Matter of Weinstein

• Decision Date: 13 July 1983
• Docket Number: Bankruptcy No. 882-82307-17,Adv. No. 882-0821-17.
• Citation: 31 BR 804
• Parties: In the Matter of Paul R. WEINSTEIN and Phoebe Weinstein, a/k/a Phoebe Blinder, Debtors. MINORITY EQUITY CAPITAL CORPORATION, Plaintiff, v. Paul WEINSTEIN, Defendant.
• Court: U.S. Bankruptcy Court — Eastern District of New York

31 B.R. 804 (1983)

In the Matter of Paul R. WEINSTEIN and Phoebe Weinstein, a/k/a Phoebe Blinder, Debtors MINORITY EQUITY CAPITAL CORPORATION, Plaintiff, v. Paul WEINSTEIN, Defendant.

Bankruptcy No. 882-82307-17, Adv. No. 882-0821-17.

United States Bankruptcy Court, E.D. New York.

July 13, 1983.

Schwartz, Sachs & Kamhi, P.C. by Able Jack Schwartz, Carle Place, N.Y., for defendant.

Stroock & Stroock & Lavan by Thomas Farber, New York City, for plaintiff.

DECISION

BORIS RADOYEVICH, Bankruptcy Judge.

In its complaint filed November 29, 1982, the plaintiff Minority Equity Capital Corporation requests judgment in the sum of $120,000 and a declaration that said debt is non-dischargeable. By answer filed February 10, 1983, the defendant, Paul Weinstein, denies the complaint's pertinent allegations and seeks dismissal of the complaint pursuant to Fed.R.Civ.P. # 12(b)(6). This matter came on for trial May 16, 1983, at which time both sides submitted their proofs and decision was reserved. Based upon the record presented, this Court makes the following.

FINDINGS OF FACT

1. The plaintiff Minority Equity Capital Corporation (hereinafter MECCO), located at 275 Madison Avenue, New York, New York, is a corporation existing under the laws of the State of New York for the principal purpose of lending money to small businesses. See Plaintiff's Complaint; Transcript of May 16, 1983 at 3, 4 (hereinafter Tr. at " ").

2. QPL Components, Inc. (hereinafter "QPL"), located at 1 Commac Loop, Ronkonkoma, New York, is a corporation existing under the laws of the State of New York for the purpose of marketing and distributing various electrical components. See Finding of Fact # 1, GECC v. QPL Components, Inc., 20 B.R. 342 (Bkrtcy.E.D. N.Y.1982).

3. The defendant, Paul Weinstein, was formerly the president and controlling shareholder of QPL. Tr. at 20.

4. General Electric Credit Corporation (hereinafter "GECC"), whose headquarters is located at 1011 High Ridge Road, Stamford, Connecticut is a corporation organized and existing under the laws of the State of Connecticut for the purpose of financing the acquisition of electrical component inventories. See Finding of Fact # 2, GECC v. QPL Components, Inc., cite supra.

5. GECC, acting in the capacity of a factor, financed QPL's inventory acquisition under a formula whereby GECC would make loans to QPL, for additional inventory, in an amount equal to 85% of QPL's outstanding accounts receivable and 50% of the value of QPL's eligible inventory. Tr. at 12, 28, 29. See Plaintiff's Exhibit IV.

6. Commencing in June of 1981, Weinstein initiated a fraudulent scheme to induce GECC to advance funds, over and above the limits set in its factoring agreement, by submitting invoices to GECC which misrepresented the value of QPL's inventory and accounts receivable. Tr. at 31-38, 63-65, 95.

7. Having reached the loan ceiling under its agreement with GECC during the summer of 1981, QPL approached MECCO seeking additional financing. Tr. at 5-6.

8. On October 29, 1981 MECCO, QPL, and Weinstein entered into an agreement which provided:

For valuable consideration and in reliance of the mutual promises and undertakings of each party

MECCO will =

A1) lend QPL $20,000 at 19% interest; principal to be repaid in 36 equal payments (monthly) beginning 1 Jan 1982; interest paid monthly beginning 1 Dec 1981

A2) guarantee repayment to GECC of QPL overadvance of up to $100,000

A3) secure guarantee to GECC with bank letter of credit of $100,000

QPL Components will =

B1) borrow $20,000 from MECCO upon terms set out in A1 above and will execute note and will secure the personal guarantee of such note by QPL Chairman and QPL President

. . . .

B5) pay 2% guarantee fee to reimburse MECCO for L/C cost

Paul Weinstein will =

C1) personally guarantee loan to QPL (# A1 above)

C2) personally guarantee that MECCO suffers no loss from its guarantee to GECC and/or related L/C

Plaintiff's Exhibit II.

9. A critical factor in MECCO's decision to guarantee and secure GECC's extension of an additional $100,000 line of credit was MECCO's assumption that QPL was not yet above the pre-existing limits of GECC's factoring agreement. Tr. at 12, 80-81.

10. Based upon the assurances provided by MECCO's guarantee of GECC's overadvances, GECC extended an additional $100,000 in credit to QPL. Tr. at 31, 53-54, 77-78.

11. Pursuant to the agreement mentioned in Finding of Fact # 8, MECCO delivered a check for $20,000 to QPL on November 2, 1981. Plaintiff's Exhibit III. Tr. at 17, 21, 30.

12. After an investigation and audit conducted in December of 1981, GECC determined that QPL had submitted over $475,000 in fraudulently fabricated inventory and accounts receivable. The bulk of these invoices were submitted prior to MECCO's October 29, 1981 agreement. Plaintiff's Exhibit VII. Tr. at 31-49.

13. Thereafter on January 6, 1982, as provided for in the GECC factoring agreement, GECC declared QPL's loan in default and drew down on MECCO's letter of credit for the full $100,000. QPL has not reimbursed MECCO for any of the $100,000 which was paid to GECC. See Tr. at 53-54, 82, 83. See also Plaintiff's Exhibit XIII.

14. Pursuant to the provisions of the $20,000 promissory note, MECCO declared the loan in default and accelerated the balance due. QPL has failed to repay the $20,000 loan to MECCO. Tr. at 53, 86. See also Plaintiff's Exhibit IX.

15. Weinstein knew that no equity cushion in QPL's accounts receivable and inventory existed when he requested MECCO to provide an overadvance guarantee of the QPL/GECC factoring agreement. Tr. at 62-64.

16. Weinstein made no effort to advise MECCO of the lack of an equity cushion under the financing agreement with GECC although he knew that no such cushion existed and that over $475,000 in false and fraudulent invoices had been submitted to GECC.

17. Weinstein intended to deceive MECCO as to the existence of a QPL inventory and account receivables equity cushion.

18. MECCO reasonably relied upon the existence in QPL's inventory and accounts receivable of an equity cushion in making its decision to guarantee $100,000 of GECC's overadvances. Tr. at 80, 81, 110-112.

19. MECCO did not rely upon the existence of an equity cushion in QPL's inventory and accounts receivable in making its decision to directly loan QPL $20,000.

20. MECCO's $100,000 loss on its overadvance guarantee was the proximate result of Weinstein's intentional and fraudulent failure to disclose to QPL that there was no equity cushion under the financing agreement with GECC and that over $475,000 in false and fraudulent invoices had been submitted to GECC.

21. MECCO's $20,000 loss on its direct loan to QPL was not the proximate result of Weinstein's misrepresentations.

CONCLUSIONS OF LAW

1. Weinstein's fostering of, and knowing failure to dispel, MECCO's misimpression as to the existence of the GECC equity cushion, was false pretense as defined in 11 U.S.C. § 523(a)(2)(A).

2. Weinstein's guarantee of the $100,000 debt owed to MECCO is non-dischargeable.

3. Weinstein's $20,000 direct loan guarantee debt owed to MECCO is dischargeable.

4. MECCO is entitled to a money judgment against Weinstein upon the $20,000 loan guarantee liability in the sum of $20,000.

5. At this time, MECCO is not entitled to a money judgment against Weinstein upon the $100,000 overadvance guarantee liability.

MEMORANDUM

In seeking to prevent the discharge of its debt, MECCO first propounds a cause of action based upon 11 U.S.C. § 523(a)(2)(B). To prevail in this effort, MECCO must prove by clear and convincing evidence that Weinstein obtained

(2) . . . money, property, services, or an extension, renewal, or refinance of credit, by—

(B) use of a statement in writing—

(i) that is materially false;

(ii) respecting the debtor\'s or an insider\'s financial condition;

(iii) on which the creditor to whom the debtor is liable for obtaining such money, property, services, or credit reasonably relied; and

(iv) that the debtor caused to be made or published with intent to deceive;

In re Newmark, 20 B.R. 842 (Bkrtcy.E.D.N. Y.1982); See also Gleason v. Thaw, 236 U.S. 558, 35 S.Ct. 287, 59 L.Ed. 717 (1915); In re Danns, 558 F.2d 114 (2d Cir.1977); In re LoBosco, 14 B.R. 739 (Bkrtcy.E.D.N.Y. 1981); In re Paley, 8 B.R. 466 (Bkrtcy.E.D. N.Y.1981).

The undisputed facts at bar are that in October of 1981 MECCO requested a written financial statement of Weinstein. What Weinstein submitted, and what MECCO accepted, was a previously executed financial statement which Weinstein had provided to European American Bank in connection with a totally unrelated financing transaction. The values given to Weinstein's real property in this statement totalled $460,000. The value of this property as indicated in the debtor's bankruptcy petition filed August 31, 1982 and given in depositions thereafter totalled approximately $310,000.¹

After review of the record presented, this Court concludes that the plaintiff has failed to make out a § 523(a)(1)(B) prima facie case. There exists no evidence establishing that the involved financial statement was materially false; that it was submitted with an intent to deceive; or that the plaintiff reasonably relied upon it in making its loan decision.

In deciding that the approximately 30% real property valuation discrepancy does not involve an intentional misrepresentation, it is noted that the contrasting values were the estimates of a layman, and that they were adduced on dates approximately a year apart. In appraising the value of real property, one is confronted with a spectrum of possible valuations more so than a definitive number. Where along the spectrum one places the property's value depends upon the multifarious circumstances involved at the decisional moment. It must certainly be conceded that no intentional fraud can be evidenced solely from the tendency to choose the upper end of the valuation spectrum when applying for a loan...