Nissan Motor Acceptance Co. v. Bunn (In re Bunn)

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IN THE MATTER OF: TIMOTHY W. BUNN, Debtor(s).

NISSAN MOTOR ACCEPTANCE COMPANY LLC, f/k/a NISSAN MOTOR ACCEPTANCE CORPORATION, Plaintiff(s) v. TIMOTHY W. BUNN and MOXIE AUTO SALES, LLC d/b/a MOXIE MITSUBISHI, Defendants(s).

No. BK22-40994-TLS

Adv. No. A23-4004-TLS

United States Bankruptcy Court, D. Nebraska

September 9, 2024

CHAPTER 7

ORDER

Thomas L. Saladino Chief Judge

This matter is before the court on the plaintiff's complaint for determination of dischargeability under 11 U.S.C §§ 523(a)(2)(A), (4), and (6). Trial was held on June 4, 2024. Sheila Bentzen appeared for plaintiff Nissan Motor Acceptance Company LLC, f/k/a Nissan Motor Acceptance Corporation. Trev Peterson appeared for the defendants Timothy W. Bunn and Moxie Auto Sales, LLC, d/b/a Moxie Mitsubishi. The parties filed post-trial closing briefs and the matter is now ready for decision.

The debtor operated a car dealership in Lincoln, Nebraska, and obtained floor plan inventory financing from Nissan Motor Acceptance Corporation ("NMAC"). NMAC alleges the debtor and his dealership sold vehicles in breach of the financing agreement and failed to pay NMAC, and as a result owe NMAC more than $525,000 in principal and interest. NMAC contends the debtor made fraudulent misrepresentations and both defendants engaged in fraudulent actions that should except the debt from discharge.

For the reasons stated in this Order, judgment will be entered in favor of the plaintiff and against the defendants, although the amount of non-dischargeable debt owed by the debtor is less than the plaintiff seeks, as explained below.

Findings of Fact

Moxie Auto Sales, LLC, d/b/a Moxie Mitsubishi ("MAS") was an automobile dealership in Lincoln, Nebraska. It opened in 2016. Moxie Dealer Services, Inc. ("DS"), owned 67% of MAS. Christopher Investments, LLC, owned 33% of the interest in MAS and was not involved in operating the business. The debtor, Timothy Bunn, owned 100% of DS. He was the managing member of MAS and oversaw the dealership's day-to-day operations. Bunn testified that he has been involved in the automobile industry since 1986, in sales, finance, and owning and operating dealerships.

In 2019, NMAC agreed to finance MAS's acquisition of new and used vehicles for the dealership's inventory in what is known as floor plan financing, and entered into an Automotive Wholesale Financing and Security Agreement with MAS. In consideration for NMAC's agreement to provide funds, MAS gave NMAC a security interest in all of its assets other than real property. NMAC timely perfected its security interest by filing a UCC-1 financing statement with the Nebraska Secretary of State. DS, Bunn, and the owners of Christopher Investments each signed a personal guaranty of the debt to NMAC.

By the middle of 2021, MAS was experiencing financial difficulties. NMAC audited MAS's wholesale inventory three times between mid-July and mid-September 2021 and determined that MAS had breached the financing agreement by selling vehicles out of trust, that is, by failing to pay NMAC from the proceeds of vehicles MAS sold or leased, which MAS and Bunn admit to. Bunn testified MAS was unable to pay NMAC back for some of the vehicles sold because MAS had not received payment for them. During this time period, Bunn was also seeking non-floor-plan funding to keep the business going from sources such as merchant cash advance services.

NMAC followed up the audit findings with a written notice dated October 12, 2021, advising MAS that it was in default under the financing agreement and the loan would be terminated as of January 14, 2022, and must be paid in full by that date. Upon receiving this notice, Bunn began searching for other financing options and initiated arrangements to transition MAS's floor plan financing to a lender called NextGear. That deal apparently fell through when NMAC refused to authorize the proposed transfer. Bunn testified that it was never his intention to double floor plan the vehicles, but rather to have NextGear buy out NMAC's interest in the floor planned vehicles. Nevertheless, records show that both NMAC and NextGear claimed security interests in some of the same vehicles as collateral for MAS's floor plan financing. After the notice of default but before the loan termination date, NMAC continued to advance floor plan funding to MAS. MAS also continued to sell vehicles out of trust.

In January 2022, NMAC took further steps to protect itself after discovering additional events of default under its financing arrangement. First, it demanded payment from MAS for the vehicles sold out of trust by letter dated January 5, 2022. Then, when payment was not made, NMAC filed a state court lawsuit against MAS and the individuals who had personally guaranteed the loan, including Bunn. On January 27, 2022, the state court granted NMAC a temporary order of replevin ordering MAS and Bunn to hold in their possession, unimpaired and unencumbered, all of NMAC's collateral.

Despite receiving the temporary order, MAS continued to sell vehicles that were included in NMAC's collateral but did not remit the proceeds to NMAC. In early March 2022, the state court found the defendants to be in contempt because they had willfully violated the temporary replevin order by continuing to sell and otherwise dispose of vehicles in violation of that order. The state court sentenced Bunn to 30 days in jail but suspended the sentence and offered the defendants the option of purging the contempt by paying $311,125.00 to NMAC within 10 days. It is not clear from the order how the state court calculated that amount, but according to NMAC, that sum represented the approximate amount due just for the vehicles sold in violation of the temporary order. To purge themselves of the contempt, MAS and Bunn timely surrendered a vehicle and paid the balance due under the contempt order. The state court also authorized NMAC to remove its vehicle collateral from MAS's lot, and MAS ceased operations a few weeks thereafter in April 2022.

In November 2022, Bunn filed the underlying Chapter 7 bankruptcy petition, listing the MAS entities as business names he had used. In February 2023, NMAC filed this adversary proceeding alleging fraud, embezzlement, and willful and malicious injury by the debtor.

Applicable Law and Discussion

1. Is the debtor liable for the LLC's actions?

Generally, courts may employ a two-step analysis to determine whether a complaint objecting to dischargeability is proper. "[F]irst, the courts determine the validity of the debt under applicable law; and second, the courts determine whether the debt should be excepted from discharge under section 523. This analysis appears most appropriate where the underlying debt is disputed[.]" Takuski v. Kurtz (In re Kurtz), 604 B.R. 549, 556 (Bankr. D. Neb. 2019) (citations omitted).

Because the parties here dispute whether the debtor is liable for the debt owed by MAS to NMAC, that two-step analysis theoretically is applicable in this case. However, in practice, the second step of the analysis is subsumed by the initial inquiry into Bunn's liability because the elements are the same under Nebraska law and bankruptcy law.

NMAC argues, first, that the bankruptcy court should hold Bunn personally liable for MAS's debt either by piercing MAS's corporate veil or by finding that he participated in the conversion of NMAC's collateral.

While MAS is a limited liability company and not a corporation, its "corporate veil" nevertheless can be pierced to prevent fraud or injustice. E & A Consulting Grp., Inc. v. World Baseball Vill. Mgmt., LLC, No. A-12-844, 2013 WL 4437312, at *4 (Neb. Ct. App. Aug. 20, 2013). Whether and how to pierce the corporate veil is a matter of state law. Epps v. Stewart Info. Servs. Corp., 327 F.3d 642, 649 (8th Cir. 2003). A creditor seeking to pierce the corporate veil bears the burden of showing by a preponderance of evidence that the corporate entity must be disregarded to prevent fraud or injustice to the creditor. J.L. Brock Builders, Inc. v. Dahlbeck, 391 N.W.2d 110, 115 (Neb. 1986).

In addition,

Under Nebraska law, "individual members and managers of a limited liability company are generally not liable for a debt, obligation, or liability of the company." Thomas & Thomas Ct. Reps., L.L.C. v. Switzer, 283 Neb. 19, 810 N.W.2d 677, 685 (2012). But "where a tort action is brought against an officer or director, there is no need to pierce the corporate veil and liability will be imposed if the elements of the tort are satisfied." Huffman v. Poore, 6 Neb.App. 43, 569 N.W.2d 549, 557 (1997); Wolf v. Walt, 247 Neb. 858, 530 N.W.2d 890, 893, 896-98 (1995) (refusing to pierce the corporate veil and then analyzing whether the president and shareholder of a corporation was liable for "constructive fraud committed by the corporation").

Lund-Ross Constructors, Inc. v. Buchanan (In re Buchanan), 31 F.4th 1091, 1095 (8th Cir. 2022) (emphasis added).

"[O]fficers and directors of a corporation may be held individually liable for personal participation in tortious acts even though they derived no personal benefit, but acted on behalf of, and in the name of, the corporation and the corporation alone was enriched by the acts." Huffman v. Poore, 569 N.W.2d 549, 559 (Neb. Ct. App. 1997).

In the present case, NMAC has alleged a cause of action against Bunn for fraudulent misrepresentation under Nebraska law. NMAC argues that Bunn is personally liable because he participated in MAS's conversion of NMAC's collateral. As stated in the Buchanan case, it is unnecessary to pierce the corporate veil if the elements of the tort of fraudulent misrepresentation are proven.

2. Fraudulent misrepresentation under Nebraska law and false representations under 11...