Opinion
Case No. 18-34513 Adversary No. 18-03393
2019-08-13
IN RE: Adam RIFAI, Debtor. NextGear Capital, Inc., Plaintiff, v. Adam Rifai a/k/a Mohamad Rifai Chekh Charif, Defendant.
Christopher V. Arisco, Alan Bartlett Padfield, George Alexander Pence, Padfield & Stout LLP, Fort Worth, TX, for Plaintiff. Adrian Stanley Baer, Law Offices of Adrian S. Baer, Houston, TX, for Defendant.
Christopher V. Arisco, Alan Bartlett Padfield, George Alexander Pence, Padfield & Stout LLP, Fort Worth, TX, for Plaintiff.
Adrian Stanley Baer, Law Offices of Adrian S. Baer, Houston, TX, for Defendant.
FINDINGS OF FACT AND CONCLUSIONS OF LAW REGARDING PLAINTIFF NEXTGEAR CAPITAL. INC.'S COMPLAINT TO DETERMINE DISCHARGEABILITY OF A DEBT PURSUANT TO 11 U.S.C. SS 523(a)(2)(A), 523(a)(4), and 523(a)(6)
Jeff Bohm, United States Bankruptcy Judge
I. INTRODUCTION
Adam Rifai (the " Debtor ") filed a Chapter 7 petition on August 10, 2018, (the " Petition Date "). [Main Case Doc. No. 1]. On December 10, 2018, NextGear Capital, Inc. (the " Plaintiff ") initiated the pending adversary proceeding against the Debtor. Prior to the Debtor filing his Chapter 7 petition, the Plaintiff extended a credit line of $450,000.00 to the Debtor's 100%-owned company—Texas Auto Family, LLC (" Auto Family ")—a debt that the Debtor personally guaranteed would be repaid. The Plaintiff requests this Court to enter a judgment for the amount of the unpaid loan, plus attorneys' fees and costs, as a nondischargeable debt for which the Debtor is liable under 11 U.S.C. §§ 523(a)(2)(A), 523(a)(4), and 523(a)(6).
Any reference to "the Code" refers to the United States Bankruptcy Code, and any reference to any section refers to a section in 11 U.S.C., which is the United States Bankruptcy Code, unless otherwise noted. Further, any reference to a "Rule" is a reference to the Federal Rules of Bankruptcy Procedure.
The Court held a five-day trial in this adversary proceeding from June 17, 2019, to June 21, 2019. The Court then took the matter under advisement. On July 1, 2019, this Court held a brief hearing to orally announce its ruling granting the relief sought by the Plaintiff. The Court indicated that it would issue written Findings of Fact and Conclusions of Law, together with a judgment, explaining its decision. However, the Court informed the parties that it would refrain from entering its written findings and conclusions, plus the judgment, until after the Plaintiff had proven up its reasonable attorneys' fees and expenses. The Court instructed the Plaintiff's counsel to submit his fee bills to the Debtor's counsel by no later than noon on July 3, 2019. The Court further instructed the Debtor's counsel to file a certificate by no later than 5:00 p.m. on July 10, 2019, setting forth whether the Debtor objected to the reasonableness of the fees and expenses requested by the Plaintiff. The Court also stated that if, and only if, the Debtor objected to the reasonableness of these fees and expenses would this Court hold a separate evidentiary hearing requiring the Plaintiff to prove up its reasonable attorneys' fees and expenses.
The Plaintiff's counsel did, in fact, timely submit his firm's fee bills, which reflect that the Plaintiff's fees and expenses total $79,975.64. [Adv. Doc. No. 30]. The Debtor thereafter timely filed a certificate objecting to this amount as unreasonable. [Adv. Doc. No. 31]. On July 15, 2019, counsel for both the Debtor and the Plaintiff jointly filed a Stipulation Resolving Defendant's Objection to the Plaintiff's Attorneys Fees and Expenses stating that the Debtor did not object to the reasonableness of the attorneys' fees and expenses claimed by the Plaintiff in the amounts of $67,803.00 in attorneys' fees and $4,287.16 in expenses. [Adv. Doc. No. 32]. Moreover, the Court exercised its independent duty to review the reasonableness of the Plaintiff's fees and expenses and found the stipulated amount of fees and expenses to be reasonable. The Court held a brief hearing on July 19, 2019, to make a record regarding the reasonableness of the attorney's fees and expenses as stipulated by the parties. Accordingly, the Court finds that $72,090.16 is a reasonable amount of attorneys' fees and expenses to be awarded to the Plaintiff for the successful prosecution of this adversary proceeding.
The Court notes that counsel for the Debtor has preserved for appeal purposes his right to argue that no fees and expenses should be awarded on the grounds that this Court erred in concluding that the underlying obligation owed by the Debtor is a non-dischargeable debt.
Now that the issue of reasonable attorneys' fees and expenses has been determined, the Court proceeds to issue these written Findings of Fact and Conclusions of Law pursuant to Rule 7052 explaining why it is granting the relief requested by the Plaintiff and entering a judgment declaring that $422,726.23 (the outstanding amount owed under the loan documents, including unpaid principal, accrued unpaid interest, attorneys' fees, and expenses) is a nondischargeable obligation owed by the Debtor. To the extent that any finding of fact is construed as a conclusion of law, it is adopted as such; and to the extent that any conclusion of law is construed as a finding of fact, it is adopted as such. The Court reserves the right to make additional findings and conclusions as this Court deems appropriate or as may be requested by either of the parties.
II. FINDINGS OF FACT
A. Background of the Debtor
1. The Debtor holds two college degrees: a marketing degree he acquired in 2010 and an accounting degree he obtained from the University of Houston. [Tape Recording, June 18, 2019, Hrg. at 10:55:01 - 10:55:17 a.m.].
2. Before the Debtor established Auto Family, he founded an 18-wheeler vehicle hauling business called Camel Auto Transport. [Tape Recording, June 18, 2019, Hrg. at 10:54:27 - 10:54:38 a.m.].
3. Additionally, prior to establishing Auto Family, the Debtor repaired cars for another dealer called Texas Advance Motors ("TAM") in 2014. [Tape Recording, June 18, 2019, Hrg. at 10:55:44 - 10:56:01 a.m.]. Specifically, he did mechanical work such as engine work, oil changes, brake work, and suspension work. [Tape Recording, June 18, 2019, Hrg. at 10:56:09 - 10:56:22 a.m.].
4. The Debtor also worked as a broker for International Motors during which time he has connected prospective buyers to International Motors. [Tape Recording, June 18, 2019, Hrg. at 10:58:04 - 10:58:22 a.m.]. The Debtor has received commissions, generally in the range of 20% to 25% of the profit that IM has received from his referrals. [Tape Recording, June 18, 2019, Hrg. at 10:58:26- 10:58:35 a.m.].
5. The Debtor filed a voluntary Chapter 7 petition on the Petition Date. [Main Case Doc. No. 1].
B. Identification of Insiders who Have Benefitted Financially from Their Blood Relationship with the Debtor
6. The Debtor regularly wired money to his mother—who resides in Saudi Arabia—from Auto Family's operating account. [Plaintiff's Ex. 60, pg. AR000199, see also Plaintiff's Ex. 62, pg. AR000230].
7. The Debtor previously employed Abdul Moula Al-Shikh Sharif, who is his brother. [Tape Recording, June 18, 2019, Hrg. at 12:56:22 - 12:57:08 p.m.]. On multiple occasions, the Debtor made payments to his brother—in the aggregate total of $15,940.00—drawn on Auto Family's account: September 2, 2017 [Plaintiff's Ex. 59, pg. AR000186], October 11, 2017 [Ex. 60, pg. AR000206], November 2, 2017 [Ex. 61, pgs. AR000222], November 8, 2017 [Ex. 62, pg. AR000232], and December 4, 2017 [Ex. 62, pg. AR000232].
8. The Debtor's brother received a salary from Auto Family during his employment. Rather than keeping time sheets for employees, the Debtor made the assumption that all of his employees worked from 9:00 A.M. to 5:00 P.M. each day. Thus, the Debtor has neither time sheets nor documentation showing his brother's work history with Auto Family. [Tape Recording, June 18, 2019, Hrg. at 1:06:21 P.M. - 1:07:35 a.m.].
9. The Debtor executed a promissory note to his brother-in-law, Muhanned Omar Albarazi, in the amount of $90,000.00 on April 1, 2015 (the " BIL Promissory Note "). [Tape Recording, June 18, 2019, Hrg. at 12:56:22 - 12:57:08 p.m.; see also Plaintiff's Ex. 68, pg. 000841]. The maturity date of the note was June 30, 2018. [Plaintiff's Ex. 68, pg. 000841]. On multiple occasions, the Debtor made payments to his brother-in-law—in the aggregate total of $4,000.00—wired from Auto Family's account: July 31, 2017 [Plaintiff's Ex. 57, pg. AR000146] and September 12, 2017 [Ex. 59, pg. AR000182].
10. The Debtor executed a promissory note to his mother-in-law, Gene Folladori (" Mother-In-Law "), in the amount of $50,000.00. [Tape Recording, June 18, 2019, Hrg. at 11:13:19 - 11:14:12 a.m.]. The Debtor testified that he received the loan proceeds sometime between February 2015 and March 2015. [Id. ]. The Debtor deposited a portion of the funds into Auto Family's operating account and used the remaining portion to purchase inventory. [Id. ]. The Debtor has not made any payments on the note owed to his mother-in-law. [Id. ].
11. The Debtor's mother, brother, brother-in-law, and mother-in-law are all insiders (collectively the "Insiders"). See 11 U.S.C. § 101(31)(A)(i).
C. Background of the Plaintiff
12. The Plaintiff came into existence through the merger of Dealer Services Corporation (" DSC ") and Manheim Auto Finance. [Tape Recording, June 17, 2019, Hrg. at 3:12:33 - 3:12:52 p.m.]. John Peacock (" Peacock "), the witness testifying on behalf of the Plaintiff, previously worked for DSC before the merger. [Tape Recording, June 17, 2019, Hrg. at 3:12:33 -3:12:52 p.m.].
13. While Peacock worked at DSC, he was a branch manager, and in that position, he was responsible for the administration of all floorplan financing. [Tape Recording, June 17, 2019, Hrg. at 3:12:53 - 3:15:16 p.m.]. DSC provided financing exclusively for used car dealerships and did not provide financing to consumers. Id.
14. Currently, Peacock is a Title Performance Manager for the Plaintiff, and has been in that position since August 1, 2018, having previously held the title of Account Executive. [Tape Recording, June 17, 2019, Hrg. at 3:15:21 - 3:15:26 p.m.]. As the Title Performance Manager for the Plaintiff, Peacock's duties now include revenue generation, collection and risk mitigation. [Tape Recording, June 17, 2019, Hrg. at 3:15:43 - 3:16:02 p.m.].
15. The purpose of the Plaintiff's monetary advances is to help dealers finance and expand their inventory. [Tape Recording, June 17, 2019, Hrg. at 3:21:54 - 3:21:59 p.m.]. For the Plaintiff to determine how much to advance a dealer, it compares the amount of money the dealer paid for a vehicle—which is shown on the bill of sale—to multiple standard valuation guides—such as those from the National Automotive Dealers Association, the Kelley Blue Book, the Manheim Market Report, and the Black Book. [Tape Recording, June 17, 2019, Hrg. at 3:22:14 -3:23:18 p.m.]. The Plaintiff, in the ordinary course of its business, advances the lesser of: (a) the amount on the bill of sale; or (b) the amount set forth in the valuation guide. Id. Here, the Plaintiff relied on the materially false bills of sale that the Debtor provided for all of the vehicles at issue (the " Twelve Vehicles "). When the Plaintiff transfers the funds, it does so via ACH into the dealership's account. [Tape Recording, June 17, 2019, Hrg. at 3:24:35 - 3:24:50 p.m.]. There are the same procedures that the Plaintiff used to approve funding for and make advances to Auto Family. D. Auto Family's Relationship with the Plaintiff
The Plaintiff's Counsel asked Peacock the following on direct examination:
Q: You mentioned bills of sale and titles, why does NextGear require a dealer to provide bills of sale and titles with respect to a non-auction purchase vehicle?
A: The bills of sale-umm-demonstrate how the vehicle was acquired by the dealer-umm-it represents the-umm-dealer's opinion of the wholesale price of the vehicle-umm-and it shows the change of vehicle-uhm-and it shows the change of ownership. In other words, who he bought it from. We can then cross-check the title to confirm-umm-that the individual listed as the seller of the bill of sale was the previous owner of the vehicle.
[Tape Recording, June 17, 2019, Hrg. at 2:21:02 - 2:21:44 p.m.].
Q: Can you explain to the court, when you receive a bill of sale and title documentation along with a request for an advance the process that NextGear specifically goes through to authorize a specific amount for that advance?
A: It, it, you would compare the dollar amount, the dealer's representation of the wholesale value to-uhm-a-uhm standard industry valuation guide-umm-the one we use primarily is Black Book.
Q: Do you use any other standard industry guides when determining valuations?
A: We can research, in certain circumstances, utilize NADA which is just another uh industry valuation guide. We can also use MMR-umm-which stands for Manheim Market Report. Umm-it's the average of all process paid for that particular vehicle at auction. So, we are allowed to-umm-use MMR as a guide as well. As far as what we advance, we would advance the lesser of what the dealer paid for it or average Black Book wholesale or MMR.
Q: Hold on a minute. I didn't hear that. Can you repeat that again please?
A: Yes sir. The advance would be the lesser of-umm-the price the dealer paid for it or one of the valuation guides that I mentioned.
Q: Why would Plaintiff choose to advance at the lesser of either the industry wide valuation guides such as MMR or the sales price reflected on the bill of sale?
A: Well, well if the bill of sale price is less, then again, that's the dealer's representation of the wholesale value of the vehicle. He is in the business of buying/selling cars so dealers, as normal course, acquire vehicles at wholesale prices so that they have a much better chance of selling them at retail prices and making profit.
[Tape Recording, June 17, 2019, Hrg. at 3:22:14 - 3:24:33 p.m.].
16. The Debtor has been the sole owner of Auto Family since its inception and was the sole owner when it obtained financing from the Plaintiff for the Twelve Vehicles that are the subject of the pending suit. [Joint Pre-Trial Statement, Admission of Fact No. 6, pg. 16].
17. On April 3, 2015, the Debtor signed a promissory note, on behalf of Auto Family, in favor of the Plaintiff, with a credit line of up to $50,000.00 (the " Original Note "). [Plaintiff's Ex. 1]. Among other things, this document established that the Plaintiff would have a security interest in all of Auto Family's assets, including each vehicle that Auto Family purchased using the financing provided by the Plaintiff. Id. On several occasions, Auto Family increased its credit line with the Plaintiff, and on June 19, 2017, the Debtor signed, on behalf of Auto Family, an amended note and security agreement increasing this credit line to $450,000.00 (the " Current Note "). [Plaintiff's Ex. 1].
18. Paragraph 2(a) of the Original Note contains the following language:
In order to secure full and prompt payment of all Liabilities and performance of all obligations of Borrower to Lender, its Affiliates, and/or their respective successors or assigns:
Borrower grants to Lender a continuing security interest in all of Borrower's assets and properties, wherever located, including, without limitation, all equipment of any kind or nature; all vehicles and vehicle parts; all Inventory now owned or hereafter acquired, including, without limitation, all Lender Financed Inventory now owned or hereafter acquired; all amounts in Borrower's Reserve
held by or on behalf of Lender, if any ....
[Plaintiff's Ex. 1, ¶ 2(a), Pg. 1 of 12].
19. Paragraph 4(a) of the Original Note contains the following language:
At the time of Borrower's execution of this Note and continuing at all times thereafter until all Liabilities have been indefeasibly paid and satisfied in full and this Note and all other Loan Documents terminated in accordance with their respective terms, Borrower hereby represents, warrants, covenants, and agrees:
(a) To sell, lease, or rent Lender Financed Inventory only in the Ordinary Course of Business in accordance with Law, and not to sell or otherwise dispose of any Lender Financed Inventory except as herein provided.
[Plaintiff's Ex. 1, ¶ 4(a), Pg.2 of 12].
20. Paragraph 4(d) of the Original Note, in pertinent part, contains the following language:
At the time of Borrower's execution of this Note and continuing at all times thereafter until all Liabilities have been indefeasibly paid and satisfied in full and this Note and all other Loan Documents terminated in accordance with their respective terms, Borrower hereby represents, warrants, covenants, and agrees:
(d) To keep at all times complete and accurate records of Borrowers Business and to promptly (but in any event within two (2) Business Days) provide to Lender copies of such records and any financial information regarding Borrower's Business or Borrower's financial condition generally, in each case as Lender may request.
[Plaintiff's Ex. 1, ¶ 4(d), Pg.2 of 12].
21. Paragraph 4(f) of the Original Note contains the following language:
At the time of Borrower's execution of this Note and continuing at all times thereafter until all Liabilities have been indefeasibly paid and satisfied in full and this Note and all other Loan Documents terminated in accordance with their respective terms, Borrower hereby represents, warrants, covenants, and agrees:
(f) To hold all amounts received from the sale of any Unit of Lender Financed Inventory in the form as received in trust for the sole benefit of and for Lender, and to remit such funds satisfying all amounts due Lender and owing by Borrower for such Unit of Lender Financed Inventory, in each case within twenty-four (24) hours of Borrower's receipt of such funds (or receipt of such funds by any Affiliate of Borrower.
[Plaintiff's Ex. 1, ¶ 4(f), Pg.2 of 12].
22. Paragraph 5(o) of the Original Note contains the following language:
5. Borrower understands and agrees to the following terms, conditions, covenants, and other agreements relating to its Credit Line and any Advances made under the Note and the other Loan Documents, and acknowledges that any failure by Borrower to adhere to any such terms, conditions, covenants, or other agreements shall result in Lender having the right (in addition to any other right that Lender may have), in its sole discretion and without notice to Borrower, to declare a Maturity Event with respect to all related Advances:
(o) So long as Borrower is not in default of this Note or any other Loan Document, Borrower may sell Lender Financed Inventory to bona fide buyers in the Ordinary Course of Business, but nothing herein shall be deemed to waive or release any interest Lender may have hereunder or under any other agreement in any proceeds or replacements of such Lender Financed Inventory. Upon the sale of any Unit of Lender Financed
Inventory, Borrower shall hold the proceeds from such sale in trust for the benefit of Lender, and Borrower shall pay to Lender, in accordance with this Note and the other Loan Documents, an amount equal to the unpaid balance of Liabilities relating to such Unit of Lender Financed Inventory.
[Plaintiff's Ex. 1, ¶ 5(o), Pg.6 of 12].
23. Paragraph 6(a) of the Original Note contains the following language:
The occurrence of any of the following events shall be considered an event of default under this Note and the other Loan Documents (each, an "Event of Default"):
Borrower or any Guarantor fails to perform any of its obligations, undertakings, or covenants under this Note or under any other Loan Document, including any obligation to repay any Liability when due and Borrower's obligation to pay upon demand any outstanding Liability under this Note.
[Plaintiff's Ex. 1, ¶ 6(a) Pg.7 of 12].
24. Paragraph 13 of the Original Note contains the following language:
This Note and the other Loan Documents are intended by the Parties to be an amendment to and restatement of any prior Demand Promissory Note and loan and Security Agreement or similar document or instrument) including any prior promissory note, loan and security agreement or similar contract) between Lender (or any predecessor of Lender, including Dealer Services Corporation and/or Manheim Automotive Financial Services, Inc.) and Borrower.
[Plaintiff's Ex. 1, ¶ 13, Pg.9 of 12].
25. Paragraph 18 of the Original Note contains the following language:
Borrower shall pay to Lender all reasonable legal fees, expenses, and collection costs incurred by Lender, Lender's Affiliates, and/or Lender's Representatives as a result of any Event of Default, Borrower's failure to perform any obligation or satisfy any Liability under this Note or any other Loan Document, and/or Borrower's unsuccessful prosecution of affirmative claims or counterclaims against such party or parties.
[Plaintiff's Ex. 1, ¶ 18, Pg.10 of 12].
26. Contemporaneous with the Original Note, the Debtor signed an Individual Guaranty (" the Guaranty "), making himself personally liable for the underlying debt should Auto Family not be able to pay. [Plaintiff's Ex. 2].
27. The Guaranty contains the following language:
Guarantor hereby voluntarily, unconditionally, and absolutely guarantees (i) the full and prompt payment when due, whether by acceleration or otherwise, and at all times hereafter, of all Liabilities; and (ii) the full and prompt performance of all the terms, covenants, conditions, and agreements related to the Liabilities. Guarantor further agrees to pay all expenses, including attorneys' fees and court costs (including, in each case, those relating to bankruptcy and appeals), paid or incurred by Lender or its Affiliates in endeavoring to collect on any Liabilities, and in enforcing this Guaranty or in defending any claims by Borrower or any Guarantor related to any of the Liabilities, plus interest on such amounts at the lesser of (A) thirteen percent (13%) per annum, compounded daily, or (B) the maximum rate permitted by Law.
[Plaintiff's Ex. 2, ¶ 2(a), Pg. 2 of 5].
28. The Guaranty also contains the following language:
The obligations of Guarantor under this Guaranty shall be continuing and shall cover any and all Liabilities existing as
of the effective date of this Guaranty and any and all Liabilities thereafter incurred by Borrower, including any and all Liabilities existing at the time of any termination of this Guaranty. This Guaranty shall be unlimited in amount and shall continue until this Guaranty is terminated pursuant to Section 3.
[Plaintiff's Ex. 2, ¶ 2(c), Pg. 2 of 5].
29. On April 7, 2015—four days after the Original Note was executed—the Plaintiff filed with the Texas Secretary of State a UCC Financing Statement, that among other things, perfected the Plaintiff's security interest on "all vehicles, vehicle parts and inventory now owned or hereafter acquired, without limitation, purchase money inventory, the purchase of which was financed or floorplanned by NextGear Capital, Inc. for [Auto Family] of whatever kind ... relating to the forgoing." [Plaintiff's Ex. 3].
30. The Current Note incorporates and continues the material obligations and terms from the Original Note (collectively the "Note ") which, combined with the Guaranty, form the basis of the Debtor's liability to the Plaintiff.
E. A Description of the Plaintiff's Collateral that is the Subject of this Suit
31. The proceeds from the sale of the Twelve Vehicles were not remitted to the Plaintiff as required by the Note. The following chart summarizes the relevant information about the Twelve Vehicles:
Price set forth Floored amount in the Bill of to Auto Family Difference Sale that Auto from the Amount that between Family Plaintiff based Auto Family Floored Represented to upon the 4 received from Amount and Balance still Vehicle Stock the Plaintiff was Plaintiff's its sale of the Amount that owed to the Number the Amount that reliance on the subsequent 5 Auto Family Plaintiff 6 Auto Family price in the vehicle received from Paid to Acquire vehicle's bill of its vehicle sale the Vehicle sale $17,300.00 $15,000.00 304 (Pl. Ex. 8, pg. 4) $17,075.00 (JPSF No. 35) $2,344.04 $15,410.19 $20,000.00 $8,786.61 307 (Pl. Ex. 12, pg. $20,000.00 (JPSF No. 46) $11,483.14 $18,050.00 6) $20,000.00 $11,980.43 326 (Pl. Ex. 16, pg. $20,000.00 (JPSF No. 57) $8,289.32 $19,000.00 6) $15,200.00 (Pl. $9,851.21 330 Ex. 20, pg. 3) $15,200.00 (JPSF No. 69) $5,618.54 $14,440.00 $23,000.00 (Pl. $17,303.46 332 Ex. 24, pg. 4) $23,000.00 (JPSF No. 81) $5,966.29 $21,850.00 $12,000.00 $7,722.00 334 (Pl. Ex. 28, pg. $11,600.00 (JPSF No. 92) $4,147.75 $11,600.00 3) $29,000.00 (Pl. $15,200.12 336 Ex. 31, pg. 3) $27,800.00 (JPSF No. 99) $12,569.74 $27,800.00 $35,000.00 (Pl. $10,915.82 340 Ex. 36, pg. 3) $35,500.00 (JPSF No. 112) $24,853.93 $35,500.00 $41,000.00 $8,786.61 341 (Pl. Ex. 40, pg. $40,900.00 (JPSF No. 123) $32,383.14 $38,855.00 3) $40,000.00 (Pl. $26,884.93 343 Ex. 45, pg. 5) $37,300.00 (JPSF No. 134) $16,007.86 $37,300.00 $20,000.00 $14,500.35 347 (Pl. Ex. 49, pg. $19,500.00 (JPSF No. 145) $5,269.40 $19,500.00 4) $50,700.00 (Pl. $8,876.61 352 Ex. 53, pg. 3) $50,700.00 (JPSF No. 157) $42,183.14 $50,700.00 TOTALS $318,575.00 $155,808.15 $171,116.29 $310,005.19
[Editor's Note : The preceding image contains the references for footnotes , , ]
All of the floored amounts set forth in this column come from Plaintiff's Ex. 5.
"JPSF" means "Joint Pre-Trial Statement Admitted Fact."
All of the floored amounts set forth in this column come from Plaintiff's Ex. 5.
32. Auto Family purchased all of the Twelve Vehicles using funding from the Plaintiff, sold them to third parties, received the sale proceeds, and then failed to remit payment to the Plaintiff. [Joint Pre-Trial Statement, Admission of Fact No. 29-160, 163, pgs. 18-26].
33. The Debtor, on behalf of Auto Family, also pledged four of the Twelve Vehicles (i.e. units 340, 341, 343, and 352) as security for a promissory note to Zayn, LLC (" Zayn "). an entity that provided financing to Auto Family. [Joint Pre-Trial Statement, pg. 7; see also Plaintiff's Ex. 43]. The Debtor's pledge of these Four Vehicles put the Plaintiff's security interest in the vehicles at risk. F. The Debtor's Improper Use of Funds
34. The Debtor used some of the funds advanced by the Plaintiff, as well as proceeds from sales of the Twelve Vehicles, to pay for various personal expenses soon after Auto Family received the advance from the Plaintiff in July of 2017. Specifically, from July 1, 2017 to July 31, 2017, the Debtor made the following personal purchases using funds from Auto Family's operating account totaling $1,777.64:
The Court has set out in detail various expenditures of the Debtor based on their description in the Plaintiff's Exhibits 57, 59, 60, and 61. Exhibit 58—which encompasses the expenditures from August 1, 2017, to August 31, 2017—does not provide a breakdown of every individual item purchased by the Debtor using funds from Auto Family's operating account. While these excerpts do not encompass all of the potential misuses of the funds by the Debtor, they encompass all of the expenditures that are patently improper.
a. On July 5, 2017, the Plaintiff deposited $30,000.00 in Auto Family's operating account.
i. On July 6, 2017 the Debtor spent $3.00 at "La Escondida" (food).
ii. On July 6, 2017, the Debtor spent $87.75 at "La Tapatia Mexican Café" (food).
iii. On July 9, 2017, the Debtor spent $35.10 at "Mawal Café & Grill" (food).
iv. On July 10, 2017, the Debtor spent $79.60 at "24 Hour Fitness" (gym).
b. On July 11, 2017, the Plaintiff deposited $22,450.00 in Auto Family's operating account.
c. On July 13, 2017, the Plaintiff deposited $5,000.00 in Auto Family's operating account.
i. On July 13, 2017, the Debtor spent $27.22 at "Layal Café" (food).
ii. On July 14, 2017, the Debtor spent $69.18 at "Union Kitchen" (food).
d. On July 17, 2017, the Plaintiff deposited $24,875.00 in Auto Family's operating account.
i. On July 18, 2017, the Debtor spent $10.79 at "Sunny's Food Store" (food).
ii. On July 19, 2017, the Debtor spent $10.16 at "El Polio Loco" (food).
e. On July 20, 2017, the Plaintiff deposited $11,000.00 in Auto Family's operating account.
i. On July 22, 2017, the Debtor spent $78.12 at "Cheesecake Factory" (food).
ii. On July 22, 2017, the Debtor spent $42.71 at "the Second City Bar" (bar).
iii. On July 23, 2017, the Debtor spent $212.25 at "Walgreens" (drug store).
iv. On July 27, 2017, the Debtor spent $8.64 at "McDonald's" (food).
v. On July 27, 2017, the Debtor spent $3.01 at "McDonald's" (food).
vi. On July 27, 2017, the Debtor spent $15.00 at "Layal Café" (food).
vii. On July 28, 2017, the Debtor spent $95.11 at "Goode Company Seafood" (food).
viii. On July 31, 2017, the Debtor sent S1,000.00 to "Samba Financial Group in Riyadh, Saudi Arabia."
According to the Debtor's testimony in a different adversary proceeding before this Court involving the same Auto Family operating account (Adv. No. 18-03392), Samba Financial Group is the vehicle that the Debtor used to transfer to the account of his brother-in-law. [Plaintiff's Ex. 57, pg. AR000140].
[Plaintiff's Ex. 57].
35. The Debtor used some of the funds advanced by the Plaintiff, as well as proceeds from sales of the Twelve Vehicles, to pay for various personal expenses soon after Auto Family received the advance from the Plaintiff in August of 2017. Specifically, from August 1, 2017, to August 31, 2017, the Debtor made the following purchases using funds from Auto Family's operating account totaling $252.38:
a. On August 3, 2017, the Plaintiff deposited $22,500.00 in Auto Family's operating account.
i. On August 4, 2017, the Debtor spent $90.96 at "Layal Café" (food).
ii. On August 5, 2017, the Debtor spent $43.29 at "24Hour Fitness USA" (gym).
b. On August 8, 2017, the Plaintiff deposited $18,800.00 in Auto Family's operating account.
c. On August 9, 2017, the Plaintiff deposited $4,690.00 in Auto Family's operating account.
d. On August 16, 2017, the Plaintiff deposited $25,500.00 in Auto Family's operating account.
e. On August 18, 2017, the Plaintiff deposited $20,000.00 in Auto Family's operating account.
i. On August 22, 2017, the Debtor made an ATM withdrawal for $118.13 in Istanbul, Turkey.
[Plaintiff's Ex. 58].
36. The Debtor used some of the funds advanced by the Plaintiff, as well as proceeds from sales of the Twelve Vehicles, to pay for various personal expenses soon after Auto Family received the advance from the Plaintiff in September of 2017. Specifically, from September 1, 2017, to September 29, 2017, the Debtor made the following purchases using funds from Auto Family's operating account totaling $5,651.44:
i. On September 2, 2017, the Debtor wrote check no. 2988 to "Abdul Moula Al Shikh Sharif" in the amount of $850.00 with the memo stating "personal."
a. On September 7, 2017, the Plaintiff deposited $10,200.00 in Auto Family's operating account.
i. On September 9, 2017, the Debtor spent $81.13 at "Miyako Japanese Restaurant."
b. On September 11, 2017, the Plaintiff deposited $53,400.00 in Auto Family's operating account.
i. On September 12, 2017, the Debtor sent $3,000.00 to "Samba Financial Group in Riyadh, Saudi Arabia."
ii. On September 12, 2017, the Debtor spent $26.03 at "Mannie's Seafood Market" (food).
iii. On September 13, 2017, the Debtor spent $38.39 at "Tastee Pizza" (food).
This transfer to the Debtor's brother followed an advance from the Plaintiff in the amount of $20,000.00 on August 18, 2017. See Plaintiff's Ex. 58, pg. AR000161, see also Finding of Fact No. 35(e).
According to the Debtor's testimony in a different adversary proceeding before this Court involving the same Auto Family operating account (Adv. No. 18-03392), Samba Financial Group is the vehicle that the Debtor used to transfer to the account of his brother-in-law. [Plaintiff's Ex. 59, pg. AR000182].
iv. On September 13, 2017, the Debtor spent $2.70 at "Tastee Pizza" (food).
v. On September 16, 2017, the Debtor spent $45.93 at "Wasfis Grill and H" (food and hookah bar).
vi. On September 16, 2017, the Debtor spent $75.00 at "Great Hand & Foot Mass" (massage parlor).
vii. On September 22, 2017, the Debtor spent $92.99 at "Wasfis Grill" (food and hookah bar).
viii. On September 23, 2017, the Debtor spent $23.02 at "Layal Café" (food).
ix. On September 25, 2017, the Debtor spent $1,212.61 at "Wayfair" (online household retailer).
x. On September 25, 2017, the Debtor spent $47.00 at "La Tapatia Mexican Café" (food).
xi. On September 26, 2017, the Debtor spent $29.20 at "Chili's" (food).
xii. On September 26, 2017, the Debtor spent $75.44 at "H-E-B" (grocery store).
c. On September 28, 2017, the Plaintiff deposited $31,600.00 in Auto Family's operating account.
i. On September 28, 2017, the Debtor spent $52.00 at "Tan Restaurant" (food).
[Plaintiff's Ex. 59].
37. The Debtor used some of the funds advanced by the Plaintiff, as well as proceeds from sales of the Twelve Vehicles, to pay for various personal expenses and to transfer funds to certain Insiders soon after Auto Family received the advance from the Plaintiff between September 30, 2017, and October 31, 2017. Specifically, from September 30, 2017, to October 31, 2017, the Debtor made the following purchases using funds from Auto Family's operating account totaling $38,200.08:
While this exhibit had a date range from September 30, 2017, to October 31, 2017, it shows some expenses made on September 29, 2017.
i. On September 29, 2017, the Debtor spent $43.26 at "The Home Depot" (hardware store).
ii. On September 29, 2017, the Debtor spent $21.62 at "AMC Studio 30" (movie theater).
iii. On September 29, 2017, the Debtor spent $25.53 at "AMC Studio 30" (movie theater).
iv. On September 30, 2017, the Debtor spent $6.71 at "Starbucks" (coffee).
v. On October 1, 2017, the Debtor spent $41.67 at "Mawal Café" (food).
vi. On October 1, 2017, the Debtor spent $31.91 at "Zeyad Bakery & Sweets" (bakery).
vii. On October 1, 2017, the Debtor spent $192.60 at "Wm Superc Wal-Mart" (grocery store).
viii. On October 1, 2017, the Debtor spent $40.00 at "Spire" (nightclub).
ix. On October 2, 2017, the Debtor spent $28.62 at "Afghan Express" (food).
a. On October 3, 2017, the Plaintiff deposited $27,800.00 in Auto Family's operating account.
i. On October 3, 2017, the Debtor spent $55.00 at "Mannie's Seafood" (food).
b. On October 4, 2017, the Plaintiff deposited $103,700.00 in Auto Family's operating account.
i. On October 4, 2017, the Debtor spent $68.34 at "Mawal Café" (food).
c. On October 5, 2017, the Plaintiff deposited $40,900.00 in Auto Family's operating account.
i. On October 6, 2017, the Debtor spent $43.29 at "24Hour Fitness USA" (gym).
ii. On October 7, 2017, the Debtor spent $93.00 at "Maryz Mediterranean" (food).
iii. On October 7, 2017, the Debtor spent $96.30 at "Petsmart" (pet store).
iv. On October 7, 2017, the Debtor spent $71.56 at "Cvs/Pharm" (drug store).
v. On October 7, 2017, the Debtor spent $30.25 at "Spire" (nightclub).
vi. On October 7, 2017, the Debtor spent $30.00 at "Spire" (nightclub).
vii. On October 8, 2017, the Debtor spent $48.74 at "Pan E Vino" (food).
viii. On October 8, 2017, the Debtor spent $54.11 at "24Hourfitannualfee" (gym membership).
ix. On October 9, 2017, the Debtor spent $14.97 at "Whataburger" (food).
x. On October 9, 2017, the Debtor spent $103.80 at "Kroger" (grocery store).
xi. On October 11, 2017, the Debtor spent $57.61 at "Wasfis Grill" (food).
xii. On October 11, 2017, the Debtor spent $93.00 at "Layal Café" (food).
xiii. On October 11, 2017, the Debtor wrote check no. 9107 to "Abdul Moula Alshikh Sharif" in the amount of $9,990.00 with the memo stating: "family help for school."
d. On October 12, 2017, the Plaintiff deposited $74,200.00 in Auto Family's operating account.
i. On October 12, 2017, the Debtor sent $25,000.00 to "Samba Financial Group in Riyadh, Saudi Arabia" for the purpose of "Mothers [sic] Hospital Treatment."
ii. On October 12, 2017, the Debtor spent $105.64 at "Wasfis Grill" (food).
iii. On October 14, 2017, the Debtor spent $40.42 at "Barbar Mediterranean Gr" (food).
iv. On October 15, 2017, the Debtor spent $20.00 at "Café Layal" (food).
v. On October 15, 2017, the Debtor spent $89.82 at "Gamestop" (video game store).
e. On October 16,2017, the Plaintiff deposited $19,500.00 in Auto Family's operating account.
i. On October 16, 2017, the Debtor spent $190.00 at "Doctors Care Clinic" (medical care).
ii. On October 17, 2017, the Debtor spent $39.46 at Barbar Mediterranean Gr" (food).
iii. On October 18, 2017, the Debtor spent $18.53 at "Mannie's Seafood Market" (food).
iv. On October 19, 2017, the Debtor spent $12.21 at "Subway" (food).
v. On October 20, 2017, the Debtor spent $251.01 at "Marshalls" (retail).
vi. On October 20, 2017, the Debtor spent $53.42 at "Wasfis Grill" (food).
vii. On October 21, 2017, the Debtor spent $148.95 at "Benihana Houston" (food).
viii. On October 22, 2017, the Debtor spent $52.69 at "Hooters" (food).
ix. On October 22, 2017, the Debtor spent $38.08 at "Café Layal" (food).
x. On October 23, 2017, the Debtor spent $9.19 at "Kfc" (food).
xi. On October 23, 2017, the Debtor spent $21.65 at "Layal Café" (food).
xii. On October 25, 2017, the Debtor spent $29.70 at "Barbar Mediterranean Gr" (food).
xiii. On October 25, 2017, the Debtor spent $34.22 at "Layal Café" (food).
xiv. On October 28, 2017, the Debtor spent $67.00 at "Spirit Halloween" (costume store).
xv. On October 28, 2017, the Debtor spent $44.18 at "Eb Aura Thriller Nigh" (nightclub).
xvi. On October 28, 2017, the Debtor spent $85.00 at "Wasfis Grill" (food).
xvii. On October 28, 2017, the Debtor spent $546.75 at "Aura Dynamic Nightlife" (nightclub).
xviii. On October 30, 2017, the Debtor spent $20.27 at "Shawarma King" (food).
[Plaintiff's Ex. 60].
38. The Debtor used some of the funds advanced by the Plaintiff, as well as proceeds from sales of the Twelve Vehicles, to pay for various personal expenses and to transfer funds to certain Insiders soon after Auto Family received the advance from the Plaintiff in November of 2017. Specifically, from November 1, 2017, to November 30, 2017, the Debtor made the following purchases using funds from Auto Family's operating account in the amount of $3,516.16:
i. On November 2, 2017, the Debtor spent $61.44 at "Wasfis Grill" (food).
ii. On November 2, 2017, the Debtor spent $40.18 at "Layal Café" (food).
iii. On November 2, 2017, the Debtor spent $29.50 at "Buffalo Wild Wings" (food).
iv. On November 2, 2017, the Debtor wrote check no. 3147 to "Abdul Moula Al-Shikh Sharif" in the amount of $850.00 with the memo stating: "personal."
v. On November 5, 2017, the Debtor spent $74.00 at "Baba Yega" (food).
a. On November 6, 2017, the Plaintiff deposited $25,600.00 in Auto Family's operating account.
i. On November 6, 2017, the Debtor spent $24.17 at "French Riviera Bakery" (food).
ii. On November 6, 2017, the Debtor spent $80.00 at "Great Hand & Foot Mass" (massage parlor).
iii. On November 6, 2017, the Debtor spent $29.89 at "Layal Café" (food).
iv. On November 8, 2017, the Debtor spent $62.48 at "Layal Café" (food).
v. On November 9, 2017, the Debtor spent $38.06 at "Hyderabad House" (food).
vi. On November 9, 2017, the Debtor spent $27.72 at "Professional Hair S" (salon).
vii. On November 10,2017, the Debtor spent $133.13 at "Wasfis Grill" (food).
viii. On November 11, 2017, the Debtor spent $10.00 at "Piazza Café" (food).
ix. On November 11, 2017, the Debtor spent $33.94 at "Café Layal" (food).
x. On November 11, 2017, the Debtor spent $16.24 at "Full Armor Gun Range" (gun range).
xi. On November 11, 2017, the Debtor spent $75.00 at "Full Armor Firearms" (firearm store).
xii. On November 12, 2017, the Debtor spent $72.79 at "Baba Yega" (food).
xiii. On November 12, 2017, the Debtor spent $535.76 at "Academy Sports" (sports supply store).
xiv. On November 12, 2017, the Debtor spent $83.93 at "Top Gun Range" (gun range).
xv. On November 12, 2017, the Debtor spent $ 152.81 at "Heb" (grocery store).
xvi. On November 12, 2017, the Debtor spent $80.00 at "Great Hand & Foot Massage" (message parlor).
xvii. On November 12, 2017, the Debtor spent $61.56 at "Fu Fu Restaurant" (food).
xviii. On November 13, 2017, the Debtor spent $77.91 at "Petsmart" (pet store).
xix. On November 13, 2017, the Debtor spent $15.92 at "Wal-Mart" (grocery store).
xx. On November 13, 2017, the Debtor spent $19.78 at "Layal Café" (food),
b. On November 14, 2017, the Plaintiff deposited $2,450.00 in Auto Family's operating account.
i. On November 16, 2017, the Debtor spent $77.28 at "The Vitamin Shoppe" (vitamin store).
ii. On November 20, 2017, the Debtor wrote check no. 9087 to "Cash" in the amount of $560.00 with no memo.
b. On November 22, 2017, the Plaintiff deposited $3,500.00 in Auto Family's operating account.
c. On November 24, 2017, the Plaintiff deposited $50,700.00 in Auto Family's operating account.
i. On November 24, 2017, the Debtor spent $192.67 at "Wayfair" (online household retailer).
d. On November 29, 2017, the Plaintiff deposited $10,200.00 in Auto Family's operating account.
[Plaintiff's Ex. 61].
39. Auto Family did not receive any advances from the Plaintiff during the period from December 1, 2017, to December 29, 2017, but the Debtor made the following purchases using funds from Auto Family's operating account in the amount of $21,076.90:
a. On December 1, 2017, the Debtor spent $50.36 at "Tan Tan Restaurant" (food).
b. On December 1, 2017, the Debtor spent $76.03 at "Layal Café" (restaurant).
c. On December 2, 2017, the Debtor spent $36.32 at "Zeyad Bakery & Sweets" (bakery).
d. On December 4, 2017, the Debtor spent $120.90 at "La Tapatia Mexican Café" (restaurant).
e. On December 4, 2017, the Debtor sent $16,800.00 to "Samba Financial Group in Riyadh, Saudi Arabia" for the purpose of "Mothers [sic] Hospital Treatment."
f. On December 4, 2017, the Debtor wrote check no. 9105 to "Abdul Moula Al-Shikh Sharif" in the amount of
$2,250.00 with the memo stating: "loan payment."
g. On December 4, 2017, the Debtor wrote check no. 9107 to "Abdul Moula Al-Shikh Sharif" in the amount of $ 1,700.00 with the memo stating: "loan payment."
h. On December 5, 2017, the Debtor spent $43.29 at "24Hour Fitness USA" (gym).
[Plaintiff's Ex. 62].
This loan payment that the Debtor made to his brother followed an advance from the Plaintiff in the amount of $10,200.00 on November 29, 2017. See Finding of Fact No. 38(d).
Id.
40. As of the Petition Date, Auto Family owed an unpaid balance of $310,005.19 to the Plaintiff. [Joint Pre-Trial Statement, Admission of Fact No. 163, pg. 26].
41. The Plaintiff would have received $310,005.19 in total if the Debtor, in his capacity as the owner of Auto Family, had remitted sufficient proceeds from each of the sales of the Twelve Vehicles. This Court finds that the Debtor had no intention of remitting sale proceeds to the Plaintiff to pay off the indebtedness associated with each of the vehicles that Auto Family sold.
III. CREDIBILITY OF THE WITNESSES
A. John Peacock
The Court finds that Peacock is a credible witness and gives substantial weight to his testimony.
B. Adam Rifai
The Court finds that the Debtor is not a credible witness. During his testimony at trial, he gave responses that directly contradicted his previous testimony in this suit. These contradictory statements relate to material issues.
First, some of his contradictory statements relate to whether he understood that he was required to notify the Plaintiff once Auto Family sold the vehicles. Specifically, when the Debtor was first asked if he was aware that Auto Family was contractually obligated to notify the Plaintiff of the sale of vehicles on which the Plaintiff has a security interest, he was quite clear that this was not his understanding, and that he was not aware of the contractual obligation he had to the Plaintiff. Indeed, when asked if he intentionally did not inform the Plaintiff of the Twelve Vehicles on which the Plaintiff had a security interest, the Debtor responded that he did not believe it was necessary to inform the Plaintiff of any vehicle's sale. Yet, when the Plaintiff's counsel had the Debtor review the Note (i.e., Plaintiff's Ex. 1, pg. 2 of 12), the Debtor admitted that he knew that he was obligated to notify the Plaintiff—testimony which clearly contradicted his previous statement that he was unaware of any obligation to notify the Plaintiff of the sale of vehicles.
The Debtor testified as follows:
Q: Did you understand that once you sold the vehicle that you are supposed to notify NextGear of its sale?
A: No, I did not.
[Tape Recording, June 18, 2019, Hrg. at 1:29:58 - 1:30:08 p.m.].
The Debtor testified as follows:
Q: You intentionally did not notify NextGear that you had sold vehicles months earlier, as of December 1st, 2017, correct?
A: Not correct.
Q: Then can you explain why NextGear was not notified that the vehicles subject to this suit had been sold previously in October and November of 2017?
A: I did not-uh-think it was necessary to tell NextGear or AFC that I sold the cars and in the same time I did not get the whole payment for them and the cars were not released to customers so that is why I did not notify NextGear ... that the car got sold.
[Tape Recording, June 18, 2019, Hrg. at 1:32:17 - 1:33:16 p.m.].
The Debtor testified as follows:
Q: Let's flip to Exhibit 1 and show me where it says that you have the discretion at any time to notify NextGear that a vehicle had been sold.
A: I agree with you, if I sell a car, I should notify NextGear if the car got sold if I release the titles of the car to the customer and transfer the title, that did not happen until December.
[Tape Recording, June 18, 2019 Hrg. 1:33:24- 1:33:47 p.m.].
Moreover, when asked why he did not notify the Plaintiff with regards to the sale of any of the Twelve Vehicles or that he had received the sale proceeds from the purchasers of these vehicles, the Debtor contradicted his prior testimony by responding that he remained silent because of his understanding that the Plaintiff would not accept partial payments. Stated differently, the Debtor admitted that he failed to notify the Plaintiff not because he believed there was no requirement to do so, but because he did not want the Plaintiff to know that he had sold the Twelve Vehicles for amounts wholly insufficient to pay off the Plaintiff under the terms of the Note. This testimony is a far cry from his prior testimony that he had no obligation whatsoever to notify the Plaintiff whenever he sold a vehicle. His change in position underscores his deviousness and lack of credibility.
The Debtor testified as follows:
Q: So, if you got $5,000.00 from a customer, why didn't you notify NextGear as of October 24th, 2017 that the vehicle had sold and you had sale proceeds?
A: Because NextGear would not take partial payment for this car as the car is sold uh, they would ask for, ask for a ... ‘ok you should pay off the car right away’, and that's how NextGear ...
[Tape Recording, June 18, 2019 Hrg. 1:38:41 - 1:38:50 p.m.].
There is more. When asked why he would agree to accept a partial payment from the buyer of a vehicle if he was aware of the Plaintiff's policy of not accepting partial payments, the Debtor was evasive and simply testified that it was not a complete sale. Finally, later in the trial, the Debtor contradicted his prior testimony by asserting that he originally had the intention of remitting the proceeds to the Plaintiff but did not want to do so until he received complete payment from the customers. In sum, the Debtor cannot get his story straight on his obligations to the Plaintiff. He has shifted from testifying that he has no obligation to then saying that he has an obligation to pay sales proceeds to the Plaintiff but only when he receives the entire amount of the proceeds from a particular sale to pay the balance associated with that vehicle. These positions are irreconcilable and cast serious doubt on the Debtor's credibility.
The Debtor testified as follows:
Q: But knowing NextGear's policy, a set number of days or a week at most to pay them back why would you agree to this type of arrangement If you got, you know, a third of the total deposit amount?
A: It was not a complete sale, it was $5,000.00 only.
[Tape Recording, June 18, 2019, Hrg. 1:39:34 - 1:39:47 p.m.].
The Debtor testified as follows:
Q: This particular vehicle, if you look at the buyer's orders, is there anything here that says it was not a complete sale as of October 24th, 2017?
A: As you see-ugh-the total payment is $15,000.00, when I received in October 24th only $5,000.00 means that not a complete sale, there's $ 10,000.00 missing here. And I did not have the funds to pay Plaintiff upfront from my pocket I was waiting for the customer to pay the rest and then just pay off NextGear.
[Tape Recording, June 18, 2019, Hrg. 1:39:54 - 1:40:00 p.m.].
Aside from the material contradictions above, the Debtor gave several non-responsive answers to questions that were unambiguous. Moreover, the Debtor's recall was conveniently clear when it suited his interests and inexplicably vague or even argumentative when the Plaintiff's counsel examined him about key events. The Debtor's memory of relevant events was unclear, confused, and contradictory, and his evasiveness and obfuscation further undermine his credibility. As one example of the Debtor's argumentative and flippant nature, the Court points to the following exchange between the Plaintiff's counsel and the Debtor:
Q: Exhibit D?
A: What uh?
Q:224.
A: 204 you said?
Q: 224, yeah it shows images, and the November bank statements and checks.
A: Okay.
Q: You see that?
A: Yeah.
Q: Top right-hand comer, it says "cash" $560.00 dated November 20th, 2017. You know what that was for?
A: We talked about this before and-uh-I told you in the previous, uh, trial that I don't recall what the name was "cash." This is a check this is not cash, so if it's paid to the order of "cash" maybe it was someone named "Cash."
Q: You're really telling the Court you think this check is payable to somebody who is named "Cash?"
A: Probably, I don't know this is a business I don't have a memo here. So, I don't know but I wish my name was "Cash."
Q: Have you recalled ever meeting somebody named "Cash?" Do you recall?
A: No.
Q: Okay, do you think you would remember if you met someone whose first name was "Cash?"
A: I would.
[Tape Recording, June 18, 2019, Hrg. 2:57:45 - 2:59:00 p.m.].
Additional testimony that the Debtor gave about accounting for his personal expenses versus his business expenses also calls his credibility into question. His testimony is quite telling:
Q: How does your accountant know which meals are personal and business? Do you tell him? On a line by line basis?
A: No he just looks at some of all of them and-umm-record it.
Q: So, he's just guessing which ones might've been personal and which ones might've been business?
Q: Well-umm-he assumes it's a business account so assuming all of them business but anyway IRS would not deduct all the money, deduct just some of it.
Q: Okay so you went ahead and reported all of the meals as business expenses knowing that some of them were personal, correct?
A: Correct, as I told you 70% to 75% of these meals business.
[Tape Recording, June 19, 2019, Hr'g. at 2:02:22 - 2:02:55 p.m.].
Aside from the above-referenced testimony that casts aspersions on the Debtor's credibility, a review of his schedules further undermines his trustworthiness. For example, the Debtor's Amended Schedule E/F lists his brother-in-law as holding a general unsecured debt of $8,520.00; however, the Debtor failed to schedule the debt that he owes to his mother-in-law. [Main Case Doc. No. 34; Findings of Fact Nos. 10-11]. This omission flies in the face of the Debtor's assertion at trial that he is indebted to his mother-in-law in the amount of $50,000.00 pursuant to a promissory note that he claims to have executed and on which he has testified he has made no payments. [Finding of Fact No. 10]. In addition, the Debtor failed to mention his brother as an Insider and any payments made thereto in his Amended Statement of Financial Affairs. [Findings of Facts Nos. 7-8, 11].
There is more. The Debtor's Amended Statement of Financial Affairs [Main Case Doc. No. 37, Pg. 13 of 14] discloses several payments made to the Insiders, including the following:
(1) a wire transfer from a Chase account to his Brother-In-Law in the amount of $30,050.00 on September 26, 2017;
(2) a wire transfer from a Chase account to his Brother-In-Law in the amount of $25,050.00 on October 5, 2017;
(3) a wire transfer from a Chase account to his mother in the amount of $9,500.00 on October 23, 2017;
(4) a wire transfer from a Chase account to his mother in the amount of $10,700.00 on November 8, 2017; and
(5) a wire transfer from a Chase account to his Brother-In-Law in the amount of $2,350.00 on November 8, 2017.
At first glance, it appears that when the Debtor references a Chase account, he means Auto Family's operating account. However, upon further review of Auto Family's Chase bank statement introduced into evidence by the Plaintiff, none of the above-referenced wire transfers appear on Auto Family's Chase account. Stated differently:
(1) there are no wire transfers or electronic withdrawals on the date of September 26, 2017 in the amount of $30,050.00 [Plaintiff's Ex. 59];
(2) there are no wire transfers or electronic withdrawals on the date of October 5, 2017 in the amount of $25,050.00 [Plaintiff's Ex. 60];
(3) there are no wire transfers or electronic withdrawals on the date of October 23, 2017 in the amount of $9,500.00 [Plaintiff's Ex. 60];
(4) there are no wire transfers or electronic withdrawals on the date of November 8, 2017 in the amount of $10,700.00 [Plaintiff's Ex. 61]; and
(5) there are no wire transfers or electronic withdrawals on the date of November 8, 2017 in the amount of $2,350.00 [Plaintiff's Ex. 61].
Because the above transactions are not listed on Auto Family's Chase bank statement, the Court finds that the Debtor has access to another Chase bank account and that he failed to disclose this account on his Statement of Financial Affairs. This failure sheds further doubt on his credibility, as he signed the Amended Statement of Financial Affairs under penalty of perjury that all of his answers were true and correct.
For all of the reasons set forth above, this Court finds that the Debtor is not a credible witness. Accordingly, the Court gives very little weight and, in some instances, no weight at all to the his testimony. The Court gives no weight to the Debtor's testimony including, but not limited to, the Debtor's testimony that he intended to remit sufficient proceeds to the Plaintiff from the sale of the Twelve Vehicles to pay off the indebtedness associated with each vehicle. Stated differently, the Court does not believe the Debtor ever intended to remit the sales proceeds from the Twelve Vehicles to the Plaintiff.
IV. CONCLUSIONS OF LAW
A. Jurisdiction
This Court has jurisdiction over this dispute pursuant to 28 U.S.C. § 1334(b). Section 1334(b) provides that "the district courts shall have original but not exclusive jurisdiction of all civil proceedings arising under title 11 [the Bankruptcy Code] or arising in or related to cases under title 11." District courts may, in turn, refer these proceedings to the bankruptcy judges for that district. 28 U.S.C. § 157(a). In the Southern District of Texas, General Order 2012-6 (entitled General Order of Reference) automatically refers all eligible cases and proceedings to the bankruptcy courts.
This suit is a core proceeding because it is a suit to determine the dischargeability of a specific debt pursuant to 28 U.S.C. § 157(b)(2)(I). This suit is also core under the general "catch-all" language because such a suit is the type of proceeding that can only arise in the context of a bankruptcy case. See Southmark Corp. v. Coopers & Lybrand (In re Southmark Corp.) , 163 F.3d 925, 930 (5th Cir. 1999) ("A proceeding is core under § 157 if it invokes a substantive right provided by title 11 or if it is a proceeding that, by its nature, could arise only in the context of a bankruptcy case.") (quoting Wood v. Wood (In re Wood) , 825 F.2d 90, 97 (5th Cir. 1987) ). Preventing the discharge of a specific debt—here, the amount owed under the Note for which the Debtor is liable under the Guaranty—can only occur in a bankruptcy court. There is no state law equivalent for this action.
B. Venue
Venue is proper under 28 U.S.C. § 1409(a). 28 U.S.C. § 1409(a) provides that "a proceeding arising under title 11 or arising in or related to a case under title 11 may be commenced in the district court in which such case is pending." The Debtor's main Chapter 7 case is presently pending in this Court; therefore, venue of this adversary proceeding is proper.
C. Constitutional Authority to Enter a Final Judgment in the Adversary Proceeding at Bar
In the wake of the Supreme Court's issuance of Stern v. Marshall, 564 U.S. 462, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011), this Court is required to determine whether it has the constitutional authority to enter a final judgment adjudicating the suit at bar. In Stern, which involved a core proceeding brought by the debtor under 28 § 157(b)(2)(C), the Supreme Court held that a bankruptcy court "lacked the constitutional authority to enter a final judgment on a state law counterclaim that is not resolved in the process of ruling on a creditor's proof of claim." 564 U.S. at 503, 131 S.Ct. 2594. As indicated above, the pending dispute before this Court is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I). The ruling in Stern was only limited to the one specific type of core proceeding involved in that dispute, which is not implicated here. Accordingly, this Court concludes that the narrow limitation imposed by Stern does not prohibit this Court from entering a final judgment here. See, e.g., Badami v. Sears (In re AFY, Inc.) , 461 B.R. 541, 547-48 (8th Cir. BAP 2012) ("Unless and until the Supreme Court visits other provisions of Section 157(b)(2), we take the Supreme Court at its word and hold that the balance of the authority granted to bankruptcy judges by Congress in 28 U.S.C. § 157(b)(2) is constitutional."); see also Tanguy v. West (In re Davis) , No. 00-50129, 538 F. App'x 440, 443 (5th Cir. 2013) ("[W]hile it is true that Stern invalidated 28 U.S.C. § 157(b)(2)(C) with respect to ‘counterclaims by the estate against persons filing claims against the estate,’ Stern expressly provides that its limited holding applies only in that ‘one isolated respect’ .... We decline to extend Stern's limited holding herein.") (citing Stern , 564 U.S. at 475, 503, 131 S.Ct. 2594 ). Alternatively, even if Stern applies to all of the categories of core proceedings brought under § 157(b)(2), see First Nat'l Bank v. Crescent Elec. Supply Co. (In re Renaissance Hosp. Grand Prairie Inc.) , 713 F.3d 285, 294 n.12 (5th Cir. 2013) (" Stern's ‘in one isolated respect’ language may understate the totality of the encroachment upon the Judicial Branch posed by Section 157(b)(2)...."), this Court still concludes that the limitation imposed by Stern does not prohibit this Court from entering a final judgment in the dispute at bar. In Stern, the debtor filed a counterclaim based solely on state law; whereas, here, the claims brought by the Plaintiff are based primarily on an express provision of the Bankruptcy Code— §§ 523(a)(2) —and judicially-created bankruptcy law interpreting this provision. This Court is therefore constitutionally authorized to enter a final judgment on the complaint filed by the Plaintiff.
The Court notes that there is some Texas law involved in the claims that the Plaintiff has brought under §§ 523(a)(2)(A) and 523(a)(6). That is why this Court finds that the claims brought by the Plaintiff are based primarily, as opposed to solely, on federal law.
Finally, in the alternative, this Court has the constitutional authority to enter a final judgment on the Plaintiff's complaint because the Plaintiff and the Debtor have consented, impliedly if not explicitly, to adjudication of this dispute by this Court. Wellness Int'l Network, Ltd. v. Sharif, ––– U.S. ––––, 135 S. Ct. 1932, 1947, 191 L.Ed.2d 911 (2015) ("Sharif contends that to the extent litigants may validly consent to adjudication by a bankruptcy court, such consent must be expressed. We disagree. Nothing in the Constitution requires that consent to adjudication by a bankruptcy court be express. Nor does the relevant statute, 28 U.S.C. § 157, mandate express consent...."). Here, the parties have never objected to this Court's constitutional authority to enter a final judgment—either in their pleadings or their joint pre-trial statement. Moreover, the parties participated in a multi-day trial in this Court, and not once did they ever object to this Court's constitutional authority to enter a final judgment. If these circumstances do not constitute consent—implied, if not express—then nothing does.
D. Dischargeability of Debt Under 11 U.S.C. § 523(a)(2)(A)
In an adversary proceeding to determine the dischargeability of a debt under § 523(a), the plaintiff bears the burden of proving the elements by a preponderance of the evidence. Fed. R. Bankr. P. 4005 ; Grogan v. Garner, 498 U.S. 279, 286, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) ; Tower Credit, Inc. v. Gauthier (In re Gauthier) , 349 F. App'x 943, 945 (5th Cir. 2009) ; Allison v. Roberts (In re Allison) , 960 F.2d 481, 483 (5th Cir. 1992) ; RecoverEdge L.P. v. Pentecost, 44 F.3d 1284, 1292 (5th Cir. 1995). "Intertwined with this burden is the basic principle of bankruptcy that exceptions to discharge 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). However, the Code affords relief only to the "honest but unfortunate debtor," and an individual may not obtain a discharge of debts incurred through his own wrongful conduct. Grogan, 498 U.S. at 286, 111 S.Ct. 654 ; Turbo Aleae Invs., Inc. v. Borschow (In re Borschow) , 467 B.R. 410, 417 (W.D. Tex. 2012). As set forth below, the Plaintiff has met its burden of proving the elements of all of its claims under § 523(a)(2)(A) and § 523(a)(6). However, its claims under § 523(a)(4) fail.
"A fact is proven by preponderance of the evidence if the finder of fact, here the court, finds it more likely than not, based on the evidence, that the fact is true." Husky Int'l Elecs., Inc. v. Ritz (In re Ritz) , 567 B.R. 715, 736 (Bankr. S.D. Tex. 2017) (quoting Bale v. Ryan (In re Ryan) , 443 B.R. 395, 408 (Bankr. N.D. Tex. 2010) ).
E. Description of the Debt that Should Not Be Discharged
At the outset, it is important to define the debt that the Plaintiff seeks to prevent from being discharged. First, the Debtor executed the Guaranty that guarantees repayment of any amounts owed by Auto Family under the Note. [Finding of Fact No. 28]. Thus, because the balance of the Note that Auto Family did not pay is $310,005.19, the Debtor is personally liable for this amount and the Plaintiff alleges that he should not be discharged from this liability. [Findings of Fact Nos. 31 and 40]. The Plaintiff's contention is that pursuant to § 523(a)(2)(A), the Debtor, as the owner of Auto Family and guarantor of the Note, incurred this liability through false representations, false pretenses, and actual fraud associated with the extension of credit that the Plaintiff provided to Auto Family. [Joint Pre-Trial Statement, Plaintiffs' [sic] Summary of Claims, Pg. 11]. See Buckeye Ret. Co., LLC v. Kakde (In re Kakde) , 382 B.R. 411, 419 (Bankr. S.D. Ohio 2008) (footnote omitted) ("Buckeye asserts that the debt owed by Mr. Kakde to Buckeye pursuant to Mr. Kakde's personal guaranty is nondischargeable under 11 U.S.C. § 523(a)(2)(B) because USAT obtained advances under the Loan guaranteed by Mr. Kakde ... by means of the intentional or reckless submissions to Provident of false Borrowing Base Certificates."); Weiss v. Alicea (In re Alicea) , 230 B.R. 492, 501 (Bankr. S.D.N.Y. 1999) ("Similarly, it alleges that [the debtor] knew when he personally guaranteed the fees that he had already committed his personal assets to other ventures and could not honor his personal guarantee."). Additionally, the Plaintiff asserts that the Debtor's liability under the Guaranty is non-dischargeable pursuant to § 523(a)(4) on the grounds that this debt of $310,000.19 was incurred because: (a) the Debtor committed fraud or defalcation while acting in a fiduciary capacity; (b) the Debtor committed embezzlement; or (c) the Debtor committed larceny. [Joint Pre-Trial Statement, Plaintiffs' [sic] Summary of Claims, pg. 11-12]. Further, the Plaintiff's contention is that pursuant to § 523(a)(6), the Debtor's liability under the Guaranty is nondischargeable due to his willful and malicious injury to the Plaintiff's property—i.e., its security interest on each of the Twelve Vehicles and the proceeds from the sales therefrom—by selling each of the vehicles for much lower than the prices that the Debtor represented Auto Family paid for the vehicles, and then admittedly failing to remit sufficient proceeds to the Plaintiff as required by the Note. [Joint Pre-Trial Statement, Plaintiffs' [sic] Summary of Claims, Pg. 12-13].
In sum, the Plaintiff contends that the Debtor owes it a non-dischargeable debt as of the Petition Date of $310,005.19 (the " Debt "). [Joint Pre-Trial Statement, Plaintiffs' [sic] Summary of Claims, Pg. 8]. The Court now addresses the Plaintiff's claims in the following order: guarantor liability under § 523(a)(2)(A) ; guarantor liability under § 523(a)(4) ; and guarantor liability under § 523(a)(6).
According to the Joint Pre-Trial statement, the Debtor admits that a debt of $310,005.19 is owed to Plaintiff as of the Petition Date. [Joint Pre-Trial Statement, Admission of Fact Nos. 27, 32, 33, 35, 38, 40, 44, 46, 48, 51, 55, 57, 61, 63, 67, 69, 72, 74, 78, 81, 83, 85, 89, 92, 94, 96, 98, 99, 101, 103, 105, 110, 112, 117, 121, 123, 126, 128, 132, 134, 137, 139, 143, 145, 148, 150, 154, 157, and 160, pgs. 16-25]. The Debtor, however, does not concede that this debt is nondischargeable.
F. Overview of the Plaintiff's Claims under § 523(a)(2)(A) Based Upon the Debtor's Guarantor Liability
The Plaintiff has brought three claims against the Debtor under § 523(a)(2)(A) : one for false representations; one for false pretenses; and one for actual fraud. Though other circuits have applied a uniform standard to all § 523(a)(2)(A) causes of action, the Fifth Circuit has distinguished the elements of "actual fraud" from "false pretenses" and "false representations." RecoverEdge L.P., 44 F.3d at 1292-93.
See, e.g., Sauer Inc. v. Lawson (In re Lawson) , 791 F.3d 214, 225 (1st Cir. 2015) (internal citations omitted) ("[W]e observe that, while there are other ways to give meaning to the distinction between ‘actual fraud’ and ‘false representations’ under § 523(a)(2)(A), they are not the most narrow available, nor are they consistent with the fraud exception's history. Rather, reading ‘false pretenses, false representations, and actual fraud’ to be limited, roughly, to mean ‘fraudulent misrepresentation and other actual frauds’ would provide the most consistent and narrow reading of § 523(a)(2)(A) by barring from discharge only those debts that ‘arise [ ] as a direct result of the debtor's [fraudulent conduct].’ ") (quoting McCrory v. Spigel (In re Spigel) , 260 F.3d 27, 32 (1st Cir. 2001) ); SEC v. Bilzerian (In re Bilzerian) , 153 F.3d 1278, 1281 (11th Cir. 1998) ; Fowler Bros. v. Young (In re Young) , 91 F.3d 1367, 1373 (10th Cir. 1996).
The distinction recognized by the Fifth Circuit appears to be a chronological one, resting upon whether a debtor's representation is made with reference to a future event, as opposed to a representation regarding a past or existing fact. [A debtor's promise ... related to a future action which does not purport to depict current or past fact ... therefore cannot be defined as a false representation or a false pretense].
Pak v. Kim (In re Kim) , No. 12-40813, 2013 WL 5376526, at *10 (Bankr. E.D. Tex. Sept. 25, 2013) (citing Bank of La. v. Bercier (In re Bercier) , 934 F.2d 689, 692 (5th Cir. 1991) ).
Moreover, there is also a distinction between false representations and false pretenses. See Argento v. Cahill (In re Cahill) , No. 15-72418-REG, 2017 WL 713565, at *6 (Bankr. E.D.N.Y Feb. 27, 2017) ("While most times both conduct and explicit statements by the debtor exist, thereby establishing a fraud under both false pretenses and false representation, the creditor may be able to establish the debtor's conduct without a showing of explicit statements or explicit statements without a showing of the debtor's conduct and still be successful under § 523(a)(2)(A)."); Wright v. Minardi (In re Minardi) , 536 B.R. 171, 187 (Bankr. E.D. Tex. 2015) (quotation omitted) ("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."); Evans v. Dunston (In re Dunston) , 117 B.R. 632, 641 (Bankr. D. Colo. 1990) (" ‘False Pretense’ is more like a con game than a stickup. It is more like being dealt from the bottom of the deck than being mugged. A false pretense is generally employed by stealth, implication, and misdirection, while fraud and false representations are typically implemented more by fabrication, explication, and diversion."). Thus, the Court will separately examine the Plaintiff's claims for false representations, its claim for false pretenses, and its claim for actual fraud. G. The Plaintiff's Claim Under § 523(a)(2)(A) for False Representations
The Plaintiff argues that the Debtor obtained financing from the Plaintiff for Auto Family through false representations. [Joint Pre-Trial Statement, Plaintiffs' [sic] Summary of Claims, Pg. 11]. To obtain a judgment that a debt is nondischargeable for false representations, the misrepresentations must have been: (1) knowing and fraudulent falsehoods, (2) describing past or current facts, (3) that were relied upon by the other party. Jacobson v. Ormsby (In re Jacobson) , No. 06-51460, 2007 WL 2141961, at *2 (5th Cir. July 26, 2007) ; In re Allison, 960 F.2d at 483 ; RecoverEdge L.P., 44 F.3d at 1292-93 ; Pasagui v. Perez (In re Perez) , No. 14-32266-H5, 2017 WL 991042, at *7 (Bankr. S.D. Tex. Mar. 13, 2017) ; U.S. Merchs. Fin. Grp., Inc. v. Martin (In re Martin) , No. 15-41103, 2017 WL 1316928, at *10 (Bankr. E.D. Tex. Apr. 7, 2017). Additionally, the Plaintiff must prove the amount of its damages. See In re Jacobson , 2007 WL 2141961, at *2 (affirming district court's affirmance of bankruptcy court's determination that "[plaintiff]'s exhibits correctly reflected the amount of damages owed by" the debtor). The Court now addresses each of these elements that the Plaintiff must satisfy.
1. Knowing and Fraudulent Falsehoods
When considering whether a knowing and fraudulent falsehood has been made, the subjective mindset of the promisor is the focus. Higgins v. Nunnelee (In re Nunnelee) , 560 B.R. 277, 285 (Bankr. N.D. Miss. 2016). "A misrepresentation is fraudulent if the maker ... knows or believes ... the matter is not as represented, or does not have the confidence in the accuracy of his representation as stated or implied, or knows ... he does not have the basis for his representation as stated or implied. Id. (quotations omitted) (citing AT & T Card Servs. v. Mercer (In re Mercer) , 246 F.3d 391, 407 (5th Cir. 2001) ). A misrepresentation by a debtor of his or her intention to perform contractual duties, for example, may be a false representation under the Code. Manheim Auto. Fin. Servs., Inc. v. Hurst (In re Hurst) , 337 B.R. 125, 131-32 (Bankr. N.D. Tex. 2005) ; Deady v. Hanson (In re Hanson) , 470 B.R. 808, 816 (Bankr. N.D. Ill. 2012) ("Proof that the debtor never put the money toward the stated purpose allows a court to infer the requisite intent."); see also Spoljaric v. Percival Tours, Inc., 708 S.W.2d 432, 434 (Tex. 1986) (internal citations omitted) ("A promise to do an act in the future is actionable fraud when made with the intention, design, and purpose of deceiving, and with no intention of performing the act. While a party's intent is determined at the time the party made the representation, it may be inferred from the party's subsequent acts after the representation is made."); Nwokedi v. Unlimited Restoration Specialists, Inc., 428 S.W.3d 191, 199 (Tex. App.—Houston [1st Dist.] 2014, pet. denied) ("A promise of future performance constitutes an actionable misrepresentation if the promise was made with no intention of performing at the time the promise was made."). This intent may be inferred from the fact that the debtor failed to take any steps to perform under the contract. In re Hurst, 337 B.R. at 131 ; Nwokedi, 428 S.W.3d at 199 ("The speaker's intent at the time of the representation may be inferred from the speaker's acts after the representation was made.").
Intent is a fact question within the realm of the trier of fact because it is dependent upon the credibility of the witnesses and the weight to be given their testimony .... [B]reach of a promise to perform combined with "slight
circumstantial evidence" of fraud constitutes some evidence of fraudulent intent and is legally sufficient to support a verdict.
Nwokedi, 428 S.W.3d at 199 (citation omitted). The debtor's silence regarding a material fact can also constitute a false representation. Selenberg v. Bates (In re Selenberg) , 856 F.3d 393, 399 (5th Cir. 2017) ; Mora v. Abraham (In re Abraham) , No. 10-03227, 2014 WL 3406513, at *3 (S.D. Tex. July 7, 2014). "When one has a duty to speak, both concealment and silence can constitute fraudulent misrepresentation; an overt act is not required." In re Selenberg, 856 F.3d at 399 (emphasis in original).
Here, the Debtor had no intention of performing under the Note as promised because the Debtor intended all along to use the advances from the Plaintiff for his own personal expenditures. [Finding of Fact No. 41]. See Spoljaric, 708 S.W.2d at 434. Specifically, multiple times after Auto Family received advances from the Plaintiff under the Note, the Debtor would use the funds for personal expenditures—e.g., food, entertainment, massages, and grocery shopping [Finding of Fact Nos. 34-39]—and, additionally, many of these expenditures included wire transfers and checks for personal loan payments and money to the Insiders. [Findings of Fact Nos. 34(e)(viii), 36(i), 35(b)(i), 37(c)(xiii), 37(d)(i), 38(iv), 39(f), and 39(g) ]. Further, after selling the Twelve Vehicles, the Debtor, instead of using the sale proceeds to pay off the balances associated with each floored vehicle are required by the Note, knowingly used these funds for his own personal benefit and also transferred these funds to the Insiders. And, it must be remembered that the Debtor, in order to obtain advances under the Note, knowingly gave materially false bills of sale to the Plaintiff in order to obtain advances greatly in excess of the amounts that Auto Family initially paid for the vehicles. [Finding of Fact No. 15]. These actions unquestionably constitute knowing and fraudulent falsehoods.
2. The Debtor's Misrepresentation Described Past or Current Facts
The Fifth Circuit has explained that "a promise to perform acts in the future is not considered a qualifying misrepresentation merely because the promise subsequently is breached." In re Allison, 960 F.2d at 484. "A debtor's misrepresentations of his intentions, however, may constitute a false representation within the meaning of the dischargeability provision if, when the representation is made, the debtor has no intention of performing as promised." Metz v. Bentley (In re Bentley) , 531 B.R. 671, 688 (Bankr. S.D. Tex. 2015) (quoting In re Allison, 960 F.2d at 484 ). Additionally, the Fifth Circuit determined that the "bankruptcy court's finding that Allison misrepresented the current fact of his future intention regarding the mortgages is also supported by the record". In re Allison, 960 F.2d at 484 (emphasis added).
Here, the Debtor provided the Plaintiff with misleading bills of sale because the Debtor listed amounts much higher than what Auto Family actually spent to purchase the Twelve Vehicles. See supra note 19. The misrepresentations described past fact—i.e., amounts that Auto Family paid for purchasing the Twelve Vehicles. [See Finding of Fact No. 15]. The Debtor knew that the Plaintiff would rely on the figures placed in the bills of sale when the Debtor would present them to the Plaintiff to obtain funding. [Finding of Fact No. 14]. Thus, the Debtor's cover-up involved past facts (i.e. the amount of money he misrepresented in the bills of sale) and a current intention to obtain the vehicle, sell it for much less than the floor amount associated with the vehicle, and pocket the sale proceeds for his own benefit. See Cohen v. Third Coast Bank, SSB, No. 1:13-CV-610, 2014 WL 2729608, at *8-9 (E.D. Tex. June 13, 2014) (affirming the bankruptcy court's ruling that the debtor's debt to a lender was nondischargeable under § 523(a)(2)(A) because the debtor had knowingly submitted borrowing base certificates containing false information about the inventory values upon which the lender relied to advance funds); see also Bandi v. Becnel (In re Bandi) , 683 F.3d 671, 676 (5th Cir. 2012) (holding that a misrepresentation about the "general overall financial condition of an entity or individual" is within the scope of a false misrepresentation under § 523(a)(2) ); In re Kakde, 382 B.R. at 420-21 (holding that falsities on a borrowing base certificate issued by debtor were materially false statements).
Case law underscores the extent of the Debtor's misrepresentations in the suit at bar. In Jacobson, the borrower represented to the lender that he would use any funds advanced by the lender for a specific purpose. Jacobson v. Ormsby (In re Jacobson) , No. 04-51572-RBK, 2006 WL 2796672, at *10 (W.D. Tex. Sept. 26, 2006). Subsequently, the borrower immediately spent the advances to pay "existing debts or other obligations [unrelated to the specific purpose], which left no remaining funds" for that specific purpose. Id. The court held that the borrower's representations described past or current facts, and not future facts; and therefore, the debt was held to be nondischargeable under § 523(a)(2)(A). Id. ; see also Kan. Nat'l Bank & Trust Co. v. Kroh (In re Kroh) , 88 B.R. 972, 984 (Bankr. W.D. Mo. 1988) ("Further, the testimony of the Bank's officers clearly supports the Court's finding that the Bank relied on the misrepresentations made by [the debtor] concerning use of the loan proceeds. The Bank was assured orally at least twice and in writing that the loan proceeds were to be used for the brothers' personal investment.").
Like the borrower in Jacobson, the Debtor, by virtue of his execution of the Note, represented that Auto Family would use the funds to pay for its inventory, sell the vehicles, and then quickly remit sufficient sale proceeds to the Plaintiff to pay off the balance owed on each particular vehicle. [Finding of Fact Nos. 18 and 22]. Instead, the Debtor procured advances from the Plaintiff for Auto Family with bills of sale that contained materially false information, sold the vehicles that the Plaintiff had floor-planned, failed to remit sufficient proceeds to the Plaintiff to pay off the balances associated with each of the floored vehicles, and then, used those proceeds in Auto Family's operating account for his personal expenditures. [Finding of Fact Nos. 34-39]. This is because, contrary to what the Debtor repeatedly represented to the Plaintiff, the Debtor never intended the advances from the Plaintiff to be used for Auto Family's business purposes. [Finding of Fact No. 41]. Rather, the Debtor intended all along that advances under the Note would be used for his own personal benefit—or for the benefit of the Insiders. [See Findings of Fact Nos. 34-39]. Thus, for all of these reasons, this Court finds that the Debtor's representations described past or current facts.
3. The Plaintiff Relied Upon the Debtor's False Representations
The third element to obtain a judgment that a debt is nondischargeable for false representations is to show that the Plaintiff relied on the Debtor's representations. Field v. Mans, 516 U.S. 59, 74, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995) ; In re Bandi, 683 F.3d at 675. Here, Peacock very credibly testified at trial that the Plaintiff relied upon the written representations of the Debtor made in the bills of sale for the Twelve Vehicles; indeed, the Plaintiff determined the amount of its advances to Auto Family based upon that information. [Finding of Fact No. 15]. Because the Plaintiff's claim is brought under § 523(a)(2)(A), the test is whether the Plaintiff justifiably relied—as opposed to reasonably relied—upon the representations made by the Debtor in the bills of sale. Field, 516 U.S. at 70, 116 S.Ct. 437 ; see also Sanford Inst. for Sav. v. Gallo, 156 F.3d 71, 74 (1st Cir. 1998) ("The rationale for placing this relatively low burden on the victim of the misrepresentation is rooted in the common law rule that the victim's contributory negligence is not a defense to an intentional tort."). As Third Coast Bank points out, "justifiable reliance does not impose a duty to investigate unless the falsity of the representation is readily apparent or obvious, or there are ‘red flags’ indicating that reliance is unwarranted." 2014 WL 2729608, at *9 ; see also Guion v. Sims (In re Sims) , 479 B.R. 415, 425 (Bankr. S.D. Tex. 2012) (citing Field, 516 U.S. at 70-71, 116 S.Ct. 437 ) (holding that a creditor has no duty to investigate a debtor's representation, unless the "falsity of the representation is readily apparent"); In re Minardi, 536 B.R. at 187-88 ("Justifiable reliance does not require a plaintiff to demonstrate reasonableness nor does it impose a duty to investigate unless the falsity is readily apparent."). "Whether a party justifiably relies on a misrepresentation is determined by looking at the circumstances of a particular case and the characteristics of a particular plaintiff, not by an objective standard." In re Sims, 479 B.R. at 425 ; see also In re Minardi, 536 B.R. at 187 (alteration in original) (citation omitted) ("Justifiable reliance requires proof that a plaintiff actually relied upon the defendant's false representations and that such reliance was justified under the circumstances.").
The Plaintiff argues that it justifiably relied on the written representations the Debtor made in the bills of sale, the Note, and the Guaranty, by virtue of his signature on all documents. [Joint Pre-Trial Statement, Plaintiffs' [sic] Summary of Claims, pg. 11]. Specifically, the Plaintiff argues that it had no reason to suspect (i.e. there were no red flags) that the Debtor would use the advances for anything other than funding Auto Family's inventory. [Id. ]. Moreover, the Plaintiff expected that Auto Family would repay each advance using the sale proceeds in accordance with the Note. [Id. ]. After all, the entire purpose behind the Plaintiff's business is to provide floorplan lending exclusively to used car dealerships so that these dealerships can purchase inventory. [Finding of Fact No. 12-13].
Here, the Plaintiff advanced funds to Auto Family in reliance upon the Debtor's representations on behalf of Auto Family in the Note and the bills of sale as well as the Debtor's own personal representations in the Guaranty. [Finding of Fact No. 15]. The Note specifically states that Auto Family will use the funds to purchase its inventory and that the proceeds from the subsequent sale of each vehicle will be held for the benefit of the Plaintiff; not used by the Debtor to pay for his own personal expenses and to funnel to the Insiders. [Findings of Fact Nos. 19 and 21]. Further, the Guaranty sets forth that the Debtor would be personally liable should Auto Family default under the Note. [Finding of Fact No. 27]. However, the Debtor used the funds to pay for his own personal expenses to the detriment of the Plaintiff. [Findings of Fact No. 34-39]. Thus, under these circumstances, the Court finds that the Plaintiff justifiably relied upon all of the representations made by the Debtor by virtue of his execution of the Note, the Guaranty, and the bills of sale.
4. The Debtor's Conduct Caused Damage to the Plaintiff
There is no question that the Debtor's conduct caused damage to the Plaintiff. Specifically, the Debtor deprived the Plaintiff of $310,005.19 because he provided the Plaintiff with materially false bills of sale in order to obtain advances for Auto Family and then, once the floored vehicles were sold, he pocketed the sale proceeds for his own personal use and ensured that the proceeds owed to the Plaintiff were not paid. [Findings of Fact Nos. 32-33, 34-39]. See DZ Bank AG Deutsche Zentral-Genossenschaft Bank v. Meyer, 869 F.3d 839, 843 (9th Cir. 2017) (holding that debtor's transfer, initiated as owner, from one corporation to another caused damage to the bank's interest because the bank no longer had assets on which to foreclose). As a result, the Plaintiff lost its security interest in the Twelve Vehicles and the proceeds from the sales of those vehicles. [See Findings of Fact Nos. 32-33]. But for the skullduggerous actions of the Debtor, the Plaintiff would have suffered no harm. Therefore, the Debtor undeniably caused damage to the Plaintiff. See In re Kroh, 88 B.R. at 984 ("The Bank has been damaged in the amount of the unpaid balance on each note, the interest accrued on the notes, and the attorney's fees incurred. Absent, [the debtor's] misrepresentations the Bank would not have loaned the money to [the debtor] and these damages would not have occurred.").
In sum, the Plaintiff has met its burden in establishing all the elements of a claim for false representations. Therefore, this Court finds that the Debt is non-dischargeable pursuant to § 523(a)(2)(A) for false representations. The Court now addresses the Plaintiff's claim for false pretenses.
H. The Plaintiff's Claim under § 523(a)(2)(A) for False Pretenses
The Plaintiff's second claim against the Debtor is based upon § 523(a)(2)(A) for false pretenses. To obtain a judgment that a debt is nondischargeable for false pretenses, the creditor must show that: (1) the debtor engaged in conduct "wronging one in his property rights by dishonest methods or schemes [such as] deprivation of something of value by trick, deceit, chicane[ry] or overreaching;" (2) there was scienter or intent; (3) causation; and (4) damages. Novartis Corp. v. Luppino (In re Luppino) , 221 B.R. 693, 701-02 (Bankr. S.D.N.Y. 1998). "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." In re Minardi, 536 B.R. at 187 (quotation omitted). Further, a false pretense "involves implied misrepresentation or conduct intended to create and foster a false impression ...." Leeb v. Guy (In re Guy) , 101 B.R. 961, 978 (Bankr.N.D. Ind. 1988). The Court now addresses each of these elements that the Plaintiff must satisfy.
One court, in distinguishing between a claim for false representation and a claim for false pretenses, explained:
While most times both conduct and explicit statements by the debtor exist, thereby establishing a fraud under both false pretenses and false representation, the creditor may be able to establish the debtor's conduct without a showing of explicit statements or explicit statements without a showing of the debtor's conduct and still be successful under § 523(a)(2)(A).
Argento v. Cahill (In re Cahill) , No. 15-72418-REG, 2017 WL 713565, at *6 (Bankr. E.D.N.Y Feb. 27, 2017). In the suit at bar, the Plaintiff has proven explicit representations made by the Debtor and therefore successfully met its burden on its claim for false representations. Now, in assessing the Plaintiff's claim for false pretenses, this Court finds that the Plaintiff has proven sufficient misconduct by the Debtor, but this conduct is intertwined with express representations. Thus, to the extent that this "false pretenses" section discusses express representations made by the Debtor, not only do they establish the Plaintiff's claim for false pretenses, but they also establish the Plaintiff's claim for false representations.
1. The Debtor's Dishonest Conduct Injured the Plaintiff's Property Interest: Namely, its Security Interests in the Twelve Vehicles
The Debtor's dishonest schemes and skullduggery wronged the Plaintiff: he destroyed the security interest the Plaintiff held in the Twelve Vehicles that it had floor-planned to Auto Family. The Plaintiff had increased the line of credit to Auto Family, [Findings of Fact Nos. 17 and 30], and the Debtor knew that by having achieved this heightened credit line, he had more opportunity to siphon off loan advances that the Plaintiff made to Auto Family for his personal and non-business-related expenses. While the Debtor argues—unpersuasively in the Court's view—that the Plaintiff should have known about his expenditures when it initially reviewed Auto Family's bank statements, there is no evidence that the Debtor told the Plaintiff about the BIL Promissory Note. [See Plaintiff's Ex. 68].
The BIL Promissory Note was executed two days prior on April 1, 2015. [Plaintiff's Ex. 68]. Check Control, Inc. v. Anderson (In re Anderson) , 181 B.R. 943, 950 (Bankr. D. Minn. 1995) (citation omitted) (noting that false pretenses can also consist of "silence when there is a duty to speak"); Minority Equity Capital Corp. v. Weinstein (In re Weinstein) , 31 B.R. 804, 810 (Bankr. E.D.N.Y. 1983) (stating when finding that the debtor's conduct amounted to false pretenses, that "[c]ase law has additionally gone so far as to extend an affirmative duty to a party in a business transaction to disclose all the facts the concealment of which would mislead the other side"). Naturally, the Debtor would not have subjectively told the Plaintiff that he planned to use Auto Family's operating account as his own personal piggy bank, and there was no evidence presented showing the Debtor was already sending money to his mother before April 3, 2015. The Debtor's failure to disclose this personal loan to the Plaintiff led the Plaintiff to believe that the Debtor had no prior financial obligations that would otherwise hinder the Plaintiff's business with Auto Family. If the Plaintiff had at least known about the BIL Promissory Note, the Plaintiff would have been apprised of the Debtor's full financial background and would have been in a better position to assess whether to make the loan—at least under the terms of the Note—knowing that the Debtor, its guarantor, had material personal financial obligations to a blood relative. Stated differently, the Plaintiff had no reason to believe the Debtor would not ensure that Auto Family would repay the advances made under the Note, especially since the Plaintiff was unaware of the Debtor's previously existing loan to his brother-in-law at the time the Note was executed. Aside from the promissory note with his brother-in-law, the Debtor lied in the bills of sale about how much money Auto Family actually spent to acquire title to the Twelve Vehicles. Moreover, the Debtor sold the Twelve Vehicles for much less than he represented to the Plaintiff they were worth—and then the Debtor spent the sale proceeds for his own personal expenses, or he transferred the funds to the Insiders. [Finding of Fact No. 31].
According to the Debtor's testimony thereafter in a different adversary proceeding before this Court involving the same Auto Family operating account (Adv. No. 18-03392), the Debtor unequivocally stated that paying his brother-in-law the balance of the BIL Promissory Note was more important than paying the Plaintiff under the terms of the Note because "I want to keep the family harmony." [Tape Recording, June 13, 2019, Hrg. at 10:42:37 - 10:43:39 a.m.].
Under the circumstances described above, the Court finds that the Debtor engaged in conduct "wronging [the Plaintiff] in [its] property rights by dishonest methods or schemes." Novartis Corp. v. Luppino (In re Luppino) , 221 B.R. 693, 701-02 (Bankr. S.D.N.Y. 1998). Thus, the first element of false pretenses is satisfied.
2. The Debtor Had Scienter or the Intent to Deceive the Plaintiff
"When deciding whether a creditor has satisfied the ‘intent’ prong of a ‘false pretenses’ dischargeability exception, the bankruptcy court must consider whether the circumstances, as viewed in the aggregate, present a picture of deceptive conduct by the debtor, indicating an intent to deceive his creditor." In re Hurst , 337 B.R. at 133 ; see also In re Dunston, 117 B.R. at 641. Here, the Debtor's sophistication, business acumen, and long-term experience in the automobile sales business underscore that he was fully aware of his wrongful intentions and that he knew exactly what he was doing when he led the Plaintiff to believe that (1) the advances made by the Plaintiff would be used to purchase inventory for Auto Family; and (2) Auto Family would immediately pay back the Plaintiff with the proceeds from the sales of the floor-planned vehicles. [See Findings of Fact Nos. 1-4]. The Debtor continued his deception repeatedly when he presented materially false bills of sale to the Plaintiff to obtain advances under the Note. Here, the Debtor committed this fraud twelve separate times—i.e. by submitting to the Plaintiff materially false bills of sale regarding the Twelve Vehicles. [Finding of Fact Nos. 15]. See, e.g., In re Hurst , 337 B.R. at 133-34 (an "[i]ntent to deceive is present if a debtor intends or has reason to expect a creditor to act, or to refrain from action, in reliance upon the debtor's misrepresentation; a result is intended if a debtor either acts with desire to cause it or acts believing that there is a substantial certainty that the result will follow from his conduct."). The Debtor intended and had reason to expect that the Plaintiff would make advances to Auto Family based upon the Debtor's requests for funding. Viewed in the aggregate, this Court finds that these circumstances present a picture of unscrupulous conduct by the Debtor, indicating a clear intent to deceive the Plaintiff.
For all of the reasons set forth above, this Court finds that the Debtor had scienter or the intent to deceive the Plaintiff. Thus, the second element of false pretenses is satisfied.
3. The Debtor's Actions Caused the Plaintiff to Lose its Property Interest
When discussing the Plaintiff's false representation claim above, this Court noted that the Plaintiff must demonstrate its justifiable reliance on the express representations made by the Debtor. However, the Plaintiff does not bear such a burden in its claim for false pretenses. According to one court:
With respect to [justifiable reliance], it is not meaningful to examine into the "justifiable reliance" of a creditor in the case of fraudulent or deceitful conduct involving non-disclosure or concealment. But "reliance" in classic fraud is, in reality, nothing more nor less than the element of causation, since it is the creditor's reliance which provides the causal link between the debtor's false representation and the creditor's damage. Thus, in a case involving false pretenses or fraud based upon the debtor's non-disclosure or concealment, classic reliance cannot and need not be proved, but the creditor must nevertheless establish a causal link between the debtor's misconduct and the creditor's injury.
In re Luppino, 221 B.R. at 701 ; see also In re Bentley, 531 B.R. at 688 ("Fraud by non-disclosure is a subcategory of fraud because, where a party has a duty to disclose, the non-disclosure may be as misleading as a positive misrepresentation of facts.") (citing Schlumberger Tech. Corp. v. Swanson, 959 S.W.2d 171, 181 (Tex. 1997) ).
The Plaintiff had no idea—or reason to believe—that the bills of sale that the Debtor delivered to the Plaintiff contained materially false representations about the amount of money that Auto Family spent to acquire the Twelve Vehicles. In the ordinary course of its business as a lender to used automobile dealers, the Plaintiff routinely relies upon the information set forth in the bills of sale in order to determine how much to loan against each floorplan vehicle. [Finding of Fact No. 15]. Here, the Plaintiff relied upon the information contained in the bills of sale and had no reason to believe that the information contained therein was false and that by making advances in reliance upon this information, its security interests would be eviscerated and the balance associated with each vehicle would go unpaid. [Finding of Fact No. 15]. Moreover, although the court in Luppino suggests that there is no need to examine the Plaintiff's justifiable reliance in this suit, there is no question that a reasonable and prudent lender would not lend money to a company similarly situated to Auto Family while knowing all of the facts that the Debtor failed to disclose. Stated differently, but for the Debtor's non-disclosure of the material facts mentioned above, the Plaintiff would not have made advances to Auto Family—which in turn, would have prevented the loss that the Plaintiff has sustained. It is clear that the Debtor's misconduct caused the Plaintiff to provide funding of $310,005.19 that it would not have otherwise provided and to lose its security interest on the proceeds from the sales of the Twelve Vehicles, thereby rendering it an unsecured creditor.
See the chart in Findings of Fact Nos. 31 and Finding of Fact No. 40. The Plaintiff advanced a total of $318,575.00 for the Twelve Vehicles and the amount still owed is $310,005.19.
4. The Debtor's Conduct Caused Damage to the Plaintiff
There is no question that the Debtor's conduct caused damage to the Plaintiff. Not only did the Debtor deprive the Plaintiff of the funds it loaned to Auto Family by squandering the proceeds (on which the Plaintiff had a security interest) away on personal expenses, he also intentionally sold the vehicles without any intent to remit the sales proceeds to the Plaintiff. [See Finding of Fact No. 41]. Because the Twelve Vehicles were sold, the Debtor also deprived the Plaintiff from repossessing each vehicle, thereby making the Debt unsecured. [See Finding of Fact No. 41]. The Plaintiff was left holding a defaulted loan with a balance of $310,005.19 from a borrower (i.e. Auto Family) who, having given a security interest to the Plaintiff on all of its assets to secure the loan, [See Finding of Fact No. 18], then ensured that this security interest was eviscerated. But for the trickery of the borrower's principal—i.e., the Debtor—the Plaintiff would have suffered no harm. Therefore, the Debtor undeniably caused damage to the Plaintiff. See In re Kroh, 88 B.R. at 984 ("The Bank has been damaged in the amount of the unpaid balance on each note, the interest accrued on the notes, and the attorney's fees incurred. Absent, [the debtor's] misrepresentations the Bank would not have loaned the money to [the debtor] and these damages would not have occurred.").
In sum, the Plaintiff has met its burden in establishing all of the elements of a claim for false pretenses; therefore and the Debt is not dischargeable. See 11 U.S.C. § 523(a)(2)(A). The Court now turns to the Plaintiff's claim for actual fraud.
I. The Plaintiff's Claim under § 523(a)(2)(A) for Actual Fraud
The Plaintiff's third claim against the Debtor is based upon § 523(a)(2)(A) for actual fraud. In the wake of the Fifth Circuit's opinion in Selenberg v. Bates (In re Selenberg) , 856 F.3d 393, 398 (5th Cir. 2017), the Court adopts the Selenberg Approach as it analyzes the Plaintiff's claim to determine whether: (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 relied on such representations; and (5) the creditor sustained losses as a proximate result of the representations.
This Court recognizes that a false representation is not always required in order to find actual fraud under 11 U.S.C. § 523(a)(2)(A). Husky Int'l Elecs., Inc. v. Ritz, ––– U.S. ––––, 136 S. Ct. 1581, 1586, 194 L.Ed.2d 655 (2016) ("The term ‘actual fraud’ in § 523(a)(2)(A) encompasses forms of fraud, like fraudulent conveyance schemes, that can be effected without a false representation."). However, the actual fraud alleged in the suit at bar is the type of actual fraud where false representations were in fact made by the Debtor. Specifically, as previously discussed, the Debtor submitted bills of sale to the Plaintiff containing materially false information upon which the Plaintiff relied to make advances to Auto Family.
1. The Debtor Made Representations
With respect to the first element, the Debtor made the following representations: (1) the purpose of the loan was to help finance Auto Family's used car inventory, [Finding of Fact No. 19]; (2) each bill of sale represented the actual amounts that Auto Family spent to purchase the vehicles, [Finding of Fact No. 20]; (3) Auto Family would remit the sales proceeds—sufficient to pay the indebtedness for each floored vehicle—after the sale of each vehicle, [Finding of Fact No. 21 and 23]; and (4) the Plaintiff would have, among other assets of Auto Family, a security interest in each vehicle that was purchased with funds advanced by the Plaintiff to Auto Family. [Findings of Fact Nos. 18 and 29].
2. The Debtor Knew the Representations were False when he Made them to the Plaintiff
The Plaintiff has met its burden in proving that the Debtor knew that the representations were false at the time he made the representations. Specifically, the Debtor made representations: (1) regarding the purpose of the advances; (2) that the bills of sale were accurate; and (3) that Auto Family would remit sufficient sale proceeds to the Plaintiff to pay off the balance associated with each floored vehicle. As further explained below, the Debtor knew these representations were false at the time that he made them.
a. Representations Regarding the Purpose of the Advances
The Debtor knew that his representations regarding Auto Family's intended use of the advances were false. [Finding of Fact No. 15]. The Debtor never intended to use the advances for Auto Family's business operations. [Finding of Fact No. 41]. Instead, the Debtor used the advances for various personal expenses, which included food and entertainment costs, and payments to the Insiders. [Finding of Fact Nos. 34-39].
When questioned about his expenditures for loan payments to his brother-in-law or transfers to his mother for alleged medical treatment, he was unable to justify these transfers for Auto Family's business development. Instead, he stated in a matter-of-fact manner that he had to pay his brother-in-law because he was family and his brother-in-law needed the money. He never gave any explanation as to how he could justify making transfers of funds to his mother as a benefit to Auto Family's business. [See Findings of Fact Nos. 6, 37(d)(i), and 39(e) ]. Each of the payments that the Debtor made came directly from Auto Family's operating account—either by a direct wire transfer, checks drawn, or cash withdrawals. [Finding of Fact Nos. 34-39]. In short, the Debtor failed to offer any evidence that payments to his family members served any legitimate business purpose for Auto Family and he knew that by Auto Family receiving advances from the Plaintiff, he would have the funds at his personal disposal.
The Plaintiff's counsel questioned the Debtor about his payments to his brother-in-law as follows:
Q: Let's move back to plaintiff's exhibit 68, if you can, um you indicated that you made payments prior to the maturity date of June 30, 2018, right?
A: Yes.
Q: And uh, some of those payments went out according to, the Texas Auto Family bank statements, correct?
A: Correct.
Q: Why did you pay back your brother-in-law prior to the maturity date from October to December of 2017?
A: Well many reasons, uh I will state it like if you let me explain.
Q: Go ahead, please explain.
A: Okay, uh first uh he was laid off from his work um based on like lot of a- lot of political changes in the country and he was without no-no income and second was the- he demanded his money and instantly and uh my sister got involved and uh um I did not want to ruin their harmony because of me and the family, especially if they have five kids and so 1 had to do that. Third, I got proceeding from insurance company uh for cars-personal cars that got flooded, and most of this loan was paid by my personal uh account which is like came from insurance cars that- my two personal cars that got flooded that were paid in cash, so I paid for my money.
Q: Are you saying for the extent that you paid from your personal account that that money was derived from insurance proceeds?
A: Okay sure, from my personal cars.
Q: Okay. To the extent money was paid out of the business account, well that's not true though, right?
A: That's not true. This was uh- This was uh from my business for a business purpose which was- that was the loan for my business.
Q: Well and let's- I just want to be clear. The reason you paid your brother-in-law back it was not a business reason for Texas Auto Family, correct?
A: It was a business, yes.
Q: No. Listen to that question real carefully. The reason you paid back your brother-in-law was reasons you recited. Those- none of those reasons contained a business reason directly related to Texas Auto Family, is that correct? The sales of cars?
A: I don't understand. If you mean the maturity date it's- I'm supposed to pay him by this time then I would agree with you.
Q: Let me just break it down, reason by reason. The first reason you said is because your brother-in-law had been laid off, correct?
A: That is correct.
Q: That's not a Texas Auto Family business purpose, correct?
A: No.
Q: Okay. Let's go to your second reason. Second reason is you paid back is because you wanted to preserve harmony between your brother-in-law and your sister, correct?
A: Absolutely yes.
Q: Okay. That is not a business reason for Texas Auto Family to pay back money, correct?
A: Correct.
Q: Remind me again what was the third reason that you provided?
A: Third reason- reason that, and this was one of the biggest reasons that I got a huge amount of money uh were cars, my personal cars um from insurance company that I paid for business purpose I mean from my personal money. I did not pay from Texas Auto Family bank account for the whole promissory note, I used my personal to pay for a business matter. And that was the biggest because I got a lot of money around $9-$6,000,00 for my two cars.
A: Okay and if that's the case, why pay any of it out of your Texas Auto Family business account?
Q: Because I run out I used all the $9-$6,000.00 for business and for my personal, when I should have kept it for myself.
A: Okay.
[Tape Recording, June 19, 2019, Hrg. at 11:08:42 - 11:13:31 a.m.].
In addition to the above-referenced testimony in the pending adversary proceeding, the Debtor's testimony in a different adversary proceeding before this Court involving the same Auto Family operating account (Adv. No. 18-03392), was as follows:
Q: Do you see that?
A: Yes, I do.
Q: And that money came from Texas Auto Family's business account to pay for your mom's medical bills, is that correct
A: Brother-in-law.
Q: This is another payment to brother-in-law?
A: Yes.
Q: And again, you authorized this transaction, correct?
A: Absolutely I did.
Q: So, a payment to your brother-in-law in December you were having financial issues then, why would you be paying your brother-in-law prior to the maturity date of the note that you said was June 2018 in the amount of $16,800.00?
A: I did not want to lose my family I want to keep the family harmony, so I was in the position that I had to send them money, and he was laid off, no work, so I had to do what I had to do.
Q: So, you obviously put family harmony above paying AFC [the Plaintiff/creditor].
A: I had to pay them, so I had to send them before it was to AFC [the Plaintiff/creditor].
Q: You say he required those payments but that's not what the contract says.
A: Exactly, yes.
[Tape Recording, June 13, 2019, Tr. at 10:42:37 - 10:43:39 a.m.].
When questioned about his use of the advances and proceeds from the sales of the Twelve Vehicles, the Debtor tried to justify these expenditures as being necessary for business development—because he would take prospective customers out to lunch or dinner to entice those individuals to do business with Auto Family. However, these expenditures included gym memberships, trips to a gun range, grocery shopping, online retail orders, trips to pet supply stores, nightclubs, and trips to coffee shops—expenditures for which the Debtor was unable to provide evidence or an explanation how these expenditures were business-related. [See Finding of Fact No. 34-39]. The Court finds that the Debtor's response that these expenditures were for business development was a bald-faced lie. There is no way that his gym membership, trips to a gun range, and grocery shopping have anything to do with Auto Family's business. Rather, the Court finds that the Debtor intended to use the funds for his own personal benefit and, in fact, did use the funds for his own personal benefit; and that he has lied about these expenditures once they came under scrutiny at trial. b. Representations That the Bills of Sale were Accurate
Next, the Debtor knew that the amounts set forth in the bills of sales were materially false when he delivered them to the Plaintiff for the purpose of receiving advances for Auto Family. [Findings of Fact Nos. 15 and 41]. In the Defendant's Summary of Claims, the Debtor stated that he did "not knowingly or recklessly misrepresent to the Plaintiff the value of the cars that he purchased from other dealers with funds provided by the Plaintiff and did not inflate the loan amount needed to purchase the cars" because he "simply presented the cars to the Plaintiff that Auto Family proposed to purchase and the price that Auto Family would pay for each car." [Joint Pre-Trial Statement, Defendant's Summary of Claims, pg. 13-14]. The Debtor continues asserting that the Plaintiff (1) knew what vehicle Auto Family planned to purchase before doing so, (2) had the resources to determine a fair market value of the vehicle, and (3) could have simply denied him funding in order to avoid damages. [Id. at pg. 14]. The Debtor implies that the Plaintiff was in the best position to uncover a supposed misrepresentation because: (1) the Debtor was not an auto mechanic himself well-versed in determining the value of an automobile based upon the extent of any damage; and (2) the Plaintiff inspected each vehicle that Auto Family planned to purchase. [Joint Pre-Trial Statement, Defendant's Summary of Claims, pg. 14]. These arguments fail because the Debtor, as the sole owner of Auto Family, was still bound by the to maintain accurate books and records for the Plaintiff's benefit. [Finding of Fact No. 20]. The Debtor, as the sole owner of Auto Family, should have stated in the bills of sale what Auto Family actually spent to acquire title to the Twelve Vehicles.
c. Representations That Auto Family Would Remit the Proceeds from the Sales of the Twelve Vehicles to the Plaintiff
Next, the Debtor represented that he—in his capacity as the owner of Auto Family—would remit sales proceeds to the Plaintiff after the completion of each vehicle sale. However, the Debtor admits that he failed to remit sufficient proceeds to the Plaintiff from the sales of the Twelve Vehicles. At trial, the Debtor tried to make an excuse, stating that in many instances he did have sufficient sale proceeds required to remit to the Plaintiff, and because he did not have a complete payment for the Plaintiff, he failed to remit payment at all. See supra notes 17-18. The Court is not persuaded by this argument because: (1) the Debtor, as sole owner of Auto Family, would not have pledged four of the Twelve Vehicles—or, one-third of the vehicles in question—to another creditor if he had really intended to pay the Plaintiff, [See Finding of Fact No. 16]; and (2) the Debtor unequivocally testified that he needed to remit funds—which were in substantial amounts—to the Insiders, "to keep the family harmony." See supra notes 25 and 28. Under these circumstances, the Court finds that the Debtor had no intention of remitting sufficient proceeds to the Plaintiff to pay off the balances associated with each of the Twelve Vehicles.
For all of the above-referenced reasons, the Debtor made representations that he knew to be false at the time he made them. Thus, the second element of actual fraud is satisfied.
3. The Debtor Made Representations with the Intention and Purpose to Deceive the Plaintiff
With respect to the third element, the Debtor made the above-referenced representations with the intention and purpose to deceive the Plaintiff. The Debtor clearly had no intention of performing as promised because he did not take any steps to perform any of Auto Family's material contractual duties as the duties related to the Twelve Vehicles. In re Allison, 960 F.2d at 484 ; In re Hurst, 337 B.R. at 133. In fact, the Debtor took immediate steps to violate Auto Family's contractual duties. [Findings of Fact Nos. 34-39]. The Debtor, after making several warranties, representations, and covenants in the Note, sold the Twelve Vehicles within the time frame of October 3, 2017, to December 5, 2017. Between August 1, 2017 and December 31, 2017, the Debtor used Auto family's operating account to pay for a total of 70,474.60 worth of his personal expenses. Therefore, the Debtor had no intention of remitting any sale proceeds to the Plaintiff to pay off the outstanding balance associated with the Twelve Vehicles. See In re Sheridan, 57 F.3d 627, 635 (7th Cir. 1995) ("[W]hen a creditor entrusts the debtor with money to use for a specific purpose and the debtor has no intention of using it in that manner, a misrepresentation exists upon which a debt can be held non-dischargeable."); see also Deady v. Hanson (In re Hanson) , 470 B.R. 808, 816 (Bankr. N.D. Ill. 2012) ("Proof that the debtor never put the money toward the stated purpose allows a court to infer the requisite intent."); Beverly Enters. v. Eversole (In re Eversole) , 110 B.R. 318, 324-25 (Bankr. S.D. Ohio 1990) (inferring intent when "a false representation which the debtor knows or should know will induce another to make a loan"). The Debtor's sheer lack of credibility and evidence to account for his actions confirm his intent to deceive the Plaintiff. For these reasons, the Plaintiff has satisfied this element.
See Plaintiff's Ex.19. This was the first of the Twelve Vehicles sold by Auto Family where no sale proceeds were remitted to Plaintiff subsequent to the sale.
See Plaintiff's Ex. 56. This was the last of the Twelve Vehicles sold by Auto Family where no sale proceeds were remitted to Plaintiff subsequent to the sale.
4. The Plaintiff Relied on the Debtor's False Representations
With respect to the fourth element, the Plaintiff relied on the above-referenced representations made by the Debtor. At trial, Peacock very credibly testified to the processes and procedures his office performed in order to qualify prospective borrowers for lines of credit. [Finding of Fact Nos. 15]. Specifically, he said when loan officers are doing their due diligence and underwriting, he and other loan officers are responsible for gathering financial information for all prospective borrowers and guarantors for the loan application. [Finding of Fact Nos. 15]. Further, he testified that the Plaintiff relies on the information gathered in order to properly qualify the prospective borrower for the loan. [Finding of Fact Nos. 15]. In addition to information submitted for the loan application, Peacock also testified that the Plaintiff requests prospective borrowers to submit accurate bills of sale, reflecting what the dealer actually paid to acquire the prospective vehicle. [Finding of Fact Nos. 15]. Just like the information gathered on the loan application, the Plaintiff also relies on the information submitted on the bills of sale. [Finding of Fact Nos. 15]. Therefore, there is enough evidence in the suit at bar to prove that the Plaintiff justifiably relied on the Debtor's representations made in the loan application, in the Note, and in the bills of sale submitted to the Plaintiff every time each of the Twelve Vehicles was floored.
5. The Plaintiff Sustained Damage as a Result of the Debtor's Misrepresentations
The final element that the Plaintiff must prove under the Selenberg approach is that the Plaintiff sustained a loss as a proximate result of the Debtor's false representations. In re Selenberg , 856 F.3d at 398. The Plaintiff must show that the two types of causation are met: (1) the Debtor's misrepresentations were the actual or "but for" cause of Plaintiff's harm; and (2) the Debtor's misrepresentations were the proximate cause of the injury—i.e., they foreseeably could have produced the injury that the Plaintiff suffered. First Nat'l Bank of Omaha v. O'Brien (In re O'Brien) , 555 B.R. 771, 782 (Bankr. D. Kan. 2016) ; see also Gomez v. Saenz (In re Saenz) , 534 B.R. 276, 299 (Bankr. S.D. Tex. 2015) (holding that foreseeable injury resulting from a debtor's misrepresentation was nondischargeable actual fraud under § 523(a)(2)(A) ); S. Title Ins. Corp. v. Mohiuddin (In re Mohiuddin) , Adv. No. 16-3151, 2017 WL 2123870, at *11 (Bankr. S.D. Tex. May 16, 2017) (same).
In this suit, the Plaintiff has established actual cause. Actual cause—or "but for" causation—"means that [the debtor's] misrepresentations must have played a substantial part, and so were a substantial factor, in affecting [the creditor's] course of conduct that result[ed] in his loss." In re O'Brien, 555 B.R. at 782 (internal citations and quotations omitted). Here, the Plaintiff approved the line of credit because the Debtor, as the owner of Auto Family, represented to the Plaintiff that the purpose of the loan was for Auto Family's business—namely to fund, in part, Auto Family's inventory of used cars. [Findings of Fact Nos. 17 and 30]. But for these explicit representations, among others, the Plaintiff would not have approved the establishment of the line of credit facility. The Note allowed for a maximum credit line of $450,000.00, [see Plaintiff's Ex. 1, pg. 23], but over time, the Plaintiff actually advanced $318,575.00 to Auto Family—for the Twelve Vehicles—in reliance upon certain representations that the Debtor (as the sole owner of Auto Family) made in the various bills of sale. [Finding of Fact No. 31]. First, by virtue of signing the Note, the Debtor represented that Auto Family had revenue that would support repayment of advances under the Note. [Finding of Fact No. 20]. Second, the Debtor represented that once Auto Family sold a vehicle that was floored by the Plaintiff under the Note, Auto Family would remit sufficient sales proceeds to the Plaintiff. [See Findings of Fact Nos. 21 and 23]. Further, but for the representations made about the purchase prices in the bills of sale that the Debtor signed and delivered to the Plaintiff for the express purpose of obtaining advances, the Plaintiff would not have approved a line of credit for $450,000.00, let alone make the advances associated with the Twelve Vehicles in an amount of $318,575.00. [See Finding of Fact No. 21]. Therefore, the Debtor's misrepresentations actually caused the Plaintiff's injury. See In re Kroh, 88 B.R. at 984 ("Finally, the element of proximate cause has been established ... Absent, [the debtor's] misrepresentations [the plaintiff] would not have loaned the money to [the debtor] and these damages would not have occurred.").
Similarly, the Plaintiff has also established proximate cause. Proximate cause—or legal causation—is largely a question of foreseeability. In re O'Brien, 555 B.R. at 782. Stated differently, a fraudulent representation is the proximate cause of a loss if, but only if, the loss might reasonably be expected to result from the reliance. Id. at 782-83 ; see also In re Mohiuddin, 2017 WL 2123870, at *11 ("Reliance is a proximate cause of a plaintiff's loss if the evidence shows that the loss was a reasonably foreseeable consequence of the plaintiff's reliance."). Here, the Plaintiff has proven that the Debtor's misrepresentations have proximately caused damages of $310,005.19—i.e., the amount of outstanding balance owed under the Note. [See Finding of Fact No. 41]. It was easily foreseeable that the Plaintiff would be damaged by any amount that it advanced to Auto Family because of the Debtor's misrepresentations in the Note (which led the Plaintiff to advance sums of money higher than what the Debtor represented Auto Family paid). [See Finding of Fact No. 41]. The Debtor's actions were an attempt to provoke $318,575.00 to be advanced over time under the Note—and the Plaintiff did just that—so that these funds could then be subjected to the Debtor's personal use. [Finding of Fact No. 34-39]. Because the Debtor was attempting to produce the result that occurred, the harm to the Plaintiff was reasonably expected (i.e., foreseeable) based upon the Plaintiff's reliance of the Debtor's misrepresentations. Deady v. Hanson (In re Hanson) , 470 B.R. 808, 816 (Bankr. N.D. Ill. 2012) ("Proof that the debtor never put the money toward the stated purpose allows a court to infer the requisite intent."). See also Spoljaric v. Percival Tours, Inc., 708 S.W.2d 432, 434 (Tex. 1986) (internal citations omitted) ("A promise to do an act in the future is actionable fraud when made with the intention, design, and purpose of deceiving, and with no intention of performing the act. While a party's intent is determined at the time the party made the representation, it may be inferred from the party's subsequent acts after the representation is made."); Nwokedi v. Unlimited Restoration Specialists, Inc., 428 S.W.3d 191, 199 (Tex. App.—Houston [1st Dist.] 2014, pet. denied) ("A promise of future performance constitutes an actionable misrepresentation if the promise was made with no intention of performing at the time the promise was made.").
In sum, this Court finds that the five elements of § 523(a)(2)(A) for actual fraud have been established. In addition, this Court finds that the $310,005.19 Debt is nondischargeable under § 523(a)(2)(A) for false pretenses, false misrepresentations, and actual fraud. The Court now addresses the Plaintiff's claims under § 523(a)(4).
J. The Plaintiff's Claim under § 523(a)(4) for Fraud or Defalcation While Acting in a Fiduciary Capacity,
Under § 523(a)(4), there are three avenues for a creditor to prevent the discharge of a particular debt. One approach is to prove that the debtor incurred the debt through embezzlement; a second is to prove that the debtor incurred the debt through larceny; and a third is to prove that the debtor incurred the debt through fraud or defalcation while acting in a fiduciary capacity. The Court now addresses each of these avenues in turn.
" ‘Defalcation,’ as commonly used (hence as Congress might have understood it), can encompass a breach of fiduciary obligation that involves neither conversion, nor taking and carrying away another's property, nor falsity." Bullock v. BankChampaign, N.A. , 569 U.S. 267, 275, 133 S.Ct. 1754, 185 L.Ed.2d 922 (2013). It is " ‘a willful neglect of duty, even if not accompanied by fraud or embezzlement." Schwager v. Fallas (In re Schwager) , 121 F.3d 177, 184 (5th Cir. 1997) (quoting Moreno v. Ashworth (In re Moreno) , 892 F.2d 417, 422 (5th Cir. 1990) ). "Defalcation" is also defined as "the fraudulent misappropriation of money held in trust; financial wrongdoing involving a breach of trust; embezzlement. Loosely, the failure to meet an obligation; a nonfraudulent default." Defalcation, BLACK'S LAW DICTIONARY (11th ed. 2019). However, "defalcation," unlike "fraud," may be used to refer to nonfraudulent breaches of fiduciary duty. Bullock, 569 U.S. at 275, 133 S.Ct. 1754. Determining whether a debtor committed fraud or defalcation while acting in a fiduciary capacity is a two-step process. See Int'l Beauty Products v. Beveridge (In re Beveridge) , 416 B.R. 552, 570 (Bankr. N.D. Tex. 2009). "First, a fiduciary relationship must exist prior to the particular transaction from which the debt arose." In re Chavez, 140 B.R. 413, 422 (Bankr. W.D. Tex. 1992) ; see also Murphy & Robinson Inv. Co. v. Cross (In re Cross) , 666 F.2d 873, 879 (5th Cir. 1982) (holding that the claimant must "be the beneficiary of a preexisting fiduciary relationship"). "Second, some type of fraud or defalcation must have occurred during the fiduciary relationship." In re Chavez, 140 B.R. at 422.
"Federal law determines what constitutes a fiduciary for the purposes of section 523(a)(4)." In re Beveridge, 416 B.R. at 570 (citing Miller v. J.D. Abrams, Inc. (In re Miller) , 156 F.3d 598, 602 (5th Cir. 1998) ("[T]he definition of ‘fiduciary’ under § 523(a)(4) is controlled by federal common law rather than Texas law.")). " ‘Under § 523(a)(4), "fiduciary" is limited to instances involving express or technical trusts.’ " In re Miller, 156 F.3d at 602 (quoting Texas Lottery Comm'n v. Tran (In re Tran) , 151 F.3d 339, 342 (5th Cir. 1998) ). "The purported trustee's duties must, therefore, arise independent of any contractual obligation." In re Tran, 151 F.3d at 342. "Once a valid fiduciary relationship has been established, a debt may be excepted from a debtor's discharge under section 523(a)(4) because it was incurred through fraud or defalcation." In re Beveridge, 416 B.R. at 571. "The definition of fraud under section 523(a)(4) is the same as that under section 523(a)(2)(A)." Id. (citing In re McDaniel, 181 B.R. 883, 887 (Bankr. S.D. Tex. 1994) ).
1. Case Law on Whether a Fiduciary Relationship Exists Between a Secured Lender and a Borrower
There is ample case law discussing whether there can be a fiduciary relationship between a secured lender and a borrower/debtor for the purpose of imposing a nondischargeable debt upon the latter. First, in Davis, the United Stated Supreme Court held that there was no trust or fiduciary relationship between the debtor and the creditor despite the "trust receipts" that stated "that the debtor holds the car as the property of the creditor." Davis v. Aetna Acceptance Co., 293 U.S. 328, 334, 55 S.Ct. 151, 79 L.Ed. 393 (1934). Stated differently, "[t]he resulting obligation is not turned into one arising from a trust because the parties to one of the documents have chosen to speak of it as a trust." Id. Second, "the fiduciary duties must be based on an express or technical trust which existed prior to the act creating the debt and without reference to a wrongful act." RAI Credit Corporation v. Patton (In re Patton) , 129 B.R. 113, 118 (Bankr. W.D. Tex. 1991) (alteration in original); see also Davis, 293 U.S. at 333, 55 S.Ct. 151 ("It is not enough that by the very act of wrongdoing out of which the contested debt arose, the bankrupt has become chargeable as a trustee ex maleficio. He must have been a trustee before the wrong and without reference thereto."). Third, in Bombardier Capital, Inc. v. Tinkler (In re Tinkler) , the Court determined that despite the agreement stating that the funds would be held "IN TRUST for BCI," the language was not specific enough to identify the trust res. Bombardier Capital, Inc. v. Tinkler (In re Tinkler) , 311 B.R. 869, 877 (Bankr. D. Colo 2004). Lastly, "the reason why a debtor will almost never be a fiduciary towards a secured creditor based solely on that relationship, is that the Debtor held more than ‘bare’ legal title in the collateral—both vehicles and the proceeds of those vehicles." Automotive Fin. Corp. v. Leonard (In re Leonard) , No. 11-5073, 2012 WL 1565120 at *9 (Bankr. E.D. Tenn. May 2, 2012) (citing Dealer Servs. Corp. v. Goldstein (In re Goldstein) , No. 09-A-96122, 2011 WL 5240335, at *1-2 (Bankr. N.D. Ill. Oct. 31, 2011).
Nevertheless, some courts have determined that an express trust does exist for purposes of § 523(a)(4) where the debtor was required to segregate funds for the benefit of creditors. See Kubota Tractor Corp. v. Strack (In re Strack) , 524 F.3d 493, 495-96, 500 (4th Cir. 2008) ; Inland Bank & Trust v. Chachula (In re Chachula) , No. 11 A 00073, 2011 WL 2551187, *2 (Bankr. N.D. Ill. June 23, 2011). However, the Bankruptcy Court for the Northern District of Texas previously found that a promise to hold funds for the benefit of a floorplan lender did not rise to the level of a trust agreement required under 11 U.S.C. § 523(a)(4). See First Nat'l Bank of Wichita Falls v. Parr (In re Parr) , 347 B.R. 561, 565 (Bankr. N.D. Tex. 2006).
2. Applicability of the Above-Referenced Cases to the Suit at Bar
Here, the Debtor signed an agreement—i.e., the Note—requiring Auto Family "to hold all amounts received from the sale of any Unit of Lender Financed Inventory in the form as received in trust for the sole benefit of and for Lender, and to remit such funds satisfying all amounts due Lender and owing by Borrower for such Unit of Lender Financed Inventory ...." [Finding of Fact No. 21]. However, "[t]he resulting obligation is not turned into one arising from a trust because the" Note refers to it as a trust. Davis, 293 U.S. at 334, 55 S.Ct. 151. Specifically, assuming any trust might otherwise be created, the Note fails to sufficiently establish any trust res. See Bombardier Capital, Inc. v. Tinkler (In re Tinkler) , 311 B.R. 869, 877 (Bankr. D. Colo 2004) (determining that despite the agreement stating that the funds would be held "IN TRUST for BCI," the language was not specific enough to identify the trust res ). Furthermore, the Note further fails to require the Debtor to segregate funds for the sole benefit of the Plaintiff; therefore, there was no trust created by the Note in the suit at bar. See Kubota Tractor Corp. v. Strack (In re Strack) , 524 F.3d 493, 495-96, 500 (4th Cir. 2008) ; Inland Bank & Trust v. Chachula (In re Chachula) , No. 11 A 00073, 2011 WL 2551187, *2 (Bankr. N.D. Ill. June 23, 2011).
Moreover, the Debtor and the Plaintiff did not have an express or technical trust established before the Note was signed. See RAI Credit Corporation v. Patton (In re Patton) , 129 B.R. 113, 118 (Bankr. W.D. Tex. 1991) (alteration in original) ("[T]he fiduciary duties must be based on an express or technical trust which existed prior to the act creating the debt and without reference to a wrongful act."); see also Davis, 293 U.S. at 333, 55 S.Ct. 151 ("It is not enough that by the very act of wrongdoing out of which the contested debt arose, the bankrupt has become chargeable as a trustee ex maleficio. He must have been a trustee before the wrong and without reference thereto."). Lastly, the Plaintiff's supposed trust was made only with reference to the underlying debt, whereas at the very most, the Plaintiff only held a security interest in each vehicle. See Automotive Fin. Corp. v. Leonard (In re Leonard) , No. 11-5073, 2012 WL 1565120 at *9 (Bankr. E.D. Term. May 2, 2012) (citing Dealer Servs. Corp. v. Goldstein (In re Goldstein) , No. 09-A-96122, 2011 WL 5240335, at *1-2 (Bankr. N.D. Ill. Oct. 31, 2011) ("[T]he reason why a debtor will almost never be a fiduciary towards a secured creditor based solely on that relationship, is that the Debtor held more than ‘bare’ legal title in the collateral—both vehicles and the proceeds of those vehicles."). Thus, the Court finds that the Debtor was not in a fiduciary relationship with the Plaintiff and therefore there is no express trust here.
Having determined that the Plaintiff cannot recover under this prong of § 523(a)(4), the Court now addresses the Plaintiff's claim under the "embezzlement" prong of § 523(a)(4).
K. The Plaintiff's Claim Under § 523(a)(4) for Embezzlement
The United States Supreme Court has defined embezzlement as "the fraudulent appropriation of property by a person to whom such property has been entrusted, or into whose hands it has lawfully come." Moore v. United States, 160 U.S. 268, 269, 16 S.Ct. 294, 40 L.Ed. 422 (1895) ; see also Miller v. J.D. Abrams, Inc. (In re Miller) , 156 F.3d 598, 602 (5th Cir. 1998) (citing Greyhound Lines Inc. v. Thurston (In re Thurston) , 18 B.R. 545, 550 (M.D. Ga. 1982) (quoting 3 Collier on Bankruptcy P. 523.14(3), 526-106 (15th ed. 1981)). Stated differently, embezzlement is 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 F. App'x 719, 723 (5th Cir. 2008). "[P]roof of the debtor's fraudulent intent in taking the property" must be established in order to "meet the definition of ‘embezzlement’ for the purposes of § 523(a)(4). In re Miller, 156 F.3d at 602 (citing Brady v. McAllister (In re Brady) , 101 F.3d 1165, 1173 (6th Cir. 1996) ). However, the requisite intent may be inferred from the surrounding circumstances. See In re Powers, 261 F. App'x at 722 ("Texas courts have held that the element of intent, for crimes of theft, can be inferred from the surrounding circumstances."). "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." In re Miller, 156 F.3d at 603 (quoting In re Sokol, 170 B.R. 556, 560 (Bankr. S.D.N.Y. 1994).
There is ample case law discussing what circumstances must exist between a secured lender and a borrower/debtor for the purpose of imposing a nondischargeable debt upon the latter as a result of embezzlement. The Court now two of these cases in order to underscore why, in the suit at bar, the Plaintiff's request for relief under § 523(a)(4) due to embezzlement must fail.
1. The Shuler Case
In Applegate v. Shuler (In re Shuler) , 20 B.R. 163 (Bankr. D. Idaho 1982), the plaintiff entered into a consignment agreement with Mr. and Ms. Shuler (the debtors) for an automotive trailer, representing that they would sell the trailer and then remit a percentage of the proceeds to the plaintiff. Id. at 163. The Shulers sold the trailer, received $6,500.00 from the buyer, but never remitted any proceeds to the plaintiff. Id. at 163-64. The Court found that the debtors' "use of the proceeds of the sale for his own purposes constituted an embezzlement" and the debt owed to the plaintiff was deemed nondischargeable. Id. at 164.
2. The Davenport Case
In Rainey v. Davenport (In re Davenport), 353 B.R. 150 (Bankr. S.D. Tex. 2006), the debtor, who was an attorney, hired Rainey as an associate with her firm and promised him a higher salary plus a percentage of any monies coming into the firm for any case on which he worked. Id. at 159. As Davenport's legal business grew, so did her profits; however, she failed to remit payment to Rainey as promised. Id. Rainey eventually filed a lawsuit and obtained a judgment against Davenport in state court, and as a means to shield herself, Davenport sought relief under Chapter 11 bankruptcy, which was later converted to a Chapter 7 case. Id. at 174. Rainey initiated an adversary proceeding to determine dischargeability of the judgment and this Court determined that the judgment was nondischargeable under § 523(a)(4) for embezzlement because "it [was] clear that in not paying Rainey, [Davenport] embezzled funds rightly belonging to Rainey under § 523(a)(4)." Id. at 202.
3. Applicability of the Above-Referenced Cases to the Suit at Bar
The Court finds that the Plaintiff's cause of action for embezzlement must fail because the Twelve Vehicles were owned by Auto Family at the time each one was sold. The vehicles and the money generated from their sales at all times belonged to Auto Family. The debtors in Shuler were liable for embezzlement because the funds deriving from the sale of the trailer were never theirs from the outset. Shuler, 20 B.R. at 164. Davenport was also liable for embezzlement for the same reason—they both misappropriated someone else's money. Davenport, 353 B.R. at 202. The Twelve Vehicles in question do not concern a consignment gone wrong where Auto Family would have agreed to sell some third party's vehicle and then deliver to them a percentage of the proceeds. [See generally Plaintiff's Ex. 8, 13, 17, 21, 25, 29, 33, 37, 41, 46, 50, and 54]. This is shown by the title certificates that were all registered in the name of "Texas Auto Family" after Auto Family purchased them. [Id. ]. Since the Plaintiff's interest was only a security interest and not actual title to each vehicle, Auto Family simply could not have embezzled from itself. Auto Family, as a limited liability company, may have a cause of action against the Debtor for embezzlement, but the Plaintiff's action fails. Thus, the Plaintiff's claim under § 523(a)(4) against the Debtor for embezzlement is denied.
L. The Plaintiff's Claim under § 523(a)(4) for Larceny
For purposes of § 523(a)(4), federal law controls the meaning of larceny and embezzlement. In re Brady, 101 F.3d 1165, 1172-73 (6th Cir.1996) ; Transamerica Com. Fin. Corp. v. Littleton (In re Littleton) , 942 F.2d 551, 555 (9th Cir. 1991) ; In re Hayden, 248 B.R. 519, 525 (Bankr. N.D. Tex. 2000). Both larceny and embezzlement involve the fraudulent appropriation of another's property; they differ only in timing. Larceny applies when a debtor unlawfully appropriates property at the outset, whereas embezzlement applies when a debtor unlawfully appropriates property after it has been lawfully entrusted to the debtor's care. See In re Miller, 156 F.3d at 602 ; In re Patton, 129 B.R. 113, 117 (Bankr.W.D.Tex.1991).
Given the facts in the suit at bar, the Court finds that the Debtor did not commit larceny. There is no question that the Debtor used the proceeds from the sales of the Twelve Vehicles for his personal benefit, [Finding of Fact No. 34-39], but, as previously stated, those funds belonged to Auto Family. The Plaintiff never held fee title to those funds, and therefore never outright owned these monies. While the Court does believe that the Debtor acted with fraudulent intent and misled the Plaintiff in order to obtain advances to pay his personal debts, the advances actually belonged to Auto Family. The only party in this situation that would have even suffered the harm of larceny by the Debtor would be Auto Family, as the independent entity whose funds the Debtor pilfered. As with embezzlement, Auto Family, as a limited liability company, may have a cause of action against the Debtor for larceny, but the Plaintiff's claim fails. In sum, the Debtor did not unlawfully appropriate funds to which the Plaintiff held title, and therefore did not commit larceny as to the Plaintiff.
While the Court finds that the Debt is non-dischargeable under the Plaintiff's claims brought pursuant to § 523(a)(2)(A) for false representation, false pretenses, or actual fraud, this Court does not find that the Debt is non-dischargeable under § 523(a)(4) for fraud or defalcation in a fiduciary capacity, embezzlement, or larceny. The Court now addresses the Plaintiff's claim for willful and malicious injury.
M. The Plaintiff's Claim under § 523(a)(6) for Willful and Malicious Injury
In addition to the Debt being nondischargeable pursuant to § 523(a)(2)(A), for false representation, false pretenses, or actual fraud, this Court finds that the Debt is non-dischargeable under § 523(a)(6).
The Supreme Court has established guidelines for determining whether a debt arises from "willful and malicious injury" under § 523(a)(6). See Kawaauhau v. Geiger, 523 U.S. 57, 59, 118 S.Ct. 974, 140 L.Ed.2d 90 (1998). In Kawaauhau, the Court held that § 523(a)(6) does not except from discharge debts arising from negligently inflicted injury. Id. Rather, it applies only to "acts done with the actual intent to cause injury," and excludes intentional acts that merely happen to cause injury. Id. at 61, 118 S.Ct. 974. "Willful," as used in the provision, "modifies the word ‘injury,’ indicating that nondischargeability takes a deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury." Id. (emphasis in original). The Supreme Court also noted that the language of § 523(a)(6) mirrors the definition of an intentional tort, which requires that an actor "intend ‘the consequences of an act,’ not simply ‘the act itself.’ " Id. at 61-62, 118 S.Ct. 974 (emphasis in original) (citation omitted). Further, as to the "malicious injury" requirement of § 523(a)(6), the Fifth Circuit has held that the word "malicious" creates an "implied malice standard." Miller v. J.D. Abrams, Inc. (In re Miller) , 156 F.3d 598, 605 (5th Cir. 1998). A debtor acts with implied malice when he acts "with the actual intent to cause injury." Id. at 606. The test for willful and malicious injury under § 523(a)(6), therefore, is condensed into a single inquiry of whether there exists "either an objective substantial certainty of harm or a subjective motive to cause harm" on the part of the debtor. Id. ; Williams v. Int'l Bhd. of Elec. Workers Local 520 (In re Williams) , 337 F.3d 504, 508-09 (5th Cir. 2003).
Injuries covered under this section "are not confined to physical damage or destruction; an injury to intangible personal property or property rights is sufficient." Collier on Bankruptcy ¶ 523.12[4] (16th ed. 2018). "Thus, the conversion of another's property [or interest in property] without the owner's knowledge or consent, done intentionally and without justification and excuse, is a willful and malicious injury within the meaning of the exception." Id. ; see also Monson v. Galaz (In re Monson) , 661 F. App'x 675, 684 (11th Cir. 2016) ("[W]here the debtor has knowledge of the lienholder's claim and subsequently sells or disposes of the property at issue without notice to the lienholder, that act constitutes a willful and malicious injury under § 523(a)(6)."). Stated differently, "a willful and malicious injury does not follow as of course from every act of conversion, without reference to the circumstances. There may be a conversion which is innocent or technical, an unauthorized assumption of dominion without willfulness or malice." Davis v. Aetna Acceptance Co., 293 U.S. 328, 332, 55 S.Ct. 151, 79 L.Ed. 393 (1934) ; see also Herman v. White (In re White) , 519 B.R. 832, 839 (Bankr. N.D. Okla. 2014) ("There may be an honest but mistaken belief, engendered by a course of dealing, that powers have been enlarged or incapacities removed. In these and like cases, what is done is a tort, but not a willful and malicious one."). Here, the circumstances reflect that the Debtor's actions amount to a conversion of the Plaintiff's property interest—i.e., its security interest on each of the Twelve Vehicles and the proceeds from the sales therefrom—that was willful and malicious under either the "objective substantial certainty of harm" standard or the "subjective motive to cause harm" standard.
This Court notes that Auto Family, by violating the terms of the Note, committed a breach of contract. The fact that Plaintiff has a breach of contract claim, however, does not mean that Plaintiff is barred from recovering under a tort claim for conversion. State of Tex. By and Through Bd. of Regents of University of Texas System v. Walker, 142 F.3d 813, 824 (5th Cir. 1998) ("In addition, under Texas law, a claim for breach of contract and the tort of conversion may arise from the same set of facts."); Vickery v. Tex. Carpet Co., 792 S.W.2d 759, 762 (Tex. App.—Houston [14th Dist.] 1990, writ denied) (finding that plaintiff's proved their case for breach of contract and conversion, which claims arose from the same set of facts).
1. Objective Substantial Certainty of Harm
"Although federal law governs a debt's dischargeability, courts look to state law to determine whether a conversion has occurred." State Farm Mut. Auto Ins. Co. v. Rodriguez (In re Rodriguez) , 568 B.R. 328, 342 (Bankr. S.D. Cal. 2017). The tort of conversion may, under varying circumstances, constitute a willful and malicious injury. Am. First Credit Union v. Gagle (In re Gagle) , 230 B.R. 174, 182 (Bankr. D. Utah 1999) ; Mabank Bank v. Grisham (In re Grisham) , 245 B.R. 65, 74 (Bankr. N.D. Tex. 2000) (finding the requisite intent to harm the bank's security interest by selling the bank's collateral without the bank's written consent or payment of the proceeds to the bank constituted conversion, resulting in a denial of the discharge under § 523(a)(6) ). Consequently, to prevail on a § 523(a)(6) conversion claim, the Plaintiff must establish: (1) that a conversion has occurred under Texas law; and (2) that the conversion is willful and malicious. In re Rodriguez, 568 B.R. at 343.
In In re Gagle, the bank obtained a perfected security interest on the debtors' truck to collateralize a personal loan. 230 B.R. at 176. The security agreement memorialized the debtors' promise to obtain written permission from the bank before altering or selling the collateral before the debt was repaid. Id. at 177. In dire need of cash, one of the debtors disassembled the truck and sold the parts to pay for his family's household expenses. Id. The debtors thereafter filed a chapter 7 petition. Id. at 178. Subsequently, the bank filed an adversary proceeding against the debtors to except from discharge the balance of the personal loan pursuant to § 523(a)(6). Id. The court held that the debt was nondischargeable under § 523(a)(6) because the debtor intentionally injured the bank's security interest by selling the truck parts for cash without the bank's permission—acts that amounted to conversion of the bank's property interest (i.e. the security interest on the truck). Id. at 182-183.
Here, the Debtor intentionally harmed the Plaintiff's security interest in the Twelve Vehicles. Specifically, the Debtor sold all of the Twelve Vehicles but failed to remit sufficient proceeds from the sales of the Twelve Vehicles to the Plaintiff to pay off each of the balances associated with each of the floored vehicles. [Findings of Fact Nos. 31 and 32]. The Debtor accomplished the conversion of the Plaintiff's security interests every time he used proceeds from the sales of any of the Twelve Vehicles to pay for any obligation other than the Debt. Like Gagle, the Debtor sold certain assets (i.e. the Twelve Vehicles) in order to use the sale proceeds for personal expenditures.
These actions are willful because the Debtor knew—or is charged with knowing—that the Plaintiff had a security interest on the Twelve Vehicles and he knew that personally using the proceeds from the sales of any of the Twelve Vehicles would impair the Plaintiff's security interests in these proceeds. See In re White, 519 B.R. at 840 ("Willful injury may also be established indirectly by evidence of both the debtor's knowledge of the creditor's lien rights and the debtor's knowledge that the conduct will cause particularized injury."); J & A Brelage, Inc. v. Jones (In re Jones) , 276 B.R. 797, 802 (Bankr. N.D. Ohio 2001).
[I]n the context where a debtor has converted a creditor's collateral, it has been held ... that the "willful" requirement of § 523(a)(6) may be indirectly established by the creditor demonstrating the existence of two facts: (1) the debtor knew of the creditor's lien rights; and (2) the debtor knew that his conduct would cause injury to those rights.
In re Jones, 276 B.R. at 802.
The Debtor's conduct is malicious because his acts of selling the Twelve Vehicles and spending virtually all of the proceeds from sales therefrom were substantially certain to cause the Plaintiff injury by eviscerating its security interests in the Twelve Vehicles and the proceeds from their sales. In re White, 519 B.R. at 839 ("The term ‘malicious’ requires proof ‘that the debtor either intend the resulting injury or intentionally [took] action that is substantially certain to cause the injury.’ ") (quoting Panalis v. Moore (In re Moore) , 357 F.3d 1125, 1129 (10th Cir. 2004) ).
The Debtor's conduct here can be contrasted with the conduct of the debtor in In re White to underscore why the Debtor's acts were willful and malicious towards the Plaintiff. In White, the debtor sold a machine and infused the sale proceeds back into his 100%-owned company's operations. The creditor holding a security interest on the machine sought a judgment of nondischargeability against the debtor based upon § 523(a)(6). The bankruptcy court held that although there was a security interest on the machine when the debtor sold it, the debtor did not act willfully and maliciously because: (1) the contract between the debtor and the creditor was poorly worded, and the debtor therefore did not understand that there was a security interest on this particular asset; and (2) the debtor plowed the sale proceeds back into the corporate borrower's operations, rather than into his own pocket. In re White, 519 B.R. at 839. By contrast, in the suit at bar, the Note is unambiguous, and the Debtor knew all along that the Plaintiff had a valid security interest in each of the Twelve Vehicles as well as in the proceeds from the sale of each of these vehicles. Meanwhile, the Debtor ensured that Auto Family did not pay off its debt to the Plaintiff when he failed to remit sales proceeds totaling $310,005.19 but instead chose to spend the funds for his own personal use and the use of the Insiders. [Findings of Fact Nos. 34-39]. All in all, the actions of the Debtor here are in stark contrast to the actions of the debtor in White and leave no doubt that his actions were willful and malicious.
In sum, the Plaintiff has met its burden of proving that the Debtor committed a willful and malicious injury because there is sufficient evidence supporting an objective substantial certainty of harm to the Plaintiff's security interest in the Twelve Vehicles and the proceeds generated from the sales of these vehicles.
2. Subjective Motive to Cause Harm
In analyzing the subjective motive to cause harm, the Honorable Marvin Isgur has noted that "the Fifth Circuit equated having a subjective motive to harm to acting with the desire to cause injury." Guerra & Moore, Ltd. v. Cantu (In re Cantu) , 400 B.R. 104, 108 (Bankr. S.D. Tex. 2008) (citing In re Miller, 156 F.3d at 604 ). "Moreover, § 523(a)(6)'s formulation triggers in the lawyer's mind the category ‘intentional torts,’ which generally require that the actor intend the consequences of an act, not simply the act itself." Kawaauhau, 523 U.S. at 58, 118 S.Ct. 974 (alteration in original). Consent is a valid defense to conversion and a justification for finding a debt to be dischargeable. See Mack v. Newton, 737 F.2d 1343, 1355 (5th Cir. 1984) ; In re Gagle, 230 B.R. at 183. There are four reasons that this Court finds the Debtor had a subjective motive to cause harm to the Plaintiff: (1) the Debtor actively misrepresented his intentions to comply with the terms of the Note in order to cause the Plaintiff to loan money; (2) the Debtor used the proceeds from the sales of the Twelve Vehicles for personal expenses; (3) the Debtor sold the Twelve Vehicles without remitting sufficient proceeds from the sales of the Twelve Vehicles to the Plaintiff as required by the Note; and (4) the Plaintiff's security interest in the Twelve Vehicles, and the proceeds generated from the sales therefrom, were eliminated due to the Debtor's use of the funds to pay his personal expenses and obligations, including payments on loans held by the Insiders as well as outright gifts to the Insiders.
Perhaps the most telling evidence of the subjective motive to harm the Plaintiff was the scheme that the Debtor carried out to have a line of credit in the amount of $450,000.00 to Auto Family established under the Note. First, he needed to actually establish a line of credit for Auto Family with the Plaintiff. Hence, he submitted a loan application for Auto Family representing that the loan advances would be used for Auto Family's operations. [Findings of Fact Nos. 17 and 19]. At the time he applied to the Plaintiff for the line of credit, the Debtor was already paying on a promissory note to his brother-in-law. [Finding of Fact No. 9]. The Debtor knew that by mispresenting how the advances were to be used and making no disclosures about the BIL Promissory Note (or any intention to wire money to his mother using Auto Family funds), it would cause the Plaintiff to establish a line of credit facility for Auto Family—which, over time, resulted in $310,005.19 that the Plaintiff would never be able to collect. This "evil motive"—namely, lying to the Plaintiff to be financially enriched and to allow him to funnel large sums of his money to the Insiders—underscores that the Debtor knew the harm the Plaintiff would suffer from his actions because it is precisely the harm that occurred.
The level of the Debtor's skullduggery is underscored by the fact that, not only did the Debtor falsely represent that the advances would be used for Auto Family's operations when, in fact, he knew that they were going to be used for his own personal expenditures, but he actually kept open Auto Family's operating account from the time the first vehicle was sold through the time the twelfth vehicle was sold. [Plaintiff's Exs. 56 and 62]. This means that the Debtor always had the intention of using Auto Family's operating account as his personal piggy bank, rather than paying himself a set salary.
The Debtor argues that he lacked the requisite intent to injure the Plaintiff because the Plaintiff knew about the transactions when the Debtor submitted Auto Family's bank statements to the Plaintiff. The Debtor also argues that because Hurricane Harvey devastated much of Houston, the car-purchasing public was untrustworthy of purchasing cars (due to flooding) and therefore his business suffered, and he was forced to sell vehicles well under fair market value. [Joint Pre-Trial Statement, Defendant's Summary of Claims, pg. 14]. The Debtor also argues that he needed to use the funds advanced to Auto Family from the Plaintiff to pay his employees so that Auto Family would not close following the harm that Hurricane Harvey imposed on the used car market. [Id. at 15].
As previously stated, the Plaintiff acted as a prudent and reasonable party by lending Auto Family the funds because based on Auto Family's revenue stream, the Plaintiff had no justifiable reason to believe its advances would not be repaid. Next, even if Auto Family's consumer base was deterred from purchasing used vehicles following Hurricane Harvey, the Debtor did not offer any evidence how his transfers to the Insiders and how his personal expenditures—gym memberships, trips to a gun range, grocery shopping, online retail orders, trips to pet supply stores, nightclubs, and trips to coffee shops—were related to Auto Family's legitimate business development. So, the argument that the market went into a slump or that employee wages had to be paid clearly did not stop the Debtor from having Auto Family pick up the tab in satisfying his personal extravagances. Lastly, the Debtor sold all Twelve Vehicles in question, so even if there was any damage done by Hurricane Harvey, it clearly did not stop Auto Family from generating cash flow that could have been used—but was not—to pay down the loan balance (in part, if not in whole) that Auto Family owed to the Plaintiff.
Furthermore, the evidence reveals that the Debtor is a sophisticated business owner. [See Finding of Fact Nos. 1-4]. Indeed, the Debtor testified that he possesses degrees both in marketing and accounting [Finding of Fact No. 1] and that he has worked in the used car business for multiple years before establishing Auto Family. [Findings of Fact Nos. 2-4]. Here, the Debtor was present at the loan closing and knew—or is charged with knowing—that the Plaintiff held a first priority security interest in the Twelve Vehicles, as well as the proceeds from the sales thereof. The Debtor signed, in his capacity as owner of Auto Family, the Note [Finding of Fact No. 17] and he also signed the Guaranty. [Finding of Fact No. 26]. The Debtor was responsible for the sales of Auto Family's inventory and he knew full well that the sale of the Twelve Vehicles would cause a debt of $310,005.19 to be owed to the Plaintiff. All in all, the Debtor's business acumen further supports that he possessed the subjective intent to convert the Plaintiff's security interest in the Twelve Vehicles and the proceeds from the sales therefrom, which resulted in the Debt—and, it is worth noting, an obligation that is totally unsecured due to the Debtor's actions. See Husky Int'l Elecs., Inc. v. Ritz (In re Ritz) , 567 B.R. 715, 752. ("The Fifth Circuit has found that ‘debtors with business acumen ... are to be held to a higher standard") (quoting In re Jordan, 927 F.2d 221, 226 (5th Cir. 1991), overruled on other grounds ). After the Debtor sold each of the Twelve Vehicles, proceeds became Auto Family's property, and the Plaintiff had a security interest on these proceeds pursuant to the Note. [Findings of Fact Nos. 18 and 29]. The Debtor knowingly converted these security interests in the proceeds when he used the funds for his personal benefit and the benefit of the Insiders rather than paying off the Debt.
In sum, this Court finds that the Debtor had subjective motive to cause harm to the Plaintiff. Specifically, the Debtor intended to: (1) deprive the Plaintiff of its valid security interests in the Twelve Vehicles; (2) deceive the Plaintiff with a false bills of sale in order to obtain advances under the Note which remain unpaid in the aggregate amount of $310,005.19; and (3) deprive the Plaintiff of its valid security interests in the proceeds by selling the Twelve Vehicles without remitting any portion of the sales proceeds to the Plaintiff. [See Finding of Fact No. 41].
For all the reasons set forth above, this Court finds that the Plaintiff has met its burden of proving the elements of its § 523(a)(6) claim against the Debtor. Therefore, the Debt is a nondischargeable obligation. The Court now addresses the Plaintiff's request that it be awarded both pre- and post-judgment interest and that these sums be declared to be nondischargeable obligations of the Debtor.
N. Pre- and Post-Judgment Interest
1. Pre-Judgment Interest
At first blush, it would appear that the Plaintiff is not entitled to pre-judgment interest because unsecured claimants—which is the category into which the Plaintiff now fits—are generally not entitled to recover post-petition interest. 11 U.S.C. § 502(b)(2). Thus, the knee-jerk reaction would be that the Plaintiff is not entitled to recover any interest under the Note that would otherwise accrue from the Petition Date up until the date that this Court enters judgment in this adversary proceeding. However, "[i]f the claim is nondischargeable, so also is the interest that continues to accrue on that claim." In re Sullivan, 195 B.R. 649, 653 (Bankr. W.D. Tex. 1996). Here, this Court has held that the Debt is nondischargeable. Accordingly, pursuant to the holding in In re Sullivan, this Court finds that the Plaintiff is entitled to pre-judgment interest—i.e. interest that has accrued under the Note from the Petition Date up to the date that this Court enters judgment. The only issue left is the calculation of pre-judgment interest.
In the Joint Pre-Trial Statement, in the section entitled "Admissions of Fact," it is set forth that the unpaid principal amount owed by Auto Family to the Plaintiff is $310,005.19. Adv. Doc. No. 19, pg. 18 of 41. Thus, there is no question that the Debtor agrees that pursuant to the Guaranty, he is personally liable, at a minimum, for this amount. Moreover, in the Joint Pre-Trial Statement, the Plaintiff, in the section entitled "Proposed Findings of Fact and Conclusions of Law," requests this Court to make a finding that "As of the Petition Date, the remaining principal balance owed on the SOT Vehicles is Three Hundred Ten Thousand, Five and 19/100 Dollars ($310,005.19)." Adv. Doc. No. 19-1, pg. 6 of 12. Thus, by its own admission, the Plaintiff represents to this Court that the principal balance owed of $310,005.19 was due as of the Petition Date. At trial, the Plaintiff submitted no evidence showing that as of the Petition Date, there was any accrued, unpaid interest that Auto Family—and therefore the Debtor (pursuant to the Guaranty)—owed to the Plaintiff. Thus, this Court can only draw the inference that the figure of $310,005.19 referenced in the Joint Pre-Trial Statement is the total amount due and owing by Auto Family—and therefore the Debtor—to the Plaintiff. Stated differently, the Court can only draw the inference that Auto Family had actually paid all accrued unpaid interest up to the Petition Date. Accordingly, for purposes of determining the amount of the debt for which the Debtor is liable will not be discharged, this Court will focus on the amount of interest that has accrued, but has not been paid, under the Note from the Petition Date up to the date that this Court enters judgment in this adversary proceeding (i.e., August 13, 2019).
Interest under the Note accrues at a per diem rate of $110.41. The Petition Date was August 10, 2018. [See Main Case Doc. No. 1]. The date that this Court is entering the judgment on the docket is August 13, 2019. Thus, interest has accrued for 368 days, which means that the total amount of interest that has accrued is $40,630.88.
The interest rate under the Guaranty is "the lesser of (A) thirteen percent (13%) per annum, compounded daily, or (B) the maximum rate permitted by law." Plaintiff's Ex. 2, pg. 1 of 5, ¶2(a). There is no applicable interest rate ceiling for commercial-related debt in Indiana (the Guaranty has an Indiana choice of law provision at Plaintiff's Ex. 2, pg. 4 of 5, ¶ 5(g)). Even under Texas law, the maximum allowed interest for any commercial loan above $250,000.00 was 18.00% during the week of June 13, 2017 (the week the Current Note was signed). See Tex. Office of Consumer Credit Comm'n: Tex. Credit Letter , Vol. 36, No. 50, week of June 13, 2017 (2017). Accordingly, the Court uses 13% as the applicable interest rate. The calculation of the amount of per diem interest is as follows: (1) (0.13 + 365) x $310,005.19 = $110.41, (2) $115.11 x 368 = $40,630.88.
When the pre-judgment interest of $40,630.88 is added to the outstanding principal owed under the Note as of the Petition Date—i.e., $310,005.19—the total amount of the nondischargeable debt owed by the Debtor (excluding attorneys' fees and costs) is $350,636.07.
2. Post-Judgment Interest on the Amount of $310,005.19
28 U.S.C. § 1961(a) sets forth that interest "shall be allowed on any money judgment in a civil case recovered in a district court." This statute also "applies to judgments entered by a bankruptcy court." Ocasek v. Manville Corp. Asbestos Disease Comp. Fund, 956 F.2d 152, 154 (7th Cir. 1992). Further, the statute sets forth that the interest will be at the rate of the "weekly average 1-year constant maturity Treasury yield, as published by the Board of Governors of the Federal Reserve System, for the calendar week preceding the date of the judgment." 28 U.S.C. § 1961(a) (footnote omitted). For the week preceding the date of this Court's judgment is the week ending of August 9, 2019 is 1.78%. Post-Judgment Interest Rates, United States District & Bankruptcy Court Southern District of Texas, http://www.txs.uscourts.gov/page/post-judgment-interest-rates (last visited August 12, 2019). Accordingly, the Court will grant the Plaintiff's request for post-judgment interest, and the rate that will be in effect on the date of the entry of the judgment will be 1.78% per annum. In re Beveridge, 416 B.R. at 581-82 (awarding post-judgment interest on debt that was declared nondischargeable pursuant to § 523(a)(2)(A) ); Boyington Capital Grp., LLC v. Haler (In re Haler) , Adv. No. 10-4217, 2016 WL 825668, at *14-15 (Bankr. E.D. Tex. Mar. 2, 2016) (same); Gronewoller v. Mascio (In re Mascio) , No. 03-1482 MER, 2014 WL 2621201, at *9 (Bankr. D. Colo. June 12, 2014) (same).
This Court's award of post-judgment interest will accrue during the period from the date the judgment is rendered until the date the judgment is satisfied. La. Power & Light Co. v. Kellstrom, 50 F.3d 319, 331-32 (5th Cir. 1995). Further, the Court concludes that all post-judgment interest is nondischargeable, once again relying upon the language in Cohen that the nondischargeable debt includes "other relief." See Cohen v. de la Cruz, 523 U.S. 213, 223, 118 S.Ct. 1212, 140 L.Ed.2d 341 (1998) ; Fire Prot. Servs., LP v. Ayesh (In re Ayesh) , 465 B.R. 443, 449-50 (Bankr. S.D. Tex. 2011) ; Miller v. Lewis, 391 B.R. 380, 385 (E.D. Tex. 2008).
O. Attorneys' Fees and Expenses
1. Applicable Law
With respect to the Plaintiff's request for attorneys' fees, the holding in Cohen is that a nondischargeable debt in a § 523(a)(2)(A) claim encompasses not only the debt created by the fraud, but also an award of attorneys' fees, among other damages. Stated differently, the word "debt" in § 523(a)(2)(A) includes any form of damage that can be causally linked to the conduct that gives rise to the nondischargeable debt. Cohen, 523 U.S. at 220, 118 S.Ct. 1212 ; Light v. Whittington (In re Whittington) , 530 B.R. 360, 386-88 (Bankr. W.D. Tex. 2014). Here, the Court concludes that the attorneys' fees incurred by the Plaintiff for the prosecution of the adversary proceeding are directly linked to the Debtor's conduct that gave rise to the nondischargeable obligation—i.e., the Debt—owed by the Debtor to the Plaintiff. See Ritz, 136 S. Ct. at 1589 (holding that "any debts ‘traceable to’ the fraudulent conveyance ... will be nondischargeable under § 523(a)(2)(A)"). The link is this: but for the Debtor's false representations, false pretenses, actual fraud, and willful and malicious injury to the Plaintiff's security interests, there would not have been a need for the attorneys' fees incurred in this adversary proceeding.
Of course, under the so-called "American Rule," each party pays its own attorneys' fees arising out of litigation except when specific authority granted by statute or contract states otherwise. "Since the Bankruptcy Code does not address whether creditors can recover attorney's fees in nondischargeability cases, they can only do so if allowed by another statute or by contract." Schwertner Backhoe Servs., Inc. v. Kirk (In re Kirk) , 525 B.R. 325, 330 (Bankr. W.D. Tex. 2015) (footnote omitted). Indeed, the Fifth Circuit has held that creditors can recover attorneys' fees only if there is a contractual or statutory right to fees under state law. See In re Jordan, 927 F.2d at 226-27 ; Luce v. First Equip. Leasing Corp. (In re Luce) , 960 F.2d 1277, 1285–86 (5th Cir. 1992).
2. Application of the Law to the Suit at Bar
In the suit at bar, the Court finds that there is a contractual basis for awarding attorneys' fees to the Plaintiff. Specifically, the Note provides a contractual obligation for Auto Family to pay the Plaintiff's reasonable attorneys' fees and expenses as a result of any event of default—which certainly has occurred here—and the Guaranty makes the Debtor also liable for the Plaintiff's reasonable attorney's fees and expenses. [Finding of Fact Nos. 22-26].
Further, this Court has the authority to determine what amount of fees is reasonable. FED. R. BANKR. P. 7054(b)(2) ; see also Perkins v. Standard Oil Co. of Ca., 399 U.S. 222, 223, 90 S.Ct. 1989, 26 L.Ed.2d 534 (1970) (per curiam) (mandating the district court to determine reasonable attorneys' fees for litigation, including various appeals); Dague v. City of Burlington, 976 F.2d 801, 804 (2d Cir. 1991) (holding that "determination of a reasonable attorney's fee ... should normally be decided by the district court in the first instance"). Indeed, this Court is best situated to review and analyze the evidence presented on a request for fees and expenses incurred for litigating in this Court. See Asarco, L.L.C. v. Jordan Hyden Womble Culbreth & Holzer, P.C. (In re ASARCO, L.L.C.) , 751 F.3d 291, 294 (5th Cir. 2014) ("A bankruptcy court has ‘broad discretion’ to determine reasonable attorneys' fees, as the ‘bankruptcy court is more familiar with the actual services performed and has a far better means of knowing what is just and reasonable than an appellate court can have.’ ") (quoting Lawler v. Teofan (In re Lawler) , 807 F.2d 1207, 1211 (5th Cir. 1987) ); Dague, 976 F.2d at 804. The evidence presented to prove reasonable attorneys' fees may include "voluminous and detailed records of attorney and staff hours spent on various projects, affidavits regarding reasonable billing rates in the relevant communities at various times during the pendency of the suit" as well as "data and arguments concerning whether, under the overall circumstances of the case, a claimed fee is reasonable." Dague, 976 F.2d at 804.
As already discussed in the Introduction, the Debtor has stipulated to the reasonableness of the Plaintiff's attorneys' fees and expenses. Specifically, the stipulation is that the amount of $67,803.00 is reasonable for the Plaintiff's attorneys' fees and the amount of $4,287.16 is reasonable for the amount of the Plaintiff's expenses.
3. The Plaintiff is Entitled to its Fees and Expenses
Based on the contractual provisions (in both Notes and the Guaranty) that the Debtor signed, and the Supreme Court's clear holding in Cohen v. de la Cruz, this Court finds that the Plaintiff's fees and expenses constitute a nondischargeable debt under § 523(a)(2)(A). Therefore, this Court finds that the total amount of reasonable attorneys' fees and expenses to which the Plaintiff is entitled to recover from the Debtor is $72,090.16, all of which this Court finds to be nondischargeable.
4. Post-Judgment Interest on the Total Amount of Attorneys' Fees and Expenses
Additionally, the Court will also order the Debtor to pay post-judgment interest on the total amount of attorneys' fees and costs awarded to the Plaintiff. The Fifth Circuit has held that interest on attorneys' fees begins to accrue on the date of the judgment allowing recovery of attorneys' fees and runs until the date the fees are paid in full. See Copper Liquor, Inc. v. Adolph Coors Co., 701 F.2d 542, 544-45 (5th Cir. 1983) (en banc), overruled in part on other grounds by J.T. Gibbons, Inc. v. Crawford Fitting Co., 790 F.2d 1193, 1195 (5th Cir. 1986), aff'd 482 U.S. 437, 107 S.Ct. 2494, 96 L.Ed.2d 385 (1987). Further, if the prevailing party is awarded attorneys' fees and those fees are a part of the judgment, then those fees will bear interest at the same rate as that applied to the judgment on the merits. Id. The Fifth Circuit allows this interest on attorneys' fees because it "better serve[s] the purpose of awarding these expenses to the prevailing party since it ... more nearly compensate[s] the victor for the expenses of the litigation." Id. at 544. The post-judgment interest that accrues on the attorneys' fees and costs is also a nondischargeable obligation. Once again, in making this conclusion, the Court relies upon the language in Cohen that the nondischargeable debt imposed upon the Debtor includes "other relief." Cohen, 523 U.S. at 223, 118 S.Ct. 1212 ; see also In re Ayesh, 465 B.R. at 449-50 (finding legal fees to be nondischargeable); Wegmans Food Mkts., Inc. v. Lutgen (In re Lutgen) , No. 98-CV-0764E(SC), 1999 WL 222605, at *3 (W.D.N.Y. Apr. 5, 1999) (same). In the suit at bar, the rate that will be in effect on the date of the entry of the judgment will be 1.78% per annum. Post-Judgment Interest Rates, United States District & Bankruptcy Court Southern District of Texas, http://www.txs.uscourts.gov/page/post-judgment-interest-rates (last visited August 12, 2019). V. CONCLUSION
Sir Walter Scott's maxim applies to the Debtor: "O, what a tangled web we weave when first we practise to deceive!" Here, the Plaintiff has proven, by the required preponderance of the evidence, that the Debtor incurred the Debt by false representations, false pretenses, and actual fraud. The Plaintiff has also proven by a preponderance of the evidence that the Debtor incurred the Debt by willfully and maliciously injuring the Plaintiff's property—i.e., eviscerating its security interest in the Twelve Vehicles and the proceeds from the sales. Having voluntarily chosen to file a Chapter 7 petition [Finding of Fact No. 5], the Debtor must now suffer the consequences of having defrauded the Plaintiff and willfully injured its property interests. Finally, although the Plaintiff has successfully proven the necessary elements of its §§ 523(a)(2)(A) and 523(a)(6) claims against the Debtor, it has failed to do so on its claims under § 523(a)(4).
Sir Walter Scott, Marmion, Canto vi. Stanza 17. The Court notes that the word "practise" is not misspelled in this quotation.
In sum, the Debtor is liable to the Plaintiff in the following amounts, all of which constitute nondischargeable obligations:
(1) unpaid principal amount owed under the Note: $310,005.19;
(2) pre-judgment interest from August 10, 2018, to August 13, 2019, at a per diem rate of $110.41, which totals $40,630.88;
(3) attorneys' fees of $67,803.00;
(4) expenses totaling $4,287.16; and
(5) post-judgment interest (accruing from the date set forth below up until all of the above referenced amounts are paid in full).
A judgment consistent with these Findings of Fact and Conclusions of Law will be entered on the docket simultaneously herewith.