In re: Regan Carroll
NC-16-1125-JuFB
| 9th Cir. BAP | Jul 21, 2017Background
- Debtor (Carroll), a contractor, led Redland Group/DogPatch and obtained two non‑institutional loans from Jadallah to fund renovation projects; this appeal concerns the 2013 "Second Loan" of $700,000 to complete a San Francisco property rehab.
- Debtor provided plans and a budget; funds were advanced in seven draws between Jan–Aug 2013, with agreement that Jadallah would finance only and Desmond would review draws.
- Debtor unilaterally changed plans (notably from a two‑car to a three‑car garage), went over budget, and failed to pay several subcontractors, who later recorded mechanics’ liens.
- After a June 2013 walkthrough with counsel and Desmond, Jadallah advanced an extra $100,000; Debtor thereafter ceased work and the project remained incomplete.
- Jadallah filed an adversary complaint seeking nondischargeability under § 523(a)(2)(A) for the Second Loan; at trial the bankruptcy court found $500,000 of the $700,000 nondischargeable ($300,000 for nondisclosure; $100,000 for affirmative misrepresentation, plus treatment of other draws) and entered judgment.
- Debtor appealed; the BAP affirmed, deferring to the bankruptcy court’s credibility findings and refusing to consider post‑trial mitigation evidence raised for the first time on reconsideration.
Issues
| Issue | Jadallah's Argument | Carroll's Argument | Held |
|---|---|---|---|
| Whether parts of the Second Loan are nondischargeable under § 523(a)(2)(A) | Debtor either omitted material facts he was duty‑bound to disclose (unpaid subs, plan changes, budget shortfall) and made affirmative false statements at the June 2013 meeting inducing advances | Loan was a valid contract and Debtor’s statements were not fraudulent; post‑trial sale / "special benefit" should mitigate or eliminate damages | Affirmed: $500,000 nondischargeable — $300,000 for fraudulent nondisclosure (March and May advances) and $100,000 for affirmative misrepresentation (August advances); court properly relied on credibility findings and excluded post‑trial mitigation evidence |
| Whether omission can constitute fraud under § 523(a)(2)(A) absent express misrepresentation | Omission actionable because Debtor had duty to disclose material facts about the project that would prevent misleading partial statements | Contended loan terms/control made § 523(a)(2)(A) inapplicable unless fraud at contracting occurred | Held omissions are actionable where duty to disclose exists (Restatement principles applied); bankruptcy court did not err in finding duty and nondisclosure fraud |
| Whether intent to deceive can be inferred | Intent can be inferred from circumstances (knowledge of facts and motive to induce further advances) | Denied intent; argued lack of evidence beyond Debtor’s testimony | Held intent permissibly inferred; trial court’s credibility determinations sustained under clearly erroneous standard |
| Whether post‑trial sale / "special benefit" damages mitigation may be considered on appeal | N/A at trial (raised after trial) | Argued post‑trial sale/special benefit should mitigate damages | Held waived and inadmissible on appeal because not part of trial record; damages not reduced on that basis |
Key Cases Cited
- Turtle Rock Meadows Homeowners Ass'n v. Slyman, 234 F.3d 1081 (9th Cir. 2000) (elements for § 523(a)(2)(A) nondischargeability claim)
- Field v. Mans, 516 U.S. 59 (U.S. 1995) (justifiable reliance analysis; distinctions for statements of financial condition)
- Apte v. Japra M.D., F.A.C.C., Inc. (In re Apte), 96 F.3d 1319 (9th Cir. 1996) (duty to disclose required for omissions to constitute fraud under § 523(a)(2)(A))
- Gertsch v. Johnson & Johnson Fin. Corp. (In re Gertsch), 237 B.R. 160 (9th Cir. BAP 1999) (intent may be inferred from totality of circumstances)
- Beltran v. Wells Fargo Bank (In re Beltran), 182 B.R. 820 (9th Cir. BAP 1995) (appellate review standards and deference to bankruptcy court credibility findings)