This is an action for exception to discharge and objection to discharge arising out of a failed Mexican time-share venture. I find for the defendants.

Factual Background

        Plaintiff Frank Wald ("Wald") is a wealthy resident of Bellevue, Washington, now in his mid 80s. Born and raised in North Dakota, Wald made his fortune through the establishment of seven "Foodland" stores in the Seattle area and his eventual sale of those stores to Lucky Stores, Inc. in 1964. His wife Helen is thirteen years his junior and kept books for Wald prior to becoming     2 ABR 207  a full time homemaker. Kathleen Visich is their daughter and John Visich is their son-in-law.

        Defendant Laurence G. Shelver is a middle aged executive currently employed with Yutana Barge Lines of Nenana ("Yutana"). His wife, Artha, is the daughter of the former owners of Yutana.

        The Walds and Shelvers met through the sale of the Wald home to the Shelvers in Seattle in 1976. After the sale, they became friends and spent time together socializing. The Shelvers regularly returned to Alaska in the summers to work for Yutana. Yutana was then owned by a family limited partnership. The Shelvers were general partners and owned 50% of the partnership. Yutana was sold to Brix Corporation in 1983. After the sale of Yutana, the parties saw more of each other. The defendants also socialized with the Visichs on several occasions. Additionally, Mr. and Mrs. Peterson, the original owners of the barge line and Artha's parents, would occasionally attend joint social functions.

        Following the sale of Yutana, the Shelvers purchased a yacht, the "Brigand", and ran a flight service for light aircraft in Seattle. The "Brigand" caught fire and was damaged. The Shelvers decided to sell the yacht and received an inquiry from Ed Rose, a Puerto Vallarta time-share marketer. The Shelvers purchased a home in Puerto Vallarta, Casa Las Rosas, from Rose and established a business relationship with him in Mexico in 1984.

        In 1984 Rose needed capital for a time-share venture known as Club Buena Vista. The Shelvers invested $35,000.00 and received 3% of gross time-share sales for their investment. The Shelvers also became involved in "Quinta Sol", a Mexican marketing corporation controlled by Rose. Rose and Shelver purchased a condominium office in a Puerto Vallarta mall.

        In 1986 Rose and Shelver became interested in a timeshare project called "Lindo Mar". The shell of the building was completed and some of the units were finished. More money was needed for construction of the remaining units prior to marketing.

        Shelver approached the Walds and the Visichs in October and November of 1986 regarding the possibility of investing in Lindo Mar. Shelver was highly enthusiastic about the project. Frank Wald told Shelver he was not interested in investing in the project. He did agree to loan Shelver $250,000.00, however. The Visichs loaned $125,000.00 and the Walds $125,000.00 in November of 1986. The Walds loaned an additional $300,000.00 to the Shelvers in 1987. The loans were to be repaid in two years at 15% interest along with double their principal amount.

        The Shelvers made monthly payments to the Walds and Visichs over a fifteen month period. After a fallout with Rose and an expensive lawsuit, the Shelvers unsuccessfully attempted to salvage the project themselves. Their efforts failed and they defaulted on their note obligations. The Walds and Visichs obtained a judgment against the Shelvers in August of 1989.

        The Shelvers sold their stock in Brigand Corporation, a corporation which operated a hobby shop, about the time of the judgment. Additionally, the Shelver family limited partnership discounted their primary asset, a note receivable from Brix Corporation, by nearly two million dollars and exchanged the obligation for cash and stock. The Shelvers used their share of the cash, approximately $550,000.00, to pay other creditors. The stock remains substantially encumbered, an asset of their bankruptcy estate. The stock also has a burdensome right of first refusal in favor of Peter Brix. Laurence Shelver resumed employment with Yutana following the stock transaction. The Shelvers filed a chapter 7 bankruptcy on November 16, 1990.

Fraud

        The primary thrust of plaintiffs' complaint is for exception to discharge based upon fraud. The elements of nondischargeable fraud endorsed by the Ninth Circuit in In re Rubin, 875 F.2d 755, 759 (9th Cir. 1989) are found in In re Pascucci, 90 B.R. 438, 444 (Bankr. C.D. Cal. 1988) which states:

        The elements of a claim for fraudulent misrepresentation under section 523(a)(2)(A) are: (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, and (7) that the damage proximately resulted from the misrepresentation.

        At a meeting on November 6, 1986, the Shelvers made the following general representations of fact to the Walds and the visichs:

        1.    That the Shelvers expected to make a profit of between $15 million and $25 million on the Lindo Mar project;

        2.    That plaintiffs could earn interest at a rate of 15% per year and double their money in two years;

        3. That the Shelvers had invested as much as plaintiffs in the Lindo Mar project;

        4.    That plaintiffs' initial investment of $250,000.00 would be used for the construction of Lindo Mar;

        5.    That the Shelvers controlled Lindo Mar.

These representations were made in the context of the Shelvers' optimism for the project as a whole. Also, the Shelvers wanted to "help" the Walds make up for bad investments in the past.

        I find that the Shelvers knew at the time they were made that statements 1, 3 & 5 were false. With regard to making $15 to $25 million dollars from the project, it was mathematically impossible for the Shelvers to make anywhere near that amount off their meager 5% interest in time-share contracts. The Shelvers knew they had none of their own money invested in the project.     2 ABR 211  They also knew that they did not control the project. Control was spread through a tangled web of foreign corporations, Quinta Sol, and Ed Rose. The Shelvers misrepresented the extent of their control. These statements were made with the intent of deceiving the Walds and the Visichs. Elements 1 through 4 of the requirements for fraud are met.

        $200,000.00 of the initial $250,000.00 loan went for promotional rights and not construction. I do not find the Shelvers knew their payments were going to be diverted from construction at the time of their meetings with the plaintiffs. Nor do I find the Shelvers knew, at the time they made the loan, payments for principal and interest would not be made. While they exaggerated their involvement and the possibility of success, they thought they could re-pay the loans.

        Frank Wald did not rely on the fraudulent statements. He refused to invest in the time-share project. He did agree, however, to loan money to the Shelvers. Wald wanted nothing to do with a time-share project in Mexico given his age and prior investment experiences. Instead, Wald relied upon the appearance of wealth presented by the Shelvers and their perceived business acumen and character. Frank Wald assumed the Shelvers were good for the money regardless of the project's success. The Shelvers had an expensive home on Lake Washington, a villa in Mexico, a yacht, airplanes, fur coats and an extensive train collection.     2 ABR 212  Wald knew of the multi-million dollar sale of the Yutana Barge Line and the interests of the Peterson and Shelver families in the sale proceeds. From Wald's perspective, he could not lose. If the time-share project failed he could look to other assets of the Shelvers, make 15% interest and still double his money.

        Even after the Visichs visited the project in Mexico in March of 1987 and defendant Laurence Shelver ignored John Visich's request to review financial records on the project, the Walds advanced yet another $300,000.00 to the Shelvers. Wald did not care about Mexico. He made a personal loan to the Shelvers and looked solely to them for repayment.

        The Visichs and Mrs. Wald maintain they relied upon misleading statements of the Shelvers in making the loans. I disagree. Frank Wald is the patriarch of the Wald family. He made the business decisions that brought the family prosperity. After Kathy Visich sold her remaining Lucky stock in October of 1987 for some $800,000.00, itself a gift from her father, he advised her to make a loan to the Shelvers. As a respectful daughter, she followed her father's advice. Her husband had little cause to differ, having contributed none of the funds himself. The Visichs, along with Frank Wald, decided to make a loan rather than a direct investment in the project. They did not rely on the Shelvers' Puerto Vallarta hype; they looked to Laurence and Artha Shelver as wealthy individuals and longtime friends to repay the loans. Mrs. Wald simply followed her husband's recommendations.

        I conclude the plaintiffs did not rely upon the Shelvers' misrepresentations. The elements of fraud have not been proven. Dismissal of the fraud count is mandatory.

Defalcation as a Fiduciary

        11 U.S.C. § 523(a)(4) excepts from discharge debts incurred while acting in a fiduciary capacity. The term fiduciary is narrowly construed. A broad definition of fiduciary does not apply. The debtor must have been the trustee of an express trust before the wrongdoing occurred. In re Short, 818 F.2d 693, 695 (9th Cir. 1987); David v. Aetna Acceptance Company, 293 U.S. 328, 333, 55 S.Ct. 151, 153, 79 L.Ed. 393 (1934).

        The Ninth Circuit Bankruptcy Appellate Panel has found an express trust to exist when a debtor served as a minister, counselor, therapist and lover to a creditor. In re Schneider, 99 B.R. 974 (9th Cir. BAP 1989). The court found an intent that the     2 ABR 214  minister act as a financial adviser and invest money for her. Thus there was a pre-existing trust.

        The Schneider facts are far removed from the case at bar. There was never any intent to form a trust. Frank Wald is an experienced businessman, with his faculties intact. The Shelvers signed promissory notes, not trust agreements. The Walds felt betrayed by people they considered their "son and daughter." While I understand the Wald's anger, the debtors' failure to repay the loans was not a breach of an express trust under the Bankruptcy Code. Their "trust" was one born of long-time friendship. While that friendship was betrayed through non-payment of the loan, the debt is not excepted from discharge.

Objections to Discharge

        In late September of 1989, the debtors as general 50% partners of the Peterson-Shelver family limited partnership, negotiated a cash discount with Peter Brix of Brix Corporation. The debtors were broke; Brix was unable to meet the payments required by the contract and Yutana was losing money. A cash discount made sense for both parties. In return for $1.6 million dollars in cash and 20% of the outstanding Yutana stock, the partnership discounted its contract with Brix by about $2 million dollars. The Shelvers received $550,000.00 cash (which promptly went to pay creditors) and stock. The other members of the limited partnership received about $1,050,000.00 cash in accordance with     2 ABR 215  their long-time ownership percentages. Following this transaction the plaintiffs had difficulty in tracking down the defendants for a judgment examination. Their Seattle relatives disclaimed knowledge of their whereabouts.

        The Shelvers filed bankruptcy on November 16, 1990. Included with their assets was the stock issued in conjunction with the transaction. Under 11 U.S.C. § 727(a) (2) a discharge is denied for fraudulent transfers or concealments within one year of the petition. The plaintiffs allege that despite the lapse of one year, there had been a "continuing concealment" which abrogated the one year period. I disagree.

        In order to invoke the doctrine of "continuing concealment" there first must be a concealment of property." Concealment has generally been defined as the transfer of legal title to property to a third party with a retention of a secret interest by the bankrupt." In re Smith, 11 B.R. 20, 22 (Bankr. N.D. Ohio 1981). In In re Olivier, 819 F.2d 550 (5th Cir. 1987) for instance, the debtor transferred title to his house seven years prior to filing bankruptcy. He continued to occupy and use it, however. The Fifth Circuit found a continuing concealment within the one year period of § 727(a)(2) ^(1.)

        Here there was no transfer of the debtor's interest in the contract to a third party. There was no secret interest retained by the debtors. The contract was discounted for cash and stock. The Shelvers received the cash and stock. They did not conceal it. Their stock is reflected in their schedules and was not concealed from the trustee. The plaintiffs are attempting to boot-strap themselves to a doctrine that simply has no application. They have no § 727(a) (2) claim based on continued concealment.

        Plaintiffs next contend that the Shelvers' transfer of their Mexican villa to a former attorney within a year of the petition was a fraudulent transfer. I disagree. The Shelvers attempted to market the villa for a substantial period of time with little success. While they had one possible sale, the purchase was killed by the plaintiffs' attorney. The villa became a continuing financial drain and the Shelvers were broke. Charges for taxes, housekeeping and grounds maintenance continued to accrue. The Shelvers offered the home to the plaintiffs but were refused. They had no choice but to offer it to their former attorney in an attempt to rid themselves of the continuing obligation. Although the home with improvements cost the Shelvers nearly $170,000.00, they had no buyers. By deeding the property to Mr. Casillas, their former attorney, they rid themselves of obligations totaling approximately $25,000.00 to $40,000.00 as well as the continuing drain of household maintenance, repairs and taxes.

        The sale of the stock in Brigand Corporation occurred more than one year prior to the bankruptcy. There was no concealment and therefore no continuing concealment. Plaintiffs' 11 U.S.C. § 727(a) (2) counts have no merit.

        The plaintiffs also allege violations of 11 U.S.C. § 727(a) (3) for failure to keep adequate books and records and under § 727(a) (5) for failure to satisfactorily explain a loss of assets.

        A review of the evidence substantiates every major expenditure of the Shelvers: the Lindo Mar investment, the discount of the Brix note, distribution of the discounted proceeds, and payments to the Walds and Visichs. Substantial records were turned over to the plaintiffs by Arthur Anderson & Co. in February of 1990. There is simply no substance to plaintiffs § 727(a) (3) allegations.

Plaintiffs' count for failure to explain loss of assets has not been proven. The Shelvers' financial evidence amply demonstrated their heavy losses in the time-share project. The Brix discount represented the largest loss of net worth to the debtors other than the Mexican time-share operation. The explanation provided by the debtors for the Brix discount was also satisfactory. The precise disposition of all funds received from the discounted note has been shown. All substantial losses have been fully accounted for by the Shelvers.

        I have reviewed the other contentions of the plaintiffs and find them without merit.

Conclusion

        With the benefit of hindsight, the defendants' Mexican time-share venture can best be described as an unmitigated disaster. It destroyed a long-term friendship among families, caused financial hardship for everyone and accomplished nothing. While the defendants made an absolutely terrible investment, they did not breach the provisions of the Bankruptcy Code in doing so. They are entitled to a fresh start.

        Therefore, IT IS HEREBY ORDERED:

        1.    Plaintiffs' complaint is dismissed with prejudice;

        2.    Defendants are awarded their costs; and

        3.    Each party shall pay their own attorney's fees.

        DATED:   December 10, 1991.

BY THE COURT

DONALD MacDONALD IV
United States Bankruptcy Judge

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