Memorandum of Decision Re: Fraud

In re DOLORES P. SEYMOUR,                                       No. 1-86-00373      Debtor. ______________________/ HERITAGE PARTNERS,      Plaintiff,    v.                                                                              A.P. No. 1-87-0121 DOLORES P. SEYMOUR and BRUCE A. SEYMOUR,      Defendants. ________________________/
Memorandum of Decision

     In 1981 plaintiff Heritage Partners and defendants Bruce and Dolores Seymour (who are husband and wife) agreed to settle a dispute between them affecting a note held by Heritage and secured by a deed of trust to the Seymours' residence at 15 Edward Court in San Rafael. Pursuant to the stipulation, Heritage agreed to reconvey the deed of trust in return for a new deed of trust to the same property. The Seymours did not disclose to Heritage that they had transferred title to their residence to a third party, so that Heritage's good deed of trust was replaced with one apparently invalid.      Heritage sued the Seymours in state court for breach of the settlement agreement and for fraud. After a nonjury trial, the state court awarded Heritage general damages in the amount of $112,036.00, attorneys' fees in the amount of $20,000.00, and punitive damages in the amount of $10,000.00. The punitive damages were assessed against Bruce Seymour only.      The state court found "flagrant fraud" on the part of Mr. Seymour but made no specific finding as to Mrs. Seymour, who admittedly signed all of the relevant documents. The state court also declared that the property was owned by the Seymours and that the deed to the third party was null and void for want of consideration.      The property is presently worth in excess of $320,000.00. Liens senior to that of Heritage total no more than $100,000.00.
     Proper venue for the action against Bruce Seymour, who is a debtor in separate bankruptcy proceedings in Utah, is clearly not in this court pursuant to 28 U.S.C. section 1409. However, the Court finds that Mr. Seymour has waived his right to object to venue by consenting to it in writing and by not seeking a change of venue before trial.      28 U.S.C. section 1334(b) vests jurisdiction over cases arising under title 11 in "the district courts." Since this grant of jurisdiction is not limited to the district court in which the underlying bankruptcy was commenced (see, e.g., 28 U.S.C. section 1334(d)), the Court finds that it has jurisdiction over this matter as to both Seymours.
     The state court explicitly found that Mr. Seymour wrongfully, fraudulently, and with intent to deceive represented that he could place a valid deed of trust against the real property when that was not the case, and that Heritage relied on the representation to its damage. While the state court judgment is not res judicata here, its findings create a prima facie case of fraud which the Seymours did not rebut. In re Houtman (9th Cir.1978) 568 F.2d 651. Accordingly, the Court finds conduct, at least on the part of Mr. Seymour, sufficient to render a debt nondischargeable pursuant to section 523(a)(2) of the Bankruptcy Code.
     The state court made no specific findings of fraud concerning Mrs. Seymour. However, she admits signing the relevant documents and generally being involved in the transaction, albeit only acting at her husband's direction. While her memory is poor, the Court does not believe that she could first deed away her home and then grant a mortgage on it without realizing that she was doing something improper. This conduct is sufficient to render the debt nondischargeable as to her as well as her husband. In re Lansford (9th Cir.1987) 822 F.2d 902, 905.      In addition, while the court in Lansford expressed reservations as to liability bases on agency, the leading authority on bankruptcy law states that a debtor who has made no false representations himself may nonetheless be bound by the fraud of an agent. 3 Collier on Bankruptcy (15th ed.) sec. 523.08[4], p. 523-49. The Court accordingly imputes Mr. Seymour's fraud to his wife, as they were both acting in furtherance of their community interests.
     The Seymours argue that even though they defrauded Heritage, Heritage has suffered no recoverable damages because as a result of the state court decree Heritage has what it bargained for, a lien on their home. They argue that since the effect of their fraud was undone by the state court, Heritage has no remaining claim arising out of their fraud.      The Court agrees only partially with the Seymours. To the extent that Heritage receives payment through enforcement of its lien, it has not been deprived of any property and therefore has no nondischargeability claim; section 523(a)(2) allows nondischargeable judgments only to the extent that property was obtained by fraud. Heritage would have a double recovery if it were allowed to have both its lien and damages for loss of it. However, Heritage has not yet been able to enforce its lien, due to the Seymours' appeal of the state court case and their subsequent bankruptcies. It is unfair to Heritage to assume that it is already whole, in spite of its seemingly favorable lien position on the property, and even more unfair to resolve speculative matters in favor of the Seymours after finding that the situation was created by their fraud.      As a court of equity, this Court may fashion a remedy which does justice to the parties. In re Ploski (Bkrtcy.D.N.H.1984) 44 B.R. 911, 914. Accordingly, the Court will enter a judgment that a nondischargeable debt exists in favor of Heritage and against both Seymours in the amount of $96,714.00. The Court reached this amount by taking 79% of the amount claimed by Heritage (the other 21% of the judgment was for punitive damages and attorneys' fees, discussed below). Interest is to accrue at the legal rate from January 13, 1988.      Enforcement of this Court's judgment (and hence, the state court judgment) as a personal obligation of the Seymours will be stayed until Heritage has fully exhausted its lien rights in the subject property. All funds recovered pursuant to enforcement of the lien rights shall be credited first toward this nondischargeable judgment.      It should be noted that even though only a portion of the debt is found to be nondischargeable, the entire debt is still a lien on the property.
     As noted above, the Bankruptcy Code provides that debts are nondischargeable only to the extent that the debtors obtained something by their fraud. Thus, those portions of a state court judgment which are in the nature of a penalty and are not based on actual pecuniary loss suffered by the creditor may not be included in a bankruptcy court judgment of nondischargeability. In re McDonald (Bkrtcy.N.D.Tex.1987) 73 B.R. 877; In re Church (Bkrtcy. N.D.Tex.1987) 69 B.R. 425; In re Brown (Bkrtcy.D.Utah 1986) 66 B.R. 13; In re Schmidt (Bkrtcy.D.Minn.1984) 36 B.R. 384. The Court therefore cannot include the punitive damages in its judgment.
     The state court found the Seymours liable for both fraud and breach of contract, and awarded attorneys' fees pursuant to the contract. Since liability for the attorneys' fees flowed from the breach of contract and not the fraud, they cannot be included in this Court's nondischargeable judgment. Matter of Smith (Bkrtcy. M.D.Fla.1987) 72 B.R. 300, 301.      Nor can this Court's judgment include fees incurred in prosecuting this adversary proceeding. This proceeding is based on a federal statute sounding in tort (section 523(a)(2)). Attorneys' fees based on bankruptcy statutes can be awarded only when the statute explicitly so provides. In re Johnson (9th Cir.1985) 756 F.2d 738, 741. See, e.g., section 523(d).      It should be noted that just because attorneys' fees are not included in this Court's judgment does not mean Heritage cannot collect them. To the extent there is equity in the property (which there appears to be), and to the extent that they are found to be reasonable, the fees may be added to Heritage's lien pursuant to section 506(b) of the Code. The fees may therefore be collected upon enforcement of the lien even though they are no longer a personal liability of the Seymours after their discharge.
     Counsel for Heritage shall submit a form of judgment in accordance with this memorandum, which counsel for Bruce Seymour shall approve as to form. This memorandum constitutes findings and conclusions pursuant to FRCP 52(a) and Bankruptcy Rule 7052.
Dated: January 14, 1988                                                                          ________________________                                                                                                                      ALAN JAROSLOVSKY                                                                                                                      U.S. BANKRUPTCY