Header graphic for print
Delaware Bankruptcy Litigation Information on Corporate Bankruptcy Proceedings in Delaware and Throughout the United States

Decision in In Re: Donna K. Brady Holds: Officers Aren’t Contractors

Posted in Opinions

Summary
In an 11 page opinion published May 18, 2011, Judge Shannon ruled that, in the context of a motion to dismiss, the officer of a corporation, which is itself a contractor, is not also a contractor by virtue of her position within the corporation. Judge Shannon’s opinion is available here (the “Opinion”).

Background

Donna K. Brady (the “Debtor”) was the principal officer of DK Brady Excavating, Inc. (“DKBE”). As such, she personally guaranteed a credit agreement on behalf of DKBE with Tri Supply and Equipment, Inc. (the ”Plaintiff”). She eventually defaulted under her obligations to the Plaintiff, had a default judgment entered against her in the Plaintiff’s favor, and filed for bankruptcy under chapter 7. Opinion at *1-2.

The Plaintiff initiated the adversary proceeding in which this opinion arose by filing a complaint seeking for an order denying the discharge sought by the Debtor. The Plaintiff made two allegations, one of which survived the motion for summary judgment. This post will focus on the allegation that did not survive the motion for summary judgment. This allegation was that the Debtor violated Delaware’s Construction Trust Statute, 6 Del.C. § 3502, bringing the previously awarded default judgment “within § 523(a)(4), which excepts from discharge a debt incurred by fraud or defalcation while acting in a fiduciary capacity.” Opinion at *2.

The Plaintiff asked the Court to construe Delaware’s Construction Trust Statute broadly to infer that the Debtor owed a fiduciary duty that she violated when she failed to pay the default judgment. Opinion at *5.

Judge Shannon’s Opinion

Judge Shannon started with the regular analysis of the legal standard for a motion to dismiss, including references to Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) and Kost v. Kozakiewicz, 1 F.3d 176 (3d Cir. 1993). Judge Shannon then addressed the legal standard for pleading fraud under § 727 of the Bankruptcy Code which requires a party to “state with particularity the circumstances constituting fraud or mistake.” Opinion at *4. In the Third Circuit, plaintiffs alleging fraud must be able to survive the “enhanced Rule 9 scrutiny” under which all such allegations are reviewed. Opinion at *4-5. But as the fraud claims were not dismissed, they won’t be discussed further in this blog post.

Turning back to the allegations of violating a construction trust, Judge Shannon discussed § 523 of the Bankruptcy Code and cited the Supreme Court in opining “The § 523 exceptions are strictly construed in favor of the debtor and the party asserting non-dischargeability bears the burden to show, by a preponderance of the evidence, that the disputed debt is not dischargeable.” Opinion at *7 (citing Grogan v. Garner, 498 U.S. 279, 287-88 (1991)).

He then turned to federal law in defining “fiduciary” narrowly, used only in the context of technical trust relationship. Federal courts then turn to state law to determine the existence of a technical trust relationship – in this instance, Judge Shannon looked to Delaware’s Construction Trust Statute. Opinion at *7. Delaware’s Construction Trust Statute includes a list of various entities that are considered “contractors” such that the statute would apply to them. Noticeably absent, however, is any mention of officers or directors of contractors. Opinion at *8-9. Judge Shannon summarized his reasoning in this portion of the decision by stating, “if the Delaware legislature intended to include officers and directors within the meaning of ‘contractor,’ it would have done so explicitly." Opinion at *9.

 
This opinion cited heavily to Judge Sontchi’s opinion in Moran v. Crowe (In re Moran), 413 B.R. 168 (Bankr. D. Del. 2009). Treating another judge’s opinion as precedent illustrates the remarkable consistency of the Delaware Judiciary. This consistency helps practitioners in this court to know which arguments to avoid, and which to emphasize.

John Bird practices with the law firm Fox Rothschild LLP in Wilmington, Delaware. You can reach John at 302-622-4263, or jbird@foxrothschild.com.