Section 523(a)(4) of the Bankruptcy Code excepts from discharge all debts “for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny.”  The term “fiduciary” has traditionally been given a “strict and narrow” definition, referring to technical trusts. In re Douglas, 634 B.R. 1086, 1091 (Bankr. S.D.Fla. 2021).  Douglas has stated that the technical trust requirement can be satisfied by a relationship created by statute or common law that mirrors the structure of a voluntary, express trust.

Do attorneys, in the context of their attorney-client relationships, act in a “fiduciary capacity” for purposes of Section 523(a)(4)?  The courts are split on this question.  The Second and Seventh Circuits have held that the attorney-client relationship, although usually not involving a technical or express trust, creates a Section 523(a)(4) “fiduciary capacity.”  See, The Andy Warhol Foundation for Visual Arts, Inc. v. Hayes (In re Hayes), 183 F.3d 162, 168 (2nd Cir. 1999) and In re Marchiando, 13 F.3d 1111, 1115 (7th Cir. 1994).  These courts have eschewed a strict technical trust requirement, focusing largely on the fact that the attorney-client relationship involves a difference in knowledge or power between a fiduciary and her principal that gives the fiduciary “a position of ascendancy over the [principal]” and proscribes to the attorney the requirement “to deal fairly, honestly[,] and with undivided loyalty” in a manner that “superimposes … a set of special and unique duties, including maintaining confidentiality, avoiding conflicts of interest, operating competently, safeguarding client property[,] and honoring the clients’ interests over the lawyer’s.” Hayes, 183 F.3d at 167-69.

The Sixth, Ninth, and Tenth Circuits appear to have taken a narrower view and concluded that the attorney-client relationship, without more, does not cause an attorney to act in a “fiduciary capacity.”  See, Fowler Bros. v. Young (In re Young), 91 F.3d 1367, 1371-72 (10th Cir. 1996); R.E. American, Inc. v. Garver (In re Garver), 116 F.3d 176, 179 (6th Cir. 1997); and Banks v. Gill Dist. Ctr., Inc. (In re Banks), 263 F.3d 862, 870-71 (9th Cir. 2001).  According to Douglas, these circuits limit the inquiry to whether the money or property on which the debt at issue is based was entrusted to the attorney-debtor in the context of a technical or express trust.  “Under this standard, neither an attorney’s ‘general fiduciary duty of confidence, trust, loyalty, and good faith,’ nor the ‘inequality between the parties’ knowledge or bargaining power’ inherent in the attorney-client relationship are sufficient to create a ‘fiduciary capacity’ under Section 523(a)(4).

Douglas  followed this latter line of cases.  In doing so, it stated that “[c]ourts within the Eleventh Circuit have limited the finding of a technical trust to circumstances where there is (1) a trust res; (2) an identifiable beneficiary; and (3) affirmative trust duties established by contract or statute.”  Id. at 1093-94.  It stated that to find the existence of a technical trust, the defendant’s relationship to the purported property at issue must be analogous to a trustee’s relationship to trust property.  Id. at 1094. 

Unlike the way a trustee controls trust property, an attorney has neither an ownership interest (technical or otherwise) in, nor the authority to control, a client’s cause of action.  To the contrary, an attorney is generally prohibited from acquiring an interest in a client’s cause of action and “must abide by a client’s decisions concerning the objectives of representation, and * * * must reasonably consult with the client as to the means by which they are to be pursued.”   While a trustee holds property in trust and need not consider the beneficiaries wishes, an attorney merely advises a client with respect to the client’s cause of action and is dutybound to manage the cause of action based on the client’s decisions.  As such, an attorney’s relationship to a client’s cause of action is distinct from a trustee’s relationship to trust property.

Though the management of a cause of action might burden an attorney with significant and solemn duties to their client, it does not create the sort of technical trust necessary to place a debtor in a “fiduciary capacity” under §523(a)(4).

Id. at 1094-95.


Matthew T. Gensburg
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