CAGO, Inc. v. Slade (In re Slade)

471 B.R. 626

In re Raymond C. SLADE, Debtor.CAGO, Inc., Plaintiff,

v.Raymond C. Slade, Defendant.

Bankruptcy No. 08–10927–j7.

Adversary No. 08–01065–j7.

United States Bankruptcy Court, D. New Mexico.

March 15, 2012.

Jason C. Bousliman, Spencer Lewis Edelman, Modrall Sperling Roehl, Harris & Sisk PA, Albuquerque, NM, for Plaintiff.

Raymond Curtis Slade, Albuquerque, NM, pro se.

MEMORANDUM OPINION

ROBERT H. JACOBVITZ, Bankruptcy Judge.

This matter is before the Court on the Complaint Objecting to Discharge ¹ filed by CAGO, Inc. (“CAGO” or “Plaintiff”), through its counsel of record, Jason C. Bousliman ², against Raymond Curtis Slade (“Mr. Slade” or “Defendant”).³ Mr. Slade is a debtor under Chapter 7 of title 11 of the United States Code. CAGO seeks a non-dischargeable judgment against Mr. Slade under §§ 523(a)(2)(A) and (B), 523(a)(4), 523(a)(6), and 523(a)(11) of the Bankruptcy Code.⁴See Consolidated Pretrial Order (Docket No. 63).

The Court held a trial on the merits on October 17 and 18, 2011. After considering the evidence, arguments of counsel and applicable statutory and case law, the Court has determined that CAGO established a claim of a non-dischargeable debt under 11 U.S.C. §§ 523(a)(2)(A), and will enter a judgment on that claim. The Court denies all other claims of a non-dischargeable debt.

Jurisdiction and Venue

This Court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. §§ 1334(a) and (b). This is a core proceeding under 28 U.S.C. § 157(b)(2)(J). Venue is proper under 28 U.S.C. § 1409(a). Pursuant to Rule 52, Fed.R.Civ.P., made applicable by Rule 7052, Fed.R.Bankr.P., the Court now states its findings of fact and conclusions of law.

FINDINGS OF FACTS

This is a case about a missing trackhoe.

Mr. Slade is the 100% owner of Stoneworks, LLC, a New Mexico limited liability company (“Stoneworks”). In late 2005, CAGO, on the one hand, and Stoneworks, Mr. Slade, individually, and Mr. Slade “dba Stoneworks,” on the other, entered into an “Equipment Lease Agreement with Option to Purchase” (the “Contract”) for a Link Belt model 4300 Quantum Excavator (the “Trackhoe” or “Equipment”).⁵ Neither Stoneworks nor Mr. Slade made any of the payments required under the Contract, and were in default from the day Stoneworks took possession of the Trackhoe. In mid–2007, the parties entered into a settlement agreement to resolve issues relating this non-performance (the “Settlement Agreement”). Again, no payments—other than those paid by a third party—were made. Mr. Slade filed a Chapter 7 bankruptcy case on March 28, 2008, Case No. 08–10927. The Trackhoe disappeared in April 2008; both parties deny knowledge of its disposition or whereabouts. Each has insinuated that the other took it. CAGO filed the Complaint in this adversary proceeding on May 15, 2008. In September 2008, a Texas grand jury indicted Mr. Slade for theft of services in excess of $200,000 in connection with his obligations under the Contract. In December 2010, Mr. Slade entered into a plea agreement whereby he agreed to pay CAGO restitution of $125,000, in addition to $75,000 that he paid immediately after the plea agreement was made. The Court now examines these events in greater detail.

The Parties Meet and Form the Contract

The parties met at some time in 2003 or 2004, well before they formed the Contract. Robert F. Bourk (“Mr. Bourk”) is the President of CAGO. He conducted or directed all actions attributable to CAGO in this case. At the time he met Mr. Slade, Mr. Bourk had been acting as the President of CAGO for approximately thirty years. Mr. Bourk was a practicing attorney for approximately twenty-five years in Oklahoma City, Oklahoma. His law practice concentrated in the areas of collection law and civil litigation. Mr. Bourk was introduced to Mr. Slade by a friend who was Mr. Slade's criminal defense attorney in unrelated matters at that time. Amongst others, Mr. Slade had been charged with bribery of a federal government official, a fact of which Mr. Bourk was aware and into which he later performed some investigation prior to entering into the Contract.⁶

Mr. Slade eventually chartered Stoneworks, which conducted a gravel mining operation. The gravel mining operation took place on land owned by Ronald E. Douglass and JoAnn C. Douglass, located in the greater Albuquerque area (the “gravel pit”). Stoneworks operated the gravel pit property under a mining lease (the “Douglass Mining Lease”).

The channel of communication between Mr. Slade and Mr. Bourk remained open after their initial introduction. In August 2005, Mr. Slade sought to obtain a trackhoe from Mr. Bourk. Mr. Slade testified that he “was trying to buy it, more than anything.” Mr. Bourk, being aware of Mr. Slade's criminal history, performed due diligence on Mr. Slade. He spoke with Robert Finch, a Chapter 7 case trustee in an unrelated bankruptcy case in which Mr. Slade was seeking recovery of construction equipment. Mr. Finch gave Mr. Bourk a favorable recommendation for Mr. Slade, telling Mr. Bourk that he, the trustee, was familiar with the case in which Mr. Slade was charged with bribery of a government official, that Mr. Slade had received a “bad deal,” and that the trustee felt like most of the problems in some of Mr. Slade's previous business dealings were not Mr. Slade's fault. Mr. Bourk also consulted two or three other attorneys who were familiar with Mr. Slade.

On November 11, 2005, CAGO and Mr. Slade executed the Contract. The Contract provided for the rental of the Trackhoe by CAGO to Stoneworks for a one-year term commencing on November 14, 2005. Slade or Stoneworks was to pay CAGO $72,000 in twelve equal monthly rental payments ($6,000 a month). Any payment more than ten days late was subject to a $500.00 late fee. A security deposit of $6,000 was required to be paid prior to commencement of the lease term. As additional security, the Contract provided for a security interest in Slade's leasehold interest in the Douglass Mining Lease. The Contract also contained a purchase option for $70,000 less any payments already made, conditioned upon Mr. Slade and/or Stoneworks being current on the payments. CAGO filed a financing statement on the Trackhoe under the New Mexico Uniform Commercial Code.

Performance Under the Contract and the 2007 Settlement Agreement

Neither Stoneworks nor Mr. Slade ever made any of the rental payments required under the Contract, nor was the required security deposit ever made. As such, the Contract was in default from the day the Trackhoe was delivered. Mr. Slade represented to Mr. Bourk that Stoneworks was waiting on payment for accounts receivable to raise funds to make the security deposit, and that, although he had other debts awaiting payment, Mr. Slade held unencumbered property and thus had alternative avenues through which to make the security deposit. Mr. Slade further represented to CAGO that Stoneworks would have the means to make the rent payments. CAGO allowed Stoneworks to take possession of the Trackhoe despite its failure to make the security deposit at the time of delivery as required by the Contract, because of Mr. Slade's representations that he would nevertheless eventually perform under the Contract.

Mr. Bourk engaged in a substantial amount of communication with Mr. Slade and other Stoneworks employees throughout 2006. Janet Hoshor,⁷ who was managing secretary of Stoneworks during much of its time in operation, was present for the initial delivery of the Trackhoe. She also helped Mr. Bourk obtain the information needed to file a UCC financing statement. Ms. Hoshor testified that she spoke with either Mr. Bourk or his wife once or twice a month by telephone while she was employed at Stoneworks. During their many conversations regarding Stoneworks' non-performance under the Contract, she repeatedly offered the Trackhoe back to Mr. Bourk. Mr. Bourk also spoke with Mr. Slade on the telephone frequently during this time period. During these conversations, Mr. Slade made continuing representations of his intentions and Stoneworks' abilities to make the rental payments. Mr. Bourk elected not to retake possession of the Trackhoe. He testified that he preferred to receive the past due rent instead of retaking possession of the Trackhoe. ⁸

Mr. Bourk made multiple personal trips to the gravel pit. Mr. Bourk was never denied access to any information he sought to the extent information was available, nor was Mr. Bourk ever denied access to the gravel pit. Stonework's business records were in a state of disarray, a fact of which Mr. Bourk was aware.

As time went on and while these events built upon one another, Mr. Bourk sought to work out a deal where he would be paid moneys owed by Mr. Slade. During one of his numerous visits, on or about September 12, 2006, Stoneworks tendered four post-dated checks to CAGO, one for $20,000 and three for $15,000 each.⁹ Mr. Bourk had reason to believe when the checks were tendered that there were insufficient funds in the bank account where they were drawn to honor the checks. Mr. Bourk sought to deposit two of the checks; they were returned for insufficient funds. He did not deposit the other two.

These specific events surrounding the Trackhoe unfolded against a backdrop fraught with business and legal difficulties. Stoneworks was financially unstable from the beginning, and a great deal of self-described financial “improv” took place; e.g., many truckers were paid in gravel and trading goods for debt was a common practice. Stoneworks' debts and problems reached an insurmountable level when the New Mexico Department of Transportation (“NMDOT”) executed a search warrant on the property via a SWAT team raid in late 2006. NMDOT Officer Stan Lundy, who directed the raid, testified that he had talked with a number of people who had bad business dealings with Mr. Slade. Based on those conversations, Officer Lundy believed Mr. Slade had stolen vehicles and equipment...