Christenson v. Lee (In Re Lee)Christenson v. Lee (In Re Lee)
MEMORANDUM DECISION
Leland Christenson was a gun enthusiast who wanted to add machine guns to his collection. Nikki Lee was an experienced gun dealer who specialized in rare machine guns. The two met at a “shoot,” and forged a relationship in which Lee agreed to procure machine guns and accessories for Christenson. Although their first transaction went smoothly, the next one went South. Eventually, Lee filed bankruptcy, and Christenson filed this adversary proceeding claiming that Lee committed fraud. Christenson also contends that Lee was less than forthcoming on his bankruptcy schedules, and concludes that Lee’s entire discharge should be denied.
We begin with some basic, but essential, terminology. For our purposes, machine guns may be grouped into two different classes: “transferable” and “nontransferable.” Although expensive, transferable machine guns can be purchased with relatively few requirements, such as a background check, a letter from a local law enforcement official and payment of a fee. Nontransferable machine guns, as the name suggests, cannot be bought and sold by the public; these weapons require a Class 3 gun dealer’s license to purchase, sell or even possess. Nontransferables are subject to strict Bureau of Alcohol, Tobacco, Firearms, and Explosives (ATF) requirements, including the right of ATF to inspect the Class 3 gun dealer’s premises annually. Trial Tr. 106. Essentially, nontransferable machine guns are intended for sale to law enforcement and the military only.
Whether a machine gun is classified as transferable or nontransferable depends on its manufacture date. Transferable weapons are those manufactured before May 1986; they are considered collectible and more valuable than nontransferables. Because the manufacturing date determines whether a machine gun is transferable, the same model gun may be transferable or nontransferable. For example, a pre-1986 (transferable) M-16 may sell for between $11,000 to $18,000, while a new (nontransferable) M-16 can be purchased by law enforcement or the military for $600 to $1,000. See Machine Guns: Machine Gun Price Guide July 2009, available at http://machinegunpriceguide.com/ htmVus_mg_4.html (last visited Aug. 25, 2009). The transaction at issue here involves two nontransferable machine guns: a Negev SAW and a P-90.
STATEMENT OF FACTS
Christenson and Lee met at the machine gun shoot and discussed Christenson’s potential purchase of an MP5. Trial Tr. at 161. Later, Lee called Christenson and said he had located one that Christenson could purchase. Trial Tr. at 162. On April 9, 2002, Christenson wired $11,000 to Lee to purchase the MP5. Trial Tr. 162-63. It is not disputed that the MP5 Lee purchased for Christenson is a transferable machine gun. Later in April 2002, Chris-tenson sent another $4,700 to Lee for an Mil and two Gemtec suppressors; these are also considered transferables. Trial Tr. 164. Lee disputes that this payment was for these items; he testified that the additional $4,700 was part of the payment for the MP3. Trial Tr. 219. Lee delivered the MP5 to Christenson in December 2002 (Trial Tr. 5); Christenson was very pleased with the transaction, and decided to purchase more machine guns for his collection. In December, Christenson transferred $25,500 to Lee to purchase a Negev. Trial Tr. 165-66. Christenson was adamant that Lee did not tell him at that time that he needed a Class 3 license to purchase the Negev: “Never. He never represented it as a — as a — military or a — police weapon of any sort.”
Id.
Chris-tenson’s interest in the machine guns was solely as a collector or investor; he had absolutely no desire or intent to become a Class 3 dealer. Trial Tr. 156, 158-159. Christenson testified he made that fact clear to Lee from the beginning (Trial Tr. 181, 182), and therefore assumed Lee understood that Christenson was only interested in transferable weapons. While waiting for the Negev, in April 2003,
He said that I should probably try to get a P90. A P90 is another really neat weapon that I could add to the collection. And it would be one that would be very valuable to have. So, I said okay, why don’t we get one?
Trial Tr. 169.
By December 2003, when Christenson had not received the Gemtechs, the Negev or the P90, he was becoming increasingly concerned. Id. He contacted Lee who advised him the Negev had arrived, and invited him to come to Lee’s house to see it. Trial Tr. 170. When he got there, Lee showed him the Negev, and advised that Christenson would need his Class 3 license to take possession of it. Id. Christenson was taken aback:
And I’m going wait a minute.... That’s not the deal. Our deal all along everywhere has been I’ve done what you told me to do ... You’ve given me what I’ve (sic) want — transferable guns.... [Y]ou know, the whole deal is transferables and now all of a sudden you’re trying to tell me that ... I’m getting a ... Class 3 license. That’s not what I’m interested in. I’m not going to do that.
Trial Tr. 171. Christenson demanded either transferable guns or his money back. Trial Tr. 172. Lee delivered neither, eventually admitting he had spent the money. Trial Tr. 173.
Lee’s testimony contradicts Christen-son’s in many key respects. He claims Christenson wanted to buy nontransferable weapons on the day they met. Trial Tr. 215. He says that he sent Christenson pictures and literature concerning the Negev and P90, clearly showing them to be nontransferable machine guns, and Christenson ordered them anyway. Trial Tr. 216-17. Lee testified that rather than Christenson seeing the Negev for the first time at Lee’s house, Lee brought the Negev to Christenson’s business. Trial Tr. 222. According to Lee, Christenson wanted to take immediate possession of the Negev, but Lee explained that he would need the Class 3 license. Trial Tr. 223. When Christenson never got around to obtaining the license, Lee just figured he was a “busy guy.” Trial Tr. 248.
Christenson claims that Lee duped him by taking money for transferable machine guns that he did not deliver. Lee counters that Christenson was aware that these guns were nontransferable and either changed his mind about the purchase or failed to timely do what was necessary to take possession of the weapons. Lee also purports to have incurred storage costs that offset Christenson’s claim.
ANALYSIS
1. Did Christenson prove by a preponderance of the evidence that Lee’s debt to Christenson was incurred by fraud, misrepresentation or false pretenses?
Bankruptcy Code § 523(a)(2)(A) declares debts nondischargeable to the extent based on fraud, false pretenses, or false representations other than a false financial statement. 11 U.S.C. § 523(a)(2)(A). Fraud can be found in an express misrepresentation or failure to disclose a material fact:
Actual fraud precluding discharge consists of any deceit, artifice, trick or design, involving the direct and active operations of the mind used to circumvent or cheat another; something said, done or omitted with the design of perpetrating what is known to be a cheat or deception. However, fraud may consist of silence, concealment or intentional non-disclosure of a material fact, as wellas affirmative misrepresentation of a material fact.
In re Faulk,
A breach of a contract or a failure to perform some promised act, by itself, will not render a debt nondischargeable under § 523(a)(2)(A), although entering into a contract or making a promise with no intention of performance may support a finding of nondischargeability.
See McClellan v. Cantrell,
Neither party can point to an express representation made by Lee that the Negev and P-90 were transferable; but the circumstances clearly show that Lee implied they were. Christenson testified that at the beginning of the parties’ relationship, he “made the understanding clear ... I only wanted transferables.” Trial Tr. 201. In his deposition, Lee admitted that he assumed Christenson was interested in collecting the weapons “and that he was an avid shooter like we were.” Trial Tr. 90.
Although Lee testified that Christenson knew that Lee specialized in nontransfera-bles (Def.’s Resp. to Pl.’s PosL-Trial Brief at 3), and denies that Christenson said he only wanted to buy transferable weapons (Trial Tr. 286), Lee’s behavior at the time of the transaction and the circumstances surrounding the sale undermine his testimony. First, all of the previous transactions between the parties involved only transferable machine guns and accessories. Second, the Negev and P-90 were rare and expensive (traits commonly associated with transferables). Third, Christenson had expeditiously returned the paperwork for previous transactions involving transferable guns, yet by the time he advanced the money for the Negev and P-90, it had been a year since Lee had given him Class 3 license paperwork, which Christenson never completed or returned — a strong indicator that he had no interest in purchasing nontransferable weapons. Fourth, Christenson had another ready source for nontransferable weapons at the “Shot Show,” a sporting goods show he attended regularly, and if he had wanted to obtain nontransferable weapons, he could have applied for the Class 3 license and obtained the guns from the manufacturers there, avoiding the middleman. Trial Tr. 159. Fifth, Lee’s testimony concerning the Negev transaction was not believable. Despite a lengthy inquiry to corroborate the details of the meeting when Lee allegedly brought the Negev to Christenson’s business, Lee was unable to plausibly explain the timing and purpose of the meeting. Trial Tr. 233-40. Finally, Christen-son testified that he did not want the burdens and responsibilities of a Class 3 gun dealer; he owns and runs several manufacturing businesses. Trial Tr. 152, 159. Lee suggested that Christenson was simply interested in owning the “high tech” nontransferable weapons like the Negev and P90 without becoming an active dealer. However, according to gun dealer Steven Lauer, who testified as an expert
Although this is a close case, the credibility scale favors Christenson, and the Court finds that Christenson’s testimony that he made it clear to Lee that he only wanted transferables is supported by the parties’ behavior. With that understanding, Lee was obligated to disclose to Chris-tenson the very material fact that the Negev and P-90 were nontransferable guns, at or before the time Christenson parted with his money. Lee’s failure to divulge that information is a failure to disclose a material fact, constituting fraud by “silence, concealment or intentional nondisclosure of a material fact” as described by the
Faulk
court.
In a somewhat similar factual scenario, in
Bombardier Capital, Inc. v. Baietti (In re Baietti),
Although Lee has argued that he lacked the requisite intent to deceive Christenson (Def.’s Resp. to Pl.’s Post-Trial Brief at 3), the Seventh Circuit has held that wrongful intent may “logically be inferred from a false representation which the debtor knows or should know will induce another to make a loan.”
In re Kimzey,
The parties also dispute whether Chris-tenson justifiably relied on Lee’s implied representation.
See Field v. Mans,
In short, Christenson has proven by a preponderance of the evidence that Lee intentionally made a material misrepresentation (by failing to disclose that the guns were nontransferable), on which Christen-son justifiably relied. There is no dispute that Christenson advanced $44,500 to Lee for these machine guns, thus establishing that Christenson was damaged by Lee’s misrepresentation. The Court rejects Lee’s argument that Christenson’s damages should be reduced by Lee’s storage costs for the weapons.
2. Did Christenson prove by a preponderance of the evidence that Lee either (A) knowingly and fraudulently made a false oath in the Schedules; or (B) failed to keep or preserve any recorded information from which his financial condition could be ascertained?
A. False Oaths
Bankruptcy Code § 727(a)(4)(A) provides that the court shall grant the debtor a discharge, unless the debtor knowingly and fraudulently made a false oath in connection with the case. Before the debtor can be denied a discharge for making a false oath, five requirements must be met: (1) the statement is under oath; (2) the statement is false; (3) the statement is materially related to the case; (4) the debtor knew the statement was false; and (5) the debtor made the statement with fraudulent intent.
Lee Supply Corp. v. Agnew,
Christenson claims that Lee made false oaths by representing to the Trustee that the bankruptcy documents were true and complete when in fact there were serious omissions in the Schedules. Christen-son alleges Lee failed to disclose several material matters, including: (a) the existence of fraudulent transfers to Henry Rahr, (b) Lee holding the “title” to the
It appears that the first and second requirements are met — Lee made false statements under oath in his Schedules and again while giving testimony at the meeting of creditors conducted by the trustee. When a debtor is in doubt concerning whether certain assets must be disclosed, he or she is obligated to disclose them.
In re Calisoff,
The materiality requirement is met because Lee’s omissions bore a relationship to his business transactions or estate or could lead to the discovery of assets or the existence or disposition of property.
See Mick v. Brisker (In re Mick),
The final requirements — that an omission or misstatement must have been knowingly and fraudulently made— are closer calls. Lee’s omissions apparently resulted from carelessness or a mistaken belief that the information was not important; he testified that he has a high school education and little business acumen. A false oath made inadvertently, under a mistaken belief, or even carelessly is not grounds for denial of discharge.
Painewebber Inc. v. Gollomp (In re Gollomp),
In
Stamat,
the debtors failed to disclose numerous assets and sources of income in their Schedules and Statement of Financial Affairs, including the husband’s part time employment as a police officer, two guns, business interests, and counterclaims they were pursuing.
Although a description of Lee’s relationship with the World Burnout Tour and the circumstances behind the transfer of the gun to Rahr could have been better explained in the Schedules, the Court does
B. Failing to Keep or Produce Adequate Records
Bankruptcy Code § 727(a)(3) provides that the court shall grant the debtor a discharge unless:
the debtor has concealed, destroyed, mutilated, falsified, or failed to keep or preserve any recorded information, including books, documents, records, and papers, from which the debtor’s financial condition or business transactions might be ascertained, unless such act or failure to act was justified under all of the circumstances of the case.
Under this provision, a debtor has an obligation to keep and produce books and records sufficient to permit the court, creditors and trustee to construct an accurate picture of the debtor’s financial history. The adequacy of a debtor’s books and records is, in some respects, judged by the sophistication of the debtor’s business and financial affairs.
See In re Scott,
In determining whether an individual debtor’s records are adequate, the court should assess how a reasonable person would have acted under similar circumstances.
In re Greene,
Christenson claims that Lee’s discharge should be denied on this ground because Lee failed to produce bank records and credit card statements for the two years before his bankruptcy. During this time, Lee was operating a coffee shop business and was buying and selling guns, which he testified was more of a “hobby” than a business. He produced two tax returns for the coffee shop business and the gun sale logbook required of the ATF. Given Lee’s limited education, small-scale operations, and relatively lax practices in the industries in which Lee did business, his failure to produce more voluminous records does not rise to the level required to deny his discharge under § 727(a)(4).
CONCLUSION
Christenson has met his burden of proving by a preponderance of the evidence that Lee’s debt to Christenson arose from fraud, false pretenses or misrepresentation as defined by Bankruptcy Code § 523(a)(2)(A). Lee’s debt to Christenson for the advance of the funds to purchase the Negev and P-90 is thus nondischargeable. Christenson did not satisfy the burden of proving that Lee’s discharge should be denied for false oaths or failure to keep