Opinion
Case No. 94-12117-AM, Adversary Proceeding No. 95-1031
December 5, 1995
Lawrence J. Anderson, Garza, Regan Rose, P.C., Rockville, MD of Counsel for plaintiff
Ronald P. Maddox, Fairfax, VA, of Counsel for defendants
MEMORANDUM OPINION
Before the court is the motion of defendant Marla Messenger filed October 20, 1995 to amend the judgment entered in this adversary proceeding on October 11, 1995, or, in the alternative, to grant a new trial. The plaintiff has filed a written opposition. For the reasons set forth in this opinion, the motion will be denied.
Facts
Only those facts necessary to the disposition of the motion are set forth.
The defendants, John and Marla Messenger, filed a joint voluntary petition under chapter 13 of the Bankruptcy Code in this court on May 31, 1994. Their case was converted to chapter 7 on November 3, 1994, and they received a discharge on May 11, 1995. Robert Barren, the holder of a $17,000 promissory note secured by a third-lien deed of trust against their property, filed a timely complaint to have the debt determined to be non-dischargeable under § 523(a)(2) of the Bankruptcy Code. A trial was held on October 11, 1995. At the conclusion of the plaintiffs evidence, the court granted defendant John Messenger's motion under Fed.R.Civ.P. 53(c) for judgment as a matter of law and dismissed him as a defendant. At the conclusion of the trial, the court made findings of fact and conclusions of law orally on the record and ruled that the liability of Marla Messenger to the plaintiff was excepted from discharge under § 523(a)(2)(A) on the ground that she had intentionally misrepresented the purpose to which she intended to put the borrowed funds. An order incorporating the court's ruling was entered on the docket the same date.
The court declined to rule that the debt was non-dischargeable on the alternate ground asserted by Barron, which was that, as a licensed real estate sales agent, Marla Messenger had an affirmative duty of full disclosure imposed by state law and implementing regulations of the Virginia Real Estate Board.
The evidence at trial established that at the time of the loan in question (May to June, 1993), Robert Barron and Marla Messenger were both licensed real estate sales agents working at the same real estate brokerage (Century 21 — Accent Realty) firm, which was owned by defendant Marla Messenger's mother, Eunice Sklopan. Barron had refinanced his home and a rental property and had taken substantial cash out, which he was looking to invest. In mid-May, 1993, he had discussions with Marla Messenger about an "equity-share" investment she proposed on behalf of one of her clients in which he would be the owner-investor. He ultimately turned the proposal down because it required more cash than he was willing to invest.
Around May 20, 1993, when he made the decision not to go ahead with the equity share proposal, Marla Messenger asked him if he would be willing to make a $17,000 third trust loan secured by the home she and her husband owned and resided in at 6711 Queens Road, Fairfax County, Virginia. Barron did not immediately agree to make the loan, and there was a second discussion approximately a week later. At that time, Mrs. Messenger and her husband had not made the April and May payments on the first deed of trust. She testified at trial that she told Baron that she wanted the money "to pay bills and to do repairs on the house." Even by her own testimony, she did not advise him that she was then two months behind on the first deed of trust. Barron testified that Mrs. Messenger made no mention of using the money to pay bills but rather told him she needed the money to complete the pending renovations on the house, and that once those were completed there would be enough value in the property that she could refinance and pay off the second and third deeds of trust. Mrs. Messenger's mother, Eunice Sklopan, testified that she overheard one conversation between Barron and her daughter from an adjacent office concerning the loan and remembered her daughter saying that she needed the loan to make some improvements and repairs to her house and to pay some bills. Having heard both Barron and Mrs. Messenger testify, and having observed their demeanor on the witness stand, the court did not credit Mrs. Messenger's account of the discussions between her and Barron and found Barren's account to be the more believable. Although Mrs. Messenger's account was corroborated to some extent by her mother's testimony, the court, considering the mother's relationship to the parties and her natural incentive to provide testimony favorable to her daughter, the fact that she heard only one of at least two conversations between Barron and her daughter, and the fact that she was in another room at the time the discussion occurred, found that the preponderance of the evidence supported Barren's account, and that he would not have made the loan had he known that a substantial portion of the proceeds was not being used to enhance the value of the property through completion of the renovations.
The existing encumbrances against the property were a $100,000 first deed of trust and a $25,000 second deed of trust.
Before making the loan, Barren verified the existence of the two deeds of trust and the assessed value of the property from tax assessment records, and also drove by the house to verify that renovations were in progress. He did not inquire of either of the existing lenders as to the status of their loans. Barren's loan was closed on June 15, 1993, by which time the first trust was three payments in arrears. At the settlement, Barren delivered to Mr. and Mrs. Messenger a cashier's check for $17,000.00, the amount of the loan proceeds. Marla Messenger telephoned the first trust noteholder that same day and stated that she was sending the three payments and associated late charges the next day. On June 21, 1993, the first trust noteholder received $3,219.12, which was applied to the April, May, and June payments, and brought the loan current. Mrs. Messenger was unable on the witness stand to state where the $17,000.00 check had been deposited, let alone how it was spent. She did testify that part of the $17,000.00 was used to bring the first trust current and to pay an unspecified amount of bills she had at the real estate office for advertising and fees paid. She offered no testimony as to what amount, if any, of the proceeds had actually been used to pay for the renovations to the house. Based on the evidence, the court found that at least $3,219.12 of the loan proceeds was applied to a purpose other than completing the renovations to the house.
The assessed value was $144,000, which Barren considered, based on what he described as "common knowledge" that Fairfax County tax assessments at that time were on the low side, sufficient to support the proposed $17,000 loan.
The note for the loan made by Barren called for monthly payments of interest only. He received a total of three checks, representing the interest for six months (which would have paid the interest to December 21, 1993). No payments were made after January 1994. Barren began foreclosure, but the foreclosure was stayed when Mr. and Mrs. Messenger filed their chapter 13 petition. The first trust holder eventually obtained relief from the stay in order to foreclose, and Barren, to protect his interest, purchased the property at the foreclosure sale for $120,000.
The purchase price paid only the first deed of trust and the expenses of the sale, and nothing was paid on account of Barren's deed of trust. At the time of the hearing, he was in the process of fixing the property up for resale or rental.
The court dismissed John Messenger as a defendant at the conclusion of the plaintiff's case, since there was no evidence that he had made any representations to Barron in connection with the loan. At the conclusion of all the evidence, the court stated its findings of fact and conclusions of law orally on the record and ruled that Mrs. Messenger's liability to Barron on the $17,000.00 note was nondischargeable under § 523(a)(2)(A) as having been obtained through a false representation that the money was to be used for completing the renovations to the house, when in fact she intended at the time to use a substantial amount for other purposes, namely the paying of bills and bringing the first deed of trust current. A judgment order was entered consistent with the bench ruling. The present motion follows.
Discussion
Under F.R.Bankr.P. 9023, incorporating Fed.R.Civ.P. 59 ("New Trials; Amendment of Judgments"),
(a) Grounds. A new trial may be granted . . . on all or part of the issues . . . (2) in an action tried without a jury, for any of the reasons for which rehearings have heretofore been granted in suits in equity in the courts of the United States. On a motion for a new trial in an action tried without a jury, the court may open the judgment if one has been entered, take additional testimony, amend findings of fact and conclusions of law or make new findings and conclusions, and direct the entry of a new judgment.
(b) Time for Motion. A motion for a new trial shall be served not later than 10 days after the entry of the judgment.
(e) Motion to Alter or Amend a Judgment. A motion to alter or amend the judgment shall be served not later than 10 days after entry of the judgment.
The motion before the court, stripped to its essentials, asserts (1) that the court incorrectly applied the law in that the principal case, In re Wimbish, 95 B.R. 379 (Bankr.W.D.Pa. 1989), the court relied upon is distinguishable on its facts from the present case; (2) that even assuming Mrs. Messenger failed to disclose that she was behind in her mortgage payments, a misrepresentation on this issue would have been a misrepresentation with respect to her financial condition, which, under § 523(a)(2), must be in writing to provide a basis for nondischargeability; and (3) that she was misled to her prejudice by the court's pretrial order into believing that her deposition (Plaintiffs Exhibit 15) and Barren's deposition (Defendants' Exhibit 1) were in evidence and part of the record. These contentions will each be discussed in turn.
A. The applicable law and burden of proof.
Under § 523(a)(2), Bankruptcy Code, a chapter 7 discharge does not discharge an individual debtor from any debt
for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by —
(A) false pretenses, a false representation, or actual fraud other than a statement respecting the debtor's or an insider's financial condition.
A false pretense or false representation for the purpose of § 523(a)(2)(A) can include a false statement as to the purpose to which the money will be put. In re Wimbish, 95 B.R. 379 (Bankr.W.D.Pa. 1989) (false statement to credit union that money would be used to complete renovations to house when debtor intended to use them to bring mortgage current made debt nondischargeable); In re Mistry 77 B.R. 507 (Bankr.E.D.Pa. 1987) (debt not dischargeable where debtor told friend he would place funds in bank account but instead used money to invest in commodity market).
Mrs. Messenger does not dispute this to be the law; rather, she argues, in effect, that Barren's evidence was not nearly as positive and "clear" as the evidence in Wimbish and thus, she argues, Barren did not carry his burden of proof. The flaw in this argument is that it ignores the Supreme Court's decision in Grogan v. Garner 498 U.S. 279, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991), which held that the required standard of proof in nondischargeability actions, even those based on fraud, is preponderance of the evidence rather than "clear and convincing" evidence.
It is true that Wimbish and Mistry both of which were decided before Grogan v. Garner applied a "clear and convincing" standard of proof, and used language stressing the strength of the evidence. On the standard of proof, however, the intervening decision in G rogan v. Garner is controlling. The strength of the evidence, as long as it satisfies the preponderance of the evidence test, is simply not one of the elements of a § 523(a)(2)(A) dischargeability action. It is true, as Mrs. Messenger further argues, that exceptions to discharge are narrowly construed. This does not mean, however, that they are grudgingly applied or that the canon of narrow construction can be used to impose a "clear and convincing" standard of proof contrary to the teaching of Grogan v. Garner. Mrs. Messenger's argument that Barron's case fails unless every element is "clearly" established simply misapprehends the burden of proof. Notwithstanding Mrs. Messenger's argument that Barron's testimony was vague, the court finds that the evidence sufficiently established (1) that Mrs. Messenger represented to Barron that the purpose of the loan was to complete the additions to the house and enhance its value, thereby permitting her and her husband to refinance and pay the second and third deeds of trust off; (2) that the representation was false in that she intended to use a substantial portion of the loan proceeds for other purposes, including paying bills and bringing the first deed of trust current; (3) that Barron reasonably relied on the representation and would not have made the loan had he known how Mrs. Messenger actually intended to use the funds; and (4) that he was damaged as a result of the reliance.
Wimbish 95 B.R. at 383; Mistry 77 B.R. at 511.
As with many civil cases, the evidence is not all one-sided, and Mrs. Messenger can certainly point to evidence in the record tending to support other findings. But preponderance of the evidence requires only that the finder of fact be able to determine from the evidence that a particular fact on which a party has the burden of proof is more likely true than not. Barron has carried that burden. Accordingly, the court rejects the argument that, because Barron's evidence was not as strong as the plaintiff's evidence in Wimbish judgment should not have been entered in his favor.
B. Failure to disclose the mortgage arrearage.
Mrs. Messenger next argues that, even assuming she failed to disclose she was behind in her mortgage payments, a misrepresentation on that issue would have been a misrepresentation with respect to her financial condition, and that, not being in writing, it cannot support a finding of nondischargeability. Certainly, there can be no question that a false statement "respecting the debtor's . . . financial condition" must, under the plain language of §§ 523(a)(2)(A) and (B), be in writing in order to render the resulting indebtedness nondischargeable. Engler v. Van Steinburg (In re Van Steinburg) 744 F.2d 1060 (4th Cir. 1984) (false oral statement that collateral had no liens was statement respecting financial condition and therefore could not provide a basis for nondischargeability). But this court's findings in the present case were not premised on a failure to disclose the mortgage arrearage. Indeed, the court in its conclusions of law at trial explicitly rejected the plaintiffs argument that Mrs. Messenger and her husband, because of their status as licensed real estate sales agents, had an affirmative legal duty under the regulations of the Virginia Real Estate Board to disclose the mortgage arrearage. The delinquent status of the mortgage, the court concluded, was no different than the encumbered status of the collateral in Engler v. Van Steinburg, Consequently, notwithstanding that under state law Mr. and Mrs. Messenger may have owed a special duty to disclose to Barron the delinquent status of the mortgage, such a duty did not make the debt nondischargeable under § 523(a)(2)(A), because the misrepresentation concerned the financial condition of the debtor and was not in writing.
However, a failure to disclose that the mortgage payments were in arrears is conceptually quite different from a misrepresentation that the loan was to be applied to a stated purpose when in fact the intended purpose was to bring the mortgage payments current. A statement as to the intended use of funds is not a statement "respecting the debtor's . . . financial condition" and is therefore not required to be in writing. Accordingly, even though the court agrees, now as it did at trial, that Mrs. Messenger's failure to disclose the mortgage delinquency would not provide a basis for finding the debt nondischargeable, the fact that her statement concerning the intended use of the funds was not in writing does not prevent a finding of nondischargeability.
C. The deposition transcripts.
Both Barren and Mrs. Messenger testified at trial. During discovery, each had also taken the deposition of the other, and the deposition transcripts were marked and filed as exhibits "Mrs. Messenger's deposition as Plaintiffs Exhibit 15 and Barren's deposition as Defendants' Exhibit 1. Each side rested without expressly offering the deposition transcripts in evidence. During closing argument, Mrs. Messenger's counsel made reference to the testimony in the transcripts, and the court ruled that, not having been admitted in evidence, they were not part of the record, particularly as both witnesses were not only available but had in fact testified in open court.
Mrs. Messenger asserts that she was prejudiced by the court's ruling, as she reasonably believed, based on the court's pretrial order, that the transcripts were in evidence and part of the record. Upon further review and reflection, the court concludes that its ruling, although correct with regard to the transcript of Mrs. Messenger's deposition, was incorrect with regard to Barren's, but that any error was harmless.
At a pretrial conference, this court entered an Amended Pretrial Order dated August 8, 1995. Among other provisions, the order required that each party exchange and file exhibits intended to be used at trial by September 29, 1995 and further provided, "EXHIBITS WILL STAND ADMITTED UNLESS OBJECTED TO IN WRITING BY OCTOBER 6, 1995" (emphasis in original). Each side filed exhibits. Barren did not object to the defendants' exhibits. The Messengers, however, filed a timely written objection to all of Barron's proposed exhibits. During the trial, therefore, Barron was required to lay a foundation for the exhibits he wished to have considered. Barron explicitly moved the admission of Plaintiffs Exhibits 1, 2, 3, 5, 6, 7, 8, 12, 16, 17, 19, 20, and 21, and those exhibits were admitted into evidence. He did not move the admission of Plaintiffs Exhibit 15, the transcript of Mrs. Messenger's deposition.
In addition to a general objection to all of the exhibits on the ground that they had not been timely served, specific objection was made to Plaintiffs Exhibits 9, 10, 11, 12, 14.
Under the terms of the pretrial order, the exhibits and served in advance of trial would "stand admitted" unless objected to in writing. Since the Messengers objected in writing to all of Barron's exhibits, none of them could "stand admitted," and Barron was required to lay a proper foundation for each of the exhibits he used at trial. Notwithstanding that he had marked the transcript of Mrs. Messenger's deposition for identification, he never sought to introduce it into evidence, and it did not become a part of the record simply because it was marked for identification. Mrs. Messenger, having objected to all of Barron's exhibits, thereby preventing them from being automatically admitted into evidence, can hardly complain if, for whatever reason, Barron chose not to move the admission of a particular exhibit. Accordingly, no basis exists for granting Mrs. Messenger a new trial on the ground that she was misled, while testifying on her own behalf, into not covering certain matters because she expected to be able to rely on her own deposition testimony.
The transcript of Barren's deposition presents a more difficult issue. It was marked as an exhibit and filed with the clerk. No written objection was filed, and by the plain language of the Amended Pretrial Order it stood admitted. The question is whether the terms of the pretrial order could limit the court's paramount authority over the admission of evidence at trial.
The purpose of the pretrial order is to expedite the trial of the case and to avoid wasting time marking, identifying, and laying a foundation for exhibits as to which there is no objection. To that end, the practice of this court has long been to issue pretrial orders requiring the parties to file with the clerk, and provide to opposing counsel, copies of all exhibits to be used at trial in sufficient time to permit the opposing party to review them and to articulate any objections. Where an exhibit is not objected to, it then stands admitted, and the court's time can be efficiently concentrated on those exhibits as to which timely objection has been made. Nevertheless, under the Federal Rules of Evidence, the court retains ultimate authority to determine what evidence is admitted. Put another way, the court is not bound to admit a item of proffered evidence simply because no objection is interposed if the court finds that the evidence is irrelevant or, if relevant, that its probative value is substantially outweighed by the danger of unfair prejudice or confusion of the issues or by considerations of undue delay, waste of time, or needless presentation of cumulative evidence. Fed.R.Evid. 402, 403; see, also Fed.R.Evid. 611(a) ("The court shall exercise reasonable control over the mode and order of interrogating witnesses and presenting evidence").
Under Fed.R.Civ.P. 43(a), made applicable in bankruptcy proceedings by F.R.Bankr.P. 9017,
In all trials the testimony of witnesses shall be taken orally in open court unless otherwise provided by an Act of Congress or by these rules, the Federal Rules of Evidence, or other rules adopted by the Supreme Court.
(emphasis added). The policy reason in favor of taking testimony in open court is obvious: not only is the right of cross-examination fully preserved, but, equally as important, the court has the benefit of seeing and hearing the witness testify and of being able to assess the witness's demeanor. In the present case, Barron testified at trial and was cross-examined by the debtor. To the extent any of his trial testimony, whether on direct or cross-examination, was inconsistent with his deposition testimony, the deposition testimony would not constitute hearsay and would have been admissible as substantive evidence and not merely to impeach. Fed.R.Evid. 801(d)(1). Likewise, to the extent that the statements made at the deposition constitute admissions, such statements are likewise excluded from the definition of hearsay and are admissible. Fed.R.Evid. 801(d)(2). Although a court could, therefore, in the exercise of its discretion, allow the testimony of a party opponent to be presented in the form of a deposition transcript even where the party is present in court, the preferable practice is to require the party to testify from the witness stand, since a cold deposition transcript does not allow the court to assess the witness's demeanor, which is often crucial in resolving disputes in the testimony. Put another way, deposition testimony, even if admissible, is not helpful to the trier of fact where the witness is present at the trial and can testify in person. Accordingly, under the authority in Fed.R.Evid. 611(a), this court would ordinarily require a party who wished to offer the testimony of an available witness to do so by calling the witness rather than by simply offering the witness's deposition, notwithstanding that Fed.R.Evid. 801(d)(2) would permit the admission of the deposition.
"A statement is not hearsay if . . . [t]he declarant testifies at the trial or hearing and is subject to cross-examination concerning the statement, and the statement is . . . inconsistent with the declarant's testimony, and was given under oath subject to the penalty of perjury at a trial, hearing, or other proceeding, or in a deposition. . . . "
"A statement is not hearsay if . . . [t]he statement is offered against a party and is (A) the party's own statement . . . "
The problem here is that the issue simply did not arise until after both sides had rested and Mrs. Messenger's attorney referred to the depositions in oral argument. Since Barron had testified and had been extensively cross-examined, the court had no reason to assume, prior to counsel referring to the deposition in oral argument, that the transcript had been marked for any purpose other than to have it readily available for impeachment purposes in the event the trial testimony was inconsistent with the deposition testimony. Since Mrs. Messenger's attorney had had full opportunity during cross-examination to bring out all relevant matters and to develop any inconsistencies, the court saw no reason to admit the deposition transcript and advised counsel that the court did not consider the transcript part of the trial record. Upon further reflection, however, the court agrees that, since no restriction on the use of the transcripts was communicated to the parties prior to the close of the evidence, and since the pretrial order clearly stated that exhibits not objected to in writing prior to trial would "stand admitted," Mrs. Messenger could reasonably have been misled.
Any error in this respect, however, is harmless and does not entitle Mrs. Messenger to a new trial. The court has carefully reviewed Defendants' Exhibit 1 in light of Barren's trial testimony and concludes that Barren's deposition testimony is consistent with, and essentially cumulative of, his trial testimony and that its admission would not have affected any of the court's findings. Accordingly, no relief is warranted.
Conclusion
For the foregoing reasons, the court concludes that no basis has been shown to alter or amend the judgment or to grant a new trial. A separate order will be issued denying the motion.