Menu    1 ABR 488 

UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF ALASKA



In re: Case No. A89-00343 )
DAVID J. MAY and )
LAURA A. MAY, )
)
Debtors.                                  )
_________________________________________)
GARNETT U. MORROW and ) Adversary No. A89-00343-001
MARYA I. MORROW, ) Chapter 7
)
Plaintiffs,                                  )
)
                v.)
)
DAVID J. MAY, )
)
Defendant.                                  )
_________________________________________)

MEMORANDUM DECISION


        This exception to discharge case came before the court for trial on April 10, 1991. The plaintiffs Garnett U. Morrow and Marya I. Morrow (the Morrows) alleged violations of 11 U.S.C. § 523(a) (2) for fraud as well as a variety of other alternative theories. I find the claim of the Morrows to be nondischargeable in the sum of $168,885.00.

I.    Facts

        David May (May) started a landscaping business as a sole proprietor in Anchorage sometime in the early 1980s. The business, High Country Landscaping, grew rapidly but was in constant financial jeopardy. May incurred ever-increasing debts and frequently missed payments to creditors. By the fall of 1985, his TOP    1 ABR 489  debts included: (1) approximately $50,000.00 in various notes to First Interstate Bank; (2) a $120,000.00 loan from the Small Business Administration in April of 1985; (3) a debt due to the Jackovich Company for equipment purchase of approximately $12,000.00 or more; (4) Clark Equipment Co. debt of approximately $15,000.00 or more; and (5) miscellaneous trade creditors with claims in excess of $20,000.00.

        Despite his knowledge of such debts and poor financial condition, May and his accountant, William Poon, concocted a financial statement showing total liabilities of but $31,000.00 as of September 31, 1985. This total was about $240,000.00 short of reality.

        May advertised his business for sale in the newspaper through Poon. The Morrows responded. They met extensively with May and Poon, who provided them with the fraudulent financial statements. May knew the statements were inaccurate. May, however, verified the accuracy of these financial statements during the meetings. Based on the statements, the Morrows purchased the business for $120,000.00 cash in December of 1985.

        Since the purchase of the business, the Morrows have borrowed $45,000.00 to keep it afloat. They paid $3,885.00 to Premier Construction, a claim May should have paid. The Morrows have never taken a draw from the business in their five years of operations. They have been unable to pay the loan they incurred to TOP    1 ABR 490  First Interstate Bank for their purchase of the business. F.D.I.C. has succeeded to the loan and it is now in foreclosure. Additionally, the Small Business Administration lien of approximately $120,000.00 principal has never been removed from the assets purchased.

II.    Fraud

       11 U.S.C. § 523(a) (2) (B) provides:

A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt--
. . .
        (2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by--
. . .
(B) use of a statement in writing--
        (i)    that is materially false;
        (ii)    respecting the debtor's or an insider's financial condition;
        (iii)    on which the creditor to whom thedebtor is liable for such money, property, services, or credit reasonable relied; and
        (iv)    that the debtor caused to be made or published with intent to deceive; or
. . .
        The elements of 11 U.S.C. § 523(a) (2) (B) have been effectivelyproven by preponderance of the evidence in accordance with Grogan v. Garner, ____ U.S. ____ 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). Here the debtor David May obtained $120,000.00 cash from the Morrows. The financial statements that he prepared with TOP    1 ABR 491  his accountant and presented to the Morrows were materially false. He understated his liabilities by nearly 900 percent. They were issued in respect to May's financial condition. The Morrows reasonably relied upon May's representation. They repeatedly met with May and his accountant, questioned them and relied upon their oral and written representations. May admitted his intent to deceive. Moreover, the circumstances of the case amply show that May caused the fraudulent financial statements to be published with the intent to deceive the Morrows in their purchase of his business. May was in a poor financial condition. He desperately needed a cash infusion to meet his obligations. He knew that if the Morrows had accurate statements, they would not purchase the business. May's debt to the Morrows is nondischargeable. In re Greene, 96 B.R. 279 (9th Cir. BAP 1989).

III.    Compensatory Damages

        Having concluded that May defrauded the Morrows, the issue becomes solely one of damages. In their trial brief, the Morrows claim damages of some $306,317.02. Such damages are hot supported by the evidence and are not warranted.

        The proper measure of damages in fraud and misrepresentationcases is set forth in the Restatement, Second: § 549. Measure of Damages for Fraudulent Misrepresentation

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(1)    The recipient of a fraudulent misrepresentation is entitled to recover as damages in an action of deceit against the maker the pecuniary loss to him of which the misrepresentation is a legal cause, including

        (a) the difference between the value of what he has received in the transaction and its purchase price or other value given for it; and

        (b) pecuniary loss suffered otherwise as a consequence of the recipient's reliance upon the misrepresentation.

(2)    The recipient of a fraudulent misrepresentation in a business transaction is also entitled to recover additional damages sufficient to give him the benefit of his contract with the maker, if these damages are proved with reasonable certainty.

American Law Institute, Restatement of the Law of Torts. Second, Volume 3, Section 549, page 108. The Restatement has been followed in Alaska cases. Saxton v. Harris, 395 P.2d 71, 75 (Alaska 1964); Bubbel v. Wien Air Alaska, Inc., 682 P.2d 374, 381 (Alaska 1984).

        Applying the test to the current situation, the court will first look to the difference between the value of the thing bought and its purchase price. The thing bought was a business. That business has failed to earn any return for the Morrows over the last five years. It was represented as being a viable, profitable business with little debt. Despite the fact that there was a substantial amount of equipment purchased, the business as TOP    1 ABR 493  purchased has produced no net income and the assets remain encumbered to the Small Business Administration. There was no real value to what was purchased. Under subparagraph (a) of § 549 the Morrows are entitled to $120,000.00 in damages as that was the difference between the value of the business, nothing, and the purchase price of $120,000.00.

Additionally, the Morrows are entitled to the pecuniary losses suffered otherwise as a consequence of their reliance upon the truth of May's representations. In this instance, the Morrows submitted evidence showing that they borrowed $45,000.00 to simply keep the business functioning. Additionally, they were forced to pay $3,885.00 to Premier Construction, a May obligation. Consequential damages total $48,885.00.

        The Morrows have failed to establish any other pecuniary damages. "In actions based on misrepresentation, damages must be established with reasonable certainty. They may not be speculative or contingent." Alaska Ins. Co. v. Movin' On Const.. Inc., 718 P.2d 472, 474 (Alaska 1986). The Morrows did not prove additional "contract" damages with reasonable certainty. Nor are damages for "mental anguish" or "stress" recoverable for fraud. In re Blachman, 1 A.B.R. 311 (Bankr. D. Alaska 1991). The Morrows are entitled to compensatory damages in the sum of $168,885.00.

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IV. Other Claims and Remedies

        The Morrows have alleged a variety of other alternative theories for recovery including breach of contract, accounting, injunctive relief, fraudulent non-disclosure, negligence, tortious bad faith breach of contract, intentional infliction of emtional distress, and intentional interference with business relationships. In addition to compensatory damages, they request punitive damages, recision and specific performance. While some of these theories closely parallel the fraud that arose out of the fraudulent financial statements, most do not state claims for relief which are cognizable as exceptions to discharge or are cumulative and redundant to the primary thrust of their case. These claims will be dismissed. Additionally, remedies of recision and specific performance cannot be granted by a bankruptcy court in an exception to discharge case.

        The imposition of punitive damages in this case is also inappropriate. First of all, May has undergone a chapter 7 bankruptcy and now works as an equipment operator. He will never have the ability, barring a radical change of circumstance, to satisfy any of the award. Secondly, while the elements of fraud were fully proven at the trial, I do not find that May had the degree of culpability necessary for the Morrows to obtain punitive damages. May was under extreme financial pressure from his failing business venture. He used terrible judgment in doing what he did. TOP    1 ABR 495  His actions, however indefensible, were not born of malice so much as desperation. They do not give rise to punitive damages in this case. Moreover, the intent of punitive damages is to punish and deter the defendant from misconduct. The defendant has undergone a bankruptcy, divorce, and is now saddled with a nondischargeable judgment of some $168,885.00. I do not think more punishment is warranted.

V.    Order


        IT IS HEREBY ORDERED:

        1.    Judgment shall be entered for the plaintiffs Garnett U. Morrow and Marya I. Morrow against defendant David May in the sum of $168,885.00 and such debt is excepted from discharge in accordance with 11 U.S.C. § 523(a)(2)(B);

        2.    Plaintiffs are awarded costs but are denied attorneys' fees; attorneys' fees are not recoverable in actions initiated under 11 U.S.C. § 523(a) (2)(B) by a creditor; and

        3.    Insofar as the plaintiffs seek alternative relief other than exceptions to discharge under 11 U.S.C. § 523(a)(2), plaintiffs' complaint is dismissed with prejudice.

        LET JUDGMENT be entered and docketed accordingly.

        DATED:    April 22, 1991.


                DONALD MacDONALD IV
                United States Bankruptcy Judge


Serve: David J. May, Defendant,
PMC-Amchitka Alaska,
General Delivery,
FPO - Seattle, WA 98796-5000 and
C/O 3032 W. 42nd Ave., No. 2,
Anchorage, AK 99517
C. Frasure II. Esq.
P. Davis, Esq.
U.S. Trustee