Opinion
No. 11-02-10188 MA, Adv. No. 02-1062 M
January 15, 2004
William F. Davis, Albuquerque, NM, for Debtors
George Dave Giddens, Albuquerque, NM, for Tafoya and B C Trucking
ORDER ON MOTION TO DISMISS OR BIFURCATE
THIS MATTER is before the Court on the Motion to Dismiss or to Bifurcate ("the Motion") filed on September 22, 2003 by Defendants, Salavador Guzman and Patricia Guzman d/ b/ a Chava Trucking Company (the "Debtors"), by and through their attorneys, Davis Pierce, P. C. (William F. Davis and Cynthia M. Tessman). The Plaintiffs, Anthony Tafoya and B C Trucking (" B C") (collectively, the "Plaintiffs") filed a Response to Motion to Dismiss or to Bifurcate on October 6, 2003 by and through their attorney, George D. "Dave" Giddens (the "Response"). Having reviewed the pleadings, the applicable Code sections, the case law and being otherwise fully informed, the Court will deny the Motion. In connection with this holding, the Court finds the following:
1. This bankruptcy was filed on January 10, 2002 under Chapter 11 of the Bankruptcy Code. The case was converted to Chapter 7 on June 2, 2003 .
2. The Debtors were licensed construction contractors employed to provide materials for a highway construction project, the Big-I Project. The Plaintiff, B C is a corporation formed to provide subcontracting services to the Debtors on the Big-I Project and several other construction projects. The Debtors and B C entered into a Joint Venture Agreement setting out the terms of this arrangement.
B C was formed in January 2000. Plaintiff, Anthony Tafoya owns 50% of the outstanding stock of B C Trucking, Inc. and is a director and President of B C. Debtor, Salavador Guzman, d/b/a Chava Trucking, is a director and Vice President of B C owning 50% of the outstanding shares of B C. Debtor, Patricia Guzman, is a director and officer of B C.
The Complaint, the Motion, the Response and other pleadings refer to the Joint Venture as Exhibit A to the Complaint; however, no exhibit is attached to the Complaint.
2. Plaintiff, B C Trucking, Inc. filed an amended proof of claim (no. 104) on October 6, 2003 for an unsecured claim in the amount of $1,083,578.04. Plaintiff, Anthony Tafoya filed a proof of claim (no. 45) in the amount of $20,000, which is also unsecured.
3. Plaintiffs filed this adversary proceeding on April 15, 2002 seeking to have their claims against the Debtors' declared non-dischargeable under 11 U.S.C. § 523(a)(4).
Discussion
Under Federal Rules of Civil Procedure 12 and 19, made applicable in bankruptcy through Federal Rules of Bankruptcy Procedure 7012 and 7019, any person needed for a just determination of the issues must be joined as a party. Federal Rule of Civil Procedure 19 provides in pertinent part as follows:
(a) . . . A person who is subject to service of process and whose joinder will not deprive the court of jurisdiction over the subject matter of the action, shall be joined as a party in the action if
(1) in the person's absence complete relief cannot be accorded among those already parties, or
(2) the person claims an interest relating to the subject of the action and is so situated that the disposition of the action in the person's absence may (i) as a practical matter impair or impede the person's ability to protect that interest or (ii) leave any of the persons already parties subject to a substantial risk of incurring double, multiple, or otherwise inconsistent obligations by reason of the claimed interest.
In the Motion to Dismiss, the Debtors first argue that if the debt to the Plaintiffs is determined to be dischargeable, then the Plaintiffs would look to the Chapter 7 estate for payment of all or part of their claims. According to the Debtors, the Trustee, as owner of the property of the estate, should be joined as a Defendant to protect the estate assets. The Debtors also argue that the Trustee represents the estate in objections to the Plaintiffs' proofs of claim filed in the bankruptcy case. If the Trustee is not joined, then, according to the Debtors, the results could be inconsistent. Finally, the Debtors assert that an accountant was hired by the Debtors while the case was in Chapter 11 to evaluate the Tafoya/ B C claims. The Debtors maintain that in the Chapter 7, the Trustee now owns the services of the accountant, and the Trustee is the only party that could require the accountant to testify regarding this analysis, which would prove relevant to the amount of the debt to the Plaintiffs. The Debtors argue that under these circumstances, the Trustee is in a better position to liquidate this claim and is, therefore, an indispensable party to this proceeding.
The Court notes that the Debtors filed an objection to B C's proof of claim before the case was converted asking the Court to allow the claim in the amount to be determined in this adversary proceeding. If the Trustee pursued this objection, no inconsistency would result.
The Debtors' Application to Employ Accountants, Atkinson Co. was granted in December of 2002.
The Plaintiffs contend that a Chapter 7 Trustee is generally not a necessary or indispensable party in an action to determine dischargeability of debts citing OnBank Trust Company v. Siddell (In re Siddell), 191 B.R. 545, 551 (Bankr. N. D. N.Y. 1996). In Siddell, the Court held that Chapter 7 Trustee of a partnership was neither an indispensable nor necessary party to non-dischargeability proceeding brought against the debtor's partners. The Plaintiffs also argue that the Trustee is not required in this proceeding to protect the Chapter 7 estate. It is the Plaintiffs' liability not the estate's that is at issue.
This Court agrees with the Plaintiffs that the Trustee is not an indispensable party in this proceeding. See Conkling v. DeBernardis (In re Parks), 76 B.R. 22, 24 (Bankr. N. D. N.Y. 1984) (dismissing trustee as defendant in dischargeability proceeding as an improper party); and In re Kirschner, 46 B.R. 583, 588 (Bankr. E. D. N.Y. 1985) (stating that it is creditor's responsibility, not trustee's, to object to dischargeability of debts). The Trustee's interests lie in collecting and administering estate assets. 11 U.S.C. § 704. While the trustee is required to investigate the financial affairs of the debtor and if advisable, oppose the discharge of the debtor, nothing in Section 704 imposes a duty upon the trustee to commence or defend an adversary proceeding to determine the dischargeability of a debt. In re Kirschner, 46 B.R. at 588. Moreover, joinder of the Chapter 7 Trustee is not required to render a complete adjudication of this proceeding because the dealings between the Plaintiffs and the Debtors are at issue. Therefore, the Court will deny the Motion to Dismiss.
In the Motion the Debtors' alternatively request that the Court bifurcate the issue of dischargeability from the determination of the amount of the Plaintiffs' claims because these issues are complex and liquidation in this Court may not be necessary if the Debtors win on the dischargeability issue. The Plaintiffs argue that a separate liquidation proceeding would unnecessarily burden the litigants and that combining the issues in one adversary proceeding would promote judicial economy. Rule 42 made applicable to bankruptcy by Federal Rule of Bankruptcy Procedure 7042, provides in pertinent part as follows:
(b) Separate Trials. The court, in furtherance of convenience or to avoid prejudice, or when separate trials will be conducive to expedition and economy, may order a separate trial of any claim,. . . or of any separate issue or . . . issues,. . . . Rule 7042(b) gives the judge "broad discretion to use the separate trial device `in furtherance of convenience or to avoid prejudice, or when separate trials will be conducive to expedition and economy.'" Susan E. Abitanta, Comment, Bifurcation of Liability and Damages in Rule 23(b)(3) Class Actions: History, Policy, Problems and a Solution, 36 Sw. L. J. 743, 744 (1982) (discussing Fed.R.Civ.P. 42(b)). See also, Surf Walk Condominium Ass'n v. Wildman, 84 B.R. 511, 514 (N.D. Ill. 1988) (stating, "[t] he decision whether to bifurcate a trial is necessarily committed to the discretion of the bankruptcy judge.").
A party requesting bifurcation has the burden to show that it is warranted. In re Koger, 261 B.R. 528, 531 (Bankr. M. D. Fla. 2001). Courts use several factors to determine whether bifurcation is advisable: 1) separability of issues; 2) simplification of discovery and the conservation of resources; 3) prejudice to parties; and 4) suitability of bifurcating trial but not discovery. Id. at 532.
In analyzing the wisdom of bifurcation under the first factor, separability of the issues, the Court must determine the "degree of evidentiary entanglement among the issues to be bifurcated." Id.
Generally, issues are not separable if the same evidence will be presented for each issue. See id. (finding that evidentiary overlap existed precluding bifurcation of statute of limitations defense from liability issue in tax evasion case because both required a showing that Debtor willfully under-reported income). Here the primary issues in determining dischargeability are whether the Debtors owed a fiduciary duty to the Plaintiffs and breached that duty. The Plaintiffs have advanced two theories as the basis for the Debtors fiduciary duty to the Plaintiffs. First, the Plaintiffs allege that B C was a close corporation in which the Debtors, as officers and directors of B C, owed B C and Plaintiff Anthony Tafoya a fiduciary duty of loyalty, good faith, inherent fairness and the obligation not to profit at the expense of the corporation. See Walta v. Gallegos Law Firm, P. C., 131 N.M. 544, 40 P.3d 449 (NM App. 2002) (holding that as a matter of law, "a majority shareholder, as well as an officer or director of a close corporation, when purchasing the stock of a minority shareholder, has a fiduciary obligation to disclose material facts affecting the value of the stock which are known to the purchasing shareholder, but not known to the selling shareholder."). Second, the Plaintiffs allege that the Debtor, Salavador Guzman d/ b/ a Chava Trucking, as a licensed general contractor, owed B C a fiduciary duty to properly distribute money received from each project to B C as a subcontractor. Allen v. Romero (In re Romero), 535 F.2d 618, 621 (10th Cir. 1976) (upholding determination that as to money received by contractor to distribute to subcontractors, the contractor was under a fiduciary duty to assure that the money advanced was properly distributed and as such, was a fiduciary for purposes of § 523(a)(4)).
For purposes of the Motion, the Court will analyze the evidence under the second theory. Under this theory, the Plaintiffs must show that the Debtors received money as contractors that they failed to correctly distribute to B C as a subcontractor on the Big I Project and several other construction projects. The amount of that non-payment, minus any offsets properly claimed by the Debtors, also must be shown to determine the amount of debt owed to Plaintiffs. For both issues, the discrepancy in payments would be proven by an accounting analysis of the money received and distributed by the Debtors to B C. This evidentiary overlap weighs in favor of denying bifurcation of the issue of dischargeability and amount of the debt.
Whether bifurcation will simplify the case involves a determination that the dispute can be resolved faster and cheaper if the issues are separated. Bifurcation will not simplify discovery in this case because discovery has been completed. In addition, given the amount of evidentiary overlap discussed above, the Court cannot find that the dispute can be resolved faster if the issues of dischargeability and damages are tried separately.
Similarly, the third factor, whether the parties would be prejudiced by bifurcating the issues of liability and damages, involves a determination of the additional cost that a bifurcation would entail as well as whether bifurcation would unacceptably delay a final outcome. Koger, 261 B.R. at 532. Here, bifurcation of dischargeability and damages would unnecessarily increase the costs of litigation to each side. Presumably the same witnesses would be called to testify as to whether the money received by the Debtors was properly distributed and the amount of any discrepancy. Thus, separate trials would unnecessarily burden the parties.
The effect of bifurcation of the trial and not discovery is not an issue here because discovery has concluded.
Because the determination of breach of fiduciary duty is sufficiently related to the determination of the amount of the debt, if any, owed by the Debtors to the Plaintiffs, bifurcation should not be granted in this case.
IT IS HEREBY ORDERED that the Motion is denied.
I hereby certify that a true and correct copy of the foregoing was either electronically transmitted, faxed, delivered, or mailed to the listed counsel and parties, on the date file-stamped above.