ROBERT A. GORDON, U.S. BANKRUPTCY JUDGE.
The question presented by this Adversary Proceeding is whether the Plaintiff/Judgment Creditor, Mr. Fridman, the individual 100% owner of the corporate creditor, Golden Gate Enterprises, Inc. (Golden Gate), may personally prosecute an 11 U.S.C. § 523(a)
In 2006, Mr. Fridman was the sole shareholder and President of Golden Gate. Ms. Rixham was the President and a shareholder of Houston's Custom Home Design, Inc. (Houston's)
Messrs. Ledwith and Becker also invited Mr. Fridman and Ms. Friedman to the grand opening of Houston's "showroom", a facility apparently purposed to give examples of the variety of home remodeling and construction services offered by Houston's. It was there that Mr. Fridman met Ms. Rixham. Mr. Fridman testified that Ms. Rixham "bragged" about Houston's and informed him that the company was, "fully licensed to perform home improvement work in the State of Maryland." Although Mr. Fridman was impressed overall with Houston's and its agents, he made the economic decision not to go forward with the backyard deck construction at that time.
In the summer of 2007, Mr. Fridman again contacted Houston's regarding the possibility of having work done at his residence. This time, he and Ms. Friedman were considering transforming the look of their front yard by way of extensive landscaping and design work (Front Yard Project). At Mr. Fridman's request, Mr. Ledwith met Mr. Fridman at Mr. Fridman's home to discuss the project. While the precise timing is a bit unclear, it appears that in the wake of that meeting the parties became more personally acquainted. In that spirit, Mr. Fridman and Ms. Friedman extended an invitation to Mr. Ledwith and Ms. Rixham to dine with them at their home. The visit turned into an all-day affair and at some point, the question was raised by Mr. Ledwith and Ms. Rixham as to whether Mr. Fridman might be willing to invest, and/or become a partner, in Houston's. According to Mr. Fridman, Ms. Rixham gave him a sales pitch that promoted and extolled Houston's financial growth and well-being. Per Mr. Fridman's testimony, she also stressed the fact that the company was still licensed and bonded. Ms. Rixham explained that Houston's rapid growth and the attendant influx of business mandated a cash investment to keep up with its projected customer demands. Nevertheless, Mr. Fridman and Ms. Friedman ultimately declined the investment opportunity and instead Mr. Fridman offered to make a loan to Houston's. Houston's accepted the offer. To make the loan, Mr. Fridman drew from his personal home equity line of credit secured by his residence and transferred the proceeds to Golden Gate's bank account. He then drew a $75,000 check from Golden Gate's account and that was the check made payable to Houston's (Golden Gate Loan). The Golden Gate Loan check was dated August 14, 2007.
The parties also memorialized their commitment to the Front Yard Project the same day. The agreement (FYP Agreement),
When Mr. Fridman's social fellowship was extended and the money lent, Ms. Rixham's home was subject to an Indemnity Deed of Trust (IDOT) that secured a $75,000 principal balance loan in favor of a Mr. Bernard Caplan (Caplan Loan). The Caplan Loan had been made to Houston's in 2006 under circumstances eerily reminiscent to the creation of Mr. Fridman's loan. Mr. Fridman was not informed by Ms. Rixham of either the Caplan Loan or the IDOT and was completely unaware of their existence when he made the Golden Gate Loan. The Caplan Loan was due and payable in August 2007, a year after its creation. The Golden Gate Loan was used to satisfy that indebtedness. Once the Caplan Loan was paid, the IDOT was released from Ms. Rixham's home. Houston's never completed the Front Yard Project and the Golden Gate Loan was never repaid. By Mr. Fridman's unrebutted testimony, Houston's abandoned the project and left his front yard in a state of ugly, haphazard, disrepair.
Mr. Fridman was the first witness called in support of his case in chief. He began by explaining that in the past he had amassed some experience "flipping houses". This meant he would purchase distressed residential real estate at a low cost and then hire contractors to renovate the property, in order to resell it at a profit. He emphasized that when hiring, a primary concern was whether the contractor was licensed. As he stated:
Tr. at 23.
Mr. Fridman then testified as to how he became familiar with Houston's after receiving the "mailer" and his first meeting with Mr. Ledwith and Mr. Becker. He testified that they both bragged about the high quality of work they offered in remodeling and home improvement. They invited him to the open house of Houston's new showroom and that is where he met Ms. Rixham. She was introduced as the President of Houston's and assured Mr. Fridman that Houston's was capable of handling from start to finish the back yard deck project he was considering. Mr. Fridman testified:
Id. at 27. Mr. Fridman was asked whether Ms. Rixham talked about Houston's licensing at their initial introduction.
Id.
While Mr. Fridman decided not to hire Houston's at that time, in mid-2007 he again reached out to Houston's regarding the Front Yard Project. In part, he explained he and Ms. Friedman believed the improvement would increase the value of the home:
Id. at 29. This time, only Mr. Ledwith was involved in discussions with Mr. Fridman regarding the Front Yard Project; neither Ms. Rixham nor Mr. Becker participated in the detailed planning.
As discussions progressed and personal kinship grew, Mr. Fridman and Ms. Friedman decided to invite Mr. Ledwith and Ms. Rixham to their home.
Id. at 31-32.
Mr. Fridman testified that while Ms. Rixham touted Houston's overall success, she also indicated the business was experiencing a short-term financial setback. Per her spiel, the business needed a cash infusion to better secure new clients and expand the business. Mr. Fridman testified:
Id. at 32-33. Mr. Fridman and Ms. Friedman ultimately decided they were unwilling to invest or become partners but they still wanted to support Houston's success, albeit from an arm's length distance. Hence, Mr. Fridman decided it would be an acceptable risk to make a loan in an amount that roughly equated with the cost of the Front Yard Project. He testified:
Id. at 33.
Mr. Fridman testified that it was his express understanding, based upon what he was told, that the $75,000 loan was to be used to expand Houston's.
Id. at 34-35. Content with the information he did have, Mr. Fridman decided to extend the loan to Houston's and engage it as contractor on the Front Yard Project, which he expected to be completed in two to three months. He testified:
Id. at 36.
During his testimony, Mr. Fridman identified the FYP Agreement and noted the Maryland Home Improvement Commission (MHIC) license number listed on its face. Pl.'s Exh. 6. In sum, Mr. Fridman came away confident in the bona fides of Houston's skill, ability and overall business condition.
Mr. Fridman wrote the $75,000 Golden Gate Loan check on August 14, 2007 and gave it to Mr. Ledwith. Pl's Exh. 6B. Mr. Fridman testified that Houston's representatives proposed an 18 month repayment term but he thought better of that proposal. He testified:
Tr. at 40.
The Golden Gate Loan was not immediately memorialized with either a promissory note or other loan documentation. Mr. Fridman explained the source of the funds:
Id. at 42.
Mr. Fridman was asked why he caused Golden Gate to loan the money.
Id. at 44-45. As indicated above, the FYP Agreement was also dated August 14, 2007. However, Mr. Fridman was dismayed to learn that instead of Houston's immediately breaking ground on the project, Mr. Ledwith and Ms. Rixham indicated that they were going on vacation. Work did eventually begin but the level of commitment was spotty at best. In fact, not long after the parallel deals were struck, the individuals affiliated with Houston's — Ms. Rixham, Mr. Becker and Mr. Ledwith — stopped responding to Mr. Fridman's telephone calls. He then decided that the loan transaction should be memorialized in writing. See Pl's. Exh. 5.
Id. at 47. Mr. Fridman, however, did not include Ms. Rixham on the promissory note.
Id. at 48.
Thus, Mr. Fridman's self-drafted note was signed by Ms. Rixham as President of Houston's but not in her personal capacity. Mr. Ledwith signed the note individually. Pl's Exh. 5.
As for the state of his yard, Mr. Fridman testified:
Id. at 59. He testified that he consulted with other contractors and an inspector and was told that most of the work was unsalvageable and would need to be demolished with the project commenced anew.
Finally, Mr. Fridman sent a certified letter to Houston's and that sparked a response from Ms. Rixham. He testified that she sounded eager to meet and discuss the resolution of both the Front Yard Project and the Golden Gate Loan. However, she never followed through and never met with Mr. Fridman. Mr. Fridman then hired an attorney who filed a Maryland Home Improvement Commission complaint against Houston's in fall of 2008. As for that, Mr. Fridman explained:
Id. at 63.
With the foregoing tale of woe as the backdrop, Mr. Fridman testified as to the specific misrepresentations made to him by Ms. Rixham.
Id. at 64. For emphasis, Mr. Fridman summed his position up succinctly:
Id. at 66.
None of Golden Gate's $75,000 loan to Houston's was ever repaid nor was the Front Yard Project completed or the payments refunded. On cross-examination, Mr. Fridman acknowledged that Golden Gate observes all mandated corporate formalities and files its tax returns. In that regard, Golden Gate reported a bad debt loss for the unpaid $75,000 loan and presumably received the corresponding benefit. Def's Exh. 13. Also, it was acknowledged by Mr. Fridman that Golden Gate, and not himself, was identified as the lender on the self-drafted note.
Ms. Rixham was called next as a witness by Mr. Fridman. She testified that she was Houston's President from 2006 to 2008, the year the company ceased operating. She also testified that she was responsible for managing most aspects of Houston's affairs, including its financial operations. She did not negotiate Houston's contracts with consumers but she did sometimes sell retail items in the showroom. Tr. at 123, 145-146.
Ms. Rixham stated that Houston's owed more debt than it had in assets on the books in 2006 and 2007. Id. at 124. She said that Houston's needed financing to finish its showroom and borrowed $75,000 from Bernard Caplan in 2006. She professed to have little knowledge of either Houston's transactions with Mr. Caplan, or a lawsuit filed by Mr. Caplan against Houston's, that followed in their wake. Ms. Rixham confirmed that Houston's did not have its own MHIC license, but instead used Mr. Becker's.
Tr. at 126-27.
Ms. Rixham confirmed that she met Mr. Fridman at Houston's showroom but denied telling him that Houston's was licensed and bonded. Id. at 133-34. She admitted that she attended the social, dining affair at Mr. Fridman's house and testified that it occurred on a Sunday of Labor Day weekend. Id. at 197.
As for the $75,000 Golden Gate Loan, Ms. Rixham testified as follows:
Id. at 136-37. Revisiting the same ground, she testified:
Id. at 138-39.
Ms. Rixham agreed there was no written memorialization when Golden Gate's check was delivered but nevertheless, she proposed to have Houston's repay the Golden Gate Loan within 18 months. This was her stated belief despite Houston's being "cash poor" in 2006 and 2007 and its circular borrowings from both Mr. Caplan and Mr. Fridman. Id. at 143.
Ms. Rixham acknowledged that she never told Mr. Fridman the truth of what they intended to do with the Golden Gate Loan.
Id. at 144.
As for the FYP Agreement, Ms. Rixham asserted that she did not review the agreement before it was signed and did not decide to include Mr. Becker's MHIC license number on its face.
The IDOT for the Caplan Loan and the Certificate of Satisfaction were admitted as Pl.'s Exh. 10. Ms. Rixham further acknowledged that she and Mr. Becker were aware of the approaching deadline to pay the Caplan Loan at the time the Golden
Ms. Friedman was then called to testify. She stated that during the day-long brunch event at their home, there were discussions regarding she and Mr. Fridman providing financial assistance to Houston's.
Tr. at 170. Ms. Friedman recalled that Ms. Rixham represented Houston's to be financially stable and doing well. She could not recall Ms. Rixham saying anything about whether Houston's had a home improvement license. With that Mr. Fridman rested his case. Ms. Rixham's defense began with her being recalled to the stand.
Ms. Rixham testified that she was approached by Mr. Ledwith and a Johnathan Lewis in 2006 about starting the business that became Houston's. Houston's was actually incorporated in 2007 by Ms. Rixham, Mr. Ledwith, and Mr. Becker, each of whom became officers. Tr. at 186-87.
According to Ms. Rixham, Mr. Ledwith was responsible for estimating remodeling contracts and supervising the work. As for the necessity of a home improvement license, Ms. Rixham testified:
Id. at 195. However, she also asserted that Mr. Becker had approved the use of his license number on Houston's contracts.
Id. at 196.
With that, Ms. Rixham rested her case. Mr. Fridman then called Mr. Bernard Caplan as a rebuttal witness.
Mr. Caplan testified that he contracted with Houston's in 2006 to install a "water feature" in his yard. Tr. at 210-11. He also testified Mr. Ledwith and Ms. Rixham requested that he personally loan Houston's, then a start-up, a total of $75,000. He asserted that the water feature would be constructed by Houston's as consideration for the loan. Id. at 212-13. However, Mr. Caplan testified, as soon as he made the loan, Houston's abandoned the project. He sued Houston's and the matter was settled but Houston's did not honor the settlement. Id. at 215-16. Nevertheless, the Caplan Loan was secured by the IDOT and Mr. Caplan confirmed that it was repaid just prior to its maturity date.
Id. at 214-15.
Mr. Becker was also called as a rebuttal witness. He confirmed that he had a Maryland home improvement license and was working for Houston's in 2007.
Tr. at 218. He went on to describe the relationship between Houston's and his business, SrB Design Build. He testified:
Id. at 219.
Mr. Becker testified that he didn't assist in preparing the contract for Mr. Fridman's project and did not authorize the use of his MHIC license number on that contract. He explained that only contracts that properly bore his license number and signature were those authorized by him for Houston's. His testimony continued:
Id. at 221-22.
Finally, Mr. Becker testified as to the use of the proceeds of the Golden Gate Loan.
Id. at 224.
On cross examination, Mr. Becker acknowledged that he allowed Houston's to use his MHIC number either when he was in charge of and/or supervising a job. He also conceded that for a period of time he received regular, biweekly checks from Houston's and those checks did not correlate to the number of jobs or amount of business he solicited. Finally, he acknowledged that he helped out on the short-lived Front Yard Project. Id. at 231-32.
On May 13, 2008, after the MHIC complaint hit a dead-end, Ms. Friedman and Golden Gate filed a complaint (State Court Complaint) in the Circuit Court of Maryland for Baltimore County (Case No. 03C08005399) against Houston's and Mr. Ledwith for breach of contract on the $75,000 loan (State Court Case). Pl.'s Exh. 2. On August 12, 2008, the State Court Complaint was amended to add Mr. Fridman as a plaintiff and Ms. Rixham as a defendant. The three Plaintiffs also added claims for breach of contract on the FYP Agreement and two counts that alleged Ms. Rixham committed fraud by inducing the $75,000 loan and the landscaping agreement. Pl.'s Exh. 2. None of the three Defendants answered or otherwise pled to the Amended Complaint.
An Order of Default was entered against Mr. Ledwith on August 7, 2009 and then
A damages inquisition was conducted on December 4, 2009. Pl.'s Exh.'s 1 & 3. Notwithstanding the finality of the default, Mr. Goddard made an effort to extricate his clients from liability. The following exchanges reflect that effort and how the State Court responded by strictly limiting the proceedings to only the damages due.
Pl.'s Exh. 3 at 11-12. The State Court refused to revisit the question of liability, including especially liability for fraud.
Id. at 17, 27-29.
On January 4, 2010, the State Court entered a final judgment (State Court Judgment) (see Pl.'s Exh. 1 & 2) against Houston's, Mr. Ledwith, and Ms. Rixham. The State Court defendants immediately moved to revise the State Court Judgment, but the motion was denied on March 11, 2010. See Pl.'s Ex. 2. However, on the basis of the State Court plaintiffs' motion, the State Court Judgment regarding Counts I and II of the State Court Complaint against Ms. Rixham was revised upwards to a total of $96,094.68. Id. The State Court Judgment on Counts III and IV was in the amount of $28,148. Id.
On October 25, 2012, Ms. Rixham filed her Voluntary Petition for relief under Chapter 7 of the Bankruptcy Code. She listed the State Court Judgment on her Schedule D (secured creditors) in the amount of $124,242.68 and included Mr. Fridman, Ms. Friedman and Golden Gate as creditors. She also listed their attorney in the State Court Case. Likewise, each creditor was included on Ms. Rixham's creditor mailing matrix and there is no dispute that they received timely notice of her Chapter 7 bankruptcy filing.
On February 1, 2013, however, Mr. Fridman alone filed the Complaint that initiated this Adversary Proceeding. The Complaint was subsequently amended on February 6, 2014. (Dkt. No. 55). By the Amended Complaint, he sought a determination that the State Court Judgment be excepted from Ms. Rixham's discharge pursuant to 11 U.S.C. §§ 523(a)(2)(A) and 523(a)(4).
(Am. Compl. ¶ 7). Mr. Fridman alleged that Ms. Rixham's "misrepresentations consisted of false statements as to the licensure of the Defendant's company and as to the capacity to complete the landscaping project coupled with false statements as to the ability to repay the loan." (Id. at ¶ 18). He further alleged that the State Court Judgment could properly be used as a matter of law to preclude and foreclose the issue of whether Ms. Rixham was liable for fraud. He alleged that the imposition of estoppel would be proper in part because Ms. Rixham had participated in the damage inquisition phase of the State Court Case. Ms. Rixham filed her Answer on April 5, 2013 (Dkt. No. 10).
The Court approved the parties' Joint Rule 26(f) Report on April 30, 2013 and entered a Scheduling Order that incorporated their proposed deadlines while also scheduling others (Scheduling Order) (Dkt. No. 13). All discovery was to be completed by June 20, 2013, amendments to the pleadings or additional parties added by June 1, 2013 and dispositive motions filed by July 20, 2013. Trial was set to begin November 5, 2013. Both sides timely filed exhibit/witnesses lists on October 22, 2013 and their Pretrial Memoranda on October 29, 2013.
However, on October 28, 2013, eight days prior to trial, Mr. Fridman filed a paper entitled Motion in Limine for Judgment on Partial Findings of Evidence under Fed. R. Civ. P. 52(c) as to Res Judicata/Collateral Estoppel (Motion for Judgment) (Dkt. No. 23).
On November 5, 2013 (the long-scheduled trial date) Mr. Fridman filed a Motion in Limine to Amend Complaint Solely as to Joinder of Parties (Motion to Amend) (Dkt. No. 35). The Motion to Amend relied upon Fed. R. Civ. P. 15(a)(2), 19(a), and 20(a)(1).
The sweeping relief sought by Mr. Fridman's "eve of trial" motions — the summary disposal of the dispute in Mr. Fridman's favor via preclusion doctrines and the addition of new plaintiffs — dictated that they should have been filed in accordance with the deadlines of the Scheduling Order and long before the trial date. Nevertheless, the Oversigned did not feel comfortable summarily disposing of the motions without a comprehensive, thorough review. Hence, the trial was sua sponte continued, a briefing schedule set and an oral ruling date of December 20, 2013 was fixed on the calendar (Dkt. No. 38). Trial, if needed, was rescheduled for February 10, 2014.
In response to the Motion to Amend, Ms. Rixham filed her Opposition and Motion to Strike on November 13, 2013 (Dkt. No. 37). She alleged that (1) the Motion to Amend was in reality a joinder motion pursuant to Rule 20(a)(1) that was nevertheless defective because the putative plaintiffs, and not Mr. Fridman, were required to seek leave to become parties, (2) the Motion to Amend was untimely because the 60 day period afforded by Bankruptcy Rule 4007(c) to file exceptions to discharge had long ago expired against the proposed plaintiffs and their independent claims, and (3) the request to join new
On November 15, 2013, Mr. Fridman filed an Amended Motion in Limine for Judgment on Partial Findings of Evidence under Fed. R. Civ. P. 52(c) as to Res Judicata/Collateral Estoppel (Amended Motion for Judgment) (Dkt. No. 40). Mr. Fridman asserted that both motions for judgment were purely evidentiary and were intended only "to conserve time and resources by making it unnecessary for the court to hear evidence on additional facts when the result would not be different even if those additional facts were established." (Amended Motion for Judgment at ¶ 6). In other words, the preclusive motions were proffered only to save precious time. Ms. Rixham filed an opposition on November 25, 2013 to both the Amended Motion for Judgment and the Amended Motion in Limine (Dkt. No. 41).
The Court denied the vast majority of the relief requested by Mr. Fridman at the December 20th hearing. As for the attempt to win a mis-named summary judgment victory through the assertion that the State Court Judgment precluded an inquiry into fraud and therefore the evidence should be strictly limited in accord with that boundary, the Court ruled as follows:
December 20, 2013 Hrg. Tr. at 55:10 — 55:30.
Hence, the State Court Judgment was held not to be preclusive as to Ms. Rixham on the question of fraud. As for the attempt to include additional Plaintiffs, the Court ruled that to the extent Ms. Friedman and Golden Gate were individual creditors of Ms. Rixham, they had a duty and obligation to seek to have their independent claims excepted from discharge in a timely fashion.
The Amended Complaint (filed on February 6, 2014) sought to have debts of $95,094.68 and $28,148.00, respectively, excepted from Ms. Rixham's discharge. Trial was held and concluded on February 10, 2014 and post-trial argument was completed on July 23, 2014.
The Court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. § 1334(b) and Local Rule 402 of the United States District Court for the District of Maryland. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I). The parties have consented to the entry of a final judgment on the merits and therefore this Court finds that the entry of a final judgment will not offend the strictures of Stern v. Marshall, 564 U.S. 462, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011) and is in compliance with Wellness Int'l Network, Ltd. v. Sharif, ___ U.S. ___, 135 S.Ct. 1932, 191 L.Ed.2d 911 (2015) (holding that parties may knowingly and voluntarily consent to adjudication of claim by Bankruptcy Court). Venue is proper under 28 U.S.C. § 1409(a).
The issue is whether the debt owed to Mr. Fridman by Ms. Rixham is non-dischargeable. Mr. Fridman bases his non-dischargeability claim on § 523(a)(2)(A), which provides:
Generally speaking, the exceptions to discharge enumerated in Section 523 are construed narrowly in order to "protect the purpose of [the Bankruptcy Code of] providing debtors a fresh start." Fleming v. Gordon (In re Gordon), 491 B.R. 691, 697 (Bankr. D. Md. 2013).
In order to prevail in a nondischargeability action under § 523(a)(2)(A), the plaintiff must satisfy five elements. Nunnery v. Rountree (In re Rountree), 478 F.3d 215, 218 (4th Cir. 2007); Dubois v. Lindsley (In re Lindsley), 388 B.R. 661, 668 (Bankr. D. Md. 2008). Those elements are: (1) that the defendant made a representation, (2) that the defendant knew at the time the representation was made that it was false, (3) that the defendant made the representation with the intent and purpose of deceiving the plaintiff, (4) that the plaintiff justifiably relied upon the false representation, and (5) that the plaintiff suffered damages as a proximate result of the representation. Lindsley, 388 B.R. at 668. The burden of proof is on the creditor to establish by a preponderance of the evidence that a debt is not dischargeable. Kubota Tractor Corp. v. Strack (In re Strack), 524 F.3d 493, 497 (4th Cir. 2008) (citing Grogan v. Garner, 498 U.S. 279, 291, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991));
A misrepresentation constitutes any words or conduct, which produce a false or misleading impression of fact in the mind of another. Kendrick v. Pleasants (In re Pleasants), 231 B.R. 893, 897 (Bankr. E.D. Va. 1999), aff'd, 219 F.3d 372 (4th Cir. 2000). Further, "[a]n omission may constitute a misrepresentation where the circumstances are such that the omission creates a false impression." Ortman v. Reinheimer (In re Reinheimer), 509 B.R. 12, 19 (Bankr. D. Md. 2014); Gordon, 491 B.R. at 701. The debtor's intent shall be determined subjectively with the totality of the relevant circumstances taken into account. Rembert v. AT & T Universal Card Servs. (In re Rembert), 141 F.3d 277, 281 (6th Cir. 1998); Pleasants, 231 B.R. at 898. The standard of reliance under Section 523(a)(2)(A) is the lesser one of justifiable (as opposed to reasonable) and that element is also to be assessed in accordance with the overall circumstances of the case. Field v. Mans, 516 U.S. 59, 73, 116 S.Ct. 437, 445, 133 L.Ed.2d 351 (1995); Colombo Bank v. Sharp (In re Sharp), 340 Fed. Appx. 899, 906, 2009 WL 2480841, at *5 (4th Cir. 2009).
This case presents a very close question. There is no doubt that a debt is owed — Ms. Rixham acknowledged on her Schedule D that Mr. Fridman is her undisputed judgment creditor as a result of the State Court Judgment. However, although alleged in the Amended Complaint, the question of fraud was not fully and fairly litigated on the merits in the State Court Case. Therefore, Mr. Fridman was left with the task of having to prove fraud such that the debt sued upon can be excepted from Ms. Rixham's discharge. Given the transactional history, his only significant roadblock is the fact that he purposefully and voluntarily chose to funnel the payments through his wholly-owned corporation, Golden Gate. Hence the question becomes whether the word "debt" in Section 523(c) should be interpreted expansively enough in this context to include the injury inflicted by Ms. Rixham's participation in the underlying scheme. The Court has wrestled with the pros and cons but in the end concludes that (a) Mr. Fridman was personally defrauded, (b) Ms. Rixham took his money to be used for her own personal benefit, and (c) the debt therefore must be excepted from her discharge.
Golden Gate was used to lend the $75,000 to Houston's and likewise made $34,003 in total payments to Houston's for the Front Yard Project. It also took a "bad debt" deduction on its 2008 corporate tax return as a result of the loss. Golden Gate did not timely assert a Section 523(a)(2) claim as a party plaintiff and therefore was not in a position to have its independent debt declared non-dischargeable. Section 523(c) expressly provides that, "the debtor shall be discharged from a debt of a kind specified in [§ 523(a)(2), (4), or (6)] unless, on request of the creditor to whom such debt is owed ... the court determines such debt to be excepted from discharge ..." (emphasis added). Therefore, Mr. Fridman was obligated to establish that the debt owed to him was obtained by fraud. In the wake of full trial on the merits, one might now reasonably conclude that, since the State Court Judgment on liability has no preclusive effect as to fraud, Mr. Fridman's actual debt is against Golden Gate. He did not personally lend money directly to Ms. Rixham. But it is equally true that
The general rule is that a corporation is an entity, separate and distinct from its shareholders. U.S. v. Brager Bldg. & Land Corp., 124 F.2d 349, 350 (4th Cir. 1941) (citing Dalton v. Bowers, 287 U.S. 404, 53 S.Ct. 205, 77 S.Ct. 389 (1932)); Superior Outdoor Signs, Inc. v. Eller Media Co., 150 Md.App. 479, 822 A.2d 478, 490 (Md. Ct. Spec. App. 2003). Thus, the rights and claims of a corporation belong to the corporation and not to its shareholders. Shenker v. Laureate Educ., Inc., 411 Md. 317, 343, 983 A.2d 408 (Md. 2009); see also Marchman v. NCNB Texas Nat. Bank, 120 N.M. 74, 898 P.2d 709, 716 (1995). Although corporate shareholders may suffer indirect harm, the right of recovery belongs exclusively to the corporation. Shenker, 411 Md. at 343, 983 A.2d 408 (citing Waller v. Waller, 187 Md. 185, 49 A.2d 449, 452 (1946)); NCNB Nat. Bank of N. Carolina v. Tiller, 814 F.2d 931, 937 (4th Cir. 1987), overruled on other grounds by Busby v. Crown Supply, Inc., 896 F.2d 833 (4th Cir. 1990) (holding that "only the corporation may vindicate its rights").
Yet, notwithstanding that settled hornbook law, the Court would have to reject reality to conclude that Mr. Fridman was not personally and directly injured by Ms. Rixham's fraudulent conduct. Stated differently, it's not as if the evidence showed that Golden Gate had its own separate assets and that those assets were used to make the subject payments. Therefore, the corporate separateness should not be permitted to shield Defendant from individual liability. See e.g., Wilcoxon Construction, Inc. v. Woodall (In re Woodall), 177 B.R. 517, 522 (Bankr. D. Md. 1995). While Woodall holds that a debtor may not hide her fraud behind her own defensive, corporate shield, this Court concludes that the same logic should apply here in the reverse to negate Ms. Rixham's offensive deployment of the technical transactional framework to the same improper end.
The Court recognizes that Mr. Fridman took several steps that undercut his position. He used Golden Gate to make the loan. He signed-off on Golden Gate's bad debt tax loss. He prepared a promissory note that did not include him as an obligee. He failed to include Ms. Rixham personally as an obligor on the note. And he failed to include Golden Gate as a plaintiff in this case.
And then, when it was past the eleventh hour, Mr. Fridman (1) sought a dispositive ruling that the State Court Judgment as to liability equaled claim and issue preclusion sufficient to enter a "partial" judgment in his favor as to fraud and (2) sought to add Golden Gate and Ms. Friedman as Plaintiffs. The rational conclusion is that both requests were made in order to diffuse the impact of not having Golden Gate as a party plaintiff in the first place. Yet, in the end, the Court concludes that Ms. Rixham's fraudulent behavior directly injured Mr. Fridman and hence he must prevail, notwithstanding, those lapses. This is so because the fraud exception has consistently been interpreted in a comprehensive manner where warranted by the facts.
In Cohen v. De La Cruz, the Supreme Court restated the policy behind Section 523(a)(2) that the Bankruptcy Code prohibits
Cohen, 523 U.S. at 218, 118 S.Ct. 1212 (emphasis added).
This broad interpretation manifests in Pleasants, where the Fourth Circuit Court of Appeals specifically rejected the argument that Section 523(a)(2)(A)'s "obtained by" language requires that some portion of a creditor's claim must have been directly transferred from the creditor to the debtor. 219 F.3d at 375 (citing Cohen, 523 U.S. at 218, 118 S.Ct. 1212). The Pleasants Court held that the language of Section 523(a)(2)(A) was "broad enough to encompass a situation in which no portion of a creditor's claim was literally transferred to the fraudulent debtor." Pleasants, 219 F.3d at 375. Most recently, in Husky v. Ritz, ___ U.S. ___, 136 S.Ct. 1581, 194 L.Ed.2d 655 (2016), the Supreme Court enhanced its expansive view of the fraud exception, wherein the Court made it clear that Section 523(a)(2)(A)'s use of the term "actual fraud" is broad enough to include fraudulent conveyances whether the actual "debt" sued upon was obtained by the transfer or not. Notwithstanding, the somewhat convoluted circumstances that underlie the debt and especially the technical "ownership" in Golden Gate, the Court will find in Mr. Fridman's favor under the more liberal umbrella in order to remedy the fraudulent conduct that Ms. Rixham had a prime role in perpetrating.
The answer here is yes. The Court finds that the two essential affirmative misrepresentations attributed to Ms. Rixham were in fact made by her. These were (1) that the purpose of the $75,000 loan was to help Houston's manage the large influx of business, and (2) that Houston's was bonded, licensed and able to handle the projects proposed by Mr. Fridman. See Gem Ravioli, Inc. v. Creta (In re Creta), 271 B.R. 214, 220 (1st Cir. BAP 2002) (holding that misrepresentations regarding a professional license go to very essence of an agreement, i.e., "the reliance by the contracting party that the debtor has the requisite knowledge"); Pleasants, 231 B.R. 893 (holding that misrepresentation regarding professional license is sufficient under § 523(a)(2)(A) because professional licenses carry with them degree of presumed competence). The most important misrepresentation should be added to these, i.e., Ms. Rixham's silence as to the existence of the Caplan Loan, the IDOT
Based on the totality of the record in this proceeding, the Court concludes that Ms. Rixham knew the representations were false at the time she made them. The evidence establishes that she knew the Caplan Loan was coming due in August 2007. She had no other means to pay that loan and it was secured by an IDOT against her personal residence. Yet she did not tell Mr. Fridman that she intended to use the Golden Gate Loan to pay Mr. Caplan. Likewise, Houston's did not have a Maryland home improvement contractor's license, nor was Houston's financially fit, or professionally capable, to manage or complete the Front yard Project. Ms. Rixham, as Houston's President, has to be charged with knowledge of the truth as to those facts, especially as compared to the representations made.
The Court concludes that Ms. Rixham did indeed make the misrepresentations with the intention of deceiving Mr. Fridman. Ms. Rixham had a very compelling, yet undisclosed, reason to obtain the loan from Mr. Fridman — she was in danger of losing her personal residence if the Caplan Loan was not paid. Neither she nor Houston's had any readily available means to pay Mr. Caplan and Houston's was, in the light of hindsight, in a precarious financial position. Indeed, it appears to have folded its tent and ceased operations not long after obtaining the Golden Gate Loan. If Ms. Rixham had revealed the truth about why the loan was needed, or that Houston's was not licensed, or was not financially competent, it is a certainty Mr. Fridman would not have caused Golden Gate to lend the money. This transaction reeks of fraud and it is imminently reasonable to conclude that the money was solicited solely to pay the Caplan Loan with no intention of repayment to Mr. Fridman. The abandonment of the Front Yard Project is sure confirmation of this. This conclusion is even more compelling when one considers that the first proposal to Mr. Fridman was for him to invest in Houston's with no direct, repayment obligation on the part of Houston's or its principals. That would have made collection much more problematic. Likewise with respect to Ms. Rixham's $70,000 to $80,000 cost estimate for the abandoned Front Yard Project, which roughly equates to the amount of money she needed to pay off the Caplan Loan. The Court concludes that the principals of Houston's never had any intention of completing that work.
Mr. Fridman's reliance was justifiable. He believed the $75,000 would be used to enhance Houston's business, not to pay a pre-existing, undisclosed loan. He testified that the presence of a home improvement license was important to him personally and a professional license does confirm a higher level of skill and expertise. See Creta, 271 B.R. at 220 (where misrepresentation regarding license was substantial factor in entering into transaction and debtor's work later appears defective, the creditor has established that defects derive directly from lack of professional qualifications). He was aware of and noted that an MHIC license number was listed on the FYP Agreement. Mr. Fridman attended the open house at Houston's showroom,
The answer here is also yes. The $75,000 loan was never repaid and the Front Yard Project was never completed. The construction and landscaping had to be demolished and redone. These losses were caused by the misrepresentations regarding the unrevealed purpose of the Golden Gate Loan, Houston's unlicensed status, its financial ill-health and its lack of ability to perform a workmanlike job. And the injury flows directly to Mr. Fridman's personal pocketbook.
The debt shall therefore be excepted from Ms. Rixham's discharge. A separate Order will issue.
It appears from its express language that Federal Rule of Civil Procedure 52 is intended to apply to a party's evidentiary presentation "during a nonjury trial" and not with regards to proceedings that transpired in another forum prior to the trial at hand. The sum and substance of previously completed litigation may of course be utilized in support of a dispositive motion, if timely filed.
The Rooker Feldman doctrine holds that "lower federal courts are precluded from exercising appellate jurisdiction over final state-court judgments." Thana v. Bd. of License Comm'rs for Charles Cnty., Md., 827 F.3d 314, 319 (4th Cir. 2016) (quoting Lance v. Dennis, 546 U.S. 459, 126 S.Ct. 1198, 163 L.Ed.2d 1059 (2006)). The Rooker-Feldman doctrine, "assesses only whether the process for appealing a state court judgment to the Supreme Court under 28 U.S.C. § 1257(a) has been sidetracked by an action filed in a district court specifically to review that state court judgment." Thana, 827 F.3d at 320.
