Court Opinion

ID: 9399140
Source: CourtListenerOpinion
Date Created: 2023-06-02 00:01:27.686977+00
Date Added: 2024-06-11T17:19:38.995875
License: Public Domain

FILED
                                                                                    JUN 1 2023
                          NOT FOR PUBLICATION
                                                                              SUSAN M. SPRAUL, CLERK
                                                                                 U.S. BKCY. APP. PANEL
           UNITED STATES BANKRUPTCY APPELLATE PANEL                              OF THE NINTH CIRCUIT

                     OF THE NINTH CIRCUIT

 In re:                                              BAP No. CC-22-1218-GFS
 SWING HOUSE REHEARSAL AND
 RECORDING, INC.; PHILIP JOSEPH                      Bk. No. 2:16-bk-24760-RK
 JAURIGUI,
              Debtors.                               Adv. No. 2:18-ap-01351-RK

 PHILIP JOSEPH JAURIGUI,
                Appellant,
 v.                                                  MEMORANDUM*
 JONATHAN MOVER,
                Appellee.

               Appeal from the United States Bankruptcy Court
                    for the Central District of California
                Robert N. Kwan, Bankruptcy Judge, Presiding

Before: GAN, FARIS, and SPRAKER, Bankruptcy Judges.

                                 INTRODUCTION

       Chapter 71 debtor Philip Joseph Jaurigui (“Debtor”) was the founder,

majority shareholder, and chief executive officer of Swing House Rehearsal

       * 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.
       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.
and Recording, Inc. (“Swing House”), a company which offered rehearsal

and recording services to musical artists. In 2014, Debtor solicited an

investment from Appellee Jonathan Mover to facilitate the buildout of a

new location. Mover advanced funds in exchange for a convertible note

jointly payable by Swing House and Debtor and made a second loan which

Debtor guaranteed.

      In 2016, Debtor and Swing House filed chapter 11 petitions. The

bankruptcy court subsequently converted Debtor’s case to chapter 7 and, in

the Swing House case, confirmed a chapter 11 plan proposed by Mover

that provided for his purchase of the business. Mover then filed an

adversary complaint to hold his debt against Debtor nondischargeable

based on false representations and omissions related to Swing House’s

business and its ability to operate as a recording studio in the new location.

After trial, the court entered a nondischargeable judgment pursuant to

§ 523(a)(2)(A), (a)(2)(B), and (a)(6).

      On appeal, Debtor argues that Mover should be judicially estopped

from arguing that Swing House was not legally permitted to operate a

recording studio in the new location because Mover made certain

statements in his approved disclosure statement which Debtor argues were

contrary to Mover’s allegations in the complaint. Debtor claims that the

allegations constitute fraud on the court by Mover and his attorney. He

also questions the sufficiency of evidence and argues the court erred by

finding the debt nondischargeable.

                                         2
      Debtor did not assert an estoppel defense or claim of fraud on the

court in the bankruptcy court, and he cannot do so on appeal. Moreover,

Debtor does not demonstrate that either doctrine is applicable here. The

bankruptcy court’s decision is supported by the evidence in the record and

is not clearly erroneous. Accordingly, we AFFIRM.

                                       FACTS 2

A.    Prepetition events

      Debtor incorporated Swing House in 2000 and, until 2018, he was its

majority shareholder, chief executive officer, and president. In 2001, Debtor

relocated Swing House from a small facility in Hollywood, California to a

larger facility located on Willoughby Avenue in Los Angeles, California

(“Willoughby”). According to Debtor, Willoughby needed to be completely

remodeled for use as a music rehearsal and recording facility. Debtor

stated that Swing House consulted with the contractor, architect, and city

inspectors and was informed that a “sound score production” permit

would allow for the broadest use of the location, including holding

rehearsal and recording sessions for film, television, and the internet.

      2   We exercise our discretion to take judicial notice of documents electronically
filed in the jointly administered bankruptcy cases and adversary proceeding. See Atwood
v. Chase Manhattan Mortg. Co. (In re Atwood), 293 B.R. 227, 233 n.9 (9th Cir. BAP 2003).
Debtor moved to augment the record to include the disclosure statement filed in the
Swing House case. Although the disclosure statement was not part of the record in the
adversary proceeding, the bankruptcy court referred to the confirmed plan in the Swing
House case and was aware of those proceedings. We grant the motion.
                                           3
Swing House obtained the sound score production permit and operated as

a rehearsal space and a recording studio at Willoughby until 2013.

      In 2013, Debtor decided to find a new location for Swing House

because of an expected increase in rent upon expiration of the Willoughby

lease and a desire to expand the business. He located a warehouse on

Casitas Avenue, Los Angeles, California (“Casitas”) which required

extensive construction to convert it to a rehearsal and recording facility.

      In February 2014, Swing House signed a lease for Casitas. At the

time, Debtor knew that Casitas was not zoned for use as a recording studio

but was zoned MR-1 for use as a warehouse. On February 17, 2014, Swing

House executed a construction contract for work to be performed at

Casitas. The contract provided for a construction budget of $880,000 and a

construction management fee not to exceed $200,000.

      Debtor then approached Mover and D’Addario & Co., Inc.

(“D’Addario”), a privately held company that manufactures musical

instrument strings and accessories, about investing in Swing House. On

February 19, 2014, Debtor transmitted to Mover and D’Addario a

Confidential Private Offering Memorandum (“Offer Memo”), which

solicited a total investment of $900,000 through sales of common stock or

convertible notes.

      The Offer Memo described Swing House’s business operations,

financial information, and plan to relocate to Casitas. It stated that Swing

House operated as a rehearsal space and recording studio and generated

                                       4
additional income from management of artists, event production, and

equipment rentals. Regarding the proposed move to Casitas, the Offer

Memo stated that buildout of the facility would require $736,500, which

would be supplemented by an allowance for tenant improvements of

$218,000.

          In July 2014, Mover advanced $150,000 in exchange for a convertible

note jointly payable by Swing House and Debtor (the “Mover Note”).3

Prior to executing the Mover Note, Debtor signed a first amendment to the

construction agreement which increased the total construction budget to

$1,425,000. Debtor did not inform Mover of the increased budget.

      Swing House did not timely vacate Willoughby at the expiration of

its lease and defaulted in August 2014. The landlord of Willoughby, 7175

WB, LLC (“7175”), ultimately filed suit in state court seeking damages of

over $900,000. Debtor did not notify Mover that Swing House had

defaulted on the Willoughby lease.

      In September 2014, Debtor informed Mover that Swing House

required an additional $50,000 to complete the recording studio at Casitas.

Mover loaned Swing House $50,000, which Debtor personally guaranteed.

Swing House did not build the recording studio at Casitas.

      At the end of September 2014, Swing House and Debtor executed a

second amendment to the construction agreement, providing for additional

      3
        D’Addario also made an investment of $500,000 in exchange for a convertible
note. The Mover Note was subordinated to the D’Addario note.
                                          5
compensation to the construction manager of $5,500 for each additional

week he remained on the project.

     Swing House obtained an additional loan of $250,000 from Jim

D’Addario, the president of D’Addario, and received the Certificate of

Occupancy in April 2015 after spending over $1,800,000. The Certificate of

Occupancy was issued for “sound score production,” and the application

for the building permit and certificate of occupancy stated: “Bldg. shall not

be used for recording studio which is not permitted in MR1 zone.”

     In September 2015, Debtor, Mover, Jim D’Addario, and others met at

D’Addario’s headquarters in New York to discuss issues with Swing

House, including construction delays and contractors’ claims of non-

payment. D’Addario agreed to provide further loans, and at the insistence

of Jim D’Addario, Mover relocated to Los Angeles to co-manage Swing

House, and Genoveva Winsen was made Director of Operations of Swing

House.

     Because of financial difficulties and the litigation with 7175, Swing

House and Debtor filed bankruptcy petitions in November 2016.

B.   The bankruptcy cases and adversary proceeding

     The court converted Debtor’s chapter 11 case to chapter 7 in July

2018. In the Swing House case, the bankruptcy court ultimately confirmed

Mover’s Fourth Amended Plan of Reorganization on November 2, 2018.

Pursuant to the confirmed plan, Mover purchased Swing House and

became its sole owner.

                                      6
      Mover then filed an adversary complaint seeking to render Debtor’s

debt nondischargeable under § 523(a)(2)(A), (a)(2)(B), and (a)(6). 4 He

alleged that Debtor fraudulently induced him to make two loans to Swing

House by misrepresenting that Casitas could legally house and operate a

recording studio. Mover additionally alleged that Debtor made false

written representations about Swing House’s financial condition in the

Offer Memo and attached financial reports, and he claimed that Debtor’s

failure to disclose financial information, including Swing House’s legal

issues with 7175 and its loss of business, constituted willful and malicious

injury under § 523(a)(6).

      Debtor denied the allegations and asserted several affirmative

defenses, including estoppel. However, in the joint pretrial stipulation,

Debtor expressly withdrew his estoppel defense.

C.    The trial and the court’s decision

      The bankruptcy court conducted a five-day trial, concluding in April

2022. Mover and Debtor each submitted trial declarations and testified

about the loans and Swing House’s business. Debtor testified that he, and

not Swing House, managed the musical artists that were listed in the

financial documents attached to the Offer Memo. Debtor acknowledged

that he was responsible for the contents of the Offer Memo, and he knew

that Mover would rely on it.

      4
        Mover also sought to deny Debtor’s discharge under § 727(a)(2) and (a)(4). The
court denied those claims and they are not part of this appeal.
                                           7
      Mover testified that he relied on the Offer Memo and oral statements

made by Debtor, and he would not have made the loans had he known that

Swing House could not legally operate a recording studio at Casitas, had

undisclosed increases in its construction budget, and had lost its largest

event production client, the Sunset Strip Music Festival.

      As the custodian of records for Swing House, Winsen testified about

its financial reports, business operations, and its agreements with musical

artists. She also testified about Swing House’s construction agreements,

building permits, and certificates of occupancy and stated that, based on

her understanding of zoning regulations and experience in building and

operating recording studios, Swing House was not permitted to operate a

recording studio at Casitas.

      The bankruptcy court entered written findings of fact and

conclusions of law and held the debt to Mover nondischargeable. The court

ruled that Debtor made materially false written statements in the Offer

Memo pertaining to Swing House’s financial condition with intent to

deceive Mover, including that: (1) Swing House could legally operate a

recording studio; (2) Swing House was engaged in management of musical

artists; (3) the construction budget for Casitas was $954,500; and (4) Swing

House’s event production income was expected to increase. The court held

that Debtor knew that Swing House could not legally operate a recording

studio at Casitas and offered no evidence to support his contention that use

                                      8
as a sound score production facility was equivalent to use as a recording

studio.

      The bankruptcy court further held that Debtor made false oral

representations about Swing House’s ability to legally operate a recording

studio and never disclosed that neither Willoughby nor Casitas was zoned

for use as a recording studio, or that Swing House had defaulted on the

Willoughby lease. The court determined that Debtor’s intentional fraud

was sufficient to constitute willful and malicious injury under § 523(a)(6),

and it entered a nondischargeable judgment in favor of Mover for

$239,288.50. Debtor timely appealed.

                                JURISDICTION

      The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and

157(b)(2)(I). We have jurisdiction under 28 U.S.C. § 158.

                                     ISSUE

      Did the bankruptcy court err by holding the debt nondischargeable?

                         STANDARDS OF REVIEW

      The ultimate question of whether a claim is nondischargeable is a

mixed question of law and fact, which we review de novo. Carillo v. Su (In

re Su), 290 F.3d 1140, 1142 (9th Cir. 2002). Under de novo review, “we

consider a matter anew, as if no decision had been made previously.”

Francis v. Wallace (In re Francis), 505 B.R. 914, 917 (9th Cir. 2014).

      When the appellant challenges the bankruptcy court’s factual

findings supporting its nondischargeability decision, we review those

                                         9
findings for clear error. In re Su, 290 F.3d at 1142. Factual findings are

clearly erroneous if they are illogical, implausible, or without support in

the record. Retz v. Samson (In re Retz), 606 F.3d 1189, 1196 (9th Cir. 2010).

“Where there are two permissible views of the evidence, the factfinder’s

choice between them cannot be clearly erroneous.” Anderson v. City of

Bessemer City, 470 U.S. 564, 574 (1985).

                                DISCUSSION

      Debtor’s central argument on appeal is that the zoning for Casitas

allows use for both a recording studio and a sound score production

facility and, thus, Swing House was legally permitted to operate as a

recording studio at Casitas. Debtor contends that Mover should have been

judicially estopped from claiming otherwise because his approved

disclosure statement described Swing House as operating a recording

studio, and he asserts that Mover and his attorney committed fraud on the

court. He argues the court erred by relying on Winsen’s testimony about

the zoning at Casitas, and he argues that the bankruptcy court’s finding of

nondischargeability is not supported by sufficient evidence.

A.    Legal standards governing nondischargeability

      Section 523(a)(2)(A) excepts from discharge any debt “obtained by

false pretenses, a false representation, or actual fraud, other than a

statement respecting the debtor’s or an insider’s financial condition.” To

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

prove, by a preponderance of the evidence: (1) misrepresentation,

                                       10
fraudulent omission, or deceptive conduct by the debtor; (2) knowledge of

the falsity or deceptiveness of his statement or conduct; (3) an intent to

deceive; (4) justifiable reliance on the debtor’s statement or conduct; and

(5) damage proximately caused by its reliance on the statement or conduct.

Turtle Rock Meadows Homeowners Ass’n v. Slyman (In re Slyman), 234 F.3d

1081, 1085 (9th Cir. 1996).

      A fraudulent omission of a material fact may constitute a false

representation if the debtor is under a duty to disclose. Apte v. Japra, M.D.,

F.A.C.C., Inc. (In re Apte), 96 F.3d 1319, 1323-24 (9th Cir. 1996); Citibank

(South Dakota), N.A. v. Eashai (In re Eashai), 87 F.3d 1082, 1089 (9th Cir.

1996). In such cases, reliance and causation are established and need not be

separately proven. In re Apte, 96 F.3d at 1323.

      Section 523(a)(2)(B) excepts from discharge debts arising from the

“use of a statement in writing—(i) that is materially false; (ii) respecting the

debtor’s or an insider’s financial condition; (iii) on which the creditor to

whom the debtor is liable . . . reasonably relied; and (iv) that the debtor

caused to be made or published with intent to deceive.”

B.    Debtor did not raise the issues of judicial estoppel or fraud on the
      court in the bankruptcy court and cannot do so on appeal.

      Debtor’s argument that we should set aside the judgment based on

judicial estoppel or fraud on the court is meritless. Debtor did not raise

these arguments in the bankruptcy court, and consequently waived them.5

      5
          Debtor argues that he did not waive the judicial estoppel defense by failing to
                                             11
See O’Rourke v. Seaboard Sur. Co. (In re E.R. Fegert, Inc.), 887 F.2d 955, 957

(9th Cir. 1989) (stating that appellate courts in the Ninth Circuit will not

consider arguments that are not properly raised in the trial court).

       Debtor expressly withdrew his affirmative defense of estoppel, and

he failed to raise a claim of fraud on the court prior to entry of the

judgment despite being fully aware of the disclosure statement and

Mover’s complaint for nondischargeability. See United States v. Sierra Pac.

Indus., Inc., 862 F.3d 1157, 1168 (9th Cir. 2017) (“[R]elief for fraud on the

court is available only where the fraud was not known at the time of

settlement or entry of judgment.” (citations omitted)). Moreover, the

statement made in Mover’s disclosure statement does not form the basis for

either judicial estoppel or fraud on the court.

       “Judicial estoppel is an equitable doctrine that ‘precludes a party

from gaining an advantage by taking one position, then seeking a second

advantage by taking an incompatible position.’” U.S. Dep’t of Educ. v.

Carrion (In re Carrion), 601 B.R. 523, 528 (9th Cir. BAP 2019) (quoting Wilcox

raise it in the bankruptcy court and cites Beall v. United States, 467 F.3d 864, 870 (5th Cir.
2006), for the proposition. In Beall, the Fifth Circuit held that the appellants waived an
issue by raising it for the first time on appeal. It noted however that the appellate court
could raise judicial estoppel sua sponte in “especially egregious case[s] wherein a party
has successfully asserted a directly contrary position.” Id. (quoting United States ex rel.
Am. Bank v. C.I.T. Constr. Inc. of Tex., 944 F.2d 253, 258 (5th Cir. 1991)). This is not the
type of egregious case that might persuade us to overlook Debtor’s waiver. As
discussed below, the disclosure statement is not contrary to the allegations in Mover’s
complaint, and the bankruptcy court did not accept the factual positions taken in the
disclosure statement.
                                              12
v. Parker (In re Parker), 471 B.R. 570, 576 (9th Cir. BAP 2012), aff’d, 533 F.

App’x 740 (9th Cir. 2013)). It requires the court to consider:

      (1) whether a party’s later position is clearly inconsistent with
      its original position; (2) whether the party has successfully
      persuaded the court of the earlier position; and (3) whether
      allowing the inconsistent position would allow the party to
      derive an unfair advantage or impose an unfair detriment on
      the opposing party.

In re Parker, 471 B.R. at 576 (cleaned up).

      Similarly, fraud on the court requires an “intentional, material

misrepresentation” that “involve[s] an unconscionable plan or scheme

which is designed to improperly influence the court in its decision.” Sierra

Pac. Indus., Inc., 862 F.3d at 1168 (citations omitted). The alleged

misrepresentations must go “to the central issue in the case,” “affect the

outcome of the case,” and “significantly change the picture already drawn

by previously available evidence.” Id. (quoting United States v. Est. of

Stonehill, 660 F.3d 415, 435-52 (9th Cir. 2011)).

      Debtor relies on the statement in the disclosure statement describing

Swing House’s business as follows: “Swing House provides comprehensive

rehearsal sound stage, rental service, and recording studio services for the

music industry at its 21,000 square foot state-of-the-art compound in

Atwater Village.”

      The statement plainly does not indicate that Swing House was legally

permitted to operate a recording studio at Casitas or that the plan

                                        13
proponents believed it could do so. Thus, the statement is not clearly

inconsistent with Mover’s allegations in the adversary complaint.

Additionally, the bankruptcy court approved the disclosure statement,

pursuant to § 1125, as containing “adequate information” sufficient to

enable a hypothetical investor to make an informed judgment about the

plan. We find no basis to conclude that the court relied upon, or was

persuaded by, any factual statement made in the disclosure statement.

C.    The bankruptcy court did not err by holding the debt
      nondischargeable.

      1.    The court properly determined that the evidence supported
            nondischargeability under § 523(a)(2)(A) and (a)(2)(B).

      Debtor contends that the evidence does not support

nondischargeability under § 523(a)(2)(A) because that section expressly

excludes statements respecting a debtor’s financial condition, and it does

not support nondischargeability under § 523(a)(2)(B) because fraudulent

omissions do not qualify as false written statements.

      Debtor is correct that debts obtained by materially false but

unwritten statements about a debtor’s or insider’s financial condition are

typically dischargeable. Oregon v. Mcharo (In re Mcharo), 611 B.R. 657, 660

(9th Cir. BAP 2020). But fraudulent omissions are not “statements.” Id. at

661-62. Consequently, a debtor under a duty to disclose material facts may

commit a fraudulent omission under § 523(a)(2)(A) even if those material

facts are pertinent to the debtor’s or an insider’s financial condition. See id.

                                       14
at 662. Debtor’s materially false written statements respecting Swing

House’s financial condition are actionable under § 523(a)(2)(B) and his

fraudulent omissions are actionable under § 523(a)(2)(A).

      The bankruptcy court determined that Debtor made materially false

written statements in the Offer Memo and attached financial statements

indicating that Swing House: (1) could legally operate a recording studio;

(2) earned income from managing artists; (3) had budgeted construction

costs of $954,000; and (4) expected an increase in revenue from event

production despite losing its largest client. The court also determined that

Debtor made fraudulent representations or omissions under § 523(a)(2)(A)

by: (1) not disclosing that the zoning of Casitas did not permit use as a

recording studio despite implying that it could legally do so; and (2) telling

Mover that Swing House needed an additional $50,000 to complete the

recording studio when he knew that Swing House was not planning to

build such a studio. The bankruptcy court did not err in its application of

§ 523(a)(2)(A) and (a)(2)(B).

      2.    The bankruptcy court’s factual findings are not clearly
            erroneous.

      Debtor argues that the bankruptcy court erred by relying on

testimony from lay witnesses Winsen and Mover in determining that

Swing House was not legally permitted to operate a recording studio. But

Debtor did not offer any evidence, expert or otherwise, to support his belief

that Swing House could operate a recording studio at Casitas. More

                                      15
importantly, Debtor admitted in the joint pretrial stipulation that he knew

Casitas was not zoned for use as a recording studio when he signed the

lease.

         Documentary evidence adduced at trial also supports Winsen’s

testimony and the bankruptcy court’s finding. Debtor maintains that Swing

House could operate a recording studio at Casitas because the Lists of Uses

Permitted in Various Zones as amended by the Zoning Administrator for

the City of Los Angeles (“Lists of Uses”) permits a recording studio in zone

C2, and all zone C2 uses are permitted in zone M1, except hospitals and

sanitariums. Contrary to Debtor’s contention, the application for the

building permit and the Certificate of Occupancy for Casitas clearly state

that it is zoned MR-1, not M1, and the permitted use is “sound score

production.” The Lists of Uses does not include recording studio as a

permitted use in zone MR-1, and it does not provide for the same broad

inclusion of C2 uses in MR-1 as it does in zone M1.6

         Debtor disputes the court’s finding of reliance and damage because

Mover joined Swing House in 2015 but did not mention fraud until 2018

when he purchased the business. Debtor suggests that Mover

         The Lists of Uses states that MR-1 includes zone C2 uses “which are devoted
         6

primarily to the manufacturing of products, or assembling, compounding or treatment
of materials with limited retail business only if incidental too the main industrial or
manufacturing use . . . , or uses which are conducted only as an accessory use to the
main use and provide services for those persons employed on the premises.” There is
no indication that Swing House intended to operate a recording studio as an accessory
service to its employees.
                                           16
manufactured his claims by finding problems in Swing House’s records,

and then arguing he was deceived by those problems years earlier.

      The bankruptcy court’s findings of reliance and damage are

supported by Mover’s testimony. Though Debtor believes that Mover was

not honest, we “give singular deference to a trial court’s judgments about

the credibility of witnesses.” Cooper v. Harris, 137 S. Ct. 1455, 1474 (2017).

D.    Debtor’s other arguments

      Debtor offers a litany of other arguments, none of which have merit.

He contends that the bankruptcy court should have reduced the amount of

the nondischargeable judgment by amounts paid on behalf of Mover’s

claim through Swing House’s confirmed chapter 11 plan. We agree that

Mover is not entitled to collect more than the amount of the debt, but that

does not require us to reverse the bankruptcy court’s judgment. The

bankruptcy court properly entered a nondischargeable judgment based on

Debtor’s liability to Mover, and Debtor can raise collection defenses at the

appropriate time in the bankruptcy court.

      Debtor cites caselaw referring to the “bespeaks caution doctrine” but

does not specifically and distinctly argue or explain how this constitutes

reversible error. Similarly, he cites three findings of fact made by the

bankruptcy court which he believes were based on a misallocation of the

burden of proof, and he cites five facts from the record, which the court did

not rely upon, which he believes are relevant to his liability. But again,

Debtor fails to distinctly argue or explain how this constitutes reversible

                                       17
error. 7 Nor do we perceive reversible error. Accordingly, we decline to

address these arguments further. See Christian Legal Soc’y v. Wu, 626 F.3d

483, 487-88 (9th Cir. 2010).

      Finally, Debtor asserts that Mover failed to allege or prove a prima

facie case under § 523(a)(4) and (a)(6), largely because there was no

evidence of a fiduciary relationship arising from an express or technical

trust. Mover did not allege, nor did the court determine,

nondischargeability under § 523(a)(4). And liability under § 523(a)(6) does

not require a fiduciary relationship.

                                  CONCLUSION

      Based on the foregoing, we AFFIRM the bankruptcy court’s

judgment.

      7
       The bankruptcy court issued 236 findings of fact, and as noted above, based its
nondischargeability judgment on numerous written statements and omissions.
                                          18