Memorandum of Decision Re: Alleged Defalcation

IN THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA
In re CHARLES and MARGARET SORENSON,                                       No. 1-87-01158      Debtors. ______________________________/ WILLIAM H. McFERREN SR.,      Plaintiff,     v.                                                                                                        A.P. No. 1-87-0189 CHARLES and MARGARET SORENSON,      Defendants. ________________________________/
Memorandum of Decision
     Plaintiff originally alleged that his claim against the debtors was nondischargeable for fraud and defalcation in a fiduciary capacity. At the commencement of trial, he conceded that as a matter of law his fraud allegations were not actionable. He offered to prove, however, that he and debtor Charles Sorenson had entered into a partnership to operate a truck, that Sorenson negligently maintained and later abandoned the truck, and that plaintiff was then forced to find the truck, repair it, and sell it in order to limit his liability. Upon these facts alone, plaintiff believes that he is entitled to a judgment of nondischargeability pursuant to section 523(a)(4) of the Bankruptcy Code.      Plaintiff's basic problem is that he confuses the term "defalcation in a fiduciary capacity" with "breach of a fiduciary duty." While many relationships give rise to a fiduciary duty, in most of these situations, including partnerships, a nondischargeable debt does not automatically result from its breach. 3 Collier on Bankruptcy (15th Ed.), pp. 523-93 to 94.      The word "defalcation" does not refer to failure to do one's duty, but rather to a mishandling of money or a failure to account for money or property received. In re Twitchell (Bankr.D.Utah 1987) 72 B.R. 431, 435, and cases cited therein. California law provides that a partner holds partnership profits in trust, and any misuse of the funds may result in a nondischargeable debt. Cal.Corp.Code section 15021; Ragsdale v. Haller (9th Cir.1986) 780 F.2d 794. This does not mean, however, that any debt between partners is nondischargeable. Unless there has been misuse of funds subject to an express trust, there can be no liability under section 523(a)(4). Davis v. Aetna Acceptance Co. (1934) 293 U.S. 328, 333; In re Pedrazzini (9th Cir.1981) 644 F.2d 756, 759. Liability under section 523(a)(4) arises from the misuse of funds subject to trust, not the fiduciary relationship itself.      Here, plaintiff does not allege that Sorenson absconded with partnership funds or property or cannot account for them. Rather, he alleges as dischargeable conduct the debtor's negligent and irresponsible care for a partnership asset. While such conduct may have been a breach of Sorenson's fiduciary duty as a partner, it is not a defalcation within the meaning of section 523(a)(4).      For the above reasons, the Court grants the debtors' motion for judgment. Pursuant to Rule 9021, a separate judgment of dismissal shall be entered.
Dated: May 18, 1988                                                                              _____________________                                                                                                                      Alan Jaroslovsky                                                                                                                      U.S. Bankruptcy