MEMORANDUM

Joan N. Feeney, United States Bankruptcy Judge.

I. INTRODUCTION

The matter before the Court is the four-count Amended Complaint filed by Lisa Reed ("Reed" or the "Plaintiff")1 against David Zak ("Zak," the "Defendant," or the "Debtor"). The Plaintiff seeks to except obligations she alleges are owed to her by the Defendant from discharge pursuant to 11 U.S.C. § 523(a)(2)(A), (4), and (6).2 The Court conducted a two-day trial commencing on March 28, 2017 at which three witnesses testified and 33 exhibits were introduced into evidence by agreement.

The issues presented include whether the Plaintiff has established that the Defendant is obligated to her for monies owed arising out of the involuntary dissolution of a partnership she had with a corporation known as Loan Modification Group, Inc. ("LMG"), an entity solely owned and controlled by the Defendant, and, if so, whether she has sustained her burden of establishing that any such obligations are excepted from the Debtor's discharge.

For the reasons set forth below, the Court concludes the Plaintiff has sustained her burden of proof under both 11 U.S.C. § 523(a)(4), and (a)(6) as the Defendant was the alter ego of LMG and is personally liable for torts he committed in his capacity as sole officer, director, and shareholder of LMG.

II. FACTS3

Reed testified that she first became acquainted with Zak in 2008 or early 2009 when he contacted her to collect monies she owed to Jonathan Friedmann, Esq. ("Attorney Friedmann") who together with Zak had represented her in conjunction with her real estate business, which she referred to as Mass Lending, as well as with respect to legal problems associated with a scheme she engineered to defraud mortgage lenders.4 She testified that she was "working for a loan modification company on the side" and asked Zak if he would be "interested in doing a loan modification on his condo in Cambridge." According to Reed, she raised the subject of a loan modification business. Zak indicated to her that he was very interested in such a venture, particularly when she informed him that "it was a lucrative business that could explode." Reed further testified that she and Zak agreed to work together. At trial, she testified about their venture as follows:

In February of 2009, Zak incorporated LMG, identifying himself as president, treasurer, secretary, director and sole shareholder in the Articles of Organization. At the time, Zak was operating Zak Law Offices, P.C. ("ZLO"), a professional corporation he incorporated in 2007. Reed took credit for naming LMG, stating "I actually came up with the name and it was a company formed based off of our advisor, Jonathan Friedmann, who was always — he was an advisor on board for us telling us that we needed a company to [sic], under ZLO's umbrella, so we can take payments for loan modification clients."

Reed testified about the trajectory of the business:

Prior to LMG's incorporation, Reed solicited homeowners in financial distress who were either having difficulty paying their mortgages or facing foreclosure. ZLO paid her a referral fee of $1,000 for each client that she referred to the law firm. In June of 2009, once the business became established, Reed's arrangements with LMG and ZLO changed and she began receiving, primarily through her nominees (her nephew and a company she owned and controlled), 50% of the profits of the loan modification business. ZLO's payments to Reed's nominees were the result of her legal and financial problems.

According to Reed,

In furtherance of that business model, LMG and ZLO required the execution of fee agreements by clients that typically required them to make an advanced payment of $2,500. LMG was described in those contracts in different ways. For example, a form fee agreement executed on April 9, 2009 by Jose Vasquez, and David Zak, as President of LMG, referred to LMG as a wholly owned subsidiary of ZLO. The fee agreement provided in pertinent part the following:

(emphasis in original).

Fee agreements executed by homeowner Yanko Matias on October 5, 2009 and by homeowner Dayanet Aviles on November 28, 2009, differentiated the services to be provided by ZLO and LMG, now referred to as Loan Modification Group of Massachusetts ("LMGM"), and described LMGM in the document as "an analytic consulting company supervised and managed" by ZLO. For LMGM's services the clients agreed to pay a $2,500 fee as reflected in the following form of agreement:

Zak executed the agreement on behalf of LMGM.

He also explained why ZLO was not initially a signatory to the fee agreement. He stated:

As noted above, Reed received 50% of the profits of the loan modification business beginning in June of 2009. Zak testified as to the reason for the profit sharing:

As part of her duties, Reed prepared so-called "production reports," which she described as follows:

Reed added: "We were exploding at that point." She estimated that there were 700-900 clients at the end of 2009.

The production report for December 2009, which was introduced as an exhibit, revealed that 10 agents, one of whom was not identified, procured 52 clients and collected $121,250 in payments which "cleared" on or after December 1, 2009 with an additional sum of $265,850 to be collected in the future. Attorney Friedmann, who was assisting ZLO, also was involved in preparing so-called production reports as his name is prominently displayed on the January 2010 report. According to that report (Exhibit 21), $106,650 in second payments cleared in December with respect to 41 loans for which a total of $228,200 was collected. Thus, there were substantial profits from the loan modification business to be distributed to Reed, directly or indirectly, and to Zak.

ZLO issued checks, signed by Zak, to Reed for her share of the partnership profits. Notably, emails relating to the disbursements showed that Reed and Zak were sharing the profits equally. For example, an email from "Gymbab@aol.com" to Reed and Zak provided: "$34K to David and $34K to Lisa." Similarly, an email dated December 2, 2009 from Maryann O'Connor to Reed and Zak provided: "Take $39,280.21 Each."

In other words, profits were not shared by LMG and Reed, but by Zak and Reed. Some of Reed's distributions, as noted above, were made by checks payable to her nephew, Chris Amarilla, and others were made payable to American Union Corporation, an entity which Reed owned and controlled. According to Reed, Attorney Friedmann advised her not to have checks issued in her name because of her pending legal problems.5 During the second half of 2009, Reed was receiving a salary and a share of profits as follows: in July 2009, ZLO issued checks to Chris Amarilla totaling $17,277.51; in August 2009, it issued a check to Reed in the sum of $4,250 and a check to Amarilla in the sum of $6,081; in September 2009, it issued checks to Amarilla in the total sum of $24,000, although a memo indicated that Reed and Zak would each receive $34,000; in October 2009, ZLO issued a check to American Union Corporation in the amount of $50,000; in November 2009, it issued a check to American Union Corporation in the sum of $36,220.22; and in December of 2009, it issued a check to that entity in the sum of $40,500.

During its existence, LMG was a profitable enterprise. Despite the profitability of the partnership, however, Zak, on January 4, 2010, arranged to have Reed escorted out of the building by an off duty police officer without prior notice to her. Accordingly, Reed's affiliation with LMG, ZLO and Zak abruptly terminated, notwithstanding the action taken on January 5, 2010 when Maryann O'Connor, on behalf of Zak, forwarded Reed a check in the sum of $11,803.30 for December 2009, representing all or part of her share of profits for that month.

In response to her exclusion from the business, Reed immediately contacted an attorney. On January 8, 2010, Reed, through her attorney, sent a letter to "Dear Attorney Zak," although her attorney addressed the letter to both Zak, individually, and ZLO. In the letter, Reed's attorney represented that she and Zak, individually, verbally agreed to operate as a partnership and that Reed believed it was Zak's "intention to unilaterally and wrongfully exclude her from all aspects of the partnership's affairs." Citing Mass. Gen. Laws ch. 108A, §§ 1-49, Reed sought immediate inspection of the books and records of the partnership and an immediate and formal accounting of all partnership affairs. In addition, she advised Zak "to hold in trust all profits derived from the affairs of the partnership until this dispute is resolved, pursuant to M.G.L. c. 108A, Section 21."

On February 25, 2010, ZLO, LMG and Tradix Associates, Inc. commenced an action against Reed in the United States District Court for the District of Massachusetts seeking injunctive relief against Reed to prevent her from "copying, accessing, using, interfering with or infringing upon the copyright of the software program below described and that they be awarded monetary damages, compensatory and punitive, plus attorneys fees and court costs and expenses."6 The software program referenced in the complaint pertained to ZLO's use of the application "to perform legal services relating to mortgage modification for clients." In the complaint, the plaintiffs represented that, with ZLO's consent, LMG used the so-called QuickBase Application and agreed to pay Tradix $100 for services in connection with each mortgage modification file it processed using the application. Notably, the parties represented that in March of 2009, "defendant Reed assumed the title of Vice-President, Customer Service, that she obtained a password enabling her to access the QuickBase Application, and that, after her termination, she reproduced the application.

Reed answered the complaint and filed a seven-count counterclaim against ZLO and LMG, asserting that she was a partner with both entities and alleging, inter alia, that ZLO and LMG owed her a fiduciary duty with respect to the operation of the partnerships and that those entities breached the partnership agreements "by failing to share profits earned and profits to be earned in the future."7 On July 18, 2011, after a four-day trial and the dismissal of the complaint in its entirety, as well as resolution of other counts by agreement, United States Magistrate Judge Leo T. Sorokin entered judgment in favor of Reed and against LMG as to counts II through VI of her counterclaim in the amount of $423,538.38, consisting of $414,000.00 in damages, plus prejudgment interest in the amount of $7,649.36, and costs in the amount of $1,889.02. He also entered judgment in favor of ZLO and LMG on Count VII of the Counterclaim and in favor of ZLO on Counts II through VI.

The jury, in response to Special Verdict Questions, determined that a partnership existed between Reed and LMG, but not between Reed and ZLO. The jury indicated that it was awarding Reed $18,000 per month for eighteen months as her "partnership profit share" ($324,000 total), and $5,000 per month for eighteen months as a "salary" ($90,000 total), for a total award of $414,000. The eighteen-month period on which the award was based encompassed the period of time from Reed's expulsion from LMG to the date of trial.

LMG filed a motion captioned "Motion for a Judgment as a Matter of Law after Trial." The district court denied the motion finding that "[o]n the evidence presented, the jury could have rejected the exhibits LMG cites as incredible and instead inferred (based upon the other evidence presented) LMG's profitability during the post-January 2009 period." LMG appealed. In a twenty-page decision, the United States Court of Appeals for the First Circuit, on September 21, 2012, affirmed. See Loan Modification Group, Inc. v. Reed, 694 F.3d 145 (1st Cir. 2012). In its decision, the First Circuit observed that "[f]ollowing Reed's expulsion, LMG continued to operate the loan modification business and retained all the profits." The Court of Appeals also repeated the judge's jury instruction as to damages:

694 F.3d at 149. The Court of Appeals also determined:

694 F.3d at 151. The First Circuit further observed that "[u]nder Mass. Gen. Laws ch. 108A, § 23(2), `[a] continuation of the business by the partners ... without any settlement or liquidation of the partnership affairs, is prima facie evidence of a continuation of the partnership.'" Id. at 152 (citations omitted). It concluded:

Id. at 153. Despite the First's Circuit's findings, Zak testified at trial in this adversary as follows: "I did not know that I had these obligations as a partner in terms of winding down the partnership. Perhaps I didn't recollect, but I did not know specific requirements of winding down a partnership and, like I said, in my view we weren't partners so it didn't apply anyway."

Prior to the opinion and mandate of the United States Court of Appeals for the First Circuit, Reed in early 2012 commenced an action against Zak, individually, and ZLO in the Middlesex Superior Court Department of the Massachusetts Trial Court. She alleged that "LMG continued operation of the home loan modification business through ZLO by transferring all of LMG's customers, income and assets to ZLO." In addition, she asserted that beginning in January 2010, "a portion of the income and assets of LMG was transferred by LMG to ZAK [sic]." Reed also alleged that Zak, as LMG's sole officer and director, authorized LMG to transfer the customers, income and assets of LMG to himself and ZLO with the intent and design "to thwart and frustrate the plaintiff's attempts to effectuate and satisfy her legal rights as a partner of LMG under Massachusetts law." In count III of her three-count complaint, Reed alleged that Zak and ZLO were involved in the conveyance by LMG of its customers, income, and assets to Zak and ZLO and the conveyances were intended to "hide, delay and defraud the plaintiff" in violation of Mass Gen. Laws ch. 109A.8 The Middlesex Superior Court action was and is stayed as a result of the commencement of the Debtor's bankruptcy case and no judgment has entered.

Even before Reed filed her counterclaim against LMG and ZLO in the United States District Court for the District of Massachusetts and filed her complaint against ZLO and Zak in the Middlesex Superior Court, the Attorney General of Massachusetts and the Attorney General of Rhode Island were receiving complaints from clients of LMG and ZLO. Reed testified that Zak did not discuss with her the illegality of the upfront fees or the complaints being made by the Attorneys General, but she was aware that some homeowners were filing complaints and had filed "lawsuits with the Better Business Bureau saying that they didn't get what they paid for." She stated "[t]here were problems from the get-go, from the beginning. That's why we hired Jonathan Friedmann to help us get through those issues and that's why the fee agreements changed throughout the year based off of the advice from our attorney."

Zak testified that LMG ceased to operate in March of 2010 but the business continued through 2011. His description of how LMG and ZLO operated in 2009 did not differ materially from Reed's description.9 When Reed became a partner, he conceded that monies in the accounts belonging to LMG and ZLO were combined and that after deductions for business expenses and a reserve, profits were divided equally. Moreover, the Profit and Loss Statement for ZLO for the period from January to December 2009 showed total income of $1,163,456.11 and total income for the period from January to March 2010 of $246,287.72. For those same periods, net income was $130,883.90 and ($49,173.24), respectively. For the year 2010, ZLO reported income of $1,596,777 and net income of $72,884. For LMG, total income for 2009 was $1,047,539.04 with net income of $207,717.38; for the three month period beginning January 2010, total income was $175,830 with net income of $7,258.66.

As noted above, LMG's business gradually was routed to ZLO beginning in January of 2010. Zak explained the reasons for his decision to terminate Reed and close LMG.

In addition, Zak testified that in December of 2009 he learned that Reed was likely to be indicted. He decided to close the business, although he continued to collect fees from clients.

Zak was cognizant of the investigations by Attorneys General in Massachusetts and Rhode Island. He testified that the impetus to shutdown LMG was the filing of complaints by former clients. He stated:

Although Zak made the business decision to cease operating LMG, as noted above, he nevertheless continued to collect fees from its clients. He testified:

Zak admitted that he was concerned about fee splitting arrangements with non-lawyers and the receipt of advanced fees. He testified: "I contacted counsel specializing in lawyer's ethics and I was directed to Model Rule 5.4(a)(3) which specifically allows a lawyer to pay a non-lawyer employee a — profits from a law firm. That is a safe harbor provision ..." He also testified that without upfront payments from clients, LMG could not operate as it lacked capital to pay its employees and other expenses. Zak testified that LMG had two or three salaried employees receiving W-2 paychecks. ZLO had five-six employees. LMG and ZLO had separate bank accounts. Zak was unaware of whether they had separate books and records, stating: "I don't know whether they were kept in separate books because I didn't do the books, but they had separate — within QuickBooks they had a separate profit and loss I — I believe based on the evidence I've seen."

Patrick Dolan ("Dolan"), an attorney with the law firm of Cornell Dolan, testified without objection as an expert witness about Zak's decision to close LMG. In his view, the business judgment rule applied10 and justified Zak's decision to close LMG. Dolan indicated that the decision was a reasonable one based upon a recitation of assumed facts which track those reproduced above. Based upon his assumptions, Dolan concluded:

Zak's legal troubles did not end with closure of LMG. In February of 2011, the Commonwealth of Massachusetts, by and through the Attorney General, filed a complaint against him, ZLO, LMG and LMGM seeking preliminary and permanent injunctive relief barring their continued unlawful conduct, restitution, penalties, attorney's fees and costs.11 In the complaint, the Attorney General referenced emergency regulations issued to address harmful trends relating to foreclosure-related services, citing 940 Mass. Code Regs. § 25.00, et seq.12 The Attorney General alleged that the defendants engaged in numerous unfair and deceptive acts and practices through radio, television, print, internet, telephone, and face-to-face advertising, which misled homeowners into believing that they could obtain dramatic loan modifications. In addition, the Attorney General alleged that the defendants falsely promised to provide legal representation and to file suit against lenders, unlawfully solicited advanced fees, provided inadequate services, employed unfair tactics and refused to provide full refunds. The Suffolk Superior Court granted the motion on January 20, 2015.13 On July 14, 2015, it entered a "Final Judgment and Permanent Injunction," enjoining various activities of the defendants, including Zak, and imposed a $2,000 civil penalty for each violation of Mass. Gen. Laws ch. 93A, § 2. Its order provided:

In addition, pursuant to Mass. Gen. Laws ch. 93A, § 4, the Superior Court ordered the defendants to pay to the Commonwealth restitution of $157,000, reflecting advanced fees collected from 65 consumers who filed complaints with the Commonwealth, as well as $68,146 in attorney's fees and costs.

In its 28-page decision accompanying the Final Judgment and Permanent Injunction, the Superior Court found that "Zak was the sole owner, officer, and director of Zak Law Offices, and controlled all of its employees and affairs. He does not dispute that he was ultimately responsible for everything at Zak Law Offices." Commonwealth of Mass. v. Zak, No. 2011-00624H, Slip op. at 4 (Mass. Super. July 14, 2015). In addition, the state court determined that "Zak was the sole owner, officer and director of LMG," adding "Zak conceded that he oversaw LMG's operations, made its ultimate decisions, and had final say over all of its operations." Id. With respect to Reed, the Superior Court determined:

Id. at 4-6.14 The Superior Court also determined:

In addition to the suit commenced against him by the Attorney General of the Commonwealth of Massachusetts, Zak was the subject of a petition for discipline filed in April of 2013 by the Office of Bar Counsel of the Massachusetts Board of Bar Overseers. It recommended his disbarment from the practice of law in the Commonwealth, having adopted the findings of a special hearing officer who conducted an evidentiary hearing over 12 days at which 25 witnesses testified and over 220 exhibits were introduced into evidence. Zak, while not contesting the actions asserted in the petition, challenged the sanction, maintaining his conduct would at most warrant suspension. Associate Justice Barbara Lenk of the Supreme Judicial Court concluded that disbarment was the appropriate sanction, stating "[n]othing less would be adequate both to protect the public from harm and to prevent further damage to the public's view of the integrity of the legal profession than already has resulted from the respondent's misconduct." She determined:

In re David Zak, No. BD-2015-080, Slip op. at 5 (S.J.C. March 16, 2016) (Exhibit 32).

Although at the time of the trial in this adversary proceeding, Zak's appeal was pending, the Supreme Judicial Court affirmed the order of disbarment in In re Matter of Zak, 476 Mass. 1034, 73 N.E.3d 262 (2017). The Supreme Judicial Court, quoting Associate Justice Lenk, observed and ruled:

476 Mass. at 1036, 73 N.E.3d at 266 (emphasis supplied). Reed was both complicit in, and a beneficiary of, Zak's misconduct. Nevertheless, Justice Lenk and the Supreme Judicial Court, in adopting her decision, determined that Zak used LMG and ZLO as instrumentalities to perpetrate the business of extracting illegal and exorbitant fees from vulnerable clients with his partner, Reed, and engaged in fee-splitting with her. Thus, the Supreme Judicial Court, and the tribunals initially considering Zak's fitness to practice law, implicitly disregarded the corporate veil of LMG by finding as a fact that Reed and Zak were partners.

III. DISCUSSION

A. Introduction

As noted above, the Plaintiff's Amended Complaint was poorly pled. Indeed, the Plaintiff, while necessarily seeking to hold Zak personally liable for partnership profits owing to references to, and reliance on, § 523(a)(2)(A), (a)(4), and (a)(6), confused theories of liability and failed to ably articulate theories of relief; indeed Reed's attorney expressly stated that she did not contend that the Defendant was liable to her as a partner, a position she implausibly maintained after trial despite overwhelming evidence to the contrary and the ruling of the Supreme Judicial Court. The Defendant asserted that the Plaintiff failed to establish the existence of a debt owed by him personally to the Plaintiff, emphasizing that he had "no reason to know in 2010 that later events would play out this way in 2011."

Despite the positions advanced by the parties in their pleadings, the evidence presented at trial tells the real a story about their relationship, although different from the ones they posit. Indeed, the parties' respective positions are inconsistent with the evidence adduced at trial, and the overwhelming evidence that is "capable of accurate and ready determination by resort to sources whose accuracy cannot reasonably be questioned," specifically the Superior Court action commenced by the Attorney General against Zak and the decision issued in that case, as well as the decision of the Supreme Judicial Court affirming Zak's disbarment. This Court can take judicial notice of those decisions as their accuracy cannot reasonably be questioned. See Wilson v. Bodnar, 750 F.Supp.2d 186, 188 n.1 (D. Me. 2010)(citing United States v. Bello, 194 F.3d 18, 23 (1st Cir.1999)).15

Federal Rule of Civ. P. 15(b)(2), made applicable to this proceeding by Fed. R. Bankr. P. 7015, provides in pertinent part:

Fed. R. Civ. P. 15(b)(2). The parties expressly and/or impliedly consented to the trial of issues not raised by the Plaintiff in her Amended Complaint, or even recognized by her in her post-trial brief. By necessity, the Plaintiff had the burden of establishing the existence of a debt owed to her by Reed. Seemingly constrained by the judgment she obtained against LMG in the United States District Court for the District of Massachusetts, Reed failed to develop what appears plain to this Court, as well as to the Supreme Judicial Court, namely that Reed and Zak were partners and that Zak cannot use the corporate form to shield himself from liability for his personal torts. See LaClair v. Silberline Mfg. Co. Inc., 379 Mass. 21, 29, 393 N.E.2d 867, 872 (1979) ("A corporate officer is liable for torts in which he personally participated whether or not he was acting within the scope of his authority."). See also Falcone v. Ragonese (In re Ragonese), No. 11-42867-MSH, 2013 WL 3379537, at *4 (Bankr. D. Mass. July 8, 2013), aff'd, 505 B.R. 605 (1st Cir. BAP 2014) (citing, inter alia, Marshall v. Stratus Pharmaceuticals, Inc., 51 Mass.App.Ct. 667, 677, 749 N.E.2d 698, 708 (2001); Standard Register Co. v. Bolton-Emerson, Inc., 38 Mass.App.Ct. 545, 550-551, 649 N.E.2d 791 (1995); The Community Builders, Inc. v. Indian Motocycle Assocs., Inc., 44 Mass.App.Ct. 537, 560, 692 N.E.2d 964 (1998)).

In In re Ragonese, supra, a case involving a dispute arising out of the construction of a lakeside vacation home, the defendant, the principal of the corporation engaged to build the home, did not oppose the plaintiff's recasting of a veil-piercing cause of action to one for fraudulent inducement and the prosecution of that claim at trial. The court determined that Rule 15(b)(2) permitted it to treat the fraudulent inducement claim in all respects as if it had been raised in the pleadings and, accordingly, determined the merits of the claim. 2013 WL 3379537, at *4. This Court adopts that approach here, particularly as it is compatible with "[t]he goal of Rule 15(b) [which] is to promote the objective of deciding cases on the merits rather than on the relative pleading skills of counsel." Am. Family Mut. Ins. Co. v. Hollander, 705 F.3d 339, 348 (8th Cir. 2013) (citing Foman v. Davis, 371 U.S. 178, 181-82, 83 S.Ct. 227, 9 L.Ed.2d 222 (1962)). "Thus, amendments under the rule are to be `liberally granted where necessary to bring about the furtherance of justice and where the adverse party will not be prejudiced.'" Id. (quoting Am. Fed'n of State, Cty. & Mun. Emps. v. City of Benton, 513 F.3d 874, 883 (8th Cir. 2008) (internal quotation marks and citation omitted)). See also Noonan v. Rauh (In re Rauh), 119 F.3d 46, 52 (1st Cir. 1997). ("Under Rule 7015(b), motions to amend a complaint to conform to the evidence admitted at trial are liberally allowed.").

The Court finds that Zak consented to the introduction of evidence pertinent to his personal liability for a debt owed to Reed. Zak agreed to the introduction into evidence of exhibits, including memoranda memorializing the sharing of profits by Reed and Zak and the decision of Justice Lenk, later affirmed by that Supreme Judicial Court, in Zak's disbarment action. Those exhibits as well as Reed's testimony established a partnership between Reed and Zak. Zak cannot complain if evidence to which he did not object undermines his defense and establishes the existence of a debt even if Plaintiff's counsel did not appreciate his burden of demonstrating Zak's individual liability. The claims for relief Reed set forth in her Amended Complaint depend upon the existence of a personal obligation on the part of Zak to her. Regardless of how the parties framed the issues, a determination of Zak's personal liability to Reed is at the heart of this adversary proceeding. Any evidence pertinent to such a determination, whether in the form of testimony, exhibits, or judicial notice of decisions whose accuracy cannot reasonably be questioned is pertinent to that determination. This Court concludes there was substantial evidence to establish Zak's personal liability to Reed and that the issue of Zak's personal liability was tried with his implied consent.

Am. Family Mut. Ins. Co. v. Hollander, 705 F.3d 339, 348 (8th Cir. 2013). This Court recently observed:

The Patriot Group, LLC v. Fustolo (In re Fustolo), 563 B.R. 85, 105 (Bankr. D. Mass. 2017). See also Premier Capital, LLC v. Crawford (In re Crawford), 841 F.3d 1 (1st Cir. 2016). Implied consent and the amendments to conform to the evidence is not permitted unless "a party `had a fair opportunity to defend and whether he could offer any additional evidence if the case were to be retried on a different theory.'" In re Rauh, 119 F.3d at 52 (citing, inter alia, Browning Debenture Holders' Comm. v. DASA Corp., 560 F.2d 1078, 1086 (2d Cir.1977)).

The evidence of Zak's personal liability to Reed and of the existence of a de facto partnership between Reed and Zak as will be discussed more fully below, was substantial and cannot be ignored despite the jury verdict in the federal district court action in which Zak was neither a plaintiff nor a counterclaim defendant. While Zak has never conceded his personal liability to Reed, he did not object to the introduction of substantial evidence that established a de facto partnership, in particular memos establishing that he and Reed equally shared the profits of the loan modification business, as well as evidence from his disbarment proceedings. In other words, Reed did not share profits with LMG or ZLO — she and Zak shared profits of their loan modification business, regardless of which entity, LMG or ZLO, extracted fees from vulnerable clients. In short, LMG was established to camouflage Reed's involvement in the business, although Zak acted like and was found to be acting like a managing partner with control over bank accounts. Moreover, sufficient evidence was presented to warrant piercing the corporate veil of LMG to hold Zak personally liable for his own tortious conduct. Zak had a full and fair opportunity to submit contrary evidence, but chose to principally rely on the judgment against LMG Reed obtained in the federal district court action where he was not named by Reed as a defendant in her counterclaim.

This Court's obligation is to apply the law to the facts as proven. Zak's personal liability for any debt for Reed's share of the profits of the loan modification business was clear based upon overwhelming evidence.

B. 11 U.S.C. § 523(a)(4)

1. Applicable Law

In her Amended Complaint, Reed seeks to except a debt from discharge under 11 U.S.C. § 523(a)(2)(A), (4), and (6). Section 523 provides in relevant part the following:

11 U.S.C. § 523(a)(2)(A), (4), and (6). In order to prevail under any of those sections, Reed had the burden of proving, first, that Zak, individually, owed her a debt, see Chen v. Huang (In re Huang), 509 B.R. 742, 754 (Bankr. D. Mass. 2014)("in the context of the dischargeability proceeding, the bankruptcy court is not only tasked with determining whether the circumstances for nondischargeability enumerated in § 523(a) are established, but must also necessarily determine the scope of the debtor's "liability on [the] claim' and the creditor's `right to payment.'"). Once she established the existence of a debt, then Reed had the burden of proving each element of a claim under § 523(a)(2)(A), (4), or (a)(6), by a preponderance of the evidence. Palmacci v. Umpierrez, 121 F.3d 781, 787 (1st Cir. 1997)(citing Grogan v. Garner, 498 U.S. 279, 287, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991)).

"The issue of whether a party is `acting in a fiduciary capacity' within the meaning of § 523(a)(4) is one of federal law." Zacharakis v. Melo (In re Melo), 558 B.R. 521, 556 (Bankr. D. Mass. 2016) (citing Petrucelli v. D'Abrosca (In re D'Abrosca), No. 10-062, 2011 WL 4592338, at *5 (1st Cir. BAP Aug. 10, 2011)). "`In order to be acting as a fiduciary, a party must be acting pursuant to an express or technical trust, not a trust which the law implies from a contract.'" In re Melo, 558 B.R. at 556 (quoting Breed's Hill Ins. Agency v. Fravel (In re Fravel), 485 B.R. 1, 14 (Bankr. D. Mass. 2013), and citing Davis v. Aetna Acceptance Co., 293 U.S. 328, 333, 55 S.Ct. 151, 79 S.Ct. 393 (1934)). An express trust requires "`an explicit declaration of trust, a clearly defined trust res, and an intent to create a trust relationship.'" Melo, 558 B.R. at 556 (citing, inter alia, Raso v. Fahey (In re Fahey), 482 B.R. 678, 687 (1st Cir. BAP 2012)).

With respect to partners,

Bane v. LeRoux (In re Curran), 157 B.R. 500, 509-10 (Bankr. D. Mass. 1993). See, e.g., Pierce v. Stevens (In re Stevens), No. 12-32221, 2014 WL 6686497, at *5 (Bankr. N.D.N.Y. Nov. 25, 2014) ("this Circuit has held that the fiduciary requirement of § 523(a)(4) can still be met if state common law has elevated the duties of partners beyond the statute so as to create an express or technical trust ... This is the case in New York since the courts have held that `New York partners are at all times accountable to one another as trustees.'").

With respect to defalcation, the Supreme Court, in Bullock v. BankChampaign, N.A., 569 U.S. 267, 133 S.Ct. 1754, 1759-60, 185 L.Ed.2d 922 (2013), determined the following:

Bullock v. BankChampaign, N.A., 569 U.S. 267, 133 S.Ct. 1754, 1759-60, 185 L.Ed.2d 922 (2013).

2. Analysis

Reed indirectly asserts that Zak owed her a debt that arose from "fraud or defalcation while he was acting in a fiduciary capacity." Although arguing that Zak owed a fiduciary duty to LMG, she implicitly argues that she and Zak were partners in LMG, rather than the jury's conclusion in the federal district court action in which Zak was not a party, namely that she was a partner with LMG. See 11 U.S.C. § 523(a)(4). Reed alleges that Zak owed a fiduciary duty to LMG and breached his fiduciary duty to LMG. The evidence presented, however, established more than that: Reed and Zak were, in fact, partners in the loan modification business.

As the Superior Court determined, Reed, who was a mortgage broker, "had placed thousands of sub-prime mortgage loans" and she "brought to the enterprise her list of thousands of borrowers for whom she had placed sub-prime loans." In addition, she brought along with her some of the agents who had worked for her in her mortgage placement business, many of them Spanish speakers." Commonwealth of Mass. v. Zak, Slip op. at 5. Without Reed, there was no loan modification business as Zak had never been involved in any loan modifications, bankruptcy cases or provided any foreclosure avoidance services. Id. Zak's testimony that Reed was merely an employee is unbelievable and the Court completely discredits it. His testimony is contrary to the overwhelming evidence, in particular the decision of the Supreme Judicial Court which determined that he engaged in illegal fee-splitting "with his partner." Matter of Zak, 476 Mass. at 1036, 73 N.E.3d at 266. That decision was the culmination of a process that began when a special hearing officer conducted an evidentiary hearing over twelve days at which 25 witnesses testified and 220 exhibits were introduced into evidence.

This Court concludes that Zak's disclaimer of knowledge of the rudiments of partnership law was specious, incredible, and immaterial to the objective manifestations of a partnership between Zak and Reed. The parties' decision to equally share profits evidences that understanding, as that type of profit sharing is the hallmark of a partnership, not an employer/employee relationship, even if Zak who was primarily responsible for books and records of LMG had had more control over its financial affairs. See Kansallis Fin. Ltd. v. Fern, 40 F.3d 476, 478-79 (1st Cir. 1994) ("Intent to carry on business as partners may be inferred from the partners' words and acts."); Fenton v. Bryan, 33 Mass.App.Ct. 688, 691, 604 N.E.2d 56 (1992). Reed's testimony as to her partnership agreement with Zak was straightforward and credible. Zak's testimony was not. Zak's decision to abruptly exclude Reed from the business premises, using a plain clothes policeman, evidences his knowledge of wrongdoing.

Zak's lack of any compunctions with respect to the use of his position as an attorney to extract fees from distressed clients of LMG and ZLO compels the conclusion that he similarly would not have had, and did not have, any compunction about scooping all profits of the loan modification business, half of which belonged to Reed, when the loan modification business was "exploding" but Reed's legal position was deteriorating. Zak was well aware of Reed's criminal exposure at the commencement of their relationship; his decision to incorporate LMG and to issue checks to Reed's nominees, Amarilla and American Union Corporation, was due to her legal problems. Zak's decision to exclude her from their business venture based upon her conduct in copying and pasting client signatures on IRS tax forms for the loan modification process appears to this Court to be a mere pretext for denying her a share of the profits. It enabled him to enrich himself once the business was established and, in Reed's words, "exploding."

Zak's professed ignorance of the law applicable to partnerships, his conscious decision to ignore Reed's letter of January 8, 2010, and his ignorance of, or blatant disregard for, Massachusetts Rules of Professional Conduct, reinforces the Court's conclusion that he converted her partnership profits. This Court has no reason to believe that his "repeated and multiple ethical violations in connection with loan modification and mortgage foreclosure cases" would have been limited to vulnerable clients of LMG and ZLO. Rather, the Court concludes that Zak's lack of ethics extended to Reed who also was vulnerable in view of her pending criminal indictment. Moreover, even if Zak had a business justification for closing LMG, such a justification would not have absolved him of his partnership obligations to his partner Reed. His testimony that she was not his partner was incredible, particularly where Reed supplied the architecture for the business in the form of clients whom she assisted in obtaining sub-prime mortgages, her connections with "agents" who could supply the loan modification business with a steady stream of clients, and her experience as a mortgage broker. Zak had none of this experience; all he had was some capital and a law license which he chose to unethically exploit.

Zak also held a position of ascendency over Reed. Aware of her personal legal problems, he incorporated LMG and LMG's name appeared on bank accounts and tax returns which he controlled. Because LMG, on paper and in practice was owned and controlled by Zak, and was the payee of client funds in the loan modification business, Zak held more power than Reed with respect to the collection and disposition of partnership funds. See, e.g. Hutton v. Vasa (In re Vasa), No. 14-12324-JNF, 2016 WL 890130, at *10 (Bankr. D. Mass. Mar. 8, 2016); Baker v. Friedman (In re Friedman), 298 B.R. 487, 498-99 (Bankr. D. Mass. 2003).

In regard to Reed's burden of proof, this Court recognizes that she obtained a judgment with respect to her counterclaim in the United States District Court for the District of Massachusetts only against LMG, not Zak or ZLO. Nevertheless, in certain circumstances, the Court (as the Supreme Judicial Court appears to have done) may disregard the corporate form, particularly where a corporation is solely owned and controlled by one individual to perpetrate fraud. As this Court observed in Butler v. Candlewood Road Partners, LLC (In re Raymond), 529 B.R. 455 (Bankr. D. Mass. 2015),

In re Raymond, 529 B.R. at 475 (footnotes omitted). Similarly, the United States Court of Appeals for the First Circuit in Morley v. Ontos, Inc. (In re Ontos, Inc.), 478 F.3d 427 (1st Cir. 2007), cert. denied, 552 U.S. 823, 128 S.Ct. 166, 169 L.Ed.2d 33 (2007), stated:

In re Ontos, 478 F.3d at 432 (emphasis supplied). Thus, piercing the corporate veil is not limited to those circumstances where there is a confused intermingling of activities of corporate entities, but can be employed to thwart the perpetration of fraudulent or other reprehensible conduct by an alter ego or to hold corporate officers responsible for their personal torts. In bankruptcy cases, courts in other jurisdictions have referenced similar standards. For example, under New York law, a party may pierce the corporate veil if they can demonstrate that "`(1) the owners exercised complete domination of the corporation in respect to the transaction attacked; and (2) that such domination was used to commit a fraud or wrong against the plaintiff which resulted in plaintiff's injury[.]'" Ng. v. Adler (In re Adler), 467 B.R. 279, 286 (Bankr. E.D.N.Y. 2012), appeal denied, judgment aff'd sub nom. Ng v. Adler, 518 B.R. 228 (E.D.N.Y. 2014) (citations omitted). In other words, "`[t]he party seeking to pierce the corporate veil must establish that the owners, through their domination, abused the privilege of doing business in the corporate form to perpetrate a wrong or injustice against that party such that a court of equity will intervene.'" Id. (citations omitted). See, e.g., Terry v. Meredith (In re Meredith), 357 B.R. 374, 380 (Bankr. E.D. Va. 2006), aff'd sub nom. In re Stephen S. Meredith, CPA, P.C., 367 B.R. 558 (E.D. Va. 2007), aff'd sub nom. In re Meredith, 527 F.3d 372 (4th Cir. 2008) (under Virginia law, "a party `seek[ing] to disregard' the corporate entity must show that the shareholder sought to be held personally liable has controlled or used the corporation to evade a personal obligation, to perpetrate fraud or a crime, to commit an injustice, or to gain an unfair advantage.'").

Reed did not introduce any evidence that LMG and ZLO failed to observe corporate formalities or that there was a confused intermingling of activity between the two corporations and Zak. She did, however, submit evidence that LMG through and by Zak transferred monies to ZLO, and ZLO through Zak distributed partnership profits to her and Zak equally. Although both LMG and ZLO engaged in the same activities, they had separate bank accounts, filed separate tax returns, and had different employees and at least for a period of time operated out of different locations. Nevertheless, as discussed above, there was overwhelming evidence that Zak was the alter ego of LMG and Reed's partner in the loan modification business. Indeed, Reed testified that she and Zak made "decisions together, like we normally did," and that Zak suggested that she "get paid the 50 percent of the business at that time because I was equal partner [sic]."

This Court infers from the weight of the evidence that Zak incorporated LMG solely to conceal Reed's involvement in the loan modification business which they were embarking on and it was his alter ego. Zak and Reed as partners utilized the corporate structure to develop and perpetuate that loan modification business. Zak cannot hide behind the corporate structure of LMG to evade his personal liability for conduct that fits squarely within the definition of defalcation set forth in Bullock. Zak's conduct as a partner, and as an attorney involved "`a gross deviation from the standard of conduct that a law-abiding person would observe in the actor's situation.'" Bullock, 133 S.Ct. at 1760. This Court has no difficulty concluding that Zak breached his duty under partnership law to segregate profits for Reed — profits which he held in trust for her under partnership law. Indeed, Reed, through her January 8, 2010 letter, advised Zak personally of his responsibilities under partnership law to segregate monies and to account to her for partnership profits. Most importantly, although he was required as a partner to hold profits in trust for her from the inception of their partnership agreement, she advised him "to hold in trust all profits derived from the affair of the partnership...." He did not do so. In other words, Zak's conduct falls squarely within the contours of § 523(a)(4). There was a trust, and Zak breached his fiduciary duty to his partner Reed by failing to account and by usurping her share of the profits of their partnership.

Reed established in the district court action that LMG owed her $18,000 per month for her share of partnership profits or $324,000. Because this Court concludes that Zak was the alter ego of LMG and responsible for his own torts and that LMG was a mere instrumentality of a de facto partnership between Zak and Reed, the Court concludes he is personally liable to Reed for that amount and that amount is nondischargeable pursuant to § 523(a)(4).

Zak argues that Reed cannot hold him personally liable for that obligation because she did not sue him personally in her counterclaim in the federal district court. This Court rejects that argument. Although Reed could have sued Zak in that action, her claims in this adversary proceeding only arise under the Bankruptcy Code. Her claims against Zak personally under 11 U.S.C. § 523(a) are not barred because she did not name Zak as a defendant in her counterclaim in the United States District Court action. She could not have sought such a determination in that action as Zak was not a debtor at the time.

C. § 523(a)(6)

1. Applicable Law

"To prevail on a complaint to except a debt from discharge, as one caused by a debtor's `willful and malicious injury,' a creditor must prove that (1) the debtor caused him or her injury; (2) the debtor's actions were malicious; and (3) the debtor's actions were willful." Jones v. Svreck (In re Jones), 300 B.R. 133, 139 (1st Cir. BAP 2003). In In re Jones, the court, citing Kawaauhau v. Geiger, 523 U.S. 57, 57, 118 S.Ct. 974, 140 L.Ed.2d 90 (1998), and Printy v. Dean Witter Reynolds, Inc., 110 F.3d 853, 859 (1st Cir.1997), summarized the law applicable to § 523(a)6) as follows:

In re Jones, 300 B.R. at 140. As this Court noted in deBenedictis v. Dougherty (In re Dougherty), 509 B.R. 757, 769 (Bankr. D. Mass. 2014), aff'd sub nom. deBenedictis v. Dougherty, No. CV 14-12139-GAO, 2015 WL 4480724 (D. Mass. July 22, 2015),

In re Dougherty, 509 B.R. at 769. According to the United States Court of Appeals for the First Circuit in Evergreen Marine Corp. v. Six Consignments of Frozen Scallops, 4 F.3d 90 (1st Cir. 1993),

Evergreen Marine Corp. v. Six Consignments of Frozen Scallops, 4 F.3d at 95 (footnote and citations omitted). In Massachusetts,

Hancock v. Caliri (In re Caliri), 335 B.R. 2, 13 (Bankr. D. Mass. 2005) (quoting Kelley v. LaForce, 288 F.3d 1, 11-12 (1st Cir. 2002)). Moreover, "[c]onversion does not require an intent to deprive the owner permanently of the property .... Rather, one only need intent to exercise dominion or control over the property of another and can be held liable for conversion even if the property over which he exercised control was believed to be his own." John Hancock Fin. Servs., Inc. v. Sloane (In re Sloane), No. 01-1213-JMD, 2002 WL 1000956, at *6 (Bankr. D. N.H. Mar. 25, 2002) (citing Schiappa v. Nat'l Marine Underwriters, Inc., 1999 Mass.App.Div. 122, 1999 WL 788616 (1999)).

Not all acts of conversion constitute a willful and malicious injury to property for the purpose of § 523(a)(6). Davis v. Aetna Acceptance Co., 293 U.S. 328, 331-32, 55 S.Ct. 151, 79 S.Ct. 393 (1934) (decided under former Bankruptcy Act of 1898). The Supreme Court in Davis stated:

Davis, 293 U.S. at 332, 55 S.Ct. 151 (internal citations omitted). See also Ocean Equity Group v. Wooten (In re Wooten), 423 B.R. 108, 132 (Bankr. E.D. Va. 2010) ("Cases subsequent to Geiger that have considered whether acts of conversion constitute willful and malicious injury focus on the distinction between whether the conversion was an intentional one or merely a reckless or negligent conversion of property.").

2. Analysis

Reed introduced no evidence that Zak personally intended to injure her or that cessation of the business of LMG was without a business justification. Zak testified that inquiries from the Attorney Generals of Massachusetts and Rhode Island as to the collection of advance fees by LMG triggered his decision to close LMG. While those reasons may have been warranted from a business judgment point of view, this Court has concluded that they were insufficient to deprive Reed of her share of the profits from the loan modification business. It is undisputed that Zak caused profits to which Reed would have been entitled to be diverted to ZLO. Zak, through LMG, exerted dominion and control over her share of the profits of their loan modification partnership. Zak abruptly removed Reed from the premises of the loan modification business and usurped her share of the profits, despite receipt of Reed's January 8, 2010 letter advising Zak of his responsibilities under partnership law. His decision and the resulting injury was intentional, not reckless. Under the circumstances, the Court concludes that Reed established that Zak willfully and maliciously converted her property, namely her share of their partnership profits, which the jury in the United States District Court action determined to be $324,000. Accordingly, this debt is excepted from discharge under § 523(a)(6).

D. § 523(a)(2)(A)

1. Applicable Law

Reed also seeks an exception to Zak's discharge based upon the "actual fraud" component of § 523(a)(2)(A), relying upon Husky Int'l Elecs., Inc. v. Ritz, ___ U.S. ___, 136 S.Ct. 1581, 194 L.Ed.2d 655 (2016).16 To establish a debt for "actual fraud," a plaintiff must show that a debtor committed an act that "counts as `fraud' and is done with wrongful intent ...." Husky Intern. Elec., Inc. v. Ritz, 136 S.Ct. at 1586.17 It can be "effected without a false representation." Id. The Supreme Court explained that "[a]lthough `fraud' connotes deception or trickery generally, the term is difficult to define more precisely." Id. See Above-All Transp. v. Fraher (In re Fraher), No. AP 14-01201-MSH, 2017 WL 715059, at *5 (1st Cir. BAP Feb. 21, 2017). In Husky, the Supreme Court observed:

136 S.Ct. at 1589 (emphasis supplied, footnote omitted).

2. Analysis

In her brief, Reed contends that Zak breached both his fiduciary duty and duty of loyalty to LMG by taking revenues, due and owing to LMG, and diverting those revenues to an entity he controlled, ZLO, for his personal financial advantage. She argues:

Zak counters that he would have had no reason to know during the first three months of 2010 that moving assets from LMG to ZLO would result in Reed being unable to satisfy a judgment and that he "had no reason to know in 2010 that later events would play out this way in 2011, and his actions back then could not have been intended to capitalize on such a situation and do not constitute actual fraud."

As noted above, the jury in the United States District Court action determined that Reed was entitled to $18,000 per month for 18 months as her share of partnership profits from LMG. Reed recognized that LMG routinely transferred those profits to ZLO (indeed she or her nominees were paid by checks issued by ZLO) and ZLO distributed the profits to her until her ouster. In her state court action, Reed asserted that LMG transferred profits to ZLO and Zak and that Zak knew those profits were fraudulently transferred. Nevertheless, under Husky, Reed was required to establish a debt "traceable to" the fraudulent conveyance. This means that she was required to prove that the transfers to Zak were in a liquidated amount and were attributable to a debt for actual fraud. In this regard, Reed submitted evidence that she was entitled to $324,000 in profits from LMG, and this Court has determined that with the implied consent of the Defendant sufficient evidence was submitted to enable this Court to find that Zak was the alter ego of LMG, that LMG was the vehicle for the loan modification business, as well as a vehicle for concealing Reed's involvement in the business and providing a veneer of legality for the collection of advanced fees from clients. With respect to her § 523(a)(2)(A) count, however, Reed did not produce evidence of payments after January 5, 2010 directly made by LMG to Zak or payments directly made by LMG to ZLO and then by ZLO to Zak, although as the sole owner on paper of LMG and ZLO, any partnership profits garnered by the loan modification business would inevitably inure to his benefit.

Reed asserts that Zak's liability flows from his participation in the fraudulent transfers, both as the sole principal of LMG, and as the sole principal of ZLO, and due to his status as the ultimate transferee. She adds that "[u]nder the law of fraudulent conveyance in Massachusetts, transferees not acting in good faith are liable to the creditor, in this case the plaintiff." She asserts that Zak's conduct satisfies "many of the statutory requirements for establishment of fraudulent transfers," citing Mass. Gen. Laws ch. 109A, § 5. The Court agrees. The burden shifted to Zak, and he failed to produce any evidence as to the accounting of funds unlawfully transferred.

The Court accepts Reed's argument that ZLO was the recipient of the fraudulent transfers and that because Zak was the sole principal of ZLO, any net profit derived by the principal of the corporation must be attributable, at least in part, to the revenues derived from the fraudulent transfers. Although Reed did not submit the tax returns for ZLO or Zak for 2010 or any subsequent years, she did submit evidence that the total revenues of ZLO were $1,596,777.00, in 2010 with a net profit of $72,884.00, but she failed to submit proof of how much of that sum should be attributable to a debt for actual fraud. In other words, the Court concludes that Reed established that Zak defalcated while acting in a fiduciary capacity by failing to account for her share of profits in the sum of $324,000, and that he converted her share of profits in the sum of $324,000, but she did not trace how Zak disposed of those sums. For the purposes of § 533(a)(2)(A), she did not trace the monies to any personal bank accounts he controlled or held and thus did not sustain her burden of proving an exception to discharge under § 523(a)(2)(A).

E. § 727(a)(3)

In the "Wherefore" clause of her Amended Complaint, Reed asks this Court to deny the Debtor a discharge under 11 U.S.C. § 727(a)(3), (a)(5) and/or (a)(6)(A) which pertain to whether the debtor has concealed or destroyed recorded information from which the debtor's financial condition or business transaction can be ascertained; whether the debtor has failed to explain satisfactorily any loss of assets; and whether the debtor has refused to obey any lawful order of the court, respectively. Reed introduced no evidence with respect to those grounds for denial of Zak's discharge, and she did not argue the merits of those claims in her brief. Accordingly, the Court concludes Reed waived those claims which are not set forth in any counts to her Amended Complaint.

IV. CONCLUSION

In view of the foregoing, the Court shall enter a judgment in favor of Reed and against Zak under 11 U.S.C. § 523(a)(4) and (a)(6). The Court shall enter a judgment in favor of Zak and against Reed under 11 U.S.C. § 523(a)(2)(A) and § 727(a).