IN RE:  JOHN J. DUFRESNE CASE NO. 95-50855

UNITED STATES BANKRUPTCY COURT

EASTERN DISTRICT OF KENTUCKY

LEXINGTON

IN RE:

JOHN J. DUFRESNE CASE NO. 95-50855

d/b/a Advantage Computer Engineering

DEBTOR

FASTLINE PUBLICATIONS, INC. PLAINTIFF

VS. ADVERSARY NO. 95-5074

JOHN DUFRESNE

d/b/a Advantage Computer Engineering, and

JOHN DUFRESNE, Individually DEFENDANTS

MEMORANDUM OPINION

 

This matter is pending on the complaint of the plaintiff Fastline Publications, Inc. to determine the dischargeability of a debt owed to plaintiff by the defendant debtor, John Dufresne, d/b/a Advantage Computer Engineering (hereinafter "ACE"). The complaint is grounded on title 11 U.S.C. § 523(a)(2)(A), which excepts from discharge debts obtained by false pretenses and false representations.

Fastline Publications, Inc., which is located at Buckner, Oldham County, near Louisville, Kentucky, produces and publishes monthly 28 farm and trade industry magazines, as for example, trucking industry magazines. Because competitors were producing cleaner, slicker magazines, Fastline desired to upgrade its publications through the use of computer controlled desktop publishing equipment.

To this end the plaintiff sought bids for the installation of 14 work stations, printers, a scanner and accessories and software to enhance its publishing facilities. Representatives of the plaintiff were acquainted with the defendant, Dufresne, because his company, ACE, had the contract to maintain the computers the plaintiff was then using in its publication business. Mr. Dufresne’s business, ACE, was located in Lexington, Kentucky.

Four vendors made presentations as to the type of equipment they believed Fastline would need and which they could provide.

On November 10, 1993, Fastline entered into a contract with ACE pursuant to which ACE was to provide the parts and labor for the installation of the new publishing system. Plaintiff’s Exhibit No. 1. On November 11, 1993, Fastline made the 10% deposit called for by the contract. This is evidenced by a $15,000 check dated November 11, 1993 made payable to Advantage Computer Engineering, drawn on the account of Fastline Printing, Inc. Plaintiff’s Exhibit No. 2. The contract was signed on behalf of ACE by Jerry Davis, the ACE salesman who persuaded Fastline to enter into the contract. Approximately a week or so later, James Hughey, who signed the contract for Fastline, was persuaded by Jerry Davis to pay an additional $125,000, representing the balance due on the contract, less $10,000, which was being written off in exchange for the payment. This payment is evidenced by a check dated November 23, 1993 payable to Advanced Computer Engineering, drawn on the account of Farmers Fastline. Plaintiff’s Exhibit No. 3. According to the testimony of Hughey he made the additional payment upon representations of Davis that the monies would lock in the prices of equipment needed for the job. As an additional incentive for the payment, Davis promised ACE would provide two additional computers, one for Hughey and one for the president of Fastline, and would provide an additional week of free training valued at $6,000. Hughey was told by Davis the equipment would be installed and the job completed in February 1994.

In late January 1994 Valerie Gaines, Fastline’s production manager, started calling ACE. She spoke with Davis on one or two occasions while she was on maternity leave. Davis told her in February not to worry: the equipment would be in. No explanation was given for the delay in installing the equipment. She was led to believe that all of the equipment was available.

She understood the equipment would be up and running by the time her maternity leave ended and she returned to work in February 1994. The equipment was to be pre-installed at ACE so it would be operative when installed at Fastline. Nothing had been done by the time she returned from maternity leave in February 1994.

In March of 1994 Mr. Davis and Mr. Dufresne avoided Ms. Gaines’ calls. She was told Mr. Dufresne was in China.

On May 4, 1994 Mr. Hughey and Ms. Gaines met with Stuart Goldsborough, Jr., who testified that in 1993 he had started to work for ACE as chief financial officer. Prior thereto he was self-employed as a public accountant doing business as Goldstar Accounting Services. ACE was a client for which he had reconciled bank statements and prepared financial statements.

He testified the contract with Fastline had not been completed because ACE had a cash shortfall. ACE did not have an escrow account for the deposit of prepayments on contracts such as the payments Fastline had made. ACE was strapped for cash because several large customers had cancelled service contracts which were the main source of steady income for ACE.

Goldsborough had no experience with computers or knowledge of the hardware or software for which Fastline had paid. He was simply trying to put back together the deal with Fastline as well as contracts with other customers of ACE.

At the request of Mr. Hughey and Ms. Gaines, Goldsborough met with them at a restaurant in Louisville. Hughey and Gaines expressed their dissatisfaction with the misrepresentations of ACE concerning delivery and installation of the equipment Fastline had been promised. Goldsborough stated Dufresne wanted the deal put back together because there was more profit for ACE in phase II and phase III of the contract than in phase I that supposed to have been completed.

Goldsborough acknowledged he was an emissary of Dufresne. He agreed to pay Fastline interest at the rate of 5% per annum on the monies Fastline had prepaid to ACE and agreed to reimburse Fastline in the amount of $2,400 which Fastline had paid to a third party for training. He promised to have the computer installation completed by June 4, 1994. He claimed to be speaking with Dufresne’s authorization. These representations were intended to placate Fastline concerning the intention and ability of ACE to complete the contract. Goldsborough was of the view that Dufresne intended to continue in business. Hughey and Gaines indicated they would not be receptive of these proposals until ACE completed phase I of the contract.

Goldsborough worked for ACE about 10 months. He left ACE because he was not getting paid. His wage checks bounced. He was owed $10,000 to $12,000 in wages when he left ACE.

After the May 4, 1994 meeting of Mr. Hughey and Ms. Gaines with Mr. Goldsborough, Fastline did receive some equipment and software.

Firstline received only about half of the equipment that was to be provided by ACE. Some of the equipment was used equipment that had been previously utilized by ACE. For example, the hard drive of the file server which was provided contained data of Brian Dingee an ACE employee. ACE had not bothered to clean up the hard drive. Fastline received only five work stations, only three of which were in working order. ACE had copied software illegally. The software for each computer was supposed to be separately licensed. The wiring for networking the computers was sloppy.

Eventually, Fastline contracted with another vendor, Bluegrass Graphics, to complete the required work, which was by then a year behind schedule. Bluegrass Graphics did not ask for a prepayment and completed the work in about two weeks.

Richard Walker, an acquaintance of the debtor dating from a time when they had worked for the same employer, testified that one of his former employers, Graphic Systems Technology, on his input and recommendation, had prepaid to ACE $12,000 for equipment that was never delivered.

Jerald (Jerry) Davis, the salesman for ACE who concluded the contract with Fastline and persuaded Fastline to prepay for the equipment, testified he had been a car salesman and had no experience with computer equipment prior to joining ACE. He acknowledged he was assisted by Dufresne in the contract negotiations as the parties exchanged faxes in working out the details of the contract concerning equipment to be deleted from or added to the contract. Davis testified he merely sold equipment -- he did not track delivery of equipment after making a sale. He recalled being contacted by Ms. Gaines about the delay in delivery of the equipment. He asked Mr. Dufresne what the problem was. Dufresne told him they were having trouble getting the equipment but they would get things worked out. Davis further testified he worked on a commission basis. Mr. Dufresne told him his commission on the Fastline deal would be paid on monies received for the second phase of the contract. Davis was paid sporadically. Some of his pay checks bounced. ACE did not pay for his mobile telephone or make his car payments as promised. The debtor owes Davis back wages. Davis was on the brink of bankruptcy but could not file because he had filed bankruptcy previously.

The debtor, John J. Dufresne, did not attend the trial on September 29, 1997 on the complaint of Fastline Publications, Inc. to except from discharge the indebtedness owed to Fastline by Dufresne. The debtor’s attorney explained the debtor had attended a computer convention in Chicago, at which time a business opportunity arose which required him to make a quick trip to China. According to the debtor’s counsel the debtor had simply forgotten about the trial, and was in China.

Counsel for the plaintiff moved to admit into evidence the deposition of the debtor taken on June 4, 1996.

A debtor is under a duty to attend the hearing on a complaint objecting to discharge and testify, if called as a witness. Rule 4002(2), Federal Rules of Bankruptcy Procedure. However, this rule does not go so far as to impose on a debtor a duty to attend a hearing on a complaint to except a debt from discharge. Therefore, if a creditor desires to call the debtor to testify at a trial involving the issue of dischargeability of a debt, a subpoena must be served upon the debtor in order to ensure the debtor’s presence at trial. See Editors’ comment to Rule 4002.

In this instance the debtor was not served with a subpoena to ensure his appearance at the trial. There is no indication in the record that an effort was made to subpoena the debtor. However, it would appear that under Rule 32(a)(3)(B) and (E), as made applicable by Rule 7032 of the Federal Rules of Bankruptcy Procedure, the deposition of the debtor should be admitted in this instance.

The deposition is not particularly helpful in establishing the debtor’s knowledge and participation before the fact in the representations made by Jerold (Jerry) Davis, ACE’s salesman, to obtain the $15,000 deposit on the contract or the $125,000 prepayment for equipment and services to be provided under the contract. However, the evidence is sufficient to support a finding that the debtor ratified the representations of the salesman Jerry Davis. The court also finds that Davis’ representation, ratified by the debtor, that the $125,000 payment would "lock in" the price of the equipment needed to fulfill the contract was false. It was this representation on which Fastline reasonably relied in making the $125,000 payment. This payment exceeds the amount of indebtedness which Fastline seeks to have declared nondischargeable.

The debtor acknowledged that he and Taz Talley, and perhaps Jerry Davis, the salesman, were involved in the negotiations with Jim Hughey and Valerie Gaines involving the type of system and the hardware needed. They determined an initial price by adding 15% to 20% to the cost of the equipment, training, and one-year parts and labor and arrived at a price of $164,577.65. Sixty percent of the $164,577.65, or $98,746.53, was to be paid prior to shipment. See Exhibit No. 3 to Dufresne deposition. At this point Jerry Davis took over the negotiations and concluded the sale at the reduced price represented by the contract of November 10, 1993. The total cost of the contract was reduced to $150,000, the deposit was reduced from 60% to 10%. ACE was to provide service (parts and labor) for one year from the installation date. The parties were to split any rebates on purchases of the equipment. Plaintiff’s Exhibit No. 1. When Jerry Davis came back with the $15,000 check, the debtor and his financial advisor discussed the matter and agreed to the deal. Dufresne deposition, pages 38-40.

The debtor denied having any knowledge of what Jerry Davis actually may have told Mr. Hughey to induce him to make the $125,000 prepayment for the equipment. According to the debtor it was his understanding that Fastline benefited by further savings perhaps as much as $8,000 by paying up-front. Dufresne deposition, pages 44-47. The debtor was aware that Jerry Davis and Stuart Goldsborough were talking to Fastline about further savings for the up-front payment. Dufresne deposition, pages 103-109.

Some equipment, approximately $30,000 worth, was ordered by the debtor C.O.D. from Merisl Americas, Inc. in March and April 1994. See Exhibit No. 4 to debtor’s deposition. Some installation began apparently in May 1994.

The debtor took no part in installation of the equipment. Dufresne deposition, page 61. Installation of the equipment was well behind schedule and was not completed because the debtor’s business ran out of money. Witnesses for the plaintiff indicated the project was only 40 to 50% completed.

The complaint seeks to have indebtedness in the amount of $100,000 declared nondischargeable, representing the loss suffered by Fastline on the contract with ACE, the debtor’s business.

CONCLUSIONS OF LAW:

It will be noted the plaintiff is Fastline Publications, Inc. The checks paid to the debtor’s business ACE for equipment, installation and training are drawn on the accounts of other entities. The initial 10% deposit of $15,000 is drawn on the account of Fast Line Printing, Inc. This check is signed by James B. Hughey, who is vice-president of Fastline Publications, Inc. The subsequent payment of $125,000 is drawn on the account of Farmers Fastline and is signed by Bruce Callen. There was no testimony as to the interrelationship between these entities. However, in his answer the defendant admits receiving the payments in question from Fastline. The defendant debtor is bound by that admission.

There is no testimony as to representations made by the debtor Dufresne. The contract was negotiated by Jerald "Jerry" Davis, a salesman for ACE. He obtained the down payment of $15,000 and the subsequent payment of $125,000 by the representations which he made at least to some extent with Mr. Dufresne’s blessing. The evidence is sufficient for the court to find, and the court does find, that the debtor, by accepting the payments from Fastline, ratified the misrepresentations made by Davis, particularly the representation that the $125,000 payment would "lock in" the cost of equipment needed for the contract. The court also finds that Fastline reasonably relied on this representation in making the $125,000 payment.

A principal may be held responsible for misrepresentations made by his agent as part of negotiations for the purpose of bringing about a sale of property even though the principal did not know of the agent’s misrepresentations. Liberty National Bank & Trust Company v. Gruenberger, 477 S.W.2d 503 (Ky. 1972). Here, the debtor and his financial advisor were fully aware of ACE’s need for cash and ratified the false representations of the salesman, Davis.

Accordingly, the court finds plaintiff’s complaint should be sustained and the debt of the defendant debtor to the plaintiff Fastline in the amount of $100,000 should be and hereby is excepted from discharge under title 11 U.S.C. § 523(a)(2)(A). Strang v. Bradner, 114 U.S. 555, 5 S. Ct. 1038, 29 L. Ed. 248 (1885); In re Ledford, Boston Mortgage Corporation v. Ledford, 950 F.2d 1556 (6th Cir. 1992); In re Cole, 164 B.R. 947 (Bankr. N.D. Ohio 1993); 3 Am.Jur.2d Agency §§ 78, 180 (1986).

Dated:

By the court –

________________________________
JOE LEE, U.S. BANKRUPTCY JUDGE

Copies to:

Steven A. Wides, Esq.

Thomas A. Stone, Esq.

UNITED STATES BANKRUPTCY COURT

EASTERN DISTRICT OF KENTUCKY

LEXINGTON

 

IN RE:

JOHN J. DUFRESNE CASE NO. 95-50855

d/b/a Advantage Computer Engineering

DEBTOR

FASTLINE PUBLICATIONS, INC. PLAINTIFF

VS. ADVERSARY NO. 95-5074

JOHN DUFRESNE

d/b/a Advantage Computer Engineering, and

JOHN DUFRESNE, Individually DEFENDANTS

 

ORDER

 

In conformity with the memorandum opinion of the court this day entered, IT IS ORDERED that the complaint of the plaintiff Fastline Publications, Inc. is hereby sustained. The debt of the defendant debtor John Dufresne to the plaintiff Fastline in the amount of $100,000 should be and hereby is excepted from discharge under title 11 U.S.C. § 523(a)(2)(A).

Dated:

By the court –

________________________________
JOE LEE, U.S. BANKRUPTCY JUDGE

Copies to:

Steven A. Wides, Esq.

Thomas A. Stone, Esq.