In some cases where a corporation goes bankrupt, it is possible to pierce the corporate veil in order to hold officers personally liable for the company’s debts owed to you. Sometimes, though, when a corporate debtor goes bankrupt, having a court find its officers personally liable can be a bit more complicated.

One such case in Illinois exemplifies this very complication. On January 21, 2011, the 7th U.S. Circuit Court ruled in Follett Higher Education Group v. Berman that the defendant in the case, who had filed for personal bankruptcy, could not be considered a fiduciary under a certain federal bankruptcy rule, such that his debt to the plaintiff would be non-dischargeable.

Here’s what happened:  In 2004 the plaintiff (Follett) hired the defendant’s company Berman & Associates, Inc. (B&A) to place advertisements on its behalf, which it did by disbursing the payments to various media outlets that ran Follett’s ads. In 2006, however, Follett learned that B&A had failed to pay several outstanding advertising bills, and Follett was forced to pay the media outlets directly without recovering the monies it had already paid to B&A to do the ad placement.

Then Jay Berman, the president, director, and sole shareholder of B&A, filed for personal bankruptcy and listed B&A’s debt to Follett on his petition. Follett brought an adversary proceeding in bankruptcy asserting that the B&A debt could not be discharged because Berman breached a fiduciary duty owed to Follett as a creditor under Illinois law.

A “fiduciary duty” is a legally binding obligation to act in the best interests of a client. Follett’s claim, essentially, was that since B&A failed to pay outstanding bills to the media outlets on Follett’s behalf, that it breached a fiduciary duty to Follett.

The Court disagreed with Follett’s interpretation. In its decision the Court remarked that “a creditor must show (1) that the debtor acted as a fiduciary to the creditor at the time the debt was created, and (2) that the debt was caused by fraud or defalcation.” The Court ultimately held that the relationship between Follett and B&A was purely commercial and contractual, and did not fit within the exception defined by federal bankruptcy law. As a result the debts listed by Berman in bankruptcy could be discharged.

The Jayaram Law Group routinely and successfully assists its clients in their business-to-business (b2b) collection needs.  We take pride in obtaining payment on accounts receivables without fracturing critical business relationships or engaging in time-consuming and costly litigation efforts.

If you need business debt collection services conducted in a professional manner, contact our B2B (business-to-business) debt collection law firm by calling 312.454.2859 or visiting www.jayaramlaw.com.