Se. Prop. Holdings, LLC v. Green (In re Jeffrey Stephen Lawrence Green Memory C. Green)

IN RE: JEFFREY STEPHEN LAWRENCE GREEN MEMORY C. GREEN DEBTORS

SOUTHEAST PROPERTY HOLDINGS, LLC PLAINTIFF v. JEFFREY STEPHEN LAWRENCE GREEN DEFENDANT

CASE NO. 17-10058

ADV. NO. 17-01017

UNITED STATES BANKRUPTCY COURT MIDDLE DISTRICT OF LOUISIANA

July 6, 2018

CHAPTER 7

MEMORANDUM OPINION

Plaintiff Southeast Property Holdings, LLC, ("SEPH") sued debtor Jeffrey Stephen Lawrence Green ("Green") to have a $41 million judgment debt declared nondischargeable. After narrowing issues for trial through summary judgment,¹ the court tried SEPH's sole remaining claim: that Green willfully and maliciously harmed SEPH when he had a family limited liability company, in violation of a federal district court's charging order, transfer $8,700 to pay an accountant for preparing tax returns for Green and several family businesses in which he owned interests. This memorandum opinion explains why $1,626.00 of the total sought is nondischargeable under 11 U.S.C. §523(a)(6).

I. FACTS

Few of the facts are in dispute.

Green and his father owned several businesses engaged in natural disaster remediation and had personally guarantied their debts to Vision Bank, SEPH's predecessor in interest. Afterthe companies defaulted, the United States District Court for the Middle District of Louisiana in 2014 rendered judgment for SEPH and against Green and others on the personal guaranties. With interest, the judgment now exceeds $41 million. The United States District Court for the Southern District of Alabama later issued a charging order to aid SEPH's efforts to collect the judgment.² The charging order directed thirteen Green companies³ "to report to Seph [sic] each time a distribution is made with respect to any transferable interest, listing the amount and time of all distributions made at the time or in connection with that distribution, and distribute to Seph [sic] any amounts that become due or distributable to J.S. Lawrence Green."⁴

SEPH's sole remaining claim against the debtor rests on a transfer by Green & Sons, LLC, in late 2017 that it contends violated the charging order. Green & Sons, LLC, is a Green family business that, though not one of SEPH's judgment debtors, was named in and subject to the charging order.

Faced with collection activity on the federal judgment, Green and his wife sought chapter 7 relief. However, the couple lacked current income tax returns, which are now required to file and maintain a bankruptcy case.⁵ Accordingly, Green asked Hartmann, Blackmon & Kilgore, the accounting firm that previously had rendered accounting services for Green family interests, to prepare the returns. Hartmann agreed to prepare state and federal tax returns for the Greensand the family companies in which Green owned an interest for $10,000.⁶ Green assembled that sum by combining $1,300 of his own exempt retirement funds with $8,700 he arranged to transfer from Green & Sons, LLC.⁷ The debtor admitted knowing that SEPH had procured the charging order when he directed a bookkeeper to transfer the money from Green & Sons, LLC, to Hartmann.⁸

The accounting firm allocated the $10,000 payment among its clients as follows:⁹

(1) $2,900 for preparing 2016 federal and state tax returns for Green & Sons, LLC;

(2) $1,524 for preparing 2016 federal and state tax returns for IED, LLC;

(3) $1,500 for preparing 2016 federal and state tax returns for International Equipment Distributors, Inc.;

(4) $1,150 for preparing 2016 federal and state tax returns for Green & Sons II, LLC; and

(5) $2,926 for preparing 2016 federal and state tax returns for Green and his wife.

II. PROCEDURAL HISTORY

SEPH's original complaint¹⁰ alleged that both debtors actually defrauded SEPH and, in the alternative, that they willfully and maliciously injured SEPH by withholding money it should have received pursuant to its charging order. Its amended complaint¹¹ alleged that Greenwithheld or diverted from SEPH proceeds of a sale by Green & Sons, LLC, again in violation of the charging order.

SEPH voluntarily dismissed its claims against co-defendant Memory C. Green at the January 31, 2018 hearing on the defendants' motion for summary judgment.¹² At that hearing, the court granted partial summary judgment on the defendants' motion but held that a dispute of material fact existed regarding dischargeability of Green's debt to SEPH for money that the debtor diverted from Green & Sons, LLC, to pay his accountants for tax return preparation.

Green was the sole trial witness.

III. BURDEN OF PROOF

SEPH bears the burden of proving by a preponderance of the evidence that Green's obligation is not dischargeable. Grogan v. Garner, 498 U.S. 279, 291, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). Exceptions to discharge must be strictly construed against the creditor and liberally construed in favor of the debtor. Hudson v. Raggio & Raggio, Inc. (Matter of Hudson), 107 F.3d 355, 356 (5th Cir. 1997).

IV. ANALYSIS

SEPH's claims that survived summary judgment are not premised on Green's having defrauded it or Vision Bank, its predecessor in interest, in connection with the bank's extension of credit to Green and his family businesses. Rather, its case rests entirely on alleged transfers Green caused to be made in violation of the charging order. Specifically, SEPH claims that the amounts Green & Sons, LLC, paid Green's accountant for preparing the debtors' personal 2016 federal and state tax returns¹³ should have been paid to it, and therefore comprise a debt that is nondischargeable under 11 U.S.C. §523(a)(2)(A) as one for "money, property, services, or[extensions] of credit to the extent obtained by false pretenses, a false representation, or actual fraud." It contends in the alternative that its claim for the transferred money is nondischargeable under Bankruptcy Code §523(a)(6), which excepts from discharge "any debt...for willful and malicious injury by the debtor to another entity or to the property of another entity."

A. Fraud

SEPH argues that the debtor's circumvention of the charging order constitutes actual fraud within the meaning of §523(a)(2)(A) and therefore renders him liable for a nondischargeable debt for the sums transferred from Green & Sons to the accounting firm. But the charging order does not prohibit Green & Sons or the other entities it names from conducting routine business; rather, it directs Green & Sons to pay SEPH any distributions the limited liability companies make with respect to Lawrence Green's interest, for application against the judgment debt.

"The key element of a nondischargeability claim for actual fraud under section 523(a)(2)(A) is the scienter requirement. The underlying conduct must involve 'moral turpitude or intentional wrong.' Thus, a debt arising from constructive fraud is not actual fraud and is dischargeable under section 523(a)(2)(A)." 4 COLLIER ON BANKRUPTCY ¶523.08[1][e] (2018). Examples of fraudulent conduct involving "moral turpitude or intentional wrong" would be embezzlement, Neal v. Clark, 95 U.S. 704, 709 (1877), and conspiring to defraud the United States, Jordan v. De George, 341 U.S. 223, 232 (1951). "[Actual fraud] 'consists in any kind of artifice by which another is deceived.... [It] implies moral guilt....'" Therrell v. Georgia Marble Holdings Corp., 960 F.2d 1555, 1563 (11th Cir. 1992).

SEPH at trial sought to prove that Green concealed funds in family entities as "retained earnings" for the LLCs, but offered no persuasive evidence that the entities were required todistribute the funds to the debtor or that the debtor concealed, much less received, those earnings in violation of the charging order. The evidence weighed against that finding. The defendant testified that he needed funds to pay his accountant to prepare the returns but had no other source of funds than the $1,300 in his retirement account.¹⁴ Green & Sons had enough money to cover the expense and so he directed the bookkeeper to send funds to cover the balance.¹⁵ Considering Green's testimony and other evidence, SEPH did not sustain its burden of proving that Green intended to deceive SEPH by directing the transfer. Indeed, Green testified that his motive was to fulfill his duties to be eligible to be a debtor and not to injure the plaintiff.¹⁶ SEPH argues that the transfer is akin to the debtor's scheme in Husky Intern. Elecs. v. Ritz¹⁷ because the defendant's pattern and practice of behavior indicates fraud. But SEPH overlooks the missing key element: scienter.

SEPH sought to impeach Green with his November 22, 2017 deposition testimony colorfully expressing a strong dislike of SEPH.¹⁸ However, Green's trial testimony was entirely credible, notwithstanding the debtor's obvious dislike for SEPH. It supports a finding that his sole goal in transferring $8,700 from Green & Sons to his accountant was to complete his tax returns to allow him to obtain bankruptcy protection.

SEPH did not carry its burden of proving under 11 U.S.C. §523(a)(2)(A) that Green actually intended to defraud it by causing Green & Sons to make the transfer.

B. Willful and Malicious Injury

The next issue is whether SEPH's claim for $8,700 may be nondischargeable on the basis that Green willfully and maliciously injured SEPH by transferring funds in violation of the charging order.

Section 523(a)(6) excepts from discharge "any debt...for willful and malicious injury by the debtor to another entity or to the property of another entity." In Matter of Miller, 156 F.3d 598 (5th Cir.1998), the Fifth Circuit considered the application of section 523(a)(6) in light of the Supreme Court's ruling in Kawaauhau v. Geiger, 523 U.S. 57, 118 S.Ct. 974, 978, 140 L.Ed.2d 90 (1998). Miller reasoned that the term "willful and malicious injury" is a single, unitary concept that is determined by a two-pronged test, namely, that "an injury is 'willful and malicious' where there is either an objective substantial certainty of harm or a subjective motive to cause harm." Miller, 156 F.3d at 606. The court later honed its analysis of ...