Memorandum of Decision Re: Alleged Fraud

FOR THE NORTHERN DISTRICT OF CALIFORNIA In re ALLAN T. BEER,                                                                                  No. 1-85-01434      Debtor. ______________________/ BRUCE and AVANEL THULIEN,      Plaintiffs,    v.                                                                                                        A.P. No. 1-86-0035 ALLAN T. BEER, JR.,      Defendant. ______________________/
Memorandum of Decision
     Prior to his bankruptcy, defendant Allan Beer was a real estate developer. He established a personal and business relationship with plaintiffs Bruce and Avanel Thulien, who operated a real property loan brokerage. Shortly before the transaction complained of here, Beer had moved his headquarters to the Thuliens' office.      In late 1984, Beer told Bruce Thulien that he was experiencing financial difficulties and needed a large loan. Thulien agreed to loan Beer $60,000.00, but only on the same terms as Thulien had seen savings and loan associations make loans to developers, which gave the lender a "piece of the action." Thulien told Beer that the money would be loaned if Beer formed a limited partnership with him, transferred his development project known as "Crystal Creek Subdivision" to the partnership, and agree that Thulien, as limited partner, would get the first $50,000.00 in profits after the loan was repaid. Beer readily agreed.      Because Thulien could not raise the 60,000.00 all at once, it was paid over to Beer in dribs and drabs during January, 1985, with the final payment of $5,562.00 being paid on February 1, 1985. Beer's February rent of $900.00 was deducted from this payment, so that the amount actually transferred to Beer was $59,100.00. On February 1, Beer signed a note for $60,000.00 and executed a deed of trust to the Crystal Creek property, both done in his individual name and not on behalf of the partnership. All of the loan proceeds had been made by checks made out to Beer personally.      Some time in early to mid February, 1985 - the exact date is not certain - Beer signed a partnership agreement and a loan agreement prepared by Thulien without benefit of counsel. Thulien had obtained a copy of such documents used by the savings and loan association he was attempting to emulate, and modified them for use in the Crystal Creek transaction. The documents contained an express agreement that the loaned funds would be used only on the Crystal Creek project.      Beer testified that he considered the covenant regarding the use of the loan proceeds to be mere boilerplate, as he had not previously agreed to the term and since he had already spent the loan proceeds on other matters when he signed the documents. Thulien alleges that Beer had orally agreed to the term regarding use of the loan proceeds before he started receiving the funds, but Thulien was so vague about where and when this agreement was orally made that the court cannot find this a matter of proven fact in the face of Beer's unequivocal denial. Thulien's knowledge of Beer's financial problems on other projects and his lack of insistence on controls for the funds do not lend credibility to Thulien's version of the facts, nor do the form of the payments, the form of the note, or the fact that Thulien deducted Beer's personal rent from the loan funds.      The Thuliens now contend that the debt should be nondischargeable because Beer has admitted that he never intended to use the loan proceeds for Crystal Creek. The Thuliens argue that this intention not to perform the contract is fraud under section 523(a)(2) of the Bankruptcy Code.      As a threshold issue, it is not at all clear that the allegations made by the Thuliens would render the debt nondischargeable even if proved. The most respected authority on bankruptcy law notes that "[n]either representations of fact that will exist in the future nor mere promises, though false and intended to deceive, afford the basis of actionable fraud" under section 523(a)(2). 3 Collier on Bankruptcy (15th ed.), p.523-21.      Even assuming that a breach of contract can render a debt nondischargeable if the debtor had no intent to perform it, the Thuliens cannot prevail in this matter because they have not proved the existence of the contract. Beer freely testified that he had no intention to use the loan proceeds solely on the Crystal Creek project because in his own mind, at the time he obtained the funds, he had made no such agreement. All of the extrinsic evidence, as well as Thulien's equivocation, support Beer's position that there was no such agreement. Thulien may have thought there was, but Beer's fraud in the inception of a contract cannot be based on what Thulien thought the contract was. The Thuliens have not proved fraud under any standard of proof, let alone the clear and convincing standard applicable to this case. Id. at 523-50.      As a fallback position, the Thuliens argue that the facts justify a finding of defalcation in a fiduciary capacity under section 523(a)(4) because of the partnership agreement. The court does not find this argument convincing. While a partnership relationship may give rise to a fiduciary duty under section 523(a)(4) (See In re Short (9th Cir.1987) 818 F.2d 693), the Thuliens did not prove that the loan proceeds were partnership assets when given to Beer. Indeed, the evidence supported the opposite finding. The court is also reluctant to impose liability on Beer for nonfraudulent conduct merely due to the partnership agreement, where nothing was hidden from the Thuliens (Mrs. Thulien did the partnership books) and both Beer and Thulien were businessmen of equal sophistication, or lack thereof.      For the foregoing reasons, as well as those stated in the record at the conclusion of evidence, the Thuliens shall take nothing by their complaint and this matter shall be dismissed. Beer shall recover his costs of suit, if any. Counsel for Beer shall submit an appropriate form of judgment.      This memorandum, together with the comments made on the record, shall constitute findings and conclusions pursuant to FRCP 52(a) and Bankruptcy Rule 7052.
Dated: October 30, 1987                                                                                  ________________________                                                                                                                            ALAN JAROSLOVSKY                                                                                                                            U.S. BANKRUPTCY