In re Younesi
| Decision Date | 15 June 1983 |
| Docket Number | Adv. No. LA 82-4743-JB.,Bankruptcy No. LA 82-03824-JB |
| Citation | 34 BR 828 |
| Court | U.S. Bankruptcy Court — Central District of California |
| Parties | In re Jack N. YOUNESI, aka Jack Nejat Younesi, Debtor. MERRILL LYNCH, PIERCE, FENNER & SMITH INC., a corporation, Plaintiff, v. Jack N. YOUNESI, Defendant. |
Franklin K. Lane, Los Angeles, Cal., for defendant.
Overton, Lyman & Prince, Los Angeles, Cal., for plaintiff.
SUPPLEMENTAL MEMORANDUM OF DECISION
Motion to Amend Findings, Make Additional Findings and Amend Order having been filed in the above-entitled action by plaintiff Merrill Lynch, Pierce, Fenner & Smith Inc., this Court hereby supplements its Memorandum of Decision to present more fully for the understanding of the parties the legal and factual bases of that decision.
Plaintiff objected to the dischargeability of a debt owed to it by defendant Jack N. Younesi incurred as a result of certain trades in securities he made on May 3, 4 and 5, 1976. The amount of this debt was stipulated to be $71,660.41, exclusive of interest. Plaintiff alleged these damages to be the result of false pretenses or actual fraud by defendant, this contention grounded largely but not exclusively on defendant's having given plaintiff three NSF checks. There was evidence, accepted by this Court, that defendant was aware at the time he wrote the checks they were not backed by sufficient funds and that he had little hope of making them good subsequently save through fortunate trades on the stock market. There was testimony also that plaintiff allowed defendant Younesi to trade in securities on credit without investigating his ability to pay or requiring from him the typical deposit, that Mr. Younesi parted with the three checks only after repeated pleading and cajoling from his broker, Mr. Ridout, and that plaintiff made no effort to determine whether the checks were backed by sufficient funds apart from depositing them to its bank in the normal course of business.
As will be explained in detail below, the conclusion of this Court was that defendant had demonstrated the requisite scienter for a finding of fraud or false pretenses under 523(a)(2)(A) of the Bankruptcy Code, but that plaintiff had not reasonably relied on defendant's intentional misrepresentations beyond the point at which it was presented with the opportunity to substantiate the first of defendant's checks and declined to do so. Therefore, the subject debt was held in part dischargeable and in part nondischargeable.
The bankruptcy courts frequently see litigation of this type, brokerage houses seeking determinations that debts owed them by former clients are nondischargeable in bankruptcy, many of these cases involving NSF checks. The reason is obvious. Brokerage houses offer what is essentially a form of legalized gambling on credit. This credit is sometimes extended quite casually. Although federal regulations limit the time between purchase of securities and payment for the purchases, the time can be extended through the simple device of paying by personal check and thereby adding the several days needed for the check to be processed. The potential for disaster is undeniable.
Because many arrangements between broker and client are not premised upon the submission of a written financial statement by the client, or in the event that such a statement is required but contains no material misrepresentations, a broker's claim of nondischargeability must be based on § 523(a)(2)(A) of the Bankruptcy Code. To prevail on such a claim, the broker has the burden of proving by clear and convincing evidence:
(1) a false representation or representations by debtor; (2) debtor\'s knowledge of the falsity of the representation; (3) debtor\'s intention and purpose to deceive the creditor; (4) creditor\'s reliance on such representations; (5) creditor\'s losses, proximately caused by debtor\'s false representations.
In re Paulk, 25 B.R. 919 (Bkrtcy.M.D.Ga. 1982), see also, In re Lo Bosco, 14 B.R. 739 (Bkrtcy.E.D.N.Y.1981), COLLIER ON BANKRUPTCY ¶ 523.084 (15th Ed.1982).
In the case of a client who simply encounters losses on the market and refuses to settle his account, not attempting to stall the broker for additional time by tendering an NSF check, the requirements of the section are very difficult indeed for the broker to prove. One Court has ruled that a debtor who continues to play the market after his situation has deteriorated to the point he knows it to be hopeless is guilty of false representations or actual fraud, potentially rendering the debt nondischargeable. Matter of Greenwald, 2 B.R. 35 (Bkrtcy.S.D.Fla. 1979). This is apparently by analogy to the "credit card cases" finding extraordinary consumer credit purchases on the eve of bankruptcy indicative of a conscious intent not to pay for the goods received. See, e.g., Matter of Hadley, 25 B.R. 713 (Bkrtcy.M.D. Fla.1982), In re Manuel, 24 B.R. 744 (Bkrtcy.S.D.Ohio 1982).
Problems exist, however, in extending this theory to cover debts to stockbrokers. First, it is difficult if not impossible to determine the point at which the debtor realized his position to be hopeless, assuming such a realization ever occurred. The intention of an individual playing the market while insolvent is hardly to lose a large sum of money and then declare bankruptcy, or, as in the credit card cases, to acquire something on credit and then hide behind the exemptions of the Bankruptcy Code to escape payment. It is the intention of any losing gambler, to keep playing until his luck changes. No matter how far down he may be, there is always the hope of reversing the trend. This attitude may be quite unrealistic, but so long as it is genuinely held there does not exist the element of scienter characteristic of fraud or false pretenses. Rutherford v. Standard Eng. Corp., 88 Cal.App.2d 554, 199 P.2d 354 (1948), COLLIER ON BANKRUPTCY ¶ 523.084 (15th Ed.1982). The bankruptcy courts are filled with debtors who have badly overextended their credit based on unrealistic appraisals of their future ability to pay, yet the debts so incurred are normally dischargeable in bankruptcy. There is no reason a debt should be treated differently simply because it is owed to a stockbroker.
In the instant case plaintiff argues that, because defendant had unpaid bills outstanding from two other brokerage houses, he had begun trading at its firm already possessed of the intention not to pay for his stock purchases. This contention is illogical. Again, no one, whether he be trader, speculator, or investor, plays the stock market with the intention of losing money and to take home a profit one must first liquidate one's holdings and settle the account with the broker.
More plausibly, plaintiff points to the three NSF checks written by Mr. Younesi to keep his account open beyond the time it would have been closed subject to federal regulations if payment was not made, suggesting that these demonstrate fraudulent intent. It appears from the evidence that defendant was aware the checks were not backed by sufficient funds when he wrote them. The issue of whether fraudulent intent may be shown by this and no more must be examined in light of the recent U.S. Supreme Court decision stating:
Although petitioner deposited several checks that were not supported by sufficient funds, that course of conduct did not involve the making of a "false statement," for a simple reason: technically speaking, a check is not a factual assertion at all, and therefore cannot be characterized as "true" or "false." Petitioner\'s bank checks served only to direct the drawee banks to pay the fact amounts to the bearer, while committing petitioner to make good the obligations if the banks dishonored the drafts. Each check did...
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