FILED JUL 21 2017 1 NOT FOR PUBLICATION SUSAN M. SPRAUL, CLERK 2 U.S. BKCY.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-16-1125-JuFB ) 6 Regan Carroll, ) Bk. No. 3:14-bk-30726-HLB ) 7 Debtor. ) Adv. No. 3:14-ap-03099-HLB ______________________________) 8 ) Regan Carroll, ) 9 ) Appellant, ) 10 ) v. ) M E M O R A N D U M* 11 ) Charles I. Jadallah, ) 12 ) Appellee. ) 13 ______________________________) 14 Argued and Submitted on June 22, 2017 at San Francisco, California 15 Filed - July 21, 2017 16 Appeal from the United States Bankruptcy Court 17 Northern District of California (San Francisco) 18 Honorable Hannah L. Blumenstiel, Bankruptcy Judge, Presiding _________________________ 19 Appearances: Michael B. Cohen argued for appellant Regan 20 Carroll; David M. Wiseblood argued for appellee Charles Jadallah. 21 _________________________ 22 Before: JURY, FARIS, and BRAND, Bankruptcy Judges. 23 24 25 26 * This disposition is not appropriate for publication. 27 Although it may be cited for whatever persuasive value it may have (see Fed. R. App. P. 32.1), it has no precedential value. 28 See 9th Cir. BAP Rule 8013-1.
-1- 1 Appellant Regan Carroll (“Debtor”) appeals from the 2 bankruptcy court’s judgment holding that part of a loan made by 3 Appellee Charles Jadallah (“Mr. Jadallah”) to fund construction 4 of real property is nondischargeable under 11 U.S.C. 5 § 523(a)(2)(A).1 For the reasons set forth below, we AFFIRM. 6 I. FACTS 7 Debtor is a contractor with extensive experience in 8 renovating real property. Debtor is president and sole 9 shareholder of The Redland Group, Inc. (the “Redland Group”) and 10 DogPatch Real Estate Company (“DogPatch”). DogPatch acts as a 11 licensed contractor on renovation projects.2 The Redland Group 12 acts as the managing entity on any project by receiving payments 13 from lenders and paying subcontractors for their services 14 performed. This appeal concerns two loans made by Mr. Jadallah 15 to the Redland Group for renovation of real property. 16 A. The 2006 First Loan 17 In 2006, Debtor was actively looking for funding from a 18 non-institutional lender to finish various renovation projects. 19 For this purpose, Debtor was introduced to Mr. Jadallah by Tim 20 Desmond (“Mr. Desmond”), a certified public accountant for both 21 men. Although Mr. Jadallah was not in the business of making 22 this type of loan, after the two met, Mr. Jadallah agreed to 23 loan the funds to the Redland Group which would be secured by a 24 1 Unless otherwise indicated, all chapter and section 25 references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and 26 “Rule” references are to the Federal Rules of Bankruptcy Procedure. 27 2 As a realtor, Debtor also operates a real estate business 28 under DogPatch.
-2- 1 note and first deed of trust on real property located at 721 San 2 Bruno Avenue, San Francisco, California (the “Property”). The 3 terms of the loan included full payment after eighteen months in 4 the amount of $600,000.00 plus interest (the “First Loan”). The 5 First Loan went solely to fund Debtor’s then-operating 6 renovation projects, not including the Property. 7 After the First Loan term expired, due to some difficulties 8 in selling the newly renovated projects, Debtor did not pay back 9 the loan. The parties orally agreed to extend the payment 10 period of the First Loan on the same terms. 11 B. The 2012 Second Loan 12 Years later, in early 2012, Debtor sought an additional 13 loan from Mr. Jadallah. This loan was to fund the complete 14 remodel of the Property upon which Mr. Jadallah held the first 15 priority lien as a result of the unpaid balance on the First 16 Loan (the “Project”). 17 On August 6, 2012, in order to convince Mr. Jadallah to 18 make the loan, Debtor provided him with detailed plans and a 19 proposed budget for the Project.3 Based on the proposed plans 20 and budget, Mr. Jadallah agreed to lend the Redland Group 21 $704,860.00.4 According to the plans, the Project was to be 22 completed within six months. In making the loan, the parties 23 agreed that (a) Mr. Jadallah would merely finance the Project 24 25 3 The Project plans were submitted to Mr. Jadallah through 26 Mr. Desmond. For many aspects of the Project, Mr. Desmond acted as a conduit between Debtor and Mr. Jadallah. 27 4 This amount included $60,000.00 for unexpected 28 contingencies.
-3- 1 and would play no part in its construction, (b) the funds would 2 be paid by Mr. Jadallah to Redland Group in draws on an 3 “as-needed” basis, and (c) Mr. Desmond would review the 4 Project’s books and expenditures prior to the funds being 5 released by Mr. Jadallah. 6 In total, Mr. Jadallah advanced $700,000.00 from January 7 2013 through August 2013 to fund the Project (the “Second 8 Loan”). The Second Loan was comprised of the following seven 9 funding draws from Mr. Jadallah to the Redland Group at the 10 request of Debtor: 11 Second Loan Date Second Loan Amount 12 January 22, 2013 $50,000.00 January 29, 2013 $150,000.00 13 March 7, 2013 $100,000.00 May 14, 2013 $200,000.00 14 May 28, 2013 $100,000.00 15 August 9, 2013 $50,000.00 August 9, 2013 $50,000.00 16 17 In February 2013, shortly after construction began, Debtor
18 unilaterally changed the original plans without the consent or
19 knowledge of Mr. Jadallah or Mr. Desmond. Most significantly,
20 Debtor altered the plans from a two-car garage to a three-car
21 garage based on the belief that it would increase the Property
22 value substantially. Due to the changes, Debtor started
23 immediately going over budget and falling behind in payments to
24 the subcontractors. Debtor did not tell Mr. Jadallah or
25 Mr. Desmond about these changed circumstances at that time.
26 On June 19, 2013, Mr. Desmond first learned from Debtor
27 that the Project was over budget and could not be completed
28 without additional funding. On that same day, by e-mail,
-4- 1 Mr. Desmond informed Mr. Jadallah that the Project was over 2 budget by $200,000.00, and needed additional funding of 3 $100,000.00. As a result of these issues, in late June 2013, 4 Debtor and Mr. Jadallah agreed to meet at the Project, along 5 with their respective attorneys and Mr. Desmond, to perform a 6 walkthrough (the “June 2013 Meeting”). At the June 2013 7 Meeting, after looking at the state of the Project, Mr. Jadallah 8 agreed to fund the additional $100,000.00 based on Debtor’s 9 representations that all subcontractors had been paid and the 10 funds would be sufficient to complete the rest of the work. 11 Shortly thereafter, Debtor ran out of funds and walked off the 12 Project, never completing the promised work. 13 Although he represented otherwise, beginning in March 2013, 14 Debtor failed to pay various subcontractors for the work 15 performed on the Project. According to the record, Debtor 16 failed to pay (a) Seosamh O’Briain (“Mr. O’Briain”) for 17 excavation work on various invoices submitted from February 2013 18 through June of 2013,5 (b) Stephen O’Kane (“Mr. O’Kane”) for 19 framing work on an invoice submitted in April 2013, and 20 (c) Golden State Lumber for unpaid lumber. As a result of the 21 failure to pay the subcontractors, each recorded mechanics’ 22 liens against the Property. At some point in 2015, Mr. Jadallah 23 started foreclosure proceedings on the Property, but such were 24 enjoined by the state court due to the recorded liens. 25 26 5 Mr. O’Briain submitted invoices on January 30, 2013, 27 February 13, 2013, February 27, 2013, March 5, 2013, April 3, 2013, and June 5, 2013. Debtor did pay the January 30, 2013 and 28 the February 27, 2013 invoice.
-5- 1 Mr. Jadallah worked out a deal with the subcontractors to 2 release their liens and eventually foreclosed in July 2015. 3 C. Bankruptcy proceedings 4 On May 11, 2014, Debtor filed a chapter 7 petition. On 5 August 15, 2014, Mr. Jadallah filed a timely adversary complaint 6 seeking to except from discharge, under §§ 523(a)(2), (4) and 7 (6), the First Loan and the Second Loan in the total amount of 8 $1,300,000.00. The basic theory of the complaint was that 9 Debtor personally made fraudulent representations that induced 10 Mr. Jadallah to make both loans to the Redland Group.6 11 On January 13, 2016, the bankruptcy court held a one day 12 trial on the §§ 523(a)(2) and (6) claims only. At the start of 13 trial, Mr. Jadallah withdrew his claims for nondischargeability 14 of the First Loan, thereby only prosecuting whether the Second 15 Loan, in the amount of $700,000.00, was exempt from discharge. 16 Debtor, Mr. Jadallah, Mr. Desmond, and Nelson Cheung, the 17 contractor that took over the Project after foreclosure, all 18 testified. On April 13, 2016, the bankruptcy court issued a 19 memorandum decision finding that $500,000.00 of the Second Loan 20 was nondischargeable under § 523(a)(2)(A). In accordance with 21 its memorandum opinion, the court entered a judgment in favor of 22 Mr. Jadallah on April 18, 2016. 23 In its decision, the court determined that $500,000.00 of 24 the total $700,000.00 was exempt from discharge based on two 25 separate claims. 26 6 27 Debtor has not challenged on appeal that as the principal of Redland Group he could be personally liable for fraudulent 28 representations made during the lending transaction.
-6- 1 The first claim was based on the nondisclosure of material 2 facts (the “Nondisclosure Claim”). The court held that Debtor 3 had a duty to disclose certain material facts that were known 4 exclusively to him but suppressed. Based on the testimony, the 5 court found that: (1) Mr. Jadallah and Mr. Desmond did not learn 6 of the changes to the Project until June 19, 2013, finding 7 Debtor’s testimony to the contrary not credible; and (2) Debtor 8 alone knew that (a) certain subcontractors and suppliers were 9 not paid, (b) the Project could not be completed on budget, and 10 (c) major changes were made to the Project, including changing 11 the plans from a two-car garage to a three-car garage. After 12 finding that he had a duty to disclose, the court concluded that 13 Debtor asked for the March 7th, May 7th, and May 28th advances 14 even though he knew that the Project could not have been 15 completed for $700,000.00 and he still owed subcontractors 16 payments from the plan changes, which were material facts that 17 he did not disclose. The court then inferred Debtor’s intent to 18 deceive because he knew that if he disclosed these facts 19 earlier, Mr. Jadallah would not have made any further advances 20 toward completion of the Project. 21 Under this claim, the court held that the March 7th, 22 May 7th, and May 28th advances were nondischargeable. The court 23 did not include the January 23rd and January 29th advances 24 because there was no evidence that Debtor knew of the major 25 changes and default in January 2013. Likewise, the court did 26 not include the two August 9th advances because on June 19, 27 2013, Mr. Jadallah had become aware of the plan changes and that 28 additional funding was needed.
-7- 1 The second claim was based on an affirmative 2 misrepresentation (the “Misrepresentation Claim”). Although 3 Debtor testified to the contrary (which the court found not 4 credible), the court determined that at the June 2013 meeting 5 Debtor represented that (1) parts for the Project had been 6 ordered, (2) contractors had been paid, and (3) the remaining 7 $100,000.00 would be sufficient to complete work on the Project. 8 The court found that Debtor knew these representations were 9 false when made because there were unpaid subcontractors and the 10 remaining two advances would not be sufficient to complete the 11 Project. From these facts the court inferred an intent to 12 defraud, as there was no other explanation why Debtor would make 13 such representations except to induce Mr. Jadallah to advance 14 the last $100,000.00. 15 On April 27, 2016, Debtor filed a timely notice of appeal 16 of the bankruptcy court’s judgment. On April 30, 2016, Debtor 17 filed a reconsideration motion and a request for judicial notice 18 in support thereof, seeking reconsideration of the memorandum 19 decision (the “Reconsideration Motion”). In large part, the 20 Reconsideration Motion requested that the court consider new 21 evidence of a post-trial sale of the Property by Mr. Jadallah, 22 after he had foreclosed and completed the renovation, and a new 23 damage theory, the “special benefits” doctrine, which would 24 mitigate damages. 25 On June 2, 2016, the bankruptcy court held a hearing on the 26 Reconsideration Motion. The court required supplemental 27 briefing on various issues that were not raised at trial, 28 including the post-trial sale and the “special benefits”
-8- 1 doctrine. After further briefing, on August 8, 2016, the court 2 entered an order denying the Reconsideration Motion. In doing 3 so, the court denied admission of any new evidence regarding the 4 post-trial sale of the Property and denied consideration of the 5 “special benefits” doctrine as an unraised affirmative defense. 6 The court stated that Debtor waived this argument by not raising 7 it at trial. Debtor did not introduce any evidence to support 8 such a theory at trial, and if the court did consider the 9 theory, it would not have resulted in a dollar for dollar 10 mitigation as Debtor argued in his motion. 11 Debtor did not file a notice of appeal or amended notice 12 including the Reconsideration Motion. 13 II. JURISDICTION 14 The bankruptcy court had jurisdiction pursuant to 28 U.S.C. 15 §§ 1334 and 157(b)(2)(A). We have jurisdiction under 28 U.S.C. 16 § 158. 17 III. ISSUE7 18 7 19 This memorandum does not address issues raised in the complaint pertaining to the alter ego theory and the causes of 20 action under §§ 523(a)(4) and 523(a)(6), or Debtor’s Reconsideration Motion for which no notice of appeal was filed. 21 First, as to the § 523(a)(4) claim, prior to trial, on October 22, 2014, the bankruptcy court granted, in part, Debtor’s 22 motion for judgment on the pleadings which dismissed the cause of 23 action alleged under § 523(a)(4). Second, as to the alter ego theory and the §523(a)(6) claim, Debtor does not include these 24 issues in his statement of issues on appeal or provide any argument in his opening brief; therefore, these issues have been 25 waived. See Arpin v. Santa Clara Valley Transp. Agency, 261 F.3d 26 912, 919 (9th Cir. 2001) (asserting that issues not specifically and distinctly argued in opening brief are waived). Last, as to 27 the Reconsideration Motion, although Debtor timely appealed the bankruptcy court’s judgment, he did not file a new notice of 28 (continued...)
-9- 1 Whether the bankruptcy court erred in holding that part of 2 the Second Loan was nondischargeable under § 523(a)(2)(A). 3 IV. STANDARDS OF REVIEW 4 Questions of law are subject to de novo review. United 5 States v. Lang, 149 F.3d 1044, 1046 (9th Cir. 1998). Questions 6 of fact are reviewed under the clearly erroneous standard. 7 Pullman-Standard v. Swint, 456 U.S. 273, 287 (1982). A finding 8 of fact is clearly erroneous when, after reviewing the evidence, 9 we are left with the definite and firm conviction that a mistake 10 has been committed. In re Contractors Equip. Supply Co., 11 861 F.2d 241, 243 (9th Cir. 1988). 12 We review a bankruptcy court’s findings of fact, whether 13 based on oral or documentary evidence, under the clearly 14 erroneous standard. Rule 8013; Wells Fargo Bank v. Beltran 15 (In re Beltran), 182 B.R. 820, 823 (9th Cir. BAP 1995). We give 16 due regard to the opportunity of the bankruptcy court to judge 17 the credibility of the witnesses. In re Beltran, 182 B.R. at 18 823. A bankruptcy court’s finding as to a debtor’s intent is a 19 question of fact. We do not substitute our judgment for that of 20 the bankruptcy court in reviewing findings of fact. Smith v. 21 James Irvine Found., 402 F.2d 772, 774 (9th Cir. 1968). If two 22 23 7 (...continued) 24 appeal or amend his prior notice to include the denial of the Reconsideration Motion. Since the order on the Reconsideration 25 Motion does not in any way amend or alter the findings of fact in 26 the court’s memorandum decision, this Panel is not bound to review the Reconsideration Motion in the instant appeal. See 27 Moldo v. Ash (In re Thomas), 428 F.3d 1266 (9th Cir. 2005); see also 10 Collier on Bankruptcy ¶ 8002.08 (15th ed., rev. 28 2005).
-10- 1 views of the evidence are possible, the trial judge’s choice 2 between them cannot be clearly erroneous. Hansen v. Moore 3 (In re Hansen), 368 B.R. 868, 874–75 (9th Cir. BAP 2007). We 4 give findings of fact based on credibility particular deference. 5 Id. 6 V. DISCUSSION 7 A. Motion to Strike 8 During the pendency of this appeal, Mr. Jadallah filed a 9 motion to dismiss or, in the alternative, to strike document 10 numbers 6 and 11 in the record on appeal on the grounds that the 11 documents were not part of the record before the bankruptcy 12 court at trial. On November 7, 2016, a motions panel entered an 13 order that denied the motion to dismiss, granted the motion to 14 strike only as to document number 6,8 and deferred to this panel 15 the determination of whether to strike document number 11. 16 As an initial matter, the number of the document which 17 Mr. Jadallah sought to strike is incorrect. Mr. Jadallah wished 18 to strike the “Declaration of [Debtor] in Support of Revised 19 Motion for Judgment on the Pleadings Combined with Motion 20 21 8 Document number 6 in Debtor’s Excerpts of Record is a Request for Judicial Notice of facts pertaining to the post trial 22 sale of the Property by Mr. Jadallah. Debtor had submitted a 23 similar request to the bankruptcy court in his Reconsideration Motion and the court sustained an objection to the request on the 24 grounds that the source of the facts was not a “generally known” source whose accuracy cannot be questioned. Our motions panel 25 granted the motion to strike the request because the pertinent 26 facts occurred after the trial concluded and therefore the information could not have been part of the record which formed 27 the basis of the bankruptcy court’s ruling. We find no error in the motion panel’s reasoning and therefore leave its ruling 28 undisturbed.
-11- 1 Summary Judgment.” Per Debtor’s Excerpts of Record, the 2 challenged declaration is document 12, not 11. We find that the 3 declaration should be stricken. The declaration was not 4 admitted into the trial record and it would be improper for this 5 Panel to consider any material outside that record. See Heath 6 v. Helmick, 173 F.2d 156 (9th Cir. 1949). 7 B. Elements of § 523(a)(2)(A) 8 Section 523(a)(2)(A), in relevant part, excepts from 9 discharge any debt for money, property, or services to the 10 extent obtained by false pretenses, a false representation, or 11 actual fraud. § 523(a)(2)(A). In order to establish that a 12 debt is nondischargeable under § 523(a)(2)(A), a creditor must 13 establish five elements by a preponderance of the evidence: 14 (1) misrepresentation, fraudulent omission or deceptive conduct by the debtor; (2) knowledge of the falsity or 15 deceptiveness of his statement or conduct; (3) an intent to deceive; (4) justifiable reliance by the creditor on the 16 debtor's statement or conduct; and (5) damage to the creditor proximately caused by its reliance on the debtor's 17 statement or conduct. 18 Turtle Rock Meadows Homeowners Ass'n v. Slyman (In re Slyman), 19 234 F.3d 1081, 1085 (9th Cir. 2000); Ghomeshi v. Sabban 20 (In re Sabban), 384 B.R. 1, 5 (9th Cir. BAP 2008). 21 Since direct evidence of an intent to deceive is rarely 22 available, a debtor’s knowledge and intent to deceive may be 23 inferred from the totality of the circumstances. Gertsch v. 24 Johnson & Johnson, Fin. Corp. (In re Gertsch), 237 B.R. 160, 25 167–68 (9th Cir. BAP 1999); Alexander & Alexander of Wash., Inc. 26 v. Hultquist (In re Hultquist), 101 B.R. 180, 183 (9th Cir. BAP 27 1989). 28 Whether reliance is justified depends upon the “qualities
-12- 1 and characteristics of a particular plaintiff, and the 2 circumstances of the particular case, rather than the 3 application of a community standard of conduct to all cases.” 4 Field v. Mans, 516 U.S. 59, 71 (1995). 5 C. Nondisclosure under § 523(a)(2)(A) 6 For purposes of § 523(a)(2)(A), an omission may give rise 7 to fraud liability only when there is a duty to disclose. Apte 8 v. Japra M.D., F.A.C.C., Inc. (In re Apte), 96 F.3d 1319, 1324 9 (9th Cir. 1996); Citibank, N.A. v. Eashai (In re Eashai), 10 87 F.3d 1082, 1089 (9th Cir. 1996). 11 We look to the common law concept of fraud found in the 12 Restatement for guidance in determining what constitutes a 13 fraudulent nondisclosure for purposes of § 523(a)(2)(A). See 14 Field v. Mans, 516 U.S. at 68–70; In re Apte, 96 F.3d at 1324; 15 Tallant v. Kaufman (In re Tallant), 218 B.R. 58, 64–65 (9th Cir. 16 BAP 1998). 17 Section 551 of the Restatement (Second) of Torts provides 18 in relevant part: 19 (1) One who fails to disclose to another a fact that he knows may justifiably induce the other to act or refrain 20 from acting in a business transaction is subject to the same liability to the other as though he had represented the 21 nonexistence of the matter that he has failed to disclose, if, but only if, he is under a duty to the other to exercise 22 reasonable care to disclose the matter in question. 23 (2) One party to a business transaction is under a duty to 24 exercise reasonable care to disclose to the other before the transaction is consummated, 25 . . . 26 (b) matters known to him that he knows to be necessary to 27 prevent his partial or ambiguous statement of the facts from 28 being misleading,
-13- 1 . . . 2 (e) facts basic to the transaction, if he knows that the other is about to enter into it under a mistake as to them, 3 and that the other, because of the relationship between them, the customs of the trade or other objective 4 circumstances, would reasonably expect a disclosure of those facts. 5 6 Restatement (Second) of Torts § 551 (1976). Moreover, in the 7 context of a contractual relationship, the Restatement (Second) 8 of Contracts may also be instructive. See Barnes v. Belice 9 (In re Belice), 461 B.R. 564, 580 (9th Cir. BAP 2011). The 10 Restatement (Second) of Contracts provides in relevant part: 11 A person’s non-disclosure of a fact known to him is equivalent to an assertion that the fact does not exist in 12 the following cases only: 13 . . . 14 (b) where he knows that disclosure of the fact would correct a mistake of the other party as to a basic assumption on 15 which that party is making the contract and if non-disclosure of the fact amounts to a failure to act in 16 good faith and in accordance with reasonable standards of fair dealing. 17 18 Restatement (Second) of Contracts § 161 (1981). Therefore, 19 stated simply, a duty arises when the defendant actively 20 conceals a material fact from the plaintiff or makes partial 21 representations to suppress some material facts. 22 A concealed fact is material if “a reasonable man would 23 attach importance to the alleged omissions in determining his 24 course of action.” Loomas v. Evans (In re Evans), 181 B.R. 508, 25 515 (Bankr. S.D. Cal. 1995). 26 D. Application of § 523(a)(2)(A) 27 We have reviewed the bankruptcy court’s findings of fact in 28 its memorandum opinion and conclude that, under both of the
-14- 1 court’s findings, it committed no clear error in finding fraud 2 under § 523(a)(2)(A). We address each claim in turn. 3 1. The Nondisclosure Claim 4 After trial, the bankruptcy court made factual findings 5 that Debtor committed actionable fraud under § 523(a)(2)(A) by 6 failing to disclose material facts known exclusively to him 7 after the June 2013 Meeting. We can only disturb these findings 8 if they were clearly erroneous. See Joseph F. Sanson Inv. Co. 9 v. 268 Ltd.(In re 268 Ltd.), 789 F.2d 674 (9th Cir. 1986). 10 (a) Nondisclosure 11 The bankruptcy court determined that an omission is 12 actionable under § 523(a)(2)(A) when there is a duty to 13 disclose. The court found that Debtor was under a duty to 14 disclose because he alone knew about material facts which were 15 unknown to Mr. Jadallah or Mr. Desmond until the June 2013 16 Meeting: various subcontractors and suppliers had not been paid; 17 major plan changes were unilaterally made to the Project by 18 Debtor; and the Project would not be completed on budget. 19 Debtor was under an obligation to disclose such to Mr. Jadallah 20 or Mr. Desmond prior to requesting the March 7th, May 7th, and 21 May 28th advances. 22 The bankruptcy court did not commit clear error in finding 23 that Debtor alone knew of the above facts prior to the June 2013 24 Meeting. Mr. Jadallah and Mr. Desmond both testified that they 25 were not made aware of the facts before the June 2013 Meeting. 26 Mr. Jadallah testified that if he had been made aware, he would 27 not have made the May advances. The court did not find Debtor’s 28 contrary testimony credible. In the end, the court simply gave
-15- 1 more weight to the trial testimony of Mr. Jadallah and 2 Mr. Desmond. Because Debtor did not submit any evidence other 3 than his testimony to support his version of the facts, the 4 court did not commit clear error in concluding that he alone 5 possessed knowledge of the omitted facts. 6 (b) Knowledge of omitted facts 7 The court found that when requesting the March and May 8 advances, Debtor had knowledge of the facts he failed to 9 disclose. Based on Debtor’s trial testimony, by March 3, 2013, 10 Debtor knew that he could not complete the Project within budget 11 and had only paid subcontractor Mr. O’Briain according to the 12 original plans, owing a balance for work done pursuant to the 13 modified plans. Based on this testimony, the court concluded 14 that Debtor knew of the omitted facts when requesting the 15 March 7th, May 7th, and May 28th advances. We see no clear 16 error. 17 (c) Intent to deceive 18 The court recognized that it was not enough that Debtor 19 failed to disclose the omitted facts, but he must have done so 20 with an intent to deceive. The court inferred that intent from 21 the surrounding circumstances, particularly because Debtor did 22 not come forward with the omitted facts based on a fear that 23 Mr. Jadallah would not make any more advances. The court’s 24 inference is sound. Mr. Jadallah testified that he would not 25 have made the March and May advances had he known of the true 26 facts. Therefore, we see no error in the court’s inference. 27 (d) Justifiable reliance 28 The bankruptcy court found Mr. Jadallah’s reliance
-16- 1 justifiable. The court stated that Mr. Jadallah and Mr. Desmond 2 did not know of the true facts when making the March and May 3 advances, and the representations made by Debtor were not 4 contrary to common sense. Therefore, the court concluded that 5 Mr. Jadallah’s reliance was justifiable when making the 6 advances. We will not disturb this finding. 7 (e) Damages 8 The court found that $300,000.00 was nondischargeable for 9 the nondisclosure. Included in this amount were the March 7th, 10 May 7th, and May 28th advances, but not included were the 11 January and August advances. It excluded the January 23rd and 12 January 29th payments because there was no evidence that Debtor 13 knew of the major changes and default in January 2013. It 14 excluded the two August 9th advances because on June 19, 2013, 15 Mr. Jadallah had become aware of the plan changes and that 16 additional funding was needed. The court’s finding of the 17 resulting damages due to nondisclosure is not error. 18 a. Debtor’s Arguments Against Nondisclosure Claim 19 Most of Debtor’s argument centers around whether 20 Mr. Jadallah recouped his losses because of a post-trial sale of 21 the Property. Debtor raised this same argument in the 22 Reconsideration Motion. In essence, Debtor asserts that under 23 the “special benefit” doctrine,9 the bankruptcy court was 24 25 9 The “special benefit” doctrine is a long-standing 26 principle of tort damages recognized under California law. See Turpin v. Sortini, 31 Cal. 3d 220 (1982). In essence, the 27 “doctrine reflects the basic compensatory theory underlying tort damages by restricting recovery to the harm actually incurred.” 28 (continued...)
-17- 1 obligated to mitigate damages, concluding that Mr. Jadallah did 2 not suffer any damages after accounting for the post-trial sale. 3 The first time Debtor raised the “special benefit” doctrine 4 or the post-trial sale of the Property was in his 5 Reconsideration Motion. Like most mitigation theories, the 6 “special benefit” doctrine must be both pled and proved prior to 7 trial. See Am. Jur. 2d, Damages § 30:24. Debtor did neither. 8 No argument, evidence, or exhibits in support of these new facts 9 were part of the bankruptcy court’s record. The law in the 10 Ninth Circuit prevents an appellate court from considering 11 evidence outside the trial record on direct appeal. Smyrnos v. 12 Padilla (In re Padilla), 213 B.R. 349, 354 n.3 (9th Cir. BAP 13 1997); see also Kirshner v. Uniden Corp. of Am., 842 F.2d 1074, 14 1077 (9th Cir. 1988). Therefore, because there is no trial 15 record pertaining to these new facts, this Panel will not 16 consider these arguments in the disposition of this appeal. 17 Debtor does not submit any argument challenging the 18 nondisclosure law or factual findings of the bankruptcy 19 court’s holding under the Nondisclosure Claim. Rather, Debtor 20 argues that because the Second Loan was based on a valid 21 contract, it is removed from § 523(a)(2)(A) unless it is shown 22 that Debtor made misrepresentations at the time of contracting. 23 We disagree. The bankruptcy court found that because 24 Debtor was required to, but did not, disclose various material 25 facts, Mr. Jadallah satisfied his burden of establishing the 26 27 9 (...continued) 28 Heckert v. MacDonald, 208 Cal. App. 3d 832, 839 (1989).
-18- 1 nondischargeable liability under § 523(a)(2)(A). Mr. Jadallah 2 did not plead or attempt to prove a fraud in the inducement 3 theory of nondischargeability. Thus, Debtor’s contract argument 4 is wayward. 5 2. The Misrepresentation Claim 6 The bankruptcy court also found that Debtor committed 7 actionable fraud under § 523(a)(2)(A) by making several 8 affirmative misrepresentations at the June 2013 Meeting. 9 (a) Misrepresentation 10 The bankruptcy court found that Debtor made the following 11 affirmative misrepresentations at the June 2013 Meeting: all the 12 parts for construction had been ordered; all contractors had 13 been paid; and the remaining $100,000.00 would be sufficient to 14 complete work on the Project. The court found Debtor’s contrary 15 testimony not credible. Rather, the court gave weight to the 16 testimony of Mr. Jadallah and Mr. Desmond that the 17 representations were made at the June 2013 Meeting. The 18 bankruptcy court properly weighed the credibility of the 19 witnesses, which we cannot disturb. See Rule 8013. 20 (b) Knowledge of falsity 21 The court found that Debtor knew that the representations 22 made at the June 2013 Meeting were false because at the time of 23 the meeting there were unpaid subcontractors and the remaining 24 advances would not be sufficient for completion. The court’s 25 findings are supported by the trial record. The testimony of 26 the subcontractors alone establish that they were unpaid at the 27 time of the June 2013 Meeting. This testimony, coupled with the 28 fact that Debtor was in charge of paying the subcontractors,
-19- 1 establishes that the bankruptcy court’s factual finding is well 2 supported by the trial record. 3 (c) Intent to deceive 4 The court found that there was an intent to deceive 5 Mr. Jadallah because there would be no other explanation for 6 making the representations other than to induce Mr. Jadallah to 7 advance the funds. We find no clear error in this finding. 8 (d) Justifiable reliance 9 The court used the same finding to establish justifiable 10 reliance in both findings of fraud. We have already shown that 11 there was no clear error in the court’s prior finding, so we 12 need not address the issue again. 13 (e) Damages 14 The court found that $100,000.00 was nondischargeable for 15 the two August advances. The court found that at the June 2013 16 Meeting, Mr. Jadallah was led to believe that the Project would 17 be completed with $100,000.00 and all subcontractors were paid; 18 he therefore made the last two August advances based on these 19 representations. The evidence supports this finding. 20 a. Debtor’s Arguments Against the Misrepresentation Claim 21 Debtor argues that the testimony does not support the 22 bankruptcy court’s finding that the last two August draws are 23 nondischargeable based on the affirmative misrepresentations.10 24 25 10 Debtor erroneously asserts that our review of the factual 26 findings is de novo, citing cases which acknowledge a mixed question of review in nondischargeability cases. However, Debtor 27 only challenges the factual findings on misrepresentation that are given clearly erroneous deference under the mixed question of 28 (continued...)
-20- 1 Debtor first heavily relies on an e-mail sent on June 20, 2 2013,11 that made Mr. Jadallah aware that $100,000.00 would not 3 be enough to finish the Project. The bankruptcy court found 4 this e-mail came before the June 2013 Meeting. The court found 5 that at the June 2013 Meeting Debtor made different 6 representations: that all the contractors had been paid and that 7 the remaining $100,000.00 would be sufficient to complete work 8 on the Project. The court believed the testimony of 9 Mr. Jadallah and Mr. Desmond that those representations were 10 made at the June 2013 Meeting and found Debtor’s counter 11 assertions not credible. We defer to the trial court on that 12 finding. 13 Second Debtor asserts that by looking at the Property 14 Mr. Jadallah had to know that $100,000.00 would not be enough to 15 finish the Project. The trial testimony and the bankruptcy 16 court’s findings establish that Mr. Jadallah was not an 17 experienced contractor, nor was he in charge of construction of 18 the Property. Mr. Jadallah was merely a passive investor and, 19 as such, nothing about the state of the Project would have been 20 inherently obvious to Mr. Jadallah. Supported by the record and 21 the court’s assessment of credibility, the bankruptcy court’s 22 findings are not clearly erroneous on this point. 23 Debtor last argues that his statement asserting that 24 10 (...continued) 25 law review. 26 11 The e-mail was sent from Mr. Desmond to Mr. Jadallah. In 27 the e-mail, Mr. Desmond quoted Debtor stating that the Project would need additional funding above the $100,000.00 to be 28 completed.
-21- 1 $100,000.00 would be sufficient to complete the work on the 2 Project is excluded from review under § 523(a)(2)(A) as a 3 “representation of Debtor’s financial condition.” 4 This argument is nonsensical. While it is true that, 5 pursuant to § 523(a)(2)(A), an oral “statement respecting the 6 debtor’s financial condition” is expressly excluded from this 7 exception to discharge, Debtor’s misrepresentation does not 8 pertain to the “financial condition” contemplated under 9 § 523(a)(2)(A). Statements regarding a debtor’s financial 10 condition “are those that purport to present a picture of the 11 debtor’s overall financial health.” Cadwell v. Joelson 12 (In re Joelson), 427 F.3d 700, 714 (10th Cir. 2005); see Barnes 13 v. Belice (In re Belice), 461 B.R. 564, 578 (9th Cir. BAP 2011). 14 Such a statement would be “analogous to balance sheets, income 15 statements, statements of changes in overall financial position, 16 or income and debt statements that present the debtor or 17 insider's net worth, overall financial health, or equation of 18 assets and liabilities.” Id. Here, the statement made was 19 pertaining to Project, not Debtor. Debtor made a representation 20 about how much he believed it would cost to finish the Project, 21 which Mr. Jadallah relied on in making his last two funding 22 draws. This representation is not a statement respecting the 23 debtor’s financial condition as contemplated by the statute and 24 relevant case law. Therefore, this argument fails. 25 VI. CONCLUSION 26 The bankruptcy court made proper factual findings on all of 27 the elements of fraud, both nondisclosure and affirmative 28 misrepresentations. Therefore, we AFFIRM.
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