In re Sarama

• Decision Date: 29 February 1996
• Docket Number: Bankruptcy No. 94 B 16668. Adversary No. 94 A 01873.
• Citation: 192 BR 922
• Parties: In re Edward J. SARAMA, Debtor. MEMORIAL HOSPITAL, Plaintiff, v. Edward J. SARAMA, Defendant.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

192 B.R. 922 (1996)

In re Edward J. SARAMA, Debtor MEMORIAL HOSPITAL, Plaintiff, v. Edward J. SARAMA, Defendant.

Bankruptcy No. 94 B 16668. Adversary No. 94 A 01873.

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

February 29, 1996.

COPYRIGHT MATERIAL OMITTED

Jeffrey Hellman, Shipman & Goodman, Hartford, CT, Derrick M. Ford, Chicago, IL, for Memorial Hospital.

Karen Walin, Law Offices of Karen Walin, Orland Park, IL, for Edward J. Sarama.

MEMORANDUM OPINION

JOHN H. SQUIRES, Bankruptcy Judge.

This matter comes before the Court on the complaint of Memorial Hospital ("Memorial") pursuant to 11 U.S.C. §§ 523(a)(2) and 523(a)(4) to determine the dischargeability of a debt owed to it by Edward J. Sarama (the "Debtor"). For the reasons set forth below, the Court holds that the debt plus interest and costs is nondischargeable under §§ 523(a)(2) and 523(a)(4).

I. JURISDICTION AND PROCEDURE

The Court has jurisdiction to entertain this matter pursuant to 28 U.S.C. § 1334(b) and Local General Rule 2.33(A) of the United States District Court for the Northern District of Illinois. This matter is a core proceeding under 28 U.S.C. § 157(b)(2)(I).

II. FACTS AND BACKGROUND

Most of the relevant facts and background are not in dispute. Memorial is an acute care general hospital which provides health care services, including out-patient emergency medical services. The Debtor is a doctor of osteopathy, specializing in emergency medicine, who was formerly under contract with Memorial to provide medical and administrative services to Memorial, and who headed its department of emergency medicine. The Debtor was also the sole shareholder and director of Memorial Emergency and Critical Care Associates, P.C. ("MECCA"), a professional corporation organized and existing under the laws of the Commonwealth of Pennsylvania with its principal place of business at 248 Brookwood Drive, York, Pennsylvania.

On July 1, 1987, Memorial entered into an agreement with the Debtor and MECCA for the purpose of securing exclusive emergency medical services from the Debtor and MECCA to Memorial's emergency medicine department. See Memorial's Exhibit No. 1. Pursuant to this agreement, MECCA contracted to provide physician coverage for Memorial's department of emergency medicine; MECCA and the Debtor then contracted with individual physicians to staff Memorial's emergency medicine department. In addition to the Debtor's duties under the agreement with Memorial, the Debtor was the chairman of Memorial's department of emergency medicine, and, as the director of the emergency residency program, was the person responsible for the training of all Memorial's emergency medicine residents. These residents were Memorial employees who were paid directly by Memorial. The agreement specifically provided that the Debtor and MECCA were to provide emergency medical services only to Memorial and to no other hospital within a 60 mile radius of Memorial.

In August 1987, during the term of the Debtor's agreement with Memorial, the Debtor and MECCA entered into a contract for emergency medical services with Lebanon Valley General Hospital in Lebanon, Pennsylvania. See Debtor's Exhibit No. 1. Pursuant to that contract, the Debtor and MECCA were to provide emergency medical services to Lebanon Valley General Hospital, for which the Debtor and MECCA were paid. Although this agreement with Lebanon Valley conflicted with the exclusivity provision of the agreement with Memorial, Memorial expressly agreed to an exception to the exclusive service requirement under its agreement with the Debtor based upon the Debtor's representation that, among other things, performance under the Lebanon Valley contract would not affect physician coverage for Memorial's department of emergency medicine, and it would provide valuable additional educational training to Memorial's residents.

In 1988, the Debtor approached Polyclinic Medical Center ("Polyclinic") in Harrisburg, Pennsylvania for the purpose of negotiating a contract for the use of the Memorial emergency medicine residents at Polyclinic. This agreement was executed on March 7, 1989. See Memorial's Exhibit No. 2. The Debtor signed the Polyclinic contract on behalf of MECCA and as director of emergency medical services and program director of emergency medicine residency program at Memorial. The Debtor held himself out as the agent of Memorial and authorized to act on its behalf to enter into the contract. In discussions with Dennis Heinle ("Heinle"), Memorial's president and chief executive officer, the Debtor represented to Memorial that the only reason for using Memorial residents at Polyclinic was to provide Memorial residents with more specialized emergency medical training. The Debtor did not tell Memorial that Polyclinic had agreed to pay, and did pay, for the services of the residents. According to Heinle (but disputed by the Debtor), the Debtor never told Memorial about the payment terms of the contract with Polyclinic. The Polyclinic contract negotiations were conducted principally between the Debtor and Polyclinic's vice president of administration and general in-house counsel, Brad Meneilly ("Meneilly"). The Debtor was the only representative of Memorial involved in the negotiations. He prepared the drafts of the Polyclinic agreement and related correspondence. Meneilly testified on deposition that Memorial, not MECCA, was the intended recipient of the fees it paid for the services of the Memorial residents. See Meneilly Deposition p. 27. This was corroborated by Norman G. Maxton ("Maxton"), Polyclinic's controller, who testified that it was his understanding that Memorial would supply its residents to cover Polyclinic's emergency room for which Polyclinic would reimburse Memorial. See Maxton Deposition p. 6. Maxton supervised the issuance and processing of checks issued by Polyclinic to pay for the services rendered under the Polyclinic contract. Maxton also stated that Memorial, not the Debtor nor MECCA, was the intended recipient of the Polyclinic payments. See Maxton Deposition p. 14-15.

From July 1, 1987 until July 1, 1991, the Debtor was in charge of all aspects of the emergency medicine program at Memorial. Accordingly, all mail relating to the emergency medicine program was routed to the Debtor. During the relevant period, the Debtor and MECCA maintained a money market account in MECCA's name with Merrill, Lynch, Pierce, Fenner & Smith, Inc. ("Merrill Lynch"). During the period from March 7, 1989 until July 1, 1991, at the Debtor's request, Polyclinic paid approximately $161,248.00 to "York Memorial Osteopathic Residents Fund," "York Memorial Emergency Medical Residents Fund" and "York Memorial Emergency Residents Fund" per the direction of the Debtor. See Memorial's Exhibit No. 5. None of these named payees were separate legal entities. The return address on the envelopes in which the checks from Polyclinic were mailed was that of Polyclinic Hospital. The checks were received in the administrative office of Memorial, and were sometimes opened there. The administrative office then notified the Debtor that he should pick up the checks, which he did and utilized all the proceeds therefrom.

Memorial has never received any of the $161,248.00 in compensation which Polyclinic paid to the Debtor and MECCA during this period. Among other things, the Debtor used some of the money to pay his personal gambling debts as well as some expenses incurred by the residents. On June 26, 1991, Heinle and Dr. Richard DiPietro asked the Debtor whether or not he had ever personally benefitted or had been compensated by Polyclinic for the use of Memorial's residents. The Debtor expressly denied that he had ever personally benefitted from any payments made by Polyclinic. Not long thereafter, however, the Debtor admitted to Heinle and DiPietro that he had in fact personally benefitted from Polyclinic and received substantial payments from Polyclinic. Memorial claims it had no prior knowledge during the period from March 7, 1989 until June 26, 1991, that Polyclinic was paying the Debtor or MECCA for the services of Memorial's residents. Memorial never acquiesced either directly or implicitly in the payment arrangements the Debtor had made with Polyclinic. The Debtor's written agreement with Polyclinic was not furnished to Memorial until after June 26, 1991.

Pursuant to the complaint, Memorial seeks to have the $161,248.00 debt held nondischargeable under §§ 523(a)(2) and 523(a)(4). Memorial alleges that (1) the Debtor's representation that Memorial's employees, the emergency medical residents, were working at Polyclinic solely as a part of their training was false; (2) the Debtor failed to disclose to Memorial that Polyclinic was paying him and MECCA for the services of the Memorial residents; (3) the Debtor misappropriated funds Memorial was entitled to and Polyclinic intended to pay to Memorial; and (4) the Debtor illegally converted the funds paid for his own use, and thus, deprived Memorial of the money for services of its employees under false pretenses and through actual fraud. Moreover, Memorial alleges that the Debtor embezzled monies due it.

III. APPLICABLE STANDARDS

The party seeking to establish an exception to the discharge of a debt bears the burden of proof. In re Martin, 698 F.2d 883, 887 (7th Cir.1983). The burden of proof required for establishing an exception to discharge is a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 286-87, 111 S.Ct. 654, 659-60, 112 L.Ed.2d 755 (1991). To further the policy of providing the debtor a fresh start in bankruptcy, exceptions to discharge are construed strictly against the creditor and liberally in favor of the debtor. Meyer v. Rigdon, 36 F.3d 1375, 1385 (7th Cir.1994); In re Zarzynski, 771 F.2d 304, 306 (7th Cir.1985).

IV. DISCUSSION

A. Section 523(a)(2)(A)

Section 523(a)(2)(A) provides in relevant part:

(a) A discharge under section

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