Court Opinion

ID: 2757149
Source: CourtListenerOpinion
Date Created: 2014-12-03 19:08:35.864002+00
Date Added: 2024-06-11T10:27:43.422519
License: Public Domain

FILED
                                                             FEB 14 2012
 1                                                       SUSAN M SPRAUL, CLERK
                                                           U.S. BKCY. APP. PANEL
 2                                                         OF THE NINTH CIRCUIT
                    UNITED STATES BANKRUPTCY APPELLATE PANEL
 3
                              OF THE NINTH CIRCUIT
 4
 5   In re:                        )      BAP No.      CC-11-1317-CaPaMk
                                   )
 6   PETER DAVID KEMPF,            )      Bk. No.    8:09-bk-16783-TA
                                   )
 7                  Debtor.        )      Adv. No.     8:09-AP-01661-TA
     ______________________________)
 8                                 )
     PETER DAVID KEMPF,            )
 9                                 )
                    Appellant,     )
10                                 )
     v.                            )      M E M O R A N D U M1
11                                 )
     HITACHI CAPITAL AMERICA CORP.,)
12                                 )
                     Appellee.     )
13   ______________________________)
14                  Argued and Submitted on January 19, 2012
                             at Pasadena, California
15
                           Filed - February 14, 2011
16
              Appeal from the United States Bankruptcy Court
17                for the Central District of California
18       Honorable Theodor C. Albert, Bankruptcy Judge, Presiding
19   Appearances:     Allan Leguay of the Law Offices of Allan Leguay,
                      argued on behalf of Appellant Peter David Kempf;
20                    Frank T. Pepler of DLA Piper (US), LLP, argued on
                      behalf of Appellee Hitachi Capital America
21                    Corporation.
22
     Before: CASE2, PAPPAS, and MARKELL, Bankruptcy Judges.
23
24
          1
25         This disposition is not appropriate for publication.
     Although it may be cited for whatever persuasive value it may
26   have (see Fed. R. App. P. 32.1), it has no precedential value.
     See 9th Cir. BAP Rule 8013-1.
27
          2
           Hon. Charles G. Case II, United States Bankruptcy Judge for
28   the District of Arizona, sitting by designation.
 1        In this appeal, Debtor/Appellant Peter David Kempf (“Kempf”)
 2   argues that: (1) the bankruptcy court erred in deciding that
 3   Creditor/Appellee Hitachi Capital America Corporation’s
 4   (“Hitachi”) amended complaint (the “First Amended Complaint”), on
 5   which trial was held, related back to its initial complaint that

 6   initiated the action (the “Original Complaint”); (2) this Panel

 7   should review the bankruptcy court’s factual findings de novo;

 8   and (3) the bankruptcy court erred in concluding that Hitachi

 9   reasonably relied on Kempf’s fraudulent financial statement in

10   extending credit to Kempf’s business, CardioCura Capital West,

11   LLC (“CardioCura”), thereby excepting Hitachi’s claim based on

12   Kempf’s guaranty from discharge under section 523(a)(2)(B) of the

13   Bankruptcy Code3.   For the reasons below, we AFFIRM.

14                                I.   Facts

15        Kempf was the principal and owner of CardioCura, a start-up

16   mobile CT business, and Hitachi is an equipment lessor.   In

17   January 2006, CardioCura, through Kempf, signed a $1,400,000

18   lease financing proposal for a mobile Phillips CT device that

19   included a proposed limited personal guaranty from Kempf (the

20   “Guaranty”).

21        In February 2006, Hitachi prepared a transaction analysis

22   that analyzed CardioCura’s: (1) feasibility; (2) working capital,

23   including Kempf’s $300,000 contribution; (3) projected gross and

24
          3
           Unless specified otherwise, all “Chapter” and “Section”
25   references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, all
     “Rule” references are to the Federal Rules of Bankruptcy
26   Procedure, Rules 1001-9037, all “Civil Rule” references are to
27   the Federal Rules of Civil Procedure, 1-86, and all “Evidence
     Rule” references are to the Federal Rules of Evidence, Rules 101-
28   1103.

                                       2
 1   net revenue; (4) risks; and (5) credit enhancements, including
 2   Kempf’s $600,000 Guaranty (later increased to $736,538).      Kempf
 3   also provided Hitachi with his and his wife’s: (1) 2003 and 2004
 4   joint tax returns; and (2) a joint personal financial statement
 5   (the “Financial Statement”), that indicated the Kempfs’ net worth
 6   to be $4,207,084, including a $2,699,188 investment known as the

 7   Angel Trust (the “Trust”).    While the tax returns suggest that

 8   Kempf’s wife is the sole beneficiary of the Trust, no such

 9   reference is made on the Financial Statement.      It was undisputed

10   at trial that Kempf had no right of access to the assets of, or

11   income from, the Trust.

12        Hitachi lent CardioCura $1,440,000 on March 16, 2006 (the

13   “Loan”), and CardioCura executed a master equipment lease (the

14   “Lease”) on March 22, 2006.   The Lease went into default in

15   August 2007, and Hitachi obtained a California state court

16   judgment against CardioCura for $1,410,635.37 and Kempf for

17   $736,538.

18        Kempf filed his Chapter 7 petition on July 7, 2009; his

19   schedules made no reference to the Trust.      Hitachi timely filed

20   an adversary proceeding to determine the state court judgment’s

21   dischargeability.

22        In its Original Complaint, Hitachi relied on section

23   523(a)(2)(A), claiming that Kempf obtained the Loan through

24   fraud.   Hitachi’s First Amended Complaint, filed December 31,

25   2009, included a second claim for relief based on section

26   523(a)(2)(B), claiming that Kempf obtained the Loan through use

27   of a false financial statement.       Hitachi argued that Kempf

28   knowingly misrepresented his net worth because he knew that he

                                       3
 1   held no interest in the Trust, which constituted a major
 2   percentage of his purported net worth.   Kempf filed a motion to
 3   dismiss the First Amended Complaint arguing that it did not
 4   relate back to the Original Complaint under Civil Rule 15,
 5   incorporated in Rule 7015, and therefore was untimely.     The
 6   bankruptcy court denied the motion.

 7        At trial, the bankruptcy court found that Kempf knew that

 8   neither Kempf nor the community had an interest in the Trust and

 9   that including it in the Financial Statement was a false

10   representation that he and the community did have such an

11   interest.    The bankruptcy court noted that Kempf was a

12   sophisticated businessman and knew that it was highly unlikely

13   that Hitachi would lend him capital for a start-up business if he

14   did not include the Trust as part of his net worth.   It also

15   noted that no evidence was presented to suggest that the issue

16   was “red-flagged” for review regarding Kempf’s Financial

17   Statement.   The bankruptcy court found that: (1) the Financial

18   Statement as written was materially false; (2) Kempf had a duty

19   to make the status of the Trust clear; (3) Kempf intended to

20   deceive Hitachi when he prepared and submitted the Financial

21   Statement, which showed a higher net worth than in reality; and

22   (4) Hitachi reasonably relied on Kempf’s Financial Statement in

23   extending credit to him.   The bankruptcy court entered judgment

24   in favor of Hitachi on June 9, 2011, holding Hitachi’s state

25   court judgment against Kempf non-dischargeable under section

26   523(a)(2)(B).    Kempf filed a timely appeal from the judgment on

27   June 21, 2011.

28

                                       4
 1                                 II.   Jurisdiction
 2        The bankruptcy court had jurisdiction over this core
 3   proceeding pursuant to 28 U.S.C. §§ 1334 and 157(b)(1)(I).    This
 4   Panel has appellate jurisdiction pursuant to 28 U.S.C. § 158.
 5                                   III.    Issues
 6        Did Hitachi’s First Amended Complaint relate back to the

 7   facts alleged in its Original Complaint under Civil Rule 15, as

 8   made applicable by Rule 7015?

 9        What standard of review should the Panel apply to the

10   factual findings in this case?

11        Did Hitachi reasonably rely on Kempf’s fraudulent financial

12   statement as required under section 523(a)(2)(B)?

13                           IV.    Standards of Review

14        We review a bankruptcy court’s statutory construction and

15   conclusions of law, including interpretation of Bankruptcy Code

16   provisions, de novo.   Einstein/Noah Bagel Corp. v. Smith (In re

17   BCE W., L.P.), 319 F.3d 1166, 1170 (9th Cir. 2003); see Hoopai v.

18   Countrywide Home Loans, Inc. (In re Hoopai), 369 B.R. 506, 509

19   (9th Cir. BAP 2007), aff’d in part, vacated in part, rev’d in

20   part, 581 F.3d 1090 (9th Cir. 2009); USAA Fed. Sav. Bank v.

21   Thacker (In re Taylor), 599 F.3d 880, 887-88 (9th Cir. 2010).

22        We review the bankruptcy court’s factual findings, including

23   a finding that a creditor reasonably relied upon false financial

24   statements, under the clearly erroneous standard.    Fed. R. Bankr.

25   P. 8013; see Hughes v. Lawson (In re Lawson), 122 F.3d 1237, 1240

26   (9th Cir. 1997); Hansen v. Moore (In re Hansen), 368 B.R. 868,

27   875 (9th Cir. BAP 2007); Candland v. Ins. Co. of N. Am. (In re

28   Candland), 90 F.3d 1466, 1469 (9th Cir. 1996); see also Mendez v.

                                         5
 1   Salven (In re Mendez), 367 B.R. 109, 113 (9th Cir. BAP 2007);
 2   Clear Channel Outdoor, Inc. v. Knupfer (In re PW, LLC), 391 B.R.
 3   25, 32 (9th Cir. BAP 2008).    A factual finding is clearly
 4   erroneous if the appellate court, after reviewing the record, has
 5   a firm and definite conviction that a mistake has been committed.
 6   Anderson v. City of Bessemer City, N.C., 470 U.S. 564, 573-74

 7   (1985); see Mendez, 367 B.R. at 113.     If two views of the

 8   evidence are possible, the trial judge’s choice between them

 9   cannot be clearly erroneous.    Anderson, 470 U.S. at 573-75; see

10   Hansen, 368 B.R. at 874-75.

11        Whether an amended complaint relates back to the date of the

12   original under Civil Rule 15 is a legal question that is reviewed

13   de novo.   Dominguez v. Miller (In re Dominguez), 51 F.3d 1502,

14   1509-10 (9th Cir. 1995); see also Magno v. Rigsby (In re Magno),

15   216 B.R. 34, 37-38 (9th Cir. BAP 1997).

16                                  V.   Discussion

17        A.    Relation Back of Hitachi’s First Amended Complaint to

18              the Original Complaint

19        Kempf moved to dismiss Hitachi’s First Amended Complaint on

20   the grounds that the second claim for relief did not relate back

21   to the Original Complaint and therefore was time-barred under

22   Rule 4007(c).   He claimed that the First Amended Complaint did

23   not arise out of the same conduct, transaction, or occurrence set

24   forth in the Original Complaint because it “outlined a new set of

25   facts and legal theories involving a previously unmentioned Angel

26   Trust . . . and completely new allegations under Section

27   523(a)(2)(B) of the Bankruptcy Code.” Aplt ER p. 28.

28        Hitachi argued that its Original and First Amended

                                         6
 1   Complaints both relate to Kempf’s intentional, willful, wanton,
 2   and/or negligent signing of the Lease and Guaranty with no intent
 3   to repay the Loan.    It argued that Counts I and II both arise out
 4   of the same underlying Loan transaction to CardioCura and Kempf’s
 5   inducement of Hitachi to enter into the Loan by fraud.
 6   Additionally, Hitachi noted that it only discovered evidence

 7   relating to Count II after Kempf admitted in his adversary

 8   proceeding deposition to having no property rights in the Trust.

 9   Therefore, Hitachi claimed that it was “disingenuous for Debtor

10   to claim that Hitachi’s further allegations of fraud, which

11   Debtor concealed from Hitachi . . . prejudices this bankruptcy

12   discharge.”     Aple. ER 232 (emphasis in original).   The bankruptcy

13   court denied Kempf’s motion.

14           An amendment to a pleading relates back to the date of the

15   original pleading when it asserts a claim or defense that arose

16   out of the same conduct, transaction, or occurrence set out in

17   the original.    See Fed. R. Civ. P. 15(c)(1)(B); Fed. R. Bankr. P.

18   7015.    This link will be found when the claim to be added is

19   likely to be proven by the same kind of evidence that would be

20   used to support the original pleading.    Magno, 216 B.R. at 39;

21   see Dominguez, 51 F.3d at 1510. The relation back doctrine is

22   liberally applied, and its basic criterion is whether the

23   original complaint gave the defendant enough notice of the nature

24   of the plaintiff’s claim so that he should not have been

25   surprised by the amplification of the allegations.     Santamarina

26   v. Sears, Roebuck & Co., 466 F.3d 570, 573 (7th Cir. 2006); see

27   Miller v. Am. Heavy Lift Shipping, 231 F.3d 242, 248 (6th Cir.

28   2009); Tiller v. Atl. Coast line R. Co., 323 U.S. 574, 581

                                        7
 1   (1945); Rural Fire Prot. Co. v. Hepp, 366 F.2d 355, 362 (9th Cir.
 2   1966).    Thus, if one can fairly perceive some relationship
 3   between what was pleaded in the original and amended complaints,
 4   the amended complaint will relate back.   Gelling v. Dean (In re
 5   Dean), 11 B.R. 542, 545 (9th Cir. BAP 1981).
 6        Hitachi’s Original Complaint alleged fraud and

 7   misrepresentation under section 523(a)(2)(A) relating to Kempf’s

 8   promise to pay his Guaranty.   The First Amended Complaint added

 9   allegations under section 523(a)(2)(B) stating that Kempf

10   fraudulently included a high asset entity in his Financial

11   Statement in order to induce Hitachi to lend to CardioCura.

12   While Hitachi’s First Amended Complaint includes an additional

13   claim for relief, both complaints concern Kempf’s alleged

14   fraudulent misrepresentations made to secure the Lease and will

15   likely be proven by the same kind of evidence – the Lease,

16   statements Kempf made to secure the Lease, documents relating to

17   Lease, etc.   Kempf even admits that “the two complaints share the

18   fact that they arise out of the same [L]ease transaction.”     Aplt.

19   Br. 25.

20        Because both Hitachi’s Original and First Amended Complaints

21   are based upon events and circumstances surrounding Kempf’s

22   execution and delivery of the Lease and Guaranty with no

23   intention of repayment, the Original Complaint gave Kempf enough

24   notice about the nature of Hitachi’s claim so that he would not

25   be surprised by the additional allegations in the First Amended

26   Complaint.    Thus, the bankruptcy court did not err in holding

27   that Hitachi’s First Amended Complaint related back to the

28   Original Complaint under Civil Rule 15(c)(1)(B).

                                       8
 1        B.   The standard under which this Panel will review the
 2             bankruptcy court’s factual findings
 3        It is a well-known rule in the federal courts generally, and
 4   the Ninth Circuit specifically, that findings of fact are
 5   reviewed on appeal under a clearly erroneous standard.   See
 6   Lawson, 122 F.3d at 1240; Hansen, 368 B.R. at 874-75; Candland,

 7   90 F.3d at 1469; see also Mendez, 367 B.R. at 113; PW, LLC,

 8   391 B.R. at 32.    Kempf contends that because the bankruptcy court

 9   was presented with uncontested facts and did not make credibility

10   determinations, the facts should be reviewed de novo since the

11   “evidentiary palate” here is identical to that of summary

12   judgment.

13        In support of this argument, Kempf cites to In re Burdge,

14   where the panel applied de novo review because the facts were

15   undisputed.   AT&T Universal Card Servs. v. Burdge (In re Burdge),

16   198 B.R. 773, 776 (9th Cir. BAP 1996).   The Burdge panel noted

17   that factual findings are reviewed under the clearly erroneous

18   standard and legal conclusions are reviewed de novo; and it

19   concluded that because there were no facts in dispute, the only

20   issue was a question of law to be reviewed de novo.   Burdge,

21   198 B.R. at 776.   Burdge, therefore, does not stand for the

22   proposition that both facts and law may be reviewed de novo but

23   merely reasserts the established legal rule that legal

24   conclusions are reviewed de novo. Id.

25        While Kempf is correct that summary judgment determinations

26   are reviewed de novo, this case is not remotely similar to a

27   summary judgment case because there were a number of facts in

28   dispute and credibility determinations were made.   See Padfield

                                       9
 1   v. AIG Life Ins. Co., 290 F.3d 1121, 1124 (9th Cir. 2002); Turtle
 2   Rock Meadows Homeowners Ass’n. v. Slyman (In re Slyman), 234 F.3d
 3   1081, 1085 (9th Cir. 2000).
 4        A review of the record reveals a number of factual disputes.
 5   Even with only Hitachi’s witness, Donald O. Link, present at
 6   trial, the trial ran for approximately five hours and included a

 7   thorough cross and re-cross examination of Mr. Link by Kempf’s

 8   counsel, which was quite hostile at times.   During Mr. Link’s

 9   cross-examination, Kempf’s attorney asked whether CardioCura’s

10   business plan was the reason Hitachi entered into the Lease and

11   Guaranty.   Mr. Link disagreed with this conclusion stating that

12   Hitachi entered the Lease because it approved the structure of

13   the transaction.   While Mr. Kempf’s counsel tried to elicit from

14   Mr. Link that the Trust was important for the transaction’s

15   approval, Mr. Link pointed out that Kempf’s representations on

16   his Financial Statement as a whole, and not necessarily only the

17   representations of the Trust, were important in the transaction.

18        At another point in the cross-examination, Kempf’s attorney

19   tried to impeach Mr. Link by arguing that he presented

20   conflicting facts in his deposition as compared to his trial

21   testimony regarding his exposure to the transaction at issue.

22   Even the bankruptcy court noted that Kempf’s counsel was making

23   “a very questionable assertion” from Mr. Link’s declaration, his

24   testimony, and documents entered into evidence that the Trust was

25   the most important element in Hitachi’s agreement to extend

26   credit to CardioCura.   Hr’g Tr. 53:23.

27        A simple review of the record establishes that many facts

28   were in dispute and that the bankruptcy court was left with a

                                     10
 1   number of credibility determinations after the cross, redirect,
 2   and re-cross examination of the only witness.       Therefore, clearly
 3   erroneous is the correct standard of review with respect to the
 4   bankruptcy court’s factual findings.
 5        C.   The level of reliance required by creditors for section
 6             523(a)(2)(B) non-dischargeability complaints

 7        Kempf argues that the bankruptcy court erred by absolving

 8   Hitachi of any duty to make even a minimal inquiry or

 9   investigation, stating that reasonable reliance requires the

10   application of a community standard of conduct.       See Field v.

11   Mans, 516 U.S. 59, 70-71 (1995).        Hitachi argues that Kempf

12   ignores the plethora of facts that demonstrate its reasonable

13   reliance, which included: (1) investigating Kempf’s financial

14   status; (2) preparing a transaction analysis; and (3) ordering a

15   separate background report on Kempf that did not show any reason

16   for alarm.

17        At trial, Hitachi based its non-dischargeability theory on

18   section 523(a)(2)(B), which reads in pertinent part:

19                (a) A discharge under . . . this title does
                  not discharge an individual debtor from any
20                debt – (2) for money, property, services, or
                  an extension, renewal, or refinancing of
21                credit, to the extent obtained by – (B) use of
                  a statement in writing –(I) that is materially
22                false; (ii) respecting the debtor’s . . .
                  financial condition; (iii) on which the
23                creditor to whom the debtor is liable for such
                  money,   property,    services,    or   credit
24                reasonably relied; and (iv) that the debtor
                  caused to be made or published with intent to
25                deceive[.]

26   11 U.S.C. § 523(a)(2)(B) (2010); see Field, 516 U.S. at 64.          This

27   code section requires "reasonable reliance," a term that courts

28   can apply without additional help and is determined on a case-by-

                                        11
 1   case basis.   Candland, 90 F.3d at 1471; Gertsch v. Johnson &
 2   Johnson (In re Gertsch), 237 B.R. 160, 170 (9th Cir. BAP 1999);
 3   Deutsche Fin. Serv. Corp. v. Osborne (In re Osborne), 257 B.R.
 4   14, 21 (Bankr. C.D. Cal. 2000).    When there is evidence of
 5   materially fraudulent statements, little investigation is
 6   required for a creditor to have reasonably relied on the debtor’s

 7   representations.   Gertsch, 237 B.R. at 170; see Gosney v. Law

 8   (In re Gosney), 205 B.R. 418, 421 (9th Cir. BAP 1996); Candland,

 9   90 F.3d at 1471; La Trattoria, Inc. v. Lansford (In re Lansford),

10   822 F.2d 902, 904 (9th Cir. 1987).

11        Lenders do not have to hire detectives before they are found

12   to have reasonably relied upon the debtor’s false financial

13   statements.   Gertsch, 237 B.R. at 170; see, e.g., Candland,

14   90 F.3d at 1471; Ashley v. Church (In re Ashley), 903 F.2d 599,

15   604-05 (9th Cir. 1990).   The mere fact that a creditor could have

16   performed a more thorough investigation or could have avoided its

17   loss by independently attempting to verify the information

18   contained in the debtor’s financial statement is no defense in a

19   proceeding to except the debt from discharge.   See Merch. Bank of

20   Cal. v. Oh (In re Oh), 278 B.R. 844, 856 (Bankr. C.D. Cal. 2002).

21        With respect to “red-flags,” a creditor is not entitled to

22   rely on obviously false representations; but, minor clues of

23   falsity in a debtor’s financial statement, which on the whole had

24   a complete and reliable appearance, do not make a creditor’s

25   reliance unreasonable for dischargeability purposes, where the

26   statements asserted that debtors owned significant property which

27   they did not actually own.   Gosney, 205 B.R. at 420-21; Gertsch,

28

                                       12
 1
     237 B.R. at 170; see also Siriani v. Nw. Nat’l Ins. Co. (In re
 2
     Siriani), 967 F.2d 302, 307 (9th Cir. 1992).
 3
          The standard in the Ninth Circuit for “reasonable reliance”
 4
     does not require adherence to any particular list of factors;
 5
     rather, as Candland and Gertsch make clear, the bankruptcy court
 6
     is to make its determination on a case-by-case basis in light of
 7
     the totality of the circumstances.     See Candland, 90 F.3d at
 8
     1471; Gertsch, 237 B.R. at 170.
 9
          Thus, we will only reverse the bankruptcy court’s decision
10
     if, after reviewing the entire record, we have a firm and
11
     definite conviction that a mistake has been committed.    See
12
     Anderson, 470 U.S. at 573; Mendez, 367 B.R. at 113; see also
13
     Eugene Parks Law Corp. Defined Benefit Pension Plan v. Kirsh
14
     (In re Kirsh), 973 F.2d 1454, 1456 (9th Cir. 1992); Candland,
15
     90 F.3d at 1469.   If, however, two views of the evidence are
16
     possible, the trial judge’s choice between them cannot be clearly
17
     erroneous.   Anderson, 470 U.S. at 573-75; see Hansen, 368 B.R. at
18
     874-75.
19
          There is sufficient evidence in the record upon which to
20
     affirm the bankruptcy court’s decision that Hitachi reasonably
21
     relied on Kempf’s fraudulent financial statements consistent with
22
     the applicable Ninth Circuit legal standard.    In reviewing this
23
     evidence, the bankruptcy court found that Hitachi was deliberate
24
     and careful in considering whether to extend credit to Kempf,
25
     because of: (1) the lengthy transaction analysis it prepared;
26
     (2) the exchange of emails between Kempf and Hitachi; and (3) the
27
     background report on Kempf, which the court found showed little
28

                                       13
 1
     or no reason for alarm.   Finally, it noted that there was nothing
 2
     in the record to suggest that Hitachi did not adhere to its
 3
     normal business practices.   With regards to the Trust, the
 4
     bankruptcy court found that it was not so obvious to discern the
 5
     truth as to who owned the Trust because while the tax returns did
 6
     indicate that Julie Kempf is the only owner, this information was
 7
     “buried some 18 pages into the returns.”    Aplt. ER 139.
 8
     Furthermore, it concluded that there was no evidence to suggest
 9
     that the tax returns were submitted for the purposes of verifying
10
     ownership instead of simply establishing historical earning
11
     capacity.
12
          Thus, we affirm the bankruptcy court’s decision that Hitachi
13
     reasonably relied upon the financial statement in extending
14
     credit to CardioCura and Kempf.
15
                                  VI.   Conclusion
16
          For the reasons set forth, the judgment of the bankruptcy
17
     court is AFFIRMED.
18
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                                        14