BILL PARKER
Chapter 7
FINDINGS OF FACT AND CONCLUSIONS OF LAW
These findings of fact and conclusions of law are not designated for publication and shall not considered as precedent, except under the respective doctrines of claim preclusion, issue preclusion, the law of the case or as to other applicable evidentiary doctrines.
Upon trial of the complaint filed by the Plaintiff, Michael Boyle (the "Plaintiff") seeking a determination of whether an alleged debt owed to him by the Defendant-Debtor, Brian Berkenbile ("Berkenbile" or the "Defendant"), is dischargeable, the Court issues the following findings of fact and conclusions of law. The Plaintiff contends that the debt is non-dischargeable under the alternative grounds set forth in 11 U.S.C. §523(a)(2)(A), §523(a)(4) and §523(a)(6). After the trial, the Court took the matter under advisement. This decision disposes of all issues pending before the Court.
FINDINGS OF FACT
1. Plaintiff, Michael Boyle, was approached by the Defendant, Brian Berkenbile, to advance certain funds for the purchase of mobile home properties from HUD. 2. Under the parties' oral agreement, the Plaintiff would advance the acquisition costs for each property, the Defendant would utilize his experience in mobile home sales to procure a buyer for each property. 3. The parties agreed that, upon the sale of each such property, the Plaintiff would recoup his purchase price and then the parties would split any realized profit. If there was a significant delay in the sale of a particular property, the Plaintiff would realize a larger, but unspecified, share of the net sales proceeds. 4. After a couple of successful sales whereupon the parties split the net proceeds as agreed, the Defendant requested permission of the Plaintiff on one occasion to retain all of the net proceeds from a particular sale in order to procure additional properties. 5. On that one occasion, the Plaintiff granted permission for the Defendant to retain and to reinvest the net sales proceeds realized from the sale of a particular property. 6. However, the Defendant began to conceal the existence of subsequent sales and began to retain the proceeds of those subsequent sales without the knowledge or permission of the Plaintiff. 7. The Defendant failed to apprise the Plaintiff as to when certain properties were purchased. 8. The Defendant failed to utilize the Plaintiff's funds in the way that the parties had agreed. 9. The Defendant utilized significant portions of the sale proceeds realized from the sale of certain properties without the permission of the Plaintiff. 10. After a significant period of time with no investment recoupment nor profit distribution having been tendered by the Defendant, the Plaintiff demanded an accounting of funds and/or properties by the Defendant. 11. Due to an alleged loss of a laptop computer and despite the demand of the Plaintiff, the Defendant was unable to account through proper recordkeeping for the disposition of the money forwarded to him by the Plaintiff or to trace the sums to the acquisition of particular properties. 12. The Defendant claimed that there were only four properties remaining in his possession that were acquired with, or were otherwise attributable to, the Plaintiff's funds. They were:
(a) 8022 Kelton Drive, Crandall, Texas;
(b) 8011 Kelton Drive, Crandall, Texas;
(c) 9258 Jessie Way, Crandall, Texas; and
(d) 9245 Diamond Avenue, Kaufman County, Texas (the "Properties").
13. With no information from the Defendant from which to verify the disposition of any of the prior properties, the Plaintiff reluctantly accepted that the Properties were the sole remaining properties that had been originally acquired with the Plaintiff's funds or subsequently acquired with improperly-retained proceeds. 14. In an effort to prevent the Defendant from conveying the Properties and keeping the proceeds without his knowledge, the Plaintiff demanded that the Defendant convey title to the Properties to him. 15. Title to the Properties was conveyed to the Plaintiff in the spring of 2009. 16. The conveyance of the Properties to the Plaintiff was a means by which the Plaintiff sought to ensure the recovery of the sums he had previously tendered to the Defendant. 17. At the time of each such conveyance, unbeknownst to the Plaintiff, each of the Properties was already encumbered by a deed of trust lien held by Legacy
Housing, Ltd. that had been granted by the Defendant. 18. In an effort to address the outstanding indebtedness due and owing to the Plaintiff as a result of his repeated failures to account for the acquisition of properties with the Plaintiff's funds and the disposition of each such property, the Defendant executed a promissory note in favor of the Plaintiff on or about February 26, 2010, in the amount of $400,000 (the "2010 Note").
19. The 2010 Note simply memorialized the indebtedness owed by the Defendant to the Plaintiff that had previously accrued. 20. The 2010 Note was accompanied by a Schedule A which listed the Properties and a "Threshold Amount" applicable to each such property.
21. The 2010 Note required the Defendant to address the underlying indebtedness through alternative means.
22. The 2010 Note required the Defendant to pay $4,000 on the 1st day of each month, commencing on March 1, 2010. 23. The 2010 Note also contained the following payment requirement:
If, as and when [Defendant] shall sell any one or more of the properties (the "Properties") listed on Schedule A attached hereto and made apart (sic) hereof for all purposes, all net proceeds realized for [Plaintiff] from a sale of any of the Properties in excess of the minimum threshold amount (the "Threshold Amount") for each of the Properties as identified on Schedule A shall be applied by [Plaintiff] as a credit against the outstanding principal balance of this Note.
52. The Plaintiff has failed to establish by a preponderance of the evidence that, at the time that the Properties were encumbered, the financial loss ultimately inflicted upon the Plaintiff was the only outcome that could have reasonably anticipated by the Defendant under the circumstances. 53. In fact, the Plaintiff introduced little, if any, evidence regarding the circumstances that surrounded the encumbrance of the Properties by the Defendant, the purpose of those encumbrances, the Defendant's financial status at the time of his actions, or the financial value of the Properties and the likelihood that the Plaintiff could recoup his investment despite the encumbrances. 54. The Plaintiff has failed to demonstrate by a preponderance of the evidence that, at the time that the Properties were encumbered, the Defendant's financial circumstances were so dismal that he could not have anticipated an ability to prevent or forestall a foreclosure by Legacy in the near future. 55. The Plaintiff has failed to demonstrate by a preponderance of the evidence that, at the time that the Properties were encumbered, there was no feasible method or course of action involving the sale of the Properties that might have protected the Plaintiff from the loss of his recoupment amounts. 56. The Plaintiff has thus failed to demonstrate by a preponderance of the evidence that, at the time that the Properties were encumbered, the Defendant knew or should have known that injury to the Plaintiff was substantially certain to occur as a result of the encumbrance of the Properties. 57. The Plaintiff failed to present proof sufficient to demonstrate the reasonable and necessary nature of attorney's fees reflected in his proof of claim and sought in this proceeding. 58. While the circumstances demonstrate that the Plaintiff has suffered a significant financial loss that was proximately caused by the conduct, inaction and ineptitude of the Defendant, that fact cannot be permitted to stand in lieu of the required degree of proper proof pertaining to the Defendant's conduct and intentions under these circumstances, particularly in light of the Bankruptcy Code's directive that exceptions to discharge must be strictly construed against a creditor and liberally construed in favor of a debtor. 59. To the extent any of these findings of fact constitute conclusions of law, the Court expressly adopts them as such.
The properties, once acquired with Plaintiff's funds, were placed into the name of Arcadia Custom Homes, L.P., for whom the Defendant worked, ostensibly in order to avoid additional insurance costs while the properties were "in inventory" by keeping them as listed properties under Arcadia's blanket insurance policy. The entity in which the acquired properties should have been held and the degree to which the Plaintiff acquiesced to the procedure actually used in the early days of the relationship is unclear.
¶ 3 of the Stipulation of Agreed Issues of Fact set forth in the approved Joint Pre-Trial Order entered in this adversary proceeding on September 23, 2013. The existing
Ex. 4. The evidence contains no specific explanation as to how the amount of the note was derived.
Schedule A included four properties other than the four specifically designated as the "Properties" in these findings. The disposition of such properties is extraneous to the issues presented in this case.
The 2010 Note was accompanied by a Loan Agreement which, among other things, imposed certain reporting requirements upon the Defendant. See Ex. 5.
See Ex. 8.
Schedule F filed by the Debtor on August 14, 2012 [dkt #6] in case no. 12-41969.
¶ 3(i) of the Stipulated Statements of Fact.
See Ex. 21.
CONCLUSIONS OF LAW
1. This Court has subject matter jurisdiction under 28 U.S.C. §§1334 and 11 U.S.C. §523. This Court has personal jurisdiction over the parties to this adversary proceeding. 2. This Court has authority to enter a final judgment in this adversary proceeding since it statutorily constitutes a core proceeding as contemplated by 28 U.S.C. §157(b)(2)(I) and (O) and meets all constitutional standards for the proper exercise of full judicial power by this Court. 3. This Court has the authority to enter a final judgment on an unliquidated claim when determining the dischargeability of that debt in a bankruptcy case. Morrison v. Western Builders (In re Morrison), 555 F.3d 473, 478-79 (5th Cir. 2009). 4. Such authority recognized in the Fifth Circuit is consistent with decisions of sister courts of appeal. See, e.g., Cowen v. Kennedy (In re Kennedy), 108 F.3d 1015, 1017-18 (9th Cir.1997); Longo v. McLaren (In re McLaren), 3 F.3d 958, 965-66 (6th Cir.1993); Abramowitz v. Palmer, 999 F.2d 1274 (8th Cir.1993); N.I.S. Corp. v. Hallahan (In re Hallahan), 936 F.2d 1496, 1508 (7th Cir.1991). 5. The recognized authority of a bankruptcy court to enter a final judgment on an unliquidated claim when determining the dischargeability of that debt in a bankruptcy case was not impaired by the decision in Stern v. Marshall, --- U.S. ----, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011). Farooqi v. Carroll (In re Carroll), 464 B.R. 293, 312 -313 (Bankr. N.D. Tex. 2011); Dragisic v. Boricich (In re Boricich), 464 B.R. 335, 337 (Bankr. N.D. Ill. 2011). 6. Even if Stern had arguably impacted that authority [which it did not],
the court would be compelled to follow existing Fifth Circuit precedent as set out in
Morrison . . . as this court cannot ignore (much less 'overrule') existing binding circuit precedent, even if that precedent is thought to be inconsistent with a later decision by the Supreme Court. Only the circuit itself can overrule its own precedents.
Christian v. Kim (In re Soo Bin Kim), 2011 WL 2708985, at *2 n.2 (Bankr. W.D. Tex., July 11, 2011), as cited in
Carroll, 464 B.R. at 313 and
Dietz v. Ford (In re Deitz), 469 B.R. 11, 21 (B.A.P. 9th Cir. 2012).
7. The complaint filed by the Plaintiff seeks a determination that the debt which he alleges is owed to him by the Defendant should be excepted from discharge under
11 U.S.C. §523(a)(2)(A), §523(a)(4) and/or §523(a)(6). 8. In seeking to except the debt owing to him from the scope of the discharge granted to the Defendant, the Plaintiff assumes the burden of proof under a preponderance of the evidence standard.
Grogan v. Garner, 498 U.S. 279, 286 (1991). 9. All exceptions to discharge under §523 "must be strictly construed against a creditor and liberally construed in favor of a debtor so that the debtor may be afforded a fresh start."
Hudson v. Raggio & Raggio, Inc. (In re Hudson), 107 F.3d 355, 356 (5th Cir. 1997). 10. However, the Fifth Circuit has noted that there are limits to the maxim that exceptions to dischargeability are to be construed narrowly in favor of the debtor, particularly in situations falling under an exception to dischargeability in a case in which a debtor has committed fraud.
See generally Deodati v. M.M. Winkler & Associates (In the Matter of: M.M. Winkler & Associates), 239 F.3d 746, 751 (5th Cir. 2001).
However, a fresh start is not promised to all who file for bankruptcy relief, but only to "the honest but unfortunate debtor." Grogan, 498 U.S. at 286-87.
Nondischargeability Under 523(a)(2)(A): Debt Arising by Fraud, False Pretenses, or False Representation.
11. The Plaintiff's Complaint seeks a determination that the debt owed to him should be excepted from discharge under §523(a)(2)(A) as a debt obtained by false pretenses, a false representation or actual fraud. 12. 11 U.S.C. §523(a)(2)(A) of the Bankruptcy Code provides that:
a discharge under §727 of this title does not discharge an individual debtor from any debt for money, property, or services, . . . to the extent obtained by false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition.
13. Section 523(a)(2)(A) encompasses similar but distinct causes of action. Though
16. Thus, the validity of the Plaintiff's claim under §523(a)(2)(A) in this case rests upon sufficient proof that the debt was obtained by actual fraud. 17. To have a debt excepted from discharge pursuant to the "actual fraud" provision in § 523(a)(2)(A), an objecting creditor must prove that:
(1) the debtor made representations;
(2) at the time they were made the debtor knew they were false;
(3) the debtor made the representations with the intention and purpose to deceive the creditor;
(4) the creditor justifiably relied on such representation; and
(5) the creditor sustained losses as a proximate result of the representations.
Pentecost, 44 F.3d at 1293,
as modified by the United States Supreme Court decision of Field v. Mans, 516 U.S. 59 (1995) [regarding the proper standard of reliance].
18. It is widely recognized that "[a] promise to perform acts in the future is not a qualifying misrepresentation merely because the promise subsequently is breached."
Woo, Inc. v. Donelson (In re Donelson), 410 B.R. 495, 503 (Bankr. S.D. Tex. 2009) (citing
Allison, 960 F.2d at 484). A breach of contract "is not sufficient to make a debt non-dischargeable, even though there is no excuse for the subsequent breach."
Turbo Aleae Inv., Inc. v. Borschow (In re Borschow), 454 B.R. 374, 395 (Bankr. W.D. Tex. 2011) (citing
Bercier, 934 F.2d at 692),
aff'd, 467 B.R. 410 (W.D. Tex. 2012). 19. Fraudulent conduct occurring subsequent to the time that an indebtedness is created is irrelevant to the issue of whether the debt was "obtained by false pretenses, a false representation, or actual fraud" within the meaning of §523(a)(2)(A) of the Bankruptcy Code.
Borschow, 454 B.R. at 401;
ColeMichael Investments, LLC v. Burke (In re Burke), 405 B.R. 626, 648 (Bankr. N.D. Ill. 2009)
aff'd, 436 B.R. 53 (N.D. Ill. 2010);
Batcha v. Forness (In re Forness), 334 B.R. 724, 734 (Bankr. M.D. Fla. 2005). 20. Because the Court concludes that the Plaintiff has failed to prove by a preponderance of the evidence that his alleged claim amount was obtained by actual fraud, judgment must be rendered for the Defendant on this §523(a)(2)(A) claim.
See, e.g., Britton v. Price (In re Britton), 950 F.2d 602, 604 (9th Cir. 1991); Caspers v. Van Horne (In re Van Horne), 823 F.2d 1285, 1287 (8th Cir. 1987). Though some bankruptcy courts outside of the Fifth Circuit have cited the decision of the United States Supreme Court in Field v. Mans, 516 U.S. 59, 116 S.Ct. 437, 133 L.Ed.2d 351(1995), in support of their proposition that all of the §523(a)(2)(A) actions are governed by the elements for actual fraud, see, e.g., AT&T Universal Card Services v. Ellingsworth (In re Ellingsworth), 212 B.R. 326 (Bankr. W.D. Mo. 1997); AT& T Universal Card Services v. Alvi (In re Alvi), 191 B.R. 724 (Bankr. N.D. Ill. 1996); the Supreme Court in that case was actually distinguishing the language used in §523(a)(2)(A) from that utilized in §523(a)(2)(B) in order to determine the degree of reliance necessary above mere reliance in fact in order to exempt a debt from discharge under (a)(2)(A). Since the Supreme Court specifically refused to even apply their direct holding regarding the degree of reliance in actual fraud cases to cases of false pretense or false representation, 116 S.Ct. at 443, n. 8, the statement that the Court erased all distinctions between the three (a)(2)(A) actions strains credibility.
While "false pretenses" and "false representation" both involve intentional conduct intended to create and foster a false impression, the distinction is that a false representation involves an express statement, while a claim of false pretenses may be premised on misleading conduct without an explicit statement. See Walker v. Davis (In re Davis), 377 B.R. 827, 834 (Bankr. E.D. Tex. 2007); and Haney v. Copeland (In re Copeland), 291 B.R. 740, 760 (Bankr. E.D. Tenn. 2003). In order for a debtor's representation to constitute a false pretense or a false representation, it "must have been: (1) [a] knowing and fraudulent falsehood, (2) describing past or current facts, (3) that [was] relied upon by the other party." In re Allison, 960 F.2d at 483; see also In re Bercier, 934 F.2d at 692 ["to be a false representation or false pretense under § 523(a)(2), the false representations and false pretenses must encompass statements that falsely purport to depict current or past facts"].
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Nondischargeability under § 523(a)(4): Debt Arising From Embezzlement.
21. 11 U.S.C. §523(a)(4) provides that "A discharge under 11 U.S.C.§ 727 does not discharge an individual from a debt for fraud or defalcation while acting in a fiduciary capacity, embezzlement or larceny." 22. "Embezzlement is defined for the purposes of §523(a)(4) as the fraudulent appropriation of property by a person to whom such property has been entrusted, or into whose hands it has lawfully come." Miller v. J.D. Abrams Inc. (Matter of Miller), 156 F.3d 598, 602 (5th Cir.1998), cert. denied, 526 U.S. 1016 (1999). 23. "Embezzlement, however, is not limited to situations in which one person is entrusted with the property of another. It also applies where . . . a person lawfully obtains property, but then fraudulently appropriates it for his or her own use." Powers v. Caremark, Inc. (In re Powers), 261 Fed. App'x. 719, 723 (5th Cir. 2008) . 24. "Given that a debtor has lawful control of the property, embezzlement then requires three elements: (1) appropriation of funds by the debtor; (2) for the debtor's use or benefit; and (3) with fraudulent intent." Andra Group, L.P. v. Gamble-Ledbetter (In re Gamble-Ledbetter), 419 B.R. 682, 696 (Bankr. E.D. Tex. 2009) (citing Rainey v. Davenport (In re Davenport), 353 B.R. 150, 200 (Bankr. S.D. Tex. 2006)). 25. Fraudulent intent is "an intent to deceive another person and thereby induce such other person to transfer, alter or terminate a right with respect to property." Winn v. Holdaway (In re Holdaway), 388 B.R. 767, 778 (Bankr. S.D. Tex. 2008); Soisson v. Hillebrandt (In re Hillebrandt), 2011 WL 2447738 at *20 (Bankr. S.D. Miss., June 15, 2011). 26. "Fraudulent intent may be inferred from the conduct of the Debtor and from circumstances of the situation." Chizk v. Ramon (In re Ramon), 433 B.R. 571, 582 (Bankr. N.D. Tex. 2010). 27. The only debt that could have arisen from an embezzlement by the Defendant related to the alleged misappropriation of sale proceeds from unidentified properties at unspecified times during the existence of the business relationship. 28. However, the particular damages sought to be recovered by the Plaintiff against the Defendant in this adversary proceeding are not derived from any asserted misappropriation of sale proceeds. 29. "A requirement that the creditor prove the damages resulting from the embezzlement is implicit in the embezzlement exception to discharge." KV Pharmaceutical Co. v Harland (In re Harland), 235 B.R. 769, 781 (Bankr. E.D. Pa. 1999) (citing Homemakers, Inc. v. Salamone (In re Salamone), 78 B.R. 74, 77 (Bankr. E.D. Pa. 1987); see also Brown v. Kuwazaki (In re Kuwazaki), 2010 WL 3706004 at *6 (B.A.P. 10th Cir., Sept. 23, 2010) [". . .embezzlement claims are limited to money or property that was used in an unauthorized way . . . [and the Plaintiff's] damages should not include any amounts that actually were used in accordance with the parties' agreement."]; Hamilton v. Green (In re Green), 2012 WL 3028462 at *6 (Bankr. W.D. Mo. July 25, 2012) ["For the debt to be nondischargeable under § 523(a)(4), the creditor must prove the damages resulting from the embezzlement."]. 30. Thus, the Plaintiff's request to except the debt allegedly owed to him by the Defendant as a debt arising from embezzlement must be denied.
Nondischargeability Under §523(a)(6): Debt Arising from Willful and Malicious Injury
31. The Plaintiff further contends that the debt owed to him should be excepted from discharge as a debt arising from a willful and malicious injury inflicted upon him by the Debtor-Defendant. 32. Section 523(a)(6) of the Bankruptcy Code provides that:
(a) A discharge under Section 727 . . . of this title does not discharge an individual debtor from any debt . . .
(6) for willful and malicious injury by the debtor to another entity or to the property of another entity.
33. In
Kawaauhau v. Geiger, 523 U.S. 57 (1998), the United States Supreme Court significantly narrowed the scope of debts that could be deemed nondischargeable under §523(a)(6). 34. The
Geiger decision clearly requires that an actor inflict a deliberate or intentional injury, not merely that an actor take a deliberate or intentional act that leads to injury.
35. As subsequently interpreted by the Fifth Circuit, a recovery under §523(a)(6) for a "willful and malicious injury" now requires proof that such injury arose from a deliberate and intentional act by a debtor that was inflicted under circumstances evidencing either: (1) an objective substantial certainty of harm; or (2) a subjective motive to cause harm.
Miller v. J. D. Abrams, Inc. (In re Miller), 156 F.3d 598, 606 (5th Cir. 1998),
cert. denied, Miller v. J.D. Abrams, Inc., 526 U.S. 1016 (1999);
see also Caton v. Trudeau (In re Caton), 157 F.3d 1026, 1029 (5th Cir. 1998). 36. The "objective substantial certainty" prong "is a recognition of the evidentiary reality that defendants rarely admit malicious intent. A court is thus expected to analyze whether the defendant's actions, which from a reasonable person's standpoint were substantially certain to cause harm, are such that the court ought to infer that the debtor's subjective intent was to inflict a willful and malicious injury on the plaintiff."
Mann Bracken, LLP v. Powers (In re Powers), 421 B.R. 326, 334-35 (Bankr. W.D. Tex. 2009),
citing In re Vollbracht, 276 Fed. App'x. 360 (5th Cir. 2007). 37. The Plaintiff has failed to demonstrate by a preponderance of the evidence the existence of a deliberate or intentional injury inflicted upon it by the Defendant. 38. The Plaintiff has failed to demonstrate by a preponderance of the evidence that the Defendant's action to encumber the Properties at that particular time created an objective substantial certainty of harm to the Plaintiff. 39. Thus, the Plaintiff has failed to sustain its burden of proof that any portion of the indebtedness asserted owed to him by the Defendant arose from the infliction of a "willful and malicious injury" as contemplated by §523(a)(6).
CONCLUSION
40. Because the Court concludes that the Plaintiff, Michael Boyle, has failed to prove by a preponderance of the evidence that the asserted debt owed by Defendant, Brian Berkenbile, was procured by false representations, false pretenses or actual fraud, judgment must be rendered for the Defendant under §523(a)(2)(A). 41. Because the Court concludes that the Plaintiff, Michael Boyle, has failed to prove by a preponderance of the evidence that the asserted debt owed by Defendant, Brian Berkenbile, arose from an embezzlement, judgment must be rendered for the Defendant under §523(a)(4). 42. Because the Court concludes that the Plaintiff, Michael Boyle, has failed to prove by a preponderance of the evidence that the asserted debt arose from a willful and malicious injury inflicted upon him by the Defendant, Brian Berkenbile, judgment must be rendered for the Defendant under §523(a)(6). 43. Thus, all relief requested in the Plaintiff's Complaint in the above-referenced adversary proceeding shall be denied. 44. To the extent any of these conclusions of law constitute findings of fact, the Court expressly adopts them as such. 45. An appropriate judgment shall be entered consistent with these findings and conclusions.
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THE HONORABLE BILL PARKER
UNITED STATES BANKRUPTCY JUDGE