Randy Curtis Bullock v. Bankchampaign, NARandy Curtis Bullock v. Bankchampaign, NA
Bill D. Bensinger, Baker, Donelson, Bearman, Caldwell & Berkowitz, PC, Birmingham, AL, for Defendant-Appellee.
Before BARKETT and PRYOR, Circuit Judges, and BUCKLEW,* District Judge.
Appellant Randy Curtis Bullock, Debtor-Defendant in the underlying bankruptcy adversary proceeding, appeals the district court‘s decision affirming the bankruptcy court‘s determination that the Illinois judgment debt owed to Appellee BankChampaign, N.A. is not dischargeable, pursuant to
I. Background
In 1978, Appellant Bullock became the trustee of his father‘s trust. The trust‘s sole asset was a life insurance policy on his father‘s life, and Bullock and Bullock‘s four siblings were the beneficiaries. The terms of the trust provided that Bullock, as trustee, could borrow from the trust in only two situations: (1) to pay the life insurance premiums, and (2) to satisfy a beneficiary‘s request for withdrawal.
Despite the trust‘s limitations on borrowing, Bullock borrowed from the trust by making three loans that were secured by the cash value of the life insurance policy. First, in 1981, upon his father‘s request, Bullock borrowed $117,545.96 for his mother so she could repay a debt that she owed to Bullock‘s father‘s business. Second, in 1984, Bullock borrowed $80,257.04 for his mother and himself to purchase certificates of deposit, which were later cashed in and used toward the purchase of a garage fabrication mill in Ohio. Third, in 1990, Bullock borrowed $66,223.96 for his mother and himself to purchase real estate. These loans were all fully repaid.
Thereafter, Bullock‘s two brothers learned of the existence of the trust, and they filed suit against Bullock in Illinois state court. In the lawsuit, Bullock‘s brothers claimed that Bullock had breached his fiduciary duty as trustee by engaging in self-dealing via the three loans. The brothers moved for summary judgment on that claim, and in 2002, the Illinois court granted their motion. Specifically, the Illinois court stated that it could not “be disputed the loans made by [Bullock] while acting as trustee are considered self-dealing transactions. All of the loans were made to entities [Bullock] had a financial interest in or to a relative.” [R:Tab K].
In its order awarding damages for the self-dealing, the Illinois court stated that Bullock did “not appear to have had a malicious motive in borrowing funds from the trust.” [R:Tab M, Ex. 7]. However, the Illinois court concluded that “neither the facts and circumstances surrounding the loans nor the motives of [Bullock] can excuse him from liability.” [R:Tab M, Ex. 7]. As a result, the Illinois court determined that damages should be awarded based on the benefit that Bullock received due to the self-dealing. The Illinois court stated that such would be hard to quantify, but based on its equitable powers, it determined that $250,000 represented the amount of the benefit that Bullock had received from the self-dealing. In addition, the Illinois court ordered that Bullock pay $35,000 in attorneys’ fees. The Illinois court also put the property obtained with the self-dealt funds (a mill located in Ohio) under a constructive trust to secure it as collateral for the $285,000 judgment amount. The Illinois court placed another constructive trust on Bullock‘s beneficial interest in his father‘s trust as an additional source of collateral for the judgment.
The constructive trusts were awarded to Appellee BankChampaign (“Bank”), which had replaced Bullock as the trustee of his father‘s trust. Bullock contends that the Bank, as trustee, has blocked his attempts to sell or lease the mill property located in
Thereafter, in 2009, Bullock filed for bankruptcy under Chapter 7 in hopes that he could discharge the Illinois judgment debt. The Bank initiated an adversary proceeding to determine the dischargeability of the judgment debt pursuant to
Specifically, the bankruptcy court concluded that Bullock was collaterally estopped from attacking the Illinois judgment. The Illinois court had determined that Bullock had breached his fiduciary duty by self-dealing via the three loans. The bankruptcy court accepted the Illinois court‘s determination that Bullock had breached his fiduciary duty by engaging in self-dealing and concluded that such conduct amounted to fraud and defalcation. As a result, the bankruptcy court found that the Illinois judgment was a debt arising from fraud or defalcation while Bullock was acting in a fiduciary capacity, and as such, the judgment debt was not dischargeable, pursuant to
Bullock appealed the bankruptcy court‘s judgment to the district court. The district court affirmed the bankruptcy court‘s decision, but it sympathized with Bullock‘s predicament—he had a judgment debt that he could satisfy only by selling the underlying collateral, but the Bank persisted in preventing the sale. The district court stated that it questioned the propriety of the Bank‘s actions and noted that holding collateral hostage in perpetuity is impermissible. However, the district court recognized that the propriety of the Bank‘s actions was not a basis for finding that the judgment debt should be discharged. As a result, the district court concluded that while it was “convinced [the Bank] is abusing its position of trust by failing to liquidate the [property], this issue is not properly before this court, but rather should [be] brought by Bullock in an action in Illinois to consider the malfeasance of the trustee.” [R:Tab G].
Thereafter, Bullock filed the instant appeal. In this appeal, Bullock argues that the bankruptcy court erred in two ways: (1) by concluding that the Illinois judgment was non-dischargeable, pursuant to
II. Standard of Review
“Because the district court in reviewing the decision of a bankruptcy court functions as an appellate court, we are the second appellate court to consider this case. Thus, this Court‘s review with regard to determinations of law, whether made by the bankruptcy court or by the district court, is de novo. The district court makes no independent factual findings; accordingly, we review solely the bankruptcy court‘s factual determinations under the ‘clearly erroneous’ standard.” In re Colortex Indus., Inc., 19 F.3d 1371, 1374 (11th Cir.1994) (citations omitted).
III. Section 523(a)(4)
In determining whether the Illinois judgment debt should be discharged,
A central purpose of the Bankruptcy Code is to provide an opportunity for certain insolvent debtors to discharge their debts and enjoy a fresh start. However, Congress has decided to exclude from the general policy of discharge certain categories of debts. One of these categories includes debts incurred by fraud or defalcation while acting in a fiduciary capacity. Such a debt is non-dischargeable [under
11 U.S.C. § 523(a)(4) ]. Congress evidently concluded that the creditors’ interest in recovering full payment of such debts ... outweighed the debtors’ interest in a complete fresh start.
Eavenson v. Ramey, 243 B.R. 160, 164 (N.D.Ga.1999) (alterations, citations, and internal quotation marks omitted). Furthermore, this Court must keep in mind that exceptions to discharge, such as
In the underlying adversary proceeding, the Bank asked the bankruptcy court to find the Illinois judgment debt to be non-dischargeable under
This Court has stated that a “ ‘[defalcation] refers to a failure to produce funds entrusted to a fiduciary” and that “the precise meaning of ‘defalcation’ for purposes of
In Central Hanover, an issue before the court was whether Herbst, who had been appointed as a receiver for real property in a foreclosure action, had committed a defalcation when he withdrew money that the court had awarded him as payment for his services as receiver before the time to appeal the order awarding him the money had expired. See Central Hanover, 93 F.2d at 511. The Central Hanover court analyzed the bankruptcy statute that provided that debts arising from fraud, embezzlement, misappropriation, or defalca- tion
Whatever was the original meaning of defalcation, it must here have covered other defaults than deliberate malversations, else it added nothing to the words, ‘fraud or embezzlement.’
...
In the case at bar [Herbst] had not been entirely innocent .... A judge had awarded him the money, and prima facie he was entitled to it; but he knew, or if he did not know, he was charged with notice (having held himself out as competent to be an officer of the court), that the order would not protect him if it were reversed; and that it might be reversed until the time to appeal had expired. He made no effort to learn from the plaintiff whether it meant to appeal, and he did not wait until it could no longer do so; he took his chances. We do not hold that no possible deficiency in a fiduciary‘s accounts is dischargeable; ... [we have said] that the misappropriation must be due to a known breach of the duty, and not to mere negligence or mistake. Although [misappropriation] probably carries a larger implication of misconduct than defalcation, defalcation may demand some portion of misconduct; we will assume arguendo that it does.
All we decide is that when a fiduciary takes money upon a conditional authority which may be revoked and knows at the time that it may, he is guilty of a defalcation though it may not be a fraud, or an embezzlement, or perhaps not even a misappropriation.
Id. at 511, 512 (citation and internal quotation marks).
In Quaif, this Court interpreted Central Hanover as standing for the proposition that a defalcation under
This Court recognizes that there is a split among the circuits regarding the meaning of defalcation under
Given our Circuit‘s explicit alignment with the Central Hanover case, this Court finds that defalcation under
Applying the recklessness standard for defalcation to the facts of the instant case, this Court concludes that the bankruptcy court was correct in determining that Bullock committed a defalcation by making the three loans while he was the trustee of his father‘s trust. Because Bullock was the trustee of the trust, he certainly should have known that he was engaging in self-dealing, given that he knowingly benefitted from the loans. Thus, his conduct can be characterized as objectively reckless, and as such, it rises to the level of a defalcation under
IV. Affirmative Defense
Bullock also argues that the bankruptcy court erred in failing to consider his affirmative defense that the Bank has acted wrongfully by impeding his attempts to sell or lease the collateralized property. Bullock cites Heller v. Lee, 130 Ill.App.3d 701, 85 Ill.Dec. 896, 474 N.E.2d 856 (1985), in support of his argument that the Bank‘s conduct has been wrongful.
In Heller, the plaintiffs obtained a judgment of more than $44,000 against the defendants. See id. at 857. The defendants had put up a bond consisting of a $15,000 certificate of deposit and a deed to real property appraised at $50,000. See id. After the judgment was affirmed on appeal, the plaintiffs moved to release the bond, and the plaintiffs applied the $15,000 certificate of deposit to the outstanding judgment. See id. Thereafter, the defendants
The plaintiffs contend that they took the property as security for eventual cash payment of the judgment. We agree. But, as matters now stand, the plaintiffs can sit on the property indefinitely and institute supplemental proceedings to recover the rest of the judgment. Thus the plaintiffs have the use and enjoyment of a valuable piece of property while the defendants, who put the property up as bond expecting it to satisfy the judgment, are not only deprived of the property, but may also be compelled to dig even deeper in order to pay the judgment. Such a result is inequitable. The plaintiffs have received a windfall at the defendants’ expense. If, as the plaintiffs contend, the transfer of the real estate was intended to secure the judgment, then by taking the deed, the plaintiffs acquired only a lien. Rather than proceed against the defendants to recover the judgment, the equitable solution is for the plaintiffs to foreclose on their lien by selling the property.
We are guided in this result by the maxim that equity regards as done that which ought to be done. The parties intended the property to secure the judgment. Therefore, the property should be used to satisfy the judgment.
... The cause is remanded and the trial court is directed to sell the property, apply the proceeds to the judgment, and remit the excess, if any, to the defendants.
Thus, based on Heller, Bullock argues that the Bank‘s actions regarding the collateral in this case have been wrongful and inequitable. Bullock takes this argument a step further and contends that because the bankruptcy court is a court of equity, and because the Bank has come to the bankruptcy court with unclean hands due to its wrongful conduct, the bankruptcy court should deny the Bank its requested relief of non-dischargeability. See Matter of Garfinkle, 672 F.2d 1340, 1347 n. 7 (11th Cir. 1982) (“The doctrine [of unclean hands] is applicable in a court of equity to deny a plaintiff the relief he seeks even though his claim might otherwise be meritorious. The principles of equity govern the exercise of a bankruptcy court‘s jurisdiction.”).
Bullock, however, has not cited any cases in which a court found a debt met the requirements of non-dischargeability under
This Court notes that if it accepted Bullock‘s argument and concluded that the judgment debt was dischargeable, Bullock would ultimately pay nothing more on the debt, as the debt would be discharged. However, if Bullock goes back to the Illinois court and raises the issue of the Bank‘s inequitable conduct, the Illinois court may order the Bank to liquidate the collateral, and as a result, it is possible that the Bank could be paid from the sale and that the judgment debt could be re- duced
V. Conclusion
Accordingly, the decision of the bankruptcy court is AFFIRMED.