Co-authored by Gregory C. Johnson

The U.S. Court of Appeals for the Fifth Circuit held that a corporate fiduciary who exercises substantial control over a limited partnership managed by a corporation can owe fiduciary obligations to the partnership itself.

David Harwood was a Director and the Chief Operating Officer of B&W Finance Co., Inc., which was the sole general partner of FNFS, Ltd., a limited partnership engaged in consumer lending operations. Mr. Harwood, who managed B&W’s daily affairs, exercised substantial control over FNFS, and withdrew more than $800,000 of FNFS funds as personal loans that he allegedly neglected to properly record. The B&W board terminated Mr. Harwood, who filed for Chapter 7 bankruptcy, and B&W challenged Mr. Harwood’s ability to discharge his debts to FNFS because he accrued this debt through defalcation while acting as a fiduciary.

The bankruptcy court ruled the debts were not dischargeable and Mr. Harwood appealed. He argued that while he owed a duty to B&W as an officer and director, this duty did not transfer to FNFS, the limited partnership managed by B&W. The Fifth Circuit disagreed, ruling that the status of a fiduciary was based on the trust conferred on Mr. Harwood and the control he exercised over FNFS. Accordingly, his debts to the partnership were not dischargeable. (In re Harwood, No. 10–40406, 2011 WL 1239810 (5th Cir. April 5, 2011))