Hopper v. Lewis (In re Lewis)

551 B.R. 41

In re: Desiree Rebecca Lewis, Debtor(s).

J. Michael Hopper, Chapter 7 Trustee for the Bankruptcy Estate of Jack Burns, and Sally Wong, Plaintiff(s)

v.Desiree Rebecca Lewis, Defendant(s).

Case No. 14–21946–B–7

Adversary No. 14–2126

United States Bankruptcy Court, E.D. California.

Signed April 25, 2016

Ronald R. Roundy, J. Russell Cunningham, Sacramento, CA, for Plaintiffs.

Gary Ray Fraley, Brian H. Turner, Sacramento, CA, for Defendant.

DECISION AFTER TRIAL

Christopher D. Jaime, UNITED STATES BANKRUPTCY JUDGE

Introduction

This is an adversary proceeding (1) to have a debt excepted from discharge under 11 U.S.C. § 523 and (2) objecting to discharge under 11 U.S.C. § 727. The plaintiffs are the chapter 7 trustee appointed in In re Jack Burns, Case No. 10–22742, and Sally Wong.¹ The defendant is Desiree Rebecca Lewis. Lewis is a debtor in the underlying chapter 7 case filed and pending in this court as In re Desiree Rebecca Lewis, Case No. 14–21946. The Petition, Schedules, and Statement of Financial Affairs were filed in Lewis' chapter 7 case on February 27, 2014.

The complaint in this adversary proceeding was filed on May 9, 2014. It alleges five “Counts” as claims for relief: a claim under § 523(a)(2)(A) in Count I; a claim under § 523(a)(4) in Count II; a claim under § 523(a)(6) in Count III; a claim under § 727(a)(3) in Count IV; and a claim under § 727(a)(4)(A) in Count V. The summons was reissued on July 18, 2014, and, together with a copy of the complaint, was served on July 23, 2014. Lewis answered the complaint on August 15, 2014.

A trial in this matter was held on April 11, 2016. Ronald Roundy, Esq., appeared for the Burns trustee and Wong. Brian Turner, Esq., appeared for Lewis. The court made several pretrial rulings on the record in open court which are incorporated herein by this reference. The court also takes judicial notice of the docket in this adversary proceeding and in the underlying chapter 7 case.

The court has heard and considered the testimony of witnesses and has also considered the documents admitted into evidence. The court now enters its findings of fact and conclusions of law pursuant to Federal Rule of Civil Procedure 52(a) made applicable in this adversary proceeding by Federal Rule of Bankruptcy Procedure 7052.

Jurisdiction and Venue

Federal subject-matter jurisdiction is founded on 28 U.S.C. § 1334. This matter is a core proceeding that a bankruptcy judge may hear and determine. See 28 U.S.C. §§ 157(b)(2)(A), (I), (J), and (0). To the extent it may ever be determined to be a matter that a bankruptcy judge may not hear and determine without consent, the parties nevertheless consent to such determination by a bankruptcy judge. See 28 U.S.C. § 157(c)(2). Venue is proper under 28 U.S.C. § 1409.

Findings of Fact

Lewis worked for Brown at the King of Curls in Sacramento, California, in the months preceding and into March of 2006. Lewis discussed her financial problems with other employees and with Brown during that time. Specifically, Lewis made it known that the mortgage on her residence at 4822 Mission Beach Court, Elk Grove, California, was in default and that the property was in foreclosure.

Lewis asked Brown for a loan to avoid foreclosure on the Mission Property. Lewis told Brown that she could repay the loan by refinancing another property she owned located at 3229 Babson Drive, Elk Grove, California. Lewis did not tell Brown that the Babson Property was previously refinanced numerous times. Lewis and Brown also discussed other ways that Lewis could make money to repay the loan such as by operating a daycare or laundry business out of one of her properties, or by selling the Mission Property. In any event, Brown was fully aware of Lewis' financial condition, he was aware that the Mission Property was in foreclosure, and he endeavored to help Lewis nonetheless.

Brown discussed extending a loan to Lewis with his wife, Wong, and they agreed to loan Lewis over $18,000 to help Lewis avoid foreclosure on the Mission Property. Lewis provided Brown with her bank information and Brown gave that information to Wong. During her lunch break on March 30, 2006, and at Brown's direction, Wong made a series of Western Union wire transfers to Lewis' bank. The funds for those transfers came from Wong's separate property account. Those funds were used to bring Lewis' mortgage current which allowed Lewis to avoid foreclosure on the Mission Property.

Wong had not met or talked with Lewis before she wired funds to Lewis' bank. Wong did not speak with Lewis until after the wire transfers were made. Wong spoke with Lewis afterwards because of transposed numbers on the account to which the funds were wired and to obtain the correct account information for Lewis' account.

Before she transferred funds from her separate property account to Lewis' bank, Wong did not inquire about Lewis' financial condition. Wong relied entirely on Brown's statements that one of his newer employees needed a loan to save her house from foreclosure. Wong also testified that she knew that real property values were depressed in 2006.

Five days after Wong transferred funds to Lewis' bank, on April 4, 2006, Brown met with Lewis and asked her to prepare a written agreement regarding the loan made on March 30, 2006, and repayment of that loan. Lewis provided Brown with a hand-written document, which she refused to sign. The document confirmed the loan, included Lewis' statement that she had a purchase agreement on the Mission Property, and also included Lewis' statement that she would repay the loan with proceeds from the sale of the Mission Property.

Several months later, on or about August 21, 2006, Brown and Wong sued Lewis in Sacramento County Superior Court. The complaint filed in that state court action alleged breach of contract and fraud claims. Three days later, on August 24, 2006, a deed of trust securing a $36,000 promissory note executed by Lewis was recorded against the Babson Property. Those funds were not used to repay the loan.

The state court case was tried on April 20, 2007. On April 24, 2007, Lewis recorded a homestead declaration on the Babson Property. Fourteen days later, on May 8, 2007, the state court entered judgment in favor of Brown and Wong and against Lewis in the amount of $18,715.79. The extent of the state court judgment is as follows:

Evidence was presented by plaintiffs that funds in the amount of $18,715.79 were paid by them to defendant's lender to stop the foreclosure on her home. Defendant contended that said funds were a gift. After considering the evidence, the court finds that said funds were not a gift to defendant.

The state court judgment was recorded with the Sacramento County Recorder on May 21, 2007. Shortly thereafter, Brown and Wong attempted to enforce the judgment by garnishing Lewis' wages. They were unsuccessful because they did not have Lewis' social security number.

Brown and Wong made no other efforts to enforce or collect the state court judgment until seven years later when, on or about February 7, 2014, they initiated a debtor's examination in the state court. That debtor's examination surprised Lewis because, as she told Wong at the time, she believed that the absence of any collection activity or enforcement of the judgment meant that the loan was forgiven. Wong confirmed Lewis' belief during trial.

During the debtor's examination, Lewis asked for a continuance. That request was granted; however, the state court judge also ordered Lewis to provide documents to Brown and Wong by February 11, 2014, and to return for further examination on February 28, 2014. Lewis did neither. Instead, on February 27, 2014, Lewis filed a voluntary petition in the underlying chapter 7 case.

Brown and Wong now seek to have their debt arising out of the state court judgment excepted from discharge under §§ 523(a)(2)(A), (a)(4), and (a)(6). They also object to Lewis' discharge under §§ 727(a)(3) and (a)(4)(A).²

Conclusion of Law

I. The Nondischargeability Counts

A. Count I—§ 523(a)(2)(A)

Count I of the complaint alleges a claim under § 523(a)(2)(A). Section 523(a)(2)(A) states as follows:

(a) A discharge under section 727 ... of this title does not discharge an individual debtor from any debt—

...

(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent 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;

11 U.S.C. § 523(a)(2)(A).

A creditor seeking to except a debt from discharge under § 523(a)(2)(A) bears the burden of proving by a preponderance of the evidence five elements: (1) misrepresentation(s), fraudulent omission(s), or deceptive conduct; (2) knowledge of the falsity or deceptiveness of such representation(s), omission(s), or conduct; (3) an intent to deceive; (4) justifiable reliance by the creditor on the subject representation(s), omission(s), or conduct; and (5) damage to the creditor proximately caused by its reliance on such representation(s), omission(s), or conduct. Ghomeshi v. Sabban (In re Sabban), 600 F.3d 1219, 1222 (9th Cir.2010) (citation omitted); Oney v. Weinberg (In re Weinberg), 410 B.R. 19, 35 (9th Cir. BAP 2009) (citations omitted). The Burns trustee and Wong have failed to meet their burden of proof on several of the § 523(a)(2)(A) elements.

Among other things, § 523(a)(2)(A) renders nondischargeable a debt for money “to the extent obtained by” misrepresentation, fraudulent omission, or deceptive conduct. The operative phrase here is “to the extent obtained by.” To be actionable under § 523(a)(2)(A), the prescribed conduct must have occurred before the debtor obtains the money. In other words, the prescribed conduct must induce the creditor to act. See Shah v. Chowdaury (In re Chowdaury), 2014 WL 2938274 at *3 (9th Cir. BAP 2014) (“a creditor must establish that it was induced ... to enter into” the subject contract “by means of ...