Wiley v. Olson (In re Olson)

1

IN RE: PATRICK LEE OLSON, Debtor.

MICHAEL WILEY, successor by assignment to MCGRATH TECHNICAL STAFFING, INC. d/b/a MCGRATH SYSTEMS, Plaintiff, v. PATRICK LEE OLSON, Defendant.

No. 22-11556-mdc

Adversary Pro No. 22-00058

United States Bankruptcy Court, E.D. Pennsylvania

May 10, 2024

CHAPTER 7

MEMORANDUM

Magdeline D. Coleman Chief U.S. Bankruptcy Judge

I. INTRODUCTION

Pending before the Court for resolution are (i) the Complaint^[1] filed by creditor Michael Wiley ("Mr. Wiley") in the above-captioned adversary proceeding (the "Nondischargeability Action"), seeking a determination that the judgment he holds against Patrick Olson (the "Debtor" and together with Mr. Wiley, the "Parties") in the amount of $3,678,122.58 (the "Default Judgment") is nondischargeable pursuant to §§523(a)(2) and (a)(4) of the United States Bankruptcy Code, 11 U.S.C. §§101, et seq. (the "Bankruptcy Code"), and (ii) the Debtor's motion to avoid Mr. Wiley's judicial lien on the Debtor's real property located at 101 Blossom Way, Pottstown, Pennsylvania (the "Property") as a result of the Default Judgment (the "Lien Avoidance Motion") to the extent it impairs the Debtor's homestead exemption.^[2]

The Court held an evidentiary trial (the "Trial") in the Nondischargeability Action on August 8, 2022, at the conclusion of which it took the matter under advisement. The Court held a hearing (the "Hearing") on the Lien Avoidance Motion on November 14, 2023, at the conclusion of which the Court took that matter under advisement as well.

For the reasons discussed below, the Court finds that (i) $3,003,000.00 of the Default Judgment is excepted from the Debtor's discharge pursuant to §523(a)(2)(A) of the Bankruptcy Code, and (ii) Mr. Wiley's judicial lien on the Property is avoided for all amounts in excess of $115,864.95.

II. RELEVANT FACTUAL AND PROCEDURAL BACKGROUND^[3]

A. The Parties' Business Relationship and the 2017 Deals

Mr. Wiley owned and operated a general staffing business through his entity, McGrath Technical Staffing d/b/a McGrath Systems ("McGrath"). The Debtor owned and operated an entity called Idea IT Solutions, LLC ("Idea Solutions"). Mr. Wiley was introduced to the Debtor in or about 2016, and at some point thereafter, the Parties commenced a business relationship involving the procurement and supply of technology hardware and software to third parties (collectively, the "Technology Products"). Pursuant to that relationship, Mr. Wiley, through McGrath, would obtain and contribute capital funding, which the Debtor would then use to acquire, configure if necessary, and supply the Technology Products to clients.

Three deals that occurred or were contemplated in 2017 are relevant to the Nondischargeability Action (collectively, the "2017 Deals"). First, according to the Debtor, he and Mr. Wiley had a deal with an entity referred to as CMG (the "CMG Deal"), whereby CMG paid McGrath funds for the purchase of certain software, which McGrath then paid to Idea Solutions,^[4] minus a small percentage that McGrath kept. The Debtor, through Idea Solutions, then provided CMG with the software. In connection with the CMG Deal, McGrath made the following payments to Idea Solutions:

Date

Amount

February 7, 2017

$24,370.87

March 23, 2017

$283,600.00

April 10, 2017

$270,400.00

May 23, 2017

$120,000.00

June 2, 2017

$30,000.00

July 18, 2017

$54,000.00

Total

$782,370.87

See Plaintiff s Ex. 1. For reasons that are not clear to the Court after reviewing the testimony of both the Debtor and Mr. Wiley, McGrath treated the last of these two payments, totaling $84,000, as being outstanding debts owed to it (the "Outstanding CMG Payments").

The second of the 2017 Deals was a proposed project with an entity referred to as Synechron, pursuant to which it was contemplated that Idea Solutions would acquire certain technology equipment for Synechron (the "Synechron Deal"). In connection with the Synechron Deal, McGrath made the following payments to Idea Solutions:

Date

Amount

February 15, 2017

$150,000.00

March 8, 2017

$250,000.00

April 25, 2017

$200,000.00

Total

$600,000.00

Although Idea Solutions evidently acquired the technology as contemplated, the Synechron Deal did not close for reasons that were not explained at Trial. As a result, McGrath was not repaid any amount of the moneys paid to Idea Solutions, and treated all of the payments, totaling $600,000, as outstanding (the "Outstanding Synechron Payments").^[5]

The last, and most relevant here, of the 2017 Deals was one the Debtor represented to Mr. Wiley to be with an entity referred to as CSS (the "CSS Deal"). The Debtor approached Mr. Wiley about a deal with CSS, again for the provision of equipment by Idea Solutions. Mr. Wiley testified that, at the Debtor's suggestion, the CSS Deal would be fulfilled in part with new equipment to be procured, and in part with equipment from the Synechron Deal that did not close, which was being stored in Virginia. According to Mr. Wiley, because the CSS Deal was larger in scale and scope than the Parties' prior deals, he and the Debtor established a new company, Idea IT Services, LLC ("Idea Services"), with the Debtor to serve as the President and Managing Member and Mr. Wiley to serve as a "co-member".

In connection with the CSS Deal, McGrath obtained capital funding and made the following payments to Idea Solutions:^[6]

Date

Amount

June 9, 2017

$310,000.00

August 7, 2017

$105,000.00

September 29, 2017

$75,000.00

Total

$490,000.00

Furthermore, although no documentary evidence was provided at Trial, Mr. Wiley testified that an additional $87,000.00 was wired to Idea Solutions after September 29, 2017, resulting in total new capital payments of $577,000.00 that McGrath made to Idea Solutions in connection with the CSS Deal (the "Outstanding CSS Payments"). The payments were funded by a line of credit McGrath held with its lender, Centric Bank ("Centric"). Mr. Wiley testified that the anticipated profit from the CSS Deal after repayment of the capital provided was approximately $2.3 million.

Collectively, Mr. Wiley asserts that when the Outstanding CMG Payments, the Outstanding Synechron Payments, and the Outstanding CSS Payments are totaled, the outstanding amount McGrath funded for the 2017 Deals was $1,261,000 (the "2017 Deals Outstanding Payments").^[7]

B. The Purported CSS Contract and the Promissory Note

In or about September 2017, Centric informed the Parties that further draws for the CSS Deal would be dependent on collateralizing the funding.^[8] Centric therefore required a signed contract for the CSS Deal that would be assigned to the bank as security. According to Mr. Wiley, within one week of being so informed, the Debtor provided a signed contract with CSS to Mr. Wiley (the "CSS Contract") purportedly executed by the Debtor as President of Idea Services and by Adam Newman ("Mr. Newman") as Chief Operating Officer of CSS.^[9] Mr. Wiley testified that he then provided the CSS Contract to Centric, after which funds were released for the CSS Deal.^[10]

Mr. Wiley testified that the CSS Deal was to close by mid-December 2017, but he was repeatedly advised by the Debtor, beginning in December 2017 and continuing through March 2018, that there were multiple alleged issues which were preventing closing by that date. As a result, Mr. Wiley required, and the Parties agreed to Idea Solutions' issuance of a Promissory Note to McGrath, dated April 2, 2018 (the "Note"), in the principal amount of $1,261,000.00 (the "Principal Amount").^[11] Mr. Wiley testified that the Parties agreed the Principal Amount reflected the amount that was to be used to fulfill the CSS Deal through that date, consisting of $600,000 in equipment purchased for the failed Synechron Deal that was to be repurposed for the CSS Deal, in addition to the $577,000 in additional capital funded for the CSS Project.^[12] The Note also provides for a "Premium Payment" of $2,426,000, which Mr. Wiley testified was intended to capture the profit McGrath expected to receive from the CSS Deal. Together, the Principal Amount and the Premium Payment total $3,687,000, although the Note provides that "the aggregate amount of the Principal Amount and the Premium Payment to be paid by [Idea Solutions] to [McGrath] here under shall be $3,600,000."^[13] Pursuant to the terms of the Note, Idea Solutions was to make monthly installment payments of $40,000 (the "Installment Payments") commencing on June 19, 2018, together with "all project-based revenue." The Debtor executed the Note on behalf of Idea Solutions and guaranteed its obligations thereunder.

Idea Solutions only made one Installment Payment thereafter. McGrath filed suit against the Debtor in Pennsylvania state court,^[14] resulting in the entry of the Default Judgment against the Debtor in November 2018 in the amount of $3,678,122.58, which Mr. Wiley testified represented both the amount outlaid for the CSS Deal and the Premium Payment.^[15]

McGrath subsequently took discovery from the Debtor's bank BB&T, in aid of execution on the Default Judgment. Through that discovery, Mr. Wiley learned that the Debtor had forged the CSS Contract and had used the Outstanding CSS Payments for personal expenses, including payments for vacations and gambling debts. Mr. Wiley testified that he then contacted Centric and the Whitpain Township police department, which after investigation, arrested and charged the Debtor with criminal forgery in August 2019. The Debtor was subsequently convicted in February 2022 in Pennsylvania state court, and among the criminal penalties imposed was a restitution judgment (the "Restitution Judgment"), entered on March 1, 2022, in the amount of $1,042,258.87.^[16] Mr. Wiley testified that payments...