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#2166 signed 9-12-95

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF KANSAS

In Re:

RONALD RAY GOODING,

DEBTOR(S)

CHAPTER 7

NO. 95-40437-7

WILLIAM STEWART GARLIC,

PLAINTIFF(S),

v.

RONALD RAY GOODING,

DEFENDANT(S)

ADV. NO. 95-7070

ORDER DISMISSING CLAIM UNDER §523(a)(4) BUT

OTHERWISE DENYING MOTIONS TO DISMISS

This proceeding is before the Court following a hearing on the defendant-debtor's motion to dismiss both claims asserted in the complaint, or for a more definite statement of one of the claims. More recently, the debtor has filed another motion to dismiss, this time based on insufficiency of service of process. The debtor appears by counsel Mark W. Neis. The plaintiff appears by counsel Charles D. McAtee. The Court has reviewed the relevant pleadings and is now ready to rule.

FACTS

Through his complaint and response to the debtor's motion, the plaintiff has alleged the following facts. The plaintiff was (and may still be) the beneficiary of a trust, and apparently had the power to direct how money in the trust should be invested. In 1992, the trustee of the truste arranged for the plaintiff to meet with the debtor's father and an architect about possibly lending them $200,000 to build an apartment complex to be called "Woodland Court." During that meeting, the plaintiff told the trustee that none of the trust money should be loaned for the project. Sometime later, the trustee asked him to meet with the debtor, but he declined, again advising the trustee not to loan or invest any of the trust money in the project.

In 1994, the plaintiff learned that the trustee had embezzled a lot of money from the trust, and soon obtained a default judgment against him for over $300,000. In the course of that suit, he learned that the trust had loaned the debtor $6,000, as evidenced by a promissory note, due in 1992, which the debtor had signed on a line above the name "Woodland Court, Ltd." The debtor allegedly knew the trustee did not have authority to make the loan, apparently because the debtor's father was present when the plaintiff told the trustee not to give any money to the Woodland Court project. The plaintiff contends that with this knowledge, the debtor participated in the trustee's breach of trust by accepting the unauthorized loan.

The plaintiff seeks to have the loan declared nondischargeable under 11 U.S.C.A. §523(a)(2)(A) or (a)(4). The debtor contends the complaint fails to state a claim for relief under either provision, or must be amended so it adequately informs him of the plaintiff's claim under §523(a)(2)(A). In his second motion to dismiss, the debtor argues that service of process was insufficient because the summons and complaint were served on his counsel but not on him personally.

DISCUSSION AND CONCLUSIONS

A debtor may not discharge a debt "for money . . . to the extent obtained by . . . false pretenses, a false representation, or actual fraud." 11 U.S.C.A. §523(a)(2)(A). As described more completely in his response to the debtor's first motion to dismiss, the plaintiff contends the debtor owes him a debt that falls within this provision because the debtor obtained a loan from the plaintiff's trustee, knowing that the trustee was not authorized to make the loan. The Court believes knowing participation in a trustee's breach of his fiduciary duties could constitute fraud, and so the plaintiff's pleadings now have stated a claim for relief under §523(a)(2)(A). The debtor has been adequately informed how he is alleged to have incurred a debt through fraud. Rather than require the plaintiff to reassert the contents of his response to the first motion to dismiss in the form of a complaint, the Court will deem the complaint to have been amended to make the factual assertions contained in the response.

A debtor also may not discharge a debt "for fraud or defalcation while acting in a fiduciary capacity." §523(a)(4). While the allegations probably state a claim that the plaintiff's trustee would owe a debt within this provision, the plaintiff has not alleged that the debtor was a fiduciary. Section 523(a)(4) applies only if the debtor incurred the debt while acting in a fiduciary capacity, not by somehow participating in actions taken by someone else who was a fiduciary. The plaintiff cites cases which said that a person who participates in a fiduciary's breach of trust could be liable to the person injured. Kline v. Orebaugh, 214 Kan. 207, 212 (1974); Hubbard v. Home Federal Savings & Loan Ass'n, 10 Kan.App.2d 547, 556-57 (1985). While these cases indicate the plaintiff has alleged facts that could make the debtor liable for the loan debt, they do not hold that the nonfiduciary becomes a fiduciary by participating in the breach of trust. A debt incurred in a nonfiduciary capacity simply is not covered by §523(a)(4). The debtor's motion to dismiss this portion of the plaintiff's complaint will be granted.

The debtor's motion to dismiss for insufficiency of service of process was filed two months after his first motion to dismiss. While it is true that the summons and complaint were supposed to be served on the debtor personally as well as on his attorney, see Federal Rule of Bankruptcy Procedure 7004(b)(9), subsections (g) and (h)(1) of Federal Rule of Civil Procedure 12, made applicable here by FRBP 7012(b), provide that this defense was waived because it was not joined with the other defenses asserted in the first motion to dismiss. The debtor's second motion to dismiss will be denied.

For these reasons, the Court hereby dismisses the plaintiff's claim based on 11 U.S.C.A. §523(a)(4), but otherwise denies the debtor's motions to dismiss. The plaintiff's complaint is hereby deemed to have been amended to include the factual allegations made in the plaintiff's response to the debtor's first motion to dismiss.

IT IS SO ORDERED.

Dated at Topeka, Kansas, this _____ day of September, 1995.













__________________________________

JAMES A. PUSATERI

CHIEF BANKRUPTCY JUDGE

 

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