McCallister Construction, Inc. 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-01646-MT
McCallister Construction, Inc.
Plaintiff(s),
v.
Nicholas Stephen Kahrilas, Laura Rae
Kahrilas
Defendant(s).
MEMORANDUM OF DECISION RE
DEFENDANTS’ MOTION FOR PARTIAL
SUMMARY JUDGMENT
Date: February 4, 2014
Time: 9:00 a.m.
Courtroom: 302
On or about September 18, 2006, Nicholas and Laura Kahrilas (referred to individually
as “Nicholas” and “Laura,” and collectively as “Defendants”) entered into a contract (the
“Construction Contract”) with Stuart McCallister of McCallister Construction, Inc. (referred to
collectively as “Plaintiff”) for construction services to be rendered in connection with construction
of a house and landscaping (the “Project”) on real property located at 463 Wynola Street, Pacific
Palisades, 90272 (the “Property”). First Amended Complaint to Determine Dischargeability of
FILED & ENTERED
MAR 13 2014
CLERK U.S. BANKRUPTCY COURT
Central District of California
BY DEPUTY CLERK	Remy
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Debt (the “Complaint”), 3:2-14. Under the Contract, Plaintiff was obligated to furnish all
necessary labor, services, materials and equipment to be used or consumed in the Project. Id.
at 3:15-16. Plaintiff was to have received the cost of the work (time plus materials) plus 15% of
the cost of the work as a contractor’s fee. Id. at 3:16-18. The Construction Contract called for
progress payments on account of the amount due on a biweekly basis. Id., Ex. A, Bates stamp
no. 24.
Sometime in February 2007, Plaintiff alleges that he learned that Defendants had taken
a construction loan from IndyMac Bank (the “IndyMac Loan”). Complaint, 3:27-28; Ex. A.
Plaintiff included in Exhibit A to the Complaint a Draw Request that purportedly bears the
signature of Plaintiff’s principal Stuart McCallister and Will Shepphird as “architect.” Id,, Ex. A,
Bates stamp no. 93. Plaintiff contends that the two signatures on the Draw Request are not
authentic. Id. at 4:4-5.
In October 2008, Plaintiff contends that he grew concerned about the “increasing
amounts” that were owed by Defendants under the Construction Contract. Complaint, 4:13-15.
Plaintiff then telephoned Nicholas to discuss payment of the past due invoices and the status of
the Project. Id. at 4:16-19; Defendants’ Answer to the Complaint (the “Answer”), 4:24-26.
Plaintiff alleges that he told Nicholas that he could not continue to work on the Project until he
was paid on the past due invoices. Complaint, 4:19-20.
Per Defendant’s request, Plaintiff and Nicholas met at Defendants’ cabana at the Bel Air
Bay Club in November 2008. Complaint, at 4:20-24; Answer, 5:1-2. Nicholas explained that his
insurance business had suffered tremendously and was short of personal funds. Complaint, at
4:24-26; Answer, 5:1-2. Plaintiff alleges that Nicholas told him that the last 10% of the IndyMac
Loan (approximately $300,000, the “Retention Funds”) was going to be released to Defendants
when a Certificate of Occupancy (“C.O.”) was obtained. Complaint, 5:1-3. If the C.O. was not
obtained by Christmas 2008, Plaintiff alleges that Nicholas represented that he would be “hit
with larger fees by IndyMac” for having to extend the IndyMac Loan. Id. at 5:7-8. Plaintiff
alleges that Nicholas guaranteed him, promised him, shook his hand and said that he gave
Plaintiff his word that Plaintiff would receive payment directly from the Retention Funds, for the
entire $300,000, and that Plaintiff would be the first to be paid. Id. at 5:9-11.
Plaintiff alleges that Nicholas stated that he had no other money available at the time to
pay him, and that the only option was to get the C.O. so that IndyMac would release the
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Retention Funds. Id. at 5:12-13. Plaintiff alleges that Nicholas encouraged him to call Mr. Paul
Hoffman (“Hoffman”) at IndyMac to confirm the amount and terms of the Retention Funds, and
mentioned that Nicholas and Hoffman were “good buddies and had been fraternity brothers
together.” Id. at 5:14-17. Plaintiff alleges that he did call Hoffman and learned that IndyMac’s
practice was to pay the loan balance from the IndyMac Loan upon final inspection of the Project.
Id. at 5:18-19.
Sometime around November 13, 2008, Defendants executed a “Notice of Completion”
form provided by IndyMac, wherein they stated that the Project was completed on November
13, 2008. Complaint, 6:16-19, Ex. G; Answer, 6:16-18. Concurrently, Defendants executed a
“Final Draw Request,” wherein Defendants requested that all of the remaining funds under the
IndyMac Loan be paid to them. Complaint, 6:26 – 7:3, Ex. H; Answer, 6:21-23.
On December 12, 2008, Plaintiff sent Nicholas an email stating that he “could go no
further until I receive money.” Complaint, Ex. C. Nicholas sent Plaintiff an email in response,
stating that Hoffman had “made it crystal clear to me that no more monies will be released until
we have [the C.O.] and while you have him on the phone ask him about the penalties I am
incurring for the project not being done by September before there were any more delay
issues.” Id. at 5:20-24; Ex. C. Plaintiff alleges that, in reliance on Nicholas’ representation that
Plaintiff would be paid from the Retention Funds, Plaintiff claims that he “recommenced” work
on the Project. Id. at 5:11-13. Plaintiff points out that Defendants obtained a temporary C.O. by
Christmas 2008. Id. Plaintiff does not specify, however, what date he stopped working on the
Project, nor what date he “recommenced” working on the Project.
Shortly after the C.O. was obtained, Plaintiff alleges that he contacted Nicholas to
inquire as to when payment would be sent for outstanding invoices; to which Nicholas allegedly
replied that Plaintiff would not be paid. Complaint, 7:4-6.
On or about January 2, 2009, Defendants received from IndyMac the final Loan draw, in
the amount of $77,944.43 and that, prior to such disbursement, Defendants had last received a
draw from IndyMac on or about September 17, 2008. Complaint, 7:19-21; Answer, 7:14-17.
Plaintiff states that, contrary to Nicholas’ alleged representation, the IndyMac Loan did not have
a retention amount of $300,000. Complaint, 7:21-24. Plaintiff alleges that he did not receive
any of the $77,944.43 that was disbursed. Id., 7:24-26.
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On January 4, 2009, Nicholas sent an email to Plaintiff stating that Defendants intended
to sell the Property, and directed Plaintiff to suspend all work on the Project “in the interim.” Id.
at 7:7-8; Ex. I. Plaintiff alleges that this was the first time he’d been apprised of Defendants’
intention to sell the Property, rather than reside in home after the Project was completed. Id. at
7:10-11.
After having not received the allegedly expected $300,000 from the IndyMac Loan
disbursement, Plaintiffs filed suit in Los Angeles Superior Court (the “State Court”) on July 29,
2009, asserting claims for breach of contract, and to foreclose a mechanic’s lien (the “State
Court Complaint”). Plaintiff’s Request for Judicial Notice in Support of Opposition to Motion for
Summary Judgment (“RJN”), Ex. 1. On January 25, 2010, Plaintiff received a default judgment
against Defendants in the amount of $268,663.57 (the “State Court Judgment”). Id., Ex. 2.
On March 15, 2011, Defendants filed a voluntary chapter 7 petition. On December 13,
2011, Plaintiffs filed an adversary complaint against Defendants to determine dischargeability of
debt. On March 6, 2012, Plaintiff filed an amended complaint under 11 U.S.C. §§ 523(a)(2)(A)
and 523(a)(6), and 11 U.S.C. § 727(a)(2)(A) and 727 (a)(4)(A).
On September 26, 2013, Defendants filed a Motion for Partial Summary Judgment (the
“MSJ”), seeking a determination on the that there are no genuine issues of material fact as to
the claims under 11 U.S.C. §§ 523(a)(2)(A) and 523(a)(6).
Res Judicata and Collateral Estoppel
Plaintiff argues in opposition to the MSJ that his State Court judgment precludes
Defendants from challenging the amount of the debt. Because nondischargeability of a debt is
an entirely separate determination with its own elements under § 523 which require more than
the establishment of liability, principles of res judicata do not apply (i.e. no determination of
nondischargeability was made). Defendants correctly argue that the State Court Complaint did
not contain a cause for action for fraud, nor did the State Court Complaint allege any facts
related to fraud. It follows then that as to the State Court Judgment, res judicata cannot apply.
Collateral estoppel, on the other hand, would apply to individual fact determinations made by
the state court that were actually litigated. See Brown v. Felsen, 442 U.S. 127 (1979).
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Collateral estoppel principles apply in discharge exception proceedings under §523(a).
Grogan v. Garner, 498 U.S. 279, 284 n.11 (1991). Pursuant to 28 U.S.C. §1738, as a matter of
full faith and credit, federal courts are required to apply the pertinent state’s collateral estoppel
principles. Gayden v. Nourbakhsh (In re Nourbakhsh), 67 F.3d 798, 800 (9th Cir. 1995). Under
California law, collateral estoppel applies only if (1) the issue sought to be precluded from
relitigation is identical to that decided in the former proceeding; (2) the issue was actually
litigated in the former proceeding; (3) the issue was necessarily decided in the former
proceeding; (4) the decision in the former proceeding was final and on the merits; and (5) the
party against whom preclusion is sought is the same, or in privity with, the party to the former
proceeding. Harmon v. Kobrin, (In re Harmon), 250 F.3d 1240, 1245 (9th Cir. 2001).
Lastly, in the Ninth Circuit, the Court must also find that giving the previous judgment
preclusive effect would further the public policies underlying the collateral estoppel doctrine.
The California Supreme Court has identified three policies underlying the doctrine of collateral
estoppel: "preservation of the integrity of the judicial system, promotion of judicial economy, and
protection of litigants from harassment by vexatious litigation." Baldwin v. Kilpatrick (In re
Baldwin), 249 F.3d 912, 919-920 (9th Cir. 2001).
Plaintiff cites In re Comer, 27 B.R. 1018 (B.A.P. 9th Cir. 1983), aff’d, 723 F.2d 737 (9th
Cir. 1984) to support his position that a state court judgment should be accorded preclusive
effect as to the amount of the judgment. Reliance on In re Comer, however, is inapposite. The
focus of the B.A.P.’s analysis in In re Comer was on § 523(a)(5), which excepts from discharge
any debt for a domestic support obligation. The state court judgment given preclusive effect in
Comer was a default judgment based on a breach of an agreement for alimony and child
support, which fits squarely within the exception to discharge under § 523(a)(5). Plaintiff’s State
Court Judgment, on the other hand, is not for fraud; instead the State Court Judgment is for
breach of contract.
Plaintiff’s reliance on Berr v. FDIC (In re Berr), 172 B.R. 299 (B.A.P. 9th Cir. 1994) is
also misplaced, as Berr is also factually distinguishable. In Berr, the state court judgment at
issue was for both breach of contract and fraud, and the B.A.P. found that the complaint to
determine dischargeability of debt under § 523(a)(2)(A) was based on similar causes of action
as were asserted in the state court, namely fraud. Id. at 306. The B.A.P. held that when the
issues before the bankruptcy court do not differ from the issues which were before the prior
adjudicating court, the “identity of issues” prong is satisfied. Id.
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The State Court Judgment cannot be given preclusive effect as to the issues raised by
the first four elements of the causes of action asserted in the Complaint. Here, State Court
Complaint did not contain a cause for action for fraud, nor did the State Court Complaint allege
any facts related to fraud. There is no identity of issues as between the State Court Judgment
and the allegations of fraud in the Complaint.
As to damages, however, Defendants are also correct that the amount of damages for
breach of contract is not preclusive as to the amount of damages, if any, which were
proximately caused by the alleged fraud. There was no delineation in the damage award
between damages for breach of contract and damages for the alleged fraud because the State
Court did not even consider any factual allegations of fraud. The State Court Judgment does
not bar Defendants from challenging the amount of the State Court Judgment that Plaintiff
asserts was the result of fraud.
The State Court Judgment, however, will preclude Defendants from making any
argument as to the amount owed to Plaintiff under the Construction Contract for breach of
contract and the terms of the Construction Contract. Those issues related to the amount
Defendants owe Plaintiff for breach of contract and the terms of the Construction Contract were
identical to that which was decided by the State Court. With regard to the second requirement,
it is settled under California law that a default judgment fulfills the criterion requiring that the
issues be actually litigated in the earlier proceeding:
[A default judgment is] conclusive to the issues tendered by the complaint as if it
had been rendered after answer filed and trial had on the allegations denied by
the answer.... Such a judgment is res judicata as to all issues aptly pleaded in the
complaint and defendant is estopped from denying in a subsequent action any
allegations contained in the former complaint.
Younie v. Gonya (In re Younie), 211 B.R. 367, 375 (B.A.P. 9th Cir. 1997) (citing In re Moore,
186 B.R. 962, 971 (Bankr.N.D.Cal.1995) (quoting Fitzgerald v. Herzer, 78 Cal.App.2d 127, 129
(1947))).
Thus, in California, a default judgment satisfies the “actually litigated” requirement for the
application of collateral estoppel. In re Younie, 211 B.R. at 375 (citing Lake v. Capps (In re
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Lake), 202 B.R. 751, 757 & n. 6 (B.A.P. 9th Cir. 1996); Green v. Kennedy (In re Green), 198
B.R. 564, 566 (B.A.P. 9th Cir.1996)). The third criterion is also met, as the issues of the terms of
the contract and the breach thereunder was necessarily decided according to the allegations of
the State Court Complaint.
As to the fourth requirement, a default judgment is “final” at the conclusion of the sixty-
day appeal period. McKee v. Nat'l Union Fire Ins. Co., 15 Cal.App.4th 282, 289 (1993) (“A
judgment is not ‘final’ for res judicata purposes until the appeal is concluded or the time within
which to appeal has passed”); Cal. Rules of Ct., Rule 8.104.
Lastly, the parties in the State Court Complaint and Complaint are the same for
purposes of the fifth requirement. The Court finds that giving the State Court Judgment
preclusive effect as to the amount owed to Plaintiff under the Construction Contract for breach
of contract, and the terms of the Construction Contract, furthers the public policies underlying
the collateral estoppel doctrine. Thus, Defendants’ argument is precluded that Plaintiff was
owed no further payment for the Project.
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
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).
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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.
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
Plaintiff alleges that in November 2008, Nicholas represented to Plaintiff that Defendants
could not pay Plaintiff the amounts owed under the Construction Contract. Plaintiffs alleges that
Nicholas’ false statements were that (1) upon receiving the C.O., IndyMac would release the
Retention Funds of approximately $200,000 to Plaintiff; and (2) if Plaintiff continued to do work
on the Project, and a C.O. was obtained by Christmas 2008, the Defendants would pay Plaintiff
directly from the Retention Funds.
Nicholas admitted that, as of November 2008, he believed that the amount of the
remaining loan proceeds yet to be disbursed on account of the IndyMac Loan was
approximately $200,000. Declaration of Nicholas Kahrilas in Support of MSJ (“Nicholas
Declaration”), 25:8-10. Nicholas then stated that he learned in late December 2008 or early
January 2009 that the remaining loan proceeds were only $77,944.43. Id. at 25:12-13.
Nicholas also states that it was his intention to use at least $200,000 to complete construction
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on or after October 2008. Id. at 9-11.
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. In re
Greene, 96 B.R. 279, 283 (9th Cir. BAP 1989). It is undisputed that, as evidenced by
Defendants’ own admissions, he provided Plaintiff with false information as to the amount left to
be disbursed. This misstatement was material, as the amount of the Retention Funds would
have been the type of information that would have induced Plaintiff to continue to work on the
Project, rather than declare a breach.
Plaintiff also alleges that Nicholas stated that he would pay all amounts due and
outstanding to Plaintiff from the proceeds received from the Retention Funds. Nicholas disputes
that he told Plaintiff that he would be paid directly from the Retention Funds for the entire
amount owed. Nicholas stated that “I never would have and I did not promise solely to
McCallister the entire $200,000 (that I thought would be received once the [C.O.] was issued).”
Nicholas Kahrilas’ Supplemental Declaration in Support of MSJ (Nicholas Supp. Declaration),
8:16-18. Nicholas stated that it was his intention to use “at least $200,000 to complete
construction,” but Defendants did not clarify whether Nicholas ever relayed this intention to
Plaintiff. Whether Defendant ever made this representation is disputed, and it is material
because if Nicholas did say that Plaintiff would be paid directly from the Retention Funds for the
entire amount owed, this would have been the type of information that would have affected
Plaintiff’s decision to not declare breach of contract for non-payment.
There is a genuine issue of material fact as to whether Nicholas made the representation
alleged. On a motion for summary judgment, the Court must view the evidence in the light most
favorable to the nonmoving party. With such ambiguities in the factual record, summary
judgment is inappropriate.
Knowledge of falsity (or ‘scienter’)
As stated above, it is undisputed that, as evidenced by Defendants’ own admissions,
Nicholas provided Plaintiff with false information as to the amount left to be disbursed.
Defendant asserts that as of October 2008, he believed that the Retention Funds totaled
approximately $200,000, and that he had no recollection of being advised until early January
2009 that the Retention Funds were only “$70,000.” Nicholas Declaration, 14:7-9; 25:12-13.
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Nicholas attempted to explain his alleged misunderstanding of the Retention Funds amount in
footnote 48 of his Declaration, wherein he states that there were approximately $200,000 of
items that had not been allocated for payment, and it was his inclusion of these items in his
mental calculation of the Retention Funds that led to his misunderstanding. Id. at 14, fn. 48.
Plaintiff counters that Nicholas’ explanations are contradicted by the IndyMac Draw
History, which Plaintiff alleges shows that not one of the line items listed by Nicholas had an
available allocation. Declaration of Stuart McCallister in Opposition to MSJ, 8:14-20; Ex. 14.
Plaintiff contends that the IndyMac Loan history shows that $93,781.73 was the available
balance as of September 16, 2008. Plaintiff argues that this shows that when Nicholas made
the statement that there were $200,000 in Retention Funds left to be disbursed, he knew the
statement was false.
The Court can draw competing inferences from the evidence -- either that Nicholas’
misstatement as to the amount of the Retention Funds was made from an honest miscalculation
and relayed in an off-the-cuff manner without checking, or that Nicholas deliberately misstated
the amount of the Retention Funds to assuage Plaintiff’s concerns and prevent him from
declaring a breach. Where different inferences may be drawn, summary judgment is
inappropriate. Sankovich v. Ins. Co. of N. Am., 638 F.2d 136, 140 (9th Cir.1981).
Plaintiff requests that the Court consider allegedly questionable statements and the
conduct of Defendants in their bankruptcy case as a whole to assess the credibility of
Defendants’ declarations and factual assertions. Such determinations are best left for trial,
where the Court can more readily assess credibility. Knowledge of the defendant is generally
better inferred based on live testimony.
Justifiable reliance & resulting damage to Plaintiffs proximately caused by their reliance
Defendants contend that Plaintiff had a pre-existing duty to perform on the Construction
Contract, and thus Defendant could not have ”obtained” services on account of his alleged
misstatement prior to November 2008. Defendants argue that the alleged statement that
Plaintiff would receive the entire amount of the Retention Funds on account of the past due
invoices defeats Plaintiff’s claim.
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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.”).
Plaintiff argues that he had known Defendants for more than 25 years, and that he knew
Laura’s entire family. Both Plaintiff and Defendants were members of the Bel Air Bay Club, and
attended the same church. Furthermore, Defendants did not begin to carry a past due balance
on the Construction Contract until October 2008. Based on the record, it was justifiable for
Plaintiff to rely on Nicholas’ alleged statement that he would be paid from the Retention Fund if
he continued to work on the Project so that the C.O. could be obtained before Christmas 2008.
Plaintiff agrees that he was owed approximately $212,000 when the alleged statements
were made in November 2008. Any work done by Plaintiff before November 2008, and any
amount owed thereon, could not have been incurred in reliance on any alleged false
representation made by Nicholas in November 2008. It is temporally impossible. Thus, it
appears that the amounts due before the alleged statements at the Bel Air Bay Club are simply
breach of contract damages and not cognizable under § 523(a)(2) because of the missing
element of proximate causation.
Plaintiff also has not provided any evidence to show that any portion of the $212,000
that was owed for past services as of November 2008 was proximately caused by Nicholas’
alleged misstatements. The parties dispute the amount that is attributable to Plaintiff’s earlier
breach of contract claim and not the alleged fraud. Defendants argue that they are entitled to
judgment in their favor for amounts that were due to Plaintiff before the alleged false statements
were made in November 2008, which Defendants argue is approximately $88,000. Plaintiff
contends that the payments made after November 2008 were properly credited to earlier
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amounts due, so the full amount due after that date would still be damages arising from the
fraud.
Defendants do not make an argument about reliance for work done after November
2008 but do argue certain amounts were paid after that date that should be credited. It is
unclear what is to be credited to earlier work and what is later work. Additional proof and
evidence as to what the total non-dischargeable damages are may be presented at trial. Solely
the attorney fees and interest attributable to such amount would also be at issue, so the parties
should be prepared to distinguish between these two time periods. The arguments as to what
amounts were paid and attributable to which time period are too conflicted, unsupported by
evidence, and unclear to reach a determination at this stage.
Nondischargeability under § 523(a)(6)
Section 523(a)(6) excepts from discharge any debt of the debtor “for willful or malicious
injury to another entity or to the property of another entity.” 11 U.S.C. § 523(a)(6). Under §
523(a)(6), Debtors’ actions would need to equate with “willful and malicious” injury within the
meaning of the Code. The first step of this inquiry is whether there is “willful” injury, which must
entail a deliberate or intentional injury. Kawaauhau v. Geiger, 523 U.S. 57, 61-62 (1998). In the
Ninth Circuit, the intent required to be considered “willful” is either the subjective intent of the
actor to cause harm or the subjective knowledge of the actor that harm is substantially certain to
occur. Carrillo v. Su (In re Su), 290 F.3d 1140, 1144-45 (9th Cir. 2002).
The second step of the inquiry is whether Debtors’ conduct was “malicious.” The
relevant test for such “malicious” conduct is: 1) a wrongful act; 2) done intentionally; 3) which
necessarily causes injury; and 4) without just cause and excuse. Jett v. Sicroff (In re Sicroff),
401 F.3d 1101, 1105-1106 (9th Cir. 2005).
The statutory scheme set out in § 523(a) indicates that nondischargeability claims
alleging fraud should be brought under § 523(a)(2)(A). See McCrary v. Barrack (In re Barrack),
201B.R. 985, 990-91 (Bankr.S.D.Cal.1996) (finding that the more specific statute, §
523(a)(2)(A), controls fraud nondischargeability rather than the more general statute, §
523(a)(6)), reversed on other grounds, 217 B.R. 598 (B.A.P. 9th Cir. 1998). Indeed, section
523(a)(2)(A) expressly applies to debts “for money” obtained by “actual fraud.” 11 U.S.C. §
523(a)(2)(A).
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The Supreme Court, however, has suggested that nondischargeability claims based on
fraud fall within the ambit of § 523(a)(6) only if: (1) the debtor fraudulently obtained something
other than money, property, or services; or (2) the fraud claim involved punitive damages.
Grogan v. Garner, 498 U.S. 279, 282 n. 2 (1991). The Supreme Court has since clarified that all
damages (both actual and punitive) resulting from a debtor's fraud are nondischargeable under
§ 523(a)(2)(A). See Cohen v. De La Cruz, 523 U.S. 213 (1998).
Here, Plaintiff alleges the exact same set of facts give rise to a nondischargeability claim
under § 523(a)(6). Plaintiff has not alleged anything more that would bring this set of facts
within the ambit of § 523(a)(6). Defendants are entitled to judgment on the § 523(a)(6) claim.
Conclusion
Viewing the facts and the inferences to be drawn therefrom in a light most favorable to
Plaintiff, there are genuine issues of material fact as to four issues of the § 523(a)(2)(A) claim,
specifically (1) whether Nicholas made a false statement; (2) whether Nicholas knew the
representation was false at the time it was made; (3) whether Plaintiff’s damages were
proximately caused by the alleged fraudulent statement; and (4) the amount of the damages, if
any, that were proximately caused by the alleged fraudulent statement.
Lastly, Defendants demonstrated that no genuine issues of material fact were presented
as to Plaintiff’s claim under § 523(a)(6). Even assuming all is as Plaintiff alleges, there is no
evidence to support a willful or malicious injury on Plaintiff.
The motion for summary judgment is DENIED as to the claim under § 523(a)(2).
Summary judgment is GRANTED as to as to the claim under § 523(a)(6). Defendants to lodge
order on the Motion for Partial Summary Judgment within 7 days.
//
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//
//
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While the entire McAllister debt is still at issue as part of the § 727 causes of action,
those causes of action were not at issue in this motion. There appears to be approximately $2.1
million in unsecured debt at issue as a consequence of the § 727 causes of action. As the
denial of a discharge on all debts would obviate the need for a trial on the § 523 cause of action,
and that evidence would be distinct and separate, the parties should plan for a trial on the § 727
action first, followed by a § 523 trial if needed. Dates to be selected at the next hearing.
###
Date: March 13, 2014
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