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. Continue reading →