In re: Brent Roy Sepulveda ( 2017 )

FILED
APR 26 2017
1 NOT FOR PUBLICATION
SUSAN M. SPRAUL, CLERK
U.S. BKCY. APP. PANEL
2 OF THE NINTH CIRCUIT
3 UNITED STATES BANKRUPTCY APPELLATE PANEL
4 OF THE NINTH CIRCUIT
5 In re: ) BAP No. CC-16-1226-FLKu
)
6 BRENT ROY SEPULVEDA, ) Bk. No. 8:13-bk-17965-SC
)
7 Debtor. ) Adv. Pro. 8:14-ap-01003-SC
______________________________)
8 )
BRENT ROY SEPULVEDA, )
9 )
Appellant, )
10 )
v. ) MEMORANDUM*
11 )
GEORGE ADAMS, JR., )
12 )
Appellee. )
13 ______________________________)
14 Argued and Submitted on March 23, 2017
at Pasadena, California
15
Filed – April 26, 2017
16
Appeal from the United States Bankruptcy Court
17 for the Central District of California
18 Honorable Scott C. Clarkson, Bankruptcy Judge, Presiding
19
Appearances: David C. Codell argued on behalf of appellant
20 Brent Roy Sepulveda; Ryan Daniel O’Dea of Shulman
Hodges & Bastian LLP argued on behalf of appellee
21 George Adams, Jr.
22
Before: FARIS, LAFFERTY, and KURTZ, Bankruptcy Judges.
23
24
25
26 *
This disposition is not appropriate for publication.
27 Although it may be cited for whatever persuasive value it may
have, see Fed. R. App. P. 32.1, it has no precedential value, see
28 9th Cir. BAP Rule 8024-1.
1 INTRODUCTION
2 Chapter 71 debtor Brent Roy Sepulveda appeals from the
3 bankruptcy court’s judgment in favor of creditor George Adams,
4 Jr. on Mr. Adams’s § 523(a)(2)(A) nondischargeability claim. He
5 argues that the court erred by (1) finding that he intended to
6 defraud Mr. Adams and (2) miscalculating the damages award to
7 Mr. Adams. We reject both arguments. Accordingly, we AFFIRM.
8 FACTUAL BACKGROUND
9 A. The joint business venture
10 This dispute arises from a business partnership between
11 Mr. Sepulveda and Mr. Adams. In 2000, the parties agreed to form
12 a joint venture whereby they would acquire real property and
13 construct and sell custom homes. In November 2000, they executed
14 a written agreement to construct four custom homes. Mr. Adams
15 was responsible for financing and obtaining construction loans,
16 and Mr. Sepulveda was responsible for the construction of the
17 homes through his company, Sepulveda Builders. Mr. Adams said
18 that Mr. Sepulveda represented that he maintained liability
19 insurance that would cover the construction of the custom homes.
20 Under the 2000 agreement, the parties constructed a home for
21 Ray and Tracy Arriola in Orange, California (the “Arriola
22 Property”) for $1.365 million. In 2004, Mr. Adams and
23 Mr. Sepulveda executed a second written agreement consistent with
24 the terms of the 2000 agreement. The 2004 agreement concerned
25
1
26 Unless specified otherwise, all chapter and section
references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532,
27 all “Rule” references are to the Federal Rules of Bankruptcy
Procedure, and all “Civil Rule” references are to the Federal
28 Rules of Civil Procedure.
2
1 the construction of a custom home for Robert and Liz Kofdarali in
2 Anaheim, California (the “Kofdarali Property”) for $3.1 million.
3 (For convenience, we will refer to the 2000 and 2004 agreements
4 collectively as the “Partnership Agreement.”)
5 B. The construction defect lawsuits
6 1. The Kofdarali lawsuit
7 In September 2007, the Kofdaralis filed suit (the “Kofdarali
8 Lawsuit”) against Mr. Adams and Mr. Sepulveda in state court for
9 construction defects related to the Kofdarali Property.
10 Mr. Adams asserted that, around this time, he discovered that
11 Mr. Sepulveda’s liability insurance did not cover home
12 construction; rather, it only covered home improvement and
13 remodeling. Accordingly, Mr. Sepulveda’s insurance carrier
14 refused to defend or indemnify Mr. Sepulveda and Mr. Adams in the
15 Kofdarali Lawsuit. Mr. Adams filed cross-claims against
16 Mr. Sepulveda for indemnity, contribution, and other causes of
17 action relating to fraud and misrepresentation.
18 The parties to the Kofdarali Lawsuit reached a settlement in
19 September 2010 that excluded Mr. Adams’s cross-claims against
20 Mr. Sepulveda. Neither Mr. Sepulveda nor his insurer contributed
21 to the costs of defense or the settlement.
22 2. The Arriola lawsuit
23 In May 2008, the Arriolas filed a state court lawsuit (the
24 “Arriola Lawsuit”) against Mr. Adams and Mr. Sepulveda for
25 construction defects associated with the Arriola Property.
26 Again, Mr. Sepulveda’s insurance carrier denied coverage, and
27 Mr. Adams filed cross-claims against Mr. Sepulveda for
28 contribution and reimbursement.
3
1 3. The settlement agreement
2 In January 2011, Mr. Adams and Mr. Sepulveda entered into a
3 settlement agreement (“Settlement Agreement”) that resolved
4 Mr. Adams’s cross-claims against Mr. Sepulveda in the Arriola
5 Lawsuit and the Kofdarali Lawsuit. The Settlement Agreement
6 provided that: (1) Mr. Sepulveda would transfer real properties
7 in Yorba Linda, California to Mr. Adams in consideration of the
8 expenses Mr. Adams incurred in defending and settling the
9 Kofdarali Lawsuit and defending the Arriola Lawsuit; (2) the
10 parties would share equally the future costs of defense of the
11 Arriola Lawsuit; and (3) the parties would share equally the
12 costs of the judgment or settlement of the Arriola Lawsuit. In
13 return, Mr. Adams agreed to dismiss the cross-claims and waive
14 his rights to reimbursement from Mr. Sepulveda for all
15 previously-incurred attorneys’ fees, costs, and expenses.
16 4. The Arriola Lawsuit judgment
17 In September 2011, the referee in the Arriola Lawsuit
18 awarded the Arriolas $370,116.66 (the “Arriola Judgment”) jointly
19 and severally against Mr. Adams and Mr. Sepulveda. The state
20 court entered the Arriola Judgment on October 17, 2011.
21 C. Mr. Adams’s state court action
22 Mr. Sepulveda partially performed under the Settlement
23 Agreement by transferring the Yorba Linda properties to
24 Mr. Adams. However, he failed to pay his share of the Arriola
25 Judgment and contribute to the post-January 2011 defense costs of
26 the Arriola Lawsuit. Therefore, Mr. Adams paid the entire
27 Arriola Judgment himself.
28 On January 27, 2012, Mr. Adams sued Mr. Sepulveda in state
4
1 court for fraud and breach of contract arising from
2 Mr. Sepulveda’s breach of the Settlement Agreement. In March, he
3 obtained an order for contribution against Mr. Sepulveda in the
4 Arriola Lawsuit for $185,058.28 and recorded an abstract of
5 judgment in that amount against Mr. Sepulveda’s residence. In
6 August, he recorded another abstract of judgment against
7 Mr. Sepulveda’s residence for $287,517.20, this time in
8 connection with the Kofdarali Lawsuit.
9 D. Mr. Sepulveda’s chapter 7 bankruptcy
10 On September 23, 2013, Mr. Sepulveda filed his chapter 7
11 petition.
12 On January 3, 2014, Mr. Adams filed his complaint to
13 determine nondischargeability of debt under §§ 523(a)(2)(A) and
14 (6). He requested a nondischargeable judgment in the amount of
15 at least $472,575.48.2
16 As to his § 523(a)(2)(A) claim, he alleged that
17 Mr. Sepulveda committed fraud by making multiple false statements
18 of material fact: (1) he falsely represented in 2000 that he had
19 liability insurance coverage for the construction of the custom
20 homes, despite knowing that his liability insurance covered only
21 home remodeling; and (2) he promised in 2011 to pay half of the
22 defense costs of the Arriola Lawsuit and subsequent judgment, but
23 never had any intention to do so. Mr. Adams said that he was
24 ignorant of the true facts and, had he known the truth about the
25 lack of insurance, he would not have gone into business with
26
2
27 By order dated July 9, 2014, the bankruptcy court
dismissed Mr. Adams’s § 523(a)(6) claim. That order is not the
28 subject of this appeal.
5
1 Mr. Sepulveda; he also would not have entered into the Settlement
2 Agreement if he had known that Mr. Sepulveda did not intend to
3 comply fully with the terms of the settlement.
4 In advance of trial on Mr. Adams’s § 523(a)(2)(A) claim, the
5 parties submitted their respective trial briefs and declarations
6 and a joint pretrial stipulation. Mr. Sepulveda agreed that he
7 lacked insurance coverage for construction of the custom homes.
8 However, he declared that he never represented to Mr. Adams that
9 he maintained contractor’s commercial general liability insurance
10 and that Mr. Adams never expressed to him that liability
11 insurance was important to him or was a requirement for agreeing
12 to the joint venture. In any event, he said that his then-wife
13 and office manager, Chelly Moore, handled all office duties and
14 paperwork, including managing Sepulveda Builders’s insurance
15 coverage. He said that she had “complete autonomy” in obtaining
16 and renewing liability insurance for the company and was solely
17 responsible for ensuring proper coverage.
18 Mr. Sepulveda further stated that he fully intended to
19 comply with the terms of the Settlement Agreement when he
20 executed it. His financial condition deteriorated after he and
21 Mr. Adams executed the Settlement Agreement due to his
22 contentious and lengthy divorce proceedings and declining
23 business income. He planned to borrow money to fulfill his
24 obligations. He offered Mr. Adams $300,000 in settlement of any
25 amounts due on the Settlement Agreement, but Mr. Adams did not
26 accept the offer.
27 At trial, Mr. Adams’s counsel cross-examined Mr. Sepulveda
28 about $200,000 that he received from the sale of his residence in
6
1 January 2011. Mr. Sepulveda admitted that, although he received
2 the funds around the time that he entered into the Settlement
3 Agreement, he did not set aside any of the monies to pay for
4 defense costs or judgment in the Arriola Lawsuit. Following
5 trial, the bankruptcy court took the matter under advisement.
6 E. The memorandum decision
7 The bankruptcy court entered its memorandum of decision on
8 July 5, 2016. It analyzed whether Mr. Sepulveda made a
9 misrepresentation or engaged in fraudulent conduct in connection
10 with the Partnership Agreement and the Settlement Agreement. It
11 concluded that both agreements resulted from Mr. Sepulveda’s
12 misrepresentations or fraudulent actions.
13 The court found that Mr. Sepulveda misrepresented his
14 construction liability coverage in order to induce Mr. Adams to
15 enter into the Partnership Agreement. Mr. Adams discussed
16 insurance coverage with Mr. Sepulveda and made clear that he was
17 concerned with the possibility of future construction defect
18 litigation. Mr. Sepulveda presented Mr. Adams with a certificate
19 of general liability insurance and told him that the policy
20 covered liability for “ground-up” construction of the custom
21 homes.
22 The court also found that Mr. Sepulveda knew that he lacked
23 proper liability insurance. The court pointed to Ms. Moore’s
24 testimony that Mr. Sepulveda instructed her to keep costs down
25 and only maintain remodeling insurance and that she only filled
26 out insurance applications at Mr. Sepulveda’s direction. The
27 court found Ms. Moore’s testimony credible, while Mr. Sepulveda’s
28 testimony was “evasive and not credible.”
7
1 The court further said that Mr. Sepulveda intended to
2 deceive Mr. Adams when he represented that he had proper
3 construction liability insurance. Ms. Moore testified that
4 Mr. Sepulveda told her that he understood that Mr. Adams wanted
5 construction liability insurance. However, the court said that
6 Mr. Sepulveda “deliberated and conducted a cost-benefit analysis”
7 and determined that he would save money by not obtaining the
8 additional coverage.
9 The court found that Mr. Adams justifiably relied on
10 Mr. Sepulveda’s representations that he held construction
11 liability insurance; Mr. Adams had no reason to believe that
12 Mr. Sepulveda was lying about the insurance coverage.
13 The court determined that Mr. Sepulveda’s misrepresentation
14 was a direct and substantial cause of Mr. Adams’s damages
15 incurred during the Arriola Lawsuit. Because Mr. Adams relied on
16 Mr. Sepulveda’s representations, he was not covered by insurance
17 when construction defects arose and had to pay for defense costs
18 and damages in the Arriola Lawsuit.
19 Regarding the Settlement Agreement, the court said that
20 Mr. Sepulveda lacked a present intent to perform or had a
21 positive intent not to perform. The court did not find credible
22 Mr. Sepulveda’s testimony that he intended to perform and had the
23 financial ability to do so.
24 The court found that Mr. Sepulveda knew or should have known
25 that he could not perform under the Settlement Agreement, because
26 he lacked the financial wherewithal to do so. Mr. Sepulveda was
27 living off of his savings, his business income had declined by
28 ninety-five percent, and he was involved in a contentious
8
1 divorce. He knew that the Settlement Agreement required him to
2 pay for prospective defense costs, but he did not allocate any of
3 the $200,000 he received from the sale of his home toward the
4 Arriola Lawsuit.
5 The court determined that the transfer of the Yorba Linda
6 properties did not indicate an intent to perform; rather, the
7 partial performance was just enough to allow Mr. Sepulveda to
8 obtain a dismissal of Mr. Adams’s cross-claims against him.
9 Moreover, the court found that Mr. Sepulveda recklessly
10 disregarded the truth of his representation that he intended to
11 perform fully because he knew that he did not have sufficient
12 assets and was not earning sufficient income to satisfy the
13 Settlement Agreement.
14 The court found that Mr. Adams justifiably relied on
15 Mr. Sepulveda’s representations, even though, by the time he
16 signed the Settlement Agreement, Mr. Adams knew that
17 Mr. Sepulveda had misrepresented the status of his insurance
18 coverage.
19 The court found that Mr. Sepulveda’s misrepresentation was a
20 substantial and important cause of the damages Mr. Adams
21 incurred. It said that there was no dispute that, if Mr. Adams
22 had known that Mr. Sepulveda did not intend to comply with the
23 Settlement Agreement, he would not have agreed to it and could
24 have continued to pursue his cross-claims against Mr. Sepulveda.
25 Regarding damages, the court granted Mr. Adams’s request in
26 full (excluding attorneys’ fees). It awarded Mr. Adams damages
27 for his costs of defending the Arriola Lawsuit and satisfying the
28 Arriola Judgment, but subtracted the amount that Mr. Adams
9
1 recovered from the foreclosure sale of Mr. Sepulveda’s residence:
2 Arriola Judgment: $370,116.55
Arriola Lawsuit Defense: $195,199.91
3 Arriola Lawsuit Consultant Fees: $18,401.81
State Court Action Fees/Costs: $94,993.43
4 (Recovery from Sepulveda foreclosure): ($151,000.00)
Total damages: $527,711.70
5
6 The court entered its judgment in the amount of $527,711.70
7 in favor of Mr. Adams, and Mr. Sepulveda timely appealed.
8 JURISDICTION
9 The bankruptcy court had jurisdiction pursuant to 28 U.S.C.
10 §§ 1334 and 157(b)(2)(I). We have jurisdiction under 28 U.S.C.
11 § 158.
12 ISSUE
13 Whether the bankruptcy court erred in awarding Mr. Adams
14 $527,711.70 and determining that the award was nondischargeable
15 under § 523(a)(2)(A).
16 STANDARDS OF REVIEW
17 In bankruptcy discharge appeals, we review the bankruptcy
18 court’s findings of fact for clear error and conclusions of law
19 de novo, and apply de novo review to mixed questions of law and
20 fact. Oney v. Weinberg (In re Weinberg), 410 B.R. 19, 28 (9th
21 Cir. BAP 2009), aff’d, 407 F. App’x 176 (9th Cir. 2010) (citation
22 omitted). De novo review requires that we consider a matter
23 anew, as if no decision had been rendered previously. United
24 States v. Silverman, 861 F.2d 571, 576 (9th Cir. 1988).
25 We review the bankruptcy court’s findings of fact for clear
26 error. See Honkanen v. Hopper (In re Honkanen), 446 B.R. 373,
27 378 (9th Cir. BAP 2011); see also Anastas v. Am. Sav. Bank
28 (In re Anastas), 94 F.3d 1280, 1283 (9th Cir. 1996) (“A finding
10
1 of whether a requisite element of section [ ] 523(a)(2)(A) claim
2 is present is a factual determination reviewed for clear
3 error.”). “To be clearly erroneous, a decision must strike us as
4 more than just maybe or probably wrong; it must . . . strike us
5 as wrong with the force of a five-week-old, unrefrigerated dead
6 fish.” Papio Keno Club, Inc. v. City of Papillion (In re Papio
7 Keno Club, Inc.), 262 F.3d 725, 729 (8th Cir. 2001) (quoting
8 Parts & Elec. Motors, Inc. v. Sterling Elec., Inc., 866 F.2d 228,
9 233 (7th Cir. 1988)); see Anderson v. City of Bessemer City,
10 470 U.S. 564, 573 (1985) (A factual finding is clearly erroneous
11 if, after examining the evidence, the reviewing court “is left
12 with the definite and firm conviction that a mistake has been
13 committed.”). The bankruptcy court’s choice among multiple
14 plausible views of the evidence cannot be clear error. United
15 States v. Elliott, 322 F.3d 710, 714 (9th Cir. 2003).
16 “The bankruptcy court’s witness credibility findings are
17 entitled to special deference, and are also reviewed for clear
18 error.” In re Weinberg, 410 B.R. at 28 (citing Rule 8013;
19 Anderson, 470 U.S. at 573).
20 “[W]e review the legal standards used in the calculation of
21 damages de novo.” R.B. Matthews, Inc. v. Transamerica Transp.
22 Servs., Inc., 945 F.2d 269, 272 (9th Cir. 1991) (citing Galindo
23 v. Stoody Co., 793 F.2d 1502, 1516 (9th Cir. 1986)); see Oswalt
24 v. Resolute Indus., Inc., 642 F.3d 856, 859-60 (9th Cir. 2011)
25 (“We review de novo the legal conclusion that damages are
26 available and review for clear error factual findings underlying
27 the damages award.”); Ambassador Hotel Co. v. Wei-Chuan Inv.,
28 189 F.3d 1017, 1024 (9th Cir. 1999) (“The district court’s
11
1 computation of damages following a bench trial is reviewed for
2 clear error. However, the issue of whether the district court
3 applied the correct legal standard in computing damages receives
4 de novo review.”) (citations omitted).
5 DISCUSSION
6 A. The bankruptcy court correctly determined that Mr. Sepulveda
committed fraud in connection with the Partnership Agreement
7 and the Settlement Agreement.
8 Section 523(a)(2)(A) excepts from discharge a debt resulting
9 from “false pretenses, a false representation, or actual fraud,
10 other than a statement respecting the debtor’s or an insider’s
11 financial condition.” Regarding the elements necessary to prove
12 a § 523(a)(2)(A) claim, we have said:
13 A creditor seeking to except a debt from discharge
based on fraud bears the burden of proof by a
14 preponderance of the evidence to establish each of five
elements: (1) misrepresentation, fraudulent omission or
15 deceptive conduct; (2) knowledge of the falsity or
deceptiveness of such representation(s) or omission(s);
16 (3) an intent to deceive; (4) justifiable reliance by
the creditor on the subject representation(s) or
17 conduct; and (5) damage to the creditor proximately
caused by its reliance on such representation(s) or
18 conduct.
19 Sachan v. Huh (In re Huh), 506 B.R. 257, 262 (9th Cir. BAP 2014)
20 (citing Ghomeshi v. Sabban (In re Sabban), 600 F.3d 1219, 1222
21 (9th Cir. 2010); In re Weinberg, 410 B.R. at 35).
22 The court found that Mr. Adams satisfied all of these
23 elements for both the Partnership Agreement and the Settlement
24 Agreement. On appeal, Mr. Sepulveda argues that the bankruptcy
25 court erred in finding that he had a fraudulent intent or
26 fraudulently induced Mr. Adams to enter into the Settlement
27 Agreement. He fails to establish that the bankruptcy court
28 committed clear error.
12
1 1. Mr. Sepulveda does not appeal the court’s finding of
misrepresentation and fraud concerning the Partnership
2 Agreement.
3 In its memorandum decision, the bankruptcy court made clear
4 that Mr. Sepulveda committed fraud concerning both the
5 Partnership Agreement and the Settlement Agreement. It
6 independently analyzed each agreement and determined that both
7 satisfied the elements of § 523(a)(2)(A). Mr. Sepulveda’s
8 misrepresentations under either agreement form a sufficient basis
9 to deny dischargeability of the debt.
10 But on appeal, Mr. Sepulveda does not challenge the court’s
11 findings regarding the Partnership Agreement. He focuses
12 exclusively on the court’s purported errors concerning the
13 Settlement Agreement. On this basis alone, we can affirm the
14 bankruptcy court’s finding of fraud under § 523(a)(2)(A).
15 2. The bankruptcy court did not err in finding that
Mr. Sepulveda committed fraud regarding the Settlement
16 Agreement.
17 Mr. Sepulveda argues that the bankruptcy court erred in
18 finding that he had an intent to deceive Mr. Adams and that he
19 fraudulently induced Mr. Adams to enter into the Settlement
20 Agreement. We discern no error.
21 All of Mr. Sepulveda’s arguments challenge the bankruptcy
22 court’s factual findings and its findings of credibility. We
23 review these determinations for clear error, giving special
24 deference to the bankruptcy court’s credibility findings. See
25 In re Weinberg, 410 B.R. at 28.
26 a. Fraudulent intent
27 Mr. Sepulveda argues that the court erred by finding,
28 despite his partial performance, that he did not intend to
13
1 perform fully under the Settlement Agreement. He claims that the
2 court erroneously interpreted his financial situation and that he
3 could have performed on the day the Settlement Agreement was
4 executed.
5 But the court considered a number of factors when finding
6 that Mr. Sepulveda knew that he could not satisfy the terms of
7 the Settlement Agreement. It found that Mr. Sepulveda could not
8 fully perform because of: (1) Mr. Sepulveda’s lack of income
9 caused by a ninety-five percent decline in his income in the two
10 years prior to the execution of the Settlement Agreement; (2) his
11 need to borrow $40,000 from his parents, but his ability to only
12 pay back $20,000; (3) his lengthy, contentious, and expensive
13 divorce proceedings; (4) his inability to work due to childcare
14 responsibilities caused by the divorce; and (5) his failure to
15 set aside for the Arriola Lawsuit any of the $200,000 received
16 from the sale of his home. It also said that, even if
17 Mr. Sepulveda did not have an affirmative intention to not
18 perform, he acted with reckless disregard for the truth. The
19 court found that Mr. Sepulveda’s testimony was not credible. The
20 court made proper factual findings supported by the record and
21 did not clearly err.
22 Mr. Sepulveda argues that his partial performance evidenced
23 his good faith, because he otherwise had no reason to surrender
24 the Yorba Linda properties. The bankruptcy court correctly
25 observed that Mr. Sepulveda surrendered the Yorba Linda
26 properties to Mr. Adams so that he could obtain a quick dismissal
27 of Mr. Adams’s cross-claims against him in the Arriola Lawsuit.
28 The court also stated that Mr. Sepulveda’s testimony on this
14
1 topic was not credible. Again, we do not discern any clear
2 error.
3 Mr. Sepulveda argues that the court should not have relied
4 on his ex-wife’s testimony. But the court made specific findings
5 that Ms. Moore’s testimony was credible, while Mr. Sepulveda’s
6 testimony was not. Mr. Sepulveda does not convince us that these
7 findings were clearly erroneous.
8 b. Fraudulent inducement
9 Mr. Sepulveda argues that the bankruptcy court erred in
10 finding that he fraudulently induced Mr. Adams to enter into the
11 Settlement Agreement. We reject this argument.
12 He contends that the bankruptcy court conflated its analysis
13 of the Partnership Agreement with the Settlement Agreement, but
14 does not explain how the bankruptcy court confused the issues.
15 He says that the court “relied on previous inaccuracies in
16 testimony in assuming that Appellant did not intend to perform
17 when the Settlement Agreement was made.” But there is no
18 indication that the court assumed fraudulent intent in connection
19 with the Settlement Agreement based on its analysis of the
20 Partnership Agreement. Nor does Mr. Sepulveda identify the
21 supposed “previous inaccuracies in testimony.” We find no error.
22 Mr. Sepulveda also argues that he acted in good faith
23 because the Kofdarali Lawsuit settled without further litigation
24 and he offered to satisfy his remaining obligations under the
25 Settlement Agreement for $300,000. But neither of these factors
26 has anything to do with his intent when he entered into the
27 Settlement Agreement. The disposition of the Kofdarali Lawsuit
28 has little or no bearing on his agreement to pay for fees, costs,
15
1 and judgment in the Arriola Lawsuit. Moreover, Mr. Adams was not
2 obligated to accept the $300,000 settlement offer.
3 Finally, Mr. Sepulveda argues that the court erred by
4 finding that Mr. Adams had met his burden as to each element of
5 the § 523(a)(2)(A) claim because Mr. Adams did not provide
6 adequate evidence. Mr. Sepulveda fails to expand on this
7 argument. As the bankruptcy court discussed extensively,
8 Mr. Adams provided sufficient evidence to prevail on each element
9 of his claim.
10 Therefore, we hold that the bankruptcy court did not clearly
11 err in finding that Mr. Sepulveda intended to defraud Mr. Adams.
12 B. The bankruptcy court did not err in calculating Mr. Adams’s
damages.
13
14 Mr. Sepulveda argues that the bankruptcy court erred in
15 calculating the damages award. His argument is not a model of
16 clarity, but he appears to contend that the bankruptcy court
17 (1) should have applied the profit that Mr. Adams received from
18 the construction of the Arriola Property against the damages
19 award and (2) should have charged him for only half of the
20 Arriola Lawsuit costs and judgment. We disagree on both counts.
21 1. Mr. Sepulveda failed to raise the purported error
regarding Mr. Adams’s profit from the sale of the
22 Arriola Property with the bankruptcy court.
23 Mr. Sepulveda did not specifically argue to the bankruptcy
24 court that he must be credited for the profit that Mr. Adams
25 received from the Arriola Property. Absent extraordinary
26 circumstances (none of which exist in this case), we will only
27 consider on appeal issues that were distinctly raised before the
28 bankruptcy court. See Yamada v. Nobel Biocare Holding AG,
16
1 825 F.3d 536, 543 (9th Cir. 2016) (“[g]enerally, an appellate
2 court will not hear an issue raised for the first time on
3 appeal”); O’Rourke v. Seaboard Sur. Co. (In re E.R. Fegert,
4 Inc.), 887 F.2d 955, 957 (9th Cir. 1989) (“appellate courts will
5 not consider arguments that are not ‘properly raise[d]’ in the
6 trial courts”); Ezra v. Seror (In re Ezra), 537 B.R. 924, 932
7 (9th Cir. BAP 2015) (“Ordinarily, federal appellate courts will
8 not consider issues not properly raised in the trial courts.”).
9 An issue “must be raised sufficiently for the trial court to rule
10 on it” in the first instance. In re E.R. Fegert, Inc., 887 F.2d
11 at 957.
12 Further, Mr. Sepulveda offered no evidence to establish the
13 amount, if any, of profit that Mr. Adams realized from the sale
14 of the Arriola Property. Mr. Sepulveda only uses an estimate or
15 example (“e.g. <$300,000>”) of Mr. Adams’s profit.
16 Therefore, we will not consider Mr. Sepulveda’s argument
17 that the bankruptcy court should have reduced the damages award
18 by the amount of Mr. Adams’ alleged profit on the Arriola
19 project.3
20 2. The bankruptcy court did not err in compensating
Mr. Adams for the full litigation costs.
21
22 Mr. Sepulveda argues that the award overcompensates
23 Mr. Adams. He says that the court should have awarded Mr. Adams
24 only half of the costs of the Arriola Lawsuit. We disagree.
25
3
26 Even if we were to consider this argument, we would affirm
the bankruptcy court’s decision. The measure of damages which
27 the bankruptcy court correctly selected, and which we discuss in
the following section, does not require any reduction for such
28 profits.
17
1 In this case, Mr. Adams offered a calculation of his damages
2 without much explanation, and the bankruptcy court accepted it
3 without much discussion. We may affirm, however, on any basis
4 supported by the record, see Caviata Attached Homes, LLC v. U.S.
5 Bank, N.A., 481 B.R. 34, 44 (9th Cir. BAP 2012), and the record
6 supports that damage award.
7 Under California law, “[a] plaintiff fraudulently induced
8 to enter into a contract has the power to elect to affirm the
9 contract and sue for damages resulting from the fraud; the
10 plaintiff may recover out-of-pocket damages in addition to
11 benefit-of-the-bargain damages.” Wang v. Massey Chevrolet,
12 97 Cal. App. 4th 856, 872 (2002); see Ifeorah v. Flegal
13 (In re Ifeorah), BAP No. CC–14–1363–KuDTa, 2015 WL 3895502, at *8
14 (9th Cir. BAP June 24, 2015), aff’d in part, rev’d in part,
15 2017 WL 1046203 (9th Cir. Mar. 20, 2017) (“The overarching goal
16 of compensatory tort damages is to make the plaintiff whole. In
17 order to accomplish this goal, the trial court typically may
18 consider out-of-pocket damages, benefit-of-the-bargain damages
19 and other measures of damages.”). “The benefit-of-the-bargain
20 measure places a defrauded plaintiff in the position he would
21 have enjoyed had the false representation been true, awarding him
22 the difference in value between what he actually received and
23 what he was fraudulently led to believe he would receive.” Henry
24 v. Lehman Commercial Paper, Inc. (In re First All. Mortg. Co.),
25 471 F.3d 977, 1001 (9th Cir. 2006) (citations omitted).
26 Conversely, “[t]he out-of-pocket measure restores a plaintiff to
27 the financial position he enjoyed prior to the fraudulent
28 transaction, awarding the difference in actual value between what
18
1 the plaintiff gave and what he received.” Id.2 A plaintiff may choose to affirm or rescind a contract
3 procured by fraud. Under California law, “[i]t is settled law
4 that if a defrauded party is induced by false representations to
5 execute a contract, the party has the option of rescinding the
6 contract or affirming it and recovering damages for the fraud.”
7 Persson v. Smart Inventions, Inc., 125 Cal. App. 4th 1141, 1153
8 (2005) (citation omitted); see Denevi v. LGCC, 121 Cal. App. 4th
9 1211, 1220 (2004) (“To be sure, the law requires one who has been
10 defrauded into entering into a contract to choose either to
11 ‘affirm or rescind’ the contract.”).4
12
4
13 When seeking to rescind a contract for fraud, the
defrauded party:
14
15 may rescind a contract “[i]f the consent of the party
rescinding, or of any party jointly contracting with
16 him, was given by mistake, or obtained through duress,
menace, fraud, or undue influence, exercised by or with
17 the connivance of the party as to whom he rescinds, or
of any other party to the contract jointly interested
18 with such party.” Cal. Civ. Code § 1689. Where, as
19 here, a party seeks to rescind a contract due to
alleged fraud in the inducement, the party must allege
20 that he or she justifiably relied on misrepresentations
made with the intent to induce him or her to execute
21 the contract. Wilke v. Coinway, Inc., 257 Cal. App. 2d
126, 136 (1967). Additionally, the party must allege
22
that but for his or her reliance on the
23 misrepresentations, the contract would not have been
executed. Merced County Mut. Fire Ins. Co. v. State of
24 California, 233 Cal. App. 3d 765, 772 (1991).
25 Eisenberg v. Citibank N.A., No. 2:13-CV-01814CAS-JPRx, 2016 WL
26 3410171, at *3 (C.D. Cal. June 15, 2016). The bankruptcy court
made appropriate findings that (1) Mr. Sepulveda obtained
27 Mr. Adams’s assent to the Partnership Agreement and Settlement
Agreement by fraud; (2) Mr. Adams justifiably relied on
28 (continued...)
19
1 It is important to recall that there are two relevant
2 contracts in this case, and that the bankruptcy court found that
3 Mr. Sepulveda committed fraud in connection with both of the
4 contracts.
5 The first contract is the Partnership Agreement, pursuant to
6 which the parties developed and sold the Arriola Property and the
7 Kofdarali Property. The bankruptcy court found (and we have
8 affirmed the finding) that Mr. Sepulveda defrauded Mr. Adams in
9 connection with Partnership Agreement by misrepresenting the
10 status of his insurance. The bankruptcy court’s award is
11 consistent with the “benefit of the bargain” measure of damages.
12 (Although Mr. Adams did not explicitly elect to affirm the
13 contracts and sue for damages, the damages calculation he
14 presented to the bankruptcy court makes sense only if he made
15 that election.) If Mr. Sepulveda had proper liability insurance
16 as he represented, Mr. Adams (1) would have received his share of
17 the profits from the sale of the Arriola Property and (2) would
18 not have had to pay any of the costs of resolving the Arriola
19 Lawsuit. To put Mr. Adams in the position he would have occupied
20 had Mr. Sepulveda told the truth about his insurance,
21 Mr. Sepulveda must pay Mr. Adams all of the costs that Mr. Adams
22 paid to resolve the Arriola Lawsuit. In other words, Mr. Adams
23 is entitled to both the profit and all of the litigation and
24 judgment costs arising from the Arriola Lawsuit.
25 The second contract is the Settlement Agreement. As noted
26
4
27 (...continued)
Mr. Sepulveda’s misrepresentations; and (3) if Mr. Adams had
28 known the truth, he would not have executed the contracts.
20
1 above, the bankruptcy court found (and we have affirmed the
2 finding) that Mr. Sepulveda defrauded Mr. Adams in connection
3 with the Settlement Agreement because Mr. Sepulveda never
4 intended to perform all of his obligations under that agreement.
5 Based on this fraud, Mr. Adams could elect to rescind the
6 Settlement Agreement (and his damages calculation only makes
7 sense on that basis). The rescission of the Settlement Agreement
8 means that the 50/50 sharing of expenses under that agreement
9 became inoperative.
10 Mr. Sepulveda argues that the damages award was punitive in
11 nature. This argument has no support. The bankruptcy court did
12 not award Mr. Adams punitive damages. All of the damages are
13 compensatory in nature.
14 Therefore, the bankruptcy court did not err in calculating
15 damages awarded to Mr. Adams.
16 CONCLUSION
17 The bankruptcy court did not err in determining that
18 Mr. Sepulveda’s nondischargeable debt to Mr. Adams totaled
19 $527,711.70. Therefore, we AFFIRM.
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