Arciniega v. Clark (In re Arciniega)
- Summarized by Lars Fuller , BakerHostetler
- 7 years 4 months ago
- BAP No. CC-15-1123-KiGD (BAP 9th Cir. Feb. 03, 2016)
- In an unpublished decision, the BAP for the 9th Circuit affirmed in part, reversed in part, and vacated and remanded in part, the judgment of the bankruptcy court (C.D. Cal.) (a) excepting a debt from discharge under 523(a)(2) and (a)(6), and (b) awarding liquidated damages and attorney's fees. BAP agreed with bankruptcy court that chapter 7 debtor's promise to "take all necessary measures" to remove ex-husband from liability on jointly owned property transferred to debtor required debtor to remove ex-husband from liability, and not just try to do so. BAP further agreed that, notwithstanding debtor's contrary testimony at trial, debtor was knew she was required to remove ex-husband from liability, was unable to accomplish promise at time it was made, and intended to deceive ex-husband in making promise. BAP disagreed, however, that payment from ex-husband as part of settlement agreement was proximately caused by debtor's fraud, and reversed on that issue, finding that the payment was expressly made for separate consideration in the settlement agreement (i.e., the transfer of debtor's interest in a separate property to ex-husband), and not with respect to the promise to remove ex-husband from liability on loan on other property, for which settlement agreement provided an express liquidated damages provision. With respect to portion of judgment attributable to liquidated damages provision, BAP found that bankruptcy court failed to make necessary finding that liquidated damages provision was properly enforceable and nondischargeable under either bankruptcy or California law. BAP ruled that liquidated damages were only nondischargeable under properly satisfied elements of 523(a)(6) (willful malicious injury), and not under mere intentional breach of contract, or, alternatively, under Cohen and 523(a)(2)(A), to extent liquidated damages clause was enforceable under California law. BAP noted it was unlikely the $1k/day liquidated damages would satisfy California law's requirement that liquidated damages be related to anticipated actual loss. Because bankruptcy court made no findings regarding the enforceability of the liquidated damages under California law, the BAP remanded for further findings on the issue. The BAP found that the bankruptcy court further erred by awarding the full amount of attorney's fees sought without stating the basis for the award. The BAP agreed with the bankruptcy court that the creditor could recover attorney's fees on his 523(a)(2) claim because nondischargeability action was an "action on the contract." However, BAP found that the creditor was limited to attorney's fees incurred litigating the breach of contract portion, and not the fraud elements. The BAP remanded to the bnakruptcy court to make findings allocating the attorney's fee awarded.
- Procedural context:
- Creditor commenced adversary proceeding against chapter 7 debtor to except debt from discharge. Bankruptcy court (C.D. Cal.) entered judgment in favor of creditor. Debtor appealed to BAP for 9th Circuit.
- Debtor, a California realtor, owned a real estate agency and had extensive professional experience in the banking industry. While married, debtor and former husband purchased two properties with husband's VA loans. After couple separated and then divorced, each resided in one of the properties. Debtor made the mortgage payments on both properties, and the parties jointly refinanced the VA loans on the properties. In 2006, debtor's ex-husband conveyed his half interest in one of the properties (Verona) to debtor. In 2007, ex-husband sued debtor for claims related to the other property (Arrowhead), seeking to acquire sole title. That same month, debtor obtained a second mortgage on Verona, without notifying ex-husband. In April 2009, the parties settled the Arrowhead litigation, agreeing that ex-husband would make payments to debtor in exchange for the debtor quit claiming the Arrowhead property to ex-husband, and debtor would "take all necessary measures" to pay off the existing VA loan on Verona, or obtain ex-husband's release from VA loan (on which ex-husband was jointly and severally liable). The settlement agreement included a liquidated damages provision of $1000/day for each party for failure to meet deadlines. It also contained reciprocal attorney's fee clause. Ex-husband performed his obligations under the agreement. Debtor failed to pay off the VA loan or obtain ex-husband's release from liability on Verona loan. Prior to executing settlement agreement, debtor, in financial distress, had communicated with VA lenders, advised them of her financial distress and inability to make payments, and been advised through extensive written communications of effect of default on loan upon ex-husband (as veteran), and his ability to utilize VA loan entitlement in future. Debtor's live in boyfriend recorded deed of trust against Verona property days before debtor signed settlement agreement. Debtor did not advise ex-husband of lender communications or deed of trust. Days after debtor signed settlement agreement, her boyfriend conveyed his deed of trust back to debtor. Following settlement, and within the one year deadline for satisfying her obligations to "take all necessary measures" to pay off the VA loan and remove ex-husband from liability on it, debtor sent one letter to the lender requesting a loan modification. Eight months after the deadline passed, debtor sent a second letter. Debtor filed chapter 7 in February 2011. Ex-husband filed adversary seeking to except debt under settlement agreement from discharge under 523(a)(2)(A) and (a)(6). Ex-husband alleged damages of $331k, plus attorney's fees, costs, and interest (281 days x $1k/day + $50k paid in settlement). Ex-husband asserted $156k in attorney's fees and costs. Following a one day trial, the court entered judgment in favor of ex-husband, awarding damages comprised of $50k payment under settlement agreement, $281k in liquidated damages, and $209,806.42 in attorney's fees and costs (total judgment of $540,806.42). Debtor appealed the judgment.
- Kirscher, Gan (sitting by designation), and Dunn
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