Hillsman v. Escoto (In re Escoto), BAP No. NV-16-1211-LJuKu
| Decision Date | 21 March 2017 |
| Docket Number | BAP No. NV-16-1211-LJuKu,Adv. No. 2:13-ap-01058-mkn |
| Parties | In re: MARK J. ESCOTO, Debtor. ROBERT G. HILLSMAN, Appellant, v. MARK J. ESCOTO, Appellee. |
| Court | U.S. Bankruptcy Appellate Panel, Ninth Circuit |
NOT FOR PUBLICATION
MEMORANDUM*Argued and Submitted on February 24, 2017 at Las Vegas, Nevada
Appeal from the United States Bankruptcy Court for the District of Nevada
Appearances: Candace Carlyon of Morris Polich & Purdy LLP argued for Appellant Robert G. Hillsman; Samuel A. Schwartz of The Schwartz Law Firm argued for Appellee Mark J. Escoto.
Before: LAFFERTY, JURY, and KURTZ, Bankruptcy Judges.
This is the second appeal arising from this adversary proceeding to determine whether Debtor Mark J. Escoto's debt to Appellant Robert G. Hillsman is dischargeable.
Hillsman loaned $200,000 to Escoto to fund Escoto's litigation against the contractor and others who built Escoto's home; the loan was due on demand, in three years, or upon settlement of the litigation, whichever came first. Escoto failed to notify Hillsman of settlements that occurred within the three-year loan term; when the initial term expired Escoto requested, and Hillsman granted, a one-year extension of the loan term.
After Escoto filed his chapter 71 case, Hillsman sought a declaration of nondischargeability under § 523(a)(2)(A) of the amounts due under the note based on Escoto's alleged fraud in procuring an extension of the loan term. After trial, the bankruptcy court found that Hillsman had proven all the elements of a nondischargeability claim under § 523(a)(2)(A) except proximate cause because Hillsman had not shown that he had valuable collection remedies available when he consented to the extension and that those remedies had lost value. Hillsman appealed to this Panel, which concluded that Escoto's fraudulent nondisclosure of the settlements resulted in an extension of credit for purposes of § 523(a)(2); thus, the Panel found that the bankruptcy court erred in focusing its proximate causeanalysis on the period from and after the date Hillsman granted the extension. The Panel remanded for the bankruptcy court to make additional or amended findings, focusing on the period from and after the settlements.
Upon remand, after further briefing and a hearing, the bankruptcy court issued a supplemental memorandum decision finding that, upon reexamining the evidence, Hillsman had still failed to meet his burden of proof to show proximate cause because he failed to establish the amount by which any available remedies lost value. We AFFIRM.
In July 2005, Escoto and his non-debtor spouse, Shirley A. Escoto,3 filed suit in state court against a contractor, Christopher Homes, and certain subcontractors for claims arising out of construction defects in building their home. While the lawsuit was pending, Escoto asked Hillsman, a friend and dental patient, for a loan to fund the litigation.
In March 2008, Hillsman lent Escoto $200,000. The debt is evidenced by a demand promissory note bearing interest at seven percent per annum and providing for interest-only payments during the term of the note. The note was due on demand, in three years (March 11, 2011), or upon settlement of the lawsuit "by and between [the Escotos] and the entity known as CHRISTOPHER HOMES et al." The note referenced Escoto granting security interestsin his dental practice, office building, and other personal property, but Hillsman never took steps to perfect those security interests. The note granted Hillsman "the right to remove any and all possessions of Escoto et al[.] to be sold as necessary to recover debt in full and to effect garnishment of any paycheck, settlement monies, or other assets without the need of a court order regarding same."
In July 2008, Escoto settled with all defendants in the construction defect litigation except for the plumbing subcontractor. This $350,000 settlement was approved by the state court; Escoto received net proceeds of $118,000. In October 2009, Escoto settled with the remaining defendant for an additional $350,000. The state court approved that settlement in November 2009, and in February 2010 Escoto received net proceeds of $142,000. Despite numerous and extended interactions between the friends, Escoto did not tell Hillsman about either settlement.
Escoto failed to make several interest payments required by the note. In March 2011, when the note came due, Escoto requested an extension of the loan term. Unaware of the settlements, Hillsman agreed to the request, and the parties executed an agreement extending the repayment period for one year but otherwise leaving the terms of the demand promissory note unchanged. Escoto's delinquency under the terms of the note continued. In August 2012 the two friends met, and Escoto reaffirmed his commitment to repay the note but once again did not disclose the settlements.
Approximately five months later, on January 4, 2013, Escotofiled a chapter 7 petition. After receiving notice of the petition, Hillsman contacted an attorney and finally learned that Escoto had settled the construction defect litigation four years earlier.
After trial, the bankruptcy court found that Hillsman had proved all elements necessary to establish the debt as nondischargeable with the exception of proximate cause. Specifically, the bankruptcy court ruled that Hillsman failed to demonstrate that he possessed valuable collection remedies on the date of the extension and that those remedies lost value during the renewal period.
In coming to this conclusion, the bankruptcy court examined the value of the potential remedies available to Hillsman at the time he agreed to the extension. Noting that there was no equity in the pledged business properties even if Hillsman had perfected his liens, the bankruptcy court discounted Hillsman's remedies as a secured creditor. As an unsecured creditor, Hillsman could pursue informal collection remedies such as telephone calls and correspondence, but the bankruptcy court found little value in these activities. The court then considered Hillsman's ability to obtain a judgment and found that he failed (1) to identify assets available to satisfy a judgment that Escoto could not exempt under state law; and (2) to demonstrate how the value of his status as a judgment creditor declined over the extension period.
Finally, the bankruptcy court considered Hillsman's equitable remedies in the form of a constructive trust created to recognize Hillsman's interest in the settlement proceeds. Thecourt found such equitable remedies unavailable as the record indicated that Escoto had disposed of the proceeds prior to the extension date.
The bankruptcy court entered judgment in favor of Escoto on July 3, 2014, and Hillsman appealed to this Panel (BAP No. NV-14-1358-KuDJu). In its memorandum decision issued May 15, 2015, the Panel held that the bankruptcy court had applied the correct legal standard for determining proximate cause and that the bankruptcy court's finding that Hillsman failed to establish proximate cause was not clearly erroneous. However, the Panel found that the bankruptcy court erred by limiting its proximate cause analysis to the date of the extension agreement in March 2011. Instead, the Panel held that Escoto's concealment of the settlements resulted in an extension of credit for purposes of § 523(a)(2). Thus, the Panel vacated the judgment and remanded for additional findings. The Panel instructed:
In light of our holding that Escoto effectively obtained an extension of credit when he failed to disclose the settlement and thereby prevented Hillsman from immediately demanding repayment in accordance with the terms of the note, on remand, the bankruptcy court will need to focus on this earlier time period and make additional or amended findings in order to determine whether all of the § 523(a)(2)(A) elements were satisfied.4
In response to the Panel's mandate, Hillsman moved for entry of findings, conclusions and judgment on the record or to reopen discovery and set a new trial date. Escoto opposed reopening the record. On July 1, 2016, the bankruptcy court granted the motionfor entry of additional or amended findings and denied the alternative request to reopen discovery and set a new trial date. The bankruptcy court concurrently issued a Supplemental Memorandum Decision After Trial ("Supplemental Memorandum") finding that, upon reexamining the evidence in light of the BAP's memorandum decision, Hillsman had still failed to meet his burden of proof to show proximate cause because he failed to establish the amount by which any remedies lost value. The bankruptcy court also entered judgment in favor of Escoto.
Hillsman timely appealed.
The bankruptcy court had jurisdiction pursuant to 28 U.S.C. §§ 1334 and 157(b)(2)(I). We have jurisdiction under 28 U.S.C. § 158.
Did the bankruptcy court err in concluding that Hillsman failed to meet his burden of proof regarding proximate cause?
We review the bankruptcy court's findings of fact for clear error and its conclusions of law de novo. Oney v. Weinberg (In re Weinberg), 410 B.R. 19, 28 (9th Cir. BAP 2009), aff'd, 407 F. Appx. 176 (9th Cir. 2010).
A bankruptcy court's interpretation of a contract is a question of law that we review de novo. Estate of Short v. Payne (In re Payne), 323 B.R. 723, 727 (9th Cir. BAP 2005).
A bankruptcy court's findings regarding proximate cause under § 523(a)(2)(A) may be reversed only if clearly erroneous. Britton v. Price (In re Britton), 950 F.2d 602, 604 (9th Cir.1991). We do not consider a finding of fact clearly erroneous unless the finding is "illogical, implausible, or without support in the record." Retz v. Samson (In re Retz), 606 F.3d 1189, 1196 (9th Cir. 2010).
To prove causation on a § 523(a)(2)(A) claim based on an...
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