Smith v. Morse (In re Morse)

550 B.R. 338

In re: Vincent Perry Morse and Mary Lynn Morse, Debtors;Jared Smith Plaintiff

v.Vincent Perry Morse and Mary Lynn Morse, Defendants.

No. 1:13–bk–13188–SDR

Adversary Proceeding No. 1:13–ap–1117–SDR

United States Bankruptcy Court, E.D. Tennessee, Southern Division.

Signed May 24, 2016

Appearances for Jared Smith, Cara J. Alday, Susie Lodico, Patrick, Beard, Schulman & Jacoway, 537 Market Street, Suite 202, Chattanooga, TN 37402

Appearances for the Debtors, Buddy B. Presley, Jr., Presley Law Firm, 1384 Gunbarrel Road, Suite B, Chattanooga, TN 37421

TRIAL MEMORANDUM

Shelley D. Rucker, UNITED STATES BANKRUPTCY JUDGE.

Plaintiff Jared Smith (“Plaintiff” or “Smith”) has filed this adversary proceeding against defendant debtors Vincent Perry Morse (“Morse”) and Mary Lynn Morse (“Mrs.Morse”) (collectively “Defendants” or “Debtors”) seeking a judgment from this court that a debt in the amount of $100,000 owed by the Debtors jointly is non-dischargeable pursuant to 11 U.S.C. §§ 523(a)(2)(A), 523(a)(4), and 523(a)(6). He also seeks denial of both Debtors' discharges under 11 U.S.C. §§ 727(a)(3), 727(a)(4)(A), and 727(a)(5).¹ (Doc. No. 1, Complaint.)² The Plaintiff further seeks interest and attorneys' fees. The court finds that Morse has an obligation to pay the Plaintiff $100,000 plus attorney's fees and that this debt is not dischargeable. The amount of attorney's fees will be determined at a hearing to be set by separate order.

I. Jurisdiction

28 U.S.C. §§ 157 and 1334, as well as the general order of reference entered in this district, provide this court with jurisdiction to hear and decide this adversary proceeding. The Plaintiff's action regarding the dischargeability of particular debts and objections to discharge is a core proceeding. See 28 U.S.C. § 157(b)(2)(I), (J).

II. Facts

A. The Parties

The Debtors filed their Chapter 7 voluntary bankruptcy petition on June 28, 2013. (Bankr.Case No. 13–13188, Doc. No. 1.) The Debtors indicated on their petition that they were also doing business under the names “Deck Masters” and “North Chatt Enterprises.” (Id. at 1.) Morse is the president and CEO of Deck Masters. (Testimony of Vincent Morse, November 9, 2015, 1:58:32 (“V. Morse Test.”)) Deck Masters, Inc. was incorporated in 2002 as a remodeling and construction company specializing in decks, although Morse had worked for several years in the construction industry prior to incorporating Deck Masters. (Id. ) He is a 51% shareholder in Deck Masters. (Id. ) Morse paid most of the bills and had the authority to write checks for Deck Masters. He also worked to “raise capital” by pursuing “private investors.” (Id. ) Morse used accounts in the name of Deck Masters, Inc. and his own name interchangeably. (Id. at 3:47:34.)

Mrs. Morse is the corporate secretary of Deck Masters, Inc. (Doc. No. 1–1, Ex. B.) She testified that she is a 49% shareholder. (Testimony of Mary Lynn Morse, November 9, 2015, 1:27:19 (“M. Morse Test.”)) However, despite her role as corporate secretary, she has not maintained the minutes for any shareholder meetings, nor has she kept any records for Deck Masters. (Id. ) She was not on the Deck Masters account. (Id. at 1:30:23.) She did not balance the Deck Masters checkbook. (Id. ) She did not keep track of vendor invoices (Id. at 1:47:36), nor did she keep track of how any construction funds were used by Deck Masters. (Id. at 1:29:43.) She did, however, sign documents as a corporate officer or guarantor for the company's projects when Morse asked. (Id. at 1:36:54.) Morse testified that the corporate records for Deck Masters are unavailable due to the death of his accountant in 2012. (V. Morse Test., November 9, 2015, 2:01:57.)

The Plaintiff, Smith, owns two car wash businesses in Chattanooga, Tennessee, and one car wash business in Winchester, Tennessee. (Testimony of Jared Smith, November 9, 2016, 9:38:24 (“Smith Test.”)) He has owned car washes for about 13 years. (Id. ) He met Morse in 2004 when Morse frequented the Plaintiff s car washes. (Id. at 9:39:11.) He testified that he had been interested in the construction business from conversations with Morse in 2008–9. (Id. at 9:42:55.)

B. The “Investment”

Smith understood that Morse was in the construction business and began discussing his interest in the business with him in 2009 or 2010. (Id. at 9:42:55.) Morse and Smith went out to lunch or for a drink several times in the summer of 2012 to discuss a business relationship. (Id. at 9:43:08–46:28.)

In the summer of 2012, Morse and Smith began discussing specific projects. (Smith Test., November 9, 2015, 9:43:08.) Morse was building in East Ridge in a development referred to as Perry Village but talked to Smith about getting involved in a new project near downtown Chattanooga called Perry North. (Id. at 9:43:22–56.) Morse encouraged Smith to invest $100,000 in the Perry North project. (Id. at 9:45:55.) Morse entertained Smith at several meetings, lunches, drinks, and a cookout where he continued to promote the Perry North project. During this time Morse repeatedly told him that “things were going really well.” (Id. at 9:47:40.)

Morse also began sending Smith documents for loans to Deck Masters and for the Perry North project. On July 16, 2012, Morse sent Smith an email with a deed of trust and a note payable by Deck Masters and the Morses to Smith for $100,000. The note was to be secured by a lien on seven tracts of property in the Perry North subdivision. (Trial Ex. 5.) The note allowed Morse to transfer two of the lots to Smith in full satisfaction of the note obligation in the eleventh month if the transfer was acceptable to both of them. (Tr. Ex. 5 at 7; Smith Test., November 9, 2015, 9:55:55.) The note was to be signed by Deck Masters and by Mr. and Mrs. Morse individually. (Tr. Ex. 5 at 8.)

Smith told Morse that he was not sure about investing in Perry North, but Morse continued to pursue him for the investment every few days. (Smith Test., November 9, 2015, 9:57:54.) On July 30, 2012, Morse sent an email to Smith which stated:

Well things are happening fast my friend! I believe the banks are smelling a buyers[sic] market again which allows them to loosen the purse strings! I'm sending you the bank commitments and this will allow you to see I'm a great candidate for investment. Here is the loan commitment from both banks! Your investment would be the last one to put us over the top!! I'm so excited and I would love for you to experience the fruitfulness of North Chattanooga! Anyway haller[sic] at me and we can go to lunch.

Vincent Morse CEO

Perry Development/Deck Masters, Inc./Perry Holmes(sic), LLC

(Tr. Ex. 7, Email dated July 30, 2012, 10:41 a.m.) Morse referred to commitments from “both banks” but the email included the first page of only one commitment. It was dated July 17, 2012, from Gateway Bank & Trust to Deck Masters, Inc. for a commitment of $1,283,200 with $300,000 to be used for the development of phase II of Perry Village. (Id. ) The page did not indicate anything about the loan being secured by the lots in Perry Village. (Id. at 2.)

The next email arrived a few minutes later and said, “Take a chance on me. I won't let you down!!!!:))).” (Tr. Ex. 8.) Another copy of a note for $100,000 from Deck Masters and a deed of trust were attached to the email. (Id. )

Morse sent a third email a minute later which said only “!!!!!!!!” with a copy of a letter confirming that Deck Masters had applied to Cornerstone Community Bank for a loan for $200,000. (Tr. Ex. 6.) The letter from Cornerstone did not state what project was to be funded from the loan if it were approved. (See id. ) Nor did it state that Cornerstone Bank had committed to make the loan.

Morse continued to press harder and harder until Smith finally told him that he was not interested in investing in Perry North. (Smith Test., November 9, 2015, 10:05:45.) When Smith told Morse “he was not comfortable getting involved in a project that size,” Morse suggested that Smith put up the money to build a house in Perry Village. (Id. at 10:06:41.) Morse told Smith that if he put up $100,000, it would be used to build the house at 902 Geswein Court and that Morse would teach him the “building process.” (Id. at 10:06:41.) Morse told Smith that the house would cost $200,000 to build. (Id. at 10:10:04.) Morse never told Smith that he was going to get a construction loan secured by 902 Geswein Court. Smith testified that Morse did emphasize to Smith that the house could be built faster if Morse did not have to get a construction loan. (Id. at 10:10:28; Tr. Ex. 20, Plaintiff's Answers to First Set of Interrogatories 5, no. 9.) Morse also represented that repayment of Smith's loan was a “sure thing.” (Id. at 10:11:09.)

The written memorandum of their understanding is entitled “Installment Note with Balloon Payment” (“Note”). (Tr. Ex. 1.) It is dated August 29, 2012, for the amount of $100,000. The Note states in part that:

FOR VALUE RECEIVED, the undersigned promises to pay to the order of JARED SMITH, the sum of ONE HUNDRED THOUSAND Dollars ($100,000.00), PLUS ONE–HALF (1/2) OF THE NET PROCEEDS OF THE SALE OF THE PROPERTY COMMONLY KNOWN AS 902 GESWEIN COURT, 37412....

The net proceeds (the sales price fro[m] the property minus expenses) of the sale shall be the amount of money due to the Seller on a settlement statement for the sale of the property. The settlement statement must be approved by Jared Smith or his assigns. Payment in full must be mailed to Jared Smith or his assigns within three business days of the closing....

If the said property has not been sold within 365 days of the execution of this note, then a balloon payment of $120,000.00 is immediately due and payable from the undersigned to Jared Smith or his assigns to satisfy this note in full.

IT IS FURTHER AGREED that should any one of said installments remain due and unpaid for thirty (30) days, then the remaining installments of this note and interest may be treated as due and payable.

NO DEED OF

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