Double Bogey, L.P. v. Enea

Summarized by Jon Powers , White and Williams LLP
10 years 7 months ago

Citation:

(9th Cir. Case No. 13-15809; July 22, 2015)

Tag(s):

Ruling:

Establishing an individual debtor is the alter-ego of a statutory entity controlled by the debtor is insufficient in itself to find the individual debtor is also the fiduciary of the entity's creditors under the Section 523(a)(4) dischargeability exception. Section 523(a)(4)'s definition of fiduciary is narrow: (1) the fiduciary obligations must arise from an express or technical trust relationship ; and (2) the trust like duties must arise before, and without reference to, the wrongdoing that caused the debt. While state partnership law may impose these trust-like obligations among partners, the LLP and LLC statutes do not create these same duties and California's alter ego doctrine does not expressly create a trust relationship and alter ego liability also does not arise before the wrongdoing--"rather it merely operates to hold an individual liable for his corporation's already-existing debt." Thus, at least in California, the common law alter ego doctrine is only, "a procedural mechanism by which an individual can be held jointly liable for the wrongdoing of his or her corporate alter ego." In short, an individual principal of a California LLP or LLC is not a “fiduciary” of the company’s creditor’s under 523(a)(4) even if alter ego liability exists. “When an individual is held liable for an act of his corporate alter ego under California law, it is not because the individual inherited his corporation’s duties and breached them himself. . . . A doctrine which merely supplies an additional judgment defendant after liability exists does not clearly and expressly impose trust-like obligations prior to the creation of that same liability.” Thus, alter ego liability alone cannot “create a ‘fiduciary’ relationship under the Code.”

Procedural context:

Appeal from a District Court Order affirming the Bankruptcy Court's ruling that the alter ego doctrine alone cannot establish the "fiduciary" relationship required for application of the Section 523(a)(4) dischargeability exception for "defalcation while acting in a fiduciary capacity."

Facts:

The Defendants in this non-dischargeability action, Chapter 7 debtors Sylvester and Paul Anea (the "Aneas"), were the sole shareholders and officers of Appian Construction, Inc. ("Appian"). Appain was the general partner of an LLP and the managing member of a separate LLC--both real estate development entities. The Plaintiff, Double Bogey, L.P. ("Double Bogey") was the 'silent' investor in these two development entities. After failing to receive a return on its investment or an accounting, Double Bogey sued Appian in state court . While the state court suit was pending, the Eneas brothers (and Appain) each filed Chapter 7 petitions. Double Bogey brought a non-dischargeability action in the Eneas' personal cases asserting, among other things, non-dischargeability under Section 523(a)(4) for "defalcation" while acting in a fiduciary capacity. The Eneas brothers conceded that Appian was Double Bogey's fiduciary and the Bankruptcy Court found prima facie evidence that the Eneas brothers were the alter egos of Appian. However, the Bankruptcy Court found that establishing the Eneas' alter ego status was not alone sufficient to find the Eneas were also personally the fiduciaries of Double Bogey under the narrow definition of fiduciary under the Code. The District Court affirmed and Double Bogey appealed to the Ninth Circuit panel.

Judge(s):

Diarmuid F. O'Scannlian and Sandra S. Ikuta, Circuit Judges and Larry A. Burns, District Judge sitting by designation

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