Appeal from the United States Bankruptcy Court for the District of Minnesota.
The opinion of the court was delivered by: Schermer, Bankruptcy Judge
Submitted: February 23, 2010
Before SCHERMER, FEDERMAN and SALADINO, Bankruptcy Judges.
Robert Glen and Karen Jean Glen (the "Glens") appeal from an Order for Judgment and Amended Judgment*fn1 entered by the bankruptcy court, liquidating the amount of a debt owed by the Glens to Darrell and Judy Marcusen (the "Marcusens") and excepting the debt from the Glens' discharge pursuant to section 523(a)(2)(A) of title 11 of the United States Code (the "Bankruptcy Code").*fn2 We have jurisdiction over this appeal from the final order and judgment of the bankruptcy court. See 28 U.S.C. § 158(b). For the reasons set forth below, we reverse.
The issues on appeal are whether: (1) the bankruptcy court erred in finding that the Marcusens established the elements of fraud under section 523(a)(2)(A) of the Bankruptcy Code based on the theory that Glens devalued the Marcusens' security interests when the Glens concealed the existence of the Marcusens' liens from subsequent lenders and concealed the transactions with subsequent lenders from the Marcusens, while the Marcusens never recorded the mortgages; and (2) monies loaned prior to the fraudulent representation constituted a proper measure of damages. We conclude that the bankruptcy court erred when it determined that the Glens committed fraud and, accordingly, any award of damages for fraud was improper.
Karen Glen and Darrell Marcusen are brother and sister. The business relationship between them began in 2003, when the Glens approached the Marcusens about participating in the construction and sale of homes in Winona, Minnesota. The Glens had just moved to Minnesota from California, where Robert Glen had gained experience in home development. The Marcusens were inexperienced in real estate development.
The Glens suggested that the Marcusens, rather than a bank, finance the construction of the projects. The Glens would build the homes and oversee the construction and sales of them. The agreement contemplated that the parties would split the profits from the sales equally. The Marcusens agreed to participate in the project. The Marcusens claim that at the parties' initial meeting in 2003 and at some point in time thereafter, the Glens assured the Marcusens that, evenif third-party purchasers did not buy the houses, the Marcusens would have the houses as security.
The first home was to be built on Lot 22, which was owned by the Glens. Some time after the initial 2003 meeting between the parties, the Marcusens asked the Glens how they would be protected in the event that something were to happen to the Glens. The Glens sought the advice of an attorney. In response, in February of 2004, the Glens executed a promissory note to the Marcusens for the amount of $125,000.00, secured by a mortgage on Lot 22. The Glens' attorney drafted the promissory note and mortgage and sent the executed note and mortgage to the Marcusens. The Marcusens held the original note and mortgage for Lot 22, but they did not record the mortgage. The house on Lot 22 sold and the Marcusens received a significant return on their investment. The Marcusens agreed to participate in another similar project.
The Glens executed a promissory note, dated September 1, 2004, to the Marcusens in the amount of $175,000.00. The promissory note was secured by a mortgage on Lot 23 which was fully executed in December of 2004. The parties disagree regarding whether the Glens held the original mortgage for Lot 23 or gave it to the Marcusens. They did not dispute that the Marcusens held a copy of the mortgage for Lot 23 and that the Marcusens did not record the mortgage for Lot 23.
The Marcusens made advances in the amount of approximately $175,000.00 for the construction on Lot 23. By early 2005, the Marcusens were apprehensive about their investment and they demanded repayment of it. Friction had developed between the parties and their communications were sporadic. The Marcusens advised the Glens that they would not extend any further financing. The last large advance was extended by the Marcusens in February of 2005.
The Glens submitted a Uniform Residential Loan Application to Winona National Bank (the "Bank") in June of 2005. In their Uniform Residential Loan Application, they failed to disclose the Marcusens unrecorded mortgage on Lot 23.Also in June of 2005, the Glens signed a promissory note to the Bank for the amount of $160,000.00, secured by a mortgage on Lot 23. The Glens paid the Marcusens $20,000.00 out of the loan they obtained from the Bank. The Glens did not timely inform the Marcusens about their transactions with the Bank. The Bank recorded its mortgage.In July of 2007, the Glens sold the property on Lot 23. The Bank's recorded mortgage was satisfied out of the proceeds from the sale. The Marcusens received nothing.
Meanwhile, the Marcusens had agreed to participate in a third project, this time for construction of a house on Lot 6. The Glens executed a third promissory note, dated November 1, 2004, for the amount of $50,000. The promissory note was secured by a mortgage on Lot 6 which was fully executed in December of 2004. The trial court found that the Glens held the original note and mortgage for Lot 6. The parties did not dispute that ...