FILED AUG 25 2014 1 NO FO PUBL A IO T R IC T N SUSAN M. SPRAUL, CLERK 2 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. CC-14-1019-TaPaKi ) 6 CRISTIE TOLOTTI, ) Bk. No. 9:10-bk-14856-RR ) 7 Debtor. ) Adv. No. 9:11-ap-01215-RR ______________________________) 8 ) CRISTIE TOLOTTI, ) 9 ) Appellant, ) 10 ) v. ) MEMORANDUM* 11 ) SEABOARD PRODUCE DISTRIBUTORS,) 12 INC., ) ) 13 Appellee. ) ______________________________) 14 Argued and Submitted on July 25, 2014 15 at Pasadena, California 16 Filed - August 25, 2014 17 Appeal from the United States Bankruptcy Court for the Central District of California 18 Honorable Robin Riblet, Bankruptcy Judge, Presiding 19 ________________________________ 20 Appearances: Michael Jay Berger argued for appellant Cristie Tolotti; Joshua S. Hopstone argued for appellee 21 Seaboard Produce Distributors, Inc. ________________________________ 22 23 Before: TAYLOR, PAPPAS, and KIRSCHER, Bankruptcy Judges. 24 25 26 * 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 INTRODUCTION 2 Debtor Christie Tolotti appeals from a summary judgment in 3 favor of Seaboard Produce Distributors, Inc. based on issue 4 preclusion. The bankruptcy court held that a state court 5 judgment, issued on default, conclusively established all the 6 elements necessary to except Seaboard’s claim from discharge 7 under 11 U.S.C. § 523(a)(6).1 8 We agree that Seaboard is entitled to issue preclusive 9 effect of the state court’s findings that Mrs. Tolotti committed 10 wrongful acts that resulted in more than $600,000 in damage to 11 Seaboard’s property. Thus, the bankruptcy court did not err when 12 it ruled that Seaboard is entitled to rely upon the state court 13 judgment on these elements of its § 523(a)(6) claim. 14 We determine, however, that Seaboard was not entitled to 15 rely upon the state court’s apparent determination that 16 Mrs. Tolotti had the subjective state of mind necessary to except 17 the debt from discharge under § 523(a)(6). For issue preclusion 18 analysis, any reasonable doubt as to what was decided by a prior 19 judgment should be resolved against allowing issue preclusive 20 effect; and nondischargeability actions are to be strictly 21 construed in the debtor’s favor. Here, Mrs. Tolotti had 22 inadequate notice that Seaboard sought determination of her 23 § 523(a)(6) subjective state of mind in the state court action. 24 Seaboard did not raise Mrs. Tolotti’s subjective state of mind as 25 a material fact to be litigated, nor did its prayer for relief 26 for damages for waste and conversion so implicate. Further, the 27 1 Unless specified otherwise, all chapter and section 28 references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532.
- 2 - 1 state court did not need to consider or determine Mrs. Tolotti’s 2 subjective state of mind for purposes of determining her 3 liability for waste and conversion. And finally, Seaboard failed 4 to provide any record of the default prove-up to show how or why 5 the state court otherwise might have reached the state of mind 6 determination on default. As a result, Seaboard failed to carry 7 its burden to show that the state court’s § 523(a)(6) state of 8 mind findings were actually litigated and, thus, they are not 9 entitled to preclusive effect. Therefore, we VACATE the 10 bankruptcy court’s summary judgment and REMAND this matter for 11 further proceedings. 12 FACTS 13 Seaboard, the successful bidder at a bank’s foreclosure 14 sale, purchased property owned by Mrs. Tolotti and her husband in 15 Camarillo, California, consisting of a residence and 16 approximately nine acres of avocado trees. To obtain possession, 17 Seaboard filed an unlawful detainer action against the Tolottis, 18 which the Tolottis actively defended. 19 After conducting a trial, the unlawful detainer court 20 awarded possession to Seaboard, along with holdover damages, and 21 ordered the Tolottis to vacate the property. The Tolottis, 22 nonetheless, continued their efforts to avoid eviction through 23 post-trial legal maneuvers. At some point after foreclosure, 24 Seaboard offered to pay for and to ensure watering, maintenance, 25 and upkeep of the avocado trees. The Tolottis either refused or 26 failed to respond to the offer. Mrs. Tolotti then filed 27 28
- 3 - 1 a petition under chapter 11.2 2 Seaboard promptly obtained relief from stay and completed 3 the eviction process. When Seaboard took possession, the avocado 4 trees were damaged from neglect and lack of water. In addition, 5 the Tolottis had removed or damaged fixtures, including toilets, 6 sinks, kitchen appliances, portions of the HVAC system, ducts, 7 and the outside barbeque. 8 Mrs. Tolotti’s chapter 11 case was converted to a case under 9 chapter 7, and Seaboard filed its adversary proceeding under 10 § 523(a)(6). Seaboard’s complaint (“Adversary Complaint”) sought 11 a nondischargeable judgment for damages caused by waste, 12 destruction and removal of fixtures from the residence, and 13 waste, destruction and damage to the avocado orchard. 14 After Mrs. Tolotti responded to the Adversary Complaint, she 15 and Seaboard entered into a stipulation. Pursuant to the 16 stipulation, the bankruptcy court lifted the automatic stay to 17 allow Seaboard to file and prosecute an action against 18 Mrs. Tolotti in state court relating to the claims raised in the 19 Adversary Complaint. 20 Seaboard filed its complaint for waste and conversion 21 against Mrs. Tolotti and her husband in Ventura Superior Court 22 (“State Court Complaint”). As its first cause of action, titled 23 “Waste, Damage, and Destruction,” Seaboard alleged that the 24 Tolottis improperly delayed turnover of the property. It listed 25 the litigation steps taken by the Tolottis in and connected to 26 27 2 Mrs. Tolotti initially filed a chapter 13 petition that she subsequently dismissed; and her husband filed a separate 28 chapter 13 petition, which was subsequently dismissed.
- 4 - 1 the unlawful detainer proceeding and the multiple bankruptcy 2 filings. Seaboard also alleged that the Tolottis knowingly 3 destroyed and damaged the property and recklessly failed to 4 maintain and care for it. Further, Seaboard alleged that these 5 “actions caused [Seaboard] to suffer financial injury without 6 cause or excuse . . .; were deliberate and intentional . . .;” 7 and the “willful and malicious actions” caused damages of not 8 less than $250,000. Request for Judicial Notice, Ex. A at 9 ¶¶ 16-17 (Adv. Pro. ECF No. 40). 10 In Seaboard’s second cause of action, for conversion, it 11 alleged that the Tolottis knew that Seaboard owned the property 12 and had right to its possession, yet “willfully and intentionally 13 took unreasonable and unsuccessful steps that obstructed and 14 thwarted” such rights. Id. at ¶¶ 19-20. In addition, Seaboard 15 alleged that the Tolottis “knowingly stole fixtures belonging to 16 [Seaboard].” Id. at ¶ 21. 17 Seaboard titled its third cause of action as one for “Waste, 18 Destruction, and Damage to Avocado Orchard.” Seaboard alleged 19 that the Tolottis damaged the avocado trees through neglect and 20 lack of watering, and that such lack of care was willful and 21 intentional. Id. at ¶¶ 23-24. It specifically alleged that 22 “[the Tolottis’] actions, were deliberate and intentional” (id. 23 at ¶ 25); they “intentionally and recklessly failed to perform 24 adequate maintenance to preserve” the trees (id. at ¶ 26); and 25 their “willful and malicious actions” (id. at ¶ 27) caused 26 Seaboard damages of not less than $300,000. 27 Approximately fifteen months later, Seaboard moved for and 28 obtained terminating sanctions against the Tolottis in the state
- 5 - 1 court action based on discovery abuses and failure to obey court 2 orders. The state court vacated trial and entered an order 3 striking the answer and entering default against the Tolottis in 4 favor of Seaboard. Thereafter, the state court entered a default 5 judgment against the Tolottis for a total of $660,511.85 6 (hereinafter, the “Default Judgment”).3 7 The Default Judgment, prepared by Seaboard’s counsel, 8 substantially mirrored the State Court Complaint, with findings 9 that the Tolottis committed the actions alleged therein. In 10 addition, it contained detailed findings describing the physical 11 damage to the residence and the avocado trees caused by such 12 actions and omissions. It also included the following express 13 findings: 14 7. The Court finds that [the Tolottis] committed each of the acts referenced in this Judgment and caused the 15 damage referenced in this Judgment without justification, just cause, or excuse. In taking the 16 above actions, the Court finds that [the Tolottis] acted deliberately, willfully, and intended to cause 17 injury to [Seaboard’s] security and impede [Seaboard] from obtaining physical possession of the property. 18 8. The Court finds that [the Tolottis] acted with 19 malice in taking the above actions and that the [the Tolottis’] actions described herein caused [Seaboard] 20 to suffer and incur damages of $300,000, for the destruction caused to the avocados, and $250,000 for 21 the damage caused to the Property due to removal of the fixtures, plus interest of $105,327.12 and costs of 22 $5,184.73 for a total judgment of $660,511.85 together with interest on the judgment as provided by law. 23 24 Request for Judicial Notice, Ex. D (Adv. Pro. ECF No. 40). No 25 3 The Default Judgment appears to have been entered based 26 on a default prove-up conducted by the state court without a hearing. The record on appeal, however, does not contain copies 27 of any documents or evidence considered by the state court for the default prove-up. Therefore, our review is limited to the 28 State Court Complaint and the Default Judgment.
- 6 - 1 appeal was filed. 2 Seaboard thereafter filed a motion for summary judgment 3 (hereinafter, “MSJ”) requesting that the bankruptcy court give 4 preclusive effect to the Default Judgment. Mrs. Tolotti opposed 5 the MSJ on the grounds that Mrs. Tolotti’s state of mind, as 6 required to establish nondischargeability under § 523(a)(6), was 7 not decided by the state court, thus creating a disputed issue of 8 fact that could not be determined by the bankruptcy court on 9 summary judgment.4 Mrs. Tolotti also argued that the issue of 10 dischargeability was not litigated in the state court and could 11 only be determined in the bankruptcy court. 12 The bankruptcy court held a hearing on the MSJ and stated 13 its findings and conclusions on the record. The bankruptcy court 14 found that the Default Judgment was entitled to preclusive effect 15 and that the findings contained therein conclusively established 16 nondischargeability of the judgment amount under § 523(a)(6). 17 The bankruptcy court entered its order granting summary judgment 18 and a separate judgment of nondischargeability thereon (the 19 “Judgment”), and Mrs. Tolotti timely appealed. 20 JURISDICTION 21 The bankruptcy court had jurisdiction pursuant to 28 U.S.C. 22 23 4 In her opposing papers, Mrs. Tolotti argued and stated by declaration that she removed the items from the property because 24 she believed them to belong to her; her court filings were made to protect her rights; and she stopped watering the avocados 25 months before foreclosure because she could not afford the bills and the trees were dying by the time Seaboard offered to 26 reimburse her for watering. Such alleged “factual disputes are irrelevant here where the court’s task is to determine whether 27 the Default Judgment will support a summary judgment for nondischargeability in this court.” Newsom v. Moore 28 (In re Moore), 186 B.R. 962, 966 n.3 (Bankr. N.D. Cal. 1995).
- 7 - 1 §§ 1334 and 157(b)(2)(I). We have jurisdiction under 28 U.S.C. 2 § 158. 3 ISSUE5 4 Did the bankruptcy court err when it determined that the 5 state court’s state of mind findings in the Default Judgment were 6 entitled to issue-preclusive effect as to Seaboard’s § 523(a)(6) 7 nondischargeability claim against Mrs. Tolotti? 8 STANDARD OF REVIEW 9 We review decisions on summary judgment de novo. Bamonte v. 10 City of Mesa, 598 F.3d 1217, 1220 (9th Cir. 2010). We also 11 review de novo whether a debt is excepted from discharge as a 12 willful and malicious injury under § 523(a)(6). Black v. Bonnie 13 Springs Family Ltd. P’ship (In re Black), 487 B.R. 202, 210 (9th 14 Cir. BAP 2013); see also Carrillo v. Su (In re Su), 290 F.3d 15 1140, 1142 (9th Cir. 2002) (nondischargeability presents mixed 16 issues of law and fact and is reviewed de novo). 17 Our review of the bankruptcy court's determination that 18 issue preclusion was available is also de novo. In re Black, 19 487 B.R. at 210. If issue preclusion was available, we then 20 review the bankruptcy court's application of issue preclusion for 21 an abuse of discretion. Id. The bankruptcy court abused its 22 discretion only if it applied the incorrect legal rule or its 23 application of the correct legal rule was illogical, implausible, 24 or without support in the record. See United States v. Hinkson, 25 5 On appeal, Mrs. Tolotti states the issue more broadly, 26 but only one of her arguments addresses the bankruptcy court’s issue preclusion determination. Mrs. Tolotti does not dispute 27 the finality of the Default Judgment; nor question the identity of the parties involved. We, therefore, do not address these 28 elements.
- 8 - 1 585 F.3d 1247, 1261-62 (9th Cir. 2009) (en banc). 2 DISCUSSION AND ANALYSIS 3 A. Standards and burdens. 4 1. Summary judgment 5 A bankruptcy court may grant summary judgment when the 6 pleadings and evidence demonstrate “that there is no genuine 7 issue as to any material fact and that the moving party is 8 entitled to a judgment as a matter of law.” Celotex Corp. v. 9 Catrett, 477 U.S. 317, 322 (1986). The movant has the burden of 10 proof. See N. Slope Borough v. Rogstad (In re Rogstad), 126 F.3d 11 1224, 1227 (9th Cir. 1997) (It is error to grant summary judgment 12 simply because the opponent failed to oppose.). 13 The issue preclusive effect of a prior state court judgment 14 may serve as the basis for granting summary judgment. See 15 Khaligh v. Hadaegh (In re Khaligh), 338 B.R. 817, 832 (9th Cir. 16 BAP 2006); see also Grogan v. Garner, 498 U.S. 279, 284 (1991) 17 (holding that the doctrine of issue preclusion applies in 18 bankruptcy court proceedings seeking to except debts from 19 discharge). Federal courts must give “full faith and credit” to 20 the judgments of state courts. 28 U.S.C. § 1738. 21 2. Issue preclusion 22 The party asserting preclusion bears the burden of 23 establishing the threshold requirements. Harmon v. Kobrin 24 (In re Harmon), 250 F.3d 1240, 1245 (9th Cir. 2001). This means 25 providing “a record sufficient to reveal the controlling facts 26 and pinpoint the exact issues litigated in the prior action.” 27 Kelly v. Okoye (In re Kelly), 182 B.R. 255, 258 (9th Cir. BAP 28 1995), aff'd, 100 F.3d 110 (9th Cir. 1996). “Any reasonable
- 9 - 1 doubt as to what was decided by a prior judgment should be 2 resolved against allowing the [issue preclusive] effect.” Id. 3 In determining whether a state court judgment is entitled to 4 preclusive effect in a bankruptcy proceeding, the bankruptcy 5 court must apply the forum state's law of issue preclusion. 6 In re Harmon, 250 F.3d at 1245. Since the question here involves 7 the preclusive effect of a California state court judgment, we 8 apply California preclusion law. See id. 9 Under California issue preclusion law, the proponent must 10 establish the following: 11 1) the issue sought to be precluded . . . must be identical to that decided in the former proceeding; 12 2) the issue must have been actually litigated in the former proceeding; 3) it must have been necessarily 13 decided in the former proceeding; 4) the decision in the former proceeding must be final and on the merits; 14 and 5) the party against whom preclusion is being sought must be the same as the party to the former 15 proceeding. 16 Honkanen v. Hopper (In re Honkanen), 446 B.R. 373, 382 (9th Cir. 17 BAP 2011); Lucido v. Super. Ct., 51 Cal. 3d 335, 341 (1990). 18 Even if all five requirements are satisfied, however, 19 California places an additional limitation on issue preclusion; 20 courts may give preclusive effect to a judgment “only if 21 application of preclusion furthers the public policies underlying 22 the doctrine.” In re Harmon, 250 F.3d at 1245 (citing Lucido, 23 51 Cal. 3d at 342). 24 3. Issue preclusive effect of default judgments 25 Most jurisdictions do not consider a default judgment to be 26 capable of satisfying the requirements for the application of 27 issue preclusion. See Murray v. Alaska Airlines, Inc., 522 F.3d 28 920, 924 (9th Cir. 2008) (citing Restatement (Second) Judgments
- 10 - 1 § 27, cmt. E). In California, however, issue preclusion may 2 apply to a default judgment; the issue to be precluded, however, 3 “must have been necessarily litigated in the action resulting in 4 the default judgment.” In re Harmon, 250 F.3d at 1246 n.5 5 (internal quotation and citation omitted). 6 The “‘necessarily litigated’ requirement imposes two 7 separate conditions: the issue must have been ‘actually 8 litigated’ and it must have been ‘necessarily decided’ by the 9 default judgment.” Id. The defendant must have had “actual 10 notice of the proceedings and a ‘full and fair opportunity to 11 litigate,’” Cal-Micro, Inc. V. Cantrell (In re Cantrell), 12 329 F.3d 1119, 1123-24 (9th Cir. 2003) (citing In re Harmon, 13 250 F.3d at 1247 n.6); and the material factual issues must have 14 been raised in the pleadings and must have been necessary to 15 sustain the judgment. Id. at 1247. 16 "[A] default judgment conclusively establishes, between the 17 parties so far as subsequent proceedings on a different cause of 18 action are concerned, the truth of all material allegations 19 contained in the complaint in the first action, and every fact 20 necessary to uphold the default judgment; but such judgment is 21 not conclusive as to any defense or issue which was not raised 22 and is not necessary to uphold the judgment." Mitchell v. Jones, 23 172 Cal. App. 2d 580, 586-587 (1959). In default situations, the 24 defendant generally has a right to depend upon the pleadings to 25 determine whether or not to appear and litigate the matter. It 26 is ordinarily held that it would be doing a defendant serious 27 wrong and injustice to uphold a judgment that gives relief beyond 28 that asked for in the complaint. Thus, “[a] default judgment
- 11 - 1 will have a[n issue preclusive] effect only as to material issues 2 actually raised in the pleadings.” Heiser, California Civil 3 Procedure § 9.03 (Matthew Bender & Co. 2nd ed. 2005) (citing 4 English v. English, 9 Cal. 2d 358 (1937); Four Star Elec. Inc. v. 5 Feh Constr., 7 Cal. App. 4th 1375 (1992)). 6 4. Section 523(a)(6) state of mind requirements. 7 A creditor objecting to the dischargeability of its claim 8 bears the burden of proving, by a preponderance of the evidence, 9 that the particular debt falls within one of the exceptions to 10 discharge enumerated in section 523(a). Grogan v. Garner, 11 498 U.S. at 286-91. Section 523(a)(6) excepts from discharge 12 debts arising from a debtor’s “willful and malicious injury” to 13 another person or to the property of another. Barboza v. New 14 Form, Inc. (In re Barboza), 545 F.3d 702, 706 (9th Cir. 2008). 15 “The word ‘willful’ in (a)(6) modifies the word ‘injury,’ 16 indicating that nondischargeability takes a deliberate or 17 intentional injury, not merely a deliberate or intentional act 18 that leads to injury.” Kawaauhau v. Geiger, 523 U.S. 57, 61 19 (1998). In the Ninth Circuit, “§ 523(a)6)’s willful injury 20 requirement is met only when the debtor has a subjective motive 21 to inflict injury or when the debtor believes that injury is 22 substantially certain to result from his own conduct.” Ormsby v. 23 First Am. Title Co. (In re Ormsby), 591 F.3d 1199, 1206 (9th Cir. 24 2010). This standard is an exacting one under any circumstance. 25 “A malicious injury involves (1) a wrongful act, (2) done 26 intentionally, (3) which necessarily causes injury, and (4) is 27 done without just cause or excuse. Malice may be inferred based 28 on the nature of the wrongful act.” Id. at 1207. The willful
- 12 - 1 injury must be established, however, before malice may be 2 inferred. See id. (citing Thiara v. Spycher Bros. 3 (In re Thiara), 285 B.R. 420, 434 (9th Cir. BAP 2002) (“the ‘done 4 intentionally’ element of a ‘malicious’ injury brings into play 5 the same subjective standard of intent which focuses on . . . 6 knowledge of harm to the creditor.”)). 7 B. Mrs. Tolotti’s subjective state of mind was not actually 8 litigated in the state court action. 9 Here, Seaboard appropriately argued below, and repeats on 10 appeal, that default judgments in California are entitled to 11 issue preclusive effect. And Seaboard also correctly argues that 12 the Default Judgment contains findings that would support 13 nondischargeability under § 523(a)(6). The state court expressly 14 found that Mrs. Tolotti “caused the damage referenced in this 15 Judgment without justification, just cause, or excuse.” Request 16 for Judicial Notice, Ex. D at ¶ 7 (Adv. Pro. ECF No. 40). It 17 found that Mrs. Tolotti “acted deliberately, willfully, and 18 intended to cause injury . . . .” Id. In addition, it found 19 that Mrs. Tolotti “acted with malice in taking the . . . actions 20 and . . . the actions . . . caused [Seaboard] to suffer and incur 21 damages . . . .” Id. at ¶ 8. These words and phrases appear 22 facially to satisfy the state of mind requirements. But the 23 problem with this view is that these words and phrases when used 24 in the context of state court causes of action for waste and 25 conversion do not comport with the very particular definitions in 26 the Ninth Circuit for bankruptcy nondischargeability purposes. 27 Moreover, nowhere in the state court complaint did Seaboard 28 allege that Mrs. Tolotti intended to cause injury to Seaboard, a
- 13 - 1 critical element of the subjective state of mind required to 2 support a § 523(a)(6) claim. This material factual issue was 3 neither raised by Seaboard in the State Court Complaint nor 4 necessary to support a state court judgment based on waste and 5 conversion. 6 Thus, prior to her default, Mrs. Tolotti could not know that 7 intent to injure would be litigated in the state court action. 8 This determination arose for the first time in the context of 9 Default Judgment and was not a required determination for 10 liability in connection with the state court waste and conversion 11 claims. 12 1. Mrs. Tolotti’s “intent to cause injury” was not raised 13 in the State Court Complaint. 14 In the State Court Complaint, Seaboard pled that 15 Mrs. Tolotti’s actions and omissions, labeled waste and 16 conversion, were intentional and deliberate. It also summarily 17 alleged that such “willful and malicious actions” caused Seaboard 18 to incur damages. Willful and intentional actions, however, are 19 not synonymous with willful or intentional injury. See Geiger, 20 523 U.S. at 61; and see Dominguez v. Elias (In re Elias), 21 302 B.R. 900, 909 (Bankr. D. Idaho 2003) (emphasis on the 22 importance of the debtor’s subjective intent under § 523(a)(6) 23 required denial of issue preclusive effect of a criminal 24 judgment). As Mrs. Tolotti argues on appeal, willful, as used in 25 state court tort actions, is not synonymous with willful under 26 § 523(a)(6). 27 2. California “willfulness” vs. § 523(a)(6) “willfulness.” 28 California law recognizes “willful” misconduct as a type of
- 14 - 1 misconduct that is more culpable than negligence but falls short 2 of intentional wrong. New v. Consol. Rock Prods. Co., 171 Cal. 3 App. 3d 681, 689 (1985). “Wilful or wanton misconduct is 4 intentional wrongful conduct, done either with a knowledge that 5 serious injury to another will probably result, or with a wanton 6 and reckless disregard of the possible result.” Id. Such 7 willful misconduct is known under several other names: “serious 8 and wilful misconduct,” “wanton misconduct,” “reckless 9 disregard,” “recklessness ” – an aggravated form of negligence. 10 Id.; and see Carlsen v. Koivumaki, 227 Cal. App. 4th 879, 895 11 (2014). But negligence, even aggravated negligence, is 12 insufficient to support a nondischargeable claim under 13 § 523(a)(6). See Petralia v. Jercich (In re Jercich), 238 F.3d 14 1202, 1207 (9th Cir. 2001) (“[I]t must be shown not only that the 15 debtor acted willfully, but also that the debtor inflicted the 16 injury willfully and maliciously rather than recklessly or 17 negligently.”). Nonetheless, Seaboard incorporated in its 18 allegations of waste and conversion such descriptors as “willful 19 and malicious actions,” “deliberate,” and “intentional.” Having 20 done so, however, Seaboard did not place at issue Mrs. Tolotti’s 21 subjective state of mind. In a default situation, if a material 22 fact was not raised in the pleadings, unless it was necessarily 23 decided, the issue was not actually litigated. See In re Harmon, 24 250 F.3d at 1248. 25 “Whether an issue was necessarily decided has been 26 interpreted to mean that the issue was not entirely unnecessary 27 to the judgment in the prior proceeding.” Murphy v. Murphy, 28 164 Cal. App. 4th 376, 400 (2008) (internal quotation and
- 15 - 1 citation omitted). Here, Seaboard was not required to prove 2 Mrs. Tolotti’s subjective intent to injure in order to prove her 3 liability for waste or conversion. 4 3. Section 523(a)(6) willfulness was not necessary for 5 Seaboard’s judgment for waste. 6 In California, waste is an unlawful act or omission of duty 7 by a person in possession of real property that results in an 8 injury to that property. S. Pac. Land Co. v. Kiggins, 110 Cal. 9 App. 56, 60-61 (1930). “Proof of conduct which has resulted in 10 substantial depreciation of the market value of the land 11 establishes waste.” Smith v. Cap Concrete Inc., 133 Cal. App. 3d 12 769, 776 (1982). Thus, liability based on this property tort 13 does not require a showing of a subjective motive to injure. 14 4. Section 523(a)(6) willfulness was not necessary for 15 Seaboard’s judgment for conversion. 16 Conversion is “the wrongful exercise of dominion over 17 another’s personal property in denial of or inconsistent with his 18 rights in the property.” In re Emery, 317 F.3d 1064, 1069 (9th 19 Cir. 2003). To succeed on a claim of conversion, the plaintiff 20 must show: (1) a present right to possess the property, (2) the 21 defendant’s conversion by a wrongful act or disposition of 22 property, and (3) damages. Hernandez v. Lopez, 180 Cal. App. 4th 23 932, 939-40 (2009). A cause of action for conversion does not 24 require a showing that the “defendant did the act in question 25 from wrongful motives, or generally speaking, even 26 intentionally.” Henderson v. Sec. Nat’l Bank, 72 Cal. App. 3d 27 764, 771 (1977). In fact, “a want of such motives, or of 28 intention, is no defense.” Id.
- 16 - 1 Thus, the finding that Mrs. Tolotti intended to cause injury 2 to Seaboard,6 was unnecessary and immaterial to establish 3 Seaboard’s right to recover its claimed damages.7 As such, 4 Mrs. Tolotti’s § 523(a)(6) subjective state of mind was not 5 necessarily decided by the state court.8 6 5. Seaboard did not seek or obtain punitive damages. 7 Arguably, if Seaboard sought and obtained a ruling in the 8 state court awarding punitive damages against Mrs. Tolotti, the 9 findings necessary to support such damages might be sufficient to 10 satisfy the state of mind requirement under § 523(a)()6). See 11 In re Jercich, 238 F.3d at 1209 (a finding of substantial 12 oppression under Cal. Civ. Code § 3294, for punitive damages, 13 held to be sufficient to show malicious injury under 14 § 523(a)(6)). Seaboard did not pray for punitive damages, 15 however, in its State Court Complaint; thus, no related findings 16 were necessary to support the decision. 17 18 6 19 We reiterate that the record on appeal fails to establish that the state court had anything more than the State Court 20 Complaint on which to base its decision. 21 7 In oral argument, Seaboard’s counsel argued that the state court read between the lines to find Mrs. Tolotti’s intent 22 to injure. The record here does not support Seaboard’s contention that the state court consciously and appropriately 23 made such inferences unless we also read between the lines. Issue preclusion analysis does not permit us to do so. 24 Mrs. Tolotti’s counsel conceded that Mrs. Tolotti’s conduct might appear “outrageous” but that in Mrs. Tolotti’s mind she was 25 legitimately entitled to do as she had done. Seaboard had the burden, and on this point, failed to carry it. 26 8 Seaboard’s recitation of the elements required for issue 27 preclusion in California omitted the word “necessarily” in the third factor: “necessarily decided.” And on appeal Seaboard does 28 no more than state that all the issues were decided.
- 17 - 1 6. A § 523(a)(6) “malice” finding necessarily requires intentional injury. 2 3 As discussed earlier, Mrs. Tolotti’s intent to cause injury 4 was not actually litigated. Even assuming the state court based 5 its “malice” finding on inferences from Mrs. Tolotti’s actions, 6 without having appropriately first determined the “intentional 7 injury,” such an inference was premature, at best. And because 8 the application of issue preclusion as to the intentional injury 9 finding was not appropriate, we determine that application of 10 issue preclusion to the finding of malice is likewise not 11 appropriate.9 12 7. Public policy considerations 13 Seaboard argues that the bankruptcy court held that public 14 policy considerations favored application of issue preclusion. 15 We determine that policy considerations favor application of 16 issue preclusion to the findings regarding Mrs. Tolotti’s actions 17 and the damages caused thereby. To give preclusive effect to the 18 facial § 523(a)(6) state of mind findings included in the Default 19 Judgment, however, is inconsistent with fairness and public 20 policy. The State Court Complaint failed to provide notice to 21 Mrs. Tolotti that her § 523(a)(6) state of mind would be 22 9 As to the “malice” finding by the state court, 23 Mrs. Tolotti argues on appeal that the state court erred in relying on allegations that she employed improper litigation 24 tactics to prevent Seaboard’s possession of the property – because she had a legal right to litigate. Thus, Mrs. Tolotti 25 argues, the bankruptcy court erred by giving the malice finding preclusive effect. Mrs. Tolotti asks the bankruptcy court and 26 this Panel to sit as reviewing courts with respect to the Default Judgment - in effect a de facto appeal of a state court decision 27 that is barred by the Rooker-Feldman doctrine. See Exxon Mobil Corp. v. Saudi Basic Indust. Corp., 544 U.S. 280, 284 (2005). We 28 appropriately decline to do so.
- 18 - 1 presented to the state court for decision. Her failure to defend 2 against that material factual issue, thus, cannot appropriately 3 be considered an admission of its truth.10 The fact that the 4 state court action involved terminating sanctions does not change 5 this conclusion. The resulting Default Judgment was broader than 6 the State Court Complaint and arguably conflated tortious conduct 7 with the “intent to injure” necessary to support 8 nondischargeability under § 523(a)(6). Here, the ultimate 9 determination of Mrs. Tolotti’s § 523(a)(6) state of mind must 10 remain a finding to be made by the bankruptcy court.11 We 11 reiterate that only Mrs. Tolotti’s state of mind remains to be 12 determined. 13 CONCLUSION 14 Based on the foregoing, we VACATE the bankruptcy court’s 15 summary judgment and REMAND this matter for further proceedings. 16 17 18 19 20 10 Seaboard argued that Mrs. Tolotti admitted willful and malicious injury when she did not dispute Seaboard’s statement of 21 undisputed facts and conclusions of law filed in support of the MSJ. We agree with Mrs. Tolotti’s assertion, however, that 22 Mrs. Tolotti only agreed that such findings were contained in the Default Judgment. She did not agree that the findings themselves 23 were undisputed. 24 11 Mrs. Tolotti also contends that the bankruptcy court improperly weighed evidence by disregarding Mrs. Tolotti’s 25 declaration in opposition to the MSJ to the effect that she did not intend to harm Seaboard. Mrs. Tolotti does not cite to any 26 point in the record to support the contention that the bankruptcy court weighed the evidence, and, as noted earlier, the contention 27 is inconsistent facially with the bankruptcy court’s analysis and ruling based solely on its application of issue preclusion to the 28 Default Judgment.
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