Strategic Funding Source, Inc. v. Veale (In re Veale)

In re: MICHELLE A. VEALE, Debtor.

STRATEGIC FUNDING SOURCE, INC., Plaintiff, v. MICHELLE A. VEALE, Defendant.

No. 21-10418 (BLS)

Adv. Pro. No. 21-50486 (BLS)

United States Bankruptcy Court, D. Delaware

November 30, 2021

Chapter 13

Michael Busenkell, Esquire Amy D. Brown, Esquire Gellert Scali Busenkell & Brown, LLC Counsel for Strategic Funding Source, Inc.

Peter K. Schaeffer, Jr., Esquire Counsel for Debtor

OPINION ^[1]

(RE: D.I. 6)

Brendan Linehan Shannon United States Bankruptcy Judge

The Debtor, Michelle A. Veale, personally guaranteed a high interest loan made to the business entity she owned prior to the business's Chapter 11 bankruptcy filing. After the Debtor filed her own Chapter 13 case, the lender, Strategic Funding Source, Inc. ("SFS"), filed an adversary complaint (the "Complaint") asserting that Ms. Veale's personal guarantee of the business debt is nondischargeable under various subsections of Bankruptcy Code § 523.

Before the Court is the Debtor's Motion to Dismiss SFS's complaint under Fed.R.Bankr.P. 7012.^[2] SFS filed a Memorandum in Opposition to the Motion to Dismiss^[3] and the Debtor filed a Reply in Support of the Motion to Dismiss.^[4] The Court heard oral argument on the Motion to Dismiss on October 14, 2021. The matter is ripe for disposition.

For the reasons set forth herein, the Court concludes that the Complaint fails to allege facts that support plausible claims for nondischargeability under § 523(a)(2), (4) or (6). The Debtor's Motion to Dismiss will be granted.

ALLEGED FACTS

The Complaint alleges the following facts:

1. On or about April 11, 2017, the Debtor executed a loan agreement with SFS in her capacity as owner of Retro Home Health Care Services, Inc. (the "Business"), as Borrower, and in her individual capacity, as Guarantor.^[5]

2. The Loan Agreement provided that SFS would provide the Business with a loan in the principal amount of $230, 000.00, and the Business promised to pay SFS the "Repayment Amount" of $319, 700.00 (consisting of principal in the amount of $230, 000.00 and interest in the amount of $89, 700.00) in 52 weekly payments of $6, 152.80 each, reflecting an effective interest rate of approximately 39 percent.^[6]

3. The Debtor personally guaranteed the Business's payment and performance under the Loan Agreement.^[7]

4. Prior to finalizing the Loan Agreement and advancing the funds, SFS recorded a telephone call with the Debtor in which SFS asked the following questions:

Q: Have you been planning to file or do you know of any reason to believe that your business will need to file for bankruptcy protection in the foreseeable future?

A: No, no I don't.

Q: Do you currently have a balance with any other merchant cash advance provider?

A: No.

5. On or about April 13, 2017, SFS advanced the loan amount, less fees (the "Funds").^[8]

6. Pursuant to instructions by the Business and the Debtor, SFS paid $101, 327.81 of the Funds directly to Provider Web Capital to satisfy a balance owed by the Business and the Debtor.^[9]

7. From April 17, 2017 through May 15, 2017, SFS received five payments from the Business's bank account totaling $30, 764.00.^[10]

8. On or about May 22, 2017 and May 30, 2017, SFS attempted to draft the next two payments from the Business's bank account, but both payments were rejected and failed to clear.

9. From May 25, 2017 through July 14, 2017, SFS made numerous attempts to contact the Business and the Debtor to address the "stop payment" on the account and the outstanding balance on the Loan, but neither the Business nor the Debtor returned SFS's calls.^[11]

10. On July 17, 2017, the Business filed a Chapter 11 bankruptcy case (the "Business Bankruptcy") in the United States Bankruptcy Court for the Southern District of Indiana (the "Indiana Bankruptcy Court").^[12]

11. The Business paid SFS nine monthly adequate protection payments of $1, 000.00 each pursuant to the Final Order Authorizing Use of Cash Collateral entered by the Indiana Bankruptcy Court.^[13]

12. On August 2, 2018, the Business's Chapter 11 Plan was confirmed and on November 8, 2018, SFS received payment of $5, 099.41.^[14]

13. The Loan Agreement required the entire balance owed to SFS to be paid by April 2018.^[15] When the Debtor failed to make any payments under the personal guarantee, on May 18, 2018, SFS filed a complaint against the Debtor in the Circuit Court of the County of Hanover, Virginia (the "Virginia State Court") alleging claims of breach of contract and fraud.^[16]

14. The Debtor failed to appear in the Virginia State Court and SFS obtained a default judgment against the Debtor on July 17, 2018 for more than $300, 000.00, including principal of $230, 000.00, a default fee of $2, 500.00, unpaid interest of $51, 486.00, attorney's fees of $16, 500.00, plus interest at the judgment rate of 6% per annum and any and all court costs.^[17]

15. On February 18, 2021, the Debtor filed a Chapter 13 bankruptcy case before this Court.

MOTION TO DISMISS STANDARD

When reviewing a motion to dismiss, the court will "accept all factual allegations as true, construe the complaint in the light most favorable to the plaintiff, and determine whether, under any reasonable reading of the complaint, the plaintiff may be entitled to relief."^[18] In Twombly, the Supreme Court instructed that a pleading must nudge claims "across the line from conceivable to plausible."^[19]"A claim has facial plausibility when the pleaded factual content allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged."^[20] The Third Circuit follows a three-step process to determine the sufficiency of a complaint:

First, the court must "take note of the elements a plaintiff must plead to state a claim." Second, the court should identify allegations that, "because they are no more than conclusions, are not entitled to the assumption of truth." Finally, "where there are well-pleaded factual allegations, a court should assume their veracity and then determine whether they plausibly give rise to an entitlement for relief."^[21]

The movant carries the burden of showing that the dismissal is appropriate.^[22]

DISCUSSION

SFS's Complaint contains four counts, each seeking a declaration that the Debtor's guarantee is nondischargeable pursuant to various subsections of Bankruptcy Code § 523. Generally, SFS alleges that the Debtor made the following misrepresentations at the time the loan was made (the "Alleged Misrepresentations"):

(1) the Business and the Debtor were not insolvent;

(2) the Business and the Debtor's financial conditions were such that the Business would not need to file bankruptcy in the "foreseeable future;"

(3) the assets subject to the security agreement were free from any liens, security interests or other encumbrances that would be superior or adverse to SFS;

(4) the Business and the Debtor would fulfill the obligations under the Loan Agreement, by allowing SFS to draft the agreed payments from one designated bank account and provide SFS with irrevocable access to the account for repayment (5) the Business and Debtor would deposit all receivables into the bank account;

(6) the Business's financial information was accurately reflected in documents and information produced to SFS;

(7) the Business intended to use the funding for business purposes rather than personal, family or household purposes;

(8) the Debtor intended to guarantee full and prompt performance of all obligations;

(9) neither the Business nor the Debtor were in arrears with any of their creditors;

(10) the Business was in good standing under all applicable laws under which the Business operates; and

(11) neither the Business nor the Debtor had or would have an outstanding balance with any other merchant cash advance provider.

The Debtor argues that the facts alleged in the adversary Complaint do not support claims for fraud or other grounds that would prevent the discharge of her guarantee obligations. She claims that the facts establish only that the small business she owned was struggling and took on the high interest loan from SFS, which she guaranteed. The Business made payments on the loan, but then defaulted and filed a chapter 11 bankruptcy case. The Debtor contends that the facts here are no different than other business lending transactions in which an entity cannot pay and seeks protection under the Bankruptcy Code.

"Dischargeability exceptions are narrowly construed."^[23] Courts have recognized that the reasons for denying a discharge must be real and substantial, not merely technical and conjectural.^[24] "A narrow construction is warranted given that one of the fundamental policies underlying the Bankruptcy Code is to permit honest debtors to reorder their financial affairs and obtain a 'fresh start,' unburdened by the weight of preexisting debt."^[25] A creditor objecting to the discharge of debts bears the burden of proof.^[26]

1. Count 1 - Nondischargeability of debt pursuant to § 523(a)(2)(A)

Section 523(a)(2)(A) provides that an individual's debt will not be discharged to the extent that the debt was "obtained by false pretenses, a false representation or actual fraud, other than a statement respecting the debtor's or an insider's financial condition."^[27] To establish nondischargeability under this section, a creditor must demonstrate that:

(i) The debtor made misrepresentations or perpetuated fraud;

(ii) The debtor knew at the time that the representations were false;

(iii) The debtor made the misrepresentations with the intention and purpose of deceiving the creditor (iv) The creditor justifiably relied on such misrepresentations; and

(v) The creditor sustained loss and damages as a proximate result of the

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