United States District Court, E.D. Virginia, Alexandria Division
In re REBECCA FAYE HEFFNER AND GEORGE DEWEY HEFFNER, Debtors.
FIRST VIRGINIA COMMUNITY BANK Appellee. REBECCA FAYE HEFFNER AND GEORGE DEWEY HEFFNER, Appellants
M. Brinkema United States District Judge
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.
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.
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"). Id. at
Heffners subsequently provided Byers with a copy of a PFS
dated June 30, 2010 (the "2010 PFS"). 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.
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.
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
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.
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
September 22, 2015, the Heffners filed a joint voluntary
petition for Chapter 7 bankruptcy. 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,  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).
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.
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 ...