In the matter of Rollins, Case Number 06-10549. Section "A" (Bankr.E.D.La. 8/10/2007)

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IN THE MATTER OF Robert Milton Rollins CHAPTER 7, DEBTOR Edward W. Kleppinger Wilhelmina L. Kleppinger Plaintiffs v. Robert Milton Rollins Defendant

Case Number 06-10549. Section "A"

Adversary Number 06-1291.

United States Bankruptcy Court, E.D. Louisiana.

August 10, 2007.

MEMORANDUM OPINION

ELIZABETH MAGNER, Bankruptcy Judge.

Robert Milton Rollins ("Debtor") filed a petition for relief under Chapter 7 of the Bankruptcy Code on June 16, 2006, and received a discharge on September 27, 2006. Edward W. and Wilhelmina L. Kleppinger (collectively the "Kleppingers") filed a Complaint for Determination Excepting Debt from Dischargeability ("Complaint") on September 11, 2006. On May 3, 2007, the Court conducted a trial on the merits. Entering appearances at the trial were:

Robert William Knights

Counsel for Plaintiffs, Edward W. Kleppinger and Wilhelmina L. Kleppinger Claude C. Lightfoot, Jr.

Counsel for Defendant, Robert Milton Rollins

At the conclusion of the trial, the parties were given leave to submit post-trial briefs on or before May 25, 2007, after which the Court took the matter under advisement. The Court having considered the pleadings, evidence presented, and arguments of counsel, issues the following

Memorandum Opinion.

Jurisdiction

This Court has jurisdiction pursuant to 28 U.S.C. §§157 and 1334; and 11 U.S.C. §523(a)(2).

Facts

The Complaint alleges that Debtor improperly withdrew and used funds held in a joint venture bank account and that he misled the Kleppingers by misrepresenting his assets and his intent to repay them.

Debtor is a New Orleans based real estate agent, appraiser, and rental manager. The Kleppingers are former business partners and friends of the Debtor. Debtor first met the Kleppingers in 1985 when he assisted them with the purchase of several rental properties.¹ Debtor also managed the rental properties for the Kleppingers; finding tenants, collecting rents, and supervising the properties' upkeep.²

In 1993 the Kleppingers lent Debtor money to purchase his own investment property. Debtor renovated the property and sold it for a profit after repaying the Kleppingers' loan with interest.³ After the Kleppingers witnessed Debtor's success with this initial project, the parties formed a joint venture. Debtor's responsibility was to find suitable properties to rehabilitate, hire contractors to perform the renovations, supervise the renovation work, and market the properties for sale or rental after the renovations were complete.⁴ The Kleppingers provided the funds to purchase and renovate the properties.⁵

A construction bank account was maintained by the joint venture for the purpose of satisfying renovation costs. Both Debtor and Edward Kleppinger ("Kleppinger") had signature authority on the account, although Debtor was the party who primarily used the account since he was responsible for construction management.⁶ Kleppinger was given the monthly bank statements and canceled checks and routinely reconciled the account.⁷ He also maintained a computer software ledger for each project to track costs of construction and the amounts he had advanced.⁸

When a property was sold, the Kleppingers were repaid the costs of acquisition and renovation without interest. Any remaining profit or loss was split evenly between the Kleppingers and Debtor. If there was a profit, Debtor would receive a check at closing. If there was a loss, Debtor's portion of the loss was carried by the joint venture until it could be offset by future joint venture profits.⁹

A second bank account was held by the joint venture for the purpose of managing rental properties owned by the joint venture. All rents were deposited into the management account and the expenses associated with ownership, i.e. maintenance, real estate taxes, insurance, etc., were paid from this account.¹⁰ Again, both Kleppinger and Debtor had signature authority and Kleppinger regularly received the bank statements and canceled checks on the account. As with the construction account, Kleppinger reconciled the statements to the checkbook and classified all disbursements and deposits by property in a computer ledger.

While the parties were in business together, Debtor never appears to have had much in the way of financial means. Debtor often needed assistance from the Klepplingers with living expenses and living arrangements.¹¹ The Klepplingers routinely advanced Debtor small loans to tide him over until a joint venture project could be completed and sold. The advances, made from the joint venture's accounts, were categorized as loans and repaid from Debtor's share of joint venture profits. At first, Debtor would ask Kleppinger for permission before taking an advance, but eventually Kleppinger gave Debtor permission to borrow small amounts of money without discussing it with him provided he marked the checks "RR Loan."¹² From 2001 through Spring of 2004, Kleppinger advanced approximately $97,750.00¹³ to Debtor without complaint. Kleppinger also received periodic repayments from Debtor. As of Spring 2004, the outstanding balance for Debtor's personal advances was $45,427.30.¹⁴

The problems between Debtor and the Kleppingers have their genesis in Debtor's decision to purchase, for his own account, a property located at 530 Spain Street, New Orleans, Louisiana.¹⁵ Debtor obtained a mortgage loan to purchase the property and a separate construction loan to fund its renovation.¹⁶ Unfortunately, the cost to renovate the property was higher than Debtor anticipated due to problems with a contractor. In late Spring of 2003, Debtor had a partially renovated house with no funds to complete the project.¹⁷ Kleppinger volunteered to help by loaning Debtor funds to complete the renovation.¹⁸

By the Spring of 2004, Debtor had borrowed an additional $92,373.54 for his Spain Street project¹⁹ and the renovations were still not complete. Although Kleppinger kept a running balance of the sums Debtor owed both for personal advances and on the Spain Street project, until the Spring of 2004, he did not object to either Debtor's personal borrowings or his borrowings for Spain Street.²⁰ In fact, there was no evidence that Kleppinger ever discussed with Debtor a need to begin repaying the outstanding amounts.

The relationship between Debtor and the Kleppingers collapsed in the Spring of 2004 when Kleppinger was preparing his 2003 taxes and realized how much money Debtor had borrowed.²¹ Kleppinger confronted Debtor and demanded that the borrowing stop. He also abruptly ended their joint venture.²² In order to calm an angry Kleppinger, Debtor represented that once Spain Street was complete, the equity created, when combined with the equity in a second property owned by Debtor and located in Alabama, would be sufficient to satisfy the amounts presently outstanding.

Somewhat appeased, Kleppinger agreed to forbear from collection but insisted that all borrowing stop. He took control of the construction account which he closed shortly thereafter. He also stopped depositing funds into the rental account in an effort to control Debtor's access to funds. Nevertheless, Kleppinger continued to voluntarily pay the expenses to complete the Spain project, even funding mortgage payments on the property to avoid defaults on the loans that primed his interest.²³

As the Spain Street project neared completion, in March of 2005, Kleppinger again confronted Debtor regarding his outstanding debt; demanding that Debtor sign an agreement setting forth the terms of the parties' business relationship and the basis for the debts owed by Debtor to the Kleppingers.²⁴ On March 10, 2005, the parties signed an agreement which memorialized the terms of their obligations to each other ("Agreement").²⁵ The Agreement stated that Debtor owed the Kleppingers $180,426.27. In addition to an acknowledgment of the amounts owed, Debtor "pledged all of his assets to secure the funds Ed and Willi were expending on his behalf."²⁶

Shortly before Debtor signed the Agreement, he transferred his interest in three pieces of property, 2465 Burgundy Street, 2763 Jasmine Street, and 128 King Charles Way, Alabaster, Alabama (the "Alabama property") to his sister.²⁷ The stated consideration for the Burgundy and Jasmine transfers was the assumption of debt against the properties.²⁸ Debtor's sister paid "ten dollars and other valuable consideration" for the Alabama property.²⁹ At the time of the transfer, the property was subject to a mortgage in the approximate amount of $138,000 and remained subject to that mortgage following the sale.³⁰

Despite the execution of the Agreement, Kleppinger continued efforts to collect his debt. Within days of the Agreement, Kleppinger began making angry calls to Debtor and pounding on his home door demanding repayment. Within sixty days, the Kleppingers sought the advice of legal counsel regarding collection. Shortly thereafter, the Kleppingers discovered Debtor's transfer of the Burgundy, Jasmine, and Alabama properties and filed a suit in the Civil District Court for the Parish of Orleans. Debtor filed the above captioned bankruptcy on June 16, 2006, and the Kleppingers subsequently instituted the above-captioned adversary to object to the dischargability of their debt. The Kleppingers assert that their debt is excepted from Debtor's discharge under section 523(a)(2)(A).³¹

Law and Analysis

Section 523(a)(2)(A) excepts from discharge money, an extension, renewal, or refinancing of credit to the extent obtained by "false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's . . . financial condition."³² A creditor must prove his claim is not subject to discharge by a preponderance of the evidence.³³

There has been much judicial discussion regarding the elements necessary to establish that a claim is non-dischargeable under section 523(a)(2)(A). Historically, courts distinguished between a claim created by false pretense...