Opinion
Case No. 17-31436 HCD Adv. Proc. No. 17-3029
02-27-2018
In the Matter of: LACY FRANCIS, JR. MILDRRED LEAH FRANCIS Debtors STATE OF INDIANA ex rel. CURTIS T. HILL, JR., on behalf of STATE BOARD OF ACCOUNTS, and CITY OF WARSAW Plaintiff v. LACY FRANCIS, JR. Defendant
Appearances: Heather M. Crockett, Esq., and William M. Braman, Esq., 302 West Washington Street, Fifth Floor, Indianapolis, Indiana 46204, attorneys for plaintiff State of Indiana ex rel. Curtis T. Hill, Jr. Lacy Francis, Jr., 7245 West Crystal Lake Road, Warsaw, Indiana 46580, pro se defendant.
Chapter 7
Appearances:
Heather M. Crockett, Esq., and William M. Braman, Esq., 302 West Washington Street, Fifth Floor, Indianapolis, Indiana 46204, attorneys for plaintiff State of Indiana ex rel. Curtis T. Hill, Jr. Lacy Francis, Jr., 7245 West Crystal Lake Road, Warsaw, Indiana 46580, pro se defendant.
MEMORANDUM OF DECISION
At South Bend, Indiana, February 27, 2018.
The matter now before the court is plaintiff State of Indiana ex rel. Curtis T. Hill, Jr.'s (State) Motion for Default Judgment (Motion). For the reasons stated below the court finds that the State has presented a sufficient basis for its Motion and it should be granted in part and denied in part.
The court notes this motion does not comply with N.D. Ind. L.B.R. B-7007-1(a).
Jurisdiction and Venue
The court has subject-matter jurisdiction over this proceeding pursuant to 28 U.S.C. §§ 1334(b) and 157(a) and Northern District of Indiana Local Rule 200-1. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I). Venue is proper pursuant to 28 U.S.C. § 1409(a). The State has expressly consented to the entry of final orders and judgment by this court. The court makes the following findings of fact and conclusions of law pursuant to Rule 7052 of the Federal Rules of Bankruptcy Procedure.
Findings of Fact
From January 2011 through December 2013, the City of Warsaw (Warsaw) contracted to have various storm sewers lined and cleaned (sewer project). Warsaw is a governmental unit within the state of Indiana. The sewer project contractor was to video each sewer before the start of work and after completion in order to establish the precise lineal footage of the work. During this period Lacy Francis, Jr. (Francis) was the Street Superintendent for Warsaw. The sewer project contractor submitted invoices to Warsaw based on the amount of lineal footage of lining and cleaning work. Although both the sewer project contractor and Francis acknowledge the creation of the videos, neither could locate any of the recordings. In his capacity as Street Superintendent, Francis personally either approved the sewer project contractor's payment vouchers, or prepared a payment voucher that another street department employee signed approving sewer project work.
An investigation by the Warsaw City Engineer led to a determination that the sewer project contractor billed Warsaw for more lineal feet of work than it actually completed. Also discovered by means of this investigation was that the sewer project contractor invoiced and was compensated for work that it never did. These findings led to Francis' arrest and an audit by the Indiana State Board of Accounts. This audit disclosed that Francis was involved in misappropriation of, diversion of, or failure to for account public funds.
An investigation by the Warsaw City Police discovered that Francis received unlawful kickbacks from the sewer project contractor immediately following payments by Warsaw to the contractor. Investigators determined that the sewer project contractor was overpaid by $267,569.00, and Francis received kickbacks totaling $51,000.00 from the contractor. In total, Warsaw suffered a direct pecuniary loss of $318,569.00.
As a result of the audit and investigation, the State criminally charged Francis in Kosciusko County Circuit Court in March 2014 with eight felony counts. On May 22, 2017, Francis entered a plea agreement of guilty to the crimes in Count I, corrupt business influence, Count II, aiding theft, Count V, providing false information to governmental entity to obtain contract, and Count VI, official misconduct. On July 24, 2017, the Kosciusko Circuit Court entered judgment of conviction against Francis. The plea agreement included the statement "The Defendant shall pay restitution for all charged and uncharged misconduct." The state court sentenced Francis to consecutive terms of four years as to Count I, four years as to Count II, two and one-half years as to Count V, and two and one-half years as to Count VI. On July 24, 2017, the Kosciusko Circuit Court also entered a restitution judgment against Francis in favor of Selective Insurance Company of America for $25,000.00, plus interest. Francis was also ordered to pay criminal restitution to Warsaw in the amount to be determined in a state court civil action.
See Kosciusko Circuit Court cause number 43C01-1403-FC-213. The counts include the following: • Count I - Corrupt business influence, class C felony, I.C. § 35-45-6-2(3) • Count II - Aiding theft, class C felony, I.C. §35-43-4-2(a)(1) / I.C. §35-41-2-4 • Count III - Theft, class D felony, I.C. §35-43-4-2(a) • Count IV - Theft, class D felony, I.C. §35-43-4-2(a) • Count V - Providing false information to governmental entity to obtain contract, class D felony, I.C. §35-43-5-11 • Count VI - Official misconduct, class D felony, I.C. §35-44.1-1-1(3) • Count VII - Official misconduct, class D felony, I.C. §35-44.1-1-1(3) • Count IIX [sic] - Conflict of interest, class D felony, I.C. §35-44.1-1-4(b)
See Plea Agreement at ¶ 2, Exhibit E to the State's complaint in this adversary proceeding.
See Judgment of Conviction, Sentencing and Order of Commitment at ¶ 7, Exhibit F to the State's complaint in this adversary proceeding.
The State commenced a civil action against Francis to recover public funds on August 21, 2014. This complaint consists of six counts. Count I alleged that (1) Francis wrongfully conspired with the sewer project contractor to over bill Warsaw, (2) the sewer project contractor paid Francis for his cooperation in the over billing scheme, (3) Francis' actions constitute gross negligence or an intentional disregard of his duties, and sought a joint and several judgment against Francis and the owner of the sewer project contractor for $333,733.88. Count II alleged the State suffered a pecuniary loss because of Francis' actions and sought joint and several recovery of treble damages of $955,707.00, plus costs, attorney fees, and prejudgment interest. Counts III and IV sought parallel joint and several recoveries from the owner of the sewer project contractor of $333,733.88 and $955,707.00 respectively. Counts V and VI sought parallel joint and several recoveries from the sewer project contractor corporation of $333,733.88 and $955,707.00 respectively. The record presented to the court by the State does not reveal the outcome or present status of the civil action to recover public funds.
Kosciusko Circuit Court cause number 43C01-1408-PL-81.
The court notes this figure differs from what the State is demanding in this adversary proceeding: $318,569.00. The difference ($15,164.88) is the cost incurred by the Indiana State Board of Accounts during its investigation of Francis. By not specifying these costs in its pleadings in this adversary proceeding, the court presumes the State has abandoned its pursuit of these costs.
I.C. § 34-24-3-1 permits the assessment of an amount not to exceed three times the actual damages of the person suffering a pecuniary loss.
Francis, with the assistance of bankruptcy counsel, filed a joint petition for relief under chapter 7 in this court on July 20, 2017, case number 17-31436. The court set October 16, 2017 as the deadline for objecting to discharge or the dischargeability of a debt. The State filed this adversary proceeding on August 30, 2017, and in it the State asks the court to except Francis' debt to it from discharge pursuant to § 523(a)(2)(A), § 523(a)(4), and § 523(a)(7). The clerk issued a summons on August 31, 2017, which required Francis to answer the complaint by October 2, 2017. The record here shows that the State made timely service of process on both Francis and his bankruptcy attorney by certified mail. When Francis did not answer or otherwise respond within the time specified in Bankruptcy Rule 7012(a), the State requested the clerk to enter Francis' default. The State's verified motion for entry of default includes a statement that Francis is not an infant, incompetent person, or engaged in any branch of the military. Based on the motion for entry of default, the clerk did so on December 7, 2017. The record shows the Bankruptcy Noticing Center sent Francis a copy of the entry of his default on December 9, 2017. On December 18, 2017, the State filed the Motion now before the court.
Conclusions of Law
I. Initial Considerations
Granting a default judgment falls within the court's discretion. See Domanus v. Lewicki, 742 F.3d 290, 301 (7th Cir. 2014). Bankruptcy Rule 7055 addresses defaults and states that Federal Rule of Civil Procedure 55 applies in adversary proceedings. Entry of a default judgment "is appropriate where defendants fail to timely answer and offer no justifiable excuse for their conduct." In re Klarchek, 509 B.R. 175, 186 (Bankr. N.D. Ill. 2014) (internal citations omitted).
Before entering a default judgment, however, the court requires that a plaintiff establish a prima facie showing on the merits of its claim. See, e.g., In re Taylor, 289 B.R. 379, 382 (Bankr. N.D. Ind. 2003) ("[T]he court needs to satisfy itself that the facts before it demonstrate a prima face entitlement" to the relief sought.); Nishimatsu Construction Co., Ltd. v. Houston National Bank, 515 F.2d 1200, 1206 (5th Cir. 1975) ("[A] defendant's default does not in itself warrant the court in entering a default judgment. There must be a sufficient basis in the pleadings for the judgment entered.") This caution stems from the established precedent in this circuit and others calling for the court to construe exceptions to discharge liberally in favor of the debtor. See, e.g., In re Trentadue, 837 F.3d 743, 749 (7th Cir. 2016); 4 Collier on Bankruptcy ¶ 523.05 (Alan N. Resnick & Henry J. Sommer eds., 16th ed.).
The court must also consider the relevance of Francis' state court guilty plea to this adversary proceeding. With respect to his actions relating to the sewer project, the court finds his guilty plea sufficiently establishes his scienter, or his actual intent to deceive Warsaw concerning the invoices for the sewer project.
The issue of nondischargeability is a matter of federal law governed by the terms of the Bankruptcy Code. Grogan v. Garner, 498 U.S. 279, 284 (1991). To except a debt from discharge, the creditor must satisfy the requirements of the Bankruptcy Code. II. Section 523(a)(2)(A), false pretenses, false representations, actual fraud
U.S. Const. Art. I, § 8, clause 4, expressly grants to Congress authority to enact bankruptcy laws. See also Gross v. Irving Trust Co., 289 U.S. 343, 344 (1933) ("The bankruptcy court has exclusive jurisdiction, and that court's possession and control of the estate cannot be affected by proceedings in other courts, state or federal.")
Under § 523(a)(2)(A), a creditor must prove that (1) the debtor made a false representation of fact, (2) the debtor (a) either knew the representation to be false or made it with reckless disregard for its truth and (b) also made it with intent to deceive, and (3) the creditor justifiably relied on the false representation. See In re Davis, 638 F.3d 549, 553 (7th Cir. 2011). The creditor seeking to except a debt from discharge must prove each element by a preponderance of the evidence. Grogan, 498 U.S. at 287 (announcing the burden of proof).
The facts here show that Francis approved invoices for payment that overstated the work performed by the sewer project contractor. As Street Supervisor, Francis knew, or should have known, the work that the sewer project contractor actually performed. The missing videos of the sewer work would have substantiated the work. Francis' approval was a prerequisite to Warsaw issuing payments to the sewer project contractor. Where a debtor knowingly or recklessly made false representations that he knew, or should have known, would induce another to act, the court may infer fraudulent intent. In re Strauss, 523 B.R. 614, 627 (Bankr. N.D. Ill. 2014). The court can only conclude that Francis approved incorrect statements of work so that Warsaw would make payments to the sewer project contractor for work not performed. Warsaw was justified in relying on the representations of its employee, Francis, who was acting within the scope of his employment as Street Superintendent when he approved payments to the sewer project contractor. The court considers Francis' guilty plea in the state court criminal proceedings persuasive in determining his knowledge of his culpability for his actions. The court finds that the State has made a prima facie showing that the court should except Francis' debt, $267,569.00 — the amount of money he misappropriated, diverted or failed to account for — from discharge under § 523(a)(2)(A). III. Section 523(a)(4), fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny
"To prevail on a § 523(a)(4) claim, the Plaintiffs must establish (1) that a trust existed; (2) that the Debtors were fiduciaries of that trust; and (3) that the Debtors committed 'fraud or defalcation' while acting as fiduciaries of the trust. The Plaintiffs bear the burden of proving each element by a preponderance of the evidence." Milwaukee Builders Supply, Inc. v. St. Antione (In re St. Antione), 533 B.R. 743, 747 (Bankr. E.D. Wis. 2015) (internal quotations and citations omitted).
At the time of the activities that are the basis of this adversary proceeding, Warsaw employed Francis. As an employee, Francis owed his employer a fiduciary duty of loyalty. Nanshan America Advanced Aluminum Technologies, LLC v. Nemick, 2017 WL 3333963, *3 (N.D. Ind. Aug. 4, 2017) (quoting SJS Refractory Co., LLC v. Empire Refractory Sales, Inc., 952 N.E. 2d 758, 768 (Ind. App. 2011)). As the employee who reviewed and approved invoices for payment, Francis breached his duty to Warsaw when he approved invoices that he knew, or should have known, contained false or inaccurate information about the work performed by the sewer project contractor. Francis obtained a direct personal benefit from his approval of these sewer project invoices when he received kickback payments from the sewer project contractor. Based on the record, the State has presented a convincing and unrebutted prima facie argument to the court that it should except Francis' $318,569.00 debt to it from discharge under § 523(a)(4). IV. Section 523(a)(7), fine, penalty, or forfeiture payable to a governmental unit that is not compensation for actual pecuniary loss
This figure includes the $267,569.00 that Warsaw overpaid on the sewer project contract and the $51,000.00 kickback received by Francis.
The Bankruptcy Code excepts from discharge a debt that is "a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit." § 523(a)(7). Section 523(a)(7) expressly does not except debts that are "compensation for actual pecuniary loss" from being discharged. Id. The State's Exhibit "F" to the complaint in this adversary proceeding is a certified copy of the Judgment of Conviction, Sentencing and Order of Commitment entered in the state court criminal action against Francis. The state court sentenced Francis to incarceration, the forfeiture of his PERF benefits to the City of Warsaw, and restitution of $25,000.00 to Selective Insurance Company of America. This judgment order also includes the following statement: "Any remaining restitution shall be handled in Case No. 43C01-1408-PL-81." This reference is to the civil suit the State brought against Francis to recover public funds for the benefit of Warsaw. This civil action seeks to recover not only the funds that Francis misappropriated, $318,569.00, as restitution, but also to impose treble damages.
Public Employees' Retirement Fund, see I.C. § 5-10.3, et seq.
See Judgment of Conviction, Sentencing and Order of Commitment at ¶ 7, Exhibit F to the State's complaint in this adversary proceeding.
See Complaint to Recover Public Funds at ¶ 9, Exhibit G to the State's complaint in this adversary proceeding and the discussion of the civil suit in the text following note 4, supra, at pp. 4-5. --------
Restitution is the restoring or giving back something to its proper owner, or making reparation to a person for loss or injury previously inflicted; or restoration of a thing lost, taken, or damaged. Restitution, Oxford English Dictionary (3rd ed. March 2010) (available on-line at www.oed.com, last visited February 26, 2018). Recovery of what was lost encompasses only what was lost, nothing more. Warsaw's loss was $318,569.00. The trebling of damages — to $955,707.00 — sought by the State goes far beyond returning to Warsaw the $318,569.00 it lost due to Francis' actions. The court's understanding of what the State is asking for is reinforced by the State's own demand in the state court civil action. The civil complaint includes multiple references to "pecuniary loss," not restitution. The court accepts the State at its word on this issue. Congress was unambiguous in drafting § 523(a)(7). Recovery of a pecuniary loss is not the type of debt that may be excepted from discharge under § 523(a)(7). The court finds that the State has failed to make a prima facie showing that the trebling of Francis' debt to it falls within the § 523(a)(7) discharge exception.
Conclusion
Lacy Francis, Jr., the defendant in this adversary proceeding, has not filed an answer or otherwise participated in these proceedings and is in default. Plaintiff State of Indiana ex rel. Curtis T. Hill, Jr. has made a prima facie showing under § 523(a)(2)(A) and § 523(a)(4) that the court should except Francis' debt to the State from his bankruptcy discharge. The court, therefore, GRANTS the State's Motion for Default Judgment against Francis as to §523(a)(2)(A) and § 523(a)(4), and DENIES the State's Motion as to § 523(a)(7).
SO ORDERED.
/s/ HARRY C. DEES, JR.
HARRY C. DEES, JR., JUDGE
UNITED STATES BANKRUPTCY COURT