In re Firestone, Bankruptcy No. 81-01715-BKC-JAG

• Decision Date: 18 August 1982
• Docket Number: Bankruptcy No. 81-01715-BKC-JAG,Adv. No. 82-0016-BKC-JAG-A.
• Citation: 26 BR 706
• Parties: In re Daniel L. FIRESTONE, Debtor. Donald Y. McMILLAN, Nancy Jean Ankenman, Douglas H. Dabney, Jack Lee, Homer Forsythe, and Jane Forsythe, Plaintiffs. v. Daniel L. FIRESTONE, Defendant.
• Court: U.S. Bankruptcy Court — Southern District of Florida

26 B.R. 706 (1982)

In re Daniel L. FIRESTONE, Debtor Donald Y. McMILLAN, Nancy Jean Ankenman, Douglas H. Dabney, Jack Lee, Homer Forsythe, and Jane Forsythe, Plaintiffs. v. Daniel L. FIRESTONE, Defendant.

Bankruptcy No. 81-01715-BKC-JAG, Adv. No. 82-0016-BKC-JAG-A.

United States Bankruptcy Court, S.D. Florida.

August 18, 1982.

COPYRIGHT MATERIAL OMITTED

Phillip D. Cameron, Worthington, Ohio, Ronald J. Rothschild, Hollywood, Fla., for plaintiffs.

Arthur Halsey Rice, c/o Leibowitz & Rice, Miami, Fla., Gary J. Rotella, c/o Frank Joseph Heston, P.A., Tamarac, Fla., for debtor-defendant.

JOSEPH A. GASSEN, Bankruptcy Judge.

FINDINGS AND CONCLUSIONS

This matter was tried on the joint complaint to determine dischargeability of debt under 11 U.S.C. § 523(a)(2)(a). The complaint is predicated on the fraud involved in inducing each of the plaintiffs to purchase a film distributorship from the debtor's corporation, Firestone Photo Co. Only one complaint was filed and one trial held. Although each plaintiff independently entered into a contract with Firestone Photo, and the possible misrepresentations to and reliance by each plaintiff must be considered separately by the court, many of the facts as to each are relevant to the others because they demonstrate the routine business practices and the knowledge of Firestone Photo and of the debtor.

At trial ruling was reserved on certain evidence. That part of the testimony of Harry B. Kenyon which was made only by way of proffer is admitted because it was not character evidence as to the debtor, but was information about the photo processing industry and the Firestone company's operations. The evidence is relevant to the truth or untruth of representations that were made to the plaintiffs and to the knowledge of the debtor as to the truth of such representations, both of which are elements under § 523(a)(2)(a). Plaintiff's Exhibits No. 56A, 57A, 58A, 59A, 60A, 61A, 62A, 66A and 67A, all marked for identification only, will not be admitted because they have insufficient relevance to the specific fact issues in this case. Exhibit No. 63, Entry of Guilty Plea, is now admitted for the purpose of proving the debtor's knowledge of the actions of his sales agent, which became relevant upon the testimony of Daniel Firestone that a sales representative whose actions led to the Entry of the Guilty Plea in 1975 visited plaintiff McMillan in 1976.

FACTS

The only witnesses were the five plaintiffs, the defendant and Kenyon. (Jane Forsythe, a co-plaintiff with her husband, did not testify.) Because of the seriousness of the effect on the debtor's rehabilitation if plaintiffs should prevail, and because of the high emotion surrounding the fraud issue, the court has very carefully considered the demeanor and credibility of each witness and has examined the documentary evidence in detail. Based on the foregoing, the court makes the following fact findings.

In 1946 in Columbus, Ohio debtor-defendant, Daniel L. Firestone, founded his company, Firestone Photographs, which he incorporated in approximately 1965. Around 1975 he formed a second corporation, Firestone Photo Co. Firestone was originally a commercial photographer and gradually expanded into photo processing and related business. He solely owned, controlled, and directed the business activities of both his corporations. He testified that one was a distribution and sales company and the other handled film processing, but the evidence suggests that their identities may not have been kept entirely separate. Firestone testified that he sometimes used corporate funds to pay personal expenses.

In late 1973 Firestone Photographs began selling distributorship franchises essentially similar to the ones which gave rise to this complaint. The distributors would purchase from Firestone rack displays with Kodak film, which were placed in stores and serviced by the distributors. To the Kodak film, Firestone attached its processing mailer, so that the store customer would pay for both the film and the Firestone film processing at the time the film was purchased.

Kenyon, a former vice-president of Firestone Photographs who was familiar with the operations of the company testified about the inception of Firestone's franchise sales program. Daniel Firestone initially asked Kenyon to get information about a competitor's program, which Kenyon did in 1973. Despite Kenyon's unfavorable report, Daniel Firestone decided that such a program should be set up by Firestone Photographs. From Kenyon's prior experience with prepaid processing, he was convinced that the program would not work because processing adds so much to the initial price that most customers prefer to buy film alone and pay for the processing later separately, leading to low sales for film which is sold together with prepaid processing. The slow sales led to film becoming outdated and because of all of this it was difficult to find outlets which would take the racks of film. Kenyon testified that the Firestone company itself had tried to sell the prepaid film and mailers previously and was unsuccessful. Nevertheless, Daniel Firestone personally decided to go ahead with it as a franchise program, and he adopted many of the competitors' materials which Kenyon had obtained.

In his discussions with Daniel Firestone at that time, one contract provision which Kenyon particularly objected to was the repurchase guarantee because he felt it would be impossible for the company to comply with that term, because of the likelihood of unsuccess of the distributorships. Kenyon also objected to the profit projection which was included in the promotional materials, first of all because it was based on Kodak figures as to the sale of film alone, not film with prepaid processing, and secondly because he felt that the sales projections were totally arbitrary. Daniel Firestone told him that the figures for projected number of sales for each distributor were average figures, but did not have any data to back them up.

Kenyon further objected to the list of prospective sales outlets included in the promotional materials because Kenyon felt there was no reason to believe that the film with Firestone processing mailers could be placed in these types of outlets. He himself spoke to representatives of the Kroger Supermarket chain and they would not even consider taking the Firestone displays.

Finally, based on his observation of company operations and his discussions with Kodak representatives and other persons in the photographic field, he concluded, after making several franchise sales, that the program would also be unsuccessful because of poor service. Firestone was taking three to four weeks to return processed film while their competitors were giving two day service, and the company did not have the cash flow to handle it more quickly.

Kenyon testified that he discussed the deficiencies of the program with Daniel Firestone on at least six occasions, but Firestone informed him that his job was just to sell the franchises. Kenyon did sell seven franchises before he left the company in February, 1974. Before he left however, the purchasers "badgered" him about their dissatisfaction because their sales outlets turned out to be "Mom and Pop" locations and they were getting very few film sales. Two of the seven asked for their money back under the repurchase agreement and Daniel Firestone "avoided" returning it. All were eventually involved in litigation.

Following Kenyon's departure, the Firestone companies continued selling distributorships. The debtor testified that the companies employed about three hundred persons in 1976 and that they were doing a lot of business. The evidence shows that there was national advertising for the sale of the franchises. Plaintiffs in this case signed distributor agreements with Firestone Photo Co. on the following dates: McMillan (Georgia)—January 26, 1976, Dabney (Virginia) —February 3, 1976, Lee (Ontario, Canada)—September 27, 1976, Forsythes (Ohio)—August 5, 1977 and Ankenman (Indiana) —August 29, 1977 (Plaintiffs' Composite Exhibits No. 3, 4, 37, 1, and 5). (Lee originally signed an agreement on September 27, 1976 and then entered into a new agreement on October 7, 1976 when he was given a different territory.) (Plaintiffs' Composite Exhibit No. 6).

In November, 1977 a fire occurred which Daniel Firestone testified caused serious interference with the processing of film by Firestone Co. Each of the plaintiffs eventually obtained undefended judgments in state or federal court against the Firestone companies and Daniel Firestone (Plaintiffs' Exhibits No. 16, 17, 18, 19 and 48). At some time subsequent to the events complained of the debtor moved to Florida, and he filed a petition in bankruptcy under chapter 7 on October 21, 1981. The companies are out of business but Firestone testified that they did not file bankruptcy because of the expense of legal representation.

The processes by which each of the plaintiffs became involved with Firestone were basically similar. Each plaintiff saw one or more newspaper advertisements seeking a distributor for "world famous Kodak film and other photo products" (Plaintiffs' Exhibit No. 7). Plaintiffs each responded to the advertisement and soon received a visit from a sales representative. A promotional packet with items such as an estimated profit projection for the distributorship, a list of types of locations where the film racks would be placed, photographs of the Firestone Co. buildings and processing equipment, Kodak sales brochures, and copies of newspaper articles about Daniel Firestone, franchising, and the photographic industry, as well as a cover letter from Daniel Firestone, were either mailed prior to the visit of the sales representative or were brought with him on his visit to the plaintiff (e.g., Plaintiffs' Composite Exhibit No. 5).

In most cases the sales representative appeared unexpectedly, often on the...