Opinion
Case No. 94-10272-AB, Adversary Proceeding No. 94-1111-AB
December 23, 1994
MEMORANDUM OPINION
This matter is before the Court on the debtors' motion under F.R.Bankr.P. 7012 and Fed.R.Civ.P. 12(b)(6) to dismiss the nondischargeability complaint brought by the plaintiff under Sections 523(a)(2) and 523(a)(4) of the Bankruptcy Code.
Initially, the Court notes its concern with the way this adversary proceeding has been permitted to languish. The plaintiffs complaint was filed March 12, 1994, and an amended complaint was filed on April 22, 1994. On May 13, 1994, the debtors filed their motion to dismiss. The scheduling order entered in this adversary proceeding on April 14, 1994 required that if a motion to dismiss were filed under F.R.Bankr.P. 7012, the motion "shall be noticed for a hearing by the proponent of the motion who shall be responsible for giving notice to all other parties. If no notice is given, no hearing will be held, and the motion will be dismissed." (emphasis added). See also Local Rule 109(L). It does not appear from a review of the file that any attempt was ever made to notice the motion to dismiss for a hearing. No answer, of course, has been filed. Because there is a suggestion in the record that some of the delay in this case may have resulted from the plaintiff's change of counsel, the Court will not in this instance dismiss the motion but will consider it on its merits.
Under familiar principles, the well-pleaded allegations in the complaint must be taken as true and must be construed in the light most favorable to the plaintiff. Conley v. Gibson, 355 U.S. 41 (1957). Ultimately, the complaint should not be dismissed unless the plaintiff can prove no set of facts in support of his claim which would entitle him to relief. Id.
At the hearing on the motion to dismiss, the debtors offered an affidavit of Ronald Asche controverting a number of allegations in the complaint. Although Fed.R.Civ.P. 12(b)(6), which is made applicable to bankruptcy adversary proceedings by F.R.Bankr.P. 7012, allows a court, in deciding a motion to dismiss for failure to state a claim upon which relief can be granted, to consider matters outside the record, the motion must in that event be treated as one for summary judgment under Fed.R.Civ.P. 56 "and all parties shall be given reasonable opportunity to present all material made pertinent to such a motion by Rule 56". It was asserted by the plaintiff, and not denied by the debtors, that the plaintiff had been furnished with the affidavit only on the morning of the hearing. Given that this adversary proceeding has been pending for over 9 months and that the parties have had substantial opportunity for discovery, the case may indeed be ripe for summary judgment. Under the circumstances, however, the Court is unwilling to treat the present motion as one for summary judgment and therefore will not consider the contents of the Asche affidavit.
As set forth in the amended complaint, Robert Nakamoto was an investor and shareholder in a corporation known as Great American Toy Company, which operated a toy store in Fairfax County, Virginia under the trade name "Nikki's Toys." Ronald and Karen Asche, the debtors, were the principal officers of the corporation and were also directors and shareholders. In June 1990, the Ashes persuaded Nakamoto to invest $2,500.00 in the company "to be specifically used to fund and capitalize the corporation." The company established both a checking and a money market account, over which only the Asches had check writing or withdrawal authority. The complaint alleges that the Asches used the corporation's assets and bank accounts as if they were their own personal assets and accounts and wrote checks on the checking account for personal expenses, including art school and out-of-town trips and made checks payable to themselves or their relatives for unspecified "outside services." When Nakamoto demanded to review the corporate records, the Asches refused to provide him access or to explain the questionable transactions. Nakamoto also guaranteed a $42,000.00 bank loan to the corporation and alleges he was induced to do so on the false representations of the Asches "that they were properly managing [the corporation] and maintaining its funds" and on the misrepresentation of Ronald Asche "as to the nature and purpose of the instrument." The company subsequently failed to pay the loan, leaving Nakamoto potentially liable to the Bank on his guarantee.
The company existed from June 8, 1990 to September 1, 1993.
Karen was the president and Ronald the secretary-treasurer.
Records of this Court reflect that Great American Toy Company filed a chapter 7 petition on April 12, 1994, Case No. 94-11378-AT. The trustee in that case has filed a no-asset report.
The court was advised at the hearing on the motion to dismiss that the bank had brought suit against Nakamoto on his guarantee but that Nakamoto was contesting liability, and the case had not yet come to trial.
The debtors argue first that the debts which the plaintiff seeks to except from discharge are corporate debts and that no sufficient basis has been alleged for piercing the corporate veil and attaching liability to the Asches for those debts. They further argue that, in any event, the duty of corporate officers to shareholders and creditors is not a "fiduciary" relationship as that term is used in Section 523(a)(4) of the Bankruptcy Code (excepting from discharge debts "for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny"). Finally, they argue that the alleged fraud is not pleaded with the specificity required by F.R.Bankr.P. 7009 and Fed.R.Civ.P. 9(b).
With respect to the first argument, the Court does not construe the plaintiff's claim as one for the payment of a corporate debt, notwithstanding that the plaintiff may also have claims against the corporation involving the same sums. The claims are directed specifically at the acts of the Ashes, that is, false representations as to the intended use of the funds Nakamoto was investing and as to the "nature and purpose" of the guarantee instrument.
With respect to the allegations that the Asches used corporate funds for their personal purposes and the issue of whether, as corporate officers, the Asches stood in a fiduciary relationship to Nakamoto in his capacity as shareholder and guarantor of the corporation's bank loan, it is difficult to reconcile the broad dicta of United Va. Bank v. Fussell (In re: Fussell), 15 B.R. 1016 (W.D.Va. 1981), upon which the plaintiff principally relies, with Sager v. Lewis (In re: Lewis), 94 B.R. 406 (Bankr.E.D.Va. 1988), cited by the debtors.Fussell, arising in the context of a corporation and relying on cases decided under the prior Bankruptcy Act of 1878, held that the term "fiduciary" includes the relationship of a corporate officer to the corporation and its creditors. Lewis, arising in the partnership context, holds that the term "fiduciary" as used in Section 523(a)(4) is restricted to "the class of fiduciaries including trustees of specific written declarations of trust, guardians, administrators, executors or public officers and, absent special considerations, does not extend to the more general class of fiduciaries such as agents, bailees, brokers, factors, and partners." 94 B.R. at 410 (emphasis added).
But even if Fussell controls, and the Asches, as corporate officers, qualify as fiduciaries under Section 523(a)(4), there remains a problem of standing, since, as Fussell notes, while the misappropriation of funds by a corporate officer may provide a basis for nondischargeability, the claim is one to be enforced by the corporation itself (directly or through a shareholder's derivative suit) or, in the event of the corporation's bankruptcy, by its trustee in bankruptcy, but not, ordinarily, by an individual creditor of the corporation. 15 B.R. at 1020, citing Pepper v. Litton, 308 U.S. 295, 60 S.Ct. 288, 84 L.Ed. 281 (1939) and Kellev v. Conwed Corp., 429 F. Supp. 969 (E.D.Va. 1977). Under the standard enunciated in Kelley, it is only when the funds misappropriated bear a "special relationship to the pre-existing debt owed the plaintiff that a creditor of the corporation can bring a nondischargeability action in its own right against the corporate officer who misappropriated those funds.
In Fussell, such a relationship was found to exist because the corporate officer, in obtaining a loan from the plaintiff bank, had signed a specific agreement that none of his own loans to the corporation would be repaid before the bank's loan was paid in full, but then, contrary to the agreement, used his position as corporate officer to cause his own loan to be repaid just before the corporation went out of business. No such special circumstances are alleged, however, in the amended complaint in this case, and the Court therefore concludes that, under the allegations in the complaint, Nakamoto lacks standing in his own right to maintain an action for nondischargeability based on the Asches' breach of fiduciary duty by misuse of corporate funds for personal expenses.
With regard, finally, to the issue of specificity, it is unquestionably true that the alleged misrepresentations are pleaded only in general terms. As an example, the complaint asserts that Ronald Asche misrepresented the "nature and scope" of the guarantee agreement for the bank loan but does not state precisely what he represented were the nature and scope. On the other hand, this is an issue that could have been resolved months ago had the debtor's counsel complied with the requirement to bring the motion to dismiss on for a hearing, and the Court is loath to see this case further delayed by requiring the plaintiff to replead, especially where the pleadings focus sufficiently on the transactions in question to place the debtors on reasonable notice as to what they will have to defend against at trial, and, to the extent greater specificity is required, the details can be fleshed out through discovery. It may well be, once those are pinned down, that summary judgment would be appropriate. But given the broad latitude that must be accorded a complaint on a motion to dismiss under Fed.R.Civ.P. 12(b)(6), the Court cannot conclude, looking solely to the complaint, that the plaintiff would be unable to prove no set of facts at trial entitling him to a determination of nondischargeability under Section 523(a)(2).
Although the discovery deadline set by the pretrial order of April 14, 1994 expired on August 12, 1994, the Court will extend the discovery deadline.
The Court notes that the preamble of the complaint specifically invokes both Sections 523(a)(2) and 523(a)(4) and that paragraph 17 of the complaint characterizes the debtors' conduct using language that would be appropriate to both sections. On the other hand, the jurisdictional allegation (¶ 1) and the prayer for relief refer only to Section 523(a)(4) and not to Section 523(a)(2). The Court will resolve the ambiguity by treating the complaint as one seeking a determination of nondischargeability under both provisions.
For the foregoing reasons, the Court will enter an order granting the motion to dismiss as it relates to Section 523(a)(4) of the Bankruptcy Code but denying the motion as it relates to the claims under Section 523(a)(2).