Memorandum of Decision Re: Fraud

IN THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA
In re ROBERT H. ISLEY II,                                                                     No. 93-12188      Debtor. ___________________________/ HAROLD MILLER and EDWARD DAVIDSON,      Plaintiffs,    v.                                                                                                  A.P. No. 93-1320 ROBERT H. ISLEY II,      Defendant. ______________________________/
Memorandum of Decision
     A few years ago, plaintiffs Harold Miller and Edward Davidson were friends with defendants Robert Isley and his domestic partner, Barry La Goy. In 1986, Isley and La Goy borrowed $10,000.00 from Miller and Davidson for the purpose of purchasing a home on the Waldo Grade in Marin County. After the loan was made, the purchase of the Waldo Grade home fell apart, and Isley and La Goy purchased a different home.      In 1989, Miller and Davidson began asking for the repayment of the loan. Isley and La Goy told them that they would repay the loan when they sold or refinanced their home. However, in 1990 Isley told Miller and Davidson that La Goy had decided the loan would not be repaid. Miller and Davidson sued in state court, and learned that in 1988 La Goy had refinanced the home and had not paid them out of the small net proceeds. In 1991, La Goy and Isley lost the home in foreclosure.      Miller and Davidson obtained a default judgment against La Goy and Isley in 1993. La Goy became ill and died, and Isley filed a Chapter 7 bankruptcy petition. In this adversary proceeding. Miller and Davidson allege that their claim against Isley is nondischargeable due to fraud.      The court first notes that there was no evidence whatsoever as to fraud when Isley and La Goy borrowed the money from Miller and Davidson. La Goy and Isley fully intended to purchase the home they described to Miller and Davidson, but after the loan was made the bank refused to finance the purchase due to landslide problems. Thus, Miller and Davidson's meager case depends fully on events which occurred long after they made the loan.      In essence, Miller and Davidson's case is that La Goy and Isley obtained an extension of credit by telling Miller and La Goy that they would be paid when the house was sold or refinanced. This argument has numerous factual and legal holes in it.      First and foremost, there was absolutely no evidence of fraudulent intent on Isley's part. The evidence made clear that in financial matters La Goy made all of the decisions, and Isley had very little knowledge of what La Goya was doing. In fact, the property was entirely in La Goya's name, as were the loans against it, so that Isley had no say in how La Goy handled the property. While Isley was vaguely aware that La Goy had refinanced the property once, he knew none of the details. The court is convinced that up until the time that La Goy decided not to repay Miller and Davidson Isley believed that they would be repaid from the sale or refinance of the house, just as he was telling them.      Second, the court is very skeptical that the sort of forbearance demonstrated by Miller and Davidson can be deemed to rise, as a matter of law, to an extension of credit. Many (if not most) financially strapped debtors make promises to creditors to pay in the future when they cannot meet a demand. The breach of such promises does not by itself turn an honestly incurred debt into one nondischargeable for fraud. The case relied upon by Miller and Davidson, In re Kim, 163 B.R. 157 (9th Cir.BAP 1994), involved a new note, as did In re Danns, 558 F.2d 114 (2d Cir.1977), the case Congress intended to codify with its "extension of credit" language. While dicta in these cases could possibly extend to this situation, the holdings themselves are not applicable because here there was no new agreement, just forbearance.      Lastly, an essential element of an action based on an extension of credit theory is that the plaintif must show that it had valuable collection remedies at the time it agreed to renew its commitment and that those remedies lost value during the renewal period. Kim, supra, at 161; In re Siriani, 967 F.2d 302, 306 (9th Cir.1992). Here, both Miller and Davidson stated that they had no way of being repaid except to the extent Isley and La Goy sold or refinanced the property and voluntarily repaid them. Had La Goy announced his intention not to pay them openly two years earlier, there was nothing different Miller and Davidson could have done. In making the loan to Isley and La Goy, Miller and Davidson knew that they were depending on the faithfulness of their friends for repayment. That trust turned out to be unjustified, but faithlessness is not the same thing as fraud.      For the foregoing reasons, Miller and Davidson will take nothing by their complaint which shall be dismissed with prejudice. Isley shall recover any costs of suit.      This memorandum constitutes the court's findings and conclusions pursuant to FRCP 52(a) and FRBP 7052. Counsel for Isley shall submit an appropriate form of judgment forthwith.
Dated: October 10, 1994                                                                                                  _______________________                                                                                                                                                    Alan Jaroslovsky                                                                                                                                                    U.S. Bankruptcy