594 B.R. 829
Bankr. S.D. Florida2019Background
- Great American (surety) filed an adversary complaint (Aug 27, 2018) objecting to dischargeability under 11 U.S.C. § 523(a)(4) against Michael Brandt, owner of Structural Integrity Contractors, Inc.
- Brandt executed an indemnity agreement with Great American that contained an express trust provision requiring that funds received for bonded contracts be held in trust for beneficiaries of the bond obligations.
- Great American paid claims on at least two bonds (parking garage and condominium projects) and alleges losses of approximately $401,140 and an additional loan for payroll; it contends Structural received project funds that were diverted to Brandt’s personal expenses.
- Plaintiff alleges a fiduciary relationship (express trust) existed under the indemnity agreement and that Brandt committed defalcation in violation of § 523(a)(4).
- Brandt moved to dismiss for failure to state a claim, arguing a technical/express trust requires prior segregation of trust assets; Great American opposed.
- The bankruptcy court denied the motion to dismiss, finding the indemnity agreement’s trust provision sufficiently established a fiduciary relationship and that facts alleging defalcation were plausibly pled.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether an express/technical trust existed under § 523(a)(4) | Indemnity agreement’s trust clause created an express trust, trust corpus, and intent to create fiduciary duties | A technical trust requires segregation of trust assets before defalcation; absent segregation, no fiduciary capacity under § 523(a)(4) | Trust provision in the indemnity agreement was sufficient to create an express trust; fiduciary relationship existed regardless of segregation |
| Whether plaintiff pled defalcation under § 523(a)(4) | Allegations that project funds were diverted to Brandt’s personal expenses and Great American incurred bond losses support defalcation after fiduciary relationship formed | Denied at motion stage; argues facts insufficient to show the intentional or reckless misconduct required for defalcation | Court found plaintiff alleged sufficient facts that defalcation occurred and that intentional/reckless conduct is a factual issue for later proceedings |
| Appropriateness of Rule 12(b)(6) dismissal | Complaint states a plausible claim for relief under federal pleading standards | Motion argued failure to state a claim given trust/segregation law | Denied; complaint survives Rule 12(b)(6) review and defendant must answer within 14 days |
| Applicability of precedent requiring segregation | Plaintiff: segregation requirement applies primarily to statutory trusts, not voluntary express trusts created by contract | Defendant: relies on Quaif, Cooseman's, and other cases to require segregation | Court distinguished Quaif/Cooseman's as addressing statutory trusts and held segregation is not required for express contractual trusts like the indemnity agreement |
Key Cases Cited
- Ashcroft v. Iqbal, 556 U.S. 662 (pleading standard requires plausible claim)
- Quaif v. Johnson, 4 F.3d 950 (11th Cir.) (statutory trusts may require segregation analysis to qualify under § 523(a)(4))
- Bullock v. BankChampaign, N.A., 569 U.S. 267 (defalcation includes intentional and reckless conduct)
- Guerra v. Fernandez-Rocha, 451 F.3d 813 (11th Cir.) (discussing inclusion of voluntary express trusts within § 523(a)(4))
- Developers Sur. & Indem. Co. v. Bi-Tech Constr., Inc., 979 F. Supp. 2d 1307 (S.D. Fla.) (indemnity agreement trust clause can create an express trust and fiduciary relationship)