Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-canb-5_14-ap-05009/USCOURTS-canb-5_14-ap-05009-0/pdf.json

Parties Involved:
Undon Paik
Plaintiff
Kenneth Keun Sung Lee
Defendant
Hyun Joo Lee
Defendant

Document Text:

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

UNITED STATES BANKRUPTCY COURT

for the Northern District of California

UNITED STATES BANKRUPTCY COURT

NORTHERN DISTRICT OF CALIFORNIA

In re

Kenneth Keun Sung Lee and

Hyun Joo Lee,

 

 Debtor(s).

)

)

)

)

)

)

)

)

)

)

Case No. 13-55559 MEH

Chapter 7

Undon Paik,

 Plaintiff.

v.

Kenneth Keun Sung Lee and 

Hyun Joo Lee, 

 Defendants.

)

)

)

)

)

)

)

)

)

)

)

)

)

)

Adv. No. 14-5009

Trial

Date: July 21, 2015 and

July 22, 2015

Time: 9:00 a.m.

Ctrm: 3020

MEMORANDUM DECISION

A trial was held July 21 and 22, 2015 in the above-captioned adversary case. Paik

requests the court deny the Lees’ chapter 7 discharge and deem the Lees’ debts to Paik

nondischargeable. John Mejia appeared on behalf of Paik and David Smyth appeared on 

behalf of Kenneth Keun Sung Lee and Hyun Joo Lee (referred to herein as “Lee” and “Hyun 

Lee” respectively).

The following constitutes

the order of the court. Signed September 8, 2015

_________________________________________________

M. Elaine Hammond

U.S. Bankruptcy Judge

Entered on Docket 

September 08, 2015

EDWARD J. EMMONS, CLERK 

U.S. BANKRUPTCY COURT 

NORTHERN DISTRICT OF CALIFORNIA

Case: 14-05009 Doc# 38 Filed: 09/08/15 Entered: 09/08/15 15:24:50 Page 1 of 17
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

UNITED STATES BANKRUPTCY COURT

for the Northern District of California

This court has jurisdiction over the adversary proceeding pursuant to 28 U.S.C. § 1334 

and General Order No. 24 of the United States District Court for the Northern District of 

California. This is a core proceeding pursuant to 28 U.S.C. § 157 (b)(2)(I) and (J).

Background

Paik, among many others, is the victim of a Ponzi scheme carried out by SNC 

Investments, Inc. and SNC Asset Management, Inc. (together, “SNC”). SNC promised high 

returns on investments in international over-the-counter foreign currency markets (“Forex”), 

but in reality it was a Ponzi scheme that converted investors’ funds for other purposes until it 

closed operations in 2008. Paik invested a total of $615,777.47 between April 2005 and April 

2006. 

Paik met Lee in the early 1990’s. Lee was a customer at Paik’s sushi restaurant and 

would make monthly visits to the restaurant from 1998 to 2001. From 2002 to 2005, he 

would visit the restaurant approximately six times a year. During his visits, Lee would 

discuss his investments in SNC with Paik, in particular his profits and the ongoing success of 

the business. 

Prior to the bankruptcy filing, Lee settled with Paik in a state court action for 

$120,000.00. The parties agreed to entry of a stipulated judgment of $165,000.00 in the event 

that Lee failed to make payments pursuant to the settlement agreement. Lee did not 

ultimately make any payments. The Lees filed the underlying chapter 7 case on October 21, 

2013 and Paik initiated this adversary proceeding on January 27, 2014. Paik seeks to have the 

court deem the Lees’ debt nondischargeable pursuant to 11 U.S.C. §§ 523(a)(2)(A)1, (a)(2)(B) 

 

1 Unless specified otherwise, all chapter, code and rule references are to the Bankruptcy Code, 

11 U.S.C. §§ 101–1532, and the Federal Rules of Bankruptcy Procedure, Rules 1001–9037.

Case: 14-05009 Doc# 38 Filed: 09/08/15 Entered: 09/08/15 15:24:50 Page 2 of 17
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

UNITED STATES BANKRUPTCY COURT

for the Northern District of California

and (a)(19), and to have the court deny the Lees’ discharge pursuant to §§ 727(a)(3) and 

(a)(4)(A).2

Discussion

1. Nondischargeability under 11 U.S.C. § 523(a)(2)(A)

To prevail on a claim under § 523(a)(2)(A), a creditor must demonstrate five elements; 

(1) misrepresentation, fraudulent omission or deceptive conduct by the debtor; (2) knowledge 

of the falsity or deceptiveness of his statement or conduct; (3) an intent to deceive; (4) 

justifiable reliance by the creditor on the debtor's statement or conduct; and (5) damage to the 

creditor proximately caused by its reliance on the debtor's statement or conduct. Deitz v. Ford 

(In re Deitz), 760 F.3d 1038, 1050 (9th Cir. 2014). The creditor bears the burden of proof to 

establish all five of these elements by a preponderance of the evidence. Id.

A § 523(a)(2)(A) claim may arise from the concealment or intentional non-disclosure 

of material facts. Loomas v. Evans (In re Evans), 181 B.R. 508, 515 n.6 (Bankr. S.D.Cal. 

1995). A debtor's knowledge and intent to deceive may be inferred by circumstantial 

evidence and from the debtor's conduct. Edelson v. Comm’r of Internal Revenue, 829 F.2d 

828, 832 (9th Cir. 1987); Donaldson v. Hayes (In re Hayes), 315 B.R. 579, 587 (Bankr. 

C.D.Cal. 2004). The alleged misrepresentation must have occurred at the inception of the 

debt as an inducement for the debt. See New Falls Corp. v. Boyajian (In re Boyajian), 367 

B.R. 138, 147 (B.A.P. 9th Cir. 2007). Paik must prove his non-dischargeability claim for 

relief by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 291 (1991).

A debtor’s knowledge and intent to deceive may be inferred from the totality of the

circumstances. Gertsch v. Johnson & Johnson, Fin. Corp. (In re Gertsch), 237 B.R. 160, 

167-68 (B.A.P. 9th Cir. 1999). When determining the knowledge element, “[a] representation 

 

2 Paik’s pre-trial brief asserts a claim for relief pursuant to 11 U.S.C. § 523(a)(6). This claim 

is not included in Paik’s Closing Argument after Trial, docket # 35. Based on its omission, 

the court determines that relief is no longer requested pursuant to § 523(a)(6).

Case: 14-05009 Doc# 38 Filed: 09/08/15 Entered: 09/08/15 15:24:50 Page 3 of 17
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

UNITED STATES BANKRUPTCY COURT

for the Northern District of California

may be fraudulent, without knowledge of its falsity, if a person making it is conscious that he 

has merely a belief in its existence and recognizes that there is a chance, more or less great, 

that the fact may not be as it is represented.” Gertsch, 237 B.R. at 168 (internal quotation 

omitted); see also Houtman v. Mann (In re Houtman), 568 F.2d 651, 656 (9th Cir. 1978) 

(“Reckless indifference to the actual facts, without examining the available source of 

knowledge which lay at hand, and with no reasonable ground to believe that it was in fact 

correct is sufficient to establish the knowledge element.”). The court may find intent to 

deceive “where there has been a pattern of falsity or from a debtor’s reckless indifference to 

or disregard of the truth.” Khalil v. Developers Sur. & Indem. Co. (In re Khalil), 379 B.R. 

163, 174-75 (B.A.P. 9th Cir. 2007).

Whether reliance is justified depends upon the “qualities and characteristics of a 

particular plaintiff, and the circumstances of the particular case, rather than of the application 

of a community standard of conduct to all cases.” Field v. Mans, 516 U.S. 59, 71 (1995).

It is uncontested that Lee visited Paik at his restaurant numerous times between 1998 

and 2005, when Paik made his initial investment in SNC.3

 Lee admits that he discussed with 

Paik his successful investments in SNC, that investing in SNC was a golden opportunity, that 

he was a director and owner of the company, and that he thought the company was very wellmanaged based on the returns. Lee disputes that he recommended for Paik to invest in SNC, 

but he admits to inviting others to invest and that he was the director of marketing for SNC. 

The court does not find credible Lee’s testimony that he never told Paik he should invest. 

Instead, the court finds Paik’s testimony compelling that Lee told him he should invest, 

provided him with SNC brochures, informed him that SNC was a safe investment, and 

promised that if Paik invested he would receive a return of 3%, that when compounded would 

yield 36% interest per year. Further, Paik’s testimony is consistent with the testimony of 

 

3 The parties stipulated that from 1998 through 2001, Lee visited Paik’s restaurant 

approximately 1-2 times per month, and from 2002 through 2005, Ken Lee visited Paik’s 

restaurant approximately 6 times a year.

Case: 14-05009 Doc# 38 Filed: 09/08/15 Entered: 09/08/15 15:24:50 Page 4 of 17
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

UNITED STATES BANKRUPTCY COURT

for the Northern District of California

Sooyeong Kwan, another investor in SNC. Thus, the court finds that Lee made 

misrepresentations about SNC to Paik to induce him to invest in SNC.

The issue then is whether Lee knew the misrepresentations were false when he made 

them. Lee asserts that he was hired because of his contacts, was not involved in SNC’s 

operations and investing, and did not know SNC’s operations were a Ponzi scheme. In 

determining whether Lee made a false representation, the court looks to whether he 

knowingly made a false representation or if he made a representation with “reckless 

indifference to the actual facts, without examining the available source of knowledge which 

lay at hand, and with no reasonable ground to believe that it was in fact correct.” See 

Houtman, 568 F.2d at 656. It is undisputed that since 2003 or 2004 Lee was a 10% owner in 

SNC, he was its Marketing Director and also on its Board of Directors, and Lee dealt 

frequently with SNC’s CEO, Peter Son, and CFO, Jin Chung. Lee further admits that he 

earned over $3 million in income from SNC in the last four years of SNC’s existence.4

 He 

testified that when potential investors wanted more information related to the Forex trading, 

he would accompany them to SNC’s offices in San Francisco for Son and Chung to answer 

their technical questions. Further, he states that Son and Chung only discussed new customer 

issues with him and that they appeared uninterested in Forex trading. Although he initially

testified that he had no recollection of it, the evidence at trial established that Lee was a 

registered member of the National Futures Association. His membership was sponsored by 

SNC. 

Lee’s history of investments in SNC also raises questions. Lee invested $270,000 

with SNC, or its predecessor Son and Company, between September 2001 and October 2003.5

 

He made no further personal investments until his business, Cal-Tech,6 provided SNC with 

 

4 This includes income paid directly to Lee from SNC, and income earned from SNC through 

Lee’s solely-owned corporation, Cal-Tech International (“Cal-Tech”).

5 The $270,000 includes a $10,000 investment made in Hyun Lee’s name but funded by a 

cashier’s check obtained by Lee.

6 Evidence was introduced to show that Cal-Tech provided additional investment funds of 

$420,000 in May 2003 and $230,000 in June 2003. The memo line on the checks state “Eun 

Suk Inc.” Lee testified that Cal-Tech made these investments on behalf of a Korean company 

Case: 14-05009 Doc# 38 Filed: 09/08/15 Entered: 09/08/15 15:24:50 Page 5 of 17
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

UNITED STATES BANKRUPTCY COURT

for the Northern District of California

$100,000 in January 2008 and another $100,000 in September 2008. Lee testified that he 

made the 2008 investments because Chung and Son informed him that SNC needed money. 

As it appears that Lee was receiving annual growth of 30% on his investments since 2003, it 

is unclear why he wasn’t investing more between 2003 and 2008. Lee’s only explanation was 

that he “didn’t want to be greedy.” The court finds this inconsistent with Lee’s admitted 

marketing tactic of flaunting his own success, and contrary to Lee’s demeanor during the trial.

Taken together, the court finds that based on Lee’s lengthy involvement with SNC and 

its founders at a high level and his access and opportunity to learn about the business, Lee 

either knew about the fraudulent nature of the Ponzi scheme or was recklessly indifferent to 

the actual facts available to him about SNC. As such, the misrepresentations of Lee to Paik 

were knowingly made with an intent to deceive for the purposes of § 523(a)(2)(A).

Paik justifiably relied on Lee’s numerous representations that investments in SNC

were safe and profitable. The reliance is justifiable based on the consistent representations to 

Paik over an eight year period. Throughout this period Lee bragged about his success through 

SNC and the money earned by Lee and his friends through it. 

Paik invested a total of $615,777.47 through three separate investments in SNC. 

These investments are supported by promissory notes issued by SNC on April 7, 2005, March 

28, 2006, and April 12, 2006. The investments made, and lost, are Paik’s damages. Paik 

argues in his closing brief that based upon promised rates of return he lost a total of 

$1,239,306.01. As the parties admit, little or none of the investors’ money was traded. Thus, 

the purported interest income never existed. Consistent with cases seeking recovery from 

investors in other Ponzi schemes, Paik is not entitled to a nondischargeable claim greater than 

his investment amount. See Donell v. Kowell, 533 F.3d 762, 771-72 (9th Cir. 2008) 

(explaining the “netting rule” in recovery of fraudulent transfers related to Ponzi schemes). 

Further, the parties’ agreed in their Joint Pre-trial Conference Statement that the appropriate 

 

that was not able to invest directly. Cal-Tech also made an investment of $100,000 in July 

2006. It is unclear whether this was made for the benefit of Lee or Eun Suk Inc.

Case: 14-05009 Doc# 38 Filed: 09/08/15 Entered: 09/08/15 15:24:50 Page 6 of 17
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

UNITED STATES BANKRUPTCY COURT

for the Northern District of California

measure of damages is the amount of money that the plaintiff lost that was caused by fraud 

and/or false statements made by Lee.

The Lees argue that any nondischargeability judgment should be reduced by the 

$300,000 that Mr. Paik received in settlements from co-obligors to the state court judgment. 

Under California law, the burden of proof is on the party asserting a right to setoff or 

reduction of damages – here, the Lees. C.B. v. City of Sonora, 769 F.3d 1005, 1032 (9th Cir. 

2014); Frankfort Marine Accident & Plate Glass Ins. Co. v. California Artistic Metal & Wire 

Co., 28 Cal. App. 74, 85-86 (Cal. Ct. App. 1915); 2 Cal. Affirmative Def. § 44:8 (2d ed.).

Defendant cites Decker v. Tramiel (In re JTS Corp.), 617 F.3d 1102 (9th Cir. 2010), 

which in turn cites to Cal. Civ. Proc. Code § 877. That statute provides: 

Where a release, dismissal with or without prejudice, or a covenant not to sue 

or not to enforce judgment is given in good faith before verdict or judgment to 

one or more of a number of tortfeasors claimed to be liable for the same tort, or 

to one or more other co-obligors mutually subject to contribution rights, it shall 

have the following effect:

(a) It shall not discharge any other such party from liability unless its terms so 

provide, but it shall reduce the claims against the others in the amount 

stipulated by the release, the dismissal or the covenant, or in the amount of the 

consideration paid for it, whichever is the greater ... .

The purpose of this statute is to preclude a double recovery arising out of the same 

wrong. JTS, 617 F.3d at 1116 (citing Vesey v. United States, 626 F.2d 627, 633 (9th Cir.

1980)).

The court in JTS explained that individuals are joint tortfeasors under Cal. Civ. Proc. 

Code § 877 if they caused “one indivisible injury” or “the same wrong.” JTS, 617 F.3d at 

1116 (citing May v. Miller, 228 Cal. App. 3d 404, 409-10 (Cal. Ct. App. 1994); Lafayette v. 

County of Los Angeles, 162 Cal. App. 3d 547, 554 (Cal. Ct. App. 1984)).

Case: 14-05009 Doc# 38 Filed: 09/08/15 Entered: 09/08/15 15:24:50 Page 7 of 17
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

UNITED STATES BANKRUPTCY COURT

for the Northern District of California

The “same wrong” may emanate from two successive independent torts and does not 

require unity of purpose, action, or intent by the two or more tortfeasors. Also, the plaintiff 

need not allege the same tort against the tortfeasors, but must only claim that the tortfeasors 

caused the same harm. “Two tortfeasors can both be liable for the same tort without being 

joint tortfeasors in the sense of concert of action and unity of purpose.” Id. at 1116-17 

(citations omitted).

Paik testified that he recovered $200,000 of his investment from his CPA Andrew

Jean and $100,000 from Byung Kang of SNC. The $300,000 he recovered represented funds 

he lost as a result of investing in SNC. A reduction is warranted to avoid double-recovery of 

those funds.

In light of the foregoing, Paik’s § 523(a)(2)(A) claim is granted with respect to Ken 

Lee, with damages in the amount of $315,777.47 ($615,777.47 in stipulated investment 

reduced by $300,000 received in settlement).

2. Nondischargeability under 11 U.S.C. § 523(a)(2)(B)

For a debt to be excepted from discharge under § 523(a)(2)(B), it must be based on a 

writing that contains: “(1) a representation of fact by the debtor, (2) that was material, (3) that 

the debtor knew at the time to be false, (4) that the debtor made with the intention of 

deceiving the creditor, (5) upon which the creditor relied, (6) that the creditor's reliance was 

reasonable, [and] (7) that damage proximately resulted from the representation.” Candland v. 

Ins. Co. of N. Am. (In re Candland), 90 F.3d 1466, 1469 (9th Cir. 1996). As with 

§ 523(a)(2)(A), knowledge and intent can be inferred from surrounding circumstances, 

including reckless disregard for the truth. In re Gertsch, 237 B.R. at 167-68. The creditor 

seeking an exception must prove these elements by a preponderance of the evidence. Grogan 

v. Garner, 498 U.S. at 291.

A misrepresentation must pertain to “the debtor’s or an insider’s financial condition” 

in order to satisfy the requirements of § 523(a)(2)(B). A corporation of which the debtor is a 

director, officer, or person in contro1 qualifies as an “insider” of the debtor. 11 U.S.C. 

Case: 14-05009 Doc# 38 Filed: 09/08/15 Entered: 09/08/15 15:24:50 Page 8 of 17
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

UNITED STATES BANKRUPTCY COURT

for the Northern District of California

§ 101(31)(A)(iv). Statements regarding a debtor’s financial condition “are those that purport 

to present a picture of the debtor's [or insider’s] overall financial health,” i.e., “those 

analogous to balance sheets, income statements, statements of changes in overall financial 

position, or income and debt statements that present the debtor or insider's net worth, overall 

financial health, or equation of assets and liabilities.” Barnes v. Belice (In re Belice), 461 

B.R. 564, 578 (B.A.P. 9th Cir. 2011) (quoting Cadwell v. Joelson (In re Joelson), 427 F.3d 

700, 714 (10th Cir. 2005)). A misrepresentation that does not pertain to financial condition 

may more appropriately give rise to a § 523(a)(2)(A) claim. However, oral 

misrepresentations regarding financial condition are not grounds for nondischargeability. In 

re Belice, 461 B.R. at 573. 

Paik testified that Lee provided him with SNC’s balance sheet and income statement

as of June 30, 2005. Both documents present a picture of SNC’s overall financial health. The

balance sheet indicated that SNC had total assets of $14,503,990.78, with over $13 million of 

the funds listed as being in a “FX Trading Acct”. This was a material misrepresentation, as it 

is an admitted fact that little or none of the SNC investors’ money was traded. Similarly, the 

income statement claims revenues of $3,401,163.11 for “Trading”. As with the balance sheet, 

the income statement misrepresented that the company was wholly engaged in Forex trading 

and that substantial funds were coming into the company from the trading. That 

representation was material, as it created an illusion of SNC’s legitimacy and profitability. 

Lee’s admitted role as a director of SNC makes SNC his insider for purposes of 

§ 523(a)(2)(B).

The circumstances support Paik’s argument that Lee possessed the requisite 

knowledge of falsity and intention to deceive. His testimony regarding his belief that SNC 

was involved Forex trading was weak – in essence he suggested that he was satisfied that 

SNC’s trading activities were legitimate because he saw graphs on computer screens during 

his visits to the San Francisco corporate office. In reality, he was highly involved with SNC’s 

principals and either knew about the fraudulent nature of the scheme or was recklessly 

indifferent to the facts available to him. 

Case: 14-05009 Doc# 38 Filed: 09/08/15 Entered: 09/08/15 15:24:50 Page 9 of 17
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

UNITED STATES BANKRUPTCY COURT

for the Northern District of California

 Paik justifiably relied on the information in the income statement and balance sheet 

in deciding to invest in SNC. Nothing in those documents raised red flags; they were 

consistent with Lee’s representations about the profitability of the company and its 

investments in the Forex market. As a result of the misrepresentations, Paik incurred 

damages in the amount of $615,777.47, subject to reduction as set forth above.

In light of the foregoing, Paik’s § 523(a)(2)(B) claim is granted with respect to Ken 

Lee, with damages in the amount of $315,777.47.

3. Nondischargeability under 11 U.S.C. § 523(a)(19)

Section 523(a)(19) provides, in pertinent part, for dischargeability of a debt that is for 

the violation of securities laws or fraud, deceit, or manipulation in connection with the 

purchase of sale of any security, and that results from any settlement agreement entered into 

by the debtor. 

“Section 523(a)(19) allows a court in appropriate circumstances to base a finding of 

securities violations on the debtor’s entry into [a] settlement agreement.” Mollasgo v. Tills 

(In re Tills), 419 B.R. 444, 452 (Bankr. S.D.Cal. 2009). In Tills, the bankruptcy court 

considered whether the debtor should be precluded from contesting liability for settled claims 

of securities violations notwithstanding language in the settlement agreement indicating that 

fault or liability were not conceded. Id. at 453. In considering whether issue preclusion 

applied, the court reviewed cases applying the legislative history behind § 523(a)(19) and the 

analogous provision § 523(a)(11).

7

Application of issue preclusion requires a prior determination that: (1) resolved an 

identical issue; (2) actually litigated the identical issue; (3) necessarily decided the identical 

issue; (4) is final and resolved the issue on its merits; and (5) occurred between parties in 

privity to one another, in the former proceeding. Khaligh v. Hadaegh (In re Khaligh), 338 

 

7 Section 523(a)(11) makes nondischargeable any debt provided in a settlement agreement 

arising from fraud or defalcation while acting in a fiduciary capacity committed with respect 

to a depository institution or insured credit union

Case: 14-05009 Doc# 38 Filed: 09/08/15 Entered: 09/08/15 15:24:50 Page 10 of

 17
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

UNITED STATES BANKRUPTCY COURT

for the Northern District of California

B.R. 817, 824 (B.A.P. 9th Cir. 2006). Additionally, the Court must consider whether 

preclusion would be fair and consistent with public policy in light of the circumstances of 

each case. Id. at 824–25. As explained in Tills, “[i]n section 523(a)(19), Congress clearly 

intended to alter the ‘actually litigated’ requirement [of the issue preclusion analysis] so that a 

settlement agreement has a preclusive effect not otherwise available.” Tills, 419 B.R. at 453. 

However, while the issue of whether a debt is for the violation of securities laws need not 

have been “actually litigated,” it must have been “necessarily decided” for issue preclusion to 

apply. See id. at 454.

Paik alleges that the parties settled after the state court determined that Paik’s notes 

were ruled to be “securities.” In support of his § 523(a)(19) argument, Paik requests that the 

court take judicial notice of the state court’s November 26, 2012 order granting summary 

adjudication on his “first, second and third causes of action” and determining that the 

promissory note issued to him by SNC is a “security” for purposes of 18 U.S.C. § 1964(c). 

In 2012, Cal. Civ. Proc. Code § 437c(s)(1) provided that “a party may move for summary 

adjudication of a legal issue or a claim for damages other than punitive damages that does not 

completely dispose of a cause of action, an affirmative defense, or an issue of duty.” Cal. 

Civ. Proc. Code § 437c (west) (effective January 1, 2012 to December 31, 2014). According 

to Paik, the parties settled based on the state court’s determination.

 While the state court’s summary adjudication order apparently ruled on the issue of 

whether Paik’s loan is a security, among other issues, the evidence does not show that the 

settlement agreement between the parties “necessarily decided” whether the debt is for the 

violation of securities laws. In other words, Paik has not proven that the parties settled based 

on a violation of securities laws or based on some other alleged wrongdoing. It appears that 

the settlement agreement was never reduced to writing and any information placed on the 

record in the state court proceeding has not been provided to the court. To the extent the 

settlement was based on the state court’s summary adjudication, it is unclear whether it was 

based on the first, second or third causes of action—or what the legal bases of those causes of 

action were. Even assuming the settlement was based in part on securities violations, the 

Case: 14-05009 Doc# 38 Filed: 09/08/15 Entered: 09/08/15 15:24:50 Page 11 of

 17
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

UNITED STATES BANKRUPTCY COURT

for the Northern District of California

court cannot determine how the parties contemplated apportionment of damages among the 

causes of action. 

Issue preclusion is thus inapplicable for purposes of § 523(a)(19) and Paik has not 

otherwise proven by a preponderance of the evidence that the parties settled based on a 

violation of securities laws or based on some other alleged wrongdoing. As such, Paik’s 

§ 523(a)(19) claim is denied.

4. Denial of Discharge under 11 U.S.C. § 727(a)(3)

Section 727(a)(3) provides for denial of discharge where, among other things, a debtor 

failed to keep or preserve any recorded information from which his financial condition or 

business transactions might be ascertained. The underlying purpose of this subsection is “to 

make discharge dependent on the debtor's true presentation of his financial affairs.” Caneva 

v. Sun Communities Operating Ltd. P'ship (In re Caneva), 550 F.3d 755, 761 (9th Cir. 2008). 

Even so, § 727(a)(3) “does not require absolute completeness in making or keeping records.” 

Id. Instead, a debtor must only “present sufficient written evidence which will enable his 

creditors reasonably to ascertain his present financial condition and to follow his business 

transactions for a reasonable period in the past.” Id. A debtor's “duty to keep records is 

measured by what is necessary to ascertain [his] financial status.” Moffett v. Union Bank, 378 

F.2d 10, 11 (9th Cir. 1967); see also U.S. Trustee v. Hong Minh Tran (In re Hong Minh 

Tran), 464 B.R. 885, 893 (Bankr. S.D.Cal. 2012) (type of debtor, as well as debtor's 

sophistication, informs the bankruptcy court's determination).

Paik points to a $1.3 million discrepancy between the amount the Lees earned between 

2004 and 2008—as evidenced by checks issued by SNC—and the amount the Lees reported 

to the IRS during that time period—as evidenced by the Lee’s W-2 from SNC and the 1099s 

issued by SNC to Cal-Tech.

8

 However, Paik offers no evidence that the Lees failed to 

 

8 At trial, Lee asserted – apparently for the first time – that the difference relates to Cal-Tech’s 

investment in SNC on behalf of a Korean company, Eun Sook. As a determination of this 

issue is not necessary to the court’s ultimate finding, the court makes no determination as to 

whether this properly accounts for the difference or not.

Case: 14-05009 Doc# 38 Filed: 09/08/15 Entered: 09/08/15 15:24:50 Page 12 of

 17
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

UNITED STATES BANKRUPTCY COURT

for the Northern District of California

maintain complete and accurate records for at least four years prepetition. In light of their 

level of sophistication, the court finds that the Lees provided sufficient information for 

creditors and the court to reasonably ascertain their financial status for purposes of their 

chapter 7 case.

Further, as to Hyun Lee, it is clear that she did not fully understand the nature of Lee’s 

involvement with SNC or the particulars of his source of income. The couple had developed 

a clear division such that Hyun Lee relied on Lee to earn income and maintain proper 

business records. Under such circumstances, the “spouse who has delegated the responsibility 

for maintaining the financial records need not inquire about those records absent some reason 

to be suspicious that they are not being kept properly.” Lansdowne v. Cox (In re Cox), 41 

F.3d 1294, 1299 (9th Cir. 1994). Hyun Lee, having no reason to be suspicious of her 

husband’s recordkeeping that the court is aware of, would not be denied a discharge under 

§ 727(a)(3) even if the court were to find the information provided by the Lees insufficient.

For the foregoing reasons, Paik’s § 727(a)(3) claim is denied.

5. Denial of Discharge under 11 U.S.C. § 727(a)(4)(A)

Bankruptcy Code § 727(a)(4)(A) provides in pertinent part that “The court shall grant 

the debtor a discharge unless ... the debtor knowingly and fraudulently, in or in connection 

with the case—(A) made a false oath or account ...” This court may deny a Chapter 7 debtor's 

discharge if (1) the debtor made a false oath in connection with the case; (2) the oath related 

to a material fact; (3) this oath was made knowingly; and (4) the oath was made fraudulently. 

Paik must establish these elements by a preponderance of the evidence. Retz v. Samson (In re 

Retz), 606 F.3d 1189, 1197 (9th Cir. 2010) (citing Roberts v. Erhard (In re Roberts), 331 B.R. 

876, 882 (B.A.P. 9th Cir. 2005)).

A false oath may involve an affirmatively false statement or an omission from a 

debtor's bankruptcy schedules or statement of financial affairs. Searle v. Riley (In re Searle), 

317 B.R. 368, 377 (B.A.P. 9th Cir. 2004) (citations omitted), aff'd, 212 Fed. Appx. 589 (9th 

Cir. 2006). A material fact is one that “bears a relationship to the debtor's business 

Case: 14-05009 Doc# 38 Filed: 09/08/15 Entered: 09/08/15 15:24:50 Page 13 of

 17
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

UNITED STATES BANKRUPTCY COURT

for the Northern District of California

transactions or estate, or concerns the discovery of assets, business dealings, or the existence 

and disposition of the debtor's property.” In re Khalil, 379 B.R. at 173. Notwithstanding this 

broad definition, a “false statement or omission that has no impact on the bankruptcy case is 

not material and does not provide grounds for relief for denial of a discharge under 

§ 727(a)(4). Id. at 172. An act is done “knowingly” when the debtor acts “deliberately or 

consciously.” Id. at 173. A fraudulent oath or omission is made fraudulently when the (1) 

debtor makes a misrepresentation or an omission; (2) that at the time he or she knew was 

false; and (3) with the intention and purpose of deceiving creditors. Id. Courts typically rely 

on circumstantial evidence to demonstrate this intent. Devers v. Bank of Sheridan, Montana 

(In re Devers), 759 F.2d 751, 753–54 (9th Cir. 1985). Recklessness alone does not establish a 

debtor's fraudulent intent. It can, however, form a part of the circumstantial evidence 

typically used to establish fraudulent intent. In re Khalil, 379 B.R. at 173.

Paik alleges that the Lees improperly listed Chris Lee as a creditor in their Schedule F 

of their bankruptcy petition. He further alleges that the Lees intentionally omitted from their 

bankruptcy schedules investments in a gas station and other investments.

Chris Lee testified at trial that Lee’s obligation to him arises out of a guaranty and 

promissory note executed in 2008. Paik argues that the Lees should not have scheduled the 

alleged debt because the relevant statute of limitations bars recovery on the debt. The Lees 

assert that they scheduled Chris Lee’s debt out of caution. The expiration of the statutory 

period within which an action can be commenced does not extinguish the debtor's obligation

under California law. Mitchell v. Cnty. Sanitation Dist. No. One of Los Angeles Cnty., 150 

Cal. App. 2d 366, 370 (1957). Instead, the statute of limitations must be raised as an 

affirmative defense. Due to the broad definition of a “claim” in § 101(5) of the Bankruptcy 

Code, debtors routinely schedule claims that may be time-barred or otherwise potentially 

unenforceable. The Lees’ act of scheduling Chris Lee as a creditor in the case was consistent 

with bankruptcy practice regularly before this court and does not constitute a knowing and 

fraudulent false oath.

Case: 14-05009 Doc# 38 Filed: 09/08/15 Entered: 09/08/15 15:24:50 Page 14 of

 17
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

UNITED STATES BANKRUPTCY COURT

for the Northern District of California

The argument that the Lees failed to include their interest in a gas station or other 

investments in their schedules is unsupported by the evidence presented at trial. In support of 

this argument, Paik provided Federal income tax returns for Cal-Tech—a separate legal entity 

from the debtors—from 2005 through 2007. The returns include a schedule of assets listing 

an “Investment” and “Investment in Gas Station” totaling between $240,000 and $290,000 

during that period. While “it is good practice for the assets of a debtor's solely owned 

corporation ... to appear on that debtor's individual bankruptcy schedules ..., where the 

existence of the corporation itself is clearly disclosed on the schedules, the Court cannot find 

fraud in the omission of individual assets belonging, not to the Debtor, but to the Debtor's 

corporation.” BTE Concrete Formwork, LLC v. Arbaney (In re Arbaney), 345 B.R. 293, 310 

(Bankr. D.Colo. 2006). The evidence submitted does not support a finding that the Lees 

owned any interest in the gas station on the petition date. Moreover, the Lees disclosed in 

their Statement of Financial Affairs that they had an interest in Cal-Tech from 2003 to 2009. 

This is consistent with Lee’s trial testimony. 

For the foregoing reasons, Paik’s § 727(a)(4)(A) claim is denied.

6. Hyun Lee’s Liability

Paik asserts that Lee’s conduct resulting in an exception to discharge should be 

attributed to Hyun Lee as well. “Marriage alone is not sufficient to impute fraud from one 

spouse to another. A business partnership between a debtor and spouse for denial of

discharge purposes exists where “the debtor assumed an active role in the [spouse's business] 

that goes beyond merely holding a community property interest in [the spouse's] business and 

performing minor services in that business.” Tsurukawa v. Nikon Precision, Inc. (In re 

Tsurukawa), 287 B.R. 515, 521 (B.A.P. 9th Cir. 2002). Fraud may be imputed to a spouse 

under agency/partnership principles in a § 523(a)(2)(A) action, if the spouses are also 

business partners. Id. at 525. However, while the debtor need not have participated actively 

in the fraud for the creditor to obtain an exception to discharge, the creditor must show that 

Case: 14-05009 Doc# 38 Filed: 09/08/15 Entered: 09/08/15 15:24:50 Page 15 of

 17
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

UNITED STATES BANKRUPTCY COURT

for the Northern District of California

the debtor knew, or should have known, of the agent's fraud. Sachan v. Huh (In re Huh), 506 

B.R. 257, 271-72 (B.A.P. 9th Cir. 2014). 

Paik asserts that liability should be established based upon Hyun Lee’s employment

by Cal-Tech during the relevant period and their joint tax returns listing her occupation as a 

corporate officer. Hyun Lee testified that she answered the phones at Cal-Tech and provided 

some general office support. She testified that she never spoke with investors and indicated 

that she was unfamiliar with her husband’s responsibilities at SNC. The court finds Hyun 

Lee’s testimony as to her involvement with Cal-Tech credible. Further, the court finds Hyun 

Lee’s testimony that she was not involved in preparation of the tax returns and did not review 

them credible. This testimony is supported by the testimony of the Lees’ accountant, Jong 

Suk Sohn, that in his 17 years of preparing tax returns for the Lees he never met Hyun Lee. 

The court finds that Hyun Lee activity at Cal-Tech does not rise to the level of a business 

partnership and that she was unaware of her husband’s conduct. Thus, there is no basis to 

impute her husband’s fraud to Hyun Lee.9

Paik is requested to submit a judgment consistent with this decision.

***END OF MEMORANDUM DECISION***

 

9 Paik erroneously asserts that the failure to except the discharge as to Hyun Lee will prevent 

him from being able to collect his judgment against the Lees’ post-petition community 

property. Paik can still reach Lee’s separate and community property to satisfy his 

nondischargeable judgment against Lee. As a leading bankruptcy treatise concludes, 

“Congress made a policy decision ‘that the economic sins of either spouse would be forever 

visited upon the community property of the spouses’ (including after acquired community 

property) when it enacted 11 U.S.C. §§ 524(a)(3) and 524(b)(1)(A) and (B).” Sophos v. Hibbs 

(In re Hibbs), 161 B.R. 259, 269-70 (Bankr. C.D. Cal. 1993) (quoting 3 Collier on 

Bankruptcy § 524.01 (King 15th ed. 1983)), aff'd, 122 F.3d 1071 (9th Cir. 1997). 

Case: 14-05009 Doc# 38 Filed: 09/08/15 Entered: 09/08/15 15:24:50 Page 16 of

 17
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

UNITED STATES BANKRUPTCY COURT

for the Northern District of California

COURT SERVICE LIST

Via ECF:

All ECF Recipients

Case: 14-05009 Doc# 38 Filed: 09/08/15 Entered: 09/08/15 15:24:50 Page 17 of

 17