Murray v. Woodman (In Re Woodman), 451 B.R. 31

Background

Joint chapter 7 debtors Randy Woodman and Rachel Lawrence faced adversary actions by Jim and Debra Murray and Boise Island Park, LLC alleging nondischargeable debts under 523(a)(2), (a)(4), and (a)(6).
Debtors organized multiple entities (Revolution 1.5, Idaho Real Estate Recyclers, LLC, and In Flow) with interconnected ownership and management by Debtors and Stacy McBain; Recyclers held interests in Tubac, LLC, into which Murray contributed $42,600 for a 49% stake.
Murray funds were deposited into Tubac’s dedicated account; Debtors later transferred Tubac funds to Lawrence & Associates’ account and used them to pay Debtors’ other businesses and personal compensation, rather than refunding Murray.
Boise Island Park, LLC had a property management agreement with Lawrence & Associates to manage Riviera Estates; Lawrence & Associates collected July-August 2008 rents totaling $38,025 but did not remit them as required when Lawrence & Associates ceased operations.
Lawrence & Associates filed bankruptcy in November 2008; Debtors filed their joint petition in July 2009; plaintiffs seek to except various debts from discharge under § 523(a)(2), (a)(4), and (a)(6).
The court consolidated the adversaries, heard the evidence, and issued findings of fact and conclusions of law under Rule 7052.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether 523(a)(2)(A) applies to Debtors' promises to repay	Murray and Boise Island contend Debtors misrepresented future refunds and payments as assurances of repayment.	Debtors deny making false representations with present intent to deceive; they intended to pay with future funds.	No § 523(a)(2)(A) nondischargeability; no proven intent to deceive.
Whether Debtors acted in a fiduciary capacity under § 523(a)(4) with respect to Murray	Idaho LLC members owe fiduciary duties; Debtors controlled Recyclers and allegedly misused Tubac funds.	LLC members do not automatically become fiduciaries under § 523(a)(4); no express preexisting trust identified.	Debtors did not act in a fiduciary capacity toward Murray under § 523(a)(4).
Whether Debtors acted in a fiduciary capacity under § 523(a)(4) with respect to Boise Island	Debtors' management of Riviera Estates and remittance duties implied fiduciary duties under agency or trust concepts.	Agency alone does not create a § 523(a)(4) fiduciary; no trust or fiduciary capacity established under Idaho law.	No fiduciary capacity for Boise Island under § 523(a)(4).
Whether embezzlement under § 523(a)(4) is proven for Murray	Debtors misappropriated Tubac funds for themselves and their entities contrary to the operating agreement.	No embezzlement; funds were used in good faith or for business purposes within authority.	Embezzlement proven; Murray's claim nondischargeable in the amount of $37,600.
Whether embezzlement under § 523(a)(4) is proven for Boise Island	Debtors used Boise Island rents to fund other enterprises; failure to remit net rents constitutes embezzlement.	Funds were owed to Boise Island via Lawrence & Associates’ agency; no conversion intended to defraud.	Embezzlement proven; Boise Island’s claim nondischargeable in the amount of $36,123.75.

Key Cases Cited

Ghomeshi v. Sabban (In re Sabban), 600 F.3d 1219 (9th Cir. 2010) (five-element test for § 523(a)(2)(A) fraud claims)
Am. Express Travel Related Servs. Co. v. Hashemi (In re Hashemi), 104 F.3d 1122 (9th Cir. 1996) (elements for § 523(a)(2)(A) including reliance and causation)
Cantrell v. Cal.-Micro, Inc. (In re Cantrell), 329 F.3d 1119 (9th Cir. 2003) (definition of fiduciary capacity; trust/loyalty duties under federal law)
Ragsdale v. Haller, 780 F.2d 794 (9th Cir. 1986) (limits on state-law fiduciary concepts for § 523(a)(4))
Teichman v. Teichman (In re Teichman), 774 F.2d 1395 (9th Cir. 1985) ( fiduciary capacity under § 523(a)(4) considerations)
Wada v. First Del. Life Ins. Co. (In re Wada), 210 B.R. 572 (9th Cir. BAP 1997) (embezlement elements in nondischargeability actions)
In re Shuler, 21 B.R. 643 (Bankr. D. Idaho 1982) (intent to deprive and agency considerations in embezzlement context)