Beher Holdings Trust v. Frascogna (In re Frascogna)
| Decision Date | 20 December 2019 |
| Docket Number | ADV. PROC. NO. 18-00128-NPO,CASE NO. 11-03822-NPO |
| Citation | 611 B.R. 77 |
| Parties | IN RE: Joseph Patrick FRASCOGNA and Lisa N. Frascogna, Debtors. Beher Holdings Trust, Plaintiff v. Joseph Frascogna, Defendant |
| Court | U.S. Bankruptcy Court — Southern District of Mississippi |
Jeff D. Rawlings, Rawlings & MacInnis, P.A., Madison, MS, for Plaintiff.
Daniel D. Ware, Ware Law Firm, PLLC, Florence, MS, for Defendant.
This matter came before the Court for trial on November 6, 2019 (the "Trial"), on the Complaint Objecting to Discharge and to Determine Dischargeability of Debt (the "Complaint") (Adv. Dkt. 1)1 filed by Beher Holdings Trust (the "BHT") and the Answer and Defenses to Complaint Objecting to Discharge and to Determine Dischargeability of Debt (the "Answer") (Adv. Dkt. 7) filed by Joseph Frascogna ("Frascogna") in the Adversary Proceeding. The Pretrial Order (the "PTO") (Adv. Dkt. 24) was entered on October 24, 2019. At Trial, Daniel D. Ware represented Frascogna and Jeffery D. Rawlings ("Rawlings") represented BHT. During the Trial, BHT introduced into evidence ten (10) exhibits and Frascogna introduced six (6) exhibits.2 The issues put forth by the parties for Trial included: (1) whether Frascogna breached a contract or breached a fiduciary duty entitling BHT to damages in the amount of $9,826,585.00; (2) whether BHT properly designated Dr. Charles C. Edwards ("Dr. Edwards")3 as an expert in damages; (3) whether BHT's cause of action against Frascogna accrued after November 2, 2011, the date of Frascogna's bankruptcy filing; (4) whether the actions of Frascogna constituted fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny so as to except from discharge any debt owed to BHT pursuant to 11 U.S.C. § 523(a)(4) ; and (5) whether the actions of Frascogna constituted willful and malicious injury to BHT so as to except from discharge any debt owed to BHT pursuant to 11 U.S.C. § 523(a)(6). (PTO at 12). The Court, having considered the pleadings, evidence, and arguments of counsel, finds as follows:4
Jurisdiction
This Court has jurisdiction over the subject matter of and the parties to this Adversary Proceeding pursuant to 28 U.S.C. § 1334. This matter is a core proceeding pursuant to 11 U.S.C. § 157(b)(2)(A) and (I). Notice of the Trial was proper under the circumstances.
At the Trial, Frascogna offered into evidence the Responses of William D. Dickson to Defendant's Second Set of Interrogatories (the "Interrogatory Response") (Frascogna's Ex. ID Only) that William D. Dickson ("Dickson") served on Frascogna in a prior action filed in the U.S. District Court for the Southern District of Mississippi (the "District Court") in Beher Holdings Trust v. Frascogna v. Dickson , No. 3:15cv7-HTW-LRA (S.D. Miss. Jan. 5, 2015) (the "District Court Action").5 BHT objected to the Interrogatory Response on the basis of hearsay. The Court marked this exhibit for identification purposes and took the matter of admissibility under advisement. Before the Court can make findings of fact, the Court must resolve the admissibility issue.
Rule 9017 of the Federal Rules of Bankruptcy Procedure applies the Federal Rules of Evidence to proceedings under the Bankruptcy Code. FED. R. BANKR. P. 9017. As a preliminary matter, the Court considers whether the evidence proffered by Frascogna was relevant to the Adversary Proceeding. "To be admissible evidence must be relevant, and the resolution of the question of relevance is in the province of the presiding judge." Williams v. Bd. of Regents of Univ. Sys. of Ga. , 629 F.2d 993, 999 (5th Cir. 1980). "Evidence is relevant if: (a) it has any tendency to make a fact more or less probable than it would be without the evidence; and (b) the fact is of consequence in determining the action." FED. R. EVID. 401.
Frascogna attempted to introduce the Interrogatory Response into evidence to prove that Dickson removed certain loan documents from his office building prior to November 2, 2011, the date that Frascogna and his spouse commenced the Bankruptcy Case. Interrogatory Response provides, in pertinent part:
Because the date is important in determining whether BHT's alleged claims accrued pre-petition or post-petition and, thus, whether BHT's alleged claims were discharged in the Bankruptcy Case, regardless of any exception to discharge that might otherwise apply, the Court finds that the Interrogatory Response is relevant to the Adversary Proceeding.
"Relevant evidence is admissible unless any of the following provides otherwise:
the United States Constitution; a federal statute; these rules; or other rules prescribed by the Supreme Court." FED. R. EVID. 402. BHT objected to the Interrogatory Response as inadmissible hearsay. " ‘Hearsay’ means a statement6 that: (1) the declarant7 does not make while testifying at the current trial or hearing; and (2) a party offers in evidence to prove the truth of the matter asserted in the statement." FED. R. EVID. 801(c). "Hearsay is not admissible unless any of the following provides otherwise: a federal statute; these rules; or other rules prescribed by the Supreme Court." FED. R. EVID. 802.
The Court finds that the Interrogatory Response is hearsay within the meaning of Federal Rule of Evidence 801. Dickson, the declarant of the Interrogatory Response, was not a party in the Adversary Proceeding and did not testify at the Trial. Moreover, the Interrogatory Response was offered to prove the truth of the matter asserted—that Dickson removed certain documents from his office building prior to November 2, 2011.8 Further, the Court finds that the Interrogatory Response does not qualify for any of the exceptions to the rule against hearsay delineated in Rules 803 and 804 of the Federal Rules of Evidence. See FED. R. EVID. 803, 804. The Court, therefore, sustains BHT's objection to the Interrogatory Response as inadmissible hearsay, and the Court will not consider the Interrogatory Response in its findings of fact.
The parties have stipulated to the findings of fact related to the matters before the Court contained in the Memorandum Opinion and Order on Third Amended Complaint in Adversary Proceeding 12-00091-NPO; Consolidated Amended Complaint in Adversary Proceeding 12-00104-NPO; Amended Complaint for Turnover, Recovery of Property Transferred Post-Petition, Damages, Declaratory Relief, Equitable Subordination, and Other Relief in Adversary Proceeding 15-00080-NPO; and Consolidated Contested Matters, Johnson v. Edwards Family Partnership, LP (In re Community Home Financial Services, Inc.) , 583 B.R. 1 (Bankr. S.D. Miss. 2018), appeal pending 3:18-cv-00158-CWR-LRA (S.D. Miss. 2018). Additional facts were adduced at the Trial.
Community Home Financial Services, Inc. ("CHFS") is a mortgage servicing entity that for the most part purchased mortgage loan portfolios at a discount from various third parties and serviced those loans. Johnson , 583 B.R. at 18. Dickson was CHFS's chief executive officer and its owner. Until the fall of 2013, CHFS's principal place of business was located in an office building owned by Dickson located at 234 East Capitol Street, in Jackson, Mississippi ("Dickson's Building"), where CHFS serviced mortgage loan portfolios, each one consisting of hundreds of individual notes secured by mostly subordinate residential mortgages on property located in over thirty (30) states in the United States.
In 2006, near the end of CHFS's relationship with its lender at the time, Roy Al Finance and Loan Company ("Roy Al Finance"), Dickson began searching for replacement financing. A business broker hired by Dickson brought a loan proposal to Dr. Edwards, an orthopedic surgeon from Baltimore, Maryland, whereby Dr. Edwards would replace Roy Al Finance as CHFS's lender. Johnson , 583 B.R. at 18.
After having Dickson over to his home for dinner in Baltimore, Dr. Edwards decided to go into business with him. (Test. of Dr. Edwards at 10:05:50-10:06:15). From September 25, 2006, to August 10, 2010, Dr. Edwards loaned approximately $16 million to CHFS. Dr. Edwards acted through four (4) entities owned and/or purportedly controlled by him, including BHT, a trust that he created under Bermuda law for the benefit of his children, and the Rainbow Group, Ltd. (the "Rainbow Group"). Johnson , 583 B.R. at 19. Dr. Edwards testified they had a "successful business relationship" and that he considered Dickson "somewhat of a friend." (Test. of Dr. Edwards at 10:06:00-10:06:16). During those initial years, Dr. Edwards was "unaware" of Dickson's "unfortunate business dealings in the past." Dr. Edwards "faults himself" for not knowing about Dickson's "very checkered past." (Test. of Dr. Edwards at 10:06:15-10:07:03).
At the beginning of their business relationship, Dr. Edwards sent a letter to Dickson outlining the terms and conditions under which the Rainbow Group would offer CHFS a revolving line of credit up to $10 million to replace CHFS's existing credit facility and provide capital for the purchase of additional home improvement loans (the "Home Improvement Loans"). Dr. Edwards proposed that the form of the Home Improvement Loan documents follow those already in existence between CHFS and its then lender, Roy Al Finance.
John Allen ("Allen"), a disbarred attorney9 and employee of CHFS, prepared the paperwork for the transaction, using as forms the documents in place between CHFS and Roy Al Finance, as suggested by Dr. Edwards. Johnson , ...
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