509 B.R. 773
Bankr. D. Mass.2014Background
- Reiss and BetterBuilt Construction LLC (50/50 members) sue McQuillin in a Chapter 7 case for nondischargeability under 11 U.S.C. § 523(a)(2)(A) and (a)(4) based on alleged self-dealing and embezzlement.
- McQuillin, as co-manager, handled BetterBuilt’s books and disbursements from 2006 onward without informing Reiss of unequal distributions.
- Operating Agreement required equal distributions to members and majority consent; with two equal members, decisions required agreement.
- Construction of a Lynnfield, MA spec house funded by loans; later insolvency and foreclosure left BetterBuilt insolvent.
- McQuillin made several unauthorized and inequitable distributions to himself (largely via Green Scenes), and used BetterBuilt funds or credit for personal or Green Scenes-related expenses.
- Reiss discovered the misappropriations by reviewing BetterBuilt’s records and banking statements and sought relief in the adversary proceeding.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether embezzlement under § 523(a)(4) is proven. | Reiss; embezzlement from BetterBuilt funds. | McQuillin; he contends either ownership or lack of fraudulent intent. | Yes; embezzlement proven with fraudulent intent. |
| Whether defalcation while acting in a fiduciary capacity applies. | Reiss — fiduciary duty existed as a close LLC; defalcation occurred. | McQuillin — argues no defalcation. | Yes; defalcation found alongside embezzlement. |
| Whether a false representation under § 523(a)(2)(A) applies. | Reiss seeks additional basis via omission; misrepresentation to cause reliance. | McQuillin disputed reliance or material misrepresentation. | Not addressed as separate basis; overpayment issue specifically found under § 523(a)(2)(A) for the Stoneham loan. |
| Whether McQuillin’s overpayment of interest to Stoneham and related misstatements are non-dischargeable. | Reiss relied on disclosures; overpayments caused damage. | McQuillin disputes duty to disclose and amount. | Yes; overpayment liability excepted from discharge under § 523(a)(2)(A). |
| Whether any liability for overpricing the home is nondischargeable. | Possible breach of fiduciary duty. | Not proven to meet the defalcation or embezzlement threshold. | Not nondischargeable; overpricing not covered. |
Key Cases Cited
- Palmacci v. Umpierrez (In re Palmacci), 121 F.3d 781 (1st Cir. 1997) (fraud may be inferred from circumstantial evidence)
- In re Sherman, 603 F.3d 11 (1st Cir. 2010) (defines embezzlement for § 523(a)(4))
- Rutanen v. Baylis (In re Baylis), 313 F.3d 9 (1st Cir. 2002) (defalcation standard; fiduciary duties under bankruptcy)
- Donahue v. Rodd Electrotype Co. of New England, Inc., 367 Mass. 578, 328 N.E.2d 505 (Mass. 1975) (duty of good faith among close corporations/LLCs)
- Pointer v. Castellani, 455 Mass. 537, 918 N.E.2d 805 (Mass. 2009) (close corporation fiduciary duties under MA law)
- Bullock v. BankChampaign, N.A., 569 U.S. 267, 133 S. Ct. 1754 (2013) (defalcation standard; moral turpitude/intent required)
- In re Spadoni, 316 F.3d 56 (1st Cir. 2003) (reliance and justified reliance in § 523(a)(2)(A))
- In re Spigel (McCrory v. Spigel), 260 F.3d 27 (1st Cir. 2001) (elements of fraud under § 523(a)(2)(A))
- In re Fahey, 482 B.R. 678 (1st Cir. BAP 2012) (treatment of fiduciary relationships under § 523(a)(4))