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Sherrick v. HST Corporate Interiors, LLC

United States District Court, M.D. Tennessee, Nashville Division

May 3, 2018




         Appellant 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.

         Appellant 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.


         Appellant 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. ( 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. at 3-4).

         Velzetta 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).

         On July 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.).

         On May 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).

         HST 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 order. (Id.).

         On 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.


         The 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).


         Whether 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 ...

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