Ron G. Bustos & Bustos, LLC v. Muller (In re Muller), 15-10055 ta7

In re: JENNIFER PATRICIA MULLER, Debtor.

RON G. BUSTOS and BUSTOS, LLC, Plaintiffs, v. JENNIFER PATRICIA MULLER, Defendant.

No. 15-10055 ta7

Adv. No. 15-01031

UNITED STATES BANKRUPTCY COURT DISTRICT OF NEW MEXICO

May 19, 2016

MEMORANDUM OPINION

Before the Court is Ron Bustos' (together with Bustos, LLC, the "Plaintiff") request that the debt owed to him be declared nondischargeable under § 523(a)(2)(A),¹ and that Defendant's discharge be denied under §§ 727(a)(3), (a)(4), and/or (a)(6). After a trial on the merits, the Court rules against Plaintiff on all claims.

I. FINDINGS OF FACT²

The Court finds:

Defendant is a high school graduate who currently works for a home healthcare provider. Her father, Everisto Muller ("Muller"), was a skilled contractor who specialized in framing.Muller retired from general contracting in 2004 for health reasons.³ Cynthia Richards ("Richards"), Defendant's domestic partner, was a banker with 32 years' experience in loan reviews, loan workouts, and regulatory compliance.

From about 2001 to 2011, Defendant dabbled in home remodeling. Sometimes she would buy cheap or distressed houses to remodel and "flip." Other times she would charge others a fee for remodeling work. Her remodeling was limited to light repairs such as painting or tile flooring installation. For the houses she bought and resold, Defendant would hire subcontractors to make any repairs she could not do herself. In general, the properties she flipped were worth $100,000 or less. Muller helped Defendant from time to time.

Defendant's remodeling business was most active between 2004-2007, when she bought, remodeled, and "flipped" between six to ten houses, usually in conjunction with friends or business acquaintances. Defendant borrowed money to buy and remodel the houses through real estate contracts and bank loans. In 2008 banks substantially tightened their lending so Defendant had to curtail her business. However, she continued to offer remodeling services to others.

Around 2005, Robert and Debra Weber bought several vacant lots in Rio Rancho. They approached Defendant and asked for leads on potential buyers.⁴ Defendant referred them to her cousin David Chavez, who ended up buying several lots. Defendant was not paid for the referral and did not invest in the lots. She had little to no contact with the Webers after 2012.

By 2011, Defendant's remodeling activities had dropped significantly. Her mother was in a car accident on September 28, 2010, and was hospitalized. Her father required full time care. Defendant and her siblings divided the duties of caring for their parents. Instead of buying or remodeling houses, Defendant began taking jobs to support herself and her family, including selling advertising and working for a home healthcare agency.

Defendant did not keep bookkeeping records or receipts for her remodeling business. When preparing her tax returns Defendant would rely on any 1099s she got from customers, her bank and credit card statements, and her memory. Not surprisingly, Defendant's tax returns were not completely accurate.

Plaintiff and Defendant met in high school. Plaintiff is a retired deputy fire chief who has been "flipping" houses for twenty years. He currently works in the air national guard, overseeing airplane maintenance. Plaintiff's remodeling business is reasonably successful.

The dispute at issue arose out of an alleged 2004 oral agreement between the parties. Plaintiff sold Defendant a house in 2004, which Defendant remodeled and "flipped." She paid Plaintiff the agreed-upon purchase price when she sold the house. According to Defendant, that was the sum and substance of their agreement. Plaintiff, on the other hand, alleges the following material terms of an oral contract:

• The parties to the agreement were Plaintiff, Defendant, Muller, and Richards;

• Plaintiff sold three houses to Defendant and/or her friends for below-market prices, so Defendant could net around $100,000 in profits when the houses were remodeled and resold. This money would provide start-up capital for Defendant's remodeling/flipping business;

• In exchange, Defendant and Muller agreed to help Plaintiff build a "million dollar" house in the Oxbow neighborhood of Albuquerque; and

• Richards agreed to use her position and connections at the bank where she worked to help Plaintiff find bargain houses to buy and remodel.

These vague, weird, unenforceable, and partially illegal⁵ terms were never put in writing. There was no credible evidence that Muller or Richards were parties to such an agreement, and the Court is skeptical whether Defendant was either.

Nevertheless, in 2007 Plaintiff sued Defendant, Richards, and Muller in state court for breach of the alleged oral agreement. The state court judge entered summary judgment against Plaintiff on the Richards claim. Plaintiff appealed.

On July 6, 2011 the parties settled the lawsuit. The settlement was memorialized in writing on September 14, 2011. Under the agreement, Plaintiff agreed to dismiss his claim against Muller and drop his appeal. In return, Defendant agreed to pay Plaintiff $30,000 by October 15, 2011, and an additional $20,000 before March 15, 2012.

Defendant had little or no money when she agreed to pay Plaintiff $50,000. She testified that she intended to raise the funds either by obtaining a construction loan to remodel a house she would find, or else by buying a house, remodeling it, and selling it at a profit. Realistically, neither alternative could be accomplished in 30 days or anything close to it. Defendant did not tell Plaintiff that she was broke, nor disclose her plan for raising money. Had she done so, Plaintiff likely would not have agreed to the settlement.

Plaintiff testified that during the settlement mediation, Defendant told him she had vacant lots she could sell, and also that she also could borrow against her house to pay the settlement amount. Defendant denied making either statement. The Court finds Defendant's testimony more credible on this point.

Defendant did not make any of the payments required under the settlement agreement. In September, 2013 Plaintiff sued to enforce the agreement and obtained a default judgment. He filed a judgment lien on Defendant's house and began foreclosure proceedings in November or December of 2014.

On November 25, 2014, the Webers conveyed a vacant Rio Rancho lot to Defendant. Defendant did not know of the conveyance until Plaintiff discovered it as part of his trial preparation.

Defendant filed this bankruptcy case on January 12, 2015. Her bankruptcy schedules did not list the Rio Rancho lot or an inoperable 1994 Toyota Tacoma pickup truck.

On February 24, 2015, Defendant stipulated to a Rule 2004 examination order, which included a requirement to produce certain documents.⁶ Defendant produced documents to Plaintiff on March 3, March 19, March 31, and April 3, 2015. Defendant produced her tax returns⁷, most of her bank statements, and statements from one or two credit cards.

Defendant obtained some of the required bank statements from US Bank, Bank of the West, and First Citizen Bank. She paid bank fees to get the copies, and paid hundreds of dollars in copy charges. Ultimately, she produced all of her Bank of the West statements, 15 months of her First Citizens Bank statements,⁸ and most of her US Bank account statements. Due to coping errors and apparent sloppiness, not all monthly statements were produced.

However, in the state court lawsuit, Defendant produced about 300 pages of documents to Plaintiff, including tax returns, HUD settlement statements, check copies, deeds, construction mortgages, closing documents, and claims of liens.

Defendant's financial condition and business transactions can be adequately determined from the documents she produced. The documents make it quite clear that Defendant has had a relatively low income for some years, operated a small remodeling business that was only marginally profitable, and lives modestly. There is no unexplained loss of assets; Defendant has never had any wealth to speak of.

On March 23, 2015, Defendant amended her schedules to include the vacant lot, which she valued at $2,000, and the Toyota pickup truck, valued at $325. The chapter 7 trustee declined to administer these assets. There is some evidence that the lot is encumbered by unpaid real estate taxes, substantially reducing or eliminating its value.

On March 30, 2015, Plaintiff initiated this adversary proceeding.

II. DISCUSSION

A. § 523(a)(2)(A) (False Representation / False Pretenses).

Section 523(a)(2)(A) excepts from a debtor's general discharge any debt "for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by - false pretenses, a false representation, or actual fraud . . . ." Plaintiff does not claim any fraud in connection with the alleged 2004 oral agreement. Rather, Plaintiff asserts that Defendant inducedhim to sign the settlement agreement with false representations or false pretenses.⁹ Plaintiff asserts that had he known the truth about Defendant's inability to pay and intent not to pay the settlement amount, he never would have signed the agreement.

1. False Representation Claim. To establish a claim for false representation, "the claimant must prove by a preponderance of the evidence that:

• debtor made a false representation;

• with the intent to deceive the creditor;

• the creditor relied on the false representation;

• the creditor's reliance was [justifiable];" and

• the representation caused the creditor to sustain a loss.

Bank of Cordell v. Sturgeon (In re Sturgeon), 496 B.R. 215, 222 (10th Cir. BAP 2013). See also Johnson v. Riebesell (In re Riebesell), 586 F.3d 782, 789 (10th Cir. 2009). "False representations are 'representations knowingly and fraudulently made that give rise to the debt.'" Adams Cnty. Dept. of Soc. Services v. Sutherland-Minor (In re Sutherland-Minor), 345 B.R. 348, 354 (Bankr. D. Colo. 2006) (quoting Cobb...