Dixon v. Wilkerson (In re Wilkerson)

In re: Lewis E. Wilkerson, Jr., Debtor.

Robert E. Dixon, Plaintiff, v. Lewis E. Wilkerson, Jr., Defendant.

No. 20-34576-KLP

Adv. Pro. No. 21-03008-KLP

United States Bankruptcy Court, E.D. Virginia, Richmond Division

September 16, 2022

MEMORANDUM OPINION

Keith L. Phillips, United States Bankruptcy Judge.

This matter commenced when Robert E. Dixon (the "Plaintiff" or "Dixon"), individually and derivatively on behalf of D.E.R. LLC, a Virginia limited liability company ("DER"), filed a complaint (the "Complaint") against the debtor, Lewis E. Wilkerson (the "Defendant" or "Wilkerson"), seeking a judgment on behalf of DER in the amount of $3,844,461 in compensatory damages and $300,000 in punitive damages and a judgment on his individual behalf in the amount of $8500 in compensatory damages and $1000 in punitive damages. The Complaint also seeks a finding that any amounts owed are nondischargeable pursuant to 11 U.S.C.§ 524(a)(4) and (6).^[1] DER was in the business of providing logging transportation services and was owned in equal shares by Dixon and Wilkerson. There was no written operating agreement for DER, nor did the Articles of Organization name a managing member; however Dixon and Wilkerson agree that they were the sole members of DER and have stipulated that Wilkerson was its managing member.^[2]

The Plaintiff alleges that the Defendant breached his fiduciary duties to DER and committed defalcation by fraudulently failing to collect or by otherwise diverting amounts owed to DER for hauling services DER provided to WST Products LLC ("WST"), an entity owned solely by the Defendant. The Plaintiff also alleges that the Defendant converted funds, including proceeds received from the sale of equipment owned by DER, and further breached his fiduciary duties by failing to pay "trust funds" for employee income and FICA taxes to the Internal Revenue Service.

The Court conducted a trial via the Zoom platform on May 23 2022. As instructed by the Court, the parties filed proposed findings of fact and conclusions of law on July 6, 2022. The following constitutes the Court's findings of fact and conclusions of law pursuant to Rule 52 of the Federal Rules of Civil Procedure, Fed. R. Civ. P. 52, made applicable by Rule 7052 of the Federal Rules of Bankruptcy Procedure, Fed.R.Bankr.P. 7052.^[3]

Jurisdiction and Venue

The Court has subject matter jurisdiction over this Adversary Proceeding pursuant to 28 U.S.C. §§ 157(a) and 1334 and the General Order of Reference from the United States District Court for the Eastern District of Virginia dated August 15, 1984. The counts set forth in the Complaint seeking a determination of the dischargeability of debts constitute core proceedings under 28 U.S.C. § 157(b)(2)(I).^[4]

Factual Findings

On May 6, 2022, the parties jointly submitted the following stipulations of fact:^[5]

1. DER was a Virginia limited liability company, SCC ID 51258161, that was organized by Wilkerson on June 16, 2004.

2. Dixon and Wilkerson were the owners of DER with each owning a 50% interest.

3. The business of DER was to provide logging transportation services to companies with which Wilkerson, but not Dixon was affiliated.

4. Dixon did not serve as a manager or managing member of DER.

5. Dixon's principal work for the company was to direct the trucking operations, subject to the overall direction of Wilkerson.

6. Wilkerson was the manager of DER.

7. Wilkerson controlled all other aspects of the company, including obtaining, buying, and selling equipment, obtaining and disposing of DER's assets, setting prices for DER's transportation services, and controlling all aspects of DER's finances, including federal and state taxation. DER filed its income tax returns via form 1065 and Wilkerson acted as the Partnership Representative for the LLC under 26 U.S.C. § 6223 and previously as the tax matters partner.

8. DER had no written Operating Agreement.

9. Wilkerson assumed overall management and control over DER without discussion or formal agreement and held that authority for as long as DER conducted business.

10. Managers and members who participate in the management of a limited liability company have fiduciary duties to the limited liability company.

11. Wilkerson acting for both DER and his wholly owned company, WST, caused the two entities to contract for DER to provide timber hauling services for WST.

12. No promissory notes or other documentation exists evidencing any loans from Wilkerson and/or WST to DER.

13. Any loans from Wilkerson to DER since the entity's formation in 2004 were capital contributions.

14. On August 30, 2018, Wilkerson sold two DER Western Star cab trucks and some related equipment to Key Truck and Equipment for $133,000 and deposited the sales proceeds check for said amount into his personal account at the Bank of Charlotte County.

15. In the fall of 2018, Wilkerson ordered Dixon to leave the property used by DER as its business premises; and Dixon left and did not return to DER's business premises.

16. DER ceased business operations in December of 2019; and at that time it owned approximately forty (40) timber trailers.

17. At present, DER now owns approximately fifteen (15) timber trailers.

18. In September 2019, Dixon filed suit against Wilkerson to address some of the same issues to be adjudicated in the case at bar in Charlotte County Circuit Court, Case No. CL 19000231-00 (the "State Court Case").

19. Dixon served written discovery in the State Court Case, seeking production inter alia from Wilkerson of all payroll records for DER.

20. Wilkerson produced DER's Driver Payroll Records for the period from November 10 through December 22, 2017, for 2018, and for the period from January 1 through December 6, 2019.

21. In response to Dixon's discovery motion, Wilkerson was ordered by the Charlotte County Circuit Court on July 22, 2020, to produce DER's Driver Payroll Records from June 16, 2004, through December 2019 (the "Discovery Order").

22. Wilkerson failed to produce any additional DER Driver Payroll Records in response to the Discovery Order and asserted that he had already produced all DER Driver Payroll Records in his possession.

23. Wilkerson filed for bankruptcy in Bankruptcy Case No. 20-34576-KLP on November 17, 2020.

24. As the person managing DER and controlling its financial affairs, Wilkerson at all times owed DER fiduciary duties including in the handling of all trust funds for income and FICA/Social Security taxes required to be withheld by the LLC from the compensation of its employees and from the LLC's own funds for the employer's share of withholdings for FICA/Social Security.

25. Wilkerson owed DER and the Internal Revenue Service a fiduciary duty to pay over all employee trust funds and not apply these trust funds to any other purposes.

Both parties testified at trial. Additional witnesses who testified included Cynthia Dixon, the Plaintiff's wife and Defendant's sister, Tanya Futrell, a certified public accountant who testified on behalf of the Plaintiff, and Dawn Wilkerson, the Defendant's wife. Additional exhibits were admitted to evidence, mostly without objection. After hearing and reviewing the testimony of the witnesses and the exhibits, the Court makes the following findings.

Dixon has known Wilkerson since he was 13 years old (he is now 61), having been good friends with his parents. Dixon was and is married to Wilkerson's older sister, Cynthia Dixon. Prior to forming DER in 2004, Dixon and Wilkerson worked together in the logging business. Dixon had been a partner with Wilkerson in DER's predecessor, a company named R.E.D.I. LLC. Dixon and Wilkerson formed DER in June 2004 after Wilkerson filed a previous bankruptcy.

DER was a part of a logging operation in Keysville, Virginia, that included two other entities primarily owned and controlled by Wilkerson, W.S.T. Products, LLC ("WST") (solely owned by Wilkerson) and B.B. & D. Products, LLC ("BB&D") (owned jointly with his brother, Roland Wilkerson). The three entities were interrelated and essentially operated as a single logging business. WST's purpose was to obtain the land necessary to provide timber and then sell the harvested timber. BB&D cut and loaded the timber. DER transported the cut timber from the logging sites to the mills. The businesses all operated out of the same location. Maintaining DER as a separate entity was driven, at least in part, by the more stringent insurance requirements associated with transporting the timber.

Dixon's role was to purchase, repair and maintain all the equipment used in the logging operation, including DER's and WST's equipment. Wilkerson primarily handled the business affairs and finances. Wilkerson's wife, Dawn Wilkerson, maintained the books. Wilkerson's brother, Roland Wilkerson, and Dixon's son were also involved in the business.

By 2011, the logging operation was doing well enough to purchase new Kenworth trucks for hauling and "the best pickups on the market" for both Dixon and Wilkerson. In 2017, the business purchased Dixon a new GMC Sierra for a price of $58,000.

In October of 2018, Dixon and Wilkerson had a falling out that resulted in Dixon leaving the business premises. Their disagreement stemmed from an incident in which Wilkerson accused Dixon's son of taking some equipment parts from the business without permission. At the same time, Wilkerson complained to Dixon that the logging operation had suffered losses totaling $5 million. Dixon also suspected that Wilkerson had used business proceeds to purchase land purportedly for both of them, that he was attempting to keep solely for himself. Until then, Dixon had not sought to examine the businesses' financial records, although he had been aware that funds were being...