Reinhart FoodService, LLC v. Riley (In re Riley)
| Decision Date | 11 August 2021 |
| Docket Number | Adversary 19-1008,16-14370 |
| Parties | In Re KENNETH R. RILEY GLORIA G. RILEY Debtors v. KENNETH R. RILEY, et al. Defendants REINHART FOODSERVICE, LLC Plaintiff |
| Court | U.S. Bankruptcy Court — Southern District of Ohio |
This opinion is not intended for publication
Plaintiff Reinhart FoodService, LLC ("Reinhart") commenced this adversary proceeding seeking a determination that a contractual obligation of $125, 000 owed to Reinhart by an entity identified in the contract as "Riley Restaurant Group dba - J. Austin's American Eatery & Walt's Barbeque" is a debt for which Defendant-Debtors Kenneth and Gloria Riley (jointly referred to as "Debtors") are personally liable and that should be excepted from their discharge under provisions of 11 U.S.C. § 523(a). Furthermore, Reinhart alleges that the Debtors should be denied a discharge under provisions of 11 U.S.C. § 727(a) because they failed to list Reinhart as a creditor in their schedules or list the funds received from Reinhart as income.
A trial was held on January 27, 2021. Based on the documentary evidence and witness testimony presented, this Court determines that Reinhart failed to establish that the Debtors are personally liable for the $125, 000 contractual obligation, a prerequisite to determining the debt nondischargeable in their bankruptcy case. Even if it was demonstrated that one or both of the Debtors were personally liable, this Court further determines that Reinhart failed to meet the elements to except the debt from discharge under 11 U.S.C. § 523(a). Reinhart's request to deny the Debtors' discharge under 11 U.S.C. § 727(a) is likewise unsuccessful. Reinhart failed to establish that the Debtors were required to reflect the $125, 000 payment from Reinhart as personal income in their bankruptcy papers such that they made a false oath by omitting the information or that any such omission was made with fraudulent intent. As such, Reinhart has failed to carry its burden of proving that the Debtors' discharge should be denied.
This Court has jurisdiction over this matter pursuant to 28 U.S.C §§ 157(a) and 1334, and the standing General Order of Reference in this District. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I) and (J).
The following are this Court's findings of facts from the testimony and evidence presented at trial.
Prior to their bankruptcy filing, Debtors Kenneth Riley ("Ken Riley") and Gloria Riley were associated with several restaurants owned and operated by various corporations and limited liability companies. The first business entity formed by the Debtors in 2007, was William-Royce, Inc., which owned and operated Riley's Restaurant, a family style restaurant in business since 1981. Riley's Restaurant continued to operate through the spring of 2016 at which time the restaurant was "rebranded" as J. Austin's American Eatery with a gastropub menu. The Debtors formed a second business entity, Riverbar, LLC, in February of 2014 which owned and operated another restaurant, J. Austin's Riverbank Cafe in Hamilton. Gloria Riley was the corporate secretary and Ken Riley was the president of both William Royce, Inc. and Riverbar, LLC.
The Debtors' son, James Riley, was also involved in the restaurant business from a young age. He went to culinary school and, at the age of 18, wanted to purchase a restaurant. In March of 2013, the Debtors helped their son incorporate J.R. Austin, LLC to purchase and operate two restaurants, Walt's Barbeque Colerain and Walt's Barbeque Hamilton (collectively "Walt's Barbeque"), previously owned by Walter Baum. J.R. Austin, LLC was owned entirely by James Riley and neither of the Debtors was an officer of that corporation although Gloria Riley became a manager.
Prior to its purchase by James Riley, Walt's Barbeque had a relationship with Reinhart, the plaintiff in this adversary proceeding and a company that engages in food distribution to national accounts and independent restaurants. Walt's Barbeque bought proprietary items from Reinhart and James Riley agreed to continue purchasing certain products from Reinhart upon his purchase of Walt's Barbeque. As part of that agreement, James Riley filed out a credit application with Reinhart that, according to Ken Riley's testimony, also included a personal guaranty[1]
At that time in 2013, the Debtors used a different food distributor and competitor of Reinhart, Gordon Food Service. However, in conjunction with James Riley's purchase of Walt's Barbeque and in the hope of adding new business with the Debtors, a Reinhart sales representative asked Gloria Riley to complete a credit application with Reinhart. On June 14, 2013, Gloria Riley signed a credit application with Reinhart on behalf of "William-Royce Inc." doing business under the trade name "Riley's Restaurant." [Docket Number 42, Plaintiff's Exhibit ("Pl. Ex.") 1] Although Gloria Riley signed the application as the Secretary of William-Royce, Inc., she also signed an "Individual Personal Guaranty" on the backside of the credit application which stated:
I, the undersigned Guarantor, for and in consideration of your extending credit at my request to Riley's / Gloria Riley (the "Purchaser"), personally guarantee prompt payment of any obligation of the Purchaser to Reinhart FoodService, LLC or any of its subsidiaries ("Seller"), whether now existing or hereinafter incurred, and I further agree to bind myself to pay on demand any sum which is due by the Purchaser to Seller whenever the Purchaser fails to pay same. It is understood that this guarantee shall be absolute, continuing and irrevocable guaranty for such indebtedness of the Purchaser.
[Id.] Gloria Riley testified that, although she signed the credit application, she cannot recall making any purchases from Reinhart under the credit agreement. Gloria Riley also testified that she never asked that her individual guaranty be released.
From 2014 to 2016, the restaurants did minimal business with Reinhart mostly limited to purchasing ancillary items for Walt's Barbeque. However, in 2016, a Reinhart sales representative approached a general manager of Reinhart, William Stacey, about putting together a potential incentive package to obtain additional business with the Debtors.
William Stacey ("Bill Stacey") is a general manager over sales and operations at Reinhart FoodService Cincinnati. He and Jeffrey Peters ("Jeff Peters"), a corporate asset recovery manager for Reinhart, testified to Reinhart's business analysis of potential customers to determine when it would be in Reinhart's interest to offer credit or an incentive package to customers or prospective customers. These Reinhart representatives testified that Reinhart often begins with "prospecting," or sending salespeople out to build relationships with restaurant operators and learn the identity of their current supplier. Prospective customers who are interested in purchasing from Reinhart must then fill out a credit application that provides Reinhart with the name and location of the potential customer's business and other information that allows the underwriting department to pull a credit report. The standard credit application utilized by Reinhart also includes Reinhart's terms and conditions and a personal guaranty provision like the one signed by Gloria Riley.
Bill Stacey further testified that Reinhart uses an incentive program to attract new customers and grow business with existing customers. To determine whether to offer an incentive, Reinhart creates what it calls a "descending dollar case report" to analyze the potential customer's volume from their current supplier. At that point, Reinhart conducts a customer profitability analysis in which Reinhart plugs in the potential customer's current numbers as well as the terms and incentive that the customer would want from Reinhart. The customer profitability analysis calculates the profitability of the potential account and helps Reinhart determine what type of incentive it can offer. The types of incentives Reinhart provides include volume incentives or, sometimes, upfront money.
In 2016, a Reinhart sales representative who had been in prior contact with the Debtors brought in Bill Stacey to put together a potential incentive package to offer the Debtors in exchange for expanding their business relationship with Reinhart. At that time, Bill Stacey held the belief that the Debtors controlled four restaurants: two Walt's Barbeque restaurants and two J. Austin's restaurants. Bill Stacey testified that the Debtors came to him with the desire to "rebrand" the two Walt's Barbeque restaurants as J. Austin's restaurants with different themes like a sports bar and barbeque restaurant. He testified that the Debtors were looking for an investment from Reinhart to help them with this rebranding. However, this testimony is disputed by Ken Riley. Mr. Riley testified that he turned down two prior offers from Reinhart and, in fact, had better money investment offers from their existing distributor, Gordon Food Service. Ken Riley stated that the reason he finally accepted Reinhart's third offer to solicit their business was because of the potential of a limited mark-up on purchases.
In order to determine whether it was in Reinhart's interests to offer the Debtors an incentive, Bill Stacey did the same type of business analysis that he had done for other companies. He reviewed the Debtors' businesses' buying history with Gordon Food Service,...
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