In re: Blake McHaro and India Rose McHaro

FILED
ORDERED PUBLISHED JAN 9 2020
SUSAN M. SPRAUL, CLERK
U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT
UNITED STATES BANKRUPTCY APPELLATE PANEL
OF THE NINTH CIRCUIT
In re: BAP No. OR-19-1010-LTaF
BLAKE MCHARO and INDIA ROSE Bk. No. 6:18-bk-61242
MCHARO,
Adv. No. 6:18-ap-06052
Debtors.
STATE OF OREGON, Department of
Human Services,
Appellant,
v. OPINION
BLAKE MCHARO,
Appellee.
Submitted Without Argument on November 21, 2019
Filed – January 9, 2020
Ordered Published - February 7, 2020
Appeal from the United States Bankruptcy Court
for the District of Oregon
Honorable David W. Hercher, Bankruptcy Judge, Presiding
Appearances: Ellen F. Rosenbaum and Carolyn G. Wade on brief for
Appellant State of Oregon, Department of Human
Services.
Before: LAFFERTY, TAYLOR, and FARIS, Bankruptcy Judges.
LAFFERTY, Bankruptcy Judge:
INTRODUCTION
The State of Oregon, Department of Human Services (DHS), appeals
the bankruptcy court’s judgment in favor of chapter 71 debtor Blake
Mcharo on DHS’s claim for nondischargeability under § 523(a)(2)(A). After
debtors failed to answer DHS’s complaint, the bankruptcy court entered
default against each of them and entered judgment against co-debtor India
Mcharo. The court, however, declined to enter judgment against Blake2
because it found that his failure to disclose that he had obtained
employment was an unwritten statement respecting his financial condition
and thus not within the purview of § 523(a)(2)(A).
We conclude that the bankruptcy court erred in its interpretation of
§ 523(a)(2)(A) and therefore VACATE the judgment in favor of Blake and
1
Unless specified otherwise, all chapter and section references are to the
Bankruptcy Code, 11 U.S.C. §§ 101-1532.
2
Because the debtors share a last name, this Memorandum refers to each debtor
by first name. No disrespect is intended.
2
REMAND for further proceedings consistent with this disposition.
FACTUAL BACKGROUND
The facts are not in dispute. In August 2011, the Mcharos applied for
public assistance cash benefits from DHS through the Temporary
Assistance for Needy Families program (TANF). The application they
signed included their agreements that: (1) they had given DHS true,
correct, and complete information; (2) they understood that making false
statements could result in state and federal penalties and the obligation to
repay any overpaid benefits; (3) they would report changes in the
information given to DHS; (4) the statements made on the application were
true and correct, under penalty of perjury; and (5) they had read and
understood their rights and responsibilities as set forth in both the
application and in Form DHS 0415R. Form DHS 0415R requires that, while
receiving benefits, the applicants must report any change in their source of
income (i.e., getting, losing, or quitting a job) within ten days.
At the time the Mcharos filled out the application, Blake was not
working. However, on October 13, 2011, he became employed with Rent-A-
Center, Inc. and remained employed there until June 30, 2012.
On November 9, 2011, India completed an “Interim Change Report.”
In that document, she marked the “No” box next to the question, “Does
anyone work?” Next, on June 7, 2012, India completed an application
listing Blake as a member of her household but did not include him as a
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person for whom she was requesting benefits. In the section regarding
household income, she answered “No” to the question “Does anyone have
or expect to get any money?” She also left blank the question asking her to
list earned income of anyone in the home who was related to her or her
children.
At no point after the initial application did Blake sign or submit any
document regarding the change in his employment status.
All during this period, between September 2, 2011, and June 30, 2012,
the Mcharos were receiving TANF benefits.
On October 1, 2015, DHS recorded two distraint warrants, one
against each of the Mcharos, showing the balance due for overpayment of
public assistance benefits plus fees. DHS collected $1,276 from the Mcharos
before they filed their chapter 7 petition.
The Mcharos filed a joint chapter 7 petition on April 22, 2018.3 DHS
timely filed a complaint under § 523(a)(2) objecting to discharge of the debt
owed to it. The complaint alleged the facts recited above and requested that
the $3,843 still owed to DHS by the Mcharos be declared nondischargeable
under § 523(a)(2), without specifying whether relief was sought under
subsection (A) or (B). The Mcharos did not file an answer. At a pretrial
conference, the bankruptcy court directed DHS to file default papers and
3
The chapter 7 trustee filed a report of no distribution, discharge was entered,
and the case was closed in August 2018.
4
briefing on the question of whether the failure to fulfill an obligation to
report a future change in circumstances can be fraud under § 523(a). DHS
duly filed the requested documents and clarified that relief was sought
under § 523(a)(2)(A).
The bankruptcy court then granted DHS’s motion to enter default
against India and Blake and entered a default judgment against India only.
It took under advisement the request for entry of judgment against Blake.
In December 2018, the bankruptcy court issued a memorandum
decision and judgment in favor of Blake. In the memorandum decision, the
court held that DHS failed to state a claim under § 523(a)(2)(A) because
Blake’s failure to report a change in employment status constituted an
unwritten statement regarding his financial condition, thus falling outside
the purview of both § 523(a)(2)(A) and (B).
JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and
157(b)(1) and (b)(2)(I). We have jurisdiction under 28 U.S.C. § 158.
ISSUE
Whether the bankruptcy court abused its discretion in denying DHS’s
request for entry of a default judgment against Blake Mcharo on DHS’s
§ 523(a)(2)(A) claim on the basis that a failure to disclose a change in
employment status constitutes an unwritten statement relating to financial
condition.
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STANDARDS OF REVIEW
The bankruptcy court’s denial of a default judgment is reviewed for
an abuse of discretion. Eitel v. McCool, 782 F.2d 1470, 1471 (9th Cir. 1986). A
bankruptcy court abuses its discretion if it applies the wrong legal
standard, misapplies the correct legal standard, or makes factual findings
that are illogical, implausible, or without support in inferences that may be
drawn from the facts in the record. See TrafficSchool.com, Inc. v. Edriver Inc.,
653 F.3d 820, 832 (9th Cir. 2011) (citing United States v. Hinkson, 585 F.3d
1247, 1262 (9th Cir. 2009) (en banc)).
We review de novo the bankruptcy court’s interpretation of the
Bankruptcy Code. Barnes v. Belice (In re Belice), 461 B.R. 564, 572 (9th Cir.
BAP 2011). “When we conduct a de novo review, we look at the matter
anew, the same as if it had not been heard before, and as if no decision
previously had been rendered, giving no deference to the bankruptcy
court’s determinations.” Id. at 572–73 (citations omitted).
DISCUSSION
Section 523(a)(2)(A) of the Bankruptcy Code excepts from discharge
any debt “obtained by false pretenses, a false representation, or actual
fraud, other than a statement respecting the debtor’s or an insider’s
financial condition.” Section 523(a)(2)(B) in pertinent part excepts from
discharge debts obtained by materially false written statements respecting
a debtor’s or insider’s financial condition. Unless the debt could fall under
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another exception to discharge as described in the Code, debts obtained by
materially false, but unwritten, statements respecting a debtor’s financial
condition are still subject to discharge. See Lamar, Archer, & Cofrin, LLP v.
Appling, 138 S. Ct. 1752, 1757 (2018).
A creditor asserting nondischargeability of a debt under
§ 523(a)(2)(A)
must demonstrate by a preponderance of the evidence . . .
(1) misrepresentation, fraudulent omission or deceptive
conduct by the debtor; (2) knowledge of the falsity or
deceptiveness of his statement or conduct; (3) an intent to
deceive; (4) justifiable reliance by the creditor on the debtor’s
statement or conduct; and (5) damage to the creditor
proximately caused by its reliance on the debtor’s statement or
conduct.
Turtle Rock Meadows Homeowners Ass’n v. Slyman (In re Slyman), 234 F.3d
1081, 1085 (9th Cir. 2000).
A fraudulent omission in the face of a duty to disclose may constitute
a false representation. Citibank (South Dakota), N.A. v. Eashai (In re Eashai),
87 F.3d 1082, 1089 (9th Cir. 1996); cf. Harmon v. Kobrin (In re Harmon), 250
F.3d 1240, 1246 & n.4 (9th Cir. 2001). In cases where a plaintiff establishes
the nondisclosure of a material fact that the debtor was under a duty to
disclose, the reliance and causation elements are established and need not
be separately proven. Apte v. Romesh Japra, M.D., F.A.C.C., Inc. (In re Apte),
96 F.3d 1319, 1323 (9th Cir. 1996).
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Although the bankruptcy court acknowledged the foregoing
authorities, it found that Blake’s fraudulent omission was a “statement
respecting financial condition” and thus fell outside the purview of
§ 523(a)(2)(A). The court concluded that a statement need not be express,
citing the definition of “statement” from Black’s Law Dictionary: “A verbal
assertion or nonverbal conduct intended as an assertion.” The court noted
that this definition tracks with the definition found in Federal Rule of
Evidence 801(a): “a person’s oral assertion, written assertion, or nonverbal
conduct, if the person intended it as an assertion.”
The bankruptcy court rejected DHS’s argument that the Supreme
Court’s recent decision in Appling established that a failure to disclose does
not constitute a “statement.” In Appling, the Supreme Court considered
whether a false oral statement regarding a single asset, an anticipated tax
refund, constituted a “statement respecting financial condition” that would
fall under the exception to discharge of § 523(a)(2). In its analysis, the
Supreme Court cited the definition of “statement” set forth in Webster’s
Third New International Dictionary: “the act or process of stating, reciting,
or presenting orally or on paper; something stated as a report or narrative;
a single declaration or remark.” Appling, 138 S. Ct. at 1759. Because Appling
involved an oral statement, the Supreme Court did not address the
question of whether a “statement” could include an omission.
The bankruptcy court reasoned that nonverbal conduct necessarily
8
includes silence in the face of a duty to disclose, and thus Blake’s failure to
disclose his changed income to DHS constituted a statement respecting
financial condition. The court concluded that this interpretation made
sense as matter of policy because if such silence were not construed as a
“statement,” then those debtors who remained silent could be punished
more harshly than those who actively lied, which would be an incongruous
result.4
We respectfully disagree with the bankruptcy court’s analysis.
Congress did not define “statement” in the Bankruptcy Code. A
fundamental canon of statutory construction is that, when a term is
undefined, words within a statute “will be interpreted as taking their
ordinary, contemporary, common meaning.” Perrin v. United States, 444
U.S. 37, 42 (1979). In interpreting an undefined term, courts may consult
dictionary definitions. Transwestern Pipeline Co., LLC v. 17.19 Acres of Prop.
Located in Maricopa Cty., 627 F.3d 1268, 1270 (9th Cir. 2010). The Webster’s
definition–the act or process of stating, reciting, or presenting orally–does
not contemplate silence or even nonverbal communication.
Appling itself provides support for the conclusion that an omission is
4
We note that the bankruptcy court recently decided a case with facts nearly
identical to those presented here and ruled in favor of the government plaintiff in
Washington County Department of Housing Services v. Hall (In re Hall), No. 18-03121-DWH,
2019 WL 4281911 (Bankr. D. Or. Sept. 9, 2019). In Hall, the bankruptcy court
reconsidered its analysis of the meaning of “statement” and concluded that, for
purposes of § 523(a)(2)(A), a fraudulent omission is not a “statement.”
9
not a “statement,” albeit in dicta. The Supreme Court noted that debt
incurred through fraudulent conduct may be nondischargeable under
§ 523(a)(2)(A). Appling, 138 S. Ct. at 1763 (citing Husky Int’l Elecs., Inc. v.
Ritz, 136 S. Ct. 1581, 1586 (2016), holding that “actual fraud” under
§ 523(a)(2)(A) includes schemes that can be undertaken without a
representation). In a related footnote, the Court cited United States v. Tucker
(In re Tucker), 539 B.R. 861 (Bankr. D. Idaho 2015), and United States v.
Drummond (In re Drummond), 530 B.R. 707 (Bankr. E.D. Ark. 2015). Both
cases involved facts substantially similar to this case, and both held that a
debt incurred by overpayment of government benefits because a debtor
failed to disclose a change in employment status was nondischargeable
under § 523(a)(2)(A). Appling, 138 S. Ct. at 1763 n.4.
We further find no compelling policy basis to treat omissions as
statements. With respect to the concern that debtors who remain silent
regarding their financial condition may be punished more harshly than
those who make affirmative oral misrepresentations, a voluntary lender
can typically protect itself by requiring financial information in writing
before loaning money. On the other hand, government agencies that
provide benefits to debtors do not intentionally set out to become creditors:
a debtor-creditor relationship arises only when the applicant becomes
disqualified from receiving benefits but fails to report the change in status.
As such, those agencies are reliant on the applicant to make full, continuing
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disclosures. In re Hall, 2019 WL 4281911 at *4 (citation omitted).
CONCLUSION
The bankruptcy court erred when it construed Blake’s failure to
disclose his change in employment status as a “statement respecting . . .
financial condition” under 11 U.S.C. § 523(a)(2)(A). Accordingly, we
VACATE and REMAND for further proceedings consistent with this
disposition.5
5
We emphasize that our holding is limited: where the debtor has made a written
application that includes financial information and promises to report any changes in
that information, the debtor’s failure to make such a report is not a “statement
respecting . . . financial condition.” On remand, the court will need to consider and
make findings as to the elements of the § 523(a)(2)(A) claim.
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