2d 502, 505-06 (7th Cir.1984) (creditor satisfied its burden of establishing nondischargeabihty by showing that its payment created a trust and that defalcation by debtor occurred); see also Schlecht v. Thornton (In re Thornton), 544 F.2d 1005, 1006 (9th Cir.1976) (burden was on creditor to show debt nondischargeable due to misappropriation by fiduciary under § 35(a)(4) which was predecessor to § 523(a)(4), but fiduciary capacity not shown); cf. In re Thirtyacre, 36 F.3d 697, 700 (7th Cir.1994) (creditor “had the burden to prove by a preponderance of the evidence that her debt met one of the statutory exceptions to discharge”); Goldberg Sec., Inc. v. Scarlata (In re Scarlata), 979 F.2d 521, 524 (7th Cir.1992) (“The burden is on the objecting creditor to prove exceptions to discharge.”); Transamerica Commercial Fin. Corp. v. Littleton (In re Littleton), 942 F.2d 551, 556 (9th Cir.1991) (creditor did not meet its burden of proof in showing debt was nondischargeable due to embezzlement under § 523(a)(4)).
In my opinion, that is an exceedingly wise rulé. One purpose of the bankruptcy law is, indeed, “to reheve unfortunate and honest debtors from perpetual bondage to their creditors_” 2 Joseph Story, Commentaries on the Constitution of the United States § 1106 (2d ed. 1851). No doubt that should not apply to “perpetrators of fraud” or to certain other disfavored classes of debtors. Grogan, 498 U.S. at 287, 111 S.Ct. at 659. It could be argued that all who attempt to discharge just debts are dishonest in some sense and that an honest bankrupt is an oxymoron. But we assume no such thing, and the burden of obtaining a determination that someone is in a class of disfavored debtors, who must continue to shoulder the sins of their past, is one that should rest with the person who seeks to prevent the discharge— the creditor. By the way, as far as reprehensibility is concerned, I fail to see why an honest, but negligent, fiduciary should be treated more harshly than a person who has committed an out and out act of fraud upon others.
There may, indeed, be times when circumstances will call out for a presumption that the creditor does fall into a disfavored class, but that should not affect the ultimate burden of persuasion. See Semilof v. Waskew (In re Waskew), 191 B.R. 34, 36-38 (Bankr. S.D.N.Y.1995) (creditor must establish that debtor committed a defalcation while acting as fiduciary, but may benefit from statutory presumption of diversion under state’s lien law); Erie Materials, Inc. v. Oot (In re Oot), 112 B.R. 497, 500-01 (Bankr.N.D.N.Y.1989) (creditor must establish that the debt arose through defalcation for § 523(a)(4) exception to apply, but may benefit from a statutory presumption or inference of diversion under state hen law). But see Cappella v. Little (In re Little), 163 B.R. 497, 503 (Bankr.E.D.Mich.1994) (creditor must as a preliminary matter establish that the debtor received funds in fiduciary capacity, then burden shifts to debtor to prove they were properly applied).
In short, I would not destabilize this area of bankruptcy law by erecting a special bur*1465den of persuasion for this single discharge exception. The burden should begin and remain with the creditor. In this case it should be Otto’s.
Beyond that, I cannot agree with Otto, regardless of where the burden of persuasion lies. The bankruptcy judge, who is the trier of fact, believed Niles, and she explained that each one of the items making up the $9,512.23 amount was based upon a mere error of accounting of one kind or another. One part was an error in entering an interest payment from the borrower which was, in fact, never even received. Another part was a misplaced parenthesis. Those were amounts which, she said, had never even existed. The final component was an amount forgiven by the creditor because he had been charging the somewhat excessive interest rate of 25% per annum on a loan. Again, if believed, she satisfactorily responded to any burden placed upon her. Given her evidence and “no rebuttal testimony,” the bankruptcy judge chose to believe her. Once believed, she should have and did prevail. That was not affected by the burden of persuasion because all of the weight was on one side—• Niles’.
Finally, I agree that the bankruptcy court should have decided the interest issues and would remand for that purpose. I, however, would not attempt to give further guidance or instructions on the subject because we do not have the complete picture before us. For example, we do not know the terms of the settlement agreement or of the state court judgment, both of which probably merged all of Otto’s separate claims into one. In the face of that uncertainty, I hesitate to issue an advisory opinion on what ultimate decision might be called for.
Thus, because I disagree with Otto’s position on both the law and the facts, I respectfully dissent from the majority opinion’s determination in part II regarding the $9,512.13 amount, although I concur with part III and in a portion of part IV of that opinion.

. All statutory references are to Title 11 of the United States Code.