LeCann v. Cobham (In re Cobham)

• Citation: 528 B.R. 283
• Decision Date: 18 March 2015
• Docket Number: CASE NO. 13–06340–8–SWH,ADVERSARY PROCEEDING NO. 14–00002–8–SWH–AP
• Court: U.S. Bankruptcy Court — Eastern District of North Carolina
• Parties: In re: Sharon J. Cobham, Debtor Nicole LeCann, D.D.S., et al., Plaintiffs, v. Sharon J. Cobham, Defendant.

528 B.R. 283

In re: Sharon J. Cobham, Debtor
Nicole LeCann, D.D.S., et al., Plaintiffs
v.
Sharon J. Cobham, Defendant.

CASE NO. 13–06340–8–SWH
ADVERSARY PROCEEDING NO. 14–00002–8–SWH–AP

United States Bankruptcy Court, E.D. North Carolina, Raleigh Division .

Signed March 18, 2015

528 B.R. 285

Robert E. Fields, III, Oak City Law LLP, Jason L. Hendren, Hendren & Malone, PLLC, Raleigh, NC, for Plaintiffs.

Erik M. Harvey, Liao Harvey, Winston–Salem, NC, for Defendant.

ORDER

Stephani W. Humrickhouse, United States Bankruptcy Judge

The matter before the court in this adversary proceeding is the Renewed Motion for Judgment on the Pleadings, filed by Nicole LeCann and Joint Entities LLC (collectively referred to as the “plaintiffs”), and the Motion for Summary Judgment, filed by Sharon J. Cobham (the “debtor”). A hearing was held on December 16, 2014, in Raleigh, North Carolina.

BACKGROUND

The debtor and LeCann practiced dentistry together through several professional corporations, including the Joint Entities, until 2010. The debtor served as president of the Joint Entities and was responsible for the overall direction and leadership of the entities, while LeCann assumed responsibility for daily accounting, reimbursements for services rendered and other details of daily operations. LeCann and the debtor each owned a fifty percent interest in each of the Joint Entities. In July 2010, LeCann filed suit on behalf of the Joint Entities in state court, asserting various derivative and individual causes of action against the debtor arising out of the debtor's alleged wrongful and self-dealing transfers of funds belonging to the Joint Entities. The lawsuit was transferred to the North Carolina Business Court, which dissolved the Joint Entities and appointed a receiver to operate them during the winding up process.

The North Carolina Business Court ultimately rendered a judgment in favor of LeCann on the derivative claims for breach of fiduciary duty and self-dealing and conflict-of-interest transactions, and additionally, awarded punitive damages on the breach of fiduciary duty claim. The Business Court based its ruling upon its finding that the debtor engaged in a “long series of complicated, wrongful, self-dealing transfers ... of funds belonging primarily to four of the Joint Entities.” The debtor did not appeal the judgment. No voluntary payments have been made by the debtor on the judgment.¹ On October 8, 2013, the debtor filed a petition for relief under chapter 7 of the U.S. Bankruptcy Code.

On January 6, 2014, the plaintiffs initiated this adversary proceeding seeking a determination by the court that the judgment debt is not dischargeable. The plaintiffs' amended complaint, filed on August 13, 2014, asserts three claims for relief: (1) the debt is nondischargeable under 11 U.S.C. § 523(a)(4) because the debtor's conduct constituted defalcation of her fiduciary obligations and fraud while acting in a fiduciary capacity; (2) the debt is nondischargeable under § 523(a)(4) because the debtor's conduct amounted to embezzlement or larceny; and (3) the debt is nondischargeable under § 523(a)(6) because it is for willful and malicious injury

528 B.R. 286

to the plaintiffs. On May 19, 2014, the plaintiffs filed their first Motion for Judgment on the Pleadings and brief in support thereof, and on September 2, 2014, filed their Renewed Motion for Judgment on the Pleadings and brief in support thereof, which incorporated their initial Motion and brief. The plaintiffs' motions for judgment on the pleadings assert that the Business Court's findings of law and fact underlying the judgment satisfy the elements required to establish nondischargeability under §§ 523(a)(4) and (a)(6), and as such, should be accorded collateral estoppel effect, thus entitling them to judgment on the pleadings on all of the claims in their complaint.

In response to the plaintiffs' motions for judgment on the pleadings, the debtor asserts that the requirements of § 523(a)(4) are not met because the plaintiffs do not allege a relationship that falls within the ambit of “fiduciary capacity,” thus precluding collateral estoppel. Further, the debtor argues that collateral estoppel does not apply to the plaintiffs' § 523(a)(4) argument because the Business Court's finding of constructive fraud was not actually litigated, that constructive fraud was not specifically plead by the plaintiffs and that the elements of constructive fraud do not mirror those of breach of fiduciary duty. The debtor also argues that the requirements of § 523(a)(4) are not met because the conclusions reached by the Business Court do not satisfy the elements of a federal embezzlement or larceny claim. Furthermore, the debtor contends that collateral estoppel likewise does not apply to the plaintiffs' § 523(a)(6) claim because the requirement of willful and malicious injury was not actually litigated in the state court action, and to the extent the factual findings address the debtor's intent to injure the plaintiffs, such findings were not necessary to the judgment. The same day that the plaintiffs filed their motion for judgment on the pleadings, the debtor filed a motion for summary judgment. The debtor's motion for summary judgment generally states that the plaintiffs cannot show the necessary elements of their causes of action under §§ 523(a)(4) and (a)(6) and that therefore, she is entitled to summary judgment.

DISCUSSION

When a court considers matters outside the pleadings in reaching a decision on a matter, a motion for judgment on the pleadings will be treated as a motion for summary judgment. Carolina Bank v. Chatham Station, Inc., 186 N.C.App. 424, 427, 651 S.E.2d 386, 388 (2007). The court has considered the parties' briefs and oral arguments in addition to the pleadings, and will thus treat their respective motions as competing motions for summary judgment. Id. “[S]ummary judgment is proper ‘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.’ ” Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). In making this determination, conflicts are resolved by viewing all facts and inferences to be drawn from the facts in the light most favorable to the non-moving party. U.S. v. Diebold, Inc., 369 U.S. 654, 655, 82 S.Ct. 993, 8 L.Ed.2d 176 (1962) (per curiam). Summary judgment is not a “disfavored...