McAfee v. Harman (In re Harman)

623 B.R. 654

In the MATTER OF: Joseph H. HARMAN, Debtor.

J. Thomas McAfee III, in his capacity as Trustee of Marital Trust #2, Plaintiff,

v.Joseph H. Harman, Defendant.

Bankruptcy Case 11-67522-LRC

Adversary Proceeding No. 11-05534-LRC

United States Bankruptcy Court, N.D. Georgia, Atlanta Division.

Signed September 30, 2020

Jimmy L. Paul, Chamberlain, Hrdlicka, White et al, Atlanta, GA, for Defendant

IN PROCEEDINGS UNDER CHAPTER 7 OF THE BANKRUPTCY CODE

ORDER

Lisa Ritchey Craig, U.S. Bankruptcy Judge

Before the Court is the Partial Motion for Summary Judgment on Counts 3, 4, and 5 of Plaintiff's First Amended Complaint (Doc. 179) (the "Motion"), filed by Joseph H. Harman ("Defendant"). The Motion raises in connection with an amended complaint filed by Carolyn T. McAfee, Executor of the Estate of James T. McAfee ("Former Plaintiff"),¹ seeking to determine a debt nondischargeable under 11 U.S.C. § 523(a)² and objecting to the Defendant's discharge under § 727(a)(2). This matter constitutes a core proceeding, over which this Court has subject matter jurisdiction. See 28 U.S.C. §§ 157(b)(2)(I) ; 1334.

I. BACKGROUND

James T. McAfee ("McAfee") agreed to lend money to Carter Oak Crossing, Ltd. ("Carter Oak"), to refinance a shopping center in Gwinnett County, Georgia. (Harman Declaration, Doc. 179-1, at 59). On September 1, 1998, Defendant, as president of Carter Oak, signed a promissory note for $400,000.00 with an annual interest rate of 25% (the "Note"). (Note, Doc. 113-2, at 5). Defendant also signed a conditional guaranty that would make him liable under the Note if he engaged in "conversion, misappropriation, theft or embezzlement with respect to any money or other property of Maker by the undersigned in his capacity as an employee, officer, director, agent or employees of Maker" (the "Guaranty"). (Guaranty, Doc. 113-2, at 10).

A. The State Court Action

In 2002, Carter Oak defaulted on the Note. (Harman Declaration, Doc. 179-1, at 60). On April 12, 2004, McAfee initiated an action against Defendant individually in the State Court of Fulton County, Georgia (the "State Court Action"). (Id. at 60-61). McAfee alleged that Defendant violated the terms of the Guaranty and sought to recover damages for breach of contract, fraud, and attorney's fees. (Id. at 61). On November 3, 2004, months after initiating the State Court Action, McAfee passed away. (Id. ). Former Plaintiff, McAfee's wife and executrix of his estate, was subsequently substituted as plaintiff in the State Court Action. (Id. ).

On April 13, 2009, the State Court granted Former Plaintiff's motion for summary judgment "as to the issues of the Conditional Guaranty, attorney's fees and expenses of litigation" (the "State Court Judgment"). (State Court Judgment, Doc. 113-2, at 34). Former Plaintiff's claim for compensatory and punitive damages based on Defendant's alleged fraud remained pending. (Id. ).

On February 4, 2011, after Defendant's unsuccessful appeal, (Court of Appeals Decision, Doc. 113-2, at 39), the parties entered a "Joint Stipulation of Fact and Dismissal with Prejudice of Count II (Fraud) of Plaintiff's Amended Complaint" (the "Stipulation"). (Stipulation, Doc. 114, at 8-10). Pursuant to the Stipulation, the parties agreed that Defendant owed $5,256,929.06 on the Note and Guaranty and $143,371.28 for attorney's fees. (Id. at 8). The Stipulation also provided that:

[Former] Plaintiff hereby dismisses Count II of the Amended Complaint (for fraud) with prejudice, provided that the parties stipulate and agree that the dismissal of Count II ... shall not be admissible (on the grounds of res judicata, estoppel, or otherwise) in any proceeding regarding the validity or dischargeability of Count I (Guaranty) and Count III (Attorneys' Fees) in the [Former] Plaintiff's Amended Complaint.

(Id. at 9). At the same time, the State Court entered a "Final Judgment" in favor of Former Plaintiff, awarding damages pursuant to the Stipulation. (Final Judgment, Doc. 114, at 7).

B. Defendant's Bankruptcy

On June 11, 2011, Defendant filed a voluntary petition under Chapter 7 of the Bankruptcy Code (the "Petition Date"). (Case No. 11-67522-LRC, Doc. 1). Former Plaintiff filed a proof of claim in Defendant's bankruptcy case on October 11, 2011, claiming a debt of $5,369,083.73 based on the Guaranty (the "Debt"). (Case No. 11067522, POC 1-1). On September 19, 2011, Former Plaintiff filed this adversary proceeding objecting to Defendant's discharge and seeking a determination that the Debt is nondischargeable. (Initial Complaint, Doc. 1). The Initial Complaint was then amended on February 14, 2014 (the "Amended Complaint"). (Amended Complaint, Doc. 113).

Counts 1 and 2 of the Amended Complaint objects to Defendant's discharge under § 727(a)(2) based on Defendant's alleged attempts to conceal assets from his creditors by transferring money to his wife and entities under Defendant's control within a year before filing bankruptcy. (Amended Complaint, Doc. 113, at 34-39). Counts 3, 4, and 5 involve the same facts that formed the basis of the State Court Judgment and seek a determination that the Debt is nondischargeable pursuant to §§ 523(a)(2), (a)(4), and (a)(6). (Amended Complaint, Doc. 113, at 39-46; State Court Judgment, Doc. 113, at 28-32). Specifically, Count 3 seeks a determination that the Debt is nondischargeable pursuant to § 523(a)(2) and alleges that Defendant represented to McAfee that:

a. The Loan would be used only for certain expenses and costs related to the Refinancing;

b. That all Net Cash Flow from the Shopping Center would be paid to McAfee before other creditors; and

c. That no additional funds were needed to close the Refinancing.

(Id. at 39). The Amended Complaint further asserts that Defendant made these statements knowing that he intended to use the loan proceeds and the money generated from Carter Oak for himself and entities under his control and that McAfee would not have lent the money to Carter Oak had he known Defendant's actual intentions. (Id. at 40-41).

Count 4 seeks a determination of nondischargeability under § 523(a)(4), alleging that between 1998 and 2004, Defendant transferred the money generated by Carter Oak, which was promised to McAfee, to Defendant and entities under his control, thereby triggering the Guaranty. (Id. at 41-44). The Amended Complaint further alleges that Defendant held $31,276 in trust on behalf of McAfee and has failed to account for that money. (Id. at 44).

Finally, Count 5 seeks a determination that the Debt is nondischargeable pursuant to § 523(a)(6) because Defendant converted money that he knew was owed to McAfee and that such conversion amounts to a willful and malicious injury. (Id. at 44-46). In particular, the Amended Complaint claims that Defendant converted the money generated from Carter Oak to himself and that Defendant used the loan proceeds to pay himself and Randy Seckman, a Carter Oak partner, $42,500 and $50,000, respectively. (Id. at 44-45).

C. Mrs. McAfee's Transfer and Substitution

On March 24, 2018, Former Plaintiff filed a Motion to Substitute Party (Doc. 173) (the "Substitution Motion"), which stated that on January 11, 2017, Plaintiff transferred her interest in this case to her son, Thomas McAfee III, in his capacity as Trustee of Marital Trust #2 (the "Transfer"). (Id. ). The Court initially declined to grant the Substitution Motion over Defendant's objection without additional information about the Transfer. Former Plaintiff then filed two affidavits on October 9, 2018 (Docs. 186, 187) (the "Affidavits"). Although there was no indication that these Affidavits were filed in support of the Substitution Motion, the Court stated, through an order entered on February 5, 2020 (Doc. 204), that it would consider them in connection with the Substitution Motion. Then, after the parties had an opportunity to file additional briefing, the Court granted the Substitution Motion on September 29, 2020. (Doc. 223).³ As a result, Thomas McAfee III, in his capacity as Trustee of Marital Trust #2 ("Plaintiff"), is the only named plaintiff in this adversary proceeding.

Through the Motion, Defendant argues that the Transfer violated O.C.G.A. § 44-12-24, which prohibits the assignment of personal torts and fraud-based claims, and therefore, Plaintiff cannot pursue Counts 3, 4, and 5 of the Amended Complaint. (Doc. 179-1, at 41-52). Defendant further argues that, due to the Transfer, neither Plaintiff nor Former Plaintiff may enforce those claims. (Defendant's Post-Hearing Brief, Doc. 196, at 15). In response, Plaintiff contends that the Transfer was not an assignment, but rather an assent pursuant to McAfee's last will and testament ("McAfee's Will"),⁴ making O.C.G.A. § 44-12-24 inapplicable. (Response in Opposition, Doc. 184, at 2-9). Alternatively, Plaintiff contends that even if the Transfer constitutes an assignment, Counts 3, 4, and 5 of the Amended Complaint were assignable notwithstanding O.C.G.A. § 44-12-24, because those claims involve a right to property rather than a right of action for personal torts or for injuries arising from fraud. (Id. at 9-12). Finally, Plaintiff argues that even if Counts 3, 4, and 5 of the Amended Complaint were unassignable, Former Plaintiff can continue to pursue those claims because transfers in violation of O.C.G.A § 44-12-24 are void. (Id. at 13).

II. DISCUSSION

Pursuant to Federal Rule of Civil Procedure 56, made applicable to this proceeding by operation of Federal Rule of Bankruptcy Procedure 7056, the Court will grant summary judgment only if "there is no genuine issue as to any material fact" and "the moving party is entitled to a judgment as a matter of law." FED. R. CIV. P. 56(c) ; see also Hairston v. Gainesville Sun Publ'shg Co. , 9 F.3d 913, 918-19 (11th Cir. 1993). A fact is material if it might affect the outcome of a proceeding under the governing substantive law. Anderson v. Liberty Lobby, Inc. , 477 U.S. 242, 256, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). A dispute of...