Court Opinion

ID: 9373893
Source: CourtListenerOpinion
Date Created: 2023-02-22 16:10:20.23011+00
Date Added: 2024-06-11T17:16:49.428349
License: Public Domain

FILED
                                                                                   FEB 2 2023
                          NOT FOR PUBLICATION                                SUSAN M. SPRAUL, CLERK
                                                                                U.S. BKCY. APP. PANEL
                                                                                OF THE NINTH CIRCUIT

          UNITED STATES BANKRUPTCY APPELLATE PANEL
                    OF THE NINTH CIRCUIT

In re:                                               BAP No. CC-22-1087-LCF
ALAN GENE LAU and AMBER
WADDELL LAU,                                         Bk. No. 1:20-bk-10346-VK
            Debtors.
                                                     Adv. No. 1:20-ap-01053-VK
ALAN GENE LAU,
             Appellant,
v.                                                   MEMORANDUM∗
RUSSELL PRIOR; CHERYL PRIOR,
             Appellees.

               Appeal from the United States Bankruptcy Court
                      for the Central District of California
               Victoria S. Kaufman, Bankruptcy Judge, Presiding

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

                                 INTRODUCTION

      Alan Gene Lau (“Debtor”) appeals the bankruptcy court’s judgment

after trial finding nondischargeable under § 523(a)(2)(A) 1 a $135,000 debt to

      ∗  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, “Rule” references are to the Federal Rules of
Bankruptcy Procedure, and “Civil Rule” references are to the Federal Rules of Civil
Procedure.
                                            1
appellees arising from his fraud in failing to disclose defects in real

property he sold to them.

      We AFFIRM.

                                    FACTS

A.    Pre-Petition Events

      Debtor has been a California licensed real estate agent since 2005. In

January 2015, he purchased a single-family home in Thousand Oaks,

California (the “Property”) to rehabilitate and resell. The MLS listing for

the Property stated that the “Property is most likely a tear down or slab

foundation will need to be replaced due to settlement issues. . . . Good

property for rehab investor.” Debtor testified at trial that he never saw the

MLS listing.

      Debtor was represented in the transaction by Aaron Berger, a

California licensed real estate broker. After inspecting the Property,

Mr. Berger signed an Agent Visual Inspection Form (“AVID”), stating that

there was “cracking,” “pronounced cracking,” or “major cracking” on the

walls and ceiling of the entry, the living room, the dining room, the

kitchen, and all three bedrooms. The AVID form further stated that there

was “noticeable cracking on many sections of walls and ceiling throughout

home; foundation issues discovered by specialist.” Mr. Berger also signed a

Real Estate Transfer Disclosure Statement (“TDS”), which stated that there

were “cracks in ceiling + walls. Possible foundation cracks.” According to

Mr. Berger’s trial testimony, although he did not specifically remember

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providing the AVID or the TDS to Debtor, his practice was to do so.

However, the copies of those documents introduced into evidence at trial

were not initialed or signed by Debtor.

      After making improvements to the Property, Debtor listed it for sale.

Appellees Russell and Cheryl Prior attended an open house. They asked

the realtor whether there were any major defects with the Property and

were told that the roof had undergone major repairs but that the realtor

was unaware of any other defects. The Priors executed a purchase and sale

agreement with Debtor for $590,000. They were provided with a Seller

Property Questionnaire (“SPQ”) and a TDS, both of which were signed by

Debtor.

      In the SPQ, Debtor disclosed that he had painted the house and

replaced the floors, interior and exterior doors, kitchen cabinets and

countertops, and the garage door. He also disclosed that proper drainage

had been installed in the back yard to remediate a previous drainage

problem. Debtor represented that he was not aware of “[a]ny past or

present known material facts or other significant items affecting the value

or desirability of the Property not otherwise disclosed to Buyer.” In the

TDS, Debtor also indicated he was not aware of any significant defects or

malfunctions with the Property, including the foundation and slab, nor was

he aware of “[a]ny settling from any cause, or slippage, sliding or other soil

problems.” The Priors hired a property inspector to inspect the Property,

who told them that the Property did not have any foundation issues.

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      The sale closed in April 2016. In late 2016, after rainy weather, the

Priors noticed cracking on the interior walls in the bedroom, kitchen, living

room, and exterior. One of the interior doors in the house started scraping

the floor. Portions of the bathroom tiling started to loosen, and there were

drainage issues in both bathrooms. In the kitchen, the marble countertop

started to separate from the wall, and cabinets started to separate from the

ceiling. The cracking worsened throughout the rainy season.

      The Priors obtained estimates totaling approximately $175,000 to

repair the foundation issues and perform cosmetic repairs. The Priors did

not have the foundation work performed, but they sued Debtor and others,

including the property inspector, in state court. All defendants settled

except Debtor, and a default judgment was entered against him in 2019.

      In June 2020, the Priors listed the Property for $688,000. They

disclosed the settlement issue with the Property and described the cracking

and other issues that had arisen after they purchased it. The disclosure

advised prospective buyers to “perform any and all inspections to satisfy

themselves.” The Property sold for $675,000.

B.    Bankruptcy Events

      In the meantime, on February 13, 2020, Debtor and his wife filed a

joint chapter 7 petition. The Priors filed a complaint against Debtor only,

seeking to have the state court default judgment declared nondischargeable

under § 523(a)(2)(A). They moved for summary judgment, arguing that the

default judgment was entitled to issue preclusive effect. The bankruptcy

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court denied the motion because Debtor obtained relief from that judgment

in the state court.

      The matter was then set for trial. The trial-setting order provided that

all direct testimony would be by declarations to be filed by a date certain.

Debtor did not file a declaration, but the bankruptcy court nevertheless

permitted him to testify at the trial. In addition to the parties, the court

heard testimony from Mr. Berger; Daniel Bone, the appraiser who

conducted an historical appraisal; and Gigi Bronstrup, consumer relations

manager for the contractor that had provided the estimate for the

foundation repairs.

      Debtor testified that he never saw the MLS listing, the AVID, or the

TDS. He further testified that, although he did a walk-through, it was

rushed and the house was full of junk, and he did not remember seeing any

cracking except for possibly on the drywall by the living room. The

bankruptcy court found this testimony not credible, noting that as an

experienced real estate agent, Debtor would have read the mandatory

disclosures provided in connection with his purchase of the Property.

Additionally, he would have seen the extensive cracking that was visible

throughout the home and would have been aware that the cracking would

have a “significant and measurable effect on its value or desirability.” The

bankruptcy court also found that Debtor’s failure to submit a declaration

before trial undermined his credibility, inferring that his failure to file a

                                        5
declaration was intended to “compromise Plaintiffs’ ability to respond to

Defendant’s testimony and to his previously unidentified exhibit.”

      Based in part on its credibility finding, the bankruptcy court

concluded that a declaration of nondischargeability under § 523(a)(2)(A)

was warranted. And, as discussed below, the bankruptcy court found that

the Priors’ damages totaled $135,000. The court thus granted judgment for

the Priors. 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.

                                    ISSUES

      Did the bankruptcy court err in finding the debt nondischargeable

under § 523(a)(2)(A)?

      Did the bankruptcy court err in finding that the proper amount of

damages was $135,000?

                         STANDARDS OF REVIEW

      We review the bankruptcy court’s conclusions of law de novo and its

findings of fact for clear error. Apte v. Japra (In re Apte), 96 F.3d 1319, 1322

(9th Cir. 1996). Whether a requisite element of a § 523(a)(2)(A) claim is

present is a factual determination reviewed for clear error. Anastas v. Am.

Sav. Bank (In re Anastas), 94 F.3d 1280, 1283 (9th Cir. 1996). The bankruptcy

court’s factual findings regarding the amount of damages are also

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reviewed under a clearly erroneous standard. Lundell v. Ulrich (In re Ulrich),

236 B.R. 720, 723 (9th Cir. BAP 1999).

      Under the clearly erroneous standard of review, if the bankruptcy

court’s findings are plausible in light of the record viewed in its entirety,

we may not reverse even if we would have weighed the evidence

differently. “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) (citations omitted). We will

affirm the bankruptcy court’s factual findings unless they are illogical,

implausible, or without support in inferences that may be drawn from the

record. United States v. Hinkson, 585 F.3d 1247, 1263 (9th Cir. 2009) (en

banc).

      We are to give “due regard to the trial court’s opportunity to judge

the witnesses’ credibility.” Civil Rule 52(a)(6) (incorporated via Rule 7052).

We also give deference to inferences drawn by the trial court. Beech Aircraft

Corp. v. United States, 51 F.3d 834, 838 (9th Cir. 1995).

                                DISCUSSION

A.    The bankruptcy court did not err in finding the debt
      nondischargeable under § 523(a)(2)(A).
      A creditor asserting nondischargeability of a debt under

§ 523(a)(2)(A) must prove five elements by a preponderance of the

evidence:

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             (1) misrepresentation, 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 by the creditor on the
             debtor’s statement or conduct; and (5) damage to the
             creditor proximately caused by its reliance on the debtor’s
             statement or conduct.
Turtle Rock Meadows Homeowners Ass’n v. Slyman (In re Slyman), 234

F.3d 1081, 1085 (9th Cir. 2000).

       Failure to disclose a material fact constitutes a false representation if

the debtor was under a duty to disclose and intended to defraud the

creditor. Citibank (S.D.), N.A. v. Eashai (In re Eashai), 87 F.3d 1082, 1089 (9th

Cir. 1996).

       At oral argument before this Panel, Debtor’s counsel conceded that

there was a misrepresentation, acknowledging that the bankruptcy court’s

credibility finding could not be reversed on appeal. He contended,

however, that the reliance element was not met because the Priors hired

their own inspector and thus did not rely on Debtor’s failures to disclose.

But, as a matter of Ninth Circuit law, if a creditor establishes the

nondisclosure of a material fact that the debtor was under a duty to

disclose, the reliance and causation elements are established and need not

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

California law, the failure of the Priors’ inspector to identify any

foundation issues was not an intervening cause that relieved Debtor from

liability.

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      The intervening negligence (or even recklessness) of a third
      party will not be considered a superseding cause if it is a
      normal response to a situation created by the defendant's
      conduct and is therefore within the scope of the reasons for
      imposing the duty upon the defendant to refrain from negligent
      conduct in the first place. A cause is superseding only when the
      third party’s intervening negligence is highly unusual or
      extraordinary and far beyond the risk the original tortfeasor
      should have foreseen.
Pedeferri v. Seidner Enters., 216 Cal. App. 4th 359, 373 (2013), as

modified on denial of reh’g (June 12, 2013) (cleaned up). Had Debtor

disclosed the cracking issues, the Priors’ inspector could have looked

for the source of the problem, i.e., by focusing his inspection on soil

stability and settlement issues.

      In short, the bankruptcy court did not err in finding that all the

elements of § 523(a)(2)(A) were met.

B.    The bankruptcy court did not err in awarding $135,000 in damages.
      The bankruptcy court found that the appropriate measure of

damages was the difference between what the Priors paid for the Property

and what it would have been worth had all the cracking issues been

disclosed. This is correct. California Civil Code § 3343(a) provides: “One

defrauded in the purchase, sale or exchange of property is entitled to

recover the difference between the actual value of that with which the

defrauded person parted and the actual value of that which he received,

together with any additional damage arising from the particular

transaction . . . .” If damages are proven, “a trial court is permitted a
                                        9
reasonable approximation in determining the amount.” Hartong v. Partake,

Inc., 266 Cal. App. 2d 942, 969 (1968) (citation omitted).

      In determining damages, the bankruptcy court used the historical

appraisal performed by Mr. Bone, which estimated the value of the

Property at $455,000 as of April 14, 2016, the date the Priors purchased it.

No evidence was presented to the contrary. The Priors paid $590,000, so the

bankruptcy court fixed the amount of damages at the difference between

$590,000 and $455,000, or $135,000.

      On appeal, Debtor attacks Mr. Bone’s methodology in performing the

historical valuation. His theory is that more damage occurred after the

Priors purchased the Property so that the repair estimate was not an

accurate basis for computing the historical value. Debtor also contends that

damages should be limited to the $13,000 reduction from the Priors’ asking

price when they sold the Property. Alternatively, he argues that damages

should be capped at $35,000 because similar properties without defects

sold for an “average” of $710,000 when the Priors sold the Property

(apparently based on one line item in Mr. Bone’s analysis showing median

home prices between April and July 2020).

      Debtor’s arguments are simply an attempt to muddy the waters. The

bankruptcy court applied the proper measure of damages under California

law, and Debtor presented no evidence at trial to contradict Mr. Bone’s

valuation or to show that his methodology was flawed. Because valuation

is a factual question, we may reverse only if we conclude that the

                                      10
bankruptcy court’s finding was illogical, implausible, or without support in

the record. That is not the situation here. The court’s conclusion is fully

supported by the record, and the bankruptcy court was under no

obligation to consider, let alone accept, an alternate factual basis for

calculating damages that was based entirely upon conjecture.

                               CONCLUSION

      For these reasons, the bankruptcy court did not err in finding the

debt resulting from Debtor’s nondisclosure of the cracking issues was

nondischargeable. Nor did the bankruptcy court err in determining the

amount of damages. We therefore AFFIRM.

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