Azalea City Credit Union v. Cochran (In re Cochran), Case No.: 18-69-JCO

606 B.R. 441

IN RE: Mark Lee COCHRAN, Debtor.

Azalea City Credit Union, Plaintiff

v.Mark Lee Cochran, et al., Defendants.

Case No.: 18-69-JCO

Adv. Proc. No.: 18-14-JCO

United States Bankruptcy Court, S.D. Alabama, Southern Division.

Filed August 28, 2019

MEMORANDUM OPINION AND ORDER

JERRY C. OLDSHUE, JR., U.S. BANKRUPTCY JUDGE

This matter came before the Court on August 12, 2019, for a trial on the Amended Complaint filed by the Plaintiff, Azalea City Credit Union (hereinafter "ACCU") and the Third Party Complaint filed by Defendant Debtor Mark Cochran (hereinafter "Debtor" or "Cochran") against Defendant Vernon Chatman (hereinafter "Chatman"). Appearing on behalf of ACCU was attorney Greg McAtee, and on behalf of Debtor was attorney Hendrik Snow. Although properly served, Mr. Chatman did not appear in person or through counsel at trial.

This Court has jurisdiction to hear this matter pursuant to 28 U.S.C. §§ 1334 and 157, and the order of reference of the District Court dated August 25, 2015. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I), and the Court has authority to enter a final order.

FACT AND PROCEDURAL HISTORY

On March 9, 2018, ACCU filed its Complaint pursuant to 11 U.S.C. § 523 alleging multiple theories for the nondischargeability of the debt owed to it by Debtor. (Doc. 1). On December 26, 2018, the Debtor filed an Answer denying the allegations alleged therein and filed his own Third Party Complaint against his former business partner, Vernon Chatman, alleging that Mr. Chatman was the party who perpetuated the fraud against ACCU, and therefore Debtor is entitled to receive a discharge of the debt. (Doc. 38). On January 30, 2019, ACCU amended its Complaint adopting and incorporating by reference the Debtor's Third Party Complaint. (Doc. 48). On April 13, 2019, Chatman was properly served with the Amended Complaint more than thirty days prior to the trial setting. On July 6, 2019, Mr. Chatman was properly served with a subpoena to appear before the Court to testify at trial on August 12, 2019. Mr. Chatman did not appear in person or through counsel at the trial.

Testifying on behalf of Plaintiff ACCU was Stacy Besnall.¹ Ms. Besnall has been a loan officer with ACCU for approximately seven years and is the loan officer who processed the loan in question herein. Debtor Mark Cochran testified in his own defense. The Court found both witnesses to be credible, forthright and honest.

At trial, Cochran testified that previously, he was common law married to Edna Chatman, who is Vernon Chatman's sister. Edna introduced Cochran to Chatman and sometime in 2016, Chatman approached Cochran about becoming a business partner with Chatman in the formation of Next Phase Auto Sales, LLC (hereinafter "Next Phase"). In September of 2016, Cochran and Chatman formed Next Phase Auto Sales, LLC as a used car sales business. Chatman chose the name of the business; Cochran was the named owner of the business, but Chatman had full authorization to make decisions for the business, to manage the business bank accounts, to receive and send mail on behalf of the business, and to conduct the day-to-day operations of the business. The business was funded by floor plan financing through a business bank account held at Commonwealth National Bank. There were only two car salesmen, including Chatman. Of the two, Chatman made the most sales.

Cochran testified that, at first, Chatman reported the business as doing ok, with car sales happening on a steady basis. Cochran did not initially realize any profits from the business, but he had another full time job at Ingalls Shipbuilding in Pascagoula, Mississippi, and trusted Chatman to run the business efficiently. As the first year progressed, Cochran noticed that car sales were starting to slow down.

Around the time that sales started to slow, in May of 2016, Cochran testified that Chatman asked Cochran to meet him at the ACCU branch in Calvert, Alabama to sign some paperwork regarding a 2014 Mercedes to be sold on the used car lot. Cochran had financed used vehicle purchases in the past for Chatman this way, so he agreed to the same on this occasion. Cochran had never been to the Calvert ACCU branch and asked if the paperwork could be signed at a location closer to Cochran's job in Pascagoula, Mississippi than in Calvert.² Chatman refused, and Cochran drove to Calvert to sign the paperwork.

Prior to Cochran going to ACCU in Calvert, Chatman had already initiated the loan with Ms. Besnall and ACCU. In initiating the loan, Chatman never mentioned to Ms. Besnall that he and Cochran were business partners in Next Phase Auto Sales. He presented the loan request as though it was for a customer purchasing a car from the used car lot. Ms. Besnall testified that she had done business this way with Chatman before, so nothing appeared to be out of the ordinary with this transaction at that time. Ms. Besnall testified that on June 1, 2016, she received a Buyer's Order from Chatman from his email account regarding a loan for a used 2014 Mercedes CLS Class sedan. (Plaintiff's Ex. 10). The Buyer's Order provided information on a 2012 Mercedes S Class that was to be traded in at the purchase of the 2014 Mercedes. (Id. ). The Buyer's Order was in Mark Cochran's name and Chatman was listed as the salesperson. (Id. ). The Buyer's Order was for the total balance of $47,294.18. (Id. ). The gap insurance, GAP Waiver Addendum and CUNA insurance policy were all in Cochran's name. (Plaintiff's Exs. 11,14, 13, respectively). The Electronic Funds Transfer Authorization Agreement was in Cochran's name. (Plaintiff's Ex. 12). Cochran testified that he signed the Transfer Authorization Agreement, but that the remainder of the document was not filled out in his handwriting.

When Cochran arrived at ACCU in Calvert on June 1, 2016, the loan was already initiated in his name, and ACCU had already prequalified Cochran to receive the loan based on Cochran's personal information and pay stubs provided by Chatman to ACCU.³ All that was left to do was for Cochran to fill out the remaining paperwork and present proper identification and the loan would be approved with the funds to be disbursed to the dealer by direct deposit shortly after the loan was processed. During the transaction, Chatman never mentioned to Ms. Besnall that the loan was not being made for Cochran to purchase a personal vehicle as a Next Phase customer or that Cochran and Chatman were business partners in Next Phase. Chatman also never mentioned to Besnall that he had not even seen the car, and he also failed to discuss that the 2012 Mercedes trade-in vehicle listed on the Buyer's Order did not exist. (Plaintiff's Ex. 10).

Both Cochran and Ms. Besnall testified that they had never met each other or had any contact before the day that Cochran came to ACCU to sign the paperwork. Cochran testified that he filled out the paperwork with the assumption that the loan was to obtain a car, not for his personal use, but to be sold on the used car lot and that the loan balance would be satisfied by the sale proceeds. Cochran was under the impression that ACCU knew of this arrangement as well. Cochran testified that though he had never seen the vehicle being financed prior to June 1, 2016, he assumed that Chatman would be able to readily obtain it after getting the loan, and that this transaction was in the ordinary course of the business for Next Phase. Once the loan was processed, the funds were transferred by direct deposit into the Next Phase Auto Sales, LLC operating account the following day.

Ms. Besnall testified that prior to this transaction, she had known Chatman for approximately ten years and had done business with him in the past at Shoreline Credit Union before she became employed with ACCU. She further testified that ACCU had previously done business with Chatman, making ten to twenty car loans per month with Chatman. She testified that other loans involving Chatman had gone delinquent in the past, but that is the sometimes the cost of doing business.

In auditing its records, Ms. Besnall testified that by the end of 2017, ACCU was missing the certificate of title for one of its loans made to Chatman. ACCU began to check for certificates of title on other loans associated with Chatman and Next Phase and realized that about twenty to twenty-one titles were missing. When ACCU attempted to verify its possession of the certificate of title on the subject 2014 Mercedes, not only could they not locate the title, they could not locate the vehicle either.

In the meantime, Cochran testified that he never made a payment on the loan to ACCU. He testified that Chatman had access to the business bank account and was in charge of the daily business of Next Phase, so Cochran never made a payment on this loan or any other loan that he personally financed for Next Phase. He stated that occasionally, Chatman would give Cochran a check from the business account for Cochran to deposit into his personal account to make payments on loans, but when the checks started bouncing, Cochran quit receiving them from Chatman. When Cochran asked Chatman about the bounced checks, Chatman was dismissive and told Cochran that he was handling it. Cochran took Chatman at his word that it was being handled. At some point after these checks bounced, the bank contacted Cochran asking that he remove Chatman from the account. Cochran closed this account and opened a new joint account with Regions Bank in the name of Next Phase, Cochran and Chatman. At this point, Chatman promised Cochran that he would get the business back to the way it was, but Cochran testified this turned out to be an empty promise.

Ms. Besnall testified that ACCU only received three good payments on this loan. (Plaintiff's Ex. 15, p.3, payments dated July 14, 2016, August 16, 2016, September 13, 2016). When the payments quit coming in, ACCU first contacted Cochran about the delinquency; however, Cochran testified that he...