Real estate loans go sour and senior woman blames long-time broker. $1.18 million. U.S. Eastern District Bankruptcy Court.

Facts and Background

• Facts and Background:

  In 2006, plaintiff Shirley Andre began experiencing the effect of the economic downturn, with vacancies and non-paying tenants in the rental properties that she had purchased to secure her retirement. Concerned that her rental properties were draining her finances, Shirley told her long-time real estate broker and financial advisor, the defendant, that she needed to improve her cash-flow and wanted to sell some of her properties.

  Defendant advised Shirley and her son to refinance their rental properities instead of selling them and to invest the proceeds in real estate loans. Plaintiffs complied with defendant’s advice.

  In 2011, the plaintiffs (Shirley and her son) discovered that all of the properties “securing” their loans had been foreclosed on and that they had lost the entirety of their investment; that the borrower, an individual, had only paid a minor portion of the interest due on the loans, and none of the principal.

   

• Plaintiff's Contentions:

  That defendant, who had directed Shirley’s property transactions and managed her properties since the early 1990s, advised her to “invest” in hard-money loans, and to do “Hard Money the Easy Way” by refinancing her rental properties instead of selling them. That defendant directed Shirley, and her son Joseph, to become lenders for hard money loans with a borrower he had “fully investigated” and who had properties that would “fully secure” the loans.

  That none of defendant's representations were true. Knowing that he had their complete trust, defendant brokered three hard-money loans to a single indivdual, for a total principal amount of $225,000. That despite defendant's repeated assurances, none of those loans were secured and defendant had done nothing meaningful to investigate the borrower's ability to repay the loans or the value of the properties in relation to existing liens.

  That unbeknownst to plaintiffs, their loans were all unsecured junior loans and there were multiple senior loans, many of which defendant was a beneficiary for. Those senior loans had exhausted the equity in the properties purportedly securing the plaintiffs' loans. Moreover, that defendant received loan origination fees for all of the Andres’ loans, was responsible for collecting and distributing the borrower's loan payments, and directed that all notices of default be sent to him instead of to the Andres. That defendant did not account to Plaintiffs for the loan payments he received.

   Plaintiffs contended that defendant’s debts to them arising from the loans he brokered between them and the borrower were non-dischargeable because of intentional fraud (11 USC §523(a)(2)(A)), fraud and defalcation as a fiduciary (11 USC §523(a)(4)) and willful misconduct (11 USC §523(a)(6)).

• Defendant's Contentions:

  Defendant contended that he was merely a co-investor with the plaintiffs, rather than a broker and fiduciary, and that any damage caused by his conduct resulted from his innocent trust in the borrower, rather than intentional misconduct. Defendant primarily relied on two cases for these defenses, In re Honkanen 446 B.R. 373 (9th Cir. 2011), and Bullock v. Bank Champaign, N.A. 133 S.Ct. 1754 (2013).

  Defendant contended that he had previously done more than 30 deals with Ms. Andre. That plaintiff was herself a licensed California realtor until her license expired in 2013.  

  Further, it was undisputed by plaintiff that in the 10 years of doing real estate deals with defendant, she was wholly reliant on defendant for real estate advice.

  That plaintiff was very interested in investing in real estate, having attending real estate clubs and purchased other real properties with other real estate agents.
   
  That plaintiff herself acknowledged that she knew from having done over 30 deals and 10 years of investing with defendant that, while defendant was generally accurate in his estimation of values, he was sometimes way off in his opinions of value.  Ms. Andre knew that in all the deals, defendant used his opinion of value as a broker and not third-party appraisals, and that she nonetheless chose to continue to do deals with defendant, fully aware that third-party appraisals were not being used.
   
  That plaintiff's dispute concerned the last three deals that were done in 2006-07.  She did not sue defendant over any of the 30+ profitable deals that also used his opinion of value as a basis for value.
   

  Defendant contended that he was a victim of the mid-2007 real estate market crash and co-invested and lost over $450,000 at the same level and priority as Ms. Andre and Joseph Andre. If he had known of the crash in the future, he would not have risked $450,000 of his own money at the same level and priority to gain a paltry $11,200 in loan origination fees. Defendant contended that the failure to warn and failure to value the properties was innocent.

  Defendant further contended that a California three-year statute of limitations barred Ms. Andre from suing on any specific misrepresentation, since the deals were done in 2006-07; that she was aware the deals were based upon defendant's opinion of value which were occasionally incorrect, having done 30+ deals with him prior to 2006, but she waited until 2013 to bring suit in the Bankruptcy Court arguing that defendant misvalued the properties.  Ms. Andre knew or should have known of this danger of misvaluation as of 2006-07 and the deadline to file suit was in 2009-10.