ROBERT H. JACOBVITZ, Bankruptcy Judge.
THIS MATTER is before the Court on the Motion for Partial Summary Judgment (sometimes called the "Motion") and supporting memorandum filed by Plaintiffs, Cody Farms, Inc. ("Cody Farms"), individually and derivatively as a member of and on behalf of Falcon Farms, L.L.C. ("Falcon Farms"), Robert L. Fletcher, and Mary K. Fletcher, husband and wife (the Fletchers), by and through their attorneys of record, Jennings, Strouss, & Salmon, P.L.C. (Brian Imbornoni). See Docket Nos. 28 and 29. Defendants Willard L. Deerman and Charlotte S. Deerman (together, the Deermans), by and through their attorneys of record, Law Office of George "Dave" Giddens, P.C. (Dean Cross), filed a response in opposition to the Motion and Plaintiffs filed a reply. See Docket Nos. 32 and 33. Plaintiffs and Defendants previously entered into a Stipulated Order to Stay Adversary Proceeding and to Compel Arbitration pursuant to which the parties proceeded with an arbitration case captioned Cody Farms, Inc., et al. v. Willard L. Deerman, et ux., American Arbitration Association No. 76 180 & 00397 08 (the "Arbitration Case"). See Docket No. 25. The arbitrator in the Arbitration Case (the "Arbitrator") has since
Plaintiffs assert that the Court should apply collateral estoppel to the findings made by the Arbitrator and determine that a portion of the award issued by the Arbitrator constitutes a non-dischargeable debt as to the Deermans under 11 U.S.C. §§ 523(a)(2)(A), 523(a)(4) and 523(a)(6). The Deermans raise essentially two issues in opposition to the Motion: 1) by filing and prosecuting the Motion, the Plaintiffs have violated both the automatic stay and a stay order entered in this adversary proceeding; and 2) because the Deermans still have the right to contest the arbitration award, the award has no preclusive effect and the Motion is pre-mature. For the reasons set forth below, the Court concludes that the filing and prosecution of the Motion violates neither the automatic stay nor the stay order entered in this adversary proceeding, that the Deermans are barred from contesting the Arbitration Award, and that the Arbitrator's findings have collateral estoppel effect. The Court will grant Plaintiff's Motion, provided that the Arbitrator's findings of fact establish all elements necessary to a finding of non-dischargeability of the debt at issue in this adversary proceeding.
The Deermans filed a voluntary petition under Chapter 11 of the Bankruptcy Code on November 20, 2009 as Case No. 11-09-15348 JA. Pre-petition, Cody Farms filed its arbitration claim against the Deermans. The Deermans filed a response to the arbitration claims on January 12, 2009, including a counterclaim against Cody Farms and a third-party claim against Robert L. Fletcher. Plaintiffs initiated this adversary proceeding by filing a Complaint to Determine Non-Dischargeability of Debt ("Complaint") on February 16, 2010. The Complaint includes individual claims and derivative claims asserted by Cody Farms as a member of Falcon Farms. Plaintiffs did not, however, pursue any derivative claims as part of the Arbitration Case. See Memorandum in Support of Motion for Partial Summary Judgment ("Plaintiffs' Supporting Memorandum"), p. 11, n. 2 — Docket No. 29, even though the caption in the Arbitration Case reflects Cody Farms both individually and derivatively as a member of and on behalf of Falcon Farms.
Cody Farms and the Fletchers filed a motion for relief from stay in the Deermans' bankruptcy case requesting relief from the automatic stay to allow the movants and the Deermans to proceed with the Arbitration Case. On October 4, 2010, a Stipulated Order to Stay Adversary Proceeding and to Compel Arbitration ("Stipulated Order") was entered in this adversary proceeding. See Docket No. 25. The Stipulated Order recited that its purpose is to stay the adversary proceeding to permit the parties to liquidate their claims against each other in the Arbitration Case, and that the Plaintiffs had filed a motion for relief from stay in the Deermans' bankruptcy case to permit the Arbitration Case to proceed. Id. The Stipulated Order included the following provisions: 1) this adversary proceeding is stayed pending further order of this Court; 2) the Deermans agree to proceed with arbitration, provided they are given a reasonable opportunity to cure any previous failure to respond to discovery or to otherwise participate in the Arbitration Case; 3) the factual determinations of liability and the amount of debt, if any, owed by either party to the other will be determined in the Arbitration Case; 4) this Court retains exclusive jurisdiction to determine whether any award in the Arbitration Case is non-dischargeable;
On October 26, 2010, the Court entered an Order Granting Motion for Relief from Stay ("Stay Relief Order") in the Deermans' bankruptcy case. See Case No. 09-15348 — Docket No. 132. The Stay Relief Order modified the automatic stay provisions of 11 U.S.C. § 362 so that the Plaintiffs and the Deermans could proceed with the Arbitration Case, provided that the Plaintiffs would not attempt to enforce any award entered in the Arbitration Case against the Deermans without further leave of this Court, and provided further that this Court retains exclusive jurisdiction over the dischargeability of any award. Id.
The Arbitration Case was conducted in Arizona. The Arbitrator entered Findings of Fact and Conclusions of Law and an Interim Award in the Arbitration Case on February 2, 2012. On March 19, 2012, the Arbitrator entered a Final Arbitration Award (defined above as the "Arbitration Award") in the Arbitration Case. The Arbitration Award has not been confirmed.
In their bankruptcy case, the Deermans filed Debtors' Motion to Extend Time to File Amended Plan and Disclosure Statement ("Motion to Extend"). See Bankruptcy Case No. 11-09-15348 J — Docket No. 237. The Motion to Extend includes arguments that echo the Deermans' arguments in opposition to the pending Motion filed in this adversary proceeding: namely, that the Plaintiffs cannot obtain a non-dischargeable judgment without first confirming the Arbitration Award and that the Deermans can challenge the Arbitration Award as part of a proceeding to confirm the Arbitration Award. See Motion to Extend — ¶¶ 4, 5, 6 — Case No. 11-09-15348 JA — Docket No. 237. At a preliminary hearing on the Motion to Extend, the parties agreed that the Deermans will have thirty days following the Court's ruling on the instant Motion within which to file an amended plan and disclosure statement.
Summary Judgment, governed by Rule 56, Fed.R.Civ.P., made applicable to adversary proceedings by Rule 7056, Fed. R.Bankr.P., will be granted when the movant demonstrates that there is no genuine dispute as to any material fact and that the movant is entitled to judgment as a matter of law. Rule 56(a), Fed.R.Civ.P. In order to defeat a motion for summary judgment, the opposing party must "go beyond the pleadings and by [his] own affidavits, or by the depositions, answers to interrogatories, and admissions on file, designate specific facts showing that there is a genuine issue for trial." Celotex Corp. v. Catrett, 477 U.S. 317, 324, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986) (internal citations omitted). When evaluating a motion for summary judgment, the Court must view the facts in the light most favorable to the party opposing summary judgment. Harris v. Beneficial Oklahoma, Inc., (In re Harris), 209 B.R. 990, 995 (10th Cir. BAP 1997) ("When applying this standard, we are instructed to `examine the factual record and reasonable inferences therefrom in the light most favorable to the party opposing summary judgment.'") (quoting Wolf v. Prudential Ins. Co. of America, 50 F.3d 793, 796 (10th Cir.1995)) (quoting Applied Genetics Int'l, Inc. v. First Affiliated Sec., Inc., 912 F.2d 1238, 1241 (10th Cir.1990) (additional internal quotation marks omitted)).
The Deermans assert that the Motion violates the automatic stay imposed by 11 U.S.C. § 362. This Court disagrees. The automatic stay imposed by 11 U.S.C. § 362 operates to stay the continuation of an action or proceeding against the debtor "to collect, assess, or recover a claim against the debtor that arose before the commencement" of the debtor's bankruptcy case. 11 U.S.C. § 362(a)(6). Its scope is extremely broad. In re Sullivan, 357 B.R. 847, 853 (Bankr.D.Colo.2006) (citing In re Gagliardi, 290 B.R. 808, 814 (Bankr. D.Colo.2003)). However, an action to contest dischargeability of a debt under section 523 of the Bankruptcy Code brought by a creditor against a debtor cannot violate the automatic stay because the automatic stay does not apply to acts taken in a debtor's bankruptcy case brought before the Bankruptcy Court seeking relief under the Bankruptcy Code. See Sears, Roebuck & Co. v. Hodges (In re Hodges), 83 B.R. 25, 26 (Bankr.N.D.Cal.1988) (observing that "an action taken in the bankruptcy court can only be found to be a violation of the automatic stay when there is no basis under the Code for the action[,]" and concluding that, "[a]s a matter of law ... a
The Deermans also assert that the Stipulated Order entered in this adversary proceeding precluded the Plaintiffs from filing or prosecuting their Motion. The Stipulated Order provides that this "adversary proceeding is stayed pending further order of this Court." See Stipulated Order, p. 2, ¶ 1 — Docket No. 25. But even the Stipulated Order provides that either party may request the Court to vacate the Stipulated Order so the parties may resume proceeding in this adversary proceeding if the Stay Relief Order in the Deermans' bankruptcy case is denied; that any award entered in the Arbitration Case in favor of the Plaintiffs and against the Deermans "shall not be enforceable without further order of this Court[;]" and that this Court retains "exclusive jurisdiction to determine whether any such award is nondischargeable under § 523 of the Bankruptcy Code." Id. at ¶ 2.
Having proceeded with the Arbitration Case and obtained an arbitration award as contemplated by the Stipulated Order and Stay Relief Order, Plaintiffs have returned to the this Court as contemplated by the Stipulated Order to request a determination that the debt at issue is non-dischargeable. The stay imposed by the Stipulated Order was intended to stay this adversary proceeding until the Arbitrator concluded the Arbitration Case. That has occurred. The Motion has been fully briefed. It does not make sense to require the movants to refile a motion for partial summary judgment and supporting papers and the Defendant to refile their response. Under the circumstances, the Court will vacate the stay imposed by the Stipulated Order nunc pro tunc as of the date of the filing of the Motion. The filing and prosecution of the Motion, therefore, does not violate the stay imposed by the Stipulated Order.
Section 9 of the Federal Arbitration Act, 9 U.S.C. §§ 1-16 ("FAA"), governs the procedure for confirming an arbitration award. That section provides, in relevant part:
Sections 10 and 11 of the FAA specify which court may issue an order vacating, modifying or correcting an arbitration
The Deermans cite cases from other jurisdictions which hold that a party can challenge an arbitration award in defense to an action to confirm an arbitration award. See, e.g., Chauffeurs, Teamsters, Warehousemen and Helpers Local Union No. 364 v. Ruan Transport Corp., 473 F.Supp. 298, 303 (N.D.Ind.1979) (holding that Section 12 of the FAA "only limits the time during which the party against whom an arbitrator rules can initiate court action; section 12 does not limit the time during which the defenses enumerated in
In discerning a statute's meaning, the starting place is the plain meaning of the language itself. See United States v. Ron Pair Enters., Inc., 489 U.S. 235, 241, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989) (resolving a dispute over the meaning of a statute "begins ... with the language of the statute itself.") (citation omitted); In re Wilbur, 344 B.R. 650, 653 (Bankr. D.Utah 2006) ("Statutory construction begins with the language of the statute itself and an analysis of whether the language is plain.") (citation omitted). When the meaning of the language is plain, the Court's analysis ends. Ron Pair, 489 U.S. at 241, 109 S.Ct. 1026 (when the plain meaning of the language is clear, the court's inquiry ends, and "`the sole function of the courts is to enforce it according to its terms.'")(quoting Caminetti v. United States, 242 U.S. 470, 485, 37 S.Ct. 192, 194, 61 L.Ed. 442 (1917)).
A plain reading of the language in Sections 9 through 12 of the FAA supports the conclusion that a party's failure to act within the three-month limitation period is fatal to such party's ability to vacate, modify, or correct the award under the FAA. There is no need for Section 9 of the FAA to reference Section 12 in order for the time limitation contained in Section 12 to apply to a defense to an application to confirm an award on grounds specified in Sections 10 and 11. Under Section 9, on a timely application the court "must" confirm the award "unless the award is vacated, modified, or corrected as prescribed in sections 10 and 11 of this title." 9 U.S.C. § 9 (emphasis added). An arbitration award cannot be vacated, modified, or corrected as prescribed in sections 10 and 11 unless a motion is made within the three-month period specified in Section 12. As pointed out by the Seventh Circuit in Chauffeurs, Teamsters, Warehousemen and Helpers, Local Union 135 v. Jefferson Trucking Co., Inc., 628 F.2d 1023, 1026 (7th Cir.1980), Section 9 of the FAA:
This application of the plain meaning of the FAA is consistent with the strong federal policy favoring resolution of disputes through arbitration.
The Deermans assert that because the parties' agreement requires application of New Mexico law, the Court must apply the Arbitration Act as adopted in New Mexico, not the FAA. See Response, p. 16, ¶ 12 — Docket No. 32. But the result is the same whether the Court applies the FAA or applicable New Mexico law. New Mexico has adopted the Uniform Arbitration Act. See N.M.S.A.1978 § 44-7A-1(a) (Repl. Pamp. 2007) ("The provisions of this act may be cited as the `Uniform Arbitration Act.'"). Similar to the FAA, the New Mexico Uniform Arbitration Act contains a restriction on the
The Deermans point out that this section contemplates a right to appeal an order confirming an arbitration award and contend that, until Plaintiffs seek to confirm the arbitration award, the Deermans have not been allowed to fully realize their appeal rights. However, under New Mexico law, a party who fails to timely file an action seeking to vacate, modify, or correct an arbitration award cannot later contest the award. See United Technology and Resources, Inc. v. Dar Al Islam, 115 N.M. 1, 5, 846 P.2d 307, 311 (1993) ("By failing to file a motion to modify or correct within ninety days after delivery of the arbitrator's award, [Appellant] waived its right to present its substantive defenses to confirmation of the award."). Thus, where a party fails to make a timely request to vacate, modify, or correct an arbitration award, a court is required to confirm the award. Id. Because the Deermans did not seek to modify or vacate the arbitration award within the ninety-day period provided under the New Mexico Uniform Arbitration Act, they have forfeited their right to do so even if the New Mexico Uniform Arbitration Act applies.
The Deermans also argue that Plaintiffs must first confirm the Arbitration Award before they can enforce it, and that by seeking to obtain a non-dischargeable judgment based on the collateral estoppel effect of the Arbitration Award Plaintiffs are making an end run around the confirmation requirement. Though Plaintiffs assert that confirmation is permissive, not mandatory, they alternatively request this Court to confirm the Arbitration Award. The Deermans agree that this Court has the authority to confirm the Arbitration Award, but assert that they must be allowed to present evidence exposing the flaws in the Arbitration Award. See Case No. 11-09-15348 — Docket No. 237, ¶¶ 7 and 14. This Court agrees that confirmation is not the only method of enforcing an arbitration award.
Section 9 of the FAA imposes a one-year statute of limitations period for motions to confirm an arbitration award. Photopaint Technologies, LLC v. Smartlens Corp., 335 F.3d 152, 158-160 (2nd Cir.2003).
The Deermans assert that this Court should not confirm the Arbitration Award for two reasons: first, the Deermans take issue with several of the Plaintiffs' undisputed facts set forth in the Motion, although they agree that the Arbitrator made those findings (see Response, p. 3 n. 1); and second, the Deermans assert that the Arbitrator made errors of law. This Court has concluded that the Deermans may not, as a defense to confirmation of the Arbitration Award, assert that the award should be vacated, modified or corrected. The Deermans have forfeited any right to contest the Arbitration Award as a defense to confirming it on the grounds to the award should be vacated, modified or corrected.
In addition, even if the Deermans had not forfeited their right to contest the Arbitration Award, their two defenses to confirmation of the Arbitration Award fail as a matter of law. Judicial review of an arbitration award is extremely limited. Dominion Video Satellite, Inc. v. Echostar Satellite, L.L.C., 430 F.3d 1269, 1275 (10th Cir.2005) (citation omitted). Erroneous
Other than the statutory bases for contesting confirmation of an arbitration award authorized under the FAA and the New Mexico Uniform Arbitration Act, there may exist a judicially-created basis for vacating an award where an arbitrator acts "in `manifest disregard' of the law." Dominion Video, 430 F.3d at 1275. Under the "manifest disregard" standard, the moving party must demonstrate from the record of the arbitration proceeding that the arbitrator "`knew the law and explicitly disregarded it.'" Id. (quoting Bowen v. Amoco Pipeline Co., 254 F.3d 925, 932 (10th Cir.2001) (internal citation omitted)). Even when an arbitrator makes a mistake in the application of the law, the arbitrator's findings will not be set aside. Dominion Video, 430 F.3d at 1275 (stating that "[m]erely `erroneous interpretations or applications of the law are not reversible.'")(quoting ARW Exploration Corp. v. Aguirre, 45 F.3d 1455, 1463 (10th Cir. 1995)). In contesting the Motion, the Deermans have not asserted that the Arbitrator's decision exhibited a "`willful inattentiveness to the governing law.'" Dominion Video, 430 F.3d at 1275 (quoting ARW Exploration, 45 F.3d at 1463). Nor, for that matter, have the Deermans asserted that there was any other type of misconduct on the part of the Arbitrator, such as fraud or corruption. Consequently, the Court concludes that the Arbitration Award should be confirmed.
Having determined that the Deermans cannot contest the Arbitration Award and that the Arbitration Award should be confirmed, the Court must now determine whether to give collateral estoppel effect to the Arbitration Award for purposes of determining the non-dischargeability of the debt at issue in this adversary proceeding. It is well-settled that collateral estoppel can be applied in bankruptcy to determine dischargeability claims. See Grogan v. Garner, 498 U.S. 279, 284-85 n. 11, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) (clarifying that "collateral estoppel principles do indeed apply in discharge exception proceedings pursuant to § 523(a)."). Further, courts, including bankruptcy courts, have given arbitration awards preclusive effect in subsequent litigation, even in the absence of confirmation of the award.
Here, the arbitration was conducted in Arizona, and the Arbitrator's factual findings that Plaintiffs assert have collateral estoppel effect were issued in the Arizona Arbitration Case. Accordingly, the Court will look to the collateral estoppel law of Arizona. Under Arizona law, collateral estoppel will preclude a party from contesting an issue litigated in a prior proceeding if the following requirements are met:
The Court has not found a case interpreting Arizona law that gave collateral estoppel effect to an arbitration award, nor has either party directed the Court to a case on that point. However, in Lansford v. Harris, 174 Ariz. 413, 850 P.2d 126 (Ct.App.1992), the Arizona Court of Appeals considered whether an issue had already been litigated as part of a fee arbitration, ultimately determining that collateral estoppel did not bar subsequent litigation because the issue had not actually been litigated as part of the arbitration. The collateral estoppel elements under New Mexico law are substantially similar to the requirements under Arizona law.
As analyzed above, the Arbitration Award is a valid and final decision on the merits. Further, the issues the Arbitrator decided were actually litigated, and the issues were essential to the issuance of the Arbitration Award. The parties to the Arbitration Award are the same, or in privity, with the parties to this adversary proceeding.
The Court will, therefore, give collateral estoppel effect to the factual findings of the Arbitrator. The only remaining issue is whether the Arbitrator's factual findings establish all elements necessary to a determination of non-dischargeability under 11 U.S.C. § 523(a)(2)(A), (a)(4) and/or (a)(6).
The following facts, which include many of the factual findings made by the Arbitrator in connection with the Arbitration Case are not subject to genuine dispute:
Debts for money obtained by false pretenses, a false representation, or actual fraud are non-dischargeable under 11 U.S.C. § 523(a)(2)(A). There are five required elements under this subsection to establish the non-dischargeability of a debt obtained by false representation: 1) the debtor made a false representation to the creditor; 2) the debtor made the false representation with the intent to deceive the creditor; 3) the creditor relied on the false representation; 4) the creditor's reliance was justifiable
The Arbitrator's factual findings issued as part of the Findings of Fact and Conclusions of Law entered in the Arbitration Case include the following:
Though set forth as part of the Arbitrator's legal conclusions, the above statements contain factual findings that are supported by the Arbitrator's findings of fact. These facts establish all elements necessary to a determination of non-dischargeability under 11 U.S.C. § 523(a)(2)(A). Mr. Deerman made false representations to the Cody Farms and the Fletchers that the 2006 hay inventory had been sold, when, in fact, it had not. Mr. Deerman knew that his representations were false at the time he made them, and he made them with the intent to deceive Cody Farms and the Fletchers. In reliance on Mr. Deerman's representations, Cody Farms and the Fletchers agreed to co-sign a promissory note to Capital Farm Credit that increased Falcon Farms' borrowing by $901, 000, provided additional production from their own hay
The Arbitrator also found that the Fletchers' reliance on Mr. Deerman's misrepresentations was reasonable. It was not unusual for hay that had been sold to be stored, which supports an inference that the Fletchers had no reason to suspect that Mr. Deerman's representation that the 2006 hay had been sold was false. Non-dischargeability under 11 U.S.C. § 523(a)(2)(A) requires only justifiable, not reasonable, reliance. Field v. Mans, 516 U.S. 59, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995) (establishing justifiable reliance standard under 11 U.S.C. § 523(a)(2)(A)). Reasonable reliance is a higher standard than justifiable reliance. See Columbia State Bank, N.A. v. Daviscourt (In re Daviscourt), 353 B.R. 674, 684 n. 23 (10th Cir. BAP 2006) (stating that "`[r]easonable' reliance requires a higher standard of care by the relying party than does `justifiable' reliance.") (citations omitted). Consequently, the Arbitrator's finding that the Fletchers' reliance was reasonable is more than sufficient to satisfy the reliance requirement under 11 U.S.C. § 523(a)(2)(A).
Debts resulting from "willful and malicious injury by the debtor to another entity or to the property of another entity" are non-dischargeable. 11 U.S.C. § 523(a)(6). Nondischargeability under this subsection requires that the debtor's actions be both willful and malicious. Panalis v. Moore (In re Moore), 357 F.3d 1125, 1129 (10th Cir.2004) ("Without proof of both [willful and malicious elements under 523(a)(6)], an objection to discharge under that section must fail.") (emphasis in original); Mitsubishi Motors Credit of America, Inc. v. Longley (In re Longley), 235 B.R. 651, 655 (10th Cir. BAP 1999) (stating that "[i]n the Tenth Circuit, the phrase `willful and malicious injury' has been interpreted as requiring proof of two distinct elements — that the injury was both `willful' and `malicious.'").
Plaintiffs assert that the Arbitration Award in the amount of $254,289.67 "for the misappropriation and diversion of the assets and funds of Falcon Farms" constitutes a non-dischargeable debt under 11 U.S.C. § 523(a)(4). See Arbitrator's Findings of Fact and Conclusions of Law, p. 16, ¶ 16. Debts for "fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny" are non-dischargeable pursuant to 11 U.S.C. § 523(a)(4).
Fiduciary capacity within the meaning of 11 U.S.C. § 523(a)(4) is extremely narrow; it only arises when there is an express or technical trust, and must exist prior to and not as a result of the wrongdoing. See Duncan v. Neal (In re Neal), 324 B.R. 365, 370 (Bankr.W.D.Okla. 2005), aff'd, 342 B.R. 384 (10th Cir. BAP 2006) ("The Tenth Circuit has taken a very narrow view of the concept of fiduciary duty under this section."); Allen v. Romero, 535 F.2d 618, 621 (10th Cir.1976) (stating that "[t]he exemption under § 17(a)(4) [the predecessor under the former Bankruptcy Act to § 523(a)(4)] applies only to technical trusts and not to those which the law implies from contract.") (citation omitted). See also, Davis v. Aetna Acceptance Co., 293 U.S. 328, 333, 55 S.Ct. 151, 154, 79 L.Ed. 393 (1934) (noting that the debtor "must have been a trustee before the wrong and without reference thereto."). "Neither a general fiduciary duty of confidence, trust, loyalty, and good faith, nor an inequality between the parties' knowledge or bargaining power is sufficient to establish a fiduciary relationship for purposes of dischargeability." Young, 91 F.3d at 1372 (internal citations omitted).
Plaintiffs assert that the Deermans owed them a fiduciary duty within the meaning of 11 U.S.C. § 523(a)(4) based on their status as members of a limited liability company. In support of their argument, Plaintiffs direct the Court to the language in the New Mexico statutes governing limited liability companies providing that members of limited liability companies owe a fiduciary duty to other members. See N.M.S.A.1978 § 53-19-16(D). A statute can impose fiduciary duties sufficient to establish a technical trust for purposes of 11 U.S.C. § 523(a)(4).
However, even when a state statute imposes fiduciary duties upon members of a limited liability company, courts often conclude that such duties are insufficient to establish a trust within the meaning of 11 U.S.C. § 523(a)(4). See, e.g., Abraham, Bar-Am and Nourit, LLC v. Grosman (In re Grosman), 2007 WL 1526701, *16 (Bankr.M.D.Fla. May 22, 2007) (finding that "[a]lthough Florida Statute Section 608.4225 does supply certain fiduciary duties, for example, holding limited liability company property as trustee and refraining from intentional misconduct, the
The relevant New Mexico statute governing limited liability companies provides, in part:
Although the statute uses trust-type language, it contemplates a trust that would arise as a result of a member's failure to account. That type of trust is a trust that arises as a result of a member's wrongdoing and cannot support a finding of fiduciary capacity for purposes of 11 U.S.C. § 523(a)(4). The substance of the New Mexico statute is similar to the Oklahoma statute at issue in Duncan, 2011 WL 6749054 which the bankruptcy court concluded did not meet the non-dischargeability requirements for a technical trust. That statute provided in relevant part that
The Duncan court reasoned that the statutory language "without the consent" renders the so-called trust a trust ex maleficio which falls outside the scope of 11 U.S.C. § 523(a)(4). Duncan, 2011 WL 6749054, at *18 (relying on case law from the Tenth Circuit Bankruptcy Appellate Panel interpreting similar language in the Uniform Partnership Act). Sections 53-19-16(D)(2)(a) and (b) similarly contemplate consent or approval from the disinterested member or managers, such that action taken without consent or approval is what gives rise to the trust relationship. The Court concludes that the statute creates a trust that arises from a member's malfeasance which cannot support a non-dischargeability claim under 11 U.S.C. § 523(a)(4). Thus, Plaintiff's claims premised on a breach of fiduciary duty while acting in a fiduciary capacity fail as a matter of law.
Embezzlement and larceny are separate grounds under 11 U.S.C. § 523(a)(4) for which no fiduciary capacity is required. See In re Lynch, 315 B.R. 173, 175 (Bankr.D.Colo.2004) ("A claim for nondischargeability under Section 523(a)(4) may rest on proof of larceny or embezzlement, without proof of a fiduciary relationship.") (citing In re Wallace, 840 F.2d 762, 765 (10th Cir.1988)).
The Arbitrator's findings of fact are sufficient to support a claim for embezzlement. To demonstrate that the debtor fraudulently appropriated property for purposes of establishing embezzlement under 11 U.S.C. § 523(a)(4), the plaintiff must show that the debtor appropriated the property for a use other than that for which it was entrusted or that the debtor was not lawfully entitled to use the funds for the purposes for which they were in fact used, and the circumstances indicate fraud.
However, Plaintiffs claim based on embezzlement cannot be asserted directly against the Deermans since the funds that the Deermans misappropriated belonged to Falcon Farms; the embezzlement claim is a derivative claim. See Spivey, 440 B.R. at 545 (finding that a claim for defalcation by debtor of limited liability company's property belonged to the limited liability company since the duty and the debt was owed to the company; consequently, the member's interest in the claim was derivative); White v. Whittle (In re Whittle), 449 B.R. 427, 430 (Bankr.M.D.Fla.2011) (finding that plaintiffs could not assert a direct claim for embezzlement against a member of limited liability company because any damage would be inflicted on the limited liability company, not the plaintiffs individually). See also Wallner v. Liebl (In re Liebl), 434 B.R. 529, 541 (Bankr.N.D.Ill. 2010) (concluding that plaintiff could not recover individually on a claim based on the debtor's embezzlement of funds from limited liability company because plaintiff could not demonstrate that the misappropriated property belonged to him personally).
Plaintiffs did not pursue derivative claims as part of the Arbitration Case
The members of Falcon Farms are Cody Farms and the Deermans. Because the Deermans' interest is adverse to the interest of Falcon Farms, and the Deermans and Cody Farms are the only members of Falcon Farms, Cody Farms was not required under N.M.S.A.1978 § 53-19-58 to obtain a vote before initiating a derivative suit on behalf of Falcon Farms. See In re D'Anello, 477 B.R. 13, 23 (Bankr.D.Mass. 2012) (reasoning that when 1) other members did not raise the lack of a vote authorizing a derivative suit as grounds for dismissal; 2) the derivative claims were brought against members whose claims were adverse to the limited liability company, and 3) the only member eligible to vote to authorize the suit was the member
Because this adversary proceeding was brought both derivatively and individually, the Court finds that Cody Farms is entitled to partial summary judgment on its derivative claim for embezzlement against the Deermans brought on behalf of Falcon Farms based on the arbitrator's findings of fact. Cf. Liebl, 434 B.R. at 537 (sustaining non-dischargeability claim for embezzlement brought derivatively on behalf of a limited liability company, inferring that the debtor acted with fraudulent intent by appropriating funds from the limited liability company for his own personal use and benefit).
The Arbitration Award awarded the sum of $254,289.67 based on "the misappropriation and diversion of the assets and funds of Falcon Farms." See Arbitration Award, p. 2, ¶ 1(b). As analyzed above, these misappropriated funds are non-dischargeable under 11 U.S.C. § 523(a)(4) and 11 U.S.C. § 523(a)(6) as a derivative claim brought by Cody Farms on behalf of Falcon Farms. The Arbitration Award includes pre-judgment interest in the amount of $135,419.94 based on the award for the Deermans' misappropriation and diversion of Falcon Farms's assets. See Arbitration Award, p. 2, ¶ 1(b). This pre-judgment interest amount is entitled to collateral estoppel effect and constitutes part of the non-dischargeable judgment. Cf. In re Roussos, 251 B.R. 86, 94 (9th Cir. BAP 2000), aff'd, 33 Fed.Appx. 365 (9th Cir.2002) (acknowledging that collateral estoppel can be applied to a state court's award of punitive damages and included as part of a non-dischargeable debt, and observing further that "a nondischargeable `debt' may include prejudgment interest, attorneys' fees and costs, and punitive damages, not all of which are actual out-of-pocket losses to the creditor due to fraud, but all of which arise from the debtor's liability for the fraudulent conduct."); The Aetna Casualty and Surety Co. v. Markarian (In re Markarian), 228 B.R. 34, 45 (1st Cir. BAP 1998) (concluding, based on Cohen v. de la Cruz, 523 U.S. 213, 118 S.Ct. 1212, 1215, 140 L.Ed.2d 341 (1998) that the entire amount of damages awarded by the district court, including the pre-and post-judgment interest was excepted from discharge).
Plaintiffs also request the Court to determine that $1,130,073.40 is non-dischargeable under 11 U.S.C. § 523(a)(2)(A) as a debt procured by fraud. The Arbitration Award provides:
However, the Arbitrator's findings of fact establish that $186,776.20 of the $1,130,073.40 in damages is attributable to additional hay provided to Falcon Farms by Fletcher Farms, not by the Fletchers individually and not by Cody Farms. See Findings of Fact and Conclusions of Law, p. 7, ¶ 30 (stating that "[t]he La Mesa office [of Falcon Farms] only paid Fletcher Farms for its first and second cuttings and a small portion of its third cutting in 2007, leaving a balance due of $186,776.20 for Fletcher Farm's [sic.] third and fourth cuttings."). Fletcher Farms is not a party to this adversary proceeding. Thus, $186,776.20 cannot be included in the total amount of the non-dischargeable judgment in favor of the Plaintiffs. The Arbitrator's factual findings also establish that Cody Farms paid the $43,297.20 to James Rascoe. Id. ("Falcon also failed to pay James Rascoe $43,297.20 for his fourth cutting. Cody Farms paid this invoice as an additional advance to Falcon."). Cody Farms is owned by Mr. Fletcher, and is a party to this adversary proceeding, both individually, and derivatively on behalf of Falcon Farms. As analyzed above, Plaintiffs' fraud claims against the Deermans are direct claims. Cody Farms, is, therefore, entitled to a non-dischargeable judgment under 11 U.S.C. § 523(a)(2)(A) in the amount of $43,297.20.
With respect to the remaining $901,000.00 component of the $1,130,073.40 award attributable to the Deermans' misrepresentations, Cody Farms and the Fletchers each co-signed the promissory note that increased Falcon Farms' liability to Capital Farm Credit by $901,000.00. However, it is not entirely clear from the Arbitrator's factual findings what portion of this debt Plaintiffs paid to Capital Farm Credit. The Arbitrator's factual findings establish that Capital Farm Credit filed a complaint against Falcon Farms, Cody Farms, the Fletchers and the Deermans, and that Capital Farm Credit agreed to settle its claims against Cody Farms and the Fletchers for the total sum of $1,500,000.00 pursuant to a Compromise and Settlement Agreement. See Findings of Fact and Conclusions of Law, pp. 11, ¶ 46. Certain proceeds held in trust by the Deermans' attorneys in the amount of $160,039.91 were used to pay a portion of the settlement amount. Id. The remaining balance in the amount of $1,339,960.00
It is not possible for the Court to determine from the Arbitration Award what portion of the $901,000.00 is non-dischargeable. While the Arbitrator's factual findings reflect that Capital Farm Credit filed
For the foregoing reasons, the Court concludes that Plaintiffs are entitled to partial summary judgment on their non-dischargeability claims under 11 U.S.C. § 523(a)(2)(A), 11 U.S.C. § 523(a)(4), and 11 U.S.C. § 523(a)(6) based on the preclusive effect of the Arbitration Award. Cody Farms is entitled to a non-dischargeable judgment in the amount of $389,709.61, including pre-judgment interest in the amount of $135,419.94, as a derivative claim on behalf of Falcon Farms based on its claims under 11 U.S.C. § 523(a)(4) and 11 U.S.C. § 523(a)(6) arising from the Deermans' misappropriation and diversion of the assets and funds of Falcon Farms. Cody Farms is also entitled to a non-dischargeable judgment in the amount of $43,297.20 based on its fraud claim under 11 U.S.C. § 523(a)(2)(A).
The Fletchers are entitled to a determination of liability on their claim for fraud under 11 U.S.C. § 523(a)(2)(A). However, further evidence is needed with respect to the damages amount attributable to the Fletchers' fraud claim. The Court will enter a separate judgment consistent with this Memorandum Opinion.
Arizona New Mexico
The issue was actually litigated The issue was actually litigated
the parties had a full and fair opportunity and Once the other three elements are
motive to litigate the issue; demonstrated, the court determines "whether
the non-moving party `had a full and fair
opportunity to litigate the issue in the prior
litigation.'" Rex, 119 N.M. at 504, 892 P.2d at
951 (quoting Shovelin, 115 N.M. at 297, 850
P.2d 996).
The resolution of the issue was essential to the The issue was necessarily determined in the
decision in the prior action prior litigation
The parties in the prior action are the same the party to be estopped was a party to the prior
proceeding
The prior decision was a valid and final decision
on the merits
