In re Chang Sup Han
Filing
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ORDER that the judgment of the Bankruptcy Court is REVERSED and the case is REMANDED to the U. S. Bankruptcy Court Case number: 2:11-bk-30025-RK, Adversary number: 2:11-ap-2632-RK., for further proceedings consistent with this order by Judge Otis D. Wright, II, re Order to Remand Case to Bankruptcy Court 45 . (lc). Modified on 7/8/2013 (lc).
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CLOSED
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UNITED STATES DISTRICT COURT
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CENTRAL DISTRICT OF CALIFORNIA
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IN RE CHANG SUP HAN
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Debtor.
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ALMA L. CASTRO; ANGELINA
MARQUEZ JUAREZ; ROSA MARIA
CAMACHO FERNANDEZ,
v.
Case No. 2:13-cv-1524-ODW
Bankruptcy Case No. 2:11-bk-30025-RK
Adversary Case No. 2:11-ap-2632-RK
ORDER
Appellants,
CHANG SUP HAN, individually and dba
GOLD MAINTENANCE, INC.
Appellees.
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Appellants Alma Castro, Angelina Marquez Juarez, and Rosa Maria Camacho
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Fernandez appeal an order from the bankruptcy court discharging the debts owed them
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by Debtor Chang Sup Han. Han’s debts arose in the context of his employment of
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Appellants in the janitorial-services industry—specifically, extensive violations of
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wage-and-hour laws and his failure to abide by his promises to pay them minimum
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wage. Appellants contend that the bankruptcy court erred in failing to hold that Han’s
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debts are nondischargeable under 11 U.S.C. §§ 523(a)(2)(A) and (a)(6). As discussed
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below, the Court agrees that Appellants’ debts are nondischargeable under
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§ 523(a)(2)(A), and consequently REVERSES and REMANDS the matter to the
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bankruptcy court.
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I.
JURISDICTION
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This Court has jurisdiction to hear appeals for judgments, orders, and decrees
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entered in intra-district bankruptcy cases referred to them under 28 U.S.C. § 157.
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28 U.S.C. § 158. The judgment in this adversary proceeding is final, and was entered
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in a bankruptcy proceeding within this District.
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appealable to this Court under 28 U.S.C. § 158.
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II.
Accordingly, the judgment is
BACKGROUND
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Chang Sup Han has been working in the cleaning industry in the United States
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for twenty years. (Mem. Decision on Compl. to Determine the Dischargeability of
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Certain Debt [“Decision”] 11.) Han started his own janitorial-cleaning service, Gold
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Maintenance, Inc., approximately ten years ago.
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Maintenance and supervised each of his employees, the Appellants in this case. (Id.
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at 3.) Gold Maintenance employed Castro from April 16, 2007 to October 10, 2008;
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Juarez from September 13, 2006 to May 4, 2008; and Fernandez from December 23,
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2007 to May 4, 2008. (Id. at 2–3.) Han fully controlled Appellants’ wages, hours,
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and working conditions, and was directly responsible for the claimed underpayment of
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wages. (Id. at 3.) Han typically required them to work thirteen to fourteen hours per
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night, five to seven nights per week. (Id.)
(Id.)
Han operated Gold
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Appellants testified at trial that Han promised to pay them “minimum wage,”
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but they were undercompensated based on the applicable minimum-wage rates. (Id.)
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Han never paid them for overtime or double-time hours, nor were they paid for their
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travel time during work hours. (Id.) Yet over the same 2006–2008 period that Han
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employed Appellants, his bank records show that he wrote over 280 checks to himself,
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to no addressee, or to “Cash”—in excess of $420,000. (Appellants’ Br. 7–8.) Han
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endorsed and cashed most of the checks himself. (Id. at 8.)
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In 2008, Appellants filed separate administrative-law claims with the California
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Labor Commissioner alleging Han owed them (1) unpaid wages for regular-time,
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overtime and double-time work, (2) unpaid wages for meal and rest periods,
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(3) interest on the wages under California Labor Code section 98.1, and (4) waiting-
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time penalties under California Labor Code section 203. (Decision 5.) On January
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29, 2010, the Labor Commissioner entered separate decisions for each Appellant on
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these claims, which were confirmed by the Los Angeles County Superior Court. (Id.)
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The Labor Commissioner found that Appellants were employees (not independent
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contractors) of Gold Maintenance; had established their hours worked by their
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personal time records; and were entitled to unpaid wages, interest, and penalties. (Id.
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at 5–6.) The Commissioner also found that Han should have known of the duty to pay
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the wages and volitionally failed to do so.
(Id. at 6.)
Accordingly, the Labor
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Commissioner awarded Castro, Juarez, and Fernandez a total of $34,323.62,
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$48,253.76, and $12,844.21, respectively. (Id.)
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On May 7, 2011, Han filed a voluntary petition for relief under Chapter 7 of the
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Bankruptcy Code. (Id. at 2.) On August 15, 2011, Appellants filed an adversary
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proceeding against Han seeking to have their Labor Code judgments deemed non-
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dischargeable under 11 U.S.C. §§523(a)(2)(A), 523(a)(4), and 523(a)(6). (Id.) The
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bankruptcy court held that Appellants had not shown by a preponderance of the
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evidence that Han’s debts should be exempt from discharge under these sections. This
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appeal followed.
III.
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ISSUES ON APPEAL
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Appellants argue that the bankruptcy court erred by failing to hold that:
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(1) Han’s debts to them are nondischargeable under Bankruptcy Code section
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523(a)(2)(A) as debts obtained by false pretenses, a false representation, or actual
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fraud; and (2) the debts are nondischargeable under Bankruptcy Code section
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523(a)(6) because these debts arose from willful and malicious injury to Appellants.1
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Appellants also aver the bankruptcy court erred by accepting Han’s ignorance of the law and
ignoring evidence of Han’s significant cash flow. Given their relevance to § 523(a)(2)(A), the Court
need not address the issues separately.
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IV.
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LEGAL STANDARD
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The question of whether a claim is excepted from discharge under
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§ 523(a)(2)(A) presents mixed issues of law and fact which this Court reviews de
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novo. In re Diamond, 285 F.3d 822, 826 (9th Cir. 2001). The bankruptcy court’s
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conclusions of law are reviewed de novo and its findings of fact are reviewed for clear
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error.
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determination is clearly erroneous if it is illogical or implausible, or if it lacks
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“support in inferences that may be drawn from facts in the record.” United States v.
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Hinkson, 585 F.3d 1247, 1261 (9th Cir. 2009) (en banc) (quoting Anderson v. City of
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In re Hamada, 291 F.3d 645, 649 (9th Cir. 2002).
Bessemer City, 470 U.S. 564, 577 (1985)).
V.
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A court’s factual
A.
DISCUSSION
Nondischargeability under section 523(a)(2)(A)
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Section 523(a)(2)(A) provides that an individual debtor will not be discharged
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“from any debt . . . for money, property, services . . . to the extent obtained by . . .
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false pretenses, a false representation, or actual fraud.” To demonstrate that a debt
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should be exempt from discharge under § 523(a)(2)(A), a creditor must prove five
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elements: (1) misrepresentation, fraudulent omission, or deceptive conduct by the
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debtor; (2) knowledge of the falsity or deceptiveness of the debtor’s statement or
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conduct; (3) an intent to deceive; (4) justifiable reliance by the creditor on the debtor’s
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statement or conduct; and (5) damage to the creditor proximately caused by her
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reliance on the debtor’s statement or conduct. In re Weinberg, 410 B.R. 19, 35
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(B.A.P. 9th Cir. 2009).
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preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 291 (1991).
The creditor must establish all five elements by a
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1.
Misrepresentation
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The bankruptcy court found that Appellants proved by a preponderance that
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Han represented that he would pay them wages at the “legal minimum wage rate.”
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(Decision 9.) Upon review of the record, the Court agrees with this assessment.
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2.
Knowledge of the falsity or deceptiveness of the statement
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The remainder of the bankruptcy court’s decision with regard to § 523(a)(2)(A)
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is premised upon a conclusion that Appellants failed to show that Han knew of the
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falsity or deceptiveness of his statements.
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preponderance of the evidence that “a false representation has been made without
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belief in its truth or recklessly, careless of whether it is true or false.” In re Kong, 239
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B.R. 815, 826–27 (B.A.P. 9th Cir. 1999). This reckless disregard for the truth of a
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representation can also be expressed as “reckless indifference to his actual
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circumstances.” Id. at 826 (citing In re Anastas, 94 F.3d 1280, 1286 (9th Cir. 1996)).
A plaintiff must establish by a
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The bankruptcy court found that Appellants had not met this burden with regard
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to Han’s representations that he would pay them “minimum wage.” (Decision 13–14.)
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The bankruptcy court credited Han’s testimony that he “thought he paid [Appellants]
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their appropriate wages at the prevailing minimum-wage rates during their
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employment” and that he did not understand the definition of hours worked—that he
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was required to calculate and compensate travel time and other items as work time.
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(Id. at 9, 10.) The bankruptcy court concluded that Han was credible and that he acted
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out of negligence. (Id. at 10, 11.)
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But Han is not a newcomer to this country; he has over twenty years of
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experience in the U.S. janitorial industry. (Id. at 11.) Han’s English may have been
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poor, but he knew enough about business law to have a certified public accountant
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draft articles of incorporation, pay Appellants as independent contractors rather than
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as employees, provide Appellants with 1099-MISC forms each year, and obtain
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workers’-compensation insurance—while reporting to his insurance carrier that Gold
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Maintenance had only two employees, himself and his son. (Id.; Appellants’ Br.
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at 16–17). With cash flow of approximately $420,000 over the relevant two-year
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period, Han’s business acumen clearly paid off. (Appellants’ Br. at 7–8.)
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Despite this experience and knowledge, the bankruptcy court found that Han
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“understood [he] was to pay $8 per hour and did so,” and that “[he] basically paid
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minimum wage” per hour of work, despite his failure to pay wages for travel time,
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meal periods, and rest periods. (Decision 9–10.) Yet the bankruptcy court overlooked
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a crucial inference about Han’s knowledge that can be reasonably drawn from this
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testimony. Han employed Appellants variously from 2007 to 2008. (Id. at 2–3.) On
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September 12, 2006, and effective January 1, 2008, the California Legislature raised
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the minimum wage for all industries from $7.50 to $8.00 per hour. Cal. Lab. Code
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section
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http://www.dir.ca.gov/IWC/Minwage2007.pdf. That Han knew to begin paying the
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minimum-wage rate of $8.00 instead of $7.50 per hour shows at least some familiarity
1197;
Minimum
Wage
Order
MW-2007,
available
at
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with California minimum-wage laws.
This suggests that his “minimum wage”
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representations, in light of his failure to further inquire into the law’s additional
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requirements and definitions, was reckless and that he was careless of the truth or
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falsity of his representations.
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Han’s business conduct and experience shows that he was a sophisticated
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businessperson with at best, a selective knowledge of applicable laws. This cannot be
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reconciled with his purported ignorance of wage-and-hour laws. Thus, the Court
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concludes that the bankruptcy court erred in its determination that Appellants failed to
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demonstrate by a preponderance the knowledge-of-the-falsity element.
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3.
Intent to deceive
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Whether or not a defendant satisfies the third element of § 523(a)(2)(A)—intent
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to deceive—is a question of fact. In re Rubin, 875 F.2d 755, 758 (9th Cir. 1989).
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Since a debtor will rarely admit to his fraudulent intentions, a creditor must rely on
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circumstantial evidence to infer an intention to deceive. In re Eashai, 87 F.3d 1082,
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1090 (9th Cir. 1996). A court may infer intent to deceive from a false representation.
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In re Rubin, 875 F.2d at 759.
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The bankruptcy court opined, “While ignorance of the law may not be a defense
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to Han’s liability for violations of the Labor Code for failure to pay proper wages to
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[Appellants], it may be considered regarding whether he had the subjective intent to
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deceive plaintiffs.” (Decision 15.) The bankruptcy court then held that because Han
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testified that he did not understand the law, he lacked subjective intent to deceive
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Appellants. (Id.)
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As discussed above, Appellants established that Han recklessly disregarded the
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truth of his representations. Coupled with the fact that Han had Appellants work
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thirteen to fourteen hours per day, five to seven days per week—and taking advantage
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of them by not paying for overtime, travel time, meal periods, or rest periods—this
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suffices to constitute intent to deceive under § 523(a)(2)(A). In re Gertsch, 237 B.R.
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160, 167–68 (B.A.P. 9th Cir. 1999) (“[I]ntent to deceive can be inferred from the
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totality of the circumstances, including reckless disregard for the truth.”).
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4.
Justifiable reliance
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Appellants must also show that their reliance on Han’s representations that he
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would pay them “minimum wage” was justified. Reliance need not reach a level of
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“reasonableness” to establish nondischargeability under § 523(a)(2)(A), but must still
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be justifiable. Field v. Mans, 516 U.S. 59, 73–76 (1995). “[A] person is justified in
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relying on a representation of fact although he might have ascertained the falsity of the
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representation had he made an investigation.” Id. at 70 (internal quotation marks
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omitted).
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The Court therefore sees no issue with Appellants’ ignorance of the Labor
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Code, since they were under no obligation to investigate Han’s statements. To the
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contrary, their ignorance may have appealed to Han when he decided to hire them.
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Furthermore, the fact that Appellants were subjected to work schedules consisting of
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thirteen to fourteen hours per day, five to seven days per week—all while receiving
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sub-par wages—does not establish that Appellants knew Han was breaking the law or
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that he was undercompensating them. Nor does their willingness to continue to work
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under these conditions establish that their justifiable reliance was unwarranted, as the
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bankruptcy court held. (Decision 16.) Their willingness to continue to work for Han
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is justified in light of their ignorance and the fact that Han at least paid them for each
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hour of work under his definition of work.
The Court finds that Appellants’
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expectation that Han would follow California’s minimum-wage laws and pay them
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accordingly is justifiable.
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5.
Proximate causation
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Finally, Appellants must prove that they sustained the alleged losses as the
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proximate result of Han’s representations.
In re Eashai, 87 F.3d at 1086.
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“[P]roximate cause entails (1) causation in fact, which requires a defendant’s
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misrepresentations to be a substantial factor in determining the course of conduct that
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results in loss [to Appellants] . . . and (2) legal causation, which requires [Appellants’]
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loss to reasonably be expected to result from reliance.” In re Bixel, 215 B.R. 772, 777
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(Bankr. S.D. Cal. 1997) (internal quotation marks omitted). In determining proximate
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cause, however, courts must refrain from relying on speculation to determine whether
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and to what extent a creditor would have suffered a loss absent fraud. In re Siriani,
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967 F.2d 302, 306 (9th Cir. 1992).
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Han’s employment of Appellants and his promise to pay them minimum wage
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were clearly substantial factors in Appellants’ losses, establishing the first element of
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proximate cause.
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(unpaid wages) were a direct result of their reliance on Han’s representations that he
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would pay them minimum wage.
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caused by their reliance on Han’s representations.
The second element is also satisfied, since Appellants’ losses
Thus, Appellants’ damages were proximately
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Accordingly, because Appellants have shown by a preponderance of the
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evidence that their unpaid wages should be exempt from discharge under
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§ 523(a)(2)(A), the judgment of the bankruptcy court is REVERSED and the case is
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REMANDED for further proceedings consistent with this order.
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B.
Nondischargeability under section 523(a)(6)
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Because the Court finds that Han’s debts should be nondischargeable
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§ 523(a)(2)(A), the Court declines to opine on Appellants’ alternative argument that
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Han’s debts are nondischargeable under § 523(a)(6).
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VI.
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DISPOSITION
The judgment of the bankruptcy court is REVERSED and the case is
REMANDED for further proceedings consistent with this order.
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IT IS SO ORDERED.
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July 8, 2013
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OTIS D. WRIGHT, II
UNITED STATES DISTRICT JUDGE
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