Opinion
Bankruptcy 21-2507-LT7 Adversary 21-90074-LT
09-05-2023
In re CHERALYN R. PRECIADO, Debtor. v. CHERALYN R. PRECIADO Defendant. ROYALTY INVESTMENT PROPERTIES, LLC, Plaintiff,
This opinion is intended only to resolve the dispute between these parties and is not intended for publication.
LAURA S. TAYLOR, BANKRUPTCY JUDGE
INTRODUCTION
Plaintiff Royalty Investment Properties, Inc. seeks a judgment under § 523(a)(6) determining that its claim against Debtor Cheralyn R. Preciado is nondischargeable. Its claim arises from an award of post-foreclosure functional rent in a state court unlawful detainer action.
Defendant's defense centers on the argument that her harmful actions were done with just cause or excuse. She asserts that she refused to vacate her former home based on advice of counsel and the belief that she had a meritorious defense to eviction. And in a typical case, involving a typical unlawful detainer action and a typical debtor, such a defense could negate a determination of nondischargeability.
But this is not a typical situation.
Defendant resided in the home for over a decade without paying her mortgage, post-foreclosure rent, property taxes, or IIOA dues. And she filed numerous bankruptcies and state court litigation to stall both foreclosure and eviction. Even so, her post-foreclosure defense in the unlawful detainer action might not justify nondischargeability if Defendant was unsophisticated (she isn't) or if, in the unlawful detainer action, she raised novel issues not previously adjudicated against her (she doesn't). Instead, Defendant relied solely on a legal theory raised in two prior state court actions. In each case, the state court dismissed her claims with prejudice. There is no just cause or excuse where she relied on a previously disapproved theory to maintain additional control of her home at significant benefit to herself and with adjudicated financial harm to Plaintiff.
Plaintiffs claim for rent is nondischargeable under § 523(a)(6).
FACTS
Defendant is far from an unsophisticated consumer debtor. She attended college but then switched to community college. Transcript of Proceeding ("TR24: 17-18; 25: 15-18. She then commenced a career as a title and escrow officer. TR. 24:24:22-23. Early in her career her employer allowed more college. TR 24:18-19. While she did not obtain a degree, she studied issues relevant to her career in real estate escrows including title insurance, finance, real estate, and escrow. TR 25:4-9.
Her career as an escrow officer spanned decades. TR 25: 23- 31:17. At times, she was a branch manager of an escrow office with multiple employees reporting to her. TR 27:14-21; 28:11-12. Currently, she has adopted less intensive employment and is anon- leader member of an escrow team. TR 30: 22-31:3. But in this capacity, she indicated that the escrows she handles tend to be the more complicated ones. TR 31:4-10.
Also, as the following bankruptcy and litigation history indicates. Defendant is a frequent consumer of legal services. She engaged multiple attorneys in connection with her various bankruptcies. She also used at least three attorneys in connection with her litigation elating to the Property. The Court evaluates her state of mind against this background.
Defendant previously owned the real property located at 24732 Rio Verde Drive, Ramona, California (the "Property''). Dkt. No. 90; uncontested fact 1. She obtained financing in relation to the Property through a loan in the principal amount of $498,850 and secured the obligation with a trust deed (the "Trust Deed Lien"). Id.: uncontested fact 13. At some point in 2007, she defaulted on her obligations.
Between 2008 and the present, Defendant filed 7 bankruptcies. She obtained a discharge in the present case and in a 2011 chapter 7, but the other cases were unsuccessful chapter 13s. Her pre-foreclosure bankruptcy history is as follows:
Unless otherwise indicated, all chapter, section, and rule references are to the Bankruptcy Code 11 U.S.C. §§101-1532, and to the Federal Rules of Bankruptcy Procedure, Rules 1001-9037.
• In 2008, she filed chapter 13 case 08-7950. She dismissed this case after her secured lender filed a stay relief motion, and she agreed to payments. She did not actually contest that stay relief was appropriate; she merely requested an opportunity to cure. Dkt. 08-7950 No. 23. She did not contest that a default commenced in 2007, that she was in default on 9 pre-petition payments and 6 postpetition payments, that balance of the secured debt was approximately $582,000, and that foreclosure was pending. She was represented by counsel in this case. See Dkt. 08-7950 passim.
• In 2009, she filed chapter 13 case 09-8228. She dismissed this case after her lender obtained stay relief allowing foreclosure of the Property. See Dkt. 09-8228 No. 35, 41, & 42. Debtor did not contest stay relief and did not dispute that she was now in default on 19 prepetition payments and 5 postpetition payments and
that the balance owed on the secured obligation was more than $598,025. Dkt. 09-8228 No. 30. She was represented by counsel in this case. See Dkt. 09-8228 passim.
• In 2011, she filed chapter 7 case 11-8405 and obtained a discharge. She was represented by counsel in this case. See Dkt. 11-8405 passim.
• Later in 2011, she filed chapter 13 case 11-17560. The case was dismissed with a stay relief motion pending and before Debtor had an obligation to oppose. She was represented by counsel in this case. See Dkt. 17560 passim.
• In 2013, she filed chapter 13 case 13-6858. This case was dismissed almost immediately for failure to file required documents. Dkt. 13-6858 No. 12. She was represented by counsel in this case. See Dkt. 13-6858 passim.
Possibly in response to a Notice of Trustee's Sale scheduled to take place on August 30, 2012, Defendant adopted a new tactic and, in addition to filing bankruptcies, also brought suit against the Lender and other parties to prevent foreclosure. She asserted that the Trust Deed Lien was unenforceable ("State Action 1"). Id.; uncontested fact 2. She was represented by counsel in state Action 1. But she lost State Action 1; the state court granted summary judgment against her with prejudice. Id.; uncontested fact 3. As Debtor was in default on the obligation secured by the Trust Deed Lien, foreclosure went forward. Id.; uncontested fact 4.
Various parties held Defendant's note, filed claims in her bankruptcies, and pursued foreclosure as a result of her defaults. Defendant based her litigation in part on the alleged failure of parties other than the original lender to prove that they held her note and bad the right to foreclose. Indeed, she mouthed this tired theory even in hearings before this Court. But this claim was rejected - with prejudice - in her first litigation attempt and all courts thereafter summarily so determined. Thus, this Court will rely on the determination of prior courts and will not differentiate between the parties initiating the loan, pursuing loan repayment through foreclosure, and the ultimately foreclosing party. All will be referred to as "Lender."
Undeterred by a with-prejudice dismissal of State Action 1, Debtor filed another state court action ("State Action T'). Id.: uncontested fact 5. She was represented by counsel in State Action 2. And again, she lost. Id.; uncontested fact 6. The state court determined that the claims in State Action 2 were duplicative of the claims dismissed with prejudice in State Action 2; it dismissed the second action with prejudice, and the appellate court affirmed. Id.
Freed of litigation impediments, Lender foreclosed. Id.; uncontested fact 7. Plaintiff acquired the Property at foreclosure and requested that Dehtor vacate. Id. Debtor refused; after foreclosure, she paid no rent, no HOA expenses; and no real property taxes. Id.; uncontested fact 8 and 17. She asserts that she paid some insurance, but the Court does not find her credible in this regard. In short, she lived on the Property without payment to anyone for more than 10 years. Id.; undisputed fact 17.
Post-foreclosure, in 2019, Defendant filed chapter 13 case 19-874. Here, she failed to make all required plan payments, and the case was dismissed. Dkt. 19-874 Nos. 41 & 45. In this case, she claimed no interest in real properly and no interest in litigation claims that would return real property to her ownership. She was represented by counsel in this case. See Dkt. 19-874 passim,
Plaintiff initiated an unlawful detainer action (the "UD Action"). Id; uncontested fact 9. It was granted possession and damages for lost rent in the amount of $71,720 several months later. Id.; uncontested fact 10. Debtor delayed resolution of the UD Action by asserting affirmative defenses identical to the claims dismissed with prejudice in State Action 1 and State Action 2. Id.; uncontested fact 15. She was represented by counsel in the UD Action.
Debtor vacated the Property one day before the date of removal by the Sherriff pursuant to the judgment in the UD Action. Id.; uncontested fact 16.
Immediately thereafter, Debtor sued Plaintiff in federal court claiming ownership of the Property. Id.; uncontested fact 11. The District Court subsequently dismissed this action with prejudice. Id.; uncontested fact 12.
STANDARDS
A central purpose of the [Bankruptcy] Code is to provide a procedure by which certain insolvent debtors can reorder their affairs, make peace with their creditors, and enjoy a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt." Grogan v. Garner, 498 U.S. 279, 286 (1991) (internal quotation omitted). "It is only the honest but unfortunate debtor, however, who is entitled to an entirely unencumbered fresh start. Accordingly, the Bankruptcy Code exempts certain debts from discharge. Such exceptions to discharge should be confined to those plainly expressed and should be strictly construed in order to serve the [Bankruptcy Code's] purpose of giving debtors a fresh start." Jette v. Sicroff (In re Sicrqff), 401 F.3d 1101, 1104 (9th Cir. 2005) (internal quotations and citations omitted).
The objecting party bears the burden of proof, by a preponderance of the evidence, as to each element of the applicable subsection of 523. Grogan, 498 U.S. At 290. /523(a)(6) provides that a debtor may not discharge a debt "for willful and malicious injury by the debtor to another entity or to the property of another entity." 11 U.S.C. § 523(a)(6)- Albmfan v. New Form, Inc. (In re Barboza), 545 F.3d 702, 706 (9th Cir. 2008).
"[T]ortious conduct is a required element for a finding of nondischargeability under § 523(a)(6)." Lockerby v. Sierra, 535 F.3d 1038, 1040 (9th Cir. 2008). The Supreme Court in Kawaauhau v. Geiger (In re Geiger) made clear that for section 523(a)(6) to apply, the actor must intend the consequences of the act, not simply the act itself" Ormsby v. First Am. Title Co. (In re Ormsby), 591 F.3d 1199, 1206 (9th Cir. 2010) (internal citation and quotes omitted). So, both willfulness and maliciousness must be proven; the malicious injury requirement is separate from the willful injury requirement. Carrillo v. Su (In re Sit), 290 F.3d 1140, 1146-47 (9th Cir. 2002) (conflating the two requirements is grounds for reversal).
"In this Circuit, § 523(a)(6)'s willful injury requirement is met only when the debtor has a subjective motive to inflict injury or when the debtor believes that injury is substantially certain to result from his own conduct. But in assessing willfulness, the debtor is charged with the knowledge of the natural consequences of his actions." Ormsby, 591 F.3d at 1206. "In addition to what a debtor may admit to knowing, the bankruptcy court may consider circumstantial evidence that tends to establish what the debtor must have actually known when taking the injury-producing action." In re Su, 290 F.3d at 1146.
"A malicious injury involves (1) a wrongful act, (2) done intentionally, (3) which necessarily causes injury, and (4) is done without just cause or excuse. Malice may be inferred based on the nature of the wrongful act." Ormsby, 591 F.3d at 1207 (internal citation and quote omitted).
ANALYSIS
An award of damages in an unlawful detainer action may be nondischargeable.
As noted, in order for a claim to be nondischargeable under § 523(a)(6) it must arise from a tort or a tort-like statutory injury. Defendant argued previously that the injury here was for the reasonable value of rent, which is akin to injury arising from a contract. While Defendant did not expressly raise the issue, the comments suggest an argument that an unlawful detainer judgment cannot be nondischargeble as it is not sufficiently tortious. The Court disagrees.
State law determines what constitutes tortious conduct. Lockerby, 535 F.3d at 1040. Generally, tortious conduct under § 523(a)(6) does not include "a simple breach of contract;" but an intentional breach of contract is nondischargeable if it involves malicious and willful tortious conduct. In reJercich, 238 F.3d 1202, 1205 (9th Cir. 2001).
So, Defendant's off-hand comments that this case involves a contract action more closely doesn't answer the question.
But, as this case involves an unlawful detainer and a hold-over after foreclosure, the requirement that the necessary tort exists requires additional thought. The Ninth Circuit has explained that in California, legal title passes to the purchaser of a property at non-judicial foreclosure upon deed redecoration; unlawful detainer proceedings exist to determine the right to possession of a property. Eden Place, LLC, v. Perl (In re Perl), 811 F.3d 1120, 1127-28 (9th Cir. 2016). The Court further explained, "entry of judgment and a writ of possession following unlawful detainer proceedings extinguishes all other legal and equitable possessory interests in the real property at issue." Id. at 1127-28. So, there is an issue left for determination post-foreclosure. Can the required tort or tort-like injurious conduct exist in such a context? And narrowly construing the exceptions to discharge in favor of the debtor suggests caution in this area.
But on the other hand, ejectment - an action to oust someone from wrongful possession of property where they claim title - has long been viewed as a tort under California law. Zettle v. Gillmeister, 64 Cal.App. 669, 671 (1923). Unlawful detainer is an alternative to an ejection action; it is more summary and limits a plaintiffs recovery of damages. But at least one California Court of Appeal has determined that an unlawful detainer action involves a claim arising in tort. Drybread v. Chipain Chiropractic Corp., 151 Cal.App.4th 1063,1070 (2007) (concluding that an unlawful detainer action sounded in tort and allowing recovery of attorneys' fees after voluntary dismissal; recovery of such fees would not be available if the unlawful detainer involved a contract action).
Thus, the claim here can be the basis of a § 523(a)(6) unlawful detainer action.
See generally Brown v. Chamomile (In re Brown), BAP No. CC-1244-FLS, 2023 WL 4196946JB.A.P. 9th Cir. June 27, 2023.
Willfulness
There is no question that Defendant's failure to either vacate the Property or to pay rent injured Plaintiff. In his trial testimony, Plaintiff outlined a wide variety of psychological and emotion distress injuries as well as economic injuries unrelated to the loss of rental income from the Property. But for purposes of this nondischargeability action the only damages at issue are lost rental. The state court determined that he was entitled to lost rental value for the Property during the period of Defendant's holdover, and awarded damages in the amount of $71,720.
Also, there is no question that Defendant actions in refusing to either pay rental value for the Property (or anything else related to the Property except, possibly, for some insurance), that Defendant acted with intent. There is no testimony indicating that her holdover was in anyway inadvertent. In her testimony, she justified her failure to escrow rent or to otherwise pay Plaintiff only by saying she was instead paying her attorney. But this is not true. She pointed out later that at some point she stopped paying her attorney; she listed him as a substantial creditor in her bankruptcy schedules. Her harmful actions were intentional.
But a willful injury requires more. In the Ninth Circuit, for injury to be willful within the meaning of § 523(a)(6), the defendant must have a subjective motive to inflict injury, or the defendant must believe that injury is substantially certain to result from its own conduct. Ormsby, 597 F.3d at 1206. The Court finds that a willfulness finding is appropriate here. First, Defendant is charged with the knowledge of the natural consequences of action (or inaction). Id. Staying in the Property post-foreclosure while not paying any amount on account of rent, HOA dues, or property taxes, necessarily causes economic injury to the party who now owns the Property. And the Court need not rely simply on the natural consequences of the act factor in finding that Defendant acted willfully.
In her deposition testimony, Defendant acknowledged that she knew that "[Plaintiff] could not have access to the house while I was in possession of it." Trial Ex. 9; TR. 4:628. Thereafter in the deposition the follow exchange occurred:
2. And that's costing him money, isn't it? From your sophisticated background in buying and selling real estate don't you think costs him some money?
A. I'm sure it did.
Q. Ok thank you.
Later the following exchange occurred:
Q. Ok. And after the unlawful detainer action was filed you still didn't vacate th property, did you?
A. No.
Q. Why not?
A. I went on my attorney's advice.
Q. Well by staying on the property you knew that the new owner could not take possession of that property right?
A. Correct
Q. And that was costing them money right?
A, I'm sure it did.
Q. Ok. After the unlawful detainer action was filed did you set aside the equivalent of the reasonable value of rent in case you lost?
A. No.
Q. Why not?
A. I was paying my attorney.
Again, this was untrue at some point in time.
In short. Defendant's actions in failing to vacate the Property after foreclosure willfully injured the Plaintiff. Her action were intentional, and she made choices knowing that she was inflicting economic injury on another party.
Malice
Again, to find that an injury is malicious within the meaning of § 523(a)(6) requires four elements. The first three are easily satisfied here. There was a wrongful act - the retention of possession of the Property after foreclosure without any attempt to pay or make available for payment fair market rent, the holdover was done intentionally as the Defendant admits, and the holdover necessarily and actually caused economic injury as the Plaintiff could not take possession of the Property and either rent it or rehabilitate it for purposes of resale during this time period.
It is the fourth element, however, that is the lynchpin of Defendant's defense in this case. An act can only be malicious within the meaning of § 523(a)(6) if it "done without just cause or excuse." Ormsby, 591 F.3d at 1207 (internal citation and quote omitted). Defendant contends that just cause and excuse for her actions exist because she was engaging in litigation. She states that she had relied on the advice of counsel in this regard.
The Defendant can assert this defense notwithstanding that she did not raise it as an affirmative defense in her answer.
Plaintiff argues that the Defendant cannot raise this defense because it was not asserted as an affirmative defense in her answer. The Court disagrees.
"Although in general a plaintiff has the burden to prove by a preponderance of the evidence that the debt arose from willful and malicious conduct. In re Jercich, 238 F.3d at 1208, just cause or excuse is in the nature of an affirmative defense. [The Ninth Circuit's Jercich decision] by implication supports the position, that a debtor must first put forth the just cause or excuse."In re Hagele, BAP No. EC-15-1033, 2016 WL 3965899, at *6 (B.A.P. 9th Cir. July 18, 2016) (citing Jercich, 238 F.3d at 1208-09).
And the BAP "has implicitly recognized that reliance on counsel's advice can constitute just cause or excuse under § 523(a)(6)." In re Rodriguez, 568 B.R. 328 at 341 (Bankr. S.D. Cal. 2017) (citing In re Smith, BAP No. EC-009-1117, 2009 WL 7809005, at *13 (B.A.P. 9th Cir. Dec. 17, 2009)), aff'd, BAP No. SC-17-1245-FLB, 2021 WL 345571 (B.A.P. 9th Cir. Feb. 1, 2021). "In other words, the advice of counsel can negate the mental state required by § 523(a)(6) [but] only if the debtor establishes that his counsel gave advice and that the debtor acted in good faith reliance on that advice." In re Rodriguez, BAP No. SC-17-1245-FLB, 2021 WL 345571, at *6 (B.A.P. 9th Cir. Feb. 1, 2021) (quoting In re Anderson, BAP No. AZ-17-1071-FSKu, 2017 WL 5163443, at *8 (B.A.P. 9th Cir. Nov. 7, 2017)); see also In re Treon, 2008 WL 65575, at 7 (debtor lacked intent to maliciously injure because of good faith reliance on counsel's advice and provided "an 'excuse' for her conduct,'").
So "[t]he defendant has the burden of proving the requisite elements of advice of counsel." Anderson, 2017 WL 5163443, at *8. It "negate[s] the mental state required by § 523(a)(6)." Id.: see also In re Ravasia, BAP No. EW-20-1212, 2021 WL 1511940, at *9 (B.A.P. 9th Cir. April 16, 2021) (quoting Reiz v. Samson (In re Retz), 606 F.3d 1189, 1199 (9th Cir. 2010)) ("Generally, a debtor who acts in reliance on the advice of his attorney lacks the intent required to deny him a discharge of his debts. However, the debtor's reliance must be in good faith.").
But. having said the above, a plaintiff need not plead reliance on counsel as a traditional affirmative defense. The Ninth Circuit "has held that the advice of counsel claim is not a separate defense, but rather 'a circumstance indicating good faith which the trier of fact is entitled to consider on the issue of fraudulent intent.'" Maring v. PG Alasak Crab Investment Co. LLC (In re Maring), 338 Fed.Appx. 655, 658 (9th Cir. 2009) (quoting Bisno v. U.S., 299 F.2d 711, 719 (9th Cir. 1961)); see also In re Spencer, BAP No. SC-16-1253, 2017 WL 3470996, at *6 (Aug. 11, 2017) ("Based on the well-settled rule in the Ninth Circuit, the Debtors did not need to plead advice of counsel as an affirmative defense.").
So, the Court will consider this evidence. Defendant, however, has the burden of proof on this point.
Defendant fails to establish just cause or excuse for her injurious actions on this record.
Debtor asserts that when her first litigation was dismissed "with prejudice" she did not understand what this meant. The Court finds her naivete to be highly unlikely. Her testimony is less equivocal after she lost the second piece of litigation ''with prejudice." The Court determines based on her relative sophistication, her obvious intelligence, and the clarity of this determination on two occasions that she understood that litigation in this regard was barred.
Against this background, Defendant's testimony arguing that she, in effect, had an excuse for failing to vacate the Property post-foreclosure, to make any payments on account of her continued residency in the Property, even to the extent of paying homeowners association dues, and the implicit assertion that this was just cause for actions that she clearly understood to be harmful to Plaintiff is not credible.
Plaintiffs counsel said it best, she had nothing to lose. If successful in litigation, she gained title to the Property. And even if unsuccessful, she obtained additional time in a home where she was not paying rent, was not paying the mortgage, was not paying the homeowner's association dues, was not paying the real properly taxes, and probably was not paying insurance. The financial benefit of these failures on her part was significant. The state court found that she owed approximately $70,000 in rent for the post-foreclosure period through judgment. True, she paid attorneys - in part - but recall that Defendant is also a sophisticated user of bankruptcy cases. She understood that any unpaid attorneys' fees would be capable of discharge in her bankruptcy case.
The Court concludes that Defendant determined to continue her litigation efforts notwithstanding her obvious awareness of the financial detriment to Plaintiff. The Court does not conclude that Defendant had any reason to be aware of the significant phycological and emotional toll lien her actions placed on Plaintiff, and Plaintiff has not attempted to recover damages in this regard. As a result, the Court concludes that Defendant's defense that she was simply continuing the litigation juggernaut (the Court's characterization not the Defendant's) does not provide just cause for her knowing actions that injured Plaintiff.
The Court's conclusion in this regard is supported by the total absence of corroborative evidence. The attorney handling the UD Action did not testify. Debtor did not produce a memo, letter, email, or even a court filing explaining why "this time" her already discredited claims had merit.
Defendant suggests that the Court assumes that the lawyer believed in the merit of her claims because he continued to work (she does not say what he did or when he did it; the unpaid fees could be partly, even largely, in the post-UD Action litigation) after she claimed an inability to pay him. The Court declines to rule based on such speculation but notes that such litigation has value even if only to force a settlement. The lawyer wasn't going to get further payment from the Defendant, but a nuisance value settlement was a possibility.
The Court also notes that Debtor did not claim to hold any claim, much less a valuable one that might return the Property to her, when she scheduled assets in her 2019 chapter 13 case. This bankruptcy was filed in the middle of the UD Action. Had Defendant really believed in the merit of her claims, she was obligated to schedule them.
CONCLUSION
Based on the foregoing, Plaintiffs claim based on the UD Judgment is nondischargeable.