IN THE UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF CALIFORNIA
CHARLES and MARGARET SORENSON, No. 1-87-01158
WILLIAM H. McFERREN SR.,
v. A.P. No. 1-87-0189
CHARLES and MARGARET SORENSON,
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
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
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 _____________________