BRRRT Props., LLC v. Pfeifer (In re Pfeifer)

IN RE: PAUL LEON PFEIFER, DEBTOR

BRRRT PROPERTIES, LLC, BRADLEY SIZEMORE, and ROSEMARY SIZEMORE, Plaintiffs, v. PAUL LEON PFEIFER, JNJ NC ENTERPRISES, INC.,and D&P PROPERTY SOLUTIONS, LLC, Defendants.

CASE NO. 18-05399-5-SWH

AP NO. 19-00010-5-SWH

UNITED STATES BANKRUPTCY COURT EASTERN DISTRICT OF NORTH CAROLINA WILMINGTON DIVISION

June 17, 2021

CHAPTER 7

POST-TRIAL ORDER REGARDING DISCHARGEABILITY OF CLAIMS

This adversary proceeding was initiated by plaintiffs BRRRT Properties, LLC, Bradley Sizemore, and Rosemary Sizemore pursuant to 11 U.S.C. §§ 523(a)(2) and (a)(4) to determine the dischargeability of a debt owed to them by chapter 7 debtor Paul Pfeifer and his related entities, JNJ NC Enterprises, Inc. and D&P Property Solutions, LLC. A trial was held in Raleigh, North Carolina, on March 11, 2021. For the reasons to follow, partial judgment will be entered for plaintiffs.

JURISDICTION

The bankruptcy court has jurisdiction over the parties and the subject matter of this proceeding pursuant to 28 U.S.C. §§ 151, 157, and 1334, and the General Order of Reference entered by the United States District Court for the Eastern District of North Carolina on August 3, 1984. This is a "core proceeding" within the meaning of 28 U.S.C. § 157(b)(2)(I), which this court may hear and determine.

PROCEDURAL POSTURE AND BACKGROUND

Prior to trial, defendants filed motions to dismiss the adversary proceeding and the first amended complaint. (Dkt. Nos. 8, 17) Both motions were denied by order entered on October 4, 2019. (Dkt. 34) Defendant Pfeifer filed his answer on November 4, 2019 (Dkt. 35) and on November 11, 2019, plaintiffs obtained an entry of default as to the corporate defendants, JNJ NC Enterprises, Inc. and D&P Property Solutions, LLC. (Dkt. 38) Plaintiffs then sought and obtained a default judgment providing that the corporate defendants' debt to plaintiffs is nondischargeable pursuant to 11 U.S.C. §§ 523(a)(2) and (a)(4), which was entered on November 14, 2019.¹ (Dkt. 40)

Plaintiffs filed a motion for summary judgment on June 24, 2020 (Dkt. 45), to which defendant Pfeifer filed a response. (Dkt. 48). After a telephonic hearing on September 17, 2020,the court entered an order denying the motion as to all issues except one: the defendant's assertion that the defense of accord and satisfaction barred plaintiffs' claims based on the partial performance of a settlement agreement executed by the parties on February 23, 2017. While the parties agreed that the $200,000 judgment referenced in paragraphs 4(i) and 4(ii) of that agreement had been satisfied, dischargeability of the $446,000 confession of judgment referenced in paragraph 4(iii) remained at issue. As to this amount, the court held that while the settlement agreement "may have worked a kind of novation, it did not bar a showing that the settlement debt arose out of 'false pretenses, a false representation, or actual fraud,' and consequently was nondischargeable." Dkt. 54 at 3, citing Archer v. Warner, 538 U.S. 314, 323 (2003).

Trial of this matter was held in Raleigh, North Carolina, on March 11, 2021, at which time the court heard testimony from plaintiff Bradley Sizemore and the debtor/defendant, Paul Pfeifer. At the conclusion of the trial, the court invited the parties to provide post-trial briefs in summation of the evidence and arguments, which both plaintiffs and Pfeifer elected to do. (Dkt. Nos. 71, 72) As is set out in more detail below, the court determines that of the total $435,174.00 amount asserted by plaintiffs, the sum of $250,000 is nondischargeable.

DISCUSSION

Plaintiffs assert that their claim against defendant for the remaining balance of the confession of judgment amount should be deemed nondischargeable under 11 U.S.C. §§ 523(a)(2) and/or (a)(4), and the court will address each section separately. Plaintiffs bear the burden of proof and must establish an exception to discharge by the preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 287-88, 291 (1991); Farouki v. Emirates Bank Int'l., Ltd., 14 F.3d 244, 249 (4th Cir. 1994).

Non-dischargeability provisions are "to be interpreted narrowly." In re Theonnes, 536 B.R. 680, 697 (Bankr. D.S.C. 2015), citing Kawaauhau v. Geiger, 523 U.S. 57, 62 (1998) (noting the "'well-known' guide that exceptions to discharge 'should be confined to those plainly expressed'" (internal citation omitted)); see also In re Causey, 519 B.R. 144, 154 (Bankr. M.D.N.C. 2014) ("If this Court were to interpret Section 523(a) as allowing equitable exceptions to discharge under general common law principles, such a holding would impermissibly widen the scope of these provisions of the Code and, in effect, swallow-up or render superfluous those exceptions enumerated in Section 523(a).").

I. Determination of the Debt Plaintiffs Seek to Declare Nondischargeable

As a threshold matter, prior to the court determining the extent to which a debt may or may not be dischargeable, plaintiffs must establish both the existence and amount of that debt. In re Campbell, 545 B.R. 875, 885-86 (Bankr. M.D.N.C. 2016); see § 523(a)(2)(A) (providing that discharge under chapter 7 does not discharge an individual debtor from any debt for money "to the extent obtained by ... false pretenses, a false representation, or fraud"). Plaintiffs contend that the nondischargeable debt owed to them by the defendant is the total sum of $435,174.00. That sum is derived from an unfiled confession of judgment in the amount of $446,000.00 provided by all defendants to plaintiffs in connection with their execution of a settlement agreement on February 23, 2017, less the sum of $10,826.00, which defendant Pfeifer already has paid pursuant to that agreement. See Plaintiffs' Ex. 26A (setting out calculations). The parties agreed that the $446,000 judgment would not be filed so long as Pfeifer made monthly payments of $600 for ten years (for a total of $72,000 in repayment) and did not default on the agreement. Pfeifer paid a total of $10,862 prior to stopping payments.

Separately, the settlement agreement also required defendants' execution of a $200,000.00 confession of judgment which was filed in New Hanover Superior Court and was to be cancelled by plaintiffs upon defendants' satisfaction of certain terms. Under the agreement, the bases for that judgment and terms for satisfaction of it were as follows: 1) That plaintiffs' funds went into Pfeifer's purchase of certain real property referred to in the agreement as the "River Knolls Lots"; 2) that escrowed property sale proceeds in the amount of $30,647.50 from the sale of some of those lots would be paid to plaintiffs; 3) that the remaining River Knolls Lots would be sold and the sale proceeds paid to plaintiffs; and 4) that upon payment to plaintiffs of both the escrowed and expected sale proceeds in the combined sum of approximately $180,000, plaintiffs would cancel the $200,000 judgment. The parties agree that Pfeifer complied with those aspects of the agreement and that the $200,000 judgment has been satisfied. Notwithstanding demand by Pfeifer that plaintiffs cancel the judgment, plaintiffs refused to do so.

In this proceeding, plaintiffs seek a determination that the entire $446,000 confession of judgment amount², less the $10,826 in monthly payments paid by Pfeifer, is nondischargeable. This calculation does not account for Pfeifer's satisfaction of the $200,000 judgment, which represents Pfeifer's repayment of a portion of plaintiffs' calculated losses and must be credited toward the $435,174.00 amount. Indeed, the court cannot discern any basis on which this amount could beaccounted for in any other way. The remaining amount of $235,174.00 is the debt at issue here, and for the reasons set out below, the court concludes that plaintiffs have met their burden of establishing by a preponderance of the evidence that this debt is nondischargeable.

II. Money obtained by false pretenses, false representation, or fraud under § 523(a)(2)(A)

Plaintiffs contend that Pfeifer obtained the investment funds at issue by way of false pretenses, a false representation, or fraud. The discharge exceptions listed in § 523 do not themselves establish liability, and instead operate to except from discharge certain types of liabilities established under non-bankruptcy law. To establish false pretenses, a false representation, or fraud under § 523(a)(2)(A), plaintiffs must show that

(1) the debtor made a representation; (2) that the debtor knew the representation was false at the time it was made; (3) that the debtor intended to deceive the creditor; (4) that the creditor relied on the representation; and (5) that the creditor sustained a loss as a result of that reliance.

Campbell, 545 B.R. at 885-86, citing In re Casper, 466 B.R. 786, 793 (Bankr. M.D.N.C. 2012). To establish a claim for fraud under North Carolina law, the plaintiffs were required to provide proof of a false representation or concealment of a material fact, reasonably calculated to deceive and made with intent to deceive, which does in fact deceive and results in damage to the injured party. See, e.g., Campbell, 545 B.R. at 876; Nunnery v. Rountree, 478 F.3d 215, 218 (4th Cir. 2007).

At trial, plaintiffs' evidence focused on six specific parcels of real property in Wilmington, North Carolina, all of which were part of the parties' property-flipping venture.³ Pursuant to thisventure, which began in late 2013 and ended in late 2015, defendant Pfeifer located properties to purchase, quickly renovate, and sell for profit. Pfeifer and his entities would buy the properties and provide to Sizemore the opportunity to pay half the investment and renovation costs. Upon the sale of a property in which both parties had invested, the plan was that each party would recoup their investment and then share the net profits 60/40, with Pfeifer taking the larger share. The first property, 4621 Dean Drive, was acquired by defendants for approximately $98,000 and became the subject...