In March of 2021, Omar Dieyleh (“Dieyleh”), filed his Chapter 11 Subchapter V Bankruptcy case. The case was jointly administered with a Chapter 11 Subchapter V case filed by Donut House, Inc. (“House”). Dieyleh is the sole shareholder of House. The plan was confirmed in September of 2021. Additional Donut House locations were owned by Dieyleh and his family members. Dieyleh has been in the donut business since 2009 and opened more locations over the years.
In 2017, Dieyleh and his brother-in-law, Omar Tarawneh, decided to open a new donut store known as DH Alameda, LLC (“DH Alameda”). Tarawneh was an engineer by trade with no experience in the donut business. Tarawneh formed Donut Café, LLC (“Café”). Café and House each owned 50% of DH Alameda. Café contributed $179,259.54 in cash and $50,000.00-worth of equipment. House contributed a license agreement valued at $229,259.54.
DH Alameda operated a retail restaurant and donut production facility. Donuts were sold to other House restaurant locations through a formalized Supplier Agreement.
Disputes arose from the operation of DH Alameda, which led to the filing of an arbitration proceeding, raising various claims between the parties.
A five-day trial was conducted in the arbitration proceeding. The Arbiter issued Preliminary and Final Awards finding (1) in favor of Café and against House and Dieyleh on Café’s claim to pierce the corporate veil of House and to hold Dieyleh personally liable for the actions of House; (2) in favor of Café and against House on Café’s claims for breach of contract and breach of fiduciary duty, and awarding damages to Café, jointly and severally, against House and Dieyleh in the amount of $297,191.00; (3) in favor of House and Dieyleh and against Café on Café’s remaining claims; (4) in favor of House and against Café dissolving DH Alameda effective as of February 1, 2021; (5) in favor of Café and against House on House’s remaining cross and counterclaims; (6) awarding costs to Café in the amount of $81,557.21, jointly and severally, against House and Dieyleh; and (7) awarding attorney’s fees to Café in the amount of $190,344.00, jointly and severally against House and Dieyleh (total award $604,838.24). In addition, pre-judgment and post-judgment interest was awarded.
Café filed this adversary proceeding claiming that Dieyleh’s debt should not be dischargeable pursuant to 11 U.S.C. § 523(a)(2)(A), (a)(4), and (a)(6). Café filed a motion for summary judgment asserting the arbitration award contains sufficient findings to be preclusive with respect to the dischargeability claims. Dieyleh filed a cross-motion for summary judgment arguing the findings are not entitled to preclusive effect. The Court examined the findings and conclusions set forth in the arbitration awards, and other materials submitted by the parties, and determined that while the arbitration proceeding could be entitled to preclusive effect, the findings and conclusions made by the Arbiter were not identical to the findings necessary to establish that the debt was excepted from discharge. The Court also found the Complaint filed in the Adversary Proceeding was insufficient to state claims under 11 U.S.C. § 523(a) but granted leave to file an amended Complaint.