In re Townsley
| Decision Date | 10 April 1996 |
| Docket Number | Bankruptcy No. 93-40287. Adv. No. 93-4149. |
| Citation | 195 BR 54 |
| Parties | In re David Michael TOWNSLEY, fdba FTI, d/b/a Foam Technologies, Inc., fdba Foam Technologies, fdba Foam Technologies, Inc., Debtor. Michael MOZEIKA, Jr., Individually and Derivatively on Behalf of Foam Technologies, Inc., and New Dimension Industries, Inc., Plaintiff, v. David Michael TOWNSLEY, Defendant. |
| Court | U.S. Bankruptcy Court — Eastern District of Texas |
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Michelle Bohreer, Seiler, Cohn & Stebbins, L.L.P., Houston, Texas, for Plaintiff.
David Townsley, McKinney, Texas, Defendant Pro Se.
COMES NOW before the Court for consideration the Original Complaint to Determine Dischargeability of Debt and to Object to Discharge. This opinion constitutes the Court's findings of fact and conclusions of law to the extent required by Fed.R.Bankr.P. 7052, and disposes of all issues before the Court.
David Townsley ("Townsley") has developed a certain expertise in manufacture and marketing of foam wraps for the automotive industry and other motorized applications. The testimony did not explain exactly how a foam wrap functions, but the technical aspects of the manufacture and application of the device is not necessary to a resolution of the issues in this case. It is sufficient to know that foam wraps are a component of filter systems on engines and can be sold to manufacturers for use as original equipment or can be placed in various retail locations for sale to consumers for use in engines owned by the consumer.
In mid-summer of 1990, probably July, mutual acquaintances introduced Townsley to Michael Mozeika ("Mozeika") who owned and operated a business called New Dimension Industries, Inc. which was located in New Jersey. Mozeika was in certain aspects of the same business as Townsley and it was believed by the mutual acquaintance that the expertise of the two parties would complement each other in the further manufacture and marketing of foam wraps and related filter products for the automotive industry.
The parties engaged in some discussion in which there was a loose agreement that Mozeika, through his corporation, would supply capital in the form of cash and raw materials to Townsley who would incorporate those raw materials into a finished product for sale. It is clear from the testimony that the parties did not have a really clear understanding of their exact business relationships and apparently each of them deliberately left the relationship rather vague in what this Court believes to be an effort on the part of each to gain some ultimate advantage.
In October of 1990, Townsley produced a pro forma income statement projecting very rosy results and lucrative profits which could be expected from their joint development and marketing efforts. The pro forma contained a complete business plan which envisioned the commencement of manufacture of foam wraps which would gradually expand to include a complete line of marine filters, custom filters, direct replacement filters and heavy duty filters. As it turns out, the projections were far too optimistic and the level of predicted sales never materialized. For his part, Mozeika agreed to furnish up to $80,000.00 in cash and raw materials to fund the business and get it up and going.
The parties never agreed on the exact form of entity to use in their new joint venture but after their meetings in the fall of 1990 and clearly without the agreement and concurrence of Townsley, Mozeika caused a corporation to be formed and registered in New Jersey known as Foam Technologies, Inc. He listed himself and Townsley as the officers of this corporation and listed Townsley as a fifty (50%) percent owner of the corporation. There was never any corporate stock issued and the state of the corporate records is unknown to the Court. Although Townsley did not participate in the forming of the corporation, he apparently ratified the actions of Mozeika by continuing with the joint enterprise.
Although both parties were ostensibly fifty (50%) percent owners of a new business that was a joint enterprise, they continued to work completely independently and never formed a coherent operating company in which each was fully acquainted with what the other was doing and what was happening in their joint enterprise.
Townsley continued to operate in North Texas in an effort to market their products and continued to supply Mozeika with overly optimistic projections of future sales. Mozeika continued to operate his business in New Jersey and supplied part of the capital he had agreed to supply along with some amounts of raw materials to be used in the manufacture of the foam wraps. However, it is clear that relationships began to deteriorate almost from the beginning. Mozeika expected profits to start flowing in quickly, and Townsley expected the cash infusion from Mozeika to flow much more quickly than it did. Consequently, the relationship between the two became strained from the beginning and there was constant tension between the parties dealing with what Townsley felt was Mozeika's failure to properly fund the operation and what Mozeika thought was Townsley's failure to produce the lucrative profits he expected. Although the parties continued to maintain their relationship, it is clear from the correspondence introduced into evidence that communication between the two was becoming more and more strained. In December, 1990 the relationship had deteriorated to the point that Mozeika required Townsley to execute personal guaranties for the funds advanced. By February or March of 1991, there was a defacto termination of their mutual efforts. At that point, Mozeika had not supplied the $80,000.00 in capital but had only supplied slightly more than half that amount and Townsley had not produced anything like the sales projected in his earlier pro forma statements. Although the parties did not formally terminate their relationship and liquidate the corporation, they did terminate any pretense of working together and Mozeika began to demand repayment of the sums he had advanced to Townsley. From late February or early March of 1991, there was no longer any pretense that these parties were working together and from that point forward it is clear that Townsley was attempting to find other suppliers of raw materials and attempting to continue to market his product. Apparently he met with some limited success in that he did sell at least $315,000.00 worth of product to Purolator.
It is clear that in March of 1991 Townsley began to transact business individually and use the trade name Foam Technologies Industries. In March of 1991 Townsley opened a separate bank account and from that point forward proceeded to do business as a sole proprietorship and utilized the name "Foam Technologies" or the initials "FTI" in his business transactions. Townsley testified that it was his belief that his relationship with Mozeika was severed at that point. It is clear to this Court that both parties were fully aware that their joint venture was at an end. Although the parties were no more definitive and formal in the termination of their relationship than they were in the formation of their relationship, it is clear that their efforts to work together developed in the fall of 1990 and terminated in the spring of 1991. It is also clear that they never had a mutual understanding of the goals that each had for their joint enterprise, and it is clear that each party attempted to use the vague nature of their relationship to advance what he perceived as his personal best interests.
On or about March 12, 1993, Townsley filed for relief under Chapter 7 of the Bankruptcy Code. His only explanation as to the disposition of the $315,148.88 he received from sales is that it was used to pay expenses. His Statement of Financial Affairs failed to list any income received in the year 1991. Mozeika has brought the present complaint seeking $45,700.00 in damages individually and judgment that such damages are nondischargeable pursuant to 11 U.S.C. § 523(a)(2)(A) and § 523(a)(2)(B); $22,545.30 in damages for New Dimensions and judgment that such damages are nondischargeable pursuant to 11 U.S.C. § 523(a)(2)(a); $315,148.88 in damages for FTI and judgment that such damages are nondischargeable under 11 U.S.C. § 523(a)(4); judgment denying Townsley's discharge pursuant to 11 U.S.C. § 727(a)(4)(A) and § 727(a)(5); and attorney's fees in the amount of $87,000.00.
Mozeika invested in FTI because of representations by Townsley that such investment would be very profitable. Townsley told Mozeika that he had a substantial existing client base, which would inure to the benefit of FTI. He produced pro formas that projected substantial sales and income from these and other clients. (Exhibits 201-203). Moreover, Townsley represented that he was developing a potentially large client, Purolator, for FTI.
Mozeika advanced $45,700.00 to FTI from December, 1990, through February, 1991.1 However, beginning in December, 1990, Mozeika insisted on personal guarantees from Townsley for one-half (½) of all monies forwarded by Mozeika. (Exhibits 302-307). This money was supposed to be Mozeika's investment in the business to be used to develop product and potential clients for FTI. As the relationship between the parties deteriorated it is apparent that Mozeika began to view it more as a loan and insisted on the personal guarantees.
For his part, Townsley had wholly failed to produce the volume of sales predicted in his optimistic pro forma that had been presented to Mozeika. Actual sales were almost nonexistent and Townsley was long on promises but very short on performance. Townsley's version of the cause for this failure was his constant problem in getting Mozeika to live up to the investment...
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