Cox v. CoronaCox v. Corona
IT IS ORDERED as set forth below:
Date: January 24, 2024
U.S. Bankruptcy Court Judge
ORDER ON DEFENDANT‘S MOTION FOR SUMMARY JUDGMENT
This mаtter is before the Court on Defendant Joseph Andrew Corona‘s (“Defendant“) Motion for Summary Judgment (the “Motion“) filed on September 27, 2023. [Doc. 27]. Plaintiff Lonnie Cox filed his Response [Doc. 33], and Defendant filed his Reply [Doc. 36]. Defendant seeks summary judgment on all claims in the complaint, including (1) determination of dischargeability under
I. SUMMARY JUDGMENT STANDARD
Summary judgment is appropriate when “the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.” Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S. Ct. 2548, 2552 (1986);
The moving party has the burden of establishing its entitlement to summary judgment. Clark v. Coats & Clark, Inc., 929 F.2d 604, 608 (11th Cir. 1991). For issues on which the moving party would bear the burden of proof at trial, the movant “must affirmatively show the absence of a genuine issue of material fact, and support its motion with credible evidence demonstrating that no reasonable jury could find for the non-moving party on all the essential elements of its case.” Landolfi v. City of Melbourne, Fla., 515 F. App‘x 832, 834 (11th Cir. 2013). When, as here, “the non-movant has the burden of proof at trial, the movant may carry the initial burden in one of two ways—by either (1) negating an essential element of the non-movant‘s case or (2) by showing that there is no evidence to prove a fact necessary to the non-movant‘s case.” Wynn v. Paragon Systems, Inc., 301 F. Supp. 2d 1343, 1349-50 (S.D. Ga. 2004) (citing Clark, 929 F.2d at 606-08); see also Celotex, 477 U.S. at 323, 325, 106 S. Ct. at 2553, 2554 (stating that Rule 56 does not require “that the moving party support its motion with affidavits or other similar materials negating the opponent‘s claim” but that the moving party may satisfy its burden by “pointing out to the district court ... that there is an absence of evidence to support the nonmoving party‘s case.“); see also Fitzpatrick v. City of Atlanta, 2 F.3d 1112, 1115-16 (11th Cir. 1993). The moving party must identify the pleadings, discovery materials, or affidavits that show the absence of a genuine issue of material fact. Celotex, 477 U.S. at 323, 106 S. Ct. at 2553. Once this burden is met, the nonmoving party cannot merely rely on allegations or denials in its own pleadings. Hairston v. Gainesville Sun Publ‘g. Co., 9 F.3d 913, 918 (11th Cir. 1993). Rather, the nonmoving party must present specific facts supported by evidence that demonstrate there is a genuine material dispute. Id.
II. UNDISPUTED MATERIAL FACTS
Defendant filed a Statement of Material Facts Not in Dispute (“Defendant‘s Statement“). [Doc. 28]. Plaintiff filed a Response to Defendant‘s Statement [Doc. 31] as well as a Statement of Additional Material Facts in Opposition to Debtor/Defendant‘s Motion for Summary Judgment. [Doc. 32]. Defendant did not file a response or otherwise controvert Plaintiff‘s additional facts. Plaintiff objects generally to Defendant‘s Statement on the basis that it did not support the facts asserted therein by citing to “particular parts of materials in the record” as required by
Federal Rule of Bankruptcy Procedure 7056 which incorporates Federal Rule of Civil Procedure 56 (“Rule 56“) requires that,
[a] party asserting that a fact cannot be... genuinely disputed must suрport the assertion by: (A) citing to particular parts of materials in the record, including depositions, documents, electronically stored information, affidavits or declarations, stipulations (including those made for purposes of the motion only), admissions, interrogatory answers, or other materials; or (B) showing that the materials cited do not establish the absence or presence of a genuine dispute, or that an adverse party cannot produce admissible evidence to support the fact.
In 2014, Plaintiff and Defendant (the “Parties“) entered into a business relationship to create Cоrnerstone Contracting Group, Inc. (“Cornerstone“). [Docs. 28, ¶ 1; 31, ¶ 1; 32, ¶ 1]. The Parties entered into a Pre-Incorporation Agreement regarding the formation and operation of Cornerstone, which did not set forth the specific ownership interests of Plaintiff and Defendant, but the Parties operated with the understanding that Defendant was 70% owner and Plaintiff was 30% owner. [Docs. 28, ¶¶ 2-3; 31, ¶¶ 2-3; 32, ¶¶ 2, 4]. In 2016, the Parties executed a handwritten Addendum to amend and supplement the Pre-Incorporation Agreement (the “Pre-Incorporation Agreement” and the “Addendum“, respectively, and collectively, the “Agreement“) which included a provision whereby Plaintiff had a “right of first refusal” for drywall and acoustical subcontracts of Cornerstone. [Docs. 28, ¶ 4-5; 31, ¶ 4-5; 32, ¶ 2]. Defendant took most of the responsibility for the day-to-day operations of Cornerstone and Plaintiff acted primarily through his business of Cox Commercial Interiors (“CCI“) under the Right of First Refusal. [Docs. 28, ¶¶ 7-8; 31, ¶ 8; 32 ¶ 6].
The business relationship between the Parties deteriorated and Plaintiff initiated the Arbitration against Defendant and Cornerstone in which he asserted breach of contract and breach of fiduciary duty claims against Defendant and that resulted in the Award being entered on September 6, 2022. [Docs. 28, ¶¶ 9-10; 31, ¶ 9-10; 32, ¶ 3,]. Pursuant to the Award, Plaintiff was awarded $4,294,734.44 in monetary damages against Defendant, including $2,553,991.00 for breach of contract, $433,785.81 for breach of fiduciary duty, $956,957.63 for expenses of litigation, and $350,000.00 in punitive damages. The Award also imposed non-monetary damages, including requiring Defendant (1) to honor Plaintiff‘s right of first refusal, (2) to hold Cornerstone “shareholder meetings
Subsequently on January 17, 2023, Plaintiff filed his Adversary Complaint and his Amended Complaint on January 18, 2023, commencing this adversary proceeding. [Docs. 1; 3; 28, ¶ 15; 31, ¶ 15].
III. LEGAL ANALYSIS
Defendant seeks summary judgment on each of Plaintiff‘s claims under
Defendant is incorrect about Plaintiff‘s ability to bring claims under § 523 because, by seeking a determination of dischargeability, Plaintiff is not asserting a claim that could have been brought in the Arbitration. Plaintiff‘s claims have already been liquidated and the only question is whether the facts giving rise to the damages awarded in the Arbitration also meet the test for an exception to discharge, which was not at issue in the Arbitration. See St. Laurent v. Ambrose (In re St. Laurent), 991 F.2d 672, 676 (11th Cir. 1993) (“While collatеral estoppel [issue preclusion] may bar a bankruptcy court from relitigating factual issues previously decided in state court, ... the ultimate issue of dischargeability is a legal question to be addressed by the bankruptcy court[.]“); Brown v. Felsen, 442 U.S. 127, 135, 138, 99 S. Ct. 2205, 2211-12 (1979) (when the bankruptcy court is determining the dischargeability of a state court judgment, it may decline to apply res judicata (claim preclusion) and may consider evidence outside the state court record because dischargeability issues are not necessarily identical to the issues arising under state law) (decided under § 17 of the Bankruptcy Act, which is
As stated in St. Laurent, issue preclusion applies in dischargeability proceedings. This Court must treat the Superior Court Order adopting the Award with the same preclusive effect that the Order would be given in the statе in which it was rendered. Lewis v. Lowery (In re Lowery), 440 B.R. 914, 921 (Bankr. N.D. Ga. 2010) (Hagenau, J.). Under Georgia law, collateral estoppel applies when the following elements are met: 1) there is an identity of parties between the two cases; 2) there is an identity of issues between the two cases; 3) the issue in question was actually and finally litigated; 4) the adjudication was essential to the earlier action; and 5) the parties had a full and fair opportunity to litigate the issues in question. Bradsher v. Watson (In re Watson), No. 18-69905, AP 19-5127, 2019 WL 5388061, *3 (Bankr. N.D. Ga. Oct. 18, 2019) (Ellis-Monro, J) (rev‘d in part on other grounds) (citing Lowery, 440 B.R. at 921; Lusk v. Williams (In re Williams), 282 B.R. 267, 272 (Bankr. N.D. Ga. 2002) (Mullins, J.)).
Here, issue preclusion applies to the extent of the facts established in the Award because the parties are identical in each action. The issues regarding Defendant‘s misuse of funds are the same that is, whether Defendant used corporate funds for personal expenses and the amount of money that was converted to personal use. The prior litigation was fully litigated to final judgment entered by the Superior Court which has not been appealed and is final. And, the parties had a full and fair opportunity to litigate in the Arbitration. That being the case the factual findings of the Arbitrator are binding in this proceeding. Further, discussion of allocation of damages established in the Arbitration is premature as the Award did not allocate damages in a way that aligns with the claims asserted under the Bankruptcy Code such that any such allocation will require additional evidence. That said, the Court can determine that any amount attributable to actions that present claims under § 523 is or is not dischargeable and determine a specific amount allocable to that claim upon evidence of such damages.
Section 523(a) of the Bankruptcy Code excepts certain debts from discharge, including debts: “(a)(4) for fraud or defalcation while acting in a fiduciary capacity, [and] embezzlement ...; [and] ... (a)(6) for willful and malicious injury by the debtor to another entity or to the property of another entity.”
A. Section 523(a)(4)
1. Fiduciary Capacity Exception
Defendant argues he is entitled to summary judgment on Plaintiff‘s claim under
To succeed on a claim under the Fiduciary Capacity Exception, Plaintiff must first establish that “the debtor held a fiduciary position in relation to the plaintiff under a technical, express, or statutory trust[,]” which is a question of federal law. Sawyer v. Thompson (In re Thompson), AP No. 19-5119, No. 18-69638-PMB, 2020 WL 2048006, *3 (Bankr. N.D. Ga. Apr. 28, 2020) (Baisier, J.); Spring Valley Produce, Inc. v. Forrest (In re Forrest), 47 F.4th 1229, 1236 (11th Cir. 2022); Strategic Funding Source, Inc. v. Dodge (In re Dodge), 623 B.R. 663, 667 (Bankr. N.D. Ga. 2020) (Bonapfel, J.). Thus, fiduciary capacity for purposes of
The Eleventh Circuit has established a three-part test to determine whether a defendant/debtor is acting in a fiduciary capacity under
First, the fiduciary relationship must have (1) a trustee, who holds (2) an identifiable trust res, for the benefit of (3) an identifiable beneficiary or beneficiaries... Second, the fiduciary relationship must define sufficient trust-like duties imposed on the trustee with respect to the trust res and beneficiaries to create a technical trust. Based on our caselaw, the two most important trust-like duties, and the ones that we have held create a techniсal trust, are the duty to segregate trust assets and the duty to refrain from using trust assets for a non-trust purpose. Third, the debtor must be acting in a fiduciary capacity before the act of fraud or defalcation creating the debt.
In re Forrest, 47 F.4th at 1241; see Quaif v. Johnson, 4 F.3d 950, 953 (11th Cir. 1993).
Under the Agreement, Plaintiff and Defendant were the only two owners and directors of Cornerstone, with Defendant as President and Plaintiff as Vice-President. [Doc. 32, Exhibit B, ¶ 5]. Defendant obtained a 70% ownership interest in the corporation and Plaintiff obtained a 30% ownership interest. [Docs. 28, ¶¶ 2-3; 31, ¶¶ 2-3; 32, ¶¶ 2, 4]. Defendant managed the day-to-day operations of the business, while Plaintiff primarily was involved in Cornerstone through the work done by his company CCI. [Docs. 28, ¶ 7-8; 31, ¶ 8; 32 ¶ 6; 32, Exhibit B ¶ 16]. Paragraph 3 of the Agreement (“Articles of Incorporation“) does not identify which shares are voting shares nor does parаgraph 5 (“Control“) provide any further delineation of the shares between the parties. [Docs. 28, ¶ 7-8; 31, ¶ 8; 32, Exhibit B ¶ 3-5]. Paragraph 7 of the Agreement (“Initial Salaries for Officers and Salary Caps“) provides that Plaintiff shall receive an initial salary of $1 per year as Vice-President of the corporation and Defendant is to receive an initial salary of $70,000 as President “should the revenues for the Corporation of that year less all expenses allow that amount to be paid without the Corporation incurring additional debt.” [Doc. 32, Exhibit B, ¶ 7]. Defendant‘s salary in subsequent years will be determined by the parties but will not exceed $125,000; no specific provision is made for Plaintiff‘s salary after the initial year. [Doc. 32, Exhibit B, ¶ 7]. The only discussion of dividends and distributions
Lonnie Cox shall cease to be involved with the Corporation on December 31, 2022, provided that all accounting and appropriate disbursements of dividends shall be performed by that date. Further, on December 31, 2022, Lonnie shall sell his shares of Stock to Joseph Corona in consideration of One Dollar ($1), provided that all accounting and appropriate disbursements of dividends shall be performed by that date.
[Doc. 32, Exhibit B, ¶ 15]. This paragraph presumes that both parties have the ability to receive dividends from Cornerstone. This is consistent with Georgia law, which provides that all shareholders in the same class have identical rights, and the board of directors may authorize corporаte distributions so long as they are not restricted by the corporation‘s articles of incorporation or bylaws.
It is well established that serving as an officer or director of a Georgia corporation, a manager of a Georgia limited liability company, or partner in a Georgia partnership is not sufficient by itself to establish fiduciary capacity for purposes of
Further, Georgia statutes like
The Parties’ relationship is memorialized in the Agreement which does not set forth any specific contractually agreed upon fiduciary
2. Embezzlement
To establish a claim of nondischargeability based on embezzlement under
Plaintiff does not assert that his claim for embezzlement applies to the damages for breach of contract; therefore, the Court focuses on the conduct that gave rise to damages for breach of fiduciary duty. Defendant argues that the first element necessary to establish a claim of embezzlement
“Standing to bring an embezzlement claim under
The reasons that underpin the general rule requiring a derivative action are that (i) it prevents a multiplicity of lawsuits by shareholders, (ii) it protects corporate creditors by putting the procеeds of the recovery back in the corporation, (iii) it protects the interest of all shareholders by increasing the value of their shares instead of allowing a recovery by one shareholder to prejudice the rights of others not a party to the suit; and, (iv) it adequately compensates the injured shareholder by increasing the value of his shares. Thomas v. Dickson, 250 Ga. 772, 773 (1983).
In Thomas, the Georgia Supreme Court, noted the general rule that a shareholder seeking to recover misappropriated corporate funds must bring a derivative suit, but then stated that, “we believe that in exceptional situations this Court and our other state courts should look at the ‘realistic objectives’ of a given case to determine if a direct action is proper.” Id. at 774. In that case, there were twо shareholders and plaintiff was the one injured by the failure of the corporation to pay dividends. The court held that all interested parties, that is, creditors, other shareholders, and directors, must be considered when determining if a direct action is available. The court noted that the corporation was paying its debts as they came due such that there was no party that could be prejudiced by recovery by the minority shareholder. Id. The court further held that payment to the corporation to increase stock value would not benefit plaintiff as there was no market for the
The facts here are similar. Plaintiff is the only other shareholder such that decreasing dividends through misuse of corporate funds injures only him, the shares are not generally marketable, and there is no evidence that there are creditors of Cornеrstone that are not being paid. However, there is also no evidence that creditors of Cornerstone are being paid; rather the proceedings in the main case indicate both Plaintiff and Defendant believe there is significant value in Cornerstone, but this belief is not record evidence and there remains a question of fact whether creditors of Cornerstone would be injured by a recovery by Plaintiff alone such that a derivative action would be required. Thus, there is a question of fact whether Plaintiff could establish that a direct action for embezzlement is appropriate. In addition, the Arbitrator held that Defendant used Cornerstone funds for personal expenses such as a family vacation and buying sports tickets. As noted, these findings are established here and there is a further question of fact regarding Defendant‘s intent while using corporate funds for improper purposes. Because there are questions of fact that could result in judgment for Plaintiff the Court will deny the Motion as to Plaintiff‘s embezzlement claim in Count I of the Amended Complaint.
B. Section 523(a)(6)
Turning to Count II of the Amended Complaint, Defendant argues that he is entitled to summary judgment on Plaintiff‘s claim for willful and malicious injury under
The Eleventh Circuit defines “mаlicious” as “wrongful and without just cause or excessive even in the absence of personal hatred, spite or ill-will.” Maxfield v. Jennings (In re Jennings), 670 F.3d 1329, 1334 (11th Cir. 2012) (quoting Walker, 48 F.3d at 1164 (citation omitted)). Section 523(a)(6) only addresses injuries that the defendant desired to occur by his conduct, it does not apply to a defendant‘s
Defendant asserts again that Plaintiff had the opportunity to assert this type of claim in the Arbitration but chose not to. [Doc. 29, pg. 14]. Defendant argues the Award does not include “findings of fact or conclusions of law that would support an award against Defendant for willful and malicious injury.” [Id.]. The facts established in the Arbitration are рreclusive in this proceeding and to the extent additional facts are necessary to establish whether the breaches established in the Award were willful and malicious a trial in this proceeding will allow the Parties to present evidence to support or undermine that proposition.
Defendant asserts further that Plaintiff does not have standing to pursue the claim because the party that suffered damages was Cornerstone, rather than Plaintiff. [Doc. 36, pg. 13]. Unliked an embezzlement claim, a willful and malicious injury claim only requires that an interest in property be injured (in a willful and malicious action) rather than requiring an ownership interest in property converted to personal use. Because of this and because a shareholder has an interest in a corporаtion sufficient to satisfy the interest in property required by
Alternatively, Defendant asserts that if the Court allows Plaintiff to try the
The breach of fiduciary duty claim resulted in a specific damage award and may sound in tort or contract. The breach of contract claim based upon the right of first refusal also resulted in a specific damage award. The clear statement from the Eleventh Circuit is that a contract right that is breached in a willful and malicious manner is sufficient under § 523(a)(6). See also, Snoke v. Riso (In re Riso), 978 F.2d 1151, 1153-1154 (9th Cir. 1992) (limited right of first refusal for purchase of property was not a property interest but a contract right); Norbert, CONTRACT CLAIMS AND THE “WILLFUL AND MALICIOUS INJURY” EXCEPTION TO THE DISCHARGE IN BANKRUPTCY, 88 Am. Bankr. J. 175 (Spring 2014). Because a breach of contract may constitute a willful and malicious injury, either to Plaintiff‘s interest in Cornerstone or to him individually, as the Arbitrator stated the right of first refusal was a promise between Defendant and Plaintiff and not between corporate entities, Defendant‘s argument that the injuries cannot constitute willful and malicious injuries under
C. Attorney‘s Fees and Punitive Damages
With respect to Count III of the Amended Complaint, Defendant asserts that he is entitled to summary judgment on Plaintiff‘s claim for nondischargeability of the attorney‘s fees3 and punitive damages awarded in the Award. The Amended Complaint asserts that the attorney‘s fees and punitive damages are nondischargeable because they were awarded in connection with a nondischargeable award. [Doc. 3, ¶ 55-57]. Defendant further contends he is entitled to summary judgment as to the attorney‘s fees because they were awarded based on conduct during the Arbitration. Defendant contends he is entitled to summary judgment as to the punitive damages because the Award says they are based on the breach of fiduciary duty claims, and the award for breach of fiduciary duty is dischargeable.
Plaintiff argues that all the debt owed to him is nondischargeable and that the arbitration would not have been necessary were it not for Defendant‘s bad acts. Therefore, by extension, any litigation expenses Plaintiff incurred as part of the Arbitration directly flow from Defendant‘s actions. Assuming Defendant is correct that the attorney‘s fees were awarded based on Defendant‘s litigаtion conduct, that would not necessarily foreclose a determination that they are nondischargeable.
“An award of attorney‘s fees in connection with a debt that is non-dischargeable is likewise non-dischargeable.” Trexler, 2016 WL 236054 at *9 (citing Cohen v. De la Cruz, 523 U.S. 213, 223, 118 S. Ct. 1212, 1219 (1998)); see also Knight, 574 B.R. at 811 (fees and expenses may be declared nondischargeable if “awarded in connection with an otherwise nondischargeable award, that is, they are awarded as recompense for the same conduct“); Palloto v. Neri, (In re Neri), No. 17-53022-BEM, AP 17-5125-BEM, 2018 WL 333819 (Bankr. N.D. Ga. Jun. 8, 2018) (Ellis-Monro, J.) (same). If attorney‘s fees are awarded in connection with a claim that includes both dischargeable and nondischargeable components, then the court may apportion the fee award accordingly. Trexler, 2016 WL 236054 at *9.
The Award states, “[I]n the conduct of this arbitration, [Defendant] caused [Plaintiff] unnecessary trouble and expense with regard to discovery and the production of financial data to which he was entitled, both as a minority owner and as a litigant. He has been stubbornly litigious, arguing defenses he agreed in the ‘Addendum’ would not be raised. His conduct in this regard entitles [Plaintiff] to the recovery of his expenses of litigation.” [Doc. 3, pg.
“Cases interpreting this section [
Turning to the claim of punitive damages, punitive damages are not always nondischargeable. Neri, 2018 WL 333819 at *7.
Defendant argues that the basis for the punitive damages awarded in the Arbitration was for mere “bad faith,” “intentional violations of fiduciary duties,” or “stubborn litigiousness,” which does not rise to the degree of severity contemplated by the willful and malicious standard of
The Award states, “[Defendant‘s] conduct with respect to use of corporate funds for his personal benefit and his disparate treatment of shareholder distributions must be classified as intentional and
In conclusion, because the undisputed facts do not foreclose Plaintiff from prevailing on his claims under
In accordance with the foregoing, it is now,
ORDERED that Defendant‘s Motion for Summary Judgment is DENIED as to Count II and Count III of the Amended Complaint. It is further,
ORDERED that Defendant‘s Motion for Summary Judgment is GRANTED in part and DENIED in part as to Plaintiff‘s Count I as follows, summary judgment is granted to Defendant on Plaintiff‘s claim for fraud or defalcation while acting in a fiduciary capacity and denied as to Plaintiff‘s claim of embezzlement under
END OF ORDER
Distribution List
Lonnie Cox
3754 Lavista Road
Suite 250
Tucker, GA 30084
Michael D. Robl
Robl Law Group LLC
Suite 250
3754 LaVista Road
Tucker, GA 30084
Joseph Andrew Corona
322 Narroway Trail
Dallas, GA 30132
Scott B. Riddle
Law Office of Scott B. Riddle, LLC
Suite 1800
3340 Peachtree Road, NE
Atlanta, GA 30326