Welch v. Giron (In re Giron)

622 B.R. 92

IN RE: David Tracy GIRON, Debtor.

Gretchen Welch, Plaintiff,

v.David Tracy Giron, Defendant.

Case No. 18-13213 t7

Adv. No. 19-1008

United States Bankruptcy Court, D. New Mexico.

Signed November 6, 2020

Michael K. Daniels, Albuquerque, NM, for Plaintiff.

OPINION

Hon. David T. Thuma, United States Bankruptcy Judge

The Court tried this adversary proceeding on August 18, 2020, to determine whether any portion of the debt Debtor owes Plaintiff, including the debt represented by an outrageous $20+ million default judgment, is nondischargeable. The Court concludes that Debtor's rescission of certain deed of trust sales in California willfully and maliciously injured Plaintiff's property rights. The resulting damages are nondischargeable. The balance of his debt to Plaintiff is dischargeable.

A. Facts.

The Court finds:¹

Gretchen Welch and David Giron are aunt and nephew. They have known each other Giron's whole life and used to be on very good terms.

Ms. Welch has over a decade of experience "flipping" houses in the Albuquerque area. She testified that she successfully flipped dozens of houses between 2004 and 2016. She learned about buying, renovating, and reselling houses in part from her father and brother, who have experience in construction.

Mr. Giron is self-employed. He makes his living serving as a foreclosure trustee in California and in finding defaulted California junior deeds of trust for investors to buy (a practice known as "junior bene buyouts"). The general idea of a junior bene buyout is to pay relatively little for a second deed of trust, keep the first deed of trust current, foreclose the junior position, sell the house, and pocket the net proceeds after paying off the first trust deed. If all goes well, the investment can be profitable. Otherwise, the junior bene buyer loses money.

Unfortunately for both parties, in 2014 Giron convinced Welch to expand her house flipping business to include California junior bene buyouts. Between October and December 2014, Giron helped Welch purchase four defaulted junior trust deeds in southern California.² After buying the junior trust deeds, Welch appointed Giron as a successor trustee. Giron then went through the process of selling the houses via nonjudicial trust deed sale. In each case, Welch credit bid her junior lien position and took title to the house, subject to the first trust deeds.³ There is no dispute that Welch paid Giron a total of about $48,000 as a fee for his services.⁴

After taking title to and possession of the Los Angeles house, Welch discovered it had foundation problems.⁵ She decided to cut her losses and allowed the first deed of trust lender to foreclose. She recouped about $8,000 in that sale, $3,000 less than she spent to acquire the second deed of trust. Added to the $11,000 she paid Giron for his work, Welch lost $14,000 on the Los Angeles house.

When Giron foreclosed on the Newport Beach property, he used a different business name on the trustee's deed of sale than he did in his prior foreclosure papers. Giron had to rescind the sale and start over, which delayed Welch and increased her "carrying costs" to flip the house.

The parties fell out over the Norwalk property. After Giron foreclosed on the second deed of trust and Welch bought the house, she evicted the occupants, spent $30,000 in renovations, and contracted to resell it in late 2015. When Giron got the payoff figure for the first deed of trust, he and Welch were surprised to find that the quoted payoff was about $32,000 higher than expected. This cost increase likely turned Norwalk from a money-maker to a money-loser. Welch was upset. The parties quarreled shortly after Thanksgiving in 2015. Giron demanded more money for his services.⁶ Welch refused to pay him any more and told Giron to remove his belongings he had stored in her garage.

Angry at what he perceived to be his aunt's unfair treatment, Giron did a reprehensible thing: between December 8 and December 22, 2015, he recorded notices rescinding the foreclosure sales of the Norwalk, Newport Beach, and Anaheim houses, due to alleged "invalid notice." The rescission notices had the effect of divesting Welch of title.

Fortunately, Giron's action had no effect on the Anaheim house. Welch was able to sell it on December 14, 2015, under a contract she had signed before Giron's wrongful act.⁷ Welch ended up losing about $16,000 on the flip.

The rescission derailed Welch's sale of the Norwalk house, however, which had been scheduled to close about the time Giron filed his notice. Finding herself suddenly unable to deliver good title, Welch could not close the sale. Her buyers sued her for breach of contract, while the owners sued her for wrongful foreclosure. In a strange twist, Welch's realtor allowed the buyers move into the house, where they lived for several months. Welch ultimately sold the house to a different buyer in February 2017. Welch was fortunate that this disruption occurred when the real estate market was rising; the 2017 sales price was $45,000 higher than her 2015 contract price. Additionally, Welch was able to collect rent and settle with the realtor to help mitigate her losses.

It is difficult to say what effect the notice of rescission had on the Newport Beach property. There was no buyer under contract in December 2015, so Giron's notice did not disrupt a sale or, as far as the Court can tell, delay the ultimate sale. Nevertheless, Welch had to spend money to reforeclose and the owner of the house sued Welch over the notice of rescission, which delayed foreclosure. Welch finally sold the Newport Beach house in February 2017.

Welch sued Giron in state court in California, alleging breach of contract, fraud, breach of fiduciary duty, negligence, intentional infliction of emotional distress, and violation of California Penal Code § 496. On November 16, 2018, the California state court entered a default judgment for more than $20 million. Welch promptly domesticated the judgment in New Mexico and Giron responded by filing this case. Welch then brought this proceeding, alleging that her judgment is nondischargable under §§ 523(a)(2)(A), (4), or (6).⁸

The Court previously ruled that Welch's default judgment established a valid debt but did not rule on dischargeability. In re Giron , 610 B.R. 670, 674–77 (Bankr. D.N.M. 2019).

B. § 523(a)(2)(A).⁹

Welch's § 523(a)(2)(A) claim focused on actual fraud. "Actual fraud consists of any deceit, artifice, trick or design involving direct and active operation of the mind, used to circumvent and cheat another—something said, done or omitted with the design of perpetrating what is known to be a cheat or deception." 4 Collier on Bankruptcy ¶ 523.08[1][e]; see also In re Vitanovich , 259 B.R. 873, 877 (6th Cir. BAP 2001) ("When a debtor intentionally engages in a scheme to deprive or cheat another of property or a legal right, that debtor has engaged in actual fraud[.]"); In re Vickery , 488 B.R. 680, 690 (10th Cir. BAP 2013) (citing Vitanovich ).

Welch argued that Giron committed actual fraud when he induced her to buy defaulted junior trust deeds and then abandoned her after filing the notices of rescission. Her argument fails. Welch's junior bene investments probably were ill-advised, but there is no evidence that they were fraudulent. Until the parties fell out over Giron's rightful fee, the investment program went more or less as anticipated.

Giron should not have filed the notices of rescission, but the notices did not defraud Welch , nor did they result in Giron obtaining any of her money or property. See § 523(a)(2); cf. In re Bolles , 593 B.R. 832, 843 (Bankr. D.N.M. 2018) (claims for money, property, services, or extension of credit obtained by fraud are governed by § 523(a)(2)(A), while claims for injury to persons or property caused by fraud are governed by § 523(a)(6)). Similarly, Giron's wrongful act did not turn his prior, commercially reasonable business dealings into actual fraud ex post facto .

The Court understands why Welch connected the notices of rescission with fraud: the notices contained an untrue statement, i.e., that there was a problem with the notice of sale. That statement was false. Nevertheless, Welch's claim against Giron is for damages caused by his wrongful act, not for money Giron obtained by the act. Similarly, although Welch was hurt by the untrue statement, she was not deceived by it. The Court concludes that § 523(a)(2)(A) does not apply.

C. § 523(a)(4).¹⁰

Giron acted as a foreclosure trustee for Welch. Did he have fiduciary duties to her? "The existence of a fiduciary relationship under § 523(a)(4) is determined under federal law." In re Young , 91 F.3d 1367, 1371 (10th Cir. 1996). "However, state law is relevant to this inquiry." Id. Under California law, Giron did not owe fiduciary duties to Welch:

‘[T]he trustee of a deed of trust is not a true trustee with fiduciary obligations, but acts merely as an agent for the borrower-trustor and lender-beneficiary.’ [quoting Yvanova v. New Century Mortgage Corp. , 62 Cal. 4th 919, 927, 199 Cal.Rptr.3d 66, 365 P.3d 845 (2016).] The trustee's ‘common’ agency for both borrower and lender ‘is a passive one, for the limited purpose of conducting a sale in the event of the trustor's default or reconveying the property upon satisfaction of the debt.’ ( Biancalana v. T.D. Service Co. (2013) 56 Cal.4th 807, 819, 156 Cal.Rptr.3d 437, 300 P.3d 518 ( Biancalana ).) "The rights and powers of trustees in nonjudicial foreclosure proceedings have long been regarded as strictly limited and defined by the contract of the parties and the statutes." ( Heritage Oaks Partners v. First American Title Ins. Co. (2007) 155 Cal.App.4th 339, 345, 66 Cal.Rptr.3d 510 ( Heritage Oaks ), quoting I. E. Associates v. Safeco Title Ins. Co. (1985) 39 Cal.3d 281, 287, 216 Cal. Rptr. 438, 702 P.2d 596 ; see also Biancalana , supra , at p. 819, 156 Cal.Rptr.3d 437, 300 P.3d 518 [" "The scope and nature of the trustee's duties are

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