In re: Fall Line Tree Service, Inc

• Court: United States Bankruptcy Appellate Panel for the Ninth Circuit
• Decided: August 5, 2022
• Docket: EC-22-1006-TLB EC-22-1007-TLB
• Status: Unpublished

Opinion

FILED AUG 5 2022 NOT FOR PUBLICATION SUSAN M. SPRAUL, CLERK U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT

UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE NINTH CIRCUIT

In re: BAP No. EC-22-1006-TLB FALL LINE TREE SERVICE, INC., BAP No. EC-22-1007-TLB Debtor. (Related Appeals)

FALL LINE TREE SERVICE, INC., Bk. No. 2:20-bk-21548-CMK Appellant, Adv. No. 2:20-ap-02128-CMK v. DICK YOST YAGHLEGIAN; LAUREN MEMORANDUM∗ YAGHLEGIAN; DLSK FAMILY TRUST, Dated June 2, 2008, Appellees.

Appeal from the United States Bankruptcy Court for the Eastern District of California Christopher M. Klein, Bankruptcy Judge, Presiding

Before: TAYLOR, LAFFERTY, and BRAND, Bankruptcy Judges.

INTRODUCTION

Debtor Fall Line Tree Service, Inc. appeals a bankruptcy court

judgment awarded in its favor against Dick Yost Yaghlegian, Lauren

Yaghlegian, and the DLSK Family Trust (jointly “the Yaghlegians”) and the

subsequent order denying its motion to alter or amend the judgment.

∗ This disposition is not appropriate for publication. Although it may be cited for whatever persuasive value it may have, see Fed. R. App. P. 32.1, it has no precedential value, see 9th Cir. BAP Rule 8024-1. Because the oral findings by the bankruptcy court and the judgment

conflict in two material respects and because the findings are insufficient in

other material respects, we VACATE and REMAND.

FACTS 1

Debtor owns and operates a retail sporting goods business located in

South Lake Tahoe known as “The Village Board Shop.” The Yaghlegians

sold the business’ assets (“Assets”) to Debtor in a seller-financed

transaction. The Asset purchase price, including the inventory, was

approximately $700,000. Debtor paid a down payment and executed two

promissory notes for the remainder of the purchase price: the $386,849

“Inventory Note”; and the $270,000 “Purchase Price Note” (collectively, the

“Notes”). The Notes both stated that they were secured by the Assets.

When Debtor was unable to pay the Notes, foreclosure threats

followed. Debtor then filed a chapter 11 2 case electing treatment as a small

business debtor under subchapter V. The Yaghlegians filed two proofs of

claim in the bankruptcy case. Claim 4 evidenced the petition date balance

1 We exercise our discretion to take judicial notice of documents electronically filed in the main case and the adversary proceeding. See Atwood v. Chase Manhattan Mortg. Co. (In re Atwood), 293 B.R. 227, 233 n.9 (9th Cir. BAP 2003). 2 Unless specified otherwise, all chapter and section references are to the

Bankruptcy Code, 11 U.S.C. §§ 101-1532, all “Rule” references are to the Federal Rules of Bankruptcy Procedure, and all “Civil Rule” references are to the Federal Rules of Civil Procedure.

2 on the Inventory Note ($246,246), and Claim 5 evidenced the petition date

balance on the Purchase Price Note ($125,750) for a total $371,996.

Debtor was not content to reorganize and pay the Yaghlegians. It

filed an adversary proceeding and generally alleged that the purchase price

substantially exceeded the value of the Assets and that the Yaghlegians,

through fraud, induced the Debtor’s owners, Mr. and Mrs. Nichols, to

agree to the price. Debtor, thus, asserted that the approximately $335,000

paid prepetition3 was, at most, what the Assets were worth and, therefore,

that the proofs of claim should be disallowed. The complaint contained

nine claims for relief: (1) Avoidance of Unperfected Security Interest; (2)

Declaratory Relief – Invalidity of Contract; (3) Avoidance and Recovery of

Preferential Transfers; (4) Fraud; (5) Fraudulent Proof of Claim; (6)

Disallowance of Claim – Proof of Claim No. 5; (7) Disallowance of Claim –

Proof of Claim No. 4; (8) Fraudulent, Unlawful and Unfair Business

Practices; and (9) Breach of Contract. After trial, Debtor successfully moved

to add two more claims for relief for (10) promissory fraud and (11) fraud

by way of concealment.

After trial, the bankruptcy court made oral findings of fact and

conclusions of law. In summary, the bankruptcy court agreed that the

Yaghlegians intentionally misled Mr. and Mrs. Nichols and awarded

Debtor $123,324 in damages for fraud. The findings included a detailed

3 Apparently, Debtor also paid about $55,000 in interest and other charges under the Notes before the petition date. 3 discussion of relevant case law but almost no discussion of the math

supporting the damages award. In addition, the bankruptcy court found

that the contract underlying the Purchase Price Note, was “made for the

purpose of furthering [a] matter or thing prohibited by statute or to aid or

assist any party therein” and was therefore “void as a matter of California

law.” Based on these rulings, the bankruptcy court determined that the

Purchase Price Note was unenforceable. But the oral ruling left the

Inventory Note fully payable, while also suggesting that it could be

partially paid through offset of the fraud judgment. The bankruptcy court

finally noted that “it’s plainly admitted that there’s no UCC-1 financing

statement for either of those notes.” “. . . . So judgment will ultimately be

entered [avoiding] those unperfected security interests.”

Thereafter the bankruptcy court entered its judgment stating:

ORDERED, ADJUDGED, and DECREED that the plaintiff Fall Line Tree Service, Inc. shall recover of defendants . . . , the sum of $123,324.37 on counts 4, 10, and 11, which sum may be offset against Proofs of Claim Nos. 4 and 5. IT IS FURTHER ORDERED, ADJUDGED, and DECREED that all other claims for relief are DISMISSED.

The findings as to cancellation of the Purchase Price Note and the

avoidance of the security interest in the Assets were not incorporated into

the judgment.

Shortly after entry of the judgment, Debtor filed a motion asking the

bankruptcy court to amend the judgment (“Motion to Amend”). Debtor

4 noted that the bankruptcy court’s oral ruling was at odds with the

judgment. It raised three points:

• First, the bankruptcy court orally determined that the Notes

were unsecured, but the judgment dismissed count 1. As a

result, the judgment left the Yaghlegians’ claims secured;

• Second, the bankruptcy court orally determined that the

Purchase Price Note was void and unenforceable, but the

judgment dismissed counts 2 and 6. As a result, the judgment

left the Purchase Price Note and Claim 5 fully payable; and

• Third, the judgment should have found that the Inventory Note

was paid in full and that Claim 4 was disallowed.

The bankruptcy court denied the Motion to Amend with little

commentary. Debtor appealed.4 5

JURISDICTION

The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and

157(b)(2)(B) and (K). We have jurisdiction under 28 U.S.C. § 158.

4 The Yaghlegians also appealed the judgment but later requested dismissal, which was granted. Debtor cross-appealed, but by the time the Notice of Cross-Appeal was filed the original appeal had been dismissed, so the cross-appeal was treated as a new appeal. 5 After the judgment was entered, Debtor levied on cash assets of the

Yaghlegians and received payment in full of the judgment. The bankruptcy court denied the Yaghlegians’ motion seeking return of those funds. Debtor’s confirmed plan 5 ISSUES

1. Whether the bankruptcy court erred when it entered judgment

dismissing Debtor’s claim for relief (1): Avoidance of Unperfected Security

Interest.

2. Whether the bankruptcy court erred by dismissing Debtor’s

claims for relief (2) Declaratory Relief – Invalidity of Contract; and

(6) Disallowance of Claim – Proof of Claim 5.

3. Whether the bankruptcy court erred by incorrectly calculating

fraud damages such that Debtor remains responsible for paying the

Yaghlegians claims.

STANDARDS OF REVIEW

“[W]e review the legal standards used in the calculation of damages

de novo.” R.B. Matthews, Inc. v. Transamerica Transp. Servs., Inc., 945 F.2d

269, 272 (9th Cir. 1991) (citing Galindo v. Stoody Co., 793 F.2d 1502, 1516 (9th

Cir. 1986)); see Oswalt v. Resolute Indus., Inc., 642 F.3d 856, 859-60 (9th Cir.

2011) (“We review de novo the legal conclusion that damages are available

and review for clear error factual findings underlying the damages

award.”). De novo review is independent and gives no deference to the

trial court’s conclusion. Roth v. Educ. Credit Mgmt. Corp. (In re Roth), 490

B.R. 908, 915 (9th Cir. BAP 2013).

We review the bankruptcy court’s findings of fact for clear error.

Carrillo v. Su (In re Su), 290 F.3d 1140, 1142 (9th Cir. 2002). A finding of fact

pays 51% of the Yaghlegians’ claims. 6 is clearly erroneous if it is illogical, implausible, or without support in the

record. Retz v. Samson (In re Retz), 606 F.3d 1189, 1196 (9th Cir. 2010).

“Where there are two permissible views of the evidence, the factfinder’s

choice between them cannot be clearly erroneous.” Anderson v. City of

Bessemer City, 470 U.S. 564, 574 (1985).

DISCUSSION

A. The bankruptcy court erred when it entered judgment dismissing

Claims for Relief (1), (2), and (6).

1. Claim for relief (1) should not have been dismissed.

After trial, the bankruptcy court found that the Yaghlegians failed to

perfect their alleged security interests and that their liens would be avoided

under § 544. The judgment, however, neither avoided the unperfected

security interests nor granted relief on the claim for relief so requesting.

Instead, it left the obligations secured. The Yaghlegian’s counsel conceded

at oral argument that lien avoidance was the ruling and intention of the

bankruptcy court. The parties jointly agreed that the Panel could simply

modify the judgment to include this provision.

The Panel is authorized to modify a judgment under 28 U.S.C. § 2106

which provides “[a] court of appellate jurisdiction may affirm, modify,

vacate, set aside or reverse any judgment, decree, or order of a court

lawfully brought before it for review[.]” But because we vacate and

remand for other reasons, we decline to so modify here. The bankruptcy

court must do so on remand.

7 2. Claims for relief (2) and (6) should not have been dismissed.

After trial, the bankruptcy court ruled that the Purchase Price Note

related to a contract “made for the purpose of furthering [a] matter or thing

prohibited by statute or to aid or assist any party therein” and was

therefore “void as a matter of California law.” The bankruptcy court

commented that it would “generate judgment determining that the

$270,000 promissory note is unenforceable.”

The judgment, however, declared neither the Purchase Price Note

nor Claim 5 unenforceable. Instead, it dismissed claims for relief (2) and (6),

which sought disallowance of the Purchase Price Note. Thus, it left the

Purchase Price Note and Claim 5 fully payable. The Yaghlegians’ counsel

conceded that disallowance of the Purchase Price Note and Claim 5 was the

ruling and intention of the bankruptcy court.

Again, under 28 U.S.C. § 2106, we could modify the judgment. But,

because we vacate and remand for other reasons, we decline to do so here.

The bankruptcy court must do so on remand.

B. The bankruptcy court did not err when it found fraud, but we must

remand for further findings as to its award of damages.

Neither Debtor nor the Yaghlegians challenge the bankruptcy court’s

findings of fraud and we discern no error.

Rather, Debtor challenges the bankruptcy court’s award of

consequential damages, asserting that the amount of the award should

8 have been sufficient to offset at least the total amount of the two proofs of

claim or $371,996, rather than the amount awarded of $123,324.37.

Debtor’s argument is essentially mathematical. In its view, the

bankruptcy court found that the value of the Assets was $225,000; it paid

$335,000 pre-petition; thus, it was damaged in the amount of $110,000 plus

out-of-pocket costs. 6 This leads inescapably, in Debtor’s view, to the

conclusion that it has paid the Yaghlegians in full.

But the bankruptcy court's findings are not as clear as suggested by

Debtor. The findings neither precisely valued the Assets nor outlined the

basis for the damages calculation. Numbers exist in the findings, but they

do not unequivocally support Debtor's argument.

True, the bankruptcy court made a precise finding of fraud damages.

It also stated that it calculated the award “with reference” to the out-of-

pocket rule of California Civil Code § 3343, which relates to real property

transactions, and “informs the analysis.” 7 In addition, the bankruptcy court

stated that “I am persuaded that the defendants were able to get a total

6 The bankruptcy court awarded $13,324.37 in compensatory damages for interest Debtor paid to short-term hard-money lenders to make payments to the Yaghlegians. 7 California Civil Code § 3343 states, in relevant part:

(a) One defrauded in the purchase, sale or exchange of property is entitled to recover the difference between the actual value of that with which the defrauded person parted and the actual value of that which he received, together with any additional damage arising from the particular transaction, including any of the following: (1) Amounts actually and reasonably expended in reliance upon the fraud.

9 price from the – from the plaintiff that exceeded the fair market value of the

business by perhaps $475,000.” And it also noted that there were two

relevant requests for admission that were deemed admitted: admission 14

that the purchase price of the business’ retail product inventory exceeded

its fair market value by at least $100,000; and admission 15 that the

aggregate purchase price exceeded the fair market value of such assets by

no less than $270,000. Thus, there are numbers in the findings, but nothing

allows us to precisely track the bankruptcy court’s calculations and

damages analysis.

Further, the mathematical arguments advanced by Debtor only go so

far. Even if its math establishes overpayment with precision, it is not clear

from the findings whether the bankruptcy court determined that all the

overpayment was the result of fraud as opposed to poor business

judgment. The bankruptcy court found a precise amount of damages and

discussed offset. These findings suggest a possible conclusion that Debtor's

principals bear some responsibility for the overpayment. The record

supports such a view, and if we had a finding so stating we would affirm –

but we do not.

In the absence of complete findings, we may vacate a judgment and

remand the case to the bankruptcy court to make the required findings. See

United States v. Ameline, 409 F.3d 1073, 1081 (9th Cir. 2005) (en banc). A

bankruptcy court’s failure to make factual findings as required by Civil

Rule 52(a), made applicable to this matter by Rule 7052, does not require

10 remand unless a full understanding of the issues under review is not

possible without aid of the findings. See Simeonoff v. Hiner, 249 F.3d 883, 891

(9th Cir. 2001). Here, the findings must be supplemented before

meaningful appellate review is possible, and remand for additional

findings is required.

CONCLUSION

Based on the foregoing, we VACATE and REMAND to permit the

bankruptcy court to correct the judgment in regard to counts (1), (2), and

(6), to issue additional findings, and to amend the judgment if appropriate

given more complete findings.