Fairlane Fixed Income Fund, LLC v. Feigl (In re Feigl)

In re: Frederick Douglas Feigl, Debtor.

Fairlane Fixed Income Fund, LLC, Plaintiff, v. Frederick Douglas Feigl, Defendant.

Case No. 19-34156-hdh11

Adv. Proc. No. 20-3011

UNITED STATES BANKRUPTCY COURT NORTHERN DISTRICT OF TEXAS DALLAS DIVISION

September 25, 2020

The following constitutes the ruling of the court and has the force and effect therein described.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

On January 30, 2020, Fairlane Fixed Income Fund, LLC (the "Plaintiff") filed a complaint¹ initiating the above-captioned adversary proceeding against Frederick Douglas Feigl (the "Defendant"). Through the Complaint, the Plaintiff seeks a finding that the Defendant should be denied a bankruptcy discharge or, in the alternative, that certain debts owed to it by the Defendant are nondischargeable. The Defendant is the former 50% owner and CEO of SafeBuy, LLC ("SafeBuy"), a used car dealership in Texas, and personally guaranteed a $1 million loan the Plaintiff made to SafeBuy (the "Fairlane Loan").² The Plaintiff generally contends that the Defendant never intended to perform under the terms of the Loan Agreement and Guaranty and that SafeBuy failed to (i) use the Fairlane Loan proceeds solely to purchase automobiles and (ii) keep the proceeds in a segregated account, which it was contractually required to do. The Plaintiff also alleges the Defendant withheld material information as to the pre-existing debts and obligations of SafeBuy and the concerns of other lenders. The Plaintiff ultimately seeks a determination that its claim against the Defendant is nondischargeable pursuant to Bankruptcy Code sections 523(a)(2)(A) and 523(a)(6). In addition, the Plaintiff seeks a global denial of the Defendant's discharge pursuant to sections 727(a)(5) and 727(a)(7).

The United States Bankruptcy Court for the Northern District of Texas temporarily suspended all live, in-person hearings in response to the COVID-19 pandemic.³ Accordingly, the parties and the Court agreed to conduct a trial by video over three consecutive days beginning on August 3, 2020. After trial, the Court took the matter under advisement. The following are the Court's Findings of Fact and Conclusions of Law, issued pursuant to Rule 52 of the Federal Rules of Civil Procedure, as made applicable in adversary proceedings by Federal Rule of Bankruptcy Procedure 7052.⁴ For the reasons set forth in greater detail below, the Court finds and concludes that in this case, the Plaintiff has not satisfied its burden to except its debt from discharge under sections 523(a)(2)(A) or 523(a)(6), nor has the Plaintiff shown the Defendant should be denied his discharge under sections 727(a)(5) or 727(a)(7).

I. JURISDICTION AND VENUE

This Court has jurisdiction over the parties and claims asserted in this proceeding under 28 U.S.C. § 1334. The claims in this adversary proceeding are core matters under 28 U.S.C. § 157(b)(2)(A), (I), and (J), as they involve a determination as to the dischargeability of a particular debt and objections to discharge. Venue is proper in this District pursuant to 28 U.S.C. § 1409(a).

II. PROCEDURAL HISTORY

On May 7, 2020 and May 8, 2020, the Plaintiff and the Defendant filed competing motions for partial summary judgment.⁵ The Court held a hearing on the Summary Judgment Motions on June 15, 2020 and took the matters under advisement. On June 24, 2020, the Court entered an order⁶ denying the Plaintiff's Summary Judgment Motion, as well as an order⁷ granting, in part, the Defendant's Summary Judgment Motion on the Plaintiff's claims under section 727(a)(3). The Court ultimately determined that there were genuine issues of material fact with respect to (1) the Defendant's intent and the Plaintiff's reliance under section 523(a)(2)(A) and (2) the Defendant's explanations and credibility under section 727(a)(5).

On July 28, 2020, the Court signed and entered the Amended Joint Pretrial Order⁸ submitted by the parties. It is well-established in the Fifth Circuit that a joint pretrial order signed by both parties supersedes all pleadings and governs the issues and evidence to be presented at trial. Kona Tech. Corp. v. Southern Pac. Transp. Co., 225 F.3d 595, 604 (5th Cir. 2000). Accordingly, the Court focuses on the issues and causes of action raised in the Amended Joint Pretrial Order in this ruling.⁹

III. FINDINGS OF FACT

A. The Parties

The Plaintiff's Private Placement Memorandum states the Plaintiff was formed for the purpose of originating high yield loans and that its loans "will typically be secured by real estate, business assets and/or guarantees that in the Manager's judgment adequately secure the underlying Loans." Jason Dodd is the founder and managing partner of the Plaintiff. Mr. Dodd is also the sole decision maker for the Plaintiff and authorized the Fairlane Loan.

The Defendant resides in Dallas County, Texas, and as previously stated, is the former 50% owner and CEO of SafeBuy. SafeBuy was formed in April 2010 and operated on a "buy here, pay here" model. The Defendant originally formed SafeBuy with another partner, William Plaster, but Leeman Stiles later came to own the other 50% of SafeBuy. While Mr. Stiles managed the day to day operations of SafeBuy, the Defendant attended auctions to purchase inventory and worked behind the scenes with the accounting department. At its height, SafeBuy was the fourth largest used car dealership in Texas with dozens of employees, including several responsible for SafeBuy's finance and accounting.

Mr. Dodd and the Defendant knew each other for years prior to this litigation. They both have children about the same age, and their daughters attended school together. At one point in time, Mr. Dodd and the Defendant considered themselves to be friends.

B. The Fairlane Loan

In early 2018, the Plaintiff began looking to grow its fund. Mr. Dodd approached the Defendant and offered to loan money to SafeBuy even though the Plaintiff had never loaned money to the Defendant or a used car business before. The Defendant told Mr. Dodd that SafeBuy would use the Fairlane Loan proceeds to purchase inventory for resale and that the inventory would be aimed at a "higher end" consumer. On May 8, 2018, the Defendant sent an email to Mr. Dodd, stating "Take [sic] look!" with a spreadsheet of financial projections for the Fairlane Loan attached (the "Dodd Forecast").

The Dodd Forecast showed projections based on a fleet of 280 vehicles being purchased using the Fairlane Loan proceeds (the "Fund II Automobiles"). At trial, Mr. Dodd testified that while SafeBuy's purchase of 280 Fund II Automobiles was possible, he did not think it was likely. Mr. Dodd testified that he understood Fund II Automobiles would be purchased with funds from the Fairlane Loan, and the notes from the Fund II Automobiles would also serve as collateral (the "Fund II Auto Paper"). The Defendant testified that the Dodd Forecast was only a high-level model, early on in his discussions with Mr. Dodd, of how a potential portfolio could operate.

On June 1, 2018, the Plaintiff and SafeBuy entered into the Fairlane Loan Documents, which the Defendant executed on behalf of SafeBuy. The Defendant simultaneously executed the Guaranty in his personal capacity. It is undisputed the Plaintiff knew SafeBuy had other lenders at the time the Fairlane Loan Documents were executed.¹⁰ And at trial, Mr. Dodd admitted that the Plaintiff did not review any financials for SafeBuy or the Defendant prior to executing the Fairlane Loan Documents and the Guaranty.

The Loan Agreement contains the following provisions relevant to the Plaintiff's allegations in this case:

• "Borrower will maintain all Loan proceeds in a depository account that is used solely for the operations of Fund II and will not comingle such funds with any other funds or depository accounts held or controlled by Borrower. . . ." § 3.2(d).

• "Promptly following receipt by Borrower of Fund II Auto Paper, Borrower will endorse all promissory notes and chattel paper in favor of Lender on the face of such promissory notes and chattel paper, unless otherwise agreed by Lender." § 3.2(e).

• "Borrower's financial projections previously delivered to Lender were prepared by Borrower in good faith and accurately reflect the future cash flow and financial performance that Borrower's management team expects from Fund II, in all material respects." § 4.5.

• ". . . Borrower is not insolvent as defined in any Applicable Law, nor will it be rendered insolvent by the execution and delivery of the Loan Documents . . . ." § 4.12.

• Borrower will "[u]se the proceeds of the Loan solely for the purchase of Fund II Automobiles." § 6.12.

• The Plaintiff's collateral coverage "shall not be less than 125% of the outstanding principal balance under the Note. In the event of a breach of the covenant set forth in the preceding sentence, Borrower shall identify and grant to Lender a security interest in sufficient additional automobiles owned by Borrower (the "Replacement Collateral") necessary to cure such breach . . . ." § 3.3.

The Plaintiff loaned SafeBuy the full $1 million under the Loan Agreement in tranches of $250,000. The Plaintiff funded its first tranche on June 1, 2018, and the next on August 1, 2018.¹¹ During this time, the Plaintiff appears to have purchased some Fund II Automobiles, but very few. Instead, the Plaintiff took pre-existing automobile notes and placed them in a segregated safe to serve as Replacement Collateral for the Fairlane Loan. After the first two tranches of the Fairlane Loan were funded, the Plaintiff had its accountants perform an audit to verify compliance with the Fairlane Loan Documents. Pursuant to that audit, a memorandum was generated on September 18, 2018 (the "Mosel Memo").

The Mosel Memo noted that SafeBuy was not in compliance with the Loan Agreement. Critically, the Mosel Memo stated that (1) SafeBuy did not have any Fund II Automobiles and only had 89 automobile notes listed as Fund II Auto Paper; (2)...