Opinion
Bankruptcy No.lO-00920-LT7 Adversary No. 10-90219-LT
11-03-2011
In re: Ryan C. Moeller, Debtor. Jeffrey S. Marshall, Plaintiff, v. Ryan C. Moeller, Defendant.
WRITTEN DECISION - NOT FOR PUBLICATION
This opinion is intended only to resolve the dispute between these parties.
MEMORANDUM DECISION
Jeffrey Marshall seeks a non-dischargeable judgment against Ryan Moeller pursuant to 11 U.S.C. § 523(a)(2)(A). Mr. Marshall alleges that Mr. Moeller obtained loans from him through false representations and fraud. More specifically, Mr. Marshall claims that Mr. Moeller, by guaranteeing returns of at least 20% and through false representations, induced him to make two loans in connection with a proposed renovation and sale of real property located at 2765 Las Palmas Cv., Del Mar, CA ("Del Mar Property"). Mr. Marshall asserts that his loans were not paid and that he, thus, suffered damages as a proximate result of the alleged misrepresentations.
Unless otherwise indicated, all chapter, section and rule references are to the Bankruptcy Code, 11 U.S.C. §§101-1532, and to the Federal Rules of Bankruptcy Procedure, Rules 1001-9037.
The Court held a trial in this matter on September 23, 2011. The Court carefully considered all arguments, all evidence properly introduced in the case, and the demeanor of the witnesses. The Court concludes, based on this analysis, that Mr. Marshall is not entitled to a non-dischargeable judgment under section 523(a)(2)(A).
The Plaintiff also generally asserted claims under section 523(a)(2)(B), but neither the evidence nor argument at trial support such a theory. In particular, section 523(a)(2)(B) requires a materially false written statement respecting the debtor's or an insider's financial condition. Here, the limited email statements regarding the possibility or probability of financing do not appear to meet the financial statement requirement of 523(a)(2)(B)(ii), and the Plaintiff, in fact, argued that Debtor actually failed to provide necessary financial information. As a result, the Court's analysis discusses only section 523(a)(2)(A). But if the emails qualify as written statements for 523(a)(2)(B) purposes, the Court's analysis as to lack of falsity and lack of fraudulent intent is equally applicable such that relief under section 523(a)(2)(B) also is not appropriate.
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FACTS
Jeffrey Marshall and Ryan Moeller met in early 2007 through intramural flag football and other social activities with mutual friends. Unfortunately, the subsequent conversations turned from football to finance. On June 28, 2007, Mr. Moeller sent a mass email soliciting investments for a real estate venture. The email's subject line read: "Investment Opportunity - 20% Guaranteed Return." The body of the email included many representations that indicated Mr. Moeller's confidence in the investment, including that Mr. Moeller's first deal sold in 18 days and paid back investors their loans plus a 20% return.
Mr. Marshall was one recipient of this email and he approached Mr. Moeller in response. Mr. Moeller then actively solicited Mr. Marshall's involvement with the Del Mar Property. Mr. Moeller wrote that he needed: "about 20K to cover mortgage payments and pay our laborers to finish up this project." Plaintiff's Ex. 2. Mr. Marshall replied that he could supply $20,000 by borrowing from his Home Equity Line of Credit (HELOC). Id. Mr. Moeller wrote back, reiterating that he could use the money for the August mortgage payment and stating that this is a "win-win" situation. Id.
The parties apparently reached an agreement and prepared a promissory note ("First Note") that provided that Mr. Moeller would pay Mr. Marshall $24,000 ($20,000 investment + 20% return) plus HELOC interest charges. The payment was due in its entirety: "on or before 10 days after close of escrow of 2765 Las Palmas Cv., Del Mar, CA 92014." Plaintiff's Ex. A.
Significantly, the parties stipulated before trial that Mr. Moeller believed the Del Mar Property to be worth at least $1.8 million at the time of this loan. The evidence supports the reasonableness of this belief, as Mr. Moeller had a 2006 appraisal supporting a greater value for the Del Mar Property once improved, and the renovation of the Del Mar Property was substantially complete.
Mr. Moeller faxed the First Note to Mr. Marshall and both parties signed on August 7, 2007. On August 9, 2007, Mr. Marshall advanced the loan proceeds through a $20,000 check from his HELOC.
On September 23, 2007, Mr. Moeller sent Mr. Marshall an email regarding the Del Mar Property that included pictures and more assurances. He stated that the asking price will be between $1.8-1.9 million and advised that he owed $1.3475 million. Along with this equity, Mr. Moeller wrote, "[a]s a backup plan, I also have 2 other possible sources of funding." Mr. Moeller also told Mr. Marshall that his money was "very safe." Plaintiff's Ex. 6.
On September 27, 2007, Mr. Moeller sent another mass email featuring the same subject line as the first and specifically soliciting funds in connection with the Del Mar Property. The email advised that:
a. There is $575,000 of equity in the Del Mar Property;
b. Mr. Moeller will have 2 more sources of funding in the next couple of months therefore investment would be very safe;
c. The Del Mar Property has been on the market for five weeks and there has been "extremely good feedback and activity;" and
d. Mr. Moeller again guaranteed a 20% return. Defendant's Ex. C.
Later that day, Mr. Marshall and Mr. Moeller prepared a second promissory note ("Second Note"). The Second Note provided that Mr. Moeller would pay Mr. Marshall $33,600 ($28,000 investment + 20% return) plus HELOC interest charges and that payment was due in its entirety: "on or before 10 days after close of escrow of 2765 Las Palmas Cv., Del Mar, CA 92014." Plaintiff's Ex. 7. Mr. Moeller faxed the Second Note to Mr. Marshall and both parties signed. On October 1, 2007, Mr. Marshall funded this loan through a check from his HELOC payable to Mr. Moeller.
In November of 2007 another email chain between Mr. Moeller and Mr. Marshall commenced. And, yet again, Mr. Moeller told Mr. Marshall that his money was very secure. More specifically, he stated that he had three ways to pay back the Marshall loans: the equity from the Del Mar Property, a potential $1 million business line of credit, and an overfinance of another property. In one email, Mr. Moeller specifically stated: "The market doesn't have an impact on my ability to pay [investors] back." Plaintiff's Ex. 9.
While Mr. Moeller and Mr. Marshall communicated extensively prior to and immediately after the loans were funded, at no time did Mr. Moeller completely disclose his financial obligations. In particular, he owed amounts to other Del Mar Property investors, had credit card debt, was obligated on loans in connection with properties in Arizona, and had student loan obligations. But the record is also clear that Mr. Moeller was actively seeking additional funding through a line of credit or other loan. And, the Court believes Mr. Moeller's testimony that he sincerely believed that he would obtain financing and that he would sell the Del Mar Property quickly and at an amount sufficient to pay his loans, expenses, investors, and a profit to himself. Mr. Moeller pursued other funding and actually received a commitment from a lender at one point, but ultimately failed to obtain a line of credit or other funding.
But, Mr. Marshall did no real due diligence, and he made no inquiry as to Mr. Moeller's personal finances.
On cross examination, Mr. Marshall admitted that this was not his first significant financial transaction. At the time of his loans to Mr. Moeller, Mr. Marshall had a real estate license that he obtained in connection with his employment as a property manager. He also previously purchased a home and took out a personal loan secured by his residence. Finally, Mr. Marshall loaned a friend $50,000 to open a bar (Gaslamp Tavern) a year or two prior to his loans to Mr. Moeller and made another $30,000 loan to his friend thereafter. Mr. Moeller claims that Mr. Marshall is a sophisticated investor. While the Court would not label Mr. Marshall as overly sophisticated, he certainly was not a financial or real estate neophyte at the time of the loans.
Inevitably, given the real estate melt down, and unfortunately, for both Mr. Moeller and Mr. Marshall, the Del Mar Property did not sell quickly and ultimately sold for less than the amount owed to the secured lender. Thus, Mr. Moeller did not pay back Mr. Marshall's loans in full. At some point Mr. Moeller attempted to follow a payment plan under which he paid back a few thousand dollars. But, almost the entire balance owed on the loans remains outstanding. As Mr. Marshall obtained these funds through a HELOC advance, he is forced to personally pay monthly interest in order to avoid default and foreclosure.
Ultimately, Mr. Moeller filed for bankruptcy, and Mr. Marshall initiated this adversary proceeding, seeking to avoid the discharge of the debt owed to him by Mr. Moeller.
DISCUSSION
Section 523(a)(2)(A) provides that:
(a) A discharge under section 727 ... of this title does not discharge an individual debtor from any debt - ...
(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by -
(A) false presences, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition;...
In the Ninth Circuit to prove actual fraud, a creditor must establish each of the following elements:
(1) That the debtor made the representations;
(2) That at the time he knew they were false;
(3) That he made them with the intention and purpose of deceiving the creditor;
(4) That the creditor relied on such representations; and
(5) That the creditor sustained the alleged loss and damage as the proximate result of the representations having been made.
Britton v. Price (In re Britton),950 F.2d 602, 604 (9th Cir. 1991); Eugene Parks Law Corp. Defined Benefit Pension Plan v. Kirsh (In re Kirsh), 973 F.2d 1454, 1457 (9th Cir. 1992). A false pretense involves an implied misrepresentation or conduct which creates and fosters a false impression, while a false representation is an express misrepresentation that induces conduct. Parker v. Grant (In re Grant), 237 B.R. 97, 113 (Bankr. E.D. Va. 1999); Krenowsky v. Haining (In re Haining), 119 B.R. 460, 463-464 (Bankr. D. Del. 1990). But the difference between fraud, false pretense, and false representation is nuanced, and the test for proving any one of them is essentially the same.
When analyzing knowledge and intent, the Court must keep in mind that reckless indifference to the truth supports a section 523(a)(2) claim. See Arm v. A. Lindsay Morrison M.D., Inc. (In re Arm), 175 B.R. 349, 354 (9th Cir. BAP 1994). Further, a debtor's silence or omission of a material fact can constitute a false representation which is actionable under section 523(a)(2)(A). Citibank (South Dakota), N.A. v. Eashai (In re Eashai),87 F.3d 1082, 1088-1089 (9th Cir. 1996). In order to find liability for fraud based upon omission or silence, however, there must be a duty to disclose. Id. But nondisclosure of a material fact in the face of a duty to disclose can establish the requisite reliance and causation for actual fraud under the Code. Apte v. Romesh Japra, M.D., F.A.C.C. Inc. v. Apte (In re Apte), 96 F.3d 1319, 1323 (9th Cir. 1996). And in a business transaction such a duty can arise. The Apte court, cited section 551 of the Restatement (Second) of Torts (1976) for the proposition that the parties in a business transaction have a:
duty to exercise reasonable care to disclose to the other before the transaction is consummated .. . facts basic to the transaction, if [a party] knows that the other is about to enter into it under a mistake as to them, and that the other, because of the relationship between them, the customs of the trade or other objective circumstances, would reasonably expect a disclosure of those facts.Apte, 96F.3d at 1324.
Finally, the Court notes the often repeated directive that the burden a creditor bears in a non-dischargeability action is high. As a result, Mr. Marshall bears the burden of proving each element of fraud by a preponderance of the evidence. Grogen v. Garner, 498 U.S. 279, 290 (1991). And, in order to avoid unjustifiably opposing a debtor's fresh start, the Ninth Circuit has held that exceptions to discharge "should be construed strictly against creditors and in favor of debtors." Klapp v. Landsman (In re Klapp), 706 F.2d 998, 999 (9th Cir. 1983).
As discussed above, for Mr. Marshall to prevail the Court must find that he proved each element of section 523(a)(2)(A) by a preponderance of the evidence.
1. False representations.
a. Mr. Moeller Did Not Make Fraudulent Misrepresentations In Connection With His Solicitation Of The Loans.
Mr. Marshall claims that Mr. Moeller made numerous misrepresentations: that there was $575,000 in equity in the Del Mar Property; that Mr. Moeller had three separate sources of funding; and that Mr. Marshall's investment was guaranteed to yield a return. The Court determines that none of these statements were materially false when made.
With regard to the equity in the Del Mar Property, the parties stipulated that Mr. Moeller believed that value of the Del Mar Property exceeded $1.8 million at the time of the loans. Consistent with this stipulation, Anderson Appraisal Services appraised the Del Mar Property at $1,925 million, once improved. And in his email dated September 27, 2007, Mr. Moeller explained his equity analysis. He sent an email to Mr. Marshall stating: "My second deal I owe 1.375mil and it appraised at 1.925mil which is 575K+ in equity." Plaintiff's Ex. 3. Although the Del Mar Property eventually sold short for $1.1 million, the representation that there was $575,000 in equity was not inaccurate at the time of the loans. Indeed, the parties also stipulated that the Del Mar Property unexpectedly decreased in value and that at the time of the loans the market crash in 2007 and 2008 was not reasonably foreseeable.
Notwithstanding the stipulated facts, Mr. Marshall challenges the accuracy of Mr. Moeller's calculation of equity arguing that actual profit upon sale would be diminished by future carrying costs, soft costs, and agent commission and that Mr. Moeller's equity analysis failed to so disclose. But Mr. Moeller never disguised the fact that the Del Mar Property was encumbered or denied that typical costs of sale existed. Further, Mr. Moeller's equity analysis was clearly a rough estimate of his belief of the then existing debt to equity ratio, and there is no evidence that he was not then paying the secured creditor and did not intend to pay accruing interest on an ongoing basis.
Mr. Marshall further questions the equity analysis based on the fact that Mr. Moeller did not disclose the existence of other investors in the Del Mar Property. But Mr. Moeller never presented his analysis as a precise calculation of profit. While Mr. Marshall was not the only Del Mar Property investor, there was no evidence that any investor was a secured creditor, so these debts were not properly included in a debt to equity analysis. In short, Mr. Moeller's equity assertions were not materially incorrect when made in connection with the solicitation of Mr. Marshall's loans either as to amount or as to the general assertion that equity sufficient to pay all creditors in full existed.
The three separate sources of funding that Mr. Moeller referred to include the equity from the Del Mar Property, a possible $1 million business line of credit, and overfinancing of another properly. The Court finds that Mr. Moeller did not make any material misrepresentations in this regard. First, as discussed above, there is no evidence suggesting that there was not substantial equity in the Del Mar Property prior to the real estate collapse and at the time of the loans. There is no evidence or even suggestion that the appraisal was fraudulent.
With regard to the line of credit and overfinancing, Mr. Moeller wrote on September 23, 2007, that he had "2 other possible sources of funding that [he] could use" to pay back Mr. Marshall's loan. This qualified statement does not rise to the level of a material misrepresentation. The evidence establishes that Mr. Moeller was pursuing other possible sources of funding. In his second solicitation email, sent after the first loan and dated September 27, 2007, Mr. Moeller stated: "I will have 2 more sources of funding in the next couple months." This cannot be construed to mean that he already had secured funding. In fact, Mr. Moeller actually received a Letter of Commitment to Fund from Lunden Investments in November. This letter provided overfinancing for another property in the form of a $3.5 million loan. While this loan ultimately fell through, Mr. Moeller's assertion that he possibly had this source of funding or believed he would obtain additional funding was not a misrepresentation when made. Mr. Moeller also orally discussed his ability to obtain alternate sources of payment and the fact that the loans were safe prior to the loans. The evidence regarding such statements, however, was general both as to content and timing and there is no evidence of more specific or clearly erroneous statements in the evidence before the Court.
Mr. Marshall also contends that the fact that Mr. Moeller was highly leveraged gave him very little chance of receiving the line of credit. In effect, he asks the Court to infer that the statement of probable financing was false to the extent it conveyed a sense of probability or uttered with reckless indifference for the truth. But, Mr. Moeller never represented that he had already received the funds or was guaranteed to receive them and, as discussed below, this assertion by Mr. Marshall is questionable as a matter of fact, unsupported by any expert testimony as to then existing lending standards, and inconsistent with the fact that Mr. Moeller obtained a commitment, albeit from an entity he described as shady after it failed to fund. The evidence as to oral statements in regard to sources of funding, again, is vague, but all written statements refer to possible funding or probable funding. There is no evidence that prior to the loans Mr. Moeller represented that he had secured such funding.
Crucially, the evidence indicates that Mr. Moeller only specifically identified these "2 other possible sources of funding" as the business line of credit and overfinancing in emails dated November 9 and November 12, 2007. Thus, the more specific statements occurred well after the loans. These statements were not materially false when made or represented puffery as discussed below.
Finally, Mr. Moeller's promise of a "20% guaranteed return" and his assurances as to the safety of the Marshall investment reflected an opinion and his confidence in the future success of the Del Mar Property project. Statements in the form of sales puffery are not actionable unless the speaker does not actually believe what he says or utters them with a reckless indifference for the truth. Smith v. Meyers (In re Schwartz & Meyers),130 B.R. 416, 423 (Bankr. S.D.N.Y. 1991) (citations omitted). Similarly, statements of sincerely held opinion will not support a claim of false statement uttered with intent to defraud. Id. at 423-24. The Court finds that Mr. Moeller sincerely believed in his ability to flip the Del Mar Property for a healthy profit sufficient to make good on his guarantee. He recently had sold a local property in 18 days for $1,375 million cash, a price above appraised value, and thereby repaid investors principal plus a 20% return. The Court finds that he actually believed that the Del Mar Property provided another opportunity for a quick sale and lucrative return on investment. Therefore, the Court finds that Mr. Moeller sincerely believed in the profitability of this venture and did not make the guarantee with a reckless indifference for the truth.
b. Mr. Moeller Did Not Omit Information Where He Had A Duty To Disclose.
Mr. Marshall also contends that he would not have loaned the money if Mr. Moeller had disclosed the amount of debt Mr. Moeller already carried. Mr. Moeller was already burdened with $23,000 in credit card debt, $50,000 in student loan debt, and loans of $290,000 and $179,000 in relation to other real properties.
First, when considering a duty to disclose, one must look to the relationship between the parties as the reasonableness of an expectation of disclosure varies depending on the closeness of the relationship. Thus, a business transaction involving persons in a close relationship gives rise to a higher expectation of disclosure than is found in a similar transaction between two strangers. Here, the parties were acquaintances who had known each other for a handful of months. Such a short-term relationship does not establish a special relationship of trust requiring the highest level of disclosure obligation.
But more importantly, and notwithstanding the relationship between the parties, this transaction was a classic case of asset-based financing. Mr. Moeller expected Mr. Marshall to be paid back from the proceeds from the disposition of the Del Mar Property. The deal never directly contemplated personal payment from Mr. Moeller's other assets. Indeed, Mr. Marshall's limited due diligence related solely to the Del Mar Property. Therefore, the nuts and bolts of Mr. Moeller's personal financial situation were not directly at issue.
In short, the Court finds that Mr. Moeller did not inappropriately and fraudulently omit this information as he had no reason to assume that these financial facts were material to a decision to invest in his Del Mar Property venture. He anticipated repayment of Mr. Marshall and other Del Mar Property investors from the Del Mar Property. On a worst case basis, he anticipated receiving a loan or line of credit. And there is no evidence that he then believed or reasonably should have believed that his other outstanding debts presented an obstacle to repayment of Mr. Marshall or financing. None involved liens on the Del Mar Property. Further, there is no evidence that any of these obligations were in collection at the time of the loans. And, there was no evidence that Mr. Moeller faced other immediate pressure to pay any of his other debt. Thus, at the time of the loans Mr. Moeller could reasonably assume that he would pay down his credit card and student loan debt over time and that these debts did not impact his ability to repay Mr. Moeller. Finally, as discussed above, Mr. Moeller was confident in his ability to obtain alternate financing. Thus, there was no unsatisfied disclosure duty under the facts of this case.
Mr. Marshall contends that Mr. Moeller also should have disclosed that there were other unsecured lenders in the Del Mar Property. The Court, again, finds such nondisclosure immaterial. What is clear is that no such investor held a lien on the Del Mar Property and that Mr. Moeller reasonably assumed abundant equity to pay these obligations. Furthermore, Mr. Moeller's solicitations were in the form of blast emails sent to many people. Mr. Marshall could easily see that Mr. Moeller sought multiple investors for the Del Mar Property venture. Here, there was no offer or illusion of exclusivity. And Mr. Moeller was not compelled to confirm or deny that Mr. Marshall was his only investor where he actively and openly solicited numerous investors.
c. Mr. Moeller Did Not Misuse Loan Proceeds.
Mr. Marshall also argues that Mr. Moeller misappropriated his investment by not using the money solely in connection with the Del Mar Property. While both parties referenced the Del Mar Property in emails, the promissory notes do not condition the loans or their uses. The notes simply provide that Mr. Moeller will pay Mr. Marshall "on or before 10 days after close of escrow of 2765 Las Palmas Cv., Del Mar, CA 92014." Mr. Moeller's email statement that he needs the money "to cover mortgage payments and pay our laborers" is not the functional equivalent of a promise to put the loan proceeds in trust for exclusive use in connection with the Del Mar Property. There was no promise of exclusivity.
Further, while it is true that Mr. Moeller comingled Mr. Marshall's money with other funds, there is no evidence that Mr. Moeller did not advance an amount equal to the loans to pay the secured creditor and laborers in connection with the Del Mar Property. Thus, the evidence fails to indicate that the project failed because Mr. Moeller did not pay related expenses. Instead, it failed, as did so many, as a result of the fact that the overall economy went into a downturn. Mr. Moeller supported the Del Mar Property for as long as he could until the market ultimately dealt the death blow and there were no longer enough investors or funds to keep the venture afloat.
2. Mr. Moeller Did Not Make Statements Or Omit Information With The Intent and Purpose of Deceiving.
Even if some statements in connection with solicitation of the loans were less than 100% accurate, the Court also finds that Mr. Moeller did not act with the purpose of deceiving Mr. Marshall. Mr. Moeller entered into business deals with Mr. Marshall and expected both parties to profit. The Court believes Mr. Moeller's testimony that he would have paid back the loans plus interest had the Del Mar Property sold for its anticipated value. Furthermore, Mr. Marshall effectively concedes this point. When asked if Mr. Moeller would have paid his investors back had there been enough money for all, Mr. Marshall replied, "I don't see why he wouldn't." Thus, at the time of the loans, Mr. Moeller intended to honor his obligations to Mr. Marshall upon sale of the Del Mar Property. Mr. Moeller's statements and silences whether they relate to lack of risk, availability of alternate financing, available Del Mar Property equity, a 20% return, or precise use of funds may reflect excess optimism, but do not establish fraudulent intent. The evidence similarly fails to support a determination that Mr. Moeller made these statements with reckless indifference to the truth. In short, the Court found Mr. Moeller credible as to his lack of fraudulent intent, the record is lacking of sufficient benchmarks of fraud to support a finding of fraudulent intent, and Mr. Marshall, thus, fails to meet his burden on this critical element.
CONCLUSION
Having concluded that Mr. Marshall failed to meet his burden of proof in these two areas the Court does not need to discuss proximate cause. The Court also determines that a discussion of reliance is unnecessary. Therefore, based on the foregoing, the Court concludes that Mr. Moeller's debt to Mr. Marshall can be discharged. Mr. Moeller must submit a judgment consistent with this ruling within 14 days.
LAURA S. TAYLOR, JUDGE
United States Bankruptcy Court