Daniel v. Del Valle (In re Del Valle)

577 B.R. 789

IN RE: Jose DEL VALLE and Olivia Del Valle, Debtor(s),

Cynthia K. Daniel, Cynthia K. Daniel Living Trust Dated March 16, 2004 and Equity Trust Company Custodian FBO Cynthia K. Daniel, Plaintiffs,

v.Robert Jose Del Valle and Olivia Del Valle, Defendant(s).

Case No.: 6:10–bk–12942–MJ

Adversary No.: 6:10–ap–01361–MJ

United States Bankruptcy Court, C.D. California, Riverside Division.

Signed October 5, 2017 Trial Dates: January 30, 2017–April 10, 2017, Submission, Date: June 16, 2017, Location: Courtroom 301 3420, Twelfth Street Riverside, CA 92501

William R. Cumming, Cumming & Associates, Costa Mesa, CA, for Plaintiffs.

Babak Semnar, Semnar Law Firm, Vista, CA, Thomas J. Weiss, Law Offices of Thomas J. Weiss, Los Angeles, CA, for Defendant.

MEMORANDUM DECISION AFTER TRIAL

Meredith A. Jury, United States Bankruptcy Judge

INTRODUCTION

As succinctly stated in a recent trial decision from Hawaii, " ‘[f]alse pretenses, a false representation, or actual fraud’ does not always require an express misrepresentation. For example, ‘a debtor's misleading conduct intended to convey an inaccurate impression may constitute false pretenses.’ " In re Higashi , 553 B.R. 153 (Bankr. D. Hawaii 2016). The investment scheme that Defendant/Debtor Jose Robert Del Valle (Del Valle)¹ lured Plaintiff Cynthia Daniel (Daniel) to participate in was just such false pretense. By making affirmative misrepresentations of fact, omitting disclosure of pertinent facts which he had a duty to disclose, and creating a false pretense of a low risk, high return investment program, Del Valle caused Daniel to part with her money because of his fraud. As a consequence, this court finds that the debt owed by Del Valle to Daniel is nondischargeable under § 523(a)(2)(A).²

FACTUAL BACKGROUND ³

Daniel's friend Greg Harper, a real estate broker, met Del Valle at a gym in 2006. Over the course of several conversations, Del Valle described to Harper a new real estate business, RDV Consulting, Inc. (RDV), that he had undertaken with Ralph Solis (Solis) which bought second trust deeds at a discount and resold them to investors, who then profited when the trust deeds paid off at their face value. Because of high loan to value on the trust deeds, even if the homeowner who was the obligor on the trust deed defaulted and foreclosure was necessary, the ultimate return would always be profitable to the investor. Harper was enticed about the investment opportunity and soon described Del Valle's business to Daniel. Daniel had recently sold a house and had $400,000 in profits which she was seeking to invest, so she became interested in Del Valle's business.

Del Valle sent Harper an email which described an investment opportunity in trust deeds purportedly owned by Solis. Harper shared the email with Daniel, who then initiated her own contact with Del Valle. She first met with Del Valle in Temecula in April 2006 with her friend Kim, then later (after her first two investments) attended a meeting of an "exclusive" small group of investors (8–10 in number) at a community clubhouse, also in Temecula, in May 2006. This meeting was conducted by Del Valle, assisted by Solis regarding details about the trust deeds, and presented a comprehensive picture of the trust deed investment business. Del Valle and Solis held themselves out as "partners" and talked about themselves as "we." The information conveyed at that meeting, and confirmed repeatedly at subsequent meetings and in email communications, turned out to be primarily false and was meant to induce Daniel and others to invest money with RDV

Del Valle described how these investment opportunities arose. Solis had unique access to a market to purchase second trust deeds (presumably at a discount, although that detail was not explained in any testimony; however, only discount buying could have generated the projected profits). He had more trust deeds available to him than he could personally buy⁴ and needed the investment dollars of others to maximize the business. RDV was interested only in a small, exclusive group of investors because it wanted to present these unique opportunities to only a select few. Before any trust deeds were offered for purchase, they would be thoroughly vetted, confirming the homeowners who had the obligation to pay, any senior liens on the property, and the loan to value which would demonstrate the minimal risk involved in the purchase. The trust deeds would be assigned to Solis in writing and then would be presented to the investors with a known return and a fixed due date. The funds invested would be used only for the purchase of each particular trust deed, not commingled with other funds. Similarly, the payouts would come exclusively from each designated homeowner, through a refinance or sale of the real property. If monthly payments were due on the trust deeds, the source of those funds would be the homeowner.

When questioned by the attendees at the meeting about what would happen if the homeowners did not pay, Del Valle represented that they would foreclose on the property and realize the advertised profits and late fees because of the cushion of equity afforded by the favorable loan to value. The need to foreclose would cause a slight delay in receiving returns, but the returns were assured. Although all of the assignments would be held by Solis, most of them would not be recorded for tax reasons.

Daniel was impressed with the presentation and excited to be invited into the exclusive group of investors. In her words, she was "on cloud 9." As she began investing, the sales pitch of Del Valle continued. There was a second meeting of the exclusive group in August, 2006, where much of the same information was discussed. During these meetings and in other communications, Del Valle emphasized his knowledge and expertise in the business and on his letterhead held himself out as "Dr. Del Valle" which conveyed to Daniel, an engineer by training and profession, his education, credential, and success.

The investment opportunities were presented to Del Valle by Solis⁵ and then to potential investors, including Daniel, by email.⁶ Purchases were documented with paperwork generally on the RDV letterhead, Second Trust Deed Division, which identified the investor, property address, property owner, prior trust deed amount (if any; eventually RDV also sold firsts), new/second trust deed amount, loan to value, investment amount, return amount and due date. Such document was signed by Daniel and a representative of RDV, usually Del Valle. Accompanying this document was usually an Investment Agreement, Short Term Note.⁷

The business operation and cash flow pattern of RDV was established early on between Del Valle and Solis. Solis would email the investment chance to Del Valle, who would determine how much profit he could take, then repackage it and email it out to his investor pool. When the money came in, Del Valle took his self-determined "commission" and sent the balance to Solis. When trust deeds came due each month, an RDV employee advised Solis what money they would need, not only to pay out the deeds but also to cover the payroll and operating expenses of RDV Solis would then send a check to RDV in the sum necessary to cover these requests. Del Valle took no steps to verify the source of the funds coming from Solis.⁸

In conversations with Daniel on several occasions, Del Valle represented that he had done a thorough investigation of the property to establish the loan to value. He claimed to have used a website available to him as a real estate professional (identified through trial testimony as a Land Title Comparison Report or Comparative Market Analysis) by which he determined the market value of the property and the amount due on existing liens so that he could calculate the loan to value which established that the investment opportunity was secure and the return certain. He also stated that he had regular meetings with Solis whereby Solis showed him the written assignments and verified the expected returns.

Daniel's first investments were in April 2006, Paris Street and Shady Lane in Hemet, with payoff dates of October and November 2006 and returns of $15,000 on $35,000 invested and $30,000 on $65,000 invested.

Both paid off early, according to Del Valle because the property owners refinanced early. Encouraged by this performance and the continued confidence of Del Valle that each subsequent opportunity had a safe loan to value and generous return, Daniel kept investing throughout 2006, 2007, and 2008, with her last investment made in November 2008. Her last "paid" deed of trust purchase was in May 2008⁹ . Her earliest "unpaid" trust deed purchase was in September 2007.¹⁰

Because of the extraordinary returns Daniel was receiving, she shared news of these profits with her friends, who became interested in making their own investments. When asked, Del Valle said he could not expand his investor pool to include others because of its exclusive nature but he suggested that the friends could invest through Daniel. As a consequence, starting in October 2006, Daniel made investments for her friends, some of which were paid deeds and others which were not. For each such transaction, Daniel prepared paperwork similar to that utilized by RDV At her friends' insistence, she also received a small payment for her "services" from them.¹¹ Significantly, trial testimony and other evidence did not reflect that any of these friends (other than perhaps Kim during the early meeting in Temecula) ever met Del Valle or heard his sales pitch They relied on Daniel's version of what he represented. In addition, although many of them suffered significant economic losses when they received no returns of principal or expected profit, none held Daniel responsible for these losses. Daniel testified none of her friends thought she had a claim against Daniel and none have ever sued her or taken any other steps to enforce such a claim.

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