The McFeely Ltd. P'ship v. Dilworth (In re Dilworth)
| Decision Date | 31 March 2022 |
| Docket Number | 18-31552 (AMN),Adv. Pro. 18-03034 (AMN) |
| Parties | In re: MICHAEL P. DILWORTH, Debtor v. MICHAEL P. DILWORTH, Defendant THE MCFEELY LIMITED PARTNERSHIP, Plaintiff |
| Court | U.S. Bankruptcy Court — District of Connecticut |
In re: MICHAEL P. DILWORTH, Debtor
THE MCFEELY LIMITED PARTNERSHIP, Plaintiff
v.
MICHAEL P. DILWORTH, Defendant
No. 18-31552 (AMN)
Adv. Pro. No. 18-03034 (AMN)
United States Bankruptcy Court, D. Connecticut, New Haven Division
March 31, 2022
Chapter 7
Re: AP-ECF No. 95
Thomas J. Sansone, Esq. Counsel for Plaintiff Carmody Torrance Sandak & Hennessey LLP
Timothy D. Miltenberger, Esq. Counsel for Defendant Cohn Birnbaum & Shea, P.C.
MEMORANDUM OF DECISION AND ORDER AFTER TRIAL
Ann M. Nevirs Chief United States Bankruptcy Judge.
I. INTRODUCTION
The plaintiff and creditor here - the McFeely Limited Partnership (the "Partnership" or "plaintiff") - asks the court to declare non-dischargeable a claim of more than $6, 000, 000 described in a 2015 promissory note from Michael P. Dilworth (the "Debtor") to the Partnership pursuant to 11 U.S.C. §§ 523(a)(4) and 523(a)(6).[1] The underlying
obligation represented by the note arose over a period of years, from 2003 through 2011. AP-ECF No. 1.[2]
To prevail, the plaintiff must establish by a preponderance of the evidence that the debt arose from "fraud or defalcation while acting in a fiduciary capacity, embezzlement or larceny," or from a "willful" and "malicious" act causing injury to the plaintiff or its property. 11 U.S.C. §§ 523(a)(4) and 523(a)(6).
II. JURISDICTION
The United States District Court for the District of Connecticut has jurisdiction over this adversary proceeding by virtue of 28 U.S.C. § 1334(b). This court derives its authority to hear and determine this matter on reference from the District Court pursuant to 28 U.S.C. §§ 157(a), (b)(1), and the District Court's General Order of Reference dated September 21, 1984. This is a "core proceeding" pursuant to 28 U.S.C. §§ 157(b)(2)(A) and (I). This memorandum constitutes the court's findings of fact and conclusions of law pursuant to Rule 52(a) of the Federal Rules of Civil Procedure, applicable here pursuant to Rule 7052 of the Federal Rules of Bankruptcy Procedure.
III. PROCEDURAL HISTORY
This adversary proceeding arises out of the Debtor's voluntary Chapter 7 case commenced on September 19, 2018 (the "Petition Date"). ECF No. 1. In Schedule E/F: Creditors Who Have Unsecured Claims (Official Form 106), the Debtor listed the Partnership as a creditor holding an undisputed, unsecured claim for $5, 893, 588.35. ECF No. 1, p. 21. The Partnership's proof of claim ("POC 1-1") asserted a higher amount - $6, 038, 638 - and included a copy of a promissory note signed by the Debtor, dated
January 16, 2015, along with a payment history (the "Note"). POC 1-1. The payment history reflected pre-petition payments totaling $504, 397 and accrued interest of $649, 447. POC 1-1.
Two months after the Petition Date, on December 24, 2018, the Office of the United States Trustee ("UST") filed a motion seeking to dismiss the Debtor's Chapter 7 case as abusive pursuant to §§ 707(b)(1) and (b)(3). ECF No. 25. The UST's motion largely turns on whether the Partnership's debt is a consumer or non-consumer debt. Dismissal under § 707(b)(1) is not available if the debt is a non-consumer debt. See, 11 U.S.C. § 707(b)(1), ECF No. 25, p. 4, ¶ 9. The UST's motion is stayed at its request until this adversary proceeding is resolved. See, ECF No. 45.
The Partnership commenced this adversary proceeding by filing a two-count complaint seeking a determination that a debt owed to it by the Debtor was non-dischargeable pursuant to §§ 523(a)(4) or 523(a)(6). AP-ECF No. 1. Almost one year after filing its original complaint, on November 7, 2019, the Partnership amended its complaint adding more factual support to its allegations, but not altering the statutory relief sought pursuant to §§ 523(a)(4) or 523(a)(6) (the "Complaint"). AP-ECF No. 95. The Debtor denied all substantive allegations. AP-ECF No. 111.
Trial was to start in early 2020, but plaintiff's counsel withdrew for reasons unrelated to this case and then the COVID-19 pandemic arrived. AP-ECF Nos. 124, 125, 151, 159. Eventually the trial was rescheduled for September 2020, and held using the ZoomGov video conference platform. AP-ECF Nos. 176, 194, 198, 205, 231.[3] Trial
commenced on September 21, 2020, and continued on September 22, 23, and 30, 2020. AP-ECF Nos. 234, 235, 237, 238, 242.[4] Five witnesses testified including: the Debtor; Helen McFeely; one of the Partnership's accountants, Kevin Sunkel; an attorney retained by the Partnership, Scott Jacobs, Esq.; and a financial advisor retained by the Partnership and expert witness, Richard Esposito.
Following trial, the parties submitted post-trial memoranda of law and reply briefs. AP-ECF Nos. 264, 265, 267, 268. The Partnership argues its debt should be deemed non-dischargeable under all prongs of §§ 523(a)(4) and 523(a)(6) because the Debtor engaged in a multi-year scheme using Partnership funds as his own personal piggy bank. AP-ECF No. 264. The Partnership also claims the Debtor's conduct amounted to intentional and malicious behavior and the court should discount his testimony as self-serving. AP-ECF No. 264. In particular, the Partnership highlights the Debtor's failure to document his intention to repay any of the funds withdrawn from the Partnership, failure to create any Partnership meeting minutes or resolutions, and failure to secure any liens or property in the Partnership's name as collateral for the alleged loans. AP-ECF No. 264. The Debtor argues any fraud claims were barred by statutes of limitations, that he never had an intent to deceive or cause harm, always intended to repay the Partnership, and only withdrew money to benefit his family, a purpose he believed fell within the Partnership's stated goals. AP-ECF No. 265. Final post-trial oral argument was held on February 21, 2021. AP-ECF No. 269.
IV. FINDINGS OF FACT
In accordance with Fed.R.Civ.P. 52 and Fed.R.Bankr.P. 7052, after consideration and analysis of the trial testimony, the documents admitted into evidence, and examination of the official record of the Chapter 7 case and the instant adversary proceeding, I find the following facts.
The Debtor and Helen
The Debtor is an attorney specializing in the area of intellectual property and admitted to practice before the United States Patent and Trademark Office and in the states of Connecticut and New York.[5] Following his graduation from Albany Law School in 1992, the Debtor worked for a couple of years with his father's law firm; then for about two years with a Connecticut law firm, Cummings and Lockwood, and then, with his father's firm again until 2001.[6] In 2001, the Debtor became senior patent counsel at the Crompton Corporation.[7] The Crompton Corporation subsequently became known as Chemtura, a company specializing in specialty chemicals.[8] The Debtor worked at Chemtura until 2007 when he left to start his own business.[9] At some point after 2007, the Debtor started his own firm, Dilworth IP, LLC.[10] The Debtor is currently with this firm.
Following the Debtor's law school graduation, he and Helen McFeely ("Helen") married in June of 1993.[11] During their marriage, Helen was a homemaker and did not
earn income outside the home.[12] In 1996, Helen and the Debtor purchased a home located at 35 Blue Spruce Circle, Weston, Connecticut for $290, 000 (the "Blue Spruce property").[13] At some point in 2001, Helen and the Debtor sold the Blue Spruce property and purchased a home located at 10 Fox Run, Easton, Connecticut (the "Fox Run property") for $879, 000.[14]
The Partnership and the Trusts
About five years after the marriage, on June 19, 1998, the Debtor became a general partner of The McFeely Limited Partnership (the "Partnership") holding a 0.045% membership interest. He was 31 years old.[15] The Partnership was created under the Delaware Revised Uniform Limited Partnership Act and registered in Delaware.[16] In addition to the Debtor, the Partnership had two other general partners:
1) Helen, also holding a 0.045% membership interest; and
2) the McFeely Multigenerational Trust (the "Multigenerational Trust") holding a 0.91% membership interest.[17]
Helen's parents - Mary R. McFeely and James F. McFeely - created the Multigenerational Trust as an irrevocable trust for the benefit of their grandchildren and named the Debtor and Helen as co-trustees.[18] The Debtor and Helen each made an initial capital contribution of $5, 000 and the Multigenerational Trust initially contributed $100, 000 into the Partnership.
The Partnership also included two limited partners:
1) the Mary R. McFeely Revocable Trust, holding a 49.5% membership interest; and,
2) the James F. McFeely Revocable Trust, holding a 49.5% membership interest (combined with the Mary R. McFeely Revocable Trusts, the "Revocable Trusts").[19]
Helen's parents created the Revocable Trusts for the benefit of Helen, her two sisters - Mary McFeely and Madeline McFeely - and their grandchildren. They named the Debtor and Helen as co-trustees.[20] See, AP-ECF No. 250, p. 61, L. 8-9 (Helen's testimony regarding her sisters). The main corpus of the Partnership funds came from the initial contributions of $5, 445, 000 by each of the Revocable Trusts.[21] The Partnership held assets totaling approximately $11 million at inception.
Helen testified there were three main reasons for establishing the Partnership, including: 1) to obtain beneficial estate tax relief; 2) to pass on funds to future generations; and 3) to have a methodical and structured way to manage the inheritance within her family.[22] The Partnership's stated business purpose was to own and manage investments, perform related acts, and do all things not otherwise illegal under the laws of Delaware.[23] The Partnership Agreement included a non-exhaustive list of permissible business activities, including, in relevant part: to engage the issue of...
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