LAMAR W. DAVIS, JR., Bankruptcy Judge.
Debtor's case was filed on August 4, 2009. On November 9, 2009, Michael Portman ("Portman") filed a complaint seeking a determination that a debt owed to him by Debtor should be held non-dischargeable. After discovery and pretrial proceedings, the issue was tried on December 7, 2010. Based on the evidence and applicable authorities I make the following Findings of Fact and Conclusions of Law.
Debtor is in his early forties and has operated a very successful landscape business in the Savannah area for a number of years. Through that relationship he became
The obligation at the heart of this controversy arose because of a 2004 business arrangement between Debtor and Portman. In addition to his landscape work, Debtor had invested in real estate and had successfully engaged in some purchase/renovation/sale transactions in residential real estate, sometimes referred to as "flip" transactions. He discovered a residence on a very desirable part of St. Simons Island (the "House") which he believed—after some renovation work—could sell for $500,000.00 or more, but could be purchased for $330,000.00. He asked his then-wife (from whom he is now divorced) if she would advance the money to make the down payment for that purchase. When she declined, Debtor approached Portman (with whom he had a long-established business relationship) about advancing the down payment. Portman agreed to lend the money with the understanding that Debtor would perform the renovations, place the house on the market, and sell it, hopefully within a six month period. It was always Portman's understanding that the purpose of the transaction was to acquire, renovate, and flip the house within a six to twelve month period. Portman did not intend that the House was to be used as a vacation home or office location for Debtor, his family, or his business.
Out of an abundance of caution, Portman's counsel drafted a promissory note payable in twelve months, in the event the sale was not accomplished on as timely a basis as anticipated. Debtor executed that note on September 30, 2004, witnessed by Portman's attorney. The note was in the principal amount of $37,000.00, provided for interest at the rate of 8.5% per annum, and was due October 1, 2005. It further provided that in addition to principal and interest, Debtor would pay Portman 25% of any profit obtained on the resale of the House as defined in the note. Exhibit 3. Portman advanced those funds and they were taken to a closing with SunTrust Bank. SunTrust advanced to Debtor a loan in the principal amount of $287,200.00 on September 30, 2004. Exhibit P-1C. The numbers on the HUD-1 closing statement in the SunTrust transaction are not entirely understandable in that the HUD-1 shows that cash was required from Debtor/borrower in the amount of $76,904.79. Id. However, Debtor testified that the only thing he paid at closing were the closing costs of $8,922.75 and the $35,000.00 down payment (advanced by Portman). It is possible that some or all of the difference is reflected on line 112 "Construction Process" which was added to the gross amount due from the borrower in order to close. That number may have represented the anticipated renovation costs to the real estate funded by SunTrust in the related transaction. See Exhibit P-20. In fact, an additional security deed was granted to SunTrust on December 20, 2004, in the amount of $35,000.00. Exhibit P-4. The construction loan agreement with SunTrust provided for a construction period ending on July 1, 2005. Construction Loan Agreement, Exhibit A, ¶ 7. It is impossible to tell if those proceeds were anticipated on the original closing HUD-1, line 112, but were not funded to the borrower until December. If that happened, it would explain why the cash due from the borrower at the closing was different from the amount Debtor testified he brought to the closing.
By late April or early May of 2005 Portman understood that the renovation was essentially finished. He made a trip to St. Simons Island, saw the house, and observed that it was in finished condition except that some minimal work was needed in the garage area. When Portman inspected the home in May of 2005 he thought it looked fantastic, did not know what the total renovation costs were, but was aware Debtor had used his own labor and his own crews to do much of the work. Portman has not returned to the House since that time.
Debtor assured Portman that he intended to sell and was trying to sell the House, but there was no sale. After multiple calls and letters, and a process of slowly worsening communications between them, Portman hired an attorney who sent a demand letter for payment of the note in April of 2008. Exhibit P-16. Debtor asked for more time to repay the note. Plaintiff agreed to delay filing a lawsuit, but that agreement was given in exchange for Debtor's execution of a security deed to secure the balance of the two notes. The security deed was prepared by Portman's counsel, executed by Debtor on May 5, 2008, and filed of record. Exhibit D-17.
Unfortunately, it was not until 2008 that Portman discovered that in July of 2006, unbeknownst to Portman, Debtor had borrowed $125,000.00 from Darby Bank, paid off the SunTrust construction loan of $35,403.34, and presumably pocketed the net proceeds of $88,213.66.
Portman contends that the obligation owed to him is nondischargeable under § 523(a)(2)(A) as the result of misrepresentations by Debtor in borrowing money under a commitment that the House would be renovated and sold within a short period of time when, in fact, Debtor had no intention of doing so.
Debtor vigorously disputes that Portman was unaware of the Darby Bank loan. Debtor further contends that he had revealed to Portman that it would take him much longer than six months to finish renovation and that he would use the House for occasional family use and as a Glynn County office location for his business.
While it appears from the documents that the estimated renovation cost was in the $29,000.00 to $35,000.00 range, Debtor now contends that the total cost of renovation was almost $145,000.00. See Exhibit D-7.
To reach a conclusion in this matter it is necessary to determine first whether Debtor violated the terms of the parties' contract—oral though it may have been. The first issue is whether Debtor breached the contract concerning the renovation process, the sales efforts required to sell it in a timely fashion, or the use of the House. The second issue is whether any breach arises to the level of false pretenses, false representations, or actual fraud within the meaning of § 523(a)(2)(A).
Because the testimony of Portman and Debtor are so completely at odds with one another on a number of points, it is helpful that there is testimony from independent witnesses. There is also evidence contained in the documents provided to the Court which aids the Court in determining the terms of the contract. After a review of all available information, I conclude that the contract terms were those as understood by Portman, and that at the time Debtor made those representations to Portman, he had no intention of adhering to them. The evidence is also replete with independent evidence which demonstrates that Debtor's testimony is entitled to little credibility.
From all the evidence, I conclude that the contract between the parties contemplated a quick renovation and sale with
11 U.S.C. § 523(a)(2)(A) provides that:
Portman alleges that Debtor obtained money from him by misrepresenting the purpose of the purchase of the House.
"The elements of a claim under § 523(a)(2)(A) are: (1) the debtor made a false representation with the intention of deceiving the creditor; (2) the creditor relied on the false representation; (3) the reliance was justified; and (4) the creditor sustained a loss as a result of the false representation." E.g. In re Wood, 245 Fed.Appx. 916, 917-18 (11th Cir.2007) (citing In re Bilzerian, 153 F.3d 1278, 1281 (11th Cir.1998)).
A false representation includes a misrepresentation of intent. A breach of a promise is not necessarily a false representation if intervening events cause the debtor to change his course of action; the debtor must have intended not to perform a the time the promise was made. In re Foster, 2010 WL 2025784, *2 (Bankr. N.D.Ga.2010) (citing 4 COLLIER ON BANKRUPTCY ¶ 523.08[1][d] (Alan N. Resnick & Henry J. Sommer eds., 16th ed. 2009)). In the instant case, Debtor approached Portman with the suggestion that they buy the House, renovate it, and sell it, all within a short period of time. Debtor never revealed his true intent to use the House for personal use as a home office for an extended period of time. However, contemporaneous with his representations to Portman, Debtor represented on his Occupancy Certification (Exhibit P-1D, dated September 9, 2004) and his Affidavit of Occupancy (Exhibit P-1F, dated September 30, 2004) that the House was a second home, not an investment property. I acknowledge that Debtor has alleged in his brief that he was told by the lender to indicate the House was a second home if he was not planning to rent the House. Brief, Dckt. No. 45, p. 2 (December 20, 2010). I nonetheless find that Debtor planned this to be a second home. Debtor indicated on his Affidavit of Occupancy
Portman testified that he loaned the money to Debtor because the nature of the investment was a short term investment. I find that Portman relied on Debtor's false representation to that effect.
Portman and Debtor had a long-standing business relationship. 1 find that Portman's reliance on Debtor's representation—that
Portman's reliance on Debtor's representation directly led to his current situation. Debtor defaulted on the note, relegated Portman to third priority, and filed bankruptcy, all but ensuring Portman would receive payment for none of the debt owed to him. I find that Portman sustained a loss, and that such loss was directly and proximately caused by Debtor's misrepresentation.
Pursuant to the foregoing Findings of Fact and Conclusions of Law, IT IS THE ORDER OF THIS COURT that the debt owed to Portman is therefore excepted from discharge under § 523(a)(2)(A).
