Kapitus Servicing. Inc. as servicing agent for Kap v. Castillo et al

IN THE UNITED STATES BANKRUPTCY COURT
FOR THE SOUTHERN DISTRICT OF TEXAS
MCALLEN DIVISION

IN RE:

CHRISTOPHER CASTILLO, LINDA
SALAZAR CASTILLO,

Debtors.
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CASE NO: 24-70049

CHAPTER 7

KAPITUS SERVICING. INC. AS
SERVICING AGENT FOR KAPITUS LLC,

Plaintiff,

VS. ADVERSARY NO. 24-7005

CHRISTOPHER CASTILLO and LINDA
SALAZAR CASTILLO,

Defendants.

MEMORANDUM OPINION

Kapitus Servicing, Inc., as servicing agent for Kapitus LLC, filed the instant complaint
under 11 U.S.C. § 523, objecting to the dischargeability of a pre-petition debt owed to Kapitus
Servicing, Inc., as servicing agent for Kapitus LLC by the defendants Christopher Castillo and
Linda Salazar Castillo. On March 31, 2026 – April 1, 2026, the Court conducted a trial at which
defendants Christopher Castillo and Linda Salazar Castillo moved for judgment on partial findings
under Federal Rule of Civil Procedure 52, which is made applicable to adversary proceedings by
Federal Rule of Bankruptcy Procedure 7052.
For the reasons stated herein, this Court holds that under (1) Count I – non-dischargeability
of debt under 11 U.S.C. § 523(a)(2)(a) for false pretenses, false representations, and actual fraud
(as to both Defendants), the pre-petition debt owed to Kapitus Servicing, Inc., as servicing agent
for Kapitus LLC by the defendants Christopher Castillo and Linda Salazar Castillo is non-
United States Bankruptcy Court
Southern District of Texas
ENTERED
August 13, 2026
Nathan Ochsner, Clerk
Case 24-07005 Document 42 Filed in TXSB on 08/13/26 Page 1 of 27

dischargeable; under (2) Count II – non-dischargeability of debt under 11 U.S.C. § 523(a)(2)(b)
for use of a statement in writing that is materially false respecting the debtor’s or an insider’s
financial condition (as to both Defendants), the pre-petition debt owed to Kapitus Servicing, Inc.,
as servicing agent for Kapitus LLC, by the defendants Christopher Castillo and Linda Salazar
Castillo is dismissed; under (3) Count III – non-dischargeability of debt under 11 U.S.C. §
523(a)(4) for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny
(as to both Defendants), the pre-petition debt owed to Kapitus Servicing, Inc., as servicing agent
for Kapitus LLC, by the defendants Christopher Castillo and Linda Salazar Castillo is dismissed;
and under (4) Count IV – non-dischargeability of debt under 11 U.S.C. § 523(a)(6) for willful and
malicious injury by the debtors (as to both Defendants), the pre-petition debt owed to Kapitus
Servicing, Inc., as servicing agent for Kapitus LLC, by the defendants Christopher Castillo and
Linda Salazar Castillo is non-dischargeable.
Accordingly, Kapitus Servicing, Inc., as servicing agent for Kapitus LLC, is granted
judgment as against Christopher Castillo and Linda Salazar Castillo in the amount of $710,241.07
(comprised of the contractual balance of $496,974.00, plus $84,417.32 in interest at a 10% rate
covering the period of 6/17/2022 to 2/26/2024 (including a $136.16 per diem), $125,164.75 in
attorney’s fees and costs, $2,500 in default fees, and $1,185 in ACH fees) and such judgment is
excepted from discharge pursuant to 11 U.S.C. § 523(a)(2)(A) and § 523(a)(6); and pursuant to
Federal Rule of Civil Procedure 54(d)(2)(B)(ii) shall accrue at an interest rate of 4.04% until paid.
I. FINDINGS OF FACT
This Court makes the following findings of fact and conclusions of law pursuant to Federal
Rule of Civil Procedure 52 (“Rule”), which is made applicable to adversary proceedings pursuant
to Federal Rule of Bankruptcy Procedure 7052 (“Bankruptcy Rule”). To the extent that any finding
Case 24-07005 Document 42 Filed in TXSB on 08/13/26 Page 2 of 27

of fact constitutes a conclusion of law, it is adopted as such. To the extent that any conclusion of
law constitutes a finding of fact, it is adopted as such. This Court made certain oral findings and
conclusions on the record. This Memorandum Opinion supplements those findings and
conclusions. If there is an inconsistency, this Memorandum Opinion controls.
II. BACKGROUND
1. On February 26, 2024, (the “Petition Date”) Christopher Castillo (“Mr. Castillo”) and Linda
Salazar Castillo (“Ms. Castillo”) (collectively, the “Debtors/Defendants”) filed for bankruptcy
protection under chapter 7 of the Bankruptcy Code,
1
initiating the instant bankruptcy case.
2

2. On May 24, 2024, Kapitus Servicing, Inc., as servicing agent for Kapitus LLC (“Kapitus” or
“Plaintiff”) filed the instant “Complaint to Determine Non-Dischargeability of Debt and for
Denial of Dischargeability of Debt Owed to Kapitus Servicing, Inc” (the “Complaint”).
3

3. On July 26, 2024, Defendants filed their “Original Answer.”
4

4. On November 24, 2025, Plaintiff and Defendants filed their “Proposed Joint Pretrial
Statement,” in which Plaintiff and Defendants consented to entry of final judgment by this
Court pursuant to Bankruptcy Rule 7008.
5

5. On March 31, 2026 – April 1, 2026, this Court held a trial.

6. On April 1, 2026, at trial, Defendants moved for judgment on partial findings under Rule 52,
which is made applicable to adversary proceedings by Bankruptcy Rule 7052.

III. CONCLUSIONS OF LAW
A. Jurisdiction and Venue
This Court holds jurisdiction pursuant to 28 U.S.C. § 1334 and exercises its jurisdiction in
accordance with Southern District of Texas General Order 2012–6.
6
Section 157 allows a district
court to “refer” all bankruptcy and related cases to the bankruptcy court, wherein the latter court

1
Any reference to “Code” or “Bankruptcy Code” is a reference to the United States Bankruptcy Code, 11 U.S.C., or
any section (i.e., §) thereof refers to the corresponding section in 11 U.S.C.
2
“Bankr. Dkt.” refers docket entries made in the Debtor’s bankruptcy case, No. 24-70049. Entries made in Plaintiff’s
Case number 24-7005 shall take the format of Dkt. No.__.
3
Dkt. No. 1.
4
Dkt. No. 8.
5
Dkt. No. 35, at 2.
6
Order of Reference to Bankruptcy Judges, Gen. Order 2012–6 (S.D. Tex. May 24, 2012).
Case 24-07005 Document 42 Filed in TXSB on 08/13/26 Page 3 of 27

will appropriately preside over the matter.
7
This Court concludes that determinations of
dischargeability are core proceedings under 28 U.S.C. § 157(b)(2)(I). This proceeding is also core
under the general “catch-all” language because such a suit is the type of proceeding that can only
arise in the context of a bankruptcy case.
8

This Court may only hear a case in which venue is proper.
9
28 U.S.C. § 1409(a) provides
that “a proceeding arising under title 11 or arising in or related to a case under title 11 may be
commenced in the district court in which such case is pending.” The Debtors’ underlying
bankruptcy is pending in this Court,
10
and so venue of this proceeding is proper.
B. Constitutional Authority to Enter a Final Judgment
While bankruptcy judges can issue final orders and judgments for core proceedings, absent
consent, they can only issue reports and recommendations on non-core matters.
11
This Court
concludes that determinations of dischargeability are core proceedings under 28 U.S.C. §
157(b)(2)(I). Accordingly, this Court concludes that the narrow limitation imposed by Stern v.
Marshall does not prohibit this Court from entering a final judgment here.
12
Alternatively, this
Court has constitutional authority to enter a final judgment because all parties in interest have

7
28 U.S.C. § 157(a); see also Order of Reference to Bankruptcy Judges, Gen. Order 2012-6 (S.D. Tex. May 24, 2012).
8
See Southmark Corp. v. Coopers & Lybrand (In re Southmark Corp.), 163 F.3d 925, 930 (5th Cir. 1999) (“[A]
proceeding is core under § 157 if it invokes a substantive right provided by title 11 or if it is a proceeding that, by its
nature, could arise only in the context of a bankruptcy case.”) (quoting Wood v. Wood (In re Wood), 825 F.2d 90, 97
(5th Cir. 1987)).
9
28 U.S.C. § 1408.
10
Bankr. Dkt. No. 1.
11
See 28 U.S.C. §§ 157(b)(1), (c)(1); see also Stern v. Marshall, 564 U.S. 462, 480 (2011); Wellness Int’l Network,
Ltd. v. Sharif, 135 S. Ct. 1932, 1938–40 (2015).
12
Dkt. No. 35 at 2; see, e.g., Badami v. Sears (In re AFY, Inc.), 461 B.R. 541, 547-48 (8th Cir. B.A.P. 2012) (“Unless
and until the Supreme Court visits other provisions of Section 157(b)(2), we take the Supreme Court at its word and
hold that the balance of the authority granted to bankruptcy judges by Congress in 28 U.S.C. § 157(b)(2) is
constitutional.”); see also Tanguy v. West (In re Davis), No. 00-50129, 538 F. App’x 440, 443 (5th Cir. 2013)
(“[W]hile it is true that Stern invalidated 28 U.S.C. § 157(b)(2)(C) with respect to ‘counterclaims by the estate against
persons filing claims against the estate,’ Stern expressly provides that its limited holding applies only in that ‘one
isolated respect’ . . . We decline to extend Stern’s limited holding herein.”) (citing Stern v. Marshall, 564 U.S. at 475,
503).
Case 24-07005 Document 42 Filed in TXSB on 08/13/26 Page 4 of 27

consented implicitly to adjudication of this dispute by this Court.
13
None of these parties have ever
objected to this Court’s constitutional authority to enter a final judgment. These circumstances
unquestionably constitute implied consent.
14
Thus, this Court wields the constitutional authority
to enter a final judgment here.
IV. ANALYSIS
A. Joint Stipulation of Facts
As a preliminary matter, Plaintiff and Defendants have stipulated to the following facts
15
:
1. On March 17, 2022, Ms. Castillo, on behalf of Castle Enterprises, LLC (“Castle”), applied
for financing via an application with a third-party vendor (“Application for Funding”).
16

2. Pursuant to the Application for Funding, Ms. Castillo is the 100% owner of Castle.
17

3. Pursuant to filings with the Texas Secretary of State, Mr. Castillo is/was the managing
member of Castle.
18

4. Defendants are insiders of Castle pursuant to 11 U.S.C. § 101(31)(A).
19

5. On March 28, 2022, Plaintiff, Castle, and Defendants, as guarantors, entered into: (a)
Forward Purchase Agreement (Fixed ACH Delivery), Authorized Sub-Servicing
Agreement, Sale Terms and Conditions, Security Agreement, Personal Guaranty,
Agreement to Arbitrate (collectively, the “Purchase Agreement”); and (b) Representations
and Acknowledgements (“R&As” and together with the Purchase Agreement, the
“Agreement”).
20

6. The Agreement provides that the Agreement is governed by Virginia law.
21

7. Ms. Castillo signed the R&As.
22

13
Wellness Int’l Network, Ltd., 135 S. Ct. at 1947 (“Sharif contends that to the extent litigants may validly consent to
adjudication by a bankruptcy court, such consent must be expressed. We disagree. Nothing in the Constitution requires
that consent to adjudication by a bankruptcy court be express. Nor does the relevant statute, 28 U.S.C. § 157, mandate
express consent . . . .”).
14
See id.
15
Dkt. No. 35.
16
Id. at 5; Dkt. 38-1.
17
Dkt. 38-1; Dkt. No. 35, at 5.
18
Dkt. No. 35, at 5.
19
Id.
20
Id.
21
Id.
22
Id.
Case 24-07005 Document 42 Filed in TXSB on 08/13/26 Page 5 of 27

8. Mr. Castillo signed the Agreement on behalf of Castle and as a guarantor.
23

9. Ms. Castillo signed the Agreement both on behalf of Castle and as a guarantor.
24

10. Ms. Castillo made numerous written representations to Plaintiff on behalf of Castle and as
a guarantor.
25

11. By entering the Purchase Agreement, both Defendants made the following written
representations, warranties, and covenants to Plaintiff, among others:

a. Representations that Castle was solvent.
26

b. Representations regarding the financial condition of Castle and Defendant,
individually, including an affirmative obligation to inform Plaintiff of any material
adverse changes in the financial condition or operations of Castle.
27

c. Representations that Castle would not prevent payment of Plaintiff’s debits, permit
diversion of the Castle’s receipts, or engage in actions that had an adverse effect
upon Seller/Castle’s obligations under the Agreement.
28

d. Representations that Castle would not enter into any arrangement, agreement or
commitment for any additional financing, whether in the form of a purchase and
sale of receivables, the sale of accounts receivable, or a loan (whether secured or
unsecured) with any party other than Plaintiff without Plaintiff’s written consent.
29

12. Under the Purchase Agreement, Plaintiff agreed to pay Castle $400,000, minus $10,000 in
origination fees, for a total of $390,000 (the “Net Purchase Price”), in exchange for the
right to all of Castle’s accounts, receipts, contract rights, and other rights to payment arising
from or relating to the payment to Castle through cash, checks, electronic transfers, ACH
transfers, credit cards, charge cards, debit cards, prepaid cards, mobile payments (including
Apple Pay and other ACH payments) and other similar payment methods that may accrue
to Castle in the ordinary course of Castle’s business (collectively, the “Receipts”) until
Castle paid $568,000.00 (the “Receipts Purchased Amount”) to Plaintiff in full.
30

13. On March 28, 2022, Plaintiff transferred the Net Purchase Price to Castle.
31

14. The Purchase Agreement entitled Plaintiff to collect a weekly amount of $5,466.00 (the
“Specified Amount”) or in a variable amount equal to 3.0% (the “Specified Percentage”)

23
Id.
24
Id.
25
Id.
26
Dkt. No. 35, at 6.
27
Id.; Dkt. No. 38-3, at 7.
28
Dkt. No. 35, at 6; Dkt. No. 38-3, at 7.
29
Dkt. No. 35, at 6; Dkt. No. 38-3, at 7.
30
Dkt. No. 35, at 7.
31
Dkt. No. 35, at 6.
Case 24-07005 Document 42 Filed in TXSB on 08/13/26 Page 6 of 27

from Castle’s bank account until such time as Plaintiff received payment in full of the
Receipts Purchased Amount.
32
Castle’s bank account is with Plains Capital Bank, and the
last four digits of the account are 5103 (the “Castle Account”).
33
The Defendants’ personal
bank account is a Plains Capital Bank account ending in the four digits 5301 (the “Personal
Account”).
34

15. In the event of a breach of the Agreement, the Specified Percentage increases to 100% and
the unpaid balance of the Receipts Purchased Amount becomes immediately payable.
35

16. To allow Plaintiff to collect its Receipts Purchased Amount, the Purchase Agreement
requires Castle to use only one bank account to deposit all Receipts collected by Castle,
which was designated by the parties in the Purchase Agreement and fully accessible to
Plaintiff.
36

17. The Purchase Agreement prohibits Castle from (i) changing the account designated for the
delivery of Receipts; (ii) setting up multiple accounts into which any of the Castle’s
receipts are deposited or otherwise transferred; (iii) blocking or stopping payment on
Plaintiff’s debit; (iv) permitting any event to occur that could cause diversion of any of
Castle’s receipts; (v) or taking any other action that could have any adverse effect upon
Castle’s obligations under the Agreement.
37

18. The Purchase Agreement lists a number of “Events of Default,” including “(e) any debit is
rejected or returned due to insufficient funds and Seller [Castle] fails to respond to . . .
inquiries or to contact Purchaser within five (5) business days.”
38
The Purchase Agreement
grants Plaintiff a blanket lien on Castle’s assets, including but not limited to: all accounts,
accounts receivable, contracts, real property leases, notes, bills, acceptances, chose in
action, chattel paper, instruments, inventory, goods, equipment, supplies, furniture, cash,
and general intangibles.
39

19. Plaintiff’s lien was perfected by its previously filed Uniform Commercial Code financing
statement as to Castle on file with the secretary of state for the State of Texas (the “Kapitus
UCC-1”).
40

20. Approximately seventy-nine (79) days after entering into the Purchase Agreement, Castle’s
June 14, 2022, payment to Plaintiff did not clear and was returned to Plaintiff due to
insufficient funds.
41

32
Id.
33
See Audio Tr. Transcript, April 1, 2026, at 10:19-10:20 am.
34
Audio Tr. Transcript, March 31, 2026, at 4:31-4:32 pm.
35
Id.
36
Id.
37
Id.
38
Id.
39
Dkt. No. 35, at 8.
40
Id.
41
Id.
Case 24-07005 Document 42 Filed in TXSB on 08/13/26 Page 7 of 27

21. In total, Defendants, on behalf of Castle and as guarantors, made thirteen (13) payments to
Plaintiff: (i) ten (10) payments between April 6, 2022, and June 8, 2022, for a total of
$54,660; (ii) two (2) payments on July 6, 2022, totaling $16,398; and (iii) one (1) payment
on August 12, 2022, in the amount of $2,733.00.
42

22. On May 27, 2022, Castle, via Ms. Castillo, entered into a “Castle Cash Advance
Agreement” with Unique Funding Solutions, LLC (“Unique Funding”) for the sale of
Castle’s future receipts/receivables.
43

23. On June 19, 2023, Castle and Ms. Castillo were sued by Unique Funding.
44

24. On September 6, 2022, Castle and Defendants were sued by Billd Exchange, LLC (“Billd
Exchange”).
45

25. In its lawsuit, Billd Exchange, LLC, sought at least $1,056,418.85 from both Castle and
Defendants, individually.
46

26. Plaintiff is a secured creditor of Castle.
47

27. Plaintiff is an unsecured creditor of Defendants.
48

28. On February 26, 2024, Defendants filed a “Voluntary Petition for Bankruptcy Under
Chapter 7” of the Bankruptcy Code.
49

29. Castle is listed as a “codebtor” of Defendants on the “Voluntary Petition for Bankruptcy
Under Chapter 7.”
50

30. Plaintiff’s claim against Defendants, including post-petition interest at the contractual rate
as well as additional costs, attorney’s fees, and expenses is $710,241.07 (the “Debt”), as of
October 3, 2025.
51
Per the Complaint, the $710,241.07 is comprised of a contractual
balance of $496,974.00, plus $84,417.32 in interest at a 10% rate covering the period of
6/17/2022 to 2/26/2024 (including a $136.16 per diem), $125,164.75 in attorney’s fees,
$2,500 in default fees, and $1,185 in ACH fees.
52

B. Evidentiary Standard

42
Id.
43
Id.
44
Id.
45
Dkt. No. 35, at 9.
46
Id.
47
Id.
48
Id.
49
Id.
50
Id.
51
Id.
52
Dkt. 1, at 3, n.2.
Case 24-07005 Document 42 Filed in TXSB on 08/13/26 Page 8 of 27

Plaintiff must prove by a preponderance of the evidence that the Debt is non-dischargeable
under 11 U.S.C. § 523. The United States Supreme Court held in Grogan v. Garner that the
standard of proof for dischargeability under 11 U.S.C. § 523 is the ordinary preponderance-of-the-
evidence standard.
53
The Court reasoned that Congress intended this standard to apply uniformly
to all exceptions listed in § 523(a), because there is no indication in the statute that different
exceptions require different burdens of proof.
54

C. Plaintiff’s Complaint
In its Complaint, Plaintiff alleges the following causes of action, to wit: (1) Count I – non-
dischargeability of debt under 11 U.S.C. § 523(a)(2)(a) for false pretenses, false representations,
and actual fraud (as to both Defendants); (2) Count II – non-dischargeability of debt under 11
U.S.C. § 523(a)(2)(b) for use of a statement in writing that is materially false respecting the
debtor’s or an insider’s financial condition (as to both Defendants); (3) Count III – non-
dischargeability of debt under 11 U.S.C. § 523(a)(4) for fraud or defalcation while acting in a
fiduciary capacity, embezzlement, or larceny (as to both Defendants); (4) Count IV – non-
dischargeability of debt under 11 U.S.C. § 523(a)(6) for willful and malicious injury by the debtors
(as to both Defendants); and (5) attorney’s fees and costs.
55

D. Bankruptcy Rule 7052 Motion for Judgment on Partial Findings
On April 1, 2026, this Court held a trial and after Plaintiff presented its case in chief and
rested, Defendants moved for judgment on all four Counts under Bankruptcy Rule 7052, which
incorporates Rule 52(c).
56
Under Rule 52(c), if a party rests their case-in-chief or has been fully
heard on an issue in a non-jury trial, and “the court finds against the party on that issue, the court

53
Grogan v. Garner, 498 U.S. 279, 291 (1991).
54
Id. at 287.
55
Dkt. No. 1, at 24–36.
56
See Audio Tr. Transcript, April 1, 2026, at 3:37 pm.
Case 24-07005 Document 42 Filed in TXSB on 08/13/26 Page 9 of 27

may enter judgment against the party on a claim or defense that, under the controlling law, can be
maintained or defeated only with a favorable finding on that issue.”
57
Judgment entered under Rule
52(c) is made after the trial court has heard all of the “evidence bearing on crucial issues of fact.”
58

The Court will next consider each Count in turn.
1. Count I: Non-dischargeability of debt under 11 U.S.C. § 523(a)(2)(A) for false
pretenses, false representations, and actual fraud (as to both Defendants)

In Count I, Plaintiffs allege that Defendants obtained the Debt by false pretenses, false
representations, and/or actual fraud within the meaning of 11 U.S.C. § 523(a)(2)(A).
59
Section
523(a)(2)(A) provides that:
(a) A discharge under section 727 . . . of this title does not discharge an individual
debtor from any debt attempted in any manner to evade or defeat such tax;

(2) for money, property, services, or an extension, renewal, or refinancing
of credit, to the extent obtained by—

(A) false pretenses, a false representation, or actual fraud, other than
a statement respecting the debtor’s or an insider’s financial
condition.
60

The Supreme Court has distinguished between “false pretenses and representations” and
“actual fraud,” and recognized two distinct paths for non-dischargeability under § 523(a)(2)(A).
61

A. False Representations and False Pretenses
For a debtor’s representation to be a false representation or false pretense, “it must have
been: (1) a knowing and fraudulent falsehood, (2) describing past or current facts, (3) that was
relied upon by the other party.”
62
“A debtor’s subjective intent may be inferred by examining the

57
Fed. R. Civ. P. 52(c).
58
Samson v. Apollo Res., Inc., 242 F.3d 629, 632 (5th Cir. 2001).
59
Dkt. No. 1, at 24–27.
60
11 U.S.C. § 523(a)(2)(A).
61
See In re Burg, 641 B.R. 120, 134 (Bankr. S.D. Tex. 2022) (citing Husky Int’l Elecs., Inc. v. Ritz, 136 S. Ct. 1581,
1586 (2016).
62
Id.
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totality of the circumstances because it most commonly cannot be established by direct
evidence.”
63
To determine the dischargeability of a debt under § 523(a) in an adversary proceeding,
the plaintiff bears the burden of proving the elements by a preponderance of the evidence.
64

i. Knowing and fraudulent falsehood
The first element that the plaintiff must prove to make a debt non-dischargeable under a §
523(a)(2)(A) false pretenses and representations theory is that the defendant made a knowing and
fraudulent falsehood.
65
Whether a knowing and fraudulent falsehood has been made depends on
the subjective mindset of the promisor
66
:
A misrepresentation is fraudulent if the maker . . . knows or believes . . . the matter
is not as represented, or does not have the confidence in the accuracy of his
representation as stated or implied, or knows . . . he does not have the basis for his
representation as stated or implied.
67

One example of a false representation under § 523(a)(2)(A) is if a debtor misrepresents his
or her intention to perform contractual duties.
68
Fraudulent intent can be inferred from a debtor’s
acts after the representation was made, such as breach of promise to perform combined with “slight
circumstantial evidence” of fraud.
69
A breach of contract soon after signing the contract can be
circumstantial evidence of an intent not to fulfill the contract.
70

Here, Defendants represented in the Agreement that Defendants would maintain enough
money in the Castle Account to make their minimum weekly payments.
71
But Mr. Castillo
admitted on the record that on multiple occasions he transferred Castle’s income out of the Castle

63
Id.
64
See Grogan, 498 U.S. at 291.
65
In re Burg, 641 B.R. at 134.
66
Id.
67
Id. (quoting AT&T Card Servs. v. Mercer (In re Mercer), 246 F.3d 391, 407 (5th Cir. 2001)).
68
Id. at 135; Nat’l Diversity Council v. Carter (In re Carter), Nos. 17-35082, 17-03446, 2018 WL 6060391, at *23
(Bankr. S.D. Tex. 2018).
69
In re Carter, No. 17-35082, 2018 WL 6060391, at *23–24 (Bankr. S.D. Tex. Nov. 19, 2018).
70
See In re Tegeler, 586 B.R. 598, 638 (Bankr. S.D. Tex. 2018).
71
Dkt. No. 38-3, at 2, 7.
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Account to Defendants’ Personal Account before Plaintiff could withdraw it from the Castle
Account.
72
Mr. Castillo also admitted to commingling Castle’s income with Defendants’ own
money by transferring Castle’s income to Defendants’ Personal Account.
73
This transferring of
funds caused Defendants to default on the Agreement only seventy-nine (79) days after Defendants
signed the Agreement.
74
Because Mr. Castillo transferred money out of the Castle Account and
commingled it with personal funds so soon after signing the Agreement, this short time period is
circumstantial evidence showing that Defendants never intended to uphold their promise to
maintain enough money in the Castle Account for Plaintiff to withdraw.
75
Thus, under §
523(a)(2)(A), Defendants’ agreement to maintain enough money in the Castle Account to make
their minimum weekly payments was a knowing falsehood.
Plaintiff also argues that Defendants breached the Agreement by entering a subsequent
funding agreement with a third party, Unique Funding.
76
Mr. Castillo admitted on the record that
only sixty (60) days after signing the Agreement, Castle entered into a Merchant Cash Advance
(“MCA”) agreement with Unique Funding.
77
The Unique Funding MCA was signed by Ms.
Castillo, on May 27, 2022.
78
Because Ms. Castillo signed the MCA so quickly after signing the
Agreement with Plaintiff, this short time period is circumstantial evidence showing that
Defendants never intended to uphold their promise not to sign a subsequent funding agreement.
79

Thus, under § 523(a)(2)(A), Defendants’ promise not to enter any subsequent funding agreements
without Plaintiff’s written consent was a knowing falsehood.

72
Audio Tr. Transcript, April 1, 2026.
73
Audio Tr. Transcript, April 1, 2026.
74
See Audio Tr. Transcript, April 1, 2026.
75
See In re Burg, 641 B.R. at 135; see also In re Carter, 2018 WL 6060391, at *23.
76
Dkt. No. 38-3, at 8-9.
77
See Audio Tr. Transcript, April 1, 2026.
78
Dkt. No. 38-33.
79
See In re Burg, 641 B.R. at 135; see also In re Carter, 2018 WL 6060391, at *23.
Case 24-07005 Document 42 Filed in TXSB on 08/13/26 Page 12 of 27

ii. Statements that falsely depict current or past facts
The second element of non-dischargeability under a § 523(a)(2)(A) false pretenses and
representations theory is that the false representation must include statements that falsely depict
current or past facts.
80
The Fifth Circuit has held that misrepresentations concerning a current fact
of the debtor’s future intention will satisfy this element.
81

Here, Defendants defaulted on payments only seventy-nine (79) days after signing the
Agreement.
82
Defendants also signed a subsequent MCA agreement with a third party, Unique
Funding, only sixty (60) days after signing the Agreement.
83
Considering the short amount of time
it took Defendants to renege on their promises to both make weekly minimum payments and to
refrain from signing a subsequent funding agreement without Plaintiff’s written consent, it can be
inferred that when Defendants signed the Agreement they made misrepresentations about whether
they intended to perform under the Agreement.
84
Thus, under § 523(a)(2)(A), Defendants’
representations that they would maintain enough money in the Castle account and would not sign
a subsequent funding agreement were false representations of their future intentions.
iii. Whether Plaintiff relied on Defendant’s misrepresentations
The third element for non-dischargeability under the false pretenses and representations
theory of § 523(a)(2)(A) is whether the plaintiff relied on a debtor’s misrepresentation.
85
While
the reliance need not be reasonable, it must be justifiable.
86
Although justifiability is a looser
standard than reasonableness, the Supreme Court has clarified that it is not without limits: “[a

80
In re Burg, 641 B.R. at 136.
81
Allison v. Roberts (In re Allison), 960 F.2d 481, 483–84 (5th Cir. 1992).
82
Dkt. No. 35, at 8.
83
Id.
84
See In re Burg, 641 B.R. at 135; see also In re Carter, 2018 WL 6060391, at *23.
85
In re Burg, 641 B.R. at 137.
86
In re Jacobson, No. 06-51460, 2007 WL 2141961, at *2 (5th Cir. July 26, 2007) (citing Field v. Mans, 516 U.S. 59,
71 (1995)).
Case 24-07005 Document 42 Filed in TXSB on 08/13/26 Page 13 of 27

person] cannot recover if he blindly relies upon a misrepresentation the falsity of which would be
patent to him if he had utilized his opportunity to make a cursory examination or investigation.”
87

Justifiable reliance requires that “the existence of the intention is material and the recipient
has reason to believe that it will be carried out.”
88
A investigation by a plaintiff into the truth of a
debtor’s representations is not required unless the falsehood is “readily apparent or obvious or
there are ‘red flags’ indicating such reliance is unwarranted.”
89

Here, Defendants represented in the Agreement that Defendants would maintain enough
money in the Castle Account to make their minimum weekly payments and would not enter
subsequent funding agreements.
90
Plaintiff testified that it investigated Castle’s financial health by
reviewing Castle’s bank statements for the year prior to the Agreement’s execution and by
interviewing the Defendants.
91
Plaintiff also testified that there were no red flags in Castle’s
financial records, and Castle appeared to be a financially healthy company.
92
Therefore, under §
523(a)(2)(A), because Defendants represented they would make their weekly payments and would
not enter subsequent funding agreements, and because Plaintiff investigated Castle’s financial
health and found no readily apparent issues, Plaintiff’s reliance on Defendants’ misrepresentations
was justifiable.
Thus, under § 523(a)(2)(A), Plaintiff has proven by a preponderance of the evidence that
because both Mr. Castillo and Ms. Castillo’s written statements that they would make their
minimum weekly payments and would not sign a subsequent funding agreement were made with
the Defendants’ knowledge that the statements were false, and because the statements were false

87
Fields, 516 U.S. at 71.
88
In re Mercer, 246 F.3d 391, 416 (5th Cir. 2001).
89
In re Carter, 2018 WL 6060391, at *26.
90
Dkt. No. 38-3, at 2, 7.
91
See In re Carter, 2018 WL 6060391, at *26; Audio Tr. Transcript, April 1, 2026.
92
Audio Tr. Transcript, April 1, 2026.
Case 24-07005 Document 42 Filed in TXSB on 08/13/26 Page 14 of 27

representations of the Defendants’ future intentions and were justifiably relied on by Plaintiff, the
Debt is nondischargeable as to both Debtors.
B. Actual Fraud
To prevail on an actual fraud claim under § 523(a)(2)(A), Plaintiff must demonstrate that:
(i) the debtor made representations; (ii) at the time the representations were made the debtor knew
they were false; (iii) the debtor made the representations with the intention and purpose to deceive
the creditor; (iv) the creditor relied on such representations; and (v) the creditor sustained losses
as a proximate result of the representations.
93
Although the Court is mindful that for actual fraud,
a false representation is not always a required element,
94
the Court finds it appropriate to consider
whether false misrepresentations occurred here given that Plaintiff alleges in Count I that
Defendants made false representations.
95

i. Whether Debtors knowingly made false representations with intent to deceive
First, “‘[a] misrepresentation is fraudulent if the maker . . . knows or believes . . . the matter
is not as’ represented, or ‘does not have the confidence in the accuracy of his representation’ as
stated or implied, or ‘knows . . . he does not have the basis for his representation’ as stated or
implied.”
96
When considering whether a knowing and fraudulent representation was made, courts
look to the subjective mindset of the defendant.
97
“A representation of the maker’s own intention
to do . . . a particular thing is fraudulent if he does not have that intention.”
98
“Courts recognize
that circumstantial evidence may be used to establish the debtor’s subjective intent as it most

93
In re Bortz, No. 22-33772, 2025 WL 1428161, at *10 (Bankr. S.D. Tex. May 16, 2025).
94
Husky Int’l Elecs., Inc. v. Ritz, 136 S. Ct. 1581, 1586 (2016).
95
Dkt. 1, at 24–27.
96
In re Bortz, 2025 WL 1428161, at *10 (quoting In re Mercer, 246 F.3d 391, 407 (5th Cir. 2001)).
97
Id.
98
Id. (quoting In re Mercer, 246 F.3d at 407).
Case 24-07005 Document 42 Filed in TXSB on 08/13/26 Page 15 of 27

commonly cannot be proven by direct evidence.”
99
“Reckless indifference to the truth can be
sufficient to establish intent to deceive under § 523(a)(2)(A).”
100

Here, Defendants represented in the Agreement that they would maintain enough money
in the Castle Account to meet their weekly minimum payments.
101
But shortly after signing the
Agreement, Mr. Castillo transferred Castle’s income to Defendant’s Personal Account and
commingled it with the Defendants’ own money.
102
As a result, Castle defaulted on its payments
only seventy-nine (79) days after Defendants signing the Agreement.
103
The fact that Castle
defaulted so quickly after Defendants signing the Agreement is circumstantial evidence showing
that Defendants intended to deceive Plaintiff when Defendants falsely represented that they would
keep enough money in the Castle Account to pay Plaintiff.
104
Thus, under § 523(a)(2)(A),
Defendants knew their representation in the Agreement that they would keep enough money in the
Castle Account to make their minimum weekly payments was false and Defendants made the
representation with the intent to deceive Plaintiff.
Defendants also represented in the Agreement that they would not sign any subsequent
funding agreements without Plaintiff’s consent, yet Ms. Castillo signed a subsequent MCA on
behalf of Castle only sixty (60) days after signing the Agreement.
105
Because Ms. Castillo signed
the subsequent MCA only sixty (60) days after signing the Agreement with Plaintiff, this short
period is circumstantial evidence showing Defendants intended to deceive Plaintiff when
Defendants falsely represented they would not sign another MCA agreement.
106
Thus, under §

99
Id.
100
Id.
101
Dkt. No. 38-3, at 2.
102
Audio Tr. Transcript, April 1, 2026; Dkt. No. 35, at 8.
103
Audio Tr. Transcript, April 1, 2026; Dkt. No. 35, at 8.
104
See In re Burg, 641 B.R. at 135; see also In re Carter, 2018 WL 6060391, at *23.
105
Dkt. No. 38-3, at 7.
106
See In re Burg, 641 B.R. at 135; see also In re Carter, 2018 WL 6060391, at *23.
Case 24-07005 Document 42 Filed in TXSB on 08/13/26 Page 16 of 27

523(a)(2)(A), Defendants knew that their representation in the Agreement that they would not sign
another MCA without Plaintiff’s written consent was false and Defendants made the representation
with the intent to deceive Plaintiff.
ii. Actual and justifiable reliance
Second, actual fraud requires that the plaintiff show actual and justifiable
reliance.
107
Actual reliance, which is equivalent to causation-in-fact, requires a showing that the
plaintiff’s reliance was “a substantial factor in determining the course of conduct that results in his
loss.”
108
The standard for actual reliance is a low bar: the plaintiff must merely prove that the
plaintiff “in fact relied upon the representations of the debtor.”
109
Justifiable reliance requires that “the existence of the intention is material and the recipient
has reason to believe that it will be carried out.”
110
Justifiable reliance requires a reasonable
reliance but is a subjective standard that is more relaxed than the objective reasonable reliance
standard.
111
A investigation by a plaintiff into the truth of a debtor’s representations is not required
unless the falsehood is “readily apparent or obvious or there are ‘red flags’ indicating such reliance
is unwarranted.”
112

Here, Defendants represented in the Agreement that Defendants would maintain enough
money in the Castle Account to make their minimum weekly payments and would not enter
subsequent funding agreements.
113
Plaintiff testified that it investigated Castle’s financial health
by reviewing Castle’s bank statements for the year prior to the Agreement’s execution and by

107
In re Bortz, 2025 WL 1428161, at *11.
108
Id. (quoting In re Mercer, 246 F.3d at 413).
109
Id. (quoting In re Mercer, 246 F.3d at 413).
110
Id. at 12 (quoting In re Mercer, 246 F.3d at 416).
111
Id.
112
Id. (quoting In re Hurst, 337 B.R. 125, 133–34 (Bankr. N.D. Tex. 2005)).
113
Dkt. No. 38-3, at 2, 7.
Case 24-07005 Document 42 Filed in TXSB on 08/13/26 Page 17 of 27

interviewing the Defendants.
114
Plaintiff testified that there were no red flags in Castle’s financial
records, and Castle appeared to be a financially healthy company.
115
Therefore, under §
523(a)(2)(A), because Defendants represented they would make their weekly payments and would
not enter subsequent funding agreements, and because Plaintiff investigated Castle’s financial
health and found no readily apparent issues, Plaintiff’s reliance on Defendants’ representations
was actual and justifiable.
iii. Whether Defendants’ misrepresentation was the proximate cause of Plaintiff’s loss

Third, § 523(a)(2)(A) requires that the defendant’s misrepresentations be the proximate
cause of the plaintiff’s loss.
116
This requires a showing that the misrepresentations were the
“proximate cause of the injury—i.e., they foreseeably could have produced the injury that the
Plaintiff suffered.”
117

Here, Plaintiff alleges that Defendants agreed to maintain enough money in the Castle
Account to make their weekly minimum payments and agreed not to sign a subsequent funding
agreement without Plaintiff’s written consent.
118
Plaintiff claims that it relied on these statements
when it entered the Agreement and transferred the Net Purchase Price to Defendants.
119
But on
June 14, 2022, a mere seventy-nine (79) days after signing the Agreement, Castle defaulted on the
payments.
120
Thus, Plaintiff’s reliance on Defendants’ misrepresentation was the proximate cause
of Plaintiff’s injury, because Plaintiff transferred the Net Purchase Price in reliance on Defendants’
promise to repay, and then Plaintiff was unable to recover the money when Defendant defaulted.

114
See In re Carter, 2018 WL 6060391, at *26; Audio Tr. Transcript, April 1, 2026.
115
Audio Tr. Transcript, April 1, 2026.
116
In re Bortz, 2025 WL 1428161, at *12.
117
Id. (quoting In re Rifai, 604 B.R. 277, 321 (Bankr. S.D. Tex. 2019)).
118
Dkt. No. 38-3, at 2, 7.
119
Dkt. No. 1, at 25–27.
120
Dkt. No. 35, at 8.
Case 24-07005 Document 42 Filed in TXSB on 08/13/26 Page 18 of 27

Therefore, under § 523(a)(2)(A), Defendants’ misrepresentation that they would make the
minimum weekly payments was the proximate cause of Plaintiff’s injury.
Thus, under § 523(a)(2)(A), Plaintiff has proven by a preponderance of the evidence that
because both Mr. Castillo and Ms. Castillo’s written statements that they would keep enough
money in the Castle Account to cover the minimum weekly payments and would not sign a
subsequent funding agreement were made with the Defendants’ knowledge that the statements
were false, were justifiably relied on by Plaintiff, and were the proximate cause of Plaintiff’s
injury, the Debt is non-dischargeable as to both Defendants.
2. Count II: non-dischargeability of debt under 11 U.S.C. § 523(a)(2)(B) for use of a
statement in writing that is materially false respecting the debtor’s or an insider’s
financial condition (as to both Defendants)

Pursuant to 11 U.S.C § 523 – Exceptions to Discharge:

(a) A discharge under section 727 . . . of this title does not discharge an individual
debtor from any debt –

(2) for money, property, services, or an extension, renewal, or refinancing
of credit, to the extent obtained by—

(B) use of a statement in writing –

(i) that is materially false;
(ii) respecting the debtor’s or an insider’s financial
condition;
(iii) on which the creditor to whom the debtor is liable for
such money, property, services or credit reasonably relied;
and
(iv) that the debtor caused to be made or published with
intent to deceive . . . .
121

The Court will consider whether Plaintiff has met its burden of proving each element of §
523(a)(2)(B) by a preponderance of the evidence.
122

121
11 U.S.C § 523(a)(2)(B).
122
Grogan, 498 U.S. at 291.
Case 24-07005 Document 42 Filed in TXSB on 08/13/26 Page 19 of 27

A. Use of a statement in writing respecting the debtor’s or an insider’s financial
condition

A statement respecting the debtor or an insider of a debtor’s financial condition must be in
writing to make a debt non-dischargeable under § 523(a)(2)(B).
123
An “insider” includes— (A) if
the debtor is an individual . . . (iv) [a] corporation of which the debtor is a director, officer, or
person in control.
124

“The debtor must have written, signed, or adopted the writing.”
125
Written statements
evidencing a debtor’s financial condition may include “balance sheets, income statements,
statements of changes in overall financial position, or income and debt statements that present the
debtor or insider’s net worth, overall financial health, or equation of assets and liabilities.”
126

“Statements falling within section 523(a)(2)(B) must do more than simply prompt
speculation about the debtor’s finances; rather, they must be ‘sufficient to determine financial
responsibility.’”
127
Furthermore, “statements of income and expenses or schedules of assets and
liabilities” will qualify.
128
But, “transactional documents that merely imply some financial status
do not qualify as statements regarding the debtor’s financial condition.”
129

Section 523(a)(2)(B)(i) also requires that the written statement the plaintiff relied upon to
incur the debt be materially false.
130
A materially false financial statement is one which “paints a
substantially untruthful picture of a financial condition by misrepresenting information of the type

123
See 11 U.S.C. § 523(a)(2)(B).
124
11 U.S.C. § 101(31).
125
In re Hosseini, No. 18-20177, 2021 WL 1961921, at *8 (Bankr. S.D. Tex. May 14, 2021).
126
Heritage Bank v. McCracken (In re McCracken), 586 B.R. 247, 255 (Bankr. S.D. Tex. 2018). Lamar, Archer &
Cofrin, LLP v. Appling, 584 U.S. 709, 721 (2018) (holding that the phrase “[a] statement respecting the debtor’s
financial condition” in 11 U.S.C. § 523(a)(2)(A) “encompass[es] statements addressing just one or some of a debtor’s
assets or liabilities”).
127
In re Janney, 557 B.R. 476, 481–82 (Bankr. M.D. La. 2016) (quoting In re Price, 123 B.R. 42, 45 (Bankr. N.D. Ill.
1991)).
128
Id. at 482 (quoting In re Price, 123 B.R. 42, 45 (Bankr. N.D. Ill. 1991)).
129
Id.
130
11 U.S.C. § 523(a)(2)(B)(i).
Case 24-07005 Document 42 Filed in TXSB on 08/13/26 Page 20 of 27

which would normally affect the decision to grant credit.”
131
“[M]ateriality should be judged by
comparing the debtor’s actual financial condition with the picture debtor paints of it.”
132
“To be
shown as ‘materially false,’ the document must not only be erroneous, but also contain information
causing the document to be substantially inaccurate.”
133
A false statement about a single asset can
be a materially false “statement respecting the debtor’s financial condition.”
134

Here, Ms. Castillo is the 100% owner of Castle, which is a corporation.
135
Ms. Castillo
therefore has control of Castle, and so Castle qualifies as an “insider” of the Debtors.
136

Plaintiff alleges that Defendants submitted false written financial records in support of the
insider Castle’s Application for Funding and misrepresented in the Agreement that Defendants
would maintain enough money in the Castle Account to make the minimum weekly payments and
would not sign a subsequent funding agreement without Plaintiff’s written consent.
137
While
Defendants did submit twelve months of Castle’s bank records in support of the Application for
Funding,
138
Plaintiff failed to present any evidence indicating that those records were falsified in
any way. Defendants’ representation in the Agreement regarding maintaining money in the Castle
Account is not a statement regarding Castle’s financial condition because it is merely a promise to
repay and it does not contain information about Castle’s financial condition.
139
Likewise,
Defendants’ representation that they would not sign a subsequent funding agreement is merely a

131
In re McCracken, 586 B.R. at 256.
132
In re Nance, 70 B.R. 318, 321 (Bankr. N.D. Tex. 1987).
133
First Nat’l Bank of Byers, N.A. v. Slonaker (In re Slonaker), 269 B.R. 595, 602–03 (Bankr. N.D. Tex. 2001).
134
Appling, 584 U.S. at 712.
135
Dkt. No. 35, at 5.
136
See 11 U.S.C. § 101(31).
137
Dkt. 1, at 27–30; Dkt. No. 38-3, at 2, 7.
138
Dkt. No. 38-9, 38-10, 38-11, 38-12, 38-13, 38-14, 38-15, 38-16, 38-17.
139
In re Janney, 557 B.R. at 482 (“[T]ransactional documents that merely imply some financial status do not qualify
as statements regarding the debtor's financial condition.”); see also, e.g., In re Segal, 195 B.R. 325, 332 (Bankr. E.D.
Pa. 1996) (lease and promissory note were not statements regarding the debtor’s financial condition); In re Oakley,
503 B.R. 407, 430 (Bankr. E.D. Pa. 2013) (“A promissory note, which contains terms and conditions regarding
repayment, is not a statement respecting the payee’s financial condition.”).
Case 24-07005 Document 42 Filed in TXSB on 08/13/26 Page 21 of 27

promise to refrain from entering another funding agreement and does not contain any information
about Castle’s financial condition.
140
Therefore, under § 523(a)(2)(B), Castle’s bank records that
were submitted with the Application for Funding and Defendants’ written representations in the
Agreement that they would make the minimum weekly payments and would not sign a subsequent
funding agreement are not statements regarding the insider Castle’s financial condition.
Thus, Plaintiff has failed to prove by a preponderance of the evidence that Defendants
made materially false written statements regarding the insider Castle’s financial condition, and so
§ 523(a)(2)(B) does not except from discharge the Debt owed by Defendants to Plaintiff.
3. Count III: non-dischargeability of debt under 11 U.S.C. § 523(a)(4) for fraud or
defalcation while acting in a fiduciary capacity, embezzlement, or larceny (as to both
Defendants)

Plaintiff argues that under 11 U.S.C. § 523(a)(4) the Debt is nondischargeable “for fraud
or defalcation while acting in a fiduciary capacity, embezzlement, or larceny.”
141
But at trial, after
Plaintiffs presented their case in chief and rested, Defendants brought a Bankruptcy Rule 7052
motion for judgment on partial findings, and the Court dismissed Count III for reasons stated on
the record.
142
Thus, the Court will not analyze Count III here.
4. Count IV: non-dischargeability of debt under 11 U.S.C. § 523(a)(6) for willful and
malicious injury by the debtors (as to both Defendants)

Plaintiff argues that under 11 U.S.C. § 523(a)(6), Defendants’ debt should be
nondischargeable for committing a willful and malicious injury.
143
The Supreme Court answered
the “pivotal question” of whether § 523(a)(6) covers “acts, done intentionally, that cause injury . .
. or only acts done with the actual intent to cause injury.”
144
The Supreme Court’s conclusion was

140
See In re Janney, 557 B.R. at 482.
141
Dkt. No. 1, at 30.
142
Audio Tr. Transcript, April 1, 2026.
143
Dkt. No. 1, at 34–36.
144
Matter of Miller, 156 F.3d 598, 604 (5th Cir. 1998) (citing Kawaauhau v. Geiger, 118 S. Ct. 974, 977 (1998)).
Case 24-07005 Document 42 Filed in TXSB on 08/13/26 Page 22 of 27

that “[t]he word ‘willful’ in (a)(6) modifies the word ‘injury,’ indicating that non-dischargeability
takes a deliberate or intentional injury, not merely a deliberate or intentional act that leads to
injury.”
145
Furthermore, the Fifth Circuit held that an injury is both willful and malicious if the
debtor intentionally took action that necessarily caused, or was substantially certain to cause, the
injury.
146
Plaintiff must prove non-dischargeability of the debt under § 523(a)(6) by a
preponderance of the evidence.
147

Here, in the Agreement, Plaintiff agreed to pay the Net Purchase Price to Castle and in
return Defendants agreed to deposit Castle’s business income exclusively into the Castle Account
and allow Plaintiff to withdraw the minimum weekly payments.
148
But Mr. Castillo admitted on
the record that he often transferred Castle’s income from the Castle Account to his Personal
Account before Plaintiff could access it.
149
Mr. Castillo also admitted to commingling Castle’s
income with Defendants’ own money by transferring Castle’s income to Defendants’ Personal
Account.
150
This transferring of funds led to Defendants defaulting on the Agreement only
seventy-nine (79) days after signing the Agreement.
151
Mr. Castillo further testified that he was
aware that transferring Castle’s income to the Personal Account meant that Plaintiff would not be
able to access it.
152
Therefore, Mr. Castillo committed acts—the transferring of money to the
Personal Account on multiple occasions—that were substantially certain to injure Plaintiff because
Plaintiff was unable to access Castle’s income.
153
Thus, under § 523(a)(6), Mr. Castillo’s
transferring of the funds was willful and malicious.

145
Kawaauhau, 118 S. Ct. at 977.
146
Matter of Miller, 156 F.3d at 606.
147
See Grogan, 498 U.S. at 291.
148
Dkt. No. 38-3, at 1-3.
149
Audio Tr. Transcript, April 1, 2026.
150
Audio Tr. Transcript, April 1, 2026.
151
See Audio Tr. Transcript, April 1, 2026.
152
Audio Tr. Transcript, April 1, 2026.
153
Matter of Miller, 156 F.3d at 606.
Case 24-07005 Document 42 Filed in TXSB on 08/13/26 Page 23 of 27

Defendant also agreed not to sign a subsequent funding agreement without Plaintiff’s
written consent.
154
Yet only sixty (60) days after signing the Agreement, Ms. Castillo signed a
subsequent MCA agreement with Unique Funding on behalf of Castle.
155
Signing the subsequent
MCA was substantially certain to injure Plaintiff because Castle agreed to allow Unique Funding
to withdraw funds from the Castle Account, which would reduce the amount of available money
for Plaintiff to withdraw.
156
Unique Funding withdrew $15,642.86 from Castle’s account both on
June 1, 2022, and also on June 8, 2022, and Castle defaulted on Plaintiff’s Agreement shortly
thereafter on June 14, 2022.
157
Therefore, under § 523(a)(6), Ms. Castillo’s entering into the
agreement with Unique Funding was substantially certain to injure Plaintiff and was therefore
willful and malicious.
Thus, under 11 U.S.C. § 523(a)(6), Plaintiff has shown by a preponderance of the evidence
that both Mr. Castillo and Ms. Castillo committed acts that caused willful and malicious injury to
Plaintiff, and so the Debt owed by Defendants to Plaintiff is nondischargeable as to both Debtors.
5. Attorney’s Fees and Costs
Plaintiff has requested an award of attorney’s fees.
158
“Rule 54(d)(2)(B)(ii) requires the
movant to include in their motion the ‘statute, rule, or other grounds’ that entitles the movant to
attorney’s fees.”
159
“In federal declaratory judgment proceedings, attorney’s fees are granted only
when the controlling substantive law permits recovery.”
160
In the Fifth Circuit, courts apply the
“American Rule,” which mandates that each party “pay their own attorney’s fees.”
161
An exception

154
Dkt. No. 38-3, at 7.
155
Audio Tr. Transcript, April 1, 2026.
156
See Dkt. No. 38-33; see also Dkt. No. 38-29, at 2, 4.
157
Dkt. No. 38-29, at 2, 4.
158
Dkt. No. 1, at 36; Dkt. No. 38-38.
159
In re Sedillo-Soto, No. 24-31067, 2026 WL 700624, at *10 (Bankr. S.D. Tex. Mar. 11, 2026) (quoting In re Cosas
Claras, LP, No. 10-50528-CAG, 2024 WL 3258801, at *3 (Bankr. W.D. Tex. July 1, 2024).
160
Id.
161
Boland Marine & Mfg. Co. v. Rihner, 41 F.3d 997, 1004 (5th Cir. 1995).
Case 24-07005 Document 42 Filed in TXSB on 08/13/26 Page 24 of 27

arises “when specific authority granted by statute or contract . . . states otherwise.”
162
Creditors
can recover attorney’s fees “if there is a contractual or statutory right to fees under state law.”
163

Furthermore, “a nondischargeable debt in a § 523(a)(2)(A) claim encompasses not only the debt
created by the fraud, but also an award of attorneys’ fees, among other damages.”
164

Here, Plaintiff requests an award of attorney’s fees in the amount of $125,164.75 and
requests that the Court declare the attorney’s fees non-dischargeable.
165
According to the
Complaint, these are the contractual fees established by the Agreement.
166
The Agreement contains
the following provision:
3.3 Costs. Seller shall pay to Purchaser all reasonable costs associated with (a) a
breach by Seller of the Transaction Documents and the enforcement thereof, and
(b) the enforcement of Purchaser’s remedies set forth herein, including but not
limited to (i) expenses, court costs and attorneys’ fees of twenty-five percent (25%)
of the total amount due to Purchaser or the actual attorney fees incurred, whichever
is greater . . .
167

Plaintiff claims a contractual balance of $496,974.00, plus $2,500 in default fees and
$1,185 in ACH fees for a total balance of $500,659.
168
The Agreement provides that Plaintiff is
owed 25% of the total balance if there is a breach of contract.
169
Twenty-five percent of $500,659
is $125,164.75, which is the amount Plaintiff claims in attorney’s fees.
170
Thus, because attorney’s
fees awarded by contract are an exception to the American Rule, $125,164.75 in contractual
attorney’s fees are awarded to Plaintiff and must be paid by Defendants.
171
Furthermore, because
the contractual balance of $496,974.00 owed under the Agreement is nondischargeable under §

162
In re Sedillo-Soto, 2026 WL 700624, at *10 (quoting In re Cosas Claras, LP, 2024 WL 3258801, at *11).
163
See In re Tegeler, 586 B.R. 598, 705–12 (Bankr. S.D. Tex. 2018).
164
In re Rifai, 604 B.R. 277, 334 (Bankr. S.D. Tex. 2019) (citing Cohen v. De La Cruz, 523 U.S. 213, 223 (1998)).
165
Dkt. No. 1, at 3–4, n.2; Dkt. No. 36–37.
166
See Dkt. No. 1, at 3–4, n.2.
167
Dkt. No. 38-3, at 9.
168
Dkt. No. 1, at 3–4, n.2.
169
Dkt. No. 38-3, at 9.
170
See Dkt. No. 1, at 3–4, n.2.
171
See In re Tegeler, 586 B.R. 598, 705–12 (Bankr. S.D. Tex. 2018).
Case 24-07005 Document 42 Filed in TXSB on 08/13/26 Page 25 of 27

523(a)(2)(A) and § 523(a)(6) as explained supra,
172
the corresponding $125,164.75 in attorney’s
fees owed under the Agreement are also non-dischargeable under § 523(a)(2)(A) and §
523(a)(6).
173

For the reasons stated herein, this Court holds that under (1) Count I – non-dischargeability
of debt under 11 U.S.C. § 523(a)(2)(a) for false pretenses, false representations, and actual fraud
(as to both Defendants), the pre-petition debt owed to Kapitus Servicing, Inc., as servicing agent
for Kapitus LLC by the defendants Christopher Castillo and Linda Salazar Castillo is non-
dischargeable; under (2) Count II – non-dischargeability of debt under 11 U.S.C. § 523(a)(2)(b)
for use of a statement in writing that is materially false respecting the debtor’s or an insider’s
financial condition (as to both Defendants), the pre-petition debt owed to Kapitus Servicing, Inc.,
as servicing agent for Kapitus LLC, by the defendants Christopher Castillo and Linda Salazar
Castillo is dismissed; under (3) Count III – non-dischargeability of debt under 11 U.S.C. §
523(a)(4) for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny
(as to both Defendants), the pre-petition debt owed to Kapitus Servicing, Inc., as servicing agent
for Kapitus LLC, by the defendants Christopher Castillo and Linda Salazar Castillo is dismissed;
and under (4) Count IV – non-dischargeability of debt under 11 U.S.C. § 523(a)(6) for willful and
malicious injury by the debtors (as to both Defendants), the pre-petition debt owed to Kapitus
Servicing, Inc., as servicing agent for Kapitus LLC, by the defendants Christopher Castillo and
Linda Salazar Castillo is non-dischargeable.
Accordingly, Kapitus Servicing, Inc., as servicing agent for Kapitus LLC, is granted
judgment as against Christopher Castillo and Linda Salazar Castillo in the amount of $710,241.07
(comprised of the contractual balance of $496,974.00, plus $84,417.32 in interest at a 10% rate

172
See Section IV.D.1.; Section IV.D.4.
173
In re Rifai, 604 B.R. at 334 (citing Cohen v. De La Cruz, 523 U.S. at 223).
Case 24-07005 Document 42 Filed in TXSB on 08/13/26 Page 26 of 27

covering the period of 6/17/2022 to 2/26/2024 (including a $136.16 per diem), $125,164.75 in
attorney’s fees and costs, $2,500 in default fees, and $1,185 in ACH fees), and such judgment is
excepted from discharge pursuant to 11 U.S.C. § 523(a)(2)(A) and § 523(a)(6); and pursuant to
Federal Rule of Civil Procedure 54(d)(2)(B)(ii) shall accrue at an interest rate of 4.04% until paid.
V. CONCLUSION
A judgment consistent with this Memorandum Opinion will be entered on the docket
simultaneously herewith.

SIGNED Thursday, August 13, 2026

________________________________
Eduardo V. Rodriguez
Chief United States Bankruptcy Judge

Case 24-07005 Document 42 Filed in TXSB on 08/13/26 Page 27 of 27