535 B.R. 243
Bankr. E.D. Tenn.2015Background
- Jenkins and J & S formed a partnership with Schmank (J & S General Contractors) to build a fixed‑price log home for Duff Development in April 2008; profit split was 50/50 and the contract required a dual‑signature partnership bank account.
- Jenkins advanced Schmank $13,500 (April 25, 2008) as an offset against Schmank’s share of profits; Schmank deposited $11,500 into a personal account and used funds for living expenses.
- Duff issued a $23,000 progress payment for the “dry‑in” payable to “Log Home Builders”/Integrity Log Homes (Schmank’s business); Schmank deposited it into an Integrity account and immediately withdrew $10,000 to himself and $9,500 into his personal account.
- Jenkins later paid additional sums to subcontractor Vance Stephens to keep work progressing after discovering payment issues; Jenkins filed suit and Schmank later filed Chapter 7 bankruptcy.
- Plaintiffs alleged nondischargeability under 11 U.S.C. §§ 523(a)(2)(A), (4), (6) based on fraud, embezzlement/defalcation in a fiduciary capacity, and willful and malicious injury; court found liability only for diversion of the $23,000 (total nondischargeable judgment $11,500).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the $13,500 advance is nondischargeable as obtained by fraud (§ 523(a)(2)(A)) | Jenkins: Schmank misrepresented intended use and induced the advance | Schmank: disclosed his need and used funds as represented for living/expenses | Denied — no material misrepresentation about the advance; dischargeable |
| Whether the $23,000 Duff payment was misappropriated (fraud/false pretenses) and nondischargeable (§ 523(a)(2)(A)) | Jenkins: Schmank caused payment to be made to his entity and diverted funds, misrepresenting that Stephens had been paid | Schmank: acted as subcontractor and entitled to profit; payments to subcontractor permitted by contract | Granted in part — $11,500 nondischargeable for fraud/false pretenses (proximate loss $10,000; additional $1,500 under alternate theories) |
| Whether diversion constitutes embezzlement/defalcation in a fiduciary capacity (§ 523(a)(4)) | Jenkins: partnership imposed fiduciary duties; directing payment to Integrity and using funds personally breached duty and shows fraudulent intent | Schmank: asserted subcontractor right and entitlement to funds | Granted — elements of embezzlement/defalcation proven as to $11,500 |
| Whether the diversion was willful and malicious (§ 523(a)(6)) | Jenkins: intentional conversion of partnership funds causing legal injury | Schmank: claimed entitlement as subcontractor; contends no intent to injure | Partly granted — court found willful and malicious conversion of $11,500 but declined additional damages beyond those awarded under other theories |
Key Cases Cited
- Grogan v. Garner, 498 U.S. 279 (preponderance standard for nondischargeability)
- Rembert v. AT & T Universal Card Servs., 141 F.3d 277 (6th Cir.) (elements for § 523(a)(2)(A) fraud/false pretenses)
- Mellon Bank v. Vitanovich (In re Vitanovich), 259 B.R. 873 (B.A.P. 6th Cir.) (actual fraud broader than misrepresentation; schemes to cheat)
- Kawaauhau v. Geiger, 523 U.S. 57 (willful means deliberate intent to cause injury under § 523(a)(6))
- Markowitz v. Campbell (In re Markowitz), 190 F.3d 455 (6th Cir.) (subjective intent test for willful and malicious)
- Brady v. McAllister (In re Brady), 101 F.3d 1165 (6th Cir.) (definition and elements of embezzlement under § 523(a)(4))
- Patel v. Shamrock Floorcovering Servs., Inc. (In re Patel), 565 F.3d 963 (6th Cir.) (defalcation: elements for fiduciary breach under § 523(a)(4))
- Bucci v. Board of Trustees (In re Bucci), 493 F.3d 635 (6th Cir.) (scope of express/technical trust for defalcation)
- Cohen v. de la Cruz, 523 U.S. 213 (attorney’s fees may be included in nondischargeable claim if authorized by underlying law)