Wank v. Gordon (In Re Wank)

FILED JAN 29 2014 1 SUSAN M. SPRAUL, CLERK U.S. BKCY. APP. PANEL 2 OF THE NINTH CIRCUIT 3 UNITED STATES BANKRUPTCY APPELLATE PANEL 4 OF THE NINTH CIRCUIT 5 In re: ) BAP No. CC-13-1137-PaKuBa ) 6 JORDAN WANK, ) Bk. No. SV 12-11628-MT ) 7 Debtor. ) Adv. No. SV 12-01156-MT ___________________________________) 8 ) ) 9 JORDAN WANK; BRUCE WANK, ) ) 10 Appellants, ) ) 11 v. ) O P I N I O N ) 12 DANIEL GORDON; BASIL SIMONA; A&S ) INVESTMENT, LLC; ATHAR SIDDIQI; ) 13 MARK FERGUSON; GEORGE TSOUPAKIS, ) ) 14 Appellees. ) ___________________________________) 15 16 Argued and Submitted on November 21, 2013 at Pasadena, California 17 Filed - January 29, 2014 18 Appeal from the United States Bankruptcy Court 19 for the Central District of California 20 Hon. Maureen Tighe, U.S. Bankruptcy Judge, Presiding 21 22 Appearances: Lincoln Browning Quintana argued for appellants Jordan Wank and Bruce Wank. David Paul Bleistein 23 argued for appellees Daniel Gordon, Basil Simona, A&S Investment, LLC, Athar Siddiqi, Mark Ferguson 24 and George Tsoupakis. 25 26 Before: PAPPAS, KURTZ and BALLINGER1, Bankruptcy Judges. 27 28 1 The Honorable Eddward Ballinger, Jr., United States Bankruptcy Judge for the District of Arizona, sitting by designation. 1 PAPPAS, Bankruptcy Judge: 2 3 Chapter 72 debtor Jordan Wank (“Wank”)3 appeals the summary 4 judgment of the bankruptcy court determining that a portion of a 5 judgment debt owed by Wank to appellees Daniel Gordon, Basil 6 Simona, A&S Investment, LLC, Athar Siddiq, Mark Ferguson and 7 George Tsoupakis (together, “the Appellees”) is excepted from 8 discharge under § 523(a)(2)(A). We VACATE the summary judgment 9 and REMAND this matter to the bankruptcy court for further 10 proceedings. 11 FACTS4 12 Wank is a California attorney who filed a chapter 7 13 bankruptcy petition. The Appellees are creditors who assert that 14 their claim against Wank should be excepted from discharge under 15 various provisions of § 523(a). They assert that Wank induced 16 each of them to invest in a fraudulent currency speculation scheme 17 18 2 Unless otherwise indicated, all chapter, section and rule references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and 19 to the Federal Rules of Bankruptcy Procedure, Rules 1001-9037. Civil Rule references are to the Federal Rules of Civil Procedure 20 1-86. 21 3 Bruce Wank, who is apparently a creditor in the bankruptcy case and son of the debtor Jordan Wank, joined in the notice of 22 appeal, and appears in the caption of the parties’ briefs. However, it is not clear in the record what his interest in this 23 litigation and the appeal may be. As near as we can tell, he was not a plaintiff or defendant in the adversary proceeding in the 24 bankruptcy court. Therefore, in this decision we refer only to the principal appellant, the debtor Wank. 25 4 This dispute ultimately concerns two declarations executed 26 by Wank, one signed in 2009 in connection with state court proceedings, and a second, later declaration filed in this 27 litigation in 2013 in which Wank either repudiates the earlier factual assertions, or attempts to explain them in context. We 28 discuss here only those facts we believe to be uncontroverted by either party. -2- 1 known as the European Investment Structure (“EIS”).5 Basil Simona 2 resides in Michigan and is the managing member of A&S Investments, 3 LLC, an entity that invested $125,000. Althar Siddiqui resides in 4 Michigan and invested $400,000. Mark Ferguson resides in Los 5 Angeles and invested $150,000. George Tsoupokis and Daniel Gordon 6 reside in Colorado, and they invested $100,000 and $50,000 7 respectively. 8 Jerry Neidich (“Neidich”) is a friend and neighbor of Wank. 9 Neidich, along with Daniele Romer (“Romer”), solicited the 10 Appellees to invest in EIS. There is no evidence in the record, 11 nor any contention by the Appellees, that Wank knew, or 12 communicated with, any of the Appellees before the first contact 13 was made with them regarding the investments. Wank concedes, 14 however, that he received funds by wire transfer from each of the 15 Appellees, and that he in turn transmitted all $825,000 of the 16 money they sent him, plus $25,000 of his own funds, to UNIFICO 17 Holdings, LLC, and its principal, Kurshid Shah (“Shah”), in care 18 of a bank account in London, United Kingdom, to invest that money 19 in currency speculation. Wank entered into written contracts (the 20 “EIS Agreements”) with each of the Appellees regarding the 21 investments, although these contracts have not been included in 22 either the appellate record or the docket of the bankruptcy court 23 adversary proceeding. The parties agree that there is no evidence 24 that UNIFICO Holdings, LLC, or Shah made any trade with the funds; 25 they also agree that the Appellees and Wank never received the 26 5 EIS is the descriptive name for the investment scheme; it 27 does not appear to be a formal organization or entity. Wank alleges, and Appellees do not dispute, that he sent all of the 28 funds he received from Appellees to the bank account of UNIFICO Holdings, LLC, in London, United Kingdom, to be invested in EIS. -3- 1 anticipated profits from their investment nor, indeed, any return 2 of their invested funds. 3 Having lost their investments, in May 2007 the Appellees sued 4 Wank, Neidich, Romer, Shah, EIS, UNIFICO Holdings, LLC, and 5 UNIFICO Trading, Ltd. (apparently a d/b/a of UNIFICO Holdings, 6 LLC) in Los Angeles Superior Court. Gordon v. Wank, case no. 7 BC 371 999 (the “State Court Action”). A First Amended Complaint, 8 filed on September 11, 2009, in the State Court Action, contained 9 twenty causes of action, including false promise, fraud and 10 conspiracy to defraud, against all defendants. 11 On December 28, 2009, Wank, Neidich and Romer entered into a 12 settlement agreement and stipulated judgment with the Appellees 13 (collectively, the “Settlement Agreement”) concerning the state 14 court action. Under the terms of the Settlement Agreement, 15 Neidich, Romer and the Appellees mutually released each other from 16 all claims on condition that Wank pay the Appellees the total sum 17 of $750,000. If Wank failed to pay the Appellees by March 15, 18 2010, he stipulated that a judgment could be entered against him 19 by the state court for the full amount of the Appellees’ claim of 20 $1,100,000. Of critical interest in this appeal, however, was the 21 following provision in the Settlement Agreement: 22 THIS JUDGMENT SHALL BE EXEMPT FROM DISCHARGE IN BANKRUPTCY 23 The Parties agree that the obligations arising from this 24 Settlement Agreement shall be non-dischargeable under the provisions of the Bankruptcy Code. Mr. Wank has 25 also executed his attached Declaration in Support of the factual basis of why his obligation under this Agreement 26 should not be discharged in Bankruptcy (Exhibit E). 27 As part of the settlement, the Appellees required Wank to 28 sign a declaration under penalty of perjury on December 30, 2009, -4- 1 a copy of which was attached to the Settlement Agreement (the 2 “First Declaration”). It included the following statements: 3 The purpose of this Declaration is to provide a factual basis to further the intention of the Plaintiffs and 4 Defendants in this litigation to ensure that if I do not pay any or all of the Judgment on a timely basis and 5 declare bankruptcy that the amounts due Plaintiffs for their investment in the [EIS], plus interest, of 6 $1,100,000 shall not be discharged in bankruptcy. First Declaration at ¶ 1. 7 In later Summer and Fall of 2004, I entered into written 8 agreements with [the Appellees] in which I agreed to act as a “primary investor” to invest their moneys that I 9 received from each of them in the [EIS] which was operated by Mr. Kurshid Shah. Id. at ¶ 2. 10 I advised each of the [Appellees] (and set forth in the 11 EIS Agreements) that before any trade was made, the trading group in England would have an “exit buyer” in 12 place, with a built in profit for each transaction, and that the profits from each trade would be deposited into 13 the account for distribution on a monthly basis. In fact, there was no such “exit buyer” and, as mentioned, 14 all of the [Appellees] and others who invested lost their entire investments. Id. at ¶ 3(e). 15 I communicated to the [Appellees] that they could expect 16 monthly returns of 30 to 50 percent. Id. at ¶ 3(f). 17 I made representations to the [Appellees], which were false, to induce them to place their funds in my trust 18 account, and to permit me to act as their “primary investor,” and to permit me to transfer [Appellees’] 19 funds to EIS. Id. at ¶ 4. 20 I communicated to the [Appellees] that investing in the [EIS] would be a safe investment, and that I was an 21 attorney with expertise in such matters. Under the terms of the EIS Agreements, the [Appellees’] funds were 22 to be returned to the [Appellees] in 45 days if no foreign currency trades were executed. However, I knew 23 at the time I executed the contracts and accepted the wire transfers for the [Appellees’] funds that there was 24 a possibility that the funds could be lost. I did not so inform the [Appellees]. Id. at ¶ 5. 25 By entering into the EIS Agreements with the Plaintiffs, 26 I did not comply with the following [California Rules of Professional Conduct]: (a) [Rule] 3-110 by failing to 27 act competently; (b) Rule 3-500, keeping clients informed of a situation in which I was acting for them; 28 and (c) Rule 4-100 failing to preserve identity of client funds. Id. at ¶ 14. -5- 1 The Settlement Agreement provided that the signed, original 2 First Declaration would be kept in a sealed envelope by an escrow 3 agent. If Wank failed to make the $750,000 payment as provided in 4 the Settlement Agreement, and later filed for bankruptcy 5 protection, the Settlement Agreement provided that the First 6 Declaration would be unsealed and submitted to the bankruptcy 7 court. The parties also executed a Stipulation to Judgment 8 providing that, if Wank failed to pay the required $750,000 by 9 March 15, 2010, the state court would be requested to enter 10 judgment in the amount of the full claim of $1,100,00. 11 Wank did not pay the required $750,000 by the March 15, 2010 12 deadline and, at the Appellees’ request, the state court, on June 13 18, 2010, entered the stipulated judgment against Wank and in 14 favor of the Appellees in the total amount of $1,100,000. 15 Wank filed a chapter 7 bankruptcy petition on February 20, 16 2012. On Schedule F, Wank listed a noncontingent, liquidated, 17 undisputed unsecured nonpriority claim of $1,250,000 for the five 18 Appellees. 19 On May 5, 2012, Appellees filed an adversary complaint 20 against Wank and his former spouse, Toby Wank, in the bankruptcy 21 court.6 Thereafter, the complaint was amended, seeking a 22 declaration by the bankruptcy court that the $1,100,000 judgment 23 debt owed to the Appellees by Wank was excepted from discharge 24 under §§ 523(a)(2), (4), (6) and (19).7 The Appellees’ first 25 6 26 Although Toby Wank was named as a co-defendant in the complaint initiating this adversary proceeding, the requested 27 relief was only directed against Wank. 7 28 We need not, and do not, discuss the parties’ arguments regarding the Appellees’ claims for an exception to discharge (continued...) -6- 1 claim, the one at issue in this appeal, sought an exception to 2 discharge for fraud under § 523(a)(2)(A), and alleged that 3 (1) Wank “stole” $825,000 from Appellees and did so “deliberately 4 and stipulated as much in the Settlement Agreement,” (2) Wank lied 5 to the Appellees when asked about the “stolen funds,” (3) Wank 6 lied to the Appellees when he sent their invested funds to EIS, 7 and (4) Wank stipulated that he committed fraud against the 8 Appellees in the First Declaration and Settlement Agreement. 9 Although Wank’s answer to the Appellees’ amended complaint 10 contained a general denial of the allegations, he admitted the 11 paragraph which quoted the text of the First Declaration noted 12 above, and the paragraph acknowledging that he signed the First 13 Declaration under penalty of perjury. 14 During the pendency of the litigation, Appellees filed a 15 Motion for Summary Judgment on December 31, 2012. After 16 discussing the general requirements for an exception to discharge 17 under § 523(a)(2)(A), the motion summarized the Appellees’ 18 argument in a single paragraph: 19 Here, the admissions of Mr. Wank in his prejudgment declaration meet these standards. He admitted that the 20 EIS was a fraud. He admitted that the [Appellees] lost all of the $825,000 they invested in the EIS. Mr. Wank 21 admitted to making false statements to induce the [Appellees] to invest in the EIS. 22 23 Notably, the Appellees did not argue that Wank knew at the time of 24 making any representations to them that they were false, nor that 25 the Appellees justifiably relied on those representations. 26 27 7 (...continued) 28 under § 523(a)(4), (6) and (19) because the bankruptcy court’s summary judgment on appeal was based solely on § 523(a)(2)(A), and the Appellees did not cross-appeal the court’s judgment. -7- 1 Wank opposed the summary judgment motion, stating that the 2 the First Declaration, and the statements he made in it, were 3 inherently unreliable and inadmissible as evidence in the 4 adversary proceeding because the First Declaration was intended to 5 defeat his right to obtain the protections of a discharge in 6 bankruptcy. Further, Wank pointed out, the Appellees failed to 7 either argue or provide any evidence that they justifiably relied 8 on any alleged misrepresentations of Wank to their detriment, and 9 thus they failed to establish an essential element of exception to 10 discharge under § 523(a)(2)(A). 11 Attached to Wank’s opposition to the summary judgment motion 12 was the Declaration of Jordan Wank (the “Second Declaration”). In 13 the Second Declaration, in addition to explaining his position and 14 certain arguments in the opposition, Wank addressed the 15 circumstances giving rise to his execution of the First 16 Declaration. Wank insisted that he had signed the First 17 Declaration under duress and while he was under the influence of 18 anxiety medication. Wank alleged that he had objected to the 19 Appellees’ counsel at the time he executed the First Declaration 20 that some of its content was “false and untrue.” While Wank 21 acknowledged that he made false statements to the Appellees that 22 he knew to be untrue, he noted that his sole incentive in signing 23 the First Declaration was because “[the Appellees’] counsel agreed 24 to a settlement satisfaction in the amount of $750,000, a large 25 discount from the damages alleged in the suit, and the settlement 26 allowed me negotiated terms and time to pay.” He also stated that 27 he believed that his statements in the First Declaration could not 28 -8- 1 be enforced against him.8 2 In the Second Declaration, Wank also specifically addressed 3 several of the statements he made in the First Declaration. As 4 noted above, the First Declaration provided: 5 In later Summer and Fall of 2004, I entered into written agreements with [Appellees] in which I agreed to act as 6 a ‘primary investor’ to invest their moneys that I received from each of them in the [EIS] which was 7 operated by Mr. Kurshid Shah. 8 First Declaration at ¶ 2. In the Second Declaration, Wank 9 confirms this statement is true, but explains it: 10 I advised each of the [Appellees] (and set forth in the EIS Agreements) that before any trade was made, the 11 trading group in England would have an “exit buyer” in place, with a built in profit for each transaction, and 12 that the profits from each trade would be deposited into the account for distribution on a monthly basis. In 13 fact, there was no such “exit buyer” and, as mentioned, all of the [Appellees] and others who invested lost 14 their entire investments. 15 Second Declaration at ¶ 3(e). 16 In the Second Declaration, Wank also charged that the 17 Appellees had “paraphrased” the EIS Agreements in the First 18 Declaration to suggest that he had made representations to 19 Appellees that he had not: 20 Specifically, the [First Declaration] says: “I advised each of the Plaintiffs that . . .” However, the EIS 21 Agreements presented to each Appellee state, “The trading group has advised us that . . . .” The last 22 sentence is sheer speculation and conjecture as no one, including the Plaintiffs or me had any knowledge of the 23 existence or non-existence of any such “exit buyer.” 24 As to the representations in paragraphs 4 and 5 of the First 25 Declaration, quoted above, Wank repudiated them, labeling them 26 27 8 In particular, Wank averred in the Second Declaration that 28 “I believed the [First Declaration] was illegal and unenforceable in any case as Plaintiffs’ counsel and I both knew the content of the declaration was false.” Second Declaration at ¶ 13. -9- 1 “false and untrue.” 2 In response to Wank’s contention that some of the statements 3 he made in the First Declaration were false and untrue, the 4 Appellees simply noted that he made those statements under penalty 5 of perjury. However, the Appellees did not address Wank’s 6 argument that they had not submitted evidence to satisfy the 7 justifiable reliance prong for an exception to discharge under 8 § 523(a)(2)(A). Before the hearing on the summary judgment 9 motion, the bankruptcy court issued a Tentative Ruling, stating, 10 in part, that: 11 In the Settlement Agreement, Debtor admits that he agreed to act as a primary investor to invest 12 Plaintiff’s monies, that the funds were wired to Defendant’s trust account to be wired to EIS, that the 13 EIS was a fraud, that Defendant advised Plaintiffs that EIS would have an exit buyer in place, but that there 14 was no such exit buyer, that he made representations to Plaintiffs that were false to induce them to place their 15 funds into his trust account and to permit him to act as Plaintiff’s primary investor. These stipulated facts 16 are probative and credible evidence of fraud and conversion. Defendant maintains that he signed the 17 Settlement Declaration under duress and undue influence because it was required for purposes of resolution of 18 the State Court Action on the eve of trial wherein Defendant had no legal representation other than 19 himself. Defendant then admits, however, that he believed the document was illegal and unenforceable. He 20 also believed that he would be able to obtain a personal loan to pay the stipulated judgment amount so the 21 Settlement Declaration would never be unsealed. 22 Defendant’s reasons for admitting the key facts of the fraud do nothing to deny the admissions previously made. 23 They are excuses that do not suffice to raise any doubt as to the admissions previously made. Thus, plaintiffs 24 have demonstrated that there is no disputed material fact as to the elements of the dischargeability actions. 25 26 The bankruptcy court made no comment in the Tentative Ruling 27 regarding whether the Appellees had justifiably relied on Wank’s 28 statements. -10- 1 After hearing and considering the summary judgment motion, 2 the bankruptcy court stated that it would not consider the 3 Appellees’ arguments for an exception to discharge under either 4 §§ 523(a)(6) or (19) because the court had not been given 5 sufficient facts to make a ruling concerning those claims. Hr’g 6 Tr. 20:8-21, February 20, 2013.9 Additionally, the court noted 7 that, in making its decisions, it had disregarded the “bankruptcy 8 defeating” clauses in the Settlement Agreement and the First 9 Declaration, and had only considered the factual admissions made 10 by Wank in the First Declaration. Hr’g Tr. 19: 4-9. However, 11 even without considering the bankruptcy defeating provisions, the 12 court determined that Wank’s admissions in the First Declaration 13 were sufficient to establish an exception to discharge under 14 § 523(a)(2)(A), and that his explanations and repudiations of 15 those admissions in the Second Declaration did not negate those 16 admissions: 17 The statements [in the Second Declaration] do not dispute the key statements made [in the First 18 Declaration]. They simply try to explain them away or justify them or rationalize them. But the statements 19 that go to the fact that false representations were made, they were made, according to paragraph 4, to 20 induce the Plaintiffs to place funds in Mr. Wank’s account, and that there were communications made, and 21 that there was an intent for them to rely on those statements because they were made to induce them and the 22 fact that there was fraud really ha[s] not been disputed with a careful reading of the [Second Declaration]. 23 24 Hr’g Tr. 19:19-20:4. 25 The bankruptcy court granted the Appellees’ motion, and on 26 March 13, 2013, the court entered a summary judgment determining 27 9 28 It is not clear what disposition was made by the bankruptcy court as to the Appellees’ § 523(a)(4) claim. Neither the court’s Tentative Ruling, nor the order or judgment, refer to that claim. -11- 1 that $825,00010 of the debt owed by Wank to the Appellees was 2 excepted from discharge under § 523(a)(2)(A). Wank filed a timely 3 appeal on March 22, 2013. 4 JURISDICTION 5 The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 6 and 157(b)(2)(I). We have jurisdiction under 28 U.S.C. § 158. 7 ISSUE 8 Whether the bankruptcy court erred in granting a summary 9 judgment determining that Wank’s debt to the Appellees was 10 excepted from discharge under § 523(a)(2)(A). 11 STANDARDS OF REVIEW 12 We review de novo the bankruptcy court’s grant of summary 13 judgment. SNTL Corp. v. Ctr. Ins. Co. (In re SNTL Corp.), 571 14 F.3d 826, 834 (9th Cir. 2009). We also review de novo whether a 15 debt is excepted from discharge under § 523(a)(2)(A). Tsurukawa 16 v. Nikon Precision, Inc. (In re Tsurukawa), 258 B.R. 192, 195 (9th 17 Cir. BAP 2001). 18 DISCUSSION 19 Summary judgment may be granted “if the movant shows that 20 there is no genuine issue as to any material fact and the movant 21 is entitled to judgment as a matter of law.” Civil Rule 56(a), 22 incorporated by Rule 7056; Barboza v. New Form, Inc. (In re 23 Barboza), 545 F.3d 702, 707 (9th Cir. 2008). The trial court may 24 not weigh evidence in resolving such motions, but rather 25 determines only whether a material factual dispute remains for 26 10 27 Although requested to do so by the Appellees, the bankruptcy court declined to declare the entire amount due under 28 the state court stipulated judgment was excepted from discharge, limiting its ruling to the actual amounts invested by the Appellees. The Appellees did not cross-appeal any aspect of the court’s judgment. -12- 1 trial. Covey v. Hollydale Mobilehome Estates, 116 F.3d 830, 834 2 (9th Cir. 1997). A dispute is genuine if there is sufficient 3 evidence for a reasonable fact finder to hold in favor of the 4 non-moving party, and a fact is “material” if it might affect the 5 outcome of the case. Far Out Prods., Inc. v. Oskar, 247 F.3d 986, 6 992 (9th Cir. 2001) (citing Anderson v. Liberty Lobby, Inc., 477 7 U.S. 242, 248-49 (1986)). The initial burden of showing there is 8 no genuine issue of material fact rests on the moving party. 9 Margolis v. Ryan, 140 F.3d 850, 852 (9th Cir. 1998). 10 Under § 523(a)(2)(A), a debt for money obtained by the debtor 11 under “false pretenses, a false representation, or actual fraud” 12 may be excepted from discharge. The Ninth Circuit has held that 13 summary judgment is proper in considering an exception to 14 discharge under § 523(a)(2)(A) if the proponent is able to show 15 that there is no genuine issue of material fact as to each of the 16 five elements of exception to discharge under that provision: (1) 17 misrepresentation, fraudulent omission or deceptive conduct by the 18 debtor; (2) knowledge of the falsity or deceptiveness of his 19 statement or conduct; (3) an intent to deceive; (4) justifiable 20 reliance by the creditor on the debtor’s statement or conduct; and 21 (5) damage to the creditor proximately caused by its reliance on 22 the debtor’s statement or conduct. Turtle Rock Homeowners Ass’n 23 v. Slyman (In re Slyman), 234 F.3d 1081, 1085 (9th Cir. 2000). 24 Based upon our de novo review of the record, we conclude that 25 the Appellees have not shown that there are no genuine issues of 26 material fact such that they are entitled to an exception to 27 discharge under § 523(a)(2)(A) as a matter of law. Before 28 examining the deficiencies in the Appellees’ attempt to establish -13- 1 the elements required for a fraud exception to discharge, we first 2 address Wank’s argument that the bankruptcy court erred in 3 granting the summary judgment based solely11 on the First 4 Declaration for reasons of public policy. 5 I. 6 The bankruptcy court should not have relied so on Wank’s statements made in the First Declaration as the sole 7 basis for granting summary judgment to the Appellees. 8 In Bank of China v. Huang (In re Huang), 275 F.3d 1173 (9th 9 Cir. 2002), in a detailed prepetition settlement agreement, the 10 debtor agreed he would not file for bankruptcy protection, and 11 that, if he did, the debt in favor of the bank evidenced by the 12 settlement agreement would not be dischargeable. Id. at 1176-77. 13 In refusing to enforce the terms of the agreement when the debtor 14 nonetheless sought bankruptcy protection, the Ninth Circuit held 15 that “it is against public policy for a debtor to waive the 16 prepetition protection of the Bankruptcy Code.” Id. at 1177 17 (quoting Hayhoe v. Cole (In re Cole), 226 B.R. 647, 651-54 (9th 18 Cir. BAP 1998)). As the Ninth Circuit explained: “This 19 prohibition of prepetition waiver has to be the law; otherwise, 20 astute creditors would routinely require their debtors to waive.” 21 Id. 22 This Panel’s opinion in In re Cole, cited in In re Huang, 23 11 24 The bankruptcy court made it clear that it was ruling solely on the basis of the First Declaration. In its Tentative 25 Ruling, it stated, “The Stipulated Facts within the [First] Declaration are probative evidence of nondischargeability under 26 §§ 523(a)(2) and (a)(6) for fraud and conversion.” Tentative Ruling at 5, February 20, 2013. At the hearing on February 20, 27 2013, the court observed, “I’ve just looked at the material disputed facts. And the material disputed facts in this [First 28 Declaration] are sufficient to prove up a [§] 523(a)(2) fraud nondischargeability judgment for $825,000.” Hr’g Tr. 19:14-17. -14- 1 provides further explanation of the reasons for this policy: 2 First, pursuant to § 523(c), bankruptcy courts have exclusive jurisdiction to determine the dischargeability 3 of claims arising under § 523(a)(2). See Seven Elves, Inc. v. Eskenazi (In re Eskenazi), 6 B.R. 366, 368-69 4 (9th Cir. BAP 1980) [citing Brown v. Felsen, 442 U.S. 127, 138 (1979)]. . . . Second, there is no recognized 5 exception to discharge for prepetition waivers of discharge or dischargeability. Section 727(b) states 6 that all debts are dischargeable in bankruptcy unless specifically excepted under § 523. Section 523 7 enumerates the exceptions to discharge, but does not except from discharge those debts that the debtor has 8 agreed prepetition not to be discharged in bankruptcy (citations omitted). If bankruptcy courts enforced 9 prepetition waivers of discharge, they would effectively be creating an exception to discharge that Congress had 10 not enumerated (citations omitted). . . . Finally, an exception to discharge impairs the debtor’s fresh start 11 and should not be read more broadly than necessary to effectuate policy[.] (citations omitted). 12 13 In re Cole, 226 B.R. at 653-54. 14 In re Huang and In re Cole continue to be good law. 15 Continental Ins. Co. v. Thorpe Insulation Co. (In re Thorpe 16 Insulation Co.), 671 F.3d 1011, 1026 (9th Cir. 2012) (in 17 reaffirming its holding in In re Huang, and again citing with 18 approval to In re Cole, the Ninth Circuit observes “it is against 19 public policy for a debtor to waive the prepetition protection of 20 the bankruptcy code.”). Bankruptcy courts in this circuit have 21 acknowledged the prohibition against prepetition waivers of 22 bankruptcy discharge rights announced in In re Huang and In re 23 Cole. In re Ashworth, 2012 WL 4596217, at *15 (Bankr. C.D. Cal. 24 Oct. 1, 2012) (citing In re Cole for the proposition that 25 “prepetition waivers of a discharge are contrary to public policy 26 and unenforceable”); In re Jennings, 306 B.R. 672, 675 (Bankr. D. 27 Or. 2004) (“As a matter of public policy, an agreement in advance 28 of a bankruptcy case that a particular claim is not subject to -15- 1 discharge is not enforceable.”). And courts in other circuits 2 have also declined to enforce prepetition discharge waivers. 3 Lichtenstein v. Barbanel (In re Lichtenstein), 161 Fed. Appx. 461, 4 467-68 (6th Cir. 2005) (agreeing with In re Cole, the Sixth 5 Circuit held that “waiving a debtor’s right to obtain a discharge 6 of a specific debt in a future bankruptcy case is void because it 7 offends the public policy of promoting a fresh start for 8 individual debtors”)12; Klingman v. Levinson, 831 F.2d 1292, 1296 9 n.3 (7th Cir. 1987) (“For public policy reasons, a debtor may not 10 contract away the right to a discharge in bankruptcy.”); First Ga. 11 Bank v. Halpern (In re Halpern), 50 B.R. 260, 262 (Bankr. N.D. Ga. 12 1985), aff’d, 810 F.2d 1061 (11th Cir. 1987) (“Policy 13 considerations dictate that dischargeability questions cannot be 14 predetermined either by a state court or by agreement of the 15 parties prior to or in anticipation of the possible filing of a 16 bankruptcy case.”). Hillmeyer v. Deller (In re Deller), 2009 17 Bankr. Lexis 5556, at *24 (Bankr. W.D. Pa. 2009) (citing both In 18 re Huang and In re Cole for their holding that “A prepetition 19 waiver of the dischargeable debt is contrary to public policy.”). 20 The prohibition on prepetition waivers of discharge for 21 public policy reasons predates the Bankruptcy Code. Fallick v. 22 Kehr, 369 F.2d 899, 904 (2d Cir. 1966) ([A]n advance agreement to 23 waive the benefits of the [Bankruptcy] Act would be void.”); In 24 re Weitzen, 3 F. Supp. 698 (S.D.N.Y. 1933) (same). One bankruptcy 25 court recently explained the basis for this policy: 26 27 12 6th Cir. R. 28(g), in effect at the time of the 28 Lichtenstein opinion, permitted citation to unpublished opinions as persuasive authority. -16- 1 Congress . . . provided in the Bankruptcy Code just two methods through which a debtor could effectuate a waiver 2 on matters concerning discharge. First, § 727(a)(10) permits debtors to waive their discharge entirely by 3 executing a postpetition written agreement and having that agreement approved by the bankruptcy court. Second, 4 after the commencement of the bankruptcy case, a debtor may waive the dischargeability of a particular debt by 5 complying with the requirements for reaffirmation agreements as set forth in § 524(c). In either case, 6 however, a debtor is under the protection of the bankruptcy court, an important commonality which is 7 lacking when a debtor executes a prepetition waiver of their discharge. 8 9 Double v. Cole (In re Cole), 428 B.R. 747, 753 (Bankr. N.D. 10 Ohio 2009). 11 In light of the strong public policy declining to enforce 12 prebankruptcy discharge waivers, Wank contends that the bankruptcy 13 court erred when it elected to ignore the bankruptcy-defeating 14 clause in the Settlement Agreement, but then considered his 15 apparent admissions in the First Declaration as evidence that he 16 committed fraud, and as the sole basis for granting summary 17 judgment in favor of the Appellees. In response, the Appellees 18 argue that while agreements that a debt will not be dischargeable 19 in bankruptcy are unenforceable, parties are free to stipulate to 20 the facts giving rise a debt, which facts can then be considered 21 by the bankruptcy court in a later dischargeability action. In 22 this position, the Appellees quoted a passage from this Panel’s 23 decision in In re Cole: 24 We have already concluded that the portion of the Stipulated Judgment that purported to waive Appellee’s 25 right to obtain a discharge of the Debt was unenforceable as against public policy. However, if the 26 parties stipulated to the underlying facts that support a finding of nondischargeability, the Stipulated 27 Judgment would then be entitled to collateral estoppel application. 28 -17- 1 226 B.R. at 653.13 2 While we do not here attempt to address all possible 3 scenarios, we agree with Wank that, given the circumstances 4 surrounding his execution of the First Declaration in this case, 5 and when viewed in light of the strong public policy prohibiting 6 debtors from contracting with creditors to forego the protections 7 of a bankruptcy filing, Wank’s statements in the First Declaration 8 must, at a minimum, be viewed with great skepticism. As a result, 9 and considering the other facts in the record, we believe it was 10 inappropriate for the bankruptcy court to grant a summary judgment 11 to the Appellees based solely on Wank’s statements made in the 12 First Declaration. 13 There can be no doubt about the purpose for the First 14 Declaration; it was drafted by the Appellees’ counsel with a 15 singular goal in mind.14 The First Declaration not intended to 16 evidence that Wank was indebted to the Appellees – that goal was 17 effectively accomplished by the terms of the Settlement Agreement. 18 The First Declaration was also not designed to be effective for 19 use by the Appellees in state court.15 Instead, the introductory 20 13 21 Of course, unlike in In re Cole, Wank’s admissions in the First Declaration were not “stipulated,” nor were they referenced 22 in the state court’s stipulated judgment. Instead, as discussed below, the First Declaration was a standalone document, executed 23 only by Wank, not submitted for consideration by the state court, and then sealed, to be used by the Appellees only in a bankruptcy 24 proceeding. 14 25 Counsel for the Appellees, at oral argument, confirmed that his law firm drafted the First Declaration. 26 15 In the Second Declaration, Wank states, and the Appellees 27 have not sought to dispute, that: “In approximately May or June 2010, the Superior Court held hearings to enter the stipulated 28 judgment. Plaintiffs’ counsel had attempted to introduce the (continued...) -18- 1 paragraph of the First Declaration reveals the true intention of 2 the drafters regarding Wank’s statements: 3 The purpose of this Declaration is to provide a factual basis to further the intention of the Plaintiffs and 4 Defendants in this litigation to ensure that if I do not pay any or all of the Judgment on a timely basis and 5 declare bankruptcy that the amounts due Plaintiffs for their investment in the [EIS], plus interest, of 6 $1,100,000 shall not be discharged in bankruptcy. 7 First Declaration at ¶ 1. 8 Given the reasons for Wank’s execution of the First 9 Declaration, we think the reliability of the factual statements 10 that follow are potentially tainted by the Appellees’ motives. 11 The document was solely intended to ensure that Wank could not 12 obtain effective relief in bankruptcy.16 While, perhaps, some of 13 Wank’s factual statements could be trusted, to do so would require 14 the bankruptcy court to weigh the credibility of those statements 15 against the circumstances under which the First Declaration was 16 executed. And while the bankruptcy court could properly evaluate 17 the First Declaration in the context of a trial, it is a far 18 different matter for the court to rely exclusively on Wank’s 19 “admissions” in the First Declaration as the sole basis for 20 granting Appellees a summary judgment that Wank committed fraud. 21 22 15 (...continued) 23 [First Declaration]. In personal, in-court testimony to Judge Rosenfield of the Superior Court and with Plaintiffs’ counsel 24 present, I specifically recanted the truth of the contents of the [First Declaration] and objected to its use. Plaintiffs’ counsel 25 then withdrew the document.” Second Declaration at ¶ 20. 16 26 Of course, the First Declaration was intended to support an exception to discharge of only the Appellees’ debt. But even 27 without knowing the details of Wank’s other debts, it is doubtful that, if he emerged from bankruptcy burdened by the Appellees’ 28 $825,000 judgment, Wank would enjoy much of a “fresh start” via his discharge of other debts. -19- 1 In our view, to grant a summary judgment in this fashion, and 2 without a trial, undermines the Ninth Circuit’s concern about 3 giving effect to agreements motivated by a creditor’s desire to 4 insulate debts from discharge in bankruptcy, and encourages the 5 sort of routine inclusion of such factual statements in settlement 6 agreements the court was attempting to discourage.17 7 Besides the bankruptcy-defeating clauses, there are other red 8 flags suggesting that Wank’s statements in the First Declaration 9 were untrustworthy. Wank stated later, in the Second Declaration, 10 and without contradiction by the Appellees, that he executed the 11 First Declaration because he felt compelled to do so, at a time 12 when he was taking prescription medications, and because he did 13 not believe he could physically withstand the rigors of a trial. 14 Wank, a lawyer, also stated that he believed his factual 15 statements in the First Declaration would be unenforceable against 16 him. While the bankruptcy court was understandably reluctant to 17 allow Wank to create fact issues by arguing with himself, Wank’s 18 later observations, considered in context with the other 19 circumstances surrounding his execution of the First Declaration, 20 were entitled to some consideration, and should have given the 21 17 22 There is evidence in the First Declaration that there may have been another, ulterior motive for the document. As noted 23 above, in it, Wank concedes that, in his dealings with the Appellees, he failed to abide by several provisions of the 24 California Rules of Professional Conduct. If Wank’s statements are indeed true, avoiding the consequences of bar discipline would 25 also constitute a strong incentive for him to sign the declaration and perform the Settlement Agreement. Of course, as the parties 26 agreed in their settlement, the information about Wank’s transgressions as a California attorney would be held in 27 confidence unless he filed a bankruptcy petition. We are also uncomfortable with this strategy, adding to our reluctance to 28 endorse the “facts” recited in the First Declaration via a summary judgment. -20- 1 bankruptcy court pause before adopting the First Declaration as 2 the sole basis for determining the material facts in this action. 3 We acknowledge that the bankruptcy court attempted to clarify 4 that it would not consider the bankruptcy-defeating provisions of 5 the Settlement Agreement and the First Declaration, and would rely 6 solely on the factual matters addressed in Wank’s declaration: 7 THE COURT: The fact that there was a stipulation that it would not be dischargeable in bankruptcy is to be 8 excised out of the declaration and is — cannot be considered and is not the law. Therefore, I’ve only 9 considered actual statements and whether or not there’s a reasonable disputed facts as to the statements made. 10 11 Hr’g Tr.19:4-9, December 19, 2012. However, in this statement, 12 the court incorrectly described the provenance of the First 13 Declaration. The First Declaration was never part of the 14 stipulated judgment. The First Declaration was attached to the 15 Settlement Agreement, and sealed by the parties and deposited with 16 an escrow company, only to be opened if Wank filed a bankruptcy 17 petition, then to be submitted to the bankruptcy court. As 18 discussed above, in our view, the First Declaration does not fall 19 under the exception to prohibition of waivers articulated in In re 20 Cole, where a court may sever from a stipulation for judgment a 21 bankruptcy-defeating clause, while giving effect to the other 22 facts included in the stipulated judgment. 226 B.R. at 655. By 23 its terms, the First Declaration was a standalone document that 24 was sealed by the parties and only to be used in the event of a 25 bankruptcy filing to provide grounds for an exception to 26 discharge. 27 All things considered, we think the First Declaration falls 28 within the public policy prohibition on waivers of bankruptcy -21- 1 protection articulated in In re Huang. The bankruptcy court, 2 under these unique circumstances, should not have relied 3 exclusively on Wank’s statements in the First Declaration in 4 awarding the Appellees a summary judgment. 5 II. 6 The bankruptcy court made credibility determinations, weighed evidence and drew inferences in favor of the 7 moving party, which are inappropriate in considering a motion for summary judgment. 8 9 Even assuming the bankruptcy court’s reliance upon the First 10 Declaration in granting summary judgment to the Appellees did not 11 transgress the public policy against enforcing prepetition 12 agreements to waive bankruptcy protections, the court’s decision 13 must nonetheless be vacated. 14 It is a basic tenet that “‘[c]redibility determinations, the 15 weighing of the evidence, and the drawing of legitimate inferences 16 from the facts’ are inappropriate at the summary judgment stage.” 17 Oswalt v. Resolute Indus., 642 F.3d 856, 861 (9th Cir. 2011) 18 (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 19 (1986)). Contrary to this admonition, an analysis of the 20 bankruptcy court’s ruling demonstrates that it necessarily made 21 credibility findings, weighed Wank’s various sworn statements, and 22 drew inferences in favor of the Appellees in granting them a 23 summary judgment. 24 It is important to note that the bankruptcy court did not 25 strike the Second Declaration as a “sham,” nor otherwise discount 26 it as patently unreliable.18 Indeed, we agree that the Second 27 18 28 In Yeager v. Bowlin, 693 F.3d 1076, 1081 (9th Cir. 2012), (continued...) -22- 1 Declaration was properly before the court for its consideration in 2 resolving the summary judgment motion. We disagree with the 3 court, however, that it was free to credit the contents of the 4 First Declaration when the Second Declaration clearly called those 5 statements into question. 6 In its Tentative Ruling, the bankruptcy court explained, 7 In the [First] Declaration, [Wank] admits that he agreed to act as a primary investor to invest [Appellees’] 8 monies, that the funds were wired to the EIS, that the EIS was a fraud, that [Wank] advised [the Appellees] 9 that EIS would have an exit buyer in place, but that there was no such exit buyer, that he made 10 representations to Plaintiffs which were false, to induce them to place their funds in his trust account 11 and to permit him to act as [Appellees’] primary investor. These stipulated facts[19] are probative and 12 credible evidence of fraud and conversion. 13 Tentative Ruling at 6. 14 Then, at the hearing, the bankruptcy court continued, 15 The statements that are disputed or the additional statements [in the Second Declaration] do not dispute 16 the key statements made. They simply try to explain 17 18 18 (...continued) the Ninth Circuit examined the “sham affidavit” rule, which allows 19 a trial court to make a credibility determination on summary judgment by rejecting a second sworn statement from a witness that 20 conflicts with his or her earlier deposition testimony. The rationale for the rule is that depositions are adversarial in 21 nature where the witness is subject to examination and cross- examination and, therefore, deposition testimony may be deemed 22 inherently more reliable than self-serving affidavits. Id.; Darnell v. Target Stores, 16 F.3d 174, 179 (7th Cir. 1994). 23 However, the Yeager court noted that the sham affidavit rule must be applied with caution, because evaluating two conflicting 24 statements from the same party necessarily involves determining credibility, and “the [trial] court is not to make credibility 25 determinations when making or denying summary judgment.” Yeager, 693 F.3d at 1080. Of course, this appeal presents a conflict 26 between Wank’s two declarations, not a deposition, so the sham affidavit exception to the prohibition on credibility 27 determinations in summary judgment does not apply. 19 28 Again, these were not “stipulated facts”; they were Wank’s statements in the First Declaration. -23- 1 them away or rationalize them. But the statements that go to the fact that false statements were made, they 2 were made, according to paragraph four, to induce the [Appellees] to place funds in Mr. Wank’s account, and 3 that there were communications made, and that there was an intent for them to rely on those statements because 4 they were made to induce them, and the fact that there was fraud really have not been disputed with a careful 5 reading of the subsequent declarations. They’re sort of explained further, and they’re supplemented, and they’re 6 rationalized, but they’re just not materially disputed. 7 Hr’g Tr. 19:18–20:7. 8 As can be seen, in evaluating Wank’s statements in the First 9 Declaration, the bankruptcy court made a credibility 10 determination. Indeed, the bankruptcy court describes Wank’s 11 statements in the First Declaration as constituting “credible 12 evidence.” To measure the value of the statements in the First 13 Declaration against Wank’s statements in the Second Declaration 14 required the bankruptcy court to assign them weight. This cannot 15 be done in the context of summary judgment. Dominguez-Curry v. 16 Nevada Transp. Dep’t, 424 F.3d 1027, 1036 (9th Cir. 2005) (At 17 summary judgment, “the judge does not weigh disputed evidence with 18 respect to a disputed material fact. Nor does the judge make 19 credibility determinations with respect to statements made in 20 affidavits, answers to interrogatories, admissions, or 21 depositions.”); SEC v. M&A W., Inc., 538 F.3d 1043, 1054-55 (9th 22 Cir. 2008) (“This Court, and others, have long recognized that 23 summary judgment is singularly inappropriate where credibility is 24 at issue. Only after an evidentiary hearing or a full trial can 25 these credibility issues be appropriately resolved . . . . The 26 district court’s assessment of [] credibility may ultimately be 27 correct, but such an assessment may only be made after a full 28 evidentiary hearing, and is inappropriate at the summary judgment -24- 1 stage.”) (citations and internal quotation marks omitted). While 2 the bankruptcy court characterized Wank’s statements in the Second 3 Declaration as explaining away, supplementing or rationalizing the 4 statements he made in the First Declaration, in doing so, the 5 court was necessarily required to weigh the value of those later 6 statements, to credit some of them, and to reject others. This 7 process was not appropriate without a trial. 8 Moreover, we disagree with the bankruptcy court’s 9 characterization of the statements in Wank’s Second Declaration as 10 merely explaining or rationalizing the statements in the First 11 Declaration. As to key elements of exception to discharge under 12 § 523(a)(2)(A), the Second Declaration flatly contradicts, not 13 explains or rationalizes, the statements in the First Declaration. 14 For example, the Appellees were required to prove that Wank 15 made representations to them. In the Second Declaration, Wank 16 flatly denies that he made any representations to the Appellees. 17 Second Declaration at ¶ 4. Instead, Wank reminds the court that 18 his “representations” were made via the EIS Agreements, documents 19 which were not submitted to the bankruptcy court. Wank’s denial 20 that he made “statements” to the Appellees therefore raises an 21 issue of material fact sufficient to require a trial. 22 In addition, neither of Wank’s declarations contain an 23 admission that he knew that the representations he made to the 24 Appellees were false when he made them, another element for a 25 § 523(a)(2)(A) fraud exception to discharge. Wank acknowledges he 26 knew that the Appellees’ funds were potentially at risk at the 27 time he signed the EIS Agreements and transferred the funds. 28 However, the bankruptcy court then inferred knowledge of the -25- 1 falsity of his representations at the time they were made from 2 Wank’s admission in the Second Declaration that, at a later date, 3 he came to know the representations were false. Drawing such an 4 inference against Wank and in favor of the Appellees was 5 inappropriate in this context of a summary judgment motion. 6 The Appellees were also required to prove that Wank intended 7 to deceive Appellees. To satisfy this requirement, the bankruptcy 8 court relied on Wank’s statement in the First Declaration, but 9 apparently discounted his statement in the Second Declaration that 10 not only did he not intend to deceive the Appellees by 11 facilitating their investments, that he in fact invested $25,000 12 of his own money in the venture. Again, the conflicting 13 statements raise a trial issue of material fact as to Wank’s 14 intention to deceive. 15 In sum, while there were obviously aspects of Wank’s First 16 Declaration that tended to establish that he intentionally induced 17 the Appellees to invest in a risky scheme, whether he committed 18 the sort of knowing fraud contemplated in § 523(a)(2)(A) was 19 called into legitimate question by the contents of the Second 20 Declaration. Since Wank’s two competing statements were the only 21 factual record the bankruptcy court could consider, in granting a 22 summary judgment to the Appellees, it assigned weight to his 23 various admissions and statements, and drew inferences against 24 Wank from those statements. This was error. 25 // 26 // 27 // 28 // -26- 1 III. 2 The Appellees did not establish that they justifiably relied on on Wank’s representations. 3 4 Even if the First Declaration could be used against Wank, and 5 even if the bankruptcy court did not inappropriately weight the 6 evidence in the record, there remained a glaring hole in the 7 Appellees’ proof that compels us to vacate the summary judgment. 8 In considering a request for an exception to discharge under 9 § 523(a)(2)(A), 10 [A] creditor must prove justifiable reliance upon the representations of the debtor. In determining that 11 issue, the court must look to all of the circumstances surrounding the particular transaction, and must 12 particularly consider the subjective effect of those circumstances upon the creditor. 13 14 In re Kirsh, 973 F.2d 1454, 1460 (9th Cir. 1992); see also 15 Citibank (S.D.) N.A. v. Eashai (In re Eashai), 87 F.3d 1082, 1090 16 (9th Cir. 1996) (noting that whether a creditor’s reliance on a 17 debtor’s representations is justified requires the application of 18 a subjective standard.) As the Supreme Court explained this 19 standard, “[j]ustification is a matter of the qualities and 20 characteristics of the particular plaintiff, and the circumstances 21 of the particular case . . . .” Field v. Mans, 516 U.S. 59, 71 22 (1995), citing the Restatement (Second) of Torts § 545A, comment 23 b. (1976). 24 In this case, to be entitled to an exception from discharge 25 under § 523(a)(2)(A), each of the Appellees must show that they, 26 individually, were justified in relying on any false 27 representations made to them by Wank. In his arguments to the 28 bankruptcy court that there were disputed material facts regarding -27- 1 whether the Appellees each justifiably relied on his alleged false 2 statements, Wank repeatedly insisted that “[Appellees] had already 3 made up their minds to invest in the EIS, and, therefore did not 4 rely on his statements.” Second Declaration at 9. Instead of 5 relying upon his statements, Wank argued that the Appellees had 6 each arrived at their decision to invest after speaking with 7 Neidich, and after conducting their own chosen due diligence. Id. 8 Wank’s uncontradicted statements about the Appellees’ lack of 9 reliance depict a plausible scenario which finds other support in 10 the parties’ submissions. For example, the Appellees attached as 11 an exhibit to their Motion for Summary Judgment a certified copy 12 of the First Amended Complaint they filed in the State Court 13 Action. Although the Appellees never discussed in the bankruptcy 14 court whether they justifiably relied (or relied at all, for that 15 matter) on Wank’s representations, they alleged in the state court 16 complaint that (1) Neidich made the first contact with Sidiqqi “by 17 telephone and extolled the virtues of the [EIS].” ¶ 24; (2) 18 Neidich and Romer had a meeting with Ferguson in June of 2004 in 19 which they “extolled the virtues of the [EIS], which Defendants 20 Neidich and Romer claimed, among other things, paid its investors 21 8% per month, which purported to yield returns of 155% per year, 22 or words to that effect.” ¶ 25; (3) in March 2004, Neidich and 23 Romer sent Gordon “an email or emails in which they extolled the 24 virtues of the [EIS]. They also made the same representations 25 regarding an 8% monthly yield and 155% annual yield on the 26 investment.” ¶ 26(a); (4) In early 2004, Neidich “solicited Mr. 27 Tsoupakis’s investment in the [EIS], which he claimed paid 28 extraordinarily high rates of return.” ¶ 27; and (5) in September -28- 1 2004, Neidich contacted A&S Investment and “extolled the virtues 2 of the [EIS].” ¶ 28.20 Collectively, these allegations in the 3 Appellees’ state court complaint tend to show that they each were 4 first contacted by either Neidich or Romer, not Wank, and that 5 Neidich and/or Rohmer made glowing and unfounded representations 6 to them concerning the EIS. In short, Appellees’ own pleading in 7 state court plausibly support Wank’s contention that: “Plaintiffs 8 had already made up their minds to invest in the EIS, and, 9 therefore did not rely on his statements.” And as Wank observes, 10 the Appellees have submitted no declarations, nor any documentary 11 evidence (such as the EIS Agreements that they admit they signed 12 in connection with their investments) to show their justifiable 13 reliance on his representations. 14 Moreover, even if they did actually rely upon Wank’s 15 statements in investing in the EIS, each of the Appellees must 16 establish that it was justifiable for them to do so, based upon 17 their background, training and experience as investors. The 18 record contains no facts to demonstrate that, assuming they in 19 fact took his word, they lacked other reasons not to appreciate 20 the risks associated with the currency investment. As Wank points 21 out, whether the Appellees could show justifiable reliance was in 22 doubt because at least some of them were arguably sophisticated, 23 educated investors: a mortgage banker, a CPA, an insurance broker, 24 a Porsche dealer, and a medical doctor. 25 20 At oral argument before the Panel, counsel for the 26 Appellees was invited to explain whether the Appellees may have relied on the representations of Neidich and Romer, which they 27 entered into the bankruptcy court’s record, rather than the alleged representations of Wank. Counsel simply stated, “They 28 relied on Wank.” -29- 1 At best, whether the Appellees each justifiably relied on 2 Wank’s representations was disputed; at worst, the record contains 3 no evidence to show such reliance. Because of this, the 4 bankruptcy court erred by determining that the debt Wank owed to 5 Appellees was excepted from discharge under § 523(a)(2)(A). 6 CONCLUSION 7 In granting summary judgment to the Appellees, the bankruptcy 8 court should not have relied solely upon a declaration expressly 9 designed to defeat Wank’s ability to obtain effective relief under 10 the bankruptcy laws. In light of a contradictory declaration, 11 the bankruptcy court should not have weighed the value of his 12 various statements, determined Wank’s credibility, or drawn 13 inferences in favor of the Appellees. Finally, there was nothing 14 in the record to show that the Appellees justifiably relied upon 15 any of Wank’s alleged false representations in making their 16 investments. Because genuine issues of material fact remain 17 requiring a trial, we VACATE the bankruptcy court’s summary 18 judgment and REMAND this matter for further proceedings. 19 20 21 Ballinger Jr., Bankruptcy Judge, concurring: 22 23 I agree that the bankruptcy court’s ruling in this case must 24 be reversed, but not for the reasons announced by the majority. 25 Reversal is warranted only because the bankruptcy court failed to 26 justify its decision to disregard Wank’s sworn disavowal of the 27 First Declaration and, therefore, improperly weighed the evidence 28 when considering plaintiffs’ request for summary judgment. Had -30- 1 the bankruptcy court found Wank’s Second Declaration the self- 2 serving product of a shammer, I would vote to affirm. I 3 respectfully disagree with the panel that the First Declaration, 4 coupled with undisputed material facts, did not establish all the 5 elements requisite to granting relief under Bankruptcy Code 6 section 523(a)(2)(A). 7 A bankruptcy court has the power to disregard sworn avowals 8 meant to defeat summary judgment if it finds them to be conclusor- 9 y, self-serving or to constitute a sham. See F.T.C. v. Pub. 10 Clearing House, Inc., 104 F.3d 1168, 1171 (9th Cir. 1997) 11 (conclusory and self-serving affidavits lacking detailed facts and 12 any supporting evidence are insufficient to create a genuine issue 13 of material fact); Kennedy v. Allied Mut. Ins. Co., 952 F.2d 262, 14 267 (9th Cir. 1991) (to disregard an affidavit as one conjured to 15 avoid summary judgment, the district court must make a factual 16 finding that the contradiction was a sham). 17 In this case, Wank’s Second Declaration is clearly self- 18 serving, but not conclusory.1 Instead of declaring Wank’s more 19 recent declaration a sham not to be considered, the bankruptcy 20 court reviewed the Second Declaration and essentially balanced its 21 credibility against the admitted facts contained in the First 22 Declaration. Statements in the Second Declaration contradicted 23 facts essential to plaintiffs’ case and created genuine disputes 24 regarding material issues. These disputed issues preclude granting 25 summary disposition and compel us to reverse the bankruptcy 26 1 The Second Declaration is ten pages long and contains 27 details of Wank’s version of the circumstances surrounding creation of each paragraph of the First Declaration. 28 -31- 1 court’s order. But, I respectfully disagree that this result 2 flows from any inherent unreliability with Wank’s initial sworn 3 admissions or a public policy concern. I believe there was 4 evidence at the trial court supporting a finding that Wank’s debt 5 to plaintiffs should be excepted from his bankruptcy discharge. 6 Section 523(a)(2)(A) excepts from discharge any debt for money, 7 property or credit obtained by false pretenses, false 8 representations or actual fraud. To obtain relief a creditor must 9 establish five elements: 1) the debtor made a representation; 2) 10 the debtor knew at the time the representation was false; 3) the 11 representation was made with the intent and purpose of deceiving 12 the creditor; 4) the creditor justifiably relied on the 13 representation; and 5) the creditor was damaged as a proximate 14 cause of the representation. Ghomeshi v. Sabban (In re Sabban), 15 600 F.3d 1219, 1222 (9th Cir. 2010); Turtle Rock Meadows 16 Homeowners Ass’n v. Slyman (In re Slyman), 234 F.3d 1081, 1085 17 (9th Cir. 2000). 18 In this case, the last element is not disputed; Wank 19 acknowledges that plaintiffs suffered substantial damage as a 20 result of the scheme in which he encouraged them to invest. And 21 the First Declaration, standing alone, provides sufficient 22 evidence that a court could conclude satisfies a number of the 23 other elements of section 523(a)(2)(A). The majority disagrees 24 and finds the First Declaration inherently unreliable. It also 25 concludes the bankruptcy court erred because the record shows 26 plaintiffs did not establish justifiable reliance. With respect 27 to the reliability of admissions found in the First Declaration, 28 the majority discusses the long recognized public policy -32- 1 prohibition against prepetition waivers of Bankruptcy Code 2 discharge rights and finds that this policy dictates that Wank’s 3 admissions in the First Declaration be viewed with great 4 skepticism. 5 I disagree that this policy consideration is relevant to this 6 case.2 As the panel notes, the bankruptcy judge correctly ruled 7 that she would not consider the “bankruptcy defeating” language 8 found both in the First Declaration and the agreement settling the 9 parties’ state court case. The question here is whether the 10 bankruptcy judge incorrectly found that sworn admissions contained 11 in the First (and disavowed in the Second) Declaration established 12 13 2 There is no dispute that the First Declaration contains an improper “bankruptcy-proofing” provision. The bankruptcy court 14 properly held that this term was void and would not be considered. But, case law clearly provides that the bankruptcy court can 15 consider underlying facts contained in materials that include a bankruptcy defeating clause. Hayhoe v. Cole (In re Cole), 226 16 B.R. 647, 651 (9th Cir. BAP 1998), citing Klingman v. Levinson, 831 F.2d 1292, 1296 n.3 (7th Cir. 1987). The majority 17 acknowledged, citing Cole, that the Bankruptcy Appellate Panel has drawn a distinction between the public policy against de facto 18 bankruptcy discharge waivers and determinations or stipulations regarding facts that may be relevant to determining if a debt is 19 dischargeable. In Cole, the bankruptcy court ignored a bankruptcy defeating clause contained in a state court judgment, but 20 considered stipulated facts contained therein to determine if collateral estoppel applied. The majority points out that there 21 are no stipulated facts and judgment in this case. But, Cole and Levinson do not require that the underlying facts be stipulated 22 to, nor do those cases require the facts be taken from a judgment. Here, we have admitted facts in a declaration signed under penalty 23 of perjury. Whether the facts were stipulated to or are a single party admission, and whether they were contained in a judgment or 24 a declaration, should make no difference to a bankruptcy court tasked with determining if those facts support a claim of non- 25 dischargeability for purposes of summary judgment. The majority’s conclusion that the public policy against bankruptcy defeating 26 clauses creates a general skepticism of the admitted facts goes too far. Cole and Levinson simply allow the court to disregard 27 the improper language and examine, without a presumption of suspicion, the underlying facts. 28 -33- 1 elements justifying relief under section 523(a)(2)(A). Reversal 2 is required not because the bankruptcy judge could not give 3 credence to the First Declaration’s admissions, but rather because 4 the record lacks a factual finding that the judge deemed the 5 factual contradictions in the Second Declaration unworthy of 6 consideration. Had the bankruptcy court found the Second 7 Declaration a sham, no public policy concern would have prevented 8 it from holding that the admissions contained in the First 9 Declaration conclusively established the following three elements 10 required for relief under section 523(a)(2)(A): 11 ! That Wank made false representations to plaintiffs to convince them to transfer hundreds of thousands of dollars to 12 him; 13 ! That Wank was aware that most, if not all, of the relevant representations were false when he made them; 14 and 15 ! That the false representations constituted deceit. Wank made them to create false impressions in 16 plaintiffs’ minds (e.g. that Wank had expertise in the financial scheme they were to invest in and that their 17 money would never be put at risk of loss). 18 The majority also rests its decision on the belief that 19 plaintiffs failed to establish the justifiable reliance needed 20 to obtain a judgment because the Second Declaration contains 21 Wank’s assertions that plaintiffs had already decided to 22 invest in the EIS currency speculation scheme prior to meeting 23 with him. This conclusion supports the view that if the 24 bankruptcy judge had memorialized her belief that the Second 25 Declaration was contrived and bogus, the decision at the trial 26 court would have to be affirmed. More important are Wank’s 27 sworn acknowledgments in the First Declaration that he made 28 representations to the Plaintiffs that were false to induce -34- 1 them to place their funds in his trust account, permit him to 2 act as their “primary investor” and transfer their money to 3 EIS. Coupled with the undisputed fact that subsequent to 4 these representations plaintiffs provided large sums to Wank, 5 the bankruptcy court could appropriately decide that 6 plaintiffs established justifiable reliance. 7 Although I respectfully disagree with the majority’s 8 reasoning, I concur in the decision to set aside the 9 bankruptcy court’s grant of summary judgment. 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 -35-