Ballard v. Thoennes (In re Thoennes)

• Decision Date: 03 September 2015
• Docket Number: Adv. Pro. No. 14–80131–HB,C/A No. 11–07438–HB
• Citation: 536 B.R. 680
• Parties: In re, Frederick Richard Thoennes, III, Debtor(s). Andrew P. (Andy) Ballard, Plaintiff(s), v. Frederick Richard Thoennes, III, Defendant(s).
• Court: U.S. Bankruptcy Court — District of South Carolina

536 B.R. 680

In re, Frederick Richard Thoennes, III, Debtor(s).Andrew P. (Andy) Ballard, Plaintiff(s)

v.Frederick Richard Thoennes, III, Defendant(s).

C/A No. 11–07438–HB

Adv. Pro. No. 14–80131–HB

United States Bankruptcy Court, D. South Carolina.

Signed September 3, 2015

James Calhoun Sarratt, Greenville, SC, for Debtor(s).

Wade S. Kolb, III, Wallace K. Lightsey, William M Wilson, III, Ralph Marshall Winn, Amos Alan Workman, Wyche PA, Greenville, SC, for Plaintiff(s).

Jason M. Ward, Dickerson & Ward, LLC, Simpsonville, SC, for Defendant(s).

ORDER ON DEFENDANT'S MOTION FOR SUMMARY JUDGMENT

Helen E. Burris, US Bankruptcy Judge, District of South Carolina

THIS MATTER came before the Court on the Motion for Summary Judgment (“Motion”) filed by Defendant Frederick Richard Thoennes, III (“Thoennes”)¹ and the Objection of Plaintiff Andrew P. Ballard (“Ballard”).² Ballard's Complaint, filed after Thoennes' bankruptcy discharge was entered, asks the Court to find that the debt owed to him is not affected by Thoennes' discharge. Thoennes' Motion asserts that, even accepting all allegations of the Complaint as true, judgment should be entered in his favor as a matter of law.³ Pursuant to Fed. R. Civ. P. 56, made applicable to this proceeding by Fed. R. Bankr. P. 7056, the Court finds that the Motion should be granted in part and denied in part.

Procedural History and Undisputed Facts

This dispute involves the ownership and control of Warpath Development, Inc. (“Warpath”), a company formed to develop a marina and related properties on Lake Keowee, South Carolina. After Ballard's business relationship with Thoennes and the other partners of Warpath began to deteriorate, Ballard filed a lawsuit against them in state court in July 2008 (the “State Court Action”).⁴ Ballard alleged various causes of action, including shareholder oppression seeking judicial dissolution as relief.⁵ After a three-day trial, an order in the State Court Action was entered on May 4, 2010, finding Thoennes and the other defendants liable for shareholder oppression and ordering them to buy out Ballard's shares in Warpath (the “Trial Order”).⁶ A summary of the state court's findings in the Trial Order follows.

Ballard is the organizer of Warpath. After Ballard and the defendants discussed the defendants' potential participation in Warpath, the parties entered into a Stock Purchase Agreement dated May 29, 2007. Under the parties' Stock Purchase Agreement, the defendants became the majority shareholders after receiving 80,000 of the 100,000 shares authorized to be issued by Warpath's Articles of Incorporation.⁷ After the defendants acquired 80% ownership of the corporation, they became unhappy about the development of Warpath and decided they wanted Ballard out of the corporation. The defendants then removed Ballard as a director by refusing to elect him as one of four directors at the first shareholders meeting after they obtained control of the corporation. Thereafter, Ballard was excluded from the management and planning for Warpath and was not kept informed concerning any plans for financing the development of the project or updates on the status of the development.

After the defendants elected themselves as directors, they passed a board resolution proposing Warpath issue additional shares “in order to raise capital, pay expenses and offer employee incentives.”⁸ The Board then presented the resolution to the shareholders, which was passed by the votes of the defendants, with Ballard dissenting. However, the shareholders of Warpath never authorized an amendment of the Articles of Incorporation to increase the amount of authorized shares beyond 100,000. Thus, this resolution was contrary to the Articles of Incorporation, and any issuance of stock by Warpath beyond the 100,000 shares already issued would be in violation of the Articles of Incorporation. Upon the issuance of the additional shares, Ballard's ownership in Warpath “would have been reduced to 2%, a tenth of his ‘final holdings' as provided in the Stock Purchase Agreement.”⁹

Ballard's State Court Action sought relief under S.C.Code §§ 33–14–300¹⁰ and 310,¹¹ which govern judicial dissolutions of corporations. The Trial Order concluded that under those statutes, a court may “provid[e] for the purchase at their fair value of shares or any shareholder, either by the corporation or by other shareholders” and may “direct[ ] or prohibit[ ] any act of the corporation or of shareholders, directors, [or] officers” upon a finding that “the directors or those in control of the corporation have acted, are acting, or will act in a manner that is illegal, fraudulent, oppressive, or unfairly prejudicial either to the corporation or any shareholder.”S.C. Code §§ 33–14–300(2)(ii), 310(d)(3) and (d)(4). However, in this case, the Trial Order found that the defendants only “acted in a manner that [was] illegal, oppressive, and unfairly prejudicial to Ballard, within the meaning of S.C.Code § 33–14–300(2)(ii),”¹² omitting a finding that they acted in a “fraudulent” manner to the corporation or any shareholder. The Trial Order concluded that “the proper equitable remedy [was] to provide for the purchase of Ballard's shares at their fair value by the defendants, jointly and severally, as set out in S.C. Code § 33–14–310(d)(4)...”¹³

Although the Trial Order found liability on the part of Thoennes and the other defendants, no damages or debt amount was established at that time. The state court defendants, including Thoennes, appealed the Trial Order.

While this appeal was pending,¹⁴ Thoennes filed a voluntary petition for Chapter 7 relief on December 2, 2011. Thoennes' Schedule F acknowledged a debt to Ballard and described the claim as “business debt” with the amount “unknown.”¹⁵ Ballard was included on Thoennes' creditor matrix through his counsel.¹⁶ A “Notice of Chapter 7 Bankruptcy Case, Meeting of Creditors & Deadlines” was issued the same day, providing the date, time, and location of the first meeting of creditors and the deadline of March 19, 2012, to file a complaint objecting to the discharge of the debtor or to determine the dischargeability of a particular debt.¹⁷

In his initial Statement of Financial Affairs, Thoennes described the pending State Court Action as “breach of contract” and indicated it was dismissed.¹⁸ An Amendment was filed on March 6, 2012, that included the Trial Court Order.¹⁹ On January 20, 2012, a Notice in Thoennes' bankruptcy case was entered and served, instructing creditors who wish to share in any distribution of funds to file a proof of claim.²⁰ The deadline for filing a proof of claim was set at 90 days after the mailing of the notice, or April 19, 2012. On March 26, 2012, Thoennes was granted a discharge under 11 U.S.C. § 727²¹ and Thoennes' case was closed on March 28, 2013.²² It is undisputed that Ballard received notice of Thoennes' bankruptcy, the applicable deadlines, and Thoennes' discharge. Ballard did not file a motion for relief from the automatic stay, a proof of claim, a motion to conduct an examination of Thoennes pursuant to Fed. R. Bankr. P. 2004, or otherwise participate in Thoennes' bankruptcy case while it was pending.

Approximately five months after Thoennes' discharge was entered, the South Carolina Supreme Court affirmed the Trial Order on August 29, 2012, finding:

illegal or fraudulent conduct is not required under section 33–14–300(2)(ii), and we agree with the circuit court that the evidence in the record shows oppression by the majority in this instance ...

....

We find the record evinces a clear intent by Appellants to “freeze-out” Ballard and exclude him from involvement with Warpath and from the benefits of ownership ... We therefore affirm the circuit court's finding of oppression and its requirement that Appellants purchase Ballard's stock at fair market value.

Ballard v. Roberson, 399 S.C. 588, 595, 597–98, 733 S.E.2d 107, 110, 112 (2012) (emphasis added) (footnote omitted). The State Court Action was remanded and a valuation hearing to determine the fair value of Ballard's ownership interest in Warpath was held on August 6, 2013. In a subsequent Order Appointing Receiver entered on April 23, 2014, the state court found that “[a]t the valuation hearing, plaintiff presented undisputed evidence that the conduct of the defendants previously held to constitute shareholder oppression had continued unchanged and unabated up to the time of the [valuation] hearing.”²³

On October 3, 2013, the state court entered an Order of Judgment (“Judgment”) finding the fair value of Ballard's ownership interest to be $3,589,297, and ordering the state court defendants, jointly and severally, to pay Ballard that amount within 90 days of entry of the Judgment and in exchange, Ballard would relinquish his shares in Warpath.²⁴ The Judgment was appealed by the state court defendants on December 20, 2013, and they filed a request for stay pending appeal on January 7, 2014, which was denied on March 27, 2014.²⁵

Meanwhile, Ballard served Thoennes with Post–Judgment Interrogatories and Requests for Production of Documents.²⁶ On March 7, 2014, Thoennes responded by objecting to each request on grounds that any debt to Ballard was discharged on March 26, 2012, pursuant to § 727 and, because the discharge is a permanent injunction, Ballard is prohibited from collecting the Judgment from Thoennes.²⁷ Ballard asserts, and Thoennes does not dispute, this was the first time Thoennes raised his discharge as a bar to collection in the context of the State Court Action.

More than two years after Thoennes' bankruptcy discharge, Ballard filed this adversary proceeding in the bankruptcy court on November 17, 2014. Finally, as a result of the pending state court appeal, the Judgment was reduced to $3,125,000 on July 15, 2015 (the “Final Judgment”). Ballard v. Roberson, No. 2015–UP–364, 2015 WL 4275343, at *4–5 (S.C.Ct.App. July 15, 2015). The hearing in this Court on the instant Motion was held on July...