In re Taite

• Decision Date: 11 June 1987
• Docket Number: Adv. No. LA 85-4076-LF.,Bankruptcy No. LA 85-09892-LF
• Citation: 76 BR 764
• Parties: In re Jason TAITE, Elaine Taite, Debtors. PEOPLE OF the STATE OF CALIFORNIA, John K. Van de Kamp, Attorney General, Plaintiffs, v. Jason TAITE, Elaine Taite, Defendants.
• Court: U.S. Bankruptcy Court — Central District of California

76 B.R. 764 (1987)

In re Jason TAITE, Elaine Taite, Debtors PEOPLE OF the STATE OF CALIFORNIA, John K. Van de Kamp, Attorney General, Plaintiffs, v. Jason TAITE, Elaine Taite, Defendants.

Bankruptcy No. LA 85-09892-LF, Adv. No. LA 85-4076-LF.

United States Bankruptcy Court, C.D. California.

June 11, 1987.

John K. Van de Kamp, Atty. Gen., Michael R. Botwin, Deputy Atty. Gen., Los Angeles, Cal., for State of Calif.

Earle Hagen, Hagen & Hagen, Encino, Cal., for debtors.

OPINION

LISA HILL FENNING, Bankruptcy Judge.

On July 18, 1985, Jason and Elaine Taite filed a joint Chapter 7 petition as husband and wife. They have since divorced. Their schedules list over $1,000,000 in disputed debts owed to the State of California as a result of state court judgments rendered in two related cases. The issue presented here is whether these debts are nondischargeable under 11 U.S.C. § 523(a)(2) or (a)(7). This Court concludes that all of these debts are nondischargeable as to Jason Taite; all but one are nondischargeable as to Elaine Taite.

BACKGROUND

In 1977, the Attorney General began an investigation of consumer fraud allegations against Debtors, doing business as Custom Craft Carpets, Inc., a retail carpet operation. Jason Taite served as president and chairman of the board of directors. Elaine was corporate secretary, the only other officer or director. At various times, she ran the office operations of the business and acted as the receptionist. No one other than the Taites ever owned stock in Custom Craft Carpets, Inc.

Upon learning of the Attorney General's investigation, but prior to the filing of the complaint, Debtors' corporation sued the individual members of the Attorney General's office in Custom Craft Carpets, Inc. v. Evell J. Younger, Superior Court of Los Angeles County, Docket No. C 225751 (1979). The complaint alleged that defendants were continuing the investigation on the basis of fabricated evidence and with knowledge that the charges were false. The trial court granted summary judgment against Custom Craft. In affirming that decision, the court of appeal summarized the allegations as follows:

"Stripped of its conclusionary allegations and epithets, the complaint simply alleges that the deputy attorneys general and the deputy city attorney cooperated together in an inquiry into plaintiffs\' debtors advertising and marketing practices. In the course of said inquiry, plaintiffs were invited to the office of the Attorney General and were advised that the deputies intended to file a civil action against the plaintiffs. Plaintiffs were offered a copy of a proposed civil complaint along with a proposed stipulated judgment which would provide for the payment of $50,000 in civil penalties and an injunction against engaging in certain proscribed practices in the future.

In short, the deputies advised plaintiffs of their intent to institute a civil action and proposed a settlement of the case. Plaintiffs then assert their innocence and allege in conclusionary fashion that deputy attorneys general and deputy city attorney, along with their employers, knew that the charges were false and were proceeding on fabricated evidence."

Custom Craft Carpets, Inc. v. Miller, 137 Cal.App.3d 120, 124, 187 Cal.Rptr. 78, 80-81 (1982).

The court of appeal found "that the entire matter was from trial level to the appellate level a sham designed to gain time for Custom Craft to continue its improper conduct." Id. at 123, 187 Cal.Rptr. at 79. In addition to the usual costs on appeal, the court penalized Debtors $10,000 ($5,000 to the State of California and $5,000 to the City of Los Angeles) for taking a frivolous appeal. Id. at 123-124, 187 Cal.Rptr. at 79-80. These sanctions were awarded pursuant to California Rules of Court, Rule 26(a) which provides:

"Where the appeal is frivolous or taken solely for the purpose of delay or where any party shall have required in the type-written or printed record on appeal the inclusion of any matter not reasonably material to the determination of the appeal, or has been guilty of any other unreasonable infraction of the rules governing appeals, the reviewing court may impose upon offending attorneys or parties such penalties, including the withholding or imposing of costs, as the circumstances of the case and the discouragement of like conduct in the future may require."

The Attorney General's investigation resulted in a civil action against Debtors, People v. Custom Craft Carpets, Inc., Jason Taite, Elaine Taite, et al., Superior Court of Los Angeles County, Docket No. C226056 (1981). The complaint alleged violations of California Business and Professions Code Sections 17200 (unfair competition), 17500 (deceptive advertising), and 17508 (failing to substantiate advertising claims). After a three month trial, the superior court expressly found that Debtors:

". . . engaged in unlawful, unfair, and fraudulent business practices in violation of Business and Professions Code section 17200, made untrue and misleading statements in violation of Business and Professions Code section 17500 and failed to substantiate certain advertising claims as required by Business and Professions Code section 17508 . . ." Id. at 2.

After trial, the court issued a permanent injunction barring the use of deceptive television commercials, deceptive home sales films, bait and switch sales tactics, violations of the Unruh Act, illegal procurement and enforcement of lien contracts and deeds of trust, poor installation of carpeting, and failure to respond to meritorious complaints from customers. The trial court, however, refused to impose civil penalties and restitution as the Attorney General requested. Both sides appealed.

The appellate opinion is reported in People v. Custom Craft Carpets, Inc., 159 Cal.App.3d 676, 206 Cal.Rptr. 12 (1984). Expressing disgust with Custom Craft's "offensive practices" and "innumerable instances of unethical conduct" (Id. at 680-81; 206 Cal.Rptr. at 15), the court of appeal affirmed the award of injunctive relief and the determination that Custom Craft was liable for its many violations of the unfair competition and false advertising provisions of the Business and Professions Code. The appellate court, however, reversed the trial court in part, concluding that it had abused its discretion in failing to impose mandatory civil penalties and order restitution.

On remand, the trial court conducted supplemental evidentiary proceedings limited to the issues of appropriate monetary sanctions. On August 7, 1985, the court issued a Modified Final Judgment and on October 2, 1985 issued a Statement of Decision, which states:

"Defendants\' violations of law were extensive. Over 20,000 deceptive television commercials were broadcasted, of which at least 6,000 were the blatantly deceptive commercials filed by William Riead. Defendants\' television commercials were responsible for approximately 90% of defendants\' customer leads which by early 1978 netted defendant over 40,000 customers.

"Defendants\' deceptive television commercials were followed by deceptive sales films, bait and switch, violations of the Unruh Act, tricking customers into signing illegal lien contracts on their homes, backdating documents, improper installation, the use of illusory and deceptive warranties, the failure to respond to legitimate complaints, the use of extortionistic collection letters, impersonating a deputy sheriff, and by other deceptive conduct.

"Defendants prospered from their deceptive, unethical and illegal business practices. For example, their sales grew from $2,578,974 in carpet and drapery sales during fiscal year 1976 to over $4,000,000 during fiscal year 1980. During this time, defendants generated more than $16 million in sales from more than $2 million in advertising.

"Defendants attempted to mitigate their exposure to civil penalties by submitting declaration testimony of their poor financial state indicating a negative net worth greatly exceeding one million dollars. The burden of proving defendants\' inability to pay the requested civil penalties rests on defendants\' shoulders. People v. Toomey, (1984) 157 Cal.App.3d 1, 24 203 Cal.Rptr. 642. Defendants failed to meet this burden.

"The evidence offered by defendants concerning their net worth was not believed by this court. The record is replete with examples of defendants\' lack of veracity. For example, defendants admitted that the two million dollar contingent liability claims to be owed to Eugene Krivis was in reality only a one thousand dollar liability. Jason Taite admitted giving Independence Bank a financial statement which falsely purported to be prepared by a certified public accountant and which contained deliberately false financial information. Jason Taite also gave the bank a copy of the Taites\' personal income tax return. Elaine Taite\'s signature was forged on the tax return. The numerous contradictions in financial statements and other financial evidence submitted to this court were so substantial and self-impeaching that the defendants\' financial information could not be believed. Defendants\' life style, which includes the recent purchase of a second home, recent remodeling, two leased luxury vehicles and a line of credit at a gambling casino indicate a substantially different financial picture than the one defendants attempted to paint . . .

"Over 3,000 customers in Los Angeles County alone had illegal liens placed on their homes. Eighteen homes in Los Angeles county were sold at foreclosure sales based on defendants\' illegal and void liens. The proscribed practices were pervasive and long enduring. The $750,000 civil penalty was based on the totality of the circumstances for all the violations of law that occurred."

People v. Custom Craft Carpets, Inc., Statement of Decision, Superior Court of Los Angeles County, No. C226056 pp. 6-8 (1985).

The $750,000 civil penalty was by no means the maximum that could...