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A creditor filed an adversary proceeding in a Chapter 13 bankruptcy case, seeking an exception from discharge based on alleged fraud and willful and malicious injury. The creditor had been involved in a business venture with the debtor and made numerous allegations of accounting irregularities and financial misrepresentations. After a bench trial, at which the plaintiff-creditor presented expert testimony from a forensic accountant and a certified public accountant, the bankruptcy court held that the plaintiff did not meet his burden of proof under either claimed exception to discharge and ruled in favor of the defendant/debtor. In re Olsen, No. 2:13-bk-60733, memorandum (D. Mont., Aug. 28, 2014).

The facts of the case might be best summarized as a business venture where the parties had different understandings of the business relationship. The defendant was the majority shareholder of Human Interactive Products, Inc. (HIPinc), a “business incubator” engaged in a wide range of activities, known as as “profit centers,” under different trade names. HIPinc had a system, including accounting methods, for evaluating the performance of its profit centers.

The plaintiff, a native plant restoration specialist, approached the defendant about starting his own business in 2006. He accepted an offer of employment with HIPinc as “Operations Manager/Senior Restoration Ecologist” with a venture called Great Bear Restoration (GBR). The defendant would be his supervisor. The plaintiff did not contribute any capital towards GBR but received a salary from HIPinc.

GBR graduated from “start-up enterprise,” according to HIPinc’s incubator model, after seven months. By the end of 2007, its first full year of operation, sales exceeded $1.5 million. It reached “post-graduate” status in mid-2008, and its sales continued to grow.

In late 2010, the defendant allegedly told the plaintiff that GBR was losing money. The plaintiff tried to terminate the relationship between GBR and HIPinc in early 2011. The parties disagreed over whether GBR was entirely part of HIPinc, or whether the defendant had intended to spin it off into a separate limited liability company (LLC) once it achieved certain benchmarks of success.

The defendant filed a Chapter 13 bankruptcy petition in May 2013. The plaintiff did not file a proof of claim with the bankruptcy court or object to the confirmation of the Chapter 13 plan, but he did file an adversary proceeding, claiming that any debt owed to him should be excepted from discharge because it resulted from “false pretenses, a false representation, or actual fraud,” 11 U.S.C. § 523(a)(2)(A), or it constituted “willful and malicious injury,” id. at § 523(a)(6).

The plaintiff’s fraud claims included allegations that the defendant fraudulently charged GBR for other profit centers’ expenses, or for expenses that were generally attributable to HIPinc, and that the defendant had promised to spin GBR off from HIPinc at a certain point. The court found that the contract between the parties had an “integration clause” stating that there were no verbal agreements in effect that were not reduced to writing, and that the contract had no provisions regarding creating a separate LLC for GBR. It also found that the plaintiff failed to prove by a preponderance of evidence that the defendant knowingly or intentionally engaged in fraudulent or deceptive conduct, that the plaintiff “justifiably relied on the [defendant’s] misrepresentation or conduct,” or that the defendant acted willfully or maliciously.

Chapter 13 bankruptcy attorney Devin Sawdayi has represented clients in Chapter 7 and Chapter 13 bankruptcy cases in the Los Angeles area since 1997, helping them repair and rebuild their finances with dignity and respect. To schedule a free and confidential consultation with a knowledgeable advocate, please contact us today online or at (310) 475-9399.

Web Resources:

In re Olsen (PACER registration required), No. 2:13-bk-60733, U.S. Bankruptcy Court, District of Montana

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