ATR-Kim Eng Capital Partners, Inc. et al v. Bonilla

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MEMORANDUM RE MOTION
TO DISMISS COMPLAINT 	-1-
UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF CALIFORNIA
In re
HUGO NERY BONILLA,
Debtor.
ATR-KIM ENG CAPITAL PARTNERS, INC.,
and ATR-KIM ENG FINANCIAL
CORPORATION,
Plaintiffs,
vs.
HUGO NERY BONILLA,
Defendant.
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Case No. 07-30309 TEC
Chapter 7
Adv. Proc. No. 07-3079 TC
MEMORANDUM RE DEFENDANT’S RULE 12(b)(6) MOTION
Plaintiff obtained a $24.5 million judgment against Defendant
in Delaware state court. 	That court found that Defendant, a
corporate director, breached his duty of loyalty to Plaintiff, a
minority shareholder, by failing to take any steps to monitor the
operations of the corporation. 	The Delaware court held Defendant
liable for the loss Plaintiff suffered when the majority
Signed and Filed: October 16, 2007
________________________________________
THOMAS E. CARLSON
U.S. Bankruptcy Judge
________________________________________
Entered on Docket
October 16, 2007
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
Case: 07-03079 Doc# 15 Filed: 10/16/07 Entered: 10/16/07 15:30:16 Page 1 of 7

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1 Plaintiff is not urging that the decision of the Delaware
court be given issue-preclusive effect at this time. 	The findings
of fact in the state-court decision are treated as allegations for
the purpose of the present motion.
MEMORANDUM RE MOTION
TO DISMISS COMPLAINT 	-2-
shareholder transferred to himself substantially all of the
corporation’s assets.
In the present action, Plaintiff seeks a determination that
Defendant’s liability is nondischargeable under 11 U.S.C.
§ 523(a)(4), because it arises from “defalcation while acting in a
fiduciary capacity”. 	Defendant moves to dismiss that claim for
relief, contending that a corporate director is not a “fiduciary”
under section 523(a)(4). 1 	For the reasons set forth below, the
motion is denied.
Whether a debtor is a fiduciary within the meaning of section
523(a)(4) is a question of federal law. 	Lewis v. Scott (In re
Lewis), 97 F.3d 1182, 1185 (9th Cir. 1996). 	First, the debtor must
have been subject to the duties of a trustee before, and without
reference to, the wrongdoing that gave rise to the debt. 	Id.
Second, the duties imposed on the debtor must be those imposed on
the trustee of an express or technical trust. 	Id. at 1185-86 n.1.
Thus, there must be an identifiable trust res, identifiable
beneficiaries, and the debtor must be subject to the duties of
loyalty, good faith, and honesty in caring for the trust res.
Lewis, supra, 97 F.3d at 1186 n.1; Miramar Resources, Inc. v.
Shultz (In re Shultz), 208 B.R. 723, 728 (Bankr. M.D. Fla.
1997)(Shultz II).
Whether a debtor is subject to the duties just described is
primarily a matter of state law. 	Lewis, supra, 97 F.3d at 1185.
The requisite duties can be imposed by agreement, state statute, or
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MEMORANDUM RE MOTION
TO DISMISS COMPLAINT 	-3-
state case law. 	Id. at 1185-86. 	The parties here agree that
Delaware law defines Defendant’s duties as a corporate director.
Numerous Delaware decisions refer to directors as trustees,
and impose on directors the highest duties of loyalty, honesty, and
fair dealing in all matters concerning the management of corporate
assets. 	See, e.g., Hynson v. Drummond Coal Co., Inc., 601 A.2d 570
(1991); Keenan v. Eshleman, 2 A.2d 904, 908 (1938). 	Furthermore,
Delaware cases impose this fiduciary duty prior to, and without
reference to, any misconduct by the director.
It is not always necessary for [directors] to reap a
personal profit or gain a personal advantage in order for
their actions in performance of their quasi trust to be
successfully questioned. 	Trustees owe not alone the duty
to refrain from profiting themselves at the expense of
their beneficiaries. 	They owe the duty of saving their
beneficiaries from loss.
Bodell v. General Gas & Electric Corp., 132 A. 442, 447 (1926).
Thus, Delaware case law clearly identifies the fiduciary duties of
a corporate director, the trust res (all corporate assets), and the
beneficiaries of the trust (the corporation and its shareholders).
Delaware court decisions do not, however, equate corporate
directors with trustees in all respects. 	The Bodell decision
quoted above refers to directors as “quasi” trustees. 	Id. 	Another
Delaware decision notes that trustees differ from corporate
directors in that trustees usually occupy a caretaking role, while
directors are often required to take risks with the assets they
manage. 	Cinerama, Inc. v. Technicolor, Inc., 663 A.2d 1134, 1148
(1994). 	Yet another Delaware decision states that corporate
directors are not trustees in the strictest sense, because they do
not hold legal title to the property of the corporation.
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MEMORANDUM RE MOTION
TO DISMISS COMPLAINT 	-4-
The officers and directors of a corporation are
fiduciaries but they are not real trustees. 	They do not
hold the legal title to the corporate property. 	They
occupy a position of extreme trust and confidence toward
all interested parties, and exercise great powers in
managing corporate affairs, but they are not trustees of
an express trust in the true sense of that term.
Bovay v. H.M. Byllesby & Co., 29 A.2d 801, 804 (1943) (citations
omitted); see also Shultz II, supra, 208 B.R. at 729 (Delaware
courts say directors are fiduciaries but “technically not
trustees”). 	The major authorities on trust law are in accord that
corporate directors occupy a trust-like position, but are not
trustees in the strict sense, because they do not directly hold
legal title for a beneficial owner. 	Bogert & Bogert, Law of Trusts
& Trustees § 16 (2007); accord Restatement (Third) of Trusts §§ 2,
5(g) (2003).
The Ninth Circuit states “the fiduciary relationship must be
one arising from an express or technical trust that was imposed
before and without reference to the wrongdoing that caused the
debt.” 	Lewis, supra, 97 F.3d at 1185 (emphasis added). 	Does this
mean that in addition to preexisting the wrong, the fiduciary duty
must be identical to that of a trustee in every technical respect?
I conclude that the fiduciary duty must preexist the trust,
and must be substantially similar to the role of a trustee, in that
there must be a trust res, identifiable beneficiaries, and clear
notice of the duties of loyalty, honesty, and fair dealing toward
the beneficiaries in all matters affecting the trust res. 	In
Lewis, the Ninth Circuit found partners to be fiduciaries under
section 523(a)(4) upon the basis of state-court decisions that
imposed on partners the duties of loyalty, honesty, and fair
dealing. 	Id. at 1186. 	One of the decisions Lewis relied upon
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2 Desantis v. Dixon, 236 P.2d 38, 41 (Ariz. 1951) (does not
refer to partner as trustee); Jerman v. O’Leary, 701 P.2d 1205,
1210 (Ariz. App. 1985)(same); Carrasco v. Carrasco, 422 P.2d 411,
413 (Ariz. App. 1967) (duty of partner “similar to a trustee’s”).
MEMORANDUM RE MOTION
TO DISMISS COMPLAINT 	-5-
described the duties of a partner as merely “similar to a
trustee’s,” and the other decisions cited failed to use the term
trustee at all in describing the duties of a partner. 2 	In addition,
Lewis noted with approval language in Collier stating that the
duties of the fiduciary need only be “substantially similar” to
those imposed on trustees.
“If state law clearly and expressly imposes trust
obligations on managing partners of limited partnerships
substantially similar to those imposed on trustees, i.e.,
the duty of loyalty and the duty to deal with one another
in good faith and with honesty, these fiduciary
obligations meet the strict requirements of section
523(a)(4)”.
Id. at 1186 n.1.
As noted above, the director of a corporation organized under
Delaware law is subject to duties substantially similar to those
imposed on the trustee of an express or technical trust, and those
duties arise before and without reference to any wrongdoing. 	The
director of a Delaware corporation is therefore a fiduciary within
the meaning of section 523(a)(4). 	Miramar Resources, Inc. v.
Shultz (In re Shultz), 205 B.R. 952, 959 (Bankr. D. New Mex. 1997)
(Shultz I); see Foster v. Lasagna, 609 F.2d 392, 396 (9th Cir.
1979)(director of corporation organized under California law is a
fiduciary for purpose of section 523(a)(4)); see also Nahman v.
Jacks (In re Jacks), 266 B.R. 728, 737 (9th Cir. BAP 2001)(same).
Defendant also argues that the Delaware judgment imposes
liability on him for acts that should be protected under the
business judgment rule. 	In essence, this is an argument that the
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MEMORANDUM RE MOTION
TO DISMISS COMPLAINT 	-6-
facts alleged do not amount to a “defalcation” within the meaning
of section 523(a)(4). 	A defalcation generally does not include the
poor exercise of business judgment in carrying out an act that the
fiduciary was authorized to perform. 	Blyler v. Hemmeter (In re
Hemmeter), 242 F.3d 1186, 1191 (9th Cir. 2001).
The facts alleged here, however, constitute a complete failure
to take any action to preserve the assets of the corporation, and
therefore go well beyond the poor exercise of business judgment.
The Delaware court found:
Bonilla . . . acted as . . . [a] stooge for Araneta,
seeking to please him and only him, and having no regard
for [Bonilla’s] obligations to act loyally towards the
corporation and all of its stockholders. 	Such behavior
is not indicative of a good faith error in judgment; it
reflects a conscious decision to approach one’s role in a
faithless manner by acting as a tool of a particular
stockholder, rather than as an independent and impartial
fiduciary honestly seeking to make decisions for the best
interests of the corporation. . . . When required by
[Bonilla’s] office to be loyal to the Delaware Holding
Company, Bonilla . . . chose total fealty to Araneta’s
conflicting interests instead.
ATR-Kim Eng Financial Corp. v. Araneta, 2006 WL 3783520 at 1, 21
(Del. Ch. 2006). 	Defendant’s alleged acts are less like an
unfortunate choice in the purchase of stock than they are like
leaving a large amount of cash unguarded in a public place. 	As
such, the alleged facts represent the type of failure to account
for trust property that has traditionally been the hallmark of
defalcation. 	Otto v. Niles (In re Niles), 106 F.3d 1456, 1460-62
(9th Cir. 1997).
**END OF MEMORANDUM**
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Court Service List
Iain A. Macdonald, Esq.
Law Offices of Macdonald & Associates
Two Embarcadero Center, Suite 1670
San Francisco, CA 94111-3930
Michael C. Fallon, Esq.
Law Offices of Michael C. Fallon
100 E Street, Suite 219
Santa Rosa, CA 95404
Michael J. Baker, Esq.
William J. Lafferty, Esq.
Matthew L. Beltramo, Esq.
Howard, Rice, Nemerovski, Canady,
Falk & Rabkin
Three Embarcadero Center, 7th Floor
San Francisco, CA 94111
Case: 07-03079 Doc# 15 Filed: 10/16/07 Entered: 10/16/07 15:30:16 Page 7 of 7