479 B.R. 746
Bankr. E.D. Tenn.2012Background
- Hulsing holds a state court judgment against Sleep Quest (June 9, 2009, for $20,318) and seeks to pierce Sleep Quest’s veil to hold Debtors liable and to deny discharge under 11 U.S.C. § 727(a)(2)(A) or §§ 523(a)(4), (a)(6).
- Sleep Quest is an LLC formed in 2006 by Debtor Steffner as sole member; SRS (Specialty Respiratory Services) was formed later and engaged in similar business.
- Debtors filed Chapter 7 bankruptcy on May 30, 2011; Hulsing filed this adversary proceeding on September 12, 2011.
- Garnishments occurred: Sleep Quest’s bank account funds were transferred to SRS just before a garnishment, leaving Sleep Quest with virtually nothing; later, Sleep Quest and SRS faced additional garnishment-related actions and BCBS reimbursements.
- Debtors listed Sleep Quest and SRS debts in schedules; Sleep Quest and SRS conducted intercompany transfers, shared address, bank, and counsel, but maintained separate records and offices.
- Court grants summary judgment for Debtors on piercing the corporate veil; Hulsing’s standing to object to discharge is limited by the veil ruling; proceedings address § 727(a)(2)(A), § 523(a)(4), and § 523(a)(6) claims.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Piercing the corporate veil standard met? | Hulsing supports veil piercing via Allen factors and asset diversion. | Debtors contend separate entities; arms-length dealings and separate records. | No; insufficient equities to pierce the veil; summary judgment for Debtors on this issue. |
| Denial of discharge under § 727(a)(2)(A)? | Debtors transferred/concealed Sleep Quest assets to hinder creditor. | Transfers involved Sleep Quest assets; no direct debtor property; no concealment. | Denied; § 727(a)(2)(A) claim fails. |
| Nondischargeability under § 523(a)(4) (fiduciary defalcation or embezzlement)? | Argues alternative theories of fiduciary defalcation or embezzlement via intercompany transfers. | No express/technical trust; no embezzlement; no fiduciary breach by officers. | Granted to Debtors; § 523(a)(4) claims fail. |
| Nondischargeability under § 523(a)(6) (willful/malicious injury)? | Garnishment-related transfers injured Hulsing; argued conversion of liened funds. | Garnished funds were negligible; no injury to legal rights; no willful/malicious act proven. | Granted to Debtors; § 523(a)(6) claim fails. |
Key Cases Cited
- Schlater v. Haynie, 833 S.W.2d 925 (Tenn.App.1992) (multiple Allen factors governing veil piercing; some factors do not require all to favor piercing)
- CAO Holdings, Inc. v. Trost, 333 S.W.3d 73 (Tenn.App.2010) (Allen-factor approach for veil piercing; equities must favor piercing)
- In re Adams, 31 F.3d 389 (6th Cir.1994) (§ 727(a)(2)(A) burden on creditor; liberal construction in debtor’s favor)
- In re Keeney, 227 F.3d 679 (6th Cir.2000) (two-part test for § 727(a)(2)(A) involving disposition and intent)
- In re Lort, 347 B.R. 909 (Bankr.M.D. Fla.2006) (illustrates direct proprietary interest requirement for § 727(a)(2)(A))
- In re Srour, 138 B.R. 413 (Bankr.S.D.N.Y.1992) (debtor’s transfers of corporate assets examined under § 727(a)(2)(A))
- In re Cooper, 430 B.R. 480 (Bankr.E.D. Tenn.2010) (trust/fiduciary relationship analysis under state law for § 523(a)(4))