Larson v. Bayer (In re Bayer)

• Decision Date: 02 December 2014
• Docket Number: Bankruptcy No. 12–11083 ELF.,Adversary No. 12–0379 ELF.
• Citation: 521 B.R. 491
• Parties: In re Nicholas BAYER, Debtor. John Larson and Greg Bayer, Plaintiffs, v. Nicholas Bayer, Defendant.
• Court: U.S. Bankruptcy Court — Eastern District of Pennsylvania

521 B.R. 491

In re Nicholas BAYER, Debtor.John Larson and Greg Bayer, Plaintiffs

v.Nicholas Bayer, Defendant.

Bankruptcy No. 12–11083 ELF.

Adversary No. 12–0379 ELF.

United States Bankruptcy Court, E.D. Pennsylvania.

Signed Dec. 2, 2014.

Paul J. Winterhalter, Law Offices of Paul J. Winterhalter, P.C., Philadelphia, PA, for Debtor.

Michael P. Gigliotti, Cappio & Gigliotti, LLP, Philadelphia, PA, Robert D. Sweeney, Chicago, IL, for Plaintiffs.

OPINION

ERIC L. FRANK, Chief Judge.

I. INTRODUCTION

The dispute giving rise to this adversary proceeding stems from the sale of the assets of a start-up business, Saxby's Coffee, Inc. (“SCI”), to owners who subsequently operated the enterprise through a new entity, Saxby's Coffee Worldwide, LLC (“SCW”). The ill-fated transaction gave rise to much litigation¹ and several bankruptcy filings.²

The debtor in the above-captioned bankruptcy case, Nicholas Bayer (“N. Bayer”), was the officer/director (and shareholder) of SCI and the driving force behind the SCI–SCW transaction. He later became an officer of SCW. Plaintiffs John Larson (“Larson”) and Greg Bayer (“G. Bayer”) (Larson and G. Bayer collectively, “the Plaintiffs”), shareholders of SCI, claim that N. Bayer was motivated by a promised employment contract with SCW and that he breached his state law based fiduciary duty to SCI because the SCI–SCW transaction stripped SCI of all of its assets without any recompense to SCI (and its shareholders). In their capacity as shareholders of SCI, the Plaintiffs claim that SCI holds a nondischargeable claim against N. Bayer, primarily under § 523(a)(4), which excepts from a debtor's discharge any debt “for fraud or defalcation while acting in a fiduciary capacity.”

On the record presented, I find that N. Bayer was not a “fiduciary” to SCI (and indirectly, to its shareholders, including Larson and G. Bayer) as that term is used in 11 U.S.C. § 523(a)(4). Therefore, the Plaintiffs' § 523(a)(4) claim must fail. Further, as elaborated below, the Plaintiffs' remaining claims (under § 523(a)(2) and, possibly, § 523(a)(6) ) were waived or have no merit. Consequently, the Plaintiffs are not entitled to a determination of nondischargeability and judgment will be entered in N. Bayer's favor on all claims.

II. PROCEDURAL HISTORY

A. Adv. No. 12–0379

On February 6, 2012, N. Bayer filed a voluntary chapter 7 petition. The chapter 7 Trustee determined that this was a no-asset case. On May 10, 2012, the Plaintiffs timely filed this adversary proceeding against N. Bayer, seeking a determination that the claims they asserted in a pre-petition Illinois state court action are nondischargeable.³ In their Amended Complaint, the Plaintiffs asserted that the claims are nondischargeable under 11 U.S.C. §§ 523(a)(2) and 523(a)(4). (Doc. # 15).⁴

B. Adv. No. 12–0378

The Plaintiffs filed a similar adversary action against another debtor, Joseph Grasso (“Grasso”) arising from the same operative facts. See Adv. No. 12–0378. Grasso's main bankruptcy case is on the docket of my colleague, Hon. Magdeline D. Coleman. Grasso was one of the principals of SCW, the purchasing entity in the SCI–SCW transaction. Due to the common issues of fact with respect to Larson's and G. Bayer's claims against N. Bayer and their claims against Grasso, Judge Coleman assigned Adv. No. 12–0378 to my docket, where I consolidated the two (2) adversary proceedings for trial.⁵

C. The Consolidated Trial

On January 11, 2013, the parties filed their Joint Pretrial Statement. (Adv. No. 12–0379, Doc. # 22; Adv. No. 12–0378, Doc. # 18). With respect to N. Bayer, the Joint Pretrial Statement states, in Part IV: “Plaintiff merely seeks a determination as to whether the pending Illinois State Court Claim should be held nondischargeable under 11 U.S.C. § 523(a)(2) and/or § 523(a)(4).” (Adv. No. 12–0379, Doc. # 22).

I held a trial of the consolidated adversary proceedings on December 12 and 13, 2013. (Docket Entry No. 50).

One particular aspect of the trial requires mention. After the conclusion of the Plaintiffs' case-in-chief, the Defendants moved for a directed verdict. A lengthy colloquy ensued, during which I expressed the view that a claim under 11 U.S.C. § 523(a)(6) may have been tried by consent, see Fed.R.Civ.P. 15(b)(2). (2 N.T. at 20–21, 31–34, 54–58).⁶ While the discussion is not entirely clear on this point, my comments could be read broadly to refer to the Plaintiffs' claims against both N. Bayer and Grasso.

After the conclusion of the trial, the parties filed post-trial briefs, the last of which was filed May 15, 2014. (Doc. # 's 70, 71).⁷

III. FINDINGS OF FACT

1. In 2003, Plaintiffs Larson and G. Bayer started a chain of coffee shops through a corporation called Proven Record, Inc.⁸ and operated under the name “Saxby's Coffee.” (Joint Pretrial Statement ¶ II, 1.).

2. In August 2005, the Plaintiffs caused Proven Record to enter into a transaction with SCI, a Georgia corporation, pursuant to which Proven Record transferred all of its assets to SCI.

(Id. ¶ II, 2.; 1 N.T. at 156, 235).⁹

3. SCI was a coffeehouse franchisor, primarily marketing, selling and administering franchise agreements for the operation of retail coffee shops. (1 N.T. at 13–14, 157–58).

4. N. Bayer began working for SCI in August 2005 and also became a shareholder of the corporation. (Jt. Pt. Stmt.¶ II, 3.).

5. In mid-to-late 2006, John Larson resigned as the President and director of SCI. (Id. ¶ II, 4; 1 N.T. at 161).

6. G. Bayer also transitioned out of SCI around the same time as Larson, in mid-to-late 2006. (1 N.T. at 161).

7. In September 2006, N. Bayer became the President and sole director of SCI. (Id. at 11).

8. At that time, John Larson owned six (6) million shares of SCI (representing 24% of the shares), G. Bayer owned five (5) million shares (20%), and N. Bayer owned six (6) million shares (24%). (Ex. P–1; 1 N.T. at 12).

9. On September 13, 2006, Larson entered into an agreement with SCI (“the Separation Agreement”), which provided, inter alia :

a. that SCI would engage Larson as a consultant and remit biweekly payments of approximately $5,200.00;

b. SCI would have the option to purchase Larson's shares for a period of time and subsequently would have the right of first refusal in the event that Larson chose to dispose of his shares;

c. N. Bayer was granted an irrevocable proxy to vote Larson's 6 million shares of SCI.

(Ex. P–1; Jt. Pt. Stmt. ¶ II, 5.).

10. SCI made several of the biweekly payments required by the Separation Agreement, but defaulted on its payment obligation in late 2006. (1 N.T. at 123–124, 206–207).

11. Between September 2006 and June 2007, several shareholders were issued new or additional shares in SCI:

Shareholder	Number of Shares in 9/2006	Number of Shares in 6/2007
Lin Bayer	17,500	500,000
David Lee	17,750	1,000,000
Dave Bayer	0	500,000
Shane Reinhart	0	500,000

(2 N.T. at 113–114; Ex. P–1).¹⁰

12. Thereafter, SCI entered into negotiations with Joseph Grasso (“Grasso”) and Kevin Meakim (“Meakim”) to invest in SCI. (1 N.T. at 22).

13. N. Bayer originally attempted to negotiate a deal in which Grasso and Meakim would both infuse capital into SCI as well as buy out the shares of the Plaintiffs. (1 N.T. 83, 106).¹¹

14. Over time, the structure of Grasso and Meakim's potential investment in SCI transitioned from an equity investment and stock purchase transaction to an asset purchase transaction. (See Ex. P–11).

15. On June 4, 2007, SCI sent a notice to its shareholders informing them of a special shareholder meeting scheduled for June 14, 2007 to vote on the sale of SCI's assets to Grasso and Meakim. (Ex. P–4; 1 N.T. at 180).¹²

16. On June 11, 2007, Larson informed N. Bayer that he was revoking his voting proxy in light of SCI's missed payments and other alleged breaches of the Separation Agreement. (See Ex. P–5, P–6).

17. At the June 14, 2007 shareholder meeting, G. Bayer asserted that he owned Larson's six (6) million shares of SCI. (1 N.T. at 180, 221).¹³

18. At the shareholder meeting, N. Bayer invoked the Larson voting proxy and voted to approve an asset sale to Grasso and Meakim and the sale was approved. (1 N.T. at 126; Jt. Pt. Stmt. ¶ II, 7.).

19. The ultimate reason for N. Bayer's support of the asset sale to Grasso and Meakim was SCI's cash poor position, its inability to pay its debts as they fell due (including its own payroll) and the substantial delinquencies it owed to many creditors, including Larson and the Internal Revenue Service for trust fund taxes. (1 N.T. at 171–72, 175–76).¹⁴

20. On July 20, 2007, SCI executed a written Asset Purchase Agreement with Saxby's Coffee Worldwide, LLC (“SCW”), a new entity formed and owned by Grasso and Meakim. (Ex. P–11).

21. After the sale of assets to SCW, N. Bayer became the President and CEO of SCW. (1 N.T. at 42).

22. In 2007, the Plaintiffs sued inter alia, N. Bayer and Grasso in Illinois State Court raising, inter alia, the claims described in note 4, supra.

IV. LEGAL STANDARDS—GENERALLY

A. Dischargeability—11 U.S.C. § 523(a)

The Bankruptcy Code seeks to promote two core policies: providing debtors with a fresh start and maximizing the equitable distribution of property to creditors. See, e.g., In re WR Grace & Co., 729 F.3d 332, 346 (3d Cir.2013). However, the fresh start policy has certain limitations; not all debts are dischargeable. Based on various competing policy concerns, see, e.g., In re Janc, 251 B.R. 525, 543–44 (Bankr.W.D.Mo.2000), Congress has carved out express, statutory exceptions to the discharge. See 11 U.S.C. § 523(a). These exceptions are construed strictly against creditors and liberally in favor of debtors. E.g., In re Cohn, 54 F.3d 1108, 1113 (3d Cir.1995) ; In re Vidal, 2012 WL 3907847, at *15 (Bankr.E.D.Pa. Sept. 7, 2012).

Generally speaking, for a debt to be nondischargeable under § 523(a), the plaintiff must establish two (2) elements. The debt itself must be valid and the debt must satisfy all of the requirements of one of the subsections of § 523(a). See In re August, 448 B.R. 331, 346–47 (Bank.E.D.Pa.2011)...