
USCA1 Opinion

	




          March 20, 1995                                [Not for Publication]                                [Not for Publication]                            United States Court of Appeals                            United States Court of Appeals                                For the First Circuit                                For the First Circuit                                 ____________________        No. 94-1991                                 IN RE ANDREW J. LANE                                       Debtor.                                 ____________________                 PETER H. MCCALLION, FRANK LOOMIS, GREGORY O'NEILL,                           WILLIAM FOWLER, RICHARD DELORENZO,                                     Appellants,                                          v.                                   ANDREW J. LANE,                                      Appellee.                                 ____________________                     APPEAL FROM THE UNITED STATES DISTRICT COURT                          FOR THE DISTRICT OF MASSACHUSETTS                   [Hon. Nathaniel M. Gorton, U.S. District Judge]                                              ___________________                                 ____________________                                        Before                                Torruella, Chief Judge,                                           ___________                            Aldrich, Senior Circuit Judge,                                     ____________________                              and Stahl, Circuit Judge.                                         _____________                                 ____________________            Kenneth  J.  Parsigian  and  Goodwin  Proctor  &  Hoar  argued for            ______________________       _________________________        appellant; Peter H. McCallion was on brief pro se.                   __________________            Charles R. Dougherty  with whom Sara Miron Bloom and Hill & Barlow            ____________________            ________________     _____________        were on brief for appellee.                                 ____________________                                 ____________________                      STAHL, Circuit Judge.   In this bankruptcy  appeal,                      STAHL, Circuit Judge.                             _____________            we  again  review  issues  arising  from  a  dispute  between            plaintiffs-appellants  ("appellants"),  who  were the  former            shareholders of Indian Hill Associates, Inc. ("Indian Hill"),            and defendant-appellee Andrew J.  Lane ("Lane") over the sale            of all Indian Hill shares to Lane.   Indian Hill's sole asset            was a contract to  purchase 165 acres  of land in New  York's            Westchester and Putnam  counties ("the  Land").   Originally,            appellants sought  a constructive trust on  Lane's Chapter 11            estate  and  a  determination  that  Lane's  indebtedness  to            appellants is nondischargeable under various subsections of              523 of the Bankruptcy Code, 11  U.S.C.   523.  On our initial            review, we upheld the bankruptcy court's dismissal as to  all            of  appellants'  claims  except   the  one  arising  under               523(a)(2)(A).1   In  re Lane,  937 F.2d  694 (1st  Cir. 1991)                             ___________            ("Lane I").  On remand, the bankruptcy court conducted a one-              ______            day trial and held that the debt owed appellants did not fall            under  this  dischargeability  exception.    On  review,  the            district  court  affirmed.    After careful  review,  we  now            affirm.                                            ____________________            1.  Section  523(a)(2)(A)  provides  that   money,  property,            services, or an extension,  renewal, or refinancing of credit            is  not discharged to  the extent it is  obtained by:  "false            pretenses,  a false  representation, or  actual fraud,  other            than  a statement  respecting  the debtor's  or an  insider's            financial condition."                                         -2-                                          2                                          I.                                          I.                                          __                      This  dispute  has  lingered  for  more than  seven            years, generating  an intricate factual background.   We cull            only  those  facts  relevant  to  this  appeal.    In   1987,            appellants formed Indian  Hill to acquire the  Land.  Through            its  treasurer,  Terence  Gargan,   Indian  Hill  executed  a            contract  under which  it agreed  to purchase  the  Land from            Putnam Limited Partners  ("Putnam") for  $3,425,000.   Indian            Hill placed a deposit  of $300,000 in escrow and  closing was            set for November 4, 1987.                        Appellants,  one of  whom  is a  lawyer, wanted  to            develop the  Land.  Critically,  however, they were  short on            both money  and experience in land  development, inadequacies            that  became  obvious  as  events unfolded.    Indian  Hill's            president, appellant Peter H. McCallion,  approached Lane, an            experienced  Massachusetts-based  developer,  about  a  joint            residential  development on  the  Land.   Lane rejected  that            proposal but  indicated that, if financing  was available, he            would consider purchasing the  entire tract from Indian Hill.            McCallion  said   that  he   would  help   secure  financing.            Negotiations  ensued and  eventually  the  parties reached  a            tentative   agreement   under  which   Lane  would   buy  all            outstanding  Indian  Hill  shares  for   $1,675,000,  thereby            acquiring all of Indian Hill's rights under the land-purchase                                         -3-                                          3            contract.  In  October 1987,  Indian Hill  sent Lane  a draft            agreement to that effect.                        Meanwhile, McCallion arranged for a meeting between            Lane and Bankers Trust Company in Manhattan.  At the meeting,            held on  November 3, 1987,  and attended by  Lane, McCallion,            and their associates, Lane's prospects for financing appeared            good,  but not  certain.   However, McCallion  and  the other            Indian Hill  shareholders faced  an imminent problem:   their            closing  with Putnam was scheduled for the next day and, with            no financing  to complete the purchase,  the $300,000 deposit            was  at  risk.    Immediately  following  the  Bankers  Trust            meeting, Lane, McCallion, and others in their group adjourned            to a nearby  restaurant.  McCallion  indicated that he  could            secure  an extension  of the  closing date  if Lane  signed a            contract  to acquire  Indian Hill's  shares.   Lane testified            that  he made  clear that  he would  not go through  with the            project  unless financing  was  available.   With  financing,            however, the  deal presented  an  attractive opportunity  for            Lane, and prospects for  a substantial profit for  the Indian            Hill  shareholders.   Eventually,  during the  course of  the            restaurant meeting,  Lane and  McCallion signed  an agreement            ("November 3rd  agreement") for sale of  Indian Hill's shares            to Lane.                        The terms  of the November  3rd agreement  required            Lane to pay a  $300,000 deposit into escrow upon  signing the                                         -4-                                          4            agreement,  $75,000  on November  4,  1987,  three additional            installments  of $350,000  each, and  a final  installment of            $250,000.   There was no financing contingency.  Lane did not            have  his checkbook  with him in  New York  but said  that he            would send the deposit check by mail.                        With the agreement in  hand, McCallion secured from            Putnam  an extension  of the  closing date  until  January 4,            1988.     Lane,  however,  never  sent   the  deposit  check.            McCallion pressed  Lane for  the deposit.    On November  30,            1987, Lane sent a letter to appellants proposing to amend the            November  3rd agreement by making Lane's obligation expressly            contingent upon  financing.  The new  closing deadline loomed            and,  on January  4, 1988, the  Indian Hill  shareholders and            Lane agreed to amend the November 3rd agreement ("January 4th            amendment").   The basic terms  of the January  4th amendment            provided:    (1)  Indian  Hill's original  deposit  would  be            released to Putnam, thereby supporting a further extension of            the closing  until February  12, 1988;  (2)  payments on  the            original  $1,675,000  share  sale price  were  made expressly            conditional  on  Lane  securing   financing;  (3)  a  payment            schedule   was  established   under  which   the  final   two            installments,  totalling $600,000,  were made  conditional on            Lane   securing   governmental   approval   for   residential            development, and;  (4) appellants agreed  to "forever release                                         -5-                                          5            and will bring  no claims  against Lane  arising or  alledged            [sic] to arise" from the November 3rd agreement.                        Pursuant to the January 4th amendment, Lane secured            a bridge loan and  paid appellants $375,000 (representing the            $300,000 down payment plus  the $75,000 that had been  due on            November  4,  1987),  and  Indian  Hill's  original  $300,000            deposit  was  released to  Putnam.    Bankers Trust  approved            financing  for Lane.  In August 1988, Lane paid appellants an            additional installment of $350,000, plus interest.  A dispute            then arose regarding  zoning of  the Land and,  as a  result,            Lane  made no  further payments  and filed  suit in  New York            state  court  charging  appellants  with  misrepresenting  or            failing  to  disclose  facts  about  the  Land.    Appellants            counterclaimed and ultimately secured a judgment against Lane            for  $468,313.2   For  reasons  apparently  unrelated to  the            Indian  Hill  dispute, Lane  filed  a  Chapter 11  bankruptcy            petition in March 1989.3                        In  the  end, appellants  more  than doubled  their            original  investment, receiving  $785,000  in  payments  from            Lane.    In October  1989,  appellants  began this  adversary                                            ____________________            2.  The  state   court  dismissed  the  claims   against  all            appellants except McCallion.            3.  Lane and his companies were among the largest real estate            developers in New England.   According to the record  in this            case,  at one point Lane's assets totalled $90 million.  Lane            filed  his bankruptcy petition on  the same day  the New York            state court awarded appellants their judgment.                                         -6-                                          6            bankruptcy    proceeding    seeking    to    determine    the            dischargeability  of,  alternatively,  the  balance   of  the            installments, which  totalled $950,000 plus  interest, or the            amount of the state court judgment, $468,313.                                         II.                                         II.                                         ___                      Bankruptcy  Rule  8013  provides  that  the court's            "[f]indings  of fact,  whether based  on oral  or documentary            evidence, shall  not be  set aside unless  clearly erroneous,            and  due  regard shall  be given  to  the opportunity  of the            bankruptcy court to judge  the credibility of the witnesses."            We review  conclusions of law de  novo.  In  re G.S.F. Corp.,                                          __  ____   ___________________            938  F.2d 1467, 1474  (1st Cir. 1991).   In an  appeal from a            district  court  review  of  a  bankruptcy  court  order,  we            independently  review the bankruptcy  court's decision.  See,                                                                     ___            e.g., In re Winthrop  Old Farm Nurseries, Inc., ___  F.3d ___            ____  ________________________________________            (1st Cir. 1995).                          Appellants'  theory  under    523(a)(2)(A)  is that            Lane acquired title  to the Indian Hill shares  by promising,            under the  November 3rd agreement,  to pay the  $300,000 down            payment to  the appellants without ever having  the intent to            do  so.    To  establish   a  claim  under  this  subsection,            appellants must  prove: (1) that  Lane made  representations;            (2) that at  the time he  knew were false;  (3) that he  made                                         -7-                                          7            them with the intent and purpose of deceiving the appellants;            (4) that  the appellants relied on  such representations; and            (5) that the appellants sustained the alleged loss and damage            as the  proximate result  of the representations  having been            made.4  See, e.g., In  re Ophaug, 827 F.2d 340, 342  n.1 (8th                    ___  ____  _____________            Cir. 1987).                        A  misrepresentation  of  intention can  constitute            fraud.   See, e.g., In re Zachary,  147 B.R. 881, 883 (Bankr.                     ___  ____  _____________            N.D. Tex. 1992) (citing  3 Collier on Bankruptcy    523.08 at                                       _____________________            523-54  (15th ed. 1991)).  If a debtor enters into a contract            with  the intent  not  to comply  with  its terms  and  later            defaults under the contract, the contract may provide a basis            for an  exception to discharge on the grounds of fraud if the            other remaining elements are established.   In re Krause, 114                                                        ____________            B.R. 582, 606 (Bankr. N.D. Ind. 1988).  However, mere failure            to  perform is  not sufficient  evidence of  scienter  nor is            subsequent  conduct contrary  to the  original representation            necessarily indicative of fraudulent  intent.  In re Zachary,                                                           _____________            147 B.R. at 883 (collecting cases).                           The  bankruptcy court  found  that  Lane did  not            misrepresent his intent.   The court found that Lane  "at all            times  informed the  [appellants]  of the  necessity that  he                                            ____________________            4.  As we noted in our earlier decision in this case, whether            appellants must prove reasonable reliance is an open question                                  __________            in this court.   Lane I, 937 F.2d at  698 n.8.  As we  do not                             ____            reach the issue in this case, we continue to take no position            in the matter.                                         -8-                                          8            obtain complete financing  for the project.   He intended  to            perform the  agreement  which he  believed  he had  with  the            [appellants]."   Thus, the  court held that  appellants' debt            did  not  fall  under  the     523(a)(2)(A)  dischargeability            exception.  Alternatively, the court  held that, by the terms            of the  January 4th  amendment, appellants had  released Lane            from all claims arising from the November 3rd agreement.5                        Appellants raise numerous arguments challenging the            bankruptcy court's  conclusion,  most of  which  have  little            bearing on the issue before us.  Indeed, appellants appear to            misapprehend  fundamentally the  issue  on appeal:   we  must            determine whether  the bankruptcy court, after  a full trial,            committed clear error  in its factual  finding that Lane  did            not misrepresent his intent when he entered into the November            3rd  agreement.6   Because  the issue  is intent,  appellants            must point  to evidence, direct or  circumstantial, of Lane's            state  of mind  sufficient to  overcome the  court's finding.            Instead,  appellants   offer  arguments  grounded   in  parol            evidence and substantive contract rules.  These arguments may            be material to the legal effect of the November 3rd agreement                               ____________                                            ____________________            5.  Because we resolve this case  under   523(a)(2)(A), we do            not reach  the  issue of  the enforceability  of the  release            contained in the January 4th amendment.            6.  We  note  that  in   their  reply  brief,  appellants  do            correctly state the issue  before the court, but  then launch            into an  extended discussion  of issues wholly  extraneous to            the  question  of  intent,  including  res  judicata,   parol                                                   ___  ________            evidence, and substantive contract law.                                         -9-                                          9            and  the January 4th amendment, but they have no relevance to            the issue of Lane's intent to misrepresent.7                         Appellants do make a  lame pass at a state-of-mind            argument by averring that Lane's fraudulent intent is evident            from  his general  conduct.   Specifically, they  refer to  a            pattern of seemingly  inconsistent statements, alleging that,            "Lane  consistently makes  up  stories to  suit his  purposes            without regard for  the truth."   They also  point to  Lane's            general conduct  subsequent  to the  November 3rd  agreement,            focusing particularly on his failure to attempt to secure the            necessary  government approval for the development, which was            a  precondition for  payment to  appellants of  the last  two            installments.                                             ____________________            7.  At  oral  argument,  appellants  offered  a  new  theory.            Seizing  on language contained in In re Krause, 114 B.R. 582,                                              ____________            606  (Bankr. N.D.  Ind. 1988), a  case cited by  the panel in            Lane I, and which we cite above, supra at 8, appellants argue            ______                           _____            that  fraud occurred  because Lane  never intended  to comply            with the  contract's terms.   They argue that  the bankruptcy                                 _____            court erred  by failing  to analyze  Lane's intent  to comply            with the terms of  the November 3rd contract,  which purports            to be fully integrated, and thus cannot incorporate any parol            agreement regarding  financing.   On this record,  we do  not            agree.   As discussed more  fully below, Lane  could not have            the  intent to  misrepresent  when, as  the  court found,  he            repeatedly  made  clear  that  the  agreement  was  expressly            conditioned on  securing financing,  the legal effect  of the            underlying document notwithstanding.   We think the court was            correct to look to Lane's  statements to appellants as direct            evidence of his  intent to  comply with the  "terms" that  he            announced,  rather than  to  infer fraud  from the  fact that            those "terms" may have had no legal effect under the language            of the contract.                                         -10-                                          10                      Appellants'   argument   falls    far   short    of            establishing clear error.   With regard to Lane's statements,            the  trial  record  reveals  that  appellants  made strenuous            efforts  to  impeach  Lane's  testimony.    In  reaching  its            conclusion, the court simply made a credibility determination            by  choosing to believe Lane,  a decision to  which we accord            deference.    As to  Lane's  post-November  3rd conduct,  the            record  contains  ample  evidence  corroborating  the court's            conclusion that  Lane's intent  in signing the  agreement was            clear  from the  beginning:    that  is,  it  was  merely  an            accommodation to facilitate the  extension of the November 4,            1987 closing date  and that his performance  of the agreement            was contingent upon securing  financing.  Most significantly,            Lane not only reiterated  his position regarding financing in            his November  30,  1987  letter,  but he  also  performed  as            promised by paying the disputed down payment after he secured            financing.  In the  end, after the benefit of  testimony from            the principal  players in this dispute,  the bankruptcy court            determined that  appellants had failed to  carry their burden            of establishing the elements  required for the   523(a)(2)(A)            exception  to apply.  Upon  our own review  of the record, we            find ample support for the bankruptcy court's finding.                                          III.                                         III.                                         ____                      As we  noted in Lane  I, appellants  took a  credit                                      _______            risk by surrendering their interests in Indian Hill in return                                         -11-                                          11            for Lane's  unsecured promise to  pay.  Lane  I, 937  F.2d at                                                    _______            699.  Unfortunately for them, bankruptcy intervened.  Because            we  find  no   clear  error  with  respect   to  the  court's            determination  that Lane  had  no intent  to misrepresent,               523(a)(2)(A) does  not apply  to appellants' claim,  and this            litigation is  finally brought to  an end.   Accordingly, the            decision of the bankruptcy court is                       affirmed.  Costs to appellee.                      affirmed.  Costs to appellee.                      _____________________________                                         -12-                                          12
