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May 23, 2010

9th Circuit Rules that Damages Assessed Against Unlicensed Contractor under California Law Discharged Even Though Fraud is Found

Ghomeshi v. Sabban (In re Sabban), --- F. 3d ---  (9th Cir. April, 2010)

Issue:   Is a claim for disgorgement from an unlicensed contractor under Cal B&P 7031(b) dischargeable even when there is a specific finding of fraud on the basis that there were no actual damages? 
 
Holding:   Yes.  
appeal from the BAP

Judge William A. Fletcher,

The debtor operated an unlicensed home remodeling business.  He falsely told Ghomeshi that he was licensed.  “California law provides that a client who employs an unlicensed contractor may recover all compensation paid to that contractor, regardless of whether the contractor has committed fraud and regardless of whether the client has sustained actual harm. Cal. Bus. & Prof. Code § 7031(b).”  After the work was done, Ghomeshi sued the debtor in state court under B&P 7031(b).  The state court found that the debtor lied but found that Ghomeshi did not suffer any harm.  Under California law, however, the state court awarded damages of $123,000, i.e., the full amount paid to the debtor.  The debtor filed chapter 7 and Ghomeshi filed a non-dischargeability complaint.  Ghomeshi argued that in Cohen v. Dela Cruz, the Supreme Court said that damages under state law are non-dischargeable once fraud is found.   The bankruptcy court ruled that the debt was discharged and the BAP affirmed. 

The 9th Circuit also affirmed distinguishing this case from Cohen. 

“[I]n Cohen v. dela Cruz, the Supreme Court held that the reach of § 523(a)(2)(A) is not limited to the amount of benefit received by the debtor.  Rather, §523(a)(2)(A) ‘prevents the discharge of all liability arising from fraud.’  Following Cohen, we have concluded that there is no requirement that the debtor ‘have received a direct or indirect benefit from his or her fraudulent activity in order to make out a violation of § 523(a)(2)(A).’” 

“We note two ways in which the case before us is different from Cohen.  First, unlike the tenants in Cohen, Ghomeshi suffered no actual harm as a result of [the debtor’s] misrepresentation that [he] held a contractor’s license.  Actual damages are available under § 7160, but the state court specifically declined to award them, holding that Ghomeshi had suffered no harm.  Second, unlike the New Jersey Consumer Fraud Act at issue in Cohen, § 7031(b) is not premised on the commission of fraud.  In order to recover compensation paid to a contractor, a plaintiff in a §7031(b) suit need only show that the contractor was unlicensed.”

“We hold that because the award of $123,000 was made under a statute that is not premised on either fraud or actual harm, it is not a debt for money obtained by fraud within the meaning of 11 U.S.C. §523(a)(2)(A).  We therefore affirm the bankruptcy court’s determination that the award of $123,000 under § 7031(b) is dischargeable.”

May 23, 2010 in 9th Circuit Briefs | Permalink

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