ORDER REGARDING MOTION FOR RELIEF FROM AUTOMATIC STAY TO PROCEED WITH STATE COURT ACTION1

MIKE K. NAKAGAWA, Bankruptcy Judge.

On January 9, 2019, the court heard the Motion for Relief from Automatic Stay to Proceed With State Court Action ("MRAS") brought by Douglas Ross, M.D. ("Ross"). The appearances of counsel were noted on the record. After arguments were presented, the matter was taken under submission.

BACKGROUND

On August 6, 2018, Jairo Alejandro Rodriguez ("Debtor") filed a "skeleton" voluntary Chapter 7 petition ("Petition"). (ECF No. 1). On the same date, a notice of the Chapter 7 filing ("Bankruptcy Notice") was issued scheduling a meeting of creditors for September 13, 2018, and notifying creditors of the appointment of a Chapter 7 trustee. (ECF Nos. 40 and 44). The Chapter 7 proceeding was assigned for administration to a panel Chapter 7 trustee, Lenard E. Schwartzer ("Trustee"). Debtor's schedules of assets and liabilities ("Schedules") and statement of financial affairs ("SOFA"), and other required information were filed on August 17, 2018. (ECF No. 46).

On Debtor's SOFA, he lists a breach of contract action entitled "Douglas B. Ross, M.D. vs. Jairo Rodriguez, PAC, A-15-728577-B" ("State Court Action"). Both the Schedules and SOFA are signed by the Debtor under penalty of perjury. According to his Schedule A/B, Debtor has an interest in the following entities: CAF Medical, LLC dba Injury & Chronic Pain Center ("CAF Medical"), Rutishauser, LLC dba NLV Pain Management & Urgent Care ("Rutishauser"), Injury Medical Consultants, and Elite Firearms and Tactical, LLC.2 He attests that the value of his interests in all of the entities is $0.00. Debtor also lists an interest in unpaid wages of approximately $550,000 owed to him by Rutishauser. In his Schedule A/B, he also attests that he has no claims against third parties, nor any contingent and unliquidated claims of any nature, including counterclaims and rights to set off claims. According to his SOFA, Debtor was the subject of two lawsuits pending at the time he filed his Petition: Douglas B. Ross, M.D. v. Jairo Rodriguez, PAC, et al., Case No. A-15-728577-B ("Ross Litigation"), and Michael Ladner v. Jairo Rodriguez, M.D., NLV Pain Management & Urgent Care, Case No. A-18-767642-C. Both lawsuits were filed in the Eighth Judicial District Court, Clark County, Nevada ("State Court").

On the same date he filed his Petition, Debtor also filed a Notice of Removal ("Removal Notice") with respect to the Ross Litigation. (ECF No. 7). Copies of the pleadings and record from the State Court also were filed along with the Removal Notice. (ECF Nos. 7 through 39).3 According to the State Court record, the original complaint in the Ross Litigation was filed on December 4, 2015, and named numerous individuals and entities as defendants.4 Since that time, the universe of additional parties now include counterclaimants, third-party plaintiffs, and third-party defendants, along with the plaintiff, the Debtor, and Rutishauser.5 The complaint in the Ross Litigation has been amended on several occasions.6

On August 17, 2018, Debtor filed an amended petition along with a statement of current monthly income. (ECF Nos. 48 and 49).

On August 29, 2018, Debtor filed another Notice of Removal with respect to the Ross Litigation, and the removed matter was assigned Adversary Proceeding No. 18-01085-MKN ("Removal Adversary"). (ECF No. 56).

On October 31, 2018, the Trustee filed and served a notice of assets and instructions for creditors to file proofs of claim no later than January 29, 2019 ("Trustee Asset Notice"). (ECF No. 83).

On November 13, 2018, Ross filed an adversary complaint to determine dischargeability of debts under Section 523(a)(2) and Section 523(a)(4), denominated Adversary Proceeding No. 18-01123-MKN ("Ross Non-Dischargeability Action"). (ECF No. 86).

On November 14, 2018, an order of discharge was entered except with respect to the claims to be resolved in the Ross Non-Dischargeability Action. (ECF No. 87).

On November 16, 2018, Ross filed in the Removal Adversary a motion to remand the Ross Litigation to the State Court ("Remand Motion"). (AECF No. 9). That motion was noticed to be heard on December 9, 2018. (AECF No. 10).

On December 4, 2018, the instant MRAS was filed by Ross and noticed for hearing on January 9, 2019. (ECF Nos. 89 and 92).

On December 5, 2018, Debtor filed an opposition to the Remand Motion. (AECF No. 14).

On December 26, 2018, an opposition to the MRAS was filed by Debtor. (ECF No. 99).

On January 3, 2019, an order was entered granting the Remand Motion ("Remand Order"). (AECF No. 30).

On January 3, 2019, Debtor filed another amended petition that no longer includes the separate attachment specifically identifying CAF Medical and Rutishauser as sole proprietorships. (ECF No. 100).7 Attached to the amended petition is an amended Schedule A/B, which does not list any claims or counterclaims against third parties.

On January 4, 2019, a reply in support of the MRAS was filed by Ross. (ECF No. 101).

On January 9, 2019, Debtor filed a motion to reconsider the Remand Order ("Reconsideration Motion"). (AECF No. 34). That motion was noticed to be heard on February 28, 2019. (AECF No. 35).8

DISCUSSION

Under the Remand Order, the Ross Litigation has been returned to the State Court. Although Debtor has filed his Reconsideration Motion, no request to stay the Remand Order has been requested, nor has a stay been entered. As to non-Debtor parties, removal of the Ross Litigation was over-inclusive because the automatic stay does not prevent Ross from pursuing recovery against any of them. See Remand Order at 8-9. Moreover, the automatic stay also does not prevent the Debtor from being deposed as a percipient witness or from being called to testify at trial. Id.

Having succeeded in his remand request, Ross now seeks relief from the automatic stay for cause under Section 362(d)(1) to continue with the Ross Litigation as to the Debtor. See MRAS at 7-8. Ross does not dispute that the Debtor received his discharge on November 14, 2018, as to claims that are not encompassed by the Ross Non-Dischargeability Action. The adversary complaint therein asserts that the Debtor's obligations to Ross are excepted from discharge under three theories: false pretenses, false representations, and/or actual fraud under Section 523(a)(2)(A); fraud or defalcation while acting in a fiduciary capacity, or embezzlement, or larceny under Section 523(a)(4); and, use of a false statement in writing respecting the Debtor's or an insider's financial condition under Section 523(a)(2)(B).9 The elements under all of these theories must be established by a preponderance of the evidence. See Grogan v. Garner, 498 U.S. 279, 291 (1991).

A nondischargeability claim under Section 523(a)(2)(A) cannot be based on a statement respecting the debtor's or an insider's financial condition. See Lamar, Archer & Cofrin, LLP v. Appling, 138 S.Ct. 1752, 1757 (2018). Instead, the claim must be based on some other culpable conduct establishing: "(1) misrepresentation, fraudulent omission or deceptive conduct by the debtor; (2) knowledge of the falsity or deceptiveness of his statement or conduct; (3) an intent to deceive; (4) justifiable reliance by the creditor on the debtor's statement or conduct; and (5) damage to the creditor proximately caused by its reliance on the debtor's statement or conduct." Turtle Rock Meadows Homeowners Assoc. v. Slyman (In re Slyman), 234 F.3d 1081, 1085 (9th Cir. 2000); see also Sachan v. Huh (In re Huh), 506 B.R. 257, 262 (B.A.P. 9th Cir. 2014). Non-disclosure of a material fact constitutes a fraudulent representation where the debtor has a duty to disclose. See Apte v. Japra (In re Apte), 96 F.3d 1319, 1323-24 (9th Cir. 1996). In a business transaction, parties owe each other a duty to disclose if, because of the relationship between them, the customs of the trade, or other objective circumstances, a reasonable expectation of disclosure is created. Id. at 1324. Alternatively, a claim for actual fraud under Section 523(a)(2)(A) may be based on proof of an individual debtor's fraudulent scheme, such as a series of fraudulent conveyances, that can be effectuated without a false representation to the creditor. See Husky Int'l Elec., Inc. v. Ritz, 136 S.Ct. 1581 (2016).

In contrast, a nondischargeability claim under Section 523(a)(2)(B) must be based on a statement respecting the debtor's or an insider's financial condition that is in writing. Even "a statement about a single asset can be a `statement respecting the debtor's financial condition.'" Lamar, Archer & Cofrin, LLP, 138 S.Ct. at 1761. In addition, the creditor must demonstrate: (1) that the statement is materially false, (2) that the creditor reasonably relied on the statement, and (3) that the debtor caused the statement to be made or published with intent to deceive. See 11 U.S.C. § 523(a)(2)(B) (i through iv).

A nondischargeability claim under Section 523(a)(4) may be based on fraud or defalcation by a fiduciary, or, on a theory of embezzlement or larceny. Fiduciary fraud or defalcation under Section 523(a)(4) requires the creditor to establish that the debtor was acting in a fiduciary capacity pursuant to an express or technical trust rather than a fiduciary characterization arising under nonbankruptcy law. See Lovell v. Stanifer (In re Stanifer), 236 B.R. 709, 714 (B.A.P. 9th Cir. 1999). A "defalcation" while acting in a fiduciary capacity requires proof that the debtor acted with "knowledge of, or gross recklessness in respect to, the improper nature of the relevant fiduciary behavior." Bullock v. BankChampaign, N.A., 569 U.S. 267, 269 (2013). Even if the individual debtor is not a fiduciary, a claim for embezzlement is nondischargeable under Section 523(a)(4) upon proof that (1) the debtor rightfully was in possession of property as a non-owner, (2) the debtor appropriated the property for a purpose other than for which the debtor was entrusted, and (3) there are "circumstances indicating fraud." See Transamerica Commercial Fin. Corp. v. Littleton (In re Littleton), 942 F.2d 551, 555 (9th Cir. 1991). "When the debtor attempts to conceal the misappropriation or to deceive the creditor regarding the misappropriation, evidence of such concealment or deception can satisfy the `circumstances indicating fraud' element." McClain v. Crown Coachworks, Inc. (In re McClain), 2017 WL 3298418, at *3 (B.A.P. 9th Cir. Aug. 2, 2017). A claim for larceny also is nondischargeable under Section 523(a)(4) and follows federal common law. See Ormsby v. First Am. Title Co. of Nev. (In re Ormsby), 591 F.3d 1199, 1205 (9th Cir. 2010). Under federal common law, larceny involves a `"[f]elonious taking of another's personal property with intent to convert it or deprive the owner of the same."' Id., quoting 4 Collier on Bankruptcy ¶ 523.10[2] (15th ed. rev. 2008). In turn, the term "felonious is defined as `proceeding from an evil heart or purpose; malicious; villainous . . . Wrongful; (of an act) done without excuse or color of right.'" In re Ormsby, 591 F.3d at 1205 n.4.

As previously mentioned in notes 4 and 6, supra, the second amended complaint in the Ross Litigation is framed as twelve separate causes of action against various defendants or combinations of defendants, on theories of breach of contract, tortious breach of the implied covenant of good faith and fair dealing, fraudulent misrepresentation, breach of fiduciary duty, conspiracy, embezzlement/theft/conversion, unjust enrichment, preliminary and permanent injunctive relief, accounting, and constructive trust. Debtor is a named defendant with respect to the following causes of action: First (breach of contract), Second (Tortious Breach of Implied Covenant of Good Faith and Fair Dealing), Third (Fraudulent Misrepresentation), Fourth (Breach of Fiduciary Duty), Fifth (Conspiracy), Sixth (Embezzlement/Theft/Conversion), Seventh (Unjust Enrichment), Eighth (Preliminary and Permanent Injunction), Ninth (Aiding and Abetting), and Twelfth (Breach of Contract). Based on the representations made at the hearing, Ross apparently concedes that only the Third (Fraudulent Misrepresentation), Fourth (Breach of Fiduciary Duty), and Sixth (Embezzlement/Theft/Conversion) causes of action are encompassed by the Ross Non-Dischargeability Action. As a result, any obligations of the Debtor predicated on the theories presented by the other causes of action alleged in the Ross Litigation have been discharged.10 Thus, the remaining question is whether Ross should be permitted to proceed against the Debtor on the theories asserted before the State Court, or, whether Ross should proceed on those theories before the bankruptcy court in the Ross Non-Dischargeability Action.

It is well established that issue preclusive effect may be given in dischargeability proceedings to the factual determinations made in a state court action. See Grogan v. Garner, 498 U.S. at 284 n.11; see, e.g., In re Ormsby 591 F.3d at 1205 n.3 (state court judgment given issue preclusive effect in action under Section 523(a)(4) and 523(a)(6)); Diamond v. Kolcum (In re Diamond), 285 F.3d 822 (9th Cir. 2002) (state court judgment given preclusive effect in action under Section 523(a)(2) and 523(a)(6)). The issue preclusion rules of the state in which the prior judgment was entered are applied by the bankruptcy court in a subsequent dischargeability proceeding. See Gayden v. Nourbakhsh (In re Nourbakhsh), 67 F.3d 798, 800 (9th Cir. 1995); Hebert v. Rakich (In re Hebert), 2016 WL 742175, at *6-9 (B.A.P. 9th Cir. Feb. 23, 2016) (issue preclusive effect under federal rules properly given to prior Michigan bankruptcy court dischargeability judgment where participant in litigation filed a subsequent bankruptcy in Nevada). In Nevada, issue preclusion applies to factual determinations in a prior proceeding under the following conditions: (1) the issue decided in the prior litigation must be identical to the issue presented in the current action, (2) the prior ruling must have been on the merits and have become final, (3) the party against whom the judgment is asserted must have been a party or in privity with a party in the prior litigation, and (4) the issue must have been actually and necessarily decided. See Howard v. Sandoval (In re Sandoval), 232 P.3d 422, 423 (Nev. 2010).

In this instance, the Ross Litigation has proceeded in the State Court for more than three years and was scheduled for a bench trial to commence in July 2019. Substantial discovery has been completed, including the State Court's resolution of numerous discovery disputes. The standard of proof applied in the Ross Litigation will be no less than the preponderance of evidence standard applicable in the Ross Non-Dischargeability Action. Ross has not consented to this bankruptcy court entering a final judgment with respect to the non-Debtor defendants. As a court of general jurisdiction, the State Court has authority to enter a final judgment with respect to all factual issues and claims asserted in the Ross Litigation. The actual and necessary litigation of any legally identical factual issues may be given preclusive effect by this bankruptcy court without need for re-litigation. Under these circumstances, considerations of judicial efficiency and economy favor allowing the Ross Litigation to be completed to final judgment in the State Court, reserving the determination of dischargeability to the subsequent entry of a judgment in the Ross Non-Dischargeability Action.11 Cause for relief from stay under Section 362(d)(1) therefore exists based on the record before this bankruptcy court.12

IT IS HEREBY ORDERED that the Motion for Relief from Automatic Stay to Proceed with State Court Action, brought by Douglas B. Ross, M.D., Docket No. 89, be, and the same hereby is, GRANTED.

IT IS FURTHER ORDERED that the automatic stay under 11 U.S.C. § 362(a)(1) is modified as to the action pending in the Eighth Judicial District Court, Clark County, Nevada, styled as Douglas B. Ross, M.D. v. Jairo Rodriguez, PAC, et al., Case No. A-15-728577-B, and that a final judgment may be entered in that action with respect to the above-captioned Chapter 7 debtor. The moving party herein shall file a copy of this order in that action.

IT IS FURTHER ORDERED that the enforcement of any final judgment entered with respect to the above-captioned Chapter 7 debtor shall be subject to a final determination by this bankruptcy court in connection with Douglas B. Ross, M.D. v. Jairo Alejandro Rodriguez, denominated Adversary Proceeding No. 18-01123-MKN.