In re Salzman

• Decision Date: 09 June 1986
• Docket Number: 83 B 20068,Bankruptcy No. 83 B 20134,83 Adv. 6149,83 Adv. 6150.
• Citation: 61 BR 878
• Parties: In re Emanuel SALZMAN, Debtor. CHRYSLER CAPITAL CORP., formerly known as E.F. Hutton Credit Corp., Plaintiff, v. Emanuel SALZMAN, Defendant. In re William HAMLIN, Debtor. CHRYSLER CAPITAL CORP., formerly known as E.F. Hutton Credit Corp., Plaintiff, v. William HAMLIN, Defendant.
• Court: U.S. Bankruptcy Court — Southern District of New York

61 B.R. 878 (1986)

In re Emanuel SALZMAN, Debtor.

CHRYSLER CAPITAL CORP., formerly known as E.F. Hutton Credit Corp., Plaintiff, v. Emanuel SALZMAN, Defendant.

In re William HAMLIN, Debtor.

CHRYSLER CAPITAL CORP., formerly known as E.F. Hutton Credit Corp., Plaintiff, v. William HAMLIN, Defendant.

Bankruptcy Nos. 83 B 20134, 83 B 20068, 83 Adv. 6149, 83 Adv. 6150.

United States Bankruptcy Court, S.D. New York.

June 9, 1986.

COPYRIGHT MATERIAL OMITTED

Garrity, Connolly, Lewis, Lowry, Grimes & Silverman, New York City, for Emanuel Salzman; Paul H. Silverman and Robert C. Reichelscheimer, of counsel.

Kreindler & Relkin, P.C., New York City, for Chrysler Capital Corp.; S. Robert Schrager and Bruce S. Nathan, of counsel.

William Hamlin, Peekskill, N.Y., pro se.

DECISION ON OBJECTIONS TO DISCHARGEABILITY

HOWARD SCHWARTZBERG, Bankruptcy Judge.

Plaintiff, Chrysler Capital Corp., has commenced adversary actions against the debtors, Emanuel Salzman and William Hamlin, on the ground that plaintiff's claims against the debtors arising under their written guarantees of payment with respect to the obligations of BFM Printing Corp. ("BFM"), of which they were principal shareholders and officers, should not be discharged pursuant to 11 U.S.C. § 523(a)(2). The two separate adversary actions against the debtors were consolidated for trial purposes on consent of all the parties. The plaintiff alleges that the debtors warranted the validity of receivables assigned to it by BFM and that, nonetheless, the debtors submitted to plaintiff false invoices for which work had not been performed by BFM and forged bills of lading for which merchandise had not been shipped by BFM. The plaintiff further alleges that it advanced funds and extended credit to BFM in reliance upon the validity of the assigned receivables. The plaintiff seeks to except from discharge its claims against the debtors on the ground that the debtors obtained from the plaintiff money and credit for their company, BFM, by reason of false representations, as proscribed by 11 U.S.C. § 523(a)(2)(A). The plaintiff also asserts that the assigned bogus receivables were materially false statements in writing respecting BFM's financial condition on which plaintiff reasonably relied and which were caused to be made by the debtors with intent to deceive the plaintiff, and which in fact, did deceive the plaintiff to its detriment.

The debtors in their answers neither admit nor deny the allegations set forth in the complaint on the ground that their answers might tend to incriminate them. In addition to claiming their rights under the Fifth Amendment, the debtors each asserted an affirmative defense that the complaint fails to state a claim upon which relief can be granted.

Emanuel Salzman did not attend the trial although his counsel called witnesses and submitted evidence in his defense. William Hamlin did attend the trial as a pro se defendant, relying upon the presentation submitted by Salzman's counsel. When called by the plaintiff to testify, William Hamlin refused to answer any questions on the ground that his answers might tend to incriminate him.

FINDINGS OF FACT

1. The debtor, Emanuel Salzman, filed with this court his voluntary petition for relief under Chapter 7 of the Bankruptcy Code on March 15, 1983.

2. The debtor, William Hamlin, filed with this court his voluntary petition for relief under Chapter 7 of the Bankruptcy Code on February 9, 1983.

3. Emanuel Salzman and William Hamlin were the president and secretary, respectively, of BFM Printing Corp., a corporation engaged in the printing business in Croton-on-Hudson, New York. They were also the sole shareholders of BFM, which they formed in 1976.

4. On September 21, 1979, each of the debtors executed a written guarantee in favor of International Paper Credit Corporation ("IPCC") in order to induce IPCC to make loans or advances, or to extend credit to their corporation, BFM. Each guarantee provides that it is a continuing guaranty and that the obligations of the guarantor "shall inure to the benefit of IPCC's successors and assigned." (Exhibits 16, 17).

5. On March 11, 1980, BFM entered into a financing agreement whereby BFM agreed to assign to IPCC all of BFM's accounts receivable as security for advances and loans to be made by IPCC to BFM. (Exhibit 15). IPCC agreed to make loans and advances to BFM up to 80% of the accounts receivable upon receipt of a schedule confirming the assignment of BFM's accounts receivable. Thereafter, IPCC made loans and advances to BFM secured by a pool of BFM's pledged collateral consisting of accounts receivable and inventory.

6. On May 15, 1981, IPCC filed with the Secretary of State of Delaware, the state of its incorporation, a certificate of amendment of its certificate of incorporation, changing the name of the corporation to E.F. Hutton Credit Corporation. (Exhibit 3).

7. On August 2, 1985, E.F. Hutton Credit Corporation filed with the Secretary of State of Delaware, a certificate of amendment of its certificate of incorporation changing the name of the corporation to Chrysler Capital Corporation. (Exhibit 4). The pleadings in this case, which originally designated E.F. Hutton Credit Corporation as the plaintiff, were amended during the trial to reflect the plaintiff's change of name to Chrysler Capital Corporation.

8. There was no evidence of any change in the operation or management of the plaintiff corporation other than the two successive name changes.

9. In addition to making loans and advances to BFM secured by BFM's accounts receivable, the plaintiff, through its division known as National Vendor Business ("NVB") advanced funds to BFM secured by BFM's machinery and equipment. In February of 1982, BFM's delinquency to the plaintiff's NVB division amounted to approximately $60,000.

10. In March of 1982, plaintiff's NVB division agreed with BFM to a six month extension on the $60,000 delinquency, with the understanding that the plaintiff's accounts receivable financing division would wire payments for BFM's assigned receivables directly to the NVB division. The plaintiff's inter-office memorandum reflecting this procedure (Exhibit D) states:

This procedure should insure that funds will be available to service the NVB indebtedness.

* * * * * *

The direct payments which Commercial Finance will transfer to NVB should serve to reduce NVB\'s exposure while not eroding the Commercial Finance and/or the overall corporate collateral base.

/(2) It should be noted that if the client\'s sales increase, operations remain profitable, and the NVB delinquency is brought under control, there could be a future need to provide an additional increase in the Commercial Finance line. In any event the account will continue to be monitored on a daily basis and any future line increases would be totally dependent upon operations continuing to be profitable.

By this procedure, portions of funds that the plaintiff would normally advance to BFM for assigned accounts receivable would not be transmitted to BFM, but would be applied by the plaintiff's bookkeeping entries as wired to the plaintiff's NVB division in reduction of the NVB division's exposure with respect to BFM's delinquency under its secured machinery and equipment obligation. In effect, funds to which BFM would normally be entitled for assigned receivables would be applied by the plaintiff as an offset against the BFM's machinery and equipment delinquency to the plaintiff's NVB division.

11. A transaction synopsis attached to Exhibit D reflects that as of the end of March, 1982, BFM's net outstanding machinery and equipment obligation to the plaintiff's NVB division was $1,040,000. BFM's maximum commercial accounts receivable line of credit was then $750,000, for a total maximum investment by the plaintiff of $1,790,000.

12. During the course of the plaintiff's dealings with BFM, the plaintiff routinely monitored the accuracy of BFM's outstanding accounts receivable by mailing letters to the various account debtors on the letterhead of Robert H. Carr and Company, a fictitious auditing firm name adopted by the plaintiff, pursuant to which an audit verification was sought as to the accuracy of the account debtors' obligations to BFM. (Exhibit F).

13. Plaintiff also monitored the BFM assigned receivables by dispatching field examiners to visit the BFM premises to examine BFM's records of sales and receivables. The field examiners made written reports and recommendations which were transmitted to the plaintiff's loan officers. (Exhibits K-1, L, L-1). The plaintiff was interested in reducing BFM's delinquency to the plaintiff's NVB division's machinery and equipment account by fixed amounts of $7800 every week for a period of twenty-six weeks by means of the offsetting transfers from assigned accounts receivable which BFM transmitted to the plaintiff's commercial finance division. This point was expressed in the plaintiff's inter-office report as follows: (Exhibit M)

It is best to wire every week for the next 26 weeks (4-5 thru 9-30) never less than $7200.00 (26 × $7200.00 = $187,200.00) This is the minimum to handle the payments. If BFM doesn\'t squeal like a pig, we best take more when available, but not more than $8500.00 depending upon availability. I don\'t want them pay sic interest on funds held by us for future payments.

14. One of the plaintiff's field examiners, Brad Mitch, noted a discrepancy with respect to one of the plaintiff's account debtors, Rudco Industries, which he reported to the plaintiff's loan officer, Thomas F. Maher, in a printed report form dated June 7, 1982, which Mr. Maher highlighted in yellow. The printed questions asked: "Was submitted aging substantially accurate?" Mitch reported: "No". The next question asked: "If not, explain (Attach schedule of corrections." Mitch answered:

Aging includes Rudco Ind. Invoice dated 5/82 — 20.0m Never Shipped — Inventory Goods — should be Debit

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