Laurie Smith Camp, Chief United States District Judge.
This matter is before the Court on appeal of Willmar Electric Services Corp. (Willmar) from the judgment issued by the United States Bankruptcy Court for the
On March 30, 2016, Dailey filed a petition for discharge under Chapter 7 of the Bankruptcy Code. During the pendency of the Chapter 7 proceedings, Willmar filed an adversary action, asserting that Dailey's debts to Willmar were not dischargeable because they were obtained through fraudulent and malicious representations.
The Bankruptcy Court made oral findings of fact and conclusions of law, at BK ECF No. 106, Tr.
Notwithstanding Dailey's lack of response, the Court has thoroughly reviewed the arguments and evidence in this case. For the reasons discussed below, the judgment of the Bankruptcy Court will be affirmed.
In 2014, Willmar contracted with Lincoln Public Schools (LPS) to provide labor and materials for LPS Security & Technology Projects in schools in Lincoln, Nebraska (the "LPS Projects"). Tr. 9, 23-24. Willmar subcontracted cabling for the LPS Project to SequrComm, Inc. ("SequrComm"). Tr. 20, 24-25; BK ECF No. 36. Dailey was the CEO of SequrComm during the LPS Projects.
As a condition to getting any payment from Willmar, SequrComm promised to pay its suppliers. BK ECF No. 36, ¶¶ 1.9, 1.10, 3.1(d); Tr. 24. Anixter, Inc. (Anixter) was SequrComm's largest supplier for the LPS Project, supplying over 90 percent of the materials and supplies. Tr.(2) 135, Tr. 33. To confirm SequrComm was paying its suppliers and materialmen, Willmar required SequrComm to sign waivers titled "Unconditional Waiver and Release Upon Progress Payment" (the "Lien Waivers"). BK ECF Nos. 37-39. Dailey admitted he signed four Lien Waivers. Each of the Lien Waivers contained this representation:
Tr. 45, 132; BK ECF Nos. 37, 38, 39, 86. Dailey understood this language to mean that SequrComm had either "already paid" its suppliers, Tr. 133-134, or would use monies received from progress payments to pay its suppliers promptly. Tr. 133, 63-65.
SequrComm applied for payment on the LPS Project twice per month. For each request for payment, SequrComm filled out Payment Applications on an American Institute of Architects form, completed its own Invoices, and completed the Lien Waivers. Tr. 23, 24, 28-32; Tr.(2) 16-18. Willmar trained SequrComm personnel to fill out the payment documents, including the Lien Waivers. BK ECF Nos. 53, 54, 57; Tr. 49-50. The documents' purpose was to verify the amount of labor and supplies provided and included in the payment application. Tr. 28-35, 43, 83-84; BK ECF Nos. 51-55, 57, 59. Willmar asserts that the Lien Waivers were crucial because if SequrComm refused to fill out Lien Waivers, Willmar would have known there was a problem with SequrComm's payment of suppliers and Willmar could have stopped making payments to SequrComm, or paid suppliers directly, or taken other action. Tr. 54.
Dailey and others at SequrComm knew the Lien Waivers were given to Willmar. Tr. 141-144; Tr.(2) 16, 52, Tr. 83. Dailey and others at SequrComm also knew the Lien Waivers had to be signed for SequrComm to get paid. Tr.(2) 16-17, Tr. 141; see also BK ECF No. 59 ("I have a check for you but I am unable to send it to you until the two attached lien waivers have been signed and emailed back to me."); BK ECF Nos. 53-57, 59, 65.
In the spring and summer of 2014, SequrComm was in serious financial trouble. Tr. 85, 99. Cash flow had become such a problem that on May 30, 2014, Dailey requested that Chris Armitage,
SequrComm was unable to pay its bills in June 2014. Tr. 76, 85. Creditors called and wrote on a regular basis demanding payment. Tr. 78. Armitage testified that she told Dailey of the vendors' demands for payment, and Dailey made decisions about which would get paid. Tr. 78, 85, 93. SequrComm was also attempting to deal with existing debts to GWB that were guaranteed by SequrComm's owners and directors. Tr. 87; Tr.(2) 15, 29. Emails from May 2014 show that SequrComm was negotiating with GWB to use the money SequrComm received from Willmar on the LPS Project to pay down the loans. BK ECF No. 63; Tr. 85-86, 99. Dailey was included on at least one of the emails. BK ECF No. 63 at 2.
Throughout this time, SequrComm owed an increasingly large debt to Anixter. There is conflicting evidence about what and when Dailey knew about SequrComm's
In early July 2014, Dailey signed two Lien Waivers to support payment from Willmar. SequrComm deposited the funds on July 10 or 11, 2014. BK ECF Nos. 42-2, 66, 75 at 22. Dailey signed another two Lien Waivers later in July 2014.
Dailey testified that at the time he signed the Lien Waivers, he believed them to be accurate. Tr.(2) 93. He also testified that he intended to pay Anixter for the supplies and parts SequrComm received, and never directed anyone to withhold payment to Anixter, nor to funnel payment to other creditors. Tr.(2) 93. Dailey admitted he "understood there was a connection between [him] personally signing lien waivers, and SequrComm getting paid from Willmar Electric." Tr. 141. He also admitted he understood his Lien Waivers would be provided to Willmar and it would rely on them. Tr. 144-145.
Dailey testified that on August 6, 2014, he first learned that SequrComm was not paying Anixter. Tr. 134-135; Tr.(2) 99-100. On that day, according to Dailey, he received an email from Shane Sweet at Anixter inquiring about payment status and representing that Anixter would not supply further product without receiving payment. BK ECF No. 62. Dailey testified that after he received the email he called Sweet and asked whether SequrComm was behind on payments to Anixter. Tr. 136. Sweet told Dailey that SequrComm was on a "slow pay." Tr. 136. Dailey understood "slow pay" to mean that SequrComm was only a little behind, and Anixter would continue to supply materials if it received "some money." Tr. 137. Dailey testified that he resolved the issue by directing Armitage to send payment to Anixter. Tr.(2) 94. Armitage agreed and "next thing I know we're getting more supplies." Tr.(2) 94.
Although Anixter again provided supplies, SequrComm did not pay Anixter with the funds Willmar paid SequrComm, either before or after Dailey signed the Lien Waivers. Tr. 54-61, 99. At some point
The Bankruptcy Court issued findings orally on the record. It acknowledged the conflicting evidence about whether Dailey decided which invoices were paid and whether he knew about SequrComm's debt to Anixter at the time he signed the Lien Waivers. The Bankruptcy Court concluded that "most of the testimony said he did not [have access to the accounting records], not all of it, but most of it." Tr.(2) 128, 132. The Bankruptcy Court also specifically found that Dailey learned about the lack of payment to Anixter from Shane Sweet's email on August 6, 2014. Tr.(2) 128. The Bankruptcy Court acknowledged that Dailey may have known of a problem with Anixter based on the testimony of Stephen Boggs who said he discussed it with Dailey between July 7 and 11, 2014, but the Bankruptcy Court concluded the problem may have appeared to Dailey to be resolved when Anixter re-commenced delivery of supplies. Thus, even if Dailey had notice of problems with Anixter between July 7 and 11, 2014, that was not sufficient "to notify [Dailey] that there is a huge balance due to Anixter on that date." Tr.(2) 129.
The Bankruptcy Court applied the elements of 11 U.S.C. § 523(a)(2)(A) and concluded that Willmar failed to show that Dailey intentionally deceived Willmar when he certified that Anixter had been paid or would be paid promptly. The Bankruptcy Court reasoned that the preponderance of the evidence failed to show Dailey knew of the debt to Anixter or that Dailey had no intention to pay. The Bankruptcy Court also concluded that Willmar had not shown its reliance on the Lien Waivers was justifiable because Willmar should have had several concerns about SequrComm's financial ability. Accordingly, the Bankruptcy Court dismissed Willmar's claim.
This Court has jurisdiction over appeals from final judgments and orders of the Bankruptcy Court under 28 U.S.C. § 158(a)(1). The Bankruptcy Court's factual findings are reviewed for clear error and its conclusions of law are reviewed de novo. In re M & S Grading, Inc., 526 F.3d 363, 367 (8th Cir. 2008); see also Fed. R. Bankr. P. 8013. This Court may affirm, reverse or modify the Bankruptcy Court's ruling or remand the case for further proceedings. Fed. R. Bankr. P. 8013.
In general, courts must grant a Chapter 7 debtor a discharge to effectuate the "fresh start" policy of the code. See 11 U.S.C. § 727(a); In re Fields, 510 B.R. 227, 233 (8th Cir. BAP 2014) (citing Caspers v. Van Horne (In re Van Horne), 823 F.2d 1285, 1287 (8th Cir. 1987)), abrogated on other grounds, Grogan v. Garner, 498 U.S. 279,
The Bankruptcy Court's conclusion that Dailey's debt to Willmar is not exempt from discharge under any of these subsections will be affirmed. First, the Bankruptcy Court correctly analyzed Willmar's § 523(a)(2) claim under § 523(a)(2)(A). Second, the Bankruptcy Court's determination that Willmar failed to prove the elements of § 523(a)(2)(A) was not clearly erroneous. Finally, the Bankruptcy Court did not err in concluding that Willmar did not prove its claim under § 523(a)(6).
Willmar's primary argument before the Bankruptcy Court and on appeal is that Dailey's debt to Willmar
In the Eighth Circuit, statements under § 523(a)(2)(B) are not limited to balance sheets or other financial forms but can include a much broader class of statements. Pontow, 111 F.3d at 609. For example, in Pontow, the representations fell under § 523(a)(2)(B) because the parties stipulated that the statements concerned the debtor's financial condition and the parties' arguments focused exclusively on § 523(a)(2)(B). Similarly, in In re Long, 774 F.2d 875, 877 (8th Cir. 1985), the court analyzed representations under § 523(a)(2)(B) where the statements appeared in the footnote of a financial statement and concerned the value of the debtor's entire inventory.
The alleged misrepresentations in this case were not statements concerning
Willmar faces a high burden in proving its claims under § 523(a)(2)(A). A creditor seeking to exempt a debt from discharge under § 523(a) must prove the elements of its claim by a preponderance of the evidence. Grogan, 498 U.S. at 288, 111 S.Ct. 654. Further, as noted above, "[e]xceptions to discharge are usually narrowly construed against the creditor and liberally against the debtor, thus effectuating the fresh start policy of the Code." Fields, 510 B.R. at 233. On appeal, whether a requisite element of a claim under § 523(a)(2)(A) has been satisfied is a factual determination which is reviewed for clear error. In re Freier, 604 F.3d 583, 587 (8th Cir. 2010) (citing Pontow, 111 F.3d at 609). A finding is clearly erroneous if, after reviewing all the evidence, the reviewing court is left with the firm conviction that a mistake has been committed. Id. (citing Anderson v. Bessemer City, 470 U.S. 564, 573, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985)).
The elements of a dischargeability claim under § 523(a)(2)(A) are: (1) the debtor made a representation; (2) the debtor knew the representation was false at the time it was made; (3) the representation was deliberately made for the purpose of deceiving the creditor; (4) the creditor justifiably relied on the representation; and (5) the creditor sustained the alleged loss as the proximate result of the representation having been made. Fields, 510 B.R. at 233 (quotations and citations therein omitted). See also Freier, 604 F.3d at 587. The Bankruptcy Court found that Willmar failed to meet its burden on elements 2, 3, and 4.
Willmar asserts that Dailey knew or should have known that the Lien Waivers in question were false at the time he signed them. "Even if a false statement is made, no fraud exists unless the maker knows the statement is false at the time the statement is made." Lindau v. Nelson, 357 B.R. 508, 513 (8th Cir. BAP 2006). A representation satisfies the knowledge element when it is made "under circumstances where a debtor should have known of the falsity [or] is one made with reckless disregard for the truth." In re Moen, 238 B.R. 785, 791 (8th Cir. BAP 1999) (quoting In re Duggan, 169 B.R. 318, 324 (Bankr. E.D.N.Y. 1994)). "In assessing a debtor's knowledge of the falsity of the representation..., the Court must consider the knowledge and experience of the debtor." Id.
Appellate courts are deferential to the bankruptcy court's findings when determining whether a debtor's promise to perform constitutes actionable fraud. For example, in Church, the bankruptcy court found that a debtor's promise to pay was not fraudulent where the debtor made payments for several months after making the promise. Id. at 547-48. The Bankruptcy Appellate Panel concluded that the bankruptcy court's findings were supported by the record. In Fields, a debtor obtained a loan by stating that he intended to use the borrowed funds for tenant improvements. 510 B.R. at 235. The bankruptcy court found that the evidence showed the debtor never intended to use the loan proceeds for that purpose. Id. The Bankruptcy Appellate Panel for the 8th Circuit upheld the bankruptcy courts findings under the clear error standard. Id. at 233, 236.
In contrast to Fields, the Bankruptcy Court concluded Willmar did not meet its burden to show Dailey never intended to use the funds to pay Anixter. Rather, as in Church, evidence supports the Bankruptcy Court's findings that Dailey intended to pay Anixter because he directed that Anixter be paid after he signed the Lien Waivers. Dailey testified that he learned of problems with Anixter when Shane Sweet advised him that SequrComm was on "a slow pay" to Anixter. Tr.(2) 94. Dailey understood this to mean that SequrComm was slightly behind on payments.
Willmar also asserts that Dailey's knowledge of SequrComm's financial issues preclude a finding that he intended to pay Anixter. Willmar argues that Dailey had extensive control of SequrComm's finances, including decisions about who would be paid. Tr. 111; Tr.(2) 39-40. Armitage testified that she discussed the Anixter nonpayment with Dailey in June 2014. Tr. 79. According to Willmar, Dailey should have known that SequrComm was in severe debt to Anixter and would have no way to pay promptly and in full. Thus, Willmar argues Dailey defrauded Willmar when he promised in the Lien Waivers that SequrComm would pay Anixter. The Bankruptcy Court assessed Willmar's arguments and evidence and made credibility determinations, concluding that although it was unclear whether Dailey had access to accounting records, most of the evidence suggested he did not. Tr.(2) 128. The Bankruptcy Court also concluded that it "had a little trouble believing the testimony of Ms. Armitage." Tr.(2) 132-33. Although the Bankruptcy Court expressed concerns with the credibility of all witnesses, it found that Willmar had not met its burden. Tr.(2) 133. Based on the evidence in the record, the Bankruptcy Court did not clearly err in making this determination.
Willmar also suggests Dailey committed fraud because he intended to pay other creditors, such as GWB, instead of Anixter. There is evidence that Dailey sought funding from GWB and others in May of 2014, and that GWB called a SequrComm loan as early as May 2014. An email exchange from May 21, 2014, demonstrates that Greg Boggs, a SequrComm employee, told Tom Fischer of GWB that SequrComm would pay GWB out of the proceeds of Willmar's payments to SequrComm. BK ECF No. 63. Dailey was included on the email from May 21, 2014, but not on subsequent emails wherein Chris Armitage agreed to terms of progress payments to GWB. BK ECF No. 63 at 2. Willmar infers that, beginning with this email exchange, Dailey and others devised a plan whereby he would sign the Lien Waivers to get funds from Willmar to pay Anixter, but instead of paying Anixter, Dailey would divert the money to pay GWB. Yet there is also evidence that, after signing the Lien Waivers, Dailey attempted to resolve payment issues with Anixter and directed Armitage to make payments to Anixter. Armitage even testified that the purpose of getting loans from GWB may have been to pay Anixter. Tr. 85-86.
There is insufficient evidence to disturb the Bankruptcy Court's conclusion that Willmar failed to meet its burden as to Dailey's intent. Accordingly, the Bankruptcy Court's finding was not clearly erroneous.
Willmar argues that, in addition to fraud pursuant to § 523(a)(2)(A),
For the reasons stated above, the Bankruptcy Court did not err in finding no evidence of willful or malicious injury. There is no evidence in the record of Dailey's malice toward Willmar, much less that Dailey intended specifically to harm Willmar. The evidence supports the Bankruptcy Court's finding that Willmar failed to meet its burden under § 523(a)(6).
The record before the Court supports the Bankruptcy Court's decision. Because the Lien Waivers in question did not concern Dailey's or SequrComm's overall financial condition, the Bankruptcy Court properly analyzed Willmar's claim under 11 U.S.C. § 523(a)(2)(A). Evidence supported the finding that Dailey intended to pay Anixter at the time Dailey executed the Lien Waivers, and that the representations in the Lien Waivers were not fraudulent. The Bankruptcy Court's decision to dismiss Willmar's claims under 11 U.S.C. § 523(a)(2)(A) and (a)(6) was not clearly erroneous. The judgment of the Bankruptcy Court will be affirmed, and a separate judgment will be entered in accordance with this Memorandum Opinion.