Mukherjee et al v. Sir et al

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-1-
UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
SAN JOSE DIVISION
In re 	Case No. 07-52029-RLE
RAYMOND J. SIR, 	Chapter 7
Debtor. 	Adv. Proc. No. 07-5147
_________________________________/
AVI MUKHERJEE & KUMAR S. SRIPADAM,
Plaintiffs,
vs.
RAYMOND J. SIR,
Defendant.
_________________________________/
MEMORANDUM DECISION AFTER TRIAL
The following constitutes
the order of the court. Signed May 25, 2010
________________________________________
Roger L. Efremsky
U.S. Bankruptcy Judge	________________________________________
Entered on Docket
May 26, 2010
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
Case: 07-05147 Doc# 43 Filed: 05/25/10 Entered: 05/26/10 13:37:53 Page 1 of
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1 GOEM was the debtor in chapter 7 case no. 07-52027 ASW.
The case is now closed. Plaintiffs filed an adversary
proceeding with identical allegations in the GOEM case which
was dismissed at plaintiffs’ request. See AP no. 07-5148.
Plaintiffs have failed to submit an order dismissing it as
requested by the court.
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I. Introduction and Procedural Posture
The court has jurisdiction to hear this matter pursuant
to 28 U.S.C. § 1334(b). This is a core proceeding under 28
U.S.C. § 157(b)(2)(I).
Raymond J. Sir (“Sir”) filed this chapter 7 case on July
6, 2007. Plaintiffs Avi Mukherjee (“Mukherjee”) and Kumar
Sripadam (“Sripadam” and, with Mukherjee, “plaintiffs”) timely
filed the Complaint commencing this adversary proceeding on
September 12, 2007. 	The Complaint states one claim for relief
under Bankruptcy Code § 523(a)(2)(A). 	The other defendant
initially named in the Complaint - chapter 7 debtor Global OEM
Solutions, LLC (“GOEM”) - was dismissed on the eve of trial. 1
Through counsel, Sir answered the complaint, generally
denying its allegations and raising affirmative defenses. 	He
responded to plaintiffs’ discovery and was deposed. 	Sir’s
counsel withdrew in September 2008 and was not replaced. 	The
case went to trial on January 5, 2010. Sir represented himself
at trial and James Cai and Seth Weiner represented plaintiffs.
This is the court’s decision following trial and
constitutes its findings of fact and conclusions of law as
required by Federal Rule of Bankruptcy
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2 The following abbreviations will be used: “Tr.”
indicates the trial transcript; “Exh.” indicates exhibit.
3 There was no corroborating evidence for this self-
diagnosis - other than the apparent gambling debts involved in
here. 	The court notes that the Diagnostic and Statistical
Manual of Mental Disorders (DSM-IV) of the American
Psychiatric Association classifies pathological gambling as an
impulse control disorder.
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Procedure 7052. 2
The gaps in the record in this case have created
analytical problems which will be apparent in the discussion
that follows. 	The problems stem in large part from the way
plaintiffs’ counsel presented the case and the fact that Sir
had no counsel at trial. 	If there appear to be missing facts
in what follows, it is not due to the court’s oversight of any
available facts.
II. Relevant Facts
A. 	Background Facts re Sir
Sir testified that he had received a bachelor’s degree
from the University of California at Berkeley (with a major in
biophysics) and had received an MBA from the University of
California at Los Angeles. 	Tr. 72:6-8. 	Sir said he had been
a “gambling addict” during the time relevant to this adversary
proceeding and was now a recovering gambling addict. 3 	Tr.
89:14-21; 90:1-5; 134:1-8; 141:15-19. 	He claimed he had lost
millions of dollars gambling. 	Tr. 73:3-9. 	He is separated
from his wife, unemployed, and living in southern California
with his parents. 	Tr. 71:17-24; 73:3-6.
Sir formed GOEM in 1999 and it operated until it filed
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4 Sir listed $1.3 million in unsecured debt on his
schedule F. Approximately $70,000 of this appears to be credit
card debt. Approximately $715,000 of this appears to be two
real property secured debts on what was Sir’s home. Sir Docket
no. 11.
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its chapter 7 case at the same time he filed this case in July
2007. 	Sir Docket no. 12, p. 5. 	At all times relevant to this
adversary proceeding, Sir owned the controlling interest in
GOEM and was its only manager. 	Exhs. 1-3. 	GOEM’s statement
of financial affairs described it as a “technology consulting
company covering both hardware and software.” 	GOEM Docket no.
11, p. 5. 	The trustee in the GOEM case filed a no asset
report and a final decree was entered in December 2007. 	GOEM
Docket no. 15.
Sir’s schedules showed unsecured debt of approximately
$1.3 million, no secured debt, and no priority debt. 	His
schedule A listed no real property. 	Sir Docket no. 11. 	He
apparently transferred his interest in what had been a jointly
owned house to his ex-wife in June 2006 according to the terms
of a marital property agreement entered into in September
2005. 	Sir Docket no. 12, p. 3; Exh. 21. 4 	However, he resided
in the home until September 2009 and the marriage has not been
formally dissolved. 	Tr. 133:5-18. 	According to his statement
of financial affairs, his income, derived solely from GOEM,
was less than $10,000 in 2007, less than $54,000 in 2006, and
less than $28,000 in 2005. 	Sir Docket no. 12, p. 1.
B. Plaintiff Mukherjee’s Testimony
Mukherjee had been employed at IBM and Hitachi from 1978
to 2006. 	Tr. 40:8-17. 	There was no evidence at trial
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5 In his poker terminology, he would “get some
reimbursement of the rake” from Bay 101. Tr. 30:11-12. This
employment was not during the time relevant to this case. 	Tr.
30:21.
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regarding his educational background or what he had done at
IBM or Hitachi; the court assumes he was an engineer. 	He met
Sir playing poker at Bay 101 in 2002 or 2003. 	Tr. 7:21-25.
At all times relevant to this case, they both played there
regularly - at least several times a week. 	Tr. 27:16-17. 	He
had also been employed at Bay 101 in some capacity because he
was a regular player there and knew the owner. 5 	Tr. 30:8-15.
After retiring from Hitachi in 2006, Mukherjee formed Global
Tech Consultants, LLC (“GlobalTech”). 	Tr. 40:2-21.
Mukherjee testified that on September 4, October 14 and
December 17, 2005, he loaned Sir cash while they were together
at Bay 101. 	Tr. 8:2-24. 	Mukherjee said these three personal
loans, totaling $30,000, were used by Sir to play poker. 	Tr.
8:2-24. 	These loans were not supported by any contemporaneous
written documentation but Mukherjee believed there had been an
agreement to repay these loans within a month or less but they
had not been. 	Tr. 9:1-7.
Mukherjee testified that even though the $30,000 loan had
not been repaid, in February 2006, Sir told him it would be in
his “best interest” to convert the unpaid $30,000 personal
loan into an investment in GOEM and to make an additional
investment of $70,000. 	Tr. 9:22-25; 11:4-10. 	He testified
that Sir told him that Sir controlled GOEM and that GOEM
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6 It is unclear what Mukherjee understood “hedge fund” to
mean. Black’s Law Dictionary defines hedge fund as “a
specialized investment group - usu. organized as a limited
partnership or offshore investment company - that offers the
possibility of high returns through risky techniques such as
selling short or buying derivatives.” Blacks Law Dictionary,
(8 th ed. 2004).
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controlled “significant hedge funds” 6 in Korea. 	Tr.9:17-21.
Mukherjee claimed that Sir told him that this investment in
GOEM could provide a “significantly higher” return than any
other investment he could make - that it could be as high as
10 - 15%. 	Tr. 10:3-7.
In February and March 2006, before the additional $70,000
was transferred, Mukherjee (or his LLC) and Sir (or GOEM)
entered into the following agreements:
1. 	The “Consultant Retainer Agreement” (“Consultant
Agreement”). 	See Exh. 7. 	The work to be performed by
Mukherjee was described as “assessing technology,” “business
development,” and “project management.” 	According to Exhibit
A to the Consultant Agreement, GOEM was to pay Mukherjee a fee
of $10,000 per month for this work plus a “net profit of 30%”
on two projects identified on Exhibit A. 	Mukherjee testified
that this consulting arrangement was a way of repaying the
personal gambling loans and he performed the consulting
services on an almost full time basis for 3 months. 	He claims
to be owed $30,000 for this work performed between March and
May 2006.
2. 	The “Subscription Agreement and Suitability
Statement” (“Subscription Agreement”). 	See Exh. 5. 	The
Subscription Agreement provided that Mukherjee “agrees to
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7 Mukherjee testified that he transferred his personal
interest in these documents to his LLC, GlobalTech. The
documents are inconsistent. See Exh. 5, p. 55 listing
“Mukherjee c/o Globaltech” as the member of GOEM, and see Exh.
5, p. 56-57 listing Globaltech as the member. Mukherjee’s
explanation for this transfer was that he wanted to use
Globaltech as the vehicle for this investment and for any
income to be received under the Consultant Agreement. Sir
testified that these decisions were Mukherjee’s alone and he
had no interest in them or influence over them.
-7-	[sir.mukherjee.sripadam.final.memo.decis ]
invest” $100,000 in GOEM and is to become a “limited partner.”
The Subscription Agreement contains representations regarding
Mukherjee’s “suitability” to make this investment and an
acknowledgment of the risks associated with it. 	The key terms
of the Subscription Agreement include:
The undersigned ... has such knowledge and experience in
financial and business matters that he is capable of
evaluating the merits and risks of an investment in the
Company and the suitability of such investment in the
Company ... is able to bear the economic risk of the
investment ... has received no representations or
warranties from the Company or the General Partner other
than those contained in the Operating Agreement ...
See Exh. 5, p. 2-3.
3. 	As contemplated by the Subscription Agreement, the
Operating Agreement for GOEM dated March 26, 2006 shows that
GlobalTech became a member with a $100,000 investment and
acquired a 5% interest in GOEM (the Subscription Agreement and
the Operating Agreement, collectively, the “LLC Documents”).
See Exh. 3. 7
Exhibit 17 is an undated and unsigned document prepared
by Mukherjee entitled “Loans and other payments to Raymond
Sir.” 	It lists the amounts and dates of each of Mukherjee’s
transfers. 	It shows the unpaid $30,000 “personal loan” made
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in three installments between September 4, 2005 and December
17, 2005. 	This entry is followed by this statement: 	“2/14/06
verbal agreement with RJ Sir to convert Loan to investment -
add $70k more for minimum unit of $100k. 	Agree to pay $70k in
installments over 3 months.” 	The document then lists twelve
transfers in amounts ranging from $3,500 to $10,000 between
February 15, 2006 and May 12, 2006 and ends “total to date
$100k.” 	See Exh. 17. 	Exhibit 17 also shows that, with one
exception, these twelve transfers were made in cash while the
parties were together at Bay 101. 	The one exceptional
transfer was a wire transfer of $8,000 to Sir’s account at the
Bellagio in Las Vegas where Sir was apparently playing poker.
Mukherjee testified that he began asking for his money
back in May 2006 and learned at this time that there were two
lawsuits pending against Sir or GOEM. 	Tr. 14:12-25. 	Exhibit
13, an email from Sir to Mukherjee dated May 25, 2006,
indicates that, due to cash flow problems, GOEM was unable to
pay the $30,000 consulting fee but apparently did not dispute
that $30,000 was owed. 	It also indicates that Sir offered to
“buy back” Mukherjee’s interest in GOEM.
In an email to Sir dated February 12, 2007, Mukherjee
summarized the history of his relationship with Sir:
You told me that, as I obviously saw with my own eyes,
the money I gave you for [GOEM] investment was in fact
lost at the gambling and poker tables at Bay 101 and
elsewhere ... You told me you would regard the money owed
as a personal loan - since obviously it went into poker
and gambling losses - and make me ‘whole’ ($130k)
personally.
See Exh. 12.
The email goes on to describe Sir’s apparent promise to
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fully repay the $130,000 by December 2006, his failure to do
so, his promise to begin making monthly payments starting in
January 2007, and an apparent failure to do that. 	See Exh.
12.
C. Plaintiff Sripadam’s Testimony
Sripadam described himself as a self-employed
“entrepreneur and business consultant.” 	Tr. 55:9-10. 	He
stated he was on the board of directors of a “couple of
companies” and was working on a start-up of some kind. 	Tr.
55:11-12. 	There was no testimony regarding his educational
background and no details were offered on his business other
than as stated here. 	Sripadam met Sir in 2005 at Bay 101
where he also played poker on a regular basis. 	Tr. 55:13-20.
Sripadam had loaned money to Sir for poker playing in the past
but as of April 2006, all such loans had been repaid. 	Tr.
63:12-23.
In April 2006, according to Sripadam, Sir told him that
GOEM had an opportunity to invest in a $1 million “mezzanine
deal” in South Korea involving an “ipo track company” whose
name Sripadam did not recall. 	Sir said GOEM was going to
invest $300,000 in this deal, and invited Sripadam to invest
$100,000 of the $300,000. 	Tr. 56:6-24. 	Sripadam thereafter
delivered to GOEM a $100,000 cashiers check made payable to
GOEM. 	Tr. 59:1-6.
Two documents were offered to support this transaction.
Exhibit 14 is an email string dated April 10 and April 11,
2006 between Sir and Sripadam in which Sir wrote:
I am inviting you to participate in a [m]ezzanine
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8 It is unclear what they understood this phrase to mean.
Generally, mezzanine financing can be structured either as
debt or equity and is often a more risky investment than
secured lending.
http://wikipedia.org/wiki/Mezzanine_financing.
-10-	[sir.mukherjee.sripadam.final.memo.decis ]
financing deal with an IPO track company in Korea. 	This
deal is through one of [the] premier Venture Capital
companies, KTIC (Korean Technology Investment Corp[.]),
www.ktic.co.kr in Korea. 	I have done numerous deals
with this company [in the] last 6 years and they have a
solid track record. 	Since this is [the] first deal for
us, my company will guarantee the minimum return of 15%
with the principle [sic] in 6 (six) months. 	In my
experience, you can expect around 30% return on this
deal in six months. 	I am making this deal a “No Risk”
deal for you.
Id.
In response to this initial email, Sripadam asked for
additional details and Sir responded with the name of the
company (“the company name is 3sdigital...they are backed by
Samsung and KTIC...”) and suggested they arrange a meeting.
See Exh. 14.
Two days later, on April 13, 2006, as president and CEO
of GOEM, Sir signed a document addressed to Sripadam entitled
Letter of Guarantee (the “Letter”) and Sripadam delivered his
$100,000 check. See Exh. 19. 	Sripadam testified that they
had exchanged a draft of the Letter on which he had commented
before it was finalized. 	Tr. 60:5-7. 	The Letter says
Sripadam is making a “personal investment” of $100,000 for a
“Mezzanine Financing Project” 8 in South Korea by and between
GOEM and Korea Exchange Bank (defined as the “Investment”)
and GOEM is issuing its “irrevocable and unconditional letter
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9 Exhibit 14 refers to Korean Technology Investment Corp.
but the Letter refers to Korea Exchange Bank. This unexplained
discrepancy may or may not be significant.
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of guarantee” in favor of Sripadam. 9 	The next two paragraphs
say:
If the Investment fails to perform and fulfill the
expected returns, [w]e, as primary obligor and not
merely as surety, do hereby irrevocably and
unconditionally guarantee, jointly and severally, to
perform and fulfill the expected return rate up to 15%
with the principal. 	We hereby irrevocably and
unconditionally undertake to pay [Sripadam] immediately
if the Investment fails to earn expected returns up to
15% upon [Sripadam’s] simple demand with your [sic]
signed statement certifying that the Investment was not
returned with a guarantee earning of 15% by October 31 st ,
2006.
See Exh. 19 (emphasis added).
Sripadam acknowledged that he had done no due diligence
regarding this transaction before he delivered his $100,000
to GOEM. 	Tr. 58:10-12. 	He testified that he suspected the
$100,000 was used by Sir for gambling but acknowledged that
it was possible it had been invested by GOEM. 	Tr. 69:1-22.
On January 23, 2007, he sent a letter demanding immediate
payment of $115,000 on the “note.” 	See Exh. 15.
D. 	Sir’s Testimony re Mukherjee and Sripadam
Sir admitted there was an unpaid $30,000 personal
gambling debt owed to Mukherjee but denied that there was an
intention to convert this $30,000 loan into an “investment”
in GOEM. 	He also denied that the additional $70,000 given to
him by Mukherjee was intended to be an “investment” in GOEM.
Tr. 83:17-19; 85:20-24; 86:14-20; 88:14-25; 89:2-5. 	He
viewed the $100,000 as a gambling debt. 	Tr. 89:2-21. 	He
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denied promising Mukherjee a 20% return - or any specific
return - on any investment. Tr. 91:13-18.
Sir’s explanation for Mukherjee’s 5% interest in GOEM
was that Mukherjee was experienced and knowledgeable in the
technology area, and because of his years at IBM and Hitachi,
had contacts that could prove beneficial to GOEM. Tr. 90:19-
25. 	Accordingly, while the testimony on this point was less
than clear, he apparently transferred a portion of his 90%
interest in GOEM to Mukherjee (or to Globaltech) so that
Mukherjee (or Globaltech) had a 5% interest and Sir then had
an 85% interest. 	Tr. 88:10-12; Exh. 2, p. 66; Exh. 3, p. 65.
In Sir’s view of the transactions involved in this adversary
proceeding, the $100,000 gambling debt owed to Mukherjee and
the transfer of the 5% interest in GOEM were two entirely
separate issues. 	Tr. 90:19. 	Nonetheless, he testified that
he believed Mukherjee’s true intention in obtaining the GOEM
interest was to secure repayment of his gambling debt. 	Tr.
86:14-20.
Sir also denied that GOEM owed consulting fees to
Mukherjee because the services provided were either without
benefit to GOEM or Mukherjee had made only insignificant
efforts to provide services. 	Tr. 94:2-5; Exh. 28, Response
to Request for Admission no. 8. 	However, he also
acknowledged that GOEM’s accounts payable included a $30,000
debt to Mukherjee or Globaltech which GOEM had been unable to
pay. 	Tr. 6:1-5; 96:8-9; Exh. 13.
Sir denied he had misrepresented any facts and denied
any intent to deceive Mukherjee. Tr. 87:23-25. 	He claimed
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10 GOEM’s schedules and Sir’s schedules are silent as to
any such loss, perhaps because it occurred more than one year
before either case was filed. Sir’s explanation for the
apparent disappearance of this $300,000 was murky at best.
Nevertheless, plaintiffs failed to ask any relevant follow-up
questions, and failed to present any documents regarding this
aspect of their case.
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that Mukherjee had known that his funds were going to be used
for gambling rather than invested in GOEM. 	Tr. 13:17-19;
91:21-23. 	Sir acknowledged that he owed money to Mukherjee
but the money had been lost gambling and he could not repay
it. 	Tr. 5:20-25; 98:5-6. 	He also testified that at one
point Mukherjee had tried to teach him to be a better poker
player in order to minimize his losses. 	Tr. 90:7-10.
Sir stated that Sripadam’s $100,000 had been used to
“support general operations” of GOEM and was not used for
“identifiable expenses.” 	See Exh. 29, Response to
Interrogatory no. 10. 	Sir denied that GOEM had invested any
“capital” in investments “in which Korean Technology
Investment Corp. had participated.” 	See Exh. 29, Response to
Interrogatory no. 19. 	At trial, Sir testified that
Sripadam’s $100,000 was deposited into GOEM’s bank account
and an equivalent amount had been allocated to some
investment in Korea from GOEM’s or his accounts there. Tr.
102:10-13; 105:11-14. 	Sir claimed that the full $300,000 had
been lost when someone in Korea absconded with the funds. 10
The mezzanine financing project never took place. 	Tr.
104:22-24; 105:6-9; 111:3-4.
//
//
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III. 	Alter Ego Issue
Plaintiffs argue that Sir and GOEM must be treated as
alter egos. 	Through use of this alter ego doctrine, plaintiffs
seek to hold Sir liable for the alleged obligations of GOEM.
At paragraph 5, the Complaint alleges, inter alia, that
there was a “unity of ownership and interest” between Sir and
GOEM, that “separateness between them has never existed,” that
there was “inadequate capitalization,” “inadequate insurance,”
a failure to “respect corporate formalities,” commingling of
funds and assets. 	Sir’s Answer generally denied the
allegations of paragraph 5.
Without citation to any authority, plaintiffs’ trial brief
asserted - in a similar conclusory fashion - that Sir
controlled GOEM, conducted it without observing corporate
formalities, and used its funds as his own to pay his gambling
debts. 	At trial Sir made no effort to refute this contention.
In general, the law regarding alter ego liability is easy
to state but difficult to apply. 	Talbot v. Fresno-Pacific
Corp., 181 Cal. App. 2d 425, 432 (Cal. Ct. App. 1960). 	When a
corporate form is used to perpetrate a fraud, circumvent a
statute, or accomplish some other wrongful or inequitable
purpose, a court may disregard the corporate entity and treat
the acts as if they were done by the individuals or by the
controlling corporation. The doctrine is to be narrowly
applied. 	Dole Food Co. v. Patrickson, 538 U.S. 468, 475 (Cal.
2003) (“The doctrine of piercing the corporate veil, however,
is the rare exception, applied in the case of fraud or certain
other exceptional circumstances.”)
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Under California law, two conditions must be met before
the alter ego doctrine will be invoked. 	First, there must be
such a unity of interest and ownership between the corporation
and its equitable owner that the separate personalities of the
corporation and the shareholder do not in reality exist.
Second, there must be an inequitable result if the acts in
question are treated as those of the corporation alone.
Automotriz Del Golfo De California S.A. De C.V. v. Resnick, 47
Cal. 2d 792, 796 (Cal. 1957); Tomaselli v. Transamerica Ins.
Co., 25 Cal. App. 4 th 1269, 1285 (Cal. Ct. App. 1994).
Difficulty in enforcing a judgment or collecting a debt does
not satisfy this inequitable result standard. 	Sonora Diamond
Corp. v. Superior Court, 83 Cal. App. 4 th 523, 539 (Cal. Ct.
App. 2000). 	There must be some evidence of bad faith.
Associated Vendors, Inc. v. Oakland Meat Co., 210 Cal. App. 2d
825, 842 (Cal. Ct. App. 1962).
Courts have considered numerous factors, including
inadequate capitalization, commingling of funds and other
assets of the two entities, the holding out by one entity that
it is liable for the debts of the other, identical equitable
ownership in the two entities, use of the same offices and
employees, use of one as a mere conduit for the affairs of the
other, disregard of corporate formalities, lack of segregation
of corporate records, and identical directors and officers.
Tomaselli, 25 Cal. App. 4 th at 1285.
The incompleteness of the record in this case makes it
impossible to make a fair assessment of enough facts to reach a
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11 It is undisputed that Sir managed and owned the
controlling interest in GOEM. Plaintiffs stress that the GOEM
bank records show that Sir withdrew cash from the GOEM bank
account and wrote checks to his wife which totaled at least
$87,000 between December 2005 and December 2006. The franchise
tax board and what appear to be other GOEM trade creditors
were also paid approximately $22,000 from this account during
this time period. See Exh. 20.
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sound conclusion on the issue of alter ego liability. 11
Despite an opportunity to do so, plaintiffs failed to meet
their burden of proof. 	Nonetheless, such a conclusion makes no
difference to the outcome of this case. For purposes of the
discussion that follows, the court will assume that Sir and
GOEM were alter egos.
IV. Bankruptcy Code § 523(a)(2)(A)
The central purpose of the Bankruptcy Code is to permit a
debtor to make peace with creditors and obtain a fresh start
free of preexisting debt. 	Grogan v. Garner, 498 U.S. 279
(1991). 	The bankruptcy discharge provides this fresh start.
To implement that purpose, the discharge is interpreted broadly
and the exceptions to discharge are interpreted narrowly in
favor of the debtor. 	Snoke v. Riso (In re Riso), 978 F.2d
1151, 1154 (9 th Cir. 1992); Su v. Carillo (In re Su), 259 B.R.
909, 912 (9 th Cir. BAP 2001), aff’d 290 F.3d 1140 (9 th Cir.
2002). 	To maintain the integrity of the bankruptcy process, a
discharge must be limited to the honest but unfortunate debtor.
See Grogan, 498 U.S. at 286-87.
Bankruptcy Code § 523(a)(2) provides that a discharge
under Bankruptcy Code § 727 does not discharge an individual
debtor for any debt - (2) for money, property, services, or an
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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.
The Complaint alleges that the plaintiffs’ debts are
nondischargeable on the grounds that the debtor obtained money
by false pretenses, a false representation and actual fraud.
In the Ninth Circuit, the terms “false pretenses” and “false
representation” have the same meaning in § 523(a)(2)(A) as the
term “actual fraud” and do not provide an independent basis for
finding a debt nondischargeable. 	See Mandalay Resort Group v.
Miller (In re Miller), 310 B.R. 185 (Bankr. C.D. Cal. 2004)
(analyzing the history of the use of these terms in bankruptcy
law).
A creditor who seeks to establish nondischargeability on
the basis of actual fraud must prove (1) the debtor made a
representation; (2) at the time debtor knew the representation
was false; (3) debtor made the representation with the
intention of deceiving the creditor; (4) the creditor
justifiably relied on the representation; and (5) the creditor
sustained damage as the proximate result of the representation
having been made. 	Citibank (South Dakota), N.A. v. Eashai (In
re Eashai), 87 F.3d 1082, 1086 (9 th Cir. 1996); Britton v.
Price (In re Britton), 950 F.2d 602, 604 (9 th Cir. 1991).
Plaintiff has the burden of proof as to each of these elements
by a preponderance of the evidence. 	Grogan, 498 U.S. at 291.
//
//
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A. False Representation
The Complaint alleges Sir made two representations to
Mukherjee - that there would be a 20% return on a $100,000
investment in GOEM and that GOEM would pay Mukherjee $30,000
based on an agreement to pay him $10,000 per month as a
consultant. 	See Complaint at ¶7(b)[represent 20% return];
¶7(d) [represent pay $10,000/month]; ¶7(j) [knew promise and
representations false]; ¶7(l) [no intent to perform].
To prevail on a claim of actual fraud, Mukherjee must show
that Sir made a false statement of fact in February 2006 and
March 2006 when he allegedly promised a 20% return on an
investment in GOEM and the LLC Documents and Consultant
Agreement were signed. 	In the alternative, he must show that
Sir made some such promise with no intention of performing.
First, Mukherjee’s contention that there was an investment
of $100,000 in GOEM is simply not credible. 	He handed $100,000
in cash to Sir while they were together playing poker or wired
it to Sir while Sir was in Las Vegas playing poker. 	He failed
to prove that Sir misrepresented how these funds were going to
be used.
Second, assuming (for purposes of discussion only) that
there was an investment in GOEM rather than a loan to enable
Sir to gamble, the LLC Documents do not represent there will be
a specific return or promise a 20% return on any investment.
The alleged oral representation by Sir of a 20% return from an
investment in GOEM - which Sir denies making - contradicts the
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12 Parole evidence is admissible with respect to issues of
fraud, illegality or other invalidating causes. See Cal. Code
Civ. Pro. § 1856(g). But this fraud exception to the parole
evidence rule does not apply when the evidence is offered to
show a promise directly at variance with a promise in the
written agreement. Bank of America v. Pendergrass, 4 Cal. 2d
258, 263 (Cal. 1935).
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terms of the LLC Documents. 12
Third, assuming Mukherjee’s theory is that Sir promised to
repay his alleged $100,000 investment in GOEM with a 20% return
(within some unspecified time frame), without an intention to
perform, Mukherjee also fails to establish this basis for the
first element of a § 523(a)(2)(A) claim.
A promise of future performance or intention is generally
not actionable as fraud at common law. 	However, if the debtor
does not actually intend to honor the promise when it is made,
this lack of intention may support a fraud claim. 	See, e.g.,
Desert Palace, Inc. v. Baumblit (In re Baumblit), 229 B.R. 50
(Bankr. E.D. N.Y. 1999), aff’d in part, rev’d in part on other
grounds, 251 B.R. 442 (E.D.N.Y. 2000). 	Sir testified that
there was no investment in GOEM, and no promise of a 20% return
on any such investment. 	Sir also testified that he intended to
repay Mukherjee and would have if he had been able to.
Mukherjee’s summary of their relationship that is Exhibit 12
confirms this, as did Exhibit 13 and Sir’s testimony at trial.
Thus, there was no proof that Sir made a promise without an
intention to perform.
Exhibit 17, the other document prepared by Mukherjee
regarding the background for the $100,000 in transfers, also
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cuts against Mukherjee on this point. 	It shows Mukherjee knew
the first $30,000 was a loan made to enable Sir to gamble. 	It
also shows Mukherjee knew the 12 transfers totaling $70,000
were going to be used by Sir to gamble at each point a transfer
was made because it shows that the transfers were made while
they were together at Bay 101 or while Sir was at the Bellagio
in Las Vegas. 	Therefore, Mukherjee failed to prove that Sir
made a false statement or representation regarding the use of
the $100,000 at the times Sir received the money or at the time
Sir and Mukherjee executed the LLC Documents. 	Based on this
evidence, Mukhrejee also failed to prove there had been a
promise made without the intention to perform.
The Complaint alleges that Sir represented that Sripadam
would receive a 15% return on his investment of $100,000 in
GOEM’s mezzanine financing deal. 	See Complaint at ¶8(a) and
(b). 	Sripadam claims this representation was false because Sir
did not intend to use the money for a mezzanine financing
project in South Korea and instead used it for gambling and to
pay personal debts.
Sripadam failed to prove that Sir (or GOEM) made a false
representation of fact at the time of this transfer and failed
to prove a promise without intention to perform. 	It is
undisputed that Sripadam transferred $100,000 to GOEM in April
2006. 	At trial, he argued that the $100,000 was “earmarked” to
go directly to a vaguely described mezzanine financing deal in
South Korea. 	A close review of the only documents offered in
support of the transaction shows that this earmarking point
fails. 	The April 10, 2006 email refers only to a “mezzanine
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financing deal with an ipo track company” through an entity
called “Korean Technology Investment Corp.” 	See Exh. 14. 	The
Letter refers to a “mezzanine financing project” in South Korea
by and between GOEM and an entity called “Korean Exchange
Bank.” 	See Exh. 19. 	Sir’s discovery responses denied that
GOEM had made any investments in which “KTIC” had participated.
See Exh. 29, Response to Interrogatory no. 19. 	At trial Sir
described GOEM losing $300,000 in some vaguely described
investment in South Korea.
While it is called a “letter of guarantee,” Exhibit 19 is
in fact a promissory note made by GOEM by which GOEM promised
“as primary obligor” that if the investment “fails to perform
and fulfill the expected returns,” GOEM agreed to “perform and
fulfill the expected return rate up to 15%” and GOEM
“unconditionally undert[ook]” to pay Sripadam “if the
“investment fails to earn expected returns up to 15%” upon his
demand. 	By its terms, the Letter was a promise by GOEM to
repay principal plus 15% to Sripadam no matter how the
“investment” performed. 	Thus, it does not support an
earmarking theory. 	Based on Exhibit 14, GOEM apparently
contemplated contributing $300,000 to some “mezzanine financing
deal” and Sripadam apparently believed his $100,000 was to go
to some such undertaking. 	However, he made a loan to GOEM that
required repayment by GOEM without regard to the performance of
any such investment.
Sir testified that the $100,000 was deposited into GOEM’s
bank account but an equivalent amount had been allocated to an
investment in Korea. 	He claimed that the entire $300,000 GOEM
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13 GOEM’s and Sir’s statement of financial affairs list
four breach of contract lawsuits, two of which were pending
and two of which had proceeded to judgment. See GOEM Docket
no. 11; Sir Docket no. 12. The total owed to the two judgment
creditors was approximately $71,000 according to schedule F in
each case. GOEM Docket no. 10, Sir Docket no. 11. It is
unclear what stage these disputes were in in May 2006. If the
nondisclosure theory involves other allegations in paragraph 7
of the Complaint, it fails for the reasons articulated above.
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had devoted to this transaction was lost when one of the
parties involved absconded with the funds. 	Based on this
record, the court finds there was no false representation by
Sir in the Letter and the Letter does not support a finding
that Sir made a promise without an intention to perform.
B. Non-Disclosure
The Complaint alleges that Mukherjee learned in May 2006
that there were lawsuits pending against Sir and GOEM. 	See
Complaint at ¶7(g). 	Paragraph 7(m) of the Complaint also
alleges that Sir “concealed or suppressed the above-stated
facts with the intent to defraud and induce” Mukherjee to make
the $100,000 investment and provide consulting services. See
Complaint at ¶7(m). 	The phrase “the above stated facts”
apparently refers to all the prior allegations in paragraph 7
of the Complaint. 	However, Mukherjee focused his nondisclosure
theory on the alleged failure to disclose certain lawsuits
pending against GOEM or Sir. 13
Concealment of a material fact that a party has a duty to
disclose can support nondischargeability of a debt on the
grounds of actual fraud. 	Apte v. Japra, M.D., F.C.C., Inc. (In
re Apte), 96 F.3d 1319, 1323-24 (9 th Cir. 1996). 	Relying on
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the Restatement (Second) of Torts (1976) § 551, in Apte, the
Ninth Circuit explained that one party to a business
transaction is under a duty to exercise reasonable care to
disclose to the other party facts basic to the transaction if
he knows that the other is about to enter into it under a
mistake as to them, and that the other, because of the
relationship between them, the customs of the trade or other
objective circumstances, would reasonably expect a disclosure
of those facts. 	Id. at 1324.
There was no testimony regarding whether Mukherjee had
ever asked for financial disclosures regarding GOEM in advance
of the February 2006 “agreement” to advance the additional
$70,000. 	There was no evidence regarding the impact of these
lawsuits - if any - on GOEM’s or Sir’s viability. 	Nor was
there evidence showing that Mukherjee would not have proceeded
if he had known of these lawsuits. 	(In fact, at trial
Mukherjee admitted he had learned of their existence in April
2006 and made three or four additional transfers to Sir after
that. 	Tr. 36:4-9.) 	In this vacuum, it is impossible to assess
whether the existence of these lawsuits was material and
whether there were any objective circumstances supporting a
duty to disclose them. 	Mukherjee has failed to establish the
failure to disclose a material fact of the caliber that would
support a claim for non-disclosure under Bankruptcy Code
§ 523(a)(2)(A).
C. Intent to Deceive
Each plaintiff must also show Sir’s intent to deceive him
through a false representation. 	This requires more than just a
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showing that Sir intended to deceive them into lending money
and later failed to repay it. 	“For actual fraud, the false
representation (whether express or implied) must be the vehicle
for the deceit. 	A free standing intent to deceive does not
support this element.” 	Miller, 310 B.R. at 196. 	Because
intent to deceive is difficult to show, the court must consider
all of the facts and circumstances of the case to determine if
the requisite intent is present. 	Id. (citing Chevy Chase Bank
v. Briese (In re Briese), 196 B.R. 440 (Bankr. W.D. Wis.
1996)).
Neither Mukherjee nor Sripadam made a sufficient showing
of intent to deceive. 	As discussed above, the evidence did not
show a false representation by Sir to either of them. 	There
was also no evidence that Sir had the requisite intent to
deceive at the time the transfers were made by the plaintiffs.
The evidence showed an unpaid $30,000 gambling loan by
Mukherjee, an agreement to continue funding Sir’s gambling with
an additional $70,000, and an apparent simultaneous agreement
to transform this gambling “bankroll” into an interest in GOEM
in order to achieve a greater chance of being repaid. 	The
evidence shows a failed investment by GOEM in an ill-defined
deal in South Korea and Sripadam’s loan to GOEM to participate
in that deal. 	On this record, plaintiffs failed to prove an
intent to deceive coupled with a false representation.
In addition, on this record, there is no support for a
finding that Sir lacked the subjective intent to repay at the
time he or GOEM received Mukherjee’s or Sripadam’s cash. 	After
hearing the witnesses at trial and reviewing the documents
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submitted into evidence, the court finds that at the time Sir
obtained plaintiffs’ money he did in fact intend to repay them.
As the Bankruptcy Appellate Panel has said, “care must be taken
to stop short of a rule that would make every desperate,
financially strapped debtor a guarantor of his ability to
repay, on pain of nondischargeability.” 	Karelin v. Bank of
America, NTSA (In re Karelin), 109 B.R. 943, 947 (9 th Cir. BAP
1990).
Plaintiffs failed to show that Sir intended to deceive
them through false representations or promises made with no
intention to perform. 	Their claims under § 523(a)(2)(A) fail
on this ground as well.
D. Justifiable Reliance
Even if Sir had made false representations in either of
the transactions with plaintiffs with the requisite intent to
deceive, the evidence does not show that either plaintiff
justifiably relied on the representations. 	Justifiable
reliance takes into consideration the individual qualities and
characteristics of the particular plaintiff, and the
plaintiff’s own capacity and knowledge from facts within his
observation. 	Field v. Mans, 516 U.S. 59, 71-72 (1995).
Whether a creditor justifiably relies on a representation by
the debtor is determined on a case by case basis. 	Id. 	As the
Ninth Circuit has explained:
The general rule is that a person may justifiably rely on
a representation even if the falsity of the representation
could have been ascertained upon investigation. 	In other
words, negligence in failing to discover an intentional
misrepresentation is no defense. 	However, a person cannot
rely on a representation if he knows that it is false or
its falsity is obvious to him. 	In sum, although a person
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ordinarily has no duty to investigate the truth of a
representation, a person cannot purport to rely on
preposterous representations or close his eyes to avoid
discovery of the truth.
In re Eashai, 87 F.3d at 1090-91.
Mukherjee testified he played poker at Bay 101 with Sir
several nights a week during the time period relevant to this
case. 	He was acutely aware of the depth of Sir’s gambling
habit. 	Mukherjee’s testimony that he believed he was investing
in GOEM by delivering large cash payments directly to Sir -
while they were together playing poker at a casino - is simply
not credible. 	In the context of this case, Mukherjee’s claim
of reliance on Sir’s alleged representation that there would be
a 20% return on an investment in GOEM - if that is what it was
- is subjectively unjustified.
Sripadam also failed to prove justifiable reliance.
Sripadam was, by his own description, an experienced investor,
and an entrepreneur familiar with various means of investing in
companies and loaning money to companies. 	He was also a
regular poker player with Sir and Mukherjee at Bay 101. 	He
understood the different types of documentation involved in
different types of transactions. 	He did no due diligence -
claiming he could simply “trust” the alleged “guarantee” by
GOEM to return his principal in six months with at least 15%
interest no matter how any “mezzanine financing” performed.
As explained above, a plaintiff may not blindly rely upon
a representation if its falsity would be obvious if he made a
cursory examination or investigation. 	Based on Sripadam’s own
description of his background and business experience, he knew
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there was no such thing as a “no risk” deal especially in the
context of “mezzanine financing” which he appeared to
understand entailed significant risk. 	His testimony also
showed that he understood that there were different ways to
document transactions - and understood the difference between a
loan, and a guarantee, and understood the different ways in
which a loan and an equity investment would be documented.
Coupled with this, he was aware of Sir’s gambling problem and
acknowledged that in the past he had loaned money to Sir to
enable him to gamble. 	In the context of this case, Sripadam
had a duty to investigate the terms of this so-called mezzanine
financing transaction and at the very least ask to see the
documentation supporting it. 	Sripadam’s claim that there was a
fraudulent promise upon which he justifiably relied fails.
E. Mukherjee Has an Unenforceable Gambling Debt
Mukherjee’s debt is clearly a gambling debt. 	Mukherjee
testified that he knew the transfers between September 2005 and
May 2006 were made to enable Sir to gamble. 	Sir also testified
that Mukherjee’s money was used to fund his gambling. 	Exhibit
12 and Exhibit 17, prepared by Mukherjee, corroborated the
series of transfers and confirmed that Mukherjee had known the
use of the funds at the time of each advance.
Gambling debts are not enforceable in California.
California has a long-standing public policy against judicial
resolution of civil claims arising out of lawful or unlawful
gambling contracts or transactions. 	This prohibition applies
to actions for recovery of gambling losses and actions to
enforce gambling debts. 	Kelly v. First Astri Corp., 72 Cal.
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App. 4th 462 (Cal. Ct. App. 1999).
California Civil Code § 1607 provides that the
consideration for a contract must be lawful within the meaning
of Civil Code § 1667. 	California Civil Code § 1667 provides
that a contract is unlawful if it is “contrary to the policy of
express law, though not expressly prohibited; or, otherwise
contrary to good morals.” 	See Union Collection Co. v. Buckman,
150 Cal. 159, 167 (Cal. 1907) (citing Cal. Civ. Code § 1607 and
§ 1667 and concluding that notes given for gambling debts were
“contra bonos mores” and unlawful). 	As explained in
Metropolitan Creditors Service of Sacramento v. Sadri, 15 Cal.
App. 4 th 1821 (Cal. Ct. App. 1993), the reasoning underlying
California’s deep-rooted policy against enforcement of debts
incurred by gambling on credit is that the law should not
invite gamblers to play themselves into debt, and the judiciary
should not thereafter participate in their financial ruin.
While the LLC Documents are not equivalent to a promissory
note or a check given in payment of a gambling debt, on the
facts of this case, the court finds the LLC Documents were an
effort to evade the rule that gambling debts are uncollectible
and are based on illegal consideration. 	The testimony
regarding the creation of the LLC Docuemnts was contradictory.
Sir claimed the LLC interest was not given in payment of
gambling debts and Mukherjee claimed - unconvincingly - that
his money had gone into GOEM. 	It is undisputed that
Mukherjee’s funds were not put into GOEM and were used - with
Mukherjee’s knowledge - to finance Sir’s gambling. 	It is clear
that Mukherjee’s $100,000 claim arises out of a gambling
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transaction and its enforcement 	- either through the fiction
of GOEM or otherwise - is barred as a matter of law.
F. Consultant Fee
There is no § 523(a)(2)(A) cause of action as to the
$30,000 consultant fee. 	At trial, Sir took the position that
nothing was owed by GOEM because the consulting work was either
not done or was not done well. 	His statement in Exhibit 13
acknowledging the obligation contradicts this. 	Mukherjee
claimed to have worked full time for 3 months. 	This appears to
be a factual dispute involving - at best - a breach of
contract. 	It does not come within the parameters of § 523 even
in the context of this case. 	If this arrangement was created
to hide the gambling debt, it also fails for the reasons stated
above.
V. Conclusion
All parties in this case were habitual gamblers during the
relevant time period. 	All of them approached this trial as
just another hand to play in the resolution of their
relationship. 	Based on the documentary evidence and testimony
at trial, plaintiffs have not shown by a preponderance of the
evidence that Sir obtained money from them by false pretenses,
false representations, or actual fraud. 	Thus, Sir’s debts to
plaintiffs are dischargeable. 	In addition, $100,000 of Sir’s
debt to Mukherjee is based on loans Mukherjee made to Sir to
enable Sir to gamble. 	This debt is therefore premised on
illegal consideration and is unenforceable for that additional
reason. 	The court will enter a judgment for Sir conforming
with this decision.
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Court Service List [by mail and ecf]
Plaintiffs’ Counsel
Seth Weiner
Schein & Cai, LLP
111 W St. John St. #1250
San Jose, CA 95112
Defendant
Raymond J. Sir
1087 Foxhurst Way
San Jose, CA 95120
Courtesy copy
Cathleen Cooper Moran
Moran Law Group, Inc.
1674 N Shoreline Blvd. #140
Mountain View, CA 94043-1375
Plaintiff
Avi Mukherjee
6940 Burning Tree Court
San Jose, CA 95119
Plaintiff
Kumar S. Sripadam
17821 Vineland Ave.
Los Gatos, CA 95030
Case: 07-05147 Doc# 43 Filed: 05/25/10 Entered: 05/26/10 13:37:53 Page 30 of
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