Bradford F. Englander, in his capacity as Plan Adm v. Gomez et al

UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF MARYLAND
at Greenbelt
IN RE: 	:
:
MASTERCRAFT INTERIORS, LTD. 	: 	Case No. 06-12769PM
KIMELS OF ROCKVILLE, INC. 	: 	Case No. 06-12770PM
: 	Chapter 11
Debtors 	: 	(Jointly Administered)
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - :
BRADFORD F. ENGLANDER 	:
In his capacity as Plan Administrator for 	:
Mastercraft Interiors, Ltd., and 	:
Kimels of Rockville, Inc. 	:
Plaintiff 	:
vs. 	: 	Adversary No. 08-0424PM
:
DOUGLAS GOMEZ, et al. 	:
Defendants 	:
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - :
MEMORANDUM OF DECISION
On December 3, 2008, the court conducted a hearing on the Motion filed by Defendants
Douglas Gomez and Carolyn Gomez to dismiss Counts XI and XII of the Amended Complaint.
In the course of the hearing, the court granted the oral motion of the Defendants Dean Nelson
and Carole Nelson to join in the Motion to Dismiss. For the reasons stated hereafter, the court
will grant the Motion to Dismiss.
Count XI of the Amended Complaint charges the Defendants with negligence in the
discharge of their duties as employees, officers, directors, and managers of the Debtors.
Specifically, the claim is that the Defendants failed to exercise reasonable diligence by accepting
Date signed December 15, 2008
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consumer deposits for furniture orders that they knew they were unable to fulfill and by not
segregating these deposits. The Amended Complaint pleads that as a result of the Defendants’
alleged negligence that the Debtors suffered damages in excess of $5.5 million. The Amended
Complaint states that unnecessary liabilities for the Debtors were created. Count XII charges the
Defendants with gross negligence and the breach of their fiduciary duties to the Debtors.
The Motion to Dismiss filed by the Gomezes is based upon two grounds – first, that the
Plan Administrator lacks standing to prosecute these claims and, next, that the claims are barred
by the equitable doctrine of in pari delicto. The court will grant the Motion to Dismiss. Either
ground suffices to support the ruling.
The Plan Administrator is an entity created by the Chapter 11 plan to prosecute causes
of action of the estates. This entity is akin to a bankruptcy trustee. As noted by Judge Schneider
in the case of In re Transcolor Corp., 296 B.R. 343, 367 (BC Md. 2003), a bankruptcy trustee
does not have standing to sue third parties such as corporate affiliates or directors. This is
because such causes of action belong to the injured creditors and not the debtor corporation and
thus not subject to enforcement by the Plan Administrator under § 1123(b)(3) of the Bankruptcy
Code.
Presumably, the Plan Administrator is relying upon Section IV(2)(A) of the Amended
Joint Plan of Liquidation for his authority for prosecution of causes of action. “Causes of
action” is a defined term set out in Section II (B)(10) of the Amended Joint Plan. But what the
court has before it is a derivative form of action. See, Mona v. Mona Electric Group, Inc., 934
A.2d 450, 464-65 (Md. App. 2007). The whole body of shareholders or equity interest holders
was dissolved by Section III(8) of the Amended Joint Plan that effected cancellation of all shares
of stock in the company. Finally, the court notes that while both parties find some comfort in the
language of the case of Bogdan v. JKV Real Estate Services, 414 F.3d 507 (CA4 2005), that case
is easily distinguished in that it involved unconditional assignments acquired by the Chapter 7
Trustee of claims held by debtor’s creditors. There are no such assignments here. Next, the
court is hard pressed to this day to understand how the collection of funds by the Debtors during
the incumbency of the Defendants resulted in damage to the Debtors. The damage occurred
when the funds were spent.
What the Plan Administrator seeks to do in this case is to turn the undisputed facts on
their head in his allegation that the Debtors were harmed by the collection of consumer deposits.
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The parties harmed were the parties making the deposits, not the recipient of the payments. The
Plan Administrator holds no Bogdan-type assignments from them.
Similarly, the counts fail because of the doctrine of in pari delicto. While some authors
urge that it is inappropriate to apply this doctrine to hamstring a bankruptcy trustee who had no
connection with the original misconduct, the principle remains generally accepted. See J EFFREY
DAVIS , Ending the Nonsense: The In Pari Delicto Doctrine Has Nothing to Do With What is
§ 541 Property of the Bankruptcy Estate, 21 EMORY BANKR . DEV . J. 519 (2005); RISA LYNN
WOLF -SMITH , Innocent Trustee/Creditors Barred by Debtors’ Past Wrongs: It Just Ain’t Right,
26-APR AM. BANKR . I NST . J. (Apr. 2007); WILLIAM M C GRANE , The Erroneous Application of the
Defense of In Pari Delicto to Bankruptcy Trustees, 29 CAL . BANKR . J. 275 (2007). Were the
court writing on a clean slate, it would agree with the opponents; however, the overwhelming
authority is to the contrary. The doctrine is an offshoot of the equitable doctrine that “he who
comes into equity must come with clean hands.” It has been consistently applied in bankruptcy
cases to bar bankruptcy trustee from suing insiders and professionals, who, prior to the filing of
the petition, caused damage to the debtor. The doctrine has long been a part of Maryland law.
Gotwalt v. Neal, 25 Md. 434 (Md. 1866); Messick v. Smith, 69 A.2d 478, 481 (Md. 1949);
Franklin v. Morrison, 711 A.2d 177, 187 (Md. 1998). In the bankruptcy context, the case of
Official Comm. of Unsecured Creditors v. R. E. Lafferty & Co., Inc., 267 F.3d 340, 355-360
(CA3 2001) is often cited for the proposition that the doctrine bars claims by a bankruptcy
trustee standing in the shoes of a debtor despite the trustee’s status as an innocent successor. See
also, Official Comm. of Unsecured Creditors of PSA, Inc. v. Edwards, 437 F.3d 1145, 1151
(CA11 2006); Grassmueck v. American Shorthorn Ass’n, 402 F.3d 833, 836 (CA8 2005). The
court believes that the three cases cited state the applicable law, and that the Fourth Circuit
would so hold until it adopts the position that the trustee is not subject to the defense of in pari
delicto as urged by Judge King in his dissent in Bogdan, supra at 515.
An appropriate order will be entered.
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cc:
Alan D. Eisler, Esq., 11140 Rockville Pike, Suite 570, Rockville, MD 20852
Sydney Platzer/Andrew Muller, Esq., 1065 Avenue of the Americas, New York NY 10018
Bradford F. Englander, Esq., 7200 Wisconsin Avenue, Suite 800, Bethesda, MD 20814
United States Trustee, 6305 Ivy Lane, #600, Greenbelt MD 20770
End of Memorandum
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