Willmar Electric Services Corp. v. Dailey
Filing
12
MEMORANDUM OPINION - The record before the Court supports the Bankruptcy Court's decision. Because the Lien Waivers in question did not concern Dailey's or SequrComm's overall financial condition, the Bankruptcy Court properly analyz ed Willmar's claim under 11 U.S.C. § 523(a)(2)(A). Evidence supported the finding that Dailey intended to pay Anixter at the time Dailey executed the Lien Waivers, and that the representations in the Lien Waivers were not fraudulent. Th e Bankruptcy Court's decision to dismiss Willmar's claims under 11 U.S.C. § 523(a)(2)(A) and (a)(6) was not clearly erroneous. The judgment of the Bankruptcy Court will be affirmed, and a separate judgment will be entered in accordance with this Memorandum Opinion. Ordered by Chief Judge Laurie Smith Camp. (LKO)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEBRASKA
IN RE:
BANKRUPTCY NO. BK A13-4040
JOSEPH KYLE DAILEY,
CHAPTER 7
Debtor,
__________________________________
________________________________
WILLMAR ELECTRIC SERVICES CORP.,
4:18CV3016
Appellant,
MEMORANDUM OPINION
vs.
JOSEPH KYLE DAILEY,
Appellee.
This matter is before the Court on appeal of Willmar Electric Services Corp.
(Willmar) from the judgment issued by the United States Bankruptcy Court for the District
of Nebraska1 (the “Bankruptcy Court”), in favor of Appellee Joseph K. Dailey. BK ECF
No. 96.2
For the reasons stated below, the judgment of the Bankruptcy Court will be
affirmed.
PROCEDURAL BACKGROUND
On March 30, 2016, Dailey filed a petition for discharge under Chapter 7 of the
Bankruptcy Code. During the pendency of the Chapter 7 proceedings, Willmar filed an
1
The Honorable Thomas L. Saladino, Chief United States Bankruptcy Judge for the District of
Nebraska.
2 The parties have not filed an appendix because the Court permitted the parties to proceed on the
original record. ECF No. 9. Accordingly, except as noted below, references to the “BK ECF No.” are to the
original record as listed in the docket sheet in the Bankruptcy Court, Willmar Elec. Servs. Corp. v. Dailey,
Case No. 16-04021-TLS (D. Neb. Bankr. July 22, 2016).
adversary action, asserting that Dailey’s debts to Willmar were not dischargeable
because they were obtained through fraudulent and malicious representations.
The Bankruptcy Court made oral findings of fact and conclusions of law, at BK ECF
No. 106, Tr.3 126:3-136:15, and held that Wilmar failed to meet its burden to prove
Dailey’s debt was not dischargeable. Willmar elected to have the appeal heard by this
Court, and filed its Brief, ECF No. 8, and the record in support of its appeal, ECF Nos. 2,
6, 11. Dailey did not respond to Willman’s Brief because Dailey’s counsel of record, Kevin
J. O’Connell, was not responsive to his client nor to the Court. O’Connell has not moved
to withdraw, yet he has failed to respond to the Court’s Order to Show Cause, ECF No.
10, and has failed to respond to the Court’s efforts to contact him directly. O’Connell’s
conduct has prolonged the Court’s review of this matter and may be the subject of future
disciplinary proceedings.
Notwithstanding Dailey’s lack of response, the Court has thoroughly reviewed the
arguments and evidence in this case. For the reasons discussed below, the judgment of
the Bankruptcy Court will be affirmed.
FACTUAL BACKGROUND
I. Subcontract and Lien Waivers
In 2014, Willmar contracted with Lincoln Public Schools (LPS) to provide labor and
materials for LPS Security & Technology Projects in schools in Lincoln, Nebraska (the
“LPS Projects”). Tr. 9, 23-24. Willmar subcontracted cabling for the LPS Project to
The abbreviation “Tr.” refers to the trial transcript before the Bankruptcy Court, found at BK ECF
Nos. 105 and 106.
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SequrComm, Inc (“SequrComm”). Tr. 20, 24-25; BK ECF No. 36. Dailey was the CEO of
SequrComm during the LPS Projects.
As a condition to getting any payment from Willmar, SequrComm promised to pay
its suppliers. BK ECF No. 36, ¶¶ 1.9, 1.10, 3.1(d); Tr. 24. Anixter, Inc. (Anixter) was
SequrComm’s largest supplier for the LPS Project, supplying over 90 percent of the
materials and supplies. Tr.(2) 135, Tr. 33. To confirm SequrComm was paying its
suppliers and materialmen, Willmar required SequrComm to sign waivers titled
“Unconditional Waiver and Release Upon Progress Payment” (the “Lien Waivers”). BK
ECF Nos. 37-39. Dailey admitted he signed four Lien Waivers. Each of the Lien Waivers
contained this representation:
The undersigned warrants that he either has already paid or will use the
monies he receives from this progress pyment [sic] to promptly pay in full
all of his laborers, subcontractors, materialmen and suppliers from [sic] all
work, materials, equipment or service provided for or to the above
referenced project up to the date of this waiver.
Tr. 45, 132; BK ECF Nos. 37, 38, 39, 86. Dailey understood this language to mean that
SequrComm had either “already paid” its suppliers, Tr. 133-134, or would use monies
received from progress payments to pay its suppliers promptly. Tr. 133, 63-65.
SequrComm applied for payment on the LPS Project twice per month. For each
request for payment, SequrComm filled out Payment Applications on an American
Institute of Architects form, completed its own Invoices, and completed the Lien Waivers.
Tr. 23, 24, 28-32; Tr.(2) 16-18. Willmar trained SequrComm personnel to fill out the
payment documents, including the Lien Waivers. BK ECF Nos. 53, 54, 57; Tr. 49-50. The
documents’ purpose was to verify the amount of labor and supplies provided and included
in the payment application. Tr. 28-35, 43, 83-84; BK ECF Nos. 51-55, 57, 59. Willmar
asserts that the Lien Waivers were crucial because if SequrComm refused to fill out Lien
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Waivers, Willmar would have known there was a problem with SequrComm’s payment of
suppliers and Willmar could have stopped making payments to SequrComm, or paid
suppliers directly, or taken other action. Tr. 54.
Dailey and others at SequrComm knew the Lien Waivers were given to Willmar.
Tr. 141-144; Tr.(2) 16, 52, Tr. 83. Dailey and others at SequrComm also knew the Lien
Waivers had to be signed for SequrComm to get paid. Tr.(2) 16-17, Tr. 141; see also BK
ECF No. 59 (“I have a check for you but I am unable to send it to you until the two attached
lien waivers have been signed and emailed back to me.”); BK ECF Nos. 53-57, 59, 65.
II. SequrComm Financial Problems
In the spring and summer of 2014, SequrComm was in serious financial trouble.
Tr. 85, 99. Cash flow had become such a problem that on May 30, 2014, Dailey requested
that Chris Armitage,4 a relatively new employee at SequrComm, make a $25,000 loan to
the company to make payroll. Tr. 76-77, 99.
SequrComm also needed additional
financing to pay for the large amount of supplies anticipated for the LPS Project. Tr. 85,
86, 159. In May or June 2014, SequrComm sought financing from its bank, Great
Western Bank (“GWB”), but was denied due to SequrComm’s failure to make payments
on existing debts. Tr. 85, 86.
SequrComm was unable to pay its bills in June 2014. Tr. 76, 85. Creditors called
and wrote on a regular basis demanding payment. Tr. 78. Armitage testified that she told
Dailey of the vendors’ demands for payment, and Dailey made decisions about which
would get paid. Tr. 78, 85, 93. SequrComm was also attempting to deal with existing
Armitage’s role within SequrComm was described in different ways. Some witnesses described
her as the CFO. It is undisputed that she was involved in handling finance and payment issues for
SequrComm.
4
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debts to GWB that were guaranteed by SequrComm’s owners and directors. Tr. 87; Tr.(2)
15, 29. Emails from May 2014 show that SequrComm was negotiating with GWB to use
the money SequrComm received from Willmar on the LPS Project to pay down the loans.
BK ECF No. 63; Tr. 85-86, 99. Dailey was included on at least one of the emails. BK
ECF No. 63 at 2.
Throughout this time, SequrComm owed an increasingly large debt to Anixter.
There is conflicting evidence about what and when Dailey knew about SequrComm’s debt
to Anixter. Dailey explained that he was not aware of the magnitude of the debt because
he did not handle bookkeeping or finance. Tr. 134-35. According to other SequrComm
employees, Dailey oversaw invoicing, and had “decision-making authority over which
vendors” and accounts payable were paid. See, e.g. Tr.(2) 19-20, 39- 41, 50- 51.
Armitage testified that she spoke to Dailey frequently about Anixter. Stephen Boggs
testified that between July 7 and 10, 2014, he called Dailey to tell him Anixter demanded
payment. Tr. 119-121, 124-125. In response, Dailey told Stephen Boggs to “knock off
questions about Anixter payments.” Tr. 126.
Boggs threatened to tell Willmar that
SequrComm was “way behind on its financial obligations” to Anixter. BK ECF No. 61; Tr.
81, 121-122. Dailey disputed the nature of his confrontation with Boggs, and testified that
the conversation took place in August 2014, not July.
III. The July 2014 Lien Waivers
In early July 2014, Dailey signed two Lien Waivers to support payment from
Willmar. SequrComm deposited the funds on July 10 or 11, 2014. BK ECF Nos. 42-2,
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66, 75 at 22. Dailey signed another two Lien Waivers later in July 2014.5 BK ECF Nos.
38, 39, 42; Tr. 41, 64-66, 69, 132. Willmar made a third payment on August 8, 2014,
based on receipt of the Lien Waivers. BK ECF Nos. 40-42; Tr. 42-43, 68-69, 112. Dave
Chapin at Willmar testified that Willmar would not have paid SequrComm without the Lien
Waivers. Tr. 69, BK ECF No. 59. Relying upon the representations in the Lien Waivers,
Willmar paid SequrComm $1,106,931.55. BK ECF No. 42; Tr. 42.
Dailey testified that at the time he signed the Lien Waivers, he believed them to be
accurate. Tr.(2) 93. He also testified that he intended to pay Anixter for the supplies and
parts SequrComm received, and never directed anyone to withhold payment to Anixter,
nor to funnel payment to other creditors. Tr.(2) 93. Dailey admitted he “understood there
was a connection between [him] personally signing lien waivers, and SequrComm getting
paid from Willmar Electric.” Tr. 141. He also admitted he understood his Lien Waivers
would be provided to Willmar and it would rely on them. Tr. 144-145.
Dailey testified that on August 6, 2014, he first learned that SequrComm was not
paying Anixter. Tr. 134-135; Tr.(2) 99-100. On that day, according to Dailey, he received
an email from Shane Sweet at Anixter inquiring about payment status and representing
that Anixter would not supply further product without receiving payment. BK ECF No. 62.
Dailey testified that after he received the email he called Sweet and asked whether
SequrComm was behind on payments to Anixter. Tr. 136. Sweet told Dailey that
SequrComm was on a “slow pay.” Tr. 136. Dailey understood “slow pay” to mean that
SequrComm was only a little behind, and Anixter would continue to supply materials if it
5
Some of the Lien Waivers are undated. As best the Court can discern from the record, they were
signed in early to mid-July 2014.
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received “some money.” Tr. 137. Dailey testified that he resolved the issue by directing
Armitage to send payment to Anixter. Tr.(2) 94. Armitage agreed and “next thing I know
we’re getting more supplies.” Tr.(2) 94.
Although Anixter again provided supplies, SequrComm did not pay Anixter with the
funds Willmar paid SequrComm, either before or after Dailey signed the Lien Waivers. Tr.
54-61, 99. At some point between the time when SequrComm unsuccessfully applied for
loans from GWB and when Willmar sent payment based on the Lien Waivers,
SequrComm entered into a “factoring” agreement with a company called “Liquid Capital.”
While the terms of the factoring agreement are unclear from the record, it appears
undisputed that Liquid Capital received funds that had come from Willmar. Once Liquid
Capital received those funds, SequrComm’s debt to GWB was paid down with the funds.
It is unclear who authorized the payments to GWB or if the payments were part of the
factoring agreement, but Anixter was not paid from the Willmar funds.
Because
SequrComm never paid Anixter, Anixter submitted a claim against Willmar’s payment
bond in December 2014 to recover the amounts SequrComm failed to pay, and Willmar
paid Anixter. BK ECF No. 44; Tr. 54-61.
IV. The Bankruptcy Court’s Decision
The Bankruptcy Court issued findings orally on the record. It acknowledged the
conflicting evidence about whether Dailey decided which invoices were paid and whether
he knew about SequrComm’s debt to Anixter at the time he signed the Lien Waivers. The
Bankruptcy Court concluded that “most of the testimony said he did not [have access to
the accounting records], not all of it, but most of it.” Tr.(2) 128, 132. The Bankruptcy
Court also specifically found that Dailey learned about the lack of payment to Anixter from
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Shane Sweet’s email on August 6, 2014.
Tr.(2) 128.
The Bankruptcy Court
acknowledged that Dailey may have known of a problem with Anixter based on the
testimony of Stephen Boggs who said he discussed it with Dailey between July 7 and 11,
2014, but the Bankruptcy Court concluded the problem may have appeared to Dailey to
be resolved when Anixter re-commenced delivery of supplies. Thus, even if Dailey had
notice of problems with Anixter between July 7 and 11, 2014, that was not sufficient “to
notify [Dailey] that there is a huge balance due to Anixter on that date.” Tr.(2) 129.
The Bankruptcy Court applied the elements of 11 U.S.C. § 523(a)(2)(A) and
concluded that Willmar failed to show that Dailey intentionally deceived Willmar when he
certified that Anixter had been paid or would be paid promptly. The Bankruptcy Court
reasoned that the preponderance of the evidence failed to show Dailey knew of the debt
to Anixter or that Dailey had no intention to pay. The Bankruptcy Court also concluded
that Willmar had not shown its reliance on the Lien Waivers was justifiable because
Willmar should have had several concerns about SequrComm’s financial ability.
Accordingly, the Bankruptcy Court dismissed Willmar’s claim.
STANDARD OF REVIEW
This Court has jurisdiction over appeals from final judgments and orders of the
Bankruptcy Court under 28 U.S.C. § 158(a)(1). The Bankruptcy Court's factual findings
are reviewed for clear error and its conclusions of law are reviewed de novo. In re M & S
Grading, Inc., 526 F.3d 363, 367 (8th Cir. 2008); see also Fed. R. Bankr. P. 8013. This
Court may affirm, reverse or modify the Bankruptcy Court's ruling or remand the case for
further proceedings. Fed. R. Bankr. P. 8013.
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DISCUSSION
In general, courts must grant a Chapter 7 debtor a discharge to effectuate the
“fresh start” policy of the code. See 11 U.S.C. § 727(a); In re Fields, 510 B.R. 227, 233
(B.A.P. 8th Cir. 2014) (citing Caspers v. Van Horne (In re Van Horne), 823 F.2d 1285,
1287 (8th Cir.1987)), abrogated on other grounds, Grogan v. Garner, 498 U.S. 279
(1991). The Bankruptcy Code precludes “debtors from discharging liabilities incurred on
account of their fraud.” Cohen v. de la Cruz, 523 U.S. 213, 217 (1998). On appeal,
Willmar seeks to exclude Dailey’s debt from discharge under three possible subsections
in 11 U.S.C. § 523(a). Relevant to this case, § 523(a) exempts from discharge: (1) any
debt for money, property, services, or an extension, renewal, or refinancing of credit, to
the extent obtained by false pretenses, false representation, or actual fraud, 11 U.S.C. §
523(a)(2)(A); (2) any debt obtained using a written statement “respecting the debtor's …
financial condition,” 11 U.S.C. § 523(a)(2)(B); and (3) any debt for willful and malicious
injury by the debtor to another entity or to the property of another entity. 11 U.S.C. §
523(a)(6).
The Bankruptcy Court’s conclusion that Dailey’s debt to Willmar is not exempt from
discharge under any of these subsections will be affirmed. First, the Bankruptcy Court
correctly analyzed Willmar’s § 523(a)(2) claim under § 523(a)(2)(A). Second, the
Bankruptcy Court’s determination that Willmar failed to prove the elements of §
523(a)(2)(A) was not clearly erroneous. Finally, the Bankruptcy Court did not err in
concluding that Willmar did not prove its claim under § 523(a)(6).
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I. Analysis under 11 U.S.C. § 523(a)(2)(A) or (a)(2)(B)
Willmar’s primary argument before the Bankruptcy Court and on appeal is that
Dailey’s debt to Willmar6 is nondischargeable because the Lien Waivers were fraudulent
or contained false representations or pretenses. 11 U.S.C. § 523(a)(2)(A). Alternatively,
Willmar argues that Dailey’s debt is nondischargeable because the Lien Waivers
concerned SequrComm’s financial condition under 11 U.S.C. § 523(a)(2)(B). Claims for
nondischargeability under § 523(a)(2)(A) and § 523(a)(2)(B) are mutually exclusive. First
Nat'l Bank of Olathe, Kansas v. Pontow (In re Pontow), 111 F.3d 604, 608 (8th Cir. 1997)).
Thus, as a threshold matter, the Court must first determine which subsection is
appropriate for Willmar’s claims under § 523(a)(2). Because claims under subsection
(a)(2)(B) require a written statement “respecting the debtor's ... financial condition,”
whether § 523(a)(2)(A) or § 523(a)(2)(B) applies turns on whether the alleged false
statements in the Lien Waivers concern Dailey’s overall financial condition. Pontow, 111
F.3d at 609.
In the Eighth Circuit, statements under § 523(a)(2)(B) are not limited to balance
sheets or other financial forms but can include a much broader class of statements.
Pontow, 111 F.3d at 609. For example, in Pontow, the representations fell under §
523(a)(2)(B) because the parties stipulated that the statements concerned the debtor’s
financial condition and the parties’ arguments focused exclusively on § 523(a)(2)(B).
Similarly, in In re Long, 774 F.2d 875, 877 (8th Cir. 1985), the court analyzed
6 The parties do not dispute that Dailey owed a debt to Willmar. Although SequrComm incurred
the debt and not Dailey personally, The Bankruptcy Court acknowledged in a previous ruling on the record
that although the statements did not concern Dailey, as CEO, Dailey received a benefit from the alleged
fraud. BK ECF No. 11, Audio File at 7:05. Dailey has not challenged the Bankruptcy Court’s conclusion.
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representations under § 523(a)(2)(B) where the statements appeared in the footnote of a
financial statement and concerned the value of the debtor’s entire inventory.
The alleged misrepresentations in this case were not statements concerning
Dailey’s financial condition. The Supreme Court recently held that the term “financial
condition” means “one's overall financial status.” Lamar, Archer & Cofrin, LLP v. Appling,
138 S. Ct. 1752, 1759 (2018). There is no evidence that Dailey’s representations about
SequrComm’s payments to Anixter respected Dailey’s overall financial status. Unlike the
parties in Pontow, the focus of the parties’ argument and the Bankruptcy Court’s analysis
in this case was § 523(a)(2)(A), not § 523(a)(2)(B). Further, the Lien Waivers related
solely to payments or intended payments to suppliers. Thus, unlike the debtor in In Re
Long, who made representations in a financial statement concerning a company’s entire
inventory, the statements in the Lien Waivers make no representation about SequrComm
or Dailey’s overall financial condition.
Accordingly, the Bankruptcy Court properly
analyzed Willmar’s claims under § 523(a)(2)(A).
II. Dischargeability Under § 523(a)(2)(A)
A. Standard of Review
Willmar faces a high burden in proving its claims under § 523(a)(2)(A). A creditor
seeking to exempt a debt from discharge under § 523(a) must prove the elements of its
claim by a preponderance of the evidence. Grogan, 498 U.S. at 288. Further, as noted
above, “[e]xceptions to discharge are usually narrowly construed against the creditor and
liberally against the debtor, thus effectuating the fresh start policy of the Code.” Fields,
510 B.R. at 233. On appeal, whether a requisite element of a claim under § 523(a)(2)(A)
has been satisfied is a factual determination which is reviewed for clear error. In re Freier,
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604 F.3d 583, 587 (8th Cir. 2010) (citing Pontow, 111 F.3d at 609). A finding is clearly
erroneous if, after reviewing all the evidence, the reviewing court is left with the firm
conviction that a mistake has been committed. Id. (citing Anderson v. Bessemer City, 470
U.S. 564, 573 (1985)).
B. Elements of § 523(a)(2)(A)
The elements of a dischargeability claim under § 523(a)(2)(A) are: (1) the debtor
made a representation; (2) the debtor knew the representation was false at the time it
was made; (3) the representation was deliberately made for the purpose of deceiving the
creditor; (4) the creditor justifiably relied on the representation; and (5) the creditor
sustained the alleged loss as the proximate result of the representation having been
made. Fields, 510 B.R. at 233 (quotations and citations therein omitted). See also Freier,
604 F.3d at 587. The Bankruptcy Court found that Willmar failed to meet its burden on
elements 2, 3, and 4.
Willmar asserts that Dailey knew or should have known that the Lien Waivers in
question were false at the time he signed them. “Even if a false statement is made, no
fraud exists unless the maker knows the statement is false at the time the statement is
made.” Lindau v. Nelson, 357 B.R. 508, 513 (8th Cir. BAP 2006). A representation
satisfies the knowledge element when it is made “under circumstances where a debtor
should have known of the falsity [or] is one made with reckless disregard for the truth.” In
re Moen, 238 B.R. 785, 791 (B.A.P. 8th Cir. 1999) (quoting In re Duggan, 169 B.R. 318,
324 (Bankr. E.D.N.Y.1994). “In assessing a debtor's knowledge of the falsity of the
representation . . ., the Court must consider the knowledge and experience of the debtor.”
Id.
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Regardless of whether Dailey knew Anixter had been paid at the time he signed
the Lien Waiver,7 Willmar has not shown that Dailey had no intention to “promptly pay
[Anixter] in full” using the money obtained from Willmar. See Lien Waivers, BK ECF Nos.
37, 38, 39, 86. In general, “[t]o qualify as a false representation or false pretense under
11 U.S.C. § 523(a)(2)(A), the statement must relate to a present or past fact.” In re
Meahyen, 422 B.R. 192, 201 (Bankr. D. Minn. 2010) (citations omitted). However, “[a]
material promise to perform in the future ‘made with the intent to defraud and without the
intent to perform . . . constitutes actionable fraud.’” Freier, 604 F.3d at 588 (quoting
McDonald v. Johnson & Johnson, 722 F.2d 1370, 1379 (8th Cir.1983)). Thus, a debtor's
promise related to a future act can constitute a false representation where the debtor
possesses no intent to perform the act at the time the debtor's promise is made. See
Fields, 510 B.R. at 235. “[A] promise to pay a debt in the future is not a misrepresentation
merely because the debtor fails to do so.” In re Church, 328 B.R. 544, 547 (B.A.P. 8th
Cir. 2005).
Appellate courts are deferential to the bankruptcy court’s findings when
determining whether a debtor’s promise to perform constitutes actionable fraud. For
example, in Church, the bankruptcy court found that a debtor’s promise to pay was not
fraudulent where the debtor made payments for several months after making the promise.
Id. at 547-48. The Bankruptcy Appellate Panel concluded that the bankruptcy court’s
7
There was conflicting testimony at trial about whether Dailey knew Anixter had not been paid at
the time he signed the Lien Waivers. Dailey testified that the first he learned of problems with Anixter on
August 6, 2014, based on an email from Shane Sweet. Tr.(2) 136. While some of its findings are less than
clear, the Bankruptcy Court found this assertion credible and specifically concluded that Dailey did not learn
of the nonpayment to Anixter until August of 2014. Tr. 132; Tr.(2) 128. Other evidence in the record
supported this finding. For example, Greg Boggs testified that in July 2014, Dailey told him that Anixter and
other suppliers were either fully paid or “a little behind.” Tr. 55. Having reviewed the record, the Court
cannot conclude that the Bankruptcy Court’s decision was clearly erroneous as to Dailey’s knowledge.
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findings were supported by the record. In Fields, a debtor obtained a loan by stating that
he intended to use the borrowed funds for tenant improvements. 510 B.R. at 235. The
bankruptcy court found that the evidence showed the debtor never intended to use the
loan proceeds for that purpose. Id. The Bankruptcy Appellate Panel for the 8th Circuit
upheld the bankruptcy courts findings under the clear error standard. Id. at 233, 236.
In contrast to Fields, the Bankruptcy Court concluded Willmar did not meet its
burden to show Dailey never intended to use the funds to pay Anixter. Rather, as in
Church, evidence supports the Bankruptcy Court’s findings that Dailey intended to pay
Anixter because he directed that Anixter be paid after he signed the Lien Waivers. Dailey
testified that he learned of problems with Anixter when Shane Sweet advised him that
SequrComm was on “a slow pay” to Anixter. Tr.(2) 94. Dailey understood this to mean
that SequrComm was slightly behind on payments.8 Dailey testified that he resolved the
issue by directing Armitage to send payment to Anixter. Tr.(2) 94. Armitage agreed and
“next thing I know we’re getting more supplies.” Tr.(2) 94. Willmar does not dispute that
Anixter again provided supplies to SequrComm. Although Anixter was not actually paid,
Dailey’s direction to pay Anixter combined with evidence that Anixter re-opened the
supply chain support the Bankruptcy Court’s finding that Dailey intended to pay Anixter
with the funds obtained from Willmar, as promised in the Lien Waivers.
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The Bankruptcy Court noted that Dailey may have known there was a problem, at the earliest,
from July 7 to 11, when Stephen Boggs allegedly confronted Dailey about the nonpayment to Anixter. Tr.
132; Tr.(2) 128. Stephen Boggs inferred that this exchange occurred in July, Tr. 119-20, whereas Dailey
testified that this exchange took place in August, Tr. 137. The Bankruptcy Court concluded that regardless
of when the exchange took place, the exchange was not sufficient to notify Dailey that a huge balance was
owing to Anixter. Stephen Boggs testified that he confronted Dailey because S. Boggs was no longer able
to order supplies from Anixter. There was no evidence that S. Boggs told Dailey that SequrComm was
severely behind in payments to Anixter. Further, S. Boggs corroborated Dailey’s testimony that he paid
Anixter to reopen the supply chain. Tr. 121.
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Willmar also asserts that Dailey’s knowledge of SequrComm’s financial issues
preclude a finding that he intended to pay Anixter. Willmar argues that Dailey had
extensive control of SequrComm’s finances, including decisions about who would be
paid. Tr. 111; Tr.(2) 39-40. Armitage testified that she discussed the Anixter nonpayment
with Dailey in June 2014. Tr. 79. According to Willmar, Dailey should have known that
SequrComm was in severe debt to Anixter and would have no way to pay promptly and
in full. Thus, Willmar argues Dailey defrauded Willmar when he promised in the Lien
Waivers that SequrComm would pay Anixter. The Bankruptcy Court assessed Willmar’s
arguments and evidence and made credibility determinations, concluding that although it
was unclear whether Dailey had access to accounting records, most of the evidence
suggested he did not. Tr.(2) 128. The Bankruptcy Court also concluded that it “had a
little trouble believing the testimony of Ms. Armitage.” Tr.(2) 132-33. Although the
Bankruptcy Court expressed concerns with the credibility of all witnesses, it found that
Willmar had not met its burden. Tr.(2) 133. Based on the evidence in the record, the
Bankruptcy Court did not clearly err in making this determination.
Willmar also suggests Dailey committed fraud because he intended to pay other
creditors, such as GWB, instead of Anixter. There is evidence that Dailey sought funding
from GWB and others in May of 2014, and that GWB called a SequrComm loan as early
as May 2014. An email exchange from May 21, 2014, demonstrates that Greg Boggs, a
SequrComm employee, told Tom Fischer of GWB that SequrComm would pay GWB out
of the proceeds of Willmar’s payments to SequrComm. BK ECF No. 63. Dailey was
included on the email from May 21, 2014, but not on subsequent emails wherein Chris
Armitage agreed to terms of progress payments to GWB. BK ECF No. 63 at 2. Willmar
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infers that, beginning with this email exchange, Dailey and others devised a plan whereby
he would sign the Lien Waivers to get funds from Willmar to pay Anixter, but instead of
paying Anixter, Dailey would divert the money to pay GWB. Yet there is also evidence
that, after signing the Lien Waivers, Dailey attempted to resolve payment issues with
Anixter and directed Armitage to make payments to Anixter. Armitage even testified that
the purpose of getting loans from GWB may have been to pay Anixter. Tr. 85-86.
There is insufficient evidence to disturb the Bankruptcy Court’s conclusion that
Willmar failed to meet its burden as to Dailey’s intent. Accordingly, the Bankruptcy Court’s
finding was not clearly erroneous.
III. Nondischargeability under 11 U.S.C. § 523(a)(6)
Willmar argues that, in addition to fraud pursuant to § 523(a)(2)(A), Dailey’s debt
is nondischargeable under 11 U.S.C. § 523(a)(6).
Section (a)(6) precludes from
discharge, “any debt for willful and malicious injury by the debtor to another entity or to
the property of another entity.” To establish a claim under § 523(a)(6), Willmar must show
by a preponderance of the evidence: that (1) the debt is for “willful injury,” and (2) the debt
is for “malicious injury.” In re Patch, 526 F.3d 1176, 1180 (8th Cir. 2008). “Willful injury”
as used in the statute, requires a “deliberate or intentional injury, not merely a deliberate
or intentional act that leads to injury.” Kawaauhau v. Geiger, 523 U.S. 57, 61 (1998). As
with § 523(a)(2), nondischargeability under § 523(a)(6) is strictly construed to effectuate
the fresh start of the Bankruptcy Code. Geiger v. Kawaauhau (In re Geiger), 113 F.3d
848, 853 (8th Cir. 1997), aff'd sub nom., Kawaauhau v. Geiger, 523 U.S. 57 (1998).
For the reasons stated above, the Bankruptcy Court did not err in finding no
evidence of willful or malicious injury. There is no evidence in the record of Dailey’s
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malice toward Willmar, much less that Dailey intended specifically to harm Willmar. The
evidence supports the Bankruptcy Court’s finding that Willmar failed to meet its burden
under § 523(a)(6).
CONCLUSION
The record before the Court supports the Bankruptcy Court’s decision. Because
the Lien Waivers in question did not concern Dailey’s or SequrComm’s overall financial
condition, the Bankruptcy Court properly analyzed Willmar’s claim under 11 U.S.C. §
523(a)(2)(A). Evidence supported the finding that Dailey intended to pay Anixter at the
time Dailey executed the Lien Waivers, and that the representations in the Lien Waivers
were not fraudulent. The Bankruptcy Court’s decision to dismiss Willmar’s claims under
11 U.S.C. § 523(a)(2)(A) and (a)(6) was not clearly erroneous. The judgment of the
Bankruptcy Court will be affirmed, and a separate judgment will be entered in accordance
with this Memorandum Opinion.
Dated this 19th day of September, 2018.
BY THE COURT:
s/Laurie Smith Camp
Chief United States District Judge
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