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NOTFOR PUBLICATION

UNITED STATES BANKRUPTCY APPELLATE PANEL

OF THE NINTH CIRCUIT

In re: ) BAP No. NC-14-1025-TaPaJu

)

CHRISTOPHER MICHAEL COTE, ) Bk. No. 12-53464

 )

Debtor. ) Adv. Pro. No. 12-05160

______________________________)

CHRISTOPHER MICHAEL COTE, )

)

Appellant, )

)

v. ) MEMORANDUM*

)

AL V., INC., )

)

Appellee. )

______________________________)

Argued and Submitted on February 19, 2015

at San Francisco, California

Filed - July 27, 2015

Appeal from the United States Bankruptcy Court

for the Northern District of California

Honorable Stephen L. Johnson, Bankruptcy Judge, Presiding

________________________________

Appearances: Charles Alex Naegele argued for Appellant

Christopher Michael Cote; Mark B. Freschi argued

for Appellee Al V., Inc.

__________________________________

Before: TAYLOR, PAPPAS, and JURY, Bankruptcy Judges.

FILED

JUL 27 2015

SUSAN M. SPRAUL, CLERK

U.S. BKCY. APP. PANEL

OF THE NINTH CIRCUIT

* 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(c)(2).
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INTRODUCTION

Chapter 71 debtor Christopher Cote appeals from the

bankruptcy court’s judgment after trial awarding damages of

$490,883.85 to appellee Al V., Inc. (“Contractor”) and declaring

this debt excepted from discharge under § 523(a)(2)(A). 

Contractor sought a nondischargeable judgment based on

alleged fraud relating to a construction contract between it and

Cote. Its alleged damages consisted primarily of amounts in

excess of its right to recovery under the construction contract

at its formation.

The bankruptcy court found that Cote intentionally deceived

Contractor by knowingly misrepresenting his ability to perform

under the construction contract. It then determined that this

proximately caused damages to Contractor. We determine that

these findings were clearly erroneous. 

The record is inconsistent with a determination that Cote

lacked necessary funding at initiation of the construction

contract. It also does not support the conclusion that the

damages awarded were contemplated by the construction contract

at formation or that they were completely recoverable under the

construction contract as thereafter amended. Therefore, we

REVERSE.

FACTS

The Agreements Between Cote and Contractor. Contractor, a

licensed general contracting company owned by Al Valles and his

1 Unless specified otherwise, all chapter and section

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

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

Procedure, Rules 1001-9037.

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wife,2 entered into a construction contract with Cote's

development company3 to build 10 homes (“Phase I”) of a planned

18-home solar-powered residential subdivision called Hanna

Square in Gilroy, California.4

At the beginning of the relationship, the parties signed a

Letter of Understanding & Confidentiality Agreement dated

June 4, 2007 (the “Confidentiality Agreement”). Cote agreed to

provide financial, technical, and management data to Contractor,

which included bank construction loan approval letters and

banking data. Valles testified at trial that this

Confidentiality Agreement somehow prohibited him from contact

with Cote’s construction lender. 

The parties also entered into a Construction Services

Contract (“Initial Contract”) along with an Addendum to and

Modification of Construction Services Contract (“Addendum,” and

together with the Initial Contract, the “Construction

Contract”).5 Contractor later argued that he was fraudulently

2 Valles had been in the contracting business more than

20 years and had built over 150 custom homes and three

commercial buildings; he primarily worked as an owner-builder

and not as a third party contractor.

3 Cote was the sole owner. At no point did Cote argue

that he was not the proper defendant. For simplicity, we refer

to the development company and Cote hereinafter as “Cote.”

4 Cote’s schedules disclosed that his employment for

21 years was as a Safari Guide and that he received $11,000.00

per month in gross income. The record suggests, however, that

he may have developed at least one prior project.

5 Each party admitted a copy of the Initial Contract into

evidence at trial. Both copies contained identical text and

contained signatures over the signature line for Valles and the

initials “A.V.” on every page. The handwritten dates differ

(continued...)

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induced to enter into and to perform under this contract. The

Construction Contract’s terms, thus, are critical to the

analysis, and we highlight the most relevant terms (or lack

thereof) as follows:

1. The Construction Contract made clear that it did not

provide for the payment of the cost of building the homes in

Phase II. This necessarily excluded any of the Phase II “under

roof” costs and certain site improvements. Instead, the

Construction Contract provided that the parties would proceed to

build the eight homes in Phase II within one year of execution

of the Construction Contract if the sales of homes in Phase I

were sufficient.

2. Contractor agreed to construct the 10 homes in Phase I

for a maximum “under roof” price of $120.756 per square foot or

a total of $1,929,585 ($120.75 multiplied by 15,980 total square

feet). The Construction Contract, however, also contained

numerous provisions that either required, under certain

circumstances, or incentivized Contractor, in all events, to

(...continued)

between the copies. At trial, Valles testified that the

signature on his exhibit was not his signature. But, he did not

dispute his signature on the Initial Contract introduced into

evidence by Cote. Aside from speculation in Contractor’s

closing argument, there was no further evidence or discussion

regarding the disparity in signature.

6 Valles testified at trial that when he was presented

with the Initial Contract for execution at the title company,

Cote tried to reduce the agreed building costs from $120.75 per

square foot to $115 per square foot. Their agreement to $120.75

is contained in the Addendum. As later discussed, Contractor’s

theory of the case does not turn on whether $115 might have been

sufficiently funded, but $120.75 was not; and Cote never

disputed that he agreed to $120.75 per square foot for the under

roof building costs when he entered into the Construction

Contract.

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construct the 10 homes at a lower cost.7 Based on these

provisions, Contractor was aware at the time that it entered

into the Construction Contract of Cote's stated goal to have

Phase I completed by January 1, 2008. There is no evidence that

Contractor advised Cote that his goal was unreasonable.

3. The Construction Contract also provided for the payment

of certain costs for site improvements and established $589,930

as the total maximum price for site improvements for both phases

of Hanna Square. Contractor agreed to later provide the

allocated cost of Phase I site improvements; there is no

evidence in the record that it did so or that the parties ever

agreed to a specific number. The bankruptcy court concluded

that the agreed upon number for Phase I offsite improvements was

$556,461; we disagree. The Initial Contract stated that this

was the maximum amount payable for both Phase I and Phase II

site improvements. The Addendum increased the site improvement

budget for both phases to a maximum of $589,930. The bankruptcy

7 First, the Construction Contract required Contractor to

reduce the maximum payable under the agreement if it obtained

reductions in amounts payable to sub-contractors through

negotiations. Contractor guaranteed in the Construction

Contract that such negotiations were ongoing. The Addendum also

required a downward adjustment if Cote provided a WRAP insurance

policy covering Contractor and all sub-contractors at Cote’s

expense. The record establishes that Cote provided insurance of

some type.

Second, the Construction Contract obligated or incentivized

Contractor to build the homes in Phase I quickly and to complete

Phase I at a total cost below budget. Contractor agreed to

identify “the most efficient economic means of achieving

Developer’s objective, which is to bring all homes to market and

be sold before 1/1/08.” Pl.’s Trial Ex. 1 at 3. Cote agreed to

pay Contractor a bonus payment of 50% of all construction cost

savings if the project completed below budget and a $50,000

bonus if the Contractor completed 8 of the 10 homes within four

months of building permit issuance and the remaining 2 homes

within five months of building permit issuance.

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court’s use of $556,461, thus, is not logical or supported by

the record. In particular, this number was never mentioned by

any party in testimony or in argument at the trial.

The record, however, does support some assumptions as to

what Cote must or should have known regarding Phase 1 site

improvements at the time of the Construction Contract.8 The

only other evidence regarding the site improvement cost for

Phase I is a construction loan progress disbursement request

including a cost allocation recap (“Disbursement Request”),

identified as an exhibit to the construction loan, which

budgeted $358,014 to bonded site improvements and $68,754 to

non-bonded site improvements, for a total of $426,768 in

budgeted site improvement costs. There is no evidence in the

record that any other amount for allocated Phase I site

improvements was discussed by Contractor and Cote prior to

execution of the Construction Contract, reasonably contemplated

8 First, Cote had to assume that something, albeit less

than $589,930, would be payable in relation to site

improvements.

Second, Cote could not assume that simple division would

provide the answer. The loan documents in the record budgeted

bonded site improvements of $358,014 and made clear that the

bonded site improvements related to both phases of the Hanna

Square project. The bankruptcy court correctly assumed that

Cote was familiar with his lender’s assumptions and documents;

he, thus, knew that he needed to pay the budgeted amount of the

bonded site improvements when he entered into the Construction

Contract.

Third, as the bankruptcy court correctly found, the

Construction Contract did not relate to both Phase I and

Phase II. Thus, it would not be reasonable for Cote to assume

that he needed to pay for all the remaining site improvement

expense through Phase I financing; for example, it is impossible

to properly landscape a home that is not yet built. The loan

documents used a budgeted amount of $68,754 for non-bonded site

improvements. The record, thus, establishes that Cote must have

known that he needed to pay for $426,768 of site improvements in

connection with Phase I.

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by Cote prior to execution of the Construction Contract, or ever

provided by Contractor either before or after the Construction

Contract.

4. Contractor agreed to receive payment of $39,500 from

the sale of each home if it required payment in excess of any

amounts detailed in the schedule of payments from United

American Bank (the “Bank”). At trial, Contractor and Cote

disagreed as to the intended meaning and effect of this

provision.

5. Pursuant to the Addendum, Cote was responsible for

certain expenses including those related to solar arrays and

fill dirt.

6. The Construction Contract contained a confidentiality

provision that repeated some paragraphs contained in the

Confidentiality Agreement. As with the Confidentiality

Agreement, Valles contended that this provision prohibited him

from contact with Cote’s construction lender.

7. The Construction Contract provided that Cote would pay

Contractor in accordance with the Bank’s “Construction Loan draw

system schedule as described in the United American Bank

Construction Loan Document.” Pl.’s Trial Ex. 1 at 15. Further,

Cote and Contractor agreed that all draw monies would be

evaluated to confirm that the total monies paid corresponded

with the total percentage of project completed as of the date

the progress payment was requested and paid. 

8. There was no provision for any award of attorney’s fees

or interest. 

Funding for Phase I Construction. Cote obtained a

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construction loan in the total amount of $3.8 million (the

“Construction Loan”) from the Bank. After payment of existing

liens and other closing costs, there was approximately

$2.6 million in Construction Loan proceeds. Contractor later

argued that this amount was insufficient to pay amounts owed

under the Construction Contract and, necessarily, that Cote knew

it. The bankruptcy court ultimately agreed. 

The record shows that the Bank also financed an additional

$155,000.9 The bankruptcy court, however, did not address this

additional loan.

Valles testified at trial that, at the formation of the

Construction Contract, Cote stated that he had additional funds

available to him outside the Construction Loan. The record

supports this statement as there was evidence that some

construction costs were paid where the source of these payments,

is unknown. The bankruptcy court did not address this evidence.

Cote obtained a bond insuring payment in relation to

$358,014 of site improvements. The bond was effective;

Contractor sued the bonding company and apparently the bonding

company paid. The bankruptcy court did not address the bond.

While the parties disagreed about the meaning of the

provision requiring payment from home sale proceeds, there was

no evidence presented establishing that it was unreasonable for

Cote to believe, when he signed the Construction Contract, that

home sales would be sufficient to pay Contractor in full. The

9 An unchallenged document admitted into evidence at trial

(defendant’s trial exhibit N) reflects that with the line of

credit Cote’s maximum credit from the Bank for costs payable

during Phase I of the Hanna Square project was $3,955,000.

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only evidence in the record was that the Bank valued the entire

Hanna Square project at over $12 million, which left it with a

healthy loan to value ratio of 31% at the time the parties

entered into the Construction Contract. The bankruptcy court

did not address this evidence.10

Construction Loan Funding. Valles also executed an

Acknowledgment of Assignment, part of a form bank document

titled Assignment of Construction Contracts dated July 11, 2007

(“Contract Assignment”). The Contract Assignment recited that

Cote requested a $3,800,000 construction loan from the Bank. 

Contractor expressly acknowledged that it was familiar with the

disbursement provisions of the Bank’s loan documents, that the

Bank’s disbursement provisions were satisfactory, and that a

change to the Construction Contract would not be effective

unless Bank approved it.

Valles never disputed that he signed the Contract

Assignment. He described it, however, as the document Cote

produced to intentionally mislead Valles into believing that

there was a full $3.8 million loan to cover construction costs

for the project.

Phase I Construction. Once started, construction of

Phase I proceeded with no payment problems until the sixth

month. Contractor submitted monthly invoices to Cote. Cote

then submitted monthly progress payment requests to the Bank. 

10 There is no evidence or argument in the record that

Cote, Valles, or Bank anticipated the rapidly approaching real

estate recession at the time of the Construction Contract and

Construction Loan Agreement; unfortunately as Phase I of the

Hanna Square project neared completion, the recession had

arrived.

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The Bank’s construction auditor walked the project with

Contractor’s project manager and discussed the work and

percentage completed. The Bank deposited the approved amounts

drawn from the loan into Cote’s account at the Bank. And,

thereafter, Cote issued checks to Contractor, which paid its

invoices in full. Indeed, on some occasions, the Bank’s auditor

did not approve the full amount requested by Contractor; when

Cote paid these amounts in full, he did so with other funds.

During this time, Cote also utilized Construction Loan

proceeds to pay other related construction costs. There is no

evidence in the record, however, that he improperly utilized

Construction Loan proceeds or received any payment for personal

benefit.

Cote and Contractor also agreed to a few changes to the

Construction Contract and executed formal change orders in the

total amount of $175,502. Under these change orders, Cote

agreed to pay Contractor on account of charges notwithstanding

the maximums in the Construction Contract.

Then, in the sixth month (at which point Phase I was

approximately 94% complete), Cote paid only part of Contractor’s

invoice, which brought total payments to Contractor up to

$1,778,350. This was the last payment made by Cote to

Contractor;11 the relationship fell apart. Cote advised

Contractor that he was out of money. His trial testimony and

11 Valles testified at trial that Contractor continued work

on the project and that its final invoice was dated February 28,

2008. He did not testify regarding the party for whom

Contractor continued the work, even after Cote allegedly told

him he had no more money. But, there is no dispute that

Contractor continued the work.

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the documentary evidence established, however, that at the time

there was $536,501.79 in available credit under the Construction

Loan. That the Bank later paid additional amounts to Contractor

further evidenced that the Construction Loan was not then fully

drawn. It appears instead that Cote was not able to immediately

access remaining loan proceeds at the time of default — not that

they did not exist. 

The following month, Contractor issued a final invoice for

over $1 million dollars, which included contract overages and

profit thereon of over $447,879 – 19% more than the maximum

amount stated in the Construction Contract. The same month,

Contractor also filed a mechanic’s lien and initiated a lawsuit

against Cote, the Bank, the bonding company, and others; and, it

filed a lis pendens against the Hanna Square property. 

Contractor eventually settled12 the litigation with the Bank

and the bonding company; the settlement brought Contractor’s

receipts just shy of the maximum amount stated in the

Construction Contract for construction of the Phase I homes plus

the entire amount allocated by the Bank for site improvements. 

But, it did not cover the 19% overage amount. At trial,

Contractor offered into evidence copies of authorized change

orders to support only $175,502 of the overages.

12 The settlement agreement was among the documents

admitted into evidence by the bankruptcy court (“Settlement

Agreement”). By its terms, it involved settlement of claims for

construction work on both phases of Hanna Square. Neither the

parties nor the bankruptcy court raised any issue on this point

and we, therefore, mention it only in passing. There is no

evidence in the record that Phase II homes were constructed; we

assume the reference to Phase II is attributable to some

Phase II site improvements.

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The bankruptcy and adversary proceeding. Nearly one year

after the settlement, Cote filed his chapter 7 bankruptcy

petition. In August 2012, over five years after the parties

entered into the Construction Contract, Contractor filed a

complaint initiating the adversary proceeding seeking judgment

and determination of nondischargeability under § 523(a)(2)(A)

and (a)(2)(B). The complaint alleged that Cote falsely

represented that he had a $3.8 million Construction Loan because

the loan was actually funded in the principal amount of

$2.1 million. It alleged that Cote knew the loan amount

representation was false, knew the Construction Loan was

insufficient, and knew the costs of construction were beyond

Cote’s ability to pay. The complaint alleged that Cote never

intended to fully compensate Contractor as required under the

Construction Contract but, rather, intended to deprive it of

“money, property and services.” Contractor asserted damages in

the amount of $769,123.01 as a proximate result of Cote’s

alleged misrepresentations regarding his intent to pay and the

sufficiency of funding.

The bankruptcy court held a one-day 6-hour timed trial13 on

December 3, 2013. The parties objected to virtually none of the

documentary evidence, and the bankruptcy court admitted the

numerous documents into evidence for all purposes; this included

documents submitted without any explanatory testimony and

13 We have exercised our discretion to review documents

filed on the bankruptcy court’s electronic docket in the

Adversary Proceeding and in the main case. See O’Rourke v.

Seaboard Sur. Co. (In re E.R. Fegert, Inc.), 887 F.2d 955,

957–58 (9th Cir. 1989).

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documents that appear incomplete or include unexplained

notations. After trial, the bankruptcy court took the matter

under submission and did not receive further briefing. 

The bankruptcy court entered its Order Following Trial on

First Amended Complaint Objecting to Discharge of Debtor (“Order

After Trial”) on January 3, 2014, as its findings of fact and

conclusions of law. It found that Valles was not sophisticated

in business. It found that “Cote misrepresented the amount of

funds at his disposal to complete the Hanna Square project[]”;

he did not have $3.8 million in the loan, as he told Contractor,

because nearly $1 million was paid to holders of first and

second deeds of trust; and he told the Bank maximum costs would

be $2,041,636.55 – an amount less than the amount required by

Contractor under the Construction Contract. Order After Trial

at 11. The bankruptcy court found that “[d]ue to these

differences, it appears the project ran out of money in January

2008, leaving [Contractor] unpaid.” Id.

Cote timely appealed.14

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 determining that a

debt owed by Cote to Contractor was excepted from discharge

14 Cote filed the notice of appeal after entry of the Order

After Trial, but before the Judgment. Nonetheless, the appeal

was timely. See Fed. R. Bankr. P. 8002(a)(2).

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pursuant to § 523(a)(2)(A).

STANDARD OF REVIEW

Whether a claim is nondischargeable presents mixed issues

of law and fact. Deitz v. Ford (In re Deitz), 760 F.3d 1038,

1042 (9th Cir. 2014). Mixed questions of law and fact are

generally reviewed de novo. See Mathews v. Chevron Corp.,

362 F.3d 1172, 1180 (9th Cir. 2004); In re Deitz, 760 F.3d at

1043. In the context of a dischargeability analysis, however,

the bankruptcy court’s factual findings are reviewed under the

clearly erroneous standard. Candland v. Ins. Co. of N. Am.

(In re Candland), 90 F.3d 1466, 1469 (9th Cir. 1996). Thus,

whether a creditor proved an essential element under

§ 523(a)(2)(A) is a factual determination reviewed for clear

error. Am. Express Travel Related Servs. Co., Inc. v. Vee

Vinhnee (In re Vee Vinhnee), 336 B.R. 437, 443 (9th Cir. BAP

2005). 

“Clearly erroneous review is significantly deferential,

requiring that the appellate court accept the [trial] court’s

findings absent a definite and firm conviction that a mistake

has been made.” United States v. Syrax, 235 F.3d 422, 427 (9th

Cir. 2000). 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

deference owed to the bankruptcy court is heightened where its

choice is based on the credibility of live witnesses. 

Rule 8013. A factual finding is clearly erroneous, however, if,

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

the definite and firm conviction that a mistake has been

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committed.” Anderson v. City of Bessemer City, NC, 470 U.S.

564, 573 (1985) (internal citation omitted). 

In general, contract interpretation is a question of law

reviewed on a de novo basis. “This is particularly true where

the intent of the parties is easily ascertainable from the clear

and explicit language of the contract.” U.S. v. 1.377 Acres of

Land, 352 F.3d 1259, 1265 (9th Cir. 2003). If the bankruptcy

court relies on extrinsic evidence in rendering its decision,

however, its findings of fact are reviewed for clear error. See

id. at 1264.

DISCUSSION

A. Exception to discharge

A claim for denial of a discharge under § 523 is construed

liberally in favor of the discharge and strictly against a

person objecting to the discharge. Inst. of Imaginal Studies v.

Christoff (In re Christoff), 527 B.R. 624, 629 (9th Cir. BAP

2015). A creditor objecting to the dischargeability of its

claim bears the burden of proving, by a preponderance of the

evidence, that the particular debt falls within one of the

exceptions to discharge enumerated in section 523(a). Grogan v.

Garner, 498 U.S. 279, 286-91 (1991).

To prevail on a claim under § 523(a)(2)(A), a creditor must

establish the existence of five distinct elements: (1) the

debtor made representations; (2) debtor knew the representations

were false at the time he made them; (3) debtor made the

representations with the intention and purpose of deceiving the

creditor; (4) the creditor justifiably relied on the

representations; and (5) the creditor sustained the alleged loss

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and damage as the proximate result of the representations having

been made. Ghomesh v. Sabban (In re Sabban), 600 F.3d 1219,

1221 (9th Cir. 2010); Britton v. Price (In re Britton), 950 F.2d

602, 604 (9th Cir. 1991).

A debtor’s silence or omission of a material fact can

constitute a false representation that is actionable under

§ 523(a)(2)(A). Citibank (South Dakota), N.A. v. Eashai

(In re Eashai), 87 F.3d 1082, 1088-89 (9th Cir. 1996). However,

in order to find liability for fraud based upon omission or

silence, there must also be a duty to disclose. Id. 

In this appeal, Cote challenges the bankruptcy court’s

factual findings supporting its determination of

nondischargeability under § 523(a)(2)(A).15 He argues that the

bankruptcy court’s own math reveals its error in finding that

Cote had insufficient funds and that the evidence supports

neither a determination that Cote intended to deceive Contractor

nor a determination that Contractor justifiably relied on the

existence of $3.8 million in construction financing.

This was essentially a fraudulent inducement or fraud at

contract initiation case. Accordingly, a finding of fraud was

appropriate only if Cote knew that he could not pay Contractor

as required under the Construction Contract at its formation;

15 Cote also challenges the § 523(a)(2)(A)

nondischargeability determination on the grounds that his

alleged misrepresentation was an oral “statement respecting the

debtor’s or an insider’s financial condition,” which is

specifically not excepted from discharge. We disagree entirely. 

Assuming Cote adequately preserved the issue, which the

bankruptcy court failed to address in its written decision,

because we reverse on other grounds, we need not further address

this argument.

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among other things, this would require that Cote knew that the

Contractor would not complete the project as agreed upon, but

instead would come in significantly over budget and after the

target date for completion. There is no such evidence in this

record.

While we acknowledge the post-trial deference owed to the

bankruptcy court, we conclude that it grounded its

determinations on three factual findings that are clearly

erroneous. First, it overestimated the amount Cote agreed to

pay to Contractor under the Construction Contract in connection

with Phase I of the Hanna Square project. Second, it

underestimated the funds and sources of funds available to Cote

to meet the agreed upon expenses under the Construction

Contract. And, third, its award of damages exceeded anything

owed under the Construction Contract both as it was initially

drafted and even as modified by the change orders. 

The trial testimony record is minimal, especially

considering the amount of debt Contractor sought to have

determined nondischargeable. We defer to the bankruptcy court’s

credibility assessments as to specific testimony,16 as we must;

but, despite the bankruptcy court’s generalized finding that

Cote was not a credible witness, we conclude that in critical

areas Cote’s undisputed testimony, when corroborated by

documentary evidence, could not be disregarded. 

The documents taken into evidence, many of which involved

16 The bankruptcy court, again, specifically found that

Valles was not sophisticated in business; nothing in the record

shows otherwise. Contractor built many homes previously but not

as a third party general contractor.

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no explanatory testimony, were substantial. The bankruptcy

court undertook to review the record, and we assume it reviewed

all the admitted documents. See Tevis v. Wilke, Fleury,

Hoffelt, Gould & Birney, LLP (In re Tevis), 347 B.R. 679, 695

(9th Cir. BAP 2006)(“It is the bankruptcy court’s responsibility

to evaluate the evidence presented . . . [for] [it] has an

obligation to consider all of the evidence properly presented

and to give it the weight that it deserves.”). Based on our

review of the record, Contractor failed to establish all the

elements of its § 523(a)(2)(A) claim, and, thus, it failed to

carry its burden.

B. What was the misrepresentation?

Contractor’s complaint alleged that Cote made three

distinct misrepresentations; the bankruptcy court found a

misrepresentation based on a variation of the third.

1. Alleged false promise to pay

Contractor alleged that Cote induced it to enter into the

Construction Contract without any intention of paying. The

bankruptcy court did not base its nondischargeability decision

on this theory, therefore, we do not address it in detail here.17

2. Alleged false representations to the Bank

Contractor also alleged that Cote made misrepresentations

to the Bank regarding the agreed upon price under the

Construction Contract. The bankruptcy court considered

17 In any event, Contractor’s first theory is inconsistent

with the undisputed fact that Cote paid Contractor over

$1.7 million prior to default and that Contractor, eventually,

received payment of substantially all amounts owed under the

Construction Contract other than cost overruns and profit

thereon from Cote, Cote's lender, and the bond Cote obtained.

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important the difference between the numbers in the (limited and

largely incomplete) bank documents in evidence and the

Construction Contract cost numbers; but, it did not base its

decision on any alleged misrepresentation made to the Bank.18

3. False representations regarding the Construction Loan 

and the sufficiency of funds to pay Contractor

Contractor alleged that Cote misrepresented19 that the full

$3.8 million of Construction Loan proceeds was available to pay

construction costs and that he failed to disclose that

approximately $1 million of the proceeds was to be used to pay

off existing liens on the property. It, thus, asserted a claim

of omission in the face of duty to disclose. Contractor also

implicitly argued that the lesser amount available under the

Construction Loan proved that Cote had insufficient funding to

pay Contractor the full price agreed to under the Construction

Contract. The bankruptcy court did not entirely reject this

argument; instead, it found fraud on a slightly different basis.

The bankruptcy court found that Cote misrepresented the

amount of funds at his disposal to complete the project. In

connection with this finding, the bankruptcy court correctly

found that only a maximum of approximately $2.6 million was

available from the $3.8 million Construction Loan to complete

18 Nor did the Bank assert a fraud claim against Cote.

19 At trial, Valles provided no details as to when, where,

or what Cote actually said to allegedly make Valles believe that

the Construction Loan did not require loan fees, loan and title

costs, interest reserves, or other common financing costs.

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Phase I of the project.20 It found, in effect, that at the time

of the Construction Contract, Cote knowingly misrepresented that

he had sufficient funds to pay Contractor the amounts owed

pursuant to the Construction Contract. The bankruptcy court

reasoned that if Cote “had sufficient funding, he would have

paid [Contractor].” Order After Trial at 13. The record does

not support this finding.

C. The record does not support a finding that Cote knowingly 

misrepresented that he had sufficient funds to pay 

Contractor

1. The bankruptcy court underestimated Cote’s sources of 

funding at the time of contract formation 

a) The Construction Loan proceeds

The bankruptcy court commenced its analysis of the

sufficiency of funds by deducting the payoffs of existing

secured debt ($1,147,199) from the $3.8 million loan amount. 

The difference, approximately $2.6 million, is supported by

Cote’s trial exhibit, an estimated closing statement from

Alliance Title Company, “Est. Undisbursed Funds,” which shows

$2,604,463 ("Net Loan Proceeds") remained after the payoffs and

all costs and charges for the loan.

20 The bankruptcy court also found that Cote told the Bank

that the project would cost a maximum of $2,041,636.55. We

question this finding; there was no express testimony in this

regard, and the Bank obtained an assignment of the Construction

Contract. The bankruptcy court’s finding was based on its

review of the Disbursement Request. A representative of the

Bank's construction auditor testified that this document was a

progress disbursement request; Valles had no personal knowledge

of who prepared the document that he received in discovery; and

Cote testified he did not think it was the budget he submitted

to the Bank. No one testified from the Bank at trial. And the

loan officer involved is now deceased.

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But, rather than analyzing whether the Net Loan Proceeds

were sufficient to pay the Construction Contract at the time of

formation, the bankruptcy court instead analyzed whether a cost

allocation totaling $2,014,636 (roughly identified in the

Disbursement Request) was sufficient to pay the Construction

Contract. It never further considered whether Cote intended

that any of the approximate $500,000 of loan proceeds

($2.6 million less $2.014 million) cover any portion of the

costs incurred for Contractor’s services under the Construction

Contract. This failure was not harmless. There is no evidence

in the record from which the bankruptcy court could logically or

plausibly infer that the approximately $500,000 ("Excess Loan

Proceeds"), or some part thereof, was not available for payment

to Contractor.21

Obviously, there is a mathematical problem with the

bankruptcy court’s summary conclusion in regard to the Net Loan

Proceeds. The maximum under roof cost of Phase I, $1,929,585,

plus the maximum site improvement cost for both Phase I and

Phase II, $589,930, is only $2,519,515 — an amount less than the

Net Loan Proceeds. And, there is no evidence in the record that

supports the bankruptcy court’s finding that Cote knew the

Phase I site improvements would be more than the Bank's budgeted

amount of $426,768. On a facial review, the Net Loan Proceeds

were sufficient for payment of the maximum obligations under the

Construction Contract reasonably assumed to be payable at the

21 At trial Cote testified that the loan contained amounts

for retainage and contingencies, among other costs.

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time of its signing: $2,356,353;22 indeed, there was

approximately $250,000 in Construction Loan proceeds in excess

of this amount.

The bankruptcy court reached a different conclusion by

focusing on the undisputed facts that: (1) the limited bank loan

documents in evidence used $101.06 per square foot (and not

$120.75) as the cost of construction for the homes in Phase I

(totaling $1,614,868) and $426,768, not the bankruptcy court's

erroneously identified $556,461, as the site improvement number. 

The bankruptcy court then concluded, in the face of contrary,

undisputed evidence, that only $2,041,636.55 was available for

payment of Construction Contract expenses and that Cote knew it. 

These findings were clearly erroneous.

The record is at odds with a conclusion that all Excess

Loan Proceeds were available for construction. The Construction

Loan documentation, incomplete as it is, indicates that, as is

not uncommon with construction loans, there were interest

reserves built into the anticipated uses of funds. The evidence

in the record references an interest reserve and interest paid

from the initiation of the Construction Loan of $63,850.65. 

Although the record is less than precise, nothing suggests that

Cote reasonably anticipated or should have reasonably

anticipated that interest reserves would exhaust the Excess Loan

Proceeds. Indeed, as Cote's stated goal was completion of

Phase I and sale of the homes by January 1, 2008, this would

have been close to the maximum in interest carry reasonably

22 $1,929,585 + $426,768 = $2,356,353.

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anticipated at loan initiation.

The Construction Contract also provided that Cote was

responsible for costs related to certain components of Phase I,

including the solar arrays. Cote apparently paid some of these

expenses from Construction Loan proceeds. This payment was

appropriate; Phase I could not be completed without such

advances, but they were draws against the $2.6 million that

further reduced its availability to Contractor.

Cote testified, however, there was also a contingency

budget built into the Construction Loan. The bankruptcy court

never addressed this testimony, notwithstanding that the limited

loan documents in the record evidence that a contingency line

item existed and was utilized. Based on the documentary

evidence in the record, the bankruptcy court’s limited view of

the amount of Construction Loan proceeds available to pay costs

under the Construction Contract was clearly erroneous. 

The record, instead, supports that as of the formation of

the Construction Contract, Cote had access to sufficient funds

or significant funds to cover the known costs reasonably

anticipated to be incurred under the Construction Contract in

Phase I from Construction Loan proceeds. The bankruptcy court’s

disregard of the Net Loan Proceeds as a source of payment is

clear error.

b) The additional $155,000 line of credit

In addition to the $3.8 million in Construction Loan

proceeds, Cote testified that he had a separate line of credit. 

The record supports his testimony and there was no contrary

evidence. The bankruptcy court never addressed this source of

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funding. On this record, its failure to consider these funds as

a source of repayment was not harmless error.

c) The bond for site costs

Cote also obtained a bond for site costs.23 Of the $426,768

in budgeted site costs, Contractor’s trial exhibit reflects the

amount of bonded site costs as $358,014.24

The bankruptcy court never considered this insurance of

funding in its analysis. Contractor presented no evidence that

it was at risk for nonpayment for bonded site improvements

despite the fact that payment was substantially assured via the

bond obtained by Cote; indeed, the only evidence was that it

received post-default payment from the bond. The bankruptcy

court’s failure to consider this evidence is not harmless error.

d) Deferred funding: $39,500 contract provision

At trial the parties disagreed on the meaning and import of

23 A recital in the Settlement Agreement states that

American Contractors Indemnity Company, as surety for Cote,

“issued certain performance and labor and materials bonds in

connection with the project, including without limitation,

Subdivision Public Improvement Payment Bond No. 1000756422 in

the amount of . . . ($393,816.00), dated of (sic) July 10 2007

(the “Bond”). It appears that the Bond likely covered both

Phase I and II, as “Project” is defined in the Settlement

Agreement to include all phases of Hanna Square, and the amount

of the Bond is higher than the amount set forth in the

Disbursement Request for Phase I only. Contractor’s reference

to “project” and “Project” in its various pleadings

inconsistently varied as to whether it was referring to one or

both phases of Hanna Square. And at trial, Contractor’s counsel

attempted to impeach Cote by reading Cote’s deposition testimony

taken in the state court action wherein he stated that he knew

the Bank did not lend enough to complete the entire project. 

Read in context, Cote was referring to the undisputed fact that

the Bank made its loan only for Phase I of Hanna Square except

as to certain bonded site improvements.

24 Bonds generally provide a separate source of payment of

site costs in the event funding is unavailable and are

frequently required by construction lenders.

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the provision in the Construction Contract for Contractor’s

deferral of payment for up to $39,500 per home until the close

of escrow on the homes. Cote testified that he relied on this

provision as a source for payment of costs up to $395,000 to the

extent Contractor’s costs exceeded the amount provided by the

Bank under its progress payment process. Again, there was no

evidence presented establishing that it was unreasonable for

Cote to believe, when he singed the Construction Contract, that

home sales would be sufficient to pay Contractor in full. 

The bankruptcy court, with no discussion or analysis, found

that this contract provision applied only if the Contractor

“required” the changes that resulted in the overages. As shown

in Contractor’s February 2008 invoice, Contractor requested

judgment for costs and profits thereon that were incurred in

excess of the maximum amount reasonably viewed as payable under

the Construction Contract. This overage equals $447,879 - 19%

over the maximum price agreed upon by the parties in the

Construction Contract. Even under Contractor’s and the

bankruptcy court's interpretation of the $39,500 provision,

Contractor agreed to defer receipt of payment of $395,000 of

this amount until close of escrow on the homes. Close of escrow

never occurred.

Thus, the bankruptcy court’s finding that the $39,500

provision applied to none of the amounts for which Contractor

sought payment is clearly erroneous. This error is not

harmless, as the record supports Cote’s testimony that he

thought that if problems arose he had up to $395,000 with which

to complete construction of the project based upon Contractor’s

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agreement to defer payment on such required amounts until close

of escrow. The only evidence in the record is that at the time

the loan was made and the Construction Contract was executed,

the Bank valued the Hanna Square project at $12 million, which

left it with a healthy loan to value ration of 31%.

e) Other funding sources

The record is thin on this point, but there is evidence of

payments from sources other than the Bank's loan proceeds. The

bankruptcy court also ignored this documentary evidence.

In sum, the record shows that Cote had funding sources that

the bankruptcy court did not consider.

2. The bankruptcy court overestimated the reasonably 

assumed site costs for Phase I

It is undisputed that Cote agreed to pay Contractor a total

of $589,930 for all site improvement (non-building) costs for

Phases I and II together. But, nothing in the record shows what

amount, if any, the parties agreed to for the Phase I site

costs. The only admitted evidence for Phase I site costs

consisted of the site cost number reflected in the Disbursement

Request, $426,748. Therefore, the bankruptcy court erred when

it assigned $556,461, the amount in the Initial Contract for

both phases, to the Phase I site costs; there is no support in

the record for this determination. This error was not harmless. 

3. The bankruptcy court's determination of falsity, thus,

was based improperly on findings that were clearly 

erroneous 

The errors detailed above led the bankruptcy court to the

conclusion of material falsity through statement, omission, or

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action. Its determination was clearly erroneous. The record is

clear that Cote had sources of payment not acknowledged by the

bankruptcy court. Further, the record makes clear that the

bankruptcy court erroneously inflated the maximum amount due

under the Construction Contract at its initiation by including

overstated site improvement costs and erroneously concluded that

Cote knew that he lacked sufficient funds. 

Contractor argues on appeal that Cote should have known

that the project would go over budget, because all projects go

over budget. We disagree. Contractor presented neither

evidence supporting its argument that all projects go over

budget nor evidence that Cote knew Contractor would go over

budget. Rather, the record shows that Cote built in monetary

incentives to try to encourage quick construction and cost

savings efforts - to bring the project in early and below

budget. The record also shows that the amounts in the

Construction Contract were maximums and that Contractor was

obligated to provide reductions upon certain circumstances. 

There is nothing in the Construction Contract that allowed

Contractor to charge anything in excess of the amounts set forth

therein.

D. The record does not support the bankruptcy court's 

determination of proximate cause and justifiable reliance

The bankruptcy court found that Contractor sustained

damages, although it did not articulate whether the damages were

the proximate result of the misrepresentation on which it based

its § 523(a)(2)(A) judgment. It awarded the damages as

calculated by Contractor in its final February 2008 invoice,

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subtracted the $535,000 settlement amount received and awarded

Contractor $490,883.85.

On this record, the bankruptcy court clearly erred in

implicitly determining that pre-Construction Contract statement

or omission proximately caused the damages that it ultimately

awarded. Contractor received payment of all but $47,353 of the

maximum under roof cost in the Construction Contract, plus 100%

of the site improvement costs included in the Bank's budget. 

The vast majority of the damages awarded by the bankruptcy

court, thus, were amounts that resulted from cost overruns

beyond the scope of the Construction Contract. 

There is no evidence in the record that Cote ever agreed to

pay all these requested cost overruns as he executed only

$175,000 in change orders. Again, Contractor agreed in the

Construction Contract to build the Phase I homes and related

site improvements for a maximum amount. It thus requested – and

received – damages greater than either the original contract

amount or the increased contract amount given the limited change

orders. The damages awarded by the bankruptcy court exceed

those available even under a breach of contract theory.

In sum, it was illogical and implausible for the bankruptcy

court to find that Contractor was proximately damaged by being

induced to enter into a contract under which Contractor received

payment of almost all but the amounts that exceeded the

contractual maximums.

The bankruptcy court also found that Valles and, thus,

Contractor relied on Cote’s representation about the sufficiency

of funds at Cote’s disposal. Valles testified that Cote told

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him he had a $3.8 million loan; as stated, this was true. 

Contractor, however, presented no evidence that the full

$3.8 million amount was necessary to pay Contractor. Both

Valles and Frietas testified that when Cote changed the rate of

compensation to $115, they insisted it be revised to $120.75. 

The bankruptcy court did not find Cote believable when he

testified that he only agreed to the increase because he was in

a hurry to close the loan even though Valles and Frietas were

taking advantage of him.25 We do not question this finding, but

note that the difference between the two amounts is $5.75 per

square foot, a total of $91,885. Based on Contractor’s alleged

damages, the insufficiency of funds issue cannot turn on this

rate differential.

The bankruptcy court did not find that Contractor’s

reliance was justifiable, although, again, it found that Valles

“did not appear to be particularly sophisticated in business

transactions.” Order Following Trial at 9.

E. The record does not support unequivocally the bankruptcy

court’s inference that Cote intended to deceive Contractor

The bankruptcy court found that Cote’s intent to deceive

Contractor was clear. The record does not support its finding

unequivocally.

 The bankruptcy court relied on Valles’ testimony that he

was kept in the dark on the loan and construction funding

process and that he had restricted access to both the Bank and

25 Although the bankruptcy court made a general finding

that Cote was not a credible witness, this was the only

testimony that the bankruptcy court specifically identified as

not credible.

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its auditor. The record, however, was inconsistent on these

points.

The bankruptcy court appears implicitly to have concluded

that Cote intentionally did not provide Valles any bank

documents. But the record is devoid of any testimony to this

effect and, in fact, is inconsistent with Valles’ execution of

the Contract Assignment wherein he acknowledged and accepted the

disbursement provisions in the Bank’s loan documents. Further,

at trial, Valles testified that Cote provided him other

documentation regarding the funding for the project, although

Valles did not recall any other specific documents.26 Thus, the

record is unclear as to what loan documentation Valles reviewed.

Valles also testified that he was prevented from contacting

the Bank’s auditor, but this testimony is inconsistent with

testimony by Contractor’s project manager and agent, Frietas. 

Frietas testified that with each invoice submitted by

Contractor, Frietas walked the project with the Bank's auditor

and discussed billings and percentage completion. The

bankruptcy court found both Valles and Frietas to be credible

witnesses. It, however, failed to address or reconcile the

inconsistencies in their testimony.

The bankruptcy court also found the method of disbursing

loan proceeds, the requirement that Contractor acknowledge

assignment of the Construction Contract, the fact that the Bank

26 The Contract Assignment was the only bank loan document

admitted in its entirely into evidence. Contractor’s exhibit

list included a document titled “United American Bank Loan

Agreement (Loan #171571)” as exhibit 30, but it, along with

documents numbered 31 through 44, was crossed off the list and

never discussed or offered at trial.

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dealt exclusively with Cote, and other aspects of the lending

process supported its determination of intent to defraud. We

note that there was no expert testimony or secondary sources

discussing construction lending introduced into evidence at

trial. Nor was there any testimony that Cote, as opposed to the

Bank, dictated the terms of the construction loan and decided

how to disburse loan proceeds; one would logically assume that

the Bank would make these decisions. The only testimony

suggesting concern on these points was from Valles, who, as

previously discussed, was found to be unsophisticated in

business. 

Finally, the bankruptcy court found evidence of intent to

defraud from what it described as alterations Cote made to the

amounts requested by Contractor when he sought payments from the

Bank. Nothing in the record, however, shows that Cote made any

such alterations. The record evidences that he requested

payment consistent with Contractor’s requests, but also sought

advances on account of other project costs not covered under the

Construction Contract, such as $157,400 for solar arrays and

$100,000 for insurance. The Construction Contract made clear

that Cote was responsible for these portions of the Phase I

construction; nothing in the agreements prohibited him from

using some of the Construction Loan proceeds to pay these

required costs. Again, there was neither testimony nor evidence

presented establishing that this use was inconsistent with the

discussions of the parties prior to execution of the

Construction Contract or at any point in time.

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CONCLUSION

Based on the foregoing, we REVERSE.

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