622 B.R. 178
Bankr. D. Md.2020Background
- Management Agreement (Mar. 1, 2014) made Robert G. Cockey II the exclusive operator of a Baltimore tavern; it stated "All profits shall inure to the benefit of the [Debtor]" but did not define "profits."
- Gough Street Liquor, LLC (owned by Popescu) owned the liquor license and leased the premises; Gough Street and Popescu had rights to audit books and receive monthly sales tax returns.
- Debtor ran the business as his first post‑college job, opened operating and payroll bank accounts (Debtor sole authorized signer), deposited tavern receipts there, paid many business expenses but did not pay all rent/triple‑net and used some operating funds for personal purchases.
- Plaintiffs sued in bankruptcy adversary proceeding claiming nondischargeability under 11 U.S.C. § 523(a)(2) (fraud/false representation) and § 523(a)(4) (embezzlement and larceny); Debtor consented to partial summary judgment fixing damages at $82,998.84.
- At trial the Court found Cockey a credible witness, concluded Plaintiffs failed to prove fraudulent intent or wrongful appropriation, and entered judgment for the Debtor (debt dischargeable).
Issues
| Issue | Plaintiff's Argument (Popescu) | Defendant's Argument (Cockey) | Held |
|---|---|---|---|
| Whether debt is nondischargeable under §523(a)(2) for false representations/actual fraud | Cockey signed and later promised to pay expenses but did not intend to perform; promises were false and induced reliance | He intended to perform, substantially performed, and lacked fraudulent intent; Plaintiffs had access to books and knew of unpaid items | Court: No §523(a)(2) — Plaintiffs failed to prove false representation, fraudulent intent, or justifiable reliance |
| Whether funds used for personal expenses constitute embezzlement under §523(a)(4) | Debtor appropriated operating funds for personal use before paying business expenses, showing fraudulent intent | Debtor reasonably believed he was entitled to use "profits" (term undefined); uses were open, some payments made, purpose to benefit himself/business not to defraud | Court: No embezzlement — Plaintiffs failed to prove fraudulent intent or that funds were misappropriated rather than legitimately used under a reasonable interpretation of "profits" |
| Whether retention of a purchased gun (bought with operating funds) constitutes larceny under §523(a)(4) | Even if purchase was business related, later personal retention without repayment is larceny | Initial taking was lawful as operator; purchase was for business safety; no malicious or fraudulent intent shown | Court: No larceny — original possession lawful and no fraudulent intent shown |
Key Cases Cited
- Nunnery v. Rountree (In re Rountree), 478 F.3d 215 (4th Cir. 2007) (exceptions to discharge construed narrowly to preserve debtor's fresh start)
- Palmacci v. Umpierrez, 121 F.3d 781 (1st Cir. 1997) (elements of fraud for §523(a)(2) and burden on creditor)
- Grogan v. Garner, 498 U.S. 279 (1991) (preponderance standard applies to nondischargeability claims)
- Miller v. J.D. Abrams, Inc. (In re Miller), 156 F.3d 598 (5th Cir. 1998) (embezzlement requires fraudulent appropriation and intent)
- Bullock v. BankChampaign, N.A., 569 U.S. 267 (2013) (importance of wrongful intent element for defalcation/embezzlement/larceny)