In re Dunlap

458 B.R. 301

In re Charles Homer DUNLAP, Lucille Grace Dunlap, Debtors.Structured Investments Co., LLC, Plaintiff,

v.Charles Homer Dunlap, Lucille Grace Dunlap, Defendants.

Bankruptcy No. 09–75282–SCS.

Adversary No. 10–07041–SCS.

United States Bankruptcy Court, E.D. Virginia,Norfolk Division.

Sept. 13, 2011.

Craig G. Margulies, The Margulies Law Firm, APLC, Fahim Farivar, Encino, CA, Thomas B. Dickenson, Norfolk, VA, for Plaintiff.Nicole A. Rosenblum, Crowley, Liberatore, Ryan & Brogan, P.C., Norfolk, VA, for Defendants.

MEMORANDUM OPINION

STEPHEN C. ST. JOHN, Bankruptcy Judge.

This matter comes before the Court upon the Motion for Summary Judgment (“Summary Judgment Motion”) filed on May 3, 2011,¹ by the Defendant, Charles Dunlap (“Mr. Dunlap”), seeking the entry of summary judgment as to the Amended Complaint filed by the Plaintiff, Structured Investments Co., LLC (“SICO”). At the conclusion of the hearing held on the Summary Judgment Motion on May 24, 2011, the Court took this matter under advisement. The Court has jurisdiction over this proceeding pursuant to 28 U.S.C. §§ 157(b) and 1334(b). Venue is proper pursuant to 28 U.S.C. §§ 1408 and 1409(a). This Memorandum Opinion constitutes the Court's conclusions of law.

I. Procedural History

A. The Complaint, the Answer, and the Motion to Dismiss

SICO filed a six-count Complaint against the Dunlaps on March 25, 2010. ² According to the Complaint, Mr. Dunlap contacted SICO in July 2008 to inquire about exchanging his monthly military pension payments (hereinafter, the “Pension Payments”) for a present value lump sum payment (hereinafter, the “Lump Sum”). Complaint ¶¶ 7–8, 12. Prior to entering into a written agreement with SICO, Mr. Dunlap allegedly provided written financial statements and information to SICO. Id. ¶¶ 10–11. Although not explicitly stated in the Complaint, Mr. Dunlap apparently qualified for the Lump Sum. Upon written memorialization of the agreement between Mr. Dunlap and SICO regarding the repayment of the Lump Sum (entitled “Purchase and Sale Agreement,” and hereinafter, the “Agreement”) in October 2008, Mr. Dunlap received the Lump Sum. Id. ¶¶ 9, 13. Under the Agreement, Mr. Dunlap agreed to remit his Pension Payments to SICO for a period of no less than ninety-six (96) months in exchange for a lump sum payment from SICO of $104,354.44, with the required repayment period subject to extension in the event of an interruption in the remittance of the Pension Payments. Id. ¶¶ 14–16. The monthly repayments to SICO were to be accomplished by the deposit of the Pension Payments into an account designated by SICO. Id. ¶¶ 17–18. By virtue of the Agreement, SICO asserts that Mr. Dunlap's Pension Payments became its property. Id. ¶ 21. According to SICO, repayment ceased in December 2009, just prior to Mr. and Mrs. Dunlap filing a joint petition under Chapter 7 of the United States Bankruptcy Code. Id. ¶¶ 19, 24. As a result, SICO argues that at least eighty-four (84) monthly payments of $2,396.33 each remain due, for a total of $201,291.72, plus interest, costs, and attorney fees as provided by the Agreement. Id. ¶ 27.

The first count of the Complaint seeks entry of a declaratory judgment finding that the Pension Payments are not property of the bankruptcy estate under 11 U.S.C. § 541; that the payments are instead the property of SICO and must be immediately turned over to it; and that SICO may pursue recovery of the payments outside the Bankruptcy Court. Complaint ¶¶ 30–31, 34–35. On this count, SICO asserts that the Pension Payments are being held for it in constructive trust by the Dunlaps, or, in the alternative, that SICO has an equitable lien on the payments. Id. ¶ 32.

Count Two seeks a determination that the debt owed to SICO by Mr. Dunlap as a result of the transfer of the Lump Sum to him is nondischargeable pursuant 11 U.S.C. § 523(a)(2)(A), alleging the funds were obtained by false pretenses, false representations, and/or actual fraud. Complaint ¶ 40. Specifically, SICO alleges that the Dunlaps represented that the full amount of the Lump Sum would be used to pay in full various debts. Id. ¶¶ 37–38. SICO asserts that the Dunlaps did not in fact use the entirety of the money to pay in full the obligations they disclosed to SICO, that they did not intend to use the funds in that manner, and that they knew this representation was false. Id. ¶¶ 39–40. SICO argues that it relied on that representation in deciding to transfer the Lump Sum to Mr. Dunlap and was damaged as a result. Id. ¶¶ 41–42.

Count Three seeks a determination that the debt owed to SICO is nondischargeable pursuant 11 U.S.C. § 523(a)(2)(B) on the basis that the Dunlaps obtained the Lump Sum by allegedly providing false written financial statements to SICO. Complaint ¶¶ 46–47. Regarding this count, SICO asserts that the Dunlaps failed to disclose certain credit card obligations and certain of their monthly expenses. Id. ¶¶ 48–49. According to SICO, the Dunlaps intended to deceive it with the false written financial statements, upon which SICO relied and was damaged as a result. Id. ¶¶ 53, 55

The fourth count requests the Court determine the debt owed to SICO is nondischargeable under 11 U.S.C. § 523(a)(4), asserting that the Dunlaps committed defalcation while acting in a fiduciary capacity. Complaint ¶¶ 60–61. SICO alleges that the Dunlaps fraudulently appropriated the Pension Payments, thereby diverting funds to which it was entitled. Id. ¶ 61. SICO further asserts under this count that the Dunlaps' actions constitute embezzlement of money that rightfully belongs to it. Id. ¶ 63.

The fifth count asks the Court to determine that the debt owed to SICO is nondischargeable under 11 U.S.C. § 523(a)(6), alleging that the Dunlaps' failure to remit the Pension Payments to SICO constitutes a conversion of money to their own use and that such use constitutes a willful and malicious injury under § 523(a)(6). Complaint ¶¶ 66–68. Finally, the sixth count requests attorney fees and costs pursuant to the Agreement. Id. ¶ 71.

On May 3, 2010, the Dunlaps, by counsel, filed a Motion to Dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6), as incorporated into the Federal Rules of Bankruptcy Procedure by Rule 7012, and a Motion for Award of Attorney Fees. SICO filed an objection to the Motion to Dismiss on May 24, 2010. The initial pretrial conference was held on May 27, 2010, at which counsel for SICO and counsel for the Dunlaps appeared. A hearing was scheduled on the Motion to Dismiss for July 15, 2010, and the pretrial conference was continued to the same day and time. In the interim, pursuant to the Court's ruling at the pretrial conference, the Dunlaps filed a reply to SICO's objection to the Motion to Dismiss on June 10, 2010, to which SICO filed a responsive pleading on June 24, 2010.

Due to problems discovered in the service of the Complaint, the Court ordered the filing of an amended complaint and supporting documentation, with proper service on all parties and a certificate of service demonstrating such service. As a result, the Court canceled the hearing and the continued pretrial conference scheduled for July 15, 2010. SICO timely filed an Amended Complaint, identical in substance to the original Complaint, in compliance with the Court's order on July 21, 2010.³ SICO filed the required certificate of service on July 22, 2010, followed by a supplemental certificate of service on August 9, 2010. Counsel for the Dunlaps filed a second Motion to Dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6) and a Motion for Award of Attorney Fees on August 5, 2010. The Court then established a hearing on the second Motion to Dismiss for October 13, 2010. The Court also rescheduled the pretrial conference for October 13, 2010. SICO filed a response in opposition to the second Motion to Dismiss on August 19, 2010.

After consideration of the arguments made by counsel for both parties at the hearing held on October 13, 2010, and for the reasons stated on the record, the Court denied the second Motion to Dismiss as to Counts One, Two, Three, Five, and Six as to both Mr. and Mrs. Dunlap. The Court granted the second Motion to Dismiss with respect to Court Four as to both Mr. and Mrs. Dunlap but granted SICO ten days to amend that count. SICO filed no amendment, and, thus, Count Four is dismissed pursuant to the Court's ruling. The Court established a trial date of May 23–24, 2011.

Pursuant to the Court's pretrial order entered October 15, 2010, the Dunlaps were afforded twenty (20) days within which to file an answer to the Amended Complaint, which they timely filed on November 2, 2010. The Answer admits certain factual allegations and denies others. With respect to certain of the admitted factual allegations, the Dunlaps provide clarifying or additional information. With the exception of certain admissions made in conformance to the admitted factual allegations, the Answer denies all of the paragraphs contained within the specific counts of the Amended Complaint.

B. The Motion for Summary Judgment and SICO's Objection

On May 3, 2011, the last day for filing motions prior to trial, Mr. Dunlap filed his Summary Judgment Motion, which was accompanied by his affidavit, and a Motion to Award Attorney Fees.⁴ On May 17, 2011, SICO, by counsel, filed its objection to the Summary Judgment Motion (“Objection”).⁵ SICO also filed an evidentiary objection to Mr. Dunlap's affidavit on May 17, 2011. On May 20, 2011, Mr. Dunlap filed an objection to the affidavit of Steven P. Covey, which accompanied SICO's Objection.

The Summary Judgment Motion recounts, in summarized form, the procedural history of the underlying bankruptcy case and this adversary proceeding. Summary Judgment Motion ¶¶ 4–7. The motion then sets forth numerous statements of fact (discussed in more detail in Part III.B.). Id. ¶¶ 8–23. Addressing the first count of the Amended Complaint, Mr. Dunlap argues that...