607 B.R. 614
Bankr. W.D. Ky.2019Background:
- In Sept. 2015 Bowman, Koressel, and Hole formed Agape Cremation & Funeral Center, LLC; each was a one-third member and Bowman was named managing member with authority over day-to-day operations and a duty to obtain co‑consent for transactions above $2,500/$5,500.
- Koressel contributed $25,000 and lent $15,000 each to Bowman and Hole (total $55,000); $36,800 was spent on renovations, leaving Koressel with an out‑of‑pocket contribution of $43,800 after partial reimbursements.
- Bowman controlled Agape’s bank accounts, moved funds into other accounts (some owned by third parties), commingled and used Agape funds for personal expenses, and caused large payments/distributions to Hole and himself while Koressel received no distributions.
- Bowman concealed financial information, excluded Koressel from meetings, sold his personal vehicle to Agape to divert funds and reconveyed it later, and allowed Agape’s license/lease to lapse; Koressel obtained related state and bankruptcy judgments against Hole.
- Bowman filed Chapter 13 (Sept. 30, 2017); plaintiffs sued under §523 and §727. The court held §727 inapplicable to Chapter 13 and, after trial, found Bowman committed embezzlement under 11 U.S.C. §523(a)(4), entering a non‑dischargeable judgment of $36,266.67 in favor of Koressel.
Issues:
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Applicability of §727 (deny discharge entirely) | Koressel: Bowman concealed/removed assets and falsified records, warranting denial of discharge under §727 grounds | Bowman: underlying case is Chapter 13; §727 inapplicable | Court: §727 does not apply in Chapter 13; analysis limited to §523 claims |
| Whether debt is nondischargeable as embezzlement under §523(a)(4) | Koressel: Bowman was entrusted with Agape funds as manager, misappropriated them for personal use and to benefit Hole, concealed transfers and structured transactions to avoid approval | Bowman: (implicit) disputes characterization as embezzlement; attacks trust/fiduciary theory and may claim transactions were business‑related or authorized | Court: Found all three embezzlement elements satisfied (entrustment, misappropriation, circumstantial evidence of fraud); debt of $36,266.67 to Koressel is nondischargeable under §523(a)(4) |
| Other §523 claims (§523(a)(2) fraud; §523(a)(6) willful/malicious injury) | Plaintiffs alleged fraud and willful/malicious injury as alternative bases | Bowman denied liability under those theories | Court: Did not need to decide those counts because §523(a)(4) embezzlement finding resolved nondischargeability |
Key Cases Cited
- Brady v. McAllister (In re Brady), 101 F.3d 1165 (6th Cir. 1996) (defines embezzlement for §523(a)(4) as fraudulent appropriation of entrusted property)
- In re Patel, 565 F.3d 963 (6th Cir. 2009) ("fiduciary capacity" under §523(a)(4) is construed narrowly as a technical trust)
- Cash Am. Fin. Servs., Inc. v. Fox (In re Fox), 370 B.R. 104 (B.A.P. 6th Cir. 2007) (sets forth three‑element embezzlement test applied in Sixth Circuit decisions)
- PMM Invs., LLC v. Campbell (In re Campbell), 490 B.R. 390 (Bankr. D. Ariz. 2013) (manager’s concealment/misuse of LLC funds supports nondischargeability under §523(a)(4))
- In re Kakareko, 575 B.R. 12 (Bankr. E.D.N.Y. 2017) (court may consider witness credibility when inferring fraudulent intent)