Sanchez v. Lovato et al

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UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF NEW MEXICO
In re:
RODOLFO LOVATO and
LISA LOVATO,
Debtors. 	No. 7-07-10287 SA
ALBERT SANCHEZ,
Plaintiff,
v. 	Adv. No. 07-1072 S
RODOLFO LOVATO and
LISA LOVATO,
Defendants.
MEMORANDUM OPINION MODIFYING PREVIOUS MEMORANDUM OPINION
ON LIABILITY AND DISMISSING COMPLAINT
On October 15, 2009, the Court entered a memorandum opinion
on the issue of liability in this adversary proceeding, stating
that “the Court finds that Lovato is liable to Sanchez and the
liability is non-dischargeable.” 	Memorandum Opinion in Support
of Judgment of Liability Against Rodolfo Lovato and Order for
Supplemental Hearing on Damages (Memo 1), at 1. 	Doc 39. 	In that
decision, the Court found that Debtor Rodolfo Lovato (Lovato or
Debtor) had effectively deceived Plaintiff Alfred Sanchez
(Sanchez or Plaintiff) by permitting Tomas Torres (Torres) to
obtain a building permit from Bernalillo County under the name of
Lovato’s company, Universal Builders, and by not informing
Sanchez at any point that Torres was not a New Mexico licensed
contractor when he (Lovato) had a duty to do so. 	Id. at 5-7.
The Court also concluded that Sanchez had justifiably relied on
Lovato’s misrepresentations, id. at 7-8, and in effect found that
Sanchez had suffered as yet unspecified damages as a result of
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1 Because no judgment has yet been entered, the Court is not
precluded from amending its findings and conclusions. 	Rule 9023,
F.R.B.P., incorporating Rule 59(a)(2), F.R.Civ.P., which provides
in relevant part that “[a]fter a nonjury trial, the court may, on
motion for a new trial, ... amend finding of fact and conclusions
of law or make new ones....” 	See Arms v. Keybank (In re Arms),
238 B.R. 259, 261 (Bankr. D. Vt. 1999)(“Bankruptcy courts have
been held to possess sufficient authority, pursuant to their
equitable powers under § 105 of the Bankruptcy Code, to modify or
vacate their own interlocutory orders. 	See, e.g., Coggin v.
Coggin (In re Coggin), 30 F.3d 1443 (11th Cir. 1994) (“The
bankruptcy court has the equitable power to correct, modify or
vacate its own interlocutory orders.”)).
2 Rule 9023(d), F.R.B.P., incorporating Rule 59(d),
F.R.Civ.P., New Trial on the Court’s Initiative or for Reasons
Not in the Motion, requires the Court to “specify the reasons
[for granting a new trial on its own motion]”. 	Since the Court
is not ordering a new trial, the requirement is not applicable.
Nevertheless, the Court’s reason for amending its conclusions and
its overall decision stems from its closer examination of the
issues of reliance and causation, which it addressed far too
summarily in Memo 1, and now addresses in this Memo 2.
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the misrepresentation. 	Id. at 8-9. 	The Court has now
reconsidered its conclusions 1, and has determined, for the
reasons set forth below in this memorandum opinion (Memo 2), that
(1) Plaintiff did not rely at all, and certainly did not rely
justifiably, on Torres having a contractor’s license to do the
work, and (2) the (undeniable) damage that Sanchez suffered was
not in fact caused by Lovato’s deception. 2 Thus, the Court
concludes Lovato is not liable to Sanchez on the grounds of fraud
(§523(a)(2)(A)). 	The Court further concludes that Lovato is not
liable to Sanchez either on the basis of fiduciary duty
(§523(a)(4)) or on the basis of malicious and wilful injury
(§523(a)(6)). 	The Court will therefore enter a judgment
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3 The Court has jurisdiction of the subject matter and the
parties pursuant to 28 U.S.C. §§ 1334 and 157; this is a core
proceeding pursuant to 28 U.S.C. § 157(b)(2)(I); and these are
findings of fact and conclusions of law as may be required by
F.R.B.P. 7052.
4 Inexplicably the Court identified Homes by Marie as Homes
by Maria in Memo 1. 	The Court apologizes for the error.
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dismissing the complaint. 3
It is clear that Sanchez’ decision to enter into a contract
with Torres stemmed largely from the fact that Torres’ bid of
$104,000 for the work, compared with the estimate of Homes by
Marie 4 of approximately $250,000 and another bid for between
$140,000 and $150,000, looked like a spectacularly good deal.
Sanchez also relied on his (Sanchez’) uncle’s recommendation of
Torres and on Mr. Puckett’s review of the numbers with him and
Puckett’s assurance that the Torres bid was reasonable. 	Whether
the allure of paying almost 60% less for the project would have
led Sanchez to disregard Torres’ lack of a contractor’s license
is questionable at best, particularly since Sanchez did not even
know of the requirement of a contractor’s license and in any
event did not even ask Torres if he had one.
It is also clear that Sanchez’ loss did not derive from
Torres’ lack of a contractor’s license. 	To begin with, there was
no proof that having a contractor’s license would have made
Torres competent. 	Torres having a license would have made Torres
exactly but no more than that – licensed. 	Being licensed does
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not mean being competent. 	Instead, Sanchez did not sufficiently
monitor the project and ensure that it was competently done. 	He
admitted that he was not competent himself to perform those
tasks, and he did not hire anyone to do them for him. 	He was
pouring money into the project without knowing what was going on.
None of this is attributable to Lovato.
Similarly, at no time was there a pre-existing fiduciary
relationship with Lovato that would engender liability on the
part of Lovato to Sanchez. 	And finally, there was no evidence
that Lovato intended to harm Sanchez or his interests.
A. 	The “Fraud Claim”, section 523(a)(2)(A).
Sanchez has not proved reliance, much less justifiable
reliance, even with respect to the limited area of whether Torres
was a licensed contractor, which by itself would be insufficient
to support a judgment of nondischargeability. 	Nor has he proved
loss causation. 	The section 523(a)(2)(A) claim will therefore be
dismissed.
Section 523(a)(2)(A) provides as follows:
A discharge under section 727, 1141, 1228(a), 1228(b),
or 1328(b) of this title does not discharge an
individual debtor from any debt – (2) for money,
property, services, or an extension, renewal, or
refinancing of credit, to the extent obtained by – (A)
false pretenses, a false representation, or actual
fraud....
A1. 	Reliance and Justifiable Reliance.
In Field v. Mans, 516 U.S. 59 (1995), the United States
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Supreme Court opined that section 523(a)(2)(A) was designed to
deal with the common law torts of false pretenses, false
representation, and fraud. 	Id. at 69. 	The Court then looked to
the Restatement (Second) of Torts (1976) (“Restatement”) as
definitive of the meanings:
The section on point [in the Restatement] dealing with
fraudulent misrepresentation states that both actual
and “justifiable” reliance are required. [Restatement
(Second) of Torts] § 537.... 	Here a contrast between a
justifiable and reasonable reliance is clear: “Although
the plaintiff's reliance on the misrepresentation must
be justifiable ... this does not 	mean that his conduct
must conform to the standard of the reasonable man.
Justification is a matter of the qualities and
characteristics of the particular plaintiff, and the
circumstances of the particular case, rather than of
the application of a community standard of conduct to
all cases.” 	Id., § 545A, Comment b. 	Justifiability is
not without some limits, however. 	As a comment to §
541 explains, a person is “required to use his senses,
and cannot recover if he blindly relies upon a
misrepresentation the falsity of which would be patent
to him if he had utilized his opportunity to make a
cursory examination or investigation. 	Thus, if one
induces another to buy a horse by representing it to be
sound, the purchaser cannot recover even though the
horse has but one eye, if the horse is shown to the
purchaser before he buys it and the slightest
inspection would have disclosed the defect. 	On the
other hand, the rule stated in this Section applies
only when the recipient of the misrepresentation is
capable of appreciating its falsity at the time by the
use of his senses.
Id. at 70-71. 	The Court then continued to examine the modern
authorities on tort law:
Similarly, the edition of Prosser's Law of Torts
available in 1978 (as well as its current successor)
states that justifiable reliance is the standard
applicable to a victim's conduct in cases of alleged
misrepresentation and that “[i]t is only where, under
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the circumstances, the facts should be apparent to one
of his knowledge and intelligence from a cursory
glance, or he has discovered something which should
serve as a warning that he is being deceived, that he
is required to make an investigation of his own.” 	W.
Prosser, Law of Torts § 108, p. 718 (4th ed. 1971);
(footnotes omitted); accord, W. Keeton, D. Dobbs, R.
Keeton, & D. Owen, Prosser and Keeton on Law of Torts §
108, p. 752 (5th ed. 1984) (Prosser & Keeton). 	Prosser
represents common-law authority as rejecting the
reasonable person standard here, stating that “the
matter seems to turn upon an individual standard of the
plaintiff's own capacity and the knowledge which he
has, or which may fairly be charged against him from
the facts within his observation in the light of his
individual case.” 	Prosser, supra, § 108, at 717;
accord, Prosser & Keeton, § 108, at 751[.]
Id. at 71-72. 	The Court ruled that for section 523(a)(2)(A)
purposes a plaintiff must prove justifiable, but not reasonable,
reliance. 	Id. at 74.
Based on the Court’s observation of Plaintiff during his
testimony, and also based on the testimony of other witnesses
about Mr. Sanchez, the Court easily concludes that Plaintiff is
an intelligent, educated person. 	He is employed by the United
States Department of Defense at Boeing Corporation as a quality
assurance technician, a position which the Court assumes requires
a rather exacting set of standards applied to complex
manufacturing and/or performance standards. 	Sanchez was clearly
capable of detecting whether Torres had a contractor’s license –
he could have simply asked to see it – if he had been aware of
that requirement. 	The fact that he was not even aware of the
requirement (for what that was worth) demonstrates that he could
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not have relied on Torres obtaining the building permit from the
county to demonstrate that Torres had a contractor’s license.
Compare Johnson v. Riebesell (In re Riebesell), 586 F.3d 782, 792
(10 th Cir. 2009) (“Even under the ‘justifiable’ test, however, the
plaintiff must ‘use his senses’ and at least make ‘a cursory
examination or investigation’ of the facts of the transaction
before entering into it.”)(Citing Field, 516 U.S. at 71.)
In summary, the Court finds that Plaintiff 1) did not
actually rely on any of Debtor’s (non)representations and 2) if
he had, the reliance would not have been justifiable.
A2. 	Loss Causation.
One element of a section 523(a)(2)(A) claims is the proof
that the debtor’s representation caused the creditor to sustain a
loss. 	Fowler Bros. v. Young (In re Young), 91 F.3d 1367, 1373
(10 th Cir. 1996).
As Field teaches, § 523(a)(2) requirements must be
determined under common law tort principles. 	For this
reason, a damage requirement is uniformly read into §
523(a)(2)(A), even though no express inclusion of such
a requirement appears in the text of that Code section.
We attribute the presence of the requirement that
“resulting injury” proximately caused by alleged
fraudulent conduct is included as a requirement in a §
523(a)(2)(A) claim to the fact that this is an element
which is necessary for the proof of common law fraud
generally.
Woodstock Housing Corp. v. Johnson (In re Johnson), 242 B.R. 283,
292 (Bankr. E.D. Pa. 1999). 	See also Domann v. Vigil, 261 F.3d
980, 984 (10 th Cir. 2001)(“[U]nder New Mexico law, proximate cause
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is a necessary element to any recovery in tort.”)(Citation
omitted.) 	Accord Cain v. Champion Window Co. of Albuquerque,
LLC, 2007-NMCA-085, ¶25, 142 N.M. 209, 216, 164 P.3d 90, 97 (Ct.
App. 2007)(A defendant is liable for damages proximately caused
by fraudulent misrepresentation.)(Citing UJI 13-1633 NMRA.)
To prove fraud under the Restatement, a plaintiff must prove
“proximate causation”, which consists of both “causation in fact”
and “legal causation.” 	See Gem Ravioli, Inc. v. Creta (In re
Creta), 271 B.R. 214, 219 (1st Cir. BAP 2002).
“Causation in fact” requires that the plaintiff’s reliance
on the misrepresentations be a “substantial factor in determining
the course of the conduct that results in [the] loss.”
Restatement § 546.
[Section 546] is concerned with the question of whether
the misrepresentation made by the defendant has caused
the plaintiff's loss at all.
...
If the misrepresentation has not in fact been relied
upon by the recipient in entering into a transaction in
which he suffers pecuniary loss, the misrepresentation
is not in fact a cause of the loss under the rule
stated in this Section. 	If the misrepresentation has
in fact induced the recipient to enter into the
transaction, there is causation in fact of the loss
suffered in the transaction; and the question becomes
one of whether the loss is of a kind for which the
maker is legally responsible.
Id., cmt. a.
“A fraudulent misrepresentation is a legal cause of a
pecuniary loss resulting from action or inaction in reliance upon
it if, but only if, the loss might reasonably be expected to
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5The Seventh Circuit commented that “loss causation” is the
same standard common law fraud rule borrowed for use in
securities fraud cases. 	Bastian, 892 F.2d at 683-84. 	It is an
instance of the common law’s requirement that a tort plaintiff
prove causation. 	Id. 	“No hurt, no tort.” 	Id. (Citation
omitted.) 	Since a securities law analysis of loss causation is
based on common law, that analysis should apply equally to common
law, non-securities law cases.
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result from the reliance.” 	Id. § 548A.
Not all losses that in fact result from the reliance
are, however, legally caused by the representation. 	In
general, the misrepresentation is a legal cause only of
those pecuniary losses that are within the foreseeable
risk of harm that it creates.
...
Pecuniary losses that could not reasonably be expected
to result from the misrepresentation are, in general,
not legally caused by it and are beyond the scope of
the maker's liability. 	This means that the matter
misrepresented must be considered in the light of its
tendency to cause those losses and the likelihood that
they will follow.
Id., cmts. a and b.
An example of “loss causation” is found in the Seventh
Circuit securities fraud case 5 of Bastian v. Petren Resources
Corp., 892 F.2d 680 (7th Cir.), cert. denied, 496 U.S. 906
(1990).
In 1981 the plaintiffs invested $600,000 in oil and gas
limited partnerships promoted by the defendants. 	The
plaintiffs allege that, had it not been for the
offering memoranda's misrepresentations and misleading
omissions concerning the defendants' competence and
integrity, the plaintiffs would not have invested in
these partnerships, which by 1984 were worthless.
Id. at 682. 	The district court dismissed for failure to allege
“loss causation.” 	The Seventh Circuit commented:
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The plaintiffs alleged that they invested in the
defendants' limited partnerships because of the
defendants' misrepresentations, and that their
investment was wiped out. 	But they suggest no reason
why the investment was wiped out. 	They have alleged
the cause of their entering into the transaction in
which they lost money but not the cause of the
transaction's turning out to be a losing one.
Id. at 684. 	The court rejected the arguments:
If the plaintiffs would have lost their investment
regardless of the fraud, any award of damages to them
would be a windfall.
...
“Loss causation” is an exotic name-perhaps an
unhappy one, for the standard rule of tort law that the
plaintiff must allege and prove that, but for the
defendant's wrongdoing, the plaintiff would not have
incurred the harm of which he complains. ... 	If the
defendants' oil and gas ventures failed not because of
the personal shortcomings that the defendants concealed
but because of industry-wide phenomena that destroyed
all or most such ventures, then the plaintiffs, given
their demonstrated desire to invest in such ventures,
lost nothing by reason of the defendants' fraud and
have no claim to damages.
Id. at 684-85. (Citations omitted.) 	The Seventh Circuit affirmed
dismissal of the case.
Bastian and the other authorities cited above show that a
Plaintiff must demonstrate a direct link between the
misrepresentation and the actual damages suffered. 	“But for”
causation alone is not enough. 	See, e.g., U.S. v. St. Louis
University, 336 F.3d 294, 302 (4th Cir.), cert. denied, 540 U.S.
1050 (2003) (SLU's claim against the government requires evidence
of proximate cause in addition to evidence of but-for causation.)
See also, e.g., Parker v. Grant (In re Grant), 237 B.R. 97, 118
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(Bankr. E.D. Va. 1999)(A doctor’s representation that he was
married, made in order to obtain a lease, was not a causal
connection to later physical damages and lost rents. 	“The
damages complained of rather appear to be the result of causes
wholly unrelated to the misrepresentation of marital status.”)
and Kaufman v. Vamvakaris (In re Vamvakaris), 197 B.R. 228, 230
(Bankr. E.D. Va. 1996)(A debtor’s misrepresentation that he had
insurance was not the proximate cause of plaintiff’s loss, which
was theft.) 	Compare Hemi Group, LLC v. City of New York, N.Y.,
___ U.S. ___, 130 S.Ct. 983, 989 (2010)(RICO case):
[T]o state a claim under civil RICO, the plaintiff is
required to show that a RICO predicate offense “not
only was a ‘but for’ cause of his injury, but was the
proximate cause as well.” [Holmes v. Securities
Investor Protection Corporation, 503 U.S. 258 (1992),]
at 268, 112 S.Ct. 1311. 	Proximate cause for RICO
purposes, we made clear, should be evaluated in light
of its common-law foundations; proximate cause thus
requires “some direct relation between the injury
asserted and the injurious conduct alleged.” 	Ibid. 	A
link that is “too remote,” “purely contingent,” or
“indirec[t]” is insufficient. 	Id., at 271, 274, 112
S.Ct. 1311.
In this adversary proceeding, Plaintiff has completely
failed to prove how any misrepresentations by Lovato (such as
they may have been) caused Plaintiff’s loss. 	The loss stemmed
from Torres’ incompetence, plain and simple. 	And Plaintiff
employed Torres not based on anything that Lovato did or did not
do but rather because Torres offered such a low price for the
work to be done, because Puckett helped persuade Plaintiff that
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the Torres proposal was reasonable, and because Plaintiff’s uncle
favorably recommended Torres. 	Therefore, the Section
523(a)(2)(A) claim will be dismissed.
B. 	The “Fiduciary Duty Claim”, section 523(a)(4).
Section 523(a)(4) provides as follows:
A discharge under section 727, 1141, 1228(a), 1228(b),
or 1328(b) of this title does not discharge an
individual debtor from any debt – (4) for fraud or
defalcation while acting in a fiduciary capacity,
embezzlement, or larceny;...
The limitations of §523(a)(4) are stated in Young:
Neither a general fiduciary duty of confidence, trust,
loyalty, and good faith, see [Evans v. Pollard (In re
Evans)], 161 B.R. [474] at 477 [(9th Cir. BAP 1993)],
nor an inequality between the parties' knowledge or
bargaining power, see [Kayes v. Klippel (In re
Klippel)], 183 B.R. [252] at 260 [(Bankr. D. Kan.
1995)], is sufficient to establish a fiduciary
relationship for purposes of dischargeability.
“Further, the fiduciary relationship must be shown to
exist prior to the creation of the debt in
controversy.” [Allen v. Romero] (In re Romero)[, 535
F.2d 618, 621 (10th Cir.1976)] ; see also In re Evans,
161 B.R. at 477.
Id., at 1372. 	In the course of the trial, there was no proof
whatever of any fiduciary relationship between Sanchez on the one
hand and Lovato on the other hand. 	Nor was there any evidence or
even a suggestion that Sanchez delivered any funds to Lovato as
part of the project, or that Lovato had received any funds. 	Thus
Allen v. Romero (In re Romero), 535 F.2d 618, 621 (10th Cir.1976)
is not applicable. 	Thus Plaintiff has not met his burden to
prove liability under §523(a)(4) and that count will be
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dismissed.
C. 	The “Willful and Malicious Injury Claim”, section 523(a)(6).
Section 523(a)(6) provides as follows:
A discharge under section 727, 1141, 1228(a), 1228(b),
or 1328(b) of this title does not discharge an
individual debtor from any debt – (4) for willful and
malicious injury by the debtor to another entity or to
the property of another entity;...
In Berger v. Buck (In re Buck), 220 B.R. 999 (10th Cir. BAP
1998), the court noted that
in Kawaauhau v. Geiger, 523 U.S. 57, 118 S.Ct. 974, 140
L.Ed.2d 90 (1998)[, d]isagreeing with the Tenth
Circuit, among others, the Supreme Court ruled the
provision [§523(a)(6)] requires a deliberate or
intentional injury, not merely a deliberate or
intentional act that leads to injury. 523 U.S. at
62-63, 118 S.Ct. at 977-78.
Id., at 1004. 	Sanchez had the burden to prove by a preponderance
of the evidence that the debt was nondischargeable. 	Id., citing
Grogan v. Garner, 498 U.S. 279 (1991). 	Nothing in the testimony
or exhibits evidenced any such intent on the part of Lovato, and
especially not to the level of a preponderance of the evidence.
Even the §523(a)(6) allegation in the Complaint failed to
specifically describe any action by Lovato that would have
comprised such behavior:
As set forth in the Judgment, and as specifically
alleged above, the Debtor Rodolfo
Lovato, without justification or excuse, and with full
knowledge of the specific consequences of
his conduct, acted notwithstanding, knowing full well
that his conduct would cause
particularized injury, in this case damages to the
Plaintiff as set forth in the Judgment.
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Doc 1, ¶20. 	In fact, contrary to the statement in that
paragraph, nothing in the Complaint or in the default judgment
rendered by the Second Judicial District Court, County of
Bernalillo, shows a willful or malicious injury to Plaintiff.
What the evidence showed at most was that Debtor was aware that
Torres illegally obtained a building permit for the Sanchez
project in the name of Debtor’s corporation, initially without
Debtor knowing anything about that, and that Debtor did not
notify Plaintiff that the building permit had been illegally
obtained, and in fact subsequently informed Plaintiff that the
building permit was in the name of Debtor’s company and therefore
Debtor ought to work with Debtor. 	But the subsequent action by
Debtor occurred long after the damage had been mostly done, and
in any event none of Debtor’s actions exhibit an intent to harm
Plaintiff. 	Therefore the §523(a)(6) count will also be
dismissed.
Conclusion
Contrary to the Court’s initial conclusion, there is no
basis for declaring whatever debt Lovato owes to Sanchez
nondischargeable. 	In consequence, the Court need not determine
the amount of any damages that Lovato might have otherwise owed
Sanchez. 	For the foregoing reasons, the Court will enter a
judgment dismissing the complaint with prejudice.
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Honorable James S. Starzynski
United States Bankruptcy Judge
Date Entered on Docket: 	February 11, 2011
Copies to:
Chris W Pierce
Hunt & Davis, P.C.
P.O. Box 30088
Albuquerque, NM 87190-0088
Jason Neal
320 Gold Avenue SW, Suite 300A
Post Office Box 8
Albuquerque, NM 87103-0008
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