In re Rajabali

• Decision Date: 22 March 2007
• Docket Number: Bankruptcy No. 05-48547.,Adversary No. 06-3439.
• Citation: 365 B.R. 702
• Parties: In re Karim A. RAJABALI, Debtor(s). Comerica Bank, Plaintiff(s) v. Karim A. Rajabali, Defendant(s).
• Court: U.S. Bankruptcy Court — Southern District of Texas

365 B.R. 702

In re Karim A. RAJABALI, Debtor(s).

Comerica Bank, Plaintiff(s) v. Karim A. Rajabali, Defendant(s).

Bankruptcy No. 05-48547.

Adversary No. 06-3439.

United States Bankruptcy Court, S.D. Texas, Houston Division.

March 22, 2007.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Michael J. Durrschmidt, Hirsch & Westheimer, Houston, TX, for Plaintiff.

Michael Glen Walker, Walker & Patterson, Houston, TX, for Defendant.

MEMORANDUM OPINION

MARVIN ISGUR, Bankruptcy Judge.

For the reasons set forth below, Plaintiffs motion for summary judgment is denied. This Court has jurisdiction of this proceeding pursuant to 28 U.S.C. §§ 1334 and 157. This is a core proceeding.

Background

On October 11, 2005, Karim A. Rajabali ("Debtor") filed for chapter 7 bankruptcy relief. Debtor owned 100% of and operated a company known as ASAP Enterprises Inc. d/b/a/ VIP cleaners ("ASAP").

Debtor, as President of ASAP, had executed a U.S. Small Business Administration Note ("Note") in favor of Comerica ("Plaintiff') in the amount of $350,000.00 on July 26, 2000. Contemporaneously with the Note, Debtor executed a Security Agreement whereby ASAP granted Comerica a continuing security interest in certain collateral to secure payment of the Note ("Security Agreement").¹ Debtor also executed a U.S. Small Business Administration Unconditional Guarantee, by which Debtor unconditionally guaranteed all amounts owning on the note. Payments were made on the Note until May 2005.

On February 28, 2005, Debtor executed an agreement to sell free and clear of all liens, pledges or encumbrances the furniture, fixtures and equipment, inventory, signs, goodwill and the name (VIP Cleaners) to GRY Enterprises. GRY Enterprises was to pay $50,000.00 as part of an earnest money contract. A balance of $340,000.00 was to be paid at closing on March 30, 2005. The Agreement was signed by Debtor for ASAP and by Ghulam Farooq ("Farooq") for GRY Enterprises ("GRY"). Money was never exchanged pursuant to this contract. Plaintiff, however, alleges that Debtor did transfer assets to Farooq.

On June 21, 2006, Plaintiff filed a complaint to determine dischargeability of debt under 11 U.S.C. §§ 523(a)(4) and (a)(6) alleging, inter alia, that Debtor committed fraud or defalcation while in a fiduciary capacity by secretly entering into the purchase and sales agreement with Farooq and that the alleged transfers of assets from the business was done willfully and maliciously. Plaintiff also seeks to bar discharge pursuant to 11 U.S.C. §§ 727(a)(3) and (a)(4)(A) based on Debtor's alleged failure to keep financial records and allegations of inconsistent statements during Debtor's testimony at the creditor's meeting, 2004 Examination and in representations in his bankruptcy schedules. Plaintiff now moves for summary judgment on the same.

Summary Judgment Standard

A party seeking summary judgment may demonstrate: (i) an absence of evidence to support the non-moving party's claims or (ii) the absence of a genuine issue of material fact. Warfield v. Byron, 436 F.3d 551, 557 (5th Cir.2006); Condrey v. SunTrust Bank of Ga., 429 F.3d 556, 562 (5th Cir.2005). Material facts are those that could affect the outcome of the action or could allow a reasonable fact finder to find in favor of the non-moving party. DIRECTV, Inc. v. Budden, 420 F.3d 521, 529 (5th Cir.2005).

The evidentiary support needed to meet the initial summary judgment burden depends on whether the movant bears the ultimate burden of proof at trial. At all times, a court views the facts in the light most favorable to the non-moving party. Rodriguez v. ConAgra Grocery Products, Co., 436 F.3d 468, 473 (5th Cir.2006). However, to weigh evidence would result in a credibility determination which is not part of the summary judgment analysis. Hunt v. Rapides Healthcare Sys., LLG, 277 F.3d 757, 762 (5th Cir.2001); See MAN Roland, Inc. v. Kreitz Motor Express, Inc., 438 F.3d 476, 478 (5th Cir. 2006). A court is not obligated to search the record for the non-moving party's evidence. Malacara v. Garber, 353 F.3d 393, 405 (5th Cir.2003).

If the movant bears the burden of proof, a successful motion must present evidence that would entitle the movant to judgment at trial. Hart v. Hairston, 343 F.3d 762, 764 (5th Cir.2003); Beck v. Tex. State Bd. of Dental Exam'rs, 204 F.3d 629, 633 (5th Cir.2000). Upon an adequate showing, the burden shifts to the non-moving party to establish a genuine issue of material fact. Warfield, 436 F.3d at 557. The non-moving party has a duty to respond with specific evidence demonstrating a triable issue of fact. Celotex Corp. v. Catrett, 477 U.S. 317, 324, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Wheeler v. BL Dev. Corp., 415 F.3d 399, 402 (5th Cir.2005). When identifying specific evidence in the record, the nonmovant must articulate how that evidence supports its position. Johnson v. Deep E. Texas Reg? Narcotics Trafficking Task Force, 379 F.3d 293, 301 (5th Cir.2004).

11 U.S.C. 523: Exceptions to Discharge

The discharge in bankruptcy is to protect the "honest but unfortunate debtor" and to give the debtor a fresh start. Grogan v. Garner, 498 U.S. 279, 287, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). There are several debts, however, that for public policy reasons are excepted from discharge. These debts include liabilities the debtor has incurred due to certain malfeasant activity. See Cohen v. de la Cruz., 523 U.S. 213, 222, 118 S.Ct. 1212, 140 L.Ed.2d 341 (1998). Congress has codified this principle in 11 U.S.C. § 523(a). Id. (quoting Grogan, 498 U.S. at 287, 111 S.Ct. 654) ("The various exceptions to discharge in § 523(a) reflect a conclusion on the part of Congress `that the creditors' interest in recovering full payment of debts in these categories outweight[s] the debtors' interests in a complete fresh start.'").

11 U.S.C. § 523(a)(4)

Section 523(a)(4) excepts from discharge any debts incurred due to "fraud or defalcation while acting in a fiduciary capacity." 11 U.S.C. § 523(a)(4). Debtor, as president of ASAP, owes a fiduciary duty to ASAP. "Corporate officers, owe fiduciary duties to the corporations they serve and they are without authority to act in any matter in which their interest are adverse to that of the corporation." 15 TEX. JUR.3D CORPORATIONS § 283 (2007) (citing Myer v. Cuevas, 119 S.W.3d 830 (Tex. App.-San Antonio 2003, no pet.); Pinnacle Data Services, Inc. v. Gillen, 104 S.W.3d 188 (Tex.App.-Texarkana 2003, pet. denied)). When a corporation becomes insolvent, creditors have a priority of distribution of the corporation's assets over that of shareholders. Accordingly, the officers and directors have a duty to preserve assets for the benefit of creditors. Fagan v. La Gloria Oil & Gas Co., 494 S.W.2d 624, 628 (Tex.Civ.App.-Houston [14th Dist.] 1973, no writ). The officers and directors maintain their fiduciary duties to the corporation. However, similar to a shareholder's ability to bring a derivative suit for violation of fiduciary duties, when a corporation is insolvent, the creditors may bring such a suit to hold the directors liable for a breach of their fiduciary duties. Id.

The effect of this ability of creditors to bring suits based on a breach of a fiduciary duty has prompted the Fifth Circuit to state that when the officers and directors of a corporation become aware that their corporation is insolvent or within the "zone of insolvency," fiduciary duties expand to creditors of the corporation. Carrieri v. Jobs.com Inc., 393 F.3d 508, 534, n. 24 (5th Cir.2004) (citing Weaver v. Kellogg, 216 B.R. 563, 583-84 (S.D.Tex. 1997)). Director's and officer's fiduciary duties are not directly to creditors; rather, when a corporation is insolvent, creditors have the ability to enforce such duties which continue to exist as to the corporation. See Floyd v. Hefner, No. H-03-5693, 2006 WL 2844245, at *10 (S.D.Tex. Sept.29, 2006)² (citing Fagan, 494 S.W.2d at 628).³

Plaintiff alleges that ASAP's insolvency occurred in December of 2003. By allegedly transferring assets of VIP Cleaners and by allegedly secretly entering into the purchase and sale agreement, Plaintiff argues that Debtor breached his fiduciary duties to Plaintiff. As a necessity for Plaintiff to support its claim, it must demonstrate that Debtor did, in fact, owe a fiduciary duty to Plaintiff. To show that Debtor owed such a duty, Plaintiff must first demonstrate that ASAP was insolvent.

The Texas Business Corporation Act lists six factors that may be considered in determining if a corporation is insolvent. TEX. Bus. CORP. Act ART. 2.38-3A (Vernon Supp.2004). Because of the use of "or" at the end of factor (5), these factors are to be considered as disjunctive, not conjunctive. Carrieri v. Jobs.com Inc., 393 F.3d 508, 532, n. 22 (5th Cir.2004) (citing Bruce v. First Fed. Say. and Loan Ass'n of Conroe, Inc., 837 F.2d 712, 715 (5th Cir.1988)).

The six insolvency factors that may be used are:

1. financial statements of the corporation, including subsidiaries, that present the financial condition of the corporation in accordance with the generally accepted accounting principles (GAAP);

2. financial statements prepared on the basis of accounting used to file the corporation's federal income tax return or any other reasonable ac counting practices;

3. financial information, including condensed financial statements prepared on a basis consistent with (1) and (2) above;

4. projection, forecast, or other forward looking information relating to the future economic performance, financial condition, or liquidity of the corporation that is reasonable in the circumstances;

5 a fair valuation or information from any other method that is reasonable in the circumstances; or

6. any combination of the statements, valuations, or information authorized by this section.

Id. (citing TEX. Bus. CORP. ACT. ART. 2.38-3A (Vernon Supp.2004)).⁴ The Court, however is not required to utilize these...