Memorandum of Decision Re: Meritless Dischargeability Action

FOR THE NORTHERN DISTRICT OF CALIFORNIA In re DANIEL and BARBARA DIERINGER,                                       No. 1-83-01017      Debtors. _____________________________/ KLAUS SCHEFTNER et al.,      Plaintiffs,    v.                                                                                                  A.P. No. 91-1078 DANIEL A. DIERINGER,      Defendant. ______________________________/
Memorandum of Decision
     Debtors Daniel and Barbara Dierenger purchased a business from plaintiffs Klaus Scheftner and Rolf Rheinschmidt in 1982, with the plaintiffs taking back a note as part of the purchase price. The debtors filed their Chapter 11 petition in 1983, and a plan of reorganization was confirmed in 1986. In 1990, the debtors were unable to continue payments under their plan and converted the case to Chapter 7.      Over the years, plaintiffs have been paid a considerable portion of their claim, including over $100,000.00 before filing and another $30,000.00 pursuant to the plan. Despite the obvious good faith demonstrated by these payments, plaintiffs allege that the balance owed to them of about $57,000.00 is nondischargeable due to fraud.      One of plaintiff's allegations was that debtors' attorney had made misrepresentations to them in order to induce them to accept the plan and later to forbear from seeking conversion. No evidence was introduced to support these allegations. Plaintiffs' primary basis for the alleged fraud is that the debtor's plan called for the shares of stock in their wholly-owned corporation to be held in trust by their attorney for the benefit of creditors. The corporation owned a valuable liquor license. Over the years, the debtors withdrew about $2,000.00 per month from the corporation. They had not promised not to do so. They had not represented that were not drawing funds from the corporation. They had not falsified any documents which plaintiffs might have relied upon. They had no obvious other sources of income other than Mrs. Dierenger's earnings. In essence, plaintiffs' argument is that the debtors fraudulently failed to disclose the draws, and had they not been made the value of the corporation would have been enough to pay their claim in full.      While nondisclosure may be the basis for a finding of nondischargeable fraud in a proper case, fraudulent intent must be proven. Here, there is not a hint of fraudulent intent. The sizable payments made to plaintiffs clearly demonstrate an intent to repay, not a fraudulent intent. Plaintiffs never even asked if draws were being made by the Dieringers, and it is utterly absurd to suggest, as plaintiffs do, that they had a right to assume that no draws were being made and the debtors were living entirely off Mrs. Dieringer's income and Mr. Dieringer's supposed winnings at the racetrack. The draws made by the Dieringers were reasonable, and permitted them to live modestly and make payments under the plan. There is no factual basis for any assumption that no draws were being made; anyone with an ounce of business sense would assume that draws were being made.      In five years on the bench, the court has not seen such a meritless dischargeability action brought to trial. It was clearly brought to harass and punish debtors for not having paid every cent owed to plaintiffs. There is no basis in either law or fact for the action, and plaintiffs neither cited law supporting their position nor made a good faith argument for the extension, modification, or reversal of existing law. Accordingly, the court must impose sanctions on plaintiffs pursuant to Federal Rule of Bankruptcy Procedure 9011.      Accordingly, the court will enter a judgment that plaintiffs shall take nothing by their complaint and shall pay to debtors their costs incurred in this proceeding plus the sum of $1,500.00.      This memorandum constitutes the court's findings and conclusions pursuant to FRCP 52(a) and FRBP 7052. Counsel for debtors shall submit an appropriate form of judgment forthwith.
Dated: January 30, 1992                                                                               _______________________                                                                                                                      Alan Jaroslovsky                                                                                                                      U.S. Bankruptcy