Kim v. Sun (In re Sun)

• Court: U.S. Bankruptcy Court — District of Colorado
• Citation: Kim v. Sun (In re Sun), 515 B.R. 788 (Bankr. Colo. 2014)
• Decision Date: 12 September 2014
• Docket Number: Case No. 12–25005 MER,Adversary No. 12–1660 MER
• Parties: In re : Hyungkeun Sun, and Yeonam Kim Sun, Debtors. Wonjoong Kim, and Yoonee Kim, Plaintiffs, v. Hyungkeun Sun, Yeonam Kim Sun, Defendants.

515 B.R. 788

In re : Hyungkeun Sun, and Yeonam Kim Sun, Debtors.Wonjoong Kim, and Yoonee Kim, Plaintiffs,

v.Hyungkeun Sun, Yeonam Kim Sun, Defendants.

Case No. 12–25005 MER

Adversary No. 12–1660 MER

United States Bankruptcy Court, D. Colorado.

Signed September 12, 2014

Chad S. Caby, Miles Gersh, James Thomaidis, Elizabeth Wills, Denver, CO, for Plaintiffs.

Richard C. Cornish, Greenwood Village, CO, for Defendants.

Chapter 7

ORDER

Michael E. Romero, Chief Judge, United States Bankruptcy Court

This case offers an object lesson in the oft-cited dangers of doing business with friends. The Plaintiffs paid $900,000 to their friends, the Defendants, in exchange for a particular investment. What Plaintiffs received was far from what was promised. They now seek a finding their debt is nondischargeable under 11 U.S.C. §§ 523(a)(2)(A), (a)(4), and (a)(6). ¹

JURISDICTION

The Court has jurisdiction over this matter under 28 U.S.C. §§ 1334(a) and (b) and 157(a) and (b). This is a core proceeding under 28 U.S.C. § 157(b)(2)(I) as it concerns a determination as to the dischargeability of a particular debt.

BACKGROUND

Plaintiff Wonjoong Kim (“W. Kim”) is a professor at the University of Seoul, Korea, where he resides most of the year, visiting his family in the United States two to three times per year for a month at a time. His wife, Co–Plaintiff Yoonee Kim (“Y. Kim”), and their daughters reside in Colorado. Beginning in approximately 2001, the Kims became friends with Defendants Hyungkeun Sun (“H. Sun”) and Yeonam Kim Sun (“Y. Sun”), who attended their church. By 2006, the Kims and the Suns had become very close, a relationship both the Kims and the Suns described as “like family.”

H. Sun had an excellent reputation in the church and in the area's Korean community as a successful real estate investor. When W. Kim found it difficult to transfer funds from Korea to fund family expenses, he asked H. Sun for advice in finding a commercial property for purchase which would generate a monthly income stream. The Kims told H. Sun they wished to limit their investment to $500,000, retaining $400,000 of their approximately $900,000 in savings to purchase a house in Colorado.

In March 2007, H. Sun contacted W. Kim with a proposal to purchase an interest in a commercial site on West Colfax in Denver (the “JCRS Property”) for $900,000. The JCRS Property was owed by the Suns' wholly-owned corporation, Y & K Sun, Inc. (“YKSI”). H. Sun convinced the Kims to invest their entire $900,000 by making the following representations:

• The JCRS Property needed $1 million for renovations and improvements.

• The JCRS Property was encumbered by a current loan of $3 million.

• H. Sun had arranged a refinancing of $4 million for the JCRS Property, and that such financing was a “done deal.” He showed the Kims a copy of a mortgage application for the JCRS Property in support of the assertion. ²

• The JCRS Property would be worth approximately $6 million when the renovations were completed and the expected lessees had moved in.³

• After the refinancing paid off the existing $3 million loan, the Suns and the Kims would split the remaining $1 million in refinancing proceeds fifty-fifty.⁴ This would provide an almost immediate return of $500,000 of the Kims' investment to enable the Kims to purchase a house, while the improved JCRS Property would provide the Kims $3,000 per month in income beginning three months after the investment.

• There were already new leases signed for a clothing store and a restaurant on the JCRS Property.

• H. Sun would guarantee the value of the investment.⁵

None of the above representations was true. Instead of using the investment to purchase a real estate interest in the JCRS Property, as originally proposed, H. Sun constructed the $900,000 investment as a purchase by the Kims of 50% of the shares of YKSI. Allegedly, this resulted from a concern expressed by the Suns' attorney, Carl Reem, that a sale of a partial interest in the JCRS Property could trigger the existing mortgage's “due on sale” clause. As part of this investment change, a stock purchase agreement (the “First SPA”) ⁶ was drafted. H. Sun represented the value of the stock was equal to or greater than the value of the $900,000 investment. The Kims signed the First SPA on April 17, 2007.

However, W. Kim's Korean bank refused to release the funds for the purchase absent evidence of a real property sale and a deed of trust in accordance with the original proposal. After the bank balked, W. Kim contacted H. Sun and told him he was no longer interested in the deal. But H. Sun convinced the Kims to complete the transaction and supplied a contract for purchase and sale of real property ⁷ to be sent to the Korean bank. Upon receipt of the contract, the bank released the $900,000.⁸ Immediately upon the Kims' receipt of the $900,000, H. Sun again transformed the deal into a stock purchase transaction. A new stock purchase agreement (the “Second SPA”) was thereafter drafted and signed by the wives, Y. Sun and Y. Kim, on May 17, 2007. ⁹

At Y. Sun's direction, Y. Kim made the $900,000 check payable to “Y + K Sun.” ¹⁰ Y. Kim believed she was giving a check to YKSI for the purchase of 50% of the company.¹¹ Although the Kims had become 50% shareholders, Y. Sun had, without the Kims' knowledge, opened a new personal bank account into which she, “Y. K. Sun,” deposited the $900,000 check.¹²

YKSI's 2007 and 2008 amended tax returns indicate the Kims “contributed $900,000 to Y & K Sun, Inc.” and show the $900,000 investment as a “loan” to the Suns as shareholders of YKSI.¹³ No such loan was ever authorized by YKSI's board of directors.

In April 2008, YKSI sold a commercial property on East Mississippi Avenue in Aurora, Colorado (the “Mississippi Property”) to an entity known as S & B Nova, which was controlled by a Mr. and Mrs. Lee (the “Lees”). The sale was financed by Hanmi Bank, which held a first priority lien against the Mississippi Property in the approximate amount of $1,726,000.¹⁴ YKSI received from S & B Nova a promissory note (the “S & B Nova Note”), secured by a junior lien, in the approximate amount of $1,035,000, and $347,000 in cash. Although the Kims owned 50% of YKSI's stock, the Kims were not informed of the Mississippi Property sale, and received no distribution from the proceeds of the sale.

Three months later, H. Sun told the Kims he was going to put YKSI into bankruptcy, and the Kims would lose their $900,000 investment unless they exchanged their 50% interest in YKSI for YKSI's interest in the $1,035,000 S & B Nova note.¹⁵ H. Sun explained the note paid monthly income of $6,200, but the Kims would only receive half of that amount. H. Sun represented the remaining half interest would be retained by the Suns as they and YKSI were in financial distress. H. Sun did not inform the Kims the S & B Nova Note was in a subordinate position to Hanmi Bank's note. H. Sun also failed to inform the Kims the S & B Nova Note was worth $163,000 less than the face amount of the note,¹⁶ due to payments previously made by S & B Nova.

On July 14, 2008, the Kims surrendered their shares of YKSI, and resigned as directors. YKSI then assigned the S & B Nova Note to the Kims. According to W. Kim, they received approximately $3,100 monthly on the S & B Nova Note.

YKSI's amended tax return for 2008 reflects the Kims resigned from YKSI on July 14, 2008, and received substitute assets, as well as a payment of $23,000 in cash.¹⁷ However, the Kims never received a $23,000 payment. Rather, Y. Sun paid $23,000 to her sister, Yeorang Kim.¹⁸

In January, 2009, H. Sun again approached the Kims. He told the Kims if they wished to protect their investment, they would need to exchange their interest in the S & B Nova Note for shares of stock in S & B Nova.¹⁹ H. Sun indicated the transaction would make Y. Kim (who would hold the shares) a 24% shareholder in S & B Nova. He informed the Kims that certain covenants associated with existing loans to S & B Nova prevented the Kims from acquiring more than a 24% interest. Therefore, S & B Nova would also issue two new promissory notes, both payable to W. Kim, in the amount of $260,000 and $372,000.²⁰ H. Sun told the Kims S & B Nova owned a gas station, a convenience store, and a check cashing business, in addition to the Mississippi Property.

On January 13, 2009, the original S & B Nova Note was canceled.²¹ Y. Kim was issued the S & B Nova shares. However, H. Sun had convinced the Kims to give 5% of the S & B Nova stock to Y. Sun, citing the Suns' tax problems. Therefore, Y. Kim received only 19% of S & B Nova's stock.

Over the lives of these transactions, the Kims received payments in the aggregate amount of $109,794 over four years. They have received no payments since 2011. Subsequently, S & B Nova was liquidated and the Lees filed for bankruptcy protection.²²

DISCUSSION

Section 523(a) exceptions to discharge must be “narrowly construed, and because of the fresh start objectives of bankruptcy, doubt is to be resolved in the debtor's favor.” ²³ The claimant bears the burden of proving nondischargeability under § 523(a) by a preponderance of the evidence.²⁴

A. 11 U.S.C. § 523(a)(2)(A)

Section 523(a)(2)(A) states in relevant part:

(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) 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—

(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition ... ²⁵

A claimant may sustain a claim under § 523(a)(2)(A) by proving false pretenses, false representation or actual fraud, and these three independent causes of action require proof of different elements.²⁶ The Bankruptcy Appellate Panel for the Tenth Circuit explained the § 523(a)(2)(A) framework as follows:

To sustain a...