IN THE UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF CALIFORNIA
|DO NOT PUBLISH
This case disposition has no value as precedent and is not intended for publication. Any publication, either in print or electronically, is contrary to the intent and wishes of the court.
MIKE and JULEE SHERMAN, No. 94-10449
DONALD and CAROLEE WOLTER,
v. A.P. No. 94-1232
MIKE and JULEE SHERMAN,
Memorandum of Decision
In 1989, defendant Julee Sherman was a licensed real estate salesperson working for a
mortgage company. She was a friend of Jennifer Austin, daughter of plaintiffs Donald and
Carolee Wolter and employed by a title company. By this adversary proceeding, the Wolters
seek a judgment that their claim, based on a secured loan they made to the Shermans as arranged
by Jennifer, is nondischargeable due to Julee's fraud.
In November of 1989, the Wolters were refinancing the debt on their real property and
borrowing more than was previously owed. Relying on Jennifer for advice, they wanted to loan
the excess proceeds at 15% percent interest. Jennifer called Julee, who had arranged the
financing, to complain that she had been unable to find a mortgage broker who could place a loan
at that kind of interest. Jennifer asked Julee if she knew of anyone who might be willing to
borrow the funds at 15%.
Julee responded by saying that she and her husband might be willing to borrow the money at
15%. After talking it over with her husband, Julee told Jennifer that they would be willing to
borrow the funds secured by a second deed of trust to their investment property in Hopland. The
Wolters, through Jennifer, agreed. The loan was made, and the Shermans made the regular
payments for about three years thereafter. They were unable to pay off the balance when their
note became due, but made interest payments until 1994, when they filed their Chapter 7 petition.
The Wolters became unsecured creditors when the holder of the first deed of trust foreclosed.
The Wolters' allegations of fraud are based on the fact that the Shermans had acquired the
Hopland property only a few months before they borrowed the money from the Wolpers for
$43,000.00, yet they told Jennifer the property was worth much more than that. While this fact
may raise the bare possibility of fraud, none of the other evidence supports a finding of fraud.
The court finds that there was no fraud for the following reasons:
1. Jennifer solicited Julee as to the loan, at a very high rate of interest which implied a
considerable risk. The idea was not the Shermans'.
2. There was no convincing evidence that the property was not worth the $110,000.00 the
Shermans thought the property was worth, notwithstanding the lower purchase price a few
months before. The evidence established a volatile real estate market. In at least one other
transaction the Shermans had realized a large profit in a very short time in a real estate
investment. The Wolters had loaned the Shermans money on this property also, and had received
payment in full.
3. The Shermans clearly believed, based on their own experience and advice from a
broker, that the property was worth far more than they had paid for it.
4. The Shermans told Jennifer that they had got a "really good deal" on the property,
putting her on notice that their valuation was based on their beliefs as to value and not the
5. The Wolters were aware of their option to have the property appraised, and elected not
to do so. The very high rate of interest clearly was so important to them that they wanted to
make the loan without verifying the value by an independent appraisal.
The Wolters argue that because Julee held a real estate license she is held to a higher standard
and can be found guilty of fraud without fraudulent intent based on an alleged fiduciary duty.
This position is not supported by the law. Fraud based on breach of a fiduciary obligation,
without actual fraudulent intent, is constructive fraud. See California Civil Code section 1573.
To make a case under section 523(a)(2) of the Bankruptcy Code, the plaintiff must show actual
fraud, not constructive fraud. In re Houtman
, 568 F.2d 651, 655 (9th Cir.1978); In re Black
F.2d 503 (10th Cir.1986); In re Hunter
, 780 F.2d 1577, 1579 (11th Cir.1986); In re Waltrip
B.R. 492, 496 (N.D.Cal.1991).
The Wolters did not establish any false statement or intentional nondisclosure of a material
fact, so there is no finding of actual fraud. Any constructive fraud (which the court does not
find) is not the sort of fraud which renders a debt nondischargeable. Accordingly, the Wolters
shall take nothing by their complaint, which shall be dismissed with prejudice. The Shermans
shall recover their costs of suit.
This memorandum constitutes the court's findings and conclusions pursuant to FRCP 52(a)
and FRBP 7052. Counsel for the Shermans shall submit an appropriate form of judgment
Dated: April 6, 1995 _______________________