Luna et al v. Coombs

1 Thomas and Jennifer Stark are also named plaintiffs but
stopped participating in the adversary proceeding on or about
December 6, 2011. 	Minutes of status conference (doc 59) and
Order Resulting from Status Conference and Notice of Hearing on
the Merits [Liability] and Damages, entered December 8, 2011
(“Order/Notice”). 	Doc 61. 	Therefore no judgment is awarded in
their favor. 	The Court did not require that the style of the
case be amended.
UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF NEW MEXICO
In re:
WILLIAM DEVLIN COOMBS and
CHRISTINA MAY COOMBS,
Debtor. 	No. 7-10-11712 SA
SALOMON LUNA, JULIE M. LUNA,
RICKY D. SWIFT, MARY L. SWIFT,
THOMAS M. STARK and
JENNIFER M. STARK,
Plaintiffs,
v. 	No. 10-1099 S
CHRISTINA MAY COOMBS,
Defendant.
MEMORANDUM OPINION
IN SUPPORT OF JUDGMENT
On June 18, 2010, Plaintiffs Salomon and Julie Luna
(“Lunas”) and Ricky and Mary Swift (“Swifts”) 1 filed this non-
dischargeability action against Debtor/Defendant, asserting that
Debtor had, among other things, fraudulently persuaded them to
“invest” money with her (that is, loan her money as an investment
vehicle), sign contracts with a business associate of Debtor for
the alleged construction of two “spec” homes (one for the Lunas
and one for the Swifts) and take out construction loans from Los
Alamos National Bank (“Bank”) to finance the construction of
those homes. 	Contrary to Debtor’s representations, Debtor did
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2 The allegations of the complaint raise questions about the
role of the employee of the Bank that permitted the borrowing and
supervised the loans, but that issue is not before the Court.
Page 2 of 	11
not own the lots which she was purporting to sell to Plaintiffs,
nor were the homes built and sold as promised. 	Instead the loan
proceeds were used for other purposes. 2 	And instead of the
profits that were supposed to flow back from Debtor’s sale of the
homes, Plaintiffs incurred a variety of costs they had to pay,
including paying property taxes, securing the property (when the
builder abandoned the construction but before the sale of the
partially constructed homes to another builder on a short-sale
basis), and paying interest reserves on the loans. 	In addition,
as a result of the short sale for the unfinished construction,
Plaintiffs not only incurred income tax liability but also are
paying off the remaining liability to the Bank over a ten-year
period at 4% interest. 	Clearly what happened was that Debtor
engaged in a speculative venture to develop portions of a
subdivision, in effect relying heavily on Plaintiffs’ funding and
the leverage that Plaintiffs’ funding enabled. 	Were the real
estate market not to have collapsed when it did, the venture
might have worked. 	Obviously it did not, and so Debtor’s
misrepresentations have come back to haunt her.
After the pleadings (complaint and answer) were filed, the
parties engaged in discovery. 	The conduct of the adversary
proceeding required several hearings, all of which were attended
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by Debtor in person. 	The discovery process proceeded desultorily
until the Court conducted a final status conference, which served
as a final pretrial conference, on December 6, 2011. 	Debtor
failed to appear at that status conference, which had been
noticed out on November 24, 2011. 	Doc 58. 	At the status
conference the Court set a trial date of January 5, 2012. 	Doc
61. 	The notice/order arising out of the status conference, doc
61, contained the following language in decretal paragraph 3: “If
Defendant fails to appear at the hearing, the Court may enter a
judgment of liability and conduct a hearing on damages. If
Defendant does appear at the hearing, the Court will likely use
the hearing to schedule another trial date.”
The Order/Notice was served on Debtor by the Bankruptcy
Noticing Center at the address that she was using throughout her
bankruptcy case and this adversary proceeding – 8338 Comanche
Road N.E., Ste. A, Albuquerque, New Mexico 87110-2357 – on
December 10, 2011. 	Doc 62. 	Two days later (December 12, 2011),
Debtor filed a change of address in the adversary proceeding,
stating that her new address was 1005 Waterford Drive,
Waxahachie, Texas 75167. 	Doc 63.
On January 5, 2012, Plaintiffs appeared for trial with their
counsel; Debtor did not appear. 	The Court took evidence and
orally rendered a default judgment of liability against Debtor
and in favor of Plaintiffs, and permitted Plaintiffs to submit a
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3The Court has subject matter and personal jurisdiction
pursuant to 28 U.S.C. §§ 1334 and 157(b); this is a core
proceeding pursuant to 28 U.S.C. §157(b)(2)(I); and these are
findings of fact and conclusions of law as may be required by
Rule 7052 F.R.B.P.
Page 4 of 	11
summary in writing of the various damages they there were
seeking. 	Minutes – doc 64. 	Plaintiffs did so by submitting an
Exhibit C and an Exhibit D directly to the Court, which the Court
has now filed in CM (doc 66 – attachments C and D). 	Thus, the
adversary proceeding is now ripe for a ruling on the damages and
for closing 3 .
As Exhibits C and D illustrate, Plaintiffs claim a variety
of damages. 	Had Defendant appeared to defend, the Court might
well have awarded fewer damages on the basis of lack of either a
causal connection with or justifiable reliance on the fraudulent
misrepresentations. 	However, with Defendant having conceded
those issues and the rest of the liability issues by not
appearing, the Court awards damages as set out at the end of this
memorandum opinion.
The first item of damages for each set of Plaintiffs is the
loan each made to Debtor. 	That item clearly constitutes
allowable damages.
The second category of items is comprised of the payments
made to the Bank pursuant to the respective construction loans
which each set of Plaintiffs executed, including the interest
reserves on the construction loans, and the amounts still owed to
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Page 5 of 	11
the Bank. 	It appears that Plaintiffs each became obligated on
these respective loans because of Debtor’s representations
(including the false representations which were a major part of
the representations), and would not have done so but for Debtor’s
representations. 	Whether Plaintiffs’ reliance on those
representations was justifiable, see Field v. Mans, 516 U.S. 59
(1995), is no longer at issue. 	Therefore this category of
damages is also allowable.
Third are the expenses incurred in protecting the real
property in which each set of plaintiffs invested: paying
subcontractors, paying property taxes and securing the property.
Having allowed the damages for the underlying loan obligation,
the cost of protecting the collateral is also allowable.
The income tax consequences of the short sale are not
allowable (although this is a closer question). 	The Restatement
(Second) of Torts, § 548A (1977) provides as follows:
Legal Causation of Pecuniary Loss
A fraudulent misrepresentation is a legal cause of a
pecuniary loss resulting from action or inaction in
reliance upon it if, but only if, the loss might
reasonably be expected to result from the reliance.
And § 549 provides in relevant part as follows:
Measure of Damages for Fraudulent Misrepresentation
(1) The recipient of a fraudulent misrepresentation is
entitled to recover as damages in an action of deceit
against the maker the pecuniary loss to him of which
the misrepresentation is a legal cause, including
(a) ...
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(b) pecuniary loss suffered otherwise as a
consequence of the recipient’s reliance upon
the misrepresentation.
Finally, the comment on clause 1(b) of § 549 recites in part:
These “indirect” or “consequential” damages resulting
from the misrepresentation are recoverable if the
misrepresentation is a legal cause of them, as stated
in § 548A. 	This means that they must be of a kind that
might reasonably be expected to result from reliance
upon the misrepresentation.
See also Sunnyland Farms, Inc. v. Central New Mexico Electric
Cooperative, Inc., 149 N.M. 746, 752-761, 255 P.3d 324, 330-39
(Ct. App.), cert. granted 150 N.M. 667, 265 P.3d 718 (2011)
(stricter limits on damages arising from the foreseeability
doctrine in contract context, citing, inter alia, Hadley v.
Baxendale,156 Eng. Rep. 145 (1854)).
In this instance, the Court finds that the income tax
consequences of the short sale are consequential damages that
would not have been incurred but for the investment arising out
of the misrepresentations. 	However, the Court also finds that
these losses would not have been reasonably contemplated as
potential damages at the time the misrepresentations and the
investments were made. 	That there might be losses if the project
failed? - clearly foreseeable (at least in theory). 	That there
would be income tax obligations arising out of a short sale after
the contractor abandoned the project following a real estate
market crash? - not so much. 	Therefore the losses arising from
the income tax consequences are not allowed.
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Court costs are routinely allowed; the Court takes the term
“litigation expenses” to mean items that would be allowed as
court costs. 	They will be allowed.
The Court makes no award for attorney fees. 	(This is not a
close question.) 	The “American rule” is that each party bears
its own fees unless otherwise provided for by a contract, statute
or rule of court. 	“Thus, the ‘American Rule’ applies to those
non-contract claims, and each party must bear its own attorneys
fees and expenses.” 	Fortier v. Dona Anna Plaza Partners, 747
F.2d 1324, 1338 (10 th Cir. 1984) (citations omitted). 	Glass v.
Pfeffer, 657 F.2d 252 (10 th Cir. 1981), reversed on other grounds
Cox v. Flood, 683 F.2d 330 (10 th Cir. 1982), does not provide
support for an award of attorney fees. 	That case dealt with a
civil rights action against police officers, which resulted in
judgment for the officers and the assessment of attorney fees
essentially as sanctions against counsel. 	The Tenth Circuit did
refer to the trial court’s inherent authority to award attorney
fees, id. at 257-58, citing inter alia Roadway Express, Inc. v.
Piper, 447 U.S. 752, 757-62 (1980), but that was in the context
of punishing counsel for misbehavior in frivolously pursuing the
litigation against one of the defendants. 	In this adversary
proceeding, of course, there has been no such misbehavior as part
of the litigation, and Glass v. Pfeffer provides no support for
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awarding attorney fees for the fraudulent behavior asserted as
part of the cause of action.
The federal judgment interest rate, 28 U.S.C. § 1961,
effective for the week ending April 27, 2012 was 0.18% per annum.
See http://www.federalreserve.gov/releases/h15/current/ (last
visited May 3, 2012).
Damages should therefore be awarded as follows:
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4Principal balance due to bank, $22,503.85 at 4% interest
per year (0.3333% per month) results in monthly amount due of
$227.84 for ten years. 	See 	http://www.investopedia.com (follow
“Free Tools” hyperlink; then follow “Calculators” hyperlink; then
follow “Monthly Mortgage Payments” hyperlink)(last visited May 3,
2012). 	The present value of an annuity of $227.84 for 120 months
at the federal judgment rate of 0.18% per year (0.015% per
month)is $27,094.19. 	See 	http://www.investopedia.com (follow
“Free Tools” hyperlink; then follow “Calculators” hyperlink; then
follow “Present Value of an Annuity” hyperlink)(last visited May
3, 2012).
Page 9 of 	11
To Salomon and Julie Luna,
ITEM 	AMOUNT
To Debtor:
Loan 	$ 	47,000.00
Accrued interest 	$ 	41,684.99
Total Debtor 	$ 	88,684.99
Payments to Bank:
On loan 	$ 	1,670.97
Interest reserves 	$ 	6,280.55
Present value of
future payments to
be made 4
$ 	27,094.19
Total Bank 	$ 	35,045.71
To Others:
Real estate taxes 	$ 	1,304.38
Securing property 	$ 	168.91
Court costs and
litigation expenses
$ 	13,199.10
Total Others 	$ 	14,672.39
Total Judgment 	$ 	138,403.09
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5Principal balance due to bank, $18,424.00 at 4% interest
per year (0.3333% per month) results in monthly amount due of
$186.53 for ten years. 	See 	http://www.investopedia.com (follow
“Free Tools” hyperlink; then follow “Calculators” hyperlink; then
follow “Monthly Mortgage Payments” hyperlink). 	The present value
of an annuity of $186.53 for 120 months at the federal judgment
rate of 0.18% per year (0.015% per month)is $22,181.70. 	See
http://www.investopedia.com (follow “Free Tools” hyperlink; then
follow “Calculators” hyperlink; then follow “Present Value of an
Annuity” hyperlink).
Page 10 of 	11
To Ricky and Mary Swift,
ITEM 	AMOUNT
To Debtor:
Loan 	$ 	40,000.00
Accrued interest 	$ 	12,800.00
Total Debtor 	$ 	52,800.00
Payments to Bank:
On loan 	$ 	0.00
Interest reserves 	$ 	12,138.92
Present value of
future payments to
be made 5
$ 	22,181.70
Total Bank 	$ 	34,320.62
To Others:
Subcontractors 	$ 	9,159.02
Real estate taxes 	$ 	2,604.00
Securing property 	$ 	8,300.00
Court costs and
litigation expenses
$ 	13,199.10
Total Others 	$ 	33,262.12
Total Judgment 	$ 	120,382.74
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6No interest shall accrue on the $41,684.99 of the judgment
that represents accrued unpaid interest.
7No interest shall accrue on the $12,800.00 of the judgment
that represents accrued unpaid interest.
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CONCLUSION
The Court will enter a judgment 1) declaring a debt to
Salomon and Julie Luna nondischargeable in the amount of
$138,403.09, with interest to accrue at the federal judgment rate
of 0.18% per annum on the amount of $96,718.10 until paid 6 ; and
2) declaring a debt to Ricky and Mary Swift nondischargeable in
the amount of $120,382.74, with interest to accrue at the federal
judgment rate of 0.18% per annum on the amount of $107,582.74
until paid 7.
Honorable James S. Starzynski
United States Bankruptcy Judge
Date Entered on Docket: 	May 4, 2012
Copies to:
B. Kay Shafer
Law Office of B. Kay Shafer
3240-D Juan Tabo NE
Albuquerque, NM 87111
Christina May Coombs
1005 Waterford Drive
Waxahachie, TX 75167
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