577 B.R. 513
Bankr. E.D. Ky.2017Background
- Richard Pearl (debtor) and Richard Feldman (plaintiff) were co-owners of Riverfront Diet Clinic, Inc. (RDC); business failed and litigation followed. Feldman filed three proofs of claim and sued to except certain debts from Pearl’s Chapter 13 discharge.
- Feldman alleged (1) a $50,000 loan from Pearl that was actually funds taken from RDC, and (2) approximately $283,821.77 in unauthorized/disproportionate withdrawals by Pearl from RDC. Feldman asserted nondischargeability under 11 U.S.C. § 523(a)(2), (4), and (6).
- Relevant factual disputes: no written loan agreement; Sirgo (attorney) wrote the $50,000 check at Pearl’s direction; Feldman (and his company DDI) later repaid $50,000 to Pearl; RDC paid DDI substantial sums (purportedly as a 6% fee and additional payments).
- The parties had informal arrangements: Feldman owned two-thirds of RDC after 2013; DDI (Feldman’s company) provided services to RDC without a written contract; bookkeeping practices and payment routing were informal and contested.
- At trial the court credited testimony that many RDC payments to DDI were intended to compensate Feldman; Feldman failed to treat corporate/person distinctions consistently. Pearl’s memory issues affected his testimony but did not supply proof of fraud or embezzlement.
- Court dismissed Feldman’s claims with prejudice, concluding Feldman failed to prove (a) a cognizable personal injury from the $50,000 loan and (b) fraud/embezzlement/willful malicious injury supporting nondischargeability for the alleged RDC withdrawals.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Feldman proved a $50,000 fraud-based debt owed personally by Pearl | Feldman: Pearl obtained $50,000 from RDC and fraudulently caused Feldman to repay Pearl rather than RDC, so Pearl owes Feldman $50,000 | Pearl: He personally loaned Feldman $50,000 (not RDC), and Feldman and DDI repaid him; Feldman suffered no personal pecuniary loss | Held: Feldman failed to prove common-law fraud or injury; no enforceable $50,000 fraud debt against Pearl |
| Whether payments to Pearl constituted unauthorized withdrawals creating a debt to RDC (asserted by Feldman as assignee) under §523(a)(2) (fraud) | Feldman: Sum of checks to Pearl exceeded payments to Feldman by ~$283k, evidencing fraud/unauthorized withdrawals owed to RDC (assigned to Feldman) | Pearl: Payments to DDI must be considered; many DDI payments were effectively compensation to Feldman; no proof of fraudulent misrepresentations | Held: Feldman failed to plead or prove state-law fraud or that a debt existed for fraud; §523(a)(2) claim fails |
| Whether alleged withdrawals constitute conversion/embezzlement under §523(a)(4) | Feldman: Disparate withdrawals equate to conversion/embezzlement of corporate funds, creating a nondischargeable debt | Pearl: Payments to DDI and informal arrangements negate proof of deceitful appropriation; no evidence of fraudulent intent to appropriate funds | Held: Conversion/embezzlement not established; no debt proven to be nondischargeable under §523(a)(4) |
| Whether alleged withdrawals are a willful and malicious injury under §523(a)(6) | Feldman: Pearl’s conduct caused RDC loss and was intentional/malicious | Pearl: At worst negligent/reckless bookkeeping and informal payments; no evidence Pearl intended injury to RDC | Held: No proof of actual intent to cause injury; §523(a)(6) claim fails |
Key Cases Cited
- Grogan v. Garner, 498 U.S. 279 (establishing burden and two-step analysis for nondischargeability: existence of debt under state law, then federal §523 analysis)
- Kawaauhau v. Geiger, 523 U.S. 57 (willful and malicious standard requires actual intent to cause injury)
- Markowitz v. Campbell, 190 F.3d 455 (discussing §523(a)(6) willful and malicious requirement)
- Brady v. McAllister, 101 F.3d 1165 (defining elements for §523(a)(2)(A) fraud-based nondischargeability)
- Norwich v. Norwich, 459 S.W.3d 889 (Ky. 2015) (fraud requires clear and convincing proof under Kentucky law)