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Case name, Citation, and Court: In re Romano (2006) 353 B.R. 738; 2006 Bankr. LEXIS 2953

Key Facts: a) Kevin J. Farley ("Farley") was a certified public who employed in Allstate and ultimately became a fifty-percent shareholder of Allstate Carting, Inc. b) The Debtor/Defendant, Phillip A. Romano was the President and other fifty-percent shareholder of Allstate. c) While engaged as a consultant, Farley became aware of the Romanos' practice of writing checks for personal expenses out of the company account. d) Allstate was in financial difficulty and failed to pay substantial debt to its unsecured creditors, while at the same time the Romanos withdrew large sums of money from Allstate. e) Romano filed a Chapter 7 bankruptcy petition in the District of Massachusetts. f) Farley filed an Amended Complaint against Romano and his wife and individually and on behalf of Allstate, seeks to except a debt he asserted was owed by the Romanos from discharge. g) Farley also argued that the Romanos' withdrawal of substantial sums from Allstate's checking account for personal expenses amounts to embezzlement under 11 U.S.C. ß 523(a)(4). * Issue:
The issue was, whether or not any debt owed by the Romanos to Farley or to Allstate was non-dischargeable pursuant to 11 U.S.C.S. ß 523(a)(2) and ß 523(a)(4).

Rule:
Section 523(a)(4) of the Bankruptcy Code provides that a debtor may not discharge debt for embezzlement or larceny. Also Section 11 U.S.C.S. ß 523(a)(2) sates that a debt shall be excepted from discharge, when it is the result of debtor’s false statement, made with knowledge of its falsify, with the intent to deceive the creditor, and where the creditor justifiably relies on the representation to its detriment.

Analysis :
The Court held that: a) No express trust existed with respect to Mr. Romano's fiduciary duty to Farley and he did not hold a position of ascendancy over Farley. Additionally Mrs. Romano was never an officer or shareholder of Allstate, and therefore owed no fiduciary duties to the corporation or to Farley. b) As Controller, Farley had a duty to exert his authority to obtain appropriate controls over the company's finances and there was no evidence that Romano prevented Farley from performing his duties. c) Farley failed to satisfy his burden of proof with respect to the elements 11 U.S.C. ß 523(a)(2)(A) and court did not find that Romano committed fraud or a defalcation while acting in a fiduciary capacity vis a vis Farley. d) The Debtors were liable under ß 523(a)(4) for embezzlement because the husband, with his wife's assistance, systematically and dramatically increased the level of withdrawals from the company. e) While Romano was entitled to the reasonable value of his services, he was not entitled to dramatically increase his compensation in a thinly disguised attempt to recoup his capital contributions and the circumstances established that they embezzled funds from Allstate. f) Farley failed to demonstrate that Romano's alleged promises to personally guarantee his unpaid loans constituted false representations upon which he could justifiably rely. Also he failed to implement or maintain any systems to ensure that Allstate's checking accounts were used exclusively for business purposes.

Conclusion: The Court entered a judgment in favor of Allstate and against the Romanos for embezzlement with respect to the excessive compensation obtained by Romano and Mrs. Romano, the court also held that creditor failed to establish that the conduct of debtors warranted a finding of fraud or defalcation while acting in a fiduciary capacity.