Opinion
MEMORANDUM DECISION
PETER W. BOWIE, Chief Bankruptcy Judge
This adversary proceeding came on regularly for trial on the Jones' complaint objecting to the dischargeability of the debt owed to them by Mr. Lanes.
The Court has subject matter jurisdiction over the proceeding pursuant to 28 U.S.C. § 1334 and General Order No. 312-D of the United States District Court for the Southern District of California. This is a core proceeding under 28 U.S.C. § 157(b) (2) (I).
Debtor Lanes operated a mortgage company, an escrow service and a realty office. By the late 1980's he and the Joneses were friends, combining business with pleasure. In 2000, debtor arranged a loan for the Joneses on their home with Greenpoint Mortgage. Thereafter, there were refinancings of the Joneses' property in 2002 and 2003 through Lanes. In 2004 the Joneses arranged their own transaction with Wells Fargo.
Meanwhile, in late Spring, 2005 Lanes purchased property on Los Coches Road. His plan was to build a first house, then split the property into three parcels, then build out the other two. He testified that he borrowed the money from Hendrickson to purchase the land, paying $100,000 down and giving Hendrickson a $395,000 note secured by other land on Dehesa Road. Subsequently, debtor arranged a construction loan for the Los Coches property of about $460,750.
The Joneses were interested in putting $100,000 down to hold a place in a development at Las Vegas Motor Speedway. To do that, they would need to borrow against their home yet again. Debtor also needed additional funds, and when the appraisal came back at $1.1 million, discussions ensued about the Joneses applying for more than they needed so they could loan debtor $240,000, later increased to $250,000. The Joneses did agree to loan Lanes $250,000 from the excess loan proceeds. The total loan was for $880,000, and was processed through Lanes' Blossom Valley Mortgage. When the loan closed, the prior debts against the Jones' property were retired, and $351,000 remained. Lanes forwarded the $100,000 to the Las Vegas project, received $250,000 himself, and the Joneses received what was left.
The Joneses testified they had a different understanding than Lanes about the duration of the loan. They said they understood Lanes just needed a short term loan of 60-90 days over which the funds would be on deposit in his accounts, all to make his balance sheet look better, Lanes testified the duration of the loan was to be a maximum of three years, or less if the Los Coches lot split and additional two homes were completed sooner.
The different understandings about the duration of the loan surfaced early, in part because Mrs. Jones was starting up her own dental lab. The $880,000 loan closed around April 19, 2006. Mr. Jones testified he contacted Lanes and asked for some of the loan back. He said he had to put pressure on Lanes, but Lanes did come through. On June 15, 2006, less than two months after the loan was made, Lanes provided a personal check for $31,875. Thirty thousand of that amount was a paydown on the loan principal, to $220,000. The other $1,875 constituted a monthly interest payment from Lanes to the Joneses for the portion of the $880,000 loan that was attributable to the portion Lanes received.
Apparently, one of the loan terms that is not disputed between the Joneses and Lanes is that he would pay them a portion of their monthly mortgage payment in relation to the amount he borrowed as a portion of the total debt. The loan itself was a 10 year fixed rate, interest payment only loan. The record established that Lanes made payments each month starting in May 2006, through May 1, 2008. Indeed, Mr. Jones testified his wife opened a special account to put those payments in.
The complexities of this case are compounded by the unusual nature of the subject loan and the lack of signed documentation supporting it. For example, in the escrow instructions for the $880,000, there is nothing suggesting any of the proceeds were authorized to be distributed to Lanes. Lanes contended at trial that this was an informal "handshake" loan. Yet he also insists it was for up to 3 years in duration and, during discovery of his files copies of unsigned promissory notes and nonrecorded trust deeds were found. Lanes testified that all of those documents were provided by him to the Joneses, while they deny seeing any until the note for $190,000 dated May 16, 2007, more than a year after the loan was made. (Ex. 97).
Debtor's version is that the loan always was intended to be three years or less, and that he agreed to pay an interest portion during the life of the loan. Moreover, he agreed to repay up to $100,000 on not less than two weeks notice. Further, he always intended that the Joneses would be secured by an interest in the Los Coches property, but he could not record that security interest until the construction financing was finished and the completion notice was issued. He testified that he instructed his staff accordingly, but that his staff failed to ever record the trust deed in favor of the Joneses.
The testimony and documentary evidence at trial establishes that Lanes owed a $460,750 construction loan to National City Bank on the Los Coches property, which was also to provide security for the Joneses. In addition, he owed Hendrickson $395,000 for the money to purchase Los Coches, but that debt was secured by property on Dehesa Road. When the first house on Los Coches was completed, debtor obtained an appraisal setting the value of Los Coches at $765,000. That was the" as is" value, but debtor believed its value was higher because of the lot split potential and additional homes. In any event, debtor proceeded to borrow against the Los Coches property, first to $612,000, then an additional $78,000, and as of November, 2006 there was over $1.1 million recorded as debt on the Los Coches property, not including the $220,000 owed to the Joneses. In none of the loan applications submitted by Lanes did he disclose the debt to the Joneses, whether as secured or unsecured debt. He testified that the nature of the loans themselves did not require that information, and that he used his credit report to complete the application, which would not have included the private, unrecorded loan to him from the Joneses.
The Joneses continued to press Lanes for repayment, while Lanes continued to pay the monthly fractional interest payments. On or about May 16, 2007 Lanes paid them another $40,000. At the same time, he presented them with a promissory note for $190,000, signed by him, and reciting it was secured by a deed of trust on Los Coches. The Joneses testified this was the first promissory note they had seen and first time they realized that Lanes would not be required to repay the balance for almost two more years. Finally, in about May, 2008 Lanes met with the Joneses at their home, told them his financial world had collapsed, that he could not make any more payments, and intended to file bankruptcy. The Joneses seek a judgment that Lanes owes them $180,000 plus interest from May, 2008, and that that debt is nondischargeable under 11 U.S.C. § 523(a) (2), (a) (4), and (a) (6).
One of the Joneses' contentions in arguing nondischargeability is that Lanes had a duty to disclose the true state of his financial condition at the time he requested the loan. However, to be a ground for nondischargeability statements - or failure to disclose - financial condition must be in writing, and must have been reasonably relied upon. Since there is no writing, as § 523(a)(2)(B) requires, the claim must fail.
Turning to § 523(a)(2)(A), it provides that a debt "for money... to the extent obtained, by - (A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's... financial condition" is not discharged. The Joneses have failed to carry their burden of proof that the loan was made in reliance on false pretenses or representations. While there is a factual dispute about the agreed duration of the loan, the separate account and monthly interest payments suggest the Joneses understood the loan would run longer than 60-90 days. The Joneses offered no explanation for why such a procedure would be set up for only 2-3 monthly payments.
The Court is persuaded, however, that the loss of $180,000 plus interest by the Joneses was the result of actual fraud by Lanes. Lanes testified that while he intended to secure the debt to the Joneses with a junior deed on the Los Coches property, he knew he could not record it until he received the completion notice on the first house without jeopardizing his construction financing. Lanes did not discuss how the proposed lot split and possible construction financing for the other two houses would have affected a trust deed in favor of the Joneses. But regardless of that, when he received the completion notice, the trust deed to the Joneses was not recorded. Lanes testified he told his staff to record it when the construction financing was completed, and his staff's error resulted in the Joneses' loss, not his. Instead, a deed in favor of Hendrickson, to replace the Dehesa Road security, was inadvertently recorded on Los Coches, leaving no collateral value for the Joneses, who would then be in junior position. The Court is not persuaded by Lanes' contentions. Even assuming such a series of major mistakes occurred in his office, Lanes had to know the Joneses' trust deed was not recorded against the property when he sought to borrow against it. In borrowing, Lanes was looking to draw cash out from new loans, with new appraisals. In order to draw cash out, both he and the lender needed to know what debt against the property was of record. That, plus the appraisal, plus the lender's loan-to-value ratio, would determine how much he could borrow. He had to know there was no record of any debt for $220,000 in favor of the Joneses when he borrowed against the Los Coches property in the Fall of 2006, all before the Hendrickson trust deed was recorded in November, 2006. With all that in mind, Lanes' failure to disclose the debt owed to the Joneses on any of his Summer-Fall 2006 loan applications suggests his intentions of unilaterally subordinating his obligation to the Joneses to many other things he wanted to do.
The Court finds and concludes that the foregoing constitutes actual fraud by Lanes against the Joneses, and therefore the debt owed to them is nondischargeable under 11 U.S.C. § 523(a)(2)(A).
The same facts support nondischargeability under § 523(a)(6), which imposes the requirements that Lanes' conduct be both willful and malicious. Those are separate requirements. In re Su , 290 F.3d 1140, 1146-47 (9th Cir. 2002). In this Court's view, debtor Lanes knew he had issued trust deeds to his commercial lenders as well as his private lenders - Hendrickson and the Joneses. Issuing those trust deeds were willful acts, whether recorded or not. Moreover, the acts were malicious within the meaning of § 523(a)(6) because Lanes had to know there was not sufficient contemporaneous value in the Los Coches property to fully secure both the commercial lenders and his private lenders. Recording of the private trust deeds - or failure to record - is not the issue. Recording protects the beneficiary against the world, but failure to record still leaves an otherwise enforceable agreement as between the private lender and Lanes. The malicious element is satisfied by Lanes knowingly issuing promises to repay from collateral he knew at the time could not support the debt. Accordingly, the debt is also nondischargeable under § 523(a)(6).
Finally, the Joneses seek nondischargeability under § 523(a)(4) for breach of fiduciary duty. To be sure, Lanes is a fiduciary under applicable California law as a loan broker, real estate agent, and escrow official. Lanes argues this was not a brokered loan, but a private loan, despite the fact that his office took its full one percent commission on the whole $880,000 loan, not the net of $880,000 minus $250,000. But that misses the point. A fiduciary under (a)(4) may be different from state law fiduciaries, with a more stringent requirement of a pre-existing trust res. In re Lewis , 97 F.3d 1182, 1185 (9th Cir. 1996). Here, the trust res was the trust deed Lanes held to perfect a security interest for the Joneses in the Los Coches property. When Lanes applied for additional funds with Los Coches as collateral, he had to know such borrowings would, at that point in time, leave the Joneses without collateral value, especially with the debt to Hendrickson also in existence. He had a duty not to reduce or eliminate collateral value for the security he claims he gave them with the unrecorded deed of trust. That was wrongful conduct on his part and makes the debt he owes to the Joneses nondischargeable under 11 U.S.C. § 523(a) (4).
Conclusion
For all the foregoing reasons, the Joneses are entitled to judgment in the principal amount of $180,000 plus interest to the date of judgment herein at ten (10) percent. Post-judgment, interest shall accrue at the federal post-judgment interest rate. The full amount of the debt plus interest as set out herein is nondischargeable under 11 U.S.C. § 523(a)(2)(A), (a)(4), and (a) (6).
Counsel for plaintiffs shall prepare a separate form of judgment consistent with the foregoing, and lodge and serve it within twenty (20) days of the date of this Memorandum Decision.
IT IS SO ORDERED.