A Review of Fraudulent Intent: the factual scenario from James vs. West

As a bankruptcy attorney in Mount Vernon, IL for over 20 years, I read through and analyze court rulings throughout the country. I was lucky to find this wonderful case from the Western District of Missouri (whence lay Kansas City, Independence, Branson, etc.). James v. West, 16-40358.

What a wonderful case this is: an excellently written opinion dealing with fraud, the means test and other topics important in bankruptcy.

This isn’t an opinion, this is a text book. It should be on the curriculum of anyone teaching bankruptcy law. It is that good!

Click on the links to read Part One, Two, Three, Four and Five.

 

Part II: Complaint to Determine Dischargeability

The Jameses timely filed a 3-count complaint against the Debtor, seeking to except from discharge their judgment debt, under § 523(a)(2)(A), (a)(2)(B), and (a)(6). The Court has previously found jurisdiction and is ready to rule.

Findings of Fact

The Court incorporates the previous findings of fact in Part I of this Opinion, and in the interests of expediency, restates and adds to them where relevant in narrative form now that many of the facts have been established.

Knowles had lived with the Debtor for 10 years. He helped her with the small karate business she ran and set up an email account for the business. Debtor and Knowles discussed Debtor’s retirement, and decided that they should open a B&B together. For reasons that are not clear, the Debtor, as the sole buyer, signed an exclusive buyer agency contract with Chartwell Realty as broker and Strong as realtor on April 1, 2013. Email exhibits show that the Debtor emailed certain real estate listings to Strong and that they toured several properties.

Within a few days, Strong, Knowles, and the Debtor visited the property located at 24704 Haines Road in Greenwood, Missouri (the “Property”). On April 6, 2013, the Debtor, as the sole buying party, and Strong, as her agent, signed the Contract, offering to purchase the Property from the Jameses for the purchase price of $999,500. The Contract provided for an all-cash sale.

There was no financing contingency clause in the Contract. Paragraph 7 of the Contract provided that because it was a cash sale, the Debtor was required to provide written verification from a depository of funds within 5 calendar days of funds sufficient to complete the closing. Any changes had to be agreed to in writing by both parties no later than 15 days before closing.

Paragraph 19 provided that upon acceptance of the Contract, the $10,000 earnest money was to be deposited with Thomson Affinity Title within 10 banking days. The Contract provided for closing on May 2, 2013 and possession on May 3, 2013, and time was of the essence.

On April 8, 2013, Strong received a letter via email, purporting to provide proof of funds from Tailwind Funding, LLC on behalf of the Debtor for the full purchase price of the Property (the “Letter”). The Letter purports to be from and is signed by one Brian J. Meidam, Funding Manager for Tailwind Funding, LLC. The Letter is dated April 8, 2013, and the evidence shows that the Jameses received the Letter the same day. The Letter reads:

To Whom It May Concern:

This letter is to confirm that Tailwind Funding, LLC is willing to provide funding for the requested purchase price to Sharon West in an amount up to $999,500 for the purchase of 24704 E. Haines Road Greenwood, Mo.. [sic] Funds are available to close on the subject property on behalf of Sharon West. Funding is subject to our complete review of the transaction and Tailwind Funding, LLC reserves the right to amend or add any requirements or loan conditions as it chooses in its sole discretion.

Please feel free to contact us if you have any questions or need any additional information.

A copy of the Letter is attached to this Opinion.

Although Strong originally testified that Debtor provided him the Letter, he later admitted that he had no knowledge or proof that she sent it to him. Knowles testified that he sent the Letter to Strong, and this Court finds Knowles did in fact create and send the Letter. Knowles testified he generated the Letter from the internet by plugging in the relevant information, such as the address and purchase price. Upon receipt, Strong passed the Letter on to Greg Duncan, the buyer’s agent, who then passed it on to the Jameses. Both Strong and Randy James testified that nothing about the Letter looked unusual.

The Debtor did not provide the proof of funds or pay the earnest money. In the next few weeks, there were several communications between Strong, Duncan, and the Title Company regarding the lack of the earnest money deposit. On May 2, the Debtor failed to show up for the closing, and the Jameses rescheduled the closing for May 6.

On May 7, Knowles sent an email to Brant Elsberry at Chartwell Realty. The email sender was listed as “Sharon West,” and the email address was “Westk4k@gmail.com.” The Debtor testified, however, that Knowles created the account for her karate business and that she did not have access to it. Knowles confirmed the Debtor did not have access, and further testified to sending the email. Strong likewise testified that Knowles, not the Debtor, sent the email. This Court finds that Knowles sent the email.

The email contained a cashier’s check image as an attachment (the “Check”), in the amount of $989,500. The Check purported to be from Banner Bank as payor. Knowles testified he found the Check image from an internet search, and that there was never an actual check.

Exhibit 29 shows Brant Elsberry passed the Check to Duncan, who passed it on to the Jameses.

Upon receiving the Check, Strong testified the lack of an account number and routing number raised red flags and that he suspected the Check was a fake. As a result, Strong ceased communications with the Debtor and Knowles. Randy James testified that he received the image of the check from Duncan and immediately realized that the transaction was a “scam.”

Strong testified that throughout the home buying process, he thought Knowles was married to the Debtor. He treated them as one unit. When pressed, however, Strong admitted he had always just “assumed” they were married, and there is no evidence he asked or the Debtor or Knowles ever told Strong they were married. Based on this evidence, the Court finds there was never an explicit representation the Debtor and Knowles were married.

Strong further testified he thought either the Debtor or Knowles had a large “fund or estate” sufficient to cover the purchase price, but could not say who told him that. There is no evidence this statement ever reached the Jameses, either through Duncan, Strong, the Debtor or Knowles. Generally, the evidence from Strong and the Debtor indicated that Strong dealt with the Debtor early on in the process, such as when they were lining up houses to tour. As they got further into the home-buying process, however, Strong communicated primarily, if not exclusively, with Knowles. Based on this testimony, this Court finds that if the representation about the large estate was made at all (which the Court is not convinced it was), it was made by Knowles, and not the Debtor.

The Debtor testified that she believed Knowles would obtain funding for the purchase price from either his brother or one of his brother’s friends or associates. Knowles corroborated this testimony, and further testified he planned to pay back the loan from the revenue of the planned B&B. This Court finds the Debtor held an honest belief that Knowles would secure the funding, and that the Debtor intended to perform fully under the Contract when she signed it.

This Court does not accept the Jameses’ argument that the Debtor entered into the Contract without any desire to perform as some part of a fraudulent scheme to get a free house. (Paragraph 8 of the Contract provides that the Jameses will provide possession when all the documents and  funds have been executed and delivered into escrow with the title company.)

The Court will make further factual findings as they become relevant to the specific counts and alleged representations here at issue.

Introduction to the Arguments

In their opening and closing arguments, the Jameses argued that the Debtor is a “smart and sophisticated lady” in part based on her business history with the karate school, and that this is evidence of the Debtor’s fraudulent intent. In their complaint, the Jameses allege that nine separate representations are fraudulent. The nine alleged representations are:

(1) The Debtor’s representation by signing the real estate contract that she intended to purchase the Property;

(2) The Debtor’s representation by signing the real estate contract that she would comply with the entirety of the Contract;

(3) The Debtor’s representation in the contract that she had $999,500 in cash to purchase the Property;

(4) The Debtor’s representation that she would close on the dates in the Contract;

(5) The Debtor’s representation in the Contract that she would take possession on May 3, 2013;

(6) The Debtor’s representation that she was approved by Tailwind Funding for $999,500;

(7) The Debtor’s representation that she had $989,500 available from Banner Bank to purchase the Property;

(8) The Debtor’s representation that she was married to Knowles; and

(9) The Debtor’s representation that she had a large estate or fund sufficient to pay the purchase price.

The Jameses allege that the Debtor made representations one through five by signing the Contract; that she made representations six and seven through the Letter and Check emails; and that she made representations eight and nine orally. In support of these alleged misrepresentations, the Jameses argue that both Knowles and Strong were the Debtor’s agents, and that Knowles and the Debtor were engaged in a joint enterprise to purchase the Property.

The trial was originally scheduled based on the assurances of the parties that trial would require half of a day. At the conclusion of the first full day of trial, the Court advised counsel on the record of various legal issues it was having difficulty with and asked counsel to address those issues at closing or in the form of additional legal citations. Both counsel provided additional legal citations that the Court read into the record at the start of the second day of trial.

On the second day of trial, the Jameses argued and adduced evidence in support of a theory that the Debtor “obtained” something by the failed real estate transaction, such as (1) the intangible right to buy the property (i.e., equitable title), and (2) the services the Jameses performed or paid for on the Property, such as home maintenance and utilities, which they argue they were required under the Contract to provide until the sale closed. This evidence was outside the scope of the complaint, which did not allege that the Debtor had obtained money, property, or services from the Jameses, but was admitted with no objection.

In response, the Debtor denies making all of the alleged fraudulent misrepresentations.

During her motion for judgment as a matter of law, and again at closing, the Debtor argued she obtained nothing, and thus relief under both § 523(a)(2)(A) and (a)(2)(B) are inappropriate. In closing, the Debtor asked this Court to award her judgment, and – for the first time – asked this Court to award her costs and attorney fees under § 523(d) and Rule 7054. In furtherance of this request, the Debtor asked this Court to award her judgment and hold the matter open for fourteen days so the Debtor could file a fee motion under Fed. R. Civ. P. 54(d)(2).

 

About the blogger:

Michael Curry of Curry Law Office in Mount Vernon, Illinois (http://michaelcurrylawoffice.com/) has helped thousands of individuals, family and small businesses in southern Illinois find protection under the Bankruptcy Code for almost twenty-five years. He is also available to help individuals and families with their estate planning (wills, power-of-attorney) and real estate and other sales transactions.

He is also the author of books on finance and bankruptcy available on Kindle through Amazon!

Whether you live in Mount Vernon, Clay City, Kinmundy, Chester and throughout Southern Illinois call Curry Law Office today at (618) 246-0993 and Finally Be Financially Free!

 

 

 

Advertisements

4 thoughts on “A Review of Fraudulent Intent: the factual scenario from James vs. West

  1. Pingback: What is Fraud? And how does it affect bankruptcy? The James vs. West case | Curry Law Office

  2. Pingback: A primer on the elements of fraud | Curry Law Office

  3. Pingback: The James vs. West case, part nine: More analysis on the Elements of Fraud | Curry Law Office

  4. Pingback: A primer on Willfull and Malicious: the final review of the James vs. West case | Curry Law Office

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s