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Larry Paulsen v. Greg J. Davis & Sara M. Davis (In re Davis), Ch. 7, BK20-40868-BSK, A20-4034-BSK (Aug. 13, 2021)

After an evidentiary hearing, the court denied a creditor’s complaint objecting to discharge and dischargeability. The debtors are the only two members in an LLC that once owned and operated golf equipment retailer with five locations in Nebraska and Iowa. The plaintiff and his business loaned money to the LLC because the plaintiff was close friends with the debtors’ family. Regular payments were made on the loan until the LLC’s cash-flow issues intensified. The debtor provided financial documentation to the plaintiff and kept him informed about store closings and liquidations. As store locations were sold, the LLC paid operating expenses, a sales tax debt, and some unsecured debts. The plaintiff thereafter filed a state-court replevin and collection action and the LLC turned over the assets remaining after the store liquidations. The debtors then filed this Chapter 7 petition.

With regard to the plaintiff’s claim under § 727(a)(2) for transfer or concealment of assets, the court ruled that because the assets at issue belonged to the LLC and not to the debtors, the creditor’s claim had no basis. Even if the assets were property of the estate, the creditor’s claim was based on a difference in value between amounts stated in pre-petition asset summaries provided to the creditor and the amounts actually turned over to the creditor as part of the replevin action. As the bankruptcy court noted, “[t]he plaintiff is not the first creditor secured primarily by inventory and equipment to find itself holding a significant deficiency claim on liquidation.” There also was no evidence of the debtors’ intent to hinder, delay, or defraud when they moved the LLC’s remaining inventory into storage. The creditor did not request that any of the assets be turned over to him; instead, he waited and then filed a replevin action.

With regard to the plaintiff’s claim under § 727(a)(3) for failure to preserve records, he did not establish that he requested any records, any records were destroyed, or existing records were inadequate. The evidence indicated the LLC’s business records were available and accessible.

With regard to the plaintiff’s claim under § 727(a)(4)(A) that the debtors made false oaths of material facts in connection with the bankruptcy case, the plaintiff did not establish a pattern of false statements. Omissions in the bankruptcy schedules were not knowingly and fraudulently made and were subsequently corrected. Discrepancies in asset values were attributable to the passage of time between the preparation of old financial statements and current bankruptcy schedules.

With regard to the plaintiff’s claim under § 727(a)(5) alleging the failure to satisfactorily explain the loss or deficiency of assets, the assets at issue belonged to the LLC, not to the debtors, so the debtors were under no obligation to explain a perceived loss or deficiency. Even if the assets belonged to the debtors, the plaintiff did not establish a loss or deficiency. The LLC’s assets were either turned over to creditors, recovered by third parties, held by landlords, or turned over to the plaintiff.

With regard to the plaintiff’s claim under § 523(a)(2)(A) alleging that the debtors falsely represented he would have a first-position lien on the LLC’s assets in exchange for one of the loans made, the evidence does not establish the necessary elements. First, there is no evidence the debtor represented that he could grant the plaintiff’s request for a first-position lien. Even if he did make such a representation, it is not a misrepresentation simply because the intended result did not happen. The evidence indicates that at the time the security agreement was signed, the debtor believed the plaintiff could be given a first-position lien. Moreover, the plaintiff did not rely on any such representation and made the loan without concern for collateral because he wanted to help the debtor.

With regard to the plaintiff’s claim under § 523(a)(2)(B) alleging that the debtors provided a false financial statement with intent to deceive, he did not establish an intent to deceive. In addition, the plaintiff’s loans were not made in reliance on the financial statements, and there is no evidence the financial statements were materially false. Any discrepancy was due to a flawed comparison of values.

Finally, with regard to the plaintiff’s claim under § 523(a)(6) alleging willful and malicious injury because the debtors paid unsecured creditors instead of the plaintiff, there was no evidence the debtors acted maliciously. Malice is not necessarily inferred from a debtor’s conduct of using proceeds to try to keep a business afloat. Here, the debtors tried to keep the last store open in order to maximize recovery for the plaintiff, among others. The plaintiff was kept apprised of the debtors’ plans and either agreed or acquiesced to them. At most, there was a breach of a security agreement, but it did not rise to the level of a willful and malicious injury. Accordingly, judgment was entered in favor of the defendants on the complaint.

Friday, August 13, 2021
Judge Brian S. Kruse