Memorandum of Decision Re: Alleged Fraud and Conversion of Collateral
1. They allege that the debt is nondischargeable pursuant to section 523(a)(2)(A) of the Bankruptcy Code, arguing that Bulger fraudulently concealed from them Fishercraft's problems.
2. They allege that at least part of the debt is nondischargeable pursuant to section 523(a)(6), arguing that Bulger converted one of their houseboats by agreeing that the competing purchaser from Fishercraft could have it. They also allege that Bulger sold another of their houseboats to another third party.
3. They allege that Bulger represented to them that all ten boats had been completed and delivered on September 10, 1985, when they made their final $30,000.00 payment, so that this amount at least is nondischargeable under section 523(a)(2)(A).
Nondisclosure may, in a proper case, be the basis for a finding of fraud under section 523(a)(2). In re Haddad, 21 B.R. 421 (9th Cir.BAP 1982). However, an essential element in such a case is actual intent to defraud. In re Kisich, 28 B.R. 401, 403 (9th Cir.BAP 1983). Collier states the law as follows:
Actual fraud, by definition, consists of any deceit, artifice, trick, or design involving direct and active operation of the mind, used to circumvent and cheat another - something said, done or omitted with the design of perpetrating what is known to be a cheat or deception.
3 Collier on Bankruptcy (15th Ed.), section 523.08 (emphasis added). While the record here arguably shows an omission, there is absolutely no showing that Bulger intended to cheat plaintiffs. In this case the court finds no fraudulent intent on the part of Bulger in not informing plaintiffs about Fishercraft's problems. At all times, Bulger believed in good faith that he could fulfill plaintiffs' order either from Fishercraft or by constructing the houseboats himself using Fishercraft's equipment, which he either had or had access to. In the absence of any unique contract terms or any sort of special relationship between the parties, the court can see no justification for a finding of fraud. Even after the Fishercraft problems came to light Viking continued to obtain plaintiffs' houseboats, and had every reason to believe it could complete the contract. It is not fraud to fail to disclose business problems which the debtor in good faith believes he can weather. In re Zakovich, 72 B.R. 271, 274 (Bkrtcy.D.Colo.1987). When Bulger learned that Fishercraft had promised the same houseboats to both Viking and another party, Bulger contacted that third party and they reached agreement between them as to how the boats would be divided. The fact that one of the boats allocated to the third party was one originally assigned to plaintiffs does not mean that Bulger "converted" the boat. Notwithstanding the title documents, the boat was not owned by plaintiffs; the third party had just as much of a claim as they did. Bulger was merely reaching a practical solution to a problem caused by Fishercraft in promising the same houseboats to two different buyers. The court finds that the houseboat sold by Bulger to Carl Rose was not one of plaintiffs'. At the very least, the uncertainty mandates a ruling for Bulger on this matter. The sole act which might constitute a fraud upon plaintiffs was the alleged representation that all the boats were delivered which induced them to part with the last $30,000.00 of the purchase price. However, the court finds that if this misrepresentation was made it was made by Bulger's brother-in-law, not Bulger, and Bulger had not authorized the statement. In summary, the court finds that it was Fishercraft's wrongful conduct, perpetrated on Viking, which caused this unfortunate situation. Even after learning of Fishercraft's conduct, Bulger still reasonably believed that Viking could perform under its contract with plaintiffs, and did in fact continue to perform, and was therefore under no duty to disclose the problems to plaintiffs. The court does not find that any of plaintiffs' houseboats were converted, or that Bulger made the one misrepresentation which could be the basis for a finding of fraud. Because the court finds no nondischargeable conduct on Bulger's part, it need not address the defense argument that under the Commercial Code plaintiffs have waived any right to a judgment. Accordingly, plaintiffs shall take nothing by their complaint, which shall be dismissed with prejudice. Each side shall bear its own costs. Counsel for Bulger shall immediately submit an appropriate form of judgment. This memorandum constitutes the court's findings and conclusions pursuant to Bankruptcy Rule 7052.
Dated: March 29, 1990 _______________________ Alan Jaroslovsky U.S. Bankruptcy