Kelly v. (In re Kelly), Civil No. 3:12–cv–00754–GPC–DHB.

• Court: United States District Courts. 9th Circuit. United States District Court (Southern District of California)
• Citation: 499 B.R. 844
• Decision Date: 17 September 2013
• Docket Number: Civil No. 3:12–cv–00754–GPC–DHB.,Bankruptcy No. 3–10–bd–7050.
• Parties: In re George T. KELLY and Lori Savoy–Kelly, Debtors. George Kelly, and Lori Kelly, Appellants and Defendants, v. J.A.W. Land & Trading LLC, a California Limited Liability Company, Appellee and Plaintiff.

499 B.R. 844

In re George T. KELLY and Lori Savoy–Kelly, Debtors.
George Kelly, and Lori Kelly, Appellants and Defendants,
v.
J.A.W. Land & Trading LLC, a California Limited Liability Company, Appellee and Plaintiff.

Civil No. 3:12–cv–00754–GPC–DHB.
Bankruptcy No. 3–10–bd–7050.

United States District Court,
S.D. California.

Sept. 17, 2013.

[499 B.R. 848]

Steven A Micheli, Carothers DiSante & Freudenberger LLP, San Diego, CA, for Plaintiff.

Charles D. Nachand, Law Offices of Charles D. Nachand, Escondido, CA, for Defendant.

ORDER AFFIRMING BANKRUPTCY DECISION
GONZALO P. CURIEL, District Judge.

Pending before the Court is Appellants George T. Kelly and Lori Savoy–Kelly's (collectively, “Kellys”) appeal of the Bankruptcy Court for the Southern District of California's (“Bankruptcy Court”) decision regarding the nondischargeability of the promissory note and subsequent March 24, 2009 modification between the Kellys and J.A.W. Land & Trading, LLC (“JAW”). The Court finds this appeal suitable for disposition without oral argument. See Civ. L.R. 7.1d.1. For the following reasons, the Court AFFIRMS the Bankruptcy Court's decision.

I. BACKGROUND¹

This appeal arises from JAW's action to except its claim against the Kellys

[499 B.R. 849]

from discharge in their Chapter 7 Bankruptcy proceeding pursuant to 11 U.S.C. § 523(a)(2)(A). The debt arises from a loan made by JAW to the Kellys, whereby JAW claimed, and the Bankruptcy Court determined, that the amount owed under the debt is $652,337.96 (the principal amount of $420,597.13 plus interest and bonus payments) and arose pursuant to a $520,000 Installment Note dated September 29, 2008, (ROA, Dkt No. 5–1 at 20; ROA, Dkt No. 5–2 at 6; “Note”), and a March 2009 Modification to that Installment Note. (ROA, Dkt No. 5–1 at 24; ROA, Dkt No. 5–3 at 69; “Modification.”)

A. Promissory Notes Secured by Deeds of Trust

The Kellys obtained the Note after approaching Richard Gillette (“Gillette”), a licensed real estate broker for Heller Crouse & Company, Inc., (Dkt No. 71 at 14:6–18), who acted as a dual agent between the Kellys and JAW, about obtaining a loan in order to assist in paying their mortgages and other expenses while they attempted to sell some of their high-end properties on Highland Drive. (Dkt No. 80 at 7:5–9.) Gillette orchestrated at least two other loans from JAW to the Kellys: the first, executed on February 23, 2008, for $200,000 and secured by a second deed of trust on 740–756 S. Escondido Boulevard, Escondido, California, 92025 (“Church Property”), (ROA, Dkt No. 5–2 at 2; Dkt No. 80 at 6:10–14; see also Dkt No. 71 at 20:14–25, 21:1–25, 22:1–25), and the second, executed on June 30, 2008, for $225,000 and secured by a second deed of trust on 1350 S. Escondido Boulevard, Escondido, California, 92025 (“Palms Property”), (ROA, Dkt No. 5–2 at 4; Dkt No. 80 at 6:10–14; Dkt No. 71 at 19:15–25, 20:1–13).

JAW, through its principal, Jim Williams (“Williams”), agreed to loan the Kellys $520,000 in an arrangement whereby JAW advanced an initial installment of $147,500 at the close of the loan escrow, dated September 24, 2008, ( See ROA, Dkt No. 5–3 at 38–52; “Loan Escrow Instr.”), and would subsequently advance $30,000 per month, each month, from November 1, 2008 through October of 2009. ( See Dkt No. 80 at 4:2–7.) As consideration for the loan, the Rider to the Note promised JAW a minimum of $100,000 from the sale of two of the properties used to secure the Note, located at 840 and 850 Highland Drive in Solana Beach, in addition to the principal and interest referenced in the Note. (ROA, Dkt No. 5–1 at 21–22; see also ROA, Dkt No. 5–2 at 12–15; the “Rider.”) The Loan Escrow Instructions directed the Kellys to execute several deeds of trust to secure the loan. ( See Loan Escrow Instr.)

The Note was secured by seven deeds of trust in junior positions to senior loans on the seven separate properties owned by the Kellys, which included their properties on Highland Drive. (Note; see also ROA, Dkt No. 5–2 at 16–35.) JAW believed the properties had a collective fair market value over and above the amount of the senior liens on the properties sufficient to secure repayment of the loan. (

[499 B.R. 850]

Dkt No. 80 at 4:7–11.) Further, the Note provided for an annual interest rate of 10% per annum, commencing on the date JAW made each advance. It also provided, upon filing a notice of default, that the interest rate would increase to 20% per annum without notice. (Note.)

+--------------------------------------------------------------+
                ¦ ¦Principal Advanced from JAW to the Kellys2 ¦ ¦
                +--------------------------------------------------------------+
                

On January 6, 2009, 850 Highland Drive sold for $1,650,000.00, with the net proceeds amounting to $37,438.41, (ROA, Dkt No. 5–3 at 30–31), 100% of which went to JAW pursuant to the Rider, in exchange for JAW releasing its deed of trust on that property. (Rider.) However, because the property sold for far less than anticipated, Williams became concerned about JAW's exposure under the Note. (Dkt No. 71 at 73:15–24.)

B. Modification to Promissory Note

After the disappointing sale of 850 Highland Drive and the decline in the real estate market in late 2008 to early 2009, Williams approached Gillette, (Dkt No. 71 at 14:6–18), to discuss modifying the Note, ( id. at 73:15–24).

Pursuant to the Modification, JAW agreed to advance one more $30,000 installment to the Kellys but would be relieved of all requirements to advance any further payments under the Note, and any future advances would be at the sole and absolute discretion of JAW. (ROA, Dkt No. 5–1 at 24; see also ROA, Dkt No. 5–3 at 69.) In exchange for this final payment, the Kellys agreed to alter the release prices for the remaining properties securing the Note (the Palms Property, the Church Property, and 1208–1218 S. Escondido Boulevard, Escondido, California (the “Boulevard Property”)), allowing JAW to receive 100% of the net proceeds after payment of the senior loans on the properties. The Kellys further promised to keep “all senior debt on the aforementioned properties current at all times.” ( Id.)

On March 24, 2009, Appellants signed the Modification to the Note. Unfortunately, Appellants were unable to repay both the senior and junior loans. (Dkt No. 80 at 4:12–15.) Appellants breached the Note and deeds of trust by, inter alia, failing to pay property taxes and failing to keep the senior debts current as promised. (Dkt No. 68 at 16–17, ¶¶ 15, 16, 19.) As a result, pursuant to the Note, Rider, Modification, Loan Escrow Instructions, and remaining deeds of trust, JAW declared the full amount remaining due on the Note immediately due and payable. (Dkt No. 68 at 17, ¶ 20.)

C. Foreclosure Proceedings

In April 2009, JAW advanced $14,982.00 in addition to what it had already loaned the Kellys to cover foreclosure costs and begin foreclosing on the six remaining

[499 B.R. 851]

properties securing the Note and the Modification. (Dkt No. 71 at 94:7–16.) Accordingly, JAW foreclosed on the Church Property, (Dkt No. 73 at 87:10–13; 88:3–10), through its second position deed of trust securing the February 2008 loan for $200,000, and on the Palms Property, through its second position deed of trust securing its June 2008 loan for $225,000. (Dkt No. 73 at 107:20.) JAW's foreclosure on these properties extinguished any remaining equity available to repay the amount owed JAW under the Note secured by its third position deeds of trust on those properties. ( Id. at 109:12–110:9.)

In June 2009, JAW advanced $49,000 to keep the loans current on the remaining properties the Kellys had promised to keep current pursuant to the Modification, and, in February 2010, JAW advanced another $2,000 for the same reason. (Dkt No. 71 at 94:17–25.) Appellants also closed a short sale on 2816 Highland Drive, Carlsbad, California, resulting in a bonus payment of $10,000 to JAW under the Note in exchange for JAW releasing its deed of trust on that property. ( Id. at 95:16–25; 96:1–2.)

On July 29, 2009, 840 Highland Drive sold at a short sale, resulting in a $25,000 bonus payment to JAW outside of escrow and pursuant to the Rider in exchange for JAW releasing its deed of trust on that property. (Dkt No. 71 at 96:3–12; Dkt No. 73 at 55:6–56:10; ROA, Dkt No. 5–1 at 14.) However, after applying the bonus payments received by JAW from the sale of 840 and 850 Highland Drive in addition to the $10,000 bonus payment from the sale of 2816 Highland Drive, the Kellys still owed JAW a remaining $27,631.59 under the Rider, no portion of which has been paid to JAW. (Dkt No. 68 at 15.)

Senior lender Pacific Trust foreclosed on 19371 4th Place, Escondido, California (“4th Place” or the “Duplex”), (Dkt No. 73 at 106:18–24; 107:11–17), and senior lender Mr. Kovalsky foreclosed on the Boulevard Property. Both foreclosures extinguished any remaining equity available to repay JAW under its junior deed of trust. ( Id. at 107:5–10.)

+-------------------------------+
                ¦Property Sales and Foreclosures¦
                +-------------------------------+
                

+-----------------------------------------------------------------------------+
                ¦Property ¦Result ¦Payment to JAW Under ¦
                +---------------------+----------------------------+--------------------------¦
                ¦ ¦ ¦Note, Modification, & ¦
                ¦ ¦ ¦Rider ¦
                +---------------------+----------------------------+--------------------------¦
                ¦ ¦ ¦for Sale of Properties ¦
                +-----------------------------------------------------------------------------+
                

+-----------------------------------------------------------------------------+
                ¦1350 S. Escondido ¦Foreclosure by JAW through ¦ ¦
                ¦Blvd., ¦second position deed of ¦$0.00 (Security wiped ¦
                ¦Escondido, CA (“Palms¦trust securing its 2008 ¦out.) ¦
                ¦Property”) ¦loan. ¦ ¦
                +---------------------+----------------------------+--------------------------¦
                ¦740–756 S Escondido ¦Foreclosure by JAW through ¦ ¦
                ¦Blvd., ¦second position deed of ¦$0.00 (Security wiped ¦
                ¦Escondido, CA ¦trust securing its

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