509 B.R. 915
Bankr. E.D. Mo.2014Background
- Debtors Debra A. Keogh (President/GM of Fleming) and Harold P. Keogh filed Chapter 7 on June 29, 2012; Fleming sued to except certain debts from discharge (or revoke discharge).
- From 2002–2004 Fleming faced severe financial stress; Debra had signatory control over Fleming bank accounts and oversight of payroll, AR/AP, hiring and operations.
- In 2003 Debra hired and paid multiple family members and an on‑and‑off employee (Jennifer Cunningham) on inflated or falsified time sheets, used cash withdrawals and third parties to cash company checks, and caused payments she later claimed were commissions.
- Debra obtained and misappropriated Fleming proprietary materials (three external hard drives and numerous technical drawings/catalog entries), then formed competing entities (Innovative, then IMC) and used those materials at the new companies.
- Fleming recovered some drawings and $170,000 from insurance; Fleming sought nondischargeability under 11 U.S.C. §§ 523(a)(2)(A), (a)(2)(B), (a)(4), (a)(6) and revocation under § 727(a)(3).
- The court found pervasive self‑dealing, unexplained cash diversions, embezzlement and larceny by Debra, but declined to find actionable fraud by misrepresentations to obtain credit or the higher standard of willful and malicious injury for § 523(a)(6). Judgment for $173,795.63 (nondischargeable) against Debra only.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether debt is nondischargeable under § 523(a)(2)(A) (fraud/false pretenses) | Debra obtained money/property by fraudulent misrepresentations and false pretenses (payments and diversions). | Debra contends payments were for legitimate work/efforts to keep Fleming afloat; no tailored false representations to obtain credit. | Denied — Fleming failed to show Debra made misrepresentations to obtain debts fitting § 523(a)(2)(A). |
| Whether debt is nondischargeable under § 523(a)(2)(B) (false written financial statements) | Debra used materially false written statements respecting financial condition to obtain credit. | Debra did not submit false written financial statements to obtain credit from Fleming. | Denied — no materially false writing used to obtain credit as required by § 523(a)(2)(B). |
| Whether debt is nondischargeable under § 523(a)(4) (fiduciary fraud/defalcation, embezzlement, larceny) | Debra, as an insider/officer, breached fiduciary duties, embezzled funds, and larcenously took drawings; those debts are nondischargeable. | Debra argued actions were attempts to preserve business and that some payments were legitimate. | Granted in part for Debra under § 523(a)(4): court finds a technical fiduciary relationship, defalcation (self‑dealing), embezzlement of funds, and larceny of drawings; nondischargeable as to Debra only. Harold Keogh not held liable. |
| Whether debt is nondischargeable under § 523(a)(6) (willful and malicious injury) | Debra’s conduct was intentional and caused certain, foreseeable harm (misappropriation and diversion). | Debra maintains some acts were intended to keep Fleming solvent; no specific intent to maliciously injure. | Denied — court finds acts willful but not shown to be malicious under § 523(a)(6). |
Key Cases Cited
- Field v. Mans, 516 U.S. 59 (1995) (justifiable reliance standard considers creditor’s characteristics and circumstances)
- Kawaauhau v. Geiger, 523 U.S. 57 (1998) (§ 523(a)(6) requires intent to cause injury, not just intentional act)
- Grogan v. Garner, 498 U.S. 279 (1991) (burden of proof and nondischargeability general principles)
- In re Maurer, 256 B.R. 495 (8th Cir. BAP 2000) (elements for fraud under § 523(a)(2)(A))
- First Nat. Bank of Olathe v. Pontow (In re Pontow), 111 F.3d 604 (8th Cir. 1997) (reasonableness and red flags under § 523(a)(2)(B))
- Bullock v. BankChampaign, N.A., 133 S. Ct. 1754 (2013) (defalcation requires culpable state of mind: knowledge or gross recklessness)
- In re Nail, 680 F.3d 1036 (8th Cir. 2012) (fiduciary status under § 523(a)(4) is question of federal law)
- In re Thompson, 686 F.3d 940 (8th Cir. 2012) (trust/fiduciary requirements and narrow construction of § 523(a)(4))