Source: http://www2.kyeb.uscourts.gov/opin/howopin/MCharles90-00307A91-0013.fandc.html
Timestamp: 2019-04-25 04:50:17+00:00

Document:
This matter came on for trial before the Court on November 18, 1991. The Court having considered the testimony offered at trial, the joint stipulation of the parties, the briefs of the parties, and the documentary and other pertinent evidence of record in this case, and being otherwise fully advised, now, in accordance with Rule 52 of the Federal Rules of Civil Procedure, made applicable herein by Rule 7052 of the Federal Rules of Bankruptcy Procedure, makes the following Findings of Fact and Conclusions of Law. Before stating its Findings and Conclusions, however, the Court will rule on the admissibility of an exhibit offered into evidence by the plaintiff. Plaintiff's Exhibit 9 is a copy of a plea agreement and judgment and related indictments regarding defendant William Eric Charles's dealings with two other financial institutions. The defendants objected to the introduction of this exhibit. The plaintiff contends that the exhibit is admissible pursuant to Rules 404 and 406 of the Federal Rules of Evidence.
Evidence of the habit of a person or of the routine practice of an organization, whether corroborated or not, and regardless of the presence of eyewitnesses, is relevant to prove that the conduct of the person or organization on a particular occasion was in conformity with the habit or routine practice.
Aside from making reference to these rules, the plaintiff has not presented any argument or cited any case which supports their application herein.
The Notes of Advisory Committee on Proposed Rules state in regard to the use of evidence of other crimes, wrongs, or acts pursuant to Rule 404(b): "The determination must be made whether the danger of undue prejudice outweighs the probative value of the evidence in view of the other means of proof and other factors appropriate for making decisions of this kind under Rule 403." Rule 403 of the Federal Rules of Evidence provides that relevant evidence may be excluded on the grounds of prejudice, confusion, or waste of time. The availability of other means of proof in this matter leads this Court to the conclusion that the admission of plaintiff's Exhibit 9 would amount to the "needless presentation of cumulative evidence" per Rule 403, and it therefore will not be admitted into evidence.
The defendants herein, William Eric Charles and Susanna D. Charles, husband and wife, filed a Chapter 11 petition in this Court on September 21, 1990. The case has since been converted to a Chapter 7 proceeding. During the time periods in question herein, defendant William Eric Charles was the authorized agent and sole stockholder and officer of W.E.C. Coal Sales, Inc. and Cade Coal, Inc. The plaintiff herein, Catlettsburg Federal Savings and Loan Association, is a creditor of the debtors. Robert H. Fugeman is the plaintiff's president and retired CEO.
On or about February 1, 1990, the defendants established and maintained an account with the plaintiff in which funds were maintained in the form of certificates of deposit. The funds were gradually increased, reaching a level of $456,215.00 on July 9, 1990, and $566,215.00 on July 27, 1990.
The plaintiff had maintained a business relationship with defendant William Eric Charles for more than ten years, issuing him real estate loans on a regular basis. Payments on these loans were timely made. Prior to July 24, 1990, the parties established a course of dealing concerning the borrowing of funds against the certificates of deposit. The defendants would procure "share loans" and repay them within a period of one week or less. Share loans are loans made by Catlettsburg Federal to depositors which are limited in amount to the amount of funds, in this case, certificates of deposit, which the depositor has at the institution. Such loans against these certificates of deposit bore interest at 2% over the rate payable on the certificate of deposit. Repayment was often by checks drawn on accounts maintained by the above-referenced corporations with other lending institutions. These checks were issued at the direction of defendant William Eric Charles.
The defendants borrowed on this account on forty-seven occasions from April through July 1990, and on each occasion signed a promissory note. Susanna Charles signed approximately half of the notes for the 47 loans during this period of time. These notes were payable on demand but, prior to July 24, 1990, the plaintiff never found it necessary to make demand. Prior to July 25, 1990, the defendants paid back each of the loans, including interest, within one week. The loans were paid by check, and the plaintiff considered the loans paid upon receipt of the checks, each of which cleared the defendants' banks. Upon delivery of a check for payment of a loan, the defendants would typically borrow additional funds against the same collateral. New credit was extended by Catlettsburg Federal without waiting for each check to clear.
In July 1990, at the request of Mr. Charles, the plaintiff permitted defendant William Eric Charles to sign approximately eight blank notes so that future loans could be made upon telephone instructions from Mr. Charles. The plaintiff agreed to allow Mr. Charles to have each note processed and completed over the telephone. From July 24-30, 1990, the defendants borrowed funds on the account in the following amounts: July 24, $450,000.00 per Share Loan No. 1974, bearing the signature "Susanna D. Charles"; July 25, $420,000.00 per Share Loan No. 1976, bearing the signature "Susanna D. Charles"; July 27, $415,000.00 per Share Loan No. 1979, bearing the signature "William E. Charles"; July 28, $150,000.00 per Share Loan No. 1980, bearing the signature "W E Charles"; July 30, $500,000.00, per Share Loan No. 1981, bearing the signature "W E Charles". (Plaintiff's Exh. 1-5). The July 27, 28, and 30 loans were made on the above-referenced blank notes signed by Mr. Charles in advance. There is contradictory testimony concerning whether Mrs. Charles signed the two notes bearing her signature in blank or in a filled-out state. (Transcript, pp. 57-58, 60-61, 82-90). Based upon the evidence and based upon Stipulation No. 12, the Court finds that Mrs. Charles executed the July 24 and July 25 note in the offices of Catlettsburg Federal in the presence of Abby Blevins, an employee of Catlettsburg Federal, on those respective dates, and that she received the checks representing the proceeds of those two loans.
The testimony of Johnna Manning, the assistant cashier at Kentucky Farmers Bank, established that W.E.C. Coal Company maintained a checking account at that institution and that both Eric Charles and Susanna Charles were signatories on that account.
Defendant Susanna D. Charles presented a check for repayment of the July 24 loan on July 25 and two checks for repayment of the July 25 loan on July 27. These checks were numbers 512, 514, and 515 totalling $863,258.76, drawn on the account of W.E.C. Coal Sales, Inc. at The Bank Josephine. Notice of payment having been stopped on these checks was issued by Kentucky Farmers Bank, the plaintiff's local banking institution, on August 1, 1990. Kentucky Farmers Bank informed the plaintiff of the dishonor of these checks by telephone prior to August 1. (Fugeman depo., pp. 19-20; Exh. 6, 7, 8).
Thomas Stewart, Vice-President of The Bank Josephine testified that the W.E.C. Coal, Inc. account had a negative balance of $22,882.81 on July 25, 1990, and that the account was overdrawn $407,162.81 on July 26, 1990. On July 27, 1990, the account was overdrawn $830,198.57. On July 30, 1990, the account balance was a positive $33,060.19, and on July 31, 1990, it was a positive $11,271.69. (Stewart depo., pp. 4-6). Mr. Stewart testified that from July 25 to August 1, 1990, there were never sufficient funds in the account of W.E.C. Coal, Inc. to cover checks 512, 514, and 515. (Stewart depo., pp. 6-7). He stated that Mr. Charles signed stop payment orders on the three checks on July 27, 1990, and gave as his reason that the funds were transferred to another bank. (Stewart depo., pp. 9-10).
After the plaintiff discovered that the checks in question would not be honored, Mr. Charles presented check number 509 for $863,251.20 drawn on the Cade Coal, Inc. account at Greenup County Bank to cover them. Mr. Fugeman testified that the check was deposited to Kentucky Farmers Bank. He then retrieved the check and attempted to get a certified check from Greenup County Bank, but, that some vacillation by Greenup County Bank, that bank informed him that it could not honor the check. The check was, in fact, never honored; a stop payment order had been put on it as well. (Fugeman depo., pp. 21-22; Exh. 9). Mr. Fugeman stated that Mr. Charles's explanation for the dishonor of the three checks drawn on The Bank Josephine was an accounting error. (Fugeman depo., p. 23) Mr. Charles also presented check number 510 for $565,606.48 drawn on the same account at Greenup County Bank in payment for another loan made during this period. A stop payment order was also put on this check. (Fugeman depo., p. 22; Exh. 10).
Jeff Elswick, Senior Vice-President of Greenup County Bank testified that the Cade Coal account had a balance of $416,444.90 as of July 27, 1990, a negative $187,308.12 balance as of July 30, 1990, and a positive $12,665.88 balance as of July 31, 1990. (Elswick depo., pp. 4-5). He stated that between July 27 and July 30 the Cade Coal account did not have sufficient funds to honor either of the checks written on it to the plaintiff. (Elswick depo., p. 6). Mr. Elswick testified that check number 509 was returned to the plaintiff on August 21 and check number 510 was returned on August 3. He stated that up until August 21 there would not have been sufficient funds in the Cade Coal account to honor either of the checks. (Elswick depo., p. 8).
Rebecca Jackson, the plaintiff's Executive Vice-President and Chief Executive Officer testified that the net amount owed by the defendants before any payment was applied was $1,933,466.79. This amount was reduced to $1,152,742.68 by the application of $556,066.81 in security and various other payments made by the defendants. (Transcript, pp. 26-27). The plaintiff "charged off" $4,595.55 in interest for its own accounting purposes; however, pursuant to the terms of the notes, the balance due on the loans the defendants owed includes that amount for a total of $1,157,338.23. (Transcript, pp. 41-42). The payoff on Share Loans 1974 and 1976 signed by defendant Susanna D. Charles was $593,200.31 as of September 30, 1990. (Transcript, pp. 50-51).
This Court has jurisdiction of this matter pursuant to 28 U.S.C. §1334(b); it is a core proceeding pursuant to 28 U.S.C. §157(b)(2)(I). The standard of proof in an action pursuant to 11 U.S.C. §523(a) is a preponderance of the evidence. See Grogan v. Garner, 111 S.Ct. 654 (1991).
Pursuant to 11 U.S.C. §523(a)(2)(A), a creditor who seeks to except a debt from discharge "must prove that the debtor obtained money through a material misrepresentation that at the time the debtor knew was false or made with gross recklessness as to its truth. The creditor must also prove that it reasonably relied on the false representation and that its reliance was the proximate cause of its loss." In re Phillips, 804 F.2d 930, 932 (6th Cir. 1986).
The testimony of plaintiff's witnesses in this matter is essentially uncontradicted. The evidence adduced thereby is sufficient to support a finding that defendants knew or should have known that the W.E.C. Coal, Inc. and Cade Coal accounts at The Bank Josephine and Greenup County Bank did not have sufficient funds to cover the checks written on those accounts in payment of loans owed to the plaintiff. The presentation of these checks was a false representation of the defendants' ability to pay which was calculated to, and did, induce the plaintiff to continue to loan money to the defendants.
The plaintiff's reliance on this false representation was reasonable based on the length and history of the relationship between the plaintiff and the defendants. The plaintiff loaned the defendants large amounts of money over a period of time. Payments on the loans were by check and were timely. The plaintiff was never given any reason to believe that any check would not be honored. As pointed out in Phillips, supra, "[t]he determination of reasonableness must be made by evaluating all the facts and circumstances of the case." At 933. The facts and circumstances of this case support a finding of reasonable reliance on the part of the plaintiff.
While it is clear from the evidence that it was William Eric Charles who either stopped payment or caused stop payment to be made upon the checks which resulted in the losses of the plaintiff, the Court must conclude that Susanna Charles was part and parcel of the process as the spouse of William Eric Charles, the party who obtained approximately one-half of the loans, the party who tendered payment on the July 24 and July 25 loans, which notes she had executed. Her contention that she was unaware of any problem concerning the checks until later lacks credibility.
The plaintiff has also established that the actions of the defendant William Eric Charles constituted willful and malicious injury to another entity or the property of another entity, pursuant to 11 U.S.C. §523(a)(6). The "willful" and "malicious" prongs of this subsection are satisfied by demonstrating that the act in question was done intentionally or deliberately and that it necessarily led to injury. See Perkins v. Scharffe, 817 F.2d 392 (6th Cir. 1987). The plaintiff is not required to show that the defendant intentionally sought to harm, but only that the act which resulted in the harm was intentional. There is no doubt that presentment of checks on accounts with insufficient funds, and stopping payment on those checks, were deliberate, intentional acts which necessarily resulted in injury to the plaintiff.
The debt of defendant William Eric Charles to the plaintiff is therefore nondischargeable pursuant to 11 U.S.C. §523(a)(2)(A) and (a)(6), and the plaintiff is entitled to a judgment against him. The debt of defendant Susanna D. Charles to the plaintiff is nondischargeable pursuant to 11 U.S.C. §523(a)(2)(A), and the plaintiff is entitled to a judgment against her.
Dated this _______ day of _____________________, 1992.

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