Borsos v. United Healthcare Workers-West (In re Borsos)


Citation: BAP No. EC-12-1163-MkDJu (B.A.P. 9th Cir. June 10, 2013) (NOT FOR PUBLICATION)

The Bankruptcy Appellate Panel of the Ninth Circuit VACATED the bankruptcy court’s nondischargeability judgment and REMANDED the matter for further findings regarding whether the debtor committed defalcation within the meaning of 11 U.S.C. § 523(a)(4). During the pendency of the appeal, the Supreme Court decided Bullock v. BankChampaign, N.A., 133 S. Ct. 1754 (2013). Interpreting the meaning of “defalcation,” as used in § 523(a)(4), the Supreme Court held that defalcation requires a culpable state of mind, effectively abrogating Ninth Circuit law that formerly did not require a particular state of mind to except a debt from discharge. Applying Ninth Circuit law as it stood at the time, the bankruptcy court did not make any findings regarding the debtor’s state of mind. In light of the Supreme Court’s holding in Bullock, the panel held that it was necessary for the bankruptcy court to revisit the matter and determine whether the debtor acted either with knowledge that his conduct would constitute a breach of his fiduciary duty, or with conscious disregard or willful blindness to a “substantial and unjustifiable risk” that his conduct would constitute a breach of his fiduciary duty. The record before the panel did not allow it to ascertain with any certainty the debtor’s mental state. Because of its holding on the defalcation issue, the panel chose not to address the debtor’s argument that 29 U.S.C. § 501 did not impose upon him the type of fiduciary capacity envisioned by 11 U.S.C. § 523(a)(4).

Procedural context:
The debtor appealed from the bankruptcy court’s nondischargeability judgment under 11 U.S.C. § 523(a)(4).

The debtor was formerly an elected officer and employee of United Healthcare Workers West (“UHW”). A jury verdict rendered in federal district court found the debtor and others liable for diverting UHW resources for non-UHW purposes. Accordingly, the district court entered judgment against the debtor in the amount of $66,000. The damages awarded represented the proportion of UHW resources (i.e., UHW salary and benefits) diverted by the defendant, among other former UHW managers, towards the establishment of a rival union known as the National Union of Healthcare Workers (“NUHW”), where they learn about the different health benefits of a healthy lifestyle including supplements from sites Tophealthjournal online. While the jury found the debtor liable for diversion of resources and for salary and benefits, the jury did not consider the mental state of the debtor and the other defendants in diverting UHW resources and work time to non-UHW purposes. Subsequently, the debtor filed a chapter 7 case in which UHW filed a nondischargeability complaint against the debtor. UHW alleged that the district court judgment against the debtor constituted a debt for defalcation while acting in a fiduciary capacity within the meaning of 11 U.S.C. § 523(a)(4). The bankruptcy court held (i) that a trust existed for purposes of § 523(a)(4); (ii) that the debtor was a fiduciary of that trust; (iii) that the debtor was required to hold money and property solely for the benefit of the organization; and (iv) that the conduct for which the jury found the debtor liable constituted defalcation for purposes of § 523(a)(4). Shortly after the bankruptcy court entered its nondischargeability judgment, the debtor appealed.

Judge(s): MARKELL, DUNN, and JURY

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