Creal Dall., LLC v. Viciedo (In re Viciedo)

612 B.R. 233

IN RE: Asbel VICIEDO, Debtor.

Creal Dallas, LLC, Plaintiff,

v.Asbel Viciedo, Defendant.

Case No. 3:18-bk-03184-JAF

Adv. No. 3:19-ap-00007-JAF

United States Bankruptcy Court, M.D. Florida, Jacksonville Division.

Signed January 7, 2020

Jonathan S Feldman, Perlman Bajandas Yevoli & Albright, P.L., Ft. Lauderdale, FL, for Plaintiff.

Paul DeCailly, DeCailly Law Group, P.A., Indian Rocks Beach, FL, for Defendant.

MEMORANDUM, DECISION AND FINDINGS OF FACT

Roberta A. Colton, United States Bankruptcy Judge

Plaintiff Creal Dallas, LLC ("Creal") sues Defendant-Debtor Asbel Viciedo ("Debtor") objecting to the dischargeability of a debt under 11 U.S.C. §§ 523(a)(2)(A) and 523(a)(6).¹ After a full day trial on November 26, 2019, and the receipt of written closing arguments on December 20, 2019, the Court finds as follows:

Jurisdiction

Jurisdiction is proper under 28 U.S.C. §§ 157 and 1334. This is a core proceeding under 28 U.S.C. § 157(b)(2)(I).

Findings of Facts

Debtor owned and operated a business called "Only Used Trucks." The corporate name of the business was Hammerhead Motors LLC ("Hammerhead"). Through Hammerhead, Debtor purchased used trucks at auction and resold the trucks at its retail locations. Hammerhead's niche market was sale of used trucks to undocumented workers who did not have a social security number.

In 2016, Creal was heavily involved in sub-prime financing through AFS Acceptance ("AFS"), a company that later merged into Creal. AFS was impressed with Hammerhead's used truck sales to undocumented workers and saw sought an opportunity to extend sub-prime financing to these individuals by developing a relationship with Hammerhead. Hammerhead, for its part, saw an opportunity to further exploit its niche and generate additional income by referring its customers for sub-prime financing.

Thus, in April 2016, Hammerhead and Creal/AFS decided to see if they could develop some synergies with floor plan financing and sub-prime consumer financing. At the time, Hammerhead had a $6.0 million floor plan arrangement with another lender. Nevertheless, to further a potentially lucrative relationship with Creal, Hammerhead entered into two agreements (i) a $1.5 million floor plan financing arrangement with Creal to finance the purchase of used trucks at auction (the "Floor Plan Agreement") and (ii) an agreement with AFS to share revenues from sub-prime financing extended to Hammerhead's customers (the "Dealer Agreement").

As part of the Floor Plan Agreement, Hammerhead executed a promissory note for $1.5 million and a security interest, in favor of Creal, for vehicles purchased by Hammerhead under Floor Plan Agreement. Debtor also personally guaranteed Hammerhead's obligations under the Floor Plan Agreement. Significantly, this was Creal's first floor plan financing arrangement.

Under the Dealer Agreement, Hammerhead was charged with sending customer credit applications to AFS to be evaluated for sub-prime financing.² If AFS agreed to provide financing, Hammerhead was entitled to a cut of the financing revenues. But AFS retained sole discretion to determine whether to extend financing to any Hammerhead customer.

The experiment was short lived. Because Creal was new at floor plan financing they were not registered with the auction company. So, the first time Hammerhead went to purchase used trucks at auction under the Creal Floor Plan Agreement, the funds were not immediately available, and Hammerhead had to rely on funds from his other floor plan lender to make its cash purchases. Creal eventually advanced $500,000 to $600,000, but as a result of the initial snafus, some of the used trucks ended up being double floor planned. It is undisputed that Hammerhead kept the money advanced by Creal and, notwithstanding some title issues, it is not disputed that Creal had a security interest in the purchased trucks.

Because of the initial difficulties with the Floor Plan Arrangement, the parties discussed using the Dealer Agreement to pay back Creal for the funds that were not needed to purchase the used trucks at auction because they came too late. Unfortunately, however, the relationship with AFS also quickly unraveled and no sub-prime loans were ever issued under Dealer Agreement.

On June 15, 2016, Creal sent an attorneys' demand letter to Hammerhead and Debtor claiming that $513,531.40 was due under the Floor Plan Agreement. When negotiations broke down, Creal seized the vehicles identified as its collateral. Only one vehicle, a 2007 Chevy Silverado, was not located and recovered by Creal (the "Missing Truck").

Thereafter, Creal filed suit against Hammerhead and Debtor for breach of contract. A settlement was reached quickly, and Hammerhead and Debtor agreed to repay $387,934.01 to Creal (the "Settlement").³ Hammerhead and/or Debtor paid approximately $243,000 to Creal under the Settlement before defaulting. Notwithstanding Hammerhead's partial payments, the Settlement entitled Creal to a judgment for the full $387,934.01 in the event of a default.

Discussion

Initially, Creal maintained that its judgment for $387,934.01 is non-dischargeable under section 523(a)(2)(A).⁴ After trial, Creal argued, in the alternative, that it is entitled to a non-dischargeability judgment just for those payments not made under the Settlement.

Section 523(a)(2)(A) excepts from discharge debts for money obtained by "false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor and or an insider's financial condition." Creal argues that Debtor fraudulently induced Creal into to Floor Plan Agreement and never intended to repay the funds advanced by Creal. Debtor argues that the relationship with Creal was simply a business transaction gone bad.

Creal' Complaint also alleges that the its judgment is non-dischargeable under section 523(a)(6) and/or that the loss of the Missing Truck was a willful and malicious collateral conversion that is non-dischargeable under the same statutory provision. Section 23(a)(6) excepts from discharge debts from discharge "for willful and malicious injury by the debtor to another entity or the property of another entity."⁵

Burden of Proof

Creditors seeking an exception to discharge under section 523 bear the burden of proof and must establish their claims by preponderance of the evidence.⁶ In addition, exceptions to discharge are construed narrowly to ensure that the "honest but unfortunate debtor" is afforded a fresh start.⁷ The reasons for denying a discharge ... "must be real and substantial, not merely technical and conjectural."⁸

Section 523 (a)(2)(A)

To establish its claim under § 523(a)(2)(A), Creal must prove that, at the time the promise was made, Debtor knew that he could not fulfill the promise or had no intention of fulfilling the promise.⁹ As the Eleventh Circuit Court explains:

Courts have generally interpreted § 523(a)(2)(A) to require the traditional elements of common law fraud. A creditor must prove that: (1) the debtor made a false representation to deceive the creditor, (2) the creditor relied on the misrepresentation, (3) the reliance was justified, and (4) the creditor sustained a loss as a result of the misrepresentation.¹⁰

To except a debt from discharge under section 523(a)(2)(A), the false representations giving rise to the debt must have been knowingly and fraudulently made.¹¹ It is also necessary that the other party relied on the representation.¹² A misrepresentation by a debtor of his or her intention to perform contractual duties may be a false representation under section 523(a)(2)(A). Intent not to perform may be inferred from the fact that the debtor failed to take any steps to perform under the contract.¹³

There are three ways to establish fraud under 523(a)(2)(A) false pretenses, false representations, or actual fraud. False pretenses is broadly construed:

The concept of false pretenses is especially broad. It includes any intentional fraud or deceit practiced by whatever method in whatever manner. False pretenses may be implied from conduct or may consist of concealment or non-disclosure where there is a duty to speak, and may consist of any acts, work, symbol, or token calculated and intended to deceive.¹⁴

A "false representation" under the statute may be "demonstrated through conduct, and a spoken or written statement is not required."¹⁵ Actual fraud is "deception or trickery committed with wrongful intent."¹⁶ A plaintiff is induced to enter into a contract when the defendant makes a knowingly false representation to the plaintiff, and the plaintiff relies on such statements when entering into the contract.¹⁷

Here, the evidence of Mr. Viciedo's alleged fraudulent inducement or false pretenses under § 523(a)(2)(A) is his failure to promptly return the cash advanced by Creal under the Floor Plan Agreement.¹⁸ This retention of funds obviously occurred after the Floor Plan Agreement was executed and after the logistical problem of Creal's inability to deal directly with the auction company became apparent. Hammerhead's failure to return the funds immediately also may be reasonably explained by subsequent discussions to repay the floor plan advances by set offs against amounts to come due to Hammerhead under the Dealer Agreement.

Further evidence supports Debtor's argument that the Floor Plan Agreement was simply a bad business deal. Hammerhead entered into the Floor Plan Agreement with Creal to make money on the Dealer Agreement with AFS. Creal's main focus (through AFS) was to obtain access to Hammerhead's customers for sub-prime financing. Credible testimony reflected a sincere desire by both parties to advance the business relationship and to make the arrangement work at the onset. The relatively small floor plan arrangement (in comparison to Hammerheads arrangements with his primary lender) was an experiment, but had the promise of enhancing a potentially lucrative relationship.

Even events after the fact demonstrate Debtor's original...