Menu   5 ABR 493
UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF ALASKA


In re: Case No. A90-00985-DMD )  
  )
Chapter 7
EUGENE A. BROOKS, JR. and )  
PATRICIA N. BROOKS, )  
  )  
        Debtors.
)  
________________________________ )  
G. OTTO HOLTA,)     Bancap No. 96-3105
)     Adversary No. A90-00985-002-DMD
     Plaintiff and) 
     Counterclaim ) 
     Defendant, ) 
) 
      v.) 
) 
WILLIAM BARSTOW, TRUSTEE, ) 
) 
     Defendant and) 
) 
WARREN G. KELLICUT,) 
) 
     Defendant and) 
     Counterclaimant.) 
________________________________ )  


MEMORANDUM DECISION


          This is an action to recover proceeds arising from the sale of lots once owned by General Development, Inc. (GDI), a dissolved corporation formerly owned by the debtor Eugene Brooks, Jr. It is a core proceeding under 28 U.S.C. 157(b)(2)(B) and (0). This court has jurisdiction over the dispute in accordance with 28 U.S.C. 1334(b) and the district court's order of reference. Because his assignment of rights was procured by fraud, G. Otto Holta's claim to the funds is disallowed.

5 ABR 494   TOP   Background

          Eugene Brooks was an Anchorage real estate developer. Warren Kellicut served as his attorney. Brooks did business through GDI. GDI owned real property subject to large liens, including tax liens arising in favor of the Municipality of Anchorage. Brooks and GDI owed Kellicut over $66,000.00 in attorney's fees. They confessed judgment for the fees. Judgment was entered on October 12, 1987, in state superior court. GDI was involuntarily dissolved on October 14, 1988. Eugene Brooks and Patricia Brooks succeeded to the property rights of GDI, as trustees for the benefit of GDI's creditors and stockholders. The Brooks filed for Chapter 7 bankruptcy relief on October 23, 1990. They did not schedule any redemptive rights or rights to excess proceeds arising from GDI real property as assets of their bankruptcy estate.

          G. Otto Holta purchased a quitclaim deed from GDI on July 26th, 1994. The deed included property described as Lots 8 and 9 of Block 2, Woolridge Subdivision, in Anchorage. Brooks executed the deed on behalf of GDI and received $400.00 from Holta. Following a tax sale on these parcels, the Municipality of Anchorage held over $33,925.57 in excess proceeds. Brooks learned of the proceeds and sued Holta and his associate, Brent Jennison, in state superior court for fraud and misrepresentation. That action was dismissed without prejudice due in part to the state court's jurisdiction concerns on bankruptcy issues.

          Following dismissal, Brooks moved to reopen his bankruptcy case. The case was reopened and William Barstow was appointed trustee. Barstow sued Holta and the Municipality to 5 ABR 495   TOP   recover the sale funds in bankruptcy court. Cross-motions for summary judgment were filed. A hearing on the motions was held on March 30th, 1995. Holta participated in the hearing and the issue of priority as to the proceeds between creditors of GDI and the trustee was discussed. The summary judgment motions were taken under advisement.

          Three days after the hearing, Holta wrote Kellicut and offered to purchase Kellicut's judgment for $500.00. The letter made no mention of the $33,925.57 held by the Municipality or the pending litigation between the trustee and Holta. Kellicut ignored the letter. Holta called Kellicut on April 12, 1995 and recorded the call. Holta wanted to complete the transaction. Kellicut put him off and did nothing.



          This court signed its decision in Barstow v. Holta and Municipality of Anchorage, Adv. No A90-00985-001, on May 2, 1995. It was docketed and served on May 4, 1995. In ruling against Holta, I found that the trustee was entitled to the disputed funds but that his first responsibility was to the corporate creditors of GDI. Holta called Kellicut on May 5, 1995 from Palm Springs, California. Kellicut agreed to the sale. Holta was to have his sister, Tamara, pick up the documents the following week. She called Kellicut on the 8th of May and received the executed documents the following day. Kellicut later learned of Holta's bankruptcy court activities and wrote Holta a threatening letter demanding recission due to fraud on July 20, 1995. Holta responded with his own threatening letter. Holta filed a complaint against the trustee seeking turnover of the funds. Kellicut has since been joined as a defendant and counter-claimed against Holta for fraud.

5 ABR 496   TOP   Analysis

          In order to rescind a contract on the grounds of misrepresentation, Kellicut must prove four things:
1) that there was a misrepresentation;

2) which was fraudulent or material;

3) which induced the party to enter the contract and

4) upon which the party was justified in relying.



Bering Straits Native Corp. v. Birklid, 739 P.2d 767, 768 (Alaska 1987), citing Johnson v. Curran, 633 P.2d 994, 997 (Alaska 1981).

          Misrepresentation can be established through a variety of means. It commonly arises through a spoken or written assertion that is not in accord with fact. Restatement (Second) of Contracts, 159, Comment a (1979). That assertion is viewed in the context in which it is offered, with any pertinent implications. "Whether a statement is false depends on the meaning of the words in all the circumstances, including what may fairly be inferred from them." Id. Fraud can also be committed where the defendant's statements are half-truths, or true remarks which omit material information. Carter v. Hoblit, 755 P.2d 1084, 1086 (Alaska 1988). As also noted in the Restatement:
b. Half-truths. A statement may be true with respect to the facts stated, but may fail to include qualifying matter necessary to prevent the implication of an assertion that is false with respect to other facts. For example, a true statement that an event has recently occurred may carry the false implication that the situation has not changed since its occurrence. Such a half-truth may be as misleading as an assertion that is wholly false.
Restatement (Second) of Contracts, 159 Comment b (1979).

          Otto Holta's misrepresentations in this case arise in a variety of manners. They include outright misrepresentations, 5 ABR 497   TOP   misrepresentation arising from false implications, half-truths, omissions, and true remarks which omit material information. They are contained in the letter he sent to Kellicut and in the recorded phone conversation of April 12, 1995.

          Holta's letter of April 4, 1995, falsely implies that nothing in the state or bankruptcy court files would reveal any source of value or payment for Kellicut's judgment. Holta's letter states:
It has come to my attention that you are a holder of a Judgment against Brooks and General Development Inc. I have had an opportunity to review the file on film at the courthouse and am fully aware of Brooks' and General Development, Inc.'s prior bankruptcies. Nevertheless, I am interested in purchasing your rights, good or bad, on the Judgment on Confession . . .
Holta clearly implies that there is nothing in the pertinent bankruptcy files that would reveal any source of value for execution. He neglects to point out that the Brooks bankruptcy file had recently been re-opened and that he was a defendant, along with the Municipality of Anchorage, in a pending lawsuit over $33,925.57 in sales proceeds brought by the Chapter 7 trustee William Barstow in bankruptcy court. He also failed to point out that at a recent hearing, just six days prior to his letter, this court and the parties discussed the need for payment of proceeds to GDI creditors prior to creditors of the Brooks' estate.

          More misrepresentations were made by Holta in the parties' phone conversation of April 12, 1995. Part of that conversation provided:
Kellicut: I haven't read it (Assignment of Judgment package), but I don't think I'm interested.
5 ABR 498   TOP  
Holta: Oh, You don't?

Kellicut: No. Why do you want it?

Holta: Well, I would like to try to execute on it.

Kellicut: What makes you think you can?

Holta: Oh, nothing in particular. I just-- I know where there's at least four hundred dollars, so- and I would hope to execute on the rest of it.
Holta's statement "Well I would like to try and execute on it" is truthful but Holta omitted material information significant to Kellicut by this answer. The true reason Holta wanted the judgment was because he had just attended a hearing where the court and counsel discussed the disposition of nearly $34,000.00 in sales proceeds. Holta was attempting to secure those proceeds because his prior quit-claim deed from Gene Brooks might not entitle him to the funds. When asked why he thought he could execute on the judgment, Holta stated, "Oh, nothing in particular. . . ." There was something in particular: nearly $34,000.00 in surplus proceeds waiting for payment to a GDI creditor. Holta had engineered the purchase of real estate rights, was intimately familiar with the tax sale of lots, and had been chasing these proceeds for months in litigation. His "nothing in particular" statement was a fraudulent misrepresentation. Similarly, his statement of "I just- I know where there's at least four hundred dollars, so- and I would hope to execute on the rest of it," is fraudulent. While the statement is literally true, Holta knew where there was a lot more than four hundred dollars. His response was misleading and designed to give Kellicut a false impression.

          Holta's responses to questions regarding the GDI and 5 ABR 499   TOP   Brooks bankruptcies as well as Gene Brooks individually were riddled with half-truths and important omissions. A portion of Holta and Kellicut's April 12th phone conversation provided:
Kellicut: How do you - how do you intend to do that (execute on the judgment) if those - if -if you know, based - based upon what you know about Gene Brooks, General Development and so on having filed bankruptcy?

Holta: Well, I'll do what I can with it. I mean, I'm not asking you to - to warrant, you know, anything on it whatsoever, I mean, If I can collect on it, I'll try; if I can't, then I can't.
Holta's response is evasive and misleading. Holta knew precisely how he would realize funds on the judgment: he would assert Kellicut's GDI judgment against the proceeds impounded by the Municipality and eventually held by the trustee. He was a party to the litigation pending in bankruptcy court and the pending motions for summary judgment. Later Kellicut asked:
Kellicut: Do you know Gene Brooks?

Holta: I have met him before, yes.

Kellicut: Uh-huh (affirmative).

Holta: I've had some dealings with him in regards to some real estate.

Again, Holta speaks in half-truths. Certainly, he had some dealings with Brooks regarding real estate but there was much more to it than that. He purchased the GDI quit-claim from Brooks in the hope of recovering surplus proceeds at a tax sale. He defended a state court action for fraud by Brooks based upon his purchase of the deed. He was also the defendant in a pending adversary in bankruptcy court in the Brooks' bankruptcy. Brooks' actions had re-opened the bankruptcy estate. Holta deliberately mislead Kellicut regarding his prior dealings with Brooks, leaving the 5 ABR 500   TOP   impression Holta's real estate dealings with Brooks were unrelated to Holta's purchase offer to Kellicut.

          Holta also misled Kellicut towards the end of the conversation:
Kellicut: Not because I'm old, it's just that I've learned that when I move fast, something usually goes wrong.

Holta: Okay. The reason I had - I did it that way is because I didn't want to waste a bunch of your time. I know its not worth a lot to you and I didn't want to waste a lot of your time with it, that's why I sent a letter and sent the check and figured if you wanted it, fine; if you didn't, you'd return my check.
Holta wasn't concerned with wasting Kellicut's time because the judgment wasn't worth a lot. Holta's concern was in acquiring a right to the $34,000.00 through Kellicut's judgment. The judgment was worth a lot, but Holta deliberately kept any details which would shed light on its value from Kellicut.

          Holta's assertions regarding his knowledge of the bankruptcies, the $400.00 available for execution, his limited dealings with Gene Brooks, and the judgment not being worth a lot to Kellicut were misrepresentations. Holta knew that disclosure of the $34,000.00 surplus and the pending litigation was necessary to prevent his prior assertions from being misrepresentations. As noted in the Restatement:
A person's non-disclosure of a fact known to him is equivalent to an assertion that the fact does not exist in the following cases only:

(a) where he knew that disclosure of the fact is necessary to prevent some previous assertion from being a misrepresentation or from being fraudulent or material . . .
Restatement (Second) of Contracts, 161 (1979). Holta's non-disclo- 5 ABR 501   TOP   sures are equivalent to assertions that there was not $34,000.00 in surplus proceeds available for execution and that no bankruptcy litigation regarding the proceeds was pending.

          I conclude that Holta made misrepresentations which were fraudulent and material to Kellicut. Holta's misrepresentations induced Kellicut to enter the purchase and sale agreement and assignment of rights. But was Kellicut justified in relying on Holta's statements?

          Holta argues that as a lawyer with many years of practice, Kellicut failed to take the elementary steps necessary to protect his own interests. Kellicut could have easily walked to the bankruptcy court and reviewed the pertinent files prior to closing. Kellicut was negligent in not independently verifying Holta's statements. The Alaska Supreme Court reviewed the concept of justifiable reliance in Cousineau v. Walker, 613 P.2d 608 (Alaska 1980). There the court allowed a purchaser to rescind a land sale contract. The purchaser was an experienced businessman who failed to investigate the seller's representations as to the size of a lot and the amount of gravel available for extraction prior to completing the sale. Despite his negligence, the court allowed him to rescind because his reliance was not " . . . wholly irrational, preposterous or in bad faith." Cousineau v. Walker, 613 P.2d at 616. The same concept should apply here. Holta's overtly fraudulent representations shouldn't be rewarded because Kellicut believed what he was told. Under the facts and circumstances of this case, Kellicut justifiably relied on Holta's statements and his reliance was not wholly irrational, preposterous or in bad faith. He is entitled to rescind the agreement.

5 ABR 502   TOP   Attorney's Fees

          Kellicut's counterclaim contains a prayer for attorney's fees. "[W]hen state law and not federal bankruptcy law provides the rule of decision in a contested matter, the bankruptcy court will award fees to the same extent allowed under the governing state law." In the Matter of Holiday Mobile Home Resorts, 803 F.2d 977, 979 (9th Cir. 1986); In the Matter of Sparkman, 703 F. 2d 1097, 1099 (9th Cir. 1983). Alaska state law determines whether recission of a contract is allowable. Accordingly, Kellicut is entitled to attorney's fees under Rule 82 of the Alaska Rules of Civil Procedure.

Conclusion

          Warren Kellicut is entitled to recission of his contract with Otto Holta. He is also entitled to Rule 82 attorney's fees and costs as to Holta. An appropriate order shall be entered.
DATED: August 10, 1998.
  
          BY THE COURT
          Donald MacDonald IV
          United States Bankruptcy Judge