816 F.2d 1222 (8th Cir. 1987), 86-1729, In re Ozark Restaurant Equipment Co.

Docket Nº86-1729.
Citation816 F.2d 1222
Party NameIn re OZARK RESTAURANT EQUIPMENT CO., INC. James G. MIXON, Trustee, Appellant, v. Bruce ANDERSON, Elmer Dale Yancey, Kenneth Eads, Robert Whiteley and Anderson Cajun's Wharf, Appellees, James G. MIXON, Trustee, Appellant, v. ANDERSON CAJUN'S WHARF, Appellee, James G. MIXON, Trustee, Appellant, v. Ed YANCEY, Bruce Anderson and Kenneth Eads, Appellee
Case DateApril 14, 1987
CourtUnited States Courts of Appeals, Court of Appeals for the Eighth Circuit

Page 1222

816 F.2d 1222 (8th Cir. 1987)

In re OZARK RESTAURANT EQUIPMENT CO., INC.

James G. MIXON, Trustee, Appellant,

v.

Bruce ANDERSON, Elmer Dale Yancey, Kenneth Eads, Robert

Whiteley and Anderson Cajun's Wharf, Appellees,

James G. MIXON, Trustee, Appellant,

v.

ANDERSON CAJUN'S WHARF, Appellee,

James G. MIXON, Trustee, Appellant,

v.

Ed YANCEY, Bruce Anderson and Kenneth Eads, Appellees.

No. 86-1729.

United States Court of Appeals, Eighth Circuit

April 14, 1987

Submitted Jan. 16, 1987.

Rehearing and Rehearing En Banc Denied July 6, 1987.

Page 1223

Jill R. Jacoway, Fayetteville, Ark., for appellant.

Raymond C. Smith, Fayetteville, Ark., for appellees.

Before McMILLIAN, JOHN R. GIBSON, and MAGILL, Circuit Judges.

MAGILL, Circuit Judge.

The sole issue in this appeal is whether a Chapter 7 bankruptcy trustee has standing to assert, on behalf of the debtor corporation's creditors, an alter ego action against the principals of the corporation. The district court 1 held in the negative. For the reasons discussed below, we affirm.

I. BACKGROUND.

In September of 1980, Bruce Anderson and Elmer Dale Yancey purchased Ozark Restaurant Equipment Co., Inc. ("Ozark") of Springdale, Arkansas, the debtor in this case. Both were 50% shareholders and directors of the corporation; Yancey was also an officer. In addition to owning Ozark stock, Anderson owned 50% or more of the stock in a number of other companies with which Ozark did business. 2 On August 24, 1982, after an abysmal performance, Ozark filed for relief under Chapter 7 of the Bankruptcy Code.

In October of 1982, the Chapter 7 trustee of Ozark filed three adversary proceedings which were subsequently consolidated for trial before the bankruptcy court. The first proceeding was an alter ego action, which was brought solely by the trustee on behalf of all of Ozark's creditors 3 against the following defendant-principals of Ozark: Anderson; Yancey; Kenneth Eads, director and president of Ozark; Robert Whiteley, a business consultant hired by Anderson to help with Ozark's finances; and Anderson Cajun's Wharf, Inc. The trustee alleged, inter alia, that because of the defendant-principals' abuses of the corporation, the corporate veil should be pierced and the individuals should be held personally liable for Ozark's debts. The second proceeding was an action by the trustee to recover an unpaid debt from Port City Equipment Company. In the third proceeding, the trustee sought recovery of certain of Ozark's loan payments to McIlroy Bank & Trust as preferential transfers. On March 21, 1984, the bankruptcy court ordered judgment in favor of the trustee on all three claims. In re Ozark Restaurant Equipment Co., 41 B.R. 476 (Bankr.W.D.Ark.1984). 4 All defendants

Page 1224

except Eads appealed the judgment. 5

On May 22, 1986, the district court issued an order affirming the bankruptcy court's judgment with respect to the unpaid debt claim, but reversing the court's judgment in the alter ego action. In re Ozark Restaurant Equipment Co., 61 B.R. 750 (W.D.Ark.1986). 6 Regarding the alter ego claim, the court, relying heavily on Caplin v. Marine Midland Grace Trust Co., 406 U.S. 416, 92 S.Ct. 1678, 32 L.Ed.2d 195 (1972), determined that a Chapter 7 trustee has no standing on his own to bring an alter ego action on behalf of the debtor corporation's creditors. Id. at 757. The court, however, remanded the case for consideration of whether the business actions which caused the bankruptcy court to pierce the corporate veil constituted transfers within the meaning of the Code and were therefore possibly recoverable by the trustee under 11 U.S.C. Secs. 547 or 548 (preferences or fraudulent transfers). Id. Ozark's trustee subsequently appealed, arguing that a Chapter 7 trustee does have standing to bring an alter ego claim on behalf of the debtor corporation's creditors.

II. DISCUSSION.

Although acknowledging that the district court had the right to raise the standing question, the trustee argues that the court's holding was incorrect as a matter of law. The trustee maintains that a Chapter 7 trustee has standing to assert an alter ego claim on behalf of the unsecured creditors of the debtor corporation based on three different areas of the Bankruptcy Code: (1) 11 U.S.C. Sec. 544; (2) 11 U.S.C. Secs. 704 and 541; and (3) 11 U.S.C. Sec. 105 and general equitable principles running throughout the Code. We begin by addressing the trustee's second argument.

A. 11 U.S.C. Secs. 704 and 541.

Section 704 of the Code outlines the duties of a Chapter 7 trustee and requires the trustee to "collect and reduce to money the property of the estate for which the trustee serves * * *." 11 U.S.C. Sec. 704(1) (emphasis added). Section 541 defines "property of the estate" and for our purposes, the relevant subsection is 541(a)(1), which defines property of the estate as "all legal or equitable interests of the debtor in property as of the commencement of the case." Id. Sec. 541(a)(1). In arguing that Section 704 permits a Chapter 7 trustee to pursue an alter ego theory cause of action to pierce the corporate veil on behalf of the creditors of the debtor corporation, the trustee failed to acknowledge the key limiting language in Section 541(a)(1)--property of the estate comprises only "legal and equitable interests of the debtor." Id. (emphasis added). Upon further examination of Sections 704 and 541 and the nature of the alter ego action, it becomes apparent that the trustee's standing argument based on these two sections must fail.

Page 1225

First, it is clear that causes of action belonging to the debtor at the commencement of the case are included within the definition of property of the estate. E.g., 4 Collier on Bankruptcy p 541.10, at 541-62 (15th ed. 1986). Any of these actions that are unresolved at the time of filing then pass to the trustee as representative of the estate, who has the responsibility under Section 704(1) of asserting them whenever necessary for collection or preservation of the estate. Id. p 704.02, at 704-6 to -7. For example, these sections give the trustee authority to bring an action for damages on behalf of a debtor corporation against corporate principals for alleged misconduct, mismanagement, or breach of fiduciary duty, because these claims could have been asserted by the debtor corporation, or by its stockholders in a derivative action. See, e.g., Pepper v. Litton, 308 U.S. 295, 307, 60 S.Ct. 238, 245, 84 L.Ed. 281 (1939) (interpreting section 70a(6) of the old Bankruptcy Act, a predecessor of Sections 541(a)(1) and 704(1) of the Code); Koch Refining v. Farmers Union Central Exchange, Inc., 56 B.R. 242, 243 (N.D.Ill.1985); 4 Collier on Bankruptcy, supra, p 541.10, at 541-69; see also Henderson v. Rounds & Porter Lumber Co., 99 F.Supp. 376, 380 (W.D.Ark.1951) (quoting with approval 4A Collier on Bankruptcy p 70.29, at 429-33 (14th ed. 1978)). Accordingly, whenever a cause of action "belongs" to the debtor corporation, the trustee has the authority to pursue it in bankruptcy proceedings.

Where, however, "the applicable state law makes such obligations or liabilities run to the corporate creditors personally, rather than to the corporation, such rights of action are not assets of the estate under Section 541(a) that are enforceable by the trustee [under Section 704(1) ]." 4 Collier on Bankruptcy, supra, p 541.10, at 541-69 to 541-70; accord Henderson, 99 F.Supp. at 380 (quoting the 1978 edition of Collier on Bankruptcy); In re Green Valley Seeds, Inc., 27 B.R. 34, 36 (Bankr.D.Ore.1982); see In re S I Acquisition, Inc., 58 B.R. 454, 461, 462 (Bankr.W.D.Tex.1986). In this respect, we recognize that "[g]enerally, the corporate veil is never pierced for the benefit of the corporation or its stockholders[.]" 18 Am.Jur.2d Corporations Sec. 46 (1985); accord In re S I Acquisition, 58 B.R. at 460; but see 1 Fletcher Cyclopedia on the Law of Private Corporations Sec. 41, at 388 (1983) (hereinafter "Fletcher Cyclopedia"). This general statement of the law is followed in Arkansas, where the courts have held that "[a] corporate entity is to be disregarded only if the corporate structure is illegally or fraudulently abused to the detriment of a third person." Thomas v. Southside Contractors, Inc., 260 Ark. 694, 543 S.W.2d 917, 919 (1976) (emphasis added) (citing Rounds & Porter Lumber Co. v. Burns, 216 Ark. 288, 225 S.W.2d 1 (1949)). Thus, the obligations and liabilities of an action to pierce the corporate veil in Arkansas do not run to the corporation, but to third parties, e.g., creditors of the corporation.

Further, although an action to pierce the corporate veil may be brought under a number of different theories, the "alter ego doctrine" of piercing the corporate veil

fastens liability on the individual who uses a corporation merely as an instrumentality to conduct his own personal business, and such liability arises from fraud or injustice perpetrated not on the corporation but on third persons dealing with the corporation. [Footnote omitted.] The corporate form may be disregarded only where equity requires the action to assist a third party. [Footnote omitted.] Accordingly, a sole shareholder may not choose to ignore the corporate entity when it suits his convenience. [Footnote omitted.]

1 Fletcher Cyclopedia, supra, Sec. 41.10, at 397 (emphasis added).

Because the corporate entity will be disregarded under Arkansas law only if it has been abused to the detriment of a third person, and because the nature of the alter ego theory of piercing the corporate veil makes it one personal to the corporate creditors rather than the corporation itself, it is axiomatic that the claim does not become property of the estate under Section 541(a)(1), nor is it...

To continue reading

Request your trial