9th Cir BAP 523(a)(4) - breach of fiduciary duty - published (pro-se case - reversed)

The court reversed a bankruptcy court ruling that a debt was nondischargeable under sec. 523(a)(4) for fiduciary defalcation.

The BAP said it would have remanded because the bankruptcy court had made its 2012 ruling under the precedent of In re Lewis, which required no fraud, or even negligence.  The Supreme Court May 2013 case reversed the holding on Lewis in Bullock v. BankChampaign:

Bullock effectively abrogated that part of In re Lewis holding that a debtor who failed to account to another need not possess any particular state of mind to except a debt from discharge based on fiduciary defalcation under § 523(a)(4). To the contrary, in Bullock, the Supreme Court interpreted § 523(a)(4) to require that, in order to except a debt for a defalcation by a fiduciary, the debtor must possess “a culpable state of mind . . . akin to that which accompanies application of the other terms in the same statutory phrase. We describe that state of mind as one involving knowledge of, or gross recklessness in respect to, the improper nature of the relevant fiduciary behavior.” Id. at 1757.

But, the BAP outright reversed the case, instead of remanding, since the agreements of the parties did no show there was a "present" formation of a partnership (or, even an LLC).  Thus there was no "present" fiduciary duty that could give rise to a defalcation:

.  .  . we conclude that the bankruptcy court erred in its determination that a partnership was formed by the Loan Agreement. At best, the parties agreed to form an LLC based upon events to occur in the future, events that never came to pass. Since no partnership existed between the parties during their dealings, we conclude that, as a matter of law, William was not a fiduciary as to Crulls for purposes of § 523(a)(4), and that the bankruptcy court erred in excepting the debt from discharge under that provision of the Bankruptcy Code.

In re Utnehmer - 9th Cir BAP 2013