In re: Joel Werner and Cathleen Werner ( 2019 )

FILED
FEB 13 2019
1 NOT FOR PUBLICATION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 Nos. CC-17-1266-STaF
) CC-17-1269-STaF
6 JOEL WERNER and CATHLEEN )
WERNER, ) Bk. No. 8:08-bk-11153-CB
7 )
Debtors. ) Adv. No. 8:10-ap-01104-CB
8 _______________________________)
)
9 JASON SCOTT WICKAM, )
)
10 Appellant, )
)
11 v. ) MEMORANDUM*
)
12 ALAN IVAR; DEBORAH IVAR; DAVID )
ROCHE, )
13 )
Appellees. )
14 _______________________________)
15 Argued and Submitted on February 22, 2018
at Pasadena, California
16
Filed – February 13, 2019
17
Appeal from the United States Bankruptcy Court
18 for the Central District of California
19 Honorable Catherine E. Bauer, Bankruptcy Judge, Presiding
20
Appearances: Robert R. Anderson argued for appellant Jason
21 Scott Wickam; Michael J. Carras of Conforti &
Carras argued for appellees Alan Ivar, Deborah
22 Ivar, and David Roche.
23
Before: SPRAKER, TAYLOR, and FARIS, Bankruptcy Judges.
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.
28 See 9th Cir. BAP Rule 8024-1.
1 Memorandum by Judge Faris
2 Concurrence in Part and Dissent in Part by Judge Spraker
3
4 INTRODUCTION
5 Chapter 111 debtor Jason Scott Wickam appeals from a
6 nondischargeability judgment under § 523(a)(2)(A) in favor of
7 plaintiffs Alan Ivar, Deborah Ivar, and David Roche. This is the
8 second nondischargeability judgment that the bankruptcy court has
9 entered in the underlying adversary proceeding. In a prior
10 appeal from the first nondischargeability judgment, we vacated
11 and remanded for further findings.
12 On remand, the bankruptcy court made additional findings
13 that adequately supported the nondischargeability judgment
14 against Mr. Wickam. We discern no clear error.
15 Mr. Wickam also appeals from the denial of his postjudgment
16 motion under Civil Rule 59(e). The bankruptcy court did not
17 abuse its discretion in denying this motion. Therefore, we
18 AFFIRM.
19 FACTS
20 A. Prebankruptcy events
21 1. The formation of Mr. Wickam’s real estate development
business and commencement of the Coral Blue project
22
23 In November 2005, Mr. Wickam and Joel Werner formed
24 Connexian Investments, Inc. (“Connexian”) to develop real estate.
25
1
26 Unless specified otherwise, all chapter and section
references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and
27 all “Rule” references are to the Federal Rules of Bankruptcy
Procedure, Rules 1001-9037. All “Civil Rule” references are to
28 the Federal Rules of Civil Procedure.
2
1 Each held a fifty percent interest in Connexian, and they planned
2 to use Connexian to purchase vacant land and build luxury homes
3 on that land. At the time they created Connexian, neither had
4 any direct experience in real estate development. Mr. Wickam had
5 worked as a general building contractor and Mr. Werner owned a
6 business marketing products. Neither had previously worked with
7 the other, as they had met for the first time shortly before they
8 went into business together.
9 Connexian’s first development project involved the
10 construction of four multi-million dollar homes on four lots on
11 Coral Blue Street in Ladera Ranch, California (the “Coral Blue
12 Project”). Connexian, through Mr. Wickam and Mr. Werner,
13 contracted to purchase these four vacant lots for just under
14 $1 million per lot. Mr. Wickam estimated a total development cost
15 for the Coral Blue Project of $13 million.
16 Originally, the purchase contract required Connexian to
17 close by May 1, 2006. Connexian, through Mr. Werner and
18 Mr. Wickam, deposited $80,000 into escrow pursuant to the
19 purchase contract. Connexian, however, was unable to procure
20 financing from conventional lenders to purchase the lots.
21 Connexian negotiated several extensions for the purchase based on
22 additional deposits of funds into escrow. Connexian deposited a
23 total of $220,000.
24 While negotiating the extensions of time to purchase the
25 lots, Connexian retained RSD Group, Inc. (“RSD”) to assist it in
26 raising the money needed for the project. RSD agreed to invest
27 $400,000 in the Coral Blue Project and referred Connexian to
28 Point Center Financial for additional financing. Point Center
3
1 Financial was a “hard money lender.”
2 2. Connexian’s financing and the plaintiffs’ initial
investments
3
4 In June 2006, Point Center Financial and Connexian entered
5 into a loan placement and fee agreement to fund the purchase of
6 all four Coral Blue Project lots and to pay the development and
7 construction costs for two of the homes (Lots 23 and 28). Point
8 Center Financial agreed to lend Connexian $6,587,100 but only if
9 Connexian raised an additional $1,615,085. Connexian informed
10 Point Center Financial that it had the money necessary to close
11 on the financing. On August 3, 2006, however, Point Center
12 Financial told Mr. Wickam and Mr. Werner that it was unable to
13 fund $2,148,800 of the $6,587,100 loan amount. Point Center
14 Financial advised Mr. Wickam and Mr. Werner that it would use its
15 best efforts to obtain the additional funding.
16 This was not the only funding shortfall Mr. Wickam and
17 Mr. Werner faced. Several months earlier, RSD informed
18 Mr. Wickam and Mr. Werner that it was not able to fund the
19 $400,000 it had promised. Consequently, with RSD’s assistance,
20 Mr. Wickam and Mr. Werner began searching for other investors.
21 Around the same time, Mr. Wickam and Mr. Werner formed Coral
22 Blue, LLC, a California limited liability company, for the stated
23 purpose of purchasing, developing, selling, and managing the four
24 lots at the Coral Blue Project.
25 a. The Ivars’ first investment ($216,000)
26 RSD introduced Alan and Deborah Ivar to the Coral Blue
27 Project investment opportunity sometime in early August 2006.
28 During a period of roughly two or three weeks, the Ivars had
4
1 multiple meetings and discussions with Mr. Wickam and Mr. Werner
2 regarding the project. The Ivars also toured the Coral Blue
3 Project lots with Mr. Wickam. The Ivars maintained that the
4 issue of project loan financing came up several times during
5 these meetings. They testified that they were told (presumably
6 during these meetings) that the project loan financing was “in
7 place” and that Mr. Wickam and Mr. Werner were using a
8 “conventional lender.” The Ivars said they understood this to
9 mean a traditional bank was financing the project and not a hard
10 money lender. The Ivars described their understanding of hard
11 money lending as loans to borrowers who are not creditworthy.
12 They further testified that they did not want to invest in
13 projects funded with hard money loans.
14 The Ivars also reviewed documents provided to them by
15 Mr. Werner and Mr. Wickam, including a subscription agreement and
16 operating agreement for Coral Blue, LLC dated as of August 18,
17 2006. The operating agreement was signed by Mr. Wickam and
18 Mr. Werner and had signature lines for the Ivars. The operating
19 agreement reflects that the Ivars made a $216,000 capital
20 contribution to Coral Blue, LLC and held 216,000 governance units
21 and economic units for the limited liability company. Schedule 1
22 also listed Mr. Werner and his wife as having made a capital
23 contribution, as well as five other investors, including RSD.
24 (Mr. Roche, the other plaintiff and appellee, was not listed as
25 an investor; as we explain below, he invested in Coral Blue, LLC
26 roughly one month later, in September 2006.)
27 The Ivars made their first investment in Coral Blue, LLC on
28 or about August 28, 2016. The Ivars gave Mr. Wickam and
5
1 Mr. Werner a check in the amount of $216,000 made payable to
2 Coral Blue, LLC.2 In exchange for their investment, the Ivars
3 received not only membership units in Coral Blue, LLC but also an
4 “Unsecured Promissory Note” made in their favor by Connexian for
5 $216,000. Mr. Wickam and Mr. Werner signed the promissory note on
6 behalf of Connexian. The note provided for repayment within a
7 year and for interest to accrue at an annual rate of twenty-five
8 percent. Notwithstanding the note, the Ivars saw themselves as
9 equity investors in Coral Blue, LLC, which they understood would
10 purchase and develop the Coral Blue Project lots. The Ivars
11 testified that they did not consider the promissory note from
12 Connexian to be significant.
13 b. Mr. Roche’s investment ($200,000)
14 Unlike the Ivars, Mr. Roche previously knew Mr. Wickam from
15 working with him on other projects in the construction industry.
16 During the summer of 2006, Mr. Wickam approached Mr. Roche about
17 investing in the Coral Blue Project. Over the course of a month
18 or so, Mr. Wickam contacted Mr. Roche on numerous occasions to
19 discuss the project. By early September 2006, Mr. Wickam began
20 to pressure Mr. Roche to invest in the Coral Blue Project. On
21 September 9, 2006, Mr. Roche made a check payable to Connexian
22
23
2
The Ivars’ $216,000 check was not included in the parties’
24 excerpts of record. However, a copy of this check, and many
other trial exhibits, are attached to the plaintiffs’ post-remand
25 motion for a post-appeal judgment. We have exercised our
26 discretion to take judicial notice of these and other bankruptcy
court documents not included in the parties’ excerpts. See
27 Rivera v. Curry (In re Rivera), 517 B.R. 140, 143 n.2 (9th Cir.
BAP 2014), aff’d in part, dismissed in part, 675 F. App’x 781
28 (9th Cir. 2017).
6
1 for $125,000, and on September 12, 2006, he made another check
2 payable to Connexian in the amount of $75,000, for an aggregrate
3 total investment of $200,000.
4 Mr. Roche’s testimony regarding his pre-investment
5 understanding of the project’s loan financing was very similar to
6 the Ivars’: “conventional financing” through a “traditional
7 bank.” According to Mr. Roche, Mr. Werner made the specific
8 representation to him that the project had conventional
9 financing, and Mr. Wickam contemporaneously validated
10 Mr. Werner’s representation by immediately telling him that
11 everything was taken care of.
12 Like the Ivars, Mr. Roche also believed that Coral Blue, LLC
13 was going to purchase the four lots and hold title to them.
14 Specifically, during his pre-investment meetings with Mr. Wickam
15 and Mr. Werner, Mr. Roche testified that he was told that Coral
16 Blue, LLC “was the vehicle to purchase four lots, build and sell
17 four homes for profit on Coral Blue [S]treet.” He also testified
18 that someone expressly told him that the four lots would be
19 purchased in the name of Coral Blue, LLC.
20 Like the Ivars, Mr. Roche received and signed a subscription
21 agreement for Coral Blue, LLC. The subscription agreement signed
22 by Mr. Roche is dated September 13, 2006. The record does not
23 include an operating agreement signed by Mr. Roche; only an
24 operating agreement dated June 6, 2006, signed by Mr. Wickam and
25 Mr. Werner with a space for Mr. Roche’s signature. That
26 operating agreement does not disclose any other members in Coral
27 Blue, LLC other than Mr. Werner, Mr. Wickam, and Mr. Roche,
28 despite the fact that the Ivars had become members about a month
7
1 earlier.
2 3. The purchase of the Coral Blue Project lots
3 On September 15, 2006, both the Point Center Financial loan
4 and Connexian’s purchase of the lots closed. The parties
5 stipulated that monies were transferred from Coral Blue, LLC’s
6 accounts to Connexian to fund the closing. Specifically, Coral
7 Blue, LLC had less than $14,000 in its bank accounts on August
8 30, 2006, just prior to the depositing of the Ivars’ first
9 investment check. The parties agreed that the Ivars’ $216,000
10 check was deposited into Coral Blue, LLC’s bank account on either
11 August 30 or 31, 2006. The parties further agreed that, prior to
12 the closing of Connexian’s purchase of the lots, “all but $41.33
13 of the money in the Coral Blue, LLC checking account and $215.53
14 of the Coral Blue, LLC savings account had been transferred into
15 the Connexian checking account. The balance in those two
16 accounts remained at about that level until the accounts were
17 closed in 2008.”
18 As a result of the sale, Connexian became the owner of
19 record of the four Coral Blue Project lots, subject to a recorded
20 deed of trust in favor of Point Center Financial. Both the note
21 and deed of trust prohibited Connexian from selling or further
22 encumbering the lots without Point Center Financial’s prior
23 written consent.
24 4. The Ivars’ second investment ($600,000)
25 By November 2016, construction had begun on the first two
26 lots. Around this time, Mr. Wickam and Mr. Werner approached the
27 Ivars to make an additional investment in the Coral Blue Project.
28 Mr. Wickam and Mr. Werner explained that they wanted to get an
8
1 early start on construction for the second pair of lots and
2 needed additional funding for “bricks and sticks,” which Mr. Ivar
3 understood to mean actual construction costs.
4 As a result, the Ivars invested another $600,000 in two
5 installments. The Ivars paid the first installment by check
6 dated December 29, 2006 to Connexian in the amount of $200,000.
7 Connexian deposited the funds into its bank account that same
8 day. Also on December 29, 2006, the parties signed escrow
9 instructions for the $200,000 loan. According to the escrow
10 instructions, the Ivars were to receive a $200,000 note from
11 Connexian payable in thirty days, bearing seven percent interest,
12 secured by a second priority deed of trust against Lots 26 and 27
13 of the Coral Blue Project. Consistent with these instructions,
14 Mr. Werner, on behalf of Connexian, executed a promissory note
15 and a deed of trust against Lots 26 and 27, also dated that same
16 day. The Ivars claimed that neither of them noticed the thirty-
17 day term of the note. The Ivars also testified that Mr. Wickam
18 and Mr. Werner instructed them not to record the trust deed
19 because it (and the note) were “simply another layer of
20 protection for [the Ivars’] investment in Coral Blue II LLC.”
21 The Ivars paid the remaining $400,000 to Connexian by check
22 dated April 18, 2007. While the two installments were paid
23 several months apart, the Ivars apparently viewed both of them as
24 part of their second investment because in exchange for these
25 funds they received 600,000 membership units in a new company:
26 Coral Blue II, LLC. According to the Ivars, Mr. Wickam and
27 Mr. Werner represented that their $600,000 investment would be
28 repaid with a twenty-five percent share of the net proceeds from
9
1 the future sale of Lots 26 and 27. There was no promissory note
2 or deed of trust for the $400,000 investment.
3 Mr. Wickam and Mr. Werner, on behalf of Coral Blue II, LLC,
4 and Mr. Ivar signed a Limited Liability Company Operating
5 Agreement of Coral Blue II, LLC. That document is dated March
6 27, 2007, roughly two months after the $200,000 promissory note
7 came due, and several weeks before the Ivars paid the $400,000
8 installment. Paragraph 2.6 of the Coral Blue II, LLC operating
9 agreement described the company’s business purpose similar to
10 Coral Blue, LLC’s, including “purchasing, developing, selling and
11 managing residential properties.” Whereas paragraph 2.6 of the
12 Coral Blue, LLC operating agreement specifically identified the
13 four Coral Blue Project lots as the object of the company’s
14 business purpose, the Coral Blue II, LLC operating agreement did
15 not refer to any specific property.
16 Consistent with the Ivars’ understanding of their $600,000
17 investment, the operating agreement for Coral Blue II, LLC shows
18 the Ivars as owning 600,000 governance and economic units for the
19 entity. Connexian is listed as owning the remaining 1,800,000
20 units in Coral Blue II, LLC. Mr. Wickam and Mr. Werner also gave
21 the Ivars a document that the Ivars refer to as an “Investment
22 Breakdown,” executed on April 18, 2007, the same day the Ivars
23 paid their $400,000 to Connexian. The Investment Breakdown
24 projected that the Ivars would receive $702,062.50 from the sale
25 of the houses to be built on Lots 26 and 27, attributable to a
26 twenty-five percent interest.
27 5. Refinancing negotiations, default and foreclosure
28 Connexian obtained a second loan from Point Center Financial
10
1 for $6 million in August 2007 to fund construction on Lots 26 and
2 27. Although the record is not entirely clear, it appears that,
3 by this point, a substantial amount of construction work had been
4 completed on Lots 23 and 28, and work had begun on Lots 26 and
5 27. While the parties were still working on closing this second
6 loan, they began working on refinancing the first Point Center
7 Financial loan. The first loan matured on October 1, 2007
8 without an agreement for refinancing. Even so, the parties
9 continued to negotiate refinancing through most of October 2007.
10 During the post-maturity refinancing negotiations, Point
11 Center Financial learned that Connexian had encumbered all four
12 Coral Blue Project lots with junior liens, in violation of the
13 terms of both Point Center Financial loans. Point Center
14 Financial also was concerned that the construction of the houses
15 on Lots 23 and 28 had suffered from significant cost overruns and
16 had not been timely completed. As of October 2007, the houses on
17 those lots still were not sufficiently completed to be marketed
18 for sale. Ultimately, Point Center Financial declined to
19 refinance the first loan, accelerated the second loan, and
20 foreclosed on all four lots. Neither the Ivars nor Mr. Roche
21 ever received any payments on their investments.
22 B. Mr. Wickam’s bankruptcy filing and the plaintiffs’
nondischargeability action
23
24 The Ivars and Mr. Roche jointly sued Mr. Wickam first in
25 California state court and later, after Mr. Wickam filed his
26
27
28
11
1 bankruptcy case, in the bankruptcy court.3
2 The plaintiffs brought to trial claims under § 523(a)(2)(A)
3 and § 523(a)(4). At trial, the bankruptcy court only decided the
4 former claim. The bankruptcy court entered judgment holding
5 Mr. Wickam liable for the Ivars’ and Mr. Roche’s investments and
6 finding the debt to be nondischargeable under § 523(a)(2)(A).
7 The bankruptcy court subsequently amended its judgment to include
8 a certification pursuant to Civil Rule 54(b).
9 C. Appeal of the bankruptcy court’s decision
10 Mr. Wickam appealed the bankruptcy court’s judgment. We
11 vacated and remanded, noting that the bankruptcy court’s amended
12 statement of decision did not contain sufficient findings. We
13 expressed particular concern that the bankruptcy court’s ruling
14 lumped together all three investments made by the Ivars and
15 Mr. Roche, even though the bankruptcy court’s one clear finding
16 of misrepresentation arguably only applied to the Ivars’ first
17 investment. To the extent the fraud committed against the Ivars
18 was based on a misrepresentation regarding ownership of the four
19 lots, we also expressed a concern that the two notes and one deed
20 of trust the Ivars received from Connexian raised serious
21 questions regarding proximate cause and reliance. Finally, we
22
3
23 Mr. Wickam filed his bankruptcy case in Colorado, so the
plaintiffs commenced their nondischargeability action against him
24 in the Colorado bankruptcy court. The Colorado bankruptcy court
later granted the plaintiffs’ motion to transfer venue of the
25 adversary proceeding to United States Bankruptcy Court for the
26 Central District of California, where it was consolidated with
four related adversary proceedings in Mr. Werner’s pending
27 bankruptcy case. The parties to the other adversary proceedings
later settled, leaving only the nondischargeability action
28 against Mr. Wickam for trial.
12
1 identified as problematic the absence of any specific findings on
2 intent to deceive, knowledge of falsity and justifiable reliance.
3 D. Post-remand proceedings
4 On remand, the plaintiffs filed a motion requesting post-
5 remand entry of judgment. In support of this motion, the
6 plaintiffs relied on all of their trial testimony and exhibits,
7 and presented to the court detailed proposed findings of fact,
8 which separately covered each investment. Mr. Wickam filed
9 detailed and specific objections to most of the plaintiffs’
10 proposed findings. In large part, he contended that the record
11 did not support the plaintiffs’ proposed findings.
12 Ultimately, the bankruptcy court adopted virtually all of
13 the plaintiffs’ findings as originally proposed, with only
14 limited revisions. The bankruptcy court then re-entered judgment
15 on the § 523(a)(2)(A) claim in favor of the plaintiffs.
16 E. Motion to reopen evidence or alter or amend the judgment
17 Mr. Wickam timely moved to reopen the record and to alter or
18 amend the judgment. He sought to have the court consider “new
19 evidence” regarding Mr. Ivar’s criminal fraud conviction arising
20 out of his practice as a chiropractor. He also sought to ensure
21 that the court had given due consideration to the declaration
22 testimony of Mr. Werner, which Mr. Wickam had filed in advance of
23 trial. The bankruptcy court entered an order denying the motion
24 on August 31, 2017. Mr. Wickam timely appealed from the
25 nondischargeability judgment and the denial of the post-judgment
26 motion.
27 JURISDICTION
28 The bankruptcy court had jurisdiction pursuant to 28 U.S.C.
13
1 §§ 1334 and 157(b)(2)(I), and we have jurisdiction under
2 28 U.S.C. § 158.
3 ISSUES
4 1. Whether the bankruptcy court erred when it determined that
5 the plaintiffs had established all of the elements for
6 nondischargeable fraud under § 523(a)(2)(A)?
7 2. Whether the bankruptcy court erred when it denied
8 Mr. Wickam’s motion to reopen the record and to alter or
9 amend the judgment?
10 STANDARDS OF REVIEW
11 In appeals from judgments under § 523(a), we review the
12 bankruptcy court’s findings under the clearly erroneous standard
13 and its legal conclusions de novo. Oney v. Weinberg (In re
14 Weinberg), 410 B.R. 19, 28 (9th Cir. BAP 2009), aff’d, 407 F.
15 App’x 176 (2010).
16 The bankruptcy court’s credibility findings are entitled to
17 particular deference and only will be disturbed if clearly
18 erroneous. Id. Findings of fact are clearly erroneous only if
19 they are illogical, implausible, or without support in the
20 record. Retz v. Samson (In re Retz), 606 F.3d 1189, 1196 (9th
21 Cir. 2010).
22 We review the bankruptcy court’s denial of a motion under
23 Civil Rule 59(e) for an abuse of discretion. Ybarra v. McDaniel,
24 656 F.3d 984, 998 (9th Cir. 2011). The bankruptcy court abused
25 its discretion if it applied the wrong legal standard or its
26 findings of fact were illogical, implausible, or without support
27 in the record. TrafficSchool.com, Inc. v. Edriver Inc., 653 F.3d
28 820, 832 (9th Cir. 2011).
14
1 DISCUSSION
2 A. The bankruptcy court did not err in determining that the
debt owed to the Ivars and Mr. Roche was nondischargeable
3 under § 523(a)(2)(A).
4 1. Elements of nondischargeable fraud
5 The parties do not dispute that the bankruptcy court
6 identified the correct elements for determining whether
7 Mr. Wickam’s liability arose from a fraudulent, nondischargeable
8 act. Those well-established elements are:
9 (1) misrepresentation, fraudulent omission or deceptive
conduct by the debtor; (2) knowledge of the falsity or
10 deceptiveness of his statement or conduct; (3) an
intent to deceive; (4) justifiable reliance by the
11 creditor on the debtor’s statement or conduct; and
(5) damage to the creditor proximately caused by its
12 reliance on the debtor’s statement or conduct.
13 In re Weinberg, 410 B.R. at 35 (quoting Turtle Rock Meadows
14 Homeowners Ass’n v. Slyman (In re Slyman), 234 F.3d 1081, 1085
15 (9th Cir. 2000)).
16 The plaintiffs have asserted a mixture of affirmative
17 misrepresentations and omissions. While the elements are largely
18 the same for a claim for fraudulent misrepresentation by
19 omission, in such situations there is no representation upon
20 which one could justifiably rely. Titan Grp., Inc. v. Faggen,
21 513 F.2d 234, 239 (2d Cir. 1975), cited with approval in Apte v.
22 Romesh Japra, M.D., F.A.C.C., Inc. (In re Apte), 96 F.3d 1319,
23 1323 (9th Cir. 1996). For this reason, “All that is necessary is
24 that the facts withheld be material in the sense that a
25 reasonable investor might have considered them important in the
26 making of this decision. This obligation to disclose and this
27 withholding of a material fact establish the requisite element of
28 causation in fact.” In re Apte, 96 F.3d at 1323 (quoting
15
1 Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128,
2 153-54 (1972)).
3 We consider these elements and the extent to which they
4 apply to each of the plaintiffs’ discrete investments.
5 2. The Ivars’ $216,000 investment
6 a. The fraudulent misrepresentations and omissions
7 The Ivars insisted at trial that Mr. Wickam misrepresented
8 the Coral Blue Project’s financing and the ownership of the lots
9 to induce them to invest. The bankruptcy court found that
10 Mr. Wickam fraudulently misrepresented these matters by failing
11 to disclose that (1) the project’s loan financing was subject to
12 a one-year term; (2) the lender had advised Mr. Wickam and
13 Mr. Werner that it could not fund $2.1 million of the $6.6
14 million loan; (3) the lender was a hard money lender as opposed
15 to a conventional lender; and (4) Connexian, instead of Coral
16 Blue, LLC, was the entity arranging to purchase the four lots.
17 The bankruptcy court sometimes referred to Mr. Wickam’s
18 conduct as affirmative fraudulent misrepresentation. At other
19 times, however, the court identified the conduct as fraudulent
20 omission. The confusion appears to derive from the Ivars’
21 testimony regarding their understanding of the financing and
22 ownership of the lots. They stated on several occasion that
23 these matters were discussed in the presence of both Mr. Wickam
24 and Mr. Werner but do not attribute any specific representations
25 to Mr. Wickam individually. The parties’ post-remand briefs and
26 their appeal briefs treat Mr. Wickam’s conduct as a species of
27 fraudulent omission. In light of the parties’ agreement
28 regarding the nature of Mr. Wickam’s fraud, we treat his conduct
16
1 as a case of fraudulent omission as well.
2 Our principal concern regarding the omissions as the basis
3 for fraudulent misrepresentation lies with whether Mr. Wickam had
4 a duty to disclose. As he correctly argues, an omission is not
5 actionable fraud absent a duty to disclose. In re Apte, 96 F.3d
6 at 1323–24. We may look to the Restatement (Second) of Torts
7 (“Restatement”) for guidance on what constitutes nondischargeable
8 fraud in general, and whether Mr. Wickam was under a duty to
9 disclose in particular. Id. (citing Field v. Mans, 516 U.S. 59,
10 70 (1995)). In relevant part, the Restatement specifies that a
11 party to a business transaction must disclose to the other party,
12 before the transaction is consummated:
13 (b) matters known to him that he knows to be necessary
to prevent his partial or ambiguous statement of the
14 facts from being misleading; and
15 . . .
16 (e) facts basic to the transaction, if he knows that
the other is about to enter into it under a mistake as
17 to them, and that the other, because of the
relationship between them, the customs of the trade or
18 other objective circumstances, would reasonably expect
a disclosure of those facts.
19
20 Restatement § 551(2)(b), (e).
21 The bankruptcy court did not make any express finding
22 concerning Mr. Wickam’s duty to disclose. Under other
23 circumstances, the absence of specific findings on this issue
24 could be a severe or even fatal impediment to our review in light
25 of the bankruptcy court’s duty to provide sufficient findings to
26 support its ruling. See Civil Rule 52(a)(1) (made applicable to
27 adversary proceeding by Rule 7052); see also Simeonoff v. Hiner,
28 249 F.3d 883, 891 (9th Cir. 2001); First Yorkshire Holdings, Inc.
17
1 v. Pacifica L 22, LLC (In re First Yorkshire Holdings, Inc.), 470
2 B.R. 864, 871 (9th Cir. BAP 2012). On the other hand, when the
3 record is fully developed and is sufficient to support the
4 bankruptcy court’s ultimate conclusion, we need not remand for
5 further findings. Simeonoff, 249 F.3d at 891. Nor is remand
6 necessary when, as here, the appellate court reasonably can infer
7 from the bankruptcy court’s findings other facts that would
8 suffice to support the bankruptcy court’s decision. Brock v. Big
9 Bear Mkt. No. 3, 825 F.2d 1381, 1384 (9th Cir. 1987); see also
10 Wells Benz, Inc. v. United States ex rel. Mercury Elec. Co., 333
11 F.2d 89, 92 (9th Cir. 1964) (stating that appellate court must
12 construe the trial court’s findings favorably, such that any
13 doubt as to what the trial court meant is resolved in favor of
14 upholding rather than invalidating the bankruptcy court’s
15 judgment).
16 Here, remand is unnecessary. The elements of fraudulent
17 omission were correctly set forth in the parties’ post-remand
18 briefs, and the court had that information available to it when
19 it found that Mr. Wickam’s conduct amounted to fraudulent
20 omission. Therefore, we reasonably can infer that the bankruptcy
21 court found that Mr. Wickam owed a duty to disclose fully and
22 completely the ownership and financing of the Coral Blue Project.
23 The record sufficiently supports this implicit finding.
24 Mr. Wickam and Mr. Werner misled the Ivars during their in-person
25 meetings by stating that conventional project loan financing was
26 “in place.” In reality, Connexian had procured financing from a
27 hard money lender that was at least $2.1 million short of what it
28 needed and was for a term of only one year. While the evidence
18
1 presented at trial is ambiguous as to whether Mr. Wickam actually
2 made these representations, he was at least present when they
3 were made. Similarly, Mr. Wickam either made representations, or
4 was present when Mr. Werner made representations, while
5 Mr. Wickam and Mr. Werner were urging the Ivars to invest in
6 Coral Blue, LLC and share in the profits from its development of
7 the four lots it was to purchase. Moreover, Mr. Wickam signed
8 the subscription agreement and operating agreement for the Ivars’
9 investment in Coral Blue, LLC, reinforcing the representation
10 that Coral Blue, LLC would own, develop and sell these
11 properties. These statements misled the Ivars to believe that
12 they were investing in a company that would own and develop the
13 four lots using financing that had been procured from a
14 conventional lender. Both Mr. Wickam and Mr. Werner had a duty
15 to disclose the omitted financing and ownership information in
16 order to avoid misleading the Ivars. See Restatement § 551(2)(b)
17 & cmt. g.
18 Second, the financing of the project and ownership of the
19 lots were fundamental to the project and the Ivars’ investment.
20 A party to a business transaction has a duty to disclose when:
21 (1) the omitted information is “basic” to the transaction;
22 (2) the nondisclosing party knew that the adverse party, in
23 entering into the transaction, was operating under a mistaken
24 belief concerning the omitted information; and (3) it was
25 reasonable under the circumstances for the adverse party to
26 expect disclosure of the omitted information. See Restatement
27 § 551(2)(e).
28 As the Ivars explained, based on their discussions with
19
1 Mr. Wickam and Mr. Werner and the documents Mr. Wickam and
2 Mr. Werner signed and gave them, they expected to obtain a return
3 on their investment from Coral Blue, LLC’s development and sale
4 of the lots. Yet, Coral Blue, LLC never acquired the lots and
5 had no rights in the lots or to participate in their sales.
6 Moreover, when the Ivars invested, Coral Blue, LLC had no
7 capitalization apart from their $216,000 investment, and even
8 those funds were promptly transferred to Connexian. Even with
9 the Ivars’ investment, Connexian had a $2.1 million shortfall in
10 its construction financing and was required to repay the Point
11 Center Financial loan within a year. Each of these facts strikes
12 at the heart of the Ivars’ investment. Mr. Wickam was under a
13 duty to accurately and fully disclose the ownership of the lots
14 and the nature of the project financing.
15 b. Knowledge of falsity
16 The bankruptcy court found that, before the Ivars’ first
17 investment, Mr. Wickam knew that the first Point Center Financial
18 loan was underfunded, that the term of this loan was for one year
19 and that Point Center Financial was a hard money lender.
20 Mr. Wickam admitted these facts.
21 As for the omission regarding ownership of the lots,
22 Mr. Wickam claims that the the bankruptcy court’s finding
23 regarding his knowledge of falsity was clearly erroneous.
24 According to Mr. Wickam, there was a last-minute decision
25 dictated by Point Center Financial, or by the escrow company
26 handling the closing, to switch from Coral Blue, LLC as the
27 purchaser/owner to Connexian.
28 Mr. Wickam relies on his declaration testimony to support
20
1 this position. But the bankruptcy court found Mr. Wickam not
2 credible generally, and nothing he has said on appeal persuades
3 us that the bankruptcy court’s credibility finding was clearly
4 erroneous. More to the point, there were numerous admitted facts
5 and exhibits demonstrating that, from the inception of the
6 project, Connexian was slated to be the owner of the four lots.
7 It was Connexian, not Coral Blue, LLC, that contracted to
8 purchase the lots. Connexian negotiated the extensions of time
9 to purchase the lots and made the deposits necessary to obtain
10 those extensions. It was also Connexian that applied for the
11 construction loan from Point Center Financial to finance the
12 purchase of the lots. The record is devoid of any references
13 that identified Coral Blue, LLC as a party to these transactions
14 (apart from Mr. Wickam’s and Mr. Werner’s representations to the
15 Ivars and Mr. Roche).
16 The record amply demonstrates that Mr. Wickam knew the true
17 nature of the project financing, and that Connexian rather than
18 Coral Blue, LLC owned the four lots, at the time the Ivars made
19 their investment in Coral Blue, LLC. In short, the bankruptcy
20 court’s findings that Mr. Wickam knew that his nondisclosure of
21 the project’s financing and ownership was false and deceptive
22 were not clearly erroneous.
23 c. Intent to deceive
24 The bankruptcy court found that Mr. Wickam failed to
25 disclose the above-referenced information regarding the project
26 loan financing and Connexian’s bid to obtain ownership of the
27 lots for the sole purpose of inducing the Ivars to make their
28 $216,000 investment. This is a finding of intent to deceive.
21
1 Seldom do fraud defendants provide direct evidence of their
2 intent to deceive. See Tustin Thrift & Loan Ass’n v. Maldonado
3 (In re Maldonado), 228 B.R. 735, 738 (9th Cir. BAP 1999).
4 Instead, bankruptcy courts typically must infer intent (or the
5 absence of intent) from circumstantial evidence. Id.6 Nothing Mr. Wickam has argued on appeal persuades us that
7 the bankruptcy court’s intent finding was clearly erroneous.
8 Essentially, he argues that he was just in charge of the
9 construction. He maintains that he relied on Mr. Werner to
10 properly and truthfully present the investment opportunity to the
11 Ivars, so he could not have formed an intent to deceive them.
12 But the bankruptcy court did not believe Mr. Wickam’s version of
13 events.
14 The record again supports the bankruptcy court’s inference
15 that Mr. Wickam played an active and purposeful role in the
16 solicitation of the Ivars’ investment in Coral Blue, LLC. The
17 Ivars testified that Mr. Wickam was a party to their discussions
18 concerning Coral Blue, LLC’s purchase and development of the four
19 lots and the financing of that project. Mr. Wickam also was
20 involved in Connexian’s purchase of the lots from the beginning,
21 including its funding. Given Mr. Wickam’s active participation
22 in the financing and purchase of the lots, his solicitation of
23 the Ivars’ investment is difficult to explain as anything other
24 than fraudulent. The record supports the bankruptcy court’s
25 finding that Mr. Wickam omitted information with the intent to
26 deceive the Ivars for the purpose of obtaining their investment.
27 d. Materiality
28 As indicated above, in cases of fraudulent omission,
22
1 bankruptcy courts are required to make a finding of materiality
2 in lieu of finding justifiable reliance. In re Apte, 96 F.3d at
3 1323. An omission is material if a reasonable investor would
4 have wanted to know the information before investing. Id. Thus,
5 the materiality issue focuses on what a reasonable investor would
6 want to know. See id. In essence, the plaintiffs are presumed
7 to have relied on the omission if it was material. See id.8 Here, the bankruptcy court found that the information
9 regarding the project loan financing and Connexian’s bid to
10 obtain ownership of the lots was material and that any reasonable
11 investor would have wanted to know this information before
12 investing. More specifically, the bankruptcy court found that a
13 reasonable investor would have wanted to know that the first
14 Point Center Financial loan was for a one-year term, that the
15 loan was underfunded by $2.1 million, and that Point Center
16 Financial was a hard money lender. The bankruptcy court further
17 found that a reasonable investor would have wanted to know that
18 Connexian, instead of Coral Blue, LLC, was the entity with the
19 contractual right to purchase the four lots.
20 As previously discussed, the financing of the Coral Blue
21 Project and ownership of the lots were fundamental to any
22 reasonable investor’s decision to invest in Coral Blue, LLC. The
23 findings that the omissions were material were not illogical,
24 implausible or unsupported by the record. Accordingly, they were
25 not clearly erroneous.
26 e. Causation and damages
27 The bankruptcy court found that Mr. Wickam’s omissions
28 caused the Ivars to lose their $216,000 investment. He has not
23
1 challenged on appeal the amount of damages the plaintiffs
2 suffered, but he disputes that his conduct caused the plaintiffs
3 to suffer those damages.
4 Again, we turn to the Restatement for guidance. Under the
5 Restatement, the causation inquiry is twofold. A finding of
6 causation requires the bankruptcy court to determine the
7 existence of: (1) causation in fact, and (2) legal causation. A
8 misrepresentation or omission is a cause in fact if it was “a
9 substantial factor” in determining the course of conduct leading
10 to the loss. Restatement §§ 546, 548A; see also Sharfarz v.
11 Goguen (In re Goguen), 691 F.3d 62, 70 (1st Cir. 2012). The
12 misrepresentation or omission is the legal cause of damages if
13 the creditor’s loss reasonably could be expected to result from
14 the reliance. Restatement § 548A.
15 In most cases of fraudulent inducement, like here, the loss
16 necessarily flows from the acts induced. See Restatement
17 § 549(1) (stating that fraud damages include: (a) the difference
18 between the value of what plaintiff actually received and its
19 purchase price; and (b) all other pecuniary loss suffered as a
20 result of the plaintiff’s reliance upon the misrepresentation).
21 This has been the correct measure for determining the loss
22 flowing from fraudulently induced conduct for well over a
23 century. See Sigafus v. Porter, 179 U.S. 116, 122-23 (1900).
24 As to all of the omissions, the bankruptcy court found that,
25 if the Ivars had known the true facts, they would not have made
26 their $216,000 investment. This finding is not challenged on
27 appeal. “If the misrepresentation has in fact induced the
28 recipient to enter into the transaction, there is causation in
24
1 fact of the loss suffered in the transaction.” Gem Ravioli, Inc.
2 v. Creta (In re Creta), 271 B.R. 214, 219 (1st Cir. BAP 2002)
3 (quoting Restatement § 546). The Ivars invested their $216,000
4 into Coral Blue, LLC because Mr. Wickam and Mr. Werner led them
5 to believe that Coral Blue, LLC would own four lots and had the
6 financing to develop them. These misrepresentations were the
7 cause in fact of their investment, and, as a result, their loss.
8 We acknowledge that this Panel expressed concern in its
9 prior decision regarding the existence of the unsecured
10 promissory note made by Connexian in favor of the Ivars covering
11 the same $216,000 investment. The Ivars explained, however, that
12 they understood that they were purchasing equity in Coral Blue,
13 LLC, and would be paid through the sale of the developed lots.
14 The Ivars testified that they paid little or no attention to the
15 promissory note from Connexian. The Ivars invested in Coral
16 Blue, LLC. They expected to recover their investment and share
17 in profits from Coral Blue, LLC after it developed the lots it
18 was supposed to purchase using the conventional financing
19 Mr. Werner and Mr. Wickam said it had. In truth, Coral Blue, LLC
20 had no assets, no conventional financing, and no ability to
21 return the Ivars’ investment, much less make any profit. The
22 Ivars’ only prospect of payment was tied to an unsecured promise
23 to repay their investment with interest from an otherwise unknown
24 corporation. The record supports the bankruptcy court’s finding
25 that these misrepresentations about Coral Blue, LLC were a
26 substantial factor in their loss, satisfying the causation in
27 fact requirement.
28 Mr. Wickam’s challenge as to causation goes more directly to
25
1 legal causation. He asserts that the Ivars’ loss actually was
2 caused by Point Center Financial’s decision to foreclose and by
3 the 2008 crash of the residential real estate market. This
4 argument, however, does not negate the foreseeability of the
5 Ivars’ loss, given Mr. Wickam’s misrepresentations that Coral
6 Blue, LLC had conventional financing to purchase and develop real
7 property that it never owned. Rather, Mr. Wickam effectively
8 contends that the market crash and the foreclosure were
9 intervening causes of the loss that absolve him of liability.
10 But the Restatement reflects a much more limited role for
11 intervening causes in relationship to legal causation:
12 In determining what is foreseeable as a result of the
misrepresentation, the possibility of intervening
13 events is not to be excluded altogether. Thus, when
the financial condition of a corporation is
14 misrepresented and it is subsequently driven into
insolvency by reason of the depressed condition of an
15 entire industry, which has no connection with the facts
misrepresented, it may still be found that the
16 misrepresentation was a legal cause of the recipient's
loss, since it may appear that if the company had been
17 in sound condition it would have survived the
depression, and hence that a loss of this kind might
18 reasonably have been expected to follow.
19 Restatement § 548A, cmt. b.
20 Here, Mr. Wickam’s position ignores the reality of the
21 transaction and the facts presented at trial. Point Financial
22 Center’s financing came due in one year, a fact that Mr. Wickam
23 and Mr. Werner knowingly concealed from the Ivars. Connexian
24 also failed to complete the construction on the first two lots
25 within that year, causing the default that led Point Financial
26 Center to foreclose on Connexian’s lots. The loss from a
27 speculative, underfunded, and misrepresented construction project
28 was wholly foreseeable, if not inevitable.
26
1 The bankruptcy court’s findings adequately addressed
2 causation and damages. They are supported by the record, and
3 they are not clearly erroneous.
4 3. Mr. Roche’s $200,000 investment
5 Mr. Roche testified to his understanding of hard money
6 lending as lending to a borrower who is not creditworthy and who
7 is a bad risk to the lender. He maintained that, had he known
8 that the Coral Blue Project was relying on a hard money lender
9 for its loan financing, he would not have invested in the
10 project.
11 Mr. Roche additionally insisted that, had he known about the
12 one-year term for the Point Center Financial loan, and the fact
13 that more than $2 million of the Point Center Financial loan was
14 unfunded, he would not have invested his $200,000 in the Coral
15 Blue Project.
16 As Mr. Roche explains, he only learned after he made his
17 $200,000 investment that the four lots were purchased in
18 Connexian’s name rather than in the name of Coral Blue, LLC. He
19 maintains that, had he known Coral Blue, LLC was not going to
20 hold title to the properties, he would not have invested his
21 $200,000.4
22 The bankruptcy court’s findings regarding Mr. Roche’s
23 $200,000 investment were very similar to its findings regarding
24 the Ivars’ $216,000 investment. The bankruptcy court found the
25
4
26 According to Mr. Roche, he had no involvement with or
knowledge of Connexian at the time of his investment. This was
27 not strictly true, as both of his investment checks were made
payable to Connexian. The record is not clear why Mr. Roche paid
28 money to Connexian for an investment in Coral Blue, LLC.
27
1 same four omissions regarding ownership of the lots and the
2 project’s loan financing.5
3 The evidence supporting the bankruptcy court’s fraud
4 findings with respect to Mr. Roche’s $200,000 investment does not
5 materially differ from the evidence adduced concerning the Ivars’
6 $216,000 investment. We similarly uphold the bankruptcy court’s
7 fraud findings in favor of Mr. Roche on his $200,000 investment.
8 4. The Ivars’ $600,000 investment
9 The bankruptcy court grouped the Ivars’ second and third
10 payments into a unitary second investment. The court’s findings
11 as to the combined $600,000 investment focused on two different
12 misrepresentations: a misrepresentation that Mr. Wickam and
13 Mr. Werner needed the additional funding for “bricks and sticks”
14 and a misrepresentation regarding the organizational status of
15 Coral Blue II, LLC.
16 The bankruptcy court also found that, but for the
17 misrepresentations that induced the Ivars to make their first
18 $216,000 investment, they would not have made the second $600,000
19
5
20 There was one additional fraudulent omission the
bankruptcy found with respect to Mr. Roche’s investment: that
21 Mr. Wickam and Mr. Werner failed to disclose to Mr. Roche the
existence of other investors in Coral Blue, LLC. Mr. Roche
22
complained that the copy of the Coral Blue, LLC operating
23 agreement he was given only listed himself, Mr. Wickam and
Mr. Werner as members. It did not list the Ivars or several
24 other Coral Blue, LLC investors (presumably solicited by
Mr. Wickam and Mr. Werner). Nonetheless, Mr. Roche admitted that
25 he did not receive his copy of the Coral Blue, LLC operating
26 agreement or his subscription agreement until after he invested.
Consequently, the omission of some of the Coral Blue, LLC
27 investors from the membership list in his copy of the operating
agreement does not support Mr. Roche’s claim that he was
28 defrauded into investing in the Coral Blue Project.
28
1 investment. The bankruptcy court reasoned that the loss of the
2 second investment flowed from the initial misrepresentations.
3 We conclude that the bankruptcy court’s findings concerning
4 the “bricks and sticks” misrepresentation were not clearly
5 erroneous and were sufficient to support its judgment as to the
6 second investment.
7 The bankruptcy court found that Mr. Wickam told the Ivars
8 that their second investment funds would be used for “bricks and
9 sticks,” meaning direct development expenses for Lots 26 and 27.
10 This finding is supported by the Ivars’ testimony and is not
11 clearly erroneous.
12 The bankruptcy court next found that this representation was
13 false because Mr. Wickam and Mr. Werner used a substantial
14 portion of those funds for other purposes, including payments to
15 themselves. Mr. Wickam argues that this finding was wrong
16 because Mr. Werner testified that all of the Ivars’ $600,000
17 actually was used for the development of the two lots. But this
18 argument ignores the parties’ stipulation of admitted facts.
19 Mr. Wickam agreed that there was little or no money in
20 Connexian’s account when the Ivars’ funds were deposited and that
21 immediately after the deposit, Connexian made substantial
22 payments not related to the development of the lots. These
23 included payments to Mr. Wickam and Mr. Werner. These admitted
24 facts support the bankruptcy court’s finding that Mr. Wickam
25 misrepresented the need for and purpose of the additional
26 $600,000 investment from the Ivars.
27 Mr. Wickam challenges the bankruptcy court’s finding that he
28 knew that the “bricks and sticks” misrepresentation was false and
29
1 that he made the misrepresentation with the intent to deceive the
2 Ivars. He argues that no evidence supports these findings. But,
3 as we have observed above, direct evidence of fraudulent
4 knowledge and intent to deceive is rarely available because
5 people rarely confess to fraud. Therefore, courts may and
6 usually must rely on inferences from other evidence. In this
7 case, the bankruptcy court did not commit clear error when it
8 inferred Mr. Wickam’s mental state from the admitted facts that
9 he was in charge of construction budgets and Mr. Wickam and
10 Mr. Werner immediately used most of the Ivars’ second investment
11 for other purposes, including a payment to Mr. Wickam himself.
12 Mr. Wickam also challenges the bankruptcy court’s finding
13 that the Ivars justifiably relied on the “bricks and sticks”
14 misrepresentation when they made their second investment.
15 In Field v. Mans, the United States Supreme Court held that
16 fraud under § 523(a)(2)(A) requires only a showing of justifiable
17 reliance rather than the higher standard for reasonable reliance.
18 The Court clarified that a creditor’s reliance was to be
19 evaluated using a subjective standard: “a person is justified in
20 relying on a representation of fact ‘although he might have
21 ascertained the falsity of the representation had he made an
22 investigation.’” 516 U.S. at 71 (citing Restatement § 540). In
23 contrast to reasonable reliance, the Supreme Court explained that
24 “[j]ustification is a matter of the qualities and characteristics
25 of the particular plaintiff, and the circumstances of the
26 particular case, rather than of the application of a community
27 standard of conduct to all cases.” Id.; see also Citibank (S.
28 Dakota), N.A. v. Eashai (In re Eashai), 87 F.3d 1082, 1090 (9th
30
1 Cir. 1996).
2 While justifiable reliance is broader than reasonable
3 reliance, it is not without limits. Again citing to the
4 Restatement, the Court in Field acknowledged that one is still
5 “required to use his senses, and cannot recover if he blindly
6 relies upon a misrepresentation the falsity of which would be
7 patent to him if he had utilized his opportunity to make a
8 cursory examination or investigation.” Field, 516 U.S. at 71
9 (quoting Restatement § 541, cmt. a). The Supreme Court further
10 elaborated:
11 justifiable reliance is the standard applicable to a
victim’s conduct in cases of alleged misrepresentation
12 and that “[i]t is only where, under the circumstances,
the facts should be apparent to one of his knowledge
13 and intelligence from a cursory glance, or he has
discovered something which should serve as a warning
14 that he is being deceived, that he is required to make
an investigation of his own.”
15
16 Id. at 71-72 (citing W. Prosser, Law of Torts § 108, p. 718 (4th
17 ed. 1971)) (emphasis added).
18 Accordingly, while a plaintiff’s negligence, by itself, is
19 insufficient to defeat a finding of justifiable reliance, the
20 plaintiff “cannot close his eyes and blindly rely” on whatever
21 the debtor says. In re Apte, 96 F.3d at 1322-23 (citing In re
22 Eashai, 87 F.3d at 1090-91). In other words, the justifiable
23 reliance standard does not permit the plaintiff to ignore red
24 flags that obviously call into question the truth of the debtor’s
25 representations regarding the transaction. See, e.g., Yim v.
26 Chaffee (In re Chaffee), BAP No. CC-16-1241-TaFC, 2017 WL
27 1046057, at *6-7 (9th Cir. BAP Mar. 17, 2017), aff’d, 713 F.
28 App’x 641 (9th Cir. Feb. 23, 2018); Edgewater Place, Inc. v. Real
31
1 Estate Collateral Mgmt. Co. (In re Edgewater Place, Inc.), No. ED
2 CV 98-281 RT, 1999 WL 35136576, at *7 (C.D. Cal. May 18, 1999);
3 Mandalay Resort Grp. v. Miller (In re Miller), 310 B.R. 185, 198-
4 99 (Bankr. C.D. Cal. 2004).
5 In this case, there was no reason for the Ivars to doubt
6 Mr. Wickam’s representation that he and Mr. Werner would use the
7 Ivars’ second investment for “bricks and sticks,” meaning direct
8 development costs for the second pair of Coral Blue Project
9 lots.6
10 Finally, Mr. Wickam contends that the misrepresentations
11 were not the proximate cause of the Ivars’ loss of their second
12 investment. He relies on the same arguments that he advances in
13 connection with the Ivars’ first investment. Those arguments
14 have no more merit when applied to the second investment than
15 they have with respect to the first.
16 B. The bankruptcy court did not err in denying Mr. Wickam’s
motion to reopen the record and to alter or amend the
17 judgment.
18 By way of his post-judgment motion, Mr. Wickam sought two
19 things: (1) to ensure that the bankruptcy court had duly
20 considered Mr. Werner’s declaration testimony; and (2) to have
21
6
The dissent concludes that there were too many “red flags”
22
of deception to sustain a finding of justifiable reliance. We
23 appreciate the dissent’s careful and thorough dissection of the
evidence. We acknowledge that the presentation of the Ivars’
24 case leaves much to be desired and that the question is a close
one. We note, however, that the Ivars faced a low bar at trial –
25 they only had to show that a “casual glance” would not have
26 revealed the fraud – and that Mr. Wickam faces a high bar on
appeal: the clearly erroneous standard of review. We think that
27 Mr. Wickam has not carried his heavy burden of showing that the
bankruptcy court committed clear error when it decided that the
28 Ivars had carried their light burden.
32
1 the court reopen the record to consider Mr. Ivar’s conviction
2 arising from referral kickback activities he engaged in as a
3 chiropractor. On appeal, Mr. Wickam only challenges the
4 bankruptcy court’s denial of relief with respect to the evidence
5 of Mr. Ivar’s conviction. In addition, Mr. Wickam concedes that
6 Mr. Ivar’s conviction is not directly relevant to his investor
7 activities that are the subject of the underlying adversary
8 proceeding. Instead, Mr. Wickam claims that the conviction
9 undermines Mr. Ivar’s credibility as a witness. He urges that,
10 based on the conviction, the bankruptcy court should have, at a
11 minimum, reassessed the credibility of Mr. Ivar’s story regarding
12 his investments or, alternately, stricken his testimony in its
13 entirety.
14 To support his motion, Mr. Wickam relied on Civil Rule
15 59(e), which is made applicable in adversary proceedings by Rule
16 9023. Relief under Civil Rule 59(e) requires the movant to
17 demonstrate either newly discovered evidence, clear error,
18 manifest injustice, or an intervening change in the law.
19 Zimmerman v. City of Oakland, 255 F.3d 734, 740 (9th Cir. 2001).
20 On appeal, Mr. Wickam solely relies on the newly discovered
21 evidence prong of Civil Rule 59(e). To support his entitlement
22 to relief under this prong, Mr. Wickam needed to establish:
23 (1) the evidence was discovered after trial, (2) the
exercise of due diligence would not have resulted in
24 the evidence being discovered at an earlier stage and
(3) the newly discovered evidence is of such magnitude
25 that production of it earlier would likely have changed
the outcome of the case.
26
27 Defenders of Wildlife v. Bernal, 204 F.3d 920, 929 (9th Cir.
28 2000).
33
1 The transcript from the hearing on the motion reflects that
2 the bankruptcy court considered these factors and found that
3 Mr. Wickam had not met his burden to establish all of them. Most
4 importantly, the bankruptcy court was not persuaded regarding the
5 third element: that the newly discovered evidence was of such a
6 magnitude that production of it earlier likely would have changed
7 the outcome of the case. Id.8 On this record, we cannot say that the bankruptcy court’s
9 finding on this third element was clearly erroneous. This is
10 especially true here, given that Mr. Wickam’s newly discovered
11 evidence was not directly connected to the conduct and events
12 that were at issue in the underlying adversary proceeding.
13 Accordingly, the bankruptcy court did not commit reversible
14 error when it denied Mr. Wickam’s postjudgment motion.
15 CONCLUSION
16 For the reasons set forth above, we AFFIRM the bankruptcy
17 court’s nondischargeability judgment and its denial of
18 Mr. Wickam’s postjudgment motion under Civil Rule 59(e).
19
20
21
22 Concurrence in Part and Dissent in Part begins on next page.
23
24
25
26
27
28
34
1 SPRAKER, Bankruptcy Judge, concurring in part and dissenting in
part.
2
3 I concur with the reasoning and conclusions reached in
4 subsections A.2. and A.3. of the Discussion section of the
5 majority decision. Those sections affirm the bankruptcy court’s
6 ruling that Mr. Wickam fraudulently induced the Ivars’ first
7 investment, and Mr. Roche’s sole investment, in Coral Blue, LLC.
8 In subsection A.4., the majority similarly affirms the bankruptcy
9 court’s ruling that Mr. Wickam fraudulently induced the Ivars’
10 second investment. I disagree. In my view, the bankruptcy
11 court’s justifiable reliance finding concerning the Ivars’ second
12 investment irreconcilably conflicts with its findings regarding
13 the Ivars’ first investment. Based on this, I believe that the
14 bankruptcy court’s conclusion that the Ivars justifiably relied
15 on the misrepresentation relating to the second investment is
16 illogical, and, therefore, clearly erroneous. I would reverse
17 the judgment as to the Ivars’ second investment, and I dissent to
18 that limited extent.
19 A. The Clearly Erroneous Standard.
20 This appeal demonstrates the inherent tension in the clearly
21 erroneous standard. As the Supreme Court aptly has explained,
22 If the [factfinder’s] account of the evidence is
plausible in light of the record viewed in its
23 entirety, [the appellate court] may not reverse it even
though convinced that had it been sitting as the trier
24 of fact, it would have weighed the evidence
differently. Where there are two permissible views of
25 the evidence, the factfinder’s choice between them
cannot be clearly erroneous.
26
27 Anderson v. City of Bessemer City, 470 U.S. 564, 573–74 (1985).
28 Anderson held that appellate courts overstep the bounds of their
1
1 duty if they merely substitute their judgment of the facts in
2 place of the factfinder’s. As Anderson put it, the appellate
3 court must not decide factual issues de novo. Id. at 573.
4 On the other hand, the clearly erroneous standard is not a
5 “blank check” that permits a trial court, sitting without a jury,
6 to make any findings it deems necessary to reach its desired
7 result. At bottom, the standard sets forth a rule of reason.
8 The factfinder’s view of the evidence is not “permissible” – and
9 is clearly erroneous – when it is “‘illogical or implausible’ or
10 lacks ‘support in [reasonable] inferences that may be drawn from
11 facts in the record.’” United States v. Hinkson, 585 F.3d 1247,
12 1261 (9th Cir. 2009) (en banc) (quoting Anderson, 470 U.S. at13 577). When factual issues are controlling, the deferential
14 nature of the clearly erroneous standard does not permit
15 appellate courts to shy away from “meticulous” and
16 “comprehensive” review of the record to ensure that the findings
17 are logical, plausible and supported by the record. See
18 Anderson, 470 U.S. at 581 (Powell, J., concurring). With the
19 standard in mind, I turn my attention to my concerns with the
20 bankruptcy court’s determination of fraud as to the Ivars’ second
21 investment.1
22
1
23 I focus my discussion upon the element of justifiable
reliance. But the court’s findings as to knowledge of falsity
24 and intent also merit a brief mention. The court based its
findings on these elements upon statements in the Ivars’
25 declarations that “Mr. Werner and Mr. Wickam indicated it was a
26 perfect time to get an early start on lots 26 and 27 and needed
additional funds for ‘bricks and sticks’ on the project which I
27 understood to mean actual construction costs.” Alan Ivar Decl.
(Sept. 20, 2013) at ¶ 67; Deborah Ivar Decl. (Sept. 20, 2013) at
28 (continued...)
2
1 B. The Justifiable Reliance Finding.
2 Mr. Wickam argues that the court erred in finding that the
3 Ivars justifiably relied on the “bricks and sticks”
4 misrepresentation in making their second investment of $600,000.
5 While there was nothing suspicious concerning the statement that
6 the Ivars’ funds would be used for “bricks and sticks,” the Ivars
7 were aware of numerous other red flags concerning their second
8 investment. In my opinion, the Ivars failed to prove that they
9 justifiably relied on the bricks and sticks misrepresentation
10 when they ignored those red flags.
11 To briefly recap, the Ivars’ second investment consisted of
12 a $200,000 installment paid in December 2006, and a $400,000
13 installment paid in April 2007. As Mr. Wickam points out, the
14 Ivars contend that they were investing this time in Coral Blue
15 II, LLC to develop lots 26 and 27, but they paid their investment
16 funds to Connexian rather than Coral Blue II, LLC. In exchange
17 for their $200,000 installment, the Ivars received a 30-day
18
19 1
(...continued)
20 ¶ 67. While these statements establish that Mr. Wickam made, or
was aware of, these representations they fall short of
21 establishing that Mr. Wickam knew the falsity of the statement or
intended to deceive the Ivars at that time. There is simply
22
nothing in the statements cited by the bankruptcy court that goes
23 to knowledge of falsity or intent. However, the court made two
other findings that arguably support its knowledge and intent
24 determinations. First it found that, at the time Connexian
received the Ivars’ two payments comprising the second
25 investment, the business accounts “were at or near a zero
26 balance.” And second, it found that Mr. Wickam received payments
shortly after each investment. Mindful of the deference given to
27 the bankruptcy court’s factual findings, I cannot say that its
findings of knowledge and intent are clearly erroneous based on
28 the totality of the evidence.
3
1 promissory note from Connexian bearing 7% interest. They also
2 received a deed of trust from Connexian against lots 26 and 27 to
3 secure repayment of the promissory note. The record reflects
4 that, at the time the Ivars made their $200,000 installment, they
5 did not receive a single document from, or about, Coral Blue II,
6 LLC.
7 Four months later, the Ivars paid an additional $400,000 to
8 Connexian for an additional investment in Coral Blue II, LLC.
9 This time, the Ivars did receive and sign an operating agreement
10 for Coral Blue II, LLC at the time they made this second payment.
11 Like the first installment payment, this second installment was
12 paid to Connexian rather than Coral Blue II, LLC. The Ivars did
13 not receive a promissory note in exchange for their $400,000
14 payment, though by this time Connexian’s 30-day note for the
15 prior $200,000 “loan” already was in default. They testified
16 that they understood they would receive 25% of the net proceeds
17 from the sales of lots 26 and 27. The Ivars failed to address
18 Mr. Wickam’s justifiable reliance argument in their appeal brief.
19 The majority decision thoroughly sets forth the metes and
20 bounds of the justifiable reliance standard and there is no need
21 to reiterate those points here. However, it bears repeating that
22 the subjective nature of the standard cuts both ways. See Field
23 v. Mans, 516 U.S. 59, 76 (1995). Because justifiable reliance
24 focuses on the circumstances of the individual case and
25 particularly on the fraud plaintiffs’ state of mind, the
26 plaintiffs must be charged with all knowledge (and beliefs) they
27 admit to having. See generally Id. at 71-72 (holding that
28 justifiable reliance focuses on the knowledge, intelligence, and
4
1 other “qualities and characteristics of the particular plaintiff,
2 and the circumstances of the particular case, rather than [on]
3 the application of a community standard of conduct to all
4 cases.”).
5 Although creditors are not generally required to investigate
6 their debtors, this does not mean that they are never required to
7 investigate. Yim v. Chaffee (In re Chaffee), BAP No.
8 CC-16-1241-TaFC, 2017 WL 1046057, at *6-7 (9th Cir. BAP 2017),
9 aff’d, 713 F. App'x 641 (9th Cir. Feb. 23, 2018), at *7 (quoting
10 Eugene Parks Law Corp. Defined Benefit Plan v. Kirsh (In re
11 Kirsh), 973 F.2d 1454, 1460 (9th Cir. 1992)). Rather,
12 justifiable reliance “turns on a person’s knowledge under the
13 particular circumstances.” Citibank (S. Dakota), N.A. v. Eashai
14 (In re Eashai), 87 F.3d 1082, 1090 (9th Cir. 1996). The court
15 “must look to all of the circumstances surrounding the particular
16 transaction, and must particularly consider the subjective effect
17 of those circumstances upon the creditor.” In re Chaffee, 2017
18 WL 1046057 at *7 (emphasis added). When fraud plaintiffs receive
19 information that, given the circumstances and their level of
20 knowledge and intelligence, should warn them that the defendant
21 might be deceiving them, they cannot blindly rely on the
22 defendant’s representations. Field, 516 U.S. at 71-72(citing W.
23 Prosser, Law of Torts § 108, p. 718 (4th ed. 1971)); see, e.g.,
24 In re Eashai, 87 F.3d at 1091 (“We will not allow a creditor, who
25 has been put on notice of the debtor’s intent not to repay, to
26 extend credit and then later claim nondischargeability on the
27 basis of fraud”); McClammer v. Holmes (In re Holmes), 570 B.R.
28 610, 621 (Bankr. W.D. Mo. 2017) (holding that at some point
5
1 multiple misrepresentations precluded a finding of justifiable
2 reliance); Cooper v. Lemke (In re Lemke), 423 B.R. 917, 924 (10th
3 Cir. BAP 2010) (no justifiable reliance where plaintiff continued
4 to lend money after red flags arose). “Reliance falls below the
5 justifiable standard when ‘red flags’ are ignored.” Hopper v.
6 Lewis (In re Lewis), 551 B.R. 41, 49 (Bankr. E.D. Cal. 2016).
7 The Ivars’ $600,000 investment was not their first
8 transaction with Mr. Wickam and Mr. Werner, and they are charged
9 with that history. Importantly, they carry with them the
10 representations on which they relied to enter into their first
11 investment on this project. The Ivars testified that when they
12 made their first investment they believed Coral Blue, LLC owned
13 the four Coral Blue lots. They also understood that Coral Blue,
14 LLC would develop the four lots, and they would be paid from the
15 sale of those lots. Based on this understanding, the Ivars
16 further testified that Coral Blue, LLC’s role in the transaction
17 was critical to them. As the Ivars put it, had they known that
18 Coral Blue, LLC was not going to own the four lots, they would
19 not have made their first investment. The bankruptcy court
20 credited this testimony in its findings, and the majority
21 decision relies upon these findings in affirming the Ivars’
22 claims for fraudulent misrepresentation as to the first
23 investment. I concur in this conclusion.
24 And yet, only a few months later, in the midst of making
25 their decision to invest an additional $200,000 in December 2006,
26 the Ivars were asked to invest in a new entity but on the same
27 project in which they had previously invested. As they explained
28 it, the Ivars were to be paid from two of the same lots that
6
1 Coral Blue, LLC previously committed to sell to fund payment on
2 the Ivars’ first investment. Moreover, in making their $200,000
3 payment to Connexian, the Ivars were confronted with proof,
4 provided to them by Mr. Wickam and Mr. Werner, that Coral Blue,
5 LLC did not own two of the four lots. Connexian did. And the
6 Ivars paid the $200,000 to Connexian. Instead of receiving any
7 interest in Coral Blue II, LLC at the time they first paid
8 Connexian, the Ivars received a 30-day promissory note from
9 Connexian secured by two of the lots Coral Blue, LLC supposedly
10 owned. At that time, they were instructed not to record that
11 deed of trust. Even overlooking the instruction not to record
12 the deed of trust, Connexian’s deed of trust goes to the
13 ownership of the lots. This directly conflicts with the Ivars’
14 fundamental understanding of their first investment made only a
15 couple of months earlier: that Coral Blue, LLC owned and was
16 developing all four Coral Blue lots, including lots 26 and 27.
17 The Ivars are charged with the knowledge gained in their
18 first transaction, and the two transactions are inherently
19 inconsistent. The Ivars testified that ownership and development
20 of the Coral Blue lots was critically important to them, and they
21 would not have made their first investment had they known that
22 Coral Blue, LLC did not own all four lots. Given that, it was
23 neither logical, nor plausible, that the Ivars justifiably relied
24 on any further solicitation statements when they knew three
25 different entities controlled by Mr. Werner and Mr. Wickam had
26 made conflicting claims of ownership and the right to develop the
27 Coral Blue lots. The Ivars were not entitled to turn a blind eye
28 to the competing claims of ownership, multiple entities,
7
1 secretive collateral, and the breach of the $200,000 promissory
2 note in making their second investment. There were simply too
3 many red flags for the Ivars to ignore before making their second
4 investment.
5 It was the Ivars’ burden of proof to establish all of the
6 elements necessary to establish nondischargeability under
7 § 523(a)(2)(A), including justifiable reliance. See Field, 516
8 U.S. at 66; Grogan v. Garner, 498 U.S. 279, 284–85 (1991); see
9 also Sachan v. Huh (In re Huh), 506 B.R. 257, 262 (9th Cir. BAP
10 2014) (en banc). Yet the Ivars did not even attempt to address
11 the red flags that existed at the time they made their second
12 investment. There is nothing in the record remotely explaining
13 what they were thinking about the introduction of Coral Blue II,
14 LLC and Connexian into the project.2 The record is totally
15 devoid of any explanation as to how they thought they would be
16 paid by the two Coral Blue entities from the sale of the same two
17 lots that Connexian owned.
18 In sum, I conclude that the bankruptcy court committed clear
19 error when it found that the Ivars justifiably relied on the
20
21
22 2
There was some discussion at trial regarding the Ivars’
23 separate investment in another Wickam and Werner project in
Colorado in which Connexian was involved. That matter, and any
24 relationship with Connexian’s ownership of the Coral Blue lots,
was not developed. More importantly, it does not alter the
25 Ivars’ testimony that they would not have made their first
26 investment in Coral Blue, LLC if they had known that the four
lots would not be owned by the entity in which they were
27 investing. Yet they invested in Coral Blue II, LLC with
knowledge that Coral Blue, LLC should have owned the lots and
28 that Connexian claimed to own the lots.
8
1 “bricks and sticks” misrepresentation.3 The finding is
2 illogical, implausible, and not supported by the record. Because
3 the Ivars failed to prove an element of their § 523(a)(2)(A)
4 claim as to their second investment, I would reverse the judgment
5 excepting that debt from discharge.
6
7
3
8 The bankruptcy court alternately found that Mr. Wickam and
Mr. Werner fraudulently induced the Ivars’ second investment by
9 misrepresenting the organizational status of Coral Blue II, LLC.
According to the Ivars, they were falsely led to believe that
10 Coral Blue II, LLC filed its Articles of Organization with the
California Secretary of State in March 2007, when in fact the
11
Articles of Organization were not filed until several months
12 later. Neither the parties nor the majority decision focus on
this alternate fraud ground. This fraud finding is problematic
13 for several reasons. For instance, the representation occurred
after the Ivars paid the first $200,000 of their second
14 investment. Second, in light of the transactional irregularities
15 noted above, the Ivars could not have justifiably relied on the
organizational status misrepresentation any more than they relied
16 on the “bricks and sticks” misrepresentation. Most importantly,
there is a lack of proximate cause in relation to this
17 misrepresentation. See Ghomeshi v. Sabban (In re Sabban), 384
B.R. 1, 6-7 (9th Cir. BAP 2008) (noting similar causal disconnect
18 between statutory disgorgement debt and plaintiff’s alleged fraud
19 loss).
20 The bankruptcy court further held that the fraud pertaining
to the Ivars’ first investment supported the nondischargeability
21 of the debt arising from their second investment. The Ivars
press this point on appeal: “Had Wickam not engaged in fraud in
22
the first place, the Ivars would not have invested their initial
23 $216,000 and thereafter not been in a position to have invested
an additional $600,000.” The majority decision does not address
24 this holding because it relies on the fraud holding pertaining to
the “bricks and sticks” representation. Suffice it to say that
25 there is no logical way Mr. Wickam’s misrepresentations that
26 induced the Ivars’ first investment also could have induced the
Ivars’ second investment in a different entity. See generally
27 Cohen v. De La Cruz, 523 U.S. 213, 220-23 (1998) (indicating that
debt must flow from the fraud to be nondischargeable); In re
28 Sabban, 384 B.R. at 6-7 (same).
9