First Bankers Trust Co., N.A. v. Dade (In re Dade)
| Decision Date | 01 May 2012 |
| Docket Number | Adversary No. 11-7090,Case No. 11-71024 |
| Parties | In Re KENT DEMOND DADE and DONYELLE R. DADE, Debtors. FIRST BANKERS TRUST COMPANY, N.A., Plaintiff, v. KENT DEMOND DADE, Defendant. |
| Court | United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Central District of Illinois |
___________________________
Mary P. Gorman
This matter is before the Court on the Motion of First Bankers Trust Company, N.A. ("FBT"), for Default Judgment with respect its two-count adversary Complaint seeking a nondischargeable judgment against Kent Demond Dade ("Debtor"). FBT's Complaint seeks to except from discharge a debt owed to FBT on the grounds that the Debtor obtained a loan from FBT by false representations, and that the ongoing sales by the Debtor of inventory which is FBT's collateral constitutes a willful and malicious injury to FBT. After the Debtor was served with summons and failed to timely answer or otherwise plead, FBT filed its Motion for Default Judgment. The Court then ordered FBT to file a prove-up affidavit to establish a prima facie case of nondischargeability. For the reasons set forth below, the Court finds that FBT has not made a prima facie case of nondischargeability as to either count of its Complaint. Accordingly, the Motion for Default Judgment will be denied. The Complaint will be set for evidentiary hearing, at which time FBT may appear and present its case in support of the entry of a nondischargeable judgment in its favor.
The facts in this case do not appear to be in dispute and, as set forth herein, are derived from affidavits and documents filed by FBT and from the schedules and Statement of Financial Affairs filed by the Debtor.
In July 2008, Debtor went to FBT to request a loan. Debtor met with Daron D. Duke, a commercial loan officer for FBT. Debtor is a firefighter employed by the City of Quincy, Illinois, and had invented a molded plastic wedge device to assist firefighters in quickly and easily shutting off automatic sprinkler systems when responding to fires. Debtor was interested in obtaining a loan from FBT to manufacture and market the device which he called the "Mul-T-Wedge." Debtor told Mr. Duke that he had retained a law firm in Missouri to set up a Missouri limited liability companycalled Monjo Innovations, LLC (the "LLC"), that he had already applied for a patent for the Mul-T-Wedge, and that he expected that the patent would be issued shortly. His plan was for the LLC to manufacture and sell the device.
Debtor asked for a loan of $15,000 in order to pay for the creation of a mold for the Mul-T-Wedge and for manufacturing the product. He had arranged for a company in Missouri to make the product. Mr. Duke asked the Debtor to provide a financial statement, which Mr. Duke represented would also serve as a loan application, and to provide the LLC documents.
Debtor met again with Mr. Duke on August 4, 2008, at which time Debtor provided the requested documents. Mr. Duke then authorized the $15,000 loan. Mr. Duke prepared a Commercial Promissory Note for $15,000 with the LLC as borrower, a Commercial Security Agreement granting FBT a security interest in all personal property assets of the LLC, and a Commercial Loan Guaranty from the Debtor individually. All three documents were dated August 5, 2008, and signed on the same day. The terms of the Note provided for payment in full by one balloon payment on August 5, 2009.
The United States Patent and Trademark Office issued the Mul-T-Wedge patent to the Debtor on September 9, 2008.
On or about December 8, 2008, Mr. Duke again met with the Debtor at the Debtor's request. At that time, Debtor told Mr. Duke that the patent for the Mul-T-Wedge had been issued, but that the LLC needed additional funds to complete the manufacture of the first batch of the product. Mr. Duke then approved an additional loan advance of $5000 and revised the original loan to $20,000. Mr. Duke prepared a new Commercial Promissory Note for the principal amount of $20,000, which was then signed by the Debtor on behalf of the LLC on the same date. The loan was payable in monthly installments of $393.15 over 60 months.
Regular loan payments were made starting on January 20, 2009, and continued untilapproximately June 30, 2010. At that time, Debtor contacted Mr. Duke to advise that, because someone working on the Mul-T-Wedge project with the Debtor had ordered a large and expensive amount of promotional materials, all of the LLC's income had to be used to pay this bill to avoid collection proceedings, leaving nothing to make the FBT loan payments. Mr. Duke then agreed to revise the payment term of the loan to a single-pay amount that would be due on March 15, 2011. A Change in Terms Agreement was prepared by Mr. Duke and executed by the Debtor on behalf of the LLC on June 30, 2010.
When the loan came due on March 15, 2011, Mr. Duke contacted the Debtor to arrange for the LLC to either pay the loan in full or restructure the loan. Debtor then advised that he was being forced to file bankruptcy because another creditor was threatening to obtain a wage deduction order against him, which would cause him to lose his job as a firefighter. Debtor and his wife, Donyelle R. Dade, filed a joint voluntary petition under Chapter 7 on April 20, 2011. FBT was listed on Schedule F as an unsecured nonpriority creditor with a claim of $18,172. As of May 16, 2011, FBT claims that the amount of $18,426.05, consisting of $17,115.81 unpaid principal, $1169.49 unpaid interest, and $140.75 accrued late charges, was due. On May 27, 2011, FBT sent a demand letter to the LLC in care of the Debtor and in care of Deena Humphrey, Registered Agent, demanding that all collateral covered by the Security Agreement be delivered to FBT by a certain date, to which FBT received no response. On October 14, 2011, FBT filed its two-count adversary Complaint.
Count I of the Complaint alleges that, "[b]oth in connection with his initial application for the Loan on December 12, 2008, and the subsequent modification of the Loan represented by the Change Agreement," Debtor represented to FBT that the LLC "owned or would own" the patent to the Mul-T-Wedge and all manufactured Mul-T-Wedge products and all proceeds from the sale of such products. FBT further contends that such representations were false inasmuch as the Debtor filed the patent application in his own name on October 6, 2006, the patent was issued to the Debtorindividually on September 9, 2008, at no time after that date was the patent assigned or otherwise transferred to the LLC, and that the Debtor disregarded the separate existence of the LLC and exercised control over all of the purported rights and assets of the LLC for his personal benefit. FBT further alleges that the false representations were material, and that it reasonably relied upon them in making the loan and entering into a security agreement with the LLC and, as a result, it has been damaged in the full amount of the loan.
Count II of the Complaint alleges that the Debtor sold a number of the Mul-T-Wedges in his possession and that he did not remit $2796.96 of the sales proceeds to FBT despite the fact that FBT has a security interest in all of the LLC's assets. FBT also contends that the Debtor has actual possession of over 100 Mul-T-Wedge units with a fair market value of at least $2495. Hence, Debtor's alleged conversion of the sale proceeds and his continued possession and control over the remaining inventory, notwithstanding the demand letter, amount to a willful and malicious injury to FBT in the total amount of $5291.96.
Debtor was properly served with summons, but failed to answer or otherwise plead to the Complaint. Accordingly, on December 12, 2011, FBT filed its Motion for Default Judgment. FBT seeks a judgment in the amount of $29,319.13, consisting of $17,115.81 unpaid principal, $1940.80 accrued interest, $140.75 accrued late charges, $8794.50 attorney fees, $561.00 post-judgment attorney fees (estimated), $543.27 costs and expenses, and $223.00 post-judgment court costs (estimated). On December 29, 2011, the Court entered an Order directing FBT to file a prove-up affidavit with sufficient facts to establish a prima facie case of nondischargeability. On March 2, 2012, FBT filed its Memorandum of Law in Support of Motion for Default Judgment along with several affidavits and other supporting documents. The matter is now ready for decision.
This Court has jurisdiction to hear this matter pursuant to 28 U.S.C. § 1334. The resolution of issues involving the dischargeability of debts are core proceedings. See 28 U.S.C. § 157(b)(2)(I).
The entry of default judgments is governed by Federal Rule of Civil Procedure 55, as made applicable to these proceedings by Federal Rule of Bankruptcy Procedure 7055. See Fed. R. Civ. P. 55; Fed. R. Bankr. P. 7055. A movant is not entitled to default judgment as a matter of right even though the debtor is in default for failing to answer or otherwise respond to a complaint. AT&T Universal Card Servs. v. Sziel (In re Sziel), 206 B.R. 490, 493 (Bankr. N.D. Ill. 1997) (citing Wells Fargo Bank v. Beltran (In re Beltran), 182 B.R. 820, 823 (B.A.P. 9th Cir. 1995)); see also New Austin Roosevelt Currency Exch. v. Sanchez (In re Sanchez), 277 B.R. 904, 907 (Bankr. N.D. Ill. 2002) (citing Lewis v. Lynn, 236 F.3d 766, 767 (5th Cir. 2001)). The granting of a default judgment lies within the sound discretion of the court. Merrill Lynch Mortg. Corp. v. Narayan, 908 F.2d 246, 252 (7th Cir. 1990) (citing Dundee Cement Co. v. Howard Pipe & Concrete Prods., Inc., 722 F.2d 1319, 1322 (7th Cir. 1983)).
Default judgments are traditionally disfavored by most courts. See, e.g., Sun Bank of Ocala v. Pelican Homestead & Sav. Ass'n, 874 F.2d 274, 276 (5th Cir. 1989) (...
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