FILED APR 26 2017 1 NOT FOR PUBLICATION SUSAN M. SPRAUL, CLERK U.S. BKCY.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