Popescu v. Cockey (In re Cockey)

622 B.R. 178

IN RE: Robert Glen COCKEY, II, Debtor.

Stefan Popescu

and

Gough Street Liquor, LLC, Plaintiffs,

v.Robert Glen Cockey, II, Defendant.

Bankr. Case No. 17-18561-NVA

Adv. Pro. No. 17-00360-NVA

United States Bankruptcy Court, D. Maryland, (Baltimore Division).

Signed September 30, 2020

Filed October 01, 2020

Michael Stephen Myers, The Law Office of Michael S. Myers, LLC, Baltimore, MD, for Plaintiff.

Terrence M. Nolan, Law Offices of Terrence M. Nolan, Baltimore, MD, for Defendant.

MEMORANDUM DECISION REGARDING COMPLAINT TO DETERMINE DISCHARGEABILITY OF DEBT

NANCY V. ALQUIST, U.S. BANKRUPTCY JUDGE

In this case, the debtor is a young man who, right out of college, entered into an agreement to operate and manage a tavern in Baltimore, Maryland. The other party to this business agreement owned the business and the real property housing the tavern. The parties envisioned that, as payment for his services in running the tavern, the debtor would be entitled to its "profits." Unfortunately for everyone, the management agreement governing their dealings failed to define adequately the meaning of the term "profits." Inevitably, the parties disagreed on what the term means. After the debtor filed this bankruptcy case, his former colleague in the tavern business made a claim against him for a debt which he alleges was incurred by the debtor's false representations, fraud, embezzlement, or larceny and is thus nondischargeable under Section 523(a)(2) and (a)(4) of the Bankruptcy Code. The Court finds that the plaintiffs have failed to establish a case for nondischargeability, and enters judgment for the Debtor.

PROCEDURAL POSTURE

This matter is before the Court pursuant to the Complaint to Determine Dischargeability of Debt (the "Complaint") filed by plaintiffs Stefan Popescu ("Mr. Popescu") and Gough Street Liquor, LLC ("Gough Street" and, together with Mr. Popescu, the "Plaintiffs"). [ECF No. 1], Through this adversary proceeding, the Plaintiffs are seeking a determination of nondischargeability under 11 U.S.C. §§ 523(a)(2) (false representation), 523(a)(4) (embezzlement), and/or 523(a)(4) (larceny) of a debt owed by debtor/defendant Robert Glen Cockey, II (the "Debtor").¹

In his Answer to Adversary Complaint to Determine Dischargeability of Debt (the "Answer"), the Debtor controverted most of the material allegations against him and consented to entry of final orders and judgment by this Court.² [ECF No. 7], Various pre-trial proceedings were held, and discovery was taken. Before trial, the Debtor consented to the entry of partial summary judgment that "the amount of damages, if not subject to discharge, are determined to be $82,998.84." See Defendant's Consent to Entry of Partial Summary Judgment, [ECF No. 44], and Order Granting Motion for Partial Summary Judgment (the "Consent Judgment"). [ECF No. 45].

An evidentiary trial was held in this matter (the "Trial"), at which the Court heard testimony from the Debtor, Mr. Popescu, Robert Cockey, Sr. ("Mr. Cockey, Sr."), took into evidence the facts stipulated to in the Joint Stipulation of Undisputed Facts (the "Stipulation of Facts") submitted by the Parties, and various exhibits, admission of which was stipulated to by the Parties, and heard closing arguments. [ECF No. 60; Transcr.³ at 11:25-12:7]. At the conclusion of the Trial, the Court requested (i) supplemental briefs from the Parties and (ii) proposed findings of fact and conclusions of law from the parties. [ECF Nos. 63-65]. These post-trial submissions were made, and the Court took the matter under advisement. This memorandum decision constitutes the Court's findings of fact and conclusions of law pursuant to Bankruptcy Rule 7052.

JURISDICTION

The Court has jurisdiction over this proceeding pursuant to 28 U.S.C. § 1334. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(1).

FINDINGS OF FACT

Based upon the record, including the Stipulation of Facts, and giving due regard to the Court's ability to assess the credibility of witnesses, the Court finds as set forth below. To the extent there was a conflict in the evidence, the Court resolves such conflict consistent with these findings.

1. Gough Street is a company owned entirely by Mr. Popescu. Stipulation of Facts at ¶ 1. Gough Street operates a restaurant and bar in Baltimore, Maryland. Id. at ¶ 2.

2. Pursuant to the Lease Agreement dated as of February 1, 2014 (the "Lease") between 1901 S. Gough Street, LLC ("Landlord") as landlord, and Gough Street, as tenant, Gough Street leased the premises known as the Commercial Space Within the Building known as 1901 Gough St., Baltimore, Maryland 21231 (the "Premises"). Id. at ¶ 3; Ex. 11, Lease at p. 1. The Lease is signed by Mr. Popescu as "owner" of the Landlord and as "owner" of Gough Street. Id. at p. 22.

3. The Lease provided for "base rent" in the amount of $2,000 per month, subject to an annual compounding escalation set forth in the Lease, beginning on the first anniversary of the "Lease Commencement Date."⁴ Ex. 11, Lease at ¶ 1. Gough Street's obligation to pay "Rent" commenced two months after the Lease Commencement Date, and Rent was due on the first day of each month. Id. at p. 1. The term "Rent" includes base rent only. Id. Gough Street was also obligated to pay additional amounts, including taxes, insurance, and certain utilities as "Additional Rent." Ex. 11, Lease at ¶¶ 4 & 6.

4. Gough Street, Mr. Popescu, and the Debtor are parties to a Management Agreement dated as of March 1, 2014 (the "Management Agreement"). Stipulation of Facts at ¶ 4, Ex. 1, Management Agreement. The Management Agreement governed the Plaintiffs' and the Debtor's rights and obligations with respect to the operation of the "Tavern"⁵ on the Premises. According to its terms, the Management Agreement commenced on March 1, 2014 and was scheduled to terminate on February 28, 2024 (the "Operating Term"). Stipulation of Facts at ¶ 4; Ex. 1, Management Agreement at ¶¶ 1 & 2.⁶

5. Pursuant to the Management Agreement, the Debtor was engaged "as the exclusive operator of the Tavern during the Operating Term." Ex. 1, Management Agreement at § 3; Stipulation of Facts at ¶¶ 6, 8, & 61.

6. The Debtor's job as operator of the Tavern was his first job post-college. Cockey Dep.⁷ 170:2-6. He had never owned, operated, or managed a restaurant or other business prior to the Tavern. Cockey Dep. at 170:2-6; Transcr. at 33:9-10; Stipulation of Facts at ¶ 10. His only prior restaurant employment experience was as a bartender and server. Cockey Dep. at 170:4-6. Although not a party to the Management Agreement, Mr. Cockey, Sr. was the individual with experience, upon whom both Mr. Popescu and the Debtor relied for advice and guidance in connection with the Tavern. Transcr. at 81:9-82:4; Popescu Dep.⁸ 52:17-53:3; 91:1-91:18.

7. As the operator, the Debtor was responsible for, among other things, all expenses of operating the Tavern, which included all expenses related to compensation of employees, rent, sales taxes, cost of alcoholic beverages, utility charges related to the Premises, cleaning costs for the Premises, repairs of equipment, and insurance. Ex. 1, Management Agreement at §§ 3, 5, 7, 8; Stipulation of Facts at ¶ 2; Transcr. at 37:6-9. These expenses included Rent and "triple net" expenses related to the Lease, i.e. real estate taxes, building insurance, and maintenance. Stipulation of Facts at ¶ 15 and 16; Ex. 1, Management Agreement at §§ 3, 7-9, 21.

8. In exchange for his operation of the Tavern, the Debtor was entitled to retain all profits from the operation of the Tavern. Ex. 1, Management Agreement at § 3(e) (stating "All profits shall inure to the benefit of the [Debtor]"); Stipulation of Facts at ¶¶ 13, 62, 66 The Management Agreement further states: "Profits. The [Debtor] shall be entitled to all profits after payment of all expenses. The [Debtor] shall pay any and all expenses with regard to the operation of the business at the location and add the [Plaintiffs] on all insurance policies as an additional insured until the transfer of the Liquor License." Ex. 1, Management Agreement at § 21. The Parties stipulated that "[t]he term ‘Profits’ was not defined in the Management Agreement." Stipulation of Facts at ¶ 63.

9. Gough Street was the "controlling party of the liquor license, which gave the Debtor the right to operate and redeem all profits of the business." Stipulation of Facts at ¶ 5.

10. Under the Management Agreement, the Debtor was required to keep "adequate books of account and other records reflecting the results of operations at the [T]avern," and the Plaintiffs had "full access to such books and records for examination, audit, inspection, transcription." Ex. 1, Management Agreement § 6.1; Stipulation of Facts at ¶ 20. The Debtor was required to provide copies of the "monthly retail sales tax returns for the prior calendar month, along with a copy of the check, draft, electronic funds transfer notice, and/or other evidence of tax payment by the 25th of day of each calendar month." Ex. 1, Management Agreement at § 6.2; Stipulation of Facts at ¶ 21.

11. Mr. Cockey, Sr. maintained the books and accounting records for the Tavern. Stipulation of Facts at ¶ 27; Transcr. at 139:21-140:13. The Debtor did not review the bookkeeping ledger maintained by Mr. Cockey Sr. for accuracy. Stipulation of Facts ¶ 28. The Debtor did not keep an accounting of his personal expenses. Stipulation of Facts at ¶ 40; Cockey Dep. at 209:11-19.

12. The Tavern used a point of sale system called a "Micros System" into which the bartender or server would enter a guest's order, the system would provide the order information for the kitchen, and the system would be used to "cash out" the check. Transcr. at 33:19-34:3. The Micros System would track sales for the day and the month; however, there would be some discrepancy between the amount recorded in Micros Systems and the actual amount deposited because, among other things, Micros Systems did not separately account...