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Rebecca Adams, LLC v. Janney

United States District Court, M.D. Louisiana

March 27, 2018

REBECCA ADAMS, LLC, Appellant
v.
TODD T. JANNEY, SR. Appellee

          RULING

          SHELLY D. DICK, JUDGE UNITED STATES DISTRICT COURT.

         This matter is before the Court on an appeal filed by Rebecca Adams LLC of the September 29, 2016 Judgment of the Bankruptcy Court in the Adversary Proceeding, In re: Todd T. Janney Sr. and Shannon C. Janney, Adv. No. 15-01026.[1] Appellant, Rebecca Adams LLC, and Appellee, Todd T. Janney, Sr., have filed their respective Briefs.[2]Appellant has also filed a Reply.[3] For the following reasons, the Bankruptcy Court's Judgment is hereby AFFIRMED.

         I. FACTUAL AND PROCEDURAL BACKGROUND

         Rebecca Adams began working for Janney, the sole owner of various healthcare businesses and clinics in 2004.[4] She provided accounting, tax, and administrative services for Todd T. Janney, Sr. (“Janney”) and these same business entities until October of 2008, when the limited liability company she had formed, Rebecca Adams, LLC (“Adams LLC”), entered a client agreement contract with Janney to continue providing the same services for these interests.[5]

         The October 24, 2008 client agreement contract provided that “[i]n consideration of services rendered, [Janney] agree[d]: that an Open Account has been established . . . and that [he was] liable for and hereby guarantee[d] the payment of a charges incurred.”[6]He also agreed that “all information provided is presented honestly, accurately, and is complete, to the best of [his] knowledge.”[7] The terms of the 2008 agreement required that “payment [was] due in full within 30 days of tax return or work completion and/or billing, whichever occurs first.”[8] Additionally, Janney agreed that a 12% interest rate per annum could be compounded monthly against any outstanding balance.[9]

         On February 20, 2013, Adams LLC entered into a “more complex client agreement contract” with Janney, his mother, Paulette Mohamed, and Physicians' Choice Physical Therapy Clinics.[10] Pursuant to the terms of the February 2013 client agreement, the client agreed to “provide The Accountant true and complete information that is vital for The Accountant to perform . . . services in a timely manner.”[11] The 2013 agreement also provided that “services [would] be billed to The Client on a bi-monthly basis and [were] due and payable upon receipt.”[12] Additionally, “[t]he Client(s) agree[d] to be personally responsible for all accounting costs and expenses incurred by The Client's business(es) and to personally bear guarantor responsibility for payment in full.”[13] Like the previous contract, the clients agreed that “an interest rate of 12% per annum, compounded monthly, [could] be assessed against” any outstanding balance after the payment due date.[14]

         Ultimately, on May 3, 2013, Adams terminated her working relationship with Janney and his companies.[15]

         On October 8, 2014, Janney and his wife Shannon filed a joint Chapter 7 Petition in the United States Bankruptcy Court for the Middle District of Louisiana.[16]Subsequently, Rebecca Adams, individually, and Adams LLC filed a Complaint Objecting to Discharge and to Determine Dischargeability of Debt.[17] Plaintiffs claimed that the Debtor's pre-petition debt owed to them, “in the amount of $198, 197.00 plus judicial interest, plus costs of this legal proceeding, and attorney's fees” should not be declared non-dischargeable under 11 U.S.C. § 523(a), or, in the alternative, that the Debtor's discharge be denied under 11 U.S.C. §§ 727(a)(3) and (a)(5).[18]

         Following a trial on the matter, the Bankruptcy Court issued a Memorandum Opinion on September 29, 2016, in which it found that Adams LLC failed to prove that (1) Janney made false representations or committed actual fraud within the meaning of 11 U.S.C. §523(a)(2)(A); (2) Janney's discharge should be denied for failure to maintain adequate books and records pursuant to 11 U.S.C. §727(a)(3); and (3) Janney's discharge should be denied for failure of the debtor to explain the loss of his personal assets pursuant to 11 U.S.C. §727(a)(5).[19] On the same day, the Bankruptcy Court issued a Judgment in favor of Janney and against Adams LLC.[20]

         Subsequently, on October 5, 2016, Adams LLC filed a Notice of Appeal with the United States District Court for the Middle District of Louisiana (“District Court”).[21] The Amended Designation of Record and Issues on Appeal along with the Docket Report were filed with the District Court on October 3, 2017.[22]

         II. LEGAL STANDARD

         The Court's jurisdiction to review the bankruptcy court's judgment exists pursuant to 28 U.S.C. § 158(a)(1).[23] The standard for a bankruptcy appeal by a district court is the same standard applied by a court of appeals reviewing a district court proceeding. The Court reviews findings of fact for clear error, conclusions of law de novo, and mixed questions of law and fact de novo.[24] A finding of fact is clearly erroneous and reversible only if based on the entire record, “the court is left with the definite and firm conviction that a mistake has been committed.”[25] “In conducting this review, the court must give due regard to the opportunity of the bankruptcy judge to determine the credibility of the witnesses.”[26]

         III. ISSUES ON APPEAL

         In its Amended Designation of Record and Issues on Appeal, Adams LLC assigned the following issues for appeal:[27]

         1. Whether the Bankruptcy Court erred by finding that it was not a “false representation” for a Debtor to withhold financial information from his accountant (even when, as here, the accountant is also a creditor).

a. Specifically, whether the Bankruptcy Court erred in finding that Adams failed to establish that she justifiably relied on Janney's misrepresentations under 11 U.S.C. § 523(a)(2)(A).
b. Whether the Bankruptcy Court erred in finding that Janney's actions in 2009 and February 2013 were red flags that should have alerted Adams that her reliance on Janney's misrepresentations was unjustified?
c. Assuming that the Bankruptcy Court correctly concluded that Adams failed to establish justifiable reliance because of her knowledge of events that constituted “red flags” in February 2013, did the Bankruptcy Court err in discharging the entire debt due to Adams, rather than just the portion of the debt that arose after the February 2013 “red flags”?
d. Whether the Bankruptcy Court erred in concluding that Adams was required to show justifiable reliance on Janney's misrepresentations considering the Supreme Court's recent opinion rendered in Husky International Electronics, Inc. v. Ritz, 136 S.Ct. 1581 (2016).

         2. Whether the Bankruptcy Court erred in concluding that Janney had not committed fraud under 11 U.S.C. § 523(a)(2)(A) when withholding financial information from his accountant?

         3. Whether the Bankruptcy Court erred in holding that Adams failed to meet its burden of proof under 11 U.S.C. § 727(a)(3), in establishing that Debtor failed to maintain adequate books and records and, in particular, whether the Bankruptcy Court's conclusion was erroneous that “Adams presented no evidence supporting a finding that any of the information Janney provided in his bankruptcy filing was incomplete or inaccurate.”

         4. Whether the Bankruptcy Court erred in holding that Adams failed to meet its burden of establishing Janney's failure to adequately explain the loss of his personal assets in order for his discharge be denied under 11 U.S.C. § 727(a)(5)?

a. Specifically, whether the Bankruptcy Court erred in concluding that Adams had no standing to assert a cause of action against the Debtor to reverse pierce his corporate veil (converting all corporate assets into Janney's personal assets), finding instead that alter ego claims belong to the bankruptcy estate and therefore, the trustee alone has standing to assert such claims, absent court discretion.
b. Whether, absent the standing issue, the Bankruptcy Court erred in finding that Adams failed to introduce sufficient evidence to pierce the veil of Janney's wholly owned limited liability companies.
c. Whether the Bankruptcy Court erred in failing to consider that the Debtor's ownership in his wholly-owned limited liability companies constitute assets of the Debtor's bankruptcy estate and as such, the Debtor's prepetition transfer of all assets contained within those companies, for no consideration, reduced the value of the Debtor's bankruptcy estate assets by diminishing the value of the Debtor's ownership interest in those limited liability companies, which the Debtor was unable to explain, and therefore, the requirements of Section 727(a)(5) were met.[28]

         As an initial matter, the Court observes that its review of this appeal is complicated because the foregoing “Issues on Appeal” do not correspond to the arguments developed in Appellant's Brief. Specifically, Appellant fails address the issues set forth in 1(c) and 1(d) regarding “fraudulent representation” in its Briefs. Therefore, these issues shall not be considered by the Court.

         IV. ANALYSIS

         A. Whether the Bankruptcy Court erred in finding that Adams LLC's reliance on Janney's misrepresentations was not justified due to “red flags”?[29]

         Appellant argues that the Bankruptcy Court's decision should be reversed because it established that its debt is nondischargeable under Section 523(a)(2)(A) based upon false representations. Adams LLC, through its member, Rebecca Adams, argued that it relied on Janney's misstatements of his and his companies' debts, and, as a result, continued to provide services to Janney for partial or no payment. In its Ruling, the Bankruptcy Court found that Adams LLC had proven the first two elements to support its claim stating that “Janney skewed the official financial portrait of himself and his companies by failing to disclose to his accountant numerous debts and, in some cases, not disclosing the correct amount of debts.”[30] However, the Bankruptcy Court found that Appellant failed to satisfy the third and final element necessary to support its claim- justifiable reliance-because “Adams LLC, through its member, Rebecca Adams, knew of enough ‘red flags' to make its unquestioning reliance on Janney's representations about finances unjustifiable.”[31]

         Adams LLC, as the creditor, has the burden of proof of establishing, by a preponderance of the evidence, that the debt in question should be excepted from discharge.[32] In order for a debtor's representation to constitute a false representation or false pretense under § 523(a)(2)(A), it “must have been: (1) [a] knowing and fraudulent falsehood [ ], (2) describing past or current facts, (3) that [was] relied upon by the other party.”[33] “[A] debtor's silence regarding a material fact can constitute a false representation under section 523(a)(2)(A).”[34] “When one has a duty to speak, both concealment and silence can constitute fraudulent misrepresentation; an overt act is not required.”[35]

         Appellant argues that the Bankruptcy Court applied the wrong legal standard to determine whether Rebecca Adams was justified in her reliance on Janney's misrepresentations about his businesses' financial situation. Specifically, Appellant asserts that the Bankruptcy Court erred by applying an objective standard instead of a subjective standard to determine reliance. Appellant contends that Rebecca Adams' reliance on Janney's misrepresentations was justified, even if that reliance may not have been reasonable under a community standard. Adams LLC further argues that the Bankruptcy Court should have considered Rebecca Adams and Janney's business relationship through her eyes.[36]

         Initially, the Court finds that the Bankruptcy Court did apply the correct legal standard for justifiable reliance. Section 523(a)(2)(A) of the Bankruptcy Code requires justifiable reliance, which “is an intermediate level of reliance between reasonable reliance and mere reliance in fact.”[37] Justifiable reliance is “determined by looking at the circumstances of a particular case and the characteristics of a particular plaintiff, not by an objective standard.”[38] It incorporates “the qualities and characteristics of the particular plaintiff, and the circumstances of the particular case, rather than of the application of a community standard of conduct to all cases.”[39] As the Bankruptcy Court correctly noted, a creditor who is “the recipient of a fraudulent misrepresentation may justifiably rely on it unless its falsity is obvious or there are ‘red flags' indicating such reliance is unwarranted.”[40] Importantly, “[a] plaintiff may not blindly rely upon a misrepresentation, the falsity of which would be obvious to the plaintiff had he or she used [his or] her senses to make a cursory examination or investigation.”[41] Consequently, “if ‘under the circumstances, the facts should be apparent to one of [the creditor's] knowledge and intelligence from a cursory glance, or he has discovered something which should serve as a warning he is being deceived, ' reliance is not justified without further investigation.”[42]

         The Court finds no error in the Bankruptcy Court's finding that Adams LLC, through its member, Rebecca Adams, failed to show justifiable reliance. While it is true that Rebecca Adams (“Adams”) and Janney had a business relationship that spanned approximately 9 years, and that, in the past, Janney had paid his invoices regularly, [43] the Court concludes that there were red-flags that demonstrate that any reliance by Adams LLC, through its member, Adams, on Janney's misrepresentations about his businesses' finances was unwarranted.

         Adams testified that Janney began having problems staying current on his invoices before June of 2012.[44] Adams stated that she knew in February of 2013 about Janney's Internal Revenue Service payroll tax debt of approximately $40, 000.00.[45] She further testified that even withholding these payroll taxes “there simply was not enough cash flow” to pay off the payroll tax debt.[46] During this time period, Adams also testified that “a lot of cash [was] being pulled out of the company, ” but that she did not know for what purpose or where the funds were going.[47] She further stated that the amount of cash that was being withdrawn “was getting more and more all the time.”[48] The Court finds that, even considering their relationship, these facts should have served as a warning to Adams that she was being deceived, and further investigation of Janney's handling of his and his companies' financial situation was warranted. And yet, even though Adams knew of these facts, in February of 2013, Adams LLC agreed to enter into another service contract with Janney and his companies to continue providing services, which, over the next three months, provided an additional $30, 000.00 in services.[49] The Court finds that while Adams may have cared about Janney and the success of his businesses, [50] under the circumstances of this case, Adams LLC, through its member Adams, knew of enough red flags such that she was not justified in blindly relying upon Janney's representations about his finances.

         This Court finds no error in the Bankruptcy Court's factual finding that Adams' knowledge of dubious business practices involving cash withdrawals and payroll tax debt were significant red flags such that Adams' reliance on Janney's misrepresentations was not justified.

         Accordingly, the Court hereby affirms the Bankruptcy Court's finding that Appellant failed to establish that Janney made a false representation rendering its claim nondischargeable under Bankruptcy Code § 523(a)(2)(A).

         B. Whether the Bankruptcy Court erred in concluding that Janney had not committed actual fraud under 11 U.S.C. § 523(a)(2)(A) by withholding financial information from his accountant?

         Adams LLC contends that because the Bankruptcy Court applied the wrong legal standard, its finding that Janney had not committed actual fraud under 11 U.S.C. § 523(a)(2)(A) is erroneous.[51] Appellant specifically argues that since the Supreme Court's decision in Husky International Electronics, Inc. v. Ritz, [52] “Adams is only required to establish a ‘fraudulent conveyance scheme' in order for Janney's debt to Adams to be deemed nondischargeable based upon fraud.”[53] Adams LLC contends that it established fraud under Husky because the evidence at trial evidence demonstrated Janney's engagement in two fraudulent conveyance schemes for the purpose of shielding himself and his companies from creditors.[54] For the following reasons, the Court finds the holding in Husky is inapplicable to Appellant's case.

         In its initial decision in Husky, the Fifth Circuit held that a representation is a necessary prerequisite for a showing of actual fraud under Section 523(a)(2)(A).[55] Subsequently, the Supreme Court reversed the Fifth Circuit, finding that “actual fraud” in Section 523(a)(2)(A) should be interpreted to “encompass fraudulent conveyance schemes, even when those schemes do not involve a false representation.”[56] On remand, the Fifth Circuit noted that the Supreme Court's holding reversed Fifth Circuit precedent to the extent that those cases required a representation in order for a debt to be nondischargeable under Section 523(a)(2)(A) for actual fraud.[57]

         Unlike the creditor in Husky, however, Adams LLC alleged that Janney made actual false representations “with the intent to deceive Adams so that Adams would continue to supply services and to obtain Financial Statements that misrepresented his financial situation, in order to obtain credit from other creditors.”[58] Importantly, Adams LLC did not make any allegations of fraudulent conveyance schemes. Upon review of the record, this Court finds no error in the Bankruptcy Court's factual finding that Adams LLC failed to prove actual fraud by a preponderance of the evidence. Because Adams LLC alleged that Janney made actual false representations, the Court finds that Husky and its holding regarding fraudulent conveyance schemes is inapplicable to Adams LLC's claim of actual fraud under 11 U.S.C. § 523(a)(2)(A).[59] Therefore, the Court hereby affirms the Bankruptcy Court's finding that the Appellant failed to prove that Janney committed actual fraud within the meaning of 11 U.S.C. § 523(a)(2)(A).

         C. Whether the Bankruptcy Court erred in holding that Adams LLC failed to meet its burden of proof under 11 U.S.C. § 727(a)(3), in establishing that Debtor failed to maintain adequate books and records? Specifically, whether the Bankruptcy Court's conclusion that “Adams presented no evidence to support a finding that any of the information Janney provided in his bankruptcy filing was incomplete or inaccurate” was erroneous?[60]

         Section 727(a)(3) states that the court shall grant the debtor a discharge, unless “the debtor has concealed, destroyed, mutilated, falsified, or failed to keep or preserve any recorded information, including books, documents, records, and papers, from which the debtor's financial condition or business transactions might be ascertained, unless such act or failure to act was justified under all of the circumstances of the case.”[61] The creditor has the initial burden of proving that “(1) the debtor fail[ed] to keep or preserve financial records, and (2) the failure [made] it impossible for the creditor to discern the debtor's financial condition.”[62] “Section 727(a)(3) is not a prescription of a ‘rigid standard of perfection' in record-keeping, but requires that the debtor ‘present sufficient written evidence which will enable his creditors reasonably to ascertain his present financial condition and to follow his business transactions for a reasonable period in the past.'”[63]

         Ultimately, the Bankruptcy Court had “‘wide discretion'” in its determination of whether the debtor maintained adequate records, and its decision constitutes “finding[s] of fact reviewed for clear error.”[64]

         Appellant takes issue with the Bankruptcy Court's conclusion that “[n]o evidence supports a finding that any of the information Janney provided in his bankruptcy filings was incomplete or inaccurate.”[65] Appellant contends that certain evidence introduced at trial showed that Janney failed to disclose his ownership in three wholly owned business entities on his Bankruptcy Schedules or Statement of Financial Affairs.[66] Appellant also argues that while Janney's Bankruptcy Schedules showed that Physician's Choice Physical Therapy WBR, LLC (“WBR”) closed in June of 2012, the trial evidence, which included Rebecca Adams' testimony and receipts of cash withdrawals totaling $67, 825.00 from WBR, showed otherwise.[67] According to Adams LLC, these unexplainable inaccuracies should have been sufficient for the Bankruptcy Court to deny Janney's bankruptcy discharge.

         The Court is presented with an obstacle that it cannot overcome when considering Adams LLC's evidentiary challenge on this particular claim. While Appellant directs the Court's attention to the actual Bankruptcy Schedules and the Statement of Financial Affairs themselves, these items were not made part of trial record in Adams v. Janney.[68]

         Because these documents were not admitted into evidence at the trial, the documents themselves are not considered as evidence on appeal.[69] However, trial testimony was offered regarding these documents and considered by the Bankruptcy Court.[70]Therefore, the Court's review is limited to the testimony offered during the trial pertaining to these documents.

         During the trial, Appellant's counsel questioned Janney about three businesses in which he held an ownership interest that were not disclosed in his Schedule B form.[71] In response, Janney testified that it was his belief that these entities were no longer active, and, in one particular case, he testified that he was unsure if the business ever was active.[72] Also during the trial, evidence regarding Physicians' Choice Physical Therapy WBR, LLC was introduced. Both Rebecca Adams and Janney offered conflicting testimony as to whether this particular clinic was open and operating in 2013.[73]Additionally, the testimony also evinced that the $67, 825.00 cash withdrawal from Physicians' Choice Physical Therapy WBR, LLC was disclosed by the Janneys to their Chapter 7 Trustee.[74]

         Considering the Bankruptcy Court's conclusions and ultimate finding, it appears to the Court that the Bankruptcy Judge found that Janney's explanations and testimony regarding the discrepancies related to the Schedule B form and the status of Physicians' Choice Physical Therapy WBR, LLC in 2013 to be more credible than the testimony offered by Rebecca Adams. Because testimony was offered on each of the evidentiary challenges being made by Appellant, this Court, sitting in an appellate capacity, gives deference to the Bankruptcy Court's determinations of witness credibility.[75] Giving the Bankruptcy Court's credibility findings the deference they are due, the Court finds that the Bankruptcy Court's conclusions regarding the accuracy and completeness of the information that Janney provided in his bankruptcy filings was not clearly erroneous.

         Based on the record before it, the Bankruptcy Court correctly found that the evidence did not support a finding that any of the information provided by Janney in his bankruptcy filings was inaccurate or incomplete. Accordingly, the Bankruptcy Court's finding that that Adams LLC failed to satisfy its burden of proof to deny Janney's discharge for ...


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