MEMORANDUM OPINION

BARRY S. SCHERMER, Chief Bankruptcy Judge.

This matter comes before this Court on remand from the Bankruptcy Appellate Panel for the Eighth Circuit (the "BAP") on the complaint of Larry M. Bauer and Cheryl L. Bauer (the "Bauers"), seeking to except debt allegedly owed to them by James Joseph Gilmartin from Mr. Gilmartin's discharge pursuant to section 523(a)(2)(A) of Title 11 of the United States Code (the "Bankruptcy Code"). Based upon the findings and conclusions set forth below, this Court finds in favor of the Bauers and against James Joseph Gilmartin.

BACKGROUND

The Bauers and Mr. Gilmartin and his wife, Nawana Maria Gilmartin (the "Gilmartins"), were close friends. In 2006, the parties formed a limited liability company (the "LLC") for the purpose of acquiring and developing real estate. Larry Bauer, an attorney, arranged for the LLC to be formed. No operating agreement was drafted for the LLC. The parties were to contribute to the LLC equally and were to share the profits equally. In reality, the Bauers made an initial capital investment of $20,000 to the LLC and the Gilmartins contributed $16,800. Both couples were ultimately reimbursed for their initial investments. According to the Bauers, the parties were also to share the losses equally.

Mr. Gilmartin had experience in real estate development and he was to act as the LLC's managing member, responsible for the daily operations of the LLC including management of the LLC's finances.

Shortly after the LLC was formed, it acquired 611 North Geyer Road, Kirkwood, Missouri, as its first project (the "Geyer Property"). The existing structure on the Geyer Property was torn down and the LLC began to build a condominium building, but the project on the Geyer Property was never completed by the LLC. The LLC started a second project located on Edgar Road in Webster Groves, Missouri (the "Edgar Property"). The project on the Edgar Property consisted of the tear-down and rebuild of a single family residence. The Edgar Property project was completed and sold at a loss.

As compensation for his services, Mr. Gilmartin was to receive a "supervisory fee" of $6,000 per month for the Geyer Property and $2,000 per month for the Edgar Property. The Bauers claim that the supervisory fee was not to exceed a total of $96,000 for the two projects ($72,000 total for the Geyer Property and $24,000 total for the Edgar Property), but Mr. Gilmartin contends that the monthly compensation was to continue for subsequent years if the projects were not completed.

The LLC borrowed money from Regions Bank to finance its projects. In 2006, the LLC obtained a "start-up" loan in the amount of approximately $25,000. Regions Bank also advanced to the LLC money on a construction loan for the Geyer Property. The Bauers and the Gilmartins personally guaranteed the Geyer Property construction loan. While the parties did not introduce a copy of the guarantees or other loan documents into evidence, Mr. Gilmartin testified that Regions Bank required an appraisal, a copy of which was admitted into evidence at trial, before it would give the construction loan to the LLC. The appraisal is dated May 30, 2007. A third loan was obtained for the Edgar Property project and again, the Bauers and the Gilmartins personally guaranteed the Edgar Property loan. The Edgar Property loan was paid in full, with part of the payment coming from the LLC through the sale of its property, and the balance paid by the Bauers.

From time to time during the construction process, at the request of the Gilmartins, the Bauers provided additional funding to the LLC beyond the funds from the Regions Bank loans. Exhibits 6 and 24 set forth the amounts that the Bauers claim they advanced to the LLC between 2006 and 2010, plus interest through January 2011 on loans they obtained or guaranteed for the LLC. Based on representations by Mr. Gilmartin that the LLC did not have sufficient funds and that additional funding was needed for the Geyer Property project, the Bauers took out a $330,000 second home equity line of credit secured by their home. Between August and December 2008, the Bauers contributed the entire $330,000 to the LLC. The Gilmartins contributed no additional funds to the LLC after their initial investment. In fact, because of the Gilmartins' personal financial problems, the Bauers made personal loans to the Gilmartins in 2006 and 2007.

Mr. Gilmartin withdrew from the LLC's bank account, and used for personal purposes, funds in excess of the amount of the $96,000 of supervisory fees to which the Bauers believed he was entitled. The Bauers' Exhibit 12 sets forth amounts that the Bauers believe Mr. Gilmartin improperly took from the LLC. Included are direct payments from the LLC to the Gilmartins and unauthorized payments to third parties to pay the Gilmartins' personal obligations. The evidence shows that the first unauthorized use of LLC funds by Mr. Gilmartin was in October 2006, when the LLC issued a check to "Safeco" in the amount of $682.00. At his deposition, Mr. Gilmartin testified that any payments from the LLC's bank account to Safeco would have been personal "loans" to himself. The Bauers also proved that Mr. Gilmartin took other unauthorized withdrawals from the LLC's account. For example, Mr. Gilmartin withdrew $5,147 to pay his year 2007 real estate taxes. Mr. Gilmartin's unauthorized withdrawals of LLC funds continued through 2008.

Mr. Gilmartin claims that his withdrawals from the LLC's account were either additional supervisory fees to which he was entitled or "loans" from the LLC, that he intended to repay all amounts he borrowed and that Larry Bauer was generally aware that Mr. Gilmartin was taking loans from the LLC. According to Mr. Gilmartin, Mr. Bauer told Mr. Gilmartin that if he needed funds beyond the personal loans from the Bauers, he should take them from the LLC's account. Mr. Gilmartin posits that Mr. Bauer was generally aware that Mr. Gilmartin was borrowing funds from the LLC. The Bauers disagree and claim that they never gave James Gilmartin permission to use LLC funds for personal purposes and that they had no knowledge of his withdrawals.

The Bauers also paid personal bills for work on their home by using LLC funds. However, the Bauers did not access LLC funds by writing checks from the LLC's account as Mr. Gilmartin had done. Rather, Mr. Gilmartin arranged for the LLC's funds to be used to pay the Bauers' bills. Mr. Gilmartin maintains that the Bauers used approximately $12,000 to $14,000 of the LLC's funds for work on the Bauers' home. The Bauers content that only approximately $1,430 of the LLC's funds were used for their home, that the parties agreed the Bauers could use LLC funds for their home and that the Bauers would repay the amount borrowed from the profit on the sale of the Geyer Property.

The Bauers did not review the LLC's spending or financial records until after they learned in late December 2008 that the LLC was delinquent in its loan payments to Regions Bank. The Bauers maintain that they did not learn of the Gilmartins' unauthorized withdrawals of LLC funds until January 2009, at which time the Bauers took over operation of the LLC.

The parties stipulated that "the Geyer [P]roperty was foreclosed on and sold on May 18, 2010 for $760,000" and that Regions Bank was the Grantee under the "trustee deed in foreclosure."

PROCEDURAL BACKGROUND

On March 5, 2010, the Gilmartins filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code. In August 2010, the Bauers filed a complaint seeking to except debt allegedly owed by the Gilmartins to them from the Gilmartins' discharge pursuant to Bankruptcy Code §§523(a)(2)(A) and (a)(4). After the close of the Bauers' case at trial, this Court entered a judgment on partial findings pursuant to Federal Rule of Bankruptcy Procedure 52(c), dismissing the Bauers' complaint in its entirety. With respect to the §523(a)(2)(A) action, this Court found that the Bauers failed to prove that they were damaged as a result of fraud allegedly committed by the Gilmartins.

The Bauers appealed to the BAP from this Court's ruling only as to the dismissal of the claim under §523(a)(2)(A), and only as to Mr. Gilmartin. The BAP identified the only issue before it as "whether the Bankruptcy Court erred in finding that the Baurs did not prove they were damaged as a result of any fraud which may have been committed by James Gilmartin." The BAP stated that this Court applied a "benefit of the bargain" measure of damages and failed to consider as part of the resulting damage element of §523(a)(2)(A) the alternate damage argument that the Bauers raised before this Court; "that they would not have invested money into the LLC in the first place, or they would have ceased putting new money in, had they known that James Gilmartin was taking money out for his own use." Because this Court did not consider "whether the `out of pocket' measure of damages is applicable," the BAP reversed this Court's decision and remanded the case to this Court. On April 18, 2012, the Bauers and Mr. Gilmartin appeared before this Court for Mr. Gilmartin to present his case at trial.

DISCUSSION

Exceptions to discharge are usually "narrowly construed against the creditor and liberally against the debtor, thus effectuating the fresh start policy of the Code." Caspers v. Van Horne (In re Van Horne), 823 F.2d 1285, 1287 (8th Cir.1987), abrogated on other grounds, Grogan v. Garner, 498 U.S. 279 (1991). "The Bankruptcy Code has long prohibited debtors from discharging liabilities incurred on account of their fraud, embodying a basic policy animating the Code of affording relief only to an `honest but unfortunate debtor." Cohen v. de la Cruz, 523 U.S. 213, 217 (1998)(internal citation omitted).

A. 11 U.S.C. §523(a)(2)(A)

Bankruptcy Code § 523(a)(2)(A) excepts from a debtor's discharge "any debt . . . for money, property, services, or an extension, renewal or refinancing of credit, to the extent obtained by . . . a false pretenses, a false representation, or actual fraud. . . ." To obtain a determination that debt is non-dischargeable under 11 U.S.C. § 523(a)(2)(A), a creditor must prove the following elements by a preponderance of the evidence: (1) the debtor made a representation; (2) the debtor knew the representation was false at the time it was made; (3) the representation was deliberately made for the purpose of deceiving the creditor; (4) the creditor justifiably relied on the representation; (5) the creditor sustained the alleged loss as the proximate result of the representation having been made. R&R Ready Mix v. Freier (In re Freier), 604 F.3d 583, 587 (8th Cir. 2010) (citing Burt v. Maurer (In re Mauer), 256 B.R. 495, 500 (B.A.P. 8th Cir.2000) and In re Ophaug, 827 F.2d 340, 343 (8th Cir.1987)), as modified by Field v. Mans, 516 U.S. 59, 74-75 (1995) (requiring justifiable reliance)).

Included in a misrepresentation are "not only words spoken or written but also any other conduct that amounts to an assertion not in accordance with the truth." The Merchants National Bank of Winona v. Moen (In re Moen), 238 B.R.785, 791 (B.A.P. 8th Cir. 1999) (quoting In re Melancon, 223 B.R. 300, 308-09 (Bankr. M.D. La. 1998) (citation omitted)). "Silence regarding a material fact can constitute a false representation actionable under § 523(a)(2)(A)." Fee v. Eccles (In re Eccles), 407 B.R. 338, 342 (B.A.P. 8th Cir. 2009) (citing Caspers v. Van Horne (In re Van Horne), 823 F.2d 1285, 1288 (8th Cir.1987)).

There is no reason why the Bauers would have contributed money to the LLC so that same money could be used freely by Mr. Gilmartin for his personal purposes. Rather, the evidence supports a finding that the parties understood that the Bauers' contributions to the LLC were made to support the LLC's business. Notwithstanding the high level of trust between the Bauers and the Gilmartins, Mr. Gilmartin omitted to tell the Bauers that he was using LLC funds for personal purposes or to get the Bauers's permission for such use. It is this omission that amounts to a misrepresentation that the funds contributed by the Bauers to the LLC were being used for the business. The Bauers had no knowledge of Mr. Gilmartin's improper use of the LLC's funds. Mr. Gilmartin's contentions that he was either entitled to funds he withdrew from the LLC's bank account as part of his "supervision fee" or that the Bauers knew about and authorized "loans" he took from the LLC, lack credibility. Instead, this Court accepts as credible the Bauers's position that the supervision fee was to be for only one year and that the Bauers never agreed to or knew about Mr. Gilmartin's taking of the LLC's funds for personal use.

A creditor may introduce circumstantial evidence to infer a fraudulent intent. Universal Bank, N.A. v. Grause (In re Grause), 245 B.R. 95, 99 (B.A.P. 8th Cir.2000). The circumstances show James Gilmartin intended for the Bauers to believe their contributions to the LLC were used for business purposes, so the Bauers would continue to fund the LLC and such funds would be available for Mr. Gilmartin's personal use. As he took personal withdrawals from the LLC's bank account, Mr. Gilmartin continued to request that the Bauers fund the LLC. Mr. Gilmartin did not keep separate records of his "loans" from the LLC and, instead, Mr. Gilmartin testified that he recorded the money he borrowed from the LLC on the LLC's checking log. According to Mr. Gilmartin, even a blind man could see which of the LLC's funds went to him or for his benefit. It is clear, however, that Mr. Gilmartin knew he was not to use the LLC's funds for personal purposes and that he intended to deceive the Bauers so he could use the LLC's bank account as his personal piggy bank.1 Mr. Gilmartin never executed any notes to repay the LLC, nor were any notations made in the LLC's records to identify personal expenditures as loans.

The Bauers relied on James Gilmartin's misrepresentations, as is evidenced by their willingness to fund the LLC and guaranty the debt to Regions Bank. This reliance by the Bauers was justifiable. Reliance may be justifiable even when an investigation would have revealed the falsity of the representation. Islamov v. Ungar (In re Ungar), 633 F.3d 675, 679 (8th Cir. 2011) (citing Field v. Mans, 516 U.S. 59, 70 (quoting Restatement (Second) of Torts (1976) §540)). Reliance is not justified when a creditor "blindly relied 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.'" Id. (citing Field, 516 U.S. at 71) (quoting Restatement (Second) of Torts (1976) §541, Cmt. a)). A determination of justifiable reliance depends on the creditor and the facts of the particular case. Id. (citing Field, at 71 (quoting Restatement (Second ) of Torts (1976) §545A, Cmt. b)). The personal loans that the Bauers gave directly to the Gilmartins stand for the proposition that the Bauers thought the money from their personal loans to the Gilmartins was sufficient to meet the Gilmartins' financial needs. There were no red flags warning the Bauers of Mr. Gilmartin's fraudulent activity with respect to the cash of the LLC.

Section 523(a)(2)(A) requires that to have a debt excepted from a debtor's discharge, a creditor is "required to prove that the [debtor] obtained money or property from [the creditor] concurrent with the [debtor's] misrepresentation." Marcusen v. Glen (In re Glen), 639 F.3d 530, 533 (8th Cir. 2011) ("only debt that is obtained by fraudulent conduct is within the scope of §523(a)(2)(A)."). The timing of the fraud is, therefore, important. Notwithstanding the Bauers' argument that the fraud commenced on "day one," this Court finds that Mr. Gilmartin's fraud on the Bauers commenced in October 2006, when the LLC first issued a check to Safeco for Mr. Gilmartin's personal payment. The record shows that Mr. Gilmartin was able to obtain funds for his personal use from October 2006 until the Bauers learned of the fraud, because the Bauers were willing to deposit funds into the LLC's bank account and guarantee the Regions Bank construction loan. And to be part of a "debt . . . for money, property, services, or an extension, renewal or refinancing of credit," obtained by fraud, the contributions made by the Bauers must have been made after October 2006 and up to the time the Bauers learned of the fraud.

B. Damages

The Bauers must also prove whether, and to what extent, the Bauer's loss was proximately caused by James Gilmartin's misrepresentations. The Bauers maintain that they "would not have invested a penny or borrowed a penny had [they] known that the whole thing was a fraud from the very beginning. . . ." They ask for "every dollar [they] put in, every dollar [they] borrowed, and very dollar [they owe] . . . because it was fraudulent from day one. . . ."

As the BAP recognized, "[a]lthough the primary measure of damages for fraud in Missouri is the benefit of the bargain, . . ., alternate measures are available when the bargain theory does not accurately measure the loss sustained. Under certain circumstances, and `out of pocket' measure of damages, such as that alleged by the Bauers here, is authorized." Bauer v. Gilmartin (In re Gilmartin), 459 B.R. 720, 725 (B.A.P. 8th Cir. 2011) (citing Glass Design Imports, Inc. v. Import Specialties, 867 F.2d 1139, 1143 (8th Cir. 1989) and Central Microfilm Serv. v. Basic/Four Corp., 688 F.2d 1206, 1220 (8th Cir. 1982)).

Here, the benefit of the bargain rule does not accurately measure the damages suffered by the Bauers. The Bauers invested in the LLC because Mr. Gilmartin failed to inform the Bauers that he was using the LLC's funds for personal purposes. Because of the actions or inactions of James Gilmartin, the Bauers did not discover the fraud until years after they had started to invest in the LLC and they were unable to avoid the loss. The benefit-of-bargain measure of damages would not accurately measure the loss. See Kerr v. First Commodity Corp. of Boston, 735 F.2d 281, 285 (8th Cir. 1984) (out of pocket theory proper where, assuming the property initially had value, defendant's actions delayed plaintiff's discovery of fraud and plaintiff was not able to avoid the losses due to passage of time); Central Microfilm, 688 F.2d at 1220-1221 (benefit of the bargain theory, difference between represented value and actual value, did not make sense where defendant induced the plaintiff to continue as a dealer of computer hardware and software packages.); Glass Design Imports, 867 F.2d at 1143 (out of pocket damages were proper where "the defendants fraudulently induced [the plaintiff] to become and continue as a dealer [of glass products] — the harm is best measured by the net losses incurred as a result.").

"Thus, under the . . . out-of-pocket rule, a defrauded plaintiff, . . ., is limited only to recovering an amount of money equal to the difference — if any — between the amount that he parted with (i.e., what he is `out of pocket') and the actual value of that which he received." 37 Am Jur 2d Fraud and Deceit, §§ 387 and 420; see also Glass Design Imports, 867 F.2d at 1143 (describing out of pocket damages as "the net losses incurred as a result [of the fraud]").

This Court calculates the amount of damages for a non-dischargeable debt by looking to the Bauers' summary of funds they allegedly contributed to the LLC based on the fraud, as set forth on their Exhibits 6 and 24, and determining whether the Bauers proved that they contributed each amount based on the fraud. Next, this Court subtracts from the amount the Bauers contributed, the value they received.

The Bauers proved that they contributed $1,795,764.43 to the LLC based on the fraud, calculated as follows:

The Bauers alleged they contributed additional amounts in reliance on Mr. Gilmartin's fraud, but the Bauers have not proven that is true. For example, the Bauers have not satisfactorily explained how they justifiably relied on Mr. Gilmartin's misrepresentations when they allegedly advanced funds for the LLC from January 2009 on, after they had already discovered James Gilmartin's fraud.2 In addition, the Bauers took the loan for the second line of credit secured by their home from the bank and allowed the funds from that loan to be given to the LLC. The interest on the Bauers' loan does not represent funds obtained by fraud.3 Other entries on the Bauers' Exhibits 6 and 24 were for an advance made before the fraud commenced, not substantiated based on the limited evidence, and for interest for the period after the Gilmartins filed their bankruptcy petition.

From the $1,795,764.43 in contributions, this Court subtracts the value received by the Bauers. The $760,000 paid for the Geyer Road property at foreclosure is, therefore, deducted from the amount the Bauers' contributions. For the purposes of calculating the amount of the non-dischargeable debt, this Court accepts as credible Mr. Gilmartin's testimony regarding the amount he had the LLC pay for work done on the Bauers' home, approximately $14,000. In addition, any payment by the Chapter 7 trustee to Regions Bank based on the Gilmartins' co-guaranty of the Geyer Property loan should be subtracted from the amount of debt owed by Mr. Gilmartin. Accordingly, the amount of the non-dischargeable debt owed to the Bauers by James Gilmartin is $1,021,764.43, less the amount of any distribution made by the Chapter 7 trustee to Regions Bank with respect to the Geyer Property construction loan.

CONCLUSION

For the foregoing reasons, this Court finds that Larry M. Bauer and Cheryl L. Bauer made a cause of action against James Joseph Gilmartin under Bankruptcy Code §523(a)(2)(A) for a non-dischargeable debt in the amount of $1,021,764.43, less the amount of any distribution made by the Chapter 7 trustee to Regions Bank with respect to the Geyer Property construction loan.