Tuesday, May 5, 2009

May an Assignee of a Debt Base Its "False Financial Statement" Nondischargeability Claim on the Assignor's Reliance on that Statement?

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys,

Boyajian v. New Falls Corp. (In re Boyajian)
Ninth Circuit Court of Appeals, Case Nos. 07-55713 & 07-55716
May 1, 2009

The Issue
May a § 523(a)(2)(B) nondischargeability proceeding be brought against debtors not just by the creditor which reasonably relied on debtors' alleged false financial statement, but also by this original creditor's successor-in-interest, which had not itself relied on those financial statements? The opinion turns on the meaning and weight to be given to the word "is" in the nondischargeability subsection § 523(a)(2)(B)(iii) and the fact that this verb is in the present tense.

The Courts Below
The bankruptcy court had entered summary judgment for the debtors, holding that the reliance on the false financial statement had to be by the assignee bringing the nondischargeability proceeding, not just the original creditor. The Bankruptcy Appellate Panel, which included Judge Randall Dunn, reversed, saying that an assignee stands in the shoes of the assignor and can base its nondischargeability case on the assignor's reliance on the false financial statements. The Ninth Circuit panel's opinion introduced the BAP opinion as a "careful" one, so one can guess which way its opinion went.

The Statute
Section 523(a)(2)(B) provides that a debt will not be discharged if it was obtained by:
use of a statement in writing—
i) that is materially false;
ii) respecting the debtor’s or an insider’s financial condition;
iii) on which the creditor to whom the debtor is liable for such money, property, services, or credit reasonably relied; and
iv) that the debtor caused to be made or published with intent to deceive . . . .
(Emphasis added.) The plain meaning of the emphasized subsection, particularly the present tense of "is," seems to require that "there be reliance by the creditor who holds the claim at the time of the bankruptcy, even if there had been reliance in the past by the creditor who originally extended credit." The Ninth Circuit disagreed.

The Ninth Circuit's Statutory Interpretation and Holding
Read as a whole, this language does not provide that a debt is non-dischargeable only if the assignee creditor reasonably relied on the materially false statement.
. . . .
The most natural reading of the word “is” in subsection (iii) is simply that the debt is nondischargeable if, at the time the money is obtained by the debtor, he or she used a materially false written statement that was intended to deceive.
. . . .
Therefore, t]he bankruptcy court erred in holding as a matter of law that [the original creditor's assignee] could not pursue an action for non-dischargeability under § 523(a)(2)(B) because it was not the original creditor whom the [debtors] allegedly deceived in the course of incurring their debt.

The Court's Remaining Rationale

1) Congressional intent: Without clear language to the contrary, "Congress intended that the general law of assignment remain applicable," allowing the holder of a general assignment to stand in the shoes of the assignor for purposes of nondischargeability actions.

2) Adverse court opinions: The Ninth Circuit rejected the reasoning and result of the local bankruptcy court case relied upon by the debtors, General Electric Capital Corp. v. Bui (In re Bui), 188 B.R. 274 (Bankr. N.D. Cal. 1995), as well as that of two out-of-circuit bankruptcy courts.

3) Sister Circuit court opinion: The Ninth Circuit embraced the result in a Seventh Circuit opinion which did not directly interpret § 523(a)(2)(B)(iii) but relied on general assignment principles to give the assignee the right to raise a § 523(a)(2)(B) nondischargeability claim: FDIC v. Meyer (In re Meyer),120 F.3d 66 (7th Cir. 1997).

4) Public policy: "[I]f assignment of such a debt were to obviate a future non-dischargeability action in all cases where the assignee did not itself rely on misleading financial statements, the functioning of modern debt markets would be unnecessarily disrupted." Plus it would be perverse to permit "dishonest debtors to receive a discharge through the fortuity that their creditor chose to assign the debt."

The Bottom Line
The assignee of a debt need not have relied on the debtor's false financial statement but may base its nondischargeability claim on the original creditor's reliance on that financial statement.

New Bulletins on this website will provide summaries of other opinions within the Ninth Circuit shortly after they are published. PLEASE EMAIL ME at Andy@BLSforAttorneys.com IF YOU WOULD LIKE TO BE EMAILED A LINK TO SUCH FUTURE REPORTS.

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
PLEASE NOTE that the writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

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