599 B.R. 838
Bankr. D. Md.2019Background
- Joshua Matthews founded Bulk Head Brewing Company (BHB); BHB never opened and failed. Matthews filed Chapter 7 in June 2017.
- Scott and Leah Crocker invested $36,000 (Aug 2016) and $16,000 (Sept 2016) in BHB and later Scott guaranteed a $100,000 Howard Bank loan (Jan 2017); Scott paid $98,560.13 to satisfy the guaranty. Total Crocker loss: $150,560.13.
- Crockers sued Matthews in an adversary proceeding seeking a §523(a)(2) determination that their losses (equity investments and guaranty payment) were nondischargeable as obtained by false representations about BHB’s liabilities to landlord and general contractor (Domco) and BHB’s licensing status.
- At trial the court found many communications were oral or informal, documentary evidence sparse (investments evidenced only by check memos), and Matthews lacked business experience but did not divert funds for personal use.
- The court made factual findings that (i) Matthews did not make intentional misrepresentations to induce the investments about licenses, (ii) oral statements about liabilities were either not made in writing or not made with intent to deceive, and (iii) Howard Bank knew BHB was a startup needing buildout funds when it made the loan.
- Court concluded the Crockers failed to prove the required elements of §523(a)(2) and denied nondischargeability; Matthews received a Chapter 7 discharge on November 15, 2017.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Are the Crockers’ equity investments ($36k and $16k) nondischargeable under §523(a)(2) due to false statements about landlord/Domco liabilities and licenses? | Crockers: Matthews misrepresented liabilities and licensing status, creditors relied and lost investment. | Matthews: Statements were oral or estimates, not written financial statements; no intent to deceive; funds used for legitimate start‑up operations. | Denied — investments dischargeable: plaintiffs failed to prove written, materially false statements with intent and reasonable reliance as required by §523(a)(2). |
| Do oral statements about BHB’s liabilities/register status fall within §523(a)(2)(B) (written financial statement requirement)? | Crockers: statements about single assets/liabilities affect financial condition and thus triggered §523(a)(2)(B). | Matthews: §523(a)(2)(B) requires a written statement about financial condition when the debtor is an insider; statements were oral. | Held: Lamar requires that statements "respecting" financial condition may include single assets, but §523(a)(2)(B) applies only to written statements; the relevant statements were oral so exception fails. |
| Is Scott Crocker subrogated to Howard Bank’s nondischargeability claim (re guaranty payment) and can he assert misrepresentations in loan docs? | Crocker: boilerplate loan representations to bank misrepresented licenses; by subrogation he can enforce bank’s nondischargeability claim against Matthews. | Matthews: Boilerplate representations were understood in context of a start‑up; bank knew buildout/licensing contingent on inspections; no bank reliance shown. | Denied — even assuming subrogation, no actionable misrepresentation to Howard Bank; bank aware BHB was not operating and loan purpose was completion of buildout. |
| Can Leah Crocker prevail on nondischargeability for her equity investments? | Leah: joined claim as co‑investor and investor spouse. | Matthews: Leah had minimal contact, did not testify, no evidence she relied on any representation. | Denied — no evidence Leah relied on any representation; claim not proven by preponderance. |
Key Cases Cited
- Kawaauhau v. Geiger, 523 U.S. 57 (1998) (exceptions to discharge are narrowly construed to protect fresh start)
- Lamar, Archer & Cofrin v. Appling, 138 S. Ct. 1752 (2018) (a statement about a single asset or liability can "respect" financial condition under §523(a)(2)(B))
- Grogan v. Garner, 498 U.S. 279 (1991) (creditor bears the burden of proving nondischargeability by a preponderance of the evidence)
- Nunnery v. Rountree (In re Rountree), 478 F.3d 215 (4th Cir. 2007) (elements of §523(a)(2)(A): false representation, knowledge, intent, justifiable reliance, proximate cause)
- Engler v. Van Steinburg (In re Van Steinburg), 744 F.2d 1060 (4th Cir. 1984) (written financial statements requirement under §523(a)(2)(B) covers statements "respecting" financial condition)
- Blackwell v. Dabney (In re Blackwell), 702 F.2d 490 (4th Cir. 1983) (oral representations about an insider corporation’s financial condition are outside §523(a)(2)(B) and cannot bar discharge)