Weiss v. FautzWeiss v. Fautz
1. Overview
By the two counts in this adversary proceeding, the plaintiff seeks a determination that a judgment debt owed him by the defendant chapter 7 debtor is excepted from discharge by operation of
2. Procedural History
On January 19, 2016, Robert R. Fautz (“Fautz” or the “Debtor“) filed a petition for relief under chapter 7 of the Bankruptcy Code. In the case thereby commenced, Fautz has received a discharge under
3. Motion to Amend Complaint to Conform to the Evidence
By this motion, Weiss moves to amend the Amended Complaint to conform to the evidence adduced at trial. The motion is vague in two respects. First, nowhere in the body of this one-page motion does Weiss specify how precisely he is seeking to amend the amended complaint. However, he did file with the motion a proposed second amended complaint, from which it appears that he is requesting that the complaint be deemed amended to include a second basis for excepting part of
The motion is also less than clear as to the basis of the relief it seeks. The one-page motion cites only to
time “to amend the pleadings to conform them to the evidence“) and moves for the form of relief it contemplates.
The parties’ briefing of this motion leaves much to be desired. Their arguments are like “two ships that pass in the night.”3
Under
The Court may find implied consent when the party whose consent is required has actively engaged in, or silently acquiesced to, the trial of the amended claim. See Fustolo v. Patriot Grp., LLC (In re Fustolo), 896 F.3d 76, 84 (1st Cir. 2018). Implied consent may be found when opposing counsel fails to object to the presentation of issues raised that are outside of the pleadings. Id. (citing Conjugal P‘ship v. Conjugal P‘ship, 22 F.3d 391, 400-01 (1st Cir. 1994)). “However, the introduction of evidence directly relevant to a pleaded issue cannot be the basis for a founded claim that the opposing party should have realized that a new issue was infiltrating the case.” Id. (quoting DCPB, Inc. v. City of Lebanon, 957 F.2d 913, 917 (1st Cir. 1992)). While the rule is to be construed liberally, the Court must protect the due process rights of the opposing party and therefore may allow a late amendment only if the non-moving party will not suffer undue prejudice. Id. (citing Campana v. Eller, 755 F.2d 212, 215 (1st Cir. 1985)).
Fautz did not consent expressly to trial of the basis for relief that Weiss now advances. Did he consent implicitly? At trial, Plaintiff‘s counsel made numerous inquiries related to the ownership of the liquor license. He asked Fautz about his representations regarding ownership of the license, Fautz responded to such inquiries, and Weiss clearly testified about his reliance on those representations. Although specific allegations regarding the liquor license did not appear in the amended complaint, Fautz‘s attorney made no objection to them when raised in testimony. This is the precise type of conduct that gives rise to the application of
4. Findings of Fact
The parties first met in the summer of 2006 through a mutual acquaintance when Fautz was looking for someone to invest in a bar he was opening in the Lower East Side of Manhattan. Prior to the parties’ being introduced, Fautz had been presented with the opportunity to purchase a bar that was already in operation. The bar was located at 210-214 Rivington Street in New York City. Fautz planned to take over the space, renovate it, and open a bar called Revolver. On August 4, 2006, Fautz established
Weiss had no previous experience investing in bars or restaurants; rather, he worked as an investment trader. Weiss testified that he had been interested in acquiring an ownership interest in a bar in his neighborhood and therefore was interested in the venture. Fautz had previously owned a “burger joint” and had been involved with operating at least one other bar. Fautz represented to Weiss that he had experience and success in the industry. Because he met Fautz through a mutual friend, Weiss did not perform any independent due diligence into Fautz.
Although Weiss testified that he was concerned because other establishments had failed in that location, he and Fautz initially agreed that Weiss would invest $100,000 in return for a ten percent interest in Silver Revolver. While hesitant, Weiss relied on Fautz‘s experience and enthusiasm in deciding to invest.5 On July 30, 2006, four days after the initial agreement, Weiss stated that he was interested in investing even more than the initial $100,000, but in order to do so he wanted his name to be on the liquor license. Liquor licenses are valuable assets in New York City. Weiss believed that having the liquor license in his name would protect his overall investment. This arrangement with the license was the major contributing factor in Weiss‘s deciding to increase his investment by $50,000.
The parties set about to document their ownership agreement. On July 31st, the day after Weiss indicated his intent to increase his investment by $50,000, the parties executed a document called “Schedule A” to a proposed but not yet executed Shareholders Agreement, and Weiss delivered a deposit check of $10,000. The salient business details of their arrangement were set forth in the first version of the “Schedule A,” which stated that Fautz would own ninety shares with a capital contribution of $600,000 and Weiss would own ten shares with a capital contribution of $100,000. Next, they moved forward on the work needed to finalize Weiss‘s further investment of $50,000. On August 18, 2006,
Fautz sent an email to Weiss requesting information Fautz claimed was needed to put Weiss on the liquor license. Weiss delivered a $90,000 check dated August 21, 2006 completing his initial investment. Importantly, Weiss testified, and I found credible, that during this time the parties had communications confirming they were the only shareholders of the corporation. The Shareholders Agreement was later finalized and executed on August 22, 2006.
On September 5, 2006, Fautz sent Weiss an email stating that Silver Revolver had received a temporary liquor license that listed Weiss as co-owner and confirmed that Silver Revolver would be signing the lease either Thursday or Friday of that week.6 Later that day the parties executed
Fautz does not dispute that he never contributed the full $450,000 as contemplated in the “Schedule A.” However, Fautz does dispute that, as Weiss testified, he stated the $450,000 would come strictly in cash; rather, he testified that he didn‘t even have $450,000 in cash. Fautz testified that he planned to cover up to $150,000 in cash and make up the rest through other investors and through “sweat equity.” He also testified that, in the end, he contributed around $141,000 in cash to the venture, a far cry from $450,000 in cash. Weiss, for his part, claims that he would never have invested had he known that Fautz was not putting up hundreds of thousands of dollars in cash. Weiss
summarized his views as follows: “I‘m never going to give anyone $150,000 and say here, go gamble with my money in a business, but if he‘s putting triple what I‘m putting in, he‘s got skin in the game. It was supposed to be there, and it was never put in.” Tr. Vol. 2, p. 125.
Once he had keys in hand,7 Fautz began substantial renovations in order to build the space into a “lounge” rather than “a gin mill.” This work was performed by an individual named Joseph John Giampa (“Giampa“), who had had previous discussions with Fautz about his investing in Silver Revolver. Giampa testified that he “built the entire place out” without compensation and believed that this was part of his investment in the bar. Fautz testified that he was planning on giving Giampa twenty-five percent of his shares in exchange for $200,000 in renovations, and that this would cover $200,000 of his (Fautz‘s) promised capital contribution. Nothing in the record suggests that this arrangement was ever formalized in writing, but Fautz testified that this resulted in Giampa being an “unofficial” major investor in the bar. Weiss testified, credibly, that he was not aware of these agreements with Giampa at the time he made his investments. Fautz did not testify otherwise. At some point following the opening and after Weiss had delivered his checks, the bar‘s manager informed Weiss that Giampa was also an investor in the venture. This disclosure began a downward spiral in the relationship between Fautz and Weiss.
Weiss and Fautz exchanged numerous emails after Weiss learned that Giampa was an investor. When Weiss questioned Giampa‘s role in the venture, Fautz responded that they needed to discuss Weiss‘s role in the bar. Fautz stated defensively: “This project was funded from day 1, I removed money to make you a part of it. . . I wasn‘t expecting eyes of (sic) my shoulders or a co-operator.” Fautz
followed up with a letter in which he explained that Silver Revolver had still not
Silver Revolver operated from October 2006 until March 2007; it never turned a profit. While Fautz ran the bar, Weiss continued to attempt to understand the corporate structure of Silver Revolver, including by making several requests for a meeting with Giampa. Once the bar ceased operations, Fautz attempted to sell the business, an effort that failed. After a short period he simply turned the keys over to the principal of Silver Revolver‘s sub-lessor, left the state of New York, and moved to Florida.
In September of 2007, Weiss sued Fautz and other entities, including Silver Revolver, in New York state court. The complaint stated counts against Fautz for breach of contract, fraud in the inducement, and unjust enrichment. On June 5, 2009, Weiss obtained a default judgment against Fautz in the amount of $150,000 plus interest at the statutory rate from August 21, 2008 and attorney‘s fees in the amount of $3,000 (the “New York Judgment“). The principal amount of the judgment, $150,000, was based on the amount of Weiss‘s investment in Silver Revolver.
Weiss initially domesticated the New York Judgment in the state of Florida, to which Fautz had moved.8 Seven years later, Fautz also domesticated the judgment in the Massachusetts Superior Court, which, on September 22, 2015, issued a new, Massachusetts judgment in the amount of $285,000 plus statutory interest from May 14, 2015 and costs (the “Massachusetts Judgment“).
5. Jurisdiction
The matter before the Court is a complaint under
of particular debts). This court accordingly has authority to enter final judgment in the matter.
6. Conclusions of Law and Analysis
Under the Bankruptcy Code‘s fresh start policy, the requirements for a discharge are liberally construed in favor of the debtor. See Palmacci v. Umpierrez, 121 F.3d 781, 786 (1st Cir. 1997) (quoting Boroff v. Tully (In re Tully), 818 F.2d 106, 110 (1st Cir. 1987)). All genuine doubts should be resolved in favor of the debtor. Id. Further, a plaintiff bears the burden of production and the burden of proof regarding every element of a
A. 11 U.S.C. § 523(a)(2)(A)
- the debtor made a knowingly false representation, or one made in reckless disregard of the truth,
- the debtor intended to deceive,
- the debtor intended to induce the creditor to rely upon the false statement,
- the creditor actually relied upon the false statement,
- the creditor‘s reliance was justifiable, and
- the reliance upon the false statement caused damage.
Dewitt v. Stewart (In re Stewart), 948 F.3d 509, 520 (1st Cir. 2020) (quoting Sharfarz v. Goguen (In re Goguen), 691 F.3d 62, 66 (1st Cir. 2012). “A false representation is an express misrepresentation.” See McGuinness v. Gannon (In re Gannon), 598 B.R. 72, 82 (Bankr. D. Mass. 2019).
The second element, intent to deceive, may be found if,
the maker of the misrepresentation (a) knows or believes that the matter is not as he represents it to be; (b) does not have the confidence in the accuracy of his representation that he states or implies; or (c) knows that he does not have the basis for his representation that he states or implies.
Stewart, 948 F.3d at 523 (quoting Palmacci, 121 F.3d at 787). The relevant inquiry is the debtor‘s state of mind at the time the representation was made, and, where the representation is a promise, whether the representation was made with either “an intention of reneging on his promise or recklessly disregarding whether or not he would keep his promise.” Id. A trier of fact may infer the requisite intent or recklessness if, based on the totality of the circumstances, the debtor knew or should have known that he was unable to keep his promise. Id. The mere failure to subsequently perform a promise or contractual obligation does not make a debt non-dischargeable if the debtor had a good faith intent to keep his promise. Id. “A dumb but honest defendant does not satisfy the test of scienter.” AT&T Universal Card Servs. Corp. v. Searle, 223 B.R. 384, 390 (Bankr. D. Mass. 1998) (quoting Palmacci, 121 F.3d at 788).
The final four elements embody the requirement that the creditor‘s claim must arise directly from the debtor‘s fraud. See McCrory v. Spigel (In re Spigel), 260 F.3d 27, 32 (1st Cir. 2001). The test under
not reward a debtor for his fraud merely because the creditor could have performed an investigation without any considerable trouble or expense. Sanford Inst. for Sav. v. Gallo, 156 F.3d 71, 75-76 (1st Cir. 1998). The Supreme
Weiss relies on two false representations to except the debt owed to him from Fautz‘s discharge under
i. Fautz‘s Intent to Invest
Weiss argues that Fautz‘s debt should be excepted from discharge under
As to the first of the six requirements of a false representation, that the debtor have made a knowingly false representation, Weiss has satisfied his burden of proof. The parties executed not one “Schedule A,” but three that stated Fautz would be investing no less than $450,000. The ordinary import
of the words used was that Fautz himself would invest cash in this amount, not that he intended to raise capital from himself and others in the stated amount or that some portion of his contribution might be sweat equity. Throughout the initial interactions between Fautz and Weiss, Weiss testified, and I find him credible, that Fautz never hinted that other individuals would be contributing to the equity of Silver Revolver. Weiss understood that Fautz intended to invest cash of no less than $450,000, and Fautz knew that he was creating this understanding in Weiss. The representation, a promise of investment of $450,000, was false, and Fautz knew it to be so each time he made it. Fautz never intended to contribute more than $150,000 in cash, and he never did so. Fautz himself testified that he would never have been able to make such a large investment; rather, he planned to invest around $150,000 in cash while arranging for up to $200,000 to be contributed in the form of Giampa‘s renovations. (Even taken together, $150,000 from Fautz and $200,000 from Giampa would still have fallen materially short of the promised $450,000.)
Weiss has also carried his burden as to the second and third requirements: intent to deceive and intent to induce reliance. Fautz made his representations that he would invest no less than $450,000 with intent to deceive Weiss. His intent to deceive is underscored by his conduct. Fautz worked hard to hide his arrangement with Giampa from Weiss. He repeatedly told Weiss that they would be the only investors in the business; then he asked Weiss not to attend the grand opening, a gathering
Weiss has further carried his burden as to the fourth and fifth requirements, that the creditor actually relied upon the false statement, and that this reliance was justifiable. As Weiss credibly testified, he relied on Fautz‘s representation about the extent of his intended investment when deciding to invest his own money. Weiss would not have made any of his investment, either the first $100,000 or
the subsequent $50,000, had he not thought that Fautz also had “skin in the game.” Moreover, Weiss‘s reliance was reasonable. Weiss had no reason not to take Fautz‘s representations at face value; his deceit was not readily apparent. The standard of justifiable reliance placed Weiss under no obligation to investigate, but it is unclear how he might have investigated had he wanted to. Only Fautz knew and could have known that he did not intend to honor his promise. Weiss has established that his reliance was justifiable. Fields v. Mans, 516 U.S. at 70-72 (reliance is justifiable if the falsity of the representation would not have been readily apparent to the person to whom it was made).
Weiss has also carried his burden as to the sixth requirement: that the reliance upon the false statement caused damage. Weiss was damaged in that, in reliance upon the false representation, he was induced to make both his initial investment of $100,000 and his subsequent investment of $50,000. He was thus parted with $150,000 of his funds, which is damage to him.
Weiss having thus satisfied each of the six requirements, I conclude that Fautz‘s representation concerning the extent of his intended investment was a false representation within the meaning of
ii. Representation as to Liquor License
As an additional basis for excepting a portion of the same debt from discharge under
On July 30, 2006, Weiss told Fautz that he was potentially interested in investing additional funds, provided his name was placed on the liquor license. Weiss believed this would protect his investment. Fautz agreed to those terms and sent an email requesting certain information so that Weiss could be added to the liquor license.
made his second investment, of $50,000, on the basis of the representation; and when the business failed, he did not have the benefit of the liquor license as security and lost his entire investment.
Weiss having thus satisfied each of the six requirements, I conclude that Fautz‘s representation that Weiss‘s name had been placed on the liquor license was a false representation within the meaning of
B. 11 U.S.C. § 523(a)(4)
Section
Section
discharge by
The threshold issue is whether the debtor was acting in a fiduciary capacity. Weiss contends that Fautz was acting in a fiduciary capacity in each instance because he was acting as the majority shareholder and director of a small, closely-held corporation, Silver Revolver, and therefore had fiduciary duties to Weiss as a minority shareholder in the corporation.
Whether a debtor is acting in a fiduciary capacity within the meaning of
The term applies only to relationships arising out of express or technical trusts, and not to trusts that are implied in law as a remedy. As a result, the existence of [a] fiduciar[y] dut[y] alone does not establish fiduciary capacity for purposes of § 523(a)(4), although most courts today recognize that the technical or express trust requirement is not limited to trusts that arise by virtue of a formal trust agreement, but includes relationships in which trust-type obligations are imposed pursuant to statute or common law.
In re Romano, 353 B.R. at 761; see also Davis v. Aetna Acceptance Co., 293 U.S. 328, 333 (1934); Rutanen v. Baylis (In re Baylis), 313 F.3d 9, 17 n.3 (1st Cir. 2002). “The elements of an express trust have traditionally included an explicit declaration of trust, a clearly defined trust res, and an intent to create a trust relationship.” Levitsky v. McPherson (In re McPherson), 564 B.R. 6, 18 (Bankr. D. Mass. 2017) (citing Fahey, 482 B.R. at 687). Technical trusts arise from a statute or common law. See Id. Technical trusts do not include “a trust which the law implies from a contract or a trust imposed as a remedy for wrongdoing.” McPherson v. Marano (In re Marano), 568 B.R. 723, 730 (Bankr. D. Mass. 2017) (citing Davis, 293 U.S. at 333). The definition is construed narrowly but can be informed by principles of state law. Romano, 353 B.R. at 688.
In previous cases involving Massachusetts entities, I have held that members in a limited liability company and shareholders in a close corporation were acting in a fiduciary relationship as that term is used in
Here, the parties do not dispute that the corporation was formed under New York state law. “[C]ases following New York law have in fact found a fiduciary relationship sufficient to meet the threshold question of § 523(a)(4).” Rothman v. Beeber (In re Beeber), 239 B.R. 13, 32 (Bankr. E.D.N.Y. 1999) (citing Ferraro v. Phillips (In re Phillips), 185 B.R. 121, 129-30 (Bankr. E.D.N.Y. 1995); First Nat‘l Bank of Boston v. Overmyer (In re Overmyer), 52 B.R. 111, 118 (Bankr. S.D.N.Y. 1985)). I therefore conclude that, after the formation of Silver Revolver, Fautz had fiduciary obligations to the corporation and, once Weiss became a shareholder, to Weiss as a shareholder.
This does not end the inquiry. “The exception to discharge applies to fiduciaries only while they are acting in a fiduciary capacity.” In re Baylis, 313 F.3d 9, 17 (1st Cir. 2002). In other words, the act that gave rise to the debt must relate to a person (akin to the beneficiary of an express trust) and assets (akin to the res of an express trust) within the scope of the debtor‘s fiduciary obligations. In addition, “the relationship must exist prior to the act creating the debt and without reference to the act.” M-R Sullivan Mfg. Co., Inc. v. Sullivan (In re Sullivan), 217 B.R. 670, 675 (Bankr. D. Mass. 1998) (citing Carlisle Cashway, Inc. v. Johnson (In re Johnson), 691 F.2d 249, 252 (6th Cir. 1982); see also Baker v. Friedman (In re Friedman), 298 B.R. 487, 497 (Bankr. D. Mass. 2003) (citing In re Frain, 230 F.3d 1014 (7th Cir. 2000)).
The meaning of defalcation has at its core the misappropriation of money held in a fiduciary capacity and the failure to account for any such monies. Whittaker v. Whittaker (In reWhittaker), 564 B.R. 115, 140 (Bankr. D. Mass. 2017), citing Stowe v. Bologna (In re Bologna), 206 B.R. 628, 633 (Bankr. D. Mass. 1997) (“Black‘s Law Dictionary defines ‘defalcation’ as ‘[t]he . . act of embezzling; ... misappropriation of trust funds or money held in any fiduciary capacity; failure to properly account for such funds‘“). However, the dictionary definitions also encompass, more broadly, “default,” “failure to meet an obligation,” and “monetary deficiency through breach of trust“: that is, any monetary deficiency resulting from a breach by a trustee of his or her fiduciary obligation. Whittaker, 564 B.R. at 141. Provided there exists the necessary level or type of intent, risk, or scienter (about which more below), defalcation encompasses any breach of fiduciary duty that results in a monetary deficiency. Id.
The Court of Appeals has further made clear that “[i]nherent in ‘defalcation’ is the requirement that there be a breach of fiduciary duty; if there is no breach, there is no defalcation.” Baylis, 313 F.3d at 17.
In addition, “defalcation requires some degree of fault, closer to fraud, without the necessity of meeting a strict specific intent requirement . . . something close to a showing of extreme recklessness.” Baylis, 313 F.3d at 18, 20. A defalcation requires a breach of fiduciary duty. Id at 17; see also Chatterjee, 594 B.R. at 30. Reckless conduct demonstrating that the fiduciary disregarded or is “willfully blind to a substantial risk that his conduct will turn out to violate a fiduciary duty” has led to a finding of defalcation. Ackerman v. Ackerman (In re Ackerman), 587 B.R. 750, 786 (Bankr. D. Mass. 2018) (citing Bullock v. BankChampaign, N.A., 569 U.S. 267, 273-74 (2013)). The risk “must be of such a nature and degree that...its disregard involves a gross deviation from the standard of conduct that a law-abiding person would observe in the actor‘s situation.” Id. “A defalcation may be presumed from a breach of the duty of loyalty.” In re Chatterjee, 594 B.R. at 30.
i. Obtaining Weiss‘s Investments
Weiss first argues that Fautz committed both fraud and defalcation by obtaining Weiss‘s investments in the manner that he did, that is, by making misrepresentations to him about the amount that Fautz would invest into the business and about Weiss‘s name being on the liquor license. Whether the predicate act is viewed as fraud or defalcation, Weiss must prove that it was committed by Fautz in a fiduciary capacity. For the following reasons, he has not satisfied that requirement.9
By the time of the acts of fraud or defalcation that resulted in Weiss‘s second investment, Weiss had become a shareholder, but not with respect to the new $50,000 that constituted that investment. As to this second tranche, Weiss was a prospective investor, not yet a shareholder. When the acts that constitute the alleged fraud and defalcation as to this second investment were committed, the monies that were the subject of these acts remained
property of Weiss. Accordingly, even though a fiduciary relationship existed between Weiss and Fautz for some purposes, that relationship did not pertain to or encompass the funds at issue. I conclude that the tripartite relationship needed to establish a technical trust—the relationship of trustee to beneficiary with respect to a res—did not exist for lack of a res held under a fiduciary obligation. It may also be that the fiduciary obligations that ran from Fautz to Weiss for some purposes did not extend to Fautz in his negotiation of new investment from this existing shareholder, but I need make no ruling on that issue. It is enough that as to this second tranche, the monies at issue did not yet belong to the corporation and were not held by Fautz in any capacity.
It makes no difference that, as a consequence of the alleged fraud and defalcation, the monies at issue became assets of the corporation and from that point forward were held by Fautz as a fiduciary. The statute expressly requires that the fraud and defalcation have been committed “while acting in a fiduciary capacity.”
Weiss has not argued that, as a consequence of the acts at issue, the monies thereby obtained for the corporation were impressed with a resulting trust—a form of remedial trust—for Weiss‘s benefit. To supply the necessary fiduciary capacity, Weiss relies solely on the relationship of controlling shareholder to minority shareholder. But the resulting trust theory would not aid Weiss‘s case. In Davis, the Supreme Court stated, “It is not enough that, by the very act of wrongdoing out of which the contested debt arose, the bankrupt has become chargeable as a trustee ex maleficio. [The debtor] must have been a trustee before the wrong and without reference thereto.” 293 U.S. at 333. While this statement is arguably dictum, other Courts, including this one, have adopted it as one of the main principles of
“the requisite trust relationship must exist prior to the act creating the debt and without reference to it.“) (citing Johnson, 691 F.2d at 252); Fowler Brothers v. Young (In re Young), 91 F.3d 1367, 1372 (10th Cir. 1996) (citing Allen v. Romero (In re Romero), 535 F.2d 618, 621 (10th Cir. 1976)); Evans v. Pollard (In re Evans), 161 B.R. 474, 477 (B.A.P. 9th Cir. 1993) (citing Ragsdale v. Haller, 780 F.2d 794, 796 (9th Cir. 1986)); Feldman v. Kaufman (In re Kaufman), 85 B.R. 706, 710 (Bankr. S.D.N.Y. 1988); Sullivan, 217 at 675.
I conclude that the acts by which Fautz obtained Weiss‘s investments for the corporation were not committed while in a fiduciary capacity, and the resulting judgment debt is accordingly not excepted from discharge by
ii. What Fautz Did with the Investments
Weiss also argues that the debt should be excepted from discharge under
First, the debt in issue is a judgment debt, and the judgment was not for the conduct complained of here. The complaint stated counts against Fautz for breach of contract, fraud in the inducement, and unjust enrichment. Each was based on the manner in which Fautz obtained Weiss‘s investments, and the measure of damages was the extent of the ill-gotten investment. No part of the judgment was predicated on acts committed by Fautz with the monies he obtained from Fautz for the corporation. Accordingly, the judgment debt is not a debt for the conduct complained of here, as
Second, Weiss has failed to prove that Fautz committed the acts that he contends constitute the alleged fraud and defalcation. Weiss contends first that Fautz misappropriated the funds he invested, but Weiss produced no evidence of misappropriation. Nothing in the record suggests that the first $100,000 did not go into the bar. As for the last $50,000, it is true that the check was made out to Fautz personally, but there is no evidence in the record that the funds were not invested in the business.
Weiss also alleges that Fautz committed fraud and defalcation by squandering the corporation‘s initial capital. There is no question that the business of Silver Revolver failed, that this failure was the result of business decisions by Fautz, and that it resulted in loss of the entire capitalization of the corporation. However, the record does not reflect that Fautz did not attempt, in good faith, to get the bar off the ground. In fact, the record demonstrates that Fautz did put a lot of work into creating what he hoped would be a successful business. The record makes clear that the location of the bar made it extremely challenging. Bad business decisions, without more, do not arise to the level necessary to demonstrate a defalcation of one‘s fiduciary duty. The business would have lasted longer had Fautz capitalized it to the extent that he promised he would, but there is no evidence that undercapitalization was the cause of the failure, or that the capitalization that Fautz promised would have been the difference between failure and success. There is nothing in the record to show that Fautz‘s actions in managing the business were egregious or a “gross deviation from the standard of conduct that a law-abiding person would
Weiss has not met his burden under
7. Conclusion
Weiss has met his burden of proving that his judgments against Fautz are, in their entirety, excepted from discharge under
Date: January 10, 2022
Hon. Frank J. Bailey
United States Bankruptcy Judge