In re Paul William Martin

Case Type:
Case Status:
19-1336 (9th Circuit, Mar 03,2021) Not Published
Affirming the U.S. Bankruptcy Court for the Central District of California (BC), the Bankruptcy Appellate Panel of the Ninth Circuit (BAP) saw no error in its inferring of the verboten intent in a debtor’s “concealment and hindrance” of his sale of collateral encumbered by the suing creditor’s promissory note (Note), acts classed as fraudulent conduct in the fraudulent conveyance context and thus as “actual fraud” under § 523(a)(2)(A) of the Bankruptcy Code (Code) per Husky, and no abuse of discretion in its construal of the Note to cover non-dischargeability litigation related expenses.
Procedural context:
On December 29, 2019, in the same tribunal presiding over the Chapter 7 case of Paul W. Martin (DR or Martin), Kevin Hunter (CR or Hunter) timely filed an adversary complaint against the DR to except from discharge the latter’s debt to him pursuant to § 523(a)(2)(A) and (B), (a)(4), and (a)(6) of the Code. A single dilatory cover-up formed the crux of this suit: in 2015, the DR had sold a 1996 Porsche 993 (Porsche), part of the collateral for a loan of $50,000 from Hunter memorialized in the Note, for $10,000, but he neither told Hunter of this transaction nor remitted any of the proceeds to him. And the DR did so despite his failure to make any payments on the Note since it had come due in November 2011. This dispute had ended up before the BC because the DR had turned to the Code just as the Superior Court of California for the County of Los Angeles (State Court) prepared to rule on Hunter’s motion for summary judgment (MSJ) in a collections case that Hunter had commenced sometime after the Porsche’s sale. After a two-day trial, the BC issued its Memorandum of Decision on Hunter’s claims on July 10, 2019. While the BC found against Hunter as to his claims under § 523(a)(2)(B), (a)(4), and (a)(6), it found in his favor as to § 523(a)(2)(A). As the BC explained, Hunter had not proven the existence of any false representation at the inception of the parties’ relationship, i.e. the negotiation and execution of the Note. Nonetheless, because the DR had sold the Porsche knowing that it was collateral for Hunter’s loan without telling or forwarding the proceeds to Hunter, he had committed, to quote Husky International Electronics, Inc. v. Ritz (Husky), “the acts of concealment and hindrance” that constitute fraudulent conduct in the fraudulent conveyance context and therefore amount to “actual fraud” for purposes of § 523(a)(2)(A). As the BAP later observed, while the DR’s misdeed did not “fit precisely into the typical fraudulent conveyance scenario, where a debtor transfers assets to put them out of the reach of unsecured creditors,” and the BC did not make any explicit finding as to the DR’s “intent to hinder, delay or defraud,” the BC had correctly diagnosed “an example of the type of conduct that could fall under § 523(a)(2)(A).” Having so determined, the BC found the $10,000 collected from the Porsche’s sale by the DR and not turned over to Hunter to be nondischargeable. In addition, consistent with prevailing precedent that allows for attorney’s fees under applicable state law if that law governs the substantive issues raised in the relevant proceedings, the BC awarded Hunter all such bills incurred in establishing the DR’s liability for actual fraud. California Code of Civil Procedure § 1021 was the statutory anchor; the Note’s terms were the contractual one. As set forth in a second memorandum of decision released on December 10, 2019, based on the Hunter’s submission, the BC calculated the fees and costs to be reimbursed at $24,005.98 and $1,489.70, respectively, for a grand total of $25,495.68. The DR timely appealed, arguing that the BC erred in its § 523(a)(2)(A) analysis and abused its discretion in awarding any fees.
The key event took place in May 2010. In that month, Hunter loaned $50,000 to the DR to assist the latter in developing a startup company, Veronica Rose Productions, Inc. (VRP). Hunter did so only after first declining due to his inability to perform due diligence on the DR’s project and much subsequent urging by a mutual acquaintance, attorney George Shohet (Shohet). So as to allay Hunter’s pestering concerns, the DR offered to secure any such loan by two paintings and the Porsche, their combined value in excess of $50,000 according to term sheets drafted by the DR himself (Sheets). To memorialize this arrangement, Shohet prepared the Note, dated September 1, 2010, in the principal amount of $50,000 with interest set at 6% per annum, with the principal and any unpaid interest due to be repaid by September 1, 2011, later extended to November 2011 at the DR’s request. As the DR had promised, the Note identified Hunter’s security as the Porsche and two untitled, signed, original Chris Reilly paintings (Paintings, and with Porsche, Collateral). In the Sheets, the DR had pegged the Porsche’s “retail value” as “34k” and the Paintings’ “retail market value” as “50k.” The Note further entitled Hunter to recover any attorney’s fees incurred in connection with the enforcement or collection of the Note or any actions for “the protection or preservation of any rights of the holder hereunder.” Perhaps to both men’s surprise, the Note represented the highpoint of their relationship, for default, a secret sale, and litigation were now to come. For some unknown cause, Hunter never perfected his security interest in the Collateral; for obvious reasons, the DR made no payments on the Note. Despite Martin’s default, Hunter did not immediately run up the courthouse steps. Until 2014, he did not contact the DR; thereafter, he resorted to “numerous” and “repeated” demands, often parried by Shohet’s statements that the DR just needed more time to repay. In 2015, without notice to either Shohet (presumably) and Hunter (indisputably), the DR sold the Porsche to a mechanic for $10,000 because its engine required, in his reckoning, prohibitively expensive repairs. Crucially, not only had the DR consummated this transaction without notice to Hunter but he also decided not to remit any of the sale proceeds to this long-unpaid creditor. After the discovery of this act—on August 21, 2015, to be precise—Hunter sued the DR in the State Court. Discovery commenced, and dueling motions on various issues gushed. Then, on June 7, 2017, as the State Court was about to unveil its definitive assessment of the MSJ, the DR filed a petition for relief under the Code’s seventh chapter.
Scott H. Gan; William Lafferty; and Robert J. Faris

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