O'Donnell v. O'Donnell

DAVID O'DONNELL, Debtor.THOMAS A. TOYE, III, Plaintiff-Appellee,

v.DAVID O'DONNELL, Defendant-Appellant.

BAP NO. EP 12-015

Bankruptcy Case No. 11-20198-JBH

Adversary Proceeding No. 11-02034-JBH

UNITED STATES BANKRUPTCY APPELLATE PANEL FOR THE FIRST CIRCUIT

December 5, 2012

NOT FOR PUBLICATION

Appeal from the United States Bankruptcy Court

for the District of Maine

(Hon. James B. Haines, Jr., U.S. Bankruptcy Judge)

Before

Lamoutte, Feeney, and Cabán,

United States Bankruptcy Appellate Panel Judges.

James F. Molleur, Esq., on brief for Appellant.

Kelly W. McDonald, Esq., on brief for Appellee.

Per Curiam.

David O'Donnell ("O'Donnell") appeals from a bankruptcy court judgment in favor of Thomas A. Toye III ("Toye") determining that O'Donnell's obligation to Toye was nondischargeable pursuant to § 523(a)(2)(B)¹ because the extension of credit was obtained by use of a false financial statement. On appeal, O'Donnell argues that the bankruptcy court clearly erred in finding that he caused his personal financial statement "to be made or published with intent to deceive" Toye, as required by § 523(a)(2)(B)(iv). For the reasons set forth below, we AFFIRM.

BACKGROUND

In 2007, O'Donnell and Rudy Ferrante ("Ferrante") established Alder Street Properties, LLC for the purpose of acquiring and holding certain apartment buildings on Alder Street and Cumberland Avenue in Portland, Maine (the "Alder Street transaction"). Under the purchase agreement for the properties, O'Donnell and Ferrante were required to provide a $350,000.00 down payment at closing, and they asked Kevin Smith, a commercial loan broker, to help arrange the financing for a bridge loan (the "Loan"). Smith, who had assisted O'Donnell and Ferrante in several prior transactions, approached Toye to see if he would be interested in financing the Loan. Smith and Toye had also worked together on several prior transactions. In connection with the Loan, Smith prepared personal financial statements for O'Donnell and Ferrante and sent them to Toye. The document purporting to be O'Donnell's personal financial statement (the "Financial Statement") was dated December 3, 2007, and was signed with O'Donnell's name, although O'Donnell maintains that he did not sign it himself, and the evidence did not show otherwise. It indicated that O'Donnell had a net worth of $2,570,733.00, that his ownership in real estate (owned either individually or through LLCs) was valued at approximately $1,620,000.00, and that he had monthly income of $38,265.00. It is undisputed that the Financial Statement was a materially false statement of his financial condition as it overstated property ownership and net rental income, and did not include encumbrances on various properties.

After receiving the Financial Statement, Toye agreed to extend the Loan. In connection therewith, Alder Street Properties LLC executed a promissory note in the amount of $350,000.00, and both O'Donnell and Ferrante provided personal guaranties of the note. As additional security, O'Donnell executed a mortgage and security agreement with respect to certain real property in Augusta, Maine. The goal was to refinance within a few months and pay off the Loan. The refinancing never occurred, however, and Toye was never repaid.

Toye sued O'Donnell in the Kennebec County Superior Court for the debt due under his personal guaranty, and on August 27, 2009, the state court entered judgment against O'Donnell in the amount of $417,974.00.

In July 2009, Ferrante filed a chapter 7 petition, and Toye brought an adversary action against Ferrante seeking a determination that the debt owed to him on account of his personal guaranty was nondischargeable pursuant to § 523(a)(2)(B). After a trial, the bankruptcy court determined that Ferrante had provided Toye with a false financial statement within the meaning of § 523(a)(2)(B) on which Toye reasonably relied and, as a result, declared Ferrante's debt to Toye to be excepted from discharge.

O'Donnell filed a chapter 7 petition in February 2011. Thereafter, Toye filed a two-count adversary complaint alleging: (1) that O'Donnell's debt to him was nondischargeable pursuant to § 523(a)(2)(B) because the debt was obtained by use of a false financial statement; and (2) that Ferrante's fraud on Toye (as determined by the bankruptcy court in Ferrante's bankruptcy case) should be imputed to his partner, O'Donnell, for purposes of determining the dischargeability of O'Donnell's debt under § 523(a)(2)(B).

In a Joint Pre-Trial Memorandum, the parties indicated that there was no dispute that the Financial Statement was materially false, that it purported to relay O'Donnell's financial condition, or that Toye relied on it in extending the Loan. Rather, the primary factual dispute centered on the fourth prong under § 523(a)(2)(B) – whether O'Donnell caused the Financial Statement to be made or published with the intent to deceive Toye. O'Donnell also challenged whether Toye's reliance on the Financial Statement was justified, and whether Smith was Toye's agent in connection with the Loan. As to the imputation of fraud claim, the parties indicated that the primary factual dispute was whether O'Donnell and Ferrante were partners.

On March 8, 2012, the bankruptcy court held a trial at which Toye, Smith, and O'Donnell testified and numerous exhibits were introduced into evidence. O'Donnell testified that Smith had handled the financing for numerous prior transactions for O'Donnell and Ferrante, and that in connection with those transactions, Smith had prepared personal financial statements for O'Donnell and submitted them to the lenders on his behalf. With respect to the Alder Street transaction, O'Donnell testified that he knew Smith needed specific financial information from him, and he provided Smith with certain bank statements, tax returns, his social security number,

and records regarding his stock portfolio and retirement accounts. He insisted, however, that he did not provide any false information to Smith, and did not know the details of any financial statement that Smith was preparing to give to Toye with respect to the Alder Street transaction. According to O'Donnell, Smith never met with him to review the Financial Statement, and the first time he saw the Financial Statement was at a state court hearing after Toye obtained judgment against him. O'Donnell also asserted that although the Financial Statement was signed with his name, he did not sign the Financial Statement himself, and he did not know who signed it. Specifically, O'Donnell testified as follows:

And what was your understanding as to the extent to which you would have to give information to Kevin Smith that he could forward to Mr. Toye about your personal financial circumstances?

Kevin – Kevin Smith told me that to, you know, to give Tom some – a sense of security and, you know, because Tom had never met me. I don't know if he'd ever met Rudy but he never met me. He needed some documents like my PrimeVest account, my retirement accounts, my stock, you know, stock – stock accounts and my Social Security Number and some tax returns.

. . .

Q: All right. So Kevin asked you for tax returns, he asked you for financial records.

A. Yes.

Q: And your Social Security Number so he could check out your credit.

A. Yes.

. . .

Q: Did you understand that Kevin was creating a personal financial statement that would include all the real estate that you owned and monthly income and expenses for your buildings?

A. Jim, I honestly didn't know what kind of financial statement he was putting together. I didn't know what it – he just told me what I needed to bring to get to them so I got that information that he required to him.

Q: And you had – you had actually sat down with Kevin Smith and prepared a personal financial statement back in June of 2007, about six months before.

A. Yes. Yup.

Smith testified about his business relationship with O'Donnell and Ferrante, and how he had assisted them with several prior transactions by preparing financial statements and other documentation. With respect to the Alder Street transaction, Smith testified about how the Loan was structured and what information he relied upon when preparing the Financial Statement. According to Smith, he gathered certain information from O'Donnell's tax returns, bank account statements, and investment account statements. He obtained income information from rent rolls or tax returns. Real estate ownership, valuations, and mortgages came from various sources, such as credit reports, city assessment records, Rudy Ferrante, or Chris Smith (a property manager assisting Ferrante and O'Donnell). Although Smith insisted that he had documentation for all the information contained in the Financial Statement, he could not definitely state who provided him with each individual piece of documentation. Smith agreed that although it was standard practice for him to talk to people about any financial statements he was preparing for them, he did not review the Financial Statement with or provide the Financial Statement to O'Donnell, nor did he see O'Donnell sign the Financial Statement.

After the close of evidence, the bankruptcy court concluded that Toye had met his burden of proof on most elements of his claim under § 523(a)(2)(B), but took under advisement the issue of whether O'Donnell had "caused [the Financial Statement] to be made or published with intent to deceive." See 11 U.S.C. § 523(a)(2)(B)(iv).

On March 20, 2012, the bankruptcy court entered its Final Judgment in favor of Toye, excepting O'Donnell's obligation to Toye from discharge under § 523(a)(2)(B). In its oral findings and conclusions, the bankruptcy court found that although O'Donnell tried to portray Smith as Toye's agent, Smith was actually O'Donnell's agent in the Alder Street transaction. The bankruptcy court stated:

Mr. Smith said he could help find the bridge financing that Mr. O'Donnell wanted. Mr. O'Donnell gave him some figures relating

...