Court Opinion

ID: 4514529
Source: CourtListenerOpinion
Date Created: 2020-03-11 00:00:57.593844+00
Date Added: 2024-06-11T09:44:06.482505
License: Public Domain

FILED
                       ORDERED PUBLISHED                       JAN 9 2020
                                                          SUSAN M. SPRAUL, CLERK
                                                            U.S. BKCY. APP. PANEL
                                                            OF THE NINTH CIRCUIT

         UNITED STATES BANKRUPTCY APPELLATE PANEL
                   OF THE NINTH CIRCUIT

In re:                                   BAP No. OR-19-1010-LTaF

BLAKE MCHARO and INDIA ROSE              Bk. No. 6:18-bk-61242
MCHARO,
                                         Adv. No. 6:18-ap-06052
                 Debtors.

STATE OF OREGON, Department of
Human Services,

                 Appellant,

v.                                        OPINION

BLAKE MCHARO,

                 Appellee.

            Submitted Without Argument on November 21, 2019

                         Filed – January 9, 2020
                   Ordered Published - February 7, 2020

             Appeal from the United States Bankruptcy Court
                        for the District of Oregon

         Honorable David W. Hercher, Bankruptcy Judge, Presiding
Appearances:        Ellen F. Rosenbaum and Carolyn G. Wade on brief for
                    Appellant State of Oregon, Department of Human
                    Services.

Before: LAFFERTY, TAYLOR, and FARIS, Bankruptcy Judges.

LAFFERTY, Bankruptcy Judge:

                                 INTRODUCTION

      The State of Oregon, Department of Human Services (DHS), appeals

the bankruptcy court’s judgment in favor of chapter 71 debtor Blake

Mcharo on DHS’s claim for nondischargeability under § 523(a)(2)(A). After

debtors failed to answer DHS’s complaint, the bankruptcy court entered

default against each of them and entered judgment against co-debtor India

Mcharo. The court, however, declined to enter judgment against Blake2

because it found that his failure to disclose that he had obtained

employment was an unwritten statement respecting his financial condition

and thus not within the purview of § 523(a)(2)(A).

      We conclude that the bankruptcy court erred in its interpretation of

§ 523(a)(2)(A) and therefore VACATE the judgment in favor of Blake and

      1
      Unless specified otherwise, all chapter and section references are to the
Bankruptcy Code, 11 U.S.C. §§ 101-1532.
      2
         Because the debtors share a last name, this Memorandum refers to each debtor
by first name. No disrespect is intended.

                                           2
REMAND for further proceedings consistent with this disposition.

                         FACTUAL BACKGROUND

      The facts are not in dispute. In August 2011, the Mcharos applied for

public assistance cash benefits from DHS through the Temporary

Assistance for Needy Families program (TANF). The application they

signed included their agreements that: (1) they had given DHS true,

correct, and complete information; (2) they understood that making false

statements could result in state and federal penalties and the obligation to

repay any overpaid benefits; (3) they would report changes in the

information given to DHS; (4) the statements made on the application were

true and correct, under penalty of perjury; and (5) they had read and

understood their rights and responsibilities as set forth in both the

application and in Form DHS 0415R. Form DHS 0415R requires that, while

receiving benefits, the applicants must report any change in their source of

income (i.e., getting, losing, or quitting a job) within ten days.

      At the time the Mcharos filled out the application, Blake was not

working. However, on October 13, 2011, he became employed with Rent-A-

Center, Inc. and remained employed there until June 30, 2012.

      On November 9, 2011, India completed an “Interim Change Report.”

In that document, she marked the “No” box next to the question, “Does

anyone work?” Next, on June 7, 2012, India completed an application

listing Blake as a member of her household but did not include him as a

                                        3
person for whom she was requesting benefits. In the section regarding

household income, she answered “No” to the question “Does anyone have

or expect to get any money?” She also left blank the question asking her to

list earned income of anyone in the home who was related to her or her

children.

      At no point after the initial application did Blake sign or submit any

document regarding the change in his employment status.

      All during this period, between September 2, 2011, and June 30, 2012,

the Mcharos were receiving TANF benefits.

      On October 1, 2015, DHS recorded two distraint warrants, one

against each of the Mcharos, showing the balance due for overpayment of

public assistance benefits plus fees. DHS collected $1,276 from the Mcharos

before they filed their chapter 7 petition.

      The Mcharos filed a joint chapter 7 petition on April 22, 2018.3 DHS

timely filed a complaint under § 523(a)(2) objecting to discharge of the debt

owed to it. The complaint alleged the facts recited above and requested that

the $3,843 still owed to DHS by the Mcharos be declared nondischargeable

under § 523(a)(2), without specifying whether relief was sought under

subsection (A) or (B). The Mcharos did not file an answer. At a pretrial

conference, the bankruptcy court directed DHS to file default papers and

      3
       The chapter 7 trustee filed a report of no distribution, discharge was entered,
and the case was closed in August 2018.

                                            4
briefing on the question of whether the failure to fulfill an obligation to

report a future change in circumstances can be fraud under § 523(a). DHS

duly filed the requested documents and clarified that relief was sought

under § 523(a)(2)(A).

      The bankruptcy court then granted DHS’s motion to enter default

against India and Blake and entered a default judgment against India only.

It took under advisement the request for entry of judgment against Blake.

      In December 2018, the bankruptcy court issued a memorandum

decision and judgment in favor of Blake. In the memorandum decision, the

court held that DHS failed to state a claim under § 523(a)(2)(A) because

Blake’s failure to report a change in employment status constituted an

unwritten statement regarding his financial condition, thus falling outside

the purview of both § 523(a)(2)(A) and (B).

                               JURISDICTION

      The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and

157(b)(1) and (b)(2)(I). We have jurisdiction under 28 U.S.C. § 158.

                                    ISSUE

      Whether the bankruptcy court abused its discretion in denying DHS’s

request for entry of a default judgment against Blake Mcharo on DHS’s

§ 523(a)(2)(A) claim on the basis that a failure to disclose a change in

employment status constitutes an unwritten statement relating to financial

condition.

                                       5
                         STANDARDS OF REVIEW

      The bankruptcy court’s denial of a default judgment is reviewed for

an abuse of discretion. Eitel v. McCool, 782 F.2d 1470, 1471 (9th Cir. 1986). A

bankruptcy court abuses its discretion if it applies the wrong legal

standard, misapplies the correct legal standard, or makes factual findings

that are illogical, implausible, or without support in inferences that may be

drawn from the facts in the record. See TrafficSchool.com, Inc. v. Edriver Inc.,

653 F.3d 820, 832 (9th Cir. 2011) (citing United States v. Hinkson, 585 F.3d

1247, 1262 (9th Cir. 2009) (en banc)).

      We review de novo the bankruptcy court’s interpretation of the

Bankruptcy Code. Barnes v. Belice (In re Belice), 461 B.R. 564, 572 (9th Cir.

BAP 2011). “When we conduct a de novo review, we look at the matter

anew, the same as if it had not been heard before, and as if no decision

previously had been rendered, giving no deference to the bankruptcy

court’s determinations.” Id. at 572–73 (citations omitted).

                                DISCUSSION

      Section 523(a)(2)(A) of the Bankruptcy Code excepts from discharge

any debt “obtained by false pretenses, a false representation, or actual

fraud, other than a statement respecting the debtor’s or an insider’s

financial condition.” Section 523(a)(2)(B) in pertinent part excepts from

discharge debts obtained by materially false written statements respecting

a debtor’s or insider’s financial condition. Unless the debt could fall under

                                         6
another exception to discharge as described in the Code, debts obtained by

materially false, but unwritten, statements respecting a debtor’s financial

condition are still subject to discharge. See Lamar, Archer, & Cofrin, LLP v.

Appling, 138 S. Ct. 1752, 1757 (2018).

      A creditor asserting nondischargeability of a debt under

§ 523(a)(2)(A)

      must demonstrate by a preponderance of the evidence . . .
      (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.

Turtle Rock Meadows Homeowners Ass’n v. Slyman (In re Slyman), 234 F.3d

1081, 1085 (9th Cir. 2000).

      A fraudulent omission in the face of a duty to disclose may constitute

a false representation. Citibank (South Dakota), N.A. v. Eashai (In re Eashai),

87 F.3d 1082, 1089 (9th Cir. 1996); cf. Harmon v. Kobrin (In re Harmon), 250

F.3d 1240, 1246 & n.4 (9th Cir. 2001). In cases where a plaintiff establishes

the nondisclosure of a material fact that the debtor was under a duty to

disclose, the reliance and causation elements are established and need not

be separately proven. Apte v. Romesh Japra, M.D., F.A.C.C., Inc. (In re Apte),

96 F.3d 1319, 1323 (9th Cir. 1996).

                                         7
      Although the bankruptcy court acknowledged the foregoing

authorities, it found that Blake’s fraudulent omission was a “statement

respecting financial condition” and thus fell outside the purview of

§ 523(a)(2)(A). The court concluded that a statement need not be express,

citing the definition of “statement” from Black’s Law Dictionary: “A verbal

assertion or nonverbal conduct intended as an assertion.” The court noted

that this definition tracks with the definition found in Federal Rule of

Evidence 801(a): “a person’s oral assertion, written assertion, or nonverbal

conduct, if the person intended it as an assertion.”

      The bankruptcy court rejected DHS’s argument that the Supreme

Court’s recent decision in Appling established that a failure to disclose does

not constitute a “statement.” In Appling, the Supreme Court considered

whether a false oral statement regarding a single asset, an anticipated tax

refund, constituted a “statement respecting financial condition” that would

fall under the exception to discharge of § 523(a)(2). In its analysis, the

Supreme Court cited the definition of “statement” set forth in Webster’s

Third New International Dictionary: “the act or process of stating, reciting,

or presenting orally or on paper; something stated as a report or narrative;

a single declaration or remark.” Appling, 138 S. Ct. at 1759. Because Appling

involved an oral statement, the Supreme Court did not address the

question of whether a “statement” could include an omission.

      The bankruptcy court reasoned that nonverbal conduct necessarily

                                        8
includes silence in the face of a duty to disclose, and thus Blake’s failure to

disclose his changed income to DHS constituted a statement respecting

financial condition. The court concluded that this interpretation made

sense as matter of policy because if such silence were not construed as a

“statement,” then those debtors who remained silent could be punished

more harshly than those who actively lied, which would be an incongruous

result.4

      We respectfully disagree with the bankruptcy court’s analysis.

Congress did not define “statement” in the Bankruptcy Code. A

fundamental canon of statutory construction is that, when a term is

undefined, words within a statute “will be interpreted as taking their

ordinary, contemporary, common meaning.” Perrin v. United States, 444

U.S. 37, 42 (1979). In interpreting an undefined term, courts may consult

dictionary definitions. Transwestern Pipeline Co., LLC v. 17.19 Acres of Prop.

Located in Maricopa Cty., 627 F.3d 1268, 1270 (9th Cir. 2010). The Webster’s

definition–the act or process of stating, reciting, or presenting orally–does

not contemplate silence or even nonverbal communication.

      Appling itself provides support for the conclusion that an omission is

      4
        We note that the bankruptcy court recently decided a case with facts nearly
identical to those presented here and ruled in favor of the government plaintiff in
Washington County Department of Housing Services v. Hall (In re Hall), No. 18-03121-DWH,
2019 WL 4281911 (Bankr. D. Or. Sept. 9, 2019). In Hall, the bankruptcy court
reconsidered its analysis of the meaning of “statement” and concluded that, for
purposes of § 523(a)(2)(A), a fraudulent omission is not a “statement.”

                                           9
not a “statement,” albeit in dicta. The Supreme Court noted that debt

incurred through fraudulent conduct may be nondischargeable under

§ 523(a)(2)(A). Appling, 138 S. Ct. at 1763 (citing Husky Int’l Elecs., Inc. v.

Ritz, 136 S. Ct. 1581, 1586 (2016), holding that “actual fraud” under

§ 523(a)(2)(A) includes schemes that can be undertaken without a

representation). In a related footnote, the Court cited United States v. Tucker

(In re Tucker), 539 B.R. 861 (Bankr. D. Idaho 2015), and United States v.

Drummond (In re Drummond), 530 B.R. 707 (Bankr. E.D. Ark. 2015). Both

cases involved facts substantially similar to this case, and both held that a

debt incurred by overpayment of government benefits because a debtor

failed to disclose a change in employment status was nondischargeable

under § 523(a)(2)(A). Appling, 138 S. Ct. at 1763 n.4.

      We further find no compelling policy basis to treat omissions as

statements. With respect to the concern that debtors who remain silent

regarding their financial condition may be punished more harshly than

those who make affirmative oral misrepresentations, a voluntary lender

can typically protect itself by requiring financial information in writing

before loaning money. On the other hand, government agencies that

provide benefits to debtors do not intentionally set out to become creditors:

a debtor-creditor relationship arises only when the applicant becomes

disqualified from receiving benefits but fails to report the change in status.

As such, those agencies are reliant on the applicant to make full, continuing

                                         10
disclosures. In re Hall, 2019 WL 4281911 at *4 (citation omitted).

                                 CONCLUSION

      The bankruptcy court erred when it construed Blake’s failure to

disclose his change in employment status as a “statement respecting . . .

financial condition” under 11 U.S.C. § 523(a)(2)(A). Accordingly, we

VACATE and REMAND for further proceedings consistent with this

disposition.5

      5
        We emphasize that our holding is limited: where the debtor has made a written
application that includes financial information and promises to report any changes in
that information, the debtor’s failure to make such a report is not a “statement
respecting . . . financial condition.” On remand, the court will need to consider and
make findings as to the elements of the § 523(a)(2)(A) claim.

                                          11