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In re Sabban

April 13, 2010

IN RE: YEHUDA SABBAN, DEBTOR,
ABDUL M. GHOMESHI, APPELLANT,
v.
YEHUDA SABBAN, APPELLEE.



Appeal from the Ninth Circuit Bankruptcy Appellate Panel Pappas, Montali, and Dunn, Bankruptcy Judges, Presiding, BAP Nos. CC-07-01269-MOPaD & 05-01574-KT.

The opinion of the court was delivered by: W. Fletcher, Circuit Judge

FOR PUBLICATION

OPINION

Submitted October 9, 2009*fn1 -- Pasadena, California

Before: William A. Fletcher and Richard R. Clifton, Circuit Judges, and James K. Singleton,*fn2 District Judge.

OPINION

Section 523(a)(2)(A) of the Bankruptcy Code excepts from discharge any debt for money, property, services, or credit obtained by fraud. 11 U.S.C. § 523(a)(2)(A). California law provides that a client who employs an unlicensed contractor may recover all compensation paid to that contractor, regardless of whether the contractor has committed fraud and regardless of whether the client has sustained actual harm. Cal. Bus. & Prof. Code § 7031(b). We consider in this case whether a monetary award under this state law is excepted from discharge pursuant to § 523(a)(2)(A). We hold that the award does not fall within the exception and is therefore dischargeable.

I. Background

Debtor Yehuda Sabban held the majority interest in Pacific Coast Creations ("Pacific"), a general partnership that performed home remodeling. Beginning in October 2002, creditor Abdul Ghomeshi entered into a series of contracts with Sabban and Pacific to perform remodeling work on Ghomeshi's home. Prior to entering into these contracts, Sabban falsely represented to Ghomeshi that Pacific was licensed by California's Contractors State License Board. In fact, Pacific was not licensed.

Pacific acted as general contractor for the remodeling project, contracting the work out to licensed subcontractors. Ghomeshi paid $123,000 to Pacific and Sabban for the work performed. Pacific and Sabban in turn paid $129,217.95, for Ghomeshi's benefit, to the licensed subcontractors and other material and labor providers.

Ghomeshi sued Sabban in state court, alleging breach of contract, negligence, fraud, and violations of California Busi- ness & Professions Code §§ 7160 and 7031(b). After other claims were withdrawn or dismissed, Ghomeshi proceeded to trial on his claims under § 7160 and § 7031(b). The state court found that Ghomeshi was induced to sign the contract in reliance upon false and fraudulent representations made by Sabban and Shimshon Avidan, an agent of Pacific, that Pacific was a licensed contractor.

California Business & Professions Code § 7160 provides a cause of action to individuals induced to contract for home improvements in reliance on fraudulent statements. A successful plaintiff may recover a penalty of $500 and reasonable attorney's fees, plus "any damages sustained by him by reason of such statements or representations made by the contractor or solicitor." Pursuant to § 7160, the state court awarded Ghomeshi the $500 penalty and attorney's fees. The state court declined to award damages under § 7160, concluding that "[t]echnically there are no damages."

California Business & Professions Code § 7031(b) provides that a party who has used the services of an unlicensed contractor may recover all compensation paid to that contractor. Liability under § 7031(b) requires only that compensation have been paid to an unlicensed contractor. Fraud and actual harm are irrelevant. See Hydrotech Sys., Ltd. v. Oasis Water-park, 52 Cal. 3d 988, 995, 997-98, 803 P.2d 370, 374, 376 (Cal. 1991). Pursuant to § 7031(b), the state court awarded Ghomeshi $123,000, the amount he had paid to Sabban and Pacific. The state court explained that "[r]ecovery under Business and Professions Code Section 7031(b) is in the nature of disgorgement of compensation paid by plaintiff to defendants."

Sabban subsequently filed for bankruptcy protection pursuant to Chapter 7 of the Bankruptcy Code. Ghomeshi filed an adversary action to determine dischargeability. Following cross-motions for summary judgment, the bankruptcy court issued a tentative ruling. It concluded, relying on Cohen v. de la Cruz, 523 U.S. 213, 223 (1998), that the $123,000 award imposed as a remedy for violation of § 7031(b) qualified as a debt obtained by fraud within the meaning of 11 U.S.C. § 523(a)(2)(A) and was therefore non-dischargeable. Following supplemental briefing, the bankruptcy court changed its tentative ruling, now concluding that the award under § 7031(b) was dischargeable. The ...


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