Wilhelm v. Finnegan

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UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF OHIO

In Re: )
) JUDGE RICHARD L. SPEER
Michael Alan and Dana Marie Finnegan )
) Case No. 08-3341
Debtor(s) )
) (Related Case: 08-33529)
Tonya R. Wilhelm ) "
)
Plaintiff(s) )
| )
v. )
)
Michael Alan Finnegan )
)
Defendant(s) )
DECISION AND ORDER

This cause comes before the Court after a Trial on the Plaintiff's Complaint to Determine
Dischargeability. The Plaintiff's Complaint is brought pursuant to the statutory exception to
dischargeability set forth in 11 U.S.C. § 523(a)(2)(A). At the Trial, the Parties were given the
opportunity to present evidence and make arguments that they wished the Court to consider in

reaching its decision.

At the conclusion of the Trial, this Court deferred ruling on the matter so as to afford the
opportunity to thoroughly review the evidence presented, the arguments of the Parties, as well as the
entire record in this case. Based upon that review, and for the following reasons, this Court finds the
Plaintiff's Complaint to have merit. With respect to this ruling, the succeeding discussion shall

constitute this Court’s findings of fact and conclusions of law pursuant to Bankruptcy Rule 7052.

AUTHENTICATED /|
U.S. GOVERNMENT
INFORMATION va

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Tonya R. Wilhelm v. Michael Alan Finnegan
Case No. 08-3341

BACKGROUND

In January of 2007, the Plaintiff, Tonya Wilhelm (hereinafter the “Plaintiff’), and the
Defendant, Michael Alan Finnegan (hereinafter the “Defendant’”’), entered into a business
relationship involving the rehabilitation of real property. A business entity, WF Properties, LLC, was
formed for this purpose. The business relationship contemplated ‘house flipping’ whereby the Parties
would purchase properties, make improvements to the properties and then sell the properties for a
profit. In this business relationship, the Plaintiff was to provide the working capital; the Defendant,
in return, would provide the ‘sweat equity’ by finding suitable properties for purchase and then

managing the properties’ rehabilitation.

Between January 2007 and June of 2007, the Defendant executed in favor of the Plaintiff nine
promissory notes. The total consideration extend on these notes was $136,000.00. With this

consideration, six properties were to be rehabilitated by the Defendant.

The notes executed by the Defendant contained handwritten language by the Defendant
indicating that the consideration extended by the Plaintiff was to be used “for the rehabilitation of
property” located at six different addresses in Northwest Ohio. Each of the note’s handwritten

language also sets forth that the amount due on the notes would be repaid upon sale of the property,

with an additional payment of either 25% or 50% of the property’s sale price. The Defendant signed

each of the promissory notes.

Ultimately, the Defendant did not perform his contractual obligations, with only some minor
payments made to the Plaintiff. Similarly, with the exception of some minor improvements, the
Defendant did not use the consideration extended by the Plaintiff for the rehabilitation of the
properties set forth in the promissory notes. Instead, bank records submitted into evidence show that

the consideration was dissipated by the Defendant largely for personal expenses, including but not

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limited to the following: personal mortgage payments; car payments, including that for a Cadillac,
for the Defendant and his wife; professional sporting events; country club dues; golfing fees;

payments to friends; cable television; and educational expenses for a child of the Defendant.

On July 7, 2008, the Defendant filed a petition in this Court for relief under Chapter 7 of the
United States Bankruptcy Code. In his bankruptcy filing, the Defendant disclosed an ownership
interest in only two of the six properties which were to have been rehabilitated. On November 1,
2008, the Plaintiff commenced this action, seeking a determination that the consideration extended

to the Defendant constituted a nondishargeable debt pursuant to 11 U.S.C. § 523(a)(2)(A).

DISCUSSION

Before this Court is the Plaintiff's Complaint to Determine Dischargeability of Debt.
Proceedings brought to determine the dischargeability of particular debts are deemed core
proceedings pursuant to 28 U.S.C. § 157(b)(2)(1). Accordingly, this Court has the jurisdictional
authority to enter final orders and judgments in this matter. 28 U.S.C. § 1334.

The Plaintiff s Complaint to determine dischargeability is brought pursuant to § 523(a)(2)(A)
of the Bankruptcy Code. This section operates so as to except from discharge any debt which arises
from a debtor’s dishonest conduct, thereby implementing a fundamental bankruptcy policy that only
those debts which are honestly incurred may be discharged. EDM Machine Sales, Inc. v. Kay
Harrison (In re Harrison), 301 B.R. 849, 853 (Bankr. N.D.Ohio 2003). Section 523(a)(2)(A)

provides:

(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this
title does not discharge an individual debtor from any debt—

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(2) for money, property, services, or an extension, renewal, or
refinancing of credit, to the extent obtained by—

(A) false pretenses, a false representation, or actual fraud,
other than a statement respecting the debtor’s or an insider’s
financial condition]. ]

Yet, to also ensure that the Congressional policy in favor of providing a debtor with a
fresh-start is furthered, exceptions to dischargeability, including that brought under 523(a)(2)(A),
are narrowly construed. Ewing v. Bissonnette (In re Bissonnette), 398 B.R. 189, 193 (Bankr.
N.D.Ohio.2008). Consistent with this, the party seeking to have a debt held nondischargeable bears
the overall burden of persuasion to establish the applicability of the asserted statutory exception to
discharge. Brandenberger v. Chinnery (In re Chinnery), 196 B.R. 836, 837 (Bankr.W.D.Mo.1996).
For this purpose, a preponderance of the evidence standard is applied. Grogan v. Garner, 498 U.S.
279, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991).

In order to sustain a cause of action under § 523(a)(2)(A), the moving party must establish
the existence of the five common law elements of fraud. Chase Manhattan Bank v. Alnajjar, (In re
Alnajjar), 276 B.R. 844, 848 (Bankr. N.D.Ohio 2002). These elements are: (1) the debtor made a
false representation; (2) the debtor knew such representation to be false at the time they were made;
(3) the representation was made with intent to deceive the creditor; (4) the creditor justifiably relied
on the representation; and (5) the creditor’s loss was the proximate result of the misrepresentation
having been made. Bernard Lumber Co. v. Patrick (In re Patrick), 265 B.R. 913, 916 (Bankr.
N.D.Ohio 2001). As is common, only the middle three elements are disputed in this case: whether
the Defendant, knowing his representations to be false, acted with the requisite intent to defraud and

whether the Plaintiff was justified in relying on the Defendant’s representations.

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On the first issue, an intent to defraud under § 523(a)(2)(A) may consist of any “deceit,
artifice, trick, or design involving direct and active operation of the mind, used to circumvent and
cheat another[.]” First Centennial Title Co. v. Bailey (In re Bailey), 216 B.R. 619, 621 (Bankr.
S.D.Ohio 1997). As well, its existence can be shown when something is “done or omitted with the
design of perpetrating what is known to be a cheat or deception.” Jd. The mere breach of a promise
to pay, however, does not establish the existence of fraud. Instead, where there is a promise to
perform a future act, fraud will only exist when coupled with a present intent not to perform.

Buchholz v. Cook (In re Cook), 263 B.R. 249, 257 (Bankr. N.D. Iowa 2001).

An intent to defraud under § 523(a)(2)(A) is determined under a subjective standard,
requiring the plaintiff to show that the debtor did not actually intend to perform those obligations
promised. Rembert v. AT & T Universal Card Servs., Inc. (Inre Rembert), 141 F.3d 277, 281 (6" Cir.
1998). Whether a debtor intends to perform as promised is a factually intensive inquiry and, since
a debtor will rarely admit to acting in a fraudulent manner, circumstantial evidence will often be
needed to determine if the debtor acted with the requisite intent. Weeber v. Boyd (In Re Boyd), 322
B.R. 318, 324 (Bankr. N.D.Ohio 2004). In assessing the available evidence, the Sixth Circuit has
held that “factor-counting” is inappropriate and that what “courts need to do is determine whether
all the evidence leads to the conclusion that it is more probable than not that the debtor had the

requisite fraudulent intent.” In re Rembert, 141 F.3d at 282.

In this matter, the Plaintiff, as evidence of the Defendant’s intent to defraud, relies heavily
on the Defendant’s banking records. (Doc. No. 36). These records, consisting of banking statements
and cancelled checks negotiated by the Defendant, reveal these facts.’ Between January 2007 and

July of 2007, the Defendant deposited into a checking account the sum of $214,675.66. This sum

1

(Doc. No. 36, 37 & 38, Ex. J to OOO).

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is inclusive and fully accounts for the $136,000.00 in consideration extended by the Plaintiff to the
Defendant. Over this same period of time, the Defendant made withdrawals from the account totaling

$203,677.40.

A subjective intent to deceive may logically be inferred from a false representation which the

debtor knows or should know will induce another to make a loan (or otherwise part with property
or services). Beverly Enterprises v. Eversole (Inre Eversole), 110 B.R. 318, 324 (Bankr. S.D.Ohio
1990). Thus, when credit is extended for a specific purpose, a relevant indicator of fraudulent intent
will concern whether a debtor uses the extension of credit for its intended purpose. Matter of Pappas,
661 F.2d 82, 86 (7" Cir. 1981) (debt held nondischargeable where it was not used for stated
purpose); In re Segala, 133 B.R. 261, 264 (Bankr. D. Mass. 1991) (debt found nondischargeable
where loans were used in required manner). Compare Inre Harrison, 301 B.R. at 854 (In not finding
fraud, this Court observed that the funds received were not primarily used for the debtor’s direct

personal benefit).

In this way, if the extension of credit is not used for its intended purpose, a strong inference
arises that the debtor never intended to perform as promised. In fact, depending on the egregiousness
of the misrepresentation, a debtor’s failure to utilize funds extended on credit for its stated purpose
may be dispositive on the issue of the debtor’s fraudulent intent. This is the situation in this matter,

with the Court finding the Defendant’s actions to be particularly egregious.

Over the course of approximately six months, the Defendant expended more than
$200,000.00. Yet, over this same time, when the Plaintiffs loans are subtracted, the Defendant only
deposited into his checking account about $89,000.00. It, thus, follows that the Defendant’s
expenditures for the time period of January through July of 2007 were largely dependent on the
$136,000.00 in consideration provided by the Plaintiff.

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Case No. 08-3341

Yet, for the time period in question, the Defendant was unable to produce a single piece of
evidence, nor was the Defendant able to call this Court’s attention to any particular expenditure,
tending to show that the funds held in his checking account were utilized for the purpose of the
Parties’ agreement — that of rehabilitating properties. Instead, although it is not practicable to list
each expenditure, it is apparent that the Defendant largely utilized the funds in his checking account
to pay for an extensive array of personal expenses, including outlays for luxury items as services. For
example, from January through July of 2007, funds from the Defendant’s checking account were put
to the following use: (1) personal mortgage payments; (2) car payments, including that for a Cadillac,
for the Defendant and his wife; (3) professional sporting events; (4) country club dues; (5) golfing
fees; (6) payments to friends; (7) cable television; and (8) educational expenses for a child of the
Defendant.

In defense of his actions, the Defendant put forth that by investing with him, the Plaintiff
assumed the risk of a loss. In the Defendant’s words, the Plaintiff “understood when funds were
transferred between us there was risk involved.” (Doc. No. 35, at pg. 2). The Defendant then goes
on to state, the Plaintiff “knew the risks she was taking. I’m guilty of one thing — being a poor

businessman. I lost everything, family, friends, all my possessions.” Jd.

The weakness with the Defendant’s argument, however, is apparent. When investing, a
person, while undoubtably assuming the risk that the investment will decline in value, does not
assume the risk that the invested funds will be used for purposes unrelated to the investment. As
such, the Plaintiff, while she may have assumed the risk that her investment in real estate would not
ultimately prove to be profitable, did not assume the risk that the Defendant would fraudulently
divert the funds she invested for his personal use. In this way, the Defendant’s modus operandi

albeit much smaller in scope, bears a striking resemblance to the disgraced financier, Bernie Madoff,

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Tonya R. Wilhelm v. Michael Alan Finnegan
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who bilked investors out of billions of dollars, diverting the sums for the benefit of himself, his

family and his close personal friends.”

Notwithstanding, the Defendant’s assumption of the risk argument does have some relevancy
on the remaining issue before the Court: whether it was appropriate for the Plaintiff, as required
under the forth element necessary to sustain a cause of action under § 523(a)(2)(A), to rely on the
Defendant’s misrepresentations. Under the common law, and thus by extension § 523(a)(2)(A), a
duty is imposed upon a person to be diligent in safeguarding their interests; a person who is not
diligent is deemed to have assumed the risk, and precluded from maintaining an action for fraud. 37

C.I.8. Fraud § 50 (2009).

In this matter, the degree of diligence exercised by the Plaintiff was anything but extensive.
When inquired by the Court, the Plaintiff admitted that she never examined the Defendant’s financial
records; nor did she look at the public records to determine if the Defendant maintained an interest
in the properties. The Plaintiff also acknowledged that, during the course of lending money to the
Defendant, she only conducted cursory examinations of some of the investment properties. Yet,
when all things are considered, the Court is persuaded that the Plaintiff's cursory examinations are

sufficient to sustain an action for nondischargeability under § 523(a)(2)(A).

Applying the common law, the United States Supreme Court in Field v. Mans held that the
standard of reliance needed under § 523(a)(2)(A) is that of justifiable, as opposed to the higher
standard of reasonable reliance. 516 U.S. 59, 74-75, 116 S.Ct. 437, 446, 133 L.Ed.2d 351 (1995).

2

http://www. reuters.com/article/idUSN061 120090506. On June 29, 2009, Bernie Madoff was
sentenced to 150 years in prison, the maximum allowed, after pleading guilty to 11 felonies,
including securities fraud, investment advisor fraud and money laundering.
http://en.wikipedia.org/wiki/Bernard_Madoff

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Tonya R. Wilhelm y. Michael Alan Finnegan
Case No. 08-3341

The difference between the two standards is that the former is subjective, whereas the latter standard
is objective. In Eugene Parks Law Corporation Defined Benefit Pension Plan v. Kirsh (Inre Kirsh),
which was favorably cited by the Supreme Court in Field v. Mans, the Ninth Circuit Court of

Appeals explained justifiable reliance as this:

the standard is not that of the average reasonable person. It is a more
subjective standard which takes into account the knowledge and relationship
of the parties themselves. Thus, a person of normal intelligence, experience
and education may not put faith in representations which any such normal
person would recognize at once as preposterous. At the same time, the
standard does protect the ignorant, the gullible, and the dimwitted, for no
rogue should enjoy his ill-gotten plunder for the simple reason that his victim
is by chance a fool. On the other hand, if a person does have special
knowledge, experience and competence he may not be permitted to rely on
representations that an ordinary person would properly accept. In other
words, while reasonableness of behavior is a factor in the mix, it is only a
factor. The more precise question is whether the person who claims to have
been gulled was justified in relying.

973 F.2d 1454, 1459 (9" Cir. 1992) (internal citations and quotations omitted).

In this matter, while her reliance may not have been reasonable, what makes the Plaintiff s
reliance justifiable is the nature of her relationship with the Defendant prior to the time the Parties
commenced their business endeavor. In particular, through their respective occupations, the Plaintiff
and the Defendant had come to know each other, during which time they had the opportunity to build
up a rapport. The transactions between the Parties, thus, cannot be considered completely at arms’
length, thereby lessening the degree of diligence necessary for the Plaintiff to establish that she

justifiably relied on the Defendant’s misrepresentations.

For all these reasons, the Court finds that the Plaintiff has sustained her burden of
establishing that her prepetition extension of credit to the Defendant constitutes a nondischargeable

debt for purposes of 11 U.S.C. § 523(a)(2)(A). A monetary judgment for the amount of $1 36,000.00,

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Tonya R. Wilhelm v. Michael Alan Finnegan
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plus interest, will also be entered. See Longo v. McLaren (In re McLaren), 3 F.3d 958, 965-66 (6
Cir. 1993) (recognizing power of bankruptcy court to enter a monetary judgment). In reaching the
conclusions found herein, the Court has considered all of the evidence, exhibits and arguments of

counsel, regardless of whether or not they are specifically referred to in this Decision.
Accordingly, it is

ORDERED that, pursuant to 11 U.S.C. § 523(a)(2)(A), any and all claims held by the
Plaintiff, Tonya R. Wilhelm, against the Defendant, Michael Alan Finnegan, are hereby determined
to be NONDISCHARGEABLE DEBTS.

IT IS FURTHER ORDERED that the Plaintiff, Tonya R. Wilhelm, is hereby awarded
judgment against the Defendant, Michael Alan Finnegan, in the amount of $136,000.00. Post
judgment interest shall accrue as provided in 28 U.S.C. § 1961.

IT IS FURTHER ORDERED that, pursuant to Bankruptcy Rule 9021, the Clerk, United
States Bankruptcy Court, shall issue a separate judgment entry in accordance with the above order.

Dated: March 8, 2010

(le Am

Richard L. Spee
United States
Bankruptcy Judge

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CERTIFICATE OF SERVICE

Copies were mailed this 8" day of March, 2010 to:

Michael Alan Finnegan
11011 Market St
Birmingham, OH 44816

Tonya R. Wilhelm
240 Monroe St.
Monroeville, OH 44847

Patricia A Kovacs
500 Madison Ave, #525
Toledo, OH 43604

/s/Diana Hernandez
Deputy Clerk, U.S. Bankruptcy Court

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