In re Wooten

423 B.R. 108

In re Justin N. WOOTEN, Alicia L. Wooten, Debtors Ocean Equity Group, Inc., Plaintiff, v. Justin N. Wooten, Defendant.

Bankruptcy No. 08-72923-SCS.

Adversary No. 09-07024-SCS.

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

January 5, 2010.

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John Edwin Bedi, Chesapeake, VA, for Defendant.

Steven L. Brown, Wolcott Rivers Gates, Virginia Beach, VA, for Plaintiff.

MEMORANDUM OPINION

STEPHEN C. ST. JOHN, Bankruptcy Judge.

This matter came on for trial on the complaint of Ocean Equity Group, Inc. ("Ocean Equity") to determine the dischargeability of a certain debt owed to Ocean Equity by the debtor, Justin N. Wooten ("Wooten"), pursuant to 11 U.S.C. §§ 523(a)(2)(A), 523(a)(2)(B), and 523(a)(6). Evidence was taken on October 14, 2009. Among the exhibits introduced by Ocean Equity was the transcript of a deposition of Wooten taken earlier pursuant to Federal Rule of Bankruptcy Procedure 2004, which the Court did not review prior to trial.¹ The parties presented their final arguments on November 17, 2009, at which time the Court took the matter under advisement. The Court has jurisdiction over these proceedings pursuant to 28 U.S.C. §§ 157(b)(2) and 1334(b). Venue is proper pursuant to 28 U.S.C. §§ 1408 and 1409. Upon consideration of the evidence and arguments presented by counsel and the pleadings submitted, the Court makes the following findings of fact and conclusions of law pursuant to Federal Rule of Bankruptcy Procedure 7052.

I. FINDINGS OF FACT

Wooten filed his petition for relief pursuant to Chapter 7 of the United States Bankruptcy Code in this Court on August 31, 2008. On March 3, 2009, Ocean Equity filed a complaint to determine the dischargeability of a certain debt owed to it by Wooten ("Complaint"). The Complaint alleges that Ocean Equity is an asset-purchasing entity that buys future Visa and MasterCard credit card receivables from other businesses. Compl. ¶ 6. According to the Complaint, Wooten's Auto Service is a Virginia corporation whose principal place of business was located at 6004 Indian River Road, Virginia Beach, Virginia 23464. Id. ¶ 7. Wooten is President and majority shareholder in Wooten's Auto Service. Id. ¶ 8. Wooten submitted a Funding Application ("Application")² that he executed, which listed that Wooten's Auto Service received monthly credit card receipts of $20,000.00 and monthly cash receipts of $10,000.00. Id. ¶¶ 9, 10. Based on the information contained in the Application, Ocean Equity agreed to purchase future credit card receivables from Wooten's Auto Service, and on or about January 30, 2008, Ocean Equity, Wooten's Auto Service, and Wooten entered into a Merchant Funding Agreement (the "Agreement")³ whereby Ocean Equity was to purchase $72,900.00 in assets, in the form of credit card receivables, from Wooten's Auto Service. Id. ¶¶ 11-12. Ocean Equity's purchased assets were to be paid by Ocean Equity receiving 23% of the credit card receipts taken in by Wooten's Auto Service. Id. ¶ 12. On or about January 30, 2008, Ocean Equity disbursed funds in the amount of $35,000.00 pursuant to the Agreement. Id. ¶ 13. Under the Agreement, Ocean Equity alleges it received a first priority lien, security interest, and assignment in receipts, accounts, instruments, inventory, equipment, general intangibles, chattel paper, cash and cash equivalents, documents, deposit and other accounts, fixtures, personal property, and leases of Wooten's Auto Service. Id. ¶ 14. Wooten's Auto Service ceased operating in the middle of September 2008. Id. ¶ 15. Ocean Equity further alleges that Wooten testified at an examination conducted pursuant to Federal Rule of Bankruptcy Procedure 2004⁴ that he notified his parts suppliers that he was closing his business but did not notify Ocean Equity. Id. ¶ 16.

Ocean Equity asserts that it had a lien on all of the personal property of Wooten's Auto Service and that Wooten removed that property from the business location in the middle of the night. Id. ¶ 17. Wooten testified at the Rule 2004 examination that he paid $41,000.00 for the business equipment when he opened his business. Id. ¶ 18. According to Ocean Equity, Wooten further testified at the Rule 2004 examination that he sold the tire equipment for $6,000.00 and deposited the money into his personal bank account to enable him to make payments on the Deeds of Trust on his home, and that he sold certain flush equipment for $1,000.00 cash, which he used to pay his personal obligations. Id. ¶¶ 19-20. Wooten also testified that he sold other pieces of equipment for cash to unknown third parties and disposed of the remaining personal property. Id. ¶ 21. According to the Complaint, Wooten testified that Wooten's Auto Service took in only $15,000.00 to $18,000.00 monthly in charge card receipts, not the $20,000.00 of monthly receipts as stated in the Application. Id. ¶ 22. Ocean Equity alleges that, had it known that Wooten's Auto Service did not take in $20,000.00 monthly in credit card receipts, it would not have entered into the Agreement with Wooten's Auto Service and Wooten. Id. ¶ 23.

Ocean Equity also alleges Wooten testified that monthly sales of Wooten's Auto Service ranged between $26,000.00 and $28,000.00, not the $30,000.00 in monthly sales as stated in the Application, and that the average monthly overhead for the business was $30,000.00. Id. ¶¶ 24, 25. Wooten also testified that Wooten's Auto Service did not pay its payroll taxes to the Internal Revenue Service for 2006 and 2007, thereby incurring a liability in excess of $43,000.00 (id. ¶ 27), and that he received a Final Notice from the Internal Revenue Service dated December 7, 2007, stating that the Internal Revenue Service intended to levy. Id. ¶ 28. As a result of this, Ocean Equity contends Wooten failed to disclose the business's true financial condition to Ocean Equity. Id. ¶ 30.

Ocean Equity additionally asserts that despite the Agreement clearly stating that Wooten's Auto Service would provide Ocean Equity with a lien on all of the inventory, Wooten testified that he transferred or sold the inventory to third parties in spite of the lien. Id. ¶¶ 31-32. Finally, Ocean Equity alleges the balance owed to it is $28,613.43 plus attorney fees, costs, and interest pursuant to the Agreement and the Application. Id. ¶ 34. Based upon these factual allegations, Ocean Equity seeks a determination of the dischargeability of the debt owed to it by Wooten under 11 U.S.C. §§ 523(a)(2)(A), 523(a)(2)(B), and 523(a)(6).

Wooten's Answer largely denies the allegations of the Complaint. Wooten specifically denies that he made any misrepresentations to Ocean Equity and that Ocean Equity had any liens upon the property of Wooten's Auto Service except for its credit card receipts. Ans. ¶¶ 30-32, 56. Wooten also affirmatively asserts that Ocean Equity had full access to the records of Wooten's Auto Service before entering into the transaction. Id. ¶¶ 9, 11, 22, 24, 30.

Ocean Equity and Wooten stipulated that Wooten was President and the majority shareholder of Wooten's Auto Service, that he signed the Application, that Ocean Equity and Wooten's Auto Service entered into the Agreement, and that Ocean Equity advanced $35,000.00 under the terms of the Agreement. Stipulations of Fact ¶¶ 2-5. They also stipulated that Wooten's Auto Service ceased its business operations in mid-September 2008, that Wooten's Auto Service did not pay its payroll taxes to the Internal Revenue Service for 2006 and 2007 and incurred a liability in excess of $43,000.00, and that Wooten received a Final Notice from the Internal Revenue Service dated December 7, 2007, stating the Internal Revenue Service intended to levy on the assets of Wooten's Auto Service ("Notice of Intent to Levy").⁵ Id. ¶¶ 6-8. Finally, the parties stipulated that Wooten's Auto Service owed other taxing authorities money for delinquent taxes as of January 30, 2008, and that Wooten sold or disposed of all of the assets of Wooten's Auto Service and did not pay any of the proceeds thereof to Ocean Equity. Id. ¶¶ 9-10.⁶

A. Evidence at Trial

The sole witnesses at trial were Edward Zinner ("Zinner") and Wooten. Zinner testified he is the Chief Executive Officer of Ocean Equity. Ocean Equity solicited Wooten, met with him, and in addition to signing him up for credit card processing with the Federated Payment Systems, a processor with whom Ocean Equity has an agreement, discussed the possibility of Wooten obtaining working capital for his business. Tr. at 6-7. Wooten provided the information required by the Application, which Ocean Equity requires every prospective client to complete and upon which it relies in determining whether to provide capital to that individual. Id. at 8. Wooten advised the monthly credit card receipts of Wooten's Auto Service totaled $20,000.00, which figure was inserted in the Application. Id. at 21. Zinner testified he would expect this figure to be accurate within a thousand dollars. Id. at 22.

Wooten indicated on the Application his taxes were not current, telling Zinner that "he had a small state tax obligation due that was just a few thousand dollars and that there were—and that everything else at that time was current." Id. at 9. Wooten did not advise Zinner that Wooten's Auto Service owed in excess of $43,000.00 to the Internal Revenue Service; according to Zinner, "Had he done that, he would not have qualified for any money at all." Id. at 10. Zinner believes that Wooten did not honestly answer the question in the Application as to whether there were any pending lawsuits against Wooten or Wooten's Auto Service, as Zinner believes that a Notice of Intent to Levy, which had been received by Wooten prior to completion of the Application, indicates a lawsuit is pending. Id. at 28-29. Zinner also believes that the Notice...