ORDER GRANTING REQUEST FOR CERTIFICATE OF APPEALABILITY
BARBARA ROTHSTEIN, District Judge
I. INTRODUCTION
This matter comes before the court on Petitioner's Request for a Certificate of Appealability. (Dkt. No. 31.) The court hereby GRANTS the request, for the reasons described below.
II. PRODECURAL HISTORY
Petitioner is a California state prisoner who is serving a sentence of fifteen-years-to-life imprisonment in the California Department of Corrections imposed following his 1988 conviction for second degree murder. Petitioner became eligible for parole on September 27, 1997; he has been denied parole a total of six times since then. Petitioner filed a petition for a writ of habeas corpus on August 8, 2007, challenging the results of the 2006 parole proceeding. (Dkt. No. 1.) The petition was stayed on December 12, 2008 pending the Ninth Circuit's decision in Hayward v. Marshall, 603 F.3d 546 (9th Cir. 2010). (Dkt. No. 24.) The stay was lifted on June 16, 2010 (Dkt. No. 26) and the petition was denied on August 8, 2010. (Dkt. No. 28.) Petitioner filed the present request for a certificate of appealability on September 7, 2010. (Dkt. No. 31.)
III. DISCUSSION
A certificate of appealability is required to appeal "the final order in a habeas proceeding in which the detention complained of arises out of process issued by a state court." See Wilson v. Bellequ, 554 F.3d 816, 824 (9th Cir. 2009). A district court may issue a certificate "only if the applicant has made a substantial showing of the denial of a constitutional right." 28 U.S.C. § 2253(c)(2). See also Belleque, 554 F.3d at 825-26. The certificate-of-appealability requirement "constitutes a gatekeeping mechanism that prevents [federal courts] from devoting judicial resources on frivolous issues while at the same time affording habeas petitioners an opportunity to persuade [courts] through briefing and argument of the potential merit of issues that may appear, at first glance, to lack merit." Lambright v. Stewart, 220 F.3d 1022, 1025 (9th Cir. 2000). However, "[t]he standard for a certificate of appealability is lenient." Hayward, 603 F.3d at 553. A petitioner need only "show that reasonable jurists could debate the district court's resolution or that the issues are adequate to deserve encouragement to proceed further." Id. ( internal quotations omitted). See also Miller-El v. Cockrell, 537 U.S. 322, 335-36, 123 S.Ct. 1029, 154 L.Ed.2d 931 (2003).
In the present motion, Petitioner argues that the Board relied solely on "the `egregious nature' of the commitment offense and disciplinary problems long past or not relevant" to justify its decision to deny him parole. (Dkt. No. 31 at 9.) Petitioner claims that relying on these immutable factors is a denial of his due process rights. Id. at 10. Petitioner mischaracterizes the Board's 2006 parole hearing findings. In that decision, the Board cited the contents of a letter that was submitted to the Board in 2002 as a basis for denying parole. The Board indicated that it felt that the letter demonstrated that Petitioner had not fully accepted responsibility for his crime, and thereby, posed a future risk of dangerousness to society. Accordingly this court held that the California judicial decisions approving the Board's 2006 determination were not an "unreasonable application" of the California "some evidence" requirement, nor based on an "unreasonable determination of the facts in light of the evidence." See In re Lawrence, 44 Cal.4th 1181, 1214 (stating that the prisoner's aggravated offense does not establish current dangerousness "unless the record also establishes that something in the prisoner's pre- or post-incarceration history, or his or her current demeanor and mental state supports the inference of dangerousness").
Petitioner claims that he did not write the letter, rather a "jailhouse lawyer" wrote the letter for him and submitted it on his behalf. See Dkt. No. 1, Exhibit B at 49. He acknowledges that he used poor judgment in submitting the letter and stated that the content of the letter does not "accurately describe [his] rehabilitation that [he has] gotten from all those self-help programs, and how [he] really feels about what [he] did to the victim and her family." Id. at 46.
Nevertheless, Petitioner has made a substantial showing of the denial of a constitutional right, namely whether the Board's denial of parole was improper in relying on the contents of a letter that was written on Petitioner's behalf by a "jailhouse lawyer," was submitted four years prior to the 2006 hearing, and the contents of which Petitioner specifically disavowed. Jurists of reason could conclude that this issue is adequate to deserve encouragement to proceed further. See Miller-El, 537 U.S. at 327.
IV. CONCLUSION
For the foregoing reasons, IT IS HEREBY ORDERED that a certificate of appealability is issued in the present action.
DATED this 6th day of October, 2010.
a 10% builder's fee in the amount of $30,557.09.
The Defendant attached to the mechanic's lien invoice #5000 dated November 8, 2007, in the amount of $23,124.00 for the framing of the basement, first and second floors, garage, and porches and invoice #5002 dated November 9, 2007, in the amount of $1,600.00 for the deck, stairs, and handrail. See COLL. TRIAL EX. 9. Handwritten on invoice #5000 are notes that $15,291.13 was paid, leaving a remaining balance of $7,832.87 and on invoice #5002 that the entire $1,600.00 is due. See COLL. TRIAL EX. 9. However, Trial Exhibit 20 evidencing the job costs detail for The Spivey Group, Inc. evidences that checks totaling $18,642.13 were written between April 5 and July 13, 2007, to seven different subcontractors for framing. See TRIAL EX. 20. Additionally, Trial Exhibit 19 references check #3011 dated August 17, 2007, in the amount of $2,952.00 and check #3016 dated August 23, 2007, in the amount of $2,900.00 for an additional $5,852.00 for framing subcontractor reimbursements. See TRIAL EX. 19. Assuming the figures on invoices #5000 and 5002 are correct, a total of $24,494.13 was paid for framing subcontractors, as reflected by Trial Exhibits 19 and 20, and the Plaintiffs did not owe the $7,832.87 assessed by the mechanic's lien for framing subcontractors but only owed $229.87, for a difference of $7,603.00 overpaid to the Defendant by virtue of his mechanic's lien and for which the Defendant is liable.
Trial Exhibit 20 reflects that the following framing subcontractors received the following payments for work designated for Lot 20 Cantrell Heights:
(1) a total of $3,074.88 to Danny Stinnett through: (a) #5117 dated April 5, 2007, for $510.88; (b) #5129 dated April 13, 2007, for $404.13; (c) #5144 dated April 20, 2007, for $625.25; (d) #1063 dated April 28, 2007, for $600.00; (e) #5178 dated May 4, 2007, for $388.00; (f) #5192 dated May 11, 2007, for $325.50; and (g) #5206 dated May 18, 2007, for $221.12;
(2) a total of $6,150.00 to David Norton through (a) #5113 dated April 5, 2007, for $800.00; (b) #5126 dated April 13, 2007, for $530.00; (c) #5141 dated April 20, 2007, for $850.00; (d) # 1062 dated April 26, 2007, for $880.00; (e) #5173 dated May 4, 2007, for $950.00; (f) #5190 dated May 11, 2007, for $850.00; (g) #5205 dated May 18, 2007, for $850.00; (h) #5246 dated June 8, 2007, for $300.00; and (i) #5271 dated June 15, 2007, for $140.00;
(3) $680.00 paid to Dewey Tucker by #5369 dated July 13, 2007;
(4) a total of $2,375.75 to Jeff Waggoner through (a) #5116 dated April 5, 2007, for $527.25; (b) #5130 dated April 13, 2007, for $427.50; (c) #5142 dated April 20, 2007, for $507.50; (d) #5159 dated April 28, 2007, for $558.25; and (e) #5177 dated May 4, 2007, for $355.25;
(5) a total of $1,312.50 to Richard Overholt through (a) #5114 dated April 5, 2007, for $387.50; (b) #5127 dated April 13, 2007, for $62.50; (c) #5158 dated April 28, 2007, for $275.00; (d) #5176 dated May 4, 2007, for $487.50; and (e) #5194 dated May 11, 2007, for $100.00;
(6) a total of $2,600.00 to Robert Sibley through (a) #5115 dated April 5, 2007, for $487.50; (b) #5128 dated April 13, 2007, for $275.00; (c) #5143 dated April 20, 2007, for $506.25; (d) #5161 dated April 28, 2007, for $412.50; (e) #5175 dated May 4, 2007, for $531.25; (f) #5193 dated May 11, 2007, for $262.50; and (g) #5207 dated May 18, 2007, for $125.00; and
(7) a total of $2,449.00 to Sonny R. Harless through (a) #5118 dated April 5, 2007, for $674.25; (b) #5125 dated April 13, 2007, for $310.00; (c) #5160 dated April 28, 2007, for $713.00; and (d) #5172 dated May 4, 2007, for $751.75.
TRIAL EX. 20.
Also attached to the mechanic's lien is invoice #5004 dated November 9, 2007, reflecting a total of $9,795.00 owed for interior trim subcontract work and handwritten notes that $4,915.37 had been paid, leaving a balance of $4,879.63. See COLL. TRIAL EX. 9. Nevertheless, Trial Exhibit 19 evidences that BKS LLC, through check #39502 dated August 7, 2007, paid $632.60, subject to a credit of $73.78 issued on December 10, 2007, resulting in a payment of $558.82 to RSG Inc. for interior trim work. See TRIAL EX. 19. Additionally, Trial Exhibit 20 evidences that a total of $5,675.26 was paid by The Spivey Group, Inc. between June 18 and October 19, 2007, to six subcontractors. See TRIAL EX. 20. Comparing the combined $6,234.08 actually paid against the $9,795.00 shown on invoice #5004, the outstanding balance was $3,560.92 rather than the $4,879.63 paid by the Plaintiffs, resulting in an overage paid of $1,318.71 for which they are now entitled.
Trial Exhibit 20 reflects that the following interior trim subcontractors received the following payments for work designated for Lot 20 Cantrell Heights:
(1) a total of $580.00 to Dewey Tucker through (a) #5455 dated August 10, 2007, for $420.00; and (b) #5524 dated August 31, 2007, for $160.00;
(2) a total of $1,627.63 to Jeff Waggoner through (a) #5288 dated June 22, 2007, for $311.75; (b) #5310 dated June 29, 2007, for $572.75; (c) #5327 dated July 6, 2007, for $471.25; and (d) #5454 dated August 10, 2007, for $271.88;
(3) $759.89 paid to LJ Smith by #614499 dated June 18, 2007;
(4) a total of $2,402.49 to Sonny R. Harless through (a) #5287 dated June 22, 2007, for $352.62; (b) #5311 dated June 29, 2007, for $689.75; (c) #5326 dated July 6, 2007, for $651.00; (d) #5453 dated August 10, 2007, for $325.50; (e) #5538 dated September 7, 2007, for $182.12; (f) #5614 dated October 5, 2007, for $155.00; and (g) #5644 dated October 19, 2007, for $46.50;
(5) a total of $211.50 to Trevor Tucker through (a) #5456 dated August 10, 2007, for $166.50; and (b) #5525 dated August 31, 2007, for $45.00; and
(6) $93.75 paid to Will Ramsey by #5335 dated July 6, 2007.
The exhibit also reflects that RSG Inc. billed a total of $5,019.79 through the following invoices: (a) June 28, 2007, for $79.00; (b) June 20, 2007, for $1,630.00; (c) June 18, 2007, for $2,443.86; (d) July 2, 2007, for $79.00; (e) dated July 5, 2007, for $20.16; (f) July 5, 2007, for $125.72; (g) July 10, 2007, for $21.50; (h) July 9, 2007, for $556.55; and (i) July 27, 2007, for $64.00.
TRIAL EX. 20.
Also attached to the mechanic's lien is invoice #5003 dated November 9, 2007, in the amount of $4,800.00 for installation, sanding, and staining of the wood floor by the flooring subcontractor. See COLL. TRIAL EX. 9. At trial, Mr. King testified definitively that invoice #5003 had already been paid, naming the subcontractor as Precision Hardwood Flooring. This testimony is supported by the handwritten notes dated February 22, 2008, on the copy of invoice #5003 entered into evidence, denoting that someone named Byron with Precision Hardwood Flooring had confirmed the work had been done and paid for. See COLL. TRIAL EX. 9. Because it had previously been paid, the Plaintiffs are entitled to recover the $4,800.00 collected by the Defendant for this invoice.
The court likewise finds that the Defendant is not entitled to the 10% builder's fee in the amount of $30,557.09 included within his mechanic's lien and referenced on the attached invoice #5013. See COLL. TRIAL EX. 9. Although the Defendant testified that he, on behalf of The Spivey Group, Inc., had an agreement with the Plaintiffs that he would be paid a 10% builder's fee by BKS LLC, there was no contract between The Spivey Group, Inc. and BKS LLC setting forth any such agreement, nor was there any reference within the Operating Agreement or other document in the record that establishes any such agreement. Without a written contract or other such documentation, the court cannot find the existence of any such arrangement, and the Plaintiffs are entitled to recover it within their damages.
Furthermore, based on the Job Costs Detail for BKS LLC, The Spivey Group, Inc. received checks totaling $158,243.57 and $158,543.54 between March and August 2007, for "project management" of Lots 20 and 28 Cantrell Heights, respectively. See TRIAL EX. 19.
There was, additionally, considerable testimony concerning the American Express charges. As evidenced by the Transaction Detail Summary for the account, each of the parties had charging privileges on the business account and was issued a card in his own name. Each made the following purchases totaling $232,556.14: between May 12 and September 13, 2007, Mr. Brown charged a total of $1,095.85; between January 23 and October 16, 2007, Mr. King charged a total of $8,015.54, and between January 27 and October 30, 2007, the Defendant charged a total of $223,444.75. See COLL. TRIAL EX. 11. Beginning in February 2007, the following payments totaling $157,763.30 were made to American Express by BKS LLC out of its checking account: (1) $6,714.37 on February 23, 2007; (2) $1,076.46 on March 19, 2007; (3) $8,311.87 on April 16, 2007; (4) $5,671.30 on May 17, 2007; (5) $7,129.10 on June 14, 2007; (6) $6,918.17 on August 14, 2007; (7) $28,367.58 on September 12, 2007; and (8) $93,574.45 on November 1, 2007. See COLL. TRIAL EX. 17. Additionally, on July 16, 2007, The Spivey Group, Inc. made a payment to American Express in the amount of $73,391.86 from its checking account. See COLL. TRIAL EX. 13.
There is no evidence in the record concerning when or if the Plaintiffs paid the remaining $1,400.98 balance after crediting all payments against all transactions.
Of the $223,444.75 charged by him, the Defendant testified that he made personal charges in the amount of $84,491.36 and reiterated that he made a payment from The Spivey Group, Inc. in the amount of $73,391.86, suggesting that it was intended to be reimbursement for a portion of his personal charges. The beginning balance on July 2, 2007, for The Spivey Group, Inc.'s checking account was $4,238.84. Deposits of $15,262.24, $128,292.47, and $102,893.40 were made on July 6, July 9, and July 11, 2007, respectively, and on July 13, 2007, the account had a balance of $174,846.26. See COLL. TRIAL EX. 13. There is no dispute that The Spivey Group, Inc. made the $73,391.86 payment to American Express on July 16, 2007; however, there is also no question that check #1041 dated July 6, 2007, in the amount of $15,000.00 and check #1042 dated July 11, 2007, in the amount of $102,893.40 were written by the Defendant out of BKS LLC's bank account and deposited into The Spivey Group, Inc.'s checking account prior to the July 16 payment, raising the question of whether the $73,391.86 was, at least in part, paid for with BKS LLC funds rather than those of The Spivey Group, Inc. See COLL. TRIAL EX. 13; COLL. TRIAL EX. 17.
Moreover, pursuant to its own independent review of the Transaction Detail Report for the Defendant's charges compared to the Job Costs Detail for The Spivey Group, Inc. for January through December 2007 prepared by the Defendant, the court finds a number of charges made by the Defendant on the American Express account that appear to be construction and/or business related but do not appear to have been used for the BKS LLC construction on Lots 20, 28, 29, and 30 in Cantrell Heights and on 1, 2, 3, 4, 5, and 6 in Monclair above and beyond the $73,361.86 paid on the card by The Spivey Group, Inc. The following charges totaling $38,062.11 appeared on the Transaction Detail Report as being charged by the Defendant but are not reflected anywhere within the Job Costs Detail Report: (1) Sign O Rama for $976.04; (2) Roofing Supply Group for a total of $11,885.62; (3) Sprint Nextel for a total of $878.22; (4) OfficeMax for a total of $554.13; (5) Parkway Storage for a total of $1,124.00; (6) Lowe's for a total of $537.94; (7) 400 East Emory Road, Powell, TN for $70.00; (8) Kroger Fuel for $70.01; (9) Fireside Hearth for a total of $3,800.00; (10) Volunteer Wire Rope for $509.15; (11) Ingles Gas Express for a total of $186.06; (12) Northern Tool Equipment for $99.34; (13) Frank Betz Associates for $900.00; (14) Exxon Mobil for a total of $102.00; (15) Knox Auto Truck Plaza for $73.01; (16) AEC CAD Solutions for $137.66; (17) Checkmate Service for $176.90; (18) Copeland Corp. for $273.13; (19) Regal Petroleum for a total of $863.21; (20) Staples for $123.93; (21) RS Atlanta for a total of $13,038.58; (22) Freightliner Knox for a total of $952.69; (23) Verizon Wireless for $163.86; and (24) Nextel Communications for $566.83. Compare COLL. TRIAL EX. 11 with TRIAL EX. 20. While it seems that some of these expenses were construction and/or business related expenses, because they do not appear on the Job Costs Detail Report, it is presumed that they were used for other projects than those in Cantrell Heights and/or Montclair.
Additionally, the Job Costs Detail Report evidences the following purchases associated with Lot 20 Cantrell Heights totaling $971.64 as being "credit card charges" that do not appear on the American Express Transaction Detail Report: (1) to Enco Materials on July 12, 2007, for $67.74; (2) to Home Depot on July 31, 2007, for $344.92, on August 14, 2007, for $20.75, on August 14, 2007, for $145.23, on August 9, 2007, for $20.80, and a credit on August 9, 2007, of $13.71 for a total of $517.79; (3) to ICI Paints on July 31, 2007, for $341.24; and (4) to Tindell's Lumber on July 23, 2007, for $37.70 and on September 4, 2007, for $7.17 for a total of $44.87. Compare COLL. TRIAL EX. 11 with TRIAL EX. 20.
Finally, the following expenses listed on the Job Costs Detail Report are listed on the Detail Transaction Report; however, the amounts do not correspond:
Vendor Job Costs Detail Report Detail Transaction Report not accounted for 84 Lumber $50,630.52 $92,208.74 $41,578.22 Home Depot $517.79 $1,116.23 $598.44 ICI-Paints $341.24 $1,916.78 $1,575.54 Tindell's $44.87 $343.45 $298.58 Gillenwater Flooring $6,574.52 $7,597.09 $1,022.57 Horizon Forest Products $5,559.03 $12,749.20 $7,190.17 United Rentals $668.07 $2,431.43 $1,763.36 ACT Metal $456.58 $530.30 $73.72 General Shale $12,499.97 $15,657.52 $3,157.55 Mayer Electric $7,481.68 $1,722.69 -$5,758.99 Kenny Pipe $9,637.92 $8,174.29 -$1,463.63 Knoxville Concrete $214.65 $11,414.13 $11,199.48 totals $94,626.84 $155,861.85 $61,235.01 As demonstrated by the record, the Defendant charged a total of $223,444.75 on the American Express card, and of that total, the Defendant testified that $84,491.36 was for personal charges. Assuming that the entire $73,391.86 payment came from The Spivey Group, Inc. funds rather than BKS LLC funds, by his own testimony, the Defendant owes $11,099.50 above the payment he made towards his admitted personal charges. In addition to that amount, the court also finds that the Defendant is liable to the Plaintiffs for the $38,062.11 for business-related expenses shown on the Transaction Detail Report which are not found on the Job Costs Detail Report, the $971.64 for charges listed on the Job Costs Detail Report as "credit card purchases" not appearing on the Transaction Detail Report, and the $61,235.01 for expenses listed on the Job Costs Detail Report for different amounts than those listed on the Transaction Detail Report for a total of $111,368.26 associated with the American Express card.
This figure leaves $38,684.63 from the $223,444.75 charged by the Defendant; however, the record does not prove the Plaintiffs' entitlement to those funds, and it takes into account the Defendant's testimony that some of the expenses listed on the Transaction Detail Report, including hotel rooms in Las Vegas, Nevada, and Duluth, Georgia, were refunded and credited against his total amounts charged.
III
Determinations as to the dischargeability of debts are governed by 11 U.S.C. § 523(a), which, as relevant to this adversary proceeding, provides that:
(a) A discharge under section 727
. . . of this title does not discharge an individual debtor from any debt —
. . . .
(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained, by —
(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition;
. . . .
(4) for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny; [or]
. . . .
(6) for willful and malicious injury by the debtor to another entity or to the property of another entity[.]
11 U.S.C. § 523(a). Section 523(a) is construed liberally in favor of the Defendant and strictly against the Plaintiffs, who bear the burden of proving by a preponderance of the evidence the necessary elements for a determination of nondischargeability.
Grogan v. Garner, 111 S. Ct. 654, 661 (1991);
Rembert v. AT T Universal Card Servs., Inc. (In re Rembert), 141 F.3d 277, 281 (6
th Cir. 1998).
A
In order to satisfy the requirements of § 523(a)(2)(A), the Plaintiffs must prove the Defendant obtained money, property, or services through material misrepresentations that he knew were false or that were made with gross recklessness, that the Defendant intended to deceive the Plaintiffs, that they justifiably relied on the Defendant's false representations, and that the Plaintiffs' reliance was the proximate cause of their losses. McDonald v. Morgan (In re Morgan), 415 B.R. 644, 649 (Bankr. E.D. Tenn. 2009).
"[F]alse pretense" involves implied misrepresentation or conduct intended to create and foster a false impression, as distinguished from a "false representation" which is an express misrepresentation[, while a]ctual fraud "consists of any deceit, artifice, trick, or design involving direct and active operation of the mind, used to circumvent and cheat another — something said, done or omitted with the design of perpetrating what is known to be a cheat or deception."
Copeland, 291 B.R. at 760 (citations omitted). "[F]alse representations and pretenses encompass statements that falsely purport to depict current or past facts,"
Peoples Sec. Fin. Co., Inc. v. Todd (In re Todd), 34 B.R. 633, 635 (Bankr. W.D. Ky. 1983), and fraudulent intent may be "inferred as a matter of fact" based on the totality of the circumstances when the Defendant has engaged in conduct that was "somewhat blameworthy."
Copeland, 291 B.R. at 759. Nevertheless, mere negligence or evidence of "[a] `dumb but honest' [debtor] does not satisfy the test."
Copeland, 291 B.R. at 765-66 (quoting
Palmacci v. Umpierrez, 121 F.3d 781, 788 (1
st Cir. 1997)). Likewise,
a broken promise to repay a debt, without more, will not sustain a cause of action under § 523(a)(2)(A). Instead, central to the concept of fraud is the existence of scienter which, for the purposes of § 523(a)(2)(A), requires that it be shown that at the time the debt was incurred, there existed no intent on the part of the debtor to repay the obligation.
EDM Mach. Sales, Inc. v. Harrison (In re Harrison), 301 B.R. 849, 854 (Bankr. N.D. Ohio 2003) (citations omitted);
see also Palmacci, 121 F.3d at 788 (stating that an honest belief that the representation is true, even if unreasonably so, "is an insufficient basis for deceit."). The court must also find justifiable reliance; i.e., the party seeking a determination of nondischargeability actually relied on the representations and, based upon the facts and circumstances known at the time, the reliance was justifiable.
Morgan, 415 B.R. at 649. In short, a determination of nondischargeability under § 523(a)(2)(A) often comes down to the defendant's conduct prior to, at the time of, and subsequent to the representations at issue and which witnesses are the most credible.
Copeland, 291 B.R. at 766;
Commercial Bank Trust Co. v. McCoy (In re McCoy), 269 B.R. 193, 198 (Bankr. W.D. Tenn. 2001).
The Plaintiffs aver that they are entitled to a nondischargeable judgment under § 523(a)(2)(A) on the basis that the Defendant falsely misrepresented to them that he was capable of managing the books and records of BKS LLC when, in fact, he was not, and that they relied upon his representations to their detriment. In support of this contention, the Plaintiffs argue that the books and records were never adequately maintained and that pursuant to the Operating Agreement, the Defendant was required to provide them with monthly reports and give them full disclosure to the financial records, which he failed to do. At trial, Mr. King testified that he repeatedly asked the Defendant for financial record information that he refused to provide, using the excuse that he had not yet set up the books and that he needed the assistance of Pam Reagan, whom he said was an accountant, to set them up, and that it was not until November 2007, after he was removed as managing member, that the Plaintiffs were given access to the financial information.
The record reflects that the Defendant did not immediately set up the books for BKS LLC and when he did, he and his wife, Julie Spivey, did so through the QuickBooks accounting software program which was on their personal home computer, and the resulting reports produced by the Defendant and introduced into evidence as Trial Exhibits 12, 19, and 20 are confusing and not easily reconcilable. Additionally, there is no dispute that the Defendant set up access to the company's bank account online and he controlled the account by having the password. Nevertheless, the record also reflects that the paper bank statements and all business correspondence from First Tennessee Bank were sent to BKS LLC's business post office box, that only the Plaintiffs had keys to the mailbox, and that Mr. Brown picked up the business mail. Additionally, Mr. Brown testified that he had online access to the American Express account, and both he and Mr. King testified that the Defendant provided them with a disc in May 2007, although Mr. Brown stated that he had to purchase the contractor's version of QuickBooks to access it and once he did, it contained incomplete and undetailed information.
In order to be a nondischargeable debt under subsection (a)(2)(A), there must be a showing of fraud in the inducement; i.e., the Plaintiffs must prove that the Defendant intentionally misled them into personally guaranteeing the construction loans and line of credit and opening the American Express account through fraudulent or material untruths and that they relied upon the untruths when they formed BKS LLC and incurred the liability. Without the initial inducement, it is not sufficient to show that the Defendant made misrepresentations and/or false statements concerning the financial information after the fact, just as it is not sufficient for a finding under this subsection to show that the Defendant denied the Plaintiffs access to the books and records. The record is clear that the representations the Plaintiff made when he was approached by the Plaintiffs about forming the company that he was a licensed contractor and that he had business relationships with venders and subcontractors were accurate. Additionally, the court is not convinced that the representation by the Defendant that he could manage the day-to-day operations was false or made with an intent to deceive and induce, based upon his approximately twelve years of experience in the building field and the fact that he had operated The Spivey Group, Inc. for approximately two years prior to forming BKS LLC with the Plaintiffs. Accordingly, based upon the record before the court, the Plaintiffs have not met their burden of proof that the debt is nondischargeable under § 523(a)(2)(A).
B
Section 523(a)(4) provides that debts obtained by embezzlement, larceny, or through fraud or defalcation while acting in a fiduciary capacity are nondischargeable. For the purposes of this subsection and as it relates to this adversary proceeding, embezzlement is "the fraudulent appropriation of property by a person to whom such property has been entrusted or into whose hands it has lawfully come." Brady v. McAllister (In re Brady), 101 F.3d 1165, 1172-73 (6th Cir. 1996). "A creditor proves embezzlement by showing that he entrusted his property to the debtor, the debtor appropriated the property for a use other than that for which it was entrusted, and the circumstances indicate fraud." Bd. of Trs. v. Bucci (In re Bucci), 493 F.3d 635, 644 (6th Cir. 2007) (quoting Brady, 101 F.3d at 1173). A finding of embezzlement does not, however, require the existence of a fiduciary relationship. Jones v. Hall (In re Hall), 295 B.R. 877, 882 (Bankr. W.D. Ark. 2003).
Larceny under § 523(a)(4) is proved if the debtor wrongfully and with fraudulent intent takes property from its rightful owner, see Great Am. Ins. Co. v. O'Brien (In re O'Brien), 154 B.R. 480, 483 (Bankr. W.D. Tenn. 1993) (citing Kaye v. Rose (In re Rose), 934 F.2d 901, 903 (7th Cir. 1991)), and differs from embezzlement because the embezzler's initial acquisition of the property at issue is lawful. Aristocrat Lakewood Nursing Home v. Dryja (In re Dryja), 259 B.R. 629, 632 (Bankr. N.D. Ohio 2001). Defalcation under § 523(a)(4) requires proof of: "1) a fiduciary relationship; 2) breach of that fiduciary relationship; and 3) a resulting loss" and is limited to situations in which the debtor held or holds funds in an express or technical trust. R.E. Am., Inc. v. Garver (In re Garver), 116 F.3d 176, 178-80 (6th Cir. 1997). Only the embezzlement aspect of § 523(a)(4) is at issue in this adversary proceeding.
To prove fraudulent misappropriation, the Plaintiff must prove "`fraud in fact, involving moral turpitude or intentional wrong, rather than implied or constructive fraud.'" Bombardier Capital, Inc. v. Tinkler (In re Tinkler), 311 B.R. 869, 876-77 (Bankr. D. Colo. 2004) (quoting Driggs v. Black (In re Black), 787 F.2d 503, 507 (1986)). "Both the intent and the actual misappropriation necessary to prove embezzlement may be shown by circumstantial evidence." Goodmar, Inc. v. Hamilton (In re Hamilton), 306 B.R. 575, 582 (Bankr. W.D. Ky. 2004) (quoting Bailey v. James (In re James), 42 B.R. 265, 267 (Bankr. W.D. Ky. 1984)); see also Estate of Harris v. Dawley (In re Dawley), 312 B.R. 765, 779 (Bankr. E.D. Pa. 2004) (holding that fraudulent intent can be deduced by examining "the facts and circumstances surrounding the act.") (citation omitted). "The fraud element may also be satisfied by a showing of deceit . . . and intent can be inferred from the relevant circumstances." Powers v. Powers (In re Powers), 385 B.R. 173, 179-80 (Bankr. S.D. Ohio 2008).
As managing member, the Defendant was clearly entrusted with BKS LLC funds. Pursuant to paragraph 11 of the Operating Agreement, the Defendant was charged with the sole power and authority to execute instruments on behalf of and legally bind the LLC. As established by their testimony, the Plaintiffs trusted that the Defendant was exercising this authority by utilizing the construction loan draws, the line of credit, and the American Express card to pay the expenses of BKS LLC and job costs for the houses being built and that he was acting within the duty of care he owed to them, "to refrain[] from engaging in grossly negligent conduct, intentional misconduct, or a knowing violation of law," as set forth in the Operating Agreement. See COLL. TRIAL EX. 1. In addition, the Defendant was also subject to the following statutory standards of conduct for members and managers:
(a)
Member-managed LLC. The only fiduciary duties a member owes to a member-managed LLC and the LLC's other members . . . are the duty of loyalty and the duty of care imposed by subsections (b) and (c). . . .
(b)
Duty of loyalty. A member's duty of loyalty to a member-managed LLC and the LLC's other members . . . is limited to the following:
(1) To account to the LLC and to hold as trustee for it any property, profit or benefit derived by the member in the conduct or winding up of the LLC's business, or derived from a use by the member of the LLC's property, including the appropriation of any opportunity of the LLC;
(2) Subject to § 48-249-404
, to refrain from dealing with the LLC in the
conduct of winding up of the LLC's business as, or on behalf of, a person having an interest adverse to the LLC; and
(3) To refrain from competing with the LLC in the conduct of the LLC's business before the termination of the LLC.
(c)
Duty of care. A member's duty of care to a member-managed LLC, and the LLC's other members . . . in the conduct of and winding up of the LLC's business, is limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct or a knowing violation of law.
(d)
Good faith and fair dealing. A member shall discharge the member's duties to a member-managed LLC and its other members . . . under this chapter or under the LLC documents, and shall exercise any rights with respect to the LLC consistently with the obligation of good faith and fair dealing.
(e)
Furtherance of member's own interest. A member of a member-managed LLC does not violate a duty or obligation under this chapter or under the LLC documents, merely because the member's conduct also furthers the member's own interest.
(f)
Dealings with LLC. A member of a member-managed LLC may lend money to and transact other business with the LLC. As to each loan or transaction, the rights and obligations of the member are the same as those of a person who is not a member, subject to other applicable law.
. . . .
(k)
Reliance on others. In discharging the duties described in this section, a member . . . is entitled to rely on information, opinions, reports or statements, including financial statements and other financial data, if prepared or presented by:
(1) One (1) or more officers or employees of the LLC whom the member . . . believes to be reliable and competent in the matters presented;
(2) Legal counsel, public accountants or other persons as to matters the member . . . reasonably believes are within the person's professional or expert competence[.]
. . . .
(l)
Unwarranted reliance. A member . . . is not acting in good faith if the member . . . has knowledge concerning the matter in question that makes reliance otherwise permitted by subsection (k) unwarranted.
(m)
Limitation on liability. A member . . . is not liable for any action taken as a member . . ., or any failure to take any action, if the member . . . performs its duties in compliance with this section.
TENN. CODE ANN. § 48-249-403 (Supp. 2010). With respect to personal liability, Tennessee Code Annotated also provides, in material part:
(a) Limited Liability Rule. (1) Except as provided in subsections (e) and (f), a member . . . of an LLC does not have any personal obligation and is not otherwise personally liable for the acts, debts, liabilities, or obligations of the LLC whether such arise in contract, tort or otherwise.
(2) A member . . . of an LLC does not have any personal obligation and is not otherwise personally liable for the acts or omissions of any other member . . . of the LLC.
(3) Notwithstanding the provisions of subdivisions (a)(1) and (a)(2), a member . . . may become personally liable in contract, tort or otherwise by reason of such person's own acts or conduct.
TENN. CODE ANN. § 48-217-101 (2002).
In his capacity as managing member, the Defendant was chosen by the parties to have the initial responsibility for setting up the LLC's books and finances and to be responsible for its day-to-day management. In association with these duties and with the Plaintiffs' knowledge and acquiescence, the Defendant requested draws on the construction loans and line of credit, withdrew funds from the BKS LLC account, and deposited them into The Spivey Group, Inc.'s account for disbursements to contractors and vendors on behalf of BKS LLC for its projects. Nevertheless, as previously discussed, the Defendant misappropriated large sums of BKS LLC funds, presumably for other projects and admittedly for his personal use, both without the authorization or knowledge of the Plaintiffs. By using BKS LLC funds for projects other than BKS LLC projects, the Defendant acted knowingly and fraudulently, and the Plaintiffs are entitled to a nondischargeable judgment against him for the amounts misappropriated from BKS LLC.
C
The Plaintiffs also aver the applicability of § 523(a)(6) for a "willful and malicious" injury. In order to be successful under this subsection, they must prove the existence of "a deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury[,]" Kawaauhau v. Geiger, 118 S. Ct. 974, 977 (1998), and that the Defendant either desired to cause the consequences of his actions or believed with reasonable certainty that such consequences would occur. Markowitz v. Campbell (In re Markowitz), 190 F.3d 455, 464 (6th Cir. 1999). "That a reasonable debtor `should have known' that his conduct risked injury to others is simply insufficient. Instead, the debtor must `will or desire harm, or believe injury is substantially certain to occur as a result of his behavior.'" Guthrie v. Kokenge (In re Kokenge), 279 B.R. 541, 543 (Bankr. E.D. Tenn. 2002) (quoting Markowitz, 190 F.3d at 465 n. 10). Additionally, "the injury must invade the creditor's legal rights." Steiner v. Best (In re Best), 109 Fed. Appx. 1, 6 (6th Cir. 2004). Accordingly, based upon Sixth Circuit authority, "unless the actor desires to cause consequences of his act, or . . . believes that the consequences are substantially certain to result from it, he has not committed a `willful and malicious injury' as defined under § 523(a)(6)." Markowitz, 190 F.3d at 464; Kokenge, 279 B.R. at 543 (citations omitted).
"Although the `willful' and `malicious' requirements will be found concurrently in most cases, the terms are distinct, and both requirements must be met under § 523(a)(6)." S. Atlanta Neurology Pain Clinic, P.C. v. Lupo (In re Lupo), 353 B.R. 534, 550 (Bankr. N.D. Ohio 2006). "An act will be deemed `willful' only if it was undertaken with the actual intent to cause injury," Cash Am. Fin. Svcs. v. Fox (In re Fox), 370 B.R. 104, 119 (B.A.P. 6th Cir. 2007), which requires the court to "look into the debtor's mind subjectively" in order to determine whether the debtor intended to cause the consequences of his act or believed that the consequences were substantially certain to result from his act[.]" Monsanto Co. v. Wood (In re Wood), 309 B.R. 745, 753 (Bankr. W.D. Tenn. 2004). On the other hand, "[a]n act is `malicious' if it is undertaken `in conscious disregard of one's duties or without just cause or excuse' . . . [and does] `not require ill-will or specific intent to do harm.'" Fox, 370 B.R. at 119 (quoting Wheeler v. Laundani, 783 F.2d 610, 615 (6th Cir. 1986)). "The conduct `must be more culpable than that which is in reckless disregard of creditors' economic interests and expectancies, as distinguished from . . . legal rights. [K]nowledge that legal rights are being violated is insufficient to establish malice. . . .'" Best, 109 Fed. Appx. at 6 (quoting In re Mulder, 306 B.R. 265, 270 (Bankr. N.D. Iowa 2004)). In other words, "[l]ack of excuse or justification for the debtor's actions will not alone make a debt nondischargeable under § 523(a)(6)." Lupo, 353 B.R. at 550. Nondischargeability under § 523(a)(6) requires proof that the Plaintiff was injured and the Defendant's deliberate or intentional actions caused its injury, but "[m]ere negligence is not sufficient to except a debt from discharge under § 523(a)(6)." Fox, 370 B.R. at 119.
The Plaintiffs argue that the Defendant converted the construction draws and line of credit. Unquestionably, acts of conversion may serve the basis for a determination of nondischargeability pursuant to § 523(a)(6). Under Tennessee law, conversion "is the appropriation of tangible property to a party's own use and benefit in exclusion or defiance of the owner's rights." Thompson v. Thompson, 2009 Tenn. App. LEXIS 99, at *45, 2009 WL 637289, at *14 (Tenn. Ct. App. Mar. 12, 2009); see also Mammoth Cave Prod. Credit Ass'n v. Oldham, 569 S.W.2d 833, 836 (Tenn. Ct. App. 1977) (defining conversion as an intentional tort requiring proof that a party appropriated another's property for his own use by exercising dominion and control in exclusion or defiance of the owner's right to use and benefit from the property). "The main focus of the tort is the interference with an owner's property right [and t]he degree of this interference, as well as the impact on the property, determines whether there has been a conversion." Gen. Elec. Credit Corp. v. Kelly Dearing Aviation, 765 S.W.2d 750, 753 (Tenn. Ct. App. 1988). "Nevertheless, while they do appreciably overlap, liability for conversion does not automatically equate with the existence of a nondischargeable debt under § 523(a)(6)." Superior Metal Prods. v. Martin (In re Martin), 321 B.R. 437, 441 (Bankr. N.D. Ohio 2004). Whether an act of conversion constitutes a willful and malicious injury within the scope of § 523(a)(6) depends upon whether the party intended to cause the harm or was substantially certain that such harm would occur. Sweeney v. Lombardi (In re Lombardi), 263 B.R. 848, 853 (Bankr. S.D. Ohio 2001).
Based upon the record, the court finds that although the Defendant did exercise dominion and control over funds belonging to BKS LLC, he did not do so to the exclusion of the Plaintiffs, and they are not entitled to a determination that his actions were willful and malicious for purposes of § 523(a)(6). As previously discussed, there is no question that the bookkeeping for BKS LLC was sloppy, at best, that the Defendant set up the LLC's books on his personal computer at his home, and that the Defendant set up access to the LLC's bank account online without sharing the password with the Plaintiffs, but that the Plaintiffs had access to bank statements through the mail and they had online access to the American Express account. Additionally, they chose the Defendant to act as managing member and the Operating Agreement expressly gives the managing member the authority to conduct all transactions on BKS LLC's behalf. There is also no dispute that the Plaintiffs were aware and were seemingly in agreement with the Defendant taking draws, writing checks from BKS LLC to The Spivey Group, Inc., and subsequently paying invoices incurred for BKS LLC projects from The Spivey Group, Inc. The Plaintiffs testified that they were not provided with financial records by the Defendant as required by the Operating Agreement, but they also testified that he provided them with a disc in May 2007 with some of the requested financial information.
The court agrees that the Defendant acted in conscious disregard to the Plaintiffs, constituting malicious conduct, but they have not proved that he acted willfully, with an intent to cause them harm, which is likewise required by § 523(a)(6).
IV
The Plaintiffs have also requested assessment of pre-judgment interest and their attorneys' fees and costs incurred in this adversary proceeding. There is no statutory authority mandating the award of pre-judgment interest, and the determination whether or not to do so is within the sound discretion of the court, "depend[ing] on whether the preferred creditor could have ascertained the amount of the preferential payment without a judicial determination." Bergquist v. Anderson-Greenwood Aviation Corp. (In re Bellanca Aircraft Corp.), 850 F.2d 1275, 1281 (8th Cir. 1988). Such an award should be based upon "considerations of fairness" and "awarded when it is necessary to make the wronged party whole." Acequia, Inc. v. Clinton (In re Acequia, Inc.), 34 F.3d 800, 818 (9th Cir. 1994). If awarded, pre-judgment interest accrues from the date of demand on the defendant or the date that the adversary proceeding commenced at the current federal rate proscribed in 28 U.S.C. § 1961 (2006). Yoder v. T.E.L. Leasing, Inc. (In re Suburban Motor Freight, Inc.), 124 B.R. 948, 1006 (Bankr. S.D. Ohio 1990); see also Emerson v. Maples (In re Mark Benskin Co., Inc.), 161 B.R. 644, 651 (Bankr. W.D. Tenn. 1993). With respect to attorneys' fees, "under the American Rule, absent statutory authorization or an established contrary exception, each party bears its own attorney's fees." Big Yank Corp. v. Liberty Mut. Fire Ins. Co., 125 F.3d 308, 313 (6th Cir. 1997); Taylor v. Fezell, 158 S.W.3d 352, 359 (Tenn. 2005) ("In Tennessee, courts follow the American Rule, which provides that litigants must pay their own attorney's fees unless there is a statute or contractual provision providing otherwise.").
Here, there is no statutory basis for payment of attorneys' fees, nor does any contract or agreement between the parties provide that attorneys' fees will be paid in the event of a dispute. To the contrary, paragraph 26 of the Operating Agreement expressly states that, in the event of dispute, "each party shall pay for and bear the costs of its own experts, evidence and attorneys' fees, except that in the discretion of the arbitrator any award may include the attorneys' fees of a party if the arbitrator expressly determines that the party against whom such award is entered has caused the dispute, controversy or claim to be submitted to arbitration as a dilatory tactic or in bad faith." COLL. TRIAL EX. 1. Additionally, the Plaintiffs have previously obtained a default judgment in the amount of $441,481.54 against The Spivey Group, Inc., which is owned 100% by the Defendant, and are being granted a nondischargeable judgment against the Defendant personally. These judgments are sufficient to make the Plaintiffs whole, and pre-judgment interest will not be awarded.
V
In summary, the court finds that the Defendant fraudulently misappropriated and embezzled funds which were entrusted to him pursuant to his position as managing member of BKS LLC. The record supports a judgment in favor of the Plaintiffs and against the Defendant in the total amount of $344,604.29, representing $3,961.81 in late fees and missed discounts, $120.18 for failing to return key sensors, $187,492.93 in funds received from the construction draws and line of credit with First Tennessee Bank by The Spivey Group, Inc. but not attributable to any BKS LLC project, a credit of $2,617.69 for interest paid by The Spivey Group, Inc. to First Tennessee Bank but not accounted for by the Plaintiffs, $13,721.71 for invoices attached to the mechanic's lien filed by the Defendant against Lot 20 Cantrell Heights that had previously been paid with BKS LLC funds, $30,557.09 for the 10% builder's fee also included within the mechanic's lien, and $111,368.26 for charges made by the Defendant on the American Express card for personal charges and charges which cannot be reconciled. This judgment is nondischargeable pursuant to 11 U.S.C. § 523(a)(4).
A judgment consistent with this Memorandum will be entered.
FILED: October 7, 2010