In re Blackburn

• Decision Date: 11 June 2009
• Docket Number: Adversary No. 07 A 00796.,Bankruptcy No. 07 B 05905.
• Citation: 415 B.R. 668
• Parties: In re Richard BLACKBURN and Victoria Blackburn, Debtor(s). Marco J. Muscarello, individually and Marco J. Muscarello, derivatively on behalf of Eldercare Risk Management, Inc., Plaintiff(s), v. Richard Blackburn and Victoria Blackburn, Defendant(s).
• Court: U.S. Bankruptcy Court — Northern District of Illinois

Page 668

415 B.R. 668

In re Richard BLACKBURN and Victoria Blackburn, Debtor(s).

Marco J. Muscarello, individually and Marco J. Muscarello, derivatively on behalf of Eldercare Risk Management, Inc., Plaintiff(s), v. Richard Blackburn and Victoria Blackburn, Defendant(s).

Bankruptcy No. 07 B 05905.

Adversary No. 07 A 00796.

United States Bankruptcy Court, N.D. Illinois, Eastern Division.

June 11, 2009.

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Abraham Brustein, Dimonte & Lizak, LLC, Park Ridge, IL, for Plaintiff.

James A. Young, James A. Young & Associates, Ltd., Elgin, IL, Richard G. Larsen, Myler, Ruddy & McTavish, Aurora, IL, for Defendants.

MEMORANDUM OPINION

MANUEL BARBOSA, Bankruptcy Judge.

This matter comes before the Court on the objections to discharge filed by plaintiffs Marco J. Muscarello, individually and Marco J. Muscarello, derivatively on behalf of Eldercare Risk Management, Inc., ("Plaintiffs"), pursuant to 11 U.S.C. § 523(a)(4), (a)(6), on August 14, 2007. Counsel for debtors Richard Blackburn and Victoria Blackburn ("Debtors") and Debtors' valuation expert filed motions for compensation for post-petition services in representation of Debtors in their adversary trial. For the reasons set forth herein, the Court sustains Plaintiffs' objections to discharge under § 523(a)(6) in Counts I and IV, and overrules Plaintiffs' objections to discharge under § 523(a)(4) in Counts II, III and V. Plaintiffs' compensatory damages are $385,638.04. In addition, Debtors' attorneys and valuation expert shall be afforded a priority Chapter 7 administrative claim, pursuant to 11 U.S.C. §§ 503(b)(2), 507(a)(2), 726(a)(1), but Debtors' attorneys and valuation expert are not entitled to immediate payment of their administrative claim, and, instead, shall be paid by the Chapter 7 trustee, pursuant to 11 U.S.C. § 726(a)(1).

JURISDICTION AND PROCEDURE

The Court has jurisdiction to decide these matters pursuant to 28 U.S.C. § 1334 and Internal Operating Procedure 15(a) of the United States District Court for the Northern District of Illinois. They are core proceedings pursuant to 28 U.S.C. § 157(b)(2)(J).

FACTS AND BACKGROUND

The following facts are taken from plaintiffs' Marco J. Muscarello, individually and Marco J. Muscarello, derivatively on behalf of Eldercare Risk Management, Inc. ("ECRM"), adversary complaint and from all public records and proceedings to which the parties refer. Many of the facts alleged in the complaint, which were admitted in the answer, are uncontested.

Debtors Richard Blackburn and Victoria Blackburn ("Debtors") filed a voluntary Chapter 13 bankruptcy petition on April 3, 2007. The meeting of creditors, pursuant to 11 U.S.C. § 341, was held on May 2, 2007 and objections to discharge were due by July 2, 2007, which was subsequently extended to August 17, 2007 by the Court's order. Plaintiffs served subpoenas to third-parties, accountants Charles J. Motl & Associates and attorney Thomas Young, as well as LegalZoom.com, Inc. for examination and documents, pursuant to Bankruptcy Rule 2004, and, in orders dated May 24, 2007, the Court granted Plaintiffs request for Rule 2004 discovery.

On August 14, 2007, Plaintiffs filed adversary complaint number 07-A-00796 to object to Debtors' discharge under five counts, pursuant to 11 U.S.C. §§ 523(a)(4), (a)(6). In Count I, Muscarello, acting derivatively on behalf of ECRM, sought recovery of a non-dischargeable judgment against Debtors, pursuant to section 523(a)(6), for willful and malicious injury to property. In Count II, Muscarello, acting derivatively on behalf of ECRM, sought recovery of a non-dischargeable judgment against Debtors, pursuant to section 523(a)(4), for fraud or defalcation while acting in a fiduciary capacity. In Count III, Muscarello, acting derivatively on behalf of ECRM, sought recovery of a non-dischargeable judgment against Debtors, pursuant to section 523(a)(4) for larceny. In Count IV, Muscarello, acting individually, sought recovery of a nondischargeable judgment against Debtors, pursuant to section 523(a)(6), for willful and malicious injury to property. In Count V, Muscarello, acting individually, sought recovery of a nondischargeable judgment against Debtors, pursuant to section 523(a)(4), for fraud and defalcation while acting in a fiduciary capacity. Debtors filed an answer on October 5, 2007.

Debtors' modified Chapter 13 plan, filed September 6, 2007, was confirmed on September 10, 2007 and provided 100% payments to unsecured creditors over sixty (60) months. The order dated September 10, 2007 that confirmed Debtors' plan was vacated on September 20, 2007.

Regarding Plaintiffs' § 523 adversary complaint, the Court conducted a trial on March 10, 11, 12 and 16, 2009. On May 11, 2009, Debtors' attorneys, Myler, Ruddy & McTavish, and Debtors' valuation expert, James D. Keith, sought compensation for post-petition services in their representation of Debtors in their adversary trial as well as for priority cost of administrative claim, pursuant to 11 U.S.C. §§ 330, 503, 507. Debtors subsequently filed a motion to voluntary convert to Chapter 7 on May 13, 2009.

A little background is in order. In 1994, Debtor Richard Blackburn ("Blackburn") was a senior health care consultant at CNA insurance for approximately four years providing risk management consulting to long-term care nursing home accounts, (Blackburn Test., Tr. 3/10/09, 102-03), but CNA terminated his employment in November 1998 as part of an internal downsizing of Blackburn's department. (Stipulation of Facts ("Stip") No. 3) Blackburn then created Eldercare Risk Management, Inc. ("ECRM"), which was originally organized as an Illinois corporation in November 1998. (Stip No. 1) Initially, the corporation was called Windy Park Associates, Inc., (Stip No. 1), and Blackburn was the sole shareholder, director, and officer of Windy Park Associates, Inc. when he was issued 1,000 shares of common stock. (Stip No. 2) The services performed by ECRM were similar to the consulting services which Blackburn performed while at CNA. (Blackburn Test., Tr. 3/10/09, 102-103)

Plaintiff Mark Muscarello ("Muscarello") is both an attorney licensed to practice law and a licensed certified public accountant ("CPA") in the State of Illinois, but he retired from the active practice of law in 2001. (Stip No. 4) Blackburn's former domestic relations' attorney, Thomas Young, referred him to his law partner, Muscarello, who was the partner within the law firm that handled business matters. (Young Test., Tr. 3/11/09, 83-84) Muscarello was the attorney that prepared the organizational documents for Windy Park Associates, Inc. (Stip No. 5).

Shortly after the organization of Windy Park Associates, Inc., Blackburn and Muscarello reached an agreement which provided, among other things, that Muscarello would pay $2,000 for one-third of the issued and outstanding common shares of Windy Park Associates, Inc. (Stip No. 6) On January 29, 1999, Windy Park Associates, Inc., filed Articles of Amendment to change the corporation name to Eldercare Risk Management, Inc. and increase the number of issued and authorized shares to 3,000, (Stip No. 7) On January 13, 1999, Richard Blackburn, as sole shareholder and director of Windy Park Associates, Inc., caused the by laws of the corporation to be amended to increase the number of directors to two persons, Muscarello and Blackburn. (Stip No. 8) No other person has served as an ECRM director at any time since January 13, 1999. (Stip No. 9) In a memorandum labeled "Directors Action" and dated December 27, 1999, Muscarello and Blackburn agreed to set Blackburn's annual salary at $50,000 beginning in 2000 and Muscarello's salary at $25,000 per year beginning when ECRM generated sufficient income to pay Muscarello's salary. (Pl.'s Ex. 1)

In November 2000, Blackburn asked Muscarello for additional funding for ECRM to meet its working capital needs. (Blackburn Test., Tr. 3/12/09, 68-69) Muscarello sought 50% ownership of the company in return for advancing $10,000 to ECRM from his wife's account. (Muscarello Test., Tr. 3/10/09, 32-33; Pl.'s Ex. 2; Blackburn Test., Tr. 3/12/09, 68-69, 98) In November 2000, Muscarello's wife, Patricia Muscarello, issued a check drawn upon her Merrill Lynch brokerage account payable to ECRM in the amount of $10,000, (Stip No. 15), and, although Blackburn claimed he was shocked by Muscarello's request for an increase in his percentage ownership of ECRM, he accepted the check; did not voice any objection to Muscarello becoming a 50% owner; and signed tax returns from 2001 through 2007 that showed Muscarello as the owner of 50% of the shares of ECRM. (Blackburn Test., Tr. 3/12/09, 46-47; PL's Exs. 5-10) Muscarello prepared ECRM's tax returns from 2000 through 2003, (Stip No. 13), while Charles Motl prepared the tax returns for ECRM for 2004, 2005, and 2006. (Stip No. 14) From the commencement of the engagement of his accounting firm, Motl understood that Muscarello was the owner of 50% of the shares of ECRM. (Motl Test., Tr, 3/10/09, 192) Moreover, Blackburn signed ECRM's 2004 through 2006 tax returns that indicated that both he and Muscarello owned 50% of the shares. (Plaintiffs Exs. 7-9)

Between 2001 and 2002, Muscarello and Blackburn had discussions about Muscarello further assisting ECRM in obtaining a line of credit from Amcore Bank for $25,000 which was eventually guaranteed by Muscarello. (Blackburn Test., Tr. 3/12/09, 79) According to Muscarello, in exchange for providing additional funding for ECRM to obtain financing, Muscarello and Blackburn, on behalf of ECRM, allegedly agreed to the "Ten Percent Agreement" which had the following elements:

A. Muscarello would sign the guaranty of the line of credit loan from Amcore Bank to ECRM;

B, Muscarello would relinquish whatever right he had to control the fiscal matters of ECRM and cede total control of...