Young Insurance Agency, Inc. v. Baker

UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF NEW MEXICO
In re:
DENNIS DALE BAKER,
Debtor. 	No. 7-07-12292 SR
YOUNG INSURANCE AGENCY, INC.,
Plaintiff,
v. 	Adv. No. 07-1136 S
DENNIS BAKER,
Defendant.
MEMORANDUM OPINION ON DEFENDANT’S
MOTION TO DISMISS
This matter is before the Court on Defendant’s Motion to
Dismiss (doc 5) and Brief in Support (doc 6), Plaintiff’s
Response and Memorandum in Opposition (doc 9) and Defendant’s
Reply (doc 11). 	Plaintiff appears through its attorney Eric D.
Dixon. 	Defendant appears through his attorney Wesley O. Pool.
This is a core proceeding to determine dischargeability of a
debt. 	28 U.S.C. § 157(b)(2)(I).
STANDARDS FOR MOTION TO DISMISS
Bankruptcy Rule 7012 adopts Federal Rule of Civil Procedure
12(b)(6) which allows for dismissal of a complaint for failure to
state a claim upon which relief can be granted. 	In reviewing a
motion to dismiss, the Court must accept all well-pleaded factual
allegations in the complaint as true and construe the complaint
in favor of the plaintiff. 	Ash Creek Mining v. Lujan, 969 F.2d
868, 870 (10 th Cir. 1992). 	“The court's function on a Rule
12(b)(6) motion is not to weigh potential evidence that the
parties might present at trial, but to assess whether the
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1The Court has considered Exhibits 1 and 2 to the Complaint,
and has excluded consideration of Exhibit A attached to
Defendant’s Brief in Support of Motion to Dismiss. 	See
Fed.R.Civ.P. 10(c) (“A copy of any written instrument which is an
exhibit to a pleading is a part thereof for all purposes.”) and
Fed.R.Civ.P. 12(d) (“If, on a motion under Rule 12(b)(6) or
12(c), matters outside the pleadings are presented to and not
excluded by the court, the motion must be treated as one for
summary judgment under Rule 56. 	All parties must be given a
reasonable opportunity to present all the material that is
(continued...)
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plaintiff's complaint alone is legally sufficient to state a
claim for which relief may be granted.” 	Miller v. Glanz, 948
F.2d 1562, 1565 (10th Cir. 1991). 	And, while a complaint
attacked by a Rule 12(b)(6) motion does not need detailed factual
allegations it does need to provide the grounds for relief, which
requires more than labels and conclusions or a formulaic
recitation of the elements of the cause of action. 	Bell Atlantic
Corp. v. Twombly, ___ U.S. ___, 127 S.Ct. 1955, 1964-65 (2007).
PLAINTIFF’S COMPLAINT
Plaintiff’s complaint is filed under Bankruptcy Code
sections 523(a)(2), (4) and (6). 	The first three paragraphs
identify the parties and allege that Plaintiff is a creditor.
Paragraph 4 describes a state court lawsuit that was tried pre-
petition and resulted in a verdict in favor of Plaintiff for
Defendant’s intentional violation of a covenant not to compete.
Damages of $28,459 were awarded. 	The state court’s Decision and
Findings of Fact and Conclusions of Law are incorporated as
Exhibit 1 1. 	Paragraph 5 states that Judgment was entered pre-
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1(...continued)
pertinent to the motion.” 	See also Hall v. Bellmon, 935 F.2d
1106, 1112 (10 th Cir. 1991)(“A written document that is attached
to the complaint as an exhibit is considered part of the
complaint and may be considered in a Rule 12(b)(6) dismissal.”)
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petition. 	The Judgment is incorporated as Exhibit 2. 	Paragraph
6 cites Grogan v. Garner, 498 U.S. 279 (1991) and alleges that
Defendant is collaterally estopped from re-litigating the state
court case. 	Paragraph 7 cites a Massachusetts bankruptcy case
and alleges that debtor acted intentionally when he went to work
for a competitor despite his covenant not to compete. 	Paragraph
8 alleges that the debt is non-dischargeable under § 523(a)(2),
(4) and (6). 	Plaintiff also seeks costs and attorney fees.
THE STATUTE
Section 523 provides, in part, as follows:
(a) A discharge under section 727 ... does not
discharge an individual debtor from any debt --
...
(2) for money, property, services, or an
extension, renewal, or refinancing of credit, to
the extent obtained by--
(A) false pretenses, a false representation,
or actual fraud, other than a statement
respecting the debtor's or an insider's
financial condition;
...
(4) for fraud or defalcation while acting in a
fiduciary capacity, embezzlement, or larceny;
...
[or]
(6) for willful and malicious injury by the debtor
to another entity or to the property of another
entity.
Section 523(a)(2)
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To establish that a claim is nondischargeable under Section
523(a)(2), the creditor must prove: “The debtor made a false
representation; the debtor made the representation with the
intent to deceive the creditor; the creditor relied on the
representation; the creditor's reliance was reasonable; and the
debtor's representation caused the creditor to sustain a loss.”
Fowler Bros. v. Young (In re Young), 91 F.3d 1367, 1373 (10 th
Cir. 1996). 	The Supreme Court, however, has ruled that the
reliance need not be reasonable, but only “justifiable.” 	Field
v. Mans, 516 U.S. 59, 74-75 (1995).
Nowhere does the complaint (or attachments) allege or refer
to any false representation, reliance, or justifiability of any
reliance. 	And, nowhere does it allege that any representation
caused any loss to Plaintiff. 	The complaint fails to state a
claim for relief under section 523(a)(2).
Section 523(a)(4)
To establish that a claim is nondischargeable under Section
523(a)(4), the creditor must prove one of three things: 1) fraud
or defalcation while acting in a fiduciary capacity, 2)
embezzlement, or 3) larceny. 	Each will be addressed.
Breach of Fiduciary Duty
To establish the breach of fiduciary duty exception to
discharge, the creditor must prove: 1) the existence of a
fiduciary duty between the debtor and the creditor, and 2) fraud
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or defalcation was committed by the debtor in the course of that
fiduciary relationship. 	Smolen v. Hatley (In re Hatley), 227
B.R. 757, 760 (10 th Cir. BAP 1998), aff’d, 194 F.3d 1320 (1999)
(unpublished) (citing Young, 91 F.3d at 1371).
First, the creditor must establish the fiduciary duty owed
by the debtor to the creditor. 	The existence of a fiduciary duty
is a legal question decided under federal law. 	Young, 91 F.3d at
1371. 	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).
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2 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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The Kelley court also noted that state statutes often, but not
always, impose trusts on persons held to be fiduciaries as a
matter of law based on their relationships. 	Id. at 473. 	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. 	Id. 2
Nowhere does the complaint (or attachments) allege or refer
to any trust, either express or statutory. 	The Court finds that
there was no fiduciary duty owed to Plaintiff under the facts
alleged in this case.
Second, if the creditor proves the existence of a fiduciary
duty, the creditor must next establish that the debtor committed
a fraud or defalcation. 	“‘[D]efalcation’ under section 523(a)(4)
is a fiduciary-debtor's failure to account for funds that have
been entrusted to it due to any breach of a fiduciary duty,
whether intentional, wilful, reckless, or negligent.” 	Antlers
Roof-Truss & Builders Supply v. Storie (In re Storie), 216 B.R.
283, 288 (10 th Cir. BAP 1997). 	In this case, there was no
fiduciary duty, so there could be no breach of that fiduciary
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duty. 	In addition, the complaint does not allege that anything
was “entrusted” to Defendant. 	The complaint fails to state a
claim for relief for breach of fiduciary duty under section
523(a)(4).
Embezzlement
To establish the embezzlement exception to discharge, the
creditor must prove: 1) the debtor lawfully came into possession
of the creditor’s property or funds, 2) that the debtor
appropriated the funds for his or her own benefit, and 3) that he
or she did so with fraudulent intent or deceit. 	Peavey
Electronics Corp. v. Sinchak (In re Sinchak), 109 B.R. 273, 276
(Bankr. N.D. Ohio 1990)(Citations omitted.)
Nowhere does the complaint allege that Defendant came into
any property belonging to Plaintiff, that he appropriated it for
his own benefit, or that he had fraudulent intent. 	The complaint
fails to state a claim for relief for embezzlement under section
523(a)(4).
Larceny
To establish the larceny exception to discharge, the
creditor must prove: 1) that the debtor fraudulently and
wrongfully took and carried away the property of the creditor, 2)
that the debtor intended to convert the property to his or her
own use, and 3) that he did so without the consent of the owner.
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Page -8-
Bryant v. Lynch (In re Lynch), 315 B.R. 173, 179 (Bankr. D. Colo.
2004). 	(Citations omitted.)
Nowhere does the complaint allege that Defendant took and
carried away the property of the Plaintiff, or that he intended
to convert Plaintiff’s property to his own use. 	The complaint
fails to state a claim for relief for larceny under section
523(a)(4).
Section 523(a)(6)
To establish that a claim is nondischargeable under Section
523(a)(6), the creditor must prove that debtor caused a
deliberate or intentional injury to the creditor or his property.
Kawaauhau v. Geiger (In re Geiger), 523 U.S. 57, 61 (1998)
(“[N]ondischargeability takes a deliberate or intentional injury,
not merely a deliberate or intentional act that leads to
injury.”)(Emphasis in original.) 	Debts resulting from
recklessness or negligence do not fall within § 523(a)(6). 	Id.
at 64.
Paragraph 7 of the complaint can reasonably be construed to
allege that Defendant deliberately or intentionally sought to
injure Plaintiff, and therefore acted wilfully. 	However, the
Complaint’s Exhibit 1 (Decision and Findings of Fact and
Conclusions of Law), Findings of Fact ¶ 59 states: “Baker’s
breach of the covenants not to compete between June 1, 2002 and
November 1, 2002 was not reckless, malicious, or in bad faith
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because of his good faith reliance upon advice of counsel.” And,
Exhibit 1, Conclusion of Law ¶ 7 states: “Both Defendants
reasonable [sic] relied upon advice of counsel and neither’s
conduct was wanton, malicious, reckless, oppressive, fraudulent
or in bad faith and therefore neither Plaintiff is awarded
punitive damages or attorney’s fees.” 	This is not a case in
which the state court had no occasion to rule on what has turned
out to be the elements of section 523(a)(6). 	Compare Brown v.
Felsen, 442 U.S. 127, 134-39 (1979). 	Rather, the Court may rely
on the doctrine of collateral estoppel to determine whether the
predicate factual elements of the cause of action have already
been determined. 	Id. at footnote 10.
In addition to Defendant being collaterally estopped from
relitigating the issues of the state court lawsuit, so should
Plaintiff. 	The state court found no bad conduct in the breach of
covenant case. 	The Bankruptcy Court is bound by those findings
and conclusions. 	See Dorr, Bentley & Pecha, CPA’s, P.C. v. Pasek
(In re Pasek), 983 F.2d 1524, 1528 (10 th Cir. 1993)(Breach of
covenant not to compete was not “willful or malicious” so debt
arising therefrom was dischargeable.) 	The complaint fails to
state a claim for relief under section 523(a)(6).
CONCLUSION
Viewing Plaintiff’s complaint in the most favorable light,
the Court finds that this controversy is a simple breach of
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contract claim over which the state court found no egregious
conduct on the part of the defendant. 	This does not make a non-
dischargeable debt. 	Plaintiff’s complaint should be dismissed.
A separate Order will enter dismissing the complaint.
ATTORNEY FEES
Defendant’s Motion to Dismiss, ¶ 6 alleges “Plaintiff had no
reasonable good faith belief in the merits of its adversary
complaint herein and Defendant should be awarded his reasonable
attorney’s fees and costs defending this action.”
Under the “American Rule” applied in federal
litigation, a prevailing party is not ordinarily
entitled to collect attorney's fees from his opponent.
Alyeska Pipeline Serv. Co. v. Wilderness Society, 421
U.S. 240, 247, 257, 95 S.Ct. 1612, 44 L.Ed.2d 141
(1975). 	This general rule applies to bankruptcy
litigation. 	In re Reid, 854 F.2d 156, 161-62 (7th Cir.
1988); All Am. of Ashburn v. Fox (In re Fox), 725 F.2d
661, 662 (11th Cir. 1984). 	However, there are two
major exceptions to the “American Rule”: (1) the rule
is abrogated when the parties have entered a contract
that shifts attorney's fees, and (2) the rule is
abrogated when a statute provides for fee shifting.
Bennett v. Coors Brewing Co., 189 F.3d 1221, 1237-38
(10th Cir.1999).
Busch v. Hancock (In re Busch), 369 B.R. 614, 624-25 (10 th Cir.
BAP 2007). 	Defendant has not alleged a contract provision that
would award him attorney fees in this case. 	But, attorney fee
awards in dischargeability litigation is governed by section
523(d), which provides:
If a creditor requests a determination of
dischargeability of a consumer debt under subsection
(a)(2) of this section, and such debt is discharged,
the court shall grant judgment in favor of the debtor
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for the costs of, and a reasonable attorney's fee for,
the proceeding if the court finds that the position of
the creditor was not substantially justified, except
that the court shall not award such costs and fees if
special circumstances would make the award unjust.
(Emphasis added.) 	The debt in this case is not a “consumer debt”
as defined in Bankruptcy Code section 101(8). 	Therefore, no fee
award is authorized. 	The American Rule applies, and each party
will bear its own fees and costs.
Honorable James S. Starzynski
United States Bankruptcy Judge
Date Entered on Docket: 	March 19, 2008
copies to:
Eric D Dixon
301 S Avenue A
Portales, NM 88130-6288
Wesley O Pool
PO Box 410
Clovis, NM 88102-0410
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