SLK Capital, LLC v. BeachSLK Capital, LLC v. Beach
DECISION AND ORDER FOR JUDGMENT
The plaintiff, SLK Capital, LLC (“SLK“), seeks a determination that debtor-defendants Brian Beach and Theresa A. Winger-Beach both owe it a debt based on a loan default by Mr. Beach and his business, Beach‘s Steaks &1 Spirits LLC, and that the debt should be excepted from discharge pursuant to
Jurisdiction
The Court has jurisdiction under
Factual Findings
In April 2015, Brian Beach purchased a property located at 10139 Highway 8, Crandon, WI 54520 for $125,000.00, a mixed-use property that later became a restaurant and the debtors’ homestead. ECF No. 65-13, at 6, 12-13. Mr. Beach funded the purchase with money from his mother, Mary Lou Reimer, and her husband, Louis Reimer. Shortly after the purchase, Mr. Beach and the business he owns, Beach‘s Steak & Spirits, LLC, applied for and obtained a series of loans from the plaintiff SLK. There is no evidence debtor had a prior relationship with SLK.
During the process of applying for financing and consolidated financing in 2015 and 2016, Brian Beach and Theresa Winger told SLK that they would have the accountant for the business, Wayne Link, provide certain financial information to SLK. That information included a document titled Beach‘s Steak & Spirits Source & Use of Funds (undated), and Beach‘s Steaks & Spirits LLC Balance Sheet, dated November 30, 2015. ECF No. 65-2, at 20, 21 (also marked as part of trial exhibit 2). The debtors also provided SLK with a business plan, ECF No. 65-2, at 7-12, industry analysis, 65-2, at 6-14, detailed need for the funds, 65-2, at 15-17, and financial
As part of the loan application process, Brian Beach described the backgrounds of key persons to work for the restaurant. He described his brother, Michael Roeper, as someone who had been employed in the food and beverage industry for almost 35 years, as a chef, executive chef, food and beverage director and general manager. ECF No. 65-2, at 3. Mr. Beach described his own background:
Brian Beach started his restaurant experience at the age of thirteen (13), washing dishes at a local restaurant. Following in his brother Mikes footsteps, Brian worked his way up the ranks to Night Chef at the age of sixteen (16) with the Holiday Inn franchise. Knowing the restaurant business was in his blood, he worked the next thirty (30Chef, Kitchen Manager. Mr. Beach has worked at the Hartford Country Club, West Bend Country Club, Devil‘s Head Ski Resort and the Five Star rated, Fox & Hounds in Germantown WI. Some of Mr. Beach‘s achievements include feeding twelve hundred (1200), at the Wisconsin AA Convention and Pig Roast, and cooking a Cancer Benefit for one thousand five hundred (1500) at the Hartford Country Club. Brian also has extensive Bartending training, working at Wisconsin‘s largest indoor bar, The Mine Shaft in Hartford, Wisconsin. Mr. Beach‘s strengths are his ability to handle stressful situations, teaching and mentoring to those who also take pride in their job, his delicious preparations of a wide variety of food the many people who have followed him through his career as a remarkable Chef.
ECF No. 65-2, at 4.3 The loan application also described the joint debtor‘s background:
Theresa Winger, Brian‘s finance had a restaurant/banquet facility in Minocqua for three (3) years. Theresa managed the entire staff and establishment which seated 500 guests. Even though “Beach‘s Steaks & Spirits” is somewhat smaller, the same managerial skills are needed. With her ability to manage and teach professionalism along with proper etiquette, Theresa will be a great fit to “Beach‘s Steaks & Spirits.”
ECF No. 65-2, at 5.4
To secure payment on each loan, Mr. Beach executed Unlimited and Continuing Guaranties of Payment, dated June 11, 2015, August 19, 2015, and December 21, 2015. ECF No. 61, at 1-2, ECF Nos. 65-3, at 12, 65-6, at 1, 65-8, at 7. SLK made the first loan to “Beach‘s Steaks & Sprits, LLC” (sic) on June 11, 2015, in the amount of $35,000. ECF No. 65-3, at 5. Mr. Beach signed that promissory note as Owner. SLK made a second loan to the business on August 19, 2015, for $25,000, ECF No. 65-5, at 5. Mr. Beach also signed that promissory note as Owner. SLK made its third loan to the business on December 21, 2015, for $20,000, with Mr. Beach signing the promissory note as Owner. ECF No. 65-8, at 5. On June 23, 2016, the SLK loans
The consolidated note states the loan would be in default upon the occurrence of one of the following events: (1) failure to make a timely monthly payment within three days of the applicable due date; (2) default in performance of any obligation or the breach of any of the representations, warranties, or covenants and failure to cure them within ten days; (3) insolvency of the borrower; (4) executing a general assignment for the benefit of creditors; (5) filing of a petition for bankruptcy, or seeking relief under any laws related thereto; (6) suspension of the operation of the business; or (7) default under the Security Agreement. ECF No. 65-9, at 2. The accompanying guaranty required Brian Beach to refrain from encumbering the restaurant‘s assets without SLK‘s consent. ECF No. 65-10, at 2.
In addition, each of the SLK loan documents signed by Brian Beach contain the following clause:
Borrower represents and warrants to Holder that: . . . h) all of the financial statements, contracts and other written information which Borrower furnished to Holder prior to the date of the Note are accurate and complete in all material respects and fairly present in all material respects the financial condition and the results of operations of Borrower for the periods covered thereby and and as of the relevant dates thereof; and . . . Borrower does not have any knowledge of any material liability of any nature not disclosed in writing to Holder.
ECF Nos. 65-5, at 3, 65-8, at 3, 65-9, at 3. Theresa Winger did not sign any of the SLK loan documents. The $90,000 consolidated note to SLK matured on June 5, 2017. ECF No. 65-9, at 1.
Several weeks later, on June 27, 2017, Brian Beach executed a $160,000 mortgage in favor of his mother and stepfather securing the business property. The mortgage was recorded with the Forest County Register of Deeds. The “Attachment to Mortgage Deed” reads:
This property was purchased by Brian E. Beach for $125,000. The purchase is set forth in a deed recorded April 7, 2015 as document number 216732. In addition to buying the real estate, Brian E. Beach also obtained $35,000 in startup money. This payment of $160,000 was made without obtaining a security interest in the real estate. The purpose of this mortgage is to provide a security interest in the real estate.
This property cannot be sold without paying this mortgage in full. Should Brian E. Beach become the subject of a bankruptcy proceeding, or otherwise insolvent, the mortgagee has the right to demand payment of the mortgage in full.
This mortgage must be paid in full when the mortgagee passes away.
The real estate description is set forth in the attached deed recorded April 7, 2015 as document number 216732.
ECF No. 65-13, at 11. Theresa Winger and Brian Beach married not long after, on July 15, 2017.
Mr. Beach‘s trial testimony was somewhat inconsistent as to whether the funds he accepted from the Reimers were a gift or a loan. On adverse examination he first responded affirmatively when asked whether he had borrowed the $160,000. He agreed that the Balance Sheet in Exhibit 2, ECF No. 65-2, at 21, did not mention that he had borrowed funds. He responded affirmatively when asked whether Exhibit 2, ECF No. 65-2, at 20, the Source and Use of Funds document, likewise did not mention that he had borrowed from the Reimers.
But as adverse questioning continued, Mr. Beach denied that the money from the Reimers was a “private loan,” stating that his mother had given the money to him, not loaned it. When SLK counsel asked about Brian‘s earlier § 341 testimony which referenced a loan, he replied “I don‘t know how loan got in there.” Brian continued, “it wasn‘t discussed as a loan, she just gave it to me.” Later, when SLK‘s counsel asked, “at no time did you correct the misstatement?” Mr. Beach replied, “there was no loan, but true.” ECF No. 72. The adverse exam continued:
Q. To start the business you borrowed $160,000 from your mother Mary Reimer is that right?
A. She gave it to me, yes. . . .
Q. You used the extra money from your mother beyond the $125,000 to pay for property and other business expenses, right?
A. Right, yes.
. . .
Q. After you borrowed the $160,000 from your mother and you purchased the property in April 2015 you promptly sought additional sources of funding, true?
A. True
. . .
ECF No. 72. It is not clear from the above testimony if Mr. Beach is saying “true, I promptly sought additional sources of funding” or if he is affirming the other part of the question “after you borrowed the $160,000 from your mother,” despite his characterization of it as a “gift” just two answers earlier.
SLK‘s counsel continued with questions about Theresa Winger‘s assistance in preparing documents for Beach‘s loan application to SLK:
Q. You were not married to Theresa at the time, your intention was for her to play a major role in the business...true?
A. True.
. . .
Q. Although you‘re the owner of the real estate in title she‘s always helped run the business generally with you as your equal, right?
A. No, I wouldn‘t say that, I pretty much ran the show.
Q. . . . [referring to Exhibit 1, an email from Brian Beach to Chuck Brys April 20, 2015] Theresa wrote the email?
A. Yes she has computer knowledge I don‘t.
Q. She was doing this with your authorization? . . . helping you and Theresa prepare financial statements to apply for additional financing with the lender? Additional emails follow, most with the signature of Theresa, she‘s working with SLK in August 2015 regarding financing?
A. I believe so, yes.
Q. Theresa is sending (this information) to Joey (Hansen) with your authorization on behalf of the business? Q. Yes it was all on me.
. . .
Q. (In this exhibit) Joey Hansen is writing to Wayne Link . . .(says) Wayne Link is sending some information that had been requested, right?
A. I don‘t follow. Now I (see it).
Q. Theresa continues an email discussion with Joey Hansen of SLK regarding questions SLK had about what you did with the initial $35,000 SLK had lent earlier that year, right?
A. I believe so, but I‘m not seeing it.
Q. Does this refresh your recollection that Theresa was working with Brys and Mr. Link to prepare financial documents to send to lenders including SLK?
A. Theresa was authorized on my call.
Q. She primarily dealt with SLK?
A. She has computer knowledge.
Q. She did the primary and direct discussions with SLK as well?
A. Right.
Q. You had essentially no recollection of direct communications with SLK?
A. I talked to SLK a few times.
Q. When documents had to be signed for SLK, you would go over them with Theresa, (and) she would get you to sign and send in to SLK?
A. Right.
Q. She always had responsibility to record financial information, right?
A. And (she) gives (the information) to accountant.
Q. And Theresa has always had general management authority with the business including ability to sign contracts for you from time to time, right?
A. On my approval, yes.
ECF No. 72. Then SLK counsel asked Mr. Beach whether he thought SLK would rely on the documents he authorized to be part of his loan application:
Q. You expected that SLK would rely upon the truth of the documents that you provided as reflected on Exhibit 2, true?
A. True.
Q. You knew if you revealed at the time that you had in fact borrowed all the money to purchase your business, that it would be a lot harder to convince any lender to loan you more money, true?
A. Ummm, I guess.
. . .
Q. In first page of Exhibit 2, middle of document says “Major price reduction allowed us to pay cash.” See that?
A. Uh huh, yes.
Q. There‘s no mention here you borrowed the money from your mother, true?
A. No not in this. No.
Q. Turn to last 5 pages of document Exhibit 1, see document Source and Use of Funds? See that document?
A. Yes.
Q. Listed at top is personal investment $160,000, true?
A. Yes, true.
Q. Private loan, nothing, true?
A. True.
Q. Seller financing, nothing, true?
A. True.
Q. Real estate loan nothing, true?
A. True.
. . .
Q. You see halfway down same page says “plus depreciation“?
A. No I don‘t. Ok.
Q. Nowhere on this document does it indicate you borrowed money from your mother, true? A. True.
Q. In fact, it says the opposite?
A. I don‘t know what you mean by the opposite.
. . . That‘s what it says here, but . . .
Q. That‘s false and inaccurate, right?
A. I wouldn‘t say that.
Q. They‘re materially inaccurate in that they deny the existence of any private loan, true?
A. No, I don‘t believe so.
Q. Where does it say you took out a private loan?
A. I didn‘t take out a private loan.
Q. What do you call what you did with your mother?
A. She gave it to me.
Q. It wasn‘t a loan?
A. It wasn‘t a loan. No.
. . .
Q. Do you recall testifying in this bankruptcy proceeding at a creditor‘s meeting?
A. Yes.
. . .
Q. And she (the Chapter 7 trustee) asked you when you had a loan with your mother and you answered when we purchased the restaurant?
A. But it was never a loan though.
Q. Did you sign a note in favor of your mother in 2015?
A. No, I never signed a note.
Q. But you testified you did?
A. I probably didn‘t understand.
Q. She then asked you how much you took out and you answered $160,000.
A. Well it was never discussed that it was a loan, she just gave it to me.
Q. Did you have a conversation with Theresa in 2015 about the money you got from your mother?
A. She knew about it, I don‘t know if I really understand the question.
Q. Did you tell Theresa you borrowed the money?
A. Yes.
Q. Even though you didn‘t borrow it you told her you did?
A. I don‘t remember that.
Q. Why would you do that if you didn‘t borrow it?
A. My mother gave me the money.
Q. So you wouldn‘t tell her you borrowed it?
A. No.
Q. She would have no reason to think the money was a loan not a gift?
A. She knew it was a gift all along.
ECF No. 72. Overall, Brian Beach‘s testimony is consistent that the money received from his mother was a gift, not a loan. Several times he has trouble understanding the questions, and he tried to correct what counsel told him his § 341 testimony was, concerning the use of the term “borrowed.”
SLK counsel then sought to impeach Mr. Beach‘s credibility at trial by offering evidence of prior convictions. See Fed. R. Evid. 609. Mr. Beach acknowledged that in 1997 he was convicted of burglary, in 2002 of resisting/obstructing, in 2006 of felon in possession of a firearm and of armed robbery, and in 2012 of battery domestic violence. Debtors’ counsel did not object to this questioning. Yet nothing in the record shows that SLK gave debtors advance notice of his intent to ask Mr. Beach about any convictions. More important to the Court‘s ability to weigh this evidence, SLK failed to supply the Court with judgments or other filings setting out the particular
Fed. R. Evid. 609, Impeachment by Evidence of a Criminal Conviction, provides:
(a) In General. The following rules apply to attaching a witness’ character for truthfulness by evidence of a criminal conviction:
(2) for any crime regardless of the punishment, the evidence must be admitted if the court can readily determine that establishing the elements of the crime required proving – or the witness’ admitting – a dishonest act or false statement.
(b) Limit on Using the Evidence After 10 Years. This subdivision (b) applies if more than 10 years have passed since the witness’ conviction or release from confinement for it, whichever is later. Evidence of the conviction is admissible only if:
(1) its probative value, supported by specific facts and circumstances, substantially outweighs its prejudicial effect; and
(2) the proponent gives an adverse party reasonable written notice of the intent to use it so that the party has a fair opportunity to contest its use.
Because debtors’ counsel did not object, the Court accepts this evidence despite SLK‘s failure to provide the Court with judgments or criminal complaints describing the elements underlying the convictions. Nonetheless, the Court is mindful that all of the convictions acknowledged by Mr. Beach are older than 10 years, and without more, are not crimes of dishonesty. This evidence therefore is entitled to little weight.6
Debtor‘s counsel then examined Mr. Beach:
Q. Other than the (wire) transfers is there any paperwork regarding this money (from the Reimers)?
A. No.
Q. So he transfers $160,000 to you to buy the restaurant?
A. Yes.
. . .
Q. Did you have to make monthly payments?
A. No.
. . .
Q. What did you plan on doing with the proceeds from the restaurant if you sold that property?
A. Pay her back.
Q. Why would you pay her back if you sold but not in any other situation?
A. It was just the right thing to do.
. . .
Q. Who was the person that wanted this mortgage (Exhibit 13) signed?
A. My brother Mike.
Q. Why did he want it, if you know?
A. I believe it was because I was getting married and he didn‘t approve of it.
Q. Why did you sign the mortgage?
A. I don‘t know why I did it, I was just asked by him to do it. I didn‘t at the time really understand what I was signing.
ECF No. 72. Counsel also asked why Mr. Beach bought the restaurant property in 2015. He responded that he wanted to be in business for himself, for a change.
Theresa acknowledged that she assisted Brian in obtaining financing from SLK. Then SLK counsel asked about her understanding of communications between Brian Beach and the Reimers about the nature of the funds he received from them:
Q. You always understood the $160,000 received from Brian‘s mother was a loan?
A. No.
. . .
Q. Turning to p. 26, 1. 19 (of Theresa‘s May 24, 2022 deposition transcript, ECF No. 69) – “Q. As I‘ve understood it, he always had a loan from his mom?
A. Yes.
Q. You knew that from the time he got the loan?
A. Yes.”
Q. But today you deny it?
A. I believe that day I also told you that you were using the word loan and it was not a loan when he got the money from his mother. He told me he got it, he did not say it was a loan. You were referring to it as a loan, sir.
Q. Well, that‘s not what you said at that time in your testimony is it?
A. This particular question, no. But if you went further into this you‘ll probably see what your court reporter recorded. How my answer was before I left that day.
. . .
Q. Do you recall that you acknowledged that they (financial documents supplied to SLK) were misleading because they did not show a loan?
A. Yes, because it was not a loan.
Q. Why would they be misleading if it was not a loan? . . . Go to p. 42, 1. 1 (of deposition, ECF No. 69) . . . You were asked, “Q. So it was a private loan that he obtained for $160,000 from Mary and Lou Reimer to purchase the real estate, right? A. I guess. Q. So it‘s wrong what this document says when it says there was no private loan used to obtain the $160,000? A. I assume.”
. . .
Q. (referring to p. 43, line. 3 of ECF No. 69): “So this document, the way it‘s characterized with the $160,000 is inaccurate, true?
A. Apparently yes.
Q. And so whoever made this misrepresented those facts with regard to where those funds came from, true? A. I guess.”
ECF No. 72.
Debtors offered additional portions of Theresa‘s deposition questioning by SLK counsel as clarification7—pp. 53, 1. 24 – 56, 1. 9 of ECF No. 69—including:
“Q. Okay. And earlier you testified that you wouldn‘t have even, at one point you said that you always knew it was a loan and now you‘re saying that you don‘t know if it was a loan or a gift? A. Well, the word loan is not, we were not looking, I was not being told it was a loan. I was being told that he was getting money from his mother and his stepfather, or his yeah, stepfather. The word loan was never used with Brian and my speaking.
Q. Well, Exhibit 2 shouldn‘t have said owner‘s contribution, it should have said either loan or contribution by owner‘s parents?
A. But –
Q. To be accurate?
A. But wouldn‘t it, yes.
Q. But it doesn‘t say that, right?
A. No.
Q. It represents that Brian Beach had the money without taking a loan because he contributed it as the owner, true?
A. True.
Q. And that‘s false, it‘s not what happened.
A. He got the money from his mother and his stepfather.
Q. So would you agree that this misrepresents the financial situation that led to the SLK loan that you were requesting in December of 2015 as shown on exhibit 4?
A. I don‘t think that anyone was misrepresenting anything.
Q. Well, you‘ve already acknowledged Exhibit 2 misrepresented the circumstances of that contribution.
A. Because of the word loan that you‘re saying it needed to be up here where, where was that? I guess.
Q. What are you saying you guess? Now you see how this would be misleading to somebody?
A. I can see how it would be misleading, yes.
Q. You can understand why a lender putting $20,000 out there for your business would want to know if the owner had made a contribution of his own assets or had in fact borrowed the money so owed that to someone else?
A. Yes, but Brian did put his own money into it.
Q. How much?
A. You would have to ask Brian, I don‘t remember.
Q. Certainly it wasn‘t –
A. I don‘t know that Brian would remember.”
ECF No. 69.
The Court finds Theresa Beach‘s trial testimony was somewhat discredited via her prior inconsistent statement.8 But the Court gives her earlier statement little persuasive weight, in part because it does not identify how she came to have personal knowledge, or “always understood” that Brian had a loan from his mother in the
SLK counsel also asked Theresa about her interaction with Ms. Hansen at SLK:
Q. You were also asked whether Joey Hansen at SLK, who was the person you were talking to about financing, true?
A. Yes.
Q. You never told her there was a loan, true?
A. No.
Q. And you acknowledge there was no way Joey Hansen or anyone at SLK would have known of the existence of this loan, true?
A. No, and again it was not a loan.
ECF No. 72.
When Ms. Hansen of SLK testified, she acknowledged that it was important to SLK that Mr. Beach had invested $160,000 in his business, noting that especially with small businesses SLK likes to see that the owners have some “skin in the game” and some personal investment. She estimated that SLK probably would not have loaned money to Beach and his business in the first instance, or over the course of a year, if SLK had known that Beach borrowed $160,000 from the Reimers. She went on to explain that SLK didn‘t take a real estate mortgage on the restaurant property because the short term note and personal guaranty included a prohibition against Beach encumbering the property without first consulting SLK. In addition, her UCC check confirmed there were no first position liens or mortgages on file. Given the small amount SLK was lending, the SLK principals did not feel a mortgage was necessary. Ms. Hansen also testified that even after the default date of June 5, 2017, SLK was willing to work with the borrowers, Brian Beach and his business. ECF No. 72.
Ultimately, Brian Beach and his restaurant business defaulted on the SLK loans. ECF No. 65-9, at 2. Several years later SLK filed a replevin action against Mr. Beach and Beach‘s Steak and Spirits, LLC in Forest County Circuit Court, obtaining a stipulated judgment against both defendants. Case No. 2020CV00050. See ECF No. 43, Answer to Amended Complaint. Neither SLK nor Mr. Beach have supplied the Court with a copy of the state court complaint or the order for judgment, so the record lacks information as to the specific claim or claims alleged, the bases for the parties’ stipulated judgment, and, if applicable, any allocation of the judgment amount between claims. Nonetheless, in the parties’ joint pretrial report to this Court, Mr. Beach agreed that he stipulated to the entry of judgment against him and his business, jointly and severally, in the amount of $220,948.18, and neither in his answer to the amended complaint or elsewhere does he argue that a portion of that debt is not subject to the
On June 10, 2021, Mr. and Mrs. Beach filed a joint petition for relief under Chapter
Conclusions of Law
I. SLK Bears the Burden of Proof.
Plaintiff SLK contends that the stipulated judgment amount owed by Brian Beach and his business is not dischargeable under
II. Requirements to Establish Nondischargeability under § 523(a)(2)(B).
Section 523(a)(2) of the Bankruptcy Code provides that
[a] discharge under section 727 ... 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 –
. . .
(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.
Accordingly, bankruptcy courts first determine, pursuant to
A. Does Either Debtor Owe SLK a Debt?
SLK filed its amended complaint against both Brian Beach and Theresa Winger Beach. The Court considers separately whether either debtor owes a debt to SLK. SLK‘s amended complaint alleged Theresa Winger Beach is jointly liable for a debt because, SLK contends, she had an ownership interest in the restaurant at the
Whether Theresa is liable for a debt that could be deemed nondischargeable under
As to whether Brian Beach owes SLK a debt of the type described in
The Court next addresses the elements of
B. Statement in Writing.
The first element of
C. Statement Respecting Debtor‘s or an Insider‘s Financial Condition.
Next, the Court must discern whether the statements are respecting the debtor‘s or an insider‘s financial condition. A statement is “respecting a debtor‘s financial condition” if “it has a direct relation to or impact on the debtor‘s overall financial status.” Lamar, Archer & Cofrin, LLP v. Appling, 138 S. Ct. 1752, 1761, 201 L.Ed.2d 102 (2018) (explaining that a statement about a single asset bears on a debtor‘s overall financial condition and can help indicate whether a debtor is able to repay a given debt.). An “insider” is defined as a “corporation of which the debtor is a director, officer or person in control”
Here, the two statements which are the focus of SLK‘s claim are not statements respecting Brian Beach‘s financial condition but are statements “respecting . . . an insider‘s financial condition.” In other words, the Source of Funds and the Balance Sheet in Exhibit 2 reflect the condition of Beach‘s Steak & Spirits, LLC, of which there is no dispute Brian Beach is a director, officer or person in control. As such, the LLC meets the Code‘s definition of “insider.” Akin to the statement in Appling, the entries on the Source of Funds and the Balance Sheet categorizing the $160,000 as paid-in capital/equity, and not as a personal loan, are facts that have a direct relation to or impact on the LLC‘s overall financial and solvency status. The entries on both documents, as endorsed by Brian Beach when he signed the promissory notes, thus are statements respecting a debtor‘s or an insider‘s financial condition, under
D. Creditor‘s Reasonable Reliance.
The parties dispute whether SLK has established that the creditor reasonably relied on Brian‘s written statements, by a preponderance of the evidence.
“[T]he concept of reasonable reliance does not generally require creditors to conduct an investigation prior to entering into agreements with prospective debtors. . .” In re Morris, 223 F.3d at 554. But in some instances, a creditor‘s reliance may be unreasonable where there is reason to doubt the debtor‘s financial stability or there is no “attempt to ascertain [his/her] true financial condition . . .” Id. In making a determination of reasonableness, a court may consider, among other things, whether the parties had prior business dealings giving rise to a
SLK asserts its reliance on the representations Beach made in the loan documents was reasonable because its loan officer, Ms. Hansen, viewed the inclusion of a $160,000 capital investment to mean (Beach and his business) had a personal stake in the success of the business. She also adequately explained that a mortgage in SLK‘s favor was unnecessary because, under the loan documents, SLK retained a primary position on the restaurant‘s real estate.
The debtors argue that SLK‘s reliance on the loan documents, without more, was not reasonable. They critique SLK for not inquiring as to the source of the $160,000 equity interest listed on the financial statements. They also argue that SLK should have sought certain other financial records from Mr. Beach, such as his bank statements or tax returns. ECF No. 73. Counsel for the Beaches also argued SLK has not shown the restaurant is insolvent, but insolvency is not an element under
The Court credits Ms. Hansen‘s testimony on reliance. She deemed a mortgage to SLK unnecessary because the notes forbade Mr. Beach from encumbering the property without SLK‘s permission, a requirement debtors fail to acknowledge. Ms. Hansen also testified that Mr. Beach‘s payments on the SLK loans strengthened their relationship and induced SLK into lending him more money and eventually consolidating the notes. She testified that SLK “probably” would not have extended financing if it knew Beach and his business had a prior loan for $160,000. Overall, the Court finds SLK reasonably relied on the written representations regarding the financial condition of Brian Beach‘s business. Ms. Hansen‘s review of these documents and independent verification of the absence of liens via a UCC search is an investigation that meets the Seventh Circuit‘s standard for satisfying
E. Material Falsity.
A primary point of contention between the parties is whether the written statements are materially false because they did not disclose any personal loan and characterized the $160,000 as Brian‘s investment of capital into the business. Material falsity has been defined as an “important or substantial untruth.” Hopewell v. Stephens (In re Stephens), No. 20-03706-JMC-7, 2021 WL 4465602, at *3 (Bankr. S.D. Ind. 2021) (citations omitted). In other words, a statement is materially false for purposes of
Some courts have tried to distinguish between loans and gifts by considering whether there were any “hallmarks of a loan” attendant to the funds. In Weber v. Giarratano (In re Giarratano), 299 B.R. 328, 334-45 (Bankr. D. Del. 2003), the court considered whether payments from a creditor to his girlfriend-employee were personal loans or gifts. The court looked to whether there was a deadline for repayment, a repayment schedule, or an interest rate attached to the funds, and whether there was a written agreement evidencing a loan. More recently, in Organic Power LLC v. Small Business Administration (In re Organic Power, LLC), 619 B.R. 540, 547-48 (Bankr. D.P.R. 2020), the court considered whether the Paycheck Protection Program should be treated as a loan or a grant program when there was no requirement of creditworthiness and repayment was not a significant aspect of the program. There, the SBA also urged the court to weigh certain hallmarks of a loan: presence of a promissory note, applicable interest rate, a maturity date, amortization terms, and an obligation to repay unless forgiven. Id.
Also critical for weighing the truth or falsity of the written statements under
To address falsity, SLK does not discuss whether there were repayment terms between Brian Beach and his parents, but instead focuses on portions of the debtors’ testimony. SLK urges that it was false to characterize the $160,000 in the Source of Funds and Balance Sheet as paid-in capital/equity, and highlights instances where both Brian and Theresa have answered affirmatively counsel‘s questions using the term “loan” or “borrowed.”
Conversely, the debtors point to other portions of their testimony. Mr. Beach testified, “She (his mother) gave it to me,” and that Theresa Beach “knew it was a gift.” He concedes he may have testified at his July 2021 meeting of creditors that the money was loaned, but states he “probably didn‘t understand the question.”13 Mr. Beach points out that he had not undertaken any repayment of the $160,000, and there was no written agreement requiring him to do so. He never signed a promissory note in favor of the Reimers. Beach testified, nonetheless, that it would “be the right thing to do” for him to repay the Reimers in the event he sold the restaurant.
Considering all the relevant evidence and in light of the principle that courts construe exceptions to discharge strictly,
i. Unsupported or waived arguments.
Several other arguments raised in the closing argument do not alter the Court‘s conclusion on the element of material falsity. Debtors’ counsel argues that “[o]nce the loan matured June 5, 2017 there could be no continuing agreement not to mortgage the property as of June 27, 2017,” ECF No. 73, at 2, but misses the point. Even if the Court‘s inquiry was not focused on when the allegedly false statements were made, Ms. Hansen‘s undisputed testimony was that she and SLK were willing to work with Brian Beach and his business after the maturity date. Her testimony supports the view that Beach‘s duties under the consolidated note and guaranty continued beyond the maturity date. Debtors offer no legal authority to the contrary.
Debtors’ counsel‘s bare cite to Edlin v. Soderstrom, 83 Wis. 2d 58 (1978), see ECF No. 73, at 2, to characterize the Reimers’ conveyance of funds to Brian as including a “right of first refusal” is undeveloped, and unsupported by debtor‘s testimony or legal authority. See M.G. Skinner & Assocs. Ins. Agency, Inc. v. Norman-Spencer Agency, Inc., 845 F.3d 313, 321 (7th Cir. 2017) (citing United States v. Hook, 471 F.3d 766, 775 (7th Cir. 2006) (“Perfunctory and undeveloped arguments are waived, as are arguments unsupported by legal authority.“)). Counsel‘s right-of-first-refusal argument appears to rely only on the 2017 mortgage between Brian and the Reimers and fails to acknowledge the lack of documentary or testimonial evidence supporting such a characterization in 2015 when debtor submitted the Source of Funds and Balance Sheet to SLK. Even so, Edlin and its progeny address an opportunity to buy, not a claim on potential sale proceeds. “A right of first refusal is a contractual right to be first in line should the opportunity to purchase or lease a property arise.” Country Visions Cooperative v. Archer-Daniels Midland Co., 2021 WI 35, ¶ 22, 396 Wis. 2d 470, 958 N.W.2d 511 (citations omitted). There is no evidence whatsoever that the Reimers wanted the opportunity to buy the restaurant property. For these reasons, debtors have waived this argument.
Likewise, neither party argued that the money from Beach‘s mother was a contingent liability at the time she gave him the funds, and without deciding, it appears no testimony or documentary evidence would support such a conclusion. “A debt is contingent if either its existence or amount depends on some future event that may or may not occur.” Freeland v. Enodis Corp., 540 F.3d 721, 730 (7th Cir. 2008) (citing In re Knight, 55 F.3d 231, 236 (7th Cir. 1995)).14 Cases addressing a failure to
In sum, SLK has failed to establish by a preponderance of the evidence that the written statements were materially false.
F. Intent to Deceive.
The parties also dispute whether SLK has proven the final element under
SLK argues that debtor had a motive to describe the funds from his mother as a gift or cash, and not as a loan, when applying to SLK for a loan. This portrayal, according to SLK, allowed him to state he purchased the restaurant real estate for cash and had no personal loans. SLK also contends that execution of the 2017 mortgage confirmed that the money wired from the Reimers to Brian Beach in 2015 was a loan all along. ECF No. 70, at 2-3. SLK urges that Mr. Beach admitted he never corrected any misstatements to SLK during the time he obtained multiple loans from that creditor, and by agreeing he never corrected any misstatements it means that there were misstatements. Id. at 4. In closing argument SLK cites a colloquy from Exhibit 11, an unofficial transcript of testimony Brian Beach gave
The debtors respond that there was no intent to deceive, and that Mr. Beach didn‘t know “SLK required Mr. Beach to have earned the $160,000 himself.” Counsel asserts there was “no pattern of purposeful conduct” and that “on this record SLK cannot prove debtor knew or should have known he had to disclose the source of the $160,000.” ECF No. 73, at 3-4. Beach‘s counsel also argues that the 2017 mortgage to the Reimers was not Brian Beach‘s idea, so he cannot have had fraudulent intent in 2015. Debtors’ counsel asserts that “Brian Beach signed the mortgage . . . because his mother wanted him to,” ECF No. 73, at 2, citing Exhibit 11, such that Brian could not have had an intent to deceive.
The parties’ arguments pass each other by. SLK does not contend that debtors should have “disclosed the source of the $160,000” but instead argues that the money always was a loan that should have been disclosed, and not a gift of cash to Brian which he invested in the business. To the extent both parties rely on various excerpts from Exhibit 11, the Court does not consider those prior statements because the underlying exhibit is not part of the record. See n. 13, supra.
The Court finds Mr. Beach‘s testimony credible overall. At trial, Mr. Beach repeatedly denied that when the Reimers wired the $160,000 to him it was a loan. As noted earlier, the lack of a written promissory note or some other documentation of repayment terms or interest rates supports Brian‘s view that the money was his to use. While a debtor‘s mere “unsupported assertions of honest intent will not overcome the natural inferences from admitted facts,” Stephens, 2021 WL 4465602, at *4 (citations omitted), the undisputed facts are that no hallmarks of a loan were present.
Mr. Beach‘s credibility is bolstered by other parts of the record. He later corrected his seeming acceptance of the word “borrowed” in one question SLK counsel posed to him. The record manifests that Mr. Beach is not a sophisticated debtor. His background, as described in Exhibit 2, ECF No. 65-2, at 4, is that he worked in restaurants from the time he was 16 years old onward, with no mention of whether he completed high school. He had never before owned a business. His answers to questions often demonstrated confusion. He admitted he didn‘t understand what he was signing in 2017 when he signed the mortgage in favor of the Reimers. Compare, e.g., Moody National Bank v. Shurley, No. 1:21-CV-1120-DAE, 2023 WL 2368023, at *6 (W.D. Tex. Feb. 1, 2023)(appeal pending) (affirming bankruptcy court‘s finding of no intent to deceive where debtors were unsophisticated, “having only one year of college between them” and held an honest if unreasonable belief that one loan would not conflict with loan from creditor-plaintiff); Northern Trust Co. v. Garman (In re Garman), 643 F.2d 1252, 1257 (7th Cir. 1980) (explaining that in determining debtor‘s knowledge or awareness of fraud, courts will scrutinize the acumen and experience of debtor.)
The variation in Mr. Beach‘s testimony does not rise to the level of reckless or willful confusion and contradiction as found in other cases. Compare, Buckeye Retirement Co. v. Hake (In re Hake), 367 B.R. 490, 508-511 (Bankr. N.D. Ohio 2008) (assessing false oath claim under
Conclusion
Even though the Court finds that the written representations to SLK were material and plaintiff‘s reliance on them was reasonable, the Court finds that debtor Brian Beach did not falsely represent $160,000 in funds given to him by his mother and stepfather as paid-in capital/equity and not a personal loan. In addition, the Court does not find Brian Beach intended, in 2015 and 2016, to deceive SLK into loaning him money, despite his thought that he might voluntarily repay those monies to his mother if he sold the restaurant. Accordingly, the Court ORDERS the debt owed by debtor Brian Beach to SLK Capital, LLC, totaling $220,948.18, is not excepted from discharge under