Cmty. Fin. Grp., Inc. v. Fields (In re Fields)
| Decision Date | 07 November 2013 |
| Docket Number | ADV 10-5019,BKY 10-50165 |
| Parties | In re: ROBERT L. FIELDS and PATRICIA A. FIELDS, Debtors. COMMUNITY FINANCE GROUP, INC., a Minnesota corporation, Plaintiff, v. ROBERT L. FIELDS, Defendant. |
| Court | United States Bankruptcy Courts. Eighth Circuit. U.S. Bankruptcy Court — District of Minnesota |
At Duluth, Minnesota
November 7, 2013.
This adversary proceeding came before the court for trial, at St. Paul. The Plaintiff appeared by its attorney, Boris Parker. The Defendant appeared personally and by his attorney, Jeffrey M. Bruzek. The trial consumed nearly three full days of courtroom time. The following memorandum decision is entered pursuant to Fed. R. Civ. P. 52(a) and Fed. R. Bankr. P. 7052. It incorporates findings of fact and conclusions of law.
The Plaintiff is described by Andrew Vilenchik, its "General Manager," as "mainly a residential mortgage originator" that also "conducted some commercial transactions."1 Per Vilenchik, its capital for lending is provided by "private investors."
The Defendant is a debtor in bankruptcy under Chapter 7. For thirty years, he was engaged in real estate development and associated building construction, eventually using multiple corporate entities for separate functions in the development process. The companies he formed to carry on construction and property management functions were LandCor Construction, Inc. ("LCCI") and LandCor, Inc. ("LandCor"). By 2005, the Defendant had completed over twenty real estate development projects.
In the middle years of the last decade, the Defendant promoted a commercial real estate development project in Otsego, Minnesota, known as "Main Street Otsego." He formed an artificial business entity, Main Street Otsego, LLC ("MSO"), through which he pursued the project.
On November 6, 2008, the Plaintiff advanced $500,000.00 to MSO on a short-term (60-day) loan, secured by a second mortgage against MSO's real estate. The specific inducement that the Defendant made to the Plaintiff in order to obtain the loan is one of the fundamental factual disputes between the parties. So is the defensibility of Vilenchik's reliance.
As the Plaintiff would have it, the advance was made on two understandings that Vilenchik formed, based on express statements by the Defendant. The first such was that MSO had to complete certain tenant improvements in the development's buildings before a senior lender, GCI Capital, Inc., would release other monies to MSO pursuant to a previously-granted line of credit. The second was that MSO would use the proceeds of a loan from the Plaintiff for the improvements and only the improvements. In its complaint and pretrial briefing, the Plaintiff also claimed that the Defendant misrepresented other facts material to the Plaintiff's risk as lender, by oral statements regarding his companies' repayment ability and by written statements of his personal financial condition.
The Defendant denies all that. He insists that before the Plaintiff made the loan he disclosed that he was in significant default on interest obligations to GCI Capital, and that he needed a loan from the Plaintiff to cure them.
MSO did not repay the loan from the Plaintiff when due. It made a number of small payments of accrued interest after the due date. GCI Capital eventually foreclosed its first mortgage against the property. MSO and the Defendant lacked the means to make any payment to the Plaintiff after that.
After the Defendant filed for bankruptcy relief, the Plaintiff timely commenced this adversary proceeding. It seeks a money judgment and a determination of nondischargeability.
The Defendant moved for summary judgment on a threshold issue, whether there was a legally-enforceable debt obligation running from him personally to the Plaintiff. He was granted summary judgment on all but one of the theories of personal liability argued by the Plaintiff. The theory reserved for trial was whether the Defendant had committed common law fraud in inducing the Plaintiff to lend to MSO. Order Re: Defendant's Motion for Summary Judgment [Dkt. No. 20], 18-21.2 Were such a liability established, the question would be whether it was excepted from discharge under bankruptcy law. The Plaintiff pled 11 U.S.C. §§ 523(a)(2)(A) and 523(a)(2)(B) as its statutory bases for nondischargeability.3
As a confusing trial came to a close, the focus of the parties' disputes seemed to emerge: whether the Defendant had made actionable misrepresentations as to specific subject matter, to induce the Plaintiff to lend; and whether the Plaintiff's reliance (on the part of Vilenchik) on the depiction of MSO's financial posture and the intended uses for the Plaintiff's loan qualified as actionable under governing law, state and federal.
The overarching theme of the defense is that the Plaintiff, during Vilenchik's evaluation of MSO's application for credit, created (or at least suffered) the conditions for its own half-million dollar financial disaster. That accusation is somewhat cavalier; and that is apparent from the very wording that the Defendant's counsel uses, particularly given the time during which the relevant events took place. However, the point is the entree into the most salient legal issue, the defensibility of the Plaintiff's reliance.
The Plaintiff's evidentiary presentation was long and grueling. It alone consumed more than the two days originally allotted for the trial. The Plaintiff's counsel dwelled on many factual minutiae, which came into evidence without objection despite questionable relevance to the theory of inducement articulated by the Plaintiff. Sprinkled throughout the record, there were bits and pieces of evidence that could have helped to support an outcome for one side or the other. At the end, it was fairly clear that neither the Defendant nor Vilenchik had been completely forthcoming in their testimony as to exactly what had transpired between them. It also might have been a matter of each not being completely honest with himself.
The record promised to be difficult to parse through, so the submission of proposed findings of fact and conclusions of law linked by reference to the evidence was ordered in lieu of closing argument or post-trial briefing. When the Plaintiff's were submitted and they were pored over, it appeared that many of the key factual points asserted as events of fraud lacked any evidence to support findings to their effect. Others required leaps of inference. All of it required attention to the detail of witness testimony regarding oral statements, subjective awareness, and intent.
It was not crystal-clear that the Plaintiff had met its burden. Nonetheless, there was something disturbing about what the Defendant had done to get a loan for MSO from the Plaintiff. And the fact that it could not be defined initially did not mean that the Plaintiff had not met its burden. Cutting against these suspicions, of course, was case law's dictate to exact strong proof of all elements from a creditor-plaintiff, and to give narrow construction to bankruptcy law'sprovisions for exception from discharge. E.g., In re Unterreiner, 699 F.3d 1022, 1025 (8th Cir. 2012) (); In re Miller, 276 F.3d 424, 429 (8th Cir. 2002) (narrow construction); Werner v. Hofmann, 5 F.3d 1170, 1172 (8th Cir. 1993) (ditto). The vagaries of the Plaintiff's record thus made post-trial decision-making difficult.
For this matter, there is a substantial overlap in the essential elements for liability under nonbankruptcy law and for dischargeability in bankruptcy. As a result, the determination on the underlying liability should be the first step. This will require the fixing of liability as a matter of fact and law and then, if warranted, the liquidation of the debt.
The gravamen of the Plaintiff's surviving claim is common law fraud, whether it be based on oral representations as to material facts or on written statements respecting MSO's and the Defendant's personal financial condition.4 If the record supports the fixing and liquidation of a debt under that theory, its dischargeability is then to be determined.5
Because both variants under 11 U.S.C. § 523(a)(2) sound in fraud, most of the elements will be common to all stages of analysis. The Defendant's inducement to the Plaintiff came out of a specific sequence of historical events, one involving severe financial stress on bothMSO and the Defendant. Thus, it is appropriate to open with fact-finding on that. These facts are common to all three steps of the analysis. The broader points of historical, transactional, and documentary origin are not in controversy between the parties.
At all relevant times, MSO held one part of a larger, multi-parcel commercial real estate project that the Defendant was developing in Otsego, a Wright County, Minnesota city on the Mississippi River.6 The Defendant had commenced the project before 2005. He had planned it on several separate parcels of real estate. The parcels were owned by separate entities, each apparently directed toward distinct end-uses in development. Each parcel bore its own financing for development. In shorthand, the Defendant and others referred to the whole project variously as "the Waterfront development" and "Main Street Otsego."
The parcel owned by MSO was to feature two buildings, one for primarily retail usage and the other for combined retail and office usage. By early 2008, the exteriors and common areas of the buildings had been finished. Individual spaces were to be finished off to meet particular tenants' needs.
The whole Waterfront/Main Street Otsego project was part of a phenomenon of the first half of the last decade in the Twin Cities metro area: a frenetic development of land in the formerly exurban area, i.e., outside the established second-tier suburbs and thirty miles or more from the Minneapolis-St. Paul core in all...
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