In re: Sanjesh Prasad Sharma and Aracely Colombina Sharma

FILED 1 MAY 14 2013 SUSAN M SPRAUL, CLERK 2 U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT 3 UNITED STATES BANKRUPTCY APPELLATE PANEL 4 OF THE NINTH CIRCUIT 5 In re: ) BAP Nos. CC-12-1302-MkTaMo ) CC-12-1520-MkTaMo 6 SANJESH PRASAD SHARMA and ) (Consolidated) ARACELY COLOMBINA SHARMA, ) 7 ) BK. No. LA 10-61901 PC Debtors. ) 8 ) Adv. No. LA 11-01555 PC ) 9 SANJESH PRASAD SHARMA, ) ) 10 Appellant, ) ) 11 v. ) M E M O R A N D U M* ) 12 CARMEN SALCIDO, ) ) 13 Appellee. ) ) 14 Argued and Submitted on February 21, 2013 15 at Pasadena, California 16 Filed – May 14, 2013 17 Appeal from the United States Bankruptcy Court for the Central District of California 18 Honorable Peter H. Carroll, Chief Bankruptcy Judge, Presiding 19 20 Appearances: David Brian Lally, Esq. for Appellant, Sanjesh Sharma; Barak Lurie, Esq., of Lurie & Park, for 21 Appellee, Carmen Salcido 22 Before: MARKELL, TAYLOR, and MONTALI,** Bankruptcy Judges. 23 24 * This disposition is not appropriate for publication. 25 Although it may be cited for whatever persuasive value it may 26 have, see Fed. R. App. P. 32.1, it has no precedential value. See 9th Cir. BAP Rule 8013-1. 27 ** Hon. Dennis Montali, United States Bankruptcy Judge for 28 the Northern District of California, sitting by designation. 1 INTRODUCTION 2 Appellee Carmen Salcido (“Salcido”) sued Debtor-Appellant 3 Sanjesh Prasad Sharma (“Sharma”), seeking a declaration that a 4 loan made by Salcido to Sharma’s company — Sharma Developments, 5 Inc. — was nondischargeable under 11 U.S.C. § 523(a)(2)(A), 6 (a)(2)(B), (a)(4), (a)(6), and (a)(19).1 After Sharma appeared 7 and answered, the bankruptcy court struck Sharma’s answer as a 8 discovery sanction, entered default against Sharma, and ordered 9 default judgment in favor of Salcido, but only on her 10 Section 523(a)(2)(A) claim. After Sharma filed his notice of 11 appeal, the bankruptcy court granted Salcido’s motion to amend 12 the judgment to include attorney’s fees. Sharma then appealed 13 both the bankruptcy court’s determination of nondischargeability 14 and the award of attorney’s fees. We AFFIRM the determination of 15 nondischargeability and REVERSE the award of attorney’s fees. 16 FACTS2 17 Salcido made two loans to Sharma. The first loan was made 18 soon after the two first met. At that time, Salcido had just 19 taken out a home equity line of credit for $240,000 to start a 20 coffee shop, which never got off the ground, but Salcido still 21 had significant funds from the loan. The line of credit had a 22 1 23 Unless specified otherwise, all chapter and section references are to the Bankruptcy Code, 11 U.S.C. §§ 101–1532; all 24 “Rule” references are to the Federal Rules of Bankruptcy Procedure, Fed. R. Bankr. P. 1001–1037; all “Civil Rule” 25 references are to the Federal Rules of Civil Procedure, Fed. R. 26 Civ. P. 1–86; and all “Evidence Rule” references are to the Federal Rules of Evidence, Fed. R. Evid. 101–1103. 27 2 These facts are a reformulation of the allegations in the 28 Complaint. 2 1 significant prepayment penalty, and Salcido told Sharma that she 2 needed to invest the money in a way that would allow her to cover 3 the large payments on the line of credit. 4 Salcido had met Sharma in his office in April 2005. At that 5 time, he told her that he “flipped” homes — buying, refurbishing, 6 and selling them at a profit. He showed her a list of numerous 7 homes that he claimed to own, and there were numerous people at 8 the office that appeared to be working for him. Sharma 9 repeatedly took steps to impress upon Salcido that he was wealthy 10 and successful: he bragged that he drove luxury cars, took lavish 11 vacations, flew his friends around in private jets, owned 12 multiple race horses, and was in the process of building a “huge, 13 palatial” home for his family. Compl. (Feb. 16, 2011) at ¶ 7. 14 From Salcido’s perspective, only a very successful person could 15 afford such things. 16 Based on these representations of success founded upon a 17 seemingly sound real estate investment strategy, Salcido agreed 18 to lend $240,000 to Sharma. Sharma “guaranteed” that Salcido 19 would make a 20% profit on her “investment.” Id. at p. 17. 20 Salcido found this rate of return enticing; she made it clear 21 that she needed the interest to survive and keep her house. When 22 they next met, Salcido gave Sharma a check for $240,000 in 23 exchange for a document entitled “promissory note” and dated 24 May 5, 2005 (the “First Promissory Note”). The term was eight 25 months and the “[t]otal profit to be paid” was $48,000, or 20% of 26 $240,000. Id. The parties to the First Promissory Note were 27 Salcido and Sharma Developments, Inc., on whose behalf Sharma 28 3 1 signed.3 Salcido did not sign the First Promissory Note. 2 Sharma ultimately performed under the First Promissory Note, 3 although he did not pay the interest due until March 27, 2006, 4 nearly three months after the eight-month term had ended. 5 Although Sharma was late with the interest payments, Salcido 6 decided to roll over her investment for another year. Since 7 taking the first loan from Salcido, Sharma had continued to 8 regale her with stories of wealth and success. On May 5, 2006, 9 Sharma provided Salcido with another promissory note (the “Second 10 Promissory Note”). The term was one year. The interest rate was 11 20% for the first $12,000 of interest and “within 10% to 15% to 12 be determined” for the remaining interest installments. Id. at 13 p. 19. Salcido states that the variable interest rate did not 14 comport with the verbal understanding of the parties. As with 15 the First Promissory Note, Sharma signed the Second Promissory 16 Note on behalf of Sharma Developments, Inc., but Salcido did not 17 sign it at all.4 18 By April 5, 2007, the date that the final installment of 19 interest was due, Sharma had not paid any installments to 20 3 Regardless of the identity of the party to this note and 21 the next one, for simplicity we refer to Sharma as the obligor 22 for all purposes. 4 23 Although Sharma seems to argue that the $240,000 was not a loan, but rather an investment in real estate, the transaction as 24 pleaded in the Complaint is best construed as a loan. Sharma alone prepared the documents and titled them “First Promissory 25 Note” and “Second Promissory Note.” The Second Promissory Note 26 has a schedule of “interest” payments and refers to the $240,000 as “principal” — words more consistent with a loan than a capital 27 investment. Compl. (Feb. 16, 2011) at p. 19. Finally, Salcido did not sign the documents, a state of affairs more consistent 28 with a promissory note than a joint investment in real estate. 4 1 Salcido. Salcido called Sharma multiple times (she estimates 2 between five and ten); she literally begged him for the money as 3 she was in “desperate straits with her mortgage.” Id. ¶¶ 40, 41. 4 For the next several months, through September 2007, Sharma paid 5 her $1,200 per month. Then he ceased paying altogether. 6 Salcido made inquiries about what had happened to her money, 7 and found out that Sharma had not refurbished the properties as 8 he told her he would. She learned that he had allowed “some or 9 all of the properties [to] go to utter waste” and that some were 10 even condemned. Id. ¶ 46. Salcido’s complaint alleged that she 11 would have never invested with Sharma if she had known about his 12 “failure to maintain and/or actually refurbish the properties 13 that he was investing her money into, and the real state of his 14 finances.” Id. ¶ 48. 15 After these discoveries, Salcido’s first legal maneuver was 16 to file suit in the Superior Court of the State of California for 17 the County of Los Angeles (the “Superior Court”) for breach of 18 contract and fraud against Sharma Developments, Inc. and Sanjesh 19 Sharma. After meeting with a mediator, the parties agreed to 20 settle all claims in July 2008 and executed a settlement 21 agreement (the “Settlement Agreement”). Under the Settlement 22 Agreement, Sharma Developments was to pay the principal amount — 23 $240,000 — plus interest at 7.00% over a period of five years. 24 The Settlement Agreement also provided that, in the event of 25 default by Sharma, Salcido would be entitled to file the 26 Stipulation for Entry of Judgment and Judgment (the 27 “Stipulation”) that was drafted as part of the Settlement 28 Agreement. Sharma defaulted, and Salcido then filed the 5 1 Stipulation in December 2008. On December 29, 2008, the Superior 2 Court ordered judgment (the “Stipulated Judgment”) against both 3 Sharma Developments, Inc. and Sanjesh Sharma in the amount of 4 $240,000. 5 Sharma did not make any payments on the Stipulated Judgment. 6 Salcido alleged that Sharma never had any intention of repaying 7 the loans or honoring the Stipulated Judgment — that he 8 “maliciously and fraudulently induced [Salcido] to accept a 9 stipulated Judgment that he never intended on performing, and has 10 made no effort to perform . . . .” Id. ¶¶ 57–58, 64, 65. 11 Furthermore, she alleged that he “set it up so that [Salcido’s] 12 and any other judgment would be difficult, if not impossible to 13 collect because he transferred all of his assets to appear 14 insolvent and justify a bankruptcy action.” Id. ¶ 58. 15 On December 3, 2010, Sharma filed Chapter 7. On February 16, 16 2011, Salcido filed the complaint (the “Complaint”) that 17 eventually led to this appeal. Salcido contended that Sharma’s 18 $240,000 obligation under the Stipulated Judgment was 19 nondischargeable under Sections 523(a)(2)(A), (a)(2)(B), (a)(4), 20 (a)(6), and (a)(19). 21 Salcido’s argument under Section 523(a)(2)(A) was twofold.5 22 First, she contended that Sharma committed fraud by inducing her 23 to loan him money that he never intended to pay back by falsely 24 representing his wealth and success and by lying about his 25 investment strategy of refurbishing properties for sale. Second, 26 5 27 We do not discuss Salcido’s other claims under Section 523(a) because the bankruptcy court dismissed them and 28 they are not at issue in this appeal. 6 1 she contended that he also committed fraud by inducing her to 2 accept the Stipulated Judgment, which he never intended to repay. 3 Sharma answered and the parties proceeded to discovery. The 4 bankruptcy court, however, ultimately ordered monetary sanctions 5 against Sharma, struck his Answer as a sanction for discovery 6 misconduct, and entered default against him.6 Salcido then moved 7 for default judgment. She supported the motion with her own 8 declarations and with declarations by Franco Ramirez (her 9 boyfriend then and now) and Michelle A. Seltzer (her attorney).7 10 The Motion for Default Judgment largely repeated the facts and 11 allegations of the Complaint. She elaborated on her 12 Section 523(a)(2)(A) argument by alleging that Sharma committed 13 fraud per se by operating a Ponzi scheme. She also argued that 14 Sharma’s alleged fraudulent transfers of property to his father 15 and then back to himself for nominal consideration demonstrate an 16 intentional plan to “avoid collection by numerous judgment 17 creditors,” including Salcido. Mot. Default J. (Apr. 12, 2012) 18 at 11–12. In essence, she argued that the Stipulated Judgment 19 was merely a delay tactic and that Sharma never intended to honor 20 6 On appeal, Sharma does not challenge the sanctions or the 21 entry of default. Consequently, we neither recite the facts 22 underlying the sanctions or the entry of default nor review the merits of those actions. 23 7 She also submitted a request for judicial notice under 24 Evidence Rule 201, seeking to have admitted a list of 13 civil cases in Los Angeles County and San Bernardino County against 25 Sharma, Sharma Developments, Inc., or other defendants named in 26 the Complaint. The request states that all of these cases resulted in either a default judgment, stipulated judgment, or 27 are stayed pending Sharma’s bankruptcy proceedings. The bankruptcy court did not explicitly rely on these purported 28 facts, and nor do we. 7 1 it. 2 Sharma opposed. He argued that the Section 523(a)(2)(A) 3 claim must fail because Salcido did not meet her burden of proof. 4 He contended that Sharma could not have made any representations 5 to Salcido, false or otherwise, because she did business with 6 Sharma Developments, Inc., not Sharma as an individual, and that 7 she has not alleged that the corporate veil should be pierced. 8 He then asserted that “[o]ne who intends to commit fraud does not 9 repay 33% of the principal debt.” Opp’n Mot. Default J. 10 (Apr. 26, 2012) at 3:18. These arguments, however, ignore the 11 fact that the Stipulated Judgment was against both Sharma 12 individually and Sharma Developments, Inc., and that the 13 Stipulated Judgment was for the entire principal amount, 14 $240,000. Lastly, he argued that Salcido’s contention that he 15 operated a Ponzi scheme was unfounded.8 16 To support his opposition, Sharma filed various evidentiary 17 objections to the declarations that Salcido submitted in support 18 of her Motion for Default Judgment. 19 In June 2012, the bankruptcy court ordered default judgment 20 against Sharma (the “Judgment”). Specifically, the court ordered 21 that the $240,000 obligation under the Stipulated Judgment was 22 nondischargeable under Section 523(a)(2)(A). The court denied 23 8 24 Sharma is correct. Salcido only offered conclusory allegations to show that Sharma did not invest her funds and in 25 fact used funds from new investors to pay prior investors — the 26 hallmark of a Ponzi scheme. See Donnell v. Kowell, 533 F.3d 762, 767 n.2 (9th Cir. 2008). While we affirm on the grounds that the 27 Complaint supports a determination of fraud under Section 523(a)(2)(A), we do not base that decision on the 28 existence of a Ponzi scheme. 8 1 attorney’s fees without prejudice pending compliance with local 2 bankruptcy rules. The court was silent as to Salcido’s other 3 claims under Section 523(a). The court did not articulate its 4 reasoning. 5 Sharma timely filed a Notice of Appeal, challenging various 6 aspects of the bankruptcy court’s grant of the Motion for Default 7 Judgment. 8 In early July, the Panel requested clarification as to 9 whether the Judgment was interlocutory because the bankruptcy 10 court had not properly dismissed some of Salcido’s claims. The 11 bankruptcy court responded with an order dismissing Salcido’s 12 claims under Sections 523(a)(2)(B), (a)(4), (a)(6), and (a)(19) 13 against all defendants. 14 Salcido then moved to amend the Judgment to include 15 attorney’s fees and a monetary sanction. Sharma opposed. On 16 October 10, 2012, the bankruptcy court issued an amended judgment 17 (the “Amended Judgment”), which differed from the prior judgment 18 only in that costs and attorney’s fees were awarded. However, 19 because the bankruptcy court had by then dismissed all of the 20 Section 523(a) claims other than the one under which Salcido 21 prevailed — Section 523(a)(2)(A) — the Amended Judgment is a 22 final and appealable order. See Dreith v. Nu Image, Inc., 23 648 F.3d 779, 786 (9th Cir. 2011) (default judgments are 24 appealable final orders). 25 On October 12, 2012, Sharma timely filed a second notice of 26 appeal challenging the award of attorney’s fees in the Amended 27 Judgment. Sharma’s two appeals were then consolidated under the 28 first appeal, BAP No. 12-1302. 9 1 Sharma did not move for relief from the entry of default 2 under Civil Rule 55(b) or the entry of default judgment under 3 Civil Rule 60(c) in the bankruptcy court. 4 JURISDICTION 5 The bankruptcy court had jurisdiction pursuant to 28 U.S.C. 6 §§ 157(b)(2)(I) and 1334. We have jurisdiction under 28 U.S.C. 7 § 158. 8 ISSUES 9 1. Must this court dismiss Sharma’s appeal because he did not 10 move for relief from default judgment under Civil Rule 60(b) 11 in the bankruptcy court? 12 2. Did the bankruptcy court commit reversible error when it 13 ordered default judgment on Salcido’s Section 523(a)(2)(A) 14 claim? 15 3. Did the bankruptcy court commit reversible error when it did 16 not hold a hearing on Salcido’s Motion for Default Judgment? 17 4. Did the bankruptcy court commit reversible error when it 18 issued the Amended Judgment without articulating to what 19 extent, if any, it had considered Sharma’s “Opposition to 20 Plaintiff’s Motion for Default Judgment” and “Evidentiary 21 Objections to the Declarations of Michelle Seltzer, Carmen 22 Salcido, and Franco Ramirez in Support of Plaintiff’s Motion 23 for Default Judgment”? 24 5. Did the bankruptcy court commit reversible error when it did 25 not deduct from the $240,000 judgment amount the $86,700 in 26 payments that Sharma made to Salcido? 27 6. Did the bankruptcy court commit reversible error when it 28 awarded attorney’s fees to Salcido after Sharma had appealed 10 1 the order of default judgment to this court? 2 STANDARDS OF REVIEW 3 We review the bankruptcy court’s entry of default judgment 4 for abuse of discretion. Eitel v. McCool, 782 F.2d 1470, 1471 5 (9th Cir. 1986); In re McGee, 359 B.R. 764, 769 (B.A.P. 9th Cir. 6 2006). Review for abuse of discretion has two parts. First, “we 7 determine de novo whether the bankruptcy court identified the 8 correct legal rule to apply to the relief requested.” U.S. v. 9 Hinkson, 585 F.3d 1247, 1261–62 (9th Cir. 2009) (en banc). If 10 so, we then determine under the clearly erroneous standard 11 whether the bankruptcy court’s factual findings and its 12 application of the facts to the relevant law were “(1) illogical; 13 (2) implausible; or (3) without support in inferences that may be 14 drawn from the facts in the record.” Id. at 1262. In this 15 inquiry, “[w]here there are two permissible views of the 16 evidence, the fact finder’s choice between them cannot be clearly 17 erroneous.” Anderson v. City of Bessemer City, N.C., 470 U.S. 18 564, 574 (1985). 19 Whether a bankruptcy court retains authority to order 20 attorney’s fees after a notice of appeal has been filed is a 21 question of law that we review de novo. See Jefferies v. Carlson 22 (In re Jefferies), 468 B.R. 373, 377 (B.A.P. 9th Cir. 2012). We 23 also review de novo whether California law allows for the award 24 of attorney’s fees in this context. Fry v. Dinan (In re Dinan), 25 448 B.R. 775, 783 (B.A.P. 9th Cir. 2011). 26 27 28 11 1 DISCUSSION 2 A. This Court is Not Required to Dismiss the Case as a Result of Sharma’s Failure to Move for Relief Under Civil 3 Rule 60(b) in the Bankruptcy Court 4 The Ninth Circuit has not definitively established whether 5 dismissal is required when a judgment entered by default is 6 appealed without first seeking review under Civil Rule 60(b), 7 which is applicable here through Rule 9024. One line of cases, 8 on which Salcido relies, holds that an appellant-defendant’s 9 failure to move for relief under Civil Rule 60(b) in the district 10 (or bankruptcy) court mandates the dismissal of an appeal before 11 reaching the merits. Consorzio Del Prosciutto di Parma v. Domain 12 Name Clearing Co., LLC, 346 F.3d 1193, 1195 (9th Cir. 2003); 13 Investors Thrift v. Lam (In re Lam), 192 F.3d 1309, 1311 (9th 14 Cir. 1999); First Beverages, Inc. v. Royal Crown Cola Co., 15 612 F.2d 1164, 1172 (9th Cir. 1980); Rohauer v. Friedman, 16 306 F.2d 933, 937 (9th Cir. 1962) (“An appeal to this court 17 cannot be used as a substitute for the timely procedure set forth 18 by Rule 60(b).”).9 19 With two exceptions, in the above cases the defendant failed 20 to answer or appear. The courts seemed especially troubled by a 21 defendant-appellant’s intention to enter the fray for the first 22 time on appeal. “Federal courts are not run like a casino game 23 in which players may enter and exit on pure whim. A defaulted 24 party may not re-enter litigation, particularly on appeal, on 25 sheer caprice. It must follow proper procedure to set aside the 26 9 27 We even dismissed a case recently on the same grounds. Nguyen v. Ford (In re Nguyen), 2011 WL 3298962 at *4 (B.A.P. 9th 28 Cir. 2011). 12 1 default.” In re Lam, 192 F.3d at 1311 (applying Rule 7055(c)). 2 In Rohauer and First Beverages, the two exceptions, the 3 appellant-defendants extensively participated in the proceedings 4 below but sought to raise new factual issues on appeal. Because 5 the appellant-defendants were aware of the new factual 6 circumstances after the entry of judgment and before the notice 7 of appeal was filed, the Ninth Circuit dismissed their appeals. 8 First Beverages, 612 F.2d at 1172 (“[The] proper approach to 9 seeking relief from judgment because of a change in the factual 10 circumstances surrounding this case would be to make a Rule 60(b) 11 motion or a motion to reopen to hear additional proof. Such 12 motions must be directed in the first instance to the district 13 court.”); Rohauer, 306 F.2d at 937; Civil Rule 62.1. 14 In a second line of cases, which Salcido failed to discuss 15 in her brief, the Ninth Circuit and this court elected to review 16 the merits of default judgments even though the appellant- 17 defendants had not moved under Civil Rule 60(b) below. Dreith v. 18 Nu Image, Inc., 648 F.3d 779, 789 (9th Cir. 2011); Alan Neuman 19 Prods., Inc. v. Albright, 862 F.2d 1388, 1391–92 (9th Cir. 1988); 20 Madsen v. Bumb, 419 F.2d 4, 6 (9th Cir. 1969); In re Kubick, 21 171 B.R. 658, 660 (B.A.P. 9th Cir. 1994). 22 In these cases, the courts treated the defendant-appellants 23 as if they had applied for relief under Civil Rule 55(c) or 24 60(b), or both, to avoid an “unduly technical disposition of the 25 case.” Madsen, 419 F.2d at 6. In re Kubick was more to the 26 point — “[a]lthough entry of a default judgment is usually 27 attacked collaterally under Rule 60(b), on direct appeal a 28 defendant can contest the legal sufficiency of allegations 13 1 contained in the complaint.” 171 B.R. at 660 (citing Alan Neuman 2 Prods., 862 F.2d at 1392). The consistent thread running through 3 these cases is that, with one exception (In re Kubick), the 4 appellant-defendants all participated below — by actively 5 communicating with the plaintiff, answering the complaint, 6 participating in discovery, and/or moving to vacate the entry of 7 default under Civil Rule 55(c). 8 In the most recent of these cases, the Ninth Circuit 9 declined to follow Parma and ruled on the merits when the 10 defendant’s answer was struck for discovery misconduct. Dreith, 11 648 F.3d at 781. The district court entered an order of default 12 upon the stricken answer and six months later granted the 13 plaintiffs’ motion for default judgment. Id. On appeal, the 14 defendants only challenged the entry of default. Id. Although 15 the defendants did not seek relief under Civil Rules 55(c) or 16 60(b) in the district court, the Ninth Circuit decided to 17 “consider the merits of this action, as both public policy and 18 the policy of this court dictate.” Id. at 789 n.1. While the 19 court did not overrule Parma, it seems to have softened Parma’s 20 holding. Moreover, the facts of Dreith are analogous to those in 21 the prior Ninth Circuit and BAP cases where the courts did not 22 require a Rule 60(b) motion below in that the appellant-defendant 23 had participated in the trial court proceedings. 24 There is yet a third line of cases where the Ninth Circuit 25 and this court have reviewed the trial courts’ grant of default 26 judgment without even discussing the import, or lack thereof, of 27 a Civil Rule 60(b) motion below. See, e.g., Televideo Sys., 28 826 F.2d 915; Eitel, 782 F.2d 1470; In re Pryor, 2011 WL 4485796 14 1 (B.A.P. 9th Cir. 2011); In re McGee, 359 B.R. 764. In these 2 cases, like those above that expressly reject the Civil 3 Rule 60(b) requirement, the appellant-defendants all participated 4 to some degree at the trial court. 5 While not articulated as such by the Ninth Circuit, the rule 6 seems to be that a case will be dismissed on appeal for failure 7 to move for relief under Civil Rule 60(b) only when the 8 appellant-defendant failed to participate in the trial (or 9 bankruptcy) proceedings or when the appeal raises new factual 10 issues. For policy reasons, this is the correct rule. 11 It would be a waste of time and resources to dismiss the 12 current appeals. If Sharma had not participated at the 13 bankruptcy court, then there may have been some benefit to having 14 him air his arguments at the bankruptcy court. But given his 15 extensive participation — answering the Complaint and engaging in 16 discovery — we would not likely gain any new information upon 17 which to base a decision if Sharma moved for relief under 18 Rule 60(b), was denied that relief (presuming without deciding 19 that the bankruptcy court would deny the motion), and then 20 returned to this court. 21 In addition, Sharma is not raising any new factual issues, 22 only arguing that the record does not support a determination of 23 fraud under Section 523(a)(2)(A). Thus, we have sufficient 24 policy and precedential support to proceed to the merits.10 25 10 26 We note that the Ninth Circuit is one of few federal courts of appeals that refuses to hear direct appeals from 27 default judgments in some circumstances, and that the Restatement of Judgments supports direct appeals from default judgments. See 28 (continued...) 15 1 B. The Bankruptcy Court Did Not Abuse its Discretion When It Ordered Default Judgment on Salcido’s Section 523(a)(2)(A) 2 Claim 3 Before discussing the merits of the nondischargeability 4 claim, we need to examine the effect of the entry of default. 5 “The general rule of law is that upon default the factual 6 allegations of the complaint, except those relating to the amount 7 of damages, will be taken as true.” Televideo Sys., 826 F.2d at 8 917–18 (internal quotation marks and citation omitted). However, 9 a default does not operate as “an absolute confession of 10 liability, for the facts alleged in the complaint may be 11 insufficient to establish liability.” In Re McGee, 359 B.R. at 12 771. “A default establishes the well-pleaded allegations of a 13 complaint . . . .” Id. at 772 (internal quotation marks and 14 citation omitted) (emphasis in original). 15 Facts that are not well pled include allegations that are made indefinite or erroneous by other allegations 16 in the same complaint, . . . allegations which are contrary to facts of which the court will take judicial 17 notice, or which are not susceptible of proof by legitimate evidence, or which are contrary to 18 uncontroverted material in the file of the case. 19 Id. (internal quotation marks and citation omitted) (emphasis in 20 original). Put another way, the burden of proof remains with the 21 plaintiff after the entry of default; the plaintiff is not 22 entitled to default judgment as a matter of right. See id. at 23 771, 774. 24 While the bankruptcy court has an independent duty to 25 10 26 (...continued) Commonwealth Dev. Auth. v. Camacho, 2010 WL 5330503 at *6–*8 (N. 27 Mar. I., December 21, 2010) (surveying the federal courts of appeals) (citing Restatement (Second) of Judgments § 78 cmt. e 28 (1982)). 16 1 determine the sufficiency of a claim, it operates with wide 2 discretion. Id. at 773; In re Kubick, 171 B.R. at 662. Under 3 Civil Rule 55(b), a bankruptcy court has the discretion to 4 require that the plaintiff prove up the facts necessary to 5 determine whether a valid claim exists against the defaulting 6 party. In re McGee, 359 B.R. at 773. The court may “conduct 7 hearings or make referrals” to “determine the amount of damages; 8 . . . establish the truth of any allegation by evidence; or . . . 9 investigate any other matter.” Fed. R. Civ. P. 55(b)(2). 10 A prove-up hearing is only required where the damages are 11 unliquidated or not capable of mathematical calculation. Davis 12 v. Fendler, 650 F.2d 1154, 1161 (9th Cir. 1981). Civil 13 Rule 55(b) does not require a hearing to investigate facts not 14 related to damages, since the default itself establishes those 15 facts as alleged in the complaint. Televideo Sys., 826 F.2d at 16 917–18. 17 One issue on appeal is whether the bankruptcy court was 18 required to hold a prove-up hearing, as Sharma argues, “in light 19 of (1) the Opposition and Evidentiary Objections filed by 20 Appellant; and (2) the unusual circumstances of this case[.]” 21 Appellant’s Am. Opening Br. (Aug. 20, 2012) at ¶ 13. As set 22 forth above, a bankruptcy court has wide discretion to determine 23 whether a prove-up hearing is necessary. If a bankruptcy court 24 determines that the facts as alleged in the complaint support the 25 plaintiff’s claim, then a prove-up hearing is only necessary to 26 fix unliquidated damages. See Davis, 659 F.2d at 1161. 27 Here, the bankruptcy court ordered default judgment without 28 a prove-up hearing. It did not state which of Salcido’s filings 17 1 it had considered or whether it had considered Sharma’s 2 opposition and evidentiary challenges. Nor was it required to do 3 so. Civil Rule 55(b) does not require that the court consider a 4 defendant’s challenges to default judgment. Once Sharma was in 5 default, the only issue before the bankruptcy court was whether 6 the well-pleaded factual allegations in the Complaint, deemed 7 true, supported a claim under Section 523(a)(2)(A), and, if not, 8 whether additional proof was necessary. The bankruptcy court 9 determined that a hearing was not necessary on the issue of 10 liability, and it had the discretion to do so. Salcido’s motion 11 and Sharma’s opposition amounted to argument about whether the 12 facts in the Complaint supported Salcido’s claim. 13 Even if the evidence submitted by Salcido in the form of 14 declarations were inadmissible, an issue which we do not decide, 15 the Amended Judgment is not defective as the result of the 16 bankruptcy court not expressly stating that it had considered 17 Sharma’s opposition and evidentiary objections. The factual 18 content in the challenged declarations was nearly identical to 19 that in the Complaint, and thus any reliance the bankruptcy court 20 may have placed on the declarations was harmless. See Fed. R. 21 Evid. 103(a). 22 So long as the bankruptcy court found sufficient evidence in 23 the Complaint’s allegations to support the determination of 24 liability under Section 523(a)(2)(A), its decision survives. The 25 bankruptcy court did not commit reversible error when it 26 determined the issue of liability without a hearing. See Davis, 27 659 F.2d at 1161. Nor did it commit reversible error when it did 28 not articulate to what extent, if any, it considered Sharma’s 18 1 opposition to the Motion for Default Judgment and his evidentiary 2 objections. See Fed. R. Civ. P. 55(b); Fed. R. Evid. 103(a). 3 We next turn to the issue of whether a hearing was required 4 to fix the damages. The precise issue is whether the bankruptcy 5 court properly gave preclusive effect, under the doctrine of 6 issue preclusion, to the damage amount — $240,000 — that the 7 Superior Court ordered upon the Stipulated Judgment. Under 8 28 U.S.C. § 1738, the Full Faith and Credit Act, federal courts 9 must apply the preclusion law of the state whose court issued the 10 prior judgment. Harmon v. Kobrin (In re Harmon), 250 F.3d 1240, 11 1245 (9th Cir. 2001) (citations omitted). 12 Under California law, issue preclusion bars the relitigation 13 of an issue if (1) the issue in the first and second action are 14 identical; (2) the issue was actually litigated and necessarily 15 decided in determining the first action; (3) the parties against 16 which issue preclusion is asserted are identical or in privity; 17 and (4) the prior decision was on the merits. See Daar & Newman 18 v. VRL Intl., 28 Cal. Rptr. 3d 482, 571, 129 Cal. App. 4th 482, 19 488–89 (2005); Pajaro Valley Water Mgmt. Agency v. McGrath, 20 27 Cal. Rptr. 3d 741, 745–46, 128 Cal. App. 4th 1093, 1099–1100 21 (2005). 22 Here, the relevant parties in both actions are identical11 23 and the issue of damages is identical. The Stipulated Judgment 24 was final and on the merits. See Cal. State Auto. Assoc. Inter- 25 11 26 The adversary complaint names various defendants who were not involved in the State Court Action, but Salcido prevailed in 27 both state court and bankruptcy court, and Sharma was individually liable under both the state court Stipulated 28 Judgment and bankruptcy court Amended Judgment. 19 1 Ins. Bureau v. Superior Court, 50 Cal. 3d 658, 663–65, 268 Cal. 2 Rptr. 284, 287–88 (1990). Finally, the issue was actually 3 litigated because the parties themselves fixed the damages amount 4 in the Settlement Agreement, and necessarily decided because the 5 damages amount is on the face of the Stipulated Judgment. The 6 Stipulated Judgment liquidated the damages. Consequently, the 7 bankruptcy court was not required to hold a prove-up hearing for 8 damages. See Davis, 659 F.2d at 1161. 9 Sharma argues that the bankruptcy court should not have 10 given preclusive effect to the facts underlying the Stipulated 11 Judgment because it included no findings of fact. Sharma is 12 correct on the law, but there is no indication that the 13 bankruptcy court gave preclusive effect to the Stipulated 14 Judgment for any issue aside from damages. Again, so long as the 15 facts in the Complaint support a determination of liability, the 16 Amended Judgment survives. 17 We now turn to the heart of this appeal — the issue of 18 whether the facts alleged in the Complaint, and deemed true upon 19 Sharma’s default, support the bankruptcy court’s determination of 20 nondischargeability under Section 523(a)(2)(A). We may affirm 21 the bankruptcy court’s decision on any ground finding support on 22 the record. Eitel, 782 F.2d at 1471. As discussed above, we 23 review for abuse of discretion. Hinkson, 585 F.3d at 1262. So 24 long as the bankruptcy court applied the correct legal rule, we 25 reverse only if the bankruptcy court’s application of the law to 26 the facts was “illogical, . . . implausible, . . . or without 27 support in inferences that may be drawn from the record” — in 28 other words, clearly erroneous. Id. 20 1 The first issue is whether the bankruptcy court applied the 2 correct legal rule. There can be no doubt that it did. 3 Section 523(a)(2)(A) is often litigated in bankruptcy court; the 4 Complaint clearly identified the claim under this section; and 5 the Judgment (and Amended Judgment) specify that relief is 6 afforded under this section. 7 The Ninth Circuit has established a multi-factor test for 8 the consideration of default judgments: 9 (1) the possibility of prejudice to the plaintiff, (2) the merits of plaintiff’s substantive claim, 10 (3) the sufficiency of the complaint, (4) the sum of money at stake in the action, (5) the possibility of a 11 dispute concerning material facts, (6) whether the default was due to excusable neglect, and (7) the 12 strong policy underlying the Federal Rules of Civil Procedure favoring decisions on the merits. 13 14 Eitel, 782 F.2d at 1471–72. 15 1. Prejudice 16 The issue is whether Salcido, if the court had not entered 17 default judgment, would have suffered lengthy and costly delays 18 or been left without other recourse for recovery or the means to 19 prevent ongoing harm. See IO Group, Inc. v. Jordan, 708 F. Supp. 20 2d 989, 997 (N.D. Cal. 2010); Warner Bros. Entm’t Co. v. Caridi, 21 346 F. Supp. 2d 1068, 1072 (N.D. Cal. 2004); Phillip Morris USA, 22 Inc. v. Castworld Prods., Inc., 219 F.R.D. 494, 499 (C.D. Cal. 23 2003). Sharma’s discovery misconduct led to delays in the 24 adversary proceeding and increased costs to Salcido (e.g., 25 increased legal fees to prepare motions for sanctions). If the 26 default judgment had not been entered, then the harm, in the form 27 of not being able to pursue relief under the Stipulated Judgment 28 due to the automatic stay, would have continued. Salcido would 21 1 have certainly suffered prejudice had default judgment not been 2 entered. 3 2. Merits of Plaintiff’s Substantive Claims and Sufficiency of the Complaint 4 5 The second and third factors, taken together, require that 6 Salcido assert a claim upon which she may recover. IO Group, 7 708 F. Supp. 2d at 997. Default judgment is favored where “the 8 complaint sufficiently states a claim for relief under the 9 ‘liberal pleading standards embodied in Rule 8’ of the Federal 10 Rules of Civil Procedure.” Stephens Media LLC v. CitiHealth, 11 LLC, No. 2:09-cv-02285-MMD-RJJ, 2012 WL 4711957 (D. Nev. Oct. 3, 12 2012) (quoting Danning v. Lavine, 572 F.2d 1386, 1389 (9th Cir. 13 1978)). In other words, the complaint must plead facts which, if 14 taken as true, plausibly give rise to liability for fraud under 15 Section 523(a)(2)(A). Ashcroft v. Iqbal, 556 U.S. 662, 678–79 16 (2009). For default judgment based solely on the complaint, 17 without the benefit of a prove-up hearing, the facts in the 18 complaint must go beyond being well-pled; they must support the 19 ultimate determination of liability. In this circumstance, the 20 two factors collapse into a single analysis because if a 21 complaint supports a determination of liability, the claim(s) 22 upon which that liability is based were perforce well-pled. 23 Section 523(a)(2)(A) excepts from discharge debts incurred 24 under false pretenses, based on false representations, or actual 25 fraud. 11 U.S.C. § 523(a)(2)(A) (2012). To establish fraud 26 under this section, the following five elements must be proven by 27 a preponderance of the evidence: (1) the debtor made a 28 representation; (2) the debtor knew that the representation was 22 1 false at the time he or she made it; (3) the debtor made the 2 representation with the intent to deceive; (4) the creditor 3 justifiably relied on the representation; and (5) the creditor 4 sustained damage as a proximate result of the misrepresentation 5 having been made. Ghomeshi v. Sabban (In re Sabban), 600 F.3d 6 1219, 1222 (9th Cir. 2010). 7 The execution of a contract is an implied representation of 8 intent to honor its terms. See Karelin v. Bank of Am. Nat’l 9 Trust and Savs. Ass’n (In re Karelin), 109 B.R. 943, 947 (B.A.P. 10 9th Cir. 1990). 11 Knowing falsity requires that Sharma either knew at the time 12 he made the representations at issue that they were false or 13 recklessly disregarded their truth. In re Sabban, 600 F.3d at 14 1222; Gertsch v. Johnson & Johnson, Fin. Corp. (In re Gertsch), 15 237 B.R. 160, 167 (B.A.P. 9th Cir. 1999). “A representation may 16 be fraudulent, without [actual] knowledge of its falsity, if the 17 person making it ‘is conscious that he has merely a belief in its 18 existence and recognizes that there is a chance, more or less 19 great, that the fact may not be as represented.’” In re Gertsch, 20 237 B.R. at 168 (quoting Restatement (Second) of Torts § 526 21 cmt. e (1977)). 22 Intent to deceive may be inferred from the totality of 23 circumstances. Citibank (S.D.), N.A. v. Eashai (In re Eashai), 24 87 F.3d 1082, 1087 (9th Cir. 1996) (“A court may infer the 25 existence of the debtor’s [deceptive] intent . . . if the facts 26 and circumstances . . . present a picture of deceptive conduct by 27 the debtor.”). “The debtor’s assertions of an honest intent must 28 be weighed against natural inferences from admitted facts.” 23 1 4 Collier on Bankruptcy ¶ 523.08[2][e][ii] (Alan N. Resnick & 2 Henry J. Sommer eds., 16th ed. 2013). A court may also infer 3 intent to deceive where the debtor makes a false representation 4 that the debtor knows, or should know, will induce the creditor 5 to make a loan. Cf. In re Gertsch, 237 B.R. 160 (upholding 6 nondischargeability determination under Section 523(a)(2)(B) 7 where debtor knowingly provided false income and asset 8 information on loan application). Finally, intent to deceive may 9 be inferred if a debtor takes no steps to perform under a 10 contract. Merchs. Nat’l Bank & Trust Co. of Indianapolis v. 11 Pappas (In re Pappas), 661 F.2d 82, 86 (7th Cir. 1981). 12 Justifiable reliance is a subjective standard that turns on 13 a person’s knowledge under the particular circumstances. 14 In re Eashai, 87 F.3d at 1090. “‘Justification is a matter of 15 the qualities and characteristics of the particular plaintiff, 16 and the circumstances of the particular case, rather than of the 17 application of a community standard of conduct to all cases.’” 18 Id. (quoting Field v. Mans, 516 U.S. 59, 70 (1995)). The 19 justifiable reliance standard generally does not entail a duty to 20 investigate, and a person may be justified in relying on a 21 representation of fact even if he might have ascertained the 22 falsity of the representation had he investigated. See Field, 23 516 U.S. at 70. A duty to investigate, however, is imposed on a 24 creditor by virtue of suspicious circumstances. Id. at 71; see 25 Wheels Unlimited, Inc. v. Sharp (In re Sharp), 2009 WL 511640 26 (Bankr. D. Idaho 2009). Thus, “justifiable reliance does not 27 exist where a creditor ignores red flags.” Mandalay Resort Grp. 28 v. Miller (In re Miller), 310 B.R. 185, 198 (Bankr. C.D. Cal. 24 1 2004) (citing In re Anastas, 94 F.3d at 1286). “[A] person 2 cannot purport to rely on preposterous representations or close 3 his eyes to avoid discovery of the truth.” In re Eashai, 87 F.3d 4 at 1090–91. 5 The bankruptcy court did not clearly indicate on which 6 instance of alleged fraud — inducement of the promissory notes or 7 inducement of the Settlement Agreement — it based the default 8 judgment. Nor did the bankruptcy court make any specific 9 findings of fact. With respect to the Section 523(a)(2)(A) 10 claims, the Amended Judgment only states, 11 ORDERED that the judgment entered for Plaintiff, Carmen Salcido and against Defendant, Sanjesh Sharma in the 12 amount of $240,000 in Case No. KC051243, styled Salcido v. Sharma Developments, Inc., et al., in the Superior 13 Court of California, County of Los Angeles, on December 29, 2008, is nondischargeable under 11 U.S.C. 14 § 523(a)(2)(A)[.] 15 Am. J. (Dec. 6, 2012). 16 We first note that the novation worked by the Settlement 17 Agreement is not a bar to inquiry about the underlying fraud 18 claim. Archer v. Warner, 538 U.S. 314, 323 (2003) (The 19 “settlement agreement and releases may have worked a kind of 20 novation, but that fact does not bar the [plaintiffs] from 21 showing that the settlement debt arose out of . . . fraud[.]” 22 (internal quotation marks and citation omitted)). Consequently, 23 the bankruptcy did not err by looking beyond the Settlement 24 Agreement to assess the fraudulent inducement of the promissory 25 notes. 26 But a fair reading of the bankruptcy court’s order is that 27 the court also relied on the fraud inducing the Settlement 28 Agreement. The reference to the state court Stipulated Judgment, 25 1 which directly flowed from the Settlement Agreement, indicates 2 that the court did not solely rely on the fraud inducing the 3 promissory notes. We need not determine on which instance the 4 bankruptcy court relied, however. Because we can affirm on any 5 ground in the record, Eitel, 782 F.2d at 1471, we separately 6 analyze both instances of alleged fraud to determine if either 7 (or both) support the bankruptcy court’s decision. 8 a. Inducement of the Promissory Notes 9 As the bankruptcy court did not explain its reasoning in the 10 Amended Judgment, the bankruptcy court would have been entirely 11 justified in relying on inferences drawn from the facts in the 12 Complaint to determine that Sharma had violated 13 Section 523(a)(2)(A). To assess these inferences, we first look 14 at the Complaint: 15 Plaintiff told Sharma that she needed to invest this money, $240,000 in all, in something that would make 16 her money right away to cover her now large mortgage payment. . . . 17 . . . Sharma told [Salcido] that he would buy homes, 18 refurbish them, and resell them at a profit. Sharma made many efforts to impress [Salcido] with his wealth 19 and success. Sharma suggested that [Salcido] meet him at his office[,] where [he] had numerous people who 20 appeared to be working for him. He also claimed to own many properties and showed [Salcido] a list of the 21 numerous homes that he claimed to own. . . . 22 . . . Sharma also made efforts on repeated occasions in person with both [Salcido] and Franco present in order 23 to impress them with his success and wealth. Sharma bragged that he drove nice cars (a Bentley, an S-Class 24 Mercedes, and a Range Rover, all newer models), took lavish vacations, including to the World Cup, flew his 25 friends around in private jets, owned multiple race horses, and was in the process of building a huge, 26 palatial home with over 14 flat screen televisions for just himself, his wife, and two children. Sharma 27 presented himself in very nice clothes and his office was extremely nice, especially to a simple person like 28 [Salcido]. To [Salcido], no one could afford these 26 1 things unless they were very successful. Neither [Salcido] nor Franco knew anyone with this level of 2 wealth and success and both felt totally impressed and in awe of Sharma. . . . 3 . . . Sharma guaranteed to [Salcido] that she would 4 make a 20% profit on investments. . . . 5 The interest that Sharma promised was particularly enticing to [Salcido] because this amount would cover 6 [Salcido’s] mortgage, taxes, and leave her with a little spending money. [Salcido] cried to Sharma about 7 how she had a huge mortgage payment at an advanced age in life and desperately needed the interest to 8 survive. . . . 9 [Salcido] let Sharma know that she would like to invest. . . . 10 Sharma and [Salcido] had a second meeting at Sharma’s 11 office and again with Franco present. At that time, [Salcido] gave Sharma a check for $240,000. Sharma 12 gave [Salcido] a check, as well, which he told her was an up front payment for interest, to help induce 13 [Salcido] that he had the money to cover the interest and payments. . . . 14 After [Salcido] provided Sharma and his company with 15 the check for $240,000 [on May 5, 2005], Sharma Developments, Inc. provided [Salcido] payments totaling 16 $31,300 on May 5, 200[5] and September 1, 2005. . . . 17 . . . Sharma gave [Salcido] these large payments to further entice her to believe him, further impress 18 [her] with his wealth, and make her feel a false sense of security regarding her investment. 19 20 Compl. (Feb. 16, 2011) at ¶¶ 5–7, 10–14, 25, 27. 21 By March 27, 2006, nearly three months after the term under 22 the First Promissory Note had expired, Sharma had paid Salcido 23 the entire interest amount due — $48,000. The Complaint 24 continues: 25 The first year, Sharma may have been late with interest payments, but [Salcido] was willing to work with this. 26 . . . He always seemed to make a check available, and then would tell them about his lavish lifestyle, 27 including his travels and expensive purchases. With these stories of his great wealth and his always 28 managing to pay [Salcido], even if sometimes late, 27 1 [Salcido] did not worry and felt that Sharma would always pay her eventually. . . . 2 Because the interest payments seemed profitable to 3 [Salcido] that first year, even if they were sometimes sporadic, [Salcido] agreed to roll over her initial 4 investment for another year with Sharma in May 2005. . . . 5 . . . Sharma had not refurbished the properties in 6 order to flip them, as he had told her. After [Salcido] invested with [Sharma], she began to find out 7 that they had let some or all of those properties go to utter waste. Some even ended up being condemned during 8 the time that [Salcido] was still dealing with [Sharma] and actively investing with him. . . . 9 . . . Sharma did nothing but sell [Salcido] a “bill of 10 goods” and return pennies to her of her own money while he ran off with the rest of the investment. . . . 11 Had Plaintiff known the truth about Sharma, his failure 12 to maintain and/or actually refurbish the properties that he was investing her money into, and the real 13 state of his finances, she never would have invested with him. . . . 14 . . . [Sharma] never intended to repay [Salcido] for 15 the money she loaned him. 16 Id. ¶¶ 31–32, 46–48, 50, 64. 17 Taking the above factual allegations as true, we cannot say 18 that the bankruptcy court erred in making the inferences 19 necessary to support a determination of nondischargeability under 20 Section 523(a)(2)(A) for fraudulent inducement of the promissory 21 notes. The following conclusions are neither illogical, 22 implausible, or without support in inference that may be drawn 23 from facts in the record: (i) Sharma represented that he was 24 wealthy and successful, and that he would invest the loan 25 proceeds into flipping real estate; (ii) he knew these 26 27 28 28 1 representations were false at the time he made them;12 (iii) he 2 made the representations with the intent to deceive Salcido;13 3 (iv) Sharma justifiably relied on the representations; and 4 (v) Salcido sustained damage — the loss of $240,000 in loan 5 principal — as a proximate result of the misrepresentations. 6 Hinkson, 585 F.3d at 1261–62. Although there may be other 7 permissible views of the evidence, Sharma has put forth none that 8 render this view clearly erroneous. Anderson, 470 U.S. at 574. 9 10 11 12 Sharma argues that the loan proceeds were in fact used for 12 “real estate development.” Appellant’s Am. Opening Br. (Nov. 14, 2012) at ¶ 17. It is possible that Salcido and Sharma are both 13 correct — that the funds were used for real estate development and that some of the related properties went to utter waste. 14 Sharma, however, does not substantiate his assertion of how the 15 funds were used, and, more importantly, does not refute Salcido’s allegation that he was not refurbishing and selling the 16 properties as he promised he would do. Sharma represented that he would flip the properties, not just invest the loan proceeds 17 in “real estate development.” 18 13 Sharma’s argument that “one who intends to commit fraud 19 does not take funds and repay it” is unavailing. Id. ¶ 24. Sharma has not repaid any of the principal amount, and a party 20 who wishes to defraud another may be incentivized to make several payments to establish trust and induce further “investments.” 21 The facts here illustrate the premise that trust is the foundation of a good con. Salcido agreed to roll over her loan 22 in the Second Promissory Note based on Sharma’s performance 23 (albeit untimely) under the First Promissory Note. 24 Sharma’s argument that Salcido “assumed the risk” is equally unavailing. Id. ¶ 26. A creditor only assumes the risk that the 25 borrower will be unable to repay the loan, not that the borrower 26 does not intend to repay the loan in the first place. See In re Karelin, 109 B.R. at 947. Put another way, the act of 27 borrowing implies an intent to repay the loan. In any event, the fraud here is not the deception as to intent to pay but deception 28 about the ability to pay. 29 1 b. Inducement of the Settlement Agreement 2 Concerning this instance of fraud, the Complaint alleges: 3 On or about August 7, 2008, Sharma stipulated to a judgment against his companies and him personally for 4 $240,000. . . . 5 Sharma never made any payment on that Judgment. 6 Sharma never had any intention of honoring that Judgment. 7 Sharma maliciously and fraudulently induced [Salcido] 8 to accept a stipulated Judgment that he never intended on performing and has made no effort to perform 9 upon. . . . Sharma set it up so that [Salcido’s] and any other judgment would be difficult, if not 10 impossible, to collect because he transferred all of his assets to appear insolvent and justify a bankruptcy 11 action. 12 Sharma transferred assets and directed people within his business to transfer assets from himself to others 13 to appear insolvent. 14 [Sharma] . . . entered into stipulations and agreements for payment, including the Stipulated Judgment, in bad 15 faith and with no intent to ever perform . . . . 16 [Salcido] incurred damages as a result of the foregoing . . . . 17 18 Compl. (Feb. 16, 2011) at ¶¶ 53, 56–58, 60, 66, 68. 19 As with the promissory notes, we cannot say that the 20 bankruptcy court erred in relying on these factual allegations to 21 make the inferences necessary to support a determination of 22 nondischargeability under Section 523(a)(2)(A) for fraudulent 23 inducement of the Settlement Agreement. The following 24 conclusions are neither illogical, implausible, or without 25 support in inference that may be drawn from facts in the record: 26 (i) Sharma represented that he would honor the Settlement 27 Agreement; (ii) he knew that representation was false at the time 28 he made it; (iii) he made the representation with the intent to 30 1 deceive Salcido; (iv) Salcido justifiably relied on the 2 representation; and (v) Salcido sustained damage — forestalled 3 collection remedies now valued at zero because the bankruptcy 4 filing prevents a return to state court, and less favorable 5 payback terms (five years at 7% under the Settlement Agreement 6 compared to immediate payment with 10% post-judgment interest 7 upon a judgment in state court14) — as a proximate result of the 8 misrepresentation. Hinkson, 585 F.3d at 1261–62. Although there 9 may be other permissible views of the evidence, Sharma has put 10 none forth that render this view clearly erroneous. Anderson, 11 470 U.S. at 574. 12 As the record supports a determination of fraud in the 13 inducement as to the promissory notes and as to the Settlement 14 Agreement, the third and fourth Eitel factors strongly weigh in 15 favor of affirmance. 16 We now return to the remainder of the Eitel factors. 17 3. Sum of Money at Stake 18 Under this factor, “the court must consider the amount of 19 money at stake in relation to the seriousness of Defendant’s 20 conduct.” PepsiCo, Inc. v. Cal. Security Cans, 238 F. Supp. 2d 21 1172, 1176 (C.D. Cal. 2002). Where the amount of money is high 22 and the seriousness of conduct is low, default judgment is 23 disfavored. See id. at 1176–77. Similarly, if the plaintiff 24 seeks equitable relief and the defendant’s conduct was severe, 25 default judgment is favored. Id. Although here the amount of 26 money is significant — $240,000 — it is outweighed by the 27 28 14 Cal. Code Civ. Proc. § 685.010 (West 2012). 31 1 seriousness of Sharma’s fraudulent conduct. The allegations of 2 the Complaint are that he misled Salcido, an unemployed person in 3 dire straits, and thereby induced her to hand over the proceeds 4 of a home equity line of credit — a line of credit whose payments 5 he knew depended on the performance of investments which he did 6 not even make. This factor strongly favors upholding the Amended 7 Judgment. 8 4. Possibility of Dispute Concerning Material Facts 9 This factor “considers the possibility of a dispute 10 concerning material facts.” In re Eitel, 782 F.2d at 1471–72. 11 The more precise question is whether there is even a possibility 12 of a dispute concerning material facts as a result of the 13 default. See Cal. Security Cans, 238 F. Supp. 2d at 1176; 14 Caridi, 346 F. Supp. 2d at 1072. The answer is no. We rely only 15 on the facts alleged in the Complaint (deemed true by operation 16 of Sharma’s default). Thus, there is no possibility of disputing 17 the material facts contained in the Complaint, as Sharma’s own 18 actions resulted in the entry of default and the consequent 19 position that the well-plead allegations of the Complaint were 20 undisputed. See Caridi, 238 F. Supp. 2d at 1072. 21 5. Default Due to Excusable Neglect 22 Default judgment is generally disfavored where default 23 resulted from excusable neglect. “A defendant’s conduct is 24 culpable if he has received actual or constructive notice of the 25 filing of the action and failed to answer.” Meadows v. Dominican 26 Republic, 817 F.2d 517, 521 (9th Cir. 1987). Sharma’s behavior 27 went well beyond failing to answer a properly-served complaint. 28 He answered and actively participated in discovery. His 32 1 discovery abuse led to sanctions, including striking his Answer, 2 which in turn led directly to the entry of default. This factor 3 strongly favors upholding the Amended Judgment. 4 6. Policy Favoring Decisions on the Merits 5 While there is a “strong policy underlying the Federal Rules 6 of Civil Procedure favoring decisions on the merits,” 7 In re Eitel, 782 F.2d at 1470, this factor standing alone is 8 insufficient to prevent entry of default judgment. Caridi, 9 346 F. Supp. 2d at 1073. As this is the only factor in Sharma’s 10 favor, it does not carry sufficient weight to justify reversing 11 the Amended Judgment. Id. 12 Because the Eitel factors strongly weigh in favor of 13 upholding the Amended Judgment in the amount of $240,000,15 we 14 have no difficulty doing so. 15 Even if the Eitel factors did not weigh so heavily, we would 16 likely affirm in any case because of the potential negative 17 effects of a reversal. In this specific context — a default 18 judgment following sanctions for discovery abuse that include a 19 stricken answer — a reversal would likely lead to the bankruptcy 20 court allowing the plaintiff to amend her complaint. The 21 defendant would then have the opportunity to file an answer. The 22 23 15 We do not credit the $86,700 that Sharma paid to Salcido 24 against the $240,000 loan principal. Sharma agreed to liability for $240,000 in the Stipulated Judgment after he had made the 25 $86,700 payments to Salcido. To the extent that anyone has a 26 complaint about the judgment amount, it would be Salcido as she may have had a right to seek additional amounts for interest 27 incurred. But she also agreed to the judgment amount in the Stipulated Judgment. Thus, neither party has grounds to 28 challenge the judgment amount and $240,000 is the correct figure. 33 1 sting of the sanction striking the answer would thus be removed, 2 as the defendant would ultimately have the opportunity to 3 challenge the plaintiff’s factual allegations. A defendant’s 4 obstruction and malfeasance in discovery, which is the very 5 process by which a plaintiff obtains information necessary to 6 prove the facts plead in the complaint, would thus be rewarded. 7 Instead of moving to dismiss under Civil Rule 12(b)(6) for 8 failure to state a claim or moving for summary judgment under 9 Civil Rule 56, a defendant believing that either the complaint is 10 insufficient or that the plaintiff has insufficient facts to 11 proceed to trial could affirmatively thwart a plaintiff’s 12 discovery efforts with the knowledge that a stricken answer will 13 merely lead to an amended complaint and the opportunity to 14 replead the answer. In addition, the plaintiff would lose the 15 opportunity to meaningfully amend its pleadings under Rule 7015 16 because the plaintiff would not be able to discover the very 17 facts that would support such amendment. Rule 7015. 18 Moreover, there is a strong inference that the court 19 believed in the sufficiency of the Complaint and intended 20 striking the answer to be a terminating sanction. If not, the 21 Judgment would not have followed so closely behind the sanction 22 order and/or the bankruptcy court would have held a prove-up 23 hearing to determine liability. If the Complaint were 24 insufficient to support liability, striking the answer would have 25 been an essentially meaningless action as Salcido’s only avenue 26 for relief would have been to amend the Complaint, which in turn 27 would have given Sharma the opportunity to replead the answer. 28 If we were to reverse, we would be diminishing the bankruptcy 34 1 court’s power to monitor the litigation before it by making 2 terminating sanctions partially or completely irrelevant. See 3 In re Nguyen, 447 B.R. 268, 280 (B.A.P. 9th Cir. 2011) (en banc) 4 (“Bankruptcy courts have the inherent authority to regulate the 5 practice of attorneys who appear before them.”) (citing Chambers 6 v. NASCO, Inc., 501 U.S. 32, 43–45 (1991)). We refuse to condone 7 the behavior that would likely follow from a reversal. 8 We now turn to the issue of attorney’s fees. 9 C. The Bankruptcy Court Erroneously Awarded Attorney’s Fees to Salcido. 10 1. The Bankruptcy Court’s Jurisdiction to Award Attorney’s 11 Fees 12 The effective filing of a notice of appeal transfers 13 jurisdiction from the bankruptcy court to this court with respect 14 to all matters involved in the appeal. See Masalosalo by 15 Masalosalo v. Stonewall Ins. Co., 718 F.2d 955, 956 (9th Cir. 16 1983) (citing Griggs v. Provident Consumer Disc. Co., 459 U.S. 56 17 (1982) (per curiam)). But this rule of exclusive appellate 18 jurisdiction is a “creature of judicial prudence . . . and is not 19 absolute. It is designed to avoid the confusion and inefficiency 20 of two courts considering the same issues simultaneously.” Id. 21 To avoid piecemeal appeals, “prevent delay and duplication at the 22 appellate level, [and] prevent hasty consideration of 23 postjudgment fee motions,” bankruptcy courts “retain the power to 24 award attorney’s fees after the notice of appeal has been filed.” 25 Id. at 957 (discussing the power of the district court); U.S. ex 26 rel. Shutt v. Cmty. Home & Health Care Servs., Inc., 550 F.3d 27 764, 766 (9th Cir. 2008); U.S. v. Edwards, 800 F.2d 878, 884 (9th 28 Cir. 1986); J.J.W.C. Enters. v. Pugh (In re Pugh), 72 B.R. 174, 35 1 178 (D. Or. 1986). 2 Accordingly, the bankruptcy court retained the power to 3 order attorney’s fees upon Salcido’s post-Notice of Appeal motion 4 and did not err by exercising that power. 5 2. The Merits of the Attorney’s Fee Award / California Law 6 Although the bankruptcy court had the power to order 7 attorney’s fees, the thornier question is whether the court 8 applied the correct legal rule. As a matter of law, was Salcido 9 entitled to attorney’s fees? Under the principle known as the 10 “American Rule,” prevailing parties in federal court are not 11 ordinarily entitled to attorney’s fees unless authorized by 12 contract or by statute. Alyeska Pipeline Serv. Co. v. Wilderness 13 Soc’y, 421 U.S. 240, 257 (1975). The Bankruptcy Code does not 14 provide a general right to recover attorney’s fees. Heritage 15 Ford v. Baroff (In re Baroff), 105 F.3d 439, 441 (9th Cir. 1997). 16 The Supreme Court has addressed the precise issue of whether 17 a prevailing creditor can recover attorney’s fees in a 18 Section 523(a)(2) action. In Cohen v. de la Cruz, 523 U.S. 213 19 (1998), the Court held that a debt incurred by fraud can include 20 costs and attorney’s fees. “Once it has been established that 21 specific money or property has been obtained by fraud, . . . ‘any 22 debt’ arising therefrom is excepted from discharge.” Id. at 218. 23 A prevailing creditor’s right to attorney’s fees is not 24 absolute, however. We have interpreted Cohen such that “the 25 determinative question for awarding attorney’s fees is whether 26 the creditor would be able to recover the fee outside of 27 bankruptcy under state or federal law.” AT & T Universal Card 28 Servs., Corp. v. Hung Tan Pham (In re Hung Tan Pham), 250 B.R. 36 1 93, 99 (B.A.P. 9th Cir. 2000). Put more precisely, the question 2 is “whether [the] creditor would be entitled to fees in state 3 court for ‘establishing those elements of the claim which the 4 bankruptcy court finds support a conclusion of 5 nondischargeability.’” In re Dinan, 448 B.R. at 785 (quoting 6 Kilborn v. Haun (In re Haun), 396 B.R. 522, 528 (Bankr. D. Idaho 7 2008)). 8 Because the basis for attorney’s fees can be statutory or 9 contractual, id. at 786, and there is no express statutory basis 10 for attorney’s fees, our analysis centers on the attorney’s fee 11 provision in the Settlement Agreement as construed under non- 12 bankruptcy law (as there is no such provision in either of the 13 promissory notes). If the scope of the attorney’s fee provision 14 is broad enough to encompass a state court action that has the 15 same elements as a Section 523(a)(2)(A) claim — common law fraud 16 — then Salcido is entitled to attorney’s fees. Turtle Rock 17 Meadows Homeowners Ass’n v. Slyman (In re Slyman), 234 F.3d 1081, 18 1083 (9th Cir. 2000) (all five elements of common law fraud under 19 California law must be proven to support nondischargeability 20 determination under § 523(a)(2)(A)). 21 In relevant part, the attorney’s fee provision states, 22 [I]t is agreed by the parties that all attorneys’ fees and costs incurred as a result of or in connection to 23 the LAWSUIT, mediation, and settlement shall be borne by the parties who incurred such attorneys’ fees and 24 costs. Should suit be brought to enforce or interpret any part of this Agreement, the “prevailing party” 25 shall be entitled to recover as an element of costs of suit and not as damages, reasonable attorneys’ fees 26 fixed by the Court. The “prevailing party” shall be the party entitled to recover his/her/its costs of suit, 27 regardless of whether such suit proceeds to final judgment. 28 37 1 Settlement Agreement (July 8, 2008) at ¶ 19 (emphasis added). 2 Salcido is unquestionably the prevailing party, as we affirm the 3 bankruptcy court’s determination of fraud in the procurement of 4 the Settlement Agreement. We focus solely on that fraud because, 5 of the two frauds committed by Sharma, it is the only one that 6 involves the Settlement Agreement and thus the only one that 7 could support attorney’s fees under that agreement. 8 We interpret the Settlement Agreement under California law 9 because the “governing law” provision in the agreement so 10 mandates. Id. ¶ 16. California statute expressly allows parties 11 to contract as they see fit concerning the payment of attorney’s 12 fees. “Except as attorney’s fees are specifically provided for 13 by statute, the measure and mode of compensation of attorneys is 14 left to the agreement, express or implied, of the parties[.]” 15 Cal. Code Civ. Prov. § 1021 (West 2012). The type of claim — 16 tort, contract, or otherwise — is irrelevant under the statute. 17 Miske v. Bisno, 139 Cal. Rptr. 3d 626, 634, 204 Cal. App. 4th 18 1249, 1259 (2012); see Redwood Theaters, Inc. v. Davison 19 (In re Davison), 289 B.R. 716, 724 (B.A.P. 9th Cir. 2003). The 20 sole issue is whether the contractual provision itself covers 21 tort claims for fraud. See Miske, 139 Cal. Rptr. 3d at 634. 22 The California courts have repeatedly interpreted clauses 23 that authorize attorney’s fees to “enforce” or “interpret” a 24 contract to not include tort claims for fraud. Exxess 25 Electronixx v. Heger Realty Corp., 75 Cal. Rptr. 2d 376, 383–84, 26 64 Cal. App. 4th 698, 707–08 (1998); see Xuereb v. Marcus & 27 Millichap, Inc., 5 Cal. Rptr. 2d 154, 157, 3 Cal. App. 4th 1338, 28 1341–42 (1992). On the other hand, California courts have held 38 1 that certain broadly-worded clauses do cover fraud claims. 2 Santisas v. Goodin, 951 P.2d 399, 405, 17 Cal. 4th 599, 608 3 (1998) (“claims arising out of the execution of the agreement or 4 the sale” (internal quotation marks omitted) (emphasis added)); 5 Miske, 204 Cal. Rptr. 3d at 628–29 (“If any dispute arises 6 between the Partners . . . prevailing party shall be entitled to 7 . . . reasonable attorney’s fees.” (emphasis added)); Lerner v. 8 Ward, 16 Cal. Rptr. 2d 486, 488, 13 Cal. App. 4th 155, 159 (1993) 9 (“in any action or proceeding arising out of this agreement” 10 (internal quotation marks omitted) (emphasis added)); Xuereb, 11 5 Cal. Rptr. 2d at 160–61 (“attorney fees and costs in any 12 lawsuit or other legal proceeding to which this Agreement gives 13 rise” (internal quotation marks omitted) (emphasis added)). 14 Xuereb stated that “gives rise” even includes events that 15 occurred prior to contract formation. 5 Cal. Rptr. 2d at 160–61. 16 But even the phrase “any dispute” is not determinative, as a 17 clause limiting fees to “any dispute under this agreement” does 18 not cover fraud claims because “under this agreement” limits the 19 claims to those that arise directly out of the contract and not 20 those that rely on events that occurred before contract 21 formation. See Thompson v. Miller, 4 Cal. Rptr. 3d 905, 911, 112 22 Cal. App. 4th 327, 334 (2003). 23 The attorney’s fee provision in the Settlement Agreement is 24 limited to actions to “enforce or interpret any part of this 25 agreement.” The plain language of the provision is not broad 26 enough to encompass a claim for fraud in the inducement. See 27 Exxess Electronixx, 75 Cal. Rptr. 2d at 383–84; Xuereb, 5 Cal. 28 Rptr. 2d at 157. Under California law, a tort claim does not 39 1 “enforce” a contract or operate to declare a party’s rights under 2 a contract. Exxess Electronixx, 75 Cal. Rptr. 2d at 384. 3 Moreover, the first quoted sentence of the attorney’s fee 4 provision defines a broader category of matters — all those “in 5 connection to the LAWSUIT, mediation, and settlement” — and 6 states that each party shall bear its own fees in connection 7 thereto. The parties apparently contemplated a wide range of 8 actions that could arise from the agreement and the underlying 9 suit and set the American Rule as a baseline. The next sentence 10 demarcates a more limited universe of actions — those that 11 “enforce” or “interpret” the agreement itself — which does not 12 include tort claims for fraud. Id. at 383–84. 13 Salcido argues that because the state court complaint 14 alleged fraud and the Settlement Agreement was executed to settle 15 the fraud claim (as well as the breach of contract claim), then 16 the attorney’s fee provision must contemplate fraud claims. This 17 would be a reasonable, although incorrect, reading of Archer. 18 Archer does not speak to the interpretation or scope of any 19 particular term of a settlement agreement. Rather, it authorizes 20 courts to review settlement agreements to determine if they 21 “reflect[] settlement of a valid claim for fraud.” Archer, 22 538 U.S. at 320. Archer examined the permissible scope of 23 settlement agreements on the whole in light of Congress’s intent 24 under Section 523(a) to “ensure that all debts arising out of 25 fraud are excepted from discharge, no matter what their form.” 26 Id. at 321 (internal quotation marks and citation omitted). The 27 dischargeability of the underlying fraudulently incurred debt is 28 not dependent on the scope of an attorney’s fee provision. Thus, 40 1 Archer should not be read to mean that all attorney’s fee 2 provisions, no matter their specific language, contemplate the 3 fraud claims underlying the settlement. In other words, 4 Congress’s intent is fully served once a fraudulently incurred 5 debt is excluded from discharge. 6 It may be correct that Salcido subjectively intended the 7 attorney’s fee provision to cover the fraud claim. Contracts, 8 however, are interpreted objectively. See Donovan v. RRL Corp., 9 26 Cal. 4th 261, 271, 109 Cal. Rptr. 2d 807, 815 (2001). We only 10 look to the facts and circumstances surrounding a contract’s 11 formation and apply the rules of interpretation if the meaning is 12 uncertain from the plain language. Edwards v. Arthur Andersen 13 LLP, 44 Cal. 4th 937, 953, 81 Cal. Rptr. 3d 282, 295 (2008) 14 (“Where the language of a contract is clear and not absurd, it 15 will be followed.” (internal quotation marks omitted)). Here, 16 the meaning of the attorney’s fee provision in the Settlement 17 Agreement is certain. Multiple California cases have interpreted 18 essentially identical clauses and determined that fraud is not an 19 action to “enforce” or “interpret” a contract. As a matter of 20 law then, Salcido was not entitled to attorney’s fees. 21 Accordingly, we REVERSE the award of attorney’s fees. 22 CONCLUSION 23 The bankruptcy court applied the correct rule to analyze the 24 nondischargeability of Sharma’s debt to Salcido under 25 Section 523(a)(2)(A). It acted within its discretion when it 26 decided that the facts in the Complaint supported the elements of 27 fraud for both instances of fraud — in the inducement of the 28 promissory notes and in the inducement of the Settlement 41 1 Agreement. The Eitel factors weigh heavily in favor of upholding 2 the Amended Judgment. We thus AFFIRM the bankruptcy court’s 3 determination of nondischargeability under Section 523(a)(2)(A) 4 for Sharma’s debt to Salcido in the amount of $240,000. 5 The bankruptcy court erred in determining that attorney’s 6 fees were allowable to Salcido, as, under California law, the 7 attorney’s fee provision in the Settlement Agreement was not 8 broad enough to include tort actions for fraud. We thus REVERSE 9 the award of attorney’s fees to Salcido. 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 42