WesBanco Bank, Inc. v. Smalley (In re Smalley)

MEMORANDUM

Alah C. Stout United States Bankruptcy Judge

This case comes before the Court on the Motion for Summary Judgment filed by the Defendants, Ronald Lee Smalley and Roxann Rae Smalley (hereinafter "Defendants"). At issue is whether the debts owed by the Defendants to the Plaintiff, WesBanco Bank, Inc. ("WesBanco"), should be excepted from discharge under the provisions of 11 U.S.C. §§ 523(a)(2), (a)(4), and (a)(6) and whether the Defendants should have their discharge denied under the provisions of 11 U.S.C. §§ 727(a)(2)(A) and 727(a)(3). WesBanco opposes the Defendants' motion. Upon review of the motion, the response, and the exhibits attached thereto, the Court concludes that the Motion for Summary Judgment should be partially granted.

JURISDICTION

The subject matter jurisdiction of bankruptcy courts is set forth in 28 U.S.C. § 1334(a). Bankruptcy courts have jurisdiction to hear all cases under title 11 of the United States Code (the Bankruptcy Code) and all claims arising thereunder. 28 U.S.C. §§ 157(b) and 1334. These "arising

under" claims are referred to as "core"proceedings and "either invoke[ ] a substantive right created by federal bankruptcy law or ... could not exist outside of the bankruptcy." Browning v. Levy, 283 F.3d 761, 773 (6th Cir. 2002) (internal quotation marks and citations omitted). Core proceedings include matters concerning the administration of the bankruptcy estate, § 157(b)(2)(A), and actions to determine the dischargeability of particular debts. 28 U.S.C. § 157(b)(2)(I).

FACTUAL AND PROCEDURAL BACKGROUND

Ronald Smalley was the president and a director of DMX Enterprises Inc. ("DMX"). Roxann Smalley was the company's secretary and its only other director. On November 15, 2016, First Citizens Bank & Capital Trust Company^[1] granted a loan to DMX in the amount of $489, 063.47 (the "Loan") to refinance two of DMX's existing loans which were scheduled to mature in December 2016. The Loan was secured, in part, by a mortgage on a building owned by DMX. Defendants personally guaranteed the Loan. Starting with one of the earlier loans, the Defendants completed and signed personal financial statements. This continued each year thereafter until WesBanco called the loan and commenced litigation to collect on the debt. Additionally, DMX provided its tax returns and financial statements to WesBanco each year from 2013-2019.

Shortly after the refinance in November 2016, WesBanco mistakenly released the mortgage. This was done on WesBanco's initiative. The Defendants' received the released mortgage. The Defendants believed that WesBanco had recorded another mortgage. In 2020, the Defendants realized that WesBanco had not only released its mortgage but also failed to record a replacement mortgage.

Eventually, the Defendants sold the DMX building. The proceeds from the sale of the DMX

building ($586, 756.00) were wired into the DMX account. Between March 2, 2020, and September 1, 2020, Defendants spent approximately $329, 256.00 of the funds. How, and to what purpose these funds were spent, is in dispute by the parties. The Defendants assert they used the funds to pay the creditors of DMX, while WesBanco alleges that the funds were used by the Defendants for personal debts. The Defendants retained the remaining $257, 500.00 to be used to pay WesBanco.

On August 28, 2020, the Defendants filed for relief under Chapter 7 of the United States Bankruptcy Code. On February 23, 2021, WesBanco initiated this adversary proceeding seeking a judgment finding the debts owed to it nondischargeable pursuant to §§523(a)(2)(A), (a)(4), and (a)(6). WesBanco also included counts in its complaint seeking to deny the Defendants their discharge pursuant to §§727(a)(2)(A) and 727(a)(3)(A).

In Count I, WesBanco alleged that in order to induce First Citizens Bank to grant the Loan to DMX, Defendants made false representations regarding the number of creditors to whom DMX owed financial obligations. WesBanco also alleged that the written statements in the personal financial statements that Defendants provided to First Citizens Bank were materially false in that they did not fully disclose the debts DMX owed to Defendants and that the written statements in the DMX tax returns were materially false to the extent they did not fully disclose the debts DMX owed to Defendants. WesBanco alleged that First Citizens Bank reasonably relied upon the representations and written statements Defendants in their personal financial statements and the DMX tax returns in deciding to grant the Loan to DMX. Finally, WesBanco alleged that the Defendants made false statements, material misrepresentations and/or omissions in their personal financial statements and the DMX tax returns with the intent to deceive First Citizens Bank and to induce it to grant the Loan to DMX. As such, WesBanco asks that these debts be excepted from

Count II alleged that, as directors and officers of DMX, Defendants owed the company a fiduciary duty. WesBanco further alleged that the Defendants breached the fiduciary duty they owed DMX by fraudulently diverting money from the proceeds of the sale of DMX's assets to their own personal use instead of using the funds to pay DMX's creditors. WesBanco also alleged defalcation, as well as embezzlement and/or larceny by fraudulently diverting money from the proceeds of the sale of DMX's assets to their own personal use instead of using the funds to pay DMX's creditors. Consequently, WesBanco asks that these debts be excepted from discharge under § 523(a)(4).

In Count III, WesBanco alleged that the debts should be excepted from discharge pursuant to § 523(a)(6). It alleges that the Defendants willfully and maliciously injured it by diverting the sales proceeds to their personal benefit. WesBanco alleged that as directors and officers of DMX, Defendants had a duty to use the proceeds of the sale of DMX's assets to pay the financial obligations DMX owed to its creditors. Instead of carrying out their duty to DMX, Defendants diverted the funds which should have been used to pay DMX's creditors to their own personal use.

With respect to the § 727 allegations, Count IV alleged that within one year before filing their petition in this matter, Defendants fraudulently transferred DMX's funds to themselves, their creditors, friends, neighbors, family members and other acquaintances which rightfully should have been used to pay DMX's debt to WesBanco. WesBanco asserts that the Defendants made these transfers with the intent to hinder, delay and defraud WesBanco. Consequently, WesBanco aks that the Defendants be denied their discharge pursuant to § 727(a)(2).

Finally, in Count V, WesBanco sought to deny the Defendants their discharge due to the Defendants' alleged failure to keep documents. WesBanco alleged that these records would have

allowed the Trustee and the Defendants creditors to ascertain the Defendants' financial condition and business transactions.

As stated above, the Defendants have now moved for summary judgment.

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 Mental Health & Mental Retardation v. Paul B., 88 F.3d 1466, 1472 (6th Cir. 1996). Absent such evidence from the nonmoving party in a motion for summary judgment, the Court need not comb the entire record to determine if any of the available evidence could be construed in such a light. See In re Morris, 260 F.3d 654, 665 (6th Cir. 2001) (holding that the "trial court no longer has the duty to search the entire record to establish that it is bereft of a genuine issue of material fact").

DISCUSSION

To properly consider the motion, the Court will address each count separately.

1. Sections 523(a)(2)(A) and § 523(a)(2)(B)

As stated above, Count I seeks to except these debts from discharge under § 523(a)(2). The Defendants argue that in order to find the refinance was fraudulently induced, WesBanco must show fraud and new money advanced. Defendants assert that WesBanco has shown neither new money advanced or pointed to any fraudulent statements made by the Defendants upon which it reasonably relied to its detriment.

The Sixth Circuit has held that to demonstrate nondischargeability under section 523(a)(2)(A), a creditor must prove four elements: (1) the debtor obtained money or property from or belonging to the creditor through false pretenses and/or material misrepresentations that at the time the debtor knew were false...