In re Jones

• Court: U.S. District Court — Northern District of Texas
• Writing for the Court: STACEY G.C. JERNIGAN, Bankruptcy Judge.
• Citation: In re Jones, 445 B.R. 677 (N.D. Tex. 2011)
• Decision Date: 03 February 2011
• Docket Number: Adversary No. 09–03051–SGJ.,Bankruptcy No. 08–36014–SGJ–7.
• Parties: In re Robert Warren JONES, Debtor.Tiffany Mullen and Mike Mullen, Plaintiffs,v.Robert Warren Jones, Defendant.

445 B.R. 677

In re Robert Warren JONES, Debtor.Tiffany Mullen and Mike Mullen, Plaintiffs,

v.Robert Warren Jones, Defendant.

Bankruptcy No. 08–36014–SGJ–7.

Adversary No. 09–03051–SGJ.

United States Bankruptcy Court, N.D. Texas, Dallas Division.

Feb. 3, 2011.

Brian Patrick Shaw, Derek D. Rollins, Leland C. de la Garza, Shackelford, Melton & McKinley, LLP, Dallas, TX, for Plaintiffs.Areya Holder, Law Office of Areya Holder, P.C., Irving, TX, for Defendant.

MEMORANDUM OPINION ¹ IN SUPPORT OF: (A) JUDGMENT OF NONDISCHARGEABLE DEBT OWED BY DEBTOR TO TIFFANY MULLEN, PURSUANT TO 11 U.S.C. § 523(a)(4); AND (B) SEPARATE JUDGMENT THAT DEBTOR SHOULD BE DENIED HIS GENERAL DISCHARGE PURSUANT TO 11 U.S.C. §§ 727(a)(2)(A) AND 727(a)(4)(A)STACEY G.C. JERNIGAN, Bankruptcy Judge.

I. INTRODUCTION

This Adversary Proceeding was brought jointly by two Plaintiffs. Both Plaintiffs urge that the above-referenced Defendant, a Chapter 7 debtor, should be denied his general discharge, pursuant to Section 727(a)(2), (4), or (5) of the Bankruptcy Code. One Plaintiff additionally urges that her claim should be specifically excepted from discharge pursuant to Section 523(a)(4) of the Bankruptcy Code.²

The Plaintiffs are: (a) Mike Mullen, a sophisticated Dallas businessman, with significant personal wealth and access to capital markets (“Mr. Mullen”); and (b) Tiffany Mullen, the former wife of Mr. Mullen, who is a beautiful, former model, and resides in Aspen, Colorado (the “Ex–Mrs. Mullen”). The Defendant/Debtor in this matter is Robert Warren Jones (the “Debtor”), who is a charismatic makeup artist and hair stylist of some celebrity—having published several books and appeared on various TV shows such as NBC's Today Show.

The Ex–Mrs. Mullen first became acquainted with the Debtor through her modeling career. Eventually, Mr. Mullen and the Ex–Mrs. Mullen decided, prepetition, to embark upon a business venture with the Debtor known as Simple Beaute, Ltd. (“Simple Beaute”). Simple Beaute was formed as a Texas limited partnership in 2001, and was primarily intended to sell DVDs and instructional books (full of glossy pictures and explanatory text) that would teach women how to properly apply cosmetics.³ Mr. Mullen ultimately made a loan to Simple Beaute, and the Debtor personally guaranteed that loan; approximately $250,000 of unpaid interest remains due and owing on such loan. While the Debtor offered some testimony suggesting that the interest on such loan may have been orally forgiven by Mr. Mullen, this court has concluded that Mr. Mullen is, in fact, a creditor of the Debtor.⁴ The Ex–Mrs. Mullen's creditor-status vis-a-vis the Debtor was more ambiguous than Mr. Mullen's, prior to the presentation of all the evidence.

The Ex–Mrs. Mullen was actually a 38.61% limited partner of Simple Beaute, and also provided gratuitous modeling services for the photography layouts in the Simple Beaute books (as well as some limited, gratuitous consultation to the Debtor at the early stages of Simple Beaute). The Ex–Mrs. Mullen has filed a proof of claim (and taken the position in this Adversary Proceeding) that the Debtor—as a director, officer, and 51% owner/controller of the corporate, managing general partner of Simple Beaute, Beaute Management, Inc. (the “Corporate GP”)—committed fraud or defalcation while acting in a fiduciary capacity and otherwise breached fiduciary duties owed to the Corporate GP and to Simple Beaute, and she, as an equity owner of these entities, can derivatively assert a claim on their behalves and on behalf of herself individually against the Debtor. The fraud or defalcation allegedly committed by the Debtor was, primarily, using Simple Beaute's funds as the Debtor's own personal piggy bank—charging as “business expenses” his and his domestic partner's lavish treatments at spas, vacations, expensive jewelry, clothing, home renovations, a Land Rover and various other items that were largely undocumented and wholly personal in nature. The debt that the Ex–Mrs. Mullen asserts is owed to her by the Debtor is actual damages in the form of one or more of the following: (a) loss of funds to Simple Beaute from the Debtor's inappropriate spending of its funds (presumably her proportionate partnership share thereof); (b) her share of lost profits that would have otherwise been distributed, if not for the inappropriate spending; and/or (c) diminishment in the value of her partnership interest by the inappropriate spending.

As explained further herein, the court has ultimately concluded that the Ex–Mrs. Mullen is, indeed, a creditor of the Debtor with a nondischargeable claim pursuant to Section 523(a)(4) of the Bankruptcy Code— i.e., the Debtor ultimately owes a debt to her as a result of his defalcation while acting in a fiduciary capacity. As will be further explained herein, the Debtor was—according to controlling Fifth Circuit case law—acting in a “fiduciary capacity,” as contemplated by Section 523(a)(4) of the Bankruptcy Code, in his role as the person in control ( i.e., President, Director, and majority shareholder) of the sole managing general partner of Simple Beaute (as later explained, the two-tiered entity structure that was in place did not insulate the Debtor from owing fiduciary duties directly to the Ex–Mrs. Mullen; the court has further determined that recent changes in Texas statutory partnership law also do not preclude the Debtor from being a fiduciary). Moreover, the Debtor willfully neglected his fiduciary duties with his misuse ( i.e., inappropriate spending) of Simple Beaute's money in a rather outrageous and flagrant manner—and a willful neglect of fiduciary duties is a “defalcation,” as contemplated by Section 523(a)(4) of the Bankruptcy Code, even when not accompanied by fraud or embezzlement.

Additionally, Texas law recognizes that damages awards are permissible for breaches of fiduciary duties owed to limited partners. The applicable case law holds that damages can be calculated in many different ways ( e.g., in the form of restitution equivalent to the loss of partnership investment; lost profits; damages for funds misdirected from the partnership; exemplary damages; etc.). Here, the court has determined that the compensatory damages that should be awarded to the Ex–Mrs. Mullen should equal: (a) the sums that the evidence conclusively showed were misappropriated (or allowed to be misappropriated) by the Debtor from Simple Beaute, (b) multiplied by the Ex–Mrs. Mullen's partnership interest of 38.61%. The evidence from a very credible expert witness, Ken Sibley (through Trial testimony and a voluminous expert report—Plaintiffs' Exhibits 171 & 172) demonstrated to the court's satisfaction that at least $1,713,320.67 of funds were improperly spent by the Debtor, or by his domestic partner and booking agents (a Ms. Smyth and a Ms. Moock), with the Debtor's permission ($1,570,551.27 in improper, personal expenses, plus another $142,769.40 booked as an account receivable owed by the Debtor that has never been repaid). Thus, the debt to the Ex–Mrs. Mullen owed by the Debtor that should be excepted from discharge, pursuant to Section 523(a)(4) of the Bankruptcy Code, equals $661,513.11 ($1,713,320.67 multiplied by 38.61%), less a $26,566.45 credit,⁵ plus $100,000 of exemplary damages,⁶ for a total of $734,946.66, plus reasonable attorney's fees, costs and expenses. Attorney's fees, costs, and expenses are reimbursable to the Ex–Mrs. Mullen, pursuant to at least paragraph 12.8 of the Partnership Agreement between her and the Debtor (and others), and pursuant to Chapter 38 of the Tex. Civ. Prac. & Rem. Code. The Ex–Mrs. Mullen is directed to request a separate evidentiary hearing to prove up reasonable attorney's fees, costs and expenses.⁷

Mr. Mullen has not pleaded that his individual claim against the Debtor should be excepted from discharge but has, along with the Ex–Mrs. Mullen, urged that the Debtor should be denied a general discharge, pursuant to Section 727(a)(2), (4), and (5) of the Bankruptcy Code. With respect to the Section 727(a)(2) count, the allegation is that the Debtor transferred, removed or concealed property of the Debtor (or permitted to be transferred, removed, or concealed property of the Debtor) within one year before the date of filing bankruptcy with the intent to hinder, delay or defraud Mr. Mullen, the Ex–Mrs. Mullen, and other creditors. The Debtor is alleged to have also continued this transferring, removing, and concealing of property after the bankruptcy petition date. The property alleged to have been transferred (all to HCM Holdings, LLC (“HCM”), a business owned by the Debtor's domestic partner, which appears to be nearly identical to the business of Simple Beaute) is as follows: (a) the name “Robert Jones” and goodwill associated therewith; (b) rights/royalties to certain books the Debtor wrote; and (c) uncompensated services ( i.e., the Debtor now performs beauty workshops where he promotes the products of HCM for free). With respect to the Section 727(a)(4) count, the Debtor is alleged to have knowingly and fraudulently, in or in connection with his case, made a false oath, by omitting material information from his Schedules and Statement of Financial Affairs, including: (a) the Debtor's alleged interest in HCM; (b) the Debtor's alleged guaranty to a book publisher; (c) certain copyrights; (d) certain royalty rights; and (e) certain trademark rights. With respect to Section 727(a)(5) of the Bankruptcy Code, the Debtor allegedly has failed, during the case, to satisfactorily explain a loss or deficiency in assets to meet his liabilities.

The court has concluded that the Plaintiffs have met their burden of proof on the Section 727(a)(2) and (4) counts. The evidence seemed clear that certain rights and opportunities of the Debtor were transferred into HCM after things became contentious with the Mullens and they sued the Debtor in state court. Moreover, the...