Johnson v. King (In re King)

541 B.R. 404
CourtUnited States Bankruptcy Court, N.D. Texas
DecidedNovember 10, 2015
DocketCASE NO. 14-42820-MXM; ADVERSARY NO. 14-04104-MXM
StatusPublished

This text of 541 B.R. 404 (Johnson v. King (In re King)) is published on Counsel Stack Legal Research, covering United States Bankruptcy Court, N.D. Texas primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Johnson v. King (In re King), 541 B.R. 404 (Tex. 2015).

Opinion

MEMORANDUM OPINION

Mark X. Mullin, United States Bankruptcy Judge

On September 29, 2015, the Court held a trial on Plaintiff Russell Johnson’s complaint to declare Defendant Earl Westley King’s debt to him nondischargeable under 11 U.S.C. § 523(a)(4) and (a)(6). Because Plaintiff did not prove certain nondis-chargeability elements by a preponderance of the evidence, the Court will enter a separate judgment for Defendant.

I. Background

In January 2007, Plaintiff and Defendant formed Earl’s Deli, LLC, a Texas limited liability company (the “LLC”), to operate a deli sandwich shop in Tarrant [406]*406County, Texas by the name of Earl’s Deli. Defendant had years of sandwich-shop experience from his prior ownership of seven Subway stores in Colorado. Plaintiff, on the other hand, did not have any prior sandwich-shop experience, as Plaintiff ran a trucking company for twenty-six years prior to opening Earl’s Deli with Defendant. Plaintiff first met Defendant in or about 1990 as a customer in one of Defendant’s Subway stores.

To form the LLC and open Earl’s Deli, Plaintiff and Defendant contributed capital to the LLC and they both guaranteed the LLC’s Wells Fargo dine of credit and a Wells Fargo credit card issued to the LLC.

Plaintiffs wholly-owned corporation, RWJ Enterprises, Inc., leased the restaurant space to the LLC under a five-year written lease that called for monthly rent of $1,200, but the parties verbally agreed to reduce the LLC’s monthly rent to $1,000. Further, the LLC paid the $1,000 monthly rent to RWJ for only six months after Earl’s Deli opened, but paid no rent thereafter.

The LLC’s Certificate of Formation provides that the LLC shall be managed by its members. PL’s Ex. 1, art. VI. The Company Agreement for the LLC, signed by both parties, likewise provides that management of the LLC is reserved to the members in proportion to their respective “Percentage Interests,” or the ratio in which the members share profits and losses, which were 51% for Plaintiff and 49% for Defendant. Pl.’s Ex. 2, ¶¶ 1.01, 3.01, 6.01, and Ex. A to the Company Agreement.

The parties did not, however, manage the LLC in proportion to their nearly equal Percentage Interests. Instead, beginning when Earl’s Deli opened its doors in May 2007 until sometime in late December 2008 or early January 2009, Defendant managed the day-to-day operations and finances of the LLC, while Plaintiff chose to be a “silent partner.” At Plaintiffs insistence, however, Defendant used Quick-Books software to record and maintain the company’s finances. Defendant had little, if any, prior experience using QuickBooks software. Plaintiff, at all relevant times, had access to the QuickBooks software and to the LLC’s other books and records.

In December 2008, Defendant informed Plaintiff that the LLC was out of money and the LLC would have to close Earl’s Deli. Plaintiff did not want to close Earl’s Deli, however, so he took over the day-today operations and finances of the LLC in late December 2008 or early January 2009. It was only then, according to Plaintiff, when he began reviewing the LLC’s QuickBooks and other books and records, that he discovered the following alleged misdeeds of Defendant:

• Shortly after opening Earl’s Deli, Plaintiff and Defendant agreed to replace the Wells Fargo line of credit ■with a lower-interest bearing loan from Regions bank. After the parties paid off the Wells Fargo line of credit with the new Regions loan, however, Defendant failed to close the Wells Fargo line of credit and instead continued to use the Wells Fargo line of credit and Wells Fargo credit'card, incurring additional LLC debt for which Plaintiff, as guarantor, was liable.
• Defendant used the LLC’s Wells Fargo credit card to purchase $3,405.69 of gas for Defendant’s personal car use.
• Defendant caused the LLC to make ' $2,000 in distributions to Defendant that were not authorized under the LLC agreement. Specifically, Plaintiff argues that under paragraph 5.02 of the Company Agreement, distri-[407]*407buttons of cash to members are allowable only after both members have approved such distributions and only if there is excess cash available after considering current and anticipated company needs.1 Plaintiff asserts that the members never met to (i) approve any of the distributions Defendant made to himself, or (ii) make the required determinations that excess cash was available for such distributions. In addition, Plaintiff points out that Defendant made distributions only to himself and not to both Plaintiff and Defendant in accordance with their respective Percentage Interests.
• When the LLC paid off the Wells Fargo line of credit with the Regions loan proceeds, according to the LLC’s general ledger, $25,000 was deposited from Regions bank on August 17, 2007, and $23,500 was withdrawn on August 20, 2007 to “Pay down Line of Credit” with Wells Fargo. Pl.’s Ex. 7. But the general ledger specifically identified only $15,374 owed to Wells Fargo as of the payoff date, thus leading to a discrepancy in the amount of $8,126 ($23,500 — $15,374) that Defendant has never been able to explain.
• Defendant made daily bank deposits from cash ' sales in even dollar amounts, which — according to Plaintiff-suggested that Defendant was not depositing all of the daily cash sales.
• Even though Plaintiff had no prior sandwich-shop experience, sales increased after Plaintiff took over operations of Earl’s Deli, leading Plaintiff to suspect that Defendant had underreported sales and pocketed the difference.

Plaintiff managed Earl’s Deli, for three ’ and a half years, from January 2009 through August 2012, without the need to use or obtain additional credit from Regions or Wells Fargo. While Plaintiff was managing Earl’s Deli, the LLC made additional distributions to Defendant in the aggregate amount of $5,705 (which was greater than the initial $2,000 of distributions made while Defendant was manager). See Pl.’s Ex. 7, Earl’s Deli, LLC General Ledger. When asked why Plaintiff allowed the LLC to make such additional distributions to Defendant after Plaintiff assumed the day-to-day operations , of Earl’s Deli, Plaintiff testified — questionably — that he wasn’t going .to “wrestle” Defendant, and he didn’t know how he could have stopped Defendant from taking ‘the distributions.

Earl’s Deli finally closed in August 2012 when RWJ, controlled by Plaintiff, changed the locks and evicted the LLC for failure to pay its rent obligations for the previous four years. The parties stipulate that (i) Plaintiff sued Defendant in the 352 nd Judicial District Court of Tarrant County, Texas (the “State Court”), (ii) the State Court case proceeded to a non-jury trial.in January 2014, (iii) the State Court rendered a now-final judgment for Plaintiff in the amount of $24,271.23, plus costs, and [408]*408(iv) the State Court did not make any findings of fact or conclusions of law when entering its judgment.

Defendant filed a Chapter 7 petition on July 11, 2014 and has since received his discharge. On November 7, 2014, Plaintiff filed this adversary proceeding timely under 11 U.S.C. § 523

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Bluebook (online)
541 B.R. 404, Counsel Stack Legal Research, https://law.counselstack.com/opinion/johnson-v-king-in-re-king-txnb-2015.