DEBTORS                                                                                                     CASE NO.  01-60994

BOBBY A. AILEY, et al.                                                                                    PLAINTIFFS

 VS.                                                                                                                  ADV. NO.  01-6061

 LEE ROY HALE, et ux.                                                                                    DEFENDANTS



         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).


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).


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:




 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).