                                                                      F I L E D
                                                               United States Court of Appeals
                                                                       Tenth Circuit
                          UNITED STATES CO URT O F APPEALS
                                                                      June 28, 2006
                                FO R TH E TENTH CIRCUIT            Elisabeth A. Shumaker
                                                                       Clerk of Court

    In re: A RLEN RO BER T M ILLIKAN,
    JR.,

                Debtor,
                                                        No. 05-5163
    -------------------------                     (D.C. No. 04-CV -112-E)
                                                        (N.D. Okla.)
    OKLAHO M A GROCERS
    ASSOCIATION, INC., an Oklahoma
    corporation,

                Plaintiff-Appellee,

      v.

    ARLEN ROBERT M ILLIK AN, JR.,

                Defendant-Appellant.



                                OR D ER AND JUDGM ENT *


Before BR ISC OE, M cKA Y, and BROR BY, Circuit Judges.




*
       After examining the briefs and appellate record, this panel has determined
unanimously to grant the parties’ request for a decision on the briefs without oral
argument. See Fed. R. App. P. 34(f); 10th Cir. R. 34.1(G). The case is therefore
ordered submitted without oral argument. This order and judgment is not binding
precedent, except under the doctrines of law of the case, res judicata, and
collateral estoppel. The court generally disfavors the citation of orders and
judgments; nevertheless, an order and judgment may be cited under the terms and
conditions of 10th Cir. R. 36.3.
         Arlen Robert M illikan, Jr. appeals the district court’s affirmance of the

bankruptcy court’s decision not to discharge a debt to Oklahoma G rocers

Association, Inc. (OGA). W e have jurisdiction under 28 U.S.C. §§ 158(d) &

1291, and we AFFIRM .

                                             I

         M illikan was the president and a shareholder of Energy Title Consultants,

Inc. (ETC). ETC operated check-cashing stores at which customers could

purchase OGA money orders, among other transactions. Pursuant to a contract

with OGA, ETC collected and remitted to OGA the proceeds from money order

sales.

         ETC’s principal bank account was with Arvest State Bank. ETC did not

open a separate account for OGA’s funds; instead, ETC deposited funds into its

regular account, and Arvest then remitted OGA’s funds to it via electronic drafts

on ETC’s account. OGA was aware of ETC’s procedure, and the parties operated

in this manner for more than three years. A problem arose, however, when

Arvest, who was also a creditor of ETC, sought to satisfy ETC’s obligations to it

by freezing all of ETC’s funds on deposit and closing ETC’s account.

Unfortunately, the seized funds included $515,545.09 in O GA money order funds.

         ETC and M illikan both filed voluntary petitions for relief under Chapter 11

of the Bankruptcy Code. OGA brought an adversary proceeding in M illikan’s

case under 11 U.S.C. § 523(a)(4), which excepts from discharge debts that result

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from “fraud or defalcation while acting in a fiduciary capacity, embezzlement, or

larceny.” After a two-day trial, the bankruptcy court held that the money order

proceeds were trust funds and that ETC owed OGA a fiduciary duty in connection

with collecting and remitting those funds. It further held that ETC’s failure to

avoid commingling the money order proceeds w ith its own funds and its failure to

remit the full proceeds to OGA constituted defalcation. Finding that M illikan, as

president of ETC, was personally liable for the defalcation, the bankruptcy court

then denied discharge of the debt under § 523(a)(4).

      M illikan filed a motion to amend the court’s findings of fact and

conclusions of law and to alter or amend the judgment, which the bankruptcy

court denied. M illikan then appealed to the district court. Affirming the

bankruptcy court’s decision, the district court held that ETC was negligent in

performing its duty to protect OGA’s funds, and that ETC’s conduct constituted

defalcation. It also held that M illikan, as ETC’s president, was liable for the

corporation’s defalcation. M illikan now appeals to this court.

                                          II

      The parties have conceded § 523(a)(4)’s fiduciary capacity requirement, so

the sole issue on appeal is whether ETC’s loss of OGA’s funds constitutes

“defalcation” for purposes of § 523(a)(4). This is a question of law, and as such

it is reviewed de novo. See Fowler Bros. v. Young (In re Young), 91 F.3d 1367,

1373 (10th Cir. 1996). “[E]xceptions to discharge are to be narrowly construed,

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and because of the fresh start objectives of bankruptcy, doubt is to be resolved in

the debtor’s favor.” Bellco First Fed. Credit Union v. Kaspar (In re Kaspar),

125 F.3d 1358, 1361 (10th Cir. 1997).

      M illikan asserts that neither he nor ETC took, used, diverted, converted, or

otherw ise misappropriated OGA’s proceeds, and he points out that he fully

accounted for the monies— they simply were not available to OGA because of

Arvest’s actions. He urges us to adopt the standard set forth in Rutanen v. Baylis

(In re Baylis), 313 F.3d 9, 18-19 (1st Cir. 2002), in which the First Circuit held

that “a defalcation requires some degree of fault, closer to fraud, without the

necessity of meeting a strict specific intent requirement,” and to find that there

was no defalcation. In the alternative, he argues that the district court and the

bankruptcy court misapplied Antlers Roof-Truss & Builders Supply v. Storie (In re

Storie), 216 B.R. 283, 288 (10th Cir. BAP 1997), in w hich this circuit’s

Bankruptcy Appellate Panel (BAP) held that “‘defalcation’ under section

523(a)(4) is a fiduciary-debtor’s failure to account for funds that have been

entrusted to it due to any breach of a fiduciary duty, whether intentional, wilful,

reckless, or negligent.”

      The statute does not define defalcation, and this court has not yet defined

the term. Black’s Law Dictionary provides tw o modern definitions:

(1) “embezzlement,” and (2) “[l]oosely, the failure to meet an obligation; a

non-fraudulent default.” Black’s Law Dictionary 448 (8th ed. 2004). In this

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context, though, “defalcation” must mean something other than “embezzlement,”

as § 523(a)(4) separately references embezzlement. Black’s second definition,

however, is rather broad; “a non-fraudulent default” may range from entirely

innocent conduct to conduct closely approaching fraud. This potential range of

meaning is reflected by the opinions of other circuit courts, which have

established varying levels of culpability for finding a defalcation under

§ 523(a)(4). See, e.g., Baylis, 313 F.3d at 20 (requiring “something close to a

showing of extreme recklessness”); Republic of Rwanda v. Uwimana (In re

Uwimana), 274 F.3d 806, 811 (4th Cir. 2001) (holding even an innocent mistake

can constitute defalcation); Banks v. Gill Distrib. Ctrs., Inc. (In re Banks),

263 F.3d 862, 870 (9th Cir. 2001) (same); Office of Thrift Supervision v. Felt

(In re Felt), 255 F.3d 220, 226 (5th Cir. 2001) (requiring willful conduct,

described as “essentially a recklessness standard”) (quotation omitted); Carlisle

Cashway, Inc v. Johnson (In re Johnson), 691 F.2d 249, 257 (6th Cir. 1982)

(holding, in connection with § 523(a)(4)’s predecessor statute, that subjective

intent to violate fiduciary duty or bad faith is irrelevant, but indicating that

negligence or mistake of fact would not support finding defalcation); Cent.

Hanover Bank & Trust Co. v. Herbst, 93 F.2d 510, 512 (2d Cir. 1937) (holding

that defalcation is different than fraud and embezzlement, but assuming that it

requires “some portion of misconduct”); see also M eyer v. Rigdon, 36 F.3d 1375,

1384-85 (7th Cir. 1994) (holding that a negligent breach of duty was not

                                           -5-
sufficient to establish a defalcation under § 523(a)(11), relating to fiduciary for

depository institution or insured credit union).

      W e need not reconcile those authorities’ definitions of “defalcation.”

“Defalcation” requires, at least, “some portion of misconduct.” Cent. Hanover

Bank, 93 F.2d at 512. W e conclude that the district court did not err in holding

that, in these circumstances, there was a defalcation for purposes of § 523(a)(4).

OGA’s funds ultimately went to satisfy ETC’s debt to Arvest Bank. Those funds

were susceptible to seizure by Arvest because ETC and M illikan deposited them

in ETC’s general bank account, in violation of Okla. Stat. tit. 6, § 2123(a). 1 As

the district court stated:

      In essence, when ETC failed to establish a separate bank account for
      the money order proceeds and designate that account as a trust
      account that Arvest did not have the right to setoff against, it was
      consenting to allow Arvest to pay itself with trust funds. . . . The
      effect is the same as if ETC had written Arvest a check for
      $515,545.09 and left the trust account short by that am ount.

R. Doc. 39 at 9. ETC, and M illikan as its president, are chargeable w ith

knowledge of ETC’s legal duties, including its statutory duty not to commingle

funds. See In re Felt, 255 F.3d at 226; In re Johnson, 691 F.2d at 257.




1
       Okla. Stat. tit. 6, § 2123(a) states: “All funds collected or received from the
sale of checks by an agent shall be impressed with a trust in favor of such
licensee in an amount equal to the amount of the proceeds due the licensee and
shall not be commingled w ith other funds of the agent.” M oney orders are
included in the definition of “checks.” Id., § 2102(2).

                                          -6-
      M illikan strenuously argues that he did not misapply OGA’s funds or use

them for his own or ETC’s purposes. Effectively, though, the funds benefitted

ETC by paying its obligation to Arvest Bank. M illikan also asserts that

commingling is a red herring, and that Arvest w ould have seized all the funds in

ETC’s account whether or not it included any funds other than OGA money order

funds. This is exactly the problem – contrary to its statutory duty, ETC made

OGA’s funds available for seizure by placing them in its general account.

Finally, we reject M illikan’s argument that OGA’s consent to ETC’s

arrangements negated ETC’s obligation to comply with its statutory duties.

      Appellee’s motion for leave to file supplement of authorities is GRANTED.

The judgment of the district court is AFFIRMED.



                                                    Entered for the Court


                                                    W ade Brorby
                                                    Circuit Judge




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