Kovens v. Goodwich (In re Goodwich)

• Decision Date: 16 September 2014
• Docket Number: Bankruptcy No. 13–10558–DER.,Adversary No. 13–00215–DER.
• Parties: In re Walter GOODWICH, Debtor. Murray Kovens, Plaintiff, v. Walter Goodwich, Defendant.
• Court: U.S. Bankruptcy Court — District of Maryland

517 B.R. 572

In re Walter GOODWICH, Debtor.Murray Kovens, Plaintiff

v.Walter Goodwich, Defendant.

Bankruptcy No. 13–10558–DER.

Adversary No. 13–00215–DER.

United States Bankruptcy Court, D. Maryland, Baltimore Division.

Signed Sept. 16, 2014.

Filed Sept. 17, 2014.

Jan Berlage, Gohn, Hankey Stichel & Berlage, LLP, Baltimore, MD, for Debtor.

MEMORANDUM OPINION

DAVID E. RICE, Bankruptcy Judge.

Murray Kovens (“Kovens”) holds a claim based upon a judgment he obtained in 2001 in a state court in Pennsylvania (and later domesticated in a Maryland court) against Walter Goodwich (“Goodwich”). After Goodwich filed a Chapter 7 bankruptcy petition in this court in 2013, Kovens filed a complaint seeking a determination that his claim against Goodwich is excepted from discharge (that is, not dischargeable) under § 523(a)(2)(A), § 523(a)(2)(B), and/or § 523(a)(4) of title 11 of the United States Code (the “Bankruptcy Code”).

A trial on the merits of the complaint was conducted on April 24 and April 25, 2014. At trial, Kovens, Goodwich, and a number of other witnesses testified, and the parties offered numerous documents that were admitted into evidence. Following closing argument, the court ordered the parties to submit a post-trial memorandum of law. Those memoranda were filed on June 9, 2014. Kovens filed a reply memorandum on June 19, 2014.

During closing argument, Goodwich raised for the first time a defense based on the assertion that his liability to Kovens has been satisfied. The amount Goodwich must pay to satisfy his remaining liability to Kovens under the judgment, however, cannot be determined from the evidence presented to this court. That question is thus a matter that must be decided later by the Maryland or Pennsylvania courts.

The assertion by Kovens that his claim against Goodwich is a debt excepted from discharge under § 523(a)(4) of the Bankruptcy Code rests on the contention that Goodwich was acting in a fiduciary capacity when he betrayed Kovens, his friend and accounting client. As explained below, Goodwich was not a fiduciary for purposes of determining dischargeability. Thus, the § 523(a)(4) exception is not applicable.

Goodwich did, however, use misrepresentations and a false financial statement to induce Kovens to make a loan guaranteed by Goodwich that was not repaid. Thus, for the reasons explained in this memorandum opinion the claim held by Kovens is excepted from discharge under both § 523(a)(2)(A) and § 523(a)(2)(B) of the Bankruptcy Code.

JURISDICTION

This court has subject matter jurisdiction over this proceeding under 28 U.S.C. § 1334, 28 U.S.C. § 157(a), and Rule 402 of the Local Rules of the United States District Court for the District of Maryland. This is a “core proceeding” under 28 U.S.C. § 157(b)(2)(I). This memorandum opinion constitutes the court's findings of fact and conclusions of law in accordance with Rule 52 of the Federal Rules of Civil Procedure (made applicable here by Rule 7052 of the Federal Rules of Bankruptcy Procedure ).

FINDINGS OF FACT

Kovens and Goodwich became acquainted when they attended high school together in the 1950's. Although Kovens attended but did not graduate from college, he is an experienced businessman who has enjoyed a long working career in the vending machine business. Kovens eventually formed and continues to operate his own business, A. Kovens Vending Corporation (“Kovens Vending”). In the meantime, Goodwich attended and graduated from college, and went to work in the accounting business with the accounting firm of Goodwich Stoller & Associates (“GSA”). Although Goodwich worked as an accountant, he was never a certified public accountant.

Kovens engaged GSA in 1993 to provide accounting services for himself and for Kovens Vending. Initially, Goodwich was the primary accountant for both Kovens and Kovens Vending. Beginning in the mid to late 1990's, however, the accounting work was handled by Jane Pitt and Jeff Stoller, both of whom were accountants employed by GSA. Kovens nevertheless believed that Goodwich was reviewing their work and continued to regard Goodwich as his primary accountant. Goodwich was, as he admits in his answer, Kovens's accountant. As a result, Goodwich knew everything about the finances of both Kovens and Kovens Vending. With the exception of the ill-fated investment in the Jimmy Buffet concert at issue here, the only other investment advice given to Kovens by Goodwich was a suggestion (adopted by Kovens) that the Fidelity Investments firm would be a good financial adviser. GSA continues to provide accounting services to Kovens and Kovens Vending. GSA apparently was and is still paid an annual retainer for its services.

In 1999, Goodwich was introduced to Carl A. Glorioso (“Glorioso”) by Samuel R. Alascia (“Alascia”), one of Goodwich's clients. Glorioso was the president of Charm City Productions, Inc. (“Charm City”). Glorioso was subsequently indicted, pled guilty, and served 37 months in a Federal penitentiary for fraud in connection with, among other things, events related to the claim asserted by Kovens against Goodwich.

The Amy Grant Concerts

Glorioso convinced Goodwich to invest in two MTV videos or concerts that were being promoted by Charm City. Goodwich received a profit on his MTV investments with Charm City. Thereafter, Goodwich introduced Glorioso to another of his accounting clients, Rudolph W. Nechay (“Nechay”). As a result, Nechay agreed to invest in a series of four Christmas concerts by Amy Grant that were to take place in late November and early December of 1999 in (i) Dayton, Ohio, (ii) Columbus, Ohio, (iii) Chicago, Illinois, and (iv) St. Louis, Missouri. In order to invest in the Amy Grant concerts, Nechay formed a corporation known as Backers, Inc. (“Backers”), which borrowed $880,000 from Maryland Permanent Bank and Trust Co. (“MPB”) on October 12, 1999 for that purpose. Goodwich personally guaranteed the MPB loan to Backers. On October 12, 1999, Goodwich entered into an Investment Agreement with Charm City (the “Amy Grant Investment Agreement”). The terms of the Amy Grant Investment agreement provided that 40% of the net profits from the four Amy Grant concerts would be paid to Goodwich in consideration for his guarantee of the $880,000 loan by MPB to Backers. The Amy Grant Investment Agreement stated that the concerts were scheduled to take place on or before December 13, 1999, and that the MPB loan would be repaid and Goodwich would be paid his share of the profits within 21 days after the four concerts were held.

Glorioso testified credibly that in October of 1999 and at or about the time that the Amy Grant Investment Agreement was executed, he issued three post-dated checks drawn on an account of Charm City at NationsBank, N.A. that were payable to “D & D Equities” in the aggregate amount of $50,000 (the “Post–Dated Checks”). Each of the Post–Dated Checks was dated December 14, 1999. D & D Equities was a real estate firm that was wholly owned by Goodwich. Glorioso testified that the Post–Dated Checks were issued by Glorioso in connection with the Amy Grant Investment Agreement with instructions that they be held and not deposited. A copy of the front side of each of the Post–Dated Checks was introduced into evidence at trial. Kovens testified that he did not remember how he obtained the copies of the Post–Dated Checks, and admitted that he has never seen the back of the Post–Dated Checks and does not know if they were ever endorsed or cashed. Nothing in the record indicates that the Post–Dated Checks were ever negotiated by D & D Equities or Goodwich. The only evidence presented on this point was the testimony of Glorioso that he did not believe the Post–Dated Checks were ever honored and charged against Charm City's account. Based upon the evidence presented at trial, I find that the Post–Dated Checks were issued in October of 1999 in connection with the Amy Grant Investment Agreement and not the later Jimmy Buffet investment agreement, and that the Post–Dated Checks were never cashed or deposited by D & D Equities or Goodwich.

The four Amy Grant concerts took place, but Glorioso lied about his involvement in producing them. In fact, those concerts were produced by a third party and neither Glorioso nor Charm City had any involvement (financial or otherwise) in the concerts. Goodwich made occasional inquiries of Glorioso about the status of the Amy Grant concerts, to which Glorioso simply responded that they were “going well.” Goodwich made no other effort until after December 13, 1999 to follow up on his investment or to determine the extent to which he would be paid any profits under the Amy Grant Investment Agreement.

The Jimmy Buffet Concert

Meanwhile, Glorioso suggested that Goodwich locate an investor who could help finance a Jimmy Buffet concert supposedly to be produced by Charm City in March of 2000. Goodwich contacted Kovens in November of 1999 about making an investment in the Jimmy Buffet concert. At the time, Kovens was not interested in investing in concert promotion, had never heard of Jimmy Buffet, and was not seeking investment advice from Goodwich. Kovens was initially reluctant to become involved. Goodwich persisted, however, and Kovens eventually agreed to make a loan of $302,500 to Charm City to finance the supposed Jimmy Buffet concert.

Charm City, Goodwich, and Kovens thus entered into an Agreement on December 13, 1999 (the “Jimmy Buffet Investment Agreement”). Pursuant to the terms of the Jimmy Buffet Investment Agreement (i) Kovens made the $302,500 loan to Charm City, (ii) Glorioso and Goodwich guaranteed repayment by Charm City of that loan, and (iii) the profits from a supposed Jimmy Buffet concert to take place in Boston on March 18, 2000 were to be divided among the three parties as follows: 40% to Kovens, 40% to Charm City, and 20% to Goodwich. The Guaranty executed by Goodwich on December 13, 1999 authorized Kovens to obtain a confessed judgment against Goodwich in any court of...