Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_06-cv-00508/USCOURTS-cand-3_06-cv-00508-11/pdf.json

Nature of Suit Code: 422
Nature of Suit: Bankruptcy Appeals Rule 28 USC 158
Cause of Action: 28:0158 Notice of Appeal re Bankruptcy Matter (BAP)

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IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

In re

DEMAS WAI YAN, aka DENNIS YAN

Debtor.

_________________________________

WEI SUEN

Plaintiff/Appellant v

DEMAS YAN, et al,

Defendants/Appellees

 /

No C 06-0508 VRW

Bankr Case No 04-33526

Bankr Adv No 05-3257

 ORDER

Plaintiff Wei Suen, as assignee of the claim of Dong Fu

(also known as Tony Fu), appeals from a judgment entered by the

United States Bankruptcy Court denying a claim for recovery of a

share of profits specified under an agreement entered into

between Fu and Defendant Demas Yan (also known as Dennis Yan). 

In the bankruptcy court’s Amended Decision After Trial

entered on March 3, 2006, the bankruptcy court characterized the

Yan-Fu agreement as a “joint venture agreement” but determined

that Suen as Fu’s assignee could not recover Fu’s share of

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 The Amended Decision of the bankruptcy court (Doc # 49 Ex

23) gives this date as October 2000 (at 2:13). This not only

makes no sense given that Wong sold the property in February 2000

but is not supported by record documents (e g, Trial Exhibit A is

a Yan-Fu-Wong agreement dated October 25, 1999)(Doc # 49 Ex 10). 

Neither party’s brief, however, calls attention to this error. 

2

profits from the project that was the subject of the agreement or

even recoup funds contributed to the venture. Specifically, the

bankruptcy court determined that Fu, who was not then a licensed

contractor, had acted as a contractor on the project and was

therefore barred from recovery by California Business and

Professions Code § 7031. After a careful review of the

bankruptcy court’s record and applicable law, the decision of the

bankruptcy court is REVERSED and REMANDED for further proceedings

consistent with this opinion.

I

A

This section summarizes the bankruptcy court’s Amended

Decision After Trial (Am Dec). Doc # 49 Ex 23.

Winky Wong owned a single-family residence at 663

Chenery Street in San Francisco (the “property”). In October

1999,1

 Yan, Fu and Wong entered into a written agreement to

demolish the existing improvements to the property and build four

condominium units. Wong was to supply the property in return for

fifty percent of the proceeds from the sale of the units, while

Yan and Fu were to pay for the cost of construction and together

receive the remaining fifty percent of the proceeds.

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On February 2000, presumably before work on the project

had begun, Yan purchased the property from Wong. On October 12,

2000, Wong, Fu and Yan canceled their three-party agreement. On

October 18, 2000, Yan and Fu entered into a new written agreement

(the “agreement”). The agreement’s complete and exact wording is

set forth below:

Agreement/Contract

This is intended to be a legally binding contract.

This agreement is between Demas Yan and Dong Fu

concerning over the project and ownership

located in 663 Chenery Street, San Francisco,

California

The entire agreement is as follows: 

1. Demas Yan will entitle to 75% ownership and

Dong Fu will entitle to 25% ownership over

the said property located in 663 Chenery

Street, San Francisco.

2. Regarding the construction project, Demas

will responsible for the initial $300,000

construction cost. Dong will responsible

for the rest of the construction costs.

3. The said property is either up for sale or

rent, the proceeds shall distribute

according to the ownership percentage;

however, Dong has complete right to decide

whether to sell or to rent the property. 

4. The ownership is transferable and can be

assigned to any one by his own choice but

only limit to his own ownership percentage.

Doc # 29 Ex 10. The document was signed by Yan and Fu, both

signatures dated October 18, 2000. 

The bankruptcy court’s decision described the agreement

at issue as a “joint-venture agreement” but provided no analysis

describing how it concluded that the agreement should be so

characterized. The Amended Decision described the parties’

responsibilities under the agreement thusly: “Yan was to provide

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the property and up to $300,000 of the costs of construction in

return for 75 percent of the proceeds from the sale of the

condominiums. Fu was to supervise construction and supply all

additional costs of construction in return for 25 percent of the

sale proceeds.” Am Dec at 2:24-28. Fu was without a valid

contractor’s license throughout the entire construction period. 

(According to evidence in the record, Fu was formerly a licensed

contractor, but was no longer. See, e g, Fu Testimony, July 26,

2005, RT 206-07 (Doc # 49).) 

Construction on the property began in May 2001 and

ended in August 2003. Yan eventually sold all four units by mid2005 for a combined price of approximately $2.3 million. 

Meanwhile, in November 2002, Yan executed a promissory

note in favor of Stella Chen, Fu’s sister, for $450,000 together

with a deed of trust against the Chenery Street property as

security for the note. Chen contended that the note represented

a promise to repay a cash loan advanced to Yan by a relative of

Fu who lived in Hong Kong. Am Dec at 3. Yan, however, contended

that he received no cash loan and that the note was “the

embodiment of Fu’s interest under the Agreement” but was

unenforceable under California law because it represented

compensation for construction services by an unlicensed

contractor. Id.

Fu at some point assigned his interest under the

agreement to Suen. Suen sought a twenty-five percent share of

the proceeds, but Yan contended that Fu’s share under the

agreement was in fact compensation for contracting services which

could not be recovered by an unlicensed contractor. Id at 3. 

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1

 Regarding the agreement, the bankruptcy court made the

following findings of fact: 

• the agreement was an agreement to establish a joint

venture;

• Yan provided the entire consideration for the

purchase of the fee interest in the property from Winky Wong in

February 2000; 

• Yan retained legal title to the property following

the execution of the agreement;

• in February 2000, Fu had not yet performed his duties

under the agreement;

• Fu was not a licensed contractor;

• Fu did not retain a general contractor; 

• Fu supervised the construction himself using both a

licensed electrical contractor and “employees.” 

Am Dec at 4-5. 

2

The bankruptcy court’s Amended Decision also included

several findings that appear to be based on evidence extrinsic to

the agreement but are not supported by findings describing such

evidence: 

• “Yan and Fu did not intend that Fu receive a present

25 percent ownership interest in the Property upon the execution

of the [] Agreement” because Yan provided the whole consideration

for the purchase from Wong and retained legal title thereafter;

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• “Yan and Fu intended that Fu would be responsible for

executing the planned construction”; and 

• the agreement “permitted Fu to hire a licensed

general contractor and did not require Fu to act as a general

contractor in executing the construction.” Id at 4. 

• Rather, “the parties intended that Fu would become an

equitable owner of a 25 percent undivided interest in the

Property only after he performed his obligations under that

Agreement.” Id. 

3

Regarding the note, the bankruptcy court made the

factual finding that the note did not represent Fu’s interest in

the agreement. Id at 9.

4 

The bankruptcy court made the following conclusions of

law relevant to this appeal: 

By supervising the construction himself, Fu acted as a

contractor. Because Fu did not have a contractor’s license, he

was not entitled to collect any compensation for work performed 

per California Business and Professions Code section 7031, which

provides that “no person engaged in the business or acting in the

capacity of a contractor, may bring or maintain any action * * *

in any court of this state for the collection of compensation for

the performance of any act or contract where a license is

required * * *” (West 2004). By seeking twenty-five percent of

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the sale proceeds, Fu was in essence seeking compensation for

services for which a contractor’s license was required. Id at 6.

Fu did not come within statutory exceptions that permit

an owner to perform certain contracting work without a license

because he was “not an owner at the time he performed the work in

question.” Id at 5. He was not an owner because, under the

bankruptcy court’s conclusion in part I A 2 above, Fu would not

become an equitable owner until he had discharged his obligation

to provide construction management services under the agreement.

Fu was also barred from recovery because he failed to hire

licensed subcontractors to “perform substantially all of the

major tasks of construction.” Id. 

Section 7031 should be read broadly to preclude the

court from awarding any payment for the work Fu performed. Id at

6. Epstein v Stahl, 176 Cal App 2d 53 (1959) does not apply

because the property in Epstein “had not been offered for sale.”

Epstein, moreover, may “not be good law” due to legislative

changes to Business & Professions Code § 7031. Id at 7. 

 Because Fu was unlicensed, Fu’s assignee Suen was

“entitled to recover no part of the proceeds of sale of the

Property pursuant to the Joint-Venture Agreement.” Id at 8.

Suen was, moreover, not entitled to alternative relief

in the form of a refund of Fu’s contributions because Fu did not

itemize the value of the materials he provided and because

California courts “have generally not apportioned the value

provided by unlicensed contractors between services and

materials, but rather have denied payment for materials supplied

as well as for services performed.” Id at 7.

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8

 B

Appellant filed a timely notice of appeal of the

bankruptcy court’s rulings. After lengthy delays in briefing and

disputes about the record on appeal, the parties had a hearing on

the merits on September 13, 2007, following which the court took

the matter under submission.

II

The court has jurisdiction to hear this appeal under 28

USC § 158(a), which grants district courts jurisdiction to hear

appeals from “final judgments, orders, and decrees” of the

bankruptcy court. 

In reviewing a bankruptcy court’s decision, a district

court reviews findings of fact for clear error and conclusions of

law de novo. In re Holm, 931 F2d 620, 622 (9th Cir 1991). 

Contract interpretation is a matter of law, reviewed de novo. In

re Beverly Hills Bancorp, 649 F2d 1329, 1334 (9th Cir 1981). 

Statutory construction is also a matter of law, reviewed de novo. 

Trustees of Amalgamated Insurance Fund v Geltman Industries, Inc,

784 F2d 926, 929 (9th Cir 1986). 

III

Appellant Suen presents two main issues on appeal: (1)

the bankruptcy court misinterpreted the agreement by adding what

he contends are additional terms to the contract, contrary to

California’s parol evidence rule; and (2) the bankruptcy court

misconstrued § 7031 by finding that it operated to bar Fu from

recovering under the agreement. 

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A

Because the issues on this appeal hinge on the nature

of the parties’ agreement, the court first reviews the bankruptcy

court’s determination that the agreement established a joint

venture. 

The existence of a joint venture agreement is a

question of fact determined by a preponderance of the evidence. 

Weiner v Fleischman, 53 Cal 3d 476, 482 (1991). 

A joint venture or partnership may be established by

oral agreement and joint venture agreements and partnerships

regarding real property are not within the statute of frauds. 

Bates v Babcock, 95 Cal 479, 487 (1892); see also, Kaljian v

Menezes, 36 Cal App 4th, 573, 583-86 (1995). A joint venture or

partnership agreement requiring one or more partners to

contribute a leasehold or title interest in real property while

another partner contributes in a different manner to the venture

may therefore be enforceable. James v Herbert, 149 Cal App 2d

741, 748 (1957). 

The statute of frauds is not a defense to enforcement

of an oral partnership agreement concerning real estate because

the subject matter of the agreement is not title to property, but

rather profits from the partnership enterprise. In Bates v

Babcock, the California Supreme Court explained: 

The settlement of partnership accounts, and

the conversion into money of the assets of

the partnership, whether real or personal,

and their division among the partners, has

always been one of the functions of a court

of equity, and that court never stops to

inquire into the source of the title of such

assets, or in whose name they are held.

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95 Cal at 487. A modern treatise on contracts is in accord: 

An apparent exception to a statutory requirement

that contracts dealing with interests in real

estate be in writing is often made in the case

of oral agreements of partnership or joint

venture * * *, which are valid even though the

intention of the partners or joint venturer is

only a right to such profits and capital as may

be left on an accounting after payment of the

firm or joint venture debts.

Richard A Lord, 9 Williston On Contracts § 25:17 at 601-03 (West

1999). 

A joint venture is an undertaking by two or more

persons jointly to carry out a single enterprise for profit.

Weiner v Fleischman, 54 Cal 3rd at 482. The distinction between

a joint venture and a partnership is not “sharply drawn” for from

a legal standpoint, both relationships are virtually the same so

that “the courts freely apply partnership law to joint ventures

when appropriate.” Id. The law requires little formality in the 

creation of a partnership and the agreement is not invalid

because it is indefinite as to details. James v Herbert, 149 Cal

App 2d at 748. The parties may agree that all members shall

participate in the profits and that only some of them shall bear

the losses; also, the contributions of the respective parties

need not be equal or of the same character. Id. The Uniform

Partnership Act of 1994 provides, inter alia, that “[a] transfer,

in whole or in part, of a partner’s transferable interest in the

partnership is permissible.” Cal Corp Code § 16503. 

The bankruptcy court did not explain how it arrived at

its finding that the agreement was a joint venture agreement. 

This finding, however, is consistent with the agreement’s terms

under the above-cited authorities and is not clear error. The

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agreement establishes an undertaking by two or more persons

jointly to carry out a single enterprise for profit. It defines

the parties’ respective contributions and responsibilities and

the distribution of profits from the enterprise, which in this

case are varying and unequal. It provides for transfer and/or

assignment of the ownership shares. These characteristics of the

agreement are all consistent with California law concerning joint

ventures. Accordingly, this court affirms the bankruptcy court’s

finding that the agreement is a joint venture agreement. 

B

The court next turns to Suen’s contention that the

bankruptcy court erred in relying on parol evidence to interpret

or vary the terms of the agreement. In particular, Suen focuses

on the bankruptcy court’s findings that the agreement imposed on

Fu responsibilities that required a contractor’s license under

California law. 

As noted previously, the bankruptcy court’s Amended

Decision contains findings about the agreement that appear to

based on extrinsic evidence —— specifically, those described in

part I A 2, supra. The court therefore takes it as established

that the bankruptcy court relied on parol evidence to interpret

or vary the terms of the agreement. The bankruptcy court,

however, did not explain for what purpose it did so or specify

the items of parol evidence on which it relied. 

 To evaluate whether the bankruptcy court’s use of

parol evidence was error, the court must consider whether the

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bankruptcy court had any proper purpose for the use of such

evidence. 

The parol evidence rule is a rule of substantive

law that is applicable in two situations. First,

the rule applies to the interpretation of the terms

of a written agreement and restricts the

introduction of extrinsic evidence on the issue of

the meaning of those terms. Second, the rule

applies to restrict the introduction of extrinsic

evidence to add to or alter the terms of an

integrated written document. 

Harry D Miller, 1 Miller & Starr California Real Estate § 1.60 at

159 (West 2000). 

Section 1638 of the California Civil Code provides,

under the heading “ascertainment of intention; language” that

“[t]he language of a contract is to govern its interpretation, if

the language is clear and explicit, and does not involve an

absurdity” (West 1985). The parol evidence rule, codified at §

1856 of the California Code of Civil Procedure, provides that

terms “set forth in writing intended by the parties as a final

expression of their agreement with respect to such terms * * *

may not be contradicted by evidence of any prior agreement or of

a contemporaneous oral agreement.” § 1856(a)(West 2007). Parol

evidence is admissible to explain or supplement an agreement with

consistent additional terms (§ 1856(b)) and for various other

purposes enumerated in the statute. A court may admit parol

evidence to explain an extrinsic ambiguity (§ 1856(g)), but

courts should not “strain to create an ambiguity where none

exists.” Waller v Truck Insurance Exchange, Inc, 11 Cal 4th 1

(1995). Parol evidence is inadmissible to vary or contradict a

written agreement if the agreement is not ambiguous. In re

Bartolo’s Estate, 124 Cal App 2d 727 (1954). 

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The bankruptcy court’s findings based on parol evidence

in part I A 2 supra all concerned the parties’ intent. Because

these findings are inconsistent with the plain meaning of the

contract and with the bankruptcy court’s finding that the

agreement was a joint venture agreement, this court must reverse

those findings. The bankruptcy court incorrectly applied Code of

Civil Procedure § 1856 and drew unwarranted legal conclusions

from the extrinsic evidence. Given the agreement’s reference to

itself as “the entire agreement,” moreover, a determination under

§ 1856(d) that the agreement was intended to be integrated

appears warranted, so that parol evidence could not be used to

find that the agreement contained additional terms not set forth

in the written contract. This includes, of course, a requirement

that Fu “would be responsible for executing the planned

construction.” Am Dec at 4. That requirement cannot be found in

the agreement. 

C

It was only by reading construction-management duties

into the agreement that the bankruptcy court was able to adjudge

Fu barred from recovery under Business & Professions Code § 7031. 

The court also disagrees with that legal conclusion. 

Having carefully considered the arguments on both sides

of this issue, the court concludes that Epstein v Stahl, 176 Cal

App 2d 53 (1959), not § 7031, states the correct rule of decision

for this issue. In Epstein, a joint venture by two brothers-inlaw to redevelop apartment buildings resulted in one suing the

other for an accounting of partnership profits. The defendant

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tried to assert that both the joint venturers’ lack of a

contractor’s license and the statute of frauds barred recovery.

The court rejected both arguments and held that the suit could go

forward. 

The bankruptcy court suggested that Epstein “may * * *

not be good law” due to subsequent legislative changes

strengthening section 7031 and also distinguished it on grounds

that the property in Epstein “had not been offered for sale.” 

The legislature amended section 7031 in the years 1961 and 1965,

but not in ways relevant to the decision in Epstein. In 1989,

the legislature modified section 7031 to add the language “or

recover in law or equity in any action” as follows:

No person engaged in the business or acting in the

capacity of a contractor, may bring or maintain

any action, or recover in law or equity in any

action, in any court of this state for the

collection of compensation for the performance of

any act or contract where a license is required by

this chapter without alleging that he or she was a

duly licensed contractor at all times during the

performance of that act or contract.

Given that the legislature passed up two opportunities to

overrule Epstein shortly after the decision was published, it is

not plausible to conclude that legislature intended to do so in

1989. Epstein is still widely cited, if not for the specific

point at issue (see, e g, 9 Williston On Contracts § 25.17 at 604

n 72; 1 Miller & Starr Real Estate § 1:70 at 226 n 13) and,

without any definitive pronouncement of the California Supreme

Court or the legislature, cannot be said to have been overruled. 

Epstein, which is consistent with decades of California

law governing joint ventures, requires reversal of the bankruptcy

court’s judgment. In addition, a common sense interpretation of

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the agreement supports this conclusion. The agreement expressly

allows transfer of the partnership interests. If construction

responsibilities attended Fu’s interest, it makes little sense to

read the agreement to allow those responsibilities to be

transferred entirely at Fu’s discretion lest those

responsibilities be committed to a transferee unable to discharge

them adequately. 

In light of these salient aspects of Epstein for

purposes of this appeal and practical considerations, the

distinction drawn by the bankruptcy court between the facts of

Epstein and those of the present case is not material to the

analysis. Suen is entitled to Fu’s share of the joint venture’s

profits. 

IV

For the reasons stated herein, the judgment of the

bankruptcy court is REVERSED. Suen, as assignee, is entitled to

Fu’s share of the joint venture’s proceeds. The precise amount

cannot readily be determined from the parties’ submissions or

from a review of the trial record. This matter is therefore

REMANDED to the bankruptcy court for such proceedings as are

necessary to determine Fu’s share under the agreement. 

This order is STAYED pending completion of settlement

proceedings before Magistrate Judge Edward Chen. The order of

remand will take effect only in the event that Magistrate Judge

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Chen notifies the undersigned that, at the conclusion of

settlement proceedings, this matter has not settled. 

 IT IS SO ORDERED.

 

VAUGHN R WALKER

United States District Chief Judge

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