FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
In re: YEHUDA SABBAN,
Debtor, No. 08-60017
BAP Nos.
ABDUL M. GHOMESHI,
Appellant, CC-07-01269-
MOPaD
v. 05-01574-KT
YEHUDA SABBAN, OPINION
Appellee.
Appeal from the Ninth Circuit
Bankruptcy Appellate Panel
Pappas, Montali, and Dunn, Bankruptcy Judges, Presiding
Submitted October 9, 2009*
Pasadena, California
Filed April 13, 2010
Before: William A. Fletcher and Richard R. Clifton,
Circuit Judges, and James K. Singleton,** District Judge.
Opinion by Judge William A. Fletcher
*The panel unanimously finds this case suitable for decision without
oral argument. See Fed. R. App. P. 34(a)(2).
**The Honorable James K. Singleton, United States District Judge for
the District of Alaska, sitting by designation.
5527
IN RE SABBAN 5529
COUNSEL
Rodolfo Lewels, Los Angeles, California, for the appellant.
Shai Oved, Woodland Hills, California, for the appellee.
5530 IN RE SABBAN
OPINION
W. FLETCHER, Circuit Judge:
Section 523(a)(2)(A) of the Bankruptcy Code excepts from
discharge any debt for money, property, services, or credit
obtained by fraud. 11 U.S.C. § 523(a)(2)(A). California law
provides that a client who employs an unlicensed contractor
may recover all compensation paid to that contractor, regard-
less of whether the contractor has committed fraud and
regardless of whether the client has sustained actual harm.
Cal. Bus. & Prof. Code § 7031(b). We consider in this case
whether a monetary award under this state law is excepted
from discharge pursuant to § 523(a)(2)(A). We hold that the
award does not fall within the exception and is therefore dis-
chargeable.
I. Background
Debtor Yehuda Sabban held the majority interest in Pacific
Coast Creations (“Pacific”), a general partnership that per-
formed home remodeling. Beginning in October 2002, credi-
tor Abdul Ghomeshi entered into a series of contracts with
Sabban and Pacific to perform remodeling work on
Ghomeshi’s home. Prior to entering into these contracts, Sab-
ban falsely represented to Ghomeshi that Pacific was licensed
by California’s Contractors State License Board. In fact,
Pacific was not licensed.
Pacific acted as general contractor for the remodeling proj-
ect, contracting the work out to licensed subcontractors.
Ghomeshi paid $123,000 to Pacific and Sabban for the work
performed. Pacific and Sabban in turn paid $129,217.95, for
Ghomeshi’s benefit, to the licensed subcontractors and other
material and labor providers.
Ghomeshi sued Sabban in state court, alleging breach of
contract, negligence, fraud, and violations of California Busi-
IN RE SABBAN 5531
ness & Professions Code §§ 7160 and 7031(b). After other
claims were withdrawn or dismissed, Ghomeshi proceeded to
trial on his claims under § 7160 and § 7031(b). The state court
found that Ghomeshi was induced to sign the contract in reli-
ance upon false and fraudulent representations made by Sab-
ban and Shimshon Avidan, an agent of Pacific, that Pacific
was a licensed contractor.
California Business & Professions Code § 7160 provides a
cause of action to individuals induced to contract for home
improvements in reliance on fraudulent statements. A suc-
cessful plaintiff may recover a penalty of $500 and reasonable
attorney’s fees, plus “any damages sustained by him by rea-
son of such statements or representations made by the con-
tractor or solicitor.” Pursuant to § 7160, the state court
awarded Ghomeshi the $500 penalty and attorney’s fees. The
state court declined to award damages under § 7160, conclud-
ing that “[t]echnically there are no damages.”
California Business & Professions Code § 7031(b) provides
that a party who has used the services of an unlicensed con-
tractor may recover all compensation paid to that contractor.
Liability under § 7031(b) requires only that compensation
have been paid to an unlicensed contractor. Fraud and actual
harm are irrelevant. See Hydrotech Sys., Ltd. v. Oasis Water-
park, 52 Cal. 3d 988, 995, 997-98, 803 P.2d 370, 374, 376
(Cal. 1991). Pursuant to § 7031(b), the state court awarded
Ghomeshi $123,000, the amount he had paid to Sabban and
Pacific. The state court explained that “[r]ecovery under Busi-
ness and Professions Code Section 7031(b) is in the nature of
disgorgement of compensation paid by plaintiff to defen-
dants.”
Sabban subsequently filed for bankruptcy protection pursu-
ant to Chapter 7 of the Bankruptcy Code. Ghomeshi filed an
adversary action to determine dischargeability. Following
cross-motions for summary judgment, the bankruptcy court
issued a tentative ruling. It concluded, relying on Cohen v. de
5532 IN RE SABBAN
la Cruz, 523 U.S. 213, 223 (1998), that the $123,000 award
imposed as a remedy for violation of § 7031(b) qualified as
a debt obtained by fraud within the meaning of 11 U.S.C.
§ 523(a)(2)(A) and was therefore nondischargeable. Follow-
ing supplemental briefing, the bankruptcy court changed its
tentative ruling, now concluding that the award under
§ 7031(b) was dischargeable. The court entered an order pro-
viding that the award under § 7031(b) (incorrectly stated as
$123,500) was dischargeable and that the award under § 7160
was nondischargeable.
Ghomeshi timely appealed the bankruptcy court’s decision
to the Bankruptcy Appellate Panel (“BAP”). Over a dissent,
the BAP affirmed the bankruptcy court’s determination that
the state court award under § 7031(b) was dischargeable and
the award under § 7160 was nondischargeable. The BAP held
that the bankruptcy court inadvertently included the $500 pen-
alty in the dischargeable debt amount, even though it had spe-
cifically held that the $500 penalty (part of the § 7160 award)
was nondischargeable. The BAP held that the award of
$123,000 under § 7031(b) was dischargeable, and that the
$500 penalty, plus attorney’s fees, awarded under § 7160 was
nondischargeable.
Ghomeshi timely appealed from the BAP’s holding that the
$123,000 award was dischargeable. Sabban declined to file an
answering brief, indicating he was agreeable to submitting on
the former briefs. Ghomeshi moved to submit this case on the
briefs, and we granted his motion.
II. Standard of Review
We review the BAP’s decision on appeal from the bank-
ruptcy court de novo. Turtle Rock Meadows Homeowners
Ass’n v. Slyman (In re Slyman), 234 F.3d 1081, 1085 (9th Cir.
2000). This court conducts “an independent review of the
bankruptcy court’s decision without deferring to the BAP.”
IN RE SABBAN 5533
Id. We review de novo the bankruptcy court’s grant of sum-
mary judgment. Id.
III. Discussion
A. The Fraud Exception to Dischargeability
[1] Section 523(a)(2)(A) of the Bankruptcy Code prohibits
the discharge of any enforceable obligation for money, prop-
erty, services, or credit, to the extent that the money, property,
services, or credit were obtained by fraud, false pretenses, or
false representations. 11 U.S.C. § 523(a)(2)(A); Cohen, 523
U.S. at 218. The creditor bears the burden of proving the
applicability of § 523(a)(2)(A) by a preponderance of the evi-
dence. Slyman, 234 F.3d at 1085. We have consistently held
that making out a claim of non-dischargeability under
§ 523(a)(2)(A) requires the creditor to demonstrate five ele-
ments:
(1) the debtor made . . . representations;
(2) that at the time he knew they were false;
(3) that he made them with the intention and purpose
of deceiving the creditor;
(4) that the creditor relied on such representations;
[and]
(5) that the creditor sustained the alleged loss and
damage as the proximate result of the misrepresenta-
tions having been made.
Am. Express Travel Related Servs. Co. v. Hashemi (In re
Hashemi), 104 F.3d 1122, 1125 (9th Cir. 1996) (quoting Brit-
ton v. Price (In re Britton), 950 F.2d 602, 604 (9th Cir.
1991)).
5534 IN RE SABBAN
The exception to dischargeability of debts under
§ 523(a)(2)(A) strikes a balance between competing goals. In
order to avoid unjustifiably impairing a debtor’s fresh start,
we have held that the exception “should be construed strictly
against creditors and in favor of debtors.” Klapp v. Landsman
(In re Klapp), 706 F.2d 998, 999 (9th Cir. 1983); cf. Beaupied
v. Chang (In re Chang), 163 F.3d 1138, 1140 (9th Cir. 1998)
(discussing the competing policies of “fresh start” and
enforcement of domestic support obligations embodied in
§ 523(a)(5)). At the same time, we have recognized that Con-
gress created the exception “to prevent a debtor from retain-
ing the benefits of property obtained by fraudulent means and
to ensure that the relief intended for honest debtors does not
go to dishonest debtors.” Slyman, 234 F.3d at 1085 (quoting
4 Collier on Bankruptcy ¶ 523.08[1][a] (15th ed. rev. 2000)).
In describing the reach and purpose of the exception, the
Supreme Court has remarked that “it is ‘unlikely that Con-
gress . . . would have favored the interest in giving perpetra-
tors of fraud a fresh start over the interest in protecting
victims of fraud.’ ” Cohen, 523 U.S. at 223 (quoting Grogan
v. Garner, 498 U.S. 279, 287 (1991)).
[2] Courts once limited the application of § 523(a)(2)(A) to
situations in which the debtor received a benefit from his or
her fraudulent activity. See Muegler v. Bening, 413 F.3d 980,
983 (9th Cir. 2005) (citing cases). However, in Cohen v. de
la Cruz, the Supreme Court held that the reach of
§ 523(a)(2)(A) is not limited to the amount of benefit received
by the debtor. Rather, § 523(a)(2)(A) “prevents the discharge
of all liability arising from fraud.” 523 U.S. at 215. Following
Cohen, we have concluded that there is no requirement that
the debtor “have received a direct or indirect benefit from his
or her fraudulent activity in order to make out a violation of
§ 523(a)(2)(A).” Muegler, 413 F.3d at 983-84. Other circuits
have held similarly. See, e.g., Deodati v. M.M. Winkler &
Assocs. (In re M.M. Winkler & Assocs.), 239 F.3d 746, 749
(5th Cir. 2001); Pleasants v. Kendrick (In re Pleasants), 219
F.3d 372, 375 (4th Cir. 2000).
IN RE SABBAN 5535
B. Ghomeshi’s Non-Dischargeability Claim
[3] The parties do not dispute that Ghomeshi, the creditor,
has established the first four elements for nondischargeability
under § 523(a)(2)(A). The only issue is whether the $123,000
awarded by the state court under § 7031(b) constitutes “loss
and damage” sustained by Ghomeshi “as the proximate
result” of the false representation that Pacific was a licensed
contractor.
The state court found that Ghomeshi was induced to con-
tract for home remodeling in reliance on Sabban’s fraudulent
misrepresentation that Pacific was licensed. But the state
court made clear that Ghomeshi suffered no actual loss as a
result of this misrepresentation.
Ghomeshi contends that Cohen compels us to conclude that
the $123,000 award is nondischargeable. Cohen involved a
landlord who charged rents above the amount permitted by
local ordinance. 523 U.S. at 215. The city rent control admin-
istrator ordered the landlord to return the excess rents. The
landlord refused to comply and subsequently filed for bank-
ruptcy. Id. The tenants initiated an adversary proceeding in
the bankruptcy court under the New Jersey Consumer Fraud
Act. That Act provides for the recovery of treble damages
from any person who has used “any unconscionable commer-
cial practice, deception, fraud, false pretense, false promise,
misrepresentation . . . or omission of any material fact with
intent that others rely upon such concealment, suppression or
omission, in connection with the sale or advertisement of any
merchandise or real estate . . . .” N.J. Stat. Ann. § 56:8-2.
Following a bench trial, the bankruptcy court found that the
landlord had committed “actual fraud” within the meaning of
§ 523(a)(2)(A), and that his actions violated the New Jersey
Consumer Fraud Act. Cohen, 523 U.S. at 215-16. The bank-
ruptcy court awarded treble damages under the New Jersey
statute and held the entire award nondischargeable. Id. at 216.
5536 IN RE SABBAN
The Supreme Court agreed, holding that the entire award
arose out of the fraud and was therefore nondischargeable. Id.
at 218-19, 223. The Court wrote that Ҥ 523(a)(2)(A) is best
read to prohibit the discharge of any liability arising from a
debtor’s fraudulent acquisition of money, property, etc.,
including an award of treble damages for the fraud.” Id. at
221 (emphasis added). “Under New Jersey law, the debt for
fraudulently obtaining $31,382.50 in rent payments includes
treble damages and attorney’s fees and costs, and conse-
quently, petitioner’s entire debt of $94,147.50 (plus attorney’s
fees and costs) is nondischargeable in bankruptcy.” Id. at 223.
Ghomeshi contends that even if he did not suffer actual loss
as a result of Sabban’s fraudulent misrepresentation that
Pacific was licensed, the award of $123,000 is “traceable to”
or “resulting from” the fraud and is therefore nondischarge-
able. See Cohen, 523 U.S. at 218 (Section 523(a)(2)(A) bars
“discharge of debts ‘resulting from’ or ‘traceable to’ fraud.”
(quoting Field v. Mans, 516 U.S. 59, 61, 64 (1995)).
Ghomeshi emphasizes that the state court found that Sabban
made a fraudulent misrepresentation that induced Ghomeshi
to enter into a contract with Pacific, and that the court
awarded Ghomeshi $123,000 for Sabban’s violation of
§ 7031(b). Ghomeshi argues that under Cohen “it makes no
difference that a debtor’s proven fraud exposes him to further
liability for violation of laws that do not mention fraud.”
We do not read § 523(a)(2)(A) and Cohen as broadly as
Ghomeshi does. Though it is a somewhat close question, we
hold that the judgment against Sabban under § 7031(b) is dis-
chargeable.
[4] We note two ways in which the case before us is differ-
ent from Cohen. First, unlike the tenants in Cohen, Ghomeshi
suffered no actual harm as a result of Sabban’s misrepresenta-
tion that Pacific held a contractor’s license. Actual damages
are available under § 7160, but the state court specifically
IN RE SABBAN 5537
declined to award them, holding that Ghomeshi had suffered
no harm.
[5] Second, unlike the New Jersey Consumer Fraud Act at
issue in Cohen, § 7031(b) is not premised on the commission
of fraud. In order to recover compensation paid to a contrac-
tor, a plaintiff in a § 7031(b) suit need only show that the con-
tractor was unlicensed. See Cal. Bus. & Prof. Code § 7031(b)
(“[A] person who utilizes the services of an unlicensed con-
tractor may bring an action in any court of competent jurisdic-
tion in this state to recover all compensation paid to the
unlicensed contractor for performance of any act or con-
tract.”).
[6] To the extent that California has a statute comparable
to the New Jersey Consumer Fraud Act, it is § 7160, under
which Ghomeshi was awarded the $500 penalty and attor-
ney’s fees. Section 7160, like the New Jersey statute, is prem-
ised on fraud. Section 7160 provides that “[a]ny person who
is induced to contract for a work of improvement . . . in reli-
ance on false or fraudulent representations or false statements
knowingly made,” may recover a $500 penalty, reasonable
attorney’s fees, and actual damages. In accordance with
Cohen, the bankruptcy court in our case held that the state
court award of $500 plus attorney’s fees under § 7160 was
nondischargeable. Sabban has not appealed that part of the
bankruptcy court’s judgment.
[7] Ghomeshi contends that permitting the discharge of
awards rendered pursuant to § 7031(b) undermines the state
policy expressed by that statute. We agree with Ghomeshi that
the state intended § 7031(b) to apply despite any resulting
injustice to the unlicensed contractor. See Hydrotech, 52 Cal.
3d at 995, 803 P.2d at 374. But the fact that discharging an
award may run counter to state policy does not render the
award nondischargeable. Congress has made a considered
judgment that the “fresh start” policy of the Bankruptcy Code
should override other state and federal laws under which debt-
5538 IN RE SABBAN
ors incur enforceable legal obligations. Congress has also rec-
ognized that the “fresh start” policy must sometimes give way
to competing interests, and has enacted the various exceptions
to dischargeability to so provide. The fraud exception of
§ 523(a)(2)(A), however, does not cover this case.
Conclusion
[8] We hold that because the award of $123,000 was made
under a statute that is not premised on either fraud or actual
harm, it is not a debt for money obtained by fraud within the
meaning of 11 U.S.C. § 523(a)(2)(A). We therefore affirm the
bankruptcy court’s determination that the award of $123,000
under § 7031(b) is dischargeable.
AFFIRMED.