Michael John Hernandez v. General Mills Federal Credit

Citations: 860 F.3d 591; 77 Collier Bankr. Cas. 2d 1611; 2017 WL 2561107; 2017 U.S. App. LEXIS 10533; 64 Bankr. Ct. Dec. (CRR) 83Docket: 16-3111

Court: Court of Appeals for the Eighth Circuit; June 14, 2017; Federal Appellate Court

Original Court Document: View Document

SummaryOriginalCytator Case TreatmentBackward CitatorAnalysis

EnglishEspañolSimplified EnglishEspañol Fácil

General Mills Federal Credit Union initiated an adversary proceeding to challenge the dischargeability of a debt in Michael John Hernandez's Chapter 7 bankruptcy. The bankruptcy court ruled that the debt was not dischargeable, a decision upheld by the district court and now affirmed by the Eighth Circuit. 

The case centers on a series of financial transactions involving Hernandez and his grandparents, Joseph and Stella Hernandez, who owned a home in St. Paul, Minnesota. In June 2003, they transferred the home's title to Hernandez while retaining a life estate. Subsequently, Hernandez participated in multiple mortgage transactions with General Mills, including a $185,000 mortgage in October 2003 to pay off the existing mortgage and consolidate personal debts, and a $30,000 home equity loan in April 2004.

In May 2004, another mortgage for $222,300 was executed for further debt consolidation, with Hernandez signing as both himself and as attorney-in-fact for his grandparents under notarized powers of attorney (POAs). In March 2005, Hernandez secured a home equity line of credit, again signing for his grandparents with new POAs that had blank signature spaces. 

Concerns arose in 2007 when Joseph and Stella began facing foreclosure due to missed payments on the loans. Their niece, Vicki Giller, discovered potential forgery in the signatures on the 2005 POAs. Giller testified that Joseph and Stella denied signing the 2004 and 2005 POAs, and noted discrepancies regarding the notarization locations. She suspected fraud, filed a police report, and contacted Adult Protective Services. In August 2008, Stella revoked the POAs related to Hernandez, and in March 2009, both grandparents filed a fraud complaint against him and General Mills in Ramsay County District Court.

The complaint alleged that Joseph and Stella did not sign the 2004 or 2005 Powers of Attorney (POAs), and that their signatures were forged. Hernandez was accused of falsely claiming he had the authority to sign loan documents for his grandparents. General Mills denied these allegations due to insufficient knowledge and made a cross-claim against Hernandez for indemnity if required to rescind the mortgages or pay damages. In June 2010, the court dismissed Joseph and Stella's claims with prejudice for failing to comply with procedural rules, while allowing defendants to enforce any rights regarding liens or mortgages. An August 2010 stipulation dismissed all claims between co-defendants without prejudice.

In 2011, a newspaper article summarized these events, which was disputed by Regina Griffith, Joseph and Stella's granddaughter. At the time of the 2015 adversary proceeding, Joseph had died, and Stella resided in a nursing home. Griffith testified against Giller, who had obtained power of attorney for Stella in 2013 but was later revoked in favor of Griffith. Griffith contended Giller had stolen from Stella and presented hearsay that Stella claimed Hernandez did not forge their signatures.

Hernandez defaulted on the loan in April 2009 and filed for Chapter 7 bankruptcy in March 2014. General Mills initiated an adversary proceeding to argue the debt was non-dischargeable due to fraud under 11 U.S.C. 523(a)(2)(A). The bankruptcy court rejected Hernandez's defenses of res judicata and statute of limitations. Testimony from Cheryl Engh, the alleged notary for the 2005 POAs, was critical; she stated the signatures were not hers and she did not recall notarizing those documents. The court admitted conflicting hearsay from Giller and Griffith and the newspaper article. A complete version of the loan agreement was admitted as evidence, which included Hernandez's signatures. The court found that General Mills met the criteria to except the loan from discharge based on the evidence presented.

Hernandez's invocation of his Fifth Amendment right against self-incrimination during questioning about discrepancies in his 2004 loan application led the bankruptcy court to interpret this negatively, resulting in the nondischargeability of his debt of $122,115.25, plus interest. The district court affirmed this decision, and Hernandez is now appealing. He claims the bankruptcy court erred in dismissing his defenses of res judicata and statute of limitations, in certain evidentiary rulings, and in finding his debt nondischargeable under 11 U.S.C. § 523(a)(2)(A). The standard for reviewing these decisions involves assessing factual findings for clear error and legal conclusions de novo.

Regarding res judicata, Hernandez argues that a prior dismissal of fraud claims in state court should preclude further litigation of the fraud issue in bankruptcy. The bankruptcy court determined that the state court's dismissal of cross-claims without prejudice did not provide a preclusive effect, as the full faith and credit statute requires adherence to the preclusion law of the state where the judgment was rendered. Under Minnesota law, claim preclusion applies if there was a judgment on the merits involving the same parties and cause of action, but this was not the case here since the claims were dismissed without prejudice. Minnesota Rule of Civil Procedure 41.01(a)(2) allows for voluntary dismissal of claims by stipulation, which was signed by all parties involved, meaning there was no final adjudication on the merits that would trigger res judicata.

A dismissal without prejudice under Rule 41.01(a) does not operate as a final adjudication on the merits unless specified otherwise, particularly in Minnesota law. Hernandez's claim preclusion defense was rejected because he did not provide contrary authority. Issue preclusion in Minnesota requires that (1) the issue must be identical to that in a prior adjudication, (2) there must be a final judgment on the merits, (3) the estopped party must be a party or in privity with a party in the prior adjudication, and (4) the estopped party must have had a full and fair opportunity to be heard. The court examined whether Hernandez’s alleged fraud was litigated against his grandparents, determining that no final judgment on the merits had occurred. Although the fraud claims were dismissed with prejudice for failure to prosecute, Minnesota law treats such dismissals as adjudications on the merits only if not specified otherwise by the court. The state court clarified that its order did not affect the defendants' rights regarding property interests. Consequently, General Mills' claim regarding Hernandez's promissory note was not precluded. Hernandez's argument for judicial estoppel was dismissed, as this doctrine has not been adopted by Minnesota courts, and General Mills' positions were not inconsistent. Lastly, Hernandez's assertion that the dismissal of fraud claims should preclude further litigation was rejected since that dismissal did not constitute a final judgment. The stipulation indicating no pending claims did not imply an adjudication on the merits of the fraud claim.

Hernandez contends that General Mills' fraud claims are barred by Minnesota's six-year statute of limitations for fraud actions, as outlined in Minnesota Statutes 541.05. Although General Mills filed its complaint nine years after the alleged fraud in 2005, the bankruptcy court determined that the claim did not accrue until 2009 when Joseph and Stella's lawsuit revealed the fraud, which is within the statutory period. Hernandez challenges the testimony of bank employee Harry Charles Ross III, arguing it does not establish when the bank became aware of potential fraud since Ross had limited exposure to the loan documents and was not present at the closing. However, the court found Ross's testimony relevant based on his familiarity with General Mills' practices, indicating that the bank did not investigate the authenticity of the 2005 powers of attorney at closing and lacked reason to do so until the 2009 lawsuit.

Additionally, Hernandez argues that Minnesota law requires a party to exercise reasonable diligence to discover fraud. The Minnesota Supreme Court has stated that the discovery of fraud occurs when it could have been discovered with reasonable diligence, and mere failure to discover it does not extend the limitation period if it results from negligence. The cases cited by Hernandez highlight scenarios where the plaintiffs had prior knowledge that should have put them on notice of fraud. In contrast, the current case does not demonstrate that General Mills had such information prior to 2009.

A plaintiff must demonstrate reasonable diligence upon having notice of a potential fraud cause of action, as established in Buller. Hernandez failed to provide evidence that General Mills was aware of potential fraud at the time of the 2005 loan; thus, the statute of limitations did not begin until the 2009 complaint. The bankruptcy court's rejection of Hernandez's limitations defense is affirmed. 

Hernandez challenged the admission of hearsay testimonies from Giller and Griffith, as well as a St. Paul Pioneer Press article, while contesting the exclusion of Exhibit BB. The court reviews evidentiary rulings for clear and prejudicial abuse of discretion. The bankruptcy court admitted Giller's and Griffith's hearsay testimonies under the residual hearsay exception and allowed the article despite objections. Exhibit BB was excluded due to authenticity issues, lack of relevance, and absence from the final exhibit list. While the court expressed doubts about the hearsay rulings, it found no prejudice to Hernandez, as the court's findings did not rely on the hearsay evidence.

For dischargeability under 11 U.S.C. § 523(a)(2)(A), a debt is non-dischargeable if obtained through false pretenses or fraud. The creditor must prove five elements by preponderance of the evidence. The court construes exceptions to discharge narrowly, and factual determinations regarding these elements are reviewed for clear error. Hernandez primarily contests the second, third, and fourth elements of this standard.

Hernandez contends that his 2005 affidavit asserting he was the attorney-in-fact for Joseph and Stella was truthful, claiming the affidavit initially had a blank date, which General Mills later filled in, and that the 2004 Powers of Attorney (POAs) remained valid until revoked in 2008. However, the bankruptcy court found Hernandez's assertions unconvincing due to the lack of corroboration and noted his personal benefit from the loan proceeds raised credibility concerns. Additional evidence supported the court's findings, including a 2008 document revoking prior authority, testimony that the signatures on the POAs were not authentic, and a discredited notarization.

Regarding intent to deceive, Hernandez argues that General Mills must prove he did not intend to repay the loan, citing his timely payments until losing his job. The court rejected this argument, clarifying that under 11 U.S.C. 523(a)(2)(A), intent only requires demonstrating that Hernandez aimed to deceive General Mills to obtain credit. Prior case law indicates that fraudulent intent can be inferred from the circumstances, and Hernandez's representation was instrumental in securing the loan. Consequently, the bankruptcy court's determination that Hernandez intentionally misled General Mills was upheld.

Hernandez contends that General Mills did not justifiably rely on the 2005 Powers of Attorney (POAs) when extending credit to him. He cites Ross's testimony indicating General Mills typically requires borrowers to sign documents for reliance, noting the absence of his signature on the 2005 POAs. While acknowledging that Minnesota law did not mandate such a signature in 2005, Hernandez argues that General Mills' policy necessitated it. He also points out that a POA was not needed for a separate $30,000 loan, concluding that General Mills generally did not require POAs for second mortgages. Thus, he posits that the lack of his signature should have raised suspicions, making any reliance unjustifiable.

The distinction between justifiable and reasonable reliance is emphasized, with the former being specific to the plaintiff’s circumstances rather than a community standard. A victim of fraud must investigate if facts suggest deception. The bankruptcy court found General Mills' reliance on Hernandez's representation justifiable, partly due to his signed affidavit, and did not identify any obvious signs of fraud in the documents. Additionally, the absence of a POA for the $30,000 loan was logical since it was solely in Hernandez's name, unlike the 2005 Loan requiring signatures from him and his grandparents.

In reviewing the overall record, the court found no clear error in concluding that Hernandez's debt was non-dischargeable under 11 U.S.C. § 523(a)(2)(A). Hernandez did not challenge the bankruptcy court's finding that the necessary elements for this exception were met, nor did he contest the negative inference drawn from his Fifth Amendment invocation. The court affirmed the bankruptcy court's decision that Hernandez's debt was not dischargeable.