Memorandum of Decision Re: Sanction for Meritless Complaint

IN THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA
In re JO ANNE WHITMAN,                                                                     No. 94-10279      Debtor. ___________________________/ DAVID and JUDY RAMPONI,      Plaintiffs,     v.                                                                                                  A.P. No. 94-1201 JO ANNE WHITMAN,      Defendant. _____________________________/
Memorandum of Decision
     On April 8, 1991, plaintiffs David and Judy Ramponi entered into a written agreement with James Whitman, husband of debtor and defendant Jo Anne Whitman, whereby the Ramponis leased real property to James with an option to purchase the property. James was unable to perform or exercise the option, and the Ramponis ended up incurring expenses in evicting the Whitmans from the premises.      James filed a bankruptcy petition in 1992, and received a discharge. As the Ramponis did not file a timely dischargeability action, his debt to them was discharged. Pursuant to section 524(a)(3) of the Bankruptcy Code, the discharge had the effect of protecting the community property of James and Jo Anne.      The Ramponis are now pursuing Jo Anne, who has filed her own bankruptcy petition. They allege first that James used a false financial statement to induce them to enter into the lease and second that Jo Anne is personally liable either because the debt was for a necessity of life or that she has some sort of vicarious liability for the fraud.      Now before the court is Jo Anne's motion for summary judgment, on the grounds that the supposedly false financial statement was delivered to the Ramponis months after the lease was entered into and could not possibly have been relied upon by them. She also seeks sanctions for a patently meritless lawsuit.      A review of the relevant documents shows that the Ramponis were contractually bound on April 15, 1991, at the latest. The financial statement alleged to be false is dated May 31, 1991, and was transmitted to the Ramponis on June 27, 1991. There is no possible way that the Ramponis could have relied on this statement in making their decision to enter into the lease. Accordingly, summary judgment is required by section 523(a)(2)(B)(iii) of the Bankruptcy Code. The Ramponi's vague argument that "negotiations were ongoing" is without merit given the unambiguous wording of the documents. Moreover, the negotiations were over a dispute as to how to implement the contract, not the contract itself.      More fundamentally, the complaint does not even allege any basis for finding Jo Anne personally liable for the alleged false financial statement. Most courts which have addressed the issue have refused to apply agency principles to nondischargeability cases. See, e.g., In re Walker, 726 F.2d 452, 454 (8th Cir.1984); In re Bardwell, 610 F.2d 228, 229 (5th Cir.1980). The general rule is that there must be some culpable conduct on the part of a wife before a debt caused by her husband's fraud may be found nondischargeable as to her. In re Lansford, 822 F.2d 902, 904-05 (9th Cir.1987). In this case, Jo Anne is not even a signatory on the contract and did not sign the financial statement. There is no basis for holding the debt nondischargeable as to her.      The Ramponi's argument that the debt is nondischargeable as to Jo Anne because state law makes a spouse's separate property liable for the necessities of life has no merit. State law has very little relevance to a nondischargeability action, which is based on federal law. Grogan v. Garner, 498 U.S. 279, 284 (1991). It is the debtor's conduct which determines whether a debt is nondischargeable, not the consideration for the debt.      The court was undecided as to awarding attorney's fees to Jo Anne until it reviewed the pleadings filed by the Ramponis. On page three of their pleading filed June 14, 1994, they admitted that had no knowledge as to Jo Anne's involvement in any fraudulent activity when they filed their complaint. Taken in its totality, the Ramponis filed a complaint which was factually meritless, in that they could not have relied on the financial statement, and brought it against a defendant when they had no knowledge of her involvement. FRBP 9011 forbids the filing of a complaint without a belief formed after reasonable inquiry that it is well grounded in fact. Having filed the complaint without making inquiry, the Ramponis violated that rule. Moreover, it appears that the action was instituted not with any reasonable expectation of recovery but rather to harass the Whitmans. Accordingly, the court will award Jo Anne $1,000.00 in sanctions in addition to her costs of suit.      For the foregoing reasons, the Ramponis' complaint will be dismissed, with prejudice. Jo Anne shall recover her costs of suit and $1,000.00 in sanctions. Her counsel shall submit an appropriate form of order granting her motion and an appropriate form of judgment.
Dated: October 6, 1994                                                                                                  _______________________                                                                                                                                                    Alan Jaroslovsky                                                                                                                                                    U.S. Bankruptcy