In the United States Bankruptcy Court

for the Northern District of Iowa

Bankruptcy No. 87-01821S
Debtor(s). Chapter 7

Adversary No. A87-0346S


This adversary proceeding is before the Court on Plaintiff/ Creditor National Farmers Union Life Insurance Company's Complaint to Determine Dischargeability of a debt owed by Defendant/Debtor Patrick D. Rooney to Plaintiff. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I).


Patrick D. Rooney ("Rooney") was an agent for National Farmers Union Life Insurance Company ("National Farmers") until early 1985. On February 5, 1987 National Farmers reduced a claim against Rooney to judgment in Woodbury County, Iowa. The basis of this claim was that Rooney took funds from customers for insurance policies which National Farmers never approved, as National Farmers was entitled to do by agreement between National Farmers and Rooney. Rooney kept those funds. Rooney's customers were led to believe that they were insured, yet actually no policy from National Farmers had been issued. Rooney's customers made claims against National Farmers, which National Farmers paid. The amount of the judgment entered in National Farmers favor was $56,207.90 for actual damages and $5,620.79 for exemplary or punitive damages, with interest at the rate of 10% per annum from November 19, 1985.

Patrick Rooney subsequently filed for bankruptcy on August 24, 1987. On September 30, 1987 National Farmers filed a complaint initiating this adversary proceeding, to determine the dischargeability in bankruptcy of the February 5, 1987 state court judgment, pursuant to 11 U.S.C. § 523(a)(4). This section states:

  1. A discharge under § 727, 1141, 1228(a), 1223(b) or 1328(b) of this title does not discharge an individual from any debt -
    1. for fraud or defalcation while acting in a fiduciary capacity, embezzlement or larceny...

11 U.S.C. § 523(a)(4).

On December 16, 1987 National Farmers filed a Motion for Summary Judgment in this matter. National Farmers appears to claim that the state court determination that Rooney's debt to National Farmers was incurred through fraud while Rooney acted in a fiduciary capacity vis-a-vis National Farmers should govern the bankruptcy court's dischargeability proceedings as a matter of law. Presumably, National Farmers makes this claim under the doctrine of collateral estoppel, but they have couched it in terms of full faith and credit and comity, according to federal and state Constitutions.

For the reasons stated herein, National Farmer's Motion for Summary Judgment is denied.


The standard for summary judgment is that there be "no genuine issues as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c). Because this Court is not convinced that there are "no genuine issues as to any material fact," the Court finds that this case is not an appropriate case for disposition on summary judgment and that Rooney is entitled to a hearing.

The Supreme Court has held in Brown v. Felsen, 442 U.S. 127, 99 S. Ct. 2205, 2213 (1979), that res judicata does not apply to confine a bankruptcy court to a review of the judgment and record in a prior state court proceeding when considering the dischargeability of a debt under §523(a). The Brown court left open the possibility that collateral estoppel may bar relitigation of determinations made by a state court. Brown, 99 S.Ct. at 2213 n.10. Thus, while a bankruptcy court may apply collateral estoppel to discharge cases, the bankruptcy court is not required to do so. The bankruptcy court may use its discretion in determining whether to apply collateral estoppel. United States Life Title Ins. Co. v. Dohm, 19 B.R. 134, 137 (N.D. Ill. 1982). In the case at hand, the Court is not required to exercise its discretion because National Farmers has not established that the requirements of collateral estoppel have been met.

The doctrine of collateral estoppel requires four conditions to be met:

  1. [T]he issues sought to be precluded must be the same as that involved in the prior litigation;
  2. [T]hat issue must have been actually litigated;
  3. [I]t must have been determined by a valid and final judgment; and
  4. [T]he determination must have been essential to the judgment.

Lovell v. Mixon, 719 F.2d 1373, 1376 (8th Cir. 1983). The case at hand falls on at least two of the four elements.

First, the issues before this Court are not the same as those involved in the state court proceeding. The issue National Farmers seeks to preclude from being "relitigated" is whether Rooney incurred a debt through fraud to National Farmers while he acted in a fiduciary capacity.

The fiduciary capacity required by § 523(a)(4) is defined by federal law, although informed by state law. In re Black, 787 F.2d 503, 506 (10th Cir. 1986). "Fiduciary" under state law, however, is much broader than "fiduciary" under the bankruptcy code. See In re Johnson, 691 F.2d 249 (6th Cir. 1982); Matter of Angelle, 610 F.2d 1335 (5th Cir. 1980); In re Hays, 31 B.R. 285, 291 (Bankr. E.D. Tenn. 1983). Judge Dandos' February 5, 1987 decision stated that Rooney was in a fiduciary relationship to National Farmers. National Farmers Union Life Insurance Co. v. Rooney, Law No. 935116, slip op. at 4, (Iowa District Court, Woodbury County February 5, 1987). The state court finding of a fiduciary relationship was relevant only for state law purposes. Judge Dandos had no reason to consider whether Rooney was a fiduciary for purposes of 11 U.S.C. § 523(a)(4).

As a consequence of the difference in issues raised in the state court proceeding and in the current bankruptcy proceeding, the second element of collateral estoppel - that the issue must actually have been litigated - is not met in this case. The issue in the bankruptcy proceeding case is whether Rooney was a fiduciary for purposes of Bankruptcy Code § 523(a)(4); whereas the issue in the state court proceeding was whether a debt was due and owing. Because the issues are different, the crucial bankruptcy issue has not been actually litigated in the previous action.

Beyond the failure to establish the elements of collateral estoppel, two other reasons exist for denying the motion for summary judgment. First, a different burden of proof applies in a proceeding to determine dischargeability than was applied in the state court proceeding. The state court proceeding required National Farmers to meet their burden of proof by a preponderance of evidence. To prevail under § 523(a)(4), however, National Farmers must prove their case by clear and convincing evidence. In re Gassen, W.D. Wis. Bankr. No. 85-00008, Adv. No. 85-0455C, slip op. at 6, (Bankr. N.D. Iowa February 9, 1987); see also In re Kimzey, 761 F.26 421, 423-24 (7th Cir. 1985); In re Castaneda, 81 B.R. 470, 472 (Bankr. N.D. Ill. 1988). Rooney is entitled to require National Farmers to meet that higher burden of proof.

Second, the facts of the case determine whether an agent acted in a fiduciary capacity to render a debt nondischargeable. Many bankruptcy court decisions have found that an insurance agent does not act in a fiduciary capacity vis-a-vis his/her principal to warrant the debt incurred to be rendered nondischargable, pursuant to § 523(a)(4). See In re Cutler, 74 B.R. 712 (14.D. Iowa 1987) (affirming bankruptcy court's finding that fiduciary relationship did not exist); In re Pehkonen, 15 B.R. 577 (N.D. Iowa 1981) (affirming bankruptcy court's finding that fiduciary relationship did not exist); Matter of McCraney, 63 B.R. 64 (Bankr. N.D. Ala. 1986) (finding that a fiduciary relationship did not exist); see also Matter of Storms, 28 B.R. 761 (Bankr. E.D. N.C. 1983) (discussing factors to consider when determining whether an agent was fiduciary of principal).

On the other hand, there are cases that find that an insurance agent does act in a fiduciary capacity vis-a-vis his/her principal to warrant the debt incurred to be rendered nondischargeable. See Morgan v. American Fidelity Fire Ins. Co., 210 F.2d 53 (8th Cir. 1954) (affirming finding that insurance agent was fiduciary of principal); In re Livingston, 40 B.R. 1018 (E.D. Mich. 1984) (affirming bankruptcy court's finding that fiduciary relationship existed); McCraney, 63 B.R. at 66 n.5 (citing cases which found a fiduciary relationship existed); In re Gagliano, 44 B.R. 259 (Bankr. N.D. Ill. 1984) (finding that fiduciary relationship existed).

Thus, the case law on this issue goes either way. A review of the above cited cases indicates that the facts of each case were quite important in the court's decision. The parties need to establish a factual record for this Court to make a determination of whether Rooney was acting in a fiduciary capacity as meant in 11 U.S.C. § 523(a)(4).

Finally, it should be noted that the judgment from the Iowa District Court did not find that the debtor was engaged in fraudulent conduct. Essentially, that judgment found that the debtor breached the contractual obligation between the Plaintiff as principal, and the debtor, as agent. Thus, one of the essential elements of § 523(a)(4), that is "...fraud or defalcation..." was not even discussed in the decision from the Iowa District Court.


IT IS HEREWITH ORDERED THAT National Farmers Union Insurance Company's Motion for Summary Judgment is denied. A pretrial hearing shall be held in Sioux City on:

OCTOBER 31, 1988, AT 4:00 P.M.

Third Floor Court Room, U.S. Court House, SIOUX CITY, Iowa.

ORDERED: October 19, 1988.

Michael J. Melloy
Chief Bankruptcy Judge