Xiang et al v. Milnes

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UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re
JAMES WILKES MILNES,
Debtor.
Bankruptcy Case
No. 10-33136DM
Chapter 7
XINYU XIANG and HANSHU DING,
Plainti
ffs,
v.
JAMES WILKES MILNES,
Defenda
nt.
Adversary Proceeding
No. 10-3191DM
MEMORANDUM DECISION
ON COMPLAINT TO EXCEPT DEBT FROM DISCHARGE
I. 	INTRODUCTION
Xinyu Xiang (“Xiang”) and Hanshu Ding (collectively “Plaintiffs”)
initiated this adversary proceeding by filing a complaint (the
Signed and Filed: July 26, 2011
________________________________________
DENNIS MONTALI
U.S. Bankruptcy Judge
________________________________________
Entered on Docket
July 27, 2011
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
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“Complaint”) against James Wilkes Milnes (“Debtor”). 	The Complaint
sought damages in the minimum amount of $125,000 plus prejudgment
interest; a determination that the Plaintiffs’ claim is
nondischargeable; punitive damages; and attorney’s fees and costs of
suit.
More specifically, by the first claim for relief, Plaintiffs
sought a determination that their claim is nondischargeable under 11
U.S.C. § 523(a)(2)(A). 1 Plaintiffs contended that prior to the filing
of his chapter 7 petition, Debtor made misrepresentations, omissions,
suppressions, and concealed material facts regarding a land investment
deal that Plaintiffs justifiably relied on and caused them to invest
$100,000 in real estate with an assured recovery of $125,00, none of
which they recovered.
By the second claim for relief, Plaintiffs sought a determination
that their claim is nondischargeable under § 523(a)(4). 	Plaintiffs
contended that Debtor agreed to manage Plaintiffs’ investment, and
engaged in fraud and defalcation while acting in a fiduciary capacity.
By the third claim for relief, Plaintiffs sought a determination
that under § 523(a)(6) their claim is nondischargeable. 	Plaintiffs
contended that Debtor willfully and maliciously injured them by
purposefully deceiving Plaintiffs regarding their real estate
investment, and caused them to lose $100,000.
The matter was tried to the court on July 12, 2011; appearances
1 Reference to the “Bankruptcy Code” is to the Bankruptcy Reform Act of
1978, as amended, 11 U.S.C. § 101, et seq. 	Unless otherwise indicated,
references to statutory sections are to sections of the Bankruptcy
Code.
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were noted in the record. 	Having considered the testimony of the
witnesses, the documentary evidence, and the arguments of the parties,
for the reasons to be explained below, the court will enter a judgment
declaring Plaintiffs’ claim in the amount of $125,000 (plus prejudgment
interest from July 2, 2009, at the rate of 10% per annum) is
nondischargeable pursuant to § 523(a)(2).
On the second and third claims for relief the court concludes that
Plaintiffs did not meet their burden of proof and the claims will be
dismissed.
II. 	FACTS 2
Debtor was president of JB Land Development, LLC (“JB Land”). 	JB
Land purchased undeveloped real estate and attempted to increase the
value of the land through development. 	JB Land solicited investors to
fund its development projects. 	In accordance with JB Land’s business
model, investors purchased a fractional interest in a parcel of
property as tenants-in-common with JB Land. 	The typical contract that
investors signed contained a provision requiring JB Land to buy back
the interest in the land sold to the investor within two years; the
buy-back price in the typical contracts was 150% of the purchase price.
JB Land owned eight to nine parcels of land and at various times
engaged in the development of a senior center, an equestrian center,
and other projects. 	No project was ever fully developed and
constructed. 	JB Land successfully executed a buy-back of an investor’s
stake in a parcel of land on one occasion. 	In that instance, JB Land
2 The following discussion constitutes the court’s findings of fact and
conclusions of law. 	Fed. R. Bankr. P. 7052(a).
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purchased undeveloped property and a short time later was able to sell
that land for approximately twice its purchase price. 	The land had not
been developed in any meaningful way and the increase in value was
largely the result of the land having been previously undervalued.
Debtor was an experienced real estate broker and a former real
estate appraiser. 	His primary role at JB Land was to utilize his
valuation skills to identify land that would be appropriate to purchase
and develop. 	Also, Debtor focused on the feasibility of developing
land. 	Debtor customarily did not recruit new investors for JB Land.
Debtor’s fellow owner of JB Land usually recruited investors, but
Debtor did meet with Xiang. 	Xiang was an engineer and did not have
experience or expertise in real estate.
On June 12, 2007, Debtor, on behalf of JB Land, met with Xiang and
discussed JB Land’s business and the opportunity for investment. 	Xiang
was put in contact with Debtor after responding to a message
advertising investment opportunities posted on an online message board
that focused on investors in Plaintiffs’ locale. 	At the meeting Debtor
gave Xiang two documents: a cover sheet introducing JB Land’s business
model and a more detailed brochure that described the company and
emphasized the quality of the investment opportunities. 	During the
meeting Debtor discussed with Xiang a 9.32 acre parcel of land in Kern
County, California (the “parcel”) that JB Land was working to develop.
Debtor told Xiang that JB Land intended to construct mini-warehouse
storage units (“mini-warehouse”) on the parcel and lease the storage
space to customers. 	Additionally, he stated that JB Land was seeking
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investors to assist in financing the development of the parcel.
In accordance with JB Land’s customary business practice,
investors would purchase an interest in the parcel and be tenants-in-
common with JB Land, which retained a “controlling” interest in it.
Debtor informed Xiang that after a two-year period, or potentially
earlier, JB Land would buy back the investors’ interest in the parcel
at an increased price, as dictated by JB Land’s standard contractual
agreement. 	The source of the buy-back funds would come from the
construction of the mini-warehouse, which would provide rental income
and increase the value of the parcel. 	Debtor stressed to Xiang that
the investment opportunity was limited because JB Land was only seeking
approximately $2.7 million to fund the development and it was important
to act quickly. 	Debtor also told Xiang that JB Land had successfully
completed a buy-back agreement with another investor, and had
repurchased that investor’s interest in one year. 	At the conclusion of
the meeting, Xiang requested that Debtor send him a copy of an
appraisal of the parcel.
Debtor sent Xiang a letter of value. 	The letter of value was
prepared by an appraisal company and stated a projected value of the
parcel of $6.95 million. 	The projected value was based on the
assumption that the parcel had been fully developed and the proposed
mini-warehouse had been constructed. 	Shortly after receiving the
letter of value, Plaintiffs decided to make an investment with JB Land.
The investment was memorialized in two documents, a Vacant Land
Purchase Agreement and Joint Escrow Instructions (“Vacant Land Purchase
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Agreement”), and a Purchase Agreement Regarding 9.32 Acres of Prime M-1
Industrial Land (“Purchase Agreement Regarding 9.32 Acres”).
Plaintiffs signed the documents on June 23, 2007, and June 25, 2007,
respectively. 	The Vacant Land Purchase Agreement provided that
Plaintiffs would purchase a 2.5% tenancy in common interest in the
parcel for the price of $100,000. 	The Purchase Agreement Regarding
9.32 Acres described the escrow process that would be used to transfer
the $100,000 to JB Land. 	It also contained the buy-back provision, a
description of Plaintiffs’ recourse if JB Land defaulted on the buy-
back, and a personal guarantee of the terms of the agreement by Debtor
and the co-owner of JB Land.
The buy-back provision, as set forth in the Purchase Agreement
Regarding 9.32 Acres, provided that JB Land would buy all of the
Plaintiffs’ interest in the parcel on or before July 1, 2009, for
$125,000. 	Additionally, if JB Land failed to purchase all of
Plaintiffs’ interest by July 1, 2009, Plaintiffs would be allowed to
retain their ownership interest or sell their interest; if Plaintiffs
opted to sell and the sale of their interest netted less than $125,000,
Plaintiffs could seek payment of the difference from JB Land and the
two guarantors.
In or around 2007, JB Land raised $2,695,200 from investors who
purchased interests in the parcel. 	Of the money raised to develop the
parcel, $400,000 was used for various development activities including
clearing the land, installing cyclone fencing, beginning the process of
grading the land, and various other steps were taken to develop the
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parcel. 	It is not clear what the remaining $2.295 million was used
for. 	What is clear is that the money was not allocated to specifically
fund development of the parcel but was appropriated for other
undocumented uses. 	At trial, Debtor confirmed that JB Land did not
necessarily use the money that was raised from investors purchasing
interests in land to develop that particular parcel of land.
Plaintiffs were never paid the $125,000 owed to them and continue to
hold their 2.5% interest in the parcel, which, according to Xiang, is
effectively worthless.
Debtor filed a petition for relief under chapter 7 of the
Bankruptcy Code on August 13, 2010 (the “Petition Date”). 	Plaintiffs
filed the complaint on November 12, 2010. 	The court entered an order
discharging the Debtor on November 23, 2010.
III. 	DISCUSSION
The court is faced with the task of determining whether Debtor
induced Plaintiffs to invest in JB Land based on false pretenses,
through false representation, or through actual fraud, whether
Plaintiffs justifiably relied on Debtor’s conduct and representations,
and consequently, whether Plaintiffs’ claim is nondischargeable.
Debtor contended that he acted in good faith towards Plaintiffs and did
not misrepresent the nature of JB Land and its involvement with the
parcel, nor did he omit any material fact. 	In contrast, Plaintiffs
pointed to the documents received at the initial meeting with Debtor
and the oral representations made at that meeting. 	On balance, the
preponderance of the evidence supports the court’s conclusion that
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Plaintiffs’ claim is nondischargeable.
Section 523 of the Bankruptcy Code dictates when a debtor is not
entitled to a discharge of certain debts. 	Section 523(a)(2)(A)
provides that a debt may not be discharged if it was obtained by “false
pretenses, a false representation, or actual fraud.” 	§ 523(a)(2)(A).
Those terms are not defined in the Bankruptcy Code; however, the United
States Supreme Court has held that the terms “carry the acquired
meaning of terms of art. 	They are common law terms, and . . . in the
case of “actual fraud,” . . . they imply elements that the common law
has defined them to include.” 	Field v. Mans, 516 U.S. 59, 69 (1995).
The Bankruptcy Code is designed to give the honest, but
unfortunate debtor a fresh start in bankruptcy; thus exceptions to
discharge should strictly construed against the creditor and liberally
in favor of the debtor. 	Landsdowne v. Cox (In re Cox), 41 F.3d 1294,
1297 (9th Cir. 1994). 	A creditor must show that the debtor engaged in
“blameworthy” conduct in order to successfully except a debt from
discharge. 	In re Anderson, 181 B.R. 943, 948 (Bankr. D. Minn. 1995).
Hence, the creditor bears the burden of proving the debtor’s
dishonesty; that burden is satisfied by establishing by a preponderance
of the evidence five elements:
(1) misrepresentation, fraudulent omission or deceptive conduct by
the debtor; (2) knowledge of the falsity or deceptiveness of his
statement or conduct; (3) an intent to deceive; (4) justifiable
reliance by the creditor on the debtor's statement or conduct; and
(5) damage to the creditor proximately caused by its reliance on
the debtor's statement or conduct. 	Turtle Rock Meadows Homeowners
Ass’n v. Slyman (In re Slyman), 234 F.3d 1081, 1085 (9th Cir.
2000).
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Each of the five Slyman elements will be addressed in turn.
A. 	Misrepresentation, Fraudulent Omission, or Deceptive Conduct
by the Debtor
Plaintiffs contended that Debtor engaged in misrepresentation,
fraudulent omission, or deceptive conduct at least three times when
interacting with Plaintiffs: when providing documents at the initial
meeting; when making verbal representations at the initial meeting; and
in an e-mail that contained the letter estimating the value of the
parcel.
Debtor provided misleading documents to Plaintiffs at the initial
meeting. 	The brochure given to Plaintiffs stated that “[i]ndividual
investments are aggregated and matched with the appropriate real
estate.” This statement purportedly described JB Land’s business model,
which involved estimating the potential value of undeveloped land if it
were developed and then allowing investors to purchase a percentage
interest in the land based on a value derived from the projected
developed value. 	In theory, investments would be recouped when the
land appreciated to the speculated value.
In the present case, the parcel was given a projected developed
value of $6.95 million; that price was then reduced by 40% to $4
million. 	JB Land then sold interests in the parcel, ranging from 1.25%
to 25%, to eleven different investors and retained a 32.62% interest in
the land. 	The eleven investors owned a 67.38% share in the parcel,
which represented an investment of $2,695,200. 	The parcel was
originally purchased for $179,000, and is presently worthless. 	There
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was no appraisal of the parcel’s actual value at the time JB Land was
procuring investors. 	Due to Debtor’s representations, Plaintiffs’
investment was obtained on the premise that it would be aggregated with
other funds from the other purchasers of interests in the parcel,
matched with the appropriate real estate, and, according to the
brochure, used to “develop or otherwise add value to the land.” 	In
actuality, JB Land did not earmark Plaintiffs’ funds to a specific
development project; rather, it used a portion of the funds to aid
development of various parcels. 	In sum, the statement in the brochure
that Plaintiffs’ investment would be designated for development of the
parcel was a misrepresentation.
Debtor’s verbal statements to Xiang at the initial meeting
contained misrepresentations. 	Debtor made verbal representations that
JB Land was seeking investors to invest in the development of the
parcel and those investors’ funds would be used to construct the mini-
warehouse and lease the storage space. 	Additionally, Debtor emphasized
to Plaintiffs the low-risk nature of the investment. 	Debtor contended
that because Plaintiffs were purchasing an interest in real estate at a
“bargain price,” if development faltered their investment would be
secured by that interest. 	However, the price Plaintiffs paid for their
interest in the purchase can only be considered a bargain if the parcel
was valued at $4 million or $6.95 million, values which were dependent
upon the parcel being fully developed. 	In reality, Plaintiffs, for
$100,000 purchased a 2.5% interest in real estate that was closer in
value to $179,000 than to $4 million. 	Even assuming that the property
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had increased in value from when it was purchased, Plaintiffs did not
receive a bargain price on their investment and their investment was
not low-risk, but was contingent on the successful completion of the
development process.
At trial, Debtor testified that the development process was
generally complicated and could contain unforeseeable risks and
uncertainties; in contrast to Debtor’s claim that the investment was
low-risk, this was not conveyed to Plaintiffs. 	In sum, Debtor
knowingly made the following verbal misrepresentations: Debtor told
Plaintiffs their investment would be used to develop the parcel and
construct the mini-warehouse, when in fact the funds were used for
various purposes; Debtor told Plaintiffs that their investment was low-
risk, when in fact the investment was subject to the complicated and
risky development process; and Debtor told Plaintiffs that their
investment was secure because they had purchased an interest in real
estate at a “bargain price,” when in fact the price paid for the real
estate could only be justified if the property was fully developed.
The court finds that the e-mail sent to Plaintiffs on June 27,
2007, was not misleading. 	The e-mail included the letter of value
projecting the value of the parcel at $6.95 million and contained no
indication that it should not be considered true and accurate. 	The
letter of value was prepared by a third-party and explicitly stated
that the estimated value was based on the assumption that the proposed
mini-warehouse project was completed. 	Debtor stated that he sent the
letter of value to Plaintiffs to establish the value of the parcel when
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all improvements were completed. 	Although assuring a potential
investor of the security of an investment by providing a valuation
based on future conditions being satisfied may not be standard
practice, transmission of the letter of value to Plaintiffs does not
establish fraudulent conduct or misrepresentation.
Nevertheless, due to the written and verbal representations made
to Xiang at his meeting with Debtor, Plaintiffs have established by a
preponderance of the evidence that Debtor engaged in misrepresentation.
Thus, the first Slyman element is satisfied.
B. 	Knowledge of the Falsity or Deceptiveness of his Statement or
Conduct
Knowledge may be proven “by circumstantial evidence and inferred
from the debtor’s course of conduct.” In re Ortenzo Hayes, 315 B.R.
579, 587 (Bankr. C.D. Cal. 2004). 	In addition, knowledge of the
falsity or deceptiveness of one’s conduct may be established by showing
reckless indifference to the truth or falsity of statements. 	Gertsch
v. Johnson & Johnson, Fin. Corp. (In re Gertsch), 237 B.R. 160, 167
(B.A.P. 9th Cir. 1999).
Debtor’s course of conduct may be examined in the totality of the
circumstances in order to determine whether a reckless indifference to
the truth and intent to deceive existed. 	Id. at 167-68. 	Debtor acted
as an appraiser and a broker before his tenure at JB Land, and had over
twenty years of real estate experience. 	Debtor acted as the president
of JB Land. 	Although his primary responsibilities at JB Land were
related to determining the value of land and the feasibility of
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development projects, on at least one occasion he solicited investors.
Debtor also assisted in the editing of the coversheet and brochure
given to Plaintiffs.
Debtor, as an editor of the documents, presumably was aware of
their content. 	However, even assuming that Debtor only edited sections
of the documents that did not contain misrepresentations, had not read
the documents in full, and was therefore unaware of the
misrepresentations the documents contained, his knowledge may still be
established by finding he acted with a reckless disregard for the
truth. 	In other words, “[r]eckless reliance by a debtor on the
statements of another may be grounds for non-dischargeability even
where the debtor had no actual knowledge that the statements made to
plaintiff were false.” 	Visotsky v. Woolley, 145 B.R. 830, 835 (Bankr.
E.D. Va. 1991) (citing, among other cases, In re Houtman, 568 F.2d 651
(9th Cir. 1978) overruled in part on other grounds by Cowen v. Kennedy
(In re Kennedy), 108 F.3d 1015 (9th Cir. 1997)).
Here, although it is likely that Debtor had actual knowledge of
the contents of the one-page cover sheet and twelve-page brochure that
he provided to Plaintiffs, distributing documents emblazoned with his
company’s name and his own name without confirming their content and
verifying the accuracy of the documents shows a reckless disregard for
the truth. 	Conduct is reckless when a known or obvious risk from which
it is highly probable harm will follow is disregarded. 	Safeco Ins. Co.
of America v. Burr, 551 U.S. 47, 49 (2007). 	Despite the contentions of
the twelve-page brochure, an experienced real estate or investment
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professional knows that few investments are “sure things” when returns
of twenty-five to fifty percent are contemplated.
Debtor was aware that investments carry varying levels of risk,
and presented this investment as a low-risk investment, despite the
potential for unforeseen complications in the development process. 	In
addition, Debtor’s experience as a real estate professional and his
position as president of JB Land would have allowed him easily to
discover the errors if he had investigated the contents of the document
before presenting it to Plaintiffs. 3 Despite Debtor’s representation
that the investment opportunity was low-risk, financial harm to
Plaintiffs was highly probable; hence, it was reckless conduct for
Debtor to present documents that contained misrepresentations in
conjunction with a solicitation for investment.
Moreover, Debtor knowingly misrepresented that Plaintiffs’ funds
would be used to develop the mini-warehouse on the parcel and that
Plaintiffs would be secured in their investment because they would have
purchased an interest in real estate at a “bargain price.” 	First,
Debtor, as president of JB Land, was aware that JB Land did not earmark
funds to specific development projects, but rather allocated the funds
to whatever project would benefit most from the funds. 	Second, the
court infers that Debtor, as an experienced real estate professional,
knew that the parcel’s pre-development value could not justify
characterizing a purchase price of $100,000 for a 2.5% interest as a
3 At trial, Debtor was unable to explain the meaning of the statement
“Individual investments are aggregated and matched with the appropriate
real estate.”
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“bargain price” that would secure Plaintiffs from risk of loss.
In sum, Plaintiffs proved by a preponderance of the evidence that
Debtor made verbal statements that he knew to be misrepresentations at
the meeting with Xiang and provided informational documents that he
knew contained misrepresentations, which together were the basis for
obtaining the $100,000 investment from Plaintiffs.
C. 	An Intent to Deceive
An intent to deceive can rarely be proven by direct evidence
establishing the debtor’s state of mind, thus “[a] court may infer
fraudulent intent from various kinds of circumstantial evidence.”
Edelson v. Commissioner, 829 F.2d 828, 832 (9th Cir. 1987); Gertsch v.
Johnson & Johnson, Fin. Corp. (In re Gertsch), 237 B.R. 160, 167-68
(9th Cir. BAP 1999). 	An intent to deceive “may properly be inferred
from the totality of the circumstances and the conduct of the person
accused.” 	In re Ormsby, 591 F.3d 1199, 1206 (9th Cir. 2010).
For example, in In re Young, a case with facts very similar to the
present case, the United States Bankruptcy Court for the Southern
District of California inferred an intent to deceive from the inclusion
of the words “Note Secured by Deed of Trust” on documents created to
record an investment, when the investment was not actually secured by a
deed of trust. 	In re Young, 208 B.R. 189, 201 (Bankr. S.D. Cal. 1997),
abrogated on other grounds by Cohen v. De La Cruz, 523 U.S. 213 (1998).
The court inferred from the debtor’s real estate experience that the
words “Note Secured by Deed of Trust” were not included by mistake, and
that debtor intended the misrepresentations to deceive investors. 	Id.
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at 201.
Like the debtor in Young, here, Debtor, an experienced real estate
professional, made representations to Plaintiffs with an intent to
deceive. 	The written documents gave the impression that the investment
funds would be secured by a deed of trust and that the funds would be
dedicated to development of the particular real estate. 	However, the
funds were not dedicated to development of a specific property.
Additionally, Debtor made verbal representations regarding the
dedication of investment funds to the development of the parcel and
claimed Plaintiffs’ investment would also be secured by the value of
the parcel. 	Both statements were misrepresentations, and in
conjunction with the written misrepresentations they were used to
induce Plaintiffs to invest in JB Land. 	The misrepresentations were
designed to make the investment opportunity more attractive and reduce
any fears of risk. 	Thus, based on the documentary and evidentiary
record the court infers that Debtor made the written and verbal
representations with an intent to deceive.
D. 	Justifiable Reliance by the Creditor on the Debtor's
Statement or Conduct
Justifiable reliance, as opposed to reasonable reliance, “is a
minimal, subjective standard that encompasses ‘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.’” 	In re Hill, 425 B.R.
766, 777 (Bankr. W.D. N.C. 2010) (citing Field v. Mans, 516 U.S. 59, 71
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(1995)). 	Moreover, a plaintiff does not have an automatic duty to
investigate the accuracy of statements or conduct, but a duty may inure
“when the surrounding circumstances give red flags that merit further
investigation; this analysis turns on ‘an individual standard of the
[creditor’s] own capacity and the knowledge which he has.’” 	In re
Sharp, 340 Fed. Appx. 899, 903 (4th Cir. 2009) (citing Field, 516 U.S.
at 72) (bracketed text in original).
For example, in In re Kane the United States Bankruptcy Court for
the District of Massachusetts found that creditors had justifiably
relied on the statements and conduct of a debtor who conducted a
telemarketing operation that solicited investors. 	In re Kane, 212 B.R.
697, 699, 701 (Bankr. D. Mass. 1997). 	The debtor made oral and written
representations about the nature of the investments to clients
initially contacted by telephone; after the initial contact by
telephone those persons interested in investing were contacted again by
phone and mail. 	Id. 	The court determined that the investors were not
sophisticated and the repeated oral representations and the information
contained in brochures mailed to the investors gave investors “no
reason to suspect that they were being defrauded. 	Therefore, their
reliance was justifiable.” 	Id. at 701.
As in Kane, there was nothing in the representations made to
Plaintiffs that raised a red flag or would have required further
investigation. 4 Plaintiffs recognized Debtor as an experienced and
4 Although the high rate of return on the investment may appear to be a
red flag, when viewed in conjunction with the fact that Debtor informed
Plaintiffs JB Land had successfully completed a buy-back at 150%, any
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accomplished real estate professional and relied on his representations
as accurate. 	Xiang testified that Plaintiffs based their decision to
invest in JB Land on the representations made by Debtor. 	That reliance
was justifiable. 	Plaintiffs did not have expertise in real estate
investment and nothing in their backgrounds provided a basis for
determining that the representations were not factual at the time they
were made. 	Thus, Plaintiffs have shown by a preponderance of the
evidence that they justifiably relied on Debtor’s representations.
E. 	Damage to the Creditor Proximately Caused by its Reliance on
the Debtor's Statement or Conduct
Section 523(a)(2)(A) limits non-dischargeability to “money,
property, services, or an extension, renewal, or refinancing of credit,
to the extent obtained by” the fraudulent conduct. 	§ 523(a)(2)(A).
Courts have struggled to interpret precisely what damages are
contemplated under § 523(a)(2)(A), but the United States Supreme Court
in Cohen v. de la Cruz concluded that the text of § 523(a)(2)(A)
“encompasses any liability arising from money, property, etc., that is
fraudulently obtained, including treble damages, attorney’s fees and
duty to investigate was met when Xiang asked for an appraisal of the
parcel. 	The Supreme Court, in its discussion of the duty to
investigate, relayed a pertinent example:
. . . if one induces another to buy a horse by representing it to be
sound, the purchaser cannot recover even though the horse has but one
eye, if the horse is shown to the purchaser before he buys it and the
slightest inspection would have disclosed the defect. 	On the other
hand . . . a defect that any experienced horseman would at once
recognize at first glance may not be patent to a person who has no
experience with horses. 	See Field, 516 U.S. at 71 (quoting
Restatement (Second) of Torts § 541 cmt. a).
In the present case, although a return of 25% may have appeared as a
red-flag to an experienced investor, Plaintiffs were not experienced
investors and had no reason to view a 25% return as suspicious.
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other relief that may exceed the value obtained by the debtor.” 	Cohen
v. de la Cruz, 523 U.S. 213, 223 (1998).
The court finds that at the least Plaintiffs suffered damages in
the amount of $100,000. 	The contract Plaintiffs entered into provided
that Plaintiffs purchase an interest in the parcel for $100,000 and at
the end of two years JB Land would buy back their interest for
$125,000. 	The $100,000 purchase price was obtained by Debtor’s
misrepresentations and directly arose from the fraudulent acquisition,
and should therefore be nondischargeable. 	Moreover, the contract
entered into between JB Land and Plaintiffs contained a provision
making Debtor personally liable for the full repurchase price of
$125,000. 	The provision provided: “This contract is guaranteed by the
principals of J B Land Development who hereby confirm their personal
liability with the following signatures.” Immediately below this
provision was the Debtor’s signature. 	Thus, Debtor was personally
liable through contract for the repurchase price of $125,000. 	Had the
terms of the contract been fulfilled Plaintiffs would have earned
$25,000 on their initial $100,000 investment. 	In sum, Plaintiffs
established by a preponderance of the evidence that they suffered
damages of $125,000 that were proximately caused by Debtor’s fraudulent
conduct and Debtor is liable for that amount. 5
5Debtor averred that Plaintiffs did not suffer damages because a
provision to the contract that dealt with possibility of JB Land’s
default provided that Plaintiffs may either retain their interest in
lieu of payment or sell their interest and seek recoupment of the
difference between the sale price and $125,000. 	It is true that
Plaintiffs did not sell their interest in the parcel, but the parcel is
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Plaintiffs have shown by a preponderance of the evidence that the
court can, and does, find the five Slyman elements necessary to
establish a case for non-dischargeability under § 523(a)(2)(A).
Therefore, the court concludes that Plaintiffs claim is
nondischargeable. 	Plaintiffs did not prove nor meaningfully argue at
trial the elements of their second and third claims for relief under §§
523(a)(4) and (6), respectively. 	Thus, because Plaintiffs succeeded on
their first claim for relief and did not satisfy the burden of proof on
their second and third claims they will not be discussed. 	Having
concluded that Plaintiffs’ claim for $125,000 is nondischargeable this
court must now determine whether any additional damages are
nondischargeable.
IV. 	DAMAGES
Plaintiffs have proven that they are entitled to except $125,000
from discharge. 	Plaintiffs also seek prejudgment interest, punitive
damages, and attorney’s fees and costs of suit. 	For the reasons to be
discussed, Plaintiffs are entitled to prejudgment interest but not
entitled to punitive damages nor attorney’s fees and costs of suit.
According to the terms of the contract, Plaintiffs were to be paid
$125,000 on or before July 1, 2009; they were not paid. 	Thus,
currently worthless and Debtor offered no evidence rebutting that fact.
Therefore, premising Plaintiffs’ ability to recover damages on the
“sale” of worthless property is an idle act and afforded no legal
recognition. 	See C AL . C IV . CODE § 3532 (“The law neither does nor
requires idle acts.”). 	However, should Plaintiffs ever sell their
interest in the parcel, the amount received from that sale would offset
Debtor’s liability.
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Plaintiffs are entitled to prejudgment interest, at the rate of 10% per
annum beginning on July 2, 2009. 	C AL . C IV . C ODE . §§ 3287, 3289(b).
In California, punitive damages are only allowed when the breach
does not arise from a contractual obligation. 	C AL . CIV . CODE § 3294.
However, when the breach of a contractual obligation is also a tort
punitive damages are recoverable. 	Frazier v. Metropolitan Life Ins.
Co., 169 Cal. App. 3d 90 (1985). 	In this case, Plaintiffs offered no
evidence that Debtor committed a tort, and merely seek a determination
that the liabilities established under the contract are not
dischargeable because the contract was fraudulently obtained. 	Thus,
Plaintiffs are not entitled to punitive damages.
Section 1021 of the California Civil Procedure Code addresses
attorney’s fees: “[e]xcept as attorney’s fees are specifically provided
for by statute, the measure and mode of compensation of attorneys and
counselors at law is left to the agreement, express or implied, of the
parties.” 	C AL . CIV . PROC . CODE § 1021. 	The contract between Plaintiffs
and Debtor did not contain a provision addressing attorney’s fees and
there was no evidence of an implied agreement regarding attorney’s fees
between the parties, therefore under section 1021 of the California
Code of Civil Procedure, Plaintiffs are not entitled to attorney’s fees
and costs.
V. 	CONCLUSION
For the reasons discussed above, Plaintiffs are entitled to a
determination on the first claim for relief that the liability of
$125,000 is not dischargeable as a result of Debtor’s chapter 7
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petition. 	Additionally, Plaintiffs are entitled to a judgment on the
first claim for relief in the amount of $125,000 plus prejudgment
interest at the rate of 10% per annum from July 2, 2009. 	Counsel for
Plaintiffs is directed to lodge a form of Judgment consistent with this
Memorandum Decision and should comply with B.L.R. 9021-1 and 9022-1.
* * END OF MEMORANDUM DECISION * *
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COURT SERVICE LIST
James Wilkes Milnes
851 Cherry Ave., #27-412
San Bruno, CA 94066
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