Tavadia Enters., Inc. v. Mitchell (In re Mitchell)

618 B.R. 199

IN RE: Sheri A. MITCHELL, Debtor

Tavadia Enterprises, Inc. and Behram Tavadia, Plaintiffs

v.Sheri A. Mitchell, Defendant

Case No. 16-33067

Adv. No. 16-03075

United States Bankruptcy Court, W.D. Kentucky, Louisville Division.

Signed June 1, 2020

Elizabeth Darling Edmondson, The Zoppoth Law Firm, Scott P. Zoppoth, Louisville, KY, for Plaintiffs.

Sheri A. Mitchell, Charity Bird Neukomm, Kaplan & Partners, LLP, Louisville, KY, Pro Se.

Nolia Gayle Batey, Louisville, KY, for Defendant

MEMORANDUM OPINION

Thomas H. Fulton, United States Bankruptcy Judge

This matter is before the Court on the Motion for Summary Judgment of the Plaintiffs, Tavadia Enterprises, Inc. ("TEI") and Behram Tavadia ("Tavadia," and together, "Plaintiffs"), and on Plaintiffs' prior Motion to Determine Nondischargeability of Debt. Plaintiffs seek to deny a discharge from Sheri A. Mitchell ("Mitchell"), the defendant in this adversary proceeding and debtor in the underlying bankruptcy case, for debts owed to them under a State Court judgment against Mitchell finding her liable for fraud in connection with business loans Plaintiffs lent her. Plaintiffs seek to deny discharge of this debt pursuant to 11 U.S.C. §§ 523(a)(2)(A), which denies discharge of any debt obtained by "false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition," and §§ 523(a)(4) and 523(a)(6), which deny discharge of debts incurred by fraud or defalcation while acting in a fiduciary capacity, embezzlement and larceny; and by willful and malicious injury of the debtor, respectively.¹

The Court has jurisdiction over this adversary proceeding pursuant to Section 523 of the Bankruptcy Code and 28 U.S.C. § 1334. This case is a core proceeding pursuant to 28 U.S.C. §§ 157(b)(2)(I) and 157(b)(2)(J). For the reasons set forth below, the Court finds that the January 31, 2019 Jefferson Circuit Court judgment against Mitchell did not decide the same issues as those raised by Plaintiffs' claims under the Bankruptcy Code, and so Plaintiffs have not proved those claims by way of issue preclusion and their Motion for Summary Judgment is denied.

FACTUAL AND PROCEDURAL BACKGROUND

The Court will note at the outset that much of the factual background recited in this opinion has been incorporated from the findings of the Jefferson Circuit Court and the Kentucky Court of Appeals in their respective decisions about the same transactions and circumstances that form the basis of this adversary proceeding. See Tavadia v. Mitchell , 564 S.W.3d 322, 329 (Ky. Ct. App. 2018) (reviewing The Circuit Court, Jefferson County, Mary M. Shaw, J., NO. 15-CI-005387 ). The dispute arose out of a business agreement between Plaintiffs and Defendant, whereby Plaintiffs lent money to Mitchell's business called One Sustainable Method Recycling, LLC ("OSM"). Plaintiffs lent $40,000 to OSM in June 2013, an additional $12,000 in the fall of 2014, and another $250,000 in February 2015 pursuant to a loan agreement that was signed at that time (the "2015 Agreement"). The parties agreed that Tavadia would be repaid $1000 per month, and, in the 2015 Agreement, that Tavadia would receive a 25% ownership in OSM and 25% of its net monthly profits. Tavadia also helped OSM secure an additional $150,000 loan from Louisville's Metropolitan Business Development Corporation ("METCO") by agreeing to act as a personal guarantor for the METCO loan to OSM.

Despite receiving these loans, OSM's financial condition deteriorated. Between April 2014 and September 2015, OSM incurred $14,540 in overdraft charges on its bank account, had not paid off its loans from Plaintiffs, and had not realized any profits. In August 2015, OSM obtained a $20,000 loan from Fundworks, LLC. Mitchell caused OSM to obtain this loan by signing the loan application and a personal guaranty with both her signature and Tavadia's signature. By October 2015, OSM had ceased operations and Mitchell sold some of OSM's equipment for a total of $46,899. Of that, $24,929 went into Mitchell's personal bank account and $21,970 went into OSM's account.

On October 21, 2015, Tavadia filed an action in the Jefferson Circuit Court against OSM and Mitchell, asserting claims for breach of contract, breach of fiduciary duty, misappropriation and conversion of company assets, and failure to allow access to company records. Tavadia later amended his complaint to add claims for fraud, pointing to bank record evidence showing Mitchell had paid for extravagant personal expenses such as massages, yoga and gym memberships, and jewelry out of OSM's bank account. The fraud claim also included forgery, stemming from Mitchell signing Tavadia's name on the Fundworks loan application and personal guaranty.

On October 7, 2016, Mitchell filed a voluntary petition for Chapter 7 bankruptcy relief in this Court. On October 19, Plaintiffs filed their Complaint with this Court, giving rise to this adversary proceeding. Because the Jefferson Circuit Court action was still pending at that time and dealt with issues parallel to this adversary proceeding, the parties tendered an Agreed Motion for Relief from Stay to allow the Jefferson Circuit Court action to continue, and this Court entered an Order granting that motion on December 13, 2016.

The Jefferson Circuit Court conducted a bench trial in its case on May 26, 2017. On August 4, 2017, the Circuit Court entered an opinion and order dismissing all claims against Mitchell. Tavadia appealed that opinion to the Kentucky Court of Appeals. A trial was held in that appeal on October 19, 2018, and the Court of Appeals reversed the order of the Circuit Court in an opinion titled Tavadia v. Mitchell , 564 S.W.3d 322 (Ky. Ct. App. 2018). In its reversing opinion, the Court of Appeals afforded the Jefferson Circuit Court "the deference due the trial court's factual findings," and analyzed the Circuit Court's legal conclusions de novo , pursuant to Kentucky law. Id. at 326. The Court of Appeals found that the Circuit Court erred in denying Plaintiffs' claims against Mitchell, and remanded the matter to the Circuit Court for further proceedings consistent with its opinion.

On January 31, 2019, the Jefferson Circuit Court entered a Final Judgement in favor of Plaintiffs and against Mitchell. Consistent with the factual findings from its initial bench trial and the Kentucky Court of Appeals' conclusions of law based on those findings, the Circuit Court held that Mitchell committed fraud against Plaintiffs, forged Tavadia's signature to obtain the Fundworks loan, and misappropriated funds from OSM. As such, it granted judgment in favor of Plaintiffs for the following:

1. The unpaid principal amount of $302,000.00 on the Loan Agreements;

2. Late fees pursuant to the Loan Agreements in the amount of $850.00;

3. Fraud damages in the amount of $100,000.00;

4. Pre-judgment interest on the principal sum of $302,000.00 at the contractual rate of six percent (6%) per annum;

5. Reasonable attorney's fees and costs in the amount of $93,009.79;

6. Punitive damages in the amount of $100,000.00; and

7. Post judgment interest at the rate of 6% per annum on the entire amount of the Judgment from the date of Judgment until paid in full.

Having resolved the state law cases as intended by this Court's prior Order granting relief from the automatic stay, Plaintiffs filed a Motion to Determine Nondischargeability of Debt with this Court on December 9, 2019. On January 16, 2020, Plaintiffs filed a Motion for Summary Judgment. On February 10, Mitchell filed a motion to extend the time to respond to the Motion for Summary Judgment, and on February 13, Mitchell's counsel filed a Motion to Withdraw as Attorney, which the Court granted. Mitchell was given 60 days to obtain new counsel. Those 60 days expired on April 23, 2020, without Mitchell obtaining any new counsel, filing a response to the Motion for Summary Judgment, or making any other filing or representation to the Court. A hearing was held on the Motion for Summary Judgment on May 6, 2020, and the Motion for Summary Judgment was taken under submission and is now ripe for adjudication.

PLAINTIFFS' MOTION TO DETERMINE NONDISCHARGEABILITY

The dischargeability of a debt in bankruptcy is an issue that must be determined in an adversary proceeding, not through motion practice. Fed. R. Bankr. P. 7001(4), (6). As such, Plaintiffs' December 9, 2019 motion is an improper instrument for their nondischargeability claims, and that motion is dismissed. The plaintiffs' later Motion for Summary Judgment is an appropriate way to bring their nondischargeability claims, and so the Court has taken that Motion under submission and will consider it here.

SUMMARY JUDGMENT STANDARD

Federal Rule of Civil Procedure 56(c), made applicable to bankruptcy proceedings by Bankruptcy Rule 7056, provides that a court shall render summary judgment if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.

The party moving the Court for summary judgment bears the burden of showing that "there is no genuine issue as to any material fact and that [the moving party] is entitled to judgment as a matter of law." Jones v. Union County , 296 F.3d 417, 423 (6th Cir. 2002) ; see generally Celotex Corp. v. Catrett , 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). Once the moving party meets that burden, the nonmoving party "must identify specific facts supported by affidavits, or by depositions, answers to interrogatories, and admissions on file that show there is a genuine issue for trial." Hall v. Tollett , 128 F.3d 418, 422 (6th Cir. 1997).

In determining the existence or nonexistence of a material fact, a court will view the evidence in a light most favorable to the nonmoving party. Tennessee Dep't of...