Patelco Credit Union v. Qari et al

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UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re 	No. 05-44325 TM
Chapter 7
ABDULLAH QARI, aka MICHAEL QARI,
fdba ARIANA LIMOUSINE SERVICES,
and RAHELA JALAL QARI, aka
RAHELA JALAL,
Debtors
____________________________/
PATELCO CREDIT UNION 	A.P. No: 05-4465 AT
Plaintiff,
vs.
ABDULLAH QARI, aka MICHAEL QARI,
fdba ARIANA LIMOUSINE SERVICES,
and RAHELA JALAL QARI, aka
RAHELA JALAL; and PAUL MANSDORF,
CHAPTER 7 TRUSTEE
Defendants.
_____________________________/
MEMORANDUM OF DECISION
In the above-captioned proceeding, plaintiff Patelco Credit
Union (“Patelco”) seeks to except from the above-captioned debtor’s
(the “Debtor”) chapter 7 discharge pursuant to 11 U.S.C. §
Signed: November 21, 2006
________________________________________
LESLIE TCHAIKOVSKY
U.S. Bankruptcy Judge
________________________________________
Entered on Docket
November 21, 2006
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
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1 The complaint also names the Debtor’s wife and co-debtor,
Rahela Qari, and Paul Mansdorf, the chapter 7 trustee, as
defendants. 	Mrs. Qari co-signed the notes evidencing the
Debt. 	No evidence was presented at trial to support a
nondischargeable judgment against Mrs. Qari or Mansdorf.
Therefore, judgment will be entered in their favor. 2
523(a)(2)(A) and (6) the debt arising from two vehicle loans (the
“Debt”). 	The proceeding was tried to the Court on October 11, 2006
and was taken under submission. 	After considering the evidence
presented and the arguments made at trial, the Court finds and
concludes that Patelco is entitled to a judgment of
nondischargeability as to the Debt. 	The basis for the Court’s
decision is set forth below. 1
BACKGROUND
At all times relevant to this proceeding, the Debtor was and
still is an automobile salesman. 	He has over eighteen years of
experience in the automobile sales industry. 	He has held positions
at most levels of management, including sales manager, finance
manager, and director of operations.
In November 2001, the Debtor was employed by Hayward Motors,
Hayward, California, as sales manager. 	He was also at times
responsible for overseeing the finance department. 	The owner of
Hayward Motors was and is a long time friend and business associate
of the Debtor’s.
In November 2001, the Debtor obtained a loan from Patelco to
enable him to purchase a Mercedes Benz vehicle (the “Mercedes”)
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from Hayward Motors, ostensibly for his personal use. 	In fact, the
Debtor purchased the Mercedes to use in his limousine business.
However, he did not disclose this fact to Patelco. 	At the time he
purchased the Mercedes, the Debtor knew that Patelco did not make
business loans.
The loan agreement required the Debtor to give Patelco a
security interest in the Mercedes by placing its name on the
certificate of title. 	The check issued to fund the loan contained
a restrictive endorsement, requiring the Debtor to cause Patelco’s
name to be placed on title. 	The check was cashed, but Patelco’s
name was not placed on title to the Mercedes. 	A few months after
the loan transaction, Patelco called the Debtor and complained that
it had not received evidence that it had been placed on title. 	The
Debtor still did not cause Patelco to be placed on title.
After driving the Mercedes for several weeks, the Debtor
purportedly consigned the Mercedes to Hayward Motors for resale.
The Mercedes was sold in April 2002. 	The proceeds were not paid to
Patelco. 	However, the Debtor continued to make the monthly loan
payments for a period of time thereafter. 	In July 2002, while the
Debtor was still current on the loan payments, the Debtor applied
for and received a second vehicle loan from Patelco, this time for
a Ford Mustang (the “Mustang”). 	Again, the Debtor agreed to place
Patelco on title as the secured creditor. 	Again, a check was
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2 The Court is not persuaded that the Mercedes and Mustang were
truly “consigned” to Hayward Motors. 	Qari testified that he
had entered into a written consignment agreement with Hayward
Motors. 	However, he failed to introduce into evidence either
the original agreement or a copy of it. 	Patelco called an
expert witness who testified that the documents evidencing the
resale of the Mercedes did not reflect industry practice for
consignment sales: i.e., if the sale had been a consignment,
the Debtor should have been listed as the seller, not Hayward
Motors. 	In fact, according to the vehicle records for the
Mercedes, the Debtor was never the registered owner of the
Mercedes.
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issued with a restrictive endorsement, requiring Patelco to be
placed on title. 	Again, the Debtor failed to cause Patelco to be
placed on title. 	Again, the Debtor testified that he consigned the
Mustang to Hayward Motors; 2 the Mustang was sold to a third party;
and the proceeds were not paid to Patelco. 	At that time, the
Debtor stopped making payments on both of the vehicle loans, and
Patelco learned that both vehicles had been sold.
In January 2003, Patelco filed suit against the Debtor in
state court, asserting claims for breach of contract and fraud,
among other things. 	In January 2004, the state court granted
Patelco’s motion for summary judgment in that action on all the
claims except the claims for fraud and civil conspiracy. 	Those
claims were dismissed without prejudice. 	A money judgment was
entered against the Debtor and his wife for $79,302.20, plus
attorney’s fees.
In August 2005, the Debtor filed a chapter 7 bankruptcy
petition. 	Patelco filed this nondischargeability action in
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November 2005, asserting a right to a nondischargeable judgment
under 11 U.S.C. § 523(a)(2)(A) and (6). 	Patelco moved for summary
judgment in April 2006, based on the state court judgment. 	Because
the state court judgment did not rule on the fraud claim and
instead dismissed it without prejudice, the Court denied the
motion, concluding that an evidentiary hearing was required.
DISCUSSION
A. 	APPLICABLE LAW
Section 523(a)(2)(A) provides, in pertinent part, that a
chapter 7 discharge does not discharge an individual’s debt:
[F]or money...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;
11 U.S.C. § 523(a)(2)(A). 	To establish “actual fraud,” a creditor
must prove five elements: (1) that the debtor made a false
representation, (2) that the debtor knew the declaration to be
false at the time that he made it, (3) that he made the false
representation with the intention of deceiving the creditor; (4)
that the creditor relied on the false representation; and (5) that
the creditor was damaged as a proximate result of having relied on
the false representation. 	See In re Eashai, 87 F.3d 1082, 1086
(9 th Cir. 1996). 	These elements must be proved by the
preponderance of the evidence. 	Id. at 1087. 	“[A] false
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representation may be established by an omission when there is a
duty to disclose.” 	Eashai, at 1089. 	As stated in Eashai, provided
the debtor has a duty to disclose, “[o]ne who fails to disclose to
another a fact that he knows may justifiably induce the other to
act or refrain from acting in a business transaction is subject to
the same liability to the other as though he had represented the
nonexistence of the matter that he has failed to disclose....” 	Id.
Section 523(a)(6) provides, in pertinent part, that a chapter
7 discharge does not discharge an individual’s debt:
[F]or willful and malicious injury by the
debtor to another entity or to the property of
another entity.
11 U.S.C. § 523(a)(2)(A). 	In Kawaauhau v. Geiger, 523 U.S. 57, 61
(1998), the Supreme Court held that, because the word “willful”
modifies the word “injury,” a debt is not excepted from a debtor’s
chapter 7 discharge pursuant to 11 U.S.C. § 523(a)(6) unless the
debtor intended to injure the creditor. 	Thus, negligent or
reckless acts do not give rise to a nondischargeable debt pursuant
to § 523(a)(6). 	Geiger, 523 U.S. 64. 	The debtor need not have
held any personal animosity against the creditor, but he must have
intended the consequences of his act. 	Id, at 61-62. 	In
determining whether a debt is for a willful injury, the Court must
determine whether the debtor subjectively intended to harm the
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debtor or had a subjective belief that harm was substantially
certain. 	See In re Su, 290 F.3d 1140, 1143-44 (9 th Cir. 2002).
The element of maliciousness must be determined separately
from willfulness. 	Su, 290 F.3d at 1146; In re Sicroff, 401 F.3d
1101, 1105 (9 th Cir. 2005).
A ‘malicious’ injury involves ‘(1) a wrongful
act, (2) done intentionally, (3) which
necessarily causes injury, and (4) is done
without just cause or excuse.’
See In re Jercich, 238 F.3d 1202, 1209 (9 th Cir.), cert. denied 533
U.S. 930 (2001), quoting In re Bammer, 131 F.3d 788, 791 (9 th Cir.
1997)(en banc). 	The Ninth Circuit has not yet held definitively
whether these elements are based on a subjective or objective
standard. 	However, in Bammer, it held that a debtor acted
maliciously and did not have just cause or excuse despite the fact
that he was motivated by compassion for his mother and did not
receive any benefit himself. 	Bammer, 131 F.3d at 793. 	It held
that it would be contrary to the spirit of § 523 “to permit a
standardless, unmeasurable, emotional, and nonlegal concept such as
compassion to negate an identifiably and legally wrongful act.”
Id. 	Thus, any subjective claim of just cause and excuse should be
judged narrowly.
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3 No evidence was presented that the Debtor intended to use the
Mustang for business purposes. 	Given the apparent success of
the scheme with respect to the Mercedes, the Debtor may have
simply purchased the Mustang for resale as a means of
generating cash.
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B. DECISION
1. 	Nondischargeability Claim Under 11 U.S.C. § 523(a)(2)(A)
As stated above, a claim of nondischargeability under 11
U.S.C. § 523(a)(2)(A) has five elements: (1) a false
representation, (2) knowledge of falsity, (3) made with the
intention of deceiving the creditor, (4) reliance by the creditor,
and (5) damage proximately caused. 	As discussed below, at trial,
Patelco established each of these elements by a preponderance of
the evidence.
The Debtor’s failure to disclose to Patelco that he intended
to use the Mercedes in his limousine business constitutes a false
representation within the meaning of 11 U.S.C. § 523(a)(2)(A). 3
Given the Debtor’s admission that he knew that Patelco did not make
business loans, the Court finds that the Debtor had a duty to
disclose to Patelco that he intended to use the Mercedes for
business purposes. 	His failure to disclose this information,
knowing its significance, therefore, also satisfies the “knowledge
of falsity” requirement. 	The Court also finds and concludes that
the Debtor failed to disclose this information, intending to
deceive Patelco. 	The Debtor wanted to obtain the loans and knew
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Patelco would not give him the loan if he disclosed his intended
use of the Mercedes.
Patelco clearly relied on the Debtor’s failure to disclose his
intended use of the Mercedes by making the first loan. 	It was
justified in doing so given the Debtor’s failure to disclose his
intended use of the vehicle. 	There were no “red flags” at that
point that should have raised Patelco’s suspicions, thereby
requiring it to conduct a more thorough inquiry of the debtor’s
intended use of the Mercedes. 	See In re Hashemi, 104 F.3d 1122,
1126 (9 th Cir. 1997)(no duty to investigate in absence of “red
flags”). 	Patelco’s damages, in the amount of the unpaid loan and
related costs, were also clearly proximately caused by the failure
to disclose and Patelco’s reliance on it.
The Court was not persuaded by a preponderance of the evidence
that, at the time he purchased the Mercedes, the Debtor intended to
resell it without recording Patelco’s name as secured creditor on
the certificate of title and without repaying Patelco’s loan. 	This
may have been a scheme developed later. 	However, the Court was
persuaded by a preponderance of the evidence that, by the time he
purchased the Mustang, this was precisely the Debtor’s intention.
Thus, the Court concludes that, when the Debtor obtained the second
vehicle loan, he falsely represented to Patelco that he intended to
repay the loan, that he knew this representation was false, and
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that this false representation was intended to deceive Patelco.
Patelco’s damages are established by the state court judgment.
The most difficult element to evaluate is the justifiable
reliance element with respect to the loan for the Mustang. 	Patelco
knew at the time it made this loan that the Debtor had failed to
record its name on the certificate of title for the Mercedes. 	It
was clearly negligent in making another loan to the Debtor given
this failure. 	Under these circumstances, can it be said that
Patelco justifiably relied on the Debtor’s promise to repay the
loan for the Mustang?
The Court concludes that it can. 	Justifiable reliance is
judged by a subjective standard. 	See Field v. Mans, 516 U.S. 59,
67 (1995). 	Thus, reliance may be justifiable, even if not
reasonable, from an objective standpoint. 	See In re Tallant, 218
B.R. 58, 68 (Bankr. 9 th Cir. 1998). 	The fact that a creditor is
negligent in ensuring that the formalities of the transaction are
followed cannot give a debtor the license to defraud the creditor.
See Eashai, 87 F.3d at 1090-91; Tallant, 218 B.R. at 67.
As noted above, the Debtor was continuing to make payments on
the Mercedes loan at the time he purchased the Mustang. 	Therefore,
although, given the problems with title to the Mercedes, Patelco’s
reliance on the Debtor’s promise to repay the Mustang loan was
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4 The Debtor’s testimony was lacking in credibility in other
respects as well. 	His testimony concerning his reasons for
consigning the vehicles made no sense. 	He testified that he
consigned the vehicles to Hayward Motors because his limousine
business was failing. 	However, as noted above, the Debtor
testified that he consigned the Mercedes a few weeks after he
obtained it–-i.e., in early January 2003. 	He testified that
his business failed because his driver loaned one of his other
vehicles–-i.e. a Lincoln–-to a friend, the friend received a
traffic citation, and the Lincoln was impounded. 	Based on the
traffic citation, a copy of which was introduced into
evidence, this did not occur until May 2003, after the
Mercedes was sold. 	Similarly, the failure of the business as
a result of the citation could not have motivated the
consignment of the Mustang which was not even purchased until
July 2003.
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perhaps not reasonable, the Court finds and concludes that it was
justifiable.
The Debtor denied having a fraudulent intent. 	He testified
that he never received any of the proceeds from the resale of the
vehicles and thus had no intent to deceive Patelco. 	The Court did
not believe him. 	His testimony was impeached by the deposition
testimony of Khalil Asefi (“Asefi”), the owner of Hayward Motors.
Asefi testified that the Debtor used the proceeds to pay the
monthly loan payments to Patelco on the Mercedes loan. 	The Court
found the Debtor’s testimony that he continued to make the loan
payments from his own income after the Mercedes was sold lacking in
credibility. 4
The Debtor also testified that it was not his fault that
Patelco’s name was not recorded as the secured creditor on the
certificates of title for the two vehicles. 	He testified that
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after he consigned the vehicles, he had no ability to cause this to
be done. 	The vehicles were under the control of Hayward Motors.
The Court was not persuaded by this testimony either. 	As
sales manager, with responsibility for overseeing the finance
department, the Debtor clearly had access to the documents required
to correct this omission. 	Moreover, if, as he claims, he merely
consigned the vehicles to Hayward Motors before their resale, the
Debtor was still the owner of the vehicles and had an absolute
right to have Patelco’s name listed as the secured creditor on the
certificate of title.
In sum, the Court finds and concludes that Patelco has met its
burden of proof with respect to all five elements of its claim
under 11 U.S.C. § 523(a)(2)(A) and is entitled to a judgment
declaring the debt created by the state court judgment
nondischargeable.
2. Claim of Nondischargeability Under 11 U.S.C. § 523(a)(6)
As noted above, Section 523(a)(6) of the Bankruptcy Code
excepts from the discharge a debtor for “willful and malicious
injury.” 	This exception applies to property damage as well as
personal injury. 	See 11 U.S.C. § 523(a)(6). 	There is no dispute
that, in this case, the Debtor’s actions caused Patelco’s “injury”:
i.e., its failure to receive repayment of the vehicle loans. 	The
only issues are whether his actions were “willful” and “malicious.”
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As set forth above, these elements must be addressed separately.
a. 	Willfulness
As discussed above, a two-pronged test is used to evaluate
willfulness. 	Sicroff, 401 F.3d at 1106, citing Su, 290 F.3d at
1140. 	The test is subjective. 	Su, 290 F.3d at 1143-46. 	The court
must determine that: (1) the act that resulted in the creditor’s
injury was intentional and (2) the debtor actually intended the
injury to occur or, at least, was substantially certain that it
would occur. Id.
Patelco met its burden of proof as to each of these prongs.
The acts that resulted in the creditor’s injury were clearly
intentional regardless of how those acts are defined. 	In one
sense, the acts that resulted in the injury may be defined simply
as the loan transactions themselves. 	If Patelco had not made the
loans, Patelco would not have suffered the injury of not being
repaid. 	The Debtor sought out the loans intentionally.
However, the acts that resulted in the injury might also be
described more narrowly: e.g., as the failure to cause Patelco’s
name to be placed on the certificates of title for the vehicles.
The Court finds that these acts (or, rather, omissions) were also
intentional. 	Even if the Debtor initially failed to record
Patelco’s name on the certificate of title for the Mercedes through
negligence, he could have corrected the problem when Patelco called
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it to his attention a few months later. 	Had the Debtor corrected
it, the Mercedes could not have been sold without paying the
proceeds to Patelco. 	Similarly, given this sequence of events, it
is impossible to view his failure to record Patelco’s name on the
certificate of title for the Mustang as anything but intentional.
The evidence presented also persuaded the Court that the
Debtor intended Patelco’s injury. 	The Debtor was an experienced
car salesman. 	He had a managerial position with occasional
responsibility for oversight of the finance department. 	He knew
what the consequences would be in the event of a resale of the
vehicles of the failure to place a secured creditor on title. 	If
he did not actually intend to harm Patelco, he was substantially
certain that that harm would occur. 	Thus, the element of
“willfulness” has been established.
b. 	Malice
As discussed above, the “malice” test contains four elements.
The creditor must prove the act was: (1) wrongful, (2) intentional,
(3) necessarily caused injury, and (4) was done without just cause
or excuse. 	Sicroff, 401 F.3d at 1106, citing In re Jerich, 238
F.3d 1202, 1209 (9th Cir. 2001). 	All four element of this test are
easily established by the evidence presented. 	Clearly, the failure
to record Patelco’s name on the certificate of title was wrongful.
It constituted a breach of the loan agreement and a violation of
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the restrictive endorsement on the checks funding the loans. 	As
discussed above, the Court was persuaded by the evidence that the
Debtor intentionally failed to record Patelco’s name on the
certificates of title.
These actions necessarily caused Patelco’s injury. 	Although
the Debtor could have repaid the loans even though Patelco’s name
was not placed on the certificates of title, as a result of the
Debtor’s failure to act as legally required, Patelco had no
assurance that the loan would be repaid. 	And, of course, Patelco
was not repaid. 	Patelco also lost its ability to repossess the
vehicles and thus recoup some of its losses by selling them.
Finally, the Debtor has presented insufficient evidence of any
just cause or excuse for his failure to cause Patelco’s name to be
placed on the certificates of title. 	His attempt to blame Hayward
Motors for the failure was unpersuasive. 	Even if, as the evidence
suggests is possible, the Debtor was never on title to the
vehicles, his position at Hayward Motors made it possible for him
to correct the problem. 	Moreover, the fact that the failure was
repeated with respect to the Mustang renders his attempted excuses
totally lacking in credibility.
CONCLUSION
Patelco is entitled to a judgment of nondichargeability as to
its state court judgment pursuant to both 11 U.S.C. § 523(a)(2)(A)
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and 11 U.S.C. § 523(a)(6). 	Counsel for Patelco is directed to
submit a proposed form of judgment in accordance with this
decision.
END OF DOCUMENT
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COURT SERVICE LIST
Spencer P. Scheer
Scheer & Imfeld, LLP
100 Smith Ranch Road, Ste. 306
San Rafael, CA 94903
Howard L. Hibbard
22693 Hesperian Blvd., Ste. 210
Hayward, CA 94523
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