Oaks v. Miller (In re Miller)

• Decision Date: 06 December 2016
• Docket Number: CASE NO. 16-50532,ADV. NO. 16-5026
• Parties: IN RE JAMES B. MILLER AND MARY MILLER DEBTORS CONNIE OAKS PLAINTIFF v. JAMES B. MILLER, JR. DEFENDANT
• Court: U.S. Bankruptcy Court — Eastern District of Kentucky

IN RE JAMES B. MILLER AND MARY MILLERDEBTORS

CONNIE OAKSPLAINTIFF v. JAMES B. MILLER, JR.DEFENDANT

CASE NO. 16-50532

ADV. NO. 16-5026

UNITED STATES BANKRUPTCY COURT EASTERN DISTRICT OF KENTUCKY LEXINGTON DIVISION

December 6, 2016

MEMORANDUM OPINION

The issue before the Court is whether a judgment debt, plus interest, costs and attorney fees, is non-dischargeable pursuant to 11 U.S.C. § 523(a)(2)(A).A trial was conducted on November 29, 2016.Upon consideration of the parties' stipulation of facts, testimony and exhibits admitted into evidence, arguments of counsel, and the record, the judgment debt, plus interest and attorney fees incurred in prosecution of this adversary proceeding, are not dischargeable.For reasons stated more fully herein, the remaining attorney fees and costs requested by the Plaintiff are dischargeable.

I.FACTS.

A.The Loan Agreement.

The Defendant Debtor James B. Miller, Jr., is a self-employed contractor and former high school classmate of the PlaintiffConnie Oaks.Prior to the events at issue herein, the Plaintiff was involved in a serious car accident.She filed a lawsuit and received a settlement of $1.3 million in 2009.Shortly thereafter, the Plaintiff hired the Defendant to repair and update her home to better accommodate her physical condition following the accident.

The Plaintiff's husband, David Riggs, referred the Defendant to her.Riggs had previously hired him as a contractor.The Defendant ultimately installed a new roof on, renovated a bathroom in, and put a commode and vanity in, the Plaintiff's home.The Plaintiff and Riggs were satisfied with the finished product.

In the fall of 2009, the Plaintiff hired the Defendant to build a sunroom for her home.At some time during the renovation, the Defendant approached Riggs about a $62,000.00 loan from the Plaintiff.Riggs testified that the Defendant informed him he wanted to expand his business by purchasing a machine to clean shingles and another to manufacture gutters.Riggs informed the Defendant that he would relay the proposal, but the Defendant had to discuss the loan with his wife, as it was "her money."

Riggs passed on the request to the Plaintiff and told her that the Defendant wanted a loan to expand his business.The Plaintiff testified that she needed to talk to the Defendant personally before loaning him any money.This was not the only time someone approached the Plaintiff to borrow money or invest in a business.The Plaintiff testified that she was approached previously by others seeking funds for start-up ventures, but had refused because she did not believe they were good investments.

The Plaintiff and Riggs met with the Defendant in their living room a day or two after the initial discussion.They testified that the Defendant reiterated his intention to expand his business by using the loan proceeds to purchase equipment to clean shingles and make gutters.Riggs was present for most of the discussion, but left periodically to smoke outside.The Defendant offered to repay the proposed loan in full, plus $12,500.00,¹ by May 2010.The Plaintiff testified that she believed the Defendant was a "good Christian man," and it appearedhis business was growing and prospering, so she agreed.She did not request collateral to secure the loan for the same reasons.

The Plaintiff drafted the Agreement Regarding Advancement of Funds with Sole Intent to Establish Loan Creating a Creditor/Debtor Relationship dated October 14, 2009, based on a form from the Internet.[Loan Agreement, Plf. Ex. D at ECFNo. 14-4;Def. Ex. 2 at ECFNo. 12-2.]The Loan Agreement indicates the Plaintiff would loan $62,000.00 and the Debtor would "pay in full the $62,000.00 plus an interest of $12,500.00 by May 31, 2010."[Id.]The Loan Agreement is signed by the Plaintiff and the Defendant.[Id.]

After executing the Loan Agreement and receiving the proceeds on October 15, 2009, the Defendant immediately wrote a check for $24,000.00 to Creative Marketing Solutions to purchase vending machines.He ultimately spent most or all of the loan proceeds on vending machines instead of using the funds to expand his construction business.The vending machine business failed within eight months and he disposed of the equipment, which had no value.

The Defendant denies the Plaintiff's version of events.The Defendant testified he never discussed the purpose of the loan with Riggs, indicating he only referred to an investment.The Defendant further testified that the Plaintiff and her husband did not ask for, and he did not disclose, his intended use of the proceeds.

The Defendant also denies ever having a special meeting with Riggs and the Plaintiff about the loan.He testified that the only time the loan was discussed was during the initial meeting with Riggs and when they sought to obtain a notary at Sky Tower Automotive upon execution of the Loan Agreement.But the Loan Agreement introduced as evidence is not notarized and the Defendant could not explain the discrepancy.

The Plaintiff and her husband testified they did not know the Defendant used the proceeds to purchase vending machines instead of purchasing the equipment discussed.The Plaintiff said she was generally aware the Defendant was working in his construction business and believed the funds were used as promised.Riggs later discovered the Defendant had purchased vending machines from the Defendant's employees and the Defendant's son.The Plaintiff testified she would not have made the loan if she had known the Defendant would use the loan proceeds for something other than expanding his construction business.Riggs also testified he would have advised his wife to refuse to loan money for vending machines because his prior experience led him to conclude they are a poor investment.

The Defendant did not pay the loan when due.The Plaintiff and her husband testified they attempted to collect from the Defendant and he initially told them he was "working on it."The Defendant continued to perform construction work on their home and ultimately offered to offset the money owed for the work performed against the debt.The Plaintiff and her husband refused because of a dispute about the accuracy of the invoice and the quality of the work.

B.The First Bankruptcy.

On August 23, 2011, the Defendant and his wife, Mary Miller, filed a joint chapter 13 bankruptcy petition in the Eastern District of Kentucky, Case No. 11-52395.The case was dismissed by the Agreed Order of Dismissal for Cause.[Agreed Order of Dismissal, Plf. Ex. J, Case No. 11-52395at ECF No. 87.]The Agreed Order was based on grounds stated in the Plaintiff's Motion to Dismiss with Prejudice, which alleged the Defendant and his wife made multiple false oaths on the petition and schedules.[Motion to Dismiss, Plf. Ex. K, Case No. 11-52395at ECF No. 59.]

C.The State Court Action.

On April 19, 2012, the Plaintiff sued the Defendant in the Lincoln Circuit Court to recover the amounts owed, plus interest, court costs, attorney fees, and punitive damages.[State Court Complaint, Plf.Ex.A at ECFNo. 14-1.]The Defendant failed to respond or otherwise answer the Complaint.[State Court Record, Plf.Ex. E, at ECFNo. 14-5.]

On June 22, 2012, the Lincoln Circuit Court held a hearing and entered a partial default judgment against the Defendant and in favor of the Plaintiff.[Partial Default Judgment, Plf. Ex. B at ECFNo. 14-2.]The state court adjudged the Defendant in default for failing to file an answer or defense to the allegations and found "the Defendant owes the Plaintiff the principal sum of $62,000.00, plus contract interest of $12,500.00, plus pre-judgment interest on said liquidated sums of eight percent (8%), from May 31, 2010, until the entry of this Partial Default Judgment, said amount totaling $87,315.68 as of June 22, 2012."[Id.]The state court further awarded post-judgment interest at the rate of twelve percent (12%).[Id.]The state court then found the Defendant in default of the allegations that the Defendant fraudulently procured the loan and negligently performed construction work, but reserved judgment on the amount of damages sustained as a result.[Id.]

On July 23, 2012, following an evidentiary hearing on damages, the state court entered a default judgment against the Defendant.[Default Judgment, Plf. Ex. C at ECFNo. 14-3.]The state court incorporated the prior Partial Default Judgment, and entered default judgment in favor of the Plaintiff for the sum of $31,129.05 for "the faulty or negligent construction on her home," plus pre-judgment interest at eight percent and post-judgment interest at twelve percent.[Id.]The state court also awarded $23,566.41 in attorney fees, plus post-judgment interest at twelve percent.[Id.]

The state court then found: "Because the Plaintiff has been forced to undergo a lengthy and tortured process to collect her money, including time, effort and attorney's fees to default a fraudulent bankruptcy filed by the Defendant, and because the Defendant fraudulently procured the loan initially, the Court awards the Plaintiff the sum of $10,000.00 in punitive damages for said fraud."[Id.]The judgment also allowed twelve percent (12%) post-judgment interest on the punitive damages.[Id.]

D.The Second Bankruptcy and this Adversary Proceeding.

The Defendant and his wife filed a second joint chapter 13 bankruptcy proceeding on March 23, 2016.On May 5, 2016, the Plaintiff filed Proof of ClaimNo. 2 for $135,467.53.The proof of claim was amended on September 29, 2016, to reflect a total debt of $163,735.97.[Amended Proof of ClaimNo. 2-1, Plf. Ex. I, ECF No. 31.]

On June 7, 2016, the Plaintiff filed this adversary proceeding seeking to declare the state court judgment non-dischargeable pursuant to § 523(a)(2)(A).The Plaintiff moved for summary judgment based on the doctrine of collateral estoppel, but the motion was denied because "the Defendant did not have a full and fair...