In re Kovacs

• Decision Date: 16 November 1982
• Docket Number: Bankruptcy No. 82-1760-JG,Adv. No. A82-1253-JG.
• Parties: In re Csaba KOVACS, d/b/a Corporate Construction Consultant, Debtor. Dominic MUNAFO, Plaintiff, v. Czaba KOVACS, Defendant.
• Court: United States Bankruptcy Courts. First Circuit. U.S. Bankruptcy Court — District of Massachusetts

42 B.R. 1 (1982)

In re Csaba KOVACS, d/b/a Corporate Construction Consultant, Debtor.

Dominic MUNAFO, Plaintiff, v. Czaba KOVACS, Defendant.

Bankruptcy No. 82-1760-JG, Adv. No. A82-1253-JG.

United States Bankruptcy Court, D. Massachusetts.

November 16, 1982.

Dawn Sprague, South Boston, Mass., for plaintiff.

Michael J. Yerardi, Braintree, Mass., for defendant.

MEMORANDUM

JAMES N. GABRIEL, Bankruptcy Judge.

The plaintiff's Complaint alleges that a debt in the amount of $2539.11 owed by the debtor, Csaba Kovacs ("Kovacs" or "the debtor") to the plaintiff, Dominic Munafo ("Munafo") is nondischargeable pursuant to 11 U.S.C. Section 523(a)(2)(A) because of the debtor's actual fraud and false representations in procuring Munafo's guarantee of a loan obtained by Kovacs. The defendant's Answer admits that Kovacs owes Munafo $2539.11 but denies the nondischargeability of the debt. A trial was held and the Court ordered the parties to submit briefs. The plaintiff filed a thorough brief, and the defendant did not file a brief.

Based upon the testimony of the several witnesses, the documentary evidence, and a review of the applicable law, I make the following findings of fact and rulings of law.

Munafo and Kovacs were friends and in the fall of 1980 Kovacs was renting a room at Munafo's house in Quincy while he looked for an apartment. Kovacs was involved in the construction business as a self-employed consultant. Munafo was a business man who owned an automobile service center in Dorchester.

In early November 1980, Kovacs asked Munafo for a loan of $3500. Kovacs stated that he needed the money to place a bid on a contract to build a fence, which would prove very profitable to him. Kovacs requested the money immediately in the form of a certified check. They agreed that Kovacs would repay the loan in thirty days. Kovacs testified that at this time he had been procuring a fence contract for a friend, who is now deceased, by means of his contacts with the company awarding the contract. He was to receive a finder's fee of $4,000 out of his friend's $16,000 profit. In his testimony, Kovacs insisted that he did not tell Munafo that the loan was for a bid, but he could not explain why he requested the funds in the form of a certified check. On November 1980, Munafo gave Kovacs a certified check drawn on the State Street Bank checking account of his business, Dorchester Brake and Muffler Service Center. The check was endorsed by Csaba Kovacs and paid on November 9, 1980.

After two months, the loan remaining unpaid, Munafo questioned Kovacs about the fence contract. Kovacs responded that the contract was delayed. Munafo indicated that it was necessary to reimburse his business account and that he would refer Kovacs to the State Street Bank to obtain a loan.

The bank initially denied Kovacs' request for a loan. In January 1981, Munafo accompanied Kovacs to the State Street Bank where they met with a loan officer, Gerald Culhane. Kovacs indicated to the bank officer that the purpose of the loan was to reimburse Munafo's business account to repay the prior loan for the fence contract bid. Mr. Culhane suggested that instead of stating this commercial purpose on the loan application that the application state that it was to pay personal bills. In this way, the approval process would move faster. Mr. Culhane also suggested that the repayment term be extended so that Kovacs could establish credit. The bank required that Munafo cosign the note and provide collateral for Kovacs' loan. Munafo guaranteed the loan and pledged a $5,000 savings account as security for repayment. Munafo testified that he would not have made the original loan or guaranteed the Kovacs' loan had he known that a fence contract did not exist. The bank approved the loan of $3500 to Kovacs. The proceeds were paid to Munafo, who returned the funds to his business account.

Shortly thereafter, Kovacs moved from Munafo's house. During 1981 Kovacs made payments on the State Street Bank loan totalling approximately $900. The loan became delinquent in 1982, and the bank levied on Munafo's bank account in the amount of $2539.11. When Munafo informed Kovacs about the delinquent loan, Kovacs admitted that he never used the money for a bid on a fence contract, but rather that he used the funds to buy two cars and to pay bills.

Munafo contends that Kovacs' debt of $2539.11 to him, which loss he sustained as a result of the bank's seizure of his savings account, is nondischargeable in bankruptcy because of Kovacs' false representations as to the purpose for the loan.

The issue presented is: whether the debt owed to Munafo, who gave a personal guarantee and pledge of his property to a bank who was lending money to the debtor in order to refinance a prior loan he had given to the debtor to allegedly enable the debtor to bid on a contract, is excepted from discharge under Section 523(a)(2)(A).

The debtor contends that he did not make false representations in obtaining the initial loan or the subsequent guarantee from Munafo, and, therefore the debt is dischargeable. Moreover, the debtor asserts that even if there was fraud in the initial loan, this transaction should not be considered because the subsequent loan constituted a novation of the original loan, and that the plaintiff has not demonstrated fraud in the subsequent transaction. The debtor does not address the issue of whether any fraudulent conduct in the first transaction may taint the second transaction. The debtor's attempt to restrict the Court's focus is unmeritorious. The circumstances surrounding both transactions are relevant to determine whether the debt to Munafo arose out of the debtor's actual fraud, false representations, or false pretenses. Where a borrower makes an agreement to repay a debt which arose out of his fraudulent conduct, which repayment attempt fails, any fraud in the underlying claim is not changed by the subsequent agreement. Hartford Accident & Indemnity v. Flanagan, 28 F.Supp. 415 (S.D.Ohio 1939); In Re Rush, 33 B.R. 97 (Bankr.D. Me.1983); Greenberg v. Schools, 21 B.R. 1011 (D.Fla.1982) aff'd 711 F.2d 152 (11th Cir.1983).

In this case, the underlying debt of Kovacs to Munafo arose out of the November 1980 loan. The sole purpose of the January 1981 transaction with the bank was to reimburse Munafo's business account. They were inextricably linked because Munafo would not have given his guarantee had it not been for the original loan. The Bank loan was so related to the first loan that they must be considered part of the same transaction. I will consider the facts surrounding both transactions in order to determine whether the debt to Munafo is nondischargeable.

Section 523(a)(2)(A) excepts from discharge "any debt . . . for obtaining money, property, services, or an...