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In re Bero

March 27, 1997

IN THE MATTER OF:

TAD BERO,

DEBTOR-APPELLANT.



Appeal from the United States District Court for the Northern District of Illinois, Eastern Division.

No. 96 C 595 Harry D. Leinenweber, Judge.

Before FLAUM, EASTERBROOK, and EVANS, Circuit Judges.

EVANS, Circuit Judge.

ARGUED JANUARY 15, 1997

DECIDED MARCH 27, 1997

Maureen Dougherty was the plaintiff in an adversary action filed in Tad Bero's bankruptcy proceeding. She claimed that a debt due her from Bero was not dischargeable because it was procured by fraud. In the bankruptcy court the parties stipulated that liability could be determined on summary judgment and that, if necessary, a trial would be held regarding damages. The bankruptcy court granted summary judgment for Dougherty and, after a trial, set damages at $112,390.52. The district court affirmed the judgment. Bero appeals.

Throughout the 1980's Bero owned two corporations, Kitchens by Bero, Inc. and Tad Bero Kitchen and Bath, Inc. Through these corporations he operated a business in East Dundee, Illinois, under the trade name Kitchens by Bero, Inc.

Dougherty responded to an ad Bero placed in a trade paper offering his business for sale. She began negotiations with him in September 1991, and on January 14, 1992, the parties signed two contracts by which Dougherty purchased the assets of the corporations. She paid $50,000 in cash, assumed a $50,000 liability at Bero's bank, and signed two promissory notes, one to each corporation in the amounts of $70,000 and $30,000.

Except for the precise sum and terms of payment, the contracts for the purchase of the two corporations were identical. Both contracts contain warranties that the sellers had valuable goodwill, had paid their tax liabilities, and were free of debts, encumbrances, liens and judgments:

[T]here are no judgments of record in the State of Illinois or any other state, or proceedings pending or threatened against the SELLER in any court that might affect this Agreement or the property herein provided to be sold; and there are no judgments [of] record or proceedings pending or threatened in Federal Court.

As Dougherty to her chagrin was to learn, these representations were not true. There were several outstanding debts owed by the debtor and also several outstanding judgments against Kitchens by Bero. The debts included unpaid Illinois state sales tax, six judgments in circuit courts for Cook and Kane Counties, debts to suppliers, and an IRS levy.

Nevertheless, Dougherty tried to keep the business going until September 1993, when she was forced to close up shop. She was unable to repay the $50,000 bank loan and the bank sued her. The case was settled when she paid $6,250, and she incurred $12,377.80 in attorney fees defending the suit.

Then Bero sued Dougherty in state court to enforce the promissory notes running in favor of the corporations. Dougherty removed the case to federal court where it was assigned to Judge Milton I. Shadur. She counterclaimed for fraud in the inducement and moved for summary judgment. Bero later filed for personal bankruptcy and was no longer involved in the case.

During proceedings in the district court, the corporations failed to file a counter-statement to Dougherty's statement of uncontested facts and also failed to answer a request for admissions pursuant to Rule 36 of the Federal Rules of Civil Procedure. Judge Shadur found that "the representations and warranties were egregiously false . . ." and that ...


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