Korman v. EagleBank

JONATHAN S. KORMAN, Appellant/Defendant, v. EAGLEBANK, Appellee/Plaintiff.

Case No.: PWG-12-3449

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MARYLAND Southern Division

Dated: July 22, 2013

MEMORANDUM OPINION

Appellant Jonathan S. Korman has filed an appeal from two orders that the United States Bankruptcy Court for the District of Maryland entered. ECF Nos. 1 & 6. These orders are the September 26, 2012 Memorandum of Decision and Order Denying Discharge and Judgment of Nondischargeability, ECF Nos. 1-12 & 1-13, in which the bankruptcy court held that Appellant's debt to EagleBank was nondischargeable and that Appellant was not entitled to a bankruptcy discharge, and the January 23, 2013 Order Awarding Attorney's Fees and Entering Money Judgments Against Jonathan A. Korman and Harvey J. Korman, ECF No. 6-6. Having reviewed the parties' briefs (ECF Nos. 5, 7 & 10) and the record, I find oral argument unnecessary. See Fed. R. Bankr. P. 8012; Loc. R. 105.6. For the reasons that follow, the bankruptcy court's order denying Appellant a discharge under 11 U.S.C. § 727(a) and finding Appellant's debt to EagleBank to be nondischargeable under 11 U.S.C. § 523(a)(2)(B) will be AFFIRMED, and the order awarding attorney's fees against Appellant will be AFFIRMED.

I. FACTUAL AND PROCEDURAL BACKGROUND¹

Appellant and his father, Harvey Korman (collectively, "the Kormans"), co-owned Imatek, a Maryland corporation that printed and distributed media displays for companies in the United States, including the United States Government Printing Office ("U.S. GPO"). Bankr. Ct. Mem. 2. Appellee EagleBank lent funds through various loans to Imatek until February 27, 2009, when Imatek closed. Id. Appellant, his father, and their wives personally guaranteed Imatek's debt to EagleBank. Id. at 3 & 8.

EagleBank extended a revolving line of credit ("Revolving Loan") to Imatek, up to a total of $750,000 at any given time, secured by Imatek's accounts receivable ("A/R"). Bankr. Ct. Mem. 3-4. EagleBank relied on "borrowing base certificates" or "BBCs," accompanied by A/R reports, to advance funds under the Revolving Loan and to defer collection efforts, when appropriate. Id. Appellant prepared and submitted the BBCs and A/R reports to EagleBank to obtain advances, as well as monthly in accordance with EagleBank's requirements, certifying the amount of income in its eligible accounts receivable. Id. The eligible A/R included all A/R less than ninety days old, except that if more than 50% of a customer's A/R were more than ninety days old, none of that customer's receivable balance was eligible. Id. at 3. The advance could not exceed 80% of the eligible A/R. Id.

Appellant submitted to the Bank on September 30, 2008 a BBC and A/R report (collectively, "September 30 BBC") that included fictitious accounts. Bankr. Ct. Mem. 5. Due to the inclusion of the fictitious accounts, the September 30 BBC showed eligible A/R of $818,812.53, rather than $322,447.01, the actual amount of eligible A/R. Bankr. Ct. Mem. 5-6.Because the balance of the loan to Imatek was $735,578.51 at that time, the loan appeared to be in-margin, i.e., the eligible A/R appeared to exceed the loan balance. Id. In reality, the loan was out-of-margin and the error resulted in a $385,000 over-extension of credit to Imatek. Id. at 6-7. Appellant testified that Imatek created the fictitious invoices and accounts for existing customers to test Imatek's new accounting system, and he unknowingly generated the September 30 BBC during the brief period before the fictitious accounts were deleted. Bankr. Ct. Mem. 5. According to Appellant's testimony, this was an inadvertent mistake, and he notified EagleBank as soon as he discovered it. Trial Tr. 174:12-23, 178:6-9, 180:8-19, May 3, 2011, ECF No. 1-4.

Thereafter, the parties entered into a Forbearance and Modification Agreement ("Forbearance Agreement") on December 3, 2008. Bankr. Ct. Mem. 7. In exchange for a personal guarantee on the entire debt, EagleBank agreed not to exercise its rights regarding Imatek's defaults on the loans, modified the payment terms on the loans, required that all A/R payments be sent to a lockbox account, and extended additional credit of $250,000 to Imatek. Id. at 8. Two months later, in February 2009, through Appellant and his father's personal counsel, Imatek informed EagleBank that it needed additional cash to stay in business. Id. Based on these communications, EagleBank issued a default notice to Imatek on February 25, 2009, identifying various defaults and the cure period for each. Id. at 9. Imatek went out of business on February 27, 2009, without curing the defaults. Id.

Harvey Korman opened a bank account at PNC Bank ("PNC Account") in early March, 2009. Bankr. Ct. Mem. 9. Although it is disputed whether Appellant opened the account with his father, compare Appellant's Br. 4 & 17 with Appellee's Br. 10, it is undisputed that, as ofMarch 27, 2009, the account was in both of their names.² Appellant's Br. 4; Appellee's Br. 10. By email, Appellant directed the U.S. GPO to submit payments on receivables to the PNC Account, and the U.S. GPO submitted payments of $23,102 ("U.S. GPO Funds") to that account, rather than the lockbox account. Bankr. Ct. Mem. 10; Trial Tr. 102:4-23, 120:10-14, May 4, 2011. The PNC Account did not appear on Imatek's bankruptcy schedules, Bankr. Ct. Mem. 11, and the Kormans did not disclose the account to EagleBank until October 2009, seven months after opening it, Trial Tr. 11:1-118:7, May 4, 2011 (Appellant's testimony).

On February 27, 2009, Appellant filed for relief under Chapter 11 of the Bankruptcy Code, and the bankruptcy court converted the case to a Chapter 7 case. Bankr. Ct. Mem. 2 & n.4; Bankr. Ct. Case No. 09-13353 (WIL) (In re Jonathan & Michelle Korman). As a creditor, EagleBank filed a proof of claim for $2,925,941.39. Bankr. Ct. Mem. 2-3. EagleBank also initiated an adversary proceeding against Appellant on June 5, 2009, alleging that Appellant's debt to EagleBank, including the U.S. GPO Funds, was not subject to discharge in bankruptcy pursuant to 11 U.S.C. § 523(a)(2) and § 727(a).³ Bankr. Ct. Mem. 12; Bankr. Ct. Case No. Adv. Proc. 09-362, Docket Entry 1. The bankruptcy court concluded that the U.S. GPO Funds were excepted from discharge under 11 U.S.C. § 523(a)(6) and that Appellant's debt to EagleBankwas excepted from discharge under 11 U.S.C. § 523(a)(2)(B), and the court denied Appellant a discharge under 11 U.S.C. § 727(a). Bankr. Ct. Mem. 27, 30, 32, & 34.

II. STANDARD OF REVIEW

This Court has jurisdiction over appeals from the bankruptcy court. 28 U.S.C. § 158. It is well established that this Court "reviews a bankruptcy court's findings of fact for clear error and conclusions of law de novo." Rosen v. Kore Holdings, Inc. (In re Rood), 448 B.R. 149, 157 (D. Md. 2011); see In re Official Comm. of Unsecured for Dornier Aviation (N. Am.), Inc., 453 F.3d 225, 231 (4th Cir. 2006). Also, this Court reviews the bankruptcy court's application of law to fact for abuse of discretion. Coggins & Harman, P.A. v. Rosen (In re Rood), No. DKC-12-1623, 2013 WL 55650, at *2 (D. Md. Jan. 2, 2013). Notably, when intent is an element of the law that the bankruptcy court applies, "'[w]hether a particular debtor has satisfied [that element] is a question of fact. Because the average debtor will deny the fraudulent intent alleged by a party seeking denial of the debtor's discharge, a court may decide the issue upon circumstantial evidence or "inferences drawn from a course of conduct."'" Pumphrey v. Neese, No. 10-cv-3215-AW, 2011 WL 1627163, at *2 (D. Md. Apr. 27, 2011) (quoting Wachovia Bank, Nat'l Ass'n v. Voccia (In re Voccia), 477 B.R. 625, 632-33 (Bankr. E.D. Va. Feb. 1, 2011) (citation omitted)). Additionally, "[d]eference to a bankruptcy court is particularly appropriate on findings of intent, 'because a determination concerning fraudulent intent depends largely upon an assessment of the credibility and demeanor of the debtor.'" Simone v. Donahoo, No. GLR-12-1143, 2013 WL 360389, at *4-5 (D. Md. Jan. 29, 2013) (quoting Boyuka v. White (In re White), 128 Fed. App'x 994, 999 (4th Cir. 2005)). Likewise, deference "is particularly appropriate when, as here, the bankruptcy court presided over a bench trial in which witnesses testified and the court made credibility determinations." Unsecured Creditors for Dornier Aviation, 453 F.3dat 235. "So long as the bankruptcy court's account of evidence is plausible, the district court may not reverse the decision simply because it would have weighed the evidence differently." Simone, 2013 WL 360389, at *2. Thus, "[i]f there are 'two permissible views of evidence, the factfinder's choice between them cannot be clearly erroneous.'" Id. (quoting McGahren v. First Citizens Bank & Trust Co. (In re Weiss), 111 F.3d 1159, 1166 (4th Cir. 1997)).

III. DISCUSSION⁴

A creditor may petition the bankruptcy court to prevent the discharge of debt under either § 523(a) or § 727(a) of the Bankruptcy Code. See 11 U.S.C. §§ 523(a), 727(a), 727(c)(1). However, § 523(a) "sets forth a variety of grounds upon which a claim of a particular creditor against the debtor may be held to be non-dischargeable," while § 727(a) "sets forth grounds upon which the debtor's discharge may be denied for reasons relating to conduct of the debtor affecting all creditors." In re Hass (Hass v. Hass), 273 B.R. 45, 49 (S.D.N.Y. 2002) (emphasis added). Consequently, "[a] judgment of non-dischargeability under Section 523(a) benefits only the debt owed to the particular creditor who objected to dischargeability and has no impact on claims of other creditors," whereas "[s]uccessful prosecution of a claim under Section 727(a) results in a judgment denying the debtor's right to a discharge as to all of his pre-petition creditors." Id. Because "[t]he grounds for challenging dischargeability under Section 523(a) and discharge under Section 727(a) are quite different," a court may find a...