In Lund-Ross Constructors, Inc. v. Buchanan (In re Buchanan), No. 21-1856, 2022 WL 1193992 (8th Cir. Apr. 22, 2022), the Eighth Circuit reversed the bankruptcy court’s grant of summary judgment given the bankruptcy court’s failure to address alternative tort claims.
The debtors owned a corporation hired to do electrical projects for the general contractor plaintiff. The debtors closed their business and filed a voluntary petition under chapter 7. Suppliers to the debtors’ business filed construction liens for amounts owed. The plaintiff obtained default judgment against the corporation for damages due to misrepresentations made by the debtors that suppliers and subcontractors had been paid. The plaintiff sought exception to discharge pursuant to 11 U.S.C. § 523(a)(2)(A) for “any debt for money . . . to the extent obtained by—false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition.”
When the trustee gave notice of assets, the plaintiff filed a proof of claim. The trustee objected to the claim on the grounds that the claim alleged a corporate debt of the business rather than a personal debt of the debtors. The plaintiff did not respond and the bankruptcy court sustained the trustee’s objection. The debtor moved for summary judgment in the adversary proceeding on the same grounds. The bankruptcy court granted the motion. The BAP affirmed and the plaintiff appealed.
On appeal, the debtors argued that the Eighth Circuit should affirm given the plaintiff cannot pierce the corporate veil to hold the debtors personally liable. The Eighth Circuit rejected this argument because liability can be imposed against an officer or director of a company based on a tort under applicable state law. The debtors did not address this alternative ground for a valid claim. As such, the Eighth Circuit held that the bankruptcy court improperly granted summary judgment.
The debtors also argued the Eighth Circuit could affirm on the alternative ground of claim preclusion because the bankruptcy court disallowed the plaintiff’s claim. But, the Eighth Circuit noted that it has denied claim preclusion when there are difficult questions including (1) whether to treat the debtors as a party to a proof-of-claim dispute when they did not appear at the proof-of-claim proceeding, or (2) whether the debtors even could be parties-in-interest to a claim objection when their estate was insolvent and the debtors could not benefit financially. Further, the debtors previously failed to argue claim preclusion before the lower courts (despite knowing about the action for exception to discharge), and the debtors failed to demonstrate why claim preclusion should apply. Thus, the Eighth Circuit declined to affirm on the alternative ground of claim preclusion.
Therefore, the Eighth Circuit reversed the bankruptcy court’s grant of summary judgment and remanded for further proceedings regarding whether the corporate veil can be pierced or whether there is independent tort liability.
Co-Editors in Chief
Karl J. Johnson, Taft Stettinius & Hollister LLP
David M. Tanabe, Winthrop & Weinstine, P.A.