McLaren, In re

• Decision Date: 30 August 1993
• Docket Number: No. 92-3966,92-3966
• Citation: 3 F.3d 958
• Parties: Bankr. L. Rep. P 75,430 In re William J. McLAREN, Debtor. William LONGO, Sr., Plaintiff-Appellee, v. William J. McLAREN, Defendant-Appellant.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 958

3 F.3d 958

Bankr. L. Rep. P 75,430

In re William J. McLAREN, Debtor William LONGO, Sr., Plaintiff-Appellee, v. William J. McLAREN, Defendant-Appellant.

No. 92-3966.

United States Court of Appeals Sixth Circuit.

Submitted Aug. 6, 1993.

Decided Aug. 30, 1993.

Jack M. Schulman (briefed), Schulman, Schulman & Meros, and Sheldon Stein (briefed), Cleveland, OH, for plaintiff-appellee.

Robert R. Kracht, Robert W. McIntyre, and George V. Pilat (briefed), McIntyre, Kahn & Kruse, Cleveland, OH, for defendant-appellant.

Before: KEITH and KENNEDY, Circuit Judges; and JORDAN, District Judge. ^*

KENNEDY, Circuit Judge.

Defendant-Debtor William J. McLaren appeals the District Court's judgment affirming the Bankruptcy Court's decision that his debts to plaintiff-creditor William Longo were not dischargeable under 11 U.S.C. Sec. 523(a). McLaren asserts error in (1) the denial of his request for a jury trial; (2) the holding that the claimed debts were nondischargeable pursuant to 11 U.S.C. Sec. 523; (3) the use and introduction at trial of his 2004 examination; and (4) the Bankruptcy Court rendering a monetary judgment against him. For the reasons set forth below, we affirm.

I.

The factual history surrounding this case is set out in depth in the decision of the Bankruptcy Court. In re McLaren, 136 B.R. 705 (Bankr.N.D.Ohio, 1992). The following summarizes the pertinent facts:

William Longo, a high school graduate, was the vice-president of his family's business until its sale in 1984. Longo realized several million dollars from the sale. An unsophisticated investor, he turned to McLaren, a stockbroker and financial advisor, for advice in investing his newly acquired fortune. Longo approached McLaren in early 1985 with a view toward investing in municipal bonds, but over the ensuing months McLaren persuaded Longo to invest in other business ventures in which McLaren had a personal financial interest. This lawsuit centers around three such investments, each of which proved to be a financial disaster for Longo.

In the first investment, Longo purchased a $300,000 interest in Peroil 1985, Ltd., an Ohio limited partnership syndicated by the debtor to engage in oil and gas exploration and development. The next investment involved the payment by Longo of $400,000 in connection with the proposed acquisition and syndication of a strip shopping center known as Northfield Plaza. Third, Longo loaned $350,000 to Westland Plaza Limited (another limited partnership venture which McLaren owned and promoted) to facilitate the refinancing of a mortgage upon Westland Plaza, another strip shopping center.

On December 22, 1988, McLaren filed for bankruptcy under Chapter 11 of the Bankruptcy Code. On January 23, 1990, the Bankruptcy Court converted his case to a Chapter 7 liquidation. At this time, McLaren owed various creditors in excess of $10,000,000, including more than $868,000 to Longo. Discharge was granted on August 27, 1990. Thereafter, Longo filed an adversary action against McLaren in bankruptcy court alleging that he had been fraudulently induced to invest his money with McLaren. Consequently, Longo asserted his $300,000 investment in Peroil 1985, $200,000 of his $400,000 payment to McLaren in connection with Northfield Plaza, and his $350,000 loan to the Westland Plaza, were nondischargeable debts under section 523(a)(2), (a)(4) and/or (a)(6) of the Bankruptcy Code. On January 24, 1992, the Bankruptcy Court rendered judgment in favor of Longo in the amount of $812,644.90 and held such obligation (indebtedness) was not dischargeable. In a lengthy and well-reasoned opinion, the Bankruptcy Court found that Longo proved nondischargeability under section 523(a)(2)(A) of the Bankruptcy Code by a preponderance of the evidence and that admission of McLaren's 2004 examination was proper. In an earlier opinion, the court determined that McLaren was not entitled to a jury trial in this adversary proceeding and that the Bankruptcy Court had the authority to render a monetary judgment against McLaren. In re McLaren, 129 B.R. 480 (Bankr.N.D.Ohio, 1991). The District Court affirmed and this appeal followed.

II. Right to a Jury Trial

McLaren contends that he is entitled to a jury trial to determine the dischargeability of the debts at issue and the amount owed. The question of whether a debtor has a Seventh Amendment right to a jury trial in a dischargeability proceeding was recently addressed by the Seventh Circuit in N.I.S. Corp. v. Hallahan (In re Hallahan ), 936 F.2d 1496 (7th Cir.1991). After extensively reviewing the applicable Supreme Court precedent, the court held that a debtor who sought a jury trial to determine the dischargeability of his obligation to certain creditors and the amount of his debt had no right to such a jury trial. As the court stated:

Two independent lines of reasoning support this conclusion. First, application of the two-part test set forth in Granfinanciera [v. Nordberg,] [492 U.S. 33, 109 S.Ct. 2782, 106 L.Ed.2d 26 (1989) ], reveals that a dischargeability proceeding is a type of equitable claim for which a party cannot obtain a jury trial. Dischargeability proceedings, like actions to recover preferential or fraudulent transfers, are core proceedings. See 28 U.S.C. Sec. 157(b)(2)(I) and (J) (1988). However, dischargeability proceedings are unlike actions to recover preferential transfers in that historically they have been equitable actions tried without juries:

[A] bankruptcy discharge and questions concerning the dischargeability of certain debts, involve issues with an equitable history and for which there was no entitlement to a jury trial in the courts of England prior to the merger of law and equity.

In re Hooper, 112 B.R. 1009, 1012 (Bankr. 9th Cir.1990); In re Johnson, 110 B.R. 433, 434 ( [Bankr.] W.D.Mo.1990); In re Brown, 103 B.R. 734 ( [Bankr.] W.D.Md.1989). The relief sought is also equitable since the essence of a dischargeability claim is a declaration that the debt is indeed dischargeable or nondischargeable.

Even if we were to assume that the dischargeability action was legal in nature, however, Hallahan cannot claim a right to jury trial because, as a Chapter 7 debtor, he voluntarily submitted his case to bankruptcy court. The Supreme Court did not address the extent of the debtor's Seventh Amendment right to jury trial in bankruptcy court in Granfinanciera. However, if creditors "by presenting their claims ... subject[ ] themselves to all the consequences that attach to an appearance," thereby losing any jury trial right otherwise guaranteed by the Seventh Amendment, debtors who initially choose to invoke the bankruptcy court's jurisdiction to seek protection from their creditors cannot be endowed with any stronger right. A defendant or potential defendant to an action at law cannot initiate bankruptcy proceedings, thus forcing creditors to come to bankruptcy court to collect their claims, and simultaneously complain that the bankruptcy forum denies him or her a jury trial. See, e.g.,In re Johnson, 110 B.R. 433 ( [Bankr.] W.D.Mo.1990) (debtor has no right to jury trial in adversary proceeding brought by bank to except debt from discharge as having been incurred by fraud); In re Edwards, 104 B.R. 890 ( [Bankr.] E.D.Tenn.1989) (same).

Id. at 1505 (citations omitted).

The case at issue is also like Hallahan in that it presents a perfect example of the injustice that would result from granting a voluntary debtor who is a defendant in an adversary proceeding a right to a jury trial on demand. After McLaren filed for bankruptcy, Longo was prevented by the automatic stay from commencing or continuing any litigation outside of the bankruptcy case to recover his claim. Longo was thus forced to initiate this dischargeability proceeding in bankruptcy court. Under Granfinanciera, Longo's filing stripped him of any right to a jury trial he might otherwise have claimed. It would be anomalous to hold that McLaren could obtain a jury trial in bankruptcy court in these circumstances. "Debtors then would be able to block their creditors' access to a jury trial without compromising their own ability to demand a jury in their preferred forum." Hallahan, 936 F.2d at 1506. Accordingly, this Court finds that the Seventh Amendment confers no right to a jury trial on a debtor, like McLaren, who files voluntarily for bankruptcy and is a defendant in an adversary proceeding. "Even if [McLaren] was pursuing a 'legal' claim, by submitting it to the bankruptcy forum he lost any Seventh Amendment jury trial right he might have asserted." Id. at 1506.

III. Fraud Under 11 U.S.C. Sec. 523(a)

Longo claims that under one or more of the following provisions of the bankruptcy laws, the subject debts are nondischargeable:

Sec. 523. Exceptions to discharge

(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt--

....

(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by--

(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition;

....

(4) for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny;

....

(6) for willful and malicious injury by the debtor to another entity or to the property of another entity;

While the other sections are implicated, Longo primarily bases his case on the "false representation" and "fraud" provisions specified in section 523(a)(2)(A). In considering an appeal from the decision of the District Court, on appeal from the Bankruptcy Court, this Court independently reviews the Bankruptcy Court's decision, applying the clearly erroneous standard to findings of fact and de novo review to conclusions of law. See, e.g.,In re Century Boat Co., 986 F.2d 154, 156 (6th Cir.1993).

It is well established that in order to except a debt...