In re Boyajian

• Decision Date: 30 March 2007
• Docket Number: BAP No. CC-06-1086-DKMo.,Adversary No. SV 04-01318-KT.,Adversary No. SV 04-01317-KT.,Bankruptcy No. SV 04-11929-KT.,BAP No. CC-06-1085-DKMo.,Bankruptcy No. SV 04-11930-KT.
• Citation: 367 B.R. 138
• Parties: In re Pateel BOYAJIAN, Debtor. In re Salpy Boyajian, Debtor. New Falls Corporation, Appellant, v. Pateel Boyajian, Appellee. New Falls Corporation, Appellant, v. Salpy Boyajian, Appellee.
• Court: U.S. Bankruptcy Appellate Panel, Ninth Circuit

367 B.R. 138

In re Pateel BOYAJIAN, Debtor.

In re Salpy Boyajian, Debtor.

New Falls Corporation, Appellant, v. Pateel Boyajian, Appellee.

New Falls Corporation, Appellant, v. Salpy Boyajian, Appellee.

BAP No. CC-06-1085-DKMo.

BAP No. CC-06-1086-DKMo.

Bankruptcy No. SV 04-11929-KT.

Bankruptcy No. SV 04-11930-KT.

Adversary No. SV 04-01317-KT.

Adversary No. SV 04-01318-KT.

United States Bankruptcy Appellate Panel of the Ninth Circuit.

Argued and Submitted on February 22, 2007.

Filed March 30, 2007.

Jeannine E. Del Monte, Hemar, Rousso & Heald, Encino, CA, for New Falls Corporation.

Alan G. Tippie, Los Angeles, CA, for Salpy Boyajian.

Before: DUNN, KLEIN, and MONTALI, Bankruptcy Judges.

OPINION

DUNN, Bankruptcy Judge.

The bankruptcy court determined as a matter of law that in order for an assignee creditor to prevail in an exception to discharge adversary proceeding brought pursuant to § 523(a)(2)(B),¹ the assignee creditor must have reasonably relied on the materially false financial statement provided by the debtor. We REVERSE.

I. FACTS

On July 13, 1999, Blue Diamond Straw & Toothpick Company, Inc. ("Blue Diamond") entered into a lease agreement ("Epic Lease") with Epic Funding Corporation ("Epic"). Pateel Boyajian ("Pateel") and Salpy Boyajian ("Salpy"), sisters (collectively "Sisters"), were Blue Diamond's President and Vice President, respectively. Pateel and Salpy each signed a Continuing Guaranty of Indebtedness, guaranteeing Blue Diamond's obligations under the Epic Lease ("Guarantees"). In conjunction with signing the Epic Lease and the Guarantees, Pateel and Salpy each provided Epic a personal financial statement dated June 30, 1999, reflecting a personal net worth of $680,162 and $719,382, respectively ("Personal Financial Statements").

By letter dated February 15, 2000, Blue Diamond advised Epic of cash flow problems that were responsible for delayed payments to Epic. Epic sold all of its rights, title and interest in the Epic Lease to Cupertino National Bank dba The Matsco Companies ("Cupertino National Bank") on March 28, 2002.² Ultimately, in May 2002, Blue Diamond defaulted on its obligations under the Epic Lease, and Pateel and Salpy defaulted on the Guarantees. On October 24, 2002, Cupertino National Bank commenced an action in Contra Costa County Superior Court, and a default judgment was entered on January 22, 2003, against Blue Diamond, Pateel and Salpy, jointly and severally, in the amount of $193,132.69, representing amounts due under the Epic Lease and the Guarantees ("Judgment").

Cupertino National Bank then assigned all of it rights, title and interest in the Judgment to Stornawaye Capital, LLC ("Stornawaye") on May 8, 2003. Stornawaye conducted judgment debtor examinations of Pateel and Salpy on November 12, 2003. Subsequently, Stornawaye assigned all of its rights, title and interest in the Judgment to New Falls Corporation ("New Falls") on February 19, 2004.

Pateel and Salpy each filed a voluntary chapter 7 petition on March 16, 2004. New Falls brought adversary proceedings against Pateel and Salpy in their respective bankruptcy cases, seeking a declaration that the Judgment was nondischarge able pursuant to § 523(a)(2)(B), based on the Personal Financial Statements, which New Falls alleged were fraudulent. On cross-motions for summary judgment, the bankruptcy court ruled that because New Falls itself had not relied on the Personal Financial Statements, as a matter of law, it was not entitled to prevail on a cause of action under § 523(a)(2)(B). The bankruptcy court denied New Falls' motions for summary judgment, granted Pateel and Salpy's motions for summary judgment, and entered summary judgments in favor of Pateel and Salpy.³ New Falls appealed.

II. JURISDICTION

The bankruptcy court had jurisdiction pursuant to 28 U.S.C. §§ 1334 and 157(b)(2)(I). We have jurisdiction over this appeal pursuant to 28 U.S.C. § 158.

III. ISSUE

Whether the "reasonable reliance" required by § 523(a)(2)(B)(iii) for a nondischargeable debt incurred with the use of a false financial statement in writing requires reasonable reliance not only by the lender who extended the original credit to a debtor, but also by an assignee.

IV. STANDARDS OF REVIEW

Construction of a statute presents a question of law that we review de novo. Duffy v. Dwyer (In re Dwyer), 303 B.R. 437, 439 (9th Cir. BAP 2003). We review a bankruptcy court's conclusions of law de novo. Fireman's Fund Ins. Co. v. Grover (In re Woodson Co.), 813 F.2d 266, 270 (9th Cir.1987). We review, summary judgment orders de novo. Tobin v. San Souci Ltd. P'ship (In re Tobin), 258 B.R. 199, 202 (9th Cir. BAP 2001). Viewing the evidence in the light most favorable to the non-moving party, we must determine "whether there are any genuine issues of material fact and whether the trial court correctly applied relevant substantive law." Id.

V. DISCUSSION

A. Section 523(a)(2)(B) and its Reliance Element

This case turns on the meaning of a provision of the Bankruptcy Code. Accordingly, the place to begin our analysis is with the language of the subject and related statutory provisions.

Exceptions to discharge of debts in bankruptcy are specified in § 523(a). The subsection at issue in this appeal is § 523(a)(2)(B), which provides:

A discharge under section 727 ... of this title does not discharge an individual debtor from any debt —

. . .

(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained, by —

. . .

(B) use of a statement in writing —

(i) that is materially false;

(ii) respecting the debtor's or an insider's financial condition;

(iii) on which the creditor to whom the debtor is liable for such money, property, services, or credit reasonably relied; and

(iv) that the debtor caused to be made or published with intent to deceive. ...

The specific question is whether New Falls, an assignee of Epic, is the "creditor to whom the debtor is liable" for purposes of § 523(a)(2)(B)(iii) "reasonable" reliance or, instead, whether Epic is the only creditor whose reliance matters. In other words, must the assignee prove, as required by the bankruptcy court, that it independently "reasonably relied" on a materially false written financial statement?

At oral argument, the Sisters conceded that three of the four essential elements prescribed by § 523(a)(2)(B) make sense only in connection with the extension of credit by the original creditor. Specifically, they concede that subparagraph (i) requiring that the statement be materially false, subparagraph (ii) requiring that the statement address financial condition, and subparagraph (iv) requiring intent to deceive all relate to the original creditor at the time of the original transaction and not to that creditor's assignee at some later time.

Thus, the question boils down to whether subparagraph (iii) requiring reasonable reliance on the statement "by the creditor to whom the debtor is liable" must, as the bankruptcy court held, be reevaluated each time the claim is assigned.

The Sisters assert that a "plain meaning" interpretation of the phrase "by the creditor to whom the debtor is liable" requires each subsequent assignee to demonstrate its own "reasonable reliance" on the debtor's original materially false statement concerning financial condition that was made or published with intent to deceive. They ask that we focus solely on the language of § 523(a)(2)(B)(iii), specifying reasonable reliance by "the creditor to whom the debtor is liable for such money, property, services, or credit," and on the definition of "creditor"⁴ under the Bankruptcy Code. The Sisters assert that § 523(a)(2)(B)(iii) does not specify reasonable reliance by the "original creditor" or the "initial creditor," just the "creditor." Accordingly, based on the "plain meaning" of § 523(a)(2)(B)(iii), viewed separately from the balance of § 523(a)(2)(B), if the "creditor," New Falls, cannot show its own reasonable reliance on the Personal Financial Statements, which apparently it cannot, it is the Sisters' position that New Falls cannot prove a required element of a § 523(a)(2)(B) cause of action, and the bankruptcy court's summary judgment rulings were correct.

However, it is not appropriate to consider the language of § 523(a)(2)(B)(iii) in isolation for a number of reasons. First, it is not consistent with the general provision of § 523(a)(2) that a debt is excepted from discharge "to the extent obtained by" the circumstances described in subparagraph (B), which inherently implies a unity of time.

Further, if Congress intended that the limited exceptions to discharge under § 523(a) would be further limited in the event of assignment of claims, it knew how to make such provisions explicit, and it did so with respect to obligations for alimony and support in § 523(a)(5)(A):

A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual from any debt —

. . .

(5) to a spouse, former spouse, or child of the debtor for alimony to, maintenance for, or support of such spouse or child ..., but not to the extent that —

(A) such debt is assigned to another entity, voluntarily, by operation of law, or otherwise (other than debts assigned pursuant to section 408(a)(3) of the Social Security Act, or any such debt which has been assigned to the Federal Government or to a State or any political subdivision of such State).... (emphasis added).⁵

In addition, the Sisters' emphasis on the use of the unmodified term "creditor" in § 523(a)(2)(B)(iii) gives it a significance that Congress never intended and is inconsistent with the other provisions of § 523(a)(2)(B). Indeed, this Panel has held that an assignee can pursue a cause of action under § 523(a)(2)(B) even if the debtor's intent to deceive, for purposes of § 523(a)(2)(B)(iv), was directed at the assigning party. See Tustin Thrift & Loan Ass'n v. Maldonado (In re Maldonado), ...