Mashala Investments, LLC v. Storm

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IT IS ORDERED as set forth below: ey ES

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Date: March 27, 2024 □ -

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Lisa Ritchey Craig

U.S. Bankruptcy Court Judge

UNITED STATES BANKRUPTCY COURT

NORTHERN DISTRICT OF GEORGIA

ATLANTA DIVISION

IN THE MATTER OF: : CASE NUMBERS

ROBERT STORM, : BANKRUPTCY CASE

: 23-55028 LRC

Debtor.

MASHALA INVESTMENTS, LLC, : ADVERSARY PROCEEDING

: NO. 23-05175-LRC

Plaintiff, :

V. :

ROBERT STORM, : IN PROCEEDINGS UNDER

CHAPTER 7 OF THE

Defendant. : BANKRUPTCY CODE

ORDER

Before the Court is the Motion to Dismiss for Failure to State a Claim Upon Which

Relief May Be Granted (Doc. 4) (the “Motion’’) filed by Robert Storm (“Defendant”). The

Motion seeks dismissal, pursuant to Rule 7012 of the Federal Rules of Bankruptcy

Procedure, of two counts of the complaint (Doc. 1, the “Complaint”) filed by Mashala

Investments, LLC (“Plaintiff”)—Count 1, which is an objection to discharge pursuant to §

727(a)(4)(C) of the Bankruptcy Code1 (the “727 Claim”) and that portion of Count 2 that

seeks a determination that a particular debt is nondischargeable under § 523(a)(4) (the

“523(a)(4) Claim”). Accordingly, this matter constitutes a core proceeding over which this

Court has subject matter jurisdiction. See 28 U.S.C. §§ 157(b)(2)(I) & (J); § 1334. No

response has been filed to the Motion, and, therefore, the Motion is deemed unopposed.

See BLR 7007-1(c).

Facts2

Defendant is the sole owner and sole principal of BinaNat Capital, LLC (“BinaNat”).

BinaNat is in the business of making hard money loans real estate transactions to borrowers

(“Obligor(s)”) that may or may not fit the conventional banking system. Defendant is the

Manager of BinaNat. The money for the hard money loans made by BinaNat came from

investors, such as Plaintiff. Defendant approached Plaintiff to do business with BinaNat

and become an investor in the hard money loans. Defendant represented to Plaintiff that a

written servicing agreement ("Servicing Agreement") would be entered for each hard

money loan. Defendant signed each Servicing Agreement twice, individually as a

guarantor, and in his representative capacity as Manager for BinaNat.

1 All further references to § are to the Bankruptcy Code, title 11 of the United States Code, unless otherwise

noted.

2  The Court has taken the facts from the allegations of the Complaint. See generally Intravisual Inc. v.

Fujitsu Microelectronics Am. Inc., 2011 WL 1004873, at *5 (E.D. Tex. Mar. 18, 2011) (holding that

“allegations pled on ‘information and belief’ should be reviewed in the same way as all factual allegations

in a Complaint” such that, the “mere fact that allegations begin with the statement ‘on information and

belief’ will not automatically render them insufficient”).

Plaintiff provided funds to BinaNat over several years in the aggregate principal

amount of $704,250 for seventeen hard money loans made by BinaNat to Obligors. None

of the hard money loans have been repaid to Plaintiff, and Defendant fully admits that

BinaNat owes Plaintiff $704,250.00 for the principal amount of the aggregate hard money

loans funded by Plaintiff as guaranteed by Defendant. Defendant admits that he took

Plaintiff's funds and did not use them for the purpose that was originally intended for three

hard money loans. Defendant admits that he used Plaintiff's funds to make fourteen hard

money loans, and when these loans were repaid by the Obligors, he failed to inform Plaintiff

of the repayment, and he used the repaid funds for other purposes instead of repaying

Plaintiff.

BinaNat made regular interest payments under the Servicing Agreements to Plaintiff

but ceased making such payments on April 5, 2022, when Plaintiff sued BinaNat and

Defendant in Fulton County, Georgia Superior Court, for fraud, among other claims (the

“Lawsuit”). Aggregate interest in the amount of $105,539.692 has accrued since BinaNat

ceased making such payments to Plaintiff. Defendant and BinaNat made regular interest

payments to Plaintiff for the intent and purpose of tricking Plaintiff by concealing the fact

that BinaNat either failed to make three hard money loans or to conceal the fact that

Obligors repaid the fourteen hard money loans to BinaNat and that Defendant and BinaNat

used the repaid funds for purposes other than repaying Plaintiff.

Defendant answered the Lawsuit and fully litigated it until February 24, 2023, when

the Fulton County Superior Court entered an order granting summary judgment in favor of

Plaintiff and against Defendant and BinaNat (“Order”). A judgment for fraud was entered

on March 2, 2023, in favor of Plaintiff and against Defendant and BinaNat in the amount

of $845,863.40 (the “Judgment”). The Order included findings of fact (which are outlined

in this Complaint) and conclusions of law showing, among other things, that Plaintiff made

out a prima facie case for fraud in paragraphs 1, 11-18 of the Conclusions of Law section

thereof. Specifically, the Order states:

 [Plaintiff] made a prima facie case that … (c) Defendant[] defrauded

[Plaintiff]. Defendant[] failed to point to specific evidence giving rise to a

triable issue and thus failed to rebut or pierce [Plaintiff’s] case.

 The tort of fraud has five elements: a false representation by a defendant,

scienter, intention to induce the plaintiff to act or refrain from acting,

justifiable reliance by plaintiff, and damage to plaintiff. Kilroy v. Alpharetta

Fitness, Inc., 295 Ga. App. 274, 275–76, 671 S.E.2d 312, 313 (2008). While

in many instances mere silence cannot be made the basis of fraud, yet, where

the circumstances are of such a nature as to impose a duty upon one to speak,

and where he deliberately fails to do so, his neglect will be deemed a

deliberate suppression of the truth, and will amount to constructive, if not

actual, fraud. Crossing Park Props., LLC v. Archer Capital Fund, LP, 311 Ga.

App. 177, 182, 715 S.E.2d 444, 448 (2011).

 [Defendant] failed to notify [Plaintiff] when loans funded by [Plaintiff]

failed to close and where BinaNat was repaid for loans that were funded by

[Plaintiff]. [Defendant] remained silent to mislead [Plaintiff] so that BinaNat

and [Defendant] could use [Plaintiff’s] money for other purposes such as

business expenses and interest payments. None of these purposes were ever

authorized or agreed to by [Plaintiff].

 BinaNat and [Defendant] also took affirmative steps by continuing to

deliver interest payments to hide the fact the loans were repaid. These steps

were taken to trick [Plaintiff] by concealing the fact that (1) the loan was

never made with [Plaintiff’s] funds, or (2) BinaNat had been repaid the

underlying loans by or for the [Obligors].

 [Defendant] and BinaNat are liable to [Plaintiff] for fraud in the following

amounts: Principal: $704,250.00, Interest: $ 80,871.38, Court Costs: $ 308.73

Attorney's Fees and Costs: $ 60,433.29, TOTAL: $845,863.40

 [Defendant] having failed to point to specific evidence giving rise to a triable

issue and thus failed to rebut or pierce [Plaintiff’s] case for breach of

contract, conversion and fraud, the Court orders as follows:

ORDER OF THE COURT

IT IS HEREBY ORDERED that summary judgment is hereby GRANTED

in favor of [Plaintiff] against [Defendant] as to [Plaintiff’s] claims for breach

of contract, conversion, fraud and attorney’s fees, as there is no genuine issue

as to any material fact.

A writ of fieri facias in favor of Plaintiff was recorded in Fulton County on March

14, 2023, in Lien Book 5615, page 269 Fulton County. Defendant, through his counsel,

participated in the Fulton County, Georgia Superior Court summary judgment hearing that

resulted in the Order.

Legal Standards

The Motion is brought pursuant to Rule 12(b)(6) of the Federal Rules of Civil

Procedure, made applicable to this adversary proceeding by Rule 7012 of the Federal Rules

of Bankruptcy Procedure. When considering whether to dismiss a complaint under Rule

12(b)(6) for failure to state a claim upon which relief can be granted, the Court must accept

as true all factual allegations set forth in the complaint and, on the basis of those facts,

determine whether the plaintiff is entitled to the relief requested. The Court must also draw

all reasonable inferences in the light most favorable to the non-moving party. See Bell Atl.

Corp. v. Twombly, 550 U.S. 544, 554-56 (2007); Daewoo Motor America Inc. v. General

Motors Corp., 459 F.3d 1249, 1271 (11th Cir. 2007); Hill v. White, 321 F.3d 1334, 1335

(11th Cir. 2003); Grossman v. Nationsbank, Nat’l Ass’s, 225 F.3d 1228, 1231 (11th Cir.

2000); Bryant v. Avado Brands, Inc., 187 F.3d 1271, 1273, n.1 (11th Cir. 1999).

The complaint must contain “sufficient factual matter, accepted as true, to ‘state a

claim to relief that is plausible on its face.’ A claim has facial plausibility when the plaintiff

pleads factual content that allows the court to draw the reasonable inference that the

defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678, 129

S. Ct. 1937, 1949, 173 L. Ed. 2d 868 (2009). Whether a complaint states a claim must be

considered in relation to Rule 8(a), which requires a pleading contain a “short and plain

statement of the claim showing that the pleader is entitled to relief.” Fed. R. Civ. P. 8(a)(2).

This standard “does not require ‘detailed factual allegations,’ but it demands more than an

unadorned, the-defendant-unlawfully-harmed-me accusation.” Iqbal, 556 U.S. at 678

(citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)).

Further, under Rule 9(b), allegations of fraud must be pled with particularity, but “[m]alice,

intent, knowledge, and other conditions of a person's mind may be alleged generally.” Fed.

R. Civ. P. 9(b). “[T]he claims of fraud or defalcation while acting as a fiduciary under §

523(a)(4) are governed by the heightened pleading standards of Rule 9, while Plaintiff's

claims for larceny and embezzlement under § 523(a)(4) . . . are governed by Rule 8.” In

re Wells-Lucas, 2021 WL 1234454, at *1–2 (Bankr. N.D. Ga. Mar. 31, 2021); see also In

re Presley, 490 B.R. 633, 639 (Bankr. N.D. Ga. 2013) (“Rule 9's heightened pleading

standard does not apply to allegations of embezzlement or larceny under this section.”).

In part, the Complaint objects to Defendant’s discharge, pursuant to § 727(a)(4)(C)

and seeks a determination that the debt owed by Defendant to Plaintiff is nondischargeable

under § 523(a)(4). As to the § 727 Claim, to prevail, Plaintiff must show that: Defendant

“knowingly and fraudulently, in or in connection with the case--(C) gave, offered, received,

or attempted to obtain money, property, or advantage, or a promise of money, property, or

advantage, for acting or forbearing to act.” 11 U.S.C. § 727(a)(4)(C). To be actionable

under § 727(a)(4)(C), “‘[t]he conduct of the debtor . . . must be done ‘in or in connection

with the case’ in which he is presently a debtor . . . .” Matter of Ledvinka, 144 B.R. 188,

191 (Bankr. M.D. Ga. 1992); see also In re Sears, 2012 WL 1414822, at *3 (Bankr. N.D.

Ala. Apr. 23, 2012) (denying relief under § 727(a)(4)(C) because “Plaintiff cannot establish

that Debtor's conduct occurred ‘in or in connection with’ this bankruptcy case”).

As to the 523(a)(4) Claim, Plaintiff must demonstrate that its debt is for “fraud or

defalcation while acting in a fiduciary capacity, embezzlement, or larceny.” 11 U.S.C. §

523(a)(4). “A bankruptcy court will not find a fiduciary relationship exists under 11 U.S.C.

§ 523 unless there is proof of an express or technical trust,” and a “fiduciary relationship

will not be implied based upon a contractual relationship alone.” In re Mullin, 88 B.R.

454, 456 (Bankr. S.D. Fla. 1988); see also Quaif v. Johnson, 4 F.3d 950, 953 (11th Cir.

1993). “[A]n ordinary business relationship does not qualify as a technical trust. In re

Morales, 2013 WL 3335052, at *6 (Bankr. N.D. Ga. June 26, 2013). Embezzlement is the

“fraudulent appropriation of property by a person to whom such property has been

entrusted, or into whose hands it has lawfully come.” Ga. Dep't Human Servs. v. Ngwangu

(In re Ngwangu), 529 B.R. 358, 365 (Bankr. N.D. Ga. 2015) (quoting Fernandez v. Havana

Gardens, LLC, 562 F. App’x. 854, 856 (11th Cir. 2014)). To establish embezzlement,

Plaintiff must show that: “(i) property owned by another is rightfully in the possession of

the debtor; (ii) the debtor appropriates the property for personal use, and (iii) the

appropriation occurred with fraudulent intent or by deceit.” In re Pervis, 512 B.R. 348,

382–83 (Bankr. N.D. Ga. 2014). “‘Thus, to amount to embezzlement, conversion must be

committed by a perpetrator with fraudulent intent.’” In re McQuillin, 509 B.R. 773, 785

(Bankr. D. Mass. 2014) (quoting In re Sherman, 603 F.3d 11, 13 (1st Cir. 2010)). Larceny

“is defined as the ‘fraudulent and wrongful taking and carrying away of the property of

another with intent to convert it to the taker's use and with intent to permanently deprive

the owner of such property.’” Andrews v. Wells (In re Wells), 368 B.R. 506, 514 (Bankr.

M.D. La. 2006); see also In re Quinones, 537 B.R. 942, 950 (Bankr. N.D. Cal. 2015)

(defining larceny as a “felonious taking of another's personal property with intent to convert

it or deprive the owner of the same,” and noting that larceny “‘is distinguished from

embezzlement in that the original taking of the property was unlawful’”).

Discussion

Defendant asserts, and the Court agrees, that the 727 Claim should be dismissed

because the Complaint does not allege that Defendant engaged in any fraudulent conduct

after the petition was filed or in any other way that is connected to the bankruptcy case.

The Complaint addresses only Defendant’s dealings with Plaintiff prepetition, and such

conduct, even if true, does not state a claim under § 727(a)(4)(C).

As to the 523(a)(4) Claim, however, the Court does not agree with Defendant that

Plaintiff cannot prove that Defendant owes it a debt for embezzlement. As the Court

understands the facts from having read the Complaint and its attachments, including a

representative servicing agreement, Plaintiff purchased an interest in the loans that BinaNat

made to borrowers and BinaNat agreed to act as Plaintiff’s agent to collect and remit the

payments made by borrowers on the loans. The Complaint sufficiently alleges that the

funds paid to BinaNat by the borrowers belonged to Plaintiff and that Defendant caused

BinaNat to appropriate the funds to its own use rather than remit them to Plaintiff as

required by the servicing agreement. The Complaint contains facts from which the Court

could infer that Defendant did so fraudulently. For example, the Complaint alleges that

BinaNat and Defendant took affirmative steps by continuing to deliver interest payments

to hide the fact that the loans were repaid in order to trick Plaintiff into believing the loans

had never been repaid or that Defendant had actually made loans with Plaintiff’s funds

when he had not. The Court notes that Defendant states in the Motion that the Complaint

does not allege facts that “constitute embezzlement, as no technical trust existed.” To the

extent that Defendant is arguing that a technical trust is necessary to support a claim for

embezzlement, the Court disagrees, as Plaintiff need not rely on the existence of a fiduciary

relationship to establish a debt for embezzlement. See In re Wells-Lucas, 2021 WL

1234454, at *9 (Bankr. N.D. Ga. Mar. 31, 2021); see also In re Ozcelebi, 640 B.R. 884,

901 (Bankr. S.D. Tex. 2022) (“The § 523(a)(4) exception to discharge may still apply

outside of a fiduciary relationship when Defendant's actions constitute ‘embezzlement’ or

‘larceny.’”). To the extent that Defendant is arguing that Plaintiff did not actually have a

property interest in the funds provided to BinaNat by Plaintiff or in the funds repaid to

BinaNat by the borrowers, or is making some other legal argument, the argument is not

clearly presented or supported. The Court will deny the Motion without prejudice to

Defendant’s filing a renewed motion, if appropriate.

Conclusion

Therefore, it is hereby

ORDERED that the Motion is GRANTED in part and DENIED in part;

IT IS FURTHER ORDERED that Count One of the Complaint, objecting to

Defendant’s discharge under § 727(a)(4)(C) is DISMISSED;

IT IS FURTHER ORDERED that the remainder of the Motion is DENIED.

END OF DOCUMENT

Distribution List

Robert Storm

94 Rosehill Court

St. Augustine, FL 32092

Michael D. Robl

Robl Law Group LLC

Suite 250

3754 LaVista Road

Tucker, GA 30084

Jon A. Gottlieb

Flynn & Gottlieb, P.A.

800 Johnson Ferry Road

Atlanta, GA 30342-1417