535 B.R. 358
10th Cir. BAP2015Background
- The Kims (creditors) invested $900,000 with the Suns (debtors) after relying on repeated representations that funds would be used to buy/renovate the JCRS property, be refinanced, yield a $500,000 short-term return, and provide ongoing monthly income.
- The Suns instead recorded the transaction as a stock purchase in Y&K Sun, Inc. (YKSI), deposited the $900,000 in a personal account, and largely diverted funds away from the JCRS project; only about $57,137 actually went to the project.
- The Suns later assigned a subordinate promissory note (the Nova Note) and then converted that to S&B Nova notes and stock; the Kims received aggregate payments of $109,794 over four years and no payments after 2011.
- The Suns filed Chapter 7 in 2012; the Kims sued in adversary proceeding seeking nondischargeability under 11 U.S.C. § 523(a)(2)(A), (a)(4), (a)(6), and (a)(19). The bankruptcy court found the debt nondischargeable under §§ 523(a)(2)(A), (a)(4), and (a)(6) and awarded $1,042,206 plus prejudgment interest at 8% compounded annually from May 17, 2007 to judgment.
- On appeal the Tenth Circuit affirmed nondischargeability, reversed the benefit-of-the-bargain damages award (because the Kims elected rescission), and remanded to (1) calculate damages as restoration (return of $900,000 plus interest less payments received, with payments applied first to interest then principal) and (2) recalculate prejudgment interest to account for payment dates and compounding.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Nondischargeability under §523(a)(2)(A) (fraud/false representations) | Kims: Suns made false representations and the Kims justifiably relied, establishing fraud. | Suns: Reliance was unjustified; no fraudulent intent or scheme proven. | Affirmed: Court found justifiable reliance, a fraudulent scheme, and intent — findings not clearly erroneous. |
| Nondischargeability under §523(a)(4) (embezzlement/larceny) | Kims: Suns wrongfully appropriated the funds entrusted to them. | Suns: Money was obtained lawfully via stock purchase agreement, so not larceny. | Affirmed: Even if not larceny, conduct amounted to embezzlement; factual findings support nondischargeability. |
| Nondischargeability under §523(a)(6) (willful/malicious injury) | Kims: Suns intentionally misled them over years and should have known damage would result. | Suns: Losses resulted from third-party S&B Nova’s failure to pay — not conduct Suns knew would cause particularized injury. | Affirmed: Court found deliberate, intentional misconduct sufficient for §523(a)(6). |
| Damages measure (benefit-of-the-bargain vs. rescission/return of money) | Kims: Sought return of $900,000 plus 8% interest; bankruptcy court awarded benefit-of-the-bargain damages (~$1.15M less payments). | Suns: Benefit-of-the-bargain award was improper and misstated property value and income stream. | Reversed: Kims elected rescission; proper measure is restoration (return of money plus interest less payments). Remanded to compute amounts and apply payments first to interest then principal. |
| Prejudgment interest rate and calculation | Kims: Requested 8% (Colorado statute) compounded annually. | Suns: State interest rate improper for federal claims; prejudgment interest date and basis problematic. | Mixed: Using Colorado's 8% compounded annually was not an abuse of discretion; but prejudgment interest must be recalculated to account for payment dates and incremental accruals. |
Key Cases Cited
- Grogan v. Garner, 498 U.S. 279 (1991) (nondischargeability determinations governed by federal law)
- Travelers Casualty & Surety Co. v. Pacific Gas & Electric Co., 549 U.S. 443 (2007) (state law governs the substance of claims in bankruptcy when applicable)
- Reed v. Mineta, 438 F.3d 1063 (10th Cir. 2006) (prejudgment interest must be computed based on when monetary injuries actually accrued)
- Guides Ltd. v. Yarmouth Group Prop. Mgmt., Inc., 295 F.3d 1065 (10th Cir. 2002) (federal-question cases ordinarily use a federal prejudgment interest rate rather than a state rate)
- U.S. ex rel. C.J.C., Inc. v. Western States Mechanical Contractors, Inc., 834 F.2d 1533 (10th Cir. 1987) (in absence of federal rule, court may apply state prejudgment interest rate as practical measure to fairly compensate plaintiff)
- Turner v. Davis, Gillenwater & Lynch (In re Investment Bankers, Inc.), 4 F.3d 1556 (10th Cir. 1993) (prejudgment interest is within trial court’s discretion and reviewed for abuse of discretion)
- Telex Corp. v. AiResearch Aviation Co., 460 F.2d 215 (10th Cir. 1972) (rescission requires restoration to precontract position)