NOT FOR PUBLICATION

MEMORANDUM DECISION

PETER W. BOWIE, Chief Judge United States Bankruptcy Court

This matter came on regularly for trial on plaintiff's complaint objecting to the dischargeability of the debt owed to Mr. Mitchell by debtor Carpenter. Plaintiff alleges that the debt owed by Carpenter was the product of Carpenter's fraud.

The Court has subject matter jurisdiction pursuant to 28 U.S.C. § 1334 and General Order No. 312-D of the United States District Court for the Southern District of California. This is a core proceeding under 28 U.S.C. § 157(b)(2)(I).

The debt owed by Carpenter to Mitchell arose out of a real estate transaction in which Mitchell purchased the rights to a piece of property in Nevada through an all-inclusive note and trust deed (AITD), by which Mitchell promised to pay to Carpenter $23 0, 000, which included an unpaid amount of $182,750 owed to the mortgagee, Long Beach Mortgage. Mitchell was to make payments to Carpenter, and Carpenter was to remit the monthly payment to Long Beach while keeping the difference. The arrangement began around June, 2003.

Mr. Mitchell made the monthly payment to Mr. Carpenter and his realty business. At some point in the Summer of 2004, Mr. Carpenter did not make the payments to the mortgagee, which resulted in a notice of default being served on Mr. Mitchell. Mr. Mitchell originally alleged in both his state court suit and this proceeding that Mr. Carpenter received the payments from Mr. Mitchell but did not forward the necessary amounts to the mortgagee, thereby triggering the default (Complaint, para. 17); (State Court Complaint, para. 12).

At trial, Mr. Mitchell testified that he sold the property after the notice of default and that Mr. Carpenter and his firm submitted a payoff demand which included claimed amounts not subsequently allowed. In any event, Mr. Mitchell sued Mr. Carpenter in Nevada State Court in December, 2004. The matter was referred for arbitration, and an award was entered in Mr. Mitchell's favor. In its entirety, the Arbitration Award explained:

Upon scrutinizing the beneficiary demand it appears that $11,619.40 in charges were attributable to the Defendant's failure to perform its obligations under the original agreement. They include late charges, NSF charges (not proved), legal/professional fees, foreclosure fees and beneficiary payoff (not proved). Additionally, Plaintiff did not provide an appraisal or other evidence to prove the value of the property at the time of the Plaintiff's sale of the property. However, it is clear the property was sold under distressed conditions created by the breach. Also, it is unrebutted that a $385,000 offer was extended on the property in the summer, 2004. The Arbitrator therefore awards $5,000.00 damages for loss of property value for a total of $16,619.40.

No damages for moving or future rental are awarded. Those expenses would have occurred had plaintiff sold the property in any event.

The Arbitrator's Award was dated November 23, 2005. On May 1, 2008 – 2 ¹/₂ years later - the state court entered a default judgment against Mr. Carpenter, at the request of Mr. Mitchell's attorney. It awarded Mr. Mitchell:

The principal sum of $16,619.40, together with interest accruing on the principal amount at the legal rate of 10% per month from April 16, 2007 to the date of the default, until paid in full, [sic] of suit in the amount of $233.00 and costs of the preparation of the legal documents needed in the prosecution of this action in the amount of $1,000.00

Curiously, the default was filed April 6, 2007--10 days after interest was to commence running--yet the interest phrase was written to run "from April 16, 2007 to the date of the default . . .." The language of the default judgment was drafted by Mr. Mitchell's attorney. Mr. Mitchell asserts he is owed $828,632.84, plus interest, on his $16,619.40 default judgment, presumably because of the interest provision.

Section 523(a)(2)(A) provides that:

(a) A discharge under section 727 ... of this title does not discharge an individual debtor from any debt - . . .

(2) for money, property, services, or an extension, renewal or refinancing of credit, to the extent obtained by -

(A) false presences, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition;

In the Ninth Circuit, to prove actual fraud a creditor must establish each of the following elements:

(1) That the debtor made the representations;

(2) That at the time he made them he knew they were false;

(3) That he made them with the intention and purpose of deceiving the creditor;

(4) That the creditor relied on such representations; and

(5) That the creditor sustained the alleged loss and damage as the proximate result of the representations having been made.

In re Britton, 950 F.2d 602, 604 (9^th Cir. 1991); In re Kirsh. 973 F.2d 1454, 1457 (9^th Cir. 1992). A false pretense involves an implied misrepresentation or conduct which creates and fosters a false impression, while a false representation is an express misrepresentation that induces conduct. In re Grant, 237 B.R. 97, 113 (Bankr. E.D. Va. 1999); In re Haining, 119 B.R. 460, 463-464 (Bankr. D.Del. 1990). But the difference between fraud, false pretense, and false representation is nuanced, and the test for proving any one of them is essentially the same.

When analyzing knowledge and intent, the Court must keep in mind that reckless indifference to the truth may support a section 523(a)(2) claim. See In re Arm, 175 B.R. 349, 354 (9^th Cir. BAP 1994). Further, a debtor's silence or omission of a material fact can constitute a false representation which is actionable under section 523(a)(2)(A). In re Eashai, 87 F.3d 1082, 1088-1089 (9^th Cir. 1996). In order to find liability for fraud based upon omission or silence, however, there must be a duty to disclose. Id. But nondisclosure of a material fact in the face of a duty to disclose can establish the requisite reliance and causation for actual fraud under the Code. In re Apte, 96 F.3d 1319, 1323 (9^th Cir. 1996). And in a business transaction such a duty can arise. The Apte court cited section 551 of the Restatement (Second) of Torts (1976) for the proposition that the parties in a business transaction have a:

duty to exercise reasonable care to disclose to the other before the transaction is consummated . . . facts basic to the transaction, if [a party] knows that the other is about to enter into it under a mistake as to them, and that the other, because of the relationship between them, the customs of the trade or other objective circumstances, would reasonably expect a disclosure of those facts.

Apte, 96 F.3d at 1324.

Finally, the Court notes the often repeated directive that the burden a creditor bears in a non-dischargeability action is high. As a result, Mr. Mitchell bears the burden of proving each element of fraud by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 290 (1991). And, in order to avoid unjustifiably opposing a debtor's fresh start, the Ninth Circuit has held that exceptions to discharge "should be construed strictly against creditors and in favor of debtors." In re Klapp, 706 F.2d 998, 999 (9^th Cir. 1983).

As noted, Mr. Mitchell argued at trial that his claim was based on Mr. Carpenter having submitted a beneficiary demand on the sale of the real property that included sums the arbitrater later concluded Mr. Carpenter had failed to prove he was entitled to claim. Mr. Mitchell characterized it as holding the sale of the property "hostage" for the amounts Mr. Carpenter set out in his beneficiary demand. The beneficiary demand Mr. Carpenter submitted included all of the following:

141.00

Unpaid Principal Balance:	$230,000.00
Interest, 6/6/2003, deferred
and defaulted payments:	14, 150.77
Accumulated Late Charges:	2, 396.00
Accumulated NSF Charges:
Legal/Professional Fees:	4, 875.00
Escrow Advance:	6, 095.88
Foreclosure Fees and/costs:	4, 057.40
Property Inspection:	705.33
Beneficiary Pay Off:	150.00
	$262,571.38

As already noted, the Arbitrator concluded the "late charges, NSF charges (not proved), legal/professional fees, foreclosure fees and beneficiary payoff (not proved)" were not allowed because those charges "were attributable to the Defendant's failure to perform its obligations under the original agreement." The disallowed charges totaled $11,619.40. The Arbitrator necessarily allowed the interest charges for "deferred and defaulted payments" of $14,150.77, as well as the escrow advance of $6,095.88 and property inspection fee of $705.33, together with the unpaid principal balance of $23 0, 000. The Arbitrator did assess $5,000 against the money due Mr. Carpenter for loss of market value of the home because of selling with a notice of default pending. Also, Mr. Carpenter testified he turned around and paid off the underlying note then held by Option One of over $192,000.

Mr. Mitchell asks this Court to find that Mr. Carpenter's acts of including in the beneficiary demand sums the arbitrator later concluded were not proven as expenses incurred were fraudulent. The Court acknowledges that Mr. Mitchell had to go along in order for the escrow to close before a foreclosure could be completed. However, that does not render the claim fraudulent. Moreover, the same arbitrator allowed Mr. Carpenter over $14,000 in "Interest, 6/6/2003 deferred and defaulted payments", while denying late charges and unproven NSF fees.

It is difficult for the Court to reconcile the multiple facets of the Arbitrator's Award, given the other facts already mentioned. In addition, Mr. Carpenter testified briefly that he believed Mr. Mitchell had breached their AITD agreement by nonpayment of taxes, and that Carpenter was trying to get Option One (the noteholder) to reconcile the payment history on the debt. All of which means that plaintiff Mitchell has failed to meet his burden of proving by a preponderance of the evidence that Mr. Carpenter engaged in fraudulent acts causing Mr. Mitchell to lose money as a result of those fraudulent acts, totalling $11,619.40 in disallowed portions of the beneficiary demand, plus $5,000 for loss of market value in sale of the property under the duress of a pending foreclosure, all before whatever post-judgment interest might actually be authorized and permissible under applicable Nevada law.

Accordingly, counsel for Mr. Carpenter shall prepare and lodge a separate form of judgment consistent with the forgoing within twenty-eight (28) days of the date of filing of this Memorandum Decision.

With his answer to the complaint, Mr. Carpenter included a counterclaim for the alleged abuse of process by not effecting proper service of process, thereby causing Mr. Carpenter's fees and expenses to be unnecessarily increased. Mr. Carpenter provided no evidence in support of his counterclaim, and, to the extent it could otherwise stand independent of 11 U.S.C. § 523(d), the Court finds and concludes it is without basis. Judgment in favor of Mr. Mitchell on the counterclaims shall be entered by the Court.

IT IS SO ORDERED.