Opinion
Case No. 10-30450 Adv. No. 10-3168
10-05-2012
In re: JAMES CONLEY BETTY H. CONLEY, Debtors FT EXPRESS, Plaintiff v. JAMES CONLEY BETTY H. CONLEY, Defendants
This document has been electronically entered in the records of the United States Bankruptcy Court for the Southern District of Ohio.
IT IS SO ORDERED.
_________________
Guy R. Humphrey
United States Bankruptcy Judge
Judge Humphrey
Chapter 7
Decision Denying All Relief in the Plaintiff's Complaint Requesting
Judgment that Defendants' Debts Owed to Plaintiff are Nondischargeable
I. Introduction
This decision concerns whether the debtors, collectively or individually, owe a nondischargeable debt to the plaintiff, Fujitrans U.S.A., Inc., dba FT Express, from their actions related to a failed trucking business venture. II. Procedural Background On January 28, 2010 the debtors, James and Betty Conley (the "Conleys"), filed a joint bankruptcy petition under Chapter 7 of Title 11 of the United States Code (estate doc. 1). On May 21, 2010 Fujitrans U.S.A., Inc. d/b/a FT Express ("FT Express") filed a complaint to determine the dischargeability of an unliquidated, disputed debt (adv. doc. 1). The complaint asserted the Conleys owed a pre-petition debt to FT Express and that this debt was nondischargeable pursuant to 11 U.S.C § 523(a)(2)(A) and (4). The Conleys filed an answer on June 17, 2010 (adv. doc. 3) and the trial commenced on July 21, 2011 and concluded on July 22, 2011. The parties filed post-trial memoranda and proposed findings (adv. docs. 92, 93, 97 & 101). This decision constitutes the court's findings of fact and conclusions of law pursuant to Federal Rule of Bankruptcy Procedure 7052.
On March 24, 2012, prior to the court reaching its decision, Lawson filed a motion to re-open the trial to admit "newly discovered evidence" and also sought an order of contempt and sanctions against the Conleys (doc. 108). After briefing and a hearing, the court denied the motion (docs. 122 and 123).
See Order Denying Plaintiff's Motion to Reopen Trial, Plaintiff's Motion to Find Defendants in Contempt, and All Requests for Sanctions (doc. 108) (doc. 123).
III. Findings of Fact
A. Formation of the Business Relationship between Betty Conley and FT Express
Betty Conley lives at 4073/4075 Gallimore Road, Sabina, Ohio (the "Gallimore Property") (Transcript [Tr.], p. 30). The Gallimore Property includes her residence and an adjoining 1o acre tract of land. Betty Conley has a high school education (Tr., p. 393). James Conley, her husband, lives nearby in a separate house (Tr., p. 388). Although the Conleys are legally married, they have been separated for 9 years (Tr., p. 388). Betty Conley's extended family includes many people working in the trucking business, and her "dream" was to run a trucking operation and be like her brothers (Tr., p. 434). Betty had never run a trucking operation, but she had experience in trucking as an owner operator and an agent from 1979 through 2002 (Tr., p. 347). See also Debtors' Exh. E (Betty Conley resume).
Katsura Yano, who uses the first name Gene ("Yano"), was an executive vice president of FT Express U.S.A., a subsidiary of Fujitrans Corporation Japan, but, by the time of trial, had been terminated. Fujitrans grosses about 1 billion dollars in sales each year and 20 million dollars in sales in the United States (Tr., pp. 114-15). By 2007, Yano had worked for Fujitrans, U.S.A. for 20 years. Fujitrans, U.S.A.'s business included a significant amount of freight hauling (Tr., p. 118). According to Yano, Fujitrans had relationships with, among other major corporations, Toyota, Mitsubishi and international trading companies (Tr., p. 119). Yano was looking to expand his fleet of trucks in this region of the United States. FT Express was the trucking division of Fujitrans, U.S.A. and started 4 years before Yano met Betty Conley. Id.
John Davis ("Davis"), who testified about some of the relevant events, has been a truck driver since 1972 (Tr., p. 97). He worked for his own company for about 10 years and also had experience as a dispatcher for various companies (Tr., pp. 97-98). Davis has known the Conleys for many years (Tr., p. 99). Davis learned from a man named Aaron Cody ("Cody"), a truck driver for FT Express, that FT Express was interested in expanding its trucking operation in Southwest Ohio. He discussed this idea with Yano in 2006 or 2007 (Tr., p. 100-01). In addition, about three weeks after the conversations with Yano began, Davis discussed FT Express's expansion plans with Betty Conley. Davis thought Betty Conley would be a good dispatcher for finding freight to haul (Tr., p. 101). Davis ultimately was not involved in the business venture between Betty Conley and FT Express; however, it was undisputed that Davis works for Jamestown Transportation, which began doing all the hauling for FT Express in 2007 after the business venture with FT Express and Betty Conley failed (Tr., p. 110). In addition, Jamestown Transportation hauled for DHL at the time the business venture between Betty Conley and FT Express was conceived (Tr., p. 125).
In 2007 Betty Conley called Yano and she told him she could get steady work for about 25 trucks to haul for DHL, an international shipping company which had a significant hub in the local area. FT Express had no prior relationship with DHL and Yano was not particularly familiar with DHL when the discussions began, but was aware they were "big [and] especially . . . strong in Europe and Asia." (Tr., p. 122). Yano made no commitment to her at that time. Id. Yano did speak to Cody about who Betty Conley generally was. Betty Conley found profitable loads for Cody when he was at risk of losing his truck. Betty Conley and Yano had some initial contact by phone.
Yano and Betty Conley met at a truck stop in Wilmington, Ohio, where the DHL hub was located. She indicated that she could get hauling business from DHL and the Gallimore Property was located near DHL's Wilmington hub, which interested Yano. Yano never communicated with DHL prior to entering into this business relationship with Betty Conley, but did some independent basic research about DHL on the internet and confirmed DHL was outsourcing freight hauling and had 27 to 28 regional hubs (Tr., pp. 126-27). Prior to this time, Betty Conley expected that she would only be an agent for FT Express to obtain hauls for FT Express (Tr., p. 435); however, the discussions between Betty Conley and Yano began to focus on DHL.
According to Yano, Betty Conley told him that she knew people at DHL and could provide "dedicated lanes." (Tr., pp. 125-26). Dedicated lanes refer to an agreement to haul a specific route for a company such as DHL on a repeated basis for a set period of time and are a guarantee of hauling business. Betty Conley indicated she would need 25 trucks to ensure she could get any hauling business from DHL, but would need 50 trucks for routes anywhere in the continental United States. However, according to Betty Conley, she never promised an agreement for "dedicated lanes" and no one who hauled for DHL received dedicated lane agreements (Tr., pp. 338-340). Davis testified that DHL did have "dedicated lanes" agreements with 30 companies, but a hauler started with a spot agreement (Tr., pp. 107-110). Yano admitted that he did not know how DHL operated (Tr., p. 261).
Betty Conley testified that she only promised a "spot agreement," which allowed someone to haul for DHL if they met certain qualifications, but did not guarantee any specific business. Betty Conley described how haulers were chosen from a load board and, essentially, if a company or owner operator hauled timely and did a satisfactory job, the hauler would receive more hauls from DHL over time (Tr., pp. 339-340). Betty Conley obtained a one year spot agreement from DHL, which was signed by her and a DHL representative on August 15, 2007.
A note Betty Conley wrote at the truck stop meeting (Exh. 3, 82) expressed that 25 trucks were needed for regional hauls and 50 trucks for national hauls. The routes listed on this document do not have a specific dedicated lane. Instead, the routes listed can be best understood as examples of national routes as contrasted with regional routes. The note states: "Need 25 truck for Route of Wilm[ington] to texas to N.Y. to Fl[orida] Back to Wilmington" and "[n]eed (at least) 50 trucks to Run California to N.Y. to Florida Back to Ohio." At the end of the note, Betty Conley described the financials of a particular example route from Wilmington to California. This note does not specify or promise dedicated lanes in the business venture between FT Express and Betty Conley. The trial record does not include any written document or other evidence corroborating Yano's testimony that Betty Conley promised dedicated lanes. Betty Conley operated during the brief business venture on the premise that she would be receiving hauls based upon the spot agreement.
Many of the individual exhibits were voluminous. The court references the bate stamp numbers of particular pages within certain exhibits.
It appears that Yano may have assumed the agreement would be dedicated lanes based on the hub system under which DHL operated (Tr., p. 148). The hauls from Wilmington did not go to just any final location, but to specific "sub hubs." However, Davis' testimony established that at least some hauls from DHL's Wilmington hub were by spot agreement.
Subsequent to the truck stop meeting, Betty Conley met with Yano and his immediate boss, the President of FT Express, Mr. Segino, at the Gallimore Property. Yano testified that the meeting was to include a representative of DHL, but no such representative attended the meeting. According to Davis, Betty Conley called him prior to that meeting, when he was hauling in the state of Washington, and asked him to come back and impersonate a DHL representative (Tr., p. 103). According to Davis, he had planned to start that trucking company with Cody and Betty Conley, and before that point, "DHL didn't have anything to do with it." (Tr., p. 103). Betty Conley admitted calling Davis in Washington, but denied that she requested him to return to Ohio to impersonate a DHL representative. Betty Conley stated she only wanted to show Yano and Segino a bill of lading from DHL. Davis denied that Betty Conley ever asked for a bill of lading. Davis also testified he was aware that two of Betty Conley's brothers "[did] a lot of business through DHL" and that two of Betty Conley's sisters had worked for DHL for over 15 years (Tr., p. 109). However, the brothers did not work for DHL, but for Jamestown Transportation, which provided freight services for DHL. The sisters worked as "normal laborers" (Tr., p. 112) for DHL.
On June 30, 2007, about the same time as the meeting with Mr. Segino and Yano (Tr. p. 132), Betty Conley sent an email to Yano which stated:
"dear mr yano, I have been trying to call you for 2 days, could you please call me back? I want to ask you if it will make you feel more comfortable about me and dhl that I am willing for you to use my farm as a lien, you and ftexpress can file a lien on my farm for a security deposit to ensure to you that I am serious about the trucking operation, this way I too am putting up (funds) by using my property, please call me so we can discuss this further. thank you, (betty) janes conley."Despite not meeting a DHL representative at the Gallimore Property meeting or any time prior to severing the business relationship with Betty Conley, the lack of any formal agreement between Betty Conley and FT Express, and having not seen any dedicated lane contract with DHL, Yano moved forward quickly, in part because Betty Conley was willing, as indicated in her e-mail, to place a lien on the Gallimore Property, but also because he was quite interested in the opportunities DHL might afford FT Express to expand its trucking business.
FT Express notes that, during this time, the Debtors were in a Chapter 13 and did not mention that fact in the email nor did she mention this nascent business venture to the Chapter 13 Trustee. The court takes judicial notice of the filing in this court -- Case No. 06-32471. The court cannot take judicial notice of any other aspect of that prior case and no other evidence was presented.
Soon a loose arrangement or joint venture was forged by Betty Conley and Yano, on behalf of FT Express. Despite Davis having the original concept for a trucking company and hauling for FT Express and Cody being an initial link between Betty Conley and FT Express, Davis and Cody were not principals in the business venture. Under the arrangement, Betty Conley would act as an independent operator who would find loads to be hauled, with the priority being loads from DHL. Betty Conley would find and hire local drivers and run the operations while FT Express would provide the trucks and trailers. The invoicing was done by FT Express, with payment being made to FT Express and commissions then paid by FT Express to Betty Conley based upon the loads paid for by customers. (Tr., p. 134).
Yano decided to use 50 trucks, rather than 25, to allow the trucks to travel routes throughout the continental United States. Yano testified 100 trailers were needed for the 50 trucks (Tr., p. 159). By the end of July 2007 FT Express, through Yano, leased 10 Freightliner trucks from DaimlerChrysler and twenty used trailers from Dayton Leasing, a leasing company found by Betty Conley (Tr., p. 158). FT Express, through Yano's authorization as a corporate officer, purchased 80 new trailers (Tr., p. 159) to bring the total to 100 trailers. The trucks and trailers were eventually to be owned by Betty and the operation would be run through her own d/b/a name "Betty's trucks."
Except for immediately prior to FT Express' termination of the joint venture, which is discussed later, this joint venture between Betty Conley and FT Express was operated without the benefit of a written agreement. However, the details of the projected income and expenses for the joint venture were included in a one page term sheet sent by e-mail from Yano to Betty Conley in July 2007 (Exh. 3, 79). This sheet included the hand-written notice "Attn Jane For Your Estimate Gene." The term sheet, despite its financial expense and income projections, does not reference any specific dedicated lanes with DHL or use that phrase. Betty Conley included some hand-written comments about the term sheet and sent it back to Yano. Some of those comments were because Betty Conley believed Yano overstated expenses she would have in acting as an owner operator for the trucks. For example, as to office expenses, such as computers, Betty wrote next to the figure of $100,000 that "won't cost that much" and indicated on the term sheet that drivers should provide their own cell phones.
B. The Truck Terminal
The parties disputed almost every aspect of their attempt to create a truck terminal on the Gallimore Property for the trucks and trailers. FT Express contends that Betty Conley received funds as loans to create the truck terminal, had no intention of repaying the loans when she received the funds, was aware the terminal would be shut down because of county or township zoning laws when she took the funds, and embezzled some of the funds for her personal use. According to FT Express, the inadequate work that was done was part of a ruse to give legitimacy to her fraudulent scheme.
Betty Conley testified the terminal was not immediately necessary and that if the joint venture had a terminal, it did not need to be at the Gallimore Road property and there were better locations more appropriately suited for it than the Gallimore Road property, but Yano insisted on building the terminal at the Gallimore Road property (Tr., pp. 406, 438-39). Betty testified that she believed that the zoning laws did not apply to owner operators (Tr. pp. 436-37) and she attempted to fulfill Yano's wishes in regard to the timing and the specifics of the terminal construction. She testified that she attempted to complete the terminal and was terminated before she could.
C. Establishment of the Gallimore Truck Terminal and Funds Advanced by FT Express for That Purpose
After embarking upon the joint venture, Yano and Conley worked to transform the Gallimore Property into a workable truck terminal and an on-site office for Betty Conley. This work included clearing trees on the property, although the degree of such clearing was in dispute. Another major part of the project was hauling and putting down loads of gravel. Betty testified "neighbors and friends" were working on the Gallimore Property 15 hours per day (Tr., p. 350) after Yano rejected an estimate from "outsiders" to do the work. Betty Conley testified that Yano was at the site four days a week, observing this activity (Tr., p. 483). He said he was not. However, other evidence showed Yano was involved in details of the business venture. For example, Betty Conley, on Yano's suggestion, paid potential drivers $100 to watch a video about FT Express and gave them food, even though Betty Conley believed she would have little difficulty finding qualified drivers in that area without any such marketing efforts and that Yano was wasting money (Tr., p. 417). Yano also testified that he was "visiting" almost weekly about receiving the DHL agreement from Betty Conley and the promised mortgage lien (Tr., p. 134). Yano also testified that he visited the Gallimore Property from time to time to look at the progress (Tr., p. 269).
In order to ready the truck terminal and office, FT Express forwarded significant funds to Betty Conley on multiple occasions over a short period of time. Yano testified that all of these funds were considered loans by FT Express to Betty Conley. According to Yano, Betty Conley promised to repay this money within one year (Tr., p. 133). Except for the initial request, there is nothing documenting who, Yano or Betty Conley, initiated the request for the other funds.
On July 24, 2007 FT Express wired $25,000 to Betty Conley's Key Bank account (Exh. 1, 7). The funds were for gravel ($15,000) and "expense money" ($10,000). Betty Conley indicated in an email to Yano she "should be able" to repay these funds by the end of 2007 (Exh. 1, 8). On August 1, 2007, $27,000 was wired to the Key Bank Account (Exhibit 1, 9). On August 15, 2007 $16,500 was wired to the Key Bank account (Exh. 1, 16). On August 24, 2007 $18,000 was wired to the Key Bank account (Exh. 1, 20). On August 31, 2007 $18,000 was wired to the Key Bank account (Exh. 1, 2-4). That deposit was for a "garage type building" for truck maintenance (Tr., p. 174). Yano testified that at this point in time, as "a worker of the company," he was becoming nervous and scared (Tr., p. 175). On September 13, 2007 $20,000 was wired to Betty's account at Key Bank. These funds were for spare tires and oil changes for the trucks. Yano testified he never did see oil or tires that were to be ordered from some of the funds advanced by FT Express and was not provided receipts. Betty Conley testified tires cost $250-350 each and were purchased because the tires on the trucks delivered were not road worthy and that she purchased "recaps" (retreaded tires) with cash.
FT Express paid for a mobile office from "Mobile Mini, Inc.," which cost initially $2,724 for delivery, set up, and the first month rental (Exhibit 7, 138). Betty Conley testified she did not want the Mobile Mini because two trailers were not allowed on the Gallimore Property, but that Yano wanted the "Mobile Mini." Tr., p. 363-64. FT Express paid for "two dispatcher desks," a desk for Betty Conley and computers (Tr., p. 187) for the Mobile Mini; however, the phone line for internet use was never hooked up to the Mobile Mini before the joint venture was terminated and the Mobile Mini was removed from the Gallimore Property. Yano, as an employee of FT Express, paid a total of $4,480.64 at an office supply store for those items (Exh. 3, 72-75) from June through August 2007. In addition, Yano testified he brought a copier, telephone equipment and some chairs from the Chicago office of FT Express. FT Express also paid for a security system to be installed at the Gallimore Property and Betty Conley testified that at trial that "it's still there" (Tr., p. 440).
The work at the Gallimore Property was never completed prior to the termination of the joint venture.
D. The Zoning Dispute Concerning the Truck Terminal and the Property
FT Express argued that a major part of the fraud was Betty Conley misrepresenting that her property could serve as a truck terminal for the business venture. The evidence showed the Gallimore Property was zoned agricultural and had been so zoned going back to at least the 1970's. Betty Conley's request to have the property re-zoned for business, to operate a drive-through carryout business, was denied by the Clinton County Zoning Commission in 2005.
In 2007 neighbors complained about construction debris and inoperable vehicles at the Gallimore Property. Walter Daniel ("Daniel"), the zoning inspector for Clinton County, contacted the Conleys about the problem several times in 2007. Formal charges were filed by the county prosecutor's office on June 18, 2007. About July to September 2007 Daniel spoke with the prosecutor about addressing the problem. When Daniel visited the property on one occasion, he noticed not only the trailer and inoperable vehicles, but 6 or 7 other vehicles and gravel on the property (Tr., p. 58). On September 20, 2007, Betty signed an affidavit agreeing to remove a construction trailer "no later than the end of October 2007." (Exh. 11, 207). While the initial issues which led to the zoning complaint were resolved without litigation, the problem of the trucking operation on agricultural property remained.
Betty Conley testified that she expected to be an owner operator and that she would not be subject to the zoning requirements: "The zoning problem was if you had a company or somebody else's trucks, company running out of there. But he signed me on as an owner operator. That meant that, you know, he leased the trucks for me and I would eventually own them trucks." Tr., p. 436. She also thought the trucking operation could have been moved to 202 Main Street, Port William (Tr., p. 438), which was a site Betty Conley had used in the past for trucking and where she currently lives (Tr., p. 100, 388).
The timing of when Yano and FT Express discovered the zoning problem with use of the Gallimore Property as a terminal was disputed at the trial. FT Express claimed that it did not find out about the problem until about September 20, 2007 (Tr., p. 197). However, Daniel's testimony, which directly contradicted Yano, was that he was "certain" he had personally met with Yano in June 0f 2007 (Tr., p. 83). Daniel's complete testimony showed that Yano was aware of the possible zoning issue as early as June 2007, and certainly prior to September, when the relationship with Betty Conley began, and not at the end of that relationship.
Later in his testimony, Mr. Daniel stated he might not be aware of an "exact date," but the evidence showed that the September 2007 meeting, just prior to the termination of any relationship between Betty Conley and FT Express, was not the first meeting between Yano and Daniel. Daniel testified he had a photograph of the property from July 26, 2007 (Tr., p. 87). According to Daniel: "I didn't know the trucking company was even going on out there until I met with Mr. Yano, then I went out there." Id. It is unlikely that the trucking business and the zoning restrictions applicable to the Gallimore Property would not have been discussed. In fact, it was information provided by Yano and Cody that led Daniel to have the concern about the trucking operation. See Tr. p. 58 & 73. Yano testified he never spoke to Daniel until about September 20, 2007 (Tr., p. 196), but Daniel testified more than one meeting occurred and the court finds Daniel's testimony was credible.
E. Final Events Prior to the Termination of the Joint Venture Between Betty Conley and FT Express
On August 15, 2007 Betty Conley entered into a spot agreement with DHL. Yano indicated that for a "long time" he asked Betty Conley "where's the contract" with DHL (Tr., p. 212). When he received the contract, which was signed August 15, 2007, it was a spot contract between DHL and Betty, as an agent of FT Express. When Yano reviewed the agreement about September 20, 2007 (Tr., p. 211-12), and realized Betty Conley did not have an agreement for dedicated lanes, this fact, along with other concerns, led to FT Express' decision to terminate its relationship with Betty Conley "as an agent, independent contractor and any other capacity of employment" on September 21, 2007 (Debtors Exh. D). Yano claimed that finding out, through Cody, about the zoning problem; the realization that Betty Conley did not have a dedicated lane agreement with DHL and other problems with the profitability of the business venture led to the termination of the joint venture.
Besides Yano's concern about the zoning, Yano testified that Betty Conley was supposed to dig out three or four feet of softer soil, put hard rock down to replace it and then several feet of gravel (Tr., p. 175). He stated the grass was growing between the gravel and only a shallow amount of gravel was applied. Yano also believed the hauls she had found were unprofitable and insufficient. He was also upset a phone line was being hooked up to a garage on the property to be used as an office rather than the Mobile Mini (Tr., p. 199), which was being leased to serve as an office.
Within days of the end of the parties' working relationship, the parties belatedly signed an agreement that Yano dated September 21, 2007 (Pl. Exh. 5, 86 & 87). Despite all that had previously transpired and Yano's great concern about the zoning problem and the spot contract, the agreement did not include any requirement for dedicated lanes and did not address zoning. Instead, it only referred to insurance and "business registration."
Yano's explanation of why, as an experienced and sophisticated businessman, he did not confirm any of Betty Conley's assertions as to her relationship with DHL or have a written contract was based on the business culture of FT Express that drove Yano's expectations. According to Yano, other business partners, which were large Japanese corporations and other international shippers, did not require written contracts. According to Yano, he trusted Betty Conley as a partner and would have felt it unacceptable to check with DHL as to any aspect of the business venture because he relied on her representations. After Yano learned that Betty Conley only had a spot agreement with DHL and learned of the zoning problems, and confirmed the spot agreement with DHL, FT Express terminated its business relationship with Betty Conley.
F. Post-Termination Period
Betty Conley testified that shortly after her termination the office was broken into and many of her files were missing. She indicated the security tape was not installed because she did not know how to use the system. The system was to have been monitored by a security company (Exh. 8, 140-41), but it was unclear if it was turned on properly.
Betty indicated that because FT Express terminated the accounts for the fuel cards and the insurance for the trucks hauling all over the United States, trucks and trailers were stranded (Tr., p. 354). Further, Betty testified that once FT Express filed reports that these trucks were stolen, the issues surrounding the return of the trucks could not be resolved until FT Express and Betty Conley were in state court litigation a month later.
Yano testified that, upon termination of the relationship between FT Express and Betty Conley, he wanted to stop the business venture as soon as possible because FT Express was responsible for the trucks and trailers in the event of an accident or other "trouble." (Tr., p. 217). He indicated that he paid drivers for funds Betty Conley had not paid for freight hauls. Yano attempted to find all the trucks and trailers, including at the Gallimore Property, shortly after the termination of the joint venture. Yano recovered some of the trucks and trailers after an order compelling their return was entered in the state court litigation. Betty Conley testified that, about that time, which was two weeks after she was terminated, she was in "possession" of 5 trailers and 4 trucks. Betty Conley indicated that she meant, as the dispatcher, she was responsible to get the trucks and trailers returned (Tr., p. 355).
The record shows that the attempt to collect invoices after Betty Conley's termination as an agent of FT Express (Tr., p. 226) were done by a third party. Those invoices were dated October 5, 2007 (Exh. 10, 150-185). Yano testified he did not know whether FT Express was paid on those invoices (Tr., p. 229). The evidence did not show Betty Conley received any funds from those invoices and the evidence did not establish whose was the address listed on the invoices.
Upon being asked if the address belonged to an individual named Ida Miller and whether he hired her, Yano testified that he did not know who she was (Tr., p. 270). Betty Conley testified that Yano hired her and she sent the post-termination invoices (Tr., p. 440).
FT Express never provided specific evidence as to any trucks and trailers that remained missing as of the time of the trial and any role Betty Conley had post-termination in preventing those trucks and trailers from being returned. For example, Yano testified, Steve Conley, among others, was using a truck without permission from another carrier, but provided no specifics or corroboration, and testified the truck was "eventually" returned (Tr., p. 435).
G. James Conley's Limited Role in the Business Venture
James Conley did not play a central role in the business venture between Betty Conley and FT Express. He played no role in the formation of the business venture, the initial contact with Yano, the term sheet, or the memorandum of understanding. He did however play a significant role in organizing the construction of the truck terminal and in repairing trucks and ensuring that they were road worthy. He also repossessed one truck and two trailers for FT Express at Yano's direction. However, no evidence established that James Conley owed debts to FT Express. The evidence established that any loans or advances of funds made by FT Express were to be repaid by Betty Conley, with no evidence suggesting that Jim Conley agreed to or was responsible for paying any such funds to FT Express.
IV. Legal Conclusions
A. Jurisdiction
The court has jurisdiction pursuant to 28 U.S.C. § 1334. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I).
B. Standard of Review
FT Express must establish the elements of its nondischargeability claims by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 287-88 (1991). Further, because exceptions to discharge are limits on a debtor's ability to obtain a "fresh start" in bankruptcy, they are to be narrowly construed. In re Bachinski, 393 B.R. 522, 532-33 (Bankr. S.D. Ohio 2008), citing Rembert v. AT & T Universal Card Servs., Inc. (In re Rembert), 141 F.3d 277, 281 (6th Cir. 1998).
C. Analysis
Section 523(a)(2)(A) provides, in relevant part, that: (a) a discharge under section 727 . . . of this title does not discharge an individual debtor from any debt . . . for money, property services, or an extension, renewal, or refinancing of credit, to the extent obtained by . . . false pretenses, a false misrepresentation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition[.]" 11 U.S.C. § 523(a)(2)(A).
2. 11 U.S.C. § 523(a)(2)(A) - Actual Fraud (Count Three)
While the last sentence of Count Three of FT Express' Complaint references § 523(a)(4), the court is construing that claim as a claim that the Conleys engaged in actual fraud that is nondischargeable under subsection of § 523(a)(2)(A). In so construing the complaint, the court takes note that paragraphs 30, 31, and 32 all reference "fraud" on the part of the Conleys. In addition, FT Express introduced evidence at the trial which it asserts proves that the Conleys engaged in actual fraud and argued in its post-trial legal memoranda that any debt owed to FT Express should be determined to be nondischargeable based upon the Conleys' actual fraud. The evidence was presented by implied consent. However, the court finds that the evidence did not prove Betty Conley committed actual fraud, but instead showed that the parties, FT Express and Betty Conley, entered into an almost doomed-from-the-start business venture which only lasted three months.
Even if an objection had been raised, the court would have granted a specific motion to conform the complaint to the evidence because it would not have prejudiced the Debtors' ability to defend the action. See Fed. R. Civ. P. 15(b) (applicable by Federal Rule of Bankruptcy Procedure 7015).
Actual fraud refers to "any deceit, artifice, trick, or design involving direct and active operation of the mind, used to circumvent and cheat another." Mellon Bank, N.A. v. Vitanovich (In re Vitanovich), 259 B.R. 873, 877 (B.A.P. 6th Cir. 2001). A debtor that "intentionally engages in a scheme to deprive or cheat another of property or legal right" has committed actual fraud. Id. "Actual fraud is broader than misrepresentation." Id. Just like the other forms of fraud in § 523(a)(2)(A), "a debtor's subjective intent at the time the debt was incurred is critical in proving fraud." Id. However, actual fraud does not require evidence of a "misrepresentation or misleading omission" or reliance. Cash Am. Fin. Svcs., Inc. v. Fox, 370 B.R. 104, 116-17 (B.A.P. 6th Cir. 2007).
The court finds that FT Express did not meet its burden to establish that the Conleys engaged in actual fraud with respect to the joint venture between Betty Conley and FT Express. Rather, the court finds that the parties simply had mismatched expectations as to the central premises of the business venture. Even up to the date that FT Express terminated the joint venture, material provisions of their agreement were never defined by the parties. The evidence did not show Betty Conley entered into the business venture with FT Express for the purpose of acquiring trucks or trailers she did not own, to be loaned funds that she knew she could not repay, or to abscond with assets from FT Express. The evidence also does not support that the uncompleted truck terminal was a ruse for any such plan.
First, the court finds the zoning problems were either an issue Betty Conley failed to fully appreciate or, at worst, a problem she hoped would be ignored by county officials once the property was otherwise cleaned up in response to a zoning violation. She did not believe creating the truck terminal at Gallimore Property was immediately essential for the success of the business venture and was focused on keeping the initial trucks and trailers she received on the road. Her understanding of the zoning law was certainly erroneous, but that misunderstanding does not show actual fraud. Also, Yano met with Daniel prior to the September 2007 meeting, but proceeded anyway. At a minimum, Yano was on notice of problems with the Gallimore Property and the evidence showed he was a frequent visitor. Yano believed that the immediate construction of the truck terminal was essential to the business venture and he was the driving force behind its creation at the Gallimore Property.
At no point during the trial did FT Express present evidence, other than from Yano, that the business relationship was understood by Betty Conley to be based on dedicated lanes. Nor did she represent that it was. The evidence indisputably showed Yano would not have entered into this business venture except if he believed that Betty Conley could provide dedicated lanes from DHL. However, Betty Conley never told Yano she could have dedicated lanes for trucks and trailers through DHL. The notes from the initial truck stop meeting do not support that she did, neither does the July 2007 term sheet that Betty Conley edited, nor even the final memorandum of understanding prepared days before Betty Conley's termination as an agent of FT Express. Although it was never firmly established if DHL provided dedicated lanes for hauling freight (Davis testified they did and Betty Conley testified to the contrary), it was quite clear that Betty Conley believed that dedicated lanes were not possible to obtain from DHL.
The meeting between Yano; his boss, Mr. Segino; and Betty Conley at the Gallimore Property did not show actual fraud. Despite the fact that a representative of DHL did not appear at that meeting, FT Express agreed to go forward. Betty Conley testified that she just sought a bill of lading from DHL. Davis testified he was asked to impersonate a DHL representative, but his testimony is colored by Jamestown Transportation's relationship with FT Express after the joint venture was terminated. Mr. Segino did not testify.
While Betty Conley never provided the promised mortgage lien on the Gallimore Property, Yano never provided anything akin to a written contract for Betty Conley to agree to and sign until days before her termination. This was in spite of the fact that the parties were embarking upon a significant business venture without having had a prior working relationship. If the providing of the mortgage lien was essential to FT Express, FT Express could have conditioned the advancing of funds by FT Express on Betty Conley's recording of such a mortgage in favor of FT Express. The failure to grant the mortgage was not actual fraud, but based on Betty Conley's concern that no written contract was ever provided by FT Express until days prior to her termination. Betty Conley agreed to provide the mortgage, in writing, as part of the memorandum of understanding, but she was terminated only five days later. Thus, the promise to grant the mortgage on the Gallimore Property was not part of a fraudulent scheme.
With respect to the advancement or loaning of funds by FT Express, the evidence established poor record keeping, significant cash transactions, and unsophisticated business practices engaged in by both Betty Conley and Yano, but not actual fraud. In essence, there was no showing that the Conleys engaged in a scheme to obtain the funds for wrongful purposes. The funds forwarded by FT Express for the truck terminal were never fully documented by either party and, although certain funds were intended for discrete aspects of the truck terminal's construction, the funds were never earmarked. Under the parties' informal agreement, these funds were loans and were to be repaid from Betty Conley's earnings from the business venture. If the business venture failed, Betty Conley was left owing these funds that she certainly could not repay without the expected commissions from the business. FT Express controlled the revenue stream from the business venture because the payments on the invoices for freight hauled went directly to it. The evidence did not show that Betty Conley entered into the venture so she could defraud FT Express out of funds under the guise of a truck terminal she never intended to use. FT Express' narrative was not corroborated beyond Yano's testimony.
The court finds that the evidence of significant cash transactions between Betty Conley and the people with whom she did business did not establish fraud by the Conleys. The evidence did show Betty Conley paid for work done at the Gallimore Property in cash. Substantial funds went to relatives or friends that worked on the property. However, it is unsurprising Betty Conley would seek out friends and relatives in her rural community to do this work and Yano never questioned who worked on the truck terminal. He did not tell Betty Conley not to hire relatives or place any qualifications upon those completing the construction. Yano testified that the grass could be seen from the sparse gravel upon one of his visits and the implication was that some of the gravel was never ordered and instead funds were kept for personal use. However, Betty Conley testified large amounts of the Gallimore Property had to be dug up and larger rocks added before the gravel was even installed. At most, the evidence showed Betty Conley's hired hands were not completing the construction of the truck terminal on a timely basis or were performing the work inadequately.
Furthermore, while the evidence did reflect some minor sums paid from Betty Conley's bank account for personal purposes that did not appear to be related to the pursuit of the joint venture, the evidence did reflect that Betty Conley was devoting all of her efforts towards pursuit of the joint venture's objectives. Without expressly earmarking the use of such funds and requiring an accounting of the use of all such funds, the court finds that Betty Conley's payment of unsubstantial bills from her bank account funds did not establish that she was engaging in a fraudulent scheme to defraud FT Express of the funds it advanced.
The evidence showed that it was unlikely that Betty Conley could have developed and maintained sufficient business to render this business venture profitable on a long term basis, which was to eventually include 50 trucks hauling freight on a nationwide basis. However, Betty Conley never exaggerated her personal experience in the trucking industry or her education. Specifically, she never told Yano or anyone at FT Express that she had run a trucking operation on the large scale Yano and Betty Conley had discussed. Yano insisted that the operation start at 50 trucks, rather than 25 trucks, to allow for nationwide hauls. While Betty Conley felt she could find loads for 50 trucks, she suggested to Yano that they start with 25 trucks. The evidence showed Betty Conley worked to find hauls during the short lived business venture and did in fact have some, if perhaps an insufficient number. Although the hauls she obtained from various companies, including DHL, may or may not have been sufficiently profitable, the effort made hardly shows a ruse for actual fraud. The key fact is that she truly believed that she could succeed and did not agree to the business venture to commit an elaborate fraud. Evidence was presented that some hauls were completed and some of those hauls were for DHL (Tr., p. 398-99).
Yano testified that Betty Conley told her after the first one or two loads "they didn't do well and then DHL stopped giving her loads. That's what she said" (Tr, p. 211). This testimony was never corroborated and was contradicted by Betty Conley's testimony that she was having success on the DHL load board.
FT Express also did not prove that the Conleys engaged in fraud during the period following the termination of the joint venture. Particularly, FT Express never sufficiently documented fraud as to the tractors and trailers which it was having difficulty recovering. The evidence showed that these tractors and trailers were out on the road when the gas cards were cancelled by FT Express. The court was left with a muddled story of cancelled gas cards and trucks and trailers scattered about which, after state litigation, eventually led to the tractors and trailers being returned to FT Express (Tr. 354). FT Express never proved specific evidence as to the missing trucks and trailers and many, if not all, of the tractors and trailers were recovered and used by FT Express to haul freight for other companies. There was no evidence that the Conleys made misrepresentations or engaged in other misconduct for the purpose of obtaining possession of these tractors and trailers.
Similarly, there was no evidence of a fraudulent scheme on the part of the Conleys with respect to any of the other property, equipment, or fixtures involved with the pursuit of the joint venture. The Mobile Mini was eventually returned to the lessor (Tr., p. 443-44). The concrete poured for the garage floor was intended to be used for the repair and maintenance of the tractors and trailers. The security system's status was never established and may still be at the Gallimore Property and was purchased at the behest of Yano when the joint venture was still being pursued by the parties.
In addition, FT Express never proved that the post-petition invoices were collected for the benefit of Betty Conley or that she received those funds. The owner of the post office box address listed on the post-termination invoices was Ida Miller (Tr. p. 440). The only funds Betty received were the loans for the uncompleted construction of the truck terminal and commissions on work completed.
Overall, FT Express never proved its theory that Betty Conley used some funds legitimately and hauled a limited number of loads just to defraud FT Express out of funds and property ("the genius of their deception" - Post-Trial Brief for Creditor-Plaintiff FT Express, p. 31). No credible evidence was presented documenting any fraudulent transfer of funds to third parties, undisclosed assets, bank accounts or large purchases. The checks to cash mostly were used to pay workers for the completed construction of the truck terminal or for money orders. In the end, all the funds for the truck terminal were loans for which Betty Conley was personally liable. Although not all the funds were accounted for by invoices, the record failed to prove actual fraud, but instead showed poor record keeping. The evidence did not show a scheme by the Conleys intended to benefit them through the construction of a truck terminal which they could use to the exclusion of FT Express at the expense of FT Express. Instead, the record established faulty business decisions by both parties and the reliance of FT Express upon Yano and his superiors, as experienced executives, to proceed with the business venture with an individual with no record of managing a trucking operation at the scale proposed. Considering Betty Conley's limited business experience and the rapid pace of the business venture, the result is closer to inevitable than surprising.
While lack of due diligence on the complaining party's part is not a defense to a claim of actual fraud, FT Express' lack of due diligence in entering into the business relationship with Betty Conley most certainly played a part in the parties' mismatched expectations and understandings. Yano proceeded with this business venture because, despite the obvious problems with the business model, he wanted the DHL business. It was important to FT Express. He testified that he did not rush into this business venture, but the timetable suggests he did proceed quite quickly and without any written contract governing the parties' relationship. These decisions to proceed on an expedited basis were not due to the trickery, deception, or artifice of Betty Conley, but because Yano wanted the business venture to progress quickly. Yano's asserted premise of the joint venture -- DHL's provision of dedicated lanes -- was not communicated to Betty Conley or memorialized in any written agreement. Instead, like ships passing in the night, the parties appeared to proceed on different assumptions.
For all these reasons, the court finds that FT Express failed to prove actual fraud under § 523(a)(2)(A) by a preponderance of the evidence.
3. 11 U.S.C. § 523(a)(2)(A) - False Representations (Count One)
The court also finds that FT Express did not establish a nondischargeable claim under § 523(a)(2)(A) based upon fraudulent misrepresentation as asserted in Count One of the Complaint.
The elements of a fraudulent misrepresentation claim under § 523(a)(2)(A) are "the debtor obtained money through a material misrepresentation that, at the time, the debtor knew was false or made with gross recklessness as to its truth; (2) the debtor intended to deceive the creditor; (3) the creditor justifiability relied on the false misrepresentation; and (4) its reliance was the proximate cause of loss." Rembert v. AT & T Univ. Card Svcs., Inc. (In re Rembert), 141 F.3d 277, 280-81 (6th Cir. 1998). There is no doubt that the Conleys received money or property from FT Express, particularly the significant advances of funds. The litigated issues though were whether the Conleys, and particularly Betty Conley, made false representations that she or they knew were false when made, whether FT Express justifiably relied on those asserted false representations, and whether FT Express' reliance on those asserted false representations caused its damages.
The justifiable reliance standard assesses reliance on a subjective basis rather than an objective one. Thus, the creditor's reliance need not necessarily be reasonable from an objective standpoint. Field v. Mans, 516 U.S. 59, 74-75 (1995). Under the justifiable reliance standard a party is "required to use his senses, and cannot recover if he blindly relies upon a misrepresentation the falsity of which would be patent to him if he had utilized his opportunity to make a cursory examination or investigation." Id. at 71. However, a party generally is under no duty to do an investigation for justifiable reliance to be found even if such an investigation might have revealed the fraud. Willens v. Bones (In re Bones), 395 B.R. 407, 432 (Bankr. E.D. Mich. 2008); Haney v. Copeland (In re Copeland), 291 B.R. 740, 767 (Bankr. E.D. Tenn. 2003).
In considering justifiable reliance, the court may consider the sophistication of the creditor and the parties' past relationship. Liberty Savings Bank, FSB v. McClintic (In re McClintic), 383 B.R. 689, 694 (Bankr. S.D. Ohio 2008) ("[W]here there is no history, the bank is sophisticated, the sums are significant, and the lender restricts its inquiry to information provided by the borrower, it is more difficult to establish justifiable reliance."); Wilhelm v. Finnegan (In re Finnegan), 428 B.R. 449 (Bankr. N.D. Ohio 2010), citing Eugene Parks Law Corp. Defined Benefit Plan v. Kirsh (In re Kirsh), 973 F.2d 1454, 1458 (9th Cir. 1992) ("[I]f a person does have special knowledge, experience and competence he may not be permitted to rely on representations that an ordinary person would properly accept. In other words, while reasonableness is a factor in the mix, it is only a factor. The more precise question is whether the person who claims to have been gulled was justified in relying."). The Kirsh decision was cited favorably for following the justifiable reliance standard in Field v. Mans, 516 U.S. at 75.
As discussed in the prior section concerning actual fraud, Betty Conley never represented that she could provide dedicated lanes. The truck stop note, the term sheet, and the memorandum of understanding (drafted by Yano) all fail to mention dedicated lanes. FT Express did not corroborate that version of events, which was the central deceit FT Express posited. Even if the DHL spot agreement had little value, as FT Express contended, the court finds based upon the evidence that Betty Conley thought that the spot agreement, combined with her understanding of how DHL works, was valuable and was the reason FT Express sought to do business with her in the joint venture.
FT Express asserts that "Fujitrans was relying on Betty Conley's business acumen and most importantly, her representations made to them concerning the success of the 'trucking hub.'" Post-Trial Brief for Creditor-Plaintiff FT Express (Doc. 92, p. 34). FT Express also asserts that "Mrs. Conley misrepresented her credentials from DHL contacts to her ability to manage the work necessary to obtain freight to haul truck profitability." Id at 12-13. Finally, FT Express asserts that the Conleys should have disclosed "the extent of their bankruptcy history." Id. at p. 27.
This court had the opportunity to observe Betty Conley and Yano in person and to listen to their testimony. After observing these individuals and their testimony, the court is convinced that Betty Conley could "talk a good game" when it came to the trucking industry. The evidence established that she had been involved with people in the industry, particularly her family, her entire life and had served in different roles in the business at various times in her working life (Tr., pp. 109-12; 347; 391; 434-35; 438). The evidence also established that Betty Conley knew people who worked at DHL (Tr., p. 392). The court is also convinced that Betty Conley believed that she could make this joint venture work to make money for herself and FT Express, that she had the ability to accomplish the goal of obtaining a significant number of loads from DHL, and that in pursuing this joint venture, she was fulfilling her own "dream" (Tr., p. 434-36). The court is also convinced that Yano believed her and believed in her. Because the court finds that Betty Conley believed the general statements she made as to her ability and connections, the court concludes that she did not make those statements with the intent to deceive Yano and FT Express.
However, besides that Betty Conley believed her own statements as to her abilities and connections, any such statements that Betty Conley made about her knowledge of the industry and her connections with DHL were classic puffery, not fraudulent misrepresentations. To warrant a finding of nondischargeability, the representation must be one of existing fact and not merely an expression of opinion, expectation, or declaration of intention. Smith v. Meyers (In re Schwartz & Meyers), 130 B.R. 416, 423 (Bankr. S.D.N.Y. 1991); Bucl v. Hampton (In re Hampton), 2008 Bankr. LEXIS 1943, at *21-22 (Bankr. D. Kan. June 27, 2008), aff'd 2009 Bankr. Lexis 427, 407 B.R. 443 (B.A.P. 10th Cir. March 11, 2009) (table decision). Statements "which amount to no more than sales 'puffery' upon which reliance should not be placed" cannot serve as the basis for a finding of nondischargeability. Hampton at *22. See also Stahl v. Lang, 108 B.R. 586, 589 (Bankr. N.D. Ohio 1989) (representation that investments in limited partnerships were risk-free was in the nature of "puffery").
Finally, the court cannot find that FT Express justifiably relied on Betty Conley's "business acumen" or her statements as to her abilities and connections with DHL, even if they could be deemed to have been fraudulent misrepresentations and not just puffery. The evidence reflected that Betty Conley had a high school education and never operated a trucking concern of the magnitude that was envisioned through the joint venture and had limited vocational and professional skills. There is no evidence that she misrepresented the level of her education, training, work experience, or skills through a resume, letter, or any other communication. Thus, the court fails to find evidence in the record to support FT Express' contention and burden to establish that it justifiably relied upon Betty Conley's assertions as to her abilities and connections.
Nor does this court find that the Conleys had an obligation to volunteer their bankruptcy history to FT Express. The Conleys' bankruptcy history was a matter of public record and so long as they did not misrepresent that history, which is not FT Express' contention, they did not commit fraud by failing to volunteer to FT Express that they had filed bankruptcy.
The court also finds that the Conleys did not fraudulently misrepresent the ability to use the Gallimore Property as a truck terminal. Betty Conley had an erroneous understanding of the zoning laws and believed it would not be an issue after the zoning complaint from the county was resolved (Tr. p. 436-38). There was no evidence that the Conleys would benefit from the work and materials put into constructing the terminal if the county or township prohibited the use of the Gallimore Property as a truck terminal. The court finds that the Conleys would not have invested the labor and effort into trying to transform the Gallimore Property into a truck terminal if they believed that it would not be allowed to be used for that purpose. Further, the evidence showed that Yano visited with Daniel about the zoning problems at the Gallimore Property as early as June 2007, rather than September 2007. Even if he did not meet with Daniel that early in the business venture, it was not justifiable reliance for FT Express to rely solely on the statement of Betty Conley to evaluate zoning issues as to a major undertaking such as a truck terminal, particularly knowing that prior issues existed. FT Express relied on the experience of Yano in this business venture and it was this reliance that ultimately doomed the effort.
Finally, the evidence did not show Betty Conley intended to deceive FT Express as to the post-termination invoices or that she profited from them. The post-termination invoices produced by Ida Miller were another unfortunate part of the failed business deal and Betty Conley's attempt to complete hauls that should have been left to FT Express. There was no evidence of false representations made by Betty Conley to FT Express upon which FT Express relied with respect to those invoices.
The court finds that FT Express simply did not "use its senses" in blindly and carelessly entering into this joint venture and in advancing significant sums of money. There was nothing represented to FT Express upon which FT Express could justifiably rely to conclude that Betty Conley was capable of successfully executing this joint venture. The court finds that Betty Conley engaged in puffery, but not fraudulent misrepresentations. The parties met at a truck stop to plan out the venture. Betty Conley's education and employment history were limited as compared to undertaking a venture of the magnitude proposed. A simple background check or review of public records would have disclosed the Conleys' bankruptcy history. The zoning for the Gallimore Property could have been checked with the county and township before investing sums to transform that property into a truck terminal. A defrauded party need not conduct due diligence in order to prevail under § 523(a)(2) when the culpable party has made factual material misrepresentations leading the innocent party to act. However, this court concludes that this failed business venture was not the result of factual misrepresentations, but rather, a lack of critical planning, understanding, and analysis of what was required to accomplish the goals of the joint venture and as to what was possible. In large part, both Betty Conley and Yano overestimated Betty Conley's abilities, underestimated the pitfalls involved with the venture, and failed to adequately plan for and investigate the tasks sought to be accomplished.
4. 11 U.S.C. § 523(a)(2)(A) - False Pretenses (Count Two)
FT Express also asserted through Count Two of its complaint that any debt owed by the Conleys to FT Express was nondischargeable based upon false pretenses. The court also rejects this theory of nondischargeability.
False pretenses is differentiated from false misrepresentation on the basis that the misleading conduct is not an express representation, but rather, an implied representation based upon conduct designed or intended to give a false impression. James v. McCoy, 114 B.R. 489, 498 (Bankr. S.D. Ohio 1990).
For the reasons previously detailed, the court does not find Betty Conley's actions constitute false pretenses. Her conduct and initial discussions with Yano concerning DHL and the establishment of a truck terminal at the Gallimore Property and her post-termination conduct all reflect an unsophisticated approach by both parties to a complex business venture that demanded more clarity to ensure understanding on both sides of this transaction. Whether this reflects poor business practices, Betty Conley's limited business experience, or a different business culture at FT Express, the significant point is Betty Conley's conduct did not exhibit an intent to deceive.
Specifically, Betty Conley did not engage in conduct that misrepresented her intention to obtain loads from DHL and others as an agent of FT Express, her intention to construct the truck terminal, or otherwise her intention to pursue the joint venture for the benefit of the parties. Rather, her conduct evinced an attempt to operate according to the most relevant documentation of the parties -- the truck terminal note, the term sheet, and the memorandum of understanding. Unfortunately, those documents did not address what FT Express conveyed at trial were its two principal concerns for the joint venture: obtaining dedicated lanes from DHL and the zoning of the Gallimore Property. The Conleys' conduct in pursuing loads from DHL and in constructing a terminal at the Gallimore Property ultimately proved to be wasted and futile, but not intentionally designed to trick FT Express into advancing funds to them or to otherwise confer benefit upon the Conleys to the detriment of FT Express.
Similarly, and for the reasons explained earlier, the court does not find evidence in the record to prove that the Conleys engaged in wrongful post-termination conduct that led FT Express to take action or to expend funds. In fact, any conduct taken by the Conleys after FT Express terminated the joint venture could not serve as a basis for a claim that the Conleys engaged in conduct constituting nondischargeable false pretenses since no reliance could be shown by FT Express after it terminated the joint venture.
5. 11 U.S.C. § 523(a)(4) - Fraud in a Fiduciary Capacity (Count 3)
While the court previously analyzed Count 3 as an "actual fraud" claim, the court has also analyzed that claim as a claim that the asserted debts owed by the Conleys to FT Express are nondischargeable under § 523(a)(4) on account of their being incurred as a result of fraud committed while in a fiduciary capacity. While Count 3 does not assert that the Conleys acted in a fiduciary capacity, the claim references § 523(a)(4) and FT Express' Proposed Finds of Fact and Law (doc. 93, ¶¶ 10 & 11) requests the court to make findings concerning asserted breaches of fiduciary duty. Thus, giving FT Express every benefit of these filings, the court has construed that claim as also asserting a claim under § 523(a)(4) for fraud while in a fiduciary capacity. However, the court finds that FT Express also did not establish that the Conleys committed fraud in a fiduciary capacity as that term is used in § 523(a)(4).
Fraud in a fiduciary capacity is defined narrowly in the Sixth Circuit, limiting it to situations in which an express or technical trust exists. Bd. of Trustees of the Ohio Carpenters' Pension Fund v. Bucci (In re Bucci), 493 F.3d 635 (6th Cir. 2007). Accord Cash Amer. Fin. Svcs., Inc, 370 B.R. at 114. To establish such a trust, a creditor must prove "(1) an intent to create a trust; (2) a trustee; (3) a trust res; and (4) a definite beneficiary." Bucci, 493 F.3d at 640. Further, the trustee must have duties that pre-exist the act which created the debt. Id. at 643.
The trial revealed that no express or technical trust ever existed between either of the Conleys and FT Express. Moreover, the Conleys had no duties as a trust fiduciary to FT Express which pre-dated the asserted debts. For these reasons alone, a nondischargeable debt under the fraud in a fiduciary capacity prong of § 523(a)(4) cannot exist under these facts.
6. 11 U.S.C. § 523(a)(4) - Embezzlement (Count 4)
Count four of the complaint alleges that "by virtue of the agreement entered into between" FT Express and the Conleys, an "employer-employee relationship was established;" the Conleys acquired money and other assets from FT Express as a result of that relationship; that the Conleys "converted such property for their own, with the intent to embezzle from" FT Express; and the embezzlement committed by the Conleys is nondischargeable under § 523(a)(4). However, the court also rejects this theory of nondischargeability.
For purposes of § 523(a)(4), embezzlement is defined by federal common law as "the fraudulent appropriation of property by a person to whom such property has been entrusted or into whose hands it has lawfully come." Brady v. McAllister (In re Brady), 101 F.3d 1165, 1172-73 (6th Cir. 1996). Embezzlement is proven "by showing that [the creditor] entrusted his property to the debtor, the debtor appropriated the property for a use other than that for which it was entrusted, and the circumstances indicate fraud." Id. at 1173. "Embezzlement differs from larceny in that the debtor's original acquisition of possession of the property was lawful." In re Pomainville, 254 B.R. 699, 705 (Bankr. S.D. Ohio 2000).
FT Express did not prove embezzlement as to the loans for the truck terminal and office. The evidence showed that the Conleys used a significant amount of the funds for gravel, the "Mobile Mini," the security system, tires, and other items needed for the joint venture. While Yano may not have required Betty Conley to pay workers with cash, he did not require any particular system of accounting because he considered her, and she was, an independent owner operator and all the funds were loans that were ultimately her responsibility. While under a typical commercial transaction one would expect workers to be paid through checks or direct deposits, with either W-2s or 1099 tax forms being issued to document those transactions, the manner in which the work was planned (or not planned) and performed with respect to transforming the Gallimore Property into a truck terminal was far from a typical commercial transaction. See Tr. pp. 349-50 ("And Jim and his boys, our boys and neighbors and friends and everybody jumped in there and worked 15 hours a day to get it done because he wanted it done immediately."; Tr., p. 406-07). Given the manner in which the workers were employed and the timing, the court finds it credible that these workers were paid in cash and that material also were paid for in cash. See Tr., pp. 410; 416-17. Further, there was no evidence that the Conleys did not spend funds for those purposes or that they secreted cash. Yano did not require that Betty Conley apply conventional accounting practices to the funds or segregate them in a separate business account or otherwise account for them. He did not even require Betty Conley to produce invoices to document purchases contemporaneously with the funds being spent. In the absence of such requirements, Betty managed the funds in a predictable manner for an individual with very little experience in large business transactions, commingling the funds for the loans in her personal account.
The evidence was inadequate to support embezzlement of the funds. Yano, without corroboration, testified, as an example, that he never noticed purchased tires at the Gallimore Property and that the gravel was inadequate. But Yano testified he did not "look" or "see" the spare tires, but Betty Conley testified Yano knew the trailers needed new tires (Tr., p. 178, 497, 543). Yano's testimony also showed had limited personal knowledge as to the condition of the tires on the trailers and assumed the tires would be road worthy (Tr., p. 542-43). As to the gravel, Betty Conley testified that gravel was purchased, brought to the site, and placed on the property (Tr., pp. 429-30), but that the work was never finished before FT Express terminated the joint venture (Tr., p. 430). Certain large checks were written to cash, but most of those funds were explained to be payments for work or for certified checks or money orders. As noted previously, FT Express showed a lack of documentation and a use of the loaned funds in a manner not up to the documented business practices of FT Express, but the evidence does not show FT Express demanded more. Further, while FT Express complains that the Conleys waited until the second day of trial to produce evidence of what they expended the advanced funds on (Post-Trial Brief for Creditor-Plaintiff FT Express (adv. doc. 92, p. 25), the Conleys did introduce evidence of the uses of those funds. See Tr. pp. 406-07; 416; 429-30. The Conleys did not produce a dollar-for-dollar accounting regarding these funds, but the burden was on FT Express to establish that the Conleys wrongfully used those funds - it was not incumbent upon the Conleys to prove the negative - that they did not wrongfully use those funds.
The court concludes that Betty Conley may not have been completely qualified to manage the amount of funds she received nor did her practices conform to the business accounting practices of FT Express. However, it was never proven that she intended to embezzle cash for her personal use. In addition, the undisputed evidence from both FT Express and Betty Conley that the advancements were loans to Betty Conley coupled with the fact that FT Express did not expressly restrict the uses of those funds negates its position that it "entrusted" those funds to Betty Conley.
At most, some of the funds may have been used for personal use because Betty Conley did not establish a separate segregated account for these funds, but rather deposited them in her personal account. However, the funds were not embezzled from FT Express' accounts to which she was entrusted, but were loans. In the end, Betty Conley, realistically or not, intended to repay these loans because she believed she could run a trucking business at the scale Yano wanted. Without a successful business venture, Betty Conley could never have repaid these loans and never claimed she could. Poorly kept records and missing invoices do not, by themselves, prove embezzlement in these circumstances. In the context of this business venture, the poor record keeping and use of Betty Conley's personal account is as predictable as it is unfortunate for all parties concerned. Accordingly, the court finds that FT Express did not meet its burden of proving that the Conleys embezzled funds from it.
FT Express never proved embezzlement as to any other property that was part of the truck terminal either.
7. FT Express Did Not Prove That James Conley Owes It a Nondischargeable Debt
Finally, FT Express did not prove that James Conley absconded with any trucks or trailers. The limited record showed James Conley repossessed a Ryder truck and two trailers for FT Express at Yano's direction and kept the truck and trailers while waiting to be paid for the repossession work (Tr. pp. 356-61). FT Express did not prove fraud under any dischargeability theory plead as to that repossession. Besides that single incident, no evidence was presented that James Conley committed any fraud when the debts were incurred or any reliance by FT Express on the actions of James Conley. The court does not find that funds spent on tires, oil and other items was misappropriated through a fraudulent scheme. As noted previously, there was no credible evidence that James Conley played any role in Betty Conley's obtaining of the loans wired to her Key Bank account supporting an embezzlement claim against him.
The court finds that FT Express did not prove James Conley owes a nondischargeable debt to it.
V. Conclusion
For the foregoing reasons, all relief sought in the Plaintiff's complaint is denied. The court will issue an order concurrently with this decision. Copies to: John J. Scaccia, 536 W. Central Avenue, 2nd Floor, Springboro, Ohio 45066 (Counsel for the Plaintiff) John J. Scaccia, 1814 East Third Street, Dayton, Ohio 45402
The Plaintiff, in its post-trial memoranda, outlined a series of theories for the determination of the underlying asserted debt, which was not liquidated prior to trial. Of course, an underlying debt is a prerequisite to a finding of nondischargeability. Weidle Corp. v. Leist (In re Leist), 398 B.R. 595, 601 (Bankr. S.D. Ohio 2008). However, since the court finds no basis for nondischargeability under any theory advanced by FT Express, the issues pertaining to the legal bases for the underlying debt and any disputes about the liquidation of the debts are moot.
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(Counsel for the Plaintiff)
Harold Jarnicki, 576 Mound Court, Suite B, Lebanon, OH 45036
(Counsel for the Defendants)