123 F.3d 1089 (8th Cir. 1997), 96-4043, In re Usery

Docket Nº:96-4043.
Citation:123 F.3d 1089
Party Name:In re: Mary Beth USERY, Debtor. Ewing B. GOURLEY; Carol L. Gourley, Plaintiffs-Appellees, v. Mary Beth USERY; Steven Usery; James McLeod, Trustee, Defendants-Appellants, Fred C. Moon, Trustee of the Estate of Mary Beth Usery, Appellant. Mary Beth USERY; Steven Usery; James McLeod, Trustee of the Shawn Usery Trust and the Stephanie Usery Trust, Plai
Case Date:August 22, 1997
Court:United States Courts of Appeals, Court of Appeals for the Eighth Circuit

Page 1089

123 F.3d 1089 (8th Cir. 1997)

In re: Mary Beth USERY, Debtor.

Ewing B. GOURLEY; Carol L. Gourley, Plaintiffs-Appellees,

v.

Mary Beth USERY; Steven Usery; James McLeod, Trustee,

Defendants-Appellants,

Fred C. Moon, Trustee of the Estate of Mary Beth Usery, Appellant.

Mary Beth USERY; Steven Usery; James McLeod, Trustee of

the Shawn Usery Trust and the Stephanie Usery

Trust, Plaintiffs-Appellants,

William Hart, Trustee Under Certain Deeds of Trust, Plaintiff,

v.

Ewing B. GOURLEY; Carol L. Gourley; E.B.G. Health Care III,

Inc.; E.B.G. Health Care IV, Inc.; Health Care

Retirement Village, Inc.; Health Care

Laundry Services, Inc.,

Defendants-Appellees.

No. 96-4043.

United States Court of Appeals, Eighth Circuit

August 22, 1997

Submitted June 9, 1997.

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[Copyrighted Material Omitted]

Page 1091

Mark E. Gardner, Springfield, MO, argued, for Defendants-Appellants.

Devon F. Sherwood, Springfield, MO, argued, for Plaintiffs-Appellees.

Before BOWMAN and MORRIS SHEPPARD ARNOLD, Circuit Judges, and KYLE, 1 District Judge.

BOWMAN, Circuit Judge.

This adversary proceeding arises out of a nursing home sale tainted by fraud. The Bankruptcy Court awarded the purchasers, Ewing and Carol Gourley, more than $5.4 million in damages resulting from the fraudulent representations of the sellers, Mary Beth and Steven Usery. The Userys appealed to the District Court, which affirmed. We now affirm as to liability but reverse and remand for a new trial on damages.

I.

In 1988, Mary Beth Usery owned a majority interest in Central Health Care Centers, Inc. (CHCC). The remaining equity in the company was owned by Mary Beth's then-husband Steven and by trusts benefitting their children. Through CHCC, the Userys owned and operated two nursing homes in Springfield, Missouri, known as Northside Nursing Center (Northside) and Ozark Nursing and Care Center (Ozark); an apartment complex; and a laundry facility. The Userys had operated the nursing homes profitably for a number of years and had withdrawn large amounts of cash from CHCC to support their lavish lifestyle. Steven's management of the homes, and particularly his reduction in staffing levels in 1987, eventually caused trouble: a March 1988 inspection of Northside by the Missouri Division of Aging revealed serious deficiencies in patient care, and CHCC had to enter into a consent agreement with the Division in order to retain its license. The agreement froze Medicaid admissions, required Northside to increase staffing levels, and gave the home until July 1989 to fix its problems or shut down.

In late 1988, the Userys, who were beginning divorce proceedings, decided to sell the homes rather than attempt to continue operating

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them. Through their accountant, Judy Breeding (who was also a director of CHCC), they met Ewing Gourley, who was well-known in Missouri as a successful manager of nursing homes. Breeding had done accounting work for Gourley in his business and in his then-pending divorce. Gourley eventually expressed interest in leasing the nursing homes from CHCC with an option to purchase, but Mary Beth insisted on selling the properties outright.

At a key meeting on March 10, 1989, the deal came together. Gourley explained to the Userys that his assets were tied up because of continuing litigation relating to his divorce. See Gourley v. Gourley (In re Marriage of Gourley), 811 S.W.2d 13 (Mo.Ct.App.1991). He emphasized that he could afford to buy the homes only if they produced sufficient cash flow to allow him to service existing debt and to pay the Userys for the sale. The Userys and Breeding (who is not a party to this case) assured Gourley that, even though 1988 financial results were not yet available, the homes' cash flow in 1988 was substantially the same as the 1987 cash flow, which the Userys and Breeding calculated to be approximately $960,000 after service of existing debt. In fact, the Userys had preliminary 1988 financial records available at the time that showed a significantly lower cash flow. Gourley later discovered these records in a cardboard box at Northside.

As the parties began to structure their deal, the Userys made two other significant misrepresentations. When Gourley inquired about accounts payable, he was told that they totaled about $75,000 and were current. After the sale, Gourley discovered that the Userys had been keeping two sets of books and that payables actually exceeded $500,000, including many delinquent accounts. The resulting drain on cash was exacerbated by Mary Beth's insistence, before the closing, on drawing down half of a $500,000 line of credit established especially for the transition. The Userys also represented that all of the long-term debt that Gourley agreed to assume was business-related debt. In fact, the long-term debt included loans totaling $110,000 that Steven had obtained through CHCC for personal purposes, as well as a debt of $18,000 owed by the Userys to Breeding for personal tax advice.

Based on the Userys' representations, Gourley and his new wife, Carol, agreed to purchase Northside, Ozark, the apartments, and the laundry facility for a total price of $8 million. The Gourleys assumed $4.1 million in long-term debt of CHCC, and they gave the Userys a note, payable over twenty years, for the balance. As the deal was structured, the amount of the note was to be adjusted after the closing to account for the difference between payables and Medicaid receivables, but this "net-out" transaction never took place. Although the Gourleys were able to get Northside out from under the consent agreement with the state, they ran into operational difficulties immediately after taking over the homes, and they had to invest substantial amounts of their own money in order to keep the businesses afloat. After a series of negotiations between the parties failed, the Gourleys stopped making payments on the note because of a shortage of cash. 2 Because the note was Mary Beth's primary source of income, she filed for Chapter 11 bankruptcy in February 1992.

In bankruptcy court, the Gourleys filed an adversary proceeding against the Userys, alleging that the Userys' fraud rendered the note void and unenforceable. Mary Beth filed an adversary proceeding against the Gourleys to collect the balance due on the note; Steven and the trustee of the Usery children's trusts intervened and joined in Mary Beth's complaint. The Bankruptcy Court consolidated the actions and conducted a bench trial, none of the parties having demanded a jury. After a thirteen-day trial, the court announced findings and conclusions from the bench, ruling in favor of the Gourleys and awarding approximately $2.2 million in damages, subject to further calculations. At the same time, the court converted Mary Beth's bankruptcy to a Chapter 7 liquidation.

More than two years later, the court filed a written memorandum opinion awarding the Gourleys more than $5.4 million in damages.

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The primary reason for the increase in damages over the original figure was the inclusion in the final judgment of general damages for the misrepresentation of the cash flow, discussed in more detail later in this opinion. Because the Gourleys' damages exceeded the balance of the note, the court declared the note satisfied and entered the excess as a judgment against the Userys. The court also denied Mary Beth a discharge of her debt to the Gourleys.

The Userys, joined by the trustee of Mary Beth's bankruptcy estate, appealed to the District Court, which affirmed.

II.

As the second court of appeal in a bankruptcy case, we apply the same standard of review as the District Court, reviewing the Bankruptcy Court's legal conclusions de novo and its findings of fact for clear error. See First Nat'l Bank v. Pontow, 111 F.3d 604, 609 (8th Cir.1997); Hold-Trade Int'l, Inc. v. Adams Bank & Trust (In re Quality Processing, Inc.), 9 F.3d 1360, 1363 (8th Cir.1993). Reversal is appropriate if the Bankruptcy Court misunderstood or misapplied the law. See Nangle v. Lauer (In re Lauer), 98 F.3d 378, 383-85 (8th Cir.1996); Hold-Trade Int'l, 9 F.3d at 1364-66.

III.

The Userys first take issue with the Bankruptcy Court's findings that they defrauded the Gourleys. The court found specifically that the Userys made three material misrepresentations; as explained above, these misstatements concerned cash flow, accounts payable, and the relationship of the debts assumed to the businesses the Gourleys purchased.

The parties agree that Missouri law applies to this case. A claim of fraud under Missouri law requires the plaintiff to show nine elements:

1) a representation; 2) its falsity; 3) its materiality; 4) the speaker's knowledge of its falsity, or his ignorance of its truth; 5) the speaker's intent that it should be acted on by the person and in the manner reasonably contemplated; 6) the hearer's ignorance of the falsity of the representation; 7) the hearer's reliance on the representation being true; 8) his right to rely thereon; and, 9) the hearer's consequent and proximately caused injury.

Heberer v. Shell Oil Co., 744 S.W.2d 441, 443 (Mo.1988) (en banc). We are satisfied that the Bankruptcy Court's findings of fact on the issue of liability are not clearly erroneous, and we have no quarrel with the court's legal conclusions on this issue. Because a detailed discussion will add little to the body of Missouri law on fraud, we affirm as to liability on the basis of the Bankruptcy Court's thorough and well-reasoned opinion. 3

IV.

As to the calculation of damages, however, we believe that the Bankruptcy Court erred in several respects. We consider general damages first, followed by particular items of special damages.

A.

In Missouri, a victim of fraud has two options: rescission of the transaction, which permits the victim to return any benefits received from and to...

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