Panel Town of Dayton, Inc. v. Corrigan et al

UNITED STATES BANKRUPTCY COURT
FOR THE SOUTHERN DISTRICT OF OHIO
WESTERN DIVISION AT DAYTON
In re:
Panel Town of Dayton, Inc.,
Debtor.
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Case No. 04-36359
Chapter 11
Judge William A. Clark
Panel Town of Dayton, Inc.,
Plaintiff,
v.
Edward Corrigan, et al.,
Defendants.
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Adv. Pro. No. 04-3311
MEMORANDUM DECISION AND ORDER GRANTING THE MOTION OF
DEFENDANT EDWARD CORRIGAN FOR PARTIAL SUMMARY JUDGMENT
Dated at Dayton, Ohio this 14th Day of September, 2005:
This document has been electronically entered in the records of the United
States Bankruptcy Court for the Southern District of Ohio.
IT IS SO ORDERED.
Dated: September 14, 2005
____________________________________________________________
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This 	matter 	is 	before 	the 	court 	on 	the 	Motion 	of 	Defendant 	Edward 	Corrigan
(“Corrigan”) for Partial Summary Judgment (the “Motion”) [Adv. Doc. # 69]; the Response of
Plaintiff/Debtor to the Motion (the “Response”) [Adv. Doc. # 75]; and the Reply of Defendant
Corrigan (the “Reply”) [Adv. Doc. # 76].
The court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157 and 1334 and the
standing order of reference entered in this district. This matter is a core proceeding pursuant to
28 U.S.C. § 157(b)(2). The following decision is determined in accordance with Fed. R. Bankr.
P. 7056.
I. Factual and Procedural Background
Douglas Dillin (“Dillin”) is the owner, sole shareholder, and President of the Debtor,
Panel Town of Dayton, Inc. (“Panel Town”). Sometime prior to September 2003, Dillin entered
into a land contract with Corrigan. The subject of the land contract was real property located in
Miami County, Ohio (the “Property”). 	By September 2003, Dillin had apparently defaulted on
the land contract and Corrigan had filed a forfeiture of land contract action in the Common Pleas
Court of Miami County, Ohio. On September 29, 2003, after a sheriff’s sale at which Corrigan
purchased the Property, Corrigan received a deficiency judgment against Dillin in the amount of
$222,672.61.
The sheriff’s sale proceeded and deficiency judgment was granted despite Dillin’s
personal bankruptcy filed on September 23, 2003. 	In November 2003, the automatic stay was
annulled as to Corrigan in Dillin’s bankruptcy and soon thereafter Dillin turned the keys to the
Property over to Corrigan. 	At the time Dillin turned over the keys to the Property to Corrigan,
the Debtor owned inventory that was located at the Property. 	Between November 2003 and
March 2004, Del Norte Refinance, LLC took an interest in the Debtor’s inventory.
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The Debtor filed bankruptcy on July 23, 2004 and this Adversary Proceeding was
commenced on November 17, 2004. In this proceeding, the Debtor alleges that Corrigan refuses
to return the Debtor’s inventory located at the Property and claims damages for the loss of the
inventory in the amount of $100,000 plus additional damages to the Debtor’s good will in the
amount of $100,000. 	Del Norte was included in this Adversary Proceeding because it has a
security interest in the Debtor’s inventory.
On February 8, 2005, Corrigan received $16,832.79 from the foreclosure sale of Dillin’s
personal residence based on a certificate of judgment filed in Greene County, Ohio. 	After
applying that amount to the deficiency judgment against Dillin, Corrigan is now owed
$205,839.82 as a result of the judgment against Dillin.
The present Motion was filed on July 22, 2005. 	In the Motion, Corrigan requests
summary judgment on the issue of whether Corrigan can offset any amount for which he is found
liable in this proceeding against the $205,839.82 that he is owed by Dillin personally. 	In the
Motion, Corrigan also indicates, but does not support, that Del Norte’s cross claims against him
should be dismissed.
II. Summary Judgment Standard
The appropriate standard to be used by the court to address a motion for summary
judgment is contained in Fed. R. Civ. P. 56(c) and is incorporated in bankruptcy adversary
proceedings by reference in Fed. R. Bankr. P. 7056. 	Rule 56(c) states in part that a court must
grant summary judgment to the moving party if:
the pleadings, depositions, answers to interrogatories, and admissions on file,
together with the affidavits, if any, show that there is no genuine issue as to any
material fact and that the moving party is entitled to a judgment as a matter of
law.
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Fed. R. Bankr. P. 7056(c); see also Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). In order
to prevail, the moving party, if bearing the burden of persuasion at trial, must establish all the
elements of its claim. 	See Celotex, 477 U.S. at 331; R.E. Cruise, Inc. v. Bruggeman, 508 F.2d
415, 416 (6th Cir. 1975). If the burden is on the nonmoving party at trial, the movant must: (1)
submit affirmative evidence that negates an essential element of the moving party’s claim; or (2)
demonstrate to the court that the nonmoving party’s evidence is insufficient to establish an
essential element of the non-moving party’s claim. Id. at 331-32.
Thereafter, the opposing party “must come forward with ‘specific facts showing that
there is a genuine issue for trial.’” Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S.
574, 586-87 (1986) (citations omitted); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249-51
(1986). “When the moving party has carried its burden under Rule 56(c), its opponent must do
more that simply show that there is some metaphysical doubt as to the material facts.”
Matsushita, 475 U.S. at 586. To this end, the non-moving party must show more than the “mere
existence of some alleged factual dispute between the parties to defeat an otherwise properly
supported motion for summary judgment; the requirement is that there be no genuine issue of
material fact.” 	Anderson, 477 U.S. at 248 (emphasis added). 	All inferences drawn from the
underlying facts must be viewed in a light most favorable to the party opposing the motion.
Matsushita, 475 U.S. at 586-88.
III. Discussion
Corrigan requests summary judgment on the sole issue of whether he can set off the debt
he is owed by Dillin individually against the amount of any judgment against him in this
adversary proceeding. 	In support of his arguments, Corrigan alleges that Dillin and the Debtor
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are alter egos under Ohio state law. If that is the case, then Corrigan’s judgment against Dillin
acts as a judgment against the Debtor.
In response, the Debtor first argues that Corrigan cannot assert a claim because he never
filed a claim in the bankruptcy. More significantly, the Debtor argues that the Debtor and Dillin
are separate entities and the requirement for mutuality of debt under 11 U.S.C. § 553 cannot be
met in these circumstances.
At the outset, the court notes that Corrigan did not lose his right to claim a setoff under §
553 by failing to file a proof of claim in this bankruptcy. 	While there are situations where a
party can waive its right of setoff, see Southeast Bank, N.A. v. Grant (In re Apex International
Management Services, Inc.), 155 B.R. 591, 595-96 (Bankr. M.D. Fla. 1993), this is not one of
those situations. In this case, Corrigan was not included on the Debtor’s schedules as a creditor
and did not receive notice of the bankruptcy or the claims bar date. Corrigan’s first opportunity
to make the set off claim was in this adversary proceeding and he is only seeking to set off
allegedly mutual debts, not receive a distribution from the bankruptcy estate. 	See In re
Calderone, 166 B.R. 825, 930 (Bankr. W.D. Pa. 1994) (holding in a Chapter 11 case that a
creditor does not waive its right to set off by failing to file a proof of claim, but does waive its
right to counterclaim by doing so). In this case, Corrigan is only seeking to set off a pre-petition
debt that he claims is mutual and he did not waive his right to set off by failing to file a claim in
the Debtor’s bankruptcy.
In order succeed on his summary judgment motion, however, Corrigan must prove that
the Dillin’s debt to him falls within the purview of 11 U.S.C. § 553. Section 553 provides in part
that the Bankruptcy Code “does not affect any right of a creditor to offset a mutual debt by such
creditor to the debtor that arose before the commencement of the case against a claim of such
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creditor against the debtor that arose before the commencement of the case.” 	11 U.S.C. § 553.
The right to set off under § 553 allows two parties who owe each other money to apply their
mutual debts against each other to avoid the “absurdity of making A pay B when B owes A.”
See In re U.S. Aeroteam, Inc., 327 B.R. 852, 861 (Bankr. S.D. Ohio 2005) (quoting Citizens
Bank of Maryland v. Strumpf, 516 U.S. 16, 18 (1995)). Section 553 does not create the right of
set off, but preserves the parties’ rights that otherwise exist under the applicable non-bankruptcy
federal or state law. 	See id; see also In re Southern Indus. Banking Corp., 809 F. 2d 329, 331
(6 th Cir. 1987).
In this case where Ohio law applies, Corrigan will have a right of set off if he can
establish that he owes the Debtor and has a claim against Debtor that both originated prior to the
commencement of the bankruptcy, that the debt and claim are mutual obligations, and that he has
a right to set off under Ohio law. 	See In re Kleather, 208 B.R. 406, 413 (Bankr. S.D. Ohio
1997). The only requirement at issue in this instance is whether Dillin’s debt to Corrigan, which
arose pre-petition, is mutual between Corrigan and the Debtor.
The Debtor is an established Ohio corporation and, under Ohio law, is clearly considered
a different entity from Dillin. See Zimmerman v. Eagle Mortgage Corp., 675 N.E. 2d 480, 485,
110 Ohio App. 3d 762 (Ohio App. 1996) (holding that a “corporation is a separate legal entity
from its shareholder even where there is only one shareholder in the corporation”). Thus, under
normal circumstances, the Debtor and Corrigan would not have mutual debts.
Corrigan argues, however, that the court should apply an equitable exception to Ohio’s
mutuality requirement. 	Ohio has long recognized the doctrine that “where the stock of a
corporation is owned entirely by one party, and the party in interest is the stockholder, the fiction
of the separate entity of the corporation may be disregarded where the ends of justice require it.”
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Knight v. Burns, 154 N.E. 345, 347, 22 Ohio App. 482 (Ohio App. 1926). This doctrine is often
referred to as the alter ego doctrine. 	Under the alter ego doctrine, Ohio courts consider many,
nonexclusive, factors including “(1) grossly inadequate capitalization, (2) failure to observe
corporate formalities, (3) insolvency of the debtor corporation at the time the debt is incurred, (4)
shareholders holding themselves out as personally liable for certain corporate obligations, (5)
diversion of funds or other property of the company property for personal use, (6) absence of
corporate records, and (7) the fact that the corporation was a mere façade for the operations of
the dominant shareholder(s).” 	Taylor Steel, Inc. v. Keeton, 417 F.3d 598, 605 (6th Cir. 2005)
(quoting LeRoux’s Billyle Supper Club v. Ma, 602 N.E. 2d 685, 689, 77 Ohio App. 3d 417 (Ohio
App. 1991)); see also Carter-Jones Lumber Co. v. LTV Steel Co., 237 F.3d 745, 749 (6th Cir.
2001) (stating that “no list of factors can be exclusive or exhaustive” under Ohio’s veil-piercing
doctrine).
Indeed, in this case, the Debtor, or more specifically Dillin, did not follow any of the
normal corporate formalities. He testified that he did not have nor ever had a corporate minute
book. 	There was no election of shareholders or stock subscription. 	In fact, Dillin testified that
he did not give consideration for his shares in the corporation. Dillin is the sole shareholder of
the Debtor. 	The Debtor has not filed tax returns for the years 2002, 2003, and 2004, but the
court can reasonably assume, based on the other evidence provided, that Dillin and the Debtor’s
financial status are inextricably connected. Thus, it appears that the Debtor is, in every sense of
the definition, Dillin’s alter ego.
The Debtor argues, however, that such an interpretation goes beyond a reasonable
extension of the doctrine as set forth by Ohio law. 	In arguing so, the Debtor looks to the
Supreme Court of Ohio’s decision in Belvedere Condominium Unit Owners’ Association v. R.E.
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Roark Companies, Inc. 	In Belvedere, the Ohio Supreme Court recognized that the corporate
form may be disregarded and individual shareholders held liable for corporate misdeeds in
certain circumstances. 	See Belvedere Condominium Unit Owners’ Association v. R.E. Roark
Companies, Inc., 617 N.E. 2d 1075, 1086, 67 Ohio St. 3d 274 (Ohio 1993). If the corporation is
simply an alter ego of the individual shareholder, the individual shareholder exercised control
over the corporation to commit fraud or an illegal act against the person seeking to disregard the
corporate form and an unjust loss resulted from the individual’s exercise of control, then Ohio
courts may disregard the corporate form and hold an individual shareholder liable for the acts of
the corporation. See Id.
Relying on Belvedere, the Debtor argues that in order for the court to allow a set off in
this case, the court must find that the Debtor committed some wrongful act in the incurring of the
debt to Corrigan. 	The court disagrees. 	Although the Belvedere court stated that the corporate
veil would be pierced if “control over the corporation by those to be held liable was exercised in
such a manner as to commit fraud or an illegal act against the person seeking to disregard the
corporate entity,” the court also stated that individuals should be held liable “when it would be
unjust to allow the shareholders to hide behind the fiction of the corporate entity.” 	Belvedere,
617 N.E. 2d at 1085-86.
It is the latter of the two statements that this court finds relevant here. 	In this case, the
Debtor and Dillin are one and the same. It would be unjust to allow either the Debtor or Dillin to
hide behind the corporate form. 	Under those circumstances, the Debtor can seek damages
against Corrigan, but Corrigan, who has a valid judgment against the Dillin, has no real method
of receiving what he is due. 	If the court does not allow the veil piercing in this instance, it is
likely that Corrigan will never receive any compensation on his judgment.
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This broad reading of the Belvedere language is supported by recent decisions from other
courts. In Taylor Steel, the Sixth Circuit Court of Appeals stated that “in recent years, the Ohio
Courts of Appeals have consistently interpreted Belvedere’s ‘illegal act’ requirement to mean a
harmful, unfair, unjust, inequitable, or wrongful act rather that solely a criminal one.” 	Taylor
Steel, 417 F.3d at 608 (citing cases).
Thus, the court finds that it would be unjust and inequitable to allow the Debtor in this
case to escape liability on Corrigan’s judgment against its sole shareholder Dillin. 	Any other
finding in this case would “make it impossible for a court of equity to make a just and equitable
determination of the case.” 	Knight, 154 N.E. at 486. 	The Debtor is Dillin’s alter ego and
Corrigan will be allowed to offset any judgment for the Debtor corporation against him in this
Adversary Proceeding with the judgment against Dillin. Corrigan’s Motion for Partial Summary
Judgment is granted on the issue of setoff.
To whatever extent the issue was implicated by the pleadings and the arguments at
hearing, summary judgment is denied as to Corrigan’s allegations and claims regarding Del
Norte’s cross claims. Those cross claims are not affected by this order.
It is so ordered.
cc:
Alfred Wm. Schneble, III, 11 W. Monument Ave., Suite 402, Dayton, Ohio 45402
Bryan K. Stewart, 249 S. Garber Drive, Tipp City, Ohio 45371
Walter Reynolds, One South Main Street, Suite 1600, Dayton, Ohio 45402-2028
United States Trustee
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