Page 18 - John Hundley 2011

corporation to violate that act. Hence, Jacobs illustrates that the corporate form can fail to
insulate the owner/executive from both civil and criminal liability in a number of contexts.

Moreover, Jacobs’ attempt to invoke the bankruptcy laws to escape the civil liability proved largely
ineffectual, because plaintiff claimed that the defendant’s actions were non-dischargeable under
that portion of § 523(a)(2)(A) of the Bankruptcy Code which applies to debts obtained through
the making of “a false representation” other than in a financial statement. In this regard,
plaintiff presented five claims, four of which were accepted by the court. First, plaintiff claimed that
the NSF checks constituted misrepresentations; second, plaintiff claimed
defendant made misrepresentations when he repeatedly promised to
issue new checks to replace the ones that were not honored by the bank;
third, plaintiff alleged defendant represented he would give plaintiff the
money which plaintiff had vested in the ERISA plan if he continued to
work for the company; fourth, plaintiff contended defendant made implicit
misrepresentations by not telling Plaintiff that the group health insurance
payment had lapsed; and fifth, plaintiff claimed defendant had falsely told
him that all insurance payments had been made. The court rejected the
first theory, but accepted the remainder.

The court went on to find that the portion of the debt arising from the unpaid wages,
insurance deductions and withdrawn ERISA plan funds constituted debt obtained through
“actual fraud” under another provision of § 523(a)(2)(A). Moreover, it found that even the
attorney fees in the underlying action were found to be non-dischargeable!

Plaintiff further argued that defendant’s debt was non-dischargeable under § 523(a)(4),
which applies to debts arising from “fraud or defalcation, while acting in a fiduciary capacity,
embezzlement, or larceny”. The court found that the withdrawals from
the pension plan, of which defendant was a fiduciary, met this test.
However, as to the remainder, while it noted that some Illinois courts have
found officers and directors of insolvent corporations to be fiduciaries of the
corporations’ creditors for purposes of § 523(a)(4), the court quoted In re
Berman, 629 F.3d 761 (7th Cir. 2011), and found more relevant that “the
Seventh Circuit just examined the issue and found that ‘[i]t is not sufficient
to show merely that a debtor was a fiduciary under applicable state law.
Although an officer or director of an insolvent corporation may be deemed a
fiduciary for creditors under state law, the officer or director may not be deemed on that basis alone, a
fiduciary under 11 U.S.C. § 523(a)(4).’”

In sum, $271,581.90 of the debt was found to be non-dischargeable.

Editor’s Note: Subsequent to the conduct in Jacobs, the Illinois legislature has amended the IWPCA and other laws to
make corporate officials criminally liable for improper withholdings and failure to pay. See P.A. 96-1407, eff. 1/1/11.

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