Unpublished Disposition, 902 F.2d 1578 (9th Cir. 1982)

MEMORANDUM^* 

We decide whether the bankruptcy court erred in determining that a debt was nondischargeable under 11 U.S.C. § 523(a) (2) (A) because it was incurred by fraud or false representations.

BACKGROUND

Robbins, an attorney, and Brower, an investigator, had an oral agreement late in 1981 under which Brower would work full time for Robbins in his law practice. They agreed that each would be paid a salary of $3,500 per month, and share equally in any bonuses.¹ 

Brower began working full time in January 1982. Because Robbins had not told his partner that he had hired Brower, he did not pay Brower through regular channels, but paid him through a trust account after Brower submitted billings of $3,500. Robbins became a sole proprietor on October 1, 1982, and from that time until Brower's termination, both received equal salaries and bonuses.

In December 1982, Robbins wrote to Brower that the business relationship was terminated. There is evidence that, on the day before, he had received a settlement check in the "Kinard" case which he requested be post-dated to January, 1983. He deposited the check into his personal, rather than business, account and denied to the office that the case had been settled. He paid none of the settlement money to Brower.

Robbins later filed for Chapter 11 bankruptcy and voluntarily converted it to Chapter 7. Brower initiated an adversary proceeding contesting the dischargeability of debts. He claimed that under 11 U.S.C. § 523(a) (2) (A), Robbins had obtained money, property or services from him through fraud or false representations. After a trial, the bankruptcy court found fraud and held that Robbins owed Brower a nondischargeable debt of $50,000. The district court affirmed, saying the finding of fraud was not clearly erroneous.

STANDARD OF REVIEW

In reviewing the district court's affirmance of a bankruptcy court's decision, we review de novo all questions of law, but will uphold the bankruptcy court's findings of fact unless they are clearly erroneous. In re Rubin, 875 F.2d 755, 758 (9th Cir. 1989) (reviewing bankruptcy court's finding of fraudulent intent and proximate cause under Sec. 523(a) (2) (A) under the clearly erroneous standard). A finding of fact is clearly erroneous when the reviewing court is left with a definite and firm conviction that a mistake has been made by the trial court. See Dollar-Rent-a-Car, Inc. v. Travelers Indem. Co., 774 F.2d 1371, 1374 (9th Cir. 1985).

ANALYSIS² 

The elements of a claim for fraudulent misrepresentation under Sec. 523(a) (2) (A)³  are:

(1) The debtor made a representation;

(2) that was material;

(3) which the debtor knew at the time to be false;

(4) with the intent to deceive the creditor;

(5) upon which the creditor reasonably relied;

(6) and which proximately resulted in damage to the creditor.

Rubin, 875 F.2d at 759. Applying these factors, we hold that the bankruptcy court's finding that Robbins knowingly made false representations with the intent to deceive Brower was not clearly erroneous.

Robbins argues that because the bankruptcy judge did not find fraud at the inception of the contract, there was no material false representation. He is incorrect.

The parties had entered into an agreement that they would share equally in salary and bonuses. There is evidence that at some time prior to the termination of the agreement, Robbins had learned of the $100,000 settlement and decided not to share it with Brower. He continued to accept services from Brower, letting him believe that nothing had changed in the relationship. See, e.g., In re Kirk, 8 Bankr. 258, 260 (Bankr.E.D. Va. 1981) (finding of fraud when logger continued to cut logs under a contract after he knew he could not pay for them). It was not clear error for the court to conclude that Robbins knowingly made false representations.⁴ 

It also was not clear error for the court to conclude that Robbins never intended to pay any of the settlement profits to Brower. They had worked on the Kinard case during their entire employment relationship. Robbins had paid Brower according to their agreement until he was about to receive the $100,000. He then took measures to hide the settlement, and lied about whether the case had settled and deposited the check in his personal account. His actions demonstrate that he never intended to share the profits with Brower. See, e.g., In re Devers, 759 F.2d 751, 753-54 (9th Cir. 1985) ("Because a debtor is unlikely to testify that his intent was fraudulent, the court may deduce fraudulent intent from all the facts and circumstances of a case.")

Robbins argues that because the employment relationship was terminable-at-will, Brower could not have reasonably relied on any representations. He fails to show clear error. There was sufficient evidence that the fraud took place before Brower's termination, and that Robbins continued to accept his services. Brower continued to work in expectation of receiving half the proceeds from the employment relationship. His reliance was reasonable because Robbins previously had honored the salary and bonus agreement.

The bankruptcy court's determination that Brower was damaged by the fraudulent misrepresentations is not clearly erroneous. He worked for Robbins with the understanding that he would share in any profits of the business. Because Robbins hid the Kinard settlement money and terminated their employment relationship, it was not clearly erroneous for the judge to find damages in the amount of $50,000.⁵ 

CONCLUSION

Having reviewed the record, we are not left with a definite and firm conviction that a mistake has been made. Robbins does not fall within the class of debtors the bankruptcy laws are designed to assist. See Rubin, 875 F.2d at 760 (citing Brown v. Felsen, 442 U.S. 127, 128 (1979)).

AFFIRMED.