Marian F. Harrison, US Bankruptcy Judge.
The trial of this case resembled a "who-done-it." Who owns the four Russian beltfed
This matter is before the Court on the complaint filed by Erik D. Lawrence ("Lawrence") and his companies, Vigilant Security Services, LLC ("Vigilant"), and Philippi Property Group, LLC's ("Philippi") (collectively "Plaintiffs") to determine the dischargeability of their claims against Debtor/Defendant Brace E. Barber ("Barber"). The complaint alleges that Barber took guns and other personal property entrusted to him by Lawrence and continued to use company credit cards for which Lawrence was the guarantor. The complaint asserts that the Plaintiffs' claims are nondischargeable under 11 U.S.C. §§ 523(a)(4) and (a)(6). For the following reasons, which represent the Court's findings of fact and conclusions of law, pursuant to Federal Rule of Bankruptcy Procedure 7052, the Court finds that Plaintiffs' gun claim is nondischargeable but that the personal property and credit card claims are dischargeable.
On May 31, 2016, Brace E. Barber and Natasha L. Barber ("Debtors") filed a joint Chapter 7 petition. On September 19, 2016, Plaintiffs Lawrence and Philippi
Lawrence is a resident of West Virginia who oversees a security company that does consulting and training for the United States Government. Vigilant, owned by Lawrence, is a company specializing in executive protection, where he teaches security procedures to different corporate entities and/or military agencies. Philippi, a limited liability company owned by Lawrence, owns certain assets, including real property, vehicles, and personal property.
Hickman ("Hickman") is a resident of Mississippi. He is the Vice President of a security company in McLean, Virginia. He was the initial owner of the guns at issue in this case.
Lawrence and Barber first met in January 2013 at a gun dealer/distributor show in Las Vegas. While in Las Vegas, Lawrence and Barber decided to enter into a business transaction.
In the Buy Sell Agreement, dated February 20, 2013, Barber and General Stability agreed to buy 100% of the ownership of Blackheart and 100% of Vigilant from Lawrence. On April 1, 2013, the sale of Blackheart and Vigilant was completed, and Barber became the President and owner of Blackheart. As of April 1, 2013, all employees at Blackheart started reporting to Barber. After the closing, Philippi leased Blackheart certain premises, including one floor of a warehouse in Barbour County, West Virginia. On April 22, 2013, General Stability assigned Lawrence a 51% interest in Blackheart.
Shortly after the closing, Barber and Steaphan Weir ("Weir")
In 2013, Lawrence learned that Hickman, his friend and business colleague, had a foreign gun familiarization training program that was going out of business. Because his business was ending, Bureau of Alcohol, Tobacco, Firearms, and Explosives
Lawrence testified that the sixteen guns have a total current market value of $70,000. Because it is difficult to procure the parts kits to make them, Lawrence testified that the guns are hard to make. These types of guns are rare in the United States and continue to increase in value over time. As part of his consulting work done through Vigilant, Lawrence taught military units how to use foreign guns, including PKMs and AK-47s. Hickman also testified in his deposition that "all sixteen weapons are worth about $70,000 to replace."
Lawrence and Hickman entered into a verbal agreement that if Lawrence used the guns for training, he would pay Hickman a rental fee until the value of the weapons was paid. Lawrence then applied for a Federal Firearms License ("FFL") in the name of Vigilant so that Vigilant could use the guns for business purposes in connection with the training classes offered by Lawrence. Lawrence could not keep the guns until such time as Vigilant's FFL application was finalized so it was agreed that Barber would store the guns in Blackheart's gun vault until then. Hickman brought the guns to Barber's home outside Nashville, Tennessee, so that Barber could drive the guns to West Virginia and pass them on to Lawrence. Upon arriving in West Virginia, the guns were stored in Blackheart's gun vault in the warehouse owned by Philippi. Lawrence confirmed that all of the guns were placed in the gun vault by checking the serial numbers. The guns were also noted in Blackheart's "bound book," which is a mandatory disposition book that each gun dealer must maintain. Specifically, under ATF regulations, a gun dealer must note in his bound book any guns he possesses for more than twenty-four hours. A bound book is not a list of the dealer's assets, but rather a record of the possession and disposition of guns at a given point in time.
On December 30, 2013, Vigilant's FFL application was approved, and an FFL license was issued to Vigilant. Upon receiving the FFL, Lawrence asked Barber to transfer the sixteen guns to him. Barber did not transfer the guns to Lawrence. Due to Lawrence's deteriorating relationship with Barber at the time, Lawrence asked Hickman to follow up with Barber about transferring the guns to Lawrence.
Hickman testified in his deposition that he made repeated inquires with Barber regarding the status of transferring the guns to Lawrence. Lawrence and Hickman eventually discussed that the guns could be "cut" and returned as parts. The guns were never returned to Lawrence or Hickman in any form. Lawrence has had to rent guns from other competitors or partners in order to run his training sessions.
Barber initially testified at trial and claimed in his 2017 interrogatory responses that Viqen, LLC, a Blackheart creditor, took possession of the guns on May 12, 2015, when it seized Blackheart's collateral after Blackheart defaulted on its debts. He claimed that he had no knowledge of the location or disposition of the guns after that date. Yet, emails were introduced at trial showing that after the alleged seizure, emails were exchanged between Barber and his employees indicating that Blackheart still had the guns in its vault. Two months later, on July 23, 2015, Barber
Approximately ten years before entering into the business transaction with Barber, Lawrence opened up credit card accounts for Blackheart business purposes. Lawrence also provided certain Blackheart employees with company credit cards issued in their names to be used for approved Blackheart business transactions. These employees continued to work for Blackheart after the business was sold to Barber. Lawrence was the guarantor of the Blackheart credit card accounts.
As part of the business transaction between Lawrence and Barber, it was agreed that the credit cards would continue to be used for approved business purchases until Barber could assume the role as guarantor for the accounts by completing credit applications for each card. Furthermore, it was agreed that Barber would pay on behalf of Lawrence any charges made on the accounts before Barber took over as guarantor. Barber's indemnification obligation was outlined in the June 1, 2013, Agreement:
The June 1, 2013, Agreement further stated:
After Barber took control of Blackheart, Barber did not remove Lawrence as guarantor, and the credit cards continued to be used by Blackheart employees under Barber's direction. Barber testified that he was in the process of having himself put on the cards as guarantor. When Lawrence asked why he had not been removed as guarantor of the credit card accounts, Barber responded that he was working on it. Lawrence testified that Barber had bad credit and was unable to have himself put on the credit cards in a timely fashion. Barber never removed Lawrence as guarantor, and his employees continued making charges that increased Lawrence's liability. Lawrence eventually paid over $30,000 to pay off the credit card purchases made by employees of Blackheart after the business transaction between Barber and Lawrence closed. Barber has not reimbursed Lawrence for these expenses.
In a separate agreement, dated April 1, 2013 ("Lease Agreement"), Lawrence,
On May 1, 2014, Lawrence filed a complaint against General Stability, Blackheart, Weir, John Aliveto, and Barber in the Circuit Court of Barbour County, West Virginia. The complaint included claims for breach of contract, conversion with regard to credit, and conversion of personal property. On April 25, 2016, Lawrence received a judgment against the Defendants for $6.5 million, which also included awards for claims not at issue in this adversary proceeding. Judgment, however, was not entered against Barber because he filed for bankruptcy protection. Lawrence subsequently filed a proof of claim in Barber's underlying bankruptcy case in the amount of $5,903,376.87 based on the Barbour County complaint.
Exceptions to discharge are to be strictly construed.
Under 11 U.S.C. § 523(a)(4), a discharge can be denied for a debt "for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny." Section 523(a)(4) creates two distinct exceptions to discharge: (1) fraud or defalcation while acting in a fiduciary capacity, and (2) embezzlement or larceny whether or not acting in a fiduciary capacity.
A finding of "fraud or defalcation while acting in a fiduciary capacity" under 11 U.S.C. § 523(a)(4) requires the following: "(1) a pre-existing fiduciary relationship, (2) a breach of that relationship, and (3) resulting loss."
In the Sixth Circuit, the defalcation provision of this section is limited only to "`those situations involving an express or technical trust relationship arising from placement of a specific res in the hands of the debtor.'"
Defalcation in a fiduciary capacity requires mental culpability, which is described as a state of mind "involving knowledge of, or gross recklessness in respect to, the improper nature of the relevant fiduciary behavior."
Embezzlement under 11 U.S.C. § 523(a)(4) is defined as "`the fraudulent appropriation of property by a person to whom such property has been entrusted or into whose hands it has lawfully come.'"
In order to prove embezzlement under 11 U.S.C. § 523(a)(4), a creditor must show "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."
The fraud element may be satisfied by a showing of deceit.
The requisite fraudulent intent may be established by circumstantial evidence.
Pursuant to 11 U.S.C. § 523(a)(6), a debt is nondischargeable when the debt is "for willful and malicious injury by the debtor to another entity or to the property of another entity." For 11 U.S.C. § 523(a)(6) to apply, the debtor must "will or desire harm" or "believe injury is substantially certain to occur as a result of his behavior."
In order to find "willful and malicious injury," the movant must show that the debtor "(1) intended to cause injury to the Creditor or to the Creditor's property, or (2) engaged in an intentional act from which the Debtor believed injury would be substantially certain to result."
Plaintiffs allege that Barber's debt for the converted guns is nondischargeable under 11 U.S.C. §§ 523(a)(4) and (a)(6). The Court finds that the Barber caused Blackheart to wrongfully retain the guns despite his knowledge of an agreement between Hickman and Lawrence and their requests that he return the guns.
The evidence established that the guns were merely entrusted to Blackheart, and in fact, Lawrence and Vigilant owned the guns. Per the agreement between Hickman and Lawrence, Blackheart was to store the guns while Vigilant's FFL application was being processed. At no point in time did Blackheart's storage of the guns denote ownership. When Vigilant's FFL was finalized in December 2013, the guns were to be available to Lawrence to be used by Vigilant.
Barber's testimony at trial was contradictory and confusing. He testified several times that he believed the guns were the property of Blackheart, that he never considered the weapons to be on loan, and that he never understood that Hickman intended the guns to be transferred to Lawrence. Yet, Barber admitted receiving an email from Hickman, dated March 26, 2014, in which Hickman states that the guns were to go to Lawrence and not Blackheart. Hickman specifically stated that the guns "are in no way part of the [Blackheart] purchase from [Lawrence]." By receiving this email, Barber was clearly on notice that the guns were never a part of the Blackheart purchase and that the guns were to be transferred to Lawrence to be used by Vigilant as soon as Vigilant obtained its license and Barber completed the transfer paperwork. Vigilant became licensed on December 30, 2013.
The contradictions in Barber's testimony do not end there. Barber sent an email to Hickman on March 23, 2015, claiming that he had started the paperwork to have the
Even Barber's statement that he had started the paperwork to transfer the sixteen guns to Lawrence was untrue. Barber never prepared the paperwork for the guns to be transferred to Lawrence. Moreover, even after Barber's March 23, 2015, email indicating that he had started the paperwork, there was continued email conversations between Barber and Blackheart employees in May 2015 regarding the benefits of keeping the guns rather than returning them.
At trial it was also established that Barber provided false information about the guns under oath in his interrogatory responses. In response to Interrogatory No. 12, Barber stated that on May 12, 2015, the guns were seized by Viqen, a creditor of Blackheart. Barber further stated in response to Interrogatory No. 12 that the transfer to Viqen was the "last I have first-hand knowledge regarding the location of the weapons." This testimony was also lacking in credibility. As shown at trial, on May 17, 2015, five days after the alleged seizure, Barber wrote an email to his employees indicating that Blackheart still had the guns in its vault. Furthermore, on July 23, 2015, more than two months after the alleged seizure by Viqen, Barber emailed Hickman stating the guns were still in Blackheart's vault. Barber, thus, knew the guns were still in Blackheart's vault months after he stated under oath that the guns had been seized by Viqen.
Moreover, Barber's responses were notarized on May 15, 2017, almost two years after Barber had further knowledge regarding the location of the guns. After failing to explain the inconsistent statements during his testimony, Barber finally admitted that "[i]f I was corresponding after that date, clearly I had knowledge of where the guns were at that time."
The evidence at trial also contradicts Barber's testimony that he did nothing to keep the guns from Lawrence. Even though he knew of the agreement between Lawrence and Hickman that the guns belonged to Lawrence, Barber did not transfer the guns. Rather, Barber continuously made up excuses why the guns could not be transferred. The evidence shows that Barber did not fulfill his promise to submit the paperwork to have the guns transferred because he did not want Lawrence to have the guns. Specifically, Barber and his employees did not want to do anything that would profit Lawrence or enhance Lawrence's reputation. The evidence further shows Barber did not transfer the guns to Lawrence because Blackheart wanted to use the guns for future financial gain. Barber even suggested one way in which Blackheart could use them for its own financial gain would be for Blackheart to retain the guns and rent them to Lawrence and Vigilant instead of returning the guns to Lawrence as Hickman and Lawrence had agreed.
This Court had the opportunity to observe witnesses on the stand, assess their demeanor, and review evidence.
Under 11 U.S.C. § 523(a)(4), the Court finds that Barber embezzled the guns. Specifically, the proof shows that the guns were entrusted to Barber and that he appropriated the guns, refusing to turn the guns over to Lawrence or to start the paperwork necessary to do so. Moreover, the evidence shows that Barber's actions were deceitful. He disregarded the agreement and requests of both Hickman and Lawrence concerning the ownership and disposition of the guns, and he continually gave contradictory answers regarding the preparation of the paperwork and the location of the guns.
The value of the guns is nondischargeable under 11 U.S.C. § 523(a)(6) because Barber willfully and maliciously failed to transfer the guns to Lawrence, which resulted in a financial injury to Lawrence.
Based on the uncontroverted proof regarding the value of the guns, Lawrence's trial testimony and Hickman's deposition, the guns would have a value of $70,000. Accordingly, the Court finds that the value of the guns, $70,000, is nondischargable under both 11 U.S.C. §§ 523(a)(4) and (a)(6).
Plaintiffs allege that Barber's continued use of the business credit cards is also grounds for nondischargeability under both 11 U.S.C. §§ 523(a)(4) and (a)(6).
As part of the Buy Sell Agreement, it was agreed that Blackheart's credit cards would continue to be used for approved business purchases and that Barber would assume the role as guarantor for each of the accounts. It was further agreed that Barber would pay on behalf of Lawrence any charges made on the accounts before Barber took over as guarantor. After Barber took control of Blackheart, Barber did not remove Lawrence as guarantor, and the credit cards continued to be used by Blackheart employees under Barber's direction. There was no timeline set out in the agreement regarding when Lawrence was to be removed as guarantor, and this arrangement was made because Barber had bad credit and was unable to immediately name himself as guarantor. In fact, the agreement only required Barber
Under the embezzlement theory, Plaintiffs have not proved that Barber misappropriated funds. The Buy Sell Agreement clearly provided that the credit cards would continue to be used for approved business purchases, and there was no proof that the credit cards were used for any other purpose. Plaintiffs also argue that the credit card debt is nondischargable due to defalcation while acting in a fiduciary capacity. Again, there was no proof that the credit cards were used for unapproved non-business purchases. Instead, Lawrence relies on Barber's delay in having Lawrence removed as guarantor on the cards and Barber's failure to indemnify Lawrence on purchases made. Lawrence knew Barber had poor credit, and the agreement did not set out a specific deadline for removing Lawrence as guarantor. In fact, Lawrence admitted at trial that "Brace and I agreed the cards would continue to be used while he attempted to get financing," and there is no proof that the debtor was ever able to obtain such financing.
Finally, under the willful and malicious theory, Barber must be shown to have intended the injury to Lawrence with respect to the credit cards. Plaintiffs argue that Barber's purchases were intentionally and willfully charged on the credit cards with full knowledge that Lawrence remained liable. While that is true, it is not enough that Barber intended to act, he must have intended the harm and consequence of his actions. The Buy Sell Agreement that bound all the relevant parties envisioned the continued use of the credit cards and contemplated that Barber would not immediately replace Lawrence as guarantor. There was simply no proof that Barber continued to use the credit cards for business purchases with the intent of not indemnifying Lawrence nor was there proof that Barber had not attempted to have Lawrence removed as guarantor. If anything, Barber's failure to indemnify and/or remove Lawrence as guarantor was a breach of contract rather than a nondischargable act under 11 U.S.C. §§ 523(a)(4) and (a)(6).
Accordingly, the Court finds that the credit card debt is not exempted from discharge under either 11 U.S.C. §§ 523(a)(4) or 523(a)(6).
Plaintiffs argue that the value of the personal property removed from warehouse space by Blackheart employees is nondischargeable under 11 U.S.C. §§ 523(a)(4) and 523(a)(6). Under 11 U.S.C. § 523(a)(4), Plaintiffs allege that Barber, acting through Blackheart employees, embezzled Lawrence's property. Plaintiffs also allege under 11 U.S.C. § 523(a)(6) that Barber, acting through Blackheart employees, willfully and maliciously removed Lawrence's property knowing the property belonged to Lawrence. The property was never returned, and based on the proof, the property had a value of $3045.
Lawrence leased the first floor of his warehouse to Blackheart. As part of the lease, Plaintiffs entrusted Blackheart with various personal property items worth $3045 that were located inside the first floor of the warehouse. Lawrence and Barber agreed to place colored stickers on the items that belonged to Plaintiffs. When Blackheart moved its operations out of the warehouse, items marked as belonging to Plaintiffs were to remain in the warehouse, but as stated, these items were removed at some point and never returned.
The proof established that the personal property was entrusted to Barber, as owner of Blackheart, and that the
The same is true with regards to Plaintiffs' assertion that this debt is non-dischargeable under 11 U.S.C. § 523(a)(6). There was no admissible proof that Barber instructed his employees to steal Plaintiffs' property from the warehouse, and even if the Court assumes Barber gave instructions to his employees regarding the removal of Plaintiffs' property, proof that such instruction was willful and malicious rather than the result of recklessness or negligence was required. Accordingly, the Court finds that this debt is not excepted from discharge pursuant to 11 U.S.C. § 523(a)(6).
For the reasons stated, the Court finds that the only nondischargeable debt is the value of the guns, $70,000, which is non-dischargable under both 11 U.S.C. §§ 523(a)(4) and (a)(6).
An appropriate order will enter.
