Argento v. Cahill (In re Cahill)

In re: LEWIS L. CAHILL, Debtor.

ANNE ARGENTO and THOMAS ROMANO, Plaintiffs, v. LEWIS L. CAHILL, Defendant.

Case No.: 15-72418-reg

Adv. Pro. No.: 15-08298-reg

UNITED STATES BANKRUPTCY COURT EASTERN DISTRICT OF NEW YORK

February 22, 2017

Chapter 7

DECISION AFTER TRIAL

The matter is before the Court pursuant to an adversary proceeding commenced by judgment creditors Anne Argento ("Ms. Argento") and Thomas Romano ("Mr. Romano") (collectively, the "Plaintiffs"). The Plaintiffs seek to except from discharge a series of loans made to Lewis Cahill ("the Debtor") pursuant to Bankruptcy Code 523(a)(2)(A). Although the Plaintiffs allege identical causes of action and introduced the same documentary evidence at trial, the Court can find in favor of only one plaintiff. Mr. Romano, who testified at trial, established each element of both false representations and false pretenses and carried his burden of proof under §523(a)(2)(A). However, because Ms. Argento offered no proof of her reliance on the Debtor's representations when she agreed to make the subject loan, the Court finds that she has failed to satisfy all of the required elements under §523(a)(2)(A), and thus her claim is discharged.¹

While the Court's decision in this matter may seem harsh, the case highlights the fundamental proposition that it is the plaintiff's burden to prove each element of any cause of action set forth in the complaint. The Plaintiffs sought relief under §523(a)(2)(A) under any of the three enumerated theories of fraud based on a misrepresentation by the Debtor.² Even where the debtor's misrepresentations are clearly established under §523(a)(2)(A), the creditor must establish a record which permits the Court to find reliance on the debtor's misrepresentations. The standard for justifiable reliance is subjective as to each creditor and the existence of reliance as required by the statute is determined by the trier of the facts. However, in the case presented on behalf of Ms. Argento, the record is barren of any evidence regarding reliance on the Debtor's fraudulent misrepresentations. Ms. Argento's failure to introduce any evidence regarding her reliance precludes the Court from finding that Ms. Argento's debt is dischargeable under §523(a)(2)(A).

PROCEDURAL HISTORY

In the Debtor's main bankruptcy case, the Plaintiffs jointly filed a motion to extend time to file an objection to the discharge of a debt under §523. (Case No. 8-15-72418-REG, ECF No. 17). The motion was granted and the Plaintiffs' time to file an objection to discharge was extended to November 16, 2015 under §§523(a)(2)(A) and 523(c). (Case No. 8-15-72418-REG, ECF No. 27). On November 11, 2015 Plaintiffs jointly filed a complaint pursuant to §523 and§727.³ (Case No. 8-15-08202-REG, ECF No. 7). Upon the Debtor's motion to dismiss, the Court dismissed the §727 claim as being untimely filed. (Case No. 8-15-08202-REG, ECF No. 4; Id. No. 17).

The Debtor also sought dismissal of the §523(a)(2)(A) claim pursuant to Federal Rules of Civil Procedure Rule 12(b)(6). (Case No. 8-15-08202-REG, ECF No. 4, pg. 6). The Debtor argued that the Plaintiffs failed to sufficiently allege the elements under §523(a)(2)(A), including reliance. Id. The Court disagreed and found that the §523 cause of action was adequately pled under Rules 12(b)(6) and 9(b). (Case No. 8-15-08202-REG, ECF No. 17). The Debtor filed an answer to the complaint and the parties filed a joint pre-trial memorandum. (Case No. 8-15-08202-REG, ECF No. 12; Id. No. 41). Trial was held on December 13, 2016. At the close of trial, the Debtor moved the Court for a directed verdict as to Ms. Argento. Trial Transcript ("Tr.") at 179. The Court denied the directed verdict in order to consider the full record. Id. The matter was marked submitted at the conclusion of the trial.

FACTS

In one sense of the word, the Debtor may be described as an entrepreneur. In the 1990s, the Debtor operated a trucking business, which eventually failed. Tr. 133. The Debtor has been involved in the pharmaceutical business. (Case No. 13-71850-REG, ECF No. 3). At some point, he moved on to his current position in the oil business. Tr. 146; See also Debtor's Chapter 7 Petition, Case No. 8-15-72418-REG, No. 1. He was also a self-proclaimed "silent partner" of a restaurant and a Vice President of a solar panel business. Tr. 144; Tr. 160.

In the Spring of 2006, before his involvement with the solar panel business, the Debtor sought "investors" to participate in his new venture into the restaurant business. Tr. 118. At thesuggestion of a family member, the Debtor called Ms. Argento, a relative of the Debtor, about investing with him. Tr. 117. According to the Debtor, Ms. Argento eventually agreed to lend him $100,000. Tr. 118. The Debtor also asked Ms. Argento if she knew anyone else who might be "interested in investing." Id. Ms. Argento introduced the Debtor to Mr. and Mrs. Romano. Id.

Mr. Romano is retired. Tr. 17. He previously was employed for 50 years as a tool and dye tradesman. Id. His educational background was limited to successful completion of a two year trade school in Italy. Id. Prior to his investments with the Debtor, Mr. Romano never participated in any similar transaction. Tr. 19. His experience with financial transactions was limited to participating in a 401(k) plan established by his employer. Id. It is clear he cannot be considered a knowledgeable or experienced investor. Tr. 19-20.

Ms. Argento has been a family friend of the Romanos for more than 20 years. Tr. 29. The women had worked together, and both Mr. and Mrs. Romano trusted Ms. Argento. Tr. 90-91. According to Mr. Romano, Ms. Argento suffered a stroke in 2015 and has since been living in a nursing home.⁴ Tr. 73. Ms. Argento did not testify at trial. Id.

The Debtor cultivated a reputation of being a successful businessman, and was building a "big, fancy" home in the Hamptons. Tr. 12; Tr. 97. Based on his conversations with Ms. Argento, Mr. Romano believed that the Debtor's oil business was lucrative and thriving. Tr. 91. According to Mr. Romano, Ms. Argento advised that the Debtor was now focusing his energy in a new venture, as an owner of a "fancy" restaurant in the Hamptons, and was looking for otherpeople to invest. Tr. 91; Tr. 97. At the encouragement of Ms. Argento, Mr. and Mrs. Romano agreed to meet with her and the Debtor about a possible investment. Tr. 91.

A meeting between the four was set up by Ms. Argento to take place sometime in May of 2006. Tr. 118. At the meeting the Debtor told all the parties that he was raising money to invest in a restaurant in the Hamptons, and it needed some finishing touches to open by the end of the Summer. Tr. 12; Tr. 120. Mr. Romano recalled that the Debtor told them the restaurant would be fantastic, with a "fancy" chef from New York City. Tr. 12; Tr. 16. The Debtor made a reference to his ownership interest in the restaurant at the meeting. Tr. 129. Based on the Debtor's statements and conduct, Mr. and Ms. Romano believed he was a partner in the restaurant. Tr. 37; Tr. 92.

At the meeting, Mr. Romano questioned the Debtor why he needed $50,000 if he had such a successful oil business. Tr. 14. Mr. Romano understood from the Debtor that there were some issues with old customers and the receivables were falling behind. Id. In general, however, the oil business was very successful. Id. Mr. Romano testified that it was reasonable to believe that businesses could get in a tight financial situation. Id. Nevertheless, the money Mr. Romano would lend would be used to open up the restaurant. Tr. 16. The Romanos were also intrigued by the possibility of obtaining a higher interest rate on their life savings. Tr. 40; Tr. 75. In fact, the Debtor promised a rate of return that was three times higher than what they were receiving at the bank. Tr. 47.

It did not occur to Mr. Romano to seek out professional advice about the transaction, to obtain any financial information about the restaurant, to ask for an ownership interest in the restaurant, or to even visit the restaurant. Tr. 29; Tr. 55-58. Mr. Romano simply asked the Debtor if he was honest. Tr. 44. Based on the Debtor's assurances regarding his honesty, hisrepresentations about his businesses, and Ms. Argento's endorsement of the Debtor, Mr. Romano decided make the loan. Tr. 44. The loans were memorialized utilizing form promissory notes which the parties executed. Tr. 115-116. See also Trial Exhibits 1 and 2. Mr. Romano tendered a check for $50,000 and Ms. Argento tendered a check for $100,000. Tr. 43 and Trial Exhibit 1 and 2. Interest was to be paid monthly. Trial Exhibits 1 and 2. Mr. Romano testified to an oral agreement that the note could be prepaid with a month or two's notice to the Debtor. Tr. 41; Tr. 76-77.

Despite the Debtor's representations, the reality was that the Debtor's interest in the restaurant was not yet determined. Tr. 121. The Debtor eventually admitted that he held no ownership interest in the restaurant despite referring to himself as a "silent partner."⁵ Tr. 127; Tr. 129. It appears the restaurant did eventually open. Tr. 139. However, it is uncertain whether what part, if any, of the proceeds from Mr. Romano's and Ms. Argento's loans were used for the restaurant. The Debtor was the named payee on the checks tendered by Mr. Romano and Ms. Argento and they were deposited, not into a corporate account, but rather into the Debtor's son's personal account. Tr. 152; Tr. 131. The Debtor testified that he had opened up a bank account in the name of the restaurant and "gifted" the first installment of money to the restaurant as a silent partner. Tr. 153-154. However, neither records of a bank account in the name of the restaurant nor evidence of payments were produced by the Debtor. Tr. 155.⁶

The Debtor admitted at trial that he did not own an oil business. Tr. 145. In fact, he worked for his son's oil business. Id. Earnings from his employment provided the source of interest payments h...