Cardenas v. Shannon (In re Shannon)

Summarized by Lars Fuller , BakerHostetler
9 years 7 months ago

Citation:

BAP Nos. AZ-14-1497-JaJuKu & AZ-15-1040-JaJuKu (BAP 9th Cir. Jul. 22, 2016) (Published)

Tag(s):

Ruling:

The BAP for the 9th Cir. affirmed in part, and reversed in part, the judgment of the bankruptcy court (D. Az.) rejecting the 523(a)(2)(A) nondischargeability claim of plaintiffs, and awarding debtor-defendants their attorney's fees and costs. The BAP found that the bankruptcy court did not err in finding that plaintiffs failed to satisfy their burden of proving the elements of 523(a)(2)(A), and that the evidence supported the bankruptcy court's findings that (a) debtors did not make certain representations; (b) that other representations were not false; and (c) that defendants did not act "deceitfully" under the Husky standard of nondischargeable fraudulent conduct. Notwithstanding contrary testimony by plaintiffs, the bankruptcy court was not clearly erroneous in adopting defendants' version of facts, based on witness credibility. The BAP did find, however, that awarding fees to defendants was clearly erroneous. Bankruptcy court failed to distinguish fees incurred litigating state law issues related to operating agreement (contract with prevailing party clause) dispute, as opposed to federal law tortious fraud. BAP remanded for bankruptcy court to make findings awarding fees for state contract issues only.

Procedural context:

Bankruptcy court entered judgment in favor of debtor-defendant in 523(a)(2)(A) nondischargeability action dismissing plaintiffs' claims and awarding defendant its fees and costs. Creditor plaintiffs appealed to BAP for 9th Circuit.

Facts:

Creditors purchased vacant land and dilapidated building for $1 million, with assistance of Ms. Shannon. An intial oral agreement between creditors and Ms. Shannon provided for the renovation and sale of the property, required Ms. Shannon to furnish funds to renovate the property, and required Ms. Shannon to pay $1 million to creditors following renovation and sale of the property. The parties memorialized the agreement in an operating agreement that was then amended. The creditors disputed that they signed the amended operating agreement, which enhanced Ms. Shannon's rights significantly, though the husband creditor admitted at trial that he had executed it. Renovations were never completed, and the property was never sold. After property was lost to foreclosure, the creditors sued Ms. Shannon and husband in state court and obtained default judgment for $1 million. Shannons filed bankruptcy under chapter 7. Creditors sued to except from discharge under 523(a)(2)(A). After three day trial, bankruptcy court entered judgment in favor of debtors-defendants, dismissing nondischargeability claims. Bankruptcy court also awarded defendants' attorney's fees in the amount of $72,691 and costs in the amount of $5,002.10 based on underlying prevailing party clause in operating agreement.

Judge(s):

Jaime, Jury, Kurtz

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