In re Salvino

• Decision Date: 09 July 2007
• Docket Number: Adversary No. 06-A-1092.,Bankruptcy No. 05-B-61546.
• Citation: 373 B.R. 578
• Court: U.S. Bankruptcy Court — Northern District of Illinois
• Parties: Christopher Keith SALVINO and Suzanne Mary Salvino, Debtors. Wish Acquisition, LLC, Plaintiff, v. Christopher Salvino, Defendant.

373 B.R. 578

Christopher Keith SALVINO and Suzanne Mary Salvino, Debtors Wish Acquisition, LLC, Plaintiff, v. Christopher Salvino, Defendant.

Bankruptcy No. 05-B-61546.

Adversary No. 06-A-1092.

United States Bankruptcy Court, N.D. Illinois, Eastern Division.

July 9, 2007.

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Carolina Y. Sales, Kenneth A. Michaels, Jr., Bauch & Michaels, LLC, Chicago, IL, for Debtors.

Miles W. Hughes, Mohsin N. Khambati, Thomas J. Augspurger, McDermott Will & Emery LLP, Chicago, IL, for Plaintiff.

Paul M. Bauch, Bauch & Michaels LLC, Chicago, IL, for Defendant.

MEMORANDUM OF DECISION

EUGENE R. WEDOFF, Bankruptcy Judge.

This adversary proceeding is before the court for judgment after trial. The plaintiff, WISH Acquisition ("Acquisition") asserts that defendant Christopher Salvino owes it debts that are nondischargeable in his Chapter 7 bankruptcy case pursuant to § 523(a)(2) and (6) of the Bankruptcy Code (Title II, U.S.C.). These provisions except from discharge debts that arose from false representations or are for willful and malicious injuries. As discussed below, Acquisition has not established that any debts owed by Salvino are nondischargeable. First, the only false representations that Acquisition proved were not shown to have resulted in a debt. Second, the only debt that Acquisition did prove at trial — arising from breach of an employment contract — was not shown to have arisen from a willful and malicious injury. Although there is authority to the contrary, the better reading of the Bankruptcy Code is that the willful and malicious injury exception applies only to claims arising from tortious conduct, not from simple breaches of contract. Accordingly, judgment will be entered in favor of Salvino.

Jurisdiction

Under 28 U.S.C. § 1334(a), the district courts have exclusive jurisdiction over bankruptcy cases. Pursuant to 28 U.S.C. § 157(a) and its own Internal Operating Procedure 15(a), the District Court for the Northern District of Illinois has referred its bankruptcy cases to the bankruptcy court of this district. When presiding over a referred case, the bankruptcy court has jurisdiction under 28 U.S.C. § 157(b)(1) to enter appropriate orders and judgments in core proceedings within the case. Acquisition's adversary proceeding is a core proceeding under 28 U.S.C. § 157(b)(2)(I) (determinations of dischargeability), and this court may therefore enter a final judgment.

Findings of Fact

In 1992, three doctors — Christopher Salvino, Jeffrey Rosen, and Claudio Alperovich — formed Midwest Surgical Consultants. In 1996, the doctors began performing bariatric (weight reduction) surgeries. (Trial Tr. 1/29 at 66-69.) By 2002, the number of surgeries the doctors were performing had increased dramatically (id. at 74), and, in response to the increased demand, the doctors formed WISH Holding, LLC ("Old Wish"), through which they opened new surgical centers around the country (id. at 67, 72). Salvino served as President and CEO of Old Wish. (Id. at 70.)

Old Wish's business model was built on rapid expansion (id. at 73-74), which it financed with loans from American Chartered Bank (id. at 77). By March 2004, Old Wish had a term loan in the amount of $2.5 million and a revolving line of credit in the amount of $4 million with the bank. (Acquisition Ex. 12, at 1, 9.) These loans were secured by. Old Wish's accounts receivable, its interest in certain real estate, and personal guarantees from Salvino, Rosen, and Alperovich. (Id.; Acquisition Ex. 13.)

In January 2005, Old Wish defaulted on these loans. (Acquisition Trial Ex. 24.) In response to the default, Joseph Chiariello, the bank's principal loan officer on the Old Wish's account, called a meeting with Rosen and Alperovich. (Trial Tr. 1/29 at 238.) Chiariello told the two doctors at this meeting that the bank intended to accelerate the notes. (Id. at 240-41.) Chiariello also told the `doctors that, Old Wish's account receivables did not support the loan balances and that the bank would contact the FBI if the doctors did not bring the loans current, liquidate the company, or find a buyer to acquire the debt. (Id. at 241-44, 252.) The meeting resulted in a Modification and Standstill Agreement. (Acquisition Ex. 26.) This agreement called for Salvino's resignation as CEO, his replacement by Rosen, the retention of a collection agency, and implementation of a lockbox for receipts. (Id. at 3-8.)

In an effort to pay the bank debt without liquidation, Old Wish located two Totential investors, Com Vest Partners ("Corn Vest") and Incubator Investments ("Incubator"). (Trial Tr. 1/29 at 116, 120.) Stephen Winslett, a partner at Com Vest, performed due diligence on Old Wish for the investors. (Trial Tr. 1/30 at 15.) In February 2005, after initial due diligence, Corn Vest and Incubator agreed to purchase a $500,000 participation in Old Wish's debt, and the bank responded by extending the standstill agreement. (Id. at 23-24.) As the due diligence continued after February, Com Vest and Incubator. purchased further loan participations. (Id.)

During the due diligence and at various times thereafter, Salvino told Corn Vest that he would stay with the company for 3 to 5 years, (Trial Tr. 1/29 at 126; Trial Tr. 1/30 at 25.) Throughout these discussions, the investors made it clear that they would not invest without Salvino's promise to stay, with the company. (Trial Tr. 1/30 at 25)

After completing his due diligence, Winslett recommended against investing in Old Wish. (Id. at 20-21; Acquisition Trial Ex. 30.) Winslett noted that Old Wish had significant problems with billing, that accounts receivables were overstated, and that the company was poorly managed. (Trial Tr. 1/30 at 20-21.) Winslett also believed that an investment in Old Wish would have required funding beyond the investors' financial abilities. (Id. at 21.)

Despite Winslett's conclusions, Com Vest and Incubator decided to acquire Old Wish's business, and they formed Acquisition to purchase both the remainder of Old Wish's bank debt and the assets of Old Wish itself. (Acquisition Ex. 66.) During subsequent negotiations regarding Acquisition's purchase, Salvino asked the bank to release the doctors from any fraud claims arising from their dealings with the bank. (Acquisition Ex. 56, 68, 69.) The bank did not do so. (Acquisition Ex. 70.)

Also in conjunction with the debt purchase, Salvino executed an employment contract that included a five-year commitment to stay with the company. (Acquisition Ex. 72.) In this contract, Acquisition agreed to forgive all but $1.5 million of Salvino's personal guaranty of the bank loan, (Acquisition Ex. 73.) The debt purchase closed on April 22, 2004, and on the same day, Old Wish filed a Chapter 11 bankruptcy case to facilitate Acquisition's purchase of Old Wish's assets. (Trial Tr. 1/30 at 119.)

Before the bankruptcy filing, Salvino sought alternative employment with other companies. (Trial Tr. 1/29 at 105.) He entered into an employment contract with iVOW, a competitor of Acquisition, on April 11, 2005. (Acquisition Ex, 47, 51.) A few days before the April 22 bankruptcy filing, however, Salvino withdrew his signed employment contract with iVOW. (Acquisition Ex, 51.) Salvino did not disclose his search for alternative employment to Acquisition. (Trial Tr. 1/29 at 138.)

On July 14, 2005, the bankruptcy court approved the sale of Old Wish's assets to Acquisition. (Acquisition Ex. 85,) Thereafter, in August 2005, Acquisition agreed to amend Salvino's employment contract. (Acquisition Ex. 87.) The amended contract, backdated to April 22, 2005, retained Salvino's five-year employment commitment, but released him from the remaining $1.5 million personal guaranty and inserted a liquidated damages clause. (Id. at 19.) Under this provision, damages were fixed at $1,500,000 if Salvino terminated the contract without breach by Acquisition during the first year of the contract term, at $1125,000 during the second year, at $750,000 during the third year, and at $375,000 during fourth year. (Id.)

On September 7, 2005, Acquisition purchased Old Wish's assets. (Acquisition Ex. 88, 89.) Within seven days of the asset purchase closing, Salvino sought employment as a Trauma Director at John C. Lincoln Hospital. (Acquisition Ex. 98; Trial Tr. 1/29 at 188, 201.) Salvino did not disclose this employment search to Acquisition. (Trial Tr. 1/30 at 197-98.)

After the asset purchase, Acquisition was unable to stabilize the business; it failed to address the problems detailed in Winslett's due diligence report — faulty billing software, collection problems, and ineffective management. (Id. at 132, 203, 245-247; Trial Tr. 1/31 at 8-9, 25-26, 45-46, 55-56.) By March 2006, the Acquisition's owners decided to stop funding the company. (Trial Tr. 1/30 at 160-61.) Acquisition asserts, without dispute from Salvino, that after winding up its business it will recover no more than $1.4 million of a total investment of approximately $10.5 million, a loss of more than $9.1 million. (Acquisition Post Trial Br., 16-17, 46.)

Meanwhile, on October 14, 2005, Salvino and his wife filed the pending Chapter 7 bankruptcy petition, seeking a discharge of their personal debts, including Salvino's liability under the liquidated damages provision of his employment contract with Acquisition. (Acquisition Ex. 118.)

On February 4, 2006, Salvino accepted part-time employment as Trauma Director at John C. Lincoln Hospital and, effective March 1, 2006 — within the first year of his employment contract with Acquisition — started working in this new position full-time. (Acquisition Ex. 137; Trial Tr. 1/29 at 219.)

Conclusions of Law

Under § 727(a) of the Bankruptcy Code, the pre-bankruptcy debts of an individual Chapter 7 debtor like Christopher Salvino are subject to a broad discharge, defined by § 524(a). However, some types of debt — those listed in § 523(a) — are excepted from this...