McCoy v. McCoy (In re McCoy)

Decision Date11 August 2016
Docket NumberAPN 15-07042-SCS,Case No. 15-70395-SCS
CourtU.S. Bankruptcy Court — Eastern District of Virginia
PartiesIn re: DEIRDRE JO MCCOY, Debtor. ESTATE OF ERMA C. MCCOY, Plaintiff, v. DEIRDRE JO MCCOY, Defendant.

Chapter 7

MEMORANDUM OPINION

This matter came on for trial on February 17, 2016, upon the Complaint of the Estate of Erma C. McCoy (the "Plaintiff") against Deirdre Jo McCoy (the "Debtor"). The Complaint ("Complaint"), filed May 11, 2015, seeks a determination that an indebtedness owed to the Plaintiff by the Debtor is not dischargeable pursuant to 11 U.S.C. § 523(a). At the conclusion of the trial, the Court took the matter under advisement. The Court has jurisdiction over this proceeding pursuant to 28 U.S.C. §§ 157(b)(2) and 1334(b). Venue is proper pursuant to 28 U.S.C. §§ 1408 and 1409. This Memorandum Opinion constitutes the findings of fact and conclusions of law of this Court pursuant to Federal Rule of Civil Procedure 52, incorporated into the Federal Rules of Bankruptcy Procedure by Rule 7052.

I. The Complaint

The Complaint alleges that the Debtor engaged in a series of fraudulent acts that ultimately resulted in Erma C. McCoy (hereinafter, "Mrs. McCoy") obtaining a reverse mortgage to satisfy certain debts incurred by the Debtor. The Plaintiff further alleges that the Debtor committed fraud by misrepresenting her intent to pay a promissory note (hereinafter, the "Confessed Judgment Note") that she entered into with Mrs. McCoy (who is now deceased and whose interest is represented by the Plaintiff), the purpose of which was to repay Mrs. McCoy for satisfying her (the Debtor's) debts. The Debtor admits signing the Confessed Judgment Note but denies the allegations of fraudulent behavior. The Complaint seeks to deny the Debtor's discharge with regard to this debt pursuant to 11 U.S.C. § 523(a)(2)(A) and § 523(a)(6).

II. Findings of Fact

A large portion of the factual history was uncontested. Moreover, all of the exhibits tendered by the Plaintiff and the Debtor were admitted without objection. Transcript of February 17, 2016 Trial (hereinafter, "Tr.") at 3.

The parties agree that Mrs. McCoy, a widow, was a strong woman with a limited education from a modest background who monitored her finances zealously. Id. at 6, 12-13. It is also undisputed that Mrs. McCoy deeded the house she resided in for a number of years, located at 333 Southgate Avenue, Virginia Beach, Virginia (hereinafter, the "Southgate Property") to her son, John Lee McCoy, Jr. (hereinafter, "John McCoy")1 and his wife, the Debtor, around 2002.2Compl. ¶ 4; Answer ¶ 4; Tr. at 19, 89, 116; Def.'s Ex. E, Deed of Gift transferring ownership of the Southgate Property from Erma C. McCoy to John McCoy and the Debtor dated October 1, 2002. The Debtor and John McCoy then encumbered the Southgate Property with a substantial amount of debt. Compl. ¶ 4; see Tr. at 18-21, 104, 106, 108, 117. However, the parties diverge on their assessments of the purpose, nature, and amount of additional debt that allegedly encumbered the Southgate Property.

The Plaintiff called Natalia Wilson (hereinafter, "Ms. Wilson"), Mrs. McCoy's granddaughter, to testify during the trial. Tr. at 4. Mrs. McCoy and Ms. Wilson had a close relationship during Mrs. McCoy's lifetime. See id. at 9-10. After Ms. Wilson became an attorneyin 2006, Mrs. McCoy forwarded her mail and financial information for Ms. Wilson to review.3 Id. at 10-11. Ms. Wilson qualified and continues to serve as the executrix of Mrs. McCoy's estate. Compl. ¶ 22; Tr. at 5; Pl.'s Ex. 23, Certificate of Qualification of Natalia C. Wilson as Executrix of the Estate of Erma McCoy dated March 9, 2015.

Ms. Wilson learned from documents that the Debtor provided during discovery that in 2002, John McCoy and the Debtor agreed to use the Southgate Property as collateral to secure a loan to allow them to repay a $54,290.00 debt related to their flooring business owed to Dominion Management (hereinafter, "Dominion"). See Tr. at 19-21; Pl.'s Ex. 4, Dominion Demand Note and Acknowledgment of Debt dated October 30, 2002 (hereinafter, the "Dominion Demand Note" and "Acknowledgment of Debt").4 The Acknowledgment of Debt set forth that John McCoy and the Debtor would "activate an equity loan from SunTrust Bank in the amount of $39,000.00 to be paid to [Dominion] on November 6th, 2002 to partially satisfy a personal debt of $54,290.00" and that the Debtor and John McCoy "agree to pay [Dominion] $550.00 per month for 29 months to satisfy the remainder of the personal debt of $15,290.00." Pl.'s Ex. 4, Acknowledgment of Debt.

It is undisputed that the Debtor and John McCoy applied for an equity loan from SunTrust Bank in October 2002, using the Southgate Property as collateral. Pl.'s Ex. 3, SunTrust Equity Application dated October 22, 2002; see also Tr. at 19, 103-04.5 While neither party offered into evidence any note or deed of trust resulting from the application to SunTrust for an equity loan, the Southgate Property was apparently encumbered with a mortgage on November 18, 2002 (hereinafter, the "SunTrust Loan"). Compl. ¶ 4; Tr. at 19, 67, 104; Pl.'s Ex. 5, SunTrust Certificate of Transfer of Deed of Trust to CitiCorp dated November 18, 2002.6 Ms. Wilson testified she believed that the Debtor and John McCoy used the proceeds of the SunTrust Loan for the down payment on the purchase of their home located at 2417 Hillcrest Meadows Lane, Virginia Beach, Virginia in 2003 (the "Hillcrest Property"). See Tr. at 25-27; Pl.'s Ex. 6, Residential Purchase Agreement for Hillcrest Property dated April 12, 2002.7

The Debtor admitted to executing the Dominion Demand Note (Tr. at 106) but disputed the amount of debt incurred against the Southgate Property as well as the purpose of the debt. See id. at 108, 142. The Debtor contended that the SunTrust Loan was not taken out to buy the Hillcrest Property, but rather to assist the business that she and John McCoy operated. Id. at 104, 131-32. Similarly, the Debtor disputed that the Dominion Demand Note and the SunTrust Loan were separate debts, contrary to the Plaintiff's insinuations.8 Id. at 105-06, 108. Instead, the Debtor testified that she and John McCoy used the entirety of the proceeds from the SunTrust Loan ($39,563.84) to partially satisfy the Dominion Demand Note. Id. at 131, 142; Def.'s Ex. F, Customer Copy of Check from SunTrust dated November 20, 2002. The relevant exhibits support the Debtor's testimony. The Dominion Demand Note refers to a debt in the principal sum of $54,290.00, with interest accruing at 8.5%, owed by John McCoy and the Debtor. Pl.'s Ex. 4. Additionally, the Acknowledgment of Debt refers to a total debt of $54,290.00 and expressly states that John McCoy and the Debtor would obtain an equity loan from SunTrust Bank in the amount of $39,000.00 and pay that amount by November 6, 2002, to partially satisfy the debt owed to Dominion. Id.

John McCoy died in 2005, predeceasing Mrs. McCoy. Compl. ¶ 5 n.1. As the sole beneficiary of John McCoy's life insurance policy, the Debtor received approximately $204,000.00 after his death. Tr. at 27-28, 70-71, 122; Pl.'s Ex. 8, Asset Account Confirmation Certificate.9 However, the Debtor did not use the life insurance proceeds to satisfy theoutstanding financial debt against the Southgate Property. Compl. ¶ 5 n.1; Tr. at 71, 122-24. Instead, after the death of her husband, the Debtor voluntarily ceased her employment, and the life insurance proceeds served as her sole source of income for three years. Tr. at 59, 71, 125-26; Pl.'s Ex. 24, Debtor's Resumé. The Debtor offered no testimony to refute Ms. Wilson's statements that she bought a new car and traveled during this time period. See Tr. at 73.

By September 2006, the Debtor had defaulted on the Dominion debt. Id. at 106-07. As a result, Dominion sought a judgment in the amount of $45,000.00 against the Debtor, which judgment was obtained by default on September 28, 2006 (hereinafter, the "Dominion Judgment"). Id. at 30-31; Pl.'s Ex. 11 (Dominion Judgment, Attachment 1 to Exhibit 11).10 The Dominion Judgment created a judicial lien against the Debtor's interest in real property, thus resulting in a judicial lien being placed on both the Southgate Property and the Hillcrest Property. See Tr. at 32, 119; Pl.'s Ex. 11 (Dominion Judgment).11 According to the Debtor'stestimony, she did not know that Dominion had placed a judicial lien against the Southgate Property in 2006 and did not discover the lien until more than a year later. Tr. at 107, 119.

The Debtor subsequently conveyed the Southgate Property back to Mrs. McCoy by a Deed of Gift on May 8, 2007. Compl. ¶ 6; Answer ¶ 6; Tr. at 31-32, 107; Pl.'s Ex. 9, Deed of Gift of Southgate Property from Dierdre J. McCoy to Erma C. McCoy dated May 8, 2007.12 The Debtor testified that she re-deeded the Southgate Property to Mrs. McCoy because she had run out of money to pay the expenses associated with both the Southgate Property and the Hillcrest Property but wanted to ensure that Mrs. McCoy could continue residing in the Southgate Property, since it had been Mrs. McCoy's home for almost fifty years.13 Tr. at 107-08, 114. Because the Southgate Property was already encumbered by two liens (created by the SunTrust Loan and the Dominion Judgment) and the Debtor was facing financial hardship, she believed there were only three available options to keep Mrs. McCoy in the Southgate Property: ask Mrs. McCoy to pay rent to reside there, have Mrs. McCoy obtain a reverse mortgage on the property, or allow both the Southgate and Hillcrest properties to go into foreclosure. Id. at 113-14. The Debtor decided to investigate reverse mortgages because she believed a reverse mortgage was the best option for allowing Mrs. McCoy to continue to reside in her home. See id. at 107-08, 114.14

The Plaintiff alleged that after the transfer of the Southgate Property back to Mrs. McCoy, the Debtor informed Mrs. McCoy that she intended to...

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