Memorandum of Decision Re: Fraud

IN THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA
In re ROBERT and SUSAN WHITFIELD,                                                 No. 93-11188      Debtors. ___________________________/ KATHLEEN MERRILL,      Plaintiff,    v.                                                                                                  A.P. No. 93-1212 ROBERT and SUSAN WHITFIELD,      Defendants. ______________________________/
Memorandum of Decision
     In March of 1990, debtors Robert and Susan Whitfield sold real property in Fremont, California to plaintiff Kathleen Merrill. Robert Whitfield, who is a licensed contractor, had attempted before the sale to turn the property into a triplex but his request had been denied by city authorities because of lack of parking. Whitfield then made modifications to the property, including the addition of an illegal kitchen without a permit, and sold the property to Merrill as a triplex. In this adversary proceeding, Merrill seeks a nondischargeable judgment based on the Whitfields' fraud.      The Whitfields readily admit that the property was not a lawful triplex, that the listing of the property as a triplex was false, and that they lied in their written disclosure when they certified that all modifications had been performed with permits. However, they argue that they gave Merrill so much information that it amounted to disclosure. The court finds that while the Whitfields did disclose enough information that even a marginally competent real estate professional should have realized that the triplex was not legal, Merrill herself did not realize the truth and justifiably relied on the Whitfields' express representations and their failure to expressly disclose that the triplex was not legal. Her claim is accordingly nondischargeable pursuant to section 523(a)(2) of the Bankruptcy Code.      To a professional, the evidence of illegality should have been overwhelming. The Whitfields expressly pointed out a door connecting two units. They pointed out a private gas meter separating the gas use for two of the units. They discussed parking problems. They disclosed that one unit was considered to be an "extension" of another unit. They hinted very strongly that the triplex was not legal. However, they did not come right out and say it, when they knew the truth full well and knew that the listing and their disclosure were not truthful.      How the two real estate brokers involved in the sale could have failed to infer the truth is beyond the court, but it is evident that Merrill herself never realized that she was buying an illegal triplex. The true facts came to light when Merrill, not realizing why there was a private gas meter, went to the utility company and the city to have it changed. That is the last thing a buyer who knew all the facts would do.      The evidence established that the property, as a lawful duplex, was worth $65,000.00 less than the contract price Merrill paid. Moreover, it will cost Merrill at least $300.00 to remove the illegal kitchen Whitfield put in one of the units. Accordingly, the court will enter a nondischargeable judgment against the Whitfields in the amount of $65,300.00, together with interest at the legal rate from and after the close of escrow. Merrill shall also recover her costs of suit.      Merrill is not entitled to punitive damages or attorneys' fees. In re Ellwanger (9th Cir.BAP 1989) 105 B.R. 551, 555; In re Fulwiler, 624 F.2d 908, 910 (9th Cir.1980); In re Itule, 114 B.R. 206, 213 (9th Cir.BAP 1990). Her notion that the court should try only "liability" and not "damages" is a minority and largely discredited position. See In re McLaren, 990 F.2d 850 (6th Cir.1993); In re Choi, 135 B.R. 649 (Bkrtcy.N.D.Cal.1991). Merrill's damages are a matter of federal bankruptcy law, not state law, and are limited by the express language of section 523(a)(2) ("to the extent") to the amount obtained from her by the Whitfields' misrepresentations.      This memorandum constitutes the court's findings and conclusions pursuant to FRCP 52(a) and FRBP 7052. Counsel for Merrill shall submit an appropriate form of judgment forthwith.
Dated: February 9, 1994                                                                                                   _______________________                                                                                                                                                     Alan Jaroslovsky                                                                                                                                                    U.S. Bankruptcy