In re Eckert

• Decision Date: 16 April 1998
• Docket Number: Adversary No. 97-917.,Bankruptcy No. 97-31509
• Citation: 221 BR 40
• Parties: In re Edward D. ECKERT, M.D. a/k/a Edward D. Eckert, Debtor. FLEMING COMPANIES, INC. d/b/a Fleming Foods, Inc. successor by merger to Malone & Hyde, Inc., Plaintiff, v. Edward David ECKERT, Defendant.
• Court: U.S. Bankruptcy Court — Southern District of Florida

221 B.R. 40 (1998)

In re Edward D. ECKERT, M.D. a/k/a Edward D. Eckert, Debtor FLEMING COMPANIES, INC. d/b/a Fleming Foods, Inc. successor by merger to Malone & Hyde, Inc., Plaintiff, v. Edward David ECKERT, Defendant.

Bankruptcy No. 97-31509, Adversary No. 97-917.

United States Bankruptcy Court, S.D. Florida.

April 16, 1998.

COPYRIGHT MATERIAL OMITTED

Lynn M. Gollin, Miami, FL, for Fleming Companies, Inc.

Michael Bakst, West Palm Beach, FL, for Edward D. Eckert.

OPINION

LARRY L. LESSEN, Bankruptcy Judge.

The issue before the Court is whether a debt for $2.4 million should be determined to be nondischargeable pursuant to 11 U.S.C. § 523(a)(2)(B) because of a false financial statement.

The Plaintiff, Fleming Companies, Inc., is a full-line wholesale supplier of food, grocery, and related products to the retail trade. It is the successor in interest by merger to Malone & Hyde, Inc.

The Debtor/Defendant, Edward Eckert, is a medical doctor specializing in obstetrics and gynecology. He filed a petition pursuant to Chapter 11 of the Bankruptcy Code on April 1, 1997. As of the petition date, Dr. Eckert was indebted to Fleming in the total amount of $2.4 million by virtue of personal guarantees executed by Dr. Eckert guaranteeing the debts of Whole Earth Galleria, Inc., f/k/a Sureway Supermarkets of Florida II, Inc.

Dr. Eckert was an investor in a venture which became known as Whole Earth Food, Inc., the parent company of Whole Earth Galleria, Inc. He was brought into this venture by David Morgenstern. Dr. Eckert had previously met Mr. Morgenstern when he delivered two of Mr. Morgenstern's children.

Morris Schwartz and Peter Casoria owned a retail grocery store known as Sureway Supermarkets of Florida II, Inc. located at 2501 E. Sunrise Boulevard in Fort Lauderdale, Florida. Sureway owed Malone & Hyde in excess of $2 million pursuant to a promissory note and supply agreement. Mr. Schwartz personally guaranteed Sureway's debt to Malone & Hyde; Mr. Casoria personally guaranteed $600,000 of Sureway's debt to Malone & Hyde.

In December 1993, Malone & Hyde agreed to finance Whole Earth Foods, Inc.'s purchase of Sureway's assets and provide product and inventory to the Galleria store. The parties to the December agreement agreed that Mr. Morgenstern would personally guarantee the indebtedness and Mr. Schwartz and Mr. Casoria would reaffirm their respective guarantees. This agreement was never consummated because Mr. Casoria refused to agree to the sale unless he was released from his personal guaranty. Dr. Eckert's name was not raised as a potential guarantor at this time.

In May 1994, Malone & Hyde agreed to finance Galleria's purchase of Sureway's assets and provide product and inventory to the Galleria store. This transaction included an agreement to release Mr. Casoria from his guarantee and include Dr. Eckert as a guarantor.

On May 16, 1994, Malone & Hyde and Galleria entered into a loan agreement for the purchase of Sureway's assets. Galleria executed and delivered to Malone & Hyde an installment promissory note in the original principal amount of $2,098,601.67 and a supply agreement. Malone & Hyde also obtained security agreements and a collateral assignment of a lease for the premises where Galleria was to operate a retail grocery store.

In September 1994, Galleria failed to make certain payments to Malone & Hyde which were due pursuant to the loan documents. By this time, Dr. Eckert had assumed control of Galleria and its affiliated companies. Dr. Eckert explained that Mr. Morgenstern was mis-managing the business, and he wanted to salvage it. In conjunction with his takeover of Galleria, Dr. Eckert approached Malone & Hyde and requested that Malone & Hyde continue to supply product and inventory to Galleria. On September 15, 1994, Dr. Eckert executed a second guaranty, pursuant to which he reaffirmed his obligation to pay all debts of Galleria which were then, or in the future, owed to Malone & Hyde. The loan documents, including the guarantees, were subsequently assigned to Fleming by Malone & Hyde.

Dr. Eckert's attempts to save the Galleria operation were unsuccessful. Upon the occurrence of several events of default, Malone & Hyde accelerated and declared immediately due and payable from Galleria and Dr. Eckert all amounts owing under the loan documents. Galleria wound up in bankruptcy, and Dr. Eckert's personal bankruptcy soon followed.

Prior to accepting Dr. Eckert as a guarantor of Galleria's indebtedness, Fleming reviewed Dr. Eckert's personal financial statement dated December 8, 1993. Nobody at Fleming specifically asked Dr. Eckert, in writing or orally, for the financial statement, and it is not clear how Fleming received the statement. Fleming does not have an original signature on the financial statement. Dr. Eckert claims that he neither prepared nor directed anyone to prepare, did not sign, and did not submit the financial statement. He does admit that the signature looks like his prescription signature, i.e. the form of his signature which he used when writing prescriptions for his patients. Fleming maintains that the financial statement was a materially false statement, upon which it reasonably relied in making its final decision to enter into the May 1994, loan transaction with Galleria. Accordingly, Fleming has filed this adversary proceeding asking that its debt be determined to be nondischargeable pursuant to 11 U.S.C. § 523(a)(2)(B).

11 U.S.C. § 523(a)(2)(B) provides in relevant part:

(e) A discharge . . . does not discharge an individual debtor from any debt —

(2) for money, property, services or an extension renewal, or refinancing of credit, to the extent obtained, by —

(B) use of a statement in writing —

(i) that is materially false;

(ii) respecting the debtor\'s . . . financial condition;

(iii) on which the creditor to whom the debtor is liable for such money, property or services reasonably relied; and

(iv) that the debtor caused to be made or published with intent to deceive.

The Plaintiff must prove each of these elements by a preponderance of the evidence in order to succeed under this section. In re Miller, 39 F.3d 301, 304 (11th Cir.1994).

It is undisputed that there is a statement in writing respecting the Debtor's financial condition. The issues are whether Dr. Eckert published the financial statement with intent to deceive, whether it was materially false, and whether Fleming reasonably relied on it.

Fleming has failed to prove by a preponderance of the evidence that Dr. Eckert published the financial statement with intent to deceive. Fleming did not produce any evidence that it specifically requested Dr. Eckert to prepare a financial statement, and no one at Fleming could positively state that Dr. Eckert delivered the financial statement to Fleming. The financial statement that Fleming received did not have an original signature, and Dr. Eckert denied preparing the statement. Although it is now generally accepted that a debtor need not sign a document in order to satisfy the writing requirement of § 523(a)(2)(B), the debtor must affirm the writing in some respect. In re Kaspar, 200 B.R. 399, 401-02 (D.Colo.1996). There was no evidence that Dr. Eckert ever acknowledged, adopted, or even saw the financial statement. No one from Fleming discussed the financial statement with Dr. Eckert. Moreover, the financial statement contained several errors — an incorrect home telephone number for Dr. Eckert and the wrong city for the location of some real property — that Dr. Eckert would not have made if he prepared or signed the document. Under these circumstances, the Court cannot find that Dr. Eckert published the financial statement.

The next question is whether the financial statement was materially false. A materially false statement has been described as "one that contains an important or substantial untruth. The measuring stick of material falsity is whether the financial institution would have made the loan if the debtor's true financial condition had been known". In re Stratton, 140 B.R. 720, 722 (Bankr.N.D.Ill.1992). Fleming argues that the financial statement is false because three commercial properties with equity in excess of $2 million are listed in the financial statement as...