Gupta v. Eastern Idaho Tumor Institute, Inc.

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