WILLIAM T. THURMAN, Bankruptcy Judge.
This matter came on regularly before the Court for trial on February 4 and 5; March 3 and 4; and May 6, 2016, the Honorable William T. Thurman, United States Bankruptcy Judge, presiding. Plaintiffs Telegraph Tower, LLC, and Jared Christiansen were represented by Bryce D. Panzer of Blackburn & Stoll, LC. Defendants Donald Larkin and Stephen Larkin represented themselves pro se. The Court made pretrial rulings on the record in open court and admitted certain exhibits, which are incorporated herein by this reference. The Court also takes judicial notice of the docket in this adversary proceeding and in the underlying chapter 7 case.
The Court has heard and considered the testimony of witnesses and has also considered the documents admitted into evidence. The Court now issues its Findings of Fact and Conclusions of Law.
Federal subject-matter jurisdiction is founded on 28 U.S.C. § 1334. This matter is a core proceeding that a bankruptcy judge may hear and determine.
1. Stephen Larkin ("Stephen") filed a Chapter 7 bankruptcy petition in the District of Utah on January 8, 2014, as Case No. 14-20198.
2. Donald Larkin ("Donald" and together with Stephen, the "Larkins") filed a Chapter 7 bankruptcy petition in the District of Utah on January 10, 2014, as Case No. 14-20290.
3. On March 28, 2014, Telegraph Tower, LLC, a Nevada limited liability company ("Telegraph") and Jared Christiansen ("Christiansen" and together with Telegraph, "Plaintiffs") filed two separate adversary proceedings, one in each of the Larkins' separate bankruptcies. Counsel for Telegraph and the Larkins stipulated to a consolidation of the two adversary proceedings.
4. On April 8, 2014, Plaintiffs and L. Warren Cox and Trina Kay Cox, Trustees of the L. Warren Cox Living Trust dated August 8, 1997 (the "Coxes") filed two separate adversary proceedings, one in each of the Larkins separate bankruptcies.
5. The various aforementioned adversary proceedings were subsequently consolidated by order of this Court for all further proceedings and for trial.
6. The claims asserted by the Coxes were subsequently assigned to Christiansen, and the Court entered an order substituting Christiansen for the Coxes as the real party in interest with respect to such claims.
7. Century Mortgage ("Century"), a Utah limited liability company, was formed in 2006. Century was the successor to an entity called Century Investments, Inc., which was formed by Donald in 1986. Donald is an 80% member of Century and Stephen is a 20% member of Century.
8. Century was in the business of arranging loans to persons and entities that wished to borrow funds.
9. Generally, all loans arranged by Century were short-term construction loans extended to developers and builders for the financing and construction of residences and, to a lesser degree, commercial properties. The lending activities were primarily in Washington County, Utah, and surrounding counties.
10. Funds for many of the loans arranged by Century were provided by persons and entities that wished to participate in such loans. These persons and entities are commonly referred to as Investors or Lenders ("Investors").
11. Century would gather information from prospective borrowers, analyze loan proposals from prospective borrowers, receive funds from Investors, then document and close the loans.
12. In exchange for its services, Century would receive fees, typically in the nature of origination fees paid by borrowers from loan proceeds.
13. Century frequently pooled funds belonging to Investors. For example, Century would receive and hold funds provided to Century by Investors for the purpose of funding advances on loans. Century would also hold funds of Investors on loans that had been paid off by borrowers per agreement with an Investor ("Investor Agreement"). This situation typically arose if Investors and Century anticipated that the funds would be redistributed to fund new loans or if Investors agreed to participate in new loans with the funds.
14. Funds held by Century on behalf of Investors were generally held in the same bank account as other funds belonging to Century and funds belonging to other Investors. During the relevant times hereto, Century used a single bank account, at SunFirst Bank, to hold its own funds and the funds belonging to Investors (the "SunFirst Bank Account"). The SunFirst Bank Account was used by Century for payment of Century's general operating expenses and payroll, disbursements of loan proceeds, and collection of payments on loans from borrowers. Century used QuickBooks, an accounting software program, for all accounting for the SunFirst Bank Account.
15. Around 2008, Christiansen formed Telegraph for the purpose of developing a parcel of property then owned by Christiansen, which was located at 82 East Telegraph Road, Washington City, Utah (the "Property"). Bradly S. Harrell ("Harrell") was also a member of Telegraph.
16. Christiansen had a loan with Village Bank, which was secured by a first priority trust deed on the Property.
17. Plaintiffs intended to develop the Property as a mixed-use retail and office building having a gross building area of approximately 32,000 square feet (the "Project").
18. Beginning around 2008 and continuing on during the relevant times herein, the parties acknowledged that the United States economy saw a sharp decline generally referred to as the Great Recession. The Great Recession had a negative impact on real-estate values nationwide, including Utah. Borrowing and lending patterns began to change, defaults on real estate loans became more frequent, and obtaining funding for real estate projects was extremely difficult. As a result, Plaintiffs requested but failed to obtain financing from several banks and lending institutions. Century became a lender of last resort to Plaintiffs.
19. In approximately the fall of 2008, Plaintiffs contacted Century in connection with their efforts to obtain construction financing for the Project (the "Project Loan"). Plaintiffs and Harrell provided Century with financial statements to support the Project Loan. Plaintiffs also provided Century with pertinent information relating to the Project, including descriptions of the Project and third-party appraisals of the Project.
20. Century expressed an interest in participating in and obtaining construction funding for the Project Loan through its group of Investors. The parties later agreed that the Project Loan would be approximately $2.8 million, which was calculated sufficient to pay off the underlying loan held by Village Bank and provide for completing construction on the Project.
21. During the times relevant to this matter, approximately 2006-2012, the Larkins participated in decisions on behalf of Century and in its business activities, and were persons in control of Century's business. Brian Larkin ("Brian"), an employee of Century and the son of Stephen, also heavily participated in the business activities and preparation of the Project Loan but was not in a pivotal decision making role.
22. During the times relevant to this matter, the Larkins had knowledge of the financial status of Century, including the assets of Century, funds on deposit in the SunFirst Bank Account, and Century's disbursements of funds from the SunFirst Bank Account. This knowledge included knowledge of the various receipts and disbursements otherwise identified and described in these Findings of Fact.
23. The basis of Century's business model was that Century would act as the agent for Investors in gathering information from prospective borrowers, analyzing loan proposals, receiving and holding funds from Investors for the loans, documenting and closing the loans, and servicing the loans on behalf of Investors. Century's business model also included the practice of not earmarking Investor funds for a specific loan in the SunFirst Bank Account. Investor funds were accounted for in Century's QuickBooks records, but Century would use Investor funds at its discretion to pay administrative expenses, repayments to Investors, and payments on loans and other projects.
24. Typically, Century was not itself a lender, unless it participated as such with respect to a specific loan.
25. Century's servicing of the loans included gathering funds from Investors, holding and disbursing the funds on behalf of Investors pursuant to the loan documents (typically as construction loan draws), collecting payments on the loans and, if necessary, arranging for foreclosure and sale of collateral.
26. Century's typical business practices were followed with respect to the Project Loan. In particular, Century acted as the agent for the various Investors that agreed to participate in the Project Loan, and, as such, owed fiduciary duties to those Investors.
27. As the members and persons in control of Century, the Larkins also owed fiduciary duties to Investors with respect to the Project Loan and admit to this fact.
28. The Larkins contacted various persons and obtained commitments that certain persons would be willing to participate as Investors in the Project Loan.
29. In approximately late March and/or early April 2009, the Larkins advised Plaintiffs that Century was close to obtaining sufficient commitments from its Investors in order to fund the Project Loan. Specifically, the Larkins advised Plaintiffs that certain loans extended by Investors on other projects were maturing and would be paid off to Century, and a loan on another property (commonly referred to as "Entrada Lot 12"), was being paid to Century, thereby generating over $1 million, which was a significant portion of the funds needed for the Project Loan.
30. The Larkins advised Plaintiffs that many of Investors involved in Entrada Lot 12 were willing to commit their funds to the Project Loan. The Larkins further advised Plaintiffs that Century would need about six more weeks to obtain the remaining funds for the Project Loan.
31. The Larkins informed Plaintiffs that in order to maintain the commitments to Century from Investors on the Project Loan, Investors needed to be assured that they would receive interest on their funds. The interest would be held by Century for the benefit of Investors until Century had obtained sufficient additional commitments to close the Project Loan.
32. The Larkins participated in and knew that communications regarding interest payments pending loan closing were being made to Plaintiffs.
33. Based upon Century's specific assurances that the necessary remaining commitments for the Project Loan could be obtained in approximately six weeks, which would trigger the Project Loan closing, Plaintiffs agreed to pay interest on funds committed by Investors to the Project Loan.
34. The sale of Entrada Lot 12 in fact closed in late March 2009, and, as a consequence thereof, Century received $1,153,023.48 belonging to Investors involved in the Entrada Lot 12 loan. These funds were deposited in the SunFirst Bank Account.
35. Donald represented to Plaintiffs that a substantial portion, over $1 million, of the Entrada Lot 12 funds would be committed to the Project Loan.
36. Within one month after Century received the funds from the sale of Entrada Lot 12, Century applied a substantial portions of those funds in payment of obligations of Century. Century made the following payments:
A. $503,197.29 to SunFirst Bank on a credit line loan of Century, which was guaranteed by Donald, Stephen, the Larkin Family Limited Partnership, and the Larkin Family Charitable Trust
B. $50,152.64 on an obligation of Donald to U.S. Bank, which Donald previously put into Century in some form; and
C. $153,650 to Professional Interchange Properties, LLC, on an obligation of Century and/or Donald, which Donald previously put into Century in some form.
37. Although consistent with Century's business model, as a consequence of the above referenced disbursements and various other disbursements by Century, as well as payments to Investors on other loans collected, as of April 20, 2009, Century only had about $15,000.00 left on deposit in the SunFirst Bank Account.
38. By April 20, 2009, Century had exhausted essentially all of the funds it had represented to Plaintiffs as had been received to fund the Project Loan, which Plaintiffs had agreed to pay interest, pending loan closing. This information was not disclosed to Plaintiffs and Century delayed closing of the Project Loan for approximately another year.
39. Century and the Larkins did not inform Plaintiffs that almost all of the funds collected to fund the Project Loan had been used by Century for other purposes. The Larkins led Plaintiffs to believe that the Project Loan funds continued to be held by Century.
40. Had Plaintiffs been told that the funds collected by Century were used for other purposes Plaintiffs would have terminated their efforts to close the Project Loan with Century because it would have been apparent that Century and Investors did not have the ability to fund and complete the Project Loan.
41. At various times after April 20, 2009, Century collected and retained "rollover funds" (i.e., funds belonging to investors on account of payoffs of other loans in which such investors recommitted the funds to new loans). Century advised Plaintiffs that the "rollover funds" would be used to fund the Project Loan.
42. At various times thereafter, until approximately late April 2010, Century collected "new money" (i.e., cash deposits that were not payoffs on existing loans being serviced by Century), from prospective Investors. Century advised Plaintiffs that the "new money" would be used to fund the Project Loan. For example, Century collected "new money" from the following:
A. $200,000 from Craig Hopkinson, Trustee of CTTZ on or about June 19, 2009;
B. $600,000 from Harris Property Investment on or about September 28, 2009, November 17 and 18, 2009, and April 30, 2010; and
C. $100,000 from Dustin Gillman on or about November 20, 2009. 43. The "rollover funds" and the "new money" (the "Future Receivables") were deposited in Century's SunFirst Bank Account.
44. Through late April 2010, Century had collected approximately $2.5 million from Investors and these funds were committed to the Project Loan.
45. Consistent with Century's business model, Century continued to use funds in the SunFirst Bank Account to pay its general operating expenses and payroll, for disbursement of other loans that it was servicing for Investors.
46. Throughout the period from April 2009 until late April 2010, the difference between the funds collected by Century for funding the Project Loan and the funds actually available in the SunFirst Bank Account continued to grow.
47. During this same period, Century used, for its own purposes, approximately $1.8 million from the funds that were committed by Investors to the Project Loan.
48. Throughout the same period, the Larkins were aware of the funds Investors committed to the Project Loan and were also aware of the funds actually available in the SunFirst Bank Account.
49. Throughout the same period, the Larkins continued to advise Plaintiffs that the Project Loan funds were available. The Larkins did not tell Plaintiffs that Century had spent or disbursed the majority of the Project Loan's funds for other purposes.
50. Despite having collected over $2.5 million from Investors for the Project Loan, as of late April 2010, Century had only approximately $600,000 in the SunFirst Bank Account and almost all of the funds were Future Receivables, recently collected from Investors to fund the Project Loan.
51. As of late April 2010, the Larkins informed Plaintiffs that Century had sufficient funds to close the Project Loan, excepting only about $300,000. Particularly, the Larkins informed Plaintiffs that Century possessed sufficient funding needed to fund the draws to be paid during the construction period. At that point, the Larkins advised Plaintiffs that Century was prepared to close on the Project Loan.
52. From the Larkins point of view, telling Plaintiffs that Century had the funds for the Project was truthful because Century and the Larkins were counting on Future Receivables and anticipated collections. However, under the circumstances of the Project Loan, Plaintiffs knew Century had solicited and collected funds specifically for the Project and it was reasonable for Plaintiffs to believe the Project Loan funds would be held and sequestered only for the Project.
53. The Larkins participated in and knew of these communications with Plaintiffs.
54. Because Century had spent the Project Loan funds for other purposes, Century only had approximately $600,000 in the SunFirst Bank Account, which was at least $1.8 million less than was represented to Plaintiffs as being available.
55. Despite only having $600,000 of the $2.8 million required for the Project Loan, the Larkins assumed Century would have funds available, from Future Receivables and anticipated collections, to fund construction draws requested by Plaintiffs for the Project Loan. Century's seemingly infallible business practice proved to be precarious and reckless during the Great Recession.
56. The Larkins had a duty to advise Plaintiffs of material information regarding the Project Loan. The Larkins did not advise Plaintiffs that Century only had $600,000 of the $2.8 million required for the Project Loan. Plaintiffs reasonably believed, based on Century's and the Larkins' representations, that the full amount necessary for the Project Loan had not only been collected by Century but were segregated into a disbursement account awaiting construction draw requests from Plaintiffs.
57. The failure of the Larkins to advise Plaintiffs that the Project Loan funds were not available in the SunFirst Bank Account was irresponsible under the existing circumstances. The Larkins carelessly anticipated that Century would accumulate Future Receivables and anticipated collections for the Project Loan but did not communicate this plan to Plaintiffs. Accordingly, the Larkins should have communicated this plan to Plaintiffs particularly in light of the Great Recession.
58. Plaintiffs were not aware that the Project Loan funds were not readily available. Moreover, Plaintiffs were not aware that the representations made by the Larkins were reckless and based on a plan of pure hope.
59. The Larkins recklessly disregarded the truth for the purpose of inducing Plaintiffs to rely on such representations in continuing to deal with Century with respect to closing the Project Loan. Plaintiffs justifiably relied on such representations to their detriment.
60. It was necessary for Century and the Larkins to induce Plaintiffs to close on the Project Loan because if Plaintiffs did not close on the Project Loan, Century would have been required to return the funds to Investors, and it no longer had sufficient funds to do so.
61. In addition, Christiansen's secured loan with Village Bank had matured. If Village Bank foreclosed on the Property, Century would likewise be unable to close on the Project loan, and would have been required to return the funds to Investors.
62. Had Plaintiffs known that the Larkins recklessly disregarded the truth by failing to disclose Century's entire financial picture and Century's reliance on Future Receivables, Plaintiffs would not have closed on the Project Loan. Among other things, had the Larkins informed Plaintiffs that the $2.8 million required for the Project Loan was used for other purposes and not readily available, Plaintiffs would have realized that Century would be unable, or likely unable, to fund the necessary construction draws for the Project Loan.
63. Lacking knowledge of the Larkins' reckless disregard for the truth, Plaintiffs proceeded to close the Project Loan, with Century acting as agent for Investors.
64. Plaintiffs and Harrell, as borrowers, Century, as agent for Investors, and Investors, as lenders, executed various documents to evidence the Project Loan (the "Project Loan Documents"). The Project Loan Documents included a Trust Deed Note,
65. As reflected in the Construction Loan Agreement and construction budget, Century, as agent for Investors, agreed to make available to Telegraph the sum of $1,721,273.90 to pay costs of construction.
A. An interest reserve of $338,520.00, which Century was to use to pay interest to Investors during the twelve months following the Project Loan closing; and
B. A closing/origination fee to Century, which was agreed to be $108,285.00.
66. After the Project Loan closed, Plaintiffs commences construction of the Project based upon Century's and the Larkins' representations that Century had and would have sufficient funds to fund the Project Loan in accordance with the Project Loan Documents.
67. After commencing construction, Telegraph submitted two construction draw requests to Century,
68. In August 2010, about two months into the construction of the Project, and after the submission of Telegraph's third draw request, Century and the Larkins informed Plaintiffs that Century did not have sufficient funds to continue disbursements on the Project Loan.
69. At this point, Century ceased making disbursements on the Project Loan on behalf of Investors.
70. Century also ceased disbursement of the monthly interest payments to Investors from the interest reserve.
71. The Larkins and Plaintiffs attempted to negotiate other arrangements for funding the Project Loan but were unsuccessful.
72. In early 2010, Warren Cox (Christiansen's former father-in-law) became aware, through his daughter that Century was close to obtaining sufficient commitments to proceed with the Project Loan.
73. Mr. Cox contacted the Larkins and informed them that he had two lots in Iron County, Utah that he was willing to pledge as collateral, as an Investor in the Project Loan, if that would enable Century to complete the funding for the Project Loan.
74. The Larkins informed Mr. Cox that Century had another Investor, Sam Schmutz, who would be willing to put up $100,000 in cash if Mr. Cox would pledge the Iron County lots as collateral.
75. Accordingly, Mr. Cox, through a company he owned called CCC Construction, executed a trust deed against the Iron County lots to secure the loan from Sam Schmutz. Mr. Cox signed an Investor Agreement to participate in the Project Loan in the sum of $100,000.
76. In connection therewith, Century executed a trust deed note for $100,000, payable to Mr. Schmutz.
77. Notwithstanding this transaction, Century did not close and fund the Project loan.
78. After execution of the Investor Agreement, the Larkins told Mr. Cox that Century still needed cash to close the Project Loan. Mr. Cox told the Larkins that he was closing on the Iron County lot which would generate approximately $100,000 and he was willing to invest that amount in the Project Loan, if it was the last investment Century needed to close on the Project Loan.
79. The Larkins confirmed to Mr. Cox that $100,000 from his lot sale would be the last funding and commitment Century needed to close the Project Loan.
80. The Larkins agreed to the terms of Mr. Cox's proposal to provide $100,000 toward the Project Loan only if it was the last funding needed to close the Project Loan. The Larkins knew of and confirmed Mr. Cox's understanding that Mr. Cox's $100,000 was the last funding and commitment that Century needed to close the Project Loan.
81. With that assurance, Mr. Cox agreed to invest $100,000 (through the sale of the lot), and he arranged for $100,000 to be disbursed by the title company handling the lot sale to Century in exchange for the reconveyance of the trust deed that had previously been given by CCC Construction to secure a loan from Mr. Schmutz.
82. On or about May 3, 2010, the title company issued a request for reconveyance of the trust deed from CCC Construction.
83. Thereafter, the title company disbursed $100,000 to Century on or about May 25, 2010, and shortly thereafter Mr. Cox executed an Investor's Agreement on behalf of the Coxes, to reflect his agreement to provide $100,000 as an Investor in the Project Loan.
84. The Larkins had a duty to advise the Coxes of material information regarding the Project Loan. The Larkins failed to disclose to the Coxes that Century did not have sufficient funds in the SunFirst Bank Account to fund the Project Loan. The Larkins failed to honor their duty and recklessly disregarded the truth by not informing the Coxes that Century only had $600,000 of the $2.8 million required for the Project Loan. The Larkins knew that Century had disbursed and spent, for other purposes, over $1.8 million of Project Loan funds, and that Century had insufficient funds available to permit it to fund the Project Loan. The Larkins' representation that the $100,000 from the Coxes was the last investment needed for the Project Loan was false and the Larkins knew the statement was false when it was made.
85. As agents of Investors and of the Coxes with respect to the Project Loan, Century and the Larkins owed a fiduciary duty to the Coxes to handle their funds honestly and to disclose to the Coxes all material information known to Century and the Larkins relating to the Project Loan. This included a fiduciary duty of the Larkins to disclose to the Coxes that, although Century had previously received approximately $2.4 million in funds from Investors for the Project loan, over $1.8 million of those funds had previously been disbursed and spent for other purposes.
86. The Larkins representation to the Coxes that Century has collected sufficient funds for the Project Loan, less $100,000, was material to the agreement to participate in the loan, inasmuch as the Coxes were willing to participate in the Project Loan only if the Coxes' investment of $100,000 was the last investment needed to close and fund the Project Loan.
87. The Coxes did not know that the Larkins recklessly disregarded the truth, and the Coxes reasonably relied, to their detriment, upon the statements of the Larkins in participating in the Project Loan and funding the $100,000.
88. Had the Coxes been told by the Larkins that Century did not have sufficient funds for the Project Loan, the Coxes would not have provided the $100,000 to Century for the Project Loan.
89. Despite reasonable inquiry and efforts to obtain a replacement construction loan, Plaintiffs and the Larkins were unable to do so because construction had commenced on the Project and mechanics' liens had been filed against the Property.
90. According to Century's representation if Century timely funded the Project Loan construction draw requests on behalf of Investors the Project would have been completed by the nine month anniversary of the Project Loan or approximately January 26, 2011.
91. According to Century's representations, if Century timely funded the construction draw requests on behalf of Investors the Project would have had a value in excess of the balance owed to Investors.
92. Specifically, had the Project Loan been funded as agreed, the Project as completed would have had a reasonable fair market value of $3,700,000.00 as of January 26, 2011.
93. If Century had funded the Project Loan as agreed, the Project Loan balance owed on the trust deed note as of January 26, 2011, would have been $2,775,530.00, taking into account the remaining "interest reserve" component of the Project Loan that would have been credited had the Project Loan been paid off on that date.
94. If Century had funded the Project as represented and agreed, the Plaintiffs would have been required to pay $304,863.84 in additional expenses in order to realize on the value of the Project.
95. The land comprising the Project, though still owned by Telegraph, has no value to Plaintiffs because it is encumbered by mechanics' liens in excess of its fair market value.
96. Accordingly, the general damages suffered by Plaintiffs as a consequence of the Larkins' reckless disregard for the truth, as measured by the loss of bargain (the value of the Project) was $619,606.16 as of January 26, 2011.
97. Interest should accrue on that sum from January 26, 2011, to the date of entry of judgment herein, at the legal rate of ten percent (10%) per annum.
98. Accordingly, general damages claimed by Telegraph and Christiansen are awarded as follows:
99. Telegraph also makes a claim for special damages as a direct and proximate result of the Larkins' reckless disregard for the truth, and because Century failed to timely and completely fund the Project Loan construction draws on behalf of Investors as represented, the Project failed. Among the adverse consequences of the Project failing were the following:
A. Telegraph halted construction on the Project because, in the absence of the Project Loan funds, Telegraph had no funds to pay the general contractors and subcontractors for work on the Project.
B. Because the Project could not be completed timely, Telegraph had to move the wall bracing (which was for construction purposes only) to facilitate the Utah Department of Transportation's ("UDOT") expansion of Telegraph Road. The cost of moving the wall bracing was $24,425.00 (comprised of $1,000.00 for engineering and $23,425.00 to B.A. Robinson Construction for work on the same).
C. Telegraph had substantial disputes with Washington City, Utah because Telegraph could not comply with the Project building permit and breached an Impact Fee Deferral Agreement, requiring substantial management time and attorney's fees. Ultimately, Washington City required that the foundations and walls of the partially built structure be removed. The cost of removing the foundations and walls of the partially built structure was $25,030.00. The Court value of the management time and attorney's fees incurred in dealing with disputes with the City in the amount of $13,894.68.
100. Telegraph received $42,800.00 from UDOT in connection with a partial condemnation of a portion of the Property, which should be credited to the damages found by the Court herein.
101. The foregoing special damages Telegraph incurred, in the amount of $20,549.68, were complete no later than October 4, 2012 when Telegraph entered into the Settlement Agreement with Washington City. Interest should accrue on that sum from October 4, 2012 to the date of entry of judgment herein at the legal rate of ten percent (10%) per annum.
102. Accordingly, special damages claimed by Telegraph are awarded as follows:
103. Plaintiffs claim that as a direct and proximate result of the Larkins' conduct, and because Century failed to timely and completely fund the Project Loan on behalf of Investors, in accordance with the representations made, litigation ensued in the State Court (the "Litigation"), involving Plaintiffs, Harrell, Century, Donald Larkin, Stephen Larkin, Brian Larkin, various parties claiming mechanics' liens on the Property, and Investors that had agreed to make the loan through Century.
104. The Larkins' bankruptcy filings stayed the Litigation against the Larkins, Brian Larkin and Century. The Bankruptcy Court dismissed the chapter 7 petitions filed by Brian Larkin and Century, but the Litigation has not yet been concluded.
105. Plaintiffs did not prevail on certain actions in the Litigation and judgments were entered in favor of certain Investors, and against Plaintiffs, jointly and severally, for costs and attorney fees incurred in the Litigation ("Attorney's Fees Judgments"), as follows:
A.
B.
106. Plaintiffs did not present sufficient evidence to support the contention that the Larkins should indemnify Plaintiffs or otherwise be responsible for attorney fees awarded to certain Investors in the Litigation. Plaintiffs initiated the Litigation and did not prevail. Plaintiffs are not entitled to a judgment against the Larkins for the amounts of the Attorney's Fees Judgments and the Larkins are not required to indemnify Plaintiffs with respect thereto.
107. Accordingly, Telegraph and Christiansen's claim for special damages stemming from the State Court Litigation are awarded as follows:
108. Telegraph was unable to pay charges and costs previously incurred in construction of the Project, which resulted, in part, in the filing of numerous mechanics' liens against the Property, and substantial increases in such costs (with interest and attorney's fees).
109. The Litigation against the mechanic's lien claimants fixed Telegraph's liability to the mechanic's lien claimants, which are secured by the mechanics' liens against the Property, as follows:
A. B. A. Robinson & Sons Const., Inc., holds a mechanics' lien against the Property to secure a judgment in the sum of $123,3.44, plus interest from and after January 13, 2014, at the rate of 4.13% per annum.
B. Sure Design Concrete, Inc., holds a mechanics' lien against the Property to secure a judgment in the sum of $97,099.38, plus interest from and after March 22, 2014, at the per diem rate of $7.22.
C. Creative Excavating, Inc., holds a mechanics' lien against the Property to secure a judgment in the sum of $82,411.51, plus interest from and after March 21, 2014, at the per diem rate of $6.09.
110. Amounts owed to the foregoing mechanics liens claimants were included in the Project Loan balance as a projected expense.
111. Telegraph's special damages as a consequence of the mechanic liens, less the projected amounts for supplies and work performed by mechanics liens claimants, are $90,307.39, plus interest at the aforementioned legal rates.
112. Accordingly, Telegraph's special damages resulting from the mechanics liens are awarded as follows:
113. Christiansen claims that if the Project Loan had been funded Christiansen would have received fees for supervising the Project in accordance with the Project Loan construction budget.
114. The Court finds that, based upon the evidence presented, the anticipated supervising fee was included in the total amount of the Project Loan and thus is not awardable as separate special damages.
115. Christiansen was (and is) a licensed real estate agent, and Christiansen anticipated that he would also be the marketing agent for the Project and receive fees from the same if the Project were developed as a condominium building. The Court is using the "as-is" valuation of the Project for Telegraph's general damages, supra, because the development of the Project as a condominium was and is speculative. Accordingly, Christiansen's losses for marketing fees, if the Project was developed as a condominium, are also speculative and not awardable.
116. Christiansen claims that he suffered emotional and mental distress as a result of the Larkins conduct. Based on the evidence presented, the Court finds that Christiansen did not meet his burden to prove he suffered emotional and mental distress as a result of the Larkins' conduct. Further, there was no corroboration from any expert that Christiansen incurred such damages.
117. Accordingly, special damages claimed by Jared Christiansen are awarded as follows:
118. As a direct and proximate result of the Larkins' reckless disregard for the truth and breach of their fiduciary duty to the Coxes, the Coxes suffered damages of $100,000.00 (the amount provided to Century for use in funding the Project Loan).
119. The Coxes received two interest payments of $1,000 from Century, on or about June 28, 2010 and July 26, 2010.
120. Christiansen, as assignee of the Coxes, is entitled to recover the sum of $100,000, plus interest at the legal rate of 10% per annum from July 26, 2010 to the date of entry of judgment herein.
121. Accordingly, general damages claimed Jared Christiansen, as assignee for the Coxes, are awarded as follows:
Section 11 U.S.C. § 523(a)(2)(A)
Exceptions to discharge are narrowly construed and any doubt is to be resolved in the debtor's favor.
The Larkins do not dispute that Plaintiffs relied on their representation and that such reliance was justifiable, which caused Plaintiffs to sustain a loss. The only questions remaining are whether the Larkins made a false representation, whether the Larkins made such representations with the intent to deceive Plaintiffs, and the total amount of loss suffered by Plaintiff as a result of the representation.
Plaintiffs assert that the Larkins' made a false representation when the Larkins failed to disclose to Plaintiffs that Century used the majority of the funds collected from Investors for the Project Loan. Plaintiffs state that the Larkins informed the Coxes that Century only needed an additional $100,000 to close the approximately $2.8 million Project Loan, when in fact Century only had approximately $600,000 in the SunFirst Bank Account to close the Project Loan. Plaintiffs and the Coxes assert that the Larkins represented that Century had collected sufficient funds from Investors in order to proceed with and close the Project Loan when in fact Century did not have sufficient funds.
The Larkins concede that they made representations to Plaintiffs and Coxes, on behalf of Century and Investors, that sufficient funds had been collected to close and fund the Project Loan. The Larkins allege that the representations were not false, at the time made, but rather true because the Project Loan funds were being held in various forms, other than readily available cash, such as Future Receivables and anticipated collections. The Larkins argue that per their business model, which proved successful for over 20 years, they never disclosed to investors and/or borrowers the amount of funds in the SunFirst Bank Account and in this case the Larkins saw no need to deviate from their norm. The Larkins acknowledge that Century was unable to fund the Project Loan and construction draws on the Project Loan but the Larkins had good faith hopes that funds would be available for the Project Loan.
The Larkins' representation to Plaintiffs that Century had collected sufficient funds to proceed with and close the Project Loan were false. The Larkins' representation to Coxes that Century only needed $100,000 to complete funding for the Project Loan was false. Contrary to the representations made by the Larkins, Century was unable to fund the Project Loan construction draws as they came because Century did not have readily-available cash to fund the Project Loan and needed much more than $100,000 for the Project Loan to close. Accordingly, Plaintiffs and Coxes have met their burden of showing that the representations made by the Larkins were false.
As recognized by the Tenth Circuit Bankruptcy Appellate Panel in Columbia State Bank, N.A. v. Daviscourt,
In this case, the Larkins' intent to deceive can be inferred from their reckless disregard for the truth concerning Century's funds available for the Project Loan. The Larkins argue that their business practice of not disclosing the amount of funds on hand to investors and/or borrowers worked for over 20 years; thus, with the Project Loan the Larkins did not see a reason to depart from their normal practice. The Larkins knew that Century did not have sufficient funds for the Project Loan but irresponsibly ignored this material fact by failing to disclose the fact to Plaintiffs and the Coxes. Applying the narrow interpretation of "reckless disregard" from In re Kukuk, the Court concludes that Plaintiffs and the Coxes have shown, by a preponderance of evidence, that the Larkins had the requisite intent to deceive Plaintiffs and the Coxes.
Again, the Larkins do not dispute that Plaintiffs and the Coxes relied on their representation and that such reliance was justified. Although Plaintiffs and the Larkins were in a relationship for over a year, which may have given Plaintiffs time to uncover certain facts about the funds for the Project Loan, Plaintiffs' reliance on the Larkins' representations was justified based on the particular circumstances of this case. Century and the Larkins had a good reputation in the community and on several occasions supplied Plaintiffs with information to assure Plaintiffs that Century had the Project Loan funds parked and ready to disburse when needed. Similarly, the Coxes were constantly assured by the Larkins that Century only needed $100,000 to complete funding for the Project Loan. Accordingly, the Court concludes Plaintiffs' and the Coxes' reliance on the Larkins' representations was justifiable.
Under § 523(a)(2)(A), a creditor must prove by a preponderance of the evidence that "the amount of his damages [are] attributable to actual fraud,"
Section 523(a)(2)(A) prevents the discharge of any debt respecting money, property, services, or credit that the debtor has "fraudulently obtained, including treble damages, attorney's fees, and other relief that may exceed the value obtained by the debtor."
Plaintiffs also seeks special damages for all amounts for which they are liable to third parties under the "Attorney's Fees Judgments" issued in the Litigation and special damages for Christiansen for lost supervision fees, anticipated marketing income, and emotional and mental anguish. The Court concludes that, based upon the evidence presented, Plaintiffs failed to meet their burden to prove that these damages are recoverable.
Section 523(a)(4) states as follows:
(a) A discharge under section 727 . . . of this title does not discharge an individual debtor from any debt . . .
(4) for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny[.].
The fiduciary defalcation exception in § 523(a)(4) has been particularly defined by the Tenth Circuit.
The Larkins do not dispute and the Court concludes that they acted as fiduciaries to the Coxes, as an Investor, with respect to the Project Loan. The Construction Loan Agreement and Investor Agreement made clear that Century was to act as agent for Investors with respect to the Project Loan. The Larkins concede that the Coxes entrusted Century with $100,000 per the Investor Agreement for the benefit of the Project Loan to Plaintiffs. The Larkins acknowledge that the representations made to the Coxes with respect to the Project Loan, while in a fiduciary capacity, and the Court concludes, supra, those representations were false. The only questions remaining are whether the Larkins acted as fiduciaries to Telegraph and Christiansen and whether the transaction with the Coxes was a defalcation.
Plaintiffs argue they were "intended beneficiaries" of the fiduciary relationship between Century and Investors. The Tenth Circuit has stated that a creditor must prove that an express or technical trust existed with respect to the parties prior to the creation of the debt.
The remaining question is whether the debt arose from misconduct that is a "defalcation" within the meaning of bankruptcy law. In order to hold a debt non-dischargeable under § 523(a)(4), the debtor must have "acted with wrongful intent, or, at a minimum, with a conscious disregard of his or her fiduciary duties."
For the reasons stated above, and based on the entire record, the Court concludes that Plaintiffs have established the elements of § 523(a)(2)(A) but did not establish the elements of § 523(a)(4). The Coxes established the elements of §§ 523(a)(2)(A) and 523(a)(4). For these reasons, the Court determines that the debt owed to Plaintiffs and the Coxes is nondischargable under § 523(a)(2(A) in the amounts as stated herein. Further, the obligation to the Coxes only, in the amount of $100,000 plus accruing interest is determined to be non-dischargeable pursuant to § 523(a)(4).
An order and judgment in accordance with these Findings of Fact and Conclusions of Law shall be uploaded by counsel for Plaintiffs.
