Rutili v. O'Neill (In re O'Neill)

• Decision Date: 08 February 2012
• Docket Number: Adversary No. 10 A 01084.,Bankruptcy No. 10 B 06832.
• Citation: 468 B.R. 308
• Parties: In the Matter of Michael O'NEILL and Margaret O'Neill, Debtors.Julius Rutili, Plaintiff v. Michael O'Neill and Margaret B. O'Neill, Defendants.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

468 B.R. 308

In the Matter of Michael O'NEILL and Margaret O'Neill, Debtors.Julius Rutili, Plaintiff

v.Michael O'Neill and Margaret B. O'Neill, Defendants.

Bankruptcy No. 10 B 06832.

Adversary No. 10 A 01084.

United States Bankruptcy Court, N.D. Illinois, Eastern Division.

Feb. 8, 2012.

Gregory K. Stern, P.C., Thompson Coburn Fagel Haber, Chicago, IL, for Plaintiff.

Michael K. Desmond, Peter A. Silverman, Thomas D. Warman, Figliulo & Silverman PC, Chicago, IL, for Defendants.

FINDINGS OF FACT AND CONCLUSIONS OF LAW FOLLOWING TRIAL

JACK B. SCHMETTERER, Bankruptcy Judge.

INTRODUCTION

This proceeding is related to the Chapter 7 bankruptcy case filed by Debtors Michael and Margaret O'Neill (“Debtors”). Creditor James Rutili (“Plaintiff”), filed this two-count Adversary Complaint objecting to their discharge and dischargeability of debt owed by Debtors for a loan by Plaintiff to them.

Count 1, brought under 11 U.S.C. § 727(a)(4) and (5) alleged that Debtors failed to list ownership of F.C. Pilgrim & Co. and Pilgrim Mgmt. Co. among their assets in the bankruptcy petition and schedules or to report loss of that asset pre-bankruptcy, thereby making false oath and failing to explain loss of assets. The Complaint also alleged Debtors failed to list ownership of certain real property. The defense has argued that Debtors have amended their schedules so as to list fully their former interests in those properties and thereby corrected all initial omissions. They also assert that the interests initially not listed had no value, had been lost prior to their bankruptcy filing, were not material, and that any failure to list those interests was due to failure of their counsel.

Count II, brought under 11 U.S.C. § 523(a)(2)(A) alleges false representations by Debtor Michael O'Neill concerning ownership in F.C. Pilgrim & Co. and Pilgrim Mgmt. Co. made in order to induce Plaintiff to make a large loan to them. Debtors argue, first, that the statements made by Michael O'Neill regarding ownership interests were not misrepresentations because Michael in fact was the controlling shareholder of a holding company that owned 100% of companies at issue. Debtors also argue that Plaintiff did not rely on the statements asserted because those statements made by Michael were oral, general in nature, and were not part of or directly connected to the loan agreements; and also because Plaintiff had his own reason for investing separate from whatever Michael's ownership interests might have been. Debtors also argue that Plaintiff did no due diligence with respect to Michael's asserted representations and, therefore, did not justifiably rely on any. Finally, Debtors argue that the oral statements in issue were “statements respecting financial condition” that are not actionable under § 523(a)(2)(A) and no financial statement was given by Debtors that might have been actionable under § 523(a)(2)(B).

The following Findings of Fact and Conclusions of Law are made and entered following trial. Pursuant thereto, judgment will enter for Defendants on both Counts.

Incorporated in the discussion below is also analysis of Plaintiff's post-trial Motion to “correct” the Stipulations admitted into evidence. For reasons set forth that Motion will be denied.

Former Interests of Defendants in “Pilgrim”

1. Michael O'Neill and Margaret B. O'Neill (the “Defendants”, and occasionally referred to individually as “Michael” or “Defendant Husband” and “Michael's Wife” or “Defendant Wife” to distinguish this Margaret O'Neill, i.e., “Michael's Wife,” from Michael's mother, named Margaret T. O'Neill), are married to each other. Plaintiff's Exhibit (hereinafter referred to as “PX”) 64, 65, 66.

2. Michael O'Neill is the son of John E. O'Neill (“John O'Neill”) and Margaret T. O'Neill (“Margaret O'Neill”) (collectively, the “Defendant Husband's Parents”, and occasionally referred to as “Defendant's Father” or “John” and “Defendant's Mother” or “Margaret”) and, the brother of Mary O. Bresnahan (“Mary”). PX 19.

3. Pilgrim Companies, Inc., (“Pilgrim Companies”) F.C. Pilgrim & Co. (“F.C. Pilgrim”), and Pilgrim Management Companies (“Pilgrim Management”) (collectively, the “Companies”), are Illinois corporations, each having their respective, principal places of business located in Illinois. PX 1, 2, 3.

4. F.C. Pilgrim was formed on or about 1938 and has operated as a real estate broker and realtor, and related functions, in Oak Park, Illinois, and nearby areas since 1938. PX 2.

5. John O'Neill and Margaret T. O'Neill, respectively, owned as of the year 2000, the outstanding shares of F.C. Pilgrim. John owned 59 shares and Margaret owned 41 shares. PX 19.

6. Beginning in the year 2000 and continuing up through April 19, 2011, Michael has been the President of F.C. Pilgrim, a licensed real estate broker. Trial Transcript (hereinafter referred to as “TR”) 143:2–12, TR 144:9–11.

7. In the year 2000, Mary worked for F.C. Pilgrim. PX 7, 8, 9, 19.

8. Pursuant to an Acquisition Agreement dated March 16, 2000, (the “Acquisition Agreement”) Pilgrim Companies purchased from John and Margaret all of their respective, issued and outstanding shares of capital stock of F.C. Pilgrim and Pilgrim Management for the sum of One Million Four Hundred Thousand and 00/100 Dollars ($1,400,000.00), plus the issue of two promissory notes, one note being issued to John and the second note issued to Margaret, as described below. PX 19; TR 146:3–13.

9. From and after the date of the Acquisition Agreement, Pilgrim Companies owned 100% of the stock of F.C. Pilgrim, and Pilgrim Companies functioned as a holding company that did not operate any business separate from F.C. Pilgrim and Pilgrim Management.

From April 2000 through December 2009, Michael O'Neill owned 66% of the stock of Pilgrim Companies, Inc. and Pilgrim Management Company. [TR 257:11–17; Trial Stip. at ¶ 7; Defendant's Exhibit (hereinafter referred to as “DX”) 8; DX 10; DX 11] From April 2000 through December 2009, the owner of F.C. Pilgrim & Co. was Pilgrim Companies, Inc., and Michael O'Neill was the majority owner/shareholder of Pilgrim Companies, Inc. [Trial Stip. at ¶ 7; DX 8–11; TR 257:11–17; DX 8; DX 10; DX 11]. Therefore, Michael O'Neill had a controlling ownership interest in F.C. Pilgrim and Co. from April 2000 through December 2009. [Trial Stip. at ¶ 7; DX 8–11; TR 257:11–17; DX 8; DX 10; DX 11].

10. Pursuant to an Installment Note dated January 1, 2000, Pilgrim Companies promised to pay John O'Neill the principal sum of Eight Hundred Twenty Six Thousand and 00/100 Dollars ($826,000.00) (“John's Installment Note”). PX 17.

11. John's Installment Note was secured by (A) 1,770 voting common shares and 1,770 nonvoting common shares of Pilgrim Companies stock, (B) 59 voting common shares of F.C. Pilgrim stock and (C) 590 voting common shares of Pilgrim Management stock. PX 17.

12. Pursuant to an Installment Note dated January 1, 2000, Pilgrim Companies promised to pay Margaret the principal sum of Five Hundred Seventy Four Thousand and 00/100 Dollars ($574,000.00) (“Margaret's Installment Note”). PX 18.

13. Margaret's Installment Note was secured by (A) 1,230 voting common shares and 1,230 nonvoting common shares of Pilgrim Companies stock, (B) 41 voting common shares of F.C. Pilgrim stock and (C) 410 voting common shares of Pilgrim Management stock. PX 18.

14. Michael, as President of Pilgrim Companies executed the John O'Neill and Margaret O'Neill Installment Notes (collectively the “Installment Notes”). PX 17, 18.

15(a). The Installment Notes dated January 1, 2000, both state that a default will occur when:

a. “[T]here is a breach of the Pledge Agreement by Pilgrim Companies, Inc. to and in favor of John E. O'Neill, dated January 3, 2000”;

b. “[T]here is a breach of the Pledge Agreement between Michael M. O'Neill and Mary O. Bresnahan, to and in favor of John E. O'Neill, dated January 3, 2000”; or,

c. “[A]t any time payment is not made for at least three (3) months from the due date of the installment payment unless waived in writing by either John E. O'Neill or Margaret T. O'Neill.”

PX 17, 18.

15(b). Paragraph 8 of the Installment Notes dated January 1, 2000 provided that upon any default, the Installment Notes would become immediately due and payable without demand or notice, which were waived. Paragraph 8 also provided that upon default John E. O'Neill or Margaret O'Neill could foreclose upon the stock provided as security for the Installment Notes in the form of Assignments Separate From Certificate. Trial Stip. at ¶ 14; DX 2–3; PX 18–19.

16. Pursuant to a Pledge Agreement dated January 3, 2000, attached to the Acquisition Agreement as Exhibit 9A, Pilgrim Companies pledged, among other assets, its 59% interest in the stock of F.C. Pilgrim to John to secure payment of John's Installment Note. PX 19H.

17. Pursuant to a Pledge Agreement dated January 3, 2000, attached to the Acquisition Agreement as Exhibit 9B, Michael pledged, among other assets, his 41% interest in the stock of Pilgrim Companies and Pilgrim Management to Margaret to secure payment of Margaret's Installment Note. PX 190.

18. Pursuant to an Escrow Agreement dated January 3, 2000, attached to the Acquisition Agreement as Exhibit 9C, Pilgrim Companies, deposited all of the shares representing its 59% stock interest in F.C. Pilgrim into escrow, with Richard Burke, Esq., as escrowee, with directions to transfer said shares upon default by Pilgrim Companies, Inc. of John's Installment Note. PX 19J.

19. Pursuant to an Escrow Agreement dated January 3, 2000, attached to the Acquisition Agreement as Exhibit 9D, Michael deposited all of the shares representing his 59% interest in Pilgrim Companies and Pilgrim Management into escrow, with Richard Burke, Esq., as escrowee, with directions to transfer said shares upon default by Pilgrim Companies, Inc. of Margaret's Installment Note. PX 19K.

20. Pursuant to an Assignment Separate From Certificate dated January 3, 2000,...