MEMORANDUM OPINION

JAMES P. SMITH, Chief Bankruptcy Judge.

In this adversary proceeding, Kapitus Servicing, Inc., formerly known as Colonial Funding Network, Inc. as servicing provider for Strategic Nationwide Funding ("Kapitus") seeks to have its claim against Debtor declared nondischargeable pursuant to 11 U.S.C. §§ 523(a)(2)(A), (a)(2)(B), (a)(4) and (a)(6). The matter came on for trial on September 17, 2019.1

At the conclusion of the evidence, the Court requested that the parties submit their closing arguments in the form of proposed findings of fact and conclusions of law. After considering the evidence, the parties arguments and the law, the Court issued its findings of fact and conclusions of law pursuant to Bankruptcy Rule 7052. (Memorandum Opinion, Docket No. 30). Thereafter, Kapitus filed a motion to alter or amend. (Docket No. 34). This motion was granted and the Court's prior Memorandum Opinion was vacated. (Docket No. 36). The Court now issues its amended findings of fact and conclusions of law pursuant to Bankruptcy Rule 7052.

FINDINGS OF FACTS

Debtor was the owner and managing member of AgForest, LLC ("AgForest"), an entity in the timber business. On June 14, 2016, AgForest entered into a "Revenue Based Factoring (RBF/ACH) Agreement" (the "June Contract") with Strategic Nationwide Funding ("Strategic") pursuant to which Strategic purchased $55,200 of AgForest's future receivables for the purchase price of $40,000.2 Pursuant to the June Contract, AgForest was required to repay Strategic $55,200 over a period of months by payments of $219 per business day. Debtor personally guaranteed the June Contract.

AgForest was required to maintain a bank account into which all of its receivables were deposited. Kapitus was responsible for servicing the June Contract for Strategic. AgForest was required to sign an agreement allowing Kapitus to make electronic drafts on AgForest's bank account ("ACH Debit") to collect the daily payments of $219.

The agreement was funded on June 16, 2016 when the agreed amount was deposited by Strategic into AgForest's bank account.3 Payments on the June Contract began June 17, 2016 and were timely withdrawn by Kapitus through October 7, 2016.

On September 13, 2016, AgForest entered into another agreement with Strategic pursuant to which Strategic purchased an additional $55,200 of AgForest's future receivables for $40,000 (the "September Contract"). Debtor also personally guaranteed the September Contract. The September Contract required payments of $239 per business day until the total of $55,200 had been paid to Strategic. Except for the payment terms, the terms of the June and September Contracts and guarantees were the same.4

The September Contract was funded on September 20, 2016 when Strategic deposited $39,195 into AgForest's bank account.5 The daily payments of $239 began on September 21 and were timely withdrawn by Kapitus through October 7, 2016.

Debtor testified that, prior to October 2016, AgForest had been working on a major timber contract for 30 to 45 days. However, sometime prior to October, the land owner changed his mind and did not enter into the contract.6 Debtor testified that this devastated the company. He testified AgForest could no longer make the daily payments to Strategic. Accordingly, on or about October 11, 2016, Debtor placed a "stop payment" order on the ACH Debits to Strategic.

Debtor filed a voluntary Chapter 13 case in this Court (Case No. 16-31255) on November 22, 2016. This case was dismissed on March 22, 2017. Debtor filed a second Chapter 13 case in this Court on May 17, 2017 (Case No. 17-30577). This case was dismissed on May 29, 2018. Debtor filed the instant Chapter 11 case in this Court on August 30, 2018. Kapitus filed a claim, arising from the June and September Contracts, of $122,847.49. The complaint initiating this adversary proceedings was timely filed on March 18, 2019.7

CONCLUSIONS OF LAW

Kapitus asserts that its claim against Debtor is nondischargeable under several subsections of 11 U.S.C. § 523(a). Kapitus has the burden of proving by a preponderance of the evidence that its claim is nondischargeable. Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 564, 112 L.Ed. 2d 755 (1991).

Equitable Bank v. Miller, (In re Miller), 39 F.3d 301, 304 (11th Cir. 1994). The Court will address each of Kapitus' arguments.

1. Section 523(a)(2)(B).

Kapitus argues that Debtor made a number of false representations in the contracts and thus its claim is nondischargeable under section 523(a)(2)(B). Section 523(a)(2)(B) provides:

(A) Insolvency.

Kapitus argues that Debtor made a false representation in Paragraph 2.9 of each contract that AgForest, an insider of Debtor (11 U.S.C. § 101(31)(A)(iii)), was not insolvent. That paragraph provides, in pertinent part:

Kapitus argues that this representation was materially false because AgForest was insolvent. To prove insolvency of AgForest, Kapitus points to AgForest's inability to cover a $64,325.14 "missing" check owed to one of AgForest's customers, a $140,062.87 judgment owed to a creditor, a $34,000.00 tax lien and a debt to the IRS of approximately $1,000,000.00. However, Kapitus' argument fails for several reasons.

Initially, it should be noted that the term "insolvent", as used in Paragraph 2.9 of the contracts, is not defined. The contracts, pursuant to Paragraph 4.5, are to be governed by New York law. Under New York law, words used in a contract are to be given their plain meaning. O'Neill v. O'Neill, 174 A.D.3d 1526, 1527, 108 N.Y.S.3d 255, 257 (2019).

Kapitus points to the nonpayment of certain debts and essentially argues that AgForest was insolvent because it was "generally not paying its debts as they come due". One New York court has recognized the difficulty of determining whether a debtor is generally paying its debts as they come due by examining how bankruptcy courts have handled the issue in involuntary bankruptcy cases. In Magten Asset Mgt. Corp. v. Bank of N.Y., 15 Misc.3d 1132[A], 2007 N.Y. Slip Op. 50951[U], *4-6, 2007 WL 1326795 (Sup. Ct., N.Y. County May 8, 2007) (Fried, J.), the court explained:

Id. at *7.8 Evidence of the overall status of Debtor's claims and payments at the time the contracts were signed was not developed. Accordingly, the Court does not have sufficient evidence to make a determination of insolvency based on the "generally not paying" standard.

Under the Bankruptcy Code, the term "insolvent" means "... financial conditions such that the sum of such entity's debts is greater than all of such entity's property, at a fair valuation ...". 11 U.S.C. § 101(32). For purposes of New York's fraudulent conveyance statutes:

New York Debtor and Creditor Law § 271[1] (2018). As is the case with respect to the "generally not paying" standard, there is insufficient evidence in the record to determine insolvency using the "balance sheet" standard.

At the trial, David Wolfson, the Vice President of Kapitus' Risk Management and Asset Recovery Department, testified as to Kapitus' normal process of investigating and evaluating potential customers. While he testified that he had reviewed hundreds of pages in the AgForest files, he was not personally involved in the investigation which led to the approval of the two contracts in question and none of the documents or materials which he reviewed were introduced into evidence.

Other than the four debts mentioned above, the Kapitus claim and lines of credit from another lender (hereinafter "Kabbage"), no evidence was introduced regarding AgForest's other (if any) liabilities. Further, except for several months of checking account bank statements, no evidence was introduced regarding AgForest's assets. Without evidence of all of AgForest's assets and all of its liabilities as they existed on the date each contract was signed, it is impossible to determine whether or not AgForest was "balance sheet" insolvent on the day each solvency representation was made.

Kapitus argues that when Debtor filed an earlier bankruptcy case in late November 2016, he failed to list AgForest as an asset, thus indicating that it had no value. However, Debtor has filed three bankruptcy cases beginning in November 2016. He testified that there were numerous errors in his schedules caused by mis-communications with his attorneys. Further, even if AgForest had no value at the end of November, that alone would not establish its value in mid-June and September 2016, when the contracts containing the solvency representations were signed. Debtor testified that AgForest lost a major contract sometime in August, September or October and that this had a devastating impact on AgForest. (Tr. 153-54). However, because the exact date that this contract was lost was not established, it is impossible to determine whether it occurred before or after the September Contract was signed.

In summary, the evidence is insufficient to establish that AgForest was insolvent when each contract was signed. Accordingly, Kapitus has failed to carry its burden of proof on this issue.

In addition, to prevail on a section 523(a)(2)(B) claim, the plaintiff must prove that it "reasonably relied" on the false representation. § 523(a)(2)(B)(iii). "Reasonable reliance connotes the use of the standard of ordinary and average person". City Bank & Trust Co. v. Vann (In re Vann), 67 F.3d 277, 280 (11th Cir. 1995).

Agribank, FCB v. Gordon (In re Gordon), 277 B.R. 805, 810 (Bankr. M.D. Ga. 2001) (internal citations omitted).

Here, Kapitus' witness was not involved in the investigation leading to these two transactions. Although he testified about Kapitus' normal procedures for investigating and approving these types of transactions, he admitted that he had no personal knowledge as to what actual financial information was provided. (Tr. 101). Further, although he testified that he saw an insolvency analysis of AgForest in the file, he did not review it. (Tr. 150).

Thus, the evidence does not establish what analysis was actually done by Kapitus. Further, it is unknown whether those doing the investigation of AgForest relied on their own analysis of AgForest's solvency or whether they relied on the contractual representations regarding solvency. Finally, without knowing exactly what information was provided to Kapitus, it is impossible to know whether the information contained "red flags" that would have made it unreasonable for the investigators to rely on the contractual representations without further investigation.

Kapitus also has the burden of showing that Debtor acted "with intent to deceive". § 523(a)(2)(B)(iv).

Hurston v. Anzo (In re Anzo), 547 B.R. 454, 470 (Bankr. N.D.Ga. 2016) (internal quotation marks and citations omitted).

Schweig v. Hunter (In re Hunter), 780 F.2d 1577, 1579 (11th Cir. 1986) (abrogated on other grounds by Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654, 112 L.Ed. 2d 755 (1991)).

Debtor testified that when he filed bankruptcy in November 2016, he thought he only owed the IRS $40,000. (Tr. 51). He did not know that the IRS had a claim of approximately $1,000,000. (Tr. 44). He also testified that, until the large timber contract was lost sometime between August and October, AgForest was in good shape and sales were greater in 2016 than in 2015. (Tr. 31). Thus, there is no evidence that Debtor believed AgForest was insolvent when he signed the contracts. Accordingly, Kapitus has failed to prove that Debtor acted with intent to deceive.

In summary, Kapitus failed to prove the insolvency of AgForest. It also failed to prove that it actually and reasonably relied on the contractual solvency representations. Finally, it failed to prove that Debtor intentionally made a misrepresentation regarding solvency. Accordingly, Kapitus has failed to carry its burden of proving that Debtor made a false representation with respect to AgForest's solvency.

(B) Failure to Disclose Debts.

Kapitus next argues that Debtor made a false representation with respect to Paragraph 2.1 of the contracts. That paragraph states, in pertinent part:

Kapitus argues that this representation was false because the bank statements Debtor provided did not disclose the above referenced judgement, tax lien, large IRS tax debt and the "missing" check obligation. However, Debtor testified that the only thing he provided, or was asked to provide, to Kapitus were checking account bank statements and applications for the transactions. (Tr. 160).10

Under New York law, "contract language is to be read in light of common speech and interpreted `according to the reasonable expectations and purposes of ordinary business [ ] people when making ordinary business contracts'". Heartland Brewery, Inc. v. Nova Cas. Co., 149 A.D.3d 522, 523, 52 N.Y.S.3d 55 (1st Dept. 2017) (quoting DMP Contr. Corp. v. Essex Ins. Co., 76 A.D.3d 844, 845, 907 N.Y.S.2d 487 (1st Dept. 2010). Further, "a contract should not be interpreted to produce a result that is absurd, commercially unreasonable or contrary to the reasonable expectations of the parties." Greenwich Capital Fin. Prods., Inc. v. Negrin, 74 A.D.3d 413, 415, 903 N.Y.S.2d 346 (1st Dept. 2010) (internal quotation marks omitted).

While financial statements contain information on liabilities and assets, checking account bank statements do not. They merely show debits and credits to a particular bank account. Thus, to avoid an absurd result, this Court will not interpret Paragraph 2.1 of the contracts to require AgForest checking account bank statements to contain information about its liabilities when such information is never included in bank statements in the normal course of business affairs. Rather, the Court will interpret the paragraph to simply mean that the checking account bank statements provided were accurate with respect to the debits and credits reflected thereon. Since there was no contention that this information was false, the Court rejects Kapitus' argument that the representation regarding the checking account bank statements was false because the statements did not reflect certain debts owed by AgForest.11

(C) Future Loans.

Finally, Kapitus argues that Debtor made a false representation with respect to future loans in Paragraph 2.10. That paragraph provides:

Kapitus argues that this representation was false because AgForest entered into several lines of credit transactions with another lender named Kabbage after each contract was signed. However, this argument fails for two reasons.

First, as the First Circuit Court of Appeals explained:

Palmacci v. Umpierrez, 121 F.3d 781, 786-87 (1st Cir. 1997). Thus, it was Kapitus' burden to prove that, when Debtor signed the two contracts in question, he knew that AgForest would obtain additional loans from Kabbage and thus did not intend to honor the future financing representation. However, while the evidence is clear that AgForest did enter into several lines of credit transactions with Kabbage after each contract was signed, there was no evidence that Debtor, at the time of signing the contracts, knew that AgForest would enter into those contracts.

Further, as previously explained, it was Kapitus' burden to prove that the alleged misrepresentations were made by Debtor with the intent to deceive. Debtor testified that Kapitus was aware of AgForest's relationship with Kabbage because he had discussed the relationship with the investigators, and payments to Kabbage were clearly shown on the checking account bank statements provided. He testified that the investigators told him that they did not care about a line of credit. (Tr. 74). Accordingly, the evidence suggests that Debtor did not consider the Kabbage lines of credit as the type of future funding referenced in Paragraph 2.10 of the contracts. Accordingly, Kapitus failed to establish that Debtor acted with intent to deceive.

(D) Business Purpose.

Section 2.12 of the contracts provides:

Kapitus contends that this representation was false because Debtor used some of the money from the transactions for his and his girlfriend's personal expenses.12 This argument fails for several reasons.

First, although the evidence is clear that Debtor paid some of his and his girlfriend's personal expenses from the checking account into which the Kapitus transaction funds were deposited, the evidence also showed that some of the payments were in lieu of salary. Thus, the fact that some of the expenses paid from this account might be personal does not change the overall business purpose of the transactions.

Further, there is no evidence that, when the two contracts were signed, Debtor knew that, in the future, he would pay personal expenses from the account. Thus, Kapitus failed to prove an intent to deceive.

Finally, the subject bank account contained funds from numerous sources, including Kapitus, Kabbage and timber contracts. The bank account had a beginning balance in June 2016 of $96,226.36. (Exhibit 20). Thereafter, and until the end of September, total deposits (of which only $61,904.09 came from Kapitus) were $135,855.77. Over the same period of time, withdrawals totaled $232,066.01.

"[M]oney is quintessentially fungible property." People v. Jennings, 504 N.E.2d 1079, 1089, 512 N.Y.S.2d 652, 662 (1986). Accordingly, once the funds from the Kapitus transactions were deposited into the account, those funds became co-mingled with funds from other sources. Thus, it is impossible to determine that the specific funds used to pay personal expenses were directly traceable to funds provided by Kapitus.

2. Section 523(a)(2)(A).

Kapitus argues that its claim is nondischargeable under 11 U.S.C. § 523(a)(2)(A) because Debtor made false representations in phone calls with Kapitus prior to the funding of the two transactions.13 Under 11 U.S.C. § 523(a)(2)(A), there is an exception to discharge of a debt:

Kapitus contends that in the phone calls, Debtor made false representations regarding additional financing, changes to the financial condition of AgForest, whether AgForest was current on its taxes, whether Debtor expected any tax liens to be filed, whether Debtor anticipated closing the business, whether any future bankruptcy filings were planned and whether there were any outstanding balances to other working cash providers. Kapitus contends that all of these representations were false.

Section 523(a)(2)(B) requires that representations "respecting the debtor's financial condition" be in writing. In Lamar, Archer & Cofrin, LLP v. Appling, ___ U.S. ___, 138 S.Ct. 1752 (2018), the Supreme Court interpreted the phrase "respecting the debtor's financial condition" expansively. The Court held:

Id. at 1761. If a representation about one asset must be in writing, then logically, representations regarding a debt or several debts must also be in writing. Accordingly, any oral representations by Debtor on the phone calls about debts of the company or his personal debts could not be challenged under § 523(a)(2)(A), but would have to be in writing and challenged under § 523(a)(2)(B).

The Court also stated that it was applying the ordinary meaning to the term "respecting". Id. It stated:

Id. at 1759. (citation omitted). Therefore, any oral representation in the phone calls about Debtor's or his company's intent to file bankruptcy or overall financial condition would be a representation "respecting the debtor's or an insider's financial condition" that would have to be in writing and challenged under § 523(a)(2)(B). Accordingly, because all of Debtor's oral representations on the phone calls were "respecting" the Debtor's or AgForest's financial condition, they may not be challenged under § 523(a)(2)(A).

3. Section 523(a)(4).

Kapitus argues that, pursuant to the two contracts, it purchased a certain amount of AgForest's future receivables. It contends that Debtor embezzled Kapitus' receivables when he "misappropriated the funds for his own benefit and with fraudulent intent." (Doc. 25, Kapitus' Proposed Findings of Fact and Conclusions of Law, p. 19).

Section 523(a)(4), in pertinent part, excepts from discharge any debt for embezzlement. The Eleventh Circuit has stated that the term "embezzlement" is defined by federal common law for purposes of § 523(a)(4). Fernandez v. Havana Gardens, LLC, 562 Fed. Appx. 854, 856 (11th Cir. 2014). "Under federal common law, `embezzlement' is `the fraudulent appropriation of property by a person to whom such property has been entrusted, or into whose hands it has lawfully come.' Id. (quoting United States v. Sayklay, 542 F.2d 942, 944 (5th Cir. 1976)). To prevail on a § 523(a)(4) claim for embezzlement, a creditor must prove that "(1) `he entrusted property to the debtor,' (2) `the debtor appropriated the property for a use other than that for which it was entrusted,' and (3) `the circumstances indicate fraud.'" Kern v. Taylor (In re Taylor), 551 B.R. 506, 521 (Bankr.M.D.Ala. 2016) (citation omitted). See United States v. Reid (In re Reid), 598 B.R. 674, 681 (Bankr.S.D.Ala. 2019); Jones v. Hall (In re Hall), 295 B.R. 877, 882 (Bankr.W.D.Ark. 2003). Accordingly, for Kapitus to prevail on its § 523(a)(4) claim, it first must show that Debtor appropriated Kapitus' property. This, in turn, requires a determination of whether the June and September Contracts were actually contracts of sale or disguised loans.

As stated above, the contracts in this case are governed by New York law. New York courts have analyzed contracts similar to the ones in this case in connection with usurious loan transactions. As explained by the court in Colonial Funding Network, Inc. v. Epazz, Inc., 252 F.Supp.3d 274 (S.D. N.Y. 2017):

Id. at 280-81. (internal quotation marks and citations omitted). In Colonial Funding, the court considered contracts which, in all material aspects, were identical to the contracts at issue in this case. The court held:

Id. at 281. Accordingly, because payment was not absolute, the court concluded that the contracts in question were actual sale contracts. Id. at 287.

As stated, the contracts in this case are, in all material aspects, identical to those considered by the court in Colonial Funding. Since a New York court has previously ruled that these types of contracts are actual sale contracts and not loans, this Court will follow its lead and reach the same conclusion. Accordingly, pursuant to the contracts, Kapitus purchased AgForest's future accounts receivables up to the stated amount. Thus, until repayment, all of AgForest's receivables were Kapitus' property.

Nevertheless, Kapitus' embezzlement claim fails for several reasons. As stated above, Kapitus must also establish that Debtor appropriated its property for use other than for which it was entrusted and show fraud. This Kapitus has failed to establish.

There is no provision in either contract which prohibits AgForest from using the receivables in the course of ordinary business affairs. Paragraph 1.11 of the contracts, entitled "Protections Against Default", provide Kapitus specific rights in the event AgForest does certain unauthorized acts. Prohibition of use of the receivables in AgForest's ordinary business affairs is not listed as a specific right of Kapitus. In addition, Paragraph 3.2 of the contracts specify Kapitus' remedies in the event of a default by AgForest. The prohibition of the use of funds in the ordinary course of business is not a listed remedy. Kapitus argues that use of receivables for business purposes "was implicitly conditioned on Kapitus' continued daily receipt of the daily payments." (Docket No. 25, p. 19). However, paragraph 4.8 of the contracts provides that the written contracts "embody the entire agreement". Therefore, Kapitus cannot argue that there was some implicit prohibition not contained in the contracts.

As held by the court in Rentrak Corp. v. Cady (In re Cady), 195 B.R. 960, 966 (Bankr. S.D. Ga. 1996):

Accordingly, with respect to the funds held in the AgForest bank account, to the extent that AgForest used the receivables in the operation of its business, Kapitus has no embezzlement claim.

Further, the Court assumes, without deciding, that using the funds for personal, rather than business, purposes might support an embezzlement claim. However, as discussed above, some of the personal payments were in lieu of salary. Further, because the account had co-mingled funds, it is impossible to trace the payment of a specific personal item to Kapitus' receivables.

Debtor's use of a new bank account opened in December 2016, under the name "Christopher Polk d/b/a AgForest", presents a harder question. According to Debtor's testimony, this account was opened solely for the purpose of having a place to collect funds on a single timber contract which AgForest entered into in November 2016. (Tr. 157-160, Exh. 25 p.c.). Since this contract was entered into when AgForest was still in business, all receivables flowing from that contract would be receivables that Kapitus had purchased and therefore Kapitus' property. Further, since the new account was used solely to collect funds on that contract, there was no co-mingling with other funds and, therefore, all payments from that account are traceable to Kapitus' property.

As discussed above, use of Kapitus' funds in the operation of AgForest's business does not support an embezzlement claim, while use for personal purchases might. However, no testimony was solicited at trial regarding the nature of the payments from the Christopher Polk account and this Court will not attempt to characterize those payments. Accordingly, Kapitus has failed to carry its burden of proof with respect to the nature of the payments from the account and its embezzlement claim related thereto must fail.

4. Section 523(a)(6).

Finally, Kapitus contends that its claim is nondischargeable under § 523(a)(6), arguing that Debtor:

Docket No. 25, Kapitus' Proposed Findings of Fact and Conclusions of Law, p. 21.

Section 523(a)(6) excludes from discharge a debt "for willful and malicious injury by the debtor to another entity or to the property of another entity". As recently explained in the case of Piedmont Bank v. Wisner (In re Wisner), 608 B.R. 589 (Bankr. N.D.Ga. 2019):

Id. at 600.

With respect to Debtor stopping the ACH payments, Debtor testified that he did this after AgForest lost a major contract and could no longer pay the required payments. (Tr. 153-54). There was no evidence that he stopped the payments for the purpose of causing injury to Kapitus.

The evidence was that the new company was opened after AgForest failed and Debtor filed bankruptcy. (Tr. 153-54, Exhibit 30). There was no evidence that he did this to hide anything from Kapitus.

As for diverting receivables to another bank account, the testimony was that when Debtor began receiving money on a particular contract, he no longer had a bank account into which he could deposit checks. Accordingly, he opened a new account to handle those funds. (Tr. 157-60). There was no evidence that he opened the account to divert receivables.

Finally, as for using the receivables for his own personal benefit, as explained above, some of the payments for Debtor's personal expenses and the expenses of his assistant were in lieu of salary. Further, with respect to the AgForest account, because the payments came from a co-mingled account, the payments cannot be traced to Kapitus' collateral. With respect to the Christopher Polk account, there was no evidence as to the nature of the payments from that account. Finally, there was no evidence that the payment of personal expenses was done for the purpose of harming Kapitus.

A final response to Kapitus' § 523(a)(6) claim is that the debt which Kapitus sought to have declared nondischargeable did not arise from an injury by Debtor to Kapitus' property. Rather, this debt was created when the two contracts were signed and Kapitus advanced funds pursuant thereto. Thus, Kapitus has no claim under § 523(a)(6).

CONCLUSION

In conclusion, Kapitus has failed to carry its burden of proof that its claim is nondischargeable under any provision of § 523. Accordingly, on Kapitus' complaint to determine nondischargeability of debt, the Court finds in favor of Debtor and against Kapitus. Judgment consistent with this opinion shall be entered separately.