Tortola v. Wilson (In re Wilson)

In re: JAMES GILMORE WILSON, Debtor

JANE OLSZESKI TORTOLA, JOAN OLSZESKI,and JUDY OLSZESKI HOLCOMB, Plaintiffs v. JAMES GILMORE WILSON, Defendant

Case No. 17-12895-JNF

Adv. P. No. 17-1140

UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF MASSACHUSETTS

February 27, 2018

Chapter 7

MEMORANDUM

I. INTRODUCTION

The matter before the Court is the Motion to Dismiss Complaint filed by James Gilmore Wilson (the "Defendant," the "Debtor," or "Wilson"). The Defendant seeks dismissal of the Complaint filed by Jane Olszeski Tortola, Joan Olszeski, and Judy Olszeski Holcomb (collectively, the "Plaintiffs"), pursuant to Fed. R. Civ. P. 9(b) and Fed. R. Civ. P. 12(b)(6), made applicable to this proceeding by Fed. R. Bankr. P. 7009 and 7012(b), respectively. The Plaintiffs, through their single-count Complaint under 11 U.S.C. § 523(a)(2)(A), seek to except a debt in the principal sum of $3,530,000, plus accruing, post-default interest, from the Debtor's discharge on the ground that the funds were obtained by false pretenses, false representations and actual fraud.

II. THE COMPLAINT

The Court paraphrases the facts alleged in Plaintiffs' Complaint.

On or about May 31, 2006, for valuable consideration, Wilson, the sole officer and shareholder of OP Ohio Corporation ("OP Ohio") executed a promissory note (the "Note") in favor of the Plaintiffs. The Note was executed in connection with Wilson's purchase of three parcels of commercial real property (the "real estate"), plus improvements, from the Plaintiffs. Pursuant to the Note, Wilson and OP Ohio unconditionally promised to pay Plaintiffs the principal sum of $3,530,000. The Note formed part of the consideration for the purchase of the real estate along with funds borrowed by Wilson from Huntington National Bank (the "Huntington Bank") and Key Bank, N.A. ("Key Bank").

Wilson ultimately transferred the purchased real estate assets to OP Ohio and HG Ohio Corporation ("HG Ohio"), another corporation that he solely owned and controlled as sole shareholder and officer. HG Ohio unconditionally guaranteed the obligations under the Note.

HG Ohio's primary lender at the time was Key Bank. A covenant in HG Ohio's loan documents with Key Bank prohibited HG Ohio from taking on any subordinated debt outside the ordinary course of business. This covenant should have imposed a barrier to HG Ohio's guarantee of the Note obligations. Nevertheless, Wilson had the Plaintiffs sign a "No-Lien Agreement" in an effort to hide the HG Ohio guarantee fromKey Bank. The No-Lien Agreement was intended to prohibit any actions on behalf of the Plaintiffs to enforce rights under the Note that might have highlighted the existence of the Note and the related guaranty obligations to Key Bank.

The Note provided that payment of the principal sum of $3,530,000 was due on or before June 1, 2009 and further provided for the pledge of certain collateral to the Plaintiffs by Wilson and OP Ohio to secure payment of the Note and any other indebtedness to the Plaintiffs. The Note referenced a "subordination agreement" between Wilson and Huntington Bank pursuant to which the amounts owing under the Note were deemed to be subordinated to any payments owed from Wilson and OP Ohio to Huntington Bank, including without limitation a certain debt of $2,950,000 extended by Huntington Bank to Wilson and OP Ohio on May 6, 2006.

Plaintiffs were never presented with and never executed a subordination agreement. To date, no payments have ever been made on the Note by Wilson or the companies he controlled, including OP Ohio, HG Ohio, or anyone acting on their behalf. The failure to pay constituted a default under the terms of the Note and guarantees. Wilson failed to pay the Plaintiffs any portion of the $3,530,000 principal on the payment date or at any time afterwards.

In 2010, the Plaintiffs brought suit in state court in Ohio in the Stark County Court of Common Pleas, Case No. 2009 CV 0227 (the "Ohio State Court Action") to enforce the Note and moved for the appointment of a receiver. Wilson thereafter caused bankruptcy petitions to be filed for both HP Ohio Corporation ("HP Ohio") (Bankr. Case No. 09-64631) and OP Ohio (Bankr. Case No 09-64633) (the "Ohio Bankruptcy Cases") in theEaster Division of the United States Bankruptcy Court for the Northern District of Ohio (the "Bankruptcy Court") at least in part to invoke the automatic stay.¹ The Ohio Bankruptcy Cases were jointly administered. The Ohio State Court Action was removed to the Bankruptcy Court and, according to the Plaintiffs, they were awarded summary judgment in an adversary proceeding allowing their claims against HG Ohio, OP Ohio and Wilson on their Note (the "Judgment"). The Bankruptcy Cases were ultimately dismissed by agreement which among other things preserved all of the Plaintiffs' rights and claims against Wilson under the Note. Wilson, at that time, appeared to be judgment proof, and the Plaintiffs were unable to satisfy in full or in part their claims under the Note.

According to the Plaintiffs, not only did Wilson and his wholly-owned entities fail to make any payment on the Note, upon information and belief, Wilson deliberately disbursed funds due to the Plaintiffs from and among the various businesses of which he was the sole owner, including from HG Ohio and OP Ohio, to Pine Street Management ("PSM"), Pine Street Investments ("PSI") and First Choice ("First Choice"), contrary to his clear obligations under the Note.

PSM was engaged to manage the properties that were sold by Plaintiffs to Wilson.² PSI was a "holding company" that, upon information and belief of the Plaintiffs, Wilson established to impermissibly move and hide funds from his creditors. Wilson acknowledged paying dividends to "investors" in PSI and First Choice from funds belonging to OP Ohio and HG Ohio, each a principal obligor and guarantor of the Note obligations, respectively, despite failing to pay any of the debt owed under the Note.

The Plaintiffs further allege that Wilson engaged in fraud and misrepresentation in inducing the Plaintiffs to enter into the real estate transaction and the related Note, asserting that Wilson fraudulently represented to the Plaintiffs that he had disclosed the existence and terms of the Note to Huntington Bank or Key Bank (the "Lenders") when, in fact, he had not done so. Wilson required the execution of the No-Lien Agreement to defraud Key Bank in direct violation of HG Ohio's agreements with Key Bank. The Plaintiffs contend that they "would never have entered into the transaction with Wilson, nor agreed to the terms of the Note had they known that the full scope of the transaction had not been disclosed to the Lenders as represented by Wilson and on the face of the Note." Plaintiffs would never have entered into the transaction with Wilson had theyknown that, by doing so, Wilson was immediately in default to Key Bank, a default he actively sought to hide from Key Bank.

Finally, the Plaintiffs allege that Wilson's conduct evidences a systematic intention to misrepresent the terms of the deal, to misrepresent his ability to meet his obligations under the Note, to divert funds from his creditors, and to forestall satisfaction of his obligations to the Plaintiffs. Wilson also has refused to cooperate with the Plaintiffs' efforts to satisfy the Judgment obtained in the State Court Action and the Bankruptcy Cases. According to the Plaintiffs, on information and belief, Wilson was in the possession or custody of assets that he refused to disclose that could have been used to satisfy his obligations to Plaintiffs under the Note.

III. THE MOTION TO DISMISS

The Defendant moves to dismiss the Plaintiffs' Complaint stating:

[T]he Complaint, based entirely on vague, conclusory allegations of fraud, falls woefully short of the particularity pleading standards of Rule 9(b). Further, to the extent that the allegation of fraud includes an allegation that the Debtor misrepresented his ability to pay, such allegation should be dismissed for failure to plead a writing. Finally, as appears from the allegations of the Complaint, the Plaintiffs could not have been harmed by any alleged "actual fraud."

The Defendant summarizes the Plaintiffs' allegations of fraud pointing to 1) the Defendant's alleged misrepresentation to the Plaintiffs that he had disclosed the transaction to the senior lenders when he did not disclose "the full scope of the transaction;" 2) that the Defendant "misrepresented his ability to meet his obligations under the Note;" and 3) the Defendant caused the borrowers, HG Ohio and OP Ohio, to fraudulently divert assets to two affiliates, a certain Pine Street Management and PineStreet Investments, which assets were presumably otherwise available to satisfy the Defendant's obligations the Plaintiffs. The Defendant concludes:

[T]he allegations contained in the Complaint are woefully deficient. First, the allegations fail to satisfy the basic pleading requirement that allegations of fraud be pled with particularity. Second, the allegation that the Debtor fraudulently misrepresented his ability to pay fails to allege a writing as is required by Section 523(a)(2). Third, the allegations of fraudulent diversion of assets does not state a claim of fraud for which any damages might be available, because the Plaintiffs admit in their Complaint that their claims were subordinate to both KeyBank and Huntington Bank.

The Plaintiffs filed an Opposition to the Defendant's Motion to Dismiss. They maintain that they pled their allegations of fraud with sufficient particularity. In addition they set forth additional allegations and requested permission to amend the Complaint to include their further allegations. In particular, the Plaintiffs allege, among other things, that the Debtor disregard corporate procedures by ignoring Ms. Olszeski Tortola's rights as a board member of HP Ohio and HG Ohio and commenced the Bankruptcy Cases without requisite corporate authority and that the...