FILED DEC 02 2011 1 ORDERED PUBLISHED SUSAN M SPRAUL, CLERK U.S. BKCY. APP. PANEL 2 O F TH E N IN TH C IR C U IT
3 UNITED STATES BANKRUPTCY APPELLATE PANEL 4 OF THE NINTH CIRCUIT 5 6 In re: ) BAP No. SC-10-1423-MkHKi ) 7 JASON BELICE AND MISHELLE ) Bk. No. 09-14236 BELICE, ) 8 ) Adv. No. 09-90576 Debtors. ) 9 ______________________________) ) 10 MICHAEL BARNES, ) ) 11 Appellant, ) ) 12 v. ) OPINION ) 13 JASON BELICE, ) ) 14 Appellee. ) ______________________________) 15 16 Argued and Submitted on October 20, 2011 at San Diego, California 17 Filed – December 2, 2011 18 ______________ 19 Appeal from the United States Bankruptcy Court for the Southern District of California 20 Honorable Peter W. Bowie, Chief Bankruptcy Judge, Presiding 21 22 Appearances: Michael L. Klein of Greenman, Lacy, Klein, O’Harra 23 & Heffron appeared on behalf of Appellant Michael Barnes.* 24 Before: MARKELL, HOLLOWELL and KIRSCHER, Bankruptcy Judges. 25 26 * No one appeared at oral argument on behalf of Jason 27 Belice, and the panel deemed Mr. Belice’s position submitted on the briefs filed. Subsequently, counsel for Mr. Belice requested 28 that the panel reset oral argument, or allow him to file a letter brief in lieu of oral argument. The panel denied the motion. 1 MARKELL, Bankruptcy Judge: 2 3 INTRODUCTION 4 Plaintiff Michael Barnes (“Barnes”) claims debtor Jason 5 Belice (“Belice”) obtained loans from him by fraud. When Belice 6 filed a chapter 71 bankruptcy and attempted to discharge those 7 debts, Barnes objected. He filed an adversary proceeding under 8 § 523(a)(2), alleging that Belice lied about various parts of his 9 financial life and his assets in order to obtain the loan. 10 Belice objected to Barnes’ complaint, and the bankruptcy 11 court granted several motions by Belice to dismiss it. 12 Ultimately, the bankruptcy court held that Belice’s alleged lies 13 and misrepresentations about specific assets were “statement[s] 14 respecting the debtor’s . . . financial condition” as 15 contemplated by § 523(a)(2)(A). It thus dismissed Barnes’ 16 complaint. We disagree, and REVERSE and REMAND. 17 BACKGROUND 18 Belice and his wife filed their chapter 7 bankruptcy 19 petition on September 22, 2009. Upon review, the clerk 20 classified Belices’ case as a no-asset bankruptcy case. The 21 Belices’ schedules listed only roughly $10,000 in exempt personal 22 property.2 23 24 1 Unless specified otherwise, all chapter and section references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and 25 all “Rule” references are to the Federal Rules of Bankruptcy 26 Procedure, Rules 1001-9037. All “Civil Rule” references are to the Federal Rules of Civil Procedure. 27 2 We obtained this information by reviewing the items on 28 the bankruptcy court’s automated bankruptcy case docket in the (continued...)
2 1 Barnes filed his first nondischargeability complaint in 2 December 2009. This complaint alleged that Barnes had lent 3 Belice $15,000 (“Loan”) in March 2008 based in part on Belice’s 4 representation that he would and did provide adequate security. 5 The security offered was a warrant purportedly entitling Barnes 6 to acquire 30% of Belice’s interest in a partnership known as the 7 Belice-Mehta Partnership. The warrant’s strike price was the 8 satisfaction of all amounts owed on the Loan. 9 The complaint alleged that Belice’s representation regarding 10 the nature of the security was false. It further alleged that 11 Belice knowingly and intentionally made this misrepresentation 12 with the intent to deceive Barnes and to induce him to make the 13 Loan. In addition, Barnes’ complaint indicated that Barnes later 14 lent Belice another $10,000 based on the same misrepresentation. 15 Barnes thus claimed damages of $25,000 plus interest as Belice 16 never repaid anything and the security given was worthless. 17 In February 2010, Belice moved to dismiss Barnes’ complaint 18 under Civil Rule 12(b)(6)(“First Motion To Dismiss”), arguing 19 that the complaint did not sufficiently allege claims for relief 20 under any of the nondischargeability grounds cited.3 Barnes 21 2 22 (...continued) Belices’ bankruptcy case. We may take judicial notice of the 23 contents and filing of these items. See Atwood v. Chase Manhattan Mortg. Co. (In re Atwood), 293 B.R. 227, 233 n.9 (9th 24 Cir. BAP 2003)(citing O’Rourke v. Seaboard Sur. Co. (In re E.R. Fegert, Inc.), 887 F.2d 955, 957-58 (9th Cir. 1989)). 25 3 26 Civil Rule 12(b)(6) applies in bankruptcy through application of Rule 7012(b). 27 Belice’s response to the First Motion To Dismiss contained 28 his own version of the circumstances surrounding the Loan, and he (continued...)
3 1 disagreed.4 2 The bankruptcy court granted Belice’s motion, stating that 3 Barnes’ allegations regarding Belice’s misrepresentations about 4 the proposed collateral were not sufficiently specific. But the 5 court went further and identified another flaw in Barnes’ 6 § 523(a)(2)(A) claim: according to the court, any 7 misrepresentation regarding the value of the proposed collateral 8 would have been a “statement respecting the debtor’s or an 9 insider’s financial condition.” If correct, any fraud based on 10 those representations would be excluded from § 523(a)(2)(A). 11 The court thus granted the First Motion to Dismiss, but did 12 so without prejudice to Barnes amending his complaint. Barnes 13 then filed a first amended complaint which attempted to address 14 the court’s concerns. In particular, Barnes alleged that Belice 15 had made the following false statements: 16 a) Debtor’s [Belice’s] monthly salary as an attorney . . . was $30,000; 17 18 3 19 (...continued) has reiterated these factual assertions in his brief on appeal. 20 Nothing in the record indicates that the bankruptcy court considered Belice’s version of the facts, nor will we. In 21 considering Civil Rule 12(b)(6) motions, a court must accept as 22 true all well-pled facts, unaffected by any contrary factual assertions. Johnson v. Riverside Healthcare Sys., 534 F.3d 1116, 23 1122 (9th Cir. 2008) (citing Broam v. Bogan, 320 F.3d 1023, 1028 (9th Cir. 2003)). 24 4 Barnes’ original complaint had also sought declarations 25 of nondischargeablity under §§ 523(a)(4) and (a)(6). Barnes 26 expressly abandoned his § 523(a)(4) claim at the hearing on the First Motion To Dismiss. Barnes abandoned his § 523(a)(6) claim 27 when he did not challenge on appeal the court’s dismissal of that claim. See Golden v. Chicago Title Ins. Co. (In re Choo), 273 28 B.R. 608, 613 (9th Cir. BAP 2002)(holding that arguments not raised in the appellant’s opening brief are deemed waived).
4 1 b) Debtor had made a $100,000 profit on the sale of his La Jolla residence in 2007; 2 c) Debtor was paying $7,000 per month in rent which he 3 could well afford; 4 d) Debtor was a San Diego Charger [sic] season ticket holder; 5 e) Debtor had purchased a $28,000 diamond engagement 6 ring in July 2007; 7 f) Debtor voluntarily left [his law firm] in late 2007 because of more lucrative income in the luxury 8 transportation sector (helicopter and jet service) and his involvement with a computer systems company; 9 g) The security for Plaintiff’s loan would be a partial 10 ownership interest in the BELICE-MEHTA PARTNERSHIP, an investor in an entertainment establishment in Macau, 11 called the Monkey Bar; 12 h) The Monkey Bar was extremely successful, would likely be sold to the Sands Casino company in 2008, and 13 would provide the Debtor with yet another revenue source; and 14 i) Debtor’s interest in the BELICE-MEHTA PARTNERSHIP 15 was worth far more than the loan from the Plaintiff to the Debtor. 16 17 First amended complaint (July 7, 2010) at 3:18-4:13. Barnes 18 further alleged that Belice had fraudulently failed to disclose 19 that Belice was being sued for $530,000 as a guarantor of a debt 20 of a company known as Running Horse Development Group, LLC (the 21 “Running Horse Liability”). 22 Belice filed a motion to dismiss the first amended 23 complaint, which the court also granted without prejudice. We do 24 not know the basis for this ruling.5 25 5 26 Neither party ordered the transcript from the June 2010 hearing on the Second Motion To Dismiss, so we do not know 27 precisely how or why the court ruled as it did on the Second Motion To Dismiss, but the statements the court later made when 28 (continued...)
5 1 Barnes then duly filed a second amended complaint, the 2 complaint that is at issue in this appeal (the “Complaint”). 3 Although he made some nonmaterial changes, he did not change the 4 series of Belice’s alleged misrepresentations, including the 5 assertion that the failure to disclose the Running Horse 6 Liability was a misrepresentation precluding discharge. 7 Belice moved yet again to dismiss the Complaint with 8 prejudice. At the hearing, the bankruptcy court based its 9 decision on familiar grounds: “The bulk of my problem remains the 10 same as it was the last time around . . . . And that is, it 11 appears to me that the representations of which you complain are 12 representations going to financial condition.” Hr’g Tr. (Sept. 13 13, 2010) at 4:8-11. 14 Barnes countered that the court should apply the strict 15 definition of the phrase “statement respecting financial 16 condition” applied in Cadwell v. Joelson (In re Joelson), 427 17 F.3d 700 (10th Cir. 2005) and in Eugene Parks Law Corp. Defined 18 Benefit Pension Plan v. Kirsh (In re Kirsh), 973 F.2d 1454, 1457 19 (9th Cir. 1992). Under this definition, he asserted, the 20 Complaint allegations regarding Belice’s misrepresentations were 21 sufficient to state a claim under § 523(a)(2)(A). 22 The court disagreed. It again ruled against Barnes. The 23 court also expressed the view that Barnes had not alleged and 24 25 5 (...continued) 26 it dismissed Barnes’ Complaint indicate that, in large part, the court granted the Second Motion To Dismiss because it construed 27 all of the alleged misrepresentations to be “statement[s] 28 respecting the debtor’s or an insider’s financial condition” expressly excluded from coverage under § 523(a)(2)(A).
6 1 could not allege any duty to disclose the Running Horse 2 Liability. 3 On October 21, 2010, the bankruptcy court entered a short 4 memorandum and order in which it reasoned that Barnes’ 5 allegations were insufficient under § 523(a)(2)(A) because they 6 consisted of oral statements respecting Belice’s financial 7 condition, and as such could not be used to support a claim under 8 § 523(a)(2)(A). Even though Belice had requested that any 9 dismissal be with prejudice, the bankruptcy court without 10 explanation crossed out the words “with prejudice” from Belice’s 11 proposed form of order. 12 On November 3, 2010, Barnes filed a notice of appeal. 13 JURISDICTION 14 The bankruptcy court’s striking of “with prejudice” in the 15 proposed form or order raises a jurisdictional issue. When a 16 court dismisses a complaint without prejudice, the plaintiff may 17 file an amended complaint even if the dismissal order does not 18 expressly state that leave to amend is granted. See McCrary v. 19 Barrack (In re Barrack), 217 B.R. 598, 603 n.4 (9th Cir. BAP 20 1998).6 An order dismissing a complaint without prejudice is an 21 22 6 When an order dismissing a complaint is silent as to whether the dismissal is with or without prejudice, we must 23 determine whether the bankruptcy court intended the order to 24 fully and finally dispose of the entire lawsuit. Mendiondo v. Centinela Hosp. Med. Ctr., 521 F.3d 1097, 1102 (9th Cir. 2008); 25 Knevelbaard Dairies v. Kraft Foods, Inc., 232 F.3d 979, 983 (9th Cir. 2000). This is consistent with the general rule that we 26 must look beyond the labels used by the bankruptcy court, and instead determine what effect the court intended that its order 27 have. Disabled Rights Action Comm. v. Las Vegas Events, Inc., 28 375 F.3d 861, 870 (9th Cir. 2004) (citing Nat'l Distrib. Agency (continued...)
7 1 interlocutory order. Id.; WMX Techs., Inc. v. Miller, 104 F.3d 2 1133, 1136–37 (9th Cir. 1997) (en banc). 3 We generally lack jurisdiction to hear an appeal from an 4 interlocutory order, unless we grant leave to appeal. See 5 Giesbrecht v. Fitzgerald (In re Giesbrecht), 429 B.R. 682, 687 6 (9th Cir. BAP 2010). Under Rule 8003, however, we may treat a 7 notice of appeal as a motion for leave to file an interlocutory 8 appeal. And we typically grant leave to appeal when “the order 9 10 6 (...continued) 11 v. Nationwide Mut. Ins. Co., 117 F.3d 432, 433 (9th Cir. 1997)). Under this standard, we do not treat an order dismissing a 12 complaint as final and appealable unless the bankruptcy court 13 clearly manifested its intent that the dismissal order be its final act in the matter. See Disabled Rights Action Comm., 375 14 F.3d at 870 (citing Campbell Indus., Inc. v. Offshore Logistics Int'l, Inc., 816 F.2d 1401, 1404 (9th Cir. 1987)); see also Casey 15 v. Albertson's Inc., 362 F.3d 1254, 1258 (9th Cir. 2004)(stating that decision is not considered final for appeal purposes unless 16 the decision: (1) fully adjudicates the issues and (2) “clearly 17 evidences the judge's intention that it be the court's final act in the matter.”). Here, there are several indications that the 18 bankruptcy court did not intend the dismissal order to be its final act in the adversary proceeding. First and foremost, it 19 crossed out the words “with prejudice” from Belice’s proposed 20 form of order. Further, the order dismissed the complaint, as opposed to dismissing the underlying adversary proceeding. See 21 Disabled Rights Action Comm., 375 F.3d at 870 (citing Montes v. United States, 37 F.3d 1347, 1350 (9th Cir. 1994)). Finally, 22 there is no indication in the record that the bankruptcy court ever determined that the lawsuit could not be saved by amendment. 23 Id. The court never said that Barnes could not state a viable 24 claim for relief; rather, the court said “I’m just afraid that the facts, at least after the second try, just don’t support 25 where you want to go.” Hr’g Tr. (Sept. 13, 2010) at 9:2- 3(emphasis added). We acknowledge that, shortly after the 26 dismissal order was entered, a docket clerk entered on the docket a notation that the adversary proceeding was closed. This 27 notation by itself, however, does not persuade us that the court 28 clearly manifested its intent that the dismissal order would be its final act in the matter.
8 1 involves [1] a controlling question of law [2] where there is 2 substantial ground for difference of opinion and [3] when the 3 appeal is in the best interests of judicial economy because an 4 immediate appeal may materially advance the ultimate termination 5 of the litigation.” Travers v. Dragul (In re Travers), 202 B.R. 6 624, 626 (9th Cir. BAP 1996); see also Magno v. Rigsby (In re 7 Magno), 216 B.R. 34, 38 (9th Cir. BAP 1997) (granting leave to 8 appeal under the Travers standard). 9 Here, the validity of the order appealed from involves a 10 controlling question of law concerning the meaning of 11 § 523(a)(2)(A)’s phrase “statement respecting the debtor’s . . . 12 financial condition.” As discussed below, the meaning of that 13 phrase is unsettled. Moreover, exercising jurisdiction here 14 would serve the interests of judicial economy by resolving the 15 meaning of that disputed phrase. In turn, this enables the 16 parties to move on and address the other issues essential to the 17 eventual disposition of the underlying adversary proceeding. 18 Indeed, although the bankruptcy court appears to have 19 dismissed the Complaint without prejudice, the record before us 20 strongly suggests that the court and Barnes had reached an 21 impasse. Barnes over time had narrowed his focus to a single 22 claim for relief under § 523(a)(2)(A), and the court had 23 consistently concluded that Barnes’ core allegations were 24 insufficient to state a claim under § 523(a)(2)(A). 25 While the better practice would have been for Barnes, before 26 filing his notice of appeal, to file a written notice of his 27 election to forego any further amendments to his Complaint so 28 that the court could enter a final judgment of dismissal of the
9 1 adversary proceeding, WMX Techs., 104 F.3d at 1135-36, we have no 2 trouble concluding here, under the particular circumstances of 3 this matter, that the interests of everyone involved – Barnes, 4 Belice and the bankruptcy court – will be best served by our 5 hearing and deciding this appeal now. We thus grant leave to 6 appeal. 7 STANDARDS OF REVIEW AND CIVIL RULE 12(b)(6) LEGAL STANDARDS 8 We review a dismissal under Civil Rule 12(b)(6) de novo. 9 See AlohaCare v. Hawaii Dept. of Human Services, 572 F.3d 740, 10 744 n.2 (9th Cir. 2009). We also review the bankruptcy court’s 11 interpretation of the Bankruptcy Code de novo. See W. States 12 Glass Corp. of N. Cal. (In re Bay Area Glass, Inc.), 454 B.R. 86, 13 88 (9th Cir. BAP 2011). 14 When we conduct a de novo review, “we look at the matter 15 anew, the same as if it had not been heard before, and as if no 16 decision previously had been rendered, giving no deference to the 17 bankruptcy court’s determinations.” Charlie Y., Inc. v. Carey 18 (In re Carey), 446 B.R. 384, 389 (9th Cir. BAP 2011); see also 19 B–Real, LLC v. Chaussee (In re Chaussee), 399 B.R. 225, 229 (9th 20 Cir. BAP 2008). 21 As a result, in order to decide this appeal, we apply the 22 same legal standards governing motions to dismiss under Civil 23 Rule 12(b)(6) that apply in all federal courts. “A Rule 12(b)(6) 24 dismissal may be based on either a ‘lack of a cognizable legal 25 theory’ or ‘the absence of sufficient facts alleged under a 26 cognizable legal theory.’” Johnson, 534 F.3d at 1121 (quoting 27 Balistreri v. Pacifica Police Dept., 901 F.2d 696, 699 (9th Cir. 28 1990)).
10 1 Under Civil Rule 12(b)(6), a court must also construe the 2 complaint in the light most favorable to the plaintiff, and must 3 accept all well-pleaded factual allegations as true. Johnson, 4 534 F.3d at 1122; Knox v. Davis, 260 F.3d 1009, 1012 (9th Cir. 5 2001). 6 In both instances, the key is whether the allegations are 7 well-pled; a court is not bound by conclusory statements, 8 statements of law, or unwarranted inferences cast as factual 9 allegations. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555-57 10 (2007). “While a complaint attacked by a Rule 12(b)(6) motion to 11 dismiss does not need detailed factual allegations, a plaintiff’s 12 obligation to provide the ‘grounds’ of his ‘entitlement to 13 relief’ requires more than labels and conclusions, and a 14 formulaic recitation of the elements of a cause of action will 15 not do.” Id. at 555 (citations omitted). “In practice, a 16 complaint . . . must contain either direct or inferential 17 allegations respecting all the material elements necessary to 18 sustain recovery under some viable legal theory.” Id. at 562 19 (quoting Car Carriers, Inc. v. Ford Motor Co., 745 F.2d 1101, 20 1106 (7th Cir. 1984)). 21 The Court elaborated on the Twombly standard in Ashcroft v. 22 Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 1949 (2009), as follows: 23 To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to 24 state a claim to relief that is plausible on its face. . . . A claim has facial plausibility when the 25 plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is 26 liable for the misconduct alleged. . . . Threadbare recitals of the elements of a cause of action, 27 supported by mere conclusory statements, do not suffice. 28
11 1 Id. (citations and internal quotation marks omitted.) 2 With these standards in mind, we turn our attention to the 3 proper construction of Barnes’ claim for relief under 4 § 523(a)(2)(A). Once we have set out the limits of 5 § 523(a)(2)(A), we then can determine whether Barnes alleged a 6 viable claim for relief under that provision. 7 DISCUSSION 8 A. The correct legal standard regarding whether misrepresentations are “statement[s] respecting the 9 debtor’s . . . financial condition.” 10 Section 523(a)(2)(A) excepts debts from discharge when those 11 debts were incurred by way of “false pretenses, false 12 representation, or actual fraud . . . .” But not all fraud leads 13 to nondischargeability. Congress expressly excluded oral 14 “statement[s] respecting the debtor’s or an insider’s financial 15 condition” from § 523(a)(2)(A)’s coverage. In short, oral 16 misrepresentations regarding financial condition are 17 dischargeable. 18 Had Congress defined the phrase “respecting the 19 debtor’s . . . financial condition,” we could easily resolve this 20 and many other cases. But it did not, and courts have sharply 21 differed over its proper scope. See Spencer v. Bogdanovich (In 22 re Bogdanovich), 292 F.3d 104, 112-13 (2d Cir. 2002) (listing 23 cases); see also Christopher W. Frost, Nondischargeability Based 24 on Fraud: What Constitutes a “Statement Respecting the Debtor's 25 Financial Condition?”, 26 Bankr. L. Ltr. 1, 5 (Issue No. 4 April 26 2006) (stating that courts interpreting the scope of the phrase 27 had divided into two camps, “one adopting a broad construction of 28 the phrase and one adopting a narrow or strict interpretation.”).
12 1 Those cases adopting a broad interpretation of the phrase have 2 concluded that the phrase includes “any statement that has a 3 bearing on the financial position of the debtor or an insider.” 4 Douglas v. Kosinski (In re Kosinski), 424 B.R. 599, 608-09 & n.8 5 (1st Cir. BAP 2010). This includes any statement regarding “the 6 status of a single asset or liability,” Joelson, 427 F.3d at 705, 7 as is the case here. 8 Those cases adopting a narrow or strict interpretation have 9 concluded that the phrase includes “only statements providing 10 information as to a debtor’s net worth, overall financial health, 11 or an equation of assets and liabilities.” In re Kosinski, 424 12 B.R. at 609. 13 The Ninth Circuit Court of Appeals has not expressly stated 14 whether it interprets the controversial phrase broadly or 15 narrowly. However, in at least one decision, it held that a 16 debtor’s statement regarding the value of and encumbrances 17 against proposed collateral for a loan was not, by itself, a 18 statement respecting the debtor’s financial condition within the 19 meaning of § 523(a)(2)(A): “For present purposes it is enough to 20 point out that the statement we are considering did not purport 21 to set forth the debtors’ net worth or overall financial 22 condition, so our analysis must revolve around 11 U.S.C. 23 § 523(a)(2)(A).” In re Kirsh, 973 F.2d at 1457. 24 While Kirsh did not expressly state whether the phrase 25 “statement respecting financial condition” should be interpreted 26 broadly or narrowly in all contexts, it would be difficult if not 27 impossible to reconcile Kirsh’s specific holding with a broad 28 interpretation of that phrase. Kirsh used language – “debtors’
13 1 net worth or overall financial condition” – which closely mirrors 2 the language that the strict interpretation courts have used. 3 Moreover, had Kirsh applied a broad interpretation, it likely 4 would have concluded that the statement regarding the value of 5 and encumbrances against the proposed collateral was a statement 6 respecting the debtor’s financial condition, as other broad 7 interpretation courts have concluded, and reached a different 8 result. See, e.g., Engler v. Van Steinburg (In re Van 9 Steinburg), 744 F.2d 1060, 1061 (4th Cir. 1984); Beneficial Nat’l 10 Bank v. Priestley (In re Priestley), 201 B.R. 875, 882 (Bankr. D. 11 Del. 1996). 12 The most recent circuit-level opinion addressing the issue 13 is In re Joelson, 427 F.3d at 700. After considering the 14 language and structure of the Code, the legislative history 15 leading up to the enactment of § 523(a)(2)(A) and (B), and the 16 decisions of other courts, Joelson concluded that the phrase 17 should be interpreted narrowly. Id. at 714. Joelson provides a 18 good analytic framework for analyzing the issues in this case. 19 1. Contextual Reading of Statute 20 Joelson initially read § 523(a)(2)(A) in the context of the 21 entire Code. Id. at 706-07. Although admitting, as it had to, 22 that the Code does not define the phrase “respecting the 23 debtor’s . . . financial condition,” the court observed that § 24 101(32)’s definition of “insolvent” does use the phrase 25 “financial condition,” and uses it to describe the overall 26 financial health of the debtor. As Joelson noted, “[t]he Code 27 defines ‘insolvent’ as, inter alia, the ‘financial condition such 28 that the sum of [an] entity’s debts is greater than all of such
14 1 entity’s property ... exclusive of [certain types] of property.’” 2 Id. at 706 (quoting 11 U.S.C. § 101(32)(A)) (emphasis in 3 original). This usage of the “financial condition” phrase 4 provides “tangential support” for a strict interpretation of the 5 phrase “respecting the debtor’s . . . financial condition.” Id. 6 Joelson’s second contextual argument is more to the point. 7 The court noted that the Code treats financial condition 8 misrepresentations very differently depending on whether these 9 representations are oral or written. Id. at 707. As Joelson 10 explained, this difference in treatment makes sense only to the 11 extent Congress meant financial condition misrepresentations to 12 refer to statements about one’s overall financial position, 13 rather than to statements about a specific asset or liability: 14 [I]t is logical to give more leeway (and more dischargeability) to a debtor who errs in stating his 15 or her overall position orally, since it is more likely that he or she may have made a mistake inadvertently. 16 It is also logical to give less leeway to a debtor who makes a specific oral misrepresentation as to a 17 particular asset, because it is less likely that such a misrepresentation is inadvertent. By the same token, 18 it is logical to give little leeway (and less dischargeability) under § 523(a)(2)(B) to a debtor who 19 fraudulently misstates his or her overall financial position in writing, since such communications carry an 20 air of formality that their oral counterparts do not and are typically made after more studied 21 consideration. 22 Id. 23 Against this analysis, the court acknowledged that Congress 24 intended § 523(a) to serve as a comprehensive scheme of 25 exceptions to discharge to further the cornerstone policy 26 embodied in the Bankruptcy Code “of affording relief only to the 27 ‘honest but unfortunate debtor.’” Cohen v. De La Cruz, 523 U.S. 28 213, 217 (1998) (quoting Grogan v. Garner, 498 U.S. 279, 287
15 1 (1991)). The broad interpretation of the financial condition 2 phrase would expand the types of dishonestly incurred debts that 3 could be discharged, in apparent contrast to the central 4 principal favoring honest debtors. 5 2. Legislative History 6 Joelson next examined the legislative history leading up to 7 enactment of § 523(a)(2)(A) and (B), mirroring in many respects 8 the Supreme Court’s detailed account of this same history in 9 Field v. Mans, 516 U.S. 59 (1995). Both Field and Joelson 10 explained that the origins of § 523(a)(2)(A) and (B) date back to 11 the turn of the Twentieth Century. Field, 516 U.S. at 64-65; 12 Joelson, 427 F.3d at 707-08. As of 1903, the precursor to 13 § 523(a)(2)(A) provided for the nondischargeability of debts 14 arising from any oral misrepresentation. Field, 516 U.S. at 65- 15 66; Joelson, 427 F.3d at 708. 16 In 1903, Congress added the precursor to § 523(a)(2)(B). 17 This section denied the debtor’s discharge as to all of his or 18 her debts to the extent he or she used a materially false written 19 statement to obtain an extension of credit. Field, 516 U.S. at 20 65; Joelson, 427 F.3d at 708. Notably, neither the debtor’s 21 deceptive intent nor the creditor’s reliance were prerequisites 22 to the denial of the debtor’s discharge under this provision. 23 Field, 516 U.S. at 65. 24 By 1960, it became apparent to Congress that some creditors 25 were abusing the existing system by reaping a windfall at the 26 expense of the debtor and other creditors. Joelson, 427 F.3d at 27 708. These creditors were encouraging or otherwise inducing 28 their borrowing clientele to issue less than complete and
16 1 accurate financial statements, thereby effectively enabling those 2 creditors to render amounts owed to them bankruptcy-proof; such 3 creditors later could coerce payment notwithstanding the filing 4 of a bankruptcy by using previously-submitted inaccurate 5 financial statements to raise the specter of the complete denial 6 of the debtor’s discharge. Id. Accordingly, in 1960 Congress 7 amended the Bankruptcy Act to combine the precursor to 8 § 523(a)(2)(B) with the precursor to § 523(a)(2)(A). Field, 516 9 U.S. at 66 n.6; Joelson, 427 F.3d at 708. 10 To this combination Congress added intent and reliance 11 requirements. Field, 516 U.S. at 66 n.6; Joelson, 427 F.3d at 12 708.7 As noted in Field: 13 Thus, as of 1960 the relevant portion of § 17(a)(2) provided that discharge would not release a bankrupt 14 from debts that 15 are liabilities for obtaining money or property by false pretenses or false 16 representations, or for obtaining money or property on credit or obtaining an extension 17 or renewal of credit in reliance upon a materially false statement in writing 18 respecting [the bankrupt’s] financial condition made or published or caused to be 19 made or published in any manner whatsoever with intent to deceive. 20 21 Field, 516 U.S. at 66 n.6 (quoting Act of July 12, 1960, Pub.L. 22 86-621, 74 Stat. 409) (emphasis added). 23 The 1960 amendments did not provide for any divergent 24 7 25 As one commentator stated, “[t]his history of increasing limits placed on nondischargeability based on false statements 26 respecting the debtor's financial condition indicates congressional intent to narrow the reach of Section 27 523(a)(2)(B).” Frost, supra, at 5. The broad interpretation, of 28 course, accomplishes the exact opposite result by bringing more misrepresentations within the ambit of § 523(a)(2)(B).
17 1 treatment of debts incurred through the use of false oral 2 statements concerning a debtor’s financial condition. 3 Furthermore, the legislative history accompanying the 1960 4 amendments made reasonably clear that the new phrase “materially 5 false statement in writing respecting [the bankrupt’s] financial 6 condition” was meant to refer to formal written financial 7 statements, by its repeated reference to “financial statements” 8 when describing the purpose and effect of the revised statute. 9 See Joelson, 427 F.3d at 708-09. Indeed, in reviewing this same 10 legislative history, Field used interchangably the phrases 11 “financial statements,” “written statement[s] of financial 12 condition” and “statement[s] in writing respecting [the 13 bankrupt’s] financial condition” thereby suggesting that it 14 viewed the meaning of these phrases as at least roughly 15 synonymous. Field, 516 U.S. at 65-66. 16 The legislative history of the 1978 Code is silent on why 17 the new statute expressly excepted oral statements respecting the 18 debtor’s financial condition from coverage under § 523(a)(2)(A). 19 But as Joelson pointed out, this same legislative history 20 reflected a general intent to maintain existing law, see Joelson, 21 427 F.3d at 709, and not exempt a significant class of 22 misrepresentations from the Code’s scheme of nondischargeable 23 debts. Id. 24 [T]here is no indication in the legislative history that Congress intended to remove from the coverage of 25 § 523(a)(2)(A) any of the debts based on oral misrepresentations going to financial condition that 26 had been within the coverage of that provision’s predecessors. 27 28 Id.
18 1 The Revision Notes accompanying the 1978 enactment of the 2 Bankruptcy Code support Joelson’s account of the legislative 3 history. Those Revision Notes state that § 523(a)(2) “is 4 modified only slightly from current section 17(a)(2).” H.R. Rep. 5 No. 95-595, at 364 (1977). The Revision Notes describe both the 6 general coverage of § 523(a)(2) and the substantive changes from 7 prior § 17(a)(2), and neither of those descriptions mention 8 anything about § 523(a)(2)(A)’s new exception from coverage. In 9 short, it would have been exceedingly odd for Congress to have 10 made a significant change in the substantive law’s coverage 11 without even mentioning it in this context. 12 3. Existing Case Law 13 After making the same observations about Field as we make 14 above, Joelson discussed the decisions of other courts that have 15 chosen between the broad and narrow interpretation of the phrase 16 “statement respecting the debtor’s . . . financial condition.” 17 Joelson, 427 F.3d at 710-14; see also Skull Valley Band of 18 Goshute Indians v. Chivers (In re Chivers), 275 B.R. 606, 614 19 (Bankr. D. Utah 2002); Weiss v. Alicea (In re Alicea), 230 B.R. 20 492, 502-04 (Bankr. S.D.N.Y. 1999). 21 On the opposing side, the seminal decision opting for the 22 broad approach is In re Van Steinburg, 744 F.2d at 1060-1061. 23 Van Steinburg is very short, and so we easily can quote the full 24 extent of its reasoning: 25 Concededly, a statement that one’s assets are not encumbered is not a formal financial statement in the 26 ordinary usage of that phrase. But Congress did not speak in terms of financial statements. Instead it 27 referred to a much broader class of statements – those “respecting the debtor’s . . . financial condition.” A 28 debtor’s assertion that he owns certain property free
19 1 and clear of other liens is a statement respecting his financial condition. Indeed, whether his assets are 2 encumbered may be the most significant information about his financial condition. Consequently, the 3 statement must be in writing to bar the debtor’s discharge. 4 5 Id. at 1061. 6 In our view, Van Steinberg and its progeny base their 7 decision on an oversimplified version of plain-meaning analysis. 8 Without considering the relationship of the phrase in question to 9 the contextual statutory scheme or the logical impact of their 10 broad interpretation on that scheme, they improperly emphasize 11 one meaning of the words to the exclusion of all other 12 considerations. See Corley v. United States,129 S.Ct. 1558, 1567 13 n.5 (2009).8 14 Based on the foregoing analysis, we hold that the phrase 15 “statement respecting the debtor’s . . . financial condition” 16 should be narrowly interpreted. We agree with Joelson’s 17 conclusion that such statements “are those that purport to 18 present a picture of the debtor’s overall financial health.” 19 20 8 We acknowledge that some courts have rejected Joelson’s 21 approach in favor of Van Steinberg’s. See, e.g., Jacobs v. Versa Corp. (In re Jacobs),2011 WL 5313825, at ** 4-5 (Bankr. E.D. 22 Mich. 2011); Material Prods. Int’l, Ltd. v. Ortiz (In re Ortiz), 441 B.R. 73, 82-83 (Bankr. W.D. Tex. 2010). However, Van 23 Steinberg and its progeny collectively bring into focus another 24 concern that we have with the broad interpretation: that is, it is difficult to conceive of any false representation regarding an 25 asset or a particular financial condition that could justifiably induce “an extension, renewal or refinancing of credit” that 26 would not also be a “statement respecting the debtor’s . . . financial condition” under the broad interpretation. And yet the 27 plain language of § 523(a)(2) contemplates on its face the 28 existence of such representations, even if the broad interpretation renders them all but inconceivable.
20 1 Joelson, 427 F.3d at 714. As Joelson put it: 2 Statements that present a picture of a debtor’s overall financial health include those analogous to balance 3 sheets, income statements, statements of changes in overall financial position, or income and debt 4 statements that present the debtor or insider’s net worth, overall financial health, or equation of assets 5 and liabilities. . . . What is important is not the formality of the statement, but the information 6 contained within it – information as to the debtor’s or insider’s overall net worth or overall income flow. 7 8 Id.9 9 In this appeal, the bankruptcy court never expressly stated 10 whether it was applying a broad or narrow interpretation of the 11 financial condition phrase. Nonetheless, the court’s rulings 12 granting all three of Belice’s motions to dismiss, as described 13 in the court’s last order, are inconsistent with a narrow 14 interpretation of the financial condition phrase. Moreover, the 15 court’s comments at the hearing on Belice’s last motion to 16 dismiss suggest that the court declined to follow Joelson. 17 Shortly after Barnes argued that the court should follow both 18 19 9 Two of our prior opinions, In re Barrack, 217 B.R. at 20 598; and Medley v. Ellis (In re Medley), 214 B.R. 607 (9th Cir. BAP 1997), involved the issue of whether certain alleged 21 misrepresentations qualified as statements respecting the debtor’s financial condition within the meaning of § 523(a)(2)(A) 22 and (B). But neither opinion decided the issue. Barrack accepted without any review the bankruptcy court’s determination 23 that the statements therein were “respecting the debtor’s . . . 24 financial condition” because the appellant did not challenge that determination on appeal. In re Barrack, 217 B.R. at 605. 25 Meanwhile, in Medley, we acknowledged the controversy over the broad versus the narrow interpretation of the phrase “respecting 26 the debtor’s . . . financial condition,” but we explained that we did not need to decide which interpretation to apply because at 27 least some of the debtor’s alleged misrepresentations would have 28 qualified under either interpretation. In re Medley, 214 B.R. at 612.
21 1 Kirsh and Joelson, the following colloquy took place: 2 The Court: I understand what you want to do. I understand how frustrating it is when you borrow money 3 from somebody and they don’t pay it back; and they said all these great things are going to happen. But 4 they’ve got to fit within the four corners of the statute. And Congress wrote those intentionally. 5 And I’m just afraid that the facts, at least after 6 the second try, just don’t support where you want to go. 7 Ms. Crothall: I understand. I just -- I -- our 8 contentions, I believe, fall squarely under the Joelson case in the 10th Circuit, your honor. And I’ve made my 9 argument. * * * 10 The Court: Motion to dismiss will be granted. 11 12 Hr’g Tr. (Sept. 13, 2010) at 8:21-9:9. 13 The bankruptcy court thus rejected Joelson and implicitly 14 adopted the broad interpretation of the phrase “respecting the 15 debtor’s . . . financial condition.” The bankruptcy court erred 16 in doing so. 17 B. Under the narrow interpretation, Belice’s alleged misrepresentations do not qualify as “statement[s] respecting the 18 debtor’s . . . financial condition.” 19 Even though we have concluded that the bankruptcy court 20 applied the incorrect legal standard, we nonetheless could affirm 21 its order if Belice’s alleged misrepresentations qualified as 22 statements respecting the debtor’s financial condition under the 23 proper legal standard. See generally Johnson, 534 F.3d at 1121 24 (holding that appellate court can affirm the trial court on any 25 basis supported by the record); Leavitt v. Soto (In re Leavitt), 26 171 F.3d 1219, 1223 (9th Cir. 1999) (same). 27 But Belice’s misrepresentations do not qualify as financial 28 condition statements. Barnes alleged in his Complaint that
22 1 Belice had made the following misrepresentations: 2 a) Debtor’s monthly salary as an attorney . . . was $30,000; 3 b) Debtor had made a $100,000 profit on the sale of his 4 La Jolla residence in 2007; 5 c) Debtor was paying $7,000 per month in rent which he could well afford; 6 d) Debtor was a San Diego Charger[sic] season ticket 7 holder; 8 e) Debtor had purchased a $28,000 diamond engagement ring in July 2007; 9 f) Debtor voluntarily left [his law firm] in late 2007 10 because of more lucrative income in the luxury transportation sector (helicopter and jet service) and 11 his involvement with a computer systems company; 12 g) The security for Plaintiff’s loan would be a partial ownership interest in the BELICE-MEHTA PARTNERSHIP, an 13 investor in an entertainment establishment in Macau, called the Monkey Bar; 14 h) The Monkey Bar was extremely successful, would 15 likely be sold to the Sands Casino company in 2008, and would provide the Debtor with yet another revenue 16 source; and 17 i) Debtor’s interest in the BELICE-MEHTA PARTNERSHIP was worth far more than the loan from the Plaintiff to 18 the Debtor. 19 Statements a, b, c and f relate to Belice’s income and 20 expenses, but they simply cannot be conceived as akin to any sort 21 of complete or comprehensive statement of income and expenses. 22 While these alleged misrepresentations reflect some aspects of 23 Belice’s historical income and expenses, they do not either 24 separately or when taken together reflect his overall cash flow 25 situation, his overall income and expenses, or the relative 26 values and amounts of his assets and liabilities. Cf. Joelson, 27 427 F.3d at 715 (“a statement about one part of Joelson’s income 28 23 1 flow . . . does not reflect Joelson’s overall financial 2 health.”). 3 Statements d, e, g, h and i relate to a handful of Belice’s 4 assets, but they do not reveal anything meaningful or 5 comprehensive about his overall net worth. These statements do 6 not purport to reflect all of Belice’s assets, and they tell us 7 nothing regarding his liabilities or any liens against any of his 8 property. Cf. Id. at 714-15 (holding that statements regarding 9 some of the assets that Joelson claimed to own did not constitute 10 “a statement as to Joelson’s overall financial health analogous 11 to a balance sheet, income statement, statement of changes in 12 financial position, or income and debt statement.”). 13 Accordingly, under our interpretation of the financial 14 condition phrase, Belice’s alleged misrepresentations do not 15 amount to a statement respecting his financial condition. At 16 most, they are isolated representations regarding various items 17 that might ultimately be included as assets in a balance sheet or 18 in a statement of net worth. The bankruptcy court thus erred 19 when it ruled that Barnes had not stated and could not state a 20 claim for relief under § 523(a)(2)(A), and we must reverse. 21 C. Fraudulent Omission 22 In addition to Belice’s affirmative representations, Barnes 23 argued that Belice committed fraud by failing to disclose a 24 significant liability. In particular, Barnes vigorously argues 25 on appeal that, contrary to the bankruptcy court’s ruling, 26 Belice’s alleged failure to disclose the $530,000 Running Horse 27 Liability was an actionable fraudulent omission. 28 24 1 A claim for relief based on a fraudulent omission must 2 allege facts that, if proven, demonstrate that the defendant had 3 a duty to disclose the omitted information. See Citibank (South 4 Dakota), N.A. v. Eashai (In re Eashai), 87 F.3d 1082, 1089 (9th 5 Cir. 1996) (stating that an omission can be fraudulent and 6 actionable under § 523(a)(2)(A) when the debtor had a duty to 7 disclose the omitted facts). 8 Section 551 of the Restatement (Second) of Torts provides in 9 relevant part: 10 (2) One party to a business transaction is under a duty to exercise reasonable care to disclose to the other 11 before the transaction is consummated, 12 * * * 13 (b) matters known to him that he knows to be necessary to prevent his partial or ambiguous 14 statement of the facts from being misleading; . . . . 15 16 Id.10 The comments accompanying Restatement § 551 explain the 17 18 10 We ordinarily look to the Restatement (Second) of Torts for guidance in determining what constitutes a fraudulent 19 nondisclosure for purposes of § 523(a)(2)(A). See Apte v. Romesh 20 Japra, M.D., F.A.C.C., Inc. (In re Apte), 96 F.3d 1319, 1324 (9th Cir. 1996); Tallant v. Kaufman (In re Tallant), 218 B.R. 58, 21 64-65 (9th Cir. BAP 1998) (citing Field, 516 U.S. at 68-70). The Restatement (Second) of Contracts also is instructive 22 when, as here, the alleged misrepresentation arises in the context of contractual relations. The Restatement (Second) of 23 Contracts provides in relevant part: 24 A person’s non-disclosure of a fact known to him is 25 equivalent to an assertion that the fact does not exist in the following cases only: 26 * * * (b) where he knows that disclosure of the fact 27 would correct a mistake of the other party as to a 28 (continued...)
25 1 meaning of clause (b) as follows: “[a] statement that is partial 2 or incomplete may be a misrepresentation because it is 3 misleading, when it purports to tell the whole truth and does 4 not.” Id. at cmt. g (emphasis added). 5 Barnes’ brief did not cite to any duty to disclose the 6 Running Horse Liability. Barnes’ attorney could not point us to 7 one when asked at oral argument. Without any such duty to 8 disclose, no implied representation can be found in Belice’s 9 silence. Without a false representation, there can be no fraud. 10 The bankruptcy court was correct to accept Belice’s argument on 11 this point. 12 CONCLUSION 13 For all of the foregoing reasons, the bankruptcy court’s 14 order is REVERSED. This matter shall be REMANDED for further 15 proceedings consistent with this opinion. 16 17 18 19 20 21 22 23 24 10 (...continued) 25 basic assumption on which that party is making the contract and if non-disclosure of the fact amounts to a 26 failure to act in good faith and in accordance with reasonable standards of fair dealing. 27 28 Restatement (Second) of Contracts § 161 (1981).