610 B.R. 154
Bankr. D. Me.2019Background
- Hill and Andrade formed a verbal general partnership in 2011 to operate a Virginia 7‑11; there was no written partnership or loan paperwork. Hill obtained the franchise in her name and controlled store receipts and distributions.
- Financing came from four sources (7‑11 loan, Andrade personal advances, Andrade, LLC loan, and a loan from Pianalto); the parties treated payments informally and Andrade allocated receipts among those loans.
- Hill took substantial "weekly draws" (tens of thousands annually) as compensation; she later made two "additional draws": $15,000 in Oct. 2016 (to pay taxes) and $9,000 in Nov. 2017 (for legal/relocation expenses).
- Andrade sued in Virginia; after a 2017 trial the Virginia court (the Order) terminated the partnership and entered judgments against Hill, including $149,299.50 as half of partnership profits and judgments on the loan balances.
- Hill filed Chapter 7; Andrade filed an adversary complaint seeking to except Hill’s debts from discharge under 11 U.S.C. § 523(a)(4), alleging embezzlement (for the two additional draws) and defalcation/fiduciary breach (for the partnership‑profits judgment).
- The bankruptcy court took the Virginia Order as preclusive on relevant findings, but held Andrade failed to prove the mental‑state elements required for embezzlement or defalcation; judgment for Hill.
Issues
| Issue | Andrade's Argument | Hill's Argument | Held |
|---|---|---|---|
| Whether Hill’s $15,000 (Oct. 2016) and $9,000 (Nov. 2017) withdrawals constitute embezzlement under § 523(a)(4) | Withdrawals were fraudulent conversions of partnership property and thus nondischargeable as embezzlement | Hill reasonably believed she had authority to take the funds (thought partnership had ended for 2016 draw; for 2017 the partnership had been terminated); no concealment or fraudulent intent | Court: No embezzlement—insufficient evidence of fraudulent intent; withdrawals were taken in good faith or after partnership termination |
| Whether the $149,299.50 judgment for half of partnership profits is nondischargeable as defalcation while acting in a fiduciary capacity under § 523(a)(4) | Andrade: Virginia partnership duties created a technical trust; Hill’s retention of profits was a breach rising to defalcation | Hill: No express trust; any fiduciary duties were unclear, performance was informal, and her conduct did not show knowledge or gross recklessness required for defalcation | Court: Assumed statutory partnership duties could create a technical trust but held Andrade failed to prove the Bullock standard (knowledge or gross recklessness); debt dischargeable |
Key Cases Cited
- Palmacci v. Umpierrez, 121 F.3d 781 (1st Cir.) (exceptions to discharge construed narrowly; plaintiff bears burden)
- Rutanen v. Baylis (In re Baylis), 313 F.3d 9 (1st Cir.) (plaintiff bears burden to prove nondischargeability under § 523(a)(4))
- Sherman v. Potapov (In re Sherman), 603 F.3d 11 (1st Cir.) (embezzlement requires fraudulent conversion and intent)
- Bullock v. BankChampaign, N.A., 569 U.S. 267 (U.S.) (defalcation requires knowledge or gross recklessness)
- Honkanen v. Hopper (In re Honkanen), 446 B.R. 373 (B.A.P. 9th Cir.) (actual fraud test under § 523(a)(4))
- LaPointe v. Brown (In re Brown), 131 B.R. 900 (Bankr. D. Me.) (fiduciary capacity under § 523(a)(4) requires technical or express trust)
- Raso v. Fahey (In re Fahey), 482 B.R. 678 (B.A.P. 1st Cir.) (distinguishing technical/express trusts from constructive trusts for § 523(a)(4))
- Me. Bonding & Cas. Co. v. Crook (In re Crook), 13 B.R. 794 (Bankr. D. Me.) (good‑faith retention and bona fide claim of right inconsistent with embezzlement)
- Davis v. Aetna Acceptance Co., 293 U.S. 328 (U.S.) (constructive trusts do not establish fiduciary capacity for § 523(a)(4))