Opinion
No. 03-10068, A.P. No. 03-1092
September 10, 2003
Memorandum on Motion for Summary Judgment
Plaintiff Patrick Caballero is the former business partner of debtor and defendant Kristine LaHaye. In April, 2002, Caballero obtained a judgment for $492,379.00 against LaHaye based on her conduct as a partner. The judgment was rendered by a state court judge after trial. In this adversary proceeding, Caballero seeks a determination that the state court judgment is nondischargeable. His motion for summary judgment, based on the state court findings, is now before the court.
The state court judgment awarded the damages based on "breach of contract, breach of fiduciary duty, conversion, constructive fraud, and for accounting" without specifying which damages were based on each count. The court did find that the total damages consisted of "$119,679.00 in accounting damages plus $372,700.00 to compensate plaintiff for the loss of his one-half interest" in the partnership.
Since judgments based on breach of contract and constructive fraud are dischargeable, and since the state court did not apportion the damages between dischargeable and nondischargeable counts or award any punitive damages, Caballero's motion for summary judgment must be denied. See In re Harmon, 250 F.3d 1240, 1249 (9th Cir. 2001)[state court finding of constructive fraud of partner did not collaterally estop debtor from litigating issue of fraud in bankruptcy court, because constructive fraud is not a basis for nondischargeability in bankruptcy proceedings].
Even if the court were to assume, as urged by Caballero, that the $119,679.00 in "accounting damages" were in fact from defalcation and conversion, there is still no basis for declaring the remaining $372,700.00 nondischargeable. Even though partners are fiduciaries under state law, not every breach of duty between partners constitutes "defalcation in a fiduciary capacity" under § 523(a)(4) of the Bankruptcy Code. See Harmon, supra, at 1248-49. While there are many ways a partner may breach his fiduciary duty under state law, he commits defalcation in a fiduciary capacity under bankruptcy law only when he misappropriates partnership property. See In re Niles, 106 F.3d 1456, 1463 (9th Cir. 1997)[Broker liable under § 523(a)(4) to the extent she misappropriated client funds, but liability did not extend to other acts which may have been breaches of fiduciary duty under state law but did not involve entrusted funds].
For the foregoing reasons, Caballero's motion for summary judgment will be denied. Counsel for LaHaye shall submit an appropriate form of order.