In re Bui, Bankruptcy No. 94-52866-ASW. Adv. No. 94-5383.

• Decision Date: 02 October 1995
• Docket Number: Bankruptcy No. 94-52866-ASW. Adv. No. 94-5383.
• Citation: 188 BR 274
• Court: U.S. Bankruptcy Court — Northern District of California
• Parties: In re Luat D. BUI and Nhung K. Tran, Debtors. GENERAL ELECTRIC CAPITAL CORP., Plaintiff, v. Luat D. BUI and Nhung K. Tran, Defendants.

188 B.R. 274 (1995)

In re Luat D. BUI and Nhung K. Tran, Debtors GENERAL ELECTRIC CAPITAL CORP., Plaintiff, v. Luat D. BUI and Nhung K. Tran, Defendants.

Bankruptcy No. 94-52866-ASW. Adv. No. 94-5383.

United States Bankruptcy Court, N.D. California.

October 2, 1995.

COPYRIGHT MATERIAL OMITTED

Gary L. Fertig (argued), Law Offices of Gary L. Fertig, Alameda, CA, for Plaintiff General Electric Capital Corporation.

MEMORANDUM DECISION

ARTHUR S. WEISSBRODT, Bankruptcy Judge.

I. BACKGROUND

Before the Court is an Application for Default Judgment for Non-Dischargeability of a Debt by Plaintiff General Electric Capital Corporation ("GECC"). GECC alleges that it is the successor in interest to the claims of two department store chains: Levitz Furniture ("Levitz") and R.H. Macy & Co. ("Macy's"). Defendants are Luat D. Bui ("Bui") and Nhung K. Tran ("Tran"), the Debtors herein (collectively, "Debtors").

Debtors filed a joint voluntary petition under Chapter 7 of the Bankruptcy Code¹ on April 28, 1994. GECC timely filed its Complaint to Determine Dischargeability of a Debt on August 4, 1994, and served its summons and complaint by first class mail upon Debtors and their attorney, Henry Liem, Esq., on August 10, 1994. The Bankruptcy Court Clerk filed an Entry of Default on September 27, 1994.

GECC brings this Application pursuant to Rule 55 of the Federal Rules of Civil Procedure, made applicable to bankruptcy proceedings by Rule 7055 of the Federal Rules of Bankruptcy Procedure.

II. APPLICABLE LAW

A. Default Judgments

An Entry of Default does not entitle a plaintiff to a Default Judgment as a matter of right. It is within the broad discretion of the trial court to grant a Default Judgment. In re Kubick, 171 B.R. 658 (9th Cir. BAP 1994), citing Alan Neuman Productions, Inc. v. Albright, 862 F.2d 1388, 1392 (9th Cir.1988), cert. denied, 493 U.S. 858, 110 S.Ct. 168, 107 L.Ed.2d 124 (1989). Furthermore, Default Judgments may only be granted upon well pleaded facts alleged in a complaint, and only for relief for which a sufficient basis is asserted in a complaint. Benny v. Pipes, 799 F.2d 489 (9th Cir.1986), cert. denied, 484 U.S. 870, 108 S.Ct. 198, 98 L.Ed.2d 149 (1987).

A plaintiff must demonstrate a prima facie case by competent evidence in order to obtain a Default Judgment. In the instant case, GECC must demonstrate each of the elements of a prima facie case of the existence of the debt and its non-dischargeability by a preponderance of the evidence in order to have its debt declared non-dischargeable. See, In re Lochrie, 78 B.R. 257 (9th Cir. BAP 1987); Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991).

B. The Standard for Non-Dischargeability

(1) 11 U.S.C. § 523(a)(2)(B)

With respect to Levitz, GECC's complaint alleges claims for relief under both 11 U.S.C. § 523(a)(6) and 11 U.S.C. § 523(a)(2)(B). The Application for judgment by default, however, seeks judgment only on the basis of § 523(a)(2)(B), and the declaration filed in support of the Application purports to recite no facts establishing a claim for relief under § 523(a)(6).² Therefore, for purposes of ruling upon this Application, this Court has considered only its sufficiency under § 523(a)(2)(B).

Under § 523(a)(2)(B), a debt is excepted from discharge if it is one 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;. . . .

(2) 11 U.S.C. § 523(a)(2)(A)

With respect to Macy's, GECC's complaint seeks relief pursuant to the provisions of § 523(a)(2)(A), which excepts from discharge "a debt for money, property, services, or an extension, renewal or refinancing of credit, to the extent obtained by . . . false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition. . . .". This claim for relief is commonly referred to as "actual fraud" and consists of:

(1) A representation by the debtor;

(2) Known by the debtor to be false;

(3) Made with the intent to deceive;

(4) Reasonably relied upon;

(5) Proximately causing damage.

In re Britton, 950 F.2d 602 (9th Cir.1991).

III. FACTS

A. Levitz

In support of its Application for Default Judgment, GECC files a Declaration of William Maloney ("Maloney"), who describes himself as a "Legal and Account Representative" for GECC. That Declaration attaches a copy of a "Levitz Revolving Charge Application" dated January 30, 1994 (Exhibit A); a Levitz statement also dated January 30, 1994, showing items of furniture purchased from Levitz (Exhibit B); and Form 7 from the Debtors' Statement of Financial Affairs filed in their bankruptcy case (Exhibit C), showing the Debtors' combined annual income to have been $6,000 in 1992 and $23,000 in 1993.

Maloney declares that he "has investigated the credit history of Debtors from credit reporters such as Equifax Credit Information Systems" and has learned that, when purchases were being made from both Levitz and Macy's, Debtors "were similarly engaged in making credit purchases financed by Bank of American sic, Wells Fargo, Sears, Roebuck & Company and others." No copies of credit reports or similar documentation are provided and no information is given concerning the amounts of such credit purchases or whether any payments were made to those other creditors.

Maloney declares that Macy's and Levitz assigned to GECC all of their respective right, title, and interest in and to the charge accounts established by the Debtors with Macy's and Levitz; no assignment or other document evidencing the contractual relationship between either merchant and GECC is provided.

The copy of the Levitz charge application that appears as Exhibit A to Maloney's Declaration is barely legible, but it is apparent that only one applicant is named, and that is Bui; only one signature is shown, which is completely illegible. The application states the applicant's monthly income from all sources is $3,500. In what appears to be part of the same transaction made on the same day, $1,499.24 was charged to the newly established account for furniture; the charge statement that appears as Exhibit B to Maloney's Declaration identifies the customer as Bui and bears only one signature, which is not legible.

Maloney declares that no payment was made for these charges; nothing is said as to whether any cash down payment was made.

B. Macy's

With respect to Macy's, Maloney's declaration states (in addition to the fact that Macy's and Levitz assigned their interest in Debtors' accounts to GECC, providing no copy of such assignment) that GECC had a retail factoring relationship with Macy's, but a copy of the underlying agreement is not furnished.

Maloney declares that Debtors made credit purchases from Macy's totalling $553.54 during the period January 12, 1994 through February 19, 1994, and that no payment has been made for such purchases.

IV. DISCHARGEABILITY

GECC has not made out a prima facie case for judgment based on the accounts of either Levitz or Macy's.

A. Levitz

There is no evidence that Tran submitted a financial statement of any kind to Levitz, nor that Tran participated in charging the purchase made at Levitz.³

As to whether the financial statement by Bui was false, GECC presents evidence that Debtors' combined annual income for the year 1993 was only $23,000, but that does not necessarily mean that Bui's monthly income from all sources in January 1994 (when the purchase was made from Levitz) could not have been or was not $3,500.⁴

B. Macy's

Insofar as the Macy's account is concerned, no allegation of a false financial statement is made but, rather, GECC alleges actual fraud on the part of Debtors by charging purchases knowing that they could not or would not pay for them. The evidence is the same as that offered in connection with the Levitz account as to a 1993 income of $23,000, and also Maloney's hearsay statement that he received information "from credit reporters such as Equifax Credit Information Systems" to the effect that Debtors were making other purchases on credit at the time the Macy's charges were made, with no indication of the magnitude of such charges. The latter would carry little weight if it were admissible, since it imparts no information about the amount of charges being incurred and it cannot be determined from Maloney's statement whether Debtors were amassing a great deal of debt or just a little debt; nor does it indicate whether Debtors were repaying some or all of that other debt. The fact that Debtors' income was $23,000 in 1993 does not mean, or even suggest, that they would be unable to repay the $553.54 in charges made at Macy's in January and February 1994.

C. Both Accounts

In addition to the foregoing deficiencies, GECC's claims for relief based on the Levitz account and on the Macy's account suffer from a fatal defect that is common to both.

A necessary element under both § 523(a)(2)(B) (false financial statement) and § 523(a)(2)(A) (actual fraud) is reasonable reliance on the part of the creditor, In re Siriani, 967 F.2d 302 (9th Cir.1992). "Reasonable" reliance for purposes of dischargeability is more properly referred to as "justifiable" reliance, In re Kirsh, 973 F.2d 1454 (9th Cir.1992) ("Kirsh"), a standard that is, at least in substantial part, subjective:

. . . the standard is not that of the average reasonable person. It is a more subjective standard which takes into account the knowledge and relationship of the parties themselves. Thus, "a person of normal intelligence, experience and education . . . may not put faith in representations which any such

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