Corporate Director’s Breach of Fiduciary Duty Not Dischargeable in Bankruptcy

Corporate Director’s Breach of Fiduciary Duty Not Dischargeable in Bankruptcy

      In a recent decision by Judge Fulton of the Bankruptcy Court, it was held that the damages owed by a former corporate officer arising out of the corporation’s claim against him for breach of fiduciary duty could not be discharged in his personal bankruptcy. Cornerstone Industries Corp. v. Kaufman (In re: Louis A. Kaufman), Case No. 14-34045, Adv. Proc. No. 15-03011, __B.R. __, 2015 WL 4692569 (Bankr. W.D. Ky. Aug. 6, 2015).

      Kaufman, while serving apparently as an officer/director, of Cornerstone, violated his fiduciary duties thereto in assisting a former employee to compete with Cornerstone.  In that action, a judgment in the amount of $1,831,738.00 was entered in Cornerstone’s favor, which award included punitive damages.  After Kaufman's post-trial motions were denied, Kaufman filed for bankruptcy relief under Chapter 11 and sought to have the judgment in Cornerstone’s favor discharge.  This decision was in response to Cornerstone’s application for summary judgment to the effect that Kaufman's liability is not dischargeable.  That request for summary judgment would be granted.

      In response to the allegation that the debt should be dischargeable, the Court parsed the provisions of Sections 523(a)(2)(A) and 523(a)(6) of the Bankruptcy Code, they being certain of the provisions which set forth the test as to when a debt is not subject to discharge, and compared them to the findings in the state court action, including the specific terms utilized in the jury instructions.  Ultimately, the Court determined that the judgment against Kaufman was for conduct which falls within the exceptions from dischargeability as set forth in Section 523(a)(2)((A) and 523(a)(6), and for that reason discharge would be denied.

      In dicta, the Court also reviewed the test under Section 523(a)(4), but ultimately determined it needed to make no conclusion as to the application of that provision in that summary judgment was already justified under Sections 523(a)(2) and 523(a)(6).

      This case is a good demonstration of how counsel for the plaintiff, anticipating a ruling in their favor on breach of fiduciary duty, should carefully construct the jury instructions with an eye to avoiding dischargeability in the event the judgment-debtor subsequently seeks bankruptcy protection.