Weiss v. Fautz (In re Fautz)
| Decision Date | 10 January 2022 |
| Docket Number | Adversary Proceeding No. 16-1093,Case No. 16-10153-FJB |
| Parties | IN RE Robert R. FAUTZ, Debtor Bob Weiss, Plaintiff v. Robert R. Fautz, Defendant |
| Court | U.S. Bankruptcy Court — District of Massachusetts |
David A. Conti, Dwyer, Ruggieri, Spino & Goncalves LLC, Boston, MA, for Plaintiff.
Dmitry Lev, Law Offices of D. Lev, PC, Watertown, MA, for Defendant.
By the two counts in this adversary proceeding, the plaintiff seeks a determination that a judgment debt owed him by the defendant chapter 7 debtor is excepted from discharge by operation of 11 U.S.C. § 523(a)(2)(A) and (a)(4). On the basis of the following findings of fact and rulings of law, I conclude that the plaintiff has met his burden of establishing the requirements of nondischargeability under subsection (a)(2)(A) as to the entirety of the judgment debt but has failed to carry his burden under subsection (a)(4).
On January 19, 2016, Robert R. Fautz ("Fautz" or the "Debtor") filed a petition for relief under chapter 7 of the Bankruptcy Code. In the case thereby commenced, Fautz has received a discharge under 11 U. S. C. § 727(b). By his amended complaint in the present adversary proceeding, Robert Weiss ("Weiss" or the "Plaintiff") seeks a determination that his judgment debt against Fautz is excepted from this discharge. In Count I of the amended complaint, under § 523(a)(2)(A), Weiss contends that the state court judgment (the "Judgment") is excepted from discharge as one for money obtained by a false representation: specifically, that to induce Weiss to invest $150,000 in the corporation they were forming, Fautz represented and promised that he would invest no less than $450,000 in the venture, when in fact he never intended to invest more than $150,000. And in Count II of the amended complaint, under 11 U.S.C. § 523(a)(4), Weiss contends that the same judgment debt is further excepted from discharge as one for fraud while acting in a fiduciary capacity and for defalcation while acting in a fiduciary capacity. The defalcation in this count appears to consist of alleged misappropriation and squandering of the initial capital used to fund the corporation that the parties formed. After a trial, conducted remotely by video due to the public health emergency created by the Covid-19 pandemic, the parties submitted proposed findings of fact and conclusions of law. After closing arguments, Weiss moved under Fed. R. Civ. P 15(b) to further amend the complaint to conform to the evidence adduced at trial. Fautz has opposed that motion. I begin with deciding the motion to further amend the complaint.
By this motion, Weiss moves to amend the Amended Complaint to conform to the evidence adduced at trial. The motion is vague in two respects. First, nowhere in the body of this one-page motion does Weiss specify how precisely he is seeking to amend the amended complaint. However, he did file with the motion a proposed second amended complaint, from which it appears that he is requesting that the complaint be deemed amended to include a second basis for excepting part of the judgment debt from discharge under subsection (a)(2)(A). Specifically, the complaint would be amended to allege that he made a $50,000 equity contribution in justifiable reliance on Fautz's representation to him that the corporation's liquor license had been placed in Weiss's name, when in fact this was false and Fautz knew it to be false.1 This is the only new basis for relief that I discern in the proposed second amended complaint.
The motion is also less than clear as to the basis of the relief it seeks. The one-page motion cites only to Rule 15(a)(2) and (b) and advances arguments (though not much developed) under both the Rule 15(b)(1) and (b)(2) standards for amendment during and after trial.2 Notwithstanding this confusion, I think it clear enough that the motion is founded on Rule 15(b)(2). I reach this conclusion for three reasons. First, the motion expressly states that it is being made under Rule 15(b), narrowing the possible bases for relief to its two subparts. Second, the motion is being made after the close of the trial, and of the two subparts of Rule 15(b), only the second is a basis for amendment after the trial. And third, the motion expressly asks that the complaint be deemed amended to "conform to the evidence adduced at trial," which tracks the language of Rule 15(b)(2) () and moves for the form of relief it contemplates.
The parties’ briefing of this motion leaves much to be desired. Their arguments are like "two ships that pass in the night."3
Under Rule 15(b)(2),4 when an issue not raised in the pleadings is actually tried, the Court may allow the amendment upon a finding that the opposing party consented, either expressly or impliedly, to the issue's being tried. Rule 15(b) is to be interpreted liberally to promote the objective of deciding cases on their merits. See Brandon v. Holt , 469 U.S. 464, 471 & n. 19, 105 S.Ct. 873, 83 L.Ed.2d 878 (1985). " Federal Rule of Civil Procedure 15(b) allows an unpleaded claim to be considered when the parties’ conduct demonstrates their express or implied consent to litigate the claim." Antilles Cement Corp. v. Fortuno , 670 F.3d 310, 319 (1st Cir. 2012).
The Court may find implied consent when the party whose consent is required has actively engaged in, or silently acquiesced to, the trial of the amended claim. See Fustolo v. Patriot Grp., LLC (In re Fustolo) , 896 F.3d 76, 84 (1st Cir. 2018). Implied consent may be found when opposing counsel fails to object to the presentation of issues raised that are outside of the pleadings. Id. (citing Conjugal P'ship v. Conjugal P'ship , 22 F.3d 391, 400-01 (1st Cir. 1994) ). "However, the introduction of evidence directly relevant to a pleaded issue cannot be the basis for a founded claim that the opposing party should have realized that a new issue was infiltrating the case." Id. (quoting DCPB, Inc. v. City of Lebanon , 957 F.2d 913, 917 (1st Cir. 1992) ). While the rule is to be construed liberally, the Court must protect the due process rights of the opposing party and therefore may allow a late amendment only if the non-moving party will not suffer undue prejudice. Id. (citing Campana v. Eller , 755 F.2d 212, 215 (1st Cir. 1985) ).
Fautz did not consent expressly to trial of the basis for relief that Weiss now advances. Did he consent implicitly? At trial, Plaintiff's counsel made numerous inquiries related to the ownership of the liquor license. He asked Fautz about his representations regarding ownership of the license, Fautz responded to such inquiries, and Weiss clearly testified about his reliance on those representations. Although specific allegations regarding the liquor license did not appear in the amended complaint, Fautz's attorney made no objection to them when raised in testimony. This is the precise type of conduct that gives rise to the application of Rule 15(b)(2). I find that the questions regarding the liquor license went beyond mere background or even credibility. It was clear that the Plaintiff was attempting to establish that Fautz's representations concerning ownership of the liquor license satisfied the various requirements of a false representation under § 523(a)(2)(A). In the absence of an objection, the Court finds that the Defendant impliedly consented to the trial of this new basis for relief. See generally Premier Cap., LLC v. Crawford (In re Crawford) , 841 F.3d 1, 1-9 (1st Cir. 2016) (). The Court will treat the operative complaint as amended under Fed. R. Civ. P. 15(b)(2) to incorporate this new basis for relief.
The parties first met in the summer of 2006 through a mutual acquaintance when Fautz was looking for someone to invest in a bar he was opening in the Lower East Side of Manhattan. Prior to the parties’ being introduced, Fautz had been presented with the opportunity to purchase a bar that was already in operation. The bar was located at 210-214 Rivington Street in New York City. Fautz planned to take over the space, renovate it, and open a bar called Revolver. On August 4, 2006, Fautz established a corporation, Silver Revolver, Inc., by filing a certificate of incorporation with the New York Secretary of State; it was through Silver Revolver that he intended to operate Revolver.
Weiss had no previous experience investing in bars or restaurants; rather, he worked as an investment trader. Weiss testified that he had been interested in acquiring an ownership interest in a bar in his neighborhood and therefore was interested in the venture. Fautz had previously owned a "burger joint" and had been involved with operating at least one other bar. Fautz represented to Weiss that he had experience and success in the industry. Because he met Fautz through a mutual friend, Weiss did not perform any independent due diligence into Fautz.
Although Weiss testified that he was concerned because other establishments had failed in that location, he and Fautz initially agreed that Weiss would invest $100,000 in return for a ten percent interest in Silver Revolver. While hesitant, Weiss relied on Fautz's experience and enthusiasm in deciding to invest.5 On July 30, 2006, four days after the initial agreement, Weiss stated that he was interested in investing even more than the initial $100,000, but in order to do so he wanted his name to be on the liquor license. Liquor licenses are valuable assets in New York City. Weiss believed that having the liquor license in his...
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