Obara v. Afc Cal, LLC (In re Obara)
| Decision Date | 28 May 2014 |
| Docket Number | BAP No. CC-13-1077-PaKiLa,Bankr. No. 09-13962-VK,CC-13-1078-PaKiLa (Related Appeals),Adv. Proc. 09-01239-VK |
| Parties | In re: JOHN A. OBARA and MYRNA CASTRO, Debtors. JOHN A. OBARA; MYRNA CASTRO, Appellants, v. AFC CAL, LLC, Appellee. |
| Court | U.S. Bankruptcy Appellate Panel, Ninth Circuit |
NOT FOR PUBLICATION
Argued and Submitted on May 15, 2014
at Pasadena, California
Appeal from the United States Bankruptcy Court
for the Central District of California
2
Appearances:
Raymond H. Aver argued for appellant Myrna Castro;
Charles Shamash of Caceres & Shamash, LLP argued
for appellant John A. Obara; Tom Roddy Normandin
of Prenovost, Normandin, Bergh & Dawe, APC argued
for appellee AFC CAL, LLC.Before: PAPPAS, KIRSCHER and LATHAM,3 Bankruptcy Judges.
Appellants, chapter 74 debtors John A. Obara ("Obara") and Myrna Castro ("Castro" and, together, "Debtors") appeal the order of the bankruptcy court determining that their debt to AFC CAL, LLC ("AFC") was excepted from discharge under both § 523(a)(2)(A) and § 523(a)(6). We AFFIRM in part and REVERSE in part regarding the determination under § 523(a)(2)(A), and AFFIRM the determination under § 523(a)(6).
Beginning in 2003, Debtors owned and operated Superior 1 Auto Sales ("Superior"). AFC Cal, LLC, a car dealership financing group, extended a modest flooring line of credit to Superior.
In 2005, Debtors formed JM Automotive Group, Inc. ("JMAG"), to serve as the corporate entity for a new car dealership. While Superior ceased to exist as a separate company in 2007 when Kia granted Debtors a new car franchise, Debtors continued to use Superior as a d/b/a for JMAG.
Castro was president of JMAG; Obara, her spouse, was itsdirector of operations.5 AFC gave JMAG a $2.5 million flooring line of credit in 2007 to acquire new cars, and a $1.5 million flooring line for used cars. These credit lines were evidenced by promissory notes and were secured by security agreements (collectively the "JM Automotive Notes") covering each new and used car financed by AFC, together with the proceeds of those sales.
Under this arrangement, when JMAG placed orders for new cars, Kia would directly draw on the $2.5 million line. When JMAG purchased used cars at an auction, the invoices were sent to AFC, and AFC would pay for them from the $1.5 million line. When AFC financed a vehicle, Kia would deliver the Manufacturer's Statement of Origin ("MSO") to AFC, or the auction would send the used car title to AFC. AFC retained the title or MSO until the vehicle was paid off. When JMAG received the title or MSO from AFC, it would submit it for registration to the California Department of Motor Vehicles ("DMV"). Obara and Castro wereguarantors on the AFC debts. Both would admit at trial that they did not retain the proceeds of the cars sold subject to AFC's flooring lien in trust and, instead, used those proceeds to pay operating expenses.
There were several minor defaults on the AFC loans in 2007 and 2008. However, the bankruptcy court would later determine that none of the defaults raised the sort of "red flags" that would have alerted AFC to potential financial difficulties at JMAG.
Since 2005, a third party, AutoVin, performed on-site monthly audits for AFC concerning JMAG's operation. Among other things, an audit included a physical count and inspection of the cars on the lots, a review of sales receipts, and reconciliation of Debtors' records. Any discrepancies were noted in an audit report (e.g., vehicles that were "off lot" for repairs or test drives, sales information, sales proceeds not received from third party finance companies, etc.). Debtors were then allowed five days after receipt of the audit report to explain and provide information to the auditor or AFC concerning any audit discrepancies, to thereby "close" the audit. Before September 2008, debtors successfully passed audit forty times, and only failed once, and that audit failure was ultimately resolved in their favor.
As part of a review of the accounts, AFC required that Debtors submit to AFC a written "Statement of Net Worth" as well as tax returns. The statement Debtors gave to AFC represented that their net worth was $3,684,842 on August 30, 2008. Attrial, they both admitted that this statement was false, in that their net worth was at the time probably $2 million less than what was represented.
In addition, on September 18 and 19, 2008, AutoVin conducted a monthly audit of Debtors' dealership. Based upon information given to him, the auditor noted in his report that there were a significant number of "unverified" vehicles, which he was lead by JMAG representatives to believe were either "sold unpaid," on "test drive," or considered "demos."
AFC's representative supervising Debtors' account, Zach Sterling ("Sterling"), testified at trial that he received the auditor's report on September 20, 2008, and noted the discrepancies between the audit report and AFC's records concerning the numbers of vehicles which should be accounted for at the dealership. When Sterling was unable to confirm the car sales with third party financing companies listed in the auditor's report, he went to the dealership on Wednesday, September 24. He met with Castro to discuss the discrepancies, and to inquire when the audit would be closed. She told him that she was compiling the records needed to close the audit, but that the dealership's computers were down. Sterling made a detailed, visual inspection of the lot, and confirmed that the car numbers were consistent with the audit report. Sterling also spoke to Obara at least once on September 24, 25, and 26, but it is disputed what was said.
Between September 23 and 25, 2008, twenty-five automatic clearing house ("ACH") transfers issued by JMAG from its bank account to AFC were dishonored by the bank, totaling $78,000.During this same time, Castro made withdrawals from JMAG's business bank accounts totaling $142,000. Sterling returned to the dealership on Thursday, September 25, 2008 to again question why the audit had not been closed, and to find out the reason for the dishonored payments.
At that time, Castro assured Sterling that she was working diligently on the audit, and that the dishonored payments must have been the result of a bank error. Sterling again made a visual examination of the lot and found the results consistent with the auditor's report.
On Friday, September 26, 2008, Sterling again returned to the dealership. He and Castro then went together to the bank branch that handled the JMAG accounts, where a bank officer advised Sterling that the dishonored payments to AFC were "possibly a bank error."6 Sterling would later testify that, upon returning to the dealership, Castro appeared to have made several payments by computer to AFC. All payments made on September 26 were later dishonored by the bank. As was later revealed, twenty-four computer payments made by JMAG to AFC on September 30, 2008, were also dishonored, totaling $212,549.47.
Sterling returned to the dealership on Monday, September 29, 2008. Upon his arrival, he received a cell phone call from a person who identified himself as Don Lake, an attorney for JMAG, who informed him that JMAG was "out of business," and that allfurther inquiries should be directed to the attorney. Sterling conducted a visual inspection of the lot and determined that forty-nine vehicles that had been on the lot from September 18 through 26 were now gone.
Sterling: My very first question to him is, John, what's going on? We just showed up and we noticed that there's a lot of cars missing, and we need to talk to you and figure out what's going on here.
Q: What did Mr. Obara say?
Sterling: He said did you receive a call from my attorney, and I responded with yes, that we had.
Q: And what did he say to that?
Sterling: He said, well, then that's what you're going to have to do. You're going to have to refer any questions to him. I'm not talking to you.
Trial Tr. 49:8-20, January 11, 2012.
Sterling immediately ordered that all remaining vehicles on the lot be repossessed. The evidence at trial would show that the forty-nine "missing" cars had all been sold over the weekend of September 27-28, 2008, by JMAG through Prime Auto Auction, for prices that were less than the outstanding debt owed on the cars to AFC. Obara and Castro have never fully accounted for the proceeds of those sales. AFC filed a complaint against Debtors in the California Department of Motor Vehicles. In anadministrative decision entered on July 7, 2011, the DMV determined that the purchasers of at least twenty of the forty-nine vehicles in dispute had not been able to obtain good title because Debtors had not paid the liens on the vehicles to AFC.7
Obara and Castro filed a joint petition for relief under chapter 7 on April 7, 2009.
AFC filed an adversary complaint against Debtors on July 9, 2009; a First Amended Complaint ("FAC") was filed on November 9, 2009. In it, AFC sought an exception to discharge for the debts owed by Debtors to AFC under §§ 523(a)(2)(A) and (B), and § 523(a)(6), and asked that Debtors' discharge be denied under §§ 727(a)(2), (a)(4), (a)(5) and (a)(7). Debtors filed an answer to the FAC on February 22, 2010, generally denying its allegations.8
AFC submitted a pretrial brief on July 18, 2011. To support its claim for an exception to discharge under § 523(a)(2)(A), AFC alleged that Debtors provided false and misleading information to AFC regarding the status of vehicles missing from the dealership lot on September 18 and...
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