493 B.R. 248
Bankr. D. Colo.2013Background
- Autohut operated as a common law partnership between Debtor and Lowell Andrews to run a used-car consignment business in Englewood, Colorado, without forming a separate entity.
- Andrews ran day-to-day operations while Debtor contributed at least $10,000 and had little involvement, according to the trial court.
- Andrews solicited consignors by contacting individuals selling cars and charging Autohut a $500 fee per sale, documented in contracts.
- Plaintiff paid $6,400 for a Ford F350 but never received the title; Autohut shut down, and numerous consignors and buyers were left without proceeds or titles.
- The Colorado Motor Vehicle Dealer Board shut down Autohut's business and license; no charges were brought against Autohut or its owners.
- After Autohut’s collapse, the seller of the Truck (Mr. Johnson) sued Plaintiff; a state court awarded Johnson ownership of the Truck, and Plaintiff was not refunded the $6,400.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether there is embezzlement under § 523(a)(4). | Andrews embezzled funds; Debtor's lack of direct action should be irrelevant. | No embezzlement by Debtor; insufficient intent or supervisory liability. | Yes; Plaintiff established embezzlement under § 523(a)(4). |
| Whether Debtor is vicariously liable for Andrews' embezzlement under Colorado partnership law. | Partnership liability imputed to Debtor for Andrews' acts within ordinary course and authority. | Limit vicarious liability; require Reckless indifference or direct benefit; Debtor lacked awareness. | Yes; Debtor is vicariously liable; the debt is nondischargeable under § 523(a)(4). |
Key Cases Cited
- Strang v. Bradner, 114 U.S. 555 (1885) (imputes fraud to partners under agency theory for nondischargeability)
- Neal v. Clark, 95 U.S. 704 (1877) (positive fraud required for nondischargeability, not implied fraud)
- Cohen v. de la Cruz, 523 U.S. 213 (1998) (fraud debts excepted from discharge; any debt arising from fraud remains nondischargeable)
- Bullock v. BankChampaign, N.A., 133 S. Ct. 1754 (2013) (defalcation requires intentional wrong; harmonizes with Neal and Strang)
- In re Tilley, 286 B.R. 782 (Bankr.D. Colo. 2002) (embez zlement elements; infers intent with animus furandi)
- Driggs v. Black (In re Black), 787 F.2d 503 (10th Cir. 1986) (embez zlement requires fraudulent intent)
- Klemens v. Wallace (In re Wallace), 840 F.2d 762 (10th Cir. 1988) (embez zlement and larceny distinctions under § 523(a)(4))
- In re Selheimer & Co., 319 B.R. 395 (Bankr.E.D. Pa. 2005) (agency/applicability of vicarious liability principles)
- In re Summit Airlines, Inc., 160 B.R. 911 (Bankr.E.D. Pa. 1993) (vicarious liability principles in bankruptcy context)
- In re M.M. Winkler & Assocs., 239 F.3d 746 (5th Cir. 2001) (rejects receipt-of-benefit requirement for vicarious liability)
- In re Tinkler, 311 B.R. 869 (Bankr.D. Colo. 2004) (embez zlement elements; interpretation in Colorado bankruptcy context)