490 B.R. 104
Bankr. N.D. Tex.2013Background
- Sherali was the sole officer, director, and shareholder of S & S Food Corporation during 2006–2011, exercising total control over the company.
- During the relevant period, S & S was insolvent and had a negative surplus, unable to pay debts as they came due.
- Sherali caused S & S to make substantial distributions to himself as shareholder, which exceeded surplus and/or occurred while insolvent.
- Sherali improperly possessed and converted S & S assets, including cash from December 1–9, 2011 and a 2003 Honda Element.
- S & S filed a Complaint to determine debt and nondischargeability under 11 U.S.C. § 523(a)(4); the Court conducted trial and issued findings of fact and conclusions of law.
- The Court awarded actual damages, exemplary damages, and attorney’s fees, and held the debt nondischargeable under § 523(a)(4).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Court’s authority to liquidate and adjudicate | S & S argues constitutional authority exists to liquidate claims and determine nondischargeability. | Sherali contends Stern limits bankruptcy court authority. | Court has authority to liquidate and decide nondischargeability. |
| Distributions unlawful under Texas law | Distributions were unlawful because S & S was insolvent or had negative surplus. | Sherali contends distributions were proper or not properly characterized as unlawful. | Distributions were unlawful; Sherali liable. |
| Defalcation under § 523(a)(4) | Defalcations occurred due to willful neglect of fiduciary duty, rendering debt nondischargeable. | Sherali disputes the characterization as defalcation. | Yes; defalcation renders debt nondischargeable. |
| Larceny/conversion under § 523(a)(4) | Sherali’s theft/conversion of cash and the Honda Element satisfy nondischargeability. | Sherali argues toward potential factual disputes or lesser liability. | Yes; larceny/conversion findings support nondischargeability. |
Key Cases Cited
- Stern v. Marshall, 131 S. Ct. 2594 (2011) (clarifies constitutional authority of bankruptcy courts)
- In re Carroll, 464 B.R. 293 (N.D. Tex. 2011) ( bankruptcy court authority to determine discharge implications)
- In re Morrison, 555 F.3d 473 (5th Cir. 2009) (bankruptcy court may liquidate state-law claims for nondischargeability)
- In re Harwood, 637 F.3d 615 (5th Cir. 2011) (fiduciary duties and related nondischargeability standards)
- In re Moreno, 892 F.2d 417 (5th Cir. 1990) (defalcation and nondischargeability standards in § 523(a)(4))