- Case Type:
- Business
- Case Status:
- Affirmed
- Citation:
- 22-20407 (5th Circuit, Oct 16,2023) Not Published
- Tag(s):
-
- Ruling:
- Following the Supreme Court's decision in Bartenwerfer v. Buckley, 589 U.S. 69 (2023), and Texas law establishing a person's liability for another's misrepresentations, an arbitrator's findings of fact were sufficient to deny the debtor a discharge of certain debts under 11 U.S.C. §§ 523(a)(2)(A) and (a)(4) when the debtor used funds held in trust by his solely-owned company as his own.
- Procedural context:
- After the debtor filed a chapter 7 bankruptcy petition, a homeowner sued the debtor to have the debtor's debts deemed nondischargeable. The debtor invoked the arbitration clause in the contract between the homeowner and the debtor's wholly-owned company. The bankruptcy court ordered arbitration but reserved for itself the issue of whether the arbitrator's findings of fact and conclusions of law made the debt nondischargeable.
The arbitrator entered an award for the homeowner. The homeowner moved for summary judgment. The debtor also moved for summary judgment, attaching his own statement.
The bankruptcy court ruled in the debtor's favor, and the homeowner appealed. The district court reversed the bankruptcy court, and the debtor appealed to the Fifth Circuit.
- Facts:
- The debtor, Stephen Hann, owned a company that built expensive houses (SKH). Hann was the sole shareholder, officer, and director of SKH.
SKH and appellee Saeed Kahkeshani contracted for SKH to build a house. Kahkeshani financed the construction, so SKH submitted draw requests to Kahkeshani's bank for payment. By the time the bank had advanced more than $760,000 to SKH, subcontractors and others had filed liens against the house. Kahkeshani then discovered that SKH had used only $193,000 to pay for the construction.
Under Texas law, SKH held the funds received from Kahkeshani's bank in trust to pay subcontractors and materials. Texas law also made Hann, as the sole shareholder and officer of SKH, personally liable for the trust funds.
Hann never signed the draw requests that were submitted to Kahkeshani's bank (and apparently never reviewed them) but did approve the completion percentages that were the source documents for the draw requests submitted by SKH.
Further, Hann personally controlled the funds that SKH supposedly held in trust for the Kahkeshani project. Hann personally directed these funds to pay Hann's own creditors and creditors of another company owned by Hann.
Kahkeshani sued SKH and Hann in state court. Hann then filed a chapter 7 bankruptcy petition. Kahkeshani filed an adversary proceeding to have Hann's debt deemed nondischargeable. Hann then invoked the arbitration clause in the SKH/Kahkehsani contract.
The bankruptcy court ordered arbitration but reserved for itself the issue of whether the arbitrator's findings of fact and conclusions of law made the debt nondischargeable.
The arbitrator entered an award for Kahkeshani but ruled that the debt was dischargeable.
- Judge(s):
- Wiener, Stewart, and Engelhardt
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