629 F.3d 761
7th Cir.2011Background
- Follett hires Berman & Associates to place ads; Follett pays 110% of ad costs, Berman & Associates disburses and retains 10% as fees.
- Follett discovers in 2006 that Berman & Associates failed to pay several advertised bills.
- Jay Berman was president, director, and sole shareholder of Berman & Associates; the firm ceased operations in 2006 and dissolved by year end.
- Follett filed an adversary proceeding in Berman’s Chapter 7 proceedings seeking non-dischargeability under 11 U.S.C. § 523(a)(4).
- Bankruptcy court and district court held Follett failed to prove Berman acted in a fiduciary capacity toward Follett; the Seventh Circuit affirms.
- Debtor’s debts are dischargeable unless a valid 523(a)(4) non-dischargeability theory is proven; the court emphasizes narrow scope of the fiduciary exception.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Berman acted as Follett’s fiduciary under §523(a)(4). | Follett contends Berman & Associates as Follett’s agent or officer in insolvency era created a fiduciary duty. | Berman argues no fiduciary relationship exists under §523(a)(4). | No fiduciary relationship proven; debt dischargeable. |
| Whether an express or implied fiduciary status exists to support §523(a)(4). | Follett asserts express or implied fiduciary duty via contract or power dynamics. | Berman asserts no express trust or implied fiduciary status. | No express trust or implied fiduciary status established. |
Key Cases Cited
- In re Frain, 230 F.3d 1014 (7th Cir. 2000) (requires proof of fiduciary defalcation with more than mere breach of contract)
- Klingman v. Levinson, 831 F.2d 1292 (7th Cir. 1987) (fiduciary status in §523(a)(4) context limited)
- Davis v. Aetna Acceptance Co., 293 U.S. 328 (1934) (fiduciary capacity must predate the wrong; narrow interpretation)
- Forsyth, 43 U.S. (2 How.) 202 (1844) (limitation on broad application of non-dischargeable debt exception)
- Marchiando, 13 F.3d 1111 (7th Cir. 1994) (trust-like obligations must exist prior to debt; not all relationships fit)
- McGee, 353 F.3d 537 (7th Cir. 2003) (express vs implied fiduciary status; asset segregation factor in some contexts)
- Woldman, 92 F.3d 546 (7th Cir. 1996) (co-equal partners not fiduciaries under 523(a)(4) absent inequality of power)