McCallion v. Lane

Opinion

USCA1 Opinion

March 20, 1995
                                [Not for Publication]
                                [Not for Publication]

                            United States Court of Appeals
                            United States Court of Appeals
                                For the First Circuit
                                For the First Circuit
                                 ____________________
        No. 94-1991

                                 IN RE ANDREW J. LANE
                                       Debtor.
                                 ____________________

                 PETER H. MCCALLION, FRANK LOOMIS, GREGORY O'NEILL, 
                          WILLIAM FOWLER, RICHARD DELORENZO,

                                     Appellants,

                                          v.

                                   ANDREW J. LANE,

                                      Appellee.

                                 ____________________

                     APPEAL FROM THE UNITED STATES DISTRICT COURT

                          FOR THE DISTRICT OF MASSACHUSETTS

                   [Hon. Nathaniel M. Gorton, U.S. District Judge]
                                              ___________________

                                 ____________________

                                        Before

                                Torruella, Chief Judge,
                                           ___________
                            Aldrich, Senior Circuit Judge,
                                     ____________________
                              and Stahl, Circuit Judge.
                                         _____________

                                 ____________________

            Kenneth  J.  Parsigian  and  Goodwin  Proctor  &  Hoar  argued for
            ______________________       _________________________
        appellant; Peter H. McCallion was on brief pro se.
                   __________________
            Charles R. Dougherty  with whom Sara Miron Bloom and Hill & Barlow
            ____________________            ________________     _____________
        were on brief for appellee.
                                 ____________________

                                 ____________________



STAHL, Circuit Judge.   In this bankruptcy  appeal,
                      STAHL, Circuit Judge.
                             _____________

            we  again  review  issues  arising  from  a  dispute  between

            plaintiffs-appellants  ("appellants"),  who  were the  former

            shareholders of Indian Hill Associates, Inc. ("Indian Hill"),

            and defendant-appellee Andrew J.  Lane ("Lane") over the sale

            of all Indian Hill shares to Lane.   Indian Hill's sole asset

            was a contract to  purchase 165 acres  of land in New  York's

            Westchester and Putnam  counties ("the  Land").   Originally,

            appellants sought  a constructive trust on  Lane's Chapter 11

            estate  and  a  determination  that  Lane's  indebtedness  to

            appellants is nondischargeable under various subsections of  

            523 of the Bankruptcy Code, 11  U.S.C.   523.  On our initial

            review, we upheld the bankruptcy court's dismissal as to  all

            of  appellants'  claims  except   the  one  arising  under   

            523(a)(2)(A).1   In  re Lane,  937 F.2d  694 (1st  Cir. 1991)
                             ___________

            ("Lane I").  On remand, the bankruptcy court conducted a one-
              ______

            day trial and held that the debt owed appellants did not fall

            under  this  dischargeability  exception.    On  review,  the

            district  court  affirmed.    After careful  review,  we  now

            affirm.

____________________

            1.  Section  523(a)(2)(A)  provides  that   money,  property,
            services, or an extension,  renewal, or refinancing of credit
            is  not discharged to  the extent it is  obtained by:  "false
            pretenses,  a false  representation, or  actual fraud,  other
            than  a statement  respecting  the debtor's  or an  insider's
            financial condition."

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I.
                                          I.
                                          __

                      This  dispute  has  lingered  for  more than  seven

            years, generating  an intricate factual background.   We cull

            only  those  facts  relevant  to  this  appeal.    In   1987,

            appellants formed Indian  Hill to acquire the  Land.  Through

            its  treasurer,  Terence  Gargan,   Indian  Hill  executed  a

            contract  under which  it agreed  to purchase  the  Land from

            Putnam Limited Partners  ("Putnam") for  $3,425,000.   Indian

            Hill placed a deposit  of $300,000 in escrow and  closing was

            set for November 4, 1987.  

                      Appellants,  one of  whom  is a  lawyer, wanted  to

            develop the  Land.  Critically,  however, they were  short on

            both money  and experience in land  development, inadequacies

            that  became  obvious  as  events unfolded.    Indian  Hill's

            president, appellant Peter H. McCallion,  approached Lane, an

            experienced  Massachusetts-based  developer,  about  a  joint

            residential  development on  the  Land.   Lane rejected  that

            proposal but  indicated that, if financing  was available, he

            would consider purchasing the  entire tract from Indian Hill.

            McCallion  said   that  he   would  help   secure  financing.

            Negotiations  ensued and  eventually  the  parties reached  a

            tentative   agreement   under  which   Lane  would   buy  all

            outstanding  Indian  Hill  shares  for   $1,675,000,  thereby

            acquiring all of Indian Hill's rights under the land-purchase

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contract.  In  October 1987,  Indian Hill  sent Lane  a draft

            agreement to that effect.  

                      Meanwhile, McCallion arranged for a meeting between

            Lane and Bankers Trust Company in Manhattan.  At the meeting,

            held on  November 3, 1987,  and attended by  Lane, McCallion,

            and their associates, Lane's prospects for financing appeared

            good,  but not  certain.   However, McCallion  and  the other

            Indian Hill  shareholders faced  an imminent problem:   their

            closing  with Putnam was scheduled for the next day and, with

            no financing  to complete the purchase,  the $300,000 deposit

            was  at  risk.    Immediately  following  the  Bankers  Trust

            meeting, Lane, McCallion, and others in their group adjourned

            to a nearby  restaurant.  McCallion  indicated that he  could

            secure  an extension  of the  closing date  if Lane  signed a

            contract  to acquire  Indian Hill's  shares.   Lane testified

            that  he made  clear that  he would  not go through  with the

            project  unless financing  was  available.   With  financing,

            however, the  deal presented  an  attractive opportunity  for

            Lane, and prospects for  a substantial profit for  the Indian

            Hill  shareholders.   Eventually,  during the  course of  the

            restaurant meeting,  Lane and  McCallion signed  an agreement

            ("November 3rd  agreement") for sale of  Indian Hill's shares

            to Lane.  

                      The terms  of the November  3rd agreement  required

            Lane to pay a  $300,000 deposit into escrow upon  signing the

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agreement,  $75,000  on November  4,  1987,  three additional

            installments  of $350,000  each, and  a final  installment of

            $250,000.   There was no financing contingency.  Lane did not

            have  his checkbook  with him in  New York  but said  that he

            would send the deposit check by mail.  

                      With the agreement in  hand, McCallion secured from

            Putnam  an extension  of the  closing date  until  January 4,

            1988.     Lane,  however,  never  sent   the  deposit  check.

            McCallion pressed  Lane for  the deposit.    On November  30,

            1987, Lane sent a letter to appellants proposing to amend the

            November  3rd agreement by making Lane's obligation expressly

            contingent upon  financing.  The new  closing deadline loomed

            and,  on January  4, 1988, the  Indian Hill  shareholders and

            Lane agreed to amend the November 3rd agreement ("January 4th

            amendment").   The basic terms  of the January  4th amendment

            provided:    (1)  Indian  Hill's original  deposit  would  be

            released to Putnam, thereby supporting a further extension of

            the closing  until February  12, 1988;  (2)  payments on  the

            original  $1,675,000  share  sale price  were  made expressly

            conditional  on  Lane  securing   financing;  (3)  a  payment

            schedule   was  established   under  which   the  final   two

            installments,  totalling $600,000,  were made  conditional on

            Lane   securing   governmental   approval   for   residential

            development, and;  (4) appellants agreed  to "forever release

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and will bring  no claims  against Lane  arising or  alledged

            [sic] to arise" from the November 3rd agreement.  

                      Pursuant to the January 4th amendment, Lane secured

            a bridge loan and  paid appellants $375,000 (representing the

            $300,000 down payment plus  the $75,000 that had been  due on

            November  4,  1987),  and  Indian  Hill's  original  $300,000

            deposit  was  released to  Putnam.    Bankers Trust  approved

            financing  for Lane.  In August 1988, Lane paid appellants an

            additional installment of $350,000, plus interest.  A dispute

            then arose regarding  zoning of  the Land and,  as a  result,

            Lane  made no  further payments  and filed  suit in  New York

            state  court  charging  appellants  with  misrepresenting  or

            failing  to  disclose  facts  about  the  Land.    Appellants

            counterclaimed and ultimately secured a judgment against Lane

            for  $468,313.2   For  reasons  apparently  unrelated to  the

            Indian  Hill  dispute, Lane  filed  a  Chapter 11  bankruptcy

            petition in March 1989.3  

                      In  the  end, appellants  more  than doubled  their

            original  investment, receiving  $785,000  in  payments  from

            Lane.    In October  1989,  appellants  began this  adversary

____________________

            2.  The  state   court  dismissed  the  claims   against  all
            appellants except McCallion.

            3.  Lane and his companies were among the largest real estate
            developers in New England.   According to the record  in this
            case,  at one point Lane's assets totalled $90 million.  Lane
            filed  his bankruptcy petition on  the same day  the New York
            state court awarded appellants their judgment.

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                                          6



bankruptcy    proceeding    seeking    to    determine    the

            dischargeability  of,  alternatively,  the  balance   of  the

            installments, which  totalled $950,000 plus  interest, or the

            amount of the state court judgment, $468,313.

II.
                                         II.
                                         ___

                      Bankruptcy  Rule  8013  provides  that  the court's

            "[f]indings  of fact,  whether based  on oral  or documentary

            evidence, shall  not be  set aside unless  clearly erroneous,

            and  due  regard shall  be given  to  the opportunity  of the

            bankruptcy court to judge  the credibility of the witnesses."

            We review  conclusions of law de  novo.  In  re G.S.F. Corp.,
                                          __  ____   ___________________

            938  F.2d 1467, 1474  (1st Cir. 1991).   In an  appeal from a

            district  court  review  of  a  bankruptcy  court  order,  we

            independently  review the bankruptcy  court's decision.  See,
                                                                     ___

            e.g., In re Winthrop  Old Farm Nurseries, Inc., ___  F.3d ___
            ____  ________________________________________

            (1st Cir. 1995).    

                      Appellants'  theory  under    523(a)(2)(A)  is that

            Lane acquired title  to the Indian Hill shares  by promising,

            under the  November 3rd agreement,  to pay the  $300,000 down

            payment to  the appellants without ever having  the intent to

            do  so.    To  establish   a  claim  under  this  subsection,

            appellants must  prove: (1) that  Lane made  representations;

            (2) that at  the time he  knew were false;  (3) that he  made

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                                          7



them with the intent and purpose of deceiving the appellants;

            (4) that  the appellants relied on  such representations; and

            (5) that the appellants sustained the alleged loss and damage

            as the  proximate result  of the representations  having been

            made.4  See, e.g., In  re Ophaug, 827 F.2d 340, 342  n.1 (8th
                    ___  ____  _____________

            Cir. 1987).  

                      A  misrepresentation  of  intention can  constitute

            fraud.   See, e.g., In re Zachary,  147 B.R. 881, 883 (Bankr.
                     ___  ____  _____________

            N.D. Tex. 1992) (citing  3 Collier on Bankruptcy    523.08 at
                                       _____________________

            523-54  (15th ed. 1991)).  If a debtor enters into a contract

            with  the intent  not  to comply  with  its terms  and  later

            defaults under the contract, the contract may provide a basis

            for an  exception to discharge on the grounds of fraud if the

            other remaining elements are established.   In re Krause, 114
                                                        ____________

            B.R. 582, 606 (Bankr. N.D. Ind. 1988).  However, mere failure

            to  perform is  not sufficient  evidence of  scienter  nor is

            subsequent  conduct contrary  to the  original representation

            necessarily indicative of fraudulent  intent.  In re Zachary,
                                                           _____________

            147 B.R. at 883 (collecting cases).   

                        The  bankruptcy court  found  that  Lane did  not

            misrepresent his intent.   The court found that Lane  "at all

            times  informed the  [appellants]  of the  necessity that  he

                                
            ____________________

            4.  As we noted in our earlier decision in this case, whether
            appellants must prove reasonable reliance is an open question
                                  __________
            in this court.   Lane I, 937 F.2d at  698 n.8.  As we  do not
                             ____
            reach the issue in this case, we continue to take no position
            in the matter.

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                                          8



obtain complete financing  for the project.   He intended  to

            perform the  agreement  which he  believed  he had  with  the

            [appellants]."   Thus, the  court held that  appellants' debt

            did  not  fall  under  the     523(a)(2)(A)  dischargeability

            exception.  Alternatively, the court  held that, by the terms

            of the  January 4th  amendment, appellants had  released Lane

            from all claims arising from the November 3rd agreement.5  

                      Appellants raise numerous arguments challenging the

            bankruptcy court's  conclusion,  most of  which  have  little

            bearing on the issue before us.  Indeed, appellants appear to

            misapprehend  fundamentally the  issue  on appeal:   we  must

            determine whether  the bankruptcy court, after  a full trial,

            committed clear error  in its factual  finding that Lane  did

            not misrepresent his intent when he entered into the November

            3rd  agreement.6   Because  the issue  is intent,  appellants

            must point  to evidence, direct or  circumstantial, of Lane's

            state  of mind  sufficient to  overcome the  court's finding.

            Instead,  appellants   offer  arguments  grounded   in  parol

            evidence and substantive contract rules.  These arguments may

            be material to the legal effect of the November 3rd agreement
                               ____________

                                
            ____________________

            5.  Because we resolve this case  under   523(a)(2)(A), we do
            not reach  the  issue of  the enforceability  of the  release
            contained in the January 4th amendment.

            6.  We  note  that  in   their  reply  brief,  appellants  do
            correctly state the issue  before the court, but  then launch
            into an  extended discussion  of issues wholly  extraneous to
            the  question  of  intent,  including  res  judicata,   parol
                                                   ___  ________
            evidence, and substantive contract law.

                                         -9-
                                          9



and  the January 4th amendment, but they have no relevance to

            the issue of Lane's intent to misrepresent.7  

                       Appellants do make a  lame pass at a state-of-mind

            argument by averring that Lane's fraudulent intent is evident

            from  his general  conduct.   Specifically, they  refer to  a

            pattern of seemingly  inconsistent statements, alleging that,

            "Lane  consistently makes  up  stories to  suit his  purposes

            without regard for  the truth."   They also  point to  Lane's

            general conduct  subsequent  to the  November 3rd  agreement,

            focusing particularly on his failure to attempt to secure the

            necessary  government approval for the development, which was

            a  precondition for  payment to  appellants of  the last  two

            installments. 

____________________

            7.  At  oral  argument,  appellants  offered  a  new  theory.
            Seizing  on language contained in In re Krause, 114 B.R. 582,
                                              ____________
            606  (Bankr. N.D.  Ind. 1988), a  case cited by  the panel in
            Lane I, and which we cite above, supra at 8, appellants argue
            ______                           _____
            that  fraud occurred  because Lane  never intended  to comply
            with the  contract's terms.   They argue that  the bankruptcy
                                 _____
            court erred  by failing  to analyze  Lane's intent  to comply
            with the terms of  the November 3rd contract,  which purports
            to be fully integrated, and thus cannot incorporate any parol
            agreement regarding  financing.   On this record,  we do  not
            agree.   As discussed more  fully below, Lane  could not have
            the  intent to  misrepresent  when, as  the  court found,  he
            repeatedly  made  clear  that  the  agreement  was  expressly
            conditioned on  securing financing,  the legal effect  of the
            underlying document notwithstanding.   We think the court was
            correct to look to Lane's  statements to appellants as direct
            evidence of his  intent to  comply with the  "terms" that  he
            announced,  rather than  to  infer fraud  from the  fact that
            those "terms" may have had no legal effect under the language
            of the contract.

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                                          10



Appellants'   argument   falls    far   short    of

            establishing clear error.   With regard to Lane's statements,

            the  trial  record  reveals  that  appellants  made strenuous

            efforts  to  impeach  Lane's  testimony.    In  reaching  its

            conclusion, the court simply made a credibility determination

            by  choosing to believe Lane,  a decision to  which we accord

            deference.    As to  Lane's  post-November  3rd conduct,  the

            record  contains  ample  evidence  corroborating  the court's

            conclusion that  Lane's intent  in signing the  agreement was

            clear  from the  beginning:    that  is,  it  was  merely  an

            accommodation to facilitate the  extension of the November 4,

            1987 closing date  and that his performance  of the agreement

            was contingent upon securing  financing.  Most significantly,

            Lane not only reiterated  his position regarding financing in

            his November  30,  1987  letter,  but he  also  performed  as

            promised by paying the disputed down payment after he secured

            financing.  In the  end, after the benefit of  testimony from

            the principal  players in this dispute,  the bankruptcy court

            determined that  appellants had failed to  carry their burden

            of establishing the elements  required for the   523(a)(2)(A)

            exception  to apply.  Upon  our own review  of the record, we

            find ample support for the bankruptcy court's finding. 

                                         III.
                                         III.
                                         ____

                      As we  noted in Lane  I, appellants  took a  credit
                                      _______

            risk by surrendering their interests in Indian Hill in return

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                                          11



for Lane's  unsecured promise to  pay.  Lane  I, 937  F.2d at
                                                    _______

            699.  Unfortunately for them, bankruptcy intervened.  Because

            we  find  no   clear  error  with  respect   to  the  court's

            determination  that Lane  had  no intent  to misrepresent,   

            523(a)(2)(A) does  not apply  to appellants' claim,  and this

            litigation is  finally brought to  an end.   Accordingly, the

            decision of the bankruptcy court is 

                      affirmed.  Costs to appellee.
                      affirmed.  Costs to appellee.
                      _____________________________

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