Daly v. Daly (In re Daly)
| Docket Number | 22-15694-SMG,Adv. 22-1391-SMG |
| Decision Date | 08 November 2023 |
| Parties | In re: DAREN C. DALY, Debtor. v. DAREN C. DALY, Defendant. PATRICK DALY, ELIZABETH DALY, ALL PAVING AND SEALCOATING, LLC, and PATRICK DALY AND ELIZABETH DALY AS THE MAJORITY SHAREHOLDERS OF ALL PAVING, INC., Plaintiffs, |
| Court | United States Bankruptcy Courts. Eleventh Circuit. U.S. Bankruptcy Court — Southern District of Florida |
The Bankruptcy Code contains special provisions for small businesses.[2] So does the Internal Revenue Code.[3] The Florida Business Corporation Act[4] ("FBCA") does not. The same corporate formation organization, and governance rules that apply to a large company like Publix Supermarkets, Inc. also apply to a small family-owned paving business. Those rules provide, among other things, that ownership of a corporation is evidenced solely by shares of stock in the corporation. No unwritten agreements among principals, or representations to third parties about ownership percentages, have any relevance in determining ownership of stock in a corporation. When family members choose to do business as a corporation (instead of using a more flexible entity, like a limited liability company) - but fail to comply with statutory corporate formation, organization, and governance requirements - they do so at their own risk.
And when family disputes over ownership of a corporation devolve and must be resolved by a court, the court must look only to the law to resolve them. Here, the law dictates that ownership of a corporation is determined solely by ownership of shares of stock in that corporation - and not by anything else. In this case, Patrick and Elizabeth Daly, the parents of Debtor Daren Daly, contend that they own 87.5% of a small family-owned paving business, All Paving, Inc. But after a 9-day trial with mostly irrelevant testimony about various purported agreements between family members and representations to third parties, the only relevant evidence - a corporate stock ledger and stock certificates - leads the Court to an easy conclusion: Daren[5] owns all 100 shares - representing 100% of the issued and outstanding stock - of All Paving, Inc.
Further neither his parents (Patrick and Elizabeth), nor the separate limited liability company of which they own the majority of the equity (All Paving and Sealcoating, LLC), have proven any claim against Daren as of the date he filed for bankruptcy. And because they have failed to prove any claim against Daren, Daren's objection to their proof of claim must be sustained, and their claim disallowed. Finally, because they have failed to prove any claim against Daren, Daren does not owe them any debt that could be excepted from discharge under Bankruptcy Code sections 523(a)(2)(A), (a)(4), or (a)(6).[6] But even if there was some debt that Daren owed to his mother, father, or All Paving and Sealcoating, LLC, the evidence failed to establish that any such debt should be excepted from any discharge that might be granted to Daren in this bankruptcy case.
Patrick and Elizabeth Daly are an American success story - immigrants who through hard work and determination formed a successful paving business called All Paving and Sealcoating, LLC, of which they own 85% of the equity. They also raised three successful children - Keith, a paramedic and firefighter; Sinead, an attorney; and Daren, a former NCAA Division I college football kicker who aspired to coach in the NFL. When the NFL didn't pan out, Daren went to law school, hoping to become a sports agent. Although he graduated from Nova Southeastern University Law School, Daren did not pass the Florida Bar Examination, thus torpedoing his plans for a career as a sports agent. Instead, he went into the family business - working for his parents at All Paving and Sealcoating, LLC - where he learned the trade and made contacts in the industry.
At some point, a dispute arose between Daren and an older gentleman named Bob Holland. Bob Holland was the primary salesman for All Paving and Sealcoating, LLC, who in respect of that role, was given a 15% equity interest in All Paving and Sealcoating, LLC. When Daren began obtaining paving clients through his own marketing and relationships, he wanted a similar "deal" to the one given to Bob Holland. So Patrick decided to give Daren the same "deal" - a 15% interest in a new, separate company. But Patrick - being unsophisticated in the law - left it to Daren (a recent law school graduate), and Daren's law school friend, Joseph Fahrendorf, to form this new business.
For reasons that are not clear, despite the flexibility and significantly less formality associated with a limited liability company (like All Paving and Sealcoating, LLC), Daren decided to form this new business as a corporation. So on September 19, 2013, Daren incorporated All Paving, Inc., by filing Electronic Articles of Incorporation with the Florida Secretary of State. After filing the articles of incorporation, however, Daren failed to undertake the next steps necessary to complete the organization of the company, including electing directors and issuing shares of stock. Regardless, sometime in 2015 Daren and his parents began operating as if All Paving, Inc. had been properly organized - even though it had never elected a board of directors or issued shares of stock to anyone. Not long thereafter, though, the family relationship soured, the business relationship deteriorated, and litigation ensued.
In 2017, Daren's parents - together with All Paving and Sealcoating, LLC and All Paving, Inc. (purportedly by his parents as alleged majority shareholders) - sued Daren in state court, alleging that they owned 87.5% of All Paving, Inc., and asserting a myriad of claims for damages against Daren and his fiancé, Jamie Schindler.[7]Ultimately, through their second amended complaint filed three and a half years into the litigation, they asserted thirteen claims against Daren and Jamie. But two of these claims were predicates for the eleven others: (1) a declaratory judgment as to ownership of All Paving, Inc., and (2) a declaratory judgment as to ownership of the "All Paving" trade name, trademark, and logo, and the allpaving.com domain name.[8]
On July 26, 2022 - after more than five years of litigation with his parents in state court - Daren filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code, electing to proceed under Subchapter V (which contains special provisions for eligible small business debtors).[9] Daren asserts in this bankruptcy case that he owns 100% of the stock of All Paving, Inc., and stated that he filed for bankruptcy due to mounting debts associated with his business operations and the state court litigation with his parents.[10]
Patrick and Elizabeth, together with All Paving and Sealcoating, LLC, filed a $4,051,277.41 proof of claim in Daren's bankruptcy case, based on the claims they asserted against him in state court.[11] Daren objected[12] to their proof of claim and then filed a plan of reorganization[13] under subchapter V of chapter 11 of the Bankruptcy Code. And Patrick, Elizabeth, All Paving and Sealcoating, LLC, and Patrick and Elizabeth (purportedly) as majority shareholders of All Paving, Inc., all filed a complaint against Daren seeking a determination that debts he allegedly owed them were excepted from any discharge that he might receive.
After the Court dismissed certain of the nondischargeability claims brought by All Paving and Sealcoating, LLC and All Paving, Inc.,[14] the following claims and plaintiffs remained in the adversary proceeding:
To prevail on any of these claims, however, the Court must first find that Patrick and Elizabeth - not Daren - are the majority owners of All Paving, Inc., and that Patrick, Elizabeth, and All Paving, Inc., together with All Paving and Sealcoating, LLC, have any claims at all against Daren. Because a determination of ownership of All Paving, Inc. was a necessary predicate to consideration of his plan of reorganization as well, and because the claims asserted in the proof of claim and in the complaint to determine dischargeabilty were all inter-related, the Court abated any plan-related deadlines so that these predicate issues could be resolved first.
The Court tried these disputes over nine separate days between April and June 2023, to determine three primary issues:
The Court has subject matter jurisdiction under ...
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