FILED JUL 22 2016 1 ORDERED PUBLISHED 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 Nos. AZ-14-1497-JaJuKu ) AZ-15-1040-JaJuKu 6 DONALD GARY SHANNON and ) (Consolidated) MAI DOAN SHANNON, ) 7 ) Bk. No. 2:10-bk-35640-BKM Debtors. ) 8 ______________________________) Adv. No. 2:11-ap-00260-EPB ) 9 ANDRES CARDENAS; TERESA ) CARDENAS, ) 10 ) Appellants, ) 11 ) v. ) O P I N I O N 12 ) DONALD GARY SHANNON; MAI DOAN ) 13 SHANNON, ) ) 14 ) Appellees. ) 15 ______________________________) 16 Argued and Submitted on May 20, 2016 at Phoenix, Arizona 17 Filed – July 22, 2016 18 Appeal from the United States Bankruptcy Court 19 for the District of Arizona 20 Honorable Eddward P. Ballinger, Jr., Bankruptcy Judge, Presiding 21 22 Appearances: H. Troy Romero of Romero Park P.S. argued for appellants Andres Cardenas and Teresa Cardenas; 23 Neal H. Bookspan of Jaburg & Wilk, P.C. argued for appellees Donald Gary Shannon and Mai Doan 24 Shannon. 25 Before: JAIME,1 JURY, and KURTZ, Bankruptcy Judges. 26 27 1 Hon. Christopher D. Jaime, United States Bankruptcy Judge 28 for the Eastern District of California, sitting by designation. 1 JAIME, Bankruptcy Judge: 2 3 Creditors Andres Cardenas and Teresa Cardenas (“Cardenases”) 4 appeal from an order denying their request for an order declaring 5 that a debt owed by debtors Donald Gary Shannon and Mai Doan 6 Shannon (“Shannons”) is non-dischargeable in the Shannons’ 7 bankruptcy case and the judgment entered on that order 8 discharging the debt. The bankruptcy court concluded that the 9 Cardenases failed to prove several elements of their 10 non-dischargeability claim under 11 U.S.C. § 523(a)(2)(A),2 which 11 excepts from discharge debts for, among other things, money and 12 property to the extent obtained by false pretenses, a false 13 representation, or actual fraud. 14 The Cardenases also appeal the bankruptcy court’s order and 15 judgment awarding costs and attorney’s fees with interest to the 16 Shannons, arguing that the action before the bankruptcy court was 17 based in fraud and misrepresentation and not contract. 18 For the reasons explained below, we AFFIRM the bankruptcy 19 court’s ruling that the Cardenases failed to prove 20 non-dischargeability under § 523(a)(2)(A), we AFFIRM the 21 bankruptcy court’s award of costs to the Shannons in the amount 22 of $5,002.10, and we VACATE and REMAND the bankruptcy court’s 23 award of $72,691.00 in attorney’s fees to the Shannons. 24 /// 25 26 2 Unless specified otherwise, all chapter and section 27 references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and all “Rule” references are to the Federal Rules of Bankruptcy 28 Procedure, Rules 1001-9037.
2 1 I. INTRODUCTION 2 The dispute below and this appeal arise out of a 3 longstanding business and personal relationship between the 4 Cardenases and the Shannons. It began in 2005 when Mr. Cardenas 5 purchased vacant land and a dilapidated building located at 30333 6 Pacific Highway South, Federal Way, Washington (“Washington 7 Property”) for $1,000,000.00, with Ms. Shannon’s assistance. It 8 continued with a fraud and negligent misrepresentation lawsuit 9 the Cardenases filed against the Shannons in Washington state 10 court in which the Cardenases obtained a default judgment in 11 excess of $1,000,000.00 against the Shannons after the Washington 12 Property was lost to foreclosure. The adversary proceeding 13 ensued when the Shannons moved to Arizona and filed a voluntary 14 petition for relief under chapter 7 of the Bankruptcy Code. 15 The Cardenases commenced an adversary proceeding in the 16 Shannons’ chapter 7 case in which they sought to have the debt 17 created by the Washington state court default judgment declared 18 non-dischargeable under § 523(a)(2)(A). After a three-day trial 19 during which the bankruptcy judge heard testimony from numerous 20 witnesses and judged their credibility, the bankruptcy court 21 entered an order denying the Cardenases’ request for an order 22 providing that any debt owed to them based on the Washington 23 state court default judgment be deemed non-dischargeable in the 24 Shannons’ bankruptcy case. Entry of a judgment, as amended, 25 discharging that debt followed. The bankruptcy court concluded 26 that the Cardenases failed to carry their burden of proof on two 27 elements of the § 523(a)(2)(A) claim. It also concluded that the 28 Cardenases failed to prove their damages were proximately caused
3 1 by their reasonable reliance on any representations made by the 2 Shannons. 3 In post-trial proceedings, the bankruptcy court awarded the 4 Shannons their costs and attorney’s fees as the prevailing 5 parties on the Cardenases’ § 523(a)(2)(A) claim. 6 The Cardenases first appealed from the adverse order and 7 judgment discharging the debt created by the Washington state 8 court default judgment. A subsequent appeal from the order and 9 judgment awarding costs and attorney’s fees followed. This court 10 consolidated both appeals. 11 II. FACTS3 12 A. The Parties 13 Before moving to Arizona, the Shannons resided in Washington 14 where they established a successful bookkeeping and accounting 15 practice. Ms. Shannon began her career with the Internal Revenue 16 Service as an enrolled agent. She is also a licensed real estate 17 agent with numerous years of real estate experience. 18 Mr. Cardenas is a Mexican immigrant. Although he lacks an 19 extensive formal education and his command and understanding of 20 the English language are limited, he is a fairly sophisticated 21 and experienced businessman. He has established an impressive 22 empire of Mexican-themed restaurants throughout Washington. He 23 owned as many as twenty restaurants, and he currently owns at 24 least fifteen. Throughout his career, Mr. Cardenas has 25 3 26 Because the parties provided limited excerpts from the trial transcripts, we exercise our discretion to review the 27 bankruptcy court’s docket for the complete trial transcript record. See Woods & Erickson, LLP v. Leonard (In re AVI, Inc.), 28 389 B.R. 721, 725 n.2 (9th Cir. BAP 2008).
4 1 personally managed and overseen his restaurant holdings and other 2 business operations in Washington and Oregon. He also has 3 experience renovating and selling real properties. Mr. Cardenas 4 always communicated with Ms. Shannon in English. 5 The Cardenases and the Shannons met sometime around 1998 and 6 formed a personal and business relationship. Through her tax and 7 accounting business, for a number of years Ms. Shannon provided 8 accounting, payroll, and tax services for all of the Cardenases’ 9 restaurants. As a result of their work for the Cardenases, the 10 Shannons received an annual six-figure income. 11 In addition to accounting, payroll, and tax services, 12 Ms. Shannon also represented Mr. Cardenas in real estate matters. 13 They had partnered successfully and profitably on the 14 rehabilitation of a former bank property where Ms. Shannon 15 oversaw and managed the purchase, renovations, and sale of the 16 building. Although Mr. Cardenas worked with Ms. Shannon on real 17 estate transactions, on the first day of trial he testified that 18 he did not rely on her for advice in real estate matters. 19 B. The Washington Property 20 Without performing any due diligence or obtaining an 21 appraisal, Mr. Cardenas purchased the Washington Property in 2005 22 for $1,000,000.00 cash as the property was about to be sold to 23 another buyer. Ms. Shannon represented Mr. Cardenas in that 24 transaction. Mr. Cardenas used his personal funds to purchase 25 the Washington Property. However, the property was subsequently 26 titled in the name of Mazatlan Properties, LLC (“MPL”), a limited 27 liability company of which the Cardenases were the sole members 28 when the Washington Property was purchased.
5 1 The Washington Property sat vacant for approximately a year. 2 It was vandalized, gutted of its fixtures and copper wiring, and 3 a target for graffiti. 4 By the summer of 2006, Mr. Cardenas decided he no longer 5 wanted the Washington Property. He retained Ms. Shannon as the 6 listing agent in 2006 and she unsuccessfully attempted to sell 7 the property through 2008. She then approached Mr. Cardenas with 8 a proposal to renovate and sell the Washington Property. 9 C. The Agreement 10 The Washington state court action and the adversary 11 proceeding arise out of the failed business venture between 12 Mr. Cardenas and Ms. Shannon for the purchase, renovation, and 13 sale of the Washington Property. It is in that context that the 14 Cardenases accused Ms. Shannon of making false representations 15 and engaging in other deceitful conduct in an effort to obtain 16 the Washington Property from Mr. Cardenas without payment. 17 Ms. Shannon denied those accusations. 18 An initial oral understanding between Mr. Cardenas and 19 Ms. Shannon provided for the renovation and sale of the 20 Washington Property, required Ms. Shannon to furnish funds for 21 renovations to the property, and required Ms. Shannon to pay 22 $1,000,000.00 to Mr. Cardenas upon renovation and sale of the 23 property. That much is undisputed. 24 The parties’ understanding was subsequently memorialized in 25 two writings, both of which are entitled “Amendment of Operating 26 Agreement of Mazatlan Properties, LLC” (the “First Amendment” and 27 “Second Amendment”). Following discussions, the First Amendment 28 would have made Ms. Shannon and one of her associates equal
6 1 members in MPL with the Cardenases, stated that Ms. Shannon and 2 her associate would provide funds necessary for renovations to 3 the Washington Property, and would have made Ms. Shannon a co- 4 manager in MPL with Mr. Cardenas. The First Amendment, admitted 5 at trial as Exhibit 17, is neither dated nor signed. The Second 6 Amendment, admitted at trial as Exhibit 18, is signed and dated 7 August 23, 2008. It transferred the Cardenases’ interest in MPL 8 and the Washington Property to Ms. Shannon, made Ms. Shannon the 9 sole member and manager of MPL, and gave her the power and 10 authority to sell or lease the Washington Property. 11 The Cardenases asserted that they never agreed to the terms 12 in the Second Amendment. They accused Ms. Shannon of using a 13 signature page from the First Amendment for the Second Amendment 14 without their knowledge or authorization. They also accused 15 Ms. Shannon of not renovating and selling the Washington Property 16 within a promised three- to five-month time period, using funds 17 other than her own funds (which they claimed she fraudulently 18 obtained through loans) to fund renovations, and not providing 19 Mr. Cardenas with a lien on the Washington Property to secure his 20 interest as she purportedly promised to do. They further accused 21 Ms. Shannon of selling a portion of the Washington Property and 22 not paying Mr. Cardenas the sale proceeds. 23 Ms. Shannon denied the Cardenases’ accusations. She denied 24 forging or appending an unauthorized signature page to the Second 25 Amendment. This is consistent with Mr. Cardenas’ trial testimony 26 that he signed the Second Amendment, signed his wife’s signature, 27 and discussed the terms of the Second Amendment with Pat Horan 28 (“Mr. Horan”), vice-president of Timberland Bank (“Timberland”),
7 1 the bank from which Ms. Shannon obtained a loan which she used 2 for renovations. Ms. Shannon attested that she had a prospective 3 buyer when she entered into the business venture with 4 Mr. Cardenas. She also attested that she agreed to furnish funds 5 to renovate the Washington Property and pay the Cardenases 6 $1,000,000.00 upon the sale of that property. However, 7 Ms. Shannon denied that she represented any time limitation on 8 completion of the renovations or sale of the property, that she 9 committed to use only her own funds, or that she promised to give 10 Mr. Cardenas a lien on the property. Additionally, the purported 11 $72,000.00 “sale” was actually a payment to MPL in 2010 by the 12 City of Federal Way for its taking of a portion of the Washington 13 Property through condemnation in an eminent domain proceeding. 14 D. Trial 15 In March of 2014, the bankruptcy court conducted a three-day 16 trial on the issue of non-dischargeability under § 523(a)(2)(A).4 17 On September 30, 2014, the bankruptcy court entered findings of 18 fact and conclusions of law in support of its order denying the 19 Cardenases’ request for an order declaring the debt created by 20 the Washington state court default judgment non-dischargeable in 21 the Shannons’ bankruptcy case. On February 25, 2015, the 22 bankruptcy court entered a judgment discharging all pre-petition 23 indebtedness the Shannons owed to the Cardenases. 24 In support of its judgment for the Shannons and against the 25 4 26 The Cardenases’ complaint pled two claims for relief: (1) enforcement of the Washington state court fraud and negligent 27 misrepresentation default judgment; and (2) “fraud under the Bankruptcy Code” based on the Shannons’ alleged negligent and 28 intentional misrepresentations.
8 1 Cardenases, the bankruptcy court made the following specific 2 findings: 3 (1) That the Shannons did not make any representation to the Cardenases that they knew to be false and they 4 did not make any representations with the intent and purpose of deceiving the Cardenases; and 5 (2) That any damages suffered by the Cardenases are not 6 a result from reasonably relying on representations by the Shannons. 7 8 Minute Entry/Order entered October 1, 2014; Judgment entered 9 February 25, 2015. 10 The bankruptcy court’s ruling was based primarily upon its 11 evaluation of live witness testimony of Mr. Cardenas, 12 Ms. Shannon, and Mr. Horan who dealt with both the Cardenases and 13 Ms. Shannon. The bankruptcy court found Ms. Shannon’s testimony 14 credible and consistent with the objective documentary evidence. 15 It found that Ms. Shannon had a letter of intent for 16 $1,700,000.00 from a prospective buyer at the inception of the 17 parties’ agreement, she did not represent there was a temporal 18 limit associated with renovations and a sale, she did not commit 19 to use only her funds for renovations, and she did not promise to 20 give Mr. Cardenas a lien on the Washington Property. 21 On the other hand, the bankruptcy court found Mr. Cardenas’ 22 testimony inconsistent with his position in the litigation and 23 other admitted evidence. Some of the more important 24 contradictions noted were: the Cardenases’ claim that Ms. Shannon 25 was a trusted advisor upon whom Mr. Cardenas relied for real 26 estate advice was contradicted by Mr. Cardenas’ testimony on the 27 first day of trial that he did not rely on her; the Cardenases’ 28 claim that Ms. Shannon represented she had a committed buyer who
9 1 would purchase the Washington Property in three to five months 2 was contradicted by Mr. Cardenas’ testimony that Ms. Shannon 3 committed to help him find a buyer within three to five months; 4 Mr. Cardenas’ claim that funds for renovation would come solely 5 from Ms. Shannon and that he was unaware of and did not authorize 6 loans was contradicted by Mr. Cardenas’ admission that he was 7 aware of the loan that Ms. Shannon obtained from Timberland and 8 that the Washington Property was security for that loan; despite 9 his claim that signature pages from the First Amendment were 10 appended to the Second Amendment, Mr. Cardenas admitted he signed 11 the Second Amendment and signed it for his wife after having it 12 in his possession; and Mr. Cardenas’ admission at trial that 13 Ms. Shannon did in fact own the Washington Property despite his 14 claim she fraudulently held herself out as an owner to obtain 15 loans. 16 In post-trial proceedings, the bankruptcy court entered an 17 order, followed by a judgment, awarding the Shannons costs in the 18 amount of $5,002.10 and attorney’s fees in the amount of 19 $72,691.00 with interest accruing at the rate set forth in 28 20 U.S.C. § 1961. It based that award on the parties’ joint pre- 21 trial statement which referenced Washington law. 22 III. JURISDICTION 23 The bankruptcy court had jurisdiction under 28 U.S.C. 24 §§ 1334 and 157(b)(2)(I). We have jurisdiction under 28 U.S.C. 25 § 158. 26 IV. ISSUES 27 1. Was the bankruptcy court clearly erroneous in its 28 findings that Ms. Shannon did not make representations that were
10 1 false and did not intend to deceive the Cardenases? 2 2. Did the bankruptcy court err in awarding the Shannons 3 costs and attorney’s fees as the prevailing party? 4 V. STANDARD OF REVIEW 5 Whether a claim is excepted from discharge presents mixed 6 issues of law and fact, which we review de novo. Diamond v. 7 Kolcum (In re Diamond), 285 F.3d 822, 826 (9th Cir. 2002). When 8 reviewing a bankruptcy court’s determination of an exception to 9 discharge claim, we review its findings of fact for clear error 10 and its conclusions of law de novo. Oney v. Weinberg (In re 11 Weinberg), 410 B.R. 19, 28 (9th Cir. BAP 2009). As relevant in 12 this appeal, whether there has been proof of an essential element 13 of § 523(a)(2)(A) is a factual determination reviewed for clear 14 error. Am. Express Travel Related Servs. Co. v. Vinhnee (In re 15 Vinhnee), 336 B.R. 437, 443 (9th Cir. BAP 2005). 16 “Clearly erroneous review is significantly deferential, 17 requiring that the appellate court accept the [trial] court’s 18 findings absent a definite and firm conviction that a mistake has 19 been committed.” United States v. Syrax, 235 F.3d 422, 427 (9th 20 Cir. 2000) (citation and internal quotation marks omitted). The 21 bankruptcy court’s choice among multiple plausible views of the 22 evidence cannot be clearly erroneous. Anderson v. City of 23 Bessemer City, 470 U.S. 564, 573-75 (1985); United States v. 24 Elliott, 322 F.3d 710, 715 (9th Cir. 2003); Ng v. Farmer (In re 25 Ng), 477 B.R. 118, 132 (9th Cir. BAP 2012). The deference owed 26 to the bankruptcy court is heightened where its choice is based 27 on the credibility of live witnesses. Anderson, 470 U.S. at 575. 28 In fact, we give great deference to the bankruptcy court’s
11 1 findings when they are based on its determinations as to 2 credibility of witnesses. Retz v. Samson (In re Retz), 606 F.3d 3 1189, 1196 (9th Cir. 2010) (citing Anderson, 470 U.S. at 575). 4 We may affirm the bankruptcy court on any basis supported by 5 the record. See ASARCO, LLC v. Union Pac. R.R. Co., 765 F.3d 6 999, 1004 (9th Cir. 2014). 7 VI. DISCUSSION 8 A. The Bankruptcy Court Did Not Err in Finding That the Cardenases Failed to Satisfy Their Burden of Proof on 9 an Element of Their § 523(a)(2)(A) Claim. 10 In a non-dischargeability action under § 523(a), the 11 creditor has the burden of proving all the elements of its claim 12 by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 13 279, 291 (1991). Exceptions to discharge are strictly construed 14 against an objecting creditor and in favor of the debtor to 15 effectuate the fresh start policies under the Bankruptcy Code. 16 Snoke v. Riso (In re Riso), 978 F.2d 1151, 1154 (9th Cir. 1992). 17 Section 523(a)(2)(A) states as follows: 18 (a) A discharge under section 727 . . . of this title does not discharge an individual debtor from any debt - 19 . . . 20 (2) for money, property, services, or an extension, 21 renewal, or refinancing of credit, to the extent obtained by - (A) false pretenses, a false 22 representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial 23 condition[.] 24 11 U.S.C. § 523(a)(2)(A). 25 A creditor seeking to except a debt from discharge under 26 § 523(a)(2)(A) based on false representations bears the burden of 27 proving by a preponderance of the evidence five elements: 28 (1) misrepresentation(s), fraudulent omission(s), or deceptive
12 1 conduct; (2) knowledge of the falsity or deceptiveness of such 2 representation(s), omission(s), or conduct; (3) an intent to 3 deceive; (4) justifiable reliance by the creditor; and (5) damage 4 to the creditor proximately caused by its reliance. Ghomeshi v. 5 Sabban (In re Sabban), 600 F.3d 1219, 1222 (9th Cir. 2010); 6 In re Weinberg, 410 B.R. at 35. The bankruptcy court found that 7 the Cardenases failed to carry their burden of proving false 8 representations and deceitful conduct by Ms. Shannon. Its 9 decision is not clearly erroneous. 10 The bankruptcy court identified the representations that the 11 Cardenases accused Ms. Shannon of making to obtain ownership of 12 MPL and the Washington Property without payment as follows:5 13 (1) that Ms. Shannon had a valid purchase commitment that would permit payment to the Cardenases of 14 $1,000,000.00 within a period of three to five months (the “Buyer and Temporal Representation”); 15 (2) that Ms. Shannon would use only her own funds to 16 renovate the Washington Property (the “Use of Funds Representation”); 17 (3) that the agreement between the parties created an 18 immediate debt (but not a property sale) owed to the Cardenases that was to be secured by a deed of 19 trust (the “Lien Representation”); and 20 (4) a representation by the Shannons through which they improperly obtained loans that were secured 21 by the Washington Property and use of the loan proceeds for other than MPL purposes (the “Other 22 Deceitful Conduct”). 23 As to each of these matters, the bankruptcy court found 24 either that the representations were not made, or if made were 25 26 27 5 These are consistent with the representations identified in 28 the Cardenases’ amended opening brief.
13 1 not false, and Ms. Shannon’s conduct was not deceitful.6 2 Supported by the record and based on its assessment of the 3 credibility of the witnesses providing testimony, the bankruptcy 4 court’s findings are not clearly erroneous. That holds true even 5 if, as the Cardenases complain on appeal, the bankruptcy judge 6 selected the Shannons’ version of events over the Cardenases’ 7 version of events. 8 1. The Buyer and Temporal Representation 9 The Cardenases accused Ms. Shannon of stating that she had a 10 committed buyer who would purchase the property within three to 11 five months of the initial oral agreement. However, Mr. Cardenas 12 contradicted that accusation at trial when he testified as 13 follows: 14 Q And can you please describe for the Court what she proposed. In other words, what was she willing to -- 15 what was her offer to you? 16 A She told me she wanted to help me out as always and that she told me that with three or four months, no 17 more than five months down the road she would find me a buyer who would be willing to pay me $1 million for 18 that property. 19 Trial Tr. (March 25, 2014) at 45:23-46:4 (emphasis added). 20 In other words, according to Mr. Cardenas, the 21 6 Although not raised by the parties, we note that the 22 bankruptcy court also recited a “reasonable” reliance standard. 23 Section 523(a)(2)(A) only requires justifiable reliance. Field v. Mans, 516 U.S. 59, 74-75 (1995); In re Sabban, 600 F.3d at 24 1222; In re Weinberg, 410 B.R. at 35. Nevertheless, because the bankruptcy court’s factual findings that Ms. Shannon made no 25 false representations and her conduct was not deceitful are not 26 clearly erroneous, we need not reach the reliance standard used by the bankruptcy court. In the absence of false pretenses, 27 misrepresentations, or deceitful conduct, the Cardenases’ § 523(a)(2)(A) claim fails regardless of which reliance standard 28 the bankruptcy court used.
14 1 representation was actually that Ms. Shannon would help find him 2 a buyer for - not that she would actually sell - the Washington 3 Property. And she did just that, it being undisputed that she 4 had a letter of intent from an interested investor for 5 $1,700,000.00 at the inception of the agreement. 6 As to the three- to five-month time frame, Mr. Cardenas 7 wavered in his testimony. In fact, Mr. Cardenas himself was 8 unsure of the time frame within which Ms. Shannon supposedly told 9 him the Washington Property would be sold. He testified on 10 direct examination that Ms. Shannon “proposed selling [the 11 property] as soon as possible and within two or three months, 12 three or four months.” Trial Tr. (March 25, 2014) at 49:22-23. 13 On cross-examination he testified that Ms. Shannon “said from 14 three to five” months. Trial Tr. (March 25, 2014) at 65:11. In 15 short, Mr. Cardenas was unclear and uncertain, and could not 16 definitively articulate what Ms. Shannon supposedly said as to 17 any time frame for a sale. 18 Mr. Cardenas’ claim that Ms. Shannon represented she would 19 renovate and sell the Washington Property within three to five 20 months is further undercut, again, by his own testimony regarding 21 another much easier and better resourced renovation project that 22 took over a year to complete. Trial Tr. (March 25, 2014) at 62- 23 63. That suggests an understanding by Mr. Cardenas that 24 renovation of the Washington Property within three to five months 25 was not likely, and two months was even less likely. 26 Mr. Cardenas’ understanding is consistent with Ms. Shannon’s 27 testimony that she “never” told him the Washington Property would 28 be renovated and sold within three to five months, (Trial Tr.
15 1 (March 25, 2014) at 136:8-10; Trial Tr. (March 26, 2014) at 2 168:17-23), because a three- to five-month time frame was not 3 possible due to permitting issues for renovations. Trial Tr. 4 (March 26, 2014) at 169:6-8. Ms. Shannon’s testimony is also 5 consistent with Mr. Horan’s testimony that there was no reference 6 in Timberland’s loan file of any mention by Ms. Shannon of a 7 three- to five-month renovation and sale time frame. Trial Tr. 8 (March 26, 2014) at 50:9-11, 55:6-8. 9 In short, when faced with Mr. Cardenas’ contradictory and 10 wavering testimony, both as to renovation and sale of the 11 Washington Property and the timeline for both, we find no error 12 in the version of events that the bankruptcy court accepted. Its 13 findings, supported by the evidence, will not be disturbed. The 14 bankruptcy court’s findings related to the Buyer and Temporal 15 Representation are not clearly erroneous. 16 2. The Use of Funds Representation 17 To support this representation, the Cardenases pointed to 18 language in the First and Second Amendment that states 19 Ms. Shannon was to “furnish funds” for the renovations. The 20 bankruptcy court also established this as the representation the 21 Cardenases accused Ms. Shannon of making based on the parties’ 22 joint pre-trial statement. 23 Ms. Shannon testified that she did not tell Mr. Cardenas she 24 would use only her funds but did tell him that all necessary 25 funds would be used for renovations to the Washington Property. 26 Trial Tr. (March 25, 2014) at 136:24-137:7. And while 27 Ms. Shannon used a significant amount of her own money for 28 renovations, she also used funds from loans obtained from
16 1 Timberland and private lenders. 2 After the Second Amendment made Ms. Shannon the sole member 3 and 100% owner of MPL, she obtained a $250,000.00 loan from 4 Timberland and a $300,000.00 loan from private lenders.7 5 Mr. Horan testified that he and Mr. Cardenas were aware that 6 Mr. Cardenas no longer owned 100% of MPL and that 100% of the 7 interest in MPL had been transferred to Ms. Shannon because the 8 two discussed the matter. Trial Tr. (March 26, 2014) at 70-71. 9 Mr. Cardenas also testified that he was aware of the Timberland 10 loan and that the Washington Property was security for that loan 11 because he and Mr. Horan also discussed both matters: 12 BY MR. DRAKE: 13 Q Mr. Cardenas, were you aware that Pat Horan and Timberland Bank were loaning money to Mai Shannon to 14 renovate the building? 15 A Yes. 16 Q And were you aware that Timberland Bank was going to get a lien in the property for that loan? 17 A The property was security for that. 18 Q Was security to Timberland Bank? 19 A Let me tell you honestly, Pat asked me if she was 20 applying for a loan and I told him it’s your money, do you have any security. And he said, yes, the security 21 is your land, your property. 22 Trial Tr. (March 25, 2014) at 96:6-18. In fact, Mr. Horan 23 testified that Timberland would not have proceeded with the loan 24 to Ms. Shannon if Mr. Cardenas was unaware that the Washington 25 26 7 Although loan funds were deposited into accounts other than 27 those maintained by MPL, the bankruptcy court concluded loan funds were not misused. It found no credible evidence that loan 28 funds were used for anything other than renovations.
17 1 Property was security for the loan. Trial Tr. (March 26, 2014) 2 at 85:4-11. 3 Based on the testimony described above, the bankruptcy court 4 could easily conclude that Ms. Shannon did not make the Use of 5 Funds Representation. In other words, Mr. Cardenas’ knowledge 6 and understanding that Ms. Shannon was using loan funds to 7 renovate the Washington Property is inconsistent with his claim 8 that Ms. Shannon represented that only her funds would be used 9 for renovations. Therefore, the bankruptcy court’s finding that 10 the Use of Funds Representation did not support the Cardenases’ 11 § 523(a)(2)(A) claim is not clearly erroneous. 12 3. The Lien Representation 13 While it is true that Ms. Shannon did not place a lien on 14 the Washington Property in favor of Mr. Cardenas, it is equally 15 true that she never represented to Mr. Cardenas that she would. 16 Trial Tr. (March 25, 2014) at 138:3-6; Trial Tr. (March 26, 2014) 17 at 211:2-6. 18 Mr. Cardenas, on the other hand, could not definitively 19 state if Ms. Shannon ever told him that she would ensure he had a 20 deed of trust on the Washington Property. At first he testified 21 she did. Trial Tr. (March 25, 2014) at 47:1-8. Then he reversed 22 course and testified that she did not: 23 BY MR. ROMERO: 24 Q Mr. Cardenas, when you entered into your agreement with Ms. Shannon, did she ever tell you that you would 25 be protected or secured if her buyer didn’t come through in buying the property? 26 A Well, I was told she had a buyer, and that 27 everything was safe, that everything that was going along fine, and -- 28
18 1 Q Did she ever tell you that she would give you a deed of trust or lien or something to protect your interest 2 in the property? 3 A No, my protection was the promise she told me. 4 Trial Tr. (March 25, 2014) at 54:7-17.8 5 Again, we will not disturb the choice by the bankruptcy 6 court of the version of events it accepted, particularly, when 7 the version accepted is supported by evidence in the record and 8 heavily dependent on the credibility of witnesses. On this 9 record, there is ample support for the bankruptcy court’s finding 10 that Ms. Shannon did not promise to provide Mr. Cardenas with a 11 lien on the Washington Property. Therefore, the bankruptcy 12 court’s finding in regard to the Lien Representation is not 13 clearly erroneous. 14 4. The Additional Deceitful Conduct 15 After this case was briefed and before it was argued, the 16 United States Supreme Court decided Husky Int’l Electronics, Inc. 17 v. Ritz, 136 S. Ct. 1581 (2016). In Husky, the Supreme Court 18 held that the term “actual fraud” in § 523(a)(2)(A) includes 19 fraudulent schemes even when those schemes do not involve a false 20 representation. 21 The parties did not raise Husky during oral argument. 22 However, the Cardenases’ amended opening brief includes 23 references to conduct raised at trial which the Cardenases claim 24 was fraudulent. This includes changing the terms of the parties’ 25 26 8 There also is no reference to any such requirement in the 27 First or Second Amendment, and there is no reference to any such lien in Timberland’s credit write-ups until early 2010. Earlier 28 write-ups did not include any such reference.
19 1 agreement, using the signature page from the First Amendment for 2 the Second Amendment without telling Mr. Cardenas, obtaining 3 loans secured by the Washington Property, and not paying 4 Mr. Cardenas the $72,000.00 MPL received when the City of Federal 5 Way condemned and took a portion of the Washington Property 6 through eminent domain. Since the conduct occurred after the 7 parties agreed to renovate and sell the Washington Property, 8 arguably, it could not have induced Mr. Cardenas to enter into 9 the business venture with Ms. Shannon in the first instance. The 10 Cardenases complain that the bankruptcy court ignored evidence of 11 this conduct. Perhaps a better characterization, and a more 12 accurate one, is that the bankruptcy judge assessed credibility, 13 found that the Cardenases lacked it, and concluded either these 14 events did not occur or, if they did, they were not fraudulent 15 because Mr. Cardenas knew of and consented to them. In any 16 event, the above-described conduct does not implicate Husky. 17 The terms of the agreement were not changed without 18 Mr. Cardenases’ knowledge or consent. The First Amendment was 19 prepared by Ms. Shannon’s lawyer after discussions with 20 Mr. Cardenas. Trial Tr. (March 25, 2014) at 132, 138. That 21 document was given to Mr. Cardenas by one of Ms. Shannon’s 22 employees. Trial Tr. (March 25, 2014) at 51-51, 77. It was also 23 reviewed by one of Mr. Cardenas’ daughters who assists with 24 business matters. Trial Tr. (March 25, 2014) at 77. 25 With regard to the Second Amendment, Mr. Cardenas claimed 26 the document was forged or fabricated, and he did not know about 27 it. Mr. Cardenas accused Ms. Shannon of tricking him into 28 signing the First Amendment and then taking the signature page
20 1 from the First Amendment and attaching it to the Second Amendment 2 without his knowledge. Not only does that make no sense because 3 the First Amendment admitted at trial was not signed, (Trial Tr. 4 (March 25, 2014) at 131:19-132:1, 138:7-9, and Appellants’ 5 Excerpts of Record BAP dkt 21 Tab 13 p. 191-192), but 6 Mr. Cardenas admitted during trial that he signed the Second 7 Amendment - admitted as Exhibit 18 - and he signed it for his 8 wife: 9 BY MR. DRAKE: 10 Q Let me start with this. Mr. Cardenas, please look at the screen right now. I’ll try and mark -- is that 11 your signature there beside the marking? 12 A That is my signature. 13 Q And what about the signature for your wife; do you recognize that signature? 14 A No, that’s not my wife’s signature. 15 Q And how do you know that? 16 A Real well. I’ve lived with her 38 years. 17 Q And you did not sign your wife’s signature there? 18 A I signed. 19 Q Oh, so you’re saying it’s not your wife’s signature 20 because you signed it, not her? 21 A Because Mai told me it would be valid, that ultimately everything would be taken care of soon 22 enough. 23 Q But is it you that signed for your wife on this document then? 24 A Yes, I’m telling yes. 25 Q Okay. And then your signature, you signed that one 26 as well? 27 A I signed it. How could I? I cannot deny that. 28
21 1 Trial Tr. (March 25, 2014) at 87:8-88:4.9 2 As discussed above in the context of the Use of Funds 3 Representation, Mr. Cardenas also testified that he was aware of 4 the Timberland loan. More precisely, he testified that he was 5 aware that Ms. Shannon obtained a loan from Timberland to fund 6 renovations because he discussed both the loan and the use of the 7 Washington Property as security for the loan with Mr. Horan. 8 Moreover, at the time Ms. Shannon obtained the Timberland loan 9 she owned 100% of MPL which owned the Washington Property. In 10 that regard, Ms. Shannon’s conduct was not deceitful. 11 That is also true with respect to the $72,000.00 that MPL 12 received from the City of Federal Way during the time the city 13 condemned and took a portion of the Washington Property through 14 eminent domain. That occurred in 2010 and, thus, when 15 Ms. Shannon owned 100% of the interest in MPL. Moreover, those 16 proceeds were received upon condemnation through eminent domain - 17 not a sale - which means the transaction would not have triggered 18 any obligation that Ms. Shannon may have had to pay those funds 19 to Mr. Cardenas upon a sale of the Washington Property. 20 5. Conclusion 21 We find no error with the bankruptcy court’s conclusion that 22 the above-described representations and conduct are not false or 23 deceitful and, thus, are insufficient to support the first 24 element of the Cardenases’ § 523(a)(2)(A) claim. Because its 25 factual determinations are supported by the record, we cannot say 26 9 27 The Cardenases never explained how the signature page of Exhibit 17, without signatures, could be swapped for a signature 28 page on Exhibit 18 with signatures.
22 1 that the bankruptcy court’s decision is clearly erroneous. 2 Therefore, as to the order and judgment that the debt created by 3 the Washington state court default judgment is dischargeable, we 4 AFFIRM. 5 B. The Bankruptcy Court Erred When it Awarded Attorney’s Fees to the Shannons. 6 7 Unless prohibited by a federal statute or the Bankruptcy 8 Rules, a prevailing party in an adversary proceeding is typically 9 awarded its costs other than attorney’s fees. See Fed. R. Bankr. 10 P. 7054(b)(1). Here, the bankruptcy court awarded the Shannons 11 $5,002.10 in costs apart from its award of $72,691.00 in 12 attorney’s fees. The Cardenases’ amended opening brief does not 13 articulate a separate argument that the bankruptcy court erred in 14 its award of costs to the Shannons. An issue not raised by a 15 party in its opening brief is generally deemed waived. Rivera v. 16 Orange County Probation Dept. (In re Rivera), 511 B.R. 643, 649 17 (9th Cir. BAP 2014). Therefore, as to the award of costs other 18 than attorney’s fees to the Shannons in the amount of $5,002.10, 19 we AFFIRM. 20 We turn now to attorney’s fees. Mr. Cardenas asked the 21 bankruptcy court to determine that his Washington state court 22 default judgment against the Shannons be deemed excepted from 23 discharge for fraud and false representations. Essentially, 24 Mr. Cardenas alleged that Ms. Shannon induced him to sign and 25 execute the First Amendment to the Limited Liability Company 26 Operating Agreement of Mazatlan Property, LLC (January 1, 2016) 27 (“Operating Agreement”) by making false representations about the 28 substance of that agreement and then by committing actual fraud
23 1 when she allegedly removed the parties’ signature page from the 2 First Amendment and attached it to the Second Amendment, which 3 effectively transferred his interest in the Washington Property 4 to her. In her answer and at trial, Ms. Shannon both denied 5 Mr. Cardenas’ allegations and showed that her conduct was 6 consistent with the Operating Agreement as amended. In other 7 words, her defense was not simply a denial of fraud allegations 8 but an assertion of her right to act as she did based upon the 9 parties’ written agreement. After hearing the evidence, the 10 bankruptcy court did not accept Mr. Cardenas’ testimony and 11 instead found Ms. Shannon’s testimony more credible. 12 The executed Second Amendment provides “except as amended by 13 this agreement, the other provisions of the operating agreement 14 shall remain in full force and effect and hereby ratified and 15 confirmed.” In the Operating Agreement, there is an attorney’s 16 fees provision that provides: 17 Section 12.3 Attorney’s Fees. If any litigation or other dispute resolution proceeding is commenced 18 between parties to this Agreement to enforce or determine the rights or responsibilities of such 19 parties, the prevailing party or parties in any such proceeding will be entitled to receive, in addition 20 [to] such other reliefs as may be granted, its or their reasonable attorney’s fees, expenses and costs incurred 21 preparing for [sic] participating in such proceedings. 22 Operating Agreement at Section 12.3. Significantly, the scope of 23 this bilateral attorney’s fees provision is quite broad and 24 likely its sweep reached issues raised by Ms. Shannon’s defense. 25 Before trial the parties filed a proposed joint pre-trial 26 order but it was not signed by the court. However, the parties 27 and the court thereafter treated it as a joint pre-trial 28 statement. Under the heading Agreed Issues of Law, the joint
24 1 pre-trial statement stated: 2 The court may award attorney fees to the prevailing party on any claim arising out of contract. RCW 3 4.84.330. 4 Relying upon the joint pretrial statement, the bankruptcy court 5 awarded attorney’s fees and costs to Ms. Shannon for the reason 6 that “the parties stipulated that the court may make an award of 7 attorney fees and costs to the prevailing party.” This is the 8 only explanation that the court provides for its award of 9 attorney’s fees. The court’s decision referenced, but does not 10 explain, the applicability of the attorney’s fees provision in 11 the Operating Agreement. 12 RCW 4.84.330 is a fee shifting statute that regulates 13 unilateral attorney’s fees provisions, making them bilateral. 14 Because the agreement at issue here contained a bilateral fee 15 provision, RCW 4.84.330 did not apply. “By its terms, 16 RCW 4.84.330 applies only to contracts with unilateral attorney 17 fee provisions.” Kaintz v. PLG, Inc., 147 Wash. App. 782, 786, 18 197 P.3d 710 (2008). Moreover, a stipulation by the parties to 19 the law does not bind a trial court or an appellate court. 20 Modeer v. United States, 183 F. A’ppx 975, 977 (Fed. Cir. 2006); 21 Avila v. INS, 731 F.2d 616, 620-21 (9th Cir. 1984); Worden v. 22 Smith, 178 Wash. App. 309, 327, 314 P.3d 1125 (2013). The 23 bankruptcy court’s reliance on the joint pre-trial statement as 24 opposed to the Operating Agreement’s attorney’s fees provision 25 for its award of attorney’s fees was error. 26 “[U]nder Cohen [v. de la Cruz, 523 U.S. 213 (1998)], the 27 determinative question for awarding attorney’s fees is whether 28 the creditor would be able to recover the fee outside of
25 1 bankruptcy under state or federal law.” Fry v. Dinan (In re 2 Dinan), 448 B.R. 775, 785 (9th Cir. BAP 2011) (citations 3 omitted). Notably, Cohen is not limited to attorney’s fees 4 awarded under state or federal statutes; it also applies to cases 5 in which fees are provided for by contract. Redwood Theaters, 6 Inc. v. Davison (In re Davison), 289 B.R. 716, 722 (9th Cir. BAP 7 2003). Under the rationale of Renfrow v. Draper, 232 F.3d 688, 8 694 (9th Cir. 2000), and Heritage Ford v. Baroff (In re Baroff), 9 105 F.3d 439, 441 (9th Cir. 1997), a prevailing debtor also can 10 recover attorney’s fees, provided the parties have a written 11 agreement which would award fees to the debtor if the same issues 12 were tried in a state court. 13 The rule in Washington is that, absent a contract, statute 14 or recognized ground of equity, attorney’s fees will not be 15 awarded as part of the cost of litigation.10 Pennsylvania Life 16 Ins. Co. v. Emp’t Sec. Dep’t, 97 Wash. 2d 412, 413, 645 P.2d 693 17 (1982). Under Washington law, attorney’s fees in contract cases 18 may be awarded if the contract contains a provision specifically 19 providing for attorney’s fees upon breach or other stipulated 20 circumstances. For purposes of a contractual attorney’s fees 21 provision, an action is on a contract if the action arose out of 22 the contract and if the contract is central to the dispute. 23 Hemenway v. Miller, 116 Wash. 2d 725, 742, 807 P.2d 863 (1991). 24 25 10 The parties stipulated to the applicability of Washington 26 state law, which is appropriate given that the business venture between the Cardenases and Shannons arose in Washington, the 27 property in question is located in Washington, and the judgment giving rise to the Shannons’ debt to the Cardenases was issued by 28 a Washington state court.
26 1 The meaning of “on the contract” is explained in Boguch v. 2 Landover Corp., 153 Wash. App. 595, 615, 224 P.3d 795 (2009), and 3 Brown v. Johnson, 109 Wash. App. 56, 58-59, 34 P.3d 1233 (2001). 4 In Boguch, the court held that “[i]f a party alleges breach of a 5 duty imposed by an external source, such as a statute or the 6 common law, the party does not bring an action on the contract, 7 even if the duty would not exist in the absence of a contractual 8 relationship.” Boguch, 153 Wash. App. at 615. Boguch sued his 9 realtors for breach of contract and negligence, contending that 10 their mistakes caused his property to lose value. His case was 11 dismissed on summary judgment and his realtors were awarded 12 attorney’s fees based upon a provision in the listing agreement. 13 Id. at 606-07. On appeal, the court reversed the attorney’s fees 14 award and remanded, stating that Boguch’s negligence claims were 15 not “on the contract” because they concerned breaches of duties 16 imposed by statute and common law. Id. at 619. The case was 17 remanded to the trial court with instructions to recalculate the 18 attorney’s fees award, limiting it to fees arising from the 19 contract claim. Id. In Brown, the purchaser of the house sued 20 the vendor for misrepresenting the house’s condition. The court 21 awarded attorney’s fees to the purchaser for her 22 misrepresentation claim against the seller because the purchase 23 and sale agreement provided for attorney’s fees to the prevailing 24 party “concerning this agreement,” and the tort arose from the 25 parties’ agreement. Brown, 109 Wash. App. at 58-59. 26 These Washington cases are consistent with Ninth Circuit 27 case law. In Baroff, Baroff’s creditors, like Mr. Cardenas, 28 disputed the dischargeability of their debt to him, alleging that
27 1 they were induced to enter into a settlement agreement by fraud 2 and false representations. Like Ms. Shannon, Baroff based his 3 defense upon the parties’ written settlement agreement. He 4 prevailed because the bankruptcy court ruled that the statute of 5 frauds barred the oral statements purporting to amend or 6 supplement the written agreement. Baroff, 105 F.3d at 442. 7 Although he prevailed, Baroff’s request for attorney’s fees was 8 denied. Id. at 441. The Ninth Circuit reversed, reasoning that 9 because the bankruptcy court was required to determine whether 10 the statute of frauds applied to the creditors’ fraudulent 11 inducement claim before ruling on the question of 12 dischargeability, “the document containing the attorney fees 13 clause in this case played an integral role in the proceedings.” 14 Id. at 442. 15 Baroff was clarified by the Ninth Circuit’s subsequent 16 decision in Renfrow. In that case, the court stated that the 17 rule in Baroff does not permit the bankruptcy court to award a 18 party’s attorney’s fees for litigating federal law issues in 19 bankruptcy court whenever a state law is “integral” to 20 determining dischargeability. Renfrow, 232 F.3d at 694. 21 Instead, the court held that attorney’s fees should be awarded 22 solely to the extent they were incurred in litigating state law 23 issues. Id. Likewise the rule in Washington is that if 24 attorney’s fees are recoverable for only some of the parties’ 25 claims, the award “must properly reflect a segregation of the 26 time spent on issues for which fees are authorized from time 27 spent on other issues.” Hume v. Am. Disposal Co., 124 Wash. 2d 28 656, 673, 880 P.2d 988 (1994).
28 1 Here, the parties’ agreement contained an attorney’s fees 2 provision awarding fees to the prevailing party in any litigation 3 between them to enforce or determine their respective rights and 4 responsibilities. In part, Ms. Shannon responded to 5 Mr. Cardenas’ fraud allegations by maintaining that the Second 6 Amendment to the Operating Agreement was validly executed and by 7 showing that her conduct was consistent with the amended 8 agreement. To the extent that she litigated those state law 9 issues before the bankruptcy court and prevailed, she was 10 entitled to an award of reasonable attorney’s fees. 11 In conclusion, the bankruptcy court’s award of attorney’s 12 fees is VACATED because it is based on an erroneous application 13 of the law. Upon REMAND, the bankruptcy court should base its 14 award of attorney’s fees upon the fees provision of the parties’ 15 Operating Agreement, and the court should limit its award to the 16 fees incurred in litigating state law issues under that 17 provision. 18 VII. CONCLUSION 19 Based on the foregoing, we AFFIRM the bankruptcy court’s 20 ruling that the Cardenases failed to meet their burden of proof 21 in establishing non-dischargeability under § 523(a)(2)(A) and its 22 judgment that the debt created by the Washington state court 23 default judgment is discharged in the Shannons’ bankruptcy case, 24 we AFFIRM the bankruptcy court’s order and judgment awarding the 25 Shannons $5,002.10 in costs, and we VACATE and REMAND the 26 bankruptcy court’s order and judgment awarding the Shannons 27 $72,691.00 in attorney’s fees. 28