Maine Coast Shellfish, LLC v. Cowles (In re Cowles)
Docket: Case No. 15-10235-JNF; Adv. P. No. 15-1069
Court: United States Bankruptcy Court, D. Massachusetts; December 18, 2017; Us Bankruptcy; United States Bankruptcy Court
Maine Coast Shellfish, LLC filed a First Amended Complaint against Jonathan Cowles seeking to determine the nondischargeability of a debt under 11 U.S.C. § 523(a)(2)(A), (a)(2)(B), and (a)(4), based on allegations of a fraudulent scheme by Cowles to convert and divert funds from the Plaintiff. The Defendant denied the material allegations and a three-day trial was held, during which five witnesses testified and 80 exhibits were admitted. Key testimony was provided by Thomas Edward Adams, the CEO of Maine Coast, who detailed his extensive experience in the seafood industry. Adams recounted his introduction to Cowles in 2013 through a mutual contact, David DiCenso, highlighting Cowles' qualifications, including his prior employment with East Coast Seafood, language skills, and a strong educational background. The case's critical issue revolves around whether Maine Coast proved the necessary grounds for an exception to discharge, which partially depends on Cowles' credibility as a witness.
On September 12, 2013, Cowles sent Adams a document titled "General Background for Jonathan Cowles," detailing his education, including an MBA from Chaminade University, language skills, and work experience as an "Exporter/businessman in Asia." Cowles did not specify the organization for which he acted as "Asia Region Director" and claimed he provided references separately. Concurrently, Adams contacted Michael Tourkistas, the owner of East Coast, to discuss a financial discrepancy involving Cowles and a customer. Cowles had a non-competition agreement with East Coast, and Adams sought to verify Cowles's account of issues with a key customer, who threatened to cease purchasing due to quality concerns. Cowles allegedly created a false entity to facilitate lobster shipments and had customers pay him directly, which he then relayed to East Coast. Tourkistas corroborated some of Cowles's claims but did not express concerns about him and even considered rehiring Cowles. Based on this information, Adams decided to hire Cowles. Adams clarified the seafood industry's distinctions between employees and brokers, explaining that brokers initiate sales and receive a commission, while Maine Coast maintained relationships with brokers to facilitate transactions. Ultimately, on November 12, 2013, Adams extended an at-will employment offer to Cowles, which Cowles accepted the same day.
Adams designated Cowles as the "Export Sales Manager," with a direct reporting line to him, a starting base salary of $1,000 per week, and a commission of $0.05 per pound on direct sales, contingent on full payment of related invoices. Commissions earned would contribute towards a $21,789.56 payment made to American Holdco Inc. for releasing Cowles from his previous employment obligations. The Letter Agreement included provisions for health insurance and paid vacation, alongside a requirement for Cowles to sign a non-disclosure and non-compete agreement, which he ultimately did not sign. Cowles accepted the offer on November 12, 2013, and prior to formal employment, had engaged in commission sales and consulting for Maine Coast, including a report on the China market.
Maine Coast and American Holdco, Inc. executed an agreement for Maine Coast to pay $21,789.56 to American Holdco, structured as an initial payment and subsequent monthly payments, conditional upon Cowles remaining employed with Maine Coast. These payments served as an alternative to sales commissions owed to Cowles. Adams believed Cowles was protected by a non-competition agreement with East Coast, and during his tenure at Maine Coast, Cowles was primarily required to sell lobsters exclusively for the company, with the exception of a brokered sales arrangement with Boston Wholesale Lobster for jumbo lobsters to South Korea, agreed verbally among the parties involved.
Upon starting at Maine Coast, Cowles completed a Maine Employee’s Withholding Allowance Certificate and a federal Form W-4, signing under penalty of perjury. He was assigned existing accounts and worked in an office environment conducive to overhearing sales discussions, often leveraging his language skills in customer communications.
Adams testified that Cowles was initially subject to standard business hours but received more flexibility due to his family responsibilities and international business dealings. Adams established a daily price range for lobster sales, allowing for negotiation, and noted that higher margins could be achieved in certain markets, particularly in Asia, with the expectation that any extra profit would benefit Maine Coast. He denied having told Cowles or Gallucci that they could retain profits exceeding the price sheet amounts.
During Cowles's employment, sales were conducted via various communication methods, with handwritten invoices distributed for record-keeping. Cowles adapted the process for Asian orders, relying on office manager Jen Ewing for invoice copies, which Maine Coast permitted due to Cowles's expertise in the region.
Adams identified customers of Maine Coast before and after Cowles joined, including SK Seafood, LLC, and Shanghai Light, which had unpaid invoices totaling about $200,000, leading to a cessation of shipments in March 2014. Maine Coast began selling to Apollo Corporation shortly after Cowles's hiring, with significant invoicing for lobsters shipped to Aloha Best Seafood, Inc. Cowles engaged Apollo as a broker due to his prior relationship with its principal, Jae Kwon Lee, and earned commissions from both Maine Coast and Apollo without disclosing this relationship to Adams, who would have questioned it had he known.
Cowles claimed that the principal of Apollo requested his management of the brokerage to bridge his income and expenses. In early 2014, Maine Coast began shipping lobsters directly to Aloha Best, a Honolulu restaurant, coinciding with the cessation of shipments to Shanghai Light. Cowles informed Maine Coast that Aloha Best would use his contacts in Asia for lobster sales, and payments were to be wired to his personal bank account. Adams, unaware of the wire transfers, did not question this arrangement, noting Aloha Best's reliability as a customer. Between March 27 and April 30, 2014, Maine Coast shipped and billed Aloha Best, receiving full payment within 14 days despite the terms being "Net 7." However, in mid-May 2014, Aloha Best began underpaying invoices, with an outstanding balance of $22,573.20 on a $70,063.20 invoice. Shipments from May 14 to June 5 totaled $489,899.60, but Aloha Best failed to pay in full. Cowles requested time to help Aloha Best improve its payment schedule in a June 4 memorandum. Some of the outstanding invoices were later paid, and Cowles provided Maine Coast with six TD Bank official checks totaling $484,553.00, which was less than the total invoices due. Most checks mentioned "Aloha," and only one referenced an invoice. Cowles personally delivered these checks to Maine Coast, directing their application to Aloha Best invoices, without any discussion of altering the account to reflect a direct relationship with a company named Dong Nan, which was associated with the checks.
Adams was aware that the Aloha Best account was overdue and was tracking the situation. He testified that outstanding invoices to Aloha Best were settled through six checks from TD Bank. On June 9, 2014, Cowles emailed Adams and Jennifer Ewing to suggest splitting the Aloha account, indicating that the DongNanXiBei side was responsible for payments and listing specific invoices related to Dong Nan. Cowles stated a current payment of $152,000 should cover certain Dong Nan invoices and that an incoming payment of $31,864 should apply to two Aloha invoices. Adams testified about 11 unpaid invoices to Aloha Best and 2 to Dong Nan, totaling $356,438.30 for lobster shipments to China between May 27 and June 10, 2014. A summary chart of partially paid or unpaid invoices was incorporated into evidence. Ultimately, Maine Coast received $484,553.00 from Cowles via cashier’s checks referencing Dong Nan, aligning with the unpaid invoices.
In early June 2014, Adams grew frustrated with Cowles's performance, advising him to collect from delinquent accounts and expressing annoyance at Cowles's complaints about financial issues. Cowles claimed that his commissions were halved due to his role as a broker, which he alleged affected Apollo Corporation and Chinese operations. Adams acknowledged reducing commissions due to a new compensation plan but noted Cowles did not resign over it. Regarding Aloha Best's payment delays, Adams emphasized the need for prompt payment. Cowles assured Adams he was working with Aloha Best while omitting that Aloha Best was not the actual customer. Adams, without informing Cowles, contacted Aloha Best's principal, Jae Chen, who was shocked to learn of the outstanding debt. Chen provided Adams with information indicating that Cowles had requested payments to his personal account rather than to Maine Coast. Following this, Adams confronted Cowles about Dong Nan, to which Cowles responded that Jackie Lu owned Dong Nan and provided related identification and documentation.
The "Application for Credit" submitted by Cowles on behalf of Dong Nan indicated annual sales of $12 million and identified Dong Nan as a "Sole Partnership," represented by Jackie Lu, located at 225 Franklin Street, Boston, Massachusetts. Dated June 11, 2014, the application included a reference to the Industrial Bank of China and an electronic signature from Jackie Lu but was largely incomplete, lacking necessary contact information for the bank and three required references. Adams reported that Cowles pressured him to proceed with shipments to Dong Nan, citing the potential negative impact on Dong Nan’s reputation and the risk of non-payment for existing debts. Despite his concerns about the Credit Application's omissions—common in paperwork from Asian clients—Adams felt compelled to allow the shipments, asserting the application was not just a formality.
A discrepancy arose between the application date and the shipment date, clarified by an email from Cowles that referenced a meeting with Mr. Lu scheduled for June 18, 2014. Cowles later acknowledged at trial that Dong Nan was merely a business name he used and admitted to fabricating the Gmail account for it, as there was no actual account at the Industrial Bank of China. Following his representation of Dong Nan as a legitimate customer, Cowles informed Adams on June 14, 2014, via email that he had bought out his non-competition agreement and planned to engage actively in the Asian market. Shortly after the credit application and shipments, Cowles resigned from Maine Coast through electronic communication, after which Adams attempted to reach both Jackie Lu and Ginger Chan for further discussion.
On June 12, 2014, Cowles resigned, prompting a text exchange with Adams regarding the payment status for the Aloha Best/Dong Nan account. Cowles informed Adams that he had notified Mr. Lu about his resignation and would not be collecting payments directly, indicating that Mr. Lu would communicate the payment schedule to the Maine Coast office. Adams requested to be included in all company-related communications. Cowles expressed a desire for a clean break and stated that he would simplify the explanation for customers regarding his departure.
Later that day, Adams informed Jackie Lu and Ginger Chan of Cowles' resignation and encouraged them to contact him directly about payments, expressing a desire to maintain business relations. Ginger Chan later communicated that Mr. Lu would deliver payment in person, but Adams emphasized the urgency of the payment of $345,320.10 due for cash flow reasons.
On June 19, Adams reiterated his need for urgent payment, receiving a reply from Ginger Chan indicating delays due to Mr. Lu's passport issues and a pending wire transfer application. On June 24, Adams followed up again on the wire schedule, while Cowles emailed Adams, stating he had spoken with an intermediary regarding payment issues caused by Chinese regulations that delayed funds. Cowles reassured Adams that the payment was simply stuck due to bureaucratic challenges and indicated that he would assist in expediting the payment process.
On June 25, 2014, following his departure from Maine Coast, Cowles emailed Adams regarding a meeting to discuss shipping activities and expedite accounts receivable. Cowles claimed that his employment terms were never finalized, rejected a salary offer of $1,200 per week with a reduced commission, and stated that Adams's attempt to have him sign a non-competition agreement led to his resignation due to financial insecurity. He contended that ongoing "grandfathered activity," which Adams had previously approved, was being inaccurately labeled as "fraud." Adams, however, testified that the only authorized grandfathered activity was related to Boston Wholesale Lobster and jumbo lobsters, and he was unaware of Cowles's involvement in shipments to Apollo or his personal financial interests in them.
On June 27, 2014, Cowles informed Adams via email that he had taken control of Dong Nan Xi Bei Co. and would manage its account balance with Maine Coast, detailing the complexities of wire transfers from China and his intention to handle payments incrementally. Cowles also mentioned addressing mortality issues regarding shipments that had not been claimed. Following this communication, Adams grew suspicious that Dong Nan might be fictitious, especially after Cowles's follow-up email on July 7, 2014, regarding pending funds. In response to allegations of fraud and embezzlement, Cowles claimed that proper notice had been given to separate Dong Nan Xi Bei as a billing entity. Adams expressed concern over the substantial outstanding accounts receivable, highlighting the potential threat to Maine Coast's payroll, employee retention, and overall viability.
Adams described that Maine Coast attempted to mitigate credit risks through various measures, including customer investigations, credit applications, credit reporting services like Seafax, and seeking credit insurance. However, he was not directly involved in obtaining credit insurance, a task managed by others in the company. Adams later discovered that lobsters billed to Aloha Best and Dong Nan were actually sold to SK Seafood and its affiliate, Shanghai Light. Maine Coast had previously suspended SK Seafood’s credit due to an outstanding debt exceeding $200,000. Although some payments were received initially, they eventually ceased, leading Maine Coast to claim on a credit insurance policy for uncollectible debts. Notably, no credit insurance was in place for $350,000 worth of lobsters delivered to Shanghai Light because they were misclassified under the Aloha Best account, and insurance companies refused coverage due to fraud concerns.
Cowles, who managed the account, acknowledged selling lobsters to Shanghai Light and attempted to collect on unpaid invoices totaling $356,438.30, but met resistance as customers believed the shipments were insured. During a trip to China, he learned that customers would not pay for shipments they assumed were already covered by insurance. Adams later discovered from the FBI that Jackie Lu and Ginger Chan were fictitious identities created by Cowles, who admitted to this deception during a deposition. Cowles had also sent a text to Adams indicating that Aloha was beginning sales in Guangzhou and Shanghai, anticipating increased orders and payments. Ultimately, Adams realized that Cowles had deceitfully shipped lobsters to an unknown recipient under a credit account that Maine Coast had not authorized, resulting in financial losses for the company. Cowles additionally shared details about his financial background, indicating prior experience in brokering lobsters before joining Maine Coast.
Cowles, facing a salary freeze at East Coast, collaborated with Robert Chen to establish Iliana and John LLC, which acquired a lobster fishing boat in Gloucester, Massachusetts. He testified regarding his interactions with Adams, acknowledging that he signed a Letter Agreement from Adams on behalf of Maine Coast, which outlined part of his compensation but did not fully define his role. Cowles characterized his employment status as ambiguous, stating he was effectively an independent contractor despite the use of the term "employee." His compensation was commission-based, and he expressed dissatisfaction when Adams halved his commission income in January 2014, though he chose not to resign, believing he could compensate through increased sales.
In an email to Adams on January 2, 2014, Cowles expressed satisfaction with his position and requested discussions on HR-related matters, including adjustments to his work hours, childcare expenses, commission payment schedules, and early enrollment in health insurance due to financial constraints as the sole custodian of his children. On January 27, 2014, he communicated his desire to change his employment status to independent contractor for tax benefits and cash-flow reasons, while affirming he would still comply with existing agreements. He also sought to purchase his own health insurance, which Adams allowed, demonstrating his accommodation of Cowles's family needs.
Cowles acknowledged that Adams rejected his request to be classified as an independent contractor, clarifying that his role had largely been independent since joining Maine Coast in fall 2013. He sought to officially change his classification due to payroll deductions but insisted this was merely a clarification of his existing status, as he fulfilled multiple roles, with only a small portion being employee-related. Cowles claimed he disclosed his relationship with Apollo to Maine Coast, specifically mentioning that he facilitated a meeting between Adams and key individuals from Apollo and Aloha Best in December 2013. He stated that although shipments were billed to Apollo, Adams was responsible for categorizing Aloha Best as both the "bill-to" and "ship-to" entity in Maine Coast's system, a mistake Cowles highlighted to Adams. Cowles described discussions about establishing a tank in China, emphasizing the exclusivity chain from Aloha Best to Apollo to Maine Coast. He noted that Adams insisted on shipping to Aloha Best to ensure a legal advantage if payment issues arose. From mid-December 2013 to mid-March 2014, Cowles believed the billing was incorrect, attributing the customer status to Apollo instead of Aloha Best. He received commissions from sales to Aloha Best and anticipated further earnings from Apollo's brokerage margin. Cowles stated he disclosed this commission structure to Adams and noted that Apollo consistently acted as the intermediary for shipments to Aloha Best and other clients in China until his resignation in June 2014.
Maine Coast's records indicate Aloha Best was designated as the "bill-to" starting March 27, 2014. Cowles testified about the necessity of sending invoices directly to customers due to specific paperwork requirements for Asian markets, emphasizing the need for the air waybill to match the packing list for customer claims. He noted that Adams approved all shipments. Since mid-December 2013, Cowles admitted to modifying Maine Coast invoices and creating new ones before shipping products, acting in the capacity of a broker. He clarified that Aloha Best, as a recipient on the invoices, was unaware of any markups made by Apollo, the company with which Cowles worked closely.
Cowles further explained that within a competitive price range, he maximized returns for Maine Coast while maintaining a margin for Apollo. Although he suggested he had disclosed his broker role to Tom, he acknowledged he never explicitly stated he was acting as a broker. Cowles described a close relationship with Apollo’s principal, Jae Kwon Lee, who publicly identified their partnership. He presented himself as an in-house broker, aiming to eliminate external brokers who complicated Maine Coast's inventory management and shipment processes. His role included protecting Tom from potential legal issues related to ownership of a tank house in China, thereby controlling the shipping chain and mitigating tax and tariff risks.
Cowles managed the significant SK Seafood/Shanghai Light account, which sold 61,783 pounds of lobster between December 2013 and March 2014. When Shanghai Light fell behind on payments in March 2014, despite existing insurance coverage of $100,000, Adams increased coverage to $250,000 but eventually halted shipments, adversely affecting Cowles' commission earnings.
Cowles engaged in discussions to replace Stephen Chen and SK Seafood, which dominated the North American lobster import market in China. He identified Shanghai Light's customer and aimed to replace SK Seafood and Shanghai Light by creating Dong Nan as an extension of Apollo. Maine Coast began shipping lobsters to Shanghai in mid-May 2014, but shipments to China were not for Aloha Best's benefit, despite invoices being generated incorrectly. Cowles attempted to correct billing errors in the computer system but faced resistance from Tom Adams, leading him to feel powerless. He acknowledged that invoices sent to Aloha Best for shipments to China were erroneous and confirmed that Dong Nan operated as a sole proprietorship under his Social Security number.
On June 4, 2014, Cowles informed Adams that Aloha Best had ordered 150,000 pounds of lobster valued at $1.2 million and had a strong payment history, requesting more time for Aloha Best to catch up on payments. He clarified that his reference to Aloha Best was about its Honolulu restaurant, not the shipments to China, which were experiencing delays in payment. Cowles maintained that Aloha Best was timely with its payments while entities in Asia were not. He did not disclose his creation of Dong Nan, believing it was justified as an extension of Apollo to maintain deniability regarding his actions and to avoid legal issues, asserting that there was no intention to defraud Maine Coast.
Key issues include the use of VAT tax strategies and non-traditional transportation methods to circumvent tariffs in the development of the Aloha Best tank house in China. There is an implication of wrongful business practices involving Stephen Chen and Tony Chen, suggesting an intent to transfer their business to a controlled entity while maintaining deniability. Tom's involvement required that this deniability be credible, particularly in the event of legal scrutiny by the Chinese government.
Cowles's banking activities reveal several accounts, including TD Bank and Bank of America, where he conducted transactions related to Aloha Best. His TD Bank account statements indicated he received wire transfers from “J A SOS INC,” which were actually from Aloha Best, totaling $37,675.25 between March 17 and 20, 2014. Cowles claimed these funds were used to pay Aloha Best invoices while noting a commission of $1,442.25 from these transactions.
From April 7 to May 6, 2014, Cowles's TD Bank account reflected further wire transfers totaling $151,846.20 and debits amounting to $146,313.85, resulting in a commission of $5,582.35. Cumulatively, from March to May 2014, Cowles skimmed $6,974.60 in commissions from Maine Coast. Additionally, his account statements show a $5,400.00 debit transfer to his brother, Stephen Cowles, unrelated to any boat or vehicle transactions.
Between May 7, 2014, and June 6, 2014, Cowles's TD Bank account ending in 921 recorded seven wire transfer credits totaling $454,000.00 and four electronic debits amounting to $272,227.75, resulting in a net difference of $181,772.25. Notably, $2,000.00 was deposited from Cowles’s TD Bank account for Dong Nan, and $165,467.00 was credited to Dong Nan’s account. Cowles testified that SK Seafood, identified through Mr. Hua Chen, sent payments that were directed to him, with shipments resuming in May 2014 with full consent from his employer, Maine Coast.
From June 7 to July 6, 2014, deposits into the same TD Bank account totaled $505,505.00, primarily from SK Seafood, with $460,000 attributed to wire transfers. Some of these transfers occurred while Cowles was still employed at Maine Coast but were claimed to satisfy orders from other packers. Total wire transfers from Aloha Best and SK Seafood amounted to $1,138,026.45 from March 17, 2014, to June 26, 2014.
During the subsequent period, Cowles transferred $242,364.00 to Dong Nan, bringing the total to $407,821.00 when combined with previous transfers. An additional $175,000.00 was transferred to his Flood Tide account and $77,229.00 to another TD Bank account. Cowles failed to disclose a $79,000.00 wire transfer from SK Seafood and the retention of $1,800.00 to Maine Coast, despite acknowledging these transactions in his testimony.
Cowles utilized his own profits to reconcile a $60,000 deposit with a $65,000 payment, indicating a method of financial management typical for a broker. He clarified that brokers typically do not disclose detailed customer information to their suppliers to avoid competitive risks. Despite retaining unauthorized broker commissions totaling $53,285.60, he remitted $484,553.00 to Maine Coast using cashier’s checks linked to Dong Nan. A debit of $9,994.94 was acknowledged as payment to American Holdco, Inc. for a release from his non-competition agreement with East Coast. Although Cowles told Adams on June 14, 2014, that he secured a family loan for this release, he avoided detailing the source of funds, asserting he had no obligation to explain his business dealings post-employment with Maine Coast. He claimed the funds related to a broader negotiation for his brokerage activities. Regarding the identities of Jackie Lu and Ginger Chan, Cowles described Lu as a pseudonym for his former sister-in-law and Chan as a Taiwanese sales representative, although he admitted that emails attributed to her were sent by him. He characterized his relationship with Maine Coast as a power struggle with Adams, maintaining that he acted as a broker during his tenure there, which lasted until mid-June 2014, and he refused to sign any non-competition agreement.
In October 2013, Cowles informed Adams that presenting a non-compete agreement would end their working relationship. Anticipating a potential request to leave Maine Coast, Cowles began job negotiations with Chinese parties. He referenced a $180,000 wire transfer from SK Seafood on June 9, 2014, and a $152,000 payment to Maine Coast, noting that $28,000 was retained for unrelated purchase orders. Cowles emphasized the need for alternative employment before severing ties with Maine Coast to ensure financial stability for his family. He facilitated lobster packaging through Ipswich Shellfish Co. and Boston Wholesale Seafood and established bank accounts for business operations after leaving Maine Coast.
Cowles also purchased a boat and towing vehicle for a Chinese project, both titled in his brother's name, which were later sold at a loss. He asserted that the funds for these purchases came from the Chinese parties for establishing a buying station. His financial records indicated significant transfers, including $242,114 to Dong Nan and $175,000 to his Flood Tide account. He wired $195,000 to Boston Wholesale Lobster in June 2014. A $98,000 deposit on July 2, 2014, into his account was attributed to SK Seafood, although it did not involve a corresponding product transaction. Cowles issued a check for $98,000 to an unknown payee shortly after. He denied any wrongdoing, asserting he did not misappropriate funds or owe unpaid invoices, and clarified that he was current on commissions owed by Maine Coast when he left in June.
Testimony revealed that the individual did not earn commissions on unpaid invoices and received a fixed rate of “0.25 cents a pound” for shipments, despite the lack of payment. Michael Delahanty, Maine Coast’s Controller since May 2015, provided insight into the company’s financial practices, specifically regarding accounts receivable insurance in 2014. He confirmed that SK Seafood was insured and that Maine Coast had submitted a claim for unpaid Shanghai Light invoices in March 2014, receiving a payment in October 2014 unrelated to those invoices. Delahanty indicated that Cowles owed Maine Coast over $345,000 and noted that claims for lobsters shipped to Shanghai Light but billed to the uninsured Aloha Best could not be submitted. He mentioned credit applications for Apollo and Aloha Best from early 2014 and described a shift in billing from Apollo to Aloha Best around March 2014. In response to questions about the Dong Nan Credit Application, Cowles stated it originated from Apollo. Cowles also acknowledged that Maine Coast was initially unaware of post-March 2014 shipments to Shanghai Light, mistakenly believing Dong Nan was at fault for non-payment. He expressed later confusion regarding the nature of shipments to Shanghai Light, citing irregular insurance practices in China that emerged during his visit in September 2014, which discouraged him from pursuing collections. Adams further testified that he contacted Steven Chen and confirmed that Shanghai Light was the ultimate recipient of the lobsters.
Adams denied any involvement in insurance fraud or tax evasion in China, emphasizing the importance of maintaining the integrity of his growing business. He stated that Maine Coast operates TSA screening facilities in York, Maine, and Boston, Massachusetts, which enhance profit margins by eliminating airline and customs brokerage fees. A Settlement Agreement executed on April 9, 2015, acknowledged that Maine Coast was owed $354,000 for lobster shipments made in May and June 2014 to SK Seafood, with an agreement for SK Seafood to pay $220,000 within a year in exchange for a release of the remaining balance. However, Maine Coast only received $2,000 of this amount. Adams confirmed that Maine Coast paid Cowles commissions regardless of invoice payments and stated that they would not have shipped to certain clients if they had known Cowles was profiting additionally from those sales. Office manager Jennifer Ewing testified that she was unaware of Dong Nan until June 2014 and contradicted Cowles’s claims about the billing addresses. Former employee Gallucci testified that he was a salaried employee entitled to commissions, with no personal profit margins from the lobsters sold. The court assessed witness credibility, concluding that Adams was credible, while Cowles was not, ultimately determining that Cowles was an employee of Maine Coast rather than an independent contractor.
Cowles's duties at Maine Coast were characterized by vague and inconsistent testimony regarding his business activities in China, which the Court found to be unsubstantiated and self-serving. The Court rejected his insinuations of insurance fraud against Maine Coast, crediting Adams's assertion that he would not risk his business with fraudulent claims. Cowles's claims that he was protecting Maine Coast were discredited; instead, the Court found that he acted primarily to serve his own interests, fearing that Adams might take advantage of his Chinese contacts.
The Court determined that Cowles was an employee of Maine Coast, a conclusion supported by the Letter Agreement he signed, which outlined his salary and benefits, and tax withholding forms. His role was limited to acting as a broker for Boston Wholesale Lobster, and he breached both his employment terms and a non-competition agreement with American Holdco, Inc. by operating beyond his authorized duties. The Court also noted that Cowles misled Adams about a payment related to releasing his non-competition obligations.
The Letter Agreement was deemed clear and indicative of employee status, contradicting any suggestion that Cowles was an independent contractor. The Court referenced legal standards from Maine courts, emphasizing criteria for distinguishing between employees and independent contractors, including the nature of the work relationship, contractual obligations, and independence in business operations.
The key points outline factors determining the nature of the employment relationship, emphasizing the right to control the work as a primary criterion distinguishing an independent contractor from an employee. The court concluded that Cowles was an employee of Maine Coast due to various factors: Adams set the price for lobsters, required regular business hours, and maintained constant communication with Cowles, who reported directly to him. Despite Cowles signing documents indicating his employee status, he claimed to be an independent contractor, asserting this status from the start of his employment. Evidence revealed Cowles intended to circumvent his employment agreement by engaging in deceptive practices, including creating invoices and a fictitious entity, Dong Nan, to conceal his activities and profit-skimming operations. His previous experience at East Coast involved similar fraudulent arrangements. The applicable law under Section 523(a)(2)(A) indicates that debts incurred through fraud are not dischargeable under Chapter 7 bankruptcy.
In *Above-All Transportation Inc. v. Fraher*, the United States Bankruptcy Appellate Panel of the First Circuit outlined the three distinct prongs for exceptions to debt discharge under bankruptcy law. The first two prongs—false pretense and false representation—require a plaintiff to demonstrate six essential elements, as established in *Privitera v. Curran*. The third prong, concerning actual fraud, necessitates proof that the debtor engaged in fraudulent acts with wrongful intent, which can occur without a false statement, as noted in *Husky International Electronics Inc. v. Ritz*. The Supreme Court emphasized that the definition of “fraud” is broad and not easily defined.
To succeed under any prong, plaintiffs must meet the preponderance of the evidence standard, according to *Grogan v. Garner*. For the false representation prong, the First Circuit's ruling in *McCrory v. Spigel* requires proof that the debtor made a knowingly false statement or acted with reckless disregard for the truth, intended to deceive, induced reliance by the creditor, and that such reliance was justifiable and resulted in damages. The last four elements specifically connect the creditor's claim to the debtor's fraudulent actions.
Additionally, case law recognizes that silence can constitute a misrepresentation, as seen in *Drake Capital Securities v. Larkin*, where a debtor's failure to disclose material facts was deemed actionable. However, the Eleventh Circuit has a stricter stance, requiring an overt false representation for fraud-related discharge exceptions. The Eighth Circuit's perspective, which allows for silence as a potential misrepresentation, aligns with common law principles of deceit, affirming that obligations to disclose material information apply in these contexts.
The court in *Old Republic Nat’l Title Ins. Co. v. Levasseur* established that a duty to disclose arises from the existence of false pretenses when one party knows that the circumstances imply a misleading set of facts. Failure to correct such a misunderstanding can constitute fraud under Section 523(a)(2)(A). This duty to disclose is obligatory if it prevents the creation of a false pretense, but the false pretense must be intentionally fostered rather than resulting from inadvertence.
In *Am. Nat’l Bank v. Lewis*, the court noted that false pretenses encompass any intentional fraud or deceit, including concealment or non-disclosure where there is a duty to speak. Silence regarding a material fact can also be considered false pretenses, which may arise from a series of actions that mislead a creditor into transferring property or extending credit.
In the analysis of Section 523(a)(2)(A), Maine Coast Seafood accused the Debtor of several material misrepresentations: (i) failing to disclose his partnership in Apollo and profit involvement; (ii) not revealing the true reason for transmitting invoices; (iii) concealing that bank checks used for payment were from his personal account; and (iv) misrepresenting the nature of the Dong Nan entity as separate from himself. The court found that Maine Coast met its burden of proof under Section 523(a)(2)(A) by a preponderance of the evidence, concluding that the Debtor accepted employment without the intention of fulfilling his duties, describing his role as more akin to an independent contractor.
Cowles's testimony reveals intentional misrepresentation regarding his employment status when he signed the November 12, 2013 Letter Agreement and engaged in a tripartite agreement with American Holdco, Inc. He did not adequately disclose his discussions about becoming an independent contractor with Adams, misleading Maine Coast about his true employment status. Despite indicating he was happy working for Maine Coast in a January 2, 2014 email, he later requested a change to independent contractor status, implying he was still an employee while concealing his relationship with Apollo and using Aloha Best to facilitate lobster shipments.
Cowles claimed to have disclosed his relationship with Jae Lee in a December 2013 meeting, where he discussed a lobster storage facility in China, but Adams and another witness could not recall such discussions, casting doubt on Cowles's credibility. He admitted to creating invoices as a broker without informing Adams, which constituted misrepresentation and false pretenses. The legal precedent cited supports that silence in the face of known misleading circumstances can create a false impression.
Cowles's assertions about shielding Maine Coast from tax implications were deemed incredible, and evidence indicated he devised a scheme to increase his compensation at Maine Coast's expense, driven by financial difficulties and a history of exploiting his Chinese connections for gain. His belief that he was in a power struggle with Adams justified his actions, which included diverting payments meant for Maine Coast into his personal accounts. Cowles's defense was ultimately viewed as contrived and implausible.
Cowles engaged in a series of misrepresentations, both through written communication and omission, with the intent to deceive Maine Coast and induce reliance on his false claims to financially benefit himself. He frequently expressed financial struggles as a single parent, which may have influenced his deceptive actions. His schemes included using Aloha Best, a customer of Maine Coast, to direct invoices for shipments to China, establishing Dong Nan, and creating a Credit Application for it. These actions facilitated the diversion of funds from Maine Coast through sales to SK Seafood and Shanghai Light, especially after Maine Coast halted additional lobster sales to Shanghai Light due to payment issues.
Cowles received wire transfers from Aloha Best and SK Seafood without proper authorization or explanation related to his supposed roles as an independent contractor or broker, which Maine Coast would not have accepted had they been aware of his activities. Although Cowles initially remitted some payments to Maine Coast, he ceased doing so by the end of May 2014 while pressuring them to continue shipments to Dong Nan. He also sent misleading emails to obstruct Maine Coast’s understanding of the situation.
Testimony indicated that Adams, the relevant authority at Maine Coast, trusted Cowles until payment delays prompted him to investigate further in mid-June 2014. Upon confrontation, Cowles continued to mislead by presenting false assurances about Dong Nan's ability to pay. Maine Coast justifiably relied on Cowles due to his strong qualifications and prior employer's willingness to rehire him. The evidence presented established that Cowles obtained money through false pretenses, leading to demonstrated damages of $356,438.30 in unpaid invoices related to shipments billed to Aloha Best and Dong Nan, although the Court noted discrepancies in Maine Coast's claimed total of unpaid invoices.
Cowles made payments totaling $484,553.00 to Maine Coast from Aloha Best and SK Seafood. After deducting this amount from unpaid invoices of $489,899.60, an underpayment of $5,346.60 was identified. Adding this underpayment to the total of unpaid invoices from Plaintiffs Exhibit 7, which is $356,438.30, results in total unpaid invoices of $361,784.90 stemming from unauthorized shipments to SK Seafood and Shanghai Light. After subtracting a $2,000.00 settlement payment from SK Seafood, the remaining debt is $359,784.90.
The Court determined that Maine Coast suffered damages due to Cowles's actual fraud. Citing *Husky Int’l Elecs. Inc. v. Ritz*, the Court explained that fraudulent transfers without false representations can still qualify as an exception to discharge under § 523(a)(2)(A). Actual fraud, defined as involving moral turpitude or intentional wrongdoing, was established. The Court found that Cowles engaged in deception by orchestrating lobster shipments to SK Seafood/Shanghai Light, despite ceasing business with them due to nonpayment, all while concealing the shipments under different company names. Although he remitted some funds, Cowles retained substantial amounts for himself, resulting in damages to Maine Coast from unpaid invoices for lobsters shipped to China. The Court dismissed Cowles's claims that his actions were motivated by a desire to benefit Maine Coast, finding no factual basis for his testimony regarding his intentions.
Maine Coast's significant losses from sales to SK Seafood and large wire transfers undermine Cowles's testimony, which the Court finds implausible. Like others involved, Cowles is deemed to have acted with moral turpitude and intentional wrongdoing. Under Section 523(a)(4) of the Bankruptcy Code, debts arising from larceny are non-dischargeable. Case law indicates that a debtor does not need to be a fiduciary for a debt to be considered nondischargeable due to larceny or embezzlement. Larceny, as defined by federal common law, involves actual fraudulent intent to obtain another's property. The distinction between larceny and embezzlement is that larceny entails unlawful initial taking, while embezzlement occurs when the property is appropriated unlawfully after being entrusted to the debtor. To prove an exception to discharge under Section 523(a)(4), a creditor must demonstrate all elements by a preponderance of the evidence. The definitions of larceny under state and federal law are aligned, with larceny requiring wrongful taking, property belonging to another, lack of consent, and intent to convert the property.
Stealing or unlawfully converting property with intent to defraud constitutes larceny. In this case, the court dismissed the plaintiffs' claims that Cowles was a fiduciary or embezzler, concluding instead that the plaintiff established a larceny claim. Cowles fraudulently redirected payments for lobster shipments to his personal bank account, resulting in a wrongful appropriation of at least $53,285.60 from Maine Coast. His actions were unauthorized as he was not permitted to act as an independent contractor or broker after March 2014, and his retention of commissions from wire transfers and cashier's checks was deemed larceny. The court found overwhelming evidence that Cowles' actions were unauthorized and intentional, leading to a judgment in favor of Maine Coast for $53,285.60.
Under Section 523(a)(2)(B), a creditor must prove five elements to prevail on a claim related to a materially false written statement regarding the debtor's financial condition: the statement must be written, concern financial condition, be materially false, be relied upon reasonably by the creditor, and be made with intent to deceive. Failure to establish any one of these elements is fatal to the creditor's claim. The interpretation of "statement respecting the debtor’s financial condition" is contested, with a trend in the District of Massachusetts favoring a narrow interpretation, focusing on statements that provide specific information about net worth or overall financial health.
A statement of financial condition must describe the debtor's financial status, although it does not need to be a formal document. It should convey information regarding the debtor's overall net worth or income-generating ability. False statements, in the context of 11 U.S.C. § 523(a)(2)(B), are those that misrepresent the debtor's financial health, akin to balance sheets or income statements. The key factor is the content of the statement rather than its formality.
In the case discussed, the application for credit submitted by Dong Nan, a business operated by the debtor, lacked sufficient detail to qualify as a statement of financial condition. It did not list assets or liabilities, provide net worth, or include expenses, merely referencing sales figures and contact details that were incomplete or erroneous. As such, it failed to meet the requirements set forth in Curran. Consequently, the court did not need to evaluate additional elements for excluding the debt from discharge under § 523(a)(2)(B). Even if the application were considered a valid statement, the absence of reasonable reliance due to its incompleteness would invalidate the claim.
Ultimately, the court ruled in favor of the plaintiff for a total of $413,070.50 on certain counts, while siding with the defendant on another count. American Holdco, Inc. was identified as the holding company for East Coast Seafood, with Tourldstas serving as CEO in November 2013.
If payments are not received from Maine Coast within the agreed timeframe, the release of Jonathan Cowles from the employment contract and promissory notes is revoked, rendering him liable for obligations and debts. Should Cowles's employment terminate, all payments made to AHI from Maine Coast are nonrefundable. Sales to Shanghai Light from August 29, 2013, to March 25, 2014, totaled 67,654.60 pounds of lobster worth $599,722.66. Aloha Best continues to be a customer of Maine Coast, with invoices starting March 27, 2014. Shipments were made to import companies due to Chinese customs regulations, with actual customers retrieving lobsters from these companies. Unpaid invoices, particularly invoice 10396 for $34,469.60, affect the total owed to Maine Coast, which includes a sum of $524,369.20 from partially paid or unpaid invoices. A total of 13 invoices were discussed, with discrepancies noted in the number sent to Dong Nan. The total value of unpaid invoices is calculated at $356,438.30, aligning closely with Cowles's listed debt to Maine Coast of $348,000.00. Cowles instructed Aloha Best to wire payments for lobsters to his bank account at TD Bank in Rowley, Massachusetts, instead of paying Apollo directly, raising questions about the nature of his business entity. The summary of shipments billed to Shanghai Light confirms transactions occurred before Cowles's affiliation with Maine Coast.
Unpaid invoices listed in Exhibit 7 were primarily billed to Aloha Best, with two exceptions for Dong Nan, and products were shipped to locations in China. The Debtor reported a loss of $224,995.00 in 2013 due to Iliana and John LLC. Plaintiff's Exhibit 24 indicates that Apollo was the billing party while Aloha Best was the shipping party during that period. The Debtor's Schedule B-Personal Property disclosed only one bank account, a TD Bank account ending in 921. After excluding wire transfers post-Cowles's resignation, total wire transfers amounted to $918,026.45, of which only $484,553.00 was remitted to Maine Coast, leaving an unaccounted balance of $433,473.45. The Debtor failed to disclose these financial transactions and assets on his Statement of Financial Affairs, including a closed Bank of America account and transfers to Boston Wholesale Lobster. Boston Wholesale Lobster was listed as a creditor with a claim of $79,000.00 for various expenses.
According to Massachusetts law, an individual performing services is presumed to be an employee unless a three-prong test is satisfied to classify them as an independent contractor. It is uncertain if Cowles is liable for losses attributed to Iliana and John, LLC, estimated at $250,000.00 in 2013. Invoice 10396, amounting to $53,332.40, remains partially unpaid with a balance of $22,573.20. Cowles instructed a split billing arrangement for Aloha Best in a June 9, 2013 email, designating certain invoices for Dong Nan and others for Aloha Best. Payments totaling $484,553.00 were made via Dong Nan cashier's checks to Maine Coast. An invoice dated May 15, 2014, for $19,071.00, was directed to Aloha Best for shipment to Shenzhen Shun Xingsheng Agricultural Products Co. Ltd. On May 27, 2014, Aloha Best wired $35,000.00 to Cowles regarding an invoice from Dong Nan. Subsequently, Cowles withdrew $27,457.00 from his TD Bank account and deposited it into his Dong Nan account, with no reference to Aloha Best on the cashier's checks. Additional commissions totaled $53,285.60.
