In re: Peter David Kempf

FILED FEB 14 2012 1 SUSAN M SPRAUL, CLERK U.S. BKCY. APP. PANEL 2 OF THE NINTH CIRCUIT UNITED STATES BANKRUPTCY APPELLATE PANEL 3 OF THE NINTH CIRCUIT 4 5 In re: ) BAP No. CC-11-1317-CaPaMk ) 6 PETER DAVID KEMPF, ) Bk. No. 8:09-bk-16783-TA ) 7 Debtor. ) Adv. No. 8:09-AP-01661-TA ______________________________) 8 ) PETER DAVID KEMPF, ) 9 ) Appellant, ) 10 ) v. ) M E M O R A N D U M1 11 ) HITACHI CAPITAL AMERICA CORP.,) 12 ) Appellee. ) 13 ______________________________) 14 Argued and Submitted on January 19, 2012 at Pasadena, California 15 Filed - February 14, 2011 16 Appeal from the United States Bankruptcy Court 17 for the Central District of California 18 Honorable Theodor C. Albert, Bankruptcy Judge, Presiding 19 Appearances: Allan Leguay of the Law Offices of Allan Leguay, argued on behalf of Appellant Peter David Kempf; 20 Frank T. Pepler of DLA Piper (US), LLP, argued on behalf of Appellee Hitachi Capital America 21 Corporation. 22 Before: CASE2, PAPPAS, and MARKELL, Bankruptcy Judges. 23 24 1 25 This disposition is not appropriate for publication. Although it may be cited for whatever persuasive value it may 26 have (see Fed. R. App. P. 32.1), it has no precedential value. See 9th Cir. BAP Rule 8013-1. 27 2 Hon. Charles G. Case II, United States Bankruptcy Judge for 28 the District of Arizona, sitting by designation.

1 In this appeal, Debtor/Appellant Peter David Kempf (“Kempf”) 2 argues that: (1) the bankruptcy court erred in deciding that 3 Creditor/Appellee Hitachi Capital America Corporation’s 4 (“Hitachi”) amended complaint (the “First Amended Complaint”), on 5 which trial was held, related back to its initial complaint that

6 initiated the action (the “Original Complaint”); (2) this Panel 7 should review the bankruptcy court’s factual findings de novo; 8 and (3) the bankruptcy court erred in concluding that Hitachi 9 reasonably relied on Kempf’s fraudulent financial statement in 10 extending credit to Kempf’s business, CardioCura Capital West, 11 LLC (“CardioCura”), thereby excepting Hitachi’s claim based on 12 Kempf’s guaranty from discharge under section 523(a)(2)(B) of the 13 Bankruptcy Code3. For the reasons below, we AFFIRM. 14 I. Facts 15 Kempf was the principal and owner of CardioCura, a start-up 16 mobile CT business, and Hitachi is an equipment lessor. In 17 January 2006, CardioCura, through Kempf, signed a $1,400,000 18 lease financing proposal for a mobile Phillips CT device that 19 included a proposed limited personal guaranty from Kempf (the 20 “Guaranty”). 21 In February 2006, Hitachi prepared a transaction analysis 22 that analyzed CardioCura’s: (1) feasibility; (2) working capital, 23 including Kempf’s $300,000 contribution; (3) projected gross and

24 3 Unless specified otherwise, all “Chapter” and “Section” 25 references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, all “Rule” references are to the Federal Rules of Bankruptcy 26 Procedure, Rules 1001-9037, all “Civil Rule” references are to 27 the Federal Rules of Civil Procedure, 1-86, and all “Evidence Rule” references are to the Federal Rules of Evidence, Rules 101- 28 1103.

1 net revenue; (4) risks; and (5) credit enhancements, including 2 Kempf’s $600,000 Guaranty (later increased to $736,538). Kempf 3 also provided Hitachi with his and his wife’s: (1) 2003 and 2004 4 joint tax returns; and (2) a joint personal financial statement 5 (the “Financial Statement”), that indicated the Kempfs’ net worth 6 to be $4,207,084, including a $2,699,188 investment known as the

7 Angel Trust (the “Trust”). While the tax returns suggest that 8 Kempf’s wife is the sole beneficiary of the Trust, no such 9 reference is made on the Financial Statement. It was undisputed 10 at trial that Kempf had no right of access to the assets of, or 11 income from, the Trust. 12 Hitachi lent CardioCura $1,440,000 on March 16, 2006 (the 13 “Loan”), and CardioCura executed a master equipment lease (the 14 “Lease”) on March 22, 2006. The Lease went into default in 15 August 2007, and Hitachi obtained a California state court 16 judgment against CardioCura for $1,410,635.37 and Kempf for 17 $736,538. 18 Kempf filed his Chapter 7 petition on July 7, 2009; his 19 schedules made no reference to the Trust. Hitachi timely filed 20 an adversary proceeding to determine the state court judgment’s 21 dischargeability. 22 In its Original Complaint, Hitachi relied on section 23 523(a)(2)(A), claiming that Kempf obtained the Loan through 24 fraud. Hitachi’s First Amended Complaint, filed December 31, 25 2009, included a second claim for relief based on section 26 523(a)(2)(B), claiming that Kempf obtained the Loan through use 27 of a false financial statement. Hitachi argued that Kempf 28 knowingly misrepresented his net worth because he knew that he

1 held no interest in the Trust, which constituted a major 2 percentage of his purported net worth. Kempf filed a motion to 3 dismiss the First Amended Complaint arguing that it did not 4 relate back to the Original Complaint under Civil Rule 15, 5 incorporated in Rule 7015, and therefore was untimely. The 6 bankruptcy court denied the motion.

7 At trial, the bankruptcy court found that Kempf knew that 8 neither Kempf nor the community had an interest in the Trust and 9 that including it in the Financial Statement was a false 10 representation that he and the community did have such an 11 interest. The bankruptcy court noted that Kempf was a 12 sophisticated businessman and knew that it was highly unlikely 13 that Hitachi would lend him capital for a start-up business if he 14 did not include the Trust as part of his net worth. It also 15 noted that no evidence was presented to suggest that the issue 16 was “red-flagged” for review regarding Kempf’s Financial 17 Statement. The bankruptcy court found that: (1) the Financial 18 Statement as written was materially false; (2) Kempf had a duty 19 to make the status of the Trust clear; (3) Kempf intended to 20 deceive Hitachi when he prepared and submitted the Financial 21 Statement, which showed a higher net worth than in reality; and 22 (4) Hitachi reasonably relied on Kempf’s Financial Statement in 23 extending credit to him. The bankruptcy court entered judgment 24 in favor of Hitachi on June 9, 2011, holding Hitachi’s state 25 court judgment against Kempf non-dischargeable under section 26 523(a)(2)(B). Kempf filed a timely appeal from the judgment on 27 June 21, 2011. 28

1 II. Jurisdiction 2 The bankruptcy court had jurisdiction over this core 3 proceeding pursuant to 28 U.S.C. §§ 1334 and 157(b)(1)(I). This 4 Panel has appellate jurisdiction pursuant to 28 U.S.C. § 158. 5 III. Issues 6 Did Hitachi’s First Amended Complaint relate back to the

7 facts alleged in its Original Complaint under Civil Rule 15, as 8 made applicable by Rule 7015? 9 What standard of review should the Panel apply to the 10 factual findings in this case? 11 Did Hitachi reasonably rely on Kempf’s fraudulent financial 12 statement as required under section 523(a)(2)(B)? 13 IV. Standards of Review 14 We review a bankruptcy court’s statutory construction and 15 conclusions of law, including interpretation of Bankruptcy Code 16 provisions, de novo. Einstein/Noah Bagel Corp. v. Smith (In re 17 BCE W., L.P.), 319 F.3d 1166, 1170 (9th Cir. 2003); see Hoopai v. 18 Countrywide Home Loans, Inc. (In re Hoopai), 369 B.R. 506, 509 19 (9th Cir. BAP 2007), aff’d in part, vacated in part, rev’d in 20 part, 581 F.3d 1090 (9th Cir. 2009); USAA Fed. Sav. Bank v. 21 Thacker (In re Taylor), 599 F.3d 880, 887-88 (9th Cir. 2010). 22 We review the bankruptcy court’s factual findings, including 23 a finding that a creditor reasonably relied upon false financial 24 statements, under the clearly erroneous standard. Fed. R. Bankr. 25 P. 8013; see Hughes v. Lawson (In re Lawson), 122 F.3d 1237, 1240 26 (9th Cir. 1997); Hansen v. Moore (In re Hansen), 368 B.R. 868, 27 875 (9th Cir. BAP 2007); Candland v. Ins. Co. of N. Am. (In re 28 Candland), 90 F.3d 1466, 1469 (9th Cir. 1996); see also Mendez v.

1 Salven (In re Mendez), 367 B.R. 109, 113 (9th Cir. BAP 2007); 2 Clear Channel Outdoor, Inc. v. Knupfer (In re PW, LLC), 391 B.R. 3 25, 32 (9th Cir. BAP 2008). A factual finding is clearly 4 erroneous if the appellate court, after reviewing the record, has 5 a firm and definite conviction that a mistake has been committed. 6 Anderson v. City of Bessemer City, N.C., 470 U.S. 564, 573-74

7 (1985); see Mendez, 367 B.R. at 113. If two views of the 8 evidence are possible, the trial judge’s choice between them 9 cannot be clearly erroneous. Anderson, 470 U.S. at 573-75; see 10 Hansen, 368 B.R. at 874-75. 11 Whether an amended complaint relates back to the date of the 12 original under Civil Rule 15 is a legal question that is reviewed 13 de novo. Dominguez v. Miller (In re Dominguez), 51 F.3d 1502, 14 1509-10 (9th Cir. 1995); see also Magno v. Rigsby (In re Magno), 15 216 B.R. 34, 37-38 (9th Cir. BAP 1997). 16 V. Discussion 17 A. Relation Back of Hitachi’s First Amended Complaint to 18 the Original Complaint 19 Kempf moved to dismiss Hitachi’s First Amended Complaint on 20 the grounds that the second claim for relief did not relate back 21 to the Original Complaint and therefore was time-barred under 22 Rule 4007(c). He claimed that the First Amended Complaint did 23 not arise out of the same conduct, transaction, or occurrence set 24 forth in the Original Complaint because it “outlined a new set of 25 facts and legal theories involving a previously unmentioned Angel 26 Trust . . . and completely new allegations under Section 27 523(a)(2)(B) of the Bankruptcy Code.” Aplt ER p. 28. 28 Hitachi argued that its Original and First Amended

1 Complaints both relate to Kempf’s intentional, willful, wanton, 2 and/or negligent signing of the Lease and Guaranty with no intent 3 to repay the Loan. It argued that Counts I and II both arise out 4 of the same underlying Loan transaction to CardioCura and Kempf’s 5 inducement of Hitachi to enter into the Loan by fraud. 6 Additionally, Hitachi noted that it only discovered evidence

7 relating to Count II after Kempf admitted in his adversary 8 proceeding deposition to having no property rights in the Trust. 9 Therefore, Hitachi claimed that it was “disingenuous for Debtor 10 to claim that Hitachi’s further allegations of fraud, which 11 Debtor concealed from Hitachi . . . prejudices this bankruptcy 12 discharge.” Aple. ER 232 (emphasis in original). The bankruptcy 13 court denied Kempf’s motion. 14 An amendment to a pleading relates back to the date of the 15 original pleading when it asserts a claim or defense that arose 16 out of the same conduct, transaction, or occurrence set out in 17 the original. See Fed. R. Civ. P. 15(c)(1)(B); Fed. R. Bankr. P. 18 7015. This link will be found when the claim to be added is 19 likely to be proven by the same kind of evidence that would be 20 used to support the original pleading. Magno, 216 B.R. at 39; 21 see Dominguez, 51 F.3d at 1510. The relation back doctrine is 22 liberally applied, and its basic criterion is whether the 23 original complaint gave the defendant enough notice of the nature 24 of the plaintiff’s claim so that he should not have been 25 surprised by the amplification of the allegations. Santamarina 26 v. Sears, Roebuck & Co., 466 F.3d 570, 573 (7th Cir. 2006); see 27 Miller v. Am. Heavy Lift Shipping, 231 F.3d 242, 248 (6th Cir. 28 2009); Tiller v. Atl. Coast line R. Co., 323 U.S. 574, 581

1 (1945); Rural Fire Prot. Co. v. Hepp, 366 F.2d 355, 362 (9th Cir. 2 1966). Thus, if one can fairly perceive some relationship 3 between what was pleaded in the original and amended complaints, 4 the amended complaint will relate back. Gelling v. Dean (In re 5 Dean), 11 B.R. 542, 545 (9th Cir. BAP 1981). 6 Hitachi’s Original Complaint alleged fraud and

7 misrepresentation under section 523(a)(2)(A) relating to Kempf’s 8 promise to pay his Guaranty. The First Amended Complaint added 9 allegations under section 523(a)(2)(B) stating that Kempf 10 fraudulently included a high asset entity in his Financial 11 Statement in order to induce Hitachi to lend to CardioCura. 12 While Hitachi’s First Amended Complaint includes an additional 13 claim for relief, both complaints concern Kempf’s alleged 14 fraudulent misrepresentations made to secure the Lease and will 15 likely be proven by the same kind of evidence – the Lease, 16 statements Kempf made to secure the Lease, documents relating to 17 Lease, etc. Kempf even admits that “the two complaints share the 18 fact that they arise out of the same [L]ease transaction.” Aplt. 19 Br. 25. 20 Because both Hitachi’s Original and First Amended Complaints 21 are based upon events and circumstances surrounding Kempf’s 22 execution and delivery of the Lease and Guaranty with no 23 intention of repayment, the Original Complaint gave Kempf enough 24 notice about the nature of Hitachi’s claim so that he would not 25 be surprised by the additional allegations in the First Amended 26 Complaint. Thus, the bankruptcy court did not err in holding 27 that Hitachi’s First Amended Complaint related back to the 28 Original Complaint under Civil Rule 15(c)(1)(B).

1 B. The standard under which this Panel will review the 2 bankruptcy court’s factual findings 3 It is a well-known rule in the federal courts generally, and 4 the Ninth Circuit specifically, that findings of fact are 5 reviewed on appeal under a clearly erroneous standard. See 6 Lawson, 122 F.3d at 1240; Hansen, 368 B.R. at 874-75; Candland,

7 90 F.3d at 1469; see also Mendez, 367 B.R. at 113; PW, LLC, 8 391 B.R. at 32. Kempf contends that because the bankruptcy court 9 was presented with uncontested facts and did not make credibility 10 determinations, the facts should be reviewed de novo since the 11 “evidentiary palate” here is identical to that of summary 12 judgment. 13 In support of this argument, Kempf cites to In re Burdge, 14 where the panel applied de novo review because the facts were 15 undisputed. AT&T Universal Card Servs. v. Burdge (In re Burdge), 16 198 B.R. 773, 776 (9th Cir. BAP 1996). The Burdge panel noted 17 that factual findings are reviewed under the clearly erroneous 18 standard and legal conclusions are reviewed de novo; and it 19 concluded that because there were no facts in dispute, the only 20 issue was a question of law to be reviewed de novo. Burdge, 21 198 B.R. at 776. Burdge, therefore, does not stand for the 22 proposition that both facts and law may be reviewed de novo but 23 merely reasserts the established legal rule that legal 24 conclusions are reviewed de novo. Id. 25 While Kempf is correct that summary judgment determinations 26 are reviewed de novo, this case is not remotely similar to a 27 summary judgment case because there were a number of facts in 28 dispute and credibility determinations were made. See Padfield

1 v. AIG Life Ins. Co., 290 F.3d 1121, 1124 (9th Cir. 2002); Turtle 2 Rock Meadows Homeowners Ass’n. v. Slyman (In re Slyman), 234 F.3d 3 1081, 1085 (9th Cir. 2000). 4 A review of the record reveals a number of factual disputes. 5 Even with only Hitachi’s witness, Donald O. Link, present at 6 trial, the trial ran for approximately five hours and included a

7 thorough cross and re-cross examination of Mr. Link by Kempf’s 8 counsel, which was quite hostile at times. During Mr. Link’s 9 cross-examination, Kempf’s attorney asked whether CardioCura’s 10 business plan was the reason Hitachi entered into the Lease and 11 Guaranty. Mr. Link disagreed with this conclusion stating that 12 Hitachi entered the Lease because it approved the structure of 13 the transaction. While Mr. Kempf’s counsel tried to elicit from 14 Mr. Link that the Trust was important for the transaction’s 15 approval, Mr. Link pointed out that Kempf’s representations on 16 his Financial Statement as a whole, and not necessarily only the 17 representations of the Trust, were important in the transaction. 18 At another point in the cross-examination, Kempf’s attorney 19 tried to impeach Mr. Link by arguing that he presented 20 conflicting facts in his deposition as compared to his trial 21 testimony regarding his exposure to the transaction at issue. 22 Even the bankruptcy court noted that Kempf’s counsel was making 23 “a very questionable assertion” from Mr. Link’s declaration, his 24 testimony, and documents entered into evidence that the Trust was 25 the most important element in Hitachi’s agreement to extend 26 credit to CardioCura. Hr’g Tr. 53:23. 27 A simple review of the record establishes that many facts 28 were in dispute and that the bankruptcy court was left with a

1 number of credibility determinations after the cross, redirect, 2 and re-cross examination of the only witness. Therefore, clearly 3 erroneous is the correct standard of review with respect to the 4 bankruptcy court’s factual findings. 5 C. The level of reliance required by creditors for section 6 523(a)(2)(B) non-dischargeability complaints

7 Kempf argues that the bankruptcy court erred by absolving 8 Hitachi of any duty to make even a minimal inquiry or 9 investigation, stating that reasonable reliance requires the 10 application of a community standard of conduct. See Field v. 11 Mans, 516 U.S. 59, 70-71 (1995). Hitachi argues that Kempf 12 ignores the plethora of facts that demonstrate its reasonable 13 reliance, which included: (1) investigating Kempf’s financial 14 status; (2) preparing a transaction analysis; and (3) ordering a 15 separate background report on Kempf that did not show any reason 16 for alarm. 17 At trial, Hitachi based its non-dischargeability theory on 18 section 523(a)(2)(B), which reads in pertinent part:

19 (a) A discharge under . . . this title does not discharge an individual debtor from any 20 debt – (2) for money, property, services, or an extension, renewal, or refinancing of 21 credit, to the extent obtained by – (B) use of a statement in writing –(I) that is materially 22 false; (ii) respecting the debtor’s . . . financial condition; (iii) on which the 23 creditor to whom the debtor is liable for such money, property, services, or credit 24 reasonably relied; and (iv) that the debtor caused to be made or published with intent to 25 deceive[.]

26 11 U.S.C. § 523(a)(2)(B) (2010); see Field, 516 U.S. at 64. This 27 code section requires "reasonable reliance," a term that courts 28 can apply without additional help and is determined on a case-by-

1 case basis. Candland, 90 F.3d at 1471; Gertsch v. Johnson & 2 Johnson (In re Gertsch), 237 B.R. 160, 170 (9th Cir. BAP 1999); 3 Deutsche Fin. Serv. Corp. v. Osborne (In re Osborne), 257 B.R. 4 14, 21 (Bankr. C.D. Cal. 2000). When there is evidence of 5 materially fraudulent statements, little investigation is 6 required for a creditor to have reasonably relied on the debtor’s

7 representations. Gertsch, 237 B.R. at 170; see Gosney v. Law 8 (In re Gosney), 205 B.R. 418, 421 (9th Cir. BAP 1996); Candland, 9 90 F.3d at 1471; La Trattoria, Inc. v. Lansford (In re Lansford), 10 822 F.2d 902, 904 (9th Cir. 1987). 11 Lenders do not have to hire detectives before they are found 12 to have reasonably relied upon the debtor’s false financial 13 statements. Gertsch, 237 B.R. at 170; see, e.g., Candland, 14 90 F.3d at 1471; Ashley v. Church (In re Ashley), 903 F.2d 599, 15 604-05 (9th Cir. 1990). The mere fact that a creditor could have 16 performed a more thorough investigation or could have avoided its 17 loss by independently attempting to verify the information 18 contained in the debtor’s financial statement is no defense in a 19 proceeding to except the debt from discharge. See Merch. Bank of 20 Cal. v. Oh (In re Oh), 278 B.R. 844, 856 (Bankr. C.D. Cal. 2002). 21 With respect to “red-flags,” a creditor is not entitled to 22 rely on obviously false representations; but, minor clues of 23 falsity in a debtor’s financial statement, which on the whole had 24 a complete and reliable appearance, do not make a creditor’s 25 reliance unreasonable for dischargeability purposes, where the 26 statements asserted that debtors owned significant property which 27 they did not actually own. Gosney, 205 B.R. at 420-21; Gertsch, 28

1 237 B.R. at 170; see also Siriani v. Nw. Nat’l Ins. Co. (In re 2 Siriani), 967 F.2d 302, 307 (9th Cir. 1992). 3 The standard in the Ninth Circuit for “reasonable reliance” 4 does not require adherence to any particular list of factors; 5 rather, as Candland and Gertsch make clear, the bankruptcy court 6 is to make its determination on a case-by-case basis in light of 7 the totality of the circumstances. See Candland, 90 F.3d at 8 1471; Gertsch, 237 B.R. at 170. 9 Thus, we will only reverse the bankruptcy court’s decision 10 if, after reviewing the entire record, we have a firm and 11 definite conviction that a mistake has been committed. See 12 Anderson, 470 U.S. at 573; Mendez, 367 B.R. at 113; see also 13 Eugene Parks Law Corp. Defined Benefit Pension Plan v. Kirsh 14 (In re Kirsh), 973 F.2d 1454, 1456 (9th Cir. 1992); Candland, 15 90 F.3d at 1469. If, however, two views of the evidence are 16 possible, the trial judge’s choice between them cannot be clearly 17 erroneous. Anderson, 470 U.S. at 573-75; see Hansen, 368 B.R. at 18 874-75. 19 There is sufficient evidence in the record upon which to 20 affirm the bankruptcy court’s decision that Hitachi reasonably 21 relied on Kempf’s fraudulent financial statements consistent with 22 the applicable Ninth Circuit legal standard. In reviewing this 23 evidence, the bankruptcy court found that Hitachi was deliberate 24 and careful in considering whether to extend credit to Kempf, 25 because of: (1) the lengthy transaction analysis it prepared; 26 (2) the exchange of emails between Kempf and Hitachi; and (3) the 27 background report on Kempf, which the court found showed little 28

1 or no reason for alarm. Finally, it noted that there was nothing 2 in the record to suggest that Hitachi did not adhere to its 3 normal business practices. With regards to the Trust, the 4 bankruptcy court found that it was not so obvious to discern the 5 truth as to who owned the Trust because while the tax returns did 6 indicate that Julie Kempf is the only owner, this information was 7 “buried some 18 pages into the returns.” Aplt. ER 139. 8 Furthermore, it concluded that there was no evidence to suggest 9 that the tax returns were submitted for the purposes of verifying 10 ownership instead of simply establishing historical earning 11 capacity. 12 Thus, we affirm the bankruptcy court’s decision that Hitachi 13 reasonably relied upon the financial statement in extending 14 credit to CardioCura and Kempf. 15 VI. Conclusion 16 For the reasons set forth, the judgment of the bankruptcy 17 court is AFFIRMED. 18 19 20 21 22 23 24 25 26 27 28