This is a brief (case summary) I wrote in 2013.  Bankruptcy case.

Utnehmer v. Crull (In re Utnehmer), 499 B.R. 705 (9th Cir. B.A.P. 2013)
Issue:   Was a partnership actually formed here such that the debtor owed fiduciary duties to the creditor which may be non-dischargeable under Section 523(a)(4)?

Holding:   No.

Judge Alan Jaroslovsky, Northern District California

Pappas, Dunn, Jury

Opinion by Pappas

The debtors decided, in 2005, to build a large “spec home” in Venice Ca which would be sold then for a profit.  They borrowed $100,000 from Crull giving Crull a promissory note which was due on sale of the property but no longer than 12 months.  “The Parties agreed that $50,000 of the initial $100,000 loan was intended to be super[s]eded by execution of a formal operating agreement which would recharacterize this $50,000 of the lenders’ interest as an investors’ equity interest in a limited liability company to be formed, with a 10% annual preferred return, and 35% participation in profits on a prorated basis.  The documents for formation of the limited liability company, and the operating agreement, were supposedly being drafted.”  The lender received interest payments for about two years.  The property was finally finished and sold but the loan was not repaid since there were insufficient funds available.  The debtors filed chapter 7 and the lenders filed a non-dischargeability complaint alleging fraud and willful and malicious injury.  The court commented that there was no fraud or willful injury but there appeared to be defalcation by a fiduciary “if a partnership arrangement is shown.”  After trial, the court stated, “If your client was a fiduciary in relation to the venture and cannot account for the proceeds, I think that that’s enough to establish defalcation.”  He entered judgment against the debtor.

The BAP reversed.  Under California law, “where the parties purport to establish a partnership to engage in business at a future time or upon the happening of a contingency, the partnership does not come into being until the time specified or until the contingency is removed.”  “It is true that an agreement to share profits may be evidence of a partnership agreement.”  “However, the presence of profit sharing does not support a presumption of the existence of the partnership unless there was also an actual sharing of the profits. CAL. CORP. CODE § 16202 (2013)(“A person who receives a share of the profits of a business is presumed to be a partner in the business.”).  Here, the facts are undisputed that no limited liability company was ever formed, no operating agreement was ever executed, and there was no actual sharing of profits between William and Crulls.”  “Moreover, profit-sharing is not considered the most important indicia of a partnership under California law.  The existence of a partnership is ordinarily evidenced by some degree of participation by alleged partners in the management and control of the business.”

The debtor acknowledged at oral argument that the matter had to be remanded based on the Supreme Court case of Bullock v. BankChampaign.  The BAP did not remand however; it reversed, since it found that there were no fiduciary duties in the first place.