Allen v. Freund

Filing 8

ORDER signed by Judge J P Stadtmueller on 6/4/15 that the order of the bankruptcy court under review is VACATED and REMANDED for further proceedings consistent with this order; and, this case is DISMISSED. (cc: all counsel)(nm)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF WISCONSIN
EDWARD O. ALLEN,
Appellant,
v.

Case No. 14-CV-1599-JPS

CHRISTOPHER C. FREUND,
Appellee.

ORDER

In this bankruptcy appeal, the appellant, Edward Allen (“Allen”),
challenges the bankruptcy court’s dismissal of his adversary complaint
against Christopher Freund (“Freund”).
Allen owned commercial property located at 4117 North Green Bay
Ave., in Milwaukee, Wisconsin.1 (Docket #1, Ex. 1 ¶ 6).2 In 2010, that property
secured several debts: (1) a primary mortgage held by M&I Bank of
approximately $105,000.00; (2) a secondary mortgage held by Chase Bank of
approximately $102,568.00; and (3) back taxes of approximately $39,780.00.
(Docket #1, Ex. 1 ¶ 7). Allen, however, “was either close to or in default on
the loans starting in May 2010.” (Docket #1, Ex. 1 ¶ 8). He was living in

1

The bankruptcy court dismissed the adversary complaint under Rule
12(b)(6) of the Federal Rules of Civil Procedure. In reviewing that order, the Court
must accept as true all of Allen’s well-pleaded factual allegations. Runnion ex rel.
Runnion v. Girl Scouts of Greater Chicago and Northwest Indiana, --- F.3d ----, 2015 WL
2151851, at *12 (7th Cir. May 8, 2015) (citing Carlson v. CSX Transp., Inc., 758 F.3d
819, 826 (7th Cir. 2014)).
2

The entire record on appeal from the bankruptcy court is attached as a
single exhibit to the first docket entry in this case. That single exhibit, in turn, holds
multiple documents. The Court will cite to those separate documents as “Ex. [###]”
for the duration of this order.

California at the time and was interested in selling the property. (Docket #1,
Ex. 1 ¶ 9).
Fortuitously (or at least it must have seemed so at the time), Freund
wrote a letter to Allen expressing interest in purchasing the property.
(Docket #1, Ex. 1 ¶ 9). Allen explained that he would be interested in selling
the property only if Freund would purchase the property for the amounts
owed on the two mortgage notes and back taxes. (Docket #1, Ex. 1 ¶ 10).
Allen “generally agreed” to this arrangement, so Allen traveled to
Milwaukee from California to give Freund a tour of the property. (Docket #1,
Ex. 1 ¶ 11).
During this time, Freund expressed some interest in the property and
asked Allen to provide contact information for the mortgage-holders’ asset
managers; Freund explained that he hoped to work with the asset managers
to arrange a “short sale.” (Docket #1, Ex. 1 ¶ 12). In other words, Freund
represented that he would call asset managers for M&I and Chase to “try to
convince [them]…to take something less than the full amount of the loan due
and owing to them.” (Docket #1, Ex. 1 ¶ 12). Presumably, this represented a
good deal for Allen: he would be able to rid himself of the property without
any remaining liabilities, as Freund would negotiate to reduce the remaining
mortgage balances—although, it also does not appear that this proposed deal
would have provided Allen with any money to walk away with. (Docket #1,
Ex. 1 ¶ 13). With this understanding, Allen provided the contact information
to Freund. (Docket #1, Ex. 1 ¶ 13).
Rather than use the contact information to facilitate a short sale,
Freund contacted M&I Bank and arranged to purchase the primary mortgage
note on the property. (Docket #1, Ex. 1 ¶ 14). This enabled Freund to
foreclose against Allen, receive a judgment of foreclosure, and force a
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sheriff’s sale of the property. (Docket #1, Ex. 1 ¶¶ 15–17). At that sheriff’s
sale, in 2011, Freund purchased the property “either individually or through
his company, J Crawford Investments.” (Docket #1, Ex. 1 ¶ 17). Thus, after
the sale, Freund owned the property, not subject to any debt. (Docket #1, Ex.
1 ¶ 17). On the other hand, Allen lost the property and was left with the
second mortgage, owned by Chase, which was no longer secured by the
property, making Allen the sole guarantor of the loan. (Docket #1, Ex. 1 ¶ 17).
Allen sued Freund in state court, “seeking recovery of damages for
allegedly fraudulent actions carried out by” Freund. (Docket #1, Ex. 1 ¶ 4).
That state court suit was stayed when Freund filed a Chapter 13 petition for
bankruptcy in 2013. (Docket #1, Ex. 1 ¶¶ 3, 4).
Thus, Allen filed this adversary proceeding, asserting intentional
misrepresentation and unjust enrichment claims against Freund, and
requesting that the bankruptcy court find that Freund owes a debt to Allen
that is not dischargeable under 11 U.S.C. §§ 523(a)(2), 523(a)(4), 523(a)(6), and
523(c). (Docket #1, Ex. 1 ¶¶ 18–38).
Freund moved to dismiss the adversary complaint. (Docket #1, Exs.
4, 5). At the bankruptcy court’s request, the parties briefed that motion.
(Docket #1, Exs. 8, 16, 17).
Then, on September 3, 2014, the bankruptcy court held a hearing on
the motion, at which it granted the motion. (Docket #1, Ex. 20). For the most
part, the bankruptcy court dismissed Allen’s claims with prejudice, finding
that Allen could not possibly state a claim under 11 U.S.C. § 523(a)(2)(B),
523(a)(4), 523(a)(6), or 523(c). (Docket #5, Ex. 1, Document 34 (“Tr.”) at 37–39).
However, the bankruptcy court’s dismissal was without prejudice to Allen’s
ability to file an amended complaint re-asserting his “remaining claims,”
including his “intentional misrepresentation claim, his related Section
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523(a)(2)(A) claim and his unjust enrichment claim.” (Tr. 39). Specifically, the
bankruptcy court offered Allen until October 3, 2014, to file and serve an
amended complaint; if Allen did not file an amended complaint, then the
bankruptcy court would enter its “whole judgment…in [Freund’s] favor.”
(Tr. 39). The bankruptcy court formalized this requirement in an order,
stating “that if Mr. Allen does not file an amended complaint by October 3,
2014, final judgment will be entered in the defendant’s favor dismissing all
claims.” (Docket #1, Ex. 22).
Allen did not timely file an amended complaint, so the bankruptcy
court dismissed his adversary proceeding on November 7, 2014. (Docket #1,
Ex. 24). In doing so, the bankruptcy court stated, “IT IS ORDERED that the
plaintiff, Edward O. Allen, recover nothing, and the action is dismissed on
the merits.” (Docket #1, Ex. 24 at 2). Judgment was thereafter entered,
incorporating the terms of the dismissal order. (Docket #1, Ex. 25).
Allen appealed, arguing that the bankruptcy court should not have
dismissed the adversary proceeding. (Docket #1). Allen filed a brief in
support of his position on appeal, and Freund responded. (Docket #5, #6).
Allen did not file a reply brief, but the time for him to do so has long since
passed, so the Court considers this matter fully briefed.
The Court has jurisdiction to decide it. The Court may hear appeals
“from final judgments, orders, and decrees” of the bankruptcy courts. 28
U.S.C. § 158(a)(1). Thus, here, because the bankruptcy court dismissed the
adversary complaint “on its merits,” after Allen let his opportunity to amend
expire, the bankruptcy court’s order is final and the Court has jurisdiction to
consider it on appeal. See, e.g., Stanek v. St. Charles Comm. Unit Sch. Dis. No.
303, 783 F.3d 634, 639–40 (7th Cir. 2015) (in non-bankruptcy case, where
plaintiff had let expire an opportunity to amend following dismissal without
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prejudice, the Seventh Circuit held that “he was entitled to accept the
dismissal as one with prejudice and take an appeal in which he could test the
legal sufficiency of his complaint”) (citing Anderson v. Catholic Bishop of
Chicago, 759 F.3d 645, 649 (7th Cir. 2014); Furnace v. Bd. of Trs. of S. Ill. Univ.,
218 F.3d 666, 669–70 (7th Cir. 2000)).
The Court reviews the bankruptcy court's factual findings for clear
error and its legal conclusions de novo. In re Marcus-Rehtmeyer, No. 14-1891,
--- F.3d ----, slip op. (7th Cir. Apr. 28, 2015) (citing In re Mississippi Valley
Livestock, Inc., 745 F.3d 299, 302 (7th Cir. 2014)).
The issue presented on appeal is very narrow: whether the bankruptcy
court erred in dismissing Allen’s 11 U.S.C. § 523(a)(2)(A) claim. Allen has
made clear that he is no longer pursuing his 11 U.S.C. § 523(a)(4) claim.
(Docket #5 at 14 n.2). Meanwhile, he does not make any mention or argument
regarding the other three claims that the bankruptcy court dismissed with
prejudice: 11 U.S.C. §§ 523(a)(2)(B), (a)(4), and (c). He also does not mention
his underlying unjust enrichment claim, instead focusing purely on
fraud/intentional misrepresentation. As such, the Court understands Allen
to be foregoing those arguments on appeal; and, even if he did not intend to
forego them, he has waived them by failing to adequately raise them. Estate
of Moreland v. Dieter, 395 F.3d 747, 759 (7th Cir. 2005) (appellate court not
required to “scour a record to locate evidence supporting a party’s legal
argument”; “[p]erfunctory or undeveloped arguments are waived”). Thus,
the Court will focus on whether the bankruptcy court erred in dismissing
Allen’s 11 U.S.C. § 523(a)(2)(A) claim.
Under 11 U.S.C. § 523(a)(2)(A), a debt is nondischargeable to the
extent it was obtained by “false pretenses, a false representation, or actual
fraud, other than a statement respecting the debtor’s or an insider’s financial
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condition.” To prove this, a plaintiff must show: “(1) that [the Debtor] made
a false representation or omission, which he either knew was false or made
with reckless disregard for the truth; (2) that [the Debtor] possessed an intent
to deceive or defraud; and (3) that [the Plaintiff] justifiably relied on the false
representation.”3 In re Davis, 638 F.3d 549, 553 (7th Cir. 2011).
For the bankruptcy court to have dismissed this claim on the merits,
it must have found that Allen’s adversary complaint did not set forth facts
to adequately demonstrate those elements. As already noted, the bankruptcy
court gave Allen an opportunity to amend his complaint. He chose not to do
so. Therefore, Allen cannot proceed by arguing that he might have been able
to plead additional facts; he accepted the dismissal of his adversary
complaint on its merits preserving only an argument that his adversary
complaint, itself, was legally sufficient. See Stanek, 783 F.3d at 639–40 (citing
Anderson, 759 F.3d at 649; Furnace, 218 F.3d at 669). He seems to acknowledge
this point, stating that his “primary argument on appeal is that the facts
alleged showing reliance are, in effect, the only facts available to show
reliance.” (Docket #5 at 6).
Allen’s complaint made the following allegations relating to his fraud
claim:
19.
On or about September 25th, 2010, Defendant Freund
represented to Mr. Allen that he was interested in purchasing
the Property from Mr. Allen and requested that Mr. Allen visit
Milwaukee to show Mr. Freund the Property. Plaintiff flew to
Milwaukee to show the property with the purpose to facilitate
the sale transaction.

3

These elements are practically identical to the underlying intentional
misrepresentation claim, see Mackenzie v. Miller Brewing Co., 2001 WI 23, ¶ 6, 241
Wis. 2d 700, 623 N.W.2d 739, so the Court will discuss the elements together.

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20.
During phone discussion and subsequent in person
conversation in Milwaukee, Mr. Allen explained and made it
known and clear to Debtor that he was not interested in
making a profit from the Sale of the Property but would sell at
a discount as long as the purchase price would cover and
satisfy the three liens attached to the Property.
21.
Mr. Freund represented that he was agreeable to these
terms.
22.
Mr. Freund, the Debtor, then requested from Mr. Allen
the identity of the bank officer or employee at M&I Bank
responsible for the M&I Loan secured by the Property and
represented that the purpose for wanting that information was
to allow Debtor to contact that bank official to negotiate a
lower payoff for the outstanding loans due to the Bank by Mr.
Allen as part of a potential sale between Mr. Allen and Mr.
Freund.
23.
Mr. Allen relied on these representations by Mr. Freund
and Mr. Freund’s promise to act in accordance with his
statements and in particular to act not to the detriment of Mr.
Allen when speaking with the Bank and otherwise.
24.
Defendant stated his interest and purpose was to
purchase the property not the Note. Debtor Defendant verbally
agreed with Plaintiffs only sale requirement, which was that
the purchase price cover the amount owed on the purchase
money mortgage, the promissory note, and back taxes.
25.
As a result of his representations, Mr. Freund owed a
duty to Mr. Allen to act in accordance with his representations
that he was intending to purchase the property from Mr. Allen
and not the Note from one of the Banks.
26.
The representations made by Mr. Freund were false and
intentionally false and misleading. The true facts were that
Defendant intended to take advantage of Mr. Allen and
attempt to obtain an assignment of the first mortgage directly
from the mortgage note holder, M&I Bank, and then foreclose
on the property in order to obtain and maximize the equity in
the Property.

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27.
Mr. Freund knew that doing so would extinguish the
2nd promissory note owed to Chase and result in him owning
the Property free and clear and potentially with substantial
equity.
28.
When Mr. Freund made these representations and
promises, he knew them to be false, and had no intention of
carrying out his promises and made these representations and
promises with the intent to induce Mr. Allen to provide him
the contact information for the bank officer and to lull Mr.
Allen into a false sense of comfort that Mr. Freund would not
take steps to hurt Mr. Allen’s position.
29.
At the time of these representations and promises, and
at the time Debtor took the actions alleged herein, Mr. Allen
was unaware of the falsity of Defendant's representations and
believed them to be true. Mr. Allen was unaware and did not
believe that Defendant's secret intention was to take advantage
of Mr. Allen, and in the exercise of reasonable diligence could
not have discovered Defendant's secret intention.
30.
Had Mr. Allen known the actual facts and Mr. Freund’s
actual intent, Mr. Allen would not have revealed the identity
of the bank officer or flew to Milwaukee in the first instance to
meet Mr. Freund.
31.
As a result of Mr. Freund’s fraudulent representations,
promises and actions, Plaintiff, Mr. Allen, remains obligated
for back taxes and a loan amount owed to Chase Bank in an
amount to be proven at trial.
(Docket #1, Ex. 1 ¶¶ 19–31).
Those allegations clearly satisfy even the heightened pleading
standards of Federal Rule of Civil Procedure 9(b), which requires allegations
of fraud to be pled with particularity. See Davis, 638 F.3d at 555 (in reviewing
11 U.S.C. § 523(a)(2) fraud claims, noting that complaint did not “satisfy Rule
8(a), let alone the more stringent Rule 9(b) standard that applies here.”)
Allen identifies all of the particulars of the fraud: who (Freund); what (false
statements regarding his intention to arrange a short sale); when (in Fall of
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2010); where (in Milwaukee, after Freund traveled here); and how (by
requesting the contact information for the asset managers and then using that
information to purchase Allen’s mortgage).
Allen also clearly pled that Freund had an intent to deceive or
defraud: “When Mr. Freund made these representations and promises, he
knew them to be false, and had no intention of carrying out his promises and
made these representations and promises with the intent to induce Mr. Allen
to provide him the contact information for the bank officer…” (Docket #1, Ex.
1 ¶ 28).
As to justifiable reliance, Allen clearly alleged that he relied on
Freund’s representations and provided the contact information for the
creditors. (Docket #1, Ex. 1 ¶¶ 13, 22–24). The fact that he turned over the
information, alone (Docket #1, Ex. 1 ¶ 13), is enough to show reliance when
taken in conjunction with Allen’s statements regarding his understanding of
Freund’s representations (Docket #1, Ex. 1 ¶¶ 22–24). It is unclear what else
Allen would have to have pled to establish reliance. This is not a “naked
assertion[] devoid of further factual enhancement,” Ashcroft v. Iqbal, 556 U.S.
662, 678 (2009); it is an allegation of fact supported by Allen’s understanding.
There was also ample factual matter to plausibly show that Allen’s reliance
was justifiable. This is a doubly low standard, here. To begin, justifiability is
a low standard, itself, even lower than reasonableness; it is not satisfied when
an individual “blindly relies upon a misrepresentation the falsity of which
would be patent to him if he had utilized his opportunity to make a cursory
examination or investigation.” Field v. Mans, 516 U.S. 59, 70–71 (1995). Next,
the Court must take the low justifiability standard in combination with the
low requirement that a pleading need only state a claim that is plausible on
its face. E.g., Iqbal, 556 U.S. at 678; Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570
Page 9 of 12

(2007). Allen’s adversary complaint satisfied that standard: he pled that
Freund “verbally agreed with [Allen’s] only sale requirement, which was
that the purchase price cover the amount owed on the purchase money
mortgage, the promissory note, and back taxes.” (Docket #1, Ex. 1 ¶ 24). If
Allen eventually establishes the existence of a verbal agreement, he could
plausibly show that he justifiably relied upon Freund’s representations. That
is all that is necessary at this early stage.
The bankruptcy court also found that Allen had not adequately pled
damages on his claim, and thus should not be allowed to proceed on it; the
Court disagrees. Allen alleged that “[d]uring 2010, the property had
sufficient equity to cover the outstanding liability for all three liens.” (Docket
#1, Ex. 1 ¶ 8). If so, then Allen was damaged when Freund obtained the
property by buying the note, foreclosing on it, and purchasing the property
at an auction; presumably, without Freund taking that action, Allen could
have sold the property to Freund or a third party and recouped some cost.
The bankruptcy court disagreed, noting that Allen’s general amenability to
a short sale is inconsistent with a belief that there was equity in the property.
(Docket #2 at 29:15–30:6). Those two concepts are, indeed, inconsistent with
one another; but, just because Allen believed at the time that a short sale was
a good idea, does not mean that, in fact, he had no equity in the property. His
belief at the time could have been mistaken. And, while Allen’s allegation
that he had equity is bare-bones, it is sufficient to escape dismissal at this
early stage. The bankruptcy court also pointed out that Allen may be
foreclosed from arguing that he had equity in the building, because the
sheriff’s sale price represents the fair value of the property under Wisconsin
law. (Docket #2 at 28:17–29:7), but at this juncture, it is not clear how much

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it was sold for at auction.4 Of course, if there is evidence that Allen, in fact,
did not have any equity in the property, then Freund can immediately
produce that evidence and move for summary judgment. For the present,
however, the Court is obliged to determine that Allen adequately pled
damages.
For these reasons, the Court finds that Allen adequately pled his 11
U.S.C. § 523(a)(2)(A) claim.
Finally, the Court must address Freund’s single argument in
opposition to Allen’s position appeal.5 Freund argues that there could be no
violation of 11 U.S.C. ¶ 523(a)(2)(A), because there was no transaction
between the parties. He did not provide any legal authority to support his
position, so the Court views the argument as having been waived. Estate of
Moreland, 395 F.3d at 759. Furthermore, even if not waived, the bankruptcy
court thoroughly analyzed the issue in its hearing, and the Court agrees with
the bankruptcy court’s reasoning. (See Docket #2 at 23:9–25:11). The Court,
therefore, rejects Freund’s argument.
The Court is obliged to vacate the bankruptcy court’s order dismissing
Allen’s adversary complaint and remand this case for further proceedings
consistent with this order.
Accordingly,

4

In a brief before the bankruptcy court, Freund argued that the most recent
property assessment of the property lists its value at $57,600.00. (Docket #1, Ex. 17
at 2). But he did not produce evidence of that fact (he would need to do so and to
move for summary judgment if he wanted the bankruptcy court to consider that)
and the most recent assessed value may not be evidence of its value in 2010.
5

Freund did not address any of the issues raised by Allen.

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IT IS ORDERED that the order of the bankruptcy court under review
be and the same is hereby VACATED and REMANDED for further
proceedings consistent with this order; and
IT IS FURTHER ORDERED that this case be and the same is hereby
DISMISSED.
The Clerk of Court is directed to enter judgment accordingly.
Dated at Milwaukee, Wisconsin, this 4th day of June, 2015.
BY THE COURT:

J.P. Stadtmueller
U.S. District Judge

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