ROGER L. EFREMSKY, Bankruptcy Judge.
Plaintiff, Khalimakhan Takhtayeva (hereinafter, "Plaintiff") initially sued Defendants Fatima Bulgucheva (hereinafter "Fatima") and Ibragim Bulguchev (hereinafter "Ibragim") (together, the "Defendants") in 2015 in state court for money Plaintiff lent Defendants between 2004 and 2009. Several months later, Defendants filed for bankruptcy relief under chapter 7 of the Bankruptcy Code.
At the conclusion of Plaintiff's case in chief, counsel for Defendants brought an oral motion under Federal Rule of Civil Procedure 52(c), which is incorporated under Bankruptcy Rule 7052, for Judgment on Partial Findings. The court took the motion under submission. For the reasons stated herein, the court grants the Rule 52(c) motion. These are the court's findings of fact and conclusions of law as required by Rule 52.
Plaintiff resides in Almaty, Kazakhstan. She is well-educated, holding degrees in English and Economics. She speaks no less than six languages. She was a very successful businesswoman and entrepreneur. At one time, she co-owned and operated with an American partner, a business in Kazakhstan that employed over one hundred employees engaged in the sale of frozen chicken parts. Later, Plaintiff owned and operated an olive oil business in Spain, where she bought land and built a home. Additionally, Plaintiff bought and sold real property in Kazakhstan. Plaintiff also purchased real property in London, England for her daughter. Plaintiff's most successful business venture was owning and operating a furrier business in Kazakhstan, known as Winter Fantasy. The business not only manufactured fur garments, but specialized in refrigeration for storing furs and dry cleaning furs and leather garments. Plaintiff traveled extensively throughout Russia, France, Great Britain and Hong Kong, attending fur exhibitions. Winter Fantasy enjoyed elite clientele from around the world.
In 2005, Plaintiff sold Winter Fantasy. In 2007, Plaintiff opened a new business called Takha, which specialized in the cleaning and storage of fur and leather garments. Plaintiff ran this business until 2017. Plaintiff is now retired.
Fatima is also from Almaty, Kazakhstan. She graduated from the Institute of Food Industry in Kazakhstan. She holds no degree in accounting, nor does she have any formal training as an accountant.
Defendants married in 1984. In 1996, they moved to Greece. While there, Fatima had a small business where she would buy fur coats in Greece, and then re-sell them in Russia or Kazakhstan. The business was not successful and Fatima closed it in 1999. This was the same year that Defendants and their three young children immigrated to the United States.
Fatima's first job in the United States was as a housekeeper at a Hilton hotel. She later went to work for a small janitorial business that employed ten people, including Fatima. Several years later, Fatima acquired the business for a small sum of money. Fatima ran the business for a short period of time under the dba Comfort Palace. In approximately 2002, business slowed and Fatima closed Comfort Palace. Thereafter, Fatima stayed home to raise the children.
Ibragim is also from Kazakhstan. He graduated from construction college there. After graduation, he worked in Kazakhstan doing industrial and civil construction. Since immigrating to the United States, he has worked in construction. In addition to working for a contractor, Ibragim built up a loyal clientele doing handyman and small construction jobs on the side. Ibragim, however, does not hold a California contractor's license. Although he has taken the test to become a licensed California contractor several times, he has never passed it due to his difficultly in reading and understanding English.
Plaintiff and Fatima first met in the mid-1990s through the furrier business. Years later, after Defendants immigrated to the United States, Plaintiff and Fatima reconnected and began communicating with one another over the phone on a regular basis.
In or about 2001, Plaintiff visited Fatima and her family at the home that Defendants were renting in Pleasanton, California.
The record is clear that at one time, Plaintiff had a close relationship with Fatima and her family. Plaintiff visited with Defendants each year between 2001 and 2011, they went on vacations together, and Plaintiff was invited to Defendants' daughter's wedding in Alamo, California in 2008.
In July 2003, Defendants purchased their first home, located at Casa Grande Drive in San Ramon, California. They paid little or no money down.
In the latter part of 2003, Plaintiff and Fatima reached an arrangement whereby Plaintiff would lend money to Defendants. In return, Defendants would acquire real properties (homes) and either demolish and rebuild them or remodel them, and then attempt to re-sell them at a profit, repaying Plaintiff from the sale proceeds.
Based on the record, there is no disagreement that Plaintiff and Defendants had no up-front discussions and reached no agreements as to: (1) how much money Defendants would borrow from Plaintiff; (2) how many or what real properties would be acquired; (3) how the purchases would be financed; and/or (4) the budgets for the proposed construction projects. Moreover, there was no discussion of the terms and conditions of repayment to Plaintiff, except for the vague promise that she would be repaid from sale proceeds when the property or properties were sold. Equally astounding, but clear from the record, is that there was no writing setting forth the parties' respective responsibilities under the arrangement. Nor was there any writing as to how funds would be advanced; whether a written request for funds first be required setting forth the amount requested and the purpose; whether copies of real estate purchase contracts or copies of invoices for materials and/or labor had to be produced prior to receiving funds, or at some point thereafter; and/or whether loan proceeds were required to be deposited and held in any specific account. Moreover, there were no restrictions on the use of the funds once advanced.
At trial, Plaintiff testified that no interest was initially charged on the loans, and acknowledged that the funds she provided to Defendants between 2004 and 2009 were advanced without any instructions regarding how the funds should be used and without any requirements that the funds be deposited and/or held in any specific account. Specifically, at trial Plaintiff testified as follows:
At trial, Plaintiff made it quite clear that she did not want to be involved in Defendants' business activities. Specifically, in response to her own counsel's question, the following exchange occurred:
Additionally, while being cross-examined by Defendants' counsel at trial, Plaintiff acknowledged that the first time she discussed any division of profit with either Defendant was not until 2011. Specifically:
Equally clear from the record is the fact that at no time did either Defendant make any representations to Plaintiff, either orally or in writing, regarding their net worth or whether they purchased their first home outright. They also made no representations to Plaintiff that any of the properties purchased with Plaintiff's funds would be purchased outright.
At trial, evidence was introduced that the funds lent by Plaintiff to Defendants were sent via wire transfer from Plaintiff's account in Kazakhstan to Defendants' bank account at Wells Fargo Bank in the United States. The funds were either wired by Plaintiff, or by her son or her driver, who were both described as Plaintiff's agents. It appears to the court that the transfers were in increments of less than $10,000 each.
In 2004, in keeping with their ill-defined lending arrangement with Plaintiff, Defendants began demolition of the home at Casa Grande. In the same year, Defendants acquired the properties at Roundhill Road and La Sonoma, both in Alamo, California. Then, in 2005, Defendants acquired the properties at San Marcos Place in San Ramon, California, and Livorna Heights, in Alamo, California.
To be clear, between 2004 and 2009, Plaintiff lent Defendants $5,275,000.
By 2008, when the Great Recession hit, none of the homes had been re-sold. In the same year, Plaintiff had Ibragim sign a Declaration of Receipt of Money in the amount of $4.7 million, reflecting funds Plaintiff had previously lent to Defendants. The Declaration of Receipt confirmed the money was to be paid back to Plaintiff upon the completion and sale of the real properties.
Three years later, all five homes had still not been re-sold. So in August 2011, Plaintiff had Ibragim sign a second Declaration of Receipt of Money indicating a new balance including additional funds lent, for a total of $5.275 million. This second Declaration again confirmed the money that Plaintiff had lent would be re-paid upon completion and sale of the real properties.
Finally, having not been repaid any of the money lent, in October 2013, Plaintiff had Defendants sign a promissory note to repay the $5.275 million. The promissory note required payment in four installments, with interest at 2% per annum from the date the funds were advanced. The first installment was due December 15, 2013.
Plaintiff lent Defendants an additional $123,790 between 2010 and 2014. Specifically, Plaintiff lent $5,000 in 2010, $106,790 in 2013, and another $12,000 in 2014.
From the Stipulated Facts, the properties located at Livorna Heights Road, 114 La Sonoma and 2946 Roundhill Road, Alamo, California, were all lost to foreclosure in 2011.
The court has jurisdiction over this matter under 28 U.S.C. § 157 and 28 U.S.C. § 1334. This is a core proceeding pursuant to 28 U.S.C. §§ 157(b)(2)(A), (I) and (J).
The court will dispatch the 11 U.S.C. § 727(a)(6) cause of action found in the caption of the complaint and prayer. Nowhere in the body of the complaint does it articulate, let alone reference a claim under 11 U.S.C. §§ 727(a)(6)(A), (B) or (C).
Section 727(a)(4)(A) bars a debtor's discharge where the debtor "knowingly and fraudulently" makes a false oath or account.
A debtor has a duty to prepare his schedules and statements carefully, completely, and accurately.
A false oath may involve a false statement or omission in the debtor's schedules or statements.
The fundamental purpose of § 727(a)(4) is to insure that the trustee and creditors have accurate information without having to conduct costly investigations.
As explained by the Ninth Circuit, false oaths are material if they bear a relationship to the debtor's business transactions or estate, or concern the discovery of assets, business dealings, or the existence and disposition of the debtor's property.
An omission or misstatement that "detrimentally affects administration of the estate" is material.
Fraudulent intent is usually proven by circumstantial evidence or by inferences drawn from the debtor's conduct.
A pattern of falsity can also clearly demonstrate fraudulent intent.
Concerning the debtor's schedules and statements, the veracity of these disclosures is essential to the successful administration of any bankruptcy case.
The complaint alleges that Defendants made numerous misrepresentations of fact at their initial creditors' meeting on September 8, 2015. Plaintiff's counsel, however, failed to provide the court with a printed copy of the transcript of the meeting of creditors and nothing offered at trial substantiated these allegations. As such, the record is devoid of any facts that would support such a cause of action. The court finds for the Defendants on the 11 U.S.C. § 727(a)(4)(A) cause of action.
Under 11 U.S.C. § 727(a)(5), a debtor may not be granted a discharge if the debtor "has failed to explain satisfactorily, before determination of denial of discharge under this paragraph, any loss of assets or deficiency of assets to meet the debtor's liabilities." Section 727(a)(5) is broadly drawn and gives the bankruptcy court power to decline to grant a discharge in bankruptcy when the debtor does not adequately explain a shortage, loss, or disappearance of assets.
Under § 727(a)(5) an objecting party bears the initial burden of proof and must demonstrate: (1) debtor at one time, not too remote from the bankruptcy petition date, owned identifiable assets; (2) on the date the bankruptcy petition was filed or order of relief granted, the debtor no longer owned the assets; and (3) the bankruptcy pleadings or statement of financial affairs do not reflect an adequate explanation for the disposition of the assets.
Glaringly absent at trial was any evidence of identifiable assets that went missing and/or were unaccounted for. No evidence was introduced that this issue was raised by Plaintiff or the chapter 7 Trustee at the meeting of creditors, nor any other time while the case was being administered by the chapter 7 Trustee. In fact, the chapter 7 Trustee filed her Report of No Distribution on October 6, 2016. Additionally, Mr. Harry, Plaintiff's own expert and forensic accountant reported the available records he was provided were sufficient to enable him to determine what the Defendants did with the money lent to them by Plaintiff.
There was no evidence presented at trial to support a finding that Defendants failed to satisfactorily explain a shortage, loss, or disappearance of assets. Therefore, the court finds in favor of the Defendants on the 11 U.S.C. § 727(a)(5) cause of action.
Section 523(a)(2)(A) provides that, "A discharge under . . . 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." To prevail on a claim under § 523(a)(2)(A), a creditor must prove five elements: "(1) misrepresentation, fraudulent omission or deceptive conduct by the debtor; (2) knowledge of the falsity or deceptiveness of his statement or conduct; (3) an intent to deceive; (4) justifiable reliance by the creditor on the debtor's statement or conduct; and (5) damage to the creditor proximately caused by its reliance on the debtor's statement or conduct."
As to this 11 U.S.C. § 523(a)(2)(A) cause of action, Plaintiff acknowledges that the allegation of Defendants' misrepresentation, fraudulent omission and/or deceptive conduct centered upon Plaintiff's assumptions regarding the underlying agreement for this "lending arrangement," including her assumption that one hundred percent (100%) of the $5.275 million lent to Defendants would go for the outright purchase of real properties (i.e., no debt financing) and construction-related expenses. First, Plaintiff contends Defendants fraudulently failed to tell Plaintiff that they would be supporting their family with the loan proceeds. Second, Plaintiff contends Defendants engaged in deceptive conduct by failing and/or refusing to provide Plaintiff with ongoing accountings of how the loan proceeds were used. Finally, Plaintiff contends in 2011, Defendants failed to disclose to Plaintiff that three (3) of the properties had been foreclosed, while purporting to claim that four of the properties were rented out.
Plaintiff was a successful and sophisticated business woman. She wanted to get her money out of Kazakhstan and as she testified, put it to work in the United States. Unfortunately, she chose to loan to Defendants, an unsophisticated couple who had no business experience in acquiring real property, with the intent to demolish and rebuild, remodel or subdivide and resell the same at a profit. At the same time, this was the run-up to the "Great Recession."
At the outset of this ill-defined lending arrangement, the parties did not engage in any discussions, let alone reach any agreement, on how much money would be lent, how many or what real properties would be acquired, or how the purchase of real properties would be financed, nor were there any discussions regarding budgets for the construction projects. There were no discussions of the term and conditions of repayment; only that Plaintiff was to be repaid from sale proceeds when the properties sold.
There was no writing setting forth the parties' respective responsibilities under the business venture. No discussion, let alone a writing, on what terms and conditions monies would be lent. For example, would the request have to be in writing, setting forth the amount to be borrowed and for what purpose. No discussion on whether copies of real estate purchase contracts or copies of invoices for material and/or labor had to be first produced or immediately thereafter for such expenditures. There was no discussion, let alone a writing, restricting the use of the money lent or any certain deposit or reporting requirements for the money.
Plaintiff acknowledged during trial no interest was initially charged on the loan proceeds. Plaintiff did testify she was to be repaid when the property or properties sold, with profit. Yet there was no discussion regarding what the profit split would be, let alone how it would be calculated. Plaintiff even testified that this was not to be her business, specifically testifying, "I'm not a participant in it. I wouldn't be able — I wouldn't be able to oversee it. I live in a different country, in Kazakhstan, and not in America."
Plaintiff testified she thought before lending the money to Defendants that Defendants were financially well-off and that they owned their home at Casa Grande outright. Yet the Defendants made no such representations to Plaintiff orally or in writing. This was pure speculation on Plaintiff's part.
Plaintiff also asserted that she only advanced money upon a specific request by Defendants. Plaintiff failed to provide evidence regarding requests for money for specific items, or corresponding wire transfers, or what the money was ultimately used for. There were allegedly hundreds of wire transfers. Yet the court was provided with no evidence that requests for money for specific items were made, a corresponding wire transfer was made, and the money used for another purpose.
As for Plaintiff's contention that Defendants had to account to her for how the money she lent them was spent, no such requirement was ever agreed to orally or in writing. Again, there were no restrictions on the use of the money lent to the Defendants. If Plaintiff was dissatisfied with the Defendants' failure to account for the use of the monies loaned, she was free to cease making any further advances.
As to Plaintiff's contention that the Defendants fraudulently omitted to tell her that they would not each be working full-time jobs once she began lending monies to them, there was no requirement to hold down a separate full-time job in order to borrow money from her. Once again, Plaintiff made an assumption that was unsupported by the record. This was no fault of the Defendants.
According to the stipulated facts, by 2009, Plaintiff had lent all of the $5.275 million to the Defendants. Additionally, in 2010, Plaintiff lent another $5,000 to Ibragim to visit his dying mother in Kazakhstan. Plaintiff claims that in 2011, when she was staying with and visiting the Defendants at the Roundhill house, they failed to inform her that three of the properties had been foreclosed, including the Roundhill house. Additionally, Plaintiff testified that the Defendants informed her all of the four other properties were rented.
Even after learning of the foreclosures, Plaintiff lent the Defendants another $106,790 in 2013, and $12,000 in 2014 for their business venture in Venezuela, with the hope that the Defendants would earn money on the oil/fuel business venture and pay her back the other money she had already lent them. Once again, there were no written loan documents or promissory notes.
Unfortunately for all concerned, the business venture in Venezuela proved unsuccessful. Plaintiff was not paid back for any of these funds as well. Based on these facts, the court finds for the Defendants on the 11 U.S.C. § 523(a)(2)(A) cause of action.
Section 523(a)(4) provides that "A discharge under section 727. . . of this title does not discharge an individual debtor from any debt — . . . (4) for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny." 11 U.S.C. § 523(a)(4).
"Defalcation" is defined as the "misappropriation of trust funds or money held in any fiduciary capacity; the failure to properly account for such funds."
For purposes of this section of the Bankruptcy Code excepting a debt from discharge "for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny" requires a culpable state of mind involving knowledge of, or gross recklessness in respect to, the improper nature of the relevant fiduciary behavior. In other words, it requires a showing of wrongful intent.
Under Ninth Circuit precedent, whether a relationship is a fiduciary one within the meaning of § 523(a)(4) is a question of federal law.
To "embezzle" means willfully to take, or convert to one's own use, another's money or property, of which the wrongdoer acquired possession lawfully, by reason of some office or employment or position of trust. BLACK'S LAW DICTIONARY (6th Ed. 1990).
Larceny is the unlawful taking and carrying away of property of another with intent to appropriate it to use inconsistent with the latter's rights.
At trial, Plaintiff failed to provide any evidence that the Defendants committed fraud or defalcation while acting in a fiduciary capacity. There was no evidence of an express or technical trust, let alone one that was imposed before and without reference to the wrongdoing that caused the debt. Moreover, there was no evidence to support a finding of embezzlement or larceny. All of the money received by the Defendants from Plaintiff were in the nature of unsecured loans, with no restrictions on the use of the funds.
It is astounding that a sophisticated businesswoman like Plaintiff, dealing with unsophisticated people like the Defendants, would have lent this amount of money without any loan documentation. Nonetheless, all of the funds lent by Plaintiff to the Defendants, complete possession and title to the monies all transferred to the Defendants. Furthermore, Plaintiff testified at trial that she was not involved in the Defendants' business. Plaintiff was adamant this was not her business. As such, the court finds for the Defendants on the 11 U.S.C. § 523(a)(4) cause of action.
Section 523(a)(6) prevents discharge "for willful and malicious injury by the debtor to another entity or to the property of another entity." 11 U.S.C. § 523(a)(6). In
In the 9th Circuit, "§ 523(a)(6)'s willful injury requirement is met only when the debtor has a subjective motive to inflict injury or when the debtor believes that injury is substantially certain to result from his own conduct."
A malicious injury involves: (1) a wrongful act; (2) done intentionally; (3) which necessarily causes injury; and (4) is done without just cause or excuse.
The money borrowed by the Defendants from Plaintiff was without any restrictions on its use by the Defendants. There was a general understanding that some of the funds borrowed would be used to acquire real properties and either demolish and rebuild them or remodel them and attempt to re-sell them at a profit, repaying Plaintiff from the sale proceeds.
This was an ill-defined loan arrangement. As previously noted, there were no upfront discussions as to how much money would be borrowed, how many or what properties would be acquired, how the purchase of real property would be financed, nor any discussion of budgets for the construction projects. There were no restrictions on the use of the money or depositing or reporting requirements on the use of the money. Moreover, there was no discussion of the terms and conditions of repayment of the funds borrowed except when the property or properties were sold, Plaintiff was to be repaid from the sale proceeds.
Furthermore, there was no discussion as to how Plaintiff would be repaid if the property or properties did not sell or, worse yet, were lost in foreclosure. It was not until October 2013 that Plaintiff had the Defendants sign a promissory note which set forth repayment terms for the $5.275 million borrowed by the Defendants from Plaintiff. The evidence presented at trial established the Defendants acquired no less than five properties, demolished and/or did major construction on three of the properties, and some remodeling on one or two others. Unfortunately, the properties did not sell. Like so many others who acquired real properties in the early 2000s, with the hope of reselling the same at a profit, when the Great Recession hit in 2008, fortunes were lost. In the case at bar, Plaintiff failed to meet the burden of proof that the Defendants had any subjective motive to inflict injury on Plaintiff. Nor did Plaintiff prove by a preponderance of the evidence that the Defendants believed that injury was substantially certain to result to Plaintiff from their conduct.
As to the remaining funds borrowed totaling $123,790, once again there were no loan documents, nor restrictions on the use of the money. Five thousand dollars was used by Ibragim to visit his dying mother in Kazakhstan, $12,000 to acquire a truck used by the LLC and another $106,790 for use by the LLC with the hope to generate funds to repay Plaintiff.
Based on all of the above, the court finds for the Defendants on the 11 U.S.C. § 523(a)(6) cause of action.
For all of the foregoing reasons, the court finds in favor of Defendants and against Plaintiff on all causes of action. The court further finds that Defendants are entitled to a discharge in the underlying bankruptcy case and the debt owed to Plaintiff is dischargable. The court will issue a separate judgment in conformance with this Memorandum Decision. The Clerk's Office is directed to close this adversary proceeding upon entry of the judgment.
