In re McClendon

• Decision Date: 11 August 2009
• Docket Number: Bankruptcy No. 08-17058-JS.,Adversary No. 08-0592-JS.
• Citation: 415 B.R. 170
• Parties: In re Paul McCLENDON and Capri McClendon, Debtors. Vinay Gulati, Plaintiff v. Paul McClendon and Capri McClendon, Defendants.
• Court: U.S. Bankruptcy Court — District of Maryland

415 B.R. 170

In re Paul McCLENDON and Capri McClendon, Debtors Vinay Gulati, Plaintiff v. Paul McClendon and Capri McClendon, Defendants.

Bankruptcy No. 08-17058-JS.

Adversary No. 08-0592-JS.

United States Bankruptcy Court, D. Maryland.

August 11, 2009.

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Melinda Gale Tell, Jordan & Tell LLP, Columbia, MD, for Debtors.

John J. Murphy, III, Walker & Murphy, LLP, Rockville, MD, for Plaintiff.

Marc L. Jordan, Columbia, MD, for Defendants.

MEMORANDUM OPINION DETERMINING DEBT TO BE DISCHARGEABLE

JAMES F. SCHNEIDER, Bankrupcy Judge.

The instant complaint seeks the nondischargeability of debt related to the breach of a so-called "equity participation contract" between the parties. The contract called for Vinay Gulati ("Gulati" or "the plaintiff") to lend $23,000 to Paul and Capri McClendon ("the McClendons" or "the defendants") for the purchase of a residence, purportedly in exchange for a 50% interest in whatever equity would exist in the residence at a future sale. The contract was written without the assistance of counsel and was not honored when the McClendons later sold the residence. The plaintiff brought suit against the debtors in the state court in which he alleged fraud and breach of contract and obtained a judgment in the amount of $132,990.61. The issue is whether the judgment is nondischargeable in bankruptcy pursuant to Section 523(a)(2), (a)(4) and/or (a)(6) of the Bankruptcy Code. For the following reasons, the judgment will be determined to be dischargeable.

FINDINGS OF FACT

1. In 2003, the McClendons met Gulati when he conducted a financial seminar at the church at which Mr. McClendon was a pastor.

2. Gulati is an experienced real estate investor and broker. He owned and operated a real estate brokerage known as Dream Realty, Inc. ("Dream"). He testified at trial that he has entered into approximately 150 real estate transactions through Dream, including approximately five equity participation contracts, and that the contract with the defendants was only the second equity participation contract he executed. He further testified that he owned multiple investment properties that he rented to tenants.

3. When the McClendons met Gulati, they were living in a home in Germantown, Maryland ("the Germantown Property"). They had fallen behind on their mortgage payments and their homeowners' association fees, but they were able to catch up through loans from family members, friends and acquaintances.

4. The McClendons informed Gulati that Mr. McClendon was employed by Kaiser Permanente and as a pastor, and that Mrs. McClendon was employed by the Food and Drug Administration. However, they testified that they did not inform him regarding (1) Mr. McClendon's 1991 conviction for credit card fraud, (2) several judgments outstanding against them, or (3) several prior foreclosures on property that they had formerly owned. Gulati did not perform any due diligence regarding the financial background of the McClendons, and explained at trial that he was "not a private investigator."

5. The McClendons contacted Gulati initially about a rental property that he had advertised. Gulati showed them the property and persuaded them that it would be in their best interests to purchase rather than rent. Because they could not afford to pay the purchase price of the property, Gulati showed other properties to them.

6. The McClendons eventually decided to purchase a property that Gulati showed them in Laurel, Maryland ("the Laurel Property").¹

7. Because the McClendons were not able to make a down payment on the Laurel Property, they entered into a "contract" with Gulati dated March 31, 2003. Plaintiff's Ex. No. 8. A revised equity participation agreement, dated April 15, 2003, provided, as follows:

Contract and Agreement

(1) Parties to the Contract: This is an equity-sharing/equity participation contract and agreement.

This contract and agreement is entered into on March 31, 2003, between Pastor Paul McClendon & Mrs. Capri McClendon, the owner-occupants to be of Lot # 5C, Timber Oak (Stone Lake Advertised Subdivision), more commonly known as 8705 Timber Oak, Laurel, MD; and Mr. Vinay Gulati the equity share partner, hereinafter called PM, CM and VG respectively.

(2) Disclosures as required by State of Maryland Law: VG wishes to disclose herein in writing that VG is a Real Estate Broker in the State of Maryland. This disclosure is required under the laws of the State of Maryland. VG is doing business as Dream Realty, Inc., a duly incorporated Company in the State of Maryland.

(3) Property Description: PM, CM and VG are purchasing the afore-said property, Lot # 5C, Timber Oak (Stone Lake Advertised Subdivision), more commonly known as 8705 Timber Oak, Laurel, MD, the near future. Said property will be ready around June-July 2003. This property is described as Lot # 5C in the Howard County Records.

(4) Occupants: PM & CM will be residing in the property. The property shall be occupied ONLY by PM & CM.

(5) Since, PM & CM will be the occupants of the property, all utilities, and the monthly HOA (Homeowners Association) fees will be paid by PM & CM. VG shall not share in this monthly recurring expenditure.

(6) Tax benefits of home-ownership: i.e. deductibility of mortgage loan interest and property taxes will belong ENTIRELY to PM & CM.

(7) Recorded Title: Recorded title to the property will be held ONLY in the names of PM & CM.

(8) PM & CM shall pay the closing costs associated with the loan, and the purchase of the house.

(9) Down-Payment: VG will put 5% down-payment. In addition, PM & CM may at THEIR discretion bring some more down-payment from their own side, IF they so wish & desire.

(10) PM and CM, will sign a "Deed of Trust", with VG as the beneficiary.

(11) There will be NO rental income to VG, as PM & CM will be living in this house, without paying any rental income to VG.

(12) In lieu of VG foregoing the rental income from this property, VG will get 50% "equity" at time of sale. PM & CM will write a check to VG for this amount from the sale proceeds of the house.

(13) "Equity" is defined as the gross selling price of the house-the principal amount due from the "Payoff" statement at time of sale.

(14) PM & CM can stay in the house as long as they want. There is NO Limit as to the duration of stay of PM & CM in this house.

(15) IF either party wants to sell out their share, then such share shall be offered to the other partner as a "buy-out" clause. Value to be determined by an independent appraisal.

(16) "Buy-outs", will be on the same term as a regular "sale" to an outside person. Neither party can "force" or coerce the other party to invoke the "buyout" clause, i.e. the "buy-out" must be agreeable to both the parties. In case either party died, then the interest of that party will be passed on to the heirs of the deceased party, through a will or a revocable living trust (QTIP:

Qualified Terminable Interest Property) of that party.

(17) Both the partners enter into this contract with good faith & intentions. Errors and omissions can be remedied at a later point in time by both parties, in which case if both parties agree, then a new contract (Novation) will replace this existing contract. IF either party objects to the change, if any, then such change shall not take place.

(18) Since, the said property is located in Howard County, Maryland, this contract will be governed under the jurisdiction of the laws of the State of Maryland, with the District Court of Howard County as the judicial body in such an event.

(19) HOWEVER, all parties agree to forego the expensive and time-consuming court litigation system. Any disputes shall be resolved first through mediation; failing which through binding Arbitration. By agreeing to Arbitration, all parties voluntarily agree to give up their legal "due process" legal rights of the court litigation system as is guaranteed in the U.S. constitution.

Revised equity participation contract, Plaintiff's Ex. No. 9.

8. Gulati testified again and again that he performed no "due diligence" on the financial condition of the McClendons and asserted that he relied on the fact that Mr. McClendon was a pastor. He also testified that he relied on "the builder," Goodier, to investigate the McClendons' financial assets and liabilities.

9. On April 25, 2003, the McClendons signed a contract to purchase the Laurel Property from Goodier. Plaintiff's Ex. No. 11. The $5,000 check from Gulati to Goodier for the down payment was deposited; the $500 check he put up to hold the lot was returned to him. His records reveal that the $5,000 check was "presented" on May 6, 2003. Plaintiff's Ex. No. 12.

10. On July 18, 2003, the McClendons closed on the sale of their Germantown Property. They took $49,355 in cash from the closing. Settlement sheet, line 603, Plaintiff's Ex. No. 13. For several months after the sale, they leased the Germantown Property while they waited to close on the Laurel Property.

11. On August 25, 2003, Gulati gave two checks to the McClendons to enable them to go to settlement on the Laurel Property two days later on August 27, 2003. The first check in the amount of $1,800 was a rent check from one of his tenants, made payable on his instructions to the McClendons. The second check in the amount of $16,200 was issued directly from a joint account that Gulati maintained with his wife. Plaintiff's Ex. No. 14. Combined with the $5,000 down payment, the total amount that Gulati had thus far lent the McClendons was $23,000.

12. On August 27, 2003, settlement occurred on the purchase of the Laurel Property. Plaintiff's Ex. No. 15. The McClendons took title to the Laurel Property as tenants by the entireties.

13. The total purchase price of the Laurel property was $493,623.66, inclusive of fees, expenses and taxes. To finance the purchase, the McClendons obtained a first mortgage from JP Morgan Chase Bank, N.A., in the amount...