Aluisi v. Jorgensen

• Court: United States Bankruptcy Court, E.D. California
• Decided: December 10, 2019
• Docket: 19-01026
• Status: Unknown

Opinion

1 NOT FOR PUBLICATION 2 3 UNITED STATES BANKRUPTCY COURT 4 EASTERN DISTRICT OF CALIFORNIA 5 6 In re: Case No. 18-14586-A-13

7 JAMES RICHARD JORGENSEN and LAURA MAE JORGENSEN, 8

9 Debtors. 10

11 DONALD G. ALUISI Adv. No. 19-01026-A 12 and KAREN ALUISI, MEMORANDUM 13 Plaintiffs, NEA-3 14 V.

15 JAMES RICHARD JORGENSEN,

16 Defendant.

18 Argued and submitted on November 12, 2019 19 at Fresno, California 20 Honorable Fredrick E. Clement, Bankruptcy Judge Presiding 21

22 Appearances: Kurt F. Vote, Wanger Jones Helsley PC for 23 plaintiffs Donald G. Aluisi and Karen Aluisi; Nicholas E. Aniotzbehere, Yarra 24 Law Group for defendant James Richard Jorgensen 25 26

27 1 Malpractice becomes fraud when an accountant knowingly conceals 2 his own error. Former clients sued their accountant for two counts of 3 fraud. Count I alleges that the accountant understated the clients’ 4 tax basis on their state income tax returns. It also hints discovery 5 from his reduction of the correct federal income tax basis to the 6 incorrect state income tax basis on subsequent tax returns. Count II 7 alleges the accountant gave faulty § 1031 Exchange advice and suggests 8 knowledge from his involvement in 20-40 § 1031 Exchanges over a 50- 9 year career. Have his former clients pled facts showing the 10 accountant’s actual knowledge as to each error? 11 I. FACTS 12 Defendant James Richard Jorgensen (“Jorgensen”) has been a 13 Certified Public Accountant for 50 years. Starting in the late 1980s 14 and continuing until 2015, Jorgensen rendered services to Donald G. 15 Aluisi and Karen Aluisi (“Aluisis”), who were farmers, 16 businesspersons, and commercial landholders. Jorgensen prepared the 17 Aluisis’ returns and advised them on financial matters. Among the 18 matters on which the Aluisis consulted Jorgensen were tax-deferred 19 transactions. At issue are two instances of excess tax liability 20 resulting from Jorgensen’s services to the Aluisis. 21 A. The Trading Post Depreciation 22 In 2000, Aluisis purchased “The Trading Post,” a commercial 23 property, from Donald G. Aluisi’s father in a tax-deferred exchange. 24 Jorgensen represented both the elder Aluisi and the plaintiff Aluisis 25 in that transaction. 26 When Jorgensen prepared the plaintiff Aluisis’ 2000 federal and 27 state income tax returns, he made an error on the state income tax 1 In early 2001, [Jorgensen] prepared [Aluisis’] 2000 tax returns, which included the 1031 Exchange for The 2 Trading Post. What occurred next was not discovered until many years later – 2017 – by [Aluisis’] new 3 Certified Public Accountant. In the 2000 tax returns both Federal and State bases were correct and 4 consistent (the amount of $3,695,335) on the disclosure page, however on the depreciation page, the 5 State tax basis, which should have remained consistent with the Federal tax basis[,] was lowered to 6 $2,833,335, a difference of $862,000. [Jorgensen] listed the tax basis for federal purposes on the 2000 7 return at $3,695,335 and California state tax basis at $2,833,335, with no explanation for the difference. 8 This is a significant and obvious inaccuracy. 9 Second Amended Complaint ¶ 16, September 4, 2019, ECF # 56 (emphasis 10 added). 11 For each following tax year until 2015, Jorgensen replicated the 12 error, understating the Aluisis’ depreciation expenses on their state 13 income tax returns, and thereby creating an unnecessary tax liability 14 for Aluisis. 15 In October 2015, while preparing the Aluisis’ 2014 income tax 16 returns, Jorgensen discovered his error. In the pertinent part, the 17 Aluisis have pled: 18 It is clear that [Jorgensen] caught his error of the incorrect State tax basis during preparation of 19 [Aluisis’] 2014 tax returns[,] which were filed on extension on October 15, 2015, because [Jorgensen] 20 deliberately changed the correct Federal Tax basis in the amount of $3,695,635 to match the lower incorrect 21 California tax basis in the amount of $2,833,335. . . Further, by [Jorgensen] lowering the correct Federal 22 tax basis of The Trading Post transaction to the incorrect California income tax basis, [Jorgensen] 23 knew that this would result in less scrutiny than raising the incorrect California basis to the correct 24 Federal basis without any explanation or acquisition that would support the higher basis. . . 25 Second Amended Complaint at ¶ 17(G). 26 Jorgensen did not disclose his error to Aluisis. For their 27 income tax returns for 2014 and for each subsequent year, Jorgensen 1 lowered the tax basis claimed on the federal income tax return to 2 $2,833,335 to match the lower, and erroneous, tax basis claimed on the 3 state income tax return. 4 Dissatisfied with Jorgensen’s services, the Aluisis terminated 5 their relationship with him and hired Christopher Morse (“Morse”), a 6 Certified Public Accountant. In 2017, Morse advised Aluisis of 7 Jorgensen’s understatement of the tax basis claimed on their state 8 income tax returns. When Morse asked Jorgensen to explain the 9 discrepancy, Jorgensen gave differing and false explanations: 10 When [Aluisis’] successor tax preparer met with [Jorgensen] to obtain information concerning the 11 inconsistency between the California state and federal bases for The Trading Post, [Jorgensen] produced no 12 tax work papers and claimed to have no knowledge of why or explanation for the tax basis discrepancy. . . 13 Subsequently, [Jorgensen] testified that a fire destroyed the records and work papers involving the 14 preparation of the 2000 tax return that reported the 1031 Exchange for the acquisition of The Trading Post. 15 [Jorgensen] claimed that he needed these records to determine why the state income tax basis was 16 substantially lower that the federal tax basis. To “cover up” his errors, [Jorgensen] stated the records 17 were destroyed in the fire. This was an intentional misstatement . . . 18 19 Second Amended Complaint at ¶ 12 (emphasis added). 20 With Morse’s assistance the Aluisis were able to amend their 21 returns as far back as the 2013 tax year. Applicable tax law 22 precluded amendments beyond that date. 23 Aluisis allege the following damages as a result of Jorgensen’s 24 conduct: lost depreciation of $45,000 between the years 2000 and 2013; 25 accounting fees paid to Jorgensen of $48,000; and additional 26 accounting fees paid to Morse of $6,325. 27 B. Section 1031 Exchange of The Trading Post 1 The Trading Post and in 2014 the Aluisis entered into a contract to 2 sell The Trading post using a “§ 1031 Exchange.”1 A § 1031 Exchange is 3 a tax strategy, sanctioned by the Internal Revenue Code, that allows 4 deferral of gains on the sale of investment property provided a like- 5 kind property is purchased with the gain from the sale of the first 6 property. Section 1031 Exchanges are subject to stringent 7 requirements. Sellers may not receive cash distributions, known as 8 “cash boot,” or reduce the amount of secured debt from the first to 9 the second property, known as “mortgage boot.” A seller’s failure to 10 comply fully with Internal Revenue Service regulations governing § 11 1031 Exchanges forfeits deferral of the tax on the gain. 12 Throughout the process the Aluisis consulted with Jorgensen and 13 discussed with him their goal of emerging from the § 1031 Exchange 14 with different investment properties that were unencumbered. The 15 Aluisis’ plan was to sell The Trading Post for $11,500,000, retire 16 secured debt against The Trading Post of $5,500,000, retain $1,000,000 17 cash and purchase other properties with the remaining $5,000,000. The 18 Aluisis were aware that retaining $1,000,000 was taxable as cash boot; 19 they were unaware that the reduction in secured debt, i.e., payoff of 20 the $5,500,000, would also be taxable as mortgage boot. Jorgensen 21 told them that their plan was “sound,” “solid,” and “valid.” 22 Jorgensen did not warn them about the mortgage boot problem. 23 Unaware that proceeding with the sale would create a substantial 24 tax on the mortgage boot, the Aluisis proceeded with the sale of The 25 Trading Post and reinvestment of sale proceeds. As a result, the 26 Aluisis owed an additional, and unexpected, $2,300,000 in taxes. 27 Aluisis contend that Jorgensen knew that their plan to step down 1 the amount of their secured debt would defeat the goal of tax deferral 2 and would generate a tax for the year in which the sale occurred. 3 They allege that Jorgensen was an experienced accountant who had 4 “handled” § 1031 Exchanges previously: 5 As a Certified Public Accountant, [Jorgensen] was knowledgeable with the requirements of 1031s and any 6 rule changes to the 1031 process through his continuing education (80 hours every 2 years). In 7 fact, [Jorgensen] had handled the original 1031 Exchange leading to the acquisition of The Trading 8 Post in 2000. Further, [Jorgensen], in sworn testimony in the State Court case testified that he 9 was an experienced CPA with direct knowledge of 1031 Exchanges from having handled between 20 to 40 . . . 10 11 Second Amended Complaint ¶ 27 (emphasis added). 12 Aluisis also allege that he knew a tax would result: 13 [Jorgensen] advised [Aluisis] that their plan was a sound plan and gave them no warning about the 14 “mortgage boot” issue. As a Certified Public Accountant with substantial 1031 Exchange experience, 15 [Jorgensen] knew that a substantial tax liability would flow from their strategy and that harm would 16 occur and that [Aluisis] would be deceived to their detriment by [Jorgensen’s] false statements . . . 17 As hereinbefore alleged, [Jorgensen] made 18 misrepresentations and fraudulent omissions in connection with his advice to [Aluisis] regarding 19 their plan concerning the 1031 Exchange of The Trading Post by telling [Aluisis] their plan regarding the 20 1031 Exchange was a valid plan. [Jorgensen] knew of the falsity and deceptiveness of his advice at the 21 time it occurred; [Jorgensen] knew of that [Aluisis] would incur tax penalties if they proceeded with the 22 plan they had explained to him . . . 23 Second Amended Complaint at ¶¶ 33, 36 (emphasis added). 24 In 2017, Aluisis brought a professional negligence action against 25 Jorgenson in state court. 26 II. PROCEDURE 27 In 2018, before the state court action could be resolved, 1 13 bankruptcy. 2 The Aluisis brought an adversary proceeding against Jorgensen to 3 except his debt to them from the discharge. 11 U.S.C. §§ 4 523(a)(2)(A), 1328(a). They contend that Jorgenson was aware of his 5 professional negligence, e.g., underreporting their tax-basis and 6 giving incorrect advice with respect to a tax-deferred real estate 7 transaction and concealing those mistakes from them. 8 On two prior occasions, Jorgensen challenged the sufficiency of 9 the Aluisis’ complaint by motion to dismiss. On each occasion this 10 court has granted Jorgensen’s motion to dismiss, giving Aluisis leave 11 to amend their complaint. 12 Aluisis filed a Second Amended Complaint alleging two counts of 13 non-dischargeable fraud under § 523(a)(2)(A), i.e., lost depreciation 14 between 2000-2015 and unnecessary tax liabilities arising from the 15 mortgage boot for the sale of The Trading Post. Jorgensen has moved 16 to dismiss the Second Amended Complaint, arguing that the Aluisis have 17 not pled facts from which the court may find anything beyond 18 professional negligence. Aluisis oppose the motion. 19 III. JURISDICTION 20 This court has jurisdiction. 28 U.S.C. § 1334(a)-(b); see also 21 General Order No. 182 of the Eastern District of California. This is 22 a core proceeding. 28 U.S.C. § 157(b)(2)(I). The plaintiffs have 23 consented to final orders and judgments by this court. Second Amended 24 Complaint at ¶ 4. 25 IV. LAW 26 A. Rule 12(b)(6) 27 Under Federal Rule of Civil Procedure 12(b)(6), a party may move 1 can be granted.” Fed. R. Civ. P. 12(b)(6), incorporated by Fed. R. 2 Bankr. P. 7012(b). “A Rule 12(b)(6) dismissal may be based on either 3 a lack of a cognizable legal theory or the absence of sufficient facts 4 alleged under a cognizable legal theory.” Johnson v. Riverside 5 Healthcare Sys., LP, 534 F.3d 1116, 1121–22 (9th Cir. 2008); accord 6 Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001). “To survive a 7 motion to dismiss, a complaint must contain sufficient factual matter, 8 accepted as true, to ‘state a claim to relief that is plausible on its 9 face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell 10 Atl. Corp. v. Twombly, 550 U.S. 544, 556, 570 (2007)). 11 After Iqbal and Twombly, courts employ a three-step analysis in 12 deciding Rule 12(b)(6) motions. At the outset, the court takes notice 13 of the elements of the claim to be stated. Eclectic Properties East, 14 LLC v. Marcus & Millichap Co., 751 F.3d 990, 997 (9th Cir. 2014). 15 Next, the court discards conclusions. Ashcroft v. Iqbal, 556 U.S. 16 662, 679 (2009); United States ex rel. Harper v. Muskingum Watershed 17 Conservancy District, 842 F.3d 430, 438 (6th Cir. 2016) (the complaint 18 failed to include “facts that show how” the defendant would have known 19 alleged facts). Finally, assuming the truth of the remaining well- 20 pleaded facts, and drawing all reasonable inferences therefrom, the 21 court determines whether the allegations in the complaint “plausibly 22 give rise to an entitlement to relief.” Iqbal, 556 U.S. at 679; 23 Sanchez v. United States Dept. of Energy, 870 F.3d 1185, 1199 (10th 24 Cir. 2017). See generally, Wagstaff Practice Guide: Federal Civil 25 Procedure Before Trial, Attacking the Pleadings, Motions to Dismiss § 26 23.75-23.77 (Matthew Bender & Company, Inc. 2019). 27 Plausibility means that the plaintiff’s entitlement to relief is Twombly 1 cross the line from conceivable to plausible”); Almanza v. United 2 Airlines, Inc., 851 F.3d 1060, 1074 (11 Cir. 2017). Allegations that 3 are “merely consistent” with liability are insufficient. Iqbal, 556 4 U.S. at 662; McCauley v. City of Chicago, 671 F.3d 611, 616 (7th Cir. 5 2011). 6 If the facts give rise to two competing inferences, one of which 7 supports liability and the other of which does not, the plaintiff will 8 be deemed to have stated a plausible claim within the meaning of Iqbal 9 and Twombly. Houck v. Substitute Tr. Servs., Inc., 791 F.3d 473, 484 10 (4th Cir. 2015); 16630 Southfield Ltd. P’hsip v. Flagstar Bank, 11 F.S.B., 727 F.3d 502, 505 (6th Cir. 2013); see also, Wagstaff, Motion 12 to Dismiss at § 23.95. But if one of the competing inferences is 13 sufficiently strong as to constitute an “obvious alternative 14 explanation,” that inference defeats a finding of plausibility and the 15 complaint should be dismissed. Marcus & Millichap Co., 751 F.3d at 16 996 (“Plaintiff’s complaint may be dismissed only when defendant’s 17 plausible alternative explanation is so convincing that the 18 plaintiff’s explanation is implausible.”); New Jersey Carpenters 19 Health Fund v. Royal Bank of Scotland Group, PLC, 709 F.3d 109, 121 20 (2nd Cir. 2013). 21 Since this is a claim alleging fraud, Rule 9(b) also applies. 22 See, e.g., Chase Bank, U.S.A., N.A. v. Vanarthos (In re Vanarthos), 23 445 B.R. 257, 264 (Bankr. S.D.N.Y. 2011). This rule’s heightened 24 pleading standard requires a plaintiff to “state with particularity 25 the circumstances constituting fraud.” Fed. R. Civ. P. 9(b), 26 incorporated by Fed. R. Bankr. P. 7009. This standard means that 27 “the complaint must set forth what is false or misleading about a Rubke v. Capitol Bancorp Ltd. 1 F.3d 1156, 1161 (9th Cir. 2009) (quoting Yourish v. Cal. Amplifier, 2 191 F.3d 983, 993 (9th Cir. 1999)) (internal quotation marks omitted). 3 The facts constituting fraud must be pled specifically enough to give 4 a defendant sufficient “notice of the particular misconduct” so that 5 defendant may defend against the charge. Vess v. Ciba-Geigy Corp. 6 U.S.A., 317 F.3d 1097, 1106 (9th Cir. 2003). A plaintiff must include 7 the “who, what, when, where, and how” of the fraud. Id. 8 B. 11 U.S.C. § 523(a)(2)(A) 9 Section 523 excepts debts incurred by fraud from discharge. 11 10 U.S.C. § 523(a)(2)(A). To except a debt from discharge under § 11 523(a)(2)(A) the creditor must plead and, by a preponderance of the 12 evidence, prove: 13 (1) misrepresentation(s), fraudulent omission(s), or deceptive conduct; (2) knowledge of the falsity or 14 deceptiveness of such representation(s), omission(s), or conduct; (3) an intent to deceive; (4) justifiable 15 reliance by the creditor; and (5) damage to the creditor proximately caused by its reliance. 16 17 In re Shannon, 553 B.R. 380, 388 (9th Cir. BAP 2016), citing Ghomeshi 18 v. Sabban (In re Sabban), 600 F.3d 1219, 1222 (9th Cir.2010). 19 An omission may give rise to an exception to discharge under § 20 523(a)(2)(A) if the debtor was under a duty to make disclosure. 21 Tallant v Kaufman (In re Tallant), 218 B.R. 58, 64-65 (9th Cir. BAP 22 1998) (attorney). The Ninth Circuit has adopted the test articulated 23 by the Restatement (Second) of Torts (1976) for deciding whether a 24 defendant has a duty to make disclosure. Apte v. Japra (In re Apte), 25 96 F.3d 1319, 1323-24 (9th Cir. 1996). The Restatement provides: 26 (1) One who fails to disclose to another a fact that he knows may justifiably induce the other to act or 27 refrain from acting in a business transaction is subject to the same liability to the other as though 1 he has failed to disclose, if, but only if, he is under a duty to the other to exercise reasonable care 2 to disclose the matter in question. 3 (2) One party to a business transaction is under a duty to exercise reasonable care to disclose to the 4 other before the transaction is consummated, 5 (a) matters known to him that the other is entitled to know because of a fiduciary or other 6 similar relation of trust and confidence between them; and 7 . . . (c) subsequently acquired information that he knows 8 will make untrue or misleading a previous representation that when made was true or believed to 9 be so . . . 10 Rest.2d Torts at § 551(1),(2)(a),(b); Cf., Treasury Department 11 Circular No. 230, § 10.21 (requiring an accountant to advise client of 12 the existence of an error on prior year’s return). 13 At issue is whether the Second Amended Complaint pleads facts 14 from which Jorgensen’s knowledge under § 523(a)(2)(A) may plausibly be 15 inferred.2 16 V. DISCUSSION 17 “Knowledge” of the falsity of the representation requires “actual 18 knowledge of the falsity of a statement” or “reckless indifference” to 19 the truth. Morimura, Ari & Co. v. Taback, 279 U.S. 24, 33 (1929); 20 Anastas v. Am. Savings Bank (In re Anastas), 94 F.3d 1280, 1286 (9th 21 Cir. 1996); Advanta Nat. Bank v. Kong (In re Kong), 239 B.R. 815, 826- 22 67 (9th Cir. BAP 1999). Reckless conduct requires something beyond 23 “simple or inexcusable negligence.” Hirth v. Donovan (In re Hirth), 24 25 2 Affidavits and declarat ions may not be attached as exhibits to the complaint. Fed. R. Civ. P. 10(c), incorporated by Fed. R. Bankr. P. 7010. 26 United States v. Ritchie, 342 F.3d 903, 908 (9th Cir. 2003). During oral argument the plaintiffs concede this point. As a result, the opinions of 27 Susan E. Bradley and James P. Braun will not be considered and the court will issue an order granting its own motion to strike the Compendium of Exhibits 1 2014 WL 7048395 *11 (9th Cir. BAP December 11, 2014). 2 A. First Count: Depreciation for The Trading Post 3 1. Have Aluisis’ pled the existence of a debt within the meaning of § 523(a)? 4 5 State law governs whether a “debt” under § 523(a) exists; federal 6 law determines whether that debt is dischargeable. Grogan v. Garner, 7 498 U.S. 279, 283-84 (1991); Northbay Wellness Group, Inc. v. Beyries, 8 789 F.3d 956, 959 n. 3 (9th Cir. 2015). 9 Jorgensen’s actions give rise to two disputed, unliquidated 10 claims. The first is but a single claim for professional negligence. 11 Under California law all injuries flowing from the violation of one 12 primary right constitute but a single cause of action. Pointe San 13 Diego Residential Community, L.P. v. Procopio, Cory, Hargreaves & 14 Savitch, LLP, 195 Cal.App.4th 265, 274-75 (2011) (multiple acts of 15 legal malpractice); Cyr v. McGovran, 206 Cal.App.4th 645, 652 (2012) 16 (realtor malpractice); Richard B. LeVine, Inc. v. Higashi, 131 17 Cal.App.4th 566, 575 (2005) (accounting malpractice and fraud). Where 18 the wrongdoing causes successive injuries over time, such single cause 19 of action supports multiple theories of relief. Big Boy Drilling 20 Corp. v. Rankin, 213 Cal. 646, 648 (1931); San Diego Water Co. v. San 21 Diego Flume Co., 108 Cal. 549, 556 (1895). As pertinent here, the 22 Aluisis’ claim spans the 15 years that Jorgensen understated the 23 allowed amount of depreciation for The Trading Post. 24 The second is a claim for fraudulent concealment. Concealment 25 may give rise to a state law claim for fraud. Hahn v. Mirda, 147 26 Cal.App.4th 740 (2007) (physician’s concealment of revised prognosis); 27 Boschma v. Home Loan Center, Inc., 198 Cal.App.4th 230, 248 (2011). 1 Aluisis, the first fraudulent concealment occurred on or about October 2 15, 2015, and would only capture damages flowing from the 3 misstatement. This is a markedly shorter period than the damages 4 arising from the professional negligence. The Aluisis have pled the 5 existence of two state law debts. 6 2. Have the Aluisis pled a debt excepted from discharge under § 523(a)? 7 8 Debts arising from fraud will be excepted from discharge; debts 9 arising from negligence will not be excepted from discharge. 10 As pertinent here, the Aluisis have pled facts from which an 11 inference of Jorgensen’s knowledge as of October 15, 2015, may be 12 drawn. Those facts are: Jorgensen’s reduction in the long-standing 13 federal income tax basis from $3,695,335 to $2,833,335; understatement 14 of the federal income tax bases from 2014 federal income tax return 15 forward; and Jorgensen’s inability to explain the discrepancy between 16 the returns and his false statements as to why he was unable to 17 produce his working papers from which the depreciation allowance was 18 claimed. Second Amended Complaint at ¶¶ 12, 17(G). 19 3. Granting a Rule 12(b)(6) motion as to the professional negligence claim only. 20 21 Though the Ninth Circuit has not addressed the issue, most courts 22 believe that a Rule 12(b)(6) motion may not be granted as to only part 23 of a claim. BBL, Inc. v. City of Angola, 809 F.3d 317, 325 (7th Cir. 24 2015); Thompson v. Paul, 657 F.Supp.2d 1113, 1129 (D. Ariz. 2009) 25 (construing motion under Rule 12(b)(6) as motion under Rule 12(f)); 26 contra, Hill v. Opus Corp., 841 F.Supp.2d 1070, 1082 (C.D. Cal. 2011). 27 But even those courts that are not inclined to grant relief under Rule 1 (allowing sua sponte relief). Fed. R. Civ. P. 12(f)(1), incorporated 2 by Fed. R. Bankr. 7012(b). 3 In this case, the Aluisis have pled a cause of action under § 4 523(a)(2)(A) premised on two different state law claims: negligence 5 and fraud. The negligence claim is dischargeable; the fraud claim may 6 be excepted from discharge. 11 U.S.C. §§ 523(a)(2)(A),(c) (provided a 7 timely adversary proceeding is filed); Fed. R. Bankr. P. 4007(c); 8 Younie v. Gonya (In re Younie), 211 B.R. 367, 373–74 (9th Cir. BAP 9 1997), aff'd 163 F.3d 609 (9th Cir.1998) (noting the identity of 10 elements between § 523(a)(2)(A) and California common law fraud). 11 These very different causes of action give rise to very different 12 rights under the bankruptcy code. 13 The professional negligence claim spans from 2000 to 2015 and 14 seeks damages in the form of lost depreciation expense and ancillary 15 costs, e.g., additional accounting fees. Professional negligence 16 alone will not support a claim of fraud under § 523(a)(2)(A). The 17 motion to dismiss will be granted insofar as the “debt,” 11 U.S.C. § 18 523(a), precedes Jorgensen’s first knowing misrepresentation, i.e., 19 October 15, 2015. 20 In contrast, fraud is nondischargeable and, in this case, gives 21 rise to a narrower species of damages. Since the fraud occurred 22 starting in October 2015, fewer years are involved. Moreover, fraud 23 damages are limited to those “traceable to” or “resulting from” the 24 fraudulent conduct. Field v. Mans, 516 U.S. 59, 64 (1995); Cohen v. de 25 la Cruz, 523 U.S. 213, 218 (1998); Ghomesh v. Sabban (In re Sabban), 26 600 F.3d 1219, 1224 (9th Cir. 2010) (monetary award against unlicensed 27 contractor not excepted from discharge where the client suffered no 1 Here, fraud damages are limited to uncaptured depreciation 2 incurred after the October 15, 2015, misrepresentation, i.e., tax 3 years after 2014, and for tax years preceding 2015 for which amendment 4 was still possible, i.e., 2011-2015, Cal. Rev. & Tax Code § 19306 5 (specifying a four-year look back period), as well as ancillary 6 damages flowing therefrom. Consequently, the court will grant the 7 motion as to any claim prior to 2011 and will deny the motion as to 8 any claim on or after 2011. 9 B. Second Count: § 1031 Exchange of The Trading Post 10 After Iqbal and Twombly, the naked assertion that a defendant 11 “knew” a particular representation was false is insufficient to plead 12 a plausible claim for fraud. Iqbal, 556 U.S. at 686-687; Zayed v. 13 Associated Bank, N.A., 779 F.3d 727, 732-734 (8th Cir. 2015). Rather, 14 the complaint must plead “specific underlying facts from which we can 15 reasonably infer the requisite intent.” In re BP Lubricants USA, 16 Inc., 637 F.3d 1307, 1312 (Fed. Cir. 2011). 17 “Knowledge” requires consciousness of the falsity: 18 A misrepresentation is fraudulent if the maker (a) knows or believes that the matter is not as he 19 represents it to be,(b) does not have the confidence in the accuracy of his representation that he states 20 or implies, or (c) knows that he does not have the basis for his representation that he states or 21 implies. 22 Rest.2d Torts at § 526 (emphasis added); Field v. Mans, 516 U.S. 59, 23 68-70 (1998) (recognizing Restatement (Second) Torts as construing § 24 523(a)(2)(A)); see also, Citibank v. Eashai (In re Eashai), 87 F.3d 25 1082, 1089 (9th Cir. 1996). 26 The comments to § 526 of the Second Restatement make this even 27 clearer. “[F]raudulent” refers “solely to the maker’s knowledge of 1 The standard is not an objective one. 2 The fact that the misrepresentation is one that a man of ordinary care and intelligence in the maker's 3 situation would have recognized as false is not enough to impose liability upon the maker for a fraudulent 4 misrepresentation under the rule stated in this Section, but it is evidence from which his lack of 5 honest belief may be inferred. . . 6 Id. at Comment on Clause (a) (emphasis added). 7 The Aluisis have alleged that Jorgensen actually “knew” that “a 8 substantial tax liability would flow” from their intended course of 9 action. Second Amended Complaint ¶¶ 33, 36. Aluisis have not alleged 10 that Jorgensen acted with a “reckless indifference” for the truth, 11 Morimura, Ari & Co., 279 U.S. at 33, nor that Jorgensen “believe[d] 12 that the matter is not as he represents it to be.” Rest.2d Torts at § 13 526(a). 14 The Aluisis have only alleged two underlying facts from which an 15 inference of knowledge might be drawn as to “how,” Muskingum Watershed 16 Conservancy District, 842 F.3d at 438, Jorgensen knew that the 17 mortgage boot provisions would be operative: that over his 50-year 18 career he had handled between 20-40 § 1031 Exchanges and that he 19 attended not less than 80 hours of continuing accountancy education 20 every two years.3 21 These facts give rise to two possible interpretations. The first 22 explanation is that Jorgensen missed the mortgage boot issue, giving 23

24 3 Some courts believe that asymmetry of information, such as knowledge in fraud, provides a basis to offer a plaintiff greater latitude in pleading plausibility. United States ex rel. Presser v. Acacia Mental Health Clinic, 25 LLC, 836 F.3d 770, 778 (7th Cir. 2016); Saldivar v. Racine, 818 F.3d 14, 23 (1st Cir. 2016). If the Ninth Circuit recognizes the asymmetry of 26 information as a basis to relax the elements of Iqbal and Twombly it is not applicable here. Prior to filing this adversary proceeding the Aluisis sued 27 Jorgensen in state court and engaged in discovery, including taking Jorgensen’s deposition. Second Amended Complaint ¶¶ 31-32. As a result, to 1 rise to a claim for professional negligence. Section 1031 Exchanges 2 are “complex, nuanced, and strict[.]” San Francisco Club, Inc. v. 3 Baswell-Guthrie, 897 F.Supp.2d 1122, 1130 (N.D. Ala. 2012); see also, 4 26 C.F.R. §§ 1.1031(a)-1-1.1031(k)-1. Jorgensen only handled one such 5 transaction for his clients every year--or perhaps every two years-- 6 over the course of his 50-year career. These facts fit neatly within 7 a simple negligence model. The second interpretation of the facts is 8 that Jorgensen was actually aware of the mortgage boot issue but 9 decided to conceal it from the Aluisis. The facts fit only roughly 10 into such a model. And while the court should not, and will not, 11 weigh competing inferences, it does find that negligence is an obvious 12 alternative explanation, rendering an inference of fraud not 13 plausible. Consequently, the motion will be granted. 14 C. Leave to Amend 15 Federal Rule of Civil Procedure 15(a) provides that leave to 16 amend “shall be freely given when justice so requires.” In 17 determining whether to grant leave to amend the court should consider 18 five factors: bad faith, undue delay, prejudice, futility, and 19 previous amendments. Johnson v. Buckley, 356 F.3d 1067, 1077 (9th 20 Cir. 2004). “Futility alone can justify” denying leave to amend. 21 Nunes v. Ashcroft, 375 F.3d 805, 808 (9th Cir. 2004). Here, the 22 Aluisis have plead their case three times. Any further effort would 23 be futile. 24 VI. CONCLUSION 25 As to Count I, the motion to dismiss will be granted as to the 26 Aluisis’ fraud claim for each year prior to the 2011 tax year and will 27 otherwise be denied. As to Count II, the motion will be granted. 1 denied. The court will issue an order from chambers. 2 | Dated: Dec 10, 2019 MSS, □□ 4 Fredrick E. Clement 5 United States Bankruptcy Judge 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 18

1 Instructions to Clerk of Court

2 Service List - Not Part of Order/Judgment

3 The Clerk of Court is instructed to send the Order/Judgment or other court generated document transmitted herewith to the parties below. The Clerk of Court will send the document 4 via the BNC or, if checked ____, via the U.S. mail.

6 Attorney for Plaintiffs Attorney for the Defendant Joseph R. Beery Nicholas E. Aniotzbehere 7 108 W Center Ave 2000 Fresno St., Suite 300 Visalia CA 93291 Fresno CA 93721 8

9 Bankruptcy Trustee (if appointed in the case) Office of the U.S. Trustee 2500 Tulare St, Ste 1401 10 Fresno, CA 93721 Kurt F. Vote Michael L. Farley 11 265 E. River Park Circle, Suite 310 108 W Center Ave 12 Fresno CA 93720 Visalia CA 93291 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27