EDWARD ELLINGTON, Bankruptcy Judge.
Having considered the complaint, answer, trial exhibits, and corresponding briefs, the Court finds that the Complaint Objecting to Dischargeability Pursuant to 11 U.S.C. 523(a)(2)(A) (Adv. Dkt #1) filed by Car Financial Services, Inc. is well-taken and should be granted.
The following facts are from this Court's Memorandum Opinion on Plaintiff's Motion for Summary Judgment (Adv. Dkt. #25) (Summary Judgment Opinion) entered in the above-styled adversary proceeding on March 21, 2018:
On June 12, 2017, Car Financial initiated the above-styled adversary proceeding with the filing of its Complaint Objecting to Dischargeability Pursuant to 11 U.S.C. § 523(a)(2)(A) (Adv. Dkt. #1) (Complaint). In its Complaint, Car Financial states that its judgment should be nondischargeable pursuant to 11 U.S.C. § 523(a)(2)(A).
The Debtor filed Defendant's Amended Answer and Defenses to Plaintiff's Complaint (Adv. Dkt. #10) (Answer) on August 29, 2017. In his Answer, the Debtor admits that he signed the Floor Plan Note, Guaranty, and Buy Back Agreement with the notation "owner" under his name, but denies that "he applied for the line of credit on behalf of Spirit and that he represented himself to be the 100% member/owner of Spirit."
On December 15, 2017, Car Financial filed Plaintiff's Motion for Summary Judgment (Adv. Dkt. #17) (Motion). Car Financial alleged that it was entitled to a judgment as a matter of law that its State Judgment in the amount of $88,353.76 was nondischargeable pursuant to § 523(a)(2)(A).
The Debtor filed Defendant's Response in Opposition to Motion for Summary Judgment (Adv. Dkt. #22) (Response to Summary Judgment) on January 29, 2018. Contrary to his Answer, the Debtor alleged in his Response to Summary Judgment that he "is the owner of Spirit and his signature as such is not a misrepresentation."
On March 21, 2018, the Court entered its Memorandum Opinion on Plaintiff's Motion for Summary Judgment (Adv. Dkt. #25) (SJ Opinion). In the SJ Opinion, the Court found that the "representation in question is the representation the Debtor made at the time he signed the Floor Plan Note, Guaranty, and the Buy Back Agreement that he was the owner of Spirit. The Court finds that the issue of whether the Debtor owned Spirit at that time was in dispute."
On August 16, 2018, a trial was held on the Complaint and Answer. At the conclusion of the trial, the parties were instructed to submit briefs. Once the final brief was filed on October 25, 2018, the Court took the matter under advisement.
This Court has jurisdiction of the subject matter and of the parties to this proceeding pursuant to 28 U.S.C. § 1334 and 28 U.S.C. § 157. This is a core proceeding as defined in 28 U.S.C. § 157(b)(1) and (2)(I).
Section 523(a)(2)(A) excepts from discharge "any debt. . .for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by—(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition." 11 U.S.C. § 523(a)(2)(A).
In a dischargeability action, the plaintiff bears the burden of proving the elements by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 286, 111 S.Ct. 654, 112 L. Ed. 2d 755 (1991). "Intertwined with this burden is the basic principle of bankruptcy that exceptions to discharge must be strictly construed against a creditor and liberally construed in favor of a debtor so that the debtor may be afforded a fresh start." Hudson v. Raggio & Raggio, Inc. (In re Hudson), 107 F.3d 355, 356 (5th Cir. 1997). The Bankruptcy Code, however, grants relief only to the "honest but unfortunate debtor," and a debtor may not discharge a debt that is incurred through his own wrongful conduct. Grogan, 498 U.S. at 286.
Car Financial has pleaded both false pretense/false representation and actual fraud. In construing § 523(a)(2)(A), the elements of false pretenses and false representations are distinguished from the elements of actual fraud. RecoverEdge L.P. v. Pentecost, 44 F.3d 1284, 1292 (5th Cir. 1995). "The distinction recognized by the Fifth Circuit appears to be a chronological one, resting upon whether a debtor's representation is made with reference to a future event, as opposed to a representation regarding a past or existing fact."
In order for Car Financial to prevail under § 523(a)(2)(A) for false pretenses or false representations, Car Financial "must prove by a preponderance of the evidence that the debtor made representations that were (1) knowing and fraudulent falsehoods, (2) describing past or current facts, (3) that were relied upon by the other party."
On May 16, 2016, the Supreme Court of the United States issued Husky Int'l Electronics, Inc. v. Ritz,
Before addressing the question of dischargeability, a brief discussion of limited liability companies is necessary. Spirit is a limited liability company created under the laws of the State of Mississippi, specifically the Revised Mississippi Limited Liability Company Act found at Miss. Code Ann. §§ 79-29-101-1301 (2013). Under Mississippi law, a limited liability company (LLC) "is formed upon the filing of a certificate of formation. The certificate of formation must set forth the name of the LLC, street and mailing address of its registered agent, and its date of dissolution, if any. Information about filing can be found on the Secretary of State's Web site."
The 2002 COF creating Spirit was filed by Jeffery on June 21, 2002. Jeffery's name is the only name on the 2002 COF. Jeffery is listed as the registered agent, and he signed the form as "manager". (Trial Exh. 7)
Once an LLC is created, the certificate of formation may be amended.
On March 29, 2004, Jeffery filed the 2004 Amendment.
Pursuant to Miss. Code Ann. § 79-29-207, "any document required by this chapter to be delivered to the Office of the Secretary of State for filing shall be signed by any one or more authorized persons.
As previously noted, in order for Car Financial to prevail under § 523(a)(2)(A) for false pretenses or false representations, Car Financial "must prove by a preponderance of the evidence that the debtor made representations that were (1) knowing and fraudulent falsehoods, (2) describing past or current facts, (3) that were relied upon by the other party." Haler, 2016 WL 825668, at *13.
The representation in question is whether the Debtor owned Spirit at the time he signed the Floor Plan Note, Guaranty, and Buy Back Agreement. If the Debtor owned Spirit at the time he signed the Floor Plan Note, Guaranty, and Buy Back Agreement, then the representation was not false and the debt is dischargeable. If, however, the Debtor did not own Spirit at the time he signed the Floor Plan Note, Guaranty, and Buy Back Agreement, then the representation was false. Assuming Car Financial meets all three elements for false pretenses or false representations, then the debt would be nondischargeable.
Turning to the second element, the Court must determine whether the representation described past or current facts. The Court finds that the representation that the Debtor owned Spirit at the time he signed the Floor Plan Note, Guaranty, and Buy Back Agreement involved a past or current fact. Therefore, Car Financial has met the second element.
As to the third element, Car Financial must prove that the representation that the Debtor owned Spirit was relied upon by Car Financial. The Court finds that the testimony at trial proves that Car Financial relied upon the Debtor's representation that he was the owner of Spirit. The Debtor testified at trial that he had signed the documents because he had good credit and Jeffery did not, and that the Debtor was helping Jeffery to get a loan.
Car Financial's former employee, Alan McAuley (McAuley), testified that this was the first time Spirit had requested Car Financial to finance a floor plan agreement.
Based on the Debtor representing himself to be the owner of Spirit, Car Financial ran "a background check, we pull credit files, we do a criminal background, we check whether an individual is on a watch list or not. The Secretary of State, this has been mentioned, that's part of it as well."
McAuley testified that as the owner of Spirit, the Debtor's criminal background check and credit check led Car Financial to believe that the Debtor was creditworthy, therefore, Car Financial agreed to loan Spirit the money to finance a floor plan for the dealership. (Trial Tr. at 38-43.) Consequently, it is clear that in loaning Spirit money, Car Financial relied upon the Debtor's representation that he was the owner of Spirit. Car Financial has met the third element.
Having met the second and third elements, in order to have the State Judgment declared nondischargeable, Car Financial must now prove that the representation that the Debtor was the owner of Spirit was a knowing and false representation. Car Financial asserts that based on his 2004 Exam testimony, the Debtor did not own Spirit at the time he signed the Floor Plan Note, Guaranty, and Buy Back Agreement. Therefore, it was a false representation.
Based upon his pleadings, his 2004 Exam testimony, and his testimony at trial, the Court finds that the Debtor is not consistent as to whether he owned/owns Spirit. In his Answer filed on August 29, 2017, the Debtor admits that he signed the Floor Plan Note, Guaranty, and Buy Back Agreement with the notation of "owner" of Spirit. The Debtor, however, denies that "he applied for the line of credit on behalf of Spirit and that he represented himself to be the 100% member/owner of Spirit."
In March of 2017, at his 2004 Exam, the Debtor testified that he was not nor had he ever been the owner of Spirit.
Like the change of position in his pleadings, at trial the Debtor flipped and flopped as to whether he was the owner of Spirit. During his testimony, the Debtor testified seven (7) times that he was the owner of Spirit. One example: "Q. Were you the owner of Spirit Automotive on November the 21
The Debtor testified five (5) times that he was not the owner of Spirit. One example: "Q. So, again, you're not the owner of Spirit Automotive, LLC? A. Right. You could say that."
The following exchange between the Debtor and the attorney for Car Financial is an example of the Debtor's vacillating testimony:
Due to the Debtor's changing testimony at trial, the Court finds that the Debtor's testimony at trial regarding whether he was/is the owner of Spirit is not credible. Consequently, the Court will not give any weight to the Debtor's trial testimony as to whether he was the owner of Spirit.
Since the Court is not giving any weight to the Debtor's trial testimony regarding ownership of Spirit, the Court is left with the Summary of Your Assets and Liabilities and Certain Statistical Information (Schedules) and Statement of Financial Affairs for Individuals Filing for Bankruptcy (SOFA) (Dkt. #16), the Debtor's testimony at the 2004 Exam, and his Answer to the Complaint.
In the SOFA, question 27 asked whether the Debtor owned a business within four (4) years of filing bankruptcy. The Debtor answered "No. None of the above applies."
At his 2004 Exam, the Debtor consistently testified that he did not have an ownership interest in Spirit:
When questioned about documents on file with the SOS's office, the Debtor testified that Jeffery had put his name on the documents and that he had no knowledge that Jeffery had signed his name to the documents:
The Debtor consistently testified at his 2004 Exam that Jeffery forged his signature on the documents filed with the SOS's office which showed that he had an ownership interest in Spirit:
At trial, the Debtor affirmed the testimony from his 2004 Exam that Jeffery had forged his signature on the documents filed with the SOS:
As to his testimony that Jeffery forged his signature on the SOS documents, the Court finds that the Debtor's 2004 Exam testimony and the Debtor's trial testimony are consistent-the Debtor repeatedly stated that he had not signed any of the documents on file at the SOS's office. The Court has not been presented with any evidence to contradict the Debtor's testimony that his signature had been forged on the documents.
Further, the Court has not been presented with an operating agreement or any other document to show that the Debtor was legally an owner of Spirit. As a result, the Court finds that the Debtor was not the owner of Spirit when he signed the Floor Plan Note, Guaranty, and Buy Back Agreement. Therefore, Car Financial has met the first element and proven that the Debtor's representation that he owned Spirit at the time he signed the Floor Plan Note, Guaranty, and Buy Back Agreement was a knowing falsehood.
Car Financial cites In re Oh,
Likewise, in the case at bar, the Debtor knew his creditworthiness was better than Jeffery's and that Car Financial would not have loaned Jeffery money in order to finance the floor plan. Therefore, the Debtor signed the Floor Plan Note, Guaranty, and the Buy Back Agreement as "owner" in order to induce Car Financial to loan Spirit money.
The Court finds that Car Financial has proven "by a preponderance of the evidence that the debtor made representations that were (1) knowing and fraudulent falsehoods, (2) describing past or current facts, (3) that were relied upon by the other party." Bercier, 934 F.2d at 692. For this reason, the Debtor's obligation to Car Financial is nondischargeable pursuant to § 523(a)(2)(A).
Because the Court has found that Car Financial has met its burden under false pretenses or false representations, the Court will not address actual fraud under § 523(a)(2)(A).
In order for Car Financial to prevail under § 523(a)(2)(A) for false pretenses or false representations, Car Financial "must prove by a preponderance of the evidence that the debtor made representations that were (1) knowing and fraudulent falsehoods, (2) describing past or current facts, (3) that were relied upon by the other party." Haler, 2016 WL 825668, at *13.
The representation in question is the representation the Debtor made at the time he signed the Floor Plan Note, Guaranty, and the Buy Back Agreement that he was the owner of Spirit. Due to the Debtor's inconsistent testimony at trial, the Debtor's testimony as to whether he was or was not the owner of Spirit is not credible.
Looking to the Debtor's Schedules and SOFA, the Debtor states that he does not have an ownership interest in any corporation or business. In his 2004 Exam testimony and his Answer to the Complaint, the Debtor consistently stated that he did not have an ownership interest in Spirit and that Jeffery forged his signature on the document filed with the SOS stating that he was the 100% owner of Spirit. (Trial Exh. 7). Therefore, the Court finds that the Debtor's representation to Car Financial that he was the owner of Spirit to be a knowingly false representation.
The representation regarding ownership described a current fact, and Car Financial proved that but for the creditworthiness of the Debtor, the owner of Spirit, it would not have loaned Spirit money. Therefore, Car Financial has met the three elements necessary for its judgment to be declared nondischargeable under § 523(a)(2)(A).
To the extent the Court has not addressed any of the parties' other arguments or positions, it has considered them and determined that they would not alter the result.
A separate judgment consistent with this opinion will be entered in accordance with Rule 7054 of the Federal Rules of Bankruptcy Procedure.
