7 ABR 533
UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF ALASKA
605 West 4th Avenue, Room 138, Anchorage, AK 99501-2296 - (Website: www.akb.uscourts.gov)
Clerk’s Office 907-271-2655 (1-800-859-8059 In-State) - Clerk’s Fax 907-271-2692
In re: Case No. A03-00988-DMD
HAROLD R. COOK, aka Sam Cook, dba C & S Resort Development LLC and
LINDA D. COOK,
Debtors.
Chapter 7
SUNLAND DEVELOPMENT
COMPANY, LLC,
Plaintiff,
v.
HAROLD R. COOK, aka Sam Cook, dba C & S Resort Development LLC and
LINDA D. COOK,
Defendants.
Adversary No. A03-90106-DMD
MEMORANDUM DECISION
This is an action to except a debt from discharge under 11 U.S.C. § 523(a)(2)(B). It is a core proceeding under 28 U.S.C. § 157(b)(2)(I). This court has jurisdiction in accordance with 28 U.S.C. § 1334 and the district court’s order of reference. I find for the plaintiff as to the defendant Harold Cook. The claim against Linda Cook will be dismissed.
Background
Harold “Sam” Cook is a resident of Homer, where he has worked as a carpenter and a charter boat captain. Linda Cook is a bank teller. Harold Cook sought to develop a large time-share resort in Homer overlooking Katchemak Bay. He met Phil
7 ABR 534 Slabaugh, then a resident of Homer, and discussed the project with him on several occasions in early 2001. Slabaugh, an experienced contractor, owns Sunland.
In March of 2001, Cook needed $60,000.00 to close on a 120 acre parcel for his time-share project. He wanted to borrow the money from Slabaugh on a short-term basis. Slabaugh required a financial statement. Harold and Linda Cook provided a financial statement to Slabaugh. The document was entitled “Harold and Linda Cook, Sam Cook Development, Inc. Financial Statement.” It was signed by the Cooks as individuals. The statement reflected a net worth of $2.7 million, $1.5 million of which came from an unencumbered piece of Oregon property known as “Forest Grove.” Slabaugh lent Cook the money and was promptly repaid.
Cook needed financing for the ambitious time-share project. He contacted James Spizzirri, a man of apparent wealth, who owned 880 acres of land adjacent to the time-share site. Spizzirri also had a home and boat in Homer. Cook and Homer realtor Allen Jantzi met with Spizzirri in Arizona in May of 2001. When they returned to Homer after the meeting, Cook and Jantzi told Slabaugh that Spizzirri had agreed to finance the project. Slabaugh prepared a “Design-Build” agreement for the project dated May 21, 2001. Harold Cook and James Spizzirri were listed as the owners of the project. Slabaugh started construction on May 21, 2001, with no signed construction agreement.
Sunland submitted a pay request in the sum of $121,401.00 for construction work on the project on July 15, 2001. On July 31, 2001, Cook, Spizzirri and Slabaugh met in Homer. The “Design-Build” agreement was changed to provide for a maximum price of $10,474,640.00 for Sunland’s construction of the project. The name of the project owner was changed to “C and S Development LLC.” Spizzirri and Cook signed as “owner” of C & S.
Sunland continued working on the project until October. None of its subsequent monthly pay requests, totaling nearly $1.2 million, were paid. Sunland shut down the project and filed suit in state court against Spizzirri, Cook and others. After Cook filed his chapter 7 petition on September 5, 2003, 1
the state court trial, scheduled for September 7, 2003, was vacated. This action ensued.
Analysis
11 U.S.C. § 523(a)(2)(B) excepts certain debts from discharge. They include:
(2) [debts] 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 the debtor is liable for such money, property, services, or credit reasonably relied; and
(iv) that the debtor caused to be made or published with intent to deceive . . . . 2
The Ninth Circuit has reworded these requirements as follows:
(1) a representation of fact by the debtor,
(2) that was material,
(3) that the debtor knew at the time to be false,
(4) that the debtor made with the intention of deceiving the creditor,
(5) upon which the creditor relied,
(6) that the creditor’s reliance was reasonable,
(7) that damage proximately resulted from the representation. 3
These elements must be proven by a preponderance of the evidence. 4
Here, Harold Cook made materially false statements in his financial statement of March 16, 2001. He represented that he owned 10 acres of unencumbered real property in Forest Grove, Oregon, valued at $1,500,000.00. He did not own the real property; it was owned by Cook’s mother. Cook deeded the property to her in the 1980’s. Cook knew that the statement was false. The statement was issued to deceive and induce Sunland and its president, Phil Slabaugh, to loan Cook $60,000.00 and to enter into a construction contract.
But did Slabaugh rely on the statement? He testified that it was a substantial factor that influenced his decision to perform the work and eventually sign the contract. There is conflicting evidence on this point, however. Slabaugh seemed very impressed by Spizzirri’s appearance of wealth. He thought Spizzirri was a high roller, capable of funding the project out of his own pocket. Additionally, Slabaugh started working on the project without a contract signed by Cook or Spizzirri. He worked for over two months before obtaining a signed contract. When that contract was signed, there was even more ambiguity. Slabaugh was apparently willing to allow Cook off the personal liability hook and replace him with an entity called C & S Development LLC. C & S was never formed, however.
I conclude that Slabaugh relied on a number of factors before starting work and entering into the contract. Although he primarily relied on Spizzirri to fund the project,
Was Slabaugh’s reliance reasonable? Unquestionably, Slabaugh was negligent in not obtaining a title report on the Oregon property and believing Cook’s fabrication. On the other hand, Cook had performed his promise to repay the $60,000.00 loan. Further, Slaybaugh was familiar with the area around the Oregon property, having made several trips there to visit his daughter. He knew it was in a highly desirable area, experiencing substantial growth. When materially fraudulent statements are made, “little investigation is required for a creditor to have reasonably relied on the representations.” 6
Sunland has incurred large losses on the construction contract. The precise amount of the losses and Cook’s proportionate liability for those losses will be liquidated in the state court litigation. Harold Cook’s liability to Sunland, in such amount as is determined in the state court proceeding, will be excepted from discharge under 11 U.S.C. § 523(a)(3)(B).
Sunland has failed to make a case against Mrs. Cook, however. “It is generally held that the marriage relationship itself is an inappropriate basis for imputing fraud.” 7
Conclusion
Sunland’s claim against Harold Cook will be sustained and the debt excepted from discharge. Sunland’s claim as to Mrs. Cook will be dismissed, with prejudice. An order and judgment will be entered consistent with this memorandum.
DATED: July 12, 2004.
BY THE COURT
DONALD MacDONALD IV
United States Bankruptcy Judge
N O T E S:
1 In re Cook, Case No. A03-00988-DMD.
2 11 U.S.C. § 523(a)(2)(B).
3 Candland v. Ins. Co. of N. America (In re Candland), 90 F.3d 1466, 1469 (9th Cir. 1996), citing Siriani vs. Northwestern Nat’l Ins. Co. (In re Siriani), 967 F.2d 302, 304 (9th Cir. 1992).
4 Grogan v. Garner, 498 U.S. 279, 291 (1991).
5 First Nat’l Bank of Colorado Springs v. Clancy (In re Clancy), 279 F.Supp 820, 822 (D.Colo. 1968), aff’d, 408 F.2d 899 (10th Cir. 1969), cert. denied, 396 U.S. 958 (1969).
6 Gertsch v. Johnson & Johnson Fin. Corp. (In re Gertsch), 237 B.R. 160, 170 (B.A.P. 9th Cir. 1999); see also La Trattoria, Inc. v. Lansford, 822 F.2d 902, 904 (9th Cir. 1987).
7 Tsurukawa v. Nikon Precision, Inc. (In re Tsurukawa), 287 B.R. 515, 526 (B.A.P. 9th Cir. 2002).
8 Id. at 527.