Reliance re. Ability to Create a Security Interest–Draper v. Cashner, LLC

Draper v. Cashner, LLC, 2014 WL 1051927 (Mo. Ct. App. E.D.), examines allegations of fraud in connection with a loan that was supposed to be secured by an LLC interest. However, the LLC agreement required unanimous consent to the creation of a security interest. The debtor’s brief states the following:

Douglas G. Draper and Charles C. Cashner testified that they expected the $1,000,000 loan to be short term. Tr. at 80- 86, 112-117. Draper admitted he received all of the stock purchased with the $1,000,000 loan with stock powers. Tr. at 88-89. In other words, he was completely secure under the agreement and, in addition, had claimed  interests in both Speed Lube LLC and Plant Maintenance Services LLC as additional security if needed. Tr. at 88-90. Draper could not recall what was said over the phone before he made the loan, see Tr. at 83-86, or the number of conversations he had concerning the loan. Tr. at 83-84. The transaction was casual, see Tr. at 84, because he trusted Cashner to pay him back. Tr. at 84-85. Draper was a member/manager of Speed Lube, LLC, but said he never read the operating agreement before making the loan. Tr. at 70-77. Cashner paid $432,340 to Draper on the notes. L.F. at 125; Tr. at 450-457. The interest rate on the June 24, 2002 note was modified on October 1, 2004 and the maturity was extended to June 30, 2006. Tr. at 53-54. On July 6, 2005, Douglas G. Draper made another loan of $250,000 to Cashner for additional stock which was also delivered to secure this note. Tr. at 87-88. The security agreement was not discussed at this time. Tr. at 92. Draper didn’t know one way or the other if interests in the limited liability companies could be pledged. Tr. at 91-92. He had access to the operating agreements for Speed Lube, LLC and Plant Maintenance Services, LLC. Tr. at 94. Not knowing what the documents stated, he trusted and relied on Cashner to determine if he could make the pledge. Tr. at 92. This is not reasonable reliance. Applying the elements of “fraud,” there was no evidence to support a finding of misrepresentation or reasonable reliance. The Judgment ignores the fact that Douglas G. Draper was a sophisticated businessman and an original member/manager of Speed Lube LLC.

Because Draper did not reasonably rely on any material misstatement of fact and did not prove the requisite elements of fraud, the Judgment for fraud should be reversed and set aside. Alternatively, should this Court find fraud, the judgment for fraud should be reversed because the lender has elected to enforce the notes and security agreement, which is inconsistent with the claim of fraud.

We are here interested in the last paragraph. The brief goes on and on, making it somewhat difficult to figure out exactly what was the nature of the alleged fraud. Additionally, after the lengthy discussion of facts, it merely provides a conclusion–reliance should not be considered reasonable or that there was not a misstatement of fact–without adequate discussion and analysis of supporting authority (other inapposite discussion above of Angelin Eng’g Co. v. Bay Co., 912 S.W.2d 633, 639 (Mo. Ct. App. 1995)).

There is a duty to read the particular contract in question. So, a claim alleging reliance on inaccurate statements concerning the import of a contract can be found not to be reasonable. Doctor’s Associates v. Stuart, 85 F.3d 975 (2d Cir. 1996), is illustrative. This author is not entirely convinced that the law should be so solicitous of the interests of those who are inclined to misstate the import of a contract being negotiated, as in Doctor’s Associates. Nevertheless, there is some authority for that proposition. However, insofar as a brief read of the brief correctly indicates the claim is that one cannot rely on alleged misstatement as to the import of some extrinsic writing, it is not clear why the aggressive view, of the type illustrated by Doctor’s Associates, should extend to extrinsic writings.

The discussion, also without authority directly addressing the matter, seems to indicate that a promise not to perform without the ability to perform is inadequate to give rise to promissory fraud. There is certainly some old authority to that effect:

A mere breach of a contract does not amount to a fraud, and neither a knowledge of inability to perform, nor an intention not to do so, would make the transaction fraudulent.

Miller v. Sutliff, 89 N.E. 651, 652 (Ill. 1909) (a case subject to subsequent exposition and development). Of course, a fraud claim, requiring scienter, would would be suspect here absent knowledge by the debtor of its inability to create the security interest. The brief is too cryptic to illuminate the pertinent facts to the casual reader. But, were there allegations of such knowledge, one would hope for collection of authority on the point.