Nextgear Capital, Inc. v. Rifai (In re Rifai)

• Decision Date: 13 August 2019
• Docket Number: Adversary No. 18-03393,Case No. 18-34513
• Citation: 604 B.R. 277
• Parties: IN RE: Adam RIFAI, Debtor. NextGear Capital, Inc., Plaintiff, v. Adam Rifai a/k/a Mohamad Rifai Chekh Charif, Defendant.
• Court: U.S. Bankruptcy Court — Southern District of Texas

604 B.R. 277

IN RE: Adam RIFAI, Debtor.NextGear Capital, Inc., Plaintiff,

v.Adam Rifai a/k/a Mohamad Rifai Chekh Charif, Defendant.

Case No. 18-34513

Adversary No. 18-03393

United States Bankruptcy Court, S.D. Texas, Houston Division.

Signed August 13, 2019

Christopher V. Arisco, Alan Bartlett Padfield, George Alexander Pence, Padfield & Stout LLP, Fort Worth, TX, for Plaintiff.

Adrian Stanley Baer, Law Offices of Adrian S. Baer, Houston, TX, for Defendant.

FINDINGS OF FACT AND CONCLUSIONS OF LAW REGARDING PLAINTIFF NEXTGEAR CAPITAL. INC.'S COMPLAINT TO DETERMINE DISCHARGEABILITY OF A DEBT PURSUANT TO 11 U.S.C. SS 523(a)(2)(A), 523(a)(4), and 523(a)(6)

Jeff Bohm, United States Bankruptcy Judge

I. INTRODUCTION

Adam Rifai (the "Debtor ") filed a Chapter 7 petition on August 10, 2018, (the "Petition Date "). [Main Case Doc. No. 1]. On December 10, 2018, NextGear Capital, Inc. (the "Plaintiff ") initiated the pending adversary proceeding against the Debtor. Prior to the Debtor filing his Chapter 7 petition, the Plaintiff extended a credit line of $450,000.00 to the Debtor's 100%-owned company—Texas Auto Family, LLC ("Auto Family ")—a debt that the Debtor personally guaranteed would be repaid. The Plaintiff requests this Court to enter a judgment for the amount of the unpaid loan, plus attorneys' fees and costs, as a nondischargeable debt for which the Debtor is liable under 11 U.S.C. §§ 523(a)(2)(A), 523(a)(4), and 523(a)(6).¹

The Court held a five-day trial in this adversary proceeding from June 17, 2019, to June 21, 2019. The Court then took the matter under advisement. On July 1, 2019, this Court held a brief hearing to orally announce its ruling granting the relief sought by the Plaintiff. The Court indicated that it would issue written Findings of Fact and Conclusions of Law, together with a judgment, explaining its decision. However, the Court informed the parties that it would refrain from entering its written findings and conclusions, plus the judgment, until after the Plaintiff had proven up its reasonable attorneys' fees and expenses. The Court instructed the Plaintiff's counsel to submit his fee bills to the Debtor's counsel by no later than noon on July 3, 2019. The Court further instructed the Debtor's counsel to file a certificate by no later than 5:00 p.m. on July 10, 2019, setting forth whether the Debtor objected to the reasonableness of the fees and expenses requested by the Plaintiff. The Court also stated that if, and only if, the Debtor objected to the reasonableness of these fees and expenses would this Court hold a separate evidentiary hearing requiring the Plaintiff to prove up its reasonable attorneys' fees and expenses.

The Plaintiff's counsel did, in fact, timely submit his firm's fee bills, which reflect that the Plaintiff's fees and expenses total $79,975.64. [Adv. Doc. No. 30]. The Debtor thereafter timely filed a certificate objecting to this amount as unreasonable. [Adv. Doc. No. 31]. On July 15, 2019, counsel for both the Debtor and the Plaintiff jointly filed a Stipulation Resolving Defendant's Objection to the Plaintiff's Attorneys Fees and Expenses stating that the Debtor did not object to the reasonableness of the attorneys' fees and expenses claimed by the Plaintiff in the amounts of $67,803.00 in attorneys' fees and $4,287.16 in expenses. [Adv. Doc. No. 32]. Moreover, the Court exercised its independent duty to review the reasonableness of the Plaintiff's fees and expenses and found the stipulated amount of fees and expenses to be reasonable. The Court held a brief hearing on July 19, 2019, to make a record regarding the reasonableness of the attorney's fees and expenses as stipulated by the parties. Accordingly, the Court finds that $72,090.16 is a reasonable amount of attorneys' fees and expenses to be awarded to the Plaintiff for the successful prosecution of this adversary proceeding.²

Now that the issue of reasonable attorneys' fees and expenses has been determined, the Court proceeds to issue these written Findings of Fact and Conclusions of Law pursuant to Rule 7052 explaining why it is granting the relief requested by the Plaintiff and entering a judgment declaring that $422,726.23 (the outstanding amount owed under the loan documents, including unpaid principal, accrued unpaid interest, attorneys' fees, and expenses) is a nondischargeable obligation owed by the Debtor. To the extent that any finding of fact is construed as a conclusion of law, it is adopted as such; and to the extent that any conclusion of law is construed as a finding of fact, it is adopted as such. The Court reserves the right to make additional findings and conclusions as this Court deems appropriate or as may be requested by either of the parties.

II. FINDINGS OF FACT

A. Background of the Debtor

1. The Debtor holds two college degrees: a marketing degree he acquired in 2010 and an accounting degree he obtained from the University of Houston. [Tape Recording, June 18, 2019, Hrg. at 10:55:01 - 10:55:17 a.m.].

2. Before the Debtor established Auto Family, he founded an 18-wheeler vehicle hauling business called Camel Auto Transport. [Tape Recording, June 18, 2019, Hrg. at 10:54:27 - 10:54:38 a.m.].

3. Additionally, prior to establishing Auto Family, the Debtor repaired cars for another dealer called Texas Advance Motors ("TAM") in 2014. [Tape Recording, June 18, 2019, Hrg. at 10:55:44 - 10:56:01 a.m.]. Specifically, he did mechanical work such as engine work, oil changes, brake work, and suspension work. [Tape Recording, June 18, 2019, Hrg. at 10:56:09 - 10:56:22 a.m.].

4. The Debtor also worked as a broker for International Motors during which time he has connected prospective buyers to International Motors. [Tape Recording, June 18, 2019, Hrg. at 10:58:04 - 10:58:22 a.m.]. The Debtor has received commissions, generally in the range of 20% to 25% of the profit that IM has received from his referrals. [Tape Recording, June 18, 2019, Hrg. at 10:58:26- 10:58:35 a.m.].

5. The Debtor filed a voluntary Chapter 7 petition on the Petition Date. [Main Case Doc. No. 1].

B. Identification of Insiders who Have Benefitted Financially from Their Blood Relationship with the Debtor

6. The Debtor regularly wired money to his mother—who resides in Saudi Arabia—from Auto Family's operating account. [Plaintiff's Ex. 60, pg. AR000199, see also Plaintiff's Ex. 62, pg. AR000230].

7. The Debtor previously employed Abdul Moula Al-Shikh Sharif, who is his brother. [Tape Recording, June 18, 2019, Hrg. at 12:56:22 - 12:57:08 p.m.]. On multiple occasions, the Debtor made payments to his brother—in the aggregate total of $15,940.00—drawn on Auto Family's account: September 2, 2017 [Plaintiff's Ex. 59, pg. AR000186], October 11, 2017 [Ex. 60, pg. AR000206], November 2, 2017 [Ex. 61, pgs. AR000222], November 8, 2017 [Ex. 62, pg. AR000232], and December 4, 2017 [Ex. 62, pg. AR000232].

8. The Debtor's brother received a salary from Auto Family during his employment. Rather than keeping time sheets for employees, the Debtor made the assumption that all of his employees worked from 9:00 A.M. to 5:00 P.M. each day. Thus, the Debtor has neither time sheets nor documentation showing his brother's work history with Auto Family. [Tape Recording, June 18, 2019, Hrg. at 1:06:21 P.M. - 1:07:35 a.m.].

9. The Debtor executed a promissory note to his brother-in-law, Muhanned Omar Albarazi, in the amount of $90,000.00 on April 1, 2015 (the "BIL Promissory Note "). [Tape Recording, June 18, 2019, Hrg. at 12:56:22 - 12:57:08 p.m.; see also Plaintiff's Ex. 68, pg. 000841]. The maturity date of the note was June 30, 2018. [Plaintiff's Ex. 68, pg. 000841]. On multiple occasions, the Debtor made payments to his brother-in-law—in the aggregate total of $4,000.00—wired from Auto Family's account: July 31, 2017 [Plaintiff's Ex. 57, pg. AR000146] and September 12, 2017 [Ex. 59, pg. AR000182].

10. The Debtor executed a promissory note to his mother-in-law, Gene Folladori ("Mother-In-Law "), in the amount of $50,000.00. [Tape Recording, June 18, 2019, Hrg. at 11:13:19 - 11:14:12 a.m.]. The Debtor testified that he received the loan proceeds sometime between February 2015 and March 2015. [Id. ]. The Debtor deposited a portion of the funds into Auto Family's operating account and used the remaining portion to purchase inventory. [Id. ]. The Debtor has not made any payments on the note owed to his mother-in-law. [Id. ].

11. The Debtor's mother, brother, brother-in-law, and mother-in-law are all insiders (collectively the "Insiders"). See 11 U.S.C. § 101(31)(A)(i).

C. Background of the Plaintiff

12. The Plaintiff came into existence through the merger of Dealer Services Corporation ("DSC ") and Manheim Auto Finance. [Tape Recording, June 17, 2019, Hrg. at 3:12:33 - 3:12:52 p.m.]. John Peacock ("Peacock "), the witness testifying on behalf of the Plaintiff, previously worked for DSC before the merger. [Tape Recording, June 17, 2019, Hrg. at 3:12:33 -3:12:52 p.m.].

13. While Peacock worked at DSC, he was a branch manager, and in that position, he was responsible for the administration of all floorplan financing. [Tape Recording, June 17, 2019, Hrg. at 3:12:53 - 3:15:16 p.m.]. DSC provided financing exclusively for used car dealerships and did not provide financing to consumers. Id.

14. Currently, Peacock is a Title Performance Manager for the Plaintiff, and has been in that position since August 1, 2018, having previously held the title of Account Executive. [Tape Recording, June 17, 2019, Hrg. at 3:15:21 - 3:15:26 p.m.]. As the Title Performance Manager for the Plaintiff, Peacock's duties now include revenue generation, collection and risk mitigation. [Tape Recording, June 17, 2019, Hrg. at 3:15:43 - 3:16:02 p.m.].

15. The purpose of the Plaintiff's monetary advances is to help dealers finance and expand their inventory. [Tape Recording, June 17, 2019, Hrg. at 3:21:54 - 3:21:59 p.m.]. For the Plaintiff to determine how much to advance a dealer, it compares the amount...