Michael E. Romero, Chief Judge, United States Bankruptcy Court
THIS MATTER came before the Court on the Plaintiffs' Amended Complaint seeking a nondischargeable judgment against the Defendant in connection with two loans. Plaintiffs abandoned their claim under 11 U.S.C. § 523(a)(6)
The Court has jurisdiction over this matter under 28 U.S.C. §§ 1334(a) and (b) and 157(a) and (b). This is a core proceeding under 28 U.S.C. § 157(b)(2)(I), as it involves a proceeding to determine the dischargeability of a particular debt. Venue is proper in this Court pursuant to 28 U.S.C. § 1409(a).
Plaintiffs William and Christine Houston (collectively, the "Houstons"), were acquainted
Munoz owns 100% of Munoz Consulting Group, LLC ("MCG"). The first loan was made on March 24, 2009, after MCG executed a $25,000 promissory note payable to Mr. Houston as lender and MCG as borrower, together with an Assignment of Real Estate Contract naming "David C. Munoz of Munoz Consulting Group" as assignor and "Bill Houston" as assignee.
The second loan relates to the same house-flip transaction. Munoz asked Houston for an additional $5,000 to complete the deal. On May 19, 2009, Mr. Houston provided Munoz another check in the amount of $5,000, this time made payable to "David Munoz," drawn from a Wells Fargo Bank account held by "William S. Houston and Christine H. Houston."
Neither the $25,000 nor the $5,000 was ever repaid, and Munoz filed his Chapter 7 petition on July 18, 2013. On October 21, 2013, the Houstons commenced this adversary proceeding.
MCG was not named as a defendant and the Houston Family Trust was not named as a plaintiff in this action. During closing arguments, the Court inquired as to whether the proper parties were before the Court, and ordered the parties to submit post-trial briefs on two limited issues: 1) whether Munoz could be personally liable for the first $25,000 loan made to MCG; and 2) whether the Houston Family Trust could be joined at the "eleventh hour" as a party plaintiff in this proceeding.
Munoz contends the Houstons did not present any evidence at trial that he individually was liable for the $25,000 promissory note because MCG was the obligor on that instrument, not Munoz. The Houstons argue Munoz is liable for the $25,000 paid to MCG under the liability theory first discussed in the U.S. Supreme Court's Cohen decision.
In Cohen, the United States Supreme Court determined:
Thus, the United States Supreme Court found "the phrase `to the extent obtained by' in § 523(a)(2)(A) ... does not impose any limitation on the extent to which "any debt" arising from fraud is excepted from discharge."
Relying on Cohen, the late Chief Judge Donald E. Cordova of the Bankruptcy Court for the District of Colorado explained the abrogation of the "receipt of benefits" approach to liability under § 523(a)(2)(A):
Under Denbleyker, any debt arising from the fraud is nondischargeable if a plaintiff establishes the required elements of § 523(a)(2)(A).
Judge A. Bruce Campbell of this Court also followed Cohen and Denbleyker, stating:
Based on this line of authority, if the Houstons (or the Trust) establish all elements of § 523(a)(2)(A) with respect to Munoz, Munoz would be liable for the $25,000 debt.
Section 523(a)(2)(A) states in relevant part:
Section 523(a) exceptions to discharge must be "narrowly construed, and because of the fresh start objectives of bankruptcy, doubt is to be resolved in the debtor's favor."
A claimant may sustain a claim under § 523(a)(2)(A) by proving false pretenses, false representation or actual fraud, and these three independent causes of action require proof of different elements.
Here, Plaintiffs did not separate the distinct elements for false pretenses, false representation and actual fraud. The Amended Complaint simply states, "[t]he Debtor obtained and retained the Plaintiffs' monies by false pretenses, false representations and actual fraud."
To establish a nondischargeable claim for a false representation under § 523(a)(2)(A), Plaintiffs must each establish the following elements by a preponderance of the evidence:
Here, the Court finds the Houstons have shown neither the requisite intent on the part of Munoz nor justifiable reliance on their own part for a false representation claim. Specifically, at the time both loans were made, the Houstons and Munoz believed the funds were needed to purchase a bank-owned property, and the property would later be sold with the Houstons to be repaid. Munoz had been involved in several similar transactions with James in the past, and the funds had been repaid each time. Munoz indicated his previous experience led him to believe the transaction would be successful. His testimony on this element was credible and no evidence was offered to rebut this explanation. Therefore, no intent to defraud the Houstons was shown.
With respect to justifiable reliance, Judge Tallman has noted:
In this case, there was no evidence the Plaintiffs performed even a cursory inspection of the representations before Mr. Houston agreed to loan money for this real estate deal. He had the expectation he would be repaid quickly and with a relatively modest amount of profit on the deal. Similarly, there is a lack of evidence as to any examination whatsoever in connection with the $5,000 loan extended from the Houstons to Munoz personally.
For these reasons, the Court finds the Houstons have not met their burden of proof to demonstrate any acts or omissions
"Motions to add or substitute parties are considered motions to amend and therefore must comply with Rule 15(a)."
Here, the Houstons' Motion to add the Houston Family Trust as a party plaintiff is moot because the evidence does not show Munoz is liable under § 523(a)(2)(A). However, even if the Houston Family Trust were added as a party plaintiff, the result would be the same, making the addition of the trust as a plaintiff futile.
Further, despite the fact the Houstons and their counsel had over two years to analyze their Exhibit 1, which shows the $25,000 came from the Houston Family Trust and not the Houstons individually, they made no effort to raise a claim on behalf of the Trust. The Motion to Amend was filed two days after trial, after the Court observed the $25,000 loan was between the Houston Family Trust and MCG, not between the Houstons and Munoz. Moreover, in the absence of any trust documentation, the Court is unable to determine the nature of the Houston Family Trust and cannot evaluate whether the Houston Family Trust would be able to bring an action under Colorado law.
Lastly, the Court turns to the Houstons' request under FED. R. CIV. P. 17(a)(1), contained in their post-trial brief. FED. R. CIV. P. 17(a), made applicable to this proceeding by FED. R. BANKR. P. 7017,
Here, the pertinent documents were in the possession of the parties well before the commencement of this proceeding, and counsel for the Houstons' had these same documents at the latest, on the date this action was commenced. The Court finds the determination of the correct party with respect to the $25,000 loan was as easy as reading the check one time. On these facts, the Court finds ascertaining the correct parties was not difficult and no mistake was made. Therefore, the Court denies the request to substitute or add the Houston Family Trust as a plaintiff under Rule 17(a)(3).
For the reasons stated above,
IT IS ORDERED the debt of the Defendant to the Plaintiffs is hereby found to be dischargeable under 11 U.S.C. § 523(a)(2)(A). Each party shall bear their own attorneys' fees and costs. A separate judgment will enter.
See also Diamond v. Vickery (In re Vickery), 488 B.R. 680, 691 (10th Cir. BAP 2013), appeal docketed, No. 13-1148 (10th Cir. April 11, 2013) (recognizing "[i]n order to give full effect to the plain meaning of the disjunctive `or' in § 523(a)(2)(A), we conclude that `actual fraud' is an independent basis for nondischargeability under that subsection.").