Berman & Associates (“B&A”) is an Illinois advertising brokerage firm. It places ads in media outlets for a fee. One of its clients is Follett Higher Education Group, a college bookstore management company. Under their contract, Follett agreed to pay B&A 110% of the purchased ads. B&A then paid the outlet directly, retaining the 10% as its fee. In mid-2006, Follett discovered that B&A had not paid for some of the purchased advertising. Follett paid the bills directly. In August of that year, Jay Berman (the sole shareholder of B&A) petitioned for personal bankruptcy. He listed B&A’s debts in his petition. Follett brought an adversary proceeding in bankruptcy, asserting that the debt was non-dischargeable under§ 523(a)(4) because Berman had breached a fiduciary duty. The bankruptcy court found for Berman, concluding that Follett had failed to prove that Berman or B&A was a fiduciary. Judge Dow (N.D. Ill.) affirmed. Follett appeals.

In their opinion, Seventh Circuit Judges Kanne, Tinder, and Hamilton affirmed. The Court noted that generally a debtor's debts are discharged in bankruptcy. One of the exceptions to that rule comes in § 523(a)(4), which applies to a "defalcation while acting in a fiduciary capacity." In order to establish the exception, the creditor must establish that the debtor was a fiduciary to the creditor when the debt originated and that the debt was caused by defalcation or fraud. The only issue on appeal was whether Berman or B&A acted as a fiduciary. The Court rejected both of Follett's theories. The first theory was that Berman was a fiduciary and relied on the Illinois principle that a corporate director owes a fiduciary duty to the corporation, its shareholders, and (upon insolvency) its creditors. But the Court noted that not every fiduciary created by state law acts "in a fiduciary capacity" under § 523. The special relationship must have existed before and be unrelated to the alleged wrong. Therefore, a director's fiduciary obligation to a creditor, created upon insolvency, does not transform the pre-insolvency relationships to fiduciary ones. Berman is therefore not a § 523 fiduciary to Follett. Under Follett's second theory, B&A is the fiduciary under the contract and Jay Berman is personally liable under a veil piercing argument. The Supreme Court has cautioned against finding a fiduciary duty in a ordinary commercial transaction, even though most commercial transactions involve some semblance of trust. A § 523 fiduciary should be found only where there is an express trust or an implied fiduciary status imposed by law. The Court addressed each in turn. With respect to an express trust, the Court found nothing in the contracts that supported an intent to create a trust. There were neither separate accounts nor segregation of funds. The Court turned to the implied fiduciary status issue. Generally speaking, contract obligations do not establish a § 523 fiduciary relationship. The Court referred to its decision in Frain, were it found that relationship in the context of a contract among shareholders. But in Frain, the debtor was the corporation's CEO and thus had a natural knowledge advantage. He also had "ultimate power" through his day-to-day control of the business. Here, there are no special confidences, no knowledge or power disparity, and no duties created by law. The relationship is simply a contractual one and does not fit within the § 523(a)(4) exception.