#2274 signed 10-2-96
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
RONALD RAY GOODING,
WILLIAM STEWART GARLIC,
RONALD RAY GOODING,
ADV. NO. 95-7070 MEMORANDUM OF DECISION
This proceeding is before the Court for resolution following a bench trial on the plaintiff's dischargeability complaint. The plaintiff appears by counsel Charles McAtee. The defendant-debtor appears by counsel Mark Neis. The Court has considered the evidence and reviewed the relevant pleadings, and is now ready to rule.
The plaintiff sought to except the debtor's $6,000 debt to him from discharge pursuant to 11
U.S.C.A. §523(a)(2)(A) and (a)(4). At trial, the Court denied the plaintiff's count based on
§523(a)(4), and directed the parties to submit suggested findings of fact and conclusions of law
on the other count. The plaintiff timely submitted his proposed findings and conclusions, and the
debtor belatedly submitted his. The plaintiff asks the Court to sanction the debtor by striking his
pleading and accepting the plaintiff's proposals as established. Such a sanction is inappropriate
under the circumstances. The Court is acting as both factfinder and judge here, and heard the
parties' evidence and arguments. Their proposed findings and conclusions were requested largely
to help the Court formulate its decision, which will be based on such proposals only to the extent
the Court agrees with them. The debtor's counsel is admonished to adhere to such deadlines in
the future, but the plaintiff's motion for sanctions will otherwise be denied.
FINDINGS OF FACT
Five witnesses testified at trial: the plaintiff, the debtor, Thomas N. Jones, the debtor's father, and Dr. Harold Voth. The plaintiff is the settlor and beneficiary of a revocable trust. He met Mr. Jones, then an attorney, at a substance abuse clinic in 1990. Jones met the debtor at a Cocaine Anonymous meeting that same year. The debtor and his father are partners in Woodland Court Apartments, Ltd. Dr. Voth is the plaintiff's psychoanalyst.
In May 1992, the plaintiff named Mr. Jones as the trustee of his trust. The trust document grants the trustee broad powers of investment, limited only by the "prudent investor" rule, Kansas laws pertaining to such trusts, and the plaintiff's power to revoke the trust. Jones was disbarred in December 1992 for having misappropriated client money in 1989 and 1990, but continued as the plaintiff's trustee until April 1994. In 1994, the plaintiff sued Jones for breaching his fiduciary duties as trustee, and obtained a judgment for $152,065.37.
During the times relevant to this lawsuit, the debtor and Mr. Jones had offices in a building the debtor owned. They shared a receptionist and secretary though their offices were on separate floors. The debtor, formerly an attorney, had surrendered his license to practice in 1989, and was engaged in real estate transactions at that time.
In mid-1990, the debtor and his parents formed the Woodland Court partnership to purchase land and build a low-income-housing apartment complex which was intended to qualify for investment tax credit benefits under a program administered by the Kansas Department of Commerce. In May 1992, Mr. Jones suggested the plaintiff and the debtor might consider whether the trust could finance the Woodland Court project. Jones and the plaintiff met with the debtor's father and the project architect, a Mr. Riley, at Jones's office to discuss the possibility of a $200,000 loan from the trust. The plaintiff had previously told Jones that he was not interested in lending money to the project, but neither he nor Jones said so at the meeting. Instead, Jones told the debtor's father that the plaintiff was not interested in lending any money at that time because of litigation in which the plaintiff was involved. This was the only meeting the plaintiff attended about the project, and the only direct contact he had with the debtor's father or Riley; he never personally met with the debtor. After the meeting, the plaintiff told Jones that he would not agree to have his money invested in the Woodland Court project under any circumstances. Apparently, the plaintiff consulted Dr. Voth about the matter and was advised against making any real estate investment.
Despite this instruction, Mr. Jones loaned soon $6,000 of the trust's money to the debtor as a representative of the Woodland Court partnership. The loan has not been repaid, and is a part of the $152,065.37 judgment the plaintiff obtained against Jones. Besides documents evidencing that loan, two letters Jones signed on behalf of the trust were admitted into evidence. One is dated in June 1992 and is addressed to an official of the Kansas Department of Commerce, and the other is dated in July 1992 and is addressed to the debtor's father. Both indicate that the trust intended to finance the Woodland Court project so long as numerous conditions were met. The letter to the debtor's father declared the trust would loan $2.9 million at 8.29% interest.
At trial, the parties presented the testimony of three more or less interested people to establish the
facts surrounding the trust's loan to the debtor. These witnesses identified three apparently
disinterested people who might have corroborated at least some of the information provided by
either side: the secretary-receptionist shared by Jones and the debtor; Mr. Riley, the architect who
attended the meeting with the plaintiff, Jones and the debtor's father, and possibly another meeting
with Jones, the debtor, and his father; and Mr. Lauber, a banker with whom some negotiations
took place and who purportedly supplied some wire-transfer information pertaining to the planned
loan for the project. Nevertheless, the parties chose not to call these independent witnesses,
leaving the Court to decide which of the three interested witnesses to believe. They offered the
following relevant testimony.
The facts according to Mr. Jones
The plaintiff only attended the May meeting as a favor to Mr. Jones and was at no time interested in the Woodland Court project. After the May meeting with the debtor's father, Mr. Riley, the plaintiff, and himself, Jones advised the debtor that the plaintiff's trust would not be an investor in the project. When the debtor asked to speak with the plaintiff, Jones told him that the plaintiff did not want to speak to him about the project. Jones typed a one-line note that the plaintiff signed which said the plaintiff was not interested in the investment. Jones placed the note on the debtor's desk while the debtor was out of the office.
The debtor prepared the June and July letters and Jones signed them to accommodate him, but the
debtor knew, despite language to the contrary in them, that the trust was not interested in lending
or investing in the project. The debtor knew the trust did not have $2.9 million. Jones told the
debtor that the plaintiff would be upset if he knew that Jones was lending money from the trust to
the debtor or the project, and that the money had to be timely repaid so the plaintiff would not
find out about the loan.
The facts according to the debtor
The debtor and his father were serious about the Woodland Court project and would not have
been dealing with Jones and the plaintiff if they had known they were not interested in the project
and did not have $2.9 million. The debtor had a group interested in buying the investment tax
credits as soon as the project was far enough along. The time to build the project and obtain the
credits was running out, so he would not have wasted his time negotiating with someone who was
not interested or had insufficient funds to get the project built. He initially accepted Jones's word
about the trust's ability to invest or loan but began to check on it when the money Jones promised
was not forthcoming. Though he did supply boilerplate language for the June and July letters
Jones signed, he was not aware that Jones and the trust did not intend to do what the letters
stated. Jones told him that he need not speak directly with the plaintiff because Jones was his
authorized representative. The debtor was not aware that Jones did not have authority to lend
$6,000 of the trust's money to him for the Woodland Court partnership. At the time the loan was
received, the debtor believed that he and the partnership would be able to repay it.
The facts according to the debtor's father
The debtor's father attended a May meeting with Jones, the plaintiff, and Mr. Riley. Before the
meeting, he had the impression that Jones believed it to be likely that the trust would loan money
for the apartment complex. At the meeting, Riley presented the plans for the project. The
plaintiff was noncommittal, but was to think about it and advise them later of his decision. Jones
reported some days later that the project was "a go."
DISCUSSION AND CONCLUSIONS
The plaintiff seeks to have the $6,000 the debtor borrowed from the trust declared nondischargeable under 11 U.S.C.A. §523(a)(2)(A). It provides:
A discharge under section 727 . . . 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 pretenses, a false representation, or actual fraud, other than a statement respecting the
debtor's or an insider's financial condition;
The creditor has the burden of proving by a preponderance of the evidence that a debt is nondischargeable. Grogan v. Garner, 498 U.S. 279 (1991). In this case, the plaintiff alleges the debtor participated in the trustee's defalcation in his fiduciary duty, and thus helped him perpetrate fraud against the plaintiff and his trust. There is no evidence that the debtor lured the plaintiff into making the loan through the use of some misrepresentation or that the debtor borrowed the money at a time when he knew it would not be possible for him to repay it. The trustee, Mr. Jones, has admitted making the loan was a defalcation of his duties. The question the Court must decide is whether the debtor knew Jones was acting improperly when he made the loan, and if so, whether this constitutes fraud for which an exception to discharge is an appropriate punishment.
The Court cannot determine who is telling the truth in this matter. Only Mr. Jones and the debtor supplied testimony relevant to the main issue. Dr. Voth merely said he told the plaintiff not to invest in real estate transactions. He had no contact with the debtor. The plaintiff had no contact with the debtor, and did not even tell the debtor's father that he definitely would not provide money to the project. At the most, he told the debtor's father that he could not invest or loan at the time because of some pending litigation, and at the least, he told him he would get back to him later about getting involved in the project. The debtor's father attended the one meeting with the plaintiff and left it believing the plaintiff might finance some or all of the project. He was later led to believe that the project would proceed, but delegated to his son most of the negotiating with Jones.
Jones and the debtor tell very different stories. Both have some logic to support them. Jones has little to gain except a co-debtor for $6,000 of a $152,065.37 judgment. The debtor has the discharge of the debt to gain. At the time of the transaction, Jones appears to have had nothing to gain by misleading both parties, but he seems to have had difficulty saying no to people and did not want to alienate either the plaintiff or the debtor. The debtor needed an investor or lender and time was running out on the project. He had nothing to gain by dealing with a sham investor or lender who could not and would not fund the project.
The Court finds the evidence is balanced, and the Court cannot say that the plaintiff has prevailed.
Consequently, the plaintiff has failed to satisfy his burden to convince the Court by a
preponderance of the evidence. The Court finds in favor of the debtor. As indicated earlier, the
plaintiff's motion for sanctions is denied.
The foregoing constitutes Findings of Fact and Conclusions of Law under Rule 7052 of the Federal Rules of Bankruptcy Procedure and Rule 52(a) of the Federal Rules of Civil Procedure. A judgment based on this ruling will be entered on a separate document as required by FRBP 9021 and FRCP 58.
Dated at Topeka, Kansas, this ____ day of October, 1996.
JAMES A. PUSATERI
CHIEF BANKRUPTCY JUDGE
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
In Re: )
RONALD RAY GOODING, ) NO. 95-40437-7
) CHAPTER 7
WILLIAM STEWART GARLIC, )
v. ) ADV. NO. 95-7070
RONALD RAY GOODING, )
JUDGMENT ON DECISION
This proceeding was before the Court for resolution following a bench trial on the plaintiff's dischargeability complaint. The plaintiff appeared by counsel Charles McAtee. The defendant-debtor appeared by counsel Mark Neis. The Court considered the evidence and issued its Memorandum of Decision resolving the parties' dispute.
For the reasons stated in the Memorandum, judgment is hereby entered denying the relief sought in the plaintiff's complaint, and denying the plaintiff's motion for sanctions.
IT IS SO ORDERED.
Dated at Topeka, Kansas, this _____ day of October, 1996.
JAMES A. PUSATERI
CHIEF BANKRUPTCY JUDGE