United States Bankruptcy Appellate Panel For the Ninth Circuit
In re: BENJAMIN MOONKANG HUH, Debtor.
BENJAMIN MOONKANG HUH, Appellee ANIL SACHAN, Appellant, Bankruptcy No. 2:10-bk-53971-BR. Adversary No. 2:11-ap-01143-BR
Argued and Submitted En Banc at Pasadena, California November 21, 2013.
Appeal from the United States Bankruptcy Court for the Central District of California. Bk. No. 2:10-bk-53971-BR, Adv. No. 2:11-ap-01143-BR. Honorable Barry Russell, Bankruptcy Judge, Presiding.
Allen B. Felahy of Felahy Law Group argued for Appellant, Anil Sachan.
J. Scott Bovitz of Bovitz & Spitzer argued for Appellee, Benjamin Moonkang Huh.
Before: DUNN, Chief Judge, PAPPAS, KIRSCHER, TAYLOR, and KURTZ, Bankruptcy Judges.
DUNN, Chief Judge:
Appellant Anil Sachan (" Sachan" ) appeals the bankruptcy court's judgment in an adversary proceeding (" Adversary Proceeding" ) in favor of appellee and defendant/debtor Benjamin Huh (" Huh" ) on Sachan's exception to discharge claim under § 523(a)(2)(A) of the Bankruptcy Code. In light of the Supreme Court's recent decision in
Bullock v. BankChampaign, N.A., 133 S.Ct. 1754, 185 L.Ed.2d 922 (2013), we voted to hear this appeal en banc to reconsider the Panel's prior published opinions on the question of when, if ever, it is appropriate to impute vicarious liability in an exception to discharge action based on fraud. See Ninth Circuit BAP Rule 8012-2(a), (c) and (d). We AFFIRM.
I. FACTUAL BACKGROUND
Huh is a licensed real estate broker. From some time in 2001 until August 2004, Huh operated a real estate and business brokerage business as a sole proprietorship under the dba " America Realty & Investment," which he had registered with the State of California Department of Real Estate. In August 2004, Huh incorporated his business as Amerity, Inc., but he did not cancel his personal registration of the America Realty & Investment dba and transfer it to Amerity, Inc. At all relevant times, Huh personally held the California real estate broker's license for his business.
At some point in time, not clear from the record but encompassing the period 2004 through early 2005, Mr. Jay Kim (" Kim" ) was associated with Amerity, Inc. and Huh as a part-time sales agent. Kim engaged in real estate sales activities as an agent in reliance on Huh's real estate broker's license. While they were affiliated, the record reflects that Huh generally supervised and provided some training to Kim.
In August 2004, Sachan, a resident of England, was looking for a business to purchase in Southern California. His background was as an avionics engineer. Sachan obtained information about " La Mexicana Market" in Long Beach, California (the " Market" ) over the internet, targeted the Market as a potential acquisition and traveled to Southern California to investigate the Market.
In September 2004, Sachan met with Kim at the America Realty & Investment office to discuss his potential acquisition of the Market. As Sachan remembered the meeting, Kim explained to him that the Market " could be managed from another country with minimal involvement and expense on my part." Kim further represented that the Market " generated $35,000 in monthly profits" and " had a monthly gross of $340,000."
At a meeting several days later, again at the offices of America Realty & Investment, Kim gave Sachan a " Disclosure Regarding
Real Estate Agency Relationships" form (" Disclosure Form" ), advising sellers and buyers, among other things, that the sales agent might represent both sides in a transaction. The only agent identified on the Disclosure Form is America Realty & Investment, with Huh named as contact. At the same meeting, Sachan signed a purchase contract for the Market that identified America Realty & Investment as the Selling Agent and Broker.
The Market purchase closed on or about March 2, 2005, with a total purchase price of $1,021,877.48 for the Market and its inventory. Kim received a commission on the purchase of $38,750, and Amerity, Inc. received $1,080.
Within weeks following the closing, Sachan received notice from the City of Long Beach Department of Planning and Building (" Planning Department" ) that his request for an operating license for the Market would be denied unless various code violations were corrected and approved plans and permits were provided for various structures. Due to the costs of complying over a relatively short timetable, Sachan was unable to satisfy the Planning Department's requirements and ultimately was denied a business license. In addition, the Market was cited for five fire code violations and forty-seven health code violations.
Sachan further discovered that the Market was generating sales at a far lower rate than had been represented to him, closer to $250,000 a month than the represented $340,000-$350,000. After suffering heavy losses, Sachan resold the Market for $660,000. A lawsuit in the Los Angeles Superior Court (" State Action" ) followed.
In the State Action, Sachan alleged a number of claims, including fraud, against multiple defendants, including the former owner of the Market, Kim and America Realty & Investment. On October 22, 2007, the jury in the State Action rendered a special verdict in favor of Sachan. The Los Angeles Superior Court (" State Court" ) entered a Judgment on Special Verdict in the State Action including the following questions and answers:
" Did Jay Kim and/or America Realty & Investment make an untrue representation of an important fact to Anil Sachan and/or Orion Sachan Corporation [Sachan's wholly-owned corporation]? (Yes.)"
" Did Jay Kim and/or America Realty & Investment know that the representation was false, or did he/it make the representation recklessly and without regard for its truth? (Yes.)"
" Did Jay Kim and/or America Reality & Investment intend that Anil Sachan and/or Orion Sachan Corporation rely on the representation? (Yes.)"
" Did Anil Sachan and/or Orion Sachan Corporation reasonably rely on the representation? (Yes.)"
" Was Anil Sachan and/or Orion Sachan Corporation's reliance on Jay Kim and/or America Realty & Investment's representation a substantial factor in causing harm to Anil Sachan and/or Orion Sachan Corporation? (Yes.)"
" [P]lease state Anil Sachan and/or Orion Sachan Corporation's economic loss: $678,000.00."
" [P]lease state Anil Sachan's non-economic loss, including physical pain/mental suffering: $39,500.00."
Judgment on Special Verdict at 2-10.
In the meantime, on November 16, 2007, Huh quietly cancelled his registration of
the America Realty & Investment dba with the California Department of Real Estate.
In 2010, Sachan moved the State Court to add Huh as a defendant in the State Action. Following an evidentiary hearing, the State Court granted the motion based on its findings that Huh, as the holder of the real estate broker's license for his business, was the only person who legally could engage in the subject transaction, and that Huh's exculpatory evidence and arguments were inadequate and not credible.
On August 16, 2010, the State Court entered an Amended Judgment on Special Verdict in the State Court Action (" Amended Judgment" ), determining and ordering that Huh was jointly and severally liable to pay a judgment to Sachan in the amount of $913,867.96, with interest at 10% from October 30, 2007. We confirmed at oral argument that the Amended Judgment was not appealed; so, for purposes of this appeal, the Amended Judgment is final under California law.
On October 13, 2010, Huh filed for bankruptcy relief under chapter 7. On January 18, 2011, Sachan filed a timely complaint initiating the Adversary Proceeding to except the Amended Judgment debt from Huh's discharge under § 523(a)(2)(A).
In denying a motion for summary judgment, the bankruptcy court concluded that issue preclusion did not support a determination that Huh committed fraud for purposes of § 523(a)(2)(A). That conclusion is not challenged in this appeal. Thereafter, the bankruptcy court conducted a trial in the Adversary Proceeding, at which direct testimony of Sachan and Huh was submitted by declaration, but both Sachan and Huh further appeared and testified live. At the conclusion of the proceedings on April 3, 2012, the bankruptcy court stated that it was going to rule for Sachan based on its understanding that it was bound by the decision in
Tsurukawa v. Nikon Precision, Inc. (In re Tsurukawa), 287 B.R. 515 (9th Cir. BAP 2002), hereinafter referred to as " Tsurukawa II." The bankruptcy court further made the following fact findings orally:
I think that the facts were that we have Huh, who was running the operation through his dba America Realty and Investment, and clearly Kim was his agent under any definition, real estate agent, but aside from that, just agency relationship. He [Huh] was the only person who had the license who could do this. So, it was clearly that was the relationship.
April 3, 2012 Hr'g Tr. at 182:18-24.
After post-trial briefing, in further proceedings, the bankruptcy court noted that it was incorrect in its assumption at the trial that it was bound by this Panel's decision in Tsurukawa II as a decision of the Ninth Circuit and advised counsel that it would consider carefully their post-trial briefs and would investigate relevant authorities further before coming to a final decision.
At a further hearing on October 2, 2012, the bankruptcy court announced its conclusion that imputed liability of a principal for the active fraud of an agent would not support an exception to discharge under § 523(a)(2)(A). Although it reiterated its finding that Kim was Huh's agent, the bankruptcy court declined to impute Kim's fraud to Huh. Accordingly, the bankruptcy court found in favor of Huh on Sachan's claim and directed counsel for Huh to prepare findings of fact and conclusions of law and a judgment in favor of Huh consistent with its rulings.
In the Findings and Conclusions, the bankruptcy court found the following facts, among others:
20. Benjamin Huh never communicated directly or indirectly with Anil Sachan or any representative of Orion Sachan Corporation regarding the purchase of [the Market].
21. Huh made no misrepresentations to Anil Sachan or any representative of Orion Sachan Corporation regarding the purchase of [the Market].
22. Neither Jay Kim, nor anyone else, made any misrepresentations to Sachan on Huh's behalf regarding ...