646 B.R. 319
Bankr. D. Or.2022Background:
- ShinePro Building Solutions, LLC was a single‑member LLC owned and controlled by Jason Reed; it performed remodeling work.
- Sami Hales paid Reed a $40,000 cash deposit to be used to purchase materials for an interior remodel; Reed placed the cash in ShinePro’s safe and never deposited it into the business bank account.
- Reed did not order materials, fabricated vendor orders and restocking/cancellation fees, and prepared a fake “Project Termination & Refund” statement; he later agreed to refund $38,500 (net of $1,500 fee) but never paid.
- Hales obtained a state court default judgment against ShinePro for $38,500; ShinePro had no assets and did not refund the deposit.
- Reed filed Chapter 7; Hales sued in adversary proceeding seeking (1) veil piercing/alter‑ego relief to hold Reed personally liable for ShinePro’s judgment and (2) nondischargeability under 11 U.S.C. § 523(a)(4) for embezzlement and for fraud/defalcation in a fiduciary capacity.
- The bankruptcy court found Reed was ShinePro’s alter ego, held the debt nondischargeable as embezzlement, and dismissed the fiduciary/defalcation claim for lack of an express/technical trust.
Issues:
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Reed is alter ego of ShinePro (pierce veil) | Reed exercised actual control, commingled funds, made misrepresentations, and insolvency harmed Hales | Company is a separate entity; no basis to pierce | Court pierced veil; Reed personally liable for ShinePro judgment |
| Whether the debt is nondischargeable as embezzlement under § 523(a)(4) | Deposit was entrusted for materials, Reed misappropriated funds and made fraudulent statements to delay refund | Deposit was an ordinary, owner‑controlled payment (not trust property) | Court held elements of embezzlement met; debt nondischargeable |
| Whether debt is nondischargeable for fraud/defalcation in a fiduciary capacity under § 523(a)(4) | Oral agreement and deposit created a trust/fiduciary duty; Reed committed fraud/defalcation | No express/technical trust existed; § 523(a)(4) inapplicable | Court found insufficient clear‑and‑convincing evidence of an express/technical trust and dismissed this claim |
Key Cases Cited
- Amfac Foods, Inc. v. Int’l Sys. & Controls Corp., 654 P.2d 1092 (Or. 1982) (factors and standards for piercing corporate veil)
- State ex rel. Neidig v. Superior Nat’l Ins. Co., 173 P.3d 123 (Or. 2007) (veil piercing is an extraordinary remedy; consider adequacy of other remedies)
- Greenleaf Auto Repair, LLC v. Ideal Auto Works, LLC, 509 P.3d 750 (Or. App. 2022) (elements required to pierce corporate veil)
- Transamerica Commercial Fin. Corp. v. Littleton (In re Littleton), 942 F.2d 551 (9th Cir. 1991) (elements and definition of embezzlement for § 523(a)(4))
- Grogan v. Garner, 498 U.S. 279 (1991) (preponderance of the evidence standard for nondischargeability claims)
- First Delaware Life Ins. Co. v. Wada (In re Wada), 210 B.R. 572 (9th Cir. BAP 1997) (contract terms can override general ownership rules for deposits; false statements can indicate fraud)
- Ragsdale v. Haller, 780 F.2d 794 (9th Cir. 1986) (fiduciary status under § 523(a)(4) requires an express or technical trust)
- Bullock v. BankChampaign, N.A., 569 U.S. 267 (2013) (defalcation requires scienter — intent or reckless conduct)