Hatfield v. Thompson (In re Thompson), BAP No. WO-15-027

• Decision Date: 19 August 2016
• Docket Number: Adv. No. 14-01081,Bankr. No. 14-12865,BAP No. WO-15-027
• Citation: 555 B.R. 1
• Parties: In re Stephen C. Thompson, Debtor. James Hatfield, individually and as the surviving spouse of Wanda Hatfield, deceased, Plaintiff-Appellant, v. Stephen C. Thompson, Defendant-Appellee.
• Court: U.S. Bankruptcy Appellate Panel, Tenth Circuit

555 B.R. 1

In re Stephen C. Thompson, Debtor.James Hatfield, individually and as the surviving spouse of Wanda Hatfield, deceased, Plaintiff-Appellant

v.Stephen C. Thompson, Defendant-Appellee.

BAP No. WO-15-027

Bankr. No. 14-12865

Adv. No. 14-01081

United States Bankruptcy Appellate Panel of the Tenth Circuit.

August 19, 2016

Submitted on the briefs:^* Kris Ted Ledford, of Ledford Law Firm, Owasso, Oklahoma, for Appellant.

Timothy Deal Kline, of Phillips Murrah, P.C., Oklahoma City, Oklahoma, for Appellee.

Before ROMERO, JACOBVITZ, and MOSIER, Bankruptcy Judges.

OPINION

JACOBVITZ

, Bankruptcy Judge.

James Hatfield appeals the bankruptcy court's summary judgment in favor of Stephen Thompson (the “Debtor”) on Hatfield's nondischargeability complaint under 11 U.S.C. § 523(a)(2)(A)

.¹ Hatfield asks us to reverse because the bankruptcy court erred in holding that (1) the underlying debt is not a debt for money, property, services, or an extension of credit “obtained by” the alleged actual fraud; and (2) that the debt cannot be excepted from the discharge because there is no valid fraud claim against the Debtor under applicable Oklahoma law. As we have determined that the bankruptcy court erred on both of these issues, we REVERSE and REMAND.

I. FACTUAL BACKGROUND.

Thompson owned four limited liability companies through which he leased and operated four nursing homes in Oklahoma.² The nursing home at the center of the instant dispute was known as the Nursing Center (the “Nursing Center”), operated by Promise McLoud, LLC. Thompson was the sole owner of Promise McLoud, LLC.³

Prior to operating the Nursing Center, Thompson filled out and submitted the Nursing Center's application for a certificate of need to the Oklahoma State Department of Health (the “Department of Health”).⁴ Thompson represented to the Department of Health that (a) he would be actively involved in the Nursing Center's operations, including formulation of governing policies affecting the quality of care; overseeing approval and implementation of its operating budget; assisting in staffing needs; monitoring operations and budget compliance; and being physically present at the Nursing Center at least eight hours per month and once every other week;⁵ and (b) Promise McLoud, LLC would purchase at least $500,000.00 in “occurrence based” liability insurance for the Nursing Center (the “Representations”).⁶ A representative of the Department of Health testified in a deposition that the Department of Health considered the Representations important to its analysis in approving the application. The Department of Health approved the application, and granted Promise McLoud, LLC a certificate of need to operate the Nursing Center on August 27, 2008. The Nursing Center commenced operations on October 1, 2008.

“Many, if not most, of Thompson's Representations never came to fruition and were not intended to come to fruition.”⁷ After obtaining the Nursing Center's certificate of need, Thompson had no further involvement with the Nursing Center. Similarly, Thompson had no further involvement with the other three nursing homes for which he obtained certificates of need from the Department of Health based on representations substantially the same as those made to obtain the certificate of need for the Nursing Home.⁸ Thompson collected a total of $6,000.00—$1,500.00 per nursing home facility—each month from the operations of the nursing homes.⁹ However, he did not personally oversee the operations of any of the four nursing homes.¹⁰ Thompson employed Janet Swisher, an experienced Oklahoma licensed nursing home administrator and long-time registered nurse, to oversee the operations. Thompson did not interview anyone for the position of overseeing his four nursing homes, including the Nursing Center, but instead relied on his brother's suggestion of whom to hire.¹¹ Thompson's brother also hired Ms. Swisher to oversee four additional nursing home centers he owned.¹² Thompson did not attempt to ensure that Ms. Swisher was competent and capable of overseeing all eight nursing home centers.¹³ Thompson admitted that he switched the Nursing Center's liability insurance coverage from an “occurrence based” policy to a cheaper “claims-made based” policy.¹⁴ Additionally, Hatfield alleged that Thompson drained Promise McLoud, LLC's bank accounts of assets and diverted those funds to other businesses owned by Thompson or Thompson's brother.¹⁵

Soon after the Nursing Center began operations, Wanda Hatfield (“Mrs. Hatfield”), Hatfield's wife, became a resident at the Nursing Center. Hatfield relied upon the fact that the Nursing Center was a state licensed facility in choosing the Nursing Center for Mrs. Hatfield's placement. Mrs. Hatfield died at the Nursing Center in September 2009.¹⁶ Hatfield alleged that Mrs. Hatfield's death resulted from significant and painful injuries she suffered at the Nursing Center as a result of substandard care.¹⁷

Hatfield filed a state court action against Promise McLoud, LLC and Thompson based on the alleged substandard care provided to Mrs. Hatfield, seeking both actual and punitive damages (the “State Court Action”).¹⁸ Thompson filed a Chapter 7 bankruptcy case the morning of the trial in the State Court Action, staying the State Court Action as against him. Promise McLoud, LLC failed to appear at trial.¹⁹ The state court entered a default judgment against Promise McLoud, LLC and allowed Hatfield to present evidence concerning damages.²⁰ The state court then awarded $750,000 in actual damages and $250,000 in punitive damages against Promise McLoud, LLC (the “Judgment”).²¹

Hatfield subsequently filed an adversary proceeding against Thompson in the bankruptcy case.²² Hatfield alleged Thompson was personally liable for the Judgment under a corporate veil piercing theory and that Thompson's alleged personal liability was nondischargeable pursuant to § 523(a)(2)

.²³ Hatfield based his veil piercing theory on Oklahoma state law allowing a plaintiff to pierce the corporate veil “under the legal doctrine of fraud.”²⁴ Thompson filed his Motion of Defendant Stephen Thompson for Summary Judgment and Supporting Brief (the “Summary Judgment Motion”)²⁵ alleging that there were no genuine issues as to any material facts with respect to his § 523(a)(2) claims and that he was entitled to judgment as a matter of law. Hatfield filed his Plaintiff's Response to Defendant's Motion for Summary Judgment (the “Response”)²⁶ asserting that there were genuine issues of material fact and that the claims for piercing the corporate veil and holding the Judgment nondischargeable pursuant to § 523(a)(2)(A) should proceed to trial.

After considering the Summary Judgment Motion, Response, and part of the Defendant's Reply to Plaintiff's Response to Defendant's Motion for Summary Judgment and Supporting Brief (the “Reply”),²⁷ the bankruptcy court entered its Order Granting Motion of Stephen Thompson for Summary Judgment and Supporting Brief (the “Order”). In the Order, the bankruptcy court granted summary judgment in favor of Thompson and held: (1) the debt at issue was not “the type of debt that can be excepted from discharge under Section 523(a)(2)(A)

;” and (2) Thompson could not satisfy the elements for fraud under Oklahoma state law.²⁸ Hatfield assigns error to these two holdings.

II. STANDARD OF REVIEW.

We review an order granting summary judgment de novo , applying “the same legal standard as was used by the bankruptcy court to determine whether either party is entitled to judgment as a matter of law.”²⁹ Summary Judgment is appropriate if all of the pleadings, depositions, and discovery responses, together with any affidavits, show that there is no genuine issue as to any material fact and that the moving party is entitled to summary judgment as a matter of law.³⁰ A “defendant moving for summary judgment need not negate the [ ] claim, but need only point out to the [ ] court that there is an absence of evidence to support the nonmoving party's case.”³¹ “Reasonable inferences that may be made from the proffered [facts] should be drawn in favor of the non-moving party ....”³² “Once the moving party meets its burden, the burden shifts to the nonmoving party to demonstrate that genuine issues remain for trial ‘as to dispositive matters for which it carries the burden of proof’ ” or, assuming there are no issues as to dispositive facts, that the moving party is not entitled to judgment as a matter of law.³³ “[I]f two reasonable factfinders could reach different conclusions ... from the undisputed facts, summary judgment is not warranted.”³⁴

III. APPELLATE JURISDICTION.

This Court has jurisdiction to hear timely filed appeals from “final judgments, orders, and decrees” of bankruptcy courts within the Tenth Circuit, unless one of the parties elects to have the district court hear the appeal.³⁵ The appealed orders together dispose of all of the claims in the adversary proceeding, thus they are final orders for purposes of appeal.³⁶ Hatfield timely filed a notice of appeal from the Order. None of the parties elected to have this appeal heard by the United States District Court for the Western District of Oklahoma. The parties have therefore consented to appellate review by this Court.

IV. DISCUSSION.

The issues presented in this appeal relate to whether Thompson is entitled to summary judgment on Hatfield's claim that his debt is excepted from discharge under § 523(a)(2)(A)

's actual fraud exception to discharge. Hatfield asserts that the bankruptcy court erred by (1) not distinguishing that, while Hatfield's claim against Promise McLoud, LLC was based on negligence, his claim against Thompson was a fraud-based corporate veil piercing claim under Oklahoma law; and (2) by not properly applying the actual fraud exception to discharge under § 523(a)(2)(A). We will address both issues.

A. A debt proven under state law on grounds other than fraud can be excepted from discharge under the actual fraud provision...