Southern California Reinvestment Fund CDFI v. Londagin et al

OCR transcription for search; preserved printed pages are authoritative

Case 6:06-ap-01271-DN Doc40 Filed 03/27/08 Entered 03/28/08 17:20:33 Desc
Main Document Page 1 of 22

Rf

sf

1
2
3
4 ENTERED
5
; MAR 28 2008
7 mc
BY Deputy Gent
8 UNITED STATES BANKRUPTCY COURT
9 CENTRAL DISTRICT OF CALIFORNIA
10 In re ) Case No. RS 06-12181 DN
) Adv. No. RS 06-01271 DN
11 |} JAMES J. LONDAGIN )
DEBRA A. LONDAGIN )
12 ) Chapter 7
Debtors. )
13 ) MEMORANDUM OF DECISION
)
14 | SOUTHERN CALIFORNIA )
REINVESTMENT FUND, CDFI )
15 )
)
16 Plaintiff. )
Vv. )
17 )
JAMES J. LONDAGIN )
18 || DEBRA A. LONDAGIN a
)
19 oe)
Defendants. )
20 )
21 Plaintiff, Southern California Reinvestment Fund,
22 || CDFI (“CDFI”), filed a complaint against the debtors, James J.
23 || Londagin and Debra A. Londagin, to determine the dischargeability
24 of a debt pursuant to 11 U.S.C. § 523(a) (2) (A), § 523 (a) (2) (B)
25 |} and § 523(a)(6).1 Trial was held on March 5, 2008. The Court
26} has considered the documentary evidence, testimony of witnesses,
27" including an assessment of the credibility of the witnesses,
28
1 Unless otherwise indicated all Code, chapter and section
references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1330.
aa ea)
GPO

mB W NY

Oo Oo +1 DW ON

10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28

Case 6:06-ap-01271-DN Doc40 Filed 03/27/08 Entered 03/28/08 17:20:33 Desc
Main Document Page 2 of 22

t

arguments and briefing by counsel and makes the following
findings and conclusions pursuant to Fed. R. Civ. P. 52 as
incorporated by Fed. R. Bank.P. Rule 7052:

I. Findings of Fact

On March 30, 2004, Mr. and Mrs. Londagin dba Empire Gardens
executed a lease with Foothill Retail Center, LLC for commercial
property located on Foothill Boulevard in Upland, California for
a lease term of ten years (“Foothill Property”). Max Taylor and
Co. III, LLC is the successor in interest to Foothill Retail
Center, LLC (collectively, “ the Landlord”).

Mrs. Londagin was employed full-time by the Ontario/
Montclair School District and was not involved in the operation
of Empire Gardens. She executed certain loan documents, the
security agreement and the deed of trust. The business license
for Empire Gardens was issued in the names of Mr. and Mrs.
Londagin. Mrs. Londagin testified that she executed certain
documents at the request of her husband without knowledge of
their content. CDFI presented no evidence to demonstrate that
Mrs. Londagin was involved in the operation of Empire Gardens,
or more importantly, that she had the intent to publish false
information regarding financial condition. The fact that the
business license and insurance for Empire Gardens was issued in
the name of Mr. and Mrs. Londagin is insufficient to establish
an agency or partnership relationship independent of the marital
relationship. It is clear that Mrs. Londagin had no management
or control over Empire Gardens. Mr. Londagin began operating
Empire Gardens out of the Foothill Property location and

continued to operate the business from that location until March

2

0 CO Hs DH OO S&P W DY

mM NM NO NY NH NY YO NY YB HBP HBP HB HB Be Be Ee PE Bb
oat Dn WO B® WY FP OO wo DO I WD HT Bw W DY FF CO

Case 6:06-ap-01271-DN Doc 40 Filed 03/27/08 Entered 03/28/08 17:20:33 Desc
Main Document Page 3 of 22

of 2005 when he could no longer afford the rent. Mr. Londagin
testified that he spoke with the property manager about vacating
the Foothill Property, gave thirty days notice, was told by the
property manager that he could vacate the Foothill Property and
the property manager would talk to the Landlord on his behalf.
Mr. Londagin testified that he believed he had no liability
pursuant to the lease notwithstanding the abandonment of the
Foothill Property. I find that this testimony is not credible.

Subsequently, on April 1, 2005, Mr. Londagin dba Empire
Gardens entered into a new lease for commercial property located
on Euclid Avenue in Upland, California (“Euclid Property”) for a
term of five years and began operating Empire Gardens from the
BFuclid Property.

In July of 2005, Mr. Londagin sought to obtain a loan and
began discussions with CDFI. Stacey Sanchez, executive
director of CDFI, had numerous conversations with Mr. Londagin
regarding the loan. Mr. Londagin prepared and submitted to CDFI
a personal financial statement, a loan application, profit and
loss statements for Empire Gardens, and a balance sheet for
Empire Gardens, among other things. Mr. Londagin represented
orally and in writing that he intended to use approximately
$14,000 of the loan proceeds to purchase a large floral
refrigeration unit (“Equipment”). He never purchased the
Equipment because business was declining and there was no longer
a need to expand.

Based upon the oral and written representations of Mr.
Londagin, including the representations in the personal

financial statement, loan application, balance sheet and profit

3

9 CO NS HD OO FP WO DY +

MO MO MO MBM NY YB NY NY YB BH BBE BB BE Pp Ee Ee
Oo ~7 HD Oo BF W NH FP DOD © @DO© I BD HW B® W NY FF OC

Case 6:06-ap-01271-DN Doc40 _ Filed 03/27/08 Entered 03/28/08 17:20:33 Desc
Main Document Page 4 of 22

1

and loss statements for Empire Gardens, Ms. Sanchez, as loan
officer, and on behalf of CDFI, granted Mr. and Mrs. Londagin a
loan in the amount. of $60,000 (“Loan”). The promissory note
(“Note”) was executed by Mr. and Mrs. Londagin on December 6,
2005 and the parties admit that the terms of the Note were
breached on May 1, 2006. Mrs. Londagin executed the Note at the
direction of Mr. Londagin because he asked her to do so. She had
no involvement with the preparation or submission of the personal
financial statement, loan application or other related documents
and made no representations with regard to the information
contained therein.

Mr. and Mrs. Londagin executed two commercial security
agreements in connection with the Note granting CDFI a first
priority security interest in all personal property of Empire
Gardens as well as two vehicles. CDFI perfected its security in
the personal property by filing a UCC-1 financing statement and
placed its name on title as lienholder with respect to the
vehicles. CDFI also obtained a third deed of trust on Mr. and
Mrs. Londagin’s residence located in Ontario, California.

On July 19, 2005, a demand letter was written to Mr. and
Mrs. Londagin by counsel to the Landlord indicating that they
were in breach of the lease for the Foothill Property and
currently indebted in the sum of approximately $54,000. The
letter indicated that, if arrangements for payment were not made,
litigation would be initiated. On 8/25/05, a second letter was
written to Mr. and Mrs. Londagin by counsel to the Landlord
requesting a response to the prior letter and advising that if no

response was received within ten days, they would take legal

4

oOo CO AST DH OO FB W NYO BB

NO MO NM NY NY YB YB NY NY BB BM BH BH pe pe Be
Oo TWD OO B® W HY &F O WO DO IY BD HT WB W DY FE CO

Case 6:06-ap-01271-DN Doc 40 Filed 03/27/08 Entered 03/28/08 17:20:33 Desc
Main Document Page 5 of 22

action without further notice.

Mr. Londagin denied knowledge of the letters. I find that
Mr. Londagin’s testimony on this issue is not credible. It is
not plausible that: (1) Mr. Londagin believed he could walk away
from a commercial lease for a term of ten years with no liability
thereon, and (2) that demand letters to Mr. and Mrs. Londagin by
counsel to the Landlord were written but never sent and/or
received. In May of 2006, the Landlord filed a lawsuit against
Mr. and Mrs. Londagin dba Empire Gardens praying for damages for
breach of the lease in the amount of approximately $128,250.

Mr. and Mrs. Londagin were served with process in June of 2006;
Mr. Londagin testified that he was unaware of any liability
regarding the Foothill Property lease until that time. I reject
this testimony and find that Mr. Londagin knew of his obligation
at the time he was preparing documents in anticipation of
obtaining the Loan from CDFI.

The evidence reflects that Mr. Londagin walked away from
the Foothill Property lease, which was for a term of ten years,
after little more than one year. Subsequently, he executed the
Euclid Property lease, which was for a term of five years, and
walked away from the Euclid Property lease after approximately
one year. In fact, he vacated the Euclid Property without
advising Ms. Sanchez, who discovered the abandonment when she
visited the Euclid Property once the payments on the Loan were in
default. Mr. Londagin testified that he believed that he had
oral agreements with the respective landlords so that he could
vacate the premises without any liability; in both cases he was

wrong. The evidence further indicates that Mr. Londagin is a

a HD OO & WW NYO +

(oe)

10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28

Case 6:06-ap-01271-DN Doc40 _ Filed 03/27/08 Entered 03/28/08 17:20:33 Desc
Main Document Page 6 of 22

sophisticated businessman who executed a lease of approximately
thirty pages for the Foothill Property, which contained specific
provisions in the event of default. Mr. Londagin knew that he
had an outstanding obligation to the Landlord at the time he
sought to obtain the Loan from CDFI.

Mr. Londagin prepared: (1) the personal financial statement,
dated 7/22/05, for purposes of obtaining the Loan, and (2) the
balance sheet, dated August 1, 2005, for Empire Gardens for
purposes of obtaining the Loan. He failed to list any liability
to the Landlord on either document notwithstanding his knowledge
that he was indebted to the Landlord in the sum of approximately
$54,000 at that time as a result of the default and damages would
continue to accrue. The personal financial statement provided a
section entitled “Other Liabilities,” which was left blank by
Mr. Londagin.

CDFI relied upon the personal financial statements, balance
sheet and other related documents. CDFI would never have granted
the Loan to Mr. and Mrs. Londagin had the breach of the Foothill
Property lease and obligation thereon been disclosed. Mr.
Londagin had numerous conversations with Ms. Sanchez during the
period from July of 2005 through December 2005 when the Note was
executed. During this process, he failed to disclose any
obligation or liability on the Foothill Property lease.

Mr. and Mrs. Londagin agreed to turn over the two vehicles
to CDFI or repair and sell the vehicles and informed CDFI’s
counsel of their intent at the 341(a) hearing. Mr. Londagin
testified that the vehicles were always available and that he

kept them in storage. He further testified that one vehicle was

6

Oo O SS HD OO & WW NYO Ff

mM NM HO MB NY NY HB NY YDB BF HBP BH Bw Be EE Be PE LE
eo WY FO Oo B® WY NY FP OO oO ODO I DB OY B® W HY FP OC

Case 6:06-ap-01271-DN Doc 40 Filed 03/27/08 Entered 03/28/08 17:20:33 Desc
Main Document Page 7 of 22

?

repaired, and he attempted to sell it by placing a for sale sign
in the window of the vehicle. CDFI’s counsel sent two demand
letters to Mr. and Mrs. Londagin’s bankruptcy counsel demanding
turnover of the vehicles; Mr. Londagin testified that he was not
aware of the demand letters sent to his counsel, which I find
unbelievable. Approximately one year later, Mr. Londagin turned
over the vehicles. All personal property collateral was sold at
auction in December of 2007. The proceeds of the auction totaled
$2,800.75. Following deductions for expenses and commissions,
CDFI received a check in the amount of $100.99.

II. Conclusions of Law

A plaintiff bears the burden of establishing an exception

to discharge by a preponderance of the evidence. Grogan v.

Garner, 498 U.S. 279, 287 (1991).

(A) Section 523(a) (2) (A) and (a) (2) (B)

Section 523(a) (2) (A) and (a) (2) (B) state, in relevant

part:
A discharge under section 727...of this title
does not discharge an individual debtor from
any debt-
(2) for money, property, services, or an
extension, renewal, or refinancing of credit
to the extent obtained by-
(A) false pretenses, a false representation,
or actual fraud, other than a statement
respecting the debtor’s or an insider’s
financial condition;
(B) 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

7

me W NY HF

oO wm

11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28

Case 6:06-ap-01271-DN Doc 40 Filed 03/27/08 Entered 03/28/08 17:20:33 Desc
Main Document Page 8 of 22

the debtor is liable for such
money, property, services, or
credit reasonably relied; and

(iv) that the debtor caused to be made
or published with intent to deceive...

Section 523(a) (2) (A) refers to representations other than
those respecting the debtor’s financial condition; Section
523 (a) (2) (B) refers to written statements respecting the

debtor’s financial condition. In re Kirsh, 973 F.2d 1454, 1457

(9th Cir. 1992).
(i) Section 523(a) (2) (A)

To prevail on a § 523(a) (2) (A) claim, a plaintiff must
prove that “(1)the debtor made the representations, (2) that at
the time he knew they were false, (3) that he made them with the
intention and purpose of deceiving the creditor, (4) that the
creditor relied on such representations, and (5) the creditor
sustained the alleged loss and damage as the proximate result of

the representations having been made.” Britton v. Price, (In re

Britton), 950 F.2d 602, 604 (9th Cir. 1991).

CDFI testified that Mr. Londagin told Ms. Sanchez that he
intended to use $14,000 of the loan proceeds to purchase
Equipment. Mr. Londagin testified that he did, in fact, make the
representation to Ms. Sanchez and that he intended to purchase
the Equipment at the time the representation was made. He
further testified that subsequently business decreased and he no
longer required the Equipment.

CDFI bears the burden to establish that at the time Mr.
Londagin made the statement he knew it was false. CDFI

presented no evidence to impeach the testimony of Mr. Londagin on

m W NYO

oO Oo HF DH OH

10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28

Case 6:06-ap-01271-DN Doc 40 Filed 03/27/08 Entered 03/28/08 17:20:33 Desc
Main Document Page 9 of 22

this issue. Because I find that CDFI failed to meet its burden
on this second element, the analysis under § 523(a) (2) (A) ends
here. Accordingly, CDFI has failed to prove that the debt is
nondischargeable under § 523 (a) (2) (A).

(ii) Section 523(a) (2) (B)

To prevail under § 523(a) (2) (B), a plaintiff must prove
the elements as required under § 523({a) (2) (A) in addition to the
use of a written statement regarding the debtor’s financial

condition. Siriani v. Northwestern Natl. Ins. Co. (In re

Siriani), 967 F.2d 302, 304 (9th Cir. 1992). The reliance under

this section must be reasonable. Candland v. Ins. Co. of N. Am.

{In re Candland), 90 F.3d 1466, 1471 (9th Cir. 1996).

“‘Material falsity’ in a financial statement can be
premised ... upon the omission of information about a debtor’s

financial condition.” In re Greene, 96 B.R. 279, 283 (9th Cir.

BAP 1989). “A statement can be materially false if it includes
information which is ‘substantially inaccurate’ and is of the
type that would affect the creditor’s decision making process.
To except a debt from discharge, the creditor must not only show
that the statements are inaccurate, but also that they contain
important and substantial untruths.” Candland, 90 F.3d at 1470.

(citing In re Greene, 96 B.R. 279, 283 (9th Cir. BAP 1989)

(citations and quotations omitted).

In completing the personal financial statement, Mr. Londagin
left the space under “Other Liabilities” blank. The document was
dated July 22, 2005, several months after Mr. Londagin defaulted
on the lease and several days after the date of the July demand

letter wherein the Landlord demanded payment for the prior months

9

ND OO fF W NO HF

10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28

Case 6:06-ap-01271-DN Doc40 Filed 03/27/08 Entered 03/28/08 17:20:33 Desc
Main Document Page 10 of 22

rent following the abandonment of the premises and breach of the
Foothill Property lease. CDFI would not have extended the Loan
had this obligation been disclosed because it would impact the
ability to repay the Loan, cause CDFI to question the character
of the borrower, and it would have been concerned about a
lawsuit, potential judgments and liens. CDFI has demonstrated by
a preponderance of the evidence that Mr. Londagin knew he had an
existing liability as a result of the breach of the Foothill
Property Lease. By failing to disclose this information in the
personal financial statement, Mr. Londagin succeeded in providing
information to CDFI that was “substantially inaccurate” as well
as “important and substantial untruths.” Id. In effect,
omission of the true nature of the liabilities of Mr. and Mrs.
Londagin by Mr. Londagin were simply false, he knew the omission
was false and led CDFI to believe that the only existing
liabilities were an existing mortgage and auto loan in the amount
of $428,800 with assets listed in the amount of $852,000.
“Material misrepresentations for this statutory section
are substantial inaccuracies of the type which would generally
affect a lender’s or guarantor’s decision.” Id. at 1470. Here,
Ms. Sanchez testified that the Loan never would have been made
had the liability been disclosed. In Candland, the court
concluded that misrepresentations of financial condition of
several hundred thousand dollars were sufficient to affect a
lender’s decision. Id. In this case, the Loan amount was
$60,000 and the existing liability, as of July of 2005, as
known to Mr. Londagin was $54,000 with further damages

continuing to accrue. Absent the false statement regarding

10

B W NY

oO Oo A HD WM

10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28

Case 6:06-ap-01271-DN Doc40 _ Filed 03/27/08 Entered 03/28/08 17:20:33 Desc
Main Document Page 11 of 22

financial condition, the Loan would not have been granted.
Intent to deceive may be inferred from the “surrounding
circumstances” as direct proof is generally not available.

Tustin Thrift & Loan Assn. v. Maldonado (In re Maldonado), 228

B.R. 735, 738 (9th Cir. BAP 1999). At the time the personal
financial statement and related documents were completed, Mr.
Londagin had already abandoned the Foothill Property and executed
the lease for the Euclid Property, which he later abandoned.
During the time period in which he was preparing the personal
financial statement, a letter was written by counsel for the
Landlord advising Mr. and Mrs. Londagin of the breach of the
Foothill Property lease, the amount of indebtedness and the
intent to pursue legal remedies. The circumstantial evidence
supports a finding of intent to deceive.

Mr. Londagin seems to have a pattern of breaching leases
and then considering a discussion with some representative of
the landlord to be equivalent of an agreement that liability
is exonerated. Since Mrs. Londagin’s involvement in the
business is passive and her information about the leases is
filtered through Mr. Londagin, I do not find the requisite
intent to deceive on her part.

CDFI also bears the burden to establish that it reasonably
relied upon the misrepresentation and it proximately caused the
damages. Id. (citing Siriani, 967 F. 2d at 304).

The plain language of § 523(a)(2)(B) requires reasonable
reliance. In analyzing this element and considering whether
there is a duty to investigate, the Ninth Circuit has determined

that a lender’s reliance on a financial statement was reasonable

11

Bm W NO

Oo Oo JT DW Ww

10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28

Case 6:06-ap-01271-DN Doc40 Filed 03/27/08 Entered 03/28/08 17:20:33 Desc
Main Document Page 12 of 22

where the lender undertook efforts to verify the financial status
of the borrower notwithstanding that the investigation failed to

reveal the fraud. La Trattoria, Inc. v. Lansford (In re

Lansford), 822 F. 2d 902, 904 (9th Cir. 1987); Candland, 90 F.3d
at 1471 (the duty to investigate was easily satisfied).

Similarly, in this case, CDFI relied upon the personal
financial statement, which proved to be false. CDFI accepted Mr.
and Mrs. Londagin’s statement of value regarding their residence.
Under the circumstances, an investigation of the value of assets,
i.e., an appraisal of the residence, would not have revealed the
fraud. The fraud was the complete omission of a liability for
breach of the Foothill Property lease. An investigation of
lawsuits and judgments would not have revealed the fraud as the
lawsuit had not been filed.

Mr. and Mrs. Londagin contend that CDFI did not, in fact,
rely upon the representation contained in the financial
documents, but instead relied upon the security provided in
exchange for the Loan. The facts belie such a conclusion. CDFI
was secured by a third deed of trust on the Property, a UCC-1
financing statement on the personal property, and as lienholder
on the two vehicles. The Property was foreclosed upon by the
senior lienholder, and CDFI received a total of $100.91 from
auction of the personal property, which included the two
vehicles. Moreover, even if CDFI relied, in part, upon the
security, it does not preclude CDFI from also relying upon the
representation of liabilities to be accurate in assessing the
financial condition of prospective borrowers in deciding whether

to grant the Loan, which it clearly did.

12

Nn OO FP W DY F&F

10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28

Case 6:06-ap-01271-DN Doc40 _ Filed 03/27/08 Entered 03/28/08 17:20:33 Desc
Main Document Page 13 of 22

In Siriani, the Ninth Circuit adopted the analysis as

applied by the Eleventh Circuit in Collins v. Palm Beach Savings

and Loan (In re Collins), 946 F.2d 815, 816 (11th Cir. 1991) in

considering the element of proximate cause. In Collins, the
debtor submitted a false financial statement to the bank and the
bank provided a loan based on the false financial statement. The
loan was secured by personal property, which was over-encumbered
and not disclosed to the bank. Following the debtor’s bankruptcy
filing, the Eleventh Circuit affirmed the bankruptcy court’s
nondischargeability determination and found that “the debtor’s
fraud and not the bank’s failure to perfect was the proximate
cause of the bank’s losses.” Siriani, 967 F.3d at 306 (citing
Collins, 946 F.2d at 815-16).

In applying a similar analysis, the Ninth Circuit concluded
that the creditor must show “that the fraud proximately caused
its loss by adducing evidence that it relied on the financial
statements, that it had valuable collection remedies at the time
of renewal [of the bond], and that such remedies lost value
during the renewal period.” Id. at 306.

The Ninth Circuit has explained proximate cause in

In re Britton as follows:

Proximate cause is sometimes said to depend

on whether the conduct has been so significant

and important a cause that the defendant should

be legally responsible. But both significance

and importance turn upon conclusions in terms

of legal policy so that they depend on whether

the policy of the law will extend the responsibility
for the conduct to the consequences which have in
fact occurred.

In re Britton, 950 F.2d 602, 604 (9th Cir. 1994) quoting W. Page
Keeton et. al., Prosser and Keeton on the Law of Torts § 42 at
273 (5th ed. 1984).

13

oOo Oo HAF DH OO FP WD DY F&F

mM MB NYO NHN NB NY NY NY NY KB BP FP BH BF HP HP Be Pp Bf
ona ® oO B® WwW DY F OO w© © I WH UO B&B W NY F CO

Case 6:06-ap-01271-DN Doc40 Filed 03/27/08 Entered 03/28/08 17:20:33 Desc
Main Document Page 14 of 22

But for the omission in the financial documents, CDFI would
never have made the Loan. The default on the Loan caused the
loss to CDFI. Default is a foreseeable result where a borrower
has provided a material misrepresentation with the intent to
deceive the lender upon which the lender reasonably relied when
the borrower failed to disclose the true nature of its
liabilities and financial condition. This is particularly true
where, as here, Mr. and Mrs. Londagin had defaulted on the
Foothill Property lease prior to applying for the Loan with
CDFI and also defaulted on the Euclid Property lease.

Subsequently, the Landlord filed a lawsuit seeking more
than $100,000 in damages and prompting this bankruptcy filing.
The Euclid Property landlord filed a claim in the bankruptcy
case. The fraud allowed Mr. and Mrs. Londagin to obtain the Loan
from CDFI that otherwise would never have been approved; the
fraud caused CDFI to act and proximately caused the damage to
CDFI. There is no legal policy reason to limit the liability of
Mr. Londagin for this debt.

The plain language of the statute requires an intent to
deceive. Fraud is not imputed from one spouse to another absent

a finding of agency relationship. Tsurukawa_ v. Nikon Precision,

Inc. (In re Tsurukawa), 258 B.R. 192 (9th Cir. BAP 2001)

(“Tsurukawa I”); Tsurukawa v. Nikon Precision, Inc. (In re

Tsurukawa), 287 B.R. 515 (9th Cir. BAP 2002) (“Tsurukawa II”)
(fraud may be imputed to a spouse under partnership and agency

principles for purposes of § 523(a) (2) (A)); La Trattoria, Inc. v.

Lansford (In re Lansford), 822 F.2d 902, 904 (9th Cir. 1987)

(fraudulent intent of wife was proven where husband presented

14

Oo O O© HS DW OO & W NYO #

MN NM NY NY YO NY YB NY NY BP HP BB BF we Ee YE Ee BL
Co 4 Dn oO BF W NY FP OO © DO WwW HD HW WB W NY BE

Case 6:06-ap-01271-DN Doc40 Filed 03/27/08 Entered 03/28/08 17:20:33 Desc
Main Document Page 15 of 22

false financial statement).

Mrs. Londagin was employed by the Ontario/Montclair School
District and asserted no management or control over Empire
Gardens; no agency or partnership relationship existed. She did
not prepare the personal financial statement or related documents
and did not participate in the misrepresentation regarding the
liability. There is no evidence of fraudulent intent as to Mrs.
Londagin. Accordingly, I find that the debt is nondischargeable
pursuant to § 523(a)(2)(B) as to Mr. Londagin only. The debt
is determined to be $58,235.25, plus interest at the California
legal rate from May 6, 2006 to the date of entry of the judgment
and at the federal rate thereafter.

(iii) Section 523 (a) (6)

Section 523(a) (6) provides, in relevant part, that a
discharge under § 727 does not discharge an individual debtor
from any debt for willful and malicious injury by the debtor to
another entity or to the property of another entity. Section
523(a) (6). Conversion “constitutes a willful and malicious

injury within the meaning of § 523(a)(6).” Del Bino v.

Bailey (In re Bailey), 197 F. 3d 997, 1000 (9th Cir. BAP 1999)

(citations omitted). “One who wrongfully withholds personal
property from another who is entitled to it under a security

agreement may be liable for conversion.” Messerall v. Fulwider,

199 Cal. App. 3d. 1324, 1329, 245 Cal. Rptr. 548 (Cal. Ct. App.

1998) (citing Hartford Financial Corp. v. Burns, 96 Cal. App. 3d

591, 598, 158 Cal. Rptr. 169 (Cal. Ct. App. 1979). To establish
a claim for conversion of personal property plaintiff must prove:

“ (1) plaintiff’s ownership or right to possession of the

15

mB W NHN

oO OO 1 HD oO

10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28

Case 6:06-ap-01271-DN Doc40 _ Filed 03/27/08 Entered 03/28/08 17:20:33 Desc
Main Document Page 16 of 22

property at the time of conversion, (2) defendant’s conversion by
a wrongful act or disposition of plaintiff’s property rights, and
(3) damages.” Messerall, 199 Cal. App. at 1329.

CDFI contends that it proved a willful and malicious injury
pursuant to § 523(a)(6) when Mr. and Mrs. Londagin failed to
either turnover the personal property, including the two
vehicles, or repair and sell the vehicles and turnover the
proceeds of sale.

It is undisputed that CDFI had a lien on the personal
property and an interest therein. CDFI indicated that Mr.
Londagin promised to turnover the property or proceeds at the
341(a) hearing.*? At that time, the property was property of the
estate as defined pursuant to § 541(a). CDFI, as a secured
creditor, had certain remedies available to it within the
confines of the bankruptcy court, including filing a motion for
relief from the automatic stay, if it wished to obtain
immediate possession. Instead, CDFI, through counsel, had
conversations with Mr. and Mrs. Londagin. Mr. Londagin
testified that he never saw the letters sent to his attorney
by counsel for CDFI demanding turnover of the property and was
not aware of the letters prior to trial. He further testified
that the property was always available. He took one of the

vehicles to be repaired and attempted to sell one of the vehicles

2 The Court takes judicial notice of the docket, which
reflects that the petition was filed on August 16, 2006; 341 (a)
was held and concluded on September 28, 2006; CDFI filed a motion
for relief from automatic stay re personal property on November
17, 2006, which was granted on December 12, 2006.

16

Oo SS DW OO SF W DY +

10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28

Case 6:06-ap-01271-DN Doc40 Filed 03/27/08 Entered 03/28/08 17:20:33 Desc
Main Document Page 17 of 22

by placing a for sale sign in the window of the vehicle. CDFI
was not particularly effective in recovering its collateral, and
perhaps again suffered by relying on Mr. Londagin to be an
upstanding debtor rather than a person whose actions demonstrate
that he is disingenuous and deceptive. CDFI’s reliance on Mr.
Londagin and his counsel was misplaced.

As to the first element of conversion, the plaintiff’s
ownership or right to possession of the property at the time of
conversion: CDFI presented no evidence to prove when the alleged
conversion occurred other than that Mr. and Mrs. Londagin
promised at the 341(a) to return the vehicles and/or make
arrangements to sell the vehicles and turnover the sale proceeds.
CDFI was not entitled to immediate possession of the property at
the time of the 341(a) hearing. A motion for relief from the
automatic stay was not filed until November of 2006.

Nor has CDFI demonstrated that Mr. and Mrs. Londagin
converted the vehicles by a wrongful act or disposition of
its property. There were no terms or conditions set forth by
CDFI as to the manner of sale nor a deadline set for date of
sale. While Mr. Londagin’s efforts demonstrate a less than
enthusiastic approach to effect a sale or turnover, the actions
do not rise to the level to establish the tort of conversion
under the heightened requirements of § 523(a) (6).

Accordingly, CDFI has failed to prove that the debt is
nondischargeable pursuant to § 523 (a) (6).

Attorney’ s Fees

CDFI seeks attorney’s fees. Attorney’s fees shall be

pled as a claim in a complaint. Fed. R. Bank. P. 7008(b).

17

mn WN HB

Oo oO ~ HD wm

10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28

Case 6:06-ap-01271-DN Doc40 Filed 03/27/08 Entered 03/28/08 17:20:33 Desc
. Main Document Page 18 of 22

CDFI has included a request for attorney’s fees within the § 523
claims in lieu of a separate claim. “A pretrial order ‘has the

effect of amending the pleadings.’” First Card v. Hunt (In re

Hunt), 238 F.3d 1098, 1101 (9th Cir. 2001) (citing 999 v. CIT

Corp., 776 F.2d 866, 871 n.2 (9th Cir. 1985)).
The parties admit in the Joint Pretrial Order that Mr.
and Mrs. Londagin breached the terms of the Note by failing to
make the May 1, 2006 payment and each payment thereafter and
further admit that $58,235.25 plus interest and other charges,
including attorney’s fees are due.
The “American Rule,” as codified pursuant to Cal. Code Civ.
Pro. § 1021, provides, in relevant part, that except as provided
by statute, compensation of attorneys is left to the agreement of
the parties. Cal. Code Civ. Pro. § 1021. The Note includes an
attorney’s fee provision as follows:
Lender may hire or pay someone else to help
collect this Note if Borrower does not pay.
Borrower will pay Lender that amount. This
includes, subject to any limits under applicable
law, Lender’s attorney’s fees and Lender’s
legal expenses, whether or not there is a
lawsuit, including attorney’s fees, expenses
for bankruptcy proceedings (including efforts
to modify or vacate any automatic stay or
injunction), and appeals. Borrower also will
pay any court costs, in addition to all other
sums provided by law.
Plaintiff’s Exhibit 1.
Because it is undisputed that the terms of the Note were
breached and the agreement provides for payment of attorney’s
fees and costs, the Court need only determine that the provision

for attorney’s fees is in accord with state law and determine

whether the debt for attorney’s fees is nondischargeable. The

18

PP WO NO HF

Oo oOo HS DD WM

10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28

Case 6:06-ap-01271-DN Doc40 Filed 03/27/08 Entered 03/28/08 17:20:33 Desc
Main Document Page 19 of 22

.

language contained in the agreement is extremely broad and
permits recovery of attorney’s fees to collect on the Note,
including whether or not there is a lawsuit and including
attorney’s fees and costs in bankruptcy proceedings.
Accordingly, the provision is within the exception to the
American Rule as codified in Cal. Code Civ. Pro. § 1021 to allow
the attorney’s fees pursuant to agreement of the parties.

A prevailing creditor is entitled to attorney’s fees ina
§ 523 action when the bankruptcy court adjudicates an action on
the contract and attorney’s fees are provided pursuant to the

contract. American Express Travel Related Servs. Co. v. Hashemi

(In re Hashemi), 104 F.3d 1122, 1126 (9th Cir. 1996); Cal. Civ.

Code § 1717. AT&T Universal Card Servs. v. Pham (In re Pham),

250 B.R. 93, 99 (9th Cir. BAP 2000) questioned the limitations of
Baroff and Hashemi and noted that “...after Cohen the
determinative question in cases under § 523(a)(2) is whether

the successful plaintiff could recover attorney’s fees in a non-

bankruptcy court.” Id. (citing Santisas v. Goodin, 17 Cal. 4th

599, 608, 71 Cal. Rptr. 2d 830, 836 (1998) (depending on

the wording of the fee provision, there may be a contractual
right to recover attorney’s fees in litigating tort claims)). The
agreement grants attorney’s fees to the prevailing party for
collection actions, and whether by a contractual term in the
agreement or alternatively as a punitive measure for compensatory
amounts expended by CDFI because of Mr. Londagin’s fraud, CDFI is
entitled to its attorney’s fees. The pretrial order supersedes
the pleadings, and the parties have admitted that the terms of

the Note were breached and that certain amounts are due and

19

—& Ww NN

oO mM

10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28

Case 6:06-ap-01271-DN Doc40 Filed 03/27/08 Entered 03/28/08 17:20:33 Desc
Main Document Page 20 of 22

~~

owing, including interest and attorney’s fees.

Ninth Circuit law had long held that “where the litigated
issues involve not basic contract enforcement questions but
issues peculiar to federal bankruptcy law, attorney’s fees will
not be awarded absent bad faith or harassment by the losing

party.” Fobian v. W. Farm Credit Bank (In re Fobian), 951 F.2d

1149, 1153 (9th Cir. 1991). However, the Fobian Rule was

recently overruled by the Supreme Court in Travelers Cas. and

Sur. Co. of America v. Pacific Gas & Elec. Co., 127 S. Ct. 1199,

167 L. Ed. 2d 178 (2007). Travelers held that “the Bankruptcy
Code does not disallow contract-based claims for attorney’s fees
based solely on the fact that the fees at issue were incurred
litigating issues of bankruptcy law.” Id. The Court vacated and
remanded the matter to the Ninth Circuit offering “no opinion as
to whether other principles of bankruptcy law would provide an
independent basis for disallowing the claim for attorney’s fees.”
Id. at 1208. Travelers explains that “it remains true that an
otherwise enforceable contract allocating attorney’s fees (i.e.,
one that is enforceable under substantive, nonbankruptcy law) is
allowable in bankruptcy unless the Bankruptcy Code provides
otherwise.” Id. at 1204. In this case, the majority of fees
were incurred post-petition litigating the § 523 claims.

In its trial brief, CDFI argues that attorney’s fees should

be awarded as punitive damages citing Cohen v. De La Cruz, 523

U.S. 213, 218 (1998). In its supplemental brief, CDFI argues
that “the Bankruptcy Court has adjudicated a contract action, and
Plaintiff seeks an award of attorney’s fees and costs due under

that contract as punitive damages for fraud.”

20

Bm W DM fF

oO oO J HD

10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28

Case 6:06-ap-01271-DN Doc40 _ Filed 03/27/08 Entered 03/28/08 17:20:33 Desc
Main Document Page 21 of 22

a

In California, punitive damages are permitted pursuant
to Cal. Civ. Code § 3294 in an action for the breach of an
obligation not arising from contract where fraud, oppression or
malice is proven by clear and convincing evidence. The policy
behind an award of punitive damages is to deter the conduct and
make an example thereof. It is undisputed that the obligation
arises from breach of the agreement.

Attorney’s fees are awarded in the sum of $24,917.50 and
costs of $1,946.92.

Counsel for the plaintiff shall prepare and lodge a
judgment conforming to the foregoing Memorandum of Decision
determining the debt of $58,235.25 to be nondischargeable as to
Mr. Londagin only, plus interest at the California legal rate
from May 6, 2006 until now, with the federal rate applicable
thereafter, plus attorney’s fees and costs in the total sum of
$26,864.42. As to Mrs. Londagin, the complaint is dismissed on

the merits, with no costs or fees awarded to her.

Date: MAR 3 7 2008 DL fe

David N. Naugle
Bankruptcy Judge

21

Case 6:06-ap-01271-DN Doc 40 Filed 03/27/08 Entered 03/28/08 17:20:33 Desc

_ . Main Document Page 22 of 22
In re Chapter_7
Case No. RS 06-12181 DN
James J. and Debra A. LONDAGIN Debtor(s).
Southern California Reinvestment Fund, CDFI, Plaintiff(s),
Adv No: RS 06-1271 DN
vs.
James J. and Debra A. LONDAGIN Defendant(s).

CERTIFICATE OF MAILING

TO ALL PARTIES IN INTEREST LISTED BELOW OR ON THE ATTACHED SERVICE LIST:

I hereby certify that I mailed a copy of this notice and a true copy of the
foregoing order to the persons and entities named below or on the attached service list on
(specify date): March 27, 2008

Dated: March 27, 2008
JON D. CERETTO
Clerk of the Bankruptcy Court

wy Sha Por nthe
perky Clerk

David W. Brody, Esq.
9404 Genesee Avenue
Suite 320

La Jolla, CA 92037

Stephen R. Wade, Esq.
W. Derek May, Esq.

400 N. Mountain Avenue
Suite 214B

Upland, CA 91786

Steven Speier, Trustee
3403 Tenth St., Ste. 742
Riverside, CA 92501

U.S. Trustee
3685 Main St., Ste. 300
Riverside, CA 92501