ATR-Kim Eng Capital Partners, Inc. et al v. Bonilla

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MEMO. RE DEFENDANT’S MTN
FOR RECONSID. AND PLAINTIFFS’
MTN. FOR SUMM. JUDG. 	-1-
UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF CALIFORNIA
In re
HUGO NERY BONILLA,
Debtor.
ATR-KIM ENG CAPITAL PARTNERS, INC.,
and ATR-KIM ENG FINANCIAL
CORPORATION,
Plaintiffs,
vs.
HUGO NERY BONILLA,
Defendant.
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Case No. 07-30309 TEC
Chapter 7
Adv. Proc. No. 07-3079 TC
MEMORANDUM RE DEFENDANT’S MOTION FOR RECONSIDERATION AND
PLAINTIFFS’ MOTION FOR SUMMARY JUDGMENT
I. 	Motion for Reconsideration
Defendant seeks reconsideration of the denial of his motion to
dismiss Plaintiffs’ fourth cause of action for failure to state a
claim upon which relief can be granted. 	In so moving, Defendant
Signed and Filed: December 17, 2007
________________________________________
THOMAS E. CARLSON
U.S. Bankruptcy Judge
________________________________________
Entered on Docket
December 20, 2007
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
Case: 07-03079 Doc# 31 Filed: 12/17/07 Entered: 12/20/07 08:43:40 Page 1 of 6

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MEMO. RE DEFENDANT’S MTN
FOR RECONSID. AND PLAINTIFFS’
MTN. FOR SUMM. JUDG. 	-2-
contends that this court made a manifest error of law in
determining that the director of a Delaware corporation is a
“fiduciary” within the meaning of section 523(a)(4) of the
Bankruptcy Code.
Defendant first argues that this court did not give proper
deference to the decision of the Ninth Circuit in Cal-Micro, Inc.,
v. Cantrell (In re Cantrell), 329 F.3d 1119 (9th Cir. 2003).
Because Cantrell relied upon a California Supreme Court decision
stating that a corporate officer is an agent rather than a trustee
under California law, I find Cantrell to be of little relevance to
the present case involving a Delaware director.
Defendant next argues that the decisions of the Delaware
Supreme Court imposing trustee-like duties on corporate directors
are inapposite because they involved instances in which the
corporation was insolvent or the director improperly benefitted
from the act in question. 	This argument is unpersuasive for two
reasons.
First, Defendant cites no Delaware decision holding that a
corporate director has trustee-like duties only where the
corporation is insolvent or the director benefits. 	At the same
time, a decision of the Delaware Chancery Court imposed trustee-
like duties on corporate directors where there was no showing of
insolvency or improper benefit. 	Bodell v. General Gas & Electric
Corp., 132 A. 442, 447 (Del. Ch. 1926).
Second, a recent decision of the Delaware Supreme Court holds
that the fiduciary duties owed shareholders are the same as those
owed creditors upon insolvency.
Case: 07-03079 Doc# 31 Filed: 12/17/07 Entered: 12/20/07 08:43:40 Page 2 of 6

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MEMO. RE DEFENDANT’S MTN
FOR RECONSID. AND PLAINTIFFS’
MTN. FOR SUMM. JUDG. 	-3-
It is well settled that directors owe fiduciary
duties to the corporation. 	When a corporation is
solvent, those duties may be enforced by its
shareholders, who have standing to bring derivative
actions on behalf of the corporation because they are the
ultimate beneficiaries of the corporation’s growth and
increased value. 	When a corporation is insolvent,
however, its creditors take the place of the shareholders
as the residual beneficiaries of any increase in value.
Consequently, the creditors of an insolvent
corporation have standing to maintain derivative claims
against directors on behalf of the corporation for
breaches of fiduciary duties. 	The corporation’s
insolvency “makes the creditors the principal
constituency injured by any fiduciary breaches that
diminish the firm’s value.” 	Therefore, equitable
considerations give creditors standing to pursue
derivative claims against the directors of an insolvent
corporation. 	Individual creditors of an insolvent
corporation have the same incentive to pursue valid
derivative claims on its behalf that shareholders have
when the corporation is solvent.
North American Catholic Educational Programming Foundation, Inc.,
v. Gheewalla, 930 A.2d 92, 101-02 (Del. 2007) (emphasis and
quotations in original)(footnotes omitted). 	In this context, the
Delaware decisions holding that directors become trustees for
creditors upon insolvency become direct support for the conclusion
that directors are trustee for shareholders while the corporation
is solvent.
Defendant argues finally that this court erred in relying upon
the “substantially similar” test stated in Lewis v. Scott (In re
Lewis), 97 F.3d 1182 (9th Cir. 1996), asserting that Lewis is an
“anomaly” among Ninth Circuit decisions otherwise interpreting
section 523(a)(4) very narrowly. 	This court is persuaded that the
functional approach of Lewis is sound. 	Reliance on formalistic
taxonomy has lead the Ninth Circuit to the somewhat curious
conclusion that a director of a California corporation is a
Case: 07-03079 Doc# 31 Filed: 12/17/07 Entered: 12/20/07 08:43:40 Page 3 of 6

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1 Lawrence T. Lasagna, Inc. v. Foster, 609 F.2d 392, 396 (9th
Cir. 1979)(director of insolvent corporation organized under
California law is fiduciary for purposes of section 35(a)(4),
predecessor to section 523(a)(4)); Nahman v. Jacks (In re Jacks),
266 B.R. 728, 737 (9th Cir. BAP 2001).
2 Cantrell, 329 F.3d at 1127.
MEMO. RE DEFENDANT’S MTN
FOR RECONSID. AND PLAINTIFFS’
MTN. FOR SUMM. JUDG. 	-4-
fiduciary for creditors when the corporation is insolvent, 1 but is
not a fiduciary for the director’s prime constituents,
shareholders, when the corporation is not insolvent. 2 	North
American Catholic, decided by the court most widely recognized for
its expertise in corporate governance, suggests that a functional,
interest-based approach is appropriate for any analysis of the
fiduciary duties of a director under Delaware law.
II. 	Plaintiffs’ Motion for Summary Judgment
Plaintiffs seek summary judgment on their fourth cause of
action based on the preclusive effect of the Chancery Court
judgment. 	Defendant contends that issue preclusion is
inappropriate because the factual issues relevant to the fourth
cause of action are not identical to those decided in the state-
court action. 	This argument is unpersuasive.
This court having decided that Defendant is a “fiduciary” as a
matter of law, the relevant fact question under section 523(a)(4)
is whether his wrongful acts amounted to a “defalcation.” 	The
state court made detailed findings to the effect that Defendant
consciously failed to take the minimum steps legally required of
him as a director to protect corporate assets. 	These findings
represent a finding of defalcation: 	Defendant, while acting in a
fiduciary capacity was unable to account for property placed under
Case: 07-03079 Doc# 31 Filed: 12/17/07 Entered: 12/20/07 08:43:40 Page 4 of 6

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MEMO. RE DEFENDANT’S MTN
FOR RECONSID. AND PLAINTIFFS’
MTN. FOR SUMM. JUDG. 	-5-
his charge, and the property was lost due to Defendant’s failure to
follow the instructions imposed upon him by law regarding the
protection of that property. 	See Otto v. Niles (In re Niles), 106
F.3d 1456, 1460-62 (9th Cir. 1997).
**END OF MEMORANDUM**
Case: 07-03079 Doc# 31 Filed: 12/17/07 Entered: 12/20/07 08:43:40 Page 5 of 6

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Court Service List
Iain A. Macdonald, Esq.
Law Offices of Macdonald & Associates
Two Embarcadero Center, Suite 1670
San Francisco, CA 94111-3930
Michael C. Fallon, Esq.
Law Offices of Michael C. Fallon
100 E Street, Suite 219
Santa Rosa, CA 95404
Michael J. Baker, Esq.
William J. Lafferty, Esq.
Matthew L. Beltramo, Esq.
Howard, Rice, Nemerovski, Canady,
Falk & Rabkin
Three Embarcadero Center, 7th Floor
San Francisco, CA 94111
Case: 07-03079 Doc# 31 Filed: 12/17/07 Entered: 12/20/07 08:43:40 Page 6 of 6