In re Westman
| Decision Date | 30 December 1988 |
| Docket Number | Bankruptcy No. B87-00810-Y. |
| Parties | In re Stephen M. WESTMAN, Valinda M. Westman, dba Perich Studio Photography, fdba IHS Photography, Debtors. Peter PERICH and Ann Perich, Plaintiffs, v. Stephen M. WESTMAN, and Valinda M. Westman, Defendants. |
| Court | U.S. Bankruptcy Court — Northern District of Ohio |
Nancy E. Yakubek, Warren, Ohio, for plaintiffs.
James H. Beck, Canfield, Ohio, for debtors/defendants.
This cause came before the Court on the Complaint filed by the Plaintiffs, Peter and Ann Perich, in which they ask the Court to find the Debtors' obligation to them to be nondischargeable pursuant to 11 U.S.C. Sec. 523(a)(2).
The Plaintiffs operated a successful and established photography business in Warren, Ohio, known as "Perich Studio Photography." After approximately 37 years of operation, the Plaintiffs decided to sell the business so that they could retire. To elicit purchase offers, the Plaintiffs advertised in both local and professional publications. The Plaintiffs received several inquiries from prospective purchasers, one of whom was the Debtor, Mr. Westman. It appears that the Debtors initially traveled to Ohio to investigate the business in April, 1984. Over the next several months, both the Plaintiffs and the Debtors discussed the terms, prices and possible financing sources available for a purchase of the studio. In August, 1984, the Debtors submitted to the Plaintiffs a letter of intent and Two Hundred Fifty & 00/100 Dollars ($250.00) earnest money to purchase the business, inventory and equipment, and associated real estate from the Plaintiffs. The agreement envisioned a cash sale of Two Hundred Thousand & 00/100 Dollars ($200,000.00) with Twenty Thousand & 00/100 Dollars ($20,000.00) down payment and the balance to be financed through a loan procured by the Debtors. The Debtors borrowed Twenty Thousand & 00/100 Dollars ($20,000.00) for the down payment from Mr. Westman's mother, Florence Dormey, and deposited Nineteen Thousand, Seven Hundred Fifty & 00/100 Dollars ($19,750.00) in an escrow account. A formal asset purchase agreement was completed on October 22, 1984, the same date that the Debtors began operating the business. On November 8, 1985, the Debtors executed a Thirty Thousand & 00/100-Dollar ($30,000.00) promissory note in favor of the Plaintiffs. The following day, the Plaintiffs received the balance of the Nineteen Thousand, Seven Hundred Fifty & 00/100-Dollar ($19,750.00) down payment which had been in escrow.1
In January, 1985, Aetna Finance Company, dba ITT Financial Services ("ITT"), sent Mr. Greg Zusan to view the property. Mr. Zusan cataloged the inventory, equipment and other photographic supplies and on January 10, 1985, filed a financing statement claiming a security interest in those items. Although the security interest was claimed, no loan had either been made or committed on or before that date by ITT. At sometime thereafter, it appears ITT notified the Debtors of a willingness to loan One Hundred Seven Thousand & 00/100 Dollars ($107,000.00) to them secured by business assets. When the Plaintiffs were advised that ITT was only willing to loan One Hundred Seven Thousand & 00/100 Dollars ($107,000.00) to the Debtors, Plaintiffs agreed to accept an Eighty Thousand & 00/100-Dollar ($80,000.00) promissory note from the Debtors, secured by a second mortgage on the commercial property and a first-position security interest in all photographic equipment and inventory. This information was forwarded to Mr. Zusan by the Plaintiff's attorney, Kay L. Williams, ESQ., on January 22, 1985, and it appears he, on behalf of ITT, agreed to Plaintiffs having a first lien on the equipment and inventory (Defendant's Exhibit 16). As additional security, the Plaintiffs also sought to obtain a second mortgage on the Debtors' former residence located in South Bend, Indiana. The Plaintiffs were aware of a financial statement in which the Debtors represented that the Indiana house was worth Forty-Five Thousand & 00/100 Dollars ($45,000.00) with a first mortgage of Eighteen Thousand, Two Hundred Twenty & 44/100 Dollars ($18,220.44).
On February 8, 1985, the Plaintiffs, the Debtors, and Kevin P. Sullivan, ESQ., of Milwaukee, Wisconsin, representing ITT, met at Ms. Williams' office to close the purchase transaction. Numerous documents were signed at the closing. The Debtors signed a promissory note for One Hundred Seven Thousand & 00/100 Dollars ($107,000.00) in favor of ITT, secured by a first mortgage on the commercial real property. The Debtors also signed a promissory note for Eighty Thousand & 00/100 Dollars ($80,000.00) in favor of the Plaintiffs, secured by a second mortgage on the commercial real property. The Plaintiffs executed a general warranty deed in the commercial real property to the Debtors. Testimony shows that Mr. Sullivan had with him various security documents which would create in ITT a first-lien position with respect to the equipment and inventory. It further appears that Ms. Williams showed Mr. Sullivan correspondence between her and Mr. Zusan providing for the Plaintiffs to have a first position in the equipment and inventory and ITT to have a second position. It further appears from the testimony that Mr. Sullivan agreed that appropriate steps could be taken after the closing to secure the first position in the equipment in the Plaintiffs and a second position in ITT, and the Plaintiffs and Ms. Williams relied upon his professional representation in that respect. Mr. Sullivan was the only representative of ITT at the closing. Late in the afternoon, all the parties walked to the Recorder's office to file the various documents. It appears that after Ms. Williams and the Plaintiffs left the Recorder's office, Mr. Sullivan and the Debtors remained at the Recorder's office and executed and filed a financing statement giving ITT a first-position security interest in all photographic equipment and supplies. Finally, on February 11, 1985, the Plaintiffs authorized the filing of a second mortgage on the Debtors' property in South Bend, Indiana.
It is not clear to the Court why Mr. Sullivan or ITT, or both of them, were not made parties to this proceeding. The testimony and documentary evidence before us supports the conclusion that Mr. Zusan of ITT had stated before the closing that ITT would agree to Plaintiffs having a first position in the equipment and inventory and that ITT would take a second position. It seems clear that Mr. Sullivan knew of his client's acquiescence in this respect and that at the closing, he agreed and represented that appropriate steps would be taken after the closing to see to the creation of the agreed lien interest in the equipment and inventory. The testimony in this respect is supported by Defendant Exhibit 16 and finds further support in the fact that Mr. Zusan, on January 10, 1985, filed a financing statement claiming a security interest in the equipment and inventory, even though no loan had either been made or committed on or before that date. Mr. Sullivan's remaining at the Recorder's office with the Debtors after the other parties left and executing and filing the financing...
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