In re Pommerer, Bankruptcy No. 5-80-203

• Decision Date: 07 May 1981
• Docket Number: Bankruptcy No. 5-80-203,Adv. No. 80-0043.
• Citation: 10 BR 935
• Parties: In re Robert August POMMERER and Shirley Georgeann Pommerer, Debtors. THORP CREDIT AND THRIFT COMPANY, Plaintiff, v. Robert August POMMERER and Shirley Georgeann Pommerer, Defendants.
• Court: U.S. Bankruptcy Court — District of Minnesota

10 B.R. 935 (1981)

In re Robert August POMMERER and Shirley Georgeann Pommerer, Debtors THORP CREDIT AND THRIFT COMPANY, Plaintiff, v. Robert August POMMERER and Shirley Georgeann Pommerer, Defendants.

Bankruptcy No. 5-80-203, Adv. No. 80-0043.

United States Bankruptcy Court, D. Minnesota, Fifth Division.

May 7, 1981.

COPYRIGHT MATERIAL OMITTED

D. H. Seel, Richfield, Minn., for plaintiff.

Mary L. Everett, Little Falls, Minn., for defendants.

MEMORANDUM DECISION AND ORDER FOR JUDGMENT

PATRICK J. McNULTY, Bankruptcy Judge.

The above-titled case came regularly on for trial before the undersigned United States Bankruptcy Judge, pursuant to notice. The Complaint seeks an Order lifting the automatic stay of proceedings provided by the Code, Title 11 U.S.C. § 362, to enable plaintiff to proceed pursuant to the provisions of the Uniform Commercial Code to realize upon personal property in which it claims a security interest; seeks a determination that the defendants' obligation to plaintiff is non-dischargeable; and seeks judgment in the amount of $23,032.67. Defendants interposed an Answer, in the nature of a general denial, and a Counterclaim in which they seek an Order voiding plaintiff's claim to a security interest pursuant to Title 11 U.S.C. § 522(f)(2)(B). By Reply to this Counterclaim, plaintiff has placed in issue the constitutionality of § 522 of the Code. Pursuant to Title 28 U.S.C. § 2403(a) and Rule 24(c), F.R.C.P., the Court certified the matter to the Attorney General of the United States, and permitted intervention for argument on the question of the constitutionality of the statute. A brief has been filed by the Director and Counsel for the Executive Officer of the United States Trustee, Department of Justice, on behalf of the government.

NOW, upon all of the file, record and proceedings, the following Memorandum Decision, incorporating Findings of Fact and Conclusions of Law, and Order is made and entered and is deemed to comply with the form requirements of the Rules of Bankruptcy Procedure.

I.

Robert August Pommerer and Shirley Georgeann Pommerer, husband and wife, filed a petition for relief under Chapt. 7 of the Code on August 29, 1980. For much of his adult life, Pommerer has either worked on a farm or operated a farm, mostly in conjunction with other employment. From 1951 to 1954, he worked in the iron mines, in 1956 and 1957 he worked on a farm in Wisconsin, and from 1957 to 1970 he was employed as a truck driver. In 1971, he started to farm on his own, and in 1975 entered into a Contract for Deed for the purchase of a larger farm. Throughout this period he maintained employment as a part-time truck driver. The defendants first borrowed money from plaintiff in July of 1976. On or about April 4, 1979, defendants made application for a loan to consolidate debts and to install a well and septic system on the farm. The balance which they owed the plaintiff at that time was about $2,800.00. During the initial conversation, Pommerer was informed that plaintiff would require a lien upon cattle and equipment as security for this loan. Pommerer informed plaintiff that he had, in addition to farm machinery, 51 cows, 3 heifers and a steer. On or about April 9, 1979 representatives of plaintiff went to the Pommerer farm and made a rather detailed inventory and appraisal of the livestock and farm machinery. The appraisal indicated that loan value of the livestock and chattels was $33,950.00. This was somewhat less than their market value. After a credit check, and a lien search, a $34,892.29 loan was approved, and arrangements made to pay off an existing lien on the cattle from the proceeds. On April 17, 1979, defendants executed the necessary note and security agreements. The security agreement granted plaintiff lien rights in all of the farm machinery which plaintiff had viewed on the Pommerer farm, and the 55 head of cattle. In addition, defendants executed a security agreement on proceeds from the future sale of milk, and assigned these proceeds to plaintiff. The security agreements were properly filed and the security interests perfected.

Unbeknownst to plaintiff, 21 head of livestock on the farm were only leased and were not owned by defendants. This lease agreement had been entered into in January 1979, and provided for monthly rental payments, which debtors maintained current, and provided that defendants could purchase the cattle for $15,408.75 after one year.

In June, 1979, defendants wanted to purchase additional farm machinery, and again applied to plaintiff for a loan. This transaction resulted in plaintiff obtaining a perfected purchase money security interest in a haybine, a corn planter and a corn sprayer.

In mid-Summer 1979, Pommerer sold two of the cows which he owned, in the fall of 1979 he sold twelve more, and thereafter he sold another twelve. During this period he also butchered two head for home consumption. Pommerer did not inform plaintiff of these actions and did not apply the sale proceeds to payment of the loan.

The Pommerers were unable to make the spring payment on the contract for deed on the farm, and in about June 1980, it was canceled. Defendants experienced trouble in making payments on the loans during the Summer of 1980, and finally decided to liquidate their assets through an auction. In reviewing the list of property advertised to be sold at the auction, plaintiff discovered that it included only 26 head of cattle. On August 28, 1980, one of plaintiff's representatives went to the farm to investigate this apparent discrepancy, and, for the first time, discovered that 28 head of cattle upon which the plaintiff had a lien were missing, and that 21 head of the remaining cattle were only leased to Pommerer. The auction was canceled, and four days later defendants filed their petition for debtor's relief. Thereafter, plaintiff arranged to take possession of the remaining five head upon which it had a lien, sold them for $3,044.08, and credited defendants' account with this amount. The debtors have claimed federal exemptions, and have included the farm machinery and equipment which is in their possession. Since losing the farm, defendants have lived in Burtrum, Minnesota where defendant is employed as a carpenter. Debtors express an intention to resume farming as soon as circumstances permit.

II.

Plaintiff premises its cause of action upon Title 11 U.S.C. § 523(a), which where, pertinent, is as follows:

"A discharge under section 727, 1141, or 1328(b) of this title does not discharge an individual debtor from any debt —

. . . .

(2) for obtaining money, property, services, or an extension, renewal, or refinance of credit, by —

(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor\'s or an insider\'s financial condition; . . .

This is basically the pre-Code provision contained in the Bankruptcy Act. The additional specification of "actual fraud" adds nothing which had not been judicially impressed upon Sec. 17 of the Act. False pretenses, false representations and actual fraud are virtually indistinguishable. Fraud has its derivation in the common law action for deceit, but has grown to include all intentional acts or omissions involving artifice which constitute a breach of a legal duty causing injury to another. The elements are, generally,

a) A false representation pertaining to a past or present fact.

b) Knowledge that the representation is false or the assertion of a matter as fact without knowledge of its truth or falsity.

c) An intention to induce the other person to act upon the representation.

d) Reliance upon the misrepresentation.

e) Resultant damage. (Cf., Rudstrom v. Sheridan, (1913) 122 Minn. 262, 142 N.W. 313.)

Actual fraud involves moral turpitude and does not include fraud implied in law which may exist without imputation of bad faith or intentional wrong. Cf., Neal v. Clark, (1887) 95 U.S. 704, 24 L.Ed. 586; In re Taylor, (9th C.A. 1975) 514 F.2d 1370. Regardless of whether the malfeasance is characterized as a false pretense, a false representation or actual fraud, it connotes deceit, artifice or trick which involves a direct and active operation of intellect which is designed to mislead. The essence of the action is deception, the misrepresentation, therefore, need not be expressed in words. Marino v. Northern P. Ry. Co., (1937) 199 Minn. 369, 272 N.W. 267. Concealment of a fact can be as effective a misrepresentation as an outright lie, see, In re Schnabel, (Minn.1945) 61 F.Supp. 386, and an actionable misrepresentation can be implied from conduct. Stern v. National City Co., (Minn.1938) 25 F.Supp. 948, aff'd. (8th C.A. 1939) 110 F.2d 601. The action in this Court sounds in tort, not in contract, and the plaintiff's burden of proof of each element of the cause of action is measured by the federal standard of clear and convincing evidence. United States v. Societe Anonyme des Anciens Establissements Cail, (1911) 224 U.S. 309, 32 S.Ct. 479, 56 L.Ed. 778; Southern Development Co. v. Silva, (1887) 125 U.S. 247, 8 S.Ct. 881, 31 L.Ed. 678; Oriel v. Russell, (1928) 278 U.S. 358, 49 S.Ct. 173, 73 L.Ed. 419; Brown v. Buchanan, (Va.1975) 419 F.Supp. 199; In re Huff, (Bkrtcy.Utah 1979) 1 B.R. 354, 1 CBC 2nd 171.

Identifying the facts supporting plaintiff's cause of action, and applying the federal standard of proof to the operative elements of fraud, is not too difficult in this case. The gist of plaintiff's case is that it was induced to enter into the loan in May of 1979 in reliance upon Pommerer's tacit representation that he could, and was, giving plaintiff a security interest in all 55 head of cattle as collateral for repayment of the loan. Undoubtedly, plaintiff was led to believe that Pommerer owned 55 head of cattle which he was free to pledge. Plaintiff made a reasonably thorough effort to ascertain whether or not there were liens filed on the cattle, but, unfortunately, the...