Opinion
NOT FOR PUBLICATION
Argued and Submitted at Pasadena, California: June 19, 2008
Appeal from the United States Bankruptcy Court for the Central District of California. Bk. No. LA 05-40301-AA. Honorable Alan M. Ahart, Bankruptcy Judge, Presiding.
Before: PAPPAS, MARKELL, and SNYDER, [ Bankruptcy Judges.
Hon. Paul B. Snyder, Bankruptcy Judge for the Western District of Washington, sitting by designation.
MEMORANDUM
Creditor Rolo Enterprises, LLC, (" Rolo") appeals the " Order After Hearing on Debtor's Objection to Allowance of Claim Number 5 by Rolo Enterprises, LLC, " entered by the bankruptcy court on January 23, 2008. We AFFIRM.
FACTS
In February 2004, Desmond J. Christall d/b/a Desmond J. Christall Construction (" Debtor") agreed to perform roofing work on two buildings owned by Rolo. Rolo found Debtor's performance unsatisfactory and contends that Debtor breached the contract.
Rolo sued Debtor in Orange County, California, Superior Court, Rolo Enter., LLC v. D.J. Christall, American Contractors Indemnity Co., case no. 05-CC-04487. Debtor did not contest the lawsuit. On July 5, 2005, Rolo was granted a default judgment against Debtor by the state court for $60,190 in compensatory damages, and $150,000 in punitive damages (the " State Court Judgment"). Rolo did not appeal the State Court Judgment.
On October 11, 2005, Debtor filed a chapter 7 bankruptcy petition. Howard M. Ehrenberg was appointed chapter 7 trustee (" Trustee"). Debtor listed the State Court Judgment on his Schedule F in the amount of $210,579.50, and did not indicate that the claim was contingent, unliquidated, or disputed. Debtor did not list any real property assets in his Schedule A.
Unless otherwise indicated, all chapter, section and rule references are to the Bankruptcy Code, 11 U.S.C. § § 101-1330, as enacted and promulgated prior to the effective date (October 17, 2005) of the relevant provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. 109-8, April 20, 2005, 119 Stat. 23, and to the Federal Rules of Bankruptcy Procedure, Rules 1001-9037.
Although Debtor failed to appear at the initial § 341(a) meeting of creditors, he appeared at the continued meeting held on December 20, 2005, and was examined by Trustee. There are three accounts in the record concerning events at the continued § 341(a) meeting. Trustee, in a sworn declaration of September 22, 2006, states that Debtor testified that he was renting a house in Long Beach, California (the " Property") and was not its owner. Debtor, in an unsworn pleading filed September 19, 2007, admits that he did not schedule the Property, but indicates that he did testify at the meeting that he had owned the Property and transferred it to Joseph Mancuso (" Mancuso"). John D. Monte (" Monte"), attorney for Rolo, in a sworn declaration filed November 7, 2007, states that he attended the § 341(a) meeting and, based on his handwritten notes, confirmed that Debtor testified at the § 341(a) meeting that Debtor briefly owned an interest in the Property.
Rolo filed an adversary proceeding in the bankruptcy court on January 12, 2006, seeking to except the State Court Judgment from discharge in Debtor's case under § 523(a)(2) and (6). Consistent with the findings of the state court when it entered the State Court Judgment, Rolo alleged that Debtor had fraudulently presented himself to Rolo as a licensed roofing contractor, that Debtor could not competently perform and complete the roofing services under his contract with Rolo, and that as a result of Debtor's willful deceit and fraud, Rolo suffered damages, eventually resulting in entry of the State Court Judgment.
On February 7, 2006, Rolo and Debtor entered into a settlement agreement (the " Settlement Agreement") resolving the adversary proceeding. Among the salient terms of the Settlement Agreement were that: (1) Christall agreed to pay Rolo $60,190 on or before February 17, 2006; (2) when it received the $60,190, Rolo agreed to file a dismissal with prejudice of the adversary proceeding and to file a satisfaction of judgment in the state court; and (3) the parties acknowledged that they had been represented by counsel in the negotiation of the agreement.
There are two release clauses in the Settlement Agreement. Under the first clause,
Provided that all conditions hereto are met, upon execution of the agreement and receipt of the settlement sum, Rollo hereby releases any and all of its claims, demands and causes of action, whether known or unknown, against each party, including but not limited to, Christall, his predecessors and/or successors in interest, attorneys, and/or agents or representatives arising out of or giving rise to the [state court lawsuit] and/or the [adversary proceeding] except such claims that may arise or exist as a result of this agreement.
Under the second clause, Christall agreed to release Rolo from all claims, using nearly identical terms. There is no representation or admission by Debtor in the Settlement Agreement regarding the ownership of any assets. The copy of the Settlement Agreement in the excerpts of record reflects that it was signed by both Debtor and Daniel Rodriguez, president of Rolo, and by the attorneys for the parties who negotiated the Settlement Agreement.
The record includes documents showing that attorneys for Rolo and Debtor negotiated the Settlement Agreement. A letter from Debtor's attorney, Weil, to Rolo's attorney, Monte, dated February 1, 2006, contains a counter-offer of payment of $50,000 in apparent response to a previous demand of $100,000 by Rolo to terminate the adversary proceeding. Of particular interest in this letter is Weil's statement that " Mr. Christall, having contacted and exhausted all of his sources, believes that this will probably have to be his final offer."
Debtor paid the $60,190 to Rolo, Rolo caused the adversary proceeding to be dismissed with prejudice by the bankruptcy court on March 1, 2006, and Rolo filed a satisfaction of judgment of the State Court Judgment on March 6, 2006.
In the meantime, Mancuso initiated an action against Debtor in Los Angeles Superior Court, Mancuso v. Christall, case no. NC 038036, on February 1, 2006 (the " Mancuso Case"). A copy of the complaint in the Mancuso Case is not included in the record, but Mancuso would later summarize his state court claims against Debtor in a pleading filed in the bankruptcy court. Mancuso alleged that: (1) Debtor induced Mancuso to purchase the Property, with the title and mortgage in Mancuso's name, because Mancuso had a better credit rating than Debtor; (2) Debtor made the down payment, and promised to make all mortgage payments and obtain financing so that Mancuso could transfer title to Debtor; (3) in 1999, Mancuso transferred title to Debtor so that Debtor could attempt to sell the Property, but kept the mortgage obligation in Mancuso's name; and (4) in 2003, without Mancuso's knowledge or consent, Debtor transferred title to the Property back to Mancuso. Mancuso claimed damages stemming from the injury to his credit rating from Debtor's failure to make loan payments, and Mancuso's entitlement to a share of the appreciation in the Property. The Mancuso Case was dismissed without prejudice on Debtor's motion on September 20, 2006.
Mancuso is not a party to this appeal. We describe the Mancuso Case here because Rolo argues that the Mancuso Case demonstrates that Debtor was aware of his interest in the Property at the same time that Debtor allegedly told Rolo that he had no assets.
Trustee filed a " no asset" report in the bankruptcy case on March 8, 2006. Debtor received a discharge on July 7, 2006, and the bankruptcy case was closed on July 11, 2006. However, at some later time, Trustee learned that Debtor may hold an interest in the Property. On October 13, 2006, on Trustee's motion, the bankruptcy court reopened the bankruptcy case to allow Trustee to administer the unscheduled asset.
On February 3, 2007, Rolo submitted a proof of claim in the reopened bankruptcy case for $178,636 based on the State Court Judgment. In calculating the amount of the claim, Rolo credited Debtor's payment of $60,190 under the Settlement Agreement against the $210,389.50 originally demanded in the adversary complaint, and recalculated the accrued interest.
On October 17, 2007, Debtor filed an Objection to Allowance of Rolo's claim. Debtor asserted that Rolo's claim had been fully satisfied by his payment under the Settlement Agreement, and that consistent with the terms of the Settlement Agreement and mutual releases, Rolo had filed a satisfaction of judgment of the State Court Judgment. Attached to the Objection was Debtor's declaration that he had borrowed the $60,190 and had paid Rolo under the Settlement Agreement.
Normally, a debtor lacks standing to object to allowance of a creditor's claims in the bankruptcy case. Heath v. Am. Express Travel Related Servs. Co. (In re Heath), 331 B.R. 424, 429 (9th Cir. BAP 2005). However, where there is potentially a surplus of assets available for distribution to creditors with allowed claims, the debtor holds the requisite pecuniary interest to support an objection. Id . In this instance, if Rolo's claim is disallowed, a surplus may result.
Rolo responded to Debtor's Objection on November 7, 2007. In its opposition, Rolo accused Debtor of fraud in inducing Rolo to enter into the Settlement Agreement. Rolo contended that Debtor concealed assets (i.e., Debtor's interest in the Property) and that, had Rolo known about the Property, Rolo would not have entered into the Settlement Agreement. According to Rolo, California law provides that an agreement entered into by parties based on the fraud of one party is enforceable only to the extent intended by the aggrieved party. To the extent that Rolo intended to release Debtor from further personal liability, Rolo acknowledged that the Settlement Agreement is enforceable. However, due to Debtor's fraud, Rolo contends that, under these facts, the Settlement Agreement should not bar Rolo's entitlement to a distribution as a creditor from the bankruptcy estate.
The bankruptcy court conducted a hearing on Debtor's objection to Rolo's proof of claim on November 21, 2007. Debtor argued that the Settlement Agreement released all claims that Rolo had against Debtor, that there was no fraud in the inducement of Rolo to enter into the Settlement Agreement, and that any interpretation of the agreement must be based on its four corners.
Rolo argued that Debtor had not met its burden of going forward with an objection to Rolo's claim. If the bankruptcy court determined that the burden of proof had shifted to Rolo, it argued that, under California law, the Settlement Agreement was procured by fraud, and that any offensive terms were therefore voidable at Rolo's option, as the defrauded party, including any waivers or releases of any claims. To evidence Debtor's fraud in inducing Rolo to settle, Rolo offered declarations from Rolo's counsel and president attesting to the representations made by Debtor to Rolo during negotiations that Debtor had no assets. Rolo's attorney argued:
We have the oral representation that was made to Rolo's counsel that there were no assets other than borrowed monies. We have a letter from Debtor's counsel that says he's exhausted all of the sources, there's nothing else that's going on, and we have a declaration from Mr. Mancuso that says, at the same time that Rolo was engaging in settlement discussions with the Debtor, Mr. Mancuso and the Debtor were arguing over Mr. Christall's ownership interest, or claim of complete ownership . . . in the property at hand. So it wasn't true. The representations that were made to us in inducing us to settle this case were not true.
Tr. Hr'g 6:23 - 7:10 (November 21, 2007).
After a colloquy between the bankruptcy court and Rolo's counsel regarding Debtor's representations, the bankruptcy judge asked Rolo's counsel, " Well, what should [Debtor] have said?" Rolo's counsel acknowledged that, in negotiating the agreement, Debtor was under no obligation to speak, but argued that if he did, he had a duty to tell the truth:
I think he should have said that he has an interest in the [Property], and he may get it, and if he gets the house, then he may have more money to settle the case. We would have withheld settling the case, and/or we would have prosecuted the adversary and gotten the entire debt excepted from discharge. So that right was lost because we relied on those representations.
Tr. Hr'g 7:24 - 8:10.
Debtor's counsel responded that Rolo was attempting to rescind the Settlement Agreement without giving back the money paid by Debtor. Rolo's counsel insisted that Rolo was not seeking rescission, citing Ninth Circuit case law allowing the defrauded party to void a contract in whatever parts it chooses.
After considering these arguments, the bankruptcy court concluded by telling Rolo's attorney, succinctly, " You can't have it both ways . . . . So what I'm going to do is . . . I will overrule the objection, predicated on your returning the monies, which will then give you your full amount of your claim as determined by the state court, okay, in your judgment." Tr. Hr'g 12:18-22.
The bankruptcy court implemented its decision in an " Order After Hearing on Debtor's Objection to Allowance of Claim Number 5 Filed by Rolo Enterprises, LLC" entered on January 23, 2008. This order provides that:
1. The objection of claim number 5 filed herein by Rolo Enterprises, LLC, is sustained unless claimant Rolo Enterprises, LLC, pays to the debtor by close of business on January 25, 2008, the sum of $60,190.00.
2. However, if claimant Rolo Enterprises, LLC, pays to the debtor the sum of $60,190.00 on or before the close of business on January 25, 2008 claim no. 5 will be allowed in the amount of $178,636.00.
Rolo did not return the settlement money to Debtor; it filed a timely appeal on February 1, 2008.
JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. § § 1334 and 157(b)(2)(B). We have jurisdiction under 28 U.S.C. § 158.
Although the bankruptcy court's order included alternative resolutions dependent upon a condition, we have no jurisdictional concerns about the finality of the order for appellate purposes. We found no case law which examines the finality of an order that allows or disallows a claim in a bankruptcy case based upon the fulfillment or failure of a condition. However, use of conditional orders is an important traditional tool for any federal judge. Charles Alan Wright, Arthur Miller & Edwin H. Cooper, 15B FEDERAL PRACTICE AND PROCEDURE § 3915.3 (2nd ed. 1998) (" Judgment may be entered in a form that gives a party a choice between alternatives or imposes some condition on the effect of the judgment."). A conditional judgment is not final under Fed.R.Civ.P. 54(a) until the contingency has been removed. Id . Here, Rolo was required to return the settlement funds to Debtor by a fixed date, January 25, 2008, or its claim would be disallowed. Because Rolo did not comply, any contingency has been removed and the bankruptcy court's order disallowing Rolo's claim constitutes a final order subject to review on appeal.
ISSUE
Whether the bankruptcy court erred when it ruled that Rolo's proof of claim would be disallowed unless Rolo returned the payment it received from Debtor.
STANDARD OF REVIEW
We review a bankruptcy court's legal conclusions, including its interpretation of the Bankruptcy Code and state law, de novo. Roberts v. Erhard (In re Roberts), 331 B.R. 876, 880 (9th Cir. BAP 2005).
DISCUSSION
I.
Under § 501(a), a creditor may file a proof of claim. Section 502(a) provides that " a claim or interest, proof of which is filed under section 501 of this title, is deemed allowed unless a party in interest . . . objects." If there is an objection to the claim, with exceptions not relevant here, the bankruptcy court, under § 502(b), after notice and a hearing, " shall determine the amount of such claim in lawful currency of the United States as of the date of the filing of the petition, and shall allow such claim in such amount, except to the extent that" one of nine circumstances justifying disallowance are found to exist. Of particular interest here is the first type of claim to be disallowed under § 502(b), where " (1) such claim is unenforceable against the debtor and property of the debtor, under any agreement or applicable law for a reason other than because such claim is contingent or unmatured[.]"
Rules 3001 through 3013 provide the procedures governing the filing and objection to proofs of claim. None of these are relevant to our consideration of this appeal except, of course, Rule 3001(f), which provides that " a proof of claim executed and filed in accordance with these rules shall constitute prima facie evidence of the validity and amount of the claim."
The Panel recently examined the competing burdens of the creditor and objector in the context of a claims dispute. In Litton Loan Servicing, LP v. Garvida (In re Garvida), 347 B.R. 697 (9th Cir. BAP 2006), the Panel described the progression and shifting burden of proof concerning allowance of a claim, as follows:
First, the creditor must submit a claim that meets the requirements of the Bankruptcy Code and Rules. Assuming the creditor complies with the formal requirements for a proper proof of claim, a presumption of validity arises, and that claim is deemed allowed unless there is an objection. Id . at 708.
Next, if an interested party objects to the proof of claim, that objecting party must submit evidence that the claim was satisfied in whole or in part, such that it should be disallowed under § 502(b)(1). Id.
Finally, assuming the objector comes forward with sufficient proof, the ultimate burden of persuasion will be allocated under otherwise applicable law. Id . at 706.
We apply this paradigm to analyze the issues presented in this appeal.
II.
A.
Rolo filed a proof of claim in proper form in Debtor's reopened bankruptcy case in compliance with the Bankruptcy Code and Rules. Under Rule 3001(f), Rolo's proof of claim was thus presumptively valid.
Debtor, as an interested party, objected to allowing Rolo's proof of claim. In doing so, Debtor had the burden of submitting evidence to the bankruptcy court that Rolo's claim based on the State Court Judgment was no longer enforceable for purposes of disallowance under § 502(b)(1).
See note 6, infra.
There is nothing in the language of § 502(b)(1) restricting its application solely to prepetition agreements concerning claims. Further, to refuse to enforce a postpetition agreement in bankruptcy court that would be fully enforceable under state law would seem inconsistent with the general policy that state law governs the substance and enforceability of claims in bankruptcy cases. Raleigh v. Ill. Dep't of Revenue, 530 U.S. 15, 20, 120 S.Ct. 1951, 147 L.Ed.2d 13 (2000). We thus apply § 502(b)(1) to our analysis of the allowance/disallowance of Rolo's claim.
To satisfy this burden, Debtor submitted the Settlement Agreement, which on its face showed that, if Debtor paid Rolo $60,190, his debt to Rolo would be satisfied and all other claims held by Rolo, known or unknown, would be released. Debtor submitted proof that he had paid Rolo the settlement amount, and that Rolo had dismissed the adversary proceeding and filed a satisfaction of judgment in the state court as required under the Settlement Agreement. The bankruptcy court implicitly, and we explicitly, accept this evidence as an adequate showing that Rolo's claim had been extinguished by an agreement consistent with § 502(b)(1).
Although the bankruptcy judge did not state on the record that " the claim is extinguished, " his comments are reasonably interpreted to have this meaning. The court told counsel for Rolo, " you can't have it both ways." We understand this to mean that Rolo could not enjoy both the benefits of the Settlement Agreement (i.e., the cash payment), and participation in the bankruptcy case as a creditor, because the Settlement Agreement and payment extinguished Rolo's claim against Debtor.
Since Debtor had satisfied his burden, the ultimate burden of persuasion that the claim should be allowed shifted back to Rolo. In re Garvida, 347 B.R. at 708. Rolo challenged the notion that the Settlement Agreement and payment operated to satisfy and release all of its claims against Debtor. Instead, Rolo argued that the Settlement Agreement was binding only to the extent intended by Rolo, because Rolo had been duped into the settlement by Debtor's fraudulent misrepresentations about the extent of his assets. In Rolo's view, under these facts, the bankruptcy court should have allowed Rolo to retain the settlement funds received from Debtor, and also should have excused Rolo from the release of claims provision in the Settlement Agreement, thereby allowing Rolo to participate in distributions to creditors in the bankruptcy case.
To determine if Rolo has carried its burden, we look to the applicable law concerning rescission of settlement agreements.
Debtor asserts that, because rescission is an equitable remedy, pursuant to Rule 7001(7), an adversary proceeding was required before the bankruptcy court could " order" that the Settlement Agreement be rescinded. However, the Panel in Hickman v. Hana (In re Hickman), 384 B.R. 832 (9th Cir. BAP 2008), ruled that since, by their nature, all claims processing decisions in bankruptcy cases are essentially equitable in nature, adversary proceedings are only required when an objection to allowance of a claim is coupled with a demand for other affirmative relief.
B.
Rolo correctly argues that California law should be applied to resolve the issues raised here. In re Garvida, 347 B.R. at 705 (" nonbankruptcy (usually state) law governs the substance of claims")(citing Raleigh v. Ill. Dep't of Revenue, 530 U.S. 15, 20, 120 S.Ct. 1951, 147 L.Ed.2d 13 (2000)). Beyond this point, we part company with Rolo's arguments.
In the bankruptcy court and on appeal, Rolo relies heavily on a statement by the court in Kaufman & Broad v. Unisys Corp., 822 F.Supp. 1468, 1474 (N.D. Cal. 1993) for the proposition that:
[T]he Ninth Circuit, following the California Supreme Court and California Courts of Appeal, has held that " . . . if the parties have not dealt at arms' length and the releasor has relied on fraudulent statements or misrepresentations by the releasee, then the release is binding only to the extent actually intended by the releasor." [Kaufman citation as above, quoting:] Frusetta v. Hauben (1990) 217 Cal.App.3d 551, 266 Cal.Rptr. 62.
Ordinarily, we would not admonish an attorney for incorrectly referring to a district court decision as " The Ninth Circuit has held . . . ." Such an error is usually a mere oversight. However, when the same error occurs three times and forms the core of the argument that Ninth Circuit precedent binds us, we must take note.
Rolo's Opening Br. at 7 (also cited in Rolo's Opposition to Debtor's Objection to Claim, and quoted by Rolo's counsel at the hearing, Tr. Hr'g 12:1-7). Standing on this authority, Rolo advances several arguments to make what amounts to a single point: since Debtor misrepresented the extent of his assets to Rolo during negotiations and upon which Rolo relied in executing the Settlement Agreement, California law allows Rolo to, simply put, interpret the Settlement Agreement as it chooses.
To succeed with this argument, Rolo must show in the record that Debtor fraudulently induced Rolo into entering into the Settlement Agreement. Before examining Rolo's proof, though, we explore the first nine words of the Kaufman/Hauben quotation: " if the parties have not dealt at arms length. . . ."
C.
Kaufman, and the California case law on this issue, all hold that where there is no arms length bargaining during negotiations, the power to release the binding effect of agreements inures to the weaker party. See e.g., Rogers v. Warden, 20 Cal.2d 286, 288-89, 125 P.2d 7 (1942) (widow, unsophisticated in business and without an attorney, was cheated out of her mineral rights by three businessmen); Seeger v. Odell, 18 Cal. 2d 409, 412-13, 115 P.2d 977 (1941) (elderly couple without legal advice were dispossessed from their home by businessmen who falsely indicated they were holders of any interest the couple had in the land). In other words, under Kaufman and similar California cases, the Panel need not decide whether Debtor engaged in a misrepresentation unless Rolo first establishes that the Settlement Agreement was not the product of arms length negotiation.
There is a presumption under California law that contracts negotiated by parties represented by attorneys are " arms length." " A characteristic of arms length negotiation is extensive and hard-fought adversarial negotiation between competent attorneys." Wershiba v. Apple Computer, 91 Cal.App.4th 224, 245, 110 Cal.Rptr.2d 145 (Cal.Ct.App. 2001). The California Supreme Court defines arms length bargaining as that between " parties of equal strength and sophistication." County of L.A. v. Soto, 35 Cal.3d 483, 490, 198 Cal.Rptr. 779, 674 P.2d 750 (1984).
Here, the record demonstrates that the negotiations of the settlement between Rolo and Debtor were placed in the hands of two attorneys who, over a period of time, exchanged information, offers and counteroffers. Both attorneys approved the final Settlement Agreement, as did their clients, presumably after considering their lawyer's advice. In short, there is nothing in the record that would support the suggestion that the Settlement Agreement was not negotiated at arms length.
Indeed, to the extent there might have been some slight imbalance in bargaining power, the record would arguably favor Rolo as having superior power. Rolo held a State Court Judgment against Debtor for a substantial sum, including an award of punitive damages, based on the state court's finding that Debtor had engaged in intentionally bad conduct. On this record, Rolo could persuasively argue that the State Court Judgment should be excepted from discharge in Debtor's bankruptcy case. The record also contains evidence that Debtor, already in chapter 7, was forced to borrow money from family and friends to fund the settlement. While Rolo was also apparently facing some financial difficulties, there is no evidence in the record that it was not at that time an operating business. In short, if there was any imbalance of power between Rolo and Debtor in negotiating their deal, it modestly favored Rolo, not Debtor.
The cases cited by Rolo all involve circumstances much different than those presented here. The principal California Supreme Court case relied on by Rolo is Casey v. Proctor, 59 Cal.2d 97, 98, 28 Cal.Rptr. 307, 378 P.2d 579 (1963). In that case, Casey was a young man contacted by an insurance adjuster a few days after he was involved in an auto accident. The court excused Casey where it was shown the adjuster had pressured Casey to execute a release that had a " no injury" block checked. Casey, in turn, relied on earlier cases involving a common theme. For example, in Raynale v. Yellow Cab Co., 115 Cal.App. 90, 300 P. 991 (1931), the plaintiff was injured in an auto accident involving a taxi. Shortly after the accident, at the request of the cab company, the plaintiff signed a release in exchange for $25 for " coat damage." The court found that there had been fraud in connection with the settlement, not consisting of affirmative misrepresentations, but in the cab company's agent discussing property damage with plaintiff, then without explaining its effect, asking her to sign a release covering other matters not discussed. Id . at 92. In Meyer v. Haas, 126 Cal. 560, 58 P. 1042 (Cal. 1899), the plaintiff fell down an elevator shaft, and shortly thereafter entered into a settlement with the operators of the elevator. A jury later found that the plaintiff was tricked into settling because his English was poor and his agent was actually working for the operators.
As can be seen, the Kaufman and Casey lines of cases do not help Rolo because they did not involve an agreement that resulted from an arms length negotiation by parties represented by counsel. Because Rolo has not shown that the Settlement Agreement was not the product of an arms length negotiation between the parties' attorneys, the bankruptcy court did not err in refusing to allow Rolo both to escape the effect of the release in Settlement Agreement and to retain the settlement funds.
D.
Even assuming the bankruptcy court should have examined whether Debtor engaged in misrepresentation in connection with negotiating the Settlement Agreement, the record on this question is, contrary to Rolo's argument, far from clear. Although there certainly is evidence that Debtor defrauded Rolo in the business relations that gave rise to the State Court Judgment, it is questionable whether Rolo was tricked into settling the discharge litigation by Debtor's alleged claims of poverty.
In California, fraud in the inducement of a contract is a subset of the tort of fraud. Hinesley v. Oakshade Town Center, 135 Cal.App.4th 289, 294-95, 37 Cal.Rptr.3d 364 (Cal.Ct.App. 2005). To establish fraud, California requires proof of all five of these elements: " (a) misrepresentation (false representation, concealment, or nondisclosure); (b) knowledge of falsity (or " scienter"); (c) intent to defraud, i.e., to induce reliance; (d) justifiable reliance; and (e) resulting damage." Id.
Rolo has provided only fragile evidence that Debtor engaged in misrepresentation. Rodriguez' account of Debtor's representations concerns negotiations in which Rodriguez did not participate, and his statements are likely hearsay. Moreover, the record does not support Rolo's argument that Debtor was asserting his rights in the Property at the same time that he was negotiating the Settlement Agreement. Debtor's allegations as to his interest in the Property in the state court action upon which Rolo relies did not occur until he filed his answer in the Mancuso Case on March 1, 2006, almost a month after entering into the Settlement Agreement.
Finally, and perhaps of paramount interest, there is no evidence that Debtor ever acknowledged in the settlement negotiations that he had an interest in the Property; instead, Rolo asserts that Debtor represented he had " no assets." Even assuming that Rolo is correct, the term " no assets" is equivocal at best. In the context of their settlement negotiations, where the emphasis was on Debtor's then-present ability to pay Rolo, it could mean that Debtor had exhausted his sources (contacts) to raise money to fund a settlement, or that Debtor did not have assets that could be liquidated within a reasonable time to generate the money to pay Rolo. Thus, contrary to Rolo's arguments, it is far from clear on this record that Rolo was duped by Debtor into entering the Settlement Agreement.
Even if Debtor lied to Rolo during the negotiations, Rolo faces a daunting task in proving it " justifiably relied" on any representations made by Debtor. " Reliance exists when the misrepresentation or nondisclosure was an immediate cause of the plaintiff's conduct which altered his or her legal relations, and when without such misrepresentation or nondisclosure he or she would not, in all reasonable probability, have entered into the contract or other transaction." Alliance Mortgage Co. v. Rothwell, 10 Cal.4th 1226, 1239 n.4, 44 Cal.Rptr.2d 352, 900 P.2d 601 (1995). And while ordinarily the elements of fraud are matters of fact that an appellate tribunal cannot determine, the California Supreme Court allows that " whether a party's reliance was justified may be decided as a matter of law if reasonable minds can come to only one conclusion based on the facts." Id . In this instance, we believe that " reasonable minds" can only conclude that Rolo could not justifiably rely on any of Debtor's representations, false or otherwise, in deciding to settle its claims against Debtor.
According to the Rodriguez declaration,
At the time Debtor filed bankruptcy, Rolo was financially distressed in part due to the fact that Rolo not only paid for services he was to perform, but also had to pay a third party to correct Debtor's work and finish the job anew and Rolo had to pay significant attorney fees. Rolo's state court attorney wanted to do a full asset investigation on Debtor, but Rolo could not afford the cost, in part, as a result of the financial drain incurred . . . . Rolo learned of the possibility that Debtor may own an interest in a house, but was unable to verify with certainty that such was the case.
Rolo then filed an action in the bankruptcy proceeding to determine dischargeability of the debt. Rolo's attorney engaged in a dialogue with Debtor's attorney. Rolo's attorney told Rolo that Debtor represented he had no assets and that, if a resolution was worked out, any money to settle with Rolo would be coming from friends and family. Rolo's attorney also told Rolo that Debtor represented that all of his sources for funding a settlement were exhausted and he would be unable to pay anything further. Based upon these representations, Rolo believed the prudent decision was to resolve the case even though it meant significantly less than it would have if other assets were available to satisfy the Judgment.
Again, this declaration is fraught with hearsay statements. But even if considered, it is apparent that Rolo was advised by its counsel to do a " full asset investigation of Debtor" and was aware of " the possibility that Debtor may own" the Property during settlement negotiations. In addition, according to Rolo's attorney, during Debtor's § 341(a) meeting examination, Debtor admitted that at some time he had owned the Property. Moreover, Debtor had a poor track record with Rolo: Rolo had been allegedly victimized by the past frauds of Debtor that resulted in the State Court Judgment in Rolo's favor against Debtor.
Given this record, we believe the California courts would conclude that no reasonable person possessing the knowledge and information of Rolo could justifiably rely on any representations made to it by Debtor. It seems far more likely that Rolo took a calculated risk that it was better off receiving the $60,190 in cash than in fighting to preserve what might be an uncollectible money judgment against Debtor for a larger sum.
CONCLUSION
Under these facts, Rolo was required to persuade the bankruptcy court that the release provision in the Settlement Agreement was not effective, such that Rolo should be allowed to both retain the settlement payment and participate as a creditor in distributions from Debtor's bankruptcy case.
The bankruptcy court was not persuaded, nor is this Panel, that Rolo's claim should be allowed in the bankruptcy case without returning the cash. In exercising its discretion, the bankruptcy court offered Rolo the opportunity to rescind the Settlement Agreement, but only on condition that Rolo return the $60,190 to Debtor. See Runyan v. Pac. Air Indus., Inc., 2 Cal.3d 304, 319, 85 Cal.Rptr. 138, 466 P.2d 682 (1970). Rolo declined this invitation, and instead appealed the bankruptcy court's order.
We conclude that the bankruptcy court's ruling to disallow Rolo's claim was consistent with California and bankruptcy law. AFFIRMED.