FILED JUN 1 2023 NOT FOR PUBLICATION SUSAN M. SPRAUL, CLERK U.S. BKCY. APP. PANEL UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE NINTH CIRCUIT
OF THE NINTH CIRCUIT
In re: BAP No. CC-22-1218-GFS SWING HOUSE REHEARSAL AND RECORDING, INC.; PHILIP JOSEPH Bk. No. 2:16-bk-24760-RK JAURIGUI, Debtors. Adv. No. 2:18-ap-01351-RK
PHILIP JOSEPH JAURIGUI, Appellant, v. MEMORANDUM* JONATHAN MOVER, Appellee.
Appeal from the United States Bankruptcy Court for the Central District of California Robert N. Kwan, Bankruptcy Judge, Presiding
Before: GAN, FARIS, and SPRAKER, Bankruptcy Judges.
INTRODUCTION
Chapter 71 debtor Philip Joseph Jaurigui (“Debtor”) was the founder,
majority shareholder, and chief executive officer of Swing House Rehearsal
* 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. 1 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. and Recording, Inc. (“Swing House”), a company which offered rehearsal
and recording services to musical artists. In 2014, Debtor solicited an
investment from Appellee Jonathan Mover to facilitate the buildout of a
new location. Mover advanced funds in exchange for a convertible note
jointly payable by Swing House and Debtor and made a second loan which
Debtor guaranteed.
In 2016, Debtor and Swing House filed chapter 11 petitions. The
bankruptcy court subsequently converted Debtor’s case to chapter 7 and, in
the Swing House case, confirmed a chapter 11 plan proposed by Mover
that provided for his purchase of the business. Mover then filed an
adversary complaint to hold his debt against Debtor nondischargeable
based on false representations and omissions related to Swing House’s
business and its ability to operate as a recording studio in the new location.
After trial, the court entered a nondischargeable judgment pursuant to
§ 523(a)(2)(A), (a)(2)(B), and (a)(6).
On appeal, Debtor argues that Mover should be judicially estopped
from arguing that Swing House was not legally permitted to operate a
recording studio in the new location because Mover made certain
statements in his approved disclosure statement which Debtor argues were
contrary to Mover’s allegations in the complaint. Debtor claims that the
allegations constitute fraud on the court by Mover and his attorney. He
also questions the sufficiency of evidence and argues the court erred by
finding the debt nondischargeable.
2 Debtor did not assert an estoppel defense or claim of fraud on the
court in the bankruptcy court, and he cannot do so on appeal. Moreover,
Debtor does not demonstrate that either doctrine is applicable here. The
bankruptcy court’s decision is supported by the evidence in the record and
is not clearly erroneous. Accordingly, we AFFIRM.
FACTS 2
A. Prepetition events
Debtor incorporated Swing House in 2000 and, until 2018, he was its
majority shareholder, chief executive officer, and president. In 2001, Debtor
relocated Swing House from a small facility in Hollywood, California to a
larger facility located on Willoughby Avenue in Los Angeles, California
(“Willoughby”). According to Debtor, Willoughby needed to be completely
remodeled for use as a music rehearsal and recording facility. Debtor
stated that Swing House consulted with the contractor, architect, and city
inspectors and was informed that a “sound score production” permit
would allow for the broadest use of the location, including holding
rehearsal and recording sessions for film, television, and the internet.
2 We exercise our discretion to take judicial notice of documents electronically filed in the jointly administered bankruptcy cases and adversary proceeding. See Atwood v. Chase Manhattan Mortg. Co. (In re Atwood), 293 B.R. 227, 233 n.9 (9th Cir. BAP 2003). Debtor moved to augment the record to include the disclosure statement filed in the Swing House case. Although the disclosure statement was not part of the record in the adversary proceeding, the bankruptcy court referred to the confirmed plan in the Swing House case and was aware of those proceedings. We grant the motion. 3 Swing House obtained the sound score production permit and operated as
a rehearsal space and a recording studio at Willoughby until 2013.
In 2013, Debtor decided to find a new location for Swing House
because of an expected increase in rent upon expiration of the Willoughby
lease and a desire to expand the business. He located a warehouse on
Casitas Avenue, Los Angeles, California (“Casitas”) which required
extensive construction to convert it to a rehearsal and recording facility.
In February 2014, Swing House signed a lease for Casitas. At the
time, Debtor knew that Casitas was not zoned for use as a recording studio
but was zoned MR-1 for use as a warehouse. On February 17, 2014, Swing
House executed a construction contract for work to be performed at
Casitas. The contract provided for a construction budget of $880,000 and a
construction management fee not to exceed $200,000.
Debtor then approached Mover and D’Addario & Co., Inc.
(“D’Addario”), a privately held company that manufactures musical
instrument strings and accessories, about investing in Swing House. On
February 19, 2014, Debtor transmitted to Mover and D’Addario a
Confidential Private Offering Memorandum (“Offer Memo”), which
solicited a total investment of $900,000 through sales of common stock or
convertible notes.
The Offer Memo described Swing House’s business operations,
financial information, and plan to relocate to Casitas. It stated that Swing
House operated as a rehearsal space and recording studio and generated
4 additional income from management of artists, event production, and
equipment rentals. Regarding the proposed move to Casitas, the Offer
Memo stated that buildout of the facility would require $736,500, which
would be supplemented by an allowance for tenant improvements of
$218,000.
In July 2014, Mover advanced $150,000 in exchange for a convertible
note jointly payable by Swing House and Debtor (the “Mover Note”).3
Prior to executing the Mover Note, Debtor signed a first amendment to the
construction agreement which increased the total construction budget to
$1,425,000. Debtor did not inform Mover of the increased budget.
Swing House did not timely vacate Willoughby at the expiration of
its lease and defaulted in August 2014. The landlord of Willoughby, 7175
WB, LLC (“7175”), ultimately filed suit in state court seeking damages of
over $900,000. Debtor did not notify Mover that Swing House had
defaulted on the Willoughby lease.
In September 2014, Debtor informed Mover that Swing House
required an additional $50,000 to complete the recording studio at Casitas.
Mover loaned Swing House $50,000, which Debtor personally guaranteed.
Swing House did not build the recording studio at Casitas.
At the end of September 2014, Swing House and Debtor executed a
second amendment to the construction agreement, providing for additional
3 D’Addario also made an investment of $500,000 in exchange for a convertible note. The Mover Note was subordinated to the D’Addario note. 5 compensation to the construction manager of $5,500 for each additional
week he remained on the project.
Swing House obtained an additional loan of $250,000 from Jim
D’Addario, the president of D’Addario, and received the Certificate of
Occupancy in April 2015 after spending over $1,800,000. The Certificate of
Occupancy was issued for “sound score production,” and the application
for the building permit and certificate of occupancy stated: “Bldg. shall not
be used for recording studio which is not permitted in MR1 zone.”
In September 2015, Debtor, Mover, Jim D’Addario, and others met at
D’Addario’s headquarters in New York to discuss issues with Swing
House, including construction delays and contractors’ claims of non-
payment. D’Addario agreed to provide further loans, and at the insistence
of Jim D’Addario, Mover relocated to Los Angeles to co-manage Swing
House, and Genoveva Winsen was made Director of Operations of Swing
House.
Because of financial difficulties and the litigation with 7175, Swing
House and Debtor filed bankruptcy petitions in November 2016.
B. The bankruptcy cases and adversary proceeding
The court converted Debtor’s chapter 11 case to chapter 7 in July
2018. In the Swing House case, the bankruptcy court ultimately confirmed
Mover’s Fourth Amended Plan of Reorganization on November 2, 2018.
Pursuant to the confirmed plan, Mover purchased Swing House and
became its sole owner.
6 Mover then filed an adversary complaint seeking to render Debtor’s
debt nondischargeable under § 523(a)(2)(A), (a)(2)(B), and (a)(6). 4 He
alleged that Debtor fraudulently induced him to make two loans to Swing
House by misrepresenting that Casitas could legally house and operate a
recording studio. Mover additionally alleged that Debtor made false
written representations about Swing House’s financial condition in the
Offer Memo and attached financial reports, and he claimed that Debtor’s
failure to disclose financial information, including Swing House’s legal
issues with 7175 and its loss of business, constituted willful and malicious
injury under § 523(a)(6).
Debtor denied the allegations and asserted several affirmative
defenses, including estoppel. However, in the joint pretrial stipulation,
Debtor expressly withdrew his estoppel defense.
C. The trial and the court’s decision
The bankruptcy court conducted a five-day trial, concluding in April
2022. Mover and Debtor each submitted trial declarations and testified
about the loans and Swing House’s business. Debtor testified that he, and
not Swing House, managed the musical artists that were listed in the
financial documents attached to the Offer Memo. Debtor acknowledged
that he was responsible for the contents of the Offer Memo, and he knew
that Mover would rely on it.
4 Mover also sought to deny Debtor’s discharge under § 727(a)(2) and (a)(4). The court denied those claims and they are not part of this appeal. 7 Mover testified that he relied on the Offer Memo and oral statements
made by Debtor, and he would not have made the loans had he known that
Swing House could not legally operate a recording studio at Casitas, had
undisclosed increases in its construction budget, and had lost its largest
event production client, the Sunset Strip Music Festival.
As the custodian of records for Swing House, Winsen testified about
its financial reports, business operations, and its agreements with musical
artists. She also testified about Swing House’s construction agreements,
building permits, and certificates of occupancy and stated that, based on
her understanding of zoning regulations and experience in building and
operating recording studios, Swing House was not permitted to operate a
recording studio at Casitas.
The bankruptcy court entered written findings of fact and
conclusions of law and held the debt to Mover nondischargeable. The court
ruled that Debtor made materially false written statements in the Offer
Memo pertaining to Swing House’s financial condition with intent to
deceive Mover, including that: (1) Swing House could legally operate a
recording studio; (2) Swing House was engaged in management of musical
artists; (3) the construction budget for Casitas was $954,500; and (4) Swing
House’s event production income was expected to increase. The court held
that Debtor knew that Swing House could not legally operate a recording
studio at Casitas and offered no evidence to support his contention that use
8 as a sound score production facility was equivalent to use as a recording
studio.
The bankruptcy court further held that Debtor made false oral
representations about Swing House’s ability to legally operate a recording
studio and never disclosed that neither Willoughby nor Casitas was zoned
for use as a recording studio, or that Swing House had defaulted on the
Willoughby lease. The court determined that Debtor’s intentional fraud
was sufficient to constitute willful and malicious injury under § 523(a)(6),
and it entered a nondischargeable judgment in favor of Mover for
$239,288.50. Debtor timely appealed.
JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and
157(b)(2)(I). We have jurisdiction under 28 U.S.C. § 158.
ISSUE
Did the bankruptcy court err by holding the debt nondischargeable?
STANDARDS OF REVIEW
The ultimate question of whether a claim is nondischargeable is a
mixed question of law and fact, which we review de novo. Carillo v. Su (In
re Su), 290 F.3d 1140, 1142 (9th Cir. 2002). Under de novo review, “we
consider a matter anew, as if no decision had been made previously.”
Francis v. Wallace (In re Francis), 505 B.R. 914, 917 (9th Cir. 2014).
When the appellant challenges the bankruptcy court’s factual
findings supporting its nondischargeability decision, we review those
9 findings for clear error. In re Su, 290 F.3d at 1142. Factual findings are
clearly erroneous if they are 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
Debtor’s central argument on appeal is that the zoning for Casitas
allows use for both a recording studio and a sound score production
facility and, thus, Swing House was legally permitted to operate as a
recording studio at Casitas. Debtor contends that Mover should have been
judicially estopped from claiming otherwise because his approved
disclosure statement described Swing House as operating a recording
studio, and he asserts that Mover and his attorney committed fraud on the
court. He argues the court erred by relying on Winsen’s testimony about
the zoning at Casitas, and he argues that the bankruptcy court’s finding of
nondischargeability is not supported by sufficient evidence.
A. Legal standards governing nondischargeability
Section 523(a)(2)(A) excepts from discharge any debt “obtained by
false pretenses, a false representation, or actual fraud, other than a
statement respecting the debtor’s or an insider’s financial condition.” To
prevail on a nondischargeability claim under § 523(a)(2)(A), a creditor must
prove, by a preponderance of the evidence: (1) misrepresentation,
10 fraudulent omission, or deceptive conduct by the debtor; (2) knowledge of
the falsity or deceptiveness of his statement or conduct; (3) an intent to
deceive; (4) justifiable reliance on the debtor’s statement or conduct; and
(5) damage proximately caused by its reliance on the statement or conduct.
Turtle Rock Meadows Homeowners Ass’n v. Slyman (In re Slyman), 234 F.3d
1081, 1085 (9th Cir. 1996).
A fraudulent omission of a material fact may constitute a false
representation if the debtor is under a duty to disclose. Apte v. Japra, M.D.,
F.A.C.C., Inc. (In re Apte), 96 F.3d 1319, 1323-24 (9th Cir. 1996); Citibank
(South Dakota), N.A. v. Eashai (In re Eashai), 87 F.3d 1082, 1089 (9th Cir.
1996). In such cases, reliance and causation are established and need not be
separately proven. In re Apte, 96 F.3d at 1323.
Section 523(a)(2)(B) excepts from discharge debts arising from the
“use of a statement in writing—(i) that is materially false; (ii) respecting the
debtor’s or an insider’s financial condition; (iii) on which the creditor to
whom the debtor is liable . . . reasonably relied; and (iv) that the debtor
caused to be made or published with intent to deceive.”
B. Debtor did not raise the issues of judicial estoppel or fraud on the court in the bankruptcy court and cannot do so on appeal.
Debtor’s argument that we should set aside the judgment based on
judicial estoppel or fraud on the court is meritless. Debtor did not raise
these arguments in the bankruptcy court, and consequently waived them.5
5 Debtor argues that he did not waive the judicial estoppel defense by failing to 11 See O’Rourke v. Seaboard Sur. Co. (In re E.R. Fegert, Inc.), 887 F.2d 955, 957
(9th Cir. 1989) (stating that appellate courts in the Ninth Circuit will not
consider arguments that are not properly raised in the trial court).
Debtor expressly withdrew his affirmative defense of estoppel, and
he failed to raise a claim of fraud on the court prior to entry of the
judgment despite being fully aware of the disclosure statement and
Mover’s complaint for nondischargeability. See United States v. Sierra Pac.
Indus., Inc., 862 F.3d 1157, 1168 (9th Cir. 2017) (“[R]elief for fraud on the
court is available only where the fraud was not known at the time of
settlement or entry of judgment.” (citations omitted)). Moreover, the
statement made in Mover’s disclosure statement does not form the basis for
either judicial estoppel or fraud on the court.
“Judicial estoppel is an equitable doctrine that ‘precludes a party
from gaining an advantage by taking one position, then seeking a second
advantage by taking an incompatible position.’” U.S. Dep’t of Educ. v.
Carrion (In re Carrion), 601 B.R. 523, 528 (9th Cir. BAP 2019) (quoting Wilcox
raise it in the bankruptcy court and cites Beall v. United States, 467 F.3d 864, 870 (5th Cir. 2006), for the proposition. In Beall, the Fifth Circuit held that the appellants waived an issue by raising it for the first time on appeal. It noted however that the appellate court could raise judicial estoppel sua sponte in “especially egregious case[s] wherein a party has successfully asserted a directly contrary position.” Id. (quoting United States ex rel. Am. Bank v. C.I.T. Constr. Inc. of Tex., 944 F.2d 253, 258 (5th Cir. 1991)). This is not the type of egregious case that might persuade us to overlook Debtor’s waiver. As discussed below, the disclosure statement is not contrary to the allegations in Mover’s complaint, and the bankruptcy court did not accept the factual positions taken in the disclosure statement. 12 v. Parker (In re Parker), 471 B.R. 570, 576 (9th Cir. BAP 2012), aff’d, 533 F.
App’x 740 (9th Cir. 2013)). It requires the court to consider:
(1) whether a party’s later position is clearly inconsistent with its original position; (2) whether the party has successfully persuaded the court of the earlier position; and (3) whether allowing the inconsistent position would allow the party to derive an unfair advantage or impose an unfair detriment on the opposing party.
In re Parker, 471 B.R. at 576 (cleaned up).
Similarly, fraud on the court requires an “intentional, material
misrepresentation” that “involve[s] an unconscionable plan or scheme
which is designed to improperly influence the court in its decision.” Sierra
Pac. Indus., Inc., 862 F.3d at 1168 (citations omitted). The alleged
misrepresentations must go “to the central issue in the case,” “affect the
outcome of the case,” and “significantly change the picture already drawn
by previously available evidence.” Id. (quoting United States v. Est. of
Stonehill, 660 F.3d 415, 435-52 (9th Cir. 2011)).
Debtor relies on the statement in the disclosure statement describing
Swing House’s business as follows: “Swing House provides comprehensive
rehearsal sound stage, rental service, and recording studio services for the
music industry at its 21,000 square foot state-of-the-art compound in
Atwater Village.”
The statement plainly does not indicate that Swing House was legally
permitted to operate a recording studio at Casitas or that the plan
13 proponents believed it could do so. Thus, the statement is not clearly
inconsistent with Mover’s allegations in the adversary complaint.
Additionally, the bankruptcy court approved the disclosure statement,
pursuant to § 1125, as containing “adequate information” sufficient to
enable a hypothetical investor to make an informed judgment about the
plan. We find no basis to conclude that the court relied upon, or was
persuaded by, any factual statement made in the disclosure statement.
C. The bankruptcy court did not err by holding the debt nondischargeable.
1. The court properly determined that the evidence supported nondischargeability under § 523(a)(2)(A) and (a)(2)(B).
Debtor contends that the evidence does not support
nondischargeability under § 523(a)(2)(A) because that section expressly
excludes statements respecting a debtor’s financial condition, and it does
not support nondischargeability under § 523(a)(2)(B) because fraudulent
omissions do not qualify as false written statements.
Debtor is correct that debts obtained by materially false but
unwritten statements about a debtor’s or insider’s financial condition are
typically dischargeable. Oregon v. Mcharo (In re Mcharo), 611 B.R. 657, 660
(9th Cir. BAP 2020). But fraudulent omissions are not “statements.” Id. at
661-62. Consequently, a debtor under a duty to disclose material facts may
commit a fraudulent omission under § 523(a)(2)(A) even if those material
facts are pertinent to the debtor’s or an insider’s financial condition. See id.
14 at 662. Debtor’s materially false written statements respecting Swing
House’s financial condition are actionable under § 523(a)(2)(B) and his
fraudulent omissions are actionable under § 523(a)(2)(A).
The bankruptcy court determined that Debtor made materially false
written statements in the Offer Memo and attached financial statements
indicating that Swing House: (1) could legally operate a recording studio;
(2) earned income from managing artists; (3) had budgeted construction
costs of $954,000; and (4) expected an increase in revenue from event
production despite losing its largest client. The court also determined that
Debtor made fraudulent representations or omissions under § 523(a)(2)(A)
by: (1) not disclosing that the zoning of Casitas did not permit use as a
recording studio despite implying that it could legally do so; and (2) telling
Mover that Swing House needed an additional $50,000 to complete the
recording studio when he knew that Swing House was not planning to
build such a studio. The bankruptcy court did not err in its application of
§ 523(a)(2)(A) and (a)(2)(B).
2. The bankruptcy court’s factual findings are not clearly erroneous.
Debtor argues that the bankruptcy court erred by relying on
testimony from lay witnesses Winsen and Mover in determining that
Swing House was not legally permitted to operate a recording studio. But
Debtor did not offer any evidence, expert or otherwise, to support his belief
that Swing House could operate a recording studio at Casitas. More
15 importantly, Debtor admitted in the joint pretrial stipulation that he knew
Casitas was not zoned for use as a recording studio when he signed the
lease.
Documentary evidence adduced at trial also supports Winsen’s
testimony and the bankruptcy court’s finding. Debtor maintains that Swing
House could operate a recording studio at Casitas because the Lists of Uses
Permitted in Various Zones as amended by the Zoning Administrator for
the City of Los Angeles (“Lists of Uses”) permits a recording studio in zone
C2, and all zone C2 uses are permitted in zone M1, except hospitals and
sanitariums. Contrary to Debtor’s contention, the application for the
building permit and the Certificate of Occupancy for Casitas clearly state
that it is zoned MR-1, not M1, and the permitted use is “sound score
production.” The Lists of Uses does not include recording studio as a
permitted use in zone MR-1, and it does not provide for the same broad
inclusion of C2 uses in MR-1 as it does in zone M1.6
Debtor disputes the court’s finding of reliance and damage because
Mover joined Swing House in 2015 but did not mention fraud until 2018
when he purchased the business. Debtor suggests that Mover
The Lists of Uses states that MR-1 includes zone C2 uses “which are devoted 6
primarily to the manufacturing of products, or assembling, compounding or treatment of materials with limited retail business only if incidental too the main industrial or manufacturing use . . . , or uses which are conducted only as an accessory use to the main use and provide services for those persons employed on the premises.” There is no indication that Swing House intended to operate a recording studio as an accessory service to its employees. 16 manufactured his claims by finding problems in Swing House’s records,
and then arguing he was deceived by those problems years earlier.
The bankruptcy court’s findings of reliance and damage are
supported by Mover’s testimony. Though Debtor believes that Mover was
not honest, we “give singular deference to a trial court’s judgments about
the credibility of witnesses.” Cooper v. Harris, 137 S. Ct. 1455, 1474 (2017).
D. Debtor’s other arguments
Debtor offers a litany of other arguments, none of which have merit.
He contends that the bankruptcy court should have reduced the amount of
the nondischargeable judgment by amounts paid on behalf of Mover’s
claim through Swing House’s confirmed chapter 11 plan. We agree that
Mover is not entitled to collect more than the amount of the debt, but that
does not require us to reverse the bankruptcy court’s judgment. The
bankruptcy court properly entered a nondischargeable judgment based on
Debtor’s liability to Mover, and Debtor can raise collection defenses at the
appropriate time in the bankruptcy court.
Debtor cites caselaw referring to the “bespeaks caution doctrine” but
does not specifically and distinctly argue or explain how this constitutes
reversible error. Similarly, he cites three findings of fact made by the
bankruptcy court which he believes were based on a misallocation of the
burden of proof, and he cites five facts from the record, which the court did
not rely upon, which he believes are relevant to his liability. But again,
Debtor fails to distinctly argue or explain how this constitutes reversible
17 error. 7 Nor do we perceive reversible error. Accordingly, we decline to
address these arguments further. See Christian Legal Soc’y v. Wu, 626 F.3d
483, 487-88 (9th Cir. 2010).
Finally, Debtor asserts that Mover failed to allege or prove a prima
facie case under § 523(a)(4) and (a)(6), largely because there was no
evidence of a fiduciary relationship arising from an express or technical
trust. Mover did not allege, nor did the court determine,
nondischargeability under § 523(a)(4). And liability under § 523(a)(6) does
not require a fiduciary relationship.
CONCLUSION
Based on the foregoing, we AFFIRM the bankruptcy court’s
judgment.
7 The bankruptcy court issued 236 findings of fact, and as noted above, based its nondischargeability judgment on numerous written statements and omissions. 18