Johnson et al v. Johnson et al
Filing
9
MEMORANDUM OPINION AND ORDER. IT IS HEREBY ORDERED that the bankruptcy court's Order and Judgment revoking Appellants' discharge pursuant to 11 U.S.C. § 727(d)(1) dated May 16, 2012, is AFFIRMED. (Written Opinion). Signed by Chief Judge Michael J. Davis on 11/29/12. (GRR)
UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
In the matter of:
Edward M. Johnson and Pamela J. Johnson,
Appellants,
MEMORANDUM OPINION
AND ORDER
Civil No. 12‐1596
v.
Daniel Johnson and Jan Johnson,
Appellees.
___________________________________________________________________
Chad A. Kelsch, Kelsch Law Firm, P.A, Counsel for Appellants.
Steven V. Rose and Gregory M. Miller, Mansfield, Tanick & Cohen,
Counsel for Appellees.
___________________________________________________________________
This matter is before the Court on appeal of the Findings of Fact,
Conclusions of Law and Judgment of the late Honorable Nancy C. Dreher,
United States Bankruptcy Judge, District of Minnesota dated May 15 and 16,
2012, revoking Appellants’ discharge. For the reasons discussed below, the
bankruptcy court’s Findings of Fact and Order revoking Appellants’ discharged
is affirmed.
1
I.
Background
This action was commenced by Appellees Dan and Jan Johnson as an
Adversary Proceeding against Appellants Edward and Pamela Johnson in
bankruptcy court. Dan and Edward Johnson are brothers, and prior to
Appellants’ bankruptcy filing, the brothers and their spouses were involved in a
business venture called Johnson Built Homes. Based on the failure of this
business venture, Appellees became creditors of Appellants. (Doc. No. 1‐6
(Adversary Complaint ¶ 1).) Appellees brought the Adversary Proceeding after
they learned that Appellants knowingly and fraudulently failed to report the
acquisition or entitlement to property or the delivery or surrender of the property
to the bankruptcy trustee. (Id. at ¶ 3, 7.) Appellees further alleged that as the
Appellants obtained a bankruptcy discharge through fraud, and because
Appellees did not learn of the fraud until after the discharge had issued,
revocation of the discharge was appropriate under 11 U.S.C. § 727(d)(1). (Id. at
¶¶ 7, 8.)
The bankruptcy court conducted a two day bench trial, and issued
Findings of Fact, Conclusions of Law and Order from the bench on May 15, 2012.
The bankruptcy court determined that Appellees had presented sufficient and
2
credible evidence that Appellants fraudulently failed to disclose their interest in
lake property located in Fairfield Township and other valuable personal
property. (Doc. No. 8 (May 15, 2012 Transcript at 384).) The court found that
although Appellants “sold” their lake home to Miles and Patricia Johnson,
Edward Johnson’s parents (the “Parents”), Appellants retained an equitable
interest in the lake property. The court found that the Parents served as an
equitable mortgagee for the Appellants because the purchase price was below
market, and because Appellants continued to use and improve the property after
the sale, and continued to store valuable personal property at the lake property
after the sale.
In addition, a document was submitted that was dictated by Miles Johnson
to his daughter‐in‐law Jan Johnson, and later notarized, that described the terms
of the transaction concerning the Fairfield Township lake property. (Plaintiffs Ex.
36.) Pursuant to this document, Miles Johnson stated that he obtained an equity
line for the purchase of the lake property, and that “the interest on the equity line
will be added to payoff when Edward and Pamela begin making payments to me
on this loan. Payments on said loan shall begin upon satisfaction of a previous
unsecured personal loan.” (Id.) This document further provides that “Edward
3
and Pamela currently remain in possession of said property and pay all expenses
including but not limited to taxes (property), electric, gas and property
insurance.” (Id.) This document closes with the following “It is our
understanding that title to the property shall return to Edward and Pamela
Johnson once the loan is paid in full.” (Id.)
Based on this evidence, and crediting the testimony of Appellees over the
testimony of the Parents and Appellants, the bankruptcy court found that the
transaction involving Appellants, the Parents and the Fairfield Township lake
property was a “disguised loan and not a true sale.” (Id. at 385.)
The bankruptcy court also rejected Appellants’ argument that in order to
find that Appellants retained an interest in the lake property, Appellees had to
present evidence of a written agreement between the Parents and Appellants ‐ an
argument based on the Statute of Frauds. (Id. at 393‐94.) The court specifically
found that “an agreement may be excepted from the statute of frauds by
application of the doctrines of promissory estoppel and equitable estoppel.
When an application of the statute of frauds is used to protect rather than to
prevent a fraud, equity requires that the doctrine of equitable estoppel be
applied.” (Id. at 394.) The court found that equitable estoppel was “likely
4
applicable here.” (Id. at 396.) The court went on to state “more importantly I
think that the contract is taken out of the Statute of Frauds by part performance.”
(Id.) “[Appellees] have shown that the [Appellants] had an agreement to
repurchase the land. They have been using and possessing the land and they
have made valuable improvements to the land.” (Id. at 397‐98.)
The court further found that “the evidence established that the lake
property transaction and the other omissions and inaccuracies in the
[Appellants’] schedules was purposeful. They sought to keep the lake property
and their other items out of the reach of the trustee and their creditors. Their
conduct with respect to the lake property and other items of personal property, I
think, based on this whole record was knowing and fraudulent.” (Id. at 400.)
The court found that Appellants could be denied a discharge based on their
fraudulent conduct pursuant to 11 U.S.C. § 727(a)(2) and/or (4). Based on these
findings, the bankruptcy court revoked Appellants’ discharge pursuant to 11
U.S.C. § 727(d)(1).
II.
Standard of Review
On appeal, this Court reviews the bankruptcy court’s findings of fact for
clear error and its conclusions of law de novo. In re Popkin & Stern, 223 F.3d 764,
5
765 (8th Cir. 2000).
III.
Analysis
At issue in this appeal is whether the evidence submitted at trial provided
a sufficient basis upon which the bankruptcy court could revoke Appellants’
bankruptcy discharge pursuant to 11 U.S.C. § 727(d)(1). To the extent that
Appellants challenge the bankruptcy court’s findings of fact, such challenge is
without merit. On appeal, this Court is not free to re‐weigh the evidence or make
independent judgments about the credibility of the witnesses. In re Carp, 340
F.3d 15 (1st Cir. 2003). See also In re Fors, 259 B.R. 131, 135 (8th Cir. BAP 2001)
(noting that “due regard shall be given to the opportunity of the bankruptcy
court to judge the credibility of witnesses.”) With this in mind, the Court has
carefully reviewed the record and the bankruptcy court’s findings of fact, and
based on such review, finds no clear error. See In re Fors, 259 B.R. at 135 (a
finding of fact is clearly erroneous “when although there is evidence to support
it, the reviewing court on the entire evidence is left with a definite and firm
conviction that a mistake has been committed.”)
The record clearly supports the bankruptcy court’s credibility
determinations. By giving credit to the testimony of Appellees, together with the
6
exhibits presented at trial, there is sufficient evidence in the record supporting
the bankruptcy court’s findings that the transaction between Appellants and the
Parents was a loan, and that once Appellants repaid certain obligations, title to
the property would return to Appellants. The record further supports the
bankruptcy court’s findings that Appellants owned certain valuable personal
property, including the fish house, and that Appellants did not include such
personal property in their bankruptcy schedules.
The Court further finds that based on the bankruptcy court’s findings of
fact, revocation pursuant to 11 U.S.C. § 727(d)(1) is appropriate. Section 727(d)(1)
provides that upon request of a creditor, and after notice and hearing, a court
shall revoke a discharge granted under subsection (a) if the discharge was
obtained through the fraud of the debtor, and the requesting party did not know
of such fraud until after the granting of such discharge.
Section 727(a) provides that a court shall grant a debtor a discharge
provided none of the exceptions listed therein applies. As relevant here, the
bankruptcy court found that the exceptions listed in subsections (a)(2) and (a)(4)
applied, and would prevent discharge. (Doc. No. 8 (Tr. at 380).)
Section 727(a)(2) provides that a discharge is not warranted where “the
7
debtor, with intent to hinder, delay, or defraud a creditor or an officer of the
estate charged with custody of property under this title, has transferred,
removed, destroyed, mutilated, or concealed, or has permitted to be transferred,
removed, destroyed, mutilated, or concealed.” Section 727(a)(4) provides that a
discharge is not warranted where “the debtor knowingly and fraudulently, in or
in connection with the case . . . made a false oath or account.”
Appellants argue that the bankruptcy court erred in finding there was
either an agreement to buy back the lake property from the Parents, or an
equitable mortgage on the lake property, as there was no written, enforceable
contract memorializing such an agreement, and that such a writing is required
pursuant to the doctrine of Statute of Frauds.
“The ‘basic purpose’ of [] the traditional statute of frauds [] is to ‘provide
reasonable safeguards to insure honest dealing.’” Stumm v. BAC Home Loans
Serv., LP, No. 11‐CV‐3736 (PJS/LIB), 2012 WL 5250560, at *5 (D. Minn. Oct. 24,
2012) (quoting Rural Am. Bank of Greenwald v. Herickhoff, 485 N.W.2d 702, 707
(Minn. 1992)). The doctrine requires parties to commit certain types of
agreements, such as the sale of real estate, to writing if the parties want to enforce
those agreements in court. Id. Here, as noted by the bankruptcy court, Appellees
8
are not seeking to enforce an agreement between the Parents and Appellants with
respect to the lake property. Rather, the issue is whether Appellants failed to
disclose to the bankruptcy trustee that they had an interest in the lake property.
Accordingly, the Statute of Frauds is not implicated.
Even if it were, Minnesota law recognizes that the doctrine of equitable
estoppel may limit the application of the Statute of Frauds. Lunning v. Land
O’Lakes, 303 N.W.2d 452, 457 (Minn. 1980). Specifically, “[w]hen an application
of the Statute will protect, rather than prevent, a fraud, equity requires that the
doctrine of equitable estoppel be applied.” Id. The doctrine of part performance
will also limit application of the Statute of Frauds. Gallagher v. Moffet, 233
Minn. 330, 332, 46 N.W.2d 792, 793 (1951). “The underlying principle is that,
when one of the contracting parties has relied on an oral agreement to such an
extent that it would be a fraud on the part of the other contracting party to void
the agreement, equity will make that agreement an exception to the statute of
frauds.” Crossroads Church of Prior Lake MN v. County of Dakota, 800 N.W.2d
608, 615 (Minn. 2011). It is not enough that one takes possession of the land,
however, one must also make valuable improvements to the land. Id.
Based on the above, it was not legal error for the bankruptcy court to
9
conclude that pursuant to the doctrine of part performance, the Statute of Frauds
did not require production of a written agreement in order to find that
Appellants had an equitable interest in the lake property.
Appellants further argue that the issue of whether Appellants maintained
an equitable mortgage on the lake property was not properly before the Court, as
such issue was not included in the pleadings. The Court has reviewed the
Adversary Compliant, and finds the issue of equitable mortgage was sufficiently
alleged therein. (See Doc. 1‐6 (Adversary Complaint ¶¶ 13, 15, 19, 23(f)).)
An equitable mortgage is created where the “real nature of the transaction
between the parties is that of a loan, advanced upon the security of realty granted
to the party making the loan.” First Nat. Bank of St. Paul v. Ramier, 311 N.W.2d
502, 503 (Minn. 1981). The form of the transaction is not dispositive; a court is
free to determine the “actual character” of a transaction. Id. The evidence
presented at trial supports the bankruptcy court’s finding that the transaction
between the Parents and Appellants was in the nature of a loan, that the parties
to such loan understood its terms, and that it was secured by the lake property.
Taken together, the finding of a loan secured by property but not recorded in the
manner typical of a standard mortgage, fits the standard for an equitable
10
mortgage. See Ramier, 311 N.W.2d at 503.
Appellants have raised a number of additional arguments in their briefs.
The Court has carefully reviewed these additional arguments, and finds them to
be without merit as well.
Accordingly,
IT IS HEREBY ORDERED that the bankruptcy court’s Order and Judgment
revoking Appellants’ discharge pursuant to 11 U.S.C. § 727(d)(1) dated May 16,
2012, is AFFIRMED.
Date: November 29, 2012
s/ Michael J. Davis
Michael J. Davis
Chief Judge
United States District Court
11
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?