Bauer v. Gilmartin (In re Gilmartin)
- Citation:
- United States Bankruptcy Panel for the Eighth Circuit, No. 11-6014
- Tag(s):
-
- Ruling:
- The BAP held that while the primary measure of fraud in Missouri is the claimant's benefit of the bargain, under certain circumstances, an "out of pocket" measure of damages is authorized and must be considered by the bankruptcy court on a nondischargeability claim under Section 523(a)(2)(A).
- Procedural context:
- The BAP reversed and remanded the decision of the Bankruptcy Court because it did not consider all applicable measures of damages under Section 523(a)(2)(A), specifically whether an "out of pocket" measure of damages was applicable under the facts.
- Facts:
- The Gilmartins and Bauers were close personal friends. Larry Bauer was an attorney. James Gilmartin had many years of experience in real estate development and sales. The Gilmartins and Bauers formed a limited liability company for the purpose of acquiring and developing real property. The LLC acquired two properties with loans obtained from an area lender. Larry Bauer was not involved in the day-to-day operations of the LLC. James Gilmartin bore the responsibility of the day-to-day management, including supervision of the construction projects and maintaining the LLC's records and finances. While the real estate projects were under construction, the Gilmartins were experiencing personal financial problems. The Bauers loaned nearly $30,000 to the Gilmartins. In addition, because the Bauers had been allegedly advised by James Gilmartin of cost overruns on the projects, the Bauers took out a $300,000 second mortgage on their home and turned all of the money over to the LLC. Meanwhile, the Bauers contend that unbeknownst to them, James Gilmartin withdrew over $200,000 in unauthorized funds from the LLC. Ultimately, one project was sold at a loss and the bank commenced foreclosure. The Gilmartins subsequently filed a chapter 7 bankruptcy petition. The Bauers commenced a nondischargeability action against the Gilmartins under Section 523(a)(2)(A) alleging, among other things, that they would not have continued to invest funds in the project, or would have ceased putting new money in, including funds from the second mortgage on their home, had they known Gilmartin was using such funds for unauthorized purposes.
The crux of the Bankruptcy Court's decision was finding that the Bauers had failed to prove the fifth and last element of Section 523(a)(2)(A) - that the Bauers sustained the alleged loss and damages as a proximate result of the respresentation, or in this case the omission, made by James Gilmartin. The Bankruptcy Court had framed the Bauers' damage argument as "but for the taking of the money without the Bauers' permisison, the LLC would have been profitable and the Bauers would have gotten back all of the money they put into the LLC." The Bankruptcy Court, however, erred when it did not consider the evidence offered on the "out of pocket" measure of damages, which was that the Bauers would not have invested money in the first place, or they would not have continued to invest funds, had they known of Gilmartin's alleged fraud.
- Judge(s):
- Kressel, Federman, and Saladino
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