Memorandum of Decision Re: Fraud

IN THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA
In re DENNIS MICHAEL BURNETT,                                                      No. 91-12704      Debtor. ______________________________/ NOB HILL VILLAS,      Plaintiff,     v.                                                                                                   A.P. No. 92-1058 DENNIS MICHAEL BURNETT,      Defendant. ______________________________/
Memorandum of Decision
   Prior to his bankruptcy, debtor Dennis Burnett was the general partner of a limited partnership known as Burnett Investments 85-11. In 1986, the partnership purchased real property from plaintiff Nob Hill Villas. Under the terms of the sale, the partnership paid $100,000.00 in cash, assumed an obligation for $125,000.00 on the property, and gave Nob Hill a note for $99,500.00 secured by a second deed of trust to the property.    In 1989, Burnett's partnership defaulted on its obligation and Nob Hill commenced nonjudicial foreclosure proceedings. Burnett filed suit on behalf of the partnership to stop the foreclosure, alleging misrepresentations made to him when the property was purchased. The state court agreed to enjoin the foreclosure pending the litigation, but only if Burnett's partnership filed a $20,000.00 bond.    A bond was posted by one Neal Smither, a business associate of Burnett who shared offices with Burnett. Smither was a quadruplegic, and used a rubber stamp to sign his name. He often gave Burnett permission to use his stamp to sign documents for him.    Unable to continue to finance the litigation, Burnett abandoned it and judgment was entered in favor of Nob Hill. The court awarded Nob Hill $48,000.00 in costs, less the bond, which was to be forfeited. However, Smither came forward and asserted that he had never given Burnett permission to use his stamp to sign the bond. The state court excused Smither from liability under the bond.    In 1991, Burnett filed a Chapter 7 bankruptcy petition. In this adversary proceeding, Nob Hill seeks to establish a nondischargeable debt based on Burnett's fraudulent use of Smither's signature stamp and based on malicious prosecution in bringing the state court action. The court finds insufficient evidence to support a judgment for malicious prosecution, and concentrates on the very thorny issues relating to the misuse of the signature stamp.    The state court, perhaps out of sympathy for Smither, excused him from liability under the bond even though he had admittedly allowed Burnett access to his signature stamp. Had it held Smither responsible, then this action would be one for $20,000.00 between Smither and Burnett. However, by excusing Smither the state court left Nob Hill with an unenforeceable bond. Nob Hill has used the opportunity to claim excessive and completely unjustified damages totalling more than $700,000.00. Because the plaintiff is Nob Hill and not Smither, and because Nob Hill's claimed damages are so outrageous, the court is faced with some very difficult issues. The difficulties arise due to the subsequent actions of Nob Hill after the state court action was dismissed.    Before Nob Hill could complete its foreclosure, the property became property of a bankruptcy estate (the court is not sure if it was Burnett's bankruptcy or a separate bankruptcy filed for the partnership). Instead of seeking relief from the automatic stay or waiting for the trustee to sell the property, Nob Hill purchased the property from the trustee. Not only did Nob Hill pay the trustee $25,000.00 in cash, but it also assumed the property subject to a junior deed of trust securing a $26,000.00 obligation. This junior deed of trust would have been wiped out by a foreclosure by Nob Hill. The reasons for Nob Hill's actions remain a mystery to the court. The court is certain that the supposed damages arising out of this voluntary conduct are not recoverable.    Pursuant to both the note and the deed of trust, the damages awarded to it in the state court action became part of the obligation secured by the real property. When Nob Hill purchased the property from the bankruptcy trustee, it was in essence accepting a deed in lieu of foreclosure. Since there was never a sale pursuant to the deed of trust, there is no way for the court to know if Nob Hill suffered any actual damages at all. Nob Hill's subsequent actions suggest strongly that it suffered no damages and in fact obtained a windfall, especially considering the $100,000.00 cash it received when it originally sold the property.    While the evidence is by no means clear, it seems more likely than not that Burnett used Smither's signature stamp without express authority and therefore ought to be responsible for the bond. However, the amount of the bond is the highest amount the court can possibly conceive as appropriate damages, and not the myriad of additional charges and expenses alleged by Nob Hill, which are either entirely fictitious, were voluntarily and unnecessarily assumed, were extinguished upon taking title, or are not allowable as a matter of law.    For the foregoing reasons, plaintiff Nob Hill shall have a nondischargeable judgment pursuant to section 523(a)(2) of the Bankruptcy Code against Burnett in the amount of $20,000.00, plus interest at the legal rate from the date judgment was entered dismissing the state court lawsuit against Nob Hill. Nob Hill shall also recover its costs of suit. Attorneys' fees are not recoverable. In re Fulwiler, 624 F.2d 908, 910 (9th Cir.1980); in re Itule, 114 B.R. 206, 213 (9th Cir.BAP 1990).    This memorandum constitutes the court's findings and conclusions pursuant to FRCP 52(a) and FRBP 7052. Counsel for plaintiff shall submit an appropriate form of judgment forthwith.
Dated: February 7, 1994                                                                                                   _______________________                                                                                                                                                   Alan Jaroslovsky                                                                                                                                                    U.S. Bankruptcy