In re Stewart

Decision Date02 April 1981
Docket NumberBankruptcy No. 79-25361-JD,80-8776-JD.
Citation10 BR 214
CourtU.S. Bankruptcy Court — Central District of California
PartiesIn re Eugene Francis STEWART, Debtor. Richard B. BERK, Plaintiff, v. Eugene Francis STEWART, Defendant.

Harvey R. Friedman, Carol A. Francone, Greenberg & Glusker, Los Angeles, Cal., for plaintiff.

Andrew F. Leoni, Slate & Leoni, Los Angeles, Cal., for defendant.


JAMES R. DOOLEY, Bankruptcy Judge.

In this action plaintiff seeks to have defendant's debt to him determined to be nondischargeable pursuant to 11 U.S.C. § 523(a)(2)(A), which excepts from discharge any debt:

"(2) for obtaining money, property, services, or an extension, renewal, or refinance of credit, by —
(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor\'s or an insider\'s financial condition;"

Plaintiff contends that he was induced to enter into a Stock Purchase Agreement with the Gene Stewart Corporation (hereinafter "GSC") and thereby transfer his insurance business to GSC because of false representations made by the defendant as follows:

(1) Oral representations to the effect that GSC had applied for a loan of $300,000 and that this loan would be granted;
(2) A written representation contained in paragraph 7.3 of the Stock Purchase Agreement that "Gene Stewart and Gary Martin are the record and beneficial owners of all of the issued and outstanding shares of Buyer".

On February 4, 1977 a Stock Purchase Agreement was entered into between GSC as Buyer and one Jason Groode and plaintiff as Sellers; and this purchase was closed on February 4, 1977 or shortly thereafter. The Stock Purchase Agreement provided, inter alia, for the purchase by GSC of all of the issued and outstanding capital stock of Jason D. Groode Enterprises and the payment by GSC to plaintiff of a total purchase price of $100,000. Among the documents which were executed in connection with the closing of the Stock Purchase Agreement, in addition to the latter agreement itself, were the following:

1. A Promissory Note dated February 4, 1977 in the principal sum of $100,000, with interest at 7½% per annum, principal and interest payable in installments of $25,000 and accrued interest on March 1, 1977 and November 1, 1977; thereafter, the remaining principal and interest to be payable in twenty-four equal monthly installments on the first day of each month beginning December 1, 1977. This Promissory Note was signed by defendant as President of GSC and by one Gary A. Martin as Vice President of GSC.

2. A Guarantee, signed by defendant and Gary A. Martin as individuals, guaranteeing the "due and punctual payment of any indebtedness of Buyer to Berk . . ." and the "performance of all of the obligations of Buyer under the Stock Purchase Agreement, including the obligations of Buyer pursuant to the Promissory Note, the Pledge Agreement and the Security Agreement executed pursuant to the terms thereof". This Guarantee also recited, inter alia:

"2.2 Berk would not have entered into the Stock Purchase Agreement unless Guarantors guaranteed payment and performance of the terms thereof."

3. A Stock Pledge Agreement between GSC and plaintiff in which GSC apparently pledged and delivered to plaintiff as security all of the shares of Jason D. Groode Enterprises that GSC was purchasing under the Stock Purchase Agreement.

4. A Security Agreement between plaintiff and GSC in which GSC granted to plaintiff a security interest in all of the assets of GSC and its subsidiaries.

None of the written documents which were executed in connection with the closing of the Stock Purchase Agreement referred to the alleged oral representations by defendant that GSC had applied for a loan and that the loan would be granted.

GSC failed to pay the installment of principal and interest which became due on March 1, 1977. Thereafter, plaintiff's counsel drafted a forbearance agreement in the form of a letter dated April 14, 1981, which, after some changes, was signed by defendant and Gary A. Martin, both individually and as officers of GSC, and was agreed and accepted by plaintiff. Among other things, the letter stated:

". . . We realize that we had informed you that Gene Stewart Corporation had a loan pending with Wells Fargo Bank, when in fact no loan application had as yet been filed. However, a loan application has been filed with Wells Fargo Bank on April 11, 1977 and should be approved within the next three to six weeks."

GSC's loan application was never approved. On September 29, 1978 summary judgment was entered in favor of plaintiff and against the defendant in the Los Angeles County Superior Court, Action No. C 235 260. This judgment decreed that ". . . plaintiff Richard B. Berk recover from defendant Eugene Stewart the sum of $88,238.36, interest thereon to the date hereof in the sum of $3,640.02, for a total judgment of $91,878.38 with plaintiff's costs and disbursements amounting to the sum of $8,629.10 together with interest on said judgment as provided by law."


At the outset it should be noted that exceptions to the operation of a discharge in bankruptcy should be narrowly construed. Gleason v. Thaw, 236 U.S. 558, 562, 35 S.Ct. 287, 289, 59 L.Ed. 717 (1915); Danns v. Household Finance Corp., 558 F.2d 114, 116 (2d Cir. 1977); In re Harlan, 7 B.R. 83, 85 (Bkrtcy.D.Ariz.1980); In re Nichols, 6 B.R. 842, 845 (Bkrtcy.D.Maine 1980); In re Green, 5 B.R. 247, 249 (Bkrtcy.N.D.Ga.1980).

In an action under Section 17(a)(2) of the Bankruptcy Act of 1898, as amended, the burden was on the party challenging the discharge of a particular debt to prove all of the elements of actual or positive fraud. Cf. In re Houtman, 568 F.2d 651, 655 (9th Cir. 1978); Matter of Nelson, 561 F.2d 1342, 1346 (9th Cir. 1977); Wright v. Lubinko, 515 F.2d 260 (9th Cir. 1975); In re Taylor, 514 F.2d 1370, 1373 (9th Cir. 1975); Sanitation Recycling, Inc. v. Jay Peak Lodging Ass'n, Inc., 428 F.Supp. 1022 (D.C. Vt.1977); In re Knight, 421 F.Supp. 1387, 1390-1391 (M.D.La.1976), affirmed without published opinion, 551 F.2d 862 (5th Cir. 1977); In re Dolnick, 374 F.Supp. 84 (N.D. Ill.1974). The same rule is applicable in construing Section 523(a)(2)(A) of the Bankruptcy Code, 11 U.S.C. § 523(a)(2)(A). In re Harlan, supra; In re Schlickmann, 6 B.R. 281, 282 (Bkrtcy.D.Mass.1980); Matter of Ratajczak, 5 B.R. 583, 586 (Bkrtcy.M.D.Fla. 1980); In re Ashley, 5 B.R. 262, 263-264 (Bkrtcy.E.D.Tenn.1980). The elements required to be proved are as follows (see Matter of Nelson, supra at p. 1346; see also In re Harlan, supra at p. 85):

(1) The debtor made the representations;

(2) That at the time he knew they were false;

(3) That he made them with the intention and purpose of deceiving the creditor;

(4) That the creditor relied on such representations; and

(5) That the creditor sustained the alleged loss and damage as the proximate result of the representations having been made.

Oral Representations

Under 11 U.S.C. § 523(a)(2)(A) it is not necessary that the false pretense or false representation be made in writing in order that the debt may be excepted from discharge. 3 Collier On Bankruptcy, 15th Ed., ¶ 523.08. Nor does the integration clause contained in paragraph 10.2 of the Stock Purchase Agreement1 prevent a showing of fraud. Bell v. Exxon Co., U.S.A., 575 F.2d 714, 715-716 (9th Cir. 1978); Morris v. Harbor Boat Building Co., 112 Cal.App.2d 882, 888, 247 P.2d 589 (1952); Ferguson v. Koch, 204 Cal. 342, 347, 268 P. 342 (1928). However, as to defendant's oral representations, this court has concluded that plaintiff has failed to prove the required elements of intentional fraud.

The evidence concerning defendant's oral representations was contradictory and creates some uncertainty as to precisely what the defendant told plaintiff and plaintiff's attorneys. The court is satisfied, however, that the defendant and Gary A. Martin intended to seek a federally insured loan on behalf of GSC in the amount of approximately $300,000 and to use the proceeds of that loan to help finance the purchase of Jason D. Groode Enterprises and other businesses. The court is also satisfied that before the Stock Purchase Agreement was executed on February 4, 1977 the defendant told plaintiff and plaintiff's attorneys in substance that GSC's application for a loan had been submitted to the Wells Fargo Bank, when in fact the loan application had not been submitted to any bank, but was still being processed at the United Indian Development Association.2 The court is further convinced that prior to the execution of the Stock Purchase Agreement the defendant used language to plaintiff and to plaintiff's attorneys indicating that he was very optimistic that the loan application would be approved. However, the court does not find that the defendant said at any time that the loan application had already been approved.

The court is not persuaded that the defendant made the oral representations to plaintiff and to plaintiff's attorneys with the intention and purpose of deceiving plaintiff. One reason for reaching this conclusion is that the benefit to be gained by the defendant from the alleged deceit is not apparent. Under the Guarantee defendant and Gary A. Martin were to assume individual liability for the entire purchase price of the shares purchased by GSC pursuant to the Stock Purchase Agreement; under the Stock Pledge Agreement, GSC was to pledge and deliver to plaintiff all of the shares purchased; and under the Security Agreement plaintiff was to be granted a security interest in all of the assets of GSC and its subsidiaries. Thus, the closing of the Stock Purchase Agreement gave GSC nothing that it could not be immediately deprived of on default3, and substantially increased the individual liability of the defendant.

Nor does the court find the necessary reliance. Under 11 U.S.C. § 523(a)(2)(A) plaintiff must prove...

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