Doug Howle's Paces Ferry Dodge, Inc. v. Ethridge (In Re Ethridge)Doug Howle's Paces Ferry Dodge, Inc. v. Ethridge (In Re Ethridge)
- Reporters:
- ,
- Before:
- Hershner
MEMORANDUM OPINION ON COMPLAINT OBJECTING TO DISCHARGE AND TO DETERMINE DISCHARGEABILITY OF DEBT
STATEMENT OF THE CASE
On July 21, 1985, Phillip Edward Eth-ridge, Defendant, filed a petition for relief under Chapter 7 of the Bankruptcy Code. In Defendant’s schedule of debts, Doug Howie’s Paces Ferry Dodge, Inc., Plaintiff, is listed as an unsecured creditor holding a claim in the amount of $108,981.44. The claim is based upon a consent judgment entered against Defendant on October 24, 1984 in the Superior Court of Clarke County. On October 15, 1985, Plaintiff filed a complaint objecting to Defendant’s discharge,
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or alternatively, requesting the Court to determine the debt to be nondis-chargeable.
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Defendant filed an answer and a counterclaim on November 18, 1985. In his counterclaim, Defendant requests costs and attorney’s fees under section 523(d) of the Bankruptcy Code
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and under
The complaint and counterclaim came on for trial on January 20, 1987. The Court, having considered the evidence presented at trial and the briefs of counsel, now publishes its findings of fact and conclusions of law.
FINDINGS OF FACT
Defendant was the president and a shareholder of Southern Motor Coach, Inc. (Southern Motor). Southern Motor was engaged in the business of manufacturing, selling, and promoting conversion vans. Defendant had several years of experience in the conversion van business prior to his association with Southern Motor.
Following its incorporation in 1982, Southern Motor established a floor plan line of credit at First American Bank and Trust Company (First American). The ceiling for the credit line was set at $200,000. In order to secure this credit, Defendant and two other shareholders and their wives personally guaranteed the corporation’s credit line, using their houses as collateral. Under the floor plan, First American would loan Southern Motor the money to purchase shell vans in the open marketplace. The vans were usually purchased from a dealer who was paid by a corporate check, a cashier’s check, or an automatic draft. First American would activate the credit line when it was presented with either the certificate of title to the van or a manufacturer’s statement of origin.
Mr. Cheek, the president of First American, testified that the Southern Motor line of credit operated in a fashion similar to overdraft protection, although technically the credit terms did not include overdraft protection. Mr. Cheek stated that when First American received a check drawn on the Southern Motor account for which there were insufficient funds, the normal procedure would be for First American to notify Southern Motor of the overdraft. First American would then hold the check for a period of twenty-four hours in order to allow Southern Motor to make arrangements to activate the credit line.
Southern Motor operated in excess of its credit limit for a number of years. Although First American warned Southern Motor to reduce the credit line, First American continued to allow Southern Motor to operate under the credit line when the line was as high as $400,000 and $500,000. Eventually, First American elected to close Southern Motor’s line of credit. Mr. Cheek testified that under normal procedures, First American would notify a customer about the closing of a line of credit in writing; however, Southern Motor was notified via telephone.
Defendant was in Oklahoma at the time First American closed Southern Motor’s line of credit. Defendant received two phone calls during this time regarding the financial state of Southern Motor. First, Defendant received a call from Mr. Ger-sten, a shareholder and secretary-treasurer of Southern Motor. Defendant testified that Mr. Gersten handled the day-to-day financial affairs of the corporation. Mr. Cheek stated that First American normally transacted business with Southern Motor through Mr. Gersten. Mr. Gersten informed Defendant of the action taken by First American and of the financial status of Southern Motor. Mr. Gersten also informed Defendant that he was resigning from the corporation effective immediately.
Defendant received a second phone call from Mr. Doug Howie, president and one-half owner of Plaintiff. Mr. Howie informed Defendant that six checks issued by Southern Motor to Plaintiff had been returned on April 20, 1984 marked insufficient funds. The checks were drawn on the Southern Motor account and bear the stamped signature of Mr. Gersten. The checks were issued on April 18 and 19 in exchange for six vans. The six vans were transferred by Southern Motor to Star Chrysler Plymouth in Tennessee.
On April 27, 1984, Defendant issued six checks to Plaintiff as replacements for the
On May 3, 1984, Plaintiff filed a civil action against Defendant. 5 In addition, Mr. Howie contacted the district attorney and caused a criminal warrant to be issued against Defendant. Defendant was arrested and held for several hours before being released on a $200,000 bond. Defendant was later indicted by a grand jury for issuing bad checks and for theft by taking. Issuing bad checks in the amount of $500 or more and theft by taking are felonies under Georgia law. 6
The civil action was settled by a consent judgment entered on October 25, 1984. In the judgment, Defendant agreed to pay Plaintiff $98,601.44 principal, $3480 interest, and $6900 attorney’s fees. Defendant further agreed that the consent judgment would be considered an agreement under section 524(c) of the Bankruptcy Code, 7 that he would not seek to discharge the judgment under any provision of the Bankruptcy Code, and that the judgment would not be dischargeable in bankruptcy. Defendant testified that he was aware of the contents of the consent judgment and that he was represented by counsel when he signed the consent judgment.
On October 24, 1984, Mr. Howie signed a waiver of prosecution of the criminal charges. An order dismissing the criminal charges was entered on October 25, 1984.
Mr. Alan Alexander, the attorney who represented Defendant in the civil and criminal actions, testified that the consent judgment and dismissal of the criminal charges were negotiated as part of a single plan. Mr. Alexander described the resolution of the two actions as a “package deal.” He testified that he did not participate in the drafting of the consent judgment and that he and Defendant had virtually no input regarding the contents of the judgment. Mr. Alexander stated that, although the district attorney was contacted and informed of the compromise being negotiated between the parties, the district attorney did not initiate the dismissal of the criminal charges.
CONCLUSIONS OF LAW
Plaintiff has conceded that this Court has exclusive jurisdiction regarding the dis-chargeability of a debt and, therefore, is not bound by the section of the judgment which states that the debt is nondischargeable in bankruptcy. Plaintiff contends, however, that a legally binding contract was created when Defendant agreed to forego his legal right to attempt to discharge the debt. Plaintiff requests that the Court enforce this contract. The Court will first examine the validity of this waiver agreement.
A contractual waiver of the dischargeability of a particular debt should be governed by the requirements of section 524(c) and (d)
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which control the validity of reaffirmation agreements.
Kingsman v. Levinson (In re Levinson),
(c) An agreement between a holder of a claim and the debtor, the consideration for which, in whole or in part, is based on a debt that is dischargeable in a case under this title is enforceable ... only if—
(2) such agreement contains a clear and conspicuous statement which advises the debtor that the agreement may be rescinded at any time prior to discharge or within sixty days after such agreement is filed with the court
The Court has determined that
Plaintiff contends that the debt underlying the consent judgment was a debt incurred by Defendant for property obtained by false pretenses, false representations, or actual fraud and thus the debt is nondis-chargeable under section 523(a)(2)(A). Section 523(a)(2)(A) provides:
(a) A discharge under section 727, 1141[,] 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt—
(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by—
(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition;
Under the general rule, all debts are dischargeable in bankruptcy unless specifically excepted by the provisions of the Bankruptcy Code.
In re Levinson,
“In order to preclude the discharge of a particular debt because of a debtor’s false representation, a creditor must prove that: the debtor made a false representation with the purpose and intention of deceiving the creditor; the creditor relied on such representation; his reliance was reasonably founded; and the creditor sustained a loss as a result of the representation. The debtor must be guilty of positive fraud, or fraud in fact, involving moral turpitude or intentional wrong, and not implied fraud, or fraud in law, which may exist without
In
In re
Halpern,
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the Eleventh Circuit Court of Appeals affirmed the ruling of .the district court and the bankruptcy court when it concluded that the bankruptcy court had properly utilized issue preclusion to reach conclusions regarding the facts underlying a determination of the dischargeability of a debt evidenced by a state court consent judgment. The consent judgment in
In re Halpern
stated that the consent judgment would constitute a final adjudication of the findings of fact. The consent judgment also stated that the judgment would collaterally estop the debtor from denying any of the factual or legal issues established in the judgment and that the debtor received consideration for agreeing to allow the judgment to act as a final adjudication.
The consent judgment presently before the Court does not contain any findings of fact, nor does the consent judgment provide that it is to have any collateral estop-pel effect. The present adversary proceeding is, therefore, distinguishable from In re Halpern. Thus, the Court must make independent findings regarding the factual basis underlying the initial incurring of the debt evidenced by the consent judgment.
The second set of checks issued by Defendant was a replacement for the first set of checks that had been dishonored for insufficient funds. No new debt or obligation was incurred by the issuance of the second set of checks. The second set of checks represents an attempt to pay a previously existing obligation.
See Tate v. Tabers (In re Tabers),
Courts are divided on the question of whether the issuance of a check that is ultimately dishonored for insufficient funds is a false representation.
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This Court need not address this issue in the present adversary proceeding, however, since Plaintiff has failed to prove by clear and convincing evidence that Defendant had the
At the time the first set of checks was issued, Southern Motor was operating on an overextended line of credit. Southern Motor continued to issue checks on its account, even though it knew or should have known that the checks were not supported by sufficient funds. Southern Motor had operated in this manner for several months. First American, although increasingly concerned with the condition of the credit line, continued to allow Southern Motor to operate above its credit limit in a manner similar to overdraft protection. The Court concludes that neither Defendant nor Southern Motor was acting with an intent to deceive creditors. When it issued the first set of checks, Southern Motor was simply relying on its established banking practice with First American. This reliance negates a finding that the checks were issued with an intent to deceive.
See Western Petroleum Co. v. Burgstaler (In re Burgstaler),
Since there was no intent to deceive when the first set of checks was issued, there was no actionable fraud or misrepresentation when the debt was incurred. As noted earlier in this opinion, any subsequent misrepresentations are irrelevant. Thus, the Court concludes that Plaintiff’s claim is not nondischargeable under
Subsection (a)(2)(B) provides that a debtor may not discharge a debt for property received by:
(B) 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 published with intent to deceive;
In
Williams v. United States,
the United States Supreme Court found that a check was not a statement of financial condition.
Williams v. United States,
Although petitioner deposited several checks that were not supported by sufficient funds, that course of conduct did not involve the making of a “false statement,” for a simple reason: technically speaking, a check is not a factual assertion at all, and therefore cannot be characterized as “true” or “false.” Petitioner’s bank checks served only to direct the drawee banks to pay the face amounts to the bearer, while committing petitioner to make good the obligations if the banks dishonored the drafts. Each check did not, in terms, make any representation as to the state of petitioner’s bank balance. As defined in the Uniform Commercial Code, a check is simply “a draft drawn on a bank and payable on demand,” § 3-104(2)(b), which “contain[s] an unconditional promise or order to pay a sum certain in money,” § 3-104(l)(b).
Although the decision in
Williams
concerned the interpretation of a criminal
In Count II of its complaint, Plaintiff requests that Defendant be denied a discharge under section 727(a)(2), (3), and (5). Section 727 provides in pertinent part:
(a) The court shall grant the debtor a discharge, unless—
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(2) the debtor, with intent to hinder, delay, or defraud a creditor or an officer of the estate charged with custody of property under this title, has transferred, removed, destroyed, mutilated, or concealed, or has permitted to be transferred, removed, destroyed, mutilated, or concealed—
(A) property of the debtor, within one year before the date of the filing of the petition; or
(B) property of the estate, after the date of the filing of the petition;
(3) the debtor has concealed, destroyed, mutilated, falsified, or failed to keep or preserve any recorded information, including books, documents, records, and papers, from which the debtor’s financial condition or business transactions might be ascertained, unless such act or failure to act was justified under all of the circumstances of the case;
(5) the debtor has failed to explain satisfactorily, before determination of denial of discharge under this paragraph, any loss of assets or deficiency of assets to meet the debtor’s liabilities;
Plaintiff failed to address its
Similarly, the Court can find no evidence to sustain a denial of discharge under
In his counterclaim, Defendant seeks an award of costs and attorney’s fees under
Notes
.
See
.
See
.
.
. In the civil action, Plaintiff sought 1100,000 in actual damages and $500,000 in exemplary damages.
.
See
. In his answer to Plaintiffs complaint, Defendant rescinded the section in the consent agreement that states that the agreement shall constitute an agreement under
.
. The Supreme Court in Moyses was referring to the purpose behind the Bankruptcy Act. This purpose was incorporated in the fresh start provisions of the Bankruptcy Code.
.
Halpern
v.
First Georgia Bank (In re Halpern),
.
See Western Petroleum Co. v. Burgstaler (In re Burgstaler),
.
.
. Since the Court has determined that the debt underlying the transaction is a dischargeable debt, the Court need not address the issue of whether Defendant is liable in his individual bankruptcy for the debt of Southern Motor. The Court notes that the Eleventh Circuit Court of Appeals has ruled that a corporate debt may be nondischargeable in the individual bankruptcy of a corporate officer.
See Ford Motor Credit Co. v. Owens,
.
See