Bankruptcy: Dischargeability of Debt - False Financial Statement in Chapter 7 Case

     Judge Tice, United States Bankruptcy Court in Richmond, denied discharge of a debt in a Chapter 7 case. The case was Global Express Money Orders, Inc. v. Davis. In Davis, the debtor previously had a convenience store that sold the creditor’s money orders through the store. The debtor still owed the creditor ($71,168.55) for some of these money orders. At issue was the debtor’s financial statement provided to the creditor at the commencement of the business between them. 

     The Court found that the debtor’s financial statement was materially false. In fact, at trial the debtor did not seriously question the inaccuracy of the statement. Rather, he tried to distance himself from its preparation and delivery to the creditor. In the financial statement the debtor provided false information as to cash in a checking account, the value of his personal residence and a beach condominium, the value of his equity in certain investments, value of mutual funds and an expected federal tax refund.
     The Court further found that the creditor required the personal financial statement of debtors as a condition precedent of the business arrangement; that the debtor, with intent to deceive, published the materially false financial statement and caused it to be delivered to the creditor; and that in contracting with the creditor and allowing the entity to incur substantial indebtedness, the creditor reasonably relied upon materially false asset entries in the financial statement, which debt was indemnified by the debtor personally.
     The Court rejected the debtor’s argument that the creditor failed to prove that he prepared the financial statement and authorized its delivery, i.e., publication with intent to deceive, to the creditor. The Court determined that the evidence showed that in the debtor’s presence and with his knowledge, the financial statement was delivered to the creditor by an (unknown) employee of the debtor’s business. The Court ruled that this evidence was sufficient to require some better explanation from the debtor than he provided. The Court stated that it did not believe the debtor’s evasive testimony that he was too busy to be bothered, and knew nothing about the contents of the financial statement or the circumstances surrounding its delivery to the creditor. The Court determined that at the very least, the debtor recklessly allowed his financial statement to be used by the creditor for its consideration of the business transaction, and his reckless indifference was sufficient to satisfy the publication with intent to deceive element of Bankruptcy Code §523(a)(2)(B).
     As to damages, the debtor argued that the loss of payment of the trust balance due was not damage or loss resulting from his publication of the false financial statement, as required by the statute. Rather, the debtor stated that the loss resulted from the failure of store employees to separate money order sales. Moreover, according to the debtor, his stores were not generating enough revenue to pay the current liabilities, and there was no evidence that he personally took funds or caused the shortage. However, the Court found it ironic that the debtor could argue that it was his employees who failed to comply with the trust agreement requirement for segregating trust fund receipts of the creditor. The debtor agreed to indemnify the creditor for his business’s indebtedness under the trust agreement, and his inability to make good on the indemnity was a direct result of his financial problems and ensuing bankruptcy. Although the Court stated that causation was not a necessary or proper element of the false financial statement issue, the Court simply found that the debtor’s false financial statement was a proximate cause of the loss.

Collections: Foreign Judgment Enforceable in Virginia

    The Richmond U.S. District Court found that the plaintiff, a British developer of computer and video games, may enforce a judgment from a United Kingdom court finding a breach of a settlement agreement by defendant, a Virginia company, that agreed to distribute the British company’s video game and then failed to pay the company.

     Plaintiff, Codemasters Group Holdings Ltd., stated that it issued invoices for the video products it shipped to defendant, SouthPeak Interactive Corp., but SouthPeak failed to pay. The parties subsequently entered into a settlement agreement in which defendant agreed to pay plaintiff $2 million. Plaintiff contended that defendant failed to make all payments and breached the settlement agreement, leaving an outstanding balance of $1,265,000 plus interest and late fees.

     Plaintiff filed suit in the UK and a court there ordered default judgment against defendant. Plaintiff subsequently sued to enforce the UK judgment in Virginia.

     The court noted that Virginia has adopted the Uniform Foreign Money-Judgments Recognition Act, which allows for the enforcement of a foreign country money judgment that is final and conclusive and enforceable where rendered.

     Two issues were raised in the Richmond court: whether the UK court had personal jurisdiction over SouthPeak, and, whether Southpeak had received notice of the UK action in sufficient time to enable it to defend.

     The settlement agreement contained a forum selection clause designating the UK as the forum for resolution of the parties’ dispute. The agreement established the acquiescence of SouthPeak to the jurisdiction of the UK court.  Thus, because prior to the commencement of the UK action SouthPeak agreed to submit to the jurisdiction of the UK court, the UK had personal jurisdiction over SouthPeak.

     SouthPeak argued that proper service of process did not occur pursuant to Virginia law, so enforcement of the foreign judgment should not be allowed. The court disagreed. The court determined that a plain reading of the Uniform Foreign Money-Judgments Recognition Act simply requires notice, and, SouthPeak had actual notice of the proceedings in the UK. Accordingly, the foreign judgment could be enforced.