Mid-S. Maint., Inc. v. Burk (In re Burk)

• Decision Date: 22 March 2018
• Docket Number: A.P.: No.: 16–01064–JDW,A.P. No.: 16–01063–JDW,Case No.: 15–14530–JDW,Case No.: 15–14529–JDW
• Citation: 583 B.R. 655
• Parties: IN RE: Zachary Alan BURK, Debtor. Mid–South Maintenance, Inc., et al., Plaintiffs, v. Zachary Alan Burk, Defendant. In re: Stephen Paul Smith and Jessica Nichole Smith, Debtors. Mid–South Maintenance, Inc., et al., Plaintiffs, v. Stephen Paul Smith and Jessica Nichole Smith, Defendants.
• Court: U.S. Bankruptcy Court — Northern District of Mississippi

583 B.R. 655

IN RE: Zachary Alan BURK, Debtor.

Mid–South Maintenance, Inc., et al., Plaintiffs,

v.Zachary Alan Burk, Defendant.

In re: Stephen Paul Smith and Jessica Nichole Smith, Debtors.

Mid–South Maintenance, Inc., et al., Plaintiffs,

v.Stephen Paul Smith and Jessica Nichole Smith, Defendants.

Case No.: 15–14529–JDW

A.P. No.: 16–01063–JDW

Case No.: 15–14530–JDW

A.P.: No.: 16–01064–JDW

United States Bankruptcy Court, N.D. Mississippi.

Filed March 22, 2018

Hugh H. Armistead, Olive Branch, MS, Mark D. Lyons, Lyons & Clark, Inc., Tulsa, OK, for Plaintiffs.

R. Michael Bolen, Hood & Bolen, Attorneys at Law, Jackson, MS, Robert T. Cornelius, Sr., New Albany, MS, for Defendant.

MEMORANDUM OPINION ¹

Judge Jason D. Woodard, United States Bankruptcy JudgeThese adversary proceedings are before the Court on the Adversary Complaint (the "Complaint") (A.P. Dkt. # 1 in each case) to determine dischargeability filed by the creditor-plaintiffs Mid–South Maintenance, Inc.; Mid–South Maintenance, Inc., Memphis; and Worldwide Steel Works, Inc., (collectively, "Mid–South") against the debtor-defendants Zachary Alan Burk (A.P. No. 16–1063) and Jessica Nichole Smith and Stephen Paul Smith (A.P. No. 16–1064) (collectively, the "Defendants").

This trial encompassed three related adversary proceedings² centered around the undisputed embezzlement of Mid–South's funds by non-defendant Kimberly Cray Burk, the mother or mother-in-law of each of these Defendants. Her scheme involved falsifying the employment of the Defendants, and others, as employees of Mid–South and depositing paychecks into their bank accounts. The three adversary proceedings share common issues of fact and law. Many of the witnesses testified to facts material in all three proceedings, and the arguments were virtually identical. For these reasons, the adversary proceedings were tried together, although each remains distinct.

The defendants in each adversary proceeding told basically the same story: although tens of thousands of embezzled dollars went through their accounts, none of the defendants had any knowledge that they were spending embezzled funds because they never looked at their bank statements, which went to Kimberly. All of the defendants claim that Kimberly perpetrated this embezzlement without their knowledge, even though the defendants, not Kimberly, spent the majority of the money, which greatly exceeded their own personal incomes. In determining the facts that follow, the Court's in-person observation of each witness was an important factor in determining credibility.

Having heard extensive testimony over a period of three days and examining the documents admitted into evidence, this Court concludes that a judgment of nondischargeability is due to be entered in favor of Mid–South against debtor-defendants Jessica Nichole Smith and Stephen Paul Smith, but that Mid–South has failed to carry its burden as to Zachary Burk.

I. JURISDICTION

This Court has jurisdiction pursuant to 28 U.S.C. §§ 151, 157(a) and 1334, and the United States District Court for the Northern District of Mississippi's Order of Reference of Bankruptcy Cases and Proceedings Nunc Pro Tunc dated August 6, 1984. This is a core proceeding as set forth in 28 U.S.C. § 157(b)(2)(B) and (I). The parties have consented to this Court's jurisdiction. (A.P. Dkt. # 39, ¶ 6 in each).

II. FINDINGS OF FACT ³

A. Common Facts

Kimberly Burk, who is not a defendant here, is a persistent criminal. She is currently serving her third prison term for embezzlement. In 1990, she pleaded guilty to bank fraud after stealing approximately $50,000 from an employer. In 2011, she pleaded guilty to embezzling $40,000 from another employer, Nu–Corp. She has most recently pleaded guilty to embezzling at least $1.4 million from Mid–South, and is currently in prison for that crime. This third embezzlement forms the foundation of this adversary proceeding.

Kimberly began working for Mid–South in 2005, eventually becoming the office manager. Through this position, she deposited unearned payroll checks into various accounts of family members by direct deposit. In order to hide her scheme, Kimberly received all of the bank statements for Mid–South. She then gave falsified summaries to Mid–South's owner, CPA, and auditors. When other employees raised questions, Kimberly would fire them. Mid–South's annual audit and outside CPA firm did not uncover Kimberly's scheme. In fact, the Mid–South embezzlement was discovered only after Kimberly went to prison for embezzling from Nu–Corp.

During the relevant time period, Mid–South's annual income averaged $15,000,000. The $300,000 a year that Kimberly stole was material, but not so crippling to the company that theft was suspected. Dennis Jones, owner of Mid–South, assumed the company's construction projects were not doing well and that was the reason for the decreased profits. This assumption was supported by the project summaries Kimberly gave him. Dennis credibly testified that he was so focused on the construction side of his business that he never considered that the issue was coming from the office.

Late in her term with Mid–South, Kimberly was arrested for embezzling $40,000 from Nu–Corp. Despite the charges, Dennis allowed Kimberly to continue working at Mid–South in the same capacity, because Kimberly convinced him of her innocence. She told him that the charges were related to stock certificates and expense checks cashed by others. The defendants argued that this arrest should have put Dennis on notice of Kimberly's activities, but Dennis credibly testified that he believed Kimberly. All witnesses (plaintiff and defense) testified that Kimberly was very convincing and deceived everyone. All witnesses also testified that Kimberly worked hard and was competent in her job.

Allusions were made by the defendants to a romantic relationship between Kimberly and Dennis, which could have clouded his judgment in continuing to rely on her, but there was no evidence to support this. All witnesses in close proximity credibly denied any improper relationship, including Kimberly and Dennis.

After depositing embezzled funds into her children's accounts, Kimberly would frequently tell her children that her paycheck was deposited in their account by mistake and would instruct them to withdraw a portion of the cash and give it to her. The Court is satisfied with the testimony that when this happened, Kimberly did receive and spend the funds, as detailed below. However, the withdrawals only constituted a small portion of the funds funneled into her children's accounts. The Defendants themselves spent the majority of the funds.

B. Zachary Burk

Zachary is the son of Kimberly Burk. At the time of the embezzlement, he was 18 years old and a freshman in college. He attended three different colleges over a period of a year and a half and was on the baseball team for two of those schools. Everything Zachary had ever received was from his mother. He lived on cash from Kimberly or money that she deposited into his account. He had never held a real job.⁴ He just went to school and played baseball. When Zachary dropped out of college, he started managing his own affairs. He then opened his own bank account and the deposits from Kimberly stopped.

The bank account Kimberly used to give Zachary embezzled funds was opened, by Kimberly, while Zachary was in high school. It was never really Zachary's account. Every deposit was made by Kimberly. She made deposits, managed funds, and made payments from this account. Zachary did not check balances, work within a budget, or exercise any type of financial management. Kimberly received the bank statements, and Zachary never saw them. He credibly testified that he never looked at his bank account, spent whatever he wanted, and his mother would manage his balance.

Zachary credibly testified that he did not question the source of funds in his account. All of the money that he had ever received at that time came from his mother. He simply thought of her as the source of all his money. Additionally, Kimberly was working many hours and so, in Zachary's mind, there was no reason to question the legitimacy of the funds. As far as Zachary knew, his mother worked many hours and was making enough for him to be able to spend what he wanted.

Kimberly would frequently tell Zachary that her check had been deposited into his account and would instruct him to make a cash withdrawal and give the money to her. Zachary did so, and this never made him suspicious, because he viewed the money in his account as Kimberly's anyway.

Despite Zachary's belief at the time of the embezzlement, a great deal of money flowed through his account, in excess of $100,000. This vast sum would put a responsible adult on notice that the funds being spent were not coming from his mother's legitimate pay. But Zachary was not a responsible adult at the time. Kimberly testified that Zachary thought there was an endless amount of money and that she never told him "no" throughout his life. He was young, naive, irresponsible, and a self-described "spoiled brat." He is not unintelligent, but at that point he had never been in a position to handle finances. He had never held a real job to know what people reasonably earn. He had no formal or informal training in finance or accounting. Zachary had no understanding of what earning or spending was reasonable at that stage of his life.

Zachary does not contest that he spent the money in his account and now understands that a portion of these funds were from Mid–South. He now sees exactly what his mother did, but it is clear to the Court that at the time, he did not know she was embezzling money.

At that stage in his life, Zachary had never had a job and did whatever his mother told him to do. While his spending was irresponsible, he had no knowledge that the funds in his account were stolen. His testimony was credible and the Court finds that he had no knowledge of the source of the funds or his...