Follett Higher Education Group, Inc. v. Berman
629 F.3d 761
7th Cir.2011Background
- Follett Higher Education Group sued in Berman’s bankruptcy proceeding claiming a non-dischargeable debt under 11 U.S.C. § 523(a)(4) for defalcation while acting in a fiduciary capacity.
- Berman & Associates provided Follett with bill-paying services, taking a 10% fee from advertising payments Follett remitted.
- Follett later discovered Berman & Associates had unpaid advertising bills, forcing Follett to pay some outlets directly.
- Berman filed for Chapter 7; Follett asserted Berman breached fiduciary duties toward Follett, making the debt non-dischargeable.
- Bankruptcy court found no fiduciary relationship; district court affirmed; Seventh Circuit affirmed, holding no § 523(a)(4) fiduciary status existed.
- Court emphasized that the § 523(a)(4) exception is narrow and requires a fiduciary duty that is not present here.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Berman acted as Follett’s fiduciary under § 523(a)(4). | Follett contends Berman & Associates’ role created a fiduciary duty. | Berman argues ordinary principal-agent contract does not create fiduciary status for § 523(a)(4). | No fiduciary status under § 523(a)(4) established. |
| Whether officers of an insolvent corporation owe fiduciary duties to creditors for § 523(a)(4). | Follett argues Jay Berman owed fiduciary duties to creditors as officer. | Court should not extend fiduciary status to individual officers from insolvency alone. | State-law officer duties do not automatically grant § 523(a)(4) fiduciary status. |
| Whether an express trust existed between Follett and Berman & Associates. | Follett claims an express trust existed via contract. | Contracts did not create an express trust with segregation of funds. | No express trust proven. |
| Whether an implied fiduciary status arose from contract to satisfy § 523(a)(4). | Follett contends the contract created trust-like obligations. | Ordinary contracts lack the trust features required for § 523(a)(4). | No implied fiduciary status; the relationship did not meet § 523(a)(4). |
| Whether the court should veil-pierce to hold Berman personally liable. | Follett seeks personal liability through veil-piercing. | Not reached since no fiduciary duty by the corporation was proven. | Veil-piercing not reached; no fiduciary relation proven. |
Key Cases Cited
- Davis v. Aetna Acceptance Co., 293 U.S. 328 (Supreme Court 1934) (fiduciary capacity must be strict and narrow; trustee before wrong required)
- Forsyth, 43 U.S. (2 How.) 202 (U.S. Supreme Court 1844) (limits the scope of the non-dischargeable exception)
- Marchiando, 13 F.3d 1111 (7th Cir. 1994) (fiduciary relationship limited; statutory/contractual basis considered)
- Frain, 230 F.3d 1014 (7th Cir. 2000) (recognizes limited fiduciary duties; requires more than mere contract duties)
- Woldman, 92 F.3d 546 (7th Cir. 1996) (no fiduciary status where duties mirror contractual obligations; no power imbalance)