497 B.R. 434
Bankr. E.D. Pa.2013Background
- Sherwin-Williams (Movant) seeks a nondischargeability determination against debtor Joseph Grasso under §§ 523(a)(2)(A), (a)(4) and (a)(6) arising from ~ $3.6M invested in a restaurant rehabilitation (WSC LP/Union Trust) and potential recapture of Historic Rehabilitation Tax Credits.
- Grasso was managing member of WSC 717 Tenants GP (WSC GP), the general partner of WSC LP, and signed the Partnership Agreement both for WSC GP and personally as guarantor; he has no direct ownership interest in WSC LP.
- The Partnership Agreement and later contribution notices contained warranties (e.g., contemporaneous PIDC loan closing; title free of undisclosed liens). Those warranties were false when made; a TD Bank loan and mortgage on the Property existed and were not disclosed in the 19‑month‑old title report relied upon by Movant.
- Movant made three capital contributions (Dec. 22, 2008; Jan. 28, 2009; Dec. 7, 2009). Under the Agreement, WSC GP/WSC LP obligations and Grasso’s guarantee could make Grasso liable for 89% of any tax credit recapture.
- Court treated numerous facts as established under Fed. R. Civ. P. 56(g), but denied Movant’s summary judgment on (a)(2)(A) and (a)(6) because Movant failed to show justifiable reliance and failed to show the absence of just cause/excuse (malice) respectively. The (a)(4) claim was dismissed by stipulation.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Standing / existence of claim | Movant is holder of claim via Grasso’s guarantee and seeks declaration that claim is nondischargeable | Grasso: no actual existing claim against him; claim contingent on IRS recapture and thus Movant lacks standing | Court: Movant holds a contingent claim under the Partnership Agreement; standing exists (claim may be contingent but is a claim) |
| § 523(a)(2)(A) — false representations | Misrepresentations in Partnership Agreement and Contribution Notices induced Movant’s capital contributions and prevented actions to avoid tax‑credit recapture | Grasso: statements were made by WSC GP (not him) and any benefit did not flow to him; Movant’s reliance was unjustified | Court: Statements attributable to Grasso as WSC GP managing member; Grasso received indirect benefit; but Movant failed to present evidence of justifiable reliance (title report was 19 months old). Summary judgment denied |
| § 523(a)(6) — willful & malicious injury | Breach/fraud by Grasso caused Movant’s injury; conduct was deliberate and produced harm | Grasso: losses arise from contract/contingent events, not willful malicious tort; lack of evidence Grasso acted without just cause or to harm Movant specifically | Court: Willfulness could be shown, but Movant failed to show malice (i.e., conduct without just cause/excuse or motivated to harm rather than to advance Grasso’s financial interests). Summary judgment denied |
| Attribution of GP statements to debtor | Movant attributes WSC GP warranties/statements to Grasso personally (for (a)(2)(A)) | Grasso contended the misstatements were those of WSC GP and not attributable to him individually | Court: As managing member/officer of WSC GP, Grasso is an "insider" and statements by WSC GP are attributable to him |
Key Cases Cited
- Field v. Mans, 516 U.S. 59 (1995) (elements of § 523(a)(2)(A) and requirement of justifiable reliance)
- Kawaauhau v. Geiger, 523 U.S. 57 (1998) (§ 523(a)(6) not intended to except simple breach of contract from discharge)
- Conte v. Gautam (In re Conte), 33 F.3d 303 (3d Cir. 1994) (willful and malicious defined as purposeful conduct or acting with substantial certainty of injury)
- Cohn v. Brown (In re Cohn), 54 F.3d 1108 (3d Cir. 1995) (discharge exceptions construed narrowly; reliance evidence discussion)
- In re Rodriguez, 629 F.3d 136 (3d Cir. 2010) (definition of "claim" includes contingent claims under § 101(5))
- In re BH & P, Inc., 949 F.2d 1300 (3d Cir. 1991) (guarantor liability creates contingent claim against guarantor)