Light v. Whittington (In re Whittington)
| Decision Date | 19 August 2014 |
| Docket Number | Bankruptcy No. 13–11036.,Adversary No. 13–01121. |
| Citation | 530 B.R. 360 |
| Parties | In re Bradley D. WHITTINGTON and Londa L. Whittington, Debtors. Robert S. Light, Stanley Light, George Gary Duncan, Adrianna D. Duncan, Robert Craig Duncan, Diana Duncan, The Meadows at Kyle II, Plaintiffs, v. Bradley D. Whittington, Defendant. |
| Court | U.S. Bankruptcy Court — Western District of Texas |
William Xander King, Sloan, Bagley, Hatcher & Perry, Houston, TX, John D. Sloan, Jr., Sloan, Bagley, Hatcher & Perry, Jason R. Searcy, Jason R. Searcy, P.C., Longview, TX, George G. Duncan by Law Office Gary G. Duncan, Santa Fe, NM, for Plaintiffs.
Harrel L. Davis, III, Gordon Davis Johnson & Shane P.C., El Paso, TX, for Defendant.
In this case, the Court must determine whether certain debts must be deemed non-dischargeable due to the debtor's failure to disclose side profits he made on land deals in which he served as fiduciary for passive investors.
This matter comes before the Court on the parties' extensively briefed cross-motions for summary judgment:
The Court has considered these submissions; the other pleadings in the record; the exhibits attached to the various briefs, including the affidavits and deposition transcripts;1 the arguments made at a hearing on this matter on May 14, 2014 (the “Hearing ”);and the relevant law. Leaving aside certain damages issues that must be left for determination upon a more developed factual record, the Court will grant summary judgment to Plaintiffs and deny it to Defendant, Bradley D. Whittington.
The Court has jurisdiction under 28 U.S.C. §§ 157 and 1334, and this is a core proceeding. See 28 U.S.C. § 157(b)(2)(I) ; Morrison v. W. Builders of Amarillo, Inc. (In re Morrison), 555 F.3d 473 (5th Cir.2009).
As far as constitutional authority, non-dischargeability actions were not “the stuff of the traditional actions at common law tried by the courts at Westminster in 1789.” Stern v. Marshall, ––– U.S. ––––, 131 S.Ct. 2594, 2609, 180 L.Ed.2d 475 (2011) (quoting Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 90, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982) (Rehnquist, J., concurring in judgment)). To the contrary, non-dischargeability actions “flow from a federal statutory scheme.” Stern, 131 S.Ct. at 2614. Thus, the Court has constitutional authority to enter a final judgment.
Due to the tangle of entities, individuals, and transactions, this case has a patina of complexity, but its core is quite simple, and the parties are in essential agreement as to all relevant facts.
The case revolves around the purchases of four properties in the Buda/Kyle area south of Austin, Texas. The deals at issue (the “Challenged Transactions ”) were made by three partnerships (the “Investor Partnerships ”): The Meadows at Buda, Ltd. (“Meadows at Buda ”), The Meadows at Kyle, Ltd. (“Meadows at Kyle I ”), and The Meadows at Kyle II, Ltd. (“Meadows at Kyle II ”).2 Meadows at Buda purchased two properties (the “Hale Property ” and the “Finley Property ”), Meadows at Kyle I purchased one property (the “Whitten Property ”), and Meadows at Kyle II purchased one property (the “Perron Property ”). See generally Pl. M.S.J. on Liab., Exs. 11, 14, 14A, 15 (Finley Property), Exs. 11, 20, 21, 65 (Hale Property), Exs. 30, 31, 33 (Whitten Property), Exs. 44, 47, 48 (Perron Property).
Robert Light, Stanley Light, George Gary Duncan (who goes by Gary), Adrianna Duncan, Robert Duncan, Diana Duncan (the “Individual Plaintiffs, ” and together with Meadows at Kyle II, “Plaintiffs ”)invested (on their own and through affiliated entities) as limited partners in the Investor Partnerships. See Pl. Resp. to Def. M.S.J., Exs. 10, 28, 46. The general partner of each Investor Partnership was an entity controlled by Defendant, Whittington.3 On the basis of his status as manager of each general partner, Whittington signed on behalf of each Investor Partnership at the closing of each Challenged Transaction. The closings took place from June 2004 to August 2006.4
What Whittington did not disclose to the limited partners—and what he affirmatively denied to Plaintiff Gary Duncan with respect to the Meadows at Kyle II deal—was that a portion of the purchase amounts paid by the Investor Partnerships never made it to the sellers of the properties. Rather, Whittington and some of his associates (acting through affiliated entities and various intermediaries) took a large cut of each purchase price. An entity called Gunn & Whittington Development I, Ltd. (“G & W ”), of which Whittington was 50% owner, received a total of $378,126.80 out of the Meadows at Buda deal (the purchase of the Finley & Hale Properties) and $244,603 out of the Meadows at Kyle I deal (the purchase of the Whitten Property).See Pl. M.S.J. on Liab., Ex. 14 (Finley), Ex. 65 (Hale), Ex. 30 (Whitten); Def. Resp. to Pl. M.S.J. on Liab., ¶ 5 (Whittington 50% owner of G & W). An entity called Madras, Inc., of which Whittington was owner, took a $106,548.66 cut of the Meadows at Kyle II deal (the purchase of the Perron Property). See Pl. M.S.J. on Liab., Exs. 42, 48, 52, 53; Gunn Aff., ¶ 6. When secret cuts to individuals and entities that were not owned by Whittington but that benefited his associates are added in, the non-disclosed payments total more than $1,750,000, out of purchases totaling approximately $7 million. In other words, more than 20% of the purchase prices paid by the Investor Partnerships went not to the sellers but to Whittington and other third parties. See Pl. M.S.J. on Liab., 5–7 ().
Whittington and his associates had originally entered into purchase agreements with the sellers of the properties. Ultimately, however, these original agreements were assigned over to the Investor Partnerships. The Investor Partnerships then purchased the properties at a higher price, consisting of (1) the originally agreed-upon amounts, which were paid to the sellers, plus (2) the undisclosed “cuts,” paid to Whittington and his associates. For example, Whittington's associates originally contracted to purchase the Hale and Finley Properties at the price of $16,500 per acre, about $3.4 million for the 207 acres of combined land. But the investors, through Meadows at Buda, ultimately paid $21,000 per acre, more than $4.3 million, for the properties. The difference of about $938,000 was kept by Whittington and his associates. The uncontested evidence shows that similar practices were followed with respect to the other properties. See generally Pl. M.S.J. on Liab., 3–8 ().
Whittington has sought to justify the “cuts” as a sort of finder's fee or development fee (or both), merited because Whittington and his associates put work into identifying desirable properties and initiating development of the open land into residential subdivisions. See, e.g., Def. Resp. to Pl. M.S.J. on Affirm. Defs., ¶ 7; Def. Resp. to Pl. M.S.J. on Liab., ¶¶ 5, 14, 28, 35.
Plaintiffs have not disputed that Whittington and his associates may have added value to the land. Nor do Plaintiffs claim that finder's fees, development fees, or intermediary fees must be disclosed in all real estate transactions. Rather, their complaint is that the extra fees should have been disclosed to them by Whittington, because he was their fiduciary when the transactions took place and the cuts were taken. Plaintiffs argue that Whittington deliberately hid the cuts from them, intending to deceive them. According to Plaintiffs, because the cuts were taken with the knowledge of and for the benefit of their fiduciary but were not disclosed to them, their fiduciary owes them a return of the cuts, and because this course of dealing amounts to fraud against the limited partners and the Investor Partnerships, his debt to them should be held non-dischargeable under the Bankruptcy Code.
As further evidence that Whittington's nondisclosures were neither innocent nor inadvertent, Plaintiffs note that, in essence, two sets of closing accounts were kept of each transaction, only one of which sets revealed that funds were being diverted to Whittington and his associates instead of being paid to the sellers of each property. See generally Pl. M.S.J. on Liab., 3–8 (). Whittington has not provided any innocent explanation of this highly incriminating evidence. In his deposition, he stated only that he did not disclose the...
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