Cardenas v. Shannon (In re Shannon)

553 B.R. 380

In re: Donald Gary Shannon and Mai Doan Shannon, Debtors.

Andres Cardenas; Teresa Cardenas, Appellants

v.Donald Gary Shannon; Mai Doan Shannon, Appellees.

BAP Nos. AZ–14–1497–JaJuKu

AZ–15–1040–JaJuKu Consolidated

Bk. No. 2:10–bk–35640–BKM

Adv. No. 2:11–ap–00260–EPB

United States Bankruptcy Appellate Panel of the Ninth Circuit.

Argued and Submitted on May 20, 2016

Filed July 22, 2016

H. Troy Romero of Romero Park P.S. argued for appellants Andres Cardenas and Teresa Cardenas.

Neal H. Bookspan of Jaburg & Wilk, P.C. argued for appellees Donald Gary Shannon and Mai Doan Shannon.

Before: JAIME,¹ JURY, and KURTZ, Bankruptcy Judges.

OPINION

JAIME, Bankruptcy Judge:

Creditors Andres Cardenas and Teresa Cardenas (“Cardenases”) appeal from an order denying their request for an order declaring that a debt owed by debtors Donald Gary Shannon and Mai Doan Shannon (“Shannons”) is non-dischargeable in the Shannons' bankruptcy case and the judgment entered on that order discharging the debt. The bankruptcy court concluded that the Cardenases failed to prove several elements of their non-dischargeability claim under 11 U.S.C. § 523(a)(2)(A),² which excepts from discharge debts for, among other things, money and property to the extent obtained by false pretenses, a false representation, or actual fraud.

The Cardenases also appeal the bankruptcy court's order and judgment awarding costs and attorney's fees with interest to the Shannons, arguing that the action before the bankruptcy court was based in fraud and misrepresentation and not contract.

For the reasons explained below, we AFFIRM the bankruptcy court's ruling that the Cardenases failed to prove non-dischargeability under § 523(a)(2)(A), we AFFIRM the bankruptcy court's award of costs to the Shannons in the amount of $5,002.10, and we VACATE and REMAND the bankruptcy court's award of $72,691.00 in attorney's fees to the Shannons.

I. INTRODUCTION

The dispute below and this appeal arise out of a longstanding business and personal relationship between the Cardenases and the Shannons. It began in 2005 when Mr. Cardenas purchased vacant land and a dilapidated building located at 30333 Pacific Highway South, Federal Way, Washington (“Washington Property”) for $1,000,000.00, with Ms. Shannon's assistance. It continued with a fraud and negligent misrepresentation lawsuit the Cardenases filed against the Shannons in Washington state court in which the Cardenases obtained a default judgment in excess of $1,000,000.00 against the Shannons after the Washington Property was lost to foreclosure. The adversary proceeding ensued when the Shannons moved to Arizona and filed a voluntary petition for relief under chapter 7 of the Bankruptcy Code.

The Cardenases commenced an adversary proceeding in the Shannons' chapter 7 case in which they sought to have the debt created by the Washington state court default judgment declared non-dischargeable under § 523(a)(2)(A). After a three-day trial during which the bankruptcy judge heard testimony from numerous witnesses and judged their credibility, the bankruptcy court entered an order denying the Cardenases' request for an order providing that any debt owed to them based on the Washington state court default judgment be deemed non-dischargeable in the Shannons' bankruptcy case. Entry of a judgment, as amended, discharging that debt followed. The bankruptcy court concluded that the Cardenases failed to carry their burden of proof on two elements of the § 523(a)(2)(A) claim. It also concluded that the Cardenases failed to prove their damages were proximately caused by their reasonable reliance on any representations made by the Shannons.

In post-trial proceedings, the bankruptcy court awarded the Shannons their costs and attorney's fees as the prevailing parties on the Cardenases' § 523(a)(2)(A) claim.

The Cardenases first appealed from the adverse order and judgment discharging the debt created by the Washington state court default judgment. A subsequent appeal from the order and judgment awarding costs and attorney's fees followed. This court consolidated both appeals.

II. FACTS³

A. The Parties

Before moving to Arizona, the Shannons resided in Washington where they established a successful bookkeeping and accounting practice. Ms. Shannon began her career with the Internal Revenue Service as an enrolled agent. She is also a licensed real estate agent with numerous years of real estate experience.

Mr. Cardenas is a Mexican immigrant. Although he lacks an extensive formal education and his command and understanding of the English language are limited, he is a fairly sophisticated and experienced businessman. He has established an impressive empire of Mexican-themed restaurants throughout Washington. He owned as many as twenty restaurants, and he currently owns at least fifteen. Throughout his career, Mr. Cardenas has personally managed and overseen his restaurant holdings and other business operations in Washington and Oregon. He also has experience renovating and selling real properties. Mr. Cardenas always communicated with Ms. Shannon in English.

The Cardenases and the Shannons met sometime around 1998 and formed a personal and business relationship. Through her tax and accounting business, for a number of years Ms. Shannon provided accounting, payroll, and tax services for all of the Cardenases' restaurants. As a result of their work for the Cardenases, the Shannons received an annual six-figure income.

In addition to accounting, payroll, and tax services, Ms. Shannon also represented Mr. Cardenas in real estate matters. They had partnered successfully and profitably on the rehabilitation of a former bank property where Ms. Shannon oversaw and managed the purchase, renovations, and sale of the building. Although Mr. Cardenas worked with Ms. Shannon on real estate transactions, on the first day of trial he testified that he did not rely on her for advice in real estate matters.

B. The Washington Property

Without performing any due diligence or obtaining an appraisal, Mr. Cardenas purchased the Washington Property in 2005 for $1,000,000.00 cash as the property was about to be sold to another buyer. Ms. Shannon represented Mr. Cardenas in that transaction. Mr. Cardenas used his personal funds to purchase the Washington Property. However, the property was subsequently titled in the name of Mazatlan Properties, LLC (“MPL”), a limited liability company of which the Cardenases were the sole members when the Washington Property was purchased.

The Washington Property sat vacant for approximately a year. It was vandalized, gutted of its fixtures and copper wiring, and a target for graffiti.

By the summer of 2006, Mr. Cardenas decided he no longer wanted the Washington Property. He retained Ms. Shannon as the listing agent in 2006 and she unsuccessfully attempted to sell the property through 2008. She then approached Mr. Cardenas with a proposal to renovate and sell the Washington Property.

C. The Agreement

The Washington state court action and the adversary proceeding arise out of the failed business venture between Mr. Cardenas and Ms. Shannon for the purchase, renovation, and sale of the Washington Property. It is in that context that the Cardenases accused Ms. Shannon of making false representations and engaging in other deceitful conduct in an effort to obtain the Washington Property from Mr. Cardenas without payment. Ms. Shannon denied those accusations.

An initial oral understanding between Mr. Cardenas and Ms. Shannon provided for the renovation and sale of the Washington Property, required Ms. Shannon to furnish funds for renovations to the property, and required Ms. Shannon to pay $1,000,000.00 to Mr. Cardenas upon renovation and sale of the property. That much is undisputed.

The parties' understanding was subsequently memorialized in two writings, both of which are entitled “Amendment of Operating Agreement of Mazatlan Properties, LLC” (the “First Amendment” and “Second Amendment”). Following discussions, the First Amendment would have made Ms. Shannon and one of her associates equal members in MPL with the Cardenases, stated that Ms. Shannon and her associate would provide funds necessary for renovations to the Washington Property, and would have made Ms. Shannon a co-manager in MPL with Mr. Cardenas. The First Amendment, admitted at trial as Exhibit 17, is neither dated nor signed. The Second Amendment, admitted at trial as Exhibit 18, is signed and dated August 23, 2008. It transferred the Cardenases' interest in MPL and the Washington Property to Ms. Shannon, made Ms. Shannon the sole member and manager of MPL, and gave her the power and authority to sell or lease the Washington Property.

The Cardenases asserted that they never agreed to the terms in the Second Amendment. They accused Ms. Shannon of using a signature page from the First Amendment for the Second Amendment without their knowledge or authorization. They also accused Ms. Shannon of not renovating and selling the Washington Property within a promised three- to five-month time period, using funds other than her own funds (which they claimed she fraudulently obtained through loans) to fund renovations, and not providing Mr. Cardenas with a lien on the Washington Property to secure his interest as she purportedly promised to do. They further accused Ms. Shannon of selling a portion of the Washington Property and not paying Mr. Cardenas the sale proceeds.

Ms. Shannon denied the Cardenases' accusations. She denied forging or appending an unauthorized signature page to the Second Amendment. This is consistent with Mr. Cardenas' trial testimony that he signed the Second Amendment, signed his wife's signature, and discussed the terms of the Second Amendment with Pat Horan (“Mr. Horan”), vice-president of Timberland Bank (“Timberland”), the bank from which Ms. Shannon obtained a loan which she used for renovations. Ms. Shannon attested that she had a prospective buyer when she entered into the business...