CR Adventures LLC v. Hughes (In re Hughes)

• Decision Date: 18 December 2019
• Docket Number: No. 18 A 257,No. 18 B 11700,18 B 11700,18 A 257
• Citation: 609 B.R. 789
• Parties: IN RE: Michael HUGHES, Debtor. CR Adventures LLC, a Delaware limited liability company, d/b/a CR Farms, Plaintiff, v. Michael Hughes, Defendant.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

609 B.R. 789

IN RE: Michael HUGHES, Debtor.

CR Adventures LLC, a Delaware limited liability company, d/b/a CR Farms, Plaintiff,

v.Michael Hughes, Defendant.

No. 18 B 11700

No. 18 A 257

United States Bankruptcy Court, N.D. Illinois, Eastern Division.

Signed December 18, 2019

Attorneys for plaintiff CR Adventures LLC d/b/a CR Farms: John L. Leonard, Michael H. Erdman, Teeple Leonard & Erdman, Chicago, IL

Attorney for defendant Michael Hughes: Ariel Weissberg, Frank Lara, Weissberg & Associates, Ltd., Chicago, IL

MEMORANDUM OPINION

A. Benjamin Goldgar, United States Bankruptcy Judge

Michael Hughes owned and operated a produce company, National Produce Sales. From 2012 to 2017, National Produce placed orders with CR Farms for several hundred thousand dollars of potatoes and onions. CR Farms shipped the potatoes and onions, but National Produce failed to pay for more than $400,000 of the shipments. Eventually, National Produce went out of business, and Hughes ended up in bankruptcy. CR Farms then filed this adversary proceeding alleging that Hughes owes CR Farms a debt for the unpaid shipments, and the debt is nondischargeable under sections 523(a)(2)(A) and (a)(4) of the Bankruptcy Code, 11 U.S.C. §§ 523(a)(2)(A), (a)(4).

Before the court for ruling are the parties' cross-motions for summary judgment. CR Farms moves for judgment on both its claims; Hughes cross-moves only on the section 523(a)(4) claim. For the reasons discussed below, CR Farms' motion will be denied, and Hughes's cross-motion will be granted.

1. Jurisdiction

The court has subject matter jurisdiction under 28 U.S.C. § 1334(b) and the district court's Internal Operating Procedure 15(a). This is a core proceeding. 28 U.S.C. § 157(b)(2)(I).

2. Background

a. Summary Judgment Standard

Summary judgment is appropriate if there is no genuine issue of material fact and the movant is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(a) (made applicable by Fed. R. Bankr. P. 7056 ). The court's main task on summary judgment is to decide whether any material dispute of fact requires a trial. Payne v. Pauley , 337 F.3d 767, 770 (7th Cir. 2003). If not, summary judgment can be entered as a matter of law. 10A Charles Alan Wright, Arthur R. Miller & Mary Kay Kane, Federal Practice & Procedure § 2725 at 416 (2016).

When a plaintiff is the movant and would have the burden of proof at trial, he has the initial burden on summary judgment of showing there are no factual disputes. Celotex v. Catrett , 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986) ; 10A Wright, Miller & Kane, supra , § 2727.1 at 492. The plaintiff also has the burden of showing he is entitled to judgment as a matter of law. Custer v. Pan Am. Life Ins. Co. , 12 F.3d 410, 416 (4th Cir. 1993) (stating that the movant must "show that the uncontroverted facts entitle the party to a judgment as a matter of law" (internal quotation omitted)). That is true even when no facts are in dispute. Wienco, Inc. v. Katahn Assocs. , 965 F.2d 565, 568 (7th Cir. 1992) (noting that with no factual disputes, the court must "make the further finding that ... summary judgment is proper as a matter of law.").

b. Summary Judgment Procedure

The bankruptcy court's local rules set out a procedure for summary judgment motions – a procedure essentially identical to the district court's procedure – designed to simplify decisions about whether material facts are in dispute. See L.R. 7056-1, 7056-2. The movant must submit a statement of facts consisting of short, numbered paragraphs with citations to evidence supporting each statement. L.R. 7056-1(B). The nonmovant must then respond to each statement, admitting or denying it, and including, "in the case of any disagreement," references to supporting evidence. L.R. 7056-2(A)(2)(a). The nonmovant may also a submit a statement offering additional facts, again with citations to supporting evidence. L.R. 7056-2(A)(2)(b).

Responding to a statement of facts is "straightforward" – or should be. Maxwell v. Penn Media (In re marchFirst, Inc.) , Nos. 01 B 24742, 03 A 1141, 2010 WL 4027723, at *2 (Bankr. N.D. Ill. Oct. 14, 2010). The respondent can admit facts, deny facts (with citations to evidence supporting the denial), or suggest under Rule 56(d) that for specified reasons essential facts cannot be presented. Id. He can also object that the evidence supporting a particular fact is inadmissible. Id. But "[t]here are no other options." Id. Responses of any other kind admit the facts stated. Id. ; see also L.R. 7056-1(C), 7056-2(B).

c. Material Facts

The facts are drawn from the parties' statements of fact and responses under Local Bankruptcy Rules 7056-1 and -2. No material facts are in dispute.¹

i. The Parties

CR Adventures LLC ("CR Farms") is an Idaho concern that sells and ships "perishable agricultural commodities" as defined in the Perishable Agricultural Commodities Act of 1930, 7 U.S.C. §§ 499a - 499s ("PACA"). (Def. L.R. 7056-2(A) Resp. ¶¶ 1, 42). National Produce Sales, Inc. ("National Produce") was an Illinois company and a licensed PACA produce dealer. (Id. ¶¶ 13-14).

Hughes joined National Produce as an employee in 2012 and appears to have worked there until it ceased business. (See id. ¶ 21). For most of that time, Hughes's father, David El-Aboudi, was National Produce's sole shareholder and was named on its PACA license. (Id. ¶¶ 15, 19; P. L.R. 7056-1(C) Resp. ¶ 7).² In September 2017, El-Aboudi sold his shares to Hughes. (Def. L.R. 7056-2(A) Resp. ¶¶ 36, 38). From then on, Hughes was National Produce's sole shareholder as well as its president, secretary, and sole director. (Id. ¶ 38).

Although the parties agree that Hughes's duties at National Produce included purchasing, sales, and payment of vendors and produce sellers (id. ¶ 25), they differ on how much control he exercised before he assumed ownership (see Def. L.R. 7056-2(A) Resp. ¶¶ 30, 41; P. L.R. 7056-1(C) Resp. ¶¶ 5, 8-9, 15). There is no disagreement, though, that once he became the sole shareholder he had complete control of the company and its daily operations. (Def. L.R. 7056-2(A) Resp. ¶ 39). Hughes decided which creditors to pay and when, he controlled the proceeds from produce sales, and he directed the company's management and its policies. (Id. ).

ii. Hughes's Dealings with CR Farms

From 2012 through late November 2017, CR Farms sold large quantities of potatoes and onions to National Produce. (Id. ¶¶ 16, 43-44). Hughes placed the orders on National Produce's behalf. (Id. ¶ 45). In 2017 alone, National Produce bought truckloads of produce from CR Farms, the orders totaling nearly $450,000. (Id. ¶¶ 16, 44).

On or near the date of each order, CR Farms sent National Produce an invoice listing the produce ordered and the price. (Id. ¶ 46). Each invoice said that a finance charge would be applied to past due accounts, and if a collection action became necessary the prevailing party would be entitled to its attorney's fees and costs. (Id. ¶ 48). Each invoice also declared that the produce sold was subject to the "statutory trust authorized by [PACA]," and CR Farms "retain[ed] a Trust claim over the[ ] commodities," any "products derived" from them, and "any receivables or proceeds" from their sale. (Id. ¶ 47).

National Produce sold most of the produce it bought from CR Farms (id. ¶ 50) but from the beginning had problems paying for it (id. ¶ 52; see also id. ¶¶ 22, 24, 26, 54-55). CR Farms repeatedly demanded payment. (Id. ¶ 55).³ CR Farms sent Hughes receivables reports, sometimes several a month. (Id. ¶ 54). Carl Sanders, CR Farms' president, telephoned National Produce and Hughes about the missing payments and also sent emails and faxes. (Id. ¶ 53). In 2015, Sanders began calling Hughes daily. (Id. ¶¶ 54).

In response, Hughes held CR Farms at bay. He assured Sanders he was working to raise capital or secure financing for National Produce. (Id. ¶ 56). He also told Sanders more than once that he would turn National Produce around, and the company would make good on all the outstanding Farms invoices. (Id. ¶¶ 26, 56, 57). He even sent CR Farms checks – but National Produce lacked the funds for the checks to clear, and Hughes knew it. (Id. ¶ 76).

Relying on Hughes's assurances, CR Farms continued to fill National Produce's orders. (Id. ¶ 56). Meanwhile, National Produce paid other vendors and also paid operating expenses, including salaries, rent, insurance, and utilities. (Id. ¶¶ 67-69, 72-74).

National Produce made these payments with funds that could have been used to pay CR Farms. (Id. ¶ 75).

In March 2018, National Produce closed its doors. (Id. ¶ 20; P. L.R. 7056-1(C) Resp. ¶ 13). When it closed, National Produce owed CR Farms $426,713.60 (Def. L.R. 7056-2(A) Resp. ¶ 60), plus $85,708.55 in finance charges and $1,885 in fees for the bounced checks (id. ¶¶ 58-59).⁴

iii. The Bankruptcy Case and Adversary Proceeding

The next month, Hughes filed a chapter 7 bankruptcy case. CR Farms then commenced this adversary proceeding with a five-count complaint. The complaint sought a declaration that Hughes owed CR Farms a debt nondischargeable under section 523(a)(4).⁵

CR Farms later moved for leave to amend its complaint. (Dkt. No. 21). The idea was to cite section 523(a)(2)(A) and so allege a second ground for nondischargeability; the facts would stay the same. (Id. ). The motion was denied as unnecessary, since claims consist of facts, not legal theories. (Dkt. No. 69, Tr. at 2); see Matrix IV, Inc. v. American Nat'l Bank & Trust Co. , 649 F.3d 539, 548 (7th Cir. 2011). As long as the complaint's factual allegations gave adequate notice of the section 523(a)(2)(A) claim (and Hughes never said otherwise (see Dkt. No. 69, Tr. at 3)), CR Farms did not need to cite the statute itself. B. Sanfield, Inc. v. Finlay Fine Jewelry Corp. , 168 F.3d 967, 973 (7th Cir. 1999).

CR Farms now moves for summary judgment on its complaint, arguing Hughes is responsible for National Produce's debt, and the debt is nondischargeable under sections...