In Re Hans Liebl

• Decision Date: 27 July 2010
• Docket Number: Bankruptcy No. 08 B 14638.,Adversary No. 08 A 00689.
• Citation: 434 B.R. 529
• Parties: In re Hans LIEBL and Kimberly Liebl, Debtors.Martin Wallner, Plaintiff,v.Hans Liebl and Kimberly Liebl, Defendants.Martin Wallner, Derivatively, on behalf of the Original Brat Hans, LLC, Plaintiff,v.Hans Liebl and Kimberly Liebl, Defendants.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

434 B.R. 529

In re Hans LIEBL and Kimberly Liebl, Debtors.

Martin Wallner, Plaintiff,

v.Hans Liebl and Kimberly Liebl, Defendants.

Martin Wallner, Derivatively, on behalf of the Original Brat Hans, LLC, Plaintiff,

v.Hans Liebl and Kimberly Liebl, Defendants.

Bankruptcy No. 08 B 14638.

Adversary No. 08 A 00689.

United States Bankruptcy Court,

N.D. Illinois,

Eastern Division.

July 27, 2010.

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Christian M. Ryba, Acosta & Skawski, P.C., for Plaintiff.

Hans Liebl and Kimberly Liebl, Pro Se, Defendants.

FINDINGS OF FACT AND CONCLUSIONS OF LAW FOLLOWING DEFAULT

JACK B. SCHMETTERER, Bankruptcy Judge.

This Adversary proceeding is related to the case filed by debtors Hans and Kimberly Liebl under Chapter 7 of the Bankruptcy Code. Creditor Martin Wallner filed the Adversary Complaint on his own behalf and also derivatively on behalf of The Original Brat Hans, LLC (“the LLC”).

Hans Liebl (“Liebl”) has worked in the food marketing industry for over twenty years, selling and/or distributing food products, Kimberly Liebl is asserted to be an artist, and Wallner is a chef with over twenty years of experience. (Second Am. Compl. [Docket No. 49] ¶¶ 6-8.) The creditor-plaintiffs seek to bar dischargeability of an asserted debt, and for a money judgment of $137,500 as to that debt. The Complaint is pleaded in eight counts. Wallner individually brings Count I against Liebl under 11 U.S.C. § 523(a)(2) on the asserted basis that Liebl fraudulently induced Wallner to invest in the LLC. Wallner also brings Count II on his own behalf against both the Liebls under §§ 523(a)(2) and (6) on grounds that they conspired to defraud Wallner of his capital investment. Counts III and IV seek recovery from Liebl under § 523(a)(4), alleging that Liebl committed fraud while acting in a fiduciary capacity. Wallner brings Count III on his own behalf and Count IV derivatively on behalf of the LLC. Counts V and VI seek recovery under § 523(a)(4) on grounds that Liebl embezzled funds. Wallner brings Count V on his own behalf and Count VI derivatively on behalf of the LLC. Counts VII and VIII seek recovery under §§ 523(a)(4) and (6) on grounds that both the Liebls conspired to embezzle. Wallner brings Count VII directly and Count VIII on behalf of the LLC.

Summons was properly served on the defendant-debtors, who failed to appear or plead. The plaintiff-creditors thereafter moved on notice for entry of a default order. The default order was entered, and therefore the Complaint's allegations were taken as confessed against the defendants. By way of supplementing allegations of the Complaint as prove up on Motion for Default Judgment, the plaintiffs also filed an affidavit by Wallner [Docket No. 19 ex. 10] and a copy of the deposition of Robert Salgena taken in this proceeding and appended to the plaintiffs' Supplemental Memorandum [Docket No. 65 ex.]. Based on the foregoing, the following Findings of Fact and Conclusions of Law are made and are to be entered.

FINDINGS OF FACT

In February 2007, Liebl approached Wallner with a written proposal to invest in Liebl's new food company. (Second Am. Compl. ¶ 10.) As part of the proposal, Liebl represented that he had already developed a line of sausages, that the product line was approved for sale to Whole Foods, and that he had contracted with a Whole Foods-approved plant to produce the sausages. ( Id. at ¶¶ 10-11.) Wallner also represented that his “conservative” expected sales figures for 2007 exceeded $600,000, increasing to at least $25,000,000 by 2017. ( Id. at ¶ 11, ex. A.) He also “verbally misrepresented” that his company had $10,000 a week in existing sales. ( Id. at ¶¶ 11-12, ex. A.) Liebl did not then disclose that he and his wife had financial liabilities, lawsuits, and judgments against themselves personally and against other limited liability companies with which they were affiliated. ( Id. at ¶ 48; Wallner Aff. [Docket No. 19 ex. 10], at ¶¶ 6-7.)

After negotiations, Liebl set up the LLC and Wallner received a 40% interest in it in return for his investment of $100,000. (Second Am. Compl. ¶¶ 15-17.) Subsequently, Wallner obtained another 10% interest in exchange for more money. ( Id. at ¶¶ 27-28.) Thus, for a total investment of $137,500, Wallner obtained a 50% ownership interest. Wallner deposited these funds in a business checking account opened by Wallner and Liebl. ( Id. at ¶¶ 24, 31.) Both had authorization to write checks, use a business debit card, and make withdrawals from the account. (Wallner Aff. ¶ 19.)

Although Wallner was a manager and a member of the LLC, Liebl and Wallner agreed that Liebl would “largely control” the business management. (Second Am. Compl. ¶¶ 18-20.) Liebl's exact, formal corporate role in the LLC is unclear. He was the sole member and manager at the time of the LLC's organization. ( Id. at ¶ 17.) Under the LLC's Operating Agreement,¹ however, the initial members were Wallner and Kimberly Liebl, while Liebl is only a manager and not a member. ( Id. at ex. E 6, 37.) The Operating Agreement provided that all its powers would be exercised by or under authority of the Management Committee, consisting of Hans Liebl, Kimberly Liebl, Martin Wallner, and Susan Wallner; that the Management Committee had authority to sell or otherwise dispose of all, or substantially all, of the LLC's assets; and that unless authorized by the Operating Agreement or the Management Committee, no agent of the LLC had authority to bind it. ( Id. at ¶ 18, ex. E.) Beginning in March 2007 and without authorization, Liebl used funds held in the LLC's checking account in order to pay his personal expenses and creditors, creditors of his three other defunct limited liability companies, and creditors of Kimberly Liebl. ( Id. at ¶¶ 33-35; Wallner Aff. ¶¶ 14-15.) These transactions included inter alia, checks made payable to Liebl or payable to “cash” totaling $12,750.00; ATM withdrawals totaling $5,376.90, including withdrawals made while on vacation to Puerto Vallarta, Mexico and Door County, Wisconsin; and $14,850 for artwork purchased from Kimberly Liebl with LLC funds (Second Am. Compl. ¶¶ 33, 35, 36.) There are other allegations of unauthorized appropriations by Liebl, but the exact dollar amounts of those are not documented. ( See id.)

In March 2007, Liebl designed a logo and retail label on behalf of the LLC for “The Original Brat Hans” brand of sausage. ( Id. at ¶ 22.) The label featured caricatures of both Liebl and Wallner, and was approved by the Federal Drug Administration in July 2007. ( Id. at ¶¶ 22, 30, ex. B.) By November 2007, the LLC was selling approximately 10,000 pounds of sausage per month bearing the “The Original Brat Hans” retail label. (Wallner Aff. at ¶ 13.)

In October 2007, the LLC received a cease and desist letter from Coleman Natural Foods (“Coleman”), informing the LLC that it must cease its operations due to an alleged trademark infringement. (Second Am. Compl. ¶ 37.) Following receipt of the letter, Liebl offered all, or substantially all, of the “assets, intellectual property, and trade secrets” of the LLC to Coleman. ( Id. at ¶ 38.) In December 2007, Liebl also informed Wallner that the LLC had ceased operations. (Wallner Aff.¶ 17.) Coleman's response to Liebls' offer is unknown, but in February 2008, Coleman hired Liebl and began marketing a line of sausage that was also called “The Original Brat Hans” under a label strikingly similar to the one previously used by the LLC. ( Id. at ¶¶ 40-41.) One notable difference between the LLC's and Coleman's label is the absence of Wallner's signature and caricature. (Salegna Dep. [Docket No. 65 ex.] 97:9-104:22; Second Am. Compl. ex. C.) Coleman's line of The Original Brat Hans sausage is still being sold. (Second Am. Compl. ¶ 42; Wallner Aff. ¶ 18.) Liebl received a salary of $150,000, and Coleman agreed to assume $100,000 of debts incurred by way of Liebl's association with the LLC as a “signing bonus.” (Salenga Dep. 38:13-38:21, 46:7-46:25, 139:22-139:25, 143:1-143:5.)

On June 6, 2008, Liebl and Kimberly Liebl jointly filed their voluntary petition for relief under Chapter 7 of the Bankruptcy Code. On August 27, 2008 Wallner filed this Adversary Complaint, seeking money damages and to bar the discharge of the Liebls' debt to him on grounds arising from various provisions of 11 U.S.C. § 523(a). Wallner properly served a summons on the Liebls [Docket Nos. 2, 5]. Following several efforts by plaintiffs in this proceeding that are not pertinent here,² the present Motion for Default Judgment was presented.

CONCLUSIONS OF LAW

I. JURISDICTION

Subject matter jurisdiction lies under 28 U.S.C. § 1334. It is before the Court pursuant to 28 U.S.C. § 157 and is referred here by District Court Operating Procedure 15(a) of the United States District Court for the Northern District of Illinois. Venue lies under 28 U.S.C. §§ 1408 and 1409. This Adversary proceeding constitutes a core proceeding under 28 U.S.C. § 157(b)(2)(I).

II. DEFAULT PROCEDURES

“Upon default, all well-pled facts in the complaint are deemed admitted.” In re Smith, 280 B.R. 436, 441 (Bankr.N.D.Ill.2002) ( citing Geddes v. United Fin. Group, 559 F.2d 557, 560 (9th Cir.1977)). But entry of a default judgment does not automatically result after default. Id. ( citing Bermudez v. Reid, 733 F.2d 18, 21 (2d Cir.1984)). The grant of a motion for entry of a default judgment lies within the sound discretion of the trial court. Merrill Lynch Mortgage Corp. v. Narayan, 908 F.2d 246, 252 (7th Cir.1990). “In the bankruptcy context, where a debtor has a presumptive right to a discharge, default judgment motions should not be granted unless the movant shows that its debt is nondischargeable as a matter of law.” In re Zecevic, 344 B.R. 572, 576 (Bankr.N.D.Ill.2006). Thus, a plaintiff must show at least prima facie facts meeting the legal requirements to except a debt from discharge. See id.

III. EXCEPTION FROM...