A judgment for breach of fiduciary duty, in the typical corporate context, will not automatically result in denial of discharge of a debt under Section 523(a)(4), according to Bankruptcy Judge Joseph N. Callaway of Greenville, N.C.
The debtor had been a senior claims adjuster for an insurance company. Before bankruptcy, the insurance company got a judgment on claims of “faithless servant” and breach of fiduciary duty. The judgment was based on allegations that the debtor paid claims based on knowingly fraudulent repair estimates. The complaint alleged that the adjuster was a “trusted” employee in a “trusted position” who had authority to distribute millions of dollars.
In his opinion on Feb. 6, Judge Callaway dismissed the dischargeability complaint under Section 523(a)(4), holding that the “existence and breach of fiduciary duty under state law does not result in an automatic exception to discharge in bankruptcy,” because “‘fiduciary’ is more narrowly construed for Section 523(a)(4) discharge purposes and under most state laws.”
Section 523(a)(4) provides that a claim is nondischargeable “for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny.”
Judge Callaway relied primarily on authority from around the country holding that nondischargeability only results where there is an express or technical trust. A “mere employment relationship is not enough to establish a fiduciary capacity for purposes of Section 523(a)(4),” he said.
Similarly, Judge Callaway held that a finding of faithless servant, “standing alone,” does not “mandate a finding of defalcation while acting in a fiduciary capacity.”
The Fourth Circuit, according to Judge Callaway, has not definitively ruled on the breadth of “fiduciary” as used in Section 523(a)(4). In a nonprecedential opinion, however, the appeals court said that the section “is limited to instances involving express or technical trusts.”