Hopper v. Lewis (In re Lewis), 551 B.R. 41

Background

In 2006 Desiree Rebecca Lewis (debtor) worked for John Brown; Brown and his wife Sally Wong advanced over $18,000 (from Wong’s separate account) via Western Union to bring Lewis’s mortgage current on her Mission Property to avoid foreclosure.
Lewis told Brown she could repay the loan by refinancing another property (Babson Property); Wong did not speak with Lewis before wiring funds and relied on Brown’s representation.
Brown and Wong sued Lewis in state court (2006) for breach and fraud; the state court entered judgment for plaintiffs for $18,715.79 in 2007 finding the funds were not a gift.
Plaintiffs largely did not attempt collection for seven years; Lewis petitioned for chapter 7 on February 27, 2014; the Burns trustee was later substituted as plaintiff in this adversary proceeding.
Plaintiffs sought nondischargeability under §§ 523(a)(2)(A), (a)(4), (a)(6) and objected to discharge under §§ 727(a)(3) and (a)(4)(A).
After trial the bankruptcy court found plaintiffs failed to meet their burdens on all counts and ruled for Lewis: the state-court debt is dischargeable and Lewis’s chapter 7 discharge is not denied.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether debt is nondischargeable under §523(a)(2)(A) (fraud/false representation)	Lewis misrepresented ability to repay (via refinance of Babson) and omitted material facts; plaintiffs relied and were damaged	Wong wired funds without any representations from Lewis; any statement to Brown wasn’t made to Wong; no duty to disclose; reliance not justifiable	Denied — plaintiffs failed to prove misrepresentation/omission, justifiable reliance, and that money was obtained by fraud; Count I dismissed
Whether debt is nondischargeable under §523(a)(4) (larceny)	Loan proceeds were taken unlawfully or converted (larceny)	Funds were used to stop foreclosure as intended; original taking was lawful; no embezzlement or fiduciary duty	Denied — no evidence of larceny or unlawful taking; Count II dismissed
Whether debt is nondischargeable under §523(a)(6) (willful and malicious injury)	Lewis willfully/ maliciously injured plaintiffs by not repaying loan	Lewis took loan to avoid foreclosure and reasonably believed debt forgiven after no enforcement for seven years; no intent to cause injury	Denied — plaintiffs failed to prove willful injury (thus §523(a)(6) not met); Count III dismissed
Whether discharge should be denied under §727(a)(3) (failure to keep records)	Debtor failed to preserve records making financial condition unknowable	Plaintiffs failed to identify missing records or show inability to ascertain financials; trustee had records	Denied — plaintiffs failed to make prima facie showing; Count IV dismissed
Whether discharge should be denied under §727(a)(4)(A) (false oath)	False statements in SOFA and perjury at state debtor’s exam and deposition	SOFA income entries were accurate (buyout); challenged statements not shown to be in connection with bankruptcy or material to administration	Denied — plaintiffs did not prove a knowing, fraudulent, material false oath; Count V dismissed

Key Cases Cited

Ghomeshi v. Sabban (In re Sabban), 600 F.3d 1219 (9th Cir. 2010) (elements required to establish fraud under §523(a)(2)(A))
Oney v. Weinberg (In re Weinberg), 410 B.R. 19 (9th Cir. BAP 2009) (fraud/non-dischargeability proof principles)
Field v. Mans, 516 U.S. 59 (1995) (justifiable reliance standard in fraud claims)
Anastas v. Am. Sav. Bank (In re Anastas), 94 F.3d 1280 (9th Cir. 1996) (red flags and limits on justifiable reliance)
Ormsby v. First Am. Title Co. of Nev. (In re Ormsby), 591 F.3d 1199 (9th Cir. 2010) (definition of larceny and willful injury under §523)
Kawaauhau v. Geiger, 523 U.S. 57 (1998) (willful and malicious injury requires deliberate intent to harm)
Barboza v. New Form, Inc. (In re Barboza), 545 F.3d 702 (9th Cir. 2008) (analyzing willfulness and maliciousness under §523(a)(6))
Littleton v. Transamerica Commercial Fin. Corp. (In re Littleton), 942 F.2d 551 (9th Cir. 1991) (distinguishing embezzlement and use for authorized purpose)
Retz v. Samson (In re Retz), 606 F.3d 1189 (9th Cir. 2010) (burden and liberal construction of §727 in favor of debtor)
Lansdowne v. Cox (In re Cox), 41 F.3d 1294 (9th Cir. 1994) (prima facie standard for §727(a)(3) record-keeping claim)
Khalil v. Developers Sur. & Indem. Co. (In re Khalil), 379 B.R. 163 (9th Cir. BAP 2007) (false statements in schedules/ SOFA can constitute false oath)
Wills v. Wills (In re Wills), 243 B.R. 58 (9th Cir. BAP 1999) (materiality standard for false oaths under §727)