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State of South Dakota Department of Social Services v. David E. Malde

May 5, 2011


The opinion of the court was delivered by: Karen E. Schreier Chief Judge


Appellant, State of South Dakota Department of Social Services, appeals the final judgment issued by the United States Bankruptcy Court for the District of South Dakota,*fn1 finding that a debt owed by appellee, David E. Malde, to the State was dischargeable. The court affirms the bankruptcy court's decision.


The pertinent, undisputed facts are as follows: Malde is a licensed mental healthcare provider who performs services in South Dakota. In May of 2004, Malde signed a Provider Agreement (Agreement) with the State to become a Medicaid provider. Medicaid providers submit electronic bills to the State for services rendered and the State's computer system generates a check. To ensure that the claims are valid, the State conducts random samplings of the submitted claims. If a provider incorrectly bills the State, he is required to reimburse the State for any amount overbilled.

In March of 2009, one of the State's Medicaid investigators reviewed Malde's Medicaid claims during a random sampling and discovered billing errors. On August 18, 2009, a hearing before an administrative law judge (ALJ) was held. On September 8, 2009, the ALJ rendered a decision determining that Malde overbilled the State in the amount of $90,000. The State did not allege fraud and the ALJ also determined that there were no allegations of fraud.*fn2 The ALJ's decision became final on September 21, 2009, because Malde did not appeal.

Malde filed for bankruptcy on November 23, 2009. Pursuant to 11 U.S.C. § 523, the State filed an adversary proceeding to object to the discharge of the debt Malde owed the State. The bankruptcy court ruled that the debt was dischargeable. The State timely appealed on October 20, 2010, and, pursuant to 28 U.S.C. §§ 158(a), 158(c)(1), brought its appeal in this court.


" 'When a bankruptcy court's judgment is appealed to the district court, the district court acts as an appellate court and reviews the bankruptcy court's legal determinations de novo and findings of fact for clear error.' " Knudsen v. I.R.S., 581 F.3d 696, 704 (8th Cir. 2009) (quoting Fix v. First State Bank of Roscoe, 559 F.3d 803, 808 (8th Cir. 2009)). Determining whether a fiduciary relationship exists is a question of law. Kent v. United of Omaha Life Ins. Co., 484 F.3d 988, 996 (8th Cir. 2007) ("Whether parties are in a fiduciary relationship is a question of law, which we review de novo." (internal citation omitted)); see also Bienash v. Moller, 721 N.W.2d 431, 434 (S.D. 2006) (" 'The existence of a fiduciary duty and the scope of that duty are questions of law for the court.' " (quoting Ward v. Lange, 553 N.W.2d 246, 250 (S.D. 1996))). Because the only issue on appeal is a question of law, whether a fiduciary relationship existed between Malde and the State, the court reviews the bankruptcy court's decision de novo.


Issue: Under South Dakota law, did Malde enter into an express trust with the State by signing the Agreement, and, if so, is the debt Malde owes to the State exempt from discharge in bankruptcy pursuant to 11 U.S.C. § 523(a)(4)? "The principal purpose of the Bankruptcy Code is to grant a 'fresh start' to the 'honest but unfortunate debtor.' " Marrama v. Citizens Bank of Mass., 549 U.S. 365, 367 (2007) (quoting Grogan v. Garner, 498 U.S. 279, 286 (1991)). But a "fresh start" is not a "free pass," Schwab v. Reilly, 130 S. Ct. 2652, 2668 (2010), and the Bankruptcy Code provides for exceptions to the discharge of a debtor's debt. See generally 11 U.S.C. § 523(a) (detailing the exceptions to the discharge of a debtor's debt).

"Exceptions to discharge are usually 'narrowly construed against the creditor and liberally against the debtor, thus effectuating the fresh start policy of the Code.' " In re Ungar, 429 B.R. 668, 673 (8th Cir. B.A.P. 2010), aff'd, 633 F.3d 675, 680 (8th Cir. 2011) (quoting Caspers v. Van Horne, 823 F.2d 1285, 1287 (8th Cir. 1987)). The creditor carries the burden to prove that a dischargeability exception applies by a preponderance of the evidence. Grogan, 498 U.S. at 291.

At issue here is 11 U.S.C. § 523(a)(4), which exempts discharge when a fiduciary commits fraud or defalcation: "A discharge . . . does not discharge an individual debtor from any debt . . . for fraud or defalcation while acting in a fiduciary capacity . . . ." The Eighth Circuit has "interpreted the term 'fiduciary' in 11 U.S.C. § 523(a)(4) to refer only to trustees of 'express trusts.' " Hunter v. Philpott, 373 F.3d 873, 875-76 (8th Cir. 2004) (citing In re Long, 774 F.2d 875, 878 (8th Cir. 1985); Davis v. Aenta Acceptance Co., 293 U.S. 328, 333 (1934)). Because "fiduciary" is used in a strict and narrow sense, it "does not embrace trustees of constructive trusts imposed by law because of the trustee's malfeasance."

Id. at 876 (citing In re Long, 774 F.2d at 878; In re Cochrane, 124 F.3d 978, 984 (8th Cir. 1997)).

"While the existence of a fiduciary relationship under § 523(a)(4) is determined under federal law, state law is relevant to this inquiry." In re Regan, 477 F.3d 1209, 1211 n.1 (10th Cir. 2007) (applying the Colorado Mechanic's Lien Trust Fund Statute to determine whether a fiduciary relationship existed under § 523(a)(4) (citations omitted)); see also In re Strack, 524 F.3d 493, 498 (4th Cir. 2008) (applying Virginia law in determining if an express trust existed); In re Lewis, 97 F.3d 1182, 1186 (9th Cir. 1996) (applying Arizona law to determine if ...

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