Midtown Investments, LLC et al v. Peterson et al

UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF NEW MEXICO
In re:
STEVEN JAMES PETERSON and
COREY MARIE PETERSON,
Debtors. 	No. 7-07-13301 SA
MIDTOWN INSURANCE, LLC. AND
PATIENT CARE SERVICES, INC.
Plaintiffs,
v. 	Adv. No. 08-1042 S
STEVEN JAMES PETERSON and
COREY MARIE PETERSON,
Defendants.
MEMORANDUM OPINION ON PLAINTIFFS’
MOTION FOR SUMMARY JUDGMENT
This matter is before the Court on Plaintiffs’ Motion for
Summary Judgment filed on November 5, 2008. 	Doc 22. 	Defendants
did not file a response. 	This is a core proceeding to determine
the dischargeability of a debt, and counterclaims thereto. 	28
U.S.C. § 157(b)(2)(I).
Although Defendants did not respond to the Motion, the Court
must still review it to determine whether Plaintiffs are entitled
to judgment as a matter of law. 	See Bankruptcy Rule 7056(c).
N.M. L.B.R. 7056-1 provides, in part:
A memorandum in opposition to the motion [for summary
judgment] shall contain a concise statement of the
material facts as to which the party contends a genuine
issue does exist. Each fact in dispute shall be
numbered, shall refer with particularity to those
portions of the record upon which the opposing party
relies, and shall state the number of the movant's fact
that is disputed. All material facts set forth in the
statement of the movant shall be deemed admitted unless
specifically controverted.
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Because Defendants filed no memorandum in opposition to the
Motion, the Plaintiffs’ Statement of Undisputed Material Facts is
deemed admitted. 	Therefore, the Court finds as follows:
1. 	Patient Care sold or rented medical supplies and equipment
to third parties throughout the country.
2. 	Prior to September, 2002, defendants owned 100% of the
common stock of Patient Care.
3. 	On or about September 5, 2002, Daniel Lee Ge1b entered into
a letter agreement with Mr. Peterson and Patient Care (the
"Letter Agreement"), pursuant to which, inter alia, Mr. Gelb
obtained an option to purchase, from Patient Care, 55% of
the common stock of Patient Care for $150,000, together with
an option to purchase an additional 20% of the common stock
of Patient Care from Mr. Peterson for an additional
$150,000.
4. 	Plaintiffs never assumed any of Mr. Gelb's rights or
obligations under the Letter Agreement or any other contract
between Mr. Gelb and Mr. Peterson.
5. 	At about the same time, a company owned by Mr. Gelb, Plaza
I, Inc. ("Plaza I") began purchasing or "factoring" Patient
Care's accounts receivable.
6. 	In late October or early November, 2004, Mr. Gelb discovered
that Mr. Peterson had fabricated invoices and sold them to
Plaza I.
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Page -3-
7. 	When he discovered the fraud, Mr. Gelb confronted Mr.
Peterson. 	At a lunch meeting on or about November 4, 2004,
Mr. Gelb suggested that Mr. Peterson transfer to Mr. Gelb
1,667 shares of his common stock in Patient Care
(representing 75% of the total outstanding shares), as
partial compensation for the losses caused by the fraud.
8. 	Mr. Peterson agreed to the proposal.
9. 	As of November 5,2004, Mr. Peterson resigned as a director
and officer of Patient Care, but continued to work with
Patient Care as a consultant.
10. 	On or about the December 6, 2004, Peterson converted and
embezzled $112,137.78 from Patient Care (the "Embezzled
Funds").
11. 	Peterson accomplished the embezzlement by opening a new bank
account in the name of Patient Care, showing himself as the
only signatory, depositing the Embezzled Funds in the new
account, and then withdrawing the funds and using them for
personal purposes.
12. 	Peterson admits that he stole the Embezzled Funds from
Plaintiffs.
13. 	Mr. Peterson was convicted of embezzlement, and is on
probation.
14. 	On or about June 1, 2005 Midtown purchased all of Patient
Care's assets that were properly assignable. 	Thus, either
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Patient Care or Midtown owns the claims at issue in this
adversary proceeding.
15. 	Peterson's fraudulent activity ended up costing Plaza I
several million dollars, because many of the accounts
receivable Patient Care sold to Plaza I were uncollectible,
and Patient Care was unable to make payment of approximately
$175,000 per month under the equipment leases to Plaza I.
16. 	While the exact amount of damage suffered by Plaza I is
difficult to quantify, the damages exceed, at a minimum,
$2,000,000.
17. 	Plaza I has transferred its claim for damages against Mr.
Peterson to the Plaintiffs.
The Court cannot find from the current record that Steven
Peterson and Corey Peterson were married at the time of the
crime, that she had anything to do with the crime, or that she
benefitted from the crime. 	Nothing in the summary judgment
motion addresses these facts, and these facts were denied in the
answer to the complaint.
The Court finds that the Counterclaim in this case consists
of two counts arising from the same transaction, namely the
transfer of stock and control of the Petersons’ former business
named Patient Care Services (the “Business”). 	The first count is
entitled “Debt owed and Money due” and seeks $85,000 allegedly
unpaid from the sale of the Business. 	The second count is
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1Unless Plaintiffs are seeking to collect from Corey
Peterson’s separate after-acquired property, the Court is not
sure that it matters whether Plaintiffs obtain a judgment against
her. 	If Plaintiffs’ claim is a community claim, it would appear
that under § 524(a)(3) the after-acquired community property will
remain liable for Mr. Peterson’s non-dischargeable debt. 	See
Federal Deposit Ins. Corp. v. Soderling (In re Soderling), 998
F.2d 730, 734 (9 th Cir. 1993)(Under California law, husband’s
crime was community claim and all community property will be
potentially liable for the debt.); Midi Music Center, Inc. v.
(continued...)
Page -5-
entitled “Breach of Contract” and claims that the Petersons have
been paid only a portion of the amount due them under the stock
purchase agreement.
CONCLUSIONS OF LAW
Bankruptcy Code § 523(a)(4) states that “A discharge under
section 727 ... does not discharge an individual debtor from any
debt – ... (4) for ... embezzlement.” 	Embezzlement consists of
the embezzling or converting to one’s own use of anything of
value, with which he or she has been entrusted, with fraudulent
intent to deprive the owner thereof. 	New Mexico v. Schifani, 92
N.M. 127, 131, 584 P.2d 174, 178 (Ct. App. 1978)(Citations
omitted.)
Steven Peterson admits the underlying facts that constituted
the embezzlement. He was found guilty of embezzlement, and is on
probation. 	The debt for the embezzled funds is nondischargeable
as to Steven Peterson. 	As to Corey Peterson the Court cannot
determine at this time if the debt for embezzlement is
dischargeable 1.
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1(...continued)
Smith (In re Smith), 140 B.R. 904, 909 (Bankr. D. N.M. 1992)
(“Once the Court has determined that only one spouse has
committed acts which make the debts nondischargeable, the
community property is liable. 	Only the separate property of the
innocent spouse will not be available to satisfy creditors.”);
Arcadia Farms Ltd. v. Rollinson (In re Rollinson), 332 B.R. 879,
883 (Bankr. D. Ariz. 2005):
Normally, the discharge causes community property
acquired post-petition to be free from pre-petition
community claims. 	Code § 524(a)(3). 	But, if either
the community debt is excepted from discharge under §
523, or if the other spouse was denied or would be
denied a discharge, the discharge does not immunize
such post-petition community property from the
community debt. 	This happens automatically by
operation of Code §§ 524(a)(3) and (b), without the
necessity for any determination as to the knowledge or
participation of the “innocent” spouse, so long as the
debt is community debt.
See also Joann Henderson, For Better or Worse: Liability of
Community Property after Bankruptcy, 29 Idaho L. Rev. 893, 898
(1992)(Both spouses must be innocent in order to gain a community
discharge.)
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Plaintiffs’ have also established that they are not liable
on the Counterclaim for at least three reasons. 	First, the stock
purchase agreement was entered into by Mr. Gelb and Mr. Peterson.
It is undisputed that neither Plaintiff assumed any of Mr. Gelb's
rights or obligations under the Letter Agreement or any other
contract between Mr. Gelb and Mr. Peterson (Fact 4). 	Therefore,
there was no contract between Plaintiffs and the Petersons and
Plaintiffs are not the proper counter-defendants. 	Second, the
undisputed facts show that Mr. Peterson caused in excess of
$2,000,000 in damages to Plaza I (fact 16) and that Plaza I has
assigned its rights to Plaintiffs (fact 17). 	Under the doctrine
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2 	The right of setoff (also called “offset”)
allows entities that owe each other money to
apply their mutual debts against each other,
thereby avoiding “the absurdity of making A
pay B when B owes A.” 	Studley v. Boylston
Nat. Bank, 229 U.S. 523, 528, 33 S.Ct. 806,
808, 57 L.Ed. 1313 (1913). 	Although no
federal right of setoff is created by the
Bankruptcy Code, 11 U.S.C. § 553(a) provides
that, with certain exceptions, whatever right
of setoff otherwise exists is preserved in
bankruptcy.
Citizens Bank of Maryland v. Strumpf,516 U.S. 16, 18 (1995).
Page -7-
of setoff 2 Plaintiffs’ claims would be subtracted from Mr.
Peterson’s claim. 	This would result in a reduction of Mr.
Peterson’s claim to $0. 	Third, from the undisputed facts it is
clear that the transfer of the Business was not pursuant to the
stock purchase agreement, but rather a partial payment for Mr.
Peterson’s creating false invoices and selling them to Plaza I.
In other words, the parties abandoned the first contract (the
stock purchase agreement) and substituted a second contract for
it, which was fully performed. 	Therefore, there is no money due,
and no breach of the original contract.
SUMMARY
The Court will enter an Order partially granting the Motion
for Summary Judgment and declaring Steven Peterson’s debt for
embezzlement to be nondischargeable. 	The Order will deny the
Motion for Summary Judgment as to Corey Peterson. 	The Order will
also dismiss the Counterclaims with prejudice. 	The Court will
set a status conference to discuss remaining issues.
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Honorable James S. Starzynski
United States Bankruptcy Judge
Date Entered on Docket: 	January 16, 2009
copies to:
David T Thuma
Attorney for Plaintiffs
Jacobvitz, Thuma & Walker
500 Marquette Ave NW Ste 650
Albuquerque, NM 87102-5309
Ronald E Holmes
Attorney for Defendants
112 Edith Blvd NE
Albuquerque, NM 87102-3524
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