520 B.R. 861
Bankr. D.N.M.2014Background
- Gross loaned the Osbornes funds (total $287,700) beginning in 2006 to help build two houses on a Deming, NM property; the parties never executed written loan documents or a recorded mortgage, and agreed the property would remain unencumbered until Gross was repaid.
- Gross advanced most funds from a HELOC and other sources; by June 23, 2009 he had advanced $221,100 and later advanced an additional $66,600 after the Osbornes obtained a State Farm mortgage.
- The Osbornes obtained a State Farm mortgage in June/July 2009 (recorded) and later modified it and obtained a Schwab mortgage in 2011, without disclosing Gross’s loan to the lenders or telling Gross about the mortgages.
- Gross sued in state court, obtained a default judgment and an equitable mortgage, recorded a transcript of judgment, then the Osbornes filed chapter 7 bankruptcy; Gross sought nondischargeability under § 523(a)(2)(A) and § 523(a)(6).
- The bankruptcy court found the Osbornes intentionally concealed the mortgages, Gross justifiably relied on the omissions, and held $66,600 of the debt nondischargeable under § 523(a)(2)(A); the court denied § 523(a)(6) relief and avoided Gross’s judicial liens under § 522(f).
Issues
| Issue | Gross’s Argument | Osbornes’ Argument | Held |
|---|---|---|---|
| Whether debt is nondischargeable under § 523(a)(2)(A) for false representations/omissions | Osbornes concealed ability to get financing, inheritance repayment promise, and that the Property was encumbered; Gross relied and was induced to advance funds | Representations were true or non-actionable (opinions/promises); Gross had opportunity to investigate | Court held concealment of mortgages (failure to disclose encumbrances) was a material misrepresentation/false pretenses; $66,600 nondischargeable (advances after June 26, 2009) |
| Whether promise to repay from inheritance made the debt nondischargeable under § 523(a)(2)(A) | Promise to repay from Kendra’s inheritance was a fraudulent representation | Promise was a future intent; mere failure to pay from inheritance doesn’t show initial intent not to pay | Court held a bare promise was insufficient; no proof Osbornes never intended to repay from inheritance, so claim failed on this theory |
| Whether statements that a construction mortgage would prevent permanent financing were actionable fraud | Gross relied on Osbornes’ statement that a mortgage would hinder takeout financing | Statements were opinion/speculation about third-party lenders; Gross should have investigated | Court held statements were opinions, Gross didn’t prove intent to deceive, and his reliance was not justifiable on that point |
| Whether debt nondischargeable under § 523(a)(6) (willful and malicious injury) | Concealment of encumbrances and misuse of loan proceeds amounted to willful, malicious injury | Concealment was deceitful but not shown to be intended to cause the specific kind of injury § 523(a)(6) requires | Court found no evidence of intent to cause harm or malice required by § 523(a)(6); claim failed |
| Whether Gross’s judicial/equitable liens impair homestead exemption under § 522(f) | Gross asserted liens from state judgment/equitable mortgage | Osbornes sought to avoid liens as impairing homestead exemption | Court avoided Gross’s judicial liens entirely because exemption consumed available equity |
Key Cases Cited
- Fowler Bros. v. Young, 91 F.3d 1367 (10th Cir. 1996) (elements and burden for § 523(a)(2)(A) claim)
- Johnson v. Riebesell (In re Riebesell), 586 F.3d 782 (10th Cir. 2009) (justifiable reliance is subjective; elements of § 523(a)(2)(A))
- Field v. Mans, 516 U.S. 59 (1995) (standard for justifiable reliance and duty to investigate)
- Kawaauhau v. Geiger, 523 U.S. 57 (1998) (§ 523(a)(6) requires deliberate or intentional injury)
- Panalis v. Moore (In re Moore), 357 F.3d 1125 (10th Cir. 2004) (willful and malicious elements under § 523(a)(6))