Shaffer v. Bird, II (In re Bird, II)

Summarized by William Wallo , Bakke Norman, S.C.
11 years 7 months ago

Citation:

Shaffer v. Bird, II (In re Bird, II), No. 14-6003 (8th Cir BAP July 8, 2014)

Tag(s):

Ruling:

The Eighth Circuit Court of Appeals affirmed the lower court's determination that a former bankruptcy trustee's breaches of fiduciary duty to bankruptcy estate constituted a non-dischargeable debt in his own bankruptcy case.

Procedural context:

The Bankruptcy Court for the Eastern District of Arkansas found judgment debt to be nondischargeable. On appeal, the Bankruptcy Appellate Panel for the Eighth Circuit affirmed.

Facts:

Former bankruptcy trustee was found to have breached fiduciary duties to the bankruptcy estate of consolidated chapter 11 debtors and to have committed fraud upon the court. As a result, he was ordered to return all fees awarded during the course of the case. The resulting judgment entered in favor of the estate was then assigned to the former equity holder of the debtors, who sought to collect the judgment from the former trustee under state law. After an unsuccessful contest over enforcement of the judgment in state court (including an appeal to the Arkansas Court of Appeals), the former trustee filed his own chapter 7 case. The judgment holder contested the dischargeability of the judgment. The bankruptcy court found the obligation to be nondischargeable under 11 U.S.C. Section 523(a)(4) as a debt incurred as a result of fraud or defalcation in a fiduciary capacity. On appeal, the former trustee argued that the judgment related to the return of fees which had been paid to him without any "indicia" of fraud because he had already returned the specific amounts the original bankruptcy court found to have been improperly obtained. After reviewing the record, the BAP concluded that the judgment - which required the return of the trustee's entire fee - was based upon a determination that the trustee's fees should be disgorged in their entirety because of his fraud upon the bankruptcy estate and the court. The judgment obligation was therefore the "result of" or was "in respect to" the fraud as contemplated by the Supreme Court in Cohen v. de la Cruz, 523 U.S. 213 (1998) and was nondischargeable. The BAP also rejected the former trustee's arguments that the judgment had not been properly revived under Arkansas law. Affirmed.

Judge(s):

Kressel, Nail, and Shodeen

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