230 F.3d 1014 (7th Cir. 2000)
In re Michael Frain, Debtor-Appellee,
No. 00-1162
In the  United States Court of Appeals  For the Seventh Circuit
Argued September 22, 2000Decided October 30,  2000

Appeal of Patrick F. O'Shea and  Roger L. Schoenfeld
Appeal from the United States District Court for the Northern District of Illinois, Eastern  Division.  No. 98 C 5651--David H. Coar, Judge.
Before Posner, Manion, and Evans, Circuit  Judges.
Manion, Circuit Judge.


1
Michael Frain  filed for Chapter 7 bankruptcy.  Appellants Patrick O'Shea and Roger  Schoenfeld filed a complaint under the  Bankruptcy Code, 11 U.S.C. sec.  523(a)(4), seeking nondischargeability of  debts owed to them from a business  relationship they had with Frain. The  bankruptcy court held that the asserted  debts were dischargeable, and the  district court affirmed. O'Shea and  Schoenfeld appeal. We reverse and remand  for further proceedings.

I.

2
In May 1989, Michael Frain, Patrick  O'Shea, and Roger Schoenfeld formed a  closely held corporation called the  Preferred Land Title Insurance Company.  Under the shareholder agreement, Frain  was Chief Operating Officer and possessed  50% of the shares of the corporation.  O'Shea and Schoenfeld were both directors  and each held 25% of the shares. Frain  was authorized to make day-to-day  business decisions and all decisions  affecting the normal operations of the  corporation. The shareholder agreement  further provided that major decisions  required consent by 75% of the shares of  the corporation, although certain  decisions required a unanimous vote.  Anything requiring a majority vote was  required to have the approval of Frain  and either O'Shea or Schoenfeld.


3
The shareholder agreement set a specific  salary formula for Frain during the first  three years of the corporation. He was to  receive $70,000 the first year with  annual increases based on the Consumer  Price Index (CPI). The salary provision  expired in 1992.  Frain continued in his  position as Chief Operating Officer after  the end of the three-year term, and  increased his salary annually well above  the CPI formula set by the initial salary  provision. The shareholder agreement,  however, also provided that "[n]o  salaries, bonuses, or other compensation  shall be paid to a shareholder . . .  unless set forth herein or approved by a  unanimous vote of the Board of  Directors." O'Shea and Schoenfeld were  aware that Frain was still receiving a  salary, but at the time did not know of  the salary increase.


4
The shareholder agreement also  prioritized distributions of corporate  cash flow. Because it was a so-called  "subchapter S corporation" (see 26 U.S.C.  sec. 1361), income and taxes were passed  through directly to the shareholders. The  agreement designated the distributions in  the following order: first, payments to  the shareholders for payment of federal  and state income taxes in proportion to  ownership of shares of the corporation;  second, payments of any outstanding  shareholder loans; and third, payments of  the balance to the shareholders also in  proportion to their ownership of shares.  Frain made shareholder distributions--the  third priority--before repaying  shareholder loans. O'Shea and Schoenfeld  protested but accepted and deposited  their shareholder distributions.


5
The corporation ceased operation in  December, 1995. Frain subsequently filed  for relief under Chapter 7 of the  Bankruptcy Code. O'Shea and Schoenfeld  filed a Dischargeability Complaint in the  bankruptcy court. See In re Frain, 222  B.R. 835 (Bankr. N.D. Ill. 1998). Apparently outstanding loans were owed to  one or both of the plaintiffs. They  argued that these debts were not  dischargeable pursuant to the Bankruptcy  Code, sec. 523(a)(4), which provides that  an individual debtor is not discharged  from any debt "for fraud or defalcation  while acting in a fiduciary capacity."  The bankruptcy court held that there was  no fiduciary relationship for purposes of  sec. 523(a)(4), and accordingly that the  alleged debts were dischargeable. The  district court affirmed on the same  basis. O'Shea and Schoenfeld appeal,  alleging that the district court erred in  its determination that no fiduciary  relationship existed.

II.

6
Section 523(a)(4) of the Bankruptcy Code  provides that "[a] discharge under  section 727, 1141, 1228(a), 1228(b), or  1328(b) of this title does not discharge  an individual debtor from any debt . . .  for fraud or defalcation while acting in  a fiduciary capacity."


7
The bankruptcy court and the district  court held that there was no fiduciary  relationship between Frain and appellants because the terms of the shareholder's  agreement did not create a fiduciary  relationship under this circuit's case  law. We review the bankruptcy and  district court's legal findings and  contract interpretations de novo. See In  re Scott, 172 F.3d 959, 966 (7th Cir.  1999); GNB Battery Technologies, Inc. v.  Gould, Inc., 65 F.3d 615, 621 (7th Cir.  1995). Findings of fact, however, are  reviewed for clear error. See Scott, 172  F.3d at 966.  In this appeal, the  relevant facts are not disputed. The  dispute is over the lower courts'  interpretation of the shareholder  agreement and whether those courts  correctly applied the law to the facts.  Accordingly, we apply de novo review.


8
This court has defined a fiduciary  relationship under sec. 523(a)(4) as "a  difference in knowledge or power between  fiduciary and principal which . . . gives  the former a position of ascendancy over  the latter." In re Marchiando, 13 F.3d  1111, 1116 (7th Cir. 1994). See also  Woldman v. Johnson, 92 F.3d 546, 547  ("section 523(a)(4) reaches only those  fiduciary obligations in which there is  substantial inequality in power or  knowledge in favor of the debtor seeking  the discharge and against the creditor  resisting discharge.").


9
A "fiduciary duty" under this test  covers circumstances which, although not  comprising a literal "trust," do "call  for the imposition of the same high  standard." See Marchiando, 13 F.3d at  1115 (citing Restatement (Second) of  Trusts sec. 2, comment b (1959)). For  example, a lawyer-client relation, a  director-shareholder relation, or a  managing partner-limited partner relation  all call for the principal to "repose a  special confidence in the fiduciary." See  id., 13 F.3d at 1116.


10
The existence of a "fiduciary  relationship" is a matter of federal law.  It bears emphasis that not all fiduciary  relationships qualify under the  Bankruptcy Code. See Woldman, 92 F.3d at  547 (7th Cir. 1996) ("[O]nly a subset of  fiduciary obligations is encompassed by  the word 'fiduciary' in section  523(a)(4)."). A fiduciary relation only  qualifies under sec. 523(a)(4) if it  "imposes real duties in advance of the  breach." See Marchiando, 13 F.3d at 1116.  In Marchiando, we recognized the well-  established principle that, for purposes  of sec. 523(a)(4), the fiduciary's  obligation must exist prior to the  alleged wrong. A constructive trust, for  example, will not qualify for purposes of  sec. 523(a)(4), since the obligations do  not exist until the wrong is committed.  See Marchiando, 13 F.3d at 1115 (citing  Davis v. Aetna Acceptance Co., 293 U.S.  328, 333 (1934); In re Bennett, 989 F.2d  779, 784 (5th Cir. 1993); In re Tiechman,  774 F.2d 1395 (9th Cir. 1985)).


11
As this court has noted, there is a  "broad spectrum of fiduciary obligations  from the case in which a trustee defrauds  a child beneficiary or a lawyer defrauds  a client or a general partner defrauds a  limited partner." Woldman, 92 F.3d at 547  (7th Cir. 1996). For example, a joint  venture between equals will not qualify  as a fiduciary relationship. See id. The  relationship in this case, however, falls  on the fiduciary end of the spectrum.


12
A difference in knowledge or power can  create a fiduciary relationship, see  Marchiando, 13 F.3d at 1116. Frain was  responsible for the day-to-day business  decisions of the corporation, giving him  a natural advantage over the other two  shareholders in terms of knowledge of the  corporation's finances. But it does not  necessarily follow that this knowledge  was unavailable to appellants. Indeed, it  was no secret that Frain was drawing a  salary after the initial three-year  period, and the appellants themselves  received and accepted shareholder  distributions from Frain even though they  were disgruntled because their loans were  not repaid first. Frain's superior  knowledge of day-to-day operations was  not sufficient in itself to establish a  position of ascendancy.


13
While the parties' access to knowledge  and information may have been reasonably  similar, the concentration of power was  substantially one-sided. The  shareholder's agreement was structured to  give Frain ultimate power over both his  own employment and the direction of the  corporation. Frain's control over the  day-to-day business of the corporation  and ownership of 50% of the shares gave  him significant freedom to run the  corporation as he saw fit, including  oversight of such items as salary and  distributions of corporate cash flow. The  only real limit to his power was the  chance of deadlock; that is, if he voted  his 50% one way and O'Shea and Schoenfeld  voted their combined 50% the other,  nothing would happen. A further reading  of the thirty-plus-page contract  discloses that "major decisions shall  require the consent of the holders of  seventy-five percent (75%) of the voting  common shares" (with some decisions  requiring 100%). The contract defined  "major decisions" to include "all  decisions affecting the Corporation which  are not in the ordinary course of  business of the Corporation." So no major  decisions can be made unless Frain  agrees. The district court, while noting  that O'Shea and Schoenfeld had 50% of the  shares and had a balance of power in many  areas, emphasized the provision that they  could "purchase Frain's interest for  $1.00 in the event [he] . . . committed  any material breach . . . ." O'Shea v.  Frain, 1999 WL 1269352, *3 (N.D. Ill.  Dec. 22, 1999).


14
But the contract requires a majority  vote to determine whether to continue  Frain's employment. Unless Frain  voluntarily terminates his employment,  the $1.00 purchase option kicks in only  if he is terminated for cause. Obviously  that is a major decision requiring 75% of  the voting shares; he can't be fired  unless he votes in favor of it. Thus the  $1.00 purchase option cannot be exercised  without Frain's approval.


15
Both lower courts relied on the $1.00  purchase provision in reaching their  decision, on the theory that the power to  buy Frain out limited his position of  power in the corporation. Theoretically,  they were correct. The termination  provision did limit Frain's position of  ascendancy under the shareholder's  agreement, but in practice this power was  hollow. Not only is for-cause termination  a "major decision" requiring consent of  holders of 75% of voting shares, but also  the contract specifically provides that  in order to terminate Frain for cause, a  majority vote was required. And as noted,  a majority vote was defined as a vote by  75% of the shares. Since Frain held 50%  of the shares, he could be removed by  appellants only if he wanted to be  removed. Thus, the power for O'Shea and  Schoenfeld to independently remove Frain  and purchase the corporation for $1.00  did not exist.

III.

16
A Chief Operating Officer with 50% of  the shares who cannot be removed for  cause without his consent possesses a  position of considerable ascendancy over  the other shareholders. All of the  decisions made in the ordinary course of  business were Frain's to make.  All of  the major decisions required Frain's  agreement. If Frain abused this power,  termination for cause was a tantalizing,  but unavailable fiction. This  shareholder's agreement was not a system  of checks and balances. Frain had more  knowledge, and substantially more power,  than appellants.


17
In this case, a fiduciary relationship  was created by the structure of the  corporation under the shareholder  agreement, which had given Frain a  position of ascendancy under our case  law. Frain argues that violations of a  contract entered into by equals are not  covered by sec. 523(a)(4). However, Frain  had a pre-existing fiduciary obligation  to O'Shea and Schoenfeld independent of  any breach of contract. This is not a  case where a fiduciary relationship was  implied from a contract. See Bennett, 989  F.2d at 784 (sec. 523 (a)(4) does not  cover fiduciary duty implied from  contract). A contract was necessary to  the existence of a fiduciary  relationship, but the obligations of the  contract were not the source of the  fiduciary relationship. The source of the  fiduciary relationship was Frain's  substantial ascendancy over O'Shea and  Schoenfeld. Whether any alleged breach of  contract was a defalcation is an issue  for the bankruptcy court.


18
We conclude, therefore, that based on  the contract Frain possessed an ascendant  position in relation to appellants. There  was accordingly a fiduciary relationship  for purposes of sec. 523(a)(4). The  bankruptcy court must now decide whether  Frain actually committed any defalcation  under sec. 523(a)(4).


19
REVERSED and REMANDED.

