REVISED
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
_____________________
No. 96-20242
_____________________
In The Matter Of: BRUCE BARTON SCHWAGER,
Debtor
---------------------------
BRUCE BARTON SCHWAGER,
Appellant,
v.
MEYER FALLAS; FRED FALLAS; WILLIAM CRAMER;
MALCOLM MARCOE,
Appellees.
_________________________________________________________________
Appeal from the United States District Court
for the Southern District of Texas
_________________________________________________________________
August 22, 1997
Before KING, GARWOOD, and PARKER, Circuit Judges.
KING, Circuit Judge:
Bruce Barton Schwager appeals the district court’s
affirming of the bankruptcy court’s ruling that his debt from a
state court judgment against him is nondischargeable under 11
U.S.C. § 523(a)(4). He argues, inter alia, that the bankruptcy
court improperly applied the doctrine of collateral estoppel to
the jury’s findings in the underlying state court judgment to
determine that his debt was nondischargeable. We agree that the
use of collateral estoppel was improper in this case, and thus,
we reverse and remand.
I. BACKGROUND
The full details of this case are set forth in the state
appellate court opinion, Schwager v. Texas Commerce Bank, N.A.,
827 S.W.2d 504 (Tex. App.—Houston [1st Dist.] 1992). We will
provide only a brief description of the facts that are pertinent
to this decision.
In January 1984, Schwager, Fred Fallas, Meyer Fallas,
Malcolm Marcoe, William Cramer, and Harvey Resnick formed a Texas
limited partnership. Schwager served as managing partner, and
the others were limited partners. The partnership purchased land
in downtown Houston for the purpose of operating a restaurant.
The partnership financed its purchase of the Houston property
with a loan from Interfirst Bank. The restaurant operated at a
loss, necessitating capital contributions from the limited
partners.
In September 1984, Texas Commerce Bank (TCB) loaned the
partnership $825,000. The partnership applied $700,000 of the
TCB loan to retire the Interfirst Bank loan and retained $125,000
as working capital. By March 1985, the working capital was
exhausted, and the limited partners were forced to make payments
on the TCB note. Eventually the limited partners stopped making
these payments.
2
In 1986, litigation ensued in Texas state court among
Schwager, the partnership, and the limited partners. Ultimately,
the trial court appointed a receiver. In January 1987, after
payments on the note again stopped, TCB accelerated the note.
TCB then sued Schwager and the limited partners in Texas state
court. Schwager filed various counterclaims. The jury awarded
compensatory damages against Schwager, finding, inter alia, that
Schwager breached both the partnership agreement and his
fiduciary duty to the limited partners. Finding that Schwager’s
breach of fiduciary duty was “committed intentionally,
maliciously or with heedless and reckless disregard of the rights
of the limited partners,” the jury also awarded exemplary damages
in favor of the limited partners. Finally, the jury found that
Schwager fraudulently induced the limited partners to enter into
the partnership agreement. The trial court entered the judgment
on December 8, 1989 (“the 1989 judgment”).
Schwager appealed to the Court of Appeals for the First
District of Texas, which, after allowing two re-briefings, struck
forty-two of Schwager’s forty-four points of error for failure to
comply with the state appellate procedure rules. Finding the
remaining two claims to be without merit, the court of appeals
affirmed the Texas trial court. The Texas Supreme Court denied
discretionary review, and the United States Supreme Court denied
certiorari. Schwager v. Texas Commerce Bank, N.A., 827 S.W.2d
504 (Tex. App.—Houston [1st Dist.] 1992, writ denied), cert.
denied, 113 S. Ct. 1844 (1993).
3
Schwager filed a petition for bankruptcy under chapter 7 in
the U.S. Bankruptcy Court for the Southern District of Texas.
Four of the limited partners1 brought an adversary proceeding to
establish that the damages awarded in the 1989 judgment were
nondischargeable debts under 11 U.S.C. § 523(a)(2)(A),
§ 523(a)(4), or § 523(a)(6).2 On February 15, 1995, the
bankruptcy court granted summary judgment in favor of the limited
partners.3 The bankruptcy court concluded that Schwager was
1
Harvey Resnick was not a party to the adversary
proceeding.
2
Bankruptcy Code § 523 provides exceptions to the general
rule that all debts are dischargeable in bankruptcy. The three
nondischargeability provisions at issue in this case are in
§ 523(a):
(a) A discharge under section 727 . . . of this title
does not discharge an individual debtor from any debt
--
(2) for money, property, services, or an
extension, renewal, or refinancing of credit, to the
extent obtained by --
(A) false pretenses, a false representation,
or actual fraud, other than a statement respecting the
debtor’s or an insider’s financial condition . . .
(4) for fraud or defalcation while acting in a
fiduciary capacity, embezzlement, or larceny . . .
(6) for willful and malicious injury by the debtor
to another entity or to the property of another entity.
11 U.S.C. § 523(a).
3
Schwager argues that summary judgment should not be
permitted in the bankruptcy context because jury trials are not
allowed. This argument is wholly without merit. Schwager cites
no relevant authority for this novel proposition, and this court
has previously affirmed summary judgments in nondischargeability
proceedings many times. See, e.g., Gober v. Terra + Corp. (In re
Gober), 100 F.3d 1195, 1201 (5th Cir. 1996); Garner v. Lehrer (In
4
collaterally estopped from relitigating any of the issues
determined in the 1989 judgment and, based on those facts,
concluded that the entire judgment (both compensatory and
exemplary damages) was nondischargeable under 11 U.S.C.
§ 523(a)(4). Fallas v. Schwager (In re Schwager), 178 B.R. 106
(Bankr. S.D. Tex. 1995).
Schwager appealed to the district court arguing, inter alia,
that use of collateral estoppel was improper and that exemplary
damages are dischargeable. The district court affirmed the
bankruptcy court. On appeal, Schwager argues that the use of
collateral estoppel is inappropriate, asserts that the court
erred in determining that he was a fiduciary to the limited
partners, and raises several other procedural arguments. We will
discuss each in turn.
II. DISCUSSION
A. Collateral Estoppel
The Supreme Court has explicitly stated that collateral
estoppel, or issue preclusion, principles apply in bankruptcy
dischargeability proceedings. Grogan v. Garner, 498 U.S. 279,
284 n.11 (1991). In such proceedings, “[p]arties may invoke
collateral estoppel in certain circumstances to bar relitigation
of issues relevant to dischargeability, although the bankruptcy
court retains jurisdiction to ultimately determine the
dischargeability of the debt.” Gober v. Terra + Corp. (In re
Gober), 100 F.3d 1195, 1201 (5th Cir. 1996). The preclusive
re Garner), 56 F.3d 677, 679 (5th Cir. 1995).
5
effect given to state court judgments under collateral estoppel
is a function of the full faith and credit statute. Garner v.
Lehrer (In re Garner), 56 F.3d 677, 679 (5th Cir. 1995)(citing 28
U.S.C. § 1738 (“[J]udicial proceedings of any court of any
[State] . . . shall have the same full faith and credit in every
court within the United States . . . as they have by law or usage
in the courts of such State . . . from which they are taken.”)).
A bankruptcy court’s decision to give preclusive effect to a
state court judgment is a question of law that this court reviews
de novo. Gober, 100 F.3d at 1201; Garner, 56 F.3d at 679.
Because Congress granted bankruptcy courts exclusive jurisdiction
to determine whether a debt is dischargeable based on the
bankruptcy courts’ expertise, Brown v. Felsen, 442 U.S. 127, 135-
36 (1979), “in only limited circumstances may bankruptcy courts
defer to the doctrine of collateral estoppel and thereby ignore
Congress’ mandate to provide plenary review of dischargeability
issues.” Dennis v. Dennis (In re Dennis), 25 F.3d 274, 278 (5th
Cir. 1994).
Because the 1989 judgment was entered by a Texas state
court, Texas rules of preclusion apply. See Garner, 56 F.3d at
679 & n.2. “Under Texas law, collateral estoppel ‘bars
relitigation of any ultimate issue of fact actually litigated and
essential to the judgment in a prior suit, regardless of whether
the second suit is based upon the same cause of action.’” Id. at
679 (quoting Bonniwell v. Beech Aircraft Corp., 663 S.W.2d 816,
6
818 (Tex. 1984)); accord Gober, 100 F.3d at 1201. The elements
of collateral estoppel under Texas law are:
(1) the facts sought to be litigated in the second
action were fully and fairly litigated in the prior
action; (2) those facts were essential to the judgment
in the first action; and (3) the parties were cast as
adversaries in the first action.
Bonniwell v. Beech Aircraft Corp., 663 S.W.2d 816, 818 (Tex.
1984).
The bankruptcy court found, and the district court agreed,
that collateral estoppel applied, based on the jury’s findings in
the 1989 judgment. The jury found several facts that pertain to
this case. In response to Question No. 16, the jury found that
“Schwager breach[ed] his fiduciary duty to [the limited partners]
in the performance of his responsibilities, . . . which
proximately caused damages [to the limited partners].” In
response to Question No. 17, the jury determined that “Schwager
materially breach[ed] the limited partnership agreement, . . .
proximately causing damages to the [limited partners].” The
jurors were instructed to answer Question No. 18 only if they
answered “yes” to either Question No. 16 or Question No. 17. The
jury then awarded damages pursuant to Question No. 18, which is
as follows:
What sum of money . . . would fairly and
reasonably compensate [the limited partners] for
damages sustained, if any, as a result of breach of
fiduciary duty or the material breach of the
partnership agreement (which you previously found)?
(emphasis added). The jury also answered “yes” to Question No.
19, which is as follows:
7
Was Bruce Schwager’s breach of fiduciary duty, if
any, committed intentionally, maliciously or with
heedless and reckless disregard of the rights of any of
the limited partners?4
After barring relitigation of these issues under the
doctrine of collateral estoppel, the bankruptcy court concluded
that Schwager’s debt based on the 1989 judgment was
nondischargeable under § 523(a)(4).5 Section 523(a)(4) provides
that a chapter 7 bankruptcy does not discharge any debt “for
. . . defalcation while acting in a fiduciary capacity,” with
defalcation being defined as “a willful neglect of duty, even if
not accompanied by fraud or embezzlement.” LSP Inv. Partnership
4
This question also provided the following instructions:
“Maliciously” means (a) conduct that is
specifically intended to cause substantial injury or
damage; or (b) an act that is carried out with flagrant
disregard for the rights of others and with actual
awareness on the part of Bruce Schwager that the act
will, in reasonable probability, result in damages.
“Heedless and reckless disregard” means more than
momentary thoughtlessness, inadvertence or error of
judgment. It means such an entire want of care as to
indicate that the act or omission in question was a
result of concious [sic] indifference to the rights or
welfare of the persons affected by it.
5
The bankruptcy court determined that jury’s finding of
fraudulent inducement satisfied the elements of
nondischargeability under § 523(a)(2)(A), but did not find the
debt nondischargeable under that section because the jury did not
award any damages for any fraudulent conduct. The bankruptcy
court made no determination regarding nondischargeability under
§ 523(a)(6). Schwager complains that the bankruptcy court
incorrectly determined that he had engaged in willful and
malicious conduct under § 523(a)(6). However, this argument is
without merit because the bankruptcy court did not rule against
Schwager on this basis.
8
v. Bennett (In re Bennett), 989 F.2d 779, 790 (5th Cir. 1993).6
Thus, the jury must have found a breach of fiduciary duty and
awarded damages on that basis in order for collateral estoppel to
establish defalcation in a fiduciary capacity under § 523(a)(4).7
Schwager asserts that the bankruptcy court’s conclusion is
erroneous, inter alia, because collateral estoppel does not apply
in this circumstance.8 He argues that the jury findings
6
The substance of the defalcation requirement is discussed
in Part II.B infra.
7
None of the parties argue that the jury’s other finding
on breach of the partnership agreement alone would be sufficient
to make the debt nondischargeable under § 523(a)(4).
8
Schwager also argues that if any judgment is to be given
preclusive effect, it should not be the 1989 judgment but the
prior one appointing a receiver. This argument is without merit.
Under Texas law, an order appointing a receiver is interlocutory.
See TEX. CIV. PRAC. & REM.P. CODE ANN. § 51.014(1) (Vernon 1997);
Schwager, 827 S.W.2d at 506-07. An interlocutory order is not
entitled to preclusive effect under Texas law. Gober, 100 F.3d
at 1201.
Schwager further contends that the jury’s findings cannot be
the basis of collateral estoppel because they are based on a
preponderance of the evidence standard and the proper standard is
clear and convincing evidence. Because we conclude that
collateral estoppel cannot be applied in this case, the standard
used for the jury findings is irrelevant. However, to the extent
Schwager argues that the standard in bankruptcy dischargeability
proceedings is clear and convincing evidence, this argument is
without merit. See Grogan, 498 U.S. at 659 (holding that the
preponderance of the evidence, not the clear and convincing
evidence, standard applies in bankruptcy dischargeability
proceedings).
Schwager makes several arguments regarding the propriety of
using the 1989 judgment as a basis of collateral estoppel. He
argues that he raised issues regarding the jurisdictional nullity
of the 1989 judgment based on the finality of the previous
judgment appointing a receiver and complains that the bankruptcy
court did not hold an evidentiary hearing. Schwager also
basically argues that because the state appellate court dismissed
almost all of his points of error, the affirmance of the 1989
9
incorporated into the 1989 judgment cannot support the
application of the collateral estoppel doctrine because the jury
found both breach of the partnership agreement and breach of
fiduciary duty. Schwager maintains that the conjunctive nature
of the jury’s damages finding means “it was impossible to
determine what was the basis for the issuance of the debt against
Schwager.” We agree with Schwager.
Texas courts have adopted the Restatement (Second) of
Judgments § 27, which is the general rule on issue preclusion.9
Gober, 100 F.3d at 1203 n.6 (noting that “Texas courts follow
Restatement (Second) of Judgments § 27 in determining when to
allow issue preclusion” and citing cases). In Eagle Properties,
Inc. v. Scharbauer, 807 S.W.2d 714, 722 (Tex. 1991), the Texas
Supreme Court applied comment i to the Restatement, which states:
i. Alternative determinations by court of first
instance. If a judgment of a court of first instance
is based on determinations of two issues, either of
which standing independently would be sufficient to
support the result, the judgment is not conclusive with
respect to either issue standing alone.
The Texas Supreme Court explained the justification for the rule:
judgment should be given no weight for collateral estoppel
purposes. These issues are irrelevant given our holding that the
1989 judgment cannot be the basis for collateral estoppel in this
case.
9
Section 27 states:
When an issue of fact or law is actually litigated and
determined by a valid and final judgment, and the
determination is essential to the judgment, the
determination is conclusive in a subsequent action
between the parties, whether on the same or a different
claim.
10
The rationale for this rule is that a determination in
the alternative may not have been as rigorously
considered as it would have been if necessary to the
result, and the losing party may be dissuaded from
appealing one determination because of the likelihood
that the other will be upheld.
807 S.W.2d at 722.
The limited partners argue, and the bankruptcy and district
courts determined, that because the full amount of the jury’s
award can be upheld on either basis, collateral estoppel applies
to both. This argument is without merit because this case falls
directly under the rule of comment i. The limited partners seek
to use one issue in the judgment, the breach of fiduciary duty,
standing alone. However, the jury was asked in a single question
to award damages for either breach of fiduciary duty or breach of
the partnership agreement. Therefore, neither ground was
essential to the judgment awarding these damages to the limited
partners because the award can be upheld on either basis.
Comment o provides an exception to the rule in comment i:
If the judgment of the court of first instance was
based on a determination of two issues, either of which
standing independently would be sufficient to support
the result, and the appellate court upholds both of
these determinations as sufficient and accordingly
affirms the judgment, the judgment is conclusive as to
both determinations. In contrast to the case discussed
in Comment i, the losing party has here obtained an
appellate decision on the issue, and thus the balance
weighs in favor of preclusion.
Although Texas has not specifically addressed comment o, federal
circuit cases interpreting comment o clearly indicate that the
appellate court must have considered the specific issue before it
is barred by collateral estoppel. See Arab African Int’l Bank v.
11
Epstein, 958 F.2d 532, 537 (3d Cir. 1992) (concluding, in a legal
malpractice action, that collateral estoppel based on a previous
state court judgment did not apply because the state appellate
court did not specifically address the reliance element of the
legal malpractice claims); Hicks v. Quaker Oats Co., 662 F.2d
1158, 1168 (5th Cir. Unit A. Dec. 7, 1981) (noting the “general
rule” adopted in comment o that “if a judgment is appealed,
collateral estoppel only works as to those issues specifically
passed upon by the appellate court”). In the appeal of the 1989
judgment, the court gave Schwager three opportunities to brief
the appeal properly before eventually striking forty-two of his
forty-four points of error. See Schwager v. Texas Commerce Bank,
N.A., 827 S.W.2d at 506. Thus, the appellate court ultimately
considered only two issues: the trial court’s jurisdiction and
whether the trial court erroneously denied Schwager the right to
open and close the evidence. Id. at 507. The court did not pass
specifically on the issues of breach of fiduciary duty or breach
of the partnership agreement, and thus, the review provided by
the Texas appellate court does not take this case out of the
general rule of comment i and into the exception of comment o.
Therefore, the application of collateral estoppel in this
case was erroneous. We reverse and remand for a redetermination
of the dischargeability issues, with specific, independent
factual findings. The law governing some of these potential
12
factual findings in the § 523(a)(4) context will be discussed
below.10
B. Defalcation
The bankruptcy court, relying on collateral estoppel,
determined that the jury’s finding that Schwager’s breach of
fiduciary duty was “committed intentionally, maliciously or with
heedless and reckless disregard of the rights of the limited
partners” meets the “defalcation” element of § 523(a)(4). This,
in combination with the court’s conclusion that Schwager was a
fiduciary to the limited partners and the jury finding that
Schwager breached his fiduciary duty, led the bankruptcy court to
conclude that the compensatory damages are nondischargeable under
§ 523(a)(4). The bankruptcy court next considered the issue of
whether the punitive damages are also nondischargeable. While
the Fifth Circuit has not addressed the dischargeability of
punitive damages under § 523(a)(4), the bankruptcy court relied
on other Fifth Circuit precedent as well as precedent from other
circuits in concluding that the punitive damages are
nondischargeable because the underlying compensatory damages are
also nondischargeable. Because we have concluded that it was
error to apply collateral estoppel and rely on these jury
findings, whether the exact language of the jury’s findings meets
the elements of § 523(a)(4) defalcation no longer matters. The
10
We do not address the § 523(a)(2) and § 523(a)(6)
nondischargeability provisions because they were not briefed in
this appeal. However, because the limited partners raised these
grounds in their dischargeability pleading, the parties and the
court are free to consider them on remand.
13
bankruptcy court, on remand, will make independent findings to
determine if the facts of Schwager’s debt meet § 523(a)(4).
Schwager argues that even if the compensatory damages are
nondischargeable, the punitive damages may be dischargeable.11
While a discussion of the punitive damages issue is premature
because it is still unclear in this case whether the compensatory
element of Schwager’s debt qualifies under § 523(a)(4), a
discussion of the types of findings necessary to make this
determination of compensatory damages is in order.
A line of Fifth Circuit cases, beginning with Moreno v.
Ashworth (In re Moreno), 892 F.2d 417, 422 (5th Cir. 1990), have
defined defalcation as “a willful neglect of duty, even if not
accompanied by fraud or embezzlement.” Accord Sheerin v. Davis
(In re Davis), 3 F.3d 113, 115 (5th Cir. 1993); Bennett, 989 F.2d
at 790. Moreno involved the dischargeability of the debt of a
corporate president who was found to have improperly taken cash
advances from the company. Id. at 418. Davis concerned a
majority shareholder in a corporation who had, inter alia,
improperly received informal dividends to the exclusion of
Sheerin, the minority shareholder. 3 F.3d at 114. Bennett
involved the general partner of a limited partnership who
wrongfully charged the limited partners for expenses that should
have been charged to the partnership. 989 F.2d at 782. The
court in Bennett quoted the definition of defalcation and then
11
The parties do not argue that if the compensatory
damages are dischargeable, then the punitive damages are
nondischargeable on some other theory.
14
stated: “Therefore, any debts incurred by Bennett as a result of
the willful neglect of his [fiduciary] duties as the managing
partner of the [limited partnership] are not dischargeable [under
§ 523(a)(4)].” Id. at 790. These cases have all involved
financial misconduct by fiduciaries and have all consistently
applied the Fifth Circuit rule that defalcation is a willful
neglect of fiduciary duty.
A major issue among the circuits and commentators is what
type of intent or mental state is necessary to qualify as
defalcation. In the first major discussion of the issue, Judge
Learned Hand noted the lack of a definition of defalcation in the
Bankruptcy Code or its legislative history and then stated:
“Colloquially perhaps the word ‘defalcation,’ ordinarily implies
some moral dereliction, but in this context it may have included
innocent defaults, so as to include all fiduciaries who for any
reason were short in their accounts.” Central Hanover Bank &
Trust Co. v. Herbst, 93 F.2d 510, 511 (2d Cir. 1937). As an
initial matter, it is clear that defalcation requires a lesser
standard than fraud, and thus defalcation does not require actual
intent, as does fraud. See id. at 512 (“[W]hen 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.’”); 4 COLLIER ON BANKRUPTCY § 523.10[1][b]
(Lawrence P. King ed., 15th rev. ed. 1997 (“Defalcation . . .
applies to conduct that does not necessarily reach the level of
15
fraud, embezzlement or misappropriation.”); 2 DAVID G. EPSTEIN ET
AL., BANKRUPTCY § 7-28 at 368 (1992) (“Note that defalcation and
fraud are not the same thing. Fraud requires some intent;
defalcation requires none.”). While defalcation may not require
actual intent, it does require some level of mental culpability.
It is clear in the Fifth Circuit that a “willful neglect” of
fiduciary duty constitutes a defalcation -- essentially a
recklessness standard.12
C. Fiduciary Duty
12
The Fifth Circuit has not defined “willful neglect” in
the bankruptcy context, but it appears clear from usage in other
contexts that it is essentially a recklessness standard. See,
e.g., United States v. Boyle, 469 U.S. 241, 245 (1985) (defining
“willful neglect” in the statute regarding the penalty for late
filing of estate tax returns as “a conscious, intentional failure
or reckless indifference”); Smith v. Wade, 461 U.S. 30, 39 n.8
(1983) (defining “willful neglect” in the tort context as “that
degree of neglect arising where there is a reckless indifference
to the safety of human life, or an intentional failure to perform
a manifest duty to the public, in the performance of which the
public and the party injured has an interest” (internal quotation
omitted)).
The Fifth Circuit averted to a negligence standard in Carey
Lumber Co. v. Bell, 615 F.2d 370 (5th Cir. 1980). In Carey, the
court held that there is no requirement of intentional conduct
for nondischargeability under then § 17(a), now § 523(a)(4), of
the Bankruptcy Code. Id. at 375-76. The debtor had argued that
intent was required, relying on language in the Second Circuit
case of In re Bernard, 87 F.2d 705, 707 (2d Cir. 1937), that
conduct under § 17(a) “must be due to a known breach of the duty,
and not to mere negligence or mistake.” The Carey court
concluded that Bernard did not apply to the facts of the case
before it, but also noted that “there is doubt as to the
continued validity of the dicta in In re Bernard.” 615 F.2d at
376. We do not read Carey as deciding that negligence suffices
to meet the defalcation rule of § 523(a)(4). The discussion of
negligence in Carey is dicta in that its holding is clearly and
simply that intent is not required. Id. The court in Carey did
not resolve what level of culpability is required, but merely
held that intentional conduct is not always required.
16
The bankruptcy court granted summary judgment on the basis
that Schwager’s debt arose from defalcation in a fiduciary
capacity under § 523(a)(4). Relying on LSP Inv. Partnership v.
Bennett (In re Bennett), 989 F.2d 779 (5th Cir. 1993), the
bankruptcy court held that, as a matter of law, Schwager was in a
fiduciary capacity with respect to the limited partners because
he was the general partner of a limited partnership. The
district court agreed with this determination.13 Schwager argues
that a fact issue exists as to whether he exercised sufficient
control over the affairs of the partnership to fall under the
rule of Bennett because the state court had appointed a receiver.
We find Schwager’s argument to be without merit.
“The scope of the concept of fiduciary under 11 U.S.C.
§ 523(a)(4) is a question of federal law; however, state law is
important in determining whether or not a trust obligation
exists.” Id. at 784. The Fifth Circuit has held that the
concept of a fiduciary under § 523(a)(4) is narrowly defined,
applying only to “technical or express trusts.” Angelle v. Reed
(In re Angelle), 610 F.2d 1335 (5th Cir. 1980).
Despite this narrow definition, Schwager’s duties to the
limited partners as general partner fall squarely within this
definition. In Bennett, the court concluded that “relationships
13
The district court also affirmed on the basis of
collateral estoppel, reasoning that the state court jury
specifically found that Schwager had breached a fiduciary duty to
the limited partners. We have already concluded that the
bankruptcy and district court erred in applying collateral
estoppel based on these jury findings.
17
in which trust-type obligations are imposed pursuant to statute
or common law” qualify under this narrow standard. 989 F.2d at
785. After an examination of Texas partnership law, the Bennett
court concluded that “Texas law clearly and expressly imposes
trust obligations on managing partners of limited partnerships
and these obligations are sufficient to meet the narrow
requirements of section 523(a)(4).” Id. at 787.
Schwager argues that the state court’s appointment of a
receiver took control of the partnership away from him. He
suggests that because the general partner’s ability to control
the partnership was critical to Bennett’s rationale, see id. at
789, the rule in Bennett does not establish as a matter of law
that he had a fiduciary relationship with the limited partners.
However, the receiver was only appointed to sell the property and
did not have control over the operations of the partnership. In
fact, the state court judgment appointing a receiver specifically
provided that Schwager was to continue to operate the restaurant.
The order further directed the limited partners to continue with
their obligation to pay partnership costs and for Schwager to
account for the money in his management of the partnership
property. Thus, the mere fact that a receiver was appointed does
not indicate that Schwager did not control the partnership. We
conclude that the bankruptcy and district court did not err in
determining, as a matter of law, that Schwager was in a fiduciary
relationship with the limited partners under the rule in Bennett.
D. Other Issues
18
Schwager complains that the bankruptcy court erred when it
permitted the limited partners to file an amended complaint after
the expiration of the 60-day filing period set forth in
Bankruptcy Rule 4007(c) for filing a complaint to determine
dischargeability. The limited partners filed their
nondischargeability complaint in the bankruptcy court three days
before the filing deadline, and the bankruptcy court allowed them
to file an amended complaint approximately two weeks later.
Bankruptcy Rule 7015 adopts Rule 15 of the Federal Rules of Civil
Procedure governing amendment of complaints, which provides that
“leave shall be freely given when justice so requires.” The
amended complaint did not allege new grounds for finding the 1989
judgment debt nondischargeable, but merely added specific facts
consistent with the nondischargeability grounds advanced in their
original complaint. The bankruptcy court did not abuse its
discretion in allowing this amendment.
Schwager argues that the limited partners failed to raise
defalcation as a ground for nondischargeability because they did
not use the word “defalcation” in either their complaint or the
amended complaint.14 The district court held that the limited
partners raised the issue of defalcation by citing § 523(a)(4) as
a ground for nondischargeability. On claims of error based on
allegations of surprise and failure to plead, the standard of
14
The limited partners pleaded that Schwager’s actions
litigated in the case leading to the 1989 judgment “constitute[d]
an exception under 11 U.S.C. Section 523(a)(4) to the
dischargeability of indebtedness owed by [Schwager] ... because
of [Schwager’s] fraud while acting in a fiduciary capacity.”
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review is abuse of discretion. Zielinski v. Hill (In re Hill),
972 F.2d 116, 122 (5th Cir. 1992); Beaubouef v. Beaubouef (In re
Beaubouef), 966 F.2d 174, 176-77 (5th Cir. 1992). There is no
reversible error if the complaining party had ample notice of the
issue. Hill, 972 F.2d at 122. Schwager had ample notice of a
defalcation claim because the limited partners pleaded
§ 523(a)(4) as a basis of nondischargeability. The bankruptcy
court did not abuse its discretion in reading the limited
partners’ pleading as raising defalcation. Furthermore, Schwager
never asserts that he had evidence he did not present or that he
would have proceeded differently in any way had the word
“defalcation” been in the pleading. Any error, therefore, was
harmless. Finally, even if Schwager had evidence he did not
present because of lack of notice of the defalcation issue, he
will have an opportunity to present it on remand to the
bankruptcy court.
Schwager makes much of the fact that bankruptcy
nondischargeability rules should be interpreted in favor of
debtors and that pro se litigants should be given liberal
treatment by the courts. See Haines v. Kerner, 404 U.S. 519,
520-21 (1972)(noting that pro se allegations are held to less
strict standards than those of lawyers); Boyce v. Greenway (In re
Greenway), 71 F.3d 1177, 1180 n.8 (5th Cir.) (“[W]e are bound to
construe the exceptions contained in § 523 of the Bankruptcy Code
narrowly and in favor of the debtor.”), cert. denied, 116 S. Ct.
2499 (1996). While both of these statements are true, Schwager
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has not explained how the bankruptcy or district court violated
either of these principles. He has neither identified any
ambiguous statute or rule that was interpreted in favor of the
limited partners nor claimed that any issue he arguably raised
was not adequately considered by the courts. We find no error in
the application of either of these two principles.
Schwager argues that res judicata, or claim preclusion, bars
the limited partners’ nondischargeability claim because they did
not raise the issue of defalcation while acting in a fiduciary
capacity before the state trial court. The doctrine of res
judicata does not apply in bankruptcy nondischargeability
proceedings. Fielder v. King (In re King), 103 F.3d 17, 19 (5th
Cir.) (citing Brown v. Felsen, 442 U.S. 127 (1979)), cert.
denied, 117 S. Ct. 2454 (1997).
III. CONCLUSION
For the foregoing reasons, we REVERSE the district court’s
judgment affirming the bankruptcy court’s judgment and REMAND to
the district court with instructions to remand to the bankruptcy
court for further proceedings consistent with this opinion.
Costs shall be borne by the appellees.
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