The bankruptcy court failed to make complete findings to support a judgment that the debts at issue were excepted from the debtor appellant's chapter 7
In 2003, Appellant, Ray Cai, began operating Citicross Corp. ("Citicross"), for the purpose of importing and distributing women's shoes manufactured in China.
The Appellees are Shenzhen Smart-In Co., Ltd. ("Shenzhen Smart-In"), Yi Dan Shan Industry Co., Ltd. ("Yi Dan Shan"), Huidong Wanda Industry Co., Ltd. and Huizhou Wanda (together "Wanda"), and Guan Hang Shoes and Guan Hang International Group Co., Ltd. (together "Guan Hang"). The Appellees all are manufacturers and/or distributors of shoes made in China.
Between mid-2005 and early 2006, Citicross
After a time, Citicross began placing substantially larger orders with Appellees.
In February 2006, Citicross placed nine orders with Shenzhen Smart-In for approximately $578,367. Because of the drastic change in the quantity of shoes ordered, before undertaking to fulfill the orders, Dawson Li Guan, Shenzhen Smart-In's president, owner, and manager, contacted Mr. Cai to determine whether he had sufficient funding to pay for the orders. In response to Mr. Guan's inquiry, Mr. Cai assured Mr. Guan that he had sufficient funds ready for payment, and that the invoices would be promptly paid consistent with the prior transactions. Based on Citicross's prior timely payments and on Mr. Cai's assurance that sufficient funds were available to pay the invoices, Shenzhen Smart-In manufactured and delivered the orders. When the time arrived for payment of the February invoices, Citicross did not pay them. Mr. Guan spoke again with Mr. Cai and was assured that he had funds and simply needed more time to make the payment.
Despite failing to make payment for the February invoices, Citicross placed five orders totaling $209,032.20 with Shenzhen Smart-In in March 2006. Mr. Guan testified that although Shenzhen Smart-In had not been paid for the February orders, based on Mr. Cai's assurance that payment would be made shortly, it manufactured and delivered Citicross's March 2006 orders.
This pattern repeated itself many times with Shenzhen Smart-In. In May 2006, having not yet paid for the February 2006 and March 2006 orders, Citicross placed an order for $45,360 worth of shoes. Mr. Guan stated that the May 2006 order was filled "[b]ecause of the trust developed when [Mr.] Cai was making prompt payments for previous purchases." Declaration of Guan Li at 3:5-8. In June 2006, Citicross placed three orders totaling $38,116.80. In August 2006, Citicross placed three orders totaling $92,601.20. In September 2006, Citicross placed an order in the amount of $8,376. In October 2006, Citicross placed an order in the amount of $70,776. Each month Shenzhen Smart-In fulfilled the orders based on Mr. Cai's assurance of payment. Ultimately, the amount of the unpaid invoices Citicross owed to Shenzhen Smart-In totaled approximately $1.2 million.
The experience of the remaining Appellees was similar.
During 2005, Citicross made prompt payments for merchandise ordered from and delivered by Yi Dan Shan. In April 2006, Citicross's orders surged. In that month Citicross placed six orders with Yi Dan Shan totaling $489,942. Because the April orders were a substantial increase from Citicross's prior orders, Naizhong Li, Yi Dan Shan's owner and general manager, contacted Mr. Cai and asked if he had sufficient funds to pay. In response to his inquiry, Mr. Cai assured Mr. Li that he had sufficient funds ready for payment, and that the invoices would be promptly paid consistent with the prior transactions. Based on Citicross's prior timely payments and on Mr. Cai's assurance that sufficient funds were available to pay the invoices, Yi Dan Shan manufactured and delivered the orders. When the time arrived for payment of the April invoices, Citicross did not pay them. Mr. Li spoke again with Mr. Cai and was assured that Citicross had funds and simply needed more time to make the payment.
Despite failing to make payment for the April invoices, Citicross placed two orders totaling $256,140 with Yi Dan Shan in May 2006. Mr. Li testified that although Yi Dan Shan had not been paid for the April 2006 orders, based on Mr. Cai's assurance that payment would be made shortly, it manufactured and delivered Citicross's May 2006 orders.
This pattern repeated itself a number of times with Yi Dan Shan. In June 2006, having not yet paid for the April 2006 and May 2006 orders, Citicross placed six orders with Yi Dan Shan for $294,720.12 worth of shoes. Mr. Li stated that the May 2006 orders were filled "[b]ecause of the trust developed when [Mr.] Cai was making prompt payments for previous purchases." Declaration of Li Haizhong at 4:9-11. In July 2006, Citicross placed four orders with Yi Dan Shan totaling $137,337. In August 2006, Citicross placed five orders with Yi Dan Shan totaling $145,314. Each month Yi Dan Shan fulfilled the orders based on Mr. Cai's assurance of payment. After August 2006, Yi Dan Shan refused to accept further orders from Citicross based on unpaid invoices. Ultimately, the amount of the unpaid invoices Citicross owed to Yi Dan Shan totaled more than $1 million.
Between September 2005 and August 2006, Citicross generally made prompt payments for merchandise ordered from and delivered by Wanda. Beginning in September 2006, payments on Citicross's accounts with Wanda stopped. However, Citicross continued to place orders with Wanda, and Mr. Cai assured Shengda Chen, Wanda's general manager, that he had "secured the funding to pay for the merchandise ordered." Declaration of Chen Sheng Da at 3:9-11. Citicross placed an order with Wanda for $93,483 worth of shoes on September 21, 2006; on October 10, 2006, Citicross placed another order with Wanda for $44,838 worth of shoes. When these orders were placed, Wanda manufactured and shipped the shoes because Mr. Cai reassured Mr. Chen that he had funds for payment but simply needed more time to make the payment. Payment, however, was not forthcoming. Thereafter Wanda refused to accept future orders from Citicross except on a cash basis. On May 21, 2007, using a copy of a wire transfer order from February 21, 2007 with the month changed, Citicross ordered nearly 3,000 additional pairs of shoes from Wanda. Wanda manufactured the ordered shoes based on the "falsified" wire transfer, which Wanda asserts was used by Mr. Cai to induce Wanda to manufacture shoes without the required prepayment.
Between August 2005 and July 2006, Citicross made prompt payments for merchandise ordered from and delivered by Guan Hang. In August 2006, Citicross placed what Yu Bin, Guan Hang's owner and manager, characterized as a "huge order" for $1 million worth of shoes.
Despite failing to make payment for the August 2006 order, Citicross placed three orders totaling $87,219 with Guan Hang in September 2006. With respect to the September 2006 orders, Mr. Yu testified that "[e]ach invoice was sent and received by [Mr.] Cai and all merchandise were manufactured and shipped." Declaration of Yu Bing at 3:26-27. After shipment, Mr. Yu promptly requested payment for both the September 2006 orders and payment for the August 2006 orders, at which time Mr. Cai told him that he needed more time to make the payments and assured Mr. Yu that "the funds were there."
In October 2006, having still not paid for the August 2006 and September 2006 orders, Citicross placed six orders with Guan Hang totaling $521,229.90. Mr. Yu testified that Guan Hang accepted the October 2006 orders "[b]ecause of the trust developed when [Mr.] Cai was making prompt payments for previous purchases."
It appears that unlike the other Appellees, Guan Hang may have required deposits from Citicross before it would manufacture shoes to fill Citicross's orders. However, for at least the October 2006 orders, it appears the deposits were not made as required. Further, Mr. Yu intimates that some payments were made. Ultimately, the amount of the unpaid invoices Citicross owed to Guan Hang totaled $463,245.23.
When collection efforts from China proved unsuccessful, the Appellees, through their owners, came to the United States in 2007 and negotiated acknowledgments of debt or repayment agreements ("Debt Acknowledgments"): Wanda on January 9; Shenzhen Smart-In on February 12; Guan Hang on August 3; and Yi Dan Shan on August 6. As reflected by the translations, the debtor or obligor in the documents was Citicross. Mr. Cai signed the documents as the legal representative of Citicross.
Armed with the Debt Acknowledgments, the Appellees filed a complaint against Citicross and Mr. Cai on September 25, 2007, in the California Superior Court ("State Court Litigation"). The claims for relief asserted in the complaint included breach of contract as well as fraud and deceit. Trial in the State Court Litigation was set for December 15, 2008. On December 10, 2008, Mr. Cai and his wife, Peilin Hu, filed a voluntary chapter 7 petition.
The Appellees obtained a default judgment against Citicross in the State Court Litigation which was entered on January 9, 2009. The default judgment was entered in favor of the Appellees on all six claims for relief, including the claim for relief for fraud and deceit.
Appellees then commenced an adversary proceeding against Mr. Cai and Ms. Hu in the bankruptcy court. Both the original and the amended adversary proceeding complaints assert claims for relief under §§ 727(a)(3), 727(a)(4)(c), and 727(a)(5). The Adversary Proceeding Cover Sheet asserts that the nature of the suit included claims under § 548 for fraudulent transfer, § 727 for objection to discharge, and § 523(a)(2) for nondischargeability of debt. At a status hearing on the amended complaint, the bankruptcy court clarified that the § 727(a)(4)(c) claim for relief would be considered a claim for relief under § 523(a)(2).
Direct testimony was presented by declaration. A two-day trial followed for cross-examination and argument. The bankruptcy judge gave his oral ruling at the conclusion of argument. He ruled that Appellees had failed to establish any claim for relief under § 727, and that they had failed to establish a claim for relief against Ms. Hu under § 523. The bankruptcy judge determined that the Appellees were entitled to judgment against Mr. Cai pursuant to § 523(a)(2)(A). The only findings made by the bankruptcy court in support of this judgment were (1) that Mr. Cai did not intend to keep his promises to pay, and (2) that Mr. Cai's asserted reasons for not paying were not credible.
The bankruptcy court entered judgment against Mr. Cai in a form to which he had objected. Mr. Cai filed a timely notice of appeal.
The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and 157(b)(2)(I). We have jurisdiction under 28 U.S.C. § 158.
Whether the bankruptcy court erred when it determined that the Appellees were entitled to an exception to discharge judgment against Mr. Cai.
In the context of an appeal from a judgment determining a debt to be nondischargeable, the issues often present mixed questions of law and fact.
A chapter 7 discharge will not discharge an individual debtor from any debt
Sec. 523(a)(2)(A). The elements for establishing that a debt is nondischargeable under § 523(a)(2)(A) are well established by Ninth Circuit authority.
Mr. Cai asserts that the bankruptcy court erred in determining the debts to Appellees are nondischargeable in his chapter 7 case pursuant to § 523(a)(2)(A). However, because the record does not reflect that the bankruptcy court made complete findings in support of the judgment, we are unable to determine at this time whether such error was committed.
Fed. R. Civ. P. 52(a)(1) provides:
Fed. R. Civ. P. 52 applies in adversary proceedings.
On appeal Mr. Cai asserts that the bankruptcy court erred by not finding that Mr. Cai's representations to Appellees constituted statements respecting the financial condition of Mr. Cai or Citicross. Mr. Cai contends that because the representations were not in writing, Appellees' claim for relief was not actionable.
A statement regarding a debtor's financial condition can form the basis for a nondischargeable debt only if the statement is in writing.
The record suggests Mr. Cai's oral representations varied from (1) he had sufficient funds ready for payment and that the invoices would be promptly paid to (2) he had secured the funding to pay for the merchandise ordered. Mr. Cai asserts on appeal that the statements upon which Appellees base their § 523(a)(2) claim for relief constitute oral statements of financial condition and therefore cannot support an exception to discharge judgment. At oral argument, Appellees conceded through counsel that the "lies" of Mr. Cai, which form the basis of their complaint, were that he had "present financial resources to pay" for the orders.
Section 523 excepts certain debts from a debtor's discharge. Debt "means liability on a claim." § 101(12). Claim means "right to payment." § 101(5)(A). Thus, to obtain a § 523 judgment against Mr. Cai, Appellees had to demonstrate that they have a right to payment from Mr. Cai.
Appellees obtained a judgment in the State Court Litigation against Citicross for the debts at issue in the adversary proceeding. Although Mr. Cai was a party to the State Court Litigation, the judgment expressly did not apply to him by virtue of the pending bankruptcy case. In addition, the Debt Acknowledgments refer to the debts of Citicross and do not appear to impose personal liability for the corporate debts on Mr. Cai. There has been no finding that Mr. Cai personally "obtained money, property, services, or an extension, renewal, or refinancing of credit" within the meaning of § 523(a)(2)(A). In their trial memorandum, Appellees argued that the debtor also is liable for the debts on an alter ego theory.
The bankruptcy court made no finding that Mr. Cai sufficiently disregarded the separate corporate identity of Citicross to be liable for its debts. Nor was there a finding that the Debt Acknowledgments imposed liability for payment on Mr. Cai personally. We believe a finding of liability on some basis is necessary where it is not clear from the record whether Mr. Cai was promising to make payments to the Appellees himself, as the Appellees appear to suggest. However, in any event, Mr. Cai's fraud may provide a sufficient basis on its own to establish his personal liability.
In 1995, the Supreme Court ruled that a party seeking to have a debt excepted from discharge under § 523(a)(2)(A) as being the result of a false representation must demonstrate that its reliance on the false representation was "justifiable" under the circumstances.
We assume for the limited purpose of this discussion that Mr. Cai made the assurances of payment as alleged by Appellees. Here, the bankruptcy court made no finding that Appellees relied, justifiably or otherwise, on the promises of Mr. Cai to pay for the Citicross orders. As is apparent from the record on appeal, this determination could not be straightforward in light of (1) the concerns for payment expressed by each Appellee when the size of Citicross's orders first increased substantially, (2) the failure of Citicross or Mr. Cai to make payment after the initial assurance was given, (3) the repeated assurances of payment requested by Appellees and given by Mr. Cai, (4) the decision of Appellees to manufacture and ship additional large orders based on their experience with prompt payment that predated the quickly multiplying defaults on newer, substantially larger, orders in spite of Appellees' requests for payment assurances.
The record reflects that Mr. Cai and Appellees put forth divergent views as to why the debts were not paid. Appellees contended that Mr. Cai gave payment assurances with no intent that he or Citicross would make payment, and that Mr. Cai's continued assurances were made for the purpose of deferring collection while Ms. Hu transferred cash from Citicross to Mr. Cai and her personal accounts. Mr. Cai asserted that Citicross's debts to Appellees were not paid because the Appellees delivered defective products that not only would not sell, but which damaged Citicross's relationships with its customers to the point that Citicross could not continue in business. The bankruptcy court found that Mr. Cai was not a credible witness and discounted his excuses for nonpayment as a result. Although this suggests that the bankruptcy court believed Appellees' versions of the facts, the bankruptcy court made no finding that the Appellees adequately supported their contentions with evidence in order to meet their burden of proof on the issue of causation.
In the absence of complete findings, we may vacate a judgment and remand the case to the bankruptcy court to make the required findings.
Because we are vacating the judgment, we do not address (1) Mr. Cai's issues on appeal relating to the form of the judgment, or (2) Mr. Cai's assertion that there was insufficient evidence in the record to support a judgment in favor of Guan Hang where the bankruptcy court had stricken Mr. Yu's declaration and testimony for lack of foundation, yet admitted into evidence the unauthenticated documents attached to the stricken declaration.
The bankruptcy court failed to make the requisite findings to support its judgment that Appellees' debts were excepted from Mr. Cai's discharge. Accordingly, we VACATE the judgment and REMAND the case to the bankruptcy court for further findings, as appropriate.
