598 B.R. 809
Bankr. D. Md.2019Background
- Defendant (president of Vito Construction) filed Chapter 7; did not list plaintiff as creditor or disclose related litigation. Plaintiff was a subcontractor unpaid for work on the Vital Records Project; alleged $150,575.99 owed.
- Plaintiff sued in adversary proceeding seeking nondischargeability under 11 U.S.C. §§ 523(a)(4) and (a)(6); amended complaint narrowed facts to the Vital Records Project and removed § 523(a)(2) claims.
- Plaintiff relies on Maryland Construction Trust Statute (Md. Real Prop. Code § 9-201 et seq.) to argue a statutory/express trust and that defendant (an officer with control of funds) had fiduciary duties and knowingly misapplied trust funds.
- Defendant moved to dismiss under Fed. R. Civ. P. 12(b)(6); court previously granted leave to amend and now considers whether the amended complaint states plausible claims under §§ 523(a)(4) and (a)(6).
- Court accepts pleaded facts as true for Rule 12(b)(6) analysis but construes exceptions to discharge narrowly given bankruptcy ‘‘fresh start’’ policy.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Maryland Construction Trust Statute creates an "express or technical" fiduciary duty under § 523(a)(4) | Statutory trust and §9-202 personal liability make defendant a fiduciary and support nondischargeability for defalcation/embezzlement | Statute imposes only a statutory/quasi or constructive trust; it does not create the kind of preexisting express/technical trust required by § 523(a)(4) | Dismissed §523(a)(4): statute does not establish the express/technical trust required for §523(a)(4) liability |
| Whether parties voluntarily created an express trust/fiduciary relationship before the wrongdoing | Defendant’s promises to pay and statements create an intent to hold/earmark funds in trust for plaintiff | Statements were promises to pay a debt, not an intention to segregate or create a trust; fiduciary status must preexist the wrong | Dismissed §523(a)(4): allegations insufficient to show an express trust existing prior to the wrong |
| Whether defendant’s alleged conduct supports nondischargeability under §523(a)(6) (willful and malicious injury) | Defendant knowingly retained/used funds subject to plaintiff's statutory rights; deliberate disregard of creditor’s rights constitutes willful and malicious injury | Nonpayment is mere breach of contract; treating refusal to pay as §523(a)(6) would eviscerate discharge policy | Claim under §523(a)(6) survives: allegations plausibly show knowing, deliberate disregard of plaintiff’s rights sufficient to state a §523(a)(6) claim |
| Procedural: Rule 12(b)(6) standard applied to nondischargeability claims | Plaintiff: facts and exhibits plausibly plead more than contractual default | Defendant: plaintiff fails to plead elements of the enumerated exceptions to discharge | Court granted in part and denied in part: dismissed Count I (§523(a)(4)) and denied dismissal of Count II (§523(a)(6)) |
Key Cases Cited
- Ashcroft v. Iqbal, 556 U.S. 662 (Sup. Ct. 2009) (pleading plausibility standard)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (Sup. Ct. 2007) (plausibility for Rule 12(b)(6))
- Chapman v. Forsyth, 43 U.S. (2 How.) 202 (U.S. 1844) (§523 fiduciary limited to technical/express trusts)
- Davis v. Aetna Acceptance Co., 293 U.S. 328 (U.S. 1934) (trust must exist before the wrong)
- Kawaauhau v. Geiger, 523 U.S. 57 (U.S. 1998) (§523(a)(6) requires intent to cause injury)
- Bullock v. BankChampaign, 569 U.S. 267 (U.S. 2013) (defalcation requires conscious disregard/willful blindness)
- First Nat'l Bank of Md. v. Stanley, 66 F.3d 664 (4th Cir. 1995) (subjective knowledge and deliberate act test for §523(a)(6))
- Butner v. United States, 440 U.S. 48 (U.S. 1979) (state property law principles apply in bankruptcy absent federal interest)