DM Capital, Inc. v. Gronewoller (In Re Mascio)DM Capital, Inc. v. Gronewoller (In Re Mascio)
ORDER AFFIRMING IN PART AND REVERSING IN PART BANKRUPTCY COURT’S ORDER
This mаtter is before the Court on De-fendanb-Appellant David Mascio’s appeal of a Bankruptcy Court’s Order that awarded damages to Plaintiff-Appellee Paul Gronewoller in the amount of $150,355. (Doc. # 19-17.) This Court has jurisdiction to review the final orders and judgments of the Bankruptcy Court pursuant to 28 U.S.C. § 158(a)(1), (c)(1) and Fed. R. Bankr.P. 8001(e), 8002.
I. BACKGROUND
A. FACTS
The following facts are undisputed and are taken from the Bankruptcy Court’s June 9, 2006 Order (Doc. # 19-10), which was issued after a trial to the court was held in November, 2005. This Court will elaborate, as needed, in its analysis section.
Mascio owned and operated a business called Mascio Asset Management, Inc. (“MAM”), which provided financial and investment advisory services. Gronewoller met Mascio in January of 2000 and they decided to form MAM Capital, LLC (“Capital”), which would be the successor company to MAM and would provide similar services. To capitalize the new company, Gronewoller formed an entity called Gronewoller & Associates, Inc. (“Associates”).
Associates and MAM entered into an Asset Purchase and Contribution Agreement (the “Agreement”) on October 1, 2000,
1
pursuant to which (1) Associates would purchase a forty-nine percent interest in certain MAM assets for $164,640, and (2) the assets would be contributed and assigned to Capital. Associates, through Gronewoller, transferred $164,640 to MAM on January 1, 2001 (“the date of payment”), as required by the Agreement. At or about the same time, the MAM assets were contributed and assigned to
Disputes over the business arose between Gronewoller and Mascio in the fall of 2001. At trial, Gronewoller asserted thаt Mascio locked him out of the business premises after he refused Mascio’s offer to buy him out for less than fair market value. Capital ceased operations in December 2001 and Associates filed a lawsuit against Mascio and MAM in state court on December 13, 2001, alleging numerous causes of action.
Shortly before the case went to trial, Mascio filed for bankruptcy relief, and Gronewoller аnd Associates then commenced this adversary proceeding under 11 U.S.C. § 523(a), asserting that the debt owed them was not dischargeable in bankruptcy because it was incurred by fraud.
B. PREVIOUS COURT ORDERS
The Bankruptcy Court issued an Order on June 9, 2006, dismissing all claims against the corporate Defendants, Capital and MAM, and denying all relief requested by Associates. The Court also held that Gronewoller was not entitled to judgment on his claims against Masсio under § 523(a)(2)(B). (Doc. # 19-10.) The parties did not challenge these rulings.
However, the Bankruptcy Court found that Mascio’s debt to Gronewoller was nondischargeable under § 523(a)(2)(A) because Mascio had (1) fraudulently represented to Gronewoller that MAM was an SEC registered company 2 and (2) failed to disclose a February 4, 2000 letter from the SEC requiring MAM to de-register. The Bankruptcy Court awarded actual damages in the amоunt of Gronewoller’s initial investment ($164,640), the unpaid balance of the promissory note ($29,381.28), plus prejudgment and postjudgment interest. 3
Mascio appealed the June 9, 2006 Order to the United States District Court for the District of Colorado (the “District Court”). Mascio raised three issues on appeal: (1) whether the Bankruptcy Court erred in failing to determine the existence of a debt under state law before considering whethеr it was nondischargeable under § 523(a)(2)(A); (2) whether Gronewoller waived any state law claim of fraud in the inducement by his conduct after obtaining full knowledge of Mascio’s misrepresentation; and (3) whether Gronewoller failed to prove any damages under state law resulting from Mascio’s alleged fraud. (Doc. # 19-12 at 5-6.)
On November 13, 2007, the District Court issued an Order affirming in part and reversing in part the June 9, 2006 Order. The District Court remanded the proceeding for findings on Mascio’s waiver defense under Colorado law and the determination of the proper measure of damages, if any, on Gronewoller’s claim of nondischargeability of Mascio’s debt under § 523(a)(2)(A).
See In re Mascio,
No. 06-cv-01780,
On February 25, 2009, the Bankruptcy Court issued an Order (Doc. # 19-13), finding that Mascio had not established his waiver defense and, thus, Mascio’s debt to
After the hearing on damages, the Bankruptcy Court issued an Order on February 11, 2010. (Doc. # 19-15.) The Bankruptcy Court determined that the actual value of MAM exceeded the value of the company as represented by Mascio. Consequently, the Court reasoned, Grone-woller suffered no detriment from his investment, and his benefit of the bargain damages totaled zero. Gronewoller sought reconsideration. (Doc. # 19-16.)
On May 13, 2010, the Bankruptcy Court granted in part and denied in part Grone-woller’s Motion to Reconsider. (Doc. # 19-17.) Relevant to this aрpeal, the Bankruptcy Court found that it had erred by not considering testimony presented by Gronewoller at the damages hearing regarding various values as represented by Mascio that exceeded the agreed value in the Agreement. At the hearing, Grone-woller provided five different estimates of value based on Mascio’s various representations. The values as represented by Masciо ranged from $485,000 (the value that Mascio claimed the company was worth in late October 2000) to $712,684 (the value based on an SEC Form ADV stating that MAM had over $30 million in assets under management on December 28, 2000). 5 (See Doc. #19-4 at 17:19-25:22; Doc. # 19-14 at 3.) Gronewoller also testified as to his different estimates of the actual value of MAM on the date of payment. His estimate of $337,905 was based on a MAM Assets Under Management Report from Januаry 1, 2001 and his estimate of $428,070 was based on a MAM Global Portfolio Statement from December 31, 2000. (See Doc. # 19-4 at 9:17-17:11; Doc. # 19-14 at 3.)
Based on this testimony and supporting exhibits, the Bankruptcy Court reversed its finding that Gronewoller had not suffered any benefit of the bargain damages. The Bankruptcy Court calculated Grone-woller’s damages by first averaging Grone-woller’s five represented value estimates and the agreed value of $336,000 from the Agreement, to find an average represented value of $533,343 on the date of payment. The Bankruptcy Court then determined the actual value of the company on the date of payment by again averaging the two values that Gronewoller suggested,
i.e.,
$337,905 and $428,070, finding that the actual value was $382,987. The Court sub
C. MASCIO’S APPEAL
On June 25, 2010, Mascio filed a Notice of Appeal and elected to have the appeal heard by District Court pursuant to Fed. R. Bankr.P. 8001(e). (Doc. ## 1, 2.) After full briefing by both parties, this case was reassigned to this Court on August 25, 2010. (Doc. # 24.) Mascio raises two issues on appeal. First, Mascio argues that the Bankruptcy Court erred in finding that he failed to establish his waiver defense under Colorado law. Second, Mascio claims that the Bankruptcy Court erred in finding that Gronewoller suffered any benefit of the bargain damages. {See Doc. #7.)
II. STANDARD OF REVIEW
The Bankruptcy Court’s factual findings are subject to a clearly erroneous standard.
In re Baldwin,
III. ANALYSIS
A. WAIVER OF FRAUD CLAIM
In early December, 2000, Gronewoller overheard Mascio directing an employee to revise an SEC Form ADV for resubmission to the SEC. Mascio informed Grone-woller that MAM had received a letter sent by the SEC on February 11, 2000 (“thе Letter”), advising MAM to de-regis-ter with the SEC because it lacked sufficient assets under management to qualify for SEC registration. (Bankr.Ct. Trial Transcript (“Trial Tr.”), Case No. 03-01482, Doc. # 252 at 49:5-50:21.) Mascio argues that Gronewoller’s knowledge of the Letter, coupled with Gronewoller’s subsequent transfer of funds in accordance with the Agreement, was sufficient to establish Mascio’s waiver defense.
The defense of waiver prevents a party who learns of the fraud before affirming the agreement from “speculating] upon the advantages or disadvantages of an agreement, receiving] its benefits and thereafter repudiating] all its obligations.”
Tisdel v. Cent. Sav. Bank & Trust Co.,
Mascio’s arguments regarding waiver rely entirely on the fact that Gronewoller learned of the Letter before the date of payment. Mascio contends that knowledge of the Letter provided Gronewoller with “full knowledge” that MAM was not actually registered with the SEC, thereby establishing Mascio’s waiver defense. In response, Gronewoller argues that the Letter did not constitute full knowledge because Mascio continued to make false representations to Gronewoller after the revelation of the SEC letter. (Doc. # 19 at 27-28.)
This Court agrees with the Bankruptcy Court that discovery of the existence of the Letter did not supply Grone-
Given the date of the Letter, the year to which it рertained, and other documents corroborating the misrepresentation, this Court finds no clear error in the Bankruptcy Court’s determination that Grone-woller did not waive his fraud claim by affirming the Agreement.
See Huskin,
B. BENEFIT OF THE BARGAIN DAMAGES
The parties set forth an “agreed value” of $336,000 in the Agreement. At the hearing to determine damages, Grone-woller testifiеd that the represented value of the company ranged from $485,000 to $712,684. (See Doc. # 19-4, 19-14 at 3, 5-7, §§ C-G.) Although the Bankruptcy Court initially equated the agreed value with the represented value, upon reconsideration, the Bankruptcy Court found that it had erred by not considering Gronewol-ler’s testimony regarding the various values above the agreed value. (Doc. # 19-17.) Mascio contends that the Bankruptcy Court erred by considering this “extrinsic evidence.”
In
Keller v.
A.O.
Smith Harvestore Products, Inc.,
the Colorado Supreme Court found that a general integration clause in a contract does not bar the admission of extrinsic evidence in a claim for negligent misrepresentation.
7
Mascio argues that an express contractual term (the $336,000 agreed value) is controlling when negotiated by the parties and not found to be misleading. Mascio cites several cases in support of his argument that the Bankruptcy Court should not have considered Gronewoller’s testimony regarding other values.
See Universal Drilling Co. v. Camay Drilling Co.,
Mascio also contends that Gronewoller could not reasonably rely on any representation besides the agreed value stated in the Agreement. During negotiations, after Gronewoller had already agreed to purchase 49% of the company for $164,640, Mascio represented that the company was actually worth $485,000 and requested that Gronewoller either pay more or receive only a 35% share of the company. Grone-woller rejected this request. (Trial Tr. at 166:7-167:14.) Mascio contends that Gro-newoller cannot have reasonably relied on a representation that he rejected. This argument defies common sense. Refusing to pay more is not аkin to rejecting a representation of value. In fact, Grone-woller testified that he believed, based on Mascio’s representations, that the company was worth more than $485,000. (Doc. # 19-4 at 19:6-24:9.) Thus, the fact that Gronewoller only paid $164,640 has no bearing on whether his reliance on other representations was reasonable.
For the foregoing reasons, the Bankruptcy Court did not err by considering Gronеwoller’s testimony concerning the represented value of the company or by finding that Gronewoller reasonably relied on Mascio’s various representations.
C. RESCISSION DAMAGES
Gronewoller requests, in the event that this Court reverses the Bankruptcy Court award of benefit of the bargain damages, that this Court remand the case back to the Bankruptcy Court for a determination of whether Gronewoller actually еlected benefit of the bargain damages in lieu of rescission damages. 8
To the extent that Gronewoller appeals the Bankruptcy Court’s decision not to reopen the record to determine whether Gronewoller elected to affirm the Agreement, the Court finds no error. The first time that this case was appealed to District Court, the late Judge Figa found that Gronewoller elected to аffirm the Agreement and recover benefit of the bargain damages, rather than seeking rescission damages.
In re Mascio,
D. CALCULATION OF DAMAGES
Although neither party appealed the Bankruptcy Court’s calculation of damages formula, this Court may raise an issue
sua sponte
“when the proper resolution is beyond doubt and the failure to address the issue would result in a miscarriage of justice.”
Counts v. Kissack
Wa
The Bankruptcy Court cited the proper standard, but failed to properly apply it. In the February 25, 2009 Order, the Bankruptcy Cоurt stated that its task was to determine “the difference between the value of the 49% investment in the business as represented by Mascio and the actual value of the investment.” (Doc. # 19-13 at 10.) In the May 13, 2010 Order, however, the Bankruptcy Court’s damage calculation did not account for the fact that Gro-newoller only purchased a 49% share of MAM’s assets. (Doc. # 197-17 at 8.) This was clear error.
Furthermore, the Bankruptcy Court should have looked only at the actual and represented value of the company on the date of payment. Under Colorado law, Gronewoller is entitled to receive “the difference between the actual value of the property
at the time of purchase
and its value at that time had the representation been true.”
Colorado Performance Corp. v. Mariposa Assocs.,
Accordingly, the award of $150,355 must be vacated and the case remanded for further proceedings consistent with this opinion. On remand, the Bankruptcy Court should apply the standard that it set forth in its February 25, 2009 Order. That is, Gronewoller should receive 49% of the difference between the actual value of the company and the represented value of the company on the date of purchase. To the extent that the Bankruptcy Court lacks sufficient evidence to determine the actual and represented values on the date of purchase, the Bankruptcy Court should reopen the record.
IV. CONCLUSION
For the foregoing reasons, it is hereby ORDERED that:
1. The Order of the Bankruptcy Court dated May 13, 2010 is AFFIRMED IN PART and REVERSED IN PART;
2. The Judgment of the Bankruptcy Court dated June 10, 2010 is AFFIRMED IN PART AND REVERSED IN PART
3. This matter is REMANDED to the Bankruptcy Court to calculate damages in accordance with this opinion.
Notes
. As noted by the Bankruptcy Court, the Agreement is dated October 1, 2001; however, the parties' testimony demonstrates that this is a typo.
. "SEC registration indicates a business manages at least $25 million in assets. This provides a financial service business with the ability to attract institutional clients because the registration implies a level of assets that can withstand the volatility of the marketplace.” (Doc. # 19-10 at 8-9.)
. The Bankruptcy Court’s entry of judgment on June 9, 2006 in favor of Gronewoller for the value of the promissory note has not been disturbed by appeal.
. Under Colorado law, "the measure of damages in [fraud] cases is the ‘benefit of the bargain’ rule, designed to give a plaintiff his or her expectation interest for loss of bargain.”
Ballow
v.
PHICO Ins. Co.,
. Gronewoller's five values were derived from various representations made by Mascio. The representations were: Mascio’s note (on a napkin) indicating that MAM was worth $485,000 (Value C), Mascio's claim to Grone-woller that investor Jim Sprout had offered $500,000 for the company (Value D), various assets under management reports generated during the summer of 2000, leading to a valuation of $558,875 (Value E), the midpoint of Gronewoller’s initial valuation range of $515,000 to $700,000, which was $607,500 (Value F), and an SEC FORM ADV stating that MAM had $30,131,501 in assets, leading to Gronewoller’s valuation of the company at $712,684 (Value G). (See Doc. 19-14 at 5-7, §§ C-G.)
. However, аlthough neither party raised the issue, it appears to this Court that the benefit of bargain damages should have been further reduced to reflect Gronewoller’s 49% partial share in MAM.
. Integration clauses generally permit contractual parties to limit future disputes to reciprocal obligations in the document. Thus, parol evidence, offered to establish the existence of prior or contеmporaneous agreements, is usually inadmissible to challenge the terms of the contract.
Keller,
. "A plaintiff who has been fraudulently induced to enter a contract may either rescind the contract or affirm the contract and recover in tort for the damages caused by the fraudulent act.” W.
Cities Broadcasting, Inc.
v.
Schueller,
. The Bankruptcy Court’s decision to average the two actual values testified to by Grone-woller was reasonable given that the values were derived from reports at the time of purchase.