Love v. Wiseman

Background

Lee Ann Love alleged that in March 2012 she entered a partnership agreement with her then in-laws, Johnny Oliver Wiseman and Vicki Lynn Wiseman, and Javea Corporation. The written document stated that Love had invested $75,000 in Javea in anticipation of eventually obtaining total ownership, representing 33 percent of the company’s value at that time. Love alleged that the parties later revised the arrangement: she paid a total of $100,000, and the Wisemans agreed to sell her part of Javea and its framing business, sell her the Monterey Property, train and employ her, and issue her 25 percent of Javea’s stock.

The Wisemans later fired Love and stopped her training. The Family Trust held title to the Monterey Property. Love sued in state court and recorded a notice of pending litigation, commonly called a lis pendens. After the Wisemans filed for Chapter 7 bankruptcy, Love filed an adversary proceeding in Bankruptcy Court against the Wisemans, the Family Trust, Javea, bankruptcy trustee Marc Del Piero, and other entities. She sought, among other things, a ruling that her debt claims against the Wisemans could not be discharged in bankruptcy, a determination of ownership of the Monterey Property, and a determination of lien rights.

The Bankruptcy Court previously dismissed Love’s claims against the Trustee, ruled that the lis pendens was void and invalid because service was not properly recorded, and determined that Love did not have a secured claim. This Court affirmed those interlocutory rulings in 2016. The Ninth Circuit dismissed Love’s appeal from that decision for lack of jurisdiction to review interlocutory bankruptcy orders.

Bankruptcy Court’s post-trial rulings

After a trial on Love’s remaining claims against the Wisemans and the Family Trust, the Bankruptcy Court found that Love and the Wisemans had been in a partnership or joint venture. It found in Love’s favor on her claims under 11 U.S.C. § 523(a)(4) and § 523(a)(6), ruling that the debt resulting from defalcation and embezzlement was not dischargeable. It rejected her claim under § 523(a)(2)(A), which concerns debts obtained through fraudulent representations or deceptive conduct, because the evidence did not show that the Wisemans knew their representations were false when they made them.

The Bankruptcy Court’s judgment also ruled that the Monterey Property was property of the bankruptcy estate, that Love did not have a secured claim, and that Love and the Wisemans’ relationship created a general unsecured claim for Love in the amount of $134,359.13. The judgment stated that Love’s claim for injunctive relief was dismissed with prejudice and was moot because ownership of the property had been established. The Bankruptcy Court later denied Love’s motion for reconsideration.

District Court’s review

The District Court reviewed factual findings for clear error and legal conclusions without deference. It affirmed the Bankruptcy Court’s post-trial order, concluding that the record did not show the Wisemans intended to deceive Love when they entered the agreement. The Court also rejected Love’s argument that the Bankruptcy Court’s findings under § 523(a)(2)(A) conflicted with its findings under § 523(a)(4) and § 523(a)(6), because the latter claims did not require proof that the Wisemans knew their statements were false or deceptive.

The Court affirmed the ruling that the Monterey Property belonged to the bankruptcy estate. It explained that the Family Trust held title, no partnership interest in the property had been recorded, and the invalid lis pendens did not provide actual or constructive notice that could defeat the Trustee’s rights as a hypothetical lien creditor or bona fide purchaser. The Court also held that the Bankruptcy Court’s order requiring the Trustee to hold the sale proceeds pending resolution of the litigation did not give Love secured-creditor status or require distribution of proceeds to her. Because Love was not a secured creditor, the Court rejected her arguments concerning adequate protection.

The Court further held that the Bankruptcy Court properly declined to reconsider issues already affirmed in the Court’s earlier order. Under the rule of mandate, a lower court may not contradict an appellate court’s prior ruling. The Court found no new evidence, intervening controlling authority, or clear error warranting reconsideration. In the final order, Judge Beth Labson Freeman affirmed the Bankruptcy Court’s orders and judgment.