Brown v. Pak (In re Michael Pak XXX-Xx-8690), Case No. 13-42442
| Decision Date | 10 April 2015 |
| Docket Number | Case No. 13-42442,Adversary No. 14-4001 |
| Court | U.S. Bankruptcy Court — Eastern District of Texas |
| Parties | IN RE: MICHAEL PAK xxx-xx-8690 Debtor KEITH BROWN Plaintiff v. MICHAEL PAK Defendant |
Upon trial of the complaint filed by the Plaintiff, Keith Brown ("Plaintiff"), seeking a determination of whether an alleged debt owed to him by the Defendant-Debtor, Michael Pak ("Pak" or the "Defendant"), is dischargeable, the Court issues the following findings of fact and conclusions of law. The Plaintiff contends that the debt is nondischargeable under the alternative grounds set forth in 11 U.S.C. §523(a)(2)(A) and §523(a)(4). After the trial, the Court took the matter under advisement. This decision disposes of all issues pending before the Court.
1. The complaint seeks a determination of the dischargeability of the debt owing by the Debtor-Defendant, Michael Pak ("Defendant"), to the Plaintiff, Keith Brown ("Plaintiff").
2. The Plaintiff had worked with the Defendant's brother, Richard Pak, in various internet broadcasting ventures in the late 1990s and early 2000s.
3. Having reaped significant financial benefits from the sale of Broadcast.com to Yahoo, the Plaintiff was looking for investment opportunities and learned that the Defendant was seeking investors for the acquisition and development of certain parcels of real property located in Frisco, Texas (the "Frisco Property").
4. The Defendant had no formal finance or legal training.
5. The Defendant had been a realtor and had owned and operated a few gas stations prior to his interactions with the Plaintiff, but had no prior experience as a real estate developer.
6. The Plaintiff had no prior experience with real estate investments and engaged in only the briefest of discourses with the Defendant regarding his plans for the Frisco Property.
7. The Plaintiff did not request, nor did he otherwise receive, any written documentation with regard to the acquisition of the Frisco Property.
8. The Plaintiff did not request, nor did he otherwise receive, any documentation with regard to the proposed development plans regarding the Frisco Property.
9. While the Defendant may have described his intentions for the property "in glowing terms," as so characterized by the Plaintiff at trial, the Defendant made no specific oral representation to the Plaintiff about the acquisition or development plans or the precise means by which any interest acquired by the Plaintiff would be held.
10. However, many of the Plaintiff's Broadcast.com co-workers appeared to be investing their newly-found wealth with the Defendant and the Plaintiff was comfortable making a similar type of investment with his co-worker's brother.
11. Thus, despite having little (if any) information about the precise manner in which his money would be used, the Plaintiff tendered the sum of $500,000.00 to the Defendant in 2001.2
12. The Defendant admitted unequivocally that the Frisco Property was owned by Pinnacle Developers, L.P. and that he was the general partner of Pinnacle Developers, L.P.3
13. The Defendant admitted unequivocally that the Plaintiff became a limited partner in Pinnacle Developers, L.P. based upon the sum tendered by the Plaintiff.
14. The Defendant testified that Pinnacle Developers, L.P. owed $4.85 million to Beal Bank under a 2-year construction/development loan at 16% interest.4
15. After the initial investment, reports regarding the progress of the development of the Frisco Property were rare and the Plaintiff acknowledged that he was too busy with his regular job responsibilities to devote much attention to the progress (or the lack thereof) of the real estate development project or his investment in it.
16. Nevertheless, within a few months, the Plaintiff tendered another $192,000 to the Defendant for use in the partnership business affairs, ostensibly to assist in the satisfaction of accruing interest obligations under the Beal Bank note.
17. When the prospect of obtaining a Tom Thumb grocery store as an anchor tenant for the Frisco Property development dimmed, and financial pressures mounted, the Defendant, as general partner of the limited partnership, abandoned his efforts to develop the Frisco Property and instead sold to an undisclosed party for an amount that "he thinks" was $5 million.5
18. After the sale of the Frisco Property by the partnership, no accounting of the sale proceeds or any other accounting of partnership assets was made by the Defendant as general partner of the limited partnership.
19. Without any information regarding the use of partnership funds, the Defendant solicited "permission" from the Plaintiff to involve the partnership in a commercial real estate development project in Sachse (the "Sachse Property").
20. Though the Defendant characterized this as a request for the transfer of the funds invested by the Plaintiff, there is no corroboration that any such funds existed nor is there any corroboration that the limited partnership actually acquired an interest in the Sachse Property.
21. As a prelude to permitting such a change, the Plaintiff visited the Sachse Property with the Defendant during its initial site work as the Defendant explained in general terms his plans to develop a strip mall and gas station on the Sachse Property.
22. No evidence was tendered to the Court with regard to how such a "transfer" took place or what governance structures, if any, were utilized to effectuate such a transfer.
23. The Plaintiff did not request at the time, nor did he otherwise receive, any documentation with regard to the acquisition of the Sachse Property by the limited partnership.
24. The Plaintiff did not request at the time, nor did he otherwise receive, any documentation with regard to the proposed plan of the partnership to develop the Sachse Property.
25. During the next several months, the Plaintiff was extremely busy with job responsibilities and made no serious inquiry regarding the limited partnership nor the development of the Sachse Property in general.
26. Approximately one-half of the Sachse Property development was completed by the partnership but financial problems again ensued and the property was eventually foreclosed upon by the primary lienholder, United Central Bank.6
27. The Defendant claims to have personally lost $3 million in the foreclosure upon the Sachse Property by United Central Bank; however, no evidence was tendered by the Defendant to corroborate any such claim.
28. After the presentment of a demand letter in 2005 by the Plaintiff, among others, to the Defendant regarding the return of all funds previously tendered by the Plaintiff,7 the Defendant executed a promissory note to the order of the Plaintiff on July 11, 2005, in the original principal amount of $500,000.00.8
29. On November 7, 2012, the Plaintiff forwarded a demand to the Defendant to satisfy the obligations due under the Note.9
30. When the Note obligations were not satisfied despite the demand, the Plaintiff sought recovery of the debt in a lawsuit filed in the 95th Judicial District Court of Dallas County, Texas under Cause No. DC-12-14680-D.10
31. Before the state court lawsuit could be tried, the Debtor-Defendant filed his voluntary petition for relief under Chapter 7 of the Bankruptcy Code in this Court on October 6, 2014.11
32. The Defendant listed the Plaintiff in his schedules as the holder of an unsecured claim in the amount of $500,000.00.
33. The Plaintiff timely filed his complaint for determination of the dischargeability of the debt owed to him on January 7, 2014, seeking recovery of the $664,000 in contributions that he had tendered to the Defendant.
34. The Plaintiff contends that the debt owed to him is nondischargeable as a debt obtained by false pretenses, a false representation or actual fraud under 11 U.S.C. §523(a)(2)(A) or, alternatively, as a defalcation by a fiduciary under 11 U.S.C. §523(a)(4).
35. The Plaintiff has failed to demonstrate by a preponderance of the evidence that any debt owed to him by the Defendant was procured under circumstances constituting actual fraud.
36. The Plaintiff has failed to demonstrate by a preponderance of the evidence that the Defendant made representations to the Plaintiff that the Defendant knew were false at the time that such representations were made.
37. The Plaintiff has failed to demonstrate by a preponderance of the evidence that the Defendant made false representations to the Plaintiff with the intention and purpose of deceiving the Plaintiff.
38. The Plaintiff has failed to demonstrate by a preponderance of the evidence that he justifiably relied upon any false representations by the Defendant since no such false representations were made to the Plaintiff.
39. The Defendant, as the sole general partner of Pinnacle Developers, L.P., stood in a formal fiduciary relationship to the Plaintiff under Texas law with regard to the application of all investment amounts received by him from the Plaintiff.
40. The Defendant, as the sole general partner of Pinnacle Developers, L.P., exercised complete control over the assets and activities of Pinnacle Developers, L.P.
41. The Plaintiff was a passive investor who wholly depended upon the Defendant for any information regarding the operations of Pinnacle Developers, L.P.
42. The only explanations supplied by the Defendant regarding the financial activities of the limited partnership were that the Frisco Property was sold "at a loss," the Sachse Property was foreclosed upon, and that everyone connected with thelimited partnership lost money.
43. Despite repeated requests, the Defendant supplied absolutely no documentation to corroborate any of the financial transactions of the limited partnership or from which the financial status of the limited partnership could otherwise be traced or determined.
44. The Defendant absolutely failed to supply any detailed financial information regarding the partnership's...
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