In re: William Roger Utnehmer and Marie Claire Utnehmer
499 B.R. 705
9th Cir. BAP2013Background
- William and John operated CW Development Partners (CWDP); title to a Venice property was held in William and Marie Utnehmer’s names but treated as CWDP property.
- In June 2005 Patrick and Mary Crull loaned $100,000 to CWDP under a written Loan Agreement and Note; paragraph 5 stated $50,000 was to be recharacterized later as equity upon execution of a future operating agreement and LLC formation.
- Crulls received some interest payments but were not repaid; CWDP refinanced the project multiple times without informing Crulls; the property later sold and Crulls received nothing from the sale proceeds.
- Crulls obtained a state-court default judgment against William, then Crulls filed an adversary proceeding in bankruptcy seeking nondischargeability under § 523(a)(2), (a)(6), and the bankruptcy court sua sponte considered § 523(a)(4).
- The bankruptcy court found the Loan Agreement created a partnership (thus fiduciary status) and held the $100,000 debt nondischargeable under § 523(a)(4) for defalcation; the BAP reversed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the Loan Agreement created a partnership | Crulls: Loan terms (profit participation language) showed intent to form a partnership/LLC and fiduciary duties arose | Debtors: Agreement was a loan; conversion to equity depended on a future contingency (operating agreement/LLC formation) that never occurred | Court: No partnership existed at signing; paragraph 5 only contemplated a future recharacterization upon formation of an LLC, so no fiduciary duty arose |
| Whether debt is nondischargeable under § 523(a)(4) as fiduciary defalcation | Crulls: Utnehmer failed to account for proceeds and breached fiduciary duties, qualifying as defalcation | Debtors: No fiduciary relationship existed; even if one did, Bullock requires culpable state of mind for defalcation | Court: Reversed bankruptcy court—because no partnership/fiduciary duty existed, § 523(a)(4) inapplicable; also noted Bullock raises an intent requirement for defalcation but remand unnecessary due to no fiduciary relationship |
Key Cases Cited
- Ragsdale v. Haller, 780 F.2d 794 (9th Cir. 1986) (California partners treated as trustees; partnership fiduciary duties relevant to § 523(a)(4))
- In re Lewis, 97 F.3d 1182 (9th Cir. 1996) (prior Ninth Circuit view that defalcation includes innocent defaults; later limited by Bullock)
- Otto v. Niles (In re Niles), 106 F.3d 1456 (9th Cir. 1997) (elements for nondischargeability under § 523(a)(4))
- Bullock v. BankChampaign, N.A., 133 S. Ct. 1754 (U.S. 2013) (Supreme Court requires a culpable mental state — knowledge or gross recklessness — for fiduciary defalcation under § 523(a)(4))