Debtors filed for relief under Chapter 7 of the Bankruptcy Code. At the time of filing they were the sole shareholders and officers and directors of a Colorado corporation. The Debtors listed on their schedule of assets a wage claim against the company and claim for monies loaned to the company.
The Chapter 7 Trustee hired counsel and filed an action against the company in state court. The complaint was properly served on Mrs. Sheahan, the registered agent for the company, but no answer was filed. Thereafter the Trustee obtained a default judgment against the company in the amount of $117,587.75, issued a Writ of Garnishment against the company’s bank, and recovered funds held in the company’s account in the amount of $28,875.34.
The Debtors objected to a fee application filed by Trustee’s counsel. The objection did not contest the reasonableness of the compensation but argued the funds held by the Trustee were wrongfully obtained.
The Objection was overruled. First, the Court held the objection was barred by the Rooker-Feldman Doctrine. The Debtors, as officers and directors of the company, could have defended the Trustee’s lawsuit and made their state law arguments as to the alleged impropriety of the Trustee’s actions in state court, but did not. They cannot later advance those theories in Bankruptcy Court to undo the state court judgment.
Second, the Court rejected the Debtors’ characterization of the garnishment as “de facto distribution” to the Trustee as a shareholder prohibited by Colorado law. The Trustee never was, and never became, an officer or director of the company. Under Colorado law, a shareholder, as an owner, does not owe a fiduciary duty to creditors. The fiduciary duty is imposed upon the officers and directors, who are empowered by state law to run the day-to-day operations of the entity and make the business decisions. The Trustee commenced litigation against the company to collect a debt in his capacity of a creditor. The Debtors remained the officers and directors of the company and retained the authority to defend the lawsuit.
Finally, because the bankruptcy estate is insolvent, the Court found the Debtors lacked standing to object to the fee application.