In re Cummings; Case No. 07-13758-SSM; April 10th, 2008
Bankruptcy and Virginia Corporate Law
Lawsuit brought in bankruptcy case highlights core aspects of Virginia corporate law
Individual debtor filed a Chapter 11 under the bankruptcy code to reorganize her debts. The debtor then brought an action for breach of contract arising from the sale of a business, a declaratory judgment that salary repayment and non-compete provisions in an employment agreement she signed are unenforceable, and damages for breach of fiduciary duty.
The court restated the standard for summary judgment that it was going to use. Importantly, the court noted that “the Supreme Court has held that a plaintiff need not plead evidence sufficient to establish a prima facia case in order to survive a motion to dismiss, but under Rule 8(a), need only give the defendant fair notice of what the plaintiff’s claim is and the grounds upon which it rests.” Swierkiewicz v. Sorena NA, 534 U.S. 506, 512 (2002). At the same time, the plaintiff must provide grounds for entitlement to relief, which requires more than labels and conclusions or a formulaic recitation of the elements of a cause of action. Bell Atlantic Corp. v. Twombly, — U.S. __ (2007).
The court went on to discuss the various Count alleged in the Complaint. The Court summarily dealt with a few of the Counts based on the inclusion of an improper party in certain claims. The court did spend some time addressing the veil piercing doctrine in Virginia and proper pleading of the same. The court noted “the veil piercing doctrine has its origins in the “desire of courts to not permit investors to manipulate the statutory privilege of limited liability to the knowing disadvantage of those who deal with the corporation.” AE Restaurants Associates, LLC v. Giampietro (In re Giampietro), 317 B.R. 841 (Bankr.D. Nev. 2004)(citing Robert B. Thompson, Piercing the Corporate Veil § 1:3(2004)).
Judge Mitchell goes on to articulate several different tests used by courts around to country to determine if the corporate veil should be disregarded. Virginia’s veil piercing test is essentially an amalgamation of these  tests, keeping as its principal focus the equitable considerations that undergird the veil piercing doctrine. See C.F. Trust, Inc. v. First Flight Ltd Partnership, 266 Va. 3, 10 (2003)(stating that the corporate entity will be disregarded and the veil pierced only if the shareholder sought to be held personally liable has controlled or used the corporation to evade a personal obligation, to perpetrate fraud or a crime, to commit and injustice, or to gain an unfair advantage and when the unity of interest and ownership is such that the separate personalities of the corporation and the individual no longer exist and to adhere to that separateness would work and injustice.) The court decided that there was enough facts set forth in the complaint with sufficient particularity to survive a motion to dismiss.
The court then addressed the count alleging breach of fiduciary duty. The court points out that Virginia does not recognize an individual shareholder’s right to claim damages for an officer or director’s breach of fiduciary duty, rather that right belongs to the corporation itself, on behalf of the entire shareholder body. Simmons v. Miller, 261 Va. 561 (2001). The court then notes that, at the very least, the individual shareholder needs to make demand on its board of directors and have them refuse to prosecute the claim, or prove that demand would be futile. Virginia Passenger & Power Co. v. Fisher, 104 Va. 121 (1905). Then, and only then, may a shareholder bring a derivative action on behalf of the corporation.
In re Houston; Case No. 08-11848; April 11th, 2008
No excuse to not have a credit counseling certificate within 5 days of filing.
The debtor in this case filed a Chapter 13 without yet having the necessary credit counseling certificate. Instead of this certificate, she filed a certification of exigent circumstances stating that she will be evicted without the court’s protection.
The court cites Bankruptcy Code §109(h)(3)(A) which allows the credit counseling requirement to be waived if the debtor submits to the court a certification that (1) “describes exigent circumstances that merit a waiver” of the credit counseling requirement; (2) “states that the debtor requested credit counseling services from an approved nonprofit budget and credit counseling agency, but was unable to obtain the services . . . during the 5-day period beginning on the date on which the debtor made that request,” and (3)”is satisfactory to the court.” Id.
The court reasons that though an impending eviction would generally qualify as an exigent circumstance, the debtor has not certified that it requested and did not receive credit counseling within the five day period before the filing. The court states that a debtor who waits until the last minute to seek counseling will not be exempt unless the agency is so backed up that it cannot provide the counseling within five days of the request. In the absence of a request for counseling services and the inability to receive it within five days of the request, the court cannot grant a deferment no matter how compelling the circumstances might otherwise be and has no choice but to dismiss the case. In re Watson, 332 B.R. 740 (Bankr. E.D. Va. 2005).
The court grants the dismissal without prejudice, but warns the debtor regarding the need to file a motion to extend the stay under §362(c)(3) and quickly highlights the requirements for a debtor to stop an eviction if the landlord already has a judgment for possession under §362(f). Onerous requirements, indeed.
Zombro v. SunTrust; AP No. 06 – 1166; April 14, 2008
Lost in Bank’s Computer System: Violation of Discharge Injunction
This case involved a credit card account and a deed of trust at SunTrust bank.
The first legal issue the court addressed was whether or not the debtor would be allowed to amend their complaint against the bank. To this the court decided that “Under the notice pleading approach adopted in Federal Rule of Bankruptcy Procedure 7008, the bank had sufficient notice both of the claim (violation of the discharge injunction) and the remedy (attorney’s fees) sought by the debtors as well as supporting allegations of fact. See Fed.R.Civ.P. 8(a)(2), made applicable by Fed.R.Bankr.P. 7008(a); Erickson v. Pardus, 127 S.Ct. 2197, 2200 (2007) (“Specific facts are not necessary; the statement need only ‘give the defendant fair notice of what the . . . claim is and the grounds upon which it rests.’”) (internal quotation marks and citations omitted).”
The court then went through the different facts that showed the bank was a notice of the claim for the discharge violation.
The debtor’s claim six different actions by the bank that could have resulted in a discharge violation. “The court need not find that all six actions taken by the bank were willful and intentional violations of the discharge junction. One violation isn’t enough.” What the court found most disturbing was the letter reiterating the payoff figure and threatening the debtor’s that further action might be taken. Suntrust cites the court’s opinion in Helmes v Wachovia Bank, N.A., 336 B.R. 105, 109 (Bankr.E.D.Va. 2005) which found that “it was not a per se violation and that there was no intentional violation of the discharge junction because the debtors file was mistakenly not flagged as a bankruptcy case.” The court pointed out that in Helmes the creditor properly corrected the error when it was brought to its attention. There was no pattern of discharge violations. The court, in that case, concluded from the totality of the circumstances that the errant credit report was not an act intended to collect a debt, but rather an excusable mistake.
Unlike the mistake in credit reporting in Helmes, which was not on its face and act to collect a discharge debt; the phone call in this case cannot be characterized as anything but attempts to collect a discharged debt.
Importantly “the bank is charged with the knowledge of the contents of its own records.” The failure to properly review the bank’s own records is not excusable mistake. If it were there would be no violations of the discharge junction, only “mistakes.” While prompt action by the court in Helmes was consistent with an innocent violation, promptness of correction of an error is not the determining factor finding willfulness or the lack of willfulness, it is a factor.
Not every action that offends discharge junction is action. An honest mistake may be a legitimate defense. However, merely showing where the bank system and wrong is not enough. Here, the summary judgment record shows that the bank knew of the bankruptcy discharge and that information was easily and readily available to the bank employees working on the account.
The court noted the bank accounting practice to “charge-off” and account and noted that and account charged off to profit and losses merely removes it from the bank’s balance sheet. It is not an acknowledgement that the debtor has been discharged. The court also noted that he discharged creditors acceptance of the voluntary payment from the debtor does not, without more, violate the discharge junction. If a debtor seeks to voluntarily repay the debt question Month creditor, the creditor does not violate discharge junction simply by responding to the request. However, if the bank knew that the request arose because of the erroneous credit bureau report or the title search or that the debtor’s asserted that the debt was discharged but were only requesting payoff out of compulsion, then the act of providing payoff may be a violation of the discharge stay. Further, “the bank is charged with all the facts known to its collection divisions even if they are geographically or operationally separated.”