William L Francis DDS Inc et al v. Kahrilas et al

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UNITED STATES BANKRUPTCY COURT
CENTRAL DISTRICT OF CALIFORNIA
SAN FERNANDO VALLEY DIVISION
In re:
Nicholas Stephen Kahrilas
Laura Rae Kahrilas
Debtor(s).
CHAPTER 7
Case No.: 1:11-bk-13182-MT
Adv No: 1:11-ap-01409-MT
Profit Sharing Plan by William L Francis
and Mark A & Cathy A Daniel Declaration
of Trust Etc, William L Francis DDS Inc
Plaintiff(s),
v.
Nicholas Stephen Kahrilas, Laura Rae
Kahrilas
Defendant(s).
MEMORANDUM OF DECISION RE
DEFENDANTS’ MOTION FOR SUMMARY
JUDGMENT
Date: January 17, 2014
Time: 11:00 a.m.
Courtroom: 302
On or about June 2008, William Francis, DDS (“Francis”) was approached by Defendant
Nicholas Kahrilas (“Nicholas”) at an unrelated open house in Pacific Palisades with a request to
make a loan to him and his wife Laura Kahrilas (“Laura,” referred to collectively as
“Defendants”) to complete the construction of a single-family residence at 463 Wynola St,
Pacific Palisades, CA 90272 (the “Property”). Complaint to Determine Dischargeability of Debt
FILED & ENTERED
JAN 27 2014
CLERK U.S. BANKRUPTCY COURT
Central District of California
BY DEPUTY CLERK	Williams
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(the “Complaint”), 2:15-17. Defendants requested a loan in the sum of $315,0001 (the “Loan” or
the “Loan Proceeds”), which was funded both by Francis and Mark Daniel, DDS (“Daniel,”
referred to collectively with Francis as “Plaintiffs”). The loan was memorialized by a promissory
note dated December 1, 2008, which was also secured by a deed of trust on the Property.
Complaint, 2:18-21.
Plaintiffs assert that Nicholas “indicated affirmatively” that the proceeds of the Loan
would be used to pay McCallister Construction, Inc. (“McCallister”) and all other contractors
(collectively referred to with McCallister as the “Contractors”), and that Laura knew of and
ratified Nicholas’ alleged representations. Complaint, 3:3-8. Plaintiffs allege that their decision
to make the Loan was based on the alleged representation by Nicholas that the loan proceeds
would be used to pay Contractors. Id. at 3:3-11; 3:15-16. It is Plaintiffs’ position that Defendants
did not pay the Contractors because the Defendants listed debts owed to the Contractors on
their bankruptcy schedules. Id. at 3:9-11. Instead, Plaintiffs’ contention is that Defendants used
the $315,000 for other personal expenses.2 Id. at 3:20-22.
Summary Judgment
Summary judgment should be granted “if the pleadings, depositions, answers to
interrogatories, and admissions on file, together with the affidavits, if any, show that there is no
genuine issue as to any material fact and that the moving party is entitled to a judgment as a
matter of law.” FRCP 56(c) (incorporated by FRBP 7056).
The moving party has the burden of establishing the absence of a genuine issue of
material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). If the moving party shows the
absence of a genuine issue of material fact, the nonmoving party must go beyond the pleadings
and identify facts that show a genuine issue for trial. Id. at 324. The court must view the
evidence in the light most favorable to the nonmoving party. Bell v. Cameron Meadows Land
Co., 669 F.2d 1278, 1284 (9th Cir.1982). All reasonable doubt as to the existence of a genuine
1 Plaintiffs allege in the Complaint that Defendants requested a loan of $315,000, but in the Opposition to the
Memorandum of Points and Authorities in Support of Partial Summary Judgment, Plaintiffs allege that Nicholas
initially requested a loan of $350,000, but that Francis and Daniel ultimately loaned Debtors $315,000. Opposition to
the Memorandum of Points and Authorities in Support of Partial Summary Judgment, 4:5.
2 Plaintiffs allege in the Complaint that Defendants, “used the $315,000 for other personal expenses”, but in the
Opposition to the Memorandum of Points and Authorities in Support of Partial Summary Judgment, Plaintiffs allege “a
bulk” of the $315,000 was used for Defendants’ personal expenses. Plaintiffs do not specify how much of the Loan
they believe was used for personal expenses and not for payment of Contractors. Opposition to the Memorandum of
Points and Authorities in Support of Partial Summary Judgment, 4:10-11.
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issue of fact should be resolved against the moving party. Hector v. Wiens, 533 F.2d 429, 432
(9th Cir.1976). The inference drawn from the underlying facts must be viewed in the light most
favorable to the party opposing the motion. Valadingham v. Bojorquez, 866 F.2d 1135, 1137
(9th Cir.1989). Where different ultimate inferences may be drawn, summary judgment is
inappropriate. Sankovich v. Ins. Co. of N. Am., 638 F.2d 136, 140 (9th Cir.1981).
A "material fact" is one that is relevant to an element of a claim or defense and whose
existence might affect the outcome of the suit. T.W. Elec. Serv. v. Pac. Elec. Contractors Ass’n.,
809 F.2d 626, 630 (9th Cir. 1987). The materiality of a fact is thus determined by the
substantive law governing the claim or defense. Id.
Parol evidence
Defendants argue that Plaintiffs cannot use inadmissible parol evidence to succeed on
the elements of reliance, causation and damages because such evidence contradicts the
promissory note and deed of trust. Defendants specifically refer to the alleged oral
representation of Nicholas that the loan was the Loan proceeds were to be used for
“construction purposes.” See Opposition to the Memorandum of Points and Authorities in
Support of Partial Summary Judgment, 5:28 – 6:1 (the “Opposition to the P&A”). Defendants
argue that this alleged representation cannot be used to contradict the express terms of the
promissory note, which does not contain any restrictions on the use of the Loan proceeds, and
that there was no separate “construction loan” agreement. Defendants believe that the parol
evidence rule bars Plaintiffs from using the alleged misrepresentation to prove fraud under
523(a)(2)(A).
Plaintiffs correctly point out that, in California, the parol evidence rule provides for certain
exceptions, including establishing fraud. Cal. Civ. Proc. Code § 1856(g); see also Tenzer v.
Superscope, 39 Cal.3d 18 (Cal. 1985). Here, Plaintiffs are not seeking to enforce or void the
written agreement; instead, they are seeking a judgment of nondischargeability and damages
for fraud in the inducement. Thus, the parol evidence rule does not apply in this case.
Indirect representations
Defendants also argue that because Nicholas never had any direct communication with
Daniel, Nicholas could not have made any misrepresentation to Daniel. Opposition to the P&A,
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19:10 – 21:8. Plaintiffs counter that, while Defendants are generally correct, there is an
exception to where the defendant intends or has reason to expect that his comments will be
passed on and will influence the conduct of others.
California follows § 533 of the Restatement Second of Torts in imposing liability upon the
maker of a fraudulent misrepresentation to A who intends that A repeat it to B, where B is the
actor and injured party. See Geernaert v. Mitchell, 31 Cal.App.4th 601, 605 (Cal.Ct.App.1995)
(finding that a seller who misrepresented facts about home defects to buyer could be liable to
subsequent buyer if he anticipated that the misrepresentations would be repeated). Similarly,
California recognizes the rule of § 531 that a fraudulent representation intended to defraud any
member of “the public or a particular class of persons” may give rise to liability in favor of
anyone who detrimentally relies on the representation, whether it was directly communicated or
not. See Bily v. Arthur Young & Co., 3 Cal.4th 370, 415 (1992) (dealing with auditor's liability to
third persons who act in reliance on information in the audit report); see also Rest.2d Torts,
§ 531.
Francis stated that when Nicholas approached him about the Loan, he told Nicholas that
he did not have sufficient funds to make the loan in the amount Nicholas requested, but that he
would contact a friend (Daniel) to seek his participation in the proposed loan. Declaration of
William Francis in Opposition to the P&A, 13:11-20. Nicholas, on the other hand, does not
dispute that Francis stated that he’d approach another party with his loan request, and stated
only that he doesn’t recollect any “substantive discussions” concerning the loan terms prior to
funding. Declaration of Nicholas Kahrilas, 33:5-17. Because Francis told Nicholas that to
accommodate the amount of his loan request he would need to contact a friend to help him fund
it, Nicholas had reason to expect that Francis would inform whomever was helping Francis fund
the Loan that the proceeds would be used to complete the construction on the Property.
Furthermore, Defendants’ contention that Francis and Daniel made two separate loans
with different security interests is belied by the evidence they presented. There is only one note
and one deed of trust. Declaration of Nicholas Kahrilas, Ex. U. While the section of the note
entitled “BORROWER’S PROMISE TO PAY” does delineate the different interests that Francis
and Daniel had in the note, the note names both parties as “Lender,” lists the debt as
“$315,000,” and provides for only one monthly payment to be made on the Loan. Id. The note
was secured by one deed of trust that empowered the party that held more than 50% of the
beneficial interest in the note to take action on behalf of all of the beneficiaries. Id. The terms of
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the note and the deed of trust disprove Defendants’ assertion that there are two separate loans.
The fact that Nicholas never had any direct communication with Daniel is not a bar to liability.
Nondischargeability under § 523(a)(2)(A)
Section 523(a)(2)(A) excepts from discharge any debt “to the extent obtained by false
pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s
or an insider’s financial condition.” 11 U.S.C. § 523(a)(2)(A). The Ninth Circuit has held that a
creditor’s claim of nondischargeability based on § 523(a)(2)(A) must satisfy five elements: (1)
the debtor made false statement or deceptive conduct; (2) the debtor knew the representation to
be false; (3) the debtor made the representation with the intent to deceive the creditor; (4) the
creditor justifiably relied on the representation; and (5) the creditor sustained damage resulting
from its reliance on the debtor’s representation. In re Slyman, 234 F.3d 1081, 1085 (9th Cir.
2000). The provisions of the § 523(a) exceptions to discharge should be construed narrowly.
See, e.g., Cal. Franchise Tax Bd. v. Jackson (In re Jackson), 184 F.3d 1046, 1051 (9th
Cir.1999); Bowen v. Francks (In re Bowen), 102 B.R. 752, 756 (B.A.P. 9th Cir. 2001).
False statement or deceptive conduct
In the Complaint, Plaintiffs allege that Nicholas represented to Francis that he needed
the loan “to pay McCallister Construction, Inc. and all other contractors.” Complaint, 3:4-5.
Plaintiffs also allege that Nicholas requested the loan to “complete the project (construction of
the residence [on the Property]).” Declaration of William Francis in Support of Opposition to the
P&A, 13:7-10. Plaintiffs contend that Nicholas stated to them that the Loan proceeds would be
used to pay Contractors and finish construction.
Nicholas stated in his deposition that he told Francis at the open house that the Loan
was needed because “[he] was tight on cash and needed monies to complete the project.”
Opposition to the P&A, Ex A, 30:9-14. Daniel admitted in his deposition that Plaintiffs permitted
Defendants to use $21,000 of the Loan Proceeds for “proper escrow closing costs.” Declaration
of Nicholas Kahrilas, Ex. A, 58:15-18. Defendants admit that a small portion of the Loan
Proceeds, approximately $40,0003, was used to pay personal expenses. Defendants’ rebuttal is
twofold: (1) that there were no restrictions on how the Loan Proceeds were to be used; and (2)
3 See Nicholas Kahrilas’ Reply in Support of Motion for Partial Summary Judgment, 2:6 ($252,000 allegedly used in
completion of the residence, $20,000 for loan closing costs = $272,000; $315,000 - $272,000 = $40,000).
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that the personal $40,000 was repaid by Defendants from earnings from a company Nicholas
was involved with that materialized in the spring of 2009. Declaration of Nicholas Kahrilas,
33:19-21 – 34:18.
On December 3, 2008, soon after the Loan proceeds were deposited into Defendants’
Bank of America account, $111,003.32 was paid to Defendants’ American Express card
(“AMEX”) for contractor charges made by McCallister in September 20084. Defendants also
contend that $128,370.62 was paid for “maintenance and construction costs” on the Property
from their Wells Fargo account, but a closer look at the cost itemization provided shows that
only $62,671.71 was used for “construction costs” - $65,698.91 was used to make loan
payments to IndyMac and to Plaintiffs on account of the Loan. Declaration of Nicholas Kahrilas,
Ex. D-1. The payments made from the IndyMac account for construction costs totaled
$17,791.22. Id., Ex. E. Defendants also assert that they paid $127,397.05 for “maintenance
and construction costs” on the Property from their Bank of America account, but once again the
cost itemization provided shows that only $103,119.50 was used for “construction costs” -
$24,277.55 was used to make loan payments to IndyMac and to Plaintiffs on account of the
Loan. Id., Ex. G.
Taking all of the above-enumerated charges into account, including the $21,000 for
proper escrow closing costs, the evidence shows that $315,585.75 was paid for “construction
costs,” not including the line items for loan payments that were eliminated from the calculation.
The construction costs paid by Defendants, however, did not end there.
During the period between December 2008 and April 2010, after the Loan was funded,
Defendants charged $96,569 for “construction costs.” These payments are separate from the
payments made directly from the Wells Fargo, IndyMac and Bank of America accounts. Id., Ex.
C-34; C-44. This brings the total paid after the Loan was funded to $412,154.75
Plaintiffs provide no evidence to rebut the evidence provided by Defendants that more
than $315,000 actually went in to completing construction following the Loan. Even making all
inferences in favor of Plaintiffs, the conclusion is inescapable that there was no
misrepresentation made by Defendants to Plaintiffs. The account and payment records
submitted for the period after the Loan was funded show that all of the Loan Proceeds were
4 See Declaration of Nicholas Kahrilas, Ex. C-5 (McCallister charged $50,000 on September 5, 2008); Ex. C-13
(McCallister charged $125,000 on September 14, 2008), for a total of $175,000 paid to McCallister from Defendant’s
AMEX card in September 2008.
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exhausted by the costs of the construction on the Property. Plaintiffs argue that the fact that
McCallister was not paid in full demonstrates that Defendants lied about what they intended to
use the Loan Proceeds for. This inference is not sufficient to overcome the accounting
provided.
Plaintiffs’ position is that Nicholas stated to Francis that he needed the Loan to
“complete the project.” Declaration of William Francis in Opposition to the P&A, 13:8-15. It is
undisputed that Defendants obtained the Certificate of Occupancy (the “COO”) in late
December 2008. The evidence presented by Defendants shows that more than the total dollar
amount of the Loan was used toward the costs of completing construction, and that the
construction on the Property was ultimately completed. Plaintiffs have not presented evidence
that raises a material dispute as to these facts.
At the hearing on the Motion for Summary Judgment, Plaintiffs argued that the fact that
Defendants owed McCallister approximately $200,000 at the time of the foreclosure
demonstrates that Defendants did not use the entire Loan Proceeds to complete the project as
was represented by Nicholas. Plaintiffs also argued that Defendants were not supposed to
have used the Loan Proceeds to pay previously incurred construction debts, specifically the
$111,003.32 in previous construction costs that were charged to Defendants’ by McCallister.
This may have been what Francis took away from his conversation with Nicholas but, as stated
in his own declaration, this was not the representation that Nicholas made. See Declaration of
William Francis in Support of Opposition to the P&A, 13:7-10.
Plaintiffs’ position is also undermined by the Note itself, which does not provide any
restrictions or conditions on the use of the Loan Proceeds, nor does it require any segregation
of the Loan Proceeds. Given the fungibility of money and, absent a segregation provision, the
important question is whether the debtor made use of equivalent amounts of money in the
required manner. See Matter of Sheridan, 57 F.3d 627, 636 (7th Cir. 1995). The breakdown of
costs above shows that the value of the entire Loan Proceeds was used towards the cost of
completing the project.
The moving party is entitled to summary judgment if the nonmoving party “after
adequate time for discovery ... fails to make a showing sufficient to establish the existence of an
element essential to that party's case, and on which that party will bear the burden of proof at
trial.” Celotex Corp., 477 U.S. at 322; see also Ilko v. Cal. St. Bd. Of Equalization (In re Ilko),
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651 F.3d 1049, 1052 (9th Cir.2011) (applying Celotex summary judgment standard to
bankruptcy court adversary proceeding). As explained in Celotex, all other facts are immaterial
when the nonmoving party fails to submit sufficient proof of an essential element of its case.
Celotex Corp., at 323.
Plaintiffs were required to present evidence that Defendants did not use the Loan
Proceeds to complete construction, as they represented they would. Plaintiffs presented no
evidence to dispute that the equivalent value of the Loan Proceeds were used to pay to
contractors and other construction costs. Instead, Plaintiffs presented argument about their
subjective intent in making the Loan. It is Plaintiffs’ position that, at trial, they could show the
veracity of Plaintiffs’ subjective intent that the Loan Proceeds be used only for prospective
construction costs. Plaintiffs miss the point: Plaintiffs’ disappointment at the frustration of their
intended investment of even a breach of contract is not at issue – whether an actual
misrepresentation was made is at issue.
Plaintiffs’ position as to what Nicholas represented has constantly shifted. At the
hearing, Plaintiffs defended their inconsistent description of Nicholas’ representation by arguing
that the notice pleading standard in federal court permitted them to make general allegations in
the Complaint that could be refined after discovery. Federal Rule of Civil Procedure 9(b)
requires a plaintiff "must state with particularity the circumstances constituting fraud," but can
allege generally "[m]alice, intent, knowledge, and other conditions of a person's mind." Bell Atl.
Corp. v. Twombly, 550 U.S. 544, 559 (2007). The particularity requirement "has been
interpreted to mean the pleader must state the time, place and specific content of the false
representations as well as the identities of the parties to the misrepresentation." In re MannKind
Sec. Actions, 2011 U.S. Dist. LEXIS 145253, *19-20 (C.D. Cal. Dec. 16, 2011). Nevertheless,
even if Plaintiffs did not adhere to the more strict pleading required by Rule 9(b), at the
summary judgment stage, the Court is not limited to looking at the four corners of the Complaint.
Evidence of an essential element is sufficient to defeat summary judgment only if a jury
reasonably could infer from that evidence the existence of that element. Here, the undisputed
evidence presented by both sides shows that Nicholas stated that he needed the Loan to
complete construction, that the equivalent sum of the Loan Proceeds was used for that purpose,
and that construction was completed.
Plaintiffs stated at the hearing that if they had known that one dollar of the Loan
Proceeds was to be used for anything other than construction and contractor costs, they would
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never have made the Loan to Defendants. That may have been their subjective understanding,
but the evidence shows that their subjective intent was not codified in the terms of the Loan, nor
was Plaintiffs’ belief supported by their own account of Nicholas’ representation. There is no
genuine issue of material fact as the evidence presented by Defendants shows that, even if the
alleged representation were made, more than the total dollar amount of the Loan was used
toward the costs of completing construction, and that the construction on the Property was
ultimately completed.
Knowledge of falsity (or ‘scienter’)
Plaintiffs allege that Defendants “knew that the representations made to Plaintiffs were
false and they never intended to pay the Contractors for the sums due on the [Property].”
Complaint, 3:17-19. Assuming, arguendo, that (1) Defendants did state that the Loan Proceeds
were going to be used to pay only Contractors; and (2) that that misrepresentation was false,
Plaintiffs must show that at the time of the alleged statement, Defendants knew that the Loan
Proceeds were going to be used for another purpose.
Defendants secured the Loan in December 2008 and the terms of the Note required full
payment of any outstanding loan balance on or before January 1, 2010. Complaint, Ex. A. The
evidence provided shows Defendants made all the required payments on the Loan from
December 2008 to July 2009. Declaration of Nicholas Kahrilas, Ex. A, 17:2:24. The parties,
however, did expect that the Loan would be satisfied by the proceeds of the sale of the
Property. Id., Ex. A, 26:3-18.
Plaintiffs have presented no evidence of Nicholas’ knowledge of the alleged falsity of
the statement, and the only evidence before the Court were the actions taken by Defendants.
These actions do not demonstrate scienter. Defendants’ actions demonstrate that they
attempted to abide by the terms of the Loan. When the funds to complete the project were
dissipated, Defendants attempted to sell the home for a lower price than they had anticipated,
and were stymied by both the size of the encumbrances on the Property and a depressed real
estate market. See Declaration of Nicholas Kahrilas, Ex. A, 14:22-25 – 15:1-2; Ex. Y. The
payments made for construction costs subsequent to the Loan’s funding show that Defendants
did not request the Loan with the intent to use the Loan for anything other than to get the
construction completed, sell the property and get all parties paid, including the profit Defendants
had anticipated but which did not materialize. That approximately 13% of the Loan’s value was
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initially used to fund other expenses does not undermine this finding, because the Loan
Proceeds that were used for other expenses were offset by non-Loan funds being used towards
construction expenses.
Plaintiffs point out that Nicholas admitted to having “made millions.” Opposition to the
P&A, 2:25-26. Defendants were in the same position as many real property investors were in
2009 – engaged in deals that were ultimately to no avail because of the economic downturn and
its effect on real estate prices. The Court takes judicial notice pursuant to Federal Rule of
Evidence 2015 of the economic downturn that began in late 2008, and the effects of said
downturn generally on the real estate market of southern California beginning in 20096.
Plaintiffs submitted no evidence that, at the time the alleged misrepresentation was made,
Defendants did not intend to honor their commitments.
Assuming, for arguments sake, that Nicholas made the representation that the Loan
Proceeds were to be used to pay Contractors, there is no genuine issue of material fact as to
this element, and Defendants are entitled to judgment as a matter of law.
Intent to deceive, i.e., to induce reliance
Plaintiffs must show that at the time of the alleged statement that the Loan Proceeds
were to be used to pay Contractors, Defendants intended to induce Plaintiff’s reliance on the
alleged misstatement. Because it is nearly impossible to prove an intent to deceive by direct
evidence, “[a] court may infer fraudulent intent from various kinds of circumstantial evidence.”
Edelson v. Comm’r, 829 F.2d 828, 832 (9th Cir.1987); Gertsch v. Johnson & Johnson, Fin.
Corp. (In re Gertsch), 237 B.R. 160, 167–68 (B.A.P. 9th Cir.1999). The court may look at “the
totality of the circumstances and the conduct of the person accused” in order to make an
inference of fraudulent intent. In re Ormsby, 591 F.3d 119, 1206 (9th Cir. 2010).
Plaintiffs allege that Defendants “intended for Plaintiffs to rely on these
misrepresentations.” Complaint, 3:26. Again, assuming for arguments sake that Nicholas made
representations that the Loan Proceeds were to be used to pay construction costs, there is no
5 Federal Rule of Evidence 201 provides that “A judicially noticed fact must be one not subject to reasonable dispute
in that it is either (1) generally known within the territorial jurisdiction of the trial court, or (2) capable of accurate and
ready determination by resort to sources whose accuracy cannot reasonably be questioned.”
6 The S&P/Case-Schiller Index for Los Angeles shows that the real estate market hit the lowest point on or about May
2009, http://www.spindices.com/indices/real-estate/sp-case-shiller-ca-los-angeles-home-price-index (last visited
January 12, 2014).
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evidence that Defendants intended to deceive Plaintiffs about the reasons for securing the
Loan. Nicholas admits to stating to Francis that he “was tight on cash and needed monies to
complete the project.” Opposition to the P&A, Ex A, 30:9-14. Defendants have presented
evidence that after the Loan was funded, they continued to pay for construction costs as well as
make regular payments on the Loan for eight months, more than 2/3 of the Loan’s term.
Viewing Defendants actions and conduct after the Loan was made, it is undisputed that
Defendants intended for Plaintiffs to rely on their representations that they intended to finish
construction, sell the Property, and then pay all secured creditors from the sale proceeds.
There is no genuine issue of material fact as to this element.
Justifiable reliance
For determining reliance, courts apply a subjective “justifiable” reliance standard, which
turns on a person's knowledge under the particular circumstances. Citibank, N.A. v. Eashai (In
re Eashai), 87 F.3d 1082, 1090 (9th Cir.1996). “Justification is a matter of the qualities and
characteristics of the particular plaintiff, and the circumstances of the particular case, rather than
of the application of a community standard of conduct to all cases.” Id. (quoting Field v. Mans,
516 U.S. 59, 70 (1995) (quoting the Restatement (Second) of Torts § 545A cmt.b (1976)). “[A]
person is justified in relying on a representation of fact although he might have ascertained the
falsity of the representation had he made an investigation.” Id. (quoting Mans, 516 U.S. at 70).
However, a person cannot justifiably rely on a representation if he or she knows it is false or its
falsity is obvious. Eugene Parks Law Corp. Defined Benefit Pension Plan v. Kirsh (In re Kirsh),
973 F.2d 1454, 1459 (9th Cir.1992) ([a] “person cannot purport to rely on preposterous
representations or close his eyes to avoid discovery of the truth.”).
Plaintiffs allege that their reliance on Defendants alleged representations that the Loan
proceeds would be used to pay Contractors was justifiable because Defendants were next-door
neighbors and long-time friends of Francis. Complaint, 4:2-5. Defendants make no argument
with respect to this element. Assuming for arguments sake that Nicholas allegedly made
misrepresentation that the Loan Proceeds were to be used to pay construction costs, there is no
evidence that Defendants intended to deceive Plaintiffs about the reasons for securing the
Loan. It was justifiable for Plaintiffs to rely on Defendants’ alleged statement that the Loan
Proceeds were going to pay Contractors, because Nicholas had prior dealings with Francis that
had worked to their mutual benefit, and Defendants seemed to be in a relatively stable financial
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position until the economic downturn began. Also, the debt was secured by a deed of trust on
the Property, which gave Plaintiffs additional grounds for reliance because if Defendants did not
repay the Loan as per the schedule, then they could expect to be paid when the house was
sold. See Declaration of Nicholas Kahrilas, Ex. A, 25:3-24 – 26:1-21.
Plaintiffs were justified in relying on the alleged representation that the Loan Proceeds
were to be used to pay Contractors. There is no genuine issue of material fact as to this
element.
Resulting damage to Plaintiffs proximately caused by their reliance on the debtor's
statement or conduct
Causation or proximate cause entails (1) causation in fact, which requires a defendant's
misrepresentations to be a substantial factor in determining the course of conduct that results in
loss and (2) legal causation, which requires a creditor's loss to “reasonably be expected to
result from the reliance.” Beneficial Cal., Inc. v. Brown (In re Brown), 217 B.R. 857, 862
(Bankr.S.D.Cal.1998) (citing Restatement (Second) of Torts, §§ 546, 548A). “A fraudulent
misrepresentation is a legal cause of a pecuniary loss resulting from action or inaction in
reliance upon it if, but only if, the loss might reasonably be expected to result from the reliance.”
Restatement (Second) of Torts, § 548A. In other words, could Plaintiffs’ damage reasonably be
expected from their reliance on Defendants’ alleged misrepresentation that the Loan proceeds
would be used to pay Contractors and complete construction?
Plaintiffs also argue that Nicholas’ alleged statement was the proximate cause of their
damage, but do not provide any evidence to support this contention. It is undisputed on the
evidence submitted that this alleged statement was not the proximate cause of Plaintiffs
damage.
Plaintiffs contend that their damage was the result of “the fact that Kahrilas failed to pay
McCallister and used the Loan Proceeds for personal use that delayed the construction.”
Opposition to the P&A, 11:2-3. As discussed earlier, the evidence does not support this factual
assertion.
Defendants counter that the delays in construction and sale were not due to misuse of
the Loan Proceeds. Defendants argue instead that the proximate cause of Plaintiffs’ damage
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was a combination of intransigence by Plaintiffs and McCallister regarding approval of a short-
sell buyer and the biggest collapse in the economy and real estate market in recent memory.
Points & Authorities in Support of Motion for Partial Summary Judgment, 21:9:20. Defendants
contend that the sale was delayed because of the dispute between Plaintiffs and McCallister
over whose lien should take priority over whom, and the alleged interference by Plaintiffs and
McCallister with the sale of the property, specifically Plaintiffs’ assertion that they had the right
to approve or reject offers to purchase the Property and their position that they would reject any
offers for purchase of the Property that did not provide sufficient proceeds to pay off both the
Plaintiffs’ and the McCallister liens. Plaintiffs dispute this factual assertion but, as it is
immaterial, it is of no import.
Defendants’ construction loan from IndyMac matured on December 26, 2008.
Declaration of Nicholas Kahrilas, Ex. M-2. Defendants provide evidence of their attempts to sell
the residence in 2009, including a cancelled contract of sale dated September 2009 and emails
from their real estate broker about other cancelled sales. Id., Ex. Y. Defendants also provided a
string of email conversations with a realtor about the frustrated attempts to sell the Property. Id.
Regardless of why, there is no dispute that Defendants were unable to complete a sale of the
Property before IndyMac foreclosed. It was the foreclosure of the Property by IndyMac , which
extinguished Plaintiffs’ junior lien, that was the proximate cause of Plaintiffs damage. Any
representation about the use of the Loan Proceeds, false or not, was not shown to have caused
the foreclosure.
Plaintiffs argued at the hearing on the Motion that there was approximately $200,000 left
owing to McCallister at the time the Property was sold at foreclosure. By this point, the Loan
Proceeds, or their equivalent value, were exhausted after having been used to pay construction
costs. Had Defendants come up with the $200,000 to pay McCallister, Plaintiffs contend that
the Property would have sold and the debt to them would have been satisfied. Plaintiffs seem
to be arguing that it was Defendants’ inability to come up with another $200,000 that resulted in
the foreclosure sale. Taking Plaintiffs’ assertion as true and credible, it was Defendants’
inability to procure more money to satisfy the claims of McCallister and other contractors that
resulted in foreclosure.
Based on the evidence presented, the Court finds that the proximate cause of Plaintiffs’
loss was not the alleged misrepresentation, or any reliance thereon, but instead it was the
foreclosure of the Property by IndyMac that extinguished Plaintiffs’ junior lien.
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Conclusion
Viewing the facts and the inferences to be drawn therefrom in a light most favorable to
Plaintiffs, the Court cannot find that the record taken as a whole demonstrates a genuine issue
of material fact for trial. Plaintiffs cannot establish at least four of the essential elements of a §
523(a)(2)(A) claim, i.e., that (1) Defendants made a representation which they knew was false at
the time it was made; (2) Defendants made the false representation with the intention and
purpose of deceiving Plaintiffs, (3) that Defendants made the representation with the intent and
purpose of deceiving Plaintiffs, and (4) that Defendant’s representation was the proximate
cause of Plaintiffs’ damage. Accordingly, Defendants are entitled to summary judgment on
Plaintiffs’ § 523(a)(2) claim as a matter of law.
Motion GRANTED. Movants shall submit order in accordance with this ruling within seven days.
###
Date: January 27, 2014
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