Ariz. Auto Spa 4, LLC v. Spreiser (In re Spreiser)

In re: RICHARD JAY SPREISERand KATHLEEN ANN SPREISER, Debtors.ARIZONA AUTO SPA 4, LLC, an Arizona Limited Liability Company;SCOTT N. SHEFTEL;and DARYL ROSS, Plaintiffs, v. RICHARD JAY SPREISERand KATHLEEN ANN SPREISER, Defendants.

Case No. 4:12-bk-17553-BMW

Adversary No. 4:12-ap-01988-EWH

UNITED STATES BANKRUPTCY COURT DISTRICT OF ARIZONA

Dated: June 23, 2014

ORDERED.

Eileen W. Hollowell, Bankruptcy Judge

Chapter 7 Proceeding

MEMORANDUM DECISION

I. INTRODUCTION

This case arises out of the construction of a car wash ("Car Wash") for owner Arizona Auto Spa 4, LLC ("AAS4") and alleged misconduct by Debtor Richard Spreiser ("Spreiser").¹ Spreiser is one of three members of Arizona Auto Spa Management, LLC ("AASM") and the manager of AAS4. AASM is not a member of AAS4. Scott Sheftel ("Sheftel") and Daryl Ross ("Ross") are the othertwo members of AASM, and Sheftel is also an investor in AAS4. Plaintiffs claim they were damaged by Spreiser's conduct and that the resultant debts should be excepted from discharge pursuant to § 523(a)(4), and, alternatively pursuant to §523(a)(2)(A) or (a)(6).² A three-day trial was held on March 19, 20 and 25, 2014.

For the reasons explained in the balance of this memorandum, Spreiser and his marital community cannot discharge the following obligations: $20,000 due to Ross, $20,000 due to Sheftel and $25,000 due to AAS4.

II. JURISDICTIONAL STATEMENT

The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 1334(b) and 157(a). This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I).

III. FACTUAL AND PROCEDURAL HISTORY

This action concerns the construction of the Car Wash by AAS4. AAS4 is comprised of about seven members, including Sheftel ("Investors"). Sheftel, Ross and Spreiser are business associates involved in the construction and operation of other car washes, where Sheftel and Ross provided funding and Spreiser handled the day-to-day operations, for which he earned over $200,000 per year.³ Sheftel and Spreiser were also friends, and Sheftel personally loaned Spreiser over $ 900,000 by the fall of 2009.

Spreiser was in dire financial straits in September 2009 due, in part, to a failed townhouse investment which was unrelated to the car washes. Spreiser had structured a deal with his lender, Advanced Capital, to repay a $250,000 debt ("Advanced Capital Loan") in a series of balloon payments through 2011. A default could have resulted in the loss of his house. Sheftel loaned Spreiser $50,000 to make his first payment to Advanced Capital in September 2009. The second$50,000 payment was due in December of 2009. Spreiser was also indebted to Eagle Rock Excavating, L.L.C. ("Eagle Rock") for work on the failed townhouse project pursuant to a $192,648.86 promissory note ("Eagle Rock Note"), which was also secured by his residence.

AAS4 was formed in October 2009, when Sheftel, Ross and Spreiser made a presentation to the Investors to solicit investments for the purpose of acquiring real property and constructing the Car Wash. The Investors were told it would take approximately $3 million to construct the Car Wash comprised of a bank loan of $2.1 million and a capital infusion of $900,000.

A written memorandum ("Offering Memorandum") was presented to the Investors which named the manager of AAS4 as AASM. In addition, the Investors were told that Spreiser was the member of AASM with the expertise to develop and operate car washes and, therefore, would be the person in charge of the construction and day-to-day operations of the Car Wash.

A. Operating Agreements and Management Provisions

An operating agreement for AAS4 ("AAS4 Operating Agreement"), dated October 19, 2009, provided that AASM, as manager, would have

full, exclusive and complete power to manage and control the business and affairs of the company and shall have all the right and powers provided to a member of a "member-managed" limited liability company by law, including the power to execute instruments and documents, to mortgage or dispose of any real property held in the name of the Company, and to take any other actions on behalf of the Company, whether or not such actions are for carrying on the business of the Company in its usual way. Except as otherwise expressly provided in this Agreement, all decisions, consents, approvals and actions made by the Manager shall be binding upon all Members.

Plaintiffs' Exh. 6 at 10, § 6.2. AASM was to be paid an 8% management fee based on monthly gross receipts. Id. At 12, § 6.6.

The three members of AASM executed an operating agreement for AASM ("AASM Operating Agreement"), dated October 16, 2009. They agreed to employ Spreiser at a salary of $3,500 per month ("Management Fee") "commencing when the automated car wash facility ... opens for business." Exh. 7 at 8, § 6.6. The management powers were reserved to all three members.

Member Managed. The Members agree that the management of the Company shall be vested in the Members. The Members further agree that the Members may designate one Member as the "Managing Member." It is not the present intention of the Members to designate a Managing Member. If the Members do not designate a Managing Member, all powers granted to a Managing Member or the Members in this Operating Agreement may be exercised by a majority vote of the Members.

Exhibit 7 at 7, § 6.1.

Undisputedly, the members neither executed a written document nor filed an amendment to the AASM Operating Agreement naming Spreiser as the managing member. While Spreiser handled the day-to-day affairs and banking, Sheftel was also a designated signatory on certain bank accounts, and Sheftel and Ross were aware of and involved in the development process. Spreiser testified that he would always seek Sheftel's approval for major decisions, and that Sheftel would assure Spreiser that he would "take care of Mr. Ross." Tr., March 20, 2014 ("Tr. #2" at 12:4-18).

Member liability was set forth as follows:

6.5 Liability of the Members. No Member shall be personally liable for failure of the Company to make distributions as set forth in this Agreement and shall not be liable, responsible, accountable in damages or otherwise to the Company or the Members for any act or omission performed or omitted by such Member in connection with the Company or its business. Notwithstanding the foregoing, a Member shall in all instances remain liable for acts or omissions in breach of this Agreement or which constitute fraud, gross negligence, wilful misconduct or breach of fiduciary duty. . . .

Plaintiffs' Exh. 7 at 8.

There was a separate oral agreement among the Investors and the members of AASM that a development fee ("Development Fee") of $100,000 would be paid as follows: $20,000 to Sheftel, $20,000 to Ross, and $60,000 to Spreiser. The Development Fee was reflected in the budget, as a construction expense, that was submitted with the Offering Memorandum. The Development Fee was to be paid "as soon as there were funds available and not at the completion of the project." Tr. #2 at 80:7-9. However, there was no provision or authorization for the Development Fee to be taken from Investor funds prior to a loan for the project being in place. At trial, Sheftel was asked:"Was there any way you could disburse that investor money before you knew you could go forward and construct the car wash?" He answered: "No, I mean those were - my two closet friends had put in a total of $200,000 into it. I wasn't going to use their money for something I wasn't entitled to." Tr., March 19, 2014 ("Tr. #1" at 60:20-25.) In addition, the Offering Memorandum provided that if $800,000 (later changed to $900,000) had not been raised by December 31, 2009, the project would not go forward and the Investors would get their money back, with interest.

B. Spreiser's Withdrawals of the Development Fee

By December 2009, the loan which AAS4 had hoped to obtain from Wells Fargo Bank had not been approved. By that date, the Investors had contributed $725,000 ("Investor Funds") of the targeted $900,000 equity contribution.⁴ Because AASM held the Investor Funds, Spreiser had access to them. Spreiser's second balloon payment of $50,000 on the Advanced Capital Loan was also due in December of 2009.

Since September of 2008, Spreiser had been discussing his financial woes with Sheftel and asking for a raise or to borrow against his portion of the Development Fee. Sheftel answered, in a September 18, 2009 email: "We can give you the whole development fee of $100k but I do feel that the compensation that Daryl and I are entitled to should be debt in the books for Wilmont [sic] and not necessarily personal debt incurred to you....let me work on it...." Sheftel testified that his statement was part of the "initial discussions" and "[i]n no shape or form was it any entitlement or commitment to give [Spreiser] money." (Tr. #1 at 168:7-11.) Spreiser concurred that Sheftel's statement was part of ongoing conversations. (Tr. #2 at 7:9-13.)

In October 2009, Sheftel told Spreiser that he would not make any more personal loans to him. (Tr. #1 at 174:2-13.) On December 15, 2009, Wells Fargo Bank denied AAS4's loanapplication. Eight days later, Spreiser asked Sheftel if Spreiser could use the Investor Funds to make a payment on the Advanced Capital Loan, which was secured by his house. (Tr. #1 at 176:4-9.)

Sheftel emailed Spreiser on December 23, 2009, stating: "Let's talk about this. If everything bottoms out and we have to return investor money, then Daryl and I have to cover any shortages. . . . As far as needing some cash flow prior to closing, let's sit down with the books and look at where we have extra . . . Don't sweat it—we'll make it happen." Sheftel testified that neither he nor Ross ever agreed to let Spreiser take the Investor Funds, and that Sheftel was merely suggesting, in his email, that they look for money in the other car wash businesses. (Tr. #1 at 177-178.)

Nevertheless, Spreiser testified that he made a follow-up phone call to Sheftel...