In re Priestley, Bankruptcy No. 94-621-PJW

• Decision Date: 06 June 1996
• Docket Number: Bankruptcy No. 94-621-PJW,Adv. No. 95-4.
• Citation: 201 BR 875
• Parties: In re Everett P. PRIESTLEY, Debtor. BENEFICIAL NATIONAL BANK, Plaintiff, v. Everett P. PRIESTLEY, Defendant.
• Court: U.S. Bankruptcy Court — District of Delaware

201 B.R. 875 (1996)

In re Everett P. PRIESTLEY, Debtor BENEFICIAL NATIONAL BANK, Plaintiff, v. Everett P. PRIESTLEY, Defendant.

Bankruptcy No. 94-621-PJW, Adv. No. 95-4.

United States Bankruptcy Court, D. Delaware.

June 6, 1996.

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Melvyn I. Monzack, Wilmington, DE, for Plaintiff.

Jeffrey M. Weiner, Wilmington, DE, Pace Reich, Philadelphia, PA, for Defendant.

MEMORANDUM OPINION

PETER J. WALSH, Bankruptcy Judge.

INTRODUCTION

In this Chapter 7 case, Beneficial National Bank ("Beneficial") commenced this adversary proceeding alleging that the debtor, Everett P. Priestley ("Priestley"), obtained an acquisition and construction loan based on false representations, and thus requests that Priestley's debt be deemed nondischargeable pursuant to 11 U.S.C. § 523(a)(2)(B)¹. Alternatively, Beneficial seeks a nondischargeability determination pursuant to Code § 523(a)(2)(A). Beneficial also requests a finding that Priestley's obligation for attorney's fees, interest, costs and late charges, in addition to the principal loan balance, is nondischargeable. For the reasons set forth below, I find that Priestley's debt to Beneficial and the associated attorney's fees, costs, interest and late charges, are nondischargeable pursuant to both Code §§ 523(a)(2)(B) and 523(a)(2)(A).

This Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334(b). This is a core proceeding pursuant to 28 U.S.C. 157(b)(2)(I).

FACTS

At the time of the events giving rise to the subject loan transaction, Priestley was a practicing attorney and, as a part-time real estate entrepreneur, the sole shareholder and president of Pallas Properties, Inc. ("Pallas"). In 1988, Priestley, through Pallas, sought to purchase and renovate a building at 501 Shipley Street in Wilmington, Delaware ("the Shipley Street property"). The Shipley Street property was to be converted into five condominiums units, with two units each on the second and third floors and a large unit consisting of the first floor, mezzanine and basement ("Unit One").

Sometime during the latter part of 1988, Priestley, through Pallas, applied for a loan from Beneficial in the amount of $900,000 to finance the acquisition and renovation of the Shipley Street property. Beneficial had an established lending relationship with Priestley, having previously extended him a $100,000 commercial mortgage and a $25,000 consumer line of credit. Priestley committed to pay an $80,000 equity contribution toward the Shipley Street property, and offered as collateral the Shipley Street property, along with other property located in Pennsylvania.

Proceeds from the sale of the condominiums were earmarked to repay the loan. Priestley, through Pallas, had obtained contracts of sale for three of the five office condominium units prior to applying for the loan, and submitted those contracts as part of the loan application. Pallas had contracted with Richard E. Yerger of Ticor Title Insurance Company and with the Delaware Counsel on Crime and Justice to purchase one condominium unit each on the second and third floors, respectively. Both of these units were under contract for 1,700 square feet each, at a sales price of $160,000 each. Pallas had also contracted with Priestley himself, Jeffrey L. Olmstead ("Olmstead"), and George W. Dalphon ("Dalphon") (collectively the "Priestley Group") to purchase Unit One for $555,000. This latter contract, evidenced by a July 27, 1988 Agreement of Sale ("Agreement of Sale"), is at the heart of this controversy.

Prior to Pallas' Beneficial loan application, the Priestley Group had already received a $435,000 commitment for mortgage financing from the Bank of Delaware to purchase Unit One. Beneficial agreed it would release Unit One after collecting $475,000, the difference between the $555,000 sales price and the Pallas' $80,000 equity contribution. Dalphon and Olmstead were to contribute $40,000 for the Unit One purchase, to make up the difference between the $475,000 release price and the $435,000 Bank of Delaware mortgage loan. Doc. # 18, Ex. 4, at 2-3.

Little did Beneficial know, there was more to the Unit One purchase deal than reflected in the Agreement of Sale. The agreements actually controlling this deal consisted of (1) the Agreement of Sale; (2) a Modification Agreement ("Modification Agreement"), which Pallas and the Priestley Group and Priestley individually executed simultaneously with the Agreement of Sale; and (3) various "unwritten understandings" between Pallas and the Priestley Group. Doc. # 31 at 7. Although Priestley submitted the Agreement of Sale to Beneficial with the Pallas loan application, he did not disclose the Modification Agreement or the "unwritten understandings" to Beneficial. Both the Agreement of Sale and the Modification Agreement were dated July 27, 1988 and apparently drafted by Priestley. While the Agreement of Sale contains a brief integration clause (viz., "this Agreement contains the entire understanding of the parties. . . ."), a preamble in the Modification Agreement plainly states that the parties "are desirous of clarifying and modifying their respective obligations" under the Agreement of Sale. Doc. # 18, Ex. 1, at 5-6, Ex. 2 at 1.

Pertinent contingencies or conditions contained in the Modification Agreement included: (1) the Priestley Group was not required to settle on the purchase of Unit One until at least one additional floor in the building was sold (the "minimum sales" condition); (2) Dalphon and Olmstead were to transfer property they owned, located at 1208 West Street ("the West Street property"), to Pallas; and Pallas, in turn, was to credit Dalphon and Olmstead $80,000 as the "down payment" on the Unit One purchase price; and (3) a "walk-away" provision: if Dalphon or Olmstead failed to settle on the agreement to purchase Unit One due to their own acts or omissions, Dalphon and Olmstead would simply forfeit $10,000 from the West Street property sale proceeds. Also pertinent was a "tax-free exchange" condition, which was one of the "unwritten understandings" among Priestley, Olmstead and Dalphon. This condition required Pallas to complete the renovations on the Shipley Street property within 180 days after the close of the sale of the West Street property so the Unit One purchase would occur within 180 days of that sale and thus qualify as a tax-free exchange under the Internal Revenue Code². Doc. # 31 at 7-9. The possibility of a tax-free exchange was mentioned in the Agreement of Sale presented to Beneficial, but not in the form of a condition:

Seller may apply the proceeds from this transaction in a tax free exchange in accordance with Section 1031 of the Internal Revenue Code. This tax treatment shall have no effect on Purchaser and Seller indemnifies Purchaser from any and all liabilities therefrom. (emphasis added).

Doc. # 18 Ex. 1 at 4.

After what were described by Priestley as lengthy negotiations, Beneficial sent Priestley a draft loan commitment letter dated January 18, 1989. In typical fashion, the commitment letter set forth a number of representations which the borrower would make by counter-signing the letter. In that letter, Beneficial articulated its understanding at that time that none of the three contracts were subject to contingencies:

Borrowers hereby represent that Agreements of Sale between Pallas Properties, Inc. and Jeffrey L. Olmstead, George W. Dalphon, Jr., and Everett P. Priestley dated July 27, 1988, Pallas Properties, Inc., and Delaware counsel on Crime and Justice dated July 12, 1988, and Pallas Properties, Inc., and Richard E. Yerger dated November 21, 1988, all of which have been submitted to the Bank in conjunction with this loan application, are in full force and effect, with all contingencies removed, and that the purchasers under each of the subject agreements are ready, willing and able to proceed to settlement upon completion of the renovations for the units described in each of the subject contracts. (emphasis added)

Doc. # 18 Ex. 6 at 5.

On January 23, 1989, Priestley sent Beneficial a letter requesting a number of changes to the commitment letter. Regarding the existence of contingencies, Priestley's letter made no reference to the Modification Agreement or the "unwritten understandings" relating to the Unit One sale, but stated:

The last section of Paragraph 6 talks about contingencies having been removed from my contracts of sale. I do have three fully executed agreements for the sale of units. However it is not accurate, nor possible, to say that all contingencies have been removed in all regards. For example, the Ticor Agreement is subject to final written agreement by Ticor as to a lease. This was explained in a letter from Mr. Richard Yerger who is the Delaware Manager. Likewise the DCCJ contract looks firm but is not unconditional. They have received $90,000.00 in grants but do not yet have a mortgage commitment.

Doc. # 18 Ex. 7.

Beneficial prepared a second commitment letter dated February 1, 1989. With regard to contractual contingencies, that commitment letter stated the three contracts were "in full force and effect, and that, subject only to certain contingencies or conditions set forth in Everett Priestley's letter of January 23, 1989" the purchasers were ready, willing and able to proceed to settlement upon completion of the renovations. Doc. # 18 Ex. 8 at 5. (emphasis added) Priestley signed this commitment letter on February 8, 1989.

The loan closing took place on February 23, 1989. The loan documents, including the $900,000 promissory note, were executed by Pallas, Priestley, individually, and Mr. and Mrs. Priestley, individually, as the "Borrowers".

Priestley, through Pallas, began renovating the Shipley Street property, but found he seriously underestimated the cost of the project. In fact, Priestley had experienced cost overruns in excess of $198,000. In the mean-time, the West...