Wilson et al v. Wall-McMahel

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NORTH CAROLINA
RALEIGH DIVISION
IN RE:
LAURA MELISSA WALL-MCMAHEL,
DEBTOR. 	CASE NO. 09-05754-8-JRL
Chapter 7
ERIC WILSON, and
LAURIE WILSON,
PLAINTIFFS. 	ADVERSARY PROCEEDING
NO: 09-00231-8-JRL
v.
LAURA MELISSA WALL-MCMAHEL,
DEFENDANT.
______________________________________________________________________________
ORDER
This matter is before the court on the complaint filed by Eric and Laurie Wilson (collectively
known as the “plaintiffs”) to determine whether the state court judgment entered in their favor
against Laura Wall-McMahel (“defendant”) is dischargeable pursuant to § 523(a)(2)(A). A trial was
conducted on August 19, 2010 and continued to and concluded on August 27, 2010.
SO ORDERED.
SIGNED this 16 day of September, 2010.
________________________________________
J. Rich Leonard
United States Bankruptcy Judge
____________________________________________________________
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JURISDICTION
This court has jurisdiction over the parties and the subject matter of this proceeding pursuant
to 28 U.S.C. §§ 151, 157, and 1334, and the General Order of Reference entered by the United States
District Court for the Eastern District of North Carolina on August 3, 1984. 	This is a core
proceeding within the meaning of 28 U.S.C. § 157(b)(2), which this court may hear and determine.
Dischargeability of a particular debt is specifically defined as a core proceeding in 28 U.S.C. §
157(b)(2)(I). Bankruptcy courts have exclusive jurisdiction of most dischargeability determinations
under § 523(a)(2). Collier on Bankruptcy ¶ 523.03 (Alan N. Resnick & Henry J. Sommer eds.,
2009).
PROCEDURAL HISTORY
The plaintiffs initiated this adversary proceeding on October 13, 2009, pursuant to §§ 523
(a)(2)(A) and 523(c) of the Bankruptcy Code (“Code”). Their complaint seeks to determine the
dischargeability of a state court judgment for unfair and deceptive trade practices awarded in their
favor by the Vance County Superior Court in Vance County, North Carolina on March 20, 2009.
Defendant answered the complaint on December 14, 2009 and sought dismissal of the complaint
pursuant to Fed. R. Civ. Pro. 12(b)(6). 	A preliminary pretrial conference was scheduled for
February 1, 2010, but was later rescheduled and held on March 8, 2010. 	On March 5, 2010,
plaintiffs filed a motion for summary judgment accompanied by a memorandum of law in support
of the motion. 	Defendant responded and filed a cross-motion for summary judgment and
memorandum of law in support on April 1, 2010. On April 20, 2010, plaintiffs responded to the
defendant’s motion for summary judgment. A hearing on the cross-motions for summary judgment
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was held on June 28, 2010 and an order granting in part and denying in part the plaintiffs’ motion
for summary judgment and denying the defendant’s motion for summary judgment was entered by
this court on July 22, 2010. That order reserved for trial the issue of whether the defendant had the
requisite subjective intent to deceive the plaintiffs during their business transactions. 	If the
defendant did have the requisite subjective intent, then the state court judgment will be deemed non-
dischargeable. However, if the evidence establishes that the defendant did not have the requisite
subjective intent to deceive, then the state court judgment will be deemed dischargeable.
FINDINGS OF FACT
1. 	Defendant is the owner of a window dressing business known as Best Blinds, which began
operations in 1997. 	Between 1997 and 2007, defendant entered into several business
training agreements with third parties, which allowed the third parties to conduct business
as distributors of Best Blinds’ products in exclusive distribution areas.
2. 	In January of 2005, Thomas Christopher Lawing (“Lawing”) and Brandy Hindes (“Hindes”)
entered into a business training agreement with the defendant granting them exclusive rights
to sell Best Blinds’ products in Johnston, Franklin, and Granville counties. 	They later
purchased the exclusive rights to sell in Apex, Cary and Morrisville too.
3. 	In 2007, the defendant formed Best Blinds Franchising, Inc. for the purpose of selling
franchises and converting existing distributors to franchisees. Lawing and Hindes declined
the opportunity to become franchisees, despite being given the opportunity to do so.
4. 	In March of 2007, Lawing visited the plaintiffs’ home for the purpose of selling window
dressings. 	While there, the plaintiffs inquired about franchise opportunities with Best
Blinds. Lawing referred them to the defendant for information about such opportunities.
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1 Selling back the territories to the defendant would act as a release of their exclusive rights to
sell in that area. Upon release, Franklin and Granville counties could by sold by the defendant to
the plaintiffs without violating the business training agreement between the defendant and
Lawing and Hindes.
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5. 	The plaintiffs expressed their immediate interest in becoming franchisees for “Raleigh and
North of the Triangle also Southern Virginia (Clarksville, South Hill)” through an electronic
questionnaire submission on March 21, 2007. The defendant emailed the plaintiffs and told
them that Raleigh/Wake Forest and Franklin and Granville counties were not available as
they had already been purchased by others (specifically Lawing and Hindes); however, the
defendant also stated the owners of those territories “have expressed interest in possibly
selling . . . .”
6. 	A “franchise kit” was mailed to the plaintiffs by the defendant on March 27, 2007. Also, on
that date, defendant informed the plaintiffs that she had spoken to Lawing and Hindes about
selling Franklin and Granville county territories and they were willing to sell them back to
the defendant.1
7. 	On March 28, 2007, the defendant informed the male plaintiff that she had not mentioned
his name when discussing the release of Franklin and Granville counties to Lawing and
Hindes. Defendant asked plaintiffs to allow her to negotiate the release, but had no objection
to the plaintiffs discussing the business with whomever they liked.
8. 	At some point in late March and early April of 2007, the defendant emailed Lawing and
Hindes and informed them that someone was interested in purchasing the exclusive right to
sell in Franklin and Granville counties. In that same email she inquired if they, Lawing and
Hindes, were interested in “getting rid of” the territories. Hindes responded on April 2,
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2007, asking what needed to be done to proceed with the release of the property. 	The
defendant responded that Lawing and Hindes should discuss how they wanted to handle the
release.
9. 	In an email dated May 16, 2007, defendant informed Lawing and Hindes that her attorney
was going to draft the paperwork for the transfer of the territory of Franklin and Granville
counties.
10. Lawing and Hindes negotiated with the defendant that they would release Franklin and
Granville counties for a sales price of $10,000.00. The parties came to a verbal agreement
that instead of paying $10,000.00 outright, the amount would be credited against monies
owing to the defendant.
11. On May 22, 2007, the defendant emailed Lawing and Hindes to inquire about the specific
details of the transfer of the territory and said that once the transfer was complete she would
credit Lawing and Hindes’ account $10,000 to represent the price the parties agreed would
be paid for the release. 	The release paperwork would be attached to the new franchise
agreement that would replace the existing business training agreement.
12. Emails dated June 8, 2007 and June 28, 2007 evidence the defendant was working with her
attorney, Marisa Faunce, to draft and revise the documents for the release and transfer of
Franklin and Granville counties throughout June of 2007.
13. In an email dated June 20, 2007, the defendant notified Hindes that the plaintiffs were
“moving forward” with the franchise agreement and a July 2007 payment would not be
needed for Franklin and Granville counties unless she notified them. Also in that email, the
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defendant stated “. . . your franchise agreement will be sent out with the release for Franklin
and Granville counties.”
14. In an email dated, July 6, 2007, defendant told her attorney that they had reached an
agreement with their first franchisees, the plaintiffs. 	At this same time, emails were
exchanged between the plaintiffs and defendant evidencing attempts to come to a mutual
agreement on the language of the franchise agreement.
15. On July 12, 2007, defendant mailed plaintiffs the final contract with an addendum and
suggested scheduling a meeting on July 23, 2007 to sign the papers as her attorney advised
they could not enter the contract prior to that date. Also in that letter, defendant advised the
plaintiffs that she had scheduled their training on the Best Blinds business and products for
the week of August 6, 2007.
16. On August 2, 2007, the defendant emailed Hindes and among other things requested that
Hindes and Lawing sign the franchise agreement she sent in July of 2007 as the release of
Franklin and Granville counties was attached to that document and memorialized their oral
agreement. Neither signed the franchise agreement or the release.
17. Emails between the plaintiffs and defendant and the defendant’s attorney continued through
August 9, 2007 when the defendant emailed the plaintiffs and attached the addendums and
agreement modifications requested by the plaintiffs. Defendant informed plaintiffs that she
had been advised by counsel that the five day waiting period previously required was not
necessary as the only changes to the documents had been requested by the plaintiffs.
18. The parties met on August 12, 2007 and signed the document titled “Best Blinds Franchise
Agreement” (“Franchise Agreement”). In the agreement the plaintiffs’ territories included
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2 Prior to this time, the defendant had used a state map without county boundary lines and
roughly outlined the territories to be included in various business training agreements.
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the following North Carolina counties: Person, Granville, Vance, Franklin and Warren. Also
attached to the Franchise Agreement was a county map of North Carolina with the
aforementioned counties highlighted.2 The plaintiffs and the defendant signed the Franchise
Agreement. The defendant’s husband, Darren McMahel, signed the document as a witness.
The plaintiffs paid the defendant $50,437.11 as a franchising fee and costs for initial start-up
and training.
19. At the time the parties executed the Franchise Agreement, the defendant had not received
the signed release of Franklin and Granville counties from Lawing and Hindes despite the
fact that she knew that such a release was required before she could provide the plaintiffs
with exclusive rights to sell in those counties. Defendant did not inform the plaintiffs that
she had not received the signed release from Lawing and Hindes prior to execution of the
Franchise Agreement.
20. 	On August 30, 2007, the male plaintiff received a telephone call from Lawing who
communicated that he and Hindes were the exclusive Best Blinds distributors for Franklin
and Granville counties. 	Lawing further informed the male plaintiff that neither he nor
Hindes had signed a release of the counties and they intended to continue to make sales in
the territory.
21. After receiving the telephone call, the male plaintiff contacted the female plaintiff and
informed her of the conversation he had with Lawing. 	The plaintiffs then called the
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defendant who assured them the problem was being resolved and they should continue
business as usual.
22. On September 6, 2007, the defendant emailed the female plaintiff and informed her “all is
well with [Lawing] about the territory ... he’s like a different person.”
23. The defendant began training the plaintiffs on the business and products of Best Blinds on
September 10, 2007 and continued to do so at her training facility for approximately one
week.
24. On September 13, 2007, defendant’s attorney, Marisa Faunce, sent a letter to Richard
Carlton, attorney for Lawing and Hindes, attempting to resolve the conflict between Lawing,
Hindes and the defendant about whether credits toward the amount owed to the defendant
or cash would be exchanged for the release of Franklin and Granville counties.
25. Both Lawing and Hindes and the plaintiffs conducted business under the Best Blinds name
between August of 2007 and March of 2008.
26. On October 11, 2007, defendant emailed the male plaintiff and admitted the deal with
Lawings and Hindes had not been completed, but she and her attorney were hoping to have
it done in the next couple of days.
27. On October 16, 2007, Lawing forwarded the defendant a copy of an email he sent to his
attorney. The email outlined the specific demands of Lawing and Hindes before they would
be willing to release the Franklin and Granville properties and how they wished to be
compensated.
28. On October 16, 2007, Faunce again contacted Carlton regarding the deal between their
respective clients for the release of Franklin and Granville counties. In the correspondence,
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defendant agreed to pay $10,000 in two payments of $5,000 in addition to a 10% fee for a
sale conducted in Franklin county by the plaintiffs.
29. Throughout October of 2007 and November of 2007, the defendant continued to negotiate
with Lawing and Hindes and would communicate her efforts to the plaintiffs.
30. On December 4, 2007, defendant emailed plaintiffs and informed them that an agreement
had been reached with Lawing and Hindes. Lawing and Hindes would leave the Best Blinds
system since they were 	in breach of their contract with the defendant. 	The defendant
alluded to an alternate plan if they did not leave the Best Blinds system, which was to initiate
a civil suit against Lawing and Hindes for breach of contract.
31. Faunce contacted Carlton on December 6, 2007 to inquire about the decision his clients had
made about selling all or some of their territories back to the defendant. Carlton responded
that his clients wanted to sell Franklin and Granville counties back to the defendant and the
agreement she sent appeared to be “fine.”
32. On December 7, 2007, the defendant forwarded to Lawing and Hindes a copy of the
addendums and release documents with her signature affixed.
33. On December 10, 2007, the plaintiffs, the defendant, and the defendant’s husband met at the
Carolina Ale House in Briar Creek and the defendant reiterated her desire to resolve the
issues with Lawing and Hindes and have the release of Franklin and Granville counties
completed. To avoid being in breach of her business training agreement with Lawing and
Hindes regarding the exclusive right to sell in a given territory, the defendant gave the
plaintiffs the option of either rescinding the Franchise Agreement as if it had never been
entered into or acquiring additional territories to replace Franklin and Granville counties.
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34. By an email dated October 11, 2007, the defendant followed up with the plaintiffs saying her
attorney advised that depending on which option they elected an addendum could be added
to identify the new territories or a termination agreement could be drafted.
35. On December 26, 2007, plaintiffs relayed to defendant that they would prefer to terminate
the agreement and she should forward the requisite paperwork.
36. Counsel for the defendant, Anthony Biller, sent a letter to Carlton, counsel for Lawing and
Hindes, on December 27, 2007, terminating all business dealings between the parties based
on Lawing and Hindes’ material breach of their contractual obligations.
37. On December 31, 2007, defendant responded to the plaintiffs’ email evidencing their intent
to rescind the Franchise Agreement 	and stated her attorney would draft the termination
agreement as the parties had discussed at their meeting on December 10, 2007.
38. A termination agreement was sent to the plaintiffs on January 10, 2008 and included non-
competition obligations binding on the plaintiffs, as well as requiring the plaintiffs to pay
termination fees.
39. On January 18, 2008, the plaintiffs advised the defendant that the proposed termination
agreement did not represent their agreement reached on December 10, 2007.
40. The plaintiffs initiated a civil lawsuit in Vance County Superior Court against the defendant
and Best Blinds Inc. on February 28, 2008.
41. At no time did the defendant pay Lawing and Hindes the $10,000 requested for the release
of Franklin and Granville counties.
42. On March 20, 2009, the Vance County Superior Court entered a judgment against the
defendant. Specifically, that court found the defendant’s conduct constituted an unfair and
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3The parties agreed to the defendant receiving a credit of $1650.00 from the total $50,437.11 the
plaintiffs paid at the December 10, 2007 meeting.
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deceptive trade practices violation under North Carolina General Statute Chapter 75 and
awarded damages in the amount of $48,787.11.3 The damages award was trebled pursuant
to N.C. Gen. Stat. § 75-16.
43. On April 20, 2009, the Vance County Superior Court assessed the plaintiffs’ attorneys fees
in the amount of $53,687.50 against the defendant.
44. On July 24, 2009, the defendant filed for relief under chapter 7 of the Code.
ANALYSIS
The plaintiffs assert that the judgment entered in Vance County Superior Court in their favor
establishes that the defendant: (1) willfully and fraudulently made false representations and
omissions regarding a material fact; (2) the defendant’s misrepresentation deceived them; (3) they
reasonably relied on the defendant’s misrepresentation; and (4) they were injured. The defendant
admits all allegations made by the plaintiffs, but challenges the conclusion that the judgment from
Vance County establishes actual fraud and therefore makes the judgment debt non-dischargeable
pursuant to § 523(a)(2)(A).
The Code’s purpose of providing debtors with a fresh start requires that exceptions to
discharge be construed narrowly; however, a creditor may move for certain debts to be deemed non-
dischargeable as there is “no constitutional or ‘fundamental’ right to a discharge in bankruptcy.”
Grogan v. Garner, 498 U.S. 279, 286 (1991) (citing United States v. Kras, 409 U.S. 434, 445-446
(1973)). Section 523(c)(1) provides that all debts described in § 523(a)(2)(A) will be automatically
discharged unless the creditor to whom the debt is owed obtains a determination by the bankruptcy
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court that the particular debt is non-dischargeable. 11 U.S.C. § 523(c)(1). Section 523(a)(2)(A)
provides, in pertinent part, that “a discharge under section 727 . . . does not discharge an individual
debtor from any debt – for money . . . to the extent obtained by – false pretenses, a false
representation, or actual fraud . . . 	.” . 11 U.S.C. § 523(a)(2)(A). To prevail in a dischargeability
action under § 523(a)(2)(A), a plaintiff must show the following:
(1) the debtor made false representations (2) that at the time [s]he knew the
representations were false; (3) that [s]he made them with the intention and
purpose of deceiving the creditor; (4) that the creditor relied on such
representations; and (5) that the creditor sustained the alleged loss and
damage as the proximate result of the representations having been made.
Randle v. Highfill (In re Highfill), 336 B.R. 701, 706 (M.D.N.C. 2006); see In re Biondo, 180 F.3d.
126, 137 (4th Cir. 1999); see also Visotsky v. Woolley (In re Woolley), 145 B.R. 830, 834 (E.D. Va.
1991) (citing Sweet v. Ritter Finance Co., 263 F. Supp. 540, 543 (W.D. Va. 1967). 	When
determining if a particular debt meets the dischargeability exception requirements, courts should
apply the preponderance of the evidence standard. Grogan, 498 U.S. at 291. To exempt a debt from
discharge under § 523(a)(2)(A), the creditor must prove the subjective intent of the debtor. Longo
v. McLaren (In re McLaren), 3 F.3d 958, 960 (6th Cir. 1993). It is well settled in North Carolina law
that a violation of the Unfair and Deceptive Trade Practice Act is established by showing that there
was an unfair or deceptive act, in or affecting commerce, which proximately caused actual injury
to the plaintiff. 	N.C. Gen. Stat. § 75-1.1; Peterson v. Bozzano (In re Bozzano), 183 B.R. 735
(M.D.N.C. 1995). 	Intent is not considered when determining if North Carolina’s Unfair and
Deceptive Trade Practices Act has been violated.
The only issue before this court is whether when the debtor presented the Franchise
Agreement to the plaintiffs on August 12, 2007, she had the subjective intent to deceive the
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plaintiffs: essentially, whether the third prong of the required showing by the plaintiffs has been met.
Under a § 523(a)(2)(A) analysis:
[A] debtor will be found to have acted with the requisite intent to defraud under §
523(a)(2)(A) when, at the time the transaction occurred, it is established that the
debtor, for [her] personal gain, knowingly mislead the [creditor] as to a material fact
concerning the [debt].
White v. Sigmon, 128 Fed. Appx. 994, 998 (4th Cir. 2005) (citing In re Grim, 293 B.R. 156, 163
(Bankr. N.D. Ohio 2003)). A showing of reckless indifference or disregard of the truth will satisfy
the requirement that the defendant acted with the intent to deceive. 	Woolley, 145 B.R. at 835.
Intent may also be inferred by an examination of the totality of the circumstances, but such intent
shall never be presumed. Id. at 836 (citing Schwalbe v. Gans (In re Gans), 75 B.R. 474, 486 (Bankr.
S.D.N.Y. 1987)). 	The defendant’s conduct after the statement was made may be considered in
determining whether there was fraudulent intent. 	Id. (citing In re Haining, 119 B.R. 460, 464
(Bankr. D. Del. 1990)).
Based on the facts found herein, this court finds that the defendant did have a good faith
belief that she had a contract with Lawing and Hindes to release Franklin and Granville counties
prior to August 12, 2007, and for that reason there was no intent to deceive the plaintiffs. Prior to
the signing of the Franchise Agreement, numerous emails were exchanged between the defendant
and Lawing and Hindes which indicate that as early as May 25, 2007, there was an agreement to
release Franklin and Granville counties. This agreement is apparent based on Hindes’ indication,
through an email dated May 25, 2007, that she and Lawing would sell the two counties, but not
Johnston county, and also how they would like to be compensated for the release. Hindes indicated
that they did not want their payment period shortened, but instead wanted each payment amount
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reduced. Without an agreement to release there would have been no reason to reduce the debt owed
to the defendant.
Furthermore, throughout June, July and the beginning of August of 2007, there are a number
of emails between the defendant and her attorney attempting to draft release documents that met
with Lawing and Hindes’ specifications. The defendant could not ultimately come to terms that
were agreeable to Lawing and Hindes; however, that did not become clear until after the August 12
signing of the Franchise Agreement by the plaintiffs. The evidence on the record also indicates that
Lawing and Hindes delayed negotiations by making themselves unavailable for prolonged periods
of time and by being indecisive on how they would accept compensation for the release of Franklin
and Granville counties. That indecisiveness does not indicate the defendant’s reckless disregard for
the truth, but rather her difficulties in completing documentation of the release. This court does not
excuse the defendant’s behavior, but finds the behavior does not amount to a reckless disregard for
the truth.
Taking into account the totality of the circumstances, it is evident that before and after the
signing of the Franchise Agreement, the defendant 	actively engaged Lawing and Hindes to
complete the release of Franklin and Granville counties. The defendant repeatedly emailed and
called Lawing and Hindes, she kept in constant contact with her attorney to make revisions as
requested by Lawing and Hindes, and her attorney repeatedly sent correspondence to Carlton in an
attempt to memorialize the agreement. Nevertheless, those efforts were not fruitful because of the
inability of the parties to decide whether a credit of $10,000 would be given to release the two
counties or if cash would be exchanged. Despite the repeated assurances from Lawing and Hindes
that they wanted to release Franklin and Granville counties, without the parties being able to resolve
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that material element of the deal nothing could be finalized. While the plaintiffs were not privy to
the communications between the defendant and Lawing and Hindes, it is evident that she was
consistently working to resolve any differences in an attempt to provide the plaintiffs with exclusive
sale rights in Franklin and Granville counties.
The court does not condone the defendant’s behavior and is left with the firm impression that
the state court was correct in concluding that her August 12, 2007 execution of the Franchise
Agreement without a signed release in hand was an unfair and deceptive trade practice. After all,
protection of a territory in which to do business was the heart of the agreement plaintiffs sought and
were never provided. However, a close reading of the documentary evidence in this case leaves the
court with the firm impression that the defendant had a reasonable belief on August 12, 2007 that
she had a firm agreement for the release of the territories the plaintiffs desired.
Based on the foregoing, this court finds the defendant did not have an intent to deceive.
Without an intent to deceive there cannot be a finding of actual fraud and the state court judgment
entered against the defendant is DISCHARGEABLE pursuant to § 523(a)(2)(A).
END OF DOCUMENT
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