Court Opinion

ID: 5813472
Source: CourtListenerOpinion
Date Created: 2022-01-12 19:00:39.698789+00
Date Added: 2024-06-11T08:42:55.763413
License: Public Domain

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   opinion should not be published and is not precedent except under the limited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