Ambassador Steel Fabrication, LLC v. Thornton (In re Thornton), Case No. 18-71744

615 B.R. 824

IN RE Joseph T. THORNTON, Jr., and Nicole Thornton, Debtors.

Ambassador Steel Fabrication, LLC, Plaintiff,

v.Joseph T. Thornton, Jr., Defendant.

Case No. 18-71744

Adv. No. 19-07008

United States Bankruptcy Court, C.D. Illinois.

Signed February 28, 2020

Sumner A. Bourne, Peoria, IL, for Defendant.

Paul Arthur Brocksmith, Brocksmith & Brocksmith, Northbrook, IL, for Plaintiff.

OPINION

Mary P. Gorman, United States Bankruptcy Judge

Before the Court, after trial, is a complaint to determine the dischargeability of a debt allegedly owed by the Debtor to Ambassador Steel Fabrication, LLC ("Ambassador"). For the reasons set forth herein, judgment will be entered in favor of the Debtor and against Ambassador. No debt to Ambassador will be excepted from the Debtor's discharge.

I. Factual and Procedural Background

Joseph T. Thornton, Jr. ("Debtor") and his spouse, Nicole Thornton, filed a voluntary petition under Chapter 7 on November 29, 2018. Relevant to the matter here, the Debtor disclosed on his statement of financial affairs that he was an owner of Thornton Rave Steel Fabrication LLC ("Thornton Rave"), which had operated from 2014 until November 2018. On his Schedule A/B, the Debtor valued his 99% interest in Thornton Rave at zero. On his Schedule E/F, he listed a number of creditors, including Ambassador, by reason of "possible personal liability" related to his operation of Thornton Rave and other businesses. Both the Debtor and his spouse received a discharge on March 19, 2019. Prior to the entry of the discharge, however, Ambassador filed a timely complaint to determine the dischargeability of a debt allegedly owed to it by the Debtor.

In its complaint, Ambassador asserted that Thornton Rave was in the business of fabricating and supplying reinforced steel material for concrete construction and sold reinforced steel and other related materials to contractors for use in construction projects. Ambassador alleged that it supplied Thornton Rave with steel materials for use in Thornton Rave's business. Further, Ambassador claimed that it had entered into joint check agreements with Thornton Rave and several of Thornton Rave's customers to require that payments for materials supplied by Ambassador would be made jointly to Thornton Rave and Ambassador. Notwithstanding those agreements, Ambassador says that, during October 2018, the Debtor caused three joint checks to be deposited into the Thornton Rave bank account without the endorsement of Ambassador, causing Ambassador to be deprived of $77,953.22 in payments due to it. Ambassador claimed that the Debtor was liable to repay that amount to Ambassador and that the debt should be found nondischargeable because his conduct constituted embezzlement of or willful and malicious injury to Ambassador's property. Copies of the three joint checks were attached to the complaint as exhibits.

The Debtor answered the complaint denying many of the material allegations against him. Specifically, he denied that he was personally indebted to Ambassador and claimed that the debt was owed only by Thornton Rave. He affirmatively admitted that the joint checks had been deposited into a Thornton Rave account and that the funds were used to pay Thornton Rave bills. Somewhat strangely, he also affirmatively admitted that he, as manager of Thornton Rave, had endorsed the joint checks before they were deposited even though the checks did not contain any such endorsements.

The matter was tried on January 14, 2020. Ambassador presented Laura Rackowski, who identified herself as its credit manager, as its first witness. Ms. Rackowski said that she was responsible for collections and for reviewing and assessing the terms of credit applications. She said that she was familiar with the credit relationship between Ambassador and Thornton Rave, which had begun in March 2017 when Thornton Rave began purchasing steel from Ambassador. Initially, Thornton Rave made its purchases from Ambassador on open account, but, after issues of timely payment arose, it was put on a cash-on-delivery program. When the logistics of that program became cumbersome, joint check agreements were put into use.

According to Ms. Rackowski, joint check agreements were entered into with Thornton Rave and a number of its customers to require those customers to include Ambassador as a payee on checks issued to pay Thornton Rave invoices. She said that Thornton Rave agreed to the arrangement because it allowed Thornton Rave to continue to purchase steel from Ambassador.

Ms. Rackowski identified a joint check agreement Ambassador entered into on May 24, 2018, with Thornton Rave and its customer, Sangamo Construction. The joint check agreement referenced a Galesburg project and required Sangamo Construction to issue joint checks in payment of Thornton Rave invoices for steel related to that project. Further, Sangamo Construction guaranteed payment on all invoices issued by Ambassador to Thornton Rave related to the project.

According to Ms. Rackowski, Ambassador received one check pursuant to the agreement, but, when more payments were not forthcoming, Ambassador made an inquiry to determine the status of payments. Sangamo Construction provided Ambassador a copy of a cancelled check dated October 3, 2018, payable to both Thornton Rave and Ambassador in the amount of $18,962.42. The check was not endorsed by either payee but contained a stamp from PNC Bank guaranteeing the absence of endorsement. Ms. Rackowski said that Ambassador had never received the check. She acknowledged, however, that Sangamo Construction had taken some action through the banking system to recover on the check paid without endorsement, and she believed that Ambassador had later been paid about $16,000 from Sangamo Construction.¹

A joint check agreement dated May 17, 2018, entered into by Ambassador, Thornton Rave, and D Construction, was also identified by Ms. Rackowski. The agreement related to a Kankakee bridge replacement project, required D Construction to issue joint checks for Thornton Rave invoices, and provided that D Construction guarantee payment of Ambassador's invoices related to the project. Ms. Rackowski said that three payments were received from D Construction pursuant to the agreement, but, when the account was not paid in full, Ambassador inquired about the status of payments. D Construction then provided a copy of a cancelled check dated October 16, 2018, payable to Thornton Rave and Harris Rebar in the amount of $48,796.30.² According to Ms. Rackowski, the check, which contained no endorsement, had never been received by Ambassador and Ambassador had never received the proceeds of the check from either Thornton Rave or D Construction.

Ms. Rackowski also identified a joint check agreement entered into by Ambassador on June 13, 2018, with Thornton Rave and Illinois Constructors. The agreement referenced the Metra Z project and, like the other agreements, required Illinois Constructors to issue joint checks for steel supplied by Ambassador and to guarantee payments of Ambassador's invoices related to the project. She also identified a copy of a cancelled check dated October 19, 2018, payable to Thornton Rave and Ambassador in the amount of $10,194.60, which she said had been obtained from Illinois Constructors when an inquiry had been made by Ambassador about invoice payments. The check was not endorsed by either payee but contained the same PNC Bank stamp guaranteeing payment in the absence of endorsement. Ms. Rackowski said that Ambassador had never received the funds represented by the check from either Thornton Rave or Illinois Constructors.

Under cross-examination, Ms. Rackowski acknowledged that she had never discussed the terms of any of the joint check agreements with anyone at Thornton Rave and she did not know who else, if anyone, at Ambassador would have done so. She also admitted that she had not discussed with anyone at Thornton Rave the circumstances under which the Sangamo Construction, D Construction, and Illinois Constructors checks had been deposited by Thornton Rave without endorsement.

Ms. Rackowski also identified three other checks issued pursuant to joint check agreements to Thornton Rave and either Ambassador or, its related entity, Harris Rebar. The checks included one dated November 1, 2018, from G.M. Sipes in the amount of $33,746.71, another dated November 1, 2018, from The Kilian Corporation in the amount of $9,792.53, and the third dated October 21, 2018, from Sangamo Construction in the amount of $37,255.91.³ None of the checks contained the endorsement of either payee. Ms. Rackowski said that the checks would have been mailed by Thornton Rave to Ambassador's administrative office and then scanned for deposit. She admitted that all three checks should have been endorsed by both payees before deposit but said that the person doing the scanning for Ambassador would not have known to look for such endorsements.

The Debtor was also called as a witness by Ambassador. He stated that Thornton Rave's business was to supply fabricated steel rebar for bridge and road construction. He acknowledged that Thornton Rave bought steel from Ambassador to use in its fabrication process. He admitted that he was the person at Thornton Rave who ran the operations and that he was responsible for managing the business affairs of the company.

The Debtor acknowledged that Thornton Rave had entered into as many as 25 different joint check agreements with Ambassador and that he understood that the agreements were necessary for Thornton Rave to continue to be supplied with steel products by Ambassador. He understood that the agreements required Thornton Rave's customers to issue joint checks to make sure that Ambassador was paid for the materials it was supplying. He said that when joint checks were received by Thornton Rave, the checks were endorsed and mailed to Ambassador, but he admitted that some joint checks "slipped through."

According...