Kapitus Servicing v. Polk (In re Polk)
| Decision Date | 19 December 2019 |
| Docket Number | Adversary Proceeding No. 19-03007,Case No. 18-30913-JPS |
| Parties | In the Matter of CHRISTOPHER DAVID POLK, Debtor KAPITUS SERVICING, INC., formerly known as Colonial Funding Network, Inc. as servicing provider for Strategic Nationwide Funding, Plaintiff v. CHRISTOPHER DAVID POLK, Defendant |
| Court | U.S. Bankruptcy Court — Middle District of Georgia |
BEFORE James P. Smith United States Bankruptcy Judge
APPEARANCE:
For Debtor/Plaintiff:
Justan C. Bounds
Carlton Fields, P.A.
1201 W. Peachtree Street
Suite 3000
Atlanta, GA 30309
Donald R. Kirk
Carlton Fields Jorden Burt, P.A.
P. O. Box 3239
Tampa, FL 33601
J. Ryan Yant
Carlton Fields Jorden Burt, P.A.
P. O. Box 3239
Tampa, FL 33601
For Defendants:
Wesley J. Boyer
Boyer Terry LLC
348 Cotton Avenue
Suite 200
Macon, GA 31201
MEMORANDUM OPINIONIn this adversary proceeding, Kapitus Servicing, Inc., formerly known as Colonial Funding Network, Inc. as servicing provider for Strategic Nationwide Funding ("Kapitus") seeks to have its claim against Debtor declared nondischargeable pursuant to 11 U.S.C. §§ 523(a)(2)(A), (a)(2)(B), (a)(4) and (a)(6). The matter came on for trial on September 17, 2019.1
At the conclusion of the evidence, the Court requested that the parties submit their closing arguments in the form of proposed findings of fact and conclusions of law. The Court, having considered the evidence, the parties' arguments and the law, hereby issues its findings of facts and conclusions of law pursuant to Bankruptcy Rule 7052.
Debtor was the owner and managing member of AgForest, LLC ("AgForest"), an entity in the timber business. On June 14, 2016, AgForest entered into a "Revenue Based Factoring (RBF/ACH) Agreement" (the "June Contract") with Strategic Nationwide Funding ("Strategic") pursuant to which Strategic purchased $55,200 of AgForest's future receivables for the purchase price of $40,000.2 Pursuant to the June Contract, AgForest was required to repay Strategic $55,200 over a period of months by payments of $219 per business day. Debtor personallyguaranteed the June Contract.
AgForest was required to maintain a bank account into which all of its receivables were deposited. Kapitus was responsible for servicing the June Contract for Strategic. AgForest was required to sign an agreement allowing Kapitus to make electronic drafts on AgForest's bank account ("ACH Debit") to collect the daily payments of $219.
The agreement was funded on June 16, 2016 when the agreed amount was deposited by Strategic into AgForest's bank account.3 Payments on the June Contract began June 17, 2016 and were timely withdrawn by Kapitus through October 7, 2016.
On September 13, 2016, AgForest entered into another agreement with Strategic pursuant to which Strategic purchased an additional $55,200 of AgForest's future receivables for $40,000 (the "September Contract"). Debtor also personally guaranteed the September Contract. The September Contract required payments of $239 per business day until the total of $55,200 had been paid to Strategic. Except for the payment terms, the terms of the June and September Contracts and guarantees were the same.4
The September Contract was funded on September 20, 2016 when Strategic deposited $39,195 into AgForest's bank account.5 The daily payments of $239 began on September 21 andwere timely withdrawn by Kapitus through October 7, 2016.
Debtor testified that, prior to October 2016, AgForest had been working on a major timber contract for 30 to 45 days. However, sometime prior to October, the land owner changed his mind and did not enter into the contract.6 Debtor testified that this devastated the company. He testified AgForest could no longer make the daily payments to Strategic. Accordingly, on or about October 11, 2016, Debtor placed a "stop payment" order on the ACH Debits to Strategic.
Debtor filed a voluntary Chapter 13 case in this Court (Case No. 16-31255) on November 22, 2016. This case was dismissed on March 22, 2017. Debtor filed a second Chapter 13 case in this Court on May 17, 2017 (Case No. 17-30577). This case was dismissed on May 29, 2018. Debtor filed the instant Chapter 11 case in this Court on August 30, 2018. Kapitus filed a claim, arising from the June and September Contracts, of $122,847.49. The complaint initiating this adversary proceedings was timely filed on March 18, 2019.7
Kapitus asserts that its claim against Debtor is nondischargeable under several subsections of 11 U.S.C. § 523(a). Kapitus has the burden of proving by a preponderance of the evidence that its claim is nondischargeable. Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 564, 112 L.Ed. 2d 755 (1991).
[C]ourts generally construe the statutory exceptions to discharge in bankruptcy 'liberally in favor of the debtor,' and recognize that '[t]he reasons for denying a discharge...must be real and substantial, not merely technical and conjectural.'" In re Tully, 818 F.2d 106, 110 (1st Cir. 1987) (quoting Dilworth v. Boothe, 69 F.2d 621, 624 (5th Cir. 1934)) seealso, Boyle v. Abilene Lumber, Inc.(Matter of Boyle), 819 F.2d 583, 588 (5th Cir. 1987). This narrow construction ensures that the "honest but unfortunate debtor" is afforded a fresh start. Birmingham Trust Nat'l Bank v. Case, 755 F.2d 1474, 1477 (11th Cir. 1985).
Equitable Bank v. Miller, (In re Miller), 39 F.3d 301, 304 (11th Cir. 1994). The Court will address each of Kapitus' arguments.
Kapitus argues that Debtor made a number of false representations in the contracts and thus its claim is nondischargeable under section 523(a)(2)(B). Section 523(a)(2)(B) provides:
Kapitus argues that Debtor made a false representation in Paragraph 2.9 of each contractthat AgForest, an insider of Debtor (11 U.S.C. § 101(31)(A)(iii)), was not insolvent. That paragraph provides, in pertinent part:
No Bankruptcy or Insolvency. As of the date of this Agreement, [AgForest] represents that it is not insolvent and does not contemplate and has not filed any petition for bankruptcy protection under Title 11 of the United States Code and there has been no voluntary petition brought or pending against [AgForest]. [AgForest] further warrants that it does not anticipate filing any such bankruptcy petition and it does not anticipate that an involuntary petition will be filed against it....
Kapitus argues that this representation was materially false because AgForest was insolvent. To prove insolvency of AgForest, Kapitus points to AgForest's inability to cover a $64,325.14 "missing" check owed to one of AgForest's customers, a $140,062.87 judgment owed to a creditor, a $34,000.00 tax lien and a debt to the IRS of approximately $1,000,000.00. However, Kapitus' argument fails for several reasons.
Initially, it should be noted that the term "insolvent", as used in Paragraph 2.9 of the contracts, is not defined. The contracts, pursuant to Paragraph 4.5, are to be governed by New York law. Under New York law, words used in a contract are to be given their plain meaning. O'Neill v. O'Neill, 174 A.D. 3d 1526, 1527, 108 N.Y. S. 3d 255, 257 (2019).
Kapitus points to the nonpayment of certain debts and essentially argues that AgForest was insolvent because it was "generally not paying its debts as they come due". One New York court has recognized the difficulty of determining whether a debtor is generally paying its debts as they come due by examining how bankruptcy courts have handled the issue in involuntary bankruptcy cases. In Magten Asset Mgt. Corp. v. Bank of N.Y., 15 Misc. 3d 1132[A], 2007 N.Y. Slip Op. 50951[U], *4-6, 2007 WL 1326795 (Sup. Ct., N.Y. County May 8, 2007) (Fried, J.), thecourt explained:
Bankruptcy courts have found that there is no precise definition of the term "generally not paying" (Matter of LeSher Intl., Ltd., 32 BR 1, 2 [Bankr SD N.Y. 1982]; seealsoIn re Brooklyn Resource Recovery, 216 BR 470, 481-482 [Bankr ED N.Y. 1997]; In re Einhorn Vacation Planning Ctr., 59 BR 179, 185 [Bankr ED N.Y. 1986]). Furthermore, in order to determine whether the debtor is not paying its debts as they come due, the court examines the number and amount of claims against the debtor, the materiality of any nonpayments in the context of the debtor's overall financial picture, and its conduct of its financial affairs (In re Brooklyn Resource Recovery, 216 BR at 481; seealsoIn re B.D. Intl. Discount Corp., 701 F. 2d 1071, 1075 [2nd Cir 1983]; In re Amanat, 321 BR 30, 39 [Bankr SD N.Y. 2005], citing In re Paper I Partners L.P. 283 BR 661, 677 [Bankr SD N.Y. 2002]; In re Century/ML Cable Venture, 294 BR 9, 31 [Bankr SD N.Y. 2003]).
Id. at *7.8 Evidence of the overall status of Debtor's claims and payments at the time the contracts were signed was not developed. Accordingly, the Court does not have sufficient evidence to make a determination of insolvency based on the "generally not paying" standard.
Under the Bankruptcy Code, the term "insolvent" means "...financial conditions such that the sum of such entity's debts is greater than all of such entity's property, at a fair valuation...". 11 U.S.C. § 101(32). For purposes of New York's fraudulent conveyance statutes:
A person is insolvent when the present fair salable value of his assets is less than the amount that will be required to pay his probable liabilities on his existing debts as they become absolute and...
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