McShannon v. Kelly (In re Kelly)

1

In the Matter of: ARNOLD J. KELLY, JR. and CAMILLE L. BREITKREUTZ, Debtors.

JEFFREY McSHANNON, Plaintiff, v. ARNOLD J. KELLY, JR., Defendant.

No. BK22-80793

Adv. Pro. 22-8019

United States Bankruptcy Court, D. Nebraska

January 30, 2024

Chapter 13

ORDER DENYING OBJECTION TO DISCHARGE AND GRANTING OBJECTION TO CLAIM

Brian S. Kruse, Bankruptcy Judge

The plaintiff, Jeffrey McShannon, seeks a judgment against the debtor, Arnold Kelly, Jr. for $117,000, which he contends is excepted from discharge under 11 U.S.C. § 523(a)(2)(A). McShannon also filed a claim in the debtors' bankruptcy case, to which the debtors objected. McShannon appeared pro se. The debtors appeared through their counsel, Ronald Hunter. The matters were tried together. Because McShannon did not establish the existence of the debt and did not meet his burden of proof under § 523(a)(2)(A), judgment is entered in favor of the defendant on plaintiff's complaint, and the debtors' objection to claim is granted.

Findings of Fact

McShannon's Testimony

McShannon's stepdaughter is Kelly's wife. McShannon contends Kelly approached him at a graduation party for a family member in early 2018. At the party, Kelly represented he had a friend who worked at a bank. The bank was selling foreclosed real estate. McShannon, who had significant experience with real estate, including purchasing, owning, and managing rental properties, and working as a general contractor, was interested. Kelly represented if each contributed $75,000 they could purchase fifteen houses and three lots. Kelly would handle everything and orally guaranteed McShannon's investment.

McShannon paid Kelly $25,000 as a down payment on April 17, 2018. By May 17, he paid Kelly a total of $71,000.^[1] After the initial real estate offering, Kelly represented the banker offered to sell them three more houses and twenty more lots for $20,000 per person. McShannon agreed and paid Kelly $26,000 total in September and October.^[2] At some point Kelly represented they could obtain twenty more houses and seven more lots for $75,000 each. McShannon did not have the money. Kelly suggested McShannon pay what he could. Kelly agreed to cover the rest. McShannon paid Kelly at least $7,500 in cash and $11,000 by check in early February 2019.^[3]

McShannon requested his money back several times in 2018 and 2019 but did not press the issue because he was busy working on his own rental properties over the months. At some point, Kelly told McShannon the money was invested in commercial real estate and inventory, not houses. The final time McShannon demanded his money, Kelly told McShannon that McShannon would not be repaid because the statute of limitations ran on the debt. Kelly then thanked McShannon for "contributing to my retirement fund".

McShannon supported his claims with paper receipts for his cash payments signed by Kelly. In addition to amounts, the receipts contain references including "houses investments", "investment houses" "property", and "investment". McShannon also offered a fill-in-the-blank power of attorney document with his own handwriting added. The document is signed by both McShannon and Kelly and is dated February 3, 2019. In the document, McShannon purports to give Kelly the power:

To purchase 70 properties with my 117,500.00 investment. Then sale 44 properties at 820 m. Remainder of properties to be split 50/50 along with money from sale split 50/50. I am promised to walk away with 375 M^[4] cash and 13 propert [sic]

….

Completion date 2-14-2019 of property sales and divide of profit or now

(Doc. #44).

Kelly's Testimony

Kelly admits receiving $104,500 from McShannon. They agree on little else. Kelly contends they never agreed to purchase real estate. Kelly would not purchase real estate because he has no experience with it. He knows nothing about investing in or flipping houses. Kelly's business was personal property. From 2010 through 2021 Kelly bought and sold personal property he obtained from estate sales and foreclosed storage lockers. Kelly operated his business online and out of a warehouse. McShannon knew of Kelly's business and wanted to participate. They agreed to purchase the contents of storage lockers, pooling their money, and dividing the contents. They attended auctions of over 100 units together in 2018 and 2019. To support his claims, Kelly offered photographs of his leased business premises, of items of personal property purchased, and of McShannon at storage units.

Kelly explained the references like "houses investments" on the cash receipts. They referred to investments McShannon was making in his own houses and rental properties. McShannon purchased storage lockers, in part, to find personal property to improve or furnish his rental properties. McShannon received tools, tile, and sinks for the rental properties furniture and other property he used for the rental properties and his own house, and other property he thought he could resell. In rebuttal, McShannon contends he did not need personal property.

Kelly admits his signature is on the power of attorney. He contends it was a form they discussed early in their relationship, but never used. He contends McShannon added the handwritten text after the fact. The original document was in the possession of McShannon during the trial.

Conclusions of Law

Whether McShannon has a claim in the debtors' bankruptcy case is primarily a question of state law. McShannon timely filed his claim. A filed proof of claim is prima facie valid. See Dove-Nation v. eCast Settlement Corp. (In re Dove-Nation), 318 B.R. 147, 152 (B.A.P. 8th Cir. 2004). McShannon's proof of claim states it is on account of "money lent".

To defeat the claim, the debtors must establish an exception to allowance under 11 U.S.C. § 502(b). The debtors assert there is no underlying basis for the debt. See 11 U.S.C. § 502(b)(1) (stating a claim is allowed except to the extent "such claim is unenforceable against the debtor and property of the debtor, under any agreement or applicable law for a reason other than because such claim is contingent or unmatured."). Once the debtors produce evidence to rebut the claim, "the burden of proof shifts to the claimant to produce evidence establishing the validity of the claim." Consumers Realty & Dev. Co., Inc v. Goetze (In re Consumers Realty & Dev. Co., Inc.) 238 B.R. 418, 423 (B.A.P. 8th Cir. 1999) ("Thus, once an objection is made to the proof of claim, the ultimate burden of persuasion as to the claim's validity and amount rests with the claimant.").

McShannon also seeks a money judgment against Kelly. As grounds for the judgment, during trial McShannon stated it was on account of a breach of contract. But McShannon cannot recover a judgment for breach of contract in the adversary proceeding. He did not plead a breach of contract claim. "A party is no more entitled to recover upon a claim not pleaded than he is to recover upon a claim pleaded but not proved." Armstrong Cork Co. v. Lyons, 366 F.2d 206, 208 (8th Cir. 1966). Instead, McShannon pled a claim for fraud in connection with a contract, which is separate from a claim for breach.

A party who fraudulently induces another to contract and then also refuses to perform the contract commits two separate wrongs, so that the same transaction gives rise to distinct claims that may be pursued to satisfaction consecutively.

Nathan v. McDermott, 945 N.W.2d 92, 106 (Neb. 2020) (citation omitted).

In the adversary proceeding McShannon seeks to have his claim excepted from discharge, which is a separate consideration. An action under state law to establish a debt is separate from a determination of the dischargeability of the debt in bankruptcy. Tatge v. Tatge (In re Tatge), 212 B.R. 604, 609 (B.A.P. 8th Cir.1997).

The bankruptcy discharge is the vehicle through which the Bankruptcy Code gives honest but unfortunate debtors a fresh start. See McDermott v. Petersen (In re Petersen), 564 B.R. 636, 644 (Bankr. D. Minn. 2017). The Code contains various exceptions from discharge. These exceptions are "narrowly construed against the creditor and liberally against the debtor, thus effectuating the fresh start policy of the Code." Willmar Elec. Servs. v. Dailey (In re Dailey), 592 B.R. 341, 349 (D. Neb. 2018) (citing Community Fin. Grp. v. Fields (In re Fields), 510 B.R. 227, 233 (B.A.P. 8^th Cir. 2014)). McShannon asserts his claim is excepted from discharge under 11 U.S.C. § § 523(a)(2)(A). Under § 523 a debtor is not discharged from a debt "to the extent obtained by false pretenses, a false representation, or actual fraud." 11 U.S.C. § 523(a)(2)(A). McShannon alleged all three occurred.^[5] The plaintiff has the burden to prove each element of a claim under § 523 by a preponderance of the evidence. Willmar Elec. Servs., 592 B.R. At 349.

The three grounds under § 523(a)(2)(A) are similar but are not identical. A false pretense involves an "implied misrepresentation or conduct intended to create and foster a false impression." Merchants Nat'l Bank v. Moen (In re Moen), 238 B.R. 785, 791 (B.A.P. 8th Cir. 1999). To prevail on a claim of false representation, the plaintiff must establish:

(1) the debtor made a representation; (2) the debtor knew the representation was false at the time it was made; (3) the representation was deliberately made for the purpose of deceiving the creditor; (4) the creditor justifiably relied on the representation; and (5) the creditor sustained the alleged loss as the proximate result of the representation having been made.

In re Dailey, 592 B.R. at 349. "[A] debtor's promise related to a future act can constitute a false representation where the debtor possesses no intent to perform the act at the time the debtor's promise is made." Id. at 350.

...