In re: Sanjesh Prasad Sharma and Aracely Colombina Sharma, 9th Cir. BAP (2013)

7/25/2019 In re: Sanjesh Prasad Sharma and Aracely Colombina Sharma, 9th Cir. BAP (2013)

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*Thi s di sposi t i on i s not appr opr i at e f or publ i cat i on.Al t hough i t may be ci t ed f or whatever per suasi ve val ue i t mayhave, see Fed. R. App. P. 32. 1, i t has no pr ecedent i al val ue.See 9t h Ci r . BAP Rul e 8013- 1.

**Hon. Denni s Mont al i , Uni t ed St at es Bankrupt cy J udge f ort he Nor t her n Di st r i ct of Cal i f or ni a, si t t i ng by desi gnat i on.

UNITED STATES BANKRUPTCY APPELLATE PANEL

OF THE NINTH CIRCUIT

I n r e: ) BAP Nos. CC- 12- 1302- MkTaMo) CC- 12- 1520- MkTaMo

SANJ ESH PRASAD SHARMA and ) ( Consol i dat ed)ARACELY COLOMBI NA SHARMA, )

) BK. No. LA 10- 61901 PCDebt or s. )

) Adv. No. LA 11- 01555 PC)

SANJ ESH PRASAD SHARMA, ))

Appel l ant , )

)v. ) M E M O R A N D U M*

)CARMEN SALCI DO, )

)Appel l ee. )

)

Ar gued and Submi t t ed on Febr uar y 21, 2013at Pasadena, Cal i f or ni a

Fi l ed May 14, 2013

Appeal f r om t he Uni t ed St ates Bankr upt cy Cour tf or t he Cent r al Di str i ct of Cal i f or ni a

Honor abl e Pet er H. Car r ol l , Chi ef Bankrupt cy J udge, Pr esi di ng

Appear ances: Davi d Br i an Lal l y, Esq. f or Appel l ant , Sanj eshShar ma; Bar ak Lur i e, Esq. , of Lur i e & Par k, f orAppel l ee, Carmen Sal ci do

Bef or e: MARKELL, TAYLOR, and MONTALI , ** Bankr upt cy J udges.

FILED

MAY 14 2013

SUSAN M SPRAUL, CLERKU.S. BKCY. APP. PANELOF THE NINTH CIRCUIT


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1Unl ess speci f i ed ot her wi se, al l chapt er and sect i on

r ef er ences ar e t o the Bankr upt cy Code, 11 U. S. C. 1011532; al lRul e r ef er ences are t o the Feder al Rul es of Bankrupt cyPr ocedur e, Fed. R. Bankr . P. 10011037; al l Ci vi l Rul er ef er ences ar e t o t he Feder al Rul es of Ci vi l Pr ocedur e, Fed. R.Ci v. P. 186; and al l Evi dence Rul e r ef er ences are t o t heFeder al Rul es of Evi dence, Fed. R. Evi d. 1011103.

2These f act s ar e a r ef or mul at i on of t he al l egat i ons i n t heCompl ai nt .

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INTRODUCTION

Appel l ee Carmen Sal ci do ( Sal ci do) sued Debt or - Appel l ant

Sanj esh Pr asad Sharma ( Sharma) , seeki ng a decl arat i on t hat a

l oan made by Sal ci do t o Shar ma s company Shar ma Devel opments,I nc. was nondi schar geabl e under 11 U. S. C. 523( a) ( 2) ( A) ,

( a) ( 2) ( B) , ( a) ( 4) , ( a) ( 6) , and ( a) ( 19) . 1 Af t er Shar ma appear ed

and answered, t he bankr upt cy cour t st r uck Sharma s answer as a

di scover y sanct i on, ent er ed def aul t agai nst Shar ma, and or der ed

def aul t j udgment i n f avor of Sal ci do, but onl y on her

Sect i on 523( a) ( 2) ( A) cl ai m. Af t er Shar ma f i l ed hi s not i ce of

appeal , t he bankr upt cy cour t gr ant ed Sal ci do s mot i on t o amend

t he j udgment t o i ncl ude at t orney s f ees. Sharma t hen appeal ed

bot h t he bankrupt cy cour t s det er mi nat i on of nondi schar geabi l i t y

and t he award of at t orney s f ees. We AFFI RM t he det er mi nat i on of

nondi schar geabi l i t y and REVERSE t he award of at t orney s f ees.

FACTS2

Sal ci do made t wo l oans t o Sharma. The f i r st l oan was madesoon af t er t he t wo f i r st met . At t hat t i me, Sal ci do had j ust

t aken out a home equi t y l i ne of cr edi t f or $240, 000 t o st ar t a

cof f ee shop, whi ch never got of f t he gr ound, but Sal ci do st i l l

had si gni f i cant f unds f r om t he l oan. The l i ne of credi t had a


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si gni f i cant pr epayment penal t y, and Sal ci do tol d Shar ma that she

needed t o i nvest t he money i n a way t hat woul d al l ow her t o cover

t he l ar ge payment s on t he l i ne of cr edi t .

Sal ci do had met Shar ma i n hi s of f i ce i n Apr i l 2005. At t hatt i me, he t ol d her t hat he f l i pped homes buyi ng, r ef ur bi shi ng,

and sel l i ng t hem at a pr of i t . He showed her a l i st of numer ous

homes t hat he cl ai med t o own, and t her e were numer ous peopl e at

t he of f i ce t hat appeared t o be worki ng f or hi m. Sharma

r epeatedl y t ook st eps t o i mpr ess upon Sal ci do t hat he was weal t hy

and successf ul : he br agged t hat he dr ove l uxur y car s, t ook l avi sh

vacat i ons, f l ew hi s f r i ends ar ound i n pr i vat e j et s, owned

mul t i pl e race hor ses, and was i n t he pr ocess of bui l di ng a huge,

pal at i al home f or hi s f ami l y. Compl . ( Feb. 16, 2011) at 7.

From Sal ci do s per spect i ve, onl y a ver y successf ul per son coul d

af f or d such t hi ngs.

Based on t hese r epr esentat i ons of success f ounded upon a

seemi ngl y sound r eal est at e i nvest ment st r at egy, Sal ci do agr eedt o l end $240, 000 t o Sharma. Sharma guarant eed t hat Sal ci do

woul d make a 20% pr of i t on her i nvest ment . I d. at p. 17.

Sal ci do f ound t hi s r at e of r et ur n ent i ci ng; she made i t cl ear

t hat she needed t he i nt erest t o sur vi ve and keep her house. When

t hey next met , Sal ci do gave Sharma a check f or $240, 000 i n

exchange f or a document ent i t l ed pr omi ssory not e and dat ed

May 5, 2005 ( t he Fi r st Pr omi ssor y Not e) . The t er m was ei ght

mont hs and t he [ t ] ot al pr of i t t o be pai d was $48, 000, or 20% of

$240, 000. I d. The par t i es t o t he Fi r st Promi ssor y Not e wer e

Sal ci do and Shar ma Devel opment s, I nc. , on whose behal f Sharma


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3Regar dl ess of t he i dent i t y of t he par t y to t hi s not e andt he next one, f or si mpl i ci t y we r ef er t o Shar ma as the obl i gorf or al l pur poses.

4Al t hough Shar ma seems t o ar gue t hat t he $240, 000 was not a

l oan, but r at her an i nvest ment i n r eal est at e, t he t r ansact i on aspl eaded i n t he Compl ai nt i s best const r ued as a l oan. Sharmaal one pr epar ed t he document s and t i t l ed t hem Fi r st Pr omi ssor yNot e and Second Promi ssory Not e. The Second Pr omi ssory Not ehas a schedul e of i nt er est payment s and r ef er s t o t he $240, 000as pr i nci pal wor ds mor e consi st ent wi t h a l oan t han a capi t ali nvest ment . Compl . ( Feb. 16, 2011) at p. 19. Fi nal l y, Sal ci dodi d not si gn t he document s, a st at e of af f ai r s more consi st entwi t h a pr omi ssory not e than a j oi nt i nvest ment i n real est at e.

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si gned. 3 Sal ci do di d not s i gn t he Fi r st Pr omi ssory Not e.

Sharma ul t i matel y per f ormed under t he Fi r st Promi ssory Note,

al t hough he di d not pay t he i nt er est due unt i l March 27, 2006,

near l y t hr ee mont hs af t er t he ei ght - mont h t er m had ended.Al t hough Sharma was l at e wi t h t he i nt er est payment s, Sal ci do

deci ded t o r ol l over her i nvest ment f or anot her year . Si nce

t aki ng t he f i r st l oan f r om Sal ci do, Shar ma had cont i nued t o

r egal e her wi t h st or i es of weal t h and success. On May 5, 2006,

Sharma pr ovi ded Sal ci do wi t h anot her pr omi ssory not e ( t he Second

Pr omi ssor y Not e) . The t er m was one year . The i nt er est r at e was

20% f or t he f i r st $12, 000 of i nt er est and wi t hi n 10% t o 15% t o

be det er mi ned f or t he r emai ni ng i nt er est i nst al l ment s. I d. at

p. 19. Sal ci do st at es t hat t he var i abl e i nt er est r at e di d not

compor t wi t h t he ver bal under st andi ng of t he par t i es. As wi t h

t he Fi r st Promi ssory Note, Sharma si gned t he Second Pr omi ssory

Note on behal f of Sharma Devel opment s, I nc. , but Sal ci do di d not

si gn i t at al l .

4

By Apr i l 5, 2007, t he dat e t hat t he f i nal i nst al l ment of

i nt er est was due, Sharma had not pai d any i nst al l ment s t o


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Sal ci do. Sal ci do cal l ed Shar ma mul t i pl e t i mes ( she est i mat es

bet ween f i ve and t en) ; she l i t er al l y begged hi m f or t he money as

she was i n desper at e st r ai t s wi t h her mor t gage. I d. 40, 41.

For t he next several mont hs, t hrough September 2007, Sharma pai dher $1, 200 per mont h. Then he ceased payi ng al t oget her .

Sal ci do made i nqui r i es about what had happened t o her money,

and f ound out t hat Sharma had not r ef ur bi shed the pr oper t i es as

he t ol d her he woul d. She l ear ned t hat he had al l owed some or

al l of t he pr oper t i es [ t o] go t o ut t er wast e and t hat some wer e

even condemned. I d. 46. Sal ci do s compl ai nt al l eged t hat she

woul d have never i nvest ed wi t h Shar ma i f she had known about hi s

f ai l ur e t o mai nt ai n and/ or act ual l y ref ur bi sh t he pr oper t i es

t hat he was i nvest i ng her money i nt o, and t he r eal st at e of hi s

f i nances. I d. 48.

Af t er t hese di scover i es, Sal ci do s f i r st l egal maneuver was

t o f i l e sui t i n t he Super i or Cour t of t he St at e of Cal i f or ni a f or

t he Count y of Los Angel es ( t he Super i or Cour t ) f or br each ofcont r act and f r aud agai nst Shar ma Devel opment s, I nc. and Sanj esh

Sharma. Af t er meet i ng wi t h a medi ator , t he part i es agr eed t o

set t l e al l cl ai ms i n J ul y 2008 and execut ed a set t l ement

agr eement ( t he Set t l ement Agr eement ) . Under t he Set t l ement

Agreement , Shar ma Devel opment s was t o pay t he pr i nci pal amount

$240, 000 pl us i nt er est at 7. 00% over a per i od of f i ve year s.

The Set t l ement Agreement al so provi ded t hat , i n t he event of

def aul t by Shar ma, Sal ci do woul d be ent i t l ed t o f i l e t he

St i pul at i on f or Ent r y of J udgment and J udgment ( t he

St i pul at i on) t hat was dr af t ed as par t of t he Set t l ement

Agr eement . Sharma def aul t ed, and Sal ci do t hen f i l ed t he


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5We do not di scuss Sal ci do s ot her cl ai ms underSect i on 523( a) because t he bankr upt cy cour t di smi ssed them andt hey ar e not at i ssue i n t hi s appeal .

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St i pul at i on i n December 2008. On December 29, 2008, t he Super i or

Cour t order ed j udgment ( t he St i pul ated J udgment ) agai nst both

Shar ma Devel opment s, I nc. and Sanj esh Shar ma i n t he amount of

$240, 000.Shar ma di d not make any payment s on t he St i pul at ed J udgment .

Sal ci do al l eged that Shar ma never had any i nt ent i on of r epayi ng

t he l oans or honor i ng t he St i pul at ed J udgment t hat he

mal i ci ousl y and f r audul ent l y i nduced [ Sal ci do] t o accept a

st i pul ated J udgment t hat he never i nt ended on per f ormi ng, and has

made no ef f or t t o per f or m . . . . I d. 5758, 64, 65.

Fur t her mor e, she al l eged t hat he set i t up so t hat [ Sal ci do s]

and any ot her j udgment woul d be di f f i cul t , i f not i mpossi bl e t o

col l ect because he t r ansf er r ed al l of hi s asset s t o appear

i nsol vent and j ust i f y a bankrupt cy act i on. I d. 58.

On December 3, 2010, Shar ma f i l ed Chapt er 7. On Februar y 16,

2011, Sal ci do f i l ed t he compl ai nt ( t he Compl ai nt ) t hat

event ual l y l ed t o t hi s appeal . Sal ci do cont ended t hat Shar ma s$240, 000 obl i gat i on under t he St i pul at ed J udgment was

nondi schar geabl e under Sect i ons 523( a) ( 2) ( A) , ( a) ( 2) ( B) , ( a) ( 4) ,

( a) ( 6) , and ( a) ( 19) .

Sal ci do s ar gument under Sect i on 523( a) ( 2) ( A) was t wof ol d. 5

Fi r st , she cont ended t hat Sharma commi t t ed f r aud by i nduci ng her

t o l oan hi m money t hat he never i nt ended t o pay back by f al sel y

r epr esent i ng hi s weal t h and success and by l yi ng about hi s

i nvest ment st r at egy of r ef ur bi shi ng pr oper t i es f or sal e. Second,


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6On appeal , Sharma does not chal l enge t he sanct i ons or t heent r y of def aul t . Consequent l y, we nei t her r eci t e t he f act sunder l yi ng t he sanct i ons or t he ent r y of def aul t nor r evi ew t hemer i t s of t hose act i ons.

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She al so submi t t ed a r equest f or j udi ci al not i ce underEvi dence Rul e 201, seeki ng t o have admi t t ed a l i st of 13 ci vi lcases i n Los Angel es County and San Bernar di no County agai nstSharma, Sharma Devel opment s, I nc. , or ot her def endants named i nt he Compl ai nt . The r equest st at es t hat al l of t hese casesr esul t ed i n ei t her a def aul t j udgment , st i pul at ed j udgment , orare st ayed pendi ng Sharma s bankr upt cy pr oceedi ngs. Thebankrupt cy cour t di d not expl i ci t l y r el y on t hese pur por t edf act s, and nor do we.

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she cont ended t hat he al so commi t t ed f r aud by i nduci ng her t o

accept t he St i pul ated J udgment , whi ch he never i nt ended to repay.

Sharma answered and t he par t i es pr oceeded t o di scover y. The

bankr upt cy cour t , however , ul t i matel y order ed monet ary sanct i onsagai nst Shar ma, st r uck hi s Answer as a sanct i on f or di scover y

mi sconduct , and ent er ed def aul t agai nst hi m. 6 Sal ci do t hen moved

f or def aul t j udgment . She support ed t he mot i on wi t h her own

decl ar at i ons and wi t h decl ar at i ons by Fr anco Rami r ez ( her

boyf r i end t hen and now) and Mi chel l e A. Sel t zer ( her at t or ney) . 7

The Mot i on f or Def aul t J udgment l ar gel y r epeat ed t he f act s and

al l egat i ons of t he Compl ai nt . She el abor at ed on her

Sect i on 523( a) ( 2) ( A) argument by al l egi ng t hat Shar ma commi t t ed

f r aud per se by operat i ng a Ponzi scheme. She al so ar gued t hat

Shar ma s al l eged f r audul ent t r ansf er s of pr oper t y t o hi s f at her

and t hen back t o hi msel f f or nomi nal consi der at i on demonst r ate an

i nt ent i onal pl an to avoi d col l ect i on by numer ous j udgment

credi t or s, i ncl udi ng Sal ci do. Mot . Def aul t J . ( Apr . 12, 2012)at 1112. I n essence, she argued t hat t he St i pul ated J udgment

was merel y a del ay t act i c and t hat Sharma never i nt ended t o honor


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8Shar ma i s cor r ect . Sal ci do onl y of f er ed concl usor yal l egat i ons t o show t hat Shar ma di d not i nvest her f unds and i nf act used f unds f r om new i nvest or s t o pay pr i or i nvest or s t hehal l mark of a Ponzi scheme. See Donnel l v. Kowel l , 533 F. 3d 762,767 n. 2 ( 9t h Ci r . 2008) . Whi l e we af f i r m on t he gr ounds t hat t heCompl ai nt support s a det er mi nat i on of f r aud underSect i on 523( a) ( 2) ( A) , we do not base that deci si on on t heexi st ence of a Ponzi scheme.

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i t .

Sharma opposed. He argued t hat t he Sect i on 523( a) ( 2) ( A)

cl ai m must f ai l because Sal ci do di d not meet her bur den of pr oof .

He cont ended t hat Shar ma coul d not have made any r epr esent at i onst o Sal ci do, f al se or ot her wi se, because she di d busi ness wi t h

Sharma Devel opment s, I nc. , not Sharma as an i ndi vi dual , and t hat

she has not al l eged t hat t he cor por at e vei l shoul d be pi er ced.

He t hen asser t ed t hat [ o] ne who i nt ends t o commi t f r aud does not

r epay 33% of t he pr i nci pal debt . Opp n Mot . Def aul t J .

( Apr . 26, 2012) at 3: 18. These argument s, however , i gnore t he

f act t hat t he St i pul ated J udgment was agai nst bot h Sharma

i ndi vi dual l y and Shar ma Devel opment s, I nc. , and t hat t he

St i pul at ed J udgment was f or t he ent i r e pr i nci pal amount ,

$240, 000. Last l y, he ar gued t hat Sal ci do s cont ent i on t hat he

oper at ed a Ponzi scheme was unf ounded. 8

To suppor t hi s opposi t i on, Shar ma f i l ed var i ous evi dent i ar y

obj ect i ons t o t he decl ar at i ons t hat Sal ci do submi t t ed i n suppor tof her Mot i on f or Def aul t J udgment .

I n J une 2012, t he bankr upt cy cour t order ed def aul t j udgment

agai nst Shar ma ( t he J udgment ) . Speci f i cal l y, t he cour t or der ed

t hat t he $240, 000 obl i gat i on under t he St i pul ated J udgment was

nondi schargeabl e under Sect i on 523( a) ( 2) ( A) . The cour t deni ed


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at t or ney s f ees wi t hout pr ej udi ce pendi ng compl i ance wi t h l ocal

bankrupt cy r ul es. The cour t was si l ent as t o Sal ci do s ot her

cl ai ms under Sect i on 523( a) . The cour t di d not ar t i cul at e i t s

r easoni ng.Shar ma t i mel y f i l ed a Not i ce of Appeal , chal l engi ng var i ous

aspect s of t he bankrupt cy cour t s gr ant of t he Mot i on f or Def aul t

J udgment .

I n ear l y J ul y, t he Panel r equest ed cl ar i f i cat i on as t o

whether t he J udgment was i nt er l ocut ory because t he bankr upt cy

cour t had not pr oper l y di smi ssed some of Sal ci do s cl ai ms. The

bankrupt cy cour t r esponded wi t h an or der di smi ssi ng Sal ci do s

cl ai ms under Sect i ons 523( a) ( 2) ( B) , ( a) ( 4) , ( a) ( 6) , and ( a) ( 19)

agai nst al l def endant s.

Sal ci do t hen moved t o amend t he J udgment t o i ncl ude

at t orney s f ees and a monetary sanct i on. Sharma opposed. On

Oct ober 10, 2012, t he bankrupt cy cour t i ssued an amended j udgment

( t he Amended J udgment ) , whi ch di f f er ed f r om t he pr i or j udgmentonl y i n t hat cost s and at t orney s f ees wer e awarded. However ,

because t he bankr upt cy cour t had by t hen di smi ssed al l of t he

Sect i on 523( a) cl ai ms ot her t han t he one under whi ch Sal ci do

pr evai l ed Sect i on 523( a) ( 2) ( A) t he Amended J udgment i s a

f i nal and appeal abl e or der . See Dr ei t h v. Nu I mage, I nc. ,

648 F. 3d 779, 786 ( 9t h Ci r . 2011) ( def aul t j udgment s are

appeal abl e f i nal or der s) .

On Oct ober 12, 2012, Shar ma t i mel y f i l ed a second not i ce of

appeal chal l engi ng t he award of at t orney s f ees i n t he Amended

J udgment . Shar ma s t wo appeal s wer e t hen consol i dat ed under t he

f i r st appeal , BAP No. 12- 1302.


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Shar ma di d not move f or r el i ef f r om t he ent r y of def aul t

under Ci vi l Rul e 55( b) or t he ent r y of def aul t j udgment under

Ci vi l Rul e 60( c) i n t he bankrupt cy cour t .

JURISDICTION

The bankr upt cy cour t had j ur i sdi ct i on pur suant t o 28 U. S. C.

157( b) ( 2) ( I ) and 1334. We have j ur i sdi ct i on under 28 U. S. C.

158.

ISSUES

1. Must t hi s cour t di smi ss Shar ma s appeal because he di d not

move f or r el i ef f r om def aul t j udgment under Ci vi l Rul e 60( b)

i n t he bankrupt cy cour t ?

2. Di d t he bankr upt cy cour t commi t r ever si bl e er r or when i t

or der ed def aul t j udgment on Sal ci do s Sect i on 523( a) ( 2) ( A)

cl ai m?

3. Di d t he bankr upt cy cour t commi t r ever si bl e er r or when i t di d

not hol d a hear i ng on Sal ci do s Mot i on f or Def aul t J udgment ?

4. Di d t he bankr upt cy cour t commi t r ever si bl e er r or when i ti ssued t he Amended J udgment wi t hout ar t i cul at i ng t o what

ext ent , i f any, i t had consi der ed Shar ma s Opposi t i on t o

Pl ai nt i f f s Mot i on f or Def aul t J udgment and Evi dent i ar y

Obj ect i ons t o t he Decl ar at i ons of Mi chel l e Sel t zer , Car men

Sal ci do, and Franco Rami r ez i n Suppor t of Pl ai nt i f f s Mot i on

f or Def aul t J udgment ?

5. Di d t he bankr upt cy cour t commi t r ever si bl e er r or when i t di d

not deduct f r om t he $240, 000 j udgment amount t he $86, 700 i n

payment s t hat Shar ma made to Sal ci do?

6. Di d t he bankr upt cy cour t commi t r ever si bl e er r or when i t

awarded at t orney s f ees t o Sal ci do af t er Sharma had appeal ed


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t he or der of def aul t j udgment t o t hi s cour t ?

STANDARDS OF REVIEW

We revi ew t he bankr upt cy cour t s ent r y of def aul t j udgment

f or abuse of di scr et i on. Ei t el v. McCool , 782 F. 2d 1470, 1471( 9t h Ci r . 1986) ; I n r e McGee, 359 B. R. 764, 769 ( B. A. P. 9t h Ci r .

2006) . Revi ew f or abuse of di scr et i on has t wo par t s. Fi r st , we

det er mi ne de novo whet her t he bankr upt cy cour t i dent i f i ed t he

cor r ect l egal r ul e t o appl y t o t he r el i ef r equest ed. U. S. v.

Hi nkson, 585 F. 3d 1247, 126162 ( 9t h Ci r . 2009) ( en banc) . I f

so, we then det er mi ne under t he cl ear l y er r oneous s t andard

whet her t he bankrupt cy cour t s f act ual f i ndi ngs and i t s

appl i cat i on of t he f act s t o t he r el evant l aw wer e ( 1) i l l ogi cal ;

( 2) i mpl ausi bl e; or ( 3) wi t hout suppor t i n i nf er ences t hat may be

dr awn f r om t he f act s i n t he r ecor d. I d. at 1262. I n t hi s

i nqui r y, [ w] her e t her e ar e t wo per mi ssi bl e vi ews of t he

evi dence, t he f act f i nder s choi ce bet ween t hem cannot be cl ear l y

er r oneous. Ander son v. Ci t y of Bessemer Ci t y, N. C. , 470 U. S.564, 574 ( 1985) .

Whet her a bankrupt cy cour t r et ai ns aut hor i t y t o or der

at t or ney s f ees af t er a not i ce of appeal has been f i l ed i s a

quest i on of l aw t hat we r evi ew de novo. See J ef f er i es v. Car l son

( I n r e J ef f er i es) , 468 B. R. 373, 377 ( B. A. P. 9t h Ci r . 2012) . We

al so r evi ew de novo whet her Cal i f or ni a l aw al l ows f or t he awar d

of at t or ney s f ees i n t hi s cont ext . Fr y v. Di nan ( I n r e Di nan) ,

448 B. R. 775, 783 ( B. A. P. 9t h Ci r . 2011) .


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9We even di smi ssed a case r ecent l y on t he same gr ounds.Nguyen v. Ford ( I n re Nguyen) , 2011 WL 3298962 at *4 (B. A. P. 9t hCi r . 2011) .

12

DISCUSSION

A. This Court is Not Required to Dismiss the Case as a Resultof Sharmas Failure to Move for Relief Under CivilRule 60(b) in the Bankruptcy Court

The Ni nt h Ci r cui t has not def i ni t i vel y est abl i shed whetherdi smi ssal i s r equi r ed when a j udgment ent er ed by def aul t i s

appeal ed wi t hout f i r st seeki ng r evi ew under Ci vi l Rul e 60( b) ,

whi ch i s appl i cabl e her e t hr ough Rul e 9024. One l i ne of cases,

on whi ch Sal ci do rel i es, hol ds t hat an appel l ant - def endant s

f ai l ur e t o move f or r el i ef under Ci vi l Rul e 60( b) i n t he di st r i ct

( or bankr upt cy) cour t mandat es t he di smi ssal of an appeal bef or e

r eachi ng t he mer i t s. Consorzi o Del Pr osci ut t o di Par ma v. Domai n

Name Cl ear i ng Co. , LLC, 346 F. 3d 1193, 1195 ( 9t h Ci r . 2003) ;

I nvest or s Thr i f t v. Lam ( I n r e Lam) , 192 F. 3d 1309, 1311 ( 9t h

Ci r . 1999) ; Fi r st Bever ages, I nc. v. Royal Cr own Col a Co. ,

612 F. 2d 1164, 1172 ( 9t h Ci r . 1980) ; Rohauer v. Fr i edman,

306 F. 2d 933, 937 ( 9t h Ci r . 1962) ( An appeal t o t hi s cour t

cannot be used as a subst i t ut e f or t he t i mel y pr ocedur e set f or t hby Rul e 60( b) . ) . 9

Wi t h t wo except i ons, i n the above cases t he def endant f ai l ed

t o answer or appear . The cour t s seemed especi al l y t r oubl ed by a

def endant - appel l ant s i nt ent i on t o ent er t he f r ay f or t he f i r st

t i me on appeal . Feder al cour t s ar e not r un l i ke a casi no game

i n whi ch pl ayers may ent er and exi t on pur e whi m. A def aul t ed

par t y may not r e- ent er l i t i gat i on, par t i cul ar l y on appeal , on

sheer capr i ce. I t must f ol l ow pr oper pr ocedur e t o set asi de t he


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def aul t . I n r e Lam, 192 F. 3d at 1311 ( appl yi ng Rul e 7055( c) ) .

I n Rohauer and Fi r st Bever ages, t he two except i ons, t he

appel l ant - def endant s ext ensi vel y par t i ci pat ed i n t he pr oceedi ngs

bel ow but sought t o r ai se new f actual i ssues on appeal . Becauset he appel l ant - def endant s were aware of t he new f act ual

ci r cumst ances af t er t he ent r y of j udgment and bef or e t he not i ce

of appeal was f i l ed, t he Ni nt h Ci r cui t di smi ssed t hei r appeal s.

Fi r st Bever ages, 612 F. 2d at 1172 ( [ The] pr oper appr oach t o

seeki ng r el i ef f r om j udgment because of a change i n t he f act ual

ci r cumst ances sur r oundi ng thi s case woul d be t o make a Rul e 60( b)

mot i on or a mot i on t o r eopen t o hear addi t i onal pr oof . Such

mot i ons must be di r ect ed i n t he f i r st i nst ance t o t he di st r i ct

cour t . ) ; Rohauer , 306 F. 2d at 937; Ci vi l Rul e 62. 1.

I n a second l i ne of cases, whi ch Sal ci do f ai l ed t o di scuss

i n her br i ef , t he Ni nt h Ci r cui t and t hi s cour t el ect ed t o r evi ew

t he mer i t s of def aul t j udgment s even t hough t he appel l ant -

def endant s had not moved under Ci vi l Rul e 60( b) bel ow. Dr ei t h v.Nu I mage, I nc. , 648 F. 3d 779, 789 ( 9t h Ci r . 2011) ; Al an Neuman

Pr ods. , I nc. v. Al br i ght , 862 F. 2d 1388, 139192 ( 9t h Ci r . 1988) ;

Madsen v. Bumb, 419 F. 2d 4, 6 ( 9t h Ci r . 1969) ; I n r e Kubi ck,

171 B. R. 658, 660 ( B. A. P. 9t h Ci r . 1994) .

I n t hese cases, t he cour t s t r eat ed t he def endant - appel l ant s

as i f t hey had appl i ed f or r el i ef under Ci vi l Rul e 55( c) or

60( b) , or bot h, t o avoi d an undul y t echni cal di sposi t i on of t he

case. Madsen, 419 F. 2d at 6. I n r e Kubi ck was more t o t he

poi nt [ a] l t hough ent r y of a def aul t j udgment i s usual l y

at t acked col l at er al l y under Rul e 60( b) , on di r ect appeal a

def endant can cont est t he l egal suf f i ci ency of al l egat i ons


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cont ai ned i n t he compl ai nt . 171 B. R. at 660 ( ci t i ng Al an Neuman

Pr ods. , 862 F. 2d at 1392) . The consi st ent t hr ead r unni ng t hr ough

t hese cases i s t hat , wi t h one except i on ( I n r e Kubi ck) , t he

appel l ant - def endant s al l par t i ci pat ed bel ow by act i vel ycommuni cat i ng wi t h t he pl ai nt i f f , answer i ng t he compl ai nt ,

par t i ci pat i ng i n di scover y, and/ or movi ng t o vacat e t he ent r y of

def aul t under Ci vi l Rul e 55( c) .

I n t he most r ecent of t hese cases, t he Ni nt h Ci r cui t

decl i ned t o f ol l ow Par ma and r ul ed on t he mer i t s when t he

def endant s answer was st r uck f or di scover y mi sconduct . Dr ei t h,

648 F. 3d at 781. The di st r i ct cour t ent er ed an or der of def aul t

upon t he st r i cken answer and si x mont hs l ater gr ant ed t he

pl ai nt i f f s mot i on f or def aul t j udgment . I d. On appeal , t he

def endant s onl y chal l enged t he ent r y of def aul t . I d. Al t hough

t he def endant s di d not seek rel i ef under Ci vi l Rul es 55( c) or

60( b) i n t he di st r i ct cour t , t he Ni nt h Ci r cui t deci ded t o

consi der t he mer i t s of t hi s act i on, as bot h publ i c pol i cy andt he pol i cy of t hi s cour t di ct at e. I d. at 789 n. 1. Whi l e t he

cour t di d not over r ul e Parma, i t seems t o have sof t ened Par ma s

hol di ng. Mor eover , t he f act s of Dr ei t h ar e anal ogous t o t hose i n

t he pr i or Ni nt h Ci r cui t and BAP cases wher e the cour t s di d not

r equi r e a Rul e 60( b) mot i on bel ow i n t hat t he appel l ant - def endant

had par t i ci pat ed i n t he t r i al cour t pr oceedi ngs.

There i s yet a t hi r d l i ne of cases where t he Ni nt h Ci r cui t

and t hi s cour t have r evi ewed t he t r i al cour t s gr ant of def aul t

j udgment wi t hout even di scussi ng t he i mpor t , or l ack t hereof , of

a Ci vi l Rul e 60( b) mot i on bel ow. See, e. g. , Tel evi deo Sys. ,

826 F. 2d 915; Ei t el , 782 F. 2d 1470; I n r e Pr yor , 2011 WL 4485796


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10We not e t hat t he Ni nt h Ci r cui t i s one of f ew f eder alcour t s of appeal s t hat r ef uses t o hear di r ect appeal s f r omdef aul t j udgment s i n some ci r cumst ances, and that t he Rest at ementof J udgment s suppor t s di r ect appeal s f r om def aul t j udgment s. See

( cont i nued. . . )

15

( B. A. P. 9t h Ci r . 2011) ; I n r e McGee, 359 B. R. 764. I n t hese

cases, l i ke t hose above t hat expr essl y r ej ect t he Ci vi l

Rul e 60( b) r equi r ement , t he appel l ant - def endant s al l par t i ci pat ed

t o some degr ee at t he t r i al cour t .Whi l e not ar t i cul at ed as such by t he Ni nt h Ci r cui t , t he r ul e

seems t o be t hat a case wi l l be di smi ssed on appeal f or f ai l ur e

t o move f or r el i ef under Ci vi l Rul e 60( b) onl y when t he

appel l ant - def endant f ai l ed t o par t i ci pat e i n t he t r i al ( or

bankr upt cy) pr oceedi ngs or when t he appeal r ai ses new f act ual

i ssues. For pol i cy r easons, t hi s i s t he cor r ect rul e.

I t woul d be a wast e of t i me and r esour ces t o di smi ss t he

cur r ent appeal s. I f Shar ma had not par t i ci pat ed at t he

bankr upt cy cour t , t hen t here may have been some benef i t t o havi ng

hi m ai r hi s ar gument s at t he bankrupt cy cour t . But gi ven hi s

extensi ve par t i ci pat i on answer i ng t he Compl ai nt and engagi ng i n

di scover y we woul d not l i kel y gai n any new i nf ormat i on upon

whi ch t o base a deci si on i f Sharma moved f or r el i ef underRul e 60( b) , was deni ed t hat r el i ef ( pr esumi ng wi t hout deci di ng

t hat t he bankr upt cy cour t woul d deny t he mot i on) , and t hen

r et ur ned t o t hi s cour t .

I n addi t i on, Shar ma i s not r ai si ng any new f act ual i ssues,

onl y argui ng t hat t he r ecord does not support a det er mi nat i on of

f r aud under Sect i on 523( a) ( 2) ( A) . Thus, we have suf f i ci ent

pol i cy and pr ecedent i al support t o pr oceed t o t he mer i t s. 10


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10( . . . cont i nued)Commonweal t h Dev. Aut h. v. Camacho, 2010 WL 5330503 at *6*8 ( N.Mar . I . , December 21, 2010) ( sur veyi ng t he f eder al cour t s ofappeal s) ( ci t i ng Rest atement ( Second) of J udgment s 78 cmt . e( 1982) ) .

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B. The Bankruptcy Court Did Not Abuse its Discretion When ItOrdered Default Judgment on Salcidos Section 523(a)(2)(A)Claim

Bef or e di scussi ng t he mer i t s of t he nondi schar geabi l i t y

cl ai m, we need t o exami ne t he ef f ect of t he ent r y of def aul t .The gener al r ul e of l aw i s t hat upon def aul t t he f act ual

al l egat i ons of t he compl ai nt , except t hose r el at i ng t o t he amount

of damages, wi l l be t aken as t r ue. Tel evi deo Sys. , 826 F. 2d at

91718 ( i nt er nal quot at i on marks and ci t at i on omi t t ed) . However ,

a def aul t does not oper at e as an absol ut e conf essi on of

l i abi l i t y, f or t he f act s al l eged i n t he compl ai nt may be

i nsuf f i ci ent t o est abl i sh l i abi l i t y. I n Re McGee, 359 B. R. at

771.

A def aul t est abl i shes t he wel l - pl eaded al l egat i ons of a

compl ai nt . . . . I d. at 772 ( i nt er nal quot at i on mar ks and

ci t at i on omi t t ed) ( emphasi s i n or i gi nal ) .

Fact s t hat ar e not wel l pl ed i ncl ude al l egat i ons t hatar e made i ndef i ni t e or er r oneous by ot her al l egat i onsi n t he same compl ai nt , . . . al l egat i ons whi ch ar econt r ar y t o f act s of whi ch t he cour t wi l l t ake j udi ci al

not i ce, or whi ch ar e not suscept i bl e of pr oof byl egi t i mat e evi dence, or whi ch ar e cont r ar y t ouncont r over t ed mat er i al i n t he f i l e of t he case.

I d. ( i nt er nal quot at i on mar ks and ci t at i on omi t t ed) ( emphasi s i n

or i gi nal ) . Put anot her way, t he bur den of pr oof r emai ns wi t h t he

pl ai nt i f f af t er t he ent ry of def aul t ; t he pl ai nt i f f i s not

ent i t l ed t o def aul t j udgment as a mat t er of r i ght . See i d. at

771, 774.

Whi l e t he bankr upt cy cour t has an i ndependent dut y t o


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det er mi ne t he suf f i ci ency of a cl ai m, i t oper at es wi t h wi de

di scret i on. I d. at 773; I n r e Kubi ck, 171 B. R. at 662. Under

Ci vi l Rul e 55( b) , a bankrupt cy cour t has t he di scr et i on t o

r equi r e t hat t he pl ai nt i f f pr ove up t he f act s necessar y t odet er mi ne whet her a val i d cl ai m exi st s agai nst t he def aul t i ng

par t y. I n r e McGee, 359 B. R. at 773. The cour t may conduct

hear i ngs or make r ef err al s t o det ermi ne t he amount of damages;

. . . est abl i sh t he t r ut h of any al l egat i on by evi dence; or . . .

i nvest i gat e any ot her mat t er . Fed. R. Ci v. P. 55( b) ( 2) .

A prove- up hear i ng i s onl y r equi r ed where t he damages are

unl i qui dat ed or not capabl e of mat hemat i cal cal cul at i on. Davi s

v. Fendl er , 650 F. 2d 1154, 1161 ( 9t h Ci r . 1981) . Ci vi l

Rul e 55( b) does not r equi r e a hear i ng t o i nvest i gat e f act s not

r el at ed t o damages, si nce t he def aul t i t sel f est abl i shes t hose

f act s as al l eged i n t he compl ai nt . Tel evi deo Sys. , 826 F. 2d at

91718.

One i ssue on appeal i s whether t he bankr upt cy cour t wasr equi r ed t o hol d a pr ove- up hear i ng, as Shar ma ar gues, i n l i ght

of ( 1) t he Opposi t i on and Evi dent i ar y Obj ect i ons f i l ed by

Appel l ant ; and ( 2) t he unusual ci r cumst ances of t hi s case[ . ]

Appel l ant s Am. Openi ng Br . ( Aug. 20, 2012) at 13. As set

f or t h above, a bankrupt cy cour t has wi de di scr et i on t o det er mi ne

whet her a pr ove- up hear i ng i s necessar y. I f a bankrupt cy cour t

det er mi nes t hat t he f act s as al l eged i n t he compl ai nt suppor t t he

pl ai nt i f f s cl ai m, t hen a pr ove- up hear i ng i s onl y necessar y t o

f i x unl i qui dated damages. See Davi s, 659 F. 2d at 1161.

Her e, t he bankr upt cy cour t order ed def aul t j udgment wi t hout

a pr ove- up hear i ng. I t di d not st at e whi ch of Sal ci do s f i l i ngs


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i t had consi der ed or whet her i t had consi der ed Sharma s

opposi t i on and evi dent i ar y chal l enges. Nor was i t r equi r ed t o do

so. Ci vi l Rul e 55( b) does not r equi r e t hat t he cour t consi der a

def endant s chal l enges t o def aul t j udgment . Once Sharma was i ndef aul t , t he onl y i ssue bef ore t he bankr upt cy cour t was whet her

t he wel l - pl eaded f act ual al l egat i ons i n the Compl ai nt , deemed

t r ue, suppor t ed a cl ai m under Sect i on 523( a) ( 2) ( A) , and, i f not ,

whet her addi t i onal pr oof was necessary. The bankr upt cy cour t

determi ned t hat a hear i ng was not necessary on t he i ssue of

l i abi l i t y, and i t had t he di scr et i on t o do so. Sal ci do s mot i on

and Shar ma s opposi t i on amount ed t o ar gument about whet her t he

f act s i n t he Compl ai nt suppor t ed Sal ci do s cl ai m.

Even i f t he evi dence submi t t ed by Sal ci do i n t he f or m of

decl arat i ons wer e i nadmi ssi bl e, an i ssue whi ch we do not deci de,

t he Amended J udgment i s not def ect i ve as t he r esul t of t he

bankrupt cy cour t not expr essl y st at i ng t hat i t had consi der ed

Shar ma s opposi t i on and evi dent i ar y obj ect i ons. The f act ualcont ent i n t he chal l enged decl ar at i ons was near l y i dent i cal t o

t hat i n t he Compl ai nt , and t hus any rel i ance t he bankrupt cy cour t

may have pl aced on t he decl ar at i ons was harml ess. See Fed. R.

Evi d. 103( a) .

So l ong as t he bankrupt cy cour t f ound suf f i ci ent evi dence i n

t he Compl ai nt s al l egat i ons t o suppor t t he det er mi nat i on of

l i abi l i t y under Secti on 523( a) ( 2) ( A) , i t s deci si on sur vi ves. The

bankr upt cy cour t di d not commi t r ever si bl e er r or when i t

det er mi ned t he i ssue of l i abi l i t y wi t hout a hear i ng. See Davi s,

659 F. 2d at 1161. Nor di d i t commi t r ever si bl e er r or when i t di d

not ar t i cul at e t o what ext ent , i f any, i t consi der ed Shar ma s


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11The adver sar y compl ai nt names var i ous def endant s who wer enot i nvol ved i n t he St at e Cour t Act i on, but Sal ci do pr evai l ed i nbot h st at e cour t and bankr upt cy cour t , and Sharma wasi ndi vi dual l y l i abl e under bot h t he st at e cour t St i pul at edJ udgment and bankr upt cy cour t Amended J udgment .

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opposi t i on t o t he Mot i on f or Def aul t J udgment and hi s evi dent i ar y

obj ect i ons. See Fed. R. Ci v. P. 55( b) ; Fed. R. Evi d. 103( a) .

We next t ur n to t he i ssue of whet her a hear i ng was r equi r ed

t o f i x t he damages. The pr eci se i ssue i s whet her t he bankr upt cycour t pr oper l y gave pr ecl usi ve ef f ect , under t he doct r i ne of

i ssue pr ecl usi on, t o t he damage amount $240, 000 t hat t he

Super i or Cour t or dered upon t he St i pul at ed J udgment . Under

28 U. S. C. 1738, t he Ful l Fai t h and Cr edi t Act , f eder al cour t s

must appl y t he pr ecl usi on l aw of t he st at e whose cour t i ssued the

pr i or j udgment . Harmon v. Kobr i n ( I n r e Harmon) , 250 F. 3d 1240,

1245 ( 9t h Ci r . 2001) ( ci t at i ons omi t t ed) .

Under Cal i f or ni a l aw, i ssue pr ecl usi on bar s t he r el i t i gat i on

of an i ssue i f ( 1) t he i ssue i n t he f i r st and second act i on ar e

i dent i cal ; ( 2) t he i ssue was act ual l y l i t i gat ed and necessar i l y

deci ded i n det er mi ni ng t he f i r st act i on; ( 3) t he par t i es agai nst

whi ch i ssue pr ecl usi on i s asser t ed ar e i dent i cal or i n pr i vi t y;

and ( 4) t he pr i or deci si on was on t he mer i t s. See Daar & Newmanv. VRL I nt l . , 28 Cal . Rpt r . 3d 482, 571, 129 Cal . App. 4t h 482,

48889 ( 2005) ; Paj aro Val l ey Wat er Mgmt . Agency v. McGr at h,

27 Cal . Rpt r . 3d 741, 74546, 128 Cal . App. 4t h 1093, 10991100

( 2005) .

Her e, t he r el evant par t i es i n bot h act i ons ar e i dent i cal 11

and t he i ssue of damages i s i dent i cal . The St i pul at ed J udgment

was f i nal and on t he mer i t s. See Cal . St at e Aut o. Assoc. I nt er -


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I ns. Bur eau v. Super i or Cour t , 50 Cal . 3d 658, 66365, 268 Cal .

Rpt r . 284, 28788 ( 1990) . Fi nal l y, t he i ssue was act ual l y

l i t i gat ed because t he par t i es t hemsel ves f i xed t he damages amount

i n t he Set t l ement Agr eement , and necessar i l y deci ded because t hedamages amount i s on t he f ace of t he St i pul at ed J udgment . The

St i pul ated J udgment l i qui dated t he damages. Consequent l y, t he

bankr upt cy cour t was not r equi r ed t o hol d a pr ove- up hear i ng f or

damages. See Davi s, 659 F. 2d at 1161.

Sharma ar gues t hat t he bankr upt cy cour t shoul d not have

gi ven pr ecl usi ve ef f ect t o t he f act s under l yi ng t he St i pul at ed

J udgment because i t i ncl uded no f i ndi ngs of f act . Shar ma i s

cor r ect on t he l aw, but t her e i s no i ndi cat i on t hat t he

bankrupt cy cour t gave pr ecl usi ve ef f ect t o t he St i pul at ed

J udgment f or any i ssue asi de f r om damages. Agai n, so l ong as t he

f act s i n t he Compl ai nt suppor t a det er mi nat i on of l i abi l i t y, t he

Amended J udgment survi ves.

We now t ur n t o t he hear t of t hi s appeal t he i ssue ofwhether t he f act s al l eged i n t he Compl ai nt , and deemed t r ue upon

Shar ma s def aul t , suppor t t he bankrupt cy cour t s det er mi nat i on of

nondi schar geabi l i t y under Sect i on 523( a) ( 2) ( A) . We may af f i r m

t he bankr upt cy cour t s deci si on on any gr ound f i ndi ng suppor t on

t he r ecor d. Ei t el , 782 F. 2d at 1471. As di scussed above, we

r evi ew f or abuse of di scr et i on. Hi nkson, 585 F. 3d at 1262. So

l ong as t he bankrupt cy cour t appl i ed t he cor r ect l egal r ul e, we

r ever se onl y i f t he bankrupt cy cour t s appl i cat i on of t he l aw t o

t he f act s was i l l ogi cal , . . . i mpl ausi bl e, . . . or wi t hout

suppor t i n i nf er ences t hat may be dr awn f r om t he r ecor d i n

ot her wor ds, cl ear l y er r oneous. I d.


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The f i r st i ssue i s whet her t he bankr upt cy cour t appl i ed t he

cor r ect l egal r ul e. Ther e can be no doubt t hat i t di d.

Sect i on 523( a) ( 2) ( A) i s of t en l i t i gat ed i n bankr upt cy cour t ; t he

Compl ai nt cl ear l y i dent i f i ed t he cl ai m under t hi s sect i on; andt he J udgment ( and Amended J udgment ) speci f y t hat r el i ef i s

af f or ded under t hi s sect i on.

The Ni nt h Ci r cui t has est abl i shed a mul t i - f act or t est f or

t he consi der at i on of def aul t j udgment s:

( 1) t he possi bi l i t y of pr ej udi ce t o t he pl ai nt i f f ,( 2) t he mer i t s of pl ai nt i f f s subst ant i ve cl ai m,( 3) t he suf f i ci ency of t he compl ai nt , ( 4) t he sum of

money at st ake i n t he act i on, ( 5) t he possi bi l i t y of adi sput e concer ni ng mat er i al f act s, ( 6) whet her t hedef aul t was due to excusabl e negl ect , and ( 7) t hest r ong pol i cy under l yi ng t he Feder al Rul es of Ci vi lPr ocedur e f avor i ng deci si ons on t he mer i t s.

Ei t el , 782 F. 2d at 147172.

1. Prejudice

The i ssue i s whether Sal ci do, i f t he cour t had not enter ed

def aul t j udgment , woul d have suf f er ed l engt hy and cost l y del aysor been l ef t wi t hout ot her r ecour se f or r ecover y or t he means t o

pr event ongoi ng harm. See I O Gr oup, I nc. v. J ordan, 708 F. Supp.

2d 989, 997 ( N. D. Cal . 2010) ; War ner Br os. Ent m t Co. v. Car i di ,

346 F. Supp. 2d 1068, 1072 ( N. D. Cal . 2004) ; Phi l l i p Mor r i s USA,

I nc. v. Cast wor l d Pr ods. , I nc. , 219 F. R. D. 494, 499 ( C. D. Cal .

2003) . Sharma s di scover y mi sconduct l ed t o del ays i n t he

adver sary pr oceedi ng and i ncr eased cost s t o Sal ci do ( e. g. ,

i ncreased l egal f ees t o pr epar e mot i ons f or sanct i ons) . I f t he

def aul t j udgment had not been ent er ed, t hen t he harm, i n t he f orm

of not bei ng abl e t o pur sue r el i ef under t he St i pul at ed J udgment

due t o t he aut omat i c st ay, woul d have cont i nued. Sal ci do woul d


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have cer t ai nl y suf f er ed pr ej udi ce had def aul t j udgment not been

ent ered.

2. Merits of Plaintiffs Substantive Claims andSufficiency of the Complaint

The second and t hi r d f act or s, t aken t oget her , r equi r e t hat

Sal ci do asser t a cl ai m upon whi ch she may r ecover . I O Gr oup,

708 F. Supp. 2d at 997. Def aul t j udgment i s f avored wher e t he

compl ai nt suf f i ci ent l y st at es a cl ai m f or r el i ef under t he

l i ber al pl eadi ng st andar ds embodi ed i n Rul e 8 of t he Feder al

Rul es of Ci vi l Pr ocedur e. St ephens Medi a LLC v. Ci t i Heal t h,

LLC, No. 2: 09- cv- 02285- MMD- RJ J , 2012 WL 4711957 (D. Nev. Oct . 3,

2012) ( quot i ng Danni ng v. Lavi ne, 572 F. 2d 1386, 1389 ( 9t h Ci r .

1978) ) . I n ot her wor ds, t he compl ai nt must pl ead f act s whi ch, i f

t aken as t r ue, pl ausi bl y gi ve r i se t o l i abi l i t y f or f r aud under

Sect i on 523( a) ( 2) ( A) . Ashcr of t v. I qbal , 556 U. S. 662, 67879

( 2009) . For def aul t j udgment based sol el y on t he compl ai nt ,

wi t hout t he benef i t of a pr ove- up hear i ng, t he f act s i n t hecompl ai nt must go beyond bei ng wel l - pl ed; t hey must suppor t t he

ul t i mat e det er mi nat i on of l i abi l i t y. I n t hi s ci r cumst ance, t he

t wo f act or s col l apse i nt o a si ngl e anal ysi s because i f a

compl ai nt suppor t s a det er mi nat i on of l i abi l i t y, t he cl ai m( s)

upon whi ch t hat l i abi l i t y i s based wer e per f or ce wel l - pl ed.

Sect i on 523( a) ( 2) ( A) except s f r om di schar ge debt s i ncur r ed

under f al se pr et enses, based on f al se repr esent at i ons, or act ual

f r aud. 11 U. S. C. 523( a) ( 2) ( A) ( 2012) . To est abl i sh f r aud

under t hi s sect i on, t he f ol l owi ng f i ve el ement s must be pr oven by

a pr eponder ance of t he evi dence: ( 1) t he debt or made a

r epr esent at i on; ( 2) t he debt or knew t hat t he r epr esent at i on was


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f al se at t he t i me he or she made i t ; ( 3) t he debt or made the

r epr esent at i on wi t h t he i nt ent t o decei ve; ( 4) t he credi t or

j ust i f i abl y r el i ed on t he r epresent at i on; and ( 5) t he cr edi t or

sust ai ned damage as a pr oxi mat e r esul t of t he mi sr epr esent at i onhavi ng been made. Ghomeshi v. Sabban ( I n r e Sabban) , 600 F. 3d

1219, 1222 ( 9t h Ci r . 2010) .

The execut i on of a cont r act i s an i mpl i ed r epresent at i on of

i nt ent t o honor i t s t er ms. See Kar el i n v. Bank of Am. Nat l

Tr ust and Savs. Ass n ( I n r e Kar el i n) , 109 B. R. 943, 947 ( B. A. P.

9t h Ci r . 1990) .

Knowi ng f al si t y requi r es t hat Shar ma ei t her knew at t he t i me

he made t he r epr esent at i ons at i ssue t hat t hey were f al se or

r eckl essl y di sr egar ded t hei r t r ut h. I n r e Sabban, 600 F. 3d at

1222; Ger t sch v. J ohnson & J ohnson, Fi n. Cor p. ( I n r e Ger t sch) ,

237 B. R. 160, 167 ( B. A. P. 9t h Ci r . 1999) . A r epr esent at i on may

be f r audul ent , wi t hout [ actual ] knowl edge of i t s f al si t y, i f t he

per son maki ng i t i s consci ous t hat he has mer el y a bel i ef i n i t sexi st ence and r ecogni zes t hat t her e i s a chance, mor e or l ess

gr eat , t hat t he f act may not be as repr esent ed. I n r e Ger t sch,

237 B. R. at 168 ( quot i ng Rest atement ( Second) of Tor t s 526

cmt . e ( 1977) ) .

I nt ent t o decei ve may be i nf er r ed f r om t he t ot al i t y of

ci r cumst ances. Ci t i bank ( S. D. ) , N. A. v. Eashai ( I n r e Eashai ) ,

87 F. 3d 1082, 1087 ( 9t h Ci r . 1996) ( A cour t may i nf er t he

exi st ence of t he debt or s [ decept i ve] i nt ent . . . i f t he f acts

and ci r cumst ances . . . pr esent a pi ct ur e of decept i ve conduct by

t he debt or . ) . The debt or s asser t i ons of an honest i nt ent must

be wei ghed agai nst nat ur al i nf er ences f r om admi t t ed f act s.


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4 Col l i er on Bankrupt cy 523. 08[ 2] [ e] [ i i ] ( Al an N. Resni ck &

Henr y J . Sommer eds. , 16t h ed. 2013) . A cour t may al so i nf er

i nt ent t o decei ve wher e t he debt or makes a f al se r epr esent at i on

t hat t he debt or knows, or shoul d know, wi l l i nduce t he cr edi t ort o make a l oan. Cf . I n r e Ger t sch, 237 B. R. 160 ( uphol di ng

nondi schar geabi l i t y det er mi nat i on under Sect i on 523( a) ( 2) ( B)

where debt or knowi ngl y pr ovi ded f al se i ncome and asset

i nf or mat i on on l oan appl i cat i on) . Fi nal l y, i nt ent t o decei ve may

be i nf er r ed i f a debt or t akes no st eps t o per f or m under a

cont r act . Mer chs. Nat l Bank & Tr ust Co. of I ndi anapol i s v.

Pappas ( I n r e Pappas) , 661 F. 2d 82, 86 ( 7t h Ci r . 1981) .

J ust i f i abl e r el i ance i s a subj ect i ve st andar d t hat t urns on

a per son s knowl edge under t he par t i cul ar ci r cumst ances.

I n r e Eashai , 87 F. 3d at 1090. J ust i f i cat i on i s a mat t er of

t he qual i t i es and char act er i st i cs of t he par t i cul ar pl ai nt i f f ,

and t he ci r cumst ances of t he par t i cul ar case, r at her t han of t he

appl i cat i on of a communi t y st andar d of conduct t o al l cases. I d. ( quot i ng Fi el d v. Mans, 516 U. S. 59, 70 ( 1995) ) . The

j ust i f i abl e r el i ance st andar d gener al l y does not entai l a dut y t o

i nvest i gat e, and a per son may be j ust i f i ed i n r el yi ng on a

r epr esent at i on of f act even i f he mi ght have ascert ai ned t he

f al si t y of t he r epr esent at i on had he i nvest i gat ed. See Fi el d,

516 U. S. at 70. A dut y t o i nvest i gat e, however , i s i mposed on a

credi t or by vi r t ue of suspi ci ous ci r cumst ances. I d. at 71; see

Wheel s Unl i mi t ed, I nc. v. Sharp ( I n r e Sharp) , 2009 WL 511640

( Bankr. D. I daho 2009) . Thus, j ust i f i abl e r el i ance does not

exi st wher e a cr edi t or i gnor es red f l ags. Mandal ay Resor t Gr p.

v. Mi l l er ( I n r e Mi l l er ) , 310 B. R. 185, 198 ( Bankr . C. D. Cal .


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2004) ( ci t i ng I n r e Anast as, 94 F. 3d at 1286) . [ A] per son

cannot pur por t t o rel y on pr epost er ous r epr esent at i ons or cl ose

hi s eyes t o avoi d di scover y of t he t r ut h. I n r e Eashai , 87 F. 3d

at 109091.The bankr upt cy cour t di d not cl ear l y i ndi cat e on whi ch

i nst ance of al l eged f r aud i nducement of t he pr omi ssor y not es or

i nducement of t he Set t l ement Agr eement i t based t he def aul t

j udgment . Nor di d t he bankr uptcy cour t make any speci f i c

f i ndi ngs of f act . Wi t h r espect t o t he Sect i on 523( a) ( 2) ( A)

cl ai ms, t he Amended J udgment onl y st at es,

ORDERED t hat t he j udgment ent er ed f or Pl ai nt i f f , CarmenSal ci do and agai nst Def endant , Sanj esh Sharma i n theamount of $240, 000 i n Case No. KC051243, st yl ed Sal ci dov. Shar ma Devel opment s, I nc. , et al . , i n t he Super i orCour t of Cal i f or ni a, Count y of Los Angel es, onDecember 29, 2008, i s nondi schar geabl e under 11 U. S. C. 523( a) ( 2) ( A) [ . ]

Am. J . ( Dec. 6, 2012) .

We f i r st note t hat t he novat i on worked by t he Set t l ement

Agr eement i s not a bar t o i nqui r y about t he under l yi ng f r audcl ai m. Ar cher v. Warner , 538 U. S. 314, 323 ( 2003) ( The

set t l ement agr eement and rel eases may have wor ked a ki nd of

novat i on, but t hat f act does not bar t he [ pl ai nt i f f s] f r om

showi ng t hat t he set t l ement debt ar ose out of . . . f r aud[ . ]

( i nt er nal quot at i on mar ks and ci t at i on omi t t ed) ) . Consequent l y,

t he bankr upt cy di d not er r by l ooki ng beyond t he Set t l ement

Agr eement t o assess t he f r audul ent i nducement of t he pr omi ssory

notes.

But a f ai r r eadi ng of t he bankrupt cy cour t s order i s t hat

t he cour t al so r el i ed on t he f r aud i nduci ng t he Set t l ement

Agr eement . The r ef er ence t o t he st ate cour t St i pul ated J udgment ,


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t hi ngs unl ess t hey wer e ver y successf ul . Nei t her[ Sal ci do] nor Franco knew anyone wi t h t hi s l evel ofweal t h and success and bot h f el t t ot al l y i mpr essed andi n awe of Shar ma. . . .

. . . Shar ma guar ant eed t o [ Sal ci do] t hat she woul d

make a 20% pr of i t on i nvest ment s. . . .The i nt er est t hat Shar ma promi sed was par t i cul ar l yent i ci ng t o [ Sal ci do] because t hi s amount woul d cover[ Sal ci do s] mor t gage, t axes, and l eave her wi t h al i t t l e spendi ng money. [ Sal ci do] cr i ed t o Shar ma abouthow she had a huge mor t gage payment at an advanced agei n l i f e and desper at el y needed t he i nt er est t osurvi ve. . . .

[ Sal ci do] l et Shar ma know t hat she woul d l i ke t oi nvest . . . .

Shar ma and [ Sal ci do] had a second meet i ng at Sharma sof f i ce and agai n wi t h Franco pr esent . At t hat t i me,[ Sal ci do] gave Sharma a check f or $240, 000. Sharmagave [ Sal ci do] a check, as wel l , whi ch he t ol d her wasan up f r ont payment f or i nt er est , t o hel p i nduce[ Sal ci do] t hat he had t he money t o cover t he i nt er estand payment s. . . .

Af t er [ Sal ci do] pr ovi ded Sharma and hi s company wi t ht he check f or $240, 000 [ on May 5, 2005] , SharmaDevel opment s, I nc. pr ovi ded [ Sal ci do] payment s t ot al i ng$31, 300 on May 5, 200[ 5] and Sept ember 1, 2005. . . .

. . . Shar ma gave [ Sal ci do] t hese l ar ge payment s t of ur t her ent i ce her t o bel i eve hi m, f ur t her i mpr ess[ her ] wi t h hi s weal t h, and make her f eel a f al se senseof secur i t y r egar di ng her i nvest ment .

Compl . ( Feb. 16, 2011) at 57, 1014, 25, 27.

By March 27, 2006, near l y thr ee mont hs af t er t he t erm under

t he Fi r st Promi ssory Note had expi r ed, Sharma had pai d Sal ci do

t he ent i r e i nt er est amount due $48, 000. The Compl ai nt

cont i nues:

The f i r st year , Shar ma may have been l at e wi t h i nt er estpayment s, but [ Sal ci do] was wi l l i ng t o wor k wi t h t hi s.. . . He al ways seemed t o make a check avai l abl e, andt hen woul d t el l t hem about hi s l avi sh l i f est yl e,i ncl udi ng hi s t r avel s and expensi ve pur chases. Wi t ht hese st or i es of hi s gr eat weal t h and hi s al waysmanagi ng t o pay [ Sal ci do] , even i f somet i mes l ate,


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[ Sal ci do] di d not wor r y and f el t t hat Shar ma woul dal ways pay her event ual l y. . . .

Because t he i nt er est payment s seemed pr of i t abl e t o[ Sal ci do] t hat f i r st year , even i f t hey wer e somet i messpor adi c, [ Sal ci do] agr eed t o r ol l over her i ni t i al

i nvest ment f or anot her year wi t h Sharma i n May2005. . . .

. . . Shar ma had not r ef ur bi shed t he pr oper t i es i nor der t o f l i p t hem, as he had t ol d her . Af t er[ Sal ci do] i nvest ed wi t h [ Shar ma] , she began t o f i nd outt hat t hey had l et some or al l of t hose pr oper t i es go t out t er wast e. Some even ended up bei ng condemned dur i ngt he t i me t hat [ Sal ci do] was st i l l deal i ng wi t h [ Shar ma]and act i vel y i nvest i ng wi t h hi m. . . .

. . . Shar ma di d not hi ng but sel l [ Sal ci do] a bi l l ofgoods and ret urn penni es t o her of her own money whi l e

he r an of f wi t h t he r est of t he i nvest ment . . . .Had Pl ai nt i f f known t he t r ut h about Shar ma, hi s f ai l ur et o mai nt ai n and/ or act ual l y r ef ur bi sh t he pr oper t i est hat he was i nvest i ng her money i nt o, and t he realst ate of hi s f i nances, she never woul d have i nvest edwi t h hi m. . . .

. . . [ Shar ma] never i nt ended t o r epay [ Sal ci do] f ort he money she l oaned hi m.

I d. 3132, 4648, 50, 64.

Taki ng t he above f act ual al l egat i ons as t r ue, we cannot sayt hat t he bankrupt cy cour t er r ed i n maki ng t he i nf er ences

necessar y t o suppor t a det er mi nat i on of nondi schargeabi l i t y under

Sect i on 523( a) ( 2) ( A) f or f r audul ent i nducement of t he pr omi ssor y

not es. The f ol l owi ng concl usi ons ar e nei t her i l l ogi cal ,

i mpl ausi bl e, or wi t hout support i n i nf er ence t hat may be dr awn

f r om f act s i n t he r ecor d: ( i ) Shar ma repr esent ed t hat he was

weal t hy and successf ul , and t hat he woul d i nvest t he l oan

pr oceeds i nt o f l i ppi ng r eal est at e; ( i i ) he knew t hese


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12Sharma ar gues t hat t he l oan proceeds were i n f act used f orr eal est ate devel opment . Appel l ant s Am. Openi ng Br . ( Nov. 14,2012) at 17. I t i s possi bl e t hat Sal ci do and Shar ma ar e bot hcorr ect t hat t he f unds wer e used f or r eal est at e devel opmentand t hat some of t he r el at ed pr oper t i es went t o ut t er wast e.Sharma, however , does not subst ant i ate hi s asser t i on of how t hef unds wer e used, and, mor e i mpor t ant l y, does not r ef ut e Sal ci do sal l egat i on t hat he was not r ef ur bi shi ng and sel l i ng t hepr opert i es as he pr omi sed he woul d do. Sharma r epr esent ed t hathe woul d f l i p t he pr oper t i es, not j ust i nvest t he l oan pr oceeds

i n r eal est at e devel opment . 13Sharma s argument t hat one who i ntends t o commi t f r aud

does not t ake f unds and r epay i t i s unavai l i ng. I d. 24.Sharma has not r epai d any of t he pr i nci pal amount , and a part ywho wi shes t o def r aud anot her may be i ncent i vi zed to make severalpayment s t o est abl i sh t r ust and i nduce f ur t her i nvest ment s. The f act s here i l l ust r at e t he premi se t hat t r ust i s t hef oundat i on of a good con. Sal ci do agr eed t o r ol l over her l oani n t he Second Pr omi ssory Not e based on Shar ma s per f ormance( al bei t unt i mel y) under t he Fi r st Pr omi ssor y Not e.

Sharma s argument t hat Sal ci do assumed t he r i sk i s equal l yunavai l i ng. I d. 26. A credi t or onl y assumes t he r i sk t hat t hebor r ower wi l l be unabl e t o repay t he l oan, not t hat t he bor r owerdoes not i nt end t o r epay t he l oan i n t he f i r st pl ace. SeeI n r e Kar el i n, 109 B. R. at 947. Put anot her way, t he act ofbor r owi ng i mpl i es an i nt ent t o r epay t he l oan. I n any event , t hef r aud her e i s not t he decept i on as t o i nt ent t o pay but decept i onabout t he abi l i t y to pay.

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r epr esent at i ons were f al se at t he t i me he made t hem; 12 ( i i i ) he

made t he repr esent at i ons wi t h t he i nt ent t o decei ve Sal ci do; 13

( i v) Shar ma j ust i f i abl y rel i ed on t he r epr esent at i ons; and

( v) Sal ci do sust ai ned damage t he l oss of $240, 000 i n l oanpr i nci pal as a pr oxi mat e r esul t of t he mi sr epr esent at i ons.

Hi nkson, 585 F. 3d at 126162. Al t hough t her e may be ot her

per mi ssi bl e vi ews of t he evi dence, Sharma has put f or t h none that

r ender t hi s vi ew cl ear l y er r oneous. Ander son, 470 U. S. at 574.


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b. Inducement of the Settlement Agreement

Concer ni ng t hi s i nst ance of f r aud, t he Compl ai nt al l eges:

On or about August 7, 2008, Sharma st i pul at ed t o aj udgment agai nst hi s compani es and hi m personal l y f or

$240, 000. . . .Sharma never made any payment on t hat J udgment .

Sharma never had any i ntent i on of honor i ng thatJ udgment .

Sharma mal i ci ousl y and f r audul ent l y i nduced [ Sal ci do]t o accept a st i pul ated J udgment t hat he never i nt endedon per f ormi ng and has made no ef f or t t o per f ormupon. . . . Shar ma set i t up so t hat [ Sal ci do s] andany ot her j udgment woul d be di f f i cul t , i f noti mpossi bl e, t o col l ect because he t r ansf er r ed al l of

hi s asset s t o appear i nsol vent and j ust i f y a bankrupt cyact i on.

Sharma t r ansf er r ed asset s and di r ect ed peopl e wi t hi nhi s busi ness t o t r ansf er asset s f r om hi msel f t o ot her st o appear i nsol vent .

[ Shar ma] . . . ent er ed i nt o st i pul at i ons and agr eement sf or payment , i ncl udi ng t he St i pul at ed J udgment , i n badf ai t h and wi t h no i nt ent t o ever per f or m . . . .

[ Sal ci do] i ncur r ed damages as a r esul t of t hef or egoi ng . . . .

Compl . ( Feb. 16, 2011) at 53, 5658, 60, 66, 68.

As wi t h t he pr omi ssory notes, we cannot say t hat t he

bankrupt cy cour t er r ed i n r el yi ng on t hese f act ual al l egat i ons t o

make t he i nf er ences necessary t o support a det er mi nat i on of

nondi schar geabi l i t y under Sect i on 523( a) ( 2) ( A) f or f r audul ent

i nducement of t he Set t l ement Agr eement . The f ol l owi ng

concl usi ons ar e nei t her i l l ogi cal , i mpl ausi bl e, or wi t hout

suppor t i n i nf er ence t hat may be dr awn f r om f act s i n t he r ecor d:

( i ) Sharma repr esent ed t hat he woul d honor t he Set t l ement

Agr eement ; ( i i ) he knew t hat r epr esent at i on was f al se at t he t i me

he made i t ; ( i i i ) he made t he r epr esent at i on wi t h t he i nt ent t o


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28 14Cal . Code Ci v. Proc. 685. 010 ( West 2012) .

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decei ve Sal ci do; ( i v) Sal ci do j ust i f i abl y r el i ed on t he

r epr esent at i on; and ( v) Sal ci do sust ai ned damage f or est al l ed

col l ect i on r emedi es now val ued at zero because t he bankr upt cy

f i l i ng pr event s a r et ur n t o st at e cour t , and l ess f avor abl epayback t erms ( f i ve years at 7% under t he Set t l ement Agr eement

compar ed t o i mmedi at e payment wi t h 10% post - j udgment i nterest

upon a j udgment i n st at e cour t 14) as a pr oxi mat e r esul t of t he

mi sr epr esent at i on. Hi nkson, 585 F. 3d at 126162. Al t hough t her e

may be ot her per mi ss i bl e vi ews of t he evi dence, Sharma has put

none f or t h t hat r ender t hi s vi ew cl ear l y er r oneous. Ander son,

470 U. S. at 574.

As t he r ecor d suppor t s a det er mi nat i on of f r aud i n t he

i nducement as t o t he pr omi ssory not es and as t o t he Set t l ement

Agr eement , t he t hi r d and f our t h Ei t el f act or s st r ongl y wei gh i n

f avor of af f i r mance.

We now r et ur n t o t he remai nder of t he Ei t el f act or s.

3. Sum of Money at Stake

Under t hi s f actor , t he cour t must consi der t he amount of

money at st ake i n r el at i on t o t he ser i ousness of Def endant s

conduct . Pepsi Co, I nc. v. Cal . Secur i t y Cans, 238 F. Supp. 2d

1172, 1176 ( C. D. Cal . 2002) . Wher e t he amount of money i s hi gh

and t he ser i ousness of conduct i s l ow, def aul t j udgment i s

di sf avor ed. See i d. at 117677. Si mi l ar l y, i f t he pl ai nt i f f

seeks equi t abl e rel i ef and the def endant s conduct was sever e,

def aul t j udgment i s f avored. I d. Al t hough her e t he amount of

money i s s i gni f i cant $240, 000 i t i s out wei ghed by t he


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ser i ousness of Shar ma s f r audul ent conduct . The al l egat i ons of

t he Compl ai nt are t hat he mi sl ed Sal ci do, an unempl oyed per son i n

di r e st r ai t s, and t her eby i nduced her t o hand over t he pr oceeds

of a home equi t y l i ne of cr edi t a l i ne of cr edi t whose payment she knew depended on t he per f or mance of i nvest ment s whi ch he di d

not even make. Thi s f actor s t r ongl y f avors uphol di ng t he Amended

J udgment .

4. Possibility of Dispute Concerning Material Facts

Thi s f act or consi ders t he possi bi l i t y of a di sput e

concer ni ng mat er i al f act s. I n r e Ei t el , 782 F. 2d at 147172.

The mor e preci se quest i on i s whether t here i s even a possi bi l i t y

of a di sput e concer ni ng mat er i al f act s as a resul t of t he

def aul t . See Cal . Secur i t y Cans, 238 F. Supp. 2d at 1176;

Car i di , 346 F. Supp. 2d at 1072. The answer i s no. We r el y onl y

on t he f act s al l eged i n t he Compl ai nt ( deemed t r ue by oper at i on

of Shar ma s def aul t ) . Thus, t her e i s no possi bi l i t y of di sput i ng

t he mater i al f act s cont ai ned i n t he Compl ai nt , as Sharma s ownact i ons r esul t ed i n t he ent r y of def aul t and t he consequent

posi t i on t hat t he wel l - pl ead al l egat i ons of t he Compl ai nt wer e

undi sput ed. See Car i di , 238 F. Supp. 2d at 1072.

5. Default Due to Excusable Neglect

Def aul t j udgment i s gener al l y di sf avor ed wher e def aul t

r esul t ed f r om excusabl e negl ect . A def endant s conduct i s

cul pabl e i f he has r ecei ved act ual or const r uct i ve not i ce of t he

f i l i ng of t he act i on and f ai l ed t o answer . Meadows v. Domi ni can

Republ i c, 817 F. 2d 517, 521 ( 9t h Ci r . 1987) . Sharma s behavi or

went wel l beyond f ai l i ng t o answer a pr oper l y- served compl ai nt .

He answer ed and act i vel y par t i ci pat ed i n di scover y. Hi s


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We do not cr edi t t he $86, 700 t hat Sharma pai d t o Sal ci doagai nst t he $240, 000 l oan pr i nci pal . Shar ma agr eed t o l i abi l i t yf or $240, 000 i n t he St i pul at ed J udgment af t er he had made t he$86, 700 payment s t o Sal ci do. To t he ext ent t hat anyone has acompl ai nt about t he j udgment amount , i t woul d be Sal ci do as shemay have had a r i ght t o seek addi t i onal amount s f or i nt er esti ncur r ed. But she al so agr eed t o t he j udgment amount i n t heSt i pul at ed J udgment . Thus, nei t her par t y has gr ounds t ochal l enge t he j udgment amount and $240, 000 i s t he cor r ect f i gur e.

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di scover y abuse l ed t o sanct i ons, i ncl udi ng st r i ki ng hi s Answer ,

whi ch i n t ur n l ed di r ect l y t o t he ent r y of def aul t . Thi s f act or

st r ongl y f avor s uphol di ng t he Amended J udgment .

6. Policy Favoring Decisions on the Merits

Whi l e t her e i s a st r ong pol i cy under l yi ng t he Feder al Rul es

of Ci vi l Pr ocedur e f avor i ng deci si ons on t he mer i t s,

I n r e Ei t el , 782 F. 2d at 1470, t hi s f act or st andi ng al one i s

i nsuf f i ci ent t o pr event ent r y of def aul t j udgment . Car i di ,

346 F. Supp. 2d at 1073. As t hi s i s t he onl y f act or i n Shar ma s

f avor , i t does not car r y suf f i ci ent wei ght t o j ust i f y r ever si ng

t he Amended J udgment . I d.

Because t he Ei t el f act or s st r ongl y wei gh i n f avor of

uphol di ng t he Amended J udgment i n t he amount of $240, 000, 15 we

have no di f f i cul t y doi ng so.

Even i f t he Ei t el f act or s di d not wei gh so heavi l y, we woul d

l i kel y af f i r m i n any case because of t he pot ent i al negat i ve

ef f ects of a r ever sal . I n t hi s speci f i c cont ext a def aul tj udgment f ol l owi ng sanct i ons f or di scover y abuse t hat i ncl ude a

st r i cken answer a r ever sal woul d l i kel y l ead t o the bankrupt cy

cour t al l owi ng t he pl ai nt i f f t o amend her compl ai nt . The

def endant woul d t hen have t he opport uni t y t o f i l e an answer . The


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st i ng of t he sanct i on st r i ki ng t he answer woul d t hus be r emoved,

as t he def endant woul d ul t i matel y have t he oppor t uni t y t o

chal l enge t he pl ai nt i f f s f actual al l egat i ons. A def endant s

obst r uct i on and mal f easance i n di scover y, whi ch i s t he ver ypr ocess by whi ch a pl ai nt i f f obt ai ns i nf or mat i on necessary t o

pr ove t he f act s pl ead i n t he compl ai nt , woul d t hus be r ewarded.

I nst ead of movi ng t o di smi ss under Ci vi l Rul e 12( b) ( 6) f or

f ai l ur e t o st ate a cl ai m or movi ng f or summary j udgment under

Ci vi l Rul e 56, a def endant bel i evi ng t hat ei t her t he compl ai nt i s

i nsuf f i ci ent or t hat t he pl ai nt i f f has i nsuf f i ci ent f act s to

pr oceed t o t r i al coul d af f i r mat i vel y t hwar t a pl ai nt i f f s

di scover y ef f or t s wi t h t he knowl edge that a st r i cken answer wi l l

merel y l ead t o an amended compl ai nt and t he oppor t uni t y t o

r epl ead t he answer . I n addi t i on, t he pl ai nt i f f woul d l ose t he

opport uni t y t o meani ngf ul l y amend i t s pl eadi ngs under Rul e 7015

because t he pl ai nt i f f woul d not be abl e t o di scover t he ver y

f act s t hat woul d suppor t such amendment . Rul e 7015.Mor eover , t her e i s a st r ong i nf er ence t hat t he cour t

bel i eved i n t he suf f i ci ency of t he Compl ai nt and i nt ended

st r i ki ng t he answer t o be a t er mi nat i ng sanct i on. I f not , t he

J udgment woul d not have f ol l owed so cl osel y behi nd t he sanct i on

order and/ or t he bankr upt cy cour t woul d have hel d a pr ove- up

hear i ng t o det er mi ne l i abi l i t y. I f t he Compl ai nt wer e

i nsuf f i ci ent t o suppor t l i abi l i t y, st r i ki ng t he answer woul d have

been an essent i al l y meani ngl ess act i on as Sal ci do s onl y avenue

f or r el i ef woul d have been t o amend t he Compl ai nt , whi ch i n t ur n

woul d have gi ven Sharma t he oppor t uni t y t o repl ead the answer .

I f we wer e t o rever se, we woul d be di mi ni shi ng the bankr upt cy


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cour t s power t o moni t or t he l i t i gat i on bef or e i t by maki ng

t er mi nat i ng sanct i ons par t i al l y or compl et el y i r r el evant . See

I n r e Nguyen, 447 B. R. 268, 280 ( B. A. P. 9t h Ci r . 2011) ( en banc)

( Bankrupt cy cour t s have the i nher ent aut hor i t y t o regul at e thepr act i ce of at t orneys who appear bef ore t hem. ) ( ci t i ng Chamber s

v. NASCO, I nc. , 501 U. S. 32, 4345 ( 1991) ) . We r ef use t o condone

t he behavi or t hat woul d l i kel y f ol l ow f r om a r ever sal .

We now t ur n t o t he i ssue of at t or ney s f ees.

C. The Bankruptcy Court Erroneously Awarded Attorneys Fees toSalcido.

1. The Bankruptcy Courts Jurisdiction to Award AttorneysFees

The ef f ect i ve f i l i ng of a not i ce of appeal t r ansf er s

j ur i sdi ct i on f r om t he bankr uptcy cour t t o t hi s cour t wi t h r espect

t o al l mat t er s i nvol ved i n t he appeal . See Masal osal o by

Masal osal o v. St onewal l I ns. Co. , 718 F. 2d 955, 956 ( 9t h Ci r .

1983) ( ci t i ng Gr i ggs v. Pr ovi dent Consumer Di sc. Co. , 459 U. S. 56

( 1982) ( per cur i am) ) . But t hi s r ul e of excl usi ve appel l at ej ur i sdi ct i on i s a cr eat ure of j udi ci al prudence . . . and i s not

absol ut e. I t i s desi gned t o avoi d t he conf usi on and i nef f i ci ency

of t wo cour t s consi der i ng t he same i ssues si mul t aneousl y. I d.

To avoi d pi ecemeal appeal s, prevent del ay and dupl i cat i on at t he

appel l at e l evel , [ and] pr event hast y consi der at i on of

post j udgment f ee mot i ons, bankr upt cy cour t s r et ai n t he power t o

awar d at t or ney s f ees af t er t he not i ce of appeal has been f i l ed.

I d. at 957 ( di scussi ng t he power of t he di st r i ct cour t ) ; U. S. ex

r el . Shut t v. Cmt y. Home & Heal t h Car e Ser vs. , I nc. , 550 F. 3d

764, 766 ( 9t h Ci r . 2008) ; U. S. v. Edwar ds, 800 F. 2d 878, 884 ( 9t h

Ci r . 1986) ; J . J . W. C. Ent er s. v. Pugh ( I n r e Pugh) , 72 B. R. 174,


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178 ( D. Or . 1986) .

Accor di ngl y, t he bankrupt cy cour t r et ai ned t he power t o

or der at t or ney s f ees upon Sal ci do s post - Not i ce of Appeal mot i on

and di d not er r by exer ci si ng that power .2. The Merits of the Attorneys Fee Award / California Law

Al t hough the bankr upt cy cour t had t he power t o or der

at t or ney s f ees, t he t hor ni er quest i on i s whet her t he cour t

appl i ed t he cor r ect l egal r ul e. As a mat t er of l aw, was Sal ci do

ent i t l ed t o at t or ney s f ees? Under t he pr i nci pl e known as the

Amer i can Rul e, pr evai l i ng par t i es i n f eder al cour t ar e not

or di nar i l y ent i t l ed t o at t or ney s f ees unl ess aut hor i zed by

cont r act or by st at ut e. Al yeska Pi pel i ne Ser v. Co. v. Wi l der ness

Soc y, 421 U. S. 240, 257 ( 1975) . The Bankr upt cy Code does not

pr ovi de a gener al r i ght t o r ecover at t or ney s f ees. Her i t age

For d v. Bar of f ( I n r e Bar of f ) , 105 F. 3d 439, 441 ( 9t h Ci r . 1997) .

The Supreme Cour t has addr essed t he preci se i ssue of whether

a pr evai l i ng credi t or can r ecover at t or ney s f ees i n aSect i on 523( a) ( 2) act i on. I n Cohen v. de l a Cr uz, 523 U. S. 213

( 1998) , t he Cour t hel d t hat a debt i ncur r ed by f r aud can i ncl ude

cost s and at t or ney s f ees. Once i t has been est abl i shed t hat

speci f i c money or pr oper t y has been obt ai ned by f r aud, . . . any

debt ar i si ng t her ef r om i s except ed f r om di schar ge. I d. at 218.

A pr evai l i ng credi t or s r i ght t o at t or ney s f ees i s not

absol ut e, however . We have i nt erpr eted Cohen such t hat t he

det er mi nat i ve quest i on f or awar di ng at t or ney s f ees i s whet her

t he cr edi t or woul d be abl e t o recover t he f ee out si de of

bankrupt cy under st at e or f eder al l aw. AT & T Uni ver sal Car d

Servs. , Corp. v. Hung Tan Pham ( I n re Hung Tan Pham) , 250 B. R.


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93, 99 ( B. A. P. 9t h Ci r . 2000) . Put mor e pr eci sel y, t he quest i on

i s whet her [ t he] credi t or woul d be ent i t l ed t o f ees i n st at e

cour t f or est abl i shi ng t hose el ement s of t he cl ai m whi ch t he

bankrupt cy cour t f i nds suppor t a concl usi on ofnondi schar geabi l i t y. I n r e Di nan, 448 B. R. at 785 ( quot i ng

Ki l bor n v. Haun ( I n r e Haun) , 396 B. R. 522, 528 ( Bankr . D. I daho

2008) ) .

Because t he basi s f or at t or ney s f ees can be st at ut or y or

cont r act ual , i d. at 786, and t her e i s no expr ess st at ut or y basi s

f or at t or ney s f ees, our anal ysi s cent er s on t he at t or ney s f ee

pr ovi si on i n t he Set t l ement Agr eement as const r ued under non-

bankrupt cy l aw ( as t her e i s no such pr ovi si on i n ei t her of t he

pr omi ssor y not es) . I f t he scope of t he at t or ney s f ee pr ovi si on

i s broad enough t o encompass a st ate cour t act i on t hat has t he

same el ement s as a Sect i on 523( a) ( 2) ( A) cl ai m common l aw f r aud

t hen Sal ci do i s ent i t l ed t o at t or ney s f ees. Tur t l e Rock

Meadows Homeowners Ass n v. Sl yman ( I n re Sl yman) , 234 F. 3d 1081,1083 (9t h Ci r . 2000) ( al l f i ve el ement s of common l aw f r aud under

Cal i f or ni a l aw must be pr oven t o suppor t nondi schar geabi l i t y

det er mi nat i on under 523( a) ( 2) ( A) ) .

I n r el evant par t , t he at t or ney s f ee pr ovi si on st at es,

[ I ] t i s agr eed by t he par t i es t hat al l at t or neys f eesand cost s i ncur r ed as a r esul t of or i n connect i on t ot he LAWSUI T, medi at i on, and set t l ement shal l be borne

by t he par t i es who i ncur r ed such at t or neys f ees andcost s. Shoul d sui t be br ought t o enf or ce or i nt er pr etany par t of t hi s Agr eement , t he pr evai l i ng par t yshal l be ent i t l ed t o recover as an el ement of cost s ofsui t and not as damages, r easonabl e at t orneys f eesf i xed by the Cour t . The pr evai l i ng par t y shal l be t hepar t y ent i t l ed t o r ecover hi s/ her / i t s cost s of sui t ,r egar dl ess of whet her such sui t pr oceeds t o f i nalj udgment .


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Set t l ement Agr eement ( J ul y 8, 2008) at 19 ( emphasi s added) .

Sal ci do i s unquest i onabl y the pr evai l i ng par t y, as we af f i r m t he

bankrupt cy cour t s det er mi nat i on of f r aud i n the pr ocur

In re: Sanjesh Prasad Sharma and Aracely Colombina Sharma, 9th Cir. BAP (2013)

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Transcript of In re: Sanjesh Prasad Sharma and Aracely Colombina Sharma, 9th Cir. BAP (2013)