Vasconcellos v. Garrett
ORDER, AFFIRMING U.S. Bankruptcy Court's order denying Vascocellos' objections to dischargeability, and its judgment in favor of Garret on those objections. Signed by Judge Callie V. S. Granade on 8/15/2011. (mab)
IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF ALABAMA
GWENDOLYN ELAINE GARRETT
GWENDOLYN ELAINE GARRETT,
CIVIL ACTION NO. 11-0115-CG-C
This is an appeal arising from the Chapter 7 bankruptcy case of Appellee,
Gwendolyn Elaine Garrett (“Garrett”) (case no. 09-14269). Appellant, Hugh
Vasconcellos (“Vasconcellos”), filed an adversary proceeding in that case seeking a
determination of non-dischargeability of a debt he claims is owed to him by Garrett
(case no. 09-1143). Vasconcellos appeals the order of the Bankruptcy Court finding
that the debt is dischargeable. For the reasons set forth below, this court finds the
decision of the Bankruptcy Court is due to be affirmed.
Facts and Procedural History1
Garrett began operating Legends Cleaners, a dry cleaning business, with her
husband, Jeffrey Garrett, in October 1999. The Garretts had contemplated selling the
business for some time, but formally signed a listing agreement with Sunbelt Brokers,
Inc., on January 2, 2007. The business equipment was subject to a $463,000 lien held by
Solo-SS, Ltd., a financing company. Compound Management, LLC, is the general partner
for Solo-SS, Ltd., and Steve Smith is a member of Compound Management. Garrett
informed Steve Smith about her intention to sell Legend Cleaners, and they negotiated a
lower lien payoff of $250,000 in the event the business was sold. At the time she decided
to sell the business, Garrett was in immediate need of money to pay Solo-SS, vendors,
rent, and other assorted bills that were due.
Vasconcellos was a customer of Legends Cleaners prior to January 2007. He
decided to buy the business. Vasconcellos and Garrett negotiated a sales price of
$350,000. Garrett contacted the Southern Law Firm to draft the necessary paperwork.
Vasconcellos signed the purchase agreement and promissory note on February 5, 2007,
agreeing to purchase the business for $350,000. The purchase agreement required a nonrefundable earnest money payment of $50,000, payable in the amounts of $10,000 on or
before January 25, 2007, and $40,000 on or before the closing date of February 15, 2007.
The remaining balance of $300,000 was payable in monthly payments of $5,524.96,
These facts are taken from Bankruptcy Judge Mahoney’s order denying plaintiff’s
objections to discharge. Vasconcellos has not raised any objections to Judge
Mahoney’s findings of fact.
commencing March 1, 2007, until paid in full.
Vasconcellos gave Garrett $10,000 on the day he signed the promissory note and
promised to pay the remaining $40,000 as agreed at closing. Vasconcellos testified that he
signed the note without seeing any business records. After signing the note and paying
Garrett $10,000, Vasconcellos began working at the business in order to learn how to run
it. He was not paid for his work during that period of time.
It is not clear from the record exactly when Vasconcellos first asked to see business
records of Legend Cleaners, but it is undisputed that he signed the note before asking to
see them. Vasconcellos testified that when Garrett did provide him with records, they
were several years old. He also testified that Garrett showed him and his sister a bonus
check for $50,000 that was several years old. Garrett never produced any recent business
records to Vasconcellos.
Vasconcellos intended to borrow the remaining escrow amount of $40,000 from his
sister in New York, but she refused to loan him the money until she saw updated business
records. Vasconcellos never paid the $40,000 escrow balance due. Garrett gave him an
extension for an unspecified amount of time in which to make the first monthly payment
of $5,524.96 that had been due March 1, 2007, according to the promissory note, but he did
not begin making any payments. Vasconcellos testified that he did not make any
payments other than the initial $10,000 because Garrett refused to show him updated
business records. Vasconcellos further testified that Garrett promised to give him his
$10,000 back if he refrained from suing her. Vasconcellos was not aware of Solo-SS, Ltd.’s
lien on the business equipment of Legend Cleaners.
A final hearing on Vasconcellos’ adversary complaint was held by the Bankruptcy
Court on July 23, 2010. On August 6, 2010, the Bankruptcy Court entered an order and
judgment finding that Garrett’s debt to Vasconcellos was dischargeable. Vasconcellos’
subsequent motion to vacate or set aside judgment was denied by the Bankruptcy Court
on October 12, 2010. This appeal followed.
I. Standard of Review
When this court sits in its capacity as an appellate court in review of the
orders of a bankruptcy court, it reviews the bankruptcy court’s legal conclusions de
novo. In re Englander, 95 F.3d 1028, 1030 (11th Cir. 1996). “The district court
must accept the bankruptcy court's factual findings unless they are clearly
erroneous, and give due regard to the bankruptcy court's opportunity to judge the
credibility of the witnesses.” Id. This court may not make independent factual
II. Dischargeability Determination
Non-dischargeability of debts in bankruptcy cases is governed by 11 U.S.C. §
523. 11 U.S.C. § 523 (a)(2)(A) deems as non-dischargeable any debt “for money,
property, services, or an extension, renewal, or refinancing of credit, to the extent
obtained by 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)(2)(B) provides for the non-dischargeability of the same type of debt obtained
by the use of a written statement “(i) that is materially false; (ii) respecting the
debtor's or an insider's financial condition; (iii) on which the creditor to whom the
debtor is liable for such money, property, services, or credit reasonably relied; and
(iv) that the debtor caused to be made or published with intent to deceive.” A
creditor seeking a determination of non-dischargeability must prove his case by a
preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 291 (1991).
Vasconcellos argues on appeal that the Bankruptcy Court erred in finding
that he had not proven his case for non-dischargeability under 11 U.S.C. §
523(a)(2)(A) or (B). A finding of non-dischargeability under 11 U.S.C. § 523(a)(2)(A)
requires proof that “(1) the debtor made a false representation with intent to
deceive the creditor, (2) the creditor relied on the representation, (3) that his
reliance was reasonably founded, and (4) that the creditor sustained loss as a result
of the representation.” In re St. Laurent, 991 F.2d 672, 676 (11th Cir. 1993).
The only misrepresentation alleged by Vasconcellos in his complaint, and the
primary alleged misrepresentation at issue in the final hearing, concerned Garrett’s
intention to sell the business to Vasconcellos. The Bankruptcy Court found that
Vasconcellos did not prove by a preponderance of the evidence that this was a false
representation. Vasconcellos does not appeal this finding of the Bankruptcy Court.
Vasconcellos’ main issue on appeal concerns the ownership of Legend
Cleaners. According to Vasconcellos, Garrett misrepresented the fact that Garrett
and her husband owned the company when Solo-SS, Ltd. had a security interest in
the assets of Legend Cleaners in the amount of $463,000.00.2 There was no
evidence presented that Garrett ever affirmatively stated that there were no
security interests or liens on the property at the time the purchase agreement was
signed, or that Vasconcellos inquired about the subject.
Vasconcellos’ argument is essentially that, by virtue of the security
agreement, it was Solo-SS, Ltd., rather than the Garretts, who owned the assets of
Legend Cleaners. He provides no case law in support. His argument is incorrect
because it assumes that the term “own” only applies to property that is possessed
free and clear of all liens and encumbrances. In a similar case, a bankruptcy court
in Michigan was faced with allegations that a debtor misrepresented his ownership
of certain restaurant equipment when the equipment was encumbered by a bank’s
security interest. In re Masters, 37 B.R. 72, 73-75 (Bankr. E.D. Mich. 1984). In
rejecting that argument, the bankruptcy court explained:
Ownership is an ambiguous term. The fact that property purchased is
subject to a security interest does not negate ownership. To a layman,
ownership is equated with purchase regardless whether the total
purchase price has or has not been paid and regardless whether the
unpaid part of the purchase price is secured or unsecured. The
statement made by the debtor that he owned the property was not a
materially false statement.
Id. at 75. That same logic applies here. The fact that the assets of Legend Cleaners
were subject to the security interest of Solo-SS, Ltd. does not make the statement
While the Bankruptcy Court did not make any specific findings as to this issue,
this court presumes that the Bankruptcy Court intended to include all
misrepresentations alleged by Vasconcellos in its finding that Vasconcellos failed to
meet his burden of proof regarding dischargeability.
that those same assets were owned by the Garretts a false one. The two can be true
at the same time. Therefore, Vasconcellos failed to satisfy the first element of nondischargeability under § 523(a)(2)(A).
It follows then that, even if Vasconcellos actually relied on the Garretts’
representation of ownership to assume that the assets of Legend Cleaners were free
and clear of all liens and encumbrances, such reliance was not reasonable.
Vasconcellos could simply have asked the Garretts about any security interests in
the property, or he could have directed his attorneys to include a representation to
that effect in the purchase agreement. Finally, he could have checked Alabama
public records and discovered the UCC Financing Statement on the property filed
by Solo-SS, Ltd. in November 2003. Accordingly, Vasconcellos did not establish the
third element of non-dischargeability under § 523(a)(2)(A).
Lastly, the court finds that even if the other elements of § 523(a)(2)(A) were
satisfied by Vasconcellos, he did not prove that the loss he suffered was a result of
this representation of the Garretts. Vasconcellos lost his $10,000.00 because he
failed to hold up his end of the contract with the Garretts, a contract which provided
that this money was part of a non-refundable earnest money deposit. Had he
complied with his contractual obligations, this money would not have been lost, but
rather would been a part of the purchase price of the business.3
Vasconcellos also argues that Garrett’s promise to him that she would show
Indeed, had Vasconcellos fully complied with the terms of the purchase agreement,
the Garretts would have been able to pay off Solo-SS, Ltd. at the negotiated payoff
amount of $250,000.00.
him recent financial records of Legend Cleaners was an actionable
misrepresentation. This issue was not raised in the complaint or at the final
hearing of this matter, therefore is not properly before this court on appeal. In re
Stacy, 167 B.R. 243 (N.D. Ala., 1994) (on appeal from bankruptcy court decision
district court will not, absent compelling circumstances, address an issue which
appellant failed to raise in bankruptcy court). Even were this a proper issue on
appeal, Vasconcellos’ argument fails. Although facts were adduced as to whether
the records were requested and received, Vasconcellos never argued that Garrett’s
promise to him on this caused the loss of his $10,000.00. Even had he done so, this
court finds, as a matter of law, that if there was a misrepresentation in this regard,
it did not result in the loss at issue. Vasconcellos admitted that he did not request
any updated financial records until after the purchase agreement had been signed
and his $10,000.00 had been paid. Therefore, any misrepresentation made by
Garrett in response could not have caused him to pay that money and hence suffer
Vasconcellos also makes passing reference to § 523(a)(2)(B) in his brief.
However, he provides no argument as to how he believes the Bankruptcy Court
erred in its application of this provision. Section 523(a)(2)(B) provides for the nondischargeability of certain types of debt obtained by the use of a written statement
“(i) that is materially false; (ii) respecting the debtor's or an insider's financial
condition; (iii) on which the creditor to whom the debtor is liable for such money,
property, services, or credit reasonably relied; and (iv) that the debtor caused to be
made or published with intent to deceive.”
The court agrees with the Bankruptcy Court that Garrett did not provide any
materially false written material. While Garrett did show Vasconcellos three-yearold financial records, she never represented them as being anything other than
what they actually were. There was no evidence presented that the records were
materially false in any way. Accordingly, Vasconcellos’ arguments regarding
§ 523(a)(2)(B) must also fail.
Finally, Vasconcellos claims that Garrett’s promise to him that she would
refund his $10,000.00 is an actionable misrepresentation. In addition to not being
properly raised before the Bankruptcy Court, this argument is a non-starter. This
promise was made, of course, well after Vasconcellos signed the purchase agreement
and handed over his first required payment. Obviously then, Garrett’s promise had
nothing to do with his decision to buy Legend Cleaners. In any event, reliance on
such a promise by Vasconcellos was quite clearly unreasonable. One may not
reasonably base a decision not to take legal action on the bare promise of another to
repay a debt. Finally, as noted above, Vasconcellos’ loss was caused by his failure to
abide by the purchase agreement, not on his reliance on Garrett’s promise to repay
the money he had already lost.
In sum, this court has reviewed the findings of fact made by the Bankruptcy Court
using a clearly erroneous standard, and its conclusions of law de novo. The
courtfinds no error in either the findings of fact or the conclusions of law.
For the reasons stated herein, the court finds that the order of the U.S.
Bankruptcy Court for the Southern District of Alabama in Adversary Proceeding
09-01064, Bankruptcy Case Number 09-01143, denying Vascocellos’ objections to
dischargeability, and its judgment in favor of Garrett on those objections, are due to
be, and are hereby, AFFIRMED.
DONE and ORDERED this 15th day of August, 2011.
/s/ Callie V. S. Granade
UNITED STATES DISTRICT JUDGE
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