Hunter, In re
| Decision Date | 20 August 1985 |
| Docket Number | Nos. 84-2312,84-2363,s. 84-2312 |
| Citation | 771 F.2d 1126 |
| Parties | 13 Collier Bankr.Cas.2d 412, Bankr. L. Rep. P 70,704 In re Larry HUNTER and Mary Ellen Hunter, Debtors. Richard JENNEN, Appellee, v. Larry HUNTER and Mary Ellen Hunter, Appellants. In re Larry HUNTER and Mary Ellen Hunter, Debtors. Richard JENNEN, Appellant, v. Larry HUNTER and Mary Ellen Hunter, Appellees. |
| Court | U.S. Court of Appeals — Eighth Circuit |
Jonathan R. Fay, Fargo, N.D., for Larry Hunter and Mary Ellen Hunter.
Stephen F. Rufer, Fergus Falls, Minn., for Richard Jennen.
Before BRIGHT, Senior Circuit Judge, and ROSS and JOHN R. GIBSON, Circuit Judges.
In this case the bankrupt, Larry Hunter, owed his creditor, Richard Jennen, a sum of $27,000 exclusive of interest. The $27,000 sum represented two separate debts: a $15,000 debt that the bankruptcy judge determined to be nondischargeable, and a $12,000 debt that the judge determined to be dischargeable in bankruptcy. The controversy relates to a pre-bankruptcy payment of $12,284.23 to the creditor on the debts which had been combined into a single note, leaving a remaining balance of $14,715.77. The bankruptcy court, 36 B.R. 28, applied the payment to the first debt incurred, the $15,000 nondischargeable debt, leaving as a nondischargeable item the sum of $2,715.77. On appeal, the district court affirmed the underlying determinations of dischargeability, but disagreed with the bankruptcy court's allocation of the payment entirely against the nondischargeable debt. It held that the payment should be allocated between the two underlying debts on a proportionate basis, leaving the debtor with a nondischargeable balance of $8,120.83. Both sides appeal. We affirm the decision of the district court on the dischargeability and apportionment issues but remand with directions.
Jennen vacationed in Florida in November 1974 and visited with Hunter, who at that time was a real estate broker engaging in speculative real estate ventures. After Jennen returned home, he received a call from Hunter in which Hunter stated that he was trying to raise $30,000 to purchase certain property in Orlando. Hunter told Jennen that for $15,000 he would become a 50% partner in the venture, and would have ownership of a one-half interest in the land. Jennen sent Hunter $15,000 in December 1974 with the understanding that Hunter would invest it in this property. In fact, the $30,000 was intended only for a small parcel of a block and Hunter was attempting to raise financing of some $300,000 to $500,000 to acquire the entire block. Hunter never explained the full complexity of the deal to Jennen, but led him to believe he would have a one-half interest in the entire block for his $15,000 investment. The venture was never closed, and Hunter did not purchase any real estate in Jennen's name with the $15,000.
Subsequently, in March 1975, Hunter called Jennen again and requested a loan of $12,000, which he needed to pay real estate taxes on some other Florida property he owned (unrelated to the Orlando venture). Jennen was somewhat skeptical, but sent Hunter a check for $12,000 on March 20 on Hunter's promise that he would repay the loan with 9% interest within thirty days. Jennen then had second thoughts about the loan and stopped payment on the check. After one or two phone conversations, Hunter persuaded Jennen, allegedly by additional misrepresentations, to lift the stop payment order. Hunter cashed the check on March 24 and, in fact, did use the money to pay the taxes.
By June 1975, Jennen had received no payments from Hunter on the $12,000 loan. He also discovered that the Orlando real estate venture had fallen through. Consequently, the parties entered into negotiations which resulted in Hunter executing a note and giving Jennen a mortgage on his house for $27,000. Jennen subsequently foreclosed, and received $12,284.23 in the foreclosure sale.
On January 18, 1976, the parties entered into an agreement under which Hunter agreed to pay Jennen the deficiency of $14,715.77 plus $750 in attorneys' fees and $500 interest. On February 23, 1976, a deficiency judgment was entered in favor of Jennen for $14,715.77.
After Hunter and his wife filed a chapter 7 bankruptcy petition, Jennen commenced an adversary proceeding in the United States Bankruptcy Court for the Eastern District of Washington, seeking a determination of the dischargeability of Hunter's debts to Jennen pursuant to 11 U.S.C. Sec. 523 (1982). 1 This adversary proceeding subsequently was transferred to the United States Bankruptcy Court for the District of North Dakota. 2 The bankruptcy court determined that Hunter persuaded Jennen to send him the initial $15,000 by intentional misrepresentations as to the nature of the venture and the scope of Jennen's would-be investment. Consequently, the court concluded that the $15,000 debt was nondischargeable under section 523(a)(2)(A).
The bankruptcy court further found the facts surrounding the $12,000 loan to be unclear, but determined that Jennen had sent the money to Hunter based solely on Hunter's assurances that he would repay the loan within thirty days. The court determined that it was not until after Hunter had cashed the check that Jennen inquired about possible security for the loan and Hunter made further misrepresentations. Thus, the court found that because Jennen had not relied on Hunter's misrepresentations about possible security in advancing this money, the $12,000 debt was dischargeable in bankruptcy.
The bankruptcy court then turned to the question of how to apportion the $12,284.23 foreclosure sale proceeds between the nondischargeable $15,000 debt and the $12,000 dischargeable debt. It found that although the parties intended the mortgage to cover both debts, they had offered no testimony as to how they intended to apply the sale proceeds toward the underlying debts. In view of the congressional mandate that exceptions to dischargeability should be narrowly construed, the bankruptcy court applied a "first-in, first-out" standard (FIFO) and concluded that the proceeds should be applied against the $15,000 debt, which was the first incurred, leaving a nondischargeable balance of $2,715.77. The bankruptcy court concluded that the remaining balance of $13,250 (including the $1,250 in attorneys' fees and interest) was attributable to the $12,000 debt and must therefore be discharged. Thus, the bankruptcy court entered judgment for Jennen for $2,715.77.
Jennen filed a motion seeking amended findings of fact and additional findings of fact under Fed.R.Civ.P. 52, which the court denied. Jennen then appealed to the district court, arguing that the bankruptcy court had erred in: (1) finding the $12,000 debt to be dischargeable, (2) applying the foreclosure sale proceeds solely to the nondischargeable debt, and (3) failing to award him attorneys' fees, interest and costs.
The district court affirmed the bankruptcy court's determination that the $12,000 debt was dischargeable on the ground that Jennen had not shown by clear and convincing evidence that Hunter procured the loan by fraudulent misrepresentations. It disagreed however, with the bankruptcy court's apportionment of the mortgage foreclosure proceeds entirely to the nondischargeable debt. The district court concluded that because the debts had been consolidated into a single note and mortgage, and were now represented by a judgment indivisible on its face, and because Jennen had established that one of the underlying debts had been fraudulently induced, the proceeds should be allocated to the two debts according to their proportionate share in the total mortgage. Thus, it allocated $6,879.17 (56% of $12,284.23) of the proceeds to the nondischargeable $15,000 debt, leaving Hunter with a nondischargeable balance of $8,120.83. The court declined to award Jennen attorneys' fees, interest or costs as contemplated by the January 1976 settlement agreement on the ground that the agreement had been entered after Jennen obtained his deficiency judgment.
In his appeal, Jennen challenges the findings of fact made by the bankruptcy court and approved by the district court 3 that Hunter did not induce Jennen to send him $12,000 in March 1975 by means of fraudulent misrepresentations.
We have reviewed the record. This essential finding, leading to the conclusion of dischargeability of the $12,000 debt, cannot be characterized as clearly erroneous. Accordingly, the determination of dischargeability of the $12,000 debt made by the bankruptcy court and approved by the district court will stand.
The apportionment of the foreclosure sale proceeds raises a question of first impression arising out of an unusual factual situation. The bankruptcy court first considered the dischargeability of the two underlying debts. But the parties had consolidated these two debts when Hunter gave Jennen a note and mortgage on his home for the total amount of the indebtedness. Jennen foreclosed on the mortgage and received $12,284.23. Thus, a legal question arose as to how the mortgage foreclosure proceeds should be apportioned between the two underlying debts, one later held to be dischargeable in bankruptcy and the other nondischargeable, in the absence of any evidence of how the parties intended to apply those proceeds. The briefs suggest three possibilities.
First, Hunter contends that we should adopt the approach of the bankruptcy court, who utilized the normal commercial "first-in, first-out" standard, and apply the proceeds against the first debt incurred--the $15,000 debt held to be nondischargeable. The result of this approach would be to leave Hunter with a nondischargeable debt of $2,715.77. We must reject this approach. The bankruptcy court employed this approach in order to give effect to...
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