Filed: Apr. 16, 2014
Latest Update: Mar. 02, 2020
Summary: BAP Rule 8013-1. D. Idaho 2013);, 16 We conclude that the bankruptcy court correctly decided to, 17 give preclusive effect to the amounts of debt owed by Urban to, 18 BCS, and to the allocation of the damages awarded in the State, 19 Court Judgment., 7 Dilley v. Gunn, 64 F.3d 1365, 1367 (9th Cir.
FILED
APR 16 2014
1 NO FO PUBL A IO
T R IC T N
2 SUSAN M. SPRAUL, CLERK
U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT
3 UNITED STATES BANKRUPTCY APPELLATE PANEL
4 OF THE NINTH CIRCUIT
5 In re: ) BAP No. SC-13-1047-PaJuKu
)
6 RICHARD SCOTT URBAN, ) Bankr. No. 12-02444-MM7
)
7 Debtor. ) Adv. Proc. 12-90154-MM
______________________________)
8 )
RICHARD SCOTT URBAN, )
9 )
Appellant, )
10 )
v. ) M E M O R A N D U M1
11 )
BCS WEST, LLC, )
12 )
Appellee. )
13 ______________________________)
14 Argued and Submitted on March 20, 2014
at Pasadena, California
15
Filed - April 16, 2014
16
Appeal from the United States Bankruptcy Court
17 for the Southern District of California
18 Honorable Margaret Mann, Bankruptcy Judge, Presiding
19
Appearances: Kerry Todd Curry of Curry & Associates argued for
20 appellant Richard Scott Urban; Marc F. Forsythe of
Goe & Forsythe, LLP argued for appellee BCS West,
21 LLC.
22
Before: PAPPAS, JURY and KURTZ, Bankruptcy Judges.
23
24
25
26 1
This disposition is not appropriate for publication.
27 Although it may be cited for whatever persuasive value it may
have (see Fed. R. App. P. 32.1), it has no precedential value.
28 See 9th Cir. BAP Rule 8013-1.
1 Appellant, chapter 72 debtor Richard Scott Urban (“Urban”),
2 appeals the order of the bankruptcy court granting summary
3 judgment to Appellee BCS West, LLC (“BCS”) determining that
4 Urban’s debt to BCS is excepted from discharge under
5 § 523(a)(2)(A) and (a)(4). We VACATE the bankruptcy court’s
6 summary judgment and REMAND.
7 FACTS
8 BCS was formed in June 2000, and over the next eight years
9 operated auto sales and rental businesses at several locations in
10 central and southern California. The original members were
11 Urban, Brian Britton (“Britton”), David Stirsman (“Stirsman”) and
12 Rob Millum (“Millum”). The four members invested $100,000 each,
13 and Britton and Stirsman loaned BCS $300,000 each. In March
14 2005, Millum, who had been regional manager of operations for
15 BCS, departed and his interest was purchased by the other
16 members. Millum’s duties were assumed by Urban, and his interest
17 was redistributed among the three remaining members, who, in
18 mid-2005, were approximately each one-third owners of BCS.
19 In 2000, Key Bank, N.A. (“Key Bank”) had provided the
20 original “flooring line of credit”3 to BCS and continued to meet
21
2
22 Unless otherwise indicated, all chapter and section
references are to the Bankruptcy Code, 11 U.S.C. §§ 101 – 1532,
23 all Rule references are to the Federal Rules of Bankruptcy
24 Procedure, Rules 1001–9037, and all Civil Rule references are to
the Federal Rules of Civil Procedure 1–86.
25
3
A flooring line of credit, also known as a floor-plan
26 line of credit, refers to “[a] loan that is secured by
27 merchandise and paid off as the goods are sold.” BLACK’S LAW
DICTIONARY 663 (9th ed. 2009); see Eisenbarth v. Eisenbarth
28 continue...
-2-
1 BCS’s borrowing needs from 2000 to 2008.
2 It is undisputed that, from its beginning, BCS was plagued
3 by a shortage of working capital. In addition, as a result of
4 the poor economic conditions following September 11, 2001, sales
5 and rentals at the BCS dealerships declined. By 2004, BCS’s
6 working capital had declined to $141,000, in March of 2005 it was
7 approximately negative $250,000, and by September of 2005 its
8 working capital was a negative $477,000.
9 BCS alleges that from the time Urban took over operations
10 following the departure of Millum in March 2005, through a
11 September 2006 meeting of members, Urban concealed information
12 regarding the finances of BCS from Britton and Stirsman, and in
13 particular, that he concealed that BCS was Sold Out of Trust
14 (“SOT”) on the Key Bank loan for about $700,000. The SOT
15 condition occurred, Urban alleges, because by mid-2006, the
16 declines in BCS working capital, coupled with demands for
17 payments from vendors, had forced Urban to choose between “paying
18 Key Bank and shutting down BCS’s business on the one hand, or
19 using proceeds from vehicle sales to pay other critical operating
20 expenses and attempting to make up the deficit later, on the
21 other hand.” Urban Decl. at 3, November 9, 2012. Urban states
22
23 3
...continue
(In re Eisenbarth), 2011 Bankr. LEXIS 2752, at * 2-3 (Bankr. D.
24
Mont. July 15, 2011) (discussing flooring lines of credit). When
25 each “floored” automobile is sold by the dealer, the loan advance
against that auto is to be repaid, usually within 90 days of the
26 sale. Failure to pay the obligation puts the dealer in the Sold
27 Out of Trust condition. In addition, placing a second lien on an
auto or motorcycle subject to a floor plan loan is referred to as
28 “double flooring.”
-3-
1 that “as Chief Operating Officer in mid-2006 he chose the
2 latter.” Id. Urban concedes that he did not consult with or
3 inform Britton and Stirsman that he was putting BCS into an SOT
4 condition with Key Bank.
5 As noted above, there was a meeting of BCS members in
6 September 2006, by which point Britton and Stirsman had become
7 aware of the SOT situation. In spite of what an arbitrator would
8 later describe as the realization that they had been “blindsided”
9 by Urban, the other members permitted him to continue as head of
10 operations and finance and, in fact, Urban was given a pay raise
11 in October 2007. The Key Bank SOT condition was eventually
12 resolved in October 2006, when the bank was paid using a $750,000
13 investment in BCS by Pacific Coast Protection Plan, an affiliated
14 company owned by Urban, Britton and Stirsman.
15 Urban was removed from his management positions at BCS in
16 March 2008, although he remained a member of BCS. In October or
17 November 2008, the BCS businesses were closed and thereafter
18 liquidated.
19 In July 2009, Britton and Stirsman caused BCS to commence an
20 arbitration proceeding against Urban. BCS alleged causes of
21 action against Urban for breach of contract, breach of fiduciary
22 duty, breach of the implied covenant of good faith and fair
23 dealing, intentional misrepresentation, negligent
24 misrepresentation, intentional interference with economic
25 advantage, and negligent interference with economic advantage.
26 Urban defended and asserted nine counter-claims against BCS. A
27 contested hearing in the arbitration was held from September 13
28 through September 18, 2010.
-4-
1 On February 2, 2011, the arbitrator issued a decision in the
2 form of an Arbitration Award (the “Award”). The arbitrator’s
3 findings of fact critical to this appeal consisted of the
4 following:
5 Based on clear and convincing evidence, the arbitrator
finds that from at least the time Millum separated from
6 BCS (March 4, 2005 until the September 21-23, 2006
members meeting in Oregon), Urban breached the
7 fiduciary duty he owed to BCS by failing to provide it
(through Stirsman and Britton) with accurate financial
8 information relative to the overall health of the
business, and in particular to the SOT position with
9 Key Bank. . . . Under the same facts, the arbitrator
holds that BCS has established its claim on this issue
10 for causes of action for breach of fiduciary duty,
breach of the covenant of good faith and fair dealing,
11 and intentional misrepresentation.
12 Award at 5.
13 The Award absolved Urban of any liability for the losses
14 incurred by BCS before September 2006 other than the loss due to
15 the SOT. The Award ruled that Urban’s “breach of duty was
16 intentional and caused damage to BCS in the amount of $697,000.”
17 The Award reduced that amount by $230,783, which represented
18 Urban’s 33.133 percent ownership interest in BCS, resulting in a
19 net award of $466,216.4 Award at 5.
20 Although BCS argued numerous post-2006 claims against Urban
21 in the arbitration, and Urban asserted numerous cross-claims, the
22 principal post-2006 claim against Urban was for his liability on
23 a capital call. In April 2008, the members voted for a capital
24
4
25 In calculating the award in the State Court Judgment, the
state court granted BCS’s request for interest on the $466,216
26 from November 9, 2006 to October 21, 2011 of $197,470.58,
27 resulting in an award of $663,686.58 attributable to the alleged
liability on the SOT. State Court Judgment at 2. Urban has not
28 challenged the computation.
-5-
1 call of $600,000 to help with operating expenses. Stirsman and
2 Britton made their capital call of $200,000 each, but Urban did
3 not. The Award determined that at the time of the capital call,
4 Urban had slightly less than one-third of the membership interest
5 in BCS, so his liability to BCS was $198,666, which the Award
6 granted to BCS.
7 The Award was confirmed, over Urban’s objection, by the San
8 Diego Superior Court on October 21, 2011 (the “State Court
9 Judgment”).5 Based on the Award, the state court granted
10 judgment to BCS for a total of $1,146,350.47 on their claims
11 against Urban, of which $663,686.58 was allocated to Urban's
12 breach of fiduciary duty, breach of the covenant of good faith
13 and fair dealing, and intentional misrepresentation. Urban, in
14 turn, was granted a judgment of $160,502.41 against BCS on his
15 cross-claims. The state court offset this amount from the total
16 awarded to BCS against him and, as provided in the Award, awarded
17 BCS a net total of $979,706 in damages against Urban, of which
18 $663,686.58 was allocated to Urban’s breach of fiduciary duty,
19 breach of the covenant of good faith and fair dealing, and
20 intentional misrepresentation. The State Court Judgment was not
21 appealed.
22 Urban filed a chapter 7 petition on February 2, 2012. On
23
5
Unless it is necessary to distinguish between the Award
24
and the State Court Judgment, we refer only to the Award. We are
25 mindful that arbitration awards are not state court judgments as
provided in the Full Faith and Credit Act, 28 U.S.C. § 1738.
26 Burkybile v. Bd. of Educ., 411 F.3d306 (2d Cir. 2005).
27 California requires a petition and action in state court to
elevate an arbitral award to a judgment. See Cal. Code Civ.
28 Proc. § 1285.
-6-
1 May 7, 2012, BCS filed a “Complaint for Determination of
2 Nondischargeability of Debt under 11 U.S.C. Section 523(a)(2)(A),
3 523(a)(4), and 523(a)(6)” (the “Complaint”) against Urban. BCS
4 asserted that Urban’s debt to BCS for the $663,686.58 component
5 of the State Court Judgment should be excepted from discharge for
6 intentional misrepresentation, fraud while acting in a fiduciary
7 capacity, and willfully and maliciously misrepresenting financial
8 information to Stirsman, Britton and Key Bank.
9 On June 21, 2012, BCS filed a motion for summary judgment
10 (the “First SJM”). The First SJM argued that the bankruptcy
11 court should apply issue preclusion and determine that Urban’s
12 debt to BCS based on the State Court Judgment was excepted from
13 discharge. Urban opposed the First SJM, arguing that BCS had not
14 presented the arbitration record, and that the arbitrator’s
15 rulings in the Award, upon which the State Court Judgment was
16 based, were not sufficient to support any exception to discharge.
17 Further, Urban argued that he was not permitted at the state
18 court to assert that the offsets should be applied to his
19 nondischargeable claims.
20 The bankruptcy court held a hearing on the First SJM on
21 July 19, 2012. On July 30, 2012, the court entered an Order
22 Denying Motion for Summary Judgment (the “First SJ Order”). In
23 it, as to the BCS claim under § 523(a)(2)(A), the court
24 determined that the Award did not make the requisite findings
25 concerning Urban’s intent to deceive BCS, and that the
26 arbitrator’s specific finding that Urban had engaged in gross
27 negligence in managing BCS, rather than intentional deceit,
28 prevented application of preclusion on the issue of fraud under
-7-
1 § 523(a)(2)(A). First SJ Order at 4-5.
2 In addition, the bankruptcy court found numerous factual
3 issues remained concerning whether the arbitrator’s findings
4 satisfied the standard for a defalcation exception under
5 § 523(a)(4). The court cited to Lewis v. Scott (In re Lewis),
6 97 F.3d 1182, 1186 (9th Cir. 1996) for the proposition that
7 “defalcation can include the innocent default of a fiduciary who
8 fails to account fully for money received.” The court expressed
9 concern regarding the § 523(a)(4) claim because “the award is
10 unclear whether the alleged defalcation was due to [Urban’s]
11 flawed judgment by permitting BCS to go SOT, or causing
12 bookkeeping errors from the shoddy records, or something more
13 nefarious.” First SJ Order at 6.
14 And as to the BCS claim for an exception to discharge under
15 § 523(a)(6), the bankruptcy court determined that the arbitrator
16 had found that Urban had committed a wrongful act (selling cars
17 out of trust), but that there was no finding that Urban did so
18 either willfully or maliciously.6 First SJ Order at 6.
19 The bankruptcy court summarized that there were triable
20 issues of fact regarding Urban’s intent to deceive, whether
21 Urban’s breaches of fiduciary duty constituted nondischargeable
22 defalcation, and whether Urban’s claims against BCS should be
23 offset against the dischargeable or nondischargeable components
24 of BCS’s claim. First SJ Order at 8.
25 BCS filed a second summary judgment motion on October 17,
26
6
27 The bankruptcy court would later dismiss the § 523(a)(6)
claim on stipulation of the parties, so it is not implicated in
28 this appeal.
-8-
1 2012 (the “Second SJM”). BCS supported this motion with a mass
2 of information, including all transcripts and the exhibits
3 submitted in the arbitration proceedings. In the Second SJM, BCS
4 argued that the arbitration record supported a finding that Urban
5 committed intentional fraud, that Urban committed defalcation
6 while acting in a fiduciary capacity, and that the offsets were
7 determined by the state court. Thus, the State Court Judgment
8 was entitled to preclusive effect.
9 Urban responded to the Second SJM on November 9, 2012. He
10 argued that exception to discharge under § 523(a)(2)(A) was not
11 justified for his alleged failure to disclose information
12 concerning BCS’s financial condition to BCS, that no § 523(a)(4)
13 defalcation had been shown to have occurred, and that issue
14 preclusion should not apply to the offset issue.
15 The bankruptcy court held a hearing on the Second SJM on
16 November 29, 2012. At the hearing the bankruptcy court announced
17 that it would grant summary judgment to BCS on the § 523(a)(2)(A)
18 claim and would deny summary judgment on the § 523(a)(4) claim
19 for defalcation. However, after the hearing, but before the
20 court could enter an order on the Second SJM, on December 13,
21 2012, Urban filed a motion for reconsideration, bringing the
22 Ninth Circuit’s decision in Anastas v. Am. Savings Bank
23 (In re Anastas), 94 F.3d 1280 (9th Cir. 1996), to the court’s
24 attention in support of his argument that § 523(a)(2)(A)
25 prohibits use of a non-written representation of debtor’s
26 financial condition as a basis for finding fraud. The court was
27 not persuaded by Urban’s arguments based on In re Anastas and
28 cited to other authority, to be discussed below.
-9-
1 On January 23, 2013, the bankruptcy court granted summary
2 judgment to BCS that the debt owed by Urban for the $663,686.58
3 was excepted from discharge under § 523(a)(2)(A) and (a)(4)
4 (“Second SJ Order”). In it, the bankruptcy court determined:
5 — The arbitration hearing was sufficiently adjudicatory to
6 satisfy California’s requirements for applying issue preclusion
7 to arbitration awards.
8 — Based on the testimony reflected in the transcripts from
9 the arbitration proceedings, the court found that Urban’s
10 concealment of financial information from BCS demonstrated his
11 intent to deceive, and thus, supported the court’s conclusion
12 that Urban’s debt to BCS was excepted from discharge under
13 § 523(a)(2)(A).
14 — Since the court would give preclusive effect to both the
15 fraud and fiduciary duty findings in the Award, the court would
16 apply issue preclusion on the § 523(a)(4) claim.
17 — The nondischargeable debt would not be reduced for Urban’s
18 offsets, because the court should give preclusive effect to the
19 offset calculation of the state court.
20 — Regarding Urban’s objections to procedural rulings by the
21 arbitrator, the bankruptcy court found that Urban’s assertions
22 were not supported by the evidence.
23 The bankruptcy court entered a Judgment on February 5, 2013.
24 Also on February 5, 2013, the bankruptcy court entered an order
25 denying reconsideration. Urban filed a timely appeal of the
26 Judgment and reconsideration order on February 6, 2013.
27 JURISDICTION
28 The bankruptcy court had jurisdiction under 28 U.S.C.
-10-
1 §§ 1334 and 157(b)(2)(I). We have jurisdiction under 28 U.S.C.
2 § 158.
3 ISSUES
4 Whether the bankruptcy court erred in determining that issue
5 preclusion was available, and whether it abused its discretion in
6 choosing to apply it to the State Court Judgment.
7 Whether the bankruptcy court erred in granting summary
8 judgment to BCS determining that Urban’s debt was excepted from
9 discharge under § 523(a)(2)(A) and (a)(4).
10 Whether the bankruptcy court abused its discretion in
11 denying reconsideration.
12 STANDARDS OF REVIEW
13 We review an award of summary judgment de novo. Grenning v.
14 Miller-Stout, 739 F.3d 1235, 1238 (9th Cir. 2014).
15 In reviewing a bankruptcy court's determination of an
16 exception to discharge, we review its findings of fact for clear
17 error and its conclusions of law de novo. Oney v. Weinberg
18 (In re Weinberg),
410 B.R. 19, 28 (9th Cir. BAP 2009).
19 The availability of issue preclusion is a question of law,
20 which we review de novo. Wolfe v. Jacobson (In re Jacobson),
21
676 F.3d 1193, 1198 (9th Cir. 2012). If issue preclusion is
22 available, the decision to apply it is reviewed for abuse of
23 discretion. Lopez v. Emergency Serv. Restoration, Inc.
24 (In re Lopez),
367 B.R. 99, 103 (9th Cir. BAP 2007).
25 Reconsideration under Rule 9023 is reviewed for abuse of
26 discretion. Determan v. Sandoval (In re Sandoval),
186 B.R. 490,
27 493 (9th Cir. BAP 1995).
28 A bankruptcy court abuses its discretion if it bases a
-11-
1 decision on an incorrect legal rule, or if its application of the
2 law was illogical, implausible or without support in inferences
3 that may be drawn from the facts in the record. United States v.
4 Hinkson, 585 F.3d 1247, 1261-62 & n.21 (9th Cir. 2009)(en banc).
5 DISCUSSION
6 Resolution of this appeal requires that the Panel apply
7 several legal standards to the bankruptcy court’s decision:
8 summary judgment, issue preclusion, exception to discharge under
9 § 523(a)(2)(A), and exception to discharge under § 523(a)(4). In
10 particular, we must determine if the State Court Judgment, based
11 on the Award, is entitled to preclusive effect and, if so,
12 whether any disputed material facts remained which prevented the
13 bankruptcy court from granting a summary judgment to BCS for an
14 exception to discharge under either § 523(a)(2)(A) or (a)(4). As
15 discussed below, we conclude that the Award is ambiguous, that
16 several elements required for an exception to discharge based on
17 issue preclusion have not been established, and that granting a
18 summary judgment to BCS was not appropriate.
19 I. Summary Judgment and Issue Preclusion.
20 Summary judgment may be granted by the trial court "if the
21 pleadings, the discovery and disclosure materials on file, and
22 any affidavits show that there is no genuine issue as to any
23 material fact and that the movant is entitled to judgment as a
24 matter of law." Civil Rule 56(a), as incorporated by Rule 7056;
25 Barboza v. New Form, Inc. (In re Barboza),
545 F.3d 702, 707 (9th
26 Cir. 2008). A trial court may not weigh the evidence in
27 resolving such motions, but rather determines only whether a
28 material factual dispute remains for trial. Covey v. Hollydale
-12-
1 Mobilehome Estates, 116 F.3d 830, 834 (9th Cir. 1997).
2 Federal courts must give "full faith and credit" to the
3 judgments of state courts. 28 U.S.C. § 1738. In determining
4 whether a state court’s judgment is preclusive in bankruptcy
5 cases as a matter of full faith and credit, the bankruptcy court
6 must apply the forum state's law of issue preclusion. Bugna v.
7 McArthur (In re Bugna),
33 F.3d 1054, 1057 (9th Cir. 1994).
8 Issue preclusion applies in the context of a § 523(a) proceeding.
9 Grogan v. Garner,
498 U.S. 279, 286-291 (1991).
10 California courts apply issue preclusion only if several
11 threshold requirements are met, and then only if application of
12 preclusion furthers the public policies underlying the doctrine.
13 Lucido v. Super. Ct.,
51 Cal. 3d 335, 342 (1990). The five
14 threshold requirements mandated by the California courts include:
15 (1) whether the issue sought to be precluded from relitigation is
16 identical to that decided in a former proceeding; (2) whether the
17 issue was actually litigated in the former proceeding;
18 (3) whether the issue was necessarily decided in the former
19 proceeding; (4) whether the decision in the former proceeding is
20 final and on the merits; and, finally, (5) whether the party
21 against whom preclusion is sought was the same as, or in privity
22 with, the party to the former proceeding.
Id. Even if all these
23 requirements are met, to apply issue preclusion, a California
24 court must consider whether any overriding concerns about the
25 fairness of the former proceeding are present, and whether
26 application of the doctrine is consistent with sound public
27 policy. Khaligh v. Hadaegh (In re Khaligh),
338 B.R. 817, 824-25
28 (9th Cir. BAP 2006).
-13-
1 California courts may apply issue preclusion to findings
2 made in an arbitration proceeding provided the arbitration
3 proceeding was conducted in an adjudicatory manner. Kelly v.
4 Vons Cos., 67 Cal. App. 4th 1329, 1335 (1998) (considering
5 application of fraud and misrepresentation found in arbitration
6 proceedings on later litigation among the participants). The BAP
7 has given issue preclusive effect to California arbitral awards
8 where the proceedings were adjudicatory in nature, and where the
9 arbitration award has been confirmed by California courts.
10 In re
Khaligh, 338 B.R. at 382.
11 II. The bankruptcy court erred in determining that issue
preclusion was available, and granting summary judgment
12 to BCS pursuant to § 523(a)(2)(A).
13 A. Fraudulent Concealment of Financial Information.
14 In the First SJ Order, as to BCS’s claim for a
15 § 523(a)(2)(A) “actual fraud” exception to discharge, the
16 bankruptcy court determined, as a matter of law, that the Award
17 satisfied elements (2), (4) and (5) for application of issue
18 preclusion, but that there remained factual disputes as to
19 elements (1) identity of issues and (3) necessarily litigated.
20 In the Second SJ Order, the bankruptcy court determined that
21 all of the elements for issue preclusion had been satisfied based
22 on Urban’s intentional misrepresentations. The court reached
23 this conclusion by finding that the arbitrator had distinguished
24 Urban’s actions during two distinct time periods: between March
25 2005 and September 2006, when Urban had intentionally
26 misrepresented BCS’s overall financial health by concealing
27 information from BCS and its members, and thereafter, where the
28 arbitrator determined that Urban was grossly negligent in his
-14-
1 management of the BCS business. Because the arbitrator allocated
2 the damages caused by Urban during the earlier period of time,
3 the bankruptcy court decided that the Award preclusively
4 established the elements necessary for a § 523(a)(2)(A) discharge
5 exception as to those damages.
6 We disagree with the bankruptcy court’s conclusion. In our
7 view, Urban’s concealment of information from BCS, even if
8 undertaken with the requisite fraudulent intent, does not qualify
9 for an exception to discharge under § 523(a)(2)(A), because the
10 information he allegedly concealed concerned the financial
11 condition of an insider.
12 Section 523(a)(2)(A) provides:
13 (a) A discharge under section 727 . . . does not
discharge an individual debtor from any debt– . . .
14
(2) for money, property, services, or an extension,
15 renewal, or refinancing of credit, to the extent obtained,
by– (A) false pretenses, a false representation, or actual
16 fraud, other than a statement respecting the debtor's or an
insider's financial condition[.]
17
18 To establish a claim for an exception to discharge under
19 this provision requires a creditor to demonstrate five elements
20 by a preponderance of the evidence: (1) the debtor made
21 representations; (2) that at the time he knew they were false;
22 (3) that he made them with the intention and purpose of deceiving
23 the creditor; (4) that the creditor justifiably relied on such
24 representations; and (5) that the creditor sustained the alleged
25 loss and damage as the proximate result of the misrepresentations
26 having been made. Ghomesh v. Sabban (In re Sabban), 600 F.3d
27 1219, 1221 (9th Cir. 2010); Siriani v. Nw. Nat’l Ins. Co. Of
28 Milwaukee, WI (In re Siriani),
967 F.2d 302, 304 (9th Cir. 1992).
-15-
1 However, even assuming these elements are satisfied, a creditor
2 will not be entitled to an exception under § 523(a)(2)(A) if the
3 debtor’s fraudulent representations consist of “statement[s]
4 respecting the debtor’s or an insider’s financial condition
5 . . . .” Heritage Pac. Fin., LLC v. Edgar (In re Montano),
6 501 B.R. 96, 102 (9th Cir. BAP 2013).
7 By its terms, a debt is not excepted from discharge for
8 fraud based on non-written representations about the financial
9 condition of the debtor or an insider of the debtor. The BAP
10 recently examined the meaning of the term “financial condition”
11 as it is used in § 523(a)(2)(A). Barnes v. Belice
12 (In re Belice),
461 B.R. 564 (9th Cir. BAP 2011). In Belice, the
13 Panel, after reviewing the case law and legislative history,
14 interpreted the term narrowly:
15 Statements that present a picture of a debtor's overall
financial health include those analogous to balance
16 sheets, income statements, statements of changes in
overall financial position, or income and debt
17 statements that present the debtor or insider's net
worth, overall financial health, or equation of assets
18 and liabilities. . . . What is important is not the
formality of the statement, but the information
19 contained within it — information as to the debtor's or
insider's overall net worth or overall income flow.
20
21 In re Belice, 461 B.R. at 578.
22 Here, the bankruptcy court granted summary judgment to BCS
23 under § 523(a)(2)(A) because the arbitrator found, as recited in
24 the Award, that “Urban breached the fiduciary duty he owed to BCS
25 by failing to provide it (through Stirsman and Britton) with
26 accurate financial information relative to the overall health of
27 the business, and in particular to the SOT position with Key
28 Bank. . . . Under the same facts, the arbitrator holds that BCS
-16-
1 has established its claim on . . . intentional
2 misrepresentation.” Award at 5 (emphasis added). In other
3 words, giving a fair reading to the Award, the arbitrator found
4 that Urban engaged in fraud by concealing information from BCS
5 and its members regarding the “overall health” of BCS, an insider
6 of Urban. See § 101(31)(A)(iv) (defining “insider” to include a
7 corporation in which the debtor is a “director, officer, or
8 person in control.”) Clearly, had Urban not concealed
9 information from his colleagues, but had instead lied to them
10 about the “overall health of the [BCS] business,” applying
11 Belice, such would not be the kind of representations that would
12 support an exception from discharge under § 523(a)(2)(A). We do
13 not believe that, simply because Urban concealed the same sort of
14 information from the members, that a different result should
15 obtain.
16 Undoubtedly, a debtor’s concealment of important facts and
17 information from a creditor can qualify as a “false
18 representation” for purposes of § 523(a)(2)(A). Citibank (S.D.)
19 N.A. v. Eashai (In re Eashai), 87 F.3d 1082, 1089 (9th Cir.
20 1996). At the hearing on November 29, 2012, the bankruptcy court
21 challenged Urban to supply case law in support of his argument
22 that debts arising from concealment of financial condition cannot
23 be excepted from discharge under § 523(a)(2)(A). Urban’s counsel
24 was unable to provide any. At the time, the court responded that
25 it also could locate no authority for that proposition.
Id. at
26 24:14-15.
27 However, in his reconsideration motion filed before the
28 bankruptcy court entered its order, Urban referred the court to a
-17-
1 discussion in the Ninth Circuit’s decision in a different context
2 in Anastas v. Am. Savings Bank (In re Anastas), 94 F.3d 1280 (9th
3 Cir. 1996), to support his position:
4 We emphasize that the representation made by [a] card
holder in a credit card transaction is not that he has
5 an ability to repay the debt; it is that he has an
intention to repay. Indeed, section 523(a)(2)
6 expressly prohibits using a non-written representation
of a debtor’s financial condition as a basis for fraud.
7
8 Id. at 1286 (emphasis added in Urban’s Op. Br. at 16). Urban
9 also cited three bankruptcy cases in support of his argument,
10 including one that was affirmed at the circuit level.
11 In Desert Palace, Inc. v. Baumblit, (In re Baumblit),
12
229 B.R. 50, 60-61 (Bankr. E.D.N.Y. 1999) aff’d in relevant part,
13
251 B.R. 442 (E.D.N.Y. 2000), aff’d 15 Fed. Appx. 30 (2d Cir.
14 2001), Baumblit was a gambler who executed a credit application
15 and numerous markers with Caesar’s casinos. The application and
16 markers did not contain adequate information about his true
17 financial condition. After he defaulted, Caesar’s brought an
18 exception to discharge claim in Baumblit’s bankruptcy case under
19 § 523(a)(2)(A). The bankruptcy court determined that the
20 application and markers were not written statements of financial
21 condition.
22 Sections 523(a)(2)(A) and 523(a)(2)(B) clearly preclude
reliance on unwritten representations respecting a
23 debtor's financial condition as a basis for
nondischargeability under section 523(a)(2)(A). A
24 nondischargeability cause of action based on
representations regarding the defendant's financial
25 condition . . . must be brought under section
523(a)(2)(B), which provides for such a cause of action
26 based on material written misrepresentations only.
Caesars has not interposed a cause of action under
27 section 523(a)(2)(B) and neither the Credit Application
nor the Markers included a written statement of
28 Baumblit's financial condition.
-18-
1 In re Baumblit, 229 B.R. at 60.
2 In Baker v. Sharpe (In re Sharpe),
351 B.R. 409, 425-26
3 (Bankr. N.D. Tex. 2006), Sharpe received several large loans from
4 Baker. Sharpe represented to Baker that he had funds sufficient
5 to payoff the loans, but that he was hiding those funds from his
6 wife pending a divorce. When Sharpe failed to pay the loans and
7 filed a bankruptcy petition, Baker sought an exception to
8 discharge under § 523(a)(2)(A). The bankruptcy court found that
9 Sharpe had given numerous implicit, nonverbal, assurances of his
10 financial condition to Baker. However, the court dismissed
11 Baker’s § 523(a)(2)(A) claim because “Sharpe's concealment of his
12 financial problems from Ms. Baker [] constitute[s] non-written
13 statements concerning Mr. Sharpe's financial condition, which are
14 [] not actionable under section 523(a)(2)(A).”
Id. at 426.
15 In Gadtke v. Bren (In re Bren),
284 B.R. 681, 695 (Bankr. D.
16 Minn. 2002), Bren was a building contractor who entered into a
17 contract to build a house for Gadtke. During the course of
18 construction, Bren and his company became insolvent, but still
19 received periodic construction payments from Gadtke. In his
20 later bankruptcy case, the bankruptcy court found that “Bren's
21 failure to disclose his precarious financial situation [to Gadke]
22 is at best an implied statement of his financial condition and
23 excluded from the purview of § 523(a)(2)(A).”
Id. at 695.
24 In the Second SJ Order, the bankruptcy court dismissed
25 Anastas as dicta, something BCS now urges that this Panel also
26 should do. BCS Op. Brief at 28 (arguing that Anastas is dicta in
27 which “a debtor allegedly incurred debt without the intent to
28 repay, and not, as in this case, where a partner with a fiduciary
-19-
1 duty fraudulently concealed information from his other partners
2 and thus damaged the business.”). We agree with the bankruptcy
3 court and BCS that the statement cited by Urban in Anastas is
4 dicta. However, we do not think the court’s comments should be
5 ignored. A bankruptcy court should not dismiss Ninth Circuit
6 dicta without giving it respectful consideration as persuasive
7 authority. Nw. Airlines, Inc. v. Camacho, 296 F.3d 787, 790 (9th
8 Cir. 2002) (holding that, even though statements in a decision
9 may be dicta, "we deem them persuasive when there is no directly
10 controlling authority"). The court has also cautioned that it
11 does not “lightly reconsider dicta, even if they do not bind us.”
12 Konop v. Haw. Airlines, Inc.,
236 F.3d 1035, 1044 (9th Cir.
13 2001).
14 Rather than Anastas, the bankruptcy court opined that there
15 was “more pertinent authority for the facts of this case that
16 directly involve concealment of a financial condition,” and cited
17 to Haddad v. Haddad (In re Haddad),
21 B.R. 421 (9th Cir. BAP
18 1982), aff’d
703 F.2d 575 (9th Cir. 1983). Second SJ Order at 6.
19 In that case, a surviving partner’s concealment of the existence
20 of partnership funds owed to his deceased partner’s widow was
21 held to be excepted from discharge under § 523(a)(2)(A). But
22 under the definition of “financial condition” established later
23 in In re Belice, we question whether In re Haddad is “more
24 pertinent” to the issue in this case. In re Haddad concerned the
25 concealment of a single fact about the partnership, the existence
26 of the funds it owed to the ex-partner’s wife. In that respect,
27 we doubt the case concerned information about the “overall
28 health” of the partnership’s business and, thus, under
-20-
1 In re Belice, we question whether the concealment in Haddad
2 involved a representation about the financial condition of the
3 debtor, or its insider as is the case here. In re Belice,
4 461 B.R. at 571.
5 In summary, the arbitrator found in the Award that Urban
6 committed an intentional misrepresentation when he concealed
7 information about BCS’s overall financial health from BCS and its
8 members. In our view, even assuming this concealment constituted
9 a “representation” for purposes of § 523(a)(2)(A), it was a
10 non-written representation about BCS’s financial condition and,
11 therefore, would not support an exception to discharge under
12 § 523(a)(2)(A). The bankruptcy court therefore erred when it
13 relied upon this finding in the Award to determine BCS was
14 entitled to a summary judgment.
15 B. Intent to Deceive.
16 We have other concerns with the bankruptcy court’s decision
17 to grant BCS a summary judgment under § 523(a)(2)(A).
18 In its First SJ Order, the bankruptcy court determined that
19 it was unclear whether the arbitrator found in the Award that
20 Urban’s actions were grossly negligent, or the product of an
21 intent to deceive. We agree with that conclusion. However, the
22 bankruptcy court reversed its position concerning Urban’s intent
23 in the Second SJ Order. It did so based on the “additional
24 evidence” BCS provided, concluding that “there was ample evidence
25 of the intent to deceive based on the testimony of Scott Biehl,
26 David Stirsman and the Debtor himself” offered during the
27 arbitration trial. Second SJ Order at 5. This approach to
28 resolving the BCS summary judgment motion is problematic.
-21-
1 In its Second SJ Motion, BCS provided the bankruptcy court
2 with the complete transcripts of the arbitral hearings, along
3 with the exhibits. In its motion, BCS cited to specific passages
4 in the testimony of BCS witnesses Paul Brien (a Key Bank
5 officer), Scott Biehl (a BCS accountant), Stirsman, and Britton,
6 suggesting that the arbitrator and the bankruptcy court could
7 infer that Urban had acted with the intent to deceive BCS.
8 Additionally, BCS cited to various portions of Urban’s testimony
9 that tended, in BCS’s view, to support that position as well.
10 Urban responded, pointing out aspects of each witness’s
11 testimony that he argued evidenced his lack of fraudulent intent.
12 In short, in the Second SJ Motion and the parties’ debate, the
13 bankruptcy court was presented with a clear factual dispute
14 between the parties regarding intent to deceive.7
15 It appears that the bankruptcy court examined the record and
16 weighed the evidence, apparently crediting the testimony of Biehl
17 and Stirsman, and discrediting that of Urban, in deciding whether
18 Urban acted with an intent to deceive. This is not appropriate
19 at the summary judgment stage. “‘Credibility determinations, the
20 weighing of the evidence, and the drawing of legitimate
21 inferences from the facts’ are inappropriate at the summary
22 judgment stage.” Oswalt v. Resolute Indus., 642 F.3d 856, 861
23 (9th Cir. 2011)(quoting Anderson v. Liberty Lobby, Inc.,
477 U.S.
24
7
25 The parties have not disputed the propriety of the
bankruptcy court’s examination of the witness testimony.
26 Regardless of the appropriateness of consulting that record, it
27 was clearly impermissible to weigh conflicting testimony and
reach credibility determinations in the context of summary
28 judgment. Anderson, 477 U.S. at 255.
-22-
1 242, 255 (1986)); see also McSherry v. Long Beach, 584 F.3d 1129,
2 1133 (9th Cir. 2009) (holding that when reviewing a grant of
3 summary judgment, “all justifiable inferences are to be drawn in
4 [nonmovant’s] favor and his evidence is to be believed.”).
5 Further, after our de novo review, we conclude that the
6 Award is patently ambiguous in two respects regarding Urban’s
7 alleged intent to deceive BCS.
8 The Award states:
9 Based on clear and convincing evidence, the arbitrator
finds that from at least the time Millum separated from
10 BCS (March 4, 2005 until the September 21-23, 2006
members meeting in Oregon), Urban breached the
11 fiduciary duty he owed to BCS by failing to provide it
(through Stirsman and Britton) with accurate financial
12 information relative to the overall health of the
business, and in particular to the SOT position with
13 Key Bank. Further, that Urban breached his fiduciary
duty to use his best efforts to keep a good
14 relationship with Key Bank, and to avoid at all costs
in going SOT. The arbitrator finds this breach of duty
15 was intentional and caused damage to BCS in the sum of
$697,000. . . . Under the same facts, the arbitrator
16 holds that BCS has established its claim on this issue
for causes of action for breach of fiduciary duty,
17 breach of the covenant of good faith and fair dealing,
and intentional misrepresentation.
18
19 Award at 19.
20 The first ambiguity in the Award relates to the two
21 sentences regarding fiduciary breach. Compare:
22 Urban breached the fiduciary duty he owed to BCS by
failing to provide it (through Stirsman and Britton)
23 with accurate financial information relative to the
overall health of the business, and in particular to
24 the SOT position with Key Bank.
25 with
26 Urban breached his fiduciary duty to use his best
efforts to keep a good relationship with Key Bank, and
27 to avoid at all costs in going SOT.
28 Immediately after the second sentence, the Award attributed
-23-
1 damages to:
2 This breach of duty was intentional and caused damage
to BCS in the sum of $697,000.
3
4 The ambiguity arises over the term “this” breach of duty.
5 The Award found a breach of duty in relation to BCS for
6 concealment of financial condition and apparently a different
7 breach of duty relating to his management duties on behalf of BCS
8 to the bank and going SOT. Although the first might be a
9 possible grounds for denial of discharge under § 523(a)(2)(A),
10 the latter is not. Further, the second sentence immediately
11 precedes the sentence referring to “this” duty, so one might
12 infer that the breach of duty that caused the damages was in
13 Urban’s management duties in relations with the bank.
14 We conclude that, on its face the Award is ambiguous whether
15 the damages awarded to BCS in the Award relate to Urban’s breach
16 of fiduciary duty regarding the relationship with Key Bank, or to
17 the earlier (more remote) reference to his breach of fiduciary
18 duty to provide financial information to BCS. Thus, there is a
19 material question arising from this ambiguity whether the breach
20 of duty in the Award attributed damages to concealment or
21 management duties. To the extent that there was any reasonable
22 doubt as to the meaning of “this” breach, in the summary judgment
23 context, that ambiguity should have been resolved in Urban’s
24 favor. Honkanen v. Hopper (In re Honkanen), 446 B.R. 373, 382
25 (9th Cir. BAP 2011) (The movant for summary judgment must
26 "introduce a record sufficient to reveal the controlling facts
27 and pinpoint the exact issues litigated in the prior action. Any
28 reasonable doubt as to what was decided by a prior judgment
-24-
1 should be resolved against allowing the collateral estoppel
2 effect.").
3 Because the bankruptcy court could not appropriately rely
4 upon the conflicting testimony of the arbitration trial
5 witnesses, and because the Award is ambiguous concerning Urban’s
6 alleged fraudulent intent, a disputed question of material fact
7 exists whether BCS is entitled to a § 523(a)(2)(A) exception to
8 discharge for fraud.
9 C. Justifiable Reliance
10 The bankruptcy court did not discuss how the Award
11 established that BCS, through Stirsman and Britton, had
12 justifiably relied to its detriment upon Urban’s alleged fraud.
13 Based upon our review of the record, we conclude there are
14 unanswered questions about whether BCS justifiably relied on
15 Urban’s concealment of its own financial conditions as a basis
16 for a summary judgment.
17 Section 523(a)(2)(A) requires a finding that a creditor
18 justifiably relied on a debtor’s false statements or
19 misrepresentations. Field v. Mans, 516 U.S. 59, 74-75 (1995).
20 Justifiable reliance is measured under a subjective standard,
21 which turns on a person’s knowledge under the particular
22 circumstances. In re
Eashai, 87 F.3d at 1090. “Justification is
23 a matter of the qualities and characteristics of the particular
24 plaintiff, and the circumstances of the particular case, rather
25 than of the application of a community standard of conduct to all
26 cases.”
Id. (quoting Field, 516 U.S. at 70). Therefore, the
27 inquiry regarding the justifiable standard focuses on “whether
28 the falsity of the representation was or should have been readily
-25-
1 apparent to the individual to whom it was made.” Beneficial
2 Cal., Inc. v. Brown (In re Brown), 217 B.R. 857, 863 (Bankr. S.D.
3 Cal. 1998) (citations omitted).
4 The justifiable reliance standard generally does not entail
5 a duty to investigate; a person may be justified in relying on a
6 representation even if he might have ascertained the falsity of
7 the representation had he made an investigation. See Field,
8 516 U.S. at 70. However, a duty to investigate is imposed on a
9 creditor by virtue of suspicious circumstances.
Id. at 71.
10 Thus, “justifiable reliance does not exist where a creditor
11 ignores red flags.” In re
Anastas, 94 F.3d at 1286. “[A] person
12 cannot purport to rely on preposterous representations or close
13 his eyes to avoid discovery of the truth.” In re Eashai,
87 F.3d
14 at 1090-91.
15 Notably, the Award concludes that Stirsman and Britton could
16 not “reasonably rely” on Urban’s representations after September
17 2006. But the Award is silent on how two, in the Award’s words,
18 ”experienced executives in the auto industry” could justifiably
19 rely on Urban’s concealment of information about BCS’s financial
20 condition before September 2006. Absent a finding that they did,
21 the Award was not adequate to establish justifiable reliance. We
22 therefore conclude that the bankruptcy court erred when it
23 decided that the Award preclusively established that BCS
24 justifiably relied on Urban’s alleged fraudulent concealment of
25 financial information for purposes of § 523(a)(2)(A).
26 D. Proximate Cause and Damages
27 The fifth element for exception to discharge under
28 § 523(a)(2)(A) is that BCS must have sustained the alleged loss
-26-
1 and damage as the proximate result of the misrepresentations
2 having been made. In re Sabban, 600 F.3d at 1221. Proximate
3 cause under § 523(a)(2)(A) requires a finding by the court that
4 there was (1) causation in fact, which requires a defendant's
5 misrepresentations to be a substantial factor in determining the
6 course of conduct that results in loss and (2) legal causation,
7 which requires a creditor's loss to "reasonably be expected to
8 result from the reliance." Burks v. Bailey (In re Bailey),
9
499 B.R. 873, 891 (Bankr. D. Idaho 2013); Beneficial Cal., Inc.
10 v. Brown (In re Brown),
217 B.R. 857, 862 (Bankr. S.D. Cal.
11 1998); Restatement (Second) of Torts, §§ 546, 548A) ("A
12 fraudulent misrepresentation is a legal cause of a pecuniary loss
13 resulting from action or inaction in reliance upon it if, but
14 only if, the loss might reasonably be expected to result from the
15 reliance.").
16 We find nothing in this record to show that Urban’s
17 concealment of financial information resulted in any particular
18 damages to BCS. Indeed, there is no reference in, nor inference
19 to be drawn from, the Award regarding this question. The absence
20 of findings concerning the proximate cause and damages question
21 is puzzling in light of the plausible argument made by Urban to
22 the bankruptcy court that there was, actually, no harm or loss
23 suffered by BCS caused by his conduct.
24 Recall, the arbitrator’s damage award to BCS was based on
25 the amount needed to satisfy BCS’s SOT condition in 2006.
26 However, it appears undisputed that BCS experienced this
27 condition when Urban, faced with a shortage of revenues, used
28 BCS’s limited funds that could have been paid to Key Bank to pay
-27-
1 the claims of vendors and other creditors to keep BCS in
2 business. In other words, that BCS was SOT did not result
3 because funds were available to pay the bank that Urban diverted
4 to other, inappropriate uses. The SOT condition apparently
5 resulted from BCS’s lack of revenues to pay both its operating
6 expenses and the Key Bank loan.
7 In summary, the Award did not preclusively establish that
8 Urban’s alleged fraud proximately caused damages to BCS. It was
9 therefore error for the bankruptcy court to grant summary
10 judgment on this point.
11 III. The bankruptcy court erred in granting summary judgment
to BCS pursuant to § 523(a)(4).
12
13 Section 523(a)(4) excepts from discharge debts “for fraud or
14 defalcation while acting in a fiduciary capacity, embezzlement,
15 or larceny[.]” For several reasons, we disagree with the
16 bankruptcy court’s decision that the Award preclusively
17 established the elements for such an exception to discharge.
18 First, in its Second SJ Order, the bankruptcy court, quoting
19 Bugna, listed the elements of a claim under § 523(a)(4): “There
20 are two issues under section 523(a)(4): whether the debtor
21 incurred the debt by committing fraud or defalcation, and whether
22 the fraud was in relation to the debtor’s fiduciary
23 responsibilities.” Bugna, 33 F.3d at 1057. However, the most
24 recent statement on these elements was in Mele v. Mele
25 (In re Mele),
501 B.R. 357 (9th Cir. BAP 2013), where the Panel
26 instructed that:
27 A debt is excepted from discharge under § 523(a)(4)
where "1) an express trust existed, 2) the debt was
28 caused by fraud or defalcation, and 3) the debtor acted
-28-
1 as a fiduciary to the creditor at the time the debt was
created." Otto v. Niles (In re Niles), 106 F.3d 1456,
2 1459 (9th Cir. 1997).
3
Id. at 363.
4 Urban argues that the bankruptcy court failed to make any
5 determination that the necessary trust elements of § 523(a)(4)
6 were established in the Award. BCS counters that this is a new
7 issue on appeal and the Panel should not consider it. But since
8 the trust relationship is a required element for an exception to
9 discharge, we can appropriately review the bankruptcy court’s
10 ruling on this point. Doing so, we conclude that the bankruptcy
11 court properly found that the requisite trust did exist between
12 Urban and BCS.
13 State law defines the trust relationships. Blyler v.
14 Hemmeter (In re Hemmeter),
242 F.3d 1186 (9th Cir. 2001). “Under
15 California law, the fiduciary duties a manager owes to the
16 limited liability company and its members are the same as those
17 of a partner to a partnership and to the partners of the
18 partnership.” Cal. Corp. Code § 17153. Cal. Corp. Code § 16404
19 makes all partners trustees over the partnership assets;
20
Ragsdale, 780 F.2d at 796. Under the Operating Agreement, as
21 amended, Urban was a member-manager of BCS. We therefore
22 conclude that the bankruptcy court had a sufficient basis to
23 conclude that a statutory trust existed between Urban, BCS,
24 Stirsman and Britton, and consequently that Urban owed a
25 fiduciary duty to them in the management of the BCS business.
26 We next review whether the record established that Urban
27 engaged in fraud or defalcation while acting in his fiduciary
28 capacity.
-29-
1 The bankruptcy court in the First SJ Order reasoned that the
2 Award was unclear, and therefore not preclusive, as to BCS’s
3 § 523(a)(4) claim. Then, at the hearing on July 29, 2012, on the
4 Second SJM, and before entering its Second SJ Order, the
5 bankruptcy court announced that it would deny summary judgment on
6 the § 523(a)(4) claim for defalcation. Before the court could
7 enter an order on the Second SJM, Urban filed a motion for
8 reconsideration. The bankruptcy court then granted BCS summary
9 judgment on its § 523(a)(4) claim for fraud by a fiduciary in the
10 Second SJ Order. We think this was error.
11 During the pendency of this appeal, on May 13, 2013, the
12 U.S. Supreme Court decided Bullock v. BankChampaign, N.A.,
13 133 S. Ct. 1754 (2013). The Bullock decision abrogated the Ninth
14 Circuit's previous intent standard and instructed that the
15 necessary state of mind for a § 532(a)(4) defalcation is "one
16 involving knowledge of, or gross recklessness in respect to, the
17 improper nature of the relevant fiduciary behavior." Pemstein v.
18 Pemstein (In re Pemstein),
492 B.R. 274, 278 (9th Cir. BAP 2013)
19 (quoting Bullock,
133 S. Ct. 1754, 1758 (2013)). At oral
20 argument before the Panel, BCS’s counsel was asked if a Bullock-
21 like “culpable state of mind” required to show a defalcation by a
22 fiduciary also applied to fraud by a fiduciary under § 523(a)(4).
23 Counsel conceded that it did, and we agree with this conclusion.
24 Although Bullock analyzed only defalcation by a fiduciary
25 under § 523(a)(4), it did not distinguish between fraud and
26 defalcation by a fiduciary. However, the decision discussed the
27 history of the exception to discharge now codified in § 523(a)(4)
28 and observed that the “linquistic neighbors” of defalcation —
-30-
1 larceny and embezzlement — have always required felonious intent.
2 The Court also noted that “‘Fraud’ must require an equivalent
3 showing.” Bullock, 133 S. Ct. at 1761 (citing to Neal v. Clark,
4
95 U.S. 704, 709 (1878)). Therefore, under the noscitur a sociis
5 rule, the Supreme Court decided that, for an exception to
6 discharge, a defalcation, like fiduciary fraud, larceny and
7 embezzlement, required a culpable state of mind. We therefore
8 confidently conclude that a culpable state of mind is also
9 required to establish fraud by a fiduciary under § 523(a)(4).
10 Of course, there is nothing in the Award to show that Urban
11 had the requisite mental state to satisfy the heightened
12 requirements in Bullock. Indeed, the Award noted that, “It is
13 apparent — and the evidence here is overwhelming — that Urban was
14 in over his head . . .” and that “Urban was overworked in trying
15 to be the head of operations and finance. This is not to excuse
16 his performance, because the arbitrator is convinced that many of
17 his actions constituted at least gross negligence.” Award at 21.
18 The arbitrator also explicitly denied BCS’s demand for punitive
19 damages and found that Urban had not engaged in embezzlement.
20 Award at 20. At the very least, these comments in the Award
21 raise a question of fact if Urban had the culpable state of mind
22 required by the Supreme Court for exception to discharge under
23 § 523(a)(4)
24 In the Second SJ Order, the bankruptcy court found that the
25 Award established that Urban engaged in actual fraud and a breach
26 of fiduciary duty for purposes of § 523(a)(2)(A), and that the
27 fraud in § 523(a)(4) is the same as actual fraud in
28 § 523(a)(2)(A). Therefore, the court concluded, the Award
-31-
1 adequately established an exception to discharge under
2 § 523(a)(4).
3 Of course, even if “actual fraud” under (a)(2)(A), and fraud
4 by a fiduciary under (a)(4) are the “same,” as the Panel has
5 held, intent to deceive and justifiable reliance are also
6 elements of proof of fraud in § 523(a)(4):
7 “Fraud" under § 523(a)(4) means actual fraud. Roussos
v. Michaelides (In re Roussos), 251 B.R. 86, 91 (9th
8 Cir. BAP 2000) (citing
Bugna, 33 F.3d at 1057). Actual
fraud involves conscious misrepresentation, or
9 concealment, or non-disclosure of a material fact
. . . . To prove actual fraud the plaintiff must
10 prove: 1) defendant made a misrepresentation,
concealment, or non-disclosure of a material fact;
11 2) defendant had knowledge that what he was saying was
false; 3) defendant intended to induce plaintiff's
12 reliance; 4) plaintiff justifiably relied; and
5) plaintiff suffered damage as a result.
13
14 In re Honkanen, 446 B.R. at 382-83.
15 Because, as discussed above, there are remaining fact
16 questions regarding Urban’s intent to deceive BCS, and BCS’s
17 justifiable reliance on Urban’s action, there remain questions of
18 material fact that prevent summary judgment as to § 523(a)(4).
19 IV. The bankruptcy court did not abuse its discretion in
applying issue preclusion to the allocation of offsets.
20
21 Urban argues in this appeal that whether his claim ought to
22 be offset against any alleged nondischargeable claim BCS holds
23 against him was never actually litigated. The State Court
24 Judgment offset the amount of Urban’s award from his cross-claims
25 of $160,140.69, against the total judgment awarded to BCS,
26 resulting in a total BCS award of $979,705.78. However, the
27 State Court Judgment did not offset his cross-claim award against
28 the $663,686. Urban argues that, because of this, the bankruptcy
-32-
1 court should have independently reviewed his offset rights.
2 For issue preclusion to apply, an issue must be fully
3 litigated in another tribunal. However, as the bankruptcy court
4 correctly pointed out, the Ninth Circuit, for policy reasons, has
5 determined that the source tribunal’s allocation of the amount of
6 debt is final, and another court, in applying issue preclusion,
7 should decline to allow allocation issues to be relitigated.
8 Sasson v. Sokoloff (In re Sasson), 424 F.3d 864, 872 (9th Cir.
9 2005) (“The classic example of the proper use of issue preclusion
10 in discharge proceeding is when the amount of the debt has been
11 determined by the state court and reduced to judgment. In that
12 event, if there are no new issues, the bankruptcy court should
13 ordinarily decline to allow the parties to relitigate the debt
14 amount and should give the state court judgment as to the amount
15 of preclusive effect.”).
16 We conclude that the bankruptcy court correctly decided to
17 give preclusive effect to the amounts of debt owed by Urban to
18 BCS, and to the allocation of the damages awarded in the State
19 Court Judgment. Urban did not appeal the State Court Judgment,
20 and should not be heard now to object to the offsets.8
21
22
23
8
The award made to Urban was predominantly for his
24
contract cross-claims (salary and vacation pay, reimbursement of
25 loans) against BCS, and it was applied in the State Court
Judgment to what was mostly the contract-based portion of the BCS
26 award (the capital call award, prevailing party attorney fees).
27 In other words, the State Court Judgment offset similar contract
claims, and left the tort award of $663,686.58 intact. We
28 discern no bankruptcy implications from this approach.
-33-
1 V. The bankruptcy court did not err in concluding that the
Award was sufficiently adjudicatory to apply issue
2 preclusion.
3 Under California’s law of preclusion, if a court determines
4 that issue preclusion is available, the court must still make a
5 determination that application of the doctrine is in the public
6 interest. A critical, indeed mandatory, component of that
7 determination in this context is whether the subject arbitral
8 proceeding was adjudicatory. Kelly v. Vons Cos., 67 Cal. App.
9 4th 1329, 1335 (1998). To aide in this review, the Panel has
10 summarized the essential elements of “adjudication” in California
11 tribunals:
12 (a) Adequate notice to persons who are bound by the
adjudication;
13
(b) The right on behalf of a party to present evidence
14 and legal argument in support of the party’s
contentions and fair opportunity to rebut evidence
15 and argument by opposing parties;
16 (c) A formulation of issues of law and fact in terms
of the application of rules with respect to
17 specific parties concerning a specific
transaction, situation, or status, or a specific
18 series thereof;
19 (d) A rule of finality, specifying a point in the
proceeding when presentations are terminated and a
20 final decision is rendered; and
21 (e) Such other procedural elements as may be necessary
to constitute the proceeding a sufficient means of
22 conclusively determining the matter in question,
having regard for the magnitude and complexity of
23 the matter in question, the urgency with which the
matter must be resolved, and the opportunity of
24 the parties to obtain evidence and formulate legal
contentions.
25
26 In re Khaligh, 338 B.R. at 830.
27 In this case, the bankruptcy court noted that it had
28 reviewed the complete transcripts and exhibits of the Award
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1 proceeding. The arbitration record disclosed that both parties
2 engaged in extensive discovery, including the deposition of
3 witnesses. The parties each had the power to subpoena witnesses.
4 And after the Award was final, Urban did have an opportunity to
5 oppose entry of the State Court Judgment, and he did. He
6 declined, however, to appeal the State Court Judgment when his
7 arguments about alleged procedural errors in the arbitration were
8 rejected by the state court.
9 Urban has never complained that he had inadequate notice of
10 the proceedings. The bankruptcy court was also aware that the
11 arbitral proceedings were conducted by a retired Justice of the
12 California Court of Appeals, who is presumably conversant with
13 California state procedural rules. The bankruptcy court found
14 that, based on its review of the transcript record, Urban’s
15 procedural objections were not supported. Although Urban
16 complained that he did not have enough time to present his
17 witnesses, his counsel asked for and received additional time
18 during the proceedings. And although Urban complains in this
19 appeal that he did not have the opportunity to cross-examine two
20 witness who submitted depositions, Urban has not clearly
21 articulated what he expected to elicit from those cross-
22 examinations.
23 Under these circumstances, the bankruptcy court did not
24 abuse its discretion in concluding that the arbitration
25 proceedings were sufficiently adjudicatory, and that public
26 policy was not offended by application of issue preclusion to the
27 Award and State Court Judgment.
28
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1 VI. Urban’s reconsideration motion was not argued on
appeal.
2
3 Although Urban listed the bankruptcy court’s order denying
4 his reconsideration motion on his notice of appeal, neither party
5 has raised any arguments concerning that order in this appeal,
6 and any challenges Urban may have to the order are waived.
7 Dilley v. Gunn, 64 F.3d 1365, 1367 (9th Cir. 1995).
8 However, to the extent that Urban suggests that the
9 bankruptcy court erred when it changed its oral ruling before
10 entry of its final order, we conclude that the bankruptcy court
11 did not abuse its discretion. Neither party has relied upon the
12 bankruptcy court’s oral rulings, as opposed to its final order.
13 A bankruptcy court, as a court of equity, has the inherent power
14 under § 105(a) to change an oral ruling in the final order,
15 provided there was no reliance by the parties. Meyer v. Lenox
16 (In re Lenox),
902 F.2d 737, 739 (9th Cir. 1990). The equitable
17 power to change its ruling arises under § 105(a). Zurich Am.
18 Ins. Co. v. Int'l Fibercom, Inc. (In re Int'l Fibercom, Inc.),
19
503 F.3d 933, 940 (9th Cir. 2007).9
20 CONCLUSION
21 The bankruptcy court erred in deciding that the Award should
22 be given preclusive effect in granting a summary judgment in
23 favor of BCS against Urban under §§ 523(a)(2)(A) and (4). We
24
9
25 Of course, the gravamen of Urban’s position in the
reconsideration motion was that the bankruptcy court erred in
26 granting summary judgment to BCS on its § 523(a)(2)(A) claim.
27 Because, on the merits, we have decided to vacate that order, our
refusal to address the order denying the reconsideration motion
28 is of no consequence to Urban.
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1 therefore VACATE the bankruptcy court’s order granting summary
2 judgment and REMAND this matter to the bankruptcy court for
3 further proceedings consistent with this Memorandum.
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