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Guerra v. Fernandez-Rocha (In Re Fernandez-Rocha)

Court: Court of Appeals for the Eleventh Circuit
Date filed: 2006-06-12
Citations: 451 F.3d 813
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                                                                  [PUBLISH]


             IN THE UNITED STATES COURT OF APPEALS

                    FOR THE ELEVENTH CIRCUIT            FILED
                      ________________________ U.S. COURT OF APPEALS
                                                         ELEVENTH CIRCUIT
                             No. 06-10159                   JUNE 12, 2006
                         Non-Argument Calendar            THOMAS K. KAHN
                                                              CLERK
                       ________________________

                   D. C. Docket No. 05-21275-CV-MGC
                     BKCY No. 00-40698-BKC-RAM

In Re: LUIS FERNANDEZ-ROCHA, MD,

                                               Debtor.
__________________________________________________

JORGE L. GUERRA,
GAYLE L. GUERRA,


                                                     Plaintiffs-Appellants,

                                  versus

LUIS FERNANDEZ-ROCHA, MD,

                                                     Defendant-Appellee.

                       ________________________

                Appeal from the United States District Court
                    for the Southern District of Florida
                      _________________________

                              (June 12, 2006)
Before CARNES, HULL and PRYOR, Circuit Judges.

HULL, Circuit Judge:

      Appellants Jorge and Gayle Guerra (the “Guerras”) appeal the district

court’s order affirming the bankruptcy court’s dismissal of their adversary

complaint against Dr. Luis Fernandez-Rocha (the “Debtor”) based on his failure to

comply with Florida’s Financial Responsibility Act, Florida Statutes § 458.320.

On appeal, the Guerras challenge the bankruptcy court and district court’s

determination that the debt in issue is dischargeable in bankruptcy. After review,

we affirm.

                                I. BACKGROUND

A.    Death of Veronica Guerra

      This appeal arises out of the tragic 1996 death of the Guerras’ newborn

daughter, Veronica Guerra. During Mrs. Guerra’s pregnancy, the Guerras had

agreed with the Debtor that he would deliver their baby. They further agreed that,

in the event the Debtor was unable to deliver the Guerras’ baby, one of his partners

would attend to the birth and Dr. Lourdes Ramon, a junior associate of the

Debtor’s, would not be involved. Nevertheless, when Mrs. Guerra was admitted to

the hospital, Dr. Ramon attended to the birth. According to the Guerras, as a result

of Dr. Ramon’s negligence, Veronica Guerra sustained injuries during the delivery



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and died eleven days later.

B.    State Court Action

      In Florida state court, the Guerras filed a malpractice action against both the

Debtor and Dr. Ramon. On February 13, 2004, the jury in the state court action

returned a verdict in favor of the Guerras and against the Debtor and Dr. Ramon.

Specifically, the jury found: (1) that Dr. Ramon’s negligence caused Veronica

Guerra’s death; (2) that there was no negligence by the Debtor with regard to

Veronica Guerra’s death; but (3) that the Debtor’s breach of contract was a legal

cause of Veronica Guerra’s death. The jury awarded the Guerras $4.2 million, and

the Florida state court entered final judgment against the Debtor.

C.    Bankruptcy Case and Adversary Proceeding

      Meanwhile, on December 1, 2000, the Debtor had filed a voluntary petition

for relief under Chapter 7 of Title 11 of the United States Code (the “Bankruptcy

Code”). On February 26, 2001, the Guerras filed in the bankruptcy case an

adversary proceeding against the Debtor. The Guerras’ adversary complaint

asserted that, pursuant to Florida Statutes § 458.320, the Debtor was obligated to

establish a fund to pay claims arising out of his rendering of, or failure to render,

medical care and services, and that the Debtor had a fiduciary duty to his patients

to maintain a claims fund of $250,000 per claim or $750,000 in the aggregate. The



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Guerras alleged that the Debtor had not established the required fund and thus

would not be able to pay the malpractice judgment against him. The Guerras

essentially alleged that they had a non-dischargeable claim against the Debtor for

the amount of the required claims fund to apply to the malpractice award.

       More specifically, the Guerras asserted that their claim was non-

dischargeable pursuant to § 523(a)(4) of the Bankruptcy Code. See 11 U.S.C. §

523(a)(4). Section 523(a)(4) provides that debts “for fraud or defalcation while

acting in a fiduciary capacity” are non-dischargeable.1

       On March 21, 2001, the bankruptcy court entered an order abating the

adversary proceeding pending the resolution of the state court litigation. On

September 9, 2002, the Debtor filed a motion to dismiss the Guerras’ adversary

complaint for failure to state a claim upon which relief could be granted or, in the

alternative, for summary judgment. The Debtor argued, inter alia, that Florida

Statutes § 458.320 is a regulatory statute and does not create a fiduciary duty or

any technical trust between the Debtor and the Guerras, and thus the § 523(a)(4)

exception to discharge does not apply to any debt between the Debtor and the




       1
         Section 523(a)(4) provides: “A discharge under section 727, 1141, 1228(a), 1228(b), or
1328(b) of this title does not discharge an individual debtor from any debt– (4) for fraud or
defalcation while acting in a fiduciary capacity, embezzlement, or larceny.” 11 U.S.C.
523(a)(4).

                                               4
Guerras.2 After a hearing, the bankruptcy court granted the Debtor’s motion to

dismiss under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim

upon which relief could be granted.

       The Guerras appealed the bankruptcy court’s dismissal to the district court,

and the district court affirmed. The Guerras now appeal to this Court.

                                       II. DISCUSSION

       The Florida Financial Responsibility Act, Florida Statutes § 458.320,

requires that to obtain a license a physician must maintain either malpractice

insurance, or a letter of credit payable to the physician, or an escrow account of his

own funds to demonstrate his financial responsibility in the event of a malpractice

award against him. See Fla. Stat. § 458.320(1). As did the bankruptcy court and

the district court, we accept the allegations of the Guerras’ adversary complaint as

true and will assume that the Debtor failed to comply with his obligations under §

458.320 and that there is no claims fund, malpractice insurance, or letter of credit

to satisfy a portion of the Guerras’ $4.2 million judgment against the Debtor.3


       2
        The Debtor also argued that Florida Statutes § 458.320 did not apply because the
Guerras’ verdict against him was for breach of contract and not negligence. However, the
bankruptcy court rejected this argument, and the Debtor does not raise this issue in this appeal.
Thus, we will assume that the Guerras’ $4.2 million judgment against the Debtor for breach of
contract would fall within the “rendering of, or failure to render, medical care and services”
language of § 458.320.
       3
       In an appeal from a district court sitting as an appellate court in a bankruptcy case, this
Court employs the same standards of review as the district court. IBT Int’l, Inc. v. Northern (In

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       Further, the Guerras’ adversary complaint is not based on the Debtor’s

failure to obtain malpractice insurance or provide a letter of credit, but is based

solely on the Debtor’s not having established a claims fund under § 458.320 that

could then be used to pay the Guerras’ malpractice judgment. Thus, the only issue

in this appeal is whether the Debtor’s failure to maintain the claims fund under §

458.320 created a debt that falls within the § 523(a)(4) exception to discharge for

debts for “defalcation while acting in a fiduciary capacity.” We first review prior

judicial interpretation of the § 523(a)(4) exception and then apply it to this case.

A.     Non-dischargeable Debts Under § 523(a)(4)

       An individual debtor’s pre-bankruptcy debts, including malpractice debts,

are generally dischargeable in a Chapter 7 bankruptcy case, and exceptions to

discharge are construed narrowly. 11 U.S.C. § 727(a), (b); Equitable Bank v.

Miller (In re Miller), 39 F.3d 301, 304 (11th Cir. 1994) (“[C]ourts generally

construe the statutory exceptions to discharge in bankruptcy liberally in favor of

the debtor and recognize that the reasons for denying a discharge must be real and

substantial, not merely technical and conjectural.”) (quotation marks, citations, and

punctuation omitted); see also R.E. Am., Inc. v. Garver (In re Garver), 116 F.3d


re Int’l Admin. Servs., Inc.), 408 F.3d 689, 698 (11th Cir. 2005). We review de novo a dismissal
for failure to state a claim, and like the bankruptcy court, we must accept the allegations in the
adversary complaint as true and construe the facts in the light most favorable to the plaintiff.
Hoffend v. Villa (In re Villa), 261 F.3d 1148, 1150 (11th Cir. 2001).

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176, 179 n.6 (6th Cir. 1997) (noting that all types of professional malpractice

claims generally are dischargeable under the Bankruptcy Code).

      Although § 523(a)(4) establishes an exception to dischargeability for debts

for “defalcation while acting in a fiduciary capacity,” this exception is a narrow

one. “The Supreme Court has consistently held that the term ‘fiduciary’ is not to

be construed expansively, but instead is intended to refer to ‘technical’ trusts.”

Quaif v. Johnson, 4 F.3d 950, 953 (11th Cir. 1993) (citing Davis v. Aetna

Acceptance Co., 293 U.S. 328, 55 S. Ct. 151 (1934), and other Supreme Court

cases interpreting previous versions of the § 523(a)(4) exception, but noting that all

versions have referred to “defalcation” and to “fiduciary capacity” or “fiduciary

character”); see Commonwealth Land Title Co. v. Blaszak (In re Blaszak), 397

F.3d 386, 391 (6th Cir. 2005) (noting that the term “fiduciary capacity” is

construed more narrowly in the context of § 523(a)(4) than in other

circumstances); see also Lee-Benner v. Gergely (In re Gergely), 110 F.3d 1448,

1450-51 (9th Cir. 1997) (noting that the doctor-patient relationship does not create

a fiduciary relationship for purposes of § 523(a)(4)).

      In Quaif, this Court further noted that the 1934 Davis decision is the last

Supreme Court case to speak to the issue and that the Supreme Court has left “the

lower courts to struggle with the concept of ‘technical’ trusts.” Quaif, 4 F.3d at



                                           7
953. Quaif also discussed the trends in judicial interpretation of the § 523(a)(4)

exception and noted that courts seemed to include the voluntary, express trust

created by contract within the scope of “fiduciary capacity” as used in § 523(a)(4).

Id. In contrast, courts have excluded the involuntary resulting or constructive trust,

created by operation of law, from the scope of the exception. Id. Additionally,

Quaif noted that cases have “also articulated a requirement that the trust

relationship have existed prior to the act which created the debt in order to fall

within the statutory [fiduciary capacity] exception.” Id. (citing Matter of Angelle,

610 F.2d 1335 (5th Cir. 1980)). Accordingly, “constructive” or “resulting” trusts,

which generally serve as a remedy for some dereliction of duty in a confidential

relationship, do not fall within the § 523(a)(4) exception “because the act which

created the debt simultaneously created the trust relationship.” Id. (emphasis

added).4

       4
         In a similar vein, in evaluating the predecessor to § 523(a)(4), the Supreme Court in
Davis stated: “It is not enough that by the very act of wrongdoing out of which the contested
debt arose, the bankrupt has become chargeable as a trustee ex maleficio. He must have been a
trustee before the wrong and without reference thereto.” Davis, 293 U.S. at 333, 55 S. Ct. at
154. That is, the language of the defalcation exception “would seem to apply only to a debt
created by a person who was already a fiduciary when the debt was created.” Id. (quotation
marks and citation omitted).
        The Davis court was interpreting Bankruptcy Act § 17(a)(4), formerly codified at 11
U.S.C. § 35(a)(4) (repealed 1978), a predecessor to § 523(a)(4). That section stated in pertinent
part: “A discharge in bankruptcy shall release a bankrupt from all his provable debts, whether
allowable in full or in part, except such as . . . were created by his fraud, embezzlement,
misappropriation or defalcation while acting as an officer or in any fiduciary capacity.”
Bankruptcy Act of 1898, § 17(a)(4), 52 Stat. 840, 851, formerly codified at 11 U.S.C. § 35(a)(4)
(repealed 1978).

                                                8
      Even if a fiduciary relationship exists prior to the act that created the debt,

the next question under § 523(a)(4) is whether there was a “defalcation” while

acting in a fiduciary capacity. In Quaif, this Court further explained that

“‘[d]efalcation’ refers to a failure to produce funds entrusted to a fiduciary,” but

that “the precise meaning of ‘defalcation’ for purposes of § 523(a)(4) has never

been entirely clear.” Id. at 955. Quaif observed that the best analysis of

“defalcation” is that of Judge Learned Hand in Central Hanover Bank & Trust Co.

v. Herbst, 93 F.2d 510 (2d Cir. 1937), in which “Judge Hand concluded that while

a purely innocent mistake by the fiduciary may be dischargeable, a ‘defalcation’

for purposes of this statute does not have to rise to the level of ‘fraud,’

‘embezzlement,’ or even ‘misappropriation.’” Quaif, 4 F.3d at 955 (citing Central

Hanover, 93 F.2d at 512). Indeed, “[s]ome cases have read the term even more

broadly, stating that even a purely innocent party can be deemed to have

committed a defalcation for purposes of § 523(a)(4).” Id.

      Additionally, Quaif observed that statutorily created trusts “fit into neither of

the traditional categories” of express trust or resulting or constructive trust and that

courts had struggled with reconciling this new type of trust. Id. at 953-54. In

Quaif, this Court addressed a Georgia statute, O.C.G.A. § 33-23-79, which

required that premiums received by an insurance agent “shall be accounted for in



                                            9
his fiduciary capacity, shall not be commingled with his personal funds, and shall

be promptly accounted for and paid to the insurer, insured, or agent as entitled to

such funds.” (Emphasis added.) The Quaif court concluded that O.C.G.A. § 33-

23-79, which expressly stated that premiums were held by an agent in his fiduciary

capacity, created fiduciary duties on the part of the agent for purposes of §

523(a)(4). Quaif, 4 F.3d at 953-54.

      We now apply these general § 523(a)(4) principles to this case.

B.    Guerras’ Adversary Complaint

      The Guerras do not contend that a physician-patient relationship creates

fiduciary duties or that malpractice debts are generally non-dischargeable. Rather,

they contend that the Debtor owed his patients a fiduciary duty, created by the

Florida Financial Responsibility Act, Florida Statutes § 458.320, to maintain funds

to satisfy malpractice debts. The Guerras argue that the Debtor breached that

fiduciary duty by failing to maintain those funds and that the Guerras have a non-

dischargeable claim against the Debtor for the amount of the required fund to pay

their malpractice award. Thus, we examine whether § 458.320 creates a fiduciary

duty or technical trust between the Debtor and the Guerras or even any debt

between them.

      “As a condition of licensing and maintaining an active [medical] license,” §



                                          10
458.320 requires that a physician “must by one of the following methods

demonstrate to the satisfaction of the board and the department financial

responsibility to pay claims and costs ancillary thereto arising out of the rendering

of, or failure to render, medical care or services”:

      (a) Establishing and maintaining an escrow account consisting of cash
      and assets eligible for deposit . . . in the per claim amounts specified
      in paragraph (b). . . .
      (b) Obtaining and maintaining professional liability coverage in an
      amount not less than $100,000 per claim, with a minimum annual
      aggregate of not less than $300,000 . . . . [or]
      (c) Obtaining and maintaining an unexpired, irrevocable letter of
      credit, established pursuant to chapter 675, in an amount not less than
      $100,000 per claim, with a minimum aggregate availability of credit
      of not less than $300,000. The letter of credit must be payable to the
      physician as beneficiary upon presentment of a final judgment
      indicating liability and awarding damages to be paid by the physician
      or upon presentment of a settlement agreement . . . .

Fla. Stat. § 458.320(1). Thus, to obtain a medical license, § 458.320(1) requires

that a physician maintain either an escrow account, professional liability coverage,

or a letter of credit in an amount of $100,000 per claim with a minimum aggregate

of $300,000. Id. As to physicians who have hospital staff privileges, such as the

Debtor here, § 458.320(2) increases those amounts to $250,000 per claim or

$750,000 in the aggregate. Fla. Stat. § 458.320(2).

      On appeal, there is no dispute that the Debtor was required by Florida law to

maintain an escrow fund, or malpractice coverage, or a letter of credit; nor is there



                                           11
any dispute that he failed to do so. However, for several reasons, we conclude that

§ 458.320 does not create a fiduciary duty or technical trust or even a debt between

the Debtor and the Guerras for purposes of § 523(a)(4) of the Bankruptcy Code.

      First,§ 458.320 is a regulatory statute requiring that the Debtor demonstrate

financial responsibility to the State to maintain his license and hospital staff

privileges. It even offers physicians three options, including maintaining an

escrow fund, to demonstrate financial responsibility. The statute does not create a

relationship, much less a contractual or fiduciary duty or a technical trust between

a physician and a patient.

      Second, even to the extent a physician opts to create such a claims fund to

satisfy the statute, the statute does not use the term “fiduciary capacity,” nor does it

require a doctor to place funds “in trust” for the benefit of third party patients. The

statute does not require the physician to hold and account for the funds to third

party patients. The statute does not create any property right in a doctor’s escrow

fund in favor of a patient. Rather, the stated purpose of § 458.320 is to require

physicians to “demonstrate to the satisfaction of the board and the department

financial responsibility to pay claims and costs” arising out of medical care. Put

simply, § 458.320 requires that a physician demonstrate financial responsibility to

the appropriate state licensing authorities through certain means, but it does not



                                           12
create in malpractice victims an entitlement to those means. See Hanft v. Church

(In re Hanft), 315 B.R. 617, 624 (S.D. Fla. 2002) (“Plainly, the ultimate purpose of

[§ 458.320] is to ensure that patients will be reimbursed for successful malpractice

claims, but that does not mean that the patients are ‘identifiable beneficiaries’ as

required for creation of a technical trust.”).5

       Third, “[t]he definition of ‘defalcation’ as ‘a failure to produce funds

entrusted to a fiduciary,’ Quaif, 4 F.3d at 955, further compels the conclusion that

Fla. Stat. § 458.320 does not create a fiduciary duty, because no funds are

‘entrusted’ to a doctor under the statute.” Hanft, 315 B.R. at 624. No funds were

entrusted to the Debtor, and thus no fiduciary duty could be created with regard to

entrusted funds.6

       The Guerras rely heavily on this Court’s decision in Quaif for the


       5
        We note that the statute does not require that any malpractice award actually be satisfied
by the escrow account used to satisfy the statute; a physician could choose to satisfy any
malpractice judgment through other funds. A prevailing malpractice plaintiff does not have a
claim or entitlement to the escrow account established under § 458.320, but rather would be a
general creditor of the defendant physician, and the physician could pay the judgment with
whatever funds he desires.
       6
        To the extent the Guerras argue that the act that created the debt was the malpractice
judgment and that the debt is rendered non-dischargeable by the Debtor’s failure to satisfy §
458.320, that argument lacks merit. Malpractice verdicts are dischargeable, and the Guerras do
not argue otherwise. The failure to maintain a claims fund does not alter the nature of the
dischargeable judgment debt. Further, the § 523(a)(4) exception to dischargeability addresses
debts “for fraud or defalcation,” not for malpractice. The Guerras could have a non-
dischargeable debt only if that debt was for defalcation of funds held in a fiduciary capacity. As
explained above, § 458.320 does not create a fiduciary duty or even a debt for purposes of §
523(a)(4) of the Bankruptcy Code.

                                                13
proposition that statutes such as § 458.320 create fiduciary duties. However, the

Guerras’ argument is misplaced. As noted earlier, the Georgia statute at issue in

Quaif explicitly stated that funds received by agents were to hold and account for

premiums in a fiduciary capacity. Here, as explained above, nothing in § 458.320

suggests that any funds required to be maintained would be held in a fiduciary

capacity. Nothing in § 458.320 requires the physician to perform any accounting

to patients of any funds held to satisfy the § 458.320 regulatory requirements.

       Accordingly, the district court and bankruptcy court did not err in

concluding that the Guerras’ claim against the Debtor based on his failure to

comply with § 458.320 falls outside the defalcation exception to discharge set forth

in § 523(a)(4).7

                                     III. CONCLUSION

       For the foregoing reasons, we affirm the district court’s order affirming the

bankruptcy court’s dismissal of the Guerras’ adversary complaint.

       AFFIRMED.




       7
         In the district court, the Debtor argued that § 458.320 is a regulatory statute and creates
no private right of action in the Guerras and that their adversary complaint fails to state a cause
of action. The Debtor did not make this argument in the bankruptcy court and the district court
did not address this issue but based its ruling on whether § 458.320 involved a fiduciary duty for
purposes of § 523(a)(4). We need not and do not address whether any private right of action
could exist under § 458.320 under any circumstances.

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