JACK CADDELL, Bankruptcy Judge.
This case is before the Court on a complaint to determine dischargeability pursuant to 11 U.S.C. § 523(a)(2)(A) and objection discharge pursuant to 11 U.S.C. §§ 727(a)(3) and (a)(4)(A). At the conclusion of the trial in this matter held on September 16, 2013, the Court invited counsel to submit post-trial briefs regarding issues of relevant state agency law, destruction of documents, and spoilation of evidence. The issues having been fully
1. Heinz operates a business known as Signature Landscapes. In December of 2010, the debtor hired Justin Taylor ("Taylor") as the general manager of Signature Landscapes to handle the day-to-day operations of the company. Heinz testified that she described the list of services offered by Signature Landscapes to Taylor when she hired him. Thereafter, the debtor oversaw Taylor for approximately one month before turning the day-to-day operations of the business over to Taylor at which point Heinz testified that she began coming into the office a couple of hours a days, twice a week. Heinz gave Taylor the power and authority to contract on behalf of Signature Landscapes.
2. In January of 2011, the plaintiff, Bonnie Lioce, contacted Signature Landscapes to request a quote to construct a covered porch and an outdoor fireplace at her residence. Lioce search the internet for qualified companies and contacted Signature Landscapes after reviewing their website which included the following statement: "For your protection we are licensed, bonded, and insured."
3. Lioce called several companies to request quotes. When she called Southern Landscapes, Lioce testified that she first spoke with Heinz's assistant, Cheri Temintel. According to Lioce, Heinz returned the call and informed her that she would send Taylor to Lioce's residence to give the Lioces an estimate. Lioce testified that Heinz gave her Taylor's credentials during the phone call. At trial, Heinz denied speaking with Lioce by telephone before Taylor quoted the project.
4. After meeting with Taylor, Lioce signed a contract with Signature Landscapes dated January 6, 2011 for $26,764 for the construction of a "covered structure attached to the roof line on three sides."
5. Lioce testified that she relied upon the statements made on Signature Landscapes' web page — that the company was "licensed, bonded and insured" — which gave her peace of mind. She further testified that she relied upon Taylor's statements and assurances that Signature Landscapes could handle the job and obtain the required permits. Lioce testified that she would not have hired Signature Landscapes had she known that Signature Landscapes was not insured and could not obtain the required building permits. She was specifically concerned about the foundation work and attaching the covered porch to her home.
7. Signature Landscapes did not complete the job. A few weeks after Signature Landscapes began construction, Heinz testified that she went to inspect the project after she saw large receipts coming in from the job. Heinz testified that Taylor exceeded his authority when he entered into the contract with Lioce because neither she nor anyone working for Signature Landscapes is a general contractor licensed to do the type of work required on the Lioce project. Without a general contractor's license, Signature Landscapes could not procure the required building permits to construct the attached covered porch. Heinz fired Taylor approximately one week later and attempted to get the permits required to complete the job but was unable to do so. Heinz testified that the porch roof was structurally unsound.
8. Not only was Signature Landscapes not licensed to construct the structure attached to the Lioces' home, it was also not insured on the date Signature Landscapes contracted to construct the covered porch and fireplace. Heinz testified that she did have general liability insurance and was licensed to install landscaping when she created the website for Signature Landscapes, however, her insurance lapsed before Signature Landscapes contracted to build the Lioces' covered porch and outdoor fireplace.
9. The Lioces had the structure torn down because licensed contractors would not complete the job as it was left by Signature Landscapes.
10. On May 13, 2011, counsel for the Lioces sent Heinz a letter terminating the contract. On May 28, 2012, the Circuit Court of Madison County, Alabama entered a judgment against Heinz and Signature Landscapes in favor of the Lioces in the amount of $39,296.26 for breach of contract.
11. Heinz is a sophisticated business woman. She obtained a degree in accounting from the University of Alabama in 1989. In addition to owning Signature Landscapes, Heinz testified that she took steps at some point in 2012 to open an accounting practice, but never had any clients. Nevertheless, Heinz created a web page under the name Sharon S. Heinz, PA, holding herself out as a public accountant even though she is not licensed as a public accountant. She also created a Facebook page and a LinkedIn account offering accounting services. Her LinkedIn account states that she is an entrepreneur, public accountant, and QuickBooks advisor. Heinz stated on her LinkedIn account that she has "over 21 years experience in Accounting and running a small business;" and further states that she specializes in "[s]mall business accounting," and "Quickbooks set up, coaching, and support."
12. On September 27, 2012, the sheriff's office went to Signature Landscapes to execute on the Lioces' judgment. The following day on September 28, 2012, Sharon Heinz, d/b/a Signature Landscapes, filed a Chapter 13 petition. This is not the debtor's first bankruptcy petition. Including the current case, the debtor has filed five bankruptcy petitions under various names. Previous filings include: case no. 89-15142-JSS-7 [Sharon Harris — Chapter
13. On October 12, 2012, the debtor filed her Chapter 13 Schedules and Statement of Financial Affairs ("SOFA"). There are numerous inaccuracies and misstatements contained in these documents:
14. The debtor maintains her accounting books on electronic software called QuickBooks. This is the same software that the debtor offered to provide "setup, coaching and support" for on her LinkedIn account.
15. Postpetition in late October of 2012, Heinz hired Leann Perry to reinstall the hard drive on one of two her office computers after the older computer crashed. The older computer contained the debtor's 2009 through 2011 QuickBooks information, as well as W2 and 1099 information. Heinz testified that she backed up her office computers approximately once a month using a thumb drive. Heinz explained that the QuickBooks version on the old computer was for 2008. Heinz testified that she could not retrieve the 2009 through 2011 information from the thumb drive using the newer version of Quick-Books. Prior to trial, Heinz failed to disclose during discovery the fact that the electronic information was available on a thumb drive.
16. Plaintiffs' requests for production required Heinz to "produce copies of all books of account and records for the past three years of any business in which you have an ownership interest."
17. Subsequently, the paper backup documentation for the destroyed electronic information was lost or destroyed in November of 2012 when Heinz relocated her office. Heinz testified that two or three boxes of records were missing after the move. Ironically, the boxes that were lost contained the backup information for the 2009 through 2011 electronic records which had just been destroyed.
18. On October 1, 2012, Heinz filed a motion to extend the automatic stay pursuant to § 362(c)(3)(B). The motion was necessitated because the debtor had a prior Chapter 13 case, case no. 09-81936-JAC-13, pending within the preceding 1-year
19. On October 15, 2012, the Court entered an order denying the motion after counsel for the Lioces appeared at the hearing and objected to the extension.
20. On October 23, 2012, Heinz filed a notice of voluntary conversion to Chapter 7. On October 27, 2012, Heinz filed a second motion to extend the automatic stay. On October 29, 2012, the Court entered an order denying on the grounds that the conversion from Chapter 13 to Chapter 7 did not change the petition filing date for purposes of the debtor's § 362 motion to extend stay.
21. On November 14, 2012, Heinz filed an adversary proceeding against Nick and Bonnie Lioce and their attorney alleging same violated the stay by failing to release levies and executions in the Circuit Court of Madison County, Alabama.
22. On November 27, 2012, the Lioces filed an emergency motion to abandon property used in the debtor's business in which the debtor did not claim a personal exemption. On January 16, 2013, the Court entered an order granting the motion to abandon.
23. On January 24, 2013, the Lioces filed a motion to extend the deadline for filing a §§ 523 and 727 complaint. The deadline ran through January 29, 2013. On January 28, 2013, the Court entered an order granting the motion and extending the deadline for a period of 60 days.
24. On March 29, 2013, the Lioces timely filed the above styled complaint.
As a preliminary matter, the Court must address an issue raised in the debtor's post-trial brief. Heinz argues that the Court should not consider issues of fraud based on any misrepresentations made by the debtor's agent because same were not alleged in the plaintiffs' complaint in violation of Rule 7009(b) which requires allegations of fraud to be stated with particularity. Pursuant to Bankruptcy Rule 7015 and FED. R. CIV. P. 15(b) issues not raised in pleadings may be treated as if they were properly raised when they were tried by express or implied consent of the parties. Rule 15(b) reads as follows:
Although the plaintiff's did not allege in their complaint that any of the oral misrepresentations upon which they relied were made by Heinz's agent rather than the debtor herself, the plaintiff's did assert these allegations in plaintiffs' brief filed in support of their motion for summary judgment filed on June 14, 2013 more than three months prior to the trial date.
At the close of trial, the Court stated on the record that it was drawing an adverse inference against Heinz based on debtor's failure to produce the thumb drive in response to plaintiffs' Requests for Production of Documents. Spoliation of evidence is "`defined as the destruction or significant alteration of evidence, or the failure to preserve property for another's use as evidence in pending or reasonably foreseeable litigation.'"
A party asserting a claim for spoilation of electronic evidence must show that: (1) the other party had an obligation to preserve the electronic evidence when it was destroyed; (2) that same was destroyed with culpable state of mind, including ordinary negligence, gross negligence, recklessness, willfulness, or intentional conduct; and (3) that the destroyed evidence was relevant and favorable to the party's claim, such that a reasonable trier of fact could find that it would support a party's claim.
In this case, the Court finds that Heinz knew or should have known that the thumb drive containing documentation from 2009 through 2011 was relevant to ongoing litigation. The missing documents include the time frame in 2011 when Taylor was employed as Heinz's agent and during which Signature Landscapes contracted to build the Lioce project. In May of 2012, the Lioces obtained a judgment against Heinz for work performed by Signature Landscapes in 2011. In September of 2012, the sheriff's office went to Signature Landscapes to execute on the
The Court finds that the evidence compels a conclusion that the debtor's spoilation of electronic evidence, the failure to preserve both electronically stored information as well as the backup paper documentation, and failure to produce the thumb drive was willful and intentional given the timing during imminent or ongoing litigation with the Lioces. While the Court will not impose a specific sanction against the debtor in this instance such as default judgment, the Court finds that the spoliation entitles the Lioces' to an adverse inference in this case to the extent same impacts the debtor's overall credibility.
"The standard for determining whether an agency relationship exists is whether the purported principal has control over the alleged agent. In order for an agency relationship to exist, there must be some affirmative evidence that the principal has the right to control the agent."
The Court finds the plaintiffs have presented substantial evidence that Taylor was in fact Heinz's agent as the debtor hired Taylor to run the day-to-day operations of Signature Landscapes. Heinz empowered Taylor to sign contracts on behalf of Signature Landscapes. Further, Lioce testified that she spoke with Heinz on the telephone to request a quote and the debtor informed Lioce that she would send Taylor to the Lioces' residence to bid on their project. Accordingly, the Court finds that Heinz exercised control over Taylor and cloaked him with authority to contract on her behalf, thus, Taylor was
The plaintiff's assert that the debt owed them under the judgment entered against Heinz is nondischargeable as a debt for money that was obtained by false pretenses, a false representation, or actual fraud within the meaning of § 523(a)(2)(A) which reads as follows:
Specifically, the plaintiff's contend that through false advertisements, Heinz solicited the Lioce project. Those advertisements put forth prominently that Signature Landscapes was "licensed, bonded, and insured," when in fact Signature Landscapes was neither insured nor licensed to perform the work for which the company bid.
Section 523(a)(2)(A) has generally been interpreted to require the traditional elements of common law fraud.
The Eleventh Circuit has recognized that a debt may be excepted from discharge either when the debtor personally commits actual fraud or when such actual fraud is imputed to the debtor under agency principles.
In Villa, the Eleventh Circuit initially recognized the Supreme Court's ruling in Neal v. Clark, 95 U.S. 704, 24 L.Ed. 586 (1877) in which the Court held that a debt will not fall within § 523(a)(2)(A) unless the debtor committed positive, actual fraud. Then the Villa court noted that the Supreme Court subsequently ruled in Strang v. Bradner, 114 U.S. 555, 5 S.Ct. 1038, 29 L.Ed. 248 (1885) that Neal's positive fraud requirement can be satisfied by the fraud of an innocent debtor's partner. The Eleventh Circuit wrote:
In Villa, the creditor argued that the holding of Strang, imputing actual fraud to an innocent partner so as to render the debt nondischargeable, should be extended to situations in which the debtor is liable for the actual fraud of an employee, not under partnership or agency principles, but as a controlling person under the Securities Exchange Act. Instead, the Eleventh Circuit read Strang narrowly as only imputing liability for fraud in bankruptcy based on the common law of partnership and agency. The Eleventh Circuit stated that in reaching this conclusion, it was mindful of its obligation to construe strictly exceptions to discharge in order to give effect to the fresh start policy of the Bankruptcy Code.
Since the Supreme Court's holding in Strang, "the majority of courts to address the issue in a commercial or business context have held that an innocent debtor's liability for her agent's wrongdoing is nondischargeable under § 523(a)(2) regardless of the debtor's knowledge or participation."
Other "courts have adopted a reckless standard, requiring that the debtor knew or should have known of the agent's fraud in order to impute intent."
In the Vasile case, the bankruptcy court held that any fraud on the part of the debtor-husband in connection with his practice of floor-planning vehicles for a higher price than what he paid for them in order to cover repair costs would not be imputed to the debtor-wife. The bankruptcy court explained that fraudulent intent may not be imputed from one spouse to another simply based on the marital relationship of the parties.
The Budnick case involved a finding that the debtor and his former wife did not have a partnership relationship and that debtor's wife did not act within the scope of her authority as an accountant and bookkeeper for an LLC for which debtor was the managing member, in embezzling funds from another employer to pay the LLC's bills. Therefore, the debtor could not be held vicariously liable for debt arising from his wife's unknown embezzlements under agency theory where the wife kept the embezzlements a secret from the debtor and the wife could not have reasonably understood that embezzlement was within the scope of her actual authority. This case is clearly distinguishable as Heinz specifically empowered Taylor to
The Court does recognize that at least one bankruptcy court in the Eleventh Circuit has questioned whether the Eleventh Circuit would apply the reckless indifference standard. In the case of Agribank v. Gordon (In re Gordon), 293 B.R. 817 (Bankr.M.D.Ga.2003), the bankruptcy court found that the Eleventh Circuit did not clearly state in Villa whether an innocent debtor's liability for her agent's wrongdoing is nondischargeable under § 523(a)(2) regardless of the debtor's knowledge or participation in the fraud, or whether the Eleventh Circuit would apply the reckless standard, requiring the debtor knew or should have known of the agent's fraud in order to impute intent. Without concrete guidance, the bankruptcy court chose to apply the higher reckless indifference standard and held that "more than the mere existence of an agent-principal relationship is required to charge the agent's fraud to the principal."
First, this Court notes that Gordon is another case involving a marital relationship. The debtor was a farmer and his wife worked full time as a school teacher. The bankruptcy court held that the marital relationship that existed between the parties did not itself provide a sufficient basis for imputing fraud, given that the wife was not partners in her husband's farming operation, and that the wife had no reason to suspect that her husband of 27 years would materially misrepresent her income and assets on financial statements that he submitted to obtain farm loans.
Further, this Court is not as certain that the Eleventh Circuit would apply the reckless indifference standard, requiring that the debtor knew or should have known of the agent's fraud in order to impute intent. The Eleventh Circuit Villa court explained that the issue in "Strang was whether the debtors, who had been unaware of their co-partner's fraud, could nonetheless be precluded from discharging the debt in bankruptcy."
Nevertheless, under either standard the Court finds that the plaintiff's have proven by a preponderance of the evidence that Heinz knew or should have known of Taylor's fraudulent misrepresentations. Lioce testified that she spoke with Heinz on the telephone and that Heinz informed Lioce that she would send Taylor to the Lioces' home to give the Lioces an estimate. Lioce further testified that the debtor gave Lioce Taylor's credentials during the phone call. After meeting with Lioce, Taylor assured Lioce that Signature Landscapes would be able to obtain the permits needed to construct the covered porch attached to the Lioces' home and, further, that Signature Landscapes had the experience
Heinz testified that she turned the day-to-day operations of the business over to Taylor soon after she hired him. Thereafter, it appears that Heinz conducted very little oversight except to review receipts that crossed her desk the few hours a week she came into the office. Yet, Heinz knew that Taylor was contracting on behalf of Signature Landscapes as she had authorized and given him the authority to do so. Based on the forgoing, the Court finds that the debtor's action were recklessly indifferent which is evidence that the debtor knew or should have known of Taylor's fraudulent misrepresentations as her agent.
The Court further finds that Heinz made false representations with intent to deceive by prominently advertising that "[f]or you protection" Signature Landscapes is "licensed, bonded, and insured." Heinz argued at trial that she is licensed to install landscaping. However, the licensing statement appears on a page of website under "Foundation and Structural Renovation." Moreover, Heinz admitted that she was not insured on the date Signature Landscapes entered into the contract with the Lioces. Nevertheless, Heinz maintained false advertisements on Signature Landscapes' website when in fact her insurance coverage had lapsed.
In Field v. Mans, 516 U.S. 59, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995), the Supreme Court determined that the applicable standard of reliance that a creditor must establish under § 523(a)(2)(A) is justifiable reliance rather than the rigid standard of reasonable reliance. In City Bank & Trust Co. v. Vann (In re Vann), 67 F.3d 277, 283 (11th Cir.1995), the Eleventh Circuit stated that under the justifiable reliance standard the "plaintiff's conduct must not be so utterly unreasonable, in the light of the information apparent to him, that the law may properly say that his loss is his own responsibility." In Vann the bankruptcy court applied the reasonable reliance standard and concluded that the bank would have been better served by demanding an appraisal of certain property and should have made other inquiries of the debtor to ascertain the status of certain properties prior to closing the debtor's loan. The Eleventh Circuit cautioned that courts should not second guess a lender's decision to make a loan, stating:
In this case, Heinz argues that if the Lioces were concerned as to whether Signature Landscapes or Heinz held a
In Sears v. United States (In re Sears), ___ Fed.Appx. ___, 2013 WL 4426516 (11th Cir.2013), the debtor, doing business as ABBA Bonding Company, issued several surety bonds for various government projects. After the debtor filed bankruptcy one of the government contractors for whom debtor was surety defaulted on his contract which triggered the debtor's obligations under the surety agreement. Because the debtor was already in bankruptcy, the government could not collect under the debtor's bond and was required to hire another contractor to finish the job at an additional cost of $1,055,724.10. The government filed an adversary proceeding challenging the dischargeability of this debt, arguing that the debtor induced it to accept him as surety using false pretenses, false representations, or actual fraud under § 523(a)(2)(A).
The debtor was required to submit an Affidavit of Individual Surety in which he pledged collateral to secure each bond. Each affidavit required the debtor to list the real estate pledged and attach supporting certified documents. On each affidavit the debtor listed various parcels of real estate. On some, but not all, he also attached a financial statement listing the net worth of ABBA Bonding as approximately $126 million. Debtor further indicated that there were no mortgages or liens on any of the pledged collateral. Each affidavit required the debtor to identify any bonds for which the pledged assets were pledged within the prior 3 years. Debtor responded "0."
The government approved ten bonds at issue, but later found out that: (1) the debtor did not own many of the properties pledged as collateral; (2) did not hold clear title to one of the properties; (3) debtor had pledged properties more than once for the various bond issues; and (4) the net worth of debtor's bonding company was substantially less than $126 million.
On the issue of reliance, the bankruptcy court reasoned that debtor's misrepresentations were not apparent to the contracting officers reviewing the affidavits because same were completely filled out and submitted under oath. Debtor argued that the government did not justifiably rely on same because he failed to attach required supporting documents to the affidavits and same were, therefore, facially incomplete.
The Eleventh Circuit found justifiable reliance where "it was not apparent from a `cursory glance' at his affidavits that they were fraudulent."
Here, the Court finds that Lioce was induced to sign the contract with Signature Landscapes in justifiable reliance upon false and fraudulent representations by Heinz's agent, that Signature Landscapes was licensed and capable of performing the work for which Signature Landscapes contracted and capable of obtaining the necessary building permits required to construct the addition to the Lioces' home; and further upon the false representations contained in advertisements that Signature Landscapes was licensed and insured. Under the circumstances, the Court finds that there was nothing which served as a warning to the Lioces that they were being deceived by either Justin Taylor or by Signature Landscapes' false advertisements; nor that they should further investigate any of the false representations made by same.
"For a debt to be nondischargeable under § 523(a)(2)(A), a creditor must show that it `sustained a loss as a result of the misrepresentation."
Based on the forgoing, the Court finds that the debt to the Lioces is excepted from discharge pursuant to 11 U.S.C. § 523(a)(2)(A).
"A bankruptcy court will grant a debtor a discharge of a debt unless the debtor has concealed, destroyed, mutilated, falsified, or failed to keep or preserve any recorded information, including books, documents, records, and papers, from which the debtor's financial condition or business transactions might be ascertained, unless such act or failure to act was justified under all of the circumstances of the case."
"Section § 727(a)(3) requires disclosure of all relevant records for the benefit of all creditors and the bankruptcy court."
To justify denial of discharge under § 727(a)(3), the plaintiff must establish by a preponderance of the evidence that: (1) the debtor "either failed to keep or preserve any recorded information, or committed an act of destruction, mutilation, falsification, or concealment of any recorded information; and (2) that as a result of such failure or act, it is impossible to ascertain the financial condition and material business transactions of the debtor."
"The records which are required to determine a debtor's financial condition differ from case to case, with a sophisticated business debtor being held to a higher standard than an unsophisticated, uneducated debtor."
Viewing the facts in the present case, the Court is satisfied that Heinz failed to keep adequate books and records from which her financial condition can be ascertained, and her failure to do so is not justified under the unique circumstances of this case. Heinz is a sophisticated businesswoman with a college degree in accounting. She has not only worked as an accountant, but she is also an entrepreneur who has owned at least two businesses, Universal Auto and her current business, Signature Landscapes. Moreover, Heinz recently held herself out as a public accountant on her personal web page which she created in anticipation of reviving her accounting career. Heinz also created a Facebook page and a LinkedIn account offering accounting services. Her LinkedIn account states that she is an entrepreneur, public accountant, and QuickBooks Advisor. Heinz stated on her LinkedIn account that she has "over 21 years experience in Accounting and running a small business;" and further states that she specializes in "[s]mall business accounting," and "Quickbooks set up, coaching, and support."
Heinz admits that the electronic information from 2009 through 2011 was destroyed after she filed bankruptcy and that
The Lioces assert that the debtor knowingly and fraudulently made numerous false oaths or accounts in or in connection with the case within the meaning of § 727(a)(4)(A). "`Courts will not grant a discharge if the debtor knowingly and fraudulently, in connection with the case, made a false oath or account.'"
To prevail on an objection to discharge for false oath or account pursuant to § 727(a)(4)(A), the Lioces must establish that:
First, the Court finds that the debtor made numerous false oaths in connection with the case. In particular, the Court finds that Heinz's schedules contain the following omissions and inaccuracies:
Next, the Court must decide whether Heinz made these false oaths knowingly and with fraudulent intent. "Because debtors generally will not testify as to their own misconduct," the Eleventh Circuit has recognized that the element of intent under § 727(a)(4)(A) "is generally proven by circumstantial evidence or inferences drawn from circumstances surrounding the debtor."
Heinz attempts to explain away each false statement as having been merely inadvertent, however, the Eleventh Circuit has recognized that "[w]hile a single, isolated instance of non-disclosure or improper disclosure may not support a finding of fraudulent intent," the repeated nature of such non-disclosures or improper disclosure will support a finding of fraudulent intent under the unique circumstances of a given case.
Finally, when determining whether a false oath will bar a debtor's discharge, the test for materiality is whether the false statement was related to the debtor's business transactions or estate, or concerned the discovery of assets, business dealings, or existence and disposition of debtor's property.
A separate order will be entered consistent with this opinion.
Done and Ordered.
