BK COURT DECIDES SEVENTEEN PERCENT OF RESTAURANT PURCHASE PRICE NOT DISCHARGED

Client, a mail carrier, filed for Chapter 7 relief after operating a restaurant that he operated for 18 months used up all his financial resources. He bought the restaurant for $171,000. He paid $71,000 as down-payment and executed a promissory note for $100,000, payable within 6 months secured by a collateral agreement in favor of seller for existing and new restaurant equipment. Client purchased the restaurant believing that sales were at least $2,000 a day based on representations made by the cook of the restaurant and seller. Client believed that with $2,000 of sales daily, he would be able to pay back the entire $100,000 note in six months from profits. Client kept his job at the USPS while depending on the cook and the cook’s family of 3 to run the restaurant for him. After acquiring possession of the restaurant, client found out that a lot of equipment needed to be replaced or repaired despite seller representations that everything was working. He spent $30,000 for new equipment and another $30,000 to fix the place. Repair of the air-conditioner alone cost $8,000. Client was not represented by counsel in the purchase of the restaurant and did not understand that the collateral agreement prohibited him to transfer equipment because seller had a security interest in existing and after acquired equipment.

 Since the restaurant never made a profit, and client was out another $60,000 for new equipment and repair of premises, client was not able to pay the $100,000 note to seller. This prompted seller to file a lawsuit in state court to get possession of the restaurant back from client who refused to give it back. Instead of defending himself in state court, he did not retain counsel and did not respond to the lawsuit. Thus, after some time, client was declared in default. Eventually, a default judgment was entered against him for $100,000 and ordering him to return possession of the restaurant to seller.

Seller then filed an adversary complaint in client’s bankruptcy asking that the entire purchase price for the restaurant of $171,000 be deemed non-dischargeable on the ground of fraud pursuant to 11USC§523(a)(2), on the ground of intent to cause her injury pursuant to §523(a)(6), and that debtor’s discharge be revoked on the ground that he made a false oath in bankruptcy and that he failed to preserve adequate books and records to ascertain his financial condition.

Case went to trial in June, 2010, and the court rendered its memorandum of decision last month. On §523(a)(2), the court found that defendant ‘bought the business from plaintiff based on her representations that the business operating seven days a week would gross $2,00 a day… and would be able to repay the loan based on this revenue stream. Defendant testified that when he began to operate the business, the business did not gross $2,000 a day, but only $600 to $700 a day. Defendant testified that because the business did not generate the revenue as represented to him by plaintiff and because additional capital was needed to replace the non-functioning equipment, he was not able to make installment payments on the note to plaintiff. Defendant’s testimony is corroborated by the income tax returns filed for 2007 and 2008…’ The court found client’s testimony ’that he intended to repay plaintiff as he represented in the promissory note and security agreement to be credible.’ Accordingly, the court finds ‘that plaintiff has not met her burden of proving that defendant made false representation to her for purposes of §523(a)(2).’

 However, the court found that client acted with intent to injure plaintiff when he transferred equipment to pay creditors because client knew that seller wanted the restaurant back when she sued him in state court to get the restaurant back. Despite this knowledge he transferred equipment to pay creditors breaching the collateral agreement. The court found the transfer of equipment as ‘malicious.’ The value of equipment transferred was determined to be $30,000 and was not dischargeable. $141,000 was discharged.

Lawrence Bautista Yang is a graduate of Georgetown University Law Center and has been in law practice for thirty years. He specializes in bankruptcy, business and civil litigation and has handled more than four thousand successful bankruptcy cases in California. He speaks Mandarin and Fujien and looks forward to discussing your case with you personally. Please call (626) 284-1142 for an appointment at 1000 S Fremont Ave Bldg A-1 Suite 1125 Unit 58 Alhambra, CA 91803.