In re Saad (Abdel-Hak v. Saad): Buyer's Claims against Salesperson Discharged

A federal bankruptcy court considered whether it could discharge claims made against him by a former client related to a misrepresentation made by the real estate professional.

Ally Saad ("Salesperson"), a licensed real estate professional, saw that the Convent of Mary Reparatrix, Inc. ("Convent") was listed for sale with real estate licensee Jeff LeBlanc ("LeBlanc"). The Salesperson contacted a number of individuals who he thought might be interested in purchasing the Convent. One of the individuals he contacted was Mounir Abdel-Hak ("Client"), who owned a jewelry store across the street from the Convent. The Client and the Salesperson visited the Convent, and shortly thereafter, the Client submitted an offer prepared by the Salesperson. The Client's offer was $900 above the listing price and also allowed the nuns to live rent-free in the Convent for a short period of time following the closing. The offer was also contingent on the Client obtaining financing for the purchase. While the offer was being prepared, the Client told the Salesperson to be "straight with him", as he testified that the Salesperson had a reputation of being "not trustworthy".

Following the submission of his offer, the Client didn't hear anything from the Salesperson, despite his repeated calls to him. Eventually, the Client called LeBlanc directly, who told him that the Convent had received other offers but could not discuss those offers with him. LeBlanc suggested that the Client talk to the Salesperson.

Thereafter, the Client learned that the Convent had accepted another offer from Jason Saad ("Buyer"), who was allegedly not related to the Salesperson but was a real estate licensee employed by the same brokerage as the Salesperson. The Buyer's offer was for $10,000 more than the listing price and contained no contingencies, but also allowed the nuns to live in the Convent rent-free for the same period of time as the Client's offer. The Buyer was represented at the closing by the Salesperson.

The Salesperson filed a Chapter 7 bankruptcy. Under Chapter 7 of the federal Bankruptcy Code, all of the debtor's nonexempt assets are collected, liquidated by the trustee, and distributed to creditors. Thereafter, any remaining debt balance is discharged by the bankruptcy court. Certain debts are generally nondischargeable, such as unpaid taxes or student loans. Additionally, otherwise dischargeable debts can be found to be nondischargeable under certain circumstances.

The Client filed a complaint with the bankruptcy court, arguing that the Salesperson owed him damages for his actions in the sale of the Convent to the Buyer. The parties agreed that if the Client's debt was determined to be nondischargeable, the amount of damages would be determined in state court. Therefore, the issue before the bankruptcy court was whether or not the Client's debt was dischargeable.

The United States Bankruptcy Court for the Eastern District of Michigan determined that the debt was dischargeable and so dismissed the complaint. The Client argued that three sections of the Bankruptcy Code made the Client's debt nondischargeable. Section 523(a)(2)(A) allows a creditor to except a debt from discharge if the creditor can show the following: the debtor obtained money through a material misrepresentation that the debtor knew was false at the time it was made; the debtor intended to deceive the creditor; the creditor justifiably relied upon the false representation; and the creditor's reliance was the cause of the loss. Concealment of a material fact constitutes a misrepresentation.

The Client argued that the Salesperson concealed the fact that he was representing two different buyers in the transaction. Michigan law allows a real estate professional to represent two buyers in the same transaction, but requires the real estate professional to make a full disclosure to the buyers of this fact. The Salesperson claimed he only began representing the Buyer after the Client's offer was rejected. However, LeBlanc testified that the Salesperson acted as a buyer's representative for both parties, as he understood both the Client and Buyer's offers to have been submitted by the Salesperson. The Salesperson's signature also appeared on the Buyer's offer.

Based on this evidence, the court concluded that the Salesperson had made a misrepresentation to the Client by failing to inform the Client that he was representing another buyer as well. The court also found that the Salesperson intended to deceive the Client. But the court found that the Client had failed to show the other two elements required by section 523(a)(2)(A). Since the Client knew that the Salesperson had a bad reputation, the court found he could not claim that he justifiably relied upon the Salesperson's misrepresentation to him. The court also found that there was no evidence that the Client would have been the successful purchaser of the Convent "but for" the Salesperson's misrepresentation. LeBlanc testified that the Salesperson had no influence over the Convent's decision to accept the Buyer's offer. Thus, the court found that section 523(a)(2)(A) did not support the Client's argument for nondischargeability.

Next, the Client argued that section 523(a)(4) made the Salesperson's debt nondischargeable. This section prevents discharge of a debt which is obtained from "fraud or defalcation while acting in a fiduciary capacity…". Since Michigan law holds that a real estate professional and his/her client are in a fiduciary relationship, the Client argued that this section should prevent discharge of the debt. However, the court disagreed. Relevant case law in the Sixth Circuit (in which the court sat) has held that this section of the Bankruptcy Code only covered "express or technical trusts and does not extend to implied trusts" and, for example, did not apply to an attorney/client relationship without evidence of the attorney holding client funds. While the Salesperson may have violated his fiduciary obligations and contractual obligations under Michigan law, he did not create a nondischargeable debt under section 523(a)(4) and so this section also did not support the Client's argument for nondischargeability.

Finally, the court considered the Client's claim that section 523(a)(6) made the Client's debt nondischargeable. Under this section, a debt is nondischargeable if the debtor knowingly undertakes a wrongful act intended to harm the creditor. The court found there was no evidence to show that the Salesperson had intended to harm the Client, and also there was no evidence to show that the Salesperson gained anything by having the Buyer purchase the property- indeed, the only testimony before the court was that the Salesperson actually received a smaller commission from the Buyer's purchase of the property (he received 2/3 of the commission he would have received if the Client had purchased the Convent). Therefore, the court ruled that this section also did not support the Client's argument for nondischargeability and so dismissed the Client's complaint.

In re Saad (Abdel-Hak v. Saad), 319 B.R. 147 (Bankr. E.D. Mich. 2004).

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