Summit Hosting, LLC v. Wilder (In re Wilder)
| Decision Date | 01 September 2022 |
| Docket Number | 21-58597-WLH,Adversary Proceeding 22-5066 |
| Parties | IN RE: BRIAN ELVIN WILDER, JR., Debtor. v. BRIAN ELVIN WILDER, JR., Defendant. SUMMIT HOSTING, LLC, Plaintiff, |
| Court | United States Bankruptcy Courts. Eleventh Circuit. U.S. Bankruptcy Court — Northern District of Georgia |
ORDER GRANTING IN PART AND DENYING IN PART MOTION FOR DEFAULT JUDGMENT
THIS MATTER is before the Court on Plaintiff's Motion for Default Judgment (Doc. No. 8) (the "Motion") determining nondischargeability of an arbitration award and state court judgment. This matter is a core proceeding pursuant to 28 U.S.C. §§ 157(b)(2)(I), and the Court has jurisdiction over the proceeding pursuant to 28 U.S.C. §§ 1334 and 157.
Plaintiff filed the Complaint on March 30, 2022 seeking to determine a confirmed arbitration award and final judgment entered against Defendant and in favor of Plaintiff for violations of the Computer Fraud & Abuse Act ("CFAA") and the Stored Communication Act ("SCA"), breach of contract, gross negligence, and fraud is nondischargeable pursuant to sections 523(a)(2), (a)(4), and (a)(6) of the Bankruptcy Code. A summons was issued, and Plaintiff certified Defendant's counsel agreed to accept service of process on behalf of Defendant and that a copy of the Complaint and a summons were sent, by United States Mail, to counsel on April 4, 2022.
Plaintiff requested entry of default for Defendant's failure to file an answer or otherwise respond to the Complaint as provided by Bankruptcy Rule 7012. On June 17, 2022, the Clerk entered default against Defendant pursuant to Bankruptcy Rule 7055. Plaintiff filed the Motion on July 21, 2022. Defendant failed to file a response; consequently, the Motion is deemed unopposed pursuant to Local Rule 7007-1(c).
Entry of default judgment under Fed.R.Bankr.P. 7055 is discretionary. In re Alam, 314 B.R. 834, 837 (Bankr N.D.Ga. 2004). Nishimatsu Constr. Co., Ltd. v Houston Nat'l Bank, 515 F.2d 1200, 1206 (5th Cir. 1975). A default only admits well-pled allegations of fact and does not admit conclusions of law. Id. Only facts established by the pleadings can support a default judgment. Alan Neuman Prods., Inc. v. Albright, 862 F.2d 1388, 1392 (9th Cir. 1988).
In determining whether the allegations in a complaint are sufficient, the Supreme Court has provided guidance in both Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007), and Ashcroft v. Iqbal, 556 U.S. 662 (2009). In these cases, the Supreme Court explained, while "detailed factual allegations" are not required, the pleading must offer more than "labels and conclusions" or "a formulaic recitation of the elements of a cause of action." Twombly, 550 U.S. at 555. Instead, the complaint must contain "enough facts to state a claim to relief that is plausible on its face." Id. at 570.
Based on the well plead allegations in the Complaint, the Court finds as follows: Plaintiff is a provider of cloud-based QuickBooks hosting and Sage hosting in the United States and Canada. Defendant was a Senior Network Engineer at Plaintiff responsible for architecting, maintaining, and securing Plaintiff's IT infrastructure.
Beginning in March 2019, while employed by Plaintiff, Defendant entered into a series of contracts with eSentire for cyber-security services without Plaintiff's knowledge or approval. The contracts purported to obligate Plaintiff to pay sums annually in exchange for kickbacks directly to Defendant. Defendant signed the agreements without Plaintiff's authorization and then concealed the agreements from Plaintiff. Defendant hid and falsified invoices; created rules to block and delete email communications from eSentire to Plaintiff regarding the agreements and related invoices; and locked out network engineers from administrative privileges to prevent them from discovering Defendant's actions.
In his capacity as Senior Network Engineer, Defendant received requests from remote users to log onto Plaintiff's IT systems. On January 18, 2020, Defendant let a ransomware cyber-attacker, posing as an employee of Plaintiff working remotely, into Plaintiff's IT infrastructure system. The cyber-attacker locked Plaintiff out of its own IT infrastructure and demanded $150,000 in ransom to unlock the system, which Plaintiff paid.
While investigating the ransomware attack, Plaintiff discovered it had not been receiving communications from eSentire and learned Defendant had entered into separate contracts with eSentire and took various actions to conceal the agreements. Plaintiff ultimately paid eSentire $305,264.83 to settle the unpaid invoices.
On June 15, 2020, Plaintiff filed a demand for arbitration and complaint for binding arbitration against Defendant alleging he violated the CFAA intentional access provision, violated the SCA, breached his employment contract with Plaintiff, and committed gross negligence and fraud. The arbitrator entered a final award on June 4, 2021 against Defendant on all counts for compensatory damages in the amount of $447,373.67, for punitive damages in the amount of $450,000.00, and for attorneys' fees and costs in the amount of $90,169.18 ("Final Award"). The Final Award is based on Defendant's liability on all counts of the complaint and does not allocate damages to specific counts. The Final Award was confirmed by the Superior Court of Forsyth County on September 13, 2021, and judgment was entered against Defendant on all counts for the amounts listed in the Final Award ("Superior Court Order").
Defendant filed for relief under Chapter 7 of the Bankruptcy Code on November 17, 2021. On March 30, 2022, Plaintiff filed the Complaint seeking a determination the amounts set forth in the Superior Court Order are nondischargeable.
A presumption exists all debts owed by the debtor are dischargeable unless the party contending otherwise proves nondischargeability by a preponderance of the evidence. 11 U.S.C. § 727(b); Grogan v. Garner, 498 U.S. 279, 287-88 (1991); St. Laurent v. Ambrose (In re St. Laurent), 991 F.2d 672, 680 (11th Cir. 1993). The purpose of this "fresh start" is to protect the "honest but unfortunate" debtors. U.S. v. Fretz (In re Fretz), 244 F.3d 1323, 1326 (11th Cir. 2001). Exceptions to discharge are, therefore, narrowly construed against the creditor and in favor of the debtor. Equitable Bank v. Miller (In re Miller), 39 F.3d 301 (11th Cir. 1994); St. Laurent, 991 F.2d at 680. Plaintiff contends the obligations in the Superior Court Order are nondischargeable pursuant to sections 523(a)(2)(A), (a)(4), and (a)(6).
Section 523(a)(2)(A) covers "actual fraud" as well as false pretenses and representations. To prove a debt was incurred through false representation under section 523(a)(2)(A), a creditor must show by a preponderance of the evidence: (1) that the debtor made a false representation with the intent to deceive the creditor; (2) that the creditor relied on the representation; (3) that the reliance was justified; and (4) that the creditor sustained a loss as a result of the representation. Hebbard v. Camacho (In re Camacho), 411 B.R. 496, 505 (Bankr. S.D. Ga. 2009) (citing In re Bilzerian, 100 F.3d 886, 892 (11th Cir.1996); In re St. Laurent, 991 F.2d 672, 676 (11th Cir.1993)). Fraud is a generic term which includes "all surprise, trick, cunning, dissembling, and any unfair way by which another is cheated." Burke v. Burke, (In re Burke), 405 B.R. 626, 646 (Bankr. N.D.Ill. 2009). "Although 'fraud" connotes deception or trickery generally, the term is difficult to define more precisely." Husky Int'l Elecs., Inc. v. Ritz, 578 U.S. 355, 360 (2016). The key element of a nondischargeability claim for actual fraud under section 523(a)(2)(A) is the scienter requirement. The underlying conduct must involve "moral turpitude or intentional wrong." Id. Thus, a debt arising from reckless conduct is not actual fraud and is dischargeable under section 523(a)(2)(A). Finally, false pretenses is defined as "a series of events, activities or communications which, when considered collectively, create a false and misleading set of circumstances, or false and misleading understanding of a transaction, in which a creditor is wrongfully induced by the debtor to transfer property or extend credit to the debtor...." In re Quinn, 492 B.R. 341, 345 (Bankr. N.D.Ga. 2013).
Plaintiff also alleges Defendant committed fraud or defalcation while acting in a fiduciary capacity within the meaning of section 523(a)(4). For a debt to be dischargeable pursuant to section 523(a)(4) based on fraud or defalcation, the debtor must have been acting as a fiduciary in accordance with an express or technical trust that existed prior to the wrongful act. In re Newton v. Lemmons (In re Lemmons), 2005 WL 6487216, * 4 (Bankr. N.D.Ga. Dec. 20, 2005) (citation omitted). A technical trust has been defined by the Eleventh Circuit as "an express trust created by statute or contract that imposes trust-like duties on the defendant and that pre-exists the alleged defalcation," as opposed to constructive or resulting trusts. Parker v. Ferland (In re Ferland), 2010 WL 2600588, at *3 (Bankr. M.D. Ga. June 21, 2010) (citation omitted); see also Guerra v Fernandez-Rocha (In re Fernandez-Rocha), 451 F.3d 813, 816 (11th Cir. 2006). "Mere friendship does not meet this standard, nor does an ordinary business relationship." In re Ferland, 2010 WL 2600588, at *3 (citation omitted); see also Spring Valley Produce, Inc., v. Nathan Aaron Forrest, Case No. 21-12133, at *19 (11th Cir. Aug. 31, 2022) ("the fiduciary...
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