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Karoly v. Schwab

United States District Court, M.D. Pennsylvania

August 22, 2014

JOHN P. KAROLY, JR., Appellant
v.
WILLIAM SCHWAB, Chapter 7 Trustee for the Estate of Cleaview Builders, Inc., Appellee

Page 50

For John Karoly, JR Karoly, agent of, Appellant: Samuel H. Israel, LEAD ATTORNEY, Prince A Thomas, Fox Rothschild LLP, Philadelphia, PA.

For William G. Schwab, Appellee: J. Zac Christman, LEAD ATTORNEY, J. Zac Christman, Newman, Williams, Mishkin, Corveleyn,Wolfe & Fareri, PC, Stroudsburg, PA.

For United States Trustee, Trustee: Anne K. Fiorenza, LEAD ATTORNEY, Office of the United States Trustee, Harrisburg, PA.

OPINION

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MEMORANDUM

MALACHY E. MANNION, United States District Judge.

John P. Karoly, Jr., a former Pennsylvania attorney, represented Dennis Slayton in a series of criminal and civil actions between 2005 and 2007. Mr. Karoly claims that Mr. Slayton agreed to sell him approximately 24 acres of property in Milford Township, Pike County, Pennsylvania, as a way to pay for his legal services. This property was held by Phoenix Soils, LLC, (" Phoenix" ) a company owned and operated by Mr. Slayton. Between March 2005 and September 2005, Mr. Karoly claims he made a series of payments to Mr. Slayton to complete the land sale. However, no sale agreement or deed was signed until after January 2007.

Around this same time, Mr. Slayton's various companies, including Phoenix, were involved in involuntary Chapter 7 bankruptcy proceedings. On September 28, 2006, the bankruptcy court entered default judgment against Mr. Slayton and these entities. That order incorporated the Milford property into the Chapter 7 bankruptcy and gave the Chapter 7 Trustee the authority to administer the properties. When the bankruptcy trustee tried to sell the Milford property in January 2007, Mr. Karoly and Mr. Slayton both objected claiming Mr. Karoly owned the property. Those objections were later withdrawn. The property was then sold and the funds placed in escrow. Mr. Karoly filed a motion claiming he held equitable title to the property and was entitled to the funds. After a two-day trial, the bankruptcy court denied his motion, finding that there was insufficient evidence to show that Mr. Karoly had an equitable interest in the property. This appeal followed.

The court finds there is sufficient evidence to support the bankruptcy judge's factual findings and legal conclusions. Mr. Slayton's earlier judicial admissions were withdrawn and his testimony established that there was never any sales agreement prior to the land being incorporated into the Chapter 7 bankruptcy. The evidence supports the bankruptcy judge's findings that there was no agreement to sell the

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property in light of the parties intent in May 2005 and that payments to Mr. Slayton essentially constituted a personal loan. As such, the appeal is DENIED and the findings of the bankruptcy court are AFFIRMED.

I. FACTUAL BACKGROUND

Although the relationship between Mr. Karoly and Mr. Slayton is long and complex, the court will only recite the facts necessary to this appeal. In February 2005, an involuntary Chapter 7 bankruptcy petition was filed against Clearview Builders, Inc. (" Clearview" ) in the bankruptcy court for this district. (App. 7). Mr. Slayton was the owner of Clearview and used another company, Phoenix, to hold all of his property. (App. 226).

Mr. Karoly began representing Mr. Slayton in a series of criminal and civil matters in Pennsylvania state court starting in April 2005. (App. 361). During this representation, Mr. Slayton's personal assets were frozen, so he could only pay an initial retainer of $50,000. (App. 446). As he was unable to pay for the ongoing litigation, Mr. Karoly loaned Mr. Slayton the cost of the litigation. He also bought several pieces of property from Mr. Slayton that are not at issue in this appeal.[1] (App. 361-364). In total, Mr. Karoly paid $350,191.48 to Mr. Slayton either for litigation expenses or land. Specifically between May 2005 and March 2007, Mr. Karoly wrote $107,000 in checks to Mr. Slayton with the notation " loan" in the memorandum. An additional $79,000 in checks had some notation that indicated they were for real estate, but did not indicate what property was at issue. (App. 361-64). Four other checks issued on October 8, 2005, totaling $40,000, noted they were in exchange for specific pieces of property in Wayne County. (App. 405-7). No other check references any specific property or property transaction.

Sometime in May 2005, Mr. Karoly claims that he and Mr. Slayton came to an oral agreement to transfer a 24-acre piece of property owned by Phoenix located in Milford Township in exchange for $160,000. (App. 517-18). According to him, the first $160,000 in checks issued to Mr. Slayton constitute the purchase price for that property. (Id.). Based on Mr. Slayton's records, his expenses for the litigation amounted to more than $202,000 by the end of September 2005, well over the alleged purchase price. (App. 361-62).

After the bankruptcy case was converted to a Chapter 11 case in March 2005, it was converted back to a Chapter 7 proceeding in January 2006 and the U.S. Trustee's Office appointed a Chapter 7 Trustee. (App. 14). In June 2006, the Chapter 7 Trustee filed adversary proceedings in the bankruptcy court and filed a complaint against Clearview, Mr. Slayton, and his other companies, including Phoenix. (App. 15-31). The complaint avers that Mr. Slayton and his various companies, including Phoenix, were alter egos of each other. Further, the complaint claims that Mr. Slayton deposited seven checks from Mr. Karoly totaling $115,000 into Phoenix's accounts. (App. 23-24).

On September 27, 2006, Mr. Karoly paid $4,733.10 to Pike County for taxes due on the Milford property. Although he claims that he was the equitable owner at this point and had fully paid the purchase price, this charge was still listed as part of his costs billed toward Mr. Slayton. (App. 364, 397). The next day, after Mr. Slayton and his companies failed to respond to the

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Chapter 7 Trustee's complaint, default judgment was entered and the Milford property was incorporated into the bankruptcy. (App. 33-34). In January 2007, the Chapter 7 Trustee filed a motion to sell the Milford property for $300,000. (App. 81). Mr. Slayton and Mr. Karoly both filed objections to this sale, claiming the property was not part of the bankruptcy because Mr. Karoly became the equitable owner prior to the default judgment. (App. 85, 89). These objections were ultimately withdrawn, the property ...


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