Gambrell v. Auerbach (In re Auerbach)

In re: GARY N. AUERBACH & DALIA AUERBACH, Debtors.

LARRY GAMBRELL, Plaintiff, v. GARY N. AUERBACH & DALIA AUERBACH, Defendants.

Case No. 14-16264

Adversary Proceeding No. 14-1218

UNITED STATES BANKRUPTCY COURT NORTHERN DISTRICT OF OHIO

October 29, 2015

Chapter 7 Proceedings

Judge Arthur I. Harris

MEMORANDUM OF OPINION¹

On December 10, 2014, the plaintiff-creditor, Larry Gambrell, filed this adversary proceeding seeking: (1) a determination that debts allegedly incurred by defendant-debtors, Gary and Dalia Auerbach ("debtors") are nondischargeablepursuant to 11 U.S.C. § 523(a)(2)(A) and (a)(2)(B); (2) entry of a monetary judgment for approximately $30,000 of actual damages and additional punitive damages in favor of Mr. Gambrell and against the debtors; and (3) costs and attorney's fees. Additionally, Mr. Gambrell objects to the debtors' claim of exemption for two automobiles, a 2004 Lincoln Towncar and a 2005 Buick LeSabre.

For the reasons that follow, the Court: (1) enters judgment in favor of Mr. Gambrell and against Gary Auerbach in the amount of $5,920, plus interest from the date of judgment at the rate provided under 28 U.S.C. § 1961; (2) finds this judgment to be nondischargeable under 11 U.S.C. § 523(a)(6); (3) finds that Mr. Gambrell is not entitled to an award of punitive damages, costs, or attorney's fees; (4) enters judgment in favor of Dalia Auerbach on Mr. Gambrell's claims against her; and (5) overrules Mr. Gambrell's objection to the debtors' claim of exemptions.

PROCEDURAL HISTORY

This adversary proceeding was preceded by a state court case originally filed by Mr. Gambrell against the debtors and Eastside Transportation Inc. on March 14, 2015. (Gambrell v. Eastside Transportation Inc., et al, Cuyahoga C.P. No. CV-14-823674 (filed Mar. 14, 2015)). On October 1, 2014, the debtors filed avoluntary petition for relief under Chapter 7 of the Bankruptcy Code (Case No. 14-16264), and the state court case was stayed pursuant to 11 U.S.C. § 362. On November 10, 2014, a meeting of creditors was held pursuant to 11 U.S.C. § 341(a) and, on November 21, 2014, the Chapter 7 trustee filed a report of no distribution (Docket No. 10, Case No. 14-16264). On January 14, 2015, the Court issued an order of discharge (Docket No. 15, Case No. 14-16264).

On December 10, 2014, Mr. Gambrell initiated the above-captioned adversary proceeding by filing a complaint alleging that the debtors: (1) fraudulently induced Mr. Gambrell to invest money in, and subsequently withdraw from, a limited liability corporation; (2) fraudulently misrepresented their ownership of vehicles on their bankruptcy filings; (3) wrongfully made a down payment on a vehicle using Mr. Gambrell's credit card after inducing Mr. Gambrell to withdraw from the limited liability corporation; and (4) converted the limited liability corporation into a domestic for profit corporation, thereby depriving Mr. Gambrell of his ownership interest in assets of the limited liability corporation. Mr. Gambrell also objects to the debtors' claim of exemption regarding two vehicles, a 2004 Lincoln Towncar and a 2005 Buick LeSabre.

On February 17, 2015, the debtors answered the complaint, denying the substantive allegations and asserting, among other defenses, that any debt owedMr. Gambrell was discharged in the debtors' bankruptcy proceeding. A trial was held on September 16, 2015. The Court heard testimony from plaintiff-creditor Larry Gambrell and defendant-debtor Gary Auerbach. The Court admitted plaintiff's exhibits 1, 2, 4, 5, 6, 7, 8, 9, and 10 without objection. The Court also admitted defendants' exhibits A, B, C, D, F, G, H, I, and J without objection. The Court admitted defendants' exhibits Q and R over plaintiff's objection. This memorandum constitutes the Court's findings of fact and conclusions of law as required by Rule 7052 of the Federal Rules of Bankruptcy Procedure.

FINDINGS OF FACT

The findings of fact contained in this memorandum of opinion reflect the Court's weighing of the evidence, including credibility of the witnesses. "In doing so, the court considered the witnesses' demeanor, the substance of the testimony, and the context in which the statements were made, recognizing that a transcript does not convey tone, attitude, body language, or nuance of expression." In re Parrish, 326 B.R. 708, 711 (Bankr. N.D. Ohio 2005). Even if not specifically mentioned in this decision, the Court considered the testimony of all the trial witnesses, exhibits admitted into evidence, and stipulations. The following facts were established at trial by a preponderance of the evidence.

Eastside LLC is Formed

Around June of 2006, Mr. Gambrell and Gary Auerbach entered into an agreement to run a transportation company. Generally, the terms of this agreement were that Mr. Gambrell would provide capital for the company and Mr. Auerbach would secure customers and operate the business out of his home. Additionally, Mr. Gambrell would use his skills as a mechanic to maintain Eastside LLC's vehicles. On June 26, 2006, Mr. Gambrell and Mr. Auerbach formed Eastside Transportation, LLC ("Eastside LLC") for this purpose. Eastside LLC then secured a number of clients and began operations.

Mr. Gambrell initially invested approximately $10,000 in the business but later made additional advancements. Mr. Gambrell used a U.S. Bank credit card account and an American Express credit card account to pay these business expenses. Both of these accounts were established in Eastside LLC's name, but Mr. Gambrell signed as the sole responsible party and extended his personal credit to the corporation. Mr. Gambrell and Mr. Auerbach were both authorized users of the American Express account and both were issued credit cards which bore the names of Eastside LLC and the cardholder. At some point, Mr. Gambrell transferred some of the American Express debt to Chase Bank. Additionally, around the time Eastside LLC was formed, Mr. Gambrell advanced approximately$1,700 to Mr. Auerbach.

For his services, Eastside LLC paid Mr. Auerbach a salary. Around 2007, Dalia Auerbach started working at Eastside LLC and drew a salary for her services, which included driving and bookeeping. By 2012, the debtors' salaries from Eastside LLC were their only sources of income. Mr. Gambrell was not paid a salary although he devoted some time to repairing Eastside LLC's vehicles and transporting customers. Around 2008, Mr. Gambrell established Larry's Automotive Service LLC. Mr. Gambrell continued repairing vehicles for Eastside, but billed for this work separately through Larry's Automotive Service LLC. Eastside LLC paid for approximately half of this work through 2010 at which time Mr. Gambrell stopped repairing vehicles for Eastside LLC. As of July 29, 2010, Eastside LLC owed Larry's Automotive Service LLC $6,358.24.

Mr. Gambrell Withdraws and Eastside Transportation Inc. is Formed

Around late 2011 or early 2012, Mr. Gambrell decided to withdraw from Eastside LLC to pursue his own business and because he did not like the direction taken by Eastside LLC. An arrangement was made in which Mr. Gambrell withdrew from Eastside LLC in exchange for the debtors repaying Mr. Gambrell the money he invested in Eastside LLC. Although this arrangement was not made in writing, Mr. Gambrell conceded that he understood his withdrawal to mean thathe would have nothing more to do with the day-to-day operation of the company. The exact terms of repayment are the heart of the dispute between Mr. Gambrell and the debtors. Although Mr. Gambrell concedes that he never discussed the arrangement with Dalia Auerbach, Mr. Gambrell claims that Mr. Auerbach promised that all of the debt would be repaid before the debtors took any additional money out of the company. Mr. Auerbach concedes that he promised to repay Mr. Gambrell's credit card debt, but he denies that he promised to do so before taking any additional money out of Eastside LLC.

Mr. Gambrell's testimony on this point of conflict was, at best, equivocal. Mr. Gambrell conceded that he initiated his withdrawal and that, at the time he withdrew, he was aware that Eastside LLC was the debtors' only source of income. The Court does not find it credible that Mr. Auerbach would promise to entirely forgo his only source of livelihood or that Mr. Gambrell, the debtors' business partner for approximately six years, could have justifiably relied on such an impression.

Additionally, for approximately two years after Mr. Gambrell withdrew from Eastside LLC, the debtors made regular payments to both of Mr. Gambrell's credit card accounts. From January 3, 2012, through August 2, 2013, the debtors paid approximately $300 per month to Mr. Gambrell's American Express creditcard account. The debtors made additional payments of $302 on November 2, 2013, and $313 on July 29, 2014. The debtors also made regular payments to Mr. Gambrell's U.S. Bank credit card account from July 24, 2006, through August 15, 2014. The amounts of these payments varied. The debtors made monthly payments of $160 from June 16, 2011, through June 14, 2014. From July 16, 2014, through August 15, 2014, these payments decreased to $125 per month. On the advice of his accountant, on June 1, 2012, Mr. Auerbach converted Eastside LLC from a limited liability corporation into a domestic for profit corporation, Eastside Transportation Inc. ("Eastside Inc."), of which Dalia Auerbach became a 50% owner. Mr. Gambrell had no ownership interest in Eastside Inc., but Eastside Inc. continued to make payments to Mr. Gambrell's credit cards. From the time of Eastside Inc.'s formation through the filing of the debtor's bankruptcy, Eastside Inc. paid approximately $5,389.85 on the American Express card account and $3,830 on the U.S. Bank Account. During this time the debtors continued to draw salaries from Eastside Inc. As of September 16, 2014, the total balance owed on the American Express account was $15,338.54. As of September 17, 2014, the total balance...