Shrock v. Meier (In re Meier)
| Decision Date | 11 October 2016 |
| Docket Number | Bankruptcy No. 14-bk-10105,Adversary No. 15-ap-00198,Adversary No. 14-ap-00403 |
| Parties | In re: Robert J. Meier, Debtor. Edward Shrock, Plaintiff v. Robert J. Meier, Defendant. Baby Supermall LLC Plaintiff v. Robert J. Meier, Defendant. |
| Court | U.S. Bankruptcy Court — Northern District of Illinois |
(Consolidated for trial)
Plaintiffs Edward Shrock ("Shrock") and Baby SuperMall LLC ("BSM") brought separate adversary proceedings against the debtor in a Chapter 7 bankruptcy case, Robert J. Meier ("Meier"), in order to determine the dischargeability of the debt owed to each by Meier. The debts alleged stem from common facts pertaining to a period of time when Meier, as managing member of BSM, is claimed to have authorized or directed actions that violated his fiduciary obligations to Shrock, then BSM's minority nonmanaging member, and to BSM. The debts owed to each are alleged to be nondischargeable pursuant to 11 U.S.C. §§ 523(a)(2), (a)(4) and (a)(6). While trial was proceeding in these adversary proceedings, a judgment was entered in state court relating to the same factual matter. The Plaintiffs here then moved for summary judgment.
Shrock's adversary complaint here relies, in part, on findings made in a jury verdict against Meier in state court for violating his fiduciary obligations to Shrock and assessing punitive damages against Meier for such violations. The state court action was pending when the bankruptcy case was filed, and the stay was lifted to allow the state court to make final determination as to liability following the jury verdict. BSM's adversary complaint, in turn, seeks an independent determination that a nondischargeable debt is due to it. BSM seeks to determine Meier's liability for damages on the basis of three theories: breach of fiduciary duty, fraud, and conversion. After judgment for punitive and compensatory damages was entered in the state court action against Meier for violating his fiduciary duties to Shrock, leave to file motions for summary judgment was sought and granted. The trial in the above captioned adversaries was then suspended.
In moving for summary judgment, Shrock argues that the preclusive effect of a state court judgment in his favor and against Meier resolves all triable issues necessary to determine nondischargeability. Shrock, as assignee of BSM claims, also moved for summary judgment, but the motion filed in the adversary proceeding brought by BSM did not offer an independent rationale. Instead, BSM's motion adopts the same arguments in Shrock's motion. Because the two motions are identical and have been treated by the parties as such, the same discussion and analysis will apply to both motions unless otherwise noted.
For reasons that follow, the motion by Shrock for summary judgment will be granted, in part, as to some of the relief sought in the adversary proceeding brought by him (14-ap-00403). Motion for summary judgment on the complaint filed by BSM (see 15-ap-00198) will be entirely denied. Separate orders and a judgment on Shrock's adversary will follow.
The facts set forth below are derived from the statement of facts submitted by the parties to the extent they comport with Local Bankruptcy Rule 7056. In assessing each motion for summary judgment, the statements are taken in the light most favorable to the non-movant. Meier's response to the statement of facts and supporting exhibits submitted by the movants have been considered, along with the Plaintiffs' reply and other supplemental filings allowed. Only those portions of the statements and responses that are appropriately presented, supported, and relevant to resolution of the pending motions for summary judgment have been included below. Other documents submitted by the parties in this case were considered, when relevant, and judicial notice of the bankruptcy docket in this case is hereby taken.1
In the late 1990s, Shrock and his brother Richard Shrock founded an Internet retailer of baby products by the name of Baby Supermall, Inc. Meier was hired as an accounting and financial consultant for the company in or about 1999.
In 2003, Meier purchased a controlling stake in Baby SuperMall, Inc., and the company was reorganized as a manager-managed Illinois limited liability company now known as Baby SuperMall LLC (referred herein as "BSM"). .) Meier became BSM's sole manager in charge of the company's day-to-day operations, and the holder of 70 membership units. Shrock retained 10 membership units, and remained employee of the company responsible for maintaining BSM's web system. (Stmt., Ex. 1 (Second Am. Comp.) ["State Ct. Comp."] ¶ 9; State Ct. Answer ¶¶ 10, 11.) Meier and Shrock became BSM's sole members when the remaining 20 units were bought back by the company from Richard. From then on, Meier would own the equivalent of an 87.5% interest and the remaining Shrock 12.5% interest would be held by Shrock.2 (See Stmt. ¶¶ 6, 17; Supp. Resp. ¶¶ 6, 17; BSM Answer ¶¶ 5, 9; Shrock Answer ¶ 4; State Ct. Answer ¶¶ 13, 14.)
BSM's operations were governed by the Operating Agreement entered into on October 21, 2003 and signed by Meier and Shrock. The Operating Agreement outlined the parties' respective roles in the company, in their capacities as members and, in Meier's case, as sole manager. While Meier's incidental powers as manager of BSM were broad, certain acts of governance—includingmanager salary increases and amendments to provisions governing salary amount limitations—required the unanimous consent of BSM's members. (OA ¶¶ 6.1.3, 10.5, 10.6.) All distributions to holders of membership units were required to be made in proportion to Meier and Shrock's respective share of membership units. (OA ¶¶ 5.1, 5.2.) Dealings between members and the company were otherwise required to be at arm's length and in a commercially reasonable manner. (OA ¶ 6.4.3.)
Meier's initial salary from BSM was limited to $150,000 a year. (See OA ¶ 6.1.3; State Answer ¶ 27.) In October 2003, Meier executed an agreement between himself and BSM providing, in part, for deferral of such salary until three months of net company profits were achieved (the "Salary Deferral Agreement"). (Stmt. ¶ 18; Id., Ex. 1B, Salary Deferral Agreement ["SDA"], ¶ 2.) The Salary Deferral Agreement also provided that Meier's would be entitled to payment of a profit sharing percentage, in addition to his initial salary rate, based on the total amount of compensation deferred. (SDA ¶¶ 4, 5.) Shrock did not consent to the compensation structure established under the Salary Deferral Agreement, which was executed between Meier and BSM, through Meier as company president. (Stmt. ¶ 19; see SDA.)
In December 2004, Meier executed another agreement between himself and BSM amending the Salary Deferral Agreement to, among other things, increase his salary from 150,000 to $350,000, retroactive to October 21, 2003. (Stmt. ¶ 20; see Stmt., Ex. 1C.) Shrock did not consent to the change in Meier's compensation provided in this amendment to the Salary Deferral Agreement, which was executed by Meier only, individually and on BSM's behalf, as president. (Stmt. ¶ 21; See State Answer ¶ 33; Stmt., Ex. 1C.)
Between January 2004 and May of 2005, Meier executed five separate agreements between himself and the company pursuant to which Meier agreed to guarantee the company's debt with three credit card companies (Visa, MasterCard and American Express), a bank loan, and obligations under a certain lease agreement. (See Stmt. ¶¶ 22-26; Supp. Resp. ¶¶ 22-26.) Meier's agreement to guarantee these debts entitled him to additional profit sharing percentages based on the amounts guaranteed. (See Stmt., Grp. Exs. 1D-1-5; StateAnswer ¶¶ 53, 54.) Meier did not seek or obtain Shrock's consent in executing the guarantees. (See State Comp. ¶ 56; State Answer ¶ 56.)
In August 2005, Meier hired his then friend (now wife) Silvia Suby as Chief Operating Officer with a salary of $110,000, plus 20% of the company's net profits, among other benefits. .) Meier later executed an Incentive Compensation Agreement between Silvia Suby and BSM in November of 2006 which, among other things, awarded her 20% percentage of the company's profits for the following three years, and entitled her to additional compensation if she was terminated prior to 2008. (Stmt., ¶ 34; Id., Grp. Ex. 1E-3.)
In October 2005, Meier hired Silvia Suby's son, David Suby, as Vice President of Information Technology with a salary of $120,000. (Stmt. ¶¶ 35, 36; Stmt., Grp. Exs. 1F-1-2.) Meier also executed an Incentive Compensation Agreement between BSM and David Suby, which granted David Suby a share of the company's profits for the following three years, including 2008, ranging from 5 to 10% of BSM's annual net profits, among other benefits. (Stmt. ¶ 38; Id., Grp. Ex. 1F-3.)
Between October 2005 and January 2006, Meier made several attempts to purchase Shrock's remaining interest in BSM, but Shrock—a minority, nonmanaging member and employee of BSM at the time—refused to sell his interest in the company. (see State Answer ¶ 16.) In December 2005, Meier reduced Shrock's annual salary from 75,000 to $40,000 per year. (State Ct. Answer ¶ 20.)
Between 2006 and 2009, BSM reported gross annual profits of more than $4,000,000, which had increased well beyond $5,000,000 by 2009. (See Id. ¶ 112...
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