530 B.R. 360
Bankr. W.D. Tex.2014Background
- Three limited-partnerships (Meadows at Buda, Meadows at Kyle I, Meadows at Kyle II) purchased four tracts of land (2004–2006); Whittington controlled each partnership’s general partner and signed closing documents on their behalf.
- Substantial portions (over $1.75M, ≈20% of purchase prices) of investor funds were diverted to entities/individuals (including entities Whittington owned or controlled) rather than to sellers; dual sets of closing/accounting documents were used to conceal the payments.
- Whittington denied side profits when queried (admitted he lied re: the Perron/Meadows at Kyle II deal); disclosures to investors occurred only after William Gunn revealed the scheme in 2010.
- Plaintiffs sued in an adversary proceeding one day before the Bankruptcy Rule 4007 deadline, asserting nondischargeability under 11 U.S.C. §§ 523(a)(2)(A) and 523(a)(4) for fraud, breach of fiduciary duty, and defalcation; later assignments were executed from partnerships to individual limited partners.
- On cross-motions for summary judgment, the court found no genuine issue that Whittington breached fiduciary duties, made false representations/omissions with intent to deceive, and committed defalcation — but reserved damages quantification for a later hearing.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether debt is nondischargeable under § 523(a)(2)(A) (false pretenses/representation/actual fraud) | Whittington knowingly omitted/affirmatively lied about secret side profits; investors justifiably relied; loss flows from the fraud | No intentional misrepresentation as to most deals; no proximate loss because partnerships paid fair market value | Court: Plaintiffs established all elements (representation/knowledge/intent/reliance/causation); debt nondischargeable under § 523(a)(2)(A) (damages amount reserved) |
| Whether debt is nondischargeable under § 523(a)(4) (fraud or defalcation while acting in fiduciary capacity) | Whittington, as controlling manager of general partners, owed trust-type fiduciary duties and committed fraud/defalcation by self-dealing and diverting funds | Argues duties arose too late or did not give rise to defalcation; challenges scope of fiduciary status | Court: Fiduciary relationship existed; intentional self-dealing/defalcation satisfied Bullock standard; nondischargeable under § 523(a)(4) |
| Standing / real party in interest (individual limited partners vs. partnerships) | Assignments from partnerships to individuals ratified and cured real‑party‑in‑interest defect; Rule 17(a)(3) and relation-back apply | Individual plaintiffs lacked prudential standing when suit was filed; assignments after filing cannot revive time‑barred claims | Court: Constitutional standing satisfied; prudential defect cured by timely ratification/assignment; Rule 17(a)(3) permits relation back — plaintiffs may proceed as if real parties in interest were original plaintiffs |
| Statute of limitations / accrual (Texas law) | Discovery rule and fraudulent concealment defer accrual until 2010 when scheme was revealed; tolling prevents limitations bar | Claims accrued at closings (2004–2006) and are time‑barred; plaintiffs could have discovered earlier with diligence | Court: Discovery rule and fraudulent concealment apply in fiduciary context; accrual deferred until discovery in 2010 — limitations defense denied |
Key Cases Cited
- Stern v. Marshall, 131 S.Ct. 2594 (U.S. 2011) (federal court authority to enter final judgment in statutorily-created bankruptcy claims)
- Cohen v. de la Cruz, 523 U.S. 213 (U.S. 1998) (§ 523(a)(2)(A) covers all liability arising from fraud, including treble damages, attorneys’ fees)
- Acosta v. Gen. Elec. Capital Corp. (In re Acosta), 406 F.3d 367 (5th Cir. 2005) (elements required to establish nondischargeability under § 523(a)(2)(A))
- FNFS, Ltd. v. Harwood (In re Harwood), 637 F.3d 615 (5th Cir. 2011) (officer of corporate general partner who controls limited partnership owes trust-type fiduciary duties under § 523(a)(4))
- Bullock v. BankChampaign, N.A., 133 S.Ct. 1754 (U.S. 2013) (heightened culpability standard for defalcation under § 523(a)(4))
- Kinzbach Tool Co. v. Corbett-Wallace Corp., 160 S.W.2d 509 (Tex. 1942) (fiduciary who acquires secret benefit without disclosure must account to principal; lack of measurable loss does not bar recovery)
- Bennett v. LSP Inv. P’ship (In re Bennett), 989 F.2d 779 (5th Cir. 1993) (control is critical in imposing trust-type duties on individuals controlling a general partner)