TERRY L. MYERS, U.S. BANKRUPTCY JUDGE.
In this adversary proceeding, T Street LLC, Doheny LLC, Trestles LLC, Oaklands LLC, EJC LLC, EUDA LLC, Tammara Heron as trustee of the Heron Family Trust, and Silver Fox Management LLC (collectively "Plaintiffs")
This Court has jurisdiction pursuant to 28 U.S.C. § 1334, and all issues before it are core matters on which it may enter final decisions under 28 U.S.C. § 157. After considering the evidence and the parties' closing arguments,
Debtor is a graduate of Utah State University with a degree in finance and accounting. He is a member of the National Association of Real Property Managers and has attended that entity's conferences and trainings. Debtor testified that he has a working knowledge of QuickBooks and has been trained in the use of property management software called AppFolio,
Plaintiffs are property owners of apartment complexes and other multifamily buildings managed by Paradigm until June 2018. Eric Uhlenhoff ("Uhlenhoff") provided testimony on behalf of T Street LLC, Doheny LLC, Trestles LLC, Oaklands LLC, EJC LLC, and EUDA LLC (collectively the "Uhlenhoff Entities"). Tammara Heron testified in her capacity as the trustee of the Heron Family Trust ("Heron Trust"), and her brother, Brett Heron, provided additional testimony regarding the relationship between the Heron Trust, Paradigm, and Debtor. Matthew Wilson ("Wilson") is a member of Silver Fox Management, LLC ("Silver Fox"), and provided testimony on behalf of Silver Fox. Generally, Plaintiffs allege that Paradigm, in the process of managing their properties, obtained and held their "owner reserves,"
Paradigm held two trust accounts—one commingled trust account for Paradigm's property owners (the "Paradigm Trust Account") and one trust account for Legacy Management Group, LLC ("Legacy"),
In February 2015, Trestles LLC ("Trestles")
On July 24, 2015, Doheny LLC ("Doheny"), the owner of the Aspen Park Apartments located at 505 E. Florida Ave. in Nampa, Idaho, entered into a "Full Service Property Management Agreement" with Paradigm. Ex. 1045 at 1, 5. This agreement provided that Paradigm was to hold rents and security deposits in a "non-interest bearing trust account separate from [Paradigm's] personal or business operating accounts." Id. at 2. Paradigm was required to maintain accurate records of monies received and disbursed, and to provide those records—and a distribution—to Doheny on the twentieth of each month. Id. at 3. Paradigm was entitled to keep 5 percent of gross rents. Id. at 4. Though Paradigm was responsible for ensuring the proper management and maintenance of this twenty-four-door property, Paradigm was only entitled to reimbursement for maintenance costs in the event it advanced its own funds for maintenance. Id. at 3. Paradigm was not entitled to "mark up" the actually incurred maintenance expenses and collect the difference.
On November 24, 2015, The Heron Family Trust (the "Heron Trust"), owner of the Crossfield Apartments located at 980 W. Parkstone St. in Meridian, Idaho, entered into a "Multi-Family Property Management Agreement" with Paradigm. Ex. 1063 at 1, 5-6. This agreement included Paradigm's Standard Contract Terms. However, Paradigm was entitled to keep all tenant application fees, non-sufficient funds bank fees, move-out inspection fees, non-payment delivery notice fees, any other tenant related fees, and 4 percent of gross rents. Id. at 4-5. Paradigm was also entitled to a markup of 7 percent if Heron Trust requested Paradigm's assistance in renovation, modernization, or capital improvements (i.e., HVAC work or floor replacement). Id. at 4. The agreement also required the Heron Trust to provide a minimum owner reserve of $40,000. Id. Tammara Heron testified that the Heron Trust maintained an owner reserve of $50,000.
The agreement further provided that the Heron Trust was "responsible for the payment of all mortgage/notes, property taxes, special assessments, Homeowner Association fees, special assessments [sic], all utilities, and premiums for casualty and liability insurance relating to the [Heron Property] unless otherwise modified in writing with [Paradigm]." Id. at 1, ¶ 3.5. The contract also stated that Paradigm "agrees to keep all mortgages, property taxes, association fees, or any other obligations which could lead to foreclosure action against the property current and paid in full." Id. at 2, ¶ 3.11. In addition, Tammara Heron testified there was an understanding with Debtor that Paradigm was to pay property insurance premiums
In January 2016, the Heron Trust received a notice of delinquent property taxes. Ex. 1067-1. Robert Heron emailed Debtor to inquire about the issue. Debtor replied: "It is taken care of and it is a mistake and did not cost you! The payment was made on time and I have been working through it with them. It shows up as paid now and they are working to take it off completely." Ex. 1067-1. The Heron Trust also had some issues with delinquent utility bills in January. When the Heron Trust inquired about them, Debtor replied via email that it was "just checks passing in the mail." Ex. 1096.
On June 27, 2016, Debtor was treated at Idaho Neurology, Saint Alphonsus, by Mary E. River, MD, following a "subacute stroke." Ex. 201-1. Debtor had follow-up visits with the doctor. There was no expert medical testimony to further explain the subacute stroke diagnosis or the implications thereof. Debtor reported that he (1) was limited in what he could perform due to headaches, (2) had issues with memory and multitasking, and (3) had other stroke-related symptoms fatigue, disorientation, and difficulty in strategizing, thinking ahead, and seeing the bigger picture. See generally id. at 8, 9, 11, 14-16. Debtor did not inform Plaintiffs of the health issues that might affect his ability to operate Paradigm's business operations and resumed full operation of Paradigm later that year.
On November 22, 2016, T Street LLC ("T Street"), the owner of a twenty-two-door property located at 801 NW 2nd St. in Meridian, Idaho, entered into a "Full Service Property Management Agreement" with Paradigm. Ex. 1041 at 1, 5. This agreement included Paradigm's Standard Contract Terms without variation. Subsequently, T Street added more doors to its property management arrangement with Paradigm. The new property was located at 3606 W Rose Hill St. in Boise, Idaho. Ex. 1054 at 55. Based on Uhlenhoff's testimony the new T Street properties were placed and treated under the original contract executed between Paradigm and T Street.
In March 2017, Debtor sought to buy out one of his business partners, Chad Clark.
On May 31, 2017, Paradigm and Debtor, as an individual obligor, executed a promissory note by which an interest in Paradigm was transferred from Team One Investments, LLC ("Team One"), to Debtor. That note provides:
Ex. 1023-1. Holladay signed this promissory note as a member of Team One Investments, LLC. Debtor testified that this note was executed in order to obtain funding to buy out Clark. However, by its terms, it obligates Debtor and Paradigm to pay Team One, not obtain funds by which Debtor and Paradigm could pay Clark. In addition, it is not clear what interest Team One Investments held and relinquished upon execution of the note. Further, there is no indication, other than conflicting testimony by Debtor, that any funds were disbursed in relation to this note.
Notwithstanding the Team One note as a purported source of funding, Debtor testified that he found it necessary to enter into a series of Merchant Cash Advances ("MCA") in order to finance his acquisition of Clark's interest in Paradigm.
On June 28, 2017, Paradigm (and Rentmaster)
Less than a month later, on August 15, 2017, Paradigm, through Debtor, entered into an MCA agreement with 1 Global Capital LLC ("Global"). Ex. 1020-1. Global advanced $90,000 in exchange for $125,100 of Paradigm's future "receipts."
In August 2017, Silver Fox acquired properties with twenty-doors located at 551 and 639 N. Moffat Ave in Emmett, Idaho. See Ex. 1108-1. These properties were already managed by Paradigm for Silver Fox's predecessor in interest, and Silver Fox continued to use Paradigm as the property management company. Silver Fox and Paradigm never executed a final, written contract, and Plaintiffs failed to establish that a contract otherwise existed. Debtor did not inform Silver Fox that Paradigm was significantly indebted under multiple MCAs.
On August 29, 2017, Paradigm, through Debtor, entered into an MCA agreement with Yellowstone Capital LLC ("Yellowstone"). Ex. 1017-16. Yellowstone advanced $82,500 in exchange for $115,418 of Paradigm's future "receipts." Id. Paradigm was to pay Yellowstone $1,539 per business day. Id. at 24. Debtor testified that he authorized Yellowstone to draw from Paradigm's operating account.
On September 11, 2017, Rentmaster, through Debtor, entered into an MCA agreement with Arcarius, LLC. Ex. 1019-1. Arcarius advanced $200,000 in exchange for $296,000 of Rentmaster's future "receipts" to be paid every business day in the amount of $1,494.95 from Rentmaster's account at Beehive Federal Credit Union. Id. at 1-2. Though this agreement did not name Paradigm, Debtor testified that this agreement was also entered into to facilitate and fund the buyout of Clark's interest in Paradigm.
On October 18, 2017, Paradigm entered into property management agreements with three more Uhlenhoff entities: Oaklands LLC ("Oaklands"), the owner of a duplex located at 854 & 856 White Cloud in Boise, Idaho, Ex. 1042; EJC LLC ("EJC"), the owner of a seven-door property located at 543-549 W. Idaho St. in Meridian, Idaho, Ex. 1043, and a one-door property located at 511 W. Pine in Meridian, Idaho, Ex. 1044; and EUDA LLC ("EUDA"), the owner of a four-plex (four doors) located at 662 W. Idaho St. in Meridian, Idaho, Ex. 1046. These contracts included Paradigm's Standard Contract Terms. See generally Exs. 1042-1044, 1046. However, Paradigm could mark up maintenance expenses by up to 20 percent. Exs. 1042-3, 1043-3, 1044-3, and 1046-3. Debtor did not inform Uhlenhoff that Paradigm was significantly indebted under multiple MCAs.
On October 25, 2017, Paradigm and Rentmaster, through Debtor, entered into an MCA agreement with Ace Funding Source, LLC ("Ace Funding"). Ex. 1021-1. Ace advanced $75,000, see Ex. 1057-3, in exchange for $112,425 of future "receipts" to be paid every business day in the amount of $1,874 from Rentmaster's account at Beehive Federal Credit Union, Ex. 1021 at 1, 5. However, on October 31, 2018, an ACH payment of $1,874 to Ace Funding Source was made from the Paradigm Trust Account, Chase (1762). Ex. 1057-7.
On November 8, 2017, Paradigm, through Debtor, entered into another MCA agreement with Yellowstone. Ex. 1017-1. Debtor testified that this second Yellowstone MCA refinanced the first Yellowstone MCA which had a remaining balance of $56,936. Ex. 1017-10. Yellowstone advanced an additional $33,064 ($90,000 — $56,936 balance) in exchange for $131,310 of Paradigm's future "receipts." Id. Paradigm was then obligated to pay Yellowstone $1,751 per business day. Id. at 9. Though this agreement did not list a bank account from which Yellowstone was authorized to draw daily ACH payments, Debtor testified that he authorized Yellowstone to draw from Paradigm's operating account.
Uhlenhoff was generally satisfied with Paradigm's services until the fall of 2017. In November 2017, Doheny's $10,768.54 owner distribution check bounced. On November 20, 2017, Uhlenhoff emailed Debtor to inform him of the issue. Ex. 1061-1. Debtor responded:
Id. Indeed the record reflects, a check from "Paradigm Trust" at Chase for $10,768.54 was deposited on November 16 but was returned as unpaid on November 20. Id. at 3-4. A subsequent check from "Paradigm/Legacy" at Mountain West Bank in an amount of $10,780.54 was deposited on November 21. Id. at 4.
Uhlenhoff had also noticed that the beginning and ending balances on his entities' monthly owner statements were not matching up because Debtor was backdating expenses to prior months. Debtor acknowledged the mistakes made on the owner statements and said he would attempt to fix the issue. Uhlenhoff questioned Debtor on the integrity of his entities' security deposits, and Debtor represented the deposits were safe and intact. Uhlenhoff did not provide dates relating to his discovery of these accounting issues or his discussions with Debtor regarding the same.
On December 28, 2017, Rentmaster, through Debtor, entered into an MCA agreement with New Era Lending, LLC ("New Era"). Ex. 1022-1. New Era advanced $80,000 in exchange for $119,920 of future "receipts" to be paid every business day in the amount of $1,999 from Rentmaster's account at Beehive Federal Credit Union. Id. at 1, 7. Though this agreement did not name Paradigm, Debtor testified that this agreement was also entered into to buy out Clark.
In early January 2018, the Heron Trust received a notice of insurance cancellation for non-payment of a December 2017 premium. Exs. 1083-1 and 1084. Debtor knew Paradigm was obligated to pay the insurance premium.
On January 23, 2018, Debtor obtained a personal loan for $80,000 from his parents. Ex. 1024. Debtor testified that this loan was to help with Paradigm's cash flow. Debtor and Kimberly Jaques personally signed a promissory note for this loan. Debtor did not sign this note on behalf of Paradigm or Rentmaster. Id. Debtor testified that he deposited the funds from this loan into either the Paradigm or Rentmaster accounts, but he did not specify which account(s).
Around February 2018, Debtor instructed Wendy Lawrence, Paradigm's bookkeeper, to make a $22,000 adjustment to an owner statement. Lawrence refused to make the adjustment because the ending balance on the previous owner statement would not match the beginning balance on the next. Her employment at Paradigm was subsequently terminated. She believes, and the Court finds, she was terminated because she refused to make this adjustment.
In February 2018, the Heron Trust received notice that the December 2017 property taxes had not been paid. Ex. 1070. A prior owner statement issued by Paradigm showed this property tax payment had been made on time. Ex. 1069-9. When the Herons emailed Debtor to figure out what had happened to the tax check purportedly written on November 30, 2017, Debtor replied: "I will go down and clear it
On February 6, 2018, Cincinnati Insurance Companies billed the Heron Trust $3,148.00 to be paid by February 30, 2017, with an additional $6,286.00 due in two installment payments by July 30, 2018. Ex. 1086 at 1-2. On February 12, 2018, Tammara Heron emailed Debtor and requested he pay the total balance of $9,434.00. Ex. 1086-2. Debtor agreed to do so. Ex. 1087-1.
In March 2018, Uhlenhoff was told by a vendor, System Kleen, that the vendor planned to place a lien on one of the Uhlenhoff Entities' properties for unpaid work the vendor performed in November 2017. The entity's owner statement showed the vendor as having been paid. Uhlenhoff met with Debtor, who claimed that System Kleen had horrible books and Paradigm had already paid for the services. Uhlenhoff again asked Debtor about his entities' security deposits, and Debtor represented that the deposits were safe in the Paradigm Trust Account.
The Heron Trust's March 2018 owner statement listed an owner distribution of $42,341.26, but that distribution had not been made. Ex. 1066-5. When Tammara Heron confronted Debtor about the reported distribution check, he claimed there was an issue with the bank account numbers being transposed, and he was going to the bank to fix the issue. The Heron Trust never received this distribution.
In March 2018, the Heron Trust received another insurance termination notice based on a failure to pay the February insurance premiums. Ex. 1088. Tammara Heron again brought the matter to Debtor's attention, and Debtor claimed he had paid the balance in full, as they agreed he would the previous month, and provided a confirmation number. Ex. 1089. Tammara Heron testified that the confirmation number was fabricated, but the April insurance invoice showed a payment was made on March 12, 2018. Ex. 1091-2. The notice of termination was rescinded March 14, 2018. Ex. 1090. On May 1, 2018, Paradigm tendered two additional checks for $3,148.00 each to the insurance provider. Ex. 1093-1.
From the initiation of their arrangement in August 2017, Silver Fox agreed to forego the receipt of owner distributions until accounting issues were resolved.
On May 29, 2018, Uhlenhoff received a call from another vendor, a painter named Craig O'Neal, who complained that he was not paid for work completed in the summer of 2017. Uhlenhoff personally paid Craig O'Neal. Uhlenhoff met with Debtor on May 31, 2018, and demanded that Debtor put someone else in charge of the day-to-day operations of Paradigm. He did not immediately fire Paradigm because he was worried about incoming rent checks. Debtor agreed to put Jason Hall, Paradigm's general manager, in charge, not disclosing to Uhlenhoff that Hall had already resigned.
In May 2018, The Heron Trust received a second delinquency notice which showed the December 2017 property tax payment was still delinquent in the amount of $65,491.20 with late fees of $1,215.79 and interest of $3,485.91. Ex. 1072. On June 4, 2018, Tammara Heron and her brother, Brett Heron, met with Debtor at his office, to collect the June 2018 property tax payment which they planned on delivering to the Ada County Assessor's office themselves. Debtor handed them a receipt dated June 1, 2018, showing a payment of $60,789.50, the original amount owing. Ex. 1073. Clearly noticeable are two alterations in the "Late Charge" and "Interest" columns where this receipt lists those fees as $0.00. Id. Debtor also gave them a blurry image of a cancelled check which he claimed to have printed from the account records at Chase.
When the Herons paid the Heron Trust's June 2018 property taxes, the Ada County Assessor provided a receipt with the history of the tax payments from 2012 to 2017. Ex. 1076. The payment actually made for the December 2017 property taxes was for $65,083.49 and that included a late charge of $1,215.79 and interest of $3,078.20. Id. at 1.
On June 4, 2018, Wilson met with Debtor in person to express his concerns over Silver Fox's lack of owner distributions and the failure to provide owner statements. In this meeting, Debtor provided owner statements for 2017 and 2018, Exs. 1108 and 1109, and again promised to make wire transfers of the balance owing. Exhibit 1109 is Silver Fox's owner statement for 2018. It shows that Paradigm made an owner distribution of $35,755.28. Ex. 1109-4. However, Wilson testified that Silver Fox never received this alleged distribution. There is also an ending cash balance of $3,310 that Silver Fox never received. Ex. 1109-4.
On June 7, 2018, Tammara Heron, Brett Heron, Uhlenhoff, and Wilson met with Debtor and Holladay to discuss the several issues they were having with Paradigm's services. At this meeting Debtor informed Plaintiffs that their money was gone because
On June 8, 2018, Sara Phillips, Paradigm's receptionist and leasing agent, helped Plaintiffs obtain further financial records from AppFolio.
On June 11, 2018, Plaintiffs sued Debtor, Paradigm, and Rentmaster in the District Court of the Fourth Judicial District of the State of Idaho, Case No. CV01-18-10654. Ex. 1040-7. Plaintiffs contemporaneously applied for a temporary restraining order. Id. at 22. On June 14, 2018, District Judge Steven Hippler issued an "Amended Ex Parte Temporary Restraining Order" ("State TRO"). Id. at 34. The State TRO was to expire on June 28, 2018, and it provided:
Id. at 35-38.
In June 2018, Debtor opened new accounts for Paradigm at Zions Bank
Debtor also withdrew money from these accounts and deposited the funds into his personal account, Zions (6564). On June 20, 2018, Debtor withdrew $1,000 from Zions (4597), Ex. 1035-1, with a corresponding $1,000 deposit into his personal account, Ex. 1036-1. On July 12, 2018, Debtor withdrew $1,500 from Zions (4589), Ex. 1034-13, with a corresponding $1,500 deposit into his personal account, Ex. 1036-1. On July 19, 2018, Debtor withdrew $558 from Zions (4589), Ex. 1034-14, with a corresponding $558 deposit into his personal account, Ex. 1036-5.
On June 29, 2018, the balance in Zions (4597) was negative $397, improving to $0 by July 2, 2018. Ex. 1031 at 1, 5. On August 20, 2018, the balance in Zions (4589) was negative $844.79. Ex. 1033-11. On August 20, 2018, Debtor filed his chapter 7 bankruptcy petition. In re Jaques, No. 18-01092-TLM (Bankr. D. Idaho). Debtor did not initially disclose his personal account, Zions (6564), in his schedules, and he amended his schedules twice before listing this personal account. Id. at Doc. Nos. 1 at 14, 69 at 6, and 147 at 3.
The Plaintiffs seek to establish nondischargeable debts under §§ 523(a)(2) or (4), asserting that Debtor misused and exhausted the funds entrusted to his company, Paradigm. EUDA seeks $5,525 in damages, Doc. No. 53 at 30; EJC seeks $14,400, Id.; Doheny seeks $56,270.49, Id. at 31; Oaklands seeks $3,150, Id.; T Street seeks $38,088.85, Id.; Trestles seeks $37,107.68, Id. at 31-32.; Tammara Heron, as trustee of the Heron Trust, seeks $270,667.31, Id. at 33; and Silver Fox seeks $49,690.84, Id.
Debtor argues that he, as a member of Paradigm, is separate from Paradigm, and that he is therefore shielded from liability under the Idaho LLC statute, which provides:
Idaho Code § 30-25-304 (emphasis added).
"Generally, `[m]embers of an LLC are not liable for the misconduct of the company unless it is proven that the company is the alter ego of the member or manager.'" Drug Testing Compliance Grp., LLC v. DOT Compliance Serv., 161 Idaho 93, 383 P.3d 1263, 1276 (2016) (emphasis added) (quoting Wandering Trails, LLC v. Big Bite Excavation, Inc. 156 Idaho 586, 329 P.3d 368, 376 (2014), which equated the alter ego test to "piercing the corporate veil" in the context of the prior LLC statute) (considering a manager's liability under the current LLC statute). The Idaho Supreme Court has not addressed whether the protections of Idaho Code § 30-25-304 extend to the individual misconduct of the member, i.e., for conduct beyond being a member and/or failing to observe formalities in managing the LLC.
As noted in In re Sterling Mining Co., 415 B.R. 762 (Bankr. D. Idaho 2009), if a state's highest court has not addressed an issue of law, this Court "must predict how the highest state court would decide the issue." Id. at 767 (quoting In re First Alliance Mortgage Co., 471 F.3d 977, 993 (9th Cir.2006); and citing Glendale Assocs., Ltd. v. NLRB, 347 F.3d 1145, 1154 (9th Cir.2003) (directing a federal court to use intermediate appellate decisions, decisions from other jurisdictions, statutes, and secondary authorities as guidance to determine how the state court would rule)). Thus, this Court must interpret the statutory language of Idaho Code 30-25-304 as the Idaho Supreme Court would. When addressing statutory construction, the Idaho Supreme Court has stated:
Verska v. Saint Alphonsus Reg'l Med. Ctr., 151 Idaho 889, 265 P.3d 502, 505-06 (2011).
Idaho Code § 30-25-304 shields a member from liability of the company "solely by reason of being or acting as a member or manager" of the LLC and makes clear that the "failure to observe formalities" as the LLC exercises its powers or manages its affairs is not a basis for imposing liability on a member. However, neither of these protections relates to, nor does the statute expressly limit liability of a member for, the member's actions that are undertaken outside the normal performance of his or her duties. Thus, the scope of this limited liability does not extend to a member's actions when the member causes the company to act illegally or fraudulently, or when the member is not acting within the bounds of her duties or obligations as a member of the company, but in his or her own self-interest.
The Official Comments to Idaho Code § 30-25-304 are particularly instructive on this issue:
This Court concludes that the Idaho Supreme Court would not extend the scope of the limited liability protection of Idaho Code § 30-25-304 beyond the protections expressly enumerated in the statute. The plain meaning of the statute only protects a member for liabilities imposed "solely by reason of being or acting as a member or manager" or for "failure to observe formalities," and, as explained by the Official Comments to Idaho Code §§ 30-25-304, the "shield is irrelevant to claims seeking to hold a member or manager directly liable on account of the member's or manager's own conduct." Therefore, Debtor is not shielded from liability for his own wrongful or tortious conduct.
Where a limited liability company shields its member(s) from liability, and equitable considerations compel a court to disregard that shield, creditors may also "pierce the veil" of the LLC by establishing the LLC was the "alter ego" of its member(s), and thereby impose personal liability on the otherwise protected member(s). Wandering Trails, 329 P.3d at 376.
Civil Rule 54(c), incorporated by Rule 7054(a), provides:
(Emphasis added.) The broad relief under Civil Rule 54(c) is limited "where the failure to request appropriate relief prejudices the adversary's defense of the matter." Hopkins v. D.L. Evans Bank (In re Fox Bean Co.), 287 B.R. 270, 289 (Bankr. D. Idaho 2002) (citing Samayoa v. Jodoin (In re Jodoin), 196 B.R. 845, 851-52 (Bankr. E.D. Cal.1996)). However, as the Jodoin court explained:
Jodoin, 196 B.R. at 852.
In this case, Debtor is not prejudiced by the Court's consideration of the issue of veil piercing. Veil piercing was an
To establish that Paradigm was the alter ego of Debtor, Plaintiffs must prove "(1) a unity of interest and ownership to a degree that the separate personalities of the [company] and individual no longer exist and (2) if the acts are treated as acts of the [company] an inequitable result would follow." Wandering Trails, 329 P.3d at 376 (citing VFP VC v. Dakota Co., 141 Idaho 326, 109 P.3d 714, 723 (2005); Vanderford Co. v. Knudson, 144 Idaho 547, 165 P.3d 261, 270-71 (2007)).
A unity of interest is not established merely because the individual is the only member of the LLC and exercises full control over said entity. Wandering Trails, 329 P.3d at 377. The Idaho Supreme Court held:
Id. at 376-77 (emphasis added).
Factors relevant to establish a unity of interest include evidence that the debtor deposited his or her own money into the company's financial accounts for purposes other than meeting capital obligations;
In this case, there is ample evidence of a unity of interest between Debtor and Paradigm. The evidence establishes Debtor disregarded the separate identities of his businesses and himself. Debtor repeatedly obligated the assets of Rentmaster to obtain financing needed for the buyout of a Paradigm member. When the obligation to service the MCAs caused a need for cash flow, Debtor obtained a personal loan, not a business loan for and through Paradigm, from his parents and deposited that money into a company account, even though there is no indication Debtor was personally obligated to meet Paradigm's expenses. In addition, Debtor used his own funds to pay Plaintiff's obligations that should have been paid from the Paradigm Trust Account (i.e., the payment of the Heron Trust's property taxes). In short, Debtor used whatever funds were or could be made available to meet immediate needs without regard to whether those funds belonged to Paradigm, Paradigm's clients, Rentmaster, or himself personally. The evidence of Debtor's conduct supports a determination that Debtor disregarded the distinction between the personalities of Paradigm and himself, and establishes a unity of interest between Paradigm and Debtor.
The Idaho Supreme Court also addressed the "inequitable result" factor of the alter ego test in Lunneborg. In holding that the trial court did not abuse its discretion, the Idaho Supreme Court stated:
Lunneborg, 421 P.3d 187, 201-202.
Here, Paradigm through Debtor used Plaintiffs' funds to service the MCAs, resulting in the Paradigm Trust Account balance being insufficient to satisfy the obligations due Plaintiffs. Debtor then took the rent checks from Plaintiffs' tenants and deposited them into two newly opened accounts for the purpose of operating a defunct business that had its existing accounts frozen by the State TRO. Debtor used those accounts in such a way as to diminish their balances below $0, paying his employees and himself. In short, Debtor "drained [Paradigm of its] assets by diverting those assets and income" to himself and to unauthorized uses. Given Debtor's actions, to allow him to "escape personal liability would be to sanction an injustice and create an inequitable result."
Thus, both elements of the alter ego test are met, and this Court concludes that Paradigm was Debtor's alter ego, and Paradigm's obligations and liabilities are thus imputed to Debtor.
Plaintiffs argue Debtor made multiple statements and misrepresentations designed to conceal the diversion of Plaintiffs' funds. Section 523(a)(2)(A) excepts from discharge "any debt ... for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by ... false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition." To prove subparagraph A, a creditor must establish:
Harmon v. Kobrin (In re Harmon), 250 F.3d 1240, 1246 (9th Cir. 2001). With respect to the element of proximate cause the creditor "must show that it had valuable collection remedies at the time it agreed to renew its commitment to the debtor, and that those remedies later became worthless," but need not show "that, had it not renewed its commitment in reliance on the debtor's fraudulent statements, it would have exercised its collection remedies in a sufficiently timely fashion to collect the debt." Siriani v. Nw. Nat'l Ins. Co. (In re Siriani), 967 F.2d 302, 305 (9th Cir. 1992).
Debtor made multiple false statements to Uhlenhoff, the Herons, Wilson, and their respective entities. These statements were made to conceal Debtor's actions and material problems with Paradigm's operation, and for the purpose of continuing business with Plaintiffs and allowing the unauthorized use of Plaintiffs' funds. Debtor made multiple representations to Uhlenhoff and Brett Heron that,
Debtor knew these statements were false or misleading, and these statements were made with the intent Plaintiffs would rely on them. Uhlenhoff, Wilson, and the Herons testified that they did rely on the truthfulness of the owner statements, and on Debtor's statements about the safety and integrity of their funds. Uhlenhoff and the Herons were justified in their reliance since, in prior similar situations, the initial issues were small and, when brought to Debtor's attention, they were plausibly explained and fixed. Wilson's reliance was also justified since being told a bookkeeper had been fired would plausibly explain Paradigm's inability to provide records. Plaintiffs were harmed by Debtor's misrepresentations and false statements because they continued their business with Debtor and Paradigm.
Debtor correctly notes that a statement made respecting Debtor's or his insiders' financial condition cannot support a § 523(a)(2)(A) claim, and he argues these statements respect Paradigm's financial condition.
In this case, the statements outlined above did not have a direct relation to Debtor's or Paradigm's finances. To the contrary, Debtor's statements regarding the integrity of the Plaintiffs' funds, the reason for late payments made on behalf of some Plaintiffs, and the owner statements, rent rolls, and cash flow statements are all statements made respecting Plaintiffs' funds not his or Paradigm's financial
Therefore, Debtor's debts, to the extent such debts were established at trial, are nondischargeable under the exception of § 523(a)(2)(A).
Plaintiffs argue that Debtor's debts are nondischargeable under § 523(a)(4) because they are debts "for fraud or defalcation while acting in a fiduciary capacity." To prevail on a cause of action under § 523(a)(4), Plaintiffs must not only show Debtor's fraud or defalcation, but also that Debtor was acting in a fiduciary capacity when he committed the fraud or defalcation. See Teichman v. Teichman (In re Teichman), 774 F.2d 1395, 1398 (9th Cir.1985).
Murray v. Woodman (In re Woodman), 451 B.R. 31, 38-39 (Bankr. D. Idaho 2011).
In this case, Plaintiffs argue the agreements between each Plaintiff and Paradigm established a trust. Plaintiffs also argue that a trust for the purpose of § 523(a)(4) was created upon receipt of tenant security deposits because Idaho Code § 6-321 imposes fiduciary-like restrictions on the retention of a security deposit.
Though Plaintiffs' arguments would appear to ignore the separation between Paradigm and Debtor, since Plaintiffs established Paradigm was Debtor's alter ego, liability can be imposed on Debtor personally if the requisite fiduciary relationships between Paradigm and Plaintiffs are established. This requires evaluation of each Plaintiff's proof.
There are no express trusts between Paradigm and Silver Fox or Trestles, as there is no evidence of the terms of the contract between Paradigm and Trestles, and no evidence of a contract between Paradigm and Silver Fox, that would create
Plaintiffs established express trusts were created by the terms of the property management agreements between Paradigm and EUDA, EJC, Oaklands, T Street, Doheny, and the Heron Trust. These contracts required Paradigm to put Plaintiffs' funds in a separate trust account, and to use the funds on behalf of the owner, and only in a manner authorized by the agreement. Thus, § 523(a)(4) applies, and the Court evaluates whether these Plaintiffs (EUDA, EJC, Oaklands, T Street, Doheny, and the Heron Trust) established the elements of fraud or defalcation under § 523(a)(4).
"`Fraud' under § 523(a)(4) means actual fraud." Honkanen v. Hopper (In re Honkanen), 446 B.R. 373, 382-83 (9th Cir. BAP 2011) (citing Roussos v. Michaelides (In re Roussos), 251 B.R. 86, 91 (9th Cir. BAP 2000)). "The definition of "fraud" for purposes of 523(a)(4) is the same as fraud with respect to 523(a)(2)." In re Chavez, 140 B.R. 413, 423 (Bankr. W.D. Tex. 1992). Thus, a creditor must establish:
Harmon, 250 F.3d at 1246. Further, in addressing "actual fraud" under § 523(a)(2)(A), the United States Supreme Court explained in Husky Int'l Elecs., Inc. v. Ritz, ___ U.S. ___, 136 S.Ct. 1581, 194 L.Ed.2d 655 (2016):
Id. at 1586 (emphasis added).
Here, Debtor's misrepresentations considered previously under § 523(a)(2)(A)— excuses about tardy payments, falsified owner statements, and excuses about Paradigm's inability to reconcile its books— are sufficient to satisfy § 523(a)(4). Debtor
Therefore, the debts, to the extent such debts were established at trial, with respect to EUDA, EJC, Oaklands, T Street, Doheny, and the Heron Trust are nondischargeable under the fiduciary fraud exception of § 523(a)(4).
"[F]or purposes of § 523(a)(4), `defalcation' means either a `misappropriation of trust funds or money held in any fiduciary capacity' or a `failure to properly account for such funds.'" Castillo v. Akers (In re Castillo), 2012 WL 3641510, at *6 (9th Cir. BAP Aug. 24, 2012) (citing Blyler, et al. v. Hemmeter (In re Hemmeter), 242 F.3d 1186, 1190 (9th Cir. 2001)). The United States Supreme Court explained in Bullock v. BankChampaign, N.A., 569 U.S. 267, 133 S.Ct. 1754, 185 L.Ed.2d 922 (2013):
Id. at 273-74, 133 S.Ct. 1754.
Here, Debtor knowingly pledged the funds in the Paradigm Trust Account to multiple MCA financers. Debtor knew Paradigm's operating account lacked cash flow to service the MCAs and that the Paradigm Trust Account was marginally sufficient to fund them. Debtor's use of these trust funds breached the terms of the Plaintiffs' contracts and Paradigm's fiduciary obligations to the property owners. This conduct resulted in the substantial depletion of the Paradigm Trust Account.
Debtor knew or should have known that obligating the Paradigm Trust Account to MCA financers would result in significant depletion of the funds held therein. Debtor took a substantial and unjustified risk in directing Paradigm to repeatedly enter into this unsustainable financing alternative (and at times Rentmaster as obligor though the funds were to benefit Paradigm), and his course of action was a gross
Thus, EUDA, EJC, Oaklands, T Street, Doheny, and the Heron Trust have established the elements of the fiduciary defalcation exception to discharge under § 523(a)(4), and Debtor's debts are nondischargeable.
Section 523(a)(4) excepts from discharge "any debt ... for ... embezzlement." This Court explained in Woodman, 451 B.R. at 41:
In Woodman, there was a multi-tiered LLC structure with the debtors as members of an LLC which was itself the managing member of a property management LLC that managed the plaintiff's mobile home park. Id. at 35-37. The plaintiff did not receive two months of rents collected by the property management company. Id. at 37. When the debtors filed bankruptcy, the plaintiff brought an adversary proceeding under § 523(a)(2), (4), and (6). Id. The Court found that the debtors, as members of the managing member of the property management company, had rightful possession of the rents and deposit receipts entrusted to the property management company by the plaintiff's tenants. Id. at 43. This relationship between the debtors and the property owner, though attenuated, was sufficient to establish the first element of embezzlement—property in the rightful possession of a nonowner—for the purposes of determining nondischargeability under § 523(a)(4). Id.
Paradigm's contracts with EUDA, EJC, Oaklands, T Street, Doheny, and the Heron Trust creates an agency between Paradigm and said Plaintiffs. Exs. 1041-1, 1042-1, 1043-1, 1044-1, 1045-1, 1046-1, and 1063-1. Debtor, as Paradigm's managing member, see Ex. 1016,
Though the terms of the Trestles contract were not proven, and the existence of a contract between Silver Fox and Paradigm was not proven, the owner statements, rent rolls, and cash flow statements provided by Debtor to both Trestles and Silver Fox are evidence that Paradigm had possession of tenant rents and security deposits of Trestles and Silver Fox.
Debtor then appropriated Plaintiffs' monies to a use other than which they were entrusted when Debtor pledged the funds to obtain financing to buyout a member of Paradigm. He authorized multiple MCAs to make daily withdrawals from the Paradigm accounts where Plaintiffs' funds were held. In addition, with respect to T Street, Doheny, and the Heron Trust, Debtor appropriated Plaintiffs' funds by charging unauthorized markups for vendor services.
The last element of embezzlement—circumstances indicating fraud—is established by (i) Debtor's admissions that he lied to clients in order to keep their business; (ii) the falsified documents provided to the Heron Trust; (iii) the repeated false excuses about check numbers, account errors, and employee errors; (iv) the owner statements that concealed markups and charged for unpaid expenses; (v) the use of funds from his other businesses and his personal account to satisfy obligations that Paradigm had insufficient funds to satisfy, when his communications to Plaintiffs suggested the payment was made in the ordinary course of business; and (vi) the post-TRO creation, funding, and draining of new Paradigm accounts.
As Plaintiffs have established the elements of embezzlement under § 523(a)(4), Debtor's debts, to the extent such debts were established at trial, are nondischargeable.
Exhibit 1054 contains owner statements and rent rolls for each Uhlenhoff entity. They show the amount in owner reserves, rents, and security deposits that should have been held by Paradigm at the end of May 2018 for each entity. By its own account, Paradigm should have held $5,525 in trust on behalf of EUDA.
Exhibit 1094 includes one page from Paradigm's general ledger relating to the Heron Trust with dates from June 7, 2018, to June 8, 2018. Tammara Heron used the balances on this page to calculate the amount that should have been held in reserve. Tammara Heron testified that a $30,883 mortgage payment was made on behalf of the Heron Trust. Therefore, she subtracted $30,883 from the ending balance of $122,930.93 on June 8, 2018, to obtain a purported reserve amount of $92,047.93. Ex. 1094-4. Though the balance of $92,047.93 far exceeds the $50,000 Tammara Heron testified to keeping in reserve with Paradigm, Tammara Heron explained that this figure also included the tenant rent checks received as of June 8, 2018. Thus, the Heron Trust calculates $92,047.93 in owner reserves and rents that was supposed to be held in trust by Paradigm.
Tammara Heron also argues the Heron Trust is entitled to $65,175 in lost security deposits. She argues Exhibit 1065 evidences the security deposits that should have been held in trust by Paradigm. See Doc. No. 53 at 32. Exhibit 1065 includes the rent roll for the Heron Property for the month of March 2018. Ex. 1065 at 3-5. As of March 31, 2018, the Heron Trust had $65,175.00 in security deposits. Id. at 5. There is no other testimony or documentary evidence showing the amount of security deposits held by Paradigm on behalf of the Heron Trust. The Court cannot conclude from this record that the Heron Trust suffered damages in this amount. The exhibit provides only a snapshot of the amount of security deposits held as of March 31, 2018. There was no evidence proffered in regard to deposits returned to, or withheld from, tenants at move out following March 31, 2018. Thus, this does not clearly establish the amount of security deposits that should have been held in trust by Paradigm in June 2018, when it became apparent the Paradigm Trust Account held insufficient funds and the Heron Trust terminated its contract with Paradigm. Nor does other evidence establish this figure.
Silver Fox argues it is entitled to damages for tenant rents and deposits lost as a result of Debtor's actions. While Silver Fox asserts Ex. 1108-17 establishes the rents and security deposits owed it on June 2018, Exhibit 1108-17 is a rent roll showing rents and deposits as of December 31, 2017. Doc. No. 53 at 22. Silver Fox attempts to explain in its closing argument the changes in the deposited amounts between December 2017 and June 2018. Id.
The Heron Trust identified incorrect entries for the insurance premiums paid by Paradigm in a cash flow statement printed by Sarah Phillips on June 6, 2018, Ex. 1094-2. The February 2018 entry indicated that Paradigm expended $9,444 for insurance premiums, but the April 2018 statement from the insurance company indicated a remaining balance of $3,148 on February 28, 2018, and a $3,148 payment on March 12, 2018. Ex. 1091-2. Thus, nothing was paid in February 2018. These errors are also apparent in an excerpt from the general ledger dealing with the Heron Trust's insurance premiums.
The chapter 7 trustee successfully avoided the December 2017 property tax payment to Ada County by Debtor on behalf of the Heron Trust in an adversary proceeding under §§ 547, 548, and 550. Hopkins v. Ada Cty. (In re Jaques), No. 19-06001-TLM, Doc. No. 32 (Bankr. D. Idaho 2019). Tammara Heron testified that, consequently, the Heron Trust had to pay these taxes and late fees again. Debtor argues that the property tax payment was always owed to Ada County by the Heron Trust, and that the Heron Trust is only damaged by the late fees. However, The Heron Trust's prior owner statement showed that funds previously due the Heron Trust were reduced by the property tax payment. Ex. 1069-9. Since Paradigm never made the property tax payment, and Debtor's attempt to make the payment with his personal funds was undone by the trustee's avoidance and recovery of those funds, the Heron Trust is entitled to the entire amount of the taxes and the late fees of $65,083.49.
Plaintiffs contend Paradigm levied unauthorized markups on maintenance or vendor charges that were not clearly identified in their owner statements. Debtor testified that it was Paradigm's standard practice to markup vendor expenses. Jason Hall, Paradigm's general manager, testified that Debtor informed him of Paradigm's maintenance markup policies on his first day of employment and emphasized the importance of making money in the maintenance business. Debtor did not inform Hall that certain properties could not be marked up based on variations in the management agreements. Wendy Lawrence, Paradigm's bookkeeper, testified that Paradigm would markup maintenance bills and other work performed upon a tenant's moveout by billing such work directly to the owners at a higher,
The contracts for Oaklands, EJC, and EUDA allowed for a 20 percent markup. See generally Exs. 1042-3, 1043-3, 1044-3, and 1046-3. However, the record establishes Paradigm was not entitled to markup any services for the properties owned by T Street or Doheny. See generally Exs. 1041 and 1045. Yet, a portion of Paradigm's general ledger for the Uhlenhoff Entities itemizes the $4,059.56 in markups on vendor services for the T Street properties, Ex. 1055 at 44-54, and $12,179.99 in markups for vendor services for the Doheny properties, Ex. 1055-23. Such improper markups are damages to these Plaintiffs.
Trestles argues it was entitled to damages for the unauthorized markup of vendor services. However, Trestles failed to establish the terms of its contract which prohibit Paradigm from marking up the expense of vendor services. While it is evident that Paradigm did markup such expenses, without evidence of the contract terms, the Court cannot conclude that such markups were improper.
Though the contract between Paradigm and the Heron Trust only allowed for a 7% vendor markup on renovation, modernization, or capital improvements requested by the Heron Trust, Ex. 1063-4, Paradigm marked up vendor services without notation regarding renovation, modernization, capital improvement, or other services. Sarah Phillips, Paradigm's receptionist and leasing agent, provided the Heron Trust with a general ledger that included vendor markups that were not clearly identified as such in the Heron Trust's owner statements. Ex. 1101. Between July 11, 2017, and June 1, 2018, Paradigm marked up maintenance and vendor expenses by $892.48. Id. at 1-5.
The Heron Trust failed to establish that all of these markups were improper. Certain services listed in the general ledger appear to fall into the categories of renovation, modernization, or capital improvement. The Heron Trust failed to demonstrate that these services actually fall outside such categories. Such services include replacement of an insulated glass unit—marked up $23.68—and exterior paint work—marked up $50. Ex. 1101 at 3-4. The Heron Trust also failed to establish that those services were not performed at the Heron Trust's request. Thus, the Heron Trust has failed to establish that $76.68 in markups were not authorized under its contract with Paradigm. The remaining markups of $815.80 were unauthorized and are appropriate as damages.
Tammara Heron also seeks damages for markups on the cost of the services of Columbia Debt Recovery. Debtor contracted with Columbia Debt Recovery on behalf of the Heron Trust. Exs. 1102-1103. The Heron Trust did not present sufficient evidence of markups on the Columbia Debt Recovery services, and no damages will be awarded therefor.
Silver Fox argues it is entitled to damages for the unauthorized markup of vendor services. However, Silver Fox failed to establish the existence of a contract or any agreement where Paradigm was prohibited from marking up vendor services, and Wilson's testimony regarding the same is insufficient to establish that vendor markups were improper. While it is evident that Paradigm did markup vendor expenses, the Court cannot conclude that such markups were improper.
Damages, as established by Plaintiffs, will be awarded in the following particulars:
EUDA: • Owner's reserve balance $500.0054 • Tenant rents $2,825.0055 • Security deposits $2,200.0056 __________ • Total $5,525.00 EJC: • Owner's reserve balance $1,000.0057 • Tenant rents $6,040.0058 • Security deposits $7,000.0059 __________ • Total $14,040.00. Doheny: • Owner's reserve balance $3,023.0060 • Tenant rents $17,217.5061 • Security deposits $23,850.0062 • Unauthorized markups $12,179.9963 __________ • Total $56,270.49. Oaklands: • Owner's reserve balance $500.0064 • Tenant rents $1,450.0065 • Security deposits $1,200.0066 _________ • Total $3,150.00. T Street: • Owner's reserve balance $4,019.2967 • Tenant rents $15,945.0068 • Security deposits $14,065.0069 • Unauthorized markups $4,059.5670 __________
• Total $38,088.85. Trestles: 71 • Owner's reserve balance $2,000.0072 • Tenant rents $14,375.0073 • Security deposits $14,765.0074 • Unauthorized Markups $0.00 __________ • Total $31,140.00. Tammara Heron, on behalf of the Heron Trust: • Security deposits $0.00 • Owner distribution $42,341.2675 • Unauthorized markups $815.8076 • Extra insurance premium $3,148.0077 • Owner reserves and rent $92,047.9378 • Property taxes and late fees $65,083.49 • Columbia debt recovery $0.00 ____________ • Total $203,436.48. Silver Fox:79 • Security deposits $0.00 • June 2018 tenant rent $0.00 • Owner distribution $35,755.2880 • May 2018 ending cash balance $3,310.0081 • Unauthorized vendor markups $0.00 ___________ • Total $39,065.28.
Plaintiffs request an award of attorneys' fees and costs under Idaho Code §§ 12-120 and 12-121, and Idaho R. Civ. P. 54. This Court previously explained:
Idaho Code § 12-120(3) provides:
Optekar v. Tickemyer (In re Tickemyer), 2011 WL 1230326, at *10-11 (Bankr. D. Idaho Mar. 31, 2011).
Here, Plaintiffs prevailed in establishing their claims and the nondischargeability thereof. In addition, Plaintiffs' claims were commercial in nature as the claims arose from Debtor's contractual obligations and commercial services. Therefore, Plaintiffs are entitled to attorneys' fees under Idaho Code § 12-120.
Plaintiffs established that debts owed them by Debtor in the foregoing particulars are nondischargeable under §§ 523(a)(2) and (4). The Court will enter an appropriate judgment once attorneys' fees are established.
Id. at *1. Generally, the installments are a percentage of each credit card transaction, as explained by the United States District Court for the Southern District of California in Captain Bounce, Inc. v. Bus. Fin. Servs., Inc., 2012 WL 928412 (S.D. Cal. Mar. 19, 2012):
Id. at *1 (internal citations omitted).
In this case, however, the MCAs were structured such that the installments would be a fixed amount in lieu of a daily percentage of credit card transactions because Paradigm was not a business that had daily credit card sales. These daily instalments were automatically drawn from accounts Debtor specified. See generally Exs. 1017-1022.
However, the ordinary meaning of the term "obligation" is "[a] legal or moral duty to do or not do something. ... A formal, binding agreement or acknowledgement of a liability to pay a certain amount or do a certain thing for a particular set of persons; esp. a duty arising by contract." BLACK'S LAW DICTIONARY 1179 (9th ed. 2009). Thus, "capital obligation," as contemplated by the Idaho Supreme Court, was likely narrower than "capital contribution" as defined in Idaho Code § 30-25-102, and is, in the context of an LLC, a capital contribution which a member of an LLC is under a legal duty to make to become a member or as required by his membership in the LLC (i.e., capital contributions required by the operating agreement or based on subsequent agreement between the members and/or the LLC).
