The United States Bankruptcy Appellate Panel of the Ninth Circuit recently held in In re Pateel Boyajian, 367 B.R. 138 (9th Cir. BAP 2007) that the “reasonable reliance” requirement for asserting nondischargeability due to the use of a false financial statement required reliance by only the original lessor and not the assignee on the assigned equipment lease.
Lessee entered into a lease agreement with Epic Funding Corporation that was guarantied by the Lessee’s principals. In support of the guaranty, the principals provided personal financial statements to Epic Funding that were in fact false. Subsequently, Epic Funding sold all rights, title and interest in the lease to Cupertino National Bank. Lessee defaulted under the lease and Cupertino had a default judgment entered against the Lessee and its principals that was subsequently assigned to New Falls Corporation. As a result of collection activities, the Lessee’s principals filed a Chapter 7 bankruptcy case and New Falls brought an adversary proceeding for nondischargeability pursuant to Section 523(a)(2)(B), asserting that the personal financial statements were fraudulent. In cross-motions for summary judgment, the bankruptcy court ruled that since New Falls itself had not relied on the principals’ personal financial statements as a matter of law, New Falls could not prevail on a cause of action based on Section 523(a)(2)(B). New Falls appealed.
The issue on appeal was whether the use of a false financial statement requires reasonable reliance not only on the part of the original lessor who extended the original credit but also by the assignee. The court began its analysis with a statutory review of which “creditor” the statute referred to and determined that the original creditor was the relevant creditor for purposes of Section 523(a)(2)(B). Next, the BAP specifically disapproved the holding in In re Bui, 188 B.R. 274 (Bktcy. N.D. Cal. 1995) which the lower court had relied upon in reaching its decision, finding that the Bui decision, which was based on a simple analogy, was unsupported. On the other hand, the BAP in reviewing case law in other discharge litigation, found considerable support for the ability of the assignee creditor to step in the shoes of the assignor in pursuing nondischargeability claims under other provisions of Sections 523 and 727. The court noted that requiring additional reliance by the assignee would be contrary to fundamental contract law and impose an unreasonable barrier with respect to the assigned rights. The court concluded that fundamental discharge considerations would be violated if a debtor is allowed to discharge obligations from the consequences of its own dishonest conduct.
The court’s holding in Boyajian advances the rights for assignees when the underlying transaction contains the basis for nondischargeability. Assigning a judgment on those claims will not “wash” the debtor’s conduct with respect to other subsequent owners. As to practice pointers with respect to assignors, judgments should contain findings of fact that would sustain a subsequent claim for nondischargeability to assist in finding willing assignees. As to assignees, any transfer should be conditioned on the assistance of the assignor that may be required in subsequent discharge litigation.