Appeal from the United States Bankruptcy Court for the Northern District of California. BK. Nos. 92-45858-JT, 92-46447-TK (Consolidated), Adv. No. 92-4634-AN. Honorable Randall Newsome, Bankruptcy Judge, Presiding.
Before: Jones, Russell, and Ollason, Bankruptcy Judges.
Appellee and Debtor, Sateesh Apte ("Dr. Apte"), is a neurologist. He is also the founder of several corporations, including Apte Group, Inc. ("Apte Group"), a management company. In August, 1989, Apte Group leased a 48,000 square foot office building in Pleasanton, California from Rosewood Associates ("Rosewood"). Dr. Apte intended to sublease the office space to other medical professionals, but was unable to secure subtenants. As a result, Apte Group fell over $1.3 million behind on lease payments.
On April 3, 1991, Rosewood filed an unlawful detainer action against Apte Group, prompting Dr. Apte to enter into workout negotiations in order to restructure the lease payments. Around June, 1991, Dr. Apte was approached by an acquaintance, Dr. Romesh Japra, about subleasing office space in the Pleasanton building. Although Dr. Japra had leased two other offices, he had never before negotiated a sublease. During sublease negotiations, Dr. Apte did not disclose to Dr. Japra that Apte Group was in default on the master lease and subject to eviction. He also failed to tell Dr. Japra when Rosewood officially terminated the master lease on July 23, 1991.
Dr. Japra knew that his sublease was subject to the master lease. As a result, he specifically requested that his sublease contain a provision ("the priority provision") that would allow him to remain in possession of the property even if the master lease were terminated. The priority provision was important to Dr. Japra because he intended to invest a lot of money in improvements in the office space. Dr. Japra signed the sublease agreement on September 16, 1991. That same day, a workout agreement between Dr. Apte and Rosewood became effective, allowing Dr. Apte to cure his arrearage on the master lease.
Dr. Japra understood that his sublease had to be approved by Rosewood before it became effective. Two weeks after Dr. Japra signed the sublease, Dr. Apte told him that the sublease had been approved. The truth, however, was that Rosewood had refused to sign the sublease unless the priority provision was taken out.
Dr. Japra also understood that the sublease required him to obtain the written consent of Rosewood before commencing any improvements, but Dr. Apte represented that he would obtain the necessary approval. After Dr. Apte made repeated assurances to Dr. Japra and Dr. Japra's office manager that the sublease and improvements had been approved, Dr. Japra began construction on the improvements, expending a total of $146,727.46.
During the sublease negotiations, Dr. Japra had no contact with Rosewood. In fact, Rosewood refused to communicate with anyone but Dr. Apte, due to legal concerns that any communication directly with a potential sublessee might be interpreted as having created a lease between Rosewood and the sublessee. As a result, Dr. Japra's only contact was with Dr. Apte.
In December, 1991, Rosewood became aware that Dr. Japra was making improvements. Rosewood informed the city of Pleasanton not to issue any further work permits, and told Dr. Apte, on January 13, 1992, that construction was to be stopped immediately. Dr. Apte did not tell Dr. Japra to stop, yet he informed Rosewood that construction on the improvements had been halted. In fact, Dr. Apte testified that he participated in and encouraged the construction and that he visited Dr. Japra's space two or three times a week to make sure that the tenant improvements were within the guidelines set by Rosewood. Rosewood soon discovered that construction had not stopped, but allowed the construction to continue based on Dr. Apte's promise that Dr. Japra would consent to deletion of the priority provision from the sublease.
In February, 1992, Dr. Apte finally told Dr. Japra that Rosewood had not approved the sublease. By this time, Dr. Japra had completed 95% of his improvements. Due to Dr. Apte's continued default on master lease payments, Rosewood filed another unlawful detainer action on March 18, 1992, only two weeks after Dr. Japra had moved into his offices. The master lease was eventually terminated and Dr. Japra, after unsuccessfully trying to negotiate a lease with Rosewood, was evicted. His eviction occurred less than six months after he had moved in.
Dr. Apte filed a chapter 7 petition soon after the master lease was terminated. Dr. Japra filed a proof of claim based upon his damages, then filed an action on December 18, 1992, to have this debt declared nondischargeable pursuant to §§ 523(a)(2)(A) and 523(a)(6).*fn1 In his complaint, Dr. Japra alleged $146,727.46 in damages, consisting of $7,980.12 in rent paid to Dr. Apte (which Dr. Apte kept instead of forwarding to Rosewood) and over $138,000 spent on improvements and other costs associated with moving into the new office space.
The bankruptcy court held a hearing on January 31, 1994. On April 28, 1994, the court ruled that Dr. Apte had made material misrepresentations with the intent to deceive Dr. Japra. However, the court ruled that Dr. Japra did not reasonably or justifiably rely upon those misrepresentations because Dr. Japra was highly educated, was experienced in negotiating leases, and should have known that Dr. Apte was not telling the truth about approval of the sublease and construction plans. The court chastised Dr. Japra for beginning construction on the improvements without seeing signed copies of the approved sublease and authorization for improvements. The court therefore concluded that all the elements of fraud had been satisfied except for reliance and causation.
The court dismissed Dr. Japra's § 523(a)(6) claim, ruling first that fraud claims may only be brought under § 523(a)(2)(A), and then stating that even if fraud claims could be brought under § 523(a)(6), all the elements of fraud had to be proven in order to prevail. Therefore, Dr. Japra could not prevail under either § 523(a)(2)(A) or § 523(a)(6), and the debt was dischargeable. Dr. Japra appeals.
1. What is the proper standard of reliance under § 523(a)(2)(A)?
2. Was the Judge's factual finding that Dr. Japra did not satisfy the reliance element clearly erroneous?
3. Did the bankruptcy court err in holding that Dr. Japra did not have a cause of action ...