In re: Daryl J. Rogers Monica E. Rogers

FILED
DEC 28 2011
1 SUSAN M SPRAUL, CLERK
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 Nos. EC-11-1138-KiDJu
) EC-11-1150-KiDJu
6 DARYL J. ROGERS; MONICA E. ) (related appeals)
ROGERS, )
7 ) Adv. No. 09-02643
Debtors. )
8 ______________________________) Bk. No. 09-34525
)
9 HOWARD PATTERSON, )
)
10 Appellant, )
)
11 v. ) M E M O R A N D U M1
)
12 DARYL J. ROGERS, )
)
13 Appellee. )
______________________________)
14
15 Argued and Submitted On November 16, 2011
at Sacramento, California
16
Filed - December 28, 2011
17
Appeal from the United States Bankruptcy Court
18 for the Eastern District of California
19 Honorable Philip H. Brandt, Bankruptcy Judge, Presiding
_____________________________________
20
Appearances: Patricia Kramer of Neasham & Kramer LLP argued for
21 appellant, Howard Patterson; Larry J. Cox of the
Law Offices of Larry J. Cox argued for appellee,
22 Daryl J. Rogers.
_____________________________________
23
24 Before: KIRSCHER, DUNN, and JURY, Bankruptcy Judges.
25
26
1
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 8013-1.
1 Appellant, Howard Patterson (“Patterson”), filed a
2 nondischargeability action against appellee, chapter 72 debtor
3 Daryl J. Rogers (“Rogers”), seeking to except his debt from
4 discharge under § 523(a)(2)(A). Patterson’s fraud claim was
5 based on two events in connection with a real estate deal between
6 Patterson, Rogers, and Rogers’s company, Gridiron Development,
7 LLC. Patterson prevailed on his fraud action on what is referred
8 to as the “2005 Release,” but the bankruptcy court found no fraud
9 existed as to the “2007 Release.” In these related appeals,
10 Patterson appeals the court’s Third Amended Judgment with respect
11 to the 2007 Release and the court’s measure of damages, and he
12 appeals the court’s orders denying his second motion to
13 alter/amend judgment and his motion for attorney’s fees and
14 costs. We AFFIRM in part and REVERSE in part.
15 I. FACTUAL AND PROCEDURAL HISTORY
16 A. Prepetition Facts.
17 1. Events leading to the 2005 Release.
18 The following facts are undisputed. Rogers is a licensed
19 real estate agent in California. As a Master Faculty Trainer,
20 Rogers trains other real estate professionals in a broad range of
21 subjects across the country through Keller Williams University.
22 Patterson is a licensed general contractor with the state of
23 California.
24 On or about May 6, 2005, Rogers entered into a written
25 Vacant Land Purchase Agreement (“Purchase Agreement”) with
26
27 2
Unless otherwise indicated, all chapter, section and rule
references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and
28 to the Federal Rules of Bankruptcy Procedure, Rules 1001-9037.
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1 Patterson for the sale of certain real property commonly known as
2 Heritage Park Estates, located in Loomis, California (“Heritage
3 Park”). Heritage Park was subject to an approved Tentative
4 Subdivision Map for Phases II and III, which allowed for 40
5 individual lots to be created upon the approval and recordation
6 of the Final Subdivision Map. The purchasers were Rogers and/or
7 another entity, Eller Development, Inc. (“Eller Development”),
8 which is located in Iowa and owned by Matt Eller (“Eller”), a
9 long-time friend and business associate of Rogers.
10 On May 18, 2005, Rogers and Eller formed Gridiron
11 Development, LLC (“Gridiron”) for the sole purpose of developing
12 Heritage Park. On or about June 15, 2005, Rogers and Patterson
13 agreed to substitute Gridiron as “buyer” of Heritage Park. The
14 purchase price for the property was $4.5 million, with Patterson
15 financing a $1.5 million note at 8% interest. Patterson was also
16 to be deeded back four of the Heritage Park lots once the Final
17 Map was approved and recorded. UMPQUA Bank (“UMPQUA”) also
18 funded a first deed of trust loan for Heritage Park.
19 Keller Williams Auburn (“Keller Williams”) represented
20 Patterson in the sale. Keller Williams is the dba of Kay Dub U
21 Auburn, LP., a California Limited Partnership in which Rogers has
22 an ownership interest, and at the time of the sale had an
23 employment relationship. Although Rogers is not a real estate
24 broker, Wayne Hall, the broker for Keller Williams, designated
25 Rogers to make virtually all of the decisions normally made by a
26 broker for Keller Williams. Agent Ken Hendrickson facilitated
27 the sale between Patterson and Rogers/Gridiron and received a
28 commission of $90,635.
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1 Rogers and Eller made an initial deposit of $1 million on
2 Heritage Park. Rogers and Patterson then executed various
3 addenda to the Purchase Agreement. Addendum 1, dated May 7,
4 2005, provided for Patterson’s seller financed deed of trust
5 loan. It was to be secured by Heritage Park “or other property
6 agreeable by both buyer and seller.” A second Addendum 1 [sic],
7 dated May 19, 2005, referenced Patterson’s seller financed deed
8 of trust loan and stated that it was now to be secured by
9 “seller’s position of $500,000 . . . each in three separate
10 buildings with lowest LTV of Ames Iowa development project.” On
11 May 27, 2005, Rogers and Eller, on behalf of Gridiron, executed a
12 promissory note in favor of Patterson for $1.5 million, which
13 reflected the maturity date as “payable upon completion of
14 Heritage Park Estates Project in Loomis, California or as
15 otherwise agreed by the parties.”
16 Eller Development owned what is a known as Parcel “A” of
17 Lot “2" of the Seventh Addition to Dauntless Subdivision, located
18 in Ames, Iowa (Parcel “A”). This property became known as the
19 West Towne Condominiums (“West Towne”). West Towne consisted of
20 seven three-story mixed use condominiums built on Parcel “A”
21 between 2005 and 2007. On or about June 27, 2005, Patterson
22 accepted security for his note in the form of a real estate
23 mortgage, executed by Eller Development, in his favor for $1.5
24 million on three of the seven buildings on Parcel “A” - Buildings
25 “A”, “B” and “E” (“First Mortgage”). Before Patterson agreed to
26 accept security in West Towne, Rogers told Patterson that he
27 personally owned one of the buildings and that one of the
28 buildings securing Patterson’s loan was “free and clear.” The
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1 First Mortgage was recorded in Iowa on June 27, 2005. Sometime
2 on or before June 27, 2005, Addendum 5 to the Purchase Agreement
3 reflected that the loan balance due Patterson was $1.1 million.
4 Around that same time, a second [sic] Addendum 5 provided that:
5 “Seller agrees to convey final 4 lots previously reserved for
6 himself to buyer for sum of $400,000. Total sales now include
7 all 40 lots on the recorded Final Map.”
8 Meanwhile, on June 16, 2005, Eller Development took out a
9 loan from First National Bank of the Midwest for $3.56 million on
10 Building “E” (the “Midwest Mortgage”), one of the buildings
11 securing Patterson’s loan. The Midwest Mortgage was not recorded
12 until July 18, 2005, after Patterson’s First Mortgage had been
13 recorded on June 27. Unbeknownst to Patterson, on July 19, 2005,
14 the day after the Midwest Mortgage was recorded, Eller
15 Development executed (but did not record) a Second Mortgage in
16 favor of Patterson on the same three buildings located on Parcel
17 “A” in the amount of $1.5 million.
18 Neither Rogers nor Eller told Patterson that Eller had
19 recorded the Midwest Mortgage against Building “E” after
20 recording Patterson’s First Mortgage. Instead, Rogers asked
21 Patterson to execute a release of the First Mortgage to correct a
22 “property description” error. Neither Rogers nor Eller told
23 Patterson that if he released his mortgage, his security interest
24 in West Towne would be subordinated to the Midwest Mortgage on
25 Building “E” when the Second Mortgage was recorded.
26 Patterson executed the release of the First Mortgage on
27 Buildings “A”, “B” and “E” on July 28, 2005 (the “2005 Release”),
28 because he believed and relied upon what Rogers had told him -
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1 that it was necessary to correct the property description. Eller
2 recorded the 2005 Release on August 8, 2005, and recorded the
3 Second Mortgage the same day. When the 2005 Release was
4 recorded, the Midwest Mortgage moved into first position on
5 Building “E”. As it turns out, no error existed in the property
6 description requiring correction. Moreover, Rogers knew it was
7 not necessary to release a mortgage to correct a property
8 description. Patterson later learned that Rogers did not own a
9 building in West Towne when he made that representation to
10 Patterson in May 2005; Rogers did not purchase Building “D” until
11 October 20, 2005.
12 Some payments, at least $300,000, were made on Patterson’s
13 loan. Payments ceased, however, after June 2006. Shortly
14 thereafter, Patterson traveled to Iowa to inspect West Towne. On
15 September 26, 2006, Eller Development quitclaimed Buildings “A”,
16 “B” and “E” (which secured Patterson’s loan) to Phinn LC, a
17 company solely owned by Eller. From November 2006 through May
18 2007, Patterson called Rogers frequently to inquire about payment
19 on the loan. On each call, Rogers assured Patterson that payment
20 would be forthcoming and that Patterson should not be concerned.
21 Patterson agreed to Rogers’s repeated requests to forebear from
22 foreclosing on West Towne.
23 2. Events leading to the 2007 Release.
24 The following facts are largely undisputed. As of June 8,
25 2007, Eller Development owned Buildings “C”, “F” and “G”, Phinn
26 LC owned Buildings “A”, “B” and “E”, and Rogers owned Building
27 “D”. Although payments were not being made on the loans for West
28 Towne, none of the Buildings were subject to judicial or non-
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1 judicial foreclosure, and no notices of default had been
2 recorded.
3 Between March and June 2007, Eller and Rogers actively
4 marketed West Towne for sale and received several offers to
5 purchase the property. Rogers did not tell Patterson that he and
6 Eller intended to transact a short sale of Parcel “A” in June
7 2007 or at any other time. On May 26, 2007, Rogers and Eller
8 received an offer for approximately $24 million for West Towne.
9 Around this same time, Rogers told Patterson that West Towne was
10 in “foreclosure” and that Patterson would lose everything unless
11 he was willing to take alternate security for his loan. Just
12 prior to this, on or about May 16, 2007, Rogers had proposed to
13 Eller that if Patterson would release his security interest in
14 West Towne, in exchange Gridiron would give Patterson a deed of
15 trust on Heritage Park. However, the men were concerned about
16 Gridiron investors losing their investment, so Rogers proposed
17 giving Gridiron investors a second deed of trust to Heritage Park
18 (behind UMPQUA and ahead of Patterson) in the amount of
19 $1.1 million, which was just under the approximate $1.3 million
20 of equity in the property. Below is an email exchange between
21 Megan Tjernagel, an employee of Eller Development, and Rogers,
22 dated May 16, 2007:
23 MEGAN: Have you had any luck obtaining a release from
Howard on the West Towne property?
24
ROGERS: Once again, I need to talk with Matt. We never
25 finish this conversation. If Howard releases, then what
do we want to put it on as replacement? Right now he has
26 a lien on West Towne and they aren’t worth anything. I
prefer that to my home or [Heritage Park]. If he puts it
27 on [Heritage Park], then our investors are out of luck.
There is too much equity in [Heritage Park] and he could
28 foreclose and sell it cheap and get his money and we
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1 would be out. So I proposed we find a way to have our
1 million of equity in [Heritage Park] put on a second
2 deed of trust after the bank’s. Then we could have
Howard go on as 3rd place. I am not sure if that is what
3 Matt wants to do. Any other suggestions??
4 Rogers executed a second deed of trust on behalf of Gridiron in
5 favor of Gridiron to secure its investors for $1.1 million and
6 sent it to Heidi Schwalbe of Alliance Title to record before
7 Patterson’s third deed of trust.
8 Based on Rogers’s representation that West Towne was in
9 foreclosure and worthless and that Patterson would fare better if
10 he accepted a deed of trust on Heritage Park, Patterson
11 ultimately agreed to release his Second Mortgage on West Towne
12 (the ?2007 Release”). In order to satisfy Patterson’s concerns
13 about signing the 2007 Release before he received the Heritage
14 Park deed of trust, Rogers prepared and presented to Patterson an
15 undated promissory note in the amount of $1.4 million (the amount
16 now owed on the original loan), to be secured by a deed of trust
17 on Heritage Park, Rogers’s personal residence, and Rogers’s stock
18 in Keller Williams.
19 According to Patterson, Rogers told him that the 2007
20 Release had to be signed on June 8, 2007. Patterson appeared at
21 Rogers’s office on June 8, but Rogers was not there. An employee
22 told Patterson that Rogers had been called to a family emergency.
23 Other than the new unsigned note and the deed of trust to
24 Heritage Park, no other documents were prepared for the security
25 in Rogers’s home or stock. While Patterson was at the office, he
26 saw documents on the counter that indicated his interest in
27 Heritage Park might be recorded in third position. Patterson
28 proceeded to sign the 2007 Release.
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1 Patterson went back to Rogers’s office on the following
2 Monday, June 11, 2007. He asked Rogers what was going on and
3 demanded to know about the other security Rogers had promised him
4 in his home and stock. Rogers replied that he never intended to
5 give Patterson the additional security interest in either his
6 home or his stock. Patterson objected to his third position on
7 Heritage Park and demanded that Rogers not record the 2007
8 Release. Rogers told Patterson that it was “too late” because he
9 had already sent the 2007 Release to Iowa to be recorded.
10 Patterson assumed, based on Rogers’s representation, that it was
11 too late to stop recordation of the 2007 Release.
12 No third deed of trust for Heritage Park in favor of
13 Patterson was ever recorded. Patterson also never received the
14 additional security in Rogers’s home and stock, or any further
15 payments on the loan. Due to the 2007 Release, Patterson did not
16 receive notice of, and was not a participant in, the short sale
17 by Eller Development, Phinn LC, and Rogers of West Towne. West
18 Towne sold for $20 million; Building “E” sold for $2,787,754.70.
19 Patterson sued Rogers (and others) in state court on May 4,
20 2009, for, inter alia, fraud, breach of contract, and breach of
21 fiduciary duty. The suit was stayed as to Rogers on July 14,
22 2009, when he filed his chapter 7 bankruptcy petition.
23 B. Postpetition Facts.
24 Patterson filed his nondischargeability complaint against
25 Rogers on October 2, 2009, seeking to except from discharge his
26 debt for damages suffered due to Rogers’s alleged fraud under
27 § 523(a)(2)(A). Patterson prayed for damages of $1,754,666.67,
28 the amount owed on the loan, punitive damages in the amount of
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1 $5 million, and attorney’s fees and costs.
2 On February 5, 2010, Patterson moved for relief from stay to
3 prosecute his fraud claim against Rogers in state court. The
4 bankruptcy court denied Patterson’s motion and ordered a trial
5 limited to nondischargeability on liability for the fraud claim,
6 reserving the issue of damages to the state court.
7 The bankruptcy court conducted a trial on Rogers’s liability
8 on November 8, 9, 10 and 12, 2010.3 Rogers admitted telling
9 Patterson that in exchange for the 2007 Release he would provide
10 Patterson the additional security of his home and stock, besides
11 a deed of trust in Heritage Park. However, according to Rogers,
12 the undated note reflecting the additional security was only a
13 ?placeholder” to appease Patterson just in case the Heritage Park
14 deed of trust did not arrive in time, prior to Patterson signing
15 the 2007 Release. Rogers testified that he told Patterson the
16 undated note was only a “placeholder,” and that he told Patterson
17 he never intended to give him the additional security. Rogers
18 testified that as of June 8, 2007, he had no equity in his home.
19 Rogers further testified that the purpose of the 2007
20 Release was to give Patterson some security in Heritage Park, as
21 opposed to his leaving it on West Towne, which had no equity.
22 According to Rogers, Eller wanted to leave Patterson’s security
23 in West Towne. Rogers denied telling Patterson that he had to
24 sign the 2007 Release on June 8, 2007, but admitted that this was
25 around the time the short sale on West Towne was taking place.
26
3
Because the bankruptcy court entered judgment in favor of
27 Patterson with respect to his debt in connection with the 2005
Release and Rogers is not appealing that issue, we focus on the
28 2007 Release and discuss the 2005 Release only where necessary.
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1 Rogers testified that no proceeds from the short sale of West
2 Towne were available beyond the first deeds of trust.
3 Patterson testified that prior to his signing the 2007
4 Release, Rogers did not disclose that Patterson’s deed of trust
5 on Heritage Park would be in third position behind Gridiron
6 investors. Patterson testified that Rogers never told him the
7 value of the additional security of the home and stock, but they
8 did discuss that Heritage Park had over $1 million in equity, and
9 Patterson assumed the home and stock had “some” value. Patterson
10 also testified that Rogers never told him that the undated note
11 was merely a ?placeholder;” Patterson believed he was getting an
12 interest in Heritage Park, plus Rogers’s home and stock.
13 Contrary to Rogers’s testimony, Eller testified that the
14 purpose of the 2007 Release was to pay Patterson, and that he
15 agreed with the decision to give Patterson a deed of trust in
16 Heritage Park in exchange for the 2007 Release. Eller also
17 testified that Heritage Park ultimately sold for only $380,000.
18 The bankruptcy court announced its ruling in favor of Rogers
19 on Patterson’s complaint on December 13, 2010. The court found
20 that no fraud existed as to either the 2005 Release or the 2007
21 Release. As to the 2007 Release, the court found that Patterson
22 never established that Rogers represented to Patterson that his
23 position in Heritage Park would be something better than third
24 position. As for the credibility of Patterson and Rogers, the
25 court found that neither witness was more credible than the
26 other. At the end of its oral ruling, the court articulated its
27 belief that the measure of damages should be the value, if any,
28 of the collateral Patterson released at the time, not the face
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1 amount of the note. A judgment in favor of Rogers was entered
2 that same day.
3 Patterson timely moved to alter/amend judgment, asking the
4 court to find Rogers liable for fraud with respect to both
5 Releases and that it strike any findings it made regarding the
6 scope and/or measure of damages. At the hearing on that motion
7 on January 27, 2011, the bankruptcy court reversed its decision
8 in part, finding that Rogers was liable to Patterson for fraud
9 based on the 2005 Release. It denied Patterson’s motion with
10 respect to the 2007 Release. As for damages, the court
11 recognized that while the state court would be determining that
12 issue, it remained of the view that the appropriate measure of
13 nondischargeable damages was the loss in value of Patterson’s
14 security position caused by the 2005 Release and his loss of
15 priority.
16 On January 27, 2011, the court entered an amended judgment
17 in favor of Patterson based on the fraudulent 2005 Release. The
18 amended judgment also set the measure of nondischargeable damages
19 as the diminution, if any, in the value of Patterson’s security
20 as a result of the 2005 Release and Patterson’s attendant loss of
21 priority.
22 On February 10, 2011, Patterson timely filed a second motion
23 to alter/amend judgment, contending that because the trial was
24 limited to liability, the amended judgment erroneously imposed a
25 measure of damages without a trial on the matter. On that same
26 date, Patterson filed a motion for attorney’s fees and costs
27
28
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1 based on the fee provision in the Purchase Agreement.4
2 The bankruptcy court held a hearing on Patterson’s second
3 motion to alter/amend judgment and his motion for attorney’s fees
4 and costs on March 4, 2011. It denied Patterson’s motion for
5 fees and costs because his fraud claim based on the 2005 Release
6 did not “arise out of” the Purchase Agreement. As for the
7 damages issue, the court stated it was “very mindful of not
8 wanting to direct the state court to do anything” or “preclud[e]
9 the possibility that there might be other damages recoverable
10 against other parties . . . .” Hr’g Tr. (Mar. 4. 2011) 24:21-22,
11 24:19-21. Nonetheless, in its restated findings dated March 23,
12 2011, the bankruptcy court found: “Defendant Daryl J. Rogers is
13 liable to Plaintiff Howard Patterson for the resulting diminution
14 in value of plaintiff’s security for the Gridiron Development LLC
15 note, and that liability is NONDISCHARGEABLE pursuant to
16 11 U.S.C. § 523(a)(2)(A).”
17 The bankruptcy court issued two minute orders denying both
18 of Patterson’s motions on March 4, 2011. Patterson timely filed
19 his notice of appeal of the minute orders. On March 23, 2011,
20 the court entered formal orders denying Patterson’s second motion
21 to alter/amend judgment on the damages issue and his motion for
22 attorney’s fees and costs on March 23, 2011. A second amended
23 judgment was also entered on March 23 to correct certain
24 grammatical errors in the amended judgment.
25
4
As the initial prevailing party, Rogers had moved for
26 attorney’s fees on the same basis as Patterson - under the fee
provision in the Purchase Agreement. However, once Rogers was no
27 longer the prevailing party, he took a contrary position in his
opposition to Patterson’s request for fees contending that no
28 fees were available under the Purchase Agreement.
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1 Patterson timely filed an amended notice of appeal regarding
2 the March 23, 2011 rulings on April 1, 2011. On May 18, 2011,
3 the bankruptcy court vacated the second amended judgment and
4 entered a Third Amended Judgment awarding Patterson statutory
5 costs as prevailing party.
6 Patterson timely filed his second amended notice of appeal
7 on June 1, 2011, of the Third Amended Judgment, the bankruptcy
8 court’s Restated and Corrected Findings of Fact and Conclusions
9 of Law with respect to its findings on the 2007 Release and the
10 measure of damages, and the orders denying his second motion to
11 alter/amend judgment and motion for attorney’s fees and costs.
12 II. JURISDICTION
13 The bankruptcy court had jurisdiction under 28 U.S.C.
14 §§ 157(b)(2)(I) and 1334. We have jurisdiction under 28 U.S.C.
15 § 158.
16 III. ISSUES
17 1. Did the bankruptcy court clearly err in determining that no
18 fraud existed as to the 2007 Release?
19 2. Did the bankruptcy court improperly limit Patterson’s
20 damages?
21 3. Did the bankruptcy court abuse its discretion in determining
22 that Patterson was not entitled to attorney’s fees and costs?
23 IV. STANDARDS OF REVIEW
24 In claims for nondischargeability, the Panel reviews the
25 bankruptcy court's findings of fact for clear error and
26 conclusions of law de novo and applies de novo review to “mixed
27 questions” of law and fact that require consideration of legal
28 concepts and the exercise of judgment about the values that
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1 animate the legal principles. Oney v. Weinberg (In re Weinberg),
2 410 B.R. 19, 28 (9th Cir. BAP 2009). Witness credibility
3 findings are entitled to special deference and are also reviewed
4 for clear error. In re Weinberg, 410 B.R. at 28; Rule 8013. A
5 finding is clearly erroneous if it is illogical, implausible, or
6 without support in the record. United States v. Hinkson,
7 585 F.3d 1247, 1261 (9th Cir. 2009)(en banc). “When there are
8 two permissible views of the evidence, the trial judge’s choice
9 between them cannot be clearly erroneous.” Village Nurseries v.
10 Gould (In re Baldwin Builders), 232 B.R. 406, 410 (9th Cir. BAP
11 1999).
12 Whether the trial court selected the correct legal standard
13 in computing damages is reviewed de novo. Mackie v. Rieser,
14 296 F.3d 909, 916 (9th Cir. 2002).
15 Whether a state statute permits attorney’s fees is reviewed
16 de novo. Kona Enter. Inc. v. Estate of Bishop, 229 F.3d 877, 883
17 (9th Cir. 2000). The denial of attorney’s fees requested under
18 state law is reviewed for an abuse of discretion or an erroneous
19 application of the law. Renwick v. Bennett (In re Bennett),
20 298 F.3d 1059, 1063 (9th Cir. 2002); Champion Produce, Inc. v.
21 Ruby Robinson Co., 342 F.3d 1016, 1020 (9th Cir. 2003). To
22 determine whether the bankruptcy court abused its discretion, we
23 conduct a two-step inquiry: (1) we review de novo whether the
24 bankruptcy court “identified the correct legal rule to apply to
25 the relief requested” and (2) if it did, whether the bankruptcy
26 court's application of the legal standard was illogical,
27 implausible or “without support in inferences that may be drawn
28 from the facts in the record.” Hinkson, 585 F.3d at 1261-62.
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1 V. DISCUSSION
2 A. The bankruptcy court did not clearly err in finding that no
fraud existed based on the 2007 Release.
3
4 To prevail on a claim under § 523(a)(2)(A), a creditor must
5 demonstrate five elements: (1) misrepresentation, fraudulent
6 omission or deceptive conduct by the debtor; (2) knowledge of the
7 falsity or deceptiveness of his statement or conduct; (3) an
8 intent to deceive; (4) justifiable reliance by the creditor on
9 the debtor's statement or conduct; and (5) damage to the creditor
10 proximately caused by its reliance on the debtor’s statement or
11 conduct. In re Weinberg, 410 B.R. at 35 (citing Turtle Rock
12 Meadows Homeowners Ass'n v. Slyman (In re Slyman), 234 F.3d 1081,
13 1085 (9th Cir. 2000)). “The creditor bears the burden of proof
14 to establish all five of these elements by a preponderance of the
15 evidence.” Id. (citing In re Slyman, 234 F.3d at 1085).
16 We begin by noting the bankruptcy court found that neither
17 of the men was more credible than the other. In its findings on
18 December 13, 2010, the bankruptcy court found that no fraud
19 existed as to the 2007 Release because Patterson failed to
20 establish that Rogers ever represented to Patterson that he would
21 be in second position on Heritage Park. Patterson’s attempt to
22 stop the transaction when he found out he would be in third
23 position merely highlighted that no clear agreement existed on
24 the security position. In the bankruptcy court’s opinion, the
25 lack of the additional security in Rogers’s home and stock is not
26 what caused the transaction to stop there; it was Patterson’s
27 third security position in Heritage Park.
28 The bankruptcy court made additional findings regarding the
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1 2007 Release at the January 27, 2011 hearing on Patterson’s
2 motion to alter/amend judgment. Because the witnesses had
3 “roughly equivalent credibility,” the court found that the
4 additional security of Rogers’s home and stock could have been a
5 placeholder as Rogers said and not intended for Patterson, but
6 Patterson had failed to prove his case by a preponderance of the
7 evidence on that issue. Hr’g Tr. (Jan. 27, 2011) 4:9-20.
8 Patterson contends the bankruptcy court clearly erred in
9 finding that no fraud occurred as to the 2007 Release in light of
10 the overwhelming evidence to the contrary. We disagree. Despite
11 his statement to Patterson that West Towne was in foreclosure,
12 which was false, Rogers’s email to Megan Tjernagel reflects his
13 belief at the time that West Towne had no value for Patterson,
14 who was in second position due to the 2005 Release. In lieu of
15 Patterson’s Second Mortgage on West Towne, Rogers offered him a
16 deed of trust on Heritage Park. Patterson testified that it was
17 “his understanding” that his deed would be recorded in second
18 position. Notably, and as the bankruptcy court found, Patterson
19 did not establish that Rogers expressly told him he would be in
20 second position on Heritage Park. As for whether Rogers
21 represented to Patterson prior to the 2007 Release that he would
22 give Patterson the additional security of the home and stock, or
23 it was just a ?placeholder” as Rogers claimed, the court found
24 both witnesses equally credible on that issue, and thus Patterson
25 failed to meet his burden that a false representation had been
26 made. No deed of trust was ever recorded for Patterson on
27 Heritage Park because Patterson directed Heidi Schwalbe not to
28 record it unless he was placed in a second position.
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1 In addition to the bankruptcy court’s findings, we fail to
2 see what damage was proximately caused by Patterson’s 2007
3 Release that he did not already suffer by the 2005 Release. In
4 other words, what additional damages would Patterson be entitled
5 to by the 2007 Release that he is not already entitled to due to
6 the fraudulent 2005 Release? It appears that but-for the 2005
7 Release, Patterson may have been paid in full on his note by
8 being in first position on at least one of the buildings in West
9 Towne. Thus, he may be able to establish damages as the full
10 amount due on the note. The record is not clear, and Patterson
11 has not articulated, what the 2007 Release would add to these
12 damages. In any event, Eller testified that Heritage Park
13 ultimately sold for only $380,000. If true, then even if
14 Patterson was in second position on Heritage Park, he would have
15 received nothing, as UMPQUA’s loan far exceeded that amount.
16 Perhaps something of value could have been had on the additional
17 security of Rogers’s home and stock, but the bankruptcy court
18 found that Patterson failed to meet his burden on whether he was
19 ever entitled to that additional security. Moreover, the
20 evidence established that no equity existed in Rogers’s home at
21 the time of the 2007 Release, and no value was ever provided in
22 the record for the stock. Patterson admitted that Rogers never
23 told him the value of the additional security in Rogers’s home or
24 stock.
25 We also fail to see how Patterson, who at the time of the
26 2007 Release believed he was in first position on West Towne and
27 apparently unaware of his second position due to the 2005
28 Release, justifiably relied on any representation by Rogers that
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1 the West Towne property was in foreclosure. Surely, Patterson
2 had not commenced any foreclosure proceedings on West Towne, and
3 as the first position lienholder, he would have received notice
4 of any foreclosure proceedings by a junior.
5 Accordingly, we cannot conclude on this record that the
6 bankruptcy court’s finding that no fraud existed as to the 2007
7 Release was illogical, implausible, or without support in the
8 record viewed in its entirety. Hinkson, 585 F.3d at 1261-62.
9 Even if we as the fact finder would have weighed the evidence
10 differently, “when there are two permissible views of the
11 evidence, the trial judge's choice between them cannot be clearly
12 erroneous." In re Baldwin Builders, 232 B.R. at 410. We AFFIRM
13 this portion of the Third Amended Judgment and the bankruptcy
14 court’s order denying Patterson’s second motion to alter/amend
15 judgment on this issue.
16 B. The bankruptcy court erred in limiting Patterson’s damages.
17 While the parties and the bankruptcy court agreed that the
18 state court would determine Patterson’s damages, if any, the
19 Third Amended Judgment reads in relevant part:
20 The liability of defendant, Daryl J. Rogers to plaintiff
Howard Patterson for the diminution, if any, in value of
21 his security for the note of Gridiron Development LLC
dated May 27, 2005, to him . . . as a result of the
22 release dated July 28, 2005 . . ., of the mortgage
initially granted by Eller Development, Inc., to secure
23 that note . . ., and Mr. Patterson’s attendant loss of
priority, is NONDISCHARGEABLE pursuant to 11 U.S.C.
24 § 523(a)(2)(A).
25 Patterson contends that although the bankruptcy court had to
26 find some damage proximately caused by Rogers’s fraudulent
27 conduct to establish liability for fraud, the court improperly
28 made a finding regarding the scope of damages without permitting
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1 the parties a trial on the issue. We agree.
2 The record reflects the bankruptcy court’s clear concern
3 about crafting a judgment that did not limit Patterson’s or any
4 other party’s damages. However, we conclude the language in the
5 Third Amended Judgment is an improper limitation on Patterson’s
6 damages. It essentially precludes the state court from
7 determining whether Patterson suffered any consequential or
8 punitive damages, which he prayed for in his nondischargeability
9 complaint. At the very least, it appears to render such damages,
10 should the state court find any, dischargeable. This is contrary
11 to Cohen v. de la Cruz, 523 U.S. 213 (1998)(holding that any
12 debts incurred as a result of debtor’s fraud, including
13 attorney’s fees or punitive damages, are nondischargeable).
14 As further error, the bankruptcy court did not articulate on
15 what authority it was limiting Patterson’s damages. At this
16 point, it is unclear whether California or Iowa law would apply
17 to this issue, which may dictate different results. Accordingly,
18 we REVERSE the damages portion of the Third Amended Judgment to
19 the extent it imposes any limitation on Patterson’s damages.
20 C. The bankruptcy court did not abuse its discretion in denying
Patterson’s motion for attorney’s fees and costs.
21
22 The bankruptcy court found that Patterson was the
23 prevailing party in his nondischargeability action. Rogers does
24 not contest that finding. However, the court rejected
25 Patterson’s argument for attorney’s fees and costs based on the
26 fee provision in the Purchase Agreement, concluding that the
27 Agreement was fully performed and Patterson’s fraud claim did not
28 “arise out of” it:
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1 So it seems to me once you’ve got the fully performed
contract and the fraud that’s established does not relate
2 to the performance of that contract, rather to a note
received in payment and the security for that note under
3 that contract, I just don’t see how it arises out of the
original purchase and sale agreement.
4
. . . .
5
But the connection is too tenuous for me to conclude that
6 the fraud in the release of the security arises out of
the original agreement.
7
8 Hr’g Tr. (Mar. 4, 2011) 17:22-18:3, 18:6-9.
9 Patterson contends the bankruptcy court erred in determining
10 his fraud claim did not “arise out of” the Purchase Agreement.
11 In Patterson’s view, the Purchase Agreement was the sine qua
12 non for the 2005 purchase-sale itself, the 2005 First Mortgage,
13 the 2005 Release, which was obtained fraudulently, and the Second
14 Mortgage. In other words, the Purchase Agreement is the “but
15 for” to the entire transaction between the parties.
16 While no independent right exists to attorney’s fees under
17 the Bankruptcy Code, a prevailing party may be awarded attorney’s
18 fees in a nondischargeability action if such fees are recoverable
19 outside of bankruptcy under state or federal law. Fry v. Dinan
20 (In re Dinan), 448 B.R. 775, 785 (9th Cir. BAP 2011)(citing
21 Cohen, 523 U.S. at 223). California law permits recovery for
22 attorney’s fees under two separate provisions.
23 California Civil Code (“CCP”) § 17175 is narrowly applied
24
5
25 CCP § 1717 provides:
26 In any action on a contract, where the contract specifically
provides that attorney's fees and costs, which are incurred
27 to enforce that contract, shall be awarded either to one of
the parties or to the prevailing party, then the party who
28 (continued...)
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1 and allows a party to recover attorney’s fees only if the action
2 involves litigation of a contract claim. Redwood Theaters, Inc.
3 v. Davison (In re Davison), 289 B.R. 716, 723 (9th Cir. BAP 2003)
4 (citing Santisas v. Goodin, 951 P.2d 399, 409 (Cal. 1998)).
5 Because Patterson’s nondischargeability action was based entirely
6 on the tort of fraud, CCP § 1717 is inapplicable. Santisas,
7 951 P.2d at 409; Xuereb v. Marcus & Millichap, Inc., 5 Cal. Rptr.
8 2d 154, 157 (Cal. Ct. App. 1992).
9 Nonetheless, CCP § 10216 permits recovery of attorney’s fees
10 by agreement between the parties and does not limit a fee
11 recovery to actions on the contract. In re Davison, 289 B.R. at12 724. Thus, attorney’s fees may be recoverable under CCP § 1021
13 even though they are not recoverable under CCP § 1717. Id.
14 (citing 3250 Wilshire Blvd. Bldg. v. W.R. Grace & Co., 990 F.2d
15 487, 489 (9th Cir. 1993)). If an attorney’s fee provision exists
16 in an agreement between the parties, the court looks to the
17 agreement’s language to determine whether an award of attorney’s
18 fees is permitted in a tort action. Id.19 The fee provision in paragraph 27 of the Purchase Agreement
20 reads in relevant part:
21
22
5
(...continued)
23 is determined to be the party prevailing on the contract,
whether he or she is the party specified in the contract or
24 not, shall be entitled to reasonable attorney’s fees in
addition to other costs (emphasis added).
25
6
CCP § 1021 provides in relevant part:
26
Except as attorney’s fees are specifically provided for by
27 statute, the measure and mode of compensation of attorneys
. . . is left to the agreement, express or implied, of the
28 parties . . . .
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1 In any action, proceeding, or arbitration between Buyer
and Seller arising out of this Agreement, the prevailing
2 Buyer or Seller shall be entitled to reasonable attorney
fees and costs from the non-prevailing party Buyer or
3 Seller . . . . (emphasis added).
4 A contract provision authorizing fees in an action to interpret
5 or enforce the contract does not permit attorney’s fees on tort
6 claims. Scientists, 951 P.2d at 414 n.9; Exxess Electronixx v.
7 Heger Realty Corp., 75 Cal. Rptr. 2d. 376, 383 (Cal. Ct. App.
8 1998); In re Davison, 289 B.R. at 725. However, the fee
9 provision at issue here is not so limiting. California courts
10 have held that contractual language providing for fees in any
11 action arising from, or relating to, the contract is broad enough
12 to encompass recovery of attorney’s fees for tort actions.
13 Scientists, 951 P.2d at 405; Xuereb, 5 Cal. Rptr. 2d at 157; Gil
14 v. Mansano, 17 Cal. Rptr. 3d 420, 423 (Cal. Ct. App. 2004).
15 The bankruptcy court appeared to recognize that Patterson,
16 as prevailing party, could be entitled to attorney's fees for his
17 tort action against Rogers based on the broad language of the
18 Purchase Agreement. However, it ultimately concluded that
19 Patterson’s claim for fraud against Rogers for the 2005 Release
20 did not “arise out of” the Purchase Agreement.
21 Whether Patterson is entitled to attorney’s fees turns on
22 whether his nondischargeability action for fraud entailed an
23 action “arising out of” the Purchase Agreement.
24 “To answer this question, we apply the ordinary rules
of contract interpretation. ‘Under statutory rules of
25 contract interpretation, the mutual intention of the
parties at the time the contract is formed governs
26 interpretation. . . . Such intent is to be inferred,
if possible, solely from the written provisions of the
27 contract. . . . The “clear and explicit” meaning of
these provisions, interpreted in their “ordinary and
28 popular sense,” unless “used by the parties in a
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1 technical sense or a special meaning is given to them
by usage” . . . , controls judicial
2 interpretation. . . . Thus, if the meaning a layperson
would ascribe to contract language is not ambiguous, we
3 apply that meaning. . . .’”
4 Exxess Electronixx, 75 Cal. Rptr. 2d at 383 (quoting Scientists,
5 951 P.2d at 405 (citations omitted)).
6 The parties do not claim they ascribed to the phrase
7 “arising out of” a particular or special meaning. Accordingly,
8 we must interpret that phrase in its ordinary and popular sense.
9 To “arise” means “to originate from a source” or “to come into
10 being or to attention.” Merriam-Webster’s Collegiate Dictionary
11 62 (10th ed. 2000). Did Patterson’s fraud claim based on the
12 2005 Release “arise out of” the Purchase Agreement? We conclude
13 that it did not. We agree with the bankruptcy court’s finding
14 that the Purchase Agreement was fully performed upon the close of
15 escrow. The fraud occurred after that date. No necessary causal
16 connection exists between Patterson’s release of his First
17 Mortgage in West Towne in 2005 and the Purchase Agreement.
18 Patterson’s fraud claim arose from his role as lender to
19 Gridiron, not as the seller in the Purchase Agreement for
20 Heritage Park. Therefore, Patterson’s cause of action did not
21 “arise from” the Purchase Agreement; it was independent of that
22 basic contractual arrangement.7
23
7
24 We further observe that paragraph 22 in the Purchase
Agreement regarding dispute resolution contains similar but
25 broader language than that in paragraph 27:
26 Buyer and Seller agree to mediate any dispute or claim
arising between them out of the Agreement, or any
27 resulting transaction, before resorting to arbitration
or court action.
28 (continued...)
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1 Perhaps the First Mortgage, which contains an attorney’s fee
2 provision, may be a source of recovery for Patterson. However,
3 as the bankruptcy court noted, the First Mortgage was signed by
4 Eller Development, a company in which Rogers apparently has no
5 interest. We further observe that Iowa law would likely apply to
6 the attorney’s fee provision in the First Mortgage, and neither
7 party ever presented any Iowa law on this issue. Moreover, the
8 attorney’s fee provision in the promissory note, which is subject
9 to California law, appears to apply only to actions enforcing the
10 note.8
11 Accordingly, we conclude that the bankruptcy court did not
12 abuse its discretion in determining Patterson was not entitled to
13 attorney’s fees based on the Purchase Agreement.
14 VI. CONCLUSION
15 We AFFIRM the bankruptcy court’s Third Amended Judgment,
16 except to the extent it imposed any limitation on Patterson’s
17 damages. We REVERSE the damages portion of the Third Amended
18 Judgment, as the issue on the scope and amount of damages will be
19 decided by the state court. We AFFIRM the bankruptcy court’s
20 order denying Patterson’s motion for attorney’s fees and costs.
21
22
23
7
(...continued)
24 Based on this broader language in paragraph 22, one might
conclude that the intent of the parties in paragraph 27 was to
25 restrict attorney’s fees to matters pertaining only to the
Agreement, not later resulting transactions such as releases and
26 recordings of deeds of trust.
27 8
The note’s fee provision states: “The undersigned
[Gridiron], in case of suit on this note, agrees to pay
28 attorney’s fees” (emphasis added).
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