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Corporate directors facing crushing judgments for leading their companies down the path to ruin can still find shelter in bankruptcy court, the 9th U.S. Circuit Court of Appeals ruled Wednesday. Though most liens are dischargeable under bankruptcy law, those incurred as a fiduciary trustee are not. But in a unanimous ruling that interpreted California law, the court held that Gregory Cantrell, a former executive at Cal Micro Inc., isn’t subject to that exception and wiped clean $1.3 million in debt. “While Cantrell in his capacity as an officer exercised some control over corporate assets of Cal-Micro, it does not follow that Cantrell was a fiduciary within the meaning of” the bankruptcy code, wrote Judge Diarmuid O’Scannlain. He was joined by Senior Judge Ferdinand Fernandez and 3rd Circuit Senior Judge Walter Stapleton, sitting by designation. Cantrell was sued by Cal-Micro for using corporate assets for his own personal benefit. Cantrell claims he was never served with the lawsuit, and a state court judge entered a default judgment. Citing a 1940 California Supreme Court decision , Bainbridge v. Stoner, 16 Cal. 2d 423, the court held that although directors and officers have some fiduciary duties, “the relationship is not one of trust, but of agency.” The decision is likely to be of interest to plaintiffs’ lawyers pursuing judgments against corporate officers who engage in fraud, but it may not represent a radical change in the law for bankruptcy judges. “In considering the non-dischargeability exceptions, there is a presumption in favor of a discharge and therefore the courts construe the exceptions narrowly,” said Heller Ehrman White & McAuliffe partner Peter Benvenutti. But, he added, “This is a square holding” that corporate officers can get discharges. More common examples of trustees, such as those who oversee estates, would not be eligible. One lawyer who litigates securities fraud class actions was surprised by the decision. “We’ve always taken the view that you can’t get the thing discharged, because it’s fraud-based,” said Joseph Tabacco Jr. of Boston-based Berman DeValerio Pease Tabacco Burt & Pucillo. It shouldn’t matter whether the judgment was obtained in state or federal court, Benvenutti said. The panel did make clear that state law should inform bankruptcy judges on the definition of a fiduciary. The panel also said there was a difference between corporate agency relationships and partnerships. The 9th Circuit has already held that partners are trustees. Cantrell’s attorney, Jon Vaught of Oakland, Calif.’s Vaught & Boutris, said it is the first time the 9th Circuit has addressed the issue, but that it is not the first court to have so ruled. He also said the impact of the ruling would be slight. “This is purely limited to the bankruptcy code,” Vaught said. “It’s a very narrow decision in the sense that it’s only going to affect a corporate officer who has a judgment against him.” Which might worry lawyers like Tabacco. “I have to say, it would be somewhat ominous if culpable defendants can avoid personal judgments by going into bankruptcy court,” Tabacco said.

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