Anderson v. Hardwick (In re Hardwick)

648 B.R. 175

IN RE: Brian Keith HARDWICK, Sara Ann Hardwick, Debtors

Andrew H. Anderson and Lori Anderson, as Co-Trustees of the Allan G. Anderson Revocable Living Trust, Plaintiffs

v.Brian Keith Hardwick, Defendant

Case No. 20-42475

Adversary No. 21-04065

United States Bankruptcy Court, E.D. Texas, Sherman Division.

Signed January 27, 2023

Michael W. Sebesta, Cavazos Hendricks Poirot, P.C., Dallas, TX, Mark A. Alexander, Mark A. Alexander, P.C., Dallas, TX, for Plaintiffs Andrew H. Anderson, as Co-Trustee of the Allan G. Anderson Revocable Living Trust, Lori Anderson, as Co-Trustee of the Allan G. Anderson Revocable Living Trust.

Mark A. Hendrix, Krage & Janvey, L.L.P., Dallas, TX, for Defendant.

MEMORANDUM OF DECISION REGARDING PLAINTIFFS’ MOTION FOR PARTIAL SUMMARY JUDGEMENT

JOSHUA P. SEARCY, UNITED STATES BANKRUPTCY JUDGE

ON THIS DATE the Court considered the "Motion for Partial Summary Judgement" (the "Motion") filed by Plaintiffs, Andrew H. Anderson and Lori Anderson, in their capacity as Co-Trustees of the Allan G. Anderson Revocable Living Trust (the "Plaintiffs"), on February 10, 2022, and the related objection, reply, and other related documents filed in the above-referenced adversary proceeding. Plaintiffs’ Motion seeks partial summary judgment excepting indebtedness owed them from discharge under 11 U.S.C. § 523(a)(19). Plaintiffs do not seek summary judgment on the other claims included in their Amended Complaint.¹ Upon due consideration of the pleadings, the proper summary judgment evidence submitted by the parties, and the relevant legal authorities, the Court concludes that no genuine issues of material fact remain to preclude entry of a partial summary judgment for Plaintiffs under 11 U.S.C. § 523(a)(19). For the reasons explained in this memorandum, Plaintiffs’ Motion is GRANTED.

I. Jurisdiction

The Court has jurisdiction of this matter pursuant to 28 U.S.C. §§ 1334(a) and 157(a). The Court has the authority to enter a final judgment in this adversary proceeding because it constitutes a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I).

II. Facts

Brian and Lori Anderson (the "Plaintiffs") are siblings.² Allan and Maria Anderson were Plaintiffs’ parents.³ Both Allan and Maria are deceased.⁴ After their parents’ passing, Plaintiffs became the Co-Trustees of the Allan G. Anderson Revocable Trust (the "Trust").⁵ While Allan was still alive, he invested in four different joint ventures being operated by Regal Energy, LLC ("Regal").⁶ Keith Hardwick (the "Defendant") was the CEO of Regal during all relevant times.⁷ It was later discovered that these joint venture investments were fraudulently obtained from Allan, resulting in litigation against Defendant and an enforcement action by the Financial Industry Regulatory Authority ("FINRA").⁸

On July 27, 2015, FINRA filed an enforcement complaint against Defendant.⁹ On or about February 9, 2017, FINRA issued a decision and order.¹⁰ FINRA's decision and order determined that Defendant made material misrepresentations or omissions in connection with the purchase or sale of a security acting with scienter.¹¹ No evidence was submitted that the FINRA order has been confirmed by any court or agency.

Allan Anderson and Plaintiff, Lori Anderson, as the Executrix of Mrs. Anderson's estate, sued Defendant in Case No. 429-0416-2016, styled Allan Anderson, et al., vs. Regal Energy, LLC, et al. , in the District Court for the 429th Judicial District of Collin County, Texas on February 1, 2018.¹² In this state court case, the claims brought against Defendant were all either for violations of securities law, or for fraud in connection with the sale or purchase of securities.¹³ Specifically, the causes of action alleged in state court were fraud, fraud in the inducement, fraud by nondisclosure, fraudulent concealment, rescission under sections 33(A)(1) and 33(A)(2) of the Texas Securities Act, and for joint and several liability of Defendant under section 33(F)(1) of the Texas Securities Act.¹⁴ Defendant filed an answer in the state court case.¹⁵ Defendant entered into a mediated settlement agreement with Plaintiffs on August 20, 2019 settling the causes of action alleged in the state court case.¹⁶ This settlement agreement, signed by Defendant, does not contain any express denial of liability but does state that "[t]he parties have all had the opportunity to review and approve this mediated settlement agreement."¹⁷ An agreed judgment was thereafter entered against Defendant in the state court case on October 4, 2019.¹⁸ This agreed judgement awarded Plaintiffs actual damages of $3,252,399.68 plus interest.¹⁹ Further, the agreed judgment stated that "[t]his agreed judgment finally disposes of all claims against Defendant, Brian Keith Hardwick."²⁰

On December 17, 2020, Defendant and his wife filed a voluntary Chapter 7 petition.²¹ Defendant admitted on his schedules that he owed Plaintiffs’ parents’ estate a total of $3,252,399.68.²² Defendant has already received his discharge except to the extent that any of his debts survived it.²³

Plaintiffs initiated this adversary proceeding by filing their complaint on March 22, 2021.²⁴ Defendant answered the complaint, filed a counter claim, and filed a motion to dismiss the case on April 22, 2021.²⁵ Defendant's motion to dismiss the case was itself dismissed on June 9, 2021 after an amended complaint was filed.²⁶ Plaintiffs filed this motion for summary judgement on February 10, 2022.²⁷ Defendant filed an objection to the motion on March 10, 2022.²⁸ Plaintiffs filed a reply to Defendant's response to the Motion on March 24, 2022.²⁹

III. Summary Judgment Standard

A court may grant summary judgment "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Celotex Corp. v. Catrett , 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986) (quoting Fed. R. Civ. P. 56(c) ). Fed. R. Bankr. P. 7056 incorporates Fed. R. Civ. P. 56 so as to apply to adversary proceedings. Thus, if summary judgment is appropriate, the Court may resolve the case as a matter of law.

The moving party always bears the initial responsibility of informing the court of the basis for its motion and producing evidence which it believes demonstrates the absence of a genuine issue of material fact. Celotex , 477 U.S. at 323, 106 S.Ct. 2548. The way the necessary summary judgment showing can be made depends upon which party will bear the burden of proof at trial. See Little v. Liquid Air Corp. , 37 F.3d 1069, 1077 n.16 (5th Cir. 1994). "A fact is material only if its resolution would affect the outcome of the action... ". Wiley v. State Farm Fire and Cas., Co ., 585 F.3d 206, 210 (5th Cir. 2009). "All reasonable inferences must be viewed in the light most favorable" to the nonmoving party, and "any doubt must resolved in favor of the nonmoving party." In re Louisiana Crawfish Producers , 852 F.3d 456, 462 (5th Cir. 2017) (citing Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp ., 475 U.S. 574, 586, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986) ).

IV. Analysis

The party seeking to establish an exception to the discharge of a debt bears the burden of proof. In re Harasymiw , 895 F.2d 1170, 1172 (7th Cir. 1990) ; Banner Oil Co. v. Bryson (In re Bryson) , 187 B.R. 939, 961 (Bankr. N.D. Ill. 1995). The United States Supreme Court has held that the burden of proof required to establish an exception to discharge is a preponderance of the evidence. Grogan v. Garner , 498 U.S. 279, 291, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) ; see also In re McFarland , 84 F.3d 943, 946 (7th Cir.), cert. denied, 519 U.S. 931, 117 S.Ct. 302, 136 L.Ed.2d 220 (1996) ; In re Thirtyacre , 36 F.3d 697, 700 (7th Cir. 1994). To further the policy of providing a debtor a fresh start in bankruptcy, "exceptions to discharge are to be construed strictly against a creditor and liberally in favor of a debtor." In re Scarlata , 979 F.2d 521, 524 (7th Cir. 1992) (quoting In re Zarzynski , 771 F.2d 304, 306 (7th Cir. 1985) ); In re Morris , 223 F.3d 548, 552 (7th Cir.2000) ; In re Reines , 142 F.3d 970, 972–73 (7th Cir. 1998), cert. denied , 525 U.S. 1068, 119 S.Ct. 797, 142 L.Ed.2d 659 (1999).

A debt may be found nondischargeable if it meets the requirements of 11 U.S.C. § 523(a)(19).³⁰ This provision was added to 11 U.S.C. § 523 "in order ‘to make judgments and settlements based upon securities law violations nondischargeable, protecting victims' ability to recover their losses.’ " Wright v. Minardi , 536 B.R. 171, 191 (Bankr. E.D. Tex. 2015), quoting In re Chan , 355 B.R. 494, 503 (Bankr. E.D. Pa. 2006). This addition was "intended to preclude the necessity of securities regulators and investors to spend precious enforcement resources to ‘reprove’ securities law" Id .

Two conditions must be met for § 523(a)(19) to make a debt dischargeable. "First, the debt must be for a violation of state or federal securities law, or for common law fraud, deceit, or manipulation in connection with a sale of any security." Nationwide Judgement Recovery Inc. v. Sorrells , 644 B.R. 158, 164 (Bankr. E.D. Tex. 2022). "Second, the debt must result from a judgement or court order." Id . To satisfy this second element, the debt may also result from "any settlement agreement entered into by the debtor" or from "any court or administrative order for any damages, fine, penalty, citation, restitutionary payment, disgorgement payment, attorney fee, cost, or other payment owed by the debtor." 11 U.S.C. §§ 523(a)(19)(B)(ii) and (iii) ; see Minardi , 536 B.R. at 192 ; see also McGraw v. Collier , 497 B.R. 877, 902 (Bankr. E.D. Ark. 2013) ; Faris v. Jafari , 401 B.R. 494, 496 (Bankr. D. Colo. 2009). It should be up to "a tribunal other than the bankruptcy court determine the liability aspect — e.g., whether a federal or state securities violation...