WLC Enters., Inc. v. Rylant (In re Rylant)

594 B.R. 783

IN RE: Walter F. RYLANT, III, Debtor.

WLC Enterprises, Inc., Plaintiff,

v.Walter F. Rylant, III, Defendant.

Case No. 17-12354-t7

Adv. No. 17-01090-t

United States Bankruptcy Court, D. New Mexico.

Signed December 7, 2018

Wesley Jackson, Albuquerque, NM, for Plaintiff.

Albert W. Schimmel, III, Schimmel Law Office, Albuquerque, NM, for Defendant.

OPINION

Hon. David T. Thuma, United States Bankruptcy Judge

Before the Court is plaintiff's complaint that its $30,000 claim against defendant is nondischargeable. After a trial on the merits, and for the reasons set forth below, the Court determines that the debt is nondischargeable.

I. FACTS

The Court finds the following facts:

William Crawley is the President and owner of Plaintiff, a New Mexico corporation. Mr. Crawley has known Defendant for many years; the acquaintance started when Defendant helped get Mr. Crawley his first loan.

Defendant's background is in banking. He worked as a banker in California from about 1981 through 1999. Defendant's banking career ended when he plead guilty to 24 counts of grand theft of personal property (in the nature of fraud and embezzlement) and served several years in prison. After his release, Defendant moved back to New Mexico. Defendant started a "house flipping" business in 2007 or 2008.

The Court finds that Mr. Crawley was a credible witness. The Court finds that Defendant was not a credible witness.

Plaintiff owned a restaurant in Albuquerque, New Mexico known as Murphy's Mule Barn. In late July or early August 2015, Defendant investigated whether to buy the restaurant from Plaintiff.

The parties had about 20 telephone calls and five or six meetings to discuss the sale of the restaurant. Several of the meetings were in the restaurant. Defendant personally conducted a walk-through of the restaurant and was aware of the general condition of the equipment.

On September 10, 2015, Plaintiff and Loop DL, LLC signed an asset purchase agreement for the restaurant assets. Loop is wholly owned by Defendant. The agreement was drafted by Defendant's attorney, Tim Padilla. Plaintiff did not have counsel.

The agreed-upon purchase price was $350,000, of which $50,000 was allocated to the restaurants' physical assets (tables, chairs, stoves, refrigerators, etc.). Loop agreed to pay $30,000 at closing, $20,000 15 days after closing, and sign a note for the remaining $300,000. The note was to accrue interest at 4%.

Before the agreement was signed, Plaintiff and Defendant discussed a possible all cash sale. At that time, Defendant had a Swiss bank account with at least $220,000 on deposit. The parties ultimately decided to proceed as outlined above.

The purchase agreement was signed on the same day as the closing, i.e., September 10, 2015. Loop signed the $300,000 note and delivered a cashier's check for $30,000. However, at closing Defendant borrowed $15,000 from Plaintiff, so the net cash Plaintiff received was $15,000.

The note does not contain standard terms that protect the holder in the event of a default. For example, there is no "acceleration clause," no grace period, no late fee, and no default rate of interest.

Defendant and Loop took possession of the restaurant immediately. Despite the prior visits to the restaurant, Defendant claims he was shocked by the condition of the restaurant and its equipment. Allegedly because of the poor condition of the equipment, Loop did not make the $20,000 payment due on September 25, 2015. The first note payment of $3,656.78 was due November 1, 2015. Loop did not make that payment, nor any subsequent note payments.

Defendant borrowed an additional $15,000 from Plaintiff before December 11, 2015, allegedly for payroll. The net effect of the second personal loan is that Plaintiff received no money for the restaurant.

Although allegedly withholding payments because of the condition of the restaurant equipment, Defendant never gave Plaintiff notice of default under the purchase agreement.¹

On January 29, 2016, Plaintiff sued Loop and Defendant in state court, case no. D-202-CV-2016-00656 ("State Court Action").² Loop filed a counterclaim for damages caused by the condition of the restaurant assets.

The action was tried on March 13 and 14, 2017, to Judge Valerie Huling. She found, inter alia:

• Defendant never repaid the $15,000 he personally borrowed from Plaintiff when he cashed the $30,000 cashier's check.

• Defendant did not repay the $15,000 payroll loan.

• The net result is that neither Loop nor Defendant made any payment of either interest or principal as required by the purchase agreement or promissory note.

• The failure to pay was a breach of the contract by Loop and Defendant, as Defendant borrowed the money that was intended for payment and used it for other purposes. In addition, no payments have been made although Defendant and Loop continue to benefit from the use of the assets.

• Considering the Defendants are continuing to benefit from the use of the property, and have breached the contract, and intentionally refused to make payments as required under the APA and the promissory note, acceleration of the amounts due under the APA and promissory note is justified.

• Plaintiff's compensatory damages resulting from the breach of contract are $350,000 plus prejudgment interest of 4% per annum on the unpaid balance, beginning September 10, 2015.

• Loop is liable for all damages awarded to Plaintiff.

• In addition, Defendant is personally liable for $30,000 of the total damages awarded to Plaintiff, as a result of the loan from Plaintiff.

• Although the actions of Defendant resulting in breach of the contract were intentional, there is insufficient evidence that he did not believe he was justified in temporarily delaying payment due to the condition of the assets and the unexpected expenses.

• Plaintiff is not entitled to punitive damages, as the Plaintiff has failed to prove a culpable mental state on the part of Defendant or Loop.

• Plaintiff failed to prove the elements of tortious interference with contract, fraud, negligence, or violation of the Unfair Practices Act.

• The damages incurred by Loop for breach of contract due to equipment in need of repair totaled $2,805.73.

Judge Huling also concluded:

• If the Plaintiff was contesting the limited liability status of Loop DL, LLC, Plaintiff had the burden of proving that Loop DL, LLC was not a limited liability company, and Plaintiff failed to meet that burden.

• The loan of $15,000 from the $30,000 cashier's check and the additional $15,000 payroll loan were loaned to Defendant personally and in his capacity as manager of Loop, and were never repaid.

• The intentional failure to make any payments pursuant to the APA or the promissory note is a substantial and material breach of the contracts and has resulted in compensatory damages incurred by Plaintiff in the amount of $350,000, plus prejudgment interest of 4% on the amount outstanding, beginning September 10, 2015.

• As $30,000 was loaned to Defendant in his individual capacity and to Loop, both Defendants are jointly and severally liable to pay $30,00 of the total amount awarded.

• Although intent has been proven on the part of Defendant, the requisite culpable mental state has not been proven to support a punitive damages award against any party, and therefore, no punitive damages are awarded.

On June 2, 2017, Judge Huling entered a money judgment in favor of Plaintiff against Loop for $347,194.27³ and a money judgment in favor of Plaintiff and against Defendant for $30,000.

Defendant/Loop operated the restaurant until the June 2, 2017, judgment was entered. Shortly thereafter, Defendant purported to perfect a security interest in the restaurant assets, and then "repossessed" the assets.

Post-judgment, Plaintiff went to the restaurant to see if there was any way to collect. While there, Plaintiff saw Defendant removing the restaurant equipment, furniture, and dishes. By the time Plaintiff gained access to the restaurant, little tangible property remained. Defendant/Loop later sold the assets and kept the proceeds.

On September 14, 2017, Defendant filed this chapter 7 case. Plaintiff brought this adversary proceeding on December 18, 2017.

Mr. Crawley was counting on the restaurant sale to finance his retirement. Because of Defendant's and Loops' failure to pay anything, Mr. Crawley, age 74, is forced to drive a truck to earn a living.

II. DISCUSSION

A. § 523(a)(6).

Plaintiff argues that Defendant's $30,000 debt is nondischargeable under § 523(a)(6), which applies to debts "for willful and malicious injury by the debtor to another entity or to the property of another entity." To satisfy the "willful" element of § 523(a)(6), there must be both "an intentional act and an intended harm; an intentional act that leads to harm is not sufficient." In re Parra , 483 B.R. 752, 771 (Bankr. D.N.M. 2012). The debtor "must ‘desire ... [to cause] the consequences of his act ... or believe [that] the consequences are substantially certain to result from it’ "; See also In re Longley , 235 B.R. 651, 656 (10th Cir. BAP 1999) (quoting Dorr, Bentley & Pecha, CPA's, P.C. v. Pasek (In re Pasek) , 983 F.2d 1524 (10th Cir. 1993) ); In re Parra , 483 B.R. at 771 (quoting Longley ).

For a debtor's actions to be malicious, they must be intentional, wrongful, and done without justification or excuse. In re Deerman , 482 B.R. 344, 369 (Bankr. D.N.M. 2012) (citing Bombardier Capital, Inc. v. Tinkler , 311 B.R. 869, 880 (Bankr. D. Colo. 2004) ).⁴ See also Saturn Systems, Inc. v. Militare (In re Militare) , 2011 WL 4625024, *3 (Bankr. D. Colo. Sep. 30, 2011) (a "wrongful act, done intentionally, without just cause or excuse"); Tso v. Nevarez (In re Nevarez) , 415 B.R. 540, 544 (Bankr. D.N.M. 2009) (without justification or excuse); America First Credit Union v. Gagle (In re Gagle) , 230 B.R. 174, 181 (Bankr. D. Utah 1999) (without justification or excuse).

It is an open question whether intentional breaches of contract can come within § 523(a)(6)....