21-5017
6th Cir.Dec 29, 2021Background
- Long and the Piercys formed a quarry venture; the parties disputed whether “profit” meant gross profit (after a royalty) or net profit (after additional production costs).
- Long claimed the Piercys underpaid and unlawfully diverted funds, was padlocked off the site, and sued in Tennessee chancery court seeking money, an accounting, and dissolution remedies.
- The chancery court interpreted the contract term “profit” in Long’s favor and entered judgment for Long for $151,670.87, but denied anticipated-profit damages and did not specify whether the award rested on breach of contract, conversion, or both.
- The Piercys filed Chapter 7 bankruptcies; Long commenced adversary proceedings seeking nondischargeability under 11 U.S.C. § 523(a)(4) for embezzlement or defalcation in a fiduciary capacity.
- The bankruptcy court granted summary judgment for the Piercys, concluding Long was collaterally estopped from litigating fraud and that no express trust (fiduciary capacity) existed; the district court affirmed.
- The Sixth Circuit reversed: it held Long was not collaterally estopped because the state judgment was ambiguous as to its basis, and that under Tennessee law (TRUPA) partners are trustees re: partnership profits for § 523(a)(4) purposes; the case was remanded.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Long is collaterally estopped from relitigating fraud/embezzlement because the state court allegedly rejected fraud | State judgment did not actually and necessarily decide fraud; the state opinion is ambiguous and did not rule on intent, so Long may litigate fraud in bankruptcy | State court focused on contract interpretation and thus rejected fraud; collateral estoppel bars relitigation | Not estopped: the state judgment is unclear whether it rested on conversion or breach; fraud was not actually and necessarily decided |
| Whether a breach-of-contract judgment precludes a § 523(a)(4) embezzlement/l arceny claim | A state breach judgment does not foreclose bankruptcy consideration of embezzlement; bankruptcy may take new evidence on dischargeability | Breach-only claims are not § 523(a)(4) fraud/embezzlement and thus dischargeable | Breach-only judgments may not automatically preclude § 523(a)(4) claims; here ambiguity means Long can attempt to prove embezzlement in bankruptcy |
| Whether partners under Tennessee law occupy a "fiduciary capacity" (express trust) for defalcation under § 523(a)(4) | TRUPA creates an express trust duty: partners must account and hold as trustee any partnership property, profit, or benefit — satisfying express/technical trust elements | Partnership status alone isn't enough; prior circuit precedent requires an express trust and not all partner duties qualify | Held for Long: TRUPA imposes trustee duties over partnership profits, creating an express trust/fiduciary capacity for § 523(a)(4) defalcation claims |
| Remedy / disposition: whether summary judgment and discharge were proper | Long seeks remand to litigate intent and defalcation given lack of preclusion and existence of fiduciary duty | Piercys seek summary judgment and discharge based on preclusion and lack of fiduciary status | Reversed and remanded: permit bankruptcy proceedings to address fraudulent intent and defalcation under § 523(a)(4) |
Key Cases Cited
- Brown v. Felsen, 442 U.S. 127 (1979) (res judicata inapplicable to bankruptcy dischargeability; bankruptcy courts may consider evidence beyond state-court record)
- Grogan v. Garner, 498 U.S. 279 (1991) (collateral estoppel may bind bankruptcy dischargeability issues if state-court issues were actually and necessarily decided)
- Bullock v. BankChampaign, N.A., 569 U.S. 267 (2013) (defalcation requires at least gross recklessness, not necessarily actual fraud)
- Bd. of Trs. of the Ohio Carpenters’ Pension Fund v. Bucci (In re Bucci), 493 F.3d 635 (6th Cir. 2007) (elements for defalcation: preexisting fiduciary relationship, breach, and loss; express trust required)
- Commonwealth Land Title Co. v. Blaszak (In re Blaszak), 397 F.3d 386 (6th Cir. 2005) (fiduciary capacity in § 523(a)(4) construed narrowly to express/technical trusts)
- Ragsdale v. Haller, 780 F.2d 794 (9th Cir. 1986) (state partnership statutes and courts can render partners trustees for § 523(a)(4) purposes)
- R.E. Am., Inc. v. Garver (In re Garver), 116 F.3d 176 (6th Cir. 1997) (debtor must hold funds in trust for a third party to satisfy § 523(a)(4))
- Mullins v. State, 294 S.W.3d 529 (Tenn. 2009) (Tennessee collateral estoppel requires issue be actually litigated, necessary to judgment, and determined on the merits)