MARGARET M. MORROW, District Judge.
Appellant Richard Houng ("Houng"), the debtor in a pending Chapter 7 bankruptcy case, appeals from the judgment of the bankruptcy court entered August 1, 2012.
From September 29, 2003 to April 2, 2010, Houng was the Chief Executive Officer ("CEO") of Westinghouse Digital Electronics, LLC ("WDE").
Tatung initiated an arbitration proceeding against WDE pursuant to the PSA on February 13, 2009, asserting various breach of contract claims.
On May 7, 2010, the arbitrator issued a statement of decision on "Phase I" of the arbitration, finding WDE liable to Tatung for $21,962,034.
On December 12, 2012, the Orange County Superior Court confirmed the arbitration award in its entirety,
On June 25, 2010, Houng filed a petition for relief under Chapter 11 of the United States Bankruptcy Code.
Subsequently, Tatung filed first amended complaint, which sought an order that Houng's debt to it was nondischargeable under 11 U.S.C. §§ 523(a)(2)(A), 523(a)(4) and § 523(a)(6).
On August 1, 2012, the bankruptcy court entered its Findings of Fact and Conclusions of Law.
The court found that the arbitrator's findings were issue preclusive,
On January 24, 2013, the court heard argument on this appeal and took the matter under submission.
On January 31, 2013, Tatung filed a request for judicial notice of the Orange County Superior Court's confirmation of the arbitration award.
The district court has jurisdiction to hear appeals from final judgments, orders
The court also reviews de novo "the bankruptcy court's determination that issue preclusion is available; that is, that findings in one proceeding may preclude litigation of the same issues in another." Fiene, 2012 WL 3867337, at *3 (citing Dias v. Elique, 436 F.3d 1125, 1128 (9th Cir. 2006); In re Lopez, 367 B.R. 99, 103 (9th Cir. BAP 2007)). Thus here, the court reviews de novo whether the bankruptcy court properly concluded that the arbitration award had preclusive effect. In re Khaligh, 338 B.R. 817, 823 (9th Cir. BAP 2006). "Once it is determined that issue preclusion is available, however, the bankruptcy court's decision to apply it is discretionary, and will be reversed only if the bankruptcy court somehow abused its discretion." Fiene, 2012 WL 3867337, at *3 (citing Dias, 436 F.3d at 1128 (in turn citing Miller v. Cnty. of Santa Cruz, 39 F.3d 1030, 1032 (9th Cir.1994)); see also George v. City of Morro Bay (In re George), 318 B.R. 729, 733 (9th Cir. BAP2004), aff'd, 144 Fed.Appx. 636 (9th Cir.2005) (Unpub. Disp.), cert. denied, 546 U.S. 1094, 126 S.Ct. 1068, 163 L.Ed.2d 861 (2006)).
The parties appear to agree that the bankruptcy court should have given the arbitrator's award the preclusive effect it would have been accorded by a California state court.
California preclusion law would certainly apply if this were a diversity action, see Jacobs v. CBS Broadcasting, Inc., 291 F.3d 1173, 1177 (9th Cir.2002); Priest v. Am. Smelting & Ref. Co., 409 F.2d 1229, 1231 (9th Cir.1969), or if the arbitrator's award had been confirmed by a California state court, Khaligh, 338 B.R. at 828 n. 2; see also Caldeira v. County of Kauai, 866 F.2d 1175, 1178 (9th Cir.1989).
This is not a diversity action, however. The bankruptcy court had jurisdiction over this action under 28 U.S.C. §§ 1334 and 157(b)(2)(I), not 28 U.S.C. § 1332. Tatung's complaint, moreover, asserted only federal claims under § 523(a). See In re Carlson, 464 Fed.Appx. 845, 849 (11th Cir. 2012) (Unpub. Disp.) ("the district court correctly found that it had federal question jurisdiction over the non-dischargeability claims pursuant to 28 U.S.C. § 1331"); In re Morrison, 555 F.3d 473, 478 (5th Cir. 2009) ("Western Builders' claim for a declaration of nondischargeability is a core proceeding under 28 U.S.C. § 157 and `is, without question, a constitutional and statutory
Title 28 U.S.C. § 1738 provides that "[t]he records and judicial proceedings of any court of any ... state ... shall have the same full faith and credit in every court within the United States ... as they have by law or usage in the courts of such state ... from which they are taken." Under § 1738, an arbitration award confirmed by a California court is entitled to the same "full faith and credit" it would receive under California law. Section 1738 does not require that federal courts give res judicata or collateral estoppel effect to an unconfirmed arbitration award, however, because "[a]rbitration is not a `judicial proceeding.'" McDonald v. City of West Branch, Michigan, 466 U.S. 284, 292, 104 S.Ct. 1799, 80 L.Ed.2d 302 (1984); see also Khaligh, 338 B.R. at 824 n. 2 ("An unconfirmed arbitration award is not subject to the Full Faith and Credit Statute because arbitration is not a `judicial proceeding' within the meaning of that statute"); Lum v. City and County of Honolulu, 728 F.Supp. 1452, 1457 (D.Haw.1989) ("an arbitrator's decision must be subject to some consideration of the merits by a court before it may be given `full faith and credit' under 28 U.S.C. § 1738"); Charles A. Wright et al., FEDERAL PRACTICE & PROCEDURE, Jurisdiction, § 4475.1 n. 6 (2d ed. 2002) ("Arbitral awards, unreviewed by any court, are not such judgments as are entitled to recognition under the full faith and credit statute"). But see In re Rosendahl, 307 B.R. 199, 208 (Bankr.D.Or.2004) (giving an unconfirmed arbitration award the "full faith and credit" it would receive under California law for purposes of issue preclusion); In re Marx, 171 B.R. 218, 221-22 (Bankr.N.D.Tex.1994) (same).
The arbitrator's award had not yet been confirmed by a California court at the time the bankruptcy court issued an order adopting the arbitrator's findings. Because § 1738 did not apply, any rule of preclusion applicable at the time of the bankruptcy court's decision would necessarily have been judicially fashioned. McDonald, 466 U.S. at 288, 104 S.Ct. 1799; see also Khaligh, 338 B.R. at 824 n. 2; Wright et al., FEDERAL PRACTICE & PROCEDURE, Jurisdiction, § 4475.1 n. 6. Stated differently, because § 1738 did not apply, and the case involved claims Tatung asserted under federal bankruptcy law, federal common law determined the preclusive effect of the arbitrator's award. Caldeira, 866 F.2d at 1178 n. 2. "The federal courts have frequently fashioned federal common law rules of preclusion where § 1738 does not apply." Id.; see also Roderick v. Mazzetti & Associates, Inc., No. C 04-2436 MHP, 2005 WL
The Supreme Court and Ninth Circuit have consistently held that, under federal law, an unreviewed arbitration decision does not have preclusive effect in a federal court action. Caldeira, 866 F.2d at 1178 ("[The Supreme Court] has consistently held that an unreviewed arbitration decision does not preclude a federal court action," citing McDonald, 466 U.S. at 288-92, 104 S.Ct. 1799; Barrentine v. Arkansas-Best Freight System, Inc., 450 U.S. 728, 742-45, 101 S.Ct. 1437, 67 L.Ed.2d 641 (1981); Alexander v. Gardner-Denver Co., 415 U.S. 36, 56-60, 94 S.Ct. 1011, 39 L.Ed.2d 147 (1974)); see also id. at 1178 n. 2 ("th[e] common law rule of preclusion, however, has not been extended to arbitration hearings," citing Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 223, 105 S.Ct. 1238, 84 L.Ed.2d 158 (1985)); Employees of Butte, Anaconda & Pacific Ry. Co. v. United States, 938 F.2d 1009, 1015 n. 3 (9th Cir.1991) ("Although appellants argue that issue preclusion applies to unreviewed arbitrations, they do not cite any case in support. We have not located any case which holds that an arbitrator is bound by an earlier arbitration decision that is not approved by a court or an administrative agency"). Cf. McInnes v. State of Cal., 943 F.2d 1088, 1093 (9th Cir.1991) (holding that an unreviewed state administrative proceeding did not have preclusive effect in the Title VII context, even if it would have had issue preclusive effect in state court). These authorities indicate that the bankruptcy court erred in finding that the arbitrator's award had preclusive effect. The court's research has uncovered no binding precedent applying the federal common law of preclusion that would grant preclusive effect to the unreviewed arbitration award in this case, and the bankruptcy court's findings of fact and conclusions of law identify no such authority.
Some courts outside this jurisdiction have held that an unreviewed arbitration award can have preclusive effect in a federal bankruptcy action. See In re Texaco, 218 B.R. 1, 10 (Bankr.S.D.N.Y.1998) ("The doctrine of collateral estoppel applies to arbitration awards ... including final, although unconfirmed arbitration awards"); In re Drexel Burnham, 161 B.R. at 907 ("if the other elements of collateral estoppel are met, the doctrine of collateral estoppel could be applied to the arbitration [a]ward, notwithstanding the fact that it is unconfirmed"); see also In re Beckemeyer, 222 B.R. 318, 321 (Bankr.W.D.Tenn.1998) (following Texaco and Marx after finding no Sixth Circuit guidance on the issue);
These courts, however, did not discuss the Supreme Court or Ninth Circuit decisions cited in this order. Most notably, they do not address McDonald, 466 U.S. 284, 104 S.Ct. 1799, 80 L.Ed.2d 302. The court therefore finds the decisions less persuasive than the decisions of courts that have declined to grant preclusive effect to unconfirmed arbitration awards after considering pertinent Ninth Circuit and Supreme Court authority. See In re Sandwich Islands Distilling Corp., No. 07-0102, 2009 WL 3806680, *4 (Bankr. D.Haw. Nov. 12, 2009) (holding, in a bankruptcy proceeding, that a creditor's claim for monetary damages was not precluded by an arbitrator's decision awarding no damages, "because an unconfirmed arbitration award, such as the arbitrators' orders in this case, has no preclusive effect," citing Caldeira, 866 F.2d at 1178); see also Lum, 728 F.Supp. at 1459 ("The Court's own research did not turn up a single case where preclusive effect was given to a ... arbitration decision without [judicial] review encompassing some appraisal of the merits," discussing McDonald, 466 U.S. 284, 104 S.Ct. 1799, 80 L.Ed.2d 302; Alexander, 415 U.S. at 56-58, 94 S.Ct. 1011; Caldeira, 866 F.2d at 1176); see also Shtab v. Greate Bay Hotel and Casino, Inc., 173 F.Supp.2d 255, 261-62 (D.N.J.2001) (denying preclusive effect to an arbitration decision that was not judicially confirmed, and discussing McDonald, 466 U.S. at 292, 104 S.Ct. 1799; Barrentine, 450 U.S. 728, 101 S.Ct. 1437, 67 L.Ed.2d 641; Alexander, 415 U.S. at 57-58, 94 S.Ct. 1011). As noted, the bankruptcy court granted summary judgment in Tatung's favor on the basis that the arbitrator's findings had issue preclusive effect. Because the arbitration award had not yet been reviewed and confirmed by a court at the bankruptcy court entered its order, its decision was in error.
In its supplemental brief, Tatung contends that the court can take judicial notice of the confirmation order for purposes of this appeal and "dispose [of] as moot the issue ... whether the Bankruptcy Court erred in applying California preclusion law."
Tatung also argues that the bankruptcy court's erroneous reliance on California law in according the arbitrator's findings preclusive effect was "harmless error" because the arbitration award has since been confirmed by the Orange County Superior Court.
The court will not reverse a bankruptcy court's decision on appeal on the basis of an error that does not affect the parties' substantial rights. In re Garvida, 347 B.R. 697, 704 (9th Cir. BAP 2006) (citing 28 U.S.C. § 2111; FED.R.BANKR. PROC. 9005 (incorporating FED.R.CIV.PROC. 61 ("The court at every stage of the proceeding must disregard any error or defect in the proceeding which does not affect the substantial rights of the parties"))). Because the Orange County Superior Court has confirmed the arbitration award, both
Stated differently, the bankruptcy court's premature decision to apply California preclusion law does not affect the substantial rights of the parties, because the degree to which the arbitration award determines those rights is now properly determined under California preclusion principles. Khaligh, 338 B.R. at 828 ("Since the confirmation of a private arbitration award by a state court has the status of a judgment, federal courts must, as a matter of full faith and credit, afford the confirmation the same preclusive consequences as would occur in state court.... [T]he confirmed arbitration award at issue in this appeal requires that, as a matter of full faith and credit, we focus on California preclusion law in the arbitration setting"). Consequently, the bankruptcy court's application of California law to determine the preclusive effect of the arbitration award four months before the Superior Court confirmed the award is therefore harmless. Cf. Coutee v. Barington Capital Group, L.P., 336 F.3d 1128, 1134-35 (9th Cir.2003) (applying harmless error analysis to a choice of law decision).
For both of the reasons stated, the court will not reverse the order of the bankruptcy court on the basis that it applied California law to determine the preclusive effect of the arbitration award.
Under California law, a party must prove the following elements to demonstrate that issue preclusion applies:
In re Cantrell, 329 F.3d 1119, 1123 (9th Cir.2003) (listing the requirements for the application of collateral estoppel under California law).
11 U.S.C. § 523(a)(2)(A) establishes an exception to discharge for any debt for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition. 11 U.S.C. § 523(a)(2)(A). A creditor must prove five elements to prevail on a claim arising under § 523(a)(2)(A): (1) misrepresentation, fraudulent omission or deceptive conduct by the debtor; (2) knowledge of the falsity or deceptiveness of the statement or conduct;
Tatung's first amended complaint alleges that WDE, through Houng, fraudulently induced it to supply goods and services to WDE by misrepresenting WDE's intention to pay for the goods.
Houng argues that the arbitrator's award is without preclusive effect as to Tatung's first cause of action because it does not include any findings related to a debt for money, property, services, or credit. Houng contends there is nothing in the bankruptcy court's findings of fact and conclusions of law that identifies the basis upon which it determined that the arbitrator considered and found the facts alleged in Tatung's § 523(a)(2)(A) claim, because the arbitrator never made such findings. Tatung argues that its only relationship to WDE was as a supplier of goods under the PSA, so any fraud necessarily involved inducing it to supply goods without intending to pay for them. It asserts that its amended arbitration demand ("FAAA") put Houng on notice of the fact that it alleged he had used WDE to obtain products from Tatung through fraud and under false pretenses.
The bankruptcy court's order does not cite a specific finding by the arbitrator that Houng owed Tatung a debt for money, property, service, or an extension, renewal, or refinancing of credit that was obtained by actual fraud.
Tatung argues that the FAAA gave Houng "reasonable notice" that the alleged fraud encompassed the fraudulent use of WDE as a shell company to obtain products from it under false pretenses. The court has reviewed the FAAA, however, and has not found a specific allegation that Houng misrepresented WDE's intention to pay for the goods supplied under the PSA. Collateral estoppel applies only when an "identical" issue is decided in a prior proceeding. Even if the FAAA had put Houng on notice that the arbitrator could find he defrauded Tatung by making misrepresentations
11 U.S.C. § 523(a)(4) creates an exception to discharge for debts "for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny." 11 U.S.C. § 523(a)(4). Whether a debtor acted in a "fiduciary" capacity for purposes of § 523(a)(4) is a question of federal law. Davis v. Aetna Acceptance Co., 293 U.S. 328, 333, 55 S.Ct. 151, 79 L.Ed. 393 (1934); In re Hemmeter, 242 F.3d 1186, 1189 (9th Cir.2001). "The definition of defalcation includes both the misappropriation of trust funds or money held in any fiduciary capacity; and the failure to properly account for such funds." In re Hemmeter, 242 F.3d at 1190-91.
Only relationships arising from express or technical trusts qualify as fiduciary relationships under § 523(a)(4). In re Lewis, 97 F.3d 1182, 1185 (9th Cir.1996). "The broad, general definition of `fiduciary' is inapplicable in the dischargeability context.... Instead, the fiduciary relationship must be one arising from an express or technical trust that was imposed before and without reference to the wrongdoing that caused the debt." Id. Whether a fiduciary is the trustee of an express or technical trust depends on state law. See, e.g., In re Baird, 114 B.R. 198, 202 (9th Cir. BAP 1990). An express trust or technical trust can be imposed by virtue of common law. In re Jacks, 266 B.R. 728, 736 (9th Cir. BAP 2001) (citing Lewis, 97 F.3d at 1185-86)); see also In re Abrams, 229 B.R. 784, 790 n. 6 (9th Cir. BAP 1999) (holding that the "`express or technical trust' required for section 523(a)(4) liability can arise from a state's common law").
Citing Jacks, the bankruptcy court held that WDE's insolvency gave rise to an express trust under California law. Jacks held that the fiduciary relationship between an insolvent corporation's officers and directors and its creditors was a "sufficient trust relationship for the application of § 523(a)(4)," because the insolvency of a corporation creates an express trust under California's "trust fund doctrine." Id. at 736-37 (citing Pepper v. Litton, 308 U.S. 295, 306-07, 60 S.Ct. 238, 84 L.Ed. 281 (1939) (a director of an insolvent corporation is a fiduciary whose obligation "is designed for the protection of the entire community of interests in the corporation — creditors as well as stockholders"); Saracco Tank & Welding Co., Ltd. v. Platz, 65 Cal.App.2d 306, 315, 150 P.2d 918 (1944) ("all of the assets of a corporation, immediately on its becoming insolvent, become a trust fund for the benefit of all of its creditors")).
In Berg, the Court of Appeal held that "under the current state of California law, there is no broad, paramount fiduciary duty of due care or loyalty that directors of an insolvent corporation owe the corporation's creditors solely because of a state of insolvency.... [T]he scope of any extra-contractual duty owed by corporate directors to the insolvent corporation's creditors is limited in California, consistently with the trust-fund doctrine, to the avoidance of actions that divert, dissipate, or unduly risk corporate assets that might otherwise be used to pay creditors claims." Id. at 1041, 100 Cal.Rptr.3d 875. Relying on Berg, the Moeller court held that a trust arising from the insolvency of a corporation under the trust fund doctrine gives rise to "a trust ex maleficio or a resulting trust, not an express or technical trust," as required by § 523(a)(4). 466 B.R. at 534.
The Moeller court reasoned that a trust arising upon corporate insolvency "occurs in the absence of an explicit declaration of trust or an actual conveyance of a trust res," so it is not an express trust. Id. at 535 (citing Bainbridge v. Stoner, 16 Cal.2d 423, 428, 106 P.2d 423 (1940) ("To create an express trust there must be an explicit declaration of trust followed by an actual conveyance or transfer of property to the trustee")). It further concluded that a trust arising upon corporate insolvency is not a technical trust, because "California courts ... expressly hold that a technical trust is not one implied by contract," and "the corporate principal/creditor duty finds its origins in agency principles and initially arises from contract." Id. at 536. The court recognized that other jurisdictions "apply a broader definition of technical trusts and conclude that technical trusts are those created [by] common law or statute." Id. It held, however, that "there is no California statute that creates a fiduciary relationship between a corporate officer or director and its creditors." Id.
Tatung argues, and the bankruptcy court concluded, that Jacks is still good law, notwithstanding Moeller and the cases it cites. The court agrees. Subsequent decisions of the Bankruptcy Appellate Panel ("BAP") have continued to rely on Jacks in holding that, under California law, an express trust arises in favor of creditor's upon the insolvency of a corporation, and that such an express trust is sufficient for purposes of § 523(a)(4). In re Nelson, No. CC-09-1016 PaRMo, 2009 Bankr.LEXIS 4543, *20-22 (9th Cir. BAP Aug. 27, 2009) (Unpub. Disp.); see also In re Weinberg, 410 B.R. 19, 23 (9th Cir. BAP2009).
The reasoning set forth in Moeller does not persuade the court that it should depart from the rule set forth in Jacks and the BAP decisions that have subsequently cited and applied it. As other courts have recognized in the context of applying § 523(a)(4), "the requirement of an `express' or `technical' trust is not absolute or formulaic." ATR-Kim Eng Financial Corp. v. Bonilla, No. C 08-01062 WHA, 2008 WL 4414153, *5 (N.D.Cal. Sept. 25, 2008). "Most courts today ... recognize that the `technical' or `express' trust requirement" of § 523(a)(4) "is not limited to trusts that arise by virtue of a formal trust agreement, but includes relationships in which trust-type obligations are imposed pursuant to statute or common law. Thus, the trust obligations necessary under section 523(a)(4) can arise pursuant to a statute, common law or a
For example, in Ragsdale v. Haller, 780 F.2d 794 (9th Cir.1986), the Ninth Circuit held that a debtor's debt to his partner was non-dischargeable because under California common law, all partners are trustees of the assets of the partnership, such that they are fiduciaries for purposes of § 523(a)(4). Id. at 796. The Ninth Circuit did not conclude that there had been an "explicit declaration of trust or an actual conveyance of a trust res" in Ragsdale. It specifically noted, in fact, that California statutes expressly recognized the existence of a trust relationship between partners only in the trust ex maleficio context where a partner has derived profits for which he has not accounted to the partnership.
Like Ragsdale, the Jacks court relied on California common law (specifically, the trust fund doctrine) to find the existence of a trust relationship sufficient to warrant application of § 523(a)(4). Berg does not demonstrate that this reliance is erroneous as a matter of California law. As the Moeller court recognized, "the Berg court was answering a question far removed from a bankruptcy court's need for categorization of a trust in a section 523(a)(4) context. It thus had no need to discuss whether a trust actually arises at corporate insolvency or upon post-insolvency misappropriation or to label any such trust as express, technical, or other." Moeller, 466 B.R. at 535. Nor did Berg overturn California's trust-fund doctrine. To the contrary, Berg "recognize[d] that [fiduciary] duties to creditors arise at corporate insolvency." See id. Berg simply held that the complaint in that case failed to allege a breach of the limited fiduciary duties that arise under the trust-fund doctrine. 178 Cal.App.4th at 1042, 100 Cal.Rptr.3d 875. Although Berg specified that the extra-contractual duty owed by corporate directors to an insolvent corporation's creditors is limited "to the avoidance of actions that divert, dissipate, or unduly risk corporate assets that might otherwise be used to pay creditors claims," it also noted that the rule it articulated was "consistent with the trust-fund doctrine." Berg, 178 Cal.App.4th at 1041, 100 Cal.Rptr.3d 875. See also Scouler & Co., LLC v. Schwartz, No. 11-cv-06377 N.C. 2012 WL 1502762, *5 (N.D.Cal. Apr. 23, 2012) ("When a corporation becomes insolvent, California's trust fund doctrine imposes an additional, albeit limited, fiduciary duty on the corporation's directors," citing Berg); In re Moniz, No. 09-90802-E-7, 2011 WL 9189752, *3 (Bankr.E.D.Cal. Mar. 8, 2011) (in Berg, "the District Court of Appeal reaffirmed the trust fund doctrine in California," citing Berg, 178 Cal.App.4th at 1041, 100 Cal.Rptr.3d 875).
For all of the reasons stated, the court concludes that the California and Ninth Circuit law applied in Jacks is the law applicable to the case at hand. As a consequence, the court finds that the bankruptcy court properly applied Jacks to determine that Houng owed Tatung fiduciary duties that arose upon WDE's insolvency pursuant to California's "trust fund doctrine."
In support of its second cause of action, Tatung alleged that WDE was insolvent as early as 2007; that Houng owed it a fiduciary duty as the alter ego of WDE; and that Houng diverted WDE assets through self-dealing and misappropriation of funds that should have been used to pay Tatung, a legitimate creditor.
Houng argues that whether he breached any fiduciary duty owed Tatung as a result of WDE's insolvency was not "necessarily" decided in the arbitration proceeding, and that the arbitrator's findings on the issue were "superfluous and entirely unnecessary." The FAAA alleged, however, that Houng was WDE's alter ego, and the arbitrator stated that he findings regarding breach of fiduciary duty and fraud were necessary not to explain why Houng was WDE's alter ego, but to describe how Houng's conduct harmed Tatung, and why it was appropriate to impose alter ego liability on Houng.
As the arbitrator correctly noted, one of the prerequisites to a finding of alter ego liability is that the corporate form must have been used to perpetrate a fraud or accomplish some other inequitable purpose. Neilson v. Union Bank of Cal., N.A., 290 F.Supp.2d 1101, 1116 (C.D.Cal. 2003) (citing Sonora Diamond Corp. v. Super. Ct., 83 Cal.App.4th 523, 538, 99 Cal.Rptr.2d 824 (2000)). The court concludes, therefore, that the arbitrator "necessarily decided" that Houng had committed fraud and breached his fiduciary duty to Tatung in the course of explaining why it was appropriate to impose alter ego liability on Houng. See, e.g., Schmidt v. County of Nevada, 808 F.Supp.2d 1243, 1250 (E.D.Cal.2011) (citing Beechwood Restorative Care Center v. Leeds, 436 F.3d 147, 153 (2d Cir.2006) ("An issue is necessarily decided when two elements are satisfied: (1) the issue was actually decided; and (2) the determination of the issue was necessary to render a valid judgment on the merits of the underlying proceeding").
Houng asserts, however, that the arbitrator's findings are not preclusive because the FAAA never alleged that his defalcations occurred while WDE was insolvent. The court's review of the FAAA confirms that it does not specifically assert that misappropriations occurred during WDE's insolvency. Houng maintains, therefore, that whether he breached a fiduciary duty to Tatung as a result of WDE's insolvency was not actually litigated. An issue is actually litigated when it is properly raised, by pleadings or otherwise, and is submitted for determination, and is determined. See, e.g., Beckway v. DeShong, 717 F.Supp.2d 908, 920 (N.D.Cal.2010) (quoting People v. Carter, 36 Cal.4th 1215, 1240, 32 Cal.Rptr.3d 838, 117 P.3d 544 (2005) (emphasis added)).
The Ninth Circuit has held that the actual litigation requirement is satisfied by a default judgment entered against a party for refusal to cooperate with discovery, if the party was accorded a full and fair opportunity to litigate the issue, but instead chose to defy court orders concerning discovery. In re Daily, 47 F.3d 365, 368-69 (9th Cir.1995).
The court's review of the arbitrator's award indicates, moreover, that the arbitrator decided that Houng owed Tatung a fiduciary duty due to WDE's insolvency, which gave rise to an express trust.
Houng next contends that the bankruptcy court erred in determining that the full amount of the debt claimed in the first amended complaint was non-dischargeable under § 523(a)(4). Houng notes that WDE has multiple creditors, and asserts that Tatung is entitled to recover only its pro rata share of the amount he misappropriated during WDE's insolvency. Tatung counters that Houng's argument conflicts with the Supreme Court's decision in Cohen v. de la Cruz, 523 U.S. 213, 118 S.Ct. 1212, 140 L.Ed.2d 341 (1998). There, the Supreme Court explained that "debt for fraud" is all debt "arising from" fraud, and there is no restitutionary ceiling imposed on the extent to which a debtor's liability for such fraud is non-dischargeable under § 523(a). Id. at 219-21. 118 S.Ct. 1212. While Cohen is not directly on point, it does suggest that Tatung is entitled to have the full amount of its debt caused by Houng's defalcations declared non-dischargeable. The bankruptcy court adopted the arbitrator's finding that the full amount of the debt claimed by Tatung was caused by Houng's commission of actual fraud against Tatung and breaches of fiduciary duties owed to Tatung.
For the reasons stated, the court concludes that Houng's debt to Tatung is non-dischargeable under 11 U.S.C. § 523(a)(4). Accordingly, the decision of the bankruptcy court is affirmed.
The few state court decisions that have discussed California's "trust fund doctrine" following Pacific Scene support the Jacks panel's approach. In Penasquitos, Inc. v. Superior Court, 53 Cal.3d 1180, 283 Cal.Rptr. 135, 812 P.2d 154 (1991), the California Supreme Court interpreted Pacific Scene as holding that "the Legislature had occupied the field of creditors' remedies against the shareholders of dissolved corporations." Id. at 1193, 283 Cal.Rptr. 135, 812 P.2d 154 (emphasis added). Penasquitos did not define the field preempted by California statute in broader terms and did not hold that Pacific Scene eliminated the California trust fund doctrine entirely. To the contrary, Penasquitos limited Pacific Scene's holding to the specific question of when a creditor can sue the former shareholders of a dissolved corporation. See id. at 1193, 283 Cal.Rptr. 135, 812 P.2d 154 ("Because Pacific Scene ... was concerned only with actions against shareholders, not actions against dissolved corporations, ... it is not controlling on the issue now before us"). In Berg & Berg Enterprises, LLC v. Boyle, 178 Cal.App.4th 1020, 100 Cal.Rptr.3d 875 (2009), the California Court of Appeal acknowledged the continuing existence of the trust fund doctrine in the state. Id. at 1041, 100 Cal.Rptr.3d 875; see also In re Moniz, No. 09-90802-E-7, 2011 WL 9189752, *3 (Bankr.E.D.Cal. Mar. 8, 2011) (in Berg, "the District Court of Appeal reaffirmed the trust fund doctrine in California," citing Berg, 178 Cal.App.4th at 1041, 100 Cal.Rptr.3d 875). Federal courts have also continued to apply the trust fund doctrine as a principle of California law after Pacific Scene. See, e.g., Scouler & Co., LLC v. Schwartz, No. 11-cv-06377 N.C. 2012 WL 1502762, *5 (N.D.Cal. Apr. 23, 2012) ("When a corporation becomes insolvent, California's trust fund doctrine imposes an additional, albeit limited, fiduciary duty on the corporation's directors"); Dollar Tree Stores Inc. v. Toyama Partners LLC, Nos. C 10-0325 SI, C 11-2696 SI, 2011 WL 3295420, *9 (N.D.Cal. Aug. 1, 2011).
The court concludes, therefore, that California's enactment of statutory remedies for creditors of dissolved corporations preempted only the common law outlining the remedies available to such creditors. It did not eliminate the trust fund doctrine relevant in assessing whether the director of an insolvent corporation breached a fiduciary duty owed to the creditors of that corporation, such that his debt is non-dischargeable under § 523(a)(4). This limited reading is consistent with the language of Pacific Scene itself. See Pacific Scene, 46 Cal.3d 407, 250 Cal.Rptr. 651, 758 P.2d at 1189 ("For the reasons stated, we conclude that the Legislature has precluded the assertion of postdissolution claims against the former shareholders of a dissolved corporation under the equitable `trust fund' theory. We emphasize, however, that this determination does not insulate dissolving corporations or their shareholders from actions for the recovery of fraudulently transferred assets"). Accordingly, the court may properly refer to the trust fund doctrine to determine whether Houng breached any fiduciary duty he owed to Tatung. See CarrAmerica Realty Corp. v. nVidia Corp., Nos. C 05-00428 JW, 2006 WL 2868979, *5 n. 1 (N.D.Cal. Sept. 29, 2006) ("[T]he In re Jacks Bankruptcy Appellate Panel commented that although `California's Corporation Code provides a remedy for an insolvent corporation's director's violations of fiduciary duties to creditors ... the common law is not repealed by implication or otherwise, if there is no repugnancy between it and the statute, and it does not appear that the legislature intended to cover the whole subject.' California's corporate statutes, while modifying remedies, do not eliminate the trust comprised of corporate assets that arises upon a corporation's insolvency.' ... Since CARR does not raise this claim in a statutory context, the Court does not consider its application, but rather, considers the common law application of CARR's claim to determine if there was a breach of a fiduciary duty for the purposes of this Order"), rev'd in part on other grounds, 302 Fed.Appx. 514 (9th Cir.2008) (Unpub. Disp.).
"[U]nder this statute, the trust arises only when the partner derives profits without consent of the partnership." Ragsdale, 780 F.2d at 796. Stated differently, the trust arises only when a misappropriation occurs. The Moeller court reasoned that the trust fund doctrine similarly creates a trust that arises only when there has been a misappropriation. 466 B.R. at 537. The fiduciary duties described in Berg, though limited, arise when the corporation becomes "actually insolvent," however, not when a misappropriation occurs. Berg, 178 Cal.App.4th at 1041, 100 Cal.Rptr.3d 875; see also Saracco Tank, 65 Cal.App.2d at 315, 150 P.2d 918 ("When a corporation becomes insolvent its assets are held in trust for the benefit of the stockholders and creditors," citing 15A FLETCHER'S CYC. OF CORP., PERM. ED. § 7369 (1938), at 59 ("The theory of the trust fund doctrine is that all of the assets of a corporation, immediately on its becoming insolvent, become a trust fund for the benefit of all of its creditors" (emphasis added))). The trust that arises under the trust fund doctrine is thus different from the trust relationship created by the statute referenced in Ragsdale, which requires that profits be "derived ... without the consent" of the partnership before fiduciary duties arise. CAL. CORP.CODE § 15021. See also In re Kallmeyer, 242 B.R. 492 (9th Cir. BAP 1999) ("[O]nce NIM became insolvent and ceased doing business, the trust fund doctrine imposed a fiduciary duty upon Debtor to hold NIM's assets in trust for the benefit of its creditors and to distribute those assets equally. The fiduciary duty was imposed prior to any defalcation, and no personal liability arose until Debtor breached this fiduciary obligation. Because the fiduciary duty arose independently of any wrongdoing and existed prior to and without reference to it, we hold that the bankruptcy court properly concluded that the trust fund doctrine imposes a fiduciary obligation upon directors within the meaning of § 523(a)(4)").
McCarthy and Ragsdale do not demonstrate, however, that the duties that LLC partners or managers owe to each other or to the company extend to the LLC's creditors. Tatung cites no authority for the proposition that the duties owed by principals of an insolvent company to creditors under the trust fund doctrine are "coextensive" with the duties owed by a principal to the company and its shareholders outside insolvency. As noted, however, Jacks remains good law, and the trust fund doctrine as applied in Jacks extends to LLCs. See, e.g., Dollar Tree Stores Inc. v. Toyama Partners LLC, Nos. C 10-0325 SI, C 11-2696 SI, 2011 WL 3295420, *7 (N.D.Cal. Aug. 1, 2011); see also JPMorgan Chase Bank v. KB Home, 632 F.Supp.2d 1013, 1027 (D.Nev.2009) ("Although limited liability companies differ from corporations, the same policies of protecting creditors of insolvent corporations are applicable to the creditors of insolvent limited liability companies"); In re McCook Metals, 319 B.R. 570, 595 (Bankr. N.D.Ill.2005) ("[D]irectors of an insolvent corporation are trustees for its creditors. They owe to the corporation's creditors the same fiduciary duties in dealing with its property that an executor would owe to creditors of a decedent's estate — they may not engage in self-dealing with, or make any personal profit from, the property that they administer. These corporate law principles are fully applicable to managers of insolvent limited liability companies"). Based on these authorities, the court need not decide whether the duties LLC partners or managers owe each other and/or the company extend to the LLC's creditors to conclude the bankruptcy court correctly determined that Houng owed Tatung fiduciary duties that arose upon WDE's insolvency.
