In re Grim

• Decision Date: 05 February 2003
• Docket Number: No. 01-31676.,No. 01-3156.,01-3156.,01-31676.
• Citation: 293 B.R. 156
• Parties: In re Gary G. GRIM, d.b.a. G.F.S. Marketing Group, Debtor. Pamela Graffice, Plaintiff, v. Gary G. Grim, d.b.a. G.F.S. Marketing Group, Defendant.
• Court: U.S. Bankruptcy Court — Northern District of Ohio

293 B.R. 156

In re Gary G. GRIM, d.b.a. G.F.S. Marketing Group, Debtor Pamela Graffice, Plaintiff, v. Gary G. Grim, d.b.a. G.F.S. Marketing Group, Defendant.

No. 01-3156.

No. 01-31676.

United States Bankruptcy Court, N.D. Ohio.

February 5, 2003.

COPYRIGHT MATERIAL OMITTED

Samuel B. Morrison, Toledo, OH, for Plaintiff.

Stephen R. Archer, Defiance, OH, for Defendant.

MEMORANDUM OPINION AND DECISION

RICHARD L. SPEER, Bankruptcy Judge.

In the instant case, the Plaintiff, as executrix of her deceased parents' estate, seeks a determination that a certain business investment placed with the Defendant is a nondischargeable debt. On October 29, 2002, a Trial was held on this matter. At the conclusion of this Trial, the Court permitted the Parties to file Post-Trial Briefs, which both the Parties have now done. After reviewing these briefs, together with all of the evidence presented in this case, the Court, for the reasons that will now be explained, finds that the debt at issue is Dischargeable under bankruptcy law.

FACTS

For the past 33 years, the Defendant, Gary Grim (hereinafter "Defendant") who is a licensed Charted Life Underwriter, has been engaged in the business of selling insurance and other related investment opportunities. In 1998, during the course of his business activities, the Defendant saw an advertisement in an insurance trade magazine to sell an investment product issued by Alliance Leasing, Inc. (hereinafter "Alliance"). This advertisement had been placed by Mr. Scott Regal who was the regional sales manager for Pioneer Leasing (hereinafter "Pioneer"). The nature of the investment product offered by Alliance concerned office equipment that would be ostensibly sold to investors who, in turn, would give the equipment back to Alliance for leasing to other companies. For the investor, the promised rate of return was 28% over a term of 25 months. The investment itself, however, unlike the office equipment which was covered by an indemnity policy, was not insured.

After contacting the Better Business Bureau and finding no negative indicators against Alliance, the Defendant responded to Alliance's advertisement. Thereafter, upon taking a course and a subsequent examination, the Defendant was permitted to sell Alliance's investment product. As a salesman, the Defendant worked entirely on commission, receiving 10% of the proceeds he solicited from investors. (Defendant's Exhibit # 4). Although not licensed to sell securities, the Defendant was assured by Alliance that the investment product it marketed was not a security, and thus no license was required. In selling Alliance's investment product, the Defendant was required to have investors send their funds directly to Alliance. In turn, Pioneer would issue, at a later date, a commission check to the Defendant for the sale.

As a part of his arrangement with Pioneer, the Defendant was required to advertise the investment product offered by Alliance in his local area. For the Defendant, this advertising consisted of placing two ads in the local paper in July and August of 1998, and circulating flyers within his community. According to the Defendant, the language contained in these advertisements was strictly controlled by Pioneer. As it pertains thereto, the language contained in the flyer issued by the Defendant stated as follows:

Insurance Company

Return

14.00%

Investment Insured

Are you satisfied with the interest earned from your Bank CD, Bank IRA, 401K, or Annuity? If not, please read on.

Security is top priority with each person's investment. I have an investment that is INSURED by Royal Indemnity Insurance Company. This company has over $100 Billion Dollars in Assets and is Rated "A" Excellent From A.M. Best (insurance analysis firm).

With this investment your return is 28% over a 25-month contract.

(14% APY-Annual Percentage Yield Example: $10000 × 28% =$12800)

You owe it to yourself to check this out! No obligation, and we pay all bank penalties for bank CD's that are invested with us.

(Plaintiff's Exhibit A). The advertisements placed by the Defendant in the local newspaper, although not as detailed, conveyed in substance this same message. (Plaintiff's Exhibits H & I).

After seeing the Defendant's advertisements, Paul and Luella Bostelman (hereinafter the "Bostelmans"), the deceased parents of the Plaintiff, Pamela Graffice, went to the Defendant's business office to discuss investing in Alliance's investment product. After consulting with the Defendant, the Bostelmans, who at that time were both just under 80 years of age, entered into a contract, in late August of 1998, to invest with Alliance. In accordance with the advertisement issued by the Defendant, the terms of this contract provided that the Bostelmans were to receive a 28% rate of return on their money over a period of 25 months. In addition, as it relates to insurance, the contract stated, "Royal Indemnity Company, as evidenced by Addendum attached herein, has insured the Equipment Purchase Program of Alliance Leasing in the amounts described in said Addendum." (Plaintiff's Exhibit C). According to the Defendant, as it relates to this latter provision, he informed the Bostelmans that only the equipment underlying the investment was insured, not the investment itself. In addition, the Defendant testified that he informed the Bostelmans that they were not contracting with him, but instead directly with the Alliance.

In late August and early September of 1998, the Bostelman's remunerated to Alliance approximately Ninety-three Thousand dollars ($93,000.00), the amount of which constituted most of their life savings. These funds came from three sources: a Prudential High Yield Fund; an IRA; and Prudential Variable Investment Plan Annuity. (Plaintiff's Exhibits, G, L, M, N & O). As evidence of their investment, two copies of checks made out to Alliance Leasing were introduced into evidence: a check from Prudential Investment in the amount of Twenty-eight Thousand Twenty-five and 79/100 dollars ($28,025.79) and a check from Paul Bostelman in the amount of Fifty-five Thousand dollars ($55,000.00). (Plaintiff's Exhibits P & Q). Both checks were made out to Alliance; however, with regards to the latter, the Defendant wrote a receipt for the check. (Plaintiff's Exhibit Q).

Shortly after the Bostelmans invested their money with Alliance, the assets of Alliance, including those funds sent to Alliance by the Bostelmans, were frozen on account of an investigation conducted by the S.E.C. Through a letter dated October 26, 1998, the Bostelmans were informed by the Defendant that there were some problems with their investment with Alliance. (Plaintiff's Exhibit T). Eventually, after the Defendant was unable to recover the Bostelmans' investment, the Plaintiff, on behalf of the Bostelmans, sued the Defendant to recover the investment; according to the Defendant, this was the first time he had ever been sued for any form of wrongdoing.

On October 15, 1998, due to its problems with the S.E.C., Alliance filed a petition for protection under Chapter 11 of the United States Bankruptcy Code. A trustee was then appointed to manage Alliance's business affairs. Sometime later, as a result of the trustee's efforts, the Plaintiff, on behalf of the Bostelmans, received a distribution from Alliance's bankruptcy estate of approximately Thirty-seven Thousand dollars ($37,000.00).

As a part of the trustee's effort to recover assets for Alliance's creditors, the Defendant was sued by the bankruptcy trustee to recover, as a preferential transfer, the commissions he had received from the various parties that he had solicited to invest with Alliance. On or around February 3, 2000, the Defendant reached a settlement with the bankruptcy trustee by agreeing to turnover a total of Twenty-four Thousand Forty-one and 98/100 dollars ($24,041.98) for all the commissions he had received. Included in this amount, was Three Thousand Eight Hundred dollars ($3,800.00) dollar in commission proceeds that the Defendant had earned on account of the Bostelmans' investment. However, as it pertains thereto, it was specifically pointed out that the Defendant's commission on Fifty-five Thousand dollars ($55,000.00) of the Bostelmans' investment had not been forwarded to the Defendant, and therefore was not included in the bankruptcy trustee's preference action. To secure financing for his settlement with the bankruptcy trustee, the Defendant had a second mortgage placed on his home.

At the Trial held in this matter, testimony was elicited from the Bostelmans' two daughters (the Plaintiff, Pamela Graffice, and Karen Johnston). The statements made by the daughters revealed the following information about the Bostelmans:

Both Mr. and Mrs. Bostelman were lucid at the time they made their business investment with Alliance;

After the liquidity of their investment with Alliance was called into question, both Mr. and Mrs. Bostelman began to experience great stress;

Both Mr. and Mrs. Bostelman died in March of the year 2000;

Before retiring, both Mr. and Mrs. Bostelman were employed in responsible positions;

After investing with Alliance, Mr. and Mrs. Bostelman had approximately $12,000.00 left in their savings.

In addition to the above information, the statements made by the Bostelmans' daughters alleged two matters concerning their parents' investment with Alliance. First, both daughters offered testimony that neither their mother nor their father was the type of person to engage in risky investments. In this same regard, and in contrast to those statements made by the Defendant, the daughters contend that their father was under the impression that their actual investment with Alliance, and not just the underlying equipment, was insured.

On March 26, 2001, the Defendant filed for protection under Chapter 7 of the United States Bankruptcy Code. In his bankruptcy petition, the Defendant, in addition to listing the...