In re Kim, BAP No. CC-93-1365-MeOPe. Bankruptcy No. LA 92-27121 CA. Adv. No. LA 92-02739 CA.

• Decision Date: 24 January 1994
• Docket Number: BAP No. CC-93-1365-MeOPe. Bankruptcy No. LA 92-27121 CA. Adv. No. LA 92-02739 CA.
• Citation: 163 BR 157
• Parties: In re Jong Gil KIM and Jung W. Kim, Debtors. CHO HUNG BANK, Appellant, v. Jong Gil KIM and Jung W. Kim, Appellees.
• Court: U.S. Bankruptcy Appellate Panel, Ninth Circuit

163 B.R. 157 (1994)

In re Jong Gil KIM and Jung W. Kim, Debtors.

CHO HUNG BANK, Appellant, v. Jong Gil KIM and Jung W. Kim, Appellees.

BAP No. CC-93-1365-MeOPe. Bankruptcy No. LA 92-27121 CA. Adv. No. LA 92-02739 CA.

United States Bankruptcy Appellate Panel of the Ninth Circuit.

Argued and Submitted October 21, 1993.

Decided January 24, 1994.

Henry Gweon, Los Angeles, CA, for Cho Hung Bank.

David Zweig, Los Angeles, CA, for Jong Gil Kim and Jung W. Kim.

Before MEYERS, OLLASON and PERRIS, Bankruptcy Judges.

OPINION

MEYERS, Bankruptcy Judge:

I

The bankruptcy court granted summary judgment in favor of the defendant in a nondischargeability action under Bankruptcy Code ("Code") Section 523(a)(2) on the basis that the plaintiff had not advanced additional funds in connection with the extension or renewal of credit.

We REVERSE and REMAND.

II

FACTS

The appellant, Cho Hung Bank ("Bank"), held a junior lien on real property located in Glendale, California ("Property"). Apparently the owner of the Property filed for bankruptcy sometime in 1987. In October of 1987 a senior lienholder obtained relief from the automatic stay so that it could conduct a foreclosure sale. The Bank alleges that the appellees, Jong Gil Kim and Jung W. Kim ("Kims"), husband and wife respectively, approached the Bank offering to purchase the Property at the impending foreclosure sale and renovate it, all with the use of funds from the Bank. The Kims would then resell the property and repay the loan, plus the amount owed on the Bank's junior lien, from the sale proceeds.

On December 7, 1987, the Bank assigned its interest in the Property to Mrs. Kim. The foreclosure sale was eventually set for May 6, 1988. On May 4, 1988, the Kims received a loan of $150,000 from the Bank and in exchange executed a promissory note ("Note") for that amount to be paid in 150 days. The Note was unsecured and made no mention of the Property. The Kims purchased the Property at the foreclosure sale for approximately $110,000, taking title in the name of Mrs. Kim. Mr. Kim quitclaimed any interest he had to Mrs. Kim. Through an escrow opened on or about September 2, 1988, Mrs. Kim conveyed title to the Property to her brother and sister-in-law for approximately $190,000. The deed is dated September 6, 1988 and was recorded on October 28, 1988. The Note was still unpaid at the time this transfer was recorded.

Finally, by a letter dated December 29, 1988, the Kims requested an extension of time to repay the Note. The Kims represented that they were still in the process of selling the property and expected the deal to close within two months. The record also indicates that similar representations were made orally to a Bank representative around that same time. The Bank granted the extension and the Kims executed a promissory note with a stated amount of $150,000 dated December 31, 1988, with the same interest rate of 2% over the prime rate due in 92 days. No additional funds were advanced.

Instead of paying off the loan to the Bank the Kims used the proceeds from the sale of the property to purchase a liquor and grocery market in May 1989. The market business was not profitable and the Kims were unable to repay the Bank. The Bank finally sued and the Kims filed for bankruptcy. The Bank brought this action to declare the debt owed it nondischargeable pursuant to Code § 523(a)(2).¹

The Kims brought a motion for summary judgment arguing that under § 523(a)(2) the Bank needed to have advanced "new money," at the time of the extension, in order to have a claim for nondischargeability. The Bank contended that no such requirement exists. The court granted summary judgment in favor of the Kims and the Bank appeals on that issue.

III

STANDARD OF REVIEW

An order granting summary judgment is reviewed de novo. In re Baird, 114 B.R. 198, 201 (9th Cir. BAP 1990). "The reviewing court will affirm a grant of summary judgment only if it appears from the record, after viewing all the evidence and factual inferences in the light most favorable to the nonmoving party, that there are no genuine issues of material fact and the moving party is entitled to judgment as a matter of law." In re Yarbrow, 150 B.R. 233, 236 (9th Cir. BAP 1993). Questions of statutory interpretation are reviewed de novo. In re Orvco, Inc., 95 B.R. 724, 726 (9th Cir. BAP 1989).

IV

DISCUSSION

A. A Claim Under § 523(a)(2) Does Not Require a Showing of New Money

The bankruptcy court specifically found that "the bank gave no new money or additional credit to the debtors when the bank extended the time to pay the note of May 4, 1988." This demonstrates that the court imposed a "new money" requirement. However, this Panel reaches the conclusion that there is no "new money" requirement under § 523(a)(2).

We begin first with the language of the statute. When "the statute's language is plain, `the sole function of the courts is to enforce it according to its terms.'" United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 241, 109 S.Ct. 1026, 1030, 103 L.Ed.2d 290 (1989) (quoting Caminetti v. United States, 242 U.S. 470, 485, 37 S.Ct. 192, 194, 61 L.Ed. 442 (1917)). Section 523(a)(2) provides that the debtor cannot discharge a debt

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

(A) false pretenses, a false representation or actual fraud, other than a statement respecting the debtor\'s or an insider\'s financial condition;

(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 section clearly excepts a debt incurred by an extension of credit which the debtor obtains through fraudulent means. Nothing in the section requires that "an extension of credit" be joined by an advance of further funds in order for a creditor to have a claim for relief. In re Duncan, 123 B.R. 383, 386 (Bankr.C.D.Cal.1991). A logical reading of the plain language of the statute shows that if a creditor suffers damage, the proximate cause of which is the fraud of the debtor in obtaining an extension of credit, then the creditor should be able to prevent the debt from being discharged. See generally In re Britton, 950 F.2d 602, 604 (9th Cir.1991). This reading is consistent with the general policy that the discharge provisions are only intended to provide a fresh start for the honest but unfortunate debtor. Britton, Id. at 606. Furthermore, if Congress had wanted to include a "new money" condition certainly it could have. See, e.g., Patterson v. Shumate, ___ U.S. ___, ___, 112 S.Ct. 2242, 2246, 119 L.Ed.2d 519 (1992) ("Congress, when it desired to do so, knew how to restrict the scope of applicable law. . . ."); see also Toibb v. Radloff, 501 U.S. 157, ___, 111 S.Ct. 2197, 2199, 115 L.Ed.2d 145 (1991) ("Congress knew how to restrict recourse to the avenues of bankruptcy relief . . . ").

Although the inquiry could end there, the Panel also looks to legislative history for assistance. The remarks on the floor of Congress make it clear that Congress intended to codify the result of In re Danns, 558 F.2d 114 (2d Cir.1977). In that case, the debtor, who had an outstanding loan, supplied a materially false financial statement in order to procure a second loan from the same lender. New York state law prohibited the lender from having more than one outstanding loan with the borrower. As a matter of course, the outstanding debt was rolled into the new loan. In the debtor's later bankruptcy, the lender moved under the Bankruptcy Act § 17(a) to have the whole amount of the loan declared nondischargeable. The creditor did not present any evidence that the original loan was renewed in reliance on the false representations. Instead, the evidence showed that the lender had renewed the first loan only because state law required the consolidation.

The court held that the statute barred "discharge only to the extent that the creditor could actually have relied upon the debtor's misrepresentation." 558 F.2d at 116. The court then ruled that the amount of the first loan was dischargeable because the lender had not shown any causal connection between the renewal of that loan and the debtor's misrepresentation. On the other hand, the new amount advanced was nondischargeable since it was given in reliance on the misrepresentation. Id.

Some courts subsequently misinterpreted Danns and the comments on the floor of Congress to mean that only the amount of new money advanced upon a renewal or extension of credit will be nondischargeable. The floor statements demonstrate that no such requirement exists.

In many cases, a creditor is required by state law to refinance existing credit on which there has been no default. If the creditor does not forfeit remedies or otherwise rely to his detriment on a false financial statement with respect to existing credit, then an extension, renewal, or refinancing of such credit is nondischargeable only to the extent of the new money advanced; on the other hand, if an existing loan is in default or the creditor otherwise reasonably relies to his detriment on a false financial statement with regard to an existing loan, the entire debt is nondischargeable under section 523(a)(2)(B).²

124 Cong.Rec. 24, 32399 (1978) (statement of Rep. Edwards), 124 Cong.Rec. 25, 33998 (1978) (statement of Sen. DeConcini). Clearly, no absolute requirement of "new money" was contemplated.

Finally, this Panel finds further support in the Ninth Circuit's recent ruling in Siriani...