FOR THE NORTHERN DISTRICT OF CALIFORNIA
ERNEST E. HARRIS, No. 1-89-00573
LAWRENCE and SUSAN CAPELIS,
v. A.P. No. 1-89-0115
ERNEST E. HARRIS,
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 _______________________