Garlock v. Thomas

575 B.R. 913
CourtDistrict Court, N.D. California
DecidedJuly 31, 2017
DocketCase No. 16-cv-06052-RS
StatusPublished
Cited by2 cases

This text of 575 B.R. 913 (Garlock v. Thomas) is published on Counsel Stack Legal Research, covering District Court, N.D. California primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Garlock v. Thomas, 575 B.R. 913 (N.D. Cal. 2017).

Opinion

ORDER AFFIRMING BANKRUPTCY COURT

RICHARD SEEBORG, United States District Judge

I. INTRODUCTION

Defendant-appellant William F. Garlock appeals the Bankruptcy Court’s judgment for appellees and the order denying his motion to amend that judgment. For the reasons that follow, both decisions are affirmed.

II. BACKGROUND

In September 2007, plaintiff-appellees Ella Thomas and Dan Bruñe invested in a two-parcel retail mall located at 495-491 Oro Dam Boulevard in Oroville, California, known as the Feather River Village property. Garlock marketed the property to prospective investors in a marketing brochure, as well as in a confidential private placement memorandum, which outlined specific details of the investment and characteristics of the property. Included in these materials were representations that the property was 94-percent leased, that there was an income producing easement across the property; that the property was worth $10 million, and that there was a 30-year, interest-only loan with Bank of the [916]*916Orient on the property. In 2008, according to Thomas and Bruñe, Garlock stopped making mortgage payments and the property went into foreclosure. The Oroville investors, including Thomas and Bruñe, allegedly lost a combined $5 million. Gar-lock denies that he simply stopped making mortgage payments, and claims that general financial recession led to the property’s financial decline. He asserts the property’s tenants defaulted on their leases, business revenues dropped, incomes plummeted, and that foreclosure was inevitable in the “unforeseeable cataclysmic financial” situation at the time.

Garlock subsequently filed for bankruptcy. On June 17, 2013, over fifty separate plaintiffs, including Bruñe and Thomas, filed a complaint against him in the bankruptcy proceedings, claiming Garlock’s debts to them were nondischargeable. Bruñe and Thomas argued specifically that Garlock’s debts involving the Feather River Village property were nondischargeable under 11 U.S.C. §• 523(a)(2)(A).

Under that provision, an individual debt- or is not discharged from any debt obtained by “false pretenses, a false representation, or actual fraud.” To prevail on their claim, Bruñe and Thomas had to demonstrate:

(1) [that] the debtor made the representations;
(2) that at the time he knew they were false;
(3) that he made them with the intention and purpose of deceiving the creditor;
(4) that the creditor relied on such representations; [and]
(5)' that the creditor sustained the alleged loss and damage as the proximate result of the misrepresentations having been made.

In re Eashai, 87 F.3d 1082, 1087 (9th Cir. 1996) (citations omitted). In their amended complaint, filed on November 23, 2013, Bruñe and Thomas alleged Garlock defrauded them through various misrepresentations about the property, including the extent of rentals on the property, its value of $10 million, its good condition, and the existence of an income-producing easement across the property. Bruñe and Thomas averred Garlock produced income statements and financial data to induce investment, despite knowing at the time such information was not accurate. According to Bruñe and Thomas, these combined misrepresentations regarding the property amounted to fraud, rendering Garlock’s debts nondischargeable and making Gar-lock personally liable to them.

A seven-day trial began on March 21, 2016. During Garlock’s opening statement, he argued the complaint was deficient because it did not state with adequate specificity which representations plaintiffs’ section 523(a)(2)(A) fraud claim referred to, or how the required elements of the fraud claim could be proven. Garlock asserted Bruñe and Thomas simply alleged “a menu list of items, but they [did not] actually frequently allege any facts to support them.” Tr. of Mar. 21, 2016 Hr’g at 17:16— 7. He requested that all evidence which did “not bolster any allegation of the complaint or [which was] outside the scope of the complaint” be considered inadmissible by the court. Id. at 17:20. On that point, the court told Garlock that if plaintiffs attempted to introduce evidence for inadequately pleaded claims, he could object to that evidence at trial. In the absence of objection, the court explained, any un-pleaded claims would still be tried.

During the trial, Bruñe and Thomas both testified that, although Garlock asserted in the private memorandum given to prospective investors that the property [917]*917had a 30-year loan on it, they ultimately discovered through correspondence with the lender bank that it only had a one-year term. This allegation was not explicitly referenced in plaintiff’s complaint. At trial, plaintiffs contended they relied on Gar-lock’s statements about the term of the bank loan when signing on as investors, with Bruñe noting that the 30-year mortgage was “the only reason” he got into the investment. Tr, of Mar. 21, 2016 Hr’g at 150:11-12. Bruñe and Thomas also discussed extensively their belief, based on Garlock’s representations, that there was an income-producing easement across the property. Bruñe testified that while the investment materials promised “$200,000 per year would come from” an “easement that went from Oro Dam Boulevard across the Oroville Shopping Center,” the easement apparently did not exist. Id. at 75:4— 10. Thomas testified that there was no easement, because if there had been, the investors would have had those revenues and they “would have been able to pay for the loan.” Id. at 235:20. Garlock denied making any fraudulent assertions about the existence of this income-producing easement, explaining that even though he could not produce proof of it at trial, the easement existed and his attorneys “told [him] it was recorded.” Tr. of Mar. 24, 2016 Hr’g at 242:2. He did not object to plaintiffs’ testimony regarding his alleged misrepresentations of the loan term.

The bankruptcy court issued its judgment on July 5, 2016. It determined Gar-lock was personally liable under section 523(a)(2)(A) for defrauding plaintiffs through false representations in two dis-positive areas of “critical concern”: the term on the bank loan and “the situation regarding the easement.” Tr. of July 5, 2016 Hr’g at 7:6-8. The court awarded $462,000 to Bruñe and $500,000 to Thomas. All claims regarding the other properties at issue were decided in Gariock’s favor.

On August 11, 2016, Garlock filed a motion to amend the judgment under Federal Rule of Bankruptcy Procedure 9023. Gar-lock contested the bankruptcy court’s findings about both the easement and the loan misrepresentations. First, Garlock argued that because he was able to then show a copy of the recorded easement, he incontrovertibly demonstrated its existence, disproving any easement-related fraud claims. Second, Garlock argued that there was insufficient evidence to demonstrate any false statement regarding the term of the bank loan was made with knowledge of its falsity or with intent to deceive investors.

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575 B.R. 913, Counsel Stack Legal Research, https://law.counselstack.com/opinion/garlock-v-thomas-cand-2017.