Summary of a Recent
Judicial Development in
Bankruptcy

Boilerplate Language in Security Agreement
Does Not Create Fiduciary Relationship

Joshua T. Crain
National AgLaw Center Graduate Assistant

Summary of Decision

In In re Ellis, 310 B.R. 762 (Bankr. W.D. Okla. 2004), the United States Bankruptcy Court for the Western District of Oklahoma held that boilerplate language in a security agreement did not create a fiduciary relationship between debtors and a bank.

Background

Debtors Don and Janice Ellis had several loans with Southwest State Bank (Bank). See id. The Bank filed exceptions to the debtors' discharge from bankruptcy and the debtors filed motions for summary judgment. See id. The parties agreed that the applicable law was the repealed Article 9 of the Oklahoma Uniform Commercial Code instead of the Revised Article 9. See id. The Bank raised two issues concerning the discharge of debtors from bankruptcy. See id. First, the Bank raised the issue of a fiduciary relationship between it and the debtors which gave rise to a claim under 11 U.S.C. § 523(a)(4). See id. Second, the Bank raised the issue of a security interest in the debtors crops, crop proceeds, and crop payments giving rise to a claim under 11 U.S.C. § 523(a)(6). See id. With respect to the Bank's first claim, the debtors sold property the Bank alleged was collateral for one of the loans. See id. When the debtors did not turn over the proceeds from such sale, the bank claimed an exception to the debtors' discharge from bankruptcy on the grounds that the debtors acted fraudulently within the meaning of § 523(a)(4).

Arguments

The debtors first argued that their summary judgment should be granted because there was no fiduciary relationship which would give rise to a claim under § 523(a)(4) of the Bankruptcy Code. See id. The Bank argued that because of the language of the security agreements signed by the debtors a fiduciary relationship was created and that proceeds received by the debtor from the sale of the Bank's collateral created a debt that the Bank could except from discharge under § 523(a)(4) of the Bankruptcy Code. See id.

Analysis and Holding

The court explained that even though there were provisions in each of the security agreements signed by the debtors with language purportedly creating a fiduciary relationship, the language was insufficient to create such a relationship under § 523(a)(4) of the Bankruptcy Code. See id. The court explained that § 523(a)(4) was limited to express or technical trusts. See id. The court explained that using the terms "trust" or "in trust" was insufficient to create an express or technical trust, but rather, the substance of the agreement must be analyzed to determine whether it fits within § 523(a)(4). See id. The court further explained that the name of the instrument also gave an indication as to the parties intent. See id. The court explained that because the name of the instrument was "Commercial Security Agreement," there was no intent to create a fiduciary relationship between the debtors and the Bank. See id. The court therefore held that there was no such relationship between the debtors and the Bank and that the Bank could not except the debt from discharge based upon § 523(a)(4) of the Bankruptcy Code. See id.

The case was decided on January 8, 2004; this summary was posted Dec. 22, 2004.