In re: Sylvester Frank Enea and Mimi Claire Enea, Paul Joseph Enea and Claire Theodora Enea

Filing 15


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1 2 3 IN THE UNITED STATES DISTRICT COURT 4 FOR THE NORTHERN DISTRICT OF CALIFORNIA 5 6 7 8 9 United States District Court For the Northern District of California 10 11 12 13 14 15 In re: No. C 12-01877 SI SYLVESTER FRANK ENEA and MIMI CLAIRE ENEA, Bankr. Case No. 09-46304 Bankr. Case No. 09-48602 Debtors. __________________________________/ Adv. Proc. No. 11-3017 DM Adv. Proc. No. 11-3018 DM Consolidated In re: Debtors. ____________________________________/ DOUBLE BOGEY, L.P., 16 17 ORDER AFFIRMING BANKRUPTCY COURT’S DISMISSAL PAUL JOSEPH ENEA and CLAIR THEODORA ENEA, Appellant, v. 18 SYLVESTER FRANK ENEA and PAUL JOSEPH ENEA, 19 Appellees. / 20 21 Appellant Double Bogey, L.P., filed adversary proceedings seeking a finding of non- 22 dischargeability pursuant to section 523(a)(4) of the Bankruptcy Code, as to debt incurred by Chapter 23 7 debtors Paul and Sylvester Enea. After a five day trial, and at the conclusion of Double Bogey’s 24 evidence, Judge Dennis Montali of the United States Bankruptcy Court of the Northern District granted 25 the debtors’ Motion for Judgment on Partial Findings, Fed. R. Bankr. P. § 7052(c). Double Bogey now 26 appeals that decision. Upon consideration of the record and the papers submitted, the Court AFFIRMS 27 the bankruptcy court’s judgment in favor of debtors. 28 1 BACKGROUND In its decision granting the Eneas’ motion, the bankruptcy court found the following facts 3 uncontested. Double Bogey had a stake in two real estate development entities: it was the limited 4 partner in 1221 Monticello, L.L.P.; and it was one of several members of Monterrosa, L.L.C. Oral 5 Decision (“Order”), Bankr. Case No. 11-3017, ECF No. 123 at 4-5. Appian Construction Company, 6 Inc., a corporation owned by debtor Paul Enea and of which debtors Paul and Sylvester Enea were the 7 sole executive officers, was the general partner of Monticello and the managing member of Monterrosa. 8 Id. at 5. Double Bogey invested over four million dollars in Monticello and over one million in 9 Monterrosa. Id. Double Bogey lost its entire investment in Monterrosa, and although it recovered its 10 United States District Court For the Northern District of California 2 invested funds in Monticello, it did not receive “substantial amounts of interest in profit participation 11 that it claims to be in the amount of several million dollars.” Id. 12 In 2009, via Chapter 7 bankruptcy proceedings, the Eneas both received discharges of their 13 debts, including those claimed by Double Bogey. Id. Double Bogey challenged that finding in 14 adversary proceedings pursuant to section 523(a)(4) of the Bankruptcy Code. 15 specifically contends that Appian Construction Company was Double Bogey’s fiduciary; that its liability 16 to Double Bogey arose out of “defalcation while acting in a fiduciary capacity” and as such was 17 nondischargeable; and that because Paul and Sylvester Enea were the alter egos of Appian Construction, 18 nondischargeability under section 523(a)(4) should likewise apply to them. Id. at 6. Double Bogey 19 Defalcation occurs when a debtor fails to pay back or account properly for “trust funds or money 20 held in a fiduciary capacity.” Blyler v. Hemmeter (In re Hemmeter), 242 F. 3d 1186, 1190 (9th Cir. 21 2001). 22 After Double Bogey had presented its case-in-chief during five days of testimony, the Eneas 23 moved for judgment on partial findings. Order at 4. On February 10, 2012, the bankruptcy court 24 granted the motion. He found that Appian Construction was a fiduciary to Double Bogey with respect 25 to the latter’s investments in Monticello and Monterrosa, id. at 6, 10, and that Double Bogey had 26 established a prima facie case that the Eneas were Appian’s “alter ego.” Id. at 8. However, the 27 bankruptcy court held that section 523(a)(4) of the Bankruptcy Code, precluding discharge, applies only 28 to fiduciary relationships created by express or statutory trust, and not to fiduciary relationships which 2 1 result by operation of law as a result of acts of wrongdoing (trusts ex maleficio). Thus, although Appian 2 Construction’s uncontested fiduciary relationship to Double Bogey did implicate section 523(a)(4), Paul 3 and Sylvester Eneas’ individual fiduciary status resulted only from their misconduct/alter ego status; 4 thus, section 523(a)(4) nondischargeability would not apply. The court also found that the Eneas could 5 not be directly liable because there was no trust res. 6 Therefore, the court granted the Eneas’ motion on the ground that Double Bogey had failed to 7 state a claim that the Eneas’ may not discharge debts that incurred as a result of Appian’s alleged 8 defalcation. Id. at 4. This appeal challenges those findings. 9 United States District Court For the Northern District of California 10 STANDARD OF REVIEW 11 A Rule 7052(c) motion for judgment on partial findings incorporates the precise language of 12 Rule 52(c) of the Federal Rules of Civil Procedure. It provides that judgment on partial findings, in a 13 non-jury trial, is appropriate where the plaintiff fails to make out a prima facie case, or where the court 14 determines that the preponderance of the evidence goes against plaintiff’s claim. Fed. R. Bank. P. 15 § 7052(c); In re Stearman, 256 B.R. 788, 791 (B.A.P. 9th Cir. 2000). Such a judgment shall be 16 supported by findings of fact and conclusions of law. 17 In reviewing bankruptcy court judgments, a district court functions as an appellate court. The 18 bankruptcy judge’s findings of fact under section 7052(c) are thus reviewed for clear error, while its 19 conclusions of law are reviewed de novo. In re Lund, 202 B.R. 127, 129 (B.A.P. 9th Cir. 1996). Mixed 20 questions of law and fact are also reviewed de novo. In re Chang, 163 F.3d 1138, 1140 (9th Cir. 1998). 21 Finally, this Court may not make independent factual findings. If the bankruptcy court is silent or 22 ambiguous as to an outcome-determinative factual question, the case must be remanded to the 23 bankruptcy court for the necessary factual findings. See In re Carter, 182 F.3d 1027, 1034 (9th Cir. 24 1999). 25 26 DISCUSSION 27 With certain enumerated exceptions, “[t]he effect of a discharge in bankruptcy is to release a 28 bankrupt from all of his provable debts.” Davis v. Aetna Acceptance Co., 293 U.S. 328, 331(1934). 3 1 The exceptions to dischargeability are listed in section 523 of the Bankruptcy Code, and include “any 2 debt for fraud or defalcation while acting in a fiduciary capacity.” 11 U.S.C. § 523(a)(4); In re Short, 3 818 F.2d 693, 694 (9th Cir. 1987). Double Bogey argues that the Eneas committed defalcation while 4 acting as the fiduciary of Double Bogey’s money in Monticello and Monterrosa, and therefore they 5 should not be discharged from their debts. Double Bogey agues two forms of liability for the Eneas: 6 (1) as the alter ego of Appian, and (2) direct liability in their individual capacity as corporate officers. 7 8 I. Section 523(a)(4) Nondischargeability – Alter Ego Status The bankruptcy court found that, as a matter of law, Double Bogey could not obtain a finding 10 United States District Court For the Northern District of California 9 of nondischargeability under section 523(a)(4), based on the Eneas’ alter ego status with Appian. In 11 reviewing this finding de novo, the Court agrees with the bankruptcy court. Therefore, even if Appian 12 was a fiduciary to Double Bogey and committed defalcation, the alter ego doctrine may not be used in 13 this case render any liability of the Eneas nondischargeable in bankruptcy. 14 “Whether a person is a fiduciary under § 523(a)(4) is a question of federal law.” Lewis v. Scott 15 (In re Lewis), 97 F.3d 1182, 1185 (9th Cir. 1996) (citing Ragsdale v. Haller (In re Haller), 780 F.2d 16 794, 795 (9th Cir. 1986)). “The broad definition of fiduciary under nonbankruptcy law–a relationship 17 involving trust, confidence, and good faith–is inapplicable in the dischargeability context.” In re 18 Honkanen, 446 B.R. 373, 378 (B.A.P. 9th Cir. 2011). As the Ninth Circuit has explained, “[f]rom 1884 19 to the present, courts have construed ‘fiduciary’ in the bankruptcy discharge context as including 20 express trusts, but excluding trusts ex maleficio, i.e., trusts that arose by operation of law upon a 21 wrongful act. We have adhered to this construction in interpreting the scope of 11 U.S.C. § 523(a)(4), 22 refusing to deny discharge to those whose fiduciary duties were established by constructive, resulting 23 and implied trusts.” In re Hemmeter, 242 F.3d at 1189-90 (9th Cir. 2001) (citations omitted). 24 The alter ego doctrine sits squarely within the ex maleficio exclusion. The alter ego doctrine 25 arises when an individual is unjustly and abusively using the corporate form as a shield for its misdeeds; 26 in instances where a party perverts the corporate form, courts will “pierce the corporate veil” and hold 27 the individual liable. See 9 Witkin, § 9, p. 785 (10th ed. 2005). Thus, the alter ego doctrine “is a device 28 imposed by courts to disregard the corporate entity and hold individuals responsible for acts knowingly 4 1 and intentionally done in the name of the corporation.” In re Munson, 6:10-BK-38482-SC, 2011 WL 2 845846, at *4 (Bankr. C.D. Cal. Mar. 9, 2011) (citing Ivy v. Plyler, 246 Cal. App. 2d 678, 682 (1966)). 3 The court in In re Munson concluded that imposing liability under the alter ego doctrine would 4 necessarily be imposing liability ex maleficio, because it operates to impose liability upon the individual 5 because of his wrongful acts. Id. Stated another way, under § 523(a)(4) the fiduciary duty must arise from “an express, technical, 7 or statutory trust that was imposed before and without reference to the wrongdoing that caused the debt.” 8 Lewis, 97 F.3d at 1185 (emphasis added); see also Ragsdale, 780 F.2d at 796. Here, only Appian owed 9 an express fiduciary duty to Double Bogey. The alter ego doctrine, used to pierce the corporate veil and 10 United States District Court For the Northern District of California 6 impose a fiduciary duty on the Eneas, could only be applied after wrongdoing. Therefore, any trust that 11 arises from the wrongdoing of the Eneas under the alter ego doctrine will be outside the purview of § 12 523(a)(4). See also, Hunter v. Philpott, 373 F.3d 873, 876-77 (8th Cir. 2004) (finding that because an 13 express trust under § 523(a)(4) “does not embrace trustees of constructive trusts imposed by law because 14 of the trustee’s malfeasance,” a debtor could not be liable “simply as an alter ego”); In re Lupo, 353 B.R. 15 534, 548 (Bankr. N.D. Ohio 2006) (finding that § 523(a)(4) requires the debtor to prove an independent 16 fiduciary duty, and refusing to apply the alter ego doctrine). 17 Double Bogey relies on many cases that impose liability on debtors who are the alter egos of 18 corporations. However, the cases that Double Bogey relies on impose liability directly, and do not stand 19 for the proposition that the alter ego doctrine can be used to create an express trust under § 523(a)(4). 20 See, e.g., In re Yarbrow, 150 B.R. 233 (B.A.P. 9th Cir. 1993) (upholding the non-dischargeability of the 21 debts of an individual debtor who was the alter ego of a corporation, but based on the direct liability of 22 the debtor); In re Baird, 114 B.R. 198 (B.A.P. 9th Cir. 1990) (same). 23 24 II. Direct Liability of the Eneas 25 Double Bogey also argues that the Eneas, as Appian’s sole corporate officers, “directly and 26 actively participated” in Appian’s defalcation, and thus may be held personally liable for that 27 defalcation. Appt. Brief at 24. The bankruptcy court denied this claim on the ground that Double Bogey 28 had failed to show that any alleged direct participation involved an identifiable “trust res.” Order at 15 5 1 (finding no “specific identification of funds that were at all times trust funds and that were improperly 2 diverted”). This Court reviews the bankruptcy court’s findings of law de novo, and its findings of fact 3 for clear error. 4 A. 6 “A debt is nondischargeable under 11 U.S.C. § 523(a)(4) where (1) an express trust existed, (2) 7 the debt was caused by fraud or defalcation, and (3) the debtor acted as a fiduciary to the creditor at the 8 time the debt was created.” In re Niles, 106 F.3d 1456, 1459 (9th Cir. 1997) (quotations omitted). The 9 Ninth Circuit has explained that courts should look to state law to determine whether an express trust 10 United States District Court For the Northern District of California 5 Requirement of a Trust Res is created. In re Baird, 114 B.R. at 202. “The statute must define the trust res, spell out the trustee’s 11 fiduciary duties and impose a trust prior to and without reference to the wrong which created the debt.” 12 Id. A “trust res” is “money or property that is entrusted to the debtor-fiduciary.” In re Evans, 161 B.R. 13 474, 478 (B.A.P. 9th Cir. 2001); see also Restatement (Second) of Trusts § 74 (1959) (a trust cannot be 14 created unless there is a trust property). Even if a court finds that there are general fiduciary duties 15 between the parties, that is “not sufficient [if there is an] absence of an express or technical trust 16 relationship with an identifiable trust res.” Id. The Evans court relied on Cal–Micro, Inc. v. Cantrell 17 (In re Cantrell), 329 F.3d 1119, 1125 (9th Cir.2003), for its finding that a real estate agent was not given 18 trust res, and therefore, even though state law created a general fiduciary duty between a real estate 19 agent and her client, there was no express trust under § 523(a)(4). 20 21 B. 22 The bankruptcy court, after five days of hearing Double Bogey’s case-in-chief, found as a factual 23 matter that there was no trust res. It found that in the instant case, there was “no specific identification 24 of any particular fund of money. There is no statute that says every dollar that comes into Monticello, 25 to Apian, is impressed with the trust. There’s no res.” Order at 19. The bankruptcy court explained 26 that “the very nature of the investment of Double Bogey in Monticello and Monte Rosa, impliedly, if 27 not explicitly, recognizes that those funds would be spent and spent for what? Spent for obviously 28 ultimately the costs and expenses in relation to the real estate development.” Id. Therefore, the The Lack of a Trust Res for Double Bogey 6 1 bankruptcy court found that the monies that went from Appian to the Eneas were not trust res when they 2 were diverted to the Eneas. 3 This Court finds no clear error in this factual determination. “Under state law, the intent of the 4 parties is controlling in determining whether payment of funds is a loan or creation of a trust.” In re 5 Niles, 106 F.3d 1456, 1463 (9th Cir. 1997) (citations omitted). The bankruptcy court emphasized the 6 fluid nature of Double Bogey’s investment in the Monticello and Monterrosa entities. Order at 15. 7 Because the investments were used for diverse business purposes, and not held as an identifiable, 8 traceable fund, the court concluded that they could not constitute a trust res for the purpose of holding 9 the Eneas directly liable for defalcation. Id. Here, the issue of intent is one of fact and the court’s United States District Court For the Northern District of California 10 finding was not clearly erroneous. 11 Double Bogey argues that under California law, partnership assets are trust res. See Ragsdale, 12 780 F.2d at 797 (finding a fiduciary trust under § 523(a)(4) because a partner is a “trustee over 13 partnership assets for all purposes”). However, it is only Appian that is in partnership with Double 14 Bogey; the Eneas are mere stock owners or corporate officers. In Cantrell, the Ninth Circuit interpreted 15 California corporate law to conclude that while officers of a corporation have general fiduciary duties, 16 they are not trustees with respect to corporate assets and, therefore, are not fiduciaries within the 17 meaning of § 523(a)(4). 329 F.3d at 1126. It quoted the California Supreme Court as holding that 18 “[o]ne who is a director of a corporation acts in a fiduciary capacity, and the law does not allow him to 19 secure any personal advantage as against the corporation or its stockholders. However, strictly 20 speaking, the relationship is not one of trust, but of agency . . . .” Id. (quoting Bainbridge v. Stoner, 16 21 Cal. 2d 423, 426 (1940)). Thus, although under California law partners are trustees over partnership 22 assets, corporate officers are not trustees over corporate assets. Therefore, there is no showing that the 23 Eneas, as corporate officers, were trustees for Double Bogey or were given control of a trust res. 24 Double Bogey’s reliance on In re Baird is also unpersuasive. In In re Baird, an Arizona state 25 law provided that money paid to a contractor was deemed to be held in trust for the benefit of the 26 subcontractor. 114 B.R. at 202. The Baird court found that this law created a trust res because it 27 expressly designated the funds received by the contractor as trust funds. The Baird court also found the 28 corporate officer directly liable, relying on Arizona case law. Id. at 204-205 (citing Seven G Ranching 7 1 Co. v. Stewart Title & Trust, 128 Ariz. 590, 593 (App.1981)). The bankruptcy court distinguished In 2 re Baird, finding that in this case there was no separate fund of money set up that was to be held in trust 3 by the Eneas for Double Bogey. Moreover, unlike in Arizona, California law clearly establishes that 4 a corporate officer is not a trustee for corporate funds. See Cantrell, 329 F.3d at 1126. Therefore, the 5 Court finds that the bankruptcy court did not commit clear error when it found that the Eneas were not 6 directly liable for defalcation. 7 8 CONCLUSION For the foregoing reasons, this Court AFFIRMS the judgment of the bankruptcy court’s granting 10 United States District Court For the Northern District of California 9 the Eneas’ motion for judgment on partial findings, and finds that Double Bogey may not prevent the 11 Eneas from discharging their debts because of defalcation under section 523(a)(4), either as the alter ego 12 of Appian or though direct liability as corporate officers. 13 14 IT IS SO ORDERED. 15 16 Dated: March 25, 2013 17 SUSAN ILLSTON United States District Judge 18 19 20 21 22 23 24 25 26 27 28 8

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