In re Biondo

Decision Date08 June 1999
Docket NumberNo. 98-2548.,98-2548.
PartiesIn re Salvatore D. BIONDO; Susan J. Biondo, Debtors. Foley & Lardner, Plaintiff-Appellee, v. Salvatore D. Biondo; Susan J. Biondo, Defendants-Appellants.
CourtU.S. Court of Appeals — Fourth Circuit

COPYRIGHT MATERIAL OMITTED

ARGUED: Steven Bret Ramsdell, Tyler, Bartl, Burke & Albert, P.L.C., Alexandria, Virginia, for Appellants. ON BRIEF: Joseph Dowell Edmondson, Jr., Foley & Lardner, Washington, D.C., for Appellee.

Before WILKINSON, Chief Judge, and HAMILTON and WILLIAMS, Circuit Judges.

Affirmed by published opinion. Judge WILLIAMS wrote the opinion, in which Chief Judge WILKINSON and Judge HAMILTON joined.

OPINION

WILLIAMS, Circuit Judge:

Salvatore and Susan Biondo (the Biondos) filed a joint voluntary petition under Chapter 7 of the Bankruptcy Code on March 20, 1997. On June 30, 1997, Foley & Lardner filed a complaint in the bankruptcy court seeking a determination that its $175,663 claim for legal fees and costs against the Biondos was not dischargeable. Foley & Lardner lodged several objections under the discharge provisions of 11 U.S.C.A. § 727 (West 1993), and alleged that the claim was excepted from discharge under 11 U.S.C.A. § 523 (West 1993 & Supp. 1999), which excludes certain debts from discharge if they were initiated through false representation, false pretenses, or actual fraud. See 11 U.S.C.A. § 523(a)(2)(A) (West 1993). On April 28,-1998, the bankruptcy court entered final judgment in favor of Foley & Lardner, holding that its claim was excepted from discharge under 11 U.S.C.A. § 523(a)(2)(A), and on appeal, the district court affirmed the bankruptcy court's decision. The Biondos now appeal to this Court. We also affirm.

I.

In the early 1990s, the Biondos employed the law firm of Foley & Lardner to represent their interests in litigation over a real estate partnership. According to the partner in charge of Foley & Lardner's Washington, D.C. office, the Biondos' legal bill grew to over $100,000, with the Biondos having paid only about $5,000 during the course of the representation. Because Foley & Lardner was unable to collect the amount due, it withdrew from its representation of the Biondos after receiving permission from the court.

Initially, the parties attempted to reach a suitable repayment agreement, but they could not reach a consensus. To recover the outstanding fees, Foley & Lardner filed essentially identical claims against the Biondos in both the Circuit Court of Fairfax County, Virginia, and the Circuit Court of Montgomery County, Maryland, in September of 1993.

While the suits were pending, and unbeknownst to Foley & Lardner, the Biondos executed what the bankruptcy court aptly described as an "elaborate" and "Byzantine collection of documents, referred to as an estate plan." (J.A. at 173). These estate planning instruments created a limited partnership named B.E.F. L.P., of which both Susan and Salvatore Biondo were general partners. The Biondos and two other family members were limited partners. As a part of the overall estate plan, the Biondos' interests in two real estate partnerships, Market Square Partnership, Ltd. and Tectonics Southern Partnership, Ltd. (the Partnerships), were transferred to B.E.F. L.P. To transfer their interests in the Partnerships to B.E.F. L.P., both Susan and Salvatore Biondo signed a "Bill of Sale and/or Assignment" for each of the Partnerships. The documents were signed and the interests in the Partnerships were transferred on January 18, 1994.

During the same time frame, the Biondos again entered into negotiations with Foley & Lardner. On March 18, 1994, the parties reached an agreement to settle the outstanding debt. The terms of the signed Settlement Agreement required Foley & Lardner to take a voluntary nonsuit in the previously filed actions, temporarily to forbear any collection actions, and to accept $54,671 plus eight percent annual interest in full payment for the legal services, rather than the total amount outstanding of $130,749. In return, the Biondos agreed to pay the reduced amount by December 31, 1995, and assigned to Foley & Lardner all distributions from the Partnerships. In connection with the Settlement Agreement, the Biondos entered into an Assignment and Security Agreement (the Security Agreement) and provided Foley & Lardner with a Promissory Note (the Note). The Note detailed the agreed upon payment terms and contained a confession-of-judgment clause in case of default.

The Security Agreement established Foley & Lardner's interest in the Partnerships through an assignment of all the Biondos' rights to distributions. The assignment of interest in the Partnerships was expressly stated to be a "material inducement to Foley & Lardner to enter into the transactions contemplated by the Settlement Agreement." (J.A. at 398). The Security Agreement represented that the Biondos "possessed all requisite power and authority to enter into and perform . . . obligations under the Settlement Agreement and this Assignment and to carry out the transactions contemplated hereby and thereby," and that no consents, authorizations, or approvals were necessary from any outside parties. (J.A. at 399). The Security Agreement also stated that the Biondos were then and would be "the sole, lawful, legal and beneficial owners" of the interest in the collateral, i.e., the Partnerships. (J.A. at 399). Finally, the Security Agreement pledged that "all information furnished by the Biondos concerning the Collateral is and shall remain true, correct and complete in all material respects." (J.A. at 400).

The Biondos failed to pay the $54,671 to Foley & Lardner by December 31, 1995. In accordance with the confession-of-judgment rights contained in the Note, Foley & Lardner obtained judgment against the Biondos in the amount of $175,663, consisting of the fees for legal services, accrued interest, and attorneys' fees related to the debt collection. The judgment was obtained on February 26, 1996. On March 20, 1997, the Biondos filed for bankruptcy, leading to Foley & Lardner's claim against the bankruptcy estate and this action.

Both the bankruptcy court and the district court held that the Biondos' debt to Foley & Lardner was excepted from discharge under 11 U.S.C.A. § 523(a)(2)(A) (West 1993). Specifically, the bankruptcy court found that the Biondos knowingly and falsely represented that they maintained and could transfer interests in the Partnerships when, in fact, those interests already had been placed into the B.E.F. L.P. For the reasons that follow, we find no error in this holding and therefore affirm the judgment.

II.

"We review the judgment of a district court sitting in review of a bankruptcy court de novo, applying the same standards of review that were applied in the district court." Three Sisters Partners, L.L.C. v. Harden (In re Shangra-La, Inc.), 167 F.3d 843, 847 (4th Cir.1999). Specifically, "we review the bankruptcy court's factual findings for clear error, while we review questions of law de novo." Loudoun Leasing Dev. Co. v. Ford Motor Credit Co. (In re K & L Lakeland, Inc.), 128 F.3d 203, 206 (4th Cir.1997). When addressing exceptions to discharge, we traditionally interpret the exceptions narrowly to protect the purpose of providing debtors a fresh start. See, e.g., Century 21 Balfour Real Estate v. Menna (In re Menna), 16 F.3d 7, 9 (1st Cir.1994). We are equally concerned with ensuring that perpetrators of fraud are not allowed to hide behind the skirts of the Bankruptcy Code. See Cohen v. Cruz, 523 U.S. 213, 118 S.Ct. 1212, 1216, 140 L.Ed.2d 341 (1998). The parties to this case present competing theories; the Biondos press the importance of a fresh start, while Foley & Lardner claims that it is a victim of fraud. We turn to the governing statutes.

The lower courts determined that the Biondos' debt to Foley & Lardner was excepted from discharge under 11 U.S.C.A. § 523(a)(2)(A) (West 1993). Section 523 reads:

A discharge under section 727 . . . does not discharge an individual debtor from any debt . . . for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by . . . false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition. . . .

11 U.S.C.A. § 523(a)(2)(A). The Biondos first contend that the Settlement Agreement, Note, and Security Agreement, did not constitute an "extension, renewal, or refinancing of credit," thus removing any actions concerning those agreements from the purview of § 523(a)(2). Second, they argue that the legal services were not "obtained by" false pretenses, false representation, or actual fraud. Third, the Biondos claim that their conduct did not amount to "false pretenses, a false representation, or actual fraud." We address these contentions seriatim.

A.

Through explicit language, Congress provided not only that debts incurred through the direct provision of money, property, or services, but also that the extension, renewal, or refinancing of credit, would fall under the purview of Bankruptcy Code § 523(a)(2)(A). See 11 U.S.C.A. § 523(a)(2)(A). There is no argument that the original debt was incurred through the provision of legal services. The question the Biondos present is whether the Settlement Agreement and the ancillary agreements were extensions, renewals, or refinancings of credit. This inquiry requires that we define the boundaries of extending, renewing, and refinancing, credit. The Bankruptcy Code does not guide us to a unique interpretation of these terms; therefore, we will turn to their common understanding. See Union Pac. R.R. Co. v. Hall, 91 U.S. 343, 347, 23 L.Ed. 428 (1875) ("Congress may well be supposed to have used language in accordance with the common understanding."); see also, e.g., Fischer v. Scarborough (In re Scarborough) 171 F.3d 638, 643 (8th Cir.1999) (...

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