Sachan v. Huh (In re Huh)

In Re Huh, 9th Cir B.A.P., CC-12-1633-En Banc (March 11, 2014) [Published]
In a published opinion, the Bankruptcy Appellate Panel for the 9th Circuit affirmed the bankruptcy court finding that that imputed liability of a principal for the active fraud of an agent would not support an exception to discharge for the principal under § 523(a)(2)(A).
Procedural context:
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.
Appellee Huh is a licensed real estate broker. Huh operated a real estate and business brokerage business, as a sole proprietorship under the dba “America Realty & Investment,” from 2001 until August 2004. Huh's sole proprietorship, “America Realty & Investment,” was 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. Mr. Jay Kim (“Kim”) was associated as a part-time sales agent with Amerity, Inc. and Huh from 2004 through early 2005 . 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. 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. /p/ 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, 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. 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. /p/ November 16, 2007, Huh 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. /p/ 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 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.” After post-trial briefing, 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. A dismissal judgment was entered in favor of Huh in the Adversary Proceeding on November 26, 2012. Sachan filed a timely Notice of Appeal.
En Banc: Dunn, Pappas, Kirsher, Taylor & Kurtz. Opinion written by Judge Dunn

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