Lenox Pines, LLC v. Smith (In re Smith)
| Decision Date | 31 March 2021 |
| Docket Number | BANKRUPTCY CASE NO. 17-67324-LRC,ADVERSARY PROCEEDING NO. 18-05005-LRC |
| Parties | IN THE MATTER OF: DAVID L. SMITH, JR., Debtor. LENOX PINES, LLC, Plaintiff, v. DAVID L. SMITH, JR., Defendant. |
| Court | U.S. Bankruptcy Court — Northern District of Georgia |
IT IS ORDERED as set forth below:
IN PROCEEDINGS UNDER CHAPTER 7 OF THE BANKRUPTCY CODE
Lenox Pines, LLC ("Plaintiff"), alleges that David L. Smith, Jr. ("Defendant"), acting as its manager, engaged in self-dealing by fraudulently borrowing and by transferring Plaintiff's funds without authority to himself and his wholly owned business entities. Plaintiff further contends that Defendant intentionally caused Plaintiff's administrative dissolution to prevent Plaintiff from recovering its losses. Through a timely filed complaint, Plaintiff seeks a determination that the debts arising from Defendant's conduct are nondischargeable under 11 U.S.C. § 523(a)(2), § 523(a)(4), and § 523(a)(6)1 (Doc., 1, the "Complaint"). Alleging that Defendant concealed and transferred an asset, made false oaths in his bankruptcy schedules, failed to keep adequate financial records, and failed to explain the loss of his assets, Plaintiff also objects to the entry of Defendant's discharge, pursuant to § 727(a)(2), § 727(a)(3), § 727(a)(4), and § 727(a)(5). Id.
Plaintiff seeks summary judgment against Defendant on all counts of the Complaint. (Doc. 49, the "Motion"). In opposition, Defendant asserts that genuine issues of material fact remain in dispute as to his intent in handling both Plaintiff's funds and his bankruptcy case, as well as the sufficiency of his record keeping and his explanation regarding the loss of his assets. This matter constitutes a core proceeding over which this Court has subject matter jurisdiction. See 28 U.S.C. §§ 1334; 157(b)(2)(I), (J).
The Last Will and Testament of Dorsey R. Smith (the "Will") created a trust for the benefit of Defendant and his siblings, Britton McLeod ("McLeod") and D. Hayden Smith ("Hayden Smith, collectively with McLeod, the "Siblings"). Plaintiff's Statement of Undisputed Material Facts ("SUMF"), ¶ 1; Defendant's Response to SUMF ("Response to SUMF"), ¶ 1. The Trust initially named David L. Smith, Sr. ("Smith, Sr.") and James N. Cline ("Cline") as co-trustees of the Trust. SUMF, ¶ 2; Response to SUMF, ¶ 2. Paragraph VIII.J. of the Will states: SUMF, ¶ 2; Response to SUMF, ¶ 2.
Upon the death of Smith, Sr., the Will provided that the Trust res would be divided into three individual shares for Defendant and the Siblings. SUMF, ¶ 4; Response to SUMF, ¶ 4; Cline Affidavit, ¶ 6. The Will provides for Cline to be appointed as a co-trustee of "each and every Trust created by the Will." Will, Exhibit A to Cline Affidavit, Item VII, ¶ A. Upon division of the Trust into three equal shares for the benefit of Defendant and the Siblings, Defendant and the Siblings "shall qualify and commence service as a co-trustee of his or her respective share," continuing to serve with Cline until the property has been distributed in accordance with the terms of the Will. Id., ¶ B; see also Hayden Smith Affidavit, ¶ 3. Smith, Sr. passed away on or about June 29, 2008. Hayden Smith Affidavit, ¶ 3.
Plaintiff was organized as a Georgia limited liability company in order to invest the Trust's assets. Smith, Sr., managed Plaintiff and was a co-trustee of the Trust until hepassed away in 2008. The Trust is the sole owner and sole member of Plaintiff, and neither Defendant nor the Siblings were ever members of Plaintiff. SUMF, ¶ 3; Response to SUMF, ¶ 3; Supplemental Affidavit of James N. Cline (Doc. 52) ("Cline Affidavit"), ¶ 5; Affidavit of Hayden Smith (Doc. 52) ("Hayden Smith Affidavit"), ¶ 4. Plaintiff did not have a written operating agreement. Cline Affidavit, Exh. I (Deposition of David L. Smith, Jr., Aug. 31, 2016, at 80).
At the time of Smith, Sr.'s death, the corpus of the Trust consisted of cash totaling approximately $1,200,000, held in various financial accounts in the name of Plaintiff. SUMF, ¶ 5; Response to SUMF, ¶ 5; Cline Affidavit, ¶ 7. After the death of Smith, Sr., Defendant became the manager of Plaintiff. SUMF, ¶ 6; Response to SUMF, ¶ 6. On July 17, 2008, the Trust (acting through Cline) and Defendant executed a written contract with regard to Defendant's serving as the manager of Plaintiff (the "Agreement"). Id.; see also Hayden Smith Affidavit, ¶ 5, Exh. A. Pursuant to the Agreement, Defendant was responsible for the "day to day operations" of Plaintiff. Defendant was a signatory on Plaintiff's bank account with discretion to issue checks in an amount up to $5,000, but Defendant was required to consult with and obtain approval from Cline to issue checks in excess of $5,000. Id.
On or about April 8, 2009, Plaintiff made three loans to Defendant in the original principal amounts of $48,000, $36,500, and $45,000 (the "Loans"). SUMF, ¶¶ 9-10; Response to SUMF, ¶¶ 9-10. The Loans were evidenced by three promissory notes (the "Notes"). The Notes reference as "collateral" three pieces of real property: 1851 Fort Valley Drive, 1434 Mill Acres Drive, and 647 Lynn Valley Road (the "Note Properties"). Cline Affidavit, ¶ 11, Exhs. E, F, G. The Loans were due and payable in full on July 7, 2009, but repayment was extended to October 31, 2009, by Cline upon the request of Defendant made by letter on August 28, 2009. Id. In the letter, Defendant stated that "[d]ue to the delays in dealing with the Atlanta Housing Authority, which has resulted in much longer stabilization period than expected, Residential South Partners, LLC ["RSP"] needs to extend the maturity date until October 31, 2009," and that the Siblings "were aware and approve of this extension and the terms above." Cline Affidavit, ¶ 12, Exh. H; Response to SUMF, ¶ 10. Cline would not have authorized an extension of the deadline for repayment of the Loans if he had known that Defendant did not intend to repay the Loans and would have called the Loans due. Cline Affidavit, ¶ 13.
Defendant used the proceeds of the Loans to purchase the Note Properties. SUMF,¶ 9; Cline Affidavit, ¶ 11. Defendant did not repay the Loans on October 31, 2009. SUMF, ¶ 12; Response to SUMF, ¶ 12. On November 30, 2009, without Cline's knowledge, RSP pledged the Note Properties to another lender, American Trust Bank, in exchange for a loan of $132,000. Cline Affidavit, ¶ 15, Exh. K. Defendant did not repay the Loans on November 30, 2009. SUMF, ¶ 13; Response to SUMF, ¶ 13. RSP later sold the Note Properties and repaid the American Trust Bank loan but did not repay the Loans. Cline Affidavit, ¶ 14.
Beginning in or around November 2009, Defendant, the Siblings, and Cline agreed "to invest the Trust Funds from [Plaintiff] in certain real estate investments in Atlanta, Georgia"—3776 North Stratford Road ("3776 North Stratford"), 3992 and 4000 Arden Way (the "Arden Way Properties"), and 5331 Northland Road ("Northland Road") (collectively, the "Agreed Transactions"). Hayden Smith Affidavit, ¶ 6. On or about November 6, 2009, Defendant represented in writing to Cline and the Siblings that an investment in 3776 North Stratford was "an opportunity for the trust to generate income" and that Defendant planned for the investment to be "the first of others" that would "make some money for everyone." Cline Affidavit, ¶ 18; Exhibit J; Response to SOMF, ¶ 16.
On June 21, 2010, Defendant sent an email message to Cline regarding an investment in the Arden Way Properties. Cline Affidavit, ¶ 19, Exh. L. In the email, Defendant stated that he had formed a new entity called RSP Arden Way, LLC ("RSP AW") to take title to the Arden Way Properties and that Plaintiff would be "one of the members if not the only member." Id. The email further states, however, that Defendant was "still working on the structure of the entity." Id. Attached to this email was a proposed operating agreement for RSP AW, dated June 22, 2010, which reflected that the members would be RSP and Plaintiff. Id. On June 24, 2010, Defendant sent an email message with the subject "Arden Way Amendments" to Cline stating that "we need to make [Plaintiff] the sole member, but I need to be the manager for a couple of reasons, mainly b/c the bank is requiring . . . ." Cline Affidavit, ¶¶ 19-20, Exh. M. Defendant transferred $536,000 from Plaintiff's account to the account of RSP AW on June 24, 2010. SUMF, ¶17; Response to SUMF, ¶ 17; Cline Affidavit, ¶¶ 19-20. On June 24, 2010, $536,000 of Plaintiff's funds were used by RSP AW to purchase the Arden Way Properties. SUMF, ¶¶ 17-18; Response to SUMF, ¶¶ 17-18; see also Defendant's Response to Interrogatories, Case No. 18-5004, Request No. 8, Exhibit W to Cline Affidavit (Doc. 41).
An operating agreement for RSP AW also dated June 22, 2010, lists RSP as the onlymember of RSP AW. Cline Affidavit, Exh. O. Cline did not know that Defendant had changed the operating agreement for RSP AW to exclude Plaintiff as a member. Cline Affidavit, ¶ 20. Cline did not agree to the change. Id. Defendant never repaid Plaintiff the $536,000 used by RSP AW to purchase the Arden Way Properties. Cline Affidavit, ¶ 21.
On or about July 12, 2010, Defendant withdrew $50,000 from Plaintiff's account and deposited the funds into the account of RSP. Cline Affidavit, ¶ 22. Defendant...
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...defendant's conversion of the property fraudulent and thus embezzlement under § 523(a)(4). Id. (quoting Lenox Pines, LLC v. Smith (In re Smith), No. 17-67324, 2021 WL 1234245 at *10 (Bankr. N.D. Ga. March 31, 2021 (Ritchey Craig, J.)). Circumstantial evidence, concealment of evidence by def......