Jung v. Dietmar Felber Pamela J. Felber (In re Dietmar Felber Pamela J. Felber)

In re: DIETMAR FELBER PAMELA J. FELBER, Debtors

GERHARD JUNG, Plaintiff v. DIETMAR FELBER PAMELA J. FELBER, Defendants

Case No. 16-32976

Adv. No. 17-3006

UNITED STATES BANKRUPTCY COURT FOR THE SOUTHERN DISTRICT OF OHIO WESTERN DIVISION AT DAYTON

Entered: December 27, 2018

December 26, 2018

Judge Humphrey

Chapter 7

Decision Determining Debt Owed to the Plaintiff is Dischargeable

On September 22, 2016 the Debtors, Dietmar and Pamela Felber (the "Felbers"), filed for relief under Chapter 7 of the Bankruptcy Code and obtained a Chapter 7 discharge on January 31, 2017. On January 20, 2017 Gerhard Jung ("Jung") filed a complaint alleging that a judgment he holds against the Felbers is non-dischargeable pursuant to 11 U.S.C. § 523(a)(2), (a)(4), and (a)(6) and this judgment should be excepted from the Felbers' discharge. Following a trial, the court took this matter under advisement.

Jurisdiction

This court has jurisdiction pursuant to 28 U.S.C. § 1334. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I) and there is no dispute as to the court having the constitutional authority to enter a final judgment.

Facts and Procedural Background

This dispute between the parties arises out of a former business relationship between them. The Felbers were operating an automobile repair business but had outgrown the location from which they operated the business in Summerville, South Carolina. Transcript at 21. They found a new location and wished to establish an automobile repair shop specializing in foreign automobiles at 144 Howe Hall Road, Goose Creek, South Carolina (the "Howe Hall Road Property"). However, they lacked the funding to acquire the real estate and related assets. That is how Jung entered the picture. The Felbers were friends of Jung and knew Jung was involved in real estate and asked Jung to assist them in securing the location and assets to be used in the repair business.

In 2008, the Howe Hall Road Property was owned by a woman named Lynda Warren, whose deceased husband had operated a car repair business at the property. Transcript at 107. In January 2008 Warren conveyed the real property to Jung for the consideration of $350,000. Defendants Exhibit B. See also Plaintiff Exhibit 2 at 1 (HUD-1 statement of sale of the Howe Hall Road Property).¹

Jung purchased the Howe Hall Road Property after being approached by Mr. Felber ("Felber"). Id. Jung and Felber had been friends since meeting about 25 years earlier. Felber suggested that Jung could buy the property as an investment and then lease it to the Felbers until the Felbers could obtain a loan from the Small Business Administration. Id. See Defendants Exhibit D (SBA loan paperwork). The parties agreed that the Felbers would buy the Howe Hall Road Property from Jung when the Felbers secured financing. Id. In the meantime, the parties entered into a standard commercial real property lease, dated December 2, 2007, that was to terminate on June 30, 2008. Defendants Exhibit A. The lease payments were $3,500 each month. Id. The lease did not address any of the personal property on the Howe Hall Road Property. Transcript at 128. The agreement included a one-page addendum which stated that "[o]n June 2019 [the Felbers] will buy the property for the appraised value of the property on that date. When the appraisal comes back, the amount owed to Gerhard Jung will not exceed 50/50 not to exceed $30,000." Plaintiff Exhibit 3. Although this addendum is somewhat cryptic and confusingly written, Mr. Felber explained that it meant that if the Howe Hall Road Property increased in value from the time Jung purchased it to the time the Felbers purchased it from Jung, the Felbers would pay Jung 50 percent of that appreciation, up to a cap of $30,000. Transcript at 71.

Felber testified that he made various improvements to the Howe Hall Road Property. Among the repairs or improvements was the installation of a second breaker box, fixing the lights to meet building code requirements, installing a staircase to a storage area, and adding gravel to the property. Transcript at 77. Mrs. Felber testified similarly. Transcript at 150-51. In addition, Felber purchased two new lifts for vehicles, and leased two others.² Transcript at 78, 83 and 93. Felber indicated that, including work done to obtain the SBA loan, such as soil samples, the Felbers spent "close to $40,000" on the Howe Hall Road Property Id. at 95.

Felber testified that during the first year of the lease between Jung and the Felbers, business "actually wasn't doing too bad." Transcript at 72. However, the financial crisis of2008 hurt the Felbers' business but, nevertheless, the Felbers made payments on the lease, and subsequent leases for about 4 years, until 2011. Certain checks bounced during that time period, but Felber testified those payments were paid a few days late. Transcript at 75.

An SBA loan was initially approved for the Felbers' purchase of the property in 2008, but due to the market downturn that year, all SBA loans were stopped and the Felbers never obtained the SBA loan or other financing necessary to purchase the Howe Hall Road Property. Transcript at 79.

The Felbers continued to use the property to operate its business, European Motorsports and Imports, Inc. ("European Motor"), long after the initial lease expired. It was only in January 2012 that Jung obtained a Warrant of Ejectment from a South Carolina magistrate. Jung testified that other ejectment proceedings had occurred, or at least other notices of ejectment were issued, but this was never documented in evidence. Plaintiff Exhibit H (January 4, 2012 Notice of Ejectment) and Transcript at 161. Jung entered into a separate lease for the Howe Hall Road Property with European Motor that covered the period between March 25, 2011 and March 24, 2012. Defendants Exhibit F. It was signed by Jung and Felber. In March 2012, Jung entered into a new lease with the Felbers' son, Chris Felber, although Jung still considered the Felbers part of the business. Transcript at 135 and 136. In any event, the locks were changed at the Howe Hall Road Property by Jung shortly thereafter, specifically on June 12, 2012. Transcript at 133 and 138. In July 2012, Jung, as a representative of his own business, G.F.J. Rentals, Inc, quickly entered into a new lease with a different party that commenced in July 2012. Defendants Exhibit P. Jung then sold the Howe Hall Road Property for $355,000 in 2016. Defendants Exhibit Q.

A key focus of the trial was the sale of a tow truck, a 2005 Chevrolet (the "Tow Truck"), located on the Howe Hall Road Property when Jung purchased the real property. Jung contended that the Felbers sold the Tow Truck without permission and misappropriated the funds. The Tow Truck was never titled to Jung, any of the Felbers, nor any entity related to those parties. Rather, it was titled to Warren, and then sold to a third-party, Davis Towing. Transcript at 81. Felber testified that the proceeds from the sale of the Tow Truck were to beused, and in fact were used, to reimburse the Felbers for the funds they spent improving the Howe Hall Road Property. Id. Apparently, the Tow Truck was, despite the title, to be included in the Howe Hall Road Property sale from Jung to Warren. In a separate legal proceeding, Jung had accused Warren of taking the Tow Truck. Defendants Exhibit O and Transcript at 141-42. Jung testified that he wanted to know why Warren signed the title when she received no funds for the Tow Truck. Transcript at 141-42. Mrs. Felber testified that a representative from the buyer, Davis Towing, wanted to know who to write out the check for to pay for the Tow Truck. Transript at 153. According to Mrs. Felber, Jung told the Davis Towing representative to write out the check to "EMI." Id. Jung told Mrs. Felber to deposit the funds for improvements on the property and also to pay back the $6,000 paid by Felber to Jung at the time of the closing on the Howe Hall Road Property. Jung did not want the title of the Tow Truck in his name during the transaction to avoid property and sales taxes. Transcript at 154.

Jung filed a complaint against the Felbers and their son, Chris Felber, and the Felbers' business, European Motor, in the Court of Common Pleas, Ninth Judicial Circuit (the "State Court") for breach of a real property lease and fraudulent conversion. Plaintiff Exhibits 1 and 8. The named defendants were properly served and failed to file an answer or other response to the complaint. Consequently, upon affidavits of default, the State Court entered an Order of Default as to liability. Plaintiff Exhibit 1. Following the default order, the State Court scheduled a damages hearing. The Felbers and their State Court counsel attended the damages hearing. The Felbers were precluded from testifying or otherwise presenting any evidence at that hearing, but their counsel was permitted to cross-examine Jung on his testimony concerning his damages. After that hearing, the State Court entered an Order for Judgment finding the defendants were liable to Jung in the amount of $150,000, including $75,000 in actual damages and $75,000 in punitive damages. The Order for Judgment included findings of both intentional conversion and willful actions by the defendants. See Plaintiff Exhibit 1 (¶5 of the Findings of Fact, and ¶9 of the Conclusions of Law).

Legal Analysis

Preclusive Effect of the State Court Default Judgment and Damages Decision

Before proceeding any further, this court will first address what preclusive effect, if any, the State Court judgment has on this dischargeability proceeding. See Plaintiff Exhibit 1.³ The question is whether any of the findings contained in the Order for Judgment have preclusive effect in determining whether the $150,000 debt owed to Jung is non-dischargeable in the Felbers' bankruptcy.⁴

Jung's State Court judgment is entitled to the same preclusive effect that it would have in the South Carolina state courts. Bay Area Factors v....