Wood v. Hortman (In re Hortman)
| Decision Date | 27 January 2022 |
| Docket Number | Bankruptcy 19-29252,Adversary Proceeding 20-02021 |
| Parties | In re: BENNETT EDWARD HORTMAN, II, Debtor, v. BENNETT EDWARD HORTMAN, II, Defendant. BROCK L. WOOD; and JACKSON WOOD, Plaintiffs. |
| Court | United States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — District of Utah |
This action came before the Court for trial on November 19 and 20 and concluded on November 29, 2021 (the "Trial"). At the Trial, Plaintiffs Brock L. Wood and Jackson Wood ("Wood Cousins" or "Plaintiffs") were represented by John W. Call of Nygaard, Coke and Vincent L.C.; while the Defendant, Bennett Edward Hortman, II ("Hortman" or "Defendant" or "Debtor"), was represented by Adam Ford of Ford & Crane, PLLC.
After receiving evidence and hearing the arguments of counsel at trial, along with considering any briefs and proposed findings of fact and conclusions of law provided to the Court, as well as a review of the record as a whole, the Court now enters the following findings of fact and conclusions of law to accompany the Court's judgement on the matter at hand. The findings and conclusions set forth herein constitute the Court's findings of fact and conclusions of law pursuant to Rule 52 of the Federal Rules of Civil Procedure, which are made applicable to this proceeding under Rule 7052 of the Federal Rules of Bankruptcy Procedure (the "Decision"). To the extent any of the following findings of fact constitute conclusions of law they are adopted as such. To the extent any of the following conclusions of law constitute findings of fact, they are also adopted as such.
The jurisdiction of this Court is properly invoked under 28 U.S.C. §§ 157(b) and 1334. Plaintiffs' claims against Defendant are core proceedings pursuant to 28 U.S.C. § 157(b)(2)(A), and may be heard and determined by this Court. The jurisdiction of this Court is not disputed and is hereby determined to be present. The Court has similarly determined venue to be proper pursuant to the provisions of 28 U.S.C. § 1409. The Court finds notice for considering the Plaintiffs' 11 U.S.C. § 523 claims at trial to be adequate and proper in all respects.
The Plaintiffs commenced this adversary proceeding seeking a determination that their claims against the Defendant should be determined non-dischargeable pursuant to 11 U.S.C. §§ 523(a)(4) and 523(a)(6). The Plaintiffs' main argument was that the Defendant's actions amounted to a conversion of the Plaintiffs' property, and therein constituted willful and malicious injury to the Plaintiffs under § 523(a)(6). Additionally, the Plaintiffs argue that the Defendant committed embezzlement and/or larceny under § 523(a)(4). Although mentioned during the trial, the Plaintiffs did not allege claims under § 523(a)(2) in their Complaint[1] and did in fact limit their claims at the inception of the trial to only §§ 523 (a)(4) and (a)(6). Therein, the overarching issues at hand involve the interpretation of a contract for services, how it figured in the operations and use of cryptocurrency, and subsequently how the actions leading to the contract's failure may constitute reason for claims to be nondischargeable.
In compiling the factual record addressed in this decision, the Court has adopted portions of each parties' Proposed Findings of Fact and Conclusions of Law[2] and has been persuaded by particular portions of testimony presented to the Court at trial.
Addressed by both parties is the ownership and influence of Defendant Bennett Hortman, II upon BET Capital, LLC ("BET"), a Utah Limited Liability Company. Although it was stipulated as an uncontested fact in the Pre-Trial Order, [3] that the Defendant was the sole owner of BET, the testimony of Ernest Woods, Timothy Covington, as well as the Defendant, persuades the Court that all three were owners/members at the time of consequence to the current action. More specifically, the time of consequence being the lead up, execution, and subsequent failed performance of the service contract between Plaintiffs and BET.
The allegations made by the Plaintiffs center around the execution and implementation, or the lack thereof, of a written contract between the Plaintiffs and BET. That contract was admitted and received and is entitled, the Cryptocurrency Mining Services Agreement (the "Agreement").[4]
1. Pre-Agreement Conversations and February 27, 2018 Conference Call
The parties agree that the lead-up to the execution of the Agreement began as a result of the Defendant's response to a post made by one of the Plaintiffs within a cryptocurrency interest group on Facebook; the post therein was a solicitation for crypto-mining services, specifically someone with a particular set of capabilities or know-how. The Defendant responded to the Plaintiffs' inquiry, referencing his mining company BET, and the parties set up a phone call for the afternoon of February 27, 2018 to discuss a potential business relationship. Further, although various terms in cryptocurrency are involved in this matter, this action can be boiled down to the simple terms of the Agreement, and whether/how it was breached.
As a result of these initial conversations, the Defendant began to mine Ravencoin (RVN), a form of cryptocurrency, on equipment purported to be owned solely by the Defendant within BET's warehouse. This was before the Agreement was signed by the parties. This "test run" was successful enough for the Defendant to make representations to the Plaintiffs about BET's ability to mine RVN on the February 27, 2018 conference call. During the phone call, the parties had negotiated to memorialize an agreement wherein BET would mine RVN for the Plaintiffs.
2. February 28, 2018 Execution of the Agreement
The following day, February 28, 2018, the parties executed the Agreement.[5] Pursuant to the Agreement, the Plaintiffs made two separate transfers of Bitcoin ("BTC") totaling 16 Bitcoin, on February 28 and March 1, 2018, to a cryptocurrency wallet held solely by the Defendant, as an individual, not BET. Additionally, the Agreement outlined that BET was to provide a list of equipment purchased in furtherance of this contract to the Plaintiffs as an exhibit to the Agreement, specifically Exhibit A. That list was never provided, and testimony as to why is both muddied and unconvincing.
Later on March 1, the Defendant, on behalf of BET, converted the 16 BTC to cash, and then made two separate deposits into BET's bank account for the total amount of the cash value of the 16 BTC. The Court notes, as do the parties, that any difference in value between the 16 BTC at the time of the Plaintiffs' initial transfer to Defendant, and the Defendant's transfer into BET Capital's account, was due to the market volatility of BTC.[6]
Once the cash deposit was made into the BET account, a number of transfers took place out of the account.[7] The Court finds that each transfer was in accordance with common BET practices. BET members frequently purchased equipment via their personal credit cards or other lines of credit. Therein, the transfers that the Plaintiffs point to would actually seem to be in line with routine reimbursements by BET to its members for company expenditures. Importantly, there is nothing in the plain language of the Agreement that states, or even implies, that the Plaintiffs' payment to BET could not be used for ordinary expenses like labor or overhead, such as electricity (a large expense for crypto-mining operations). Additionally, a number of "round number" transfers by BET were either attributed to employees' wages, or to private contractors performing services for BET. Another example of ordinary expenses that were not prohibited, neither explicitly nor implicitly, by the Agreement.
Shortly after the Agreement was executed, there was a massive spike in the difficulty and cost of mining RVN, due in most part to the coin being listed on an exchange. Each party represented that RVN's absence from a crypto-exchange was of paramount importance for entering into the Agreement in the first place, and the coin's inclusion onto an exchange increased the mining difficulty far beyond the parties' expectations.
In the days following the execution of the Agreement, and the subsequent spike in difficulty for mining RVN, the parties did discuss possible terms of a settlement to the Agreement. Although general terms were discussed, nothing near an agreement was ever made. The most specific settlement offer is contained in an April 9, 2018 email from Plaintiff Brock Wood to BET, requesting 16 BTC for settlement of the Agreement, even going so far as to represent that this request was a "haircut" due to the diminished value of BTC at the time.[8]
Nonetheless the parties continued under the Agreement as it was executed on February 28, 2018, until BET wound down and closed shop sometime in the Summer of 2018. In that interim, the Defendant had left Utah to begin to work as a salesman in an attempt to both raise funds for BET and provide for his own family. The Defendant discussed this leaving with the Plaintiffs during the settlement discussions, instructing them to continue negotiations with his attorney, Mr. Ford. In leaving the state, the Defendant left the operations and decision-making for BET solely in the hands of Ernest Lee Woods, a co-member of BET. During this period, several business decisions were made by Mr. Woods, including the liquidation of certain coins mined, whether it be RVN or Ethereum or Bitcoin, to pay the bills of BET. The Court is...
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