Long v. Yoder (In re Long)

538 B.R. 108

In re Adam R. LONG, Debtor.

Adam R. Long, Appellant

v.James J. Yoder, Appellee.

No. 14–2617–JAR.

Bankruptcy No. 09–23473.

Adversary No. 09–6172.

United States District Court, D. Kansas.

Signed Sept. 18, 2015.

Carl R. Clark, Shane J. McCall, Lentz Clark Deines PA, Overland Park, KS, Roy L. Carlson, Russell M. De Phillips, Milberg & De Phillips, P.C., Cardiff by the Sea, CA, for Appellant.

John R. Campbell, Jr., John R. Campbell, Jr., LLC, Leawood, KS, for Appellee.

MEMORANDUM ORDER AND OPINION

JULIE A. ROBINSON, District Judge.

Debtor Adam Long (“Long” or “Appellant”) appeals the Order and Judgment of the bankruptcy court entering a money judgment in favor of creditor James Yoder (“Yoder”), and determining that the debt was non-dischargeable under 11 U.S.C. § 523(a)(2)(A). Having reviewed the record and the applicable law, the bankruptcy court's order and judgment are affirmed.¹

I. Appellate Jurisdiction

The Appellant has elected to have the appeal heard by this Court.² The appeal was timely filed by the Appellant, and the bankruptcy court's order is “final” within the meaning of 28 U.S.C. § 158(a)(1).³

II. Standard of Review

In reviewing a bankruptcy court's decision, this Court functions as an appellate court and is authorized to affirm, reverse, modify, or remand the bankruptcy court's ruling.⁴ “The Tenth Circuit follows the established principle that a district court “review[s] the bankruptcy court's legal determinations de novo and its factual findings under the clearly erroneous standard.”⁵ When a case involves mixed questions of fact and law, courts “conduct a de novo review if the question primarily involves the consideration of legal principles and apply the clearly erroneous standard if the question is primarily a factual inquiry.”⁶ An appellate court reviews a non-dischargeability ruling under § 523(a)de novo.⁷ But an appellant's claim that the evidence is insufficient to support the bankruptcy court's legal conclusion is an issue of fact that this Court reviews for clear error.⁸ An appellate court must consider evidence presented to the trial court in a light most favorable to the prevailing party, especially where the fact finder was, as here, the court rather than the jury.⁹ “A finding of fact is clearly erroneous if it is without factual support in the record or if, after reviewing all of the evidence, the court is left with the definite and firm conviction that a mistake has been made.”¹⁰ The trial court's decision need only be “permissible,” not “correct.”¹¹ If the bankruptcy court's account of the evidence is plausible in light of the record viewed in its entirety, the district court may not reverse it even though it may have weighed the evidence differently.¹² “Where there are two permissible views of the evidence, the fact finder's choice between them cannot be clearly erroneous.”¹³ Finally, determinations made on the basis of the credibility of a witness are given great deference by appellate courts.¹⁴

III. Statement of Facts

On October 16, 2009, Long filed a Chapter 7 bankruptcy petition for relief. Yoder initiated an adversary proceeding by filing a Complaint alleging that the debt of Long in the sum of $941,780.82 was non-dischargeable under 11 U.S.C. § 523(a)(2)(A) due to Long's fraud and misrepresentation. The bankruptcy court held a two-day evidentiary hearing, and on December 1, 2014, entered a Nunc Pro Tunc Memorandum Opinion and Order, ruling in favor of Yoder on his Complaint, ruling in favor of Long on a Motion for Sanctions, and overruling Long's Motion for Summary Judgment, resulting in a judgment in favor of Yoder in the net sum of $906,551.¹⁵

After reviewing the record and the parties' briefs, the Court finds, except as noted below, the bankruptcy court's factual findings are accurate and supported by the record as set forth below.¹⁶

Debtor Adam Long grew up in the Kansas City area. At the time of trial, Long was thirty-three years old, lived in California, and worked as a broker for Ayre Investments. Long was a classmate of Yoder's son, Jay Yoder, and Yoder helped coach Long on a middle school football team. Jay Yoder lived with Long in Florida briefly in 1997, where Long attended college. Long moved back to Kansas City in 2000, and graduated with a degree in business administration from the University of Kansas in 2003. Long then briefly worked for Waddell and Reed as a financial advisor, then went to work for Wells Fargo Financial.

Long worked for Wells Fargo Financial for nine months in 2003, selling consumer finance products, including home loans. While Long did not close the consumer loans or participate in the securitization process, he understood that the home loans were secured by a mortgage, and understood the difference between secured and unsecured debts. After nine months, Long was promoted to a position in the Wells Fargo Home Mortgage Division, which provided subprime loans to less qualified applicants. Again, Long did not handle the preparation of closing documents or the closing of these loans. Long worked at Wells Fargo in different capacities for approximately two years. In 2005, Long began working for First National Mortgage Services, where he brokered loans until late 2006. Long testified that while at First National, he understood that he was selling secured loans that required a mortgage or deed of trust to secure the loan, but that he was never responsible for recording, drafting, or thoroughly reviewing any documents related to the mortgage transaction. Long testified that despite this experience in the mortgage industry, it was a promissory note, and not a mortgage, that is filed with the appropriate local authorities to perfect a lien for a real estate loan.

Long began “flipping” Kansas City metropolitan area houses in 2004, that is, purchasing and rehabilitating houses for a quick resale. This was initially a part-time venture for Long, who flipped or turned thirty to 100 lower-value properties in 2004. Long then ventured into the sale of higher value properties, where it was common practice for lenders to finance the property purchase price and, in some instances, to loan additional funds that were used to rehabilitate, renovate, or build residential properties. Although there was not testimony that he prepared any mortgage or deed of trust, in all of these transactions, Long was involved and signed the closing documents, including the notes and mortgages.¹⁷

Long and Jay Yoder rekindled their relationship in 2006, and began socializing together. Long told Jay that he was doing well flipping houses and Jay mentioned that his father had recently retired and might wish to participate in Long's enterprise. Various witnesses testified that Long and Yoder met anywhere from five to fifteen times between April and November 2006. Long described these discussions as his financial “courtship” with Yoder, consistent with relationship building, with an eventual progression to more specific discussions about Long's business. During November and December 2006, a nascent business relationship formed.

James Yoder graduated from the University of Kansas in 1975 with a degree in business. He was President and CEO of Air Resources, Inc., a company he started in 1983. In 1998, he purchased Southern Aeroparts. In 2004, he invested in property in Mexico. Yoder also owned a restaurant in Montreal and in 2005 purchased condominiums located on the Country Club Plaza in Kansas City, Missouri, where he lived. At the time of trial, Yoder was approximately fifty-six years old. Yoder testified that his prior real estate investments were mostly personal in nature, and his other investments were extensive and primarily focused in the aircraft industry, equities, and financial instruments, not the purchase of real property. Yoder testified that in this case, he was a lender, not an investor. Yoder testified that he develops a relationship of trust between himself and the other parties to the investment or transaction, and relies upon the integrity and honesty of the other participant in the financial transaction or investment, and that he has had success with his approach.

In November 2006, Long and Yoder reached an agreement in principle that Yoder would loan $500,000 to Long's house flipping business, and the loan would carry a thirty percent interest rate. Yoder testified that he would not have the funds from the sale of his business until December 2006, so the initial agreement was that the entire loan would be made in January 2007.¹⁸ In December 2006, the parties met again and discussed the details of the loan. At this meeting, Long asked Yoder, “You want security for this [the loan]?” Yoder replied that he did. Either at this meeting or a separate meeting sometime in December, Long requested an advance of $200,000 on the loan, and on December 2, 2006, Yoder agreed. At this time, no promissory note or mortgage was signed by the parties, and the testimony is unclear whether the parties agreed to collateralize the loan when the $200,000 advancement was made.

On January 18, 2007, Yoder loaned Long an additional $285,000. At this time, the parties signed a promissory note for $500,000 (the “Note”); the loan included the $200,000 initial advance, $15,000 interest for the advance, and the additional $285,000, with the $215,000 rolled over into the $500,000 Note. The Note states, “THIS PROMISSORY NOTE shall be secured by a Mortgage, filed of record, on the property located at 1000 W. 66th Terrace, Kansas City, Missouri 64113” (the “Property”). The Property was a higher-end house located just off Ward Parkway. Prior to executing the Note, Long showed Yoder and told him there was $1 million equity in the Property and that Yoder's mortgage would be protected by a mortgage in the Property.¹⁹ This conversation occurred prior to the distribution of the second portion ($285,000) of the loan. Yoder did not ask Long for an appraisal or valuation of the property or whether there were any...