In re O'Connor

Decision Date25 September 1992
Docket NumberBankruptcy No. 91-80206,Adv. No. 91-8151.
Citation145 BR 883
PartiesIn re James M. O'CONNOR & Leora J. O'Connor, Debtors. S.P. INVESTMENTS LIMITED PARTNERSHIP, Plaintiff, v. James M. O'CONNOR & Leora J. O'Connor, Defendants.
CourtU.S. Bankruptcy Court — Western District of Michigan

COPYRIGHT MATERIAL OMITTED

Dood and Wilson, John J. Dood and Candace L. Wilson, Okemos, Mich., for plaintiff.

Loomis, Ewert, Ederer, Parsley, Davis & Gotting, P.C., Kenneth W. Beall, Lansing, Mich., for defendants.

OPINION

DAVID E. NIMS, Jr., Bankruptcy Judge.

Dischargeability Lease as Property Publication

The Plaintiff filed this adversary proceeding based on 11 U.S.C. § 523(a)(2)(B), asking this court to find that the unpaid balance due under a lease plus other costs are a nondischargeable debt of the Debtors/Defendants, guarantors under the lease.

FACTS

As of 1990, James M. O'Connor (J.O'C.) had been involved in the real estate business for almost 20 years. He and Leora O'Connor (L.O'C.) were married on May 27, 1989. L.O'C. had been employed 11 years at IBM where she was a service support specialist after working as a receptionist and secretary.

In the first part of 1990 or earlier, J.O'C. became interested in obtaining a Re/Max franchise. The company would operate under J.O'C.'s brokerage and the sales people working under that brokerage would pay a set monthly fee for this privilege along with J.O'C.'s assistance and guidance. J.O'C. would pay the rent, overhead and cost of operations. In order to get started as a Re/Max franchisee, it was essential that office space be found and leased.

About this time J.O'C. encountered Robert Homan (Homan), whom he had known before. Homan was then a leasing agent for S.P. Investments Limited Partnership (S.P.I.) of which Farm Meadows Corporation was the general partner. Keith Schroeder was the major stockholder and president of Farm Meadows and a limited partner of S.P.I. In the course of informal discussions, it was disclosed that Homan was leasing office space for S.P.I. and J.O'C. was looking for office space. This initial meeting in the spring of 1990 led to many further conversations and discussions between J.O'C. and Homan. Homan would report to Schroeder the general substance of these discussions and also spoke highly of J.O'C.'s commitment and determination. By July of 1990, J.O'C. had formed Re/Max Calibur Corporation (Re/Max) for the purpose of operating the new business which he was about to commence.

On July 18, 1990, J.O'C. and Homan met at Schroeder's office. Strangely, J.O'C. was at all times in one room, Schroeder in another, and Homan moved between the offices. J.O'C. brought to the meeting a personal financial statement, prepared for Financial Acceptance Corporation (F.A.C.) in acquiring a loan for Re/Max's office furnishings and equipment, and signed by him and his wife on July 3, 1990. J.O'C. testified that he offered to make out a new financial statement for S.P.I. but Homan replied that it wasn't necessary. L.O'C. was not aware that this financial statement was presented to Homan or S.P.I. Homan produced two leases which were prepared by S.P.I. for Re/Max and dated for execution on July 17, 1990. One lease was for a temporary location and the other was for a three year lease on a larger, newer suite of offices which were to be constructed according to Re/Max specifications and ready for occupancy on November 1, 1990. Both leases were then signed by J.O'C. on behalf of Re/Max. Schroeder through Homan informed J.O'C. that he had to have a personal guaranty signed by J.O'C. and his wife. His reason was that he had just recently been through a scenario where a start-up company had leased property from him and then moved out leaving him "holding the bag," and he was determined not to let that happen again. J.O'C. inquired as to whether it was necessary that L.O'C. sign the guaranty and Homan replied that it was mandatory. Because J.O'C. wanted his attorney to examine the guaranty and L.O'C. was not present, Homan prepared a simple agreement which J.O'C. signed. This agreement read as follows:

MEMORANDUM
DATE: July 18, 1990
TO: SP Investments Limited Partnership
FROM: James M. O\'Connor (signed James M. O\'Connor)
RE: Suite 350 Hamilton Center
I hereby agree and understand that my wife and I will sign a personal guarantee for the lease entered into between SP Investments Limited Partnership and Re/Max Calibur, dated July 17, 1990, for Suite 350 Hamilton Center.

The memorandum, leases signed by J.O'C. and financial statement were all delivered to Schroeder by Homan.

During the next two weeks negotiations took place as to a proposed written guaranty satisfactory to S.P.I.'s and O'Connors' attorneys. Schroeder obtained a credit report, studied the financial statement, noting in particular the net worth, equity in real estate and cash on hand, and discussed the proposed leasing with his two sons and his attorney.

The O'Connors executed the personal guaranty on July 31, 1990. It is likely that Schroeder signed the leases contemporaneously, although he was unable to testify to the actual date. Schroeder was now satisfied that he had protected S.P.I. He had a recent financial statement showing a net worth of almost $200,000 and cash on hand of $80,000, a written personal guaranty signed by the O'Connors, and was dealing with a man with a good reputation and almost twenty years experience in the real estate business.

However, the financial statement contained many errors. J.O'C. stated that he gave the F.A.C. statement to Homan knowing that the figures were not right. Although at first he indicated that he told Homan twice that there had been changes in the form, when pressed, he admitted that he had never sat down with Homan or Schroeder and said that these numbers are not correct.

Just prior to the signing of the F.A.C. financial statement, J.O'C. obtained $75,000 from certain lines of credit and deposited it in an account for the sole purpose of showing it on his financial statement under the asset column as cash on hand without listing it as a liability. His explanation was that since he was just putting it in and would pay it back after he made out his financial statement he saw no necessity of showing the loan as a debt. A loan officer of F.A.C. suggested this ploy, according to J.O'C., in order for Re/Max to obtain a $90,000 line of credit with F.A.C. and J.O'C. thought it was proper. The same misleading statement was given S.P.I. as the O'Connors' financial statement. J.O'C. admitted that he failed to show taxes due on real estate, explaining that it never crossed his mind that he should include taxes on the statement because his certified public accountant told him not to pay them off since they could be paid when the property was sold. The stated real estate income for 1989 was partly based on a lease that never materialized.

Just before November 1, 1990, the commencement date on the lease for the permanent space, the O'Connors visited with Schroeder and told him that things were not going well and they needed some help. He stated that he would consider some options, he also suggested that they talk to Homan. While Schroeder was spinning his wheels trying to figure out what he could do, J.O'C. without further notice moved into the permanent space during the first week of November. At this time there was no occupancy permit.

Schroeder described the delay until January, 1991 in acquiring the permit as bureaucratic. Various inspections which must be made in a specific order are required for the occupancy permit, but the independent inspectors set their own schedules. Schroeder testified that the space passed all inspections and on other occasions lessees had moved in prior to obtaining a permit. In the case of the O'Connors, he was surprised that they had proceeded to move in after the discussion of their problems only a few days before.

L.O'C. testified that it was their hope that by December they would have six or seven agents and this would pay their overhead. However, by December J.O'C.'s health was deteriorating and they had only one agent whose negative personality was not helping draw other people to the business. Monies were going out faster than anticipated. They decided to close the business and try to pay everybody rather than attempting to continue, concluding that fewer people would get hurt this way. On or about December 15, 1990, Re/Max moved out of the leased premises. J.O'C was hospitalized by the end of December and required approximately three months to recover. L.O'C. wrote a letter at the end of December stating that they left the property because of code violations. The only problem expounded upon during the trial was regarding the lack of a fire door, an issue which arose when they had gotten locked in the building and couldn't get out without their keys which they had given to their secretary for the purpose of making duplicates.

On January 14, 1991, James M. O'Connor and Leora J. O'Connor filed a joint bankruptcy petition for relief under chapter 7 and on June 19, 1991 received a discharge of all of their dischargeable debts.

JURISDICTION

This court has jurisdiction over this adversary proceeding by 28 U.S.C. § 1334(a), 28 U.S.C. § 157(a), and W.D.Mich.L.R. 57.

This is a core proceeding under 28 U.S.C. § 157(b)(2)(I).

BURDEN OF PROOF

The standard of proof for the dischargeability exceptions in 11 U.S.C. § 523(a) is the ordinary preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). I have applied that standard in determining the issue of dischargeability in this proceeding.

DISCUSSION
1. Debtors' liability resulting from guaranty.

The O'Connors assert that they never received any consideration for the personal guaranty because the leases were already in existence when the guaranty was signed and without consideration for the guaranty, they are not personally liable...

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