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FILED

APR 26 2017

SUSAN M. SPRAUL, CLERK

U.S. BKCY. APP. PANEL

OF THE NINTH CIRCUIT

NOT FOR PUBLICATION

UNITED STATES BANKRUPTCY APPELLATE PANEL

OF THE NINTH CIRCUIT

In re: ) BAP No. CC-16-1226-FLKu

)

BRENT ROY SEPULVEDA, ) Bk. No. 8:13-bk-17965-SC

)

Debtor. ) Adv. Pro. 8:14-ap-01003-SC

______________________________)

)

BRENT ROY SEPULVEDA, )

)

Appellant, )

)

v. ) MEMORANDUM*

)

GEORGE ADAMS, JR., )

)

Appellee. )

______________________________)

Argued and Submitted on March 23, 2017

at Pasadena, California

Filed – April 26, 2017

Appeal from the United States Bankruptcy Court

for the Central District of California

Honorable Scott C. Clarkson, Bankruptcy Judge, Presiding

 

Appearances: David C. Codell argued on behalf of appellant

Brent Roy Sepulveda; Ryan Daniel O’Dea of Shulman

Hodges & Bastian LLP argued on behalf of appellee

George Adams, Jr.

 

Before: FARIS, LAFFERTY, and KURTZ, Bankruptcy Judges.

* This disposition is not appropriate for publication. 

Although it may be cited for whatever persuasive value it may

have, see Fed. R. App. P. 32.1, it has no precedential value, see

9th Cir. BAP Rule 8024-1.
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INTRODUCTION

Chapter 71 debtor Brent Roy Sepulveda appeals from the

bankruptcy court’s judgment in favor of creditor George Adams,

Jr. on Mr. Adams’s § 523(a)(2)(A) nondischargeability claim. He

argues that the court erred by (1) finding that he intended to

defraud Mr. Adams and (2) miscalculating the damages award to

Mr. Adams. We reject both arguments. Accordingly, we AFFIRM.

FACTUAL BACKGROUND

A. The joint business venture

This dispute arises from a business partnership between

Mr. Sepulveda and Mr. Adams. In 2000, the parties agreed to form

a joint venture whereby they would acquire real property and

construct and sell custom homes. In November 2000, they executed

a written agreement to construct four custom homes. Mr. Adams

was responsible for financing and obtaining construction loans,

and Mr. Sepulveda was responsible for the construction of the

homes through his company, Sepulveda Builders. Mr. Adams said

that Mr. Sepulveda represented that he maintained liability

insurance that would cover the construction of the custom homes.

Under the 2000 agreement, the parties constructed a home for

Ray and Tracy Arriola in Orange, California (the “Arriola

Property”) for $1.365 million. In 2004, Mr. Adams and

Mr. Sepulveda executed a second written agreement consistent with

the terms of the 2000 agreement. The 2004 agreement concerned

1 Unless specified otherwise, all chapter and section

references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, 

all “Rule” references are to the Federal Rules of Bankruptcy

Procedure, and all “Civil Rule” references are to the Federal

Rules of Civil Procedure.

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the construction of a custom home for Robert and Liz Kofdarali in

Anaheim, California (the “Kofdarali Property”) for $3.1 million. 

(For convenience, we will refer to the 2000 and 2004 agreements

collectively as the “Partnership Agreement.”)

B. The construction defect lawsuits

1. The Kofdarali lawsuit

In September 2007, the Kofdaralis filed suit (the “Kofdarali

Lawsuit”) against Mr. Adams and Mr. Sepulveda in state court for

construction defects related to the Kofdarali Property. 

Mr. Adams asserted that, around this time, he discovered that

Mr. Sepulveda’s liability insurance did not cover home

construction; rather, it only covered home improvement and

remodeling. Accordingly, Mr. Sepulveda’s insurance carrier

refused to defend or indemnify Mr. Sepulveda and Mr. Adams in the

Kofdarali Lawsuit. Mr. Adams filed cross-claims against

Mr. Sepulveda for indemnity, contribution, and other causes of

action relating to fraud and misrepresentation.

The parties to the Kofdarali Lawsuit reached a settlement in

September 2010 that excluded Mr. Adams’s cross-claims against

Mr. Sepulveda. Neither Mr. Sepulveda nor his insurer contributed

to the costs of defense or the settlement.

2. The Arriola lawsuit

In May 2008, the Arriolas filed a state court lawsuit (the

“Arriola Lawsuit”) against Mr. Adams and Mr. Sepulveda for

construction defects associated with the Arriola Property. 

Again, Mr. Sepulveda’s insurance carrier denied coverage, and

Mr. Adams filed cross-claims against Mr. Sepulveda for

contribution and reimbursement.

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3. The settlement agreement

In January 2011, Mr. Adams and Mr. Sepulveda entered into a

settlement agreement (“Settlement Agreement”) that resolved

Mr. Adams’s cross-claims against Mr. Sepulveda in the Arriola

Lawsuit and the Kofdarali Lawsuit. The Settlement Agreement

provided that: (1) Mr. Sepulveda would transfer real properties

in Yorba Linda, California to Mr. Adams in consideration of the

expenses Mr. Adams incurred in defending and settling the

Kofdarali Lawsuit and defending the Arriola Lawsuit; (2) the

parties would share equally the future costs of defense of the

Arriola Lawsuit; and (3) the parties would share equally the

costs of the judgment or settlement of the Arriola Lawsuit. In

return, Mr. Adams agreed to dismiss the cross-claims and waive

his rights to reimbursement from Mr. Sepulveda for all

previously-incurred attorneys’ fees, costs, and expenses.

4. The Arriola Lawsuit judgment

In September 2011, the referee in the Arriola Lawsuit

awarded the Arriolas $370,116.66 (the “Arriola Judgment”) jointly

and severally against Mr. Adams and Mr. Sepulveda. The state

court entered the Arriola Judgment on October 17, 2011.

C. Mr. Adams’s state court action 

Mr. Sepulveda partially performed under the Settlement

Agreement by transferring the Yorba Linda properties to

Mr. Adams. However, he failed to pay his share of the Arriola

Judgment and contribute to the post-January 2011 defense costs of

the Arriola Lawsuit. Therefore, Mr. Adams paid the entire

Arriola Judgment himself.

On January 27, 2012, Mr. Adams sued Mr. Sepulveda in state

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court for fraud and breach of contract arising from

Mr. Sepulveda’s breach of the Settlement Agreement. In March, he

obtained an order for contribution against Mr. Sepulveda in the

Arriola Lawsuit for $185,058.28 and recorded an abstract of

judgment in that amount against Mr. Sepulveda’s residence. In

August, he recorded another abstract of judgment against

Mr. Sepulveda’s residence for $287,517.20, this time in

connection with the Kofdarali Lawsuit.

D. Mr. Sepulveda’s chapter 7 bankruptcy

On September 23, 2013, Mr. Sepulveda filed his chapter 7

petition. 

On January 3, 2014, Mr. Adams filed his complaint to

determine nondischargeability of debt under §§ 523(a)(2)(A) and

(6). He requested a nondischargeable judgment in the amount of

at least $472,575.48.2

As to his § 523(a)(2)(A) claim, he alleged that

Mr. Sepulveda committed fraud by making multiple false statements

of material fact: (1) he falsely represented in 2000 that he had

liability insurance coverage for the construction of the custom

homes, despite knowing that his liability insurance covered only

home remodeling; and (2) he promised in 2011 to pay half of the

defense costs of the Arriola Lawsuit and subsequent judgment, but

never had any intention to do so. Mr. Adams said that he was

ignorant of the true facts and, had he known the truth about the

lack of insurance, he would not have gone into business with

2 By order dated July 9, 2014, the bankruptcy court

dismissed Mr. Adams’s § 523(a)(6) claim. That order is not the

subject of this appeal.

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Mr. Sepulveda; he also would not have entered into the Settlement

Agreement if he had known that Mr. Sepulveda did not intend to

comply fully with the terms of the settlement.

In advance of trial on Mr. Adams’s § 523(a)(2)(A) claim, the

parties submitted their respective trial briefs and declarations

and a joint pretrial stipulation. Mr. Sepulveda agreed that he

lacked insurance coverage for construction of the custom homes. 

However, he declared that he never represented to Mr. Adams that

he maintained contractor’s commercial general liability insurance

and that Mr. Adams never expressed to him that liability

insurance was important to him or was a requirement for agreeing

to the joint venture. In any event, he said that his then-wife

and office manager, Chelly Moore, handled all office duties and

paperwork, including managing Sepulveda Builders’s insurance

coverage. He said that she had “complete autonomy” in obtaining

and renewing liability insurance for the company and was solely

responsible for ensuring proper coverage.

Mr. Sepulveda further stated that he fully intended to

comply with the terms of the Settlement Agreement when he

executed it. His financial condition deteriorated after he and

Mr. Adams executed the Settlement Agreement due to his

contentious and lengthy divorce proceedings and declining

business income. He planned to borrow money to fulfill his

obligations. He offered Mr. Adams $300,000 in settlement of any

amounts due on the Settlement Agreement, but Mr. Adams did not

accept the offer.

At trial, Mr. Adams’s counsel cross-examined Mr. Sepulveda

about $200,000 that he received from the sale of his residence in

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January 2011. Mr. Sepulveda admitted that, although he received

the funds around the time that he entered into the Settlement

Agreement, he did not set aside any of the monies to pay for

defense costs or judgment in the Arriola Lawsuit. Following

trial, the bankruptcy court took the matter under advisement.

E. The memorandum decision

The bankruptcy court entered its memorandum of decision on

July 5, 2016. It analyzed whether Mr. Sepulveda made a

misrepresentation or engaged in fraudulent conduct in connection

with the Partnership Agreement and the Settlement Agreement. It

concluded that both agreements resulted from Mr. Sepulveda’s

misrepresentations or fraudulent actions.

The court found that Mr. Sepulveda misrepresented his

construction liability coverage in order to induce Mr. Adams to

enter into the Partnership Agreement. Mr. Adams discussed

insurance coverage with Mr. Sepulveda and made clear that he was

concerned with the possibility of future construction defect

litigation. Mr. Sepulveda presented Mr. Adams with a certificate

of general liability insurance and told him that the policy

covered liability for “ground-up” construction of the custom

homes.

The court also found that Mr. Sepulveda knew that he lacked

proper liability insurance. The court pointed to Ms. Moore’s

testimony that Mr. Sepulveda instructed her to keep costs down

and only maintain remodeling insurance and that she only filled

out insurance applications at Mr. Sepulveda’s direction. The

court found Ms. Moore’s testimony credible, while Mr. Sepulveda’s

testimony was “evasive and not credible.”

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The court further said that Mr. Sepulveda intended to

deceive Mr. Adams when he represented that he had proper

construction liability insurance. Ms. Moore testified that

Mr. Sepulveda told her that he understood that Mr. Adams wanted

construction liability insurance. However, the court said that

Mr. Sepulveda “deliberated and conducted a cost-benefit analysis”

and determined that he would save money by not obtaining the

additional coverage.

The court found that Mr. Adams justifiably relied on

Mr. Sepulveda’s representations that he held construction

liability insurance; Mr. Adams had no reason to believe that

Mr. Sepulveda was lying about the insurance coverage.

The court determined that Mr. Sepulveda’s misrepresentation

was a direct and substantial cause of Mr. Adams’s damages

incurred during the Arriola Lawsuit. Because Mr. Adams relied on

Mr. Sepulveda’s representations, he was not covered by insurance

when construction defects arose and had to pay for defense costs

and damages in the Arriola Lawsuit.

Regarding the Settlement Agreement, the court said that

Mr. Sepulveda lacked a present intent to perform or had a

positive intent not to perform. The court did not find credible

Mr. Sepulveda’s testimony that he intended to perform and had the

financial ability to do so.

The court found that Mr. Sepulveda knew or should have known

that he could not perform under the Settlement Agreement, because

he lacked the financial wherewithal to do so. Mr. Sepulveda was

living off of his savings, his business income had declined by

ninety-five percent, and he was involved in a contentious

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divorce. He knew that the Settlement Agreement required him to

pay for prospective defense costs, but he did not allocate any of

the $200,000 he received from the sale of his home toward the

Arriola Lawsuit.

The court determined that the transfer of the Yorba Linda 

properties did not indicate an intent to perform; rather, the

partial performance was just enough to allow Mr. Sepulveda to

obtain a dismissal of Mr. Adams’s cross-claims against him. 

Moreover, the court found that Mr. Sepulveda recklessly

disregarded the truth of his representation that he intended to

perform fully because he knew that he did not have sufficient

assets and was not earning sufficient income to satisfy the

Settlement Agreement.

The court found that Mr. Adams justifiably relied on

Mr. Sepulveda’s representations, even though, by the time he

signed the Settlement Agreement, Mr. Adams knew that

Mr. Sepulveda had misrepresented the status of his insurance

coverage.

The court found that Mr. Sepulveda’s misrepresentation was a

substantial and important cause of the damages Mr. Adams

incurred. It said that there was no dispute that, if Mr. Adams

had known that Mr. Sepulveda did not intend to comply with the

Settlement Agreement, he would not have agreed to it and could

have continued to pursue his cross-claims against Mr. Sepulveda.

Regarding damages, the court granted Mr. Adams’s request in

full (excluding attorneys’ fees). It awarded Mr. Adams damages

for his costs of defending the Arriola Lawsuit and satisfying the

Arriola Judgment, but subtracted the amount that Mr. Adams

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recovered from the foreclosure sale of Mr. Sepulveda’s residence: 

Arriola Judgment: $370,116.55

Arriola Lawsuit Defense: $195,199.91

Arriola Lawsuit Consultant Fees: $18,401.81

State Court Action Fees/Costs: $94,993.43

(Recovery from Sepulveda foreclosure): ($151,000.00)

Total damages: $527,711.70 

The court entered its judgment in the amount of $527,711.70

in favor of Mr. Adams, and Mr. Sepulveda timely appealed.

JURISDICTION

The bankruptcy court had jurisdiction pursuant to 28 U.S.C.

§§ 1334 and 157(b)(2)(I). We have jurisdiction under 28 U.S.C.

§ 158.

ISSUE

Whether the bankruptcy court erred in awarding Mr. Adams

$527,711.70 and determining that the award was nondischargeable

under § 523(a)(2)(A).

STANDARDS OF REVIEW

 In bankruptcy discharge appeals, we review the bankruptcy

court’s findings of fact for clear error and conclusions of law

de novo, and apply de novo review to mixed questions of law and

fact. Oney v. Weinberg (In re Weinberg), 410 B.R. 19, 28 (9th

Cir. BAP 2009), aff’d, 407 F. App’x 176 (9th Cir. 2010) (citation

omitted). De novo review requires that we consider a matter

anew, as if no decision had been rendered previously. United

States v. Silverman, 861 F.2d 571, 576 (9th Cir. 1988).

We review the bankruptcy court’s findings of fact for clear

error. See Honkanen v. Hopper (In re Honkanen), 446 B.R. 373,

378 (9th Cir. BAP 2011); see also Anastas v. Am. Sav. Bank

(In re Anastas), 94 F.3d 1280, 1283 (9th Cir. 1996) (“A finding

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of whether a requisite element of section [ ] 523(a)(2)(A) claim

is present is a factual determination reviewed for clear

error.”). “To be clearly erroneous, a decision must strike us as

more than just maybe or probably wrong; it must . . . strike us

as wrong with the force of a five-week-old, unrefrigerated dead

fish.” Papio Keno Club, Inc. v. City of Papillion (In re Papio

Keno Club, Inc.), 262 F.3d 725, 729 (8th Cir. 2001) (quoting

Parts & Elec. Motors, Inc. v. Sterling Elec., Inc., 866 F.2d 228,

233 (7th Cir. 1988)); see Anderson v. City of Bessemer City,

470 U.S. 564, 573 (1985) (A factual finding is clearly erroneous

if, after examining the evidence, the reviewing court “is left

with the definite and firm conviction that a mistake has been

committed.”). The bankruptcy court’s choice among multiple

plausible views of the evidence cannot be clear error. United

States v. Elliott, 322 F.3d 710, 714 (9th Cir. 2003). 

“The bankruptcy court’s witness credibility findings are

entitled to special deference, and are also reviewed for clear

error.” In re Weinberg, 410 B.R. at 28 (citing Rule 8013;

Anderson, 470 U.S. at 573).

“[W]e review the legal standards used in the calculation of

damages de novo.” R.B. Matthews, Inc. v. Transamerica Transp.

Servs., Inc., 945 F.2d 269, 272 (9th Cir. 1991) (citing Galindo

v. Stoody Co., 793 F.2d 1502, 1516 (9th Cir. 1986)); see Oswalt

v. Resolute Indus., Inc., 642 F.3d 856, 859-60 (9th Cir. 2011)

(“We review de novo the legal conclusion that damages are

available and review for clear error factual findings underlying

the damages award.”); Ambassador Hotel Co. v. Wei-Chuan Inv.,

189 F.3d 1017, 1024 (9th Cir. 1999) (“The district court’s

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computation of damages following a bench trial is reviewed for

clear error. However, the issue of whether the district court

applied the correct legal standard in computing damages receives

de novo review.”) (citations omitted).

DISCUSSION

A. The bankruptcy court correctly determined that Mr. Sepulveda

committed fraud in connection with the Partnership Agreement

and the Settlement Agreement.

Section 523(a)(2)(A) excepts from discharge a debt resulting

from “false pretenses, a false representation, or actual fraud,

other than a statement respecting the debtor’s or an insider’s

financial condition.” Regarding the elements necessary to prove

a § 523(a)(2)(A) claim, we have said: 

A creditor seeking to except a debt from discharge

based on fraud bears the burden of proof by a

preponderance of the evidence to establish each of five

elements: (1) misrepresentation, fraudulent omission or

deceptive conduct; (2) knowledge of the falsity or

deceptiveness of such representation(s) or omission(s);

(3) an intent to deceive; (4) justifiable reliance by

the creditor on the subject representation(s) or

conduct; and (5) damage to the creditor proximately

caused by its reliance on such representation(s) or

conduct. 

Sachan v. Huh (In re Huh), 506 B.R. 257, 262 (9th Cir. BAP 2014)

(citing Ghomeshi v. Sabban (In re Sabban), 600 F.3d 1219, 1222

(9th Cir. 2010); In re Weinberg, 410 B.R. at 35). 

The court found that Mr. Adams satisfied all of these

elements for both the Partnership Agreement and the Settlement

Agreement. On appeal, Mr. Sepulveda argues that the bankruptcy

court erred in finding that he had a fraudulent intent or

fraudulently induced Mr. Adams to enter into the Settlement

Agreement. He fails to establish that the bankruptcy court

committed clear error.

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1. Mr. Sepulveda does not appeal the court’s finding of

misrepresentation and fraud concerning the Partnership

Agreement. 

In its memorandum decision, the bankruptcy court made clear

that Mr. Sepulveda committed fraud concerning both the

Partnership Agreement and the Settlement Agreement. It

independently analyzed each agreement and determined that both

satisfied the elements of § 523(a)(2)(A). Mr. Sepulveda’s

misrepresentations under either agreement form a sufficient basis

to deny dischargeability of the debt. 

But on appeal, Mr. Sepulveda does not challenge the court’s

findings regarding the Partnership Agreement. He focuses

exclusively on the court’s purported errors concerning the

Settlement Agreement. On this basis alone, we can affirm the

bankruptcy court’s finding of fraud under § 523(a)(2)(A).

2. The bankruptcy court did not err in finding that

Mr. Sepulveda committed fraud regarding the Settlement

Agreement.

Mr. Sepulveda argues that the bankruptcy court erred in

finding that he had an intent to deceive Mr. Adams and that he

fraudulently induced Mr. Adams to enter into the Settlement

Agreement. We discern no error.

All of Mr. Sepulveda’s arguments challenge the bankruptcy

court’s factual findings and its findings of credibility. We

review these determinations for clear error, giving special

deference to the bankruptcy court’s credibility findings. See

In re Weinberg, 410 B.R. at 28.

a. Fraudulent intent

Mr. Sepulveda argues that the court erred by finding,

despite his partial performance, that he did not intend to

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perform fully under the Settlement Agreement. He claims that the

court erroneously interpreted his financial situation and that he

could have performed on the day the Settlement Agreement was

executed.

But the court considered a number of factors when finding

that Mr. Sepulveda knew that he could not satisfy the terms of

the Settlement Agreement. It found that Mr. Sepulveda could not

fully perform because of: (1) Mr. Sepulveda’s lack of income

caused by a ninety-five percent decline in his income in the two

years prior to the execution of the Settlement Agreement; (2) his

need to borrow $40,000 from his parents, but his ability to only

pay back $20,000; (3) his lengthy, contentious, and expensive

divorce proceedings; (4) his inability to work due to childcare

responsibilities caused by the divorce; and (5) his failure to

set aside for the Arriola Lawsuit any of the $200,000 received

from the sale of his home. It also said that, even if

Mr. Sepulveda did not have an affirmative intention to not

perform, he acted with reckless disregard for the truth. The

court found that Mr. Sepulveda’s testimony was not credible. The

court made proper factual findings supported by the record and

did not clearly err.

Mr. Sepulveda argues that his partial performance evidenced

his good faith, because he otherwise had no reason to surrender

the Yorba Linda properties. The bankruptcy court correctly

observed that Mr. Sepulveda surrendered the Yorba Linda

properties to Mr. Adams so that he could obtain a quick dismissal

of Mr. Adams’s cross-claims against him in the Arriola Lawsuit. 

The court also stated that Mr. Sepulveda’s testimony on this

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topic was not credible. Again, we do not discern any clear

error. 

Mr. Sepulveda argues that the court should not have relied

on his ex-wife’s testimony. But the court made specific findings

that Ms. Moore’s testimony was credible, while Mr. Sepulveda’s

testimony was not. Mr. Sepulveda does not convince us that these

findings were clearly erroneous.

b. Fraudulent inducement

Mr. Sepulveda argues that the bankruptcy court erred in

finding that he fraudulently induced Mr. Adams to enter into the

Settlement Agreement. We reject this argument.

He contends that the bankruptcy court conflated its analysis

of the Partnership Agreement with the Settlement Agreement, but

does not explain how the bankruptcy court confused the issues. 

He says that the court “relied on previous inaccuracies in

testimony in assuming that Appellant did not intend to perform

when the Settlement Agreement was made.” But there is no

indication that the court assumed fraudulent intent in connection

with the Settlement Agreement based on its analysis of the

Partnership Agreement. Nor does Mr. Sepulveda identify the

supposed “previous inaccuracies in testimony.” We find no error.

Mr. Sepulveda also argues that he acted in good faith

because the Kofdarali Lawsuit settled without further litigation

and he offered to satisfy his remaining obligations under the

Settlement Agreement for $300,000. But neither of these factors

has anything to do with his intent when he entered into the

Settlement Agreement. The disposition of the Kofdarali Lawsuit

has little or no bearing on his agreement to pay for fees, costs,

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and judgment in the Arriola Lawsuit. Moreover, Mr. Adams was not

obligated to accept the $300,000 settlement offer. 

Finally, Mr. Sepulveda argues that the court erred by

finding that Mr. Adams had met his burden as to each element of

the § 523(a)(2)(A) claim because Mr. Adams did not provide

adequate evidence. Mr. Sepulveda fails to expand on this

argument. As the bankruptcy court discussed extensively,

Mr. Adams provided sufficient evidence to prevail on each element

of his claim.

Therefore, we hold that the bankruptcy court did not clearly

err in finding that Mr. Sepulveda intended to defraud Mr. Adams.

B. The bankruptcy court did not err in calculating Mr. Adams’s

damages.

Mr. Sepulveda argues that the bankruptcy court erred in

calculating the damages award. His argument is not a model of

clarity, but he appears to contend that the bankruptcy court

(1) should have applied the profit that Mr. Adams received from

the construction of the Arriola Property against the damages

award and (2) should have charged him for only half of the

Arriola Lawsuit costs and judgment. We disagree on both counts.

1. Mr. Sepulveda failed to raise the purported error

regarding Mr. Adams’s profit from the sale of the

Arriola Property with the bankruptcy court.

Mr. Sepulveda did not specifically argue to the bankruptcy

court that he must be credited for the profit that Mr. Adams

received from the Arriola Property. Absent extraordinary

circumstances (none of which exist in this case), we will only

consider on appeal issues that were distinctly raised before the

bankruptcy court. See Yamada v. Nobel Biocare Holding AG,

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825 F.3d 536, 543 (9th Cir. 2016) (“[g]enerally, an appellate

court will not hear an issue raised for the first time on

appeal”); O’Rourke v. Seaboard Sur. Co. (In re E.R. Fegert,

Inc.), 887 F.2d 955, 957 (9th Cir. 1989) (“appellate courts will

not consider arguments that are not ‘properly raise[d]’ in the

trial courts”); Ezra v. Seror (In re Ezra), 537 B.R. 924, 932

(9th Cir. BAP 2015) (“Ordinarily, federal appellate courts will

not consider issues not properly raised in the trial courts.”). 

An issue “must be raised sufficiently for the trial court to rule

on it” in the first instance. In re E.R. Fegert, Inc., 887 F.2d

at 957. 

Further, Mr. Sepulveda offered no evidence to establish the

amount, if any, of profit that Mr. Adams realized from the sale

of the Arriola Property. Mr. Sepulveda only uses an estimate or

example (“e.g. <$300,000>”) of Mr. Adams’s profit.

Therefore, we will not consider Mr. Sepulveda’s argument

that the bankruptcy court should have reduced the damages award

by the amount of Mr. Adams’ alleged profit on the Arriola

project.3

2. The bankruptcy court did not err in compensating

Mr. Adams for the full litigation costs.

Mr. Sepulveda argues that the award overcompensates

Mr. Adams. He says that the court should have awarded Mr. Adams

only half of the costs of the Arriola Lawsuit. We disagree. 

3 Even if we were to consider this argument, we would affirm

the bankruptcy court’s decision. The measure of damages which

the bankruptcy court correctly selected, and which we discuss in

the following section, does not require any reduction for such

profits.

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In this case, Mr. Adams offered a calculation of his damages

without much explanation, and the bankruptcy court accepted it

without much discussion. We may affirm, however, on any basis

supported by the record, see Caviata Attached Homes, LLC v. U.S.

Bank, N.A., 481 B.R. 34, 44 (9th Cir. BAP 2012), and the record

supports that damage award.

 Under California law, “[a] plaintiff fraudulently induced

to enter into a contract has the power to elect to affirm the

contract and sue for damages resulting from the fraud; the

plaintiff may recover out-of-pocket damages in addition to

benefit-of-the-bargain damages.” Wang v. Massey Chevrolet,

97 Cal. App. 4th 856, 872 (2002); see Ifeorah v. Flegal

(In re Ifeorah), BAP No. CC–14–1363–KuDTa, 2015 WL 3895502, at *8

(9th Cir. BAP June 24, 2015), aff’d in part, rev’d in part,

2017 WL 1046203 (9th Cir. Mar. 20, 2017) (“The overarching goal

of compensatory tort damages is to make the plaintiff whole. In

order to accomplish this goal, the trial court typically may

consider out-of-pocket damages, benefit-of-the-bargain damages

and other measures of damages.”). “The benefit-of-the-bargain

measure places a defrauded plaintiff in the position he would

have enjoyed had the false representation been true, awarding him

the difference in value between what he actually received and

what he was fraudulently led to believe he would receive.” Henry

v. Lehman Commercial Paper, Inc. (In re First All. Mortg. Co.),

471 F.3d 977, 1001 (9th Cir. 2006) (citations omitted). 

Conversely, “[t]he out-of-pocket measure restores a plaintiff to

the financial position he enjoyed prior to the fraudulent

transaction, awarding the difference in actual value between what

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the plaintiff gave and what he received.” Id.

A plaintiff may choose to affirm or rescind a contract

procured by fraud. Under California law, “[i]t is settled law

that if a defrauded party is induced by false representations to

execute a contract, the party has the option of rescinding the

contract or affirming it and recovering damages for the fraud.”

Persson v. Smart Inventions, Inc., 125 Cal. App. 4th 1141, 1153

(2005) (citation omitted); see Denevi v. LGCC, 121 Cal. App. 4th

1211, 1220 (2004) (“To be sure, the law requires one who has been

defrauded into entering into a contract to choose either to

‘affirm or rescind’ the contract.”).4

4 When seeking to rescind a contract for fraud, the

defrauded party:

may rescind a contract “[i]f the consent of the party

rescinding, or of any party jointly contracting with

him, was given by mistake, or obtained through duress,

menace, fraud, or undue influence, exercised by or with

the connivance of the party as to whom he rescinds, or

of any other party to the contract jointly interested

with such party.” Cal. Civ. Code § 1689. Where, as

here, a party seeks to rescind a contract due to

alleged fraud in the inducement, the party must allege

that he or she justifiably relied on misrepresentations

made with the intent to induce him or her to execute

the contract. Wilke v. Coinway, Inc., 257 Cal. App. 2d

126, 136 (1967). Additionally, the party must allege

that but for his or her reliance on the

misrepresentations, the contract would not have been

executed. Merced County Mut. Fire Ins. Co. v. State of

California, 233 Cal. App. 3d 765, 772 (1991).

Eisenberg v. Citibank N.A., No. 2:13-CV-01814CAS-JPRx, 2016 WL

3410171, at *3 (C.D. Cal. June 15, 2016). The bankruptcy court

made appropriate findings that (1) Mr. Sepulveda obtained

Mr. Adams’s assent to the Partnership Agreement and Settlement

Agreement by fraud; (2) Mr. Adams justifiably relied on

(continued...)

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It is important to recall that there are two relevant

contracts in this case, and that the bankruptcy court found that

Mr. Sepulveda committed fraud in connection with both of the

contracts.

The first contract is the Partnership Agreement, pursuant to

which the parties developed and sold the Arriola Property and the

Kofdarali Property. The bankruptcy court found (and we have

affirmed the finding) that Mr. Sepulveda defrauded Mr. Adams in

connection with Partnership Agreement by misrepresenting the

status of his insurance. The bankruptcy court’s award is

consistent with the “benefit of the bargain” measure of damages. 

(Although Mr. Adams did not explicitly elect to affirm the

contracts and sue for damages, the damages calculation he

presented to the bankruptcy court makes sense only if he made

that election.) If Mr. Sepulveda had proper liability insurance

as he represented, Mr. Adams (1) would have received his share of

the profits from the sale of the Arriola Property and (2) would

not have had to pay any of the costs of resolving the Arriola

Lawsuit. To put Mr. Adams in the position he would have occupied

had Mr. Sepulveda told the truth about his insurance,

Mr. Sepulveda must pay Mr. Adams all of the costs that Mr. Adams

paid to resolve the Arriola Lawsuit. In other words, Mr. Adams

is entitled to both the profit and all of the litigation and

judgment costs arising from the Arriola Lawsuit. 

The second contract is the Settlement Agreement. As noted

4(...continued)

Mr. Sepulveda’s misrepresentations; and (3) if Mr. Adams had

known the truth, he would not have executed the contracts.

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above, the bankruptcy court found (and we have affirmed the

finding) that Mr. Sepulveda defrauded Mr. Adams in connection

with the Settlement Agreement because Mr. Sepulveda never

intended to perform all of his obligations under that agreement. 

Based on this fraud, Mr. Adams could elect to rescind the

Settlement Agreement (and his damages calculation only makes

sense on that basis). The rescission of the Settlement Agreement

means that the 50/50 sharing of expenses under that agreement

became inoperative.

Mr. Sepulveda argues that the damages award was punitive in

nature. This argument has no support. The bankruptcy court did

not award Mr. Adams punitive damages. All of the damages are

compensatory in nature.

Therefore, the bankruptcy court did not err in calculating

damages awarded to Mr. Adams.

CONCLUSION

The bankruptcy court did not err in determining that

Mr. Sepulveda’s nondischargeable debt to Mr. Adams totaled

$527,711.70. Therefore, we AFFIRM.

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