The opinion of the court was delivered by: Judge Joan B. Gottschall
MEMORANDUM OPINION AND ORDER
On January 2, 2007, Ernest and Beverly Ojeda filed for Chapter 7 bankruptcy protection. Gail Goldberg filed an adversary proceeding on March 28, 2007, seeking to have her loan to the Ojedas excepted from discharge. The Ojedas received a discharge pursuant to 11 U.S.C. § 727(a) on November 2, 2007, subject to resolution of the instant proceeding. The Bankruptcy Court conducted a three-day hearing, and issued a memorandum opinion and order on April 22, 2008, finding that Gail's debt is not excepted from discharge. Goldberg v. Ojeda (In re Ojeda), 397 B.R. 67 (Bankr. N.D. Ill. 2008). Gail now appeals. This court heard oral arguments on March 3, 2009.
Gail, and her husband Ronald Goldberg,*fn1 seek to have a debt owed by the Ojedas excepted from discharge under 11 U.S.C. § 523(a)(2)(A). The debt was initiated by a note executed in 1998 ("1998 Note"). At that time, the Ojedas were restauranteurs, and were the sole shareholders of two Illinois corporations, Pelham Enterprises, Inc. ("Pelham"), and Dices, Inc. Pelham owned franchise rights, a real estate lease, and related personal property with respect to a McDonald's restaurant.
Dices, Inc. was a management company, and managed a second McDonald's restaurant. The franchise rights, real estate lease, and related personal property related to the second McDonald's restaurant were owned by Dices Enterprises, which was operated as a proprietorship by the Ojedas. The Ojedas were involved in the day-to-day operations of both restaurants.
Gail is a former high school teacher, and Ronald is a former deputy sheriff, police officer, entrepreneur in the wireless communications industry, and a current venture capitalist, having taken part in 25--30 short-term, high-risk loans since 1990. The Goldbergs and Ojedas met through a mutual acquaintance shortly before the 1998 Note was executed.
The 1998 Note, executed on August 6, 1998, extended the Ojedas a short-term bridge loan in the amount of $600,000, at an annual interest rate of 18%, with a maturity date of October 6, 1998. The 1998 Note was secured by 160,000 shares of "Pan American Bank" ("PAB") stock.*fn2 The Ojedas also provided the Goldbergs with a personal financial statement and a financial statement for Pelham and Dices Enterprises, though no additional security was provided.
The Ojedas immediately began making the required monthly interest payments, as they would continue to do for the next eight years. The October 6, 1998 maturity date of the 1998 Note came and went, but the Goldbergs did not call the loan. At some date in 1998, the Ojedas and Goldbergs executed a new, undated note payable to both Goldbergs which replaced the 1998 Note and extended the maturity date to December 1, 2000 ("Second Note"). Like the 1998 Note, the Second Note was secured by the 160,000 shares of stock. Beginning with the Second Note and continuing until the Ojedas' default, the Goldbergs sent monthly interest invoices to the Ojedas.
PAB began experiencing financial difficulties in 1998 or 1999, and Pan American Bancshares, the holding company that owned PAB, sold PAB to JD Financial on October 5, 1999. This transfer involved a one-for-one hundred share reverse stock split of the common shares of Bancshares, rendering the Ojedas' 160,000 shares virtually worthless. Pan American Bancshares was also required to change its name, and became Cermak Road Holdings, Inc. ("Cermak"). After the sale the Ojedas possessed only 1,600 shares of stock in Cermak. These events were not disclosed by the Ojedas to the Goldbergs.
The Goldbergs learned that PAB was experiencing problems by other means, and sought additional security from the Ojedas. On November 1, 2001, a new note was executed ("2001 Note") which replaced the Second Note. The 2001 Note contained identical principal and interest terms as the Second Note, but was between only Gail and the Ojedas, and was secured by separate corporate guarantees from Pelham and Dices, Inc., as well as by 160,000 shares of Bancshares stock.*fn3 Dices Enterprises did not provide a corporate guarantee on the 2001 Note. The 2001 Note matured on January 2, 2003. The January 2, 2003 maturity date came and went, but the Goldbergs continued sending the Ojedas monthly interest invoices, and the Ojedas continued making the monthly interest payments.
On October 1, 2004, Pelham and Dices Enterprises sold their interests in the two McDonald's restaurants for a combined purchase price of approximately $5,100,000. However, the Ojedas had a significant deferred capital gains tax, and after a portion of the sales proceeds were used to pay the restaurants' creditors, the remaining balance (a little over $1,000,000) was deposited in a "Starker Trust" pending investment in a like-kind asset that would permit the Ojedas to defer the capital gains tax.*fn4 None of the proceeds from the sales were used to pay the Goldbergs. Although the Ojedas no longer possessed any interests in any McDonald's restaurants after October 1, 2004, they continued to pay the Goldbergs with checks that continued to reference the McDonald's store formerly managed by Dices, Inc.
On December 31, 2004, Pelham entered into an asset purchase agreement related to Joey Buona's Pizzeria/Grille-Chicago L.L.C. ("Joey Buona's"), which closed in January, 2005. All remaining proceeds from the McDonald's sales were invested in Joey Buona's. This was not a successful enterprise, and Joey Buona's failed by February, 2006. Pelham filed for Chapter 7 bankruptcy in January, 2007.
The Ojedas defaulted on the 2001 Note in January, 2006. Prior to that date, and considering the 1998 Note, the Second Note, and the 2001 Note together, the Ojedas had made approximately 89 payments of interest with an aggregate value of around $801,000. The ...