In re: Ferdinand Gertes and Emma R. Dutro

• Court: United States Bankruptcy Appellate Panel for the Ninth Circuit
• Decided: December 5, 2012
• Docket: CC-12-1257-HKiD
• Status: Unpublished

Opinion

FILED DEC 05 2012 1 SUSAN M SPRAUL, CLERK U.S. BKCY. APP. PANEL 2 OF THE NINTH CIRCUIT

3 UNITED STATES BANKRUPTCY APPELLATE PANEL 4 OF THE NINTH CIRCUIT 5 In re: ) BAP No. CC-12-1257-HKiD ) 6 FERDINAND GERTES and ) Bk. No. 11-24572-BR EMMA R. DUTRO, ) 7 ) Adv. No. 11-02484-BR Debtors. ) 8 ______________________________) ) 9 MIGUEL A. GARCIA, ) ) 10 Appellant, ) ) 11 v. ) M E M O R A N D U M1 ) 12 FERDINAND GERTES; EMMA R. ) DUTRO; ) 13 ) Appellees. ) 14 ______________________________) 15 Argued and Submitted on November 15, 2012 at Pasadena, California 16 Filed - December 5, 2012 17 Appeal from the United States Bankruptcy Court 18 for the Central District of California 19 Honorable Barry Russell, Bankruptcy Judge, Presiding 20 Appearances: Appellant Miguel A. Garcia argued pro se; David 21 Scott Hagen, Esq. argued for Appellees Ferdinand Gertes and Emma R. Dutro. 22 23 Before: HOLLOWELL, KIRSCHER, and DUNN, Bankruptcy Judges. 24 25 26 1 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 8013-1. 1 Miguel Garcia (Garcia) appeals the bankruptcy court’s 2 judgment in favor of the debtors on his complaint to deny the 3 debtors a discharge under § 727.2 We AFFIRM. 4 I. FACTS 5 Ferdinand Gertes and Emma Dutro (Dutro) (the Debtors) filed 6 a chapter 7 bankruptcy petition and schedules on April 4, 2011. 7 On bankruptcy Schedule A - Real Property, the Debtors listed two 8 properties in Carson, California. One was their residence, 9 purchased in 1986. The other (the Property) was described as: 10 1/3 interest in [single family residence in Carson, California]. Debtors own a 1/3 interest in a single 11 family residence . . . with Steve Saiz and the Bayside Apostolic Center, each of whom own a 1/3 interest. The 12 property was acquired by the owners in 7/07 for $899,000 with $200,000 down payment put up by the other 13 two owners. The intent was to develop the property by building condos but the real estate market changed 14 while those plans were being developed. The existing house has 5 bedrooms, 3 baths in approximately 2000 15 square feet and is occupied by 3 renters who pay a total of $2000 per month. Current fair market value of 16 property, per zillow.com search on 3/23/11 is $427,000. Property is subject to first trust deed in favor of 17 Chase with balance of $743,000 and a municipal development loan of $200,000 which does not bear 18 interest and would be due upon sale of the property. 19 Also in their schedules, the Debtors listed Garcia as an 20 unsecured creditor with a claim of $78,000. Garcia is an 21 architect and contractor. After Garcia and Dutro met in 2003, 22 they worked together on several construction projects. In 2007, 23 Dutro contemplated developing the Property into a condominium 24 complex (the Project), but she needed financing. Garcia agreed 25 26 2 Unless otherwise indicated, all chapter and section 27 references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532. “Rule” references are to the Federal Rules of Bankruptcy 28 Procedure, Rules 1001-9037.

-2- 1 to lend Dutro money with the understanding that, in exchange, he 2 would be given general contractor and architectural work on the 3 Project. 4 With the help of Dutro’s son, Garcia refinanced his own 5 property and obtained a loan of $75,000, which he, in turn, lent 6 to Dutro. On October 17, 2007, Dutro signed a note (Note) in 7 favor of Garcia in the amount of $81,512.00, which represented 8 the $75,000 loan plus transactional closing costs. Payment on 9 the Note was due by October 17, 2010. The Note referenced that a 10 deed of trust was to secure the Note. However, it appears that 11 no deed of trust was ever executed or recorded. 12 Dutro made monthly interest payments on the Note from 13 October 2007 through October 2008. She stopped making payments 14 beginning in November 2008, and failed to repay the Note. 15 On July 13, 2011, Garcia filed a complaint against the 16 Debtors objecting to their discharge pursuant to § 727(a)(4), 17 (a)(7), and (a)(2). After the Debtors filed a motion to dismiss, 18 Garcia filed an amended complaint on September 19, 2011 (the 19 Complaint). In the Complaint, and in his pre-trial and trial 20 briefs, Garcia’s allegations focused on his contention that Dutro 21 enticed him to refinance his property by promising him all 22 contractor work on the Project and by promising him that a high 23 return would be gained from the refinancing. He alleged that 24 Dutro made the false and misleading promise that she would invest 25 Garcia’s money in the Project, when no such investment was ever 26 made; he alleged that instead the Debtors used his money for 27 their own personal use. Garcia also asserted that the Note 28 should have been secured by a deed of trust that Dutro promised,

-3- 1 but failed, to record. 2 The Debtors denied the allegations. Dutro submitted a 3 declaration stating that no collateral for the loan was ever 4 contemplated by her or Garcia. She stated that Garcia’s money 5 was used to pay for architectural drawings and engineering for 6 the Project and to service the debt on the Property. Dutro also 7 stated that she had intended to complete the Project but the 8 subsequent downturn in the real estate market made it too 9 difficult. Therefore, she contended that she returned a portion 10 of the Property to the former seller, and rented out the 11 residence on the Property, retaining her one-third interest. The 12 Debtors maintained that they fully disclosed their interest in 13 the Property, the rental income, and monthly obligations on the 14 Property. 15 On April 3, 2012, Garcia filed a reply brief with 16 “additional facts.” The additional facts were that although 17 Dutro contended she purchased the Property with partners, Steve 18 Saiz and the Bayside Apostolic Center, the Los Angeles County 19 Recorder’s Office as well as the Tax Assessor’s Records showed 20 that Dutro alone held title to the Property. Thus, Garcia 21 shifted the focus of his allegations under § 727 to contend that 22 the Debtors (1) concealed Dutro’s full interest in the Property 23 with an intent to hinder, delay, or defraud the bankruptcy 24 trustee and creditors (§ 727(a)(2)); (2) failed to record the 25 deed of trust that secured the Note and instead transferred the 26 Property to insiders (§ 727(a)(2)); and, (3) failed to fully 27 disclose their ownership of the Property on her bankruptcy 28 schedules (§ 727(a)(4)).

-4- 1 A trial was held on May 9, 2012. Garcia and Dutro submitted 2 testimony by declaration. Dutro also testified at the trial. 3 Garcia submitted into evidence the Note and the records of the 4 Los Angeles County Recorder’s Office and Tax Assessor. At the 5 trial, Garcia’s counsel argued only the § 727(a)(4) claim that 6 the Debtors should be denied a discharge because Dutro “failed to 7 disclose the truth of the matter that she’s a 100 percent owner 8 of the property.” Trial Tr. (May 9, 2012) at 8:5-15. 9 Dutro was asked about the nature of her interest in the 10 Property. She testified that Steve Saiz and the Bayside 11 Apostolic Center put money down for the purchase of the Property 12 and she took the title in her name. She testified that she took 13 the title with the understanding among them that they would each 14 have a one-third interest in the Property and any profit from the 15 Project. 16 The bankruptcy court made an oral ruling at the close of 17 trial. It found that although the official records listed Dutro 18 as the title holder of the Property, Dutro “disclosed everything, 19 and there’s no reason not to accept what she said.” Trial Tr. 20 (May 9, 2012) at 15:1-2. The bankruptcy court found that the 21 Debtors provided sufficient information on their bankruptcy 22 schedules so that anyone could easily investigate the basis of 23 the other partners’ interest in the Property. The bankruptcy 24 court noted that the Note was a form that was simply filled out 25 by the parties. It found that while there was a dispute about 26 whether the Note was secured by a deed of trust, it “would [not] 27 base a nondischargeability of this nature [ ] on just that.” Id. 28 at 15:5-10. Finally, the bankruptcy court found there was no

-5- 1 fraud or misrepresentation by the Debtors: “I’m not convinced 2 from the facts before me that it wasn’t anything other than 3 described by the Debtor that things went bad for a lot of people, 4 and the Debtor simply couldn’t make the payments.” Id. at 5 15:14-18. 6 On May 17, 2012, the bankruptcy court entered judgment in 7 favor of the Debtors.3 Garcia timely appealed. 8 II. JURISDICTION 9 The bankruptcy court had jurisdiction pursuant to 28 U.S.C. 10 §§ 1334 and 157(b)(2)(J). We have jurisdiction under 28 U.S.C. 11 § 158. 12 III. ISSUE 13 Did the bankruptcy court err in entering judgment in favor 14 of the Debtors on the Complaint? 15 IV. STANDARDS OF REVIEW 16 We apply the following standards of review to a judgment on 17 an objection to discharge: (1) the bankruptcy court’s 18 determinations of the historical facts are reviewed for clear 19 error; (2) the selection of the applicable legal rules under 20 § 727 is reviewed de novo; and (3) the application of the facts 21 to those rules requiring the exercise of judgments about values 22 animating the rules is reviewed de novo. Retz v. Samson 23 (In re Retz), 606 F.3d 1189, 1196 (9th Cir. 2010) (citing Searles 24 25 3 At the trial and in its judgment on Garcia’s Complaint, 26 the bankruptcy court referenced § 727 and § 523. However, 27 according to the bankruptcy court docket, Garcia did not file a separate complaint alleging § 523 claims for relief. Garcia also 28 did not reference § 523 in his Complaint.

-6- 1 v. Riley (In re Searles), 317 B.R. 368, 373 (9th Cir. BAP 2004), 2 aff’d, 212 Fed. Appx. 589 (9th Cir. 2006)). 3 A factual finding is clearly erroneous if it is “illogical, 4 implausible, or without support in the record.” Id. at 1196 5 (citing United States v. Hinkson, 585 F.3d 1247, 1261-62 & n.21 6 (9th Cir. 2009)(en banc)). 7 V. DISCUSSION 8 A denial of a discharge is an act that must not be taken 9 lightly. Consequently, § 727 must be construed liberally in 10 favor of the debtor and against the objector. Roberts v. Erhard 11 (In re Roberts), 331 B.R. 876, 882 (9th Cir. BAP 2005) (citing 12 First Beverly Bank v. Adeeb (In re Adeeb), 787 F.2d 1339, 1342 13 (9th Cir. 1986)). However, the opportunity for a fresh start is 14 available only to the “honest but unfortunate debtor.” Merena v. 15 Merena (In re Merena), 413 B.R. 792, 807 (Bankr. D. Mont. 2009) 16 (citing Grogan v. Garner, 498 U.S. 279, 286-87 (1990)). 17 Therefore, a party objecting to a debtor’s discharge must prove 18 by a preponderance of the evidence that the debtor’s actions or 19 conduct fall within one of the exceptions to discharge set forth 20 in § 727. Khalil v. Developers Sur. & Indem. Co. (In re Khalil), 21 379 B.R. 163, 172 (9th Cir. BAP 2007), aff’d, 578 F.3d 1167, 1168 22 (9th Cir. 2009). 23 Garcia’s sole contention at the trial and on appeal is that 24 the Debtors made a false oath on their bankruptcy schedules 25 because they disclosed only a one-third interest in the Property, 26 when the title records showed Dutro was the only title holder of 27 the Property. On appeal, Garcia contends that there was “no 28 documentary evidence whatsoever [ ] presented by Debtors or on

-7- 1 their behalf which would rebut the ‘prima Facie evidence’ 2 presumption that their ownership was anything other than what is 3 shown by the official title records.” Therefore, Garcia argues 4 that the bankruptcy court erred in finding that the Debtors did 5 not make a material omission on their bankruptcy schedules 6 requiring a denial of their discharge. 7 The Bankruptcy Code provides that a chapter 7 debtor shall 8 be granted a discharge, unless “the debtor knowingly and 9 fraudulently, in or in connection with the case – (A) made a 10 false oath or account.” 11 U.S.C. § 727(a)(4)(A). The 11 “fundamental purpose of § 727(a)(4)(A) is to insure that the 12 trustee and creditors have accurate information without having to 13 conduct costly investigations.” In re Retz, 606 F.3d at 1196 14 (citing Fogal Legware of Switz., Inc. v. Wills (In re Wills), 15 243 B.R. 58, 63 (9th Cir. BAP 1999)). To succeed on a 16 § 727(a)(4)(A) claim, the objecting party must demonstrate that: 17 (1) a false oath or statement was made by the debtor; 18 (2) knowingly and fraudulently; (3) which was material to the 19 course of the bankruptcy proceedings. Id.; In re Roberts, 20 331 B.R. at 882. 21 A false oath or statement is made when it occurs in the 22 debtor’s schedules or at an examination during the course of the 23 proceedings. In re Roberts, 331 B.R. at 882. A debtor’s 24 bankruptcy schedules must be verified or contain an unsworn 25 declaration under penalty of perjury. 28 U.S.C. § 1746; 26 Rule 1008. Accordingly, a false statement or omission in a 27 debtor’s schedules is a false oath under § 727(a)(4)(A). 28

-8- 1 The bankruptcy court found that the Debtors did not fail to 2 disclose their interest in the Property. The bankruptcy court 3 found that although the official documents revealed that Dutro 4 was the title holder, the Debtors disclosed in their schedules 5 that Dutro held a one-third interest in the Property as it was 6 purchased with Steve Saiz and the Bayside Apostolic Center. It 7 found that the Debtors’ disclosure regarding the Property in 8 their schedules provided the Trustee and creditors with 9 sufficient information to further investigate the ownership 10 interests if there were any questions. Moreover, it found that 11 “there’s no reason not to accept what she said” about co-owning 12 it with her partners, and intending to repay Garcia and complete 13 the Project. Trial Tr. (May 9, 2012) at 15:1-2. 14 Findings of fact based on credibility are given particular 15 deference on appeal. Anderson v. City of Bessemer City, N.C., 16 470 U.S. 564, 575 (1985); Arab Monetary Fund v. Hashim (In re 17 Hashim), 379 B.R. 912, 924-25 (9th Cir. BAP 2007). Nevertheless, 18 the record supports both contentions: that Dutro wholly owned the 19 Property or that Dutro owned only a one-third interest. Where 20 there are two permissible views of the evidence, the fact 21 finder’s choice between them cannot be clearly erroneous.” 22 Anderson, 470 U.S. at 574. Consequently, we cannot conclude that 23 the bankruptcy court’s finding that the Debtors had a one-third 24 ownership interest in the Property was clearly erroneous. As a 25 result, the bankruptcy court did not err in finding that the 26 Debtors did not make a material omission on their schedules. 27 Because Garcia did not establish the elements necessary to 28 prevail on his § 727(a)(4) claim, we agree with the bankruptcy

-9- 1 court’s conclusion that the Debtors were entitled to judgment on 2 the Complaint. 3 VI. CONCLUSION 4 For the foregoing reasons, we AFFIRM. 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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