Ghomeshi v. Sabban (In Re Sabban)Ghomeshi v. Sabban (In Re Sabban)
Lead Opinion
OPINION
The debtor, an unlicensed contractor, entered into a home improvement contract with the creditor. Prior to bankruptcy, a state court entered a judgment against the debtor in the amount of $123,500 and additionally awarded the creditor attorneys’ fees in the amount of $71,269.30. The creditor sought summary judgment from the bankruptcy court that all of the amounts awarded by the state court were nondischargeable under 11 U.S.C. § 523(a)(2)(A).
I. FACTS
A. The State Court Action
Following trial, a state court entered a judgment in the amount of $123,500 in favor of appellant Abdul M. Ghomeshi (“Creditor”) against appellee Yehuda Sab-ban (“Debtor”). The state court also stated that Creditor was entitled to recover attorneys’ fees, which it later fixed at $71,269.30. The state court also made certain factual findings which the bankruptcy court later adopted under the doctrine of issue preclusion.
Debtor held an eighty percent interest in a general partnership, Pacific Coast Creations (“Pacific”), created to provide home improvement work. Even though neither Debtor nor Pacific were licensed in California, Debtor represented himself and Pacific as licensed contractors.
A representative of Pacific contacted Creditor soliciting home improvement work. Creditor entered into a series of written and oral contracts with Debtor and Pacific, which served as the general contractor for the remodeling of Creditor’s home. Creditor testified that he would not have hired Pacific if he had known the truth about the unlicensed status of Pacific and Debtor.
The state court specifically found that Creditor acted in reliance on Debtor’s representations that Pacific was licensed and was thus induced into entering into the contracts with Pacific. The state court also found that when Debtor represented to Creditor that Pacific was a licensed contractor, he “knew it was a false representation, a fraudulent representation, and a false statement knowingly made.”
Creditor paid $123,000 to Pacific and Debtor while and after the improvement work was performed.
After “considerable problems developed” between Creditor and Debtor, Creditor sued for breach of contract, fraud and violations of California Business and Professions Code section 7160 (“ § 7160”) and California Business and Professions Code section 7031(b) (“ § 7031(b)”). Creditor eventually dismissed the breach of contract and fraud causes of action, and trial proceeded on the allegations that Debtor had violated § 7160 and § 7031(b).
Section 7160 provides that any person who is induced to contract for a work of home or other improvement “in reliance on false or fraudulent representations or false statements knowingly made” may recover a penalty of $500, plus reasonable attorneys’ fees “in addition to any damages sustained by him by reason of such statements or representations made by the contractor or solicitor.” Cal. Bus. & Prof. Code § 7160. The state court awarded Creditor $500 plus attorneys’ fees under this section, but specifically held that the $123,000 paid by Creditor, and which Creditor sought to recover pursuant to § 7031(b), did not constitute damages for the purposes of § 7160. In other words, the state court found that Creditor did not sustain such damages “by reason of such statements or representations made by the contractor or solicitor.” Cal. Bus. & Prof. Code § 7160.
Even though the state court found that Creditor did not suffer actual damages for purposes of the fraud provisions of § 7160, it nonetheless awarded Creditor $123,000 “in the nature of disgorgement” pursuant to § 7031(b). Section 7031 prohibits unlicensed contractors from maintaining actions to recover compensation and additionally permits a party who has utilized the services of an unlicensed contractor “to recover all compensation paid” to the contractor. The statute does not on its face limit disgorgement only to those who have been defrauded by an unlicensed contractor. Instead, as the California Supreme Court has held, the statutory prohibition against compensation to unlicensed con
B. The Nondischargeability Action
Debtor filed his chapter 7 case on August 8, 2005, and Creditor filed his complaint to determine dischargeability on November 14, 2005. Creditor filed a motion for summary judgment. Debtor’s opposition to the motion included a cross-motion for summary judgment. The bankruptcy court issued a tentative ruling stating that it would grant summary judgment in favor of Creditor declaring the full amount of the state court judgment (the $123,000 awarded under § 7031(b) plus the $500 penalty and attorneys’ fees awarded under § 7160’s fraud provisions) nondischargeable.
At the initial hearing on the motion for summary judgment, counsel for Debtor argued that the court had erred in its tentative ruling by treating the $123,000 award under § 7031(b) as a claim for money, property, services, or credit obtained by fraud under section 523(a)(2)(A), particularly when the state court specifically held that Creditor did not suffer damages in that amount as a result of Debtor’s fraud (under § 7160) in procuring the contracts. The court therefore permitted the parties to submit supplemental briefs on the issue of whether the § 7031(b) award of $123,000 would be nondischargeable under Cohen v. De La Cruz,
At a subsequent hearing the court modified its tentative ruling and ordered that the amount awarded under § 7031(b) was dischargeable. The court noted that § 7031(b) is “a regulatory statute about status” and “not a tort statute about misconduct.” The bankruptcy court agreed with the state court that the $123,000 in damages did not result from Debtor’s fraud or misrepresentation. The court did find that the $500 penalty and the attorneys’ fees in excess of $71,000 awarded under § 7160 were nondischargeable.
On June 20, 2007, the bankruptcy court entered a stipulated order on Creditor’s motion for summary judgment, providing that the portion of the state court judgment ($123,500) attributable to § 7031(b) was subject to discharge and that attorneys’ fees in the amount of $71,269.30 awarded under § 7160 were nondischargeable.
On October 3, 2007, the clerk of this panel entered an order noting that the order on the motion for summary judgment is not a separate final judgment itself, citing Casey v. Albertson’s, Inc.,
The bankruptcy court had jurisdiction pursuant to 28 U.S.C. §§ 1334 and 157(b)(2)(I) and we have jurisdiction under 28 U.S.C. § 158.
III.ISSUE
Did the bankruptcy court err in holding that the state court’s award of $123,000 to Creditor under § 7031(b) was not excepted from discharge pursuant to section 523(a)(2)(A)?
IV.STANDARD OF REVIEW
We review de novo the bankruptcy court’s ruling on a motion for summary judgment. Tobin v. San Souci Ltd. P’ship (In re Tobin),
V.DISCUSSION
Section 523(a)(2)(A) excepts from discharge any debt for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by false pretenses, a false representation, or actual fraud. 11 U.S.C. § 523(a)(2)(A). In order to establish that a debt is nondis-chargeable under section 523(a)(2)(A), a creditor must establish five elements by a preponderance of the evidence:
(1) misrepresentation, fraudulent omission or deceptive conduct by the debtor;
(2) knowledge of the falsity or deceptiveness of his statement or conduct; (3) an intent to deceive; (4) justifiable reliance by the creditor on the debtor’s statement or conduct; and (5) damage to the creditor proximately caused by its reliance on the debtor’s statement or conduct.
Turtle Rock Meadows Homeowners Ass’n v. Slyman (In re Slyman),
Because an exception to discharge impairs a debtor’s fresh start, section 523(a)(2)(A) “should not be read more broadly than necessary to effectuate policy, e.g., preventing debtors from avoiding debts incurred by fraud or other culpable conduct.” Hayhoe v. Cole (In re Cole),
The limits on the dischargeability of debts contained in section 523 should be construed strictly against creditors and in favor of debtors. E.g., Gleason v. Thaw,236 U.S. 558 , 562,35 S.Ct. 287 , 289,59 L.Ed. 717 (1915) (“[I]n view of the well-known purposes of the [bankruptcy laws], exceptions to the operations of a discharge should be confined to those plainly expressed.”); In re Houtman,568 F.2d 651 , 656 (9th Cir. 1978).
Klapp v. Landsman (In re Klapp),
At issue here is whether the state court’s award of $123,000 to Creditor pursuant to § 7031(b) constitutes damages “proximately caused” by Creditor’s reliance on Debtor’s misrepresentation regarding his unlicensed status. More particularly, the question is whether in light of Cohen v. De La Cruz, the § 7031(b) award is a debt for money “obtained by” false pretenses, a false representation, or actual fraud under section 523(a)(2)(A). Given that we are to construe strictly the exceptions to discharge and that the exception under section 523(a)(2)(A) is limited to debts arising from a debtor’s fraudulent conduct, we conclude that the § 7031(b) award is dischargeable.
In Cohen v. De La Cruz,
The debtor landlord argued that the treble damages were not encompassed by section 523(a)(2)(A) because they did not represent money or services that the debt- or “obtained” from the creditors. The Supreme Court disagreed, stating that the “most straightforward reading of [section] 523(a)(2)(A) is that it prevents discharge of ‘any debt’ respecting ‘money, property, services, or ... credit’ that the debtor has fraudulently obtained, including treble damages assessed on account of the fraud.” Id. at 218,
While the Supreme Court held that a debtor need not “obtain” or receive money or property fraudulently in order for a creditor to prevail under section 523(a)(2)(A), it repeatedly acknowledged that the liability must “arise from” the fraud to be nondischargeable.
The statutory disgorgement did not require a showing of fraud; section 7031 is neutral as to fraudulent intent and was enacted to deter unlicensed contractors from offering their services for pay. Hydrotech Systems,
As a consequence, the award did not “arise from” Debtor’s fraud and Cohen v. De La Cruz is distinguishable.
VI. CONCLUSION
Because the $123,000 disgorgement of compensation under § 7031(b) did not
Notes
. Unless otherwise indicated, all chapter, section and rule references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1330, and to the Federal Rules of Bankruptcy Procedure, Rules 1001-9037, as enacted and promulgated prior to the effective date of The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub.L. 109-8, 119 Stat. 23.
. Issue preclusion, often called "collateral es-toppel,” forecloses reliligation of matters that have already been decided in prior proceedings. Paine v. Griffin (In re Paine),
. The state court found that Creditor paid $123,000 to the "defendants.” The defendants included Debtor and Julian Berariu, individually and doing business as Pacific.
. In directing counsel how to word the order, the court inadvertently included the $500 penalty in the dischargeable debt. The court had specifically held that the penalty was nondischargeable, but the state court’s judgment in the amount of $123,500 included the $123,000 awarded under § 7031(b) and the $500 awarded under § 7160. Under the bankruptcy court's own ruling, the latter portion should not have been included in the discharged amount.
Despite this error, Creditor prepared and submitted an order which its counsel “approved as to form and content” and which included the $500 penalty in the dischargea-ble portion. Creditor did not request the bankruptcy court to correct this error and has not raised this error on appeal. Normally we would not address or rectify it in this appeal. Golden v. Chicago Title Ins. Co. (In re Choo),
. Even though the title of the order refers only to the Creditor’s motion for summary judgment, the portion of the order discharging the § 7031(b) disgorgement award is actually a grant of the Debtor's cross-motion for summary judgment.
. The Supreme Court stated:
Moreover, the phrase “to the extent obtained by’’ in [section] 523(a)(2)(A), as the Court of Appeals recognized, does not impose any limitation on the extent to which “any debt” arising from fraud is excepted from discharge. “[T]o the extent obtained by” modifies "money, property, services, or ... credit” — not "any debt” — so that the exception encompasses "any debt ... for money, property, services, or ... credit, to the extent [that the money, property, services, or ... credit is] obtained by” fraud. The phrase thereby makes clear that the share of money, property, etc., that is obtained by fraud gives rise to a nondischargeable debt. Once it is established that specific money or property has been obtained by fraud, however, "any debt” arising therefrom is excepted from discharge.
Id. at 218-19,
. Other cases declaring statutory damages nondischargeable are similarly distinguishable. For example, in Albarran v. New Form, Inc. (In re Albarran),
. Courts have excepted debts from discharge where the debtor has misrepresented the status of his or her professional license, but only to the extent the creditors were actually injured because of the misrepresentations. See Sinha v. Clark (In re Clark),
Unlike here, none of these courts found an absence of actual damage to the creditor as a result of the debtor's fraud. None of these cases involved statutory disgorgement of compensation paid to an unlicensed contractor notwithstanding the absence of actual injury or the absence of fraud. As noted in 5 Bruner and O’Connor on Construction Law § 16:22 (updated May 2007), California is one of few jurisdictions that has enacted a statute authorizing the disgorgement of compensation by unlicensed contractors in the absence of actual damages.
.We offer no defense of Debtor’s mischief, described so emphatically by Judge Pappas in his dissent. The disagreement with him is whether we are to focus solely on Debtor’s conduct, as he does, or on the unequivocal facts in the record, viz., the determination of the state court, as we do. Judge Pappas says the fraud taints the entire relationship of the parties, including whatever economic consequences follow. We say the Supreme Court instructs us to find damages resulting from the fraud, and to refuse to discharge all that follow. Here we are bound by the determination of the state court that there were none.
Dissenting Opinion
dissenting:
I must dissent.
The debtor deceived Creditor. The state court found that the debtor employed “a false representation, a fraudulent representation, and a false statement knowingly made ...” about the status of his licensure as a contractor to induce Creditor to enter into the construction contracts. Because his conduct was fraudulent, under the time-tested policies of the Bankruptcy Code and Supreme Court case law, all debts that debtor owes to Creditor arising from that fraudulent relationship must be excepted from his discharge in bankruptcy under § 523(a)(2)(A). That includes the debtor’s statutory liability to Creditor under Cal. Bus. & Prof.Code § 7031(b).
Our analysis should be driven by the facts, not concerns for a hypothetical “innocent” unlicensed contractor. Here, the debtor is precluded from contesting that he lied to Creditor, telling him his business held a state contractor’s license; that, solely in reliance upon this false representation, Creditor was induced to contract with the debtor, and thus paid him $123,000; and that, at the time of contracting, the debtor knew his statements to Creditor were false. These facts unmistakably describe fraud, and based upon these findings, the state court ordered the debtor to repay all the monies he received from Creditor, as required by the California statute,
The debtor’s attempt to discharge Creditor’s claim should have been rebuffed by the bankruptcy court because “[t]he Bankruptcy Code has long prohibited debtors from discharging liabilities incurred on account of their fraud, embodying a basic policy animating the Code of affording relief only to an ‘honest but unfortunate debtor.’ ” Cohen v. De La Cruz,
To implement this fundamental bankruptcy policy, Cohen instructs that § 523(a)(2)(A) be read in a “straightforward” fashion, to prevent discharge of any debt respecting money, property, services or credit that the debtor has fraudulently obtained.
We should decline to employ a general rule of construction in favor of the specific interpretation given the same statute at issue in this appeal by Cohen. Here, the facts show that but for the debtor’s fraud, Creditor would have never hired nor paid him. Plainly, the debtor’s responsibility to disgorge payments to Creditor is directly traceable to his deception.
At bottom, the majority aligns with a debtor who, as to his dealings with Creditor, was not honest. We should instead protect the victim of the debtor’s fraud. Cohen,
. In enforcing § 7031(b), the state court noted it was implementing the California legislature’s goal of "protecting the homeowner" by providing a "stimulus” to contractors to obey the law.
. Indeed, in contrast to the approach taken by the majority, our court of appeals has endorsed an expansive reading of Cohen. For example, in a slightly different context, the court indicated that it is not necessary for a