Chen v. PhatChen v. Phat
Ashely M. Chan, United States Bankruptcy Judge
OPINION
I. INTRODUCTION
In this adversary proceeding, the plaintiffs, Ting Chen and Maily Lai (collectively “Plaintiffs“), seek to have this Court determine that the unpaid amount of $60,000.00 owed to them under a settlement agreement with the Debtor, Hay Phat a/k/a Payne Keang Lim (“Debtor“), is nondischargeable
II. FACTUAL BACKGROUND
Plaintiff Chen was born in Laos, while Debtor Payne Keang Lim was born in Cambodia. Case No. 19-00123 E.C.F. No. (“E.C.F.“) 20, Resp. Mot. to Dismiss Am. Compl. 3. Both are members of a tightly knit Asian community consisting of Laotian and Cambodian families. E.C.F. 16, Compl. ¶ 6(B). The Debtor and Plaintiff Chen have known each other for ten years. E.C.F. 16, Compl. ¶ 6(C). They had been close friends for approximately four years and have a history of gambling together. Id.; E.C.F. 43, Tr. of Trial 46:1-5. Debtor had a gambling addiction and confessed, “[e]very time [he went] to the casino [he] couldn‘t help [him]self.” Tr. of Trial 33:13-17, 35:18-19. Debtor has sought help for his gambling addiction and claims that he is no longer an avid gambler. Id. at 44:13-16.
On five different dates, starting October 29, 2013, and ending on February 15, 2016, Debtor borrowed various sums of money totaling $120,000.00 from Plaintiffs. E.C.F. 16, Compl. ¶ 6(E). Debtor paid Plaintiffs interest on such loans of $1,700.00 a month for a period of four years. E.C.F. 43, Tr. of Trial 32:23-33:15. The loans were made on a cash-basis, and thеre was no formal repayment plan. Id. at 33:2-7. Ultimately, on October 14, 2017, the Debtor executed and delivered to Plaintiffs an Installment Judgment Note and Disclosure and Waiver in connection with these loans. E.C.F. 16, Ex. 3. The Installment Judgment Note required the Debtor to make twelve consecutive monthly payments beginning thirty days after October 14, 2017, in the amount of $10,550.00 each month. E.C.F. 16, Ex. 3 p.1.
The Debtor failed to make any payments due on the Installment Judgment Note. E.C.F. 16, Compl. ¶ 6(H). On February 15, 2018, Plaintiffs filed a complaint in confession of judgment against Debtor in the Court of Common Pleas of Philadelphia County at February Term, 2018, No. 1431. Id. at ¶ 6(I); E.C.F. 24, Ans. ¶ 6(I). Plaintiffs confessed judgment against Debtor in the amount of $146,165.00. E.C.F. 16, Compl. ¶ 6(I); E.C.F. 24, Ans. ¶ 6(I). On June 6, 2018, Plaintiffs and Debtor entered into a settlement agreement (“Agreement“) to settle the confession of judgment action for $60,000.00. E.C.F. 16, Ex. 1. The Agreement includes a forbearance provision releasing Debtor from the judgment in exchange for his compliance with the terms of the Agreement (“Forbearance Provision“). E.C.F. 16, Compl. Ex. 1 ¶ 2(c)-(d). The Agreement required an initial payment of $5,000.00 within thirty days of the date of the execution of the Agreement and monthly payments of $500.00 commencing August 1, 2018, with the final payment to be made on or before October 1, 2027. Id. at ¶ 2(a)(1)-(2). As a condition of the Agreement, Debtor executed a mortgage in the principal sum of $60,000.00 in favor of the Plaintiffs on his persоnal residence located at 1806 E. Allegheny Avenue, Philadelphia, PA (“the Property“). E.C.F. 16, Ex. 2. Plaintiffs recorded the mortgage in the Philadelphia County Recorder of Deeds at Doc ID 53381223. Id. at 3. Based on the Agreement, Plaintiffs marked their action against Debtor in the Court of Common Pleas of Philadelphia County settled, discontinued, and ended. E.C.F. 16, Compl. ¶ 6(L).
On July 5, 2018, the Debtor delivered the initial payment to his attorney in the form of a check in the amount of $5,000.00
On August 15, 2018, the Debtor tendered another check for the first monthly payment of $500.00 (“Second Check” and, collectively with the Initial Check, “Checks“) from the Account, which Plaintiff Chen deposited on August 27, 2018. E.C.F. 37, Joint Pre-Tr. St. ¶ 16. However, the Second Check also was returned on August 29, 2018 for insufficient funds. E.C.F. 16, Ex. 6. The Debtor has failed to provide substitute payments for the Checks. E.C.F. 16, Compl. ¶ 6(T). Furthermore, the Debtor has failed to make any other monthly payments required under the Agreement. Id. at ¶ 6(U).
It is uncontested by both parties that, as of May 31, 2018, the balance in the Account was $300.00; between May 31, 2018 and June 14, 2018, $6,709.00 were deposited into the Account; and, during the same period, $4,135.13 was withdrawn from the Account. E.C.F. 37, Ex. 11. As of July 5, 2018, the balance in the Account was $597.30; between July 5, 2018 and August 28, 2018, $50,275.39 was deposited into the Account; and, during the same period, $51,074.33 was withdrawn from the Account. Id. Many deposits and withdrawals in the Account were borne out of Debtor‘s gambling winnings and losses. E.C.F. 43, Tr. of Trial 41:10-20. From July 5, 2018—when the Initial Check was tendered—to August 28, 2018—when the last check was returned, there were insufficient funds to cоver the Initial Check of $5,000.00 on each day during this time period except July 12 and 13 and August 6, 7, and 8. E.C.F. 37, Ex. 11. However, Debtor had sufficient funds to cover the funds for the Second Check ($500.00) for thirty-nine days of the fifty-three day period. Id.
On February 15, 2019, the Debtor filed a petition for relief under Chapter 13 of Title 11 of the United States Code. E.C.F. 16, Compl. ¶ 6(V). On October 24, 2019, the Plaintiffs filed a complaint against Debtor, which was amended several times, seeking a determination that the Debtоr‘s debt of $60,000.00 (“Debt“) owed to Plaintiffs is nondischargeable under
III. DISCUSSION
Plaintiffs argue that the Debtor engaged in false pretenses and false representations within the meаning of the nondischargeability exception under
Ultimately, because the Plaintiffs failed to prove that the Debtor signed the Agreement with no intention of complying or in reckless disregard for whether he could comply, the Court concludes that the Debt is dischargeable.
A. 11 U.S.C. § 523(a)(2)(A)
a discharge...under this title does not discharge an individual debtor from any debt...for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor‘s or an insider‘s financial condition...
Courts have generally recognized that the denial of the debtor‘s discharge is a harsh sanction. See In re Gioioso, 979 F.2d 956, 962 (3d Cir. 1992); Carto v. Oakley (In re Oakley), 503 B.R. 407, 423 (Bankr. E.D. Pa. 2013), aff‘d, 530 B.R. 251 (E.D. Pa. 2015); (Panda Herbal Int‘l Inc. v. Luby (In re Luby), 438 B.R. 817, 826 (Bankr. E.D. Pa. 2010). Consistent with the “fresh start” policy underlying the Bankruptcy Code, the provisions of
As a threshold matter, the plain language of
A
While false representations require express statements, a false pretense “requires proof of an implied misrepresentation promoted knowingly and willingly that creates a misleading understanding of the transaction by the plaintiff” and which wrongfully induces the plaintiff to advance money, property, services, or an extension, renewal, or refinancing of credit to the debtor. In re Oakley, 503 B.R. at 432; L.L. Lifestyle, Inc. v. Vidal (In re Vidal), Bankr. No. 10-14071, Adv. No. 10-0335, 2012 WL 3907847, at *15-16 (Bаnkr. E.D. Pa. Sept. 7, 2012).
B. The Forbearance Provision in the Agreement Constitutes an “Extension” or “Refinancing” of Credit Under § 523(a)(2)(A) .
In order for this Court to find the Debt nondischargeable pursuant to
Courts are divided on whether forbearance constitutes an extension of credit under
Similarly, other courts have determined a forbearance constitutes a “refinancing” of credit on the basis that the term “refinancing” is extensive and includes any change in the Debtor‘s obligation which amounts to substituting a new debt obligation for an existing one. Foley & Lardner v. Biondo (In re Biondo), 180 F.3d 126, 133 (4th Cir. 1999); Smith v. Johnson-Battle (In re Johnson-Battle), 599 B.R. 769, 785 (Bankr. D.N.J. 2019) (finding a settlement agreement which was akin to a novation constitutes a refinancing); Bank of Chester Cty. v. Price (In re Price), Nos. 93-15506DAS, 93-0947DAS, 93-15707DAS, 94-0013DAS, 1994 Bankr. LEXIS 2395, at *13 (Bankr. E.D. Pa. Apr. 12, 1994) (quoting In re Eberle, 61 B.R. 638, 641 (Bankr. D. Minn. 1985)) (forbearance is sufficient to constitute a “renewal” or “refinance” within the meaning of
However, a minority of courts have concluded that forbearance does not constitute an “extension of credit” under
The Court is persuaded by the reasoning of the majority view, which considers a forbearance agreement to be an “extension” or “refinancing” of credit under
In light of the foregoing, because the Agreement‘s Forbearance Provision amounts to an indulgence giving the Debtor ten additional years to pay his obligation to the Plaintiffs, thus extending the debtor-creditor relationship, it fits squarely within the definition of “extension” promoted by the majority view for purposes of
C. Intent to Deceive Under 11 U.S.C. § 523(a)(2)(A)
As previously mentioned, to sustain a
Courts may also infer intent to deceive from a debtor‘s reckless disregard for the truth. In re Bocchino, 794 F.3d 376, 380-82 (3d Cir. 2015); Boyuka v. White (In re White), 128 Fed. Appx. 994, 998–99 (4th Cir. 2005) (“A showing of reckless indifference to the truth is sufficient to demonstrate the requisite intent to deceive.“); Rembert v. AT&T Universal Card Servs. (In re Rembert), 141 F.3d 277, 280 (6th Cir. 1998) (requiring proof that “the debtor obtained money through a material misrepresentation that, at the time, the debtor knew was false or made with gross recklessness as to its truth“); Mayer v. Spanel Int‘l, Ltd., 51 F.3d 670, 673–75 (7th Cir. 1995) (“[A] сreditor must prove that the debtor obtained the money through representations which the debtor either knew to be false or made with such reckless disregard for the truth as to constitute willful misrepresentation.“); In re Cohn, 54 F.3d at 1119; Gen. Elec. Capital Corp. v. Acosta (In re Acosta), 406 F.3d 367, 373 (5th Cir. 2005) (quoting In re Norris, 70 F.3d 27, 30 n.12 (5th Cir. 1995)); In re Ortiz, 514 B.R. at 768. “Reckless indifference to the truth is sufficient to prove the requisite intent to deceive... Thus a reckless disregard for the truth of a statement will fulfill both the knowledge element and the intent to deceive element.” De La Cruz v. Cohen (In re Cohen), 185 B.R. 171, 177-78 (Bankr. D.N.J. 1994). Ultimately, “where а person knowingly or recklessly makes false representations which the person knows or should know will induce another to act, the finder of fact may logically infer an intent to deceive.” In re Giquinto, 388 B.R. at 166. In fact, the Third Circuit found a debtor‘s reckless disregard for the truth of his representations to creditors satisfied
D. The Debtor Did Not Enter the Agreemеnt Intending to Deceive the Plaintiff Nor with Reckless Disregard for His Ability to Comply with Its Terms.
Ultimately, the Court must evaluate whether the Debtor executed the Agreement intending to deceive the Plaintiffs. It is well established that a failure to perform as promised, by itself, merely gives rise to a cause of action for breach of contract, not actionable misrepresentation, fraud, or false pretenses under
Based upon the circumstantial evidence presented, the Court finds that the Plaintiffs have not demonstrated that the Debtor intended to deceive them when he signed the Agreement or that he should have known that he could not satisfy the terms of the Agreement. First, the Debtor, who was forthcoming about his gambling addiction, consistently testified that at the time he entered into the Agreement, he intended to pay the Debt with his gambling winnings. In fact, within a short period after signing the Agreement, his gambling winnings and other deposits into the Account amounted to over $50,000, substantiating his belief that he could have made the initial $5,000 payment. Furthermore, for four years he had made monthly interest payments to the Plaintiffs of $1,700, further demonstrating the reasonableness of his belief that he could satisfy the Agreement‘s terms which required much lower monthly payments following the initial $5,000 payment. Finally, not only were there five days between July 5 and August 28 when the Initial Check could have been honored, but thirty-nine days when the Second Check could have been honored. If the Debtor had never intended to make payments under the Agreement, the Debtor would have never risked having sufficient funds in the Account to make any payments or he would havе written the Checks from an account with a zero balance. Moreover, the Court cannot find that he should have known he could not comply with the Agreement especially when there were far more days than not that the Second Check could have been honored. Accordingly, as demonstrated by the Debtor‘s testimony, his substantial gambling winnings and deposits, and his record of making monthly interest payments of over $1,000 for four years, the Court concludes that the Debtor intended to make payments under the Agreement from his gambling winnings, believed he could do so, and should not have known at the outset that he would be unable to satisfy the terms. While his belief in his ability to pay may have defied the odds given his gambling addiction, it does not support the Plaintiffs’ conclusion that the Debtor never intended at the time he signed the Agreement to comply with its terms. Tropicana Casino & Resort v. August (In re August), 448 B.R. 331, 355 (Bankr. E.D. Pa. 2011) (“So long as the debtor has an honest, even if unreasonable belief, that he will get lucky at gambling and pay off his debts this Court is satisfied that the debtor has the requisite intent to pay.“) (internal citation omitted).
Therefore, the Court holds that Plaintiffs did not meet their evidentiary burden to establish the Debtor had the requisite intent necessary to satisfy a
I. CONCLUSION
Based on the foregoing, the Court finds that the Debt is dischargeable.
Date: January 21, 2021
Honorable Ashely M. Chan
United States Bankruptcy Judge