Barenberg v. Burton (In re Burton)

• Decision Date: 31 August 2010
• Docket Number: Adv. No. 09-01353,BAP No. CO-10-022,Bankr. No. 09-15177
• Parties: IN RE RUSSELL ROSCOE BURTON, Debtor. TOM BARENBERG, Plaintiff - Appellant, v. RUSSELL ROSCOE BURTON, Defendant - Appellee.
• Court: U.S. Bankruptcy Appellate Panel, Tenth Circuit

IN RE RUSSELL ROSCOE BURTON, Debtor.TOM BARENBERG, Plaintiff - Appellant,

v.RUSSELL ROSCOE BURTON, Defendant - Appellee.

BAP No. CO-10-022

Bankr. No. 09-15177

Adv. No. 09-01353

UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE TENTH CIRCUIT

August 31, 2010

NOT FOR PUBLICATION

Chapter 7

OPINION^*

Appeal from the United States Bankruptcy Court

for the District of Colorado

Before MICHAEL, NUGENT, and SOMERS, Bankruptcy Judges.

SOMERS, Bankruptcy Judge.

Tom Barenberg appeals the bankruptcy court's order granting Defendant/Debtor's motion to dismiss his amended complaint and its order denying his motion to reconsider the dismissal. We affirm in part and reverse in part.¹

I. FACTUAL BACKGROUND

In October 2007, Barenberg and Burton Custom Homes, LLC ("BCH"), entered into an agreement to form Brookwood 4, LLC ("Brookwood"), for the purpose of building a single family residence in Douglas County, Colorado.² Brookwood's Operating Agreement called for Barenberg to provide the funds required to purchase a specified building lot ("the Property"), while BCH would obtain a construction loan, and manage, supervise and control the construction of improvements on the Property.³ Barenberg contributed to Brookwood $350,430.80 that Brookwood used to buy the Property called for by the Operating Agreement.

Debtor Russell Roscoe Burton ("Debtor") was the sole member, manager, and owner of BCH. Barenberg claimed Debtor induced him to enter into the Brookwood Operating Agreement by representing that (1) Debtor would use Barenberg's capital contribution to purchase a vacant residential lot, (2) Debtor would obtain a construction loan to cover the costs of building a house on the lot, (3) Barenberg's investment would be secured by a second deed of trust lien on the lot, subject only to the construction loan, (4) no other liens would be placed on the Property, and (5) on sale of the Property with improvements, Barenberg's investment would be repaid first, then any profits divided between Barenberg and BCH.

On November 20, 2007, just thirty-six days after Debtor signed the Brookwood Operating Agreement for BCH, BCH obtained a $100,000 loan secured by a deed of trust on the Property. Barenberg alleged that "[Debtor], either individually or through BCH, used the proceeds [from that loan] for hisown personal benefit or the benefit of entities solely owned by [him], and for purposes other than construction of improvements upon the Property."⁴ Neither Debtor nor BCH repaid the loan.

Debtor filed a Chapter 7 petition in March 2009. In June 2009, Barenberg, through Distressed Properties, LLC, paid off the balance owed on the loan secured by the Property, a bit over $118,000.⁵ Barenberg then filed a timely nondischargeability complaint against Debtor pursuant to 11 U.S.C. § 523(a)(2)(A),⁶ (a)(4) and (a)(6).⁷ He claimed Debtor's actions had improperly diminished the value of his interest in the Property by the amount he paid on the loan.⁸

Debtor filed a motion to dismiss Barenberg's complaint, which the bankruptcy court ruled on in November 2009.⁹ In its order, the bankruptcy court concluded that Barenberg's allegations failed to suggest Debtor owed him a debt, or that such debt would be nondischargeable under § 523(a)(2)(A), (a)(4) or (a)(6). The bankruptcy court found that (1) Barenberg had failed to allege Debtor committed the conduct that caused the injury, and did not allege facts necessary to pierce BCH's corporate veil; (2) Barenberg's allegations did not suggest Debtor owed him a fiduciary duty or had breached any such duty; and (3) anyinjury alleged in the complaint had been suffered by Brookwood, not Barenberg directly, and Barenberg was not asserting a derivative action on behalf of Brookwood. The bankruptcy court ordered that Barenberg's complaint would be dismissed unless Barenberg filed an amended complaint within 20 days.

Barenberg timely filed his Amended Complaint.¹⁰ Debtor filed a motion to dismiss, claiming the Amended Complaint suffered from the same deficiencies as the original one.¹¹ In February 2010, the bankruptcy court granted the motion to dismiss ("Dismissal Order").

Barenberg filed a timely motion for reconsideration of the Dismissal Order, citing newly discovered evidence and legal error as grounds for reconsideration.¹² The bankruptcy court summarily denied that motion on April 1, 2010 ("Reconsideration Order"), finding that "[Barenberg's] Motion does not raise any new facts or issues that would be a proper basis for reconsideration of its prior Order."¹³ Barenberg filed a notice of appeal on April 14, 2010, specifying the order being appealed as "the judgment, order, or decree of the bankruptcy judge entered . . . on the 1st day of April, 2010, upon defendant's Motion to Dismiss Complaint."¹⁴

II. APPELLATE JURISDICTION

Federal Rule of Appellate Procedure 3(c)(1)(B) provides that a notice of appeal must designate the judgment, order, or part thereof being appealed.Because it includes the date of the Reconsideration Order but not the date of the Dismissal Order, Barenberg's notice of appeal might be interpreted to designate only the Reconsideration Order as the ruling being appealed, but we think the reference to Debtor's motion to dismiss indicates that Barenberg intended to appeal the Dismissal Order as well. Furthermore, Debtor has not complained that he was not aware the earlier order was being appealed and has fully briefed all the issues Barenberg has raised, so he has not been misled or prejudiced by the somewhat vague reference to the Dismissal Order.¹⁵ We conclude Barenberg's notice of appeal was sufficient to give us jurisdiction to review the Dismissal Order, and not just the Reconsideration Order. Barenberg's notice of appeal was timely filed from the order disposing of his timely post-judgment motion.¹⁶ The Dismissal Order and the Reconsideration Order are final orders for purposes of 28 U.S.C. § 158(a), and neither party elected to have this appeal heard by the districtcourt.¹⁷ Therefore, this Court has appellate jurisdiction over this appeal.¹⁸

III. ISSUES AND STANDARD OF REVIEW

Federal Rule of Bankruptcy Procedure 7012(b) makes Federal Rule of Civil Procedure 12(b) apply to adversary proceedings like the one Barenberg filed against Debtor. The bankruptcy court dismissed Barenberg's Amended Complaint under Civil Rule 12(b)(6) on the ground it failed to state a claim for relief. We review the grant of a Rule 12(b)(6) motion to dismiss de novo, applying the same legal standards as the bankruptcy court.¹⁹ To survive a Rule 12(b)(6) motion to dismiss, a plaintiff must include in the complaint "enough facts to state a claim to relief that is plausible on its face."²⁰ This requires "more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do."²¹ "Factual allegations must be enough to raise a right to relief above the speculative level, on the assumption that all the allegations in the complaint aretrue (even if doubtful in fact)."²² In ruling on a motion to dismiss, a court must construe the complaint in the light most favorable to the plaintiff, take as true all factual allegations, and make all reasonable inferences in the plaintiff's favor that can be drawn from the pleadings.

We review the denial of a motion for reconsideration for an abuse of discretion.²³

IV. DISCUSSION

Because all of Barenberg's claims are based on an alter-ego or piercing-the-corporate-veil theory, we must first determine whether the Amended Complaint contains sufficient allegations to support a claim to pierce BCH's corporate veil. A threshold question is whether state or federal law should be applied. Federal common law determines the parameters of the alter-ego doctrine when the underlying cause of action is based on federal law, while state law controls when the underlying cause of action is based on state law.²⁴ Because Barenberg's claims are based on state law fraud and conversion, this Court will apply Colorado law on piercing the corporate veil.

In Micciche v. Billings,²⁵ the Colorado Supreme Court discussed piercing the corporate veil, stating:

Generally, a corporation is treated as a legal entity separate from its shareholders, thereby permitting shareholders to commit limited capital to the corporation with the assurance that they will have no personal liability for the corporation's debts. Krendl & Krendl, Piercing the Corporate Veil: Focusing The Inquiry, 55 Den.L.J. 1 (1978). When, however, the corporate structure is used so improperly that the continued recognition of the corporation as a separate legal entity would be unfair, the corporate entity may be disregarded and corporate principals held liable for the corporation'sactions. Id. at 2. Thus, if it is shown that shareholders used the corporate entity as a mere instrumentality for the transaction of their own affairs without regard to separate and independent corporate existence, or for the purpose of defeating or evading important legislative policy, or in order to perpetrate a fraud or wrong on another, equity will permit the corporate form to be disregarded and will hold the shareholders personally responsible for the corporation's improper actions.²⁶

Under Colorado law, then, imposing personal liability on a shareholder for a corporate debt is appropriate when three elements are present: (1) the corporation was a mere alter ego of the shareholder, (2) the corporate structure was used to perpetrate a wrong, and (3) piercing the corporate veil would achieve an equitable result.²⁷ "An alter ego relationship exists when the corporation is a mere instrumentality for the transaction of the shareholders' own affairs, and there is such unity of interest in ownership that the separate personalities of the corporation and the owners no longer exist."²⁸ Colorado courts consider a variety of factors in determining whether to disregard the corporate fiction and treat a corporation and its shareholder as alter...