ROGER T. BENITEZ, District Judge.
Appellants Janet and Paul Vohariwatt appeal the Bankruptcy Court's September 4, 2018 Judgment on Remand. The Judgment is
In 2006, Appellants Janet and Paul Vohariwatt purchased real estate located at 31 Sandpiper Strand. In December 2008, the Vohariwatts contracted to rent the property to tenants. The tenants paid $60,000 to rent the property for one year, as well as a $10,000 "pet deposit" and a $5,000 security deposit. The tenants began living at the property in May 2009. In January 2010, the Vohariwatts and the tenants agreed to extend the lease until June 20, 2011 for another $60,000. The tenants made a $50,000 rent payment in May 2010, and the parties agreed that the pet deposit would be used to cover the remaining $10,000 of rent owed.
Notices of Default for the Property were recorded in August 2009 and July 2010, and Notices of Trustee's Sale for the Property were recorded in November 2009 and October 2010. On February 3, 2011, Keith and Joanne Matson purchased the 31 Sandpiper Strand property at a foreclosure auction. The Vohariwatts did not learn of the foreclosure auction until February 4, 2011. Between February 4, 2011 and February 23, 2011, the Matsons requested that the Vohariwatts turn over the rent money prepaid by the tenants for the period of February 3, 2011 (the day the Matsons took ownership of the property) through June 20, 2011 (the end of the rental period). The Vohariwatts refused.
On March 30, 2011, the Vohariwatts brought suit for wrongful foreclosure against the Matsons in the Superior Court, County of San Diego. On October 7, 2011, the Superior Court dismissed the Vohariwatts' wrongful foreclosure suit. On that day, the Matsons again requested that the Vohariwatts turn over the prepaid rent, and the Vohariwatts again refused.
The Matsons then brought suit against the Vohariwatts in the Superior Court, County of San Diego for (1) wrongful institution of civil proceedings for their wrongful foreclosure suit against the Matsons and (2) for conversion of the prepaid rent. After a two-day trial in January 2013, the Superior Court found for the Matsons on both claims, entering judgment against the Vohariwatts for $23,587.55 on the wrongful institution of civil proceedings claim and for $22,520.55 on the conversion claim. In finding for the Matsons on the conversion claim, the Superior Court stated:
Doc. 6-9 at p. 29 (2/5/2013 Superior Court Judgment).
In February 2016, the Vohariwatts filed for Chapter 7 bankruptcy. On April 28, 2016, the Matsons filed a complaint in the Bankruptcy Court seeking a determination that the two debts owed under the Superior Court's judgment against the Vohariwatts were nondischargeable under 11 U.S.C. § 523(a)(6). On January 24, 2017, the Matsons moved for a summary judgment order declaring that the judgment debts were exempt from the Vohariwatts' discharge. The Bankruptcy Court granted the Matsons' motion as to the debt owed for wrongful institution of civil proceedings. However, the Bankruptcy Court denied the Matsons' motion as to the debt owed for the conversion judgment, finding that particular debt to be dischargeable because it did not satisfy § 523(a)(6). In so holding, the Bankruptcy Court reasoned that the Matsons were collaterally estopped from arguing § 523(a)(6)'s nondischargeability exception applied because of the Superior Court's judgment that the conversion occurred on February 3, 2011. Specifically, the Bankruptcy Court determined that because the Superior Court found the conversion occurred on February 3, 2011, and the Vohariwatts did not learn about the foreclosure sale until after February 3, 2011, their conversion on February 3, 2011 could not be "willful and malicious," as required by § 523(a)(6)'s nondischargeability exception.
On June 19, 2017, the Matsons appealed to this Court the parts of the Bankruptcy Court's judgment declaring that the judgment debt attributable to conversion was discharged and ordering that the interest would accrue at the federal judgment rate. On appeal, this Court held that "the Bankruptcy Court erred when it applied the doctrine of collateral estoppel to conclude that the Conversion did not include acts that occurred after February 3, 2011" because "[t]he Superior Court had no reason to decide whether or not the Conversion included events that occurred after that date." 12/18/17 Order at p. 6. As relevant to the instant appeal, this Court further held:
12/18/17 Order at p. 7.
On remand, the Bankruptcy Court held a hearing during which it asked, "[W]ith respect to additional hearings to understand whether there's a commission of acts of dominion after February 3, 2011, and if there is a conversion, that conversion was willful and malicious, what are you anticipating you might have to do?" Doc. 149 at p. 4. Both parties stated their wish to brief the issues, and the Court set a briefing schedule. See id. The Court additionally requested a full transcript of the Superior Court trial, which the parties agreed to provide, and noted, "We will determine whether or not, after the conclusion of the briefing — that the Court is satisfied that no further evidence is required." Id. at p. 10.
When the Vohariwatts filed their opposition brief on remand, they attached a declaration with more than 100 pages of new exhibits showing "improvements" they made to the property prior to the February 3, 2011 foreclosure. At the August 23, 2018 hearing on remand, the Bankruptcy Court issued a "tentative ruling ... sustain[ing] the Matsons' evidence objection to strike the Vohariwatts' post-trial evidence as untimely and irrelevant and took under submission to explain in writing the basis for her decision on remand that (1) the Vohariwatts' conversion of the prepaid rent began on February 3, 2011 and has continued until the present; and (2) the resulting conversion debt is for a `willful and malicious injury' that is nondischargeable under 11 U.S.C. § 523(a)(6)." Doc. 9-1 at p. 81; see also Doc. 9-1 at p. 78 ("Tentative Ruling"). The Bankruptcy Court later issued a five-page written order reaffirming its tentative ruling. Doc. 9-1 at p. 81. This appeal followed.
The Vohariwatts raise two issues on appeal. First, they argue that the Bankruptcy Court erred by using the "substantial certainty" standard for "willful injury" adopted by In re Jercich, 238 F.3d 1202 (9th Cir. 2002). Second, they contend that even if the Bankruptcy Court applied the correct standard, it did not apply it correctly, including because it improperly struck the Vohariwatts' pre-foreclosure improvements evidence. For the reasons discussed below, the Court rejects both grounds for appeal and affirms the Bankruptcy Court's judgment.
Section 523(a)(6) prevents the discharge of any debt arising from "willful and malicious injury by the debtor to another entity or to the property of another entity[.]" § 523(a)(6). The Vohariwatts contend that the Bankruptcy Court applied the wrong standard for § 523(a)(6)'s "willful" injury requirement because it relied upon the Ninth Circuit's decision in Jercich.
The Court reviews de novo the Bankruptcy Court's construction of § 523(a)(6). See In re Su, 290 F.3d 1140, 1142 (9th Cir. 2002) (stating that a conclusion of law is reviewed de novo). In its 2018 decision, the Bankruptcy Appellate Panel ("BAP") considered and rejected the same arguments raised by the Vohariwatts. See In re Hamilton, 584 B.R. 310 (9th Cir. BAP 2019), pending appeal, 2019 WL 1259164 (9th Cir. Apr. 19, 2019). As the BAP recently explained, "[Geiger and Jerich] are not at odds" with one another.
Id. at 61 (emphasis in original).
Three years after Geiger, the Ninth Circuit decided Jercich and declined to find that, under Geiger, the willfulness prong necessarily requires a "specific intent" to cause injury. Jercich, 238 F.3d at 1207. In so holding, the Jercich court reasoned that Geiger "clarified that it is insufficient under § 523(a)(6) to show that the debtor
The Vohariwatts' reliance on Hawkins v. Franchise Tax Board of California, 769 F.3d 662 (9th Cir. 2014), to show that willfulness requires "specific intent" fares no better. Hawkins is distinguishable because it concerned only tax debts under § 523(a)(1)(A) within "the bankruptcy tax context," not a conversion judgment within the context of a willful and malicious injury under § 523(a)(6), as is the case here. See also Hamilton, 584 B.R. at 320 (rejecting debtors' reliance upon Hawkins on same grounds). Thus, contrary to the Vohariwatts' argument, Hawkins did not "implicitly overrule Jercich." Id.
Having rejected the Vohariwatts' arguments and construed the test for willfulness under § 523(a)(6), the Court considers next whether the Bankruptcy Court applied the correct standard for willfulness. It did. The Bankruptcy Court properly grounded its construction of the willfulness standard in Geiger, Jercich, and In re Su, 290 F.3d 1140 (9th Cir. 2002), by using the "substantial certainty" standard adopted in Jercich. See Doc. 9-1 at p. 82-83. Accordingly, the Bankruptcy Court did not err in its construction of § 523(a)(6).
Next, the Vohariwatts contend that even if Jercich is good law, the Bankruptcy Court incorrectly applied its "substantial certainty" standard to the facts of this case by finding § 523(a)(6)'s willful injury requirement was satisfied. To make that determination, the Bankruptcy Court necessarily made factual findings about the Vohariwatts' mental state. Thus, the Court reviews those factual findings for clear error. See Hamilton, 584 B.R. at 318 ("The clear error standard applies to the bankruptcy court's factual findings about the Debtors' mental state."). The Bankruptcy Court made the following findings on willfulness:
Doc. 9-1 at p. 83.
As previously discussed, the willful injury requirement is met when the debtor knows that the injury is substantially certain to occur as a result of his conduct. See Jercich, 238 F.3d at 1208. The court may infer intent "from the totality of the circumstances and the conduct of the person accused." In re Ormsby, 591 F.3d 1199, 1206 (9th Cir. 2010). In addition, the "court may consider circumstantial evidence that tends to establish what the debtor must have actually known when taking the injury-producing action." Su, 290 F.3d at 1146, n. 6. "The [d]ebtor is charged with the knowledge of the natural consequences of his actions," Ormsby, 591 F.3d at 1206, and the court is not required to "take the debtor's word for his state of mind," Su, 390 F.3d at 1146, n. 6.
The Vohariwatts argue that the Bankruptcy Court improperly assumed the conversion judgment was nondischargeable without identifying and considering the requisite "nexus" between their conduct and the end result. That argument lacks merit. The Bankruptcy Court did not base its finding of intent merely on the Vohariwatts' retention of the prepaid rent, as the Vohariwatts contend. Rather, the Bankruptcy Court relied upon the Vohariwatts' undisputed acts of interference with the property's tenants. As the Bankruptcy Court found, the post-February 3, 2011 "injury-producing" conduct was the Vohariwatts' "asking the renters to remain in possession without paying any rent to the Matsons, while simultaneously retaining the prepaid rent instead of transferring it to the Matsons." Doc. 9-1 at p. 83. The Bankruptcy Court further found that the Vohariwatts knew their actions would cause substantial injury to the Matsons because "[t]he necessary consequence of this action is that the Matsons could not re-rent the property, or possess the property for themselves, or receive the rental income from the property to pay their mortgage and other debts." Id. Thus, in contrast to the Vohariwatts' characterization, the Bankruptcy Court's decision was not based on the existence of the conversion judgment, alone. Instead, the record reflects that the Bankruptcy Court properly considered the parties' arguments and the evidence offered at trial to come to its conclusions regarding the Vohariwatts' knowledge and intent—conclusions that are logical, plausible, and supported by the record.
Next, the Vohariwatts contend that because they used the prepaid rent funds to pay for "improvements" to the property prior to the foreclosure sale on February 3, 2011, the Matsons "actually had ownership of all the funds received from the prepaid rents" that they were owed pursuant to the Superior Court's conversion judgment. Doc. 8 at p. 22; see also Doc. 9-3 (7/11/2018 Declaration and attached exhibits). Thus, the Vohariwatts theorize, the Bankruptcy Court erred by "conclud[ing] that the Vohariwatts knew the natural consequences of continued retention of prepaid rent [wa]s to deprive the Matsons of their use'" because the Matsons were not, in fact, injured. Doc. 8 at p. 22 (citing Doc. 9-1 at p. 83.). The Vohariwatts are incorrect. The Vohariwatts' late-filed evidence of pre-foreclosure improvements to the property, accompanied by their new theory that the Matsons were somehow reimbursed for the prepaid rent by purchasing the property with the pre-foreclosure improvements, is not only illogical, but it contradicts issues already resolved by the Superior Court, which in turn, the Bankruptcy Court and this Court were required to accept. See 12/17/18 Order ("Under California law, collateral estoppel ... applies to issues that `have been necessarily decided in the former proceeding.'"). In the first appeal, this Court held that collateral estoppel applied to three issues necessarily resolved by the Superior Court: "(1) whether the Matsons had a right to the Prepaid Rent `at the time of the conversion,' (2) whether the Vohariwatts converted the Prepaid Rent `by a wrongful act,' and (3) the amount of damages owed to the Matsons." 12/18/17 Order at p. 6. Accordingly, the Vohariwatts are collaterally estopped from using their late-filed evidence to challenge either the extent of the Matsons' financial damage or whether the Vohariwatts converted the prepaid rent on February 3, 2011.
Nonetheless, the Vohariwatts contend that the Bankruptcy Court erred by striking their pre-foreclosure improvements evidence.
Further, even if the Bankruptcy Court had considered the pre-foreclosure improvements evidence—which it may have
Second, even considering the Vohariwatts' new theory within the "totality of the circumstances," a court is not required to accept it as true, particularly in the face of evidence to the contrary. See, e.g., Ex. 29; App. 133 (2012 email from the Vohariwatts to third party stating, "I do not think they have the right [to the prepaid rent] ... 1. Because we have not dropped the wrongful foreclosure case. 2. These are money we used to pay the mortgage and reinstate the loan."); see also Su, 390 F.3d at 1146, n. 6 (noting that the court is not required to "take the debtor's word for his state of mind."). For example, during direct examination at trial, counsel asked, "What did you do with the rent and the security deposit you received," and the Vohariwatts responded, "We use[d] it to pay mortgage." Tr. P. 89:26-28; App. 460. Thus, even considering the pre-foreclosure improvements evidence, the Bankruptcy Court's finding that the Vohariwatts interfered with the Matsons' rental income, as well as refused to reimburse them, would still be logical, plausible, and supported by the record. See In re Retz, 606 F.3d 1189, 1196 (9th Cir. 2010) ("A court's factual determination is clearly erroneous if it is illogical, implausible, or without support in the record.").
For the previous reasons, the Bankruptcy Court properly construed "willfulness" under § 523(a)(6), properly applied Jercich's substantial certainty standard to the facts, and did not abuse its discretion by striking the pre-foreclosure improvements evidence.
The Bankruptcy Court's Judgment dated September 4, 2018 is
