Larry M. Bauer v. James J. Gilmartin ( 2011 )

United States Bankruptcy Appellate Panel
FOR THE EIGHTH CIRCUIT
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No. 11-6014
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In re: James Joseph Gilmartin; *
Nawana Maria Gilmartin *
*
Debtors *
*
Larry M. Bauer; Cheryl L. Bauer * Appeal from the United States
* Bankruptcy Court for the
Plaintiffs - Appellants * Eastern District of Missouri
*
v. *
*
James Joseph Gilmartin; *
Nawana Maria Gilmartin1 *
*
Defendants - Appellees *
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Submitted: October 27, 2011
Filed: November 16, 2011
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Before KRESSEL, Chief Judge, FEDERMAN and SALADINO, Bankruptcy Judges
FEDERMAN, Bankruptcy Judge
1
Although Nawana Maria Gilmartin was identified as an Appellee in the
Notice of Appeal, counsel for the Bauers advised the court at oral argument that
the Bauers were not pursuing an appeal as to her.
This is an action for nondischargeability. Larry and Cheryl Bauer appeal from
the Judgment of the Bankruptcy Court finding that they failed to prove that they were
damaged as the result of fraud allegedly committed by Debtor James Gilmartin. For
the reasons that follow, we REVERSE AND REMAND.
PROCEDURAL BACKGROUND
The Bauers filed an adversary complaint against the Gilmartins in their
bankruptcy case, seeking a determination that the Gilmartins’ debt to them in
connection with a real estate venture was nondischargeable under § 523(a)(2)(A) and
(a)(4). At the conclusion of the Bauers’ case at trial, the Bankruptcy Court entered
judgment in favor of the Gilmartins based on partial findings, pursuant to Federal
Rule of Civil Procedure 52(c). That rule authorizes the Court to enter judgment
against a party which has been “fully heard” on a necessary element of its proof,
during a nonjury trial, if the Court finds against that party as to that element.2 Such
2
Rule 52(c) provides:
(c) Judgment on Partial Findings. If a party has been fully heard on
an issue during a nonjury trial and the court finds against the party on
that issue, the court may enter judgment against the party on a claim
or defense that, under the controlling law, can be maintained or
defeated only with a favorable finding on that issue. The court may,
however, decline to render any judgment until the close of the
evidence. A judgment on partial findings must be supported by
findings of fact and conclusions of law as required by Rule 52(a).
Fed. R. Civ. P. 52(c), made applicable in bankruptcy proceedings by Fed. R.
Bankr. P. 7052.
2
finding may be made even if the party has established a prima facie case, based on the
court’s evaluation of the evidence and determinations regarding credibility.3
In its ruling from the Bench, the Bankruptcy Court concluded that the Bauers
had not proven nondischargeability under § 523(a)(4), nor had they proven that they
were damaged as a result of the Gilmartins’ alleged fraud, a necessary element of §
523(a)(2)(A). The Bauers appeal only as to James Gilmartin, and only as to the ruling
under § 523(a)(2)(A). Thus, the sole question before us is whether the Bankruptcy
Court erred in finding that the Bauers did not prove they were damaged as a result of
any fraud which may have been committed by James Gilmartin.
STANDARD OF REVIEW
The standard of appellate review on a judgment on partial findings is the same
as any other non-jury case.4 We thus review the Bankruptcy Court’s findings of fact
under Rule 52(c) for clear error, and its legal conclusions de novo.5 Since we hold
that the Bankruptcy Court did not consider all applicable measures of damages, we
do not review its factual findings. The following facts are provided based on the
3
See 9 James Wm. Moore et al., Moore’s Federal Practice § 52.51 (3d ed.
2011). Counsel for both parties have at times referred to the Court’s judgment as
being based on a “directed verdict.” While that term was once used as to jury
cases, Federal Rule of Civil Procedure 50 was amended in 1991 to retitle “directed
verdicts” as “judgments as a matter of law.” See Williams v. Mueller, 13 F.3d
1214, 1215 n. 1 (8th Cir. 1994). Judgment as a matter of law is proper if there is no
legally sufficient evidentiary basis for a reasonable jury to find for the nonmovant
under controlling law. 9 Moore’s Federal Practice at § 50.60[1]. This being a
court-tried case, judgment as a matter of law under Rule 50 does not apply.
4
Id. at § 52.52[1].
5
Minnesota Laborers Health and Welfare Fund v. Scanlan, 360 F.3d 925,
927 (8th Cir. 2004).
3
allegations in the pleadings and the evidence which was offered at trial and is not
disputed.
FACTUAL BACKGROUND
The Gilmartins and Bauers were close personal friends. Larry Bauer was an
attorney, and James Gilmartin had many years of experience in real estate
development and sales. In 2006, the Gilmartins and Bauers formed a limited liability
company known as Gilmartin-Bauer LLC for the purpose of acquiring and developing
real property. Although Larry Bauer prepared Articles of Organization and filed them
with the Missouri Secretary of State, there were no written operating agreements or
contracts between the parties in connection with this endeavor. According to the
Bauers, however, they had orally agreed that the two families would make equal cash
contributions and would share profits and losses equally. The Bauers and Gilmartins
made initial capital investments of $20,000 and $16,800, respectively.
Shortly after the LLC was formed, it purchased an existing apartment building
located in Kirkwood, Missouri, which the parties planned to replace with a new four-
unit condominium (the “Kirkwood Project”). In addition, in mid-2007, the LLC
purchased a single-family residential property in Webster Grove, Missouri, which
they planned to tear-down and rebuild (the “Webster Grove Project”).
The LLC obtained two loans from Regions Bank for these projects: the first in
the amount of $1.36 million, and a second in the amount of $465,000. Both loans
were personally guaranteed by both the Bauers and the Gilmartins.
Larry Bauer was not involved in the day-to-day operations of the LLC. James
Gilmartin bore the responsibility of the day-to-day management, including the
supervision of the construction projects and maintaining the LLC’s records and
finances. The parties agree that, in exchange for his duties with the LLC, James
4
Gilmartin was to receive monthly compensation. They disagree as to whether such
monthly compensation was to extend for more than a year if the projects had not been
completed.
While the projects were under construction, the Gilmartins were experiencing
cash flow problems in their personal finances. According to the Bauers, they loaned
the Gilmartins nearly $30,000 in 2006 and 2007. In addition, James Gilmartin called
upon the Bauers on several occasions to infuse additional funds into the LLC, which
they did. And, because they had allegedly been advised by James Gilmartin of cost
overruns on the projects, the Bauers took out a $330,000 second mortgage on their
home and turned all of that money over to the LLC between August 2008 and
December 2008. The Gilmartins’ cash flow problems prevented them from investing
any additional capital into the LLC after the initial capital investment.
Meanwhile, the Bauers contend that unbeknownst to them, James Gilmartin
was taking unauthorized funds out of the LLC to pay for personal expenses, in
addition to any supervisory fees they had agreed to. According to the Bauers, James
Gilmartin withdrew over $200,000 in unauthorized funds during 2007 and 2008.
Toward the end of December 2008, Regions Bank began calling the Bauers
regarding delinquent loan payments. In response, the Bauers obtained the bank
account records in January 2009 and learned – for the first time, according to them–
of the unauthorized withdrawals. Larry Bauer took over management of the LLC at
that point.
Ultimately, the Webster Grove Project was sold at a loss, and Regions Bank
commenced foreclosure on the Kirkwood Project. The Gilmartins filed a Chapter 7
bankruptcy petition on March 5, 2010. While the Bauers remain liable on their bank
guaranties in connection with these projects, they allege here that they would not have
continued to invest funds in the project, including those from the second mortgage
5
on their home, had they known that James Gilmartin was using such funds for
unauthorized purposes.
DISCUSSION
§ 523(a)(2)(A) provides an exception to discharge of any debt “for money,
property, services, or an extension, renewal, or refinancing of credit, to the extent
obtained by . . . false pretenses, false representation, or actual fraud . . . .”6
In order to prevail on a nondischargeability cause of action for actual fraud
under § 523(a)(2)(A), the Bauers must prove, by a preponderance of the evidence: (1)
that James Gilmartin made representations; (2) that at the time he made the
representations he knew they were false; (3) that he made such representations with
the intention and purpose of deceiving the Bauers; (4) that the Bauers justifiably
relied on such representations; and (5) that the Bauers sustained the alleged loss and
damages as a proximate result of the representation having been made.7 Fraud by
omission can form the basis for nondischargeability under § 523(a)(2)(A).8
The linchpin of the Bankruptcy Court’s Judgment in this case is the finding that
the Bauers failed to prove the fifth element – that they sustained a loss as a proximate
result of James Gilmartin’s alleged misrepresentations. There is no dispute that the
Bauers lost money on this venture. The question for purposes of this appeal is
whether any of their loss was the proximate result of the alleged misuse of funds. The
6
11 U.S.C. § 523(a)(2)(A).
7
See In re Ophaug, 827 F.2d 340 (8th Cir. 1987), as modified by Field v.
Mans, 519 U.S. 59, 116 S. Ct. 437, 444, 133 L.Ed.2d 351 (1995).
8
Merchants Nat’l Bank of Winona (In re Moen), 238 B.R. 785, 791 (B.A.P.
8th Cir. 1999) (“A debtor’s silence regarding a material fact may constitute a false
representation actionable under section 523(a)(2)(A).”).
6
Bankruptcy Court phrased the Bauers’ resulting damage argument as “but for the
taking of the money without our permission, the LLC would have been profitable, and
I would have – [Regions] Bank would have been paid, and I would have gotten back
all of the money that I put into this company, this LLC.” The Court then found that
there simply was no evidence to support that conclusion. In other words, the Court
concluded that since the Bauers had failed to prove that the venture would have
otherwise been successful absent the alleged misuse of funds, there were no damages
resulting from such misuse.
The Bauers assert that the Bankruptcy Court failed to consider their alternate
damage argument, namely, that they would not have invested money into the LLC in
the first place, or they would have ceased putting new money in, had they known that
James Gilmartin was taking money out for his own use.
This argument was raised before the Bankruptcy Court, but not considered as
part of the resulting damage element. Specifically, the Complaint alleged that the
Bauers “would not have funded the LLC or entered into an agreement with Gilmartin
without [believing that] Plaintiffs’ money was being spent solely on legitimate LLC
construction purposes.”9 Also, in their Trial Brief filed in the Bankruptcy Court, the
Bauers argued that “[t]he evidence will show that the Gilmartin’s [sic] engaged in
fraud to convince the Bauer’s [sic] to invest their money in the LLC and to borrow
to fund the LLC. But for the fraud, the Bauer’s [sic] would not have invested any
money or borrowed any money.”10 In addition, Larry Bauer testified at trial that, “We
would not have invested a penny or borrowed a penny had we known that the whole
thing was a fraud from the very beginning. . . . We want every dollar we put in, every
9
Complaint at ¶ 20, Bauer v. Gilmartin (In re Gilmartin), Ch. 7 Case No.
10-42094, Adv. No. 10-4365 (Bankr. E.D. Mo. Aug. 12, 2010).
10
Plaintiffs’ Trial Brief at 5, Bauer v. Gilmartin (In re Gilmartin), Ch. 7
Case No. 10-42094, Adv. No. 10-4365 (Bankr. E.D. Mo. Feb. 18, 2011).
7
dollar we borrowed, and every dollar we owe . . . . Because it was fraudulent from
day one . . . .”11
Although the primary measure of damages for fraud in Missouri is the benefit
of the bargain, as applied by the Bankruptcy Court, alternate measures are available
when the bargain theory does not accurately measure the loss sustained.12 Under
certain circumstances, an “out of pocket” measure of damages, such as that alleged
by the Bauers here, is authorized.13 The Bauers offered evidence that they would not
have invested any money in the first place, or that they would not have continued to
invest funds, had they known of James Gilmartin’s alleged fraud. Since the
Bankruptcy Court found against them on the damages issue without considering
whether the “out of pocket” measure of damages is applicable, we reverse and
remand.
11
Transcript of Trial at 75-76. In discussing the other elements of §
523(a)(2)(A), the Bankruptcy Court did describe the crux of the Bauers’ case as
“[w]e never would have loaned the LLC money had we known it was going to be
stolen or taken out without our permission . . . .” Transcript at 131. However, the
Court did not discuss this as part of its analysis of the resulting damage element.
12
Glass Design Imports, Inc. v. Import Specialties, 867 F.2d 1139, 1143
(8th Cir. 1989).
13
Id. See also Central Microfilm Serv. v. Basic/Four Corp., 688 F.2d 1206,
1220(8th Cir.1982), cert. denied, 459 U.S. 1204, 103 S.Ct. 1191, 75 L.Ed.2d
436(1983).
8