Selasa, 15 Oktober 2013

Real Estate Investors Wish They Were Partners After Developer Filed Chapter 7 Bankruptcy



Utnehmer v. Crull (In re Utnehmer)
  12-1362  (Opinion released last week! 10/10/13)
Developer may erase debt to investors during bankruptcy proceedings because their loan agreement for luxury home project did not make them business partners.
In 2005, a real estate developer purchased a million dollar property in Venice California.  However, it was apparently a junk property.  The developer wanted to tear down the structure and build from scratch, resell it and make a healthy profit.  However, they did not have enough money.

Enter Patrick and Mary Crull.  The Crulls loaned the developer $100,000.  The goal was to rebuild the property in one year.  However, the Great Recession caused a change in plans.  In 2008, the project was completed and sold for $3,725,000. The real estate developer sold the property for about 2.5 million more than what he bought the property.  Unfortunately, the sale proceeds were used the money to pay back other creditors, but did not pay back the Crulls.

The Crulls were mad!  They filed a lawsuit.  The Developers never answered the complaint because they knew that they were going to be forced to file bankruptcy.  The Crulls were easily able to obtain a judgment of $213,645.17 for their $100,000 investment.

The Developers countered the judgment by filing a chapter 7 bankruptcy petition. They named the Crulls as debtors and sought to discharge the debt.  The Crulls were forced to file a complaint inside the bankruptcy proceedings and asked the court to rule that the Developers could not discharge the debt to them via this bankruptcy. At the trial, the bankruptcy court found that the loan agreement for bankruptcy created a partnership between the Developer/debtor and the Crulls, and because of that partnership, Developers'/Debtors' debt to them could not be discharged.

The Developers appealed the trial court and won!  The appellate court reversed the bankruptcy court. Bankruptcy Code Section 523(a)(4) provides that if a person filed for bankruptcy under a chapter 7, he cannot get rid of debts he owes, which occurred due to his fraud while acting in a fiduciary capacity. In California, business partners are fiduciaries within the meaning of Section 523(a)(4). Here, however, the loan agreement between the real estate developers and and the Crulls were not good enough to create a partnership relationship.

What is interesting to note is that the loan agreement made reference that the Developers and the Crulls were going to form a partnership in the future.  But because it was a mere idea to form a partnership in the future, it was not enough to form a partnership.  Thus, the appellate court concluded there was nothing in the loan agreement that established any intent to create a partnership at any point.

The court concluded that because there was no partnership agreement between the real estate developers the Crulls, they did not owe a fiduciary duty.  As a result, the debt is discharable.

This opinion by the court was published last week.  The Crulls are probably still kicking themselves for electing to be lenders instead of partners on this Venice beach property.   

Photo Credit: http://www.flickr.com/photos/huffstutterrobertl/

This article was written by California Attorney, Kenneth Jorgensen.
To find out more, or to contact Ken, please visit his websites at www.fresnolawgroup.com and
www.fresnobankruptcylawgroup.com

Tidak ada komentar:

Posting Komentar