Rosenberger v. Gallagher (In re Gallagher), Case No.: 13-26584-ABA

In Re: MARK GALLAGHER and PAMELA GALLAGHER, Debtors.

GIGI GALLAGHER ROSENBERGER, individually,and NANCY CELLA, as executrix of the Estate of John J. Gallagher, Plaintiffs v. MARK GALLAGHER and PAMELA GALLAGHER, Defendants

Case No.: 13-26584-ABA

Adv. No.: 14-01236-ABA

UNITED STATES BANKRUPTCY COURT DISTRICT OF NEW JERSEY

September 9, 2016

NOT FOR PUBLICATION

Chapter: 7

Judge: Andrew B. Altenburg, Jr.

MEMORANDUM DECISION

Before the court is the adversary proceeding filed by Plaintiffs Nancy Cella, as executrix of the Estate of John J. Gallagher, and Gigi Gallagher Rosenberger, objecting to discharge and dischargeability under sections 727(a) and 523(a) of title 11 of the United States Code (the "Bankruptcy Code"). Prior to trial, the court dismissed all claims against Defendant Pamela Gallagher, all of Ms. Cella's section 523 claims against Mark Gallagher, and several of Ms. Rosenberger's section 523 and 727 claims against Mark Gallagher. As to the remaining claims under section 523(a)(2)(A) and section 727(a)(4)(A), the court finds that the Plaintiffs did not present evidence necessary to meet their burden of proof and thus it rules in favor of the Mark Gallagher.

JURISDICTION AND VENUE

This matter before the court is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I) and (J), and the court has jurisdiction pursuant to 28 U.S.C. § 1334, 28 U.S.C. § 157(a) and the Standing Order of Reference issued by the United States District Court for the District of New Jersey on July 23, 1984, as amended on September 18, 2012, referring all bankruptcy cases to the bankruptcy court. The following constitutes this court's findings of fact and conclusions of law as required by Federal Rule of Bankruptcy Procedure 7052.

PROCEDURAL HISTORY

The Debtors, Mark and Pamela Gallagher, filed a voluntary petition for bankruptcy under chapter 7 of the Bankruptcy Code on July 30, 2013. On February 14, 2014 Ms. Rosenberger and Ms. Cella filed this adversary proceeding seeking the denial of discharge of certain debts under section 523 and objecting to the discharge of the debtors under section 727. The Debtors filed a motion for summary judgment on November 3, 2015, and following a hearing, the court granted the motion in part and denied it in part. All claims against Pamela Gallagher were dismissed, as were all of Ms. Cella's section 523 claims against Mark Gallagher, along with several of Ms. Rosenberger's claims under sections 523 and 727. The claims that remain against Mark Gallagher are Ms. Rosenberger's claim under section 523(a)(2)(A) and both Plaintiffs' objection to the discharge of Mark Gallagher under section 727(a)(4)(A).

A trial was held on June 16, 2016 and both parties submitted post-trial briefs on August 5, 2016. The following are the court's findings of fact and conclusions of law.

FINDINGS OF FACT

Before delving into the procedural facts, an explanation of the relationship of the parties is helpful. Pamela and Mark Gallagher are husband and wife. Mark and his brother, Terrence Gallagher, co-own Gallagher Brothers LLC ("Gallagher Brothers") each as a 50% owner/member. Mark Gallagher also owned a company called Mark Gallagher Inc. and had interests in companies named Malmar Inc. and Atlantic One Tilton LLC. Mark and Terrence's brother, John C. Gallagher, is a partner in the accounting firm of Gallagher & Rhodes, P.A. John. J. Gallagher was a cousin of Mark Gallagher and owned a company, John Gallagher Painting that Gallagher Brothers often hired as a commercial painter for its various construction projects. John J. Gallagher is deceased, and his sister, Ms. Cella, as the executrix of his estate, is a Plaintiff in this adversary proceeding. Gigi Gallagher Rosenberger ("Ms. Rosenberger" and together with Ms. Cella the "Plaintiffs") was a real estate broker with 20 years of experience. Gallagher Brothers often hired her firm, CBAG LLC, as the agent for various projects the company purchased and completed.

Gallagher Brothers was a construction company that purchased properties and constructed residential and commercial buildings "on spec," with the intent to sell the properties once construction was completed. In and around 2008, Gallagher Brothers was constructing a commercial project at 3330 Bargaintown Road, Egg Harbor Township, New Jersey ("Bargaintown Road") when financial difficulties arose with the project.

Sometime in 2007, Gallagher Brothers borrowed $995,000 from CBAG LLC (the "Rosenberger Loan").¹ Mark Gallagher personally guaranteed this loan. Beginning in November of 2007 and continuing through October of 2008, Ms. Rosenberger wrote four checks to Gallagher Brothers.

In February 2008, Gallagher Brothers borrowed $775,000 from John J. Gallagher (the "John J. Loan"). Mark Gallagher also personally guaranteed this loan.

Finally, in late 2008, Mark Gallagher pledged his shares in Gallagher Brothers as well as his interest in his other corporations as security for a $225,000 loan from his brother John C. Gallagher's accounting firm, Gallagher & Rhodes, P.A (the "John C. Loan").

Around the time work began on Bargaintown Road, Gallagher Brothers had several other projects under construction and Mark Gallagher was also completing work on his personal residence on Osborne Avenue, Margate City, New Jersey (the "Osborne Property"), as well as working on several other projects. In 2012, Bargaintown Road was lost in a foreclosure action. Gallagher Brothers was unable to repay the Rosenberger Loan or the John J. Loan.

On July 30, 2013, the Debtors filed their chapter 7 petition. Their Schedules I and J indicated that Mark Gallagher had no income from January through July of 2013. Additionally, the Statement of Financial Affairs filed indicated that he had no income from employment or operation of business in 2012.

DISCUSSION

As noted above, the only claims remaining against Mark Gallagher are the claim by Ms. Rosenberger under section 523(a)(2)(A) and the claim brought by both Plaintiffs under 727(a)(4)(A). These claims will be discussed separately.

A. Exception from Discharge under 523(a)(2)(A)

Turning first to the claim under section 523(a)(2)(A), the Bankruptcy Code states that a debt may be excepted from discharge if it was obtained under false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition. 11 U.S.C. § 523(a)(3)(A). The elements of section 523(a)(2)(A) must be established by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 291 (1991). Generally, the provisions of section 523(a) are "strictly construed against creditors and liberally construed in favor of debtors," owing to the overriding bankruptcy purpose of granting debtors a fresh start. In re Cohn, 54 F.3d 1108, 1113 (3d Cir. 1995). The elements that must be proven for fraud under section 523(a)(2)(A) are:

(1) the debtor obtained money, property or services through a material misrepresentation;

(2) the debtor, at the time, knew the representation was false or made with gross recklessness as to its truth;

(3) the debtor intended to deceive the creditor;

(4) the creditor [justifiably] relied on the debtor's false representations; and

(5) the creditor sustained a loss and damages as a proximate result of the debtor's materially false representations.

In re Karpo, 2011 WL 3034486, at *6 (Bankr. D.N.J. July 22, 2001) (citing De La Cruz v. Cohen (In re Cohen), 191 B.R. 599, 604 (D.N.J. 1996), aff'd, 106 F.3d 52 (3d Cir. 1997), aff'd, 523U.S. 213 (1998)). Gross recklessness satisfies the scienter requirement of section 523(a)(2)(A). In re Bocchino, 794 F.3d 376, 380 (3d Cir. 2015).

Applying these elements to this case, the court cannot find that Ms. Rosenberger met her burden. Specifically, she failed to show that Mark Gallagher made any misrepresentation that he knew at the time was false or that he made with gross recklessness at the time of the transaction.

Ms. Rosenberger alleged five misrepresentations or omissions made by Mark Gallagher, which she relied to her detriment in deciding to agree to the Rosenberger Loan. First, she alleged that Mark Gallagher told her that the proceeds from the Rosenberger Loan would be used exclusively for Bargaintown Road, when the funds were in fact used for other things including the Osborne Property. Next, she alleged that Mark Gallagher misrepresented that the proceeds from the Rosenberger Loan would be held in a separate account. Third, she alleged that Mark Gallagher omitted that Gallagher Brothers was receiving additional funding through the John J. Loan. Fourth, Ms. Rosenberger alleged that Mark Gallagher omitted the fact that he intended to pledge his interest in Gallagher Brothers and other companies as security for the John C. Loan. Finally, Ms. Rosenberger alleged that Mark Gallagher failed to inform her that the bank had already rejected a Gallagher Brothers loan application, and instead intimated that he simply did not want to deal with the bureaucracy of the bank.

The only evidence submitted by Ms. Rosenberger were two exhibits, neither of which established any of the allegations listed above, or any of the elements Ms. Rosenberger was required to establish under section 523(a)(2)(A). She offered four checks from CBAG LLC to Gallagher Brothers totaling $995,000. Ex. 2. Mark Gallagher never contested that a loan in the amount of $995,000 was made by Ms. Rosenberger. Thus, these checks did not help establish any of the elements discussed above.

Second, Ms. Rosenberger admitted into evidence Cape Savings Bank account statements for Mark and Pamela Gallagher (the "Accounts Statements"). Ex. 10. The Account Statements are unrelated to the section 523 claim and relate instead, only to the claim under section 727.

Thus, Ms. Rosenberger asks the court, based only on the testimony presented at trial, to conclude that the Rosenberger Loan should be excepted from discharge.

a. Proceeds of the Rosenberger Loan would be used exclusively for...