Me. Coast Shellfish, LLC v. Cowles (In re Cowles)

• Decision Date: 15 December 2017
• Docket Number: Case No. 15–10235–JNF,Adv. P. No. 15–1069
• Citation: 578 B.R. 108
• Parties: IN RE Jonathan COWLES, Debtor Maine Coast Shellfish, LLC, Plaintiff v. Jonathan Cowles, Defendant
• Court: U.S. Bankruptcy Court — District of Massachusetts

578 B.R. 108

IN RE Jonathan COWLES, Debtor

Maine Coast Shellfish, LLC, Plaintiff

v.Jonathan Cowles, Defendant

Case No. 15–10235–JNF

Adv. P. No. 15–1069

United States Bankruptcy Court, D. Massachusetts.

Signed December 15, 2017

Entered December 18, 2017

George Dilworth, Kaitlyn Husar, Drummond Woodsum, Jeffrey T. Piampiano, Drummond Woodsum & McMahon, Portland, ME, for Plaintiff.

Gary W. Cruickshank, Law Office of Gary W. Cruickshank, Boston, MA, for Defendant.

MEMORANDUM

Joan N. Feeney, United States Bankruptcy Judge

I. INTRODUCTION

The matter before the Court is the First Amended Complaint to Determine Nondischargeability of Debt filed by Maine Coast Shellfish, LLC ("Maine Coast" or the "Plaintiff") against Jonathan Cowles ("Cowles," the "Defendant," or the "Debtor"). Pursuant to its three-count Amended Complaint, the Plaintiff seeks to except a debt, arising from an alleged "fraudulent scheme carried out by the Debtor ... to convert property of and divert funds from the Plaintiff," from discharge under 11 U.S.C. § 523(a)(2)(A) (Count I), (a)(2)(B) (Count II), and (a)(4) (Count III). The Defendant filed an Answer, denying most material allegations set forth in the Amended Complaint.

The Court conducted a three-day trial on August 1, 2017, August 2, 2017, and August 14, 2017 at which five witnesses testified and 30 exhibits were admitted into evidence. The principal of Maine Coast, Thomas Edward Adams ("Adams"), and the Debtor testified at length. Three employees of Maine Coast also testified, supporting Adams's testimony. The critical issue presented is whether the Plaintiff sustained its burden of proving an exception to discharge under 11 U.S.C. § 523(a)(2)(A), (a)(2)(B), or (a)(4), the determination of which turns, in part, on whether the Debtor was a credible witness.

The Court makes the following findings of fact and rulings of law in accordance with Fed. R. Bankr. P. 7052.

II. FACTS

A. Adams's Testimony

Adams, the founder and CEO of Maine Coast, testified about his 32–year involvement in the seafood industry which began when he was 15 years old and working in York, Maine as a laborer for a small lobster company. In his mid-twenties, after completing college, he became a 50% owner of that enterprise, "taking over daily operation of running the entire business." In May of 2009, Adams sold his 50% ownership stake in the business, agreeing to "a two-year non-compete to buy, distribute, [and] sell live lobster anywhere in the world."

At the expiration of the non-competition agreement, Adams founded Maine Coast, initially engaging four or five employees, including an administrator, an executive with seafood experience charged with buying and selling seafood products, and warehouse laborers and drivers. Adams testified that, in 2012, Maine Coast hired its first salesperson, Matthew Gallucci ("Gallucci"), to sell live lobsters. Gallucci is still employed by Maine Coast and testified about the terms of his employment. Adams explained that prior to employing Gallucci, he handled sales of live lobsters, including "a little bit of Asian shipping." He indicated that the company had not yet developed inroads into the Asian market but he recognized that it was a "quickly developing market."

Adams testified that he was introduced to Cowles in the fall of 2013 by David DiCenso ("DiCenso"), the owner of Boston Wholesale Lobster, a friendly competitor of Maine Coast. According to Adams, DiCenso told him that Cowles "was looking for a full-time employment position with a lobster or seafood company and that David was not hiring one but had recommended Jonathan Cowles speak to us because we were a fast-growing new company and could potentially be looking for help in sales." Adams further testified that Cowles, who had been employed by East Coast Seafood ("East Coast"), one of the largest shippers of lobsters in North America and a competitor of Maine Coast, informed him that he had lived in China and South Korea, as well as Hawaii, although he was originally from Maine. In addition, Adams testified that Cowles informed him that he spoke several languages, including Mandarin and Portuguese. Indeed, he had been trained as an interpreter of Mandarin by the U.S. Government. He also had obtained a Masters in Business Administration. Because the "Asian appetite for North American lobster was growing quickly," Adams indicated that he was very interested in interviewing Cowles.

On September 12, 2013, Cowles emailed Adams a document, captioned "General Background for Jonathan Cowles." In that document, Cowles set forth his education, which included a Masters of Business Administration from Chaminade University in Honolulu, Hawaii, proficiencies in multiple languages, and recent professional work, including work as an "Exporter/businessman in Asia." Notably, Cowles did not specifically identify the entity for which he served as "Asia Region Director" or include references in his General Background. Cowles testified that he forwarded references to Adams separately.

At around the time Adams received Cowles's "General Background," Adams reached out to the owner of East Coast, Michael Tourkistas ("Tourkistas"), a competitor whom Adams highly regarded as a leader in the shellfish industry. Cowles had a non-competition agreement with East Coast and, in addition, Adams had another concern:

Jonathan had explained to me that there had been some discrepancy in a financial transaction between East Coast and a customer that Jonathan had East Coast ship lobsters to. I wanted to hear—I'd heard Jonathan's side of things but I wanted to hear from East Coast, their version of events as well.

Adams testified about what Cowles had told him:

He told me that due to quality issues with a very important customer of East Coast that he was selling to, the customer was threatening to never buy from East Coast Seafoods again. Jonathan did not want to lose the customer so that he had created some sort of entity to ship East Coast lobster under a false entity, had the customer pay him directly and then he paid East Coast those monies.

Adams testified that Tourkistas had "a similar recollection." Adams explained:

He [Tourkistas] did not know all the particulars of what happened but he did say that something happened, they shipped lobsters to somebody. The lobsters he didn't—I don't believe he knew exactly where they went but he did tell me he had been paid in full by Jonathan Cowles for the lobster but that the money from China had been directed to Jonathan Cowles before being presented to East Coast Seafood.

Adams indicated that Tourkistas did not express concerns about Cowles, had considered rehiring him, and recognized his potential to be a very successful salesperson within the lobster industry, especially for sales to Asia. Thus, Adams made the decision to hire Cowles as an employee.

Adams testified about the distinctions in the seafood industry between employees and independent contractors, as well as the role of brokers. With respect to brokers he testified as follows:

Most often my idea of the role of a broker ... [is that] ... they ... initiate the sales process with the customer. They also initiate the buying side to us. We ship to their customer usually on—we supply the credit terms for the customer and the broker gets just a flat commission in the middle.

Adams stated that Maine Coast had relationships with two brokers who would initiate purchases from Maine Coast on behalf of their customers. Maine Coast would ship to the brokers' customers based on credit established by the customers and collect receivables directly from the customers. Once paid by a customer, Maine Coast would then pay a commission to the broker of 10 to 20 cents per pound of lobsters sold. Adams testified that in discussions with Cowles he only contemplated an employee relationship, with one exception, discussed below.

On November 12, 2013, Adams, on behalf of Maine Coast, as "an employer at will," extended an offer of employment to Cowles. Cowles accepted the offer set forth in the letter (the "Letter Agreement") the same day. In the Letter Agreement, Adams indicated that Cowles would have the title of "Export Sales Manager," would report directly to him, and would receive a "starting base salary" of $1,000 per week, plus a ".05/lb commission for all direct sales that you develop when related invoices have been paid in full." Adams further stated: "[t]hese commissions will go towards the [$]21,789.56 paid to American Holdco Inc.¹ on your behalf for the release of your employment agreement until paid in full." In the Letter Agreement, Adams also referred to eligibility for health insurance and paid vacation, as well as the requirement that Cowles "review and sign the company's standard non-disclosure and non-compete agreement." Adams testified that the benefits referenced in the Letter Agreement would not have been offered to independent contractors or brokers. Adams, however, admitted Cowles did not sign a non-compete agreement with Maine Coast. Cowles enthusiastically accepted the offer contained in the Letter Agreement, signing his name to it on November 12, 2013, adding "Thank you, Tom!"

According to Adams, Cowles "did some commission sales" for Maine Coast prior to his acceptance of employment. Adams explained that Cowles "called and said, 'I have these customers looking for lobsters; can we sell to them and can—will you pay me a commission on them' and I agreed to do so." In this regard, Cowles testified that he also did consulting work and prepared a report for Maine Coast in which he "weigh[ed] the risks of the China market, the opportunities and risks where I heavily emphasized the need to have credit insurance on all shipments that went out to Asia."

In conjunction with Cowles's employment, American Holdco, Inc., Maine Coast, and Cowles executed an agreement pursuant to which Maine Coast agreed to pay American Holdco, Inc. $21,789.56, with an initial payment of $5,447.39, followed by monthly...