USCA1 Opinion
March 20, 1995
[Not for Publication]
[Not for Publication]
United States Court of Appeals
United States Court of Appeals
For the First Circuit
For the First Circuit
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No. 94-1991
IN RE ANDREW J. LANE
Debtor.
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PETER H. MCCALLION, FRANK LOOMIS, GREGORY O'NEILL,
WILLIAM FOWLER, RICHARD DELORENZO,
Appellants,
v.
ANDREW J. LANE,
Appellee.
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APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Nathaniel M. Gorton, U.S. District Judge]
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Before
Torruella, Chief Judge,
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Aldrich, Senior Circuit Judge,
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and Stahl, Circuit Judge.
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Kenneth J. Parsigian and Goodwin Proctor & Hoar argued for
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appellant; Peter H. McCallion was on brief pro se.
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Charles R. Dougherty with whom Sara Miron Bloom and Hill & Barlow
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were on brief for appellee.
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STAHL, Circuit Judge. In this bankruptcy appeal,
STAHL, Circuit Judge.
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we again review issues arising from a dispute between
plaintiffs-appellants ("appellants"), who were the former
shareholders of Indian Hill Associates, Inc. ("Indian Hill"),
and defendant-appellee Andrew J. Lane ("Lane") over the sale
of all Indian Hill shares to Lane. Indian Hill's sole asset
was a contract to purchase 165 acres of land in New York's
Westchester and Putnam counties ("the Land"). Originally,
appellants sought a constructive trust on Lane's Chapter 11
estate and a determination that Lane's indebtedness to
appellants is nondischargeable under various subsections of
523 of the Bankruptcy Code, 11 U.S.C. 523. On our initial
review, we upheld the bankruptcy court's dismissal as to all
of appellants' claims except the one arising under
523(a)(2)(A).1 In re Lane, 937 F.2d 694 (1st Cir. 1991)
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("Lane I"). On remand, the bankruptcy court conducted a one-
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day trial and held that the debt owed appellants did not fall
under this dischargeability exception. On review, the
district court affirmed. After careful review, we now
affirm.
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1. Section 523(a)(2)(A) provides that money, property,
services, or an extension, renewal, or refinancing of credit
is not discharged to the extent it is obtained by: "false
pretenses, a false representation, or actual fraud, other
than a statement respecting the debtor's or an insider's
financial condition."
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I.
I.
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This dispute has lingered for more than seven
years, generating an intricate factual background. We cull
only those facts relevant to this appeal. In 1987,
appellants formed Indian Hill to acquire the Land. Through
its treasurer, Terence Gargan, Indian Hill executed a
contract under which it agreed to purchase the Land from
Putnam Limited Partners ("Putnam") for $3,425,000. Indian
Hill placed a deposit of $300,000 in escrow and closing was
set for November 4, 1987.
Appellants, one of whom is a lawyer, wanted to
develop the Land. Critically, however, they were short on
both money and experience in land development, inadequacies
that became obvious as events unfolded. Indian Hill's
president, appellant Peter H. McCallion, approached Lane, an
experienced Massachusetts-based developer, about a joint
residential development on the Land. Lane rejected that
proposal but indicated that, if financing was available, he
would consider purchasing the entire tract from Indian Hill.
McCallion said that he would help secure financing.
Negotiations ensued and eventually the parties reached a
tentative agreement under which Lane would buy all
outstanding Indian Hill shares for $1,675,000, thereby
acquiring all of Indian Hill's rights under the land-purchase
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contract. In October 1987, Indian Hill sent Lane a draft
agreement to that effect.
Meanwhile, McCallion arranged for a meeting between
Lane and Bankers Trust Company in Manhattan. At the meeting,
held on November 3, 1987, and attended by Lane, McCallion,
and their associates, Lane's prospects for financing appeared
good, but not certain. However, McCallion and the other
Indian Hill shareholders faced an imminent problem: their
closing with Putnam was scheduled for the next day and, with
no financing to complete the purchase, the $300,000 deposit
was at risk. Immediately following the Bankers Trust
meeting, Lane, McCallion, and others in their group adjourned
to a nearby restaurant. McCallion indicated that he could
secure an extension of the closing date if Lane signed a
contract to acquire Indian Hill's shares. Lane testified
that he made clear that he would not go through with the
project unless financing was available. With financing,
however, the deal presented an attractive opportunity for
Lane, and prospects for a substantial profit for the Indian
Hill shareholders. Eventually, during the course of the
restaurant meeting, Lane and McCallion signed an agreement
("November 3rd agreement") for sale of Indian Hill's shares
to Lane.
The terms of the November 3rd agreement required
Lane to pay a $300,000 deposit into escrow upon signing the
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agreement, $75,000 on November 4, 1987, three additional
installments of $350,000 each, and a final installment of
$250,000. There was no financing contingency. Lane did not
have his checkbook with him in New York but said that he
would send the deposit check by mail.
With the agreement in hand, McCallion secured from
Putnam an extension of the closing date until January 4,
1988. Lane, however, never sent the deposit check.
McCallion pressed Lane for the deposit. On November 30,
1987, Lane sent a letter to appellants proposing to amend the
November 3rd agreement by making Lane's obligation expressly
contingent upon financing. The new closing deadline loomed
and, on January 4, 1988, the Indian Hill shareholders and
Lane agreed to amend the November 3rd agreement ("January 4th
amendment"). The basic terms of the January 4th amendment
provided: (1) Indian Hill's original deposit would be
released to Putnam, thereby supporting a further extension of
the closing until February 12, 1988; (2) payments on the
original $1,675,000 share sale price were made expressly
conditional on Lane securing financing; (3) a payment
schedule was established under which the final two
installments, totalling $600,000, were made conditional on
Lane securing governmental approval for residential
development, and; (4) appellants agreed to "forever release
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and will bring no claims against Lane arising or alledged
[sic] to arise" from the November 3rd agreement.
Pursuant to the January 4th amendment, Lane secured
a bridge loan and paid appellants $375,000 (representing the
$300,000 down payment plus the $75,000 that had been due on
November 4, 1987), and Indian Hill's original $300,000
deposit was released to Putnam. Bankers Trust approved
financing for Lane. In August 1988, Lane paid appellants an
additional installment of $350,000, plus interest. A dispute
then arose regarding zoning of the Land and, as a result,
Lane made no further payments and filed suit in New York
state court charging appellants with misrepresenting or
failing to disclose facts about the Land. Appellants
counterclaimed and ultimately secured a judgment against Lane
for $468,313.2 For reasons apparently unrelated to the
Indian Hill dispute, Lane filed a Chapter 11 bankruptcy
petition in March 1989.3
In the end, appellants more than doubled their
original investment, receiving $785,000 in payments from
Lane. In October 1989, appellants began this adversary
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2. The state court dismissed the claims against all
appellants except McCallion.
3. Lane and his companies were among the largest real estate
developers in New England. According to the record in this
case, at one point Lane's assets totalled $90 million. Lane
filed his bankruptcy petition on the same day the New York
state court awarded appellants their judgment.
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bankruptcy proceeding seeking to determine the
dischargeability of, alternatively, the balance of the
installments, which totalled $950,000 plus interest, or the
amount of the state court judgment, $468,313.
II.
II.
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Bankruptcy Rule 8013 provides that the court's
"[f]indings of fact, whether based on oral or documentary
evidence, shall not be set aside unless clearly erroneous,
and due regard shall be given to the opportunity of the
bankruptcy court to judge the credibility of the witnesses."
We review conclusions of law de novo. In re G.S.F. Corp.,
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938 F.2d 1467, 1474 (1st Cir. 1991). In an appeal from a
district court review of a bankruptcy court order, we
independently review the bankruptcy court's decision. See,
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e.g., In re Winthrop Old Farm Nurseries, Inc., ___ F.3d ___
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(1st Cir. 1995).
Appellants' theory under 523(a)(2)(A) is that
Lane acquired title to the Indian Hill shares by promising,
under the November 3rd agreement, to pay the $300,000 down
payment to the appellants without ever having the intent to
do so. To establish a claim under this subsection,
appellants must prove: (1) that Lane made representations;
(2) that at the time he knew were false; (3) that he made
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them with the intent and purpose of deceiving the appellants;
(4) that the appellants relied on such representations; and
(5) that the appellants sustained the alleged loss and damage
as the proximate result of the representations having been
made.4 See, e.g., In re Ophaug, 827 F.2d 340, 342 n.1 (8th
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Cir. 1987).
A misrepresentation of intention can constitute
fraud. See, e.g., In re Zachary, 147 B.R. 881, 883 (Bankr.
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N.D. Tex. 1992) (citing 3 Collier on Bankruptcy 523.08 at
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523-54 (15th ed. 1991)). If a debtor enters into a contract
with the intent not to comply with its terms and later
defaults under the contract, the contract may provide a basis
for an exception to discharge on the grounds of fraud if the
other remaining elements are established. In re Krause, 114
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B.R. 582, 606 (Bankr. N.D. Ind. 1988). However, mere failure
to perform is not sufficient evidence of scienter nor is
subsequent conduct contrary to the original representation
necessarily indicative of fraudulent intent. In re Zachary,
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147 B.R. at 883 (collecting cases).
The bankruptcy court found that Lane did not
misrepresent his intent. The court found that Lane "at all
times informed the [appellants] of the necessity that he
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4. As we noted in our earlier decision in this case, whether
appellants must prove reasonable reliance is an open question
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in this court. Lane I, 937 F.2d at 698 n.8. As we do not
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reach the issue in this case, we continue to take no position
in the matter.
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obtain complete financing for the project. He intended to
perform the agreement which he believed he had with the
[appellants]." Thus, the court held that appellants' debt
did not fall under the 523(a)(2)(A) dischargeability
exception. Alternatively, the court held that, by the terms
of the January 4th amendment, appellants had released Lane
from all claims arising from the November 3rd agreement.5
Appellants raise numerous arguments challenging the
bankruptcy court's conclusion, most of which have little
bearing on the issue before us. Indeed, appellants appear to
misapprehend fundamentally the issue on appeal: we must
determine whether the bankruptcy court, after a full trial,
committed clear error in its factual finding that Lane did
not misrepresent his intent when he entered into the November
3rd agreement.6 Because the issue is intent, appellants
must point to evidence, direct or circumstantial, of Lane's
state of mind sufficient to overcome the court's finding.
Instead, appellants offer arguments grounded in parol
evidence and substantive contract rules. These arguments may
be material to the legal effect of the November 3rd agreement
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5. Because we resolve this case under 523(a)(2)(A), we do
not reach the issue of the enforceability of the release
contained in the January 4th amendment.
6. We note that in their reply brief, appellants do
correctly state the issue before the court, but then launch
into an extended discussion of issues wholly extraneous to
the question of intent, including res judicata, parol
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evidence, and substantive contract law.
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and the January 4th amendment, but they have no relevance to
the issue of Lane's intent to misrepresent.7
Appellants do make a lame pass at a state-of-mind
argument by averring that Lane's fraudulent intent is evident
from his general conduct. Specifically, they refer to a
pattern of seemingly inconsistent statements, alleging that,
"Lane consistently makes up stories to suit his purposes
without regard for the truth." They also point to Lane's
general conduct subsequent to the November 3rd agreement,
focusing particularly on his failure to attempt to secure the
necessary government approval for the development, which was
a precondition for payment to appellants of the last two
installments.
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7. At oral argument, appellants offered a new theory.
Seizing on language contained in In re Krause, 114 B.R. 582,
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606 (Bankr. N.D. Ind. 1988), a case cited by the panel in
Lane I, and which we cite above, supra at 8, appellants argue
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that fraud occurred because Lane never intended to comply
with the contract's terms. They argue that the bankruptcy
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court erred by failing to analyze Lane's intent to comply
with the terms of the November 3rd contract, which purports
to be fully integrated, and thus cannot incorporate any parol
agreement regarding financing. On this record, we do not
agree. As discussed more fully below, Lane could not have
the intent to misrepresent when, as the court found, he
repeatedly made clear that the agreement was expressly
conditioned on securing financing, the legal effect of the
underlying document notwithstanding. We think the court was
correct to look to Lane's statements to appellants as direct
evidence of his intent to comply with the "terms" that he
announced, rather than to infer fraud from the fact that
those "terms" may have had no legal effect under the language
of the contract.
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Appellants' argument falls far short of
establishing clear error. With regard to Lane's statements,
the trial record reveals that appellants made strenuous
efforts to impeach Lane's testimony. In reaching its
conclusion, the court simply made a credibility determination
by choosing to believe Lane, a decision to which we accord
deference. As to Lane's post-November 3rd conduct, the
record contains ample evidence corroborating the court's
conclusion that Lane's intent in signing the agreement was
clear from the beginning: that is, it was merely an
accommodation to facilitate the extension of the November 4,
1987 closing date and that his performance of the agreement
was contingent upon securing financing. Most significantly,
Lane not only reiterated his position regarding financing in
his November 30, 1987 letter, but he also performed as
promised by paying the disputed down payment after he secured
financing. In the end, after the benefit of testimony from
the principal players in this dispute, the bankruptcy court
determined that appellants had failed to carry their burden
of establishing the elements required for the 523(a)(2)(A)
exception to apply. Upon our own review of the record, we
find ample support for the bankruptcy court's finding.
III.
III.
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As we noted in Lane I, appellants took a credit
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risk by surrendering their interests in Indian Hill in return
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for Lane's unsecured promise to pay. Lane I, 937 F.2d at
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699. Unfortunately for them, bankruptcy intervened. Because
we find no clear error with respect to the court's
determination that Lane had no intent to misrepresent,
523(a)(2)(A) does not apply to appellants' claim, and this
litigation is finally brought to an end. Accordingly, the
decision of the bankruptcy court is
affirmed. Costs to appellee.
affirmed. Costs to appellee.
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