Yules v. Gillis

UNITED STATES BANKRUPTCY COURT
FOR THE
DISTRICT OF MASSACHUSETTS
~~~~~~~~~~~~~~~~~~~~~~
In re
ROBERT J. GILLIS, 	Chapter 7
Debtor 	Case No. 09-16977-JNF
~~~~~~~~~~~~~~~~~~~~~~
BRANCH R. YULES,
Plaintiff
v. 	Adv. P. No. 09-1338
ROBERT J. GILLIS,
Defendant
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MEMORANDUM
I. INTRODUCTION
The matter before the Court is the Defendant’s Amended Motion to Dismiss, or in
the Alternative, for Judgment on the Pleadings (the “Motion”), and the Plaintiff’s
Opposition. Through his Complaint, the Plaintiff asserts that a debt allegedly owed to him
by the Defendant is nondischargeable pursuant to 11 U.S.C. § 523(a)(6). The Court heard
the Motion on February 9, 2010 and requested the Plaintiff to file a supplemental brief in
support of his contention that certain monies obtained by the Defendant/Debtor and his
spouse were earmarked for the Plaintiff. 	The Defendant also filed a supplemental
opposition.
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The issue presented is whether the Plaintiff has stated a plausible claim for relief
under 11 U.S.C. § 523(a)(6). Alternatively, in view of the submission of matters outside the
record, the issue is whether the Defendant/Debtor is entitled to summary judgment. For
the 	reasons 	set 	forth 	below, 	the 	Court 	shall 	enter 	judgment 	in 	favor 	of 	the
Defendant/Debtor.
The Court now makes its findings of fact and rulings of law in accordance with Fed.
R. Bankr. P. 7052.
II. FACTS
Robert J. Gillis (the “Debtor”) filed a voluntary petition under Chapter 7 on July 23,
2009. 	On Schedule I-Current Income of Individual Debtor(s), he listed his occupation as
“software engineer.” In his Statement of Financial Affairs, he disclosed additional sources
of income from book royalties and the internet sale of photographs.
The Plaintiff, Branch Yules (“Yules”), timely filed an adversary proceeding against
the Debtor, seeking a determination that a debt arising out of a business venture between
Yules and the Debtor’s spouse is nondischargeable pursuant to 11 U.S.C. § 523(a)(6).
A. The Complaint
Yules’s allegations in the Complaint are critical to a determination of the Motion.
The Court paraphrases those allegations as follows:
Robert Gillis is the husband of Susan Gillis, both of whom
reside at 154 Beach Street, Foxboro, MA 02035-1054.
In or around July, 2003, Susan Gillis acquired real property
consisting of two buildings known and numbered 23 and 25
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Darrow Street, Pawtucket, Rhode Island (the “Property”),
subject to two mortgages totaling approximately $110,000, by
deed from David Wright.
In or around the fall of 2003, Susan Gillis contacted Yules and
proposed that he join her in the business venture of renovating
and selling the Property that she had previously acquired,
because she needed him to capitalize the project.
Yules and Susan Gillis entered into a written “Operating
Agreement” and a written “S.B. Realty Trust.” Pursuant to the
“Operating Agreement,” Yules and Susan Gillis agreed to
renovate and sell the Property with any profits distributed in
accordance with an agreed upon formula. Title was to be taken
in the “S.B. Realty Trust,” a Massachusetts nominee trust.
Yules’s role under the agreement was to provide the money
($135,000) for the clearing of outstanding mortgages and
renovation and/or other expenses of the Property, as well as
interfacing with attorneys and accountants. Susan Gillis’s
agreed role was to renovate and manage the Property,
including collecting and distributing rents, paying bills, and
handling the advertisement and sale of the Property.
The 	agreement 	between 	the 	parties 	contemplated 	two
outcomes to the parties’ venture. The first was that the
Property would be sold and the parties would divide the
profits according to an agreed upon formula. Alternatively, the
second 	was 	that 	Susan 	Gillis 	would 	have 	the 	Property
appraised and buy out Yules’s interest in the partnership
according 	to 	the 	agreed 	upon 	formula. 	Under 	either
circumstance, 	Yules 	was 	entitled 	to 	the 	return 	of 	his
capitalization of the venture, together with a portion of any
profits.
Although Yules and Gillis initially agreed to hold title to the
Property through a nominee trust, the S.B. Realty Trust, as
co-owners, this idea was abandoned after consulting with
Rhode Island counsel and learning that such a trust would not
limit 	Yules’s 	personal 	liability. 	However, 	Yules 	was
considered an equitable co-owner of the Property, and it was
anticipated that an appropriate title-holding agreement would
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be formally executed to reflect their co-ownership.
On or about September 26, 2003, Yules provided to Susan Gillis
the $135,000 for the clearing of title ($110,000) and renovation
and/or other expenses ($25,000) related to the Property. The
$135,000 was wired to McGunagle and Reidy, a law office in
Cranston, Rhode Island, that handled the transaction. The sum
of $110,000 supplied by Yules paid off the two outstanding
mortgages and the other $25,000 of the money supplied by
Yules was disbursed in increments from Attorney McGunagle
to Susan Gillis.
Robert Gillis was aware of his wife’s business venture with
Yules. Robert Gillis did not have permission from Yules to
mortgage the Property or to otherwise participate in the
business venture.
On or around July 22, 2004, Robert Gillis and Susan Gillis,
obtained a $224,000 loan from Champion Mortgage Co., based
upon a $280,000 appraised value of the Property, i.e., such loan
reflected an 80% loan to value ratio. The loan was secured by
their conveyance of a first mortgage lien on the Property in
favor of Champion Mortgage Co., in that amount.
Of the loan proceeds, $211,721.10 was disbursed to Robert
Gillis and Susan Gillis, and Foxborough Savings account
documents reflect their receipt of such funds on July 19, 2004
(of the $224,000.00 mortgage proceeds, $10,510.90 went to
disbursements to pay the Gillis’s pre-existing creditors, such as
a Sears credit card and the City of Pawtucket, and $1,768.00
was used for loan origination fees).
The vast majority of the mortgage proceeds were to have been
used to buy out Yules’s interest in the venture. At a minimum,
Yules was entitled to the return of his initial $135,000.00 capital
investment. However, none of the mortgage proceeds were
used to buy out Yules’s interest in the venture.
Yules neither had knowledge that Robert Gillis and Susan
Gillis had actually applied for and obtained a mortgage on the
Property, nor did they ever inform Yules that they had
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obtained a mortgage.
However, had Yules been notified in July of 2004 that they had
obtained a mortgage on the Property and his interest in the
partnership been bought out as agreed in the Operating
Agreement, the business venture would have been profitable.
Pursuant to the agreed upon formula in the Operating
agreement, their financial interests would been calculated as
follows:
Stipulated appraised value 	$280,000.00
Less 	Plaintiff’s 	Capitalization 	-$135,000.00
Equals total profit 	=$145,000.00
Total profit divided by two ($145,000.00/2) = $72,500.00 profit
for each.
Susan Gillis’s share = $72,500.00 (primarily in equity in the
Property).
Yules’s share would have been:
Returned capitalization ($135,000.00) + his profit
(72,500.00) = $207,500.
Thus, of the $211,721.10 of mortgage proceeds Robert Gillis
and Susan Gillis jointly received, $207,500 should have been
used to buy out Yules. Yules, however, has not received any
funds from Robert and Susan Gillis, either from the mortgage
or otherwise.
Robert Gillis was not entitled to any of the mortgage proceeds.
Rather than buying out Yules according to the Operating
Agreement, Robert and Susan Gillis misappropriated and used
the vast majority of the mortgage proceeds on their personal
expenditures, including but not limited to the following:
a. $6,100.00 to Robert Gillis. See Check Nos. 622
& 19291.
b. $19,625.00 related to a Saab automobile. See
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Check Nos. 546 & 597.
c. $550.00 for “Pats tx,” i.e., Patriots tickets. See
Check No. 568.
d. $5,000.00 for an unrelated legal matter. See
Check No. 575.
e. $3,500.00 for legal fees in an unrelated matter.
See Check No. 596.
f. $1,000.00 for legal fees in an unrelated matter.
See Check No.616.
g. $1,350.00 for legal fees in an unrelated matter.
See Check No. 618.
h. $18,400.00 for legal fees to defend against
Yules’s claims against them. See Check Nos. 667,
769, 772 & 749712.
I. $3,750.00 for a hot tub. See Check Nos. 671 &
675.
j. $1,840.07 for property taxes on their Foxboro
home. See Check No. 692.
k. $2,000.00 for a deposit on a 32ft. boat. See
Check Nos. 681 & 792.
As a result of Robert and Susan Gillis misappropriating the
funds for their personal living expenses, by July 20, 2005, just
one 	year 	after 	receiving 	the 	$211,721.10 	mortgage 	loan
proceeds, these funds had been depleted to an amount of
$2,545.61.
By the summer and fall of 2004, Susan Gillis had cut off all
communication with Yules and did not respond to his phone
calls. Yules, in an attempt to discover the status of the business
venture, drove to Pawtucket, RI, to view the Property. While
in Pawtucket, Yules decided to investigate the real estate
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filings with respect to the Property at the Pawtucket City Hall,
whereupon Yules learned for the first time that Robert and
Susan Gillis had mortgaged the Property.
Yules filed an action in the Norfolk Superior Court, C.A. No.
05-00092, against Robert and Susan Gillis on January 18, 2005,
and service was made in February, 2005.
At the time Robert Gillis and Susan Gillis were served with the
Superior Court action, they still had approximately $100,000.00
of Yules’s funds. Rather than returning or setting aside these
funds, Robert and Susan Gillis used the funds to hire attorneys
to defend against Yules’s claim for such funds.
Thereafter, 	Susan 	Gillis 	filed 	for 	bankruptcy 	protection,
Chapter 7 Case No. 05-23528, and Yules commenced an
adversary proceeding, Adv. Proc. No. 06-01007. The Hon.
Rosenthal, J., entered judgment in favor of Yules determining
that Susan Gillis’s debt was non-dischargeable under 11 U.S.C.
§ 523(a)(6), as a result of Susan Gillis’s willful and malicious
injury to Plaintiff, and also revoked Susan Gillis’s discharge
under 11 U.S.C. § 727(d)(1) for having obtained the discharge
by fraud and under 11 U.S.C. § 727(d)(2) for fraudulently
failing to report the acquisition of certain property to the
Bankruptcy Trustee. These determinations were subsequently
affirmed by the Bankruptcy Appellate Panel for the First
Circuit, BAP No. MB 08-067, and Susan Gillis was sanctioned
pursuant to Fed.R.Bankr.P. 8020 for filing a frivolous appeal.
Susan Gillis has appealed these rulings to the First Circuit
Court of Appeals.
Based upon the foregoing allegations, Yules alleged that the Debtor and his wife
converted all of his interest, investment and profits by depositing the funds in a personal
account and spending the vast majority of the funds on their personal and family expenses.
According to Yules, the only result that could flow from these wrongful acts was an injury
to him. In his Complaint, he asserted that Robert Gillis wrongfully lived off of his funds
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for a year and until the funds were completely depleted. 	In Yules’s view, the Debtor
committed a willful and malicious injury by converting and misappropriating Yules’s
funds for his own benefit and use.
B. Yules v. Susan Gillis (Adv. P. No. 06-1007)
As alleged in his Complaint, Yules commenced an action against Susan Gillis and
obtained a judgment against her under 11 U.S.C. § 523(a)(6). In that adversary proceeding,
prior to the entry of final judgment by Judge Rosenthal, Judge Robert Somma conducted
a trial, following which he granted a directed verdict in favor of the debtor with respect to
counts under 11 U.S.C. § 523(a)(2)(A) and (a)(4), as well as 11 U.S.C. § 727(d)(3). 	In a
written “Memorandum of Decision and Order on Motion of Susan Gillis for Directed
Verdict,” dated June 28, 2007, Judge Somma found that Yules acknowledged that he had
not met his burden of proof under 11 U.S.C. § 523(a)(2)(A) and voluntarily sought dismissal
of that count. 	With respect to Yules’s count under 11 U.S.C. § 523(a)(4), Judge Somma
determined that Yules failed to establish that Susan Gillis acted in a fiduciary capacity in
connection with their business venture. He stated:
The trust agreement executed by the parties became inoperative and
ineffective by their mutual agreement when the plaintiff learned that it could
not serve as a title-holding vehicle to limit the plaintiff’s personal liability.
Moreover, the operating agreement setting forth their respective rights and
obligations is not a partnership agreement but rather a simple contract
incident to the Venture. In neither case - - inoperative trust agreement or
operating project agreement - - does the debtor act in a fiduciary capacity as
to the plaintiff. Lastly, any resulting or constructive trust imposed in these
circumstances would be employed as a remedy and would not satisfy the
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requirement of fiduciary capacity as used in § 532(a)(4).
Judge Somma denied the motion for judgment on partial findings with respect to the count
under 11 U.S.C. § 523(a)(6) and the counts under 11 U.S.C. § 727.
Judge Rosenthal, who subsequently was assigned the case, 	entered a final
judgment, with the consent of the parties, based upon his review of the record of the
adversary proceeding, including the transcripts of the evidentiary hearings and trial held
on February 21, 2007, March 14, 2007 and August 22, 2007. In reaching his decision that
Susan Gillis willfully and maliciously injured Yules, Judge Rosenthal found the following
facts:
Here the debtor/defendant, Susan Gillis, knew she owed the plaintiff, Branch
Yules, money. In fact, at least by her way of thinking, she set it aside, but she
asserts in her rather unconvincing statement that she didn’t send him the
money because she couldn’t reach him. . . .
She [Susan Gillis] acknowledges that things were tight, that she couldn’t do
everything, so she decided obviously consciously to use the funds she
earmarked to attempt to complete the project, but that conscious unilateral
decision proved to be further disaster, and her situation plummeted
downhill into financial ruin.
Although initially Ms. Gillis claimed she used the earmarked funds for the
project in which Mr. Yules was involved, ultimately she acknowledged that
she used much, if not most, of the subject funds for other personal purposes,
such as paying her attorneys; she bought an automobile; she paid rent, she
bought a hot tub, et cetera. At various points during the trial, Ms. Gillis’s
justification for using the funds for personal use was some of the money was
hers and she was entitled to use it to, quote, “no harm, no foul,” end quote,
because if Mr. Yules had been paid, the payment would have been
recoverable as a preference.
Transcript, pages 4-5. 	Judge Rosenthal determined that Susan Gillis’s testimony was
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incredible, noting contradictions, memory lapses and long delays, as well as failures to
amend schedules and even to appear at the section 341 meeting of creditors and to provide
a complete detailed accounting. 	Additionally, Judge Rosenthal entered a judgment
revoking Susan Gillis’s discharge. The United States Bankruptcy Appellate Panel for the
First Circuit affirmed Judge Rosenthal’s order revoking Susan Gillis’s discharge. It did not
specifically address the issue under 11 U.S.C. § 523(a)(6), finding it was subsumed and
disposed of in its decision under 11 U.S.C. § 727(d)(1).
C. Yules’s Supplemental Materials
In his Supplement to his Opposition to the Motion, Yules submitted a Joint
Stipulation of Facts, executed by counsel to Yules and counsel to Susan Gillis, and a
statement of Stipulated Facts, executed by counsel to Yules and counsel to the Chapter 7
trustee in Susan Gillis’s case, both of which were filed in Adv. P. No. 06-1007, as well as
copies of the Operating Agreement and Declaration of Trust referenced by Judge Somma
in ruling on Susan Gillis’s motion for a directed verdict. Additionally, he submitted the
Champion Loan Application and Champion Mortgage Disbursement Statement.
III. ANALYSIS
A motion to dismiss under Rule 12(b)(6) must be granted unless the complaint
contains sufficient factual matter, accepted as true, to “‘state a claim to relief that is
plausible on its face.’” Cunningham v. Nat’l City Bank, 588 F.3d 49, 52 (1st Cir. 2009) (citing
Ashcroft v. Iqbal, __U.S. __, 129 S.Ct. 1937, 1949 (2009), and quoting Bell Atlantic Corp. v.
Twombly, 550 U.S. 544, 570 (2007)). If matters outside the pleadings are presented to and
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not excluded by the court, the motion to dismiss must be treated as a motion for summary
judgment under Rule 56. See Fed. R. Civ. P. 56(d), made applicable to this proceeding by
Fed. R. Bankr. P. 7012.
The court in Desrosiers v. Transamerica Fin. Corp. (In re Desrosiers), 212 B.R. 716,
718 n.1. (Bankr. D. Mass. 1997), explained the relationship between Rule 12(b)(1) and (b)(6):
Transamerica based its Motion to Dismiss the Adversary Proceeding on
Federal Rule of Civil Procedure 12(b)(1), made applicable here by Federal
Rule of Bankruptcy Procedure 7012. 	Rule 12(b)(1) relates to the lack of
subject matter jurisdiction. . . . Transamerica argues only that the causes of
action raised in this adversary proceeding are barred by the doctrine of res
judicata. Thus, the applicable ground for dismissal is the Complaint’s failure
to state a claim upon which relief can be granted. See Fed. R. Civ. P. 12(b)(6);
see, e.g., Mullens v. United States, 785 F.Supp. 216, 222 (D. Me. 1992)
(dismissing a cause of action barred by res judicata under Fed. R. Civ. P.
12(b)(6)). Further, because Transamerica relies on matters outside the
pleadings, the Court must treat the motion as one for summary judgment
under Federal Rule of Bankruptcy Procedure 7056, incorporating Federal
Rule of Civil Procedure 56. 	See Fed. R. Civ. P. 12(b) (“If, on a motion
asserting the defense numbered (6) to dismiss . . . matters outside the
pleading are presented to and not excluded by the court, the motion shall be
treated as one for summary judgment and disposed of as provided in Rule
56”). . . . Rule 12(b) requires that all parties “be given reasonable opportunity
to present all material made pertinent to such a motion by Rule 56” . . . .
212 B.R. at 718 n.1. 	Because matters outside the pleadings have been presented to the
Court, the Court shall treat the Debtor’s Motion as a Motion for Summary Judgment.
To prevail on a complaint under 11 U.S.C. § 523(a)(6), the plaintiff must establish by
a preponderance of the evidence, see Grogan v. Garner, 498 U.S. 279 (1991), that the debtor
willfully and maliciously intended to injure him or his property. In Kawaauhau v. Geiger,
523 U.S. 57 (1998), a unanimous Court performed the following analysis:
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We confront this pivotal question concerning the scope of the “willful and
malicious injury” exception: Does § 523(a)(6)’s compass cover acts, done
intentionally, that cause injury . . ., or only acts done with the actual intent to
cause injury . . .? The words of the statute strongly support the [latter]
reading.
The word “willful” in (a)(6) modifies the word “injury,” indicating that
nondischargeability takes a deliberate or intentional injury, not merely a
deliberate or intentional act that leads to injury. Had Congress meant to
exempt debts resulting from unintentionally inflicted injuries, it might have
described instead “willful acts that cause injury.” Or, Congress might have
selected an additional word or words, i.e., “reckless” or “negligent,” to
modify “injury.” Moreover, . . . the (a)(6) formulation triggers in the lawyer's
mind the category “intentional torts,” as distinguished from negligent or
reckless torts. Intentional torts generally require that the actor intend “the
consequences of an act,” not simply “the act itself.” Restatement (Second) of
Torts § 8A, comment a, p. 15 (1964) (emphasis added).
Id. at 61-62 (footnote omitted). The Court held that, “debts arising from recklessly or
negligently inflicted injuries do not fall within the compass of § 523(a)(6).” Id. at 64.
Based upon the allegations set forth in Yules’s Complaint and the supplemental
materials he submitted, the Court finds that Yules has not submitted sufficient evidence
from which this Court could find that Robert Gillis, who was not a participant in the
business venture between Yules and Susan Gillis and who did not sign the Operating
Agreement, willfully and maliciously injured Yules’s property, namely his share of profits
from the sale of the Property. Although the Debtor was aware that his spouse was in a
business venture with Yules, the stipulated facts that were part of the record in Adv. P. No.
06-1007 do not establish that the Debtor was aware of any specific contract provisions set
forth in the Operating Agreement or that he was aware that his wife was not entitled to
refinance the property and use the proceeds in any manner she deemed fit. Although Susan
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Gillis was found to have willfully and maliciously injured Yules, there is nothing in the
record from which this Court could impute her conduct to the Debtor in this adversary
proceeding.
Yules did not allege that he met the Debtor or had any interactions with him in
connection with the Property or the business venture he had with Susan Gillis. There was
no evidence that the Debtor was engaged in the purchase and renovation of rental
properties or that he assisted his spouse in her endeavor with Yules.
Yules maintains that, once he commenced his action in the Norfolk Superior Court,
the Debtor and his spouse should have set aside the remaining monies from the refinancing
and that the Debtor’s failure to do so constituted a willful and malicious injury. The Court
rejects Yules’s argument. 	At the commencement of the Norfolk Superior Court action,
Yules could have sought either a trustee process attachment of the monies in the
Foxborough savings account maintained by Susan Gillis or an injunction against the Debtor
and his spouse. In the absence of such a court order, the Debtor’s use of the money from
the refinancing did not constitute a willful and malicious injury to Yule’s property. The
monies simply were not designated as belonging to Yules.
IV. CONCLUSION
In view of the foregoing, the Court finds that Yules’s Complaint fails to state a
plausible claim for relief, and, in light of the supplemental materials submitted, warrant
the entry of summary judgment in favor of Gillis. 	Accordingly, the Court shall enter an
order granting Gillis summary judgment.
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By the Court,
Joan N. Feeney
United States Bankruptcy Judge
Dated: March 24, 2010
cc: Gregory D. Lorincz, Esq., Michael B. Feinman, Esq.
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