Franklin County Area Development Corp. v. Leos (In re Leos)

Citations: 462 B.R. 151; 2011 Bankr. LEXIS 4916Docket: Bankruptcy No. 1-10-bk-10064 RNO; Adversary No. 1-11-ap-00216 RNO

Court: United States Bankruptcy Court, M.D. Pennsylvania; December 19, 2011; Us Bankruptcy; United States Bankruptcy Court

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Both the Plaintiff, Franklin County Area Development Corporation (FCADC), and the Defendant, John P. Leos, filed motions for summary judgment in a bankruptcy case concerning the dischargeability of Leos' debt. The Court, led by Bankruptcy Judge Robert N. Opel, II, denied both motions, allowing the case to proceed to trial. 

Jurisdiction is established under 28 U.S.C. §§ 1334 and 157, categorizing the proceeding as core under § 157(b)(2)(I). The facts reveal that Leos filed for Chapter 13 bankruptcy on December 15, 2010. FCADC filed a complaint on April 1, 2011, seeking to declare a portion of Leos' debt non-dischargeable under 11 U.S.C. § 523(a)(2), concerning two loans issued to Concessionaire Management Corporation. Leos personally guaranteed these loans, and the complaint alleges that part of the $250,000 loan was intended for purchasing enrobing equipment, which was never acquired due to currency fluctuations affecting costs.

FCADC's Proof of Claim amounts to $168,589.85, with no objections filed. Additionally, judgment documents against Leos and co-guarantors George and Elaini Tsoukatos are included. Leos' response claims he was only a minority shareholder of Concessionaire and states that the loan proceeds were instead used for other business expenses. 

FCADC's motion includes an affidavit from Zoe Tsoukatos, asserting that the equipment was not purchased and that Concessionaire lacked funds to repay the loan. Leos countered with a cross-motion for summary judgment. The court referenced Federal Rules of Civil Procedure and Bankruptcy Procedure governing summary judgment, emphasizing the necessity for no genuine issues of material fact for such judgments to be granted.

The moving party must prove that no genuine issue of material fact exists to succeed in a motion for summary judgment. An opponent can only counter this by presenting specific facts that demonstrate a genuine issue for trial; mere conclusory statements or general denials are insufficient. Courts evaluate evidence by viewing facts in favor of the non-moving party, without weighing the evidence to determine the truth. 

In a bankruptcy context, a creditor objecting to the discharge of a debtor's obligation must prove, by a preponderance of the evidence, that the debt fits within exceptions outlined in 11 U.S.C. § 523(a). These exceptions are interpreted strictly against creditors and favorably towards debtors. Specifically, § 523(a)(2) addresses debts incurred through false pretenses or fraud. To establish non-dischargeability, the creditor must prove five elements: 1) a misrepresentation or deceptive conduct by the debtor; 2) the debtor's knowledge of the falsity; 3) intent to deceive; 4) justifiable reliance by the creditor; and 5) damage resulting from the reliance.

In evaluating FCADC's motion for summary judgment, there is a significant factual dispute regarding Leos' intent when obtaining the loans. Notably, prior cases cited by FCADC are procedurally different, as they involved testimony that provided clarity on the debtor's intentions, whereas in this instance, such evidence is lacking.

The court evaluated witness credibility and the debtor's intentions regarding loan proceeds while determining the standard for justifiable reliance by FCADC on Leos' statements or conduct. Citing Field v. Mans, the court clarified that justifiable reliance is subjective, dependent on the plaintiff's capacity and knowledge, rather than a community standard. The court found FCADC had not met its burden of proving justifiable reliance due to unresolved material questions, such as the absence of a documentary letter of credit for the Enrober purchase and the delay in discovering the absence of the purchase until 2008.

Additionally, the fifth element for non-dischargeability requires proof that the plaintiff suffered damages due to justifiable reliance, which the court also found lacking. Leos' affidavit indicated potential ongoing payments by the Tsoukatos to FCADC and mentioned an agreement regarding loan repayment, suggesting the possibility of a novation. This created a genuine factual dispute regarding damages suffered by FCADC. 

In denying both parties' motions for summary judgment, the court emphasized the necessity of resolving material factual issues at trial, particularly concerning Leos' intentions and the credibility of witness testimony. The court reiterated the importance of cautiousness in granting summary judgment when state of mind is involved and highlighted that summary judgment should not resolve factual disputes based solely on opposing affidavits. An order will be entered accordingly, referencing relevant statutes from the Bankruptcy Code and the recent amendments.