Follo v. Morency (In re Morency)
| Decision Date | 02 April 2013 |
| Docket Number | No. 10-1133,Case No. 10-13666-FJB,10-1133 |
| Parties | In re SUSAN C. MORENCY, Debtor CARL FOLLO, FOLLO HOSPITALITY, INC., and CARPA REAL ESTATE, LLC, Plaintiffs v. SUSAN C. MORENCY, Defendant |
| Court | United States Bankruptcy Courts. First Circuit. U.S. Bankruptcy Court — District of Massachusetts |
Adversary Proceeding
By their complaint in this adversary proceeding, plaintiffs Carl Follo ("Follo"), Follo Hospitality, Inc., and CARPA Real Estate LLC (collectively, "the Plaintiffs") seek a determination that their claim against the debtor, Susan Morency ("Morency"), for fraud—fraud by which the Plaintiffs were allegedly induced to purchase an inn (the "Inn") of which Morency was indirectly a part owner—is excepted from discharge under 11 U.S.C. § 523(a)(2)(A) and (B), and they seek this determination exclusively on the basis of the issue-preclusive effect of a Vermont judgment (the "Judgment"). Morency denies the operative allegations, disputes the issue-preclusive effect of the Judgment, and counterclaims for costs and attorney's fees under 11 U.S.C. § 523(d). After a trial, the Court now enters the following findings and conclusions and, on the basis thereof, determines that the debt is not excepted from discharge and denies relief under § 523(d).
On April 5, 2010, Morency filed a petition for relief under chapter 7 of the Bankruptcy Code. No objection to entry of discharge was filed, and therefore a discharge entered in favor of Morency on July 26, 2010. Nonetheless, the Plaintiffs timely filed the complaint commencing this adversary proceeding. The complaint asserts two counts for determination that Plaintiffs' claim against Morency is excepted from discharge: one under 11 U.S.C. § 523(a)(2), for false representation and actual fraud, and another under 11 U.S.C. § 523(a)(6), for willful and malicious injury. The Plaintiffs have not prosecuted the latter count at trial and do not now seek judgment on the basis of it; accordingly, any right to relief they may have under subsection (a)(6) is deemed waived. With respect to the former count, the complaint does not indicate whether the Plaintiffs are proceeding under subsection (a)(2)(A), (a)(2)(B), or both. In relevant part, Morency's answer denies the operative allegations of the complaint and disputes the preclusive effect of the state court judgment. In addition, she contends that the position of the Plaintiffs in bringing their claim under 11 U.S.C. § 523(a)(2) is not substantially justified, for which reason she counterclaims for costs and attorney's fees under § 523(d). The Plaintiffs have not answered the counterclaim.
With regard to specifying the incidents of fraud that serve as the basis for Plaintiffs' demands for relief under § 523(a)(2), the complaint states only as follows:
Complaint, ¶¶ 11-13, 19. The complaint nowhere specifies precisely when and how Morency made the representations in question and how they were false. However, the Plaintiffs attached to the complaint a copy of the decision of the Vermont Supreme Court on the parties' cross appeals from the Judgment (the "Appellate Decision"), and that decision indicates that the Judgment is based on proof as to one or both of two allegations of fraud against Morency. In the first, she is alleged to have signed tax returns for 2001 and 2002 that overstated the Inn's gross income for those years, which returns were supplied through a broker to the Plaintiffs and induced them to purchase the Inn. In the second, Morency is alleged to have falsified certain of the Inn's guest-information and room-assignment records to overstate the Inn's occupancy rates for 2001 or 2002; these falsified records were in turn supplied to a real estate agent, who incorporated the false information in a sales brochure that misrepresented the Inn's occupancy rates, which brochure was supplied to and relied on by the Plaintiffs.
The Plaintiffs next moved for summary judgment on the strength of the preclusive effect of their state court judgment. After a hearing, the Court denied this motion, stating:
The Motion relies entirely on collateral estoppel to establish Plaintiffs' right to judgment under section 523(a)(2)(A), but collateral estoppel is unavailable because at least one element of a cause of action under section 523(a)(2)(A) was neither actually determined by the Vermont judgment nor necessary to that judgment. Section 523(a)(2)(A) requires that the alleged misrepresentation be made "with intent to induce the plaintiff to rely on the misrepresentation." Palmacci v. Umpierrez, 121 F.3d 781, 786 (1st Cir. 1997). The jury instruction in the Vermont action included no such requirement. In addition, the judgment was vacated on appeal and remanded and is not presently a final judgment.
The Plaintiffs then moved for reconsideration of the order denying summary judgment, and the Court denied reconsideration. The parties then submitted the joint pretrial memorandum that the Court hadrequired of them, which statement included (among other things) a recitation of certain facts that are not in dispute.
On the eve of trial, the Plaintiffs filed a motion entitled Motion for Entry of Judgment, seeking judgment under § 523(a)(2)(A) and (B) on the basis of the issue-preclusive effect of the Vermont judgment. At the start of the trial, the Court denied this motion without prejudice to consideration of the preclusion issue upon submission of the case at trial.
At trial, the Plaintiffs introduced into evidence only the Appellate Decision, the decision of the Vermont Supreme Court on the parties' cross appeals from the Judgment; having done this, the Plaintiffs rested their case. Morency then presented evidence of her own in the form of the testimony of three witnesses and related documents. The Plaintiffs objected to the entry of any evidence by Morency as irrelevant, arguing that any case she might present is precluded by the issue-preclusive effect of the Judgment. The Court admitted Morency's evidence subject to later determination of the preclusive effect of the Vermont judgment as to the issues presented in this proceeding. After trial, each party submitted a post-trial brief, whereupon the Court took the matter under advisement. In their post-trial brief, the Plaintiffs made clear that they are relying exclusively on the Judgment and its preclusive effect.
The facts and evidence were presented in three stages: certain agreed-upon facts that the parties set forth in the Joint Pretrial Memorandum; the Appellate Decision, Follo et al. v. Florindo and Morency et al., 2009 VT 11, 185 Vt. 390, 970 A.2d 1230 (2009), which the Plaintiffs submitted in large part for what it discloses about the Judgment, which is the basis of the Plaintiffs' case; and the evidencesubmitted by Morency, some of which pertains to the status and determinative effect of the Judgment.1 I will set forth the agreed facts as they were articulated by the parties, then set forth what the Appellate Decision indicates about the judgment it reviewed and the current posture of that judgment, and then set forth the additional evidence Morency has adduced regarding the status and preclusive effect of the Judgment. Because the Plaintiffs rely exclusively on the Judgment and its preclusive effect, and I find these insufficient to warrant entry of judgment for the Plaintiffs, I need not make further findings.
The following enumerated paragraphs constitute what the parties, in the Joint Pretrial Memorandum, identified as "the agreed upon facts which require no proof at trial."
1. The Plaintiffs' claim against Morency arises from a 2003 transaction whereby the Plaintiffs purchased an inn and an adjoining cottage located in Rockingham, Vermont (the "Inn") from Morency and a Paul Florindo ("Florindo") for $1,245,000 (the "Purchase Price").
2. Morency was the majority owner, president, and treasurer of the entity which held the Inn, Cranberry Farms LLC.
3. Morency owned 51 percent of the Inn and Florindo owned 49 percent.2
4. The Inn's employee reported to Morency, and Morency wrote checks to the employee in payment.
5. Prior to her ownership of the Inn, Morency owned an interest in a family-owned floor covering company and also owned a rental property together with Florindo.
6. Follo's decision to purchase the Inn for the Purchase Price was based on their [sic] belief that the Inn generated certain levels of revenue and maintained certain occupancy rates.
7. Specifically, Follo employed a "gross revenue multiplier" approach to calculating appropriate sales prices for inns.
8. The sales brochure for the Inn included a profit and loss statement for the year 2001, which reflected $226,000 in sales and net income of $150,000.
9. The sale of the Inn to Follo closed in March, 2003.
10. In 2004, Follo filed a complaint against Florindo, Morency, Cranberry Farm LLC, PSFM, Inc., and the real estate agents in the Windham Superior Court [Docket No. 110-2-04 Wmcv],...
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