In re Towe

• Decision Date: 26 September 1994
• Docket Number: Bankruptcy No. 90-11685-7. Adv. No. 91/00166.
• Citation: 173 BR 217
• Parties: In re William Edward TOWE, a/k/a Edward Towe, Cora Florence Towe, a/k/a Florence Towe, Debtors. Craig D. MARTINSON, Trustee, and United States of America Internal Revenue Service, and Montana Department of Revenue, Intervenors, Plaintiffs, v. William Edward TOWE, a/k/a Edward Towe and Grant Investments Fund, a partnership, and Norma Gumpel, Lewis Rector and Nancy Brooks, Intervenors, Defendants.
• Court: U.S. Bankruptcy Court — District of Montana

173 B.R. 217 (1994)

In re William Edward TOWE, a/k/a Edward Towe, Cora Florence Towe, a/k/a Florence Towe, Debtors.

Craig D. MARTINSON, Trustee, and United States of America Internal Revenue Service, and Montana Department of Revenue, Intervenors, Plaintiffs, v. William Edward TOWE, a/k/a Edward Towe and Grant Investments Fund, a partnership, and Norma Gumpel, Lewis Rector and Nancy Brooks, Intervenors, Defendants.

Bankruptcy No. 90-11685-7. Adv. No. 91/00166.

United States Bankruptcy Court, D. Montana.

September 26, 1994.

Sherry Scheel Matteucci, U.S. Atty., D.Mont., Victoria L. Francis, Asst. U.S. Atty., Kirk C. Lusty, Eric M. Casper, Trial Attys., Tax Div., U.S. Dept. of Justice, Washington, DC, for plaintiffs Craig D. Martinson, U.S., I.R.S.

Paul Van Tricht, Dept. of Rev., Office of Legal Affairs, Helena, MT, for plaintiff Mont. Dept. of Revenue.

Carey Matovich, Billings, MT, for defendant William Towe.

Gerald Murphy, Moulton Law Firm, Billings, MT, for defendant Grant Inv. Fund.

James A. Patten, Billings, MT, for defendants Norma Gumpel, Lewis Rector, Nancy Brooks.

Thomas Towe, Billings, MT, for S.O. Tow Trust.

Gerald Murphy, Moulton Law Firm, Billings, MT, for TAFF, Heartland Trust, Lewis Rector Trust, Towe Farms, Inc., Towe Foundation.

ORDER

JOHN L. PETERSON, Bankruptcy Judge.

In this adversary proceeding, the Chapter 7 Trustee and Intervenors United States Internal Revenue Service (IRS), and Montana Department of Revenue (DOR), seek turnover of assets of the Defendant Grant Investments Fund (Grant), a partnership, on the grounds that Grant is the alter ego of the Debtor Edward Towe. Intervenors/Defendants Gumpel, Brooks, and Rector are investors and partners of Grant who oppose the turnover of such assets, contending first, with Grant and Towes, that the Trustee lacks standing to bring an alter ego claim; second, that the doctrine of collateral estoppel does not apply; and third, if the partnership entity is pierced, all investors of Grant are entitled to priority positions as creditors. Each of these arguments will be addressed in turn. The parties concede this is a core proceeding under 28 U.S.C. § 157(b)(2)(E), and that this Court has jurisdiction under 28 U.S.C. § 1334 and F.R.B.P. 7001.

A. TRUSTEE'S STANDING

The Defendants argue the Plaintiff Chapter 7 Trustee and the Intervenor Plaintiff lack standing in this case to "assert causes of action based on the alter ego theory," citing Williams v. California 1st Bank, 859 F.2d 664 (9th Cir.1988). Williams holds:

We agree with the Eighth Circuit that Congress\' express decision to overrule Caplin v. Marine Midland Grace Trust Co. of New York, 406 U.S. 416, 92 S.Ct. 1678, 32 L.Ed.2d 195 (1972) is "extremely noteworthy". In re Ozark Restaurant Equip. Co., 816 F.2d 1222 at 1228 8th Cir.1987. We also share that court\'s certitude that "Congress\' message is clear — no trustee, whether a reorganization trustee as in Caplin or a liquidation trustee, has power under . . . the Code to assert general causes of action, such as an alter ego claim, on behalf of the bankrupt estate\'s creditors." Id. (Emphasis added).

859 F.2d at 667.

The holding in Williams must be considered in light of the facts of that case where the Trustee attempted, through assignment, to bring actions personal to creditors on behalf of the estate. Williams holds the "Trustee lacked authority to bring suit on the claims." Id. In Williams, the Trustee, through assignments, was attempting to recover judgments on claims which were personal to each creditor, and which were not property of the bankruptcy estate. In that context, then, the holding is correct.

However, where the Chapter 7 Trustee seeks to recover assets of a debtor's estate through an alter ego action by piercing the corporate veil, the case law is consistent that the Trustee has standing. As explained in Koch Refining v. Farmers Union Central Exchange, Inc., 831 F.2d 1339, 1348-49 (7th Cir.1987):

However, the Trustee has no standing to bring personal claims of creditors. A cause of action is "personal" if the claimant himself is harmed and no other claimant or creditor has an interest in the cause. But allegations that could be asserted by any creditor could be brought by the trustee as a representative of all creditors. If the liability is to all creditors of the corporation without regard to the personal dealings between such officers and such creditors, it is a general claim. See 3A Fletcher Cyc Corp., §§ 1134, 1277.1 (rev.perm.ed. 1986).

Koch and other cases such as Matter of S.I. Acquisition, Inc., 817 F.2d 1142, 1153 (5th Cir.1987) rely on the "well-reasoned" approach of In re Western World Funding, Inc., 52 B.R. 743, 783 (Bankr.Nev.1985):

The debtor need not have even a claim of title at the time of bankruptcy, if a creditor could have nevertheless acquired a lien on the property. 4B Collier at 574. This expansion of the trustee\'s lien rights under the Act was carried over to the Code at § 544(a)(1). Its "plain and literal import" gives the trustee of a corporate debtor a lien on all the nonexempt property of directors, officers, and stockholders, under the same conditions that creditors might have reached that property. 4A Collier at 435 n. 41. Therefore, the trustee\'s alter ego claim may be construed as an action to establish the extent of his lien under § 544(a)(1), which the trustee certainly has standing to pursue.

The trustee\'s standing may also be based on 11 U.S.C. § 541 and § 704. The trustee has the duty to collect and reduce to money the property of the estate. § 704(1). Section 541(a)(1) provides that the estate is comprised of all legal and equitable interests of the debtor, including any chose in action which the debtor might have had against others. 4 Collier on Bankruptcy ¶ 541.01 (15th ed.). Under the Nevada alter ego doctrine, the corporation has, in some sense, an equitable interest in the assets of its alter ego, because the corporation and the alter ego are identical. The trustee brings the alter ego action to establish this identity. He certainly has standing to seek a declaratory judgment that certain assets are in equity, if not in law, assets of the estate, and thereby subject to his administration.

* * * * * *

In this state, the alter ego is not considered to be a "third party" to whom liability is shifted. In the seminal case of McCleary Cattle v. Sewell, the Nevada Supreme Court noted:

The creditors are not seeking to reach assets in the hands of a third party . . . or to substitute or add a new party to the old action. For the purposes of execution, the corporation and its alter ego are to be regarded as identical.

73 Nev. 279 at 282, 317 P.2d 957 1957. The Court of Appeals for the Ninth Circuit has followed this rationale in remarking that a bankruptcy trustee could be deemed to be in constructive possession of the defendant\'s assets "by a determination of alter ego, i.e., that the defendant and the bankrupt are pragmatically one and the same." Suhl v. Bumb, 348 F.2d 869 at 873 9th Cir.1965. Other courts have held that the assets of a debtor-corporation\'s alter ego are assets of the estate. See, e.g., Freehling v. Nielson (In re F & C Services, Inc.), 44 B.R. 863, 11 C.B.C.2d 1126, 1130 (Bankr.S.D.Fla.1984), and authorities cited therein. See also Sampsell v. Imperial Paper & Color Corp., 313 U.S. 215, 61 S.Ct. 904, 85 L.Ed. 1293 (1941).

As the Court in Western World Funding noted, under Nevada law the alter ego doctrine is an equitable remedy where the corporate entity is disregarded or pierced where (1) the corporation is influenced and governed by the person asserted to be its alter ego; (2) where there is such a unity of interest and ownership that one is inseparable from the other; and (3) that adherence to the fiction of separate entity of the corporation would sanction a fraud or promote injustice. 52 B.R. at 777. The Ninth Circuit Court of Appeals in Towe Antique Ford Foundation v. I.R.S., 999 F.2d 1387, 1391 (9th Cir.1993), citing Montana cases, cited two general factors which Montana courts consider in determining whether to disregard the separate identity of a corporation. First, the party seeking to pierce the corporate veil must show the corporation is the alter ego of the individual. Id. Second, there must be a showing that the corporation was used as a subterfuge to defeat public convenience, justify wrong or perpetrate fraud, keeping in mind that the alter ego doctrine is an equitable remedy to curb injustices resulting from the improper use of a corporate entity. Id. at 1391-92. The alter ego doctrines described in Western World Funding and Towe Antique Ford Foundation are thus very similar, if not identical. Indeed, one of the Montana cases cited in Towe Antique Ford, Meridian Minerals Co. v. Nicor Minerals, Inc., 228 Mont. 274, 742 P.2d 456, 462 (1987), cites and relies upon the Nevada case of Bonanza Hotel Gift Shop, Inc. v. Bonanza No. 2, (1979), 95 Nev. 463, 596 P.2d 227, 229, thereby indicating an approval of the Nevada alter ego doctrine.

I conclude, therefore, that the Trustee has standing to bring a claim for relief on the basis of the Montana alter ego doctrine. In fact, only the Trustee could prosecute such action to recover assets for the estate. In re Guyana Development Corp., 168 B.R. 892, 909 (Bankr.S.D.Tex.1994). (As a creditor, the IRS has no standing to allege an alter ego theory for the bankruptcy estate absent order of the court allowing the creditor to proceed in exceptional cases where the Trustee unjustifiably refuses to act). Therefore, if the Trustee likewise was prohibited from asserting the alter ego doctrine to prevent an injustice, the wrongdoer would escape unharmed to the detriment of the creditors. Accordingly, the Defendants' assertion the Trustee lacks standing to bring this action is without merit.

B. COLLATERAL ESTOPPEL

The doctrine of collateral estoppel was placed in issue by the Plaintiffs with the admission...