In re Menendez
| Decision Date | 01 December 1989 |
| Docket Number | Bankruptcy No. 89-13394-BKC-SMW,Adv. No. 89-0480-BKC-SMW-A. |
| Parties | In re Oviedo T. MENENDEZ and Gladys Menendez, Debtors. Robert T. WRIGHT, Jr., as Trustee, Plaintiff, v. Oviedo T. MENENDEZ and Gladys F. Menendez, Defendants. |
| Court | U.S. Bankruptcy Court — Southern District of Florida |
Lynn M. Harris, Mershon, Sawyer, Johnston, Dunwody & Cole, Miami, Fla., for plaintiff.
Edward Waldron, Coral Gables, Fla., for defendants.
FINDINGS OF FACT AND CONCLUSIONS OF LAW
THIS CAUSE came before the Court on November 14, 1989 upon a complaint to determine the dischargeability of a debt filed by plaintiff, Robert T. Wright, Jr., as trustee for Mershon, Sawyer, Johnston, Dunwody & Cole ("Trustee Wright") against the debtors Oviedo T. Menendez and Gladys F. Menendez, his wife (the "debtors"). The Court having heard the testimony, examined the evidence presented, observed the candor and demeanor of the witnesses and being otherwise fully advised in the premises, does hereby make the following findings of fact and conclusions of law.
This is an adversary proceeding brought pursuant to 11 U.S.C. § 523(a)(4) to except from discharge the debt owed by defendants to plaintiffs. This Court has jurisdiction over this proceeding pursuant to 28 U.S.C. §§ 1334 and 157(a) and (b). The Court finds that the subject matter of the complaint is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I).
The facts giving rise to the complaint are largely undisputed. In March, 1981 the debtors acquired all of the outstanding stock of Waterway Estates, Inc. ("Waterway"). The debtors were the only officers, directors and shareholders of Waterway from March, 1981 until the corporation was dissolved in 1985. Waterway's only asset was a parcel of real estate (the "Cocoplum property"). The primary purpose of Waterway was to build a residence on the Cocoplum property in which the debtors intended to reside. The construction of the house was funded by a loan from Ocean Bank which held a first mortgage on the Cocoplum property.
On December 1, 1981, David Topp instituted a state court lawsuit against Arvida Corporation and other defendants in Dade County, Florida (the "Topp case"). As part of Arvida's response to the Topp complaint, Arvida asserted a crossclaim and filed a third party complaint against Waterway seeking indemnification from Waterway for any loss Arvida might suffer as a result of Topp's claims. On April 26, 1985, the Topp court found in favor of Arvida on Arvida's indemnity claims against Waterway for a total amount of $72,365.52 plus interest, costs and reasonable attorneys' fees. Subsequently, the Topp court ordered Waterway to indemnify Arvida for costs totaling $2,266.04 and attorneys' fees totaling $39,000.00.
In April of 1985 debtor Oviedo Menendez entered into a business venture with his brother-in-law, Jose Vazquez Blanco to construct a housing development in Venezuela. In connection with the business transaction, on April 22, 1985 a "Joint Venture Agreement" was executed by debtor Oviedo Menendez in his individual capacity. The terms of the joint venture agreement provided that Mr. Menendez would receive a 50% interest in the investment and the proceeds derived therefrom in exchange for his promise to pay $500,000.00 to Mr. Blanco as his initial contribution. At the time of the transaction Mr. Menendez did not have $500,000.00 to contribute and Mr. Blanco agreed to lend that sum to Mr. Menendez. To provide security for Mr. Menendez's personal obligation to Mr. Blanco, on May 1, 1985 the debtors, as officers of Waterway, caused a second mortgage to be placed on Waterway's primary asset, the Cocoplum property. In 1987, the housing development venture began experiencing financial difficulties and subsequently failed leaving Mr. Menendez liable to Mr. Blanco for $500,000.00.
On or about September 9, 1985, the debtors caused Waterway to be dissolved. Although the Articles of Dissolution represented that all obligations of Waterway were paid, the judgment debt to Arvida remained unsatisfied. On October 9, 1985, Oviedo Menendez conveyed title to the Cocoplum property by quit claim deed from Waterway to himself and Gladys Menendez, individually.
Subsequently, on September 4, 1987, the debtors conveyed title to the Cocoplum property by general warranty deed to the Timon Corporation, for $850,000.00. As a result of the sale of the Cocoplum property to Timon Corporation, Inc., Mr. Blanco received $175,000.00 and released his mortgage. The debtors received $75,000.00. The debtors did not utilize the $75,000.00 to satisfy the debts due to Waterway's creditors, but instead, satisfied their own personal obligations.
On June 23, 1988 Arvida assigned to Arvida/JMB Partners all of Arvida's right title and interest in the judgments and orders entered against Waterway and in favor of Arvida in the Topp case. On September 30, 1988, Arvida/JMB Partners assigned its interest in the judgments to the law firm of Mershon, Sawyer, Johnston, Dunwody & Cole ("Mershon") for which Wright is acting as trustee.
On July 7, 1989 Oviedo T. Menendez and Gladys F. Menendez, his wife, filed a voluntary petition for relief under Chapter 7 of Title 11 of the Bankruptcy Code. Trustee Wright filed this adversary complaint on October 13, 1989 seeking a determination of the dischargeability of the debt owed to Mershon, Sawyer, Johnston, Dunwody & Cole by the debtors.
The Court finds that pursuant to 11 U.S.C. § 523(a)(4) that the debtors committed fraud or defalcation while acting in a fiduciary duty and therefore the debt to Trustee Wright is nondischargeable. To except an obligation from discharge under 11 U.S.C. § 523(a)(4) a plaintiff must prove:
The Court finds the above-stated elements to be present in the instant case as explained in the following legal discussion.
Section 523(a)(4) provides that a debtor will not be discharged from any debt "for fraud or defalcation while acting in a fiduciary capacity. . . ." In interpreting the language of 11 U.S.C. § 523(a)(4), courts have held that the fiduciary capacity must arise from an "express or technical trust." Davis v. Aetna Acceptance Corp., 293 U.S. 328, 55 S.Ct. 151, 79 L.Ed. 393 (1934).
This court has previously held that "in defining `fiduciary capacity' as it applies to § 523(a)(4) . . . a state statute can create the necessary fiduciary status." Federal Ins. Co. v. Feldman (In re Feldman), 85 B.R. 163, 164 (Bankr.S.D.Fla.1988). See also, Intercontinental Life Ins. Co. v. Good (In the Matter of Good), 33 B.R. 163 (Bankr.M.D.Fla.1983). In Feldman, this court found that the Florida statute governing the handling of insurance premiums collected by an agent from insureds creates the "express or technical" trust required by 11 U.S.C. § 523(a)(4). 85 B.R. at 164.
The Court finds that Section 607.301 of the Florida Statutes creates the necessary "express or technical" trust required in an action under 11 U.S.C. § 523(a)(4). Fla. Stat. § 607.301 provides in pertinent part:
This statute specifically provides for the creation of a trust with a res consisting of the dissolved corporation's property or proceeds derived therefrom and imposes a duty upon the trustees to distribute the proceeds of the corporate assets to the creditors of the corporation.
The debtors argue that Fla.Stat. § 607.301 does not create an express or technical trust pursuant to 11 U.S.C. § 523(a)(4) in that the statute does not specifically require the segregation of funds into a trust account. The Court finds no merit in this argument for two reasons. First, segregation of the funds is not a mandatory element for an express trust to exist. Ford Motor Credit Co. v. Hickey, (In re Hickey), 41 B.R. 601 (Bankr.S.D.Fla. 1984). Second, even if segregation of the trust assets was required, Fla.Stat. § 607.301 specifies that after dissolution of a corporation any corporate assets remaining are to be held by the trustees for distribution to creditors. Although the language of the statute does not include the word "segregation," the language contemplates a trust consisting solely of property of the dissolved corporation. Therefore, the Court finds that the statutory trust created by Fla.Stat. § 607.301 fulfills the requirement under 11 U.S.C. § 523(a)(4) that there be an "express or technical" trust creating the fiduciary capacity.
The second element of an 11 U.S.C. § 523(a)(4) action that the debtors must have committed a fraud or defalcation is also satisfied. This Court has determined that "defalcation is the slightest misconduct and it need not be intentional conduct; negligence or ignorance may be `defalcation'." Morales v. Codias (In re Codias), 78 B.R. 344, 346 (Bankr.S.D.Fla.1987). The Sixth Circuit has held that "creating a debt by breaching a fiduciary duty is a sufficiently bad act to invoke Section 17(a)(4) exception even without a known subjective...
To continue reading
Request your trial