Opinion
Case No. A03-00988-DMD, Adversary No. A03-90106-DMD.
July 12, 2004
MEMORANDUM DECISION
This is an action to except a debt from discharge under 11 U.S.C. § 523(a)(2)(B). It is a core proceeding under 28 U.S.C. § 157(b)(2)(I). This court has jurisdiction in accordance with 28 U.S.C. § 1334 and the district court's order of reference. I find for the plaintiff as to the defendant Harold Cook. The claim against Linda Cook will be dismissed.
Background
Harold "Sam" Cook is a resident of Homer, where he has worked as a carpenter and a charter boat captain. Linda Cook is a bank teller. Harold Cook sought to develop a large time-share resort in Homer overlooking Katchemak Bay. He met Phil Slabaugh, then a resident of Homer, and discussed the project with him on several occasions in early 2001. Slabaugh, an experienced contractor, owns Sunland
In March of 2001, Cook needed $60,000.00 to close on a 120 acre parcel for his time-share project. He wanted to borrow the money from Slabaugh on a short-term basis. Slabaugh required a financial statement. Harold and Linda Cook provided a financial statement to Slabaugh. The document was entitled "Harold and Linda Cook, Sam Cook Development, Inc. Financial Statement." It was signed by the Cooks as individuals. The statement reflected a net worth of $2.7 million, $1.5 million of which came from an unencumbered piece of Oregon property known as "Forest Grove." Slabaugh lent Cook the money and was promptly repaid.
Cook needed financing for the ambitious time-share project. He contacted James Spizzirri, a man of apparent wealth, who owned 880 acres of land adjacent to the time-share site. Spizzirri also had a home and boat in Homer. Cook and Homer realtor Allen Jantzi met with Spizzirri in Arizona in May of 2001. When they returned to Homer after the meeting, Cook and Jantzi told Slabaugh that Spizzirri had agreed to finance the project. Slabaugh prepared a "Design-Build" agreement for the project dated May 21, 2001. Harold Cook and James Spizzirri were listed as the owners of the project. Slabaugh started construction on May 21, 2001, with no signed construction agreement.
Sunland submitted a pay request in the sum of $121,401.00 for construction work on the project on July 15, 2001. On July 31, 2001, Cook, Spizzirri and Slabaugh met in Homer. The "Design-Build" agreement was changed to provide for a maximum price of $10,474,640.00 for Sunland's construction of the project. The name of the project owner was changed to "C and S Development LLC." Spizzirri and Cook signed as "owner" of C S. They also initialed the signature page of the prior contract. Slabaugh even signed the old agreement. Sunland's July 15 pay request was paid in August, 2001.
Sunland continued working on the project until October. None of its subsequent monthly pay requests, totaling nearly $1.2 million, were paid. Sunland shut down the project and filed suit in state court against Spizzirri, Cook and others. After Cook filed his chapter 7 petition on September 5, 2003, the state court trial, scheduled for September 7, 2003, was vacated. This action ensued.
In re Cook, Case No. A03-00988-DMD.
Analysis 11 U.S.C. § 523(a)(2)(B) excepts certain debts from discharge. They include:
(2) [debts] for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by —"
. . . .
(B) use of a statement in writing —"
(i) that is materially false;
(ii) respecting the debtor's or an insider's financial condition;
(iii) on which the creditor to whom the debtor is liable for such money, property, services, or credit reasonably relied; and
(iv) that the debtor caused to be made or published with intent to deceive. . . .
The Ninth Circuit has reworded these requirements as follows:
(1) a representation of fact by the debtor,
(2) that was material,
(3) that the debtor knew at the time to be false,
(4) that the debtor made with the intention of deceiving the creditor,
(5) upon which the creditor relied,
(6) that the creditor's reliance was reasonable,
(7) that damage proximately resulted from the representation.
Candland v. Ins. Co. of N. America (In re Candland), 90 F.3d 1466, 1469 (9th Cir. 1996), citing Siriani vs. Northwestern Nat'l Ins. Co. (In re Siriani), 967 F.2d 302, 304 (9th Cir. 1992).
These elements must be proven by a preponderance of the evidence.
Grogan v. Garner, 498 U.S. 279, 291 (1991).
Here, Harold Cook made materially false statements in his financial statement of March 16, 2001. He represented that he owned 10 acres of unencumbered real property in Forest Grove, Oregon, valued at $1,500,000.00. He did not own the real property; it was owned by Cook's mother. Cook deeded the property to her in the 1980's. Cook knew that the statement was false. The statement was issued to deceive and induce Sunland and its president, Phil Slabaugh, to loan Cook $60,000.00 and to enter into a construction contract.
But did Slabaugh rely on the statement? He testified that it was a substantial factor that influenced his decision to perform the work and eventually sign the contract. There is conflicting evidence on this point, however. Slabaugh seemed very impressed by Spizzirri's appearance of wealth. He thought Spizzirri was a high roller, capable of funding the project out of his own pocket. Additionally, Slabaugh started working on the project without a contract signed by Cook or Spizzirri. He worked for over two months before obtaining a signed contract. When that contract was signed, there was even more ambiguity. Slabaugh was apparently willing to allow Cook off the personal liability hook and replace him with an entity called C S Development LLC. C S was never formed, however.
I conclude that Slabaugh relied on a number of factors before starting work and entering into the contract. Although he primarily relied on Spizzirri to fund the project, Cook's fraudulent financial statement was also a substantial factor in inducing Slabaugh to perform the work and enter into the contract.
First Nat'l Bank of Colorado Springs v. Clancy (In re Clancy), 279 F.Supp 820, 822 (D.Colo. 1968), aff'd, 408 F.2d 899 (10th Cir. 1969), cert. denied, 396 U.S. 958 (1969).
I cannot ignore the close proximity of the financial statement to the start of construction. Cook gave Slabaugh the financial statement in March. Slabaugh started construction just two months later, on May 21st, and before he had a signed agreement for the project. Slabaugh relied on the false financial statement when he decided to move forward on the project.
Was Slabaugh's reliance reasonable? Unquestionably, Slabaugh was negligent in not obtaining a title report on the Oregon property and believing Cook's fabrication. On the other hand, Cook had performed his promise to repay the $60,000.00 loan. Further, Slaybaugh was familiar with the area around the Oregon property, having made several trips there to visit his daughter. He knew it was in a highly desirable area, experiencing substantial growth. When materially fraudulent statements are made, "little investigation is required for a creditor to have reasonably relied on the representations." I find Slabaugh's reliance to have been reasonable.
Gertsch v. Johnson Johnson Fin. Corp. (In re Gertsch), 237 B.R. 160, 170 (B.A.P. 9th Cir. 1999); see also La Trattoria, Inc. v. Lansford, 822 F.2d 902, 904 (9th Cir. 1987).
Sunland has incurred large losses on the construction contract. The precise amount of the losses and Cook's proportionate liability for those losses will be liquidated in the state court litigation. Harold Cook's liability to Sunland, in such amount as is determined in the state court proceeding, will be excepted from discharge under 11 U.S.C. § 523(a)(3)(B).
Sunland has failed to make a case against Mrs. Cook, however. "It is generally held that the marriage relationship itself is an inappropriate basis for imputing fraud."
Tsurukawa v. Nikon Precision, Inc. (In re Tsurukawa), 287 B.R. 515, 526 (B.A.P. 9th Cir. 2002).
To impute fraud to a spouse, there must be a partnership or other agency relationship independent of the marriage. Linda Cook was not a business partner in the project. She signed the erroneous financial statement, but no reliable evidence has been submitted indicating that she knew the statement was false or that she signed it with the intention of deceiving Slabaugh. Harold Cook's fraud cannot be attributed to her under a partnership or agency theory. Slabaugh's claim as to Linda Cook has been discharged and she will be dismissed, with prejudice, from this adversary proceeding.
Id. at 527.
Conclusion
Sunland's claim against Harold Cook will be sustained and the debt excepted from discharge. Sunland's claim as to Mrs. Cook will be dismissed, with prejudice. An order and judgment will be entered consistent with this memorandum.