Centra Bank, Inc. et al v. Burton

IN THE UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF WEST VIRGINIA
IN RE: 	)
)
DENNIS BURTON, 	)
)
Debtor. 	) 	Case No. 08-01403
___________________________________ 	)
)
CENTRA BANK, INC. 	)
and MILAN PUSKAR, 	)
)
Plaintiffs, 	)
)
v. 	) 	Adv. Proc. No. 09-00034
)
DENNIS M. BURTON, 	)
)
Defendant. 	)
____________________________________ 	)
MEMORANDUM OPINION
Centrua Bank, Inc. and Milan Puskar filed a three-count adversary complaint against
Dennis M. Burton (the “Debtor”) to except debts from the Debtor’s discharge under 11 U.S.C. §
523(a)(4) on grounds of defalcation. 	The Debtor seeks to dismiss all counts of the adversary
complaint on the grounds that the Bank and Mr. Puskar have failed to state a claim.
For the reasons stated herein, the court will grant in part and deny in part the Debtor’s
Motion to Dismiss.
I. STANDARD OF REVIEW
In adjudicating a motion to dismiss for failure to state a claim under Fed. R. Civ. P.
12(b)(6), a court must accept as true all of the factual allegations in the complaint as well as the
reasonable inferences that can be drawn from them, and a court may dismiss the complaint “only
if it is clear that no relief could be granted under any set of facts that could be proved consistent
1
Dated: Thursday, September 17, 2009 1:10:12 PM
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with the allegations.” Hishon v. King & Spalding, 467 U.S. 69, 73 (1984). 	This principle,
however, is inapplicable to threadbare recitals of a cause of action’s elements, supported by mere
conclusory statements. Ashcroft v. Iqbal, 129 S. Ct. 1937, 1950 (2009). Defeating a motion to
dismiss under Rule 12(b)(6) requires the plaintiff to provide more in the complaint than “mere
labels and conclusions, and a formulaic recitation of the elements of a cause of action will not
do.” Bell Atl. Corp. v. Twombly, 127 S. Ct. 1955, 1965 (2007). 	The factual allegations in the
complaint “must be enough to raise a right of relief above the speculative level” id. at 1959, and
be enough to “state a claim to relief that is plausible on its face.” Ashcroft, 129 S. Ct. at 1949.
Determining whether a complaint is “facially plausible” is context-specific, requiring the
reviewing court to draw on its experience and common sense. Id. at 1950.
II. BACKGROUND
The Debtor specializes in radiology. In March 2004, the Debtor incorporated Amerirad,
Inc., of which he is the president and sole stockholder, to provide radiology services. To obtain
operating funds for Amerirad, the Debtor caused Amerirad to execute four notes with Centra
Bank: (1) $1,000,000 on July 27, 2004, (2) $1,000,000 on October 3, 2005, (3) $298,000 on
November 30, 2006, and (4) $750,000 on December 26, 2006. Each note is personally
guaranteed by the Debtor. The fourth note is also guaranteed by Milan Puskar.
All four notes are secured by, among other things, Amerirad’s accounts and receivables.
Importantly, the security agreement accompanying the notes defines “Collateral” as including
“[a]ll rights . . . [Amerirad] now has or may have in the future to the payment of money[.]” The
security agreement further provides that:
Upon the occurrence of any default under this Agreement, [Amerirad] hereby
irrevocably . . . appoints [Centra Bank] . . . as [Amerirad’s] true and lawful
attorney-in-fact with full power of substitution . . . to exercise the following
powers with respect to the Collateral:
(1) To demand, sue for collection, receive, and give acquittance for any and all
monies due or owing with respect to the Collateral;
. . .
(3) To settle, compromise, prosecute, or defend any action or proceeding with
respect to the Collateral;
(4) To sell, transfer, assign or otherwise deal in or with the Collateral or the
proceeds thereof, as fully as if [Centra Bank] were the absolute owner thereof . . .
.
(Compl. ¶ 36.).
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In August 2008, Amerirad defaulted on all four notes. On August 27, 2008, Centra Bank
issued a default notice to Amerirad demanding that each of the notes be paid in full. 	On
September 5, 2008, the Debtor filed his Chapter 7 bankruptcy petition. As a guarantor on the
December 2006 note, Milan Puskar paid the $722,253.57 balance in full on September 29, 2008.
As of February 13, 2009, Centra Bank was still owed $1,429,087.45.
III. DISCUSSION
Centra Bank and Milan Puskar assert that the Debtor took at least $400,000 from
Amerirad for his personal use, which is reflected as an account receivable on Amerirad’s books.
In their request for relief, they ask the court to enter a money judgments in their favor and to
declare both judgments excepted from the Debtor’s discharge pursuant to 11 U.S.C. § 523(a)(4)
on the grounds of defalcation.
Section 727(b) of the Bankruptcy Code provides that a Chapter 7 discharge relieves a
debtor “from all debts” that arose before the filing of the bankruptcy petition. 	11 U.S.C. §
727(b). Not every debt, however, is subject to being discharged; § 523(a) of the Bankruptcy
Code provides nineteen exceptions whereby a pre-petition debt will remain valid after entry of a
debtor’s discharge order. 	Because these exceptions to discharge contravene the “fresh start”
policy of the Bankruptcy Code, they are construed narrowly in favor of the debtor. E.g., United
States v. Fegeley (In re Fegeley), 118 F.3d 979, 983 (3d Cir. 1997) (“[E]xceptions to discharge
are to be strictly construed in favor of the debtor.”); Ostrum v. Porter, No. 03-118; 2008 Bankr.
LEXIS 109 at *8 (Bankr. N.D.W. Va. Jan. 10, 2008) (same). In particular, § 523(a)(4) provides:
A discharge under section 727, . . . of this title does not discharge an individual
debtor from any debt -
. . .
(4) for fraud or defalcation while acting in a fiduciary capacity . . . .
11 U.S.C. § 523(a)(4).
To prevail on a § 523(a)(4) claim, the movant must establish, by a preponderance of the
evidence, the existence of both: (A) a fiduciary relationship and (B) a defalcation while acting in
that fiduciary capacity. E.g., Grogan v. Garner, 498 U.S. 279, 282-83 (1991) (applying a
preponderance of the evidence standard to § 523(a) causes of action); Fowler Bros. v. Young (In
re Young), 91 F.3d 1367, 1371 (10 th Cir. 1996) (“[U]nder § 523(a)(4), Fowler Brothers had to
establish the following two elements to prevent the discharge of Mr. Young's debt: a fiduciary
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relationship between Fowler Brothers and Mr. Young and fraud or defalcation committed by Mr.
Young in the course of that fiduciary relationship.”).
Regarding the existence of a fiduciary relationship, the definition of “fiduciary” for
purposes of § 523(a)(4) is controlled by federal common law. Harrell v. Merchant's Express
Money Order Co. (In re Harrell), No. 98-1728, 1999 U.S. App. LEXIS 4743 at *7 (4th Cir.
March 19, 1999) (citing Miller v. J.D. Abrams, Inc. (In re Miller), 156 F.3d 598, 602 (5th Cir.
1998)). Under the federal common law, the term “fiduciary” includes express or technical trusts:
[The term “fiduciary capacity” as used in § 523(a)(4)] has been fixed by judicial
construction for nearly a century. . . . [T]he statute “speaks of technical trusts, and
not those which the law implies from contract.” The scope of the exception was
to be limited accordingly. 	Through the intervening years that precept has been
applied by this court in varied situations with unbroken continuity. 	It is not
enough that by the very act of wrongdoing out of which the contested debt arose,
the bankrupt has become chargeable as trustee ex maleficio. He must have been a
trustee before the wrong and without reference thereto. . . . “The language would
seem to apply only to a debt created by a person who was already a fiduciary
when the debt was created.”
Davis v. Aetna Acceptance Co., 293 U.S. 328, 333 (1934) (citations omitted); see also R.E. Am.,
Inc., v. Garver (In re Garver), 116 F.3d 176, 180 (6 th Cir. 1997) (“[T]he defalcation provision of
§ 523(a)(4) is limited to only those situations involving an express or technical trust relationship
arising from placement of a specific res in the hands of the debtor.”).
Limiting the definition of “fiduciary” in § 523(a)(4) is important because to expand the
definition of fiduciary to include all those upon whom the law imposes fiduciary duties would
eviscerate the bankruptcy discharge. 	E.g., Chapman v. Forsyth, 43 U.S. 202, 208 (1844) (“If
the act embrace such a debt, it will be difficult to limit its application. It must include all debts . .
. where the law implies an obligation from the trust reposed in the debtor. Such a construction
would have left but few debts on which the law could operate. . . . But this is not the relation
spoken of in [§ 523(a)(4)].”). Thus, some courts hold that to be a “fiduciary” under § 523(a)(4),
the debtor must have “either expressly signified his intention at the outset of the transaction, or
was clearly put on notice by some document in existence at the outset, that he was undertaking
the special responsibilities of a trustee to account for his actions over and above the normal
obligations that contracting parties have to each other in a commercial transaction.” 	Bamco v.
Reeves (In re Reeves), 124 B.R. 5, 10 (Bankr. D.N.H. 1990).
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Even in the absence of an express or technical trust, however, “the existence of a state
statute or common law doctrine imposing trust-like obligations on a party may, at least in some
circumstances, be sufficient to create a technical trust relationship for purposes of section
523(a)(4).” 4 Collier on Bankruptcy ¶ 523.10[1][d] (Alan N. Resnick & Henry J. Sommer, eds.
15th ed. rev. 2009). 	Thus, certain fiduciary relationships exists that are determined to be so
special that they fall within the meaning of “fiduciary” in § 523(a)(4) despite the absence of an
express trust or other actual, preexisting notice to the debtor that he is holding property in trust
for another. 	These relationships have included an ambassador and the property of the
ambassador’s represented country, Republic of Rwanda v. Uwimana (In re Uwimana), 274 F.3d
806 (4th Cir. 2001), a financial advisor committing fraud and found to be a fiduciary by default in
a state court judgment, Pahlavi v. Ansari (In re Ansari), 113 F.3d 17 (4 th Cir. 1997), real estate
agents handling closing funds, Hamby v. St. Paul Mercury Indemnity Co., 217 F.2d 78 (4th Cir.
1954), attorneys handling client funds, Andy Warhol Found. for Visual Arts, Inc. v. Hayes (In re
Hayes), 183 F.3d 162 (2d Cir. 1999), and those acting under a power of attorney to an
incompetent person, Ostrum v. Porter, No. 03-118; 2008 Bankr. LEXIS 109 (Bankr. N.D.W. Va.
Jan. 10, 2008).
As stated by the Court of Appeals for the Second Circuit, the reason certain types of
statutory or common law fiduciary relationships are encompassed within the meaning of
“fiduciary” as used in § 523(a)(4) is because the focus of Chapman and Davis, supra, was to
prevent ordinary commercial debts from being excepted from discharge, and those cases never
cast “serious doubt on the fact that certain relationships not constituting actual trusts are within
the defalcation exception.” 	Hayes, 183 F.3d at 169; see also In re Marchiando, 13 F.3d 1111,
1115-16 (7th Cir. 1994) (stating that a fiduciary relationship that imposes duties in advance of a
breach by the debtor is within the scope of § 523(a)(4)); Hamby, 217 F.2d at 80 (holding that the
term fiduciary in § 523(a)(4) encompasses those in a common law fiduciary relationship that
have been entrusted with funds such that the relationship between the parties is more than merely
debtor-creditor).
Therefore, the term “fiduciary,” as used in § 523(a)(4), encompasses both express and
technical trusts, and those statutory and common law fiduciary duties that impose trust-like
obligations on a party in advance of the party’s alleged wrongdoing.
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Regarding the meaning of “defalcation” as used in § 523(a)(4), the Fourth Circuit defined
the contours of that tort:
Defalcation is “the failure to meet an obligation” or “a nonfraudulent default.” To
be defalcation for purposes of 11 U.S.C. § 523(a)(4), an act need not “rise to the
level of . . . ‘embezzlement’ or even ‘misappropriation.’” Thus, negligence or
even an innocent mistake which results in misappropriation or failure to account
is sufficient.
Uwimana), 274 F.3d at 811; see also Ansari, 113 F.3d at 20 (“‘[A] ‘defalcation’ for purposes of
this 	statute 	does 	not 	have 	to 	rise 	to 	the 	level 	of 	‘fraud,’ 	‘embezzlement,’ 	or 	even
‘misappropriation.’”) (citation omitted).
In this case, Centra Bank and Mr. Puskar allege that the Debtor committed defalcation
by: (A) violating his fiduciary duty to Amerirad by taking Amerirad’s funds for his personal use;
(B) violating his fiduciary duty to Amerirad, which prevented Amerirad from paying Centra
Bank, which, due to the Debtor’s personal guarantees, constitutes defalcation with respect to
Centra Bank; and (C) violating his fiduciary duty to all creditors by using the funds of Amerirad
for his personal benefit at a time when Amerirad was in the zone of insolvency.
A. 	The Debtor’s Alleged Defalcation of Amerirad
In their first cause of action, Centra Bank and Mr. Puskar assert that the Debtor took
$400,000 – or more – from Amerirad for his personal use, which, because he is the principal of
Amerirad, constitutes a breach of his fiduciary obligations to Amerirad. Under the terms of the
parties’ security agreement, Centra Bank and Mr. Puskar contend that they have the right to
bring this claim against the Debtor as the attorney-in-fact or substitute of Amerirad, or as owner
of Amerirad’s rights.
In his Motion to Dismiss, the Debtor claims, among other things, that even if Centra
Bank and Mr. Puskar have the ability to assert causes of action belonging to Amerirad against
him for his alleged personal use of corporate funds,1 a corporate officer or director is not a
“trustee” of corporate funds and no trust res ever existed before his alleged wrongdoing on
which to base a breach of an express or technical trust.
1. The Security Agreement executed between the parties plainly gives Centra Bank the right to
assert causes of action belonging to Amerirad against the Debtor for monies due or owing. The
Debtor asserts that no cause of action may be stated against him on behalf of Amerirad on the
grounds that Amerirad is not a named plaintiff in this case. The court does not believe that this
is a dispositive defect on which to grant a motion to dismiss.
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By statute, an officer of a West Virginia corporation, when performing in the officer’s
official capacity, must “act: (1) In good faith; (2) With the care that a person in a like position
would reasonably exercise under similar circumstances; and (3) In a manner the officer
reasonably believes to be in the best interest of the corporation.” 	W. Va. Code § 31D-8-842; see
also § 31D-8-830 (settling forth similar duties for directors). 	In examining the scope of an
officer or director’s duty to the corporation and its shareholders the Supreme Court of Appeals
for West Virginia has stated that the duty encompasses fiduciary obligations:
“While the officers and directors of a business corporation are accorded a rather
broad latitude in the conduct of the affairs of the corporation, they occupy a
fiduciary relationship toward it and its shareholders. . . .”
Syllabus Pt. 4, State ex rel. Smith v. Evans, 547 S.E.2d 278 (W. Va. 2001) (quoting Syllabus Pt.
2, Masinter v. WEBCO Co., 262 S.E.2d 433 (W. Va. 1980)); see also Airlines Reporting Corp. v.
Ellison (In re Ellison), 296 F.3d 266, 271 (4th Cir. 2002) (“[T]he Ellisons, when acting as officers
and directors of Sovereign Travel, ‘occupied a fiduciary relationship toward [Sovereign Travel]’
under West Virginia law.”) (citation omitted).
Although corporate officers and directors act in a fiduciary capacity with respect to the
corporation and its 	shareholders, the Supreme Court of Appeals for West Virginia has
recognized that officers and directors “are not technically trustees, but are agents who bear a
relation of trust and confidence to their principal.” 	Young v. Columbia Oil Co., 158 S.E. 678,
681 (W. Va. 1937); see also Cal-Micro, Inc. v. Cantrell (In re Cantrell), 329 F.3d 1119, 1126
(9th Cir. 2003) (explaining that under California law, “although officers and directors are imbued
with the fiduciary duties of an agent and certain duties of a trustee, they are not trustees with
respect to corporate assets.”); Miramar Resources v. Shultz (In re Shultz), 208 B.R. 723, 729
(Bankr. M.D. Fla. 1997) (“[A]s a director of Mirmar, Defendant may have been a fiduciary, but
not a trustee under traditional Delaware corporate doctrine.”); 18B Am. Jur. 2d Corporations §
1460 (2008) (“In a broad sense, the directors and officers of a corporation are its agents. While
they may not be in a strict sense trustees, they occupy a fiduciary, or more exactly a
quasi-fiduciary, relation to the corporation and its shareholders.”); Restatement (Third) Trust § 5
(2003) (“The following are not trusts: . . . (g) corporations, partnerships, and other business
associations . . . .”). 	Corporate officers and directors “do not hold title to the property of the
corporation and therefore are not trustees.” Restatement (Third) Trust § 5 cmt. f.
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In this case, when Amerirad obtained loan funds from Centra Bank, the Debtor had
fiduciary obligations to deal with corporate property for the benefit of Amerirad and its
shareholders. 	The Debtor was not a trustee over the loan proceeds. 	This fact, however, is not
fatal to Centra Bank’s and Mr. Puskar’s claim under § 523(a)(4). 	The claim can survive the
Debtor’s motion to dismiss so long as the fiduciary obligation owed by the Debtor to Amerirad
is not based on an ordinary commercial debt, the fiduciary duty preexisted the alleged wrong,
and the relationship is one that imposes trust-type obligations.
The Court of Appeals for the Fifth Circuit addressed a similar factual circumstance in the
case of In re Moreno, 892 F.2d 417 (5th Cir. 1990). 	Moreno was the president of Petroleum
Energy 	Equipment 	Company 	(“PEEC”), 	which 	filed 	a 	Chapter 	11 	case 	and 	was 	being
administered by a Chapter 11 trustee. 	Id. at 418. 	Moreno also filed bankruptcy, and it was
discovered that he owed PEEC $47,000 for personal corporate advances, and entities related to
Moreno owed PEEC over $150,000. 	Id. 	After Moreno filed a personal Chapter 7 bankruptcy,
PEEC’s trustee sought to except the debts owed by him to PEEC from his discharge based on
acts of defalcation under § 523(a)(4). 	Id. at 421. 	The Fifth Circuit determined that Moreno’s
fiduciary duty to PEEC “encompassed, at least, a responsibility not to lend PEEC’s money to
himself or corporations controlled by him on less than an arms-length basis.” Id. This duty was
sufficiently akin to the trust-type obligations imposed by an express or technical trust to satisfy
the “fiduciary” requirement of § 523(a)(4). Id.
This court agrees. 	By statute, a corporate officer must act “[i]n a manner the officer
reasonably believes to be in the best interest of the corporation.” 	W. Va. Code § 31D-8-842.
The Supreme Court of Appeals for West Virginia has long recognized that corporate officer and
directors occupy a fiduciary relationship toward the corporation and its shareholders. Evans, 547
S.E.2d 278. Furthermore, the Supreme Court of Appeals has expressly recognized that corporate
officers and directors have trust-type obligations even though they are not technically trustees.
Young, 158 S.E. at 681. 	For these reasons, and based on the modern trend in federal
jurisprudence to include certain fiduciary, trust-type relationships that do not rise to the level of
an express or technical trust within the scope of § 523(a)(4)’s definition of “fiduciary,” this court
holds 	that 	the 	fiduciary 	relationship 	between 	a 	corporate 	officer 	and/or 	director 	to 	the
corporation 	and 	its 	shareholders 	is 	a 	trust-type 	obligation 	that 	satisfies 	the 	“fiduciary”
requirement of § 523(a)(4).
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Having determined that the requisite fiduciary duty exists, the next step is to determine if
Centra Bank and Mr. Puskar have sufficiently alleged an act of defalcation. 	Like the Fifth
Circuit in Moreno, 892 F.2d at 421, this court finds that the Debtor’s fiduciary obligation to
Amerirad encompassed, at least, a duty not to lend Amerirad’s money to himself on a less than
arms-length basis. According to the Complaint, the Debtor used Amerirad’s funds to sustain his
own lavish lifestyle and image by using Amerirad’s money to charter airplanes ($155,000), pay
for limousine services ($38,000), import musicians and expensive wines, and pay for expensive
travel, hotels, lavish gifts, tailgate parties, sports tickets and the like. 	(Compl. ¶¶ 26, 42).
Accordingly, Centra Bank and Mr. Puskar have stated a claim upon which relief may be granted
in Count I of their Complaint.
B. 	Debtor’s Alleged Breach of Fiduciary Duties to Centra Bank
In Count II of their Complaint, Centra Bank and Mr. Puskar argue that the Debtor owes
fiduciary obligations to Amerirad as a corporate officer and director. The further alleged that the
Debtor breached his fiduciary duties to Amerirad by “diverting” corporate money for his
personal use. Based on this alleged breach of fiduciary duty – and because the Debtor personally
guaranteed the notes to Centra Bank – they contend that the Debtor is liable to Centra Bank for
defalcation within the meaning of 11 U.S.C. § 523(a)(4).
Count II of the Complaint appears to be based on two cases decided by the Court of
Appeals for the Fourth Circuit, Airlines Reporting Corp. v. Ellison (In re Ellison), 296 F.3d 266
(4 th Cir. 2002) and Kubota Tractor Corp. v. Strack (In re Strack), 524 F.3d 493 (4th Cir. 2008).
In Ellison, 296 F.3d at 270-71, the court determined that a personal guarantee of a corporate debt
was excepted from discharge when: (1) a personal guarantee existed; (2) the indebtedness arose
due to defalcation or “the breach of a fiduciary relationship between two corporations”; (3) the
debtor was personally responsible for the conduct that gave rise to the corporation’s breach of
defalcation; and (4) the debtor’s conduct itself was a breach of the debtor’s fiduciary duty to the
corporation. These factors were reiterated in Strack, 524 F.3d at 500.
In this case, however, neither Ellison nor Strack is applicable. Quite simply, Centra Bank
and Mr. Puskar have failed to show that Amerirad owed any fiduciary duties, or in any way
breached an express or technical trust with Centra Bank. Thus, elements two and three of the
above-stated test have not been met. Therefore, the court will dismiss Count II of the Complaint.
C. 	Fiduciary Duties in the “Zone of Insolvency”
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In Count III, Centrua Bank and Mr. Puskar contend that, at the time the Debtor allegedly
diverted Amerirad’s funds for his personal use, Amerirad was in the zone of insolvency, and,
thus, 	as Amerirad’s president, the Debtor owed a fiduciary duty to Centrua Bank sufficient to
sustain a cause of action under § 523(a)(4).
It is axiomatic that a corporation is run with a view toward maximizing shareholder
wealth. 	When a corporation is insolvent, however, creditors – not shareholders – become the
corporation’s primary risk bearers because shareholders have essentially lost their bet on the
company. 	The activities of an insolvent corporation are, therefore, gambles with the corporate
creditors’ right to payment. If an officer or director is faithful to the directive that the purpose of
a corporation’s existence is to maximize shareholder wealth, then officers and directors of an
insolvent corporation “may be tempted to make very risky investments since speculator returns –
however unlikely – would inure to the benefit of the shareholders, while losses wold be borne by
creditors.” Frederick Tung, The New Death of Contract: Creeping Corporate Fiduciary Duties
for Creditors, 57 Emory L. J. 809, 820 (2008).
To protect creditors of an insolvent corporation, the Supreme Court of Appeals of West
Virginia has stated that – when a corporation becomes insolvent – the fiduciary duties of the
officers directors shifts from the stockholders to the creditors:
The law by great weight of authority seems to be settled that when a corporation
becomes insolvent, or in a failing condition, the officers and directors no longer
represent the stockholders, but by fact of insolvency, become trustees for the
creditors, and that they then cannot by transfer of its property or payment of cash,
prefer themselves or other creditors . . . .
Syllabus Pt. 4, Arnold v. Knapp, 84 S.E. 895, 899 (W. Va. 1915); see also FDIC v. Sea Pines
Co., 692 F.2d 973, 976-77 (4th Cir. 1982) (same); Davis v. Woolf, 147 F.2d 629, 633 (4th Cir.
1947) (same); Little Switzerland Brewing Co. v. Oxley, 197 S.E.2d 301, 306 (W. Va. 1973)
(same).
When describing the officers and directors of an insolvent corporation as “trustees for the
creditors,” the court is mindful that the Supreme Court of Appeals is imposing fiduciary duties
on the officers and directors that favor corporate creditors. This court does not believe that the
Supreme Court of Appeals intended to impose a full trust relationship between creditors and the
officers and directors of an insolvent corporation for the following two reasons.
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First, the Supreme Court of Appeals of West Virginia has subsequently recognized that
the relationship between officers/directors and the corporation/shareholders is a fiduciary one,
but 	the 	officers 	and 	directors 	“are 	not 	technically 	trustees” 	for 	the 	benefit 	of 	the
corporation/shareholders. 	Young, 158 S.E. at 681. 	This conclusion is consistent with the
instruction in Restatement (Third) Trusts § 5 (2003), that corporations are not trusts. 	It is
illogical to impose more stringent duties of a trustee administering trust assets on officers and
directors for the benefit of corporate creditors than those officers and directors bear to their own
corporation and shareholders. 	Indeed, as recognized by the Delaware Supreme Court in North
American Catholic Educational Programming Foundation, Inc. v. Gheewalla, 930 A.2d 92, 101
(Del. 2007), when a corporation becomes insolvent it is the creditors that effectively take the
place of the shareholders as the residual, economic beneficiaries of corporate assets.
Second, when stating that the assets of a insolvent corporation constitute a trust fund for
the benefit of creditors, the term “trust fund” is only used by way of analogy or metaphor. 	E.g.,
Hollins v. Brierfield Coal & Iron Co., 150 U.S. 371, 381-82 (1893) (“While it is true language
has been frequently used to the effect that the assets of a corporation are a trust fund held by a
corporation for the benefit of creditors, this has not been to convey the idea that there is a direct
and express trust attached to the property. [T]hey ‘are not in any true and complete sense trusts,
and can only be called so by way of analogy or metaphor.’”) (citation omitted); 7 Collier on
Bankruptcy ¶ 1108.09[4][a] (Alan N. Resnick & Henry J. Sommer eds. 15th ed. rev. 2009) (“The
trust fund doctrine is an analogy and is not, and should not be, interpreted literally; the assets of
an insolvent corporation are not an actual trust, and the directors are not actually trustees whose
conduct is governed by the very strict fiduciary standards of the law of trusts.”).
The origins of the “trust fund” corporate insolvency doctrine can be traced to Wood v.
Dummer, 3 Mason, 308 (1824), which concerned directors of a bank that declared a substantial
dividend for themselves at a time when the bank was being dissolved. 	Justice Story declared
that the “capital stock of banks is to be deemed a pledge or trust fund for the payments of the
debts contracted by the bank.” Id. Thus, according to some commentators, the decision was an
equitable, ad hoc response to address roguish behavior and never intended to create a true trust
relationship. 	E.g., Henry T.C. Hu and Jay Lawrence Westbrook, Abolition of the Corporate
Duty to Creditors, 107 Colum. L. Rev. 1321, 1332-33 (2007) (“Wood was an ad hoc response, a
conceptually casual treatment of monies that were in the corporate till pledged in some ill-
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defined way to creditors.”). 	Indeed, the corporate trust fund doctrine is “often poorly
understood” and “‘perhaps no concept has created as much confusion in the field of corporate
law . . . .’” 	In re MortgageAmerica Corp., 714 F.2d 1266, 1269 (5th Cir. 1983) (citation
omitted). 	The “trust fund doctrine was established principally to permit a court of equity to
marshal and distribute a corporation’s assets upon its insolvency and dissolution in much the
same way as would a modern bankruptcy court [at a time when] federal bankruptcy and state
corporation laws were as yet ill-established.” Id.
Concluding that corporate officers and directors of a West Virginia corporation are not
trustees for the benefit of corporate creditors, of course, does not mean that corporate officers
and directors of an insolvent corporation are not “fiduciaries” to their creditors as the term is
used in § 523(a)(4). 	West Virginia and Fourth Circuit precedent plainly states that a fiduciary
relationship exists between the officers and directors of an insolvent corporation and its
creditors. Sea Pines Co., 692 F.2d at 976-77; Arnold, 84 S.E. at 899. In fact, in Gheewalla, 930
A.2d 92, the Delaware Supreme Court held that creditors of an insolvent corporation have
standing to bring derivative claims of shareholders against the corporation and its officers and
directors for a breach of a fiduciary duty. Considering this court’s conclusion, supra, that an
officer or director’s breach of a fiduciary duty to the corporation can constitute a sufficiently
trust-like obligation upon which to find the existence of a fiduciary relationship under §
523(a)(4), and considering further that shareholders can assert the same rights as the corporation
for a breach of these trust-like obligations, the court likewise holds that creditors, who are in
effect standing in the place of shareholders, are entitled to assert the same rights of shareholders.
Consequently, the fiduciary, trust-like obligations owed by directors and officers of an insolvent
corporation 	to 	the 	corporation’s 	creditors 	qualifies 	as 	the 	type 	of 	fiduciary 	relationship
contemplated in § 523(a)(4).
In this case, construing all factual inferences in the Complaint in favor of Centra Bank
and Mr. Puskar, it is possible that Amerirad was insolvent before the Debtor’s alleged acts of
defalcation, and, consequently, that the Debtor, as the officer and director of Amerirad, owed a
fiduciary duty to Amerirad’s creditors that preexisted his alleged acts of defalcation. 	Therefore,
the Court finds that Centra Bank and Mr. Puskar have stated a claim for relief in Count III of
their Complaint.
IV. CONCLUSION
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The court will enter a separate order pursuant to Fed. R. Bankr. P. 9021 that grants in part
and denies in part the Motion to Dismiss.
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