Memorandum of Decision Re: Fraud

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Decisions
IN THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA
In re MIKE and JULEE SHERMAN,                                                         No. 94-10449        Debtors. ___________________________/ DONALD and CAROLEE WOLTER,        Plaintiffs,    v.                                                                                                      A.P. No. 94-1232 MIKE and JULEE SHERMAN,        Defendants. ______________________________/
Memorandum of Decision
     In 1989, defendant Julee Sherman was a licensed real estate salesperson working for a mortgage company. She was a friend of Jennifer Austin, daughter of plaintiffs Donald and Carolee Wolter and employed by a title company. By this adversary proceeding, the Wolters seek a judgment that their claim, based on a secured loan they made to the Shermans as arranged by Jennifer, is nondischargeable due to Julee's fraud.      In November of 1989, the Wolters were refinancing the debt on their real property and borrowing more than was previously owed. Relying on Jennifer for advice, they wanted to loan the excess proceeds at 15% percent interest. Jennifer called Julee, who had arranged the financing, to complain that she had been unable to find a mortgage broker who could place a loan at that kind of interest. Jennifer asked Julee if she knew of anyone who might be willing to borrow the funds at 15%.      Julee responded by saying that she and her husband might be willing to borrow the money at 15%. After talking it over with her husband, Julee told Jennifer that they would be willing to borrow the funds secured by a second deed of trust to their investment property in Hopland. The Wolters, through Jennifer, agreed. The loan was made, and the Shermans made the regular payments for about three years thereafter. They were unable to pay off the balance when their note became due, but made interest payments until 1994, when they filed their Chapter 7 petition. The Wolters became unsecured creditors when the holder of the first deed of trust foreclosed.      The Wolters' allegations of fraud are based on the fact that the Shermans had acquired the Hopland property only a few months before they borrowed the money from the Wolpers for $43,000.00, yet they told Jennifer the property was worth much more than that. While this fact may raise the bare possibility of fraud, none of the other evidence supports a finding of fraud. The court finds that there was no fraud for the following reasons:      1. Jennifer solicited Julee as to the loan, at a very high rate of interest which implied a considerable risk. The idea was not the Shermans'.      2. There was no convincing evidence that the property was not worth the $110,000.00 the Shermans thought the property was worth, notwithstanding the lower purchase price a few months before. The evidence established a volatile real estate market. In at least one other transaction the Shermans had realized a large profit in a very short time in a real estate investment. The Wolters had loaned the Shermans money on this property also, and had received payment in full.      3. The Shermans clearly believed, based on their own experience and advice from a broker, that the property was worth far more than they had paid for it.      4. The Shermans told Jennifer that they had got a "really good deal" on the property, putting her on notice that their valuation was based on their beliefs as to value and not the purchase price.      5. The Wolters were aware of their option to have the property appraised, and elected not to do so. The very high rate of interest clearly was so important to them that they wanted to make the loan without verifying the value by an independent appraisal.      The Wolters argue that because Julee held a real estate license she is held to a higher standard and can be found guilty of fraud without fraudulent intent based on an alleged fiduciary duty. This position is not supported by the law. Fraud based on breach of a fiduciary obligation, without actual fraudulent intent, is constructive fraud. See California Civil Code section 1573. To make a case under section 523(a)(2) of the Bankruptcy Code, the plaintiff must show actual fraud, not constructive fraud. In re Houtman, 568 F.2d 651, 655 (9th Cir.1978); In re Black, 787 F.2d 503 (10th Cir.1986); In re Hunter, 780 F.2d 1577, 1579 (11th Cir.1986); In re Waltrip, 139 B.R. 492, 496 (N.D.Cal.1991).      The Wolters did not establish any false statement or intentional nondisclosure of a material fact, so there is no finding of actual fraud. Any constructive fraud (which the court does not find) is not the sort of fraud which renders a debt nondischargeable. Accordingly, the Wolters shall take nothing by their complaint, which shall be dismissed with prejudice. The Shermans shall recover their costs of suit.      This memorandum constitutes the court's findings and conclusions pursuant to FRCP 52(a) and FRBP 7052. Counsel for the Shermans shall submit an appropriate form of judgment forthwith.
Dated: April 6, 1995                                                                                                      _______________________                                                                                                                                               Alan Jaroslovsky                                                                                                                                              U.S. Bankruptcy