Geltzer v. Bedke (In re Mundo Latino Mkt. Inc.)

• Decision Date: 16 August 2018
• Docket Number: Case No. 16-11349 (SMB),Adv. Pro. No. 18-01013 (SMB)
• Citation: 590 B.R. 610
• Parties: IN RE: MUNDO LATINO MARKET INC., Debtor. Robert L. Geltzer, chapter 7 trustee, Plaintiff, v. Kathryn L. Bedke, Defendant.
• Court: U.S. Bankruptcy Court — Southern District of New York

590 B.R. 610

IN RE: MUNDO LATINO MARKET INC., Debtor.Robert L. Geltzer, chapter 7 trustee, Plaintiff,

v.Kathryn L. Bedke, Defendant.

Case No. 16-11349 (SMB)

Adv. Pro. No. 18-01013 (SMB)

United States Bankruptcy Court, S.D. New York.

Signed August 16, 2018

ARCHER & GREINER, P.C., 630 Third Avenue, 7th Floor, New York, NY 10017, Allen G. Kadish, Esq. Of Counsel, Attorneys for Plaintiff Robert L. Geltzer

WHITE & CASE LLP, 1221 Avenue of the Americas, New York, NY 10028, Paige C. Spencer, Esq. Of Counsel, Attorneys for Defendant Kathryn L. Bedke

MEMORANDUM DECISION GRANTING IN PART AND DENYING IN PART MOTION TO DISMISS

STUART M. BERNSTEIN, United States Bankruptcy Judge:

On April 10, 2018, Robert L. Geltzer, the chapter 7 trustee (the "Trustee") of Mundo Latino Market Inc. ("Mundo Latino" or the "Debtor"), filed the Amended Complaint , dated Apr. 10, 2018 ("Amended Complaint " ) (ECF Doc. # 11), seeking to hold Defendant Kathryn L. Bedke ("Bedke") liable for breach of fiduciary duty, corporate waste and negligence in her roles as majority shareholder, director and officer of the Debtor. Bedke moves to dismiss the Amended Complaint on two grounds: she is protected by the business judgment rule, and the Trustee failed to join certain necessary parties. (See Motion to Dismiss the Chapter 7 Trustee's Amended Complaint , dated Apr. 24, 2018 ("Motion " ) (ECF Doc. # 14), and accompanying Defendant Kathryn L. Bedke's Memorandum of Law in Support of her Motion to Dismiss Trustee's Amended Complaint , dated Apr. 25, 2018 ("Bedke Memorandum " ) (ECF Doc. # 16).) The Trustee opposes the Motion , asserting that the business judgment rule does not apply to a corporate fiduciary's wholesale failure to oversee the activities of the corporation. (See Trustee's Objection to Defendant's Motion to Dismiss , dated May 29, 2018 ("Trustee Objection " ) (ECF Doc. # 18).) For the reasons that follow, the Motion is granted in part and denied in part.

BACKGROUND

A. The Amended Complaint

The facts are derived from the well-pleaded allegations in the Amended Complaint . Mundo Latino is a New York corporation that operated a retail food and household supply market at 590 West 174^th Street in Manhattan. (¶¶ 13, 14.)¹ Bedke owned 70% of the shares of Mundo Latino, was a vice president and served as a director. (¶¶ 20, 25.) Kathryn N. Holler ("Holler") owned the remaining 30% of Mundo Latino's shares and was its president, treasurer and also served as a director. (¶¶ 21, 22, 25.) Bedke invested over $1 million to capitalize and maintain Mundo Latino, and Holler invested over $100,000. (¶¶ 23, 24.)

Bedke had a full-time job elsewhere, and did not operate the Debtor's business or locate herself at its premises. (¶¶ 35, 36.) Instead, in late 2013 or early 2014, she caused Giovanni Rodriguez ("Rodriguez") to start and operate Mundo Latino on her behalf. (¶ 30.) Bedke authorized Rodriguez to, among other things: (i) oversee the initial build-out and make improvements to the store, (ii) outfit the store for operation as a retail market, including with shelving, machinery and computer equipment, (iii) purchase inventory, including food and household items, (iv) hire, train and supervise workers and (v) conduct daily operations. (¶ 31.) Rodriguez conducted the build-out, acquired machinery and equipment, opened bank accounts, credit card and vendor accounts, hired employees, retained professionals and registered with the state. (¶ 33.)

In late 2014 or early 2015, Mundo Latino opened for business. (¶ 34.) It lost money for the entire period of its operation, (¶ 42), primarily due to Rodriguez's mismanagement and bad acts. The gravamen of the Amended Complaint is that Bedke breached her fiduciary duty of due care by failing to supervise Rodriguez, and more generally, the operations of the Debtor. In the first category,² the Amended Complaint asserts that Bedke failed to supervise or oversee Rodriguez in connection with placing and receiving merchandise orders, making vendor payments, signing checks without signatory authority, making payroll payments, abandoning an ADP payroll system in favor of an informal payroll system, making payroll payments "off the books," and borrowing money to fund the Debtor's operations or fund the Debtor, from Bedke or other parties, without interest or expectation of repayment. (¶¶ 40-41.) In addition, Bedke permitted Rodriguez to use the Debtor's funds or funds that were "intended for use by the Debtor in the market," to buy for himself various accessories and electronics, including an Apple laptop, and to borrow money from third parties in the name of the Debtor to support the Debtor's operations "and/or" for other non-Debtor-related uses. (¶¶ 41, 65.) Finally, Bedke did not require Rodriguez to repay timely personal loans or interest owed to the Debtor. (¶ 66.)

In the second category, the Amended Complaint charges that the Debtor "purchased and possessed a computer system consisting of point-of-service record-keeping cash registers and a networked computer system (collectively, the "System") that was capable of maintaining and providing purchasing and sales activities and substantially all other record keeping necessary to operate the business," which Bedke should have used to monitor the Debtor's reports on purchasing, sales, expenses, payroll and sales tax activity, but she failed to do so. (¶ 39.) Bedke failed to install or achieve the installation of the System, and failed to see that Rodriguez used any system to "maintain books and records and business activity of the Debtor." (¶ 40.) In addition, she failed to assert control over, supervise and oversee the Debtor's books and records as well as its day-to-day activities and operations, payroll activities, tax activities and the payment of rent and compliance with the Debtor's lease. (¶ 41; see ¶ 59.) Finally, Bedke "failed to assure that the Debtor had proper budget and fiscal controls," (¶ 60), "failed to maintain and ensure that the Debtor maintained proper books and records," (¶ 61), "mismanaged the Debtor's finances and caused the Debtor to operate in a status of insolvency," (¶ 62), "failed to oversee the Debtor's employees and agents," (¶ 63), "enabled the Debtor to be subject to theft and mismanagement by employees and agents," (¶ 64), "failed to capitalize the Debtor adequately in respect of construction and outfitting costs and failed to take, or delayed taking, actions to secure additional funding, or reduce or manage other expenses resulting in damages to the Debtor and its creditors," (¶ 67), "failed to ensure that the Debtor complied with applicable laws and regulations," (¶ 68) and "neglected, or failed to perform, her duties with respect to management and disposition of the corporate assets in her charge as set forth herein." (¶ 69.)

Based on this litany of wrongdoing, the Trustee contends that Bedke is liable for (1) $1,139,728.89 which represents the sum of the filed claims³ and (2) the unpaid administrative expenses in the case based on theories of breach of fiduciary duty as a shareholder, officer and director (First Claim for Relief), corporate waste (Second Claim for Relief) and negligence (Third Claim for Relief).

B. The Motion

Bedke has moved to dismiss the Amended Complaint pursuant to Rules 12(b)(6) and (7) of the Federal Rules of Civil Procedure ("Federal Rule"), made applicable to this adversary proceeding by Rule 7012(b) of the Federal Rules of Bankruptcy Procedure ("Bankruptcy Rule"). She asserts that the Amended Complaint is fatally flawed for several reasons. First, the claims for breach of fiduciary duty, corporate waste and negligence cannot survive the protections of the business judgment rule. (Bedke Memorandum at 8-12.) To the extent the Trustee's negligence claim is based on Bedke's status as majority shareholder, that claim must be dismissed because the Trustee has not alleged that she acted for her benefit and to the detriment of Mundo Latino, and a majority shareholder generally is not a fiduciary for other shareholders. (Id. at 12-13.) Finally, the Trustee's failure to join Holler and Rodriguez as necessary parties violates Federal Rule 12(b)(7). (Bedke Memorandum at 14-16.)

The Trustee responds that the business judgment rule does not protect Bedke's wholesale failure to act, monitor or perform her managerial functions, (Trustee Objection at 5-8), and furthermore, does not shelter her from responsibility for breaches of her fiduciary duty. (Id. at 6.)⁴

DISCUSSION

"To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face." Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (citation omitted); accord Bell Atl. Corp. v. Twombly , 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Iqbal , 556 U.S. at 678, 129 S.Ct. 1937 ; accord Twombly , 550 U.S. at 556, 127 S.Ct. 1955. The court must assume the veracity of all "well-pleaded factual allegations," and determine whether, together, they plausibly give rise to an entitlement to relief. Iqbal , 556 U.S. at 679, 129 S.Ct. 1937.

A. First Claim for Relief

1. Shareholder and Vice President

The First Claim for Relief alleges that Bedke breached her fiduciary duties as the majority shareholder, vice president and director of the Debtor by failing to properly supervise Rodriguez and the operation of the Debtor's business. "Under New York law, ‘[t]he elements of a cause of action to recover damages for breach of fiduciary duty are (1) the existence of a fiduciary relationship, (2) misconduct by the defendant, and (3) damages directly caused by the defendant's misconduct.’ " In re Perry H. Koplik & Sons, Inc. , 499 B.R. 276, 289 (S.D.N.Y. 2013) (quoting Rut v. Young Adult Inst., Inc. , 74...