Summary of a Recent
Judicial
Development in
Bankruptcy
Defalcation Results in Exemption from Discharge
to the Extent of the Creditor's Loss
Walt McCarterNational AgLaw Center Research Associate
Summary of Decision
In AG Acceptance Corp. v. Kirby (In re Kirby), Case No. 03-16858, Adv. No. 04-5080, 2005 Bankr. LEXIS 1475 (Bankr. D. Kan. July 29, 2005), the United States Bankruptcy Court for the District of Kansas held that a Chapter 12 debtor's defalcation excepted the debt from discharge only to the extent that the defalcation resulted in a loss to the plaintiff.
Background
Debtor filed a Chapter 12 case in 1995 and was granted discharge in 2003 of all debts incurred prior to his filing. Id. at *2-3. In 2002, the debtor secured further financing from AG Acceptance Corporation, using his crops as collateral, and subsequently sold some of those crops to pay operating expenses. Id. at 4-5. Rabo Agservices, on behalf of AG Acceptance Corp., filed a complaint to determine discharge pursuant to 11 U.S.C.A. § 523(a)(4), alleging that the debtor converted collateral securing the debt. Id. at *1-2.
Arguments
Plaintiff argued that all of the elements to deny a discharge of its claim pursuant to subsection 523(a)(4) were present, and contended that the debtor, as debtor-in-possession in his 1995 case, was serving in a fiduciary capacity when he committed a defalcation by converting the collateral. Id. at *7.
Debtor conceded that the elements for denial of discharge under subsection 523(a)(4) were present, but argued that only the part of the claim that was directly traceable to the defalcation should be excepted from discharge. Id. at *7.
Analysis and Holdings
Under Subsection 523(a)(4), two elements were required to prevent discharge of the debt: a fiduciary relationship between the debtor and AgServices, and fraud or defalcation committed by the debtor in the course of that fiduciary relationship. Id. at *8. The debtor admitted and the court agreed that the elements were satisfied. Id. at *10. The debtor contended, however, that only the amount of the loss to the plaintiff which was sustained as a result of defalcation should be excepted from discharge. Id. at *11. The court held that "the extent of nondischargeability is determined by the amount of the loss caused by the defalcation while acting in a fiduciary capacity." Id. at *11-12. Therefore the court excepted the debtor's obligation from discharge only to the extent that his defalcation while serving in a fiduciary capacity as debtor-in-possession in his prior Chapter 12 proceeding resulted in a loss to the plaintiff. Id. at *14.
The case was decided on July 29, 2005.