In Re Randolph C. Bugna, Debtor. Randolph C. Bugna v. Edward E. McArthur

We consider two technical but important questions of bankruptcy law: (1) Are state court findings that the debtor committed fraud and breach of fiduciary duty binding on the debtor in dischargeability proceedings? And, (2) does Bankruptcy Code section 523(a)(4) preclude discharge of punitive damages?

A. Bugna and McArthur were business partners. Bugna, a licensed real estate broker, agreed to purchase for McArthur a 14.4% interest in a California partnership called Lakeview, Ltd. McArthur tendered a $90,000 earnest-money check, but Bugna promptly returned the uncashed check with the assurance McArthur would be able to complete the purchase after certain technical problems were cleared away. Months later, McArthur learned that Bugna was snapping up the 14.4% interest for himself.

McArthur sued Bugna in California state court for fraud and breach of fiduciary duty. A jury award of $90,000 in compensatory and $300,000 in punitive damages was affirmed on appeal. Bugna then filed for bankruptcy and McArthur initiated proceedings to have the $390,000 declared nondischargeable under Bankruptcy Code section 523(a)(4), which denies the debtor a discharge “from any debt ... for fraud or…