Martinez v. Vergara

UNITED
STATES
BANKRUPTCY
COURT
NORTHERN DISTRICT OF CALIFORNIA
1300 Clay Street (2d fl.)
Oakland, CA. 94612
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Decision
UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re 	No. Case 09-70380 J
Adv. No. 10-4029 AJ
EDUARDO A. VERGARA, Chapter 7
Debtor. 	/
ARTURO MARTINEZ, 	Date: 11/09/10
Time: 10:00 a.m.
Plaintiff, 	Ctrm: 215
vs.
EDUARDO A. VERGARA,
Defendant. /
DECISION
By this adversary proceeding, plaintiff Arturo Martinez
(“Martinez”) seeks to render nondischargeable a debt he is owed
by defendant Eduardo Vergara, the above debtor (“Vergara”). 	The
court will enter judgment in favor of Vergara.
A. 	Background
In 2002, Vergara took over management responsibilities for a 13
unit building on MacArthur Boulevard in Oakland, California (the
“Property”) that Martinez had acquired the previous year.
Signed: November 18, 2010

EDWARD D. JELLEN
U.S. Bankruptcy Judge

Entered on Docket
November 18, 2010
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
Case: 10-04029 Doc# 30 Filed: 11/18/10 Entered: 11/18/10 14:11:14 Page 1 of 8

UNITED
STATES
BANKRUPTCY
COURT
NORTHERN DISTRICT OF CALIFORNIA
1300 Clay Street (2d fl.)
Oakland, CA. 94612
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
2	Decision
Thereafter, Vergara and Martinez informally agreed that Martinez
would sell Vergara a 20% interest in the Property. 	In April 2005,
Vergara and Martinez discussed the possibility of Vergara purchasing
the entire Property from Martinez. 	At the time of these
discussions, the Property was in a state of disrepair. 	It was only
partially rented out, and many of the tenants were engaging in
illegal activity on the premises. 	Vergara’s intent was to renovate
and rehabilitate the Property and then refinance it.
The discussions between Vergara and Martinez resulted in the
parties signing a handwritten term sheet dated April 2005 under
which Vergara was to pay Martinez $450,000 for his equity in the
Property, such payments to be made over a period of five years.
In late September 2005, Martinez and Vergara entered into a
more formal purchase agreement, which provided that Vergara would
purchase the Property for the sum of $910,000. 	The purchase
agreement stated that it was “merely a memorial of a previous
agreement with all terms the same dated April 1, 2005.”
On October 17, 2005, Martinez and Vergara entered into an
addendum to the purchase agreement providing for Martinez to carry
back a note for $450,000, and for Vergara to assume all the debts on
the Property, including mortgage payments, taxes, and insurance.
The addendum stated that Vergara would refinance the Property.
If he did so within six months, Vergara was to pay $100,000 to
Martinez immediately on the refinance, and then pay certain
installment payments to Martinez. 	If, however, the refinance
occurred after passage of the six month period, then payment of the
Case: 10-04029 Doc# 30 Filed: 11/18/10 Entered: 11/18/10 14:11:14 Page 2 of 8

UNITED
STATES
BANKRUPTCY
COURT
NORTHERN DISTRICT OF CALIFORNIA
1300 Clay Street (2d fl.)
Oakland, CA. 94612
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
3	Decision
$100,000 was to be deferred according to an alternate payment
schedule specified in the addendum. 	One additional addendum
followed, which altered some of the payment terms.
On October 19, 2005, Martinez conveyed the Property to Vergara
by grant deed. 	Vergara’s purchase money debt to Martinez was
unsecured.
In November 2006, Vergara refinanced the Property, and realized
a substantial gain from the refinance transaction. 	Because the
refinance occurred after passage of the six month period mentioned
in the contract addendum, Vergara was not contractually required to
make the immediate $100,000 payment, and he did not do so.
The parties agree that Vergara paid Martinez a total of $86,945
toward the purchase price. 	Vergara testified that he had also paid
substantial sums for mortgage payments on the Property before he
acquired title, and had also paid over $62,000 plus attorneys’ fees
to settle several lawsuits related to the Property. 	The parties
disagree as to whether these expenditures by Vergara were to be
credited against Vergara’s debt to Martinez.
In any event, Vergara eventually lost the Property through
foreclosure. 	On October 30, 2009, Vergara filed his voluntary
petition herein under chapter 7 of the Bankruptcy Code. 	This
adversary proceeding followed.
Martinez’s complaint alleges that Vergara still owes him
$450,000 consisting of the unpaid portion of the purchase price for
the Property plus an unliquidated amount for rents that Martinez
contends that Vergara absconded with, and that this debt is
Case: 10-04029 Doc# 30 Filed: 11/18/10 Entered: 11/18/10 14:11:14 Page 3 of 8

UNITED
STATES
BANKRUPTCY
COURT
NORTHERN DISTRICT OF CALIFORNIA
1300 Clay Street (2d fl.)
Oakland, CA. 94612
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
1Bankruptcy Code § 523(a)(2)(B) provides:
(a) 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 -
. . .
(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 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. . ..
2Bankruptcy Code § 523(a)(4) provides:
A discharge under section 727 . . . of this title does
not discharge an individual debtor from any debt -
. . .
(4) for fraud or defalcation while acting in a
(continued...)
4	Decision
nondischargeable pursuant to Bankruptcy Code § 523(a)(2)(A) (fraud),
523(a)(2)(B) (false financial statement), and 523(a)(4) (fiduciary
fraud or defalcation).
B. 	Discussion
At the conclusion of Martinez’s case in chief, the court
granted Vergara’s motion pursuant to Fed. R. Civ. P. 52(c),
applicable via Fed. R. Bankr. P. 7052, for judgment in his favor on
Martinez’s claims under Bankruptcy Code § 523(a)(2)(B) 1 and
523(a)(4). 2
Case: 10-04029 Doc# 30 Filed: 11/18/10 Entered: 11/18/10 14:11:14 Page 4 of 8

UNITED
STATES
BANKRUPTCY
COURT
NORTHERN DISTRICT OF CALIFORNIA
1300 Clay Street (2d fl.)
Oakland, CA. 94612
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
2(...continued)
fiduciary capacity, embezzlement, or larceny.
3Indeed, Vergara never provided Martinez orally with any
information about his financial condition, nor did Martinez ever
request any such information.
5	Decision
As to the former, the evidence failed to show that Vergara ever
provided Martinez with any statement in writing respecting his
financial condition. 3
As to the latter, it is true that at the time of the purchase,
Vergara was a licensed real estate broker, and a licensed attorney.
It is also true that Martinez trusted him.
This, however, does not create a fiduciary relationship within
the meaning of Bankruptcy Code § 523(a)(4). 	In their dealings,
Vergara acted as a principal, not as a broker or attorney. 	A
provision in the purchase agreement so stated.
In In re Baird, 114 B.R. 198 (9th Cir. BAP 1990), the Ninth
Circuit Bankruptcy Appellate Panel took the occasion to explain the
meaning of “fiduciary capacity” under Bankruptcy Code § 523(a)(4).
The BAP explained:
The meaning of ‘fiduciary capacity’ under section
523(a)(4) is a question of federal law, which has
consistently limited this term to express or technical
trust relationships. 	The broad general definition of a
fiduciary relationship - one involving confidence, trust
and good faith - is inapplicable in the dischargeability
context. 	The debt alleged to be nondischargeable must
arise from a breach of trust obligations imposed by law,
separate and distinct from any breach of contract. 	In
addition, the requisite trust relationship must exist
prior to and without reference to the act of wrongdoing.
This requirement eliminates constructive, resulting or
implied trusts.
Case: 10-04029 Doc# 30 Filed: 11/18/10 Entered: 11/18/10 14:11:14 Page 5 of 8

UNITED
STATES
BANKRUPTCY
COURT
NORTHERN DISTRICT OF CALIFORNIA
1300 Clay Street (2d fl.)
Oakland, CA. 94612
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
6	Decision
Baird, 114 B.R. at 202 (internal citations omitted).
The evidence failed to show that Vergara was in a fiduciary
relationship with Martinez.
As to Martinez’s fraud claims, Bankruptcy Code § 523(a)(2)(A)
provides: “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.”
To prevail under § 523(a)(2)(A), a creditor must establish
that: (1) the debtor made a representation, (2) with knowledge of
its falsity, (3) with the intention and purpose of deceiving the
creditor, (4) that the creditor justifiably relied on the
representation, Field v. Mans, 516 U.S. 59, 116 S.Ct. 437
(1995)(justifiable reliance required), and (5) that the creditor
sustained damage as the proximate result thereof. 	See In re
Britton, 950 F.2d 602, 604 (9th Cir. 1991). 	The creditor must
establish each of these elements by a preponderance of the evidence.
Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654 (1991).
Here, the evidence failed to establish any fraud on the part of
Vergara. 	The evidence did not establish or even suggest that
Vergara made any misrepresentations to Martinez, or that he had any
intent to deceive Martinez when he contracted to purchase the
Property. 	Nor did the evidence show that Vergara misappropriated
///
Case: 10-04029 Doc# 30 Filed: 11/18/10 Entered: 11/18/10 14:11:14 Page 6 of 8

UNITED
STATES
BANKRUPTCY
COURT
NORTHERN DISTRICT OF CALIFORNIA
1300 Clay Street (2d fl.)
Oakland, CA. 94612
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
7	Decision
any rents (or even show the amount of the monthly rents, if any,
that the Property generated).
Martinez argues that, during the period after the parties had
entered into the purchase agreement, and prior to the transfer of
title, Vergara had caused some mass evictions on the Property,
thereby reducing the income the Property generated, and that the
timing of these evictions evidences Vergara’s fraudulent intent.
Given the state of the Property and the unsatisfactory quality of
its tenants, such evictions seem, if anything, to have been prudent,
and are in no way indicative of any fraud on the part of Vergara.
C. 	Conclusion
Martinez entered into what turned out to be an unwise
bargain. 	He agreed to sell the Property to Vergara on an unsecured
basis, leaving himself at risk when he surrendered title, and
unprotected when Vergara obtained substantial sums out of the
refinance. 	Unfortunately for Martinez, Bankruptcy Code
§ 523(a)(2)(A) does not provide a remedy for an unwise bargain. 	The
court will therefore enter judgment in favor of Vergara.
END OF ORDER
Case: 10-04029 Doc# 30 Filed: 11/18/10 Entered: 11/18/10 14:11:14 Page 7 of 8

UNITED
STATES
BANKRUPTCY
COURT
NORTHERN DISTRICT OF CALIFORNIA
1300 Clay Street (2d fl.)
Oakland, CA. 94612
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
8	Decision
COURT SERVICE LIST
Michael Melchin, Esq.
Law Offices
1405 Huntington Avenue, Suite 202
S. San Francisco, CA 94080
Jeffrey A. Dito, Esq.
Valinoti & Dito, LLP
180 Montgomery Street, Suite 940
San Francisco, CA 94104
Case: 10-04029 Doc# 30 Filed: 11/18/10 Entered: 11/18/10 14:11:14 Page 8 of 8