Hyrad Corp. v. Furrer (In re Furrer)

• Decision Date: 23 December 2016
• Docket Number: Adversary Number: 16-49,Case Number: 16-11090-7
• Parties: In re: FREDERICK J. FURRER and LUCY FURRER, Debtors. HYRAD CORPORATION and HOWARD C. NELSON, Plaintiffs, v. FREDERICK J. FURRER, Defendant.
• Court: U.S. Bankruptcy Court — Western District of Wisconsin

In re: FREDERICK J. FURRER and LUCY FURRER, Debtors.HYRAD CORPORATION and HOWARD C. NELSON, Plaintiffs, v. FREDERICK J. FURRER, Defendant.

Case Number: 16-11090-7

Adversary Number: 16-49

UNITED STATES BANKRUPTCY COURT WESTERN DISTRICT OF WISCONSIN

December 23, 2016

MEMORANDUM DECISION

This matter is before the Court on the motion of HYRAD Corporation and Howard Nelson ("Hyrad" or "Nelson" individually, and collectively the "Plaintiffs") for summary judgment on their adversary complaint against Frederick Furrer ("Furrer"). The Plaintiffs contend that facts determined in Columbia County Circuit Court render Furrer's debt to the Plaintiffs nondischargeable as either a debt based on fraud or defalcation while acting in a fiduciary capacity or as an embezzlement, see 11 U.S.C. § 523(a)(4), or based on a willful and malicious injury, see 11 U.S.C. § 523(a)(6). Further, they assert that Furrer is precluded from relitigating those facts. For the reasons that follow, the Plaintiffs' motion for summary judgment is granted.

JURISDICTION

Federal district courts have "original and exclusive jurisdiction" of all cases under title 11 of the United States Code (the "Bankruptcy Code "). 28 U.S.C. § 1334(a). The federal district courts also have "original but not exclusive jurisdiction" of all civil proceedings arising under title 11 of the United States Code, or arising in or related to cases under title 11. 28 U.S.C. § 1334(b). District courts may, however, refer these cases to the bankruptcy judges for their districts. 28 U.S.C. § 157(a). In accordance with section 157(a), the District Court for the Western District of Wisconsin has referred all of its bankruptcy cases to the Bankruptcy Court for the Western District of Wisconsin. Western District of Wisconsin Administrative Order 161 (July 12, 1984).

A bankruptcy judge to whom a case has been referred may enter final judgment on any core proceeding arising under the Bankruptcy Code or arising in a case under title 11. 28 U.S.C. § 157(b)(1). A proceeding for determination of the dischargeability of a particular debt arises in a case under title 11 and is specified as a core proceeding. 28 U.S.C. § 157(b)(2)(I).

None of the parties have raised the issue of whether this Court has constitutional authority to enter a final judgment on all counts of the Complaint in light of the United States Supreme Court's decision in Stern v. Marshall, 564 U.S. 462 (2011). This Court has an independent duty to determine whether it has such authority. Rutkowski v. Adas (In re Adas), 488 B.R. 358, 379 (Bankr. N.D. Ill. 2013).

All of the counts in the Complaint are based on sections 523(a)(4) and (6) of the Bankruptcy Code. Section 523 is unequivocally a bankruptcy cause of action. Determining the scope of a discharge is a fundamental part of the bankruptcy process even when it implicates state law. See Deitz v. Ford (In re Deitz), 469 B.R. 11, 20 (B.A.P. 9th Cir. 2012).

Thus, even in light of the Seventh Circuit's later opinions regarding Stern, see Wellness Int'l Network, Ltd. v. Sharif, 727 F.3d 751 (7th Cir. 2013), and Ortiz v. Aurora Health Care, Inc. (In re Ortiz), 665 F.3d 906 (7th Cir. 2011), the Court concludes it has constitutional authority to enter a final judgment in this adversary proceeding.

Accordingly, this Court has both the jurisdiction and the authority to enter final judgment in this matter. Hence, this decision contains the Court's findings of fact and conclusions of law.

FACTS

Hyrad was incorporated in 1989 and received a U.S. Patent the same year for an adjustable shock absorber. Since 1994, the Hyrad shares have been owned by Nelson, Furrer, and James Strickland. Nelson was a Hyrad director from 1995 to 2006. He was the treasurer from 1995 to 2001 and a vice-president from 1995 until 2005. Furrer served as the president of Hyrad. He also served as its treasurer from 2001 through the periods at issue.

Bumps in the road developed and, in 2007, Nelson brought an action against Furrer asserting various claims on his own behalf and that of Hyrad. The claims were for theft, breach of fiduciary duties, improper retention of corporate funds, and improperly receiving unauthorized payments. Following six days of trial, the state court issued a Memorandum Decision, Findings of Fact and Conclusions of Law, and a Judgment.

The following facts were determined by the state court:

a. The officers and directors of Hyrad were authorized by its bylaws to exercise all business powers of the corporation, including entering into contracts for employee compensation.

b. Leader Corporation, a company wholly owned by Furrer, provided management services to Hyrad. It also functioned as Furrer's management company for the purpose of accepting his compensation.

c. Furrer and Leader failed to prove that all of the money paid by Hyrad to Leader was for actual business expenses for the benefit of Hyrad during the years 2001 through the first half of 2009.

d. Hyrad paid insurance premiums for Furrer's personal property, undocumented personal travel expenses, rent and utility expenses, and other amounts for the personal benefit of Furrer and his family between 2001 and 2007.

e. Furrer caused Hyrad to pay Leader $25,412 in unsubstantiated expenses that directly benefitted Furrer.f. Furrer received excess compensation not authorized by the Board of Hyrad.

g. Furrer paid himself excess compensation in the amount of $184,735.

h. The actual damages Hyrad incurred as a result of Furrer's actions in paragraph g. totaled $184,735.

i. Additionally, Furrer paid himself excess compensation through his subsidiary corporations in the amount of $21,211.15.

j. The actual damages Hyrad incurred as a result of Furrer paying himself through his subsidiary corporations totaled $21,211.15.

k. The sum of Hyrad's actual damages incurred as a result of Furrer's actions totaled $205,946.15.

l. Actual damages are subject to an award of 12% interest per annum under Wis. Stat. § 814.04(4) from the date of the state court's decision forward on any and all liquidated amounts found owing.

m. Hyrad's actual damages, with statutory interest, totaled $267,124.40.

n. Hyrad was entitled to exemplary damages in the amount of $267,124.40 under Wis. Stat. § 895.446 as a result of Furrer's actions.

o. Furrer knowingly and intentionally deceived Nelson and the Hyrad Board by understating his compensation.p. Furrer knowingly and intentionally used Hyrad funds to pay himself compensation through Leader in excess of what he reported to Nelson and Hyrad.

q. Furrer had no authorization to receive the actual damage amounts suffered by Hyrad.

r. Furrer acted with intent to convert the amounts to his own use and to the use of other companies he owned and controlled.

s. Furrer's actions were performed maliciously and in intentional disregard of the rights of Hyrad and Nelson.

t. Furrer used his positions as director, president, primary manager, and majority shareholder to further his private interests at the expense of Hyrad and the other shareholders.

u. The initial attorney's fees the state court awarded Hyrad as a result of Furrer's actions totaled $247,000. The cost of investigation Hyrad incurred as a result of Furrer's actions totaled $62,969.68. As a result of a reconsideration of the Court's Memorandum Decision dated August 30, 2010, the state court awarded Hyrad an additional sum of attorney's fees and costs of $31,331.87, for a total of $341,301.55 pursuant to Wis. Stat. § 895.446.

The Hyrad Judgment also determined other matters related to the operation, control and liquidation of Hyrad. For example, it replaced the Hyrad directors and ordered the election of new officers. It required engagement of a manager to operate and wind down the business, identify assets, and liquidatethe assets. Further, it provided that if an appropriate manager could not be retained within a set time or there was any other impasse, an application for the appointment of a receiver could be filed for the purpose of winding down Hyrad and distributing the net proceeds.

Furrer filed two appeals of the Judgment. A Petition for Review was denied as were two Motions in the Supreme Court for Reconsideration. Undeterred, Furrer prosecuted an appeal in the Court of Appeals. Lacking success in that court, he filed yet another appeal to the Supreme Court while pursuing a Motion to Reconsider in the Court of Appeals. The eight years of continuous litigation by Furrer confirm an unremitting pattern of motions, appeals, and motions for reconsideration.

His trips through the appellate courts being unsuccessful, in 2014 he returned to the trial court with yet another motion to reopen or reconsider. He argued the court was mistaken in its conclusions and findings because there was a fraud on the court related to source documents and information that was available at the time of the original trial. Denying this motion, the trial court confirmed Furrer repeatedly had opportunities to raise these issues in a timely manner and failed to do so. Moreover, if there were relevant documents, he could have introduced them into evidence at trial but did not do so. What is more, he demonstrated his exhaustive efforts at appeals thus confirming his exercise of full litigation.

Following the exhaustive course of litigation, the state court granted a Motion to Appoint a Receiver. The Order appointing a receiver provides:

The receiver shall attempt to liquidate all assets of HYRAD and make best efforts to maximize the value of such liquidation; in addition, the receiver shall receive funds recovered from Mr. Furrer to satisfy the Judgment entered in this matter and shall distribute the proceeds according to the provisions of the Judgment; the receivership shall continue until the Judgment in this matter has been satisfied.

DISCUSSION

The narrow questions presented by the summary judgment in this matter are (1) whether, under the principles of issue preclusion, this Court is bound by the decision rendered against the...