563 B.R. 431
1st Cir. BAP2017Background
- Eric Zutrau (Debtor) borrowed substantial sums from his sister Leilani (Appellee) to fund two projects: construction of a house on Oak Bluffs property and a condominium-conversion in Brookline. Loans were documented by multiple promissory notes (Notes A–E).
- Appellee financed many advances by drawing on bank lines of credit secured by her residence and by using funds she expected to be repaid from proceeds of the Brookline condominium sales.
- Debtor promised (via September 2006 e-mails and notes) to repay Appellee from Brookline sale proceeds, to give her priority after banks, and to execute/record mortgages securing Notes B–E; he recorded a mortgage only for Note A.
- Debtor twice refinanced Brookline without informing Appellee, sold three condominium units, and used remaining sale proceeds to pay other unsecured creditors; Appellee received $250,000 which she allocated among several obligations.
- Appellee sued in adversary proceeding seeking nondischargeability under 11 U.S.C. § 523(a)(2)(A) and (a)(6); after trial the bankruptcy court held $193,000 nondischargeable under § 523(a)(2)(A) (later amended to $321,000 via Rule 59(e) motion) and $80,000 nondischargeable under § 523(a)(6).
- Debtor appealed pro se; the Bankruptcy Appellate Panel affirmed the Amended Judgment finding the required elements of § 523(a)(2)(A) and § 523(a)(6) supported by the record.
Issues
| Issue | Appellee's Argument | Debtor's Argument | Held |
|---|---|---|---|
| Whether debts obtained by Debtor’s promises and false statements are nondischargeable under § 523(a)(2)(A) | Debtor made knowingly false promises (to repay from Brookline after banks and to record mortgages) inducing loans; Appellee justifiably relied and suffered damages | Debtor contends he intended to repay, recorded mortgage for Note A, and Appellee misallocated the $250,000 repayment; some amounts were previously ruled dischargeable | Court: Findings supported; Debtor intended to deceive; Appellee’s reliance was justifiable; $321,000 of principal plus interest and fees excepted from discharge under § 523(a)(2)(A) (including previously excluded $128,000 after Rule 59(e)) |
| Whether refusal or failure to record mortgages defeats nondischargeability claims | Appellee: promissory notes created an (unperfected) property interest and false promises to record mortgages were fraudulent inducements | Debtor: October 2007 email modified/relieved recording obligations; recording of some mortgages was unnecessary/waived | Court: Even if a later email suggested delay, the promises were false when made; Appellee held an interest in proceeds; Debtor’s failure to record and subsequent conduct support fraud findings |
| Whether bankruptcy court erred in amending judgment (Rule 59(e)) to include additional Note A principal | Appellee: incorporation of prior debts into Note A constituted refinancing/renewal obtained by Debtor’s false promise, so additional principal falls under § 523(a)(2)(A) | Debtor: court previously found earlier amounts dischargeable and should not have reopened those findings | Court: Amendment proper—Appellee presented persuasive grounds showing refinancing/renewal in reliance on Debtor’s promise; additional findings supported; Amended Judgment affirmed |
| Whether Appellee’s allocation of the $250,000 repayment was improper, eliminating claims for Notes C–E | Debtor: $250,000 would have covered Notes C–E and other advances if allocated differently, leaving no nondischargeable balance | Appellee: testified parties agreed allocation (including $84,704 to Oak Bluffs expenses); court credited her testimony | Court: Credibility findings plausible and not clearly erroneous; allocation upheld; claims remain valid |
Key Cases Cited
- Zutrau v. Zutrau (In re Zutrau), 546 B.R. 239 (Bankr. D. Mass. 2016) (bankruptcy court decision affirmed by BAP)
- Toye v. O’Donnell (In re O’Donnell), 728 F.3d 41 (1st Cir. 2013) (clear-error standard; deference when intent/credibility at issue)
- Anderson v. City of Bessemer City, 470 U.S. 564 (U.S. 1985) (factfinder’s choice among permissible views not clear error)
- Field v. Mans, 516 U.S. 59 (U.S. 1995) (§ 523(a)(2)(A) requires only justifiable, not reasonable, reliance)
- Castellanos Group Law Firm v. F.D.I.C. (In re MJS Las Croabas Props., Inc.), 545 B.R. 401 (1st Cir. BAP 2016) (standard of review statements for bankruptcy appeals)
- Falcone v. Ragonese (In re Ragonese), 505 B.R. 605 (1st Cir. BAP 2014) (dischargeability determination is a final, appealable bankruptcy order)
- R.C. Olsen Cadillac, Inc. v. Haras (In re Haras), 526 B.R. 435 (Bankr. D. Mass. 2015) (reckless representations can establish intent to deceive)