Norling v. Donawerth (In re Norling), Case No. SACV 10-01162 DMG

In re JOHN W. NORLING, et al., Debtors.JOHN W. NORLING, Appellant,

v.ELVYN DONAWERTH, et al., Appellees.

Case No. SACV 10-01162 DMG

Bankruptcy Case No. 8:08-bk-11747-ES

Adversary Case No. 8:08-ap-01263-ES

UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA

Dated: March 19, 2012

ORDER RE BANKRUPTCY APPEAL

This matter is before the Court on an appeal from the Bankruptcy Court. The Court held a hearing on February 24, 2012. Having duly considered the respective positions of the parties, both in their briefs and at oral argument, the Court now renders its decision. For the reasons set forth below, the judgment of the Bankruptcy Court is

AFFIRMED.

I.FACTUAL BACKGROUND

Appellant John Norling is a general contractor with substantial experience in the construction trade, including residential remodeling projects. (2 Tr. at 120:3-132:16.)On March 30, 2005, Norling and Appellees Elvyn and Alice Donawerth entered into a contract whereby Norling would provide construction and remodeling work to the Donawerth's home in Lake Forest, California. (1 Tr. at 16:13-17:22.) The total contract price was for $179,350. (Id. at 17:23-24.) Subsequently, the parties modified the contract to include the addition of a skylight and a second-story deck for an additional $33,476.47. (Id. at 84:1-24.) With these additions, the total contract price was $212,826.47. The Donawerths made periodic payments to Norling. (2 Tr. at 116:25117:3.)

Shortly after the project commenced, Norling introduced the Donawerths to two young and inexperienced men who would be working at the job site. (1 Tr. at 15:11-21.) Norling stated that he would be teaching them the trade. (Id. at 15:22-24.) Kathy Smouse, a boarder who was at the job site, testified that Norling was only occasionally there and that she never observed him working with the two young men. (Id. at 189:13190:24.)

The Donawerths began complaining to Norling about the progress of the construction project. (Id. at 30:10-12.) They became "suspicious" of Norling in mid-2005. (Id. at 120:8-11.) Norling provided assurances that the project could be completed on time. (Id. at 167:13-19, 167:25-168:11.) He represented that certain work—such as the heating, ventilation, and air conditioning ("HVAC"), plumbing, skylight, and balcony—was complete. (Id. at 41:19-24, 61:5-10, 67:6-9, 70:2-6.) Later, the Donawerths began complaining to Norling that the work was not complete and did not comply with the building code. (Id. at 30:13-15.) Norling would always assure them that everything was fine. (Id. at 153:2-10.)

On February 11, 2006, Alice Donawerth wrote a letter to Norling stating her concerns and demanding that he comply with certain conditions if he wished to go forward with the project. (Id. at 30:19-31:22.) Norling signed the letter, indicating his agreement to comply with the conditions. (Id. at 30:19-31:22.)

On April 10, 2006, one of Norling's young and inexperienced employees cut into a gas line while trying to repair the floorboard. (Id. at 137:22-138:19.) The Donawerths tried to contact Norling, but Norling was out-of-state and non-responsive until April 24, 2006. (2 Tr. at 179:14-17, 182:10-183:1.) The Donawerths eventually terminated Norling in May 2006. (1 Tr. at 137:12-15.) As of April 21, 2006, the Donawerths had expended $190,809.88, of which $148,866.02 was paid to Norling and $41,943.86 was paid directly to suppliers. (Id. at 28:13-21.)

The Donawerths contacted Norling's bonding company, HHC Surety Company. (1 Tr. at 27:10-16.) HCC hired Art Renga of Roel Consulting Group to conduct an investigation. (2 Tr. at 5:10-6:1.) Renga found hidden defects in the plumbing and HVAC, and work not performed to code, such as the skylight and upper-deck railing. (Id. at 15:12-20, 24:18-24, 73:4-24, 83:9-16.) Renga also found that the windows were installed improperly. (Id. at 78:2-7.) Based upon Renga's written findings, HCC paid the Donawerths $10,000—the full amount of the bond. (1 Tr. at 73:12-14.)

The Donawerths filed a complaint in state court for breach of contract and fraud. Subsequently, Norling filed a voluntary petition for bankruptcy under Chapter 7 and the state court action was stayed pursuant to 11 U.S.C. § 362. On July 16, 2008, the Donawerths filed an adversary proceeding in Bankruptcy Court against Norling alleging non-dischargeability under 11 U.S.C. §§ 523(a)(2) and 523(a)(6). The Bankruptcy Court conducted a bench trial from May 24 through May 27, 2010. On the first day of trial, the parties stipulated to dismiss Sakura Norling as a defendant. At the close of the Donawerths' case-in-chief, the Bankruptcy Court granted Norling's motion for nonsuit as to the 11 U.S.C. § 523(a)(6) claim. At the conclusion of the trial, the Bankruptcy Court took the matter under submission.

On June 24, 2010, the Bankruptcy Court issued an oral ruling. In its findings of fact and conclusions of law, the Bankruptcy Court found Norling's debt to the Donawerths non-dischargeable for false pretenses or actual fraud under 11 U.S.C. § 523(a)(2)(A). The Bankruptcy Court entered judgment for the Donawerths in the amountof $168,028.78. (5 Tr. at 2:15-17:6.) Norling timely appealed. On appeal, Norling contends that the Bankruptcy Court applied the wrong legal standard and that there is insufficient evidence to support its non-dischargeability finding and the amount of damages awarded to the Donawerths.

II.STANDARD OF REVIEW

A district court reviews the bankruptcy court's findings of fact for clear error and its conclusions of law de novo. Fed. R. Bankr. P. 8013; Gebhart v. Gaughan (In re Gebhart), 621 F.3d 1206, 1209 (9th Cir. 2010) (citing Abele v. Modern Fin. Plans Servs., Inc. (In re Cohen), 300 F.3d 1097, 1101 (9th Cir. 2002)). Mixed questions of law and fact, such as whether a claim is non-dischargeable, are reviewed de novo. Hamada v. Far

E. Nat'l Bank (In re Hamada), 291 F.3d 645, 649 (9th Cir. 2002) (citing Beaupied v. Chang (In re Chang), 163 F.3d 1138, 1140 (9th Cir. 1998); Murray v. Bammer (In re Bammer), 131 F.3d 788, 792 (9th Cir. 1997) (en banc)).

"The clear error standard is significantly deferential and is not met unless the reviewing court is left with a 'definite and firm conviction that a mistake has been committed.'" Fisher v. Tucson Unified Sch. Dist., 652 F.3d 1131, 1136 (9th Cir. 2011) (quoting Cohen v. U.S. Dist. Court for N. Dist. of Cal., 586 F.3d 703, 708 (9th Cir. 2009)) (internal quotation marks omitted). A court's factual determination is clearly erroneous only if it is illogical, implausible, or lacks "support in inferences that may be drawn from facts in the record." United States v. Hinkson, 585 F.3d 1247, 1261 (9th Cir. 2009) (en banc) (quoting Anderson v. City of Bessemer City, N.C., 470 U.S. 564, 577, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985)) (internal quotation mark omitted).

III.DISCUSSION

Ordinarily in a Chapter 7 proceeding, an individual may discharge his debts pursuant to 11 U.S.C. § 727. Sherman v. Sec. & Exch. Comm'n (In re Sherman), 658 F. 3d 1009, 1010 (9th Cir. 2011). Section 523(a)(2)(A) excepts from discharge any debtfor money, property, services, or credit that the debtor obtained by fraud. Ghomeshi v. Sabban (In re Sabban), 600 F.3d 1219, 1220 (9th Cir. 2010). To establish a claim of non-dischargeability under Section 523(a)(2)(A), the creditor must demonstrate five elements: (1) the debtor made representations; (2) at the time, the debtor knew that they were false; (3) the debtor made them with the intention and purpose of deceiving the creditor; (4) the creditor relied on the representations; and (5) the creditor sustained the alleged loss and damage as the proximate result of the misrepresentations having been made. Id. at 1222 (quoting Am. Express Travel Related Servs. Co. v. Hashemi (In re Hashemi), 104 F.3d 1122, 1125 (9th Cir. 1996)).

A. The Bankruptcy Court Applied The Proper Legal Standard

1. Inferring Fraudulent Intent From The Totality Of The Circumstances

Norling contends that the Bankruptcy Court erred by applying the wrong legal standard. (Appellant's Opening Br. at 31.) First, relying on Turtle Rock Meadows Homeowners Ass'n v. Slyman (In re Slyman), 234 F.3d 1081 (9th Cir. 2000), Norling maintains that the Bankruptcy Court erred by applying the relaxed totality-of-the-circumstances standard to determine the element of intent rather than requiring direct evidence thereof. (Id. at 31-32.)

Slyman, however, concerned only the reliance and damages elements. The creditor in that case, a homeowners association, argued that it did not need to show that it had provided services—maintenance and upkeep of common areas and facilities—in reliance on the debtor homeowner's deceptive conduct or that such conduct had proximately caused the debt—homeowners association dues—that the association sought to recover. 234 F.3d at 1085-86. The association cited an earlier case, Citibank (S.D.), N.A. v. Eashai (In re Eashai), 87 F.3d 1082 (9th Cir. 1996), in support of its argument that a totality-of-the-circumstances test should apply.¹ Slyman rejected a totality-of-the-circumstances approach in cases between homeowners and homeowners associations, holding that "[a] homeowners association must prove the elements of misrepresentation [sic] and reliance directly and by a preponderance of the evidence."² 234 F.3d at 1086. Because Slyman involved proof of elements other than intent, it is unilluminating as to the appropriate standard of proof for that element.

In any event, the Bankruptcy Court did not—as Norling contends—rely on a case involving credit card debt. To the contrary, it distinguished those cases and the 12-factor test that they utilize. (See 5 Tr. at 7:10-14 ("In cases like [American Express Travel Related Services Co. v. Hashemi (In re Hashemi), 104 F.3d 1122, 1125 (9th Cir. 1996)], which was actually a credit card case, the Ninth Circuit has set forth a number of factors that courts can look to to infer intent in the context of use of a credit card. Those factors...