Ershowsky v. Freedman (In re Freedman)

Summarized by Jeffrey Snyder , Bilzin Sumberg Baena Price & Axelrod, LLP
14 years 9 months ago

Citation:

10-15407 (11th Cir. May 26, 2011)

Tag(s):

Ruling:

The Eleventh Circuit affirmed (a) an order of the bankruptcy court finding that appellant owes appellee a nondischargeable debt based on an oral fraudulent misrepresentation pursuant to section 523(a)(2)(A) and (b) district court's finding that that appellant had waived his argument that section 523(a)(2)(B) requires an allegedly fraudulent misrepresentation to be made in writing by failing to raise it in the bankruptcy court and because no exception to the waiver doctrine applies. The Court noted ithat because the bankruptcy court based its finding of nondischargeability on section 523(a)(2)(A), which does not require a written statement like section 523(a)(2)(B) does, the Eleventh Circuit's refusal to consider appellant's argument that an oral statement cannot satisfy section 523(a)(2)(B) would not result in a miscarriage of justice or implicate the interests of substantial justice so as to justify an exception to the waiver rule.

Procedural context:

Appeal of district court's affirmance of bankruptcy court order finding that debtor/appellant owed non-dischargeable debt to creditor/appellee.

Facts:

Appellant/Debtor Freedman purchased Image Marketing Associates, Inc. (“Image Marketing”), in 2002 for approximately $1 million. Appellee/Creditor Ershowsky was its most important employee in terms of client contact and relationships. After she gave Freedman one month’s notice of her departure, he offered her an immediate $15,000 raise, an annual raise of 10% each year thereafter, additional perks related to vacation time and working remotely, and a share of any profits related to the ultimate sale of the company. He said that he intended to grow the business and sell it within four to five years. He indicated that the business was worth approximately $1 million and that Ershowsky would make $400,000 to $500,000 on the sale of the business. She knew that the original owners had sold Image Marketing to Freedman for $1 million, Freedman did not tell her that the company had any substantial debt, and she was not aware that Freedman had obtained a small-business loan of approximately $600,000 in order to purchase the company. Ershowsky received the $15,000 raise and most of the other perks. In late December 2004, the parties reached a final agreement as to the profit-sharing arrangement, and a final Phantom Stock Agreement was signed in January 2005.Ershowsky also signed an employment contract as part of that transaction. When Ershowsky asked Freedman why the Phantom Stock Agreement included a provision for deducting corporate liabilities, he told her only that he might borrow money in the future in order to grow the company or that he might lend his personal money to the company, and they agreed that such obligations should be paid first. He did not tell her that there were existing, significant obligations. In mid-2006, he agreed to sell Image Marketing to Crab Key Holdings, LLC (“Crab Key”). Crab Key required Ershowsky to sign a new employment agreement as part of the sale. No one approached Ershowsky about that agreement, and she did not learn of it until after Freedman sold the company. Instead, Freedman forged her signature on the agreement. The sale closed in July 2006. When she returned to the office, she found on her desk a redacted copy of the closing statement, a redacted copy of some additional numbers, and a check for $21,956. The unredacted version that was filed with the bankruptcy court showed that the business had sold for $945,000 plus the payment of certain closing costs, but that $583,210.02 were used to pay off the small-business and purchase-money loans. The bankruptcy court calculated damages of $166,660 based on the proceeds that would have been available if the debts had not existed, as well as $4,445.16 in unmatched retirement-account contributions and $851.96 in unreimbursed expenses. After Freedman filed a Chapter 7 petition in the bankruptcy court, Ershowsky filed a complaint alleging that he owed her a nondischargeable debt, pursuant to 11 U.S.C. § 523(a)(2)(A), (a)(4), on grounds of false pretenses, false representations, actual fraud, and fraud as fiduciary. Freedman stated that Ershowsky was represented by an attorney during the negotiation of the Phantom Stock Agreement, that she never requested a financial review or attempted to discuss the financial condition of the company, and that the two of them never discussed the company’s financial condition, revenue, gross margins, expenses, or debts. He further stated that he paid her $21,936 upon sale of the company, pursuant to the Phantom Stock Agreement, and that her claim that he represented any specific future financial benefit was completely false and without merit. The bankruptcy court found that Freedman had made false and fraudulent representations to Ershowsky in order to deceive her into remaining with Image Marketing, when he (1) represented to her that Image Marketing had a $1 million value and (2) failed to inform her of the company’s long-term debt. The court further found that Ershowsky had justifiably relied upon Freedman’s misrepresentations, and that his statement that the net-liabilities language in the Phantom Stock Agreement referred only to future debt was as inaccurate and misleading as his previous statements.

Judge(s):

HULL, PRYOR, and FAY

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