Airlines Reporting v. Ellison

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
In Re: STANLEY MARSHALL ELLISON; 
KAY DEARING ELLISON,
Debtors.
AIRLINES REPORTING CORPORATION,
Plaintiff-Appellee,  No. 01-2277
v.
STANLEY MARSHALL ELLISON; KAY
DEARING ELLISON,
Defendants-Appellants.

Appeal from the United States District Court
for the Southern District of West Virginia, at Beckley.
David A. Faber, District Judge.
(CA-00-1067-5, BK-94-50123, AP-94-96)
Argued: May 7, 2002
Decided: July 11, 2002
Before WILKINSON, Chief Judge, and NIEMEYER and
LUTTIG, Circuit Judges.
Affirmed in part, vacated in part, and remanded by published opinion.
Judge Niemeyer wrote the opinion, in which Chief Judge Wilkinson
joined. Judge Luttig wrote a dissenting opinion.
COUNSEL
ARGUED: James R. Sheatsley, GORMAN, SHEATSLEY & COM-
PANY, L.C., Beckley, West Virginia, for Appellants. R. Terrance
2 IN RE: ELLISON
Rodgers, ALLEN, GUTHRIE & MCHUGH, Charleston, West Vir-
ginia, for Appellee. ON BRIEF: Nicholas P. Mooney, II, ALLEN,
GUTHRIE & MCHUGH, Charleston, West Virginia; C. Erik Gustaf-
son, LECLAIR RYAN, P.C., Alexandria, Virginia, for Appellee.
OPINION
NIEMEYER, Circuit Judge:
Airlines Reporting Corporation ("ARC") commenced this adver-
sary proceeding in the Chapter 7 bankruptcy of Stanley Marshall Elli-
son and Kay Dearing Ellison to establish the Ellisons’ liability on
their personal guarantees of their travel agency’s indebtedness to
ARC and to establish that this indebtedness is nondischargeable under
11 U.S.C. § 523(a)(4). The district court concluded that the Ellisons
are indebted to ARC in the amount of $574,678 and that this indebt-
edness arose from the Ellisons’ defalcation while acting in a fiduciary
capacity and therefore is nondischargeable. On appeal, we affirm the
district court’s conclusion that the Ellisons’ indebtedness on their per-
sonal guarantees is nondischargeable but remand for further factfind-
ing with respect to the amount of indebtedness.
I
Stanley Ellison and his wife, Kay Ellison, were officers, directors,
and shareholders of Sovereign World Travel, Ltd. ("Sovereign
Travel"), a West Virginia corporation operating a travel agency in
Charleston, West Virginia. To facilitate its business of selling airline
tickets, Sovereign Travel entered into an Agent Reporting Agreement
with ARC, a Delaware corporation owned by various airline carriers,
that acted as the carriers’ agent for issuing airline tickets and collect-
ing the payment for those tickets from travel agents.
The Agent Reporting Agreement provided for a trust arrangement,
under which Sovereign Travel collected payments for the sales of air-
line tickets, placed the proceeds of those sales in a trust account with
the Whitesville State Bank for the benefit of ARC, and reported to
ARC weekly on the ticket sales made to customers. The deposited
IN RE: ELLISON 3
proceeds, excluding Sovereign Travel’s commissions, were desig-
nated as "the property of the carrier and [were to] be held in trust until
accounted for to the carrier." After Sovereign Travel submitted its
sales report to ARC, ARC paid itself with checks that ARC drew on
the trust account. Sovereign Travel and ARC also executed a "Cush-
ion Agreement," whereby Sovereign Travel agreed to keep a cushion
of $100,000 in the same trust account and whereby the parties agreed
that withdrawals would "be permitted by ARC drafts only."
In addition to Sovereign Travel’s undertakings with ARC, ARC
required, as a condition of allowing Sovereign Travel to remain on its
approved agency list, the personal guarantees of the Ellisons. Accord-
ingly, the Ellisons signed personal guarantees of performance under
which they "promise[d] and guarantee[d] the unconditional payment
by [Sovereign Travel] . . . of all indebtedness, liabilities and obliga-
tions of every nature and kind arising out of or in connection with the
[Agent Reporting Agreement]" between ARC and Sovereign Travel.
In late 1993, Sovereign Travel began experiencing financial diffi-
culties. It began to fail to deposit proceeds of the ticket sales into the
trust account with Whitesville State Bank, and it began to fail to sub-
mit weekly sales reports to ARC. When ARC attempted to draw from
the trust account, checks were returned for insufficient funds. These
failures of performance by Sovereign Travel were the result of the
Ellisons’ personal decisions and conduct. The Ellisons were involved
in the supervision and handling of the day-to-day operations of Sover-
eign Travel and the handling of the relationship between Sovereign
Travel and ARC. And to the extent that Sovereign Travel in fact went
out of trust in its relationship with ARC, the Ellisons acknowledge
that they were the ones responsible for the corporation’s actions.
In January 1994, Sovereign Travel filed a voluntary petition under
Chapter 7 of the United States Bankruptcy Code.1 And a few months
later, in April 1994, the Ellisons followed, filing this Chapter 7 pro-
ceeding.
1
The actual debtor in that proceeding is Great American Holding Com-
pany which succeeded to the assets and obligations of Sovereign Travel.
4 IN RE: ELLISON
ARC filed a complaint against the Ellisons in this bankruptcy pro-
ceeding, seeking a judgment of $342,207 based on the Ellisons’ per-
sonal guarantees of Sovereign Travel’s indebtedness to ARC and a
declaratory judgment that the Ellisons’ indebtedness to ARC is non-
dischargeable under 11 U.S.C. § 523(a). In its complaint, ARC
alleged that because of the Ellisons’ personal involvement in Sover-
eign Travel’s defalcation to ARC, the liability of the Ellisons on their
personal guarantees to ARC is nondischargeable on three grounds: (1)
fraud under 11 U.S.C. § 523(a)(2)(A); (2) defalcation "while acting in
a fiduciary capacity and/or embezzlement" under 11 U.S.C.
§ 523(a)(4); and (3) "willful and malicious injury . . . to ARC" under
11 U.S.C. § 523(a)(6).
On ARC’s motion filed in the adversary proceeding, the bank-
ruptcy court granted ARC partial summary judgment, finding the Elli-
sons liable on their personal guarantees and declaring that
indebtedness nondischargeable under 11 U.S.C. § 523(a)(4). The
court concluded that the Ellisons defaulted while acting in a fiduciary
capacity based on the following:
The fiduciary relationship between ARC and [Sovereign
Travel] is clearly set out in the [Agency Reporting Agree-
ments], and the defendants’ liability for those obligations is
equally clear from the two personal guarantees executed by
each of them individually, and the fact that the defendants
have both admitted responsibility for handling the weekly
sales reports and the trust account at Whitesville State Bank.
The court explained its conclusions as follows:
The defendants had both a fiduciary duty to ARC in the exe-
cution of the [Agency Reporting Agreement] which created
an express trust relationship with respect to the Traffic Doc-
uments and the trust account at the Whitesville State Bank,
and a fiduciary duty to [Sovereign Travel] as officers and
directors to ensure that [Sovereign Travel] complied with
the terms of the [Agency Reporting Agreement] so as not to
lose its agency listing. Defendants were instrumental in the
actions which constituted the defalcation, and thus must be
held personally liable for their breach of fiduciary duty.
IN RE: ELLISON 5
Following the entry of the partial summary judgment on liability,
the bankruptcy court conducted a hearing on damages and held that
the Ellisons were obligated to ARC in the amount of $391,062 in
principal and $183,616 in prejudgment interest, for a total of
$574,678. In computing these damages, the court concluded that the
Ellisons were responsible for reimbursing the airline carriers at the
standard coach rates for tickets sold and not at the lower tour rates
under which Sovereign Travel allegedly sold the tickets.
On appeal, the district court affirmed, entering judgment in favor
of ARC on September 20, 2001. From the district court’s judgment,
this appeal followed.
II
The Ellisons contend that the district court erred in holding that
their indebtedness to ARC, based on their personal guarantees of Sov-
ereign Travel’s obligations, was not dischargeable under 11 U.S.C.
§ 523(a)(4). The Ellisons point out that it was Sovereign Travel, not
they, who had a fiduciary relationship with ARC and that, as officers
and directors of Sovereign Travel, they owed no fiduciary duty to
ARC. They also note that being guarantors of Sovereign Travel’s
indebtedness did not place them in a fiduciary relationship with ARC.
They argue that their fiduciary duty to Sovereign Travel as its officers
and directors is "irrelevant" and that Sovereign Travel’s trust relation-
ship with ARC was not imputable to them personally. In sum, the
Ellisons contend that neither their fiduciary duty to Sovereign Travel,
based on being officers and directors of Sovereign Travel, nor Sover-
eign Travel’s fiduciary duty to ARC, based on the Agent Reporting
Agreement, translates into a fiduciary relationship between the Elli-
sons and ARC. See, e.g., In re Long, 774 F.2d 875, 878 (8th Cir.
1985) ("We question . . . the propriety of opposing a corporation’s
fiduciary duties on a stockholder-employee in the absence of such a
local rule"); In re Cross, 666 F.2d 873, 880-81 (5th Cir. 1982) (con-
cluding that the exception to discharge for defalcation while acting in
a fiduciary capacity required a fiduciary obligation to the creditor, not
just a fiduciary duty to the corporation for which the officer worked).
Thus, the issue that the Ellisons raise is whether the Ellisons’
indebtedness to ARC, based on their personal guarantees, is "for fraud
6 IN RE: ELLISON
or defalcation while acting in a fiduciary capacity, embezzlement, or
larceny." If it is, then under 11 U.S.C. § 523(a)(4), their indebtedness
is not dischargeable in bankruptcy.
We begin by recognizing that by simply guaranteeing Sovereign
Travel’s debt to ARC, the Ellisons did not place themselves in a fidu-
ciary relationship with ARC. See, e.g., In re Levitan, 46 B.R. 380,
386-87 (Bankr. E.D.N.Y. 1985) (holding that an ordinary security
agreement did not create a fiduciary relationship between debtor and
creditor). But in this case, there are three additional facts that we must
consider.
First, Sovereign Travels’s indebtedness to ARC arose out of the
breach of a fiduciary relationship between the two corporations.
Under the Agent Reporting Agreement, Sovereign Travel was obliged
to collect payments for the sale of tickets and place those payments
in a trust account with Whitesville State Bank for the benefit of ARC
and subject only to ARC’s withdrawals. The Agent Reporting Agree-
ment provided that these proceeds, less commissions due to Sovereign
Travel, were the "property of the carriers," to be "held in trust" by
Sovereign Travel "until satisfactorily accounted for to the carriers."
Because Sovereign Travel failed to place ticket-sales proceeds into
the trust account and failed to report to ARC the sales that generated
these proceeds, Sovereign Travel breached the trust arrangement and
therefore defalcated "while acting in a fiduciary capacity" with
respect to these funds. See In re Ansari, 113 F.3d 17, 20-21 (4th Cir.
1997); see also In re Uwimana, 274 F.3d 806, 811 (4th Cir. 2001)
(stating that even negligence or an innocent mistake could constitute
a defalcation under § 523(a)(4)).
Second, the Ellisons, when acting as officers and directors of Sov-
ereign Travel, "occupied a fiduciary relationship toward [Sovereign
Travel]" under West Virginia law. See Bailey v. Vaughan, 359 S.E.2d
599, 605 (W. Va. 1987) (internal quotation marks and citation omit-
ted).
Third, the Ellisons were personally responsible for the conduct that
gave rise to Sovereign Travel’s defalcation to ARC. They personally
handled Sovereign Travel’s weekly sales reports and ARC’s trust
account at the Whitesville State Bank. And they withheld money that
IN RE: ELLISON 7
was designated to be placed in trust for ARC, causing Sovereign
Travel’s default. Thus, it was the Ellisons themselves who depleted
ARC’s trust funds to the point that checks properly drawn on the trust
account were returned for insufficient funds. In short, the Ellisons’
personal conduct brought about Sovereign Travel’s defalcation to
ARC. And while an officer of a corporation is in no way personally
liable for corporate torts solely on account of his corporate position,
where the officer actually participates in or otherwise sanctions the
tortious acts, personal liability may lie. See Bowling v. Ansted
Chrysler-Plymouth-Dodge, Inc., 425 S.E.2d 144, 149 (W. Va. 1992).
Thus, in this case, not only did the Ellisons guarantee Sovereign
Travel’s indebtedness and performance to ARC, they also created that
very indebtedness through their personal conduct by single-handedly
causing the corporation to breach its trust arrangement with ARC. In
doing so, they also breached their fiduciary duty to the corporation as
officers and directors, and their tortious conduct made them jointly
and severally liable with the corporation vis-a-vis ARC, quite apart
from their personal guarantees.
Based on the confluence of: (1) the Ellisons’ personal guarantees
to ARC of Sovereign Travel’s indebtedness; (2) the fact that Sover-
eign Travel’s indebtedness arose from Sovereign Travel’s breach of
its fiduciary duty to ARC; (3) the fact that Sovereign Travel’s breach
of a fiduciary duty was brought about by the Ellisons’ personal con-
duct; and (4) the fact that the Ellisons’ conduct amounted to a breach
of their fiduciary duty to Sovereign Travel, we conclude that the Elli-
sons’ indebtedness to ARC under the personal guarantees was from
their defalcation while acting in a fiduciary capacity and therefore is
not dischargeable in bankruptcy under 11 U.S.C. § 523(a)(4). In so
holding, we recognize that the class of nondischargeable debts is
indeed quite narrow, see, e.g., In re Miller, 156 F.3d 598, 602 (5th
Cir. 1998), but we also avoid a construction so narrow as to eviscerate
§ 523(a)’s purpose of preventing debtors such as the Ellisons, from
avoiding, through bankruptcy, the consequences of their wrongful
conduct. See, e.g., In re Magpusao, 265 B.R. 492, 496 (Bankr. M.D.
Fla. 2001) ("Exceptions to discharge prevent a debtor from avoiding
the consequences of wrongful conduct by filing a bankruptcy case");
In re Chapman, 228 B.R. 899, 908 n.7 (Bankr. N.D. Ohio 1998) (stat-
ing that § 523(a) exceptions to discharge "are designed to prevent the
8 IN RE: ELLISON
debtor from avoiding, through a bankruptcy filing, the consequences
of wrongful conduct"); In re Portner, 109 B.R. 977, 985 (Bankr. D.
Colo. 1989) (noting the need to balance "the fresh start policy [with]
preventing a dishonest debtor from avoiding through bankruptcy the
consequences of wrongful . . . conduct"); In re Wheeler, 101 B.R. 39,
47 (Bankr. N.D. Ind. 1989) (same); In re Mayo, 94 B.R. 315, 322-23
(Bankr. D. Vt. 1988) (same); In re Levitan, 46 B.R. at 383 ("Many
of the exceptions [to discharge] are intended to prevent a debtor from
avoiding through bankruptcy the consequences of his wrongful con-
duct").
Stated otherwise, the Ellisons, through their wrongful conduct,
brought about the very indebtedness which they now seek to dis-
charge. They controlled — through a willingness to breach their fidu-
ciary duty to Sovereign Travel — Sovereign Travel’s ability to satisfy
its fiduciary duty to ARC. Combined with the Ellisons’ personal guar-
antees, this control makes separating the Ellisons from Sovereign
Travel’s defalcation while acting in a fiduciary capacity impossible.
Accordingly, we agree with the district court that the Ellisons’ indebt-
edness to ARC was caused solely by the Ellisons’ breach of trust and
is therefore not dischargeable under 11 U.S.C. § 523(a)(4). Cf. In re
Folliard, 10 B.R. 875, 876 (D. Md. 1981) ("An officer of a corpora-
tion ‘who knowingly causes the misappropriation of trust property by
the corporation is personally liable for participation in the breach of
trust committed by the corporation’" (citation omitted)).
III
The Ellisons also contend that the district court erred in calculating
the amount owed to ARC under their personal guarantees. They main-
tain that the district court based the reimbursement amount on stan-
dard commercial fares when many of the airline tickets were actually
sold at lower tour rates. The bankruptcy court based its use of the
higher rates on the fact that Sovereign Travel — through the Ellisons
— failed to report its sales in a timely manner, thereby forfeiting the
right to use the lower tour rates actually collected from the customers.
The Ellisons argue that use of the higher rates by the court is not justi-
fied by the contractual relationship and thus constitutes a penalty, not
damages.
IN RE: ELLISON 9
At the December 6, 1999 hearing on damages, the Ellisons offered
into evidence several contracts setting the tour rates owed to the air-
lines for tickets sold by Sovereign Travel. The agreed-upon tour rates
were substantially lower than the usual commercial coach rates that
were charged by the carriers to independent third-party ticket pur-
chasers. ARC objected to this evidence because it had not been pro-
duced in advance of the hearing and asserted on the merits that, by
failing to remit the money owed to the carriers promptly, Sovereign
Travel was not entitled to the benefit of the contracted prices, even
though this position is not supported by the contracts themselves. In
response to ARC’s objection, the bankruptcy court noted that there
was insufficient time after the summary judgment ruling for Sover-
eign Travel to produce the documents in advance, and accordingly the
court allowed the contracts to be admitted with the following accom-
modation to ARC:
Instead of just disregarding totally that evidence [the con-
tracts] from the Defendants, what we are going to do is give
the Plaintiffs an opportunity to submit, by affidavit. I don’t
think the Plaintiffs ought to be put to the expense of coming
to another trial and another hearing, and if the Plaintiffs can
show to me, by sufficient affidavit, that you don’t get the
benefit of a tour agreement, unless you remit the reduced
prices promptly, then I think they are entitled to judgment
with respect to those matters.
Following the hearing, ARC filed an affidavit, stating that there
were no records to support the Ellisons’ contention that they were
entitled to the negotiated tour rates "because of passage of time" and
due to the Ellisons’ failure to remit money owed to the carriers
promptly. The bankruptcy court accepted ARC’s explanation and,
despite the lack of such contingencies in the negotiated tour rates, cal-
culated damages based on the higher commercial coach rate. We con-
clude that this was error.
It is well settled that damages for breach of contract "must be such
as will give, and only such as will give, compensation for the actual
loss directly flowing from the breach of the contract." Horn v. Bowen,
67 S.E.2d 737, 739 (W. Va. 1951) (internal quotation marks and cita-
tion omitted). Contract damages must reflect what the injured party
10 IN RE: ELLISON
would have received had the contract been performed; they cannot be
punitive. Id. And, as long as a contract is not ambiguous, extrinsic
evidence cannot supply the terms of the contract. See, e.g., Larew v.
Monongahela Power Co., 487 S.E.2d 348, 352 (W. Va. 1997); Mar-
shall v. Elmo Greer & Sons, Inc., 456 S.E.2d 554, 557 (W. Va. 1995).
Applying these well-settled principles to this case, the Ellisons’
debt to ARC should have been calculated based on the contract price
negotiated between the Ellisons and the airlines. Had the Ellisons met
their responsibility of holding the proceeds of air travel sales in trust
and submitting sales reports, ARC would have been entitled to draw
only the negotiated tour rates from the trust account. And because the
contracts clearly did not make the negotiated tour rates contingent on
payment by a certain date, the bankruptcy court erred by relying on
ARC’s affidavits to discredit those rates. At bottom, if the tour rates
were those actually applicable, the calculation based on standard com-
mercial rates amounted to a penalty, in violation of well-accepted
contract principles.
Notwithstanding this error, ARC argues that the contracts for tour
rates produced by the Ellisons were never executed and therefore
were invalid. But this issue has never been addressed by the bank-
ruptcy court. Because we believe that the contracts’ validity should
be decided in the first instance by the bankruptcy court, we will
remand the damages issue for further factual findings by the bank-
ruptcy court. To the extent that it might be established that there were
no valid contracts for tour rates or reduced fares, we would agree that
the standard commercial rates applicable at the time of the Ellisons’
defalcation would be the appropriate measure for the Ellisons’ debt.
Accordingly, we vacate the award of damages and remand that
issue for further factfinding.
IV
In sum, we affirm the bankruptcy court’s ruling that, under 11
U.S.C. § 523(a)(4), the Ellisons’ indebtedness to ARC based on their
personal guarantees to ARC of Sovereign Travel’s indebtedness is a
IN RE: ELLISON 11
nondischargeable debt. And on the issue of damages, we vacate the
award and remand for further factfinding.2
AFFIRMED IN PART, VACATED IN PART,
AND REMANDED FOR FURTHER PROCEEDINGS
LUTTIG, Circuit Judge, dissenting:
Section 523(a)(4) of the Bankruptcy Code provides that any debt
"for fraud or defalcation while acting in a fiduciary capacity" is non-
dischargeable in Chapter 7. The majority agrees that the Ellisons
owed no fiduciary duty to ARC. From that premise, it unavoidably
follows that the district court’s decision holding the Ellisons’ debt to
ARC non-dischargeable under this provision of section 523(a)(4)
must be reversed. As I will explain below, the only defensible con-
struction of the above-quoted provision is that the debt must have
been incurred while the debtor was acting in a fiduciary capacity with
respect to the creditor seeking to take advantage of section 523(a)(4).
If there was no fiduciary duty owed by the debtor to the creditor, then
section 523(a)(4) simply does not apply.
In its tortured path to the opposite conclusion, the majority creates
a new avenue to non-dischargeability under section 523(a)(4). As I
can best understand it, a debtor may be barred from discharging a
debt in Chapter 7 if he owes a fiduciary duty to a corporation other
than the creditor; that corporation, in turn, owes a fiduciary duty to
the creditor seeking to invoke section 523(a)(4); the corporation com-
mits defalcation while acting in a fiduciary capacity with respect to
that creditor; the debtor "brings about" or "controls" that corporation’s
defalcation; the debtor simultaneously breaches a fiduciary duty owed
to the corporation (but does not necessarily commit fraud or defalca-
tion with respect to that corporation); and, last but not least, the debtor
is a guarantor of that corporation’s debts.1
2
On the Ellisons’ contention that the bankruptcy court abused its dis-
cretion in denying them leave to implead the trustee in the bankruptcy
of Sovereign Travel (now Great American Holding Company), we con-
clude that the court did not abuse its discretion.
1
None of these conditions is sufficient, in and of itself, to establish
non-dischargeability under the majority’s opinion, although I cannot tell
12 IN RE: ELLISON
I would confine the scope of section 523(a)(4) to its text and
reverse the district court’s judgment.
I.
I begin with the principle upon which we all agree — that the Elli-
sons owed no fiduciary duty to ARC. While the parties concede (and
the majority holds) that Sovereign World Travel was "acting in a fidu-
ciary capacity" with respect to ARC,2 the Ellisons’ personal guarantee
for sure whether each of these is necessary, in the majority’s view, for
this provision of section 523(a)(4) to apply. To give just one example,
I am at a loss to understand how the Ellisons’ guarantee of Sovereign
Travel’s indebtedness has anything to do with non-dischargeability under
section 523(a)(4), which asks only whether a debt is "for fraud or defal-
cation while acting in a fiduciary capacity." The existence of a guarantee
agreement has no bearing on whether the Ellisons committed fraud, com-
mitted defalcation, or acted in a fiduciary capacity, yet the majority
includes it among the "confluence" of factors supporting its conclusion
that the Ellisons’ indebtedness to ARC is non-dischargeable under sec-
tion 523(a)(4).
The guarantee agreement is certainly relevant to whether a debt exists
between the Ellisons and ARC, but its use as a factor in support of the
non-dischargeability of that debt under section 523(a)(4) remains a mys-
tery to me.
2
An issue that the parties do not address is whether the mere use of the
word "trust" in the agreement between Sovereign World Travel and ARC
is sufficient to establish a fiduciary relationship between the two corpora-
tions. The contract between Great American and ARC stated:
[Great American] recognizes that the proceeds of the sales, less
[Great American’s] commissions, on these ARC traffic docu-
ments are the property of the carrier and shall be held in trust
until accounted for to the carrier.
J.A. 304. But courts have not automatically found fiduciary relationships
simply because a document uses the word "trust." See Judd v. First Fed-
eral Savings and Loan Ass’n, 710 F.2d 1237, 1241 (7th Cir. 1983)
("Simply stated, the words used in a document are not always conclusive
evidence of a trust. The principal consideration is intent."); In re Long,
774 F.2d 875, 878-79 (8th Cir. 1985) ("It is the substance of the transac-
tion, rather than the labels assigned by the parties, which determines
IN RE: ELLISON 13
of Sovereign Travel’s obligations in no way imputes Sovereign Trav-
el’s "fiduciary capacity" to the Ellisons. The majority correctly rejects
the notion that a guarantor of a fiduciary’s debts himself becomes a
fiduciary by virtue of the guarantee agreement. See ante, at 5. A guar-
antee agreement is nothing more than a promise to answer for the
payment of another’s debt; it does not entail fiduciary obligations of
any sort. Although Sovereign Travel may have been acting in a fidu-
ciary capacity with respect to ARC, its guarantors were not.
Nor did the Ellisons become ARC’s fiduciaries by virtue of their
status as officers or as shareholders of Sovereign Travel. See In re
Long, 774 F.2d 875, 878 (8th Cir. 1985) (holding that corporate offi-
cers are not charged with the corporation’s fiduciary duties, in the
absence of a state law rule creating fiduciary status in the officer).
Officers and shareholders are not vicariously liable for the fiduciary
obligations of their corporation, even if they "control" a corporation’s
ability to satisfy those obligations, unless there is reason to disregard
the corporate form. Whether a court should "pierce the corporate veil"
is a question of state law, and no argument or evidence in the record
suggests that the Ellisons operated Sovereign Travel as a shell corpo-
ration, without observing the corporate forms, in an effort to defraud
their creditors. In the absence of these circumstances, the officers of
a corporate fiduciary do not themselves become fiduciaries.
The only other possible source of a fiduciary duty to ARC is the
Ellisons’ conduct. The majority hints that West Virginia tort law
would hold the Ellisons directly and personally liable for their corpo-
ration’s debt, see ante at 7, although this issue was never briefed or
argued. (If the majority really believed that the Ellisons’ debt to ARC
arose under West Virginia tort law, there would be no need to rely on
the Ellisons’ guarantee among its "confluence" of reasons for affirm-
whether there is a fiduciary relationship for bankruptcy purposes."). One
could argue that, notwithstanding the language in the agreement, the
ticket sale arrangements between Great American and ARC resemble
more of a debtor-creditor relationship between sophisticated corporate
parties, rather than the typical fiduciary relationship, where there is a dif-
ference in knowledge and power between the fiduciary and the principal.
But the parties do not belabor this point, so neither do I.
14 IN RE: ELLISON
ing the non-dischargeability order under section 523(a)(4); indeed,
there would be no need to discuss the Ellisons’ guarantee agreement
at all.) But even if the Ellisons committed a business tort under West
Virginia law, that still would not establish that the Ellisons owed a
fiduciary duty to ARC.
II.
Notwithstanding the absence of a fiduciary duty to ARC, the
majority concludes that the Ellisons "act[ed] in a fiduciary capacity"
under section 523(a)(4) because they owed a fiduciary duty to their
corporation, Sovereign Travel. See ante, at 6-7. This construction of
the statute is indefensible. If a fiduciary duty to someone other than
the creditor is sufficient to satisfy the "acting in a fiduciary capacity"
requirement of section 524(a)(3), then any creditor in bankruptcy can
render his debt non-dischargeable by characterizing the debtor’s
actions as "fraud or defalcation," so long as, at the time the debt
accrued, the debtor owed a fiduciary duty to someone else — anyone
else. Any failure to pay a creditor, whether on a contract or an adverse
court judgment, could be characterized as a "defalcation,"3 once sec-
tion 524(a)(3) is divorced from its requirement that the debtor owe a
fiduciary duty to the creditor and commit an act of defalcation while
acting in that fiduciary capacity. The majority’s construction of sec-
tion 523(a)(4) could exempt all of a fiduciary’s debts from discharge
in bankruptcy, even those debts incurred entirely apart from his duties
as a trustee.
The alternative (and only sensible) construction of the nondischar-
geability provision would require that the debtor have "act[ed] in a
fiduciary capacity" with respect to the creditor. On this reading ARC,
of course, cannot prevail because even the majority agrees that the
Ellisons owed no fiduciary duty to ARC. Yet the majority rejects this
construction of the statute, and then attempts to confine the absurd
results that would follow from its own interpretation of the "acting in
a fiduciary capacity" requirement by adding additional (and non-
textual) factors in determining whether creditors in ARC’s position
3
Black’s Law Dictionary includes among its definitions of "defalca-
tion" as "the act of a defaulter" and the "failure to meet an obligation."
Black’s Law Dictionary (6th ed.) 417.
IN RE: ELLISON 15
can establish non-dischargeability under section 523(a)(4). See ante,
at 7-8.
What appears to underlie the majority’s decision is a concern that
unscrupulous corporate officers might pilfer assets from corporate-
controlled trust funds and then escape liability by filing for bank-
ruptcy and hiding behind the corporate form. Perhaps the majority
believes this is what the Ellisons are trying to do to ARC, as the opin-
ion repeatedly labels the Ellisons’ conduct as "wrongful," notwith-
standing the Bankruptcy Court’s explicit finding that "there is no
evidence that the [Ellisons] committed actual fraud," J.A. at 308, and
the lack of any findings of fact or evidence in the record to suggest
moral culpability on the part of the Ellisons.4
But even assuming that the majority’s grim characterization of the
Ellisons’ conduct is accurate, its declaration that granting a discharge
would be at odds with the "purpose" of section 523(a), see ante at 7-
8 (preventing debtors from "avoiding . . . the consequences of their
wrongful conduct") cannot justify ignoring the only plausible con-
struction of the statute’s text in favor of the new judicially-created
multi-factored nondischargeability provision. An equal but opposite
"purpose" that could be gleaned from section 523(a) (as well as the
rest of the Bankruptcy Code and the case law) is the policy of giving
the debtor a "fresh start." It seems to me that this "purpose," no less
than the one chosen by the majority, should guide interpretation of
section 523(a). It is no answer to say the fresh start policy is conferred
4
ARC alleged in its complaint that the Ellisons submitted certain
weekly sales reports that were "false and misleading," J.A. 138, but the
Ellisons denied this and the bankruptcy court "found no evidence" of
this. J.A. 308. The bankruptcy court further stated that "ARC has not
shown that [Sovereign Travel] actually failed to deposit monies received
into the trust account at Whitesville State Bank or that [Sovereign
Travel] actually withdrew monies from that account for use in daily
operations." J.A. 308. Moreover, I am unable to find (and the majority
does not cite) any evidence in the record or findings of fact by any court
that would support the majority’s characterization of the Ellisons’ con-
duct as "wrongful." At worst, it appears the Ellisons failed to meet their
financial obligations at a time when their business was struggling. In the
absence of fraud or manipulation, that hardly constitutes "wrongful con-
duct," even though their failures would incur legal liability.
16 IN RE: ELLISON
only on those who incurred their debts through "non-wrongful" con-
duct, as debts from all sorts of "wrongful conduct" are dischargeable
under section 523(a)(4) in the name of giving the debtor a fresh start.
This nicely illustrates the pitfalls of attempting to construe statutes
in accordance with a perceived statutory "purpose." Not only can mul-
tiple "purposes" be gleaned from a long and intricate statute such as
the Bankruptcy Code, but courts have no principled basis for choos-
ing among them. A legislative compromise has already resolved the
competing policy concerns of giving the debtor a fresh start without
letting people off the hook for, and therefore encouraging, "wrongful
conduct." A court’s task is to implement this compromise by applying
the plain meaning of the statute, unadorned by divinations of statutory
"purpose."
In any event, the majority’s concerns of corporate officers evading
the consequences of their wrongful conduct, in addition to being irrel-
evant to the task of statutory construction, are unfounded. Other non-
dischargeability provisions of the bankruptcy code, apart from section
523(a)(4), can prevent corporate directors and officers from using per-
sonal bankruptcy proceedings to escape liability for their misdeeds.
Section 523(a)(2)(A), for example, provides that any debt for money
obtained by "actual fraud" cannot be discharged in bankruptcy,
whether or not the debtor acted in a fiduciary capacity when commit-
ting the fraud. And section 523(a)(6) states that debts "for willful and
malicious injury by the debtor to another entity or to the property of
another entity" will also survive bankruptcy. In short, the Bankruptcy
Code provides creditors with ample protection from the shenanigans
of corporate officers. But only a creditor to whom a fiduciary duty is
owed by the debtor can establish non-dischargeability upon a mere
showing of defalcation, and nothing more.
III.
Perhaps the conclusion reached by the majority under its multi-
factor test is just another way of saying that the Ellisons’ conduct was
sufficiently egregious to warrant setting aside the corporate form, and
holding the Ellisons personally liable for Sovereign Travel’s debt to
ARC. Whether corporate forms may be disregarded is a question of
state law, and ARC has not made any argument, in this appeal or in
IN RE: ELLISON 17
the proceedings below, that the corporate veil should be pierced. Nor
has the factual record been developed to allow this court to determine
whether the Ellisons neglected the corporate forms in managing their
business, whether they used the corporate form to perpetrate an injus-
tice, or whether any of the nineteen factors that West Virginia courts
consider in deciding whether to disregard the corporate form, see
Laya v. Erin Homes, Inc., 352 S.E.2d 93, 98 (W. Va. 1986), have
been met.
The majority rescues ARC’s forfeiture, and its failure to develop
the necessary evidence on this issue, by rejecting a textual analysis of
section 523(a)(4) and replacing it with a multi-factor test for non-
dischargeability that will breed nothing but confusion and increased
litigation.
IV.
Because the majority’s decision finds no support in the text of the
bankruptcy code or in the record of the case, I respectfully dissent.