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 |
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.
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.
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
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
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
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) ...
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