Master-Halco, Inc. v. Picard (In Re Picard)Master-Halco, Inc. v. Picard (In Re Picard)
MEMORANDUM OF DECISION AND ORDER RE: MOTION TO DISMISS AND OBJECTION THERETO
Before the court is that certain Motion To Dismiss (Counts One, Three and Four of the Plaintiffs Complaint) (Adv. P. Doc. I.D. No. 6, the “Motion To Dismiss”)
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filed by the debtor Michael Charles Picard (the “Debtor”), and that certain Objection to the Motion To Dismiss (Adv. P. Doc. I.D. No. 10, the “Objection”) filed by creditor Master-Halco, Inc. (the “Plaintiff’). The court has jurisdiction over this matter as a core proceeding, pursuant to
1. PROCEDURAL BACKGROUND
A. The Chapter 7 Case
The Debtor commenced this chapter 7 case by the filing of a voluntary petition on April 21, 2005. (Doc. I.D. No. 2.) On June 2, 2005, the Debtor filed with this court a list of creditors, Schedules A-J, a Statement of Financial Affairs, and a Disclosure of Compensation of Attorney of Debtor. (Doc. I.D. No. 15.) Also on that date a Motion for Relief from the Automatic Stay (Doc. I.D. No. 13, the “Motion for Relief from Stay”) was filed by the Plaintiff. (Doc. I.D. No. 14.) That motion referred to a complaint and an application for prejudgment remedy that the Plaintiff had filed with the United States District Court, District of Connecticut (the “District Court Action”). Objections to the Motion for Relief from Stay were filed on June 17, 2005 by the chapter 7 trustee (Doc. I.D. No. 25), the Debtor (Doc. I.D. No. 26), and creditor A & M Construction, Inc. (“A & M”) 3 (Doc. I.D. No. 27). A hearing was scheduled for September 21, 2005 on those objections. (Doc. I.D. No. 58.) The Motion for Relief from Stay was marked off at the September 21st hearing, with the right to reclaim retained by the Plaintiff. (9/21/05 Audio Record at 1:46:43-49.)
On June 8, 2005 the Plaintiff filed a Motion for Extension of Time for Filing Complaint Objecting to Discharge or Dis-
B. The Adversary Proceeding
While the Motion To Vacate was pending, the Plaintiff initiated this adversary proceeding by filing a Complaint for Determination of Dischargeability on October 10, 2005 (Doc. I.D. No. 71, the “Complaint”) pursuant to Bankruptcy Code § 523. 4 The Debtor filed the Motion To Dismiss on October 25, 2005. The Objection was filed on November 11, 2005. (Adv.P.Doc. I.D. No. 10.) A hearing was held on the Motion To Dismiss and the Objection on November 16, 2005 and the matter was taken under advisement, pending timely receipt of post-hearing briefs by the parties. Post-hearing briefing was timely completed.
On January 3, 2006, in the interest of justice and judicial efficiency, the chapter 7 case and both adversary proceedings were reassigned to the Honorable Albert S. Dabrowski, Chief United States Bankruptcy Judge for this district. (Doc. I.D. No. 91.) However, the Motion To Dismiss and the Objection were retained by the undersigned for decision. The matter is now ripe for decision.
1. The Complaint
The general allegations in the Complaint are as follows. The Plaintiff, a manufacturer of fencing products and materials, extended credit to Atlas Fence, Inc. 5 (“Atlas”) for many years “based in part on the representations or misrepresentations” of the Debtor “and/or his agents, servants, and/or employees.” (Adv.P.Doc. I.D. No. 1.) The Plaintiff alleges that it has incurred costs and attorneys’ fees in exposing the misrepresentations made by the Debtor and unearthing the schemes orchestrated by the Debtor in order to avoid his obligations under a personal guaranty. The Plaintiff alleges that the Debtor was the person in control of Atlas during the relevant time period.
The Complaint sounds in four counts. The first count (“Count One”) asserts, pursuant to Bankruptcy Code § 523(a)(2), a debt for money or property obtained by false representations or fraud. Count One
The second count (“Count Two”) of the Complaint alleges, pursuant to Bankruptcy Code § 523(a)(2), a debt for money or property obtained through a false financial statement, claiming that the Debtor knowingly submitted false financial information to his accountant for the year ending December 21, 2002. Count Two alleges that the written financial statement upon which it relied in extending credit to Atlas was materially false in its representation of Atlas’ financial condition, and that the Debtor intended to deceive the Plaintiff into relying on this false information. Id.
The third count (“Count Three”) of the Complaint asserts, pursuant to Bankruptcy Code § 523(a)(4), a debt resulting from fraud or defalcation while acting in a fiduciary capacity, claiming that the Debtor, as an officer of Atlas at all relevant times, with familiarity with the business dealings and financial condition of Atlas, had a fiduciary duty to the Plaintiff when Atlas became insolvent, or was in the vicinity of insolvency. Count Three alleges that the Debtor, inter alia, breached his duties of good faith and/or loyalty and due care, concealed relevant information from the Plaintiff, engaged in self-dealing, and engaged in various schemes to defraud the Plaintiff of the rightful payment of its bills. Count Three further alleges that the Debt- or failed in his duty to safeguard the assets of Atlas because, among other things, the Debtor was not free from self-interest, he looted Atlas’ assets, he violated both his and Atlas’ covenant of good faith and fair dealing, he misled creditors, and he failed to seek outside expert advice under circumstances where that advice was reasonably required. Id. Count Three further alleges that the Debtor’s breach of fiduciary duty caused the Plaintiff specific, personal and direct injury, as well as damages, for which the Plaintiff alleges it is also entitled to receive reasonable attorneys’ fees.
The fourth and final count (“Count Four”) asserts, pursuant to Bankruptcy Code § 523(a)(6), a debt resulting from willful and malicious injury by the Debtor to another entity for a series of steps the Debtor allegedly took to shield assets when Atlas began to experience financial trouble and/or was in the zone of insolvency. Count Four alleges a laundry list of alleged transfers, loans and establishment of trusts undertaken by the Debtor after he allegedly realized that Atlas was experiencing financial troubles and that its financial condition was becoming precarious.
Count Four further alleges that on October 28, 2003 the Debtor set up the A & M Family Limited Partnership (“A & M Family”), a business entity to which the Debtor allegedly transferred personal assets and/or control over his other companies. The Debtor allegedly served as the general manager of A & M Family and owned a 1% interest and had 100% control; the Trust allegedly was the limited partner of A & M Family and had a 99.9% [sic] ownership interest in A & M Family. The Debtor allegedly transferred in excess of $350,000 in personal assets to A & M Family. On October 3, 2003, the Debtor allegedly transferred $40,500 to a bank account jointly held by the Debtor and his mother, which sum allegedly was later transferred to A & M Family.
Count Four further alleges that, in addition, the Debtor transferred his legal and/or equitable interest in A & M Construction Company, LLC to A & M Family. The Debtor allegedly transferred more than $150,000 from Atlas to himself then to A & M Industries, LLC (“A & M Industries”). A & M Industries allegedly was formed by John Uvino, the vice president and treasurer of Atlas during the critical time period when Atlas allegedly was in the zone of insolvency (approximately two months after the Debtor admitted that he knew Atlas was in financial trouble). The Debtor allegedly also formed, or caused others to form, PGP Group, LLC (“PGP”) using personal assets that he allegedly transferred to A & M Family shortly after Atlas became insolvent.
Count Four further alleges that, through A & M Family, the Debtor loaned Rickster Associates, LLC (“Rickster”) $320,000 for the sole purpose of enabling a straw man, Richard D’Angelo, to purchase Atlas’ assets at a March 13, 2004 auction. Rickster allegedly was formed by Mr. D’Angelo just three weeks prior to the auction of Atlas’ assets. The Atlas assets purchased by Rickster allegedly were immediately sent to PGP. A & M Family allegedly has a .01% ownership interest in PGP with 100% voting rights and Rickster allegedly owned the remaining 99.9% of PGP with no voting rights.
Count Four further alleges that the Debtor subsequently transferred his 1% general interest in A & M Family to the PIC Management Group, LLC (“PIC Management”) which is owned by the Debtor (1% with all voting rights) and the
Count Four further alleges that the Debtor allowed Mr. Ruocco to place mortgages on three parcels of the Debtor’s property without adequate consideration, after the Debtor repaid Mr. Ruocco the $500,000 loan borrowed sometime between May and July of 2003 (see supra), such repayment being made before payment or interest was due. Count Four further alleges that on February 27, 2004 approximately $400,000 worth of equipment belonging to Atlas was hidden in a building owned by Mr. Ruocco. Count Four further alleges that all the aforementioned transfers of funds and/or assets were wrongful, willful and malicious, and were performed intentionally and without justification or excuse, and that the Debtor knew that these actions were sure to cause financial harm to the Plaintiff. 7
The Bankruptcy Court docket for this district reflects that Atlas (aka Atlas Fence, Atlas Fence & Guardrail, Atlas Recreational, and Atlas Outdoor) filed a petition under chapter 7 of the Bankruptcy Code on May 19, 2004. (Case No. 04-32405(ASD).)
2. The Motion To Dismiss
In the Motion To Dismiss, the Debtor argues that the averments of fraud in Count One are not stated with the specificity required by
The Debtor argues that, pursuant to Rule 12(b)(6) of the Federal Rules (made applicable here pursuant to Rule 7012 of the Bankruptcy Rules), Count Three also must be dismissed because Count Three fails to allege that the Debtor was acting in a fiduciary capacity within the purview of Section 523(a)(4) of the Bankruptcy Code because controlling case law requires an “express trust.” Finally, the Debtor states that Count Four must be dismissed pursuant to Rule 12(b)(6) of the Federal Rules because Count Four fails to allege the willful and malicious injury within the meaning of Section 523(a)(6) of the Bankruptcy Code, claiming that intentional breaches of contract, or mere fraudulent transfers of property in which the creditor has no security interest do not qualify as willful and malicious injury within the meaning of Section 523(a)(6). (Adv. P. Doc. I.D.6.) In addition, the Debtor argues
3. The Objection
The Plaintiff argues that Count One should not be dismissed because,
inter alia,
the Complaint places the Debtor on notice of the precise conduct with which he is charged, in conformance with the underlying purpose of
II. ANALYSIS
A. The Law
1.
Standard for Motion To Dismiss Pursuant to
In finding that a plaintiffs complaint was in compliance with
Rule 9(b) serves three intended goals: (1) to provide a defendant with fair notice of a plaintiffs claim, (2) to preserve a defendant’s reputation, and (3) to decrease strike suits. The Rule permits a plaintiff to generally plead the requisite intent of a fraud claim, but requires the circumstances of the alleged fraud be pled with particularity and assert facts that give rise to a strong inference of fraudulent intent. The rule of particularity, however, does not require that the complaint explain the plaintiffs theory of the case.
Community Memorial Hospital v. Gordon (In re Gordon),
Rule 9(b) is ... to be read in conjunction with Rule 8(a) which requires only a “short and plain statement” of the claims for relief ... In Decker v. Massey-Ferguson, Ltd.,681 F.2d 111 (2d Cir.1982), the Second Circuit Court of Appeals applied a straightforward test to determine the sufficiency of a claim based on fraud: the Plaintiff need only allege the existence of facts and circumstances sufficient to warrant the pleaded conclusion that fraud had occurred. In so doing, the plaintiffs attorneys would be stating “the circumstances constituting fraud ... with particularity” as required byRule 9(b) .
Sculler v. Rosen (In re Rosen),
2. Standard for Motion To Dismiss Pursuant to Rule 12(b)(6)
Rule 12(b)(6) states that [ejvery defense, in law or fact, to a claim for relief in any pleading, whether a claim, counterclaim, cross-claim, or third-party claim, shall be asserted in the responsive pleading thereto if one is required, except that the following defenses may at the option of the pleader be made by motion: ... (6) failure to state a claim upon which relief can be granted.
Fed.R.CivJP. Rule 12(b)(6) (West 2006).
“A court should dismiss under Rule 12(b)(6) only if it appears beyond doubt that the plaintiff can prove no set of facts in support of its claim which would entitle it to relief.”
Carter Hill Associates v. Town of Clinton (In re Carter Hill Associates),
In applying the
3. Nondischargeability Pursuant To Bankruptcy Code § 523
“[T]he issue of nondischargeability [is] a matter of federal law governed by the terms of the Bankruptcy Code.”
Grogan v. Garner,
(a) A discharge under section 727, 1141, 1228(b) of this title does not discharge an individual debtor from any debt—
(2) for money, property services, or an extension renewal or refinancing of credit to the extent obtained by
(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition ....;
(4) for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny ...;
(6)for willful and malicious injury by the debtor to another entity or to the property of another entity.
a.
The elements of fraud under
b.
The general rule as to corporations “is that directors and officers do not owe a fiduciary duty to creditors of a corporation, except under special circumstances such as when the corporation is insolvent. From the moment a corporation becomes insolvent, its assets are deemed to be held in trust for the benefit of creditors. The rationale for this view is that directors of an insolvent corporation have special knowledge that is unknown to creditors.”
In re IDS Holding Co., LLC,
“When ... a corporation becomes insolvent or nearly insolvent, the ... courts have recognized that the interests of creditors in the assets of the corporation become senior to those of the corporation’s shareholders, for it is from those assets that the corporation’s debt to its creditors must be paid.
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The law thus imposes a constructive trust upon those assets for the benefit of all creditors, and a fiduciary duty upon the corporations’s [sic] officers and directors to preserve those assets for the benefit of creditors.”
Id. (citing Bennett Restructuring Fund, L.P. v. Hamburg,
In
The Andy Warhol Foundation for Visual Arts, Inc. v. Hayes (In re Hayes),
Warhol,
c.
“The word ‘willful’ in [
“As used in
B. Applying the Law to the Allegations of the Complaint
1.
Count One:
The Debtor argues that Count One must be dismissed because it is not pleaded with sufficient particularity pursuant to
2.
Count Three:
The Debtor asserts that Count Three must be dismissed because it fails to allege that the Debtor was acting in a fiduciary capacity within the purview of
The court is unconvinced by the Debt- or’s argument, reading
IDS Holding Company, LLC,
above, for the premise that under Connecticut law, there is fiduciary duty “from the moment a corporation is insolvent [or nearly insolvent], [and said corporation’s] assets are to be held in trust by its officers and directors for creditors.”
Id.
at 238. It is the court’s observation that modern case law, particularly in this circuit, has declined to construe
Davis
to hold that
Accordingly, this court reads
Warhol
and
IDS
and relevant state-court cases in conjunction to support the proposition that an allegation that the Debtor, as an officer of Atlas, was placed in a fiduciary capacity as to Atlas’ creditors when Atlas became insolvent (or entered the “zone of insolvency”) is a sufficient allegation of “fiduciary” status within the purview of
3.
Count Four:
The Debtor argues that Count Four fails to allege willful and malicious injury within the meaning of
a. Willful and Malicious Injury
The court concludes that the Debtor’s transfer of his own property does not result in a
However, to the extent that the Debtor is liable in damages to the Plaintiff for the transfer of Atlas’ assets (rather than his own assets), Count Four should not be dismissed. That is because the liability of the Debtor to the Plaintiff in respect of such transfer would not arise from the Guaranty but, rather, from an “injury” to the Plaintiffs property
(i.e.,
the receivable owing from Atlas).
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Cf. Murray v. Bammer (In re Bammer),
The Debtor may be liable to the Plaintiff for the transfers of Atlas’ assets on one or more theories. For example, if the Debtor is deemed to be the transferee of the Atlas assets (either
per se
or on a “piercing” theory), he may be liable to the Plaintiff in damages as a result.
See Robinson v. Coughlin,
The Debtor argues that because Bankruptcy Code § 727(a)(2)(A) and § 727(a)(7)
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deny a discharge to a debtor transferor with respect to an actual fraudulent transfer perpetrated within the year prior to bankruptcy, but do not impose such a penalty for earlier fraudulent transfers, Congress similarly intended to eliminate
The Debtor’s argument would be more persuasive if the creditors’ remedy under Section 727(a)(2) and/or Section 727(a)(7) were more similar to their remedy under
Ignoring the temporal limitation for present analytical purposes, if the Debtor did in fact fraudulently transfer his own assets, he could be denied a discharge under Section 727(a)(2). However, as noted above, creditors would have a
Again ignoring the temporal limitation for present analytical purposes, if the Debtor did in fact fraudulently transfer Atlas’ assets, he could be denied a discharge under Section 727(a)(7). However, only creditors of Atlas then would be able to assert a
It is true that, when the fraudulent transfer is by a third party individual to an individual debtor and occurs outside the one-year period, there may be a lack of symmetry between the penalties imposed on them if both are in bankruptcy. That is because
III. CONCLUSION
For the reasons set forth above, the Debtor’s Motion To Dismiss is granted as to Count Four but only with respect to transfers of the Debtor’s own assets. The remainder of the Motion is denied. The Objection is overruled and sustained to the same extent.
It is SO ORDERED.
Notes
.References to the docket of this chapter 7 case appear in the following form: "Doc. I.D. No.__” References herein to the docket for this adversary proceeding appear in the following form: "Adv.P. Doc. I.D. No. _..” References to the audio record in this case appear in the following form: "_/_/05 Audio Record at _:_:__" References herein to the docket for the District Court proceeding appear in the following form: "District Court Doc. I.D. No.__”
. That order referred to the "Bankruptcy Judges for this District” inter alia "all proceedings ... arising under Title 11, U.S.C.....”
. A & M Construction is listed in Michael Picard's Schedules as a business entity of which he is manager, but he holds no percentage of ownership. A & M Construction is owned by one James Ilewicz and A & M Family Limited Partnership.
. The Plaintiff also filed an objection to discharge pursuant to Bankruptcy Code § 727(a). (See Adv. Pro. No. 05-3141(ASD).)
. This court takes judicial notice of the Commercial Recording Division files on the Secretary of the State of Connecticut website (www.concord.sots.ct.gov) to the effect that Atlas Fence, Inc. is incorporated under the laws of the State of Connecticut.
. The Complaint does not specify when, where, or under what circumstances that testimony took place.
. Count Four alleges an injury to the Plaintiff. However, a fair reading of Count Four would include injury to the Plaintiff's property (i.e., its receivable from Atlas) as well.
. The entity in
IDS
was a Connecticut limited liability company. Since 1909, Connecticut courts have recognized that at times a director of a corporation may assume fiduciary duties to other persons beyond the corporation and its shareholders.
See Baldwin v. Wolff,
. For example, Count One alleges that the Debtor executed the Guaranty with no intention of performing under it. That allegation is sufficient to state a fraud under
. Gentry v. Kovler (In re Kovler),
. The "willful and malicious” nature of the injury may be proved at trial from all the facts and circumstances.
See, e.g., Stelluti,
. It is not the court's function to suggest other theories of potential liability.
. Bankruptcy Code § 727 states in relevant part as follows:
(a) The court shall grant the debtor a discharge unless—
(2) the debtor, with intent to hinder, delay, or defraud a creditor or an officer of the estate charged with custody of property under this title, has transferred, removed, destroyed, mutilated, or concealed, or has permitted to be transferred, removed, destroyed, mutilated, or concealed—
(A) property of the debtor, within one year before the date of the filing of the petition;
(7) the debtor has committed any act specified in paragraph (2) ... of this subsection, on or within one year before the date of the filing of this petition, or during the case, in connection with another case, under this title or under the Bankruptcy Act, concerning an insider ...