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In Re: Bradley J. Fitch and Julie A.Serpa-Fitch, Debtors. v. Don Barnes; Jeanne Barnes


April 7, 2011


Appeal from the United States Bankruptcy Court for the District of Nevada Honorable John L. Peterson, Bankruptcy Judge, Presiding. Bk. No. 07-51249




Adv. No. 07-05122


Argued and Submitted on February 18, 2011 at Las Vegas, Nevada

Filed - April 7, 2011

Before: HOLLOWELL, KIRSCHER, and DUNN, Bankruptcy Judges.

The debtor challenges the bankruptcy court's factual findings made in its determination that a loan obligation to the debtor's former employer was nondischargeable under § 523(a)(2)(A).*fn2 We AFFIRM.


Julie Serpa (Serpa) and Bradley Fitch (Fitch) (collectively, the Debtors) were husband and wife. They owned two businesses, Fitch Aviation and Fitch Transportation. Serpa was the bookkeeper for the Debtors' businesses. Additionally, Serpa worked as a part-time bookkeeper for Jeanne Barnes (Barnes), who owned several small businesses. She worked for Barnes for over a decade. During the course of the relationship between Serpa and Barnes, Barnes lent Serpa $50,000 to help the Debtors with the Fitch Transportation business.*fn3 The money was later repaid with interest.

On September 20, 2005, Serpa sent Barnes an email asking to borrow money. Serpa told Barnes that she needed to borrow $200,000 for deposit into the Fitch Aviation bank account in order to increase the business' credit line and that she would return the money after 60 days.

Based on these conditions, Barnes agreed to lend Serpa $200,000 (the Loan). On September 23, 2005, they memorialized their agreement and executed a promissory note in the amount of $200,000 (the Loan Agreement), with 12% interest, compounded monthly. Pursuant to the Loan Agreement, Serpa was obligated to repay the Loan within 60 days, or by November 23, 2005, and pay $4,000 in interest. Additionally, the Loan Agreement provided that:

A ten-day grace period will be allowed if additional time is needed. If payment is not made in full on 12-4-05 (60 days plus 10 day grace period), a penalty of $200 plus $2,000.00 interest will be due and an additional 120 days will be allowed. During the extension, an interest payment of $2,000.00 is payable monthly plus a $200.00 late fee will also be due monthly. . . . After 120 days and no payment has been made foreclosure will begin on [the Debtors'] real property.

Although the Note referenced a security interest on the Debtors' real property that served as their residence (the Home), no deed of trust was executed at that time. On September 25, 2005, Barnes wrote a check to Serpa for $200,000. Serpa deposited the money into Fitch Aviation's bank account. On September 29, 2005, Serpa, presumably acting within her role as bookkeeper, wrote her husband a check, drawn on the Fitch Aviation account, in the amount of $100,000. Fitch then deposited the $100,000 check into the Debtors' personal bank account.*fn4

The Debtors failed to repay the money within 60 days. Barnes followed up with Serpa about repayment of the Loan several times. Serpa told her that the Debtors were trying to sell an airplane or to refinance their home in order to repay the Loan. In early 2006, Fitch emailed Barnes explaining that the Debtors were trying to put a deal together by either selling assets or raising additional capital in order to repay the Loan. In the meantime, he explained, they were out of cash and credit and would not be able to make the required interest payments. In March 2006, Serpa emailed Barnes informing her the Debtors were meeting with investors and that things were "looking up."

On March 11, 2006, the Debtors executed a deed of trust on the Debtors' Home in favor of Barnes as security for the Loan. Barnes did not record the deed of trust because, according to Barnes, the title report showed there was no equity in the Home. On April 19, 2006, the parties executed a renegotiated Loan Agreement, lowering the amount of interest to 10% and extending repayment to April 23, 2007.

Sometime in August 2006, the Northern Nevada Bank (the Bank) and Fitch Aviation entered into a debt modification agreement, which resulted in extending Fitch Aviation's credit line to $420,000. Even though the credit line was increased, the Debtors did not repay Barnes.

In February 2007, Serpa informed Barnes that the Debtors were "planning to have everything taken care of" so that they could repay the Loan by April. However, no payment was forthcoming. At the end of April 2007, Barnes wrote to Serpa, "What's going on? No payment, no phone call? Let us know what is happening." In May 2007, Fitch responded to Barnes that "the airplane deal" had not yet closed and that the Debtors needed additional time to pay. He explained that they were also working with Bank of America for an equity line of credit to satisfy the Loan. In June 2007, Serpa emailed Barnes that they were still working on the means to repay the Loan.

On September 17, 2007, the Debtors filed for chapter 7 bankruptcy. Fitch Transportation and Fitch Aviation were listed as co-debtors. Serpa and Fitch divorced during the course of the bankruptcy.

On November 2, 2007, Barnes filed a complaint against the Debtors alleging that the Loan was nondischargeable under § 523(a)(2) and (a)(4) (the Complaint). Barnes' claim under § 523(a)(4) was dismissed with prejudice on March 5, 2008, when the bankruptcy court found that no fiduciary relationship existed between Barnes and the Debtors. However, Barnes pursued the Complaint under § 523(a)(2).

On September 25, 2009, the bankruptcy court granted summary judgment in favor of Fitch, finding that Fitch never contacted Barnes or made any representations to Barnes before Barnes made the Loan.

A trial was held on January 28, 2010, to determine whether, as to Serpa, the Loan was nondischargeable. After the trial, the bankruptcy court took the matter under advisement. It issued written findings of fact and conclusions of law on March 1, 2010, along with a nondischargeable judgment against Serpa in the amount of $200,000 (the Judgment). Serpa timely appealed.


The bankruptcy court had jurisdiction pursuant to 28 U.S.C. §§ 1334 and 157(b)(2)(I). We have jurisdiction under 28 U.S.C. § 158.


Did the bankruptcy court err in finding that the Loan was nondischargeable?


Whether a claim is dischargeable presents mixed issues of law and fact, which we review de novo. Peklar v. Ikerd (In re Peklar), 260 F.3d 1035, 1037 (9th Cir. 2001). The Ninth Circuit has held that the bankruptcy court's findings made in the context of a dischargeability analysis are factual findings reviewed under the clearly erroneous standard. Candland v. Ins. Co. of N. Am. (In re Candland), 90 F.3d 1466, 1469 (9th Cir. 1996). Thus, whether a creditor has proven an essential element of a cause of action under § 523(a)(2)(A) is a factual determination reviewed for clear error. Am. Express Travel Related Servs. Co., Inc. v. Vee Vinhnee (In re Vee Vinhnee), 336 B.R. 437, 443 (9th Cir. BAP 2005); Cossu v. Jefferson Pilot Sec. Corp. (In re Cossu), 410 F.3d 591, 595-96 (9th Cir. 2005).

A finding 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) (citing United States v. Hinkson, 585 F.3d 1247, 1261-62 & n.21 (9th Cir. 2009) (en banc)). The clearly erroneous standard does not "entitle a reviewing court to reverse the finding of the trier of fact simply because it is convinced that it would have decided the case differently." Anderson v. City of Bessemer City, N.C., 470 U.S. 564, 573 (1985).

Moreover, when factual findings are based on determinations regarding the credibility of witnesses, we give great deference to the bankruptcy court's findings, because the bankruptcy court, as the trier of fact, had the opportunity to note "variations in demeanor and tone of voice that bear so heavily on the listener's understanding of and belief in what is said." Id. at 575; see also Rule 8013.


The Bankruptcy Code excepts from discharge any debt for money, property, services, or credit obtained by false pretenses, a false representation, or actual fraud. 11 U.S.C. § 523(a)(2)(A). To prevail on a claim under § 523(a)(2)(A), a creditor must demonstrate five elements: (1) misrepresentation, fraudulent omission or deceptive conduct by the debtor; (2) knowledge of the falsity or deceptiveness of the debtor's 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); In re Candland, 90 F.3d at 1469.

The creditor bears the burden of proving each element of § 523(a)(2)(A) by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 287 (1991). In order to strike a balance between allowing debtors a fresh start and preventing a debtor from retaining the benefits of property obtained by fraudulent means, § 523(a)(2)(A) is strictly construed against creditors and in favor of debtors. In re Slyman, 234 F.3d at 1085; Ghomeshi v. Sabban (In re Sabban), 384 B.R. 1, 5 (9th Cir. BAP 2008), aff'd, 600 F.3d 1219, 1222 (9th Cir. 2010).

Serpa contends that the bankruptcy court erred in its factual findings.*fn5 Serpa contends that the bankruptcy court's findings do not support the conclusion that she made a false representation to Barnes with the intention to deceive her. Additionally, she challenges the bankruptcy court's finding that Barnes relied on Serpa's representation or that Barnes had resulting damages.

1. False Representation Made With Intent To Deceive The determination of nondischargeability under § 523(a)(2)(A) is a question of federal, not state law, and mirrors the common law elements of fraud. Therefore, courts interpret the elements of § 523(a)(2)(A) consistent with the common law definition of "actual fraud" set forth in the Restatement (Second) of Torts. Field v. Mans, 516 U.S. 59, 69 (1995).

Under the Restatement, a person is liable for damages resulting from his or her misrepresentation of fact made for the purpose of inducing another to act (or refrain from action) in reliance on the misrepresentation. Restatement (Second) of Torts § 525 (1977). The misrepresentation is fraudulent if the maker (a) knows or believes that the matter is not as he represents it to be, (b) does not have the confidence in the accuracy of his representation that he states or implies, or (c) knows that he does not have the basis for his representation that he states or implies.

Restatement (Second) of Torts § 526 (1977); Gertsch v. Johnson & Johnson (In re Gertsch), 237 B.R. 160, 168 (9th Cir. BAP 1999). Thus, the scienter requirement for a fraudulent misrepresentation is established if it was made with actual knowledge of the falsity of the statement or reckless disregard for its truth. Houtman v. Mann (In re Houtman), 568 F.2d 651, 656 (9th Cir. 1978); In re Gertsch, 237 B.R. at 167.

In evaluating whether a debtor intended to deceive a creditor by misrepresentation or false pretenses, the bankruptcy court must look at the debtor's intention at the time the misrepresentation was made. In re Bath, 2010 WL 4118109, at *7 (Bankr. E.D. Pa. 2010). Because direct evidence of intent to deceive is rarely available, "the intent to deceive can be inferred from the totality of the circumstances, including reckless disregard for the truth." In re Gertsch, 237 B.R. at 167-68; Household Credit Servs., Inc. v. Ettell (In re Ettell), 188 F.3d 1141, 1145 n.4 (9th Cir. 1999) ("reckless conduct could be sufficient to establish fraudulent intent").

Serpa contends there are many errors with the bankruptcy court's findings; however, she does not dispute she told Barnes that the Loan was to be used to increase Fitch Aviation's credit line and would quickly be repaid. Instead, Serpa argues that because the initial email from Serpa to Barnes asking for the Loan was not in evidence (having not been kept by Barnes), Barnes' testimony is suspect. Misrepresentations may be oral, written, or include other conduct that amounts to an assertion not in accordance with the truth. See Comment (b) to Restatement (Second) of Torts (1977). Therefore, the oral representations between Serpa and Barnes may form the basis for a finding of the fraudulent misrepresentation. Barnes' failure to produce the email does not bar her claim.

Barnes testified that in her communications with Serpa prior to the Loan, Serpa explained that the Loan would be put into the Fitch Aviation account to help increase the business credit line and would be returned in 60 days:

[BARNES]: I get an email from [Serpa] around the 19th of September, about borrowing two hundred thousand dollars to put in a credit line for sixty days. . . . So I called [Serpa] and I said, 'What is this?' And she said, 'We need to borrow two hundred thousand dollars to put into our credit line for sixty days.' So I said, 'It's going to sit in the bank for sixty days?' And she said, 'Yes.' And then I said, 'What happens after the sixty days?' And she says, 'After the sixty days you get your money back.' And I said, 'That's all there is to it?'

Trial Tr. at 39:10-24.

Serpa's testimony is consistent with Barnes' understanding:

[BARNES' COUNSEL]: And you wrote her in that e-mail and said that you needed to increase your credit line by two hundred thousand dollars?

[SERPA]: As I recall, yes.

[BARNES' COUNSEL]: And that you indicated to her that you only needed the money for sixty days?

[SERPA]: This is what [Fitch] told me that we--Everything that I--all the information I was getting, I got it from [Fitch].. . .

[BARNES' COUNSEL]: How were you supposed to pay the money back within sixty days then?

[SERPA]: That was [Fitch]'s worries, not mine...that was my ex-husband's. He was going to repay the money in sixty days.

Trial Tr. at 12:9-20; 14:6-11.

Serpa testified that she wrote the email asking for a loan to increase the Fitch Aviation credit line and repeatedly made the contention that the Loan would be used to increase the business' credit line. Although Serpa also stated that she told Barnes the money would be used to operate the business, Barnes testified that she would not have made the Loan if she knew the money would be used in the operation of the business.

On appeal, Serpa argues that there was never any representation made that the Loan proceeds were to have been placed in a "restricted account to secure the loan." We agree, but whether or not the account was restricted is immaterial. The fact that there was no discussion about a restricted account does not change the fact that Serpa represented to Barnes that the Loan proceeds would be placed into Fitch Aviation's account solely for the purpose of increasing its credit line.

The terms of the Loan Agreement provided for repayment within 60 days. Even though the Loan Agreement offered a grace period and a possible extension of 120 days, the extension does not alter the representation made by Serpa to Barnes that the Loan was short-term. Based upon Barnes' and Serpa's testimony, as well as the Loan Agreement, there is ample evidence in the record to support the bankruptcy court's finding that Serpa represented to Barnes that the Loan would be used to increase Fitch Aviation's credit line and be repaid within 60 days.

The bankruptcy court's determination that this representation was fraudulent and made with the intent to induce Barnes into providing the Loan is not illogical, implausible, or without support in inferences from the record. Serpa testified that she believed having additional money in the Fitch Aviation account would result in an increase in the credit line based on a conversation with a representative from the Bank. However, the Bank representative testified that he did not have a conversation with either of the Debtors about increasing Fitch Aviation's credit line by adding $200,000 to its account. Fitch Aviation's credit line, he testified, did increase over time, but the increases were pursuant to stipulations regarding the paying down of the credit line and pursuant to increased pledges of deeds of trust and other security for the line of credit. The Bank representative testified that simply putting cash into the business bank account would not result in an increase in the credit line. He stated the Bank's policy was to require a cash-secured loan before any credit would be increased. The bankruptcy court did not find it credible that Serpa would use the Loan proceeds to increase the credit line, since there was no arrangement made with the Bank to do so. As noted above, we defer to the bankruptcy court's credibility determinations. Rule 8013.

The evidence presented indicated that Serpa knew that Fitch Aviation had other uses for the Loan proceeds. Serpa testified that while "she did not know about what was happening in the business," she was nevertheless aware that mechanic's liens had been placed on Fitch Aviation's airplanes sometime around the time of the Loan,*fn6 and she was aware that over $100,000 in liens needed to be paid off before the business could resume. Indeed, Serpa testified that some of the Loan proceeds were, in fact, used to satisfy those mechanic's liens.

Furthermore, almost immediately after depositing the Loan, Serpa drew out $100,000 for deposit in the Debtors' personal bank account. She explained that this was done, on advice of her accountant, because the Loan was a "personal loan" and could not be on Fitch Aviation's books. The bankruptcy court did not find her explanation credible since the remaining $100,000 was not similarly diverted. The bankruptcy court found that Serpa's actions directly after depositing the Loan proceeds demonstrated that she never intended to use the Loan to increase Fitch Aviation's credit line (or even to use it for business operations) and repay it within 60 days.

Thus, based on the evidence in the record, the testimony given at trial, the bankruptcy court's credibility determinations, and Serpa's conduct immediately after the deposit of the Loan proceeds, we cannot conclude that the bankruptcy court clearly erred when it found that Serpa knew the representations she made to Barnes were false at the time she made them, or that, at a minimum, she acted with reckless disregard of the truth. Accordingly, we conclude that the bankruptcy court did not err in determining that the first three elements required under § 523(a)(2)(A) were satisfied.

2. Damages As A Result Of Reliance On The False Representation

A creditor must establish that it relied on a debtor's false representation. The Supreme Court has held that the degree of the creditor's reliance need only be justifiable, not reasonable. Field v. Mans, 516 U.S. 59, 74 (1995); Citibank (South Dakota), N.A. v. Eashai (In re Eashai), 87 F.3d 1082, 1090 (9th Cir. 1996). Justification "is a matter of the qualities and characteristics of the particular plaintiff, and the circumstances of the particular case, rather than of the application of a community standard of conduct to all cases."

Id. at 71 (quoting Restatement (Second) of Torts § 545A cmt b (1976)).

The bankruptcy court found that Serpa induced Barnes to provide the Loan based on a fraudulent misrepresentation. It found that Barnes, being a long-time business associate and friend of Serpa's, provided the Loan in reliance on Serpa's representation that the Loan was a short-term loan for the purpose of increasing Fitch Aviation's credit line. After reviewing the record, we cannot say that the bankruptcy court's finding was illogical, implausible, or without support from the evidence before it.

Serpa argues that there is no evidence that Barnes would have acted any differently if she had known the true purposes of the Loan. However, Barnes testified that she would not have made the Loan if she knew that the Debtors would use it to pay the operating expenses of Fitch Aviation, or to use while they looked for other investors in the business. She testified that she trusted Serpa as a friend and an employee.

Serpa contends that Barnes is a competent business woman, and if Barnes had relied on a representation that the Loan would be placed in a restricted account to be used as security, she would not have executed a promissory note with a 120-day extension and secure it with a deed of trust. First, there is no evidence in the record that supports a claim that Barnes was told that the Loan proceeds were being placed in a restricted account. Secondly, while the Loan Agreement provided the opportunity to extend its terms in the event the Loan was not repaid in 60 days, the extension required penalty payments, which is consistent with Barnes' understanding that it was to be a short-term loan. Barnes, having dealt with banks before on business issues, testified that the extensions were included in the event the Bank moved more slowly in increasing the credit line than the Debtors' anticipated.

Furthermore, although the Loan Agreement referenced a security interest in the Debtors' Home, a deed of trust was not executed until over a year later when the Loan Agreement was re- negotiated. None of these terms, however, negate the Serpa's representation, at the time the Loan was made, that the Note would be repaid in 60 days.

A person is justified in relying on a representation even though he or she might have ascertained the falsity had they conducted an investigation. Field v. Mans, 516 U.S. at 71; Apte v. Romesh Japra, M.D., F.A.C.C., Inc. (In re Apte), 96 F.3d 1319, 1322 (9th Cir. 1996) (citing In re Eashai, 87 F.3d at 1090-91). However, a person cannot prevail under § 523(a)(2)(A) if he or she "blindly relies upon a misrepresentation the falsity of which would be patent" to him or her. Field v. Mans, 516 U.S. at 70 (citations omitted). Here, there is no evidence that Barnes could have easily discovered the falsity of Serpa's representations. Barnes had no ability to determine what the Bank's arrangements were with Fitch Aviation regarding an increase of its credit line. She relied on Serpa's word; she trusted her as a friend and employee. Accordingly, the bankruptcy court did not err in finding that Barnes justifiably relied on Serpa's fraudulent misrepresentation in making the Loan.

Serpa contends that Barnes' loss of money was caused because she chose not to record the deed of trust, not because she relied on Serpa's fraudulent misrepresentation. The deed of trust was executed in March 2006, long after the parties entered into the Loan Agreement. The Loan Agreement was modified and the deed of trust taken because Barnes was unable to collect on the Loan.

Causation or proximate cause entails (1) causation in fact, which requires a defendant's misrepresentations to be a substantial factor in determining the course of conduct that results in loss, and (2) legal causation, which requires a creditor's loss to "reasonably be expected to result from the reliance." Beneficial Calif., Inc. v. Brown (In re Brown), 217 B.R. 857, 862 (Bankr. S.D. Cal. 1998) (citing Restatement (Second) of Torts § 546, 548A (1976)). We have already concluded that the bankruptcy court did not err when it determined that Barnes demonstrated she provided the Loan in reliance on Serpa's fraudulent misrepresentations. The Loan was not repaid and Barnes, therefore, suffered an actual loss as a result. Accordingly, we conclude that the bankruptcy court did not err in determining that the Loan is nondischargeable as to Serpa. See Restatement (Second) of Torts § 525 (1977).


Because we have concluded that the bankruptcy court did not make clearly erroneous factual findings supporting its determination that all the elements of § 523(a)(2)(A) were met, we AFFIRM the bankruptcy court's Judgment.

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