Boyajian v. New Falls Corp. ( 2009 )


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  •                    FOR PUBLICATION
     UNITED STATES COURT OF APPEALS
          FOR THE NINTH CIRCUIT
    
    In the Matter of: PATEEL BOYAJIAN,     
                               Debtor,
                                               No. 07-55713
                                                 BAP No.
    PATEEL BOYAJIAN,
                              Appellant,      CC-06-01085-
                                                  DKMo
                      v.
    NEW FALLS CORPORATION,
                               Appellee.
                                           
    
    In the Matter of: SALPY BOYAJIAN,      
                              Debtor,
                                               No. 07-55716
                                                 BAP No.
    SALPY BOYAJIAN,
                              Appellant,      CC-06-01086-
                                                  DKMo
                      v.
                                                OPINION
    NEW FALLS CORPORATION,
                               Appellee.
                                           
                 Appeal from the Ninth Circuit
                   Bankruptcy Appellate Panel
     Klein, Montali, and Dunn, Bankruptcy Judges, Presiding
    
                     Argued and Submitted
             October 20, 2008—Pasadena, California
    
                           Filed May 1, 2009
    
     Before: Kim McLane Wardlaw, William A. Fletcher, and
                Richard A. Paez, Circuit Judges.
    
                                 5123
    5124         IN THE MATTER OF BOYAJIAN
           Opinion by Judge William A. Fletcher
    5126              IN THE MATTER OF BOYAJIAN
    
    
    
    
                             COUNSEL
    
    Howard N. Madris; Alan G. Tippie, SULMEYERKUPETZ,
    Los Angeles, California, for the appellant.
    
    Jeannine E. Del Monte; Raffi Khatchadourian, HEMAR,
    GORDON & ROUSSO, Encino, California, for the appellee.
    
    
                             OPINION
    
    W. FLETCHER, Circuit Judge:
    
       New Falls Corporation (“New Falls”) brought an adversary
    proceeding in bankruptcy court seeking a declaration that a
    default judgment owed by Pateel and Salpy Boyajian (“the
    Boyajians”) is non-dischargeable under 11 U.S.C.
    § 523(a)(2)(B). The judgment against the Boyajians was
    based on a claim that they had failed to satisfy their obliga-
    tions under a lease agreement. Although the judgment was
    entered in favor of New Falls’s predecessor-in-interest, New
    Falls alleges that it was assigned all rights to the judgment,
    including the right to non-dischargeability under
    § 523(a)(2)(B).
    
       The bankruptcy court held that because New Falls had not
    itself relied on the Boyajians’ financial statements, its claim
    of non-dischargeability under § 523(a)(2)(B) failed as a mat-
    ter of law. The Bankruptcy Appellate Panel of the Ninth Cir-
    cuit (“the BAP”) reversed, holding that New Falls stood in the
    shoes of its predecessor and could state a claim to non-
                         IN THE MATTER OF BOYAJIAN                     5127
    dischargeability under § 523(a)(2)(B) based upon its pre-
    decessor’s reliance. We affirm the judgment of the BAP.
    
                        I.   Procedural Background
    
       On July 13, 1999, the Boyajians’ company, Blue Diamond
    Straw & Toothpick Company, Inc. (“Blue Diamond”), entered
    into a lease agreement with the Epic Funding Corporation
    (“Epic”). At the time of the agreement, Pateel Boyajian was
    Blue Diamond’s President, and Salpy Boyajian was its Vice
    President. In order to obtain the lease, the Boyajians each sub-
    mitted personal financial statements, and each signed a “Con-
    tinuing Guaranty of Indebtedness” in which they personally
    guaranteed Blue Diamond’s obligations under the lease.
    According to deposition testimony, Epic relied on the Boyaji-
    ans’ statements in agreeing to the lease.
    
       On or about March 28, 2002, Epic sold its right, title, and
    interest in the lease to Cupertino National Bank dba The
    Matsco Companies (“Cupertino”).1 By May of that year, Blue
    Diamond and the Boyajians failed to make the required pay-
    ments under the lease, thereby defaulting on both the lease
    agreement and the personal guaranties. In October, Cupertino
    filed a civil action against the Boyajians and Blue Diamond.
    Default judgment was entered against them in January 2003,
    and Cupertino was awarded damages totaling $193,132.69. In
    May 2003, Cupertino assigned all of its right, title, and inter-
    est in the judgment to Stornawaye Capital. On February 19,
    2004, Stornawaye Capital in turn assigned all of its right, title,
    and interest in the judgment to New Falls.
      1
        The Boyajians do not concede that the following chain of assignments
    was valid. But given the holding of the bankruptcy court that New Falls’s
    claim necessarily failed as a matter of law, even assuming a valid chain
    of assignments, we assume at this stage that the assignments were indeed
    effective. The bankruptcy court will consider the Boyajians’ factual con-
    tentions on remand.
    5128                      IN THE MATTER OF BOYAJIAN
       The Boyajians each filed Chapter 7 bankruptcy petitions on
    March 16, 2004. On August 2, New Falls filed an adversary
    complaint against the Boyajians, seeking, inter alia, a ruling
    that the judgment owed by the Boyajians was non-
    dischargeable under § 523(a)(2)(B).2 New Falls contended
    that the personal financial statements submitted by the Boyaji-
    ans in order to obtain the lease were materially false, and that
    discharge was therefore unavailable. Both sides moved for
    summary judgment.
    
       The bankruptcy court granted summary judgment to the
    Boyajians. The court held that “reliance [under
    § 523(a)(2)(B)(iii)] has to go to [New Falls] not to the pre-
    decessor in interest, and that at the time [New Falls] . . . pur-
    chased this debt this information was a few years old, and that
    there couldn’t have been reliance by [New Falls].” New Falls
    appealed to the BAP, which reversed. New Falls v. Boyajian
    (In re Boyajian), 
    367 B.R. 138
     (B.A.P. 9th Cir. 2007). In a
    careful opinion, the BAP held that, barring any limitations in
    the assignment itself, § 523(a)(2)(B)(iii) permits an assignee
    to stand in the shoes of its assignor and to pursue an exception
    to discharge based on the assignor’s reliance on materially
    false financial statements. In the view of the BAP, the bank-
    ruptcy court erred by failing to take account of “the legal
    implications of an assignment.” Id. at 145.
      2
       Section 523(a)(2)(B) provides that a debt will not be discharged in
    bankruptcy proceedings if the debt was obtained through:
          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
    11 U.S.C. § 523(a)(2)(B) (emphasis added).
                      IN THE MATTER OF BOYAJIAN                5129
      On April 26, 2007, the Boyajians appealed to this court.
    We affirm the judgment of the BAP and remand to the bank-
    ruptcy court for proceedings consistent with this opinion.
    
                       II.    Standard of Review
    
       We review decisions of the BAP de novo and apply the
    same standard of review that the BAP applied to the bank-
    ruptcy court’s ruling. Wood v. Stratos Prod. Dev. (In re Ahaza
    Sys., Inc.), 
    482 F.3d 1118
    , 1123 (9th Cir. 2007). We review
    de novo the bankruptcy court’s decision to grant or deny sum-
    mary judgment. Suncrest Healthcare Ctr. LLC v. Omega
    Healthcare Investors, Inc. (In re Raintree Healthcare Corp.),
    
    431 F.3d 685
    , 687 (9th Cir. 2005). We also review de novo
    the bankruptcy court’s and the BAP’s interpretations of the
    bankruptcy statute. Salazar v. McDonald (In re Salazar), 
    430 F.3d 992
    , 994 (9th Cir. 2005); Debbie Reynolds Hotel &
    Casino, Inc. v. Calstar Corp. (In re Debbie Reynolds Hotel &
    Casino, Inc.), 
    255 F.3d 1061
    , 1065 (9th Cir. 2001).
    
                             III.   Discussion
    
       [1] This case turns on § 523(a)(2)(B)(iii) of the Bankruptcy
    Code and its intersection with the law of assignment. Section
    523(a)(2)(B)(iii) provides an exception to discharge of a debt
    under 11 U.S.C. § 727 where the debt was obtained by means
    of a materially false written financial statement. Section
    523(a)(2)(B)(iii) requires that the materially false statement
    be one “on which the creditor to whom the debtor is liable for
    such money, property, services, or credit reasonably relied.”
    The question before us is whether the assignee of a debt must
    itself have relied on the materially false statement, or whether
    it is enough that the original creditor did so.
    
       We begin by analyzing the statutory language. The Boyaji-
    ans argue that under the plain meaning of § 523(a)(2)(B)(iii)
    the creditor asserting non-dischargeability must itself have
    relied on the allegedly materially false financial statement.
    5130               IN THE MATTER OF BOYAJIAN
    The Boyajians focus on the word “is” in § 523(a)(2)(B)(iii).
    They argue that use of the present tense requires that, in the
    case of an assignment, there be reliance by the creditor who
    holds the claim at the time of the bankruptcy, even if there
    was reliance by the creditor who originally extended credit.
    
       [2] We disagree. First, a narrow focus simply on the verb
    tense in subsection (iii) does not capture the proper meaning
    of § 523(a)(2)(B). The relevant statutory language, quoted
    more fully, is as follows:
    
        A discharge under section 727 . . . does not dis-
        charge an individual debtor from any debt . . . for
        money . . . to the extent obtained by . . . use of a
        statement in writing . . . that is materially false . . .
        on which the creditor to whom the debtor is liable
        for such money . . . reasonably relied; and . . . that
        the debtor caused to be made . . . with intent to
        deceive[.]
    
    11 U.S.C. § 523(a)(2)(B). The clear import of this language
    is that a debt is non-dischargeable to the extent that it is “ob-
    tained by . . . use of a statement in writing” made with the
    intent to deceive the creditor. Read as a whole, this language
    does not provide that a debt is non-dischargeable only if the
    assignee creditor reasonably relied on the materially false
    statement. See, e.g., McClellan v. Cantrell, 
    217 F.3d 890
    , 896
    (7th Cir. 2000) (Ripple, J., concurring) (“The language
    ‘obtained by’ clearly indicates that the fraudulent conduct
    occurred at the inception of the debt, i.e., the debtor commit-
    ted a fraudulent act to induce the creditor to part with his
    money or property.”). The most natural reading of the word
    “is” in subsection (iii) is simply that the debt is non-
    dischargeable if, at the time the money is obtained by the
    debtor, he or she used a materially false written statement that
    was intended to deceive.
    
      [3] Second, Congress was undoubtedly aware that under
    general principles of assignment law an assignee steps into
                      IN THE MATTER OF BOYAJIAN                 5131
    the shoes of the assignor. Had Congress wished for assigned
    debts to be treated differently under § 523(a)(2)(B), it would
    have done more than rely on the word “is” in subsection (iii).
    In the absence of such specific language, we believe that Con-
    gress intended that the general law of assignment remain
    applicable. That is, assuming New Falls was indeed the recip-
    ient of a general assignment of the original judgment, it can
    stand in the shoes of its assignor and pursue a non-
    dischargeability action under § 523(a)(2)(B). See Ota v. Sam-
    sung Elecs. Co. (In re Ota), 
    192 B.R. 545
    , 549 (B.A.P. 9th
    Cir. 1996) (“We conclude that absent an improper purpose or
    motive, an assignee or purchaser of claims has standing to
    object to a debtor’s discharge.”); State Bar of Cal. v. Tooks
    (In re Tooks), 
    76 B.R. 162
    , 164 (Bankr. S.D. Cal. 1987)
    (“[T]his court holds that the partial assignment of a non-
    dischargeable claim under § 523(a)(4) and § 523(a)(6) does
    not affect the dischargeability of the claim.”).
    
       In support of their argument, the Boyajians rely on General
    Electric Capital Corp. v. Bui (In re Bui), 
    188 B.R. 274
    (Bankr. N.D. Cal. 1995). In Bui, General Electric Capital Cor-
    poration (“GECC”) brought a suit to except from discharge a
    debt owed to it by Bui. GECC alleged that Bui had submitted
    false financial statements to a Levitz store in opening a charge
    account. Levitz later assigned its right to the debt to GECC.
    After Bui filed for bankruptcy, GECC brought suit seeking a
    declaration of non-dischargeability under § 523(a)(2)(B). The
    bankruptcy court found what it called a “fatal defect” in
    GECC’s suit. Id. at 278. The court concluded that “[t]here is
    no evidence that GECC, the plaintiff here, relied upon any-
    thing in connection with the Levitz account. . . . No evidence
    is offered to show that Bui made any statements, written or
    oral, concerning Debtors’ financial condition or anything else,
    to GECC.” Id. at 279.
    
      The court illustrated its holding with an analogy:
    
        In a situation such as this, involving a “middleman,”
        reliance should be shown by each link in the chain
    5132               IN THE MATTER OF BOYAJIAN
        of parties involved. Assume that A sells a ring to B
        representing in writing that it is a diamond whereas
        in fact it is a cubic zirconia. B sells it to C. C sells
        it to D and D sells it to E who discovers the truth.
        If A files for bankruptcy, does E have a valid cause
        of action against A under § 523(a)(2)? . . . It seems
        clear that, at a minimum, in the absence of an appli-
        cable legal presumption, E would have to show that
        B, C, D and E all reasonably relied on A’s original
        misrepresentation to B.
    
    Id. The Bui court provided no citation for its analogy and no
    reasoning to explain why sale of tangible property is compa-
    rable to an assignment of a debt under § 523(a)(2)(B). As the
    BAP properly concluded, an assignee creditor is not the same
    thing as a downstream purchaser of goods. As the BAP has
    previously held, assignees in general have standing to pursue
    non-dischargeability. See In re Ota, 
    192 B.R. 545
    . We there-
    fore decline to adopt the reasoning and result in Bui, as well
    as that of two out-of-circuit bankruptcy court decisions in
    accord with it. See WDH Howell, LLC v. Hurley (In re Hur-
    ley), 
    285 B.R. 871
     (Bankr. D.N.J. 2002), and Tompkins &
    McMaster v. Whitenack (In re Whitenack), 
    235 B.R. 819
    (Bankr. D.S.C. 1998).
    
       [4] Allowing an assignee creditor to pursue non-
    dischargeability under § 523(a)(2)(B) is in accord with a deci-
    sion by the Seventh Circuit. While that court has not specifi-
    cally addressed the statutory language in subsection
    (a)(2)(B)(iii), it has expressly rejected the result sought by the
    Boyajians in this case. In FDIC v. Meyer (In re Meyer), 
    120 F.3d 66
    , 67 (7th Cir. 1997), Meyer was a business owner who
    personally guaranteed his business’s debt. When the business
    defaulted, a default judgment was entered against Meyer. Id.
    The right to the debt was ultimately assigned to the Resolu-
    tion Trust Corporation (“the RTC”). Id. When Meyer declared
    bankruptcy, the RTC sought non-dischargeability on various
    grounds, including § 523(a)(2)(B). Id. Meyer argued that the
                       IN THE MATTER OF BOYAJIAN                5133
    assignee was barred from pursuing non-dischargeability. Id. at
    70. The court rejected the argument. “Meyer is saying that
    Assignee has no legal recourse against Debtor. That cannot be
    true: the very reason that the institution of assignment exists
    is to enable Creditor to transfer its rights against Debtor . . .
    to Assignee . . . .” Id. at 70.
    
       [5] Allowing an assignee to pursue non-dischargeability
    under § 523(a)(2)(B) is also supported by the policy goals of
    the Bankruptcy Code. The Bankruptcy Code “limits the
    opportunity for a completely unencumbered new beginning to
    the honest but unfortunate debtor.” Grogan v. Garner, 
    498 U.S. 279
    , 286-87 (1991) (quotation marks omitted). While the
    bankruptcy court in this case held in favor of the Boyajians,
    it noted the perversity of permitting dishonest debtors to
    receive a discharge through the fortuity that their creditor
    chose to assign the debt. Moreover, if assignment of such a
    debt were to obviate a future non-dischargeability action in all
    cases where the assignee did not itself rely on misleading
    financial statements, the functioning of modern debt markets
    would be unnecessarily disrupted. There is no reason to con-
    strue § 523(a)(2)(B)(iii) to require such an outcome.
    
                              Conclusion
    
       [6] We agree with the BAP’s conclusion. The bankruptcy
    court erred in holding as a matter of law that New Falls could
    not pursue an action for non-dischargeability under
    § 523(a)(2)(B) because it was not the original creditor whom
    the Boyajians allegedly deceived in the course of incurring
    their debt. We therefore AFFIRM the judgment of the BAP
    and remand to the bankruptcy court for further proceedings.
    
      AFFIRMED