United States District Court, M.D. Tennessee, Nashville Division
IN RE PAUL W. SHERRICK, Debtor.
HST CORPORATE INTERIORS, LLC, Appellee. AUL W. SHERRICK, Appellant,
WILLIAM L. CAMPBELL, JR. UNITED STATES DISTRICT JUDGE
appeals the final Bankruptcy Court's July 6, 2017
“Order Denying Discharge” and Memorandum Opinion
(the “Order”). In the Order, the Bankruptcy Court
denied Appellant's discharge of debts under 11 U.S.C.
§ 523(a)(4) based on Appellant's embezzlement, after
piercing the corporate veil of Sherrick Construction, Inc.
alleges the Bankruptcy Court erred in finding sufficient
proof to pierce the corporate veil and enforce the debt of
Sherrick Construction, Inc. against Appellant, and erred in
finding Appellant committed embezzlement under 11 U.S.C.
§ 523(a)(4). For the reasons stated below, the decision
of the Bankruptcy Court is REVERSED, and
this case is REMANDED to the Bankruptcy
Court for further proceedings consistent with this opinion.
FACTS AND PROCEDURAL HISTORY
was involved in the construction and contracting business in
Middle Tennessee beginning in the early 1980s. (Doc. No. 8 at
5). In 1994, Appellant founded Sherrick Construction, Inc.
(“Sherrick Construction”) and obtained a general
contractor's license. (Id.). Appellant was the
president and sole owner of Sherrick Construction and a
certified Small Business Administration 8(a) (“SBA
8(a)”) business, authorized to obtain federal contracts
as a socially or economically disadvantaged business. (Doc.
No. 1-2 at 2). In June 2011, Appellee HST Corporate
Interiors, LLC (“HST” or “Appelle”)
negotiated a contract with the United States for the
installation of furniture and related items at the Hurlburt
Field Child Development Center (the “Project”) in
Florida, and was directed to involve a SBA 8(a) contractor to
sign the government contract. (Id.). Larry Carr, a
representative of HST, contacted the Appellant to see if
Sherrick Construction could serve as the SBA 8(a) contractor
for the Project. (Id.). HST entered into a verbal
contract whereby HST would procure and install items for the
Project, but Sherrick Construction would be the contracting
party with the Federal Government. (Id.). HST sent a
91-page attachment to Appellant that included information on
the Project, a detailed invoice, the proposed amount to be
paid Sherrick Construction, and the amount of the total
contract. (Id.at 2-3). The total amount of the
contract was $314, 500.00, and Sherrick Construction would
receive $8, 960.00 of that total. (Id. at 3).
Sherrick Construction served as the named SBA 8(a)
contractor, and HST purchased and installed the related items
for the Project. (Id.). On February 13, 2012,
Appellant emailed HST stating that he believed the Project
should be invoiced in two billings, the first one at 98% of
the total billing amount and the second at 2%. (Id.
Conyers (“Ms. Conyers”) coordinated federal
contract projects for Sherrick Construction, but had no
knowledge of Sherrick Construction's involvement in the
Project until February 28, 2012. (Id. at 4). Tammy
Holzapfel (“Ms. Hozapfel”), the bookkeeper for
Sherrick Construction, also had no knowledge of the Project
until Ms. Conyers billed the government on March 20, 2012.
(Id.). Sherrick Construction requested payment from
the government for the total contract amount of $314, 000 in
two separate invoices. The government paid monies directly
into Sherrick Construction's operating account on April
18, 2012 ($280, 190.83) and August 1, 2012 ($34, 309.17).
(Id. at 4-5).
7, 2012, HST contacted Ms. Conyers requesting an update on
payment from the Project and asked if Sherrick Construction
received payment from the government. (Id. at 5).
Ms. Conyers requested an invoice from HST on July 9, 2012 and
August 8, 2012, and HST provided the invoice on August 8,
2012. (Id.). On January 24, 2013, five months after
Sherrick Construction received full payment from the
government, HST notified Ms. Conyers that HST had never
received full payment for the Project. (Id.).
31, 2012, after receiving the first payment for the Project
from the government, Appellant transferred $73, 161 from
Sherrick Construction's account to pay his past due
personal income taxes for 2010. (Id.). From July
2012 to September 2012, Appellant transferred another $24,
550 from Sherrick Construction to pay his personal income tax
debt. (Id.). According to Ms. Holzapfel, Sherrick
Construction also paid $75, 000 to $100, 000 in the first
part of 2012 for payroll taxes because the company did not
have sufficient funds when the taxes were due. (Id.
at 6). Sherrick Construction was also subjected to an
insurance audit, which cost Sherrick Construction between
$45, 000 and $50, 000. (Id.). Due to Sherrick
Construction's SBA 8(a) certification expiration in 2011
and sequestration of discretionary spending imposed by the
Federal Government in 2012, numerous awarded bids for
Sherrick Construction were never commenced or were cancelled.
(Doc. No. 8 at 5-6, 13). This lead to severe cash issues and
Sherrick Construction's inability to pay HST for the
Project. (Id. at 13).
filed a lawsuit against Appellant and Sherrick Construction
in the Chancery Court for the State of Tennessee. (Doc. No.
1-2 at 6). On January 12, 2016, Appellant and Sherrick
Construction field for relief under Chapter 11, which stayed
the Chancery Court litigation. (Id.). On May 3,
2016, the Bankruptcy Court allowed Appellant and Sherrick
Construction to convert their cases to Chapter 7 proceedings.
(Id.). HST filed adversary complaints to determine
the dischargeability of the debt owed by Sherrick
Construction to HST. (Id.). The dischargeability
action against Sherrick Construction was dismissed by agreed
February 1, 2017, the Bankruptcy Court conducted a one-day
trial to determine the dischargeability of the debt owed to
HST by Appellant. (Doc. No. 8 at 15). On July 6, 2017, the
Bankruptcy Court entered an Order and Memorandum Opinion
finding that: (1) Appellant owed a debt to HST by piercing
the Sherrick Construction corporate veil; and (2) HST's
claim was not dischargeable because Appellant embezzled funds
in order to pay personal expenses under 11 U.S.C. §
523(a)(4). (Doc. No. 1-2). On July 19, 2017, Appellant timely
filed a notice of appeal.
STANDARD OF REVIEW
Court reviews the Bankruptcy Court's findings of fact for
clear error, and its conclusions of law de novo. Rembert
v. AT&T Univ. Card Serv. (In re Rembert), 141 F.3d
277, 280 (6th Cir. 1998). A factual finding is clearly
erroneous when the reviewing court is left with the definite
and firm conviction on the entire evidence that a mistake has
been made. Id. If a mixed question of law and fact
exists the court “must break it down into its
constituent parts and apply the appropriate standard of
review for each part.”Wesbanco Bank Barnesville v.
Rafoth (In re Baker & Getty Fin. Servs.,
Inc.), 106 F.3d 1255, 1259 (6th Cir.1997).
ISSUES ON APPEAL
the Bankruptcy Court erred in finding sufficient proof to
pierce the corporate veil and enforce the debt of Sherrick
Construction against Appellant, and whether the Bankruptcy
Court committed clear error in finding ...