No. 03-12823, A.P. No. 04-1018.United States Bankruptcy Court, N.D. California.
December 15, 2004
Memorandum of Decision
ALAN JAROSLOVSKY, Bankruptcy Judge
In the summer of 2000, plaintiff David Kurland was in dire financial straits, even to the point of contemplating suicide. He had purchased an interest in a business known as Downtown Autobody, LLC, and had loaned the business about $500,000.00. Not only was the business failing, but Kurland had personally guaranteed hundreds of thousands of dollars of business debt.
The other principal of the business was Chapter 7 debtor and defendant Dion Reif. When Kurland told Reif about his dire situation, Reif found a new investor, A.C. Patel, to take out Kurland. In
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September, 2004, the parties entered into an agreement whereby Kurland would sell his interest in the LLC for $1 million (the approximate balance owed to him on his loans, plus accrued interest).[1] Patel personally guaranteed this obligation, plus agreed to indemnify Kurland against claims made on him by business creditors.
The Patel deal was a godsend for Kurland, which he freely admitted. It saved him from personal and well as financial disaster. Although Patel later resisted meeting his obligations, alleging that he had been fraudulently induced to enter into the deal, he subsequently settled with Kurland for over $400,000.00. Had Patel not entered into the picture, Kurland would have lost everything and been on the hook for much more to business creditors.
Kurland has somehow convinced himself that Reif owes him a nondischargeable debt. He does not allege that Reif lied to him, but rather that Reif withheld information about Patel. Here in Kurland’s own words, is his statement of the case:
Q. What exactly do you contend that [Reif] did not tell you that he should have told you?
A. How good Mr. Patel’s word was, how good Mr. Patel’s ability to perform would be, that he was performing in a reasonable and predictable way, and he did not do those things for me.
Kurland’s case is so utterly without merit on every legal and factual level that it is difficult to know where to begin. Reif did not know that Patel’s word was not good, or that Patel had no ability to perform. Reif thought Patel’s word was good and that he had the ability to perform. Patel’s word was good, and h did have the ability to perform. Kurland had privately investigated Patel, and knew Patel had the ability to perform. The evidence does not justify the finding of a single element of fraud, let alone establish a nondischargeable debt.
Even if the evidence had established some sort of intentional non-disclosure (which it does not), Kurland suffered no damages. At the very worst, Kurland would have been no better off than if no angel
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had been found. There is not the slightest indication that anyone else could have been found had Patel not agreed to invest. Debts are nondischargeable under § 523(a)(2) of the Bankruptcy Code only to the extent that money or property is obtained by false pretenses. Kurland was already owned $1 million before Patel was brought in; he was not induced to part with anything other than a worthless interest in a failing business and an interest in real property lacking equity. How Kurland can claim the entire note as his damages for fraud is beyond the understanding of the court even if fraud had been shown.
Kurland’s reliance on defalcation in a fiduciary capacity under § 523(4) of the Bankruptcy Code is entirely misplaced. In order for a debt to be nondischargeable under that section, there must be an express trust. In re Lewis, 97 F.3d 1182, 1185 (9th
Cir. 1996). The trust may be created by agreement or statute; California law makes partners trustees of partnership property, so a partner is liable under § 523(a)(4) for improper use of partnership property. Ragsdale v. Haller, 780 F.2d 794, 796
(9th Cir. 1986). However, broad general concepts of fiduciary duty under state law are inapplicable in the dischargeability context. In re Cantrell, 329 F.3d 1119, 1125 (9th Cir. 2003). Kurland’s theory that Reif is liable to him, even absent any fraud, for failing to inform him about Patel’s supposed untrustworthiness or an entirely innocent agreement made with Patel after Kurland was out of the picture does not hold water because they arise out of general state law notions of fiduciary duty and not misuse or failure to account for partnership assets. See In re Niles, 106 F.3d 1456, 1463 (9th Cir., 1997)[defalcation by real estate broker in relation to client funds rendered this claim nondischargeable, but not other claims based on general breach of fiduciary duty under state law].[2]
For the foregoing reasons, Kurland will take nothing by his complaint which will be dismissed, with prejudice. Reif shall recover his costs of suit.
This memorandum constitutes the court’s findings and conclusions pursuant to FRCP 52(a) and FRBP 7052. Counsel for Reif shall submit an appropriate form of judgment forthwith.
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