FILED FEB 26 2015 1 NOT FOR PUBLICATION SUSAN M. SPRAUL, CLERK 2 U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT 3 UNITED STATES BANKRUPTCY APPELLATE PANEL 4 OF THE NINTH CIRCUIT 5 In re: ) BAP No. NC-14-1154-JuTaPa ) 6 DEBRA A. HART, ) Bk. No. 11-42424 ) 7 Debtor. ) Adv. No. 11-04177 ______________________________) 8 ) DEBRA A. HART, ) 9 ) Appellant, ) 10 v. ) M E M O R A N D U M* ) 11 BEVERLY KARAEFF, ) ) 12 Appellee. ) ______________________________) 13 Argued and Submitted on February 19, 2015 14 at San Francisco, California 15 Filed - February 26, 2015 16 Appeal from the United States Bankruptcy Court for the Northern District of California 17 Honorable William J. Lafferty, Bankruptcy Judge, Presiding 18 _________________________ 19 Appearances: David Ashley Smyth argued for appellant Debra A. Hart; Steven J. Hassing argued for appellee 20 Beverly Karaeff. _________________________ 21 Before: JURY, TAYLOR, and PAPPAS Bankruptcy Judges. 22 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. 28 See 9th Cir. BAP Rule 8024-1.
-1- 1 Chapter 71 debtor Debra A. Hart appeals from the bankruptcy 2 court’s judgment in favor of appellee-creditor, Beverly Karaeff, 3 finding the amount of $450,000 (plus prejudgment interest of 4 $222,904.11 for a total of $672,904.11) nondischargeable under 5 § 523(a)(2)(A). 6 We AFFIRM the bankruptcy court’s decision finding that the 7 debts associated with the August 15, 2007 transaction 8 ($200,000), the August 27, 2007 transaction ($100,000), and the 9 May 20, 2008 transaction ($100,000) are nondischargeable in the 10 total amount of $400,000. The bankruptcy court found the 11 $50,000 debt associated with the December 10, 2007 transaction 12 was discharged: “Debtor was not sufficiently involved in the 13 . . . $50,000 in a manner that would support non- 14 dischargeability as to her.” Because the $50,000 amount was 15 included in the judgment ($450,000), we REMAND this matter to 16 the bankruptcy court for the limited purpose of entering a 17 corrected judgment in the amount of $400,000 plus prejudgment 18 interest. 19 I. FACTS 20 The bankruptcy court wrote an extensive Memorandum Decision 21 following an eight-day trial on the underlying adversary 22 proceeding in this case. We borrow heavily from the bankruptcy 23 court’s recitation of the facts but do so in a summary fashion 24 for purposes of this appeal. 25 26 1 Unless otherwise indicated, all chapter and section 27 references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and “Rule” references are to the Federal Rules of Bankruptcy 28 Procedure.
-2- 1 A. Prepetition Events 2 Debra is a licensed real estate agent and her husband, 3 Clyde Hart (referred to as Toby throughout these proceedings) is 4 a real estate broker and real estate developer. Their son Lance 5 held a contractor’s license. Debra, Toby and Lance owned 6 various real estate-related businesses. 7 1. New Horizon Investments, Inc. 8 In September 2002, Debra formed New Horizon Investments, 9 Inc. (NHII), now a suspended California corporation, as a 10 vehicle through which to receive her real estate sales 11 commissions to minimize her tax liability. In June 2004, Debra 12 and Toby jointly owned a sixty percent equity interest in NHII 13 and Lance owned the remaining forty percent equity. Debra was 14 the President and Toby was the Secretary of the company, at 15 least initially. Lance served as Chief Financial Officer and 16 Vice–President of NHII during the period of formation of GTP 17 Properties Ltd. (GTP). 18 2. GTP Properties Ltd. 19 GTP was a limited partnership formed in 2004, with NHII as 20 the sole general partner. The Harts used GTP from time to time 21 in efforts to develop the Shady Glen property (further described 22 below). To that end, with the assistance of counsel, they 23 drafted a Private Placement Memorandum (PPM), Subscription 24 Agreement (SA) and Limited Partnership Agreement (LPA) for GTP. 25 The PPM was intended as an aid to those considering 26 investing in GTP. The PPM identifies GTP as a limited 27 partnership created for the sole purpose of acquiring and 28 developing Shady Glen and states that the general partner of
-3- 1 GTP, NHII, is under contract to purchase the property from a 2 third party. The goal of the “Shady Glen Real Estate Project” 3 was to build, and ultimately sell to “third party buyers,” two 4 homes on two lots. The PPM also states that, through the 5 efforts of NHII, the property has been approved for a lot split 6 and that design plans for two 5000 square foot houses are being 7 considered. The PPM goes on to state that NHII is under 8 contract to purchase Shady Glen, that as part of the project 9 NHII will sell its entire interest in the property to GTP for 10 $2,000,000 (the “Purchase Price”) and that upon payment of the 11 Purchase Price, GTP would hold title to Shady Glen “free and 12 clear.” 13 The PPM states that NHII shall raise the capital necessary 14 to develop the Shady Glen property by sale of 120 partnership 15 units at $30,000 each. Thus, the entire capitalization of the 16 partnership was to be raised by equity investments from 17 partners. The PPM expressly states: 18 [In] the event that there remains an undersubscription of the Partnership Units, 19 the General Partner would reject all investor subscriptions, promptly notify the 20 subscribed investors of such rejection, and promptly return to the subscribed investors, 21 in full, any subscription monies paid by them. 22 23 The PPM describes NHII as a California corporation whose 24 shareholders are Toby and Debra Hart, as husband and wife, as to 25 a sixty percent interest, and Lance, as to a forty percent 26 interest. Toby, Debra and Lance were identified as the 27 directors of the corporation; Toby was President of the 28 corporation, Debra was Secretary–Treasurer and Lance was
-4- 1 Vice–President. 2 The SA changed the financial arrangements described in the 3 PPM slightly, by decreasing the purchase price for each 4 Partnership unit to $25,000 (for a total of 144 Units), but 5 retained the overall capital to be raised, solely via equity 6 investments, at $3,600,000. The language quoted above from the 7 PPM concerning the effect of an undersubscription of the 8 Partnership was repeated verbatim in the second paragraph of the 9 SA. 10 Consistent with the provisions of the PPM and the SA, the 11 LPA states that the sole purpose of the Partnership is to 12 acquire and develop Shady Glen and that the funds necessary for 13 the project, the sum of $3,600,000, will be raised via the sale 14 of equity investments to limited partners. The LPA identifies 15 NHII as the General Partner and gives the General Partner fairly 16 standard powers of control and management of Partnership 17 operations and assets. 18 The Harts first used GTP to raise capital in June 2004. 19 Four partners, including Gary and Janette Drew, invested a total 20 of $800,000. The Harts gave the Drews the PPM, SA and LPA which 21 pertained to two homes on two lots. The Drews eventually 22 invested a total of $200,000 in the project. 23 3. Shady Glen 24 Shady Glen was a 2.21 acre parcel of undeveloped land on a 25 hillside in Walnut Creek, California. NHII acquired Shady Glen 26 from Eugene Wolsky via a “Vacant Land Purchase Agreement,” dated 27 September 2, 2003, that called for the property to be 28 transferred to NHII for a total price of $1,200,000, with a
-5- 1 closing to occur on January 9, 2004. Although Wolsky gave NHII 2 a grant deed dated January 23, 2004, in fact the escrow for the 3 transaction did not close, and the deed was not recorded, until 4 July 2, 2004, when NHII provided Wolsky the proceeds of a loan 5 in the amount of $800,000 from Sequoia Mortgage Capital 6 (“Sequoia”). Thereafter, NHII effected a lot split into what 7 would be known as “Lot A” and “Lot B,” each slightly larger than 8 one acre. 9 In 2006, Toby and Debra, through their roles in NHII, 10 transferred both lots to Debra, personally, as her sole and 11 separate property. Lot B was deeded to Debra on August 1, 2006. 12 Lot A was deeded to Debra on September 7, 2006. Each deed was 13 recorded shortly after its execution. 14 4. The Transactions Between Karaeff And The Harts 15 Debra met Karaeff at an open house that Debra hosted in 16 2004. Debra listed and sold Karaeff’s Oakland home in 2004 and 17 was Karaeff’s agent when she purchased a home in the Harts’ 18 Diablo neighborhood that year. Toby and Lance remodeled that 19 home for a total cost of approximately $300,000. During this 20 time, Karaeff became a close friend of Debra, Toby and the Hart 21 family generally. 22 When Karaeff entered the scene as a lender and/or an 23 investor in the Shady Glen project, Debra owned the entire 24 property. The house on Lot A was under construction, financed 25 through a construction loan from Washington Mutual Bank (“WAMU”) 26 in the total amount of $1,837,500 which was secured by a deed of 27 trust on Lot A. Lot B was undeveloped at that time and was 28 security for obligations to Sequoia. Sequoia held deeds of
-6- 1 trust on Lot B securing a $400,000 loan obtained on August 1, 2 2006, and a $200,000 loan obtained on October 19, 2006. 3 In 2007, Karaeff obtained an equity line of credit on her 4 home and began investing, or loaning, various sums of money with 5 the Harts. Four transactions are relevant in this appeal. 6 On August 15, 2007, Karaeff advanced $200,000 (it is 7 disputed whether it was a loan or an investment). In connection 8 with this transaction Debra gave her the PPM, SA and LPA, but 9 this time the documents pertained to the development of one home 10 on Lot B. The bankruptcy court refers to these documents signed 11 by Karaeff as relating to “GTP II.” Referring to this version 12 of documents, the bankruptcy court found Debra had primarily 13 prepared the PPM. 14 Karaeff loaned another $100,000 on August 27, 2007, and 15 $50,000 on December 10, 2007. 16 On May 20, 2008, she made a short-term loan of $100,000 17 through Toby, ostensibly to one of his associates, 18 Mr. Mendleson. 19 The Harts did not pay Karaeff back any portion of the 20 $200,000 she advanced nor did she receive payment on her other 21 loans. Eventually, Karaeff learned that Lot A and Lot B had 22 been lost to foreclosure. 23 B. Bankruptcy Events 24 On March 4, 2011, Debra filed her chapter 7 petition. 25 On June 4, 2011, the Drews filed an adversary proceeding 26 against Debra, Toby and others seeking to have their debt in the 27 amount of $200,000 found nondischargeable under § 523(a)(2)(A) 28 and (a)(4).
-7- 1 Two days later, Karaeff filed an adversary proceeding 2 against Debra, Toby, Lance, Two Harts, Inc.,2 Two Harts 3 Construction & Development Incorporated and NHII, seeking to 4 have $450,000 found nondischargeable under § 523(a)(2)(A) and 5 (a)(4). 6 Lance, Toby and Two Harts, Inc. filed motions to dismiss in 7 both adversary proceedings on the grounds that the bankruptcy 8 court did not have jurisdiction to enter a judgment against them 9 and a judgment could not be rendered nondischargeable against 10 them because they were not debtors in the related bankruptcy 11 case. The bankruptcy court granted both motions and dismissed 12 the adversary proceedings as to these non-debtor defendants. 13 Karaeff later sued Toby for fraud in state court. 14 Subsequently, the bankruptcy court entered an order 15 granting Karaeff’s Civil Rule 423 motion to consolidate her 16 adversary proceeding with the Drews’ adversary proceeding for 17 all purposes. Debra did not appeal that order. Karaeff’s and 18 the Drews’ adversary proceedings were jointly tried on 19 April 1-4, May 6-7, and August 5, 6, 8 and 9, 2013. Following 20 21 2 Lance owned Two Harts, Inc. 22 3 Civil Rule 42(a), made applicable to bankruptcy 23 proceedings by Rule 7042, provides:
24 (a) Consolidation. If actions before the court involve a common question of law or fact, the court may: 25 26 (1) join for hearing or trial any or all matters at issue in the actions; 27 (2) consolidate the actions; or (3) issue any other orders to avoid unnecessary cost or 28 delay.
-8- 1 the trial, the bankruptcy court issued separate memoranda of 2 decision for the respective cases of Karaeff and the Drews. 3 The bankruptcy court found in favor of Debra and against 4 the Drews based upon the statute of limitations. 5 In this case, the bankruptcy court noted that Karaeff’s 6 financial involvement with the Harts and their entities was 7 contested. During the trial, Debra denied any involvement in 8 the various transactions. The bankruptcy court stated that it 9 was “struck by the Harts’ consistent failure to offer rational, 10 sensible, candid explanations regarding the transactions giving 11 rise to these disputes.” The court further stated that “the 12 ‘story’ to which the Harts testified, as regarding most disputed 13 facts, ranged from implausible, to logically inconsistent, to 14 entirely self-serving.” Therefore, the bankruptcy court based 15 its conclusions of law in large part on the facts it found and 16 determined through the credible testimony of Karaeff. 17 The court determined that Debra made false 18 misrepresentations in connection with the $200,000 19 loan/investment and that the other elements of § 523(a)(2)(A) 20 were met. With respect to the August 27, 2007, and May 20, 21 2008, loans, both in the amount of $100,000, the bankruptcy 22 court found that Debra’s involvement in the transactions rose to 23 a level sufficient to find nondischargeability. The bankruptcy 24 court entered the nondischargeability judgment in favor of 25 Karaeff on March 14, 2014. Debra timely appealed. 26 II. JURISDICTION 27 The bankruptcy court had jurisdiction pursuant to 28 U.S.C. 28 §§ 1334 and 157(b)(2)(I). We have jurisdiction under 28 U.S.C.
-9- 1 § 158. 2 III. ISSUES 3 A. Whether the bankruptcy court erred by finding the 4 $200,000 debt nondischargeable; and 5 B. Whether the bankruptcy court applied an incorrect 6 legal standard regarding Debra’s state of mind for a finding of 7 fraud in connection with the August 27, 2007 $100,000 8 transaction and May 20, 2008 $100,000 transaction.4 9 IV. STANDARDS OF REVIEW 10 The question of whether a particular debt is dischargeable 11 is a mixed question of fact and law that we review de novo. 12 See Honkanen v. Hopper (In re Honkanen), 446 B.R. 373, 382 (9th 13 Cir. BAP 2011); see also Searles v. Riley (In re Searles), 14 317 B.R. 368, 373 (9th Cir. BAP 2004) (stating that mixed 15 questions are reviewed de novo when they require the court “to 16 consider legal concepts and exercise judgment about values 17 animating legal principles.”). 18 To the extent an issue within the mixed question can be 19 identified as solely a question of fact, it is subject to a 20 clearly erroneous standard of review. See Rose v. United 21 22 4 Debra listed five issues in her opening brief which we 23 distilled into the two claims of error as set forth above. Karaeff contends that Debra waived some of her listed issues 24 because they were not included in Debra’s Statement of Issues (SOI) on Appeal (which originally stated twenty-two issues). We 25 disagree there is any waiver on this basis. See Office of the 26 U.S. Tr. v. Hayes (In re Bishop, Baldwin, Rewald, Dillingham & Wong, Inc.), 104 F.3d 1147, 1148 (9th Cir. 1997) (arguments not 27 specifically listed in an SOI are not waived) and Wages v. J.P. Morgan Chase Bank, N.A., (In re Wages), 508 B.R. 161, 164 (9th 28 Cir. BAP 2014).
-10- 1 States, 905 F.2d 1257, 1259 (9th Cir. 1990). Moreover, the 2 clearly erroneous standard does not permit us to conduct a 3 de novo review of the evidence, but it does allow this Panel to 4 consider whether there was enough evidence in the record to 5 support the factual findings of the bankruptcy court. See 6 Civil Rule 52(a) (made applicable to bankruptcy proceedings by 7 Rule 7052(a)). 8 A finding of whether a requisite element of a 9 § 523(a)(2)(A) claim is present is a factual determination that 10 we review for clear error. See Anastas v. Am. Sav. Bank 11 (In re Anastas), 94 F.3d 1280, 1283 (9th Cir. 1996); Candland v. 12 Ins. Co. Of N. Am. (In re Candland), 90 F.3d 1466, 1469 (9th 13 Cir. 1987) (whether there has been a misrepresentation is a 14 finding of fact reviewed for clear error); Cowen v. Kennedy 15 (In re Kennedy), 108 F.3d 1015, 1018 (9th Cir. 1997) (intent to 16 deceive under § 523(a)(2)(A) is a question of fact). A 17 bankruptcy court’s factual findings are clearly erroneous if 18 they are illogical, implausible, or without support from 19 inferences that may be drawn from the record. United States v. 20 Hinkson, 585 F.3d 1247, 1259–61 (9th Cir. 2009) (en banc). 21 V. DISCUSSION 22 A. Legal Standards: § 523(a)(2)(A) 23 Under § 523(a)(2)(A), a debtor is not discharged in 24 bankruptcy from any debt obtained by “false pretenses, a false 25 representation, or actual fraud.” The creditor bears the 26 burden, under the preponderance of the evidence standard, of 27 demonstrating each of the following five elements: 28 (1) misrepresentation, fraudulent omission or deceptive conduct
-11- 1 by the debtor; (2) knowledge of the falsity or deceptiveness of 2 the representation or omission; (3) an intent to deceive; 3 (4) the creditor’s justifiable reliance on the representation or 4 conduct; and (5) damage to the creditor proximately caused by 5 reliance on the debtor’s representations or conduct. Ghomeshi 6 v. Sabban (In re Sabban), 600 F.3d 1219, 1222 (9th Cir. 2010); 7 Citibank v. Eashai (In re Eashai), 87 F.3d 1082, 1086 (9th Cir. 8 1996). 9 “The burden of showing something by a ‘preponderance of the 10 evidence,’ . . . ‘simply requires the trier of fact to believe 11 that the existence of a fact is more probable than its 12 nonexistence before [he] may find in favor of the party who has 13 the burden to persuade the [judge] of the fact’s existence.’” 14 Concrete Pipe & Prods. of Cal., Inc. v. Constr. Laborers Pension 15 Trust for S. Cal., 508 U.S. 602, 622 (1993) (citation omitted). 16 Because direct evidence of intent to deceive (the scienter 17 element) is rarely available, “the intent to deceive can be 18 inferred from the totality of the circumstances, including 19 reckless disregard for the truth.” Gertsch v. Johnson & 20 Johnson, Fin. Corp. (In re Gertsch), 237 B.R. 160, 167–68 21 (9th Cir. BAP 1999); Household Credit Servs., Inc. v. Ettell 22 (In re Ettell), 188 F.3d 1141, 1145 n.4 (9th Cir. 1999) 23 (“reckless conduct could be sufficient to establish fraudulent 24 intent”); Houtman v. Mann (In re Houtman), 568 F.2d 651, 656 25 (9th Cir. 1978) (“Reckless indifference to the actual facts, 26 without examining the available source of knowledge which lay at 27 hand, and with no reasonable ground to believe that it was in 28 fact correct is sufficient to establish the knowledge
-12- 1 element.”). Accordingly, a bankruptcy court may find the 2 requisite intent “where there has been a pattern of falsity or 3 from a debtor’s reckless indifference to or disregard of the 4 truth.” Khalil v. Developers Sur. & Indem. Co. (In re Khalil), 5 379 B.R. 163, 174–75 (9th Cir. BAP 2007) (discussing intent to 6 deceive in the context of § 727(a)). 7 Finally, we are mindful that “exceptions to discharge 8 should be strictly construed against an objecting creditor and 9 in favor of the debtor.” Snoke v. Riso (In re Riso), 978 F.2d 10 1151, 1154 (9th Cir. 1992); Mele v. Mele (In re Mele), 771 F.3d 11 1119, 1125 (9th Cir. 2014). 12 B. The bankruptcy court did not err in finding that the $200,000 debt was nondischargeable. 13 14 After a multi-day trial, the bankruptcy court determined 15 that all the elements for finding the $200,000 nondischargeable 16 were met based on the following: 17 Misrepresentations: Debra was aware of Karaeff’s 18 significant home equity. Debra told Karaeff that Karaeff 19 “needed to get her money working for her” which evidences 20 Debra’s involvement in soliciting money from Karaeff and also 21 goes to her role in inducing Karaeff’s reliance. 22 The court found that Debra made the following statements to 23 Karaeff with regard to the $200,000 transferred August 15, 2007, 24 for the development of Lot B through what Debra and Toby 25 represented to be a limited partnership: (1) Debra told Karaeff 26 that $200,000 was needed immediately to begin construction on 27 Lot B; (2) Debra gave Karaeff the SA, which included the 28 statement that, in the event of under-subscription, all
-13- 1 subscription monies would be returned to the limited partners; 2 (3) Debra gave Karaeff the LPA, the stated primary purpose of 3 which was the development of Lot B; and, (4) Debra told Karaeff 4 that the property was free and clear of liens. All of these 5 statements were false. 6 Knowledge That The Statements Were False: Debra admitted 7 that she had no intention to develop Lot B at the time she 8 convinced Karaeff to invest as a limited partner for Lot B’s 9 development. She stated that she wanted to live in the home on 10 Lot A, without the inconvenience of a neighboring residence on 11 Lot B. None of the $200,000 was used for the development of 12 Lot B. The Harts had no plans to build a house on Lot B, but 13 nonetheless represented to Karaeff that such a home would be 14 sold with profits distributed to partners within a year. Even 15 with a substantial underscription, Debra never attempted to 16 return Karaeff’s investment. Finally, the property was not free 17 and clear at the time that Karaeff committed her $200,000. 18 Intent to Deceive: Debra intended to deceive Karaeff and 19 induce her reliance on those statements. Debra supplied 20 partnership documents for GTP II, a sham “partnership” which was 21 never formed and was never intended to be formed. Debra also 22 convinced Karaeff to commit $200,000 after Karaeff expressed 23 that she was initially inclined to invest $100,000. 24 Justifiable Reliance: The court determined that Karaeff’s 25 reliance on Debra’s statements was justifiable. Debra and 26 Karaeff were close friends. Karaeff had no prior experience in 27 real estate development through a partnership. Karaeff trusted 28 the expertise of her friend, Debra, who convinced her that the
-14- 1 investment was a good idea through any number of statements both 2 oral and contained within the partnership documents Debra had 3 supplied to Karaeff. 4 Damages: Karaeff was damaged in the initial amount of 5 $200,000 as a result of her reliance on Debra’s false 6 statements. 7 On appeal, Debra challenges the bankruptcy court’s findings 8 on several grounds. First, Debra argues that the court erred in 9 finding that (1) she told Karaeff that $200,000 was needed 10 immediately to begin construction on Lot B and (2) she gave 11 Karaeff the LPA, the stated primary purpose of which was the 12 development of Lot B. Debra maintains that the bankruptcy court 13 erroneously based these findings on the premise that she knew 14 that Lot B could never be developed because she had decided 15 irrevocably that she wanted someday to live in the house on 16 Lot A and never have a neighbor on Lot B. According to Debra, 17 “this was not [her] testimony on the issue.” She also stated 18 that Toby wanted to build on Lot B and “. . . well if that is 19 what he wishes that is where - what we’re going to do.” 20 Whether there has been a misrepresentation is a finding of 21 fact reviewed for clear error. In re Candland, 90 F.3d at 1469. 22 The record shows that at another point during the trial Debra 23 testified: “I had no intention of having another home built on 24 Lot B ever.” Further, Toby testified that from the time Karaeff 25 paid the $200,000 until the date Lot B was lost to foreclosure 26 there was no construction done on Lot B. He also testified that 27 he had no idea where the money was actually used. 28 The bankruptcy court did not find the Harts’ testimony
-15- 1 credible. Based on the court’s credibility determination, a 2 rational factfinder could find that Debra’s contradicting 3 statements regarding the development of Lot B were not worthy of 4 belief and could reasonably infer that neither Debra nor the 5 Harts ever intended to construct a home on Lot B. Where there 6 are two permissible views of the evidence, the factfinder’s 7 choice between them is not clearly erroneous; this applies to 8 credibility-based findings and to findings based on inferences 9 from other facts. Lewis v. Ayers, 681 F.3d 992, 999 (9th Cir. 10 2012); Leon v. IDX Sys. Corp., 464 F.3d 951, 958 (9th Cir. 11 2006); Anderson v. City of Bessemer City, N.C., 470 U.S. 564, 12 574 (1985). In short, we discern no clear error. 13 Next, Debra argues the bankruptcy court erred in finding 14 that she made a false statement when she gave Karaeff the SA, 15 which included the statement that, in the event of 16 undersubscription, all subscription monies would be returned to 17 the limited partners. Debra submits that there is no evidence 18 in the record to show that at the time Karaeff transferred the 19 $200,000, she intended that it would not be returned should the 20 remaining investment money not be raised. 21 Again, there is no merit to this argument. Whether there 22 is an intent to deceive is a question of fact subject to the 23 clearly erroneous standard. In re Kennedy, 108 F.3d at 1018. 24 Likewise, we review the sufficiency of the evidence to support a 25 factual finding under the clearly erroneous standard. See 26 Civil Rule 52(a). Because Debra asserts there is no evidence 27 regarding her intent to deceive, our review under the clearly 28 erroneous standard requires a complete set of the trial
-16- 1 transcripts and other relevant evidence considered by the 2 bankruptcy court. See Friedman v. Shelia Plotsky Brokers, Inc. 3 (In re Friedman), 126 B.R. 63, 68 (9th Cir. BAP 1991) (citing 4 Fed. R. App. P. 10(b)(2) which provides that “[i]f the appellant 5 intends to urge on appeal that a finding or conclusion is 6 unsupported by the evidence or is contrary to the evidence, the 7 appellant shall include in the record a transcript of all 8 evidence relevant to such finding or conclusion.”). Debra 9 failed to include a complete set of the trial transcripts in the 10 record and has included the direct testimony by declaration of 11 only Karaeff and herself. Therefore, we are unable to address 12 Debra’s “no evidence” argument. See Ehrenberg v. Cal. State 13 Univ., Fullerton Found. (In re Beachport Entm’t), 396 F.3d 1083, 14 1087 (9th Cir. 2005) (failure to provide essential transcripts 15 or portions thereof can result in an adverse decision on the 16 merits). 17 Moreover, whether Debra had the intent to deceive is a 18 question of fact that can be inferred from the totality of the 19 circumstances, so Debra’s credibility is an important factor. 20 Here, the bankruptcy court properly considered the totality of 21 the circumstances and did not find the Harts’ testimony 22 credible. The court found Debra’s intent to deceive was 23 “readily” apparent: 24 Debtor supplied Karaeff with partnership documents for GTP II, a sham ‘partnership’ which was never formed, 25 and was never intended to be formed. Debtor made other false statements regarding the development of 26 Lot B, which she admitted was never going to happen on her watch and she also convinced Karaeff to commit 27 $200,000 after Karaeff expressed that she was initially inclined to invest $100,000. 28
-17- 1 These findings, which turned on credibility determinations, are 2 not clearly erroneous. 3 Debra also challenges the bankruptcy court’s finding that 4 her statement to Karaeff that the property was free and clear of 5 liens amounts to a false misrepresentation. According to Debra, 6 the bankruptcy court’s finding was based upon Karaeff’s 7 statement in her direct written testimony referring to a 8 statement allegedly made orally by Debra when they first visited 9 the Shady Glen site: 10 Debi told me that she had found the property one day and wrote a check for it on the spot without even 11 telling her husband. She said the property was free and clear. 12 13 Debra argues that this statement by the bankruptcy court is not 14 quoted but paraphrased, and it does not specify whether 15 Karaeff’s claim was that the property was free and clear when 16 purchased or free and clear at the time that the statement was 17 made. Debra also maintains that the investment documents and 18 the alleged description of the investment say nothing about the 19 property being free and clear of liens until it is purchased by 20 the limited partners, at which time the owner (and presumably 21 his mortgages) would be paid off. Debra opines that it is 22 irrelevant to the buyer whether the seller owns the property 23 free and clear of liens since whatever liens are on the property 24 will be paid off in escrow. In the end, Debra asserts there is 25 not enough information as to what was said or heard or 26 understood by either Debra or Karaeff regarding the casual “no 27 lien” statement during that first visit to Shady Glen to 28 constitute evidence of dishonesty on Debra’s part.
-18- 1 These arguments are not only unclear but also unconvincing. 2 Even assuming there was error, it was harmless when the 3 bankruptcy court identified numerous other misrepresentations 4 made by Debra to Karaeff. Any one of these statements would be 5 sufficient to support the nondischargeability of the $200,000 6 debt without the “no lien” statement. Moreover, in considering 7 the totality of the circumstances to determine whether Debra had 8 the intent to deceive, the bankruptcy court could properly 9 consider whether Debra’s “no lien” statement to Karaeff during 10 the first visit to the Shady Glen property was part of a pattern 11 of falsity. In sum, Debra has offered no basis for us to 12 overturn the bankruptcy court’s conclusion that the $200,000 13 debt was nondischargeable based on Debra’s fraud. 14 Debra also makes a number of arguments in her reply brief 15 about the bankruptcy court’s findings on the $200,000 debt. We 16 do not consider them because arguments raised for the first time 17 in a reply brief are waived. Coleman v. Quaker Oats Co., 18 232 F.3d 1271, 1289 n.4 (9th Cir. 2000). 19 C. The bankruptcy court did not err in finding that the August 27, 2007 debt in the amount of $100,000 was 20 nondischargeable. 21 With respect to this debt, the bankruptcy court noted that 22 Karaeff conceded that Debra was not present when Karaeff and 23 Toby entered into the August 27, 2007 loan for $100,000. 24 The bankruptcy court’s Memorandum Decision reflects that 25 after eight days of trial, Debra brought an oral motion under 26 Civil Rule 52 for judgment on partial findings with respect to 27 the August 27, 2007 $100,000 loan. After discussion concerning 28 the motion, the court determined that Karaeff was not alleging
-19- 1 any direct involvement by Debra and must prove this aspect of 2 her case, if at all, by resort to imputation of Toby’s 3 fraudulent statements on a partnership theory. After trial, in 4 its written findings of fact and conclusions of law, the 5 bankruptcy court sua sponte reconsidered that aspect of its 6 decision. Upon reconsideration, the court found that Debra was 7 “directly involved” in the August 27, 2007 $100,000 transaction 8 such that the debt was nondischargeable in her bankruptcy. 9 In her original SOI, Debra listed as an issue: Whether the 10 bankruptcy court committed an error of law or an abuse of 11 discretion that during the trial, the judge stated that out of 12 the four loans involved in the trial, the middle two loans 13 involving $150,000 were out. No defense was given on those two 14 loans. In his decision he stated he revisited “those loans” and 15 included them in the judgment. In her opening brief, Debra does 16 not raise, challenge, or otherwise analyze whether the 17 bankruptcy court’s decision to sua sponte reconsider its earlier 18 ruling had any impact on her. Therefore, any arguments relating 19 to this issue are waived. Indep. Towers of Wash. v. Wash., 20 350 F.3d 925, 929 (9th Cir. 2003) (“[W]e cannot ‘manufacture 21 arguments for an appellant’ and therefore we will not consider 22 any claims that were not actually argued in appellant’s opening 23 brief.”). 24 The bankruptcy court found that Debra was directly involved 25 in the August 27 transaction in the following ways: 26 (1) Approximately one month earlier, in July 2007, Debra told Karaeff on two occasions that she needed to 27 get her money working for her; the Court has already found that Debra was aware of Karaeff’s equity in her 28 home and instrumental in helping Karaeff obtain the
-20- 1 line of credit that would finance the $100,000 advanced on August 27, 2007; (2) Debra made false and 2 misleading statements to Karaeff regarding Lot A—the development project that would purportedly benefit 3 from the $100,000 loan. Debra took Karaeff to Shady Glen, showed her the house on Lot A and said that it 4 would be completed within 30 to 45 days. Whether this statement was false when made or an overly optimistic 5 projection could be argued. But Debra also said that the property was free and clear of liens, which was 6 clearly a false statement; (3) Karaeff’s relationship with Debra was such that statements by Debra carried 7 significant weight on a personal level, given their friendship, and on a professional level, given Debra's 8 presentation as an individual with knowledge and expertise in real estate development. The Court 9 believes that Toby, on his own, could not have obtained this $100,000. Debra's conduct, through 10 these false and misleading statements, was essential to Karaeff's decision to advance funds (emphasis 11 added). 12 The bankruptcy court further found: 13 Toby then came to Karaeff on the date in question and said that he needed $100,000 to finish the house on 14 Lot A. This statement was false when made. The money that Karaeff loaned was never used to develop Lot A. 15 In his trial testimony, Toby said he could not recall whether any amount of that sum was used in the 16 construction on Lot A. But during his deposition, Toby admitted that none of the proceeds of that loan 17 was used for Shady Glen. Toby intended to deceive Karaeff by inducing her reliance on the false 18 statement. He did so, and Karaeff justifiably relied on Toby's statement. Damages resulted when the money, 19 loaned for the completion of Lot A, was not used in any part for that purpose and was not returned to 20 Karaeff. 21 The bankruptcy court noted that the Ninth Circuit ruled, 22 under similar facts, that an individual in Debra’s position may 23 be held directly responsible for her role in a fraudulent 24 scheme. La Trattoria, Inc. v. Lansford (In re Lansford), 25 822 F.2d 902, 904–05 (9th Cir. 1987). In In re Lansford, the 26 Ninth Circuit concluded that, by virtue of her participation and 27 involvement in a fraudulent transaction, a wife could be held 28 culpable for that transaction, even where her husband actually
-21- 1 prepared the fraudulent statement. The debtor husband made a 2 false financial statement in connection with a purchase of a 3 restaurant from plaintiff. After debtor husband and debtor wife 4 jointly filed bankruptcy, plaintiff brought an action under 5 § 523(a)(2)(B) against both husband and wife. 6 Instead of relying on imputation on a partnership theory 7 through agency principles, the Ninth Circuit cited evidence 8 which connected debtor wife to the financial statement and the 9 deception. Evidence establishing the debtor wife’s direct role 10 in the fraud included findings that: (1) debtor wife was 11 involved in initiating discussions with La Trattoria, even if 12 through her husband; (2) debtor wife discovered the potential 13 restaurant venture; and, (3) debtor wife signed the purchase 14 documents transferring the restaurant which repeated a 15 misrepresentation contained within the false financial 16 statement. Id. at 904. The Ninth Circuit found debtor wife 17 “culpably responsible” for the fraud. Id. It reversed the 18 ruling of this Panel that had declined to impose liability on 19 debtor wife due to lack of “knowledge or connivance” on her 20 part. Id. at 903. 21 After considering the facts and holding in In re Lansford, 22 the bankruptcy court concluded: 23 Although Debra was not physically present when Karaeff loaned $100,000 at a meeting with Toby, this event 24 occurred approximately one month after Debra and Karaeff visited Shady Glen, and approximately two 25 weeks after Debra made other false statements about Shady Glen in connection with the ‘partnership 26 development of Lot B. In the middle weeks of August, Debra was instrumental in the process by which Karaeff 27 obtained the line of credit through which Karaeff would fund advances to Hart entity projects. The 28 Court finds Debra’s role in the fraud to be direct and
-22- 1 essential to its success. Her false statements regarding Lot A in July and early August of 2007 are 2 properly carried forward to the August 27, 2007 transaction date. . . . Based on the foregoing, all 3 elements of [§] 523(a)(2)(A) are established . . . . 4 On appeal, Debra argues that there is no evidence that 5 Karaeff’s August 27, 2007 loan was made with her knowledge or 6 participation. Again, we cannot address Debra’s “no evidence” 7 argument without the complete trial transcript and other 8 evidence considered by the bankruptcy court. 9 Next, citing Bullock v. BankChampaign, N.A., 133 S.Ct. 1754 10 (2013) and Sachan v. Huh (In re Huh), 506 B.R. 257 (9th Cir. BAP 11 2014) (en banc), Debra maintains there must be some evidence 12 that she knew Toby was asking Karaeff for additional loans and 13 that he was intending to defraud her and that she, Debra, had 14 participated directly in these fraudulent loans. Debra fails to 15 provides any analysis as to how the holdings in Bullock and 16 In re Huh help her case. Her challenge seems to be that the 17 bankruptcy court applied an incorrect legal standard regarding 18 her state of mind for a finding of fraud when she was neither 19 present when the loan was made to Toby nor did she have 20 knowledge of the loan. 21 The Supreme Court in Bullock held that the term 22 “defalcation” is treated similarly to “fraud” for purposes of 23 § 523(a)(4). 133 S.Ct. at 1756. The court ruled that 24 defalcation “includes a culpable state of mind requirement akin 25 to that which accompanies application of the other terms in the 26 same statutory phrase. We describe that state of mind as one 27 involving knowledge of, or gross recklessness in respect to, the 28 improper nature of the relevant fiduciary behavior.” Id. at
-23- 1 1757. Where actual knowledge is lacking, intent can still be 2 shown for purposes of § 523(a)(4) if the “fiduciary ‘consciously 3 disregards’ (or is willfully blind to) ‘a substantial and 4 unjustifiable risk’ that his conduct will turn out to violate a 5 fiduciary duty.” Id. at 1759-60. 6 The Panel in In re Huh considered the mental state for 7 fraud set forth in Bullock in connection with the imputation of 8 fraud under § 523(a)(2)(A) when a partnership or agent-principal 9 relationship was found. The Panel, sitting en banc, held that 10 before an agent’s fraud may be imputed to the debtor-principal, 11 for purposes of the discharge exception for debts obtained by 12 actual fraud, proof is required that the debtor is culpable, 13 that is, that the debtor “knew or should have known” of the 14 agent’s fraud, though the debtor need not have participated 15 actively in the fraud. 506 B.R. at 272. 16 Neither Bullock nor In re Huh help Debra on appeal. There 17 is no indication that the holding in Bullock heightens the state 18 of mind required for fraud under § 523(a)(2)(A) as already 19 required in this Circuit. Further, the bankruptcy court found 20 it unnecessary to find a “de facto partnership”5 through which 21 to impute Toby’s fraud to Debra under agency and partnership 22 principles because the court found “direct, culpable, conduct by 23 Debra and involvement by her in the fraud such that it is her 24 own.” Therefore, the standards for the imputation of fraud set 25 forth in In re Huh are not applicable. 26 5 27 Karaeff had alleged in her first amended complaint that Debra, Lance and Toby were “defacto partners” with each being the 28 agent of each of the others.
-24- 1 In addition, Debra never argues that the bankruptcy court’s 2 reliance on In re Lansford was improper or otherwise misplaced. 3 Even in the absence of “knowledge or connivance,” the holding in 4 In re Lansford allows the imposition of liability when there is 5 evidence showing Debra’s direct role in the fraud. Here, the 6 bankruptcy court considered Debra’s conduct and misleading 7 statements made to Karaeff one month prior to this transaction, 8 Debra’s close personal relationship with Karaeff, and Debra’s 9 role in helping Karaeff obtain the substantial line of credit on 10 her property. The bankruptcy court found that Debra’s conduct 11 and misleading statements were essential to Karaeff’s decision 12 to advance the funds. Accordingly, the bankruptcy court found 13 sufficient circumstantial evidence from which to infer Debra’s 14 direct role in the fraud. 15 Debra does not challenge any of these findings on appeal 16 nor does she contend that these facts do not support an 17 inference of her direct involvement in the fraud. In any event, 18 insofar as the bankruptcy court’s findings were based mostly on 19 its credibility determinations, such determinations are entitled 20 to special deference. Leon v. IDX Systems Corp., 464 F.3d at 21 958. In sum, Debra has offered no basis for us to overturn the 22 bankruptcy court’s conclusion that the $100,000 debt was 23 nondischargeable based on Debra’s direct involvement in the 24 fraud. 25 D. The bankruptcy court did not err in finding that the May 20, 2008 debt in the amount of $100,000 was 26 nondischargeable. 27 In connection with this loan, Karaeff’s account is that she 28 was having dinner and watching television with Toby and Debra on
-25- 1 May 20, 2008. Toby was on the phone, stopped his conversation, 2 and asked Karaeff if she would like to make a quick $6,000 3 through loaning his associate $100,000 that would be paid back 4 in thirty days at six percent interest. It was later revealed 5 to Karaeff, by Toby, that this associate was Mendelson. Karaeff 6 stated that Debra was present, the two looked at each other, and 7 Debra smiled saying “it will be okay.” The bankruptcy court 8 found Karaeff’s testimony credible on the Mendelson transaction, 9 in contrast to the Harts’ testimony which was evasive and relied 10 on facts not proven at trial. The court further found that: 11 Debra and Toby jointly participated in this fraud, each making statements to solicit the Mendelson 12 $100,000 from Karaeff. Toby made the false statement that he would loan, on Karaeff’s behalf, $100,000 to 13 his friend. Debra’s statement “it will be okay” appears, at a minimum, to be sufficiently reckless to 14 be a false statement under 523(a)(2)(A). Even without finding that this statement on its own supports a 15 claim for non-dischargeability, Debra’s role in inducing Karaeff’s reliance on a false statement made 16 by Toby is sufficient direct involvement in the fraud such that fraudulent intent by Debra is found and she, 17 under Lansford, is responsible for any non-dischargeable debt. 18 19 The court next assessed Debra’s statement, “it will be 20 okay,” to determine whether it was so recklessly indifferent to 21 the truth as to be fraudulent. The bankruptcy court found: 22 Debra was, at best, recklessly indifferent to the truth of her comforting assertion that Karaeff’s money 23 was safe with Mendelson, via Toby. Furthermore, the context of the transaction suggests that Debra knew 24 Toby’s motives and that the money was not going to Mendelson. 25 Debra added her statement to bolster Toby’s false 26 statement and to induce Karaeff's reliance. The Court need not find this statement false in itself. It is 27 the most significant evidence of Debra’s involvement in the fraud, which was as follows: (1) Karaeff was 28 Debra's friend, who was socializing with Debra and
-26- 1 Toby on the night the transaction occurred; their relationship was such that Karaeff would rely on 2 Debra’s advice and opinion; (2) Were the money to go to Shady Glen (and it appears that it was never 3 transferred to Mendelson out of the Two Harts account), Debra would directly benefit from the 4 Karaeff loan as it would go toward the construction of her home in an otherwise economically challenged 5 project; (3) Debra, knowing that the money was not going to Mendelson, offered her assurance through 6 smiling and saying “it will be okay.” This statement was intended to induce Karaeff's reliance on Toby's 7 false statement. Finding Debra directly involved with the fraud, this Court concludes that this debt may be 8 determined non-dischargeable in Debra’s bankruptcy. 9 On appeal, Debra again complains there is no evidence in 10 the record to support the bankruptcy court’s decision. She 11 further claims, without citation to any authority, that the 12 bankruptcy court’s finding of reckless indifference to the truth 13 without a finding of dishonesty is not enough. 14 We summarily dispose of Debra’s argument in relation to 15 this transaction. To the extent Debra is relying on Bullock and 16 In re Huh, those cases do not help her case as explained above. 17 Here, applying the principles set forth in In re Lansford, the 18 bankruptcy court found that Debra directly participated in the 19 fraud. In so finding, the court properly considered Debra’s 20 reckless disregard for the truth when she stated “it will be 21 okay.” Under § 523(a)(2)(A), “the intent to deceive can be 22 inferred from the totality of the circumstances, including 23 reckless disregard for the truth.” In re Gertsch, 237 B.R. at 24 167–68. And, again, witness credibility played an important 25 role in the trial court’s determination. In sum, Debra has 26 offered no basis for us to overturn the bankruptcy court’s 27 conclusion that the $100,000 debt was nondischargeable based on 28 Debra’s direct involvement in the fraud.
-27- 1 E. Remaining Issues 2 Debra contends that the bankruptcy court’s findings and 3 evidence in the Drews’ adversary proceeding cannot be considered 4 in this appeal. Debra further asserts that Karaeff cannot 5 allege for the first time on appeal that the findings or the 6 evidence in Drew are relevant to Debra’s mens rea in Karaeff. 7 Finally, she maintains that the Drews were strangers and Karaeff 8 was a personal friend so statements in the Drew case should not 9 be considered here. 10 Debra fails to point out what evidence is in the record 11 before us regarding the Drews’ case that has any bearing on the 12 issues raised in this appeal. The bankruptcy court granted 13 Karaeff’s Civil Rule 42 motion to consolidate her adversary 14 proceeding with that of the Drews for all purposes, including 15 trial. We found nothing in the record to show that she appealed 16 this order. Instead she now complains about the effect of the 17 consolidation for the first time in this appeal which we do not 18 consider. See Smith v. Marsh, 194 F.3d 1045, 1052 (9th Cir. 19 1999) (“[W]e will not consider arguments that are raised for the 20 first time on appeal.”). 21 VI. CONCLUSION 22 For the reasons stated, we AFFIRM the bankruptcy court’s 23 decision regarding the nondischargeability of the August 15, 24 2007 $200,000 debt, the August 27, 2007 $100,000 debt, and the 25 May 20, 2008 $100,000 debt for a total of $400,000. Because the 26 bankruptcy court found the December 2007 debt dischargeable, but 27 also included this amount in the judgment for $450,000 (plus 28 prejudgment interest), we REMAND this matter to the bankruptcy
-28- 1 court for the limited purpose of correcting the judgment. 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
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