The Upshot: A Chapter 7 Debtor that was the sole shareholder and director of a debt-ridden company is not a fiduciary as to creditor of his company merely because the company was insolvent when he filed his personal bankruptcy.
Discussion: Chapter 7 Debtor was the sole shareholder and director of a company that owned money as the result of activity that pre-dated his filing. One of the creditors of his company argued that since it had incurred debts while it was presumptively insolvent, the debts were presumptively fraudulent, making the Debtor a “special fiduciary” as to creditors under Illinois law. The 7th Circuit Court of Appeals disagreed, ruling that even if the Debtor did constitute a so-called “special fiduciary” under state law, he was not a fiduciary under 11 USC 523(a)(4). In other words, not all fiduciaries as the term is defined in State law stand in a “fiduciary capacity” under Bankruptcy law. Moreover said the Court, Congress did not intend for Sec. 523(a)(4) of the Bankruptcy Code to render officers and directors de facto liable for corporate debts; although they might be, if some other rationale justified holding them liable (i.e. fraud or defalcation).