585 B.R. 465
Bankr. E.D. Tenn.2018Background
- Defendant (sole owner/president of T G International, Inc. (TGI)) pleaded guilty to importing military machinegun barrels by false statements to ATF; ATF seized large quantities of TGI inventory in late 2009.
- Plaintiffs (Carl Lansden, Robert “Butch” Cash, and Hugh Lansden) had loaned TGI substantial sums (2005–2009). After the ATF seizure, parties negotiated an Inventory in Satisfaction of Debt Agreement (ISDA, Apr. 29, 2010) under which TGI/Defendant transferred specified inventory (Delivered, ARMACO in Hungary, and FTZ in Washington) and a separate premium inventory to satisfy debts.
- The ISDA represented the ARMACO and FTZ inventories as “unencumbered,” nominated Waffen Werks as Plaintiffs’ importer/agent, and included a release provision and an attorneys’ fees clause; Defendant signed both individually and for TGI.
- In fact the ARMACO inventory was subject to ARMACO’s claims (unpaid invoices, storage, demil costs) and ultimately seized by Hungarian authorities; FTZ inventory was subject to a recorded NWI chattel lien and Citizens National Bank had a blanket UCC lien on TGI inventory.
- Plaintiffs never received the ARMACO inventory or the premium inventory; they partially obtained FTZ inventory after paying costs. Plaintiffs sued in state court; Defendant later filed bankruptcy and Plaintiffs commenced this adversary to except ISDA-related debt from discharge under 11 U.S.C. § 523(a)(2)(A).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether loans to TGI (2005–2009) are nondischargeable under § 523(a)(2)(A) | Lansden/Cash: debts were procured by Defendant's fraud; nondischargeable | Snodgrass: loans were to TGI (corporate), not him personally; ISDA re-obligated debt | Court: original loans (to extent not re-obligated by ISDA) were discharged March 16, 2015; analysis focuses on ISDA |
| Whether the ISDA was procured by false pretenses/false representations/actual fraud | Plaintiffs: ISDA falsely represented inventory as unencumbered and misled re: importability; reliance caused loss | Defendant: Plaintiffs assumed risk; he lacked fraudulent intent and may have been unaware of some liens | Court: ISDA false as to ARMACO and FTZ encumbrances and ATF/importability; Defendant acted with fraudulent intent; but reliance differs by inventory category |
| Whether Plaintiffs justifiably relied and whether reliance proximately caused losses | Plaintiffs: reasonably relied on ISDA statements and Forms 6; would not have agreed if aware of liens/illegal barrels | Defendant: Plaintiffs (and their agent) knew or should have known of encumbrances/costs; Plaintiffs waived or assumed risks | Court: Reliance was justifiable and proximate for the ARMACO inventory (nondischargeable); reliance was not justifiable as to FTZ inventory (dischargeable) because Plaintiffs/agent had notice of FTZ liens/costs |
| Remedies: money judgment, attorneys’ fees, punitive damages, allocation | Plaintiffs: seek $1,276,536.41 + interest, attorneys' fees, punitive damages | Defendant: challenges amounts, mitigation, waiver of fee claims | Court: Awards compensatory damages total $1,458,501.97; finds $800,626.97 (ARMACO $615,000 + Premium $185,626.97) nondischargeable under § 523(a)(2)(A) (allocated among Plaintiffs); FTZ-related $657,875 discharged; attorneys’ fees under ISDA allowed (Lucas $100,000 awarded; additional fees for this adversary to be submitted); punitive damages denied |
Key Cases Cited
- Grogan v. Garner, 498 U.S. 279 (statutory burden and standard for § 523(a)(2)(A) claims)
- Rembert v. AT & T Universal Card Servs., Inc., 141 F.3d 277 (6th Cir.) (§ 523 intent standard; construe exceptions narrowly in favor of debtor)
- Brady v. McAllister, 101 F.3d 1165 (6th Cir.) (benefits-theory: debtor may be liable where he controlled/benefitted from corporation receiving creditor’s funds)
- United States v. Keefer, 799 F.2d 1115 (6th Cir.) (materiality test for misrepresentations: tendency to influence creditor’s decision)
- Husky Int'l Elecs., Inc. v. Ritz, 136 S. Ct. 1581 (actual fraud under § 523(a)(2)(A) can include schemes effected without a false representation)