Opinion
Case No. 11-54539-ASW AP No. 11-05240-ASW
08-28-2012
In re KENNETH S. CHOE AND YONG H. CHOE, Debtors. UNDON PAIK, Plaintiff, v. KENNETH S. CHOE AND YONG H. CHOE, Defendants.
Chapter 7
MEMORANDUM DECISION GRANTING IN PART AND DENYING IN PART
DEFENDANTS' MOTION FOR SUMMARY JUDGMENT
Before the Court is a motion ("Motion") by Defendants Kenneth and Yong Choe ("Defendants") seeking summary judgment or adjudication on Plaintiff's claims. Plaintiff Undon Paik ("Plaintiff") filed an opposition ("Opposition") to the Motion on July 3, 2012, and Defendants filed a Reply on July 9, 2012. The Motion was set to be heard on July 12, 2012, but because the Opposition was filed after the deadline provided by Bankruptcy Local Rule 7003-1(b), the Court issued an order continuing the hearing to August 28, 2012.
Plaintiff is represented by John V. Mejia, Esq. Defendants are represented by Steven Knuppel, Esq., of the Fuller Law Firm. Upon consideration of the parties' written arguments and evidence, the Court grants Defendants' Motion in part and denies the Motion in part.
Background
On January 12, 2009, Plaintiff filed a lawsuit against Defendant Kenneth Choe ("Choe") in Santa Clara County Superior Court, alleging that Choe knowingly took part in a Ponzi scheme that deprived Plaintiff of Plaintiff's savings. In the state court lawsuit, Plaintiff asserted claims of fraud, negligent misrepresentation, breach of contract, and violations of 18 U.S.C. § 1962 (a), (c), and (d) of the Racketeer Influenced and Corrupt Organizations Act ("RICO"). On May 11, 2011, Defendants filed for Chapter 7 bankruptcy. Plaintiff filed a complaint with this Court, alleging that Choe: (1) made false representations; (2) committed fraud as a fiduciary; (3) committed a willful and malicious injury against Plaintiff; (4) concealed, destroyed, falsified, or failed to keep or preserve any recorded information; and (5) made a false oath when both Defendants swore under penalty of perjury that Defendants provided correct information on Defendants' bankruptcy petition. Plaintiff argues that as a result, Defendants should be denied a discharge of this specific debt under 11 U.S.C. § 523(a)(2), (4), and (6), and a general discharge under 11 U.S.C. § 727 (a) (3) and (4).
There are no factual issues concerning Yong Choe, Kenneth Choe's spouse, who appears to be named as a Defendant solely because Yong Choe is a debtor.
Standard of Review
Summary judgment shall be rendered by the Court if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law. Fed. R. Bankr. P. 7056 (incorporating Fed. R. Civ. P. 56); Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 584-85 (1986). All reasonable inferences must be drawn against the moving party. Adickes v. S.H. Kress & Co., 398 U.S. 144, 158-59 (1970); United States v. Diebold, Inc., 369 U.S. 654, 655 (1962). The Court may not weigh the evidence or make credibility determinations. See Bravo v. City of Santa Maria, 665 F.3d 1076, 1083 (9th Cir. 2011).
Material facts are those that may affect the outcome of the case. A dispute as to a material fact is genuine if there is sufficient evidence for a reasonable jury to return a verdict for the non-moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). Because Plaintiff -- not Defendants -- bears the burden of proof at trial, Plaintiff must produce sufficient competent evidence to establish a prima facie claim to avoid summary judgment. See Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986).
Material Facts
Based upon the evidence submitted by the parties, which the Court construes in a light most favorable to Plaintiff, the Court makes the following findings for purposes of this Motion only.
Plaintiff is Korean. Sometime in 2005, representatives of SNC Investments, Inc. and SNC Asset Management, Inc. (collectively referred to as "SNC") began visiting Plaintiff and various other members of the Korean community, promoting investment opportunities in SNC. Plaintiff was initially unsure of whether to invest, and therefore consulted Plaintiff's CPA, Andrew Jean ("Jean"), Choe's brother. Plaintiff had known Jean and Jean's family for several years prior to Plaintiff hiring Jean as Plaintiff's CPA. After talking to Jean, Plaintiff made an initial investment of $50,000 on or about April 7, 2005. Later, according to Plaintiff's answer to Interrogatory 3, attached to Plaintiff's attorney's declaration, Jean encouraged Plaintiff to invest more money. On October 29, 2008, media reports began to surface that SNC was a Ponzi scheme. Plaintiff never received the promised returns on his investments. In fact, according to Plaintiff's response to Interrogatory 11, attached to Plaintiff's attorney's declaration, Plaintiff lost investments in the amount of $615,777.47.
Plaintiff's declaration contains some dating discrepancies. On Page 2, Lines 18-20, Plaintiff states that Choe entered Plaintiff's restaurant in 2005 and convinced Plaintiff to invest. Yet on Page 3, Line 19, Plaintiff states that Choe began visiting Plaintiff's restaurant "in approximately" 2006.
According to the Defendants' motion papers (with no declaration or other evidentiary suport), due to SNC closing its operations, Korean investors were expected to lose $70 million in investments.
Plaintiff and Defendants dispute Choe's role in SNC. In Plaintiff's declaration, Plaintiff states that Choe was one of the members of SNC who made visits to Plaintiff's restaurant and initially encouraged Plaintiff to invest. Choe told Plaintiff that SNC would produce a higher interest rate than the banks and Plaintiff could withdraw Plaintiff's money at any time. After Plaintiff invested the first $50,000, Choe -- in addition to Jean -- encouraged Plaintiff to invest more money. According to Plaintiff, Choe also "targeted" Koreans who were church members and retired. Plaintiff believes that the entire time, Choe was aware that SNC was a Ponzi scheme. Plaintiff believed that Choe had this knowledge because Choe routinely spent time with the principals and owners of SNC, playing golf, drinking, and sometimes taking trips to South Korea with them. Choe was also told by an unspecified individual to leave a meeting for investors who were victims of SNC because Choe was an agent of SNC. Plaintiff believes that Choe was a fund manager who deposited investors' money in a single bank account and then used the account to pay Choe's personal expenses.
In Choe's declaration, Choe denies being a fund manager, having spoken to Plaintiff about investing in SNC, or having received money from Plaintiff. Choe also denies being an employee or owner of SNC, and states that Choe did not hold any position that would require Choe to keep records of other people who invested. Choe denies Plaintiff's claim that Choe diverted funds for personal use. Choe states that Choe did not learn SNC was a Ponzi scheme until October 29, 2008, and also lost money through investments in SNC.
Analysis
A. 11 U.S.C. § 523(a)(2)(A) Fraud Claim
Under 11 U.S.C. § 523(a)(2)(A), an individual debtor is not discharged from debt "for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by -- (A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition." To establish a claim under section 523(a) (2) (A), seven elements, must be met: (1) a representation of fact was made by the debtor; (2) that was material; (3) that the debtor knew at the time was false; (4) that debtor made with the intention of deceiving the creditor; (5) upon which the creditor relied; (6) the reliance was reasonable; and (7) damage proximately resulted from the representation. Siriani v. Northwestern Nat'l Ins. Co. (In re Siriani), 967 F.2d 302, 304 (9th Cir. 1992).
Defendants argue that Plaintiff cannot prove that Choe's behavior met the first six of these elements. In his declaration, Choe states that Choe never had any conversations with Plaintiff, or provided Plaintiff with written materials, about investing in SNC. Choe also states that Choe had no knowledge, prior to October 29, 2008, that SNC was a Ponzi scheme.
Plaintiff argues that Plaintiff has sufficient evidence that Choe's actions fall within section 523(a)(2)(A). Regarding the first two elements, Plaintiff's declaration states: "I recall [Choe] representing himself as a fund manager to me." According to Plaintiff, beginning in 2006, Choe came into Plaintiff's restaurant with other members of SNC, where Choe talked about "how good of an investment it was . . . how SNC Investments, Inc. would give me hire [sic] interest rates than banks, and promising high rates of return and better than bank rates of return, and that I would be able to pull out my money at any time, etc." Regarding the third and fourth elements, Plaintiff relies on circumstantial evidence. Plaintiff states in his declaration that while Plaintiff might lack personal knowledge that Choe knew of the Ponzi scheme, evidence of Choe's relationship with the SNC leadership suggests that Choe was at least aware that SNC was promoting a Ponzi scheme. According to Plaintiff, prior to October 29, 2008, Choe was "usually with principals and owners of SNC Asset Management, Inc.," playing golf and drinking, as well as taking trips with the principals and owners to South Korea. Plaintiff contends that if Choe was aware that SNC was a Ponzi scheme, then Choe's statements to Plaintiff were necessarily intended to deceive Plaintiff as to SNC's true nature.
The Court finds that Plaintiff's evidence on the first four elements is sufficient. Plaintiff's evidence that Choe met regularly with the SNC leadership raises the possibility that Choe understood the true nature of SNC and therefore that Choe knew Choe's alleged representations to Plaintiff were false and Choe sought to deceive Plaintiff.
Defendants argue in their Reply that Plaintiff failed to provide evidence of how Plaintiff knew of Choe's relationship with SNC, but Defendants' declarations do not provide any facts indicating how Plaintiff could not have known.
Defendants argue that even if Plaintiff provided sufficient evidence for elements (1) through (4), Plaintiff has failed to provide evidence for elements (5) and (6): that Plaintiff relied upon these representations and that the reliance was reasonable. Attorney Steven T. Knuppel's declaration refers to Plaintiff's response to Interrogatory 23, which states that Plaintiff was "always nervous about his investment" and that Plaintiff had consulted Choe's brother, Andrew Jean, before investing. Defendants argue that this shows that Plaintiff relied upon Jean's representations rather than Choe's.
In Plaintiff's declaration, Plaintiff states that Plaintiff relied upon Choe's representations despite feeling reluctant and unsure at first, and that it was "only natural that [Plaintiff] speak with [his] CPA Andrew Jean." Plaintiff also states that Plaintiff's reliance was reasonable because Plaintiff had known Jean and Jean's family for several years prior to Plaintiff hiring Jean as Plaintiff's CPA.
The Court finds that Plaintiff's proffered evidence is sufficient to demonstrate genuine disputes of fact on this claim. Plaintiff has provided evidence that Choe may have known about SNC s Ponzi scheme and that Plaintiff may have reasonably relied, at least in part, on Choe's representations intended to induce Plaintiff to invest. The Court therefore denies Defendants' Motion on this claim.
B. 11 U.S.C. § 523(a)(4) Fraud as a Fiduciary Claim
The next issue is whether Plaintiff has provided sufficient evidence that Choe committed fraud while acting as a fiduciary. Under 11 U.S.C. § 523(a)(4), an individual debtor is not discharged from debt "for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny."
In order to establish that Choe committed fraud in a fiduciary capacity, Plaintiff must first provide evidence that Choe was a fiduciary of SNC. However, a "fiduciary" in the context of section 523(a) (4) is different from the broad definition used in the nonbankruptcy context -- a relationship involving trust, confidence, and good faith. Honkanen v. Hopper (In re Honkanen), 446 B.R. 373, 378 (B.A.P. 9th Cir. 2011). A fiduciary relationship under section 523(a) (4) must arise from "an express or technical trust that was imposed before, and without reference to, the wrongdoing that caused the debt as opposed to a trust ex maleficio, constructively imposed because of the act of wrongdoing from which the debt arose." Id. at 378-79 (citing Ragsdale v. Haller, 780 F.2d 794, 796 (9th Cir. 1986)). A narrow definition of fiduciary "is consistent with the policy of construing the exceptions to discharge in § 523 strictly against the objecting creditor and liberally in favor of the debtor." Id. at 379 n.5. While the scope of the term "fiduciary duty" is federal in nature, the Ninth Circuit has looked to state law -- in this case, California -- to determine whether a trust relationship exists. Id. at 379. Trusts that arise "as remedial devices to breaches of implied or express contracts -- such as resulting or constructive trusts -- are excluded, while statutory trusts that bear the hallmarks of an express trust are not." Id.
Under California law, an express trust arises when five elements are present: (1) intent to create a trust, (2) trustee, (3) trust property, (4) a proper legal purpose, and (5) a beneficiary. Id. at 379 n.6. A technical trust arises "from the relationship of attorney, executor, or guardian, and not to debts due by a bankrupt in the character of an agent, factor, commission merchant, and the like." Id. at 37 9 n.7.
Under California Civil Code section 15201, a trust exists only if the settlor manifests intent to create a trust. Cal. Civ. Code § 15201.
Under California Civil Code section 15203, a "proper legal purpose" is one that is not illegal or against public policy. Cal. Civ. Code § 15203.
Defendants argue that Plaintiff has not provided sufficient evidence that Choe was a fiduciary under section 523(a) (4). Choe states in his declaration that he was not a fund manager, employee, or owner of SNC and held no position requiring Choe to keep records of other people. Plaintiff argues that Choe's disputed position as a fund manager meant that Choe was acting as a fiduciary. Plaintiff cites several California cases in making his argument. See Assilzadeh v. California Federal Bank, 82 Cal. App. 4th 399 (2000); Michelson v. Hamada, 29 Cal. App. 4th 1566 (1994); Youman v. Equifax, Inc., 111 Cal. App. 3d 498 (1980). However, none of the cases on which Plaintiff relies involved bankruptcy. As such, the fiduciary relationship referred to by Plaintiff is the broad definition of fiduciary rather than the definition supplied in Honkanen for section 523(a)(4). See Assilzadeh, 82 Cal. App. 4th at 414 (stating that a broker's fiduciary duty to his clients requires "the highest good faith and undivided service and loyalty"); Michelson, 29 Cal. App. 4th at 1581 ("Confidential and fiduciary relations are, in law, synonymous, and may be said to exist whenever trust and confidence is reposed by one person in the integrity and fidelity of another."); Youman, 111 Cal. App. 3d at 517 (noting that a fiduciary relationship is one involving confidence).
Plaintiff has not provided sufficient evidence that Choe was a fiduciary for purposes of section 523(a) (4). First, Plaintiff has provided no evidence that a fiduciary relationship arose from a technical trust as defined by Honkanen. A technical trust arises "from the relationship of attorney, executor, or guardian." Honkanen, 446 B.R. at 379 n.7. Choe is described as a fund manager, not an attorney, executor, or guardian. Plaintiff has also provided no evidence that his relationship with Choe held the same weight and importance as an attorney-client relationship.
Finally, Plaintiff has provided no evidence of an express trust relationship. Plaintiff's declaration does demonstrate that Choe, if he was a fund manager, would be a trustee, with control over investors' funds, the trust property. In addition, the trust would have had a beneficiary, whether the investors or the SNC executives. However, Plaintiff has provided no evidence that SNC ever had a proper legal purpose, or that there was ever an intent to create a trust. To the contrary, Plaintiff contends that SNC had an illegal purpose -- the Ponzi scheme. Therefore, Plaintiff has not provided sufficient evidence of an express trust. Since Plaintiff not provided evidence that Choe was a fiduciary under section 523(a)(4), the Court grants Defendants' Motion on this claim.
C. 11 U.S.C. § 523(a)(6) Willful and Malicious Injury Claim
Next, the Court considers whether Plaintiff has produced evidence of a willful and malicious injury. Under 11 U.S.C. § 523(a) (6), an individual debtor is not discharged from a debt resulting from "willful and malicious injury by the debtor to another entity or to the property of another entity."
These are two separate requirements -- the injury must be both willful and malicious. Barboza v. New Form, Inc. (In re Barboza), 545 F.3d 702, 706 (9th Cir. 2008). To be willful, an injury must be deliberate or intentional. Id. at 707-08. Reckless conduct does not meet this standard. Id. Rather, the debtor must have intended the consequences of the debtor's actions -- specifically, the debtor must have had a subjective motive to inflict injury or have a belief that injury is substantially certain to result from the conduct. Suarez v. Barrett (In re Suarez), 400 B.R. 732, 736-37 (B.A.P. 9th Cir. 2009); see also Su v. Su (In re Su), 290 F.3d 1140, 1142 (9th Cir. 2002). In addition, a deliberate or intentional act which merely leads to injury is not a willful injury. Barboza, 545 F.3d at 706. To be malicious, the injury must involve: (1) a wrongful act (2) which is done intentionally, (3) which necessarily causes injury, and (4) which is done without just cause or excuse. Id.
The Plaintiff carries the burden of proof on this claim. Suarez, 400 B.R. at 736. Therefore, the Court looks to see whether Plaintiff has supported both the willful and malicious elements of this claim with sufficient evidence.
Neither party disputes that Plaintiff was injured. Plaintiff invested more than once in SNC, and as a result, lost a substantial amount of money. According to Plaintiff's response to Interrogatory 11, attached to Plaintiff's attorney's declaration, Plaintiff lost $615,777.47. While Defendants argue that Plaintiff has no evidence that Choe subjectively intended to injure Plaintiff, as the Court noted above, Plaintiff's evidence that Choe was a fund manager who spent significant time with the SNC leadership raises a question of fact as to whether Choe knew about the Ponzi scheme. If Choe knew of the Ponzi scheme, and encouraged Plaintiff to invest, that suggests that Choe knew that by encouraging Plaintiff to invest, Plaintiff was substantially certain to lose that investment. For these reasons, Choe's alleged conduct satisfies the "willful injury" standard.
There is also evidence that Choe maliciously injured Plaintiff. If Choe knew of the Ponzi scheme, then by encouraging Plaintiff to invest, Choe would have intentionally committed a wrongful act, without just cause or excuse. This act necessarily injured Plaintiff by forcing Plaintiff to lose his savings. Because Plaintiff has provided enough evidence to support this claim, the Court denies Defendants' Motion to dismiss as to this claim.
D. 11 U.S.C. § 727 Claims
Plaintiff admits in Plaintiff's Opposition that Plaintiff has not conducted sufficient discovery to provide evidence that Choe failed to keep, or destroyed, records under 11 U.S.C. § 727(a) (3), or that Choe made a false oath or account under 11 U.S.C. § 727(a)(4). Plaintiff requests that the Court permit Plaintiff more time to conduct discovery under Federal Rule of Civil Procedure 56(d)(1) or (d)(2) (incorporated by Federal Rule of Bankruptcy Procedure 7056).
Rule 56(d) (1) and (d) (2) provide: "If a nonmovant shows by affidavit or declaration that, for specified reasons, it cannot present facts essential to justify its opposition, the court may: (1) defer considering the motion or deny it; or (2) allow time to obtain affidavits or declarations or to take discovery." At the same time, Federal Rule of Civil Procedure "vests the trial judge with broad discretion to tailor discovery narrowly and to dictate the sequence of discovery." Crawford-El v. Britton, 523 U.S. 574, 598 (1998). A trial court judge may limit the frequency or extent of use of discovery methods if the court determines "the burden or expense of the proposed discovery outweighs its likely benefit, taking into account the needs of the case, the amount in controversy, the parties' resources, the importance of the issues at stake in the litigation, and the importance of the proposed discovery in resolving the issues." Id. at 599.
Here, Plaintiff and Defendant had four months to conduct discovery between the time Plaintiff filed the First Amended Complaint on February 16, 2012, and the time Defendants filed the current Motion on June 12, 2012. Plaintiff's attorney admits in his declaration that Plaintiff's attorney has been unable to conduct discovery due to his "heavy schedule" and that is "no excuse." The Court notes that no discovery deadline has been set because the Case Management Conference is on hold pending the outcome of this Motion. Therefore, the discovery period is still open, which would enable Plaintiff to continue gathering the necessary documents to support Plaintiff's 727 claims. However, given that Plaintiff has had four months since the filing of the First Amended Complaint, and more than one year since Plaintiff filed the original Complaint, and given that Plaintiff has no valid excuse for the lack of discovery, the Court finds that granting Plaintiff extended time would cause an undue burden and unnecessary delay. The Court therefore grants Defendants' Motion on both claims.
Conclusion
The Motion is denied with respect to Plaintiff's claims that Defendants' debt should not be discharged under section 523(a) (2) and (a)(6). The Motion is granted on Plaintiff's claims seeking to deny a discharge under sections 523(a)(4) and 727.
IT IS SO ORDERED.
_________________
ARTHUR S. WEISSBRODT
UNITED STATES BANKRUPTCY JUDGE
Court Service List Court Service List
Kenneth S. Choe &
Yong H. Choe
2122 Shadow Ridge Way
San Jose, CA 95138
Lars T. Fuller
Saman Taherian
Steven Knuppel
The Fuller Law Firm
60 N Keeble Ave.
San Jose, CA 95126
John V. Mejia
Law Offices of John V. Mejia
2450 Stanwell Drive
Concord, CA 94520
Carol Wu
Chapter 7 Trustee
25A Crescent Dr. #413
Pleasant Hill, CA 94523
Office of the U.S. Trustee / SJ
U.S. Federal Bldg.
280 S 1st St. #268
San Jose, CA 95113-3004