Fraudulent Documentation

by Andrew K. Alper September/October 2007
Are assignee’s rights limited in a bankruptcy case? By looking into the recent case of In re Boyajian, 367 B.R. 138 (B.A.P. 9th Cir.), filed on March 30, 2007, we can now determine whether an assignee can submit nondischargeability claims against dishonest debtors, lessees or guarantors.

When lenders and lessors decide to sell their loans and leases to third-party assignees, one of the problems an assignee always faces is whether or not a court will enforce the lease or loan based on the affidavit or declaration presented by the assignee. Many times, the assignor is out of business, has been foreclosed upon by its lender, its relationship may be strained with the assignor because of other default issues and the assignor will not execute a declaration or affidavit, or the assignor is otherwise unavailable to execute a declaration or affidavit to authenticate the loan or lease documents.

Therefore, without such authentication by the original lender or lessor, it is difficult to introduce competent evidence of the lease and loan documents because these lease and loan documents were entered into by the assignor, not by the assignee, and were made in the assignor’s ordinary course of business and were not made or entered into by the assignee in its ordinary course of business.

Because of the hearsay and best evidence rules or because the assignee simply is not competent to testify to admit the documents into evidence since it has no personal knowledge of entering into them with the lessee, obligor or guarantor, an objection can be made to the introduction of such evidence of the debt due by the lessee, obligor or guarantor, and the objection may be sustained by the court, which will preclude the assignee’s recovery of the debt.

A second problem exists in a bankruptcy context. When the original lender or lessor received financial statements from an obligor, lessee or guarantor that it relied on in entering into the lease or loan transaction or making another extension of credit — after the transaction is subsequently assigned — the assignee may also want to contend that it is entitled to bring an action based on receipt of fraudulent financial statements. If the financial information provided by the lessee, obligor or guarantor proves to be false, a creditor in a bankruptcy can request the judgment or obligation due to the assignee be held nondischargeable.

Pursuant to 11 U.S.C. §523(a):

“A discharge under §727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt… 2.) for money, property, services, or an extension, renewal or refinancing of credit, to the extent obtained by — A.) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition; B.) use of a statement in writing — i.) that is materially false; ii.) respecting the debtor’s or an insider’s financial condition; iii.) on which the creditor to whom the debtor is liable for such money, property, services, or credit reasonably relied; and iv.) that the debtor caused to be made or published within intent to deceive…” (emphasis added)

Assuming the original lender or lessor would be able to prevail in an action to deny the dischargeability of the debt when the debtor or lessee files bankruptcy based on receipt of fraudulent financial statements, does that right extend to the assignee of the loan or lease since the assignee never made an extension of credit to the lessee or obligor? This issue brings us to the recent case of In re Boyajian, 367 B.R. 138 (B.A.P. 9th Cir.) filed on March 30, 2007.

In Boyajian, a lessee entered into a lease agreement with Epic Funding Corporation (Epic). Pateel Boyajian and Salpy Boyajian (the guarantors) were the president and vice president of the lessee and guaranteed the obligations. The guarantors each provided Epic with a personal financial statement reflecting a net worth of $680,162 and $719,382, respectively. When the lessee advised Epic of cash flow problems, which were responsible for delayed payments, Epic thereafter sold all of its right, title and interest in the lease to Cupertino National Bank, dba Matsco (Matsco).

Shortly after the sale to Matsco, the lessee defaulted on its obligations under the lease and the guarantors defaulted on their guarantees. Matsco commenced an action in state court and judgment was entered thereafter in the sum of $193,132.69. After judgment was entered, Matsco assigned its right to the judgment to Stornawaye Capital, LLC, which some months later assigned the judgment to New Falls Corporation (the assignee).

The guarantors each filed voluntary Chapter 7 petitions after the judgment was assigned to the assignee. The assignee brought adversary proceedings against each guarantor seeking a declaration that the judgment was nondischargeable pursuant to 11 U.S.C. §523(a)(2)(B) based on receipt by the original lessor, Epic, of fraudulent personal financial statements to obtain the credit to enter into the lease. It was clear the statements were fraudulent.

The issue in the case, however, was whether or not the assignee could meet the criteria to demonstrate its “reasonable reliance” required by §523(a)(2)(B)(iii) to deem the debt to be nondischargeable based on the guarantors’ fraudulent financial statements. The Bankruptcy Court had held that in order for the assignee to have the debt deemed to be nondischargeable, the fraudulent financial statement requires reasonable reliance not only by the lender who extended the original credit to a debtor, but also by every assignee who took the assignment.

It was argued by the guarantors that if an assignee cannot show the reasonable reliance by all assignees in the chain of title, it cannot prove a required element of §523(a)(2)(B) and the claim based on nondischargeability must be denied. The Bankruptcy Court agreed.

The Bankruptcy Appellate Panel came to the rescue and ruled that an assignee can pursue a cause of action under §523(a)(2)(B) even if the debtor’s intent to deceive, for purposes of §523(a)(2)(B)(iv), was directed at the assignor and not the assignee. See Tustin Thrift & Loan Ass’n. v. Maldonado (In re Maldonado), 228 B.R. 735, 738-740 (9th Cir. BAP 1999).

The Bankruptcy Appellate Panel further held that an assignee merely steps into the shoes of his assignor and the question of what rights or remedies pass with a given assignment depends on the interest of the parties. See State Bar v. Tooks (In re Tooks), 76 B.R. 162, 164 (Bankr. S.D. Ca. 1987); P. Coast Agric. Exp. Ass’n. v. Sunkist Growers, Inc., 526 F.2d 1196, 1208 (9th Cir. 1975).

As stated by the Bankruptcy Court in the case In re Geriatrics Nursing Home, Inc., 195 B.R. 34, 38 (Bankr. D. N.J. 1996): “It is not sensible to argue that a purchaser of a claim who takes an assignment of the claim does not step into the shoes of the assignor. Neither the Bankruptcy Code nor the Bankruptcy rules restrict the ability of an assignee to assert all the rights of a creditor. In the absence of inequitable conduct, the Court cannot discern any basis for limiting the rights of an assignee of a claim.”

Moreover, the Bankruptcy Appellate Panel had previously recognized the right of an assignee creditor to pursue an outright denial of a debtor’s discharge under §727(a). See Ota v. Samsung Elecs. Co. (In re Ota), 192 B.R. 545 (9th Cir. BAP 1996). In addition, previous decisions of the Bankruptcy Appellate Panel, with respect to the rights of assignees to bring exception to discharge actions under §523(a)(2)(B), had also previously been implicitly recognized without any specific reasoning or discussion as to the implications of the assignment. See e.g. Smith v. Lachter (In re Smith), 242 B.R. 694 (9th Cir. BAP 1999) and Berr v. FDIC (In re Berr), 172 B.R. 299 (9th Cir. BAP 1994). See also FDIC v. Meyer (In re Meyer) 120 F 3d. 66 (7th Cir. 1997) for a similar decision in the Seventh Circuit.

Epic sold all of its right, title and interest to the Epic lease to Matsco, which then obtained judgment against the lessee and the guarantors. The judgment was thereafter assigned to the assignee. Thus, the Bankruptcy Appellate Panel ruled to impose a requirement that the assignee must show its own reliance and the reliance of others, independent of Epic’s reliance at the time the lease was entered into, imposed a barrier to enforcement of its assignment rights, made no sense when applying the remedy made available under §523(a)(2)(B).

In opposition to the Bankruptcy Appellate Panel’s ruling, the guarantors also argued that New Falls Corporation, the assignee, could not demonstrate its reasonable reliance on the personal financial statements either because the guarantors did not provide the assignee with personal financial statements. They also argued that it was simply not reasonable for the assignee to rely on the personal financial statements, which were nearly five years old at the time the assignee took its assignment of the judgment.

In reply to that argument, the Bankruptcy Appellate Panel stated that for purposes of §523(a)(2), the timing of the fraud and the elements to prove fraud focus on the time when the lender made the extension of credit to the debtor not at a later point in time. Thus, the Bankruptcy Appellate Panel held that the assignee steps into the shoes of the assignor. It noted the inquiry of whether a creditor justifiably relied on debtor’s alleged misrepresentations is focused on the moment in time when that original creditor extended the funds to the debtor and not at a later point in time.

This is case is more good news for assignees of paper. If subsequent cases follow the lead of the Bankruptcy Appellate Panel for the Ninth Circuit, assignees of lenders and lessors who purchase paper will be able to pursue nondischargeability claims against dishonest debtors, lessees or guarantors. They will also not be able to hide behind the contention that the assignee did not “reasonably rely” on the financial statement so the assignee cannot prevail in a nondischargeability claim.


Andrew K. Alper is a partner with the law firm of Frandzel Robins Bloom & Csato, LC in Los Angeles. Alper has been representing equipment lessors, funding sources and other financial institutions since 1978. Alper obtained his Bachelor of Arts degree in Political Science, Magna Cum Laude, from the University of California at Santa Barbara and received his Juris Doctor from Loyola Marymount University School of Law making the Dean’s List.

Alper’s practice emphasizes the representation of equipment lessors and funding sources in all aspects of equipment leasing including litigation, documentation, bankruptcy and transactional matters. Besides representing equipment lessors and funding sources, Alper represents banks and other financial institutions.

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