Sargis v. Aguilar (In re Aguilar)

• Decision Date: 09 June 2014
• Docket Number: Bankruptcy No. 10–38275.,Adversary No. 13–00299.
• Citation: 511 B.R. 507
• Parties: In re Veronica AGUILAR and Jose E. Aguilar, Debtors. Robert J. Sargis, Plaintiff, v. Veronica Aguilar and Jose E. Aguilar, Defendants.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

511 B.R. 507

In re Veronica AGUILAR and Jose E. Aguilar, Debtors.Robert J. Sargis, Plaintiff,

v.Veronica Aguilar and Jose E. Aguilar, Defendants.

Bankruptcy No. 10–38275.

Adversary No. 13–00299.

United States Bankruptcy Court,

N.D. Illinois,

Eastern Division.

Signed May 29, 2014.

As amended June 9, 2014.

John V. Delgaudio, Jr., John V. Del Gaudio Jr., Ltd., Markham, IL, Mark R. Sargis, Bellande & Sargis Law Group, LLP, Chicago, IL, for Plaintiff.

Drake Shunneson, Shunneson Law Office, Libertyville, IL, Karen Walin, Chicago Legal, LLC, Berwyn, IL, for Defendants.

Memorandum Opinion

JACQUELINE P. COX, Bankruptcy Judge.

This matter is before the Court for ruling on Plaintiff's Amended Complaint to determine dischargeability of a debt under 11 U.S.C. § 523(a)(2)(A). Therein, Plaintiff argues, inter alia, that the Debtors, through their agent, made false representations in procuring a mortgage loan. For the reasons that follow, the Court enters judgment in favor of the Plaintiff.

I. Jurisdiction and Venue

The Court has jurisdiction over this adversary proceeding under 28 U.S.C. § 1334 and Internal Operating Procedure 15(a) of the United States District Court for the Northern District of Illinois. This matter involves a core proceeding under 28 U.S.C. § 157(b)(2)(I): determination as to dischargeability of particular debts.

II. Facts and Background

Eighty-eight year old Plaintiff Robert J. Sargis (the “Plaintiff” or “Sargis”) is a creditor of debtors Veronica Aguilar and Jose E. Aguilar (“Debtors”) in the bankruptcy proceeding.

In 2006, Susana Limon (“Limon”), Veronica Aguilar's sister, located a home she wanted to buy; however, she did not qualify for a mortgage due to her poor credit rating. (Joint Stip., p. 4, ¶ 39.) Debtors agreed to apply for the mortgage loan for Limon and hired Victor Paredes (“Paredes”) a long-time friend and fellow church member to procure financing. Paredes, the former president and agent of ProCasa Mortgage Corporation (“Pro Casa Mortgage”) and ProCasa Realty, acted as the Debtors' mortgage loan originator (Pl.Ex. 8, Broker Fee Disclosure) and procured a loan from BNC Mortgage to the Aguilars as borrowers. (Joint Ex. 7, BNC Mortgage; Joint Stip., p. 3, ¶ 31, dkt. no 53.)

The Debtors then purchased a single family residential property located at 3512 S. 61st Avenue, Cicero, Illinois (the “Property”) and granted a mortgage to BNC Mortgage, Inc. (“BNC”). The mortgage to BNC was accompanied by a promissory note signed by the Debtors.

Paredes also solicited a private loan from the Plaintiff and arranged for the Debtors and Limon to borrow $21,000 as a second mortgage to cover the closing costs and down payment. Paredes informed Sargis that the Debtors and Limon would live together at the Property. Based on that representation, Sargis issued a check dated May 11, 2006 made out to the Debtors in the amount of $21,000. (Joint Ex. 3, Check dated May 11, 2006.) The Debtors and Limon executed a note in favor of Plaintiff in the amount of $21,000 (the “Sargis Note”). (Joint Ex. 4.) The Sargis Note was secured by a mortgage to Plaintiff, also dated May 16, 2006 (the “Sargis Mortgage”). Pursuant to the Sargis Note, Debtors and Limon assumed joint and several liability on the obligation to Plaintiff. (Joint Ex. 4, Sargis Note.)

By April 15, 2009, the Sargis Note was in default. Up to the time of default, all payments on the Sargis Note were made by Limon, who resided in the Property with her husband and children. (Joint Stip., ¶ 40, dkt. no. 53.)

On July 25, 2012, a Judgment of Foreclosure and Sale was entered against the Debtors in the amount of $32,994 for the amount due and owing on the Sargis Note.

On May 22, 2013, Plaintiff filed an Amended Complaint (the “Complaint”) objecting to the dischargeability of the $32,994 debt under 11 U.S.C. § 523(a)(2).¹ The Plaintiff alleges that Debtors, through their agent, made false representations by becoming borrowers and purchasers of the Property, when in fact they had no intention of making any payments on the Sargis Note or residing at the Property.

III. Applicable LawA. Count I—False Representation and Actual Fraud § 523(a)(2)(A)

A party seeking to establish an exception to discharge of a debt bears the burden of proof. Goldberg Sec., Inc. v. Scarlata (In re Scarlata), 979 F.2d 521, 524 (7th Cir.1992). A creditor must meet this burden by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 291, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991).

Section 523(a)(2)(A) of the Bankruptcy Code (the “Code”) excepts from discharge a debt incurred by “false pretenses,a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition.” 11 U.S.C. § 523(a)(2)(A) sets forth three separate grounds for dischargeability: false pretenses, false representation, or actual fraud. An intentional falsehood relied on under § 523(a)(2)(A) must concern a material fact. Bletnitsky v. Jairath, 259 B.R. 308, 314 (Bankr.N.D.Ill.2001).

1. False Pretenses or False Representation

To except a debt from discharge based on false pretenses or a false representation, a creditor must establish that: “(1) the debtor made a false representation or omission, (2) that the debtor (a) knew was false or made with reckless disregard for the truth and (b) was made with the intent to deceive, (3) upon which the creditor justifiably relied.” Ojeda v. Goldberg, 599 F.3d 712, 716–17 (7th Cir.2010). All three elements must be proven to prevail on a § 523(a)(2)(A) claim. Glucona Am., Inc. v. Ardisson (In re Ardisson), 272 B.R. 346, 357 (Bankr.N.D.Ill.2001).

False pretenses under § 523(a)(2)(A) “include implied misrepresentations of conduct intended to create or foster a false impression.” Nicholas & Assoc. v. Morgan (In re Morgan ), 2011 WL 3651327, at *4 (Bankr.N.D.Ill. Aug.18, 2011) (internal citation omitted). A false pretense does not require overt misrepresentations. Mem'l Hosp. v. Sarama ( In re Sarama ), 192 B.R. 922, 928 (Bankr.N.D.Ill.1996). Rather, “omissions or a failure to disclose on the part of the debtor can constitute misrepresentations where the circumstances are such that the omissions or failure to disclose create a false impression which is known by the debtor.” Sarama, 192 B.R. at 928.

A false representation, by contrast, is an express misrepresentation demonstrated either by a spoken or written statement or through conduct. In re Morgan, at *4. A debtor's silence concerning a material fact can also constitute a false representation. Id. (citing In re Westfall, 379 B.R. 798, 803 (Bankr.C.D.Ill.2007)).

2. Actual Fraud

To establish a claim for actual fraud under § 523(a)(2)(A), the plaintiff must prove that (1) a fraud occurred (2) the debtor intended to defraud, and (3) the fraud created the debt. Wachovia Securities, LLC v. Jahelka (In re Jahelka), 442 B.R. 663, 669 (Bankr.N.D.Ill.2010).

The Seventh Circuit Court of Appeals has defined fraud for purposes of § 523(a)(2)(A) as follows:

Fraud is a generic term, which embraces all the multifarious means which human ingenuity can devise and which are resorted to by one individual to gain an advantage over another by false suggestions or by the suppression of truth. No definite and invariable rule can be laid down as a general proposition defining fraud, and it includes all surprise, trick, cunning, dissembling, and any unfair way by which another is cheated.

McClellan v. Cantrell, 217 F.3d 890, 893 (7th Cir.2000). Further, fraud includes “any deceit, artifice, trick or design involving direct and active operation of the mind, used to circumvent and cheat another.” McClellan, at 893.

3. Intent

A cause of action under any prong of § 523(a)(2)(A) requires a showing that the debtor acted with an intent to deceive. Pearson v. Howard ( In re Howard ), 339 B.R. 913, 919 (Bankr.N.D.Ill.2006). Intent to deceive is measured by the debtor's subjective intention at the time the representation was made. CFC Wireforms, Inc. v. Monroe ( In re Monroe ), 304 B.R. 349, 356 (Bankr.N.D.Ill.2004). Because proof of fraudulent intent may be unavailable, the scienter requirement may be inferred from surrounding circumstances. Hickory Point Bank & Trust, FSB v. Kucera ( In re Kucera ), 373 B.R. 878, 884 (Bankr.C.D.Ill.2007).

4. Justifiable Reliance

The final element under § 523(a)(2)(A), justifiable reliance, requires that a creditor not “blindly [rely] upon a misrepresentation the falsity of which would be patent to him if he had utilized his opportunity to make a cursory examination or investigation.” Field v. Mans, 516 U.S. 59, 71, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995). Under this standard, the creditor has no duty to investigate unless the falsity of the representation would have been readily apparent. Ojeda v. Goldberg, 599 F.3d 712, 717 (7th Cir.2010) (citing Field, 516 U.S. at 70–71, 116 S.Ct. 437). “[A] person is justified in relying on a representation of fact ‘although he might have ascertained the falsity of the representation had he made an investigation.’ ” Mercantile Bank v. Canovas, 237 B.R. 423, 429 (Bankr.N.D.Ill.1998) (quoting Field, 516 U.S at 70, 116 S.Ct. 437).

B. Apparent Agency Theory of Liability

In his Complaint, Plaintiff asserts that the Debtors are liable for the deceitful conduct of Paredes under an agency theory of liability. Under Illinois law,² a principal-agent relationship arises where “the principal has the right to control the manner and method in which work is carried out by the alleged agent and whether the alleged agent can affect the legal relationship of the principal.” Chemtool, Inc. v. Lubrication Techs., 148 F.3d 742, 745 (7th Cir.1998). “An agent is one who, acting under authority from another, transacts business for him, and a true agency requires that the agent's function be the carrying out of the principal's affairs.” Chemtool, 148 F.3d at 745 (quoting Lang v. Consumers Ins. Service, Inc., 222 Ill.App.3d 226, 232, 164 Ill.Dec. 825, 583 N.E.2d 1147 (199...