In re Apte, Bankruptcy No. 92-45858-JT
| Decision Date | 13 April 1995 |
| Docket Number | 92-46447-TK. BAP No. NC-94-1567-JRO. Adv. No. 92-4634-AN.,Bankruptcy No. 92-45858-JT |
| Parties | In re Sateesh APTE, Debtor. ROMESH JAPRA, M.D., F.A.C.C., INC., a California professional corporation, Appellant, v. Sateesh APTE, Appellee. |
| Court | Bankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, Ninth Circuit |
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Patric J. Kelly, Randy M. Hess and Duane W. Shewaga, Adleson, Hess, Christensen & Kelly, San Jose, CA, for appellant.
R. Kenneth Bauer, Walnut Creek, CA, for appellee.
Before JONES, RUSSELL and OLLASON, Bankruptcy Judges.
I. FACTS
Appellee and Debtor, Sateesh Apte ("Dr. Apte"), is a neurologist. He is also the founder of several corporations, including Apte Group, Inc. ("Apte Group"), a management company. In August, 1989, Apte Group leased a 48,000 square foot office building in Pleasanton, California from Rosewood Associates ("Rosewood"). Dr. Apte intended to sublease the office space to other medical professionals, but was unable to secure subtenants. As a result, Apte Group fell over $1.3 million behind on lease payments.
On April 3, 1991, Rosewood filed an unlawful detainer action against Apte Group, prompting Dr. Apte to enter into workout negotiations in order to restructure the lease payments. Around June, 1991, Dr. Apte was approached by an acquaintance, Dr. Romesh Japra, about subleasing office space in the Pleasanton building. Although Dr. Japra had leased two other offices, he had never before negotiated a sublease. During sublease negotiations, Dr. Apte did not disclose to Dr. Japra that Apte Group was in default on the master lease and subject to eviction. He also failed to tell Dr. Japra when Rosewood officially terminated the master lease on July 23, 1991.
Dr. Japra knew that his sublease was subject to the master lease. As a result, he specifically requested that his sublease contain a provision ("the priority provision") that would allow him to remain in possession of the property even if the master lease were terminated. The priority provision was important to Dr. Japra because he intended to invest a lot of money in improvements in the office space. Dr. Japra signed the sublease agreement on September 16, 1991. That same day, a workout agreement between Dr. Apte and Rosewood became effective, allowing Dr. Apte to cure his arrearage on the master lease.
Dr. Japra understood that his sublease had to be approved by Rosewood before it became effective. Two weeks after Dr. Japra signed the sublease, Dr. Apte told him that the sublease had been approved. The truth, however, was that Rosewood had refused to sign the sublease unless the priority provision was taken out.
Dr. Japra also understood that the sublease required him to obtain the written consent of Rosewood before commencing any improvements, but Dr. Apte represented that he would obtain the necessary approval. After Dr. Apte made repeated assurances to Dr. Japra and Dr. Japra's office manager that the sublease and improvements had been approved, Dr. Japra began construction on the improvements, expending a total of $146,727.46.
During the sublease negotiations, Dr. Japra had no contact with Rosewood. In fact, Rosewood refused to communicate with anyone but Dr. Apte, due to legal concerns that any communication directly with a potential sublessee might be interpreted as having created a lease between Rosewood and the sublessee. As a result, Dr. Japra's only contact was with Dr. Apte.
In December, 1991, Rosewood became aware that Dr. Japra was making improvements. Rosewood informed the city of Pleasanton not to issue any further work permits, and told Dr. Apte, on January 13, 1992, that construction was to be stopped immediately. Dr. Apte did not tell Dr. Japra to stop, yet he informed Rosewood that construction on the improvements had been halted. In fact, Dr. Apte testified that he participated in and encouraged the construction and that he visited Dr. Japra's space two or three times a week to make sure that the tenant improvements were within the guidelines set by Rosewood. Rosewood soon discovered that construction had not stopped, but allowed the construction to continue based on Dr. Apte's promise that Dr. Japra would consent to deletion of the priority provision from the sublease.
In February, 1992, Dr. Apte finally told Dr. Japra that Rosewood had not approved the sublease. By this time, Dr. Japra had completed 95% of his improvements. Due to Dr. Apte's continued default on master lease payments, Rosewood filed another unlawful detainer action on March 18, 1992, only two weeks after Dr. Japra had moved into his offices. The master lease was eventually terminated and Dr. Japra, after unsuccessfully trying to negotiate a lease with Rosewood, was evicted. His eviction occurred less than six months after he had moved in.
Dr. Apte filed a chapter 7 petition soon after the master lease was terminated. Dr. Japra filed a proof of claim based upon his damages, then filed an action on December 18, 1992, to have this debt declared nondischargeable pursuant to §§ 523(a)(2)(A) and 523(a)(6).1 In his complaint, Dr. Japra alleged $146,727.46 in damages, consisting of $7,980.12 in rent paid to Dr. Apte (which Dr. Apte kept instead of forwarding to Rosewood) and over $138,000 spent on improvements and other costs associated with moving into the new office space.
The bankruptcy court held a hearing on January 31, 1994. On April 28, 1994, the court ruled that Dr. Apte had made material misrepresentations with the intent to deceive Dr. Japra. However, the court ruled that Dr. Japra did not reasonably or justifiably rely upon those misrepresentations because Dr. Japra was highly educated, was experienced in negotiating leases, and should have known that Dr. Apte was not telling the truth about approval of the sublease and construction plans. The court chastised Dr. Japra for beginning construction on the improvements without seeing signed copies of the approved sublease and authorization for improvements. The court therefore concluded that all the elements of fraud had been satisfied except for reliance and causation.
The court dismissed Dr. Japra's § 523(a)(6) claim, ruling first that fraud claims may only be brought under § 523(a)(2)(A), and then stating that even if fraud claims could be brought under § 523(a)(6), all the elements of fraud had to be proven in order to prevail. Therefore, Dr. Japra could not prevail under either § 523(a)(2)(A) or § 523(a)(6), and the debt was dischargeable. Dr. Japra appeals.
II. ISSUES
III. STANDARD OF REVIEW
The proper standard of reliance to be applied in a § 523(a)(2)(A) action is a question of federal law. See Grogan v. Garner, 498 U.S. 279, 284, 111 S.Ct. 654, 658, 112 L.Ed.2d 755 (1991). The bankruptcy court's decision that Dr. Japra did not have a cause of action under § 523(a)(6) is also a question of law. We review a bankruptcy court's application of the law de novo. In re Kirsh, 973 F.2d 1454, 1456 (9th Cir.1992) (per curiam).
"The determination of justifiable reliance is a question of fact subject to the clearly erroneous standard of review." Id. at 1456.2 A factual finding is clearly erroneous if, after examining the evidence, the reviewing court "is left with the definite and firm conviction that a mistake has been committed." Anderson v. City of Bessemer City, 470 U.S. 564, 573, 105 S.Ct. 1504, 1511, 84 L.Ed.2d 518 (1985) (citing United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 542, 92 L.Ed. 746 (1948)).
IV. DISCUSSION
11 U.S.C. § 523(a)(2)(A) (1994).
It is well-settled that a creditor alleging actual fraud must prove five elements: (1) the debtor made a material misrepresentation, (2) with knowledge of its falsity, (3) with the intent to deceive, (4) on which the creditor relied, and (5) due to which the creditor sustained loss or damage. See Kirsh, 973 F.2d at 1457; In re Britton, 950 F.2d 602, 604 (9th Cir.1991); In re Rubin, 875 F.2d 755, 759 (9th Cir.1989).
The first issue on appeal is the type of reliance a plaintiff must show in order to prevail in a § 523(a)(2)(A) proceeding. The bankruptcy court stated in its Findings of Fact, Opinion, and Conclusions of Law ("opinion") that the Ninth Circuit has applied three different standards of reliance in its prior decisions: actual, reasonable and justifiable. The bankruptcy court rejected actual reliance as too favorable for creditors. The bankruptcy court then concluded that Dr. Japra had failed to prove either reasonable or justifiable reliance.
Dr. Japra argues that actual reliance should be the correct standard, citing In re Ophaug, 827 F.2d 340 (8th Cir.1987). In Ophaug, the court pointed out that § 523(a)(2)(B) included a specific "reasonableness" requirement. Therefore, the court reasoned, § 523(a)(2)(A)'s lack of a reasonableness requirement meant that only actual reliance is necessary to establish actual fraud. Id. at 342-43. However, we have previously considered and rejected this reasoning, In re Howarter, 114 B.R. 682, 685 (9th Cir. BAP 1990), as has the Ninth Circuit. Kirsh, 973...
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