Feldy Boys, LLC v. Polasky (In re Polasky)
| Decision Date | 17 February 2021 |
| Docket Number | Case No. 2:18-bk-05576-FMD,Adv. Pro. No. 2:18-ap-594-FMD |
| Parties | In re: Linda F. Polasky, Debtor. Feldy Boys, LLC, Plaintiff, v. Linda F. Polasky, Defendant. |
| Court | United States Bankruptcy Courts. Eleventh Circuit. U.S. Bankruptcy Court — Middle District of Florida |
THIS PROCEEDING came before the Court for trial on October 20, 2020 and October 23, 2020, of the Complaint Objecting to Dischargeability of Debt Owed by Debtor (the "Complaint")1 filed by Feldy Boys, LLC ("Plaintiff"). Plaintiff alleges that Debtor and her husband fraudulently induced Plaintiff to purchase their commercial real property in Ohio by making material misrepresentations related to the property. Based on these allegations, Plaintiff seeks to except a debt from discharge under 11 U.S.C. § 523(a)(2).
The Court has carefully considered the evidence and finds that Plaintiff did not establish the required elements for nondischargeability of the debt under § 523(a)(2). Judgment will be entered in favor of Debtor on Plaintiff's Complaint.
In the 1980's, Debtor formed a corporation, Linda Cooper's Identity Hair Salon, Inc., which conducted business under the name "Identity Hair Salon and Medical Spa" ("Identity"). Debtor was Identity's sole owner and officer. For over 20 years, Debtor operated Identity at 8501 Beechmont Avenue, Cincinnati, Ohio (the "Property"),2 a commercial property she originally owned with her former husband. Identity also operated a second salon on Kenwood Avenue (the "Kenwood Salon"), approximately ten miles away from the Property.3
In 2005, Debtor met John Polasky, her current husband ("Husband"), and they were married in 2006.4 Husband has been a practicing attorney for over 30 years.5
Beginning in November 2005, Husband made a series of loans to Identity that he documented with promissory notes.6 The promissory notes included a $300,000.00 note dated December 31, 2005, and a $405,100.00 note dated January 3, 2006. Husband made these loans to satisfy debts owed by Debtor or Identity, including a payment to Debtor's former husband to buy out his ownership interest in the Property. To secure the loans, Husband obtained a mortgage lien on the Property.7
In 2005, Husband prepared a Business Property Lease Agreement (the "Lease") that Debtor signed on Identity's behalf.8 Under the Lease, Debtor leased the Property to Identity for a 20-year term beginning on January 1, 2006, and Identity agreed to pay Debtor rent of $7,000.00 permonth. The Lease was a "triple-net" lease, meaning that Identity was responsible for paying the expenses associated with the Property, such as utilities, insurance, and property taxes.9
In August 2010, Husband made three loans to Identity in the amounts of $36,000.00, $18,000.00, and $100,000.00, respectively. Debtor, as Identity's president, signed three promissory notes evidencing these loans.10 In 2013 or 2014, Husband became a co-owner of the Property.11 In July 2015, Husband loaned Identity $34,000.00, and Debtor, as president of Identity, signed a promissory note payable to herself and Husband.12
Debtor and Husband filed joint federal income tax returns for 2015 and 2016. Their 2015 tax return reflected a nonpassive loss from Identity (an S corporation) of $125,552.00 and net rental income from the Property of $115,831.00.13 Their 2016 tax return reflected a nonpassive loss from Identity of $179,380.00, and net rental income from the Property of $109,465.00.14 In October 2016, Husband loaned Identity $40,000.00, and Debtor, on behalf of Identity, signed a promissory note payable to Husband in that amount.15
In late 2016 or early 2017, Debtor and Husband decided to sell the Property, in part because Northside Bank was pressuring Debtor regarding a $200,000.00 line of credit to Identity.16 In addition, Husband testified that in December 2016, he and Debtor agreed to abate the rent owed to them by Identity because of the pressure from Northside Bank.17 Debtor and Husband also decided to close the Kenwood Salon and to move its equipment to the Property.
Debtor and Husband employed Nat Comisar ("Comisar") as their real estate agent in connection with the sale of the Property.18 Comisar marketed the Property as a commercial property having a ten-year lease with Identity.19
In March 2017, Debtor, as Identity's president, signed a promissory note in which Identity agreed to pay her $75,000.00.20 Husband testified that the $75,000.00 amount corresponded to loans that Identity had obtained from two lenders known as Swift Capital and Best Egg.21 On June 15, 2017, Husband paid the real estate tax due on the Property with a cashier's check for $13,645.41.22
On June 26, 2017, Husband wrote Comisar an email regarding a potential sale of the Property, stating that:
Debtor and Husband filed a joint federal income tax return for 2017, that reflected a nonpassive loss from Identity of $91,119.00 and a net rental loss from the Property of $41,280.00.24
In the summer of 2017, Plaintiff became interested in purchasing the Property as an investment. Plaintiff is an Ohio limited liability company, owned by three brothers, that invests in residential and commercial real estate that it intends to hold and lease over a period of time.25 Plaintiff's president and managing partner, DanFeldkamp ("Mr. Feldkamp"), was familiar with the Property because it is only a mile or two from Plaintiff's main office, he knew friends and family members who had frequented the Identity salon, and because, in 2000, Plaintiff had considered purchasing the Property for its own office.26
Plaintiff's real estate agent was Jack Vilardo ("Vilardo"). On August 8, 2017, Comisar sent Vilardo an email with copies of (1) the Lease, with a representation that Debtor would "execute a new lease upon closing for 10 years at $85,000 NNN with a 2 year personal guarantee and a 10 year corporate guarantee," and (2) Identity's profit and loss statements ("P&Ls") for 2014, 2015, and 2016.27 The P&Ls apparently were prepared by Identity's internal bookkeeper, Shauna Buckley.28
The 2014 P&L reflects that Identity earned total income of $1,824,288.63 and net income of $210,135.47; the 2015 P&L shows that Identity earned total income of $1,779,928.60 and net income of $193,309.01; and the 2016 P&L shows that Identity earned total income of $1,685,134.94 and net income of $117,457.24. The P&Ls also reflect that Identity paid annual rent of $85,000.00 in 2014, 2015, and 2016. The P&Ls do not reflect that Identity made any interest payments on loans or other debt.
On August 17, 2017, Vilardo emailed Comisar regarding "some concern for the risk of default particularly given the fact that the business will likely sell or be transferred."29 And Mr. Feldkamp testified that he and Vilardo discussed "the fact that [Debtor] had planned to sell off her business at some point."30
On August 24, 2017, Vilardo sent Comisar an email stating that Plaintiff had several questions regarding Identity. First, Vilardo asked for the reason why Identity's income had decreased over the prior three years; second, Vilardo asked whether "gift certificates that need to be redeemed" are in Identity's "financials;" and third, Vilardo asked about Debtor's plans and permits for the relocation of equipment from the Kenwood Salon to the Property.31
Later that day, Comisar responded to Vilardo:
On September 4, 2017, notwithstanding Plaintiff's concerns regarding the absence of a liability for unused gift certificates on Identity's P&Ls, Identity's declining income in the prior three years, and the possibility that Debtor would sell Identity, Plaintiff entered into a contract with Debtor and Husband for the purchase of the Property for $900,000.00 (the "Contract").34 The Contract was conditioned on Identity's entering a new lease agreement with Plaintiff, to be guaranteed by Debtor for four years. In the Contract, Plaintiff represented that it was relying solely on its own examination of the Property as to the Property's physical condition and character, and not on any statements by the real estate agents,except for the agents' written statements made directly to Plaintiff.35
The sale closed on October 30, 2017 (the "Closing Date"). The closing statement reflects that Plaintiff paid the purchase price of $900,000.00, and that three mortgages totaling $810,824.63 were paid at closing, including a portion of Husband's third mortgage on the Property.36 Debtor, as president of Identity, signed a new lease agreement (the "New Lease") with Plaintiff as the landlord, and Debtor individually signed a personal guaranty of Identity's obligations under the New Lease.37 At the closing, Husband paid the first and last months' rent to Plaintiff under the New Lease with a check written on the bank account of his separately owned corporation.38
On the Closing Date, Husband drafted three promissory notes payable to himself and Debtor from Identity. The first note, for $648,092.45, provided for Identity to pay the principal balance to Debtor and Husband by January 10, 2018.39 Husband testified that the note represented "the amount of the Northside mortgage,...
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