In re Steele

• Citation: 292 B.R. 422
• Decision Date: 24 April 2003
• Docket Number: Bankruptcy No. 02-10052 SBB.,Adversary No. 02-1161 HRT.
• Parties: In re Robert M. STEELE, Debtor. Edward J. Horejs, Plaintiff, v. Robert M. Steele, Defendant.
• Court: United States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — District of Colorado

292 B.R. 422

In re Robert M. STEELE, Debtor.

Edward J. Horejs, Plaintiff, v. Robert M. Steele, Defendant.

Bankruptcy No. 02-10052 SBB.

Adversary No. 02-1161 HRT.

United States Bankruptcy Court, D. Colorado.

April 24, 2003.

COPYRIGHT MATERIAL OMITTED

William G. Horlbeck, F. Kelly Smith, Denver, CO, for defendant.

Deanna L. Westfall, Denver, CO, for plaintiff.

ORDER DENYING PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT AND GRANTING DEFENDANT'S MOTION FOR SUMMARY JUDGMENT

HOWARD R. TALLMAN, Bankruptcy Judge.

This case comes before the court on cross motions for summary judgment. The Court will deny the motion filed by the Plaintiff, Mr. Horejs, but will grant the motion filed by the Defendant Mr. Steele. For the reasons which follow, the Court holds that, as a matter of law, the relationship of corporate director to individual shareholder in a closely held corporation is not sufficient to make the director a fiduciary of a technical trust such that he is exposed to liability under 11 U.S.C. § 523(a)(4) for a breach of those fiduciary duties.

Fed.R.Civ.P. 56 as applied to bankruptcy cases by Fed. R. Bankr.P. 7056 dictates the standard which this Court must use in ruling a motion for summary judgment. Summary judgment is proper only "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56. This Court exercises great circumspection in the granting of a motion for summary judgment. There should always be a natural preference for allowing the parties to proceed to a trial on the merits where there is any factual matter subject to a bona fide dispute which bears on the ultimate resolution of the controversy. Associated Press v. U.S., 326 U.S. 1, 6, 65 S.Ct. 1416, 1418, 89 L.Ed. 2013 (1945) ("Rule 56 should be cautiously invoked to the end that parties may always be afforded a trial where there is a bona fide dispute of facts between them"). "Where it appears however that there is no genuine issue as to any material fact upon which the outcome of the litigation turns, the case is appropriate for disposition by summary judgment and it becomes the duty of the court to enter such judgment." Whelan v. New Mexico Western Oil and Gas Company, 226 F.2d 156, 159 (10th Cir.1955).

The standard of proof in dischargeability matters under 11 U.S.C. § 523 is the preponderance of the evidence standard. Grogan v. Garner, 498 U.S. 279, 286, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). Furthermore, "exceptions to discharge are to be narrowly construed, and because of the fresh start objectives of bankruptcy, doubt is to be resolved in the debtor's favor." Cundy v. Woods (In re Woods), 284 B.R. 282, 288 (D.Colo.2001) (citing Bellco First Federal Credit Union v. Kaspar (In re Kaspar), 125 F.3d 1358, 1361 (10th Cir.1997)).

I. FACTS¹

Prior to March 1992, Plaintiff Horejs was the sole shareholder, and he and his wife were the officers and directors, of a corporation named Northern Pharmacies at Steele's Inc. ("Northern"). In August of 1991, a new corporation was formed named Steele's Pharmacies, Inc. ("Steele's Pharmacies"). Horejs was named a director of that corporation along with Defendant Steele and a third party, Russell K. Kates. Horejs, Steele and Kates were elected officers of Steele's Pharmacies at the first board meeting in March of 1992. Two thirds of Steele's Pharmacies corporate stock was issued to Steele's Markets, Inc. ("Steele's Markets") and one third of Steele's Pharmacies corporate stock was issued to Horejs as consideration for the sale of his interest in Northern to Steele's Pharmacies. In conjunction with the sale of Horejs' interest in Northern to Steele's Pharmacies, Horejs was employed by Steele's Pharmacies to manage the pharmacies which it owned and operated. In addition to that, Horejs entered into a buy-sell agreement with Steele's Pharmacies which required Steele's Pharmacies to purchase all of the shares of a terminated shareholder within 30 days following the shareholder's termination.

After the formation of Steele's Pharmacies, Inc., and before the first board meeting, Steele and Kates signed a purported corporate resolution giving them the authority to execute notes and to enter into security agreements encumbering the assets of Steele's Pharmacies. The resolution was not voted on by the full board of Steele's Pharmacies and was not a topic of discussion or action at any board meeting. Horejs was unaware of this resolution at the time of its execution. In 1998 or 1999, Steele and Kates gave personal guarantees to Nash Finch Co. in connection with a loan made to Steele's Markets. Steele and Kates also pledged the assets of Steele's Pharmacies to secure the loan made to Steele's Markets. There is no record of a board meeting of Steele's Pharmacies to approve the encumbrance of its assets and it appears that Horejs was unaware that the assets of Steele's Pharmacies had been encumbered for that purpose.

Despite being an officer, shareholder and manager of Steele's Pharmacies, Horejs was generally excluded from the decision making process in the operation of Steele's Pharmacies. Decisions as central to the operation of Steele's Pharmacies as the bulk purchase of inventory of other pharmacies were voted on by the board of Steele's Markets, as if the same board of directors controlled both corporations. It appears that Steele and Steele's Markets generally treated Steele's Pharmacies as if it were simply a part of Steele's Markets and as if its assets were part of the assets of Steele's Markets. There seems to have been little or no effort on the part of Steele and Steele's Markets to observe the separate corporate identity of Steele's Pharmacies.

On February 4, 2001, Horejs employment with Steele's Pharmacies was terminated. Steele's Pharmacies did not perform on its obligation under the buy-sell agreement to repurchase Horejs stock upon the termination of his employment.

In April of 2001, Steele's Pharmacies sold three of its operating pharmacies to Professional Pharmacy Services. As part of the asset purchase agreement for that transaction, Steele's Pharmacies reaffirmed the security agreement to Nash Finch, Co. It appears that no meeting of the board of directors was held by Steele's Pharmacies to approve the sale or the contents of the asset purchase agreement prior to the consummation of the sale. Although a special meeting of the Steele's Pharmacies board was called three months after the sale, in June of 2001, for the purpose of ratifying the sale, the sale was never ratified by the Steele's Pharmacies board of directors. The full proceeds of the sale of Steele's Pharmacies went to secured creditors McKesson HBOC, Inc., and Nash Finch Co. None of the proceeds stayed with Steele's Pharmacies. Nash Finch was primarily a creditor of Steele's Markets. McKesson was the major pharmaceutical supplier to Steele's Pharmacies. At the time of the negotiation of the sale, the parties believed that McKesson's lien was superior to Nash Finch's lien, but due to a problem with McKesson's lien perfection, Nash Finch received the majority of sale proceeds. As the pharmacies sold were the only assets of Steele's Pharmacies that had substantial value, Horejs' stock in Steele's Pharmacies is now greatly devalued if not completely worthless.

The Court further notes that, in addition to Defendant's bankruptcy case, this business failure has spawned bankruptcy cases by Russell K. Kates and Carol A. Kates, (02-28379 DEC, filed November 12, 2002), and Steele's Markets, Inc. (01-11323 SBB, filed on February 8, 2001, as a Chapter 11 reorganization and converted to a Chapter 7 liquidation on November 15, 2001).

II. DISCUSSION

Plaintiff Horejs brought this action pursuant to 11 U.S.C. § 523(a)(4) in an effort to except from discharge a debt which he claims is owed to him by Defendant Steele. That section provides that:

(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt —

...

(4) for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny;

....

11 U.S.C. § 523(a)(4).

In order for Plaintiff to prevail on its motion for summary judgment, he needs to first demonstrate the existence of a relationship between Defendant Steele and Plaintiff Horejs such that Defendant owed Plaintiff a fiduciary duty that rises to the level which is necessary to find liability under 11 U.S.C. § 523(a)(4). If Plaintiff clears that hurdle, then he would have to show that a breach of that duty occurred which caused him damages.

Defendant's motion for summary judgment may be granted by showing, based on undisputed facts, either that there is no fiduciary duty running from a corporate director to an individual shareholder which is cognizable under 11 U.S.C. § 523(a)(4), or that, even if such duty exists, the duty was not breached or that Plaintiff suffered no damages resulting from any breach which may have occurred. The Court grants summary judgment in favor of Defendant because it is satisfied that the duties owed to an individual shareholder by a corporate director are not those of a fiduciary under an express trust or a technical trust which would be required for this Court to find liability under 11 U.S.C. § 523(a)(4).

The question of whether or not there is a § 523(a)(4) fiduciary relationship is a matter of federal law. Fowler Brothers v. Young (In re Young), 91 F.3d 1367, 1371 (10th Cir.1996). "Neither a general fiduciary duty of confidence, trust, loyalty, and good faith ... nor an inequality between the parties' knowledge or bargaining power ... is sufficient to establish a fiduciary relationship for purposes of dischargeability." Id. at 1372; see also, Upshur v. Briscoe, 138 U.S. 365, 375, 11 S.Ct. 313, 317, 34...