BBI Architectural Services v. Janney (In re Janney)BBI Architectural Services v. Janney (In re Janney)
MEMORANDUM OPINION
Plаintiff BBI Architectural Services (“BBI”) sued Todd T. Janney, Sr. (“Jan-ney”) to have Janney’s debt to it declared nondischargeable pursuant to 11 U.S.C. § 523(a)(2)(A) and (B). This opinion explains why Janney’s debt to BBI is nondis-chargeable pursuant to Bankruptcy Code § 523(a)(2)(A).
Facts
BBI sued two companiеs Janney owned, Physician’s Choice Physical Therapy, Inc. (“PCPT”) and Physician’s Choice Physical Therapy of Livingston Parish, Inc. (“PCPTLP”), for unpaid pre-petition architectural services.
In accordance with the settlement, the parties to the litigation joined in a November 21, 2013 consent judgmеnt that cast Janney himself in judgment to BBI in solido with PCPT and PCPTLP, though Janney was not a party to the lawsuit for reasons not made plain in the record. BBI later agreed to amend the judgment and remove Janney as a judgment debtor.
Janney and his wife filed chapter 7 on October 8, 2014. BBI timely sued to have Janney’s debt to it declared nondischargeable under 11 U.S.C. § 523(a)(2)(A) and (B). The court consоlidated this adversary proceeding for trial with the claims in Rebecca Adams, LLC v. Todd T. Janney, Sr. (Adv. No. 15-1026).
I. False Representation and Actual Fraud pursuant to § 523(a)(2)(A)
BBI’s lawsuit centers on Janney’s actions negotiating a settlement and consent judgment. BBI claims that Janney misled it into settling with PCPT and PCPTLP when neither company remained in business. This, it contends, renders Janney’s debt to it nondischargeable under Bankruptcy Code § 523(a)(2)(A). That provision excepts from discharge debts obtained by “false pretenses, false representation, or actual fraud....”
The Fifth Circuit has developed two separate tests for dischargeability claims under § 523(a)(2)(A), predicated on which element of the statute the plaintiff is basing its claim. “When defining the elements of nondischargeability, the Fifth Circuit has distinguished between actual fraud on one hand and false pretenses and false representations on the other.” In re Quinlivan,
BBI argues that the debt is nondis-chargeable under section 523(a)(2)(A) both as having arisen through the debtor’s actual fraud but also as a result of his false representation. It contends thаt Janney committed both actual fraud and a false representation when he signed the promissory note and settlement agreement obligating companies he knew were not operating to pay a $22,500 debt.
A Janney Committed a False Representation When He Induced BBI to Settle with Two Non-Operating Businesses
BBI alleges that Janney’s conduct fell within the scope of Bankruptcy Code § 523(a)(2)(A) as a series of false representations that PCPT and PCPTLP were operational. In other words, it сontends that Janney misled BBI by defending its lawsuit and negotiating a settlement on behalf of his defunct businesses.
A debtor’s false representation or false pretense falls within § 523(a)(2)(A) if it was “(1) [a] knowing and fraudulent falsehood ..., (2) describing past or current facts, (3) that [was] reliеd upon by the other party.” RecoverEdge L.P. v. Pentecost,
The evidence established that Jаn-ney knew that PCPT and PCPTLP were no longer in business when he signed the settlement agreement and promissory note
The credible evidence also supported a finding that Janney did not disclose his businesses’ status to BBI. Janney insisted at trial that he had disclosed to BBI in the course of state court proceedings that his two companies were no longer doing business and so cannot fairly be accused of misleading BBI. The defendant’s uncorroborated testimony on this point is not worthy of credibility,
The last element of the test for nondis-chargeability under § 523(a)(2)(A) is whether the creditor justifiably relied on the debtor’s misrepresentation.
No evidence was offеred supporting a finding that BBI had any reason to suspect that PCPT and PCPTLP were not going concerns when it settled with Janney and his businesses and later when it agreed to release Janney from the consent judgment.
In summary, BBI has established that Todd Janney’s debt to it is nondischargeable as a misrepresentation under § 523(a)(2)(A).
B. Janney Committed Actual Fraud When He Obligated Entities to a Judgment He Knew They Could Not Pay
BBI also contends that Janney committed actual fraud by obligating entities he knew could not pay the $22,500 settlement, and thereby rendered his own obligation to BBI under the settlement nondischargeable pursuant to Bankruptcy Code § 523(a)(2)(A).
“Actual fraud, by definition, consists of any deceit, artifice, trick or design involving direct and active operation of the mind, used to circumvent and cheat another — something said, done or omitted with the design of perpetrating what is known to be a cheat or deception.” RecoverEdge,
Janney knew when he signed the settlement agreement and promissory note that the companies he was obligating to the settlement with BBI were out of business and unable to perform the settlement.
The next issue is whether Janney possessed fraudulent intent when he signed the settlement agreement and promissory note. Only two payments — in the amounts of $1,045 and $500 — were made on the settlement agreement before BBI agreed to amend the consent judgment to remove Janney personally. PCPT, which Janney controlled, made the two payments, thereby conveying the false impression that Janney’s companies were doing business.
BBI president Brent Bueche testified that he met Jannеy in late 2013 after the parties executed their settlement and the consent judgment. Bueche testified that he asked Janney about payment on the debt and Janney responded that he was unable to pay because he lacked credit.
The parties joined in January 2014 in a motion to amend the consent judgment to rеmove Janney as a judgment debtor. Neither Janney nor his companies made any settlement payments to BBI after amending the consent judgment. The amendment and later events support a finding that Janney misled BBI into amending the consent judgment: had BBI known that PCPT and PCPTLP were not in business, it is unlikely that BBI would have willingly released the only judgment debtor potentially able to honor the settlement.
To summarize, the evidence established that Janney intended to defraud BBI by allowing it to believe that the companies it was settling with werе operational and then later inducing BBI to remove him from the consent judgment. Janney’s actions were knowing and intentional and constitute “actual fraud” within the meaning of Bankruptcy Code § 523(a)(2)(A).
II. Materially False Written Financial Statements under § 528(a)(2)(B)
BBI also alleges that Janney’s execution of the settlement agreement itself is not dischargeable under 11 U.S.C. § 523(a)(2)(B). That section of the Bankruptcy Code excepts from discharge debts for money or services obtained by “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 such money, property, services, or credit reasonably relied; and (iv) that the debtor caused to be made or publishеd with the intent to deceive.” BBI’s claim on this count fails because the settlement agreement is not a writing respecting the debtor’s “financial condition.”
Statements falling within section 523(a)(2)(B) must do more than simply prompt speculation about the debtor’s fi
The settlement agreement between BBI and Janney and his businesses incorporates promises to pay and to release claims in exchange for the payments but does not paint a сomplete picture of Janney’s and his companies’ financial condition.
Conclusion
The еvidence established that Janney’s debt is nondischargeable pursuant to 11 U.S.C. § 523(a)(2)(A) though not under 11 U.S.C. § 523(a)(2)(B). The court will enter judgment in favor of BBI.
Notes
.BBI Architectural Services v. Physicians Choice Physical Therapy, Inc. and Physicians’ Choice Physical Therapy of Livingston Parish, Incоrporated, Docket No. 126394 in the 21st Judicial District Court for Livingston Parish, Louisiana,
. Testimony of Todd Janney, February 4, 2016, p 331, lines 12-21.
. January 9, 2014 Amended Consent Judgment (Exhibit 4).
. Testimony of Brent Bueche, Feb. 4, 2016, p. 311, line 24-p. 312, line 2. BBI received the first payment, for $1,045.00, on November 15, 2013. It received a second payment, for $500.00, оn December 6, 2013.
. Testimony of Todd Janney, February 4, 2016, p. 329, lines 5-19. Janney testified that the entities were not engaged in any business though they were still filing tax returns.
. Janney could have offered the testimony of his and BBI’s state court counsel to substantiate his story. His failure to do sо supports an inference that counsel would not have corroborated his claims and casts doubt on his version of events. United States v. Wilson,
. Field v. Mans,
. Testimony of Brent Bueche, president of BBI, February 4, 2016, p. 290, lines 5-21.
. Before settling, BBI researched the companies’ standing using the coiporate database maintained by the Louisiana Secretary of State. Testimony of Testimony of Brent Bueche, February 4, 2016, p. 304, lines 13-16.
. RecoverEdge quoted from an earlier edition of COLLIER ON BANKRUPTCY virtually identical to the sixteenth editiоn.
. See fn. 5, supra.
. Testimony of Brent Bueche, Feb. 4, 2016, p. 293, line 15-p. 294, line 5.
.Testimony of Todd T. Janney, Feb. 4, 2016, p. 346, lines 19-23.
. Promissory notes also do not comprise sufficient information regarding the debtor’s financial condition to support a claim under § 523(a)(2)(B) because they ordinarily arе not statements respecting the maker's financial condition. In re Oakley,