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May 4, 2009

9th Circuit Rules that Reliance of Original Creditor Sufficient to Finding in Favor of Assignee that Debt Is Non-Dischargeable

Brief by my University of West Los Angeles School of Law student, Roksana Moradi:

Boyajian v. New Falls Corp., --- F.3d ---, 2009 WL 1163874- (9th Cir. 2009)

Issue: Must the assignee of a debt itself have relied on the materially false statement to make the debt non-dischargeable, or is it enough that the original creditor did so?

Holding:  Enough that original creditor relied on the false statement.

Judge William Fletcher,

In 1999, the Boyajians’ company, Blue Diamond Straw & Toothpick Company, Inc. (“Blue Diamond”), entered into a lease agreement with the Epic Funding Corporation (“Epic”).  In order to obtain the lease, the Boyajians each submitted personal financial statements, and each signed a “Continuing Guaranty of Indebtedness” in which they personally guaranteed Blue Diamond’s obligations under the lease.  Epic relied on the Boyajians’ statements in agreeing to the lease.  In 2002, Epic sold its interest in the lease to Cupertino National Bank.  By May of that year, Blue Diamond and the Boyajians failed to make the required payments and in October Cupertino filed a civil action against them.  A default judgment was entered and Cupertino was awarded damages totaling $193,132.69.  In May 2003 Cupertino assigned the judgment to Stornawaye Capital who subsequently assigned its interest in the judgment to New Falls Corporation (“New Falls”) in 2004.

The Boyajians each filed Chapter 7 bankruptcy petitions in 2004 and New Falls filed an adversary complaint against them seeking, inter alia, a ruling that the judgment owed by the Boyajians was nondischargeable under § 523(a)(2)(B).  New Falls contended that the personal financial statements submitted by the Boyajians in order to obtain the lease were materially false, and that discharge was therefore unavailable.  Although the judgment was entered in favor of New Falls’ predecessor-in-interest, New Falls alleged that it was assigned all rights to the judgment, including the right to non-dischargeability under§ 523(a)(2)(B).  That section of the Code provides an exception to discharge of a debt where the debt was obtained by means of a materially false written financial statement, one “on which the creditor to whom the debtor is liable for such money, property, services, or credit reasonably relied.”

Both sides moved for summary judgment and 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 predecessor in interest, and that at the time [New Falls] . . . purchased 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, holding 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 bankruptcy court erred by failing to take account of “the legal implications of an assignment.”

The Ninth Circuit Court of Appeals affirmed the BAP ruling that the bankruptcy court erred.  The Boyajians position that the plain meaning of § 523(a)(2)(B)(iii) required the creditor asserting non-dischargeability to have itself relied on the allegedly materially false financial statement.  The appellate court disagreed, holding that the language “‘obtained by’ clearly indicates that the fraudulent conduct occurred at the inception of the debt, i.e., the debtor committed a fraudulent act to induce the creditor to part with his money or property.”  And quoting FDIC v. Meyer (In re Meyer), 120 F.3d 66, 70 (7th Cir. 1997), “the very reason that the institution of assignment exists is to enable Creditor to transfer its rights against Debtor . . .to Assignee . . . .”.   Therefore,  assuming New Falls was indeed the recipient of a general assignment of the original judgment, it can stand in the shoes of its assignor and pursue a nondischargeability action under § 523(a)(2)(B).   

May 4, 2009 | Permalink

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