In re McLaren, Bankruptcy No. 88-04828
| Decision Date | 24 January 1992 |
| Docket Number | Bankruptcy No. 88-04828,Adv. No. 90-0230. |
| Citation | 136 BR 705 |
| Parties | In re William J. McLAREN, Debtor. William LONGO, Sr., Plaintiff, v. William J. McLAREN, Defendant. |
| Court | U.S. Bankruptcy Court — Northern District of Ohio |
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Robert M. McIntyre, McIntyre, Kahn & Kruse Co., L.P.A., Thomas C. Pavlik, Sindell, Rubenstein, Einbund, Pavlik, Novak & Celebrezze, Cleveland, Ohio, for debtor-defendant.
Jack M. Schulman, Schulman & Schulman, Sheldon Stein, Cleveland, Ohio, for plaintiff.
The plaintiff brought this adversary proceeding to establish that several payments made by him to the Debtor, or to entities controlled by the Debtor, were nondischargeable under subsections 523(a)(2), (4) or (6) of the Bankruptcy Code and to revoke the Debtor's discharge under section 727(d)(3) of the Code because of the Debtor's alleged failure to obey an order of the Court. The Court has jurisdiction over this proceeding under 28 U.S.C. § 1334(b) and General Order No. 84 entered in this district on July 16, 1984. This is a core proceeding under 28 U.S.C. § 157(b)(2)(I). This opinion constitutes the Court's findings of fact and conclusions of law pursuant to Bankruptcy Rule 7052.
This proceeding was tried before the Court on September 4 and 5, 1991. Plaintiff testified on his own behalf and called an accountant with the firm of accountants which had done work for the Debtor and entities controlled by him. He also called the Debtor as a witness; however the Debtor invoked his Fifth Amendment privilege against self-incrimination and refused to testify. The Court sustained the Debtor's Fifth Amendment claim of privilege but permitted plaintiff's counsel to read into the record portions of the transcript of the Debtor's 2004 examination. At Debtor's request the Court admitted the transcript of the balance of the 2004 examination. The Debtor's case was limited to recalling the plaintiff for examination.
The Debtor has been a stockbroker since the late 1950's. He worked for a number of brokerage firms including McDonald & Company, where his father was for a time the managing partner. In the 1980's he also was active in the promotion and syndication of limited partnerships. By the late 1980's he had become hopelessly in debt; on December 22, 1988 he filed a voluntary petition for reorganization under chapter 11 of the Bankruptcy Code. According to the Debtor's schedules, he owed more than $10 million to various creditors including approximately $868,000 to the plaintiff. His schedules showed only $78,150 in assets. The Debtor's effort to reorganize was not successful and on January 22, 1990 the Court converted his case to chapter 7 for liquidation. The Court granted the Debtor his discharge on August 27, 1990.
Plaintiff is a high school graduate, he testified that he had taken several college business courses, but he was obviously not a knowledgeable or sophisticated investor. He was vice-president of a family business which manufactured high performance sealants and caulks until the sale of the business in 1984. The plaintiff realized several million dollars on the sale. Soon after he came into his share of the proceeds of the business he sought out the Debtor for investment advice. They were members of the same country club and were, apparently, casual acquaintances.
Plaintiff approached the Debtor in early 1985 with a view towards investing in municipal bonds and apparently made a number of such investments. But over the ensuing months the Debtor persuaded him to invest heavily in other endeavors in which the Debtor had a predominant personal interest. Each of these investments proved a disaster and plaintiff lost virtually all of the money he invested. He filed this adversary proceeding on the theory that each of these investments had been induced by the Debtor's fraud.
These investments each involved partnerships in which the Debtor was a general partner. In the first the plaintiff purchased a $300,000 interest in Peroil 1985-1, Ltd., an Ohio limited partnership syndicated by the Debtor to engage in oil and gas exploration and development. In the next, the plaintiff paid the Debtor $400,000 in connection with the proposed acquisition and syndication of a strip shopping center near Cleveland known as Northfield Plaza. The third was a $350,000 loan by the plaintiff to Westland Plaza Limited, an Ohio limited partnership which owned a strip shopping center in Columbus, Ohio. Plaintiff asserts that his $300,000 investment in Peroil 1985, $200,000 of his $400,000 payment to the Debtor in connection with Northfield Plaza and his $350,000 loan to Westland Plaza are obligations of the Debtor to him which are nondischargeable under section 523(a)(2), (a)(4) and/or (a)(6) of the Bankruptcy Code. In relevant part section 523(a) provides as follows:
Although subsections 523(a)(4) and (6) are, as noted, subsequently implicated in this proceeding to a limited extent, Debtor bases his case on the "false representations" and "fraud," specified in subsections 523(a)(2)(A) of the Bankruptcy Code.
The facts required to prove nondischargeability under section 523(a)(2)(A) of the Bankruptcy Code are substantially the same as those required to prove fraud under Ohio law. Coman v. Phillips (In re Phillips), 804 F.2d 930 (6th Cir.1986); Burr v. Stark County Board of Commissioners, 23 Ohio St.3d 69, 491 N.E.2d 1101 (1986). The burden of proof under both federal and Ohio law is a preponderance of the evidence. Grogan v. Garner, ___ U.S. ___, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991); see 51 O.Jur.3d Fraud and Deceit § 255 (1984) and cases cited therein.
According to the Ohio Supreme Court, the elements of fraud (including false pretenses and misrepresentation) are:
Burr v. Stark County Board of Commissioners, 23 Ohio St.3d 69, 491 N.E.2d 1101 (1986) (); see also Shover v. Cordis Corp., 61 Ohio St.3d 213, 574 N.E.2d 457 (1991); Cohen v. Lamko, Inc., 10 Ohio St.3d 167, 462 N.E.2d 407 (1984).
As its name suggests, Peroil 1985 was one of a series of oil and/or gas ventures promoted by the Debtor, all but one of which was also designated by the year of its syndication: Warrant 1492, Peroil 1982, Peroil 1983 and Peroil 1984. (A Peroil 1986 was also contemplated but never launched.) Each of these ventures was an Ohio limited partnership in which the Debtor was the general partner. None of these partnerships engaged directly in oil or gas exploration, development or production. Each channeled its operations through a turnkey drilling contract. Each entered into a drilling contract with 8916 Perkins Corp., an Ohio corporation wholly owned and controlled by the Debtor which derived its name from the Debtor's Mentor, Ohio, home address. However, Perkins did not engage in any drilling or oil and gas activities; it had no office and no employees other than the Debtor. Its role was limited to subcontracting the actual work, generally to an entity called British American Petroleum Company.
Although the Debtor's description of his oil and gas ventures at his 2004 examination was hazy and sometimes contradictory, it appears clear enough that the last two were total failures and the earlier ventures were at best marginal. The investors received little if any return from the proceeds of the ventures' wells. From the inception the Debtor had apparently covered some operating costs of the ventures and made distributions to partners from funds other than those generated by the ventures. Both the oil and gas markets had deteriorated; the Debtor moved the drilling site, first from Bradford to Oil City Pennsylvania, then to Kentucky. In Kentucky the Debtor switched his efforts from oil to gas. Debtor's syndication fortunes had also declined. Peroil 1984 raised only $235,000 although it had committed to a $1,170,000 drilling contract with Perkins. Peroil 1985 raised $715,000 of a planned $1.3 million, $300,000 from the plaintiff.
The Court finds that the Debtor sold the plaintiff a $300,000 limited partnership interest in Peroil 1985 with assurances that the Debtor's earlier ventures had been successful, that two of the plaintiff's and the Debtor's mutual acquaintances were receiving substantial payments from the earlier ventures and that the plaintiff would realize a monthly return of $14 to $20 thousand based upon a projected $350,000 investment.
These representations were made in the context of a relationship in which the plaintiff had sought out the Debtor for conservative investments. The plaintiff was put under pressure to commit by the Debtor's representation there was limited availability. The Debtor did not dispute this testimony but would deflect it by characterizing the projections as "pu...
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