Feldman v. Pearl (In re Pearl)

577 B.R. 513

IN RE: Richard B. PEARL, Debtor

Richard Feldman, individually and as Assignee of claims by Riverfront Diet Clinic, Inc., Plaintiff

v.Rick Pearl, Defendant

CASE NO. 16–20305

ADV. NO. 16–2006

United States Bankruptcy Court, E.D. Kentucky, Covington Division.

Signed September 29, 2017

Michael B. Baker, Covington, KY, William R. O'Bryan, Jr., Nashville, TN, for Plaintiff.

Stuart P. Brown Covington, KY for Defendant.

MEMORANDUM OPINION

Tracey N. Wise, Bankruptcy Judge

This unfortunate dispute involves two cousins and longtime close friends who owned a business together. When their business failed, their relationship splintered among accusations of misconduct, and litigation in multiple venues ensued. Ultimately, this Court held a trial on the merits of the claims that Plaintiff asserted against Debtor/Defendant relating to funds disbursed from the business; specifically, a loan made to Plaintiff and a disparity in distributions from the business to the parties.

Debtor Richard B. Pearl filed a chapter 13 petition on March 11, 2016. He listed Plaintiff Richard Feldman and their co-owned business, Riverfront Diet Clinic, Inc. ("RDC"), as creditors. Plaintiff filed three proofs of claim in the bankruptcy case. Claim 9, filed on behalf of Plaintiff personally, asserts an unsecured debt owed for fraud totaling $50,000.00. Claim 10, filed by Plaintiff as "Assignee of Riverfront Diet Clinic, Inc., in dissolution," seeks to recover an unsecured debt owed to RDC totaling $283,821.77 for "Fraud and/or unauthorized withdrawals from RDC."¹ Claim 11, also filed on behalf of Plaintiff personally, asserts an unsecured debt totaling $188,607.25 owed for "Fraud and/or unauthorized withdrawals from RDC," i.e., for about two-thirds of the debt allegedly owed to RDC. Debtor objected to all three claims.

Plaintiff filed the Complaint initiating this proceeding on July 18, 2016. He asks this Court to find that Debtor owes debts to Plaintiff and RDC that should be excepted from Debtor's discharge under § 523(a)(2), (4) and (6).² Debtor filed an Answer to the Complaint and asserted counterclaims, which the Court dismissed upon Plaintiff's motion. Feldman v. Pearl (In re Pearl), AP Case No. 16-2006, 2017 WL 932951, 2017 Bankr. LEXIS 616 (Bankr. E.D. Ky. Mar. 8, 2017).

The parties appeared for trial on Plaintiff's claims on July 25, 2017. Plaintiff, represented by counsel, called three live witnesses: (i) himself; (ii) Debtor; and (iii) Rex Leatherwood, Esq., an attorney with business and legal ties to Plaintiff and his wholly-owned business. Without objection, Plaintiff also introduced into evidence prior testimony given by Debtor at a deposition and at his Rule 2004 examination, as well as the deposition testimony of two witnesses residing in Tennessee beyond the Court's subpoena power: (i) Shawn Sirgo, Esq., another attorney connected to Plaintiff and his wholly-owned business, as well as to debtor, and (ii) Larrice Carter, CPA, an accountant working for Plaintiff and his wholly-owned business. Debtor, also represented by counsel, called Pamela Gross, the bookkeeper and tax preparer for Debtor and RDC. No experts testified at trial. Post-trial, each party tendered proposed findings of fact and conclusions of law.

FINDINGS OF FACT

I. Early history.

Plaintiff Richard Feldman and Debtor Richard Pearl are second cousins. They grew up together and were very close as youths—Plaintiff testified that they were best friends—even seeing a Beatles concert together in happier days. Both men ultimately assumed careers in the diet clinic business, including through ownership of RDC, a Kentucky corporation operating in Covington, Kentucky. Plaintiff, a medical doctor, also has provided operating assistance to many other diet clinics in multiple states through a wholly-owned Tennessee business, Doctors' Diet, Inc. ("DDI"). He owns interests in two other clinics, but Plaintiff does not own a stake in the vast majority of the clinics to which DDI provides services.

Debtor, a Kentucky citizen, formed RDC in April 1996. Its original owners were Debtor, Plaintiff, and non-party Kevin Henderson. In the late 1990s, Plaintiff conveyed his interest in RDC to Henderson to settle a dispute, leaving Henderson and Debtor as RDC's only shareholders until February 2010. Debtor was listed as RDC's President on all of RDC's annual reports filed between 1997 and 2012. RDC has been inactive and in bad standing with the Kentucky Secretary of State since its administrative dissolution in September 2013. RDC ceased operations in the fall of 2014.

II. After RDC experiences business troubles, Plaintiff rejoins RDC.

Beginning in late 2009 or early 2010, RDC had a dispute with a physician that hurt its financial position and jeopardized its future. The physician, who had been affiliated with RDC, took patient files to form a competing business. Debtor was suffering from serious health issues at the time and called his cousin for help because of his experience with weight loss clinics and with RDC. Plaintiff agreed to assist. In February 2010, he and others associated with DDI came to Covington to stabilize RDC's affairs, including that DDI loaned funds to RDC. Plaintiff referred to these DDI loans as "my loans" at trial.

When Plaintiff returned to assist, Henderson, Debtor and Plaintiff entered into a new ownership arrangement under which each owned one-third of RDC. Plaintiff also became RDC's Treasurer. While Debtor continued to operate RDC on a day-to-day basis, Plaintiff became intimately involved in advertising, staffing, and other RDC business matters. Plaintiff and Debtor were in frequent contact, sometimes speaking multiple times in a day, and Plaintiff obtained updates from Debtor on RDC's day-to-day financial performance on request.

Upon Plaintiff's return to RDC, Plaintiff and Debtor agreed that Debtor would receive a salary of $1,000.00 per week as RDC's principal operator. They further agreed that distributions to the two from RDC above that salary would be equal. Plaintiff posits that Debtor took a highly uneven amount of draws from RDC in violation of this agreement—which was not memorialized in a writing signed by Debtor, Plaintiff, Henderson, or anyone on RDC's behalf. Neither party explained Henderson's position on this distribution arrangement, or stated whether Henderson also was to receive distributions. Henderson did not participate in the trial.

Also upon Plaintiff's return, DDI began to provide goods and management services to RDC. Unlike DDI's relationships with other diet clinics, DDI and RDC did not have a written contract pursuant to which DDI would deliver its services in exchange for six percent of RDC's gross revenues. Nevertheless, Plaintiff and Debtor, who together owned two-thirds of RDC at the time, agreed that DDI would receive six percent of RDC's gross revenues as a fee for its services. RDC also would pay DDI for certain specific goods. For example, RDC bought folders from DDI containing information on the diet program, which RDC gave to customers.

About three years after Plaintiff rejoined RDC, he acquired Henderson's stock, leaving the two cousins as the sole co-owners of RDC. RDC's By-laws dated March 2013 listed Debtor as RDC's President, Debtor's wife, Elaine, as RDC's Secretary, and Plaintiff as RDC's Treasurer.³ As of the trial, Plaintiff owned two-thirds of RDC's stock and Debtor owned the remaining third.

III. Facts relating to Plaintiff's two claims against Debtor.

A. Plaintiff's $50,000.00 loan.

Although Plaintiff became RDC's Treasurer in February 2010, Debtor kept control over its checkbook and he directed payments for the business. At some point between Plaintiff's return to RDC and May 11, 2010—Plaintiff did not establish the specific date at trial despite its significance to his claim—Plaintiff orally asked Debtor to cause RDC to loan him $50,000.00. Plaintiff did not offer a business purpose for the loan, or explain why he wanted a loan from RDC, a diet clinic (not a bank) which Plaintiff testified was in financial trouble.

Debtor told Plaintiff that RDC did not have the funds to make the loan, but that Debtor would loan him the requested $50,000.00. Plaintiff accepted Debtor's offer. No written agreement exists with respect to this loan.

In the same general time frame, Debtor was in the midst of a separate dispute with Henderson (then a RDC co-shareholder) and Debtor wanted to protect his money. On April 20, 2010, Debtor and his spouse had a personal joint checking account with a balance of $82,829.04. On April 22, Debtor deposited a $50,000.00 check from RDC into the personal account, leaving RDC with about $18,000.00 in its account. Then, on April 27, Debtor sent $132,000.00 from the personal account to Nashville attorney Shawn Sirgo. Sirgo served for a time as DDI's corporate counsel, represented Plaintiff individually in certain matters, and knew Debtor due to Sirgo's involvement in RDC's rescue in February 2010. Sirgo deposited Debtor's funds into his business account, leaving a balance of $1,220.43 in Debtor's personal account.

On May 11, 2010, Sirgo received an email from Debtor authorizing the loan to Plaintiff. Sirgo then wrote a $50,000.00 check to Plaintiff from his business account on that same date, with the check's memo line stating "Loan From Rick Pearl." Sirgo understood that Debtor was making a personal loan to Plaintiff because Plaintiff "was requesting sums of money for his daughter's wedding and for other personal things." [ECF No. 70–1 at 13.]

Nearly two years later, on May 8, 2012, through Sirgo, Debtor inquired about Plaintiff's repayment of the loan. In July 2012, Plaintiff withdrew $40,000.00 from his personal account and sent it to Debtor. DDI—Plaintiff's wholly-owned entity—also sent a $10,000.00 check to Debtor that month. Plaintiff testified that he took a $10,000.00 loan from DDI to pay Debtor back, but offered no documents proving that he and DDI treated this as a loan. Plaintiff also testified that...