Matter of Richey, Bankruptcy No. 2-88-00421
| Decision Date | 11 July 1989 |
| Docket Number | Bankruptcy No. 2-88-00421,Adv. No. 2-88-0237. |
| Citation | 103 BR 25 |
| Court | U.S. Bankruptcy Court — District of Connecticut |
| Parties | In the Matter of Michael Francis RICHEY, Debtor. Karen HARPER and Priscilla Armitage, Plaintiffs, v. Michael F. RICHEY, Defendant. |
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John P. Zanini, and JoAnn Paul, Beck and Eldergill, Manchester, Conn., for plaintiffs.
Anthony S. Novak, Tarlow, Levy, Harding & Droney, P.C., Farmington, Conn., for debtor-defendant.
In this core proceeding, Karen Harper and Priscilla Armitage, the plaintiffs, allege that a state-court default judgment obtained by them against Michael F. Richey, the debtor, represents a nondischargeable debt. The allegation arises out of transactions in which the plaintiffs invested money in and loaned money to a corporation in which the debtor and his then wife were the sole stockholders. The following facts found are based upon a trial held on April 21, 1989.
In 1986, the debtor, the owner and operator of a truck used in interstate trucking, decided to incorporate the business. The debtor, who left school after the tenth grade, assumed he did not need the assistance of an attorney and on May 22, 1986, filed a hand-drafted certificate of incorporation for Double Seven Express, Inc. (Double Seven or "the company"). For guidance, he utilized an instruction booklet obtained from the Connecticut Secretary of State's office. Double Seven was incorporated with $1,000.00 stated capital, authorization to issue 5,000 shares of common stock, the debtor elected as president and sole director, and the debtor's wife, Jolene, elected secretary. The debtor claimed at trial to be the owner of 3,000 shares of Double Seven common stock, with Jolene, from whom he is now divorced, the owner of 2,000 shares.
Six months after incorporating the company, the debtor started to contact local banks to secure loans to expand the company's business through improvement of its leased premises and the purchase of more trucks. In January 1987, he was advised to contact the Small Business Administration for assistance, but before any loan applications were acted upon, the debtor met the plaintiff, Karen Harper (Harper).
Among Double Seven's employees was a truck driver named David Bartley (Bartley). Bartley knew that the debtor had been seeking financing for expansion of the company, and he also knew that Harper, a friend of his, was looking to invest some inherited money. Bartley informed Harper that Double Seven needed investors, and he was instrumental in arranging a meeting held on February 27, 1987 between Harper, her husband, the debtor and Bartley.
At the meeting, the debtor explained to the Harpers the nature of the expansion he intended for Double Seven's business. He told them the company was making an annual profit of $15,000.00 with a single truck, and he calculated that the company could make $150,000.00 per year profit if it had ten trucks. The debtor stated that investing in Double Seven would be a good investment, with a potentially high rate of return, and that the Harpers might double their money by year's end. The meeting lasted two and one-half hours during which the debtor showed the Harpers one or two hauling contracts as illustrative of the rates that Double Seven charged customers. The debtor did not produce any company financial statements. At the conclusion of the meeting, Harper agreed to purchase 1,600 shares of Double Seven common stock for $24,000.00. The debtor advised Harper that Double Seven would have the stock certificates printed and sent to her within thirty days. Harper gave the debtor her check, payable to Double Seven, for $14,000.00 at the meeting and an additional $10,000.00 on March 10, 1987 when the debtor, as company president, issued her a receipt for $24,000.00 for the purchase of the Double Seven stock.
Shortly after the February meeting, the debtor contacted Harper and told her that the company could use an additional $15,000.00 for the purchase of trucks where substantial manufacturer rebates were available. Harper advised the debtor that she did not have any additional money to invest, but that her mother, Priscilla Armitage (Armitage), did. Harper contacted her mother who, without ever visiting the company premises or meeting the debtor, on March 3, 1987, loaned Double Seven $7,000.00 and purchased $8,000.00 worth of stock at $15.00 per share. Mrs. Armitage testified that along with her daughter, she wanted to double her money.
To purchase the trucks, which were to be used, not new, vehicles, the debtor had been dealing with Arthur Ray (Ray), a truck-leasing consultant and broker. Ray and the debtor went around the country, including trips to Ohio, Iowa and Texas, to inspect truck fleets available for sale. The debtor understood that Ray would buy the trucks and lease them to the company. In the end, after months of looking and after the debtor had paid Ray $17,000.00, the truck-leasing program had to be abandoned. Ray provided only one truck, and there were no available manufacturers' rebates. The one truck obtained turned out to need substantial repairs. The debtor contacted a collection agency to regain monies given to Ray, but the agency refused to take the matter.
The debtor had deposited the funds received from the plaintiffs in the Double Seven bank account and used them for company purposes, including the payment of company indebtedness. By June 1987, Harper became concerned that she had neither received stock certificates nor dividend checks, and she demanded a refund of her money. The debtor then first consulted an attorney about Double Seven's financial difficulties and the situation with the Harper and Armitage investments and loan. The attorney advised the debtor that the plaintiffs would be better off with their transactions restructured completely as loans rather than as stock purchases because, if the plaintiffs received stock, they would be holding stock that had no value due to the company's insolvency. The debtor, on June 29, 1987, sent to Harper a letter which stated the following:
On July 7, 1987, the plaintiffs brought suit in the Connecticut Superior Court against the debtor and Double Seven alleging fraud, misrepresentation and violation of Connecticut statutes regarding the sale of securities. The state court defaulted the debtor on November 17, 1987 for failure to appear, and entered a judgment for the plaintiffs for $39,000.00 damages plus interest, attorney's fees and court costs. The debtor filed a chapter 13 case on April 22, 1988, which he converted on September 20, 1988 to a case under chapter 7. The plaintiffs filed the present nondischargeability complaint on November 17, 1988, alleging that the state-court's judgment represented monies obtained by fraud (§ 523(a)(2)(A)); that the fraud or a defalcation occurred while the debtor was acting as a fiduciary (§ 523(a)(4)); and that the debtor's actions amounted to a willful and malicious injury (§ 523(a)(6)).
Section 523(a) of the Bankruptcy Code sets forth exceptions to discharge. The provisions relevant to the present matter are as follows:
Exceptions to dischargeability of debts are construed narrowly in favor of the debtor. In re Danns, 558 F.2d 114, 116 (2d Cir. 1977). The burden is on the creditor to prove all the facts essential to sustain the objection and, at least in the case of alleged fraud, to do so by clear and convincing evidence. Family Credit Union v. Schuster (In re Schuster), 69 B.R. 352, 355 (Bankr.D.Conn.1987). The plaintiffs do not argue that the state-court default judgment is entitled to collateral estoppel effect in the bankruptcy court on the issue of dischargeability. Cf. MA & M, Inc. v. Supple (In re Supple), 14 B.R. 898, 902 (Bankr. D.Conn.1981).
Under § 523(a)(2)(A), "a debt may be determined nondischargeable based on fraud where the creditor proves that: (1) the debtor made the representations; (2) at the time he knew they were false; (3) he made them with the intention and purpose of deceiving the creditor; (4) the creditor relied on such representations; (5) the creditor sustained the alleged loss and damage as the proximate result of the representation having been made." Fugere v. Whitford (In re Whitford), 95 B.R. 5, 8 (Bankr. D.R.I.1989). The plaintiff claims the debtor's representations at the February 27, 1987 meeting and on or about March 3, 1987 satisfy this test.
Section 523(a)(2)(A) does not cover the debtor's...
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