Court Opinion

ID: 4550762
Source: CourtListenerOpinion
Date Created: 2020-07-23 20:00:49.353906+00
Date Added: 2024-06-11T08:38:09.334425
License: Public Domain

NOT FOR PUBLICATION                         FILED
                    UNITED STATES COURT OF APPEALS                        JUL 23 2020
                                                                      MOLLY C. DWYER, CLERK
                                                                       U.S. COURT OF APPEALS
                             FOR THE NINTH CIRCUIT

In re: JOEL WERNER; CATHLEEN                    No.    19-60007
WERNER,
                                                BAP No. 17-1266
             Debtors,
______________________________
                                                MEMORANDUM*
JASON SCOTT WICKAM,

                Appellant,

 v.

ALAN IVAR; et al.,

                Appellees.

                          Appeal from the Ninth Circuit
                           Bankruptcy Appellate Panel
             Spraker, Taylor, and Faris, Bankruptcy Judges, Presiding

                             Submitted April 15, 2020**
                               Pasadena, California

      *
             This disposition is not appropriate for publication and is not precedent
except as provided by Ninth Circuit Rule 36-3.
      **
             The panel unanimously concludes this case is suitable for decision
without oral argument. See Fed. R. App. P. 34(a)(2).
Before: COLLINS and LEE, Circuit Judges, and PRESNELL,*** District Judge.

Partial Concurrence and Partial Dissent by Judge COLLINS

      Chapter 7 debtor Jason Wickam appeals the Ninth Circuit Bankruptcy

Appellate Panel’s affirmance of the Bankruptcy Court’s determination, in a

consolidated adversary proceeding, that certain of his debts were nondischargeable

under 11 U.S.C. § 523(a)(2)(A) as being the product of fraud.

      The debts originated as investments in the Coral Blue Project, a real estate

development project that was run by Wickam and Joel Werner and which

eventually failed. The project involved building high-end spec homes on four lots

purchased for that purpose. The investors at issue here--an individual, David

Roche, and a married couple, Alan and Deborah Ivar--contend that Wickam and

Werner made a number of material misrepresentations and omissions regarding the

project, in the absence of which they would not have invested (and subsequently

lost) their money. Wickam disputes that the debts resulted from any fraud on his

part and argues that the Bankruptcy Court failed to make the necessary factual

findings to support its nondischargeability determinations.

      In appeals from judgments under 11 U.S.C. § 523(a)(2)(A), we review the

bankruptcy court’s factual findings under the clearly erroneous standard and its

      ***
            The Honorable Gregory A. Presnell, United States District Judge for
the Middle District of Florida, sitting by designation.

                                         2
legal conclusions de novo. Candland v. Ins. Co. of N. Am. (In re Candland), 90

F.3d 1466, 1469 (9th Cir. 1996). Findings of fact are clearly erroneous if they are

illogical, implausible, or without support in the record. Retz v. Samson, et al (In re

Retz), 606 F.3d 1189, 1196 (9th Cir. 2010). When factual findings are based on

determinations regarding the credibility of witnesses, we give great deference to

the bankruptcy court’s findings. Id. On appeal from the Bankruptcy Appellate

Panel, we review the Bankruptcy Court’s rulings independently. Citibank v.

Eashai (In re Eashai), 87 F.3d 1082, 1086 (9th Cir. 1996).

      A discharge under Chapter 7 of the Bankruptcy Code does not discharge an

individual debtor from any debt for money, property, or services to the extent that

the money, property, or services were obtained by false pretenses, a false

representation, or actual fraud. 11 U.S.C. § 523(a)(2)(A). To establish that a debt

is not dischargeable under 11 U.S.C. § 523(a)(2)(A), a creditor must prove, by a

preponderance of the evidence, five elements: (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).

                                          3
         The Bankruptcy Court originally ruled in favor of the Ivars and Roche after

a trial in 2013. On appeal, the Ninth Circuit Bankruptcy Appellate Panel

(henceforth, the “BAP”) reversed on the grounds that the Bankruptcy Court had

not made sufficient factual findings. On June 27, 2017, the Bankruptcy Court

entered new findings of fact and conclusions of law to support its decision that the

debts were not dischargeable. In particular, the Bankruptcy Court judge made a

finding, based on the totality of the evidence and the presentation in open court by

the witnesses, that “Wickam was, in fact, not credible,” and that she believed that

the version of events presented by the Plaintiffs was truthful. Wickam appealed

again, but this time the BAP affirmed the decision of the Bankruptcy Court, with

one judge dissenting as to the nondischargeability of the Ivars’ second investment.1

This appeal followed.

         I.    The Ivars’ Initial Investment

         In August 2006, the Ivars made their initial investment in the Coral Blue

Project by issuing a $216,000 check to Coral Blue, LLC, an entity controlled by

Wickam and Werner. The Bankruptcy Court found that as of the date of the Ivars’

initial investment, Wickam knew the following facts, which were unknown to the

Ivars:

1
  The Ivars initially invested $216,000 in the project. After construction began,
they invested another $600,000. The investments are discussed separately below.

                                           4
      1.     The Coral Blue Project lots were going to be owned by Connexian

Investments, Inc. (henceforth, “Connexian”), another entity controlled by Wickam

and Werner, rather than Coral Blue, LLC, as had been represented in the Coral

Blue, LLC Operating Agreement that had been provided to the Ivars.

      2.     The primary loan for the project had not been fully funded.

Specifically, an entity named Point Center Financial had committed to lend

approximately $6.6 million, which was to be used to buy all four of the Coral Blue

Project lots and finance construction of two of the four spec homes. At

(essentially) the last second, Point Center Financial notified Wickam and Werner it

could only fund $4.4 million, and they were forced to begin the project with this

lesser amount.

      3.     The Point Center Financial loan required full repayment within 12

months or the property would be subject to foreclosure.

      4.     Point Center Financial was a “hard money” lender as opposed to a

“conventional” lender.

      A. Materiality

      Wickam first argues that the four facts cited by the Bankruptcy Court were

not material. Immaterial facts cannot serve as the predicate for a finding of fraud.

See, e.g., Apte v. Romesh Japra, M.D., F.A.C.C., Inc. (In re Apte), 96 F.3d 1319,

1324 (9th Cir. 1996). But a material fact is simply one “that a reasonable investor

                                          5
might have considered . . . important in the making of [the investment] decision.”

Id. (internal quotation marks and citation omitted).

      All four of the facts cited by Wickam went to the financial underpinnings of

the Coral Blue Project: the fact that the lender, Point Center, had only funded two

thirds of the amount it had originally promised to provide; the unrealistically short

12-month payment deadline; Wickam and Werner being unable to obtain

conventional financing and being forced to deal with a hard money lender; and title

to the lots being held by Connexian rather than Coral Blue, LLC. All four of these

facts were ones that a reasonable investor would have considered important in

deciding whether to invest in the Coral Blue Project. The Bankruptcy Court did

not err in finding these facts to be material.

      B. Knowledge of Falsity

      Wickam next contends that the Bankruptcy Court failed to cite a factual

basis for its finding that he knew, at the time the Ivars made their initial

investment, that the Coral Blue Project lots would be owned by Connexian rather

than Coral Blue, LLC. But the parties’ stipulated facts--to which the Bankruptcy

Court cited--established that Connexian had been the entity seeking to borrow the

money to buy the lots, that Connexian had entered into purchase contracts for

them, and that Connexian had put down $220,000 in deposits on them. The

Bankruptcy Court’s finding on this point is adequately supported by the record.

                                           6
Wickam also argues that there is no support for the Bankruptcy Court’s finding

that he knew that Point Center was a hard money lender, but again, the parties’

stipulated facts provide a sufficient basis to infer such knowledge. Wickam further

contends that the Coral Blue, LLC Operating Agreement gave him and Werner the

discretion to make the financial decisions of which the Ivars complain. But the

issue here is not one of authority but whether Wickam misrepresented the

decisions that he made.

      C. Intent to Deceive

      Wickam also complains that the Bankruptcy Court did not discuss the third

element of an 11 U.S.C. § 523(a)(2)(A) claim, intent to deceive, instead simply

stating that Wickam and Werner sought to induce the Ivars into investing in the

Coral Blue Project. But intent to deceive may be inferred from surrounding

circumstances. Here, the surrounding circumstances show that in August 2006,

Wickam was in danger of losing the Coral Blue Project – and all of the money and

effort invested up to that point – if the Ivars opted not to make that initial

investment. Accordingly, the record supports the bankruptcy court’s finding that

Wickam failed to disclose material information for the sole purpose of inducing the

Ivars to invest.

      D. Justifiable Reliance

      Wickam contends that the Bankruptcy Court erred in determining that the

                                           7
Ivars justifiably relied on the statement that Coral Blue, LLC would hold title to

the four lots. First, he contends that they could not have relied on this assurance

because, four months after their initial investment, they wrote a $200,000 check to

Connexian and signed documents that indicated that Connexian held title to those

lots. He also argues that it was illogical for them to rely on Coral Blue, LLC

holding title to the lots because when they made their initial investment, they

received a promissory note from Connexian – meaning that Connexian was the

only entity promising them a return on that investment.

      Neither of these assertions is persuasive. The Bankruptcy Court credited the

Ivars’ testimony that they relied on assurances from Wickam and Werner that

Coral Blue, LLC would hold title to the lots. Seeing documents four months later

suggesting otherwise would not retroactively affect their reliance at the time of

their initial investment. And the Ivars testified that they paid little attention to the

promissory note that they received in addition to their membership units in Coral

Blue, LLC, because they expected to be paid when the first two houses were sold

by the latter entity. Conversely, the Bankruptcy Court found that Wickam was not

credible.

      E. Proximate Cause

      Wickam argues that the Bankruptcy Court failed to make sufficient findings

that his actions were the proximate cause of the loss. According to the

                                            8
Restatement (Second) of Torts § 548A, “[a] fraudulent misrepresentation is a legal

cause of a pecuniary loss resulting from action or inaction in reliance upon it if, but

only if, the loss might reasonably be expected to result from the reliance.” In this

case, Wickam and Werner were unable to complete construction of and sell the

first two houses within the Point Center loan’s one-year deadline. Because

Wickam and Werner could not refinance that loan, Point Center foreclosed,

causing the Ivars to lose their entire investment. When they made their initial

investment, the Ivars were unable to properly assess the risk of this happening

because of the failure to disclose such things as the funding shortfall from Point

Center and the absence of assets held by Coral Blue, LLC. In the words of the

BAP, “[t]he loss from a speculative, underfunded, and misrepresented construction

project was wholly foreseeable, if not inevitable.” The Bankruptcy Court made

sufficient findings that Wickam’s actions were the proximate cause of that loss.

      II.    Roche’s Investment

      Roche invested a total of $200,000--$125,000 on September 9, 2006 and

$75,000 on September 12, 2006--in the Coral Blue Project. Both checks were

written to Connexian. The evidence and findings of the Bankruptcy Court in regard

to Roche’s $200,000 investment are largely the same as those in regard to the

Ivars’ initial investment. The Bankruptcy Court found that Wickam had a duty but

failed to disclose to Roche the same four material facts that he failed to disclose to

                                           9
the Ivars, and that Roche would not have made his investment if he had known the

truth about these facts. The Bankruptcy Court also found that Roche lost his entire

investment when Point Center foreclosed on the Coral Blue Project lots.

      Wickam makes the same arguments in opposition to the Bankruptcy Court’s

findings that the debt to Roche was the product of fraud, and those arguments are

as unavailing as to Roche’s investment as they were in regard to the Ivars’ initial

investment. The Bankruptcy Court did not err in finding that the $200,000 debt to

Roche was nondischargeable under 11 U.S.C. § 523(a)(2)(A).

      III.   The Ivars’ Second Investment2

      On December 29, 2006, the Ivars invested an additional $200,000 in the

Coral Blue Project, by way of a check issued to Connexian. On April 18, 2007,

after being presented with an operating agreement for an entity referred to as

“Coral Blue II, LLC,” the Ivars invested an additional $400,000 in the project.3 In

the memo line of the check, which was made out to Connexian, Alan Ivar wrote

“Lots 26 & 27 Ladera”. The Ivars testified that they had been told by Wickam and

2
  Although the Ivars eventually wrote two more checks to invest in the Coral Blue
Project, for simplicity’s sake these transactions will be treated as a single, two-part
investment.
3
  The operating agreement, dated March 27, 2007 and signed by Wickam and
Werner, provided that Coral Blue II, LLC was a California limited liability
company registered with the California Secretary of State on that same date. In
reality, California Blue II, LLC was not registered with the California Secretary of
State until November 15, 2007.

                                          10
Werner that their additional $600,000 was to be used to get a head start on

construction of the Coral Blue Project’s third and fourth houses.

      The Bankruptcy Court found that before the Ivars made their second

investment, Wickam knew that the money was not going to be used for direct

development expenses on the third and fourth houses. The Bankruptcy Court also

found that Wickam had a duty to disclose this information but failed to do so

because he wanted to entice the Ivars into investing, and that the Ivars would not

have made their second investment if they had known the truth. Finally, the

Bankruptcy Court found that the Ivars lost their entire $600,000 second investment

when Point Center foreclosed.

      A.     Materiality, Falsity, Intent to Deceive

      As with the initial investment, Wickam challenges the Bankruptcy Court’s

finding (both as to materiality and knowledge of falsity) that he knew that the

$600,000 would not be used for direct development expenses on the third and

fourth houses. However, the expected use of this money would obviously be

material to a potential investor. As for the issue of falsity, Wickam was in charge

of keeping the construction budgets for the project. This fact, coupled with the fact

(stipulated to by the parties) that most of the Ivars’ $600,000 investment was

quickly used by Connexian to pay other expenses (including Wickam himself)

supports the finding that Wickam knew beforehand that the money would not be

                                         11
used for construction on the third and fourth lots. This also supports the

Bankruptcy Court’s finding with regard to intent to deceive – i.e., that Wickam

withheld this information from the Ivars in order to entice them into making their

second investment.

      B.      Justifiable Reliance

      As previously noted, the Bankruptcy Court credited the Ivars’ testimony that

when they made their initial investment in August 2006, they believed that title to

the four Coral Blue Project lots would be held by Coral Blue, LLC, that Coral

Blue, LLC would develop the lots, and that they would be paid from the sale of the

resulting houses. The Bankruptcy Court also credited their testimony that, had

they known that this would not be the case, they would not have made their initial

investment.

      However, just a few months later, they were asked to invest in a new entity--

Coral Blue II, LLC--on the same project, and they said they expected to be paid

based on the sale of two of the same four lots that Coral Blue, LLC was supposed

to sell to pay them back on their initial investment. In exchange for the $200,000

that they invested in December 2006, they received a 30-day promissory note4

from Connexian rather than something indicating they had acquired an ownership

4
  The note was in default when the Ivars wrote their $400,000 check to Connexian
in April 2007.

                                         12
interest in Coral Blue II, LLC. They also received a Deed of Trust (which they

were instructed not to record) indicating that Connexian, rather than Coral Blue,

LLC, owned the four lots.

      Two of the three judges on the BAP found the Ivars’ reliance to be justified.

However, the remaining judge, Judge Spraker, found that the knowledge gained by

the Ivars from these documents was fatal to their claim of reliance:

      The Ivars were not entitled to turn a blind eye to the competing claims
      of ownership, multiple entities, secretive collateral, and the breach of
      the $200,000 promissory note in making their second investment.
      There were simply too many red flags for the Ivars to ignore before
      making their second investment.

      Section 523(a)(2)(A) requires only justifiable (rather than reasonable)

reliance. Field v. Mans, 516 U.S. 59 (1995). As the Field court noted, quoting the

Restatement (Second) of Torts (1976), “a person is justified in relying on a

representation of fact ‘although he might have ascertained the falsity of the

representation had he made an investigation.’” Id. at 70. Moreover,

“[j]ustification is a matter of the qualities and characteristics of the particular

plaintiff, and the circumstances of the particular case, rather than of the application

of a community standard of conduct to all cases.” Id. at 71. Notably, the Ivars

were not professional investors, and they indicated by their testimony and their

actions that they did not pay attention to the paperwork they received when making

their investments. They testified that they had been told they were gaining

                                           13
ownership interests in Coral Blue and Coral Blue II, rather than just lending money

to Connexian. As they did not see themselves as lenders, it would make sense that

they did not examine the promissory note (or the not-to-be recorded Deed of Trust)

received in connection with their investment, which suggested Connexian owned

the lots at issue. Their position that they did not pay attention to this paperwork is

reinforced by the fact that the Ivars issued a $400,000 check to Connexian at a time

when the note was already several months in default. Accordingly, though an

investigation of the paperwork might have led them to reconsider, the Ivars’

reliance on the statements of Wickam and Werner in connection with their second

investment was justifiable. The Bankruptcy Court did not err in finding the debt to

be nondischargeable.

             AFFIRMED

                                          14
                                                                         FILED
Wickam v. Ivar, No. 19-60007
                                                                          JUL 23 2020
COLLINS, Circuit Judge, concurring in part and dissenting in part:   MOLLY C. DWYER, CLERK
                                                                       U.S. COURT OF APPEALS

      I concur in sections I and II of the court’s memorandum, which affirm the

judgment of Ninth Circuit Bankruptcy Appellate Panel (“BAP”) insofar as it

upholds the bankruptcy court’s ruling that Wickam’s debts arising from the Ivars’

initial investment and from Roche’s investment were nondischargeable under 11

U.S.C. § 523(a)(2)(A). But I disagree with the majority’s affirmance of the BAP’s

judgment concerning the Ivars’ second investment, and I therefore dissent from

section III of the court’s memorandum. For substantially the reasons explained by

Judge Spraker in his dissent below, I conclude that, as to their second investment,

the Ivars’ reliance was not justified. See Wickam v. Ivar (In re Werner), 2019 WL

641411, at *15–18 (B.A.P. 9th Cir. Feb. 13, 2019) (Spraker, J., concurring in part

and dissenting in part). Accordingly, I would reverse the BAP’s judgment to the

extent that it upholds the bankruptcy court’s decision to exempt from discharge the

debt arising from the Ivars’ second investment.