605 B.R. 62
Bankr. E.D. Va.2019Background
- Debtors William K. Matkins and Bay Rivers Industrial entered a factoring agreement with Commercial Cash Flow (Beach Commercial); Matkins signed a continuing guaranty personally guaranteeing Bay Rivers’ obligations.
- Bay Rivers sold invoices to Beach Commercial; Beach paid 81% down for purchased invoices and obtained title to proceeds, with contractual provisions requiring Bay Rivers to hold customer payments in trust and remit them immediately.
- On June 27, 2017 Bay Rivers sold three Huntington Ingalls invoices that had not actually been delivered; an Authorization to Sell (ATS) bearing Matkins’s signature stamp certified delivery and customer satisfaction.
- Bay Rivers also sold three Glotech invoices; when Glotech paid by a paper check in August 2017 (the “Glotech Check”), Matkins deposited the check into a Chesapeake Bank account and used the funds instead of delivering them to Beach Commercial.
- Beach Commercial sued Matkins to except the guarantied debt from discharge under 11 U.S.C. §§ 523(a)(2)(A) (fraud) and 523(a)(4) (fiduciary defalcation/embezzlement); trial resulted in findings that the Huntington Ingalls invoice sale was a knowing/ reckless misrepresentation and the Glotech deposit was fiduciary defalcation. Court calculated nondischargeable amount of $174,149.42 (excludes later attorney’s fees pending separate submission).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether representations on the June 27, 2017 ATS (that Huntington Ingalls received goods) render the guarantied debt nondischargeable under § 523(a)(2)(A) | Beach Commercial: ATS contained express false representations known (or recklessly believed) by Matkins/Bay Rivers and induced the purchase, causing loss | Matkins: he did not personally complete or review that ATS; bookkeeper used his stamp; Beach Commercial knew Bay Rivers’ cash problems, so reliance was unjustified | Court: Matkins liable (agency/principal binds him); misrepresentation was reckless/intentional, Beach Commercial’s reliance was justifiable; debt for Huntington Ingalls invoices nondischargeable under § 523(a)(2)(A) |
| Whether deposit/use of the Glotech Check constitutes fiduciary defalcation under § 523(a)(4) | Beach Commercial: Factoring Agreement created an express trust; Bay Rivers held proceeds as trustee but deposited/spent funds — constituting defalcation | Matkins: deposited expecting to repay; Bay Rivers’ financial distress excused action; he lacked fraudulent intent | Court: Factoring Agreement created an express trust (title to proceeds passed to Beach Commercial; duties to restrict/use/segregate proceeds); Matkins (aware of duties) consciously disregarded and spent funds — fiduciary defalcation established; debt nondischargeable under § 523(a)(4) |
| Whether Matkins is personally liable under his guaranty for Bay Rivers’ fraud/defalcation | Beach Commercial: Guaranty covers all obligations; guarantor is liable for company’s breaches and misrepresentations/defalcation caused by him | Matkins: contests characterization and mental state; points to delegation (bookkeeper) and cash-flow context | Court: Guaranty binds Matkins; Matkins’ own conduct (signature, deposit of Glotech Check) and agency principles attribute company’s wrongful acts to him — personal nondischargeable liability upheld |
| Amounts nondischargeable and permissible post-purchase charges (fees/interest) | Beach Commercial: seeks principal invoice amounts plus 1% late fees, 3% APR interest, and attorney fees totaling $191,097.55 | Matkins: disputes amounts and some asserted fees; contests dischargeability | Held: Court awarded full face value of Huntington Ingalls ($134,879.14) and Glotech invoices ($34,921.70), 1% late fees ($1,698.01), and contractual 3% APR interest ($2,650.57) — total $174,149.42; attorney fees deferred for later determination |
Key Cases Cited
- Gleason v. Thaw, 236 U.S. 558 (U.S. 1915) (exceptions to discharge construed narrowly in favor of debtor)
- Grogan v. Garner, 498 U.S. 279 (U.S. 1991) (burden: preponderance of the evidence for nondischargeability under § 523)
- Field v. Mans, 516 U.S. 59 (U.S. 1995) (justifiable reliance standard is less demanding than reasonable reliance)
- Bullock v. BankChampaign, N.A., 569 U.S. 267 (U.S. 2013) (defalcation requires knowledge or gross recklessness as to fiduciary misconduct)
- Kubota Tractor Corp. v. Strack, 524 F.3d 493 (4th Cir. 2008) (analysis of express trust/fiduciary status for § 523(a)(4))
- Airlines Reporting Corp. v. Ellison, 296 F.3d 266 (4th Cir. 2002) (personal guaranty can render guarantor liable for corporate fiduciary defalcation)
- Husky Int’l Elecs., Inc. v. Ritz, 136 S. Ct. 1581 (U.S. 2016) (actual fraud under § 523(a)(2)(A) can include fraudulent transfers even without an express misrepresentation)