Kern v. Taylor (In re Taylor)

551 B.R. 506

In re Deborah J. Taylor, DebtorJames Kern, et al., Plaintiffs

v.Deborah H. Taylor, Defendant

Case No. 15–32588–WRS

Adv. Pro. No. 16–3007–WRS

United States Bankruptcy Court, M.D. Alabama.

Signed June 6, 2016

Richard Jon Davis, Maynard Cooper & Gale PC, Birmingham, AL, for Plaintiffs.

Anthony B. Bush, The Bush Law Firm, LLC, Montgomery, AL, for Defendant.

MEMORANDUM DECISION

William R. Sawyer, United States Bankruptcy Judge

This adversary proceeding is before the Court on the motion to dismiss filed by Defendant Deborah Taylor, the Debtor in the underlying Chapter 7 case. (Doc. 9). The Plaintiffs seek a determination that debts in the amount of roughly $2 million allegedly owed by the Defendant are non-dischargeable under 11 U.S.C. §§ 523(a)(2)(A), (a)(2)(B), and (a)(4). The Plaintiffs have filed a response opposing the motion to dismiss, and the Defendant has filed a reply. (Docs. 12 & 14). For the reasons set forth below, the Defendant's motion is GRANTED IN PART and DENIED IN PART.

I. FACTS & PROCEDURAL HISTORY

A. Introduction

This case revolves around two failed real estate projects that the Plaintiffs invested in and the Defendant managed. The first project, Maple Village Apartments, was invested in by the following Plaintiffs: G & L Investments—Maple Village, LLC (“G & L”); JK Investments—Maple Village, LLC (“JK”); JP Investments—Maple Village, LLC (“JP”); JS Investments—Maple Village, LLC (“JS”); and Knecht Investment Group—Maple Village, LLC (“KIG”). (Doc. 1, pp. 1–2). Whenever possible, this opinion will refer to these Plaintiffs collectively as the “MV Plaintiffs.”

The second project, Courtyard Apartments, was invested in by the following Plaintiffs: James Kern, Elise Kern, John Simmons, James Pridgen, Ginger Pridgen, Gary Knecht, David Tucker, John Phillips, and Michael Doughty. (Doc. 1, pp. 1–2). Again, whenever possible, this opinion will refer to these Plaintiffs collectively as the “Courtyard Plaintiffs.”

Defendant Deborah Taylor (“Defendant”) was a managing member of Sycamore Management Group (“Sycamore”) and a member of an entity known as Sytco, LLC (“Sytco”). Sycamore was the company hired to manage the two real estate projects.

B. Maple Village Apartments

1. Investment and Purchase

In 2006, Matthew Bostic (“Bostic”), Defendant's brother, approached certain MV Plaintiffs (or their members) and pitched the Maple Village Apartments project as an investment opportunity “that would yield high rates of return.” (Doc. 1, p. 7). Together with Sycamore, the MV Plaintiffs (except KIG) formed an entity known as Sycamore Investment Group—Maple Village, LLC (“Maple Village”) in November 2006 and invested $250,000 each.¹ Maple Village's members executed an operating agreement in March 2007 that appointed Defendant as Maple Village's manager and stated that the purpose of Maple Village was to acquire and operate the Maple Village Apartments. (Doc. 1, p. 6). Also in March 2007, Maple Village and KIG entered into a tenancy in common agreement to acquire the Maple Village Apartments.² Maple Village was appointed as the managing co-tenant of Maple Village Apartments. Maple Village, KIG, and Sycamore entered a management agreement in which Sycamore would be responsible for the management of the Maple Village Apartments. (Doc. 1, p. 6).

On March 22, 2007, Maple Village and KIG executed a promissory note in the amount of $10,825,000 to Barclays Capital Real Estate (together with its assignees, the “Lenders”) to finance the purchase of Maple Village Apartments. Maple Village and “Knecht”³ executed a loan agreement and mortgage in favor of the Lenders, and Defendant executed a guaranty of the note and loan agreement. (Doc. 1, pp. 7–8).

2. Management

Defendant allegedly failed to make distributions routinely or, when she did make distributions, failed to comply with Maple Village's operating agreement in doing so. (Doc. 1, p. 11). Defendant allegedly commingled funds belonging to Maple Village with funds that were received from other properties controlled or managed by Sycamore. The MV Plaintiffs assert that the other properties had different ownership structures than Maple Village and that the commingling of the funds deprived them of funds they were entitled to. The commingling transfers were not reflected in the financial reports Defendant provided to the MV Plaintiffs. (Doc. 1, p. 11).

Defendant also allegedly caused Maple Village to accept new members without notice to, or consent of, the other members of Maple Village. This was in violation of Maple Village's operating agreement. (Doc. 1, p. 11). Finally, Defendant allegedly caused Maple Village to enter at least two unapproved financial transactions outside the ordinary course of business that obligated Maple Village to Sycamore in the amount of at least $288,000. This was also in violation of Maple Village's operating agreement. (Doc. 1, p. 12).

3. Default and Foreclosure

On December 2009, the Lenders sent Defendant a notice of default indicating that Maple Village and KIG had failed to meet their payment obligations under the promissory note. On February 9, 2010, and on December 6, 2012, Defendant received demand letters from the Lenders' counsel, which indicated that the promissory note was still in default and requested immediate payment to cure. On January 15, 2013, the Lenders sent Defendant a letter indicating that it was accelerating the overall indebtedness on the promissory note. On February 12, 2013, the Lenders foreclosed on their mortgage and sold the Maple Village Apartments for $12,508,848. Defendant did not inform the MV Plaintiffs of any of the Lenders' communications or the foreclosure sale. (Doc. 1, p. 8).

4. Defendant's Post–Foreclosure Activity

Defendant allegedly “verbally misrepresented to MV Plaintiffs, including Kern, Simmons, and Pridgen,” that the Maple Village Apartments were continuing to operate as before “on numerous occasions leading up to and following the foreclosure sale[.]”⁴ (Doc. 1, p. 10).

Defendant allegedly made distributions to some of the MV Plaintiffs following the foreclosure of the Maple Village Apartments. On May 12, 2013, Defendant distributed $7,418.39 to Gary Knecht (pursuant to his membership in KIG) that was drawn from Sytco. Defendant also distributed $8,134 each to JS and JP, though the complaint is silent as to precisely when these were made. (Doc. 1, p. 10).

On August 12, 2013, Defendant allegedly provided “Plaintiff Kern” with a “wholly fabricated financial statement” purporting to show the activity of Maple Village Apartments through June 2013. Defendant provided similar materials to “Plaintiffs Simmons and Pridgen” at a subsequent meeting. (Doc. 1, pp. 9–10). The Plaintiffs assert this was intended to prevent the MV Plaintiffs from discovering that the property had been lost in foreclosure. (Doc. 1, p. 10).

C. Courtyard Apartments

1. Investment and Purchase

Bostic formed Sycamore Investment Group—Decatur, LLC (“Decatur LLC”)⁵ as its sole initial member on December 17, 2007, and assigned half his interest in Decatur LLC to Defendant the following day. Bostic pitched the Courtyard Apartments “as an investment opportunity that would yield high rates of return.” (Doc. 1, pp. 13–14). In April 2008, Bostic and Defendant sold membership interests in Decatur LLC to the Courtyard Plaintiffs in return for investments ranging from $50,000 to $400,000 each. The members of Decatur LLC executed its operating agreement appointing Defendant as its managing member, and stating that the purpose of Decatur LLC was to acquire and operate the Courtyard Apartments. Decatur LLC and Sycamore entered an agreement in which Sycamore would be responsible for the management of the Courtyard Apartments. (Doc. 1, pp. 12–13). Decatur LLC obtained a loan for $6,270,000 and reportedly contributed $2,167,000 of its own capital to finance the purchase of Courtyard Apartments. Decatur LLC purchased the Courtyard Apartments on April 28, 2008 for $7,950,000. (Doc. 1, p. 14).

2. Management

Defendant allegedly commingled Decatur LLC's funds with funds belonging to other entities such as Sycamore and Sytco, as well as funds from other properties that Sycamore managed. (Doc. 1, pp. 14 and 16). Defendant paid Sytco at times to perform the same property management services that Sycamore was being paid to perform. Defendant and Bostic “routinely and fraudulently misrepresented” the status of the Courtyard Plaintiffs' investments in Decatur LLC. (Doc. 1, p. 14).

After the Courtyard Apartments were purchased, Defendant allegedly added new members and capital to Decatur LLC, including Plaintiffs Michael Doughty and John Phillips, while simultaneously paying out capital to other members. This was done without the knowledge of the other Courtyard Plaintiffs and in violation of Decatur LLC's operating agreement. It also served to dilute the membership interests of the other Courtyard Plaintiffs. (Doc. 1, pp. 14–15).

Defendant allegedly misrepresented the source of a dividend payment made to Gary Knecht on May 12, 2013. The payment “purportedly represented profits related to the Courtyard Apartments and Maple Village Apartments,” but in reality was drawn from Sytco. (Doc. 1, p. 15). Defendant also allegedly embezzled funds from Decatur LLC. The statements from the Courtyard Apartments' account allegedly reflect that Defendant used Decatur LLC's funds to pay for personal expenses and assets, such as jewelry, out-of-town travel expenses, and tuition at show choir camp. (Doc. 1, pp. 15–16). Finally, Defendant allegedly refused to recognize contributions by Gary Knecht that were made after Decatur LLC purchased the Courtyard Apartments. Knecht apparently contributed $153,000, but Defendant only attributed $127,000 to his account. (Doc. 1, p. 16). The complaint alleges other contributions were made and not recognized by Defendant, but does not provide any specifics about them.

The Courtyard Apartments were sold at a foreclosure sale in January 2016. (Doc. 1, p. 17).

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