DeWwine v. Dudley (In re Dudley)

• Decision Date: 17 August 2017
• Docket Number: Case No. 15–54258,Adv. Pro. No. 15–02199
• Citation: 582 B.R. 708
• Parties: IN RE: Edward DUDLEY, Sr., Debtor. Mike DeWine, Ohio Attorney General, Plaintiff, v. Edward Dudley, Sr., Defendant.
• Court: U.S. Bankruptcy Court — Southern District of Ohio

582 B.R. 708

IN RE: Edward DUDLEY, Sr., Debtor.Mike DeWine, Ohio Attorney General, Plaintiff,

v.Edward Dudley, Sr., Defendant.

Case No. 15–54258

Adv. Pro. No. 15–02199

United States Bankruptcy Court, S.D. Ohio, Eastern Division, Eastern Division.

Signed August 17, 2017

Victoria D. Garry, Cincinnati, OH, for Plaintiff.

Edmund F. Brown, FisherBroyles LLP, Columbus, OH, Patricia B. Fugee, FisherBroyles, Perrysburg, OH, for Defendant.

MEMORANDUM OPINION GRANTING IN PART AND DENYING IN PART DEFENDANT'S MOTION FOR SUMMARY JUDGMENT AND DENYING PLAINTIFF'S MOTION FOR PARTIAL SUMMARY JUDGMENT (Docs. 26 and 33)

C. Kathryn Preston, United States Bankruptcy Judge

This adversary proceeding is before the Court for consideration of cross-motions for summary judgment and related documents filed in support: Defendant's Motion for Summary Judgment (Doc. 26) ("Dudley's MSJ"); Plaintiff's Motion for Partial Summary Judgment (Doc. 33¹ ) ("AG's MSJ"); and Defendant's Memorandum in Opposition to Plaintiff's Motion for Partial Summary Judgment and Reply in Support of Defendant's Motion for Summary Judgment (Doc. 42) ("Dudley's Memorandum"); and Plaintiff's Reply in Support of the State's Motion for Partial Summary Judgment (Doc. 45)("AG's Reply"). The defendant in this adversary proceeding, Edward Dudley, Sr. ("Dudley"), was a designated financial officer at several community schools and is the debtor in the underlying Chapter 7 bankruptcy case. The plaintiff, the Attorney General of the State of Ohio (the "AG"), is seeking a determination that Dudley's liability resulting from certain Findings for Recovery issued by the state auditor is excepted from discharge under 11 U.S.C. § 523(a)(8)(A)(ii). Dudley's MSJ seeks the opposite determination: that whatever liability he may have to the State of Ohio is not excepted from discharge under either 11 U.S.C. § 523(a)(8)(A)(ii) or (a)(4), and that his discharge should not be denied under 11 U.S.C. § 727(a)(3), as a matter of law. Neither party is seeking summary judgment as to the underlying liability itself, which has not been definitively established.² The Court, having considered the record and the arguments of the parties, issues the following opinion.

I. Jurisdiction

The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334 and Amended General Order 05–02 entered by the United States District Court for the Southern District of Ohio, referring all bankruptcy matters to this Court. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I) and (J). Venue is properly before this Court pursuant to 28 U.S.C. §§ 1408 and 1409.

II. Standard of Review for Motions for Summary Judgment

Rule 56 of the Federal Rules of Civil Procedure, made applicable to adversary proceedings by Federal Rule of Bankruptcy Procedure 7056, provides that the Court "shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a). A party seeking summary judgment must illustrate that the facts are not genuinely disputed by pointing to "particular parts of materials in the record, including depositions, documents, electronically stored information, affidavits or declarations, stipulations ..., admissions, interrogatory answers, or other materials[.]" Fed. R. Civ. P. 56(c)(1)(A). The party seeking summary judgment bears the initial burden of "informing the ... court of the basis for its motion, and identifying those portions of the [record] which it believes demonstrate the absence of a genuine issue of material fact." Celotex Corp. v. Catrett , 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986) ; see also Fed. R. Civ. P. 56(c)(3).

If the movant satisfies this burden, the nonmoving party may not rest on its pleading, but similarly must, by citation to particular parts of the record, demonstrate that a fact or facts are subject to dispute. Fed. R. Civ. P. 56(c)(1). The mere allegation of a factual dispute is not sufficient to defeat a motion for summary judgment; to prevail, the non-moving party must show that there exists some genuine issue of material fact. See Anderson v. Liberty Lobby, Inc. , 477 U.S. 242, 247–48, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). "The Judge's function is not himself to weigh the evidence and determine the truth of the matter but to determine whether there is a genuine issue for trial." Hirsch v. CSX Transp., Inc. , 656 F.3d 359, 362 (6th Cir. 2011) (quoting Anderson , 477 U.S. at 249, 106 S.Ct. 2505 ). "When determining whether the evidence is sufficient, the trial court should not weigh the evidence, evaluate the credibility of witnesses, or substitute its judgment for that of the jury." J.C. Wyckoff & Assocs., Inc. v. Standard Fire Ins. Co. , 936 F.2d 1474, 1487 n.19 (6th Cir. 1991) (citation omitted). Rather, the court must deem as true the nonmovant's evidence and must view all justifiable inferences in a light most favorable to the non-moving party. Matsushita Elec. Indus. Co. v. Zenith Radio Corp. , 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986) ; Anderson , 477 U.S. at 255, 106 S.Ct. 2505.

The Sixth Circuit Court of Appeals has articulated the following standard to apply when evaluating a motion for summary judgment:

[T]he moving [party] may discharge its burden by "pointing out to the ... court ... that there is an absence of evidence to support the nonmoving party's case." The nonmoving party cannot rest on its pleadings, but must identify specific facts supported by affidavits, or by depositions, answers to interrogatories, and admissions on file that show there is a genuine issue for trial. Although we must draw all inferences in favor of the nonmoving party, it must present significant and probative evidence in support of its [position]. "The mere existence of a scintilla of evidence in support of the [nonmoving party's] position will be insufficient; there must be evidence on which the jury could reasonably find for the [nonmoving party]."

Hall v. Tollett , 128 F.3d 418, 422 (6th Cir. 1997) (internal citations omitted).

A material fact is one whose resolution will affect the determination of the underlying action. Tenn. Dep't of Mental Health & Mental Retardation v. Paul B. , 88 F.3d 1466, 1472 (6th Cir. 1996) (citing Anderson , 477 U.S. at 248, 106 S.Ct. 2505 ). An issue is genuine if a rational trier of fact could find in favor of either party on the issue. Schaffer v. A.O. Smith Harvestore Prods., Inc. , 74 F.3d 722, 727 (6th Cir. 1996) (citation omitted).³ "The substantive law determines which facts are ‘material’ for summary judgment purposes." Hanover Ins. Co. v. American Eng'g Co. , 33 F.3d 727, 730 (6th Cir. 1994) (citations omitted). However, determinations of credibility, weight to be given the evidence, and inferences to be drawn from the facts remain the province of the jury. Anderson , 477 U.S. at 255, 106 S.Ct. 2505.

In determining whether each party has met its burden, the court must keep in mind that "[o]ne of the principal purposes of the summary judgment rule is to isolate and dispose of factually unsupported claims or defenses." Celotex , 477 U.S. at 323–24, 106 S.Ct. 2548. If otherwise appropriate, summary judgment may also be entered for a nonmoving party. K.E. Resources, LTD. v. BMO Fin. Inc. (In re Century Offshore Mgmt. Corp.) , 119 F.3d 409, 412 (6th Cir. 1997) ; see also Celotex , 477 U.S. at 326, 106 S.Ct. 2548 ("[D]istrict courts are widely acknowledged to possess the power to enter summary judgments sua sponte , so long as the losing party was on notice that she had to come forward with all of her evidence."); see also Fed. R Civ. P. 56(f).

III. Factual Background

Chapter 3314 of the Ohio Revised Code governs the creation and operation of community schools⁴ in Ohio. These community schools are public schools and are publicly funded. They receive funds both from the school districts where the community school's students reside and from state and federal grants made by or passing through the Ohio Department of Education.

Each school is required to have a designated fiscal officer ("DFO"). Ohio Rev. Code § 3314.011(A). This person performs the same function as the treasurer of a traditional school district and is often referred to as the school's treasurer.

Dudley received a school treasurer's license in 2008. From 2008 through 2012, Dudley served as DFO to various community schools located throughout Ohio. It was not uncommon for individuals to act as DFO for multiple community schools simultaneously, as Dudley did. As DFO, Dudley had access to the schools' funds and accounts, prepared and signed checks, and produced various reports for the schools' governing boards, the schools' sponsors, the Ohio Department of Education, and external auditors.

Community schools are subject to audits by the Auditor of State (the "Auditor"). The Auditor reviews the schools' financial statements and general financial status, as well as assesses internal controls and the schools' compliance with relevant laws, regulations, and other requirements. The Auditor produces an audit report that details the results of the audit and identifies any problems discovered. If the audit reveals that funds were expended in violation of law, the audit report includes findings for recovery ("FFR"). An FFR states the law at issue, summarizes the facts relevant to the violation, sets forth the amount of money involved, and identifies those individuals or entities that the Auditor has concluded are liable, individually or jointly, for the repayment of the funds.⁵

Audits of some of the community schools⁶ for which Dudley acted as DFO resulted in audit reports containing FFRs. The grounds for most of these FFRs fall into three main categories: (1) transactions that were insufficiently documented, (2) transfers of public funds pursuant to contracts that violated Ohio Rev. Code § 2921.42(A) 7, and (3) payments of illegal bonuses and stipends. While not all...