Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-canb-4_11-ap-04254/USCOURTS-canb-4_11-ap-04254-0/pdf.json

Parties Involved:
Mitch House
Plaintiff
Michael C. McKean
Defendant
Blanca L. McKean
Defendant

Document Text:

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

 UNITED STATES BANKRUPTCY COURT

 NORTHERN DISTRICT OF CALIFORNIA

OAKLAND DIVISION

In re ) Case No. 11-44932

)

Michael C. McKean, )

Blanca L. McKean, )

)

Debtors, ) Chapter 7

)

________________________________ )

)

Mitch House, )

)

)

Plaintiff, ) Adv. Pro. No. 11-4254

)

vs. )

) 

Michael C. McKean, )

Blanca L. McKean, )

) Defendants. )

__________________________________ )

 MEMORANDUM OF DECISION

This matter came on for trial on April 16, 2012. Mitch House

represented himself as Plaintiff. Michael and Blanca McKean

represented themselves as Defendants. Trial commenced, and the

introduction of evidence was completed on the evening of April 16,

The following constitutes

the order of the court. Signed May 15, 2012

________________________________________

William J. Lafferty, III

U.S. Bankruptcy Judge

Entered on Docket 

May 16, 2012

GLORIA L. FRANKLIN, CLERK 

U.S BANKRUPTCY COURT 

NORTHERN DISTRICT OF CALIFORNIA

Case: 11-04254 Doc# 38 Filed: 05/15/12 Entered: 05/16/12 16:33:17 Page 1 of 13
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

2012. The matter was reconvened telephonically on April 20, 2012,

at 9:30 a.m., pursuant to the Court’s oral order, to allow the

parties to make closing statements. At the conclusion of closing

statements, the Court made extensive findings and issued its ruling

on almost all of the matters at issue, reserving its determination

of the dischargeability of one transaction upon further review of

the evidence. 

This Memorandum Decision is not intended to replace or

supersede the findings and rulings the Court made orally during the

April 20 proceedings. Rather, the purpose of this Decision is to

summarize, briefly, and for the convenience of the parties, the

matters addressed during the Court’s oral ruling, to clarify the

Court’s determination with respect to the one transaction reserved

for further review, and to identify a few remaining issues that,

after consideration, the Court believes the parties did not address,

or did not adequately address, and give the parties the opportunity

to present their views on those matters. 

As background, Plaintiff has brought this action against

Defendants seeking a determination that certain debts owed by

Defendants to Plaintiff should be excepted from discharge in

bankruptcy pursuant to the provisions of 11 U.S.C. §§ 523(a)(2)(A),

(4) and (6). In brief, Plaintiff and Defendants, who had a business

and a social relationship prior to the occurrence of the events set

forth in the Complaint, entered into an arrangement whereby

Plaintiff took title to real property located at 770 Tunbridge,

Danville, California (the “Real Property”), and Defendants retained

2

Case: 11-04254 Doc# 38 Filed: 05/15/12 Entered: 05/16/12 16:33:17 Page 2 of 13
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

possession and occupancy of the Real Property in exchange for their

agreement to make the payments on the loan secured by the Real

Property. As part of the transaction whereby he acquired title to

the Real Property, Plaintiff also (a) advanced the sum of

approximately $123,000 to (i) pay closing costs of approximately

$53,000 and (ii) pay $60,000 to Diana Holmgren, the prior owner of

the Real Property, who had had a similar arrangement with

Defendants, and who was owed that amount by Defendants as “rent” or

more likely, unpaid monthly loan amounts, and (b) incurred new debt

to “take out” World Savings Bank. There is no dispute but that, at

the closing of the initial transaction, Plaintiff owned Real

Property worth approximately $1.2 Million, encumbered by secured

debt in the approximate amount of $790,000. Thereafter, from time

to time until April 2009, Plaintiff also advanced varying amounts to

Defendants, without any written agreement governing the repayment of

these or other sums. Defendants made some payments to Plaintiff

with respect to the loan amounts due on a monthly basis for the Real

Property and with respect to amounts loaned to Defendants by

Plaintiff, but stopped making such payments in July 2009. 

Based on the facts presented, the Court issued the following

oral rulings: 

1. The Court determined that there is no basis to conclude

that any debts owed by Blanca McKean to Plaintiff should be excepted

from discharge on any basis offered. There was no evidence

presented that Blanca McKean made any false statement to Plaintiff

with respect to the transactions described, or acted in a fiduciary

3

Case: 11-04254 Doc# 38 Filed: 05/15/12 Entered: 05/16/12 16:33:17 Page 3 of 13
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

capacity with respect to Plaintiff, or wilfully and maliciously

injured the person or property of Plaintiff. Plaintiff purported to

offer evidence to the effect that Blanca McKean “benefitted” from

her husband’s alleged fraud, but, as the Court instructed the

Plaintiff on numerous occasions, in order to impute fraud from a

husband to a wife, it is not sufficient merely to assert that the

wife received a monetary benefit from husband’s bad acts; there must

be evidence that the wife actively participated in the wrong-doing.

See Tsurukawa v. Nikon Precision, Inc. (In re Tsurukawa), 287 B.R.

515, 522 (9th Cir. BAP 2002). There was absolutely no such evidence

offered.

2. The Court determined that there was no basis to conclude

that Michael McKean was acting in a fiduciary capacity within the

meaning of section 523(a)(4) with respect to the transactions with

Plaintiff set forth in the Complaint. Plaintiff attempted to rely

for this showing upon an isolated incident in which Michael McKean

acted as a financial advisor to Plaintiff with respect to the

investment of one retirement account, but, as the Court stated at

trial, that one transaction, which occurred before, and had nothing

to do with, the transactions between these parties concerning the

Real Property, cannot provide a basis to determine that Michael

McKean acted as a fiduciary with respect to the loan transactions

complained of. Plaintiff also attempted to base his claim that

Michael McKean acted as a fiduciary on his alleged status as a “loan

agent” with respect to two transactions involving the Real Property,

i.e., the transaction via which Plaintiff originally came to own the

4

Case: 11-04254 Doc# 38 Filed: 05/15/12 Entered: 05/16/12 16:33:17 Page 4 of 13
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

Real Property, which closed in January 2007, and the transaction via

which the original loan was refinanced in February 2007. 

With respect to the initial transaction, despite Plaintiff’s

continuous and argumentative assertions to the contrary and

aggressive questioning of Defendants, there was no basis to find

that Michael McKean acted as a loan agent with respect to that

transaction. With respect to the refinance, Michael McKean admitted

that he did act as a loan agent on this transaction. However, there

was no evidence that there was any fraud or defalcation by Michael

McKean with respect to the refinance; to the contrary, it appears

that the transaction was handled competently, and that it achieved

the desired effect—lowering the applicable interest rate on the

loan on the Real Property—with full disclosure to Plaintiff of all

material facts concerning that transaction. 

As an aside, even if Michael McKean did become a “fiduciary” to

Plaintiff under state law because of his status as a loan agent,

Plaintiff presented no competent argument that Mr. McKean thereby

took on a fiduciary capacity to Plaintiff within the meaning of

section 523(a)(4) of the Code, which does not include every

relationship that might be referred to as a “fiduciary” relationship

under state law. See Cal-Micro, Inc. v. Cantrell (In re Cantrell),

329 F.3d 1119, 1125-28 (9th Cir. 2003). 

3. The Court determined that there was no basis to conclude

that any debt from Michael McKean to Plaintiff resulted from a

willful and malicious act by McKean causing harm to Plaintiff’s

person or property within the meaning of section 523(a)(6) of the

5

Case: 11-04254 Doc# 38 Filed: 05/15/12 Entered: 05/16/12 16:33:17 Page 5 of 13
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

Code. The sole basis offered by Plaintiff for this liability was

Michael McKean’s alleged failure to repay the debts when Plaintiff

made demand. As the Court also explained to Plaintiff, in order to

establish liability under this section, it must be shown that at the

time of the act complained of, the defendant had the intention to

perform an act harming the plaintiff, as well as the intention to

inflict the harm (or a substantial certainty that the harm would

ensue). 

For obvious reasons, a plaintiff may not establish liability

under this section merely by asserting that he asked for payment,

and payment was not made. See Orr v. Marcella (In re Marcella), 463

B.R. 212, 220 (D. Conn. 2011)(citations omitted). 

4. Lastly, the Court determined that, for the most part, the

debts incurred by Michael McKean to Plaintiff were not the result of

an oral false statement, fraud, or false pretenses, within the

meaning of section 523(a)(2)(A). For purposes of establishing

liability under section 523(a)(2)(A) of the Code, a plaintiff must

demonstrate that the Defendant (a) made a false statement about a

material fact, (b)that he knew it was false when he made it, (c)

that he made it with intent to deceive the plaintiff, (d) that the

plaintiff reasonably relied on the statement, and (e) that the

plaintiff was harmed by the false statement. Turtle Rock Meadows

Homeowners Ass’n v. Slyman (In re Slyman), 234 F.3d 1081, 1085 (9th

Cir. 2000); Ghomeshi v. Sabban (In re Sabban), 384 B.R. 1, 5 (9th

Cir. BAP 2008). 

6

Case: 11-04254 Doc# 38 Filed: 05/15/12 Entered: 05/16/12 16:33:17 Page 6 of 13
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

As the Court explained in detail during its oral ruling, while

Plaintiff claims to have been deceived with respect to the

transaction by which he ended up owning the Real Property, all

relevant aspects of the transaction were disclosed to Plaintiff. 

Indeed, Plaintiff, who was experienced in real estate matters via

his prior occupation as a real property appraiser, participated in

the original loan and the shortly-following refinance, through which

he acquired property worth not less than $1.2 Million in exchange

for assumption of debt and payment of closing costs and other

liabilities of no more than $800,000. And Plaintiff himself

admitted during the trial that he was aware that he could have, for

example, simply sold the Real Property at various points, paid the

underlying debt secured by the property, repaid himself what he had

loaned the Defendants, and realized substantial additional equity. 

That he chose not to do so, in the absence of any agreement between

himself and Defendants limiting or restraining his actions with

respect to the Real Property, demonstrates that any harm that ensued

was eminently preventable by Plaintiff himself. 

5. To the extent that Plaintiff thereafter lent Defendants

additional moneys, with the limited exception of the funds advanced

in March and April of 2009, which the Court will address below,

there simply was no competent evidence that such funds were obtained

via a false statement, fraud, or false pretenses. The parties

presented directly conflicting testimony concerning the alleged

purposes for the advances, with Plaintiff asserting, without any

independent corroboration, that these amounts were sought to “clean

7

Case: 11-04254 Doc# 38 Filed: 05/15/12 Entered: 05/16/12 16:33:17 Page 7 of 13
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

up Defendants’ credit,” while Defendants claim that to the extent

any rationale for the advances was requested, they replied,

truthfully, that the bulk of the moneys went to improving the Real

Property (for which they supplied receipts for substantial amounts

expended) or for their living expenses. But again, it simply does

not appear that these advances were procured via any fraud or false

statements, and, in any event, for much of this time, Plaintiff

could simply have sold the Real Property and made himself whole. 

6. The Court also indicated that, with respect to the advance

of $14,000 on April 9, 2009, it reached a different conclusion. The

Court believes that the evidence demonstrated, and Defendant Michael

McKean did not entirely dispute, that this advance was made based

upon Defendant Michael McKean’s statement that he expected shortly

to receive commissions from real estate sales that had been or would

soon be completed. The Court found this testimony credible because,

by the time of this advance, and in view of Defendants’ failure to

make payments then due, as well as the understanding that the equity

in the Real Property was in all likelihood at least substantially

eroded, the Court believed that it was highly unlikely that

Plaintiff would have advanced any further funds without an express

statement from Michael McKean respecting a specific source of

repayment. The Court is also convinced that Michael McKean’s

statement regarding the source of funds of repayment was false when

made. 

During this portion of the Court’s ruling, Plaintiff inquired

whether the Court would also apply the same rationale to an advance

8

Case: 11-04254 Doc# 38 Filed: 05/15/12 Entered: 05/16/12 16:33:17 Page 8 of 13
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

of $10,900 made on March 11, 2009, which Plaintiff asserted was also

made based upon false statements regarding commissions to be paid in

the immediate future. Having now reviewed the trial briefs of the

parties and the testimony of Michael McKean, the Court does conclude

that the $10,900 advance should also be excepted from discharge as

the product of a false statement or fraud by Defendant Michael

McKean.1 Therefore, subject to the determination of how to apply

amounts repaid by Mr. McKean during April and May 2009, the Court

concludes that the sum of $24,900 should be deemed nondischargeable

under section 523(a)(2)(A). 

7. In concluding that the March and April 2009 advances of

$24,900 in the aggregate should be excepted from discharge under

section 523(a)(2)(A) of the Code, the Court is mindful of the

requirement of that section that an oral false statement about the

financial condition of the debtor may not form the basis for a

finding of non-dischargeability. For the benefit of the parties,

and of any court reviewing this matter on appeal, this Court wishes

to stress that it has considered whether a statement that repayment

will be made from funds to be received by the debtor falls within

the term “statement respecting a debtor’s . . . financial

1

Although Michael McKean contested at trial whether he had 

received the funds referenced in the March 11 or the April 9

transactions, the Court did not find Mr. McKean’s quasi-denial

credible, particularly in light of the fact that Mr. McKean

admitted the accuracy of Plaintiff’s calculations re amounts

advanced, including the March and April 2009 advances, during his

deposition. See, Reporters Transcript of Deposition of Michael

at 8:6-8; 10:11-24. 

9

Case: 11-04254 Doc# 38 Filed: 05/15/12 Entered: 05/16/12 16:33:17 Page 9 of 13
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

condition,” and concludes that it does not. The Code does not

define the term “statement respecting financial condition,” and the

intended breadth of that term is not without dispute in the case

law. This Court however, finds helpful, and ultimately persuasive,

the recent opinion of the Bankruptcy Appellate Panel in the case

Barnes v. Belice (In re Belice), 461 B.R. 564 (9th Cir. BAP 2011),

in which the Panel reviewed the various opinions interpreting the

language of section 523(a)(2)(A) and concluded that the Ninth

Circuit has elected to follow a “narrow” reading of that language. 

In re Belice, 461 B.R. at 574-77. Accordingly, this Court will

limit its consideration of the term “statement respecting financial

condition of the debtor” to those statements that “present a picture

of the debtor’s overall financial health,” and will not impose that

term upon an express statement of fact concerning a specific source

of repayment of moneys to be advanced that is made to induce that

advance.

8. Plaintiff also requested as damages at trial amounts

properly characterized as “consequential damages,” and amounts

expended for attorneys’ fees. As the Court indicated to Plaintiff

prior to and during the trial, consequential damages could not be

awarded because Plaintiff’s Complaint had not sought such damages,

and Plaintiff had not made a timely motion to amend the Complaint. 

In addition, the Court did not believe that Plaintiff had made out a

case for the sort of consequential damages sought, e.g., loss of

income from a limousine business, additional insurance expenses, and

additional interest charges on a personal credit card, let alone

10

Case: 11-04254 Doc# 38 Filed: 05/15/12 Entered: 05/16/12 16:33:17 Page 10 of

 13
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

that such damages should be non-dischargeable, if proven. With

respect to the claim for attorneys’ fees, there was simply no

contractual or statutory basis for recovery of such fees. 

9. Finally, in reviewing the record again in preparing this

Memorandum Decision, the Court has concluded that there are two 

issues that were not addressed adequately by the parties at trial:

a. The Court has determined that the March 11 and April 9

transfers should be excepted from discharge. However the Court also 

notes that Mr. McKean repaid the Plaintiff $5000 on April 24, 2009

and $8000 on May 21, 2009, i.e., after the last advance from

Plaintiff. The Court is unaware of any agreement or convention

between the parties for applying or allocating amounts repaid (i.e.,

should amounts repaid be applied to the oldest unpaid amount or

should these repayments be applied to the last advances?),

particularly in light of the nature of the false statement that the

Court concluded justifies relief under section 523(a)(2)(A). The

Court would like the parties to address this issue with a pleading

to be filed within 20 days of the date of this Memorandum Decision;

b. The Court is uncertain whether the parties are in

agreement with respect to the aggregate amount due and unpaid from

Defendants (without regard to the consequential damages and

attorneys’ fees which are not being allowed). While the bulk of

these amounts will be dischargeable under the Court’s ruling, the

Court is still obliged to enter a Judgment for the entire amount due

and owing, which will then constitute a liquidation of a claim

against Defendants. The testimony of Mr. McKean at trial indicated

11

Case: 11-04254 Doc# 38 Filed: 05/15/12 Entered: 05/16/12 16:33:17 Page 11 of

 13
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

that he believed that he was substantially in agreement with the

calculations offered by Plaintiff regarding unpaid amounts, implying

that there is at least some basis for Mr. McKean to dispute the

amount sought by Plaintiff. The Court would like the parties also

to provide, within 20 days of the date of this Memorandum Decision,

their calculations of the amounts due and owing as of June 1, 2012,

including any amounts claimed as interest. 

**END OF DOCUMENT**

12

Case: 11-04254 Doc# 38 Filed: 05/15/12 Entered: 05/16/12 16:33:17 Page 12 of

 13
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

COURT SERVICE LIST

Mitch House

154 Crest Avenue

Alamo, CA 94507 

Michael C. McKean

Blanca L. McKean

1755 3rd St.

Livermore, CA 94550 

13

Case: 11-04254 Doc# 38 Filed: 05/15/12 Entered: 05/16/12 16:33:17 Page 13 of

 13