All posts in Case Briefs

Is Fraud under California Law the Same as Fraud under 523(a)(2)? Yes says Judge Maureen Tighe.

In Moussighi v. Talasazan (In re Talasazan), 1:16-ap-01119-MT (Bkrcy June 2018, C.A. Cal Tighe J.), Judge Tighe said,

Fraud under California law and § 523(a)(2)(A) are identical for purposes of collateral estoppel. In re Younie, 211 B.R. 367, 373 (B.A.P. 9th Cir. 1997), aff’d, 163 F.3d 609 (9th Cir. 1998); In re Jung Sup Lee, 335 B.R. 130, 136 (B.A.P. 9th Cir. 2005).

This came up in an argument I had with someone recently re res judicata.  I stated that a state court judgment that says ONLY “Plaintiff wins $1 million based on the fraud of defendant,” is res judicata in bankruptcy court whether entered by default or not.   I was told I was mistaken in no uncertain terms because fraud under California law is not the same as fraud under 523(a)(2).  Wrong!

By the way, the judgment example above IS res judicata as to the amount owed in any event – at least for claims purposes.  The typical state court judgment says “Plaintiff wins $1 million” (nothing else).  Collateral estoppel in that case as to fraud still MIGHT apply depending on whether it was actually litigated etc.  Underlying documents, rulings etc are needed.  But the judgment ITSELF is res judicata as to how much defendant/debtor owes the creditor.  That statement does NOT mean that if there was fraud, the damages for fraud are $1 million.  But it does mean debtor owes creditor $1 million (which is discharged unless 523(a) applies).

The Talasazan matter has an interesting twist.  The debtor moved for summary judgment on the grounds that fraud was litigated in state court and the ruling was in the debtor’s favor and therefore could not be relitigated.  The problem is that the state court judge did not say that.   Judge Tighe wrote:

“[W]hile fraud was pled, argued, and briefed after trial, the Third Amended Judgment does not include fraud in the list of causes of action on which Plaintiffs prevailed.

It appears that the Superior Court ruled in Plaintiffs’ favor on the negligent misrepresentation cause of action rather than fraud.

For purposes of collateral estoppel, as detailed below, the Superior Court’s silence with respect to the fraud action, in the context of undisputed evidence from both sides that the issue was fully litigated, was a ruling in favor of the Debtor and not the Plaintiffs.”

Beware of Putting an Unenforceable Penalty into Your Settlement Agreement

I was pretty surprised to find this case.  As a mediator, this comes up all the time.  Plaintiff will take a smaller amount in payments but wants a big penalty if the agreed upon amount is not paid.  I wonder if it is different if approved by the bankruptcy court.   A tip of the hat to attorney D. Brian Reider for sending me this case.

PURCELL v. SCHWEITZER, 224 Cal.App.4th 969 (2014)

Issue:  Where a settlement agreement provides that in the event of a default, an additional amount is owed, can the additional amount be found to be an unenforceable penalty?

Holding:  Yes.  “The amount set as liquidated damages `must represent the result of a reasonable endeavor by the parties to estimate a fair average compensation for any loss that may be sustained.” Read more…

Sham Guaranty? More Stuff I Didn’t Know

LSREF2 CLOVER PROPERTY 4, LLC v. FESTIVAL RETAIL FUND 1, LP, (2016) 3 Cal.App.5th 1067

Issue:  Is the guaranty of a loan by the parent entity here a “sham” guaranty?

Holding:  No, “[T]he overriding concern when deciding whether the sham guaranty defense applies is whether the guaranty is an attempt to circumvent the antideficiency laws.”

Festival Retail Fund 1, LP (the “Fund”) was formed to find real property to invest in.  From the outset, the Fund purchased properties only through newly formed “special purpose entities” (“SPE”).  Here the Fund entered into an agreement to buy a property.  The agreement provided that the property would be purchased by a SPE.  The SPE was also a limited partnership and was wholly owned by the Fund.  Bank then made a loan to the SPE to buy the property.  The Fund guaranteed $1.5 million of the $25 million loan.  The Bank later filed a non-judicial foreclosure complaint and included the Fund alleging breach of the guaranty.  The Fund argued that it was the alter ego of the SPE under the “single business enterprise” theory and therefore it was “protected by antideficiency laws because it was, in reality, the primary obligor on the loan and the loan guaranty was effectively a sham.”  The court agreed and entered judgment for the Fund. Read more…

Must a Chapter 13 Plan be 3 or 5 years (or full pay) even if no one objects?

One of the more interesting cases we will discuss on Saturday is In re Escarcega.  The BAP really blasts the chapter 13 trustee up in San Jose.   The BAP ruled that a chapter 13 plan must be 3 or 5 years (or full pay), even if no one objects.

In re Escarcega, 573 B.R. 219 (9th Cir. BAP September 2017) 

Issue:   Where the chapter 13 trustee does not object to a plan, must the plan still be for “the applicable commitment period”?

Holding:   Yes.  Plus the chapter 13 trustee should be objecting to such plans.

Judges Elaine Hammond and Stephen Johnson, Northern District of California (San Jose Division) Read more…

Outside Reverse Veil Piercing now available for LLCs in California

This is a case brief regarding Curci Investments, LLC v. Baldwin, Cal. Ct. App. Case No. G052764 (Aug. 10, 2017), which is a case about “reverse veil piercing” which the Court found can be applied to LLCs. Corporations continue to be protected by reverse veil piercing.

Ordinarily a corporation is considered a separate legal entity, distinct from its stockholders, officers and directors, with separate and distinct liabilities and obligations.[1] The same is true of a limited liability company (LLC) and its members and managers.[2]

Read more…

In re Sundquist – $45 million in Punis Sounds About Right to Me

I hereby nominate Judge Christopher Klein for Super Judge.  This is my brief of the 109 page Memorandum.

Sundquist v. Bank of America (In re Sundquist) 566 B.R. 563, 14-02278 CN (Bkrtcy, E. D. Cal. May, 2017) Klein, J.

Issue:   Given that Bank of America violated the automatic stay, what is the proper amount of damages under section 362(k)?

Holding:   Actual damages of $1,074,000 plus $5 million of punitive damages, further punitive damages awarded of $40 million payable to two consumer organizations and five law schools.

Judge Christopher Klein

The debtors here had attempted unsuccessfully prepetition to do loan mods with Bank of America.  They finally filed chapter 13 to stop the foreclosure sale.  Notwithstanding that it had notice, the bank conducted the foreclosure sale the next day anyway.  “Bank of America committed at least six further automatic stay violations by the end of August 2010 as it bulled forward.”  This included bringing an unlawful detainer.  About the same time, a different department of the bank recognized the error and notified the foreclosure company.  But upon receiving the three day notice, the debtors panicked and immediately moved.  “Although Bank of America knew on August 20, 2010, and beyond cavil by September 7, 2010, that the foreclosure would be rescinded, it did not withdraw the unlawful detainer action or tell the Sundquists the action would be dismissed.”  Six months later, the bank finally rescinded the foreclosure sale but did not tell the debtors nor their counsel.  The debtors learned about the rescission a month or two later and asked for the keys back.  The bank gave them the keys.  When they moved back into the property, the tress were dead, appliances gone, the place was ransacked, and the HOA had assessed a $20,000 penalty for not taking care of the place.  The bank not only refused to pay for the damages but demanded that the debtors pay the mortgage for the time when it owned the property. That’s why people wanting to buy a home, should consider take the precautions so this don’t happen to them as well.

The debtors finally sued the bank in state court.  The state court eventually said that the violation of the stay claims had to be litigated in federal court.  So the debtors filed an action in federal court which was then referred to the bankruptcy court.   During the litigation, the debtors complained to the federal Consumer Financial Protection Bureau.  “The Bank of America response to CFPB is noteworthy for two false statements made by the Office of the Bank of America CEO and President.  It falsely asserts that there was no foreclosure of the Sundquist residence.  And, it falsely asserts that the Sundquists are not in active litigation with Bank of America.  Both statements were materially false.”

Judge Klein then walked through the types of damages available for violation of the automatic stay.  ”Actual damages under § 362(k)(1) include both physical damages and economic damages.”  “Emotional distress damages are also commonly the subject of awards of actual damages.”  “Attorneys’ fees and costs are a mandatory component of the § 362(k)(1) remedy.”  Punitive damages are awarded in “appropriate circumstances.”  He writes that the “thin-skull” doctrine works.

Judge Klein then walked through the evidence he received.  He found “Renée Sundquist to be an exceptionally credible witness.  She displayed considerable courage in revealing her very private journal and exposing herself to cross-examination and public exposure of her all-too-human traits.”  Note: there are many references in the footnotes to her diary.  He also commented that the debtor’s attorney could have done a better job establishing the specifics of the damages.

Finally, he made very painstaking efforts to compute the damages for each of many different aspects of the actual damages.  For example, he awarded $401,511 for lost income of wife, $91,351 for lost income of husband, $24,000 for lost property, $83,200 for alternate housing, $24,000 for the HOA damages, and $62,268 for attorneys fees.  He awarded $300,000 of emotional distress damages.  Total actual damages were $1,074,000.

For punitive damages Judge Klein said, “To award punitive damages measured by a conventional multiplier of three to six times of the Sundquist compensatory damages would be laughed off in Bank of America’s boardroom as a mere ‘cost of doing business’ payable out of the petty cash account.”

He noted however that punitive damages should not result generally in a huge windfall to the plaintiffs.  “To let a defendant escape well-deserved punitive damages that are needed to vindicate the societal interests served by the law authorizing the award merely because a plaintiff would be receiving too much money is not a satisfactory answer.”  “A solution based on common sense is to direct to a public purpose the portion of legitimate punitive damages that exceed what private victims ought to be allowed to retain — the societal interest component of punitive damages.”  “It is noteworthy that the language of the statute does not prohibit a court from putting strings on what may be done with a portion of the amount awarded.”

So Judge Klein awarded $45 million in punitive damages.  He permitted the debtors to keep $5 million but ordered them to give the rest (after taxes) to seven different entities including five local California law schools.  He dictated that if Bank of America were to donate $30 million to the same organizations, he would limit the punitive damages to $5 million paid to the debtors.  Two additional comments re punitive damages are worth note.  He ordered the funds to “be used [by the corporate recipients] only for education in consumer law and delivery of legal services in matters of consumer law.”  He also commented, “It is the intention of this court that the six designated entities shall have standing to participate in requests for post-trial relief in this court and to participate in any appeal from the judgment in this adversary proceeding.”
Finally, Judge Klein declared the debtors’ mortgage “reinstated” and fixed the amount owing.  He then said

“Bank of America will be enjoined from requiring payments from the Sundquists (who may make voluntary payments), and enjoined from declaring a default, until 60 days after Bank of America pays the Sundquists the full amount of the actual and punitive damages here awarded.”

Note:  Bank of America of course immediately appealed to the BAP, docket number  17-1103.  On April 27, 2017, it gave notice that it had posted a $57 million appeal bond.   The two bankruptcy organizations and the law schools have each filed a “Notice of Appearance”  On May 9, 2017, each of the school and organizations filed a Motion to Intervene which is set for hearing on June 6, 2017.  The bank’s opening brief is due on June 2, 2017.  As of May 29, 2017, there is no extension of that due date.

Fair Use is a Defense to DMCA Takedown Notices and Could Subject Copyright Holders to Attorney Fees

The Digital Millennium Copyright Act provides a potent mechanism for copyright owners to demand that certain copyrighted materials be taken off of websites. This is because online services providers are given immunity from liability as long as they “expeditiously” remove content after receiving notification from a copyright holder that the
content is infringing.

The idea behind giving service providers immunity is rooted in the idea that if all the service provider is dong is allowing people to post content, then the content poster, and not the provider, should be liable for the copyright violation. That makes sense. Service providers like YouTube would go out of business if they were held liable for all the copyrighted videos posted on there.

Read more…

Slavery + Chapter 11

I loved reading this case.  Felt like a Grimms’ fairy tale.

Picture this — you earn a paycheck, right?  Now put yourself in a position that when you receive your paycheck, an invisible hand (no not Uncle Sam) comes and takes a big chunk of that paycheck to pay your creditors, and you cannot do anything about it!   Kind of like an involuntary wage garnishment.  This is what a bankruptcy court was faced with in a Chapter 11 case in New Jersey.

Read more…

CCP 1717 – Getting Attorneys Fees (In re Penrod, 9th Circuit)

There was a recent published Ninth Circuit opinion re: the hanging paragraph in 1325(a).   In re Marlene A. Penrod, 13-16097, Ninth Circuit (2015)(Published).

However, to me, what was more interesting was the fight over whether the auto loan lender should pay debtor’s attorneys fees (about $250,000).   Court said yes.

The contract between the debtor-borrower and the lender said ‘in the event of a default, the borrower (debtor) was to pay the lender to collect what it was owed plus attorneys fees.”

Read more…

Ninth Circuit: Ch. 20′s Keep Stripping (In re Blendheim)

Ninth Circuit cleared it up:  In a “Chapter 20,” ineligibility for a discharge in a subsequent Ch. 13 does not preclude a debtor from permanently voiding a lien.  In short, strip away.

Debtors got Ch. 7 discharged, and next day filed Ch. 13.  Debtors home was encumbered by 2 liens.  The first lienholder, a Bank, filed a claim and it is their lien that is at issue on this appeal.

Debtors objected to the Bank’s POC arguing that it failed to attach the promissory note as required by FRBP 3001 (Bank only attached the deed of trust).  The Bank simply ignored the objection.   Court entered a default order disallowing their claim.  Next, Debtors filed an adversary to void Bank’s first lien since their claim was no longer an allowed secured claim.  Court agreed and said the lien would be void upon completion of their chapter 13 bankruptcy.

Debtor’s reached plan confirmation, and the Bank woke up…..

Read more…