Veazey v. Sutton (In re Sutton)

Citation: 550 B.R. 917Docket: CASE NO. 14-73364-WLH; ADV. PROC. NO. 15-5092

Court: United States Bankruptcy Court, N.D. Georgia; June 2, 2016; Us Bankruptcy; United States Bankruptcy Court

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A dischargeability action was initiated under Section 523, stemming from a $15,000 state judgment against Dwayne Sutton for the alleged conversion of a security business. The U.S. Bankruptcy Court has jurisdiction over this core matter. Key facts include the relationship between plaintiff Mark Veazey and defendant Sutton, both former Atlanta Police Department officers. After Veazey's resignation in 2005, he worked as a pilot and security personnel for Akon, while Sutton had contracts with Crime Prevention Agency, Inc. (CPA). Veazey claimed to be the sole owner of CPA despite not holding an official position initially. He later changed the corporate records, positioning himself as CEO and appointing his minor son as secretary.

Concerns arose during a May 6, 2013, board meeting regarding Veazey's ownership claims and financial practices, particularly his unilateral changes to corporate records and bank account management. This led to Sutton being elected as president and subsequent amendments to the Secretary of State’s records on May 15, 2013, which reflected Sutton as CEO and included other board member changes. Sutton authorized these amendments, and he and Hintz informed Wells Fargo of the changes in leadership at CPA.

Sutton and Heidi Hintz provided board minutes and Secretary of State records to the bank as proof of Sutton's termination. A new CPA account was opened with Sutton as president. On May 16, 2013, Sutton transferred $8,254 from the old CPA account to the new one to pay employees, while Veazey was out of town. Upon his return, Veazey discovered that furniture, equipment, and files had been removed by Hintz and another employee. Veazey notified Wells Fargo to freeze the CPA account and subsequently withdrew $8,200 from it. Litigation followed, and Veazey filed a complaint with the police, which did not result in action against Sutton. He also sued Sutton, the Hintzes, Bryan, and Wells Fargo in Fulton County Superior Court, settling with Wells Fargo and Bryan. The jury awarded Veazey $15,000 in compensatory damages against Sutton and Heidi Hintz, with no punitive damages, on February 7, 2014. Sutton filed for Chapter 7 bankruptcy on November 27, 2014, prompting Veazey to file a complaint on February 11, 2015, to determine the non-dischargeability of the debt under 11 U.S.C. § 523(a)(2). This section excludes debts obtained through false pretenses, requiring the creditor to prove: 1) a false representation was made to deceive, 2) the creditor relied on it, 3) the reliance was justified, and 4) a loss was sustained. Actual fraud encompasses broader deceitful acts than false representation.

The Supreme Court's ruling in Husky International Electronics, Inc. v. Ritz clarifies that actual fraud does not necessitate a misrepresentation. Under Section 523(a)(2)(A), debts are non-dischargeable if incurred through "false pretenses," which can include implied misrepresentations or conduct that fosters a false impression. False pretenses may arise from omissions or failures to disclose by the debtor when such actions create a misleading understanding known to the debtor. Establishing false pretenses typically involves multiple actions or representations that mislead a creditor into extending credit or transferring property.

To prove a debt non-dischargeable under Section 523(a)(2)(A), the plaintiff must demonstrate: 1) an omission or implied misrepresentation by the defendant; 2) the defendant's knowledge and intention; 3) a misleading understanding created for the plaintiff; and 4) that this induced the plaintiff to provide money or property. In Veazey's case against Sutton, allegations include false representations and actual fraud related to Wells Fargo, resulting in a loss of $8,254, as well as misrepresentation of Sutton's position at CPA. However, it remains uncertain if these representations towards a third party meet the criteria for deception under Section 523(a)(2)(A). 

Intent to deceive must be present at the time of the misrepresentation, and while gross recklessness may suffice, Veazey failed to prove that Sutton intended to deceive. Sutton's testimony indicated he acted based on reliable information suggesting Veazey overstepped his authority at CPA, supported by objective evidence like changes in Secretary of State records.

No evidence was presented to show that Sutton knowingly provided false information or that he benefited from the transaction with Veazey. Sutton did not retain any transferred funds; instead, those funds were used for cashier’s checks for employees. Testimony indicated that Heidi Hintz and Arlin Kelly, not Sutton, removed furniture and equipment from the office. Veazey's claims of misrepresentation, false pretenses, or fraud were unsupported, as he failed to demonstrate Sutton's knowledge of any false information or intent to deceive. The court concluded that Sutton's debt to Veazey is dischargeable under Section 523(a)(2)(A). 

Veazey attempted to introduce Section 523(a)(6) post-trial without moving to amend his pleadings, which the court would not consider. Even if an amendment had been filed, the court would assess whether Sutton had a fair opportunity to defend against this new theory, and it noted that Veazey did not mention willful or malicious injury in his original complaint. The court cited that to establish non-dischargeability under Section 523(a)(6), the injury must be intentional or deliberate, which was not proven in this case. 

The conclusion was that Sutton’s actions, while intentional, did not constitute willful injury to Veazey as required by law, rendering the debt dischargeable. The court ordered judgment in favor of Sutton, affirming that Veazey's claim lacked sufficient basis under the relevant legal standards.