Memorandum of Decision Re: Damages for Fraud

FOR THE NORTHERN DISTRICT OF CALIFORNIA In re ERNEST E. HARRIS,                                                       No. 1-89-00573      Debtor. ___________________________/ LAWRENCE and SUSAN CAPELIS,      Plaintiffs,    v.                                                                                  A.P. No. 1-89-0115 ERNEST E. HARRIS,      Defendant. ______________________________/
Memorandum of Decision
     Debtor and defendant Ernest Harris is a real estate broker. In 1986, he was the listing agent for the sale of undeveloped acreage in Mendocino County. Plaintiffs Lawrence and Susan Capelispurchased the property through Harris.      Prior to the purchase, Harris had told the plaintiffs that the southern boundary included all of a certain meadow area. This representation was false, in that only a part of the meadow was in fact within the boundaries of the property. At the time Harris made the representations, he knew where the true boundary was. If the plaintiffs had known what Harris knew, they would not have agreed to purchase the property.      Plaintiffs sought rescission from the sellers due to the misrepresentations of their agent. The sellers agreed to rescission and returned $22,862.56 of the $31,644.56 plaintiffs had paid to them. In this action, plaintiffs seek to have the balance of their losses, plus attorneys' fees, declared nondischargeable pursuant to section 523(a)(2) of the Bankruptcy Code.      The court has no problem finding liability under 523(a)(2). While the Code provides that a debt based on fraud is only nondischargeable to the extent the debtor obtained money or property thereby, the definition is broad enough to encompass money obtained for a principal when the debtor is the agent. The real issue in this case is the extent of damages.      The court sees no basis for the awarding of attorneys' fees. They are not money or property obtained by fraud, as the statute limits. Any contractual obligation to pay attorneys' fees or to indemnify plaintiffs was clearly discharged. An action under section 523(a)(2) is not a state law contract or tort action; it is purely a federal cause of action designed to implement the policies of the Bankruptcy Code. In re Fulwiler (9th Cir.1980) 624 F.2d 908, 910. Attorneys' fees are recoverable in actions based on federal bankruptcy statutes only when the statute so provides. In re Johnson (9th Cir.1985) 756 F.2d 738. See, e.g., section 523(d) of the Code. Attorneys' fees are not recoverable by a creditor in an action under 523(a)(2). Matter of Smith (Brktcy.M.D.Fla.1987) 72 B.R. 300.      Plaintiffs attempted to proceed against Harris based on the sellers' claims against him, which were assigned to plaintiffs as part of their settlement with the sellers. The court disallowed this claim summarily on the basis of section 523(c), which limits dischargeability actions to only those to whom the debt is owed. See In re Beugen (9th Cir.BAP 1989) 99 B.R. 961.      The court finds that the allowable nondischargeable judgment in this case is $14,419.50, which is the difference between what the plaintiffs paid out and what they recovered from the sellers, together with interest to May 25, 1988. The judgment shall bear interest from that date at the federal legal rate. Plaintiffs shall also recover their costs of suit.      Counsel for plaintiffs shall submit an appropriate form of judgment, which counsel for Harris has approved as conforming to this decision. This memorandum constitutes findings and conclusions pursuant to FRCP 52(a) and Bankruptcy Rule 7052.
Dated: November 29, 1989                                                                                  _______________________                                                                                                                               Alan Jaroslovsky                                                                                                                              U.S. Bankruptcy