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In re Heffner

United States District Court, E.D. Virginia, Alexandria Division

March 23, 2017



          Leonie M. Brinkema United States District Judge

         Debtor-Appellants Rebecca Faye Heffner and George Dewey Heffner ("appellants" or "the Heffners") appeal the finding of the United States Bankruptcy Court for the Eastern District of Virginia ("bankruptcy court") that their debt to First Virginia Community Bank ("appellee" or "FVCB") is non-dischargeable under 11 U.S.C. § 523(a)(2)(B), 11 U.S.C. § 723(a)(3), and 11 U.S.C. § 727(a)(5). For the reasons that follow, the bankruptcy court's finding of non-dischargeability will be affirmed.


         The Heffners are a married couple who owned a convenience store called Little Country Store, Inc., in Purcellville, Loudon County, Virginia. [Bankr. Dkt. 70] at 3. In April 2011, they also owned Heffner Properties, LLC ("HP"), which in turn owned "a 58.5 acre parcel of real property also located in Purcellville, referred to by the parties as the 'Mountain Property.'" Id.

         In April 2011, the Heffners "applied for a commercial loan with FVCB." Id., at 3. As part of that application, the Heffners and their bookkeeper, Ellis Hawkins ("Hawkins"), met with FVCB's commercial lending officer, Bill Byers ("Byers"). Id. The bankruptcy court found that at that meeting, Byers asked the Heffners for three years of tax returns and a personal financial statement ("PFS").[1] Id. at 4.

         The Heffners subsequently provided Byers with a copy of a PFS dated June 30, 2010 (the "2010 PFS").[2] 14 at 13. In the Liabilities section of the 2010 PFS, the Heffners listed: (1) a $2, 500 credit card balance; (2) a $576, 677 mortgage on their personal residence; and (3) an approximately $3.2 million mortgage on the Mountain Property. Id. at 5. The 2010 PFS included a statement saying

Each [of the] undersigned represents and warrants that the information provided is true and complete and that the Bank may consider this statement as continuing to be true and correct until a written notice of a change is given to the Bank by the undersigned.

Id. at 15.

         On May 5, 2011, Rebecca Heffner signed a credit agreement with the Merchants Grocery Company ("MGC") as a guarantor. Id. at 5. On September 1, 2011, both Heffners signed a promissory note payable to MGC with a principal amount of $820, 000. Id. at 6. In violation of the warranty in the 2010 PFS, the Heffners never informed FVCB of these new liabilities. Id. at 5-6.

         On September 7, 2011, the FVCB loan closed after the Heffners executed a Business Loan Agreement on behalf of Little Country Stores and HP, signed a promissory note with a principal amount of approximately $2.7 million, and agreed to a commercial guaranty. Id. at 6. In that commercial guaranty, appellants represented that "no material adverse change has occurred in [their] financial condition since the date of the most recent financial statements provided to Lender and no event has occurred which may materially affect Guarantor's financial condition." Id. at 15 (internal quotation marks omitted). Contrary to that representation, they failed to disclose both the May 5, 2011, credit agreement and the September 1, 2011, $820, 000 note. The F VCB loan was secured by the Little Country Store property as well as the Mountain Property owned by HP.

         In March 2014, the Heffners sold their interest in HP (and therefore the Mountain Property) to their son, George Heffner, Jr., and his wife. Id. at 7. The Heffners received $1.5 million in cash as part of this transaction, which they paid to FVCB in exchange for FVCB releasing its lien on the Mountain Property. Id. The Heffners also received a secured promissory note in the amount of $608, 350 and an unsecured promissory note in the amount of $25, 000 in exchange for HP, about which they did not inform FVCB. Id. at 7-8.

         Soon after they sold HP, the Heffners took out a $450, 000 loan from Leeds Manor Capital, LC ("LMC), which “was secured by a pledge and assignment of the $608, 350.00 Secured Promissory Note that the [Heffners] received in connection with the sale of their equity interests in HP." Id.

         On September 22, 2015, the Heffners filed a joint voluntary petition for Chapter 7 bankruptcy.[3] On December 28, 2015, FVCB filed its three-count complaint in this adversary proceeding. Count 1 alleged non-dischargeability under 11 U.S.C. § 523(a)(2)(B), for use of a materially false statement, and under 11 U.S.C. § 523(a)(6), for willful and malicious injury to property. Count 2 alleged non-dischargeability under 11 U.S.C. § 523(a)(4), for fraud or defalcation. Count 3 raised several objections to discharge, including four claims of fraudulent transfers, [4] failure to keep and preserve recorded information regarding the LMC loan, making false oaths with intent to defraud regarding the LMC loan and other property at the meeting of the creditors, and failure to satisfactorily explain the loss of the funds from the LMC loan, respectively in violation of § 727(a)(2)(A), (a)(3), (a)(4), and (a)(5).

         On May 18, 2016, FVCB filed a Motion for Summary Judgment, to which appellants responded. On June 30, 2016, the bankruptcy court granted in part and denied in part FVCB's motion. [Bankr. Dkt. 70] at 2. With respect to Count 1, the bankruptcy court concluded that FVCB had shown that the 2010 PFS was a materially false statement in writing respecting the Heffners' financial condition on which FVCB reasonably relied, leaving for trial only the issue of whether the Heffners furnished the 2010 PFS to FVCB with the intent to deceive the bank. Id. The bankruptcy court denied summary judgment with respect to all the claims in Count 3, which also proceeded to trial. Id.[5]

         One July 5, 2016, three days before trial, FVCB sought to amend its complaint to include a new § 523 willful and malicious injury claim arising out of the Heffners' sale of HP to then-son and daughter-in-law, which included a reference to the LMC loan. Id. The court denied that motion as prejudicial to the Heffners, although ...

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