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Allen v. Freund

United States District Court, E.D. Wisconsin

June 23, 2017

EDWARD O. ALLEN, Appellant,
CHRISTOPHER C. FREUND, Appellee. Bankruptcy No. 14-02027-GMH


          J. P. Stadtmueller U.S. District Judge.

         Appellant Edward O. Allen (“Allen”) appeals an adverse judgment of the bankruptcy court. (Docket #1). The bankruptcy court held an adversary trial on Allen's claim that Appellee and debtor Christopher C. Freund (“Freund”) committed fraud, ultimately finding in favor of Freund. This appeal, originally filed on September 12, 2016, was reassigned to this branch of the Court on March 15, 2017. The appeal has been fully briefed, and for the reasons stated below, the judgment of the bankruptcy court is affirmed.

         1. BACKGROUND

         In adversary proceeding 14-2027, United States Bankruptcy Judge G. Michael Halfenger heard a claim by Allen that Freund, who was in Chapter 13 bankruptcy proceedings, committed fraud against him in connection with the failed sale of a real estate parcel. Allen sought to prove fraud in order to establish that the debt he asserts Freund owes him would be considered non-dischargeable.

         1.1 Fraud Claims and Section 523(a)(2)(A)

         Under 11 U.S.C. § 523(a)(2)(A), a debt is nondischargeable in bankruptcy to the extent it was obtained by “false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition.” The party objecting to discharge bears the burden to establish an exception to discharge by a preponderance of the evidence. Goldberg Secs. Inc. v. Scarlata (In re Scarlata), 979 F.2d 521, 524 (7th Cir. 1992); Grogan v. Garner, 498 U.S. 279, 291 (1991).

         The three types of fraud contemplated by Section 523(a)(2)(A)- false pretenses, false representation, and actual fraud-are often analyzed separately. See, e.g., In re Jacobs, 448 B.R. 453, 471 (Bankr. N.D.Ill. 2014). But generally, to prove that a debt is nondischargeable pursuant to Section 523(a)(2)(A), a plaintiff must show: “(1) that [the debtor] made a false representation or omission, which he either knew was false or made with reckless disregard for the truth; (2) that [the debtor] possessed an intent to deceive or defraud; and (3) that [the plaintiff] justifiably relied on the false representation [or omission].” In re Davis, 638 F.3d 549, 553 (7th Cir. 2011); Ojeda v. Goldberg, 599 F.3d 712, 716-17 (7th Cir. 2010).

         Under the broad umbrella of Section 523(a)(2)(A), courts entertain claims arising from overt misrepresentations, implied misrepresentations, courses of conduct intended to foster false impressions, and silence or concealment surrounding material facts. See In re Reichartz, 529 B.R. 696, 700-01 (Bankr. E.D. Wis. 2015); see also McClellan v. Cantrell, 217 F.3d 890, 893 (7th Cir. 2000) (“[F]raud is a generic term, which embraces all the multifarious means which human ingenuity can devise and which are resorted to by one individual to gain an advantage over another by false suggestions or suppression of truth.”).

         All types of Section 523(a)(2)(A) claims, however, require a showing of deceptive intent. In re Kimzey, 761 F.2d 421, 423 (7th Cir. 1985). Fraud under Section 523(a)(2)(A) cannot normally be established if the misrepresentation or omission at issue relates to future promises. James Cape & Sons Co. v. Bowles (In re Bowles), 318 B.R. 129 (Bankr. E.D. Wis. 2004); Palmacci v. Umpierrez, 121 F.3d 781, 786 (1st Cir. 1997). However, there exists a narrow exception where, at the time the promise was made, the debtor had no intention to perform the promised act. In re Bowles, 318 B.R. at 144.

         1.2 The Facts Adduced at Trial

         At a bench trial on the liability portion of Allen's claim held on February 11, 2016, [1] Judge Halfenger heard statements by Allen, acting pro se, and Freund's counsel. He also heard testimony from Allen, Freund, and John Hauer (“Hauer”), an employee of M&I Bank (“M&I”). The following facts are drawn from the findings of fact made by the bankruptcy court in an oral ruling handed down on September 1, 2016. See (Docket #17-1 at 11-39).

         In 2004, Allen purchased a commercial office building located at 4117 North Green Bay Avenue in Milwaukee, Wisconsin (the “Property”). M&I held a first mortgage on the Property to secure a note. In 2005, Allen moved from Milwaukee to San Diego, California.

         He remained current on his obligation to M&I until late 2009, when his financial situation became “precarious.” Id. at 14. His ability to remain current on the mortgage “hinged on maintaining a steady stream of rental income from his tenant at the [Property], ” and in 2009 his tenant moved out. Id. Beginning in 2010, he began making half-payments for several months. Thereafter, he was totally unable to make any further payments.

         While endeavoring to stay current with M&I, Allen was likewise unable to keep abreast of his other obligations, including a debt he owed to Chase Bank and property taxes he owed to the City of Milwaukee. Chase Bank eventually obtained a money judgment against Allen and recorded a lien against the Property. The City of Milwaukee did the same in connection with the delinquent tax payments.

         In early 2009, Allen listed the Property for sale due to the difficulty of managing it while living in California, “and also presumably due to his financial difficulties in regard to the [Property].” Id. at 15. He says he received only low-ball offers, not serious interest. Then, in September 2010, Freund sent Allen a letter stating that he was interested in purchasing the Property. The letter explained that Freund was not a developer, but was interested in “finding a larger place for himself.” Id. It also stated that Freund was “aware of the past due taxes and pending building inspection orders.” Id. In his letter, Freund suggested that “there may be a way around any other legal issues if there are any.” Id. at 15-16.

         In response, Allen reached out to Freund, and the two had a telephone conversation. During the call, Allen told Freund that he wanted to sell the Property for enough money to satisfy his three debts-the M&I mortgage note, the Chase Bank judgment lien, and the City of Milwaukee tax lien. Allen did not state a specific dollar amount for these debts. At the end of the conversation, Freund said he was interested in touring the Property.

         Allen did some research on his prospective buyer. He learned from a local newspaper article that Freund had undertaken development opportunities in the Milwaukee in the past. He satisfied himself that Freund was a bona fide prospective purchaser and therefore decided to travel to Milwaukee to show Freund the Property. They toured the Property together on October 9, 2010. At the time of their visit, the building was vacant, boarded-up, vandalized, and overgrown with vegetation.

         After the tour, Freund told Allen that the Property met his needs and thus could be a suitable site for him. However, Freund, interested in getting a better deal, asked Allen if he thought that M&I could be convinced to take less than was owed on the mortgage note. Allen said he did not know.

         The bankruptcy court noted that here, the parties' versions of events diverged. Freund testified that he asked Allen about the bank holding the mortgage note and that Allen mentioned the name of the M&I loan officer. Allen, however, said that Freund asked for the bank's contact information specifically. Allen further testified that Freund did not express interest in contacting Chase Bank. The bankruptcy court noted that “[u]ltimately, these differences don't matter and I accept Allen's description of the discussion.” Id. at 17.

         Soon thereafter, Freund approached Hauer, vice president of M&I, about the possibility of obtaining a better deal for the Property than what Allen owed. Judge Halfenger observed that Freund's “recall was imperfect” regarding his meeting with Hauer, but that it was clear that Freund asked Hauer whether M&I would consider a short sale of the Property. Id. Hauer rejected this suggestion. Hauer instead offered to sell Freund the note.

         Freund remained in frequent contact with Allen throughout these negotiations with M&I, as evidenced in voicemail messages Freund left for Allen on November 11 and 13, 2010. In the messages, Freund told Allen that he had talked to M&I Bank and that events were in motion to purchase the note. He did not say that it was he who was the prospective buyer of the note.

         On November 22, 2010, Freund, through his company, J. Crawford Investment, LLC (“J. Crawford”), acquired M&I's interest in the note and the mortgage for $10, 500. That same day, Freund called Allen, telling him that he had bought the note from M&I and that this could help eliminate the obligation Allen owed to Chase Bank. The following day, Freund or his agent recorded the assignment of the mortgage in the Milwaukee County Register of Deeds office.

         Allen “was not pleased with Freund's report and believed he had been tricked.” Id. at 18. On November 29, 2010, Allen wrote a letter to Freund's attorney expressing his frustration with Freund's conduct and threatening to oppose foreclosure by seeking an injunction. However, Allen never actually pursued this course.

         By December 3, 2010, the parties' relationship had “cooled.” Id. Freund left another voicemail for Allen, indicating that a short sale was no longer an option and that Allen owed Freund-or more specifically, Freund's company, J. Crawford-over $100, 000 on the note formerly held by M&I. J. Crawford initiated foreclosure proceedings in January 2011 and obtained a foreclosure judgment. Allen did not contest the foreclosure. J. Crawford subsequently quitclaimed its interest in the note to Freund and Freund then dissolved J. Crawford.

         Allen then sued Freund in Milwaukee County Circuit Court in May 2012. Freund filed a bankruptcy petition under Chapter 13 in March 2013. Allen commenced an adversary proceeding against Freund in the bankruptcy court, alleging fraud. In August 2013, the bankruptcy court dismissed Freund's Chapter 13 bankruptcy case and the adversary proceeding because Freund failed to file his tax returns as required by a prior court order. Freund filed another Chapter 13 bankruptcy petition in October 2013, and Allen filed the instant adversary proceeding in January 2014.

         1.3 The Bankruptcy ...

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