In re Brandon

• Decision Date: 18 November 2002
• Docket Number: Adversary No. 01-2056.,Bankruptcy No. 01-20745.
• Parties: In the matter of Richard L. BRANDON, Debtor. SunTrust Bank, Plaintiff, v. Richard L. Brandon, Defendant.
• Court: U.S. Bankruptcy Court — Southern District of Georgia

297 B.R. 308

In the matter of Richard L. BRANDON, Debtor SunTrust Bank, Plaintiff, v. Richard L. Brandon, Defendant.

Bankruptcy No. 01-20745.

Adversary No. 01-2056.

United States Bankruptcy Court, S.D. Georgia, Brunswick Division.

November 18, 2002.

COPYRIGHT MATERIAL OMITTED

James D. Benefield, Brunswick, GA, for Plaintiff.

John S. Myers, St. Marys, GA, for Defendant.

MEMORANDUM AND ORDER ON MOTION TO DETERMINE DISCHARGEABILITY OF DEBT

LAMAR W. DAVIS, JR., Bankruptcy Judge.

Richard L. Brandon ("Debtor") filed for Chapter 7 bankruptcy protection on May 17, 2001, and listed SunTrust Bank ("SunTrust") as a creditor. SunTrust timely filed a proof of claim for a debt in the principal amount of $210,029.23, plus attorney's fees and interest. SunTrust objects to discharge of that debt under 11 U.S.C. § 727 and seeks a determination that the debt is non-dischargeable under 11 U.S.C. § 523. The Court has jurisdiction in this core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I). Having considered evidence presented in the pleadings and at trial on August 8, 2002, arguments of counsel, and available authority, I make the following Findings of Fact and Conclusions of Law in conformance with Federal Rule of Bankruptcy Procedure 7052(a).

FINDINGS OF FACT

Debtor is a physician practicing in the Camden County, Georgia, area. He previously specialized in obstetrics and gynecology. At present, however, he specializes only in gynecology. Since 1996, Debtor has successively conducted his medical practice through three corporate entities: Brandon Women's Center, Camden Women's Center, and Camden Healthcare Association.

Debtor first established his business as Brandon Women's Center ("BWC"). On July 8, 1996, while conducting his medical practice through BWC, he individually borrowed $410,115.00 from SunTrust, Ex. P-1. He agreed to "promptly notify Secured Party [SunTrust], in writing, of any addition to, change in, or discontinuance of its place of business as shown in this instrument and the location of its office where it keeps its records as set forth herein." Ex. P-8, ¶ 4.a. With BWC's consent, see Ex. P-2 (captioned "Owners Consent to Pledge Collateral"), Debtor pledged BWC's accounts receivable, including "receivables now or hereafter received," as collateral. See Exs. P-1, P-2, P-4 (Exhibit A, "Accounts Receivable," attached to UCC-1). The security agreement itself was executed by Debtor in his individual capacity only. See Ex. P-8. On July 9, 1996, SunTrust perfected its security interest in BWC's receivables by filing a UCC-1 Financing Statement. Ex. P-4. On March 18, 1999, the SunTrust debt was renewed in the principal amount of $234,080.49, and on April 4, 2000, the debt was renewed in the amount of $203,266.30. Exs. P-3, P-5 (each stating purpose as "renewal/consolidate debt & pay off IRS"; each indicating that "this Note is a renewal, but not a satisfaction, of Loan Number 0883955846-18"). The renewal notes, each of which was signed by Debtor individually, recited that "the obligations under this Note are also secured by the collateral described in any security instruments executed in connection with this Note, and any collateral described in any other security instruments securing this Note or all of Borrower's obligations to Lender." Exs. P-3, P-5.

Early in 1998, prior to executing the 1999 and 2000 renewals of the SunTrust debt and without giving notice to SunTrust, Debtor established and began to conduct his medical practice through a new entity, Camden's Women Center ("CWC") and ceased doing business through BWC.¹ On August 14, 1998, Debtor pledged CWC's accounts receivable and other assets to the First National Bank of Kingsland, Georgia, Ex. P-11, for the purpose of securing a line of credit which CWC needed to fund its business operations, see Ex. P-12. Debtor acknowledges that CWC utilized the same telephone number, employees, and office location that BWC had used.

Debtor currently practices as an independent contractor providing services to Camden Healthcare Association ("CHA"). The owner of CHA is Sally Bennett. On July 17, 2000, Debtor and CHA executed a provider agreement under which CHA allowed Debtor to provide medical services through CHA, effective June 1, 2000. Ex. P-7. Under that agreement, CHA was to retain the first $6,000.00 of all monies received, Debtor was to receive the second $6,000.00 of receipts for services rendered, and any excess was to be shared, with Debtor receiving 60 percent. Debtor testified that the provider agreement was subsequently modified, and that he now receives 90 percent of the excess over $12,000.00 per month.

On July 14, 2000, Debtor, while retaining the corporate form of CWC, attempted to convey the assets of CWC to Bennett and CHA. See Ex. P-6. That transaction resulted in a net disbursement to Debtor of approximately $98,000.00.² The real estate and equipment conveyed were sold by Debtor individually and not by CWC. After the closing, approximately $30,000.00 in CWC receivables were paid to CHA.³ Although the documents do not reflect that the accounts receivable were sold, the parties do not appear to dispute that this was their intent. Debtor also pledged other CWC assets to CHA, including "all inventory, furniture, fixtures, equipment, raw materials and products, as well as manufactured products, all account receivables, note, chattel papers, purchase orders, contracts general and intangible property and all rights of payment and all money received now and hereafter for Camden Womens Center." P-11.

Debtor's bankruptcy petition listed his gross income at $5,200.00 per month, while the productivity reports from September of 2000 to May of 2001 showed that his income averaged more than $8,000.00 monthly. Ex. P-15. Debtor's explanation for the apparent discrepancy is that CHA pays $8,000.00 to CWC pursuant to a provider agreement between CWC and CHA. From that amount, CWC pays, in addition to Debtor's salary, certain overhead expenses including liability insurance coverage, professional dues, and lease payments on a piece of ultrasound equipment owned by CWC.

SunTrust vice president and loan officer Ronald Adams testified that at the time he "rolled over" the original loan-when the balance was in the $200,000.00 range-Debtor provided no information concerning any change in his corporate structure or in billing practices. Mr. Adams learned of the changes only after Bank sued, obtained a judgment, sent letters to persons who owed money to Debtor's original professional corporation, and was informed by the payers that they showed no payables to BWC due to the Debtor's changed billing practices.

Mr. Adams personally examined microfilm records of First National Bank of Kingsland ("Kingsland"), where Debtor began doing business after he formed CWC. From those records, Adams notes that beginning in 1998, payments to BWC were deposited into the CWC account. Because he found Kingsland's microfilm records to be disorganized, he was unable to determine exactly what funds that may have been intended for BWC were deposited to the CWC account. To have done so would have required him to look at every item included in every deposit on every day's activity at Kingsland. Within the available discovery time, he determined that between January and April of 1998, $17,010.99 in checks payable to BWC were deposited to the CWC account. See Ex. P-16.

Positions of the Parties

SunTrust asserts the following bases for excluding the debt from discharge: (1) § 523(a)(4) applies because Debtor, as the controlling principal of BWC, failed to marshal all accounts receivable for the benefit of BWC creditors as required under this Court's decision in Smith Drug Co. v. Pharr-Luke (In re Pharr-Luke), 259 B.R. 426 (Bankr.S.D.Ga.2000); (2) § 523(a)(6) applies because Debtor intentionally damaged its interest in BWC's accounts receivable; and (3) § 523(a)(2) applies because Debtor fraudulently failed to disclose corporate changes to SunTrust when he requested renewals of the original loan.

Debtor admits that at the time he signed the renewal notes, he did not advise SunTrust of the change in his corporate structure from BWC to CWC nor or that he was billing his medical services in a name other than BWC. He also admits that he did not advise Sun Trust that he had sold the assets of CWC to Sally Bennett or inform Sun Trust that he had executed a provider agreement with CHA. Debtor contends, nonetheless, that he did not violate any provision of the agreements or of Georgia law in failing to disclose these facts, and that Georgia case law shows that it was SunTrust's duty to monitor its collateral and to make inquiries. He also argues that the Court should not speculate as to any commingling of assets of BWC with CWC's assets other than the $17,000.00 testified to by Mr. Adams, that accounts receivable are temporal in nature and thus ever-changing in amount and collectability and that SunTrust cannot in this Court rely on the value of the receivables as matching the unpaid balance of his obligation because of their fungible and rolling nature.

CONCLUSIONS OF LAW

For the reasons that follow, the debt will be excluded from discharge by application of 11 U.S.C. § 523(a)(2).

Section 523(a)(2) provides that a discharge "does not discharge an individual debtor from any debt ... for ... renewal or refinancing of credit, to the extent obtained by false pretenses, a false representation, or actual fraud." § 523(a)(2). "As distinguished from false representation, which is an express misrepresentation[,] false pretense involves an implied misrepresentation or conduct intended to create and foster a false impression," Minority Equity Capital Corp. v. Weinstein (In re Weinstein), 31 B.R. 804, 809 (Bankr.E.D.N.Y.1983), and "[i]t is well recognized that silence, or the concealment of a material fact, can be the basis of a false impression which creates a misrepresentation actionable under § 523(a)...