Zacharakis v. Melo (In re Melo)

• Decision Date: 20 September 2016
• Docket Number: Adv. P. No. 15-1022,Case No. 14-12732-JNF
• Citation: 558 B.R. 521
• Court: U.S. Bankruptcy Court — District of Massachusetts
• Parties: In re Jamie L. Melo, Debtor George Zacharakis, Individually and as a Member of Memoza Enterprises LLC and M & Z Enterprises, LLC, Plaintiff v. Jamie L. Melo, Defendant

558 B.R. 521

In re Jamie L. Melo, Debtor

George Zacharakis, Individually and as a Member of Memoza Enterprises LLC and M & Z Enterprises, LLC, Plaintiff
v.
Jamie L. Melo, Defendant

Case No. 14-12732-JNF
Adv. P. No. 15-1022

United States Bankruptcy Court, D. Massachusetts.

Signed September 20, 2016

John M. McAuliffe, McAuliffe & Associates, P.C., Newton, MA, Paul T. Prew,

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DiMento & Sullivan, Boston, MA, for Plaintiff.

David B. Madoff, Steffani Pelton Nicholson, Madoff & Khoury LLP, Foxborough, MA, for Defendant.

MEMORANDUM

Joan N. Feeney, United States Bankruptcy Judge

I. INTRODUCTION

The matter before the Court is the Plaintiff's Complaint for an exception to discharge of debts he alleges are owed by the debtor arising out of their business venture in Honey Dew Donuts franchises. The Complaint originally contained seven counts and was filed against the Chapter 7 debtor, Jamie L. Melo (the “Debtor”), by George Zacharakis (“Zacharakis”), in his individual capacity and as a member of two Massachusetts limited liability companies, namely, Memoza Enterprises LLC (“Memoza”) and M & Z Enterprises, LLC (“M & Z”)(jointly, the “LLCs” or the “Companies”), which were co-owned by Zacharakis, the Debtor and others. Prior to trial, the Court dismissed the following counts in the Complaint pursuant to Fed. R. Civ. P. 12(b)(6), made applicable hereto by Fed. R. Bankr. P. 7012(b) : Count IV (Conversion), Count V (Breach of Fiduciary Duty), Count VI (Deceit), and Count VII (Mass. Gen. Laws ch. 93A) as such counts were claims based on state law, were duplicative of Counts I through III of the Complaint, did not state a claim for any exception to discharge under 11 U.S.C. § 523 and were not properly before this Court.¹ Through the remaining counts of the Complaint, Counts I through III, Zacharakis seeks a determination that a debt allegedly owed to him by the Debtor in connection with his de facto management of three failed Honey Dew Donuts franchise locations, operated through the LLCs, is excepted from discharge pursuant to 11 U.S.C. § 523(a)(2)(A), (4) and (6).²

The parties filed a Joint Pretrial Memorandum on June 19, 2015, in which they admitted to numerous facts. The Court conducted a trial over four days, at which five witnesses testified and 26 agreed exhibits were introduced into evidence. On the first day of trial, the parties submitted an Amended Stipulation of Facts in which they stipulated to additional facts.³ They also submitted a document entitled “Further Stipulated Fact” at trial, which provided the account numbers for seven Citizens Bank accounts owned by the Debtor. Following the trial, both parties submitted Proposed Findings of Fact on April 1, 2016.⁴ Thereafter, the Court identified several

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legal issues concerning the standing of Zacharakis to assert claims of the LLCs directly against the Debtor, which arose in the context of the parties' business dealings through the LLCs. Despite the Debtor's failure to file a dispositive motion prior to trial, the Court ordered the parties to file supplemental memoranda on the legal issues outlined by the Court in an Order dated May 13, 2016.⁵ The parties filed their supplemental memoranda on June 20, 2016.

This Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334(a) and (b) and the order of reference from the United States District Court for the District of Massachusetts. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I). The Court now makes the following findings of fact and conclusions of law pursuant to Fed. R. Bankr. P. 7052. For the reasons set forth below, the Court rules that Zacharakis has not sustained his burden of proving an exception to discharge for any debt owed to him by the Debtor pursuant to 11 U.S.C. § 523(a)(2)(A), (4) or (6) and shall enter a judgment in favor of the Debtor with respect to all remaining counts in the Complaint, namely Counts I, II and III.

II. PROCEDURAL BACKGROUND

On June 5, 2014, the Debtor filed a voluntary petition under Chapter 7 of the Bankruptcy Code, and he filed required Schedules of Assets and Liabilities and Statements on the same date. On Schedule A—Real Property, the Debtor listed a home, which he held through a trust, located in North Dartmouth, Massachusetts, with a value of $260,000, subject to secured claims in the total amount of $220,129. On Schedule B—Personal Property, the Debtor listed personal property valued at $19,338.00. On Schedule F—Creditors Holding Unsecured Nonpriority Claims, the Debtor listed George and Maria Zacharakis with “Unknown Trade Debt” in the amount of $1.00, and total unsecured nonpriority claims of over $258,000, many of which were characterized as “trade debt.”⁶ On the Debtor's Statement of Financial Affairs (the “SOFA”), in response to Question 1 entitled “Income from employment or operation of business,” he listed losses of ($5,649) and ($8,022) for 2012 with respect to Memoza and M & Z, respectively. In response to Question 10 of the SOFA, entitled “Other transfers,” the Debtor listed Carlos Motto [sic] as the transferee of “Membership interest in M & Z ... and Memoza ... per resolution of corporate dispute.”⁷

On September 9, 2014, Zacharakis filed a Motion to conduct an examination of the Debtor pursuant to Fed. R. Bankr. P. 2004 (the “2004 Exam”) for the purpose of probing the Debtor's conduct and business activities in the operation and management of the franchise business. The Motion was

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allowed by the Court on the same day. A deposition of the Debtor was conducted by Zacharakis on November 3, 2014 (the “Deposition”). On December 31, 2014, the Chapter 7 Trustee filed a Report of No Distribution. On January 26, 2015, Zacharakis, after obtaining several extensions to do so, timely filed the Complaint which contains three remaining counts as follows: Count I (11 U.S.C. § 523(a)(4) ); Count II (11 U.S.C. § 523(a)(2)(A) ); and Count III (11 U.S.C. § 523(a)(6) ). On January 27, 2015, the Debtor received a discharge of all of his dischargeable debts pursuant to 11 U.S.C. § 727.

III. FINDINGS OF FACT⁸

A. The Witnesses

This proceeding involves failed Honey Dew Donuts franchise businesses operated through Memoza and M & Z which were owned, to varying degrees, by six original partners, namely, Zacharakis, the Debtor, Lina Mota (“Lina”) and her then husband, Carlos Mota (“Carlos”), Maria Zacharakis (“Maria”), who is Zacharakis's wife, and Samia Melo, who is the Debtor's wife. Zacharakis testified that the venture began when he, as the manager of several gas stations, was approached by Samia, who worked with Lina at a Honey Dew franchise located in one of Zacharakis's gas stations, to ascertain whether Zacharakis would be interested in financing a new Honey Dew Donuts franchise.

All of the original partners, except for Maria, testified at the trial. Zacharakis received his college degree in 1988 and has worked in gas station management since that time. He devoted a minimum of 50 hours per week to his work. Lina testified that she had worked at various Honey Dew Donuts locations, including the one located in the station managed by Zacharakis, for about two years, and that she worked at that location with Samia who was her friend. According to Lina, the two discussed the possibility of owning their own Honey Dew Donuts franchise. Carlos, an owner of his own Honey Dew franchises, was an original partner in the venture, but eventually left the business following a dispute with the other partners which is discussed in greater detail below.

Zacharakis, Lina and Carlos testified and were credible in their accounts of the genesis of the business venture and their respective roles in the day-to-day operations. Despite their general credibility, each had difficulty recalling specific dates and frequently spoke in generalities, often referring to “the store” or “the bank account” when the business operated three retail locations and had multiple bank accounts. During their testimony, they also tended to conflate the ownership, assets, liabilities and operations of the LLCs.⁹ This often resulted in confusing testimony about certain key events relevant to Zacharakis's burden of proof. The Court finds the versions of events recounted by Zacharakis, Lina, and Carlos to be credible.

The Debtor is a Deputy Sheriff at the Bristol County Sheriff's Office in Massachusetts. He had some restaurant and cooking experience at his parents' restaurant. At numerous times during the trial, his testimony was unclear and evasive. He also was unresponsive to many questions.

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He frequently answered “I don't know,” “I don't understand what you are asking me” or answered a question with a question when asked about routine matters. This resulted in a muddled and labored account of the parties' relationships and respective duties and obligations. Additionally, he admitted at trial to giving false testimony at his Deposition regarding the disposition of certain property owned by the LLCs. His bitterness over the failed business venture was evident in his testimony and demeanor. Samia, his spouse, also frequently failed to answer questions...