In re: Victor Huezo ( 2020 )

FILED
JUL 22 2020
NOT FOR PUBLICATION
SUSAN M. SPRAUL, CLERK
U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT
UNITED STATES BANKRUPTCY APPELLATE PANEL
OF THE NINTH CIRCUIT
In re: BAP No. CC-19-1260-LTaF
VICTOR HUEZO,
Debtor. Bk. No. 2:11-bk-35922-RK
VICTOR HUEZO,
Appellant, Adv. No. 2:11-ap-02825-RK
v.
JOEY BALL, MEMORANDUM*
Appellee.
Appeal from the United States Bankruptcy Court
for the Central District of California
Honorable Robert N. Kwan, Bankruptcy Judge, Presiding
Before: LAFFERTY, TAYLOR, and FARIS, Bankruptcy Judges.
INTRODUCTION
Chapter 71 debtor Victor Huezo appeals the bankruptcy court’s
judgment of nondischargeability for $874,620.24 in favor of Appellee Joey
*
This disposition is not appropriate for publication. Although it may be cited for
whatever persuasive value it may have, see Fed. R. App. P. 32.1, it has no precedential
value, see 9th Cir. BAP Rule 8024-1.
1
Unless specified otherwise, all chapter and section references are to the
Bankruptcy Code, 11 U.S.C. §§ 101-1532, and “Rule” references are to the Federal Rules
of Bankruptcy Procedure.
Ball. Mr. Ball made several “investments” in Mr. Huezo’s business,
Fremont Investment Holdings, Inc. (“Fremont”), based on Mr. Huezo’s oral
and written representations that those investments would be used to fund
specific hard money secured loans.2 Some of the investments were instead
used to fund higher risk unsecured loans or to pay Mr. Huezo
commissions, and some of the funds were recycled into new loans without
authorization from Mr. Ball. Although Mr. Ball received some payments,
Fremont ultimately defaulted and filed bankruptcy, as did Mr. Huezo.
After a trial (and significant post-trial activity), the bankruptcy court
found the debt to Mr. Ball nondischargeable under §§ 523(a)(2)(A) and
(a)(6). Mr. Ball challenges the bankruptcy court’s findings regarding
justifiable reliance and willful and malicious conduct. He also contests the
bankruptcy court’s allocation of payments and credits and its prejudgment
interest calculation.
He has not shown that the bankruptcy court erred in its findings on
the merits of the nondischargeability claims. But in calculating the final
judgment amount, the bankruptcy court did not apply a $29,000 payment
that Mr. Ball received after the trial on the nondischargeability claims but
before entry of the final judgment. The final judgment amount is therefore
2
Although the parties and the court referred to Mr. Ball’s contributions to
Fremont alternatively as “investments” and “loans,” the record shows that the
transactions were intended as loans.
2
incorrect.
Accordingly, we AFFIRM in part, VACATE in part, and REMAND.
FACTUAL BACKGROUND
Pre-Petition Events
In 2006 and 2007, Mr. Ball became acquainted with Mr. Huezo
through several golf outings with their mutual friend, Curtis Hayden.
Mr. Ball, a businessman, had owned and operated tanning salons for over a
decade. He had been acquainted with the Huezo family for nearly 25 years,
having gone to high school with Mr. Huezo’s older brother, but he did not
get to know Mr. Huezo until these golf outings. Mr. Hayden was Mr. Ball’s
longtime friend and a real estate agent who had handled a transaction for
Mr. Ball. Mr. Hayden knew that Mr. Ball was holding significant liquid
assets. He also knew that Mr. Huezo was seeking investors for Fremont,
which was in the business of lending money using funds from third-party
investors. Mr. Hayden suggested that Mr. Ball approach Mr. Huezo about
investing in Fremont.
Mr. Huezo held real estate sales and broker’s licenses and had been
involved in commercial lending since the late 1990s. In 2007, Mr. Huezo
was the majority owner of Fremont; he later bought out the minority owner
and became Fremont’s sole owner. During the relevant time periods, he
used the title “Executive Vice President-CEO,” and he was the sole
individual who handled all accounting functions for Fremont. Through his
3
efforts, Fremont obtained a California Department of Corporations Finance
Lender’s License.
In late 2006 and early 2007, Mr. Ball went out on five or six golf
outings with Mr. Hayden and Mr. Huezo. Mr. Huezo told Mr. Ball that
Fremont was a real estate broker and lender and was very profitable. He
told Mr. Ball that: (1) Fremont had been making a lot of money on loans;
(2) Fremont was getting a lender’s license that would allow it to guarantee
loans; (3) Fremont had other investors; and (4) the other investors would
buy out Mr. Ball’s investment within 30 days if Mr. Ball wanted his money
back. He also told Mr. Ball that the loans were highly collateralized secured
loans that had little to no risk and were guaranteed, and that Mr. Ball
would be paid a 15 percent return on his investment.3 In reality, Fremont’s
primary source of capital for its lending business was Mr. Ball.
In July 2007, Mr. Huezo sent Mr. Ball written materials explaining
Fremont’s lending program (the “Fremont Informational Materials”),
which stated that Fremont investors were guaranteed to receive monthly
payments at rates of 8.5 percent to 15 percent annually. The Fremont
Informational Materials stated that investors would have their money
secured by the assets and collateral held by Fremont from loans it made to
3
The trial testimony on these points was disputed by Mr. Huezo and
Mr. Hayden, but the bankruptcy court found their testimony not credible and Mr. Ball’s
testimony credible.
4
borrowers and that before Fremont processed any loans, investors would
receive an “activity report” describing the type and amount of loans,
proposed interest rate, total debt owed and collateral value for the
proposed loans. Additionally, the materials stated that most investors
would be paid within 12 months or when the loans made came due but
that Fremont would pay the money back sooner if the investor needed it.
The materials also stated that Fremont would send all investors quarterly
balance sheets. No balance sheets were provided to Mr. Ball during the
relevant time periods.
Mr. Ball made four loans to Fremont: (1) $240,000 in November 2007;
(2) $70,000 in January 2008; (3) $130,000 in February 2008; and (4) $404,750
in March 2008. Only the first, second, and fourth loans are at issue in this
appeal.4
First Loan: November 2007 - $240,000
On November 26, 2007, Mr. Huezo sent Mr. Ball an Investor Activity
Report (the “November Report”) listing four proposed “Secured Loans” to
be made by Fremont that implicitly would be funded by Mr. Ball’s
investment of $240,000. Each loan listed an interest rate of 15 percent. The
total amount to be loaned was listed as $240,000, to be secured by collateral
worth $1,580,000. The November Report included a standard paragraph
4
The bankruptcy court found dischargeable the $130,000 loan made in February
2008; Mr. Ball did not cross-appeal that decision.
5
stating:
Here is a list of the proposed loans we are going to close this
week. In order, [sic] to issue credit to our clients we will need to
know your commitment to Fremont Investment Holdings, Inc.
Please take a few moments to fax back your commitment.
Priority on to [sic] the loan commitments will be based on a first
come, first serve [sic] basis.
The November Report contained blank spaces for Mr. Ball to fill in
the amount he was willing to commit and the date the funds would be
available. At the bottom of the page was language certifying that the
investor would commit to making the funds available within three days of
faxing in the commitment, and a signature line. Mr. Huezo orally
confirmed to Mr. Ball that the $240,000 investment was intended for the
listed loans, which would be collateralized by real property worth more
than enough to secure the loans. Mr. Ball filled out and signed the report
and wired $240,000 to Fremont on November 28, 2007. Mr. Huezo then
gave Mr. Ball a promissory note dated November 28, 2007 for $240,000,
which listed Fremont as the borrower and was signed by Mr. Huezo as
Executive Vice President-CEO. The note provided for a 15 percent interest
rate, monthly payments of $3,000, and a maturity date of January 1, 2009.
Paragraph 7 of the note indicated it was a “Uniform Secured Note.”
It is not clear whether Mr. Ball’s investment was used for all of the
loans listed on the November Report or only one, a loan to Inocencio
Rodriguez. Although that loan was secured by a deed of trust, the amount
6
loaned by Fremont was $250,000 rather than the $150,000 listed on the
November Report, which substantially changed the loan to value ratio,
given the collateral value of $340,000. When the Rodriguez loan was
repaid, the money was not used to pay back Mr. Ball. Instead, Fremont
used the funds for a second $250,000 loan to Mr. Rodriguez without
obtaining Mr. Ball’s authorization. The second Rodriguez loan was paid in
full in May 2008, but Mr. Ball was not repaid. Mr. Huezo paid himself a
$30,000 commission from the funds, again without authorization from
Mr. Ball, but Mr. Huezo did not explain what happened to the balance,
other than a nominal amount Fremont paid Mr. Ball.
Second Loan: January 2008 - $70,000
In January 2008, Mr. Huezo solicited another investment of $70,000,
emailing Mr. Ball an Investor Activity Report (the “January Report”) listing
two proposed loans totaling $70,000 at 15 percent interest and secured by
collateral worth a total of $790,000. The January Report contained the same
standard language as the November Report and, again, Mr. Huezo orally
represented to Mr. Ball that the $70,000 investment was intended to fund
the listed loans. Mr. Ball completed the paperwork and wired the funds to
Fremont, after which Mr. Huezo delivered to Mr. Ball a promissory note
dated January 11, 2008 for $70,000, which listed Fremont as the borrower
and was signed by Mr. Huezo as Executive Vice President-CEO. The note
provided for a 15 percent interest rate, monthly payments of $875, and a
7
maturity date of February 1, 2009. Again, Paragraph 7 of the note indicated
it was a “Uniform Secured Note.”
Fremont thereafter made two loans of $46,000 and $40,000,
respectively, although the second loan was not made from Mr. Ball’s
January investment.5 Instead, the funds remaining after the $46,000 loan
were used for operational and other purposes, including a $30,000
disbursement from Fremont’s bank account to Mr. Huezo’s personal bank
account. In any event, neither loan was secured, and neither loan was
repaid.
Fourth Loan: March 2008 - Las Vegas and Los Angeles Deals $404,750
In February and March 2008, Mr. Huezo solicited another investment
from Mr. Ball, this time to fund two deals, a “Vegas deal” and a “Los
Angeles deal,” both of which were to be secured loans. Mr. Ball agreed to
invest $404,750. Although no Investor Activity Report was provided for
these loans, Mr. Ball relied on Mr. Huezo’s oral representations that the
$404,750 was to fund two secured loans, the larger of which ($367,250)
would be secured by real property in Las Vegas with equity well in excess
of the loan amount. For reasons that are unclear, multiple promissory notes
were executed in connection with the transaction. Two notes dated March
5
The $40,000 loan was made in May 2008, and the bankruptcy court found not
credible Mr. Huezo’s testimony that the funds for that loan came from the January
investment because in the intervening time, Mr. Ball had made additional investments
with Fremont in excess of $500,000.
8
21, 2008, each for $404,750, were executed, with monthly payments to
commence March 1, 2008. Fremont was designated as the obligor on one of
the notes and “Victor Huezo of Fremont Investment Holdings, Inc. DBA
Fremont Investment Funding” on the other. Another promissory note for
$460,000 dated March 21, 2008, was executed by Mr. Huezo on behalf of
Fremont. On December 31, 2008, an assignment of that promissory note
was executed by Mr. Huezo assigning to Mr. Ball the beneficial interest in
that note.
The Las Vegas deal fell through and was never funded, but
Mr. Huezo sent Mr. Ball an email on March 25, 2008, telling him that the
deal was still on and to wire the funds. Mr. Ball did so the next day. It is not
clear whether Mr. Ball’s investment was used to fund the Los Angeles deal,
but in July and September 2008, Fremont disbursed approximately $92,000
to the borrower for that deal and obtained a promissory note for $100,000,
but no security interest was granted to secure that note.
Payments from Fremont
Between January 2008 and July 2010, Fremont made several
payments to Mr. Ball totaling $282,624.27. In 2013, Mr. Ball received a
distribution from the Fremont bankruptcy estate of $102,855.96.6
Bankruptcy Case and Adversary Proceeding
6
As will be discussed below, Mr. Ball received an additional distribution of
$29,068.42 from the Fremont bankruptcy estate in September 2016.
9
Mr. Huezo filed a chapter 7 petition on June 15, 2011. Mr. Ball filed a
timely complaint seeking a declaration of nondischargeability of the debt
owed to him under §§ 523(a)(2)(A) and (a)(6).7 After a four-day trial in
April 2014, the bankruptcy court took the matter under submission. For
unknown reasons, the court did not issue a decision until over two years
later, in September 2016.8 The bankruptcy court’s memorandum decision
found the portion of the debt attributable to the November 2007 and
January 2008 loans nondischargeable under § 523(a)(2)(A) only
(“September 2016 Memorandum”). The September 2016 Memorandum did
not include a calculation of the amount of prejudgment interest to be
awarded; it ordered Mr. Ball to submit a proposed final judgment and a
declaration in support of his computations of prejudgment interest. Before
he did so, Mr. Huezo filed a notice of appeal.9
After reviewing the proposed judgment and notice of appeal, the
bankruptcy court entered an order in November 2016 vacating the
September 2016 Memorandum due to the court’s errors in calculating
7
In his answer to the complaint, Mr. Huezo asserted that he was not liable for the
debt (presumably because the notes at issue were executed by Fremont). It is not clear
whether the bankruptcy court ever explicitly ruled on that issue, but Mr. Huezo has not
raised the issue in this appeal.
8
There are no entries on the adversary proceeding docket between August 22,
2014 and May 17, 2016, when the court requested further briefing on the issue of
allocation of payments.
9
That appeal (No. CC-16-1344) was dismissed as moot on January 6, 2017.
10
prejudgment interest and in failing to consider certain documents included
in requests for judicial notice submitted before trial. After further briefing
and status conferences and consideration of additional evidence, including
the declaration of Mr. Ball’s counsel setting forth his interest computation,
the bankruptcy court issued an amended memorandum decision on
September 30, 2019 finding nondischargeable the debt attributable to the
November 2007, January 2008, and March 2008 loans.10 After credits, the
bankruptcy court found the total amount of the nondischargeable debt to
be $478,598.67 plus prejudgment interest of 7 percent under California
Civil Code § 3287(a). The court entered a final judgment on October 29,
2019 for $874,620.24, including prejudgment interest.11
Mr. Huezo timely appealed.
JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and
157(b)(2)(I). We have jurisdiction under 28 U.S.C. § 158.
10
Contrary to appellant’s counsel’s assertion at oral argument, the bankruptcy
court changed its ruling with respect to the March 2008 loans based on its examination
of the additional evidence, not on any reassessment of witness credibility.
11
The bankruptcy court did not award the interest rate provided by the
promissory notes because it found that rate (15 percent) to be usurious. It did not,
however, disallow all interest because it found that Mr. Huezo was estopped by his
fraudulent conduct.
11
ISSUES
Whether the bankruptcy court had jurisdiction to vacate the
September 2016 Memorandum.
Whether the bankruptcy court erred in finding the debt resulting
from the November 2007, January 2008, and March 2008 investments
nondischargeable under § 523(a)(2)(A).
Whether the bankruptcy court erred in finding the debt resulting
from the November 2007, January 2008, and March 2008 investments
nondischargeable under § 523(a)(6).
Whether the bankruptcy court erred in its allocation of payments and
credits.
Whether the bankruptcy court erred in its computation of
prejudgment interest.
STANDARDS OF REVIEW
We review the bankruptcy court’s findings of fact for clear error and
its conclusions of law de novo. Carrillo v. Su (In re Su), 290 F.3d 1140, 1142
(9th Cir. 2002). Whether a creditor justifiably relied on a debtor’s false
representations is a question of fact reviewed for clear error. Eugene Parks
Law Corp. Defined Benefit Pension Plan v. Kirsh (In re Kirsh), 973 F.2d 1454,
1456 (9th Cir. 1992). We also review for clear error findings that an injury is
willful, see Gee v. Hammond (In re Gee), 173 B.R. 189, 192 (9th Cir. BAP 1994),
and malicious, see Thiara v. Spycher Bros. (In re Thiara), 285 B.R. 420, 427 (9th
12
Cir. BAP 2002).
A finding of fact is clearly erroneous if it is illogical, implausible, or
without support in the record. Retz v. Samson (In re Retz), 606 F.3d 1189,
1196 (9th Cir. 2010). “Where there are two permissible views of the
evidence, the factfinder’s choice between them cannot be clearly
erroneous.” Anderson v. City of Bessemer City, 470 U.S. 564, 574 (1985). When
factual findings are based on credibility determinations, we must give even
greater deference to the bankruptcy court’s findings. Id. at 575.
DISCUSSION
In this appeal, Mr. Huezo assigns error to the entry of judgment of
nondischargeability under §§ 523(a)(2)(A) and (a)(6). With respect to the
§ 523(a)(2)(A) claim, he argues that the bankruptcy court erred in finding
that Mr. Ball justifiably relied on Mr. Huezo’s representations in making
investment loans to Fremont. As to the § 523(a)(6) claim, he argues that the
bankruptcy court erred in finding that he acted willfully and maliciously in
convincing Mr. Ball to make the loans.
Additionally, Mr. Huezo contends that the bankruptcy court erred in:
(1) allocating the payments and credits to be applied to the loans; and
(2) computing the amount of prejudgment interest awarded.
Finally, Mr. Huezo contends that the bankruptcy court had no
jurisdiction to vacate the September 2016 Memorandum because, at the
time it did so, an appeal was pending before the Bankruptcy Appellate
13
Panel. Because this argument challenges the bankruptcy court’s
jurisdiction, we address it first.
A. The bankruptcy court retained jurisdiction to vacate the September
2016 Memorandum.
Mr. Huezo correctly points out that “[t]he timely filing of a notice of
appeal to either a district court or bankruptcy appellate panel will typically
divest a bankruptcy court of jurisdiction ‘over those aspects of the case
involved in the appeal.’” Sherman v. Sec. & Exch. Comm’n (In re Sherman),
491 F.3d 948, 967 (9th Cir. 2007) (quoting Neary v. Padilla (In re Padilla), 222
F.3d 1184, 1190 (9th Cir. 2000)). See also Griggs v. Provident Consumer
Discount Co., 459 U.S. 56, 58 (1982) (“The filing of a notice of appeal is an
event of jurisdictional significance—it confers jurisdiction on the court of
appeals and divests the district court of its control over those aspects of the
case involved in the appeal.”). But this rule assumes that the notice of
appeal relates to an entered final order or judgment, which is not the case
here.
As noted, Mr. Huezo filed a premature notice of appeal after the
bankruptcy court entered the September 2016 Memorandum but before it
entered a final judgment. Rule 8002(a)(2) provides, “[a] notice of appeal
filed after the bankruptcy court announces a decision or order–but before
entry of the judgment, order, or decree–is treated as filed on the date of and
after the entry.” Because no judgment based on the September 2016
14
Memorandum was entered, the notice of appeal did not become effective,
and jurisdiction was never transferred to the Bankruptcy Appellate Panel.
Additionally, jurisdiction did not transfer to the Panel because the
September 2016 Memorandum was not a final order. This Panel lacks
jurisdiction over interlocutory orders unless it grants leave to appeal. See 28
U.S.C. § 158(a)(3); Rains v. Flinn (In re Rains), 428 F.3d 893, 904 (9th Cir.
2005) (appeal from an interlocutory order is premature and does not
transfer jurisdiction to the appellate court absent leave of that court).
For these reasons, we hold that the bankruptcy court retained
jurisdiction to vacate the September 2016 Memorandum.
B. The bankruptcy court did not clearly err in finding that Mr. Ball
justifiably relied on Mr. Huezo’s misrepresentations.
In this circuit, a creditor asserting nondischargeability of a debt under
§ 523(a)(2)(A) must establish five elements:
(1) misrepresentation, fraudulent omission or deceptI’ve
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), 234 F.3d
1081, 1085 (9th Cir. 2000). A fraudulent omission in the face of a duty to
disclose may constitute a false representation. Harmon v. Kobrin (In re
15
Harmon), 250 F.3d 1240, 1246 (9th Cir. 2001). In cases where a plaintiff
establishes the nondisclosure of a material fact that the debtor was under a
duty to disclose, the reliance and causation elements are established and
need not be separately proven. Apte v. Romesh Japra, M.D., F.A.C.C., Inc. (In
re Apte), 96 F.3d 1319, 1323 (9th Cir. 1996).
Mr. Huezo challenges only one of the bankruptcy court’s findings on
these elements: that Mr. Ball justifiably relied on Mr. Huezo’s statements.
In determining justifiable reliance, the bankruptcy “court must look to all
of the circumstances surrounding the particular transaction, and must
particularly consider the subjective effect of those circumstances upon the
creditor.” In re Kirsh, 973 F.2d at 1460.
The general rule is that a person may justifiably rely on a
representation even if the falsity of the representation could
have been ascertained upon investigation. In other words,
negligence in failing to discover an intentional
misrepresentation is no defense. However, a person cannot rely
on a representation if he knows that it is false or its falsity is
obvious to him. In sum, although a person ordinarily has no
duty to investigate the truth of a representation, a person
cannot purport to rely on preposterous representations or close
his eyes to avoid discovery of the truth.
Romesh Japra, M.D., F.A.C.C., Inc. v. Apte (In re Apte), 180 B.R. 223, 229 (9th
Cir. BAP 1995), aff’d, 96 F.3d 1319 (9th Cir. 1996) (citations and quotation
marks omitted).
Mr. Huezo contends that there were several “red flags” that should
16
have triggered Mr. Ball to investigate further, specifically: (1) the “very
high” interest rate (15 percent) to be paid on short term, secured loans;
(2) Mr. Ball committed to the investments without receiving any
information on the creditworthiness of the borrowers, despite language in
the reports stating that he had approved borrower credit; (3) Mr. Ball never
received any security or guaranty documents on any of the loans, nor did
he receive a note for the March 2008 loan until 2010; (4) Mr. Ball never
received any balance sheets for Fremont, despite requesting them; (5) the
promissory notes appeared to be taken off the internet, and each included a
paragraph stating that the note was a “Uniform Secured Note” and a
“Security Instrument” and referred to a nonexistent “Section 15”; and
(5) the second check to Mr. Ball for $3,875 was a handwritten, temporary
check apparently drawn on a brand new bank account.
The bankruptcy court found that although Mr. Ball was an
experienced small businessman, he was not a sophisticated investor. The
bankruptcy court also found that, with respect to all of the subject loans,
Mr. Ball’s reliance on Mr. Huezo’s representations was justifiable, in part
based on the long history of friendship with Mr. Huezo’s family and the
fact that Mr. Ball thought of Mr. Huezo as a “friend.” Regarding the
November 2007 and January 2008 loans, the bankruptcy court also cited its
findings that Mr. Huezo’s oral representations were consistent with the
relevant Investor Activity Reports and the fact that Mr. Ball received
17
promissory notes for those loans. As for the March 2008 loan, the
bankruptcy court cited its finding that Mr. Huezo’s oral representations
were consistent with email messages regarding the Las Vegas and Los
Angeles deals, i.e., that the loans would have “tons of collateral,” and
because, by then, Fremont had started making regular payments on the
earlier loans.
Given that “a person may justifiably rely on a representation even if
the falsity of the representation could have been ascertained upon
investigation,” id. at 229, Mr. Huezo’s arguments are not well taken.
Although there were some aspects of the transactions that were out of the
ordinary, they cannot be characterized as “preposterous” or obvious
enough to require investigation in light of the relationship between
Mr. Ball and Mr. Huezo. The bankruptcy court’s finding that Mr. Ball
justifiably relied on Mr. Huezo’s intentional misrepresentations was not
illogical, implausible, or without support in the record. Additionally, the
court’s underlying findings were largely based on credibility
determinations, to which we must defer. Mr. Huezo has not established
that the bankruptcy court clearly erred in finding that the justifiable
reliance element was met.12
12
In his arguments regarding justifiable reliance, Mr. Huezo incorrectly relies in
part on cases involving the objective “reasonable reliance” standard applicable to claims
under § 523(a)(2)(B): Heritage Pacific Financial, LLC v. Machuca (In re Machuca), 483 B.R.
(continued...)
18
C. The bankruptcy court did not err in finding the debt
nondischargeable under § 523(a)(6).
To prevail on a § 523(a)(6) claim, the plaintiff must establish that the
debt at issue is “for willful and malicious injury by the debtor to another
entity or to the property of another entity.” The willful and malicious
prongs of the claim must both be established. Barboza v. New Form, Inc. (In
re Barboza), 545 F.3d 702, 706 (9th Cir. 2008).
A “willful” injury is a “deliberate or intentional injury, not merely a
deliberate or intentional act that leads to injury.” Id. (quoting Kawaauhau v.
Geiger, 523 U.S. 57, 61 (1998)). “[T]he willful injury requirement of
§ 523(a)(6) is met when it is shown either that the debtor had a subjective
motive to inflict the injury or that the debtor believed that injury was
substantially certain to occur as a result of his conduct.” Petralia v. Jercich
(In re Jercich), 238 F.3d 1202, 1208 (9th Cir. 2001).
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. Id.
The bankruptcy court found that these elements were met. The court
found Mr. Huezo’s conduct “willful” based upon its findings that
(1) Mr. Huezo knew that Mr. Ball was relying on the Investor Activity
12
(...continued)
726 (9th Cir. BAP 2012); and Heritage Pacific Financial, LLC v. Montano (In re Montano),
501 B.R. 96 (9th Cir. BAP 2013).
19
Reports (with respect to the November 2007 and January 2008 loans) and
his oral and written representations (with respect to the March 2008 loan)
and intended his investments to be used for secured loans to specific
borrowers; (2) despite this knowledge, Mr. Huezo diverted the funds
Fremont received from the payoff of the loans to pay himself commissions
and recycle the remaining money into new loans, including unsecured
loans, without Mr. Ball’s consent; and (3) Mr. Huezo, as a real estate
professional with extensive experience with commercial lending, would
have known that a secured loan would be less likely to injure Mr. Ball than
an unsecured loan, and that is why Mr. Ball conditioned his investments on
Fremont making secured loans. The bankruptcy court held that this
conduct rose to the level of a subjective motive to inflict injury or proof that
Mr. Huezo knew that injury was substantially certain to result.
The bankruptcy court found that the injury to Mr. Ball was malicious
because
it involved a wrongful act by Huezo in making false
representations to Ball, which was done intentionally as
previously discussed, which necessarily caused injury because
Huezo either took the money for himself or recycled Ball’s
money into new, [riskier] unsecured loans, contrary to his
representations to Ball that the loans would be secured and to
specifically identified borrowers and without just cause or
excuse since Huezo took the money for himself and recycled
Ball's money into new loans without Ball’s knowledge or
consent.
20
Mr. Huezo argues that the bankruptcy court erred in finding that he
acted willfully and maliciously. He contends that Mr. Huezo’s conduct was
a breach of contract only and not tortious because there was no evidence
that Mr. Huezo intentionally failed to pay Mr. Ball, or that he failed to pay
for the purpose of injuring Mr. Ball. Mr. Huezo argues that the fact that
Fremont made several payments on the debt negates any inference that
Mr. Huezo had a subjective motive to injure Mr. Ball. But he cites no
authority for this proposition, and he fails to acknowledge that, under
§ 523(a)(6), tortious conduct may also be established by showing that the
debtor believed that injury was substantially certain to occur as a result of
his conduct.13 He also seems to miss the point that the tortious conduct here
is not solely in failing to pay Mr. Ball in full, but in diverting the funds he
invested for purposes other than those promised, thus increasing Mr. Ball’s
risk of loss without his knowledge or consent.
D. We must remand for the bankruptcy court to recalculate the
judgment amount.
1. Payment and Credit Allocation
Of the $282,624.27 in payments made to Mr. Ball, the bankruptcy
court allocated $212,634.87 to the November 2007, January 2008, and March
13
Mr. Huezo does not seem fully to grasp this aspect of the standard. He argues
“[t]here was no testimony by Ball which even referenced his belief that Huezo had a
subjective motive. And a belief by Ball that not paying him on the Fremont promissory
notes was ‘substantially certain’ to cause injury happens every time a debt is not
repaid.” But it is Mr. Huezo’s subjective belief, not Mr. Ball’s, that is relevant.
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2008 loans, and the remaining $69,989.40 to the (dischargeable) February
2008 loan. The court also applied a “construction and insurance credit” of
$31,355.29 ratably to all four loans ($7,838.82 per loan). It allocated the
entire $102,855.96 Mr. Ball received from the Fremont bankruptcy estate to
the dischargeable portion of the debt, the February loan of $130,000. In
addition, the bankruptcy court also applied to the February loan $69,989.40
in payments made by Fremont. These credits resulted in a $50,684.18
overpayment of the February loan, and an overpayment of $7,953.22 of the
January loan. The court held that these surplus amounts were to be applied
to prejudgment interest on the respective (January and February) notes.
Mr. Huezo does not contest the allocation of payments to the
nondischargeable debt, but he argues that the $50,684.18 surplus on the
February loan should have been applied to the principal of the November
2007 loan, “which would have reduced the prejudgment interest
significantly.” But he cites no factual or legal basis for this assertion, and
we see no error in the bankruptcy court’s allocation of the overpayments to
prejudgment interest on the associated loans.
More concerning is that Mr. Ball received an additional distribution
of $29,068.42 from the Fremont bankruptcy estate in September 2016. It
does not appear that anyone pointed this out to the bankruptcy court
before it made its calculation, but the application of this payment impacts
the total amount of the judgment. Accordingly, we must remand for the
22
bankruptcy court to recalculate the judgment amount.
2. Interest Computation
The bankruptcy court’s amended memorandum decision left the
amount of prejudgment interest under California Civil Code § 3287 to be
determined after submission of a declaration in support of Mr. Ball’s
computations of prejudgment interest. On October 17, 2019, Mr. Ball’s
counsel submitted a proposed judgment and declaration that set forth the
calculation; the bankruptcy court adopted Mr. Ball’s figures in the final
judgment entered October 29, 2019.14 The calculation began with the court’s
determination of the final amount of the nondischargeable debt,
$478,598.67, and added prejudgment interest from the respective maturity
dates of the notes, $396,021.57, for a final judgment amount of $874,620.24
as of September 30, 2019.
Mr. Huezo argues that the bankruptcy court erred in computing the
amount of prejudgment interest. This argument is, in part, an extension of
his argument regarding the payment allocation. He contends that the
calculation started with the wrong amount, $478,598.67, which did not
reflect the $50,684.18 overpayment that he thinks should have been applied
to the November 2007 loan. We have disposed of this issue.
Mr. Huezo also argues that the court’s interest calculation is a “total
14
The proposed judgment and declaration were served on Mr. Huezo’s counsel,
and no objection was filed.
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mystery,” but his confusion seems to stem from the fact that he refers to
figures set forth in a brief filed by Mr. Ball in August 2017, not the
declaration filed in October 2019. That declaration sets forth the interest
calculation in great detail, and, other than the omission of the $29,068.42
distribution discussed above, we have no basis on which to find that the
bankruptcy court erred in adopting it.
At the same time, as discussed above, the final judgment amount,
including prejudgment interest, will need to be recalculated on remand to
take into account the omitted payment.
CONCLUSION
Mr. Huezo has not shown that the bankruptcy court erred in any of
its findings underlying the merits of the nondischargeability claims. We
therefore AFFIRM the judgment to the extent it declares the debt
nondischargeable. But for the reasons explained above, we VACATE and
REMAND for the bankruptcy court to recalculate the correct amount of the
judgment.
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