Pac. Addax Co. v. Lau (In re Lau), Case No. 11-40284

Decision Date04 November 2013
Docket NumberCase No. 11-40284,Adversary No. 11-4203
PartiesIN RE: JOHN J. LAU xxx-xx-6993 and DEBORAH Y. LAU xxx-xx-1436 Debtors PACIFIC ADDAX CO., INC. and TINA NOSEFF Plaintiffs v. JOHN J. LAU and DEBORAH Y. LAU Defendants
CourtUnited States Bankruptcy Courts. Fifth Circuit. U.S. Bankruptcy Court — Eastern District of Texas
Chapter 7
FINDINGS OF FACT AND CONCLUSIONS OF LAW

Upon trial of the complaint filed by the Plaintiffs, Pacific Addax Co., Inc. and Tina Noseff (the "Plaintiffs") seeking a determination of whether a respective debt owed to each of them by the Defendant-Debtors, John J. and Deborah Y. Lau ("Defendants"), is dischargeable, the Court issues the following findings of fact and conclusions of law. The Plaintiffs contend that the debt is nondischargeable under the alternative grounds set forth in 11 U.S.C. §523(a)(2)(A) and (a)(4).1 After the trial, the Court took the matter underadvisement. This decision disposes of all issues pending before the Court.

FINDINGS OF FACT

1. The Debtor-Defendant, John J. Lau, was a managing member of JNC Partners, LLC ("JNC"), a company that was engaged in speculative real estate ventures through the procurement of option contracts on unimproved tracts of real property.

2. The Debtor-Defendant, Deborah Y. "Debbie" Lau, was also a manager of JNC2 and was active in its business operations. She kept the books and records of JNC and participated at times in real estate and lending transactions as the attorney-in-fact for her husband, both individually and in his managerial capacity.3

3. JNC attempted to compete against larger real estate acquisition companies by paying larger amounts in unrefundable earnest money deposits to potential sellers of large real estate tracts and by truncating the closing deadline to lure potential sellers to choose its offer. While the option contract was pending, JNC would attempt to market particular parcels of the tract in order to determine the overall viability of the project.

4. The Plaintiffs first met John Lau in 2005 through the Dallas chapter of the Hong Kong Economic Development Council.

5. Edward C. "Eddie" Lee ("Lee"), the President of Plaintiff, Pacific Addax Co., Inc. ("Pacific Addax"), discussed investment opportunities in real property with John Lau. Eventually, Lee's sister, Plaintiff, Tina Noseff, became interested in investment opportunities with Lau as well.

6. Specifically, discussions between Lee and John Lau centered upon financial investments designated: (1) to assist in the acquisition of a 13.5-acre tract locatedon the northwest corner of Fannin and Tex. Hwy 121 in Melissa, Collin County, Texas (the "Melissa Property"); and (2) to further the development for sale of a tract of land composed of 1,898.19 acres, located south of Lake Ray Roberts in Denton County, Texas (the "Craver Ranch").

7. On October 31, 2005, Pacific Addax invested $500,000 with JNC.

8. On October 31, 2005, Tina Noseff invested $100,000 with JNC.

9. At the time of these original investments by the Plaintiffs, they had no specific agreement with John Lau regarding the precise allocation of their respective investment amounts between the Melissa project and the Denton project.

10. At the time of these original investments by the Plaintiffs, they had no specific agreement with John Lau regarding the identification of the particular organizational structure by which the Melissa Property would be acquired and held.

11. However, these investments were solicited based upon John Lau's representations to the Plaintiffs that each would own an actual ownership percentage in each of the specific development projects.

12. The Plaintiffs' original investments were clearly not tendered as a product of JNC's general program to raise capital for its investment activities by issuing unsecured promissory notes at high interest rates that were unrelated to a specific investment project.

13. The Plaintiffs have failed to demonstrate by a preponderance of the evidence that their initial investments tendered for the acquisition of the Melissa Property were procured by either Defendant under circumstances constituting actual fraud.

14. The Plaintiffs have failed to demonstrate that John Lau made representations to induce the initial investments from the Plaintiffs that were knowingly false at the time they were made or that were made for the purpose of deceiving the Plaintiffs.

15. However, John Lau, as a managing member of JNC, accepted the $600,000 from the Plaintiffs, tendered for the specific purpose of acquiring an interest in the Melissa Property (in whatever form that materialized) as well as becoming investors in the Craver Ranch development which was actually owned by a limited liability company known as JNC Partners Denton, LLC ("JNC Denton").

16. John Lau, as a managing member of JNC, agreed to hold the $600,000 invested by the Plaintiffs until such time as a specific allocation of the Plaintiffs' investments was determined so that JNC could then apply such amounts toward the Plaintiffs' fractional ownership of each particular property.

17. John Lau, as a managing member of JNC, stood in a formal fiduciary relationship to the Plaintiffs under Texas law with regard to the application of the original investment amount of $600,000.00.

18. John Lau, as a managing member of JNC, failed to account properly for the application and disposition of the Plaintiffs' original investment amount of $600,000.00 pursuant to the Plaintiffs' instructions.

19. The failure of John Lau, as a managing member of JNC, to account properly for the application and disposition of the Plaintiffs' original investment amount of $600,000.00 pursuant to the Plaintiffs' instructions constituted a breach of fiduciary duty.

20. The foregoing breach of fiduciary duty by John Lau, as a managing member of the managing general partner of Melissa Fourteen, Ltd., was performed knowingly or constituted such an extreme departure from the standard of ordinary care required of a person in his position as to compel the conclusion that he consciously disregarded the risk that his actions and/or omissions would result in a breach of fiduciary duty.

21. The foregoing breach of fiduciary duty by John Lau, as a managing member of the managing general partner of Melissa Fourteen, Ltd., did not arise as a consequence of mere negligence or inadvertence.

22. The failure of John Lau, as a managing member of JNC, to account properly for the precise application and disposition of the Plaintiffs' original investment amount of $600,000.00 pursuant to the Plaintiffs' instructions constituted a defalcation while acting in a fiduciary capacity.

23. Deborah Lau, as a member and managing member of JNC, and as the acknowledged custodian of the books and records for JNC, was aware of the breach of fiduciary duty and defalcation by John Lau through JNC's receipt and improper disposition of the Plaintiffs' original investment amount of $600,000.00.

24. Deborah Lau, as a member and managing member of JNC, and as an individual guarantor of JNC liabilities, knowingly retained the benefits from this breach of fiduciary duty and defalcation by John Lau regarding the application and disposition of the Plaintiffs' original investment amount.

25. An agreement was eventually reached between the Plaintiffs and John Lau regarding the allocation of the Plaintiffs' investments into the two specific projects.

26. Although the specific date that the allocation occurred is not revealed by the evidence presented, $420,000 of the Pacific Addax investment and $80,000 of the Tina Noseff investment were applied to the acquisition of interests in JNC Partners Denton, LLC which held title to the Craver Ranch.

Melissa Fourteen, Ltd.

27. $80,000 of the $500,000 originally tendered to JNC by Pacific Addax in October 2005 was allocated toward the acquisition of the Melissa Property.

28. $20,000 of the $100,000 originally tendered to JNC by Tina Noseff in October 2005 was allocated toward the acquisition of the Melissa Property.

29. Thus, once the allocation was made, John Lau and Deborah Lau, as managing members of JNC, had the responsibility to apply the sum of $100,000 toward the acquisition of the Melissa Property.

30. There is no evidence that the Plaintiffs' investments were utilized for the stated purpose.

31. At the time of the investments, JNC had an existing contract for the purchase of the Melissa Property but the closing of that transaction had not yet occurred.

32. With the Plaintiffs' consent, John Lau exercised sole discretion as to the creation of the specific type of organizational entity under which the Melissa Property was to be acquired, for which the Plaintiffs' funds were to be committed.

33. At or about the time at which the acquisition of the Melissa Property was negotiated, John Lau elected to utilize a limited partnership vehicle to fulfill the promises made to the Plaintiffs.

34. On or about July 14, 2006 - the same date that the Melissa tract was acquired - Melissa Fourteen, Ltd. was created.4

35. JNC became the general partner (and "Managing General Partner") of Melissa Fourteen, Ltd.

36. The Plaintiffs became limited partners in Melissa Fourteen, Ltd.5

37. Pursuant to the Melissa Fourteen Limited Partnership Agreement, the expressly-stated purpose of Melissa Fourteen, Ltd. was to acquire, maintain and sell the 13.5 acre tract of land located on the northwest corner of Fannin and Highway 121 in Melissa, Texas.6

38. JNC, as the general partner of Melissa Fourteen, Ltd., was specifically authorized and directed "to consummate any transaction and to perform any and all necessary actions thereto."7

39. Consistent with the representations made by John Lau to the Plaintiffs, the limited partnership agreement specifically provided that "Legal title to such Land shall be taken and held in the name of the Partnership."8

40. On the same date, July 14, 2006, JNC acquired the Melissa Property.9

41. However, John Lau, as a managing member of JNC, acquired the Melissa Property in the name of...

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