ETRG Invs., LLC v. Hardee (In re Hardee)

• Decision Date: 14 March 2013
• Docket Number: Case No. 11-60242,Adversary No. 11-6011
• Parties: In re: JAMES H. HARDEE xxx-xx-3905 Debtor ETRG INVESTMENTS, LLC, DAN TOMLIN, and MARK SCOTT Plaintiffs v. JAMES H. HARDEE Defendant
• Court: United States Bankruptcy Courts. Fifth Circuit. U.S. Bankruptcy Court — Eastern District of Texas

IN RE: JAMES H. HARDEE xxx-xx-3905 DebtorETRG INVESTMENTS, LLC, DAN TOMLIN, and MARK SCOTT Plaintiffs

v.JAMES H. HARDEE Defendant

Case No. 11-60242

Adversary No. 11-6011

UNITED STATES BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF TEXAS TYLER DIVISION

Signed: March 14, 2013

Chapter 7

FINDINGS OF FACT AND CONCLUSIONS OF LAW^*

Upon trial of the complaint in the above-referenced adversary proceeding, the Court issues the following findings of fact and conclusions of law pursuant to Fed. R. Civ. P. 52, as incorporated into adversary proceedings in bankruptcy cases by Fed. R. Bankr. P. 7052.

AGREED FACTS¹

1. Plaintiffs Dan Tomlin and Mark Scott are individuals residing within Georgia.²

2. Plaintiff ETRG Investments, L.L.C. ("ETRG") is a Texas limited liability company formed in May 2005 for the purpose of owning and operating Zaxby's fast-food restaurants in central Arkansas.³

3. Plaintiffs Dan Tomlin and Mark Scott invested in ETRG in exchange for an ownership interest.⁴

4. Defendant invested no money into ETRG. Defendant held the title of Managing Member of ETRG from its inception until December 2008.⁵

5. The salary that ETRG agreed to pay Defendant was $75,400 per year.⁶

6. In September 2006, Irwin Franchise Capital Corporation provided an SBA loan to ETRG for $350,000.⁷

7. Plaintiff Mark Scott initially invested $77,500 into ETRG.⁸

8. Plaintiff Dan Tomlin initially invested $93,000 into ETRG.⁹

9. Defendant sent a letter to the investors of ETRG on December 31, 2005, which was included in Plaintiffs' bates-stamped discovery documents as

PLT02805-2818.¹⁰

10. Defendant prepared and sent to each investor monthly financial statements regarding the financial condition of ETRG.¹¹

11. Defendant sent falsified financial statements via email to ETRG investors to conceal his taking of ETRG funds in excess of his scheduled compensation amount.¹²

12. During his time as the Managing Member, Defendant used ETRG funds in lieu of his scheduled compensation, but in excess of that scheduled compensation amount, for his personal purposes, including personal mortgage payments, personal vehicle payments, and personal credit card payments.¹³

13. In October 2011, Hardee was charged and subsequently pled guilty to wire fraud pursuant to 18 U.S.C. § 1343 before the United States District Court for the Eastern District of Texas in a case styled United States of America v. James Henry Hardee and pending under case number 6:11-CR-96.¹⁴

14. The sentencing hearing before the United States District Court for the Eastern District of Texas in United States of America v. James Henry Hardee, case number 6:11-CR-96, was set for December 5, 2012.¹⁵

15. The following bank accounts were owned by ETRG during the time that Defendant was manager of ETRG: Regions Bank account numbers ending in 4566, 8138, 8146, 0073; Community Bank account number ending in 6057; Arvest Bank account numbers ending in 8867, 8583, 2781, 2778, 2765.¹⁶

16. The following bank accounts were owned by Hardee in his personal capacity during the time he was manager of ETRG: Regions Bank account ending in 3413 and Southside Bank account ending in 2327.¹⁷

17. During the time that Defendant was manager of ETRG, he resided in Tyler, Texas.¹⁸

18. During the time that Defendant was manager of ETRG, he was married to Cuba Machelle Hardee.¹⁹

19. During the time that Defendant was manager of ETRG, Cuba Machelle Hardee owned and operated a business known as "ITZ EN."²⁰

20. Defendant has three children: Ella, Preston, and Anna.²¹

21. During the time he was manager of ETRG, Defendant owed a personal debt to National Star Mortgage, LLC.²²

22. During the time he was manager of ETRG, Defendant or his wife was a member of Hollytree Country Club.²³

23. During the time he was manager of ETRG, Defendant or his wife had insurance with Kemper Auto Insurance.²⁴

24. On December 10, 2010, ETRG filed a lawsuit against Defendant in the Circuit Court of Pulaski County, Arkansas, Case No. CV 2010-7060, which was stayeddue to Defendant's filing for relief under Chapter 7 of the Bankruptcy Code.²⁵

25. On December 10, 2010, Dan Tomlin filed a lawsuit against Defendant in the Circuit Court of Pulaski County, Arkansas, Case No. CV 2010-7061, which was stayed due to Defendant's filing for relief under Chapter 7 of the Bankruptcy Code.²⁶

26. Defendant filed a voluntary petition under Chapter 7 of the United States Bankruptcy Code on March 17, 2011.²⁷

27. Defendant listed ETRG, Mr. Tomlin, Mr. Scott, and other former members of ETRG as creditors on his "Schedule F, Creditors Holding Unsecured Nonpriority Claims."²⁸

28. Defendant admitted the following in his Responses to Plaintiff's First Set of Requests for Admission:

(a) That ETRG's company regulations required him to obtain unanimous consent from ETRG's members prior to incurring any indebtedness of $100,000 on behalf of ETRG. (RFA No. 1)

(b) That as manager of ETRG he was responsible for paying, on behalf of ETRG, any payroll taxes owed to the state of Arkansas.

(c) That he wrote checks, itemized in the spreadsheets attached to Plaintiffs' First Set of Requests for Admission as Exhibit 1.

(d) That during the period of his employment with ETRG, his duties included ETRG's tax responsibilities.

(e) That he was involved in ETRG's "tax matters" from 2006 to 2008.

(f) That $77,500 was initially invested into ETRG by Mark Scott and that Dan Tomlin initially invested $93,000.

(g) That he signed and sent the letter attached to Plaintiffs' First Set of Requests for Admission as Exhibit 2 (PLT 02798-02804).

(h) That the letter attached to Plaintiffs' First Set of Requests for Admission as Exhibit 3 (PLT 02805-02818) is a letter that he sent to potential investors of ETRG.²⁹

ADDITIONAL FINDINGS OF FACT

29. The Plaintiffs timely filed a complaint for determination of dischargeability of a debt on June 14, 2011, seeking to except their respective claims from the scope of any discharge granted to the Defendant.

30. The Plaintiffs contend that the debts owed to them in their various capacities are each non-dischargeable as a debt obtained by actual fraud or by false representations pursuant to 11 U.S.C. §523(a)(2)(A), and as a debt arising from a defalcation by a fiduciary and/or embezzlement under §523(a)(4).³⁰

31. On June 20, 2012, the Court granted in part and denied in part the Plaintiffs' Motion for Partial Summary Judgment. In that order, and in the reasons expressed on the record issued in support of that decision, the Court determined that, on the basis of uncontested material facts established by the summary judgment evidence, a debt is owed by the Defendant to ETRG Investments, LLC, arising from the unauthorized diversion of corporate funds and that such debt is non-dischargeable pursuant to 11 U.S.C. §523(a)(4).

32. The Court, however, denied the summary judgment requested by ETRG as to the precise amount of the debt owed by the Defendant to ETRG, with such issue reserved for trial.

33. The Plaintiffs acknowledged at the beginning of the evidence that the sum properly due and owing to ETRG by the Defendant from their perspective did not exceed $274,278.08.³¹

34. The Defendant contended that additional credits should be allowed to lower the debt owed to ETRG because certain withdrawals of funds by the Defendant were utilized for company business.

35. The Defendant breached his fiduciary duty to ETRG by entering into an unauthorized lending relationship with Irwin Franchise Capital Corporation.

36. The Defendant embezzled significant sums of money from ETRG in order to pay for his personal expenses, in order to obtain excessive expense reimbursements, and otherwise to receive compensation in excess of the amount that he was duly authorized to receive from ETRG.

37. From a preponderance of the submitted evidence, including consideration of the "disputed transactions" listed in Defendant's Ex. GG and the Defendant's testimony, and after allowance of credits for salary, documented business expenses, and deposits that the Defendant returned to ETRG's accounts, the Court finds that an additional credit of $20,946.69 should be granted to the Defendant.

38. Therefore, the Defendant owes a debt to the Plaintiff, ETRG Investments, LLC, arising from his embezzlement in the amount of $253,331.39.

IRS Tax Liabilities

39. As for liabilities arising from the Defendant's failure to tender required tax payments to the United States Internal Revenue Service (IRS) on behalf of ETRG,³² the Defendant clearly breached the obligations imposed upon him by ¶ 6.03 of the LLC Regulations as to all Plaintiffs.³³

40. Though the precise determination of the taxes, interest and penalties remains in flux, the latest calculations reveal that a tax debt of $248,027.12 is owed by ETRG to the IRS.³⁴

41. The Defendant breached his fiduciary duty to ETRG to exercise proper care in managing ETRG's affairs in diverting funds and failing to tender all required payments to the appropriate taxing authorities, including the IRS.

42. As the sole person authorized to transact business and direct the financial activities of ETRG, including the payment of all accrued tax obligations, the Defendant acted as an agent of the Company.

43. As an agent of ETRG during his tenure as Managing Member, the Defendant had a formal fiduciary relationship with ETRG.

44. The Defendant's failure in each instance to tender required tax payments to the IRS on behalf of ETRG constituted a willful breach of duty as to ETRG.

45. The Defendant's failure in each instance to tender required tax payments to the IRS on behalf of ETRG constituted a defalcation while acting in a fiduciary capacity as to ETRG.

46. Each individual Plaintiff, Dan Tomlin and Mark Scott, has failed to establish by a preponderance of the evidence that the Defendant had a formal fiduciary relationship with him.

47. The LLC Regulations governing ETRG did not impose, nor did it even address, any fiduciary duty by and among the members of ETRG.³⁵

48. The evidence presented failed to establish...