W.D.N.C.: Shaf International v. Mohammed – Only the Receiver Can Ride This Motorcycle

Summary:

In Shaf International, Inc. v. Mohammed (W.D.N.C. Sept. 22, 2025), Judge Reidinger affirmed the Bankruptcy Court’s grant of summary judgment to the debtor, holding that a single creditor lacks standing to assert fiduciary duty claims against the officer of an insolvent corporation where the injury alleged is common to all creditors.

Background:

Shaf International sold motorcycle gear to Jafrum International, a company owned and operated by debtor Jaffer Sait Mohammed, who personally guaranteed the corporate debt. When Jafrum collapsed, it sold its inventory to an affiliate of Vance Leathers, a Florida company, for $436,000—satisfying Vance’s $311,000 debt and leaving other creditors, including Shaf, unpaid. Shaf later obtained a $661,239 judgment in New Jersey and then sued Mohammed in an adversary proceeding, alleging “constructive fraud while acting in a fiduciary capacity” and “willful and malicious injury,” asserting that he diverted assets and favored one creditor over others.

The Court’s Holding:

The District Court agreed with both the Bankruptcy Court and long-settled North Carolina law that fiduciary duties of corporate officers run to the corporation itself, not to individual creditors—unless the injury is “peculiar or personal” to that creditor. Where multiple creditors share the same injury—here, the debtor’s alleged preference for one creditor over the rest—only a receiver, trustee, or derivative action on behalf of all creditors has standing.

Shaf’s arguments that its judgment and large claim size made it unique fell flat: the court noted that a judgment creditor is still an unsecured creditor of the same class as others, and “being the largest” does not confer exclusivity. Similarly, Shaf’s claim that the debtor’s post-sale employment with his wife’s company (which later did business with the buyer) was a form of self-dealing failed both factually and legally, as any resulting injury again would have been suffered equally by all creditors.

Practice Pointer:

This case reaffirms that individual creditors cannot repackage collective injuries into personal claims simply by invoking fiduciary language or alleging bad faith. Where a debtor-officer allegedly strips or favors assets in the wind-down of an insolvent corporation, only a receiver, trustee, or derivative plaintiff acting for all creditors may bring a fiduciary breach or constructive fraud action.

For creditor’s counsel, this underscores two key points:

1. Preserve corporate claims early—consider seeking appointment of a receiver or filing an involuntary bankruptcy before assets vanish.

2. Don’t mistake nondischargeability for standing—even if a debt might fit §523(a)(4) or (a)(6), the underlying claim must still be one the creditor can legally bring.

And for debtors’ counsel: when closing a business, ensure any payments to insiders or favored creditors are scrupulously documented and defensible—because while individual creditors can’t sue, the trustee (or a vigilant receiver) certainly can.

With proper attribution,  please share this post.