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holding that corporate officers are not fiduciaries for purposes of 11 U.S.C. § 523 under Idaho law
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Case No. 03-21239, Adversary No. 03-6354.
August 12, 2004
MEMORANDUM OF DECISION
This matter comes before the Court upon a motion for summary judgment by chapter 7 debtors and adversary defendants, G. Don Murrell and Katheren Murrell ("Defendants"). This adversary proceeding was brought by creditors and plaintiffs, Jack and Maureen Streibick ("Plaintiffs"), seeking a determination that certain debts were nondischargeable under provisions of § 523(a) of the Bankruptcy Code.
Having carefully evaluated the affidavits and materials of record, the briefing and arguments presented by the parties, and the relevant authorities, the Court determines that the motion should be granted. Summary judgment will be entered in favor of Defendants, and the complaint shall be dismissed.
BACKGROUND AND FACTS
In August, 1998, Plaintiffs commenced an action against Defendants, among others, in the District Court of the First Judicial District of Idaho, in Kootenai County, as Case No. CV-98-4705 (the "State Court Case"). The original complaint in the State Court Case alleged claims for relief against Defendants characterized as (1) breach of fiduciary duty, (2) conversion, (3) fraud, (4) intentional interference with contractual relations, (5) negligence, (6) racketeering, and (7) indemnification and contribution. See Doc. No. 7, Ex. A at 17-18. An amended complaint filed in May 2000 dropped the claims for fraud and racketeering, but added a claim for breach of contract and a claim for unjust enrichment. Doc. No. 7, Ex. B at 14-17.
On September 29, 2000, a "Memorandum Opinion in re: Murrells' Motion for Partial Summary Judgment" (the "State Court Decision") was entered in the State Court Case. See Doc. No. 7, Ex. C. The State Court Decision granted summary judgment to Defendants on all asserted causes of action except for breach of contract. Id. The State Court Decision was not certified under Id. R. Civ. P. 54(b) and, thus, no appeal was taken. Prior to trial on the sole remaining claim for breach of contract, Defendants filed a voluntary chapter 7 petition for relief commencing Case No. 03-21239 before this Court.
On November 17, 2003, Plaintiffs initiated the instant adversary proceeding. Their complaint alleged that Plaintiffs were creditors of Defendants, and that their claims should be declared nondischargeable obligations under § 523(a). Defendants contested those allegations and, as noted, moved for summary judgment. Plaintiffs responded by arguing that summary judgment would be improper, and that their claims under § 523(a)(4) should go to trial. A. The genesis of the claims
The initial complaint, Doc. No. 1, did not specify the subdivision(s) of § 523(a) that Plaintiffs believed were implicated, but generally alleged that claims arising from Defendants' "breaches of fiduciary duty, fraud, and embezzlement, be determined to be non-dischargeable." Id. at 11-12. In responding to Defendants' motion for summary judgment, Plaintiffs made clear that the portions of § 523(a) relied upon at the time of the complaint were § 523(a)(2)(A) and § 523(a)(4). See Doc. No. 13 at 4-5.
Plaintiffs conceded that "[c]ertain [of their] claims . . . are admittedly not encompassed by § 523. These include [Plaintiffs'] state court claims for intentional interference with contract, negligence, indemnification/contribution, and breach of contract." See Doc. No. 13 at 7. This left outstanding only claims for breach of fiduciary duty, conversion, and unjust enrichment. Id. Then, after addressing at length issues of fiduciary duty, Plaintiffs stated that "[w]hile [the State Court Decision] is not a final judgment which binds [Plaintiffs] under doctrines of res judicata or collateral estoppel, the claim of conversion will not be further urged as a non-dischargeable claim under § 523." Id. at 16. Plaintiffs then concluded:
"Of the claims [in the State Court Case] which fall within the ambit of § 523, [Plaintiffs'] adversary proceeding is predicated upon their claim for breach of fiduciary duty. [Plaintiffs] urge this Court to find that material issues of fact preclude entry of summary judgment in favor of [Defendants], and against [Plaintiffs], on [Plaintiffs'] claim for breach of fiduciary duty."
Id.
Resolution of the pending motion is driven by the question of whether there existed a fiduciary relationship sufficient for § 523(a)(4) purposes. A brief summary of the history of the parties' financial dealings and the general nature of the prior litigation is needed in order to address that issue.
The factual matters in this discussion are, to a significant degree, not subject to dispute. As to those aspects which are disputed, the Court concludes that they are not material and do not require denial of Defendants' motion for summary judgment.
Plaintiffs reside in Lewiston, Idaho, and have several varied business interests and pursuits. Mr. Streibick is a certified public accountant, a licensed real estate broker, and has had ownership interests in several businesses.
In 1994, Defendant Don Murrell was employed by Stratford Building Corporation ("SBC") in Rathdrum, Idaho. SBC manufactured modular homes. Defendants considered the possibility of forming an independent modular home dealership for the purpose of selling SBC homes to the public. However, Mr. Murrell's employment contract with SBC limited the extent of his involvement in any such enterprise.
Mr. Streibick became aware of SBC's product and Kootenai County construction facility, and was interested in establishing a dealership. He was in some fashion during his inquiries referred to Mr. Murrell at SBC.
A series of discussions occurred between Plaintiffs and Defendants in 1994 about Plaintiffs' possible involvement in a new business entity, which would be formed to operate as a dealership for marketing SBC modular homes directly to consumers. The discussions were initially between Mr. Streibick and Mr. Murrell, and the Plaintiffs' interest in entering into a business relationship was to some degree based on Mr. Murrell's experience, knowledge and contacts. However, the parties recognized that he could not be directly involved given the prohibitions in his SBC employment contract.
The parties ultimately agreed to join in business, and on the organization of a new corporate entity. Defendant Katheren Murrell, the Murrells' twenty year old son, Donnie, and Plaintiffs would be directors of the new corporation. Mr. Streibick was to be the president of this corporation, and Mrs. Murrell would be a vice president, secretary and treasurer. Stock was to be held by Mrs. Murrell (5,000 shares) and Plaintiffs (5,000 shares together).
Other members of the Murrell family would ultimately become employed by the business as well.
In August, 1994, "Stratford Modular Structures, Inc." was incorporated using the described ownership and management structure. The corporate name was later changed in December, 1995, to Stratford Northwest Building Systems, Inc. ("SNW"). Mrs. Murrell's contribution for her stock consisted of $5,000.00 and the procurement of an agreement (entitled "Stratford Homes Builder Agreement") between SBC and SNW. Plaintiffs were to contribute $5,000.00 plus working capital up to $150,000.00. Mr. Streibick guaranteed the Stratford Homes Builder Agreement. Mrs. Murrell was authorized by SNW resolution to negotiate and execute documents related to the expenditure of SNW's funds.
For simplicity, "SNW" is used in this Decision to refer to the parties' corporation formed in August 1994, at times both before and after the corporate name change.
Plaintiffs contend that Mr. Murrell was at all times the motivating force behind SNW and the individual responsible for its operations. Plaintiffs argue that Mrs. Murrell had little business experience and that Donnie was a full-time student, and that they were therefore only a front for Mr. Murrell due to the SBC limitations on Mr. Murrell's involvement. They also note that Mr. Murrell executed SNW's subchapter S election form for the IRS, reflecting an ownership in the corporation. They further argue that Mr. Murrell was the one who procured the Stratford Homes Builder Agreement, which was executed by Mr. Murrell — on behalf of SBC — and by Mr. Streibick on behalf of SNW.
Though having received certain funding from Plaintiffs, SNW soon faced a need for additional capital. Plaintiffs and Defendants entered into an agreement in October, 1994, which provided that Plaintiffs would borrow funds from third parties, on such terms as were acceptable to Plaintiffs, as SNW's operating capital needs dictated. One-half of such funds would then be lent to SNW directly by Plaintiffs. The other half would be lent by Plaintiffs to Defendants, who would in turn lend them to SNW. The parties' loans to SNW would be on the same terms as Plaintiffs obtained from their personal lenders. Plaintiffs thereafter obtained and provided funds under this agreement to SNW.
This agreement was between Plaintiffs and Mrs. Murrell, with Mr. Murrell "joining [t]herein to bind his community interest."
There is a dispute over whether the one-half of Plaintiffs' borrowed funds were first lent by them to Defendants and then by Defendants to SNW, as contemplated under the agreement, thus creating personal repayment obligations of Defendants to Plaintiffs. The dispute is not material to the ultimate outcome of the matter now before the Court.
Mrs. Murrell was the general manager of SNW and handled the day-to-day affairs of the business, including its operating funds and accounts. The parties disagree over the magnitude of involvement by Plaintiffs in the daily business operations.
The Stratford Homes Builder Agreement contemplated that SNW would procure buyers for SBC modular homes. SNW would enter into an agreement with a purchaser and agree to install and erect the home. SNW would then place an order for that home with SBC. The ultimate purchaser would obtain its own third-party (generally institutional) financing for the purchase. The purchaser's loan proceeds would be periodically released by the purchaser's financier as construction progressed. SNW agreed that all such funds would be paid to SBC until SBC was paid in full, at which time SBC would execute a lien release or waiver. To effectuate this process, the purchaser, SNW and SBC would enter into a contract entitled "Loan Proceeds Assignment and Agreement" under which SNW agreed to assign directly to SBC an amount of the purchaser's loan proceeds sufficient to pay the purchase price.
During the latter part of 1996, four home orders were placed with SNW by purchasers named Blam, Simundson, Collins and Chen. The first three used a Loan Proceeds Assignment and Agreement as discussed above. The Chen sale did not, as that purchaser anticipated using personal rather than borrowed funds. However, a "construction agreement" on the Chen purchase, also signed by Mrs. Murrell for SNW, included a requirement that the contract be approved by SBC and secured through use of an assignment of funds or other method acceptable to SBC. Defendants were aware that SNW's obligations to SBC on these four sales were personally guaranteed by Plaintiffs.
Each of the three agreements was executed by Mrs. Murrell on behalf of SNW.
Between late 1996 and early 1997, funds from the four purchasers were received by SNW and deposited directly into SNW's bank account (even though certain of the checks were made payable to SBC). These funds were later expended rather than being paid over to SBC. In April, 1997, SBC made demand on SNW for $241,425.90, simultaneously asserted a demand on Plaintiffs under the guarantee in the event SNW did not timely pay, and placed liens on the four projects.
Plaintiffs contend that far more than this amount was involved, and that Defendants were unable to account for the expenditure of certain of the funds in excess of the SBC-demanded amount. They also argue that Defendants were unable to show that all the diverted funds were actually expended for legitimate SNW business expenses rather than used personally.
Plaintiffs borrowed substantial amounts from third-party sources to satisfy these personally guaranteed SNW obligations to SBC, and secured those new loans with personal assets. However, Plaintiffs were unable to obtain from Defendants what they felt was a satisfactory explanation regarding the conduct related to the SBC-assigned funds. Nor could Plaintiffs obtain from Defendants an agreement to repay Plaintiffs for the new funds advanced to cure SNW's default to SBC.
Plaintiffs believed that at least one-half of these new amounts should be repaid by Defendants under the October, 1994, agreement related to advances of operating capital. Plaintiffs were also upset with Defendants' resistance to paying their "share" since the infusion of cash by Plaintiffs resolved criminal charges threatened against Mrs. Murrell regarding the misapplication of the funds SNW received from Blam.
Following unsuccessful attempts to resolve the deepening rift, Plaintiffs withdrew from further business dealings with Defendants. The State Court Case followed, as did Defendants' bankruptcy filing and this adversary proceeding.
DISCUSSION AND DISPOSITION
A. Summary judgment standards
Summary judgment may be granted if, when the evidence is viewed in a light most favorable to the non-moving party, there are no genuine issues of material fact and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(e), incorporated by Fed.R.Bankr.P. 7056; Leimbach v. Lane (In re Lane), 302 B.R. 75, 81, 03.4 I.B.C.R. 213, 215 (Bankr. D. Idaho 2003) (citing Far Out Prods., Inc. v. Oskar, 247 F.3d 986, 992 (9th Cir. 2001)).
The Court does not weigh evidence in resolving such motions but, rather, determines only whether a material factual dispute remains for trial. Leimbach, 302 B.R. at 81, 03.4 I.B.C.R. at 215 (citing Covey v. Hollydale Mobilehome Estates, 116 F.3d 830, 834 (9th Cir. 1997)). A dispute is genuine if there is sufficient evidence for a reasonable fact finder to hold in favor of the non-moving party. A fact is "material" if it might affect the outcome of the case. Id. (citing Far Out Prods., 247 F.3d at 992).
The initial burden is on the moving party but, if the non-moving party bears the ultimate burden of proof on an element at trial, that party must make a showing sufficient to establish the existence of that element in order to survive the motion. Esposito v. Noyes (In re Lake Country Invs., LLC), 255 B.R. 588, 597, 00.4 I.B.C.R. 175, 178 (Bankr. D. Idaho 2000) (citing Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986)). "Failure to sustain this burden as to any required element of a cause of action is fatal to that cause, even if issues are shown to exist as to other elements. A complete failure on one element necessarily renders the other elements `immaterial' whether factually disputed or not." Esposito, 255 B.R. at 597 (citing Celotex Corp.).
B. Section 523(a)(4)
As noted above, Plaintiffs have recognized that several of the claims they asserted in the State Court Case do not fall within the scope of § 523(a) at all. Further, of those arguably falling under § 523(a), Plaintiffs have elected to assert only a cause of action under § 523(a)(4) in this adversary proceeding. See supra at n. 2.
Under § 523(a)(4), a debt "for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny" will not be discharged in bankruptcy. Neither embezzlement nor larceny is alleged or supported with argument here. Rather, Plaintiffs argue that Defendants' conduct amounted to either fraud or defalcation while Defendants stood in or occupied a fiduciary capacity with respect to Plaintiffs. Under the authorities noted, since Plaintiffs bear the ultimate burden of proving the elements of § 523(a)(4) at trial, they must make a showing sufficient to establish the existence of each element in order to defeat Defendants' summary judgment motion.
"Defalcation" under § 523(a)(4) addresses the question of whether a fiduciary can account for the trust res in its control. See Dakota Steel, Inc. v. Dakota (In re Dakota), 284 B.R. 711, 725 (Bankr. N.D. Cal. 2002) (citing Lewis v. Scott (In re Lewis), 97 F.3d 1182, 1186 (9th Cir. 1996)). Lewis notes that "innocent defaults" of a fiduciary, who fails to account fully, are actionable in addition to intentional or negligent defaults, "so as to reach the conduct of all fiduciaries who were short in their accounts." 97 F.3d at 1186. If a fiduciary status exists, the burden is shifted to the debtor to show that a defalcation did not occur by accounting for the res. Dakota Steel, 284 B.R. at 725 (citing In re Niles, 106 F.3d 1456 (9th Cir. 1997).
1. The existence of the requisite fiduciary capacity
a. Application of federal law and narrow construction
Determining whether an individual is a "fiduciary" under § 523(a)(4) is a question of federal law, not state law. Cal-Micro, Inc. v. Cantrell (In re Cantrell), 329 F.3d 1119, 1125 (9th Cir. 2003) (citing Mills v. Gergely (In re Gergely), 110 F.3d 1448, 1450 (9th Cir. 1997)). A fiduciary for § 523(a)(4) purposes is narrowly defined:
We have previously held that "[t]he broad, general definition of fiduciary — a relationship involving confidence, trust and good faith — is inapplicable in the dischargeability context." Ragsdale v. Haller, 780 F.2d 794, 796 (9th Cir. 1986). As a result, we have adopted a narrow definition of "fiduciary" for purposes of § 523(a)(4):
"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." Lewis v. Scott (In re Lewis), 97 F.3d 1182, 1185 (9th Cir. 1996)).
329 F.3d at 1125. Cantrell further stated that "[W]hile the definition of `fiduciary' is governed by federal law, we have relied in part on state law to ascertain whether the requisite trust relationship exists." Id. (citing Lewis, 97 F.3d at 1185, and Ragsdale, 780 F.2d at 796) (emphasis supplied).
Still, it is clear that not all fiduciary capacities or relationships recognized by state law will be found sufficient for § 523(a)(4) purposes. Id. at 1125-26. As this Court recently noted in Cornforth v. Wahlen (In re Wahlen), 02.4 I.B.C.R. 179 (Bankr. D. Idaho 2002):
The specific relationship addressed in Cantrell is directly relevant to the present case, and will be discussed more fully below.
[T]he Ninth Circuit has squarely rejected . . . an expansive definition, stating that the "broad, general definition of `fiduciary' is inapplicable in the dischargeability context." Lewis, 97 F.3d at 1185; see also Evans v. Pollard (In re Evans), 161 B.R. 474, 477 (B.A.P. 9th Cir. 1993) ("The broad general definition of a fiduciary relationship — one involving confidence, trust and good faith — is inapplicable in the dischargeability context."); Silva, 00.2 I.B.C.R. at 69 (explaining that it is insufficient, for purposes of § 523(a)(4), for the creditor to show merely that the debtor occupied a position of trust toward the creditor).
Id. at 180; see also Wussler v. Silva (In re Silva), 00.2 I.B.C.R. 66, 69 (Bankr. D. Idaho 2000) (an express trust, technical trust, or statutory trust is prerequisite, and "[i]t is not sufficient . . . to show merely that one party occupies a position of trust toward another, even such as to impose equitable responsibilities under state law.").
b. Plaintiffs' arguments under state law
Plaintiffs argue that, under Idaho law, directors and officers of corporations owe fiduciary duties or responsibilities to the corporation and to shareholders. They appear to concede that there is no express agreement creating those duties, much less an agreement creating any trust. Instead, they rely on Idaho statutes and case law. See Doc. No. 13 at 7-8.
Though the parties admit it is not controlling, they refer extensively to the State Court Decision. That court found that Mrs. Murrell, as a corporate officer and director, owed fiduciary duties to the corporation, SNW, and its shareholders. See Doc. No. 7, Ex. C at 15-16 (relying on Idaho Code § 30-1-841, § 30-1-842, and Weatherby v. Weatherby Lumber Co., 492 P.2d 43 (Idaho 1972), among other cases). However, it found that those duties "went only to SNW and its assets" and did not extend to Plaintiffs' guarantee, which was a separate non-corporate obligation. Id. at 20-21, see also id. at 27. Concluding that Plaintiffs' damages arose out of the guarantee and not out of their position as shareholders, it found summary judgment appropriate. Id. at 21.
i. Statutes
Plaintiffs cite Idaho Code § 30-1-841 and § 30-1-842 in support of their contention. Id. at 7. These provisions state:
30-1-841. Duties of officers. — Each officer has the authority and shall perform the duties set forth in the bylaws or, to the extent consistent with the bylaws, the duties prescribed by the board of directors or by direction of an officer authorized by the board of directors to prescribe the duties of other officers.
30-1-842. Standards of conduct for officers. — (1) An officer, when performing in such capacity, shall act:
(a) In good faith;
(b) With care that a person in a like position would reasonably exercise under similar circumstances; and
(c) In a manner the officer reasonably believes to be in the best interests of the corporation.
(2) In discharging those duties an officer, who does not have knowledge that makes reliance unwarranted, is entitled to rely on:
(a) The performance of properly delegated responsibilities by one (1) or more employees of the corporation whom the officer reasonably believes to be reliable and competent in performing the responsibilities delegated; or
(b) Information, opinions, reports or statements, including financial statements and other financial data, prepared or presented by one (1) or more employees of the corporation whom the officer reasonably believes to be competent in the matters presented or by legal counsel, public accountants or other persons retained by the corporation as to matters involving skill or expertise the officer reasonably believes are matters:
(i) Within the particular person's professional or expert competence; or
(ii) As to which the particular person merits confidence.
(3) An officer shall not be liable to the corporation or its shareholders for any decision to take or not to take action or any failure to take action, as an officer, if the duties of the office are performed in compliance with this section. Whether an officer who does not comply with this section shall have liability will depend in such instance on applicable law, including those principles of section 30-1-831, Idaho Code, that have relevance.
Idaho Code §§ 30-1-841, 30-1-842.
Section 30-1-831, which is referred to in § 30-1-842(3), addresses standards of liability for directors.
Nothing on the face of these statutory provisions purports to create fiduciary duties, much less a "trust" relationship, in the sense required by federal bankruptcy law for § 523(a)(4) purposes. Nor do the ABA Official Comments or the Idaho Reporter's Comments to these sections indicate that such duties or a trust relationship are statutorily created.
The Comments are extensive, and not repeated here. There is little reference in these Comments to matters involving a fiduciary relationship, with the exception of language in the Idaho Reporter's Comment to § 30-1-842, which states: "Further, the distinction should be kept in mind between these [statutory] standards of conduct and the officer's fiduciary duties to the corporation and its shareholders. The latter are defined by judicial law rather than by legislative enactment." Id.
ii. Case law
In the absence of an express agreement, or a trust created by or recognized under statute, the focus turns to state case law. See Cantrell, 329 F.3d at 1126-28 (addressing California decisions); Cantrell, 269 B.R. at 420 (same); Alexander Alexander of Washington, Inc. v. Hultquist (In re Hultquist), 101 B.R. 180, 185 (9th Cir. BAP 1989) (addressing Washington law); accord Wahlen, 02.4 I.B.C.R. at 180 (considering issue of trust under Idaho worker's compensation statutes and case law).
Plaintiffs base their arguments regarding the existence of a fiduciary relationship on a number of Idaho cases including Jordan v. Hunter, 865 P.2d 990 (Idaho Ct.App. 1993), Weatherby v. Weatherby Lumber Co., 492 P.2d 43 (Idaho 1972), Morton v. Morton Realty Co., 241 P. 1014 (Idaho 1925), and Riley v. Callihan Mining Co., 155 P. 665 (Idaho 1916). See Doc. No. 13 at 7-8.
There is little doubt that these cases do announce a general rule that corporate officers and directors owe fiduciary duties to the corporation and its shareholders. See, e.g., Jordan, 865 P.2d at 995-96; Weatherby, 492 P.2d at 45. But the Court concludes that the fiduciary capacity identified by the Idaho courts is not sufficient to meet the narrower and more restrictive standards of § 523(a)(4).
Cantrell concerned a similar sort of situation, and similar arguments. The bankruptcy court in Cantrell had concluded that a person who was an officer, director or controlling shareholder of a corporation was a trustee of a "statutory trust" under California law and, thus, a fiduciary for purposes of § 523(a)(4). CalMicro, Inc. v. Cantrell (In re Cantrell), 258 B.R. 756, 761-64 (Bankr. N.D. Cal. 2001). See also 269 B.R. at 420-21 (discussing the bankruptcy court's decision). The bankruptcy court relied in large part on the decision in Ragsdale, 780 F.2d at 796-97, and found "no principled basis" to distinguish between the fiduciary relationship between partners that was addressed in Ragsdale and the relationship between the corporation and its directors, officers and controlling shareholders that was before it. Cantrell, 258 B.R. at 764.
It is noteworthy that this court viewed the issue in terms of a "statutory trust" in which the officers, directors or controlling shareholders were trustees with respect to the corporate assets over which they had the ability to exercise control. Id. at 762, 764-65.
The BAP disagreed, noting that California cases, including Bainbridge v. Stoner, 106 P.2d 423 (Cal. 1940), even while speaking of the "fiduciary capacity" of corporate directors, did not actually conclude that a trust was created:
In the process of rejecting the plaintiffs' argument, the Bainbridge court explained:
One who is a director of a corporation acts in a fiduciary capacity, and the law does not allow him to secure any personal advantage as against the corporation or its stockholders. . . . However, strictly speaking, the relationship is not one of trust but of agency. . . .
269 B.R. at 421 (quoting 106 P.2d at 421) (emphasis supplied). The BAP summarized:
The BAP also noted that in Bancroft-Whitney Co. v. Glen, 411 P.2d 921 (Cal. 1966), the court stated corporate officers and directors were "technically not trustees" and relied on agency law to analyze the officer's duties. Id. The Ninth Circuit, in affirming the BAP, expressly noted the same. See 329 F.3d at 1126.
Thus, we cannot conclude in the face of Bainbridge that California law recognizes officers, directors or controlling shareholders as trustees of either an express or a statutory trust.
We reached the same conclusion under Washington law in In re Hultquist, 101 B.R. 180 (9th Cir. BAP 1989). Hultquist held that, under Washington law, a corporate officer is not a trustee of either an express or statutory trust, so the debtor was not a fiduciary for purposes of § 523(a)(4). The bankruptcy court, here, distinguished Hultquist because it was based on Washington law rather than California law. While Hultquist is not directly on point, neither California nor Washington corporate law make corporate principals trustees of express or statutory trusts.
. . .
To ignore the distinction between the trustee of a technical trust and a corporate principal would do violence to the narrow construction of the term "fiduciary" that the United States Supreme Court established in the bankruptcy discharge context over 150 years ago. See Chapman v. Forsyth, 43 U.S. 202, 208, 2 How. 202, 11 L.Ed. 236 (1844) ("The [bankruptcy] act speaks of technical trusts, and not those which the law implies from the contract."). This narrow construction has been reiterated on many occasions since Chapman, under each of the applicable dischargeability statutes that have been enacted since Chapman. See e.g. In re Lewis, 97 F.3d 1182, 1185 (9th Cir. 1996). See also Davis v. Aetna Acceptance Co., 293 U.S. 328, 333, 55 S.Ct. 151, 79 L.Ed. 393 (1934) (listing supreme court cases that have upheld the narrow construction).
Moreover, Chapman's reasoning for adhering to a narrow construction is just as cogent today as it was 150 years ago:
If the act embrace such a debt, it will be difficult to limit its application. It must include all debts arising from agencies; and indeed all cases where the law implies an obligation from the trust reposed in the debtor. Such a construction would have left but few debts on which the law could operate. In almost all the commercial transactions of the country, confidence is reposed in the punctuality and integrity of the debtor, and a violation of these is, in a commercial sense, a disregard of a trust. But this is not the relation spoken of in the first section of the act.Chapman, 43 U.S. at 208.
269 B.R. at 421-23 (footnotes omitted).
To be fair to the bankruptcy court in Cantrell, it should be noted that court also analyzed California precedent and had concluded: "In the absence of Ragsdale, the Court would be inclined to find this sparse and ambiguous case law insufficient to make an officer, director or controlling shareholder a fiduciary within the meaning of 11 U.S.C. § 523(a)(4)." 258 B.R. at 763.
When the Ninth Circuit affirmed, the BAP's distinction between fiduciary duties based on agency and those arising from a trust was ratified. See, e.g., 329 F.3d at 1126 ("[T]hese [California] cases merely specify that officers owe fiduciary duties in their capacity as agents of a corporation; they fail to hold that officers are trustees of a statutory trust with respect to corporate assets.").
The Ninth Circuit went so far as to state that, under the California cases, "although officers and directors are imbued with the fiduciary duties of an agent and certain duties of a trustee, they are not trustees with respect to corporate assets." Id. at 1126 (emphasis supplied).
The Court has considered carefully the articulations of the Idaho courts in the several cases cited by Plaintiffs, and evaluated the same through the prism provided by Cantrell which, as noted, addressed similar contentions regarding fiduciary relationships and the liability of corporate officers and directors. The Court concludes that Plaintiffs here fare no better than the plaintiffs in Cantrell.
There is also a procedural similarity between the instant case and Cantrell. The question of sufficient fiduciary status for § 523(a)(4) purposes arose in Cantrell on the debtor-defendant's [cross] motion for summary judgment. See 258 B.R. at 758; 269 B.R. at 417, 423-244 (holding that the bankruptcy court should have granted summary judgment in favor of the debtor-defendant on the basis of lack of sufficient fiduciary relationship); 329 F.3d at 1128 ("Because under California law a corporate officer is not a fiduciary within the meaning of § 523(a)(4), we further conclude that Cantrell is entitled to summary judgment on Cal-Micro's non-dischargeability claims.").
In discussing the fiduciary relationship in Jordan, the court noted the agency law underpinnings:
Officers are agents of the corporation, and, as such, are subject to the usual principles of agency law, including the fiduciary duties of agents. . . . As an agent, an officer owes his principal, the corporation, the fiduciary duties of good faith and fair dealing.
865 P.2d at 995-96 (citation and footnotes omitted). This articulation cannot be effectively distinguished from those found in Bainbridge v. Stoner, 106 P.2d 423 (Cal. 1940) and Bancroft-Whitney Co. v. Glen, 411 P.2d 921 (Cal. 1966), or Washington law as addressed in Hultquist, 101 B.R. at 185, upon which the BAP and Ninth Circuit expressly relied in Cantrell. See 269 B.R. at 421-22; 329 F.3d at 1126-27. Similar issues exist with the other Idaho authorities on which Plaintiffs rely.
The Jordan court mentions and distinguishes an earlier decision, Stephan v. Hoops Const. Co., 771 P.2d 912 (Idaho 1989). Id. at 996. It characterizes Stephan as "reject[ing] the proposition that a corporate officer owes a fiduciary duty with respect to noncorporate assets, such as the stockholdings of individual shareholders." Id. Defendants also cite that case, and argue to this Court that, even if there was a fiduciary relationship between them and the corporation, Plaintiffs lack the ability to assert that such duties extended to them personally, at least in relation to the specific conduct alleged and regarding the specific funds allegedly diverted. See Doc. No. 19 at 2-3. As noted earlier, the State Court Decision agreed with Defendants. Since this Court herein finds that no fiduciary status exists sufficient for § 523(a)(4) purposes, it need not address this contention.
This Court is, of course, sensitive to the fact that Idaho law recognizes the existence of fiduciary duties in the corporate context. However, Plaintiffs have not shown that any of the Idaho cases would establish a trust or otherwise impose fiduciary duties sufficient to meet the bankruptcy standard required for a § 523(a)(4) claim under applicable federal law.
Plaintiffs are not alone in their inability to meet the narrower bankruptcy standard. In addition to the cases discussed previously in this Decision, a growing number of courts around the country have been called upon to evaluate claims that the fiduciary obligations of corporate officers and directors are sufficient for § 523(a)(4) purposes, and the weight of that case law decidedly tilts against Plaintiffs' position. See Michigan Web Press, Inc. v. Wilcox (In re Wilcox), 310 B.R. 689, 696-97 (Bankr. E.D. Mich. 2004); Dominie v. Jones (In re Jones), 306 B.R. 352, 354-57 (Bankr. N.D. Ala. 2004); Digital Commerce, Ltd. v. Sullivan (In re Sullivan), 305 B.R. 809, 819-21 (Bankr. W.D. Mich. 2004); Horejs v. Steele (In re Steele), 292 B.R. 422, 427-34 (Bankr. D. Colo. 2003); Dakota, 284 B.R. at 724-25; Posillico v. Bratcher (In re Bratcher), 281 B.R. 753, 762-63 (Bankr. M.D. Fla. 2002).
Plaintiffs' failure to establish this required element makes entry of summary judgment against them appropriate. Celotex Corp., 477 U.S. at 322-23; see also discussion at n. 21 supra. This also renders moot the several other issues debated by the parties at length in their briefing and at hearing. CONCLUSION
The Court must note, before concluding, the existence of Nahman v. Jacks (In re Jacks), 266 B.R. 728 (9th Cir. BAP 2001). The Panel in Jacks acknowledged that a § 523(a)(4) claim might lie where an insolvent corporation's director breached fiduciary duties as a "statutory trustee" of corporate assets for the corporation's creditors. See 266 B.R. at 737. Jacks was addressed by the BAP in Cantrell even though it was not raised by the litigants. See 269 B.R. at 422 n. 10. The Cantrell Panel found the theory addressed in Jacks not relevant because the insolvency of the corporation was not raised and because the plaintiffs in Cantrell were not creditors of the corporation. Id.; see also 329 F.3d at 1127 n. 6. (The plaintiffs in Cantrell were, instead, the corporation itself, its Employee Stock Ownership Plan and another trust that ultimately became the sole stockholder of the corporation, all of whom were creditors of the debtor-officer by virtue of a prebankruptcy state court judgment. See 258 B.R. at 758-60.)
Idaho has a similar theory, sometimes called the "trust fund doctrine," under which directors of insolvent corporations are deemed to hold the corporation's assets in trust, as a "trust fund" for corporate creditors, and cannot properly prefer themselves to such creditors in the disposition of such assets. See generally La Voy Supply Co. v. Young, 369 P.2d 45, 50 (Idaho 1962). Nevertheless, Jacks does not provide an answer for Plaintiffs in this case.
First, Plaintiffs themselves point to several reasons why the "trust fund doctrine" does not apply here. See Doc. No. 13 at 14-15. Second, Plaintiffs here lack the standing to assert claims under the doctrine because they proceed not as creditors of SNW injured by the alleged misapplication of an insolvent corporation's assets to other than corporate debts. Rather, their claims are made as shareholders of SNW, or through their status as guarantors. Accord State Court Decision at 16-17, 19-21. They thus suffer the same inability to assert the doctrine as did the plaintiffs in Cantrell.
Based upon the foregoing, the Court determines that Defendants' motion for summary judgment shall be granted, and Plaintiffs' complaint will be dismissed. Defendants' counsel shall submit an order and judgment accordingly.