Krieger Craftsmen, Inc. v. Ostosh (In re Ostosh)

• Decision Date: 20 September 2018
• Docket Number: Adversary Proceeding No. 16-80072,Case No. BG 15-04059
• Citation: 589 B.R. 319
• Parties: IN RE: Christopher J. OSTOSH, Debtor. Krieger Craftsmen, Inc., Plaintiff, v. Christopher J. Ostosh, Defendant.
• Court: U.S. Bankruptcy Court — Western District of Michigan

589 B.R. 319

IN RE: Christopher J. OSTOSH, Debtor.Krieger Craftsmen, Inc., Plaintiff,

v.Christopher J. Ostosh, Defendant.

Case No. BG 15-04059

Adversary Proceeding No. 16-80072

United States Bankruptcy Court, W.D. Michigan.

Signed September 20, 2018

Steven M. Bylenga, Esq. and Dan E. Bylenga, Jr., Esq., attorneys for Krieger Craftsmen, Inc., Plaintiff.

Timothy L. Taylor, Esq., attorney for Christopher J. Ostosh, Debtor-Defendant.

OPINION REGARDING NONDISCHARGEABILITY OF DEBT AND OBJECTIONS TO DISCHARGE

James W. Boyd, United States Bankruptcy Judge

I. INTRODUCTION AND ISSUES PRESENTED.

The complaint in this adversary proceeding arises from a long, acrimonious business relationship between Krieger Craftsmen, Inc. ("KCI" or the "Plaintiff") and Christopher J. Ostosh (the "Debtor" or "Defendant"). Specifically, KCI, as successor in interest to West Michigan Community Bank (sometimes referred to herein as "WMCB"), asserts that a debt owed by the Debtor should be nondischargeable because the loan was obtained by use of intentionally false financial statements under § 523(a)(2)(B) of the Bankruptcy Code.¹ KCI also asserts that the Debtor should be denied a discharge because he failed to satisfactorily explain a loss of assets under § 727(a)(5), transferred or concealed property with the intent to defraud creditors under § 727(a)(2)(A), and knowingly and fraudulently made false oaths or accounts in his bankruptcy case under § 727(a)(4)(A). For the reasons that follow, the court holds that the Debtor is entitled to judgment in his favor on all counts of the Plaintiff's complaint.

II. JURISDICTION.

The court has jurisdiction over this bankruptcy case. 28 U.S.C. § 1334. The bankruptcy case and all related proceedings have been referred to this court for decision. 28 U.S.C. § 157(a) ; L. Civ. R. 83.2(a) (W.D. Mich.). This nondischargeable debt action is a statutory core proceeding and this court has constitutional authority to enter a final order. 28 U.S.C. § 157(b)(2)(I) (determinations as to the dischargeability of certain debts); see, e.g., Hart v. Southern Heritage Bank (In re Hart), 564 F. App'x 773, 776 (6th Cir. Apr. 28, 2014) (unpublished opinion) (notwithstanding the Supreme Court's decision in Stern v. Marshall, 564 U.S. 462, 131 S. Ct. 2594, 180 L.Ed.2d 475 (2011), the bankruptcy court has "constitutional authority to enter a final monetary judgment" in a dischargeability action). Further, even Stern claims may be decided by bankruptcy courts if the parties consent. Wellness Int'l Network, Ltd. v. Sharif, ––– U.S. ––––, 135 S. Ct. 1932, 191 L.Ed.2d 911 (2015). While this is not a Stern claim, the parties have consented to this court entering a final order in this adversary proceeding. (See First Pretrial Order, AP Dkt. No. 12.)

III. FINDINGS OF FACT.

A four-day trial was held in this adversary proceeding on February 20 and 21, 2018, and April 9 and 10, 2018.² At the trial, the court heard testimony from four witnesses: the Debtor; Lynda Ostosh, the Debtor's wife; Jeffrey S. Berens, Executive Vice President and Chief Lending Officer of West Michigan Community Bank; and Doug Bouwman, Chief Executive Officer and shareholder in Commercial Tool & Die. The Debtor testified extensively, and the court found him to be a credible witness. Similarly, the court found Lynda Ostosh, Jeffrey Berens, and Doug Bouwman to be credible witnesses. The court also admitted numerous exhibits into evidence. After the trial, the parties submitted written closing statements on May 18, 2018, and briefs addressing supplemental legal authority on June 5, 2018.³

A. The Debtor's Prior Work History.

The Debtor began working as a machinist at his family's business, Hamilton Die & Mold, while attending college in the early 1980s. (Tr. at 19, 21-22.) In 1983, at age twenty-one, the Debtor formed his own mold machining business, Metal Masters. (Tr. at 25.) Through his hard work and skills as a machinist, the Debtor built Metal Masters into a successful enterprise. In his first year, he had sales of approximately $250,000, of which approximately $200,000 was profit. (Tr. at 26.) By the time Metal Masters ceased operations seventeen years later, its average annual sales had grown to between $5 million and $6 million. (Tr. at 25.)

In 1997, the Debtor stopped operating Metal Masters and joined Corver Engineering as a co-owner. (Tr. at 30, 34.) He left Corver after approximately fifteen months due to managerial differences with the other owners and Corver's financial troubles. (Tr. at 34-35, 475-76.) Shortly thereafter, in 1998 or 1999, the Debtor was approached by Doug Bouwman and offered a position with Bouwman's company, Commercial Tool & Die. (Tr. at 35-36.) The Debtor accepted Bouwman's offer, moved to the Grand Rapids area, and began working for Commercial Tool & Die as a consultant. (Tr. at 36.) Within a year and a half, the Debtor was promoted to president of the entire Commercial Tooling Group, which consisted of three companies, CG Plastics, CG Automation, and Commercial Tool & Die. (Tr. at 478.) According to the Debtor, Commercial Tool & Die's business grew considerably under his leadership: sales went from $10 to 15 million per year to $33 million per year, the size of the company's facilities tripled, and the company acquired several different machine tools. (Tr. at 480.) Regardless, by February 2005, Doug Bouwman determined that there was no more room for growth and insisted that the Debtor either take a fifty percent pay cut or be terminated. (Tr. at 480-81.) The Debtor refused the pay cut and Bouwman fired him. (Tr. at 93.)

B. The Debtor's Relationship with Krieger Craftsmen.

Krieger Craftsmen, Inc. (herein "KCI") is a plastic injection mold shop located on Three Mile Road in Grand Rapids, Michigan. (Tr. at 482-83.) In December 2005, the owner of KCI, Tim Krieger, contacted the Debtor about coming to work for the company. (Tr. at 39, 482.) The Debtor began working at KCI as a consultant a few weeks later, in January 2006. (Tr. at 39, 482, 484.)

From the time the Debtor began working for KCI, the company had financial challenges. For instance, in early January 2006, when the Debtor began consulting for KCI, the company had an outstanding balance of approximately $530,000 on its line of credit with its primary lender, West Michigan Community Bank. (Dft. Exh. C.) According to the Debtor, he immediately started suggesting operational improvements and ways to grow KCI's business, and over time his role at KCI evolved considerably. (Tr. at 484-85.) Sales increased and the volume of work at KCI went up. The Debtor explained that these increased sales required an up-front expenditure of cash for material and wages and a delayed receipt of payment for the finished product. (Tr. at 494.) This created additional cash flow issues at KCI. Throughout the next year and a half, the balance on KCI's line of credit continued to grow, often coming close to its limit of $745,000. (Dft. Exh. C.)

The Debtor also testified that Tim Krieger talked to him about becoming a partner in KCI or acquiring an ownership interest in the company from the inception of his employment. (Tr. at 487.) In October 2006, Tim Krieger made a written partnership offer to the Debtor. (Plf. Exh. 1.) Krieger's letter praised the "positive changes" that had happened at KCI during the Debtor's tenure with the company and expressed an interest in bringing the Debtor on as a partner in exchange for a $500,000 cash contribution. (Id.) The Debtor testified that he was never interested in forming a partnership with Tim Krieger or becoming a co-owner of KCI; nonetheless, there were "a lot of conversations and talk" about the Debtor acquiring some type of ownership interest in KCI. (Tr. at 486-87; 495-96.)

C. The November 27, 2006 Personal Financial Statement.

Tim Krieger also spoke to third parties, including WMCB, about the possibility of the Debtor acquiring an interest in KCI. (Tr. at 496.) On November 27, 2006, Jeremy Deutschmann, the loan officer responsible for KCI's account with WMCB, asked the Debtor to fill out a Personal Financial Statement ("PFS"). (Plf. Exh. 2; Dft. Exh. A.) The circumstances that led WMCB to request the PFS and the purposes for which it was provided are not clear from the record. Jeremy Deutschmann did not testify at trial, and Jeffrey Berens, the representative of WMCB who did testify, did not know why the personal financial statement was requested. (Tr. at 353-54.) He "surmised" that it may have been requested "in preparation for a loan request" or because the Debtor was generally looking to be an investor in KCI.⁴ (Tr. at 352-54.) Although the Debtor acknowledged that he checked a box at the top of the form marked "Individual Credit," indicating that he was "relying on [his] own income and assets ... as a basis for extension or repayment of credit," the Debtor testified that he was not seeking a loan from WMCB at the time the PFS was completed. (Plf. Exh. 2; Tr. at 496, 503.) Instead, the Debtor stated that he viewed the financial statement as an "accommodation" and a "cursory exercise" that was requested by the Bank based on Tim Krieger's general interest in bringing the Debtor on as a partner in KCI. (Tr. at 496, 503.) He filled it out from memory in about twenty minutes and returned it to Deutschmann. (Tr. at 460.)

The Plaintiff asserts that the November 27, 2006, Personal Financial Statement included numerous misrepresentations about the Debtor's assets and liabilities:

1. Undisclosed Liabilities . The Debtor testified that the $100,000 in "personal property" disclosed on the PFS likely included a Pontiac GTO that he owned at the time and had financed through GMAC. (Tr. at 58, 582.) The Debtor also testified that he provided vehicles for his children from the time they turned sixteen until they were at least twenty-one. (Tr. at 584.) The PFS states the current ages of the Debtor's children as "20, 19, and 16." (Plf. Exh. 2.) However, the PFS does not disclose any...