Allison, Matter of, No. 90-3891

• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)
• Writing for the Court: Before POLITZ, Chief Judge, HIGGINBOTHAM; POLITZ
• Citation: 960 F.2d 481
• Parties: Bankr. L. Rep. P 74,606 In the Matter of Dean Philip ALLISON and Phyllis Cohen Allison, Debtors. Dean Philip ALLISON and Phyllis Cohen Allison, Appellees, v. Crescentia R. ROBERTS, Appellant.
• Decision Date: 12 May 1992
• Docket Number: No. 90-3891

Page 481

960 F.2d 481 Bankr. L. Rep. P 74,606 In the Matter of Dean Philip ALLISON and Phyllis Cohen
Allison, Debtors.
Dean Philip ALLISON and Phyllis Cohen Allison, Appellees,
v.
Crescentia R. ROBERTS, Appellant. No. 90-3891. United States Court of Appeals,
Fifth Circuit. May 12, 1992.

Page 482

Mark C. Landry, Newman, Mathis, Brady, Wakefield & Spedale, Metairie, La., for appellant.

Pamela Van Geffen, Douglas S. Draper, Friend, Wilson & Draper, New Orleans, La., for appellees.

Appeal from the United States District Court For the Eastern District of Louisiana.

Before POLITZ, Chief Judge, HIGGINBOTHAM, Circuit Judge, and PRADO, ^* District Judge.

POLITZ, Chief Judge:

Crescentia Roberts, a creditor of bankrupt debtors Dean and Phyllis Allison, appeals the district court's ruling that the Allisons' debt to Roberts is dischargeable in bankruptcy. We conclude that under the provisions of 11 U.S.C. § 523(a)(2)(A) the debt of Dean Allison is not dischargeable but that the debt of Phyllis Allison is.

Background

Roberts sold certain immovable property in New Orleans to the Allisons. The contract to sell the two residences called for credit sales, secured by second mortgages covering 80% of the purchase prices. The Allisons defaulted on the notes prior to taking bankruptcy. Citing 11 U.S.C. § 523(a)(2)(A), Roberts maintains that their debt to her should not be discharged in bankruptcy because the Allisons obtained her property through false pretenses, false representations, or actual fraud.

In the interim contract the Allisons agreed to limit the first, or primary mortgages on the properties to a maximum of 20% of the purchase price, thus assuring that Roberts would be fully secured for the credit portion. Prior to the closing, counsel for the Allisons mailed copies of the proposed deeds and mortgages to George Blue, Roberts' attorney who was also her son-in-law. Blue promptly responded by calling for a revision of the instruments to include language which would "require that limit be placed on original and refinancing of 1st mortgage of 20% of value since we are financing 80% on 2nd." The documents produced by the Allisons' attorney at closing did not contain this language.

After hearing the testimony of those present at the closing, the bankruptcy court found that Blue refused to consummate the sales without the first mortgage limitations. Dean Allison agreed to the

Page 483

addition of the clauses. Apparently the clauses could not be added immediately because the secretary of Allison's counsel was at lunch. It was agreed that the clauses would be added upon her return and before the instruments were recorded. Thus assured, Roberts signed the deeds conveying her property to the Allisons. The limiting language was never added; in its place was an incomprehensible, meaningless provision.

On the very day that Dean Allison represented that the first mortgages would not exceed 20% of the market value he executed first mortgages for at least four times that amount, effectively negating Roberts' secured position. Roberts did not discover this until after the Allisons defaulted in payment and it became necessary for her to secure a judgment against them in state court for the unpaid balance. Based on these facts the bankruptcy court held that the debt was not dischargeable for Dean Allison but was dischargeable for his wife who was not present at the closing. The matter was appealed to the district court.

The district court found that the evidence of misrepresentation and fraud on the part of Dean Allison was purely parol evidence which, under Louisiana law, should not have been considered. The district court reversed the bankruptcy court's ruling as to Dean Allison, holding that the debt was dischargeable as to both Allisons. We now reinstate the disposition of this issue as made by the bankruptcy court.

Analysis

Bankruptcy court findings of fact are subject to the clearly erroneous standard of review and will be reversed only if, on the entire evidence, we are left with the definite and firm conviction that a mistake has been made. Matter of Delta Towers, Ltd., 924 F.2d 74 (5th Cir.1991) (citing United States v. United States Gypsum Co., 333 U.S. 364, 68 S.Ct. 525, 92 L.Ed. 746 (1948)). Conclusions of law are reviewed de novo. The creditor claiming nondischargeability has the burden of proving, by a preponderance of the evidence, that the debt is exempt from discharge. Grogan v. Garner, --- U.S. ----, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991).

"The validity of a creditor's claim is determined by rules of state law. Since 1970, however, the issue of nondischargeability has been a matter of federal law governed by the terms of the Bankruptcy Code." Grogan v. Garner, 111 S.Ct. at 657-58 (citations and footnotes omitted). ¹ The discharge exception provided by 11 U.S.C. § 523 does not discharge a debt

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[.]

Section 523(a)(2)(A) contemplates frauds involving "moral turpitude or intentional wrong; fraud implied in law which may exist without imputation of bad faith or immorality, is insufficient." 3 Collier on Bankruptcy p 523.08 (15th ed. 1989) (footnote omitted) (quoted in Matter of Foreman, 906 F.2d 123, 127 (5th Cir.1990)). ² The misrepresentations must have been: (1) knowing and fraudulent falsehoods, (2) describing past or current facts, (3) that were relied upon by the other party. Collier, supra (quoted in Foreman ). It is undisputed that the Allisons received "property," specifically real estate, from Roberts.

As to the first requirement, the bankruptcy court...