Hyundai-Wai Mach. Am. Corp. v. Rouette (In re Rouette)

Decision Date22 October 2013
Docket NumberAdversary No. 13–2018.,Bankruptcy No. 13–20250 (ASD).
CourtUnited States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — District of Connecticut
PartiesIn re Nelson R. ROUETTE, and Sandra Calvo Rouette, Debtors. Hyundai–Wai Machine America Corp., Plaintiff, v. Nelson R. Rouette, and Sandra J. Calvo Rouette, Defendants.

OPINION TEXT STARTS HERE

Kenneth Baum, Edward Sun Kiel, Cole, Schotz, Meisel, Forman & Leonard, Hackensack, NJ, Jessica Grossarth, Pullman & Comley, LLC, Bridgeport, CT, for Plaintiff.

Edward P. Jurkiewicz, Lawrence & Jurkiewicz LLC, Avon, CT, for Defendants.

MEMORANDUM AND ORDER ON DEBTOR–DEFENDANTS' MOTION TO DISMISS

ALBERT S. DABROWSKI, Chief Judge.

I. INTRODUCTION

Before the Court is a Motion to Dismiss this adversary proceeding filed pursuant to Fed.R.Civ.P. 12(b)(6), by Nelson R. Rouette and Sandra J. Calvo Rouette, the Debtor–Defendants (hereinafter, the “Debtors”) in this bankruptcy case and adversary proceeding. A hearing was held on the Motion to Dismiss and related pleadings on October 10, 2013 (hereinafter, the “Hearing”), following which the Court took the matter under advisement. For the reasons set forth hereinafter, the Motion to Dismiss shall be granted in part and denied in part.

II. BACKGROUND

On February 8, 2013 (hereinafter, the “Petition Date”), the Debtors commenced the above captioned bankruptcy case by the filing of a voluntary petition under Chapter 7 of the United States Bankruptcy Code. On May 13, 2013, Hyundai–Wai Machine America Corp. (hereinafter, the Plaintiff) commenced the above captioned adversary proceeding by filing a complaint (hereinafter, the “Complaint”) against the Debtors.

A. The Complaint

Through the Four–Count Complaint the Plaintiff seeks a determination that the Debtors have personal liability to it on the grounds of veil piercing related to a $1,650,000 debt of Quality Machine Solutions, Inc. (hereinafter, “QMSI”), alleged to be a wholly-owned business of the Debtors (Count One). Assuming that the Plaintiff prevails on the veil piercing issue in the adversary proceeding, the Plaintiff then seeks to have the debt determined to be non-dischargeable under Bankruptcy Code §§ 523(a)(2)(A) (“money ... obtained by—false pretenses, a false representation, or actual fraud”); 523(a)(4) ( “fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny”); and/or 523(a)(6) (“willful and malicious injury”) (Counts Two–Four).

The Complaint further and more specifically alleges, inter alia, that the Debtors, as the sole shareholders, directors, and officers of QMSI, oversaw the purchase of millions of dollars of machine tools and equipment from the Plaintiff on credit; resold those assets to QMSI's customers; used QMSI's corporate credit card to pay for millions of dollars in personal expenses, including numerous luxury items; directed the use of corporate funds to pay those credit card charges; periodically changed QMSI's mailing address to their own personal address; and took excessive shareholder distributions—all at a time when QMSI failed to make payment to the Plaintiff.

The Complaint also asserts that on September 29, 2009, the Plaintiff obtained a judgment against QMSI in the United States District Court for the District of New Jersey in the amount of $1,650,000, plus interest (hereinafter, the District Court Judgment”); that the Plaintiff subsequently filed suit against Debtors in the United States District Court for the District of Connecticut (hereinafter, the “Connecticut Action”), seeking to pierce the corporate veil to hold the Debtors personally liable for QMSI's judgment debt, with the Connecticut Action stayed as of the Petition Date pursuant to § 362(a).

B. The Motion to Dismiss

On August 26, 2013, Debtors filed a Motion to Dismiss, accompanied by a Memorandum of Law in Support of Motion to Dismiss, ECF Nos. 33–1 and 2, and further supported by an Amended Memorandum of Law in Support of Motion to Dismiss (hereinafter, the “Amended Memorandum of Law”), ECF No. 37, seeking to dismiss this proceeding under Fed.R.Civ.P. 12(b)(6), applicable in adversary proceedings by Fed. R. Bankr.P. 7012(b).2 The Plaintiff responded on October 4, 2013, by filing a Memorandum in Opposition to Defendants' Motion to Dismiss Complaint to Declare Debt Nondischargeable, (hereinafter, the “Memorandum in Opposition”), ECF No. 38, following which the Debtors on October 9, 2013, responded by filing Defendant's [sic] Memorandum of Law in Reply to Plaintiff's Memorandum in Opposition (Doc. # 38) (hereinafter, the “Reply Memorandum”), ECF No. 39.

III. DISCUSSION

Distilled to its essence, the Motion to Dismiss asserts three grounds for dismissal of this adversary proceeding.

First, the Debtors do not presently contest that the Plaintiff obtained the District Court Judgment against QMSI, rather they maintain that the present matter cannot be adjudicated because the Connecticut Action for veil piercing was not determined prior to the Petition Date, and, therefore, the Debtors have no liability to the Plaintiff. Stated differently, the Debtors appear to argue that because there was no predetermined obligation recognizable under the law prior to the Petition Date, the Plaintiff has no existing claim against the Debtors. In support of their argument, the Debtors look to the phrase “right to payment” under § 101(5)(A) as a prerequisite to all the phrases that follow and assert that because the Plaintiff had no established right to payment as of the Petition Date it cannot be established post-petition. The Debtors also deny that the Plaintiff's claim fits under any of the other possible formulations of “claim” as spelled out in § 101(5)(A), which provides:

(5) The term “claim” means—

(A) right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured....

Although the Debtors cite a number of cases in support of their position, none of them is dispositive of the present matter, and at least one supports the Plaintiff's position. The Debtors quote as follows from LTV Steel Co. v. Shalala (In re Chateaugay Corp.), 53 F.3d 478, 497 (2d Cir.1995): “Where there is no legal relationship defined at the time of the petition ... it would be impossible to find even the remotest ‘right to payment.’ Debtors' Amended Memorandum of Law, p. 6. However, the language omitted [“...”] from this quote—“ that is, where the statute imposing the liability has not been enacted,(emphasis added)—is highly relevant to the present matter, as the rights at issue in LTV Steel arose under a statute, but the applicable statute did not exist prior to the bankruptcy filing in that case. Upon consideration of the complete LTV Steel quote, the Court finds that case distinguishable and not controlling here, where the claims are based on contract and torts and arose prior to the Petition Date.

Moreover, additional and clarifying language in LTV Steel, lends further support to the Plaintiff's position.

A claim will be deemed pre-petition when it arises out of a relationship recognized in, for example, the law of contracts or torts. “A claim exists only if before the filing of the bankruptcy petition, the relationship between the debtor and the creditor contained all of the elements necessary to give rise to a legal obligation—‘a right to payment’—under the relevant non-bankruptcy law.” In re National Gypsum Co., 139 B.R. 397, 405 (N.D.Tex.1992).

LTV Steel, 53 F.3d at 497.

In the instant proceeding all of the elements permitting a court to determine whether the Debtors should be held liable for their corporation's debts were alleged to be in place prior to the Petition Date.3 The contract between the Plaintiff and the Debtors' company was entered into prior to the bankruptcy. Money and goods changed hands before the bankruptcy. The Debtors' alleged conduct that forms the basis for veil piercing also occurred prepetition. The only thing missing is what is sought—an adjudication of liability.

This proceeding is analogous to the more typical personal injury case arising from a prepetition accident but where there is no judgment because the state court action was stayed by the automatic stay of § 362(a). The absence of a judgment in such a case does not mean the party does not have a prepetition “right to payment.” That is why the phrase “right to payment” is modified by the phrase, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured.” 11 U.S.C. § 101(5)(A) (emphasis added).

As the United States Supreme Court noted in Johnson v. Home State Bank, 501 U.S. 78, 83, 111 S.Ct. 2150, 115 L.Ed.2d 66 (1991) concerning § 101(5), Congress intended by this language to adopt the broadest available definition of ‘claim.’ Thus, in that case the Supreme Court held that a mortgage interest that survives the discharge of a debtor's personal liability is still a “claim” within the meaning of § 101(5). Prior to Johnson v. Home State Bank, in Pennsylvania Dep't of Pub. Welfare v. Davenport, 495 U.S. 552, 558, 110 S.Ct. 2126, 109 L.Ed.2d 588 (1990), the Supreme Court reviewed the legislative history of the Bankruptcy Code and noted Congress' intent to invest the term “claim” with the “broadest possible” scope so that “all legal obligations of the debtor ... will be able to be dealt with in a bankruptcy case.” SeeH.R.Rep. No. 95–595, at 309 (1977).

In light of the above, the Court finds the Debtors' argument that the present matter cannot be adjudicated by this Court to be unpersuasive.

In the Debtors' second argument in support of the Motion to Dismiss they assert that since a veil-piercing claim is a non-core proceeding arising under state law, this Court should consider the matter “moot” as to Count One. 4 Debtors' Amended Memorandum of Law, p. 6, Part B.

A case becomes moot only when it is ...

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    ...of Santa Ana, Inc. v. Koper (In re Koper), 516 B.R. 707, 719 (Bankr.E.D.N.Y.2014); Hyundai–Wai Mach. Am. Corp. v. Rouette (In re Rouette), 500 B.R. 670 (Bankr.D.Conn.2013). In dischargeability actions decided after Stern, several courts have noted, “the issues of liability ... and discharge......
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    ...f Santa Ana, Inc. v. Koper (In re Koper), 516 B.R. 707, 719 (Bankr.E.D.N.Y.2014) ; Hyundai–Wai Mach. Am. Corp. v. Rouette (In re Rouette), 500 B.R. 670 (Bankr.D.Conn.2013).In dischargeability actions decided after Stern, several courts have noted, “the issues of liability ... and dischargea......
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