Creditor Wei-Min Wu initiated an adversary proceeding against the debtors, Ping Ma and Jay Ma, to except a debt from discharge under § 523(a)(2)(A)-(B), (a)(4), (a)(6) and (a)(19) (collectively, "Section 523(a) claims").
Prepetition, Wu initiated a state court action against the debtors for fraud, conversion and other claims
Three months after the debtors filed their chapter 7 petition on September 18, 2007, Wu initiated the adversary proceeding against them.
With respect to the § 523(a)(2)(A) claim, Wu alleged that, in investing in Decon, he relied on the debtors' fraudulent representations. Wu contended that the debtors induced him to invest in Decon by assuring him that they would "take good care of [his] money" and that Decon could generate "good profits" for Wu through its real property investments. Wu claimed that the debtors never intended to honor their promises, but intended to use Decon to obtain from Wu funds for their own personal use.
As for the § 523(a)(2)(B) claim, Wu asserted that he relied on the debtors' written representation that they had the financial means to contribute equal capital into Decon in deciding to invest his funds in Decon.
With respect to the § 523(a)(4) claim, Wu contended that the debtors had a fiduciary duty to Wu because they controlled and managed Decon on behalf of all of its shareholders. He alleged that the debtors breached their fiduciary duty by appropriating for their own use proceeds from the sale of and loans against several of Decon's real properties.
Wu did not elaborate grounds for the remaining claims. With respect to the § 523(a)(6) claim, Wu simply alleged that the debtors' fraudulent acts were willful and malicious. As for the § 523(a)(19) claim, Wu merely contended that the debt owed to him by the debtors resulted from a settlement agreement between Ping Ma and Sunhill Development, Inc. ("Sunhill"), another investment company.
Sometime after the debtors filed their answer, the bankruptcy court set the matter for trial for July 14, 2010.
The bankruptcy court also entered an order establishing procedures for the presentation of evidence at trial ("trial procedure order"). The trial procedure order required Wu and the debtors to present direct testimony by written declaration. The trial procedure order further provided that declarations were admissible only if the declarants were present at trial for cross-examination. The trial procedure order further provided that any oral testimony at trial, other than cross-examination, would be limited to rebuttal testimony.
On the day of trial, the debtors attempted to submit a motion to dismiss under Civil Rule 12(b)(6)("Civil Rule 12(b)(6) motion").
Prior to trial, Wu submitted his trial brief and three supporting declarations: a declaration made by himself ("Wu declaration"), one by Zhang ("Zhang declaration"), and one by his attorney, Steven Coté ("Coté declaration").
The Coté declaration referenced various exhibits that Coté had compiled in a separately-filed "Compendium of Exhibits to Trial Brief and Related Declarations" ("Exhibit Compendium").
In his declaration, Wu explained that he, Zhang and the debtors formed Decon to purchase and develop real property. He explained that the debtors were entrusted with operating Decon as both he and Zhang resided in China.
Wu went on to describe how the debtors took out loans against the Chino Hills properties without his knowledge and consent. He asserted that Ping Ma admitted liability for the loans against the Chino Hills properties and agreed to repay those loans. He further asserted that Ping Ma admitted that she incurred debt against the Chino Hills properties because she neither followed "normal business practices" nor adhered to the "corporate management system." According to Wu, the debtors also executed an accounting that confirmed that he and Zhang invested more than $1 million in Decon.
Notably, Wu did not state that the debtors made false representations to him. He did not state that the debtors knew their representations, if any were made, were false. Nor did Wu indicate that the debtors made any such representations with the intent and purpose of deceiving him into investing in Decon. He also did not indicate that he relied on the debtors' misrepresentations in investing in Decon and that he sustained damages as a result of the debtors' misrepresentations.
The bankruptcy court issued its evidentiary rulings on each of the declarations at the start of trial. The bankruptcy court did not admit the Zhang declaration into evidence because she was not present at trial as required under the trial procedure order.
The bankruptcy court also admitted the Coté declaration into evidence, though it struck portions of the Coté declaration as well, based on the debtors' evidentiary objections. Before it issued its evidentiary ruling on the Coté declaration, the bankruptcy court questioned whether Coté could participate as a witness because he was Wu's attorney. Coté explained that he believed he could testify because his testimony did not have "anything that's of any substance to the issues that are involved in the non-dischargeability claim." Tr. of July 14, 2010 trial, 5:24-25, 6:1.
After the bankruptcy court issued its evidentiary rulings on the declarations, the debtors again moved to dismiss the adversary proceeding, this time under Civil Rule 41(b)("Civil Rule 41(b) motion").
Midway through trial, the bankruptcy court sua sponte reconsidered the debtors' motion to dismiss as to Ping Ma. The bankruptcy court went through each of the Section 523(a) claims in light of the evidence presented at trial. The bankruptcy court ultimately concluded that the evidence before it did not support any of the Section 523(a) claims; in fact, the bankruptcy court repeatedly noted that Wu's arguments did not comport with the testimony before it.
With respect to the § 523(a)(2)(B) claim, the bankruptcy court did not "see anything in the evidence before [it] dealing with [financial statements]." Tr. of July 14, 2010 trial, 65:12-13. Counsel for Wu admitted that "[t]here were no financial statements." Tr. of July 14, 2010 trial, 65:15.
The bankruptcy court next addressed the § 523(a)(4) claim. It determined that there was no evidence showing that Ping Ma owed a fiduciary duty to Wu and embezzled his funds. Rather, the bankruptcy court found, the evidence tended to indicate that Ping Ma embezzled funds from Decon.
As for the § 523(a)(6) claim, the bankruptcy court determined that Wu himself did not suffer any willful and malicious injury by Ping Ma; rather, "any willful or malicious injury would have been against Decon." Tr. of July 14, 2010 trial, 66:21-22. With respect to the § 523(a)(19) claim, counsel for Wu advised the bankruptcy court that Wu was no longer pursuing the § 523(a)(19) claim.
As for Wu's remaining § 523(a) claim, the bankruptcy court determined that Wu did not meet his burden of proof under § 523(a)(2)(A) because his declaration did not set forth facts establishing the elements of § 523(a)(2)(A). Specifically, the bankruptcy court found that Wu failed to assert that Ping Ma made false representations regarding Decon's real property investments and the use of Wu's investment funds. It determined that Wu also failed to state that he relied on her false representations in investing in Decon. Counsel for Wu conceded that there was nothing in the Wu declaration indicating that Ping Ma made such representations and that Wu relied on them.
The bankruptcy court repeatedly pointed out that Decon, not Wu, was the proper party to assert claims for relief against the debtors. It stated that "these [were] actions that Decon would have had [against the debtors], not the shareholders or owners [i.e., Wu and Zhang] of Decon." Tr. of July 14, 2010 trial, 60:18-20. Counsel for Wu even admitted that the claims for relief belonged to Decon, not Wu, a Decon shareholder. The bankruptcy court then granted the debtors' motion to dismiss as to Ping Ma, based in part on its reasoning that Wu "had the wrong Plaintiff" and that "any wrong alleged in the complaint would have been done to the corporation [i.e., Decon], not to the individuals [i.e., Wu and Zhang], at least for the purposes of [§] 523(a)(2), [4] and [6]." Tr. of July 14, 2010 trial, 71:19-23.
The bankruptcy court entered an order dismissing the adversary proceeding ("dismissal order") on August 27, 2010.
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.
Did the bankruptcy court err in dismissing the adversary proceeding?
We review the bankruptcy court's dismissal of an adversary proceeding for an abuse of discretion.
We review the bankruptcy court's factual findings for clear error and its legal conclusions de novo.
We may affirm on any ground supported by the record.
Counsel for the debtors moved to dismiss Wu's adversary proceeding based on Civil Rule 41(b). If the bankruptcy court dismissed on that basis, it relied on an incorrect procedural ground in dismissing the adversary proceeding. We nonetheless affirm the bankruptcy court, albeit on other grounds, as supported by the record before us.
We first must address Wu's argument concerning standing. According to Wu, the debtors argued for the first time in their motion to dismiss that he lacked standing to assert the Section 523(a) claims against them because the Section 523(a) claims belonged to Decon. Wu contends on appeal that the debtors should have raised the issue of standing earlier; specifically, the debtors should have included it in the joint pretrial order.
Contrary to Wu's contention, standing is a jurisdictional issue that can be raised at any time.
As we mentioned earlier, the debtors erroneously relied on Civil Rule 41(b) in moving to dismiss the adversary proceeding. Civil Rule 41(b) provides, in relevant part:
None of the bases for dismissal under Civil Rule 41(b) apply to the circumstances here. Wu clearly prosecuted the adversary proceeding; he took it all the way to trial. Wu neither failed to comply with any procedural rule nor with any court order. Civil Rule 41(b) therefore does not provide the proper procedural grounds to support dismissal.
Wu asserted claims under § 523(a)(2)(B) and (a)(19). The bankruptcy court summarily disposed of these two claims — with good reason.
Section 523(a)(2)(B) excepts from discharge any debt obtained "by means of a materially false written financial statement."
Section 523(a)(19) excepts from discharge any debt resulting "from a judgment for a violation of any federal or state securities law or for common law fraud, deceit or manipulation in connection with the purchase or sale of any security."
Section 523(a)(4) provides that any debt for fraud or defalcation while acting in a fiduciary capacity is excepted from discharge. Under § 523(a)(4), a breach of fiduciary duty excepted from discharge concerns instances involving express or technical trusts.
Section 523(a)(4) also excepts from discharge any debt incurred by embezzlement.
Here, Wu did not present any evidence establishing that there was an express trust between him and the debtors. Wu also failed to present evidence showing that the debtors embezzled funds
Section 523(a)(6) excepts from discharge any debt arising from willful and malicious injury by the debtor to another person or the property of another person.
Here, Wu did not present any evidence that he personally suffered any willful and malicious injury by the debtors. The Wu declaration did not set forth any facts that meet the elements of § 523(a)(6).
Section 523(a)(2)(A) excepts from discharge any debt for money, property or credit obtained by false pretenses, false representations or actual fraud. The creditor bears the burden of proving each element of its claim under § 523(a)(2)(A) by a preponderance of the evidence.
Wu solely relied on his own declaration to establish his claim for relief under § 523(a)(2)(A), as Zhang's declaration was not admitted, and Coté's declaration was not probative as to any of the elements of the § 523(a)(2)(A) claim. But the Wu declaration did not provide specific facts to establish each or any of the elements of a § 523(a)(2)(A) claim. Nothing in the Wu declaration indicated that the debtors knowingly made false representations to deceive him into investing in Decon. Nothing in the Wu declaration indicated that Wu justifiably relied on the debtors' misrepresentations in investing in Decon nor that he sustained damages as a result of the debtors' misrepresentations. As the bankruptcy court pointed out, the Wu declaration essentially "had to do with [the debtors] improperly taking these loans out [with respect to Decon properties] and not properly accounting for them." Tr. of July 14, 2010 trial, 66:4-9; 68:10-12. Wu simply failed to present evidence to establish a claim for relief under § 523(a)(2)(A).
Alternatively, we affirm the bankruptcy court's dismissal of the adversary proceeding under Civil Rule 52(c).
The court is justified in immediately dismissing the case or claim when a party pursuing the claim fails to demonstrate the elements of the claim in fact or in law.
The "right to be `fully heard' does not amount to a right to introduce every shred of evidence that a party wishes, without regard to the probative value of that evidence."
In deciding whether to dismiss a case or claim under Civil Rule 52(c), the court weighs the evidence and resolves the case based on the preponderance of the evidence.
During oral argument, counsel for Wu stated that he planned to prove Wu's case at trial through various documents and excerpts provided by Ping Ma, which he claimed to have attached to the Coté declaration. These documents and excerpts were not attached to the Coté declaration, but referenced therein and made part of the Exhibit Compendium. Wu did not provide the Exhibit Compendium in the record on appeal. We thus cannot determine whether the documents and exhibits in the Exhibit Compendium would have helped Wu establish the elements of his Section 523(a) claims.
Reviewing the documents Wu did provide in the record on appeal, we conclude that the bankruptcy court did not abuse its discretion in dismissing the adversary proceeding. Aside from his declaration, Wu only offered his live testimony at trial limited by the trial procedure order to rebuttal only, in support of his Section 523(a) claims. Admittedly, the bankruptcy court did not allow Wu to complete his testimony. What testimony Wu did provide, however, did not establish any of the elements of any of his Section 523(a) claims; his testimony held little probative value. Moreover, the trial procedure order limited Wu's testimony to rebuttal only, which would do nothing to establish any of the elements of his Section 523(a) claims. We surmise that it became "manifestly clear" to the bankruptcy court midway through trial that neither Wu's testimony nor his declaration would help prove his case. Once it determined that Wu did not present evidence sufficient to sustain his Section 523(a) claims, the bankruptcy court properly exercised its discretion to halt the trial and reconsider the debtors' motion to dismiss the adversary proceeding.
The bankruptcy court did not err in dismissing the adversary proceeding, but arguably relied on an incorrect procedure in doing so. There are sufficient grounds, supported by the record, however, for us to affirm the bankruptcy court's decision.
Based on our review of the record, we determine that dismissal was warranted because Wu did not meet his burden of proof to establish a claim for relief under any of the Section 523(a) claims. As an alternative ground, we determine that dismissal was warranted under Civil Rule 52(c). We AFFIRM.
We discuss the history of Civil Rule 52(c) more fully
