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In Re: James Castro and Jessica Debtors. v. James A. Castro

April 4, 2011


Appeal from the United States Bankruptcy Court for the Central District of California Hon. Samuel L. Bufford, Bankruptcy Judge, Presiding. Bk. No. LA 08-16504 SB CASTRO, Adv. No. LA 08-01660 SB





Argued and submitted on March 16, 2011 at Pasadena, California

Filed - April 4, 2011

Before: PAPPAS, DUNN and KIRSCHER, Bankruptcy Judges.

This is an appeal from the bankruptcy court's order granting summary judgment in favor of chapter 7*fn2 debtor James A. Castro ("Castro"), dismissing the § 523(a) exception to discharge claims asserted by creditors Brian Donlinger ("Donlinger"), West Coast Buddy, LLC ("WCB"), and Milo, LLC ("Milo") (collectively, "Appellants"). We VACATE and REMAND the dismissal under § 523(a)(2)(A), and AFFIRM the dismissal under § 523(a)(4).


Sunset Beach

Castro was an investment banker. In June 2004, he learned that a local business, Dublin's Irish Whiskey Pub ("Dublins"), intended to sell its lease rights to a commercial property on West Sunset Boulevard, West Hollywood, California. As he later recounted in his declaration, Castro was "very optimistic and excited about the possibility of opening a new venture, consisting of a restaurant and a bar, there." Because Castro had no experience in operating such a business, he invited Steve Marlton ("Marlton"), an experienced restauranteur, to join him in making a proposal to acquire the lease. Castro was the managing member of Gardner Restaurants, LLC; Marlton was president of California Restaurant Authority, Inc. Together, they formed Sunset Restaurants Limited Partnership ("SRLP"), in which their two entities were the general partners. SRLP acquired the lease rights to the commercial property on July 1, 2004.

Capital was needed to develop the property into an operating business. To assist them in attracting investors to their project, Castro and Marlton created a document called a Confidential Investment Summary (the "PPM"), which outlined the business plans and objectives of SRLP and contained information on the proposed business venture. For example, in describing what it termed "The Concept," the PPM states "Sunset Beach Restaurant and Ultra Lounge [will be] set in a casual beach inspired setting, in the same vein as the world renowned Nikki Beach [a well-known, successful restaurant and bar in Florida], that promotes mingling among its guests. . . . The bar area, located away from the main dining room, will create a focal point for guest interaction." Describing the venture's business strategy, the PPM noted in particular that, "[t]he sophisticated, full-service bar will offer a broad selection of domestic and imported bottled and draft beers, premium wines, and speciality drinks, along with top shelf liquor. . . . The Venue anticipates to be open seven days a week generally from 11:00 a.m. to 2:00 a.m. to serve its guests lunch, happy hour, dinner and late supper."

Castro and Donlinger agree that they met at a birthday party in September 2004, and that, for the first time, they discussed Donlinger's possible investment in SRLP.

On November 16, 2004, SRLP filed an application with local authorities for a Minor Conditional Use Permit ("MCUP"). Among the statements submitted to the Planning Commission of the City of West Hollywood, and contrary to the statements in the PPM, the MCUP indicated that "Sunset Beach intends to be open for Lunch during week days from 11:30 a.m. to 2:30 p.m. and for Dinner from 5:30 p.m. to 12:30 a.m. Sunday through Thursday and until 1:30 a.m. on Fridays and Saturdays." In addition, this application made no request for authority to operate a "full-service bar" at Sunset Beach to service customers independent of food services. Moreover, the proposed floor plans for the project accompanying the application show space allotted for an "espresso bar" on the first floor of the business premises, and for a "sushi bar" on the second floor.

In mid-December 2004, Castro and Donlinger met again at the El Guapo Restaurant to talk more about Sunset Beach. At that meeting Castro gave Donlinger a copy of the PPM, a form Subscription Agreement to the partnership, and an Equity Bonus Plan. The parties significantly diverge, however, in their characterization and recollection of the oral discussions at that meeting.

Donlinger alleges that Castro made numerous oral representations to him at the El Guapo meeting that the "Sunset Beach Restaurant and Ultra Lounge" would be a "restaurant, full service bar and nightclub." In particular, he alleges in the Second Amended Complaint that:

Castro told Donlinger [] that he and his partner planned to open an ultra lounge at the property called Sunset Beach, which would be a restaurant, full service bar and nightclub, which would promote an interactive experience among the customers. Castro stated that the model for Sunset Beach was a nightclub in Miami, Florida called Nikki Beach, which was an "ultra lounge" which contained a restaurant and nightclub. Castro explained that Sunset Beach would have multiple dining areas and a full service bar for alcohol service and consumption. He said the bar would be the focal point of guest interaction. He also told Donlinger that Sunset would have a disk jockey booth and a dance floor, so that its patrons could dance until 2:00 a.m. each night. Castro also told Donlinger that he was so confident in the success of Sunset that he had invested $150,000.00 of his own money in the company.

Donlinger's declaration submitted in opposition to Castro's summary judgment motion restates these allegations:

Castro explained to me [at the El Guapo meeting that] SRLP proposed to open a restaurant and bar at the property, which would be an "ultra lounge." He explained to me that it was to be a hip venue on the Sunset Strip which would have two full-service bars, meal service, music, a disc jockey, happy hours, dancing, promotions and special events, among other things. He also told me that Sunset Beach would be operating under the exact same guidelines as Dublin's had operated previously. . . . Castro further explained to me that Sunset Beach would be open until 2:00 a.m. each night, and that it was intended to compete with other such venues on the Sunset Strip as Saddle Ranch Chop House and Miyagi's. . . . The real attraction of these venues is the bar/nightlife scene. They both have large bars which are their main attractions, and are frequently doing business at their bars until 2:00 a.m. Except for the alleged representation that he had invested his own money, in his declaration in support of summary judgment, Castro does not deny that he made any of these statements to Donlinger at the El Guapo. As Castro summarizes what was said, "I explained [to Donlinger] our concept of what Sunset Beach would be, and how we expected to fund construction without any debt financing (such as a construction loan from a bank)."

Castro makes no comment in his declaration regarding Donlinger's allegation that, by describing the proposed business as "an ultra lounge," he thereby implied it would include a full-service bar that would serve alcohol to customers who were not also dining at the restaurant. He was later asked in his deposition to explain his concept of an ultra lounge:

Question: Back in 2004 and 2005, did you have an understanding of what an ultra lounge was?

Castro: Yes.. . . .

Question: Back in 2004 and 2005, your understanding of [ultra lounge], did it include a place where someone could go and get a drink without having to order food?

Castro: Yes.

Question: Did it include a place where someone could go and actually walk up to a bar, sit at the bar, and have a drink there, without having to worry about being put at a restaurant table to eat?

Castro: Yes.

Castro Dep. 33:13-15, 34:3-11 (December 2, 2009).

Between December 2004 and May 2005, Castro and Donlinger had several more meetings, telephone conversations and email exchanges regarding Donlinger's possible investment in SRLP. Donlinger alleges that in those communications Castro repeated his statements that Sunset Beach would stay open until 2:00 a.m. every day of the week, with music and dancing.

In one email communication on February 25, 2005, Donlinger requested that Castro send him the floor plans for the restaurant so that he could show them to other potential investors. In response, Castro sent the floor plans, which showed an espresso bar on the first floor and a sushi bar on the second. At that time, Castro also wrote, "Keep in mind, terms such as espresso bars and sushi bars are simply ways to get around the permitting process. They will simply be alcohol bars."

On March 25, 2005, in a telephone conversation, Castro informed Donlinger that he was about to "close the fund to new investors." Donlinger told Castro that he planned on becoming an investor. Castro then joined Marlton in the call, who congratulated ...

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