Kirsh, In re

• Citation: 973 F.2d 1454
• Decision Date: 06 July 1992
• Docket Number: No. 91-55701,91-55701
• Parties: 27 Collier Bankr.Cas.2d 942, 23 Bankr.Ct.Dec. 727, Bankr. L. Rep. P 74,911 In re Ronald KIRSH; In re Paula Kirsh, Debtors. EUGENE PARKS LAW CORPORATION DEFINED BENEFIT PENSION PLAN, Plaintiff-Appellant, v. Ronald KIRSH; Paula Kirsh, Defendants-Appellees. . Submitted *
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

Page 1454

973 F.2d 1454

27 Collier Bankr.Cas.2d 942, 23 Bankr.Ct.Dec. 727,

Bankr. L. Rep. P 74,911

In re Ronald KIRSH; In re Paula Kirsh, Debtors EUGENE PARKS LAW CORPORATION DEFINED BENEFIT PENSION PLAN Plaintiff-Appellant, v. Ronald KIRSH; Paula Kirsh, Defendants-Appellees.

No. 91-55701.

United States Court of Appeals Ninth Circuit.

Submitted ^* July 6, 1992.

Decided Aug. 31, 1992.

Gary Brown, Century City, Cal., for plaintiff-appellant.

James M. Leonard, Leonard & Zeitsoff, Los Angeles, Cal., for defendants-appellees.

Appeal from the United States District Court for the Central District of California.

Before FARRIS, WIGGINS and FERNANDEZ, Circuit Judges.

PER CURIAM:

Ronald and Paula Kirsh (the Kirshes) filed for bankruptcy, and the Eugene Parks Deferred Benefit Pension Plan (the Plan) asked that the Kirshes' debt to it be found nondischargeable pursuant to 11 U.S.C. § 523(a)(2)(A). The bankruptcy court denied that request because it found that the Plan had not relied on the Kirshes' false representations. The district court affirmed the bankruptcy court. We affirm.

BACKGROUND

Eugene Parks (Parks) is an attorney who established the Plan to provide for his retirement. Parks had been practicing law for twenty years and the area of his practice was business law. That included handling real estate transactions in which he represented buyers, sellers or brokers. The Plan was intended to be the basis of Parks' retirement security, so in his capacity as its administrator he was cautious Ronald Kirsh (Kirsh) had been a client of Parks for ten years and their relationship was not simply that of attorney and client. They socialized together and, as Kirsh said, Parks "was everything to me. He was all my advice, he was all my legal advice, all my personal advice, all my marital advice." In a 1987 letter, Kirsh wrote, "I think of you like my own father.... Thank you, your son Ronnie." Clearly, these men were very close personal friends.

                about lending the Plan's money.   He did not use it for speculative purposes
                

In 1987, the Kirshes had fallen on hard times and were deeply in debt. Parks knew that the Kirshes did not always pay their legal bills on time, but he still agreed to lend them money from the Plan. In doing that, he insisted upon receiving security in the form of a deed of trust on real property owned by the Kirshes. He also obtained a little additional security by having the Kirshes give him postdated checks for the first four interest payments. This dispute revolves around that loan transaction.

The loan was in the amount of $40,000 and the Kirshes gave the Plan a deed of trust on a condominium they owned. The note which that deed of trust secured contained the following recitals:

A. Warrantee [sic]: For the purpose of inducing the Payee/Lender to make this loan, we represent that:

(a) The present value of the property securing this loan is $240,000.00; and

(b) The only encumbrance senior to this loan is a First Deed of Trust in favor of Glendale Federal S & L Association with an outstanding loan balance of approximately $140,000.00.

The terms of the loan to the Kirshes were fair, reasonable, and fully disclosed to them. There was not a breath of actual overreaching on the part of Parks. Neither the Plan nor Parks ordered a title report of any kind. They simply accepted the Kirshes' representations about the state of the security.

Those representations were false. In fact, the property was encumbered by two deeds of trust. One secured a loan from Glendale Federal Savings and Loan with an unpaid balance of $133,200. That loan was in default. The other, which was taken out just one month before the transaction with the Plan, secured a loan with a balance of $120,000 from Mercantile National Bank. The Plan's note was therefore secured by a third deed of trust. When the condominium was ultimately foreclosed upon, the Plan received nothing. The proceeds of the sale were just enough to pay off Glendale Federal and to leave about $17,200 for Mercantile National.

The Plan received very little return on its investment before the Kirshes filed bankruptcy. It claimed that it had been defrauded and sought to exempt the debt from discharge, but the bankruptcy court found in favor of the Kirshes. The district court affirmed, and the Plan appealed.

JURISDICTION AND STANDARD OF REVIEW

We have jurisdiction pursuant to 28 U.S.C. § 158(d) and 28 U.S.C. § 1291.

We review the bankruptcy court's findings of fact under the clearly erroneous standard, and its conclusions of law de novo. In re Jogert, Inc., 950 F.2d 1498, 1505 (9th Cir.1991). The determination of justifiable reliance is a question of fact subject to the clearly erroneous standard of review. See id., where the phrase "reasonable reliance" was used, about which we will say more in this opinion. The issue of nondischargeability is a question of federal law and is governed by the provisions of the Bankruptcy Code. Grogan v. Garner, --- U.S. ----, ----, 111 S.Ct. 654, 658, 112 L.Ed.2d 755 (1991).

DISCUSSION

As we have already pointed out, when the Kirshes sought the protection of the bankruptcy court, the Plan sought to prevent the discharge of their debt. It relied upon the fraud provision of the Bankruptcy Code, 11 U.S.C. § 523(a)(2)(A). Section 523(a)(2) provides in pertinent part that a debtor is not entitled to be discharged from

any debt to the extent that the debt was 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....

As a plain reading of the statute shows, parts (A) and (B) are mutually exclusive, the former referring to representations other than those respecting the debtor's financial condition and the latter referring specifically to written statements of financial condition. This difference has been recognized by other courts. See In re Ophaug, 827 F.2d 340, 342-43 (8th Cir.1987); In re Seaborne, 106 B.R. 711, 714 (Bankr.M.D.Fla.1989). Cf. In re Siriani, 967 F.2d 302, 304 (9th Cir.1992) ("the two subsections of section 523 are substantially similar"). For present purposes it is enough to point out that the statement we are considering did not purport to set forth the debtors' net worth or overall financial condition, so our analysis must revolve around 11 U.S.C. § 523(a)(2)(A).

We have outlined the elements which a creditor must prove in order to preclude a debtor's discharge. Those are:

(1) [that] the debtor made the representations;

(2) that at the time he knew they were false;

(3) that he made them with the intention and purpose of deceiving the creditor;

(4) that the creditor relied on such representations;

(5) that the creditor sustained the alleged loss and damage as the proximate result of the representations having been made.

In re Britton, 950 F.2d 602, 604 (9th Cir.1991) (quoting In re Houtman, 568 F.2d 651, 655 (9th Cir.1978) (emphasis omitted)).

In this case, there can be no doubt that the Kirshes made representations which they knew were false and that they made those representations with the intention of deceiving Parks and the Plan. Nor can it be doubted that those representations were the proximate cause of the Plan's losses. Thus, elements (1), (2), (3) and (5) are satisfied. Our analysis will therefore focus upon the fourth element. The Kirshes contend that the Plan did not prove that element by a preponderance of the evidence. That is the Plan's burden. See Grogan, --- U.S. at ----, 111 S.Ct. at 658. The Kirshes also contend that since Parks was their attorney, the Plan should not be able to prevent their discharge. We will consider each of these issues in turn.

A. Reliance.

(1) The Legal Standard.

The courts have had some difficulty with the reliance issue and that has, at least on the surface, generated a split among the circuits. That split is over what word should implicitly or explicitly precede the word "reliance." Should we say "actual reliance" or "reasonable reliance" or "justifiable reliance"? We now decide that the latter phrase is the proper one and that it most accurately describes what the courts have actually done.

We start with the Supreme Court's observation that we are deciding a question of federal, not state, law. Grogan, --- U.S. at ----, 111 S.Ct. at 658-59. That, of course, does not reveal the content of the federal law itself, but there is reason to think that it is simply the common law. The Supreme Court has pointed us in that direction. While the Court has recognized the fresh start purpose of the bankruptcy law, it has also emphasized that the real concern is for the "honest but unfortunate debtor." Id. at ----, 111 S.Ct. at 659. The Court completed that thought by stating: "We think it unlikely that Congress, in fashioning the standard of proof that governs the applicability of these provisions If common law is to apply, it is important to identify the content of that law. We turn to two of the best sources of that law, the well-known Prosser and Keeton on the Law of Torts and the Restatement (Second) of Torts. They make it quite clear that at common law the justifiable reliance standard is the proper one.

                would have favored the interest in giving perpetrators of fraud a fresh start over the interest in protecting victims of fraud."  Id.  This suggests to us that the Court had the usual common law standard in mind, rather than some exotic standard designed to give more protection to the perpetrators of fraud.   Nor is there any reason to believe that Congress itself intended to alter the common law when it adopted section 523(a)(2)(A).

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