In re Zenovic, 013117 FED9, BAP SC-15-1204-FYJu

Docket Nº:BAP SC-15-1204-FYJu
Party Name:In re: JOSEPH ZENOVIC, Debtor. v. MALCOLM CRUMP, as Trustee of the Malcolm A. and S'anta Lou Crump Family Trust UTD 12/10/87; S'ANTA LOU CRUMP, as Trustee of the Malcolm A. and S'anta Lou Crump Family Trust UTD 12/10/87; ANGELA CRUMP, Appellees. JOSEPH ZENOVIC, Appellant, Bk. No. 13-07230-LT7 Adv. Pro. 13-90218-LT
Attorney:Kerry Todd Curry of Curry & Associates argued on behalf of Appellant Joseph Zenovic Jason M. Santana argued on behalf of Appellees Malcolm A. Crump, S'anta Lou Crump, and Angela Crump.
Judge Panel:Before: FARIS, YUN, and JURY, Bankruptcy Judges.
Case Date:January 31, 2017
Court:United States Courts of Appeals, Court of Appeals for the Ninth Circuit
 
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In re: JOSEPH ZENOVIC, Debtor.

JOSEPH ZENOVIC, Appellant,

v.

MALCOLM CRUMP, as Trustee of the Malcolm A. and S'anta Lou Crump Family Trust UTD 12/10/87; S'ANTA LOU CRUMP, as Trustee of the Malcolm A. and S'anta Lou Crump Family Trust UTD 12/10/87; ANGELA CRUMP, Appellees.

BAP No. SC-15-1204-FYJu

Bk. No. 13-07230-LT7

Adv. Pro. 13-90218-LT

United States Bankruptcy Appellate Panel of the Ninth Circuit

January 31, 2017

         NOT FOR PUBLICATION

          Argued and Submitted on January 19, 2017 at San Diego, California

         Appeal from the United States Bankruptcy Court for the Southern District of California Honorable Laura S. Taylor, Chief Bankruptcy Judge, Presiding

          Kerry Todd Curry of Curry & Associates argued on behalf of Appellant Joseph Zenovic

          Jason M. Santana argued on behalf of Appellees Malcolm A. Crump, S'anta Lou Crump, and Angela Crump.

          Before: FARIS, YUN, [**] and JURY, Bankruptcy Judges.

          MEMORANDUM [*]

         INTRODUCTION

         Chapter 71 debtor Joseph Zenovic appeals from the bankruptcy court's judgment following trial determining that appellees Malcolm, S'anta Lou, and Angela Crump hold a nondischargeable claim in the amount of $266, 481.64. He does not challenge the court's finding of liability or determination of nondischargeability, but rather only disputes the bankruptcy court's calculation of damages. We agree with the bankruptcy court's application of California's seven percent prejudgment interest rate, rather than the much lower federal rate. However, we hold that the bankruptcy court erred in valuing certain real property for the purpose of calculating the damages claim. Accordingly, we AFFIRM IN PART, REVERSE IN PART, and REMAND to enter judgment consistent with this decision.

         FACTUAL BACKGROUND

         A. The Crumps and their desire to build an eldercare facility

         Malcolm and S'anta Crump, a married couple, their adult daughter, Angela, and several extended family members owned interests in an income-producing commercial property. In 2008, the family decided to sell the property, and each of the Crumps expected to receive a substantial cash distribution.

         In order to replace the lost rental income, Mr. Crump, Mrs. Crump, and Angela decided to seek a replacement rental property in Ramona, California. They contacted Mrs. Crump's friend and real estate broker, Karen Clendenen. Ms. Clendenen suggested that the Crumps participate in an exchange under section 1031 of the Internal Revenue Code in order to defer capital gains taxes.

         After considering several properties, Mrs. Crump shifted her focus to building and operating an eldercare facility. At this point, Ms. Clendenen introduced her to Mr. Zenovic, with whom she shared office space.

         Ms. Clendenen introduced Mr. Zenovic as a general contractor with experience on projects in the Ramona area. Mr. Zenovic told Mrs. Crump that his company, Meadow Builders, owned two parcels of contiguous real property (the "Property") in Ramona totaling 1.3 acres. Mr. Zenovic represented to her that the Property was suitable for her needs and "buildable and ready to go."

         After a number of meetings with Mr. Zenovic and Ms. Clendenen, the Crumps decided to purchase the Property and hire Mr. Zenovic as the general contractor to construct an eldercare facility on the Property. In fact, neither Mr. Zenovic nor Meadow Builders held a general contractor's license in the state of California.

         B. The purchase contracts

         Ms. Clendenen represented both the Crumps and Mr. Zenovic and drafted the relevant contracts: a Vacant Land Purchase Agreement ("Purchase Agreement"), an addendum ("Addendum") to the

          Purchase Agreement, and a second Vacant Land Purchase Agreement ("Second Purchase Agreement"). Unfortunately, she drafted the contracts ineptly.

         The Purchase Agreement, which Ms. Clendenen prepared using a standard form from the California Association of Realtors, provided that the Crumps would purchase the larger of the two parcels comprising the Property for a purchase price of $641, 000.

         The Second Purchase Agreement identified the smaller parcel comprising the Property and a purchase price of $115, 000.

         The Addendum cryptically provided as follows:

         Purchase price to include the following: 1. Landscape = $20, 000

2. Road Improvements - $15, 000

3. Furniture - $20, 000

4. Sewer construction - $36, 000

5. $400, 000 for cost of approx. 2600 sq. ft. home

6. Lot with 2 APN #-281-452-04-00 and 281-443-17-00

There will be a separate agreement between Buyer and Seller on APN # 281-443-17-00 for $115, 000 to close as part of this transaction. Seller to pay total amount toward Buyers [sic] bills (to be determined by Buyer)[.]

Buyer will be closing escrow on land only. Construction to start once escrow is closed on land. Total purchase price to be $641, 000 to include construction and cost above.

         The testimony at trial and the bankruptcy court's findings explain that the contracts provided for $491, 000 in construction costs and $150, 000 for the cost of the Property, totaling $641, 000. The Crumps paid Mr. Zenovic a total of $756, 000 but received an immediate refund of $115, 000 less escrow fees. (This was the ostensible purchase price for the smaller lot, which proceeds the Seller was to use to pay the Buyer's bills.)2 Title to both lots would pass to the Crumps at closing, and Mr. Zenovic agreed to build a home after the closing.

         C. Mr. Zenovic's failure to construct the eldercare facility

         In December 2008, the parties executed the Purchase Agreements. Escrow closed later that month, and the monies were wired into Mr. Zenovic's bank account.

         Mr. Zenovic did not even begin to construct the eldercare facility. Rather, he used the Crumps' money to pay unrelated personal and business debts. By April 2009, he had depleted almost all of those funds. The bankruptcy court rejected Mr. Zenovic's attempts to explain this away, and he does not appeal this aspect of the bankruptcy court's decision.

         Over the next year, Mr. Zenovic repeatedly put off the Crumps' questions regarding the start of construction. The Crumps finally learned in February 2010 that the eldercare facility could not be constructed on the Property because it was nearly impossible to obtain a sewer permit to service the Property. They discovered that, since 2006, Mr. Zenovic had attempted to obtain a sewer permit from the Ramona Municipal Water District but had failed.

         In September and November 2010, the Crumps wrote to Mr. Zenovic, demanding a financial accounting, but he refused to provide any information.

         D. Litigation in state court and bankruptcy court

         In October 2011, the Crumps sued Mr. Zenovic, Meadow Builders, and Ms. Clendenen and her employer in San Diego Superior Court (the "State Court Action"). Their allegations against Mr. Zenovic included a fraud claim. After nearly two years of litigating the State Court Action, and about two weeks before the start of trial, Mr. Zenovic filed his chapter 7 petition.

         Around the same time, the Crumps settled with Ms. Clendenen and her employer (the "Realtor Defendants") for $498, 000. The Crumps received the settlement payment in October 2013.

         The Crumps filed an adversary complaint against Mr. Zenovic on August 16, 2013, asserting that their claim was nondischargeable under §§ 523(a)(2)(A) and (a)(6).

         E. The adversary proceeding trial and closing briefs

         The bankruptcy court conducted a six-day trial in December 2014. Among other things, the Crumps introduced the testimony of a real estate agent who had been trying to sell the Property for a year and a half. She testified that she had reduced the asking price several times and that it was currently offered at $79, 900. The Crumps offered no other evidence of the value of the Property at trial.

         The parties filed closing briefs, in which they discussed the proper measure of damages. The Crumps argued that the court should enter judgment totaling $264, 660.05. Their reasoning was as follows:

(1) Excluding prejudgment interest, the Crumps' out-of- pocket losses totaled $566, 925.96, which consisted of construction costs totaling $491, 000, third-party payments totaling $4, 925.96, and decrease in the Property's value totaling $71, 000 ($150, 000 purchase price minus $79, 000 current value).

(2) Mr. Zenovic was entitled to a credit against his liability for the $498, 000 settlement that the Crumps received from the Realtor Defendants.

(3) The Crumps were entitled to prejudgment interest at seven percent per annum totaling $195, 743.09. They...

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