Bonito Land & Livestock, Inc. v. Green

UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF NEW MEXICO
In re:
RONNIE JACKIE GREEN and
AMIE ADAMS GREEN,
Debtors. 	No. 11-05-16399 SR
BONITO LAND & LIVESTOCK, INC.,
Plaintiff,
v. 	Adv. No. 05-1217 S
RONNIE JACKIE GREEN,
Defendant.
MEMORANDUM OPINION ON PLAINTIFF’S
MOTION FOR SUMMARY JUDGMENT
This matter is before the Court on Plaintiff Bonito Land &
Livestock, Inc.’s (“Bonito”) Motion for Summary Judgment (doc 25)
and Memorandum in Support (doc 26). 	Defendant filed a Response
(doc 31) to which Plaintiff replied (doc 33). 	Plaintiff appears
through its attorney Moses, Dunn, Farmer & Tuthill, P.C. (Victor
Carlin). 	Defendant appears through his attorney Moore, Berkson &
Gandarilla, P.C. (George Moore). 	This adversary proceeding is
one to determine the dischargeabilty of a debt and is therefore a
core proceeding under 28 U.S.C. § 157(b)(2)(I). 	The Motion is
based upon the collateral estoppel effect of a state court
judgment that Plaintiff claims establishes all elements of a
claim for defalcation while acting in a fiduciary capacity. 	For
the reasons set forth below, the Court finds that the Motion for
Summary Judgment is not well taken and should be denied.
Defendant does not dispute Bonito’s Statement of Undisputed
Facts, which provides:
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1. 	From January 5, 1995 until July 22, 1999 Ron Green (“Green”)
served as Vice President, Secretary, and Director of Bonito.
2. 	Green participated in the day-to-day operations, management,
and decision-making process of Bonito until July 22, 1999, at
which time he was removed as Vice President/Secretary and
Director.
3. 	The removal of Green as Vice President/Secretary and
Director of Bonito was justified by the appearance of
self-dealing and breach of duty of loyalty owed to Bonito by
Green.
4. 	After a trial on the merits, on July 22, 2002 the Twelfth
Judicial District Court, Lincoln County (“State Court”), entered
judgment on Bonito's Counterclaim against Green in the amount of
$140,079.42 as of August 1, 2002, plus interest at the rate of
8.75% per annum, plus costs.
5. 	On or about November 18, 2002 the State Court entered an
award of costs in the amount of $103,297.48 against Green in
favor of Bonito.
6. 	Green owes Bonito the sum of $135,446.38 as a result of
unaccounted for funds from corporate transactions handled by
Green, corporate property conveyed by Green to himself, and
pursuant to promissory notes from Green to Bonito.
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7. 	$13,000 of the Judgment represents certain promissory notes
which bear prejudgment interest in the amount of $4,613.04 as of
August 1, 2002.
8. 	Green's hands were proven to be unclean.
9. 	Green diverted corporate assets from Bonito to his own
benefit and wholly failed to account to Bonito therefore.
10. 	The funds taken by Green from the sales of Bonito's property
that were not accounted for by Green were intentionally converted
by Green for his own use.
11. 	Green’s conversion of Bonito's property for his personal use
was done intentionally.
12. 	Bonito has been damaged by Green's intentional conversion of
Bonito's property in the amount of $122,466.38.
13. 	Green wrongfully diverted funds from Bonito.
14. 	Green wrongfully conveyed corporate property to himself.
15. 	Green's actions as described in Bonito's Counterclaim
constituted a breach of his fiduciary duties to Bonito.
16. 	Green diverted funds from the sale of corporate assets to
his personal benefit and transferred corporate assets into his
own name.
17. 	Green breached his duty of loyalty to Bonito.
18. 	With regard to Bonito's Counterclaim for conversion and
breach of fiduciary duty the State Court used the ordinary
preponderance of the evidence standard.
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CONCLUSIONS OF LAW
Collateral estoppel applies. 	But, the Court bases its
decision on substantive provisions of the Bankruptcy Code so will
not address the collateral estoppel issues.
Bankruptcy Code Section 523(a)(4) provides:
A discharge under section 727, ... of this title does
not discharge an individual debtor from any debt--
...
(4) for fraud or defalcation while acting in a
fiduciary capacity...
Accordingly, a finding of nondischargeability under section
523(a)(4) requires a showing of (1) the existence of a fiduciary
relationship between the debtor and the objecting party, and (2)
a defalcation committed by the debtor in the course of that
fiduciary relationship. 	Antlers Roof-Truss & Builders Supply v.
Storie (In re Storie), 216 B.R. 283, 286 (10 th Cir. BAP 1997)
(citing Fowler Bros. v. Young (In re Young), 91 F.3d 1367, 1371
(10 th Cir. 1996)). 	Defendant admits (for the purposes of this
motion only) that, if he were a fiduciary, his acts would
constitute defalcations. 	See Defendant’s Response to Plaintiff’s
Motion for Summary Judgment, doc 31, at p. 2. 	Therefore, the
only dispute before the Court is the existence of the fiduciary
relationship.
The existence of a fiduciary duty for section 523(a)(4) is a
question of federal law, not a “fact” that can be pled. 	Van de
Water v. Van de Water (In re Van de Water), 180 B.R. 283, 289
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(Bankr. D. N.M. 1995) (fiduciary capacity is a question of
federal law; the general definition of fiduciary is too broad in
the dischargeability context.); Young, 91 F.3d at 1371 (“The
existence of a fiduciary relationship under § 523(a)(4) is
determined under federal law.”) 	In Employers Workers’
Compensation Assoc. v. Kelley (In re Kelley), 215 B.R. 468, 471-
72 (10 th Cir. BAP 1997), the Tenth Circuit Bankruptcy Appellate
Panel discussed fiduciary duty:
Section 523(a)(4) of the Bankruptcy Code excepts from
discharge any debt "for fraud or defalcation while
acting in a fiduciary capacity." 	The Tenth Circuit
recently explained the meaning of "fiduciary capacity"
in this provision.
The existence of a fiduciary relationship under §
523(a)(4) is determined under federal law.
However, state law is relevant to this inquiry.
Under this circuit's federal bankruptcy case law,
to find that a fiduciary relationship existed
under § 523(a)(4), the court must find that the
money or property on which the debt at issue was
based was entrusted to the debtor. 	Thus, an
express or technical trust must be present for a
fiduciary relationship to exist under § 523(a)(4).
Neither a general fiduciary duty of confidence,
trust, loyalty, and good faith, nor an inequality
between the parties' knowledge or bargaining
power, is sufficient to establish a fiduciary
relationship for purposes of dischargeability.
"Further, the fiduciary relationship must be shown
to exist prior to the creation of the debt in
controversy." [Allen v. Romero (In re Romero)],
535 F.2d [618,] 621 [(10th Cir. 1976)].
Fowler Bros. v. Young (In re Young), 91 F.3d 1367,
1371-72 (10th Cir. 1996)(additional citations omitted).
We are, of course, obliged to apply this narrow view of
the fiduciaries who are covered by § 523(a)(4).
The Kelley court also noted that state statutes often, but not
always, impose trusts on persons held to be fiduciaries as a
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1 See also Davis v. Aetna Acceptance Co., 293 U.S. 328, 333
(1934): “It is not enough that, by the very act of wrongdoing out
of which the contested debt arose, the bankrupt has become
chargeable as a trustee ex maleficio. 	He must have been a
trustee before the wrong and without reference thereto.”
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matter of law based on their relationships. 	Id. at 473. 	See
also Van de Water, 180 B.R. at 289 (“The trust requirement is not
limited to trusts arising out of a formal agreement, but includes
relationships in which trust-type obligations are imposed
pursuant to statute or common law.”) (Citation omitted.) 	A state
statute must meet three requirements to trigger section
523(a)(4)’s fiduciary status: (1) the trust res must be defined
by the statute, (2) the statute must spell out the fiduciary
duty, and (3) the statute must impose a trust on funds prior to
the act creating the debt. 	Kelley, 215 B.R. at 473. 1
In this case, Bonito does not argue that there was an
express trust. 	Rather, Bonito claims that under New Mexico law
corporate directors “are charged with something more than a
general fiduciary duty.” 	Memorandum Brief in Support of
Plaintiff’s Motion for Summary Judgment, doc 26, at p. 5.
Alternatively, Bonito argues that the Tenth Circuit has abandoned
the requirement of an express or technical trust. 	Reply Brief in
Support of Plaintiff’s Motion for Summary Judgment, doc 33, at
pp. 1-4.
First, Bonito argues that the statutes concerning corporate
governance establish the requisite trust. 	However, there is
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2See N. M. Stat. Ann. § 53-8-25.1, Duties of Directors:
“A director shall perform his duties as a director ... in good
faith, in a manner the director believes to be in or not opposed
to the best interests of the corporation and with such care as an
ordinarily prudent person would use under similar circumstances
in a like position.”
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nothing in the Business Corporation Act (N. M. Stat. Ann. § 53-
11-1 et seq.) that makes directors or officers of a corporation a
trustee of corporate assets. 	Corporations themselves have the
power to own and hold both real and personal property. 	N. M.
Stat. Ann. 53-11-4(D). 	The statute does not provide for property
to be held by the directors or officers in trust. 	Therefore, the
first part of the Kelley test is not met. 	While the statutes
arguably recognize a generalized fiduciary duty of officers and
directors to the corporation 2, they do not spell out any specific
fiduciary duties that officers or directors must exercise over
any specific assets. 	Therefore, the second part of the Kelley
test is also not met. 	There is no trust.
Second, Bonito’s alternative argument fails. 	Most of this
argument focuses on Orem Postal Credit Union v. Twitchell (In re
Twitchell), 892 F.2d 86 (10 th Cir. 1989)(Table) which reversed
the Utah District Court, 91 B.R. 961 (D. Utah 1988), which had
reversed the Utah Bankruptcy Court, 72 B.R. 431 (Bankr. D. Utah
1987). 	Bonito’s argument is that when the Tenth Circuit reversed
the District Court without opinion it in effect adopted the
Bankruptcy Court’s opinion as the law of the Tenth Circuit. 	The
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Bankruptcy Court had found that Utah statutes placed the
Defendant in a fiduciary relationship with the credit union of
which he was president and treasurer. 	Id. at 434. 	The
Bankruptcy Court then found several defalcations and held the
debt nondischargeable. 	Id. at 436. 	The Bankruptcy Court did not
find a specific trust; its decision was based on the mere
existence of a fiduciary duty followed by defalcations. 	The sole
issue on appeal to the District Court was whether Mr. Twitchell
was a fiduciary within the meaning of section 523(a)(4). 	91 B.R.
at 963. 	The District Court reversed. 	It found that the Utah
statute in question recognized that officers of credit unions
have fiduciary duties to the institution, but stated
“[n]evertheless, there are no regulations in [the statute] that
express a legislative intent to place a credit union officer as a
trustee over funds belonging to the credit union.” 	Id. at 966.
The Tenth Circuit reversed without opinion. 	892 F.2d 86 (10 th
Cir. 1989)(Table). 	Bonito argues that this reversal indicates
that the Tenth Circuit agreed that the existence of a fiduciary
duty, standing alone, is sufficient for section 523(a)(4)
liability. 	However, it is as equally plausible that the Tenth
Circuit independently reviewed the statute in question and found
that in fact it created a trust. 	We do not know.
In any event, a single panel of the Tenth Circuit cannot
reverse a decision of a prior panel without an en banc hearing or
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3Note also that In re Young was decided after Twitchell.
Page -9-
an intervening contrary decision by the United States Supreme
Court. 	In re Smith, 10 F.3d 723, 724 (10 th Cir. 1993)(Per
curium), cert. denied, 513 U.S. 807 (1994). 	Therefore, Twitchell
cannot be deemed as reversing Allen v. Romero (In re Romero), 535
F.2d 1618, 1621 (10 th Cir. 1976)(which requires an express or
technical trust be present for the fiduciary duty to be
nondischargeable) or Fowler Bros. v. Young (In re Young), 91 F.3d
1367, 1371 (10 th Cir. 1996) 3 (“Under this circuit’s federal
bankruptcy case law, to find that a fiduciary relationship
existed under §523(a)(4), the court must find that the money or
property on which the debt at issue was based was entrusted to
the debtor. ... Thus, an express or technical trust must be
present for a fiduciary relationship to exist under §523(a)(4).”
(Citations omitted.))
CONCLUSION
This Court is bound by Tenth Circuit case law such as In re
Romero and In re Young, both of which require the existence of an
express or technical trust before finding a fiduciary duty that
is subject to Bankruptcy Code section 523(a)(4). 	There is no
express trust in this case, and there is no technical or
statutory trust arising from New Mexico’s Business Corporation
Act. 	The Court therefore can find no fiduciary duty and the
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section 523(a)(4) breach of fiduciary duty claim should be
dismissed.
Honorable James S. Starzynski
United States Bankruptcy Judge
Date Entered on Docket: 	February 29, 2008
copies to:
Victor E Carlin
Moses Law Firm
PO Box 27047
612 First Street, NW
Albuquerque, NM 87125-7047
George M Moore
Moore, Berkson & Gandarilla
PO Box 216
Albuquerque, NM 87103-0216
Arin Elizabeth Berkson
Moore, Berkson & Gandarilla, P.C.
PO Box 216
Albuquerque, NM 87103-0216
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