Opinion
Case No. 06-12769PM, Case No. 06-12770PM, Adversary No. 08-0424PM.
December 15, 2008
MEMORANDUM OF DECISION
On December 3, 2008, the court conducted a hearing on the Motion filed by Defendants Douglas Gomez and Carolyn Gomez to dismiss Counts XI and XII of the Amended Complaint. In the course of the hearing, the court granted the oral motion of the Defendants Dean Nelson and Carole Nelson to join in the Motion to Dismiss. For the reasons stated hereafter, the court will grant the Motion to Dismiss.
Count XI of the Amended Complaint charges the Defendants with negligence in the discharge of their duties as employees, officers, directors, and managers of the Debtors. Specifically, the claim is that the Defendants failed to exercise reasonable diligence by accepting consumer deposits for furniture orders that they knew they were unable to fulfill and by not segregating these deposits. The Amended Complaint pleads that as a result of the Defendants' alleged negligence that the Debtors suffered damages in excess of $5.5 million. The Amended Complaint states that unnecessary liabilities for the Debtors were created. Count XII charges the Defendants with gross negligence and the breach of their fiduciary duties to the Debtors.
The Motion to Dismiss filed by the Gomezes is based upon two grounds — first, that the Plan Administrator lacks standing to prosecute these claims and, next, that the claims are barred by the equitable doctrine of in pari delicto. The court will grant the Motion to Dismiss. Either ground suffices to support the ruling.
The Plan Administrator is an entity created by the Chapter 11 plan to prosecute causes of action of the estates. This entity is akin to a bankruptcy trustee. As noted by Judge Schneider in the case of In re Transcolor Corp., 296 B.R. 343, 367 (BC Md. 2003), a bankruptcy trustee does not have standing to sue third parties such as corporate affiliates or directors. This is because such causes of action belong to the injured creditors and not the debtor corporation and thus not subject to enforcement by the Plan Administrator under § 1123(b)(3) of the Bankruptcy Code.
Presumably, the Plan Administrator is relying upon Section IV(2)(A) of the Amended Joint Plan of Liquidation for his authority for prosecution of causes of action. "Causes of action" is a defined term set out in Section II (B)(10) of the Amended Joint Plan. But what the court has before it is a derivative form of action. See, Mona v. Mona Electric Group, Inc., 934 A.2d 450, 464-65 (Md.App. 2007). The whole body of shareholders or equity interest holders was dissolved by Section III(8) of the Amended Joint Plan that effected cancellation of all shares of stock in the company. Finally, the court notes that while both parties find some comfort in the language of the case of Bogdan v. JKV Real Estate Services, 414 F.3d 507 (CA4 2005), that case is easily distinguished in that it involved unconditional assignments acquired by the Chapter 7 Trustee of claims held by debtor's creditors. There are no such assignments here. Next, the court is hard pressed to this day to understand how the collection of funds by the Debtors during the incumbency of the Defendants resulted in damage to the Debtors. The damage occurred when the funds were spent.
What the Plan Administrator seeks to do in this case is to turn the undisputed facts on their head in his allegation that the Debtors were harmed by the collection of consumer deposits. The parties harmed were the parties making the deposits, not the recipient of the payments. The Plan Administrator holds no Bogdan-type assignments from them.
Similarly, the counts fail because of the doctrine of in pari delicto. While some authors urge that it is inappropriate to apply this doctrine to hamstring a bankruptcy trustee who had no connection with the original misconduct, the principle remains generally accepted. See JEFFREY DAVIS, Ending the Nonsense: The In Pari Delicto Doctrine Has Nothing to Do With What is § 541 Property of the Bankruptcy Estate, 21 EMORY BANKR. DEV. J. 519 (2005); RISA LYNN WOLF-SMITH, Innocent Trustee/Creditors Barred by Debtors' Past Wrongs: It Just Ain't Right, 26-APR AM. BANKR. INST. J. (Apr. 2007); WILLIAM MCGRANE, The Erroneous Application of the Defense of In Pari Delicto to Bankruptcy Trustees, 29 CAL. BANKR. J. 275 (2007). Were the court writing on a clean slate, it would agree with the opponents; however, the overwhelming authority is to the contrary. The doctrine is an offshoot of the equitable doctrine that "he who comes into equity must come with clean hands." It has been consistently applied in bankruptcy cases to bar bankruptcy trustee from suing insiders and professionals, who, prior to the filing of the petition, caused damage to the debtor. The doctrine has long been a part of Maryland law. Gotwalt v. Neal, 25 Md. 434 (Md. 1866); Messick v. Smith, 69 A.2d 478, 481 (Md. 1949); Franklin v. Morrison, 711 A.2d 177, 187 (Md. 1998). In the bankruptcy context, the case of Official Comm. of Unsecured Creditors v. R. E. Lafferty Co., Inc., 267 F.3d 340, 355-360 (CA3 2001) is often cited for the proposition that the doctrine bars claims by a bankruptcy trustee standing in the shoes of a debtor despite the trustee's status as an innocent successor. See also, Official Comm. of Unsecured Creditors of PSA, Inc. v. Edwards, 437 F.3d 1145, 1151 (CA11 2006); Grassmueck v. American Shorthorn Ass'n, 402 F.3d 833, 836 (CA8 2005). The court believes that the three cases cited state the applicable law, and that the Fourth Circuit would so hold until it adopts the position that the trustee is not subject to the defense of in pari delicto as urged by Judge King in his dissent in Bogdan, supra at 515.
An appropriate order will be entered. Notice Recipients Recipients of Notice of Electronic Filing: Recipients submitted to the BNC (Bankruptcy Noticing Center):
District/Off: 0416-0 User: dconstabl Date Created: 12/16/2008 Case: 08-00424 Form ID: pdfall Total: 19 aty Alan D. Eisler aeisler@meyerseisler.com aty Bradford F. Englander benglander@linowes-law.com aty Jennifer Larkin Kneeland jkneeland@linowes-law.com aty Katherine M. Sutcliffe Becker kbecker@stinson.com aty Lawrence P Block lblock@stinson.com aty Richard H. Gins richard@ginslaw.com TOTAL: 6 pla Bradford F. Englander, in his capacity as Plan Administrator for Mastercraft Interiors, Ltd. and Kimels of Rockville, Inc. 7200 Wisconsin Avenue Suite 800 Bethesda, MD 20814 dft Douglas Gomez 7113 Natelli Woods Lane Bethesda, MD 20817 dft Carolyn Gomez 7113 Natelli Woods Lane Bethesda, MD 20817 dft Dean Nelson 854 Cork Elm Court Severn, MD 21144 dft Carole Nelson 854 Cork Elm Court Severn, MD 21144 dft Danny Gomez 18700 Shremor Drive Derwood, MD 20855 dft George Gomez 12708 Found Stone Road Apt 105 Germantown, MD 20874 dft Rebecca Gomez 12708 Found Stone Road Apt 105 Germantown, MD 20874 dft Angela King 8007 Gold Cup Lane Bowie, MD 20715 dft Quentin King 8007 Gold Cup Lane Bowie, MD 20715 dft Donald Beaudoin 9109 Gue Road Damascus, MD 20872 dft Joel Snyder 933 Hidden Moss Drive Cockeysville, MD 21030 Office of the US Trustee 6305 Ivy Lane, Suite 600 Greenbelt, MD 20770 TOTAL: 13