In re Cherry
| Decision Date | 08 March 2000 |
| Docket Number | Bankruptcy No. 93-21955-B. Adversary No. 99-2148-S. |
| Citation | 247 BR 176 |
| Parties | In re Arthur Lee CHERRY, III, Debtor. Arthur Lee Cherry, III, Plaintiff, v. Dennis M. Arendall, Defendant. |
| Court | U.S. Bankruptcy Court — Eastern District of Virginia |
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Carl E. Eason, Jr., Suffolk, VA, for Debtor.
Charles L. Marcus, Portsmouth, VA, trustee.
STEPHEN C. ST. JOHN, Bankruptcy Judge.
This matter came on for trial, on February 8, 2000, upon the Complaint of Arthur Lee Cherry, III ("Cherry") against Dennis M. Arendall ("Arendall"). This Memorandum Opinion and Order constitutes the findings of fact and conclusions of law of this Court pursuant to Federal Rule of Bankruptcy Procedure 9012.
Few material facts appear to be in dispute here. Originally, Cherry was an employee of Cherry Carpets, Inc. in Portsmouth, Virginia, an enterprise Cherry and other family members owned. Cherry sold his interest in the family business in 1990, and as a condition of sale, he entered into a non-competition agreement with the purchasers. A number of years earlier, Cherry had met Arendall at a trade convention and the two remained in sporadic contact because of their respective carpet businesses. After leaving his family firm, Cherry contacted Arendall to explore joining Arendall's carpet company, DMA & Associates ("DMA"), located in Richmond, Virginia.
Arendall hired Cherry and Cherry commenced work at DMA in February, 1991 as a sales assistant at an approximate salary of $38,000.00 annually. After Arendall hired him, the purchasers of Cherry's prior business interest sued Cherry, Arendall and DMA, alleging, among other things, that Cherry had violated the terms of his non-competition agreement by entering into the employ of DMA. Cherry concluded that he needed to retain counsel separate from the counsel Arendall & DMA had retained to defend the allegations, but was without sufficient monies to do so.
Upon Cherry's request, Arendall personally loaned Cherry $5,000.00 to retain an attorney. A note prepared by Ms. Eunice Peatross, the bookkeeper and treasurer of DMA ("Peatross"), evidenced this obligation. The note, dated April 18, 1991, was for the principal sum of $5,000.00 payable on the demand of Arendall and accrued interest at the rate of twelve percent (12%) per annum. Subsequently, Arendall advanced additional monies to fund Cherry's defense. A note dated September 24, 1991 in the original principal amount of $7,500.00, also prepared by Peatross, evidenced the first of these additional advances. This note was payable to Arendall on demand with interest accruing at twelve percent (12%) per annum. A final advance from Arendall occurred about one year later. This loan, for $5,000.00, was evidenced by a note dated September 30, 1992, also payable on demand with twelve percent (12%) interest per annum (the three notes shall, as a group, be referred to as the "Original Notes").
Meanwhile, notwithstanding the necessity of defending against the litigation prosecuted by his prior business associates, Cherry advanced at DMA. Cherry received several salary increases and, by 1993, occupied the position of Acting President of DMA. Despite his ever increasing remuneration, however, Cherry experienced financial difficulties and concluded that he would file for protection under the Bankruptcy Code. Cherry filed his petition under Chapter 7 of the Bankruptcy Code in this Court on April 14, 1993.1 Among the creditors listed on his Schedule F was Arendall, who was scheduled for personal loans in the amounts of $5,000.00, $7,500.00 and $5,000.00 respectively. Notice of Cherry's bankruptcy filing was mailed to Arendall on April 16, 1993. Peatross testified that she received the notice of Cherry's bankruptcy at DMA's place of business, and that she personally gave the notice to Arendall.
The sole factual dispute centers around the circumstances relating to the execution of the Replacement Notes. Cherry was approached by Arendall at some undetermined time after filing and advised Arendall of Cherry's filing. Cherry expressed his sorrow over the necessity of filing and, according to Arendall, agreed to repay the amounts the Original Notes represented. Peatross recalled being in a meeting with both Cherry and Arendall where Arendall directed her to create new notes, to which Cherry agreed. Peatross drafted three new notes, each drafted May 1, 1993, that were respectively identical to the Original Notes, except for their face amounts of $6,000.00, $9,000.00 and $6,250.00 ("Replacement Notes"). Each face amount was calculated based on the original principal amounts of each Original Note plus all interest accrued thereon through May 1, 1993.2 No new monies or any other new consideration was advanced at the time of the making of these notes. Cherry executed the Replacement Notes in the presence of Arendall and Peatross.3 On July 30, 1993, Cherry was discharged from all debts dischargeable under 11 U.S.C. § 523. A copy of the order of discharge was mailed to Arendall on the same date.4
Cherry continued in the employ of DMA, receiving continued salary increases and Arendall initiated no demand for payment of the Replacement Notes nor any other collection efforts. Cherry made no payments on the Replacement Notes while working for DMA. Cherry elected to terminate his employment with DMA in 1994. Subsequent to Cherry leaving DMA, Arendall had three meetings or conversations with Cherry seeking repayment of the Replacement Notes; in each instance, Cherry advised that he was working on a plan of repayment, but no specific plan was ever proposed to Arendall. Arendall also contacted Cherry's present employer and, in the course of discussing other matters, inquired about Cherry's ability to repay him. Arendall additionally contacted Cherry's brother to inquire whether Cherry was included as a beneficiary under his late father's trust agreement. Cherry and Arendall also confronted each other at a bid opening in Richmond, where Arendall publicly cursed Cherry in expressing his disdain for Cherry's failure to repay the Replacement Notes.
Arendall retained counsel for the purpose of collection of the Replacement Notes. Counsel contacted Cherry at least once to compel payment. In June 1999, Arendall caused to be filed in a Virginia state court a Motion for Judgment seeking the entry of judgment against Cherry by reason of the Replacement Notes ("Motion for Judgment"). The Motion for Judgment in paragraph 4 thereof acknowledges that, at some time after the execution of the Original Notes, Cherry filed bankruptcy and named Arendall as a creditor. Subsequent to the filing of the Motion for Judgment, counsel for Cherry, in a telephone conversation and in a letter dated July 8, 1999, advised Arendall of Cherry's contention that the filing of the Motion for Judgment was a violation of § 524 of the Bankruptcy Code. Cherry demanded that the Motion for Judgment be dismissed or Cherry would attempt to have Arendall held in contempt for violation of the Bankruptcy Code. Arendall declined to dismiss the Motion for Judgment and Cherry initiated the instant Complaint in this Court on September 21, 1999. Cherry subsequently amended his Complaint.5
In his Amended Complaint, Cherry alleges that the Replacement Notes failed to contain certain language required by 11 U.S.C. § 523(c)(3) and that neither these notes nor any other agreement was filed with this Court as § 523(c)(3) also requires. The Complaint filed by Cherry also alleges that Arendall sought to enforce the Replacement Notes in a Virginia state court despite requests by Cherry to desist Arendall's enforcement attempts. Cherry requests the Court to find Arendall in contempt for violating the discharge order and an award of compensatory and punitive damages, costs and attorney's fees.
Arendall in his Answer admitted the Original Notes failed to contain the language as set forth in 11 U.S.C. § 524(c) and that neither the Original Notes nor any other agreement of Arendall with Cherry was filed with this Court, but denied any violation of the discharge order. Arendall counterclaimed against Cherry praying for an entry of judgment in the amount owed under the terms and conditions of the Replacement Notes.6
Arendall both initiated and continued prosecution of the Motion for Judgment after receiving the advice of his legal counsel. Cherry has incurred attorney's fees and costs in the defense of the Motion for Judgment and in the prosecution of the instant Complaint in the amount of $6,000.00. Cherry never made payments on the Replacement Notes.
This Court must resolve only one discrete point. It is undisputed that the Replacement Notes do not comply with the requirements of 11 U.S.C. § 524(c) concerning the required substance of reaffirmation agreements. It is similarly undisputed that neither the Replacement Notes nor any other agreement between Cherry and Arendall was ever filed with this Court as § 524(c) also requires. Rather, Arendall's sole defense rests with his contention that Cherry's making of the Replacement Notes was a "voluntary repayment" of the Original Notes that the provisions of 11 U.S.C. § 524(f) save from voidability. Arendall reasons that (1) he and Cherry mutually intended that the Replacement Notes be executed to cause the repayment of the Original Notes and (ii) Cherry's execution of the Replacement Notes was entirely voluntary on his part. Thus, Arendall argues, the provisions of 11 U.S.C. § 524(f), which purport to preserve the ability of a debtor to voluntarily repay any debt, operate to except this circumstance from the admitted failure to comply with the requirements for reaffirmation found in 11 U.S.C. § 524(c). Arendall points the Court to what he contends are the unique non-coercive circumstances of the making of the Replacement Notes, believing that the instant case does not demonstrate the concerns of...
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