Opinion
Civil No. 05-CV-1125-XR Bankruptcy Case No. 04-51572-RBK, Adversary No. 04-5084-RBK.
September 26, 2006
ORDER
Appellant, Paul C. Jacobson, appeals an order of the United States Bankruptcy Court for the Western District of Texas, The Honorable Ronald B. King presiding, holding that the debt Jacobson owes to appellee, James Robert Miller, is nondischargeable pursuant to 11 U.S.C. § 523(a)(2)(A). For the reasons stated below, the Court AFFIRMS the bankruptcy court's decision.
I. Factual and Procedural Background
Brett Ormsby is the grandson of James Robert Miller. Ormsby was appointed conservator of Miller in December 2001. Miller is a 91 year-old retired businessman who currently resides in a nursing home in Salt Late City, Utah. In this adversary proceeding, the bankruptcy court dealt with a transaction that began in 1998 between Miller, Miller's long-time business acquaintance, Mr. Clair Phillips, and Phillip's business acquaintance, Mr. Paul Jacobson. Jacobson owned a company called FS Condominiums, Inc. ("FSC"), and he and Phillips approached Miller with a proposal for Miller to loan funds so that FSC could acquire and refurbish thirty-three condominium units located in Dallas, Texas. Jacobson was the president, sole officer, director, and owner of 100% of the outstanding shares of FSC stock. Miller participated in this project by loaning funds to Jacobson and/or FSC. FSC and Jacobson would sell the refurbished condominiums at a profit, repaying Miller's initial investment plus interest. The capital to start the project was lent by Mr. Miller to Mr. Jacobson and his business, FSC, through a series of promissory notes ("Individual Notes"). The Individual Notes were secured by liens on various specified condominium units.
Ormsby was appointed "conservator" in Utah; a conservator is similar to a guardian in Texas.
The condominium project was originally named the Foreside Condominiums, but it was subsequently renamed the Point Two Turtle Creek Condominiums.
The notes referred to all date between October 1, 1998, through May of 1999. They are admitted into evidence as Plaintiff's Exhibits No. 1-40, and these exhibits include the promissory notes and the deeds of trust.
In August 1999, Miller loaned an additional $1.7 million to Jacobson ("August 1999 Note"). Miller became first and second lien holder on the specified condo units, securing both the August 1999 Note and the Individual Notes. The August 1999 Note set interest at 12%, called for Jacobson to pay monthly arrearage on the interest and to start paying on the principal by August 5, 2000. Several months later, in late November 1999, Miller entered into two separate agreements to extend the maturity date of the Individual Notes and the August 1999 Note. The first "Modification and Extension Agreement of Certain Promissory Notes," ("First Extension Agreement"), became effective as of November 19, 1999, and the "Second Modification and Extension Agreement of Certain Promissory Notes," ("Second Extension Agreement"), became effective on November 22, 1999. The Second Extension Agreement also consolidated an additional loan of $200,000.
Both of the notes were notarized by Mr. Miller and Mr. Jacobson on December 3, 1999, and December 6, 1999, respectively.
In the following year, Miller issued two additional promissory notes to Jacobson on behalf of FSC. The first was issued on April 6, 2000, in the amount of $140,000, and the second was issued on June 19, 2000, in the amount of $440,000. Of the $440,000 loaned on June 19, Miller retained $40,000 as a bonus from Jacobson. Thereafter, correspondences were sent in October 2000 discussing the marketing of the renovated units, projected completion dates, and the net value of the units. In a memo dated November 21, 2000, Miller was represented with a detailed estimate of the expenditures necessary to complete the renovations. The additional capital needed totaled $474,300.00. The proposed remedy was to obtain a loan from Bank Dallas for $400,000 and finance the remaining $74,300 with rental income from Jacobson's other properties in Texas.
Pursuant to this understanding of a need for additional money, Miller and Jacobson signed a "Letter Agreement" dated November 29, 2000. The letter consolidated the mortgage and all interest held by mortgagor Jacobson, extended the amortization period until March 15, 2001, and provided that Miller release his first liens on certain units in order to provide those units as collateral for the $400,000 loan from Bank Dallas. On December 8, 2000, Mr. Jacobson sent a letter to Mr. Miller advising that a refusal to comply with the Letter Agreement would cause foreclosure proceedings to be brought against Miller's interests in the project, would jeopardize the project's ability to obtain the loan from Bank Dallas, and would place the entire project in danger of losing millions of dollars. Thereafter, Miller complied and executed a "Release, Modification, Extension, Estoppel, and Ratification Agreement" ("Modification Agreement") on December 8, 2000. The Modification Agreement formalized the Letter Agreement. The debt was consolidated at $3,439,582.27 and set the new note to become effective February 15, 2001. Additionally, Mr. Jacobson, on behalf of FSC, executed a "Secured Promissory Note" in the amount of the original principal plus interest and provided a new deed of trust to Mr. Miller on twenty-three units to secure the note.
The Modification Agreement was acknowledged on December 8, 2000 by Mr. Miller and Clair Phillips, and by Mr. Jacobson on on December 11, 2000.
With no payments having been received pursuant to the Modification Agreement, no appreciable work commenced on the condominiums with first liens held by Miller, and none of the funding provided by Bank Dallas having been applied to the condominiums with first liens held by Miller, the parties entered into negotiations for another extension of the loan. A "Second Modification, Extension, and Ratification Agreement" ("June 2001 Modification") became effective on June 1, 2001. The June 2001 Modification extended the amortization period until September 15, 2001, whereupon the first monthly payment of $38,181.27 would be due.
Jacobson failed to make any loan payments, and on August 6, 2002, Ormsby represented Miller at a foreclosure sale on twenty-three units on which Miller held the first lien. There were no third party vendors present at the foreclosure auction, and Miller's bid of $800,000 awarded him the deeds. Thereafter, a certain "Trustee's Deed (by Substitute Trustee)" was filed in the Deed Records Office of Dallas County, Texas on August 7, 2002, conveying twenty-three of the condominium units to Ormsby as the successful bidder.
Ormsby filed suit against Jacobson, FSC, and Phillips in state district court in Dallas County, Texas. The suit alleged fraud in real estate transactions, fraud, fraud in the inducement, and breach of fiduciary duty. Shortly afterwards, on March 15, 2004, Jacobson filed a voluntary petition for bankruptcy pursuant to Chapter 7 of Title 11 of the United States Code. On June 14, 2004, Ormsby filed a complaint to institute an adversary proceeding in Mr. Jacobson's bankruptcy case. The complaint contained allegations of fraud and fraud in the inducement and asked that the debts owed by Jacobson to Miller be deemed as nondischargeable pursuant to 11 U.S.C. § 523(a), (4), and (6). The bankruptcy court held a hearing that lasted three days.
On July 1, 2005, the bankruptcy court found that Jacobson's debt to Miller is nondischargeable pursuant to 11 U.S.C. § 523(a)(2)(A). The amount of judgment was $4,356,881.16 plus twelve percent (12%) interest from May 1, 2005 to July 1, 2005, plus interest at the federal judgment rate from the date of the judgment until it is paid. This amount included all principal and interest up to the June 2001 Modification, added interest at 12% beginning October 1, 2001, credited the balance $800,000 for the amount received as a result of the foreclosure, and calculated interest through April 2005. Post judgment interest was set at the federal interest rate.
The bankruptcy court found that Jacobson "obtained an extension, modification, or renewal . . . by false representations." The bankruptcy court based its ruling on the following three false representations: (1) Jacobson represented that the renovation job on all the condominium units would be finished in approximately four months with the $400,000 Bank Dallas loan; (2) Jacobson represented that Miller must release his first lien on ten units so that Jacobson could obtain a loan from Bank Dallas for $400,000 to finish work on all the units; and (3) Jacobson represented that the homeowner's association ("HOA") was about to foreclose on the condominium units whose owners had not paid their homeowner's assessments.
The bankruptcy court found that while the $400,000 Bank Dallas loan was used to renovate the ten units on which Bank Dallas held first liens, almost no work was done on the remaining twenty-three units on which Miller held first liens. Jacobson represented that the $400,000 would be used to complete renovation on all of the units, not just the Bank Dallas units. The bankruptcy court found that the only units that were finished were the ten units held as collateral by Bank Dallas, and the twenty-three units held as collateral by Miller were subject to new mechanics liens, new material liens, new claims by the HOA, and were not finished. The evidence indicates that the bulk of the proceeds of the Bank Dallas loan were used to pay existing HOA assessments, past-due amounts owing by Jacobson and/or FSC to various contractors or other existing obligations of FSC, and a payment of $17,318.72 to a separate entity wholly-owned by Jacobson.
The bankruptcy court also found that Jacobson was on the board of the HOA, the HOA had never taken any steps to foreclose on any owner for failure to pay assessments, and that the HOA never intended or threatened to foreclose on Jacobson's units.
II. Complaints on Appeal
11 U.S.C. § 523 11 U.S.C. § 523 for the entire project based upon 408
(1) Appellant questions whether Plaintiff's Exhibit 63 constituted sufficient evidence to support the nondischargeability of debt pursuant to (a)(2). (a) (a)(2) states debts will not be discharged, "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." (b) Plaintiff's Exhibit 63 is the "Contractor Estimated Renovation Costs to Complete Project," dated November 21, 2000. The estimated cost of completion was listed as $474,300.00. The estimate stated that $400,000 of that amount would be paid from the Bank Dallas loan and the remaining $74,300 would be paid from rental income from Jacobson's other properties in Texas. (2) Appellant questions whether the bankruptcy court's finding concerning Miller's release of his original first liens on the thirty-three units constitutes "sufficient evidence" to support the nondischargeability of debt. (a) The bankruptcy court relied on Jacobson's representation that it was necessary for Miller to release his first liens on ten condominium units so that work could be completed on all the units from the proceeds of the $400,000 Bank Dallas loan. The Bank Dallas loan was secured by first liens on the ten units that Miller released. (b) The bankruptcy court held that this was a misrepresentation because it was not necessary for Miller to release status as first lien holder on the ten units in order to obtain a bank loan for additional money to complete the renovations. (3) Appellant questions whether Plaintiff's Exhibit 65 constituted "sufficient evidence" to support the nondischargeability of debt. (a) Plaintiff's Exhibit 65 is a letter sent by FSC to Miller, dated December 8, 2000, stating foreclosure would ensue on Miller's interests in the condominium project if Miller failed to comply with the Modification Agreement. (b) Exhibit 65 further states that FSC had relied on Miller's compliance in going forward with financing arrangements, and if Miller refused to comply with the agreement, then the financial status of the entire project would be placed in jeopardy. (c) The bankruptcy court held the statement regarding foreclosure was not true since the HOA had never sought foreclosure on any unpaid homeowner's assessments. (4) Appellant questions whether the bankruptcy court appropriately found that there was "no accord and satisfaction." (a) The bankruptcy court held that after receiving the loans from Miller there was no accord and satisfaction to rectify the misrepresentations made by Jacobson. Subsequent transactions between Miller and Jacobson were solely "extensions, renewals, and modifications of the loans bases [sic] upon these representations." (5) Appellant questions whether the bankruptcy court appropriately found that there was "no release" by Miller. (a) The bankruptcy court held that after obtaining the loans, release was not given by Miller in extending, modifying, and renewing the loans' terms. (6) Appellant questions whether the bankruptcy court appropriately found that there was "no compromise and settlement" between Miller and Jacobson. (a) The bankruptcy court held that there was no compromise and settlement between the parties through the later extensions, modifications, or renewals of the loans. The bankruptcy court finds, "[a]ll that Mr. Miller did was advance additional funds up to a certain point," and then, he made several modification agreements based on false representations. (7) Appellant questions whether the bankruptcy court appropriately found that there was "no novation" by Miller. (a) The bankruptcy court held that there was no novation by Miller in extending, modifying, or renewing the terms of the loans to excuse the misrepresentations made by Jacobson in originally obtaining the loans. (8) Appellant questions if the bankruptcy court has evidence to support the finding that Ormsby, acting for Miller, renovated and sold the remaining twenty-three condos sustaining a substantial loss. (a) The bankruptcy court notes that Miller foreclosed on the twenty-three condominiums that he held as collateral, finished renovating them, and eventually sold them at a large loss. (b) Ormsby bought the twenty-three units at the foreclosure sale for $800,000. He completed the renovation of the units, and he still owns them today. Some or all of the units are currently leased to tenants. (9) Appellant complains that the bankruptcy court did not make a finding of fact on whether Miller relied on the representations of Jacobson. (a) The bankruptcy court found that Miller relied on "at least three" false representations when he agreed to extend, modify, and renew the original debt. The bankruptcy court stated that subsequent transactions between Miller and Jacobson were solely "extensions, renewals, and modifications of the loans bases [sic] upon these representations." Although the critical word is misspelled in the transcript of the bankruptcy court's oral ruling, it is clear that the bankruptcy court found that the extensions, renewals, and modifications were these three false representations. This interpretation is confirmed by language in another portion of its ruling, in which the bankruptcy court stated that Jacobson "obtained an extension, modification or renewal of . . . these loans . . . by false representations." In yet another portion of its ruling, the bankruptcy court stated that the "three [false] representations . . . were used to obtain and [sic] extension, modification or renewal of the loans in this case." (b) The bankruptcy court never explicitly stated that Miller "justifiably relied" on Jacobson's alleged false representations, which is the reliance standard in section 523(a)(2)(A) nondischargeability cases. (10) Appellant questions whether the bankruptcy court committed error in its calculation of damages awarded to Miller. (a) The bankruptcy court approved the amount found on Ormsby Exhibit 113. Exhibit 113 sets the amount of damages at $4,356,881.16. The post judgment interest rate is the federal interest rate and calculates damages through April 1, 2005. (b) Exhibit 113 sets out the amount owed as of the June 2001 Modification and adds interest at a rate of 8.5%. This figure appears to be based on the amount of the original principal $3,439,582.27 with interest added. (c) Then, beginning on October 1, 2001, the interest rate increases to 12% since no payments were made. Also, the spreadsheet includes credit for the $800,000 spent in acquiring the property after the foreclosure sale transferred the properties' deeds to Ormsby in August 2002. (d) In making this objection to the damages calculation, Plaintiff argues that all the notes payable to Miller were nonrecourse note and that Miller did not pay fair market value for the units at the foreclosure sale. (11) Appellant questions whether the bankruptcy court committed error in finding that the subsequent extending, modifying, or renewing did not purge any misrepresentations made by Jacobson. (a) The bankruptcy court held that the subsequent extensions, modifications, and renewal of the terms of the loans did not serve to clarify or elucidate any previous false representations made by Jacobson. (12) Appellant questions whether the bankruptcy court committed error in refusing to admit Defendant's Exhibits 38 and 43. (a) Defendant's Exhibit 38 is a "demand" letter from Ormsby to Jacobson, dated June 16, 2003, requesting immediate payment of the loaned money. The letter outlines potential courses of action Ormsby threatens to take to recover the money, and then, expands on the outcome and repercussions Ormsby perceives will result. Ormsby accuses Jacobson and Clair Phillips of fraud, violations of Utah's Elderly Abuse Statute, and illegal interstate wire transfers among other violations. Finally, Ormsby offers a settlement of an impending lawsuit for $2.5 million. (b) Appellee's counsel objected, under Rule Federal Rules of Evidence, to the letter's introduction because it constituted a settlement offer before the state court lawsuit was commenced. Ormsby's sole objection to the introduction of the letter was that it violated Rule 408. (Trial Transcript Vol. 2, page 445) The bankruptcy judge sustained Appellee's objection. (page 445-48). (c) Rule 408 is entitled "Compromise and Offers to Compromise," and states "Evidence of (1) furnishing or offering or promising to furnish, or (2) accepting or offering or promising to accept, a valuable consideration in compromising or attempting to compromise a claim which was disputed as to either validity or amount, is not admissible to prove liability for or invalidity of the claim or its amount. Evidence of conduct or statements made in compromise negotiations is likewise not admissible." (d) Defendant's Exhibit 43 cannot be located by the Court. (13) Appellant questions whether the bankruptcy court committed error in refusing to admit at trial Exhibits 18 and 19 of the Deposition of Clair Phillips. (a) The Deposition of Clair Phillips and all the exhibits attached to that deposition (except for deposition exhibits 18 and 19) were admitted as Plaintiff's Exhibit 111. (b) Exhibit 18 of Phillips' deposition is a summary of Miller's former investment interests, relating to investments not involved in this proceeding. The spreadsheet lists dates, name of venture, the loan amount invested into each project, the amount of interest paid on each loan, and totals for each. (c) The judge did not admit Exhibit 18 of Phillips' deposition into evidence because he held that it was irrelevant to the current proceeding. He stated that "it's not really relevant" and "it doesn't really relate to this-the transaction." (Trial Transcript Vol. 2, page 483). (d) Exhibit 19 of Phillips' deposition, also Defendant's Exhibit 38, is the demand letter sent by Ormsby which was not admitted. (Trial Transcript Vol. 2, page 483). (e) When Phillips' deposition was introduced into evidence as Plaintiff's Exhibit 111, the court ruled to exclude deposition exhibits 18 and 19. (Trial Transcript Vol. 2, page 485). (f) The judge said that despite there being no objections to Exhibit 111, the court had previously sustained an objection to the letter when it was introduced as Defendant's Exhibit 38. Therefore, the court ruled to exclude the letter again when it appeared as Exhibit 19 of Phillips' deposition.III. Legal Analysis
A. The Standard of Review.
The Court has appellate jurisdiction over this appeal pursuant to 28 U.S.C. § 158(a)(1). The district court reviews the bankruptcy court's findings of fact for clear error, giving due regard to the bankruptcyjudge's opportunity to judge the credibility of witnesses. General Electric Capital Corp. v. Acosta (In re Acosta), 406 F.3d 367, 369 (5th Cir. 2005); Total Minatome Corp. v. Jack/Wade Drilling, Inc. (In re Jack/Wade Drilling), 258 F.3d 385, 387 (5th Cir. 2001); See In re Young, 995 F.2d 547, 548 (5th Cir. 1993) (citing Bankr. Rule 8013). The bankruptcy court's factual findings are clearly erroneous only if, on the entire evidence, the Court is left with a "definite and firm conviction that a mistake has been made." Otto Candies, L.L.C. v. Nippon Kaiji Kyokai Corp., 346 F.3d 530, 533 (5th Cir. 2003); In re Allison, 960 F.2d 481, 483 (5th Cir. 1992). Where there are two permissible views of the evidence, the fact finder's choice between them cannot be clearly erroneous. Anderson v. Bessener City, 470 U.S. 564, 574 (1985). A trial court's findings in a section 523(a)(2)(A) cause of action are factual and are subject to a clearly erroneous standard of review. See Allstate Ins. Co. v. Foreman (In Re Foreman), 906 F.2d 123, 135 (5th Cir. 1990) (the clearly erroneous standard applies to review of the question of intent to defraud under section 523(a)(2)(A)).The Court reviews the bankruptcy court's conclusions of law de novo. In re Acosta, 406 F.3d at 369; In re Jack/Wade Drilling, 258 F.3d at 387. The admission of evidence is committed to the sound discretion of the bankruptcy court, subject to review for abuse of that discretion. See In re Charter Co., 125 B.R. 650, 654 (M.D. Fla. 1991) (citing Miller v. Universal City Studios, Inc., 650 F.2d 1365, 1374 (5th Cir. 1981)).
It is well established that an issue is not preserved for appeal when it was not presented to or considered by the bankruptcy court. See Matter of Quenzer, 19 F.3d 163, 164 (5th Cir. 1993); Matter of Gilchrist, 891 F.2d 559 (5th Cir. 1990). See also United States v. Williams, 156 B.R. 77, 81 (S.D. Ala. 1993) ("This court's function on appeal from a Bankruptcy Court's determination is to reverse, affirm, or modify only those issues that were presented to the trial judge."). For instance, in Bercier, the Fifth Circuit reversed the district court and held that the creditor should not have been allowed to raise a new exception to discharge, 11 U.S.C. § 523(a)(6), when the bankruptcy court had not considered that exception but instead found the debt nondischargeable under 11 U.S.C. § 523(a)(2). 934 F.2d 689, 693 (5th Cir. 1991).
B. Section 523(a)(2)(A) Dischargeability Exception.
Section 523(a)(2)(A) of the Bankruptcy Code provides that a debt will not be discharged in bankruptcy if it is "for money, property, services, or an extension, renewal, or refinancing of credit," to the extent that it was "obtained by false pretenses, a false representation, or actual fraud." 11 U.S.C. § 523(a)(2)(A). A creditor must prove its claim of nondischargeability by a preponderance of the evidence. In re Acosta, 406 F.3d at 369; In re Mercer, 246 F.3d 391, 403 (5th Cir. 2001).
The Fifth Circuit has established different standards for proving nondischargeability depending upon whether the exception from discharge is based upon "false pretenses and false representations" or "actual fraud." RecoverEdge L.P. v. Pentecost, 44 F.3d 1284, 1292 (5th Cir. 1995). For a debt to be nondischargeable for "false pretenses and false representations" under section 523(a)(2)(A), the creditor must show (1) a knowing and fraudulent falsehood, (2) describing past or current facts, (3) that was relied upon by the other party." RecoverEdge, 44 F.3d at 1292; In re Allison, 960 F.2d at 483; see Bank of La. v. Bercier (In re Bercier), 934 F.2d 689, 692 (5th Cir. 1991) ("[T]o be a false representation or false pretense under § 523(a)(2), the `false representations and false pretenses [must] encompass statements that falsely purport to depict current or past facts.'") A mere promise to be executed in the future is not sufficient to make a debt nondischargeable, even though there is no excuse for the subsequent breach. In re Bercier, 934 F.3d 692. The bankruptcy court found that Jacobson's debt is nondischargeable pursuant to 11 U.S.C. § 523(a)(2)(A) based on at least three false representations made by Jacobson to Miller.
In contrast, for a debt to be nondischargeable for "actual fraud" under section 523(a)(2)(A), the creditor must show (1) that the debtor made a representation; (2) that the debtor knew the representation was false; (3) that the representation was made with the intent to deceive the creditor; (4) that the creditor actually and justifiably relied on the representation; and (5) that the creditor sustained a loss as a proximate result of its reliance. In re Acosta, 406 F.3d at 369; RecoverEdge L.P. v. Pentecost, 44 F.3d at 1293. Debts that satisfy the third element, the scienter requirement, are debts obtained by frauds involving "moral turpitude or intentional wrong, and any misrepresentations must be knowingly and fraudulently made." In re Martin, 963 F.2d 809, 813 (5th Cir. 1992). An intent to deceive may be inferred from "reckless disregard for the truth or falsity of a statement combined with the sheer magnitude of the resultant misrepresentation." In re Norris, 70 F.3d 27, 30 n. 12 (5th Cir. 1995), citing In re Miller, 39 F.3d 301, 305 (11th Cir. 1994). Nevertheless, an honest belief, even if unreasonable, that a representation is true and that the speaker has information to justify it does not amount to an intent to deceive. Palmacci v. Umpierrez, 121 F.3d 781, 788 (1st Cir. 1997). Thus, a "dumb but honest" defendant does not have scienter. Id., citing 2 F. Harper, et al., Law of Torts § 7.3, at 393 (2d Ed. 1986).
C. The bankruptcy court's finding that Jacobson's debt is nondischargeable pursuant to the "fraudulent representation" exception of section 523(a)(2)(A) is not clearly erroneous. The finding that Jacobson's debt is nondischargeable based on the first and third false representations cited by the bankruptcy court is not clearly erroneous. (appellate issues 1 and 3). The finding that Jacobson's debt is nondischargeable based on the second false representation cited by the bankruptcy court is clearly erroneous; however, this error is harmless. (appellate issue 2).
1. First False Representation.
The bankruptcy court found that Jacobson made "at least three" false representations to Miller in order to obtain an extension, modification, or renewal of debt that was originally incurred non-fraudulently. The first false representation cited by the bankruptcy court was that "Jacobson represented that the job on renovating the condominium units would be finished in approximately four months with an additional loan of $400,000 to be made by the Bank of Dallas." In discussing this first false representation, the bankruptcy court found that the $400,000 "was used to pay various expenses of Mr. Jacobson and the condominium units. And it was used to finish the ten units that the Bank of Dallas had liens on but very little, if any, work was done on the remaining 23 units that Mr. Miller had liens on, whereas, the representation had been made that the funds would be used to finish all the units."
The Court finds that the bankruptcy court's holding that this first false representation made Jacobson's debt nondischargeable pursuant to 11 U.S.C. § 523(a)(2)(A) is not clearly erroneous. The record indicates that Jacobson represented to Miller that entering into the Letter Agreement and the Modification Agreement to allow Jacobson to obtain the Bank Dallas loan would constitute the last funds needed to fully complete the project, including the twenty-three units in which Miller was to obtain new liens. Trans. pg. 620, line 24 through pg. 621, line 22; pg. 658, lines 2 through 7; pg. 664, line 5 through line 24; pg. 665, line 17 through line 25; pg. 708, line 6 through line 9; pgs. 757, line 5 through line 8; pg. 765, line 18 through line 24. Jacobson even testified that the primary purpose for the Bank Dallas loan was to complete the interior and renovation on all the condominium units. Trans., pg. 664, line 8 through line 14. Jacobson also testified that he told Phillips that the $400,000 Bank Dallas loan would be the last money needed to complete the entire project. Trans., pg. 665, line 17 through line 21. Such representations by Jacobson to Miller were additionally corroborated by similar representations made by Jacobson to Ormsby in January 2001. Trans., pg. 154, line 6 through pg. 155, line 7; pg. 166, line 22 through pg. 167, line 5; pg. 169, line 20 through 170, line 17.
Notwithstanding Jacobson's express representations to Miller, no measurable work was done on the twenty-three units Miller retained as collateral pursuant to the terms of the Modification Agreement from the date thereof through the date Ormsby foreclosed on twenty-three condominium units over one and one-half years later in August 2002. Trans., pg. 167, line 21 through 168, line 5; pg. 623, lines 15-22; pg. 209, line 17 through pg. 210, line 5; pg. 679, line 6 through line 14. Ormsby Ex. P-63 was provided to Miller on or about November 21, 2000 in contemplation of negotiations and in connection with the Letter Agreement and the Modification Agreement included in Ormsby Ex. P-66. Trans. pg. 650, lines 10-15. Directly contrary to Jacobson's admitted representations to Miller, Phillips and Ormsby, the Bank Dallas loan was not used to complete the entire project. The evidence clearly shows that the proceeds of the Bank Dallas loan were immediately used by Jacobson to pay existing debts relating to the project and/or were paid to other entities owned and controlled by Jacobson (i.e., the sum of $17,318.72 was paid to Dallas CasaNueva Apartments, Inc. — an entity wholly owned by Jacobson). Ormsby Ex. P-69; Trans., pg. 676, line 23 through pg. 677, line 13. Dallas Casa Nueva Apartments, Inc. did not perform any interior work at the Condominiums. Trans., pg. 677, line 8 through line 13.
At the time Jacobson provided Exhibit 63 to Miller on November 21, 2000 and made representations to both Miller and Phillips that the $400,000 Bank Dallas loan would be sufficient to complete the project, Jacobson knew how the funds would be distributed. The settlement statement from Republic Title Company (Ormsby Ex. P-69) dated December 7, 2000 shows the immediate disbursal of the entire loan proceeds to pay existing debts or other payments. Jacobson knew that there would be no Bank Dallas loan proceeds remaining to finish completion of the remaining twenty-three units held as collateral by Miller. Jacobson personally directed where the funds from the Bank Dallas loan would be spent. Trans, pg. 824, line 7 through pg. 825, line 7. The record clearly shows that Jacobson performed no material work on the remaining twenty-three units held as collateral by Miller after the date of the Modification Agreement. Therefore, Jacobson's unequivocal knowledge and direction of where the Bank Dallas loan proceeds would be used, including paying old debts, indicate that his representations to Miller were false.
Jacobson represented to Miller that the Bank Dallas loan would be sufficient to complete the entire project. In contrast, the Bank Dallas loan proceeds were immediately spent to pay existing debts or other obligations, which left no remaining funds for completion of the project as represented by Jacobson to Miller. These representations by Jacobson were of past or current facts. It is also important to note that Ormsby Exhibit P-63 did not disclose to Miller Jacobson's intention to use a portion of the loan proceeds to pay purported debts owing to other lienholders that did not perform interior or exterior services on the project (i.e., Jerry Wheat in the amount of $10,000.00 and Diane Russell in the amount of $8,600.53) or the payment to Dallas Casa Nueva Apartments, Inc. Trans., pg. 676, line 11 through line 13; pg. 677, line 19 through line 24. Jacobson acknowledged at trial that he was in a much better position than Miller to have knowledge concerning the status of the exterior renovations and the HOA. Trans., pg. 743, line 21 through pg. 744, line 1. As additional evidence that Jacobson knew that his representations to Miller were false, Jacobson forwarded certain correspondence dated August 27, 2001 requesting that Miller loan the additional sum of $470,161.00 to complete the project. Ormsby Ex. P-84. Jacobson sent separate correspondence dated December 18, 2001 stating that Jacobson needed the sum of $372,111.00 to complete the project. Ormsby Ex. P-87.
Notwithstanding Jacobson's representations to Miller to induce to him to enter into the Letter Agreement and Modification Agreement, Jacobson thereafter continued asking Miller for more funds to complete the project. Jacobson thereafter obtained a loan from MGM Holdings, Inc. in the amount of $1,100,000 secured by certain of the condominium units formerly held as collateral by Miller in January 2002. Ormsby Ex. P-91, P-92 and P-93; Trans., pg. 765, line 18 through line 24. Although Jacobson received this additional significant loan in January 2002, he still did not complete the twenty-three units which constituted the collateral of Miller. Instead, Jacobson paid himself $100,000. Ormsby Ex. P-92; Trans., pg. 69, line 20 through 23; Ormsby Ex. P-104.
Jacobson argues in his brief that his execution of a guaranty on the Bank Dallas loan is proof that Jacobson desired the project to succeed and he believed his representations to be truthful. First, such arguments are not supported by the record in this appeal and were not found persuasive factually by the Bankruptcy Court. Additionally, as evidence to the contrary, it appears that Jacobson took various steps, including obtaining the MGM loan, to make sure that the Bank Dallas loan was paid in full to avoid any potential personal liability to himself.
2. Second False Representation.
The bankruptcy court found that the second false representation consisted of Jacobson's statement that it was necessary for Miller to release his first liens on ten units so that work could be finished on all the units with the proceeds of the $400,000 Bank Dallas loan. The bankruptcy court states, "It was not necessary to release his units. Mr. Miller never should have done that."
Jacobson represented to Miller in the Letter Agreement (Ormsby Ex. P-64) that Bank Dallas required only six of the condominium units as collateral. Jacobson acknowledged that certain mechanics liens attached to Miller's collateral due to the release of lien set forth in the Modification Agreement. Trans., pg. 652, line 14 through line 19. Jacobson additionally acknowledged that he produced no documents indicating that Miller was advised of such mechanics liens. Trans., pg. 652, line 20 through line 22. In other words, Jacobson knew that Miller's global release of his lien would subject Miller's collateral to new lien claimants, but did not advise Miller of such facts.
The Court finds that the bankruptcy court clearly erred by relying on this second false representation in finding the debt nondischargeable under section 523(a)(2)(A). The bankruptcy court's statement that Miller "should never have done that [release his original liens on all thirty-three units]" is a retrospective judgment or opinion concerning the unfavorable terms of the Modification Agreement entered into between Jacobson and Miller. It is true that Miller's release of his original liens subjected his collateral to new claims; however, Jacobson never represented to Miller that his collateral would not be subject to new claims. Jacobson represented to Miller that Miller would have to release his original liens in order for Jacobson to obtain the $400,000 Bank Dallas loan. This statement did not falsely purport to depict current or past facts. The evidence indicates that Bank Dallas did in fact require Miller to release his original liens before it would loan the $400,000 to Jacobson. Although Jacobson might have been able to obtain a loan from another source that did not require a first lien on its collateral, that possibility is irrelevant to whether Jacobson made a statement to Miller regarding the Bank Dallas loan that falsely purported to depict current or past facts. Jacobson made a representation concerning the terms of the $400,000 Bank Dallas loan, not the more favorable terms of some other hypothetical loan.
The Court finds that Jacobson had no duty to disclose the fact that Miller's collateral would be subject to new claims after Miller released his original liens; Jacobson's omission in this regard cannot be construed as a false representation. The relationship between a creditor and guarantor is not a confidential or fiduciary relationship that gives rise to a duty to disclose. See Cole v. Hall, 864 S.W.2d 563, 568 (Tex.App.-Dallas 1993, writ dism'd w.o.j.) (citing Federal Deposit Ins. Corp. v. Coleman, 795 S.W.2d 706, 709 (Tex. 1990) (the relationship between creditor and guarantor is not special relationship importing duty of good faith)).
The evidence indicates that Miller's release of his original liens was a bad business decision because it subjected his collateral to new claims and because Jacobson might have been able to get a different loan without the need to release his original liens. However, a retrospective judgment or opinion that the terms of a contract are unfavorable does not mean that the debtor engaged in fraud when he asked the creditor to accept those unfavorable terms. The Court finds that Jacobson fraudulently induced Miller into making this Modification Agreement by stating that the $400,000 Bank Dallas loan would complete the project (first false representation) and that the HOA was about to initiate foreclosure proceedings against Miller's collateral (third false representation). Thus, although this second false representation would not support a discharge under section 523(a)(2)(A) because it is a retrospective judgment or opinion concerning the unfavorable terms of the Modification Agreement, the Court is still convinced that the first and third false representations (which induced Miller to sign the Modification Agreement) justify the bankruptcy court's nondischargeability finding. Accordingly, the bankruptcy court's error regarding the second false representation is harmless.
3. Third False Representation.
The bankruptcy court found that the third false representation consisted of Jacobson's representation that the HOA was about to foreclose on the condominium unit owners who had not paid their assessments. The Court agrees with the bankruptcy court that this statement "was not true."
In Ormsby Exhibit P-65, Jacobson represented to Miller, in effect, that the board of directors of the HOA had already voted and put into place procedures whereby any owner not making payment of past HOA assessments by December 8, 2000 would have foreclosure proceedings instituted against them on December 11, 2000. At all relevant times, Jacobson was on the board of directors of the HOA and participated in the board of directors meeting evidenced by the resolution included in Ormsby Ex. P-62. Trans. pg. 220, line 23 through line 25; pg. 233, line 24 through pg. 234, line 1.
Ken Morris was familiar with the condominium project and performed accounting and other services for the HOA from approximately 1998 through 2004. Trans., pg. 192, lines 16-19; pg. 194, lines 14-24. Morris believed that he attended every board of directors' meeting of the HOA during the relevant time period. Trans., pg. 195, lines 12-14 and 22-25. It was Morris' perception that Jacobson controlled the board of directors of the HOA. Trans., pg. 221, lines 1-1 7. Morris testified that he was not aware of any board resolutions where the HOA instructed the foreclosure of any units in the entire project. Trans., pg. 222, lines 5-1 7. Morris prepared the board of directors resolution in Ormsby Exhibit P-62. Trans., pg. 221, line 18 through line 19. No board of directors resolution of the HOA, or other evidence, was admitted at trial that authorized the initiation of foreclosure proceedings by the HOA as represented by Jacobson to Miller in Ormsby Exhibit P-65. Jacobson even testified at trial that he has no knowledge that the HOA ever foreclosed on any owner. Trans., pg. 655, line 22 through line 25. Further, Morris's testimony unequivocally supports the Bankruptcy Court's findings in this regard. Specifically, Morris testified that (1) there was never a board resolution to start foreclosure proceedings; (2) there were never instructions by the board to commence foreclosure proceedings; (3) Jacobson's statements in Ormsby Exhibit P-65 that the board of directors "has already voted" is not accurate; (4) to his knowledge, the board of directors had not voted to commence foreclosure proceedings; and (5) Jacobson's statements in Ormsby Exhibit P-65 that "the officers of the association have been instructed to retain attorneys on Monday to proceed immediately with such foreclosures" is not accurate. Trans., pg. 225, lines 4-25.
Jacobson attempts to make the point that Ormsby Exhibit P-62 could be read to indicate that the board of directors refused to give any additional extensions for the payment of special assessments. Even if that fact were true, that does not mean (and there is no evidence in the record) that the board of directors of the HOA had either agreed to or resolved to promptly commence foreclosure proceedings. In fact, Morris's testimony was exactly to the opposite, as found by the bankruptcy court. Ormsby Exhibit P-62 (the Board of Directors Resolution) does not authorize the foreclosure of any units. In fact, the resolution contemplates further meetings by the board of directors on December 11, 2000. In sum, as found by the Bankruptcy Court, Jacobson made false representations to Miller in Ormsby Exhibit P-65 to induce him to enter into the Modification Agreement. Factual findings in this regard made by the Bankruptcy Court were supported by the testimony of Morris, an individual that was not a party to this litigation, and other evidence. These representations by Jacobson were of past or current facts. Alternatively, such representations were made by Jacobson with reckless indifference for the truth.
Jacobson attempts to argue next that, in effect, there is no evidence in the record to indicate that Miller had Jacobson's letter dated December 8, 2000 (Ormsby Ex. P-65) in his possession when Miller executed the Modification Agreement on December 8, 2000. Findings made by the Bankruptcy Court in this regard are not clearly erroneous. First, Jacobson testified at trial that his December 8, 2000 demand letter (Ormsby Ex. P-65) was sent to Miller "on the eve of the signing of Document No. 66 [the Modification Agreement]." Trans., pg. 643, lines 4-8. Jacobson also testified, in effect, that his lawyer drafted the letter at his request because Miller told Jacobson he did not want to do the deal and enter into the Modification Agreement. Trans. pg. 644, line 8 through 24. Based upon Jacobson's testimony, the statements made in the December 8, 2000 demand letter, and the fact that the December 8 correspondence could have been faxed to Miller due to Jacobson's rush to close the Bank Dallas loan, the Bankruptcy Court's factual findings on this issue are not clearly erroneous. In fact, the Bankruptcy Court's findings are supported by the record. The record clearly shows that after signing the Letter Agreement, Miller did not want to sign the proposed Modification Agreement. Miller ultimately executed the Modification Agreement on the same date of the demand letter included in Ormsby Exhibit P-65.
Jacobson additionally argues, in effect, that since the Modification Agreement was merely a formal memorialization of the Letter Agreement included in Ormsby Exhibit P-64, any purported misrepresentations in the December 8, 2000 letter identified as Ormsby Ex. P-65 are irrelevant. First, the Modification Agreement is much more than a mere formal memorialization of the terms of the Letter Agreement. At Jacobson's direct request, Jacobson's attorney included language in the form of Modification Agreement which purported to provide a release to Jacobson. Trans., pg. 628, line 23 through pg. 629, line 11. Such release language was not included in the Letter Agreement. The Letter Agreement also did not provide for a release of Miller's liens on all thirty-three units, unlike the provisions of the Modification Agreement. The form of Modification Agreement, including the purported release, was sent to Miller while Miller lived in a nursing home and was not represented by counsel. Trans., pg. 629, lines 15-23. The Letter Agreement is merely one page in length, excluding exhibits. The Modification Agreement is seven pages in length, including an additional twenty-six pages in exhibits. Therefore, and as found by the Bankruptcy Court, any misrepresentations made by Jacobson to Miller prior to execution of the Modification Agreement are relevant and actionable. The Court finds that the bankruptcy court's holding that this third false representation made Jacobson's debt nondischargeable pursuant to 11 U.S.C. § 523(a)(2)(A) is not clearly erroneous.
D. The bankruptcy court's calculation of damages is not clearly erroneous. (appellate issue 10).
1. Jacobson has personal liability on the full amount of the debt.
Although Jacobson used the three false representations to obtain an extension, modification, or renewal of the loan-as opposed to the original loan proceeds — he still has personal liability on the full amount of the debt. In Whitney National Bank v. Ledet (In re Ledet), the district court held that "because advances on both the initial line of credit and the subsequent refinancing were procured through false representations, the full amount of the debt is non-dischargeable." No. 99-3719, 2000 U.S. Dist. LEXIS 3334, *17 (E.D. La. March 14, 2000). In Ledet, the Appellant claimed that a debt is dischargeable under section 523(a)(2) only "to the extent" it was obtained through false pretenses. Id. at *16-17. The Ledet court rejected this argument because the Supreme Court held that the phrase "to the extent obtained by" in section 523(a)(2)(A) modifies "money, property, services, or . . . credit," not "any debt." See Cohen v. Cruz, 523 U.S. 213, 218 (1998). Accordingly, "once it is established that specific money or property has been obtained by fraud . . . `any debt' arising therefrom is excepted from discharge." Id.; see also In re Gerlach, 897 F.2d 1048, 1051 (10th Cir. 1990) (plain language of 523(a)(2)(A) suggests that dischargeability is an "all or nothing" proposition) (quoting Birmingham Trust Nat'l Bank v. Case, 755 F.2d 1474, 1477 (11th Cir. 1985)). Gerlach held that "not only is a new debt procured through fraud excepted from discharge, but old debt which is extended, renewed, or refinanced through fraud is also nondischargeable." 897 F.2d at 1050; see Norris v. First National Bank in Luling (Matter of Norris), 70 F.3d 27, 29 n. 6 (5th Cir. 1995) (entire note excepted from discharge when renewal obtained by false documentation). Based on Ledet and Norris, the Court finds that the entire debt owed by Jacobson to Miller is nondischargeable pursuant to section 523(a)(2)(A).
The Court acknowledges that Muleshoe State Bank v. Black, No. CA-5-87-104, 1987 U.S. Dist. LEXIS 8225, **2-5 (E.D. Tex. July 13, 1987) holds to the contrary. The Court believes that Norris overruled Muleshoe.
2. Jacobson has personal liability on full amount of the debt even though the debt consists mostly of nonrecourse notes.
Although most of the debt owing to Miller consisted of nonrecourse notes, Jacobson still has personal liability on the full amount of the debt. Jacobson asserted in his brief that each and every promissory note executed by Jacobson or FSC and payable to Miller were non-recourse notes; therefore, Miller's only recourse in the event of default would be to foreclose on the twenty-three condominium units held as collateral by him. First, the Court finds that at least two of the notes omitted any nonrecourse language. See Ormsby Ex. P-54 and P-56. Second, the Court finds that Jacobson is still liable for the entire debt even thought it consists mostly of nonrecourse notes.
The facts of this case are strikingly similar to those in Seaborne v. City Federal Savings Bank. 106 B.R. 711, 715 (Bankr. M.D. Fl. 1989). In Seaborne, the debtor, Arthur Seaborne, was the general partner of North Village Professional Center Limited, L.P. ("North Village"). Id. at 712. Seaborne sought a loan from City Federal Saving Bank ("City Federal") in the amount of $3,150,000 for the purpose of the North Professional Center, an office building located in Tampa, Florida. Id. North Village was purchasing the building, and Seaborne was arranging the transaction on behalf of North Village. Id. Seaborne admitted giving City Federal false closing documents while trying to obtain the loan. Id. at 713. He filed a voluntary petition for bankruptcy pursuant to 11 U.S.C. Chapter 7. Id. City Federal brought an action in bankruptcy court to except any deficiency debt of Seaborne from discharge pursuant to 11 U.S.C. § 523(a)(2)(A). Id. After the bankruptcy court found that City Federal had established the elements of section 523(a)(2)(A), it turned to the following question: "whether Seaborne is personally liable on the deficiency debt even though he is not personally liable on North Village's promissory note and mortgage to City Federal because it is nonrecourse indebtedness." Id. at 715. Seaborne claimed that he was not personally liable on the deficiency debt, even though he was the general partner of the limited partnership that incurred the debt, because the debt was nonrecourse. In rejecting this argument, the bankruptcy court held that "a court will hold a shareholder, officer, or director of a corporate entity personally liable for a tort, including fraud, in which he himself is involved. Id. (citing McMillan v. Firestone (In re Firestone), 26 B.R. 706, 714 (Bankr. S.D. Fl. 1982); Lobato v. Pay Less Drug Stores, Inc., 261 F.2d 406 (10th Cir. 1958)). The bankruptcy court then stated the following standard for personal liability of a corporate officer:
It is the general rule that if an officer or agent of a corporation directs or participates actively in the commission of a tortious act or an act from which a tort necessarily follows or may reasonably be expected to follow, he is personally liable to a third person for injuries proximately resulting therefrom. But merely being an officer or agent of a corporation does not render one personally liable for a tortious act of a corporation. Specific direction or sanction of, or active participation or cooperation in, a positively wrongful act of commission or omission which operates to the injury or prejudice of the complaining party is necessary to generate individual liability in damages of an officer or agent of a corporation for the tort of the corporation.Lobato, 261 F.2d at 408-409; Firestone, 26 B.R. at 714. The bankruptcy court found that Seaborne was the sole representative acting of behalf of North Village, that he actively sought the loan from the creditor on behalf of the defaulting limited partnership, and that he actively participated in committing fraud by knowingly delivering false closing documents to City Federal. Id. at 715. Therefore, his fraudulent actions justify holding him personally liable on the deficiency debt to City Federal even though the debt was nonrecourse. Id.
Jacobson was the president, sole officer, director, and owner of 100% of the outstanding shares of FSC stock. Jacobson made false representations to Miller concerning the use of the $400,000 Bank Dallas loan proceeds (first false representation) and the imminence of foreclosure actions by the HOA against Miller's collateral (third false representation). The Court finds that Jacobson participated actively in the commission of a tortious act against Miller. Jacobson is personally liable on the deficiency of the debt after giving Jacobson credit for the $800,000 in proceeds from the foreclosure sale. Jacobson is not shielded from personal liability by the fact that the debt is nonrecourse or the fact that the debt was incurred by Jacobson's corporation, FSC.
The Fifth Circuit has recognized but not addressed the issue of whether "a non-recourse debt obtained by fraud is nondischargeable" pursuant to 11 U.S.C. 523(a)(2)(A). Martin v. First National Bank LaGrange (Matter of Martin), 963 F.2d 809, 815 (5th Cir. 1992). The Martin court refused to address the issue because it affirmed the district court's finding that the debt was dischargeable. Id. This Court could not find any other Fifth Circuit precedent on this issue.
In calculating the total amount of the judgment, the bankruptcy court relied on Ormsby Ex. P-113. The spreadsheet clearly shows credit to Jacobson for the $800,000 in proceeds from the foreclosure sale. Jacobson strenuously objects to the bankruptcy court's calculation of damages. Jacobson argues that "[i]t is unjust enrichment to grant the Plaintiff a judgment for $4,356,881.16 and also allow him to keep the property [obtained by Ormsby at the foreclosure sale]. . . . At any time Miller could have foreclosed on his liens. This was his sole remedy [because the debt was nonrecourse]." The Court has already found that nonrecourse debt obtained by false representations is nondischargeable pursuant to 11 U.S.C. § 523(a)(2)(A). Thus, Jacobson is personally liable for the deficiency judgment on the debt after he is given credit for the $800,000 paid at the foreclosure sale by the highest bidder-Ormsby. The amount of the deficiency claim, if any, of a foreclosing mortgagee is calculated by subtracting the foreclosure sale price (or credit bid) from the amount owed under the note. Home Hearth Plano Parkway, L.P. v. LaSalle Bank, N.A., 320 B.R. 596 (Bankr. N.D. Tex. 2004) (citing Provident Nat. Assur. Co. v. Stephens, 910 S.W.2d 926, 39 Tex. Sup. Ct. J. 54 (Tex. 1995). Miller is entitled to full contract damages in this case, which consists of the value of the outstanding debt offset by the sale price of the collateral at the foreclosure sale.
It would be strange to think that a debtor could fraudulently induce a creditor into entering a contract (i.e. a loan agreement) and then the debtor could rely on nonrecourse language in that contract to avoid personal liability on the debt.
Jacobson takes exception to the fact that Miller still owns and rents the foreclosed upon units and the fact that Jacobson only received a $800,000 offset from the foreclosure. Miller's subsequent use of the condominiums units after his purchase is irrelevant because Miller presumably paid fair market value for the units at the foreclosure sale and Jacobson received an offset for this amount. Although Miller's subsequent use of the units is not relevant to the damages calculation, the question of whether Miller's payment of $800,000 actually represented the fair market value of the twenty-three units might be relevant.
The Court will liberally construe Jacobson's "unjust enrichment" claim as a claim that the bankruptcy court wrongfully computed the offset that Jacobson was entitled to receive from the foreclosure sale. In 1991, the Texas Legislature adopted TEX. PROP. CODE § 51.003 ("Section 51.003"), the "Deficiency Judgment" statute. Section 51.003 sets forth the requirements for obtaining a deficiency judgment following a non-judicial foreclosure sale. Unlike the "Anti-Deficiency" statutes of other jurisdictions, Texas's deficiency judgment statute does not prohibit a lender from obtaining a deficiency judgment. Instead, the statute provides a right of offset as follows:
The Court will liberally construe Jacobson's "unjust enrichment" claim as a "wrongful calculation of offset" claim because Jacobson alleges that the units were worth more than Jacobson paid for them at the foreclosure sale. The Court notes that Jacobson does not cite to any case law or statutory authority in making this argument. Jacobson makes generalized assertions that the court's calculation of damages is "illogical" and "does not make sense;" however, Jacobson failed to argue that he was entitled to statutory offset pursuant to TEX. PROP. CODE § 51.003(b). In the future, Jacobson's counsel should cite to authority.
51.003. Deficiency Judgment
(a) If the price at which real property is sold at a foreclosure sale under Section 51.002 [non-judicial foreclosure] is less than the balance of the indebtedness secured by the real property, resulting in a deficiency, any action brought to recover the deficiency must be brought within two years of the foreclosure sale and is governed by this section.
(b) Any person against whom such recovery is sought by motion may request that the court in which the action is pending determine the fair market value of the real property as of the date of the foreclosure sale. . . .
(c) If the court determines that the fair market value of the real property is greater than the sale price of the real property at the foreclosure sale, the persons against whom recovery of the deficiency is sought are entitled to an offset against the deficiency in the amount by which the fair market value, less the amount of any claim, indebtedness, or obligation of any kind that is secured by a lien or encumbrance on the real property that was not extinguished by the foreclosure, exceeds the sale price. . . .
During the bankruptcy adversary proceeding, Jacobson failed to present a claim for statutory offset pursuant to section 51.003(b). Since this claim was not raised by Jacobson or addressed by the bankruptcy court, it was waived. It is well established that an issue is not preserved for appeal when it was not presented to or considered by the bankruptcy court. See Matter of Quenzer, 19 F.3d 163, 164 (5th Cir. 1993); Matter of Gilchrist, 891 F.2d 559 (5th Cir. 1990). See also United States v. Williams, 156 B.R. 77, 81 (S.D. Ala. 1993) ("This court's function on appeal from a Bankruptcy Court's determination is to reverse, affirm, or modify only those issues that were presented to the trial judge."). If no party requests a determination of fair market value pursuant to section 51.003(b), the sale price at the foreclosure sale shall be used to compute the deficiency. Lairsen v. Slutzky, 80 S.W.3d 121, 127 (Tex.App.-Austin 2002, pet. denied) (citing TEX. PROP. CODE § 51.003(c)). Jacobson received an offset of $800,000, which was the sale price of the collateral at the foreclosure sale, and Jacobson failed to object to any other specific entries contained in the damages spreadsheet (Ormsby Ex. P-113). The bankruptcy court's calculation of damages is not clearly erroneous.
3. Alternatively, Jacobson is barred from asserting that he has no personal liability on the debt based on the doctrine of judicial admissions.
Jacobson was the sole officer, sole director, and sole shareholder of FSC. Trans. pg. 700, lines 14-19. Jacobson's Chapter 7 bankruptcy petition expressly asserts that he formerly did business as ("fdba") FSC, and various other enumerated entities. Ormsby Ex. 118. Additionally, the bankruptcy schedules signed by Jacobson under penalty of perjury and filed in his bankruptcy case and entitled "Schedule F. Creditor's Holding Unsecured Non-Priority Claims" schedule his indebtedness owing to Miller as an obligation of him personally. Ormsby Ex. 118. Jacobson's bankruptcy schedules also do not list the indebtedness owing to Miller as contingent, unliquidated, or disputed. The "Amended Schedule F. Creditor's Holding Unsecured Non — Priority Claims" filed by Jacobson in his bankruptcy case similarly schedule Miller as a creditor of Jacobson individually. Such claim is again not scheduled as contingent, unliquidated, or disputed. Ormsby Ex. 119. Jacobson's bankruptcy schedules also do not disclose any claims or causes of action against Miller or Ormsby. Consistent with Jacobson's other disclosures in his bankruptcy schedules, his response to question 18 on Jacobson's statement of financial affairs filed with the Bankruptcy Court on or about March 30, 2004, Jacobson lists "none" for any corporations in which he was an officer, director, etc., in the prior six (6) years. Ormsby Ex. P-118. In other words, Jacobson was treating FSC as himself or merely a "d/b/a."
"[S]tatements in bankruptcy schedules are executed under penalty of perjury and when offered against a debtor are eligible for treatment as judicial admissions." Larson v. Groos Bank, NA., 204 B.R. 500, 502 (W.D. Tex. 1996), citing, In re Musgrove, 187 B.R. 808, 812 (Bankr. N.D. Ga. 1995) (holding entry in debtor's schedules, standing alone, constitutes a judicial admission). In Larson, the debtor's statement of "none" in his bankruptcy schedules in response to a question regarding whether any contingent and unliquidated claims existed judicially admitted that he placed no value on the lawsuit. See also In re Kaskel, 269 B.R. 709, 715 (Bankr. Idaho 2001); In re Bohrer, 266 B.R. 200, 201 (Bankr. N.D. Cal. 2001). A judicial admission is binding on the party making it and a judicial admission may not be explained or controverted. See Martinez v. Ball' h Louisiana, Inc., 244 F.3d 474, 476-77 (5th Cir. 2001). Additionally, Jacobson even testified that he "told Mr. Miller that he [Miller] would be paid in full [and Jacobson] made assurances [to Miller] personally that he would . . . be paid." Trans. pg. 541, lines 12-1 6. The Court finds that Jacobson is barred from asserting that he has no personal liability on the debt based on the doctrine of judicial admissions.
4. Alternatively, Jacobson waived the issues of personal liability and calculation of damages by failing to address them in the bankruptcy court.
It is well established that an issue is not preserved for appeal when it was not presented to or considered by the bankruptcy court. See Matter of Quenzer, 19 F.3d 163, 164 (5th Cir. 1993). Jacobson did not contest his personal liability on the debt in the bankruptcy court, nor did he contest the amount of the debt that he owed. During the final hearing, when the bankruptcy court stated that it would render judgment for the amount contained in Ormsby Ex. P-113, the bankruptcy court then asked Jacobson's counsel whether he had any questions on that issue. Mr. Tutt, Jacobson's counsel, stated, "No, Your Honor." During the hearing, Ormsby testified that Jacobson has never disputed the amount owed. Trans., pg. 341, line 20 through pg. 342, line 5. Jacobson waived the issues of personal liability and calculation of damages by failing to address them in the bankruptcy court.
E. The bankruptcy court did not abuse its discretion by not admitting (1) Defendant's Exhibit 38, (2) Defendant's Exhibit 43, (3) Exhibit 18 of the Deposition of Clair Phillips, and (4) Exhibit 19 of the Deposition of Chair Phillips. (appellate issues 12 and 13).
The admission of evidence is committed to the sound discretion of the bankruptcy court, subject to review for abuse of that discretion. See In re Charter Co., 125 B.R. 650, 654 (M.D. Fla. 1991) (citing Miller v. Universal City Studios, Inc., 650 F.2d 1365, 1374 (5th Cir. 1981)). The Court refused to admit Defendant's Exhibit 38, the demand letter from Ormsby to Jacobson, on the ground that its admission would violate Fed.R.Evid. 408. Under Rule 408, evidence of conduct or statements made in compromise negotiations is not admissible. This letter includes a sum certain settlement demand. The bankruptcy court did not abuse its discretion in refusing to admit Defendant's Exhibit 38.
The bankruptcy court refused to admit Exhibit 18 of Phillip's Deposition on the ground that it was irrelevant. This spreadsheet lists the financial details of prior Jacobson investments not involved in this proceeding. The bankruptcy court did not abuse its discretion in refusing to admit Exhibit 18 of Phillip's Deposition. The bankruptcy court also refused to admit Exhibit 19 of Phillip's Deposition. This exhibit is the same as Defendant's Exhibit 38, which was not admitted because its admission would violate Rule 408. As stated above, this ruling was not an abuse of discretion.
The Court could not locate Defendant's Exhibit 43 in the record, and Jacobson failed to describe the content of that exhibit and failed to cite to any authority or argument related to its improper exclusion. The Court finds that Jacobson waived his objection to the bankruptcy court's refusal to allow Defendant's exhibit 43 into evidence. See Vaughn v. Mobile Oil Exploration Producing Southeast, Inc., 891 F.2d 1195, 1198 (5th Cir. 1990) (stating that "[a]mple authority exists that trial courts will not rule on claims-buried in the pleadings-that go unpressed before the [C]ourt."); see Kelly v. Foti, 77 F.3d 819, 823 (5th Cir. 1996) (stating that "[a] party must press, not merely intimate, an argument, in order to preserve it for appeal.")
F. The bankruptcy court's implicit finding of justifiable reliance is not clearly erroneous. (appellate issue 9).
Section 523(a)(2)(A) requires justifiable, but not reasonable reliance. Field v. Mans, 516 U.S. 59, 74 (1995). Justifiable reliance is a less exacting standard that reasonable reliance. Id. at 77. The inquiry will thus focus on whether the falsity of the representation was or should have been readily apparent to the individual to whom it was made. 4 Collier on Bankruptcy (15th Ed.) ¶ 523.08[1][b]; see Fields, 516 U.S. at 74 (stating that "[a]s for the reasonableness of reliance, our reading of the Act does not leave reasonableness irrelevant, for the greater the distance between the reliance claimed and the limits of the reasonable, the greater the doubt about reliance in fact.") Reliance on a representation is justifiable if its falsity is not ascertainable upon a cursory examination or investigation. See Field, 516 U.S. at 71; accord Sanford Inst. For Savings v. Gallo, 156 F.3d 71, 74 (1st Cir. 1998). The Court finds that the bankruptcy court made an implicit finding of justifiable reliance, and this finding was not clearly erroneous.
Jacobson attempts to cast Miller as an astute person and aware of his financial dealings throughout the men's business dealings including dealings relating to the subject condominium project. Miller was certainly a successful businessman in his earlier years. However, the evidence shows that Miller resided in a nursing home throughout the relevant time period relating to the condominium units and had Parkinson's disease. Trans., pg. 74, line 23 through pg. 75, line 2; pg. 75, line 14 through pg. 77, line 5; pg. 271, line 16 through 23. Jacobson even admitted that Miller could not attend to the condominium units. Trans., pg. 619, lines 16-18.
The Court's findings also support the reliance requirement of 11 U.S.C. $523(a)(2), even if the reliance element is determined to be only implicit in the Bankruptcy Court's findings. "Even if a trial judge fails to make a specific finding on a particular fact, the reviewing court may assume that the court impliedly made a finding consistent with its general holding so long as the implied finding is supported by the evidence." Kona Technology Corp. v, Southern Pacific Transp. Co., 225 F.3d 595, 613 (5th Cir. 2000), citing Texas Mortgage Svcs. Corp. v. Guadalupe Sav. And Loan Assn. 761 F.2d 1068, 1075 n. 12 (5th Cir. 1985).
Miller never did see the condominium units. Trans., pg. 603, line 17 through 22. Jacobson additionally testified as follows.
Q. And because he could not travel to Texas, isn't it the case that he would have no choice but to rely on, at that time, and in fact did what you-all were telling him?
A. That's true. . . . So he was capable of doing it, but he depended on myself and Clair and Brett to handle the work.
Trans., pg. 604, line 2 through line 11. The bankruptcy court stated that subsequent transactions between Miller and Jacobson were solely "extensions, renewals, and modifications of the loans bases [sic] upon these representations." Although the critical word is misspelled in the transcript of the bankruptcy court's oral ruling, it is clear that the bankruptcy court found that the extensions, renewals, and modifications were based upon these three false representations. This interpretation is confirmed by language in another portion of its ruling, in which the bankruptcy court stated that Jacobson "obtained an extension, modification or renewal of . . . these loans . . . by false representations." In yet another portion of its ruling, the bankruptcy court stated that the "three [false] representations . . . were used to obtain and [sic] extension, modification or renewal of the loans in this case." The Court finds that Miller justifiably relied on the false representations.
G. The bankruptcy court's erroneous factual finding that Ormsby sold his foreclosed units at a large loss is harmless error. (appellate issue 8).
The Court finds that the bankruptcy court made an erroneous factual finding when it stated that Ormsby sold his foreclosed units at a large loss. After the foreclosure, Ormsby finished the renovation work on the twenty-three units held as collateral. Ormsby currently owns those units, and some or all of them are currently leased to third parties. A clearly erroneous finding of fact does not constitute reversible error if there is other sufficient evidence to support the bankruptcy court's ruling. See Thidodeaux v. Olivier (In re Olivier), 819 F.2d 550, 552 (5th Cir. 1987) (in a nondischargeability proceeding pursuant to 11 U.S.C. § 727, an erroneous finding of fact was harmless error where ample evidence supported the district court's ruling that debtors acted with intent to hinder, delay, or defraud creditors). The Court finds that although this factual finding was clearly erroneous, it constituted harmless error.
H. The bankruptcy court's finding that there was no accord and satisfaction, no release, no compromise and settlement, no novation, and no purging of the false representations by any later extensions or renewals of the loans is not clearly erroneous. (appellate issues 4, 5, 6, 7, and 11).
The bankruptcy court found that "there was not a purging of the misrepresentation by any later extensions or renewals of the loans. There was no accord and satisfaction, there was no release by Mr. Miller, there was no compromise in settlement, there was not a novation by Mr. Miller." Accord and satisfaction is not a defense when the new, separate agreement was procured by the making of false representations. See Kucell v. Walter E. Heller Co., 813 F.2d 67, 70 (5th Cir. 1987) ("Even when agreement exists, the accord is not binding if a party enters it under fraud, compulsion or mistake of fact," citing Spring Branch Bank v. Mengden, 628 S.W.2d 130, 134 (Tex.Civ.App.-Houston 1981, writ ref'd n.r.e)). A settlement agreement or release, like any other contract, may be avoided if it was procured by fraud. Wright v. Dydow, 173 S.W.3d 534, 546 (Tex.App.-Houston [14th Dist.] 2004, pet. denied). Jacobson's contractual defenses do not shield him from liability for his tortious acts. The bankruptcy court's finding that there was no accord and satisfaction, no release, no compromise and settlement, no novation, and no purging of the false representations by any later extensions or renewals of the loans is not clearly erroneous.
III. CONCLUSION
The judgment of the bankruptcy court is AFFIRMED.
It is so ORDERED.