In re Chang Sup Han

Filing 47

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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O 1 2 3 4 CLOSED 5 6 7 UNITED STATES DISTRICT COURT 8 CENTRAL DISTRICT OF CALIFORNIA 9 10 IN RE CHANG SUP HAN 11 Debtor. 12 13 14 15 16 17 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. 18 19 Appellants Alma Castro, Angelina Marquez Juarez, and Rosa Maria Camacho 20 Fernandez appeal an order from the bankruptcy court discharging the debts owed them 21 by Debtor Chang Sup Han. Han’s debts arose in the context of his employment of 22 Appellants in the janitorial-services industry—specifically, extensive violations of 23 wage-and-hour laws and his failure to abide by his promises to pay them minimum 24 wage. Appellants contend that the bankruptcy court erred in failing to hold that Han’s 25 debts are nondischargeable under 11 U.S.C. §§ 523(a)(2)(A) and (a)(6). As discussed 26 below, the Court agrees that Appellants’ debts are nondischargeable under 27 § 523(a)(2)(A), and consequently REVERSES and REMANDS the matter to the 28 bankruptcy court. 1 I. JURISDICTION 2 This Court has jurisdiction to hear appeals for judgments, orders, and decrees 3 entered in intra-district bankruptcy cases referred to them under 28 U.S.C. § 157. 4 28 U.S.C. § 158. The judgment in this adversary proceeding is final, and was entered 5 in a bankruptcy proceeding within this District. 6 appealable to this Court under 28 U.S.C. § 158. 7 II. Accordingly, the judgment is BACKGROUND 8 Chang Sup Han has been working in the cleaning industry in the United States 9 for twenty years. (Mem. Decision on Compl. to Determine the Dischargeability of 10 Certain Debt [“Decision”] 11.) Han started his own janitorial-cleaning service, Gold 11 Maintenance, Inc., approximately ten years ago. 12 Maintenance and supervised each of his employees, the Appellants in this case. (Id. 13 at 3.) Gold Maintenance employed Castro from April 16, 2007 to October 10, 2008; 14 Juarez from September 13, 2006 to May 4, 2008; and Fernandez from December 23, 15 2007 to May 4, 2008. (Id. at 2–3.) Han fully controlled Appellants’ wages, hours, 16 and working conditions, and was directly responsible for the claimed underpayment of 17 wages. (Id. at 3.) Han typically required them to work thirteen to fourteen hours per 18 night, five to seven nights per week. (Id.) (Id.) Han operated Gold 19 Appellants testified at trial that Han promised to pay them “minimum wage,” 20 but they were undercompensated based on the applicable minimum-wage rates. (Id.) 21 Han never paid them for overtime or double-time hours, nor were they paid for their 22 travel time during work hours. (Id.) Yet over the same 2006–2008 period that Han 23 employed Appellants, his bank records show that he wrote over 280 checks to himself, 24 to no addressee, or to “Cash”—in excess of $420,000. (Appellants’ Br. 7–8.) Han 25 endorsed and cashed most of the checks himself. (Id. at 8.) 26 In 2008, Appellants filed separate administrative-law claims with the California 27 Labor Commissioner alleging Han owed them (1) unpaid wages for regular-time, 28 overtime and double-time work, (2) unpaid wages for meal and rest periods, 2 1 (3) interest on the wages under California Labor Code section 98.1, and (4) waiting- 2 time penalties under California Labor Code section 203. (Decision 5.) On January 3 29, 2010, the Labor Commissioner entered separate decisions for each Appellant on 4 these claims, which were confirmed by the Los Angeles County Superior Court. (Id.) 5 The Labor Commissioner found that Appellants were employees (not independent 6 contractors) of Gold Maintenance; had established their hours worked by their 7 personal time records; and were entitled to unpaid wages, interest, and penalties. (Id. 8 at 5–6.) The Commissioner also found that Han should have known of the duty to pay 9 the wages and volitionally failed to do so. (Id. at 6.) Accordingly, the Labor 10 Commissioner awarded Castro, Juarez, and Fernandez a total of $34,323.62, 11 $48,253.76, and $12,844.21, respectively. (Id.) 12 On May 7, 2011, Han filed a voluntary petition for relief under Chapter 7 of the 13 Bankruptcy Code. (Id. at 2.) On August 15, 2011, Appellants filed an adversary 14 proceeding against Han seeking to have their Labor Code judgments deemed non- 15 dischargeable under 11 U.S.C. §§523(a)(2)(A), 523(a)(4), and 523(a)(6). (Id.) The 16 bankruptcy court held that Appellants had not shown by a preponderance of the 17 evidence that Han’s debts should be exempt from discharge under these sections. This 18 appeal followed. III. 19 ISSUES ON APPEAL 20 Appellants argue that the bankruptcy court erred by failing to hold that: 21 (1) Han’s debts to them are nondischargeable under Bankruptcy Code section 22 523(a)(2)(A) as debts obtained by false pretenses, a false representation, or actual 23 fraud; and (2) the debts are nondischargeable under Bankruptcy Code section 24 523(a)(6) because these debts arose from willful and malicious injury to Appellants.1 25 /// 26 /// 27 1 28 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. 3 IV. 1 LEGAL STANDARD 2 The question of whether a claim is excepted from discharge under 3 § 523(a)(2)(A) presents mixed issues of law and fact which this Court reviews de 4 novo. In re Diamond, 285 F.3d 822, 826 (9th Cir. 2001). The bankruptcy court’s 5 conclusions of law are reviewed de novo and its findings of fact are reviewed for clear 6 error. 7 determination is clearly erroneous if it is illogical or implausible, or if it lacks 8 “support in inferences that may be drawn from facts in the record.” United States v. 9 Hinkson, 585 F.3d 1247, 1261 (9th Cir. 2009) (en banc) (quoting Anderson v. City of 10 In re Hamada, 291 F.3d 645, 649 (9th Cir. 2002). Bessemer City, 470 U.S. 564, 577 (1985)). V. 11 12 A court’s factual A. DISCUSSION Nondischargeability under section 523(a)(2)(A) 13 Section 523(a)(2)(A) provides that an individual debtor will not be discharged 14 “from any debt . . . for money, property, services . . . to the extent obtained by . . . 15 false pretenses, a false representation, or actual fraud.” To demonstrate that a debt 16 should be exempt from discharge under § 523(a)(2)(A), a creditor must prove five 17 elements: (1) misrepresentation, fraudulent omission, or deceptive conduct by the 18 debtor; (2) knowledge of the falsity or deceptiveness of the debtor’s statement or 19 conduct; (3) an intent to deceive; (4) justifiable reliance by the creditor on the debtor’s 20 statement or conduct; and (5) damage to the creditor proximately caused by her 21 reliance on the debtor’s statement or conduct. In re Weinberg, 410 B.R. 19, 35 22 (B.A.P. 9th Cir. 2009). 23 preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 291 (1991). The creditor must establish all five elements by a 24 1. Misrepresentation 25 The bankruptcy court found that Appellants proved by a preponderance that 26 Han represented that he would pay them wages at the “legal minimum wage rate.” 27 (Decision 9.) Upon review of the record, the Court agrees with this assessment. 28 /// 4 1 2. Knowledge of the falsity or deceptiveness of the statement 2 The remainder of the bankruptcy court’s decision with regard to § 523(a)(2)(A) 3 is premised upon a conclusion that Appellants failed to show that Han knew of the 4 falsity or deceptiveness of his statements. 5 preponderance of the evidence that “a false representation has been made without 6 belief in its truth or recklessly, careless of whether it is true or false.” In re Kong, 239 7 B.R. 815, 826–27 (B.A.P. 9th Cir. 1999). This reckless disregard for the truth of a 8 representation can also be expressed as “reckless indifference to his actual 9 circumstances.” Id. at 826 (citing In re Anastas, 94 F.3d 1280, 1286 (9th Cir. 1996)). A plaintiff must establish by a 10 The bankruptcy court found that Appellants had not met this burden with regard 11 to Han’s representations that he would pay them “minimum wage.” (Decision 13–14.) 12 The bankruptcy court credited Han’s testimony that he “thought he paid [Appellants] 13 their appropriate wages at the prevailing minimum-wage rates during their 14 employment” and that he did not understand the definition of hours worked—that he 15 was required to calculate and compensate travel time and other items as work time. 16 (Id. at 9, 10.) The bankruptcy court concluded that Han was credible and that he acted 17 out of negligence. (Id. at 10, 11.) 18 But Han is not a newcomer to this country; he has over twenty years of 19 experience in the U.S. janitorial industry. (Id. at 11.) Han’s English may have been 20 poor, but he knew enough about business law to have a certified public accountant 21 draft articles of incorporation, pay Appellants as independent contractors rather than 22 as employees, provide Appellants with 1099-MISC forms each year, and obtain 23 workers’-compensation insurance—while reporting to his insurance carrier that Gold 24 Maintenance had only two employees, himself and his son. (Id.; Appellants’ Br. 25 at 16–17). With cash flow of approximately $420,000 over the relevant two-year 26 period, Han’s business acumen clearly paid off. (Appellants’ Br. at 7–8.) 27 Despite this experience and knowledge, the bankruptcy court found that Han 28 “understood [he] was to pay $8 per hour and did so,” and that “[he] basically paid 5 1 minimum wage” per hour of work, despite his failure to pay wages for travel time, 2 meal periods, and rest periods. (Decision 9–10.) Yet the bankruptcy court overlooked 3 a crucial inference about Han’s knowledge that can be reasonably drawn from this 4 testimony. Han employed Appellants variously from 2007 to 2008. (Id. at 2–3.) On 5 September 12, 2006, and effective January 1, 2008, the California Legislature raised 6 the minimum wage for all industries from $7.50 to $8.00 per hour. Cal. Lab. Code 7 section 8 That Han knew to begin paying the 9 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 10 with California minimum-wage laws. This suggests that his “minimum wage” 11 representations, in light of his failure to further inquire into the law’s additional 12 requirements and definitions, was reckless and that he was careless of the truth or 13 falsity of his representations. 14 Han’s business conduct and experience shows that he was a sophisticated 15 businessperson with at best, a selective knowledge of applicable laws. This cannot be 16 reconciled with his purported ignorance of wage-and-hour laws. Thus, the Court 17 concludes that the bankruptcy court erred in its determination that Appellants failed to 18 demonstrate by a preponderance the knowledge-of-the-falsity element. 19 3. Intent to deceive 20 Whether or not a defendant satisfies the third element of § 523(a)(2)(A)—intent 21 to deceive—is a question of fact. In re Rubin, 875 F.2d 755, 758 (9th Cir. 1989). 22 Since a debtor will rarely admit to his fraudulent intentions, a creditor must rely on 23 circumstantial evidence to infer an intention to deceive. In re Eashai, 87 F.3d 1082, 24 1090 (9th Cir. 1996). A court may infer intent to deceive from a false representation. 25 In re Rubin, 875 F.2d at 759. 26 The bankruptcy court opined, “While ignorance of the law may not be a defense 27 to Han’s liability for violations of the Labor Code for failure to pay proper wages to 28 [Appellants], it may be considered regarding whether he had the subjective intent to 6 1 deceive plaintiffs.” (Decision 15.) The bankruptcy court then held that because Han 2 testified that he did not understand the law, he lacked subjective intent to deceive 3 Appellants. (Id.) 4 As discussed above, Appellants established that Han recklessly disregarded the 5 truth of his representations. Coupled with the fact that Han had Appellants work 6 thirteen to fourteen hours per day, five to seven days per week—and taking advantage 7 of them by not paying for overtime, travel time, meal periods, or rest periods—this 8 suffices to constitute intent to deceive under § 523(a)(2)(A). In re Gertsch, 237 B.R. 9 160, 167–68 (B.A.P. 9th Cir. 1999) (“[I]ntent to deceive can be inferred from the 10 totality of the circumstances, including reckless disregard for the truth.”). 11 4. Justifiable reliance 12 Appellants must also show that their reliance on Han’s representations that he 13 would pay them “minimum wage” was justified. Reliance need not reach a level of 14 “reasonableness” to establish nondischargeability under § 523(a)(2)(A), but must still 15 be justifiable. Field v. Mans, 516 U.S. 59, 73–76 (1995). “[A] person is justified in 16 relying on a representation of fact although he might have ascertained the falsity of the 17 representation had he made an investigation.” Id. at 70 (internal quotation marks 18 omitted). 19 The Court therefore sees no issue with Appellants’ ignorance of the Labor 20 Code, since they were under no obligation to investigate Han’s statements. To the 21 contrary, their ignorance may have appealed to Han when he decided to hire them. 22 Furthermore, the fact that Appellants were subjected to work schedules consisting of 23 thirteen to fourteen hours per day, five to seven days per week—all while receiving 24 sub-par wages—does not establish that Appellants knew Han was breaking the law or 25 that he was undercompensating them. Nor does their willingness to continue to work 26 under these conditions establish that their justifiable reliance was unwarranted, as the 27 bankruptcy court held. (Decision 16.) Their willingness to continue to work for Han 28 is justified in light of their ignorance and the fact that Han at least paid them for each 7 1 hour of work under his definition of work. The Court finds that Appellants’ 2 expectation that Han would follow California’s minimum-wage laws and pay them 3 accordingly is justifiable. 4 5. Proximate causation 5 Finally, Appellants must prove that they sustained the alleged losses as the 6 proximate result of Han’s representations. In re Eashai, 87 F.3d at 1086. 7 “[P]roximate cause entails (1) causation in fact, which requires a defendant’s 8 misrepresentations to be a substantial factor in determining the course of conduct that 9 results in loss [to Appellants] . . . and (2) legal causation, which requires [Appellants’] 10 loss to reasonably be expected to result from reliance.” In re Bixel, 215 B.R. 772, 777 11 (Bankr. S.D. Cal. 1997) (internal quotation marks omitted). In determining proximate 12 cause, however, courts must refrain from relying on speculation to determine whether 13 and to what extent a creditor would have suffered a loss absent fraud. In re Siriani, 14 967 F.2d 302, 306 (9th Cir. 1992). 15 Han’s employment of Appellants and his promise to pay them minimum wage 16 were clearly substantial factors in Appellants’ losses, establishing the first element of 17 proximate cause. 18 (unpaid wages) were a direct result of their reliance on Han’s representations that he 19 would pay them minimum wage. 20 caused by their reliance on Han’s representations. The second element is also satisfied, since Appellants’ losses Thus, Appellants’ damages were proximately 21 Accordingly, because Appellants have shown by a preponderance of the 22 evidence that their unpaid wages should be exempt from discharge under 23 § 523(a)(2)(A), the judgment of the bankruptcy court is REVERSED and the case is 24 REMANDED for further proceedings consistent with this order. 25 B. Nondischargeability under section 523(a)(6) 26 Because the Court finds that Han’s debts should be nondischargeable 27 § 523(a)(2)(A), the Court declines to opine on Appellants’ alternative argument that 28 Han’s debts are nondischargeable under § 523(a)(6). 8 VI. 1 2 3 DISPOSITION The judgment of the bankruptcy court is REVERSED and the case is REMANDED for further proceedings consistent with this order. 4 IT IS SO ORDERED. 5 July 8, 2013 6 7 8 ____________________________________ OTIS D. WRIGHT, II UNITED STATES DISTRICT JUDGE 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 9

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