Court: United States Bankruptcy Court, S.D. Ohio; October 5, 2012; Us Bankruptcy; United States Bankruptcy Court
A debtor, along with her spouse, engaged in a business venture involving two commercial trucks, which ultimately failed. The legal issues revolve around whether their actions in obtaining truck titles through the Ohio unclaimed motor vehicle statute and their handling of the vehicles resulted in a non-dischargeable debt. The plaintiff claims that the debtors made false misrepresentations, qualifying the debt as nondischargeable under 11 U.S.C. § 523(a)(2)(A), or that embezzlement of the vehicles warrants nondischargeability under § 523(a)(4). The court determined that the debtors' actions do indeed create nondischargeable debts under § 523(a)(4).
Key issues for the court included its authority to assess state law fraud and embezzlement claims post-Stem v. Marshall, the potential liability of the debtors under state law, and whether any resulting debt is nondischargeable under § 523(a)(2) or (4). The Conleys filed for Chapter 7 bankruptcy in January 2010 and received a discharge in July 2011, but Lowell Lawson contested the dischargeability of a disputed debt under § 523(a)(2) and (4). A trial took place in July 2011, followed by a motion from Lawson to reopen the trial based on newly discovered evidence, which the court denied.
Evidence presented included details about Lawson’s trucking business and a loan arrangement with Betty Conley for $1,000 to cover insurance costs. Subsequently, Lawson purchased seven Volvo trucks from Clear Choice Leasing, which provided financing through a $30,000 promissory note, with titles transferred to Lawson subject to a lien in favor of Clear Choice.
Seven vehicles are identified, all Volvos from 1998 or 1993, with specific VIN numbers provided. Stephen M. Jordan is the sole member of Clear Choice, which held liens on these vehicles. Two trucks were purchased in July 2009, and in June 2009, Lawson executed a $6,000 promissory note, leading to a lien on an additional 1998 Volvo. Lawson held the title for all vehicles sold by Clear Choice, with each tractor priced at $6,000. Despite some principal payments, Lawson still owed most of the balance on two notes at trial.
A meeting in April or May 2009 between Betty, Lawson, and Lawson's office manager involved discussions about Betty operating a truck terminal under Lawson Trucking’s authority. On May 13, 2009, Betty contributed $3,000 towards an unspecified ownership interest in Lawson Trucking, part of which covered insurance costs for the trucks. Initially, Lawson offered Betty five trucks, later reducing this to two after deciding to retain three. They ultimately agreed on a lease with a purchase option for two 1998 Volvo tractors, but the written agreement lacked VIN identification for the vehicles.
Betty's lease payments were set at $1,100 monthly, covering Lawson's obligation to Clear Choice for those trucks. She was responsible for repairs and half of the insurance, and would pay Lawson $25 for each haul while retaining other revenue. An 'open door' policy was established to allow Lawson to review Betty's haul paperwork for compliance and tax purposes. They planned to operate under the name 'Lawson Trucking/All-In Transportation.' Betty selected trucks based on recommendations from her husband, a mechanic, but there were inconsistencies in testimonies regarding which two tractors were chosen. Although the agreement was documented, disputes arose about its accuracy and whether Betty signed it, though these issues were deemed immaterial to the court's decisions.
Key terms of the agreement included: 1) Betty was to buy two Volvo tractors from Lawson by covering payments owed to Clear Choice, with each truck valued at $6,000; 2) Betty was allowed to utilize Lawson’s regulatory authority under "All-In Transportation"; 3) Lawson would receive $25 per load hauled by Betty; and 4) Betty was responsible for all associated costs, including fuel, repairs, and insurance.
The business relationship deteriorated quickly, marked by disputes over amounts owed between the parties and miscommunications regarding truck repairs and loads. Access to essential records became a significant issue, with testimonies indicating that Betty had difficulty providing necessary documentation, claiming asthma-related issues prevented her from delivering papers in person at Lawson's home, which had multiple dogs.
On July 29, 2009, April Lawson communicated that Betty owed $2,920 for various payments and expenses. The situation escalated on August 4, 2009, when Betty sent three written demands for repair costs totaling $13,460 related to Volvo tractors, which were unrelated to her agreement with Lawson. This led to a heated exchange between Betty and Lawson’s employee, Ledbetter, who emphasized the need for improved communication. That same day, Betty declared the contract void due to Lawson's alleged breach and claimed $10,210 in owed funds, including various charges and claims of contract violations. In response, April Lawson reiterated that Conley’s labor disputes were separate from Betty's business dealings with Lawson, urging her to keep those matters apart.
On August 7, 2009, April Lawson sent a cease and desist letter to Betty Conley, demanding the return of equipment and alleging breaches of their agreement due to Betty's failure to make certain payments and adhere to the agreed rules. Following the deterioration of their business relationship, Betty attempted to collect payments for repairs made by her husband, James Conley, under the business names 'Port Diesel' and others, for Volvo tractors purchased by Lawson. This included communication with Lawson’s employees, written demands, and successfully transferring titles of three tractors to 'Port Diesel.' Disputes emerged regarding whether Betty owed Lawson money and vice versa, specifically concerning the set-off of debts. Betty indicated that James Conley would allow her to offset amounts owed for repairs against her debts to Lawson, but Lawson rejected this proposal.
In an effort to collect $4,775 and $3,670 for repairs to two tractors, Betty sent demands to Lawson, stating these repairs were authorized and requiring payment within 14 days to avoid further action. Jordan, a representative of Lawson, responded, explaining that a creditor with a lien on trucks is not responsible for their repairs and asserted that Clear Choice Leasing would be paid first in the event of any financial recovery. Betty refused to provide documentation for the repairs and claimed, "Possession is 90% of the law." Following the lack of response to her demands, Betty sought to obtain titles to three Volvo tractors from Lawson, which were in the possession of the Conleys.
To obtain titles for three tractors, Port Diesel first secured an Ohio vendor’s license, as required for title transfer. James Conley, under the trade name 'Port Diesel Truck Service,' applied for the license on August 26, 2009, with his daughter signing the application using his social security number. After acquiring the license, the Conleys sought to transfer the titles of the 8800 Tractor, 8815 Tractor, and 8726 Tractor from Lawson to Port Diesel. On October 16, 2009, Betty Conley filed unclaimed motor vehicle affidavits and applications for title transfers with the Greene County Common Pleas Court, successfully transferring the titles.
However, Lawson recovered the 8726 Tractor from Richard Weber, an employee of Betty Conley, before the Conleys could sell it. Subsequently, Lawson obtained the title for the 8726 Tractor from Robert Young, who had received it as payment from Betty. Leonard Smith, a mechanic at Port Diesel, purchased the 8800 and 8815 Tractors, with the proceeds shared among the mechanics who repaired Lawson's tractors.
The dispute centers on which tractors were being acquired by Betty. Her responsibility for repairs and maintenance on the tractors depended on their identification and ownership. The tractors chosen by Betty were not definitively identified by VIN, leading to conflicting testimonies about which tractors were involved. While Richard Weber and Robert Young identified the 8726 Tractor as the one Weber drove, Lawson claimed that Betty was acquiring the 8800 and 8815 Tractors. Betty provided inconclusive testimony, asserting that the 8805 and 8811 Tractors were the ones being acquired, while stating that her trucks were 'repossessed' by Lawson. She claimed that two of Lawson's tractors were already inside the Port Diesel garage when the repossessions occurred.
Betty testified that the 8726 Tractor had been repaired for Lawson and was taken from outside the garage the following day. She denied attempting to collect funds on behalf of Port Diesel for her tractors, claiming her debts were owed to James Conley. James Conley corroborated her statement. The issue arose regarding whether the tractors transferred by the Conleys to Port Diesel were the same ones Betty was acquiring or others purchased by Lawson from Clear Choice. Evidence indicated that James Conley worked on multiple tractors acquired by Lawson, including those from Clear Choice. Ledbetter and Lawson also testified that Conley repaired Lawson's trucks without any prior disputes.
The court made several findings based on witness credibility and evidence presented:
1. Ledbetter and April Lawson's testimonies were deemed credible, despite Lawson's emotional state affecting his delivery.
2. Weber's testimony, supported by regulatory logs, confirmed that he drove the 8726 Tractor for Betty, which was one of the tractors she was acquiring from Lawson.
3. Although Betty was responsible for repairs on the 8726 Tractor, she submitted an invoice to Lawson and Clear Choice for repairs, transferring the title to Port Diesel. The Conleys had given the title to Young.
4. There was no credible evidence, aside from Betty's claims, that both her trucks were repossessed or recovered by Lawson; testimony indicated only one tractor, the 8726, was recovered.
5. The evidence established that Lawson recovered only one of the two trucks Betty was acquiring and that one of the tractors transferred to Port Diesel was the 8800 Tractor, which Betty was responsible for maintaining.
6. The Lawsons credibly testified that they parked a third tractor at the Conleys' property due to zoning issues.
The Conleys did not contest the testimony regarding the transfer of a tractor to Port Diesel, which was parked at their property with their consent, identified as the 8815 Tractor. The court noted multiple issues with invoices prepared by Betty for James Conley dba Port Diesel, including the absence of signed work orders from Lawson and supporting documents for parts purchased. The invoices for the 8800 and 8815 Tractors were created after a business relationship ended and were seen as attempts to evade obligations to Lawson. Storage charges listed on the invoices were deemed unjustified, and while the 8800 Tractor invoice included some itemization, the 8815 invoice lacked detail.
Lawson refused to allow offsetting of debts between him and Betty Conley, prompting the Conleys to transfer titles of multiple tractors into Port Diesel’s name. Betty's statements indicated an intention to claim ownership of the trucks, and while she conducted most actions related to the title transfers, James Conley suggested and ratified these actions as Port Diesel's owner.
The court confirmed its jurisdiction over the proceeding and stated that the plaintiff must prove nondischargeability claims by a preponderance of evidence. It emphasized that discharge exceptions should be narrowly interpreted and clarified that for a debt to be considered nondischargeable, it must be owed by the debtor to the creditor.
In Spinnenweber v. Moran, the court addresses the distinction between liquidated and unliquidated debts in bankruptcy proceedings and the implications of the Supreme Court's decision in Stern v. Marshall. Lawson seeks a judgment on an unliquidated debt while asserting that it is nondischargeable. Historically, bankruptcy courts could liquidate debts in nondischargeability cases, a practice upheld by the Sixth Circuit prior to Stern. However, Stern ruled that bankruptcy courts lack the constitutional authority to enter final judgments on state law counterclaims unrelated to a creditor’s proof of claim.
The court notes that despite Stern's narrow decision, subsequent rulings have affirmed bankruptcy courts' authority to issue final judgments on debts tied to state law within dischargeability adversary proceedings, distinguishing these cases from Stern. The court emphasizes that it must adhere to binding circuit precedent, such as Longo v. McLaren, unless overturned by the en banc court or a Supreme Court ruling. Given the McLaren precedent and the narrow interpretation of Stern, the court concludes it has the constitutional authority to liquidate the debt under Ohio law.
To establish the nondischargeability of a debt, a creditor must demonstrate its existence under state law. Ohio law recognizes a civil cause of action for conversion, defined as wrongful dominion over property that excludes the owner's rights. This principle is supported by relevant case law, including Fenix Enterprises and Landskroner.
Conversion pertains specifically to identifiable, tangible personal property. To establish conversion, three elements must be met: 1) the plaintiff's ownership or right to possess the property at the time of the conversion; 2) the defendant's wrongful act or disposition of the plaintiff's property rights; and 3) damages incurred. It is noted that if a defendant lawfully possessed the property initially but later wrongfully retains it, a demand and refusal are typically necessary to prove conversion.
In this case, the Conleys disregarded Lawson's ownership of the 8800 Tractor and 8815 Tractor, converting them by misapplying Ohio law and causing damage to Lawson by depriving him of both tractors. Although the Conleys initially held the tractors lawfully, their retention became unlawful when their business relationship with Lawson ended. The court confirmed Lawson's claim for conversion, establishing a debt of $6,000 for each tractor, resulting in a total of $12,000 in damages against the Conleys.
Lawson's requests for attorney fees and punitive damages were denied. The court highlighted that Lawson failed to provide the necessary legal basis or circumstances for such awards, rendering his request undeveloped and thus waived. Additionally, attorney fees must be pled as a separate count, which Lawson did not do, and no evidence was presented regarding the fees or an appropriate amount for punitive damages. The court concluded that the $6,000 compensatory damages awarded were sufficient to deter future misconduct by the Conleys.
Lastly, Lawson's complaint included an allegation of false misrepresentation under 11 U.S.C. § 523(a)(2)(A), asserting that the Conleys made false representations that, when combined with his detrimental reliance, constituted fraudulent misrepresentation. This section indicates that a discharge under bankruptcy does not eliminate debts incurred through false representations.
To establish nondischargeability under 11 U.S.C. § 523(a)(2)(A), four elements must be proven: 1) the debtor obtained money through a material misrepresentation that was known to be false or made with gross recklessness; 2) the debtor intended to deceive the creditor; 3) the creditor justifiably relied on the misrepresentation; and 4) this reliance was the proximate cause of the creditor's loss. Justifiable reliance requires that a party use their senses and cannot recover if they blindly accept a misrepresentation that would have been obvious upon a cursory examination. However, a party generally does not have a duty to investigate for justifiable reliance, even if such investigation could have revealed the fraud. Factors such as the creditor's sophistication and the parties' prior relationship may be considered in assessing justifiable reliance.
In this case, Lowell Lawson claims that Betty Conley made fraudulent misrepresentations regarding her desire to enter into a partnership and the terms of their business arrangement involving his trucks. Conley assured Lawson that she would make payments and manage the trucking operation, which Lawson contends were material terms. The court determined that Lawson's claims of misrepresentation pertained to future intentions rather than existing facts, which do not support nondischargeability. The court found that Conley entered into the arrangement intending to fulfill her obligations, and her initial involvement was only to assist in selecting tractors, with no evidence of fraudulent intent at the outset of the business relationship.
Lawson's claim under 11 U.S.C. § 523(a)(2)(A) for fraudulent misrepresentation primarily relies on alleged misrepresentations by the Conleys made during or before the agreement with Betty, with no sufficient proof of reliance on any misrepresentations made after the agreement commenced, particularly regarding the conversion of tractors. Lawson's complaint also asserts that the Conleys intended to deceive him and retain his property, constituting false pretenses. False pretenses, which are implied through conduct rather than explicit misrepresentations, were not proven as Lawson did not demonstrate reliance on the Conleys' subsequent actions.
For Count One, regarding embezzlement under § 523(a)(4), Lawson alleges that the Conleys converted his tractors for personal use with intent to embezzle, thus creating a nondischargeable debt. Embezzlement is defined as the fraudulent appropriation of property lawfully entrusted to someone. To substantiate embezzlement, Lawson must prove: (1) he entrusted the property to the Conleys, (2) they appropriated it for unauthorized use, and (3) the circumstances suggest fraud. Embezzlement can involve tangible personal property, including vehicles, and is distinct from larceny due to lawful initial possession. The court must assess whether Lawson has met the criteria for establishing embezzlement under § 523(a)(4).
Lawson needed to demonstrate three critical elements for his claims of entrustment and embezzlement against the Conleys: (1) the entrustment of tractors to the Conleys, (2) the appropriation of those tractors for unauthorized uses, and (3) circumstances indicating fraudulent intent. The court reviewed ownership and entrustment in relation to the Ohio conversion claim and the § 523(a)(4) nondischargeability embezzlement claim. Evidence confirmed Lawson owned the 8726, 8800, and 8815 Tractors before their title transfer to Port Diesel by the Conleys.
Entrustment was established for the 8800 Tractor to Betty Conley, as Lawson provided it to her under their business agreement. However, he did not entrust this tractor to James Conley. Conversely, Lawson entrusted the 8815 Tractor to James Conley, parking it at the Gallimore Road property with the Conleys’ consent, as zoning laws restricted parking at Lawson's property. Evidence indicated James Conley controlled this property, while no evidence showed Betty’s control.
The Conleys’ transfer of the 8800 and 8815 Tractors constituted appropriation, depriving Lawson of ownership and possessory rights, especially after Lawson demanded their return, which the Conleys refused. The 8800 Tractor was entrusted for a business venture, not for sale to Leonard Smith, and the 8815 Tractor was entrusted for parking, not sale. Thus, appropriation and deprivation elements were met concerning both tractors.
Although no initial fraudulent intent was found in the Conleys' business dealings, the court must assess whether their subsequent actions regarding the title transfers and dispositions of the tractors indicated fraud.
The Ohio unclaimed motor vehicle statute, Ohio Revised Code § 4505.101, outlines the process for transferring title to unclaimed vehicles. The Conleys attempted to transfer title for three Lawson tractors to James Conley, operating as Port Diesel, arguing compliance with this statute. Lawson contended that the Conleys fabricated mechanics’ bills to file a mechanics’ lien and unclaimed motor vehicle affidavit to gain ownership of the tractors unlawfully.
To obtain a certificate of title under the statute, the applicant must meet several conditions: be a repair garage or storage facility owner, ensure the vehicle's value is under $2,500, have the vehicle unclaimed for at least 15 days, provide written notice to the vehicle owner by certified mail, and verify compliance through an affidavit. Furthermore, if there are liens, the applicant must notify lienholders.
The notices sent by the Conleys to Lawson regarding the 8800 and 8815 Tractors did not meet the statutory requirements for written notice. Previous Ohio case law establishes that written notices must substantially comply with statutory requirements. The Ohio Supreme Court has ruled that mere conditional language in notices does not fulfill the statutory requirement for an unconditional demand. Thus, the failure to comply with the notice provisions may invalidate the attempted transfer of title under the unclaimed motor vehicle statute.
Requirements for compliance with statutory notice provisions must be at least substantially met. In the case of JP Morgan Chase Bank, N.A. v. Carbone, the court ruled that a lien must provide specific information to the holder of an open-end mortgage to gain priority, and mere actual notice is insufficient without formal written notification. Similarly, the case of Whitesides v. Mason established that inaccurate notices regarding a mechanic’s lien do not invalidate the lien itself. Ohio courts necessitate that statutory notices adhere closely to the prescribed terms.
In this instance, the notices sent to Lawson did not conform to Ohio Revised Code § 4505.101. The notices, dated June 4 and signed on August 4, 2009, failed to instruct Lawson to remove the vehicles and were merely collection demands lacking detail on charges or authorization for repairs. They did not indicate that titles would be sought for the tractors if payment was not made. Additionally, the notices provided Lawson with 14 days to pay, while the statute specifies 15 days for vehicle removal. The Unclaimed Motor Vehicle Statute mandates clear notification to the owner regarding the need to remove the vehicle and the consequences for non-compliance, which were not provided in these notices. The supporting "Unclaimed Motor Vehicle Affidavit" completed by Betty emphasized the necessity of following all statutory provisions, including proper notification to the vehicle's owner.
The custodian certifies that a vehicle has remained unclaimed after proper notification and that a search for liens through Ohio Bureau of Motor Vehicles was conducted prior to completing the unclaimed motor vehicle affidavit. Notices sent by Betty to Lawson in August 2009 demanding payment were inadequate because they failed to inform Lawson of the 15-day claim period and potential forfeiture of ownership. Had the notice indicated that the Conleys intended to transfer the titles of the tractors, Lawson could have pursued legal action. The notices sent to Clear Choice regarding the tractors were similarly deficient, lacking required information such as vehicle location, value, and the consequences of non-removal within the specified timeframe. These failures constitute significant violations of the Unclaimed Motor Vehicle Statute, which mandates strict compliance to protect property rights. The court emphasizes the need for careful scrutiny of self-help remedies to prevent the unlawful deprivation of rights. The discussion will continue regarding whether there are indications of fraud affecting the nondischargeability of debts related to the Conleys' title transfers and vehicle disposition.
Lawson and James Conley had no payment disputes regarding Conley’s work on Lawson’s trucks until Lawson attempted to collect from Betty. Betty openly expressed her intent to claim ownership of the tractors, asserting that “possession was 90% of the law.” Evidence showed that the 8726 Tractor was one of the tractors Betty was acquiring from Lawson, with Weber driving it under her agreement with Lawson, while Betty was responsible for its maintenance. However, the Conleys transferred the title of the 8726 Tractor to Port Diesel, falsely claiming Lawson owed James Conley for repairs. The invoices from Port Diesel were created only after the dispute escalated and lacked proper documentation, signatures, and detailed descriptions of work performed. Additionally, the Conleys claimed other individuals repaired trucks at Port Diesel, but no supporting testimony was provided.
Betty certified, on behalf of Port Diesel, that Lawson was given written notice regarding repair and storage charges, location of the tractors, and potential forfeiture of ownership if not claimed within 15 days. However, only handwritten collection notices were delivered, failing to specify forfeiture conditions. These certifications were deemed intentionally false, allowing the Conleys to wrongfully claim ownership of the tractors under the guise of state law. The court concluded that the circumstances indicated fraud, satisfying the requirements for embezzlement.
The court awarded Lawson $6,000 against Betty for the conversion of the 8800 Tractor and $6,000 against James for the conversion of the 8815 Tractor, classifying these conversions as nondischargeable debts under 11 U.S.C. § 523(a)(4). Interest on the judgment will accrue per federal judgment interest rates. The court emphasized that despite the Conleys filing a joint bankruptcy petition, they have been living separately for years.
James Conley initially denied his marriage to Betty, yet they have cooperated on family and business matters despite being separated. Ledbetter indicated that two signed copies of an agreement existed, although one was left at Betty's residence. Betty refused to sign a contract as she did not want to be an employee or agent. The Conleys described Port Diesel as a trade name for a group of mechanics, while the Lawsons claimed it was James Conley's garage. When applying for a vendor's license in Ohio, the Conleys' daughter signed James Conley's name as the owner, stating Lawson hired James for truck repairs. The application indicated James as the sole owner, which contradicted claims of partnership. The court concluded that Port Diesel was a trade name for James Conley, supported by evidence of his operations and the lack of credible evidence of incorporation or partnership. Betty recounted her involvement in collection efforts against Lawson for unpaid repairs, indicating communication with Lawson's wife about deducting repair bills from payments owed. The transfer of a tractor's title from Lawson to Port Diesel is referenced, though the actual affidavit was not included in the exhibits.
Betty provided incomplete information regarding the VIN numbers of tractors she was to acquire from Lawson, omitting those related to the Conleys’ transfer to Port Diesel and suggesting irrelevant VINs. The Conleys did not demonstrate legal grounds for a three-party set-off. The court determined the value of two tractors converted by Betty and James Conley at $6,000 each, with further details in the section about the nondischargeability of the debt. Lawson’s reference to 11 U.S.C. § 523(a)(4) is identified as a scrivener's error; relevant allegations align with a false representation under § 523(a)(2)(A), a point conceded by the Conleys. Any claim of fraud in a fiduciary capacity is flawed, as the Conleys lacked fiduciary duties to Lawson and no express trust existed prior to the dispute, referencing case law for support.
The Unclaimed Motor Vehicle Statute was discussed, noting a case where an insurance company could not reclaim title to a stolen vehicle per the statute's processes. The statute imposes a $2,500 limit based on vehicle value, allowing deductions for impound charges. Evidence showed that the Unclaimed Motor Vehicle Affidavit for the tractors indicated amounts owed to the county's general fund, but there was no proof of payment. The court did not need to determine if Clear Choice required to pay the Conleys to reclaim the tractors, as Clear Choice held valid liens on the titles, which take precedence over mechanic's liens. The Conleys proceeded with the tractors' disposition despite issues raised by Clear Choice’s principal.
