IN THE UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF CALIFORNIA
ALLEN and DIANA JAMES, No. 1-84-00990
v. A.P. No. 1-84-0231
Memorandum of Decision
In 1981 debtor and defendant Allen James was a gem dealer whose normal business activities included
selling gemstones to investors. Plaintiff Gretchen Siemens was at that time an unsophisticated investor
seeking to invest the proceeds of a personal injury settlement.
Siemens was introduced to James by her financial planner, who advised her that due to the inflation
occurring at the time a portion of her funds should be invested in hard assets such as gemstones. Siemens
met James on September 17, 1981, at James' office.
At the first meeting, James and Siemens spoke generally about investments in gemstones with Siemens
indicating a desire to purchase about $10,000.00 in stones; no agreement was reached. A few days later,
James called Siemens' financial planner to say that he had a very unique opportunity for Siemens to make
a quick profit on a gemstone if she acted quickly. The planner called Siemens, who then met with James.
James told Siemens that he had a client who was very anxious to sell a 5.77 carat ruby. He said that
a partnership was being formed to syndicate the purchase of the ruby for $72,000.00, but it would not be
ready to make the purchase for a few weeks to a month. James told Siemens that he would buy the ruby
himself except that he had used all his cash purchasing other stones. He showed Siemens an appraisal of
the stone at $225,000.00, indicating to her that this was the retail value of the stone but that it was easily
worth $80,000.00 to $90,000.00 on a quick sale basis. He suggested that Siemens had a rare opportunity
to pick up a real bargain by purchasing the ruby for $62,000.00, holding it for less than a month, and then
selling it to the limited partnership for $72,000.00.
Several of the above representations were false. The ruby was in fact owned by James himself, who
had purchased it four days after meeting with Siemens. James had negotiated his purchase price of
$34,620.00 with the gem importer, and knew that this amount was the true value of the ruby. Moreover,
he purchased the ruby on credit with no payment due for two months; if the limited partnership was
coming together as he represented, he could have sold it the stone himself and made an extra $10,000.00
without any expenditure of funds.
Relying on the scenario painted by James, Siemens paid him $62,000.00 and took possession of the
ruby on September 28, 1981. Needless to say, the limited partnership fell through, the bottom dropped
out of the gemstone market, and Siemens ended up selling the stone in 1987 for $9,000.00. During the
first few years after Siemens purchased the ruby, James had made unsuccessful efforts to sell it for her.
The Court has no trouble at all finding actual and affirmative fraud on the part of James. While he may
not have been under a duty to tell Siemens that he was the owner of the stone, he was certainly not
justified in lying to her about its ownership or making up a story about a distress sale. Siemens had no
intent of making such a large investment in gemstones, and would not have done so if she had not believed
the story; James himself had warned her about how rare "true bargains" were in the gem business.
Moreover, it was fraud for James to show Siemens the $225,000.00 appraisal, which he knew was way
out of line, and tell Siemens that the ruby was worth $80,000.00 to $90,000.00 on a quick sale basis,
without disclosing to her that he had just purchased it for $34,000.00; a recent negotiated sale is always
the best evidence of value. Silence regarding such a material fact itself constitutes a false representation
actionable under section 523(a)(2)(A) of the Bankruptcy Code. Matter of Van Horne
(8th Cir. 1987) 823
F.2d 1285, 1288.
The Court disagrees with Siemens only so far as she measures her damages. She argues that she is
entitled to the difference between what she paid for the ruby and the $9,000.00 she sold it for six years
later because of her "forebearance" in reliance on James' attempts to sell it for her, without commission,
which proved to be unsuccessful. The Court declines to so rule for two reasons. First, the Court cannot
find by clear and convincing evidence that any of the statements made to Siemens after
she bought the
ruby were fraudulent in character. Second, even knowingly false statements made by the debtor in order
to obtain forebearance are not considered actionable under section 523(a)(2) if no additional property was
obtained by the debtor as a result. In re Preston
(DC .D.Va.1983) 47 B.R. 354; In re Grubbs
M.D.Ga.1981) 9 B.R. 499; In re Schmidt
(Bkrtcy.N.D.Ind.1986) 70 B.R. 634; In re Hames
(Bkrtcy.D.Minn.1985) 53 B.R. 868; In re Bacher
(Bkrtcy.E.D.Pa.1985) 47 B.R. 825.
For the foregoing reasons, Siemens is entitled to a judgment in the amount of $27,380.00 plus interest
at the legal rate from and after September 28, 1981. She will also recover her costs of suit. The judgment
will be nondischargeable.
Counsel for Siemens shall submit an appropriate form of judgment. This memorandum constitutes
findings and conclusions pursuant to FRCP 52(a) and Bankruptcy Rule 7052.
Dated: March 10, 1988 __________________________