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In re Heyl

United States Court of Appeals, Eighth Circuit

October 18, 2018

In re: Richard Michael Heyl; Jennifer Heyl Debtors
Richard Michael Heyl Defendant-Appellee Steve Conway; LorCon LLC #1 Plaintiffs - Appellants Lorcon LLC #4 Plaintiff Heyl Partners Station Plaza, LLC Defendant

          Submitted: September 24, 2018

          Appeal from United States Bankruptcy Court for the Eastern District of Missouri - St. Louis

          Before SALADINO, Chief Judge, DOW and SANBERG, Bankruptcy Judges.


         The Appellants, Steve Conway and Lorcon LLC #1, appeal the order of the Bankruptcy Court[1] dismissing their adversary complaint, as well as an order denying their motion to reconsider the dismissal order. We have jurisdiction over this appeal. See 28 U.S.C. §158(b). For the reasons that follow, we affirm.


         Steve Conway, through his entity LorCon LLC #1 ("LorCon")[2], invested in Heyl Partners Station Plaza ("Heyl Partners") and Johns Folly Ocean Villas, LLC ("Johns Folly"), two real estate development ventures Debtor Richard Michael Heyl had promoted to Conway, a principal of LorCon. In early 2007, when Heyl Partners ran into severe financial difficulties, Heyl presented Conway andLorCon with the option of transferring the interest from Heyl Partners to either Johns Folly or Madaford Gardens, LLC. Appellants opted to transfer the Heyl Partners investment into an additional investment in Johns Folly. The value of appellant's transfer of the investment from Heyl Partners to Johns Folly was negotiated in large part based on Debtor's representations concerning an asserted recent investment in Johns Folly by an apparent insider, Mary Beth Kinsella. After the 2007 transfer of its interest from Heyl Partners to Johns Folly, Appellants also fulfilled two large capital calls by Johns Folly, further increasing their investment. Ultimately, the Johns Folly venture also failed.

         On August 31, 2009, Debtors Richard M. Heyl ("Heyl") and Jennifer Ann Heyl filed a voluntary petition for relief under Chapter 7, Title 11 of the United States Code in the United States Bankruptcy Court for the Eastern District of Missouri, Eastern Division. In Schedule F (general unsecured claims) of their petition, they listed an unsecured, undisputed, non-contingent, liquidated debt in the amount of zero dollars owed to Steven Conway ("Conway") for "[p]otential liability for investment in JFOV, LLC." The bankruptcy was a "no asset" case, so no proof of claim deadline was set. Notwithstanding, Conway filed a proof of claim in the name of LorCon, asserting an unsecured debt in the amount of $79, 500.00, representing an investment loss related to JFOV, LLC (the "Debt").

         On August 27, 2010, Appellants commenced an adversary proceeding in the Bankruptcy Court (the "2010 Adversary Proceeding") against Heyl, alleging false pretenses, false representation and actual fraud related to the JFOV, LLC investment and seeking a determination that the Debt is excepted from discharge under § 523(a)(2)(A). On February 13, 2012, the Bankruptcy Court entered Judgment in favor of Heyl. The Bankruptcy Court found that while Heyl had made false statements to Conway that were relied upon by Conway, the Debt was not the proximate result of the representations. Therefore, Conway failed to meet his burden of proof as to proximate causation.

         Appellants did not appeal the judgment in the 2010 Adversary Proceeding. However, on February 11, 2013, Conway and LorCon filed their Motion for Relief from Judgment, alleging that "newly discovered evidence" had been obtained, warranting relief from the judgment in the 2010 Adversary Proceeding. On April 8, 2013, the Bankruptcy Court denied that motion.

         Appellants appealed the denial of their motion to the Bankruptcy Appellate Panel. LorCon was subsequently dismissed from the appeal after its lawyer withdrew from representation. On December 12, 2013, the Bankruptcy Appellate Panel entered an order dismissing the appeal, concluding that Conway lacked standing to pursue the appeal because he did not have a pecuniary interest in the outcome. On further appeal, the Eighth Circuit Court of Appeals affirmed.

         Meanwhile, in October of 2012, Conway made a written complaint to the Enforcement Section of the Missouri Securities Division of the Office of Secretary of State (the "Enforcement Section"), raising claims against Heyl and an affiliated limited liability company known as Heyl Partners Station Plaza, LLC ("HPSP") asserting the fraudulent sale of investment interests in HPSP and JFOV. The Enforcement Section investigtated and on April 23, 2015, a Consent Order (the "Consent Order") was entered into by Heyl, HPSP, and the Enforcement Section.

         In the Consent Order, Heyl and HPSP expressly did not admit or deny any of the allegations made, but rather consented to the entry of the Consent Order solely for the purpose of resolving that proceeding before the Enforcement Section. The Consent Order required Heyl and HPSP to pay a fine and costs to the state of Missouri only in the event that they violated the Consent Order within a two-year period after its execution. The Consent Order acknowledged that the Missouri Resident who initiated the complaint had incurred a $79, 500.00 investment loss but did not include a monetary judgment or any other form of relief in favor of Conway, LorCon #1, and/or any other creditors.

         On October 14, 2015, Conway, LorCon #1, and LorCon, LLC #4[3] filed a new adversary complaint with the Bankruptcy Court, which is the adversary proceeding from which this appeal arose (the "2015 Adversary Proceeding"). This time, Appellants sought to except the Debt from Heyl's discharge under 11 U.S.C. § 523(a)(19).

         On March 8, 2017, Heyl filed his Amended Motion to Dismiss the 2015 Adversary Proceeding pursuant to Fed.R.Civ.P. 12(b)(6), for failure to state a claim upon which relief can be granted. Conway and the LorCon entities filed a Response to the Amended Motion to Dismiss objecting to dismissal. On December 11, 2017, the Bankruptcy Court entered its Order granting the Motion to Dismiss ("Dismissal Order") on seven (7) separate ...

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