In re: Sylvester Frank Enea and Mimi Claire Enea, Paul Joseph Enea and Claire Theodora Enea

Filing 15

ORDER AFFIRMING BANKRUPTCY COURT'S DISMISSAL (Illston, Susan) (Filed on 3/25/2013)

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IN THE UNITED STATES DISTRICT COURT

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FOR THE NORTHERN DISTRICT OF CALIFORNIA
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United States District Court
For the Northern District of California

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In re:

No. C 12-01877 SI

SYLVESTER FRANK ENEA and MIMI
CLAIRE ENEA,

Bankr. Case No. 09-46304
Bankr. Case No. 09-48602

Debtors.
__________________________________/

Adv. Proc. No. 11-3017 DM
Adv. Proc. No. 11-3018 DM
Consolidated

In re:

Debtors.
____________________________________/
DOUBLE BOGEY, L.P.,

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ORDER AFFIRMING BANKRUPTCY
COURT’S DISMISSAL

PAUL JOSEPH ENEA and CLAIR
THEODORA ENEA,

Appellant,
v.

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SYLVESTER FRANK ENEA and PAUL
JOSEPH ENEA,

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Appellees.

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Appellant Double Bogey, L.P., filed adversary proceedings seeking a finding of non-

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dischargeability pursuant to section 523(a)(4) of the Bankruptcy Code, as to debt incurred by Chapter

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7 debtors Paul and Sylvester Enea. After a five day trial, and at the conclusion of Double Bogey’s

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evidence, Judge Dennis Montali of the United States Bankruptcy Court of the Northern District granted

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the debtors’ Motion for Judgment on Partial Findings, Fed. R. Bankr. P. § 7052(c). Double Bogey now

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appeals that decision. Upon consideration of the record and the papers submitted, the Court AFFIRMS

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the bankruptcy court’s judgment in favor of debtors.

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BACKGROUND
In its decision granting the Eneas’ motion, the bankruptcy court found the following facts

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uncontested. Double Bogey had a stake in two real estate development entities: it was the limited

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partner in 1221 Monticello, L.L.P.; and it was one of several members of Monterrosa, L.L.C. Oral

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Decision (“Order”), Bankr. Case No. 11-3017, ECF No. 123 at 4-5. Appian Construction Company,

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Inc., a corporation owned by debtor Paul Enea and of which debtors Paul and Sylvester Enea were the

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sole executive officers, was the general partner of Monticello and the managing member of Monterrosa.

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Id. at 5. Double Bogey invested over four million dollars in Monticello and over one million in

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Monterrosa. Id. Double Bogey lost its entire investment in Monterrosa, and although it recovered its

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United States District Court
For the Northern District of California

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invested funds in Monticello, it did not receive “substantial amounts of interest in profit participation

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that it claims to be in the amount of several million dollars.” Id.

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In 2009, via Chapter 7 bankruptcy proceedings, the Eneas both received discharges of their

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debts, including those claimed by Double Bogey. Id. Double Bogey challenged that finding in

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adversary proceedings pursuant to section 523(a)(4) of the Bankruptcy Code.

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specifically contends that Appian Construction Company was Double Bogey’s fiduciary; that its liability

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to Double Bogey arose out of “defalcation while acting in a fiduciary capacity” and as such was

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nondischargeable; and that because Paul and Sylvester Enea were the alter egos of Appian Construction,

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nondischargeability under section 523(a)(4) should likewise apply to them. Id. at 6.

Double Bogey

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Defalcation occurs when a debtor fails to pay back or account properly for “trust funds or money

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held in a fiduciary capacity.” Blyler v. Hemmeter (In re Hemmeter), 242 F. 3d 1186, 1190 (9th Cir.

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2001).

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After Double Bogey had presented its case-in-chief during five days of testimony, the Eneas

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moved for judgment on partial findings. Order at 4. On February 10, 2012, the bankruptcy court

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granted the motion. He found that Appian Construction was a fiduciary to Double Bogey with respect

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to the latter’s investments in Monticello and Monterrosa, id. at 6, 10, and that Double Bogey had

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established a prima facie case that the Eneas were Appian’s “alter ego.” Id. at 8. However, the

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bankruptcy court held that section 523(a)(4) of the Bankruptcy Code, precluding discharge, applies only

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to fiduciary relationships created by express or statutory trust, and not to fiduciary relationships which
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result by operation of law as a result of acts of wrongdoing (trusts ex maleficio). Thus, although Appian

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Construction’s uncontested fiduciary relationship to Double Bogey did implicate section 523(a)(4), Paul

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and Sylvester Eneas’ individual fiduciary status resulted only from their misconduct/alter ego status;

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thus, section 523(a)(4) nondischargeability would not apply. The court also found that the Eneas could

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not be directly liable because there was no trust res.

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Therefore, the court granted the Eneas’ motion on the ground that Double Bogey had failed to

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state a claim that the Eneas’ may not discharge debts that incurred as a result of Appian’s alleged

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defalcation. Id. at 4. This appeal challenges those findings.

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United States District Court
For the Northern District of California

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STANDARD OF REVIEW

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A Rule 7052(c) motion for judgment on partial findings incorporates the precise language of

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Rule 52(c) of the Federal Rules of Civil Procedure. It provides that judgment on partial findings, in a

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non-jury trial, is appropriate where the plaintiff fails to make out a prima facie case, or where the court

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determines that the preponderance of the evidence goes against plaintiff’s claim. Fed. R. Bank. P.

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§ 7052(c); In re Stearman, 256 B.R. 788, 791 (B.A.P. 9th Cir. 2000). Such a judgment shall be

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supported by findings of fact and conclusions of law.

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In reviewing bankruptcy court judgments, a district court functions as an appellate court. The

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bankruptcy judge’s findings of fact under section 7052(c) are thus reviewed for clear error, while its

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conclusions of law are reviewed de novo. In re Lund, 202 B.R. 127, 129 (B.A.P. 9th Cir. 1996). Mixed

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questions of law and fact are also reviewed de novo. In re Chang, 163 F.3d 1138, 1140 (9th Cir. 1998).

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Finally, this Court may not make independent factual findings. If the bankruptcy court is silent or

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ambiguous as to an outcome-determinative factual question, the case must be remanded to the

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bankruptcy court for the necessary factual findings. See In re Carter, 182 F.3d 1027, 1034 (9th Cir.

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1999).

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DISCUSSION

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With certain enumerated exceptions, “[t]he effect of a discharge in bankruptcy is to release a

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bankrupt from all of his provable debts.” Davis v. Aetna Acceptance Co., 293 U.S. 328, 331(1934).
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The exceptions to dischargeability are listed in section 523 of the Bankruptcy Code, and include “any

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debt for fraud or defalcation while acting in a fiduciary capacity.” 11 U.S.C. § 523(a)(4); In re Short,

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818 F.2d 693, 694 (9th Cir. 1987). Double Bogey argues that the Eneas committed defalcation while

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acting as the fiduciary of Double Bogey’s money in Monticello and Monterrosa, and therefore they

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should not be discharged from their debts. Double Bogey agues two forms of liability for the Eneas:

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(1) as the alter ego of Appian, and (2) direct liability in their individual capacity as corporate officers.

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I.

Section 523(a)(4) Nondischargeability – Alter Ego Status
The bankruptcy court found that, as a matter of law, Double Bogey could not obtain a finding

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United States District Court
For the Northern District of California

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of nondischargeability under section 523(a)(4), based on the Eneas’ alter ego status with Appian. In

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reviewing this finding de novo, the Court agrees with the bankruptcy court. Therefore, even if Appian

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was a fiduciary to Double Bogey and committed defalcation, the alter ego doctrine may not be used in

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this case render any liability of the Eneas nondischargeable in bankruptcy.

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“Whether a person is a fiduciary under § 523(a)(4) is a question of federal law.” Lewis v. Scott

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(In re Lewis), 97 F.3d 1182, 1185 (9th Cir. 1996) (citing Ragsdale v. Haller (In re Haller), 780 F.2d

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794, 795 (9th Cir. 1986)). “The broad definition of fiduciary under nonbankruptcy law–a relationship

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involving trust, confidence, and good faith–is inapplicable in the dischargeability context.” In re

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Honkanen, 446 B.R. 373, 378 (B.A.P. 9th Cir. 2011). As the Ninth Circuit has explained, “[f]rom 1884

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to the present, courts have construed ‘fiduciary’ in the bankruptcy discharge context as including

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express trusts, but excluding trusts ex maleficio, i.e., trusts that arose by operation of law upon a

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wrongful act. We have adhered to this construction in interpreting the scope of 11 U.S.C. § 523(a)(4),

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refusing to deny discharge to those whose fiduciary duties were established by constructive, resulting

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and implied trusts.” In re Hemmeter, 242 F.3d at 1189-90 (9th Cir. 2001) (citations omitted).

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The alter ego doctrine sits squarely within the ex maleficio exclusion. The alter ego doctrine

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arises when an individual is unjustly and abusively using the corporate form as a shield for its misdeeds;

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in instances where a party perverts the corporate form, courts will “pierce the corporate veil” and hold

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the individual liable. See 9 Witkin, § 9, p. 785 (10th ed. 2005). Thus, the alter ego doctrine “is a device

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imposed by courts to disregard the corporate entity and hold individuals responsible for acts knowingly
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and intentionally done in the name of the corporation.” In re Munson, 6:10-BK-38482-SC, 2011 WL

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845846, at *4 (Bankr. C.D. Cal. Mar. 9, 2011) (citing Ivy v. Plyler, 246 Cal. App. 2d 678, 682 (1966)).

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The court in In re Munson concluded that imposing liability under the alter ego doctrine would

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necessarily be imposing liability ex maleficio, because it operates to impose liability upon the individual

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because of his wrongful acts. Id.
Stated another way, under § 523(a)(4) the fiduciary duty must arise from “an express, technical,

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or statutory trust that was imposed before and without reference to the wrongdoing that caused the debt.”

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Lewis, 97 F.3d at 1185 (emphasis added); see also Ragsdale, 780 F.2d at 796. Here, only Appian owed

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an express fiduciary duty to Double Bogey. The alter ego doctrine, used to pierce the corporate veil and

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United States District Court
For the Northern District of California

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impose a fiduciary duty on the Eneas, could only be applied after wrongdoing. Therefore, any trust that

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arises from the wrongdoing of the Eneas under the alter ego doctrine will be outside the purview of §

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523(a)(4). See also, Hunter v. Philpott, 373 F.3d 873, 876-77 (8th Cir. 2004) (finding that because an

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express trust under § 523(a)(4) “does not embrace trustees of constructive trusts imposed by law because

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of the trustee’s malfeasance,” a debtor could not be liable “simply as an alter ego”); In re Lupo, 353 B.R.

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534, 548 (Bankr. N.D. Ohio 2006) (finding that § 523(a)(4) requires the debtor to prove an independent

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fiduciary duty, and refusing to apply the alter ego doctrine).

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Double Bogey relies on many cases that impose liability on debtors who are the alter egos of

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corporations. However, the cases that Double Bogey relies on impose liability directly, and do not stand

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for the proposition that the alter ego doctrine can be used to create an express trust under § 523(a)(4).

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See, e.g., In re Yarbrow, 150 B.R. 233 (B.A.P. 9th Cir. 1993) (upholding the non-dischargeability of the

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debts of an individual debtor who was the alter ego of a corporation, but based on the direct liability of

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the debtor); In re Baird, 114 B.R. 198 (B.A.P. 9th Cir. 1990) (same).

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II.

Direct Liability of the Eneas

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Double Bogey also argues that the Eneas, as Appian’s sole corporate officers, “directly and

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actively participated” in Appian’s defalcation, and thus may be held personally liable for that

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defalcation. Appt. Brief at 24. The bankruptcy court denied this claim on the ground that Double Bogey

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had failed to show that any alleged direct participation involved an identifiable “trust res.” Order at 15
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(finding no “specific identification of funds that were at all times trust funds and that were improperly

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diverted”). This Court reviews the bankruptcy court’s findings of law de novo, and its findings of fact

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for clear error.

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A.

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“A debt is nondischargeable under 11 U.S.C. § 523(a)(4) where (1) an express trust existed, (2)

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the debt was caused by fraud or defalcation, and (3) the debtor acted as a fiduciary to the creditor at the

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time the debt was created.” In re Niles, 106 F.3d 1456, 1459 (9th Cir. 1997) (quotations omitted). The

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Ninth Circuit has explained that courts should look to state law to determine whether an express trust

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United States District Court
For the Northern District of California

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Requirement of a Trust Res

is created. In re Baird, 114 B.R. at 202. “The statute must define the trust res, spell out the trustee’s

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fiduciary duties and impose a trust prior to and without reference to the wrong which created the debt.”

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Id. A “trust res” is “money or property that is entrusted to the debtor-fiduciary.” In re Evans, 161 B.R.

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474, 478 (B.A.P. 9th Cir. 2001); see also Restatement (Second) of Trusts § 74 (1959) (a trust cannot be

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created unless there is a trust property). Even if a court finds that there are general fiduciary duties

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between the parties, that is “not sufficient [if there is an] absence of an express or technical trust

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relationship with an identifiable trust res.” Id. The Evans court relied on Cal–Micro, Inc. v. Cantrell

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(In re Cantrell), 329 F.3d 1119, 1125 (9th Cir.2003), for its finding that a real estate agent was not given

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trust res, and therefore, even though state law created a general fiduciary duty between a real estate

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agent and her client, there was no express trust under § 523(a)(4).

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B.

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The bankruptcy court, after five days of hearing Double Bogey’s case-in-chief, found as a factual

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matter that there was no trust res. It found that in the instant case, there was “no specific identification

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of any particular fund of money. There is no statute that says every dollar that comes into Monticello,

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to Apian, is impressed with the trust. There’s no res.” Order at 19. The bankruptcy court explained

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that “the very nature of the investment of Double Bogey in Monticello and Monte Rosa, impliedly, if

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not explicitly, recognizes that those funds would be spent and spent for what? Spent for obviously

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ultimately the costs and expenses in relation to the real estate development.” Id. Therefore, the

The Lack of a Trust Res for Double Bogey

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bankruptcy court found that the monies that went from Appian to the Eneas were not trust res when they

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were diverted to the Eneas.

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This Court finds no clear error in this factual determination. “Under state law, the intent of the

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parties is controlling in determining whether payment of funds is a loan or creation of a trust.” In re

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Niles, 106 F.3d 1456, 1463 (9th Cir. 1997) (citations omitted). The bankruptcy court emphasized the

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fluid nature of Double Bogey’s investment in the Monticello and Monterrosa entities. Order at 15.

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Because the investments were used for diverse business purposes, and not held as an identifiable,

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traceable fund, the court concluded that they could not constitute a trust res for the purpose of holding

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the Eneas directly liable for defalcation. Id. Here, the issue of intent is one of fact and the court’s

United States District Court
For the Northern District of California

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finding was not clearly erroneous.

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Double Bogey argues that under California law, partnership assets are trust res. See Ragsdale,

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780 F.2d at 797 (finding a fiduciary trust under § 523(a)(4) because a partner is a “trustee over

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partnership assets for all purposes”). However, it is only Appian that is in partnership with Double

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Bogey; the Eneas are mere stock owners or corporate officers. In Cantrell, the Ninth Circuit interpreted

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California corporate law to conclude that while officers of a corporation have general fiduciary duties,

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they are not trustees with respect to corporate assets and, therefore, are not fiduciaries within the

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meaning of § 523(a)(4). 329 F.3d at 1126. It quoted the California Supreme Court as holding that

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“[o]ne who is a director of a corporation acts in a fiduciary capacity, and the law does not allow him to

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secure any personal advantage as against the corporation or its stockholders. However, strictly

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speaking, the relationship is not one of trust, but of agency . . . .” Id. (quoting Bainbridge v. Stoner, 16

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Cal. 2d 423, 426 (1940)). Thus, although under California law partners are trustees over partnership

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assets, corporate officers are not trustees over corporate assets. Therefore, there is no showing that the

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Eneas, as corporate officers, were trustees for Double Bogey or were given control of a trust res.

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Double Bogey’s reliance on In re Baird is also unpersuasive. In In re Baird, an Arizona state

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law provided that money paid to a contractor was deemed to be held in trust for the benefit of the

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subcontractor. 114 B.R. at 202. The Baird court found that this law created a trust res because it

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expressly designated the funds received by the contractor as trust funds. The Baird court also found the

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corporate officer directly liable, relying on Arizona case law. Id. at 204-205 (citing Seven G Ranching
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Co. v. Stewart Title & Trust, 128 Ariz. 590, 593 (App.1981)). The bankruptcy court distinguished In

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re Baird, finding that in this case there was no separate fund of money set up that was to be held in trust

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by the Eneas for Double Bogey. Moreover, unlike in Arizona, California law clearly establishes that

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a corporate officer is not a trustee for corporate funds. See Cantrell, 329 F.3d at 1126. Therefore, the

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Court finds that the bankruptcy court did not commit clear error when it found that the Eneas were not

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directly liable for defalcation.

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CONCLUSION
For the foregoing reasons, this Court AFFIRMS the judgment of the bankruptcy court’s granting

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United States District Court
For the Northern District of California

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the Eneas’ motion for judgment on partial findings, and finds that Double Bogey may not prevent the

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Eneas from discharging their debts because of defalcation under section 523(a)(4), either as the alter ego

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of Appian or though direct liability as corporate officers.

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IT IS SO ORDERED.

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Dated: March 25, 2013

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SUSAN ILLSTON
United States District Judge

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