Court Opinion

ID: 4154114
Source: CourtListenerOpinion
Date Created: 2017-03-20 20:00:57.23831+00
Date Added: 2024-06-11T12:52:46.462688
License: Public Domain

FILED
                                 NOT FOR PUBLICATION
                                                                            MAR 20 2017
                       UNITED STATES COURT OF APPEALS                    MOLLY C. DWYER, CLERK
                                                                          U.S. COURT OF APPEALS

                                 FOR THE NINTH CIRCUIT

In re: GEORGE CHIKE IFEORAH,                     No. 15-60047

               Debtor,                           BAP No. 14-1363

------------------------------                   Bankr. No. 12-15356

GEORGE CHIKE IFEORAH,                            MEMORANDUM*

               Appellant,

 v.

RYAN FLEGAL and
INVEST & DESIGN LLC,

               Appellees.

                          Appeal from the Ninth Circuit
                            Bankruptcy Appellate Panel
               Kurtz, Dunn, and Taylor, Bankruptcy Judges, Presiding

                        Argued and Submitted February 13, 2017
                                 Pasadena, California

Before: M. SMITH and OWENS, Circuit Judges, and KORMAN,** District Judge.

        *
             This disposition is not appropriate for publication and is not precedent
except as provided by 9th Cir. R. 36-3.
       **
             The Honorable Edward R. Korman, Senior District Judge for the U.S.
District Court for the Eastern District of New York, sitting by designation.
      George Ifeorah, debtor, appeals from the Bankruptcy Appellate Panel (“BAP”),

raising issues relating to the proper application of proximate causation to the

bankruptcy exception for fraud that arises under 11 U.S.C. § 523(a)(2). The finding

of fraud in this case arises out of a landlord-tenant dispute. Ifeorah, the tenant,

defaulted on rent for the commercial property he was leasing for his restaurant. Ryan

Flegal, the landlord, responded by commencing an unlawful detainer proceeding

against him. On the day of trial, Ifeorah convinced Flegal to allow him to remain on

a reduced rent schedule, in exchange for a balloon payment to be paid later, and a

promise that Flegal could keep the commercial kitchen facility that Ifeorah had built

on the leased premises, if Ifeorah ever defaulted. Ifeorah never intended to keep that

promise, and the representation that he was the owner of said equipment was false.

Unbeknownst to Flegal, Ifeorah had previously transferred title to the equipment to

an LLC in which he held a 60% stake. Although Ifeorah briefly made the required

rent payments, he eventually defaulted again. By the time that Flegal was able to eject

him from the premises, accrued but unpaid back rent had risen to north of $160,000.

Moreover, rather than leaving a turnkey kitchen as promised, Ifeorah hired contractors

to dismantle it and ship it offsite, destroying much of its value. He subsequently filed

for Chapter 11 bankruptcy protection, which he later converted to a Chapter 7

liquidation.

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      Flegal commenced an adversary proceeding, seeking a declaration that Ifeorah’s

debts were non-dischargeable. After the bankruptcy court ruled in favor of Flegal,

Ifeorah appealed both the non-dischargeability holding and the damages award. The

BAP affirmed. This appeal followed.

                                   DISCUSSION

      Section 523(a)(2)(A) of the Bankruptcy Code provides that debts arising from

fraud are non-dischargeable. A claim for non-dischargeability under that section has

five elements, but only one—“damage to the creditor proximately caused by its

reliance on the debtor’s statement or conduct”—is relevant here. Deitz v. Ford (In re

Deitz), 760 F.3d 1038, 1050 (9th Cir. 2014) (order) (emphasis supplied).

      In relevant part, the award included accrued but unpaid back rent and the

market value of the kitchen equipment. We divide the rental damages into distinct

categories. Ifeorah missed approximately $33,000 in rent payments before the

settlement agreement, which allowed him to remain on the premises on a reduced rent

schedule. He later defaulted on a balloon payment to Flegal, which was to consist of

the rent unpaid at the time of the settlement agreement, and the rent that was deferred

due to the reduced rent schedule. The BAP was correct that Ifeorah would have owed

the rent unpaid at the time of settlement regardless of the fraud, and therefore it did

not fall within the exception to discharge for fraud under 11 U.S.C. § 523(a)(2).

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Nevertheless, the deferred rent due on the date of the balloon payment (about $9,000)

flowed directly from the signing of the settlement agreement itself, which was induced

by Ifeorah’s fraudulent promise and warranty.

      The third category of damages, consisting of the unpaid rent accumulated

between the default on the balloon payment and Flegal’s next attempt to evict Ifeorah

(about $35,000), was not directly caused by the fraud, because Flegal’s “reluctan[ce]

to evict Mr. Ifeorah without a new tenant that could come in” was an intervening

cause. Significantly, during this period of time, Ifeorah “continued to make monthly

rental payments to [Flegal],” although he frequently missed payments. Thus, Flegal’s

delay was most likely caused by that fact, rather than by Ifeorah’s fraud. Under these

circumstances, it was clear error to include this category of damages in an exception

to discharge under Section 523(a)(2).

      The fourth category of damages accrued after Flegal’s demand that Ifeorah quit

the premises in February 2012, until Ifeorah left (about $65,000). On the day of the

settlement agreement, Flegal was on the cusp of evicting Ifeorah after a prolonged

unlawful detainer process. By virtue of the fraud, and the subsequent withdrawal of

unlawful detainer proceedings, Ifeorah essentially reset the clock on the eviction

process. When he later defaulted, Flegal had to start the eviction process from scratch.

This delay, from the date of Flegal’s second demand that Ifeorah quit the premises

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until Ifeorah finally left in December 2012, gave Ifeorah nearly an additional year in

the rental property. Because the fraud enabled Ifeorah’s dilatory behavior, these

damages were proximately caused by the fraud.

      We turn now to the loss of the kitchen. The BAP held that, “but for Ifeorah’s

fraud, Flegal would have held a contractual entitlement to retain the kitchen

equipment.” The problem with this reasoning is that Flegal did have a contractual

entitlement to the kitchen, notwithstanding Ifeorah’s fraud. Indeed, the course of

conduct that resulted in the loss of the kitchen began when Ifeorah removed the

kitchen equipment from the rental property, not when he misrepresented that he

personally owned such equipment. The loss would have been the same if Ifeorah’s

promises were true. Thus, the bankruptcy court clearly erred when it found that

Flegal’s loss of the kitchen equipment was a proximate result of fraud. Rather, as

Ifeorah argues, the loss of the kitchen was caused by the breach of his promise to

leave a turnkey kitchen if he defaulted on the settlement agreement. Damages

resulting from a breach of contract, however, are dischargeable in bankruptcy.

Moreover, it was Ifeorah’s breach of contract, not the fraud, that compelled Flegal to

give a rent discount to his new tenant. Consequently, the BAP erred by awarding

Flegal an exception to discharge for the loss of the kitchen.

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      We have considered Ifeorah’s other arguments and concluded that they have no

merit. In sum, we affirm in part and reverse in part, and remand to the bankruptcy

court to calculate damages, including appropriate calculations for the accumulation

of interest, in accordance with the foregoing analysis.

      Each party shall bear its own costs on appeal.

      AFFIRMED IN PART, REVERSED IN PART, AND REMANDED.

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