Jenkins v. IBD, Inc.

Filing 12

MEMORANDUM AND ORDER. IT IS ACCORDINGLY ORDERED that the bankruptcy courts Memorandum Opinion and Order Granting Plaintiffs Motion for Summary Judgment and Denying Defendants Motion for Summary Judgment (Doc. 1-1) and corresponding Judgment (Doc. 1-3) are REVERSED AND REMANDED. Signed by District Judge Eric F. Melgren on 4/11/2013. (aa)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF KANSAS

THOMAS SCOTT JENKINS,
Appellant,
vs.
Case No. 11-CV-2667-EFM
IBD, INC.,
Appellee.

MEMORANDUM AND ORDER
In this bankruptcy appeal, appellant and adversary defendant Thomas Scott Jenkins
(“Jenkins”) seeks review of the bankruptcy court’s order denying his motion for summary
judgment and granting summary judgment to appellee and adversary plaintiff, IBD, Inc. (“IBD”).
For the reasons set forth below, the bankruptcy court’s order is reversed and the matter is
remanded to the bankruptcy court for determination of issues described herein.

I.

Factual and Procedural Background1

A. Jenkins’ Departure from IBD
IBD is a Kansas corporation that provides customized software and computer
programming services, primarily to clients in the agricultural industry. Jenkins formerly served
as the company’s chief executive officer and sat on IBD’s board of directors. In its early
operations, IBD expended significant resources to develop its central software product known as
Agrifusion. This Agrifusion software enabled IBD to enter into contracts with approximately
forty customers.
In April 2001, IBD began to experience financial difficulties. As IBD’s chief executive
officer, Jenkins was charged with finding new investors or purchasers of IBD assets to pay the
company’s debts. Jenkins traveled around the country to attend investment conferences but
ultimately failed to secure a purchaser for IBD. When efforts to find investors and purchasers
failed, Jenkins and other IBD employees began to discuss forming a new company called
Enterprise Business Solutions, LLC (“EBS”), which would retain IBD’s customers.

On

September 28, 2001, Jenkins resigned as IBD’s chief executive officer. At this time, Jenkins did
not disclose his plans to form a new company to IBD’s remaining board member.
In October 2001, Jenkins directed former IBD employees to copy IBD’s servers and to
transfer the information to EBS’s servers. Jenkins then directed that IBD’s servers be wiped to
ensure that no software products remained with IBD. EBS did not pay IBD for its software.
Shortly thereafter, EBS informed IBD customers that they were obligated to complete the
balance of their contracts with EBS or pay an early termination fee. Some of IBD’s customers

1

In accordance with the procedures for summary judgment, the facts set forth herein are uncontroverted for
the purposes of the present motions before the Court. If controverted, the facts are related in the light most
favorable to the party opposing summary judgment.

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decided to terminate their contract and paid the termination fee to EBS. EBS continued to serve
most of the customers previously served by Plaintiff. EBS represented to IBD’s customers that it
was the same company as IBD operating under a new name. However, EBS told IBD’s creditors
that it was a different company that did not assume or pay any of IBD’s debts or obligations.
B.

State-Court Trial and Appeal
On June 17, 2004, IBD filed an action against both Jenkins and EBS in the District Court

for Johnson County, Kansas, alleging conversion of its software, intellectual property, customer
lists, customer contacts, goodwill, domain name, and telephone number. IBD also asserted a
claim against Jenkins alleging breach of fiduciary duty as officer and director of IBD. Following
a trial in January 2006, a jury found Jenkins and EBS liable for conversion and awarded IBD
$508,288.00 in damages. The jury also found Jenkins liable for breach of fiduciary duty and
awarded IBD $400,000.00 in damages. Finally, the jury found punitive damages appropriate,
and at an evidentiary hearing on April 12, 2006, the trial court awarded IBD punitive damages in
the amount of $162,623.00.
Jenkins appealed, arguing that the trial court’s jury instructions failed to adequately
apprise the jury of controlling Kansas law and that the trial court permitted an improper damage
award. The Kansas Court of Appeals ultimately affirmed the trial court’s judgments and damage
awards.2 Since that time, Jenkins paid IBD approximately $415,086.02 in partial satisfaction of
the judgments.
C.

Bankruptcy Proceedings
On June 21, 2010, Jenkins filed for Chapter 7 bankruptcy protection. At the time of

bankruptcy filing, Jenkins owed IBD approximately $575,000.00.

IBD filed an adversary

2

IBD, Inc. v. Enter. Bus. Solutions, LLC, 2009 WL 929072, *15 (Kan. Ct. App. 2009).

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complaint in the bankruptcy proceeding, seeking a determination that Jenkins’s judgments were
non-dischargeable.

IBD filed a motion for summary judgment, arguing that 11 U.S.C. §

523(a)(4) and (a)(6) precluded discharge of Jenkins’s indebtedness to IBD. Jenkins contested
IBD’s motion and filed his own cross-motion for partial summary judgment, arguing that 11
U.S.C § 523(a)(4) does not preclude discharge because no express or technical trust existed
between Jenkins and IBD.

On November 21, 2011, the bankruptcy court issued its

Memorandum Opinion and Order (“Bankruptcy Order”) (Doc. 1-1), granting IBD’s motion for
summary judgment and denying Jenkins’s motion.
II.

Standards

A. Review of Bankruptcy Court Orders
In reviewing a bankruptcy court’s decision, this Court functions as an appellate court and
is authorized to affirm, reverse, modify, or remand the bankruptcy court’s ruling.3 “Legal
decisions of the bankruptcy court are reviewed de novo and factual findings are reviewed for
clear error.”4 “A finding of fact is clearly erroneous if it is without factual support in the record
or if, after reviewing all of the evidence, the court is left with the definite and firm conviction
that a mistake has been made.”5 If the bankruptcy court’s account of the evidence is plausible in
light of the record viewed in its entirety, the district court may not reverse it even though it may

3

28 U.S.C. § 158(a); Fed. R. Bankr. P. 8013.

4

Id.

5

In re Yellow Cab Co-op. Ass’n, 132 F.3d 591, 597 (10th Cir. 1997) (quoting In re Peterson Distrib., Inc.,
82 F.3d 956, 959 (10th Cir.1996)).

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have weighed the evidence differently.6 “Where there are two permissible views of the evidence,
the fact finder’s choice between them cannot be clearly erroneous.”7
B. Summary Judgment
Pursuant to Federal Rule of Bankruptcy Procedure 7056, Federal Rule of Civil Procedure
56 governs summary judgment in adversary proceedings.8 The summary judgment standard in
bankruptcy court is therefore identical to the familiar summary judgment standard in the district
court.9 Summary judgment is appropriate if the moving party demonstrates that “there is no
genuine dispute as to any material fact” and that it is “entitled to judgment as a matter of law.”10
“An issue of fact is ‘genuine’ if the evidence allows a reasonable jury to resolve the issue either
way.”11 A fact is “material” when “it is essential to the proper disposition of the claim.”12 The
Court views the evidence and all reasonable inferences in the light most favorable to the party
opposing the motion for summary judgment under consideration.13
The moving party bears the initial burden of demonstrating the absence of a genuine issue
of material fact.14 In attempting to meet this standard, the moving party need not disprove the
nonmoving party’s claim; rather, the movant must simply point out the lack of evidence on an

6

In re Blinder, Robinson & Co., 124 F.3d 1238, 1241 (10th Cir.1997).

7

In re Farmers Coop. Ass’n, 2006 WL 950189, *3 (D. Kan. April 7, 2006).

8

Fed. R. Bankr. P. 7056.

9

In re Slamans, 69 F.3d 468, 476 (10th Cir. 1995).

10

11

Haynes v. Level 3 Commc’ns, LLC, 456 F.3d 1215, 1219 (10th Cir. 2006).

12

Id.

13

LifeWise Master Funding v. Telebank, 374 F.3d 917, 927 (10th Cir. 2004).

14

Fed. R. Civ. P. 56(a).

Thom v. Bristol-Myers Squibb Co., 353 F.3d 848, 851 (10th Cir. 2003).

‐5‐

essential element of the nonmoving party’s claim.15 If the moving party carries its initial burden,
the party opposing summary judgment cannot rest on the pleadings but must bring forth “specific
facts showing a genuine issue for trial.”16 The opposing party must “set forth specific facts that
would be admissible in evidence in the event of trial from which a rational trier of fact could find
for the nonmovant.”17

“To accomplish this, the facts must be identified by reference to

affidavits, deposition transcripts, or specific exhibits incorporated therein.”18

Conclusory

allegations alone are insufficient to defeat a properly supported motion for summary judgment.19
The nonmovant’s “evidence, including testimony, must be based on more than mere speculation,
conjecture, or surmise.”20
Though the parties in this case filed cross-motions for summary judgment, the legal
standard remains the same.21 Each party retains the burden of establishing the lack of a genuine
issue of material fact and entitlement to judgment as a matter of law.22 Each motion will be
considered separately.23 “To the extent the cross-motions overlap, however, the court may
address the legal arguments together.”24

Finally, summary judgment is not a “disfavored

15

Id.

16

Garrison v. Gambro, Inc., 428 F.3d 933, 935 (10th Cir. 2005).

17

Mitchell v. City of Moore, Okla., 218 F.3d 1190, 1197 (10th Cir. 2000) (citing Adler v. Wal-Mart Stores,
Inc., 144 F.3d 664, 670 (10th Cir. 1998)).
18

Adler, 144 F.3d at 671.

19

White v. York Int’l Corp., 45 F.3d 357, 363 (10th Cir. 1995).

20

Bones v. Honeywell Int’l, Inc., 366 F.3d 869, 875 (10th Cir. 2004).

21

City of Shawnee v. Argonaut Ins. Co., 546 F. Supp. 2d 1163, 1172 (D. Kan. 2008).

22

United Wats, Inc. v. Cincinnati Ins. Co., 971 F. Supp. 1375, 1381-82 (D. Kan. 1997) (citing Houghton v.
Foremost Fin. Servs. Corp., 724 F.2d 112, 114 (10th Cir.1983)).
23
24

Atl. Richfield Co. v. Farm Credit Bank of Wichita, 226 F.3d 1138, 1148 (10th Cir. 2000).
Berges v. Standard Ins. Co., 704 F. Supp. 2d 1149, 1155 (D. Kan. 2010).

‐6‐

procedural shortcut,” but it is an important procedure “designed to secure the just, speedy and
inexpensive determination of every action.”25
III.

Analysis

Exceptions to discharge under 11 U.S.C. § 523 are narrowly construed with deference
given to the fresh-start policy that underlies the Bankruptcy Code.26 As the party opposing
Jenkins’s discharge, IBD carries the burden of proving the applicability of a discharge exception
by a preponderance of the evidence.27
A. IBD Has Failed to Establish “Fiduciary Capacity” Under 11 U.S.C. § 523(a)(4)
1. “Fiduciary Capacity” Requires an Express or Technical Trust
Jenkins argues that the bankruptcy court erred as a matter of law when it ruled that IBD’s
judgment for breach of fiduciary duty is non-dischargeable pursuant to 11 U.S.C. § 523(a)(4).
Section 523(a)(4) excepts from discharge “any debt . . . for fraud or defalcation while acting in a
fiduciary capacity . . . .”28 “Although the question of fiduciary status under this provision is one
of federal law, state law is an important factor in determining when a trust relationship exists.”29
Kansas law clearly imposes a general fiduciary duty upon corporate directors and officers to act
in the best interests of the corporation.30
Jenkins does not dispute whether corporate officers and directors owe a general fiduciary
duty to their corporation under Kansas law. Rather, Jenkins argues that general fiduciary duty

25

26

In re Sweeney, 341 B.R. 35, 40 (B.A.P. 10th Cir. 2006).

27

Id.

28

11 U.S.C. § 523(a)(4).

29

In re Karr, 442 B.R. 785, 801 (Bankr. D. Kan. 2011).

30

Celotex Corp. v. Catrett, 477 U.S. 317, 327 (1986) (quoting Fed. R. Civ. P. 1).

See, e.g., Becker v. Knoll, 239 P.3d 830, 834 (Kan. 2010).

‐7‐

under state law is insufficient to establish fiduciary capacity under § 523(a)(4). Indeed, “[t]he
general definition of fiduciary—a relationship involving confidence, trust and good faith—has
been found to be too broad in the dischargeability context.”31 “[T]he mere fact that state law
places two parties in a relationship that may have some of the characteristics of a fiduciary
relationship does not necessarily mean that the relationship is a fiduciary relationship under 11
U.S.C. § 523(a)(4), which requires the existence of express or technical trust.”32 Accordingly,
while the Bankruptcy Order points to numerous cases holding that officers and directors are
fiduciaries of their corporations under Kansas law, those cases do nothing to unilaterally
establish fiduciary capacity under § 523(a)(4).
The Tenth Circuit has “limited the term ‘fiduciary capacity,’ as it is used in the statute, to
include only those types of relationships arising out of a pre-existing express or technical trust
and not those which the law implies from a contract.”33 “The fact that the [d]ebtor may have
owed some sort of general fiduciary duty to his corporation . . . is insufficient to establish the
type of fiduciary duty that is required in the Tenth Circuit for dischargeability issues under §
523(a)(4).”34

Courts in this circuit have found numerous general fiduciary relationships

insufficient to establish “fiduciary capacity” under § 523(a)(4) in the absence of an express or
technical trust: attorney and client,35 corporate director and minority stockholder,36 and

31

In re Goseland, 114 B.R. 263, 268 (D. Kan. 1990) (citing In re Angelle, 610 F.2d 1335, 1338–39 (5th
Cir. 1980)).
32

4 Collier on Bankruptcy, ¶ 523.10(1)(d) (Resnick & Sommer, eds., 15th ed. 2004) (citing In re Regan,
477 F.3d 1209 (10th Cir. 2007)).
33

Id. (citing In re Romero, 535 F.2d 618, 621 (10th Cir.1976)); see also, In re Young, 91 F.3d 1367, 137173 (10th Cir. 1996) (holding that an attorney-client relationship is alone insufficient to demonstrate fiduciary
capacity in the absence of an express or technical trust); In re Seay, 215 B.R. 780, 785-87 (B.A.P. 10th Cir. 1997);
In re Storie, 216 B.R. 283, 286-90 (B.A.P. 10th Cir. 1997).
34

In re Utterback, 2004 WL 2357761, *7 (Bankr. D. Kan. Mar. 3, 2004).

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partnership.37

More specifically, courts have applied the Tenth Circuit rule to find that a

corporate officer and director lacks fiduciary capacity under § 523(a)(4) when his corporation
failed to establish an express or technical trust.38
In this case, the Bankruptcy Order recognized the Tenth Circuit rule that fiduciary
capacity under § 523(a)(4) requires an express or technical trust, but held that the trust
requirement does not apply when the subject relationship involves a corporation and its officers.
In support of this proposition, the bankruptcy court and IBD relied heavily upon this district’s
bankruptcy opinion, In re Karr.39 In Karr, the District Court of Johnson County, Kansas, entered
a final judgment against John William Karr (“Karr”) for committing fraud while acting as a
corporate director and officer.40

When Karr subsequently sought Chapter 7 bankruptcy

protection, the bankruptcy trustee initiated an adversary action and filed a motion for summary
judgment, alleging that the state-court judgment was non-dischargeable under § 523(a)(4).41 The
bankruptcy court granted the trustee’s motion for summary judgment and expressly “reject[ed]
Karr’s further argument that a § 523(a)(4) fiduciary relationship exists only when there is an
express or technical trust . . . .”42

35

Young, 91 F.3d at 1371-73.

36

In re Stevens, 2007 WL 412824, **3-4 (Bankr. D. Kan. Feb. 1, 2007) (citing In re Steele, 292 B.R. 422
(Bankr. D. Colo. 2003).
37

38

In re Green, 386 B.R. 865, 870-71 (Bankr. D.N.M. 2008).

39

442 B.R. 785 (2011).

40

Karr, 442 B.R. at 790.

41

Id. at 804.

42

In re Hatley, 227 B.R. 757, 760-61 (B.A.P. 10th Cir. 1998) (partners); Seay, 215 B.R. at 785-87.

Id. at 802.

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The Karr opinion cites to non-binding and generic treatise materials for the propositions
that “for purposes of § 523(a)(4), the relationship of a corporate officer to the corporation
commonly imposes a fiduciary relationship,”43 and the “[n]ondischargeable liability of corporate
officers to the corporation . . . is well established.”44 These statements stand in stark contrast to
the Tenth Circuit’s plain holdings that affirmatively require evidence of an express or technical
trust. In that respect, Karr misstates the Tenth Circuit rule that universally requires evidence of
an express or technical trust in order to establish fiduciary capacity under § 523(a)(4).
Karr and its progeny, particularly In re Markley,45 also carve out an exception to the
Tenth Circuit rule. Karr and Markley held that the “rule requiring an express or technical trust
does not apply when a corporation, rather than a corporate creditor or individual shareholder,
objects to the discharge of a corporate officer’s debt to it.”46 To support this proposition, those
decisions cited a footnote in In re Cowley,47 which does not support the proposed exception.48
Further, neither of those decisions provide any rationale for distinguishing a corporate officer or
director’s relationship with a corporation from his relationship with corporate creditors or
shareholders.

43

Id. at 801-03 (citing Leah A. Kahl and Peter C. Ismay, Exceptions to Discharge for Fiduciary Fraud,
Larceny, and Embezzlement, 7 J. Bankr. L. & Prac. 119, 122 (1998)).
44

Id. at 801 (citing 3 Norton Bankr. L. & Prac. ¶ 57:27 at p. 57–80 (3d ed., Thompson Reuters 2010)).

45

460 B.R. 793 (Bankr. D. Kan. 2011).

46

Karr, 442 B.R. at 802-03 (distinguishing a corporate officer’s relationship to a corporation from such
officer’s relationship to minority shareholders or corporate creditors); See In re Markley, 460 B.R. 793, 799 (Bankr.
D. Kan. 2011) (citing Karr, 442 B.R. at 802-03).
47

35 B.R. 526 (Bankr. D. Kan. 1983).

48

In support of its proposition creating an exception to the Tenth Circuit rule, the Karr court cited In re
Cowley, 35 B.R. at 529, n. 1. That footnote provides, “A corporate officer may not be a fiduciary of the
corporation’s creditors absent a statutory, technical or express trust.” In re Cowley, 35 B.R. at 529, n. 1. (citing
Romero, 535 F.2d at 618). Obviously, this footnote contradicts, and does not support, the Karr court’s proposed
exception.

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Since Karr and Markley were decided, this district’s Chief Bankruptcy Judge, Robert E.
Nugent, issued an opinion expressly recognizing that the proposed corporate plaintiff exception
stands in contrast with the Tenth Circuit rule requiring an express or technical trust.49 Because
the Court finds no support for the proposed exception to the general Tenth Circuit rule, the Court
declines to follow Karr and its progeny by allowing such an exception here. The Court therefore
finds that the bankruptcy court in this case erred in applying the exception.
2. IBD Failed to Demonstrate the Existence of an Express or Technical Trust
The relationship between Jenkins and IBD is subject to the Tenth Circuit rule, which
requires an express or technical trust to establish fiduciary capacity under § 523(a)(4). “Under
Kansas law, the elements necessary to create an express trust are: (1) an explicit declaration and
intention to create a trust; (2) the transfer of lawful and definite property made by a person
capable of making transfer thereof; and (3) a requirement to hold the property as trustee for the
benefit of a cestui que trust with directions as to the manner in which the trust funds are to be
applied.”50 IBD does not allege that the parties entered into a formal or express trust agreement,
but instead argues that Jenkins’s obligations arose by virtue of his status as an officer and
director.

However, the Kansas Supreme Court has held that the relationship between a

corporation and its officers or directors does not give rise to an express trust.51 Consequently,
any trust relationship between Jenkins and IBD must be technical in nature.

49

In re Bratt, 2013 WL 1337259, *9 (Bankr. D. Kan. Mar. 28, 2013).

50

In re Foy, 2010 WL 2584193, *3 (Bankr. D. Kan. June 21, 2010) (citing Jennings v. Jennings, 211 Kan.
515, Syl. ¶ 4, 507 P.2d 241 (1973)).
51

Guilfoyle v. Brown, 88 P.2d 1082, 1085 (Kan. 1939) (“Even if the relation between a corporation and its
officers is that of trustee and cestui que trust, the trust is not an ‘express' trust . . . .”); Miami Ocean View Co. v.
Phillips, 19 P.2d 690, 692 (Kan. 1933).

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A technical trust differs from an express trust in that the intention of the parties is not
relevant,52 and the parties’ fiduciary obligations are imposed by law, not implied by law.53
Technical trusts may arise under common law or statute.54 With regard to the common law,
numerous Kansas cases contemplate a fiduciary relationship between a corporation and its
officers or directors.55 The question, however, is whether Kansas law merely imposes a general
fiduciary duty of confidence and good faith or whether such duty gives rise to a common-law
technical trust for the purposes of § 523(a)(4).56 While several cases refer to corporate officers
and directors as “trustees,”57 this conclusion “is rhetorically sound, but technically inexact.”58 “It
is a statement often found in opinions, but is true only to a limited extent.”59 Corporate officers
and directors “more nearly represent the managing partners in a business firm than a technical
trustee. At most, they are implied trustees . . . .”60 Because the fiduciary obligations of
corporate officers and directors is implied by law and not imposed by law, the Court finds that
Jenkins’s status as an officer and director did not give rise to a common-law technical trust.
The Court must therefore determine whether any statutory provision gave rise to a
technical trust between the parties. To demonstrate a technical trust sufficient to invoke §

52

Romero, 535 F.2d at 621–22; Steele, 292 B.R. at 427 (citing In re Turner, 134 B.R. 646, 649 (Bankr.
N.D. Okla. 1991)).
53

Steele, 292 B.R. at 427-28 (citing Romero, 535 F.2d at 621-22).

54

55

See, e.g., Becker, 239 P.3d at 834.

56

See Steele, 292 B.R. at 427 (distinguishing general fiduciary duty from a technical trust).

57

See, e.g., Stewart v. Harris, 77 P. 277, 279-80 (Kan. 1904).

58

Guilfoyle, 88 P.2d at 1085.

59

Id.

60

Id.

Id. (emphasis added).

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523(a)(4), IBD must establish three elements. “Those elements are: (1) that the trust res must be
defined by the statute; (2) that the statute must spell out the fiduciary duty; and (3) that the
statute must impose a trust on funds prior to the act creating the debt.”61 IBD does not point to
any authority in the Kansas corporation statutes, and the Court finds no such provision, that
imposes a fiduciary duty on officers or directors of a corporation that rises to the level of a
technical trust under § 523(a)(4). Indeed, federal courts have evaluated the corporation statutes
of numerous states and held those provisions insufficient to create a technical trust necessary to
establish non-dischargeability under § 523(a)(4).62 Accordingly, the Court finds that Jenkins was
not subject to a statutory technical trust. Because IBD has failed to demonstrate an express or
technical trust, the Court finds that the bankruptcy court erred in holding that Jenkins’s general
fiduciary duties gave rise to fiduciary capacity under § 523(a)(4). Further, because an issue fact
remains regarding whether such an express or technical trust existed for the purposes of
dischargeability, the Court remands this case to the bankruptcy court for determination.63
B. The Bankruptcy Court Erred in Applying the Doctrine of Collateral Estoppel
Jenkins asserts that the bankruptcy court erred in applying the doctrine of collateral
estoppel to hold that the state-court findings sufficiently supported the exceptions to discharge
under § 523(a)(4) and (a)(6). As a matter of law, collateral estoppel may apply in § 523 actions

61

Medved v. Novak (In re Novak), 97 B.R. 47, 59 (Bankr. D. Kan. 1987).

62

Steele, 292 B.R. at 428-30; In re Tway, 161 B.R. 274, 281 (Bankr. W.D. Okla. 1993) (“[T]he Oklahoma
General Corporation Act does not impose any express statutory fiduciary duties on directors of a corporation.”); In
re Sadler, 2007 WL 4199598, *2 n. 1 (Bankr. N.D. Fla. Nov. 26, 2007) (“[T]here is no Florida statute that
establishes a trust to meet the bankruptcy’s standard of fiduciary capacity for a corporate director or officer, and
there is no express trust between the parties that is evidenced in the record.”); In re Hill, 390 B.R. 407, 412 (B.A.P.
10th Cir. 2008) (holding that the Oklahoma corporation code “does not sufficiently and explicitly create a trust or
define a trust res that would satisfy the Tenth Circuit’s statutory trust requirements.”).
63

See In re Green, 281 B.R. 699, 705 (D. Kan. 2002) (remanding case to bankruptcy court for factual
determination).

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to determine the dischargeability of a debt.64 To determine the applicability and effect of
collateral estoppel, federal courts look to the law of the state in which judgment was rendered.65
Under Kansas law, a party is collaterally estopped from re-litigating facts that have been
comprehensively litigated, finally adjudicated, and resulted in a state-court judgment.66
Collateral estoppel applies when: (1) the issue previously decided is identical with the
one presented in the action in question, (2) the prior action has been finally adjudicated on the
merits, (3) the party against whom the doctrine is invoked was a party to the prior adjudication,
and (4) the party against whom the doctrine is raised had a full and fair opportunity to litigate the
issue in the prior action.67 If a state court adjudicates a question and determines factual issues
using standards identical to those of §523, collateral estoppel operates to preclude relitigation of
those issues in the bankruptcy court.68 The party seeking to invoke collateral estoppel must show
that the same operative facts formed the basis for both the state-law action and the
dischargeability complaint.69
1. IBD’s Judgment for Breach of Fiduciary Duty
Jenkins does not dispute that he was a party to the state-court litigation, that he had a full
and fair opportunity to litigate issues before the state courts, or that the state courts entered and
affirmed a final judgment on IBD’s claim for breach of fiduciary duty. Rather, Jenkins disputes
the identity of issues presented to the state and bankruptcy courts. More specifically, Jenkins

64

Grogan v. Garner, 498 U.S. 279, 284 (1991).

65

Marrese v. American Acad. Of Orthopaedic Surgeons, 470 U.S. 373, 379-80 (1985).
KPERS v. Reimer & Koger Assocs., Inc., 941 P.2d 1321, 1344 (Kan. 1997).

66

67

In re Klippel, 183 B.R. 252, 258 (Bankr. D. Kan. 1995) (citing In re Lombard, 739 F.2d 499, 502 (10th
Cir. 1984)); Williams v. Evans, 552 P.2d 876, 878 (Kan. 1976).
68

69

Klippel, 183 B.R. at 259 (citing Brown v. Felsen, 442 U.S. 127, 139 n. 10 (1979)).
In re McCarthy, 350 B.R. 820, 834 (Bankr. N.D. Ind. 2006).

‐14‐

asserts that the state-court jury verdict and judgment contemplated his general “fiduciary duty”
under state law, but failed to determine whether Jenkins’s relationship to IBD constituted
“fiduciary capacity” required to establish the discharge exception under § 523(a)(4). The Court
agrees.
Section 523(a)(4) excepts from discharge “any debt . . . for fraud or defalcation while
acting in a fiduciary capacity . . . .”70 The bankruptcy code does not define “fiduciary capacity,”
but its definition is a matter of federal, not state, law.71 As stated above, the Tenth Circuit
requires the existence of an express or technical trust to establish fiduciary capacity under §
523(a)(4).72 Not every fiduciary relationship recognized under state law rises to the level of
fiduciary capacity for the purpose of dischargeability.73
In this case, the state-court judgment for breach of fiduciary duty rests upon the following
instruction that the trial court issued to the jury:
The Plaintiff contends that a fiduciary relationship existed between IBD, Inc., and
Scott Jenkins, the Defendant. The term “fiduciary relationship” refers to any
relationship of blood, business, friendship or association in which one of the
parties places special trust and confidence in the other. It exists in cases where
there has been a special confidence placed in one who, in equity and good
conscience, is bound to act in good faith and with due regard to the interest of the
one placing the confidence.74

70

71

Klippel, 183 B.R. at 259.

72

Young, 91 F.3d at 1371-73.

73

See id.

74

11 U.S.C. § 523(a)(4) (emphasis added).

Jury Instruction No. 17, Doc. 3-3, at 77.

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This “general definition of fiduciary—a relationship involving confidence, trust and good faith—
is too broad in the dischargeability context.”75

The record does not reveal any specific

instruction or evidence directly related to the existence of an express or technical trust. Because
the standards and evidence related to IBD’s state-law claim for breach of fiduciary duty differ
from the narrower standards and evidence necessary to establish an express or technical trust
required to establish fiduciary capacity under § 523(a)(4), the Court finds that the issue
previously decided is not identical to the one presently before the Court. For this reason, the
Court finds that the bankruptcy court erred in applying collateral estoppel and remands the case
to the bankruptcy court for determination regarding Jenkins’s fiduciary capacity.
2. IBD’s Judgment for Punitive Damages
Jenkins next argues that the bankruptcy court erred in applying collateral estoppel to
preclude litigation concerning whether he caused “willful and malicious injury” to IBD under §
523(a)(6). Section 523(a)(6) excepts from discharge “any debt . . . for willful and malicious
injury by the debtor to another entity or to the property of another entity.”76 “The word ‘willful’
in (a)(6) modifies the word ‘injury,’ indicating that nondischargeability takes a deliberate or
intentional injury, not merely a deliberate or intentional act that leads to injury.”77 “The focus of
the ‘malicious’ inquiry is on the debtor’s actual knowledge or the reasonable foreseeability that
his conduct will result in injury to the creditor, not on abstract and perhaps moralistic notions of
the ‘wrongfulness’ of the debtor’s act.”78 “Under § 523(a)(6), the debtor’s malicious intent can

75

Klippel, 183 B.R. at 259 (citing In re Weiner, 95 B.R. 204, 206 (Bankr.D.Kan.1989)).

76

11 U.S.C. § 523(a)(6).

77

Kawaahau v. Geiger, 523 U.S. 57, 61 (1998) (emphasis in original); Farmers Ins. Group v. Compos (In
re Compos), 768 F.2d 1155, 1158 (10th Cir.1985) (holding that § 523(a)(6) “does not except from discharge
intentional acts which cause injury; it requires instead an intentional or deliberate injury”).

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be shown in two ways.”79 First, [i]n the rare instances in which there is direct evidence that the
debtor’s conduct was taken with the specific intent to harm the creditor, the malice requirement
is easily established.”80 Second, and “[m]ore commonly, however, malicious intent must be
demonstrated by evidence that the debtor had knowledge of the creditor’s rights and that, with
that knowledge, proceeded to take action in violation of those rights.”81 To establish whether
collateral estoppel applies in an adversary action regarding dischargeability, courts look to the
jury instructions given in prior litigation.82
In this case, the jury found that punitive damages were appropriate upon the following
instruction:
In this case the plaintiff claims that defendant acted in a willful, fraudulent, or in a
malicious manner toward Plaintiff. If you award the plaintiff actual damages,
then you may consider whether punitive damages should be allowed. Punitive
damages may be allowed in the jury’s discretion to punish a defendant and to
deter others from like conduct.
....
If you find the defendant did one or more of the acts claimed by the plaintiff you
should then determine whether clear and convincing evidence has been presented
that the defendant acted in a willful, fraudulent, or in a malicious manner. If you
determine punitive damages should be allowed, your finding should be entered in
the verdict form. . . . .83
The trial court also issued jury instructions defining the words, “willful,” “fraudulent,” and
“malice.” “An act performed with a designed purpose or intent on the part of a person to do

78

In re Reid, 149 B.R. 669, 672 (Bankr. D. Kan. 1992) (quoting In re Posta, 866 F.2d 364-367 (10th Cir.

79

Posta, 866 F.2d at 367.

80

Id.

81

Id.

1989)).

82

See In re Duvall, 2009 WL 3367092, *5 (Bankr. D. Colo. Oct. 9, 2009) (reviewing jury instructions to
determine applicability of collateral estoppel in an adversary action).
83

Jury Instruction No. 18, Doc. 3-3, at 78.

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wrong or to cause an injury to another is a willful act.”84 “An act performed to intentionally
suppress or conceal a material fact for the purpose of inducing another in reliance upon it is a
fraudulent act.”85 “Malice is a state of mind characterized by an intent to do a harmful act
without a reasonable justification or excuse.”86 Upon these instructions, the jury found that IBD
was entitled to punitive damages. To arrive at this finding, the jury must have implicitly found
that clear and convincing evidence showed that Jenkins “acted in a willful, fraudulent, or in a
malicious manner.”87
Jenkins argues that collateral estoppel is inapplicable because the disjunctive jury
instruction requiring “willful, fraudulent, or malicious”88 conduct meaningfully differs from the
conjunctive finding of “willful and malicious”89 conduct necessary under § 523(a)(6).
According to Jenkins, the disjunctive posture of the instruction permitted the jury to award
punitive damages without finding both willful and malicious conduct.

The Court agrees.

Indeed, the trial court’s jury instructions define the words “willful” and “malice” to require intent
to cause harm or injury, the same standard required to find “willful and malicious” conduct under
Section 523(a)(6). However, the trial court’s disjunctive jury instruction also permitted the jury
to award punitive damages upon a finding of fraudulent conduct alone. The jury instruction
defining “fraudulent” conduct does not require intent to cause harm or injury, but only requires
intent to suppress or conceal a material fact. Therefore, the disjunctive nature of the jury

84

85

Jury Instruction No. 19, Doc. 3-3, at 79.

86

Jury Instruction No. 21, Doc. 3-3, at 81.

87

Jury Instruction No. 18, Doc. 3-3, at 78.

88

Jury Instruction No. 18, Doc. 3-3, at 78 (emphasis added).

89

Jury Instruction No. 20, Doc. 3-3, at 80.

11 U.S.C. § 523(a)(6) (emphasis added).

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instruction permitted the jury to award damages without finding the injurious intent necessary to
support “willful and malicious” conduct under § 523(a)(6).
Numerous courts have refused to apply collateral estoppel to a state-court judgment based
upon a disjunctive jury instruction including one or more alternatives that deviate from the
standards required under Section 523(a)(6).90 In this situation, the disjunctive language of jury
instructions or state-court judgments is not trivial; it “is fatally problematic.”91 Because the
Court cannot conclusively conclude that the jury verdict and state-court judgments contemplated
standards identical to those required under § 523(a)(6), application of collateral estoppel is
inappropriate. Accordingly, the Court finds that the bankruptcy court erred in applying collateral
estoppel and remands this case to the bankruptcy court for determination regarding to Jenkins’s
alleged conduct was “willful and malicious” for the purpose of dischargeability.
C. Compliance with Local Bankruptcy Rule 7056.1
Finally, Jenkins argues that the bankruptcy court erred in considering and granting IBD’s
motion for summary judgment because its motion was not supported by factual materials
required under Local Bankruptcy Rule 7056.1. Because the Court reverses the bankruptcy
court’s order granting IBD’s motion for summary judgment, this matter is rendered moot and the
Court need not reach the issue.

90

In re Martin, 130 B.R. 930, 946 (Bankr. N.D. Ill. 1991) (refusing to apply collateral estoppel because
“the jury instructions allowed the jury to award punitive damages even in the absence of a finding of malice or
willfulness on the part of Debtor.”); In re Schwenn, 44 B.R. 746, 749 (Bankr. E.D. Wis. 1984); In re Gray, 2011 WL
4503078, *10 (B.A.P. 9th Cir. July 7, 2011) (“[T]he disjunctive language in the Jury Instructions and the State Court
Judgment is fatally problematic.”); In re Loader, 417 B.R. 604, 612 (Bankr. D. Idaho 2009); In re Pierron, 448 B.R.
228, 237 (Bankr. S.D. Ohio 2011); In re Bachinski, 393 B.R. 522, 534 (Bankr. S.D. Ohio 2008) (“A judgment does
not have issue-preclusive effect if it makes several findings of fact or conclusions of law in the disjunctive and at
least one of the alternative findings is insufficient to support a nondischargeability judgment.”); In re Eastburg, 440
B.R. 864, 876 (Bankr. D.N.M. 2010)
91

In re Gray, 2011 WL 4503078, *10 (B.A.P. 9th Cir. July 7, 2011).

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IT IS ACCORDINGLY ORDERED that the bankruptcy court’s Memorandum Opinion
and Order Granting Plaintiff’s Motion for Summary Judgment and Denying Defendant’s Motion
for Summary Judgment (Doc. 1-1) and corresponding Judgment (Doc. 1-3) are REVERSED
AND REMANDED.
IT IS SO ORDERED.
Dated this 11th day of April, 2013.

ERIC F. MELGREN
UNITED STATES DISTRICT JUDGE

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