IN RE:
UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF KENTUCKY
LEXINGTON
IN RE:
LEE ROY HALE
MARY ELIZABETH
HALE
DEBTORS CASE
NO. 01-60994
BOBBY A. AILEY, et al. PLAINTIFFS
VS. ADV.
NO. 01-6061
LEE ROY HALE, et ux. DEFENDANTS
MEMORANDUM OPINION AND ORDER
This adversary
proceeding is before the court pursuant to Agreed Order to remove it from the
court's trial docket and submit it on the
record. (Document # 27). The parties have briefed the issues (Documents
# 39, 40, & 41) and have filed Final Joint Stipulations (Document #
36). Furthermore, the defendant-debtors
subsequently filed Motion for Summary Judgment. (Document # 42). The
matter now stands submitted. (Document
# 43).
FINDINGS OF FACT:
The parties' joint stipulations (Document # 36) are incorporated by reference, as
if set forth in their entirety herein.
In essence, Plaintiffs (collectively
"Aileys") complain that Defendants ("Hales") purchased the stock of Ailey Oil Company
for just over $1.5 million with the use of a false financial statement dated
December 2, 1995.
A copy of the Stock Purchase Agreement dated
December 8, 1995 (the
AContract") which has been made part of the record of
this adversary proceeding is Exhibit # 31 to the deposition of Michael Ailey
taken April 1, 2002 (Document # 32) and is attached hereto as Opinion Exhibit
A. However, the exhibit is an unsigned
copy of the agreement and does not have Exhibits referred to in the document,
including Exhibit B which is referred to as promissory notes
"duly executed by an authorized officer of the
Corporation and personally guaranteed by the [Hales]."
Apparently these promissory notes are a note to Earl Ailey in the sum of
$130,396.57 and one to Bobby Ailey in the sum of $21,799.16.
Payment of the agreed upon purchase price[1]
consisted of assumption of debt owed by the corporationB to two banks in the total amount of
approximately $690,000 and to Earl and Bobby Ailey in the total amount of
approximately $152,000-- plus some $745,000.
Of that $745,000,
"Down Payment" of
$123,000 was reduced to about $53,000 because of debt the Aileys owed to the
corporation, and the
"Balance" of some $622,000 was to be paid over the
following 10 years in equal monthly increments, at 6.5% interest per annum,
plus a final balloon payment.
In order to secure promissory notes given for
the "Balance" owed-- some $622,000-- the Hales granted the Aileys a security
interest in all of the assets of Ailey Oil Co.
The record shows, and it is undisputed, that
at the time of closing, December 8, 1995, the debtors had deeded to their
children for no consideration 21 of 33 pieces of property listed on the
Financial Statement presented at the closing.
The deeds were recorded in April of 1997, some 16 months after the
closing. The properties conveyed
represent $3.237 million of $7.259 million in total value of the Hales' property.
They also represent $1.334 million of $2.44 million in equity. Thus, the 12 pieces of property not deeded
to the Hales' children represent $4.022 million in value
and $1.106 in equity.
Counsel for the plaintiffs states that the
Hales made payment on the Ailey debt for approximately 36 months, with no
payment being made to James D. Ailey after November 8, 1997; no payment to
Michael Ailey after June 8, 1998; and no payment to other stockholders and to
Earl Ailey after September 8, 1998.
(Document # 39).
Counsel for the plaintiffs asserts that the
debt to the Aileys should be founds nondischargeable pursuant to 11 U.S.C.
' 523(a)(2)(B) based on
"fraudulent concealment of the fact that the
Hales had deeded the majority of their properties to their children for no
consideration at the time of their closing with the Aileys" plus
"over valuation of assets" (counsel asserts that the difference in value given in the deeds as
compared to the financial statement is $911,000.) (Document # 39).
CONCLUSIONS OF LAW:
The law of the case can be stated easily by
looking at the language of 11 U.S.C.
' 523(a)(2)(B).[2] That section provides that a debt is
nondischargeable if the debtor has obtained property by use of a written
statement that is
"materially
false," respecting the debtor's financial condition, on which the creditor
reasonably relied[3], and
that the debtor caused to be made or published
"with intent to deceive."
The U. S. Supreme Court held
in Grogan v. Garner, 111 S.Ct. 654 (1991), that the burden of proof is
by a preponderance of the evidence.
Within the Sixth Circuit a showing of gross negligence can be a
sufficient basis to establish an intent to deceive. In re Woolum (Bank One, Lexington, N.A. vs. Woolum), 979
F.2d 71, 73 (1992).
Looking to all facts and circumstances of the
case, the court concludes that the plaintiffs have not sustained their burden
of proof that the debt is non-dischargeable pursuant to 11 U.S.C.
' 523(a)(2)(B). The totality of circumstances presented shows that the
plaintiff-creditors did not reasonably rely, if at all, on the financial
statement of the Hales. Prior provision
of the financial statement was not part of the consideration described in the
Contract. In fact, there is no mention
whatsoever of personal financial statements of the Defendants in the Contract
and hence no express representations nor warranties by the Defendants in that
regard. Paragraph 13 of the Contract is
titled "Entire Agreement" and states that the entire agreement
regarding the sale is contained in that document. Paragraph 7 of the agreement,
"Buyers' Representations and Warranties," is absent of any reference to requirement of
a financial statement by the Hales. The
only mention of required presentation of financial statements is by the Aileys
and the corporation, in Paragraph 6,
"Seller's Representations and Warranties."
Furthermore, the Hales' financial statement was delivered at the closing. If there is a
"red flag" to be found in this scenario, presentation
of a financial statement at that late point in time obviates the plaintiff's claim of reliance thereon. Another
"red flag" should have been reduction of the purchase
price by $700,000 at the time of closing, from $2.2 million to $1.5 million
allegedly on a "take it or leave it" basis.
Looking further to the totality of
circumstances, the court takes note that the deeds in question were not
recorded until April of 1997, some 16 months after closing and, according to
plaintiffs' counsel, about five months before the Hales
ceased all payments to the Aileys. Furthermore,
the Hales made payments on the Ailey debt for about 3 years. It appears the Hales attempted to comply
with the agreement, aside from the gifted property.
Also, although personal guarantees were given
for a total of about $152,000B to Earl for about $130,000 and to Bobby for about $22,000-- the
"remaining," or non-gifted property, had a value of $4.022 million and equity of
$1.106 million, more than enough to cover the amount personally guaranteed by
the Hales.
In sum, evaluating all the facts and viewing
all the circumstances of this case, the court finds the debt dischargeable in
bankruptcy; the complaint is dismissed.
Dated this _____ day of August 2002
By the court:
_____________________________
JOSEPH M. SCOTT, JR.
US. BANKRUPTCY JUDGE
Copies to:
Marcia A. Smith,
Esq.
John M. Simms, Esq.
[1] The
discussed purchase price of $2.2 million was reduced at the closing to an
agreed purchase price of just over $1.5 million.
[2]
Although the complaint was brought under 11 U.S.C.
' 523(a)(2)(B),
"false financial statement," and
'11 U.S.C. 523(a)(6),
"willful and malicious injury," the plaintiffs have made no argument under
Section 523(a)(6); therefore, the court will not address this provision.
[3]
Plaintiff's counsel cites to the U. S. Supreme Court
case of Field v. Mans, 116 S.Ct. 437 (1995), for the holding that in
determining whether a debt should be excepted from discharge the test is
justifiable reliance. However, that
case was discussion of the standard to be applied under 523(a)(2)(A), not (B).