In re: Leticia Joy Arciniega

FILED
FEB 03 2016
SUSAN M. SPRAUL, CLERK
1 NOT FOR PUBLICATION U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT
2
3 UNITED STATES BANKRUPTCY APPELLATE PANEL
4 OF THE NINTH CIRCUIT
5 In re: ) BAP No. CC-15-1123-KiGD
)
6 LETICIA JOY ARCINIEGA, ) Bk. No. 6:11-bk-15412-SY
)
7 Debtor. ) Adv. No. 6:11-ap-01735-SY
)
8 )
LETICIA JOY ARCINIEGA, )
9 )
Appellant, )
10 )
v. ) M E M O R A N D U M1
11 )
JAMES CLARK, )
12 )
Appellee. )
13 ______________________________)
14 Argued and Submitted on January 21, 2016,
at Pasadena, California
15
Filed - February 3, 2016
16
Appeal from the United States Bankruptcy Court
17 for the Central District of California
18 Honorable Scott Yun, Bankruptcy Judge, Presiding
19
Appearances: Bruce Adelstein of Law Office of Bruce Adelstein
20 argued for appellant Leticia Joy Arciniega; Chad V.
Haes of Marshack Hays LLP argued for appellee James
21 Clark.
22
Before: KIRSCHER, GAN2 and DUNN, Bankruptcy Judges.
23
24
25
1
This disposition is not appropriate for publication.
26 Although it may be cited for whatever persuasive value it may
have, it has no precedential value. See 9th Cir. BAP Rule 8024-1.
27
2
Hon. Scott H. Gan, Bankruptcy Judge for the District of
28 Arizona, sitting by designation.
1 Debtor Leticia Joy Arciniega appeals a judgment excepting a
2 $50,000 debt from discharge under § 523(a)(2)(A)3 and (a)(6) for
3 false representations Arciniega made in connection with a
4 settlement agreement with James Clark. Arciniega also appeals the
5 bankruptcy court's decision to award Clark $281,000 in liquidated
6 damages and to award him $209,806.42 in attorney's fees as part of
7 the nondischargeable judgment. We AFFIRM, in part, REVERSE, in
8 part, and VACATE and REMAND, in part.
9 I. FACTUAL BACKGROUND AND PROCEDURAL HISTORY
10 A. Prepetition events
11 1. The marriage and properties purchased
12 Arciniega is a California realtor and owns a real estate
13 agency. She also has extensive professional experience in the
14 banking industry, including recent employment as a compliance
15 consultant for various financial institutions. Clark is a Vietnam
16 veteran and is Arciniega's former husband.
17 In 1979, the couple purchased a home known as the Arrowhead
18 Property. In 1991, they purchased a second home known as the
19 Verona Property. Both properties were purchased with Clark's VA
20 home loan entitlement. The couple took title to the properties in
21 both their names. In 1991, Arciniega and Clark separated. Since
22 that time, Clark has lived at the Arrowhead Property; Arciniega
23 has lived at the Verona Property. The marriage was formally
24 dissolved in 2000.
25 Despite their split, Arciniega continued to make the mortgage
26
27 3
Unless specified otherwise, all chapter, code and rule
references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and
28 the Federal Rules of Bankruptcy Procedure, Rules 1001-9037.
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1 payments on both properties. She and Clark later refinanced the
2 VA loans on both properties. In 2006, Clark conveyed his one-half
3 interest in the Verona Property to Arciniega.
4 2. Clark's lawsuit over the Arrowhead Property
5 In March 2007, Clark sued Arciniega for claims relating to
6 the Arrowhead Property. Clark sought to acquire title to the
7 Arrowhead Property as his sole and separate property. That same
8 month, Arciniega obtained a second mortgage on the Verona Property
9 from CitiMortgage for $100,000 secured by a junior deed of trust
10 against the property. Arciniega did not tell Clark about the
11 second mortgage.
12 In late April 2009, Clark and Arciniega settled the Arrowhead
13 litigation, as memorialized in a written Settlement Agreement.
14 Clark signed the Settlement Agreement on May 4, 2009; Arciniega
15 signed it on May 11, 2009. Both parties were represented by
16 counsel. Under the Settlement Agreement, the parties agreed that:
17 A. By May 13, 2009, Clark would pay Arciniega $50,000,
18 provided that by May 13, 2009, Arciniega had quitclaimed to Clark
19 her interest in the Arrowhead Property; and
20 B. By May 13, 2010, Arciniega would "take all necessary
21 measures to pay off the existing VA loan and remov[e] [Clark's]
22 name from the loan on [the Verona Property]."
23 The Settlement Agreement expressly provided that Arciniega was
24 prohibited from attempting to assume the VA loan on the Verona
25 Property. The Settlement Agreement provided for liquidated
26 damages of $1,000 per day for each party should they fail to meet
27 their respective deadlines. It also contained a reciprocal
28 attorney's fees clause.
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1 Per section II.A. of the Settlement Agreement, Clark paid
2 Arciniega the $50,000 and Arciniega transferred her one-half
3 interest in the Arrowhead Property to Clark. However, Arciniega
4 never paid off the VA loan on the Verona Property or removed
5 Clark's name from it as she agreed to do under section II.B. of
6 the Settlement Agreement.
7 3. Arciniega's financial troubles and pre-settlement
communications regarding the Verona Property loans
8
9 After the Arrowhead litigation had been filed and prior to
10 the execution of the Settlement Agreement, Arciniega had extensive
11 written communications with CitiMortgage and credit counseling
12 agencies regarding her dire financial condition and efforts to
13 modify the VA loan on the Verona Property. Arciniega admitted she
14 did not disclose any of these communications to Clark prior to the
15 parties entering into the Settlement Agreement.
16 Eight months before she executed the Settlement Agreement,
17 Arciniega received a letter from the VA dated September 3, 2008.
18 The letter included the "Release of Liability" package Arciniega
19 had requested and explained to Arciniega the process of how to
20 assume a VA loan. The letter advised that "if the VA grants a
21 release of liability, this will not restore the veteran's Home
22 Loan entitlement. The veteran will not be able to use his
23 entitlement until you (the assumer) pays the loan in full. In
24 addition, if you (the assumer) defaults on the payments and the
25 lender forecloses on the loan, the veteran will lose his
26 entitlement until you (the assumer) repays VA for the loss
27 suffered in the foreclosure."
28 Five months before she executed the Settlement Agreement,
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1 Arciniega received a letter from Springboard Nonprofit Consumer
2 Credit Management dated December 8, 2008, in response to a prior
3 counseling session she received. The letter noted that
4 Arciniega's net income was insufficient to maintain the first
5 mortgage on the Verona Property, that her expenses exceeded her
6 income by $3,820 per month, and recommended that Arciniega effect
7 a short sale or deed in lieu.
8 Four months before executing the Settlement Agreement,
9 Arciniega received a letter from CitiMortgage's Loss Mitigation
10 Department dated January 22, 2009, in response to her request for
11 assistance on the VA loan. The letter, addressed to both Clark
12 and Arciniega, stated that the file had been forwarded to a loss
13 mitigation specialist for review and advised that CitiMortgage was
14 "unable to suspend collection or foreclosure activity until such
15 time that a Workable Solution has been approved or completed,
16 depending on the type of solution offered."
17 Three months before executing the Settlement Agreement,
18 Arciniega received a letter from CitiMortgage's Loss Mitigation
19 Department dated February 12, 2009, in response to her request for
20 a forbearance plan. This letter, also addressed to both Clark and
21 Arciniega, set forth a forbearance plan for the VA loan on the
22 Verona Property. Arciniega signed the contract agreeing to the
23 plan's terms. Although a signature line was provided for Clark,
24 he did not sign.
25 About one month before she executed the Settlement Agreement,
26 Arciniega received a letter from CitiMortgage's Loss Mitigation
27 Department dated April 13, 2009, in response to Arciniega's
28 "recent inquiry regarding assistance with [her] mortgage." This
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1 letter, addressed to both Clark and Arciniega, indicated ways for
2 Arciniega to keep her home and alternatives to foreclosure. The
3 letter stated that "[i]n order to open a file for review in loss
4 mitigation, your request must include financial information from
5 all borrowers who signed the original loan . . . ." Arciniega
6 admitted she did not ask Clark for any financial information so
7 CitiMortgage could open a file for review of loss mitigation.
8 Three weeks before executing the Settlement Agreement,
9 Arciniega received a letter from CitiMortgage dated April 20,
10 2009. This letter, addressed to both Clark and Arciniega,
11 indicated that CitiMortgage was "concerned because your mortgage
12 account is still delinquent."
13 On May 2, 2009, just nine days before she signed the
14 Settlement Agreement, Arciniega sent a letter to CitiMortgage
15 seeking to modify the VA loan and the second loan on the Verona
16 Property. Arciniega explained her dire financial condition and
17 that the current forbearance plan was not sufficient relief. She
18 requested that CitiMortgage "re-write" the loans under the terms
19 she offered. Particularly, Arciniega indicated that: (1) she was
20 "delinquent" on her first mortgage based on its forbearance
21 status; (2) she had effectuated a settlement with Clark that
22 required her to "remove his name from the mortgage on this house"
23 and that she "must remove James' name from the loan;" (3) her
24 declining income made it difficult for her to qualify for a new
25 mortgage to accomplish her requirement to remove Clark; (4) the
26 Verona Property would "not appraise for an amount sufficient to
27 allow for a refinance;" (5) she had "exhausted" her savings
28 "completely;" (6) she earned only $2,700 per month but her monthly
-6-
1 expenses were nearly $4,000; and (7) she risked losing the Verona
2 Property if she did "not forestall [her] probable delinquency,
3 default and eventual foreclosure." CitiMortgage ultimately
4 granted a modification of the VA loan on the Verona Property.
5 In addition to not telling Clark about these pre-settlement
6 communications with Springboard or CitiMortgage, Arciniega also
7 admitted not disclosing that her live-in boyfriend, David
8 Christian, recorded a deed of trust against the Verona Property on
9 April 28, 2009, just days before Arciniega signed the Settlement
10 Agreement, purporting to secure a $120,000 loan to Arciniega. At
11 that time, Arciniega valued the Verona Property at $89,000.
12 Christian reconveyed his security interest in the Verona Property
13 back to Arciniega on May 19, 2009, one week after she signed the
14 Settlement Agreement.
15 4. Arciniega's post-settlement communications regarding the
Verona Property loans
16
17 Per the Settlement Agreement, Arciniega had one year, until
18 May 13, 2010, to "take all necessary measures" to pay off the VA
19 loan and remove Clark's name from it.
20 On March 10, 2010, Arciniega sent a letter to CitiMortgage,
21 seeking to once again modify the VA loan on the Verona Property.
22 This letter was essentially identical to the one she submitted to
23 CitiMortgage on May 2, 2009.
24 Arciniega's deadline of May 13, 2010, passed. Eight months
25 later, on January 11, 2011, Arciniega sent a letter to
26 CitiMortgage seeking another modification of the VA loan. This
27 letter was essentially identical to the ones she submitted on
28 May 2, 2009, and March 10, 2010.
-7-
1 B. Postpetition events
2 Arciniega filed a chapter 7 bankruptcy case on February 18,
3 2011.
4 1. Clark's adversary action against Arciniega
5 Clark filed an adversary complaint against Arciniega, seeking
6 to except the debt owed to him under the Settlement Agreement from
7 discharge under § 523(a)(2)(A) and (a)(6).4 Clark alleged that
8 Arciniega had deliberately failed to disclose she had no intention
9 of satisfying the VA loan on the Verona Property, with the purpose
10 of inducing Clark to pay her $50,000. Clark alleged that he
11 justifiably relied on Arciniega's representations that she
12 intended to pay off the VA loan. Clark alleged that as a result
13 of Arciniega's false representations and/or actual fraud, he had
14 suffered damages of at least $331,000, exclusive of attorney's
15 fees, costs and interest.
16 Clark and Arciniega later filed a joint pretrial
17 stipulation. While they agreed to many facts, one source of
18 disagreement was their differing interpretations of Arciniega's
19 obligations under the Settlement Agreement. Clark believed
20 Arciniega was required to pay off the VA loan and remove his name
21 from it, which she failed to do. Arciniega believed she was
22 required only to "take all necessary measures" to pay off the VA
23 loan and remove Clark's name from it, which she contended she did.
24 In other words, Arciniega did not believe she had to actually
25 accomplish the task of paying off the VA loan and removing Clark's
26
27 4
Clark also sought to deny Arciniega's discharge under
§ 727(a)(2) and (a)(4). The bankruptcy court found in favor of
28 Arciniega on those claims. They are not at issue on appeal.
-8-
1 name from it, only that she had to make her best efforts to do so.
2 Thus, Arciniega contended she had not breached the Settlement
3 Agreement.
4 In her direct testimony declaration filed on January 21,
5 2014, Arciniega stated that she intended to perform under the
6 Settlement Agreement and that she had been trying since 2006 to
7 pay off the VA loan on the Verona Property and remove Clark's name
8 from it. However, at the time the Settlement Agreement was
9 executed, the Verona Property was severely underwater (by at least
10 $80,000) due to market and economic conditions beyond her control;
11 thus, it could not be refinanced under traditional terms.
12 In his direct testimony declaration, Clark testified that the
13 reason for removing his name from the VA loan on the Verona
14 Property was so that he could regain his VA home loan entitlement.
15 Clark said he relied on Arciniega's representation that she would
16 pay off the VA loan and remove his name from it by May 13, 2010.
17 He also relied on Arciniega's representation that she would pay
18 liquidated damages of $1,000 per day for each day she failed to
19 meet her deadline. Clark testified that Arciniega executed the
20 Settlement Agreement to induce him to pay her $50,000, knowing she
21 would not perform her obligations in exchange for his. Clark
22 testified that as a result of his reliance, he had incurred
23 $206,000 in actual damages (the $50,000 settlement amount plus at
24 least $156,000 in attorney's fees and costs through trial) and
25 $281,000 in liquidated damages (281 days x $1,000 per day
26 beginning on May 14, 2010, until the petition date of February 18,
27 2011). Clark testified that had he known about Arciniega's pre-
28 settlement communications regarding her dire financial condition
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1 and the state of the Verona Property loans, he would not have
2 entered into the Settlement Agreement; these communications
3 clearly showed that Arciniega had no ability to pay off or
4 refinance the VA loan and was not going to be able to simply
5 remove his name from it.
6 Arciniega, now pro se, filed a second direct testimony
7 declaration on February 24, 2015, along with some proposed,
8 untimely trial exhibits. Clark objected to virtually every
9 paragraph of the 2015 declaration and the proposed exhibits on
10 various evidentiary grounds. Notably, pages 1-3 of Arciniega's
11 latest seven-page declaration contained language identical to that
12 of her earlier declaration filed in 2014, to which Clark had not
13 objected. In any event, the bankruptcy court sustained a majority
14 of Clark's evidentiary objections, including many he asserted for
15 pages 1-3. Much of Arciniega's 2015 declaration and all but two
16 of her proposed exhibits were excluded. Arciniega has not
17 appealed any of the bankruptcy court's evidentiary rulings.5
18 2. The trial
19 The one-day trial proceeded on March 17, 2015. Arciniega
20 represented herself; only she and Clark testified. Clark admitted
21 that within one year prior to entering into the Settlement
22 Agreement he had not received any information as to Arciniega's
23
5
Clark contends Arciniega improperly included in her
24 excerpts of record documents not admitted into evidence. We
agree. Because Arciniega has not appealed the bankruptcy court's
25 evidentiary rulings with respect to the following documents, we
did not consider them on appeal: (1) Arciniega's stricken
26 testimony from her 2015 declaration; and (2) the documents
attached to Arciniega's 2015 declaration the bankruptcy court
27 excluded. As an appellate court, we can only consider evidence
included in the record. Kirschner v. Uniden Corp. of Am.,
28 842 F.2d 1074, 1077-78 (9th Cir. 1988).
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1 financial condition, yet he believed she had the ability to pay
2 off or refinance the VA loan on the Verona Property. After
3 hearing additional testimony and closing argument from the
4 parties, the bankruptcy court took the matter under submission,
5 stating it would announce its oral ruling the next day.
6 3. The bankruptcy court's ruling
7 The bankruptcy court issued its oral ruling on March 18,
8 2015, finding for Clark on his nondischargeability claims under
9 § 523(a)(2)(A) and (a)(6). The court awarded Clark the $50,000 he
10 paid to Arciniega as part of the Settlement Agreement. It further
11 awarded Clark $281,000 in liquidated damages per the Settlement
12 Agreement, $1,000 per day for each day that Arciniega "did not
13 live up to the provisions of that agreement . . . from the day she
14 breached to the day she filed for bankruptcy." Trial Tr.
15 (Mar. 18, 2015) at 14:17-20. Finally, under Cohen v. de la Cruz,
16 523 U.S. 213 (1998), the court awarded Clark his attorney's fees
17 and costs based on the fee provision in the Settlement Agreement.
18 The court ordered Clark to file a declaration to prove-up his
19 attorney's fees before entering a final judgment.
20 After Clark filed the fee declaration, the bankruptcy court
21 entered a judgment excepting Clark's debt of $540,806.42 from
22 Arciniega’s discharge under § 523(a)(2)(A) and (a)(6) (the
23 "Judgment"). The Judgment consisted of $331,000 in damages and
24 the $209,806.42 in attorney's fees and costs Clark incurred for
25 the adversary proceeding. Arciniega timely appealed the Judgment.
26 II. JURISDICTION
27 The bankruptcy court had jurisdiction under 28 U.S.C. §§ 133428 and 157(a)(2)(I) and (J). We have jurisdiction under 28 U.S.C.
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1 § 158.
2 III. ISSUES
3 1. Did the bankruptcy court err in determining that Arciniega
4 had acted with the requisite fraudulent intent and that Clark
5 justifiably relied on her representations under § 523(a)(2)(A)?
6 2. Did the bankruptcy court err in determining that Arciniega
7 willfully and maliciously injured Clark under § 523(a)(6)?
8 3. Did the bankruptcy court err in determining that Clark
9 suffered actual damages of the $50,000 settlement payment as a
10 result of Arciniega's fraud or willful and malicious injury?
11 4. Did the bankruptcy court abuse its discretion in awarding
12 Clark liquidated damages of $281,000 as part of the
13 nondischargeable debt?
14 5. Did the bankruptcy court err in awarding Clark attorney's
15 fees of $209,806.42 as part of the nondischargeable debt?
16 IV. STANDARDS OF REVIEW
17 We review de novo the bankruptcy court's legal conclusions,
18 and we review for clear error its factual findings as to whether
19 the requisite nondischargeability elements are present. Tallant
20 v. Kaufman (In re Tallant), 218 B.R. 58, 63 (9th Cir. BAP 1998).
21 Findings of fact are clearly erroneous only if they are illogical,
22 implausible or without support in the record. Retz v. Samson
23 (In re Retz), 606 F.3d 1189, 1196 (9th Cir. 2010).
24 We review the bankruptcy court's decision to apply § 523(a)
25 to an award of attorney's fees de novo. Redwood Theaters, Inc. v.
26 Davison (In re Davison), 289 B.R. 716, 720 (9th Cir. BAP 2003).
27 See Dinan v. Fry (In re Dinan), 448 B.R. 775, 782 (9th Cir. BAP
28 2011)(we review de novo the bankruptcy court's decision to award
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1 attorney's fees under state law).
2 We review the bankruptcy court's decision to award liquidated
3 damages under the abuse of discretion standard. Traxler v.
4 Multnomah Cty., 596 F.3d 1007, 1015 (9th Cir. 2010). The court
5 abuses its discretion if it applied the wrong legal standard or
6 its findings were illogical, implausible or without support in the
7 record. TrafficSchool.com, Inc. v. Edriver Inc., 653 F.3d 820,
8 832 (9th Cir. 2011).
9 V. DISCUSSION
10 A. The bankruptcy court did not clearly err in determining
Arciniega had acted with the requisite fraudulent intent and
11 that Clark justifiably relied on her representations.
12 Section 523(a)(2)(A) excepts from discharge any debt for
13 money, property, services or an extension, renewal, or refinancing
14 of credit, to the extent obtained by false pretenses, a false
15 representation or actual fraud. The creditor bears the burden of
16 demonstrating by a preponderance of the evidence each of the
17 following five elements: (1) misrepresentation, fraudulent
18 omission or deceptive conduct by the debtor; (2) knowledge of the
19 falsity or deceptiveness of the representation or omission; (3) an
20 intent to deceive; (4) the creditor's justifiable reliance on the
21 representation or conduct; and (5) damage to the creditor
22 proximately caused by reliance on the debtor's representations or
23 conduct. Ghomeshi v. Sabban (In re Sabban), 600 F.3d 1219, 1222
24 (9th Cir. 2010); Oney v. Weinberg (In re Weinberg), 410 B.R. 19,
25 35 (9th Cir. BAP 2009). Exceptions to discharge under § 523 are
26 narrowly construed in favor of the debtor. Su v. Carrillo
27 (In re Su), 259 B.R. 909, 912 (9th Cir. BAP 2001), aff'd, 290 F.3d
28 1140 (9th Cir. 2002).
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1 1. False representation
2 Whether the debtor made a false representation is a finding
3 of fact reviewed for clear error. Candland v. Ins. Co. of N. Am.
4 (In re Candland), 90 F.3d 1466, 1469 (9th Cir. 1996). Under the
5 Settlement Agreement, Arciniega agreed to "take all necessary
6 measures to pay off the existing VA loan and remov[e] [Clark's]
7 name from the loan on [the Verona Property]." The bankruptcy
8 court found this was a specific representation that Arciniega
9 would pay off the VA loan and remove Clark's name from it within
10 the specified period. The court rejected as not credible
11 Arciniega's contention that she was only required to try to pay
12 off the VA loan and remove Clark's name from it, and that as long
13 as she tried, she would satisfy her contractual obligations. The
14 court found the Settlement Agreement to be "written in a very
15 plain and clear language. There is no ambiguity there." Trial
16 Tr. (Mar. 18, 2015) at 6:23-25. It further found Arciniega's
17 contention that she only had to try to perform was undermined by
18 her May 2, 2009 letter to CitiMortgage, written just nine days
19 before she signed the Settlement Agreement, wherein she stated, "I
20 must remove James' name from the loan." Thus, opined the court,
21 Arciniega "knew exactly what she had to do" — either pay off the
22 VA loan or remove Clark's name from it by May 13, 2010. Id. at
23 7:12-18.
24 Arciniega disputes the bankruptcy court's interpretation of
25 the "unambiguous" phrase that she would "take all necessary
26 measures" to remove Clark from the VA loan on the Verona Property
27 to mean that she was required to succeed at doing so. Arciniega
28 contends the bankruptcy court interpreted "measures" in a way that
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1 conflated the means with the ends. It understood "take all
2 necessary measures" as including the end of taking Clark off the
3 loan. She maintains the plain meaning of this phrase is that she
4 had to "take all necessary measures" to accomplish the end of
5 paying off the VA loan or removing Clark's name from it, not that
6 she actually had to accomplish these ends. We disagree.
7 According to Burton's Legal Thesaurus, the similar legal
8 phrase "take the necessary measure" is a verb meaning:
9 "accomplish, achieve, act, attain, be instrumental, bring to
10 fruition, decide, determine, discharge, effectuate, enforce,
11 execute, find a method, find the means, find the way, follow
12 through, fulfill, gain, gain results, get, obtain, perform,
13 produce, realize." (4th ed. 2007). Clearly then, "take all
14 necessary measures" means to accomplish the end. Here, that meant
15 removing Clark's name from the VA loan by whatever means
16 necessary.
17 Moreover, Arciniega's interpretation defies logic. Merely
18 "trying" to pay off the VA loan or remove Clark's name from it
19 served no purpose to Clark. Such actions would not restore his VA
20 home loan entitlement or eliminate his liability on the VA loan.
21 In addition, Arciniega's performance of "trying" to get Clark's
22 name off the VA loan would be entirely subjective as to when a
23 breach occurred. How much effort by Arciniega would be enough to
24 satisfy her obligation under the contract? One letter to
25 CitiMortgage? Five letters? Ten letters and five phone calls?
26 Alternatively, whether Arciniega was successful at paying off the
27 VA loan or removing Clark's name from it provides a clear basis
28 for determining any potential breach. Obviously, this was the
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1 intent of the Settlement Agreement.
2 Accordingly, the bankruptcy court did not clearly err in
3 finding that the language of the Settlement Agreement was clear
4 and unambiguous and that Arciniega had represented she would pay
5 off the VA loan or remove Clark's name from it.
6 2. Knowledge of the falsity and intent to deceive the
creditor
7
8 Intent to deceive under § 523(a)(2)(A) is a question of fact
9 we review for clear error. In re Candland, 90 F.3d at 1469. The
10 bankruptcy court examined the evidence, including the testimony
11 offered at trial, and found that Arciniega knew her representation
12 that she would pay off the VA loan or remove Clark's name from it
13 was false, because she knew or should have known at the time she
14 entered into the Settlement Agreement that she could not perform.
15 To support its finding, the court pointed to the pre-settlement
16 letters between Arciniega and Springboard or CitiMortgage, all of
17 which evidenced her knowledge of her dire financial condition and
18 that she did not have sufficient income to pay her expenses. Most
19 persuasive was the fact that these various letters were written a
20 few months, weeks or even days before she signed the Settlement
21 Agreement. Thus, Arciniega was "fully cognizant" of her situation
22 and her inability to perform, yet she still entered into the
23 Settlement Agreement and received the benefit of Clark's $50,000
24 payment. Trial Tr. (Mar. 18, 2015) at 9:15-20
25 Of particular importance to the bankruptcy court was the
26 May 2, 2009 letter Arciniega wrote to CitiMortgage, just nine days
27 before she signed the Settlement Agreement, where she acknowledged
28 the Verona Property would not appraise for a sufficient amount for
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1 refinance, that she was delinquent, her earnings were low and that
2 she had exhausted all of her reserves.
3 The bankruptcy court also determined Arciniega's fraudulent
4 intent on the basis that she never actually tried to perform under
5 the Settlement Agreement. "A complete failure to take steps
6 towards carrying out a promise can support an inference that the
7 promisor never intended to perform." Field v. Baldwin
8 (In re Baldwin), 2012 WL 909293, at *3 (Bankr. D. Haw. Mar. 15,
9 2012)(citing Mitchell v. Barnette (In re Barnette), 281 B.R. 869,
10 876 (Bankr. W.D. Pa. 2002)). Her belief that modification or
11 attempts to assume the VA loan evidenced her attempt to perform
12 and thus proved her intent to perform, she just could not perform,
13 was "not persuasive." Trial Tr. (Mar. 18, 2015) at 10:3-8. The
14 court found that Arciniega knew, as evidenced by the May 2, 2009
15 letter to CitiMortgage, she had to get Clark's name off the VA
16 loan. The court also considered Arciniega's knowledge and
17 sophistication about real estate and the banking industry in
18 making its intent determination.
19 Arciniega contends the bankruptcy court's finding that she
20 acted with fraudulent intent was erroneous because it was based on
21 two faulty premises: (1) Arciniega knew she could not remove
22 Clark from the VA loan; and (2) Arciniega knew that "take all
23 necessary measures" required her to remove Clark's name from the
24 VA loan. As for Arciniega's second alleged premise, we have
25 already affirmed the bankruptcy court's finding that Arciniega
26 knew she was required under the Settlement Agreement to succeed in
27 removing Clark's name from the VA loan within the specified time
28 period, not that she merely had to try.
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1 Arciniega's contends the first premise also fails because she
2 did not know she could not remove Clark's name from the VA loan
3 with such certainty as to render her promise fraudulent. The
4 bankruptcy court disagreed, finding that based on her dire
5 financial condition at the time and her sophistication level she
6 knew or should have known that she would be unable to perform
7 under the Settlement Agreement. "[A] promise made with a positive
8 intent not to perform or without a present intent to perform
9 satisfies § 523(a)(2)(A)." Rubin v. West (In re Rubin), 875 F.2d
10 755, 759 (9th Cir. 1989). Additionally, the promise can be found
11 fraudulent "where the promisor knew or should have known of his
12 prospective inability to perform[.]" McCrary v. Barrack
13 (In re Barrack), 217 B.R. 598, 606 (9th Cir. BAP 1998).
14 Arciniega relies on Anastas v. Am. Sav. Bank (In re Anastas),
15 94 F.3d 1280 (9th Cir. 1996), for the proposition that in
16 situations where a debtor faces an objectively difficult time
17 performing an obligation, testifies to an honest belief that she
18 could perform and acts accordingly, it is clear error for the
19 bankruptcy court to infer fraudulent intent solely from the
20 objective difficulty of performance.
21 In Anastas, the debtor obtained cash advances on several
22 credit cards to finance his gambling. He always made the monthly
23 minimum payment to one particular credit card issuer.
24 Eventually, the debtor was unable to make the payment, given all
25 of his other credit card debts. He tried to work out alternate
26 payment arrangements with the subject issuer before he filed his
27 chapter 7 bankruptcy case, but the issuer refused. The issuer
28 then sought to except the credit card debt from discharge under
-18-
1 § 523(a)(2)(A). The bankruptcy court found that the debtor
2 committed fraud within the meaning of § 523(a)(2)(A), because he
3 incurred the debt without the intent to repay.
4 The Ninth Circuit reversed, holding that the bankruptcy court
5 erroneously based its determination on the debtor's inability to
6 pay the credit card debt rather than on his intent to pay. The
7 Anastas court held that when determining whether a creditor has
8 established the requisite element of intent in the context of
9 credit card fraud, a court's inquiry must focus on a debtor's
10 intent rather than ability to repay. 94 F.3d at 1285. Financial
11 condition, standing alone, is not a substitute for an actual
12 finding that the debtor intended to deceive the creditor when the
13 charges were incurred. Id. at 1286. Specifically, when
14 determining whether to except a credit card debt from discharge
15 under § 523(a)(2)(A), the court's "express focus must be solely on
16 whether the debtor maliciously and in bad faith incurred credit
17 card debt with the intention of petitioning for bankruptcy and
18 avoiding the debt." Id.
19 Anastas is factually distinguishable from this case because
20 Arciniega was not trying to obtain credit extensions from Clark.
21 She promised to remove Clark's name from the VA loan by the
22 specified time period by either paying it off or implementing some
23 other means. Further, the bankruptcy court did not infer
24 Arciniega's fraudulent intent solely from her financial condition
25 and the objective difficulty of performance; it inferred her
26 fraudulent intent from evidence that she knew of the impossibility
27 of what she had promised. That evidence consisted of her
28 sophisticated knowledge and the pre-settlement letters from
-19-
1 Springboard and CitiMortgage, particularly, the May 2, 2009
2 letter, which reflected that Arciniega was woefully insolvent,
3 that she could not pay her mortgages on the Verona Property, that
4 she risked losing the home to foreclosure, that she had exhausted
5 her savings and, most importantly, that she knew the Verona
6 Property was so far underwater no hope existed to refinance it.
7 Although Arciniega testified that CitiMortgage required her
8 first to modify the VA loan before it would consider refinancing,
9 no other evidence supported her contention. None of the pre- or
10 post-settlement letters made any mention of the possibility of
11 refinancing, which Arciniega admitted at trial. No one from
12 CitiMortgage offered a declaration; no expert witness testified on
13 her behalf. In addition, the bankruptcy court sustained Clark's
14 objection to Arciniega's testimony as hearsay as to whether or not
15 CitiMortgage required first a loan modification before it would
16 consider a refinance. Trial Tr. (Mar. 17, 2015) at 136:1-137:9.
17 Because direct evidence of intent to deceive is rarely
18 available, it can be inferred from the totality of the
19 circumstances, including reckless disregard for the truth.
20 Gertsch v. Johnson & Johnson, Fin. Corp. (In re Gertsch), 237 B.R.
21 160, 167-68 (9th Cir. BAP 1999). Based on the totality of the
22 circumstances, the bankruptcy court concluded that due to her dire
23 financial condition and her knowledge of real estate and the
24 banking industry, Arciniega could not have believed she could
25 refinance, pay off the VA loan or remove Clark's name from it
26 within the required time when she entered into the Settlement
27 Agreement. We do not perceive any clear error in the bankruptcy
28 court's finding that Arciniega acted with fraudulent intent. At
-20-
1 minimum, the evidence supports a finding that she acted with
2 reckless disregard for the truth.
3 3. Justifiable reliance
4 Arciniega does not challenge the bankruptcy court's finding
5 as to Clark's justifiable reliance. Therefore, we will not
6 further discuss the issue. See Christian Legal Soc'y v. Wu,
7 626 F.3d 483, 487–88 (9th Cir. 2010)("We review only issues [that]
8 are argued specifically and distinctly in a party's opening
9 brief.").
10 B. The bankruptcy court erred in finding that Clark's damages of
the $50,000 settlement payment was proximately caused by
11 Arciniega's fraud.
12 Although we conclude that the bankruptcy court did not err in
13 finding that Arciniega made a false representation, that she
14 intended to deceive Clark and that Clark justifiably relied on
15 Arciniega's representation, we REVERSE its finding that Clark was
16 damaged in the amount of the $50,000 payment he made to Arciniega
17 as a result of her fraud.
18 Another element for an exception to discharge under
19 § 523(a)(2)(A) is that Clark must have sustained loss or damages
20 as the proximate result of the misrepresentation having been made.
21 In re Sabban, 600 F.3d at 1223. The bankruptcy court found that
22 as a result of Arciniega's fraud, Clark suffered damages of the
23 $50,000 he paid to her as part of the Settlement Agreement.
24 Arciniega challenges the bankruptcy court's finding that
25 Clark suffered actual damages of the $50,000 payment by arguing
26 that for Clark to recover on his fraud in the inducement claim, he
27 had to rescind the Settlement Agreement, return the benefits he
28 received and seek restitution. As an initial matter, Arciniega
-21-
1 never raised this issue before the bankruptcy court, so we are not
2 required to address it. See Samson v. W. Capital Partners, LLC
3 (In re Blixseth), 684 F.3d 865, 872 n.12 (9th Cir. 2012)(appellate
4 court may decline to address argument not raised before bankruptcy
5 court). Nonetheless, we disagree.
6 Generally speaking, California law allows fraud plaintiffs to
7 retain the benefits of a contract he or she was fraudulently
8 induced to enter into and at the same time sue for damages for the
9 loss suffered as a result of the fraud. Lazar v. Super Ct.,
10 12 Cal. 4th 631, 646 (1996). In other words, fraud victims can
11 recover out-of-pocket damages in addition to benefit-of-the-
12 bargain damages. See also Robinson Helicopter Co., Inc. v. Dana
13 Corp., 34 Cal. 4th 979, 992 (2004)(where fraud damages are ordered
14 in relation to contractual obligations a fraud plaintiff may
15 recover "out-of-pocket" damages in addition to "benefit-of-the-
16 bargain" damages). One exception to this rule is when the subject
17 contract is a contract for the purchase, sale or exchange of
18 property. See CAL. CIV. CODE § 3343(a)(1). Thus, plaintiffs who
19 are fraudulently induced to enter into property transactions may
20 only recover as a measure of their damages out-of-pocket losses.
21 Fragale v. Faulkner, 110 Cal. App. 4th 229, 236 (2003).
22 Arciniega contends, but fails to show why, CAL. CIV. CODE
23 § 3343 applies here. An exchange of property was only part of the
24 Settlement Agreement; the transaction here was not a sale,
25 purchase or exchange of property as contemplated by the statute.
26 In any event, settlement agreements appear to be beyond the scope
27 of CAL. CIV. CODE § 3343. Ifeorah v. Flegal (In re Ifeorah),
28 2015 WL 3895502, at *7 (9th Cir. BAP June 24, 2015)(citing
-22-
1 Northridge Homeowners Ass'n v. State Farm Fire & Cas. Co., 50 Cal.
2 4th 913, 926 (2010)(determining proper measure of damages for
3 fraudulent inducement to enter into settlement agreement without
4 any reference or citation to CAL. CIV. CODE § 3343).
5 Arciniega has not cited any authority for the proposition
6 that rescission is necessary or even relevant where the claim is
7 one for exception to discharge under § 523(a)(2)(A) or (a)(6).
8 Nevertheless, we reject her argument that Clark was required to
9 rescind the Settlement Agreement because it contained a mutual
10 release of all known and unknown claims. Here, the release was
11 not the sole object of the contract for which the consideration
12 was paid. Persson v. Smart Inventions, Inc., 125 Cal. App. 4th
13 1141, 1155-56 (2005)(reviewing California cases).
14 However, the bankruptcy court did clearly err with respect to
15 awarding Clark damages for the $50,000 payment. Section II.A. of
16 the Settlement Agreement provides that Clark would pay Arciniega
17 $50,000 in exchange for Arciniega transferring her interest in the
18 Arrowhead Property to Clark. These two transactions occurred as
19 agreed. In a separate provision of the Settlement Agreement —
20 section II.B. — Arciniega agreed to pay off the VA loan and to
21 remove Clark's name from it. The only damages associated with her
22 breach of that provision is the liquidated damages of $1,000 per
23 day for each day she failed to perform. No tie exists between the
24 $50,000 payment Clark made to Arciniega and Arciniega's obligation
25 to pay off the VA loan and/or to remove Clark's name from it.
26 Therefore, we fail to see how the $50,000 payment was the
27 proximate result of Arciniega's breach of section II.B or her
28 fraud. Thus, it should not have been included in Clark's damages,
-23-
1 or the court should have applied a different standard for
2 calculating damages associated with determining damages arising
3 from Arciniega’s fraud.
4 C. The bankruptcy court abused its discretion in awarding Clark
liquidated damages without determining whether or not such
5 damages were enforceable under California law.
6 Arciniega contends that Clark could not recover liquidated
7 damages because that provision is an unenforceable penalty, citing
8 to CAL. CIV. CODE § 1671.6 Clark argues that Arciniega did not
9 present this argument before the bankruptcy court and therefore we
10 should not consider it. Arciniega, who appeared pro se at trial,
11 contended in her closing argument that she was not subject to a
12 "penalty or liquidated damages clause." Trial Tr. (Mar. 17, 2015)
13 at 179:19. Thus, we believe she sufficiently preserved the issue
14 for appeal. Even if not, the question before us is purely one of
15 law, which we have the discretion to consider as long as Clark is
16 not prejudiced. Columbia Steel Casting Co., Inc. v. Portland Gen.
17 Elec. Co., 111 F.3d 1427, 1443 (9th Cir. 1997). We conclude Clark
18 is not prejudiced because it was his initial burden to establish
19 damages under § 523(a)(2)(A) or (a)(6); he has fully briefed the
20 issue. Therefore, we exercise our discretion to consider it.
21 The Settlement Agreement contains a liquidated damages clause
22 which provides that the non-breaching party would receive $1,000
23 per day for each day the breaching party failed to meet his/her
24
6
CAL. CIV. CODE § 1671(b) provides:
25
Except as provided in subdivision (c), a provision in a
26 contract liquidating the damages for the breach of the
contract is valid unless the party seeking to invalidate the
27 provision establishes that the provision was unreasonable
under the circumstances existing at the time the contract was
28 made.
-24-
1 respective deadlines. Here, 281 days passed between Arciniega's
2 breach and her bankruptcy filing. As such, and with little
3 explanation, the bankruptcy court awarded Clark $281,000 in
4 liquidated damages.
5 Liquidated damages specified in a contract may be excepted
6 from discharge under § 523(a) if the debt arose from the debtor's
7 fraud or misrepresentation or willful and malicious injury. Wish
8 Acquisition, LLC v. Salvino (In re Salvino), 373 B.R. 578, 588
9 (Bankr. N.D. Ill. 2007)(applying § 523(a)(2)(A)); Brzys v.
10 Lubanski (In re Lubanski), 186 B.R. 160, 166-67 (Bankr. D. Mass.
11 1995)(applying § 523(a)(6)); Weitzer v. Lyman (In re Lyman),
12 113 B.R. 729, 731 (Bankr. M.D. Fla. 1990)(applying
13 § 523(a)(2)(A)). However, liquidated damages based on a mere
14 breach of contract, even an intentional breach, are not excepted
15 from discharge under § 523. Sterling Factors v. Whelan
16 (In re Whelan), 236 B.R. 495, 504-05 (Bankr. N.D. Ga. 1999);
17 In re Lyman, 113 B.R. at 731; Lipps v. Ky. (In re Lipps), 79 B.R.
18 67, 69 (Bankr. M.D. Fla. 1987). See Snoke v. Riso (In re Riso),
19 978 F.2d 1151, 1154 (9th Cir. 1992) (damages for breach of
20 contract, even in the case of intentional breach, are fully
21 dischargeable unless accompanied by tortious conduct).
22 Under Cohen, an obligation to pay liquidated damages could
23 satisfy the threshold condition that such damages constitute a
24 "debt" as described in § 523(a). 523 U.S. at 217-18 ("Once it has
25 been established that specific money or property has been obtained
26 by fraud, . . . 'any debt' arising therefrom is excepted from
27 discharge."). As the Supreme Court noted "[a] 'debt' is defined
28 in the Code as 'liability on a claim,' § 101(12), a 'claim' is
-25-
1 defined in turn as a 'right to payment,' § 101(5)(A), and a 'right
2 to payment,' . . . 'is nothing more nor less than an enforceable
3 obligation.'" Id. (quoting Pa. Dep’t of Pub. Welfare v.
4 Davenport, 495 U.S. 552, 559 (1990)).
5 Therefore, liquidated damages could be excepted from
6 Arciniega's discharge under § 523(a)(2)(A) due to her fraud if
7 they are an "enforceable obligation" under California law. In
8 California, a liquidated damages provision will generally be
9 considered unreasonable, and therefore unenforceable, under CAL.
10 CIV. CODE § 1671 if it "bears no reasonable relationship to the
11 range of actual damages that the parties could have anticipated
12 would flow from a breach" and the parties must attempt to
13 "estimate a fair average compensation for any loss that may be
14 sustained." Ridgley v. Topa Thrift & Loan Ass'n, 17 Cal. 4th 970,
15 977 (1998). In the absence of such relationship, a contractual
16 clause purporting to predetermine damages is construed as a
17 penalty. Id. "The characteristic feature of a penalty is its
18 lack of proportional relation to the damages which may actually
19 flow from failure to perform under a contract." Id. Such
20 penalties are ineffective; the wronged party can collect only the
21 actual damages sustained. Id. See also Ebbert v. Mercantile Tr.
22 Co., 213 Cal. 496, 499 (1931)(any provision by which money or
23 property would be forfeited without regard to the actual damage
24 suffered would be an unenforceable penalty).
25 The bankruptcy court did not evaluate whether the liquidated
26 damages were enforceable under California law. Given the standard
27 set by the California Supreme Court, it seems unlikely that the
28 $1,000/day provision was related to any anticipated actual loss
-26-
1 Clark would suffer by remaining on the VA loan. Accordingly, upon
2 remand, the bankruptcy court will need to review the subject
3 provision under the given standard and determine the appropriate
4 amount of liquidated damages, if any.
5 D. The bankruptcy court erred when it awarded Clark the full
amount of his attorney's fees without stating its basis for
6 doing so.
7 Arciniega contends that Clark could not recover attorney's
8 fees because the fee provision in the Settlement Agreement
9 expressly references CAL. CIV. CODE § 1717, which limits recovery to
10 a contract action, not one for fraud. Although she did not raise
11 this specific issue before the bankruptcy court, whether Clark was
12 entitled to attorney's fees as part of the nondischargeable debt
13 is purely a question of law, it was his burden to prove, and he
14 has fully briefed the issue. Therefore, we exercise our
15 discretion to consider it. Columbia Steel Casting Co., 111 F.3d
16 at 1443.
17 The bankruptcy court did not discuss in detail on what basis
18 it awarded Clark his attorney's fees, stating only that the
19 Settlement Agreement provided for fees to the prevailing party.
20 In any event, we believe the bankruptcy court misapplied the law.
21 Under the "American Rule," prevailing parties in federal
22 court are not ordinarily entitled to attorney's fees unless
23 authorized by contract or statute. Alyeska Pipeline Serv. Co. v.
24 Wilderness Soc'y, 421 U.S. 240, 257 (1975). The Code does not
25 provide a general right to recover attorney's fees. Heritage Ford
26 v. Baroff (In re Baroff), 105 F.3d 439, 441 (9th Cir. 1997).
27 In Cohen, the Supreme Court addressed the issue of whether a
28 prevailing creditor can recover attorney's fees in a § 523(a)(2)
-27-
1 action and held that a debt incurred by fraud can include
2 attorney's fees and costs. Because the creditors in Cohen were
3 entitled to treble damages and attorney's fees and costs under a
4 state statute for the debtor's fraudulent conduct, the entire debt
5 was excepted from discharge, including the fees and costs.
6 Cohen is not limited to cases involving statutorily-based
7 attorney's fees; it applies equally to cases in which fees are
8 provided for by contract. In re Dinan, 448 B.R. at 786. In
9 nondischargeability actions, the determinative question for
10 awarding attorney's fees is "whether [the] creditor would be
11 entitled to fees in state court for 'establishing those elements
12 of the claim which the bankruptcy court finds support a conclusion
13 of nondischargeability.'" Id. at 785 (quoting Kilborn v. Haun
14 (In re Haun), 396 B.R. 522, 528 (Bankr. D. Idaho 2008)).
15 No statutory basis exists for the award of attorney's fees in
16 this case; thus, we focus our analysis on the attorney's fees
17 provision in the Settlement Agreement, which is governed by
18 California law and is the only basis on which Clark could be
19 awarded fees. If the scope of the attorney's fees provision is
20 broad enough to encompass a state court action that has the same
21 elements as a § 523(a)(2)(A) claim — common law fraud — then Clark
22 is entitled to fees. Turtle Rock Meadows Homeowners Ass'n v.
23 Slyman (In re Slyman), 234 F.3d 1081, 1083 (9th Cir. 2000). The
24 attorney's fee provision at issue provides, in pertinent part:
25 In the event of future actions including, but not limited
to filing a motion to enforce settlement, litigation or
26 arbitration relating to the enforcement of this Agreement,
the prevailing party shall be entitled to his or her
27 reasonable attorney's fees, expenses and costs incurred
therein pursuant to California Civil Code section 1717.
28
-28-
1 California law permits recovery for attorney's fees under two
2 provisions. CAL. CIV. CODE § 17177 allows a party to recover
3 attorney's fees incurred in the litigation of a contract claim.
4 In re Davison, 289 B.R. at 722 (CAL. CIV. CODE § 1717 provides for
5 attorney's fees in an "action on a contract")(citing Santisas v.
6 Goodin, 17 Cal. 4th 599, 615 (1998)). CAL. CIV. CODE § 10218
7 permits recovery of attorney's fees by agreement between the
8 parties and does not limit recovery of fees to actions on the
9 contract. Id. at 724. Attorney's fees for fraud claims may be
10 recovered if the contract so provides.
11 Although the arguably ambiguous language of the attorney's
12 fees provision — i.e., "future actions including, but not limited
13 to . . . relating to the enforcement of this Agreement" — could be
14 construed as broad enough to include tort claims such as fraud,
15 the provision's explicit reference to CAL. CIV. CODE § 1717 creates
16 the limitation that reasonable attorney's fees can only be awarded
17 to the prevailing party in an "action on the contract." CAL. CIV.
18
19
7
CAL. CIV. CODE § 1717 authorizes attorney's fees "[i]n any
20 action on a contract, where the contract specifically provides
that attorney's fees and costs, which are incurred to enforce that
21 contract, shall be awarded either to one of the parties or to the
prevailing party, then the party who is determined to be the party
22 prevailing on the contract, whether he or she is the party
specified in the contract or not, shall be entitled to reasonable
23 attorney's fees in addition to other costs." CAL. CIV. CODE
§ 1717(a).
24
8
CAL. CIV. CODE § 1021 provides:
25
Except as attorney's fees are specifically provided for by
26 statute, the measure and mode of compensation of attorneys
and counselors at law is left to the agreement, express or
27 implied, of the parties; but parties to actions or
proceedings are entitled to their costs, as hereinafter
28 provided.
-29-
1 CODE § 1717(a); Hosseini v. Key Bank (In re Hosseini), 504 B.R.
2 558, 567 n.13 (9th Cir. BAP 2014)(citing Santisas, 17 Cal. 4th
3 599)(CAL. CIV. CODE § 1717 is to be narrowly applied and is
4 available to a party only if the dispute involves litigation of a
5 contract claim). The fee provision, therefore, is clear;
6 attorney's fees are only recoverable under CAL. CIV. CODE § 1717.
7 See Edwards v. Arthur Andersen, LLP, 44 Cal. 4th 937, 953
8 (2008)(where language of a contract is clear and not absurd, it
9 will be followed).
10 Accordingly, Clark had to show that the adversary proceeding
11 against Arciniega was an "action on the contract" to recover
12 attorney's fees. A nondischargeability action may be considered
13 an "action on a contract" even when the plaintiff only asserts one
14 claim for fraud. See AT&T Universal Card Servs.[] Corp. v. Pham
15 (In re Pham), 250 B.R. 93, 96 (9th Cir. BAP 2000)(even though
16 plaintiff did not expressly specify breach of contract as a ground
17 for relief, it nonetheless pleaded a contract cause of action
18 because it sought "determination of [a] debt and recovery of
19 attorney's fees" based on its contract with the debtor). If the
20 action involves contract and tort claims, attorney's fees may only
21 be recovered under CAL. CIV. CODE § 1717 for the fees incurred to
22 litigate the contract claims. In re Davison, 289 B.R. at 723
23 (citing Santisas, 17 Cal. 4th at 615).
24 In determining whether a proceeding was an action on a
25 contract, courts may look beyond the parties' pleadings. Sea Win,
26 Inc. v. Tran (In re Tran), 301 B.R. 576, 584 (Bankr. S.D. Cal.
27 2003)(citing Yadidi v. Herzlich (In re Yadidi), 274 B.R. 843,
28 851-52 (9th Cir. 2002) and Fed. R. Civ. P. 15(b))(action under
-30-
1 § 523(a)(2)(A) included a claim for breach of contract, even
2 though complaint only asserted nondischargeability claims, because
3 "the trial was conducted primarily as a breach of contract
4 action."); see Savage v. Brill (In re Savage), 2015 WL 2452626, at
5 *5 (9th Cir. BAP May 20, 2015)(title of cause of action is of
6 secondary importance to the nature of the parties' assertions in
7 applying CAL. CIV. CODE § 1717(a)). In Tran, the debtor had
8 disputed liability under the contract, requiring the plaintiff to
9 put on evidence to establish both dischargeability and breach of
10 contract. 301 B.R. at 584.
11 Thus, whether Clark was entitled to an award of attorney's
12 fees under CAL. CIV. CODE § 1717 for an "action on a contract" turns
13 on whether the Settlement Agreement played an integral role in the
14 nondischargeability action. In re Baroff, 105 F.3d at 442
15 (nondischargeability action "was an action on [the] contract
16 because the document containing the attorney's fee clause . . .
17 played an integral role in the proceedings."). In Baroff, the
18 Ninth Circuit distinguished Grove v. Fulwiler (In re Fulwiler),
19 624 F.2d 908 (9th Cir. 1980), where the contract was collateral to
20 the nondischargeability proceedings. Id. In Fulwiler, the
21 bankruptcy court "did not adjudicate the validity of the note in
22 determining whether the debt was dischargeable." Id. (citing
23 Fulwiler, 624 F.2d at 909-10). "Rather, the court determined that
24 the debtors obtained the loan evidenced by the note through
25 fraud." Id. Unlike the note in Fulwiler, the document containing
26 the attorney's fees clause in Baroff — a settlement agreement
27 purporting to release the parties from all other claims, including
28 the disputed debts at issue — played an integral role in the
-31-
1 nondischargeability action because the bankruptcy court needed to
2 determine the enforceability of the settlement agreement to
3 determine dischargeability. Thus, it was an "action on the
4 contract" within the meaning of CAL. CIV. CODE § 1717. Id.
5 More recently in Barrientos v. 1801-1825 Morton LLC, 583 F.3d
6 1197, 1216 (9th Cir. 2009), the Ninth Circuit in interpreting CAL.
7 CIV. CODE § 1717 reaffirmed its holding in Lafarge Conseils Et
8 Etudes, S.A. v. Kaiser Cement & Gypsum Corp., 791 F.2d 1334, 1340
9 (9th Cir. 1985), that an action is "on a contract" within the
10 meaning of CAL. CIV. CODE § 1717 whenever "the underlying contract
11 between the parties is not collateral to the proceedings but plays
12 an integral part in defining the rights of the parties."
13 Clark did not plead a breach of contract claim, but rather
14 only a claim for exception to discharge under § 523(a)(2)(A) and
15 (a)(6). Nonetheless, Arciniega put at issue the phrase "take all
16 necessary measures" in the Settlement Agreement to support her
17 defense that she could not have been liable to Clark for fraud (or
18 breach of contract) because she only had to try to pay off or
19 refinance the VA loan and remove Clark's from it, and she did try.
20 This required Clark to put on evidence to establish both
21 dischargeability and breach of contract, particularly Arciniega's
22 obligations under the Settlement Agreement. It also required the
23 bankruptcy court to interpret the disputed phrase to determine the
24 validity of her defense, which it did:
25 And that is exactly what the contract provides. The
contract provides that by May 13, 2010, defendant has to
26 take all necessary measures to either pay off the VA loan
or remove James Clark, plaintiff's name, from the loan
27 . . . on the Verona property.
28 So defendant's testimony and argument that it was her
-32-
1 subjective interpretation or belief that the contract only
required her to just take certain actions, including
2 trying to modify the loan or trying to assume the loan,
which is expressly prohibited in the settlement agreement,
3 constituted compliance with the settlement agreement is
not persuasive.
4
Trial Tr. (Mar. 18, 2015) at 7:14-24. Thus, the Settlement
5
Agreement played an integral role in Clark's nondischargeability
6
action.
7
Accordingly, because the adversary proceeding against
8
Arciniega was an "action on a contract" within the meaning of CAL.
9
CIV. CODE § 1717, Clark was entitled to recover reasonable
10
attorney's fees. However, he was entitled to recover only those
11
fees expended on litigating the contract claim. In re Davison,
12
289 B.R. at 723 (citing Santisas, 17 Cal. 4th at 615). In the
13
prove-up declaration, Clark's counsel provided no distinction in
14
its not-so-detailed invoices for what fees were incurred for
15
litigating the contract claim as opposed to the fraud claim. The
16
invoices merely show month-end totals.
17
The bankruptcy court does not appear to have apportioned the
18
fee award to only those fees Clark incurred for litigating the
19
contract claim. It may have considered this issue and decided to
20
award the entire amount of fees Clark requested, but that is not
21
clear from its ruling.9 In fact, we are unable to tell precisely
22
23
9
We are mindful that under California law:
24
Attorney's fees need not be apportioned when incurred for
25 representation on an issue common to both a cause of action
in which fees are proper and one in which they are not
26 allowed. Attorneys fees need not be apportioned between
distinct causes of action where plaintiff's various claims
27 involve a common core of facts or are based on related legal
theories. Apportionment is not required when the issues in
28 (continued...)
-33-
1 on what basis the court awarded the full amount of fees. As a
2 result, we must remand this issue so it can make a proper fee
3 determination.
4 VI. CONCLUSION
5 For the foregoing reasons, we AFFIRM the Judgment as to the
6 bankruptcy court's ruling that Arciniega acted with the requisite
7 intent under § 523(a)(2)(A) and that Clark justifiably relied on
8 her representations. However, we REVERSE the bankruptcy court's
9 ruling that the $50,000 settlement payment was a proximate result
10 of Arciniega's fraud. We further VACATE and REMAND the Judgment
11 respecting the bankruptcy court's award of liquidated damages in
12 the amount of $281,000 and the $209,806.42 in attorney's fees.10
13
14
15
16
17
18
9
(...continued)
19 the fee and nonfee claims are so inextricably intertwined
that it would be impractical or impossible to separate the
20 attorney's time into compensable and noncompensable units.
21 Harmon v. City & Cty. of S.F., 158 Cal. App. 4th 407, 417 (2007)
(citations and internal quotation marks omitted).
22
10
Because we have determined that the bankruptcy court did
23 not err in ruling that Clark's debt (whatever the court determines
it to be) could be excepted from discharge under § 523(a)(2)(A),
24 we need not address its decision excepting this same debt from
discharge under § 523(a)(6). See Fresno Motors, LLC v. Mercedes
25 Benz USA, LLC, 771 F.3d 1119, 1125 (9th Cir. 2014)(we can affirm
on any ground supported by the record). Even if we did consider
26 Clark's § 523(a)(6) claim, the Judgment suffers the same
deficiency of proximate cause as to the $50,000 payment Clark made
27 to Arciniega and her failure to pay off the VA loan and remove his
name from it. The same issues respecting the liquidated damages
28 and attorney's fees also would be present.
-34-