EDUCATOR'S DELIGHT, INC.

DEBTOR CASE NO. 02-51870

KENTUCKY EDUCATIONAL SUPPLIES, LLC PLAINTIFF

VS. ADV. NO. 03-5143

EDUCATOR'S DELIGHT, INC., STEPHEN

PALMER, Trustee, NANCY KEMPER,

JOHN T. KEMPER, and JAMIE KEMPER DEFENDANTS

Introduction

Stephen Palmer, as trustee (the "Trustee") of the bankruptcy estate of Educator's Delight, Inc. (the "Debtor"), is before the court on the Motion to Dismiss or in the Alternative Motion for Summary Judgment that he filed in this adversary proceeding on January 5, 2004. Having considered the motion, the pleadings and other papers filed in this proceeding, and the briefs and arguments of counsel, the court finds that this proceeding presents no genuine issue of material fact and that the Trustee is entitled to judgment as a matter of law.

Factual and Procedural Background

On February 28, 2002 Kentucky Educational Supplies, LLC ("KES") purchased the Debtor's assets. On June 18, 2002 an involuntary petition for relief under Chapter 7 of the Bankruptcy Code was filed against the Debtor. On July 10, 2002 the court entered an order for relief.

On May 15, 2003 KES filed the Adversary Proceeding Complaint commencing this proceeding, alleging that the Debtor and its shareholders, Nancy Kemper, John T. Kemper, and Jamie Kemper (the "Kempers"), made various misrepresentations in connection with the asset purchase. Count I of the complaint purports to assert a breach of contract and of the duty of good faith and fair dealing, and seeks to rescind the sale agreements, prejudgment interest, and consequential and delay damages and attorney's fees. Count II seeks actual damages for fraud, and Count III seeks punitive damages for the defendants' allegedly "improper, tortuous [sic] and unlawful conduct." Although named as a defendant, the Debtor has never been served with process.

On December 12, 2003 the Kempers filed offers of judgment pursuant to Rule 68 of the Federal Rules of Civil Procedure, made applicable in bankruptcy adversary proceedings by Rule 7068 of the Federal Rules of Civil Procedure. On December 19, 2003 KES filed notices of its acceptance of the offers of judgment. The parties thereafter agreed on the form of judgment to be entered, Paragraph 3 of which states:

That acceptance of the Defendant [Name] Kemper's Offer of Judgment by the Plaintiff Kentucky Educational Supplies, LLC shall operate as a full release of all the claims asserted by the Plaintiff Kentucky Educational Supplies, LLC in the action styled Kentucky Educational Supplies, LLC v. Educator's Delight, Inc., Stephen Palmer, Nancy Kemper, John T. Kemper and Jamie Kemper, United States Bankruptcy Court, Eastern District of Kentucky, Lexington Division, Adversary Number 03-5143.

The judgments were entered against the Kempers on February 5, 2004.

Legal Discussion

The Trustee's motion to dismiss asserts that the commencement of this proceeding is void as a violation of the automatic stay. However, the automatic stay is "inapplicable to a suit commenced in the same court where the bankruptcy was pending." In re Roxford Foods, Inc., 12 F.3d 875, 878 (9th Cir. 1993); accord, e.g., Prewitt v. North Coast Village, Ltd. (In re North Coast Village, Ltd.), 135 B.R. 641, 643-44 (B.A.P. 9th Cir. 1992); In re Briarwood Hills Assocs., L.P., 237 B.R. 479, 480-81 (Bankr. W.D. Mo. 1999); Armco, Inc. v. N. Atl. Ins. Co. (In re Bird), 229 B.R. 90, 94-95 (Bankr. S.D.N.Y. 1999); In re Redburn, 193 B.R. 249, 260 n.17 (Bankr. W.D. Mich. 1996). As one bankruptcy court explained: "Such suits against the debtor can be considered the functional equivalent of filing a proof of claim against the bankruptcy estate. The bankruptcy court is invested with the authority, mandate and power to determine and allow claims against the debtor, despite the automatic stay." Bird, 229 B.R. at 95. As the parties have acknowledged, KES's claims against the Debtor and its estate could have been raised by a proof of claim, and there is no question that filing a proof of claim would not violate the automatic stay. The Trustee's motion to dismiss will be denied.

The Trustee seeks summary judgment on two grounds. The first is that the settlements with the Kempers resolve the liability of their employer and principal - the Debtor - and therefore the liability of the estate. In this regard, the Trustee relies on Copeland v. Humana of Kentucky, Inc., 769 S.W.2d 67 (Ky. Ct. App. 1989), which held that a settlement with a primary tortfeasor (a firm of anesthesiologists) effects a release of secondary tortfeasors vicariously liable for the primary tortfeasor's conduct (the hospital where the anesthesiologist practiced), even if the settlement purports to reserve the plaintiff's rights against the secondary tortfeasor. The court explained that the hospital did not have a "separate and distinct" duty to the patient, but its duty was solely through its staff. Id. at 69. Regarding this "vicarious liability" basis for its holding, the court stated:

Having agreed not to sue the servant/agent, and made recovery by settlement therefrom, the appellant may not now seek additional recovery from the master/principal based upon the same acts of alleged negligence, whether the document is called a "release" or "covenant not to sue."

It matters little how the servant was released from liability; as long as he is free from harm, it appears to us that his master should also be blameless.

. . . .

. . . . The [plaintiffs] had but one cause of action which the law gave to compensate them for [the patient]'s injuries. This cause of action for the allegedly tortious conduct of [the anesthesiologists] was assertable against the hospital only because [the anesthesiologists] were allegedly acting in their function as employees or ostensible agents of the hospital at the time they committed the negligent act causing [the patient]'s injury. When [the anesthesiologists] entered into the structured settlement agreement with the [plaintiffs], they repaired the wrong that they had done and therefore were fully acquitted from further liability. This acquittance inured to the benefit of the hospital, for the discharge of the primary tortfeasor ([the anesthesiologists]) must be held to discharge the secondary tortfeasor (the hospital) also from further responsibility, as the hospital's liability for the tortious act was vicarious in nature and derived solely from its legal relation to the wrongdoer, [the anesthesiologists].

Id. at 69-70 (citations omitted).

The Copeland case made clear, however, that "'a covenant not to sue one of two joint wrongdoers does not release and will not bar an action against the other.'" Id. at 69 (quoting Louisville Times Co. v. Lancaster, 133 S.W. 1155, 1157 (Ky. 1911)). Where a defendant's liability is premised on its own act, rather than (or in addition to) the act of the settling defendant, the non-settling defendant is not discharged. DeStock No. 14, Inc. v. Logsdon, 993 S.W.2d 952, 959 (Ky. 1999). Thus, the question facing the court ⁽¹⁾ is whether the Debtor's liability to KES, if any, would be joint with or secondary to that of the Kempers.

Insofar as Counts II and III of the complaint are concerned, there is no question that the only basis for holding the Debtor liable for the tortious acts of the Kempers is the doctrine of respondeat superior. A corporation can act only through its agents, e.g., Caretenders, Inc. v. Commonwealth, 821 S.W.2d 83, 86 (Ky. 1991), and the Kempers were the Debtor's only agents, so KES does not allege that the Debtor engaged in independent conduct giving rise to direct liability for fraud. The Debtor did not owe a "separate and distinct" duty to KES; rather, its duty was solely through its agents. The Debtor's liability (in Copeland's words) "derived solely from its legal relation to the wrongdoer[s]," the Kempers. Accordingly, KES's vicarious liability for the acts of the Kempers was discharged by the releases of the Kempers.

The same would seem to be true insofar as Count I of the complaint is concerned as well. Any breach of contract would have been committed by the Kempers, as agents for the Debtor. Although a corporation's liability for breach of contract is not vicarious but is direct - it is the corporation, not its employees, that is guilty of breaching a contract between the corporation and another party, the liability is also derivative of the actions of the employees in that, again, a corporation can only act through its agents. Neither the parties nor the court have identified any authorities addressing whether a corporation's liability for breach of contract is discharged by a release of the employees who committed the breach on the corporation's behalf. ⁽²⁾

However, Count I of the complaint, although entitled "Breach of Contract," does not assert a breach. Rather, it alleges that the defendants fraudulently induced KES to enter into the contract and seeks rescission and other relief for such inducement. "Fraud in the inducement is a tort-based remedy; it is not grounded in contract law." Bank of Montreal v. Signet Bank, 193 F.3d 818, 829 (4th Cir. 1999); see, e.g., Harrison v. Timminco Techs. Corp., 45 F.3d 430 (Table), 1994 WL 714357, at **1 (6th Cir. 1994) (claim for rescission for fraud in inducement was subject to statute of limitations for tort claims); Banque Arabe et Internationale D'Investissement v. Maryland Nat'l Bank, 57 F.3d 146, 151-53 (2d Cir. 1995) (assignment of all of assignor's right, title, and interest in contract included tort claims related to contract, so assignee could seek rescission for fraudulent inducement). Accordingly, there is no question that Copeland applies to Count I of the complaint, as well as Counts II and III.

Under Kentucky law, KES's releases of the Kempers effected a discharge of the liability, if any, of the Debtor and, therefore, its bankruptcy estate. Thus, the Trustee is entitled as a matter of law to judgment dismissing the complaint against him and against the Debtor. ⁽³⁾ Because judgment has already been entered against the remaining defendants, this ruling effects the final disposition of this adversary proceeding.

Conclusion

For the foregoing reasons, the court will enter a separate order overruling the Trustee's motion to dismiss but sustaining his motion for summary judgment, and will enter a separate judgment dismissing this adversary proceeding.

Copies to:

Jonathan L. Gay, Esq.

Stephen Barnes, Esq.

Jason Hargadon, Esq.

Sam P. Burchett, Esq.

1. KES argues that the acceptance of an offer of judgment does not constitute a settlement. KES's position is without merit. Objectwave Corp. v. Authentix Network, Inc., No. 00 C 7823, 2002 WL 31236297, at *3 (N.D. Ill. Oct. 3, 2002) ("we find that Authentix' offer of judgment, and Objectwave's acceptance, constitute a binding settlement agreement between the parties"); see, e.g., Delta Air Lines, Inc. v. August, 450 U.S. 346, 362 (1981) ("A Rule 68 offer of judgment is a proposal of settlement . . . ."). In any event, the applicability of Copeland turns on whether there was a release: "It matters little how the servant was released from liability." Copeland v. Humana of Ky., Inc., 769 S.W.2d 67, 69 (Ky. Ct. App. 1989). There is no question that KES released the Kempers from liability, so any party secondarily liable for their conduct would be absolved.

2. Perhaps that is because only a party to a contract can breach it. If the contract is with the corporation, only the corporation can commit a breach; if the contract is with a corporation's agent, only the agent can commit a breach. Only if both the agent and the corporation are parties to the contract and assume their own obligations to other parties can both be held liable for breach and, because the parties would each be guilty of breach, the liability of each would be primary.

3. For this reason, the court need not address the second ground for summary judgment asserted by the Trustee, i.e., that KES has insufficient evidence to go to trial on its claims against the estate.