True Value Company v. Wiley et al

UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF NEW MEXICO
In re:
HARRY CARLTON WILEY and
VIRGINIA RUTH WILEY,
Debtors. 	No. 7-07-13053 SL
TRUE VALUE COMPANY,
fka TruServ Corporation,
Plaintiff,
v. 	Adv. No. 08-1078 S
HARRY CARLTON WILEY and
VIRGINIA RUTH WILEY,
Defendants.
MEMORANDUM OPINION ON DEFENDANTS’
MOTION FOR PARTIAL SUMMARY JUDGMENT
This matter is before the Court on Defendants’ Motion for
Partial Summary Judgment (“Motion”)(doc. 23), Plaintiffs’
response (“Response”)(doc. 28) and Defendants’ reply
(“Reply”)(doc 37). 	Plaintiffs appear through their attorneys
Rodey, Dickason, Sloan, Akin & Robb, P.A. (Charles Hughson) and
Houston Harbaugh, PC (Samuel Simon). 	Defendants appears through
their attorney Michael K. Daniels. 	This is a core proceeding.
28 U.S.C. § 157(b)(2)(I).
Plaintiff’s complaint (“Complaint”) is one to determine the
dischargeability of a state court judgment under 11 U.S.C. §
523(a)(4) and to deny the Debtors’ discharge under 11 U.S.C. §
727. 	The Motion is addressed only to the Section 523(a)(4)
claim. 	That section provides: “A discharge under section 727 ...
of this title does not discharge an individual debtor from any
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debt– ... 	for fraud or defalcation while acting in a fiduciary
capacity, embezzlement, or larceny[.]”
PROCEDURAL ISSUES
Defendant’s Motion seeks partial summary judgment under
Bankruptcy Rule 7056, which adopts Fed.R.Civ.P. 56. 	Federal Rule
56 states, in part:
...
(b) For Defending Party. 	A party against whom a claim,
counterclaim, or cross-claim is asserted or a
declaratory judgment is sought may, at any time, move
with or without supporting affidavits for a summary
judgment in the party's favor as to all or any part
thereof.
(c) Motion and Proceedings Thereon. ... The judgment
sought shall be rendered forthwith 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.
(e) Form of Affidavits; Further Testimony; Defense
Required. 	Supporting and opposing affidavits shall be
made on personal knowledge, shall set forth such facts
as would be admissible in evidence, and shall show
affirmatively that the affiant is competent to testify
to the matters stated therein. 	Sworn or certified
copies of all papers or parts thereof referred to in an
affidavit shall be attached thereto or served
therewith. 	The court may permit affidavits to be
supplemented or opposed by depositions, answers to
interrogatories, or further affidavits.
“A summary judgment motion must be supported in such a way as to
allow a bankruptcy court to credibly determine if ‘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.’” Harris v.
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Beneficial Oklahoma, Inc. (In re Harris), 209 B.R. 990, 995 (10 th
Cir. B.A.P. 1997)(quoting Fed.R.Civ.P. 56(c).)
Although affidavits are not strictly required by Rule
56 or case law, in practice they are usually necessary
to obtain summary judgment.... [I]t makes sense to
distinguish between affidavits that primarily give
testimony and affidavits that are used primarily to
introduce documents so that the court may consider the
documents in determining whether material factual
matter is genuinely in dispute. 	A party seeking to
rely on material other than affidavits to obtain
summary judgment may nonetheless need to use an
affidavit to place these materials before the court and
into the official record. ...
In order for documents not yet part of the court record
to be considered by a court in support of or in
opposition to a summary judgment motion they must meet
a two-prong test: (1) the document must be attached to
and authenticated by an affidavit which conforms to
Rule 56(e); and (2) the affiant must be a competent
witness through whom the document can be received into
evidence. ...
Documentary evidence for which a proper foundation has
not been laid cannot support a summary judgment motion,
even if the documents in question are highly probative
of a central and essential issue in the case.
Id. at 995-96 (quoting 11 James Wm. Moore et al., Moore’s Federal
Practice §§ 56.10[4][c][I] & 56.14[2][c](3d ed. 1997)(footnotes
omitted.)). 	See also Carmona v. Toledo, 215 F.3d 124, 131 (1 st
Cir. 2000)(“Documents supporting or opposing summary judgment
must be properly authenticated.”)(citing Fed.R.Civ.P. 56(e));
Orsi v. Kirkwood, 999 F.2d 86, 92 (4 th Cir. 1993)(“To be
admissible at the summary judgment stage, documents must be
authenticated by and attached to an affidavit that meets the
requirements of Rule 56(e).”)(Internal punctuation and citation
omitted.); United States v. Dibble, 429 F.2d 598, 602 (9 th Cir.
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1970) (Unauthenticated summary judgment exhibits are inadmissible
hearsay.); White v. Wells Fargo Guard Services, 908 F.Supp. 1570,
1579 (M.D. Ala. 1995)(Court may not consider documents not sworn
or certified as required by Fed.R.Civ.P. 56(e).)
Plaintiff’s response contains no affidavits, there are no
previous affidavits on file in this case, and the unauthenticated
exhibits attached to the response are inadmissible hearsay.
Therefore, the Court cannot consider the exhibits as part of the
response. 	See Alexander v. CareSource, 576 F.3d 551, 561 (6 th
Cir. 2009)(It is improper for District Court to consider
documents that do not meet the requirements of Rule 56(e) if
opponent objects.)(citing Moore v. Holbrook, 2 F.3d 697, 699 (6 th
Cir. 1993)).
THE MOTION AND RESPONSE
Defendant’s Motion lists five proposed material undisputed
facts and their sources in the record:
1) Defendants operated several hardware stores,
supplied at certain times by Plaintiff True Value. 	See
Complaint, generally.
2) Plaintiff got a large judgment against
Defendants prior to the filing of the bankruptcy
proceeding. 	Complaint paragraphs 5-15.
3) Defendant Harry Wiley, in his capacity as a
corporate officer of HRW of Las Cruces, Inc.,
participated in the sale of hardware store assets from
HRW of Las Cruces, Inc. to Oxford Investments, LLC.
Complaint paragraphs 99-121.
4) The source of the fiduciary duty alleged by
Plaintiff to have been breached by Defendants is a
general fiduciary duty running from corporate officers
to creditors of said corporations. 	Complaint
paragraphs 99-121; see also Response to Interrogatory 6
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(first set of interrogatories) and Response to Request
for Production 6 (first set of interrogatories),
attached hereto as Exhibits A and B respectively, and
incorporated herein by reference.
5) Although Defendants do not consider it relevant
to this motion, a copy of the asset sale agreement
between HRW of Las Cruces, Inc., and Oxford
Investments, LLC is attached hereto as Exhibit C, and
is incorporated herein by reference. This is done
because the document is referenced in Plaintiff’s
Response to Request for Production 6 as a possible
source of the fiduciary duty it alleges Defendants owe
to Plaintiff.
Motion, doc 23, p. 1-2.
Under N.M. LBR 7056-1, an opponent of a summary judgment
motion must affirmatively respond to each proposed fact and, if a
fact is contradicted the opponent must cite to supporting
material in the record:
A memorandum in opposition to the motion shall contain
a concise statement of the material facts as to which
the party contends a genuine issue does exist. 	Each
fact in dispute shall be numbered, shall refer with
particularity to those portions of the record upon
which the opposing party relies, and shall state the
number of the movant's fact that is disputed. 	All
material facts set forth in the statement of the movant
shall be deemed admitted unless specifically
controverted.
N.M. LBR 7056-1. 	See also Fed.R.Civ.P. 56(e)(2):
Opposing Party's Obligation to Respond. 	When a motion
for summary judgment is properly made and supported, an
opposing party may not rely merely on allegations or
denials in its own pleading; rather, its response
must--by affidavits or as otherwise provided in this
rule--set out specific facts showing a genuine issue
for trial. 	If the opposing party does not so respond,
summary judgment should, if appropriate, be entered
against that party.
In Alexander, the Court emphasized the role of Rule 56(e):
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Rule 56(e)(2) leaves no doubt about the obligation
of a summary judgment opponent to make her case with a
showing of facts that can be established by evidence
that will be admissible at trial. 	Fed.R.Civ.P.
56(e)(2) (“When a motion for summary judgment is
properly made and supported, an opposing party may not
rely merely on allegations or denials in its own
pleading; rather, its response must-by affidavits or as
otherwise provided in this rule-set out specific facts
showing a genuine issue for trial.”). 	In fact, “[t]he
failure to present any evidence to counter a
well-supported motion for summary judgment alone is
grounds for granting the motion.” 	Everson v. Leis, 556
F.3d 484, 496 (6th Cir. 2009) (citing Skousen v.
Brighton High School, 305 F.3d 520, 528 (6th
Cir.2002)). 	Rule 56(e) identifies affidavits,
depositions, and answers to interrogatories as
appropriate items that may be used to support or oppose
summary judgment. 	See Fed.R.Civ.P. 56(e).
Alexander, 576 F.3d at 558.
Plaintiff’s Response admits proposed facts 1 and 2. 	With
respect to proposed fact 3, Plaintiff “disputes” the fact, but
then simply cites to two paragraphs of its complaint. 	This is
insufficient to controvert the fact. 	See Fed.R.Civ.P. 56(e)(2)
(“[A]n opposing party may not rely merely on allegations ... in
its own pleadings.”) 	The Court will therefore deem fact 3 to be
undisputed. 	With respect to proposed fact 4, Plaintiff
“disputes” the fact, and states “The fiduciary obligations in
this case arise from an express trust entered into by the Wileys
and HRW of Las Cruces, Inc.” 	Plaintiff does not cite to a
location in the record. 	Furthermore, as discussed above, the
unauthenticated exhibits attached to the Response cannot be
considered by the Court (including the alleged commercial
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security agreement). 	The Court will therefore deem fact 4 to be
undisputed. 	Plaintiff did not respond to proposed fact 5, so it
is deemed admitted. 	N.M. LBR 7056-1.
DISCUSSION
“The judgment sought should be rendered if the pleadings,
the discovery and disclosure materials on file, and any
affidavits show that there is no genuine issue as to any material
fact and that the movant is entitled to judgment as a matter of
law.” 	Fed.R.Civ.P. 56(c)(2). 	There is no genuine issue as to
any material fact, so the sole remaining issue is whether
Defendants are entitled to judgment as a matter of law. 	The
Court finds that they are.
In Employers Workers’ Compensation Assoc. v. Kelley (In re
Kelley), 215 B.R. 468, 471-72 (10 th Cir. BAP 1997), the Tenth
Circuit Bankruptcy Appellate Panel discussed fiduciary duty:
Section 523(a)(4) of the Bankruptcy Code excepts from
discharge any debt "for fraud or defalcation while
acting in a fiduciary capacity." 	The Tenth Circuit
recently explained the meaning of "fiduciary capacity"
in this provision.
The existence of a fiduciary relationship under §
523(a)(4) is determined under federal law.
However, state law is relevant to this inquiry.
Under this circuit's federal bankruptcy case law,
to find that a fiduciary relationship existed
under § 523(a)(4), the court must find that the
money or property on which the debt at issue was
based was entrusted to the debtor. 	Thus, an
express or technical trust must be present for a
fiduciary relationship to exist under § 523(a)(4).
Neither a general fiduciary duty of confidence,
trust, loyalty, and good faith, nor an inequality
between the parties' knowledge or bargaining
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power, is sufficient to establish a fiduciary
relationship for purposes of dischargeability.
"Further, the fiduciary relationship must be shown
to exist prior to the creation of the debt in
controversy." [Allen v. Romero (In re Romero)],
535 F.2d [618,] 621 [(10th Cir. 1976)].
Fowler Bros. v. Young (In re Young), 91 F.3d 1367,
1371-72 (10th Cir. 1996)(additional citations omitted).
We are, of course, obliged to apply this narrow view of
the fiduciaries who are covered by § 523(a)(4).
The Kelley court also noted that state statutes often, but not
always, impose trusts on persons held to be fiduciaries as a
matter of law based on their relationships. 	Id. at 473. 	See
also Van de Water v. Van de Water (In re Van de Water), 180 B.R.
283, 289 (Bankr. D. N.M. 1995)(“The trust requirement is not
limited to trusts arising out of a formal agreement, but includes
relationships in which trust-type obligations are imposed
pursuant to statute or common law.”)(Citation omitted.) 	A state
statute must meet three requirements to trigger section
523(a)(4)’s fiduciary status: (1) the trust res must be defined
by the statute, (2) the statute must spell out the fiduciary
duty, and (3) the statute must impose a trust on funds prior to
the act creating the debt. 	Kelley, 215 B.R. at 473.
The Court will examine the complaint in light of these
factors. 	First, the Court notes that the existence of a
fiduciary duty is a question of law, not a fact that can be pled.
Van de Water, 180 B.R. at 289 (Fiduciary capacity is a question
of federal law; the general definition of fiduciary is too broad
in the dischargeability context.); Fowler Brothers, 91 F.3d at
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1See Complaint ¶¶ 28 (“Debtors have not respected corporate
formalities and have engaged in self dealing in breach of their
fiduciary duties to the Family Trust, the companies, the LLC and
creditors of the companies, including True Value.”), 30
(“Debtors’ debt to True Value is due in part to fraud and
defalcation while the Debtors acted in a fiduciary capacity as
officers of a corporation that was insolvent but still possessed
a commercial building and a hardware store full of inventory.”),
113 (“As president of HRW Las Cruces, Debtor Mr. Wiley had a
fiduciary duty to preserve the assets of the company for
creditors, including True Value.”), 115 (“By transferring the
assets of HRW Las Cruces to Oxford Investments, LLC, Debtor Mr.
Wiley took valuable assets of HRW Las Cruces with which he was
entrusted and Debtors, in their capacities as sole stockholders
of HRW Las Cruces, have breached their fiduciary duty to preserve
of the company assets for creditors, including True Value.”), 117
(“Debtor Mr. Wiley as sole Trustee of the Family Trust, in
effect, loaned Family Trust funds to his daughter which quickly
returned to Debtors’ personal funds. Debtor Mr. Wiley’s action
was a breach of his fiduciary duty to the Family Trust.”), 118
(“The sale by Debtors of their personal property to their
daughter and son-in-law’s company occurred in June 2006.
Debtors’ subsequent delay in filing their Petition after having
knowledge of insolvency was a breach of their fiduciary duty to
their creditors, including True Value.”), 119 (“Debtors were
planning to file the instant Petition while simultaneously
placing a business owned 100% by them on the market for sale.
This action to sell assets was a breach of their fiduciary duty
to their creditors as it further devalued the stock of HRW Las
Cruces.”), 120 (“Debtors breached their fiduciary duty to their
creditors when, on or about November 23, 2007, they permitted HRW
Las Cruces to enter into an Asset Purchase Agreement to sell its
assets to Oxford Investments, which is owned by Debtors’ daughter
and son-in-law, for $8,000 paid up front and a Note held by HRW
Las Cruces in the amount of $171,008.76 payable over fifteen (15)
years. 	Debtors breached their fiduciary duty to creditors by
devaluing the stock in HRW Las Cruces, which debtors owned 100%
of at the time of the transaction, November 23, 2007– a mere ten
(10) days prior to Debtors filing their Petition.”) and 121
(“Moreover, Debtors further breached their fiduciary duty and
(continued...)
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1371 (“The existence of a fiduciary relationship under §
523(a)(4) is determined under federal law.”) 	Therefore, the
Court will disregard the Complaint’s conclusory allegations 1 that
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1(...continued)
further devalued the stock in HRW Las Cruces by causing to be
paid $10,000 in or around December 2007 to Attorney Lyle Wood for
the preparation of the aforementioned Asset Purchase Agreement.”)
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Defendants were acting in a fiduciary relationship and look to
the well-pled facts to see if the complaint alleges facts that
could indicate such a relationship.
The complaint does not allege an express trust. 	The
admissible evidence on record does not show an express trust.
Plaintiff pointed out no statute that would create such a trust.
Defendant’s interrogatory 6, doc. 23-1, asked Plaintiff to
describe with specificity any fiduciary duty it alleged
Defendants have in favor of Plaintiff. 	Plaintiff’s discovery
response to this question was “[P]lease see complaint filed in
the instant action.” 	Similarly, Defendant’s request for
production 6, doc. 23-2, asked for production of “Any documents
which you allege would constitute some foundation for the
creation or maintenance of a fiduciary duty on the part of
Defendants in favor of either Plaintiff related in any way to the
issues raised in your complaint.” 	Plaintiff’s response was “True
Value generally refers to the November 23, 2007 Asset Purchase
Agreement, including all documents referenced therein; the
related Promissory Installment Note as well as the corporate
documents of H.R.W. of Las Cruces, Inc.” 	The November 23, 2007
asset purchase agreement was executed by Oxford Investments, LLC.
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See doc. 23-3. 	It creates no fiduciary duties. 	Neither the
related Promissory Installment Note or the corporate documents of
H.R.W. of Las Cruces, Inc. are in evidence. 	In summary, the
Court finds no fiduciary duty running from the Defendants to
Plaintiff that is actionable under 11 U.S.C. § 523(a)(4). 	A
separate order will enter granting Defendant’s Motion.
Honorable James S. Starzynski
United States Bankruptcy Judge
Date Entered on Docket: 	April 1, 2010
Copies to:
Charles R. Hughson
Rodey, Dickason, Sloan, Akin & Robb, P.A
P.O. Box 1888
Albuquerque, NM 87103-1888
Samuel Herman Simon
Houston Harbaugh, PC
Three Gateway Center
401 Liberty Ave, 22nd Floor
Pittsburgh, PA 15222
Michael K Daniels
PO Box 1640
Albuquerque, NM 87103-1640
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