Zeba, LLC v. Hosseini (In re Hosseini)
| Decision Date | 14 May 2021 |
| Docket Number | CASE NO: 18-20177,ADVERSARY NO. 19-2001 |
| Parties | IN RE: BARZAN HOSSEINI, Debtor. ZEBA, LLC, Plaintiff, v. BARZAN HOSSEINI, Defendant. |
| Court | U.S. Bankruptcy Court — Southern District of Texas |
Mohammad Motaghi, the owner of Zeba, LLC ("Zeba"), filed this adversary proceeding against the Debtor, Barzan Hosseini ("the Debtor"), seeking a determination that a debt owed to Zeba is excepted from discharge pursuant to 11 U.S.C. § 523(a)(2)(A), (a)(2)(B), (a)(4), and (a)(6). Mr. Motaghi operated a check cashing business ("the Business") with the Debtor's father, Tom Hosseini. Mr. Motaghi claims to have funded the Business with an initial $80,000.00. It is unclear whether the $80,000.00 was an equity investment or loan. The Debtor was not involved in the formation of the Business, but frequently assisted his father with operating the Business. After the Business closed, Mr. Motaghi discovered that only about $15,000.00 remained in the Business bank account.
Mr. Motaghi accused the Debtor of absconding with the initial contribution and claims the Debtor accepted responsibility. The Debtor then executed a promissory note, secured by a deed of trust on the Debtor's family home, located at 3905 Keighley Crossing, Corpus Christi, Texas. The Debtor defaulted on the note and Mr. Motaghi initiated foreclosure proceedings. The Debtor filed a chapter 13 bankruptcy petition, and Zeba filed this adversary proceeding seeking a determination that the note is excepted from discharge. The Court held a trial on the matter and makes the following findings of fact and conclusions of law.
$14,650.00 owed to Mr. Motaghi is excepted from discharge. That amount survives the bankruptcy as an unsecured, non-discharged claim.
The Court's findings of fact are drawn from the testimony heard and evidence admitted at trial. The Court heard testimony from both the Debtor and Mr. Motaghi. Additionally, Michael Budd and Commander David Torres testified. At the outset, the Court notes that the evidentiary record in this adversary proceeding is replete with holes and inconsistencies. Mr. Motaghi and the Debtor's father formed the Business based on an oral agreement. That agreement was never reduced to writing. Nor was the Debtor's father available to testify. Material chunks of the Business records were either not kept in the ordinary course, misplaced, or destroyed. No bank account statements from the first months of the Business are in evidence. Further, the Debtor plainly lied under oath. That uncorroborated position of the Debtor's testimony will not be credited. However, portions are amply corroborated and are accepted by the Court. Mr. Motaghi likewise provided inconsistent testimony, but his inconsistencies appear to be based more on his unsubstantiated assumptions rather than on willful false testimony.
Mr. Motaghi owns and operates Snappy Foods convenience stores in the Corpus Christi area. At times, Mr. Motaghi has operated check cashing businesses inside his convenience stores. In early 2016, the Debtor's father approached Mr. Motaghi about opening a new check cashing venture. The Debtor's father estimated that the Business could yield about $3,000.00-$4,000.00 in profits per month. Mr. Motaghi agreed to form the Business, and agreed to capitalize the business with an $80,000.00 contribution. It is unclear whether the partners viewed Mr. Motaghi'scontribution as a loan or an equity investment. However, Mr. Motaghi testified that he expected to have the $80,000.00 returned after the Business concluded. The Business opened in the spring or summer of 2016, and closed down in October 2017.
The Business was located at a kiosk inside a Snappy Foods store. Customers would endorse checks to Zeba in exchange for cash in hand. Every check that the Business handled received a Zeba, LLC stamp "for deposit." The Business profited by collecting a fee which ranged from 1% to 1.5% of a check's value. For example, a customer might endorse a $1,000.00 check to Zeba, in exchange for $990.00 or $985.00 cash, depending on the precise fee charged. The Business would deposit that check into a Zeba account with Value Bank, making a $10.00 or $15.00 profit.
The bank account was held by Zeba. Mr. Motaghi owns 60% of Zeba, and his wife owns the remaining 40%. The Debtor's father had authority to make deposits and withdrawals from the account.
Mr. Motaghi did not involve himself with the day to day operations of the Business. That was the Debtor's father's responsibility. The Business cash and undeposited checks were stored in a safe in a back office of the Snappy Foods store. Each morning, the Debtor's father would take cash out of the safe and place it in a register in the kiosk. Each evening at closing time, both the remaining cash and all checks would be locked in the safe. Approximately every other day, the Debtor's father would deposit the checks in the bank account, then withdraw enough cash to fund daily operations. The Debtor's father kept logbooks detailing the Business' finances.
At the end of each month, the Debtor's father would calculate the monthly profits. Mr. Motaghi and the Debtor's father would split the profits evenly. Mr. Motaghi withdrew his share of the profits from the bank account. The Debtor's father took his share in cash out of the register.Mr. Motaghi testified that the Business was profitable every month, and that his profit share generally ranged between $1,000.00-$1,500.00 per month.
The primary risk of loss associated with the Business was bounced checks. If the Business deposited a check drawn on an account with insufficient funds, Value Bank would return the check. The Business would lose the face value of the check, and would be charged a fee by Value Bank. After a check bounced, Value Bank would notify Mr. Motaghi and send him an image of the check. Mr. Motaghi passed the information along to the Debtor's father, who would then attempt to track down the customer and collect the value of the check and any chargeback fees. Mr. Motaghi testified that the Debtor's father personally knew most customers. Mr. Motaghi suggested that those close customer relationships allowed the Debtor's father to reliably collect bounced checks.
Mr. Motaghi estimated that only ten to twelve checks bounced over the entire course of the Business. Further, he claimed that every bounced check was eventually collected in full. The evidence at trial demonstrated that his testimony was inaccurate. A review of the bank statements shows that twelve to thirteen checks bounced in the two-month period from January 2017 to February 2017 alone. This suggests that the total number of bounced checks far exceeded Mr. Motaghi's estimate. Mr. Motaghi's testimony vastly underestimated the total number of bounced checks. There was also no evidence that Mr. Motaghi monitored the collection status of any bounced check after he notified the Debtor's father. Mr. Motaghi merely assumed that the Debtor's father collected each bounced check.
Because Mr. Motaghi did not closely monitor the bank account or track the number and collection status of bounced checks, the Court declines to credit Mr. Motaghi's testimony that all bounced checks were collected.
Prior to the commencement of the Business, the Debtor's father suffered a stroke. According to the Debtor, the stroke impacted his father's ability to operate the business, including his father's ability to keep reliable accounting records. A review of the records introduced at trial shows that the accounting records and log books maintained by the Debtor's father were replete with errors. The Court does not know whether any of the errors were precipitated by deficiencies resulting from the father's stroke, although the Debtor implied that his father suffered substantial post-stroke deficits. The Debtor began assisting his father at the Business. The Debtor had no formal role or title, but helped his father with almost all aspects of the Business. As compensation, the Debtor's father gave part of his share of the monthly profits to the Debtor. When he began working at the Business, the Debtor was about 22 years old.
The Debtor typically worked alongside his father, but sometimes operated the Business on his own. Although his father kept the only key to the office, the Debtor borrowed the key when he needed to stay late or operate the Business alone. The Debtor testified that the safe typically held $10,000.00 to $15,000.00 cash on weekdays, and about $30,000.00 on weekends. Fridays saw the highest volume of business because customers generally received paychecks at the end of the week.
The Debtor frequently visited Value Bank with his father to make Business deposits and withdrawals. However, the Debtor was not a signatory on the account. The Debtor did not have access to bank statements. Value Bank allowed customers to make check deposits of under $5,000.00 via a drive-thru teller. Larger amounts needed to be deposited within the bank. When his father felt sick, the Debtor would enter the bank to deposit large checks while his father waited in the car. In such instances, both the Debtor and his father would endorse the checks. Cash withdrawn from the account was taken back to Snappy Foods and placed in the safe.
When Mr. Motaghi informed the Debtor's father that a check bounced, the Debtor often tried to collect the check in lieu of his father. The Debtor would first try and track down the customer. If the Debtor found the customer, the Debtor would try to negotiate repayment of the cash. If the Debtor was unsuccessful, the business would send the customer a demand letter. It was not clear what proportion of all bounced checks the Debtor helped collect.
In September 2017, the Debtor's father suffered a second stroke. The medical emergency left the Debtor's father unable to continue running the Business. After the stroke, the Debtor sporadically operated...
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