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Follett Higher Education Group, Inc. v. Berman

March 29, 2010


Appeal from the United States Bankruptcy Court for the Northern District of Illinois, Eastern Division Bankr. No. 06 B 10566 Adversary No. 07-141 Hon. A. Benjamin Goldgar.

The opinion of the court was delivered by: Hon. Robert M. Dow, Jr.


Appellant Follett Higher Education Group, Inc. timely filed this appeal from a final order of the bankruptcy court dismissing Follett's adversary proceeding pursuant to Federal Rule of Civil Procedure 52(c). This Court has jurisdiction pursuant to 28 U.S.C. § 158(a). In considering a bankruptcy appeal, the Court reviews factual findings for clear error, while conclusions of law are reviewed de novo. See In re Midway Airlines, 383 F.3d 663, 668 (7th Cir. 2003); In re Frain, 230 F.3d 1014, 1017 (7th Cir. 2000). As explained below, finding no error of fact or law in the decision of the bankruptcy court, this Court affirms the bankruptcy court's judgment.

I. Background

A. Factual History

Until ceasing operations in 2006, Berman and Associates, Inc. ("B & A") was an Illinois corporation in the business of providing media-buying services to various clients, including Follett Higher Education Group, Inc. ("Follett"). Follett is an Illinois corporation that manages more than 750 college bookstores nationwide. At all relevant times, Jay Berman was the president and sole shareholder of B & A. Between 2004 and the spring of 2006, B & A and Follett entered into a series of contractual arrangements whereby B & A was to act as Follett's media buyer. Pursuant to the agreements, Follett was to pay B & A 110 percent of the cost of the advertising that B & A placed on Follett's behalf. In turn, B & A was to pay the media outlets (newspapers, radio stations, billboards, etc.) and then B & A would retain ten percent as its fee for the services provided.

B & A began to experience a financial downturn and struggled to remain operating. It failed on numerous occasions to pay media outlets for Follett's advertising placements. Jay Berman admitted that there were "hundreds of thousands of dollars' worth of bills" that Follett gave him the money to pay, but that remained unpaid. He also acknowledged that B & A "commingled" the money of all of its clients, as well as B & A's own money, in a single account. Ultimately B & A closed its doors in the summer of 2006 and dissolved as an Illinois corporation in December 2006. When B & A went out of business in June of 2006, Berman "got rid of all the computers," and he and his wife abandoned or threw away the remaining paper records.

B. Procedural History

On August 9, 2006, Follett filed an action in the Chancery Division of the Circuit Court of Cook County against B & A and Jay Berman individually. On August 23, 2006, Jay Berman filed a Chapter 7 bankruptcy petition in the Northern District of Illinois. On February 28, 2007, Follett filed an adversary proceeding against Jay Berman, alleging that Jay Berman had breached his fiduciary duties to Follett (Count I) and that he should be denied discharge pursuant to 11 U.S.C. § 523(a)(4) due to fraud or defalcation while Berman was acting in a fiduciary capacity (Count III). Follett voluntarily dismissed the state court action on November 11, 2007.

Counts I and III were tried before the bankruptcy court on May 7, 2009. At the close of Follett's case, Berman's counsel made an oral motion under Rule 7052 of the Bankruptcy Rules for a judgment based on partial findings. Rule 7052 incorporates Federal Rule of Civil Procedure 52(c), which provides for judgment on partial findings.*fn1 After hearing oral argument, the bankruptcy court rejected the grounds on which Berman moved, but dismissed Follett's adversary proceeding on separate grounds. The bankruptcy court also issued a Bankruptcy Rule 9021 judgment on Counts I and III.

On May 18, 2009, Follett filed a timely notice of appeal, and on May 21, 2009, Follett filed an amended notice of appeal correcting errors contained in the original notice. This Court has jurisdiction to hear Follett's bankruptcy appeal pursuant to 28 U.S.C. § 158(a)(1).

II. Analysis

A. Summary of the Bankruptcy Court's Ruling

In the ordinary course of bankruptcy, the debtor's assets are applied to the payment of his debts, and, even though the assets usually will be insufficient to pay those debts in full, a debtor will emerge from bankruptcy with the unpaid balance discharged. McClellan v. Cantrell, 217 F.3d 890, 892 (7th Cir. 2000). Section 523(a)(4) of the Bankruptcy Code excepts certain debts from the discharge granted to a debtor in section 727: "A discharge under section 727 * * * of this title does not discharge an individual debtor from any debt * * * for fraud or defalcation while acting ...

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