don’t know much about bankruptcy fraud. I know that bankruptcy courts have the
authority to find that some debts are non-dischargeable. And in that event,
filing the bankruptcy may not be the answer the debtor is seeking.
of my lack of knowledge, it’s a topic that is worth exploring. A recent case
will illustrate the point.
2004 Humberto Saenz Jr. entered into a Franchise Agreement with Pizza Patron in
south Texas. The Franchise Agreement prohibited Saenz from transferring
franchises without the consent of the franchisor.
formed Estrella Ventures, LLC, for the purpose of operating four Pizza Patron
restaurants. He financed his accounts receivable, inventory, equipment,
furniture and fixtures with the International Bank of Commerce and a $480,000
loan. Sales must have been good, as the debt was reduced to $336,000 in five
2009 Jose Maria Gomez approached Saenz to purchase one store. Gomez and Saenz
reached a deal for Gomez to acquire the Rio Grande City Pizza Patron franchise
for $350,000, just enough to pay off the IBC debt. Neither Gomez nor Saenz
obtained written consent to the transfer from Pizza Patron.
furnished sales reports, tax returns and income statements to Gomez. Gomez used
them to substantiate the purchase price, and predict future revenues and expenses.
to health concerns, Gomez closed the store in 2011. Saenz reopened it under the
Pizza Patron name.
unhappy with a $70,000 loss and believing that Saenz made material wrongful
misrepresentations to Gomez which induced Gomez to purchase the store, sued
Saenz for fraud. Saenz countered by filing a Chapter 7 bankruptcy petition. The
lawsuit was dispatched to bankruptcy court, where the court found for Gomez,
entered judgment for $412,000 against Saenz, and determined that since the
claim was based in fraud a discharge in bankruptcy would not serve to avoid the
other words, the underlying purpose of the Chapter 7 bankruptcy filing – to duck
the claim of Gomez – would not succeed and Gomez would still be able to collect
monies owed to him even after the bankruptcy was concluded.
United States Court of Appeals looked at the evidence presented and determined
that Saenz “lied frequently whenever it
suited him.” Income Statements furnished by Saenz were false; discrepancies
in accounting procedures and royalty payments were “problematic and unacceptable.”
bankruptcy court had the right to weigh the credibility of both Gomez and
Saenz, and determine that Saenz’s fraudulent conduct induced Gomez to make
business decisions. And that substantial losses were incurred.
claims are not dischargeable in bankruptcy. Gomez wins. Saenz loses. Gomez may
now continue to extract the amount owing to him from Saenz regardless of
Saenz’s Chapter 7 bankruptcy proceeding.
Humberto Saenz v. Jose Maria Gomez;
No 17-41004; United States Court
of Appeals of Texas, 5th Circuit, August 7, 2018: https://www.law.com/texaslawyer/almID/1534478158TX1741004/.
Learned / Questions Asked
claims are not dischargeable in bankruptcy.
due diligence and analysis is critical not only in real estate deals, but also
in general business transactions. Complete trust in one party’s statements
without verification can yield money losses and litigation.
an unreported piece to this case. Although Gomez ultimately prevailed in our
legal system – did he really? He likely spent an exorbitant amount in legal
fees to obtain a Judgment. And now what? Our Texas homestead and other debtor-exemption
laws are still available to Saenz. What happens if Saenz uses those laws to his
benefit and doesn’t pay Gomez – then who won?
Stuart A. Lautin, Esq.*
* Board Certified,
Commercial (1989) and Residential (1988) Real Estate Law,
Board of Legal Specialization
in the States of Texas and New York
Allen & Lautin, PC
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