United States Court of Appeals
Fifth Circuit
F I L E D
UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT December 17, 2004
_______________________ Charles R. Fulbruge III
Clerk
Cause No. 03-51252
_______________________
In The Matter Of: SHAILESH GUPTA
Debtor.
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SHAILESH GUPTA,
Appellant,
versus
EASTERN IDAHO TUMOR INSTITUTE, INC.,
Appellee.
Appeal from the United States District Court
for the Western District of Texas
Before REAVLEY, JONES, and DENNIS, Circuit Judges.
EDITH H. JONES, Circuit Judge:
Dr. Shailesh Gupta sought Chapter 7 bankruptcy relief
after a judgment was obtained against him in Texas state court for
his “breach of fiduciary duty” against a co-joint venturer. The
question before this court is whether collateral estoppel applies
to bar relitigation of the facts and to compel a conclusion that
the judgment was a non-dischargeable debt for “fraud or defalcation
while acting in a fiduciary capacity. . .” 11 U.S.C. § 523(a)(4).
Contrary to the bankruptcy and district courts, we hold that
collateral estoppel was inappropriate, and must reverse and remand
for further proceedings.
I. BACKGROUND
On September 1, 1995, Northwest Houston Radiation Medical
Group Limited (“Northwest”) entered into a Joint Venture Agreement
(“Agreement”) with Dr. Gupta (“Gupta”) to operate a radiological
clinic. The initial term of the joint venture was to be twelve
months. Gupta was responsible for medical and professional
staffing, while Northwest contributed all necessary equipment,
office space and machinery. Gross revenues were to be divided
equally between the parties. While Gupta was responsible for
billing for services, that function was to be performed “at the
direction and supervision of Northwest. . . .” Finally, each party
was to share in the management of the business, and all non-medical
decisions required the partners’ unanimous agreement. The venture
lapsed when the parties failed to renew their Agreement before its
expiration date. Gupta, however, remained on the property, con-
ducted the same business, and retained all revenues collected for
more than a year.1
1
Although the preamble provides that the Agreement is created under
California law, ¶18 of the Agreement states that “[t]he laws of the State of
Texas shall govern the interpretation of this agreement.” Because the issue
before us regards legal interpretation of fiduciary capacity as determined by the
parties’ duties to one another under the Agreement, Texas law will apply.
2
In 1997, Eastern Idaho Tumor Institute, Inc. (“Eastern
Idaho”), as successor in interest to Northwest, sued Gupta in state
court alleging, in part, breach of fiduciary duty for Gupta’s
failure to remit a fifty percent share of gross revenues to Eastern
Idaho. After a three-day trial, the jury found against Gupta and
awarded Eastern Idaho over $250,000 in damages. The jury specifi-
cally found that: (1) Gupta breached the Agreement by failing to
remit half the gross revenues to Eastern Idaho; (2) “a relationship
of trust and confidence” existed between Gupta and Eastern Idaho;
(3) Gupta breached a fiduciary duty to Eastern Idaho created by
virtue of the Agreement;2 and (4) Gupta failed to pay rent while he
occupied the premises after the Agreement expired. Gupta not only
appealed the judgment to the state appellate court, but he also
filed for Chapter 7 bankruptcy.
Eastern Idaho commenced an adversary proceeding to
determine the non-dischargeability, under 11 U.S.C. § 523(a)(4), of
2
There is a dispute regarding whether the jury verdict form,
specifically Question No. 4, inappropriately shifted the burden of proving breach
to Gupta. Specifically, at oral argument, a panel member asked whether the
litany of compliance requirements in Question No. 4 “precede determination of
fiduciary . . . or do they follow it.” Audio Tr. (August 30, 2004). While the
ultimate burden to prove breach rests with the plaintiff, once a fiduciary duty
is established, the fiduciary is then burdened with proving compliance with the
duty. Tex. Bank & Trust Co. v. Moore, 595 S.W.2d 502, 509 (Tex. 1980). Question
No. 4 reflects this shift. In response to Question No. 3, the jury found that
a relationship of trust and confidence existed, which supports a finding of
fiduciary duty under Texas law. The jury was then tasked with determining
whether Gupta complied with his duty in Question No. 4, which shifted the burden
of demonstrating compliance to Gupta. We think that this was proper. Even if
the burden shifting was incorrect, it does not affect the narrow question before
this court, which is whether the state law fiduciary duty found in response to
Question No. 3 and, arguably, presumed in Question No. 4, is sufficient to sup-
port a fiduciary finding under 11 U.S.C. §523(a)(4).
3
approximately one-fourth of the judgment, i.e., that part which was
attributable to the findings of breach of fiduciary duty. The
bankruptcy court agreed that the state jury’s findings are entitled
to preclusive effect on the federal claim. Gupta appealed to the
district court, which affirmed.
Gupta now appeals to this court, contending that the
state court findings did not effectively determine the discharge-
ability of this portion of the judgment under § 523(a)(4) of the
Bankruptcy Code. We agree.
II. STANDARD OF REVIEW
This court reviews a bankruptcy court’s decision to give
preclusive effect to a state court judgment de novo, and its
findings of fact under a clearly erroneous standard. Gober v.
Terra + Corp. (In re Gober), 100 F.3d 1195, 1201 (5th Cir. 1996).
III. ANALYSIS
A bankruptcy court may apply collateral estoppel in a
dischargeability proceeding to preclude relitigation of state court
findings that are relevant to dischargeability. See Schwager v.
Fallas (In re Schwager), 121 F.3d 177, 181 (5th Cir. 1997) (citing
Grogan v. Garner, 498 U.S. 279, 285 n.11, 111 S.Ct. 654, 658 n.11,
112 L.Ed.2d 755 (1991)). The ultimate determination of
dischargeability is, however, a federal question. As we have
elaborated, “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
4
important in determining whether or not a trust obligation exists.”
LSP Inv. Partnership v. Bennett (In re Bennett), 989 F.2d 779, 784
(5th Cir. 1993) (relying on Angelle v. Reed (In re Angelle), 610
F.2d 1335, 1335-41 (5th Cir. 1980)). The problem in this case is
how to interpret the jury’s finding of a breach of fiduciary duty
in light of Texas partnership law and this circuit’s interpretation
of the federal standard.
Bankruptcy law has consistently rendered non-dis-
chargeable debts that arise from “fraud or defalcation while acting
in a fiduciary capacity. . . .” 11 U.S.C. § 523(a)(4). Justice
Cardozo explained a predecessor provision as follows:
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 v. Aetna Accept. Co., 293 U.S. 328, 333, 55 S.Ct. 151, 154,
79 L.Ed. 393 (1934). Davis goes on to hold that a debtor was not
a trustee “in that strict and narrow sense,” id., when he allegedly
converted property subject to the creditor’s security interest.
Implementing Davis, this court has held that a trust relationship
imposed by Louisiana statute on the dealings between a homebuilder
and his customers was, on the facts presented, insufficient to
establish a non-dischargeable breach of fiduciary duty. Angelle,
610 F.2d at 1335-41. The court emphasized that a trust must exist
“prior to the wrong and without reference to it,” id. at 1340, in
order to constitute a “technical trust” within the non-
5
dischargeability provision.3 This court has, on the other hand,
not hesitated to conclude that debts arising from misappropriation
by persons serving in a traditional, pre-existing fiduciary
capacity, as understood by state law principles, are non-
dischargeable. Thus, debts of corporate officers to the corpora-
tion or a minority shareholder have been held non-dischargeable, as
have the debts of a managing partner of a limited partnership to
the limited partners. Moreno v. Ashworth (In re Moreno), 892 F.2d
417, 421 (5th Cir. 1990); Bennett, 989 F.2d at 791; Sheerin v.
Davis (In re Davis), 3 F.3d 113, 117 (5th Cir. 1993).
In Bennett, we noted a split among lower court decisions
and declined to rule on whether co-equal partners hold duties to
each other that are “fiduciary” for purposes of § 523(a)(4) non-
dischargeability. Since Bennett was decided, two circuits have
held debts of a partner toward fellow partners or the partnership
non-dischargeable on this ground. Lewis v. Scott (In re Lewis),
97 F.3d 1182, 1189 (9th Cir. 1996); Laughter v. Speight (In re
Speight), 16 F.3d 287, 287 (8th Cir. 1994). No circuit court has
held to the contrary. 3 NORTON BANKR. L. & PRAC. 2D § 47:28 (2004).
The bankruptcy court here attempted to simplify this case
and to bring it within Bennett by finding that Dr. Gupta was
essentially a managing partner of the party’s joint venture.
3
Technically, Angelle, like Davis, interprets § 17(a)(4) of the
Bankruptcy Act, rather than §523(a)(4) of the 1978 Bankruptcy Code, but the
provisions are materially indistinguishable.
6
Unfortunately, no such “finding” was litigated or made in the state
court proceedings, and, collateral estoppel cannot attach to a non-
existent finding.4 The evidence in the record before us, moreover,
tends to suggest just the opposite: That Gupta and Eastern Idaho
managed the venture jointly, each with special spheres of
responsibility but with unanimity required in many decisions. Not
only are we not bound by the state court finding, but for present
purposes, we may not assume Gupta was equivalent to a managing
partner.
Gupta’s precise role, whether as the manager or simply a
co-venturer, would be irrelevant if all partners are fiduciaries to
each other for purposes of § 523(a)(4). Texas law, however, fails
to support that broad proposition. Rules governing the internal
management of joint ventures in Texas follow those applicable to
partnerships. TEX. REV. CIV. STAT. ANN. ART. 6132b-2.02(a). Texas
partnership law was significantly amended in 1994, before the
events giving rise to this case, to refine the nature and scope of
partners’ duties to each other. The amendment replaced a section
formerly titled “Partner Accountable as Fiduciary”5 with the
following:
4
Texas state rules governing collateral estoppel apply here.
Schwager, 121 F.3d at 181. Pursuant to Texas law, collateral estoppel may be
applied where (1) the facts sought to be litigated in the second action were
fully and fairly litigated in the first 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. Sysco Food Servs. Inc. v. Trapnell, 890 S.W.2d 796, 801
(Tex. 1994).
5
TEX. REV. CIV. STAT. ANN. ART. § 6132b, § 21 (1970).
7
Trustee Standard Inapplicable. A partner, in that
capacity, is not a trustee and is not held to the same
standards as a trustee.
TEX. REV. CIV. STAT. ANN. ART. 6132b-4.04(f). The State Bar Committee
Official Comment explains, “This section defines partnership duties
and implies that they are not to be expanded by loose use of
‘fiduciary’ concepts from other contexts or by the rhetoric of some
prior cases.” TEX. REV. CIV. STAT. ANN. ART. 6132b-4.04, cmt.6
This is not to say that Texas partners no longer owe
special duties to each other. The same provision defines duties of
loyalty and care, together with obligations to discharge those
duties in good faith and in the best interests of the partnership.
TEX. REV. CIV. STAT. ANN. ART. 6132b-4.04(a),(b),(c),(d). The duty of
loyalty expressly includes that of accounting to the partnership
and holding and using property or money for its benefit during the
partnership’s existence and its winding up. Id. Under these
provisions, certain duties that partners owe to each other may rise
to the level of a “fiduciary” for purposes of § 523(a)(4).7 The
Texas Supreme Court has taken note of the statutory change, and the
fact that the principles as applied to the case before it had not
6
The commentary goes on to explain that subsection (f) further
attempts “to restrict reliance on the unfortunate language of prior law. The
term ‘fiduciary’ is inappropriate when used to describe the duties of a partner
because a partner, unlike a true trustee, may legitimately pursue the partner’s
own self-interest and not solely the interests of fellow partners or the
partnership.”
7
In Angelle, this Court stated that the only possible way Angelle
could be considered a fiduciary was if Louisiana law imposed trust-like duties
on contractors in his position. 610 F.2d at 1341.
8
changed (i.e., no duty to offer former partners a business
opportunity arising after the partnership terminated), in M.R.
Champion, Inc. v. Mizell, 904 S.W.2d 617 (Tex. 1995). The Court
also cited the revised statute for the proposition that, “Partners
owe each other and their partnership a duty in the nature of a
fiduciary duty in the conduct and winding up of partnership
business . . . .” Mizell, 904 S.W.2d at 618 (emphasis added). It
would appear that, at least as to the duty to account for money
owed to the partnership, a partner’s duties may constitute a pre-
existing, express or technical trust within the meaning of the
Supreme Court’s Davis decision and the Fifth Circuit’s Angelle
decision and are analogous to those of the corporate officers in
Davis and Moreno cases. We need not speculate on the subject of
partners’ duties further here, however.
The jury findings concerning Gupta’s relationship of
trust and confidence to Eastern Idaho must be viewed through the
lens of federal law as well as the modified Texas partnership
standards. Angelle, of course, held that a relationship involving
confidence, trust and good faith is “far too broad” to satisfy the
federal standard. Angelle, 610 F.2d at 1341. Further, the jury’s
finding of Gupta’s fiduciary duty was predicated solely on “a
relationship of trust and confidence.” The jury’s separate finding
of a breach of fiduciary duty was based on general phrases
concerning the duty (e.g., to conduct transactions that were “fair
and equitable” to Eastern Idaho), rather than on specific events or
9
actions that might fall within the parameters of the amended
statute. Finally, there is no way to tie the damages found for
breach of fiduciary duty back to specific instances of Gupta’s
misconduct that might correlate with Texas’s amended statute or the
federal standard.8
In short, the state court findings are insufficient to
warrant collateral estoppel here, because they are based on a
standard that Angelle held insufficient, and they do not indicate
that the facts actually litigated and decided comport with those
limited areas of responsibility that still may be deemed
“fiduciary” under Texas partnership law. As in Schwager, we
confront findings that are insufficiently precise to govern the
dischargeability determination for federal purposes.
CONCLUSION
Accordingly, the bankruptcy court’s summary judgment in
favor of Eastern Idaho, affirmed by the district court, must be
reversed, and the case remanded for further proceedings.
REVERSED and REMANDED.
8
The jury separately found damages based on (a) Gupta’s breach of the
Agreement by failing to account for half the gross revenues; (b) lost rental
value of medical equipment; and (c) lost premises rent.
10