Memorandum of Decision Re: Alleged Fraud and Conversion of Collateral

FOR THE NORTHERN DISTRICT OF CALIFORNIA In re RICHARD and CYNTHIA BULGER,                                       No. 1-89-01500      Debtors. ___________________________/ JAMES L. SCHILLING and DARRYL FRY,      Plaintiffs,     v.                                                                                             A.P. No. 1-89-0186 RICHARD M. BULGER,      Defendant. ______________________________/
Memorandum of Decision
     Despite a considerable amount of confusing details and a plethora of documents, this is fundamentally a simple case. Plaintiffs James Schilling and Darryl Fry seek a nondischargeable judgment against defendant Richard Bulger, alleging that he made misrepresentations to them and fraudulently concealed facts from them in order to induce them to pay for some boats they had agreed to purchase, and that Bulger converted two of their boats. While the court understands the basis of the action clearly, it finds that plaintiffs have not proved their case.      In 1984, Bulger was the president of Viking Marine, Inc., a small corporation owned by Bulger, his wife, and his brother-in-law. Viking Marine was in the business of selling recreational boats. Bulger was also the president of another corporation, Spanish Flat Enterprises, Inc., which operated a marina. Late in 1984, plaintiffs contracted with Viking Marine to purchase 10 houseboats. At the same time, Spanish Flat agreed to lease the houseboats from plaintiffs. The transaction had tax benefits for plaintiffs.      The houseboats were to be constructed by Fishercraft, Inc., a third party manufacturer. Plaintiffs and Bulger agreed to set up a bank account wherein plaintiffs deposited the purchase price. They agreed to release the funds on a periodic basis based on progress made toward completion and delivery of the houseboats. In order to allow plaintiffs to get tax benefits for 1984, Bulger obtained title documents for plaintiffs showing a date of purchase of December 28, 1984, even though the houseboats identified in the documents were still under construction at Fishercraft. Plaintiffs were fully aware of this.      At first things went smoothly; Fishercraft delivered three houseboats, one of which Viking returned to have some problems corrected. Plaintiffs authorized disbursements to Viking from the bank account. However, in April Fishercraft delivered a houseboat which had a hull number different from those identified as assigned to plaintiffs' purchase. When Bulger questioned Fishercraft about the situation, he discovered that Fishercraft was in financial trouble and had promised both Viking and another purchaser the same houseboats. Bulger contacted the other purchaser, and between them they reached an agreement to divide up what houseboats were available and then complete the remaining houseboats themselves, using equipment obtained from Fishercraft to make the hulls and directly contracting with other suppliers for engines, etc. Bulger did not tell plaintiffs about the problems at Fishercraft.      Viking continued to work in good faith to produce plaintiffs' houseboats, and in fact obtained eight of them and had started the other two when it failed. In the aftermath of Viking's bankruptcy, plaintiffs were more or less left to fend for themselves in obtaining possession of their houseboats. For various reasons, including the fact that the hull numbers on some of plaintiffs' houseboats did not match their before-the-fact title documents, plaintiffs were able to recover only three houseboats. They accordingly seek a nondischargeable judgment on the following grounds:
     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[5] (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