Marmic Fire & Safety Co., Inc. v. ETG Fire, LLCMarmic Fire & Safety Co., Inc. v. ETG Fire, LLC
CORRECTED* MEMORANDUM OPINION AND ORDER DENYING MOTION TO DISMISS
______________________________________________________________________I. Introduction.
The Plaintiffs, Marmic Fire & Safety Co., Inc. (“Marmic“) and APS FireCo, LLC (“APS“) (together, the “Plaintiffs“), initiated this Adversary Proceeding against Debtor-Defendant, ETG Fire, LLC (“ETG Fire“), by filing a “Complaint to Determine Dischargeability of a Debt Pursuant to
Accepting all the facts alleged by the Plaintiffs in the Complaint as true, and having reviewed the Motion to Dismiss, Response, and Reply, the Court concludes that the Plaintiffs have alleged sufficient facts to properly state claims for relief under
II. Jurisdiction and Venue.
The Court has jurisdiction over this Adversary Proceeding and the Motion to Dismiss pursuant to
III. Procedural Background.
On June 20, 2024, ETG Fire filed for protection under Chapter 11, Subchapter V of the Bankruptcy Code, commencing the case captioned: In re ETG Fire, LLC, Bankr. Case No. 24-13446 TBM (Bankr. D. Colo.) (the “ETG Fire Case“). A related entity, ETG Fire Midco, LLC (“Midco“), filed for protection under Chapter 11, Subchapter V, on the same day, commencing the case captioned: In re ETG Fire Midco, LLC, 24-13447 (Bankr. D. Colo.) (the “Midco Case“). (ETG Docket No. 1 and Midco Docket No. 1.)3 Shortly thereafter, the Court ordered that the two main bankruptcy cases be jointly administered, with the ETG Fire Case serving as the lead case. (ETG Docket Nos. 56 and 62 and Midco Docket Nos. 57 and 58.)
The Plaintiffs filed Proof of Claim No. 44-1 against ETG Fire, asserting a general unsecured claim in the amount of “not less than $5,447,788.36” (the “Plaintiffs’ POC“). Subsequently, ETG Fire objected to the Plaintiffs’ POC. (ETG Docket No. 229, the “POC Objection“). ETG Fire‘s POC Objection remains pending.
The ETG Fire Case and Midco Case have generated substantial disputes (including many between the Plaintiffs and ETG Fire and Midco). ETG Fire and Midco
Meanwhile, on September 30, 2024, the Plaintiffs filed the Complaint. In the Complaint, the Plaintiffs assert eleven counts against ETG Fire: (1) misappropriation of confidential information; (2) misappropriation of trade secrets in violation of the Defend Trade Secrets Act,
ETG Fire did not answer the Complaint. Instead, ETG Fire filed the Motion to Dismiss, seeking dismissal of all claims in the Complaint pursuant to
IV. Standard for Evaluating Motions to Dismiss Under Fed. R. Civ. P. 12(b)(6) .
The Court‘s analysis of the Motion to Dismiss, Response, and Reply starts with the applicable federal rules of procedure. In this case, ETG Fire asserts that the Complaint should be dismissed pursuant to
Every defense to a claim for relief in any pleading must be asserted in the responsive pleading if one is required. But a party may assert the following defenses by motion . . . failure to state a claim upon which relief can be granted . . . .
When considering a motion to dismiss under
Under the “refined standard,” a claim is considered “plausible” when the complaint contains facts which allow the Court “to draw a reasonable inference that the defendant is liable for the misconduct alleged.” Iqbal, 556 U.S. at 678 (quoting Twombly, 550 U.S. at 570). “Plausible” does not mean “probable,” although the plaintiff must show that its entitlement to relief is more than speculative. Id.; Twombly, 550 U.S. at 555. If the allegations in a complaint “are so general that they encompass a wide swath of conduct, much of it innocent, then the plaintiffs have not nudged their claims across the line from conceivable to plausible.” Kansas Penn, 656 F.3d at 1215. Put another way, “the complaint must give the Court reason to believe that this plaintiff has a reasonable likelihood of mustering factual support for these claims.” Ridge at Red Hawk, LLC v. Schneider, 493 F.3d 1174, 1177 (10th Cir. 2007) (emphasis in original).
“The nature and specificity of the allegations required to state a plausible claim will vary based on context.” Kansas Penn, 656 F.3d at 1215; see also Iqbal, 556 U.S. at 679 (“Determining whether a complaint states a plausible claim for relief will . . . be a context-specific task that requires the reviewing court to draw on its judicial experience and common sense.“). Thus, the Tenth Circuit has held that “the Twombly/Iqbal standard is ‘a middle ground between heightened fact pleading, which is expressly rejected, and allowing complaints that are no more than labels and conclusions or a formulaic recitation of the elements of a cause of action, which the Court stated will not do.‘” Khalik v. United Airlines, 671 F.3d 1188, 1191 (10th Cir. 2012) (citing Robbins v. Oklahoma, 519 F.3d 1242, 1247 (10th Cir. 2008)) (internal quotation marks and citations omitted in Khalik).
The Court is bound to accept only factual allegations as true and will not give deference to legal conclusions. “Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.” Iqbal, 556 U.S. at 578. As a result, courts often begin their analysis by identifying allegations that are no more than conclusions and, therefore, not entitled to the “assumption of truth.” Id. at 679. Legal conclusions must be supported by well-pleaded factual allegations, which can be assumed as true and evaluated as to whether they plausibly give rise to the requested relief. Id. This process is a context-specific task which depends on the elements of a particular claim and requires the Court to draw upon its judicial experience and common sense. Burnett, 706 F.3d at 1236 (quoting Iqbal, 556 U.S. at 679). Careful evaluation is necessary both to ensure that a defendant is sufficiently able to prepare his defense and to avoid “ginning up the costly machinery associated with our civil discovery regime on the basis of a largely groundless claim.” Kansas Penn, 656 F.3d at 1215 (internal quotation omitted).
V. Summary of Factual Allegations in Complaint.
The factual allegations of the Complaint (which must be accepted as true) may be summarized as follows:
A. Allegations Regarding Plaintiffs, Operations, and Confidential Information.
Marmic is a Missouri corporation with operations throughout the United States. (Compl. ¶ 9.) APS is a limited liability company organized under the laws of the State of Oklahoma with operations throughout the United States. (Compl. ¶ 10.) Marmic acquired APS on or about October 23, 2021, and APS remains a wholly-owned subsidiary of Marmic. (Compl. ¶ 11.) Marmic operates a full-service fire protection business, providing retail, medical, commercial, and industrial companies with hazard analysis, fire and personal safety products, fire suppression installations, and inspection services conforming to mandates from the Occupational Safety and Health Administration, government codes, and National Fire Protection Association standards. (Compl. ¶ 18.) APS provides inspection, design, and project services in the fire-protection industry as well as products and services relating to fire protection, including without limitation fire alarms, fire sprinklers, fire extinguishers, kitchen hood fire systems, and special hazard fire systems. (Compl. ¶ 19.)
The Plaintiffs’ relationships, technical know-how, and customer goodwill are the result of the Plaintiffs’ substantial investment and effort over extensive periods of time, and constitute business assets of significant and substantial value. (Compl. ¶ 21.) The Plaintiffs entrust their goodwill and their customers’ preferences to a team of sales professionals who manage their relationships with key accounts and serve as Plaintiffs’ face during their employment. (Compl. ¶¶ 20-21.) The Plaintiffs’ sales representatives and management employees have access to confidential, proprietary, and valuable information about Plaintiffs’ business, including bidding information; customer preferences and anticipated projects; CAD graphics; floor plans; business plans; market research and forecasts; marketing and advertising plans, techniques, and budgets; pricing strategies; cost sheets; supplier information; and product specifications, designs, inventions and techniques. (Compl. ¶ 22.) The Plaintiffs compensate their employees in exchange for their service to the Plaintiffs. (Compl. ¶ 20.)
To protect their confidential information from disclosure to third parties, including competitors, the Plaintiffs enacted company-wide policies, including a Confidential Company Information Policy. Under that policy, confidential information about the Plaintiffs’ business, “including but not limited
B. Allegations Regarding ETG Fire.
ETG Fire is a direct competitor of the Plaintiffs. (Compl. ¶ 3.) ETG Fire was established in 2013 by its Founder and former President, Chris Vanderstokker (“Vanderstokker“). (Compl. ¶¶ 2-3.) Vanderstokker sold ETG Fire to Erdoni, LLC (“Erdoni“), pursuant to a Unit Purchase and Sale Agreement dated January 19, 2022 (the “PSA“). (Compl. ¶ 4.) Following Erdoni‘s purchase of ETG, Christopher Czarnowski (“Czarnowski“) became the Chief Executive Officer of ETG Fire, and Vanderstokker remained employed by ETG Fire in a sales and consulting role. (Compl. ¶ 5.)
C. Allegations Regarding Certain of Plaintiffs’ Employees and Their Employment Contracts.
APS hired Tyler Aebersold (“Aebersold“) in October 2013. Following Marmic‘s acquisition of APS in 2021, Aebersold worked on behalf of both the Plaintiffs. When he was hired by APS in 2013, Aebersold signed an employment agreement that contained certain restrictive covenants. (Compl. ¶ 34.) On or about November 17, 2021, Aebersold signed a Confidentiality Agreement and Agreement Not to Compete with Marmic (the “Aebersold Agreement“). (Compl. ¶ 30.) The Aebersold Agreement provided:
Whereas, it is agreed that the Employee, during the period of employment with Employer and for a period of 36 months following the termination of Employee‘s employment with the Employer will not either directly or indirectly call upon, solicit, divert or take away or attempt to solicit, divert or take away any of the customers, business or patrons of the Employer upon whom the Employee called or solicited or catered or became acquainted with while employed with the Employer. It is furthermore agreed that during the term of Employee‘s employment and for a period of 36 months after the termination of employment, the Employee will not participate directly or
indirectly, personally or as the agent or Employee of another, in the ownership, management, operation or control of any business similar to the type of business conducted by the Employer at the time of the termination of this Agreement within a 100-mile radius of any location owned by Joplin Fire Protection Co., Inc. or Marmic Fire & Safety, Inc.
(Compl. ¶ 31.) The Aebersold Agreement further provided:
Employee further agrees that the information gained by Employee in promoting Employer‘s business including, by way of illustration and without limitations, the names and addresses of the customers of the Employer and the marketing methods are confidential information and Employee shall not disclose to any parties such information during the period of his employment or for a period of 36 months thereafter.
(Compl. ¶ 32.) Finally, the Aebersold Agreement stated:
Employee also agrees, during Employee‘s engagement with Employer and for a period of one (1) year after my employment ends for any reason, not to directly or indirectly, solicit, recruit, hire or otherwise interfere with the employment of Employer‘s employees.
Aebersold voluntarily resigned from his employment relationship with the Plaintiffs, effective on May 9, 2023. (Compl. ¶¶ 28, 95.) At the time of his resignation from employment with the Plaintiffs, Aebersold held the role of Sales Manager. (Compl. ¶ 28.) As Sales Manager, Aebersold was responsible for working directly with and developing and maintaining goodwill with Plaintiffs’ customers, including customers focused on special fire hazard protection systems, which are fire protection systems designed to protect a highly sensitive or valuable asset or to provide fire protection in areas where fire-sprinkler use is not a viable option. (Compl. ¶ 29.)
APS hired Gary Holmes in January 2015. On or about February 25, 2016, Holmes signed an “Employee Confidential Information, Non-Solicitation and Noncompete Agreement” (the “Holmes Agreement“) with APS. Holmes worked for APS in the Tulsa County, Oklahoma area at the time he signed the Holmes Agreement and through the date of his voluntary resignation from employment on August 23, 2022. (Compl. ¶¶ 37 and 57.)
Paragraph 3 of Holmes Agreement states, among other things, that Holmes “understands and agrees that the confidential business and customer information of [the] Company is a valuable business asset belonging to the Company and [Holmes] will not, during the term of this Agreement or any time hereafter, directly or indirectly, copy, disseminate, or make use of such information for any purpose unrelated to Company‘s business, and will keep the same in the strictest of confidence.” Paragraph 3 further outlines examples of “confidential information,” and states that Holmes may “at no time, in any fashion, form, or manner directly or indirectly use, divulge or disclose such information to any third party without first obtaining the express written consent of the Company.” Paragraph 3 of Holmes Agreement requires Holmes to “immediately return to Company any and all of Company‘s records, sales, materials, samples, forms, documents, vendor materials, sales records and all other property and documents of any nature whatsoever.” (Compl. ¶ 38.) The Holmes Agreement also states that “upon [Holmes‘] separation from employment,” Holmes may not
for any reason . . . directly or indirectly, personally or through any other person or business, seek to cause any other employees or independent representatives
of Company to terminate their relationships with Company and will not, directly or indirectly, assist any other person or entity in seeking to do so.
(Compl. ¶ 39.) Finally, Paragraph 5 of Holmes Agreement prohibits Holmes from “[d]irectly solicit[ing] the Established Customers of the Company or of Company‘s related entities.” (Compl. ¶ 40.)
At the time of his separation from the Plaintiffs on August 23, 2022, Holmes held the role of Director, Special Hazard & Alarm Systems. (Compl. ¶ 35.) As Director, Special Hazard & Alarm Systems, Holmes had access to the Plaintiffs’ confidential information and trade secrets. Furthermore, he led and oversaw the Plaintiffs’ special fire hazard protection business. He held a significant leadership role that required him to exercise business judgment on behalf of the Plaintiffs with respect to the special fire hazard protection business and that placed him in a position to develop close relationships with, and influence over, the Plaintiffs’ employees and customers. (Compl. ¶ 36.)
APS hired Lynn Mullin in August 1998. (Compl. ¶ 41.) On or about December 8, 2016, Mullin signed an “Employee Confidential Information, Non-Solicitation and Noncompete Agreement” (the “Mullin Agreement“) with APS. (Compl. ¶ 43.) The terms of the Mullin Agreement are virtually identical to the Holmes Agreement. (Compl. ¶¶ 44-46.) In March 2023, Mullin submitted her voluntary resignation to Plaintiffs. Mullin‘s resignation took effect in April 2023. (Compl. ¶ 92.) At the time of her separation, Mullin held the role of Project Sales Manager, focusing on the Plaintiffs’ special fire hazard protection business. (Compl. ¶ 41.) In her role as Project Sales Manager, Mullin had access to the Plaintiffs’ confidential information and trade secrets. Furthermore, Mullin‘s work for the Plaintiffs in its special fire hazard protection business division provided her with significant access to the Plaintiffs’ customer relationships and confidential information about those customers. This access provided Mullin with an opportunity to develop close relationships with, and influence over, the Plaintiffs’ customers. (Compl. ¶ 42.)
APS hired Catesa Smith (“Smith“) in November of 2005. (Compl. ¶ 47.) On or about December 10, 2014, Smith signed an “Oklahoma Employee Confidential Information, Non-Solicitation, and Non-Compete Agreement” (“the Smith Agreement“). (Compl. ¶ 49.) The terms of the Smith Agreement are similar to the Holmes Agreement. (Compl. ¶ 50-52.) Smith worked for the Plaintiffs in the Tulsa County, Oklahoma area at the time she signed the Smith Agreement and through the date of her voluntary resignation from employment in August 2023. (Compl. ¶ 49.)
D. Allegations Regarding Conspiracies Between ETG Fire, Aebersold, Holmes, and Mullin While Aebersold, Holmes, and Mullin Were Employed by Plaintiffs.
Between August 2022 and August 2023, ETG Fire raided a large group of employees working for Plaintiffs, including in Plaintiffs’ special fire hazard protection business division. (Compl. ¶ 53.) In addition to raiding Plaintiffs’ employee base, ETG Fire engaged in efforts to obtain and use Plaintiffs’ confidential information and trade secrets so that ETG Fire could divert customer projects and relationships from Plaintiffs to ETG Fire. (Compl. ¶ 54.)
At the time of ETG Fire‘s sale to Erdoni during January 2022, Marmic employed Aebersold, Holmes, Mullin, Smith, Joshua Westphal (“Westphal“), Joseph Smothermon (“Smothermon“), and other employees, in or near Tulsa, Oklahoma. In the course of their employment for Plaintiffs, Aebersold and Mullin prepared bids for
Prior to the conclusion of Holmes’ employment with the Plaintiffs in August 2022, he began performing services for ETG Fire, including carrying out efforts to divert Plaintiffs’ customers to ETG Fire. (Compl. ¶ 57.) Holmes also emailed Plaintiffs’ documents, including a third-party consulting report titled “Handbook,” from his APS FireCo email to his personal email. (Compl. ¶ 79.) Holmes began officially working for ETG Fire as its Chief Operations Officer shortly after his separation from the Plaintiffs. (Compl. ¶¶ 57, 79.)
Prior to the date on which Holmes voluntarily ended his employment with Plaintiffs, Vanderstokker, Troy Kinder (ETG Fire‘s Chief Information Officer) (“Kinder“), Holmes, Aebersold, Mullin, and employees of ETG Fire worked together to pursue the diversion of business from Plaintiffs to ETG Fire, including by preparing bids for customer projects on behalf of ETG Fire that had solicited bids from Plaintiffs — not from ETG Fire. Pursuant to this scheme, Mullin and Aebersold would prepare bids for Plaintiffs’ customers on Plaintiffs’ letterhead and send them to Vanderstokker and Kinder to be signed and submitted to customers on behalf of ETG Fire. (Compl. ¶¶ 58 and 62) Aebersold regularly communicated with Holmes and Vanderstokker, and Aebersold discussed ETG Fire‘s projects with the ETG Fire‘s customers, answered customer questions, and prepared revised bids. (Compl. ¶ 63.)
While Holmes, Aebersold, and Mullin remained employed with Plaintiffs, they engaged in a process they called “ETG-izing” the bids (meaning, to put the Plaintiffs’ customer bids on ETG Fire letterhead). Vanderstokker and Kinder would share the “ETG-ized” bids with Plaintiffs’ customers in an effort to divert the projects to ETG Fire, and they and multiple other officers of ETG Fire knowingly encouraged, aided, and abetted Holmes‘, Aebersold‘s, and Mullin‘s diversion of Plaintiffs’ customers to ETG Fire as well as their use of Plaintiffs’ proprietary and confidential information and trade secrets. (Compl. ¶¶ 59, 60, 61, 64, 65, 67, 68-77.)
Aebersold, Mullin, Holmes, Vanderstokker, Kinder, and other employees of ETG Fire knew that ETG Fire was not authorized by Plaintiffs to receive bids that were prepared by Plaintiffs’ employees for Plaintiffs’ customers, and furthermore knew that they were not authorized to use those bids in order to prepare a lower-priced bid on behalf of ETG Fire. (Compl. ¶ 66.) Holmes, Mullin, and Aebersold took the foregoing actions with the goal of diverting clients and business opportunities from the Plaintiffs to ETG Fire prior to their separation from Plaintiffs, so that Holmes, Mullin, and Aebersold (along with other of Plaintiffs’ employees that thereafter worked for ETG Fire) would have an established pipeline of commission-generating business upon their arrival at ETG Fire. (Compl ¶ 56.) ETG Fire‘s actions were undertaken with the encouragement, assistance, and direction of Czarnowski, Vanderstokker, Kinder, and other high-ranking officers and employees of ETG Fire. At the highest level of the company, ETG Fire was fully aware and supportive of the scheme spearheaded by Czarnowski, Vanderstokker, and other ETG Fire employees.
E. Allegations Regarding Continuation of the Conspiracies Between ETG Fire, Aebersold, Holmes, and Mullin After They Resigned from Their Positions With Plaintiffs.
After Holmes resigned from his position with the Plaintiffs in August 2022, he began working for ETG Fire. (Compl. ¶ 78.) Thereafter, ETG Fire and Holmes continued to conspire and work with Mullin and Aebersold, who were both still employees of Plaintiffs, to divert customers and business opportunities from Plaintiffs to ETG Fire and to misappropriate trade secrets including proprietary design drawings; project files for Plaintiffs’ customer projects and bids, including CAD graphics, floor plans, cost sheets, purchase orders, warranty letters, billing requests, job proposals, and project checklists owned by Plaintiffs; quotes Mullin had provided to Plaintiffs’ customers, detailed information about Plaintiffs’ projects, safety data sheets, plant layouts, and correspondence with Plaintiffs’ customers. (Compl. ¶¶ 80, 81, 83, 112-137.)
After Holmes began working for ETG Fire, he solicited Plaintiffs’ employees, including Aebersold, Mullin, and Westphal, to work for ETG Fire. (Compl. ¶¶ 83-87.) Holmes did so with Czarnowski‘s assistance and blessing. Indeed, Czarnowski sent Aebersold and Mullin each a laptop in February 2023, while they were still employed with Plaintiffs, to facilitate their misappropriation and misuse of Plaintiff‘s confidential and proprietary information and trade secrets. (Compl. ¶¶ 88-94.)
ETG Fire paid both Aebersold and Mullin commissions for bids they prepared for ETG Fire and helped win for ETG Fire while they was still employed by Plaintiffs. (Compl. ¶¶ 96-97.) Holmes was aware that these activities violated his contractual obligations, along with those Aebersold and Mullin owed to the Plaintiffs. (Compl. ¶ 82.) And ETG Fire knew that its conduct breached Aebersold‘s, Mullin‘s, Holmes‘, and Smith‘s duties and contractual obligations owed to Plaintiffs. (Compl. ¶ 139.) ETG Fire injured the Plaintiffs by willfully and maliciously undertaking their scheme to misappropriate Plaintiffs’ confidential and trade secret information, and to use that information to wrongfully solicit Plaintiffs’ customers to do business with ETG Fire to the detriment of Plaintiffs. (Compl. ¶ 212.) ETG Fire‘s actions, through its agents, were deliberate, intentional, and premediated, and ETG Fire intended to inflict harm on the Plaintiffs’ business. (Compl. ¶¶ 213 and 214.)
F. Allegations Regarding Conspiracy Between ETG Fire and Smith.
While employed with Plaintiffs, Smith was privy to confidential information and/or trade secrets, including national account pricing, related to Plaintiffs’ bid in a request for proposal (“RFP“) for an established customer. (Compl. ¶ 99.) In December 2022, Smith forwarded the documents related to the RFP from her APS email to her personal email. She also emailed Holmes with an Excel spreadsheet identifying prospective customers for ETG Fire. Over 50 of the entries on the spreadsheet are active customers of Plaintiffs and Established Customers under the Smith Agreement. Holmes responded to the email, attaching a revised spreadsheet and information regarding salary, sales projections, and revenue estimates if she joined ETG Fire. (Compl. ¶¶ 100-102.)
Smith remained employed with the Plaintiffs until she resigned from her position on August 22, 2023. (Compl. ¶ 104.) She then became employed by ETG Fire,
VI. The Motion to Dismiss and Response.
A. ETG Fire‘s Arguments in Favor of Dismissal of the Complaint.
Like a three leaf Shamrock, ETG Fire seeks dismissal of all claims in the Complaint on three related but independent grounds. First, ETG Fire contends that
B. The Plaintiffs’ Arguments Against Dismissal of the Complaint.
The Plaintiffs disagree with ETG Fire‘s reading of statutes which govern the applicability of
VII. Legal Analysis.
A. General Framework for Evaluation of Section 523(a) Claims.
In the Complaint, the Plaintiffs assert that ETG Fire is indebted to them as a result of its alleged wrongful conduct. The Plaintiffs further contend that the debt arising from ETG Fire‘s misconduct is nondischargeable under
The term “debt” is defined in
So, generally, the Court‘s first step in determining whether a plaintiff has stated a claim under
In this case, ETG Fire does not contest that the Complaint stated sufficient facts to satisfy the “claim on the debt‘” component; instead, its argument for dismissal relates solely to the second component: dischargeability. That is, ETG Fire contends that under the Bankruptcy Code, the debts of corporate debtors, including those in Subchapter V, cannot be deemed nondischargeable under
Given ETG Fire‘s discrete dischargeability arguments in the Motion to Dismiss, the Court assumes (without finally deciding) that ETG Fire has alleged sufficient
B. Section 523(a) Is Applicable to Debts of Corporate Debtors in Subchapter V Cases.
About six years ago, Congress made a significant addition to Chapter 11 of the Bankruptcy Code: the Small Business Reorganization Act of 2019 (the “SBRA“).6 The SBRA (commonly referred to as “Subchapter V“), was designed to streamline the
reorganization and rehabilitation process for small business debtors. Substantively, the SBRA lowered the Chapter 11 bar for confirmation of a plan of reorganization by permitting confirmation even if all classes of creditors reject the proposed plan and by eliminating the so-called “absolute priority rule.” Procedurally, Congress simplified some of the more cumbersome aspects of standard Chapter 11 cases by eliminating unsecured creditors’ committees and disclosure statements. Suffice it to say that the SBRA offers many potential advantages for qualifying Chapter 11 debtors.
ETG Fire elected to proceed under Subchapter V to secure such advantages. But, since the SBRA is still fairly new, there are some uncertainties. Both the Plaintiffs and ETG Fire recognize that there exists a split of legal authority regarding whether the
“If a debtor‘s bankruptcy plan is confirmed as a consensual plan under
Based on the foregoing, for purposes of the Court‘s decision, the Court assumes that ETG Fire is attempting to secure confirmation of the Operative Plan on a nonconsensual basis under
The disagreement between ETG Fire and the Plaintiffs is mirrored in Subchapter V caselaw. The disagreement arises mainly from differing interpretations of the interplay between the text of
If the plan of the debtor is confirmed [non-consensually] under
section 1191(b) of this title, as soon as practicable after completion by the debtor of all payments due within the first 3 years of the plan, or such longer period not to exceed 5 years as the court may fix, unless the court approves a written waiver of discharge executed by the debtor after the order for relief under this chapter, the court shall grant the debtor a discharge of all debts provided insection 1141(d)(1)(A) of this title, and all other debts allowed undersection 503 of this title and provided for in the plan, except any debt —(1) on which the last payment is due after the first 3 years of the plan, or such other time not to exceed 5 years fixed by the court; or
(2) of the kind specified in
section 523(a) of this title.
(emphasis added). Notably,
But there is a rub: the cross-reference to
But, save for Off-Spec. Solutions, 651 B.R. 862, the analysis used by most bankruptcy courts has not fared well on appeal. The only two Circuit Courts of Appeal to have addressed the issue have decided, uniformly, as a matter of statutory interpretation, that the discharge of both individual and corporate Subchapter V debtors under
(“all Subchapter V debtors are textually subject to the discharge limitations, not just individual Subchapter V debtors.“) (emphasis in original). And the only District Court appellate decision on the topic concurs. Chicago & Vicinity Laborers’ Dist. Council Pension Plan v. R&W Clark Constr., Inc. (In re R&W Clark Constr., Inc.), 2024 WL 4789403, at *7 (N.D. Ill. Nov. 14, 2024) (“Congress made a choice to change bankruptcy proceedings for small business debtors and chose to treat individual and corporate debtors the same. To hold that
With due respect to the various Bankruptcy Courts who have ruled otherwise, this Court finds the traditional statutory analysis employed by the Fourth Circuit Court of Appeals (in Cleary Packaging, 36 F.4th 509) and the Fifth Circuit Court of Appeals (in GFS Industries, 99 F.4th 223) far more compelling and persuasive. See also Synergetic Oil Tools, Inc. v. Revelant Holdings, LLC (In re Revelant Holdings LLC), Case No. 21-CV-2213 (D. Colo. Mar. 28, 2023) (unpublished) (“The Court finds the Fourth Circuit‘s analysis persuasive and reverses and remands the case back to the Bankruptcy Court to reanalyze the issue in light of In re Cleary Packaging, LLC, 36 F.4th 509, 518 (4th Cir. 2022)).
In Cleary Packaging, the appellate court engaged in a thoughtful and thorough analysis of
§ 1192(2) provides for granting debtors a discharge of all debts, subject to stated exceptions. For the purpose of Subchapter V, the term “debtor” was defined during the relevant time period to mean “a person engaged in commercial or business activities” that has debt of not more than $7.5 million.11 U.S.C. § 1182(1) (2020) (emphasis added). “[P]erson” is in turn defined to include both individuals and corporations, see id.§ 101(41) , and “corporation[s]” include limited liability companies, id.§ 101(9)(A) . We thus conclude that§ 1192(2) provides for the discharge of debts for both individual and corporate debtors.
Still, even though
To address the question, we begin by focusing on
We add — to the extent that one might find tension between the language of
Id. at 514-15 (internal citations omitted; emphasis in original). The court went on to explain that “[t]he context of
The Fifth Circuit Court of Appeals agreed with the Cleary Packaging court in GFS Industries, 99 F.4th 223, ruling that the plain language of
But, ETG Fire suggests that the Fourth and Fifth Circuits are wrong and, instead, the Court should adopt the approach used by the Ninth Circuit Bankruptcy Appellate Panel: Off-Spec Solutions, 651 B.R. 862. In Off-Spec Solutions, the appellate panel reasoned:
Section 523(a) unambiguously applies only to individual debtors. The reference in§ 1192 to debts “of the kind specified insection 523(a) ” can reasonably be construed to mean the list of debts, but nothing in§ 1192 obviates the express limitation in the preamble of§ 523(a) or otherwise expands its scope to corporate debtors . . . .Moreover, as part of the Small Business Reorganization Act of 2019 (“SBRA“), Congress amended
§ 523(a) to add§ 1192 to the list of discharge provisions to which it applies. Interpreting§ 1192 to extract from§ 523(a) only the list of nondischargeable debts, without its limitation to individuals, would render the amendment surplusage . . . .If
§ 1192 makes the debts specified in§ 523(a) nondischargeable to all debtors, the concurrent amendment to§ 523(a) has no meaning . . . .
Off-Spec Solutions, 651 B.R. at 867 (internal citations omitted). The Off-Spec Solutions court, concluded, therefore:
Based on the language and context of the statutes, we believe that the better interpretation is that
§ 1192 reiterates§ 523(a) ‘s application to debtors under subchapter V, and§ 523(a) limits its applicability to individuals.
Id.
Again, ETG Fire urges the Court to adopt the Off-Spec Solutions approach and thereby determine that, as a matter of law, the Plaintiffs cannot state a claim under
In particular, the Court agrees with the Cleary Packaging appellate panel‘s conclusion that
This Court has conducted its own exhaustive and independent statutory interpretation of
Accordingly, the Court rejects ETG Fire‘s contention that, as a matter of law, the Plaintiffs cannot state a claim for relief under
C. The Plaintiffs Adequately Alleged ETG Fire‘s Intent to Cause Willful and Malicious Injury.
In the Motion to Dismiss, ETG Fire argues, next, that the Plaintiffs have not stated a claim for “willful and malicious injury” under
1. General Inquiry Under Section 523(a)(6) .
According to the Supreme Court, to satisfy the willful injury part of
[T]he (a)(6) formulation triggers in the lawyer‘s mind the category “intentional torts,” as distinguished from negligent or reckless torts. Intentional torts generally require the actor to intend “the consequences of an act,” not simply “the act itself.”
Id. at 61-62 (emphasis in original).
To establish a willful injury, a creditor may use “direct evidence that the debtor acted with the specific intent to harm a creditor or the creditor‘s property, or . . . indirect evidence that the debtor desired to cause the injury or believed the injury was substantially certain to occur.” Smith, 618 B.R. at 912. See also Moore, 357 F.3d at 1129 (“to constitute a willful act under
The standard for “malicious” injury is different than “willful” injury. Something else is required. But what? The most recent binding appellate decision on
[M]alicious injury requires “evidence of the debtor‘s motives.” In re Smith, 618 B.R. 901, 919 (B.A.P. 10th Cir. 2020) (quotation marks omitted). To be malicious, the debtor must have “acted with a culpable state of mind vis-à-vis the actual injury caused the creditor.” Id. (quotation marks omitted). The malicious injury requires that the action be “wrongful and without just cause or excuse.” Id.
Bloom, 2022 WL 2679049, at *7. See also Smith, 618 B.R. at 919. The Tenth Circuit also explained:
[P]ersonal animus is not a requirement for malicious injury.
Smith, 618 B.R. at 919 (describing the requirements for malicious injury); see also Ball v. A.O. Smith Corp., 451 F.3d 66, 69 (2d Cir. 2006) (explaining malicious injury means “wrongful and without just cause or excuse, even in the absence of personal hatred, spite, or ill-will (quoting In re Stelluti, 94 F.3d 84, 87 (2d Cir. 1996))).
Bloom, 2022 WL 2679049, at *7. So, malice can be shown if the injury was wrongful and inflicted “without just cause or excuse.” Wagner, 492 B.R. at 55 (emphasis omitted); Steward Software Co., LLC v. Kopcho (In re Kopcho), 2014 WL 3933657, at *6 (Bankr. D. Colo. Aug. 12, 2014) (same). In assessing the presence or absence of “malicious injury,” the totality of the circumstances must be examined. Dorr, Bentley & Pecha, CPA‘s, P.C. v. Pasek (In re Pasek), 983 F.2d 1524, 1527 (10th Cir. 1993) (stating that “all the surrounding circumstances, including any justification or excuse offered by the debtor, are relevant to determine whether the debtor acted with a culpable state of mind” under
2. ETG Fire‘s Argument.
In the Motion to Dismiss and Reply, ETG Fire focuses on intent and asserts that the actions and intentions of third parties (i.e., the management and employees of a company) cannot ever be imputed to any corporate debtor under
In Bartenwerfer, the Supreme Court ruled that a debt incurred on the basis of misrepresentations made by the debtor‘s husband, who was also her business partner, in connection with the sale of a home the debtor and her husband had remodeled as a business venture, was a “debt for money obtained by false pretenses, a false representation, or actual fraud” within the
ETG Fire argues that
Contrary to ETG Fire‘s position, the Fourth and Fifth Circuits, this court, and several other courts, have determined that the debts of corporate debtors in Subchapter V cases may be excepted from discharge pursuant to
3. Actions and Intentions “of the Debtor“.
ETG Fire construes the case law holding that the conduct of others cannot be imputed to a debtor for purposes of
Because they are not natural persons, corporate entities, such as ETG Fire, “act only through ‘the instrumentality of their officers or other duly authorized agents.‘” Secs. Inv. Prot. Corp. v. Bernard L. Madoff Inv. Secs., LLC, 650 B.R. 24, 35 (Bankr. S.D.N.Y. 2023) (quoting John Lofts, LLC v. Meridian Cap. Grp., LLC (In re 45 John Lofts, LLC), 599 B.R. 730, 743 (Bankr. S.D.N.Y. 2019)). As such, an agent‘s knowledge and acts may properly be imputed to a corporate defendant. Id. at 35-36 (citing John Lofts, 599 B.R. at 743). See also Knox v. 1st Sec. Bank of Utah, 206 F.2d 823, 826 (10th Cir. 1953)
(“It is, of course, true that a corporation can act only through its officers and agents and that knowledge of the officers is generally imputed to the corporation.“); In re Stat-Tech Secs. Litig., 905 F. Supp. 1416, 1422 (D. Colo. 1995) (“Generally, the acts and knowledge of an agent are imputed to the principal. Because a corporation can act only through its agents, the rule is that the actions of corporate officers and directors are attributable to the corporate entity.“); Am. Int‘l Grp., Inc. v. Greenburg (In re Am. Int‘l Grp. Inc., Consol. Derivative Litig.), 976 A.2d 872, 889-90 (Del. Ch. 2009) (noting that “a corporation must act through its human agents” and stating that “the agents’ actions are the actions of the corporation itself“); Satellite Fin. Planning Grp. v. 1st Nat‘l Bank of Wilmington, 633 F. Supp. 386, 400 (D. Del. 1986) (“Knowledge and action of a corporation‘s agent ordinarily are imputed to the corporation when the agent acts on the corporation‘s behalf.“); Lumbermens Mut. Cas. Co. v. Thornton, 92 S.W.3d 259, 270 (Mo. Ct. App. 2002) (“normally, the acts of a corporation‘s agent are imputable to its principal“) (citing Miller v. Ernst & Young, 938 S.W.2d 313, 315 (Mo. Ct. App. 1997)); Webb Agency, Inc. v. Com. Std. Ins. Co., 333 F. Supp. 966, 968 (E.D. Mo. 1971) (“agent‘s malice is imputable to the corporation, making the latter liable for malicious, willful, or criminal torts of its agents or employees within the scope of their employment“) (citing State on Inf. of Taylor v. Am. Ins. Co., 200 S.W.2d 1 (Mo. 1946); State ex rel. United Factories, Inc., v. Hostetter, 126 S.W.2d 1173 (Mo. 1939); Simmons v. Kroger Grocery & Baking Co., 104 S.W.2d 357 (Mo. 1937); 19 Am.Jur.2d Corporations § 1428; 19 C.J.S. Corporations § 1263, and other authority). Cf. Meitav Dash Provident Funds & Pension Ltd. v. Spirit AeroSystems Holdings, Inc., 79 F.4th 1209, 1217 (10th Cir. 2023) (determining, in securities fraud action, that scienter can be imputed to a corporation where an official intentionally or recklessly approves a false statement to the public).
The same reasoning applies in the bankruptcy context. For example, in Drivetrain, LLC v. DDE Partners, LLC (In re Cyber Litigation, Inc.), 2023 WL 6938144 (Bankr. D. Del. Oct. 19, 2023), the court put it this way:
It is generally accepted that, in connection with a fraudulent conveyance claim, “[t]he only relevant intent is that of the debtor.” Where the debtor is an individual, this analysis is straightforward; the individual‘s intent controls. Where the debtor is a corporation or other legal entity, however, the enquiry becomes more nuanced. Entities cannot themselves actually form an intent. Rather, as an extension of the general principle that entities can only act through their officers, directors, or agents, an entity‘s intent is determined by imputing the intent of its agents.
. . . .
[T]he Third Circuit explained, “. . . a corporation can speak and act only
through its agents and so must be accountable for any acts committed by one of its agents within his actual
or apparent scope of authority and while transacting corporate business.” Thus, in the fraudulent conveyance context, so long as a corporation‘s agent had the requisite fraudulent intent when it caused the corporation to carry out the transaction, that intent is imputed to the corporation.
Id. at *7-8.
Based on such principles, the Court concludes that, for purposes of
In this case, the Plaintiffs made numerous factual allegations (which must be accepted as true) showing that Vanderstokker and Czarnowski, both executives and officers of ETG Fire acting in the scope of their employment, engaged in numerous shenanigans. For example, they allegedly knowingly encouraged, aided, abetted, and participated in a scheme to divert the Plaintiffs’ customers to ETG Fire and to use the Plaintiffs’ propriety and confidential information and trade secrets for the benefit of ETG Fire to the detriment of the Plaintiffs’ business. The Plaintiffs’ factual allegations that officers and executives of ETG Fire (as well as numerous senior employees of ETG Fire) acted with such intention suffice to state a basis for finding that ETG Fire, through its agents, had knowledge of the Plaintiffs’ rights and engaged in conduct violative of such rights since they knew that such actions would cause particularized “willful and malicious injury” to the Plaintiffs. Under the circumstances, the Court finds that the Plaintiffs have stated a claim for relief under
D. The Complaint Need not Be Dismissed in Favor of the Claims Allowance Process.
In the Motion to Dismiss, ETG Fire asserts that the Complaint should be dismissed because ETG Fire has objected to the Plaintiffs’ claims in the ETG Fire Case and initiated the claims allowance and disallowance process pursuant to
Under
Federal Rules of Bankruptcy Procedure, rather than
So, determining the amount of a debt (the “claim on the debt” component) is central (even required) in a
Notwithstanding, judicial efficiency suggests that since ETG Fire contests the validity and amount of the Plaintiffs’ claims in this Adversary Proceeding as well as in the claims allowance and disallowance process (through the POC Objection), such issues might best be joined together for trial. As the Plaintiffs note,
VIII. Conclusion and Order.
For the foregoing reasons, the Motion to Dismiss is DENIED pursuant to
Dated this 20th day of March, 2025.
BY THE COURT:
__________________________
Thomas B. McNamara,
United States Bankruptcy Judge
Notes
Except as otherwise provided in this subsection, in the plan, or in the order confirming the plan, the confirmation of a plan — (A) discharges the debtor from any debt that arose before the date of such confirmation, and any debt of a kind specified insection 502(g) ,502(h) , or502(i) of this title, whether or not — (i) a proof of the claim based on such debt is filed or deemed filed undersection 501 of this title; (ii) such claim is allowed undersection 502 of this title; or (iii) the holder of such claim has accepted the plan; and (B) terminates all rights and interests of equity security holders and general partners provided for by the plan.
Notwithstanding paragraph (1), the confirmation of a plan does not discharge a debtor that is a corporation from any debt — (A) of a kind specified in paragraph (2)(A) or (2)(B) ofsection 523(a) that is owed to a domestic governmental unit, or owed to a person as the result of an action filed under subchapter III of chapter 37 of title 31 or any similar State statute; or (B) for a tax or customs duty with respect to which the debtor — (i) made a fraudulent return; or (ii) willfully attempted in any manner to evade or to defeat such tax or such customs duty.