Opinion
Case No. 10-22356-PB7 Adv. No. 11-90154-PB
2013-09-27
In re CURTIS L. and STEPHANIE A. FARBER, Debtors, CHRISTOPHER J. and WENDY W. PHILCOX, Plaintiffs, v. CURTIS L. and STEPHANIE A. FARBER, Defendants.
WRITTEN DECISION - NOT FOR PUBLICATION
ORDER ON DEFENDANT'S
RENEWED MOTION FOR
PARTIAL SUMMARY
JUDGMENT
Defendants' previous motion for partial summary judgment was denied with respect to Plaintiffs' § 523(a)(2)(A) and § 523(a)(2)(B) claims. The § 523(a)(2)(A) is based upon Plaintiffs' reconveyance of a deed of trust. In this renewed motion, Defendants have added evidence of the value of the subject property as of the date of the reconveyance. The Court has decided to afford Plaintiffs an additional opportunity to obtain their own evidence of value. Accordingly, no ruling is made on the § 523(a)(2)(A) claim at this time. Rather, Plaintiffs have 60 days from the entry of this order to obtain and file competent evidence of value. Once that is filed, the Court will contact the parties and schedule a hearing on this part of the motion.
The motion is denied with respect to the § 523(a)(2)(B), as there is neither new evidence nor argument.
BACKGROUND
As of the beginning of 2006, after a series of transactions, Plaintiffs held a promissory note in the amount of $1.5 million signed by Defendants' wholly owned corporation, Pacific Liberty, Inc., (PL Note). The PL Note was secured by a second priority deed of trust on Defendants' real property at Las Flores Drive in Carlsbad, California (Las Flores Property). The Las Flores Property was subject to a first priority deed of trust held by construction lender Temecula Valley Bank (TVB).
On September 27, 2006, at the request of Defendant Curtis Farber, Plaintiffs agreed to reconvey their second priority deed of trust on the Las Flores Property, to enable Defendants to negotiate an extension and increase with TVB. Plaintiffs contend that they agreed to reconvey the deed of trust based upon Curtis' assurance that the deed of trust would be promptly re-recorded. Indeed, the copy of the Reconveyance provided by Plaintiffs includes a notation "we've signed the form to put it right back on." This is the first alleged misrepresentation at issue.
For reasons which are not relevant to this decision, Plaintiffs' deed of trust was not re-recorded. On April 22, 2008, TVB foreclosed on the Las Flores Property. TVB credit bid the full amount of its senior claim, and Plaintiffs have received nothing on the PL Note since Defendants stopped making payments in May, 2008.
After Defendants stopped making payments on the PL Note, the parties began negotiating a resolution. In connection therewith, Defendants prepared a financial statement and schedule of real estate assets. On August 7, 2008, former counsel for the Defendants forwarded the Financial Statement attached to an email, in which he explained "Excluded from the Statement are assets held in qualified retirement plans (401k) and IRAs."
Defendants hired new counsel, and continued negotiations. Plaintiffs requested a verified, updated personal financial statement for Defendants. On November 11, 2008, Defendants' new counsel sent an updated version of the Financial Statement, which was, according to Defendants, "essentially identical to the one sent by [former counsel] in August 2008." This version of the Financial Statement is the second alleged misrepresentation at issue.
On November 15, 2008, the parties executed a "Settlement and Security Agreement and Release" (Settlement Agreement). Per the Settlement Agreement, Plaintiffs and Defendants agreed to extinguish the Note (and another not subject to this motion) and replace them with a new note in the amount of $2 million (New Note). The Settlement Agreement provided that the New Note would constitute a novation of the previous notes. The parties also executed mutual releases and waiver of Civil Code § 1542, which contained a "carve out" should Defendants file a bankruptcy petition.
Plaintiffs claim to have relied on false financial statements which omitted over $1,000,000 in liquid assets. Plaintiffs claim they would not have entered into the Settlement Agreement if they had known of those assets. Plaintiffs acknowledge that the cover sheet to the financial statement prepared by counsel for Defendants stated that the 401K plan and IRA were not included, but also claim that the same attorney stated that Defendants had nothing to live on.
Plaintiffs filed a complaint seeking to have their claims excepted from Defendants' discharge on several theories. Two of the theories are challenged in this motion for summary judgment - sections 523(a)(2)(A) and (B).
DISCUSSION
Defendants have renewed their motion for summary judgment on two of Plaintiffs' claims - sections 523(a)(2)(A) and (B). Those claims are based upon two separate alleged misrepresentations.
Section 523(a)(2)(A)
As discussed above, Plaintiffs contend that Defendant Curtis induced them to reconvey their deed of trust on the Las Flores Property by misrepresenting his intent to immediately re-record the deed of trust. Section 523(a)(2)(A) excepts from discharge "any debt" "(2) 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."
Claims under § 523(a)(2)(A) typically stand or fall on whether the representation was false, whether it was material and/or whether the debtor justifiably relied thereon. However, before getting to those issues, the Court must determine whether there is a "debt" and whether debtor "obtained" any "money, property, services, or an extension, renewal, or refinancing of credit," in the first place.
In this case what Defendants "obtained" was a reconveyance of Plaintiffs' deed of trust. The reconveyed deed of trust is clearly not money, services, nor an extension, renewal or refinancing of credit. The only other option is that it is property. Property is not defined in § 523 or anywhere else in the Code. In a Supreme Court case applying the predecessor to § 523 under the Act, the court concluded that legal services were not property, describing the limitations of the concept of property:
At most [property] denotes something subject to ownership, transfer, or exclusive possession and enjoyment, which may be brought within the dominion and control of a court through some recognized process. This is certainly the full extent of the word's meaning as employed in ordinary speech and business, and the same significance attaches to it in many carefully prepared writings.Glerason v. Thaw, 236 U.S. 558, 561 (1915).
The Court finds that in general, the reconveyance of a deed of trust would fit within this parameter and would amount to obtaining property. It is generally accepted that granting a security interest in property is a transfer of property. It stands to reason then that return of such an interest is a transfer of property.
The issue raised by Defendants' renewed motion is whether the security interest reconveyed had any value. If it did not, Defendants' theory is that no "debt" would have resulted based upon the reconveyance. Another way to state the same argument, is that the alleged fraud and reconveyance would have resulted in no damages. See In re Siriani, 967 F.2d 302, 304 (9thCir. 1992), in which the court set out the elements of § 523(a)(2)(A), which included "(7) that damage proximately resulted from the misrepresentation."
In support of the prior motion Defendants had submitted the declaration of appraiser Kenneth Keagy, in which he opined on the value of the Las Flores Property as of April 22, 2008, the date TVB foreclosed. In support of the renewed motion Defendants have submitted the Supplemental Appraisal Report of appraiser Keagy, in which he opines that as of September 27, 2006, the date the Las Flores deed of trust was reconveyed, the Las Flores Property was worth $4,500,00, which is less than what was owed to TVB at that time - $5,549,613.80 as of September 19, 2006.
Based upon these numbers, the reconveyed deed of trust had no value, and thus no debt arose based thereon. Plaintiffs have provided no competent evidence to date to the contrary.
At the hearing, Plaintiffs requested a continuance in order to obtain a competing appraisal, showing that the reconveyed deed of trust had some value. The Court has misgivings, because, as counsel for the Defendants explained at the hearing, Plaintiffs had notice of the hearing and an opportunity to obtain a competing appraisal. Nevertheless, upon reflection the Court has decided to allow the Plaintiffs such an opportunity. Accordingly, the Court will not rule on Plaintiffs' motion at this time. Rather, Plaintiffs have 60 days from the entry of this order to obtain and file competent evidence of value. Once that is filed, the Court will contact the parties to reschedule the hearing on this motion.
Section 523(a)(2)(B)
Defendants also seek summary judgment on the § 523(a)(2)(B) cause of action, arguing that the "alleged omissions in the financial statements delivered to Plaintiffs were neither false nor material." This argument was raised and rejected in Defendants' prior motion for summary judgment. Defendants added neither new argument nor evidence. As with the prior motion, the motion is denied as there are triable issues of material fact on this claim.
CONCLUSION
For the foregoing reasons, the Court will not rule on Defendants' motion on the § 523(a)(2)(A) claim at this time. Rather, Plaintiffs have 60 days from the entry of this order to obtain and file competent evidence of value. Once that is filed, the Court will contact the parties to reschedule the hearing on this motion. The Court denies the motion with respect to the § 523(a)(2)(B) claim.
IT IS SO ORDERED.
____________________
PETER W. BOWIE, Judge
United States Bankruptcy Court