KEVIN R. ANDERSON, U.S. Bankruptcy Judge.
The matter before the Court is Ray Klein, Inc. dba Professional Credit Service's ("Plaintiff") Motion for Default Judgment. The Court has heard the arguments of Plaintiff's counsel, heard testimony of witnesses, and received exhibits into evidence as noted on the record. Daniel Jeff Webb, the Defendant, however, did not appear at the hearing or file an objection to the Plaintiff's Motion. The Court has also read the pleadings and has conducted its own independent investigation of applicable law. The Court is prepared to rule and now issues its findings of fact and conclusions of law. Any of the findings of fact herein are deemed, to the extent appropriate, to be conclusions of law, and any of the conclusions of law herein are similarly deemed to be findings of fact, and they shall be equally binding as both.
The Court has jurisdiction over this contested matter pursuant to 28 U.S.C. § 1334(a) & (b) and 28 U.S.C. § 157(b). The Plaintiff's Motion is a core proceeding under 28 U.S.C. § 157(b)(2)(I), and the Court may enter a final order. Venue is appropriate in this District under 28 U.S.C. §§ 1408 and 1409, and notice of this hearing was properly given to all parties in interest.
1. On March 13, 2015 Daniel Jeff Webb ("Webb") filed a joint voluntary Chapter 7 bankruptcy case with Laissa Tereza Call (Case No. 15-22138).
2. Webb was represented by Leonard J. Carson of Pearson, Butler & Carson, PLLC ("Carson").
3. The deadline to object to the Debtors' discharge or to challenge dischargeability of debts under 11 U.S.C. §§ 523 and 727
4. On June 19, 2015, the Plaintiff filed an Adversary Proceeding (the "Complaint") against the Webb. The Plaintiff sought a determination that its debts against Webb were nondischargeable under §§ 523(a)(2) and 523(a)(6).
5. The Plaintiff properly served the Summons and Complaint on Webb and Carson by mail on June 30, 2015.
6. Webb filed an answer to the Complaint ("Answer") on July 28, 2015.
7. A few months later, on January 28, 2016, the Court entered an Order Granting Second Amended Stipulated Motion to Amend Order Governing Scheduling and Preliminary Matters ("Scheduling Order"). The Scheduling Order set a Final Pretrial Conference in the case for May 3, 2016.
8. Before the Final Pretrial Conference was held, Carson filed a Motion to Withdraw as Attorney of Record for Webb ("Motion to Withdraw") on April 29, 2016.
9. On May 2, 2016, the Motion to Withdraw was granted. The order on the Motion to Withdraw stated that "[a] party who fails to file Notice of Substitution of Counsel or Notice of Appearance ... will be deemed to be proceeding pro se and, may be subject to sanction pursuant to Federal Rules of Civil Procedure 16(f)(1), including but not limited to dismissal or default judgment."
10. The next day, May 3, 2016, the Court held the Final Pretrial Conference. Floyd C. Mattson ("Mattson") appeared telephonically on behalf of the Plaintiff. However, Webb did not appear at the hearing. The Court rescheduled the Final Pretrial Conference for June 7, 2016 ("Rescheduled Hearing").
12. On June 7, 2016, the Court held the Rescheduled Hearing on the Final Pretrial Conference. Mattson appeared telephonically for the Plaintiff; however, Webb did not appear. The Bankruptcy Court's staff reported that Webb had called the Court shortly before the Rescheduled Hearing to indicate he would be unable to attend the hearing. Though Webb had not previously requested permission to appear telephonically, the Court's staff nonetheless attempted to reach Webb by telephone so he could participate at the hearing. However, Webb could not be reached. The Court then took a brief recess and reconvened the hearing at 2:00 p.m., but Webb could still not be contacted. The Court stated it would issue an Order to Show Cause for Webb's failure to appear. The Court also mentioned that it would consider an entry of a default certificate if Webb failed to appear at a subsequent hearing.
13. On June 9, 2016, the Court filed an Order to Appear and Show Cause ("OSC") for Webb. The OSC ordered Webb to appear before the Court on June 28, 2016 at 9:30 a.m. and to show cause why he: (1) failed to appear at both the original and rescheduled hearing on the Final Pretrial Conference set by the Court; and (2) failed to file his own Pretrial Order or otherwise respond to the Plaintiff's Pretrial Order. The OSC also stated that "the Court will consider imposing sanctions pursuant to Fed. R. Civ. P. 37(b)(2)(A)(ii)-(vii) for failure to comply with the Court's Scheduling Order, including but not limited to, striking [Webb's] answer and/or rendering a judgment by default against ... [Webb] under Local Rule 7055-1."
14. A few days after the OSC was issued, Webb filed a Motion to Reschedule Hearing. Webb requested that the OSC hearing be moved until after the middle of July because of his work schedule.
15. Despite Webb's request, the Court held the OSC hearing. However, no parties appeared. The Court then rescheduled the OSC hearing for July 26, 2016 at 10:30 a.m. and provided notice to Webb. In addition to the terms in the prior OSC order, the Court ordered Webb to "inform Judge Anderson's Chambers no later than July 21, 2016 at 4:30 p.m." if he could not appear at the rescheduled OSC hearing.
16. On July 26, 2016, the Court held the rescheduled OSC hearing. Mattson appeared telephonically for the Plaintiff. However, once again, Webb did not appear. As a result, the Court sanctioned Webb under Fed. R. Civ. P. 16(f)(1)(A)-(C) and Fed. R. Civ. P. 37(b)(2)(A)(iii) by striking Webb's Answer to the Complaint. The Court also ordered that no later than August 19, 2016, Plaintiff could file a motion for default judgment and set the matter for hearing.
17. On August 16, 2016, the Plaintiff filed a Motion for Default Judgment.
18. The Court held a hearing on the Plaintiff's Motion for Default Judgment on October 18, 2016 at 9:30 a.m. Mattson appeared on behalf of the Plaintiff; however,
19. In June 2010, Webb signed a Vessel Purchase and Sale Agreement (the "Agreement") to purchase the vessel SeaTex, described as a 56 Matthews (the "Vessel") from Donald and Sue Baker ("Bakers") for $94,500.
20. The Agreement provided that Webb would make a down payment of $8,950 and thereafter pay $800 a month.
21. The Agreement was secured by a Preferred Marine Mortgage between Seatex Charters II, LLC ("Seatex Charters") and the Bakers on August 19, 2010.
22. Webb was the sole member of Seatex Charters.
23. On February 10, 2012, a judgment was entered in favor of the Bakers; SeaTex Charters, Inc. against M/Y SeaTex, O.N. 287804, Her Tackle, Apparel, Boats, Appurtenances, in rem; Daniel Jeffrey Web; SeaTex Charters II, LLC, in personam in the U.S. District Court for the Western District of Washington, Case No.: 3-11-CV-05122 (the "Default Judgment").
24. The Default Judgment was in the amount of $165,184.36, plus attorney's fees and expenses in the amount of $14,409, and included the damages assessed by the United States District Court, District of Alaska in its Judgment in Rem of August 9, 2011. The Default Judgment also allowed interest of 8% to accrue per annum, as determined by the Alaska court from January 5, 2011 until paid in full.
25. On May 11, 2013, Bakers assigned the Default Judgment to the Plaintiff.
26. As of October 10, 2016, the total amount due from the Default Judgment is $270,124.20.
27. David Carleson ("Carleson") has been a yacht broker for 30 years.
28. Carleson testified that he met Webb sometime in 2010 when Webb expressed an interest in purchasing a boat. Carleson later suggested that Webb consider the Vessel.
29. Webb told Carleson that he was interested in the Vessel because he wanted to operate a charter business. Webb also represented that his brother was in the funeral-home business and that he was in the process of obtaining a funeral-home business license as well. Webb also stated that he and his brother had purchased a mortuary business in Tacoma, Washington.
30. Carleson testified that Webb made several representations regarding his financial abilities before he purchased the Vessel, including —
31. Afterwards, Carleson passed along Webb's representations to the Bakers, the owners of the Vessel, before the Agreement was signed.
32. After the Agreement was signed, Carleson testified that he could not locate Webb or the Vessel, and that the Webb had not maintained insurance on the Vessel.
33. Donald Baker ("Baker") testified that he owned the Vessel when it was sold to Webb.
34. Baker testified that he relied on Carleson's representations that Webb appeared to be a valid purchaser for the Vessel. These representations included —
35. After the Agreement was made, Baker said Webb only made three monthly payments, that each payment was late, and that payments ceased after November 2010.
36. Baker further testified that Webb never insured the Vessel even though it was a requirement of the Agreement. In fact, Baker stated that he covered three months of insurance premiums after the Agreement was signed. At one point, Baker received proof of insurance from Webb, but shortly thereafter, Baker received a notice of cancellation from the insurance company because Webb never made the payments.
37. Baker said Webb represented that the Vessel was in Washington around September 2010. However, Baker later learned from another source that Webb had taken the Vessel to Alaska during that period.
38. Baker testified that the U.S. Marshalls later repossessed the Vessel in Alaska in March or April of 2011. Baker discovered that several liens were filed against Vessel for repair work authorized by Webb.
39. Baker stated when he recovered the Vessel from Alaska, it had been completely "trashed." For instance, the diesel-generator had been removed; the batteries had been removed, broken, or damaged; there was extensive water and freezing damage; and about $40,000 in electronic marin equipment had been removed from the Vessel.
40. Baker testified that it took a week to make repairs to enable the Vessel to return to Washington state.
41. Baker sold the Vessel in August 2011.
The Plaintiff seeks a determination that the debt related to the Default Judgment is nondischargeable under §§ 523(a)(2) and 523(a)(6).
Section 523(a)(2)(A) prevents the discharge of a debt based on three separate causes of action: false pretenses, a false representation, or actual fraud.
First, to sustain a claim for false pretenses, a creditor must show that the debtor made "implied misrepresentations intended to create and foster a false impression."
Second, to sustain a claim for a false representation, a creditor must show, by a preponderance of the evidence, that "[1] [t]he debtor made a false representation; [2] the debtor made the representation with the intent to deceive the creditor; [3] the creditor relied on the representation; [4] the creditor's reliance was reasonable; and [5] the debtor's representation caused the creditor to sustain a loss."
Third, to except a debt from discharge based on actual fraud, "the creditor must show: (a) the debtor committed actual fraud; (b) the debtor obtained money, property, services, or credit by actual fraud; and (c) the debt arises from actual fraud."
Turning to the second count in the Complaint, that Webb willfully and maliciously
To prevail on this claim, a creditor has the burden to prove, by a preponderance of the evidence, that a debtor's act was 1) "willful" and 2) "malicious."
On the other hand, a finding of maliciousness requires proof that the debtor either intends the resulting injury or intentionally takes action that is substantially certain to cause the injury.
Before visiting the merits of the Plaintiff's case, the Court must review the standards for default judgment under FED. R. BANKR. P. 7055. Under this rule, the Court may conduct a hearing when it needs to "establish the truth of any allegation by evidence."
In this case, the Plaintiff has alleged sufficient facts to show by a preponderance of the evidence that Webb obtained the debt on the Vessel under false pretenses, false representation, and actual fraud. The Court bases its decision on the record, exhibits, and testimony provided in this case. The Court was particularly persuaded by the testimony of Carleson, who testified that Webb made several representations about his financial ability to repay the debt with the Bakers. Namely, that Webb had special connections to the Kraft Foods business; that he had the
Though Webb never challenged these allegations, the Court finds further support of Webb's false representations concerning his financial abilities in the record. For instance, in the February 2016 deposition, Webb testified that his only experience in the mortuary business had been in 1996 for less than a year.
Furthermore, Webb's false representations were made with the intent to deceive Carleson and the Bakers, and did indeed cause the Bakers to sustain a significant loss to their property. Specifically, after the Vessel was recovered from Webb, the Bakers were only able to sell it for $12,000 because of Webb's removal of items from the Vessel and his failure to properly store and maintain it.
Even if Webb's statements to Carleson were not actual representations of his financial ability to make payments on the debt, Webb's conduct clearly showed he intended to create and foster a false impression when he purchased the Vessel. Webb made this impression to Carleson when he stated that he had the backing of well-known and financially-successful organizations, such as Kraft Foods and the LDS church. Webb also made implied representations that he had legitimate business plans related to the purchase of the Vessel. Specifically, that the Vessel would be used for charter work out of the Seattle area, and that he already had begun efforts to obtain a mortuary license. Webb's misleading conduct ultimately induced the Bakers to enter into the Agreement. Thus, for these reasons, Webb's actions rise to the level of false pretenses.
Webb's representations and conduct in this case also rise to the level of actual fraud under § 523(a)(2)(A). As previously discussed, Webb's actions show that he intentionally engaged in a scheme to deprive or cheat the Bakers when he obtained the Vessel. For instance, Webb never obtained insurance on the Vessel, despite this clear term in the Draft Letter of Understanding and the Preferred Marine Mortgage.
The Court, however, declines to grant a default judgment in favor of the Plaintiff under § 523(a)(6). Plaintiff argues that Webb willfully and maliciously injured the Bakers' property by removing $40,000 in electronics and accessories from the Vessel. Although Plaintiff provided testimony and evidence of the value of these items, such evidence failed to establish that Webb's actions were done with the specific intent to harm the Bakers or their property. The Court is certainly mindful that Webb's actions harmed the Bakers' property, but based on the evidence presented, the Court finds that the Plaintiff has not satisfied its burden to show that Webb's actions were both willful and malicious for purposes of § 523(a)(2)(A).
The Court finds that the obligations owing to Plaintiff, as ordered by the U.S. District Court Case No.: 3:11-CV-05122, are non-dischargeable under § 523(a)(2). The Court finds that the damages related to the non-dischargeable debt total $270,124.20, as outlined in Exhibit 18. However, the Court denies the Plaintiff's request to find that the debt is excepted from discharge under § 523(a)(6). The Court will ask the Plaintiff as the prevailing party to prepare the order of default judgment granting in part and denying in part the Plaintiff's request.
