LFR Collections LLC v. Sax

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UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re
RICHARD SAX, 	No. 11-10464
Debtor(s).
______________________________________/
LFR COLLECTIONS, LLC,
Plaintiff(s),
v. 	A.P. No. 11-1220
RICHARD SAX,
Defendant(s).
_______________________________________/
Memorandum on Motion to Dismiss
_________________
The complaint in this adversary proceeding alleges that plaintiff LFR Collections, LLC, loaned
money to the professional corporation of defendant and Chapter 7 debtor Richard Sax, an attorney.
Sax guaranteed the obligation personally. LFR alleges that Sax dissolved his corporation after
receiving a demand for payment from LFR. The complaint alleges that Sax converted at least
$195,000.00 of its collateral wilfully and maliciously and his debt to LFR is accordingly
nondischargeable pursuant to § 523(a)(6) of the Bankruptcy Code. The complaint also alleges that
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Entered on Docket
November 21, 2011
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
Case: 11-01220 Doc# 11 Filed: 11/20/11 Entered: 11/21/11 09:09:17 Page 1 of 2

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the debt is nondischargeable pursuant to § 523(a)(4) for defalcation in a fiduciary capacity.
Sax’s motion to dismiss the complaint for failure to state a claim is now before the court.
Sax does not seriously argue that the complaint does not state facts sufficient to establish a claim that
LFR has some sort of nondischargeable claim against Sax pursuant to § 523(a)(6). However, he
attacks the § 523(a)(4) allegations as being insufficient.
Under California law all of the assets of the corporation become a trust for the benefit of
creditors upon a corporation's insolvency and, accordingly, a sufficient trust relationship exists for the
application of § 523(a)(4). In re Jacks, 266 B.R. 728, 737 (9th Cir.BAP 2001). 	Sax argues that the
complaint is defective because it does not specifically allege that the corporation was insolvent when
Sax dissolved it. However, the complaint does allege that at the time of distribution “Defendant was
required to hold the assets of the Professional Corporation in trust for such creditors, including the
Lender.” LFR can establish a right to relief under § 523(a)(4) by showing that this allegation is true,
which will involve showing that the corporation was insolvent. The allegation is sufficient to survive a
motion to dismiss.
For the foregoing reasons, Sax’s motion to dismiss will be denied. Counsel for LFR shall
submit an appropriate form of order.
Dated: November 20, 2011
SAlan Jaroslovsky
U.S. Bankruptcy Judge
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Case: 11-01220 Doc# 11 Filed: 11/20/11 Entered: 11/21/11 09:09:17 Page 2 of 2