Lawrence v. Frost Bank ( 2022 )


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  • Case: 21-10103     Document: 00516163444          Page: 1    Date Filed: 01/12/2022
    United States Court of Appeals
    for the Fifth Circuit                               United States Court of Appeals
    Fifth Circuit
    FILED
    January 12, 2022
    No. 21-10103                          Lyle W. Cayce
    Clerk
    In the Matter of: Kyle Mark Lawrence,
    Debtor,
    Kyle Mark Lawrence,
    Appellant,
    versus
    Frost Bank,
    Appellee.
    Appeal from the United States District Court
    For the Northern District of Texas
    USDC No. 3:19-CV-1843
    Before Owen, Chief Judge, and Jones and Wilson, Circuit Judges.
    Per Curiam:*
    *
    Pursuant to 5th Circuit Rule 47.5, the court has determined that this
    opinion should not be published and is not precedent except under the limited
    circumstances set forth in 5th Circuit Rule 47.5.4.
    Case: 21-10103         Document: 00516163444             Page: 2   Date Filed: 01/12/2022
    No. 21-10103
    Kyle Mark Lawrence filed for bankruptcy under Chapter 7. Frost
    Bank contended in an adversary proceeding that the debt Lawrence owed to
    it was nondischargeable under 
    11 U.S.C. § 523
    (a)(2)(A). The bankruptcy
    court found Lawrence’s debt nondischargeable based on false representation
    and actual fraud. The district court affirmed. We affirm the district court’s
    judgment.
    I
    The bankruptcy court found the following: Kyle Lawrence was the
    sole owner and member of Lawrence Built, LLC (Lawrence Built). Lawrence
    formed Lawrence Built as a Texas limited liability company in 2012.
    Lawrence Built sometimes operated under the assumed name “LB
    Commercial Roofing.” On July 30, 2017, Lawrence and Lawrence Built filed
    separate Chapter 7 bankruptcy cases.
    The bankruptcy proceeding involved four secured promissory notes.
    These notes were all executed by Lawrence Built in favor of Frost Bank
    (Frost). Lawrence was the guarantor. Three of these notes were unpaid as
    of the date Lawrence filed for bankruptcy.
    Section 523(a)(2)(A) of the Bankruptcy Code sets forth exceptions to
    discharge in bankruptcy proceedings. 1 The Code does not discharge a debtor
    from “any debt . . . for money, property, services, or an extension, renewal,
    or refinancing of credit, to the extent obtained by false pretenses, a false
    representation, or actual fraud, other than a statement respecting the
    debtor’s or an insider’s financial condition.” 2 Nondischargeability is a
    matter of federal law and “must be established by a preponderance of the
    1
    
    11 U.S.C. § 523
    (a)(2)(A).
    2
    
    Id.
    2
    Case: 21-10103           Document: 00516163444             Page: 3      Date Filed: 01/12/2022
    No. 21-10103
    evidence.” 3 A basic principle of bankruptcy is that “exceptions to discharge
    must be strictly construed against a creditor and liberally construed in favor
    of a debtor[.]” 4 However, “a debtor has no constitutional or fundamental
    right to a discharge,” and the “[Code] limits the opportunity for a completely
    unencumbered new beginning to the honest but unfortunate debtor.” 5
    In Husky International Electronics, Inc. v. Ritz, 6 the Supreme Court
    concluded that “Congress did not intend ‘actual fraud’ to mean the same
    thing as ‘a false representation’” under the Code. 7 The Court interpreted
    “actual fraud” to “encompass fraudulent conveyance schemes, even when
    those schemes do not involve a false representation.” 8 Because the evidence
    in the case before us supports the finding of actual fraud, the district court
    did not err in holding that Lawrence’s debt was nondischargeable.
    One of the notes at issue was secured by a commercial security
    agreement which gave Frost a security interest in all of Lawrence Built’s
    inventory, accounts receivable, general intangibles, instruments, rents,
    monies, payments and all other rights related to the accounts receivable.
    After granting this security interest to secure the note, Lawrence Built and
    Lawrence missed the very first payment on that note and all payments
    thereafter.
    3
    Cowin v. Countrywide Home Loans, Inc. (In re Cowin), 
    864 F.3d 344
    , 349 (5th Cir.
    2017) (citing Grogan v. Garner, 
    498 U.S. 279
    , 284 (1991)).
    4
    
    Id.
    5
    Grogan, 
    498 U.S. at 286-87
     (internal quotations and citations omitted).
    6
    ___U.S.___, 
    136 S. Ct. 1581
     (2016).
    7
    
    Id. at 1586
    .
    8
    
    Id. at 1590
    .
    3
    Case: 21-10103      Document: 00516163444              Page: 4   Date Filed: 01/12/2022
    No. 21-10103
    On April 18, 2017, Lawrence signed a Certificate of Formation for a
    new entity, “LB Commercial Roofing, LLC.” Prior to this time, Lawrence
    used “LB Commercial Roofing” as a “d/b/a” for Lawrence Built. Like
    Lawrence Built, Lawrence was the sole owner and member of LB
    Commercial Roofing, LLC. Lawrence used the same logo for Lawrence
    Built, LB Commercial Roofing, and LB Commercial Roofing, LLC and the
    same phone number for Lawrence Built and LB Commercial Roofing, LLC.
    Lawrence never told Frost that he was creating and would be doing business
    through this new entity. Lawrence also met with a bankruptcy attorney in
    April and decided that he and Lawrence Built would file for bankruptcy. He
    did not file immediately, but waited to file for three months because he
    testified that he did not have the funds to file.
    In November 2016, after the execution of debt instruments with Frost
    Bank, Lawrence Built subcontracted with Cresta Construction under the
    assumed name LB Commercial Roofing. Frost alleged that Lawrence Built
    diverted revenue from this construction project to the new entity, LB
    Commercial Roofing, LLC, without informing Frost or Cresta Construction,
    and that Lawrence did the same thing when subcontracting with other
    construction companies. Additionally, Lawrence diverted some of the funds
    from LB Commercial Roofing, LLC into a personal account that he failed to
    disclose in his original bankruptcy filing.          He also transferred several
    intangible assets from Lawrence Built to LB Commercial Roofing, LLC.
    Upon discovering this, Frost sued Lawrence in bankruptcy court,
    seeking to establish a breach-of-contract claim and have the court declare
    Lawrence’s debt nondischargeable. The bankruptcy court held that Frost
    had established a claim against Lawrence, and that the claim was
    nondischargeable under 
    11 U.S.C. § 523
    (a)(2)(A) because “there were ‘false
    representations’ and ‘actual fraud’ committed by Mr. Lawrence against
    4
    Case: 21-10103             Document: 00516163444             Page: 5       Date Filed: 01/12/2022
    No. 21-10103
    Frost.” Lawrence appealed the bankruptcy court’s ruling to the district
    court, which affirmed. Lawrence now appeals that ruling to this court.
    II
    “We review the decision of the district court by applying the same
    standard to the bankruptcy court’s findings of fact and conclusions of law
    that the district court applied.” 9 Accordingly, “[a] bankruptcy court’s
    findings of fact are subject to review for clear error, and its conclusions of law
    are reviewed de novo.” 10 “Mixed questions of law and fact are also reviewed
    de novo.” 11
    “‘Actual fraud’ has two parts: actual and fraud.” 12 “Actual” means
    “any fraud that ‘involv[es] moral turpitude or intentional wrong.’” 13
    “Fraud” encompasses situations in which “a debtor’s transfer of
    assets . . . impairs a creditor’s ability to collect the debt.” 14 In cases of
    fraudulent conveyance schemes, “the fraudulent conduct is not in
    dishonestly inducing a creditor to extend a debt.                     It is in the acts of
    concealment and          hindrance.” 15    In Husky, the debtor drained the borrowing
    entity “of assets it could have used to pay its debts to creditors . . . by
    9
    Morrison v. W. Builders of Amarillo, Inc. (In re Morrison), 
    555 F.3d 473
    , 480 (5th
    Cir. 2009).
    10
    
    Id.
     (italics omitted).
    11
    Cowin v. Countrywide Home Loans, Inc. (In re Cowin), 
    864 F.3d 344
    , 349 (5th Cir.
    2017).
    12
    Husky Intern. Elecs., Inc. v. Ritz, ___U.S.___, 
    136 S. Ct. 1581
    , 1586 (2016).
    13
    
    Id.
     (quoting Neal v. Clark, 
    95 U.S. 704
    , 709 (1878)).
    14
    Id. at 1587.
    15
    Id.
    5
    Case: 21-10103           Document: 00516163444         Page: 6      Date Filed: 01/12/2022
    No. 21-10103
    transferring large sums of [the borrowing entity’s] funds to other entities [the
    debtor] controlled.” 16
    In the present case, the bankruptcy court concluded that “Mr.
    Lawrence perpetuated a fraudulent scheme by transferring funds from the
    accounts receivable of . . . Lawrence Built, into a bank account of . . . LB
    Commercial Roofing, LLC, with the intent of defrauding Frost Bank as a
    creditor.” Lawrence transferred intangible assets from Lawrence Built to LB
    Commercial Roofing, LLC. He transferred money from LB Commercial
    Roofing, LLC into his own personal bank account. He deposited checks
    intended for Lawrence Built into the bank account of LB Commercial
    Roofing, LLC. In short, the bankruptcy court found that Lawrence diverted
    the funds of Lawrence Built, the borrowing entity, into other bank accounts
    in order to hinder Frost’s ability to reach that money. Lawrence testified that
    he was concerned creditors were going to seize money from Lawrence Built.
    Lawrence argues that LB Commercial Roofing, LLC actually
    performed the work, not Lawrence Built; but that does not undercut the
    bankruptcy court’s determination that LB Commercial Roofing, LLC was
    created to hinder Frost’s ability to reach assets. “When examining a debtor’s
    intent under section 523(a)(2)(A), the Court is required to consider whether
    the circumstances in the aggregate present a picture of deceptive conduct on
    the part of the debtor, which betrays an intent on the part of the debtor to
    deceive his creditors.” 17
    16
    Id. at 1585.
    17
    G.L. Barron Co., Inc. v. Morris (In re Morris), Case No. 13-70043-HDH-7, Adv.
    No. 13-07003, 
    2014 WL 550869
    , at *3 (Bankr. N.D. Tex. 2014) (citing Manheim Auto. Fin.
    Servs., Inc. v. Hurst (In re Hurst), 
    337 B.R. 125
    , 133 (Bankr. N.D. Tex. 2005)).
    6
    Case: 21-10103    Document: 00516163444            Page: 7   Date Filed: 01/12/2022
    No. 21-10103
    The bankruptcy court did not err in finding that Lawrence intended to
    defraud Frost by perpetuating a fraudulent conveyance scheme and that
    Lawrence committed actual fraud actionable under § 523(a)(2)(A). The
    circumstances present a picture of deceptive conduct by which Lawrence was
    diverting assets out of Frost’s reach. Lawrence’s debt was accordingly
    nondischargeable.
    *        *         *
    The judgment of the district court is AFFIRMED.
    7
    

Document Info

Docket Number: 21-10103

Filed Date: 1/12/2022

Precedential Status: Non-Precedential

Modified Date: 1/12/2022