Anil Sachan v. Benjamin Moonkang Huh (In re Benjamin Moonkang Huh)
Anil Sachan v. Benjamin Moonkang Huh (In re Benjamin Moonkang Huh), 506 B.R. 257 (9th Cir. BAP March 11, 2014)–published en banc Oionion of the United States Bankruptcy Appellate Panel of the Ninth Circuit ("BAP"–held that imputing fraud to a debtor for purposes of exception to discharge under 11 U.S.C. § 523(a)(2), where the evidence does not show that the debtor knew or had reason to know of the agent’s fraud, "…is not consistent with the provisions or objectives of the Bankruptcy Code."
Facts:
Pre-petition, the debtor was a licensed real estate broker in California. While initially operating a sole proprietorship under a fictitious business name, the debtor subsequently incorporated his business but retained his broker license in his personal name. Associated with the debtor and his corporation was Jay Kim ("Kim"), who engaged in real estate activity under the debtor’s license.
During that relationship, Anil Sachan ("Sachan") dealt with Kim in Sachan’s efforts to purchase a market in Long Beach, California. Kim acted on behalf of the seller. Misrepresentations of fact were made to Sachan affirmatively and by omission regarding the revenues of the market and its physical condition not being in compliance with the City of Long Beach code provisions. Sachan acquired the market and suffered heavy losses, subsequently reselling the market at a loss.
Sachan commenced litigation against multiple defendants, including Kim and the fictitious business name for the debtor. A jury verdict in Sachan’s favor was rendered, and in 2010, the superior court amended the judgment to include the debtor as jointly and severally liable for the judgment in Sachan’s favor. The debtor thereafter filed a chapter 7 bankruptcy petition on October 13, 2010.
Sachan timely filed a complaint to except his judgment against the debtor from discharge under 11 U.S.C. § 523(a)(2)(A). Following a trial, the bankruptcy court rendered judgment in favor of the debtor based on findings of fact that: (i) the debtor never directly communicated with Sachan; (ii) the debtor made no misrepresentations to Sachan; (iii) no misrepresentations were made on the debtor’s behalf to Sachan; and (iv) the debtor was not aware of the condition of the market being sold. An appeal to the BAP followed.
Reasoning:
The BAP, reviewing under a de novo standard as to issues of law, framed the question on appeal as whether or not the bankruptcy court (Hon. Barry Russell) erred in declining to impute the fraud of Kim to the debtor for purposes of the discharge exception. More precisely, the question was whether the provisions of 11 U.S.C. § 523(a)(2)(A), excepting a debtor’s discharge for debts resulting from "false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition" may be applied to a debtor by imputation based on the fraud of the debtor’s agent.
The BAP, reaching back to Neal vs. Clark, 95 U.S. 704 (1877), and Strang vs. Bradner, 114 U.S. 555 (1885) (both decisions under the Bankruptcy Act of 1867) noted the unwillingness of the Supreme Court to impute fraud as a basis to deny a discharge except in instances where the fraud was committed by a partner of the debtor. Recognizing that the evolving purposes of bankruptcy law have changed over time, the BAP reviewed several approaches to the issue of imputation of fraud taken by various Courts of Appeal outside the Ninth Circuit.
Under the BAP’s analysis, these approaches generally fell along a spectrum ranging from Fifth Circuit’s holding in Deodati v. M.M. Winkler § Associates, 239 F.3d 746 (5th Cir. 2001) (adopting an "absolute" approach that innocent partners could not discharge debts generated from their partners’ fraud), through the the Sixth Circuit in BancBoston Mortg. Corp. v. Ledford, 970 F.2d 1556 (6th Cir. 1992) cert. denied, 507 U.S. 916 (1993) (holding that innocent partners could be denied a discharge because of partners’ fraud where they received the financial benefits of that fraud) to the Eighth Circuit in Walker v. Citizens State Bank, 726 F.2d 452 (8th Cir. 1984) (holding that the agent’s fraud can be imputed to the debtor only when there was proof that the principal "knew or should have known of the fraud"). Under the Eighth Circuit’s approach, reckless indifference to the acts of the agent could also result in imputation. Finally, the BAP noted a fourth line of circuit authority which it described as "minimalist" – and which, relying on the Supreme Court’s 1885 Strang decision, holds that fraud will not be imputed except in a specific partnership context.
The BAP went on to discuss recent Supreme Court decisions on related issues. In Kawaauhau v. Geiger, 523 U.S. 57 (1998), the Supreme Court, dealing with Section 523(a)(6)’s exception to discharge for "willful and malicious injury by the debtor to another" in the context of a medical malpractice case, held that non-dischargeability required a deliberate or intentional injury. Finally, in Bullock v. BankChampaign, N.A., 133 S.Ct. 1754 (2013), the Supreme Court considered Section 523(a)(4)’s exception to discharge "for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny." In this latter decision, the Supreme Court appeared to come full circle, reaching back to its 1877 decision in Neal in reiterating that the fiduciary defalcation by the debtor must be based on a showing of, "culpable state of mind". The BAP concluded that Geiger and Bullock cut strongly against the imputation of the fraud of another to the debtor for purposes of Section 523(a)(2)(A) without some further showing of the debtor’s own culpability.
The BAP then reviewed related Ninth Circuit authority, discussing first Impulsora Del Territorio Sur, S.A. v. Cecchini, 780 F.2d 1440 (9th Cir. 1986), a case addressing Section 523(a)(6). Though it concluded this decision had been effectively overruled by Geiger, the BAP noted that Cecchini nonetheless seemed to place the Ninth Circuit in the Six Circuit’s "receipt of benefits" camp (under the earlier-reviewed BancBoston Mortg. Corp. decision).
Turning next to Sherman v. Sec. § Exch. Comm’n, 658 F.3d 1009 (9th Cir. 2011), the BAP stated that the Ninth Circuit’s discussion, though perhaps dicta, nonetheless seems to suggest that under Section 523(a)(2)(A) it is the debtor’s conduct which must have been fraudulent to gain the exception to the discharge.
Finally, the BAP finally turned to a review of its prior decisions, including those in Tobin v. Sans Souci Ltd. P’ship, 258 B.R. 199 (9th Cir. BAP 2001) and Tsurukawa v. Nikon Precision, Inc., 258 B.R. 192 (9th Cir. BAP 2001), as well as a subsequent, second Tsurukawa opinion holding that fraud in an action under Section 523(a)(2)(A) could be imputed to a spouse only under partnership/agency principles. The BAP concluded that its prior authority is consistent with the adoption of the Eighth Circuit’s "knew or should have known" standard in the earlier-reviewed Walker decision. The BAP then specifically adopted the Walker standard, holding that the imputation to a debtor of an agent’s fraud, absent the debtor’s knowledge or having reason to know of that fraud, was not consistent with the Bankruptcy Code’s provisions or objectives. The BAP affirmed the bankruptcy court’s dismissal.
Commentary:
The BAP’s extensively researched and analyzed Opinion in Huh helps clarify the law on whether or not a debt can be held NONdischargeable (not discharged), pursuant to 11 USC 523(a)(2)(A) where the fraud was committed by the debtor’s agent. The BAP held that such a debt could be excepted from discharge only when the agent’s misconduct was known or should have been reasonably known by the debtor. This, the BAP held, is consistent with the purposes of the Bankruptcy Code: to give debtors a fresh start, and that the exceptions to discharge be strictly construed. This author agrees, and would add that under the Huh standard, evidence such as "receipt of benefits," though not dispositive, nevertheless remains relevant.
The Substance of this analysis is from the e-newsletter of the Insolvency Committee of the CA State Bar of 6/3/14.