In re Copeland

Decision Date10 March 2003
Docket NumberBankruptcy No. 02-30516.,Adversary No. 02-3060.
Citation291 B.R. 740
PartiesIn re Angela R. COPELAND, Debtor. Kevin C. Haney and Marilyn Sue Melhorn, Plaintiffs, v. Angela R. Copeland, Defendant.
CourtU.S. Bankruptcy Court — Eastern District of Tennessee

Jenkins & Jenkins Attys., PLLC, Michael H. Fitzpatrick, Esq., Knoxville, TN, for Plaintiffs.

Bailey, Roberts & Bailey, P.L.L.C., N. David Roberts, Jr., Esq., Knoxville, TN, for Defendant/Debtor.

MEMORANDUM

RICHARD S. STAIR, Jr., Bankruptcy Judge.

This adversary proceeding is before the court upon the Complaint filed by the Plaintiffs, Kevin C. Haney and Marilyn Sue Melhorn, on April 30, 2002, seeking a determination that damages incurred by the Plaintiffs stemming from the sale of a business from the Debtor and her husband to the Plaintiffs are nondischargeable under 11 U.S.C.A. § 523(a)(2)(A) (West 1993).

On January 21, 2003, the Plaintiffs filed a Motion to Alter or Amend (Motion to Amend), requesting permission to amend their Complaint to include 11 U.S.C.A. § 523(a)(2)(B) (West 1993) as a basis for their cause of action against the Debtor. In support of the Motion to Amend, the Plaintiffs aver that their cause of action may more properly lie under § 523(a)(2)(B) and that the facts underlying their claim are indistinguishable regardless of whether the proof supports a determination of nondischargeability under § 523(a)(2)(A) or (B). The Debtor filed a Response to Motion to Alter or Amend on January 24, 2003, in opposition to the Motion to Amend. The court reserved its ruling pending the conclusion of the trial and will address the Motion to Amend in this Memorandum.

Leave to amend is governed by Federal Rule of Civil Procedure 15, made applicable to adversary proceedings by Federal Rule of Bankruptcy Procedure 7015, and "shall be freely given when justice so requires." FED. R. CIV. P. 15(a). Additionally, an amendment "relates back to the date of the original pleading when ... the claim ... asserted in the amended pleading arose out of the conduct, transaction, or occurrence set forth or attempted to be set forth in the original pleading." FED. R. CIV. P. 15(c). Here, it is clear that the facts and circumstances upon which the Plaintiffs have relied in support of their cause of action against the Debtor are the same whether they are proceeding under subsection (A) or subsection (B) of § 523(a)(2). Accordingly, the Plaintiffs' Motion to Amend will be granted, and the court will also consider their allegations pursuant to § 523(a)(2)(B) as if this relief was requested in the Complaint.

This is a core proceeding. 28 U.S.C.A. § 157(b)(2)(I) (West 1993).

I

The trial of this adversary proceeding was conducted on January 27, 2003. The record before the court consists of 137 stipulated exhibits introduced into evidence, together with the testimony of six witnesses, Mitchell Adams, Natalic LaRose, the Plaintiffs,1 Carole Ireland, and the Debtor.

Additionally, the Plaintiffs, on January 22, 2003, served a subpoena to appear and testify upon Barbara Womack, a reporter with the Knoxville News-Sentinel, who appeared with counsel and made an oral motion to quash the subpoena (Motion to Quash), pursuant to Federal Rule of Evidence 5012 and Tennessee Code Annotated section 24-1-208. This statute, known as Tennessee's Shield Law, provides, in pertinent part:

(a) A person engaged in gathering information for publication ... connected with or employed by the news media or press ... shall not be required by a court ... to disclose before ... any Tennessee court ... any information or the source of any information procured for publication ....

....

(c)(1) Any person seeking information or the source thereof protected under this section may apply for an order divesting such protection. Such application shall be made to the judge of the court having jurisdiction over the hearing, action or other proceeding in which the information sought is pending.

(2) The application shall be granted only if the court after hearing the parties determines that the person seeking the information has shown by clear and convincing evidence that:

(A) There is probable cause to believe that the person from whom the information is sought has information which is clearly relevant to a specific probable violation of law;

(B) The person has demonstrated that the information sought cannot reasonably be obtained by alternative means; and

(C) The person has demonstrated a compelling and overriding public interest of the people of the state of Tennessee in the information.

TENN. CODE ANN. § 24-1-208 (2000). Tennessee's Shield Law applies to all civil proceedings and concerns confidential and non-confidential information. Austin v. Memphis Publ'g Co., 655 S.W.2d 146, 149 (Tenn.1983). If the party requesting divestiture cannot prove all three requirements of subsection (c)(2) by clear and convincing evidence, the application will be denied. Id. at 150; see also Moore v. Domino's Pizza, L.L. C., 199 F.R.D. 598 (W.D.Tenn.2000); Tenn. ex rel. Gerbitz v. Curriden, 738 S.W.2d 192 (Tenn.1987); Dingman v. Harvell, 814 S.W.2d 362 (Tenn.Ct.App.1991).

After hearing arguments by the parties to the Motion to Quash, the court held that there was no probable cause to believe that the information sought was clearly relevant to issues presented and that the Plaintiffs had not presented a compelling public interest in having Ms. Womack testify.3 The Motion to Quash was orally granted, and the subpoena directing Ms. Womack to testify was quashed. This ruling will be memorialized in the judgment to be entered contemporaneously with the filing of this Memorandum.

II

Many of the facts underlying the Plaintiffs' Complaint are not in dispute. In May 1999, the Plaintiffs learned that a business known as Heavenly Cheesecakes & Chocolates (HCC) was for sale, and they attempted to obtain further information by telephoning HCC. In June 1999, they received a telephone call from the Debtor, who confirmed that HCC's assets were indeed for sale. Negotiations began and were ultimately consummated between the Plaintiffs and the Debtor's husband, Brad Copeland. During these negotiations, Mr. Copeland made several false statements and supplied the Plaintiffs with fabricated documents that falsely represented the financial stability of HCC, including documents representing that sales taxes and reports had been timely filed with the Tennessee Department of Revenue on behalf of HCC.

The closing for the sale of HCC's assets occurred on August 2, 1999, effective as of July 31, 1999 (the Closing). At the Closing, the Plaintiffs remitted the purchase price of $200,000.00.4 The following documents were executed by the Plaintiffs, Mr. Copeland, and the Debtor: (1) Asset Purchase Agreement; (2) Confidentiality and Non-Competition Agreement; (3) Bill of Sale; (4) Closing Statement; and (5) Sales Tax Affidavit (collectively the Closing Documents). See TRIAL EX. 8; TRIAL EX. 9; TRIAL EX. 10; TRIAL EX. 7; and TRIAL EX. 11. Below the signature line for the Debtor's signature, each document states "Angela Copeland, d/b/a Heavenly Cheesecakes and Chocolates — Knoxville."5

Subsequent to the purchase of HCC's assets, the Plaintiffs discovered that the financial affairs of HCC had been greatly misrepresented. Although the Asset Purchase Agreement stated otherwise, the Plaintiffs learned that (1) the sales tax reports to be filed with the Tennessee Department of Revenue had, in fact, not been filed; (2) the sales taxes for HCC were not current;6 (3) the sales tax returns had not been filed; (4) financial statements submitted during the negotiations evidencing the financial status of HCC were false; and (5) the oven, freezer, and cooler were not in good working order on the date of the Closing.

As a result of these misrepresentations, the Plaintiffs filed a lawsuit against the Copelands to recover their damages in the Chancery Court for Knox County, Tennessee. After the Debtor became ill and was unable to attend trial, the Plaintiffs filed a voluntary non-suit as to her but proceeded in their trial against Mr. Copeland. Pursuant thereto, on November 8, 2001, the Chancellor rendered her opinion from the bench, finding that Mr. Copeland had defrauded the Plaintiffs, assessing damages against him in the amount of $99,053.00, representing $49,053.00 in consequential damages and $50,000.00 in punitive damages. Pursuant to the Chancellor's bench opinion, a Judgment was entered on November 8, 2001 (the Knox County Chancery Court Judgment). See T RIAL EX. 141.

The Plaintiffs re-filed their lawsuit against the Debtor in the Knox County Chancery Court on November 15, 2001. The Debtor, thereafter on February 1, 2002, filed her Voluntary Petition under Chapter 7, thereby staying the Plaintiffs' prosecution of the Knox County Chancery Court action. On her Schedule F (Creditors Holding Unsecured Nonpriority Claims), the Debtor listed a disputed, unliquidated, contingent, joint litigation claim with Mr. Copeland owing to the Plaintiffs. The Debtor received her discharge on June 19, 2002.7

In this adversary proceeding, the Plaintiffs allege that, along with Mr. Copeland, the Debtor is liable to them for the fraudulent misrepresentations that induced them to purchase HCC's assets. First, the Plaintiffs maintain that, although the majority of their negotiations for the purchase of HCC's assets took place with Mr. Copeland, they were initially contacted by the Debtor, who was also present at the Closing on August 2, 1999, and who executed the Closing Documents "d/b/a" HCC. Next, the Plaintiffs argue that because the...

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