FILED NOV 01 2012 1 SUSAN M SPRAUL, CLERK U.S. BKCY. APP. PANEL 2 OF THE NINTH CIRCUIT
3 UNITED STATES BANKRUPTCY APPELLATE PANEL 4 OF THE NINTH CIRCUIT 5 In re: ) BAP No. 12-1269-JuKiD ) 6 JAMES LARRY SACCHERI and ) Bk. No. 09-17721 JUDITH ANNE SACCHERI, ) 7 ) Adv. No. 09-1273 Debtors. ) 8 ______________________________) JAMES LARRY SACCHERI, ) 9 ) Appellant, ) 10 ) v. ) M E M O R A N D U M* 11 ) ST. LAWRENCE VALLEY DAIRY; ) 12 JUDITH ANNE SACCHERI, ) ) 13 Appellees. ) ______________________________) 14 Argued and Submitted on October 19, 2012 15 at Sacramento, California 16 Filed - November 1, 2012 17 Appeal from the United States Bankruptcy Court for the Eastern District of California 18 Honorable Richard T. Ford, Bankruptcy Judge, Presiding 19 _____________________________________ 20 Appearances: Appellant James Larry Saccheri argued pro se; Jeff Reich, Esq. argued for appellee St. Lawrence 21 Valley Dairy. ____________________________________ 22 23 Before: JURY, KIRSCHER, and DUNN 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- 1 Chapter 71 debtor, James Larry Saccheri (“Saccheri” or 2 “Debtor”), appeals from the bankruptcy court’s judgment in favor 3 of appellee, St. Lawrence Valley Dairy, Inc. (the “Dairy”), 4 finding that his debt in the amount of $492,006.67 plus 5 attorneys’ fees of $59,382.50 and costs of $2,737.50 was 6 nondischargeable under § 523(a)(2)(A) and (4). 7 We AFFIRM the bankruptcy court’s decision finding that the 8 debt was nondischargeable under § 523(a)(2)(A) and 9 (a)(4)(embezzlement), except for the award of attorneys’ fees 10 which we REVERSE. We remand this proceeding to the bankruptcy 11 court for entry of judgment consistent with this disposition. 12 I. FACTS 13 A. Prepetition Events 14 Saccheri, an attorney,2 approached his friends and clients 15 to invest in a dairy farm located in Chateaugay, New York. One 16 of the investors, Michael J. Montgomery (“Montgomery”), was a 17 distant family member of Saccheri and Saccheri’s client for 18 almost twenty years.3 The other investors, James and Joan 19 Kozera, had known Saccheri since grade school and were also 20 21 1 22 Unless otherwise indicated, all chapter and section references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and 23 “Rule” references are to the Federal Rules of Bankruptcy Procedure. 24 2 Saccheri resigned from the California State Bar in April 25 2001 with charges pending. 26 3 Montgomery was also a farmer and real estate investor. He 27 testified that he owned approximately 135 income properties consisting of single family residences, commercial buildings and 28 apartment buildings. Montgomery invested $480,000 in the Dairy.
-2- 1 former clients.4 Montgomery and the Kozeras did not want to 2 invest in the Dairy if loans were involved. 3 From September 4, 2003 until November 24, 2003, Saccheri 4 was the sole officer and director of the Dairy. On November 24, 5 2003, Montgomery became the secretary/treasurer. On April 12, 6 2004, at the Dairy’s first annual meeting of shareholders and 7 directors, Montgomery, James Kozera, Joan Kozera and Saccheri 8 were elected to the board of directors. Saccheri was elected 9 president, Montgomery was elected secretary/treasurer, 10 Mr. Kozera was elected vice-president and Mrs. Kozera was a 11 director. The officers and directors remained the same until 12 December 27, 2007. 13 At all times, Saccheri had control of the Dairy’s bank 14 accounts and he alone kept the company’s books and prepared the 15 financial statements. Over time, Saccheri began taking 16 substantial sums of money from the Dairy in the form of “loans” 17 without board approval and which far exceeded his annual 18 compensation of $30,000.5 These “loans” were capitalized as 19 “other assets” on the Dairy’s balance sheet with a line item 20 entitled “North Country Trust” or “NC Trust”. 21 In 2007, Montgomery became aware that he had signed papers 22 for an unauthorized secured loan arranged by Saccheri in the 23 24 4 There were other investors as well. Saccheri testified that his sister, Janice, and her husband invested $20,000. The 25 record also shows that Dr. Lee invested in the Dairy. Dr. Lee’s 26 shares were bought back for $50,000 (500 shares at $100 a share). 5 27 Saccheri disputes the bankruptcy court’s factual finding that his salary was $30,000. As noted below, we do not find any 28 of the court’s factual findings clearly erroneous.
-3- 1 amount of $350,000 from Yankee Farm Credit to the Dairy. 2 Montgomery received a letter from the bank stating that the 3 property taxes were not being paid on the property in New York, 4 which was a requirement of the loan. 5 Also in 2007, Montgomery further learned about Saccheri’s 6 self-dealings and concealment of the financial condition of the 7 Dairy through his trust attorney, Paul Franco, who had reviewed 8 the Dairy’s records. Saccheri’s self-dealings included, among 9 other things, obtaining the unauthorized secured loan from 10 Yankee Farm Credit and his use of the Dairy’s money to pay 11 personal expenses, including payments on his house and for 12 health insurance. Montgomery also learned from his trust 13 attorney that he had personally guaranteed the $350,000 Yankee 14 Farm Credit loan by signing a document without reading it. 15 Montgomery called a meeting at Mr. Franco’s office. The 16 Kozeras, Montgomery, Saccheri and others attended. After they 17 left the meeting, the board members realized that Saccheri alone 18 was preparing the financial statements and doing the bookkeeping 19 for the Dairy. They agreed that a CPA should be hired. At a 20 subsequent meeting, after Saccheri failed to bring in an 21 accountant, Saccheri resigned. 22 Subsequently, Mrs. Kozera and Mr. Ezell, the CPA, discussed 23 money going in and out of the Dairy’s bank account to other bank 24 accounts the board members knew nothing about. They discovered 25 that Saccheri had written checks from the Dairy to pay back 26 funds to the Palmira Marando Trust, which was maintained for 27 Montgomery’s grandmother. Saccheri had taken funds from the 28
-4- 1 trust in his role as trustee.6 They also discovered that 2 Saccheri had written unauthorized checks totaling $152,400.44 3 from the Dairy to the Trenhaile Estate. At an April 1, 2008, 4 shareholder meeting, when Saccheri was asked why he took the 5 money from the Dairy, Saccheri replied that he was in debt from 6 his declining law practice 1995 to 2000. Then from 2000 to 2004 7 he stated that he accumulated even more personal consumer debt. 8 On June 25, 2008, the parties entered into a settlement and 9 release agreement (“Settlement Agreement”) whereby they settled 10 the claims for $375,000. In connection with the Settlement 11 Agreement, Saccheri signed an unsecured promissory note for 12 $299,000 and a second note for $76,000 which was secured by a 13 deed of trust on Saccheri’s family home. Under the terms of the 14 settlement, if Saccheri was not in default, the Dairy agreed not 15 to pursue any action at law or equity against him. The 16 Settlement Agreement contained an attorneys’ fees clause which 17 stated that the losing party shall pay the prevailing party a 18 reasonable sum for attorneys’ fees incurred in bringing an 19 action for the purpose of enforcing this Settlement Agreement or 20 pursuing a breach thereof. 21 Saccheri made only a few payments on the notes before 22 defaulting. 23 B. Bankruptcy Events 24 On August 12, 2009, Saccheri and his wife Judith filed a 25 joint chapter 7 petition. In Schedule D, debtors listed the 26 27 6 Saccheri admitted that he wrote twenty-eight checks to the 28 Palmira Marando Trust totaling $81,525.
-5- 1 Dairy as having a secured debt in the amount of $75,597 against 2 their residence. In Schedule F, debtors listed the Dairy as 3 having an unsecured debt in the amount of $297,416. 4 The Adversary Proceeding 5 On November 9, 2009, the Dairy filed a nondischargeability 6 complaint against Debtor for an unliquidated amount. On 7 June 25, 2010, the Dairy filed a third amended complaint 8 (“TAC”). The TAC alleged four claims for relief, with the first 9 three claims asserted against Debtor and the fourth claim 10 asserted against Judith. The first and second claims for relief 11 were based on § 523(a)(4) and alleged that Debtor had committed 12 fraud or defalcation while acting in a fiduciary capacity and 13 embezzlement. The third claim for relief, based on 14 § 523(a)(2)(A), alleged that Debtor had obtained money and goods 15 by false pretenses, false representation and actual fraud. The 16 facts underlying each of the claims for relief were essentially 17 the same and related to the numerous unauthorized “loans” Debtor 18 had taken from the Dairy and his concealment of those “loans” 19 from the other board members. 20 The fourth claim for relief, asserted against Judith only, 21 was based on § 523(a)(6). The bankruptcy court dismissed the 22 claim against Judith on summary judgment. 23 On April 6, 2011, the bankruptcy court held a final pre- 24 trial hearing and bifurcated the trial into liability and damage 25 phases. The court set a trial for the liability phase on May 9 26 and 10, 2011. At the conclusion of the trial the matter was 27 submitted to allow for further findings and briefs. 28 On June 29, 2011, the bankruptcy court issued its findings
-6- 1 of fact and conclusions of law. The bankruptcy court found that 2 the Dairy had proven all the elements for embezzlement under 3 § 523(a)(4), for defalcation while acting as fiduciary under 4 § 523(a)(4) and for fraud under § 523(a)(2)(A). Based on these 5 conclusions, the court found that the debt in an unspecified 6 amount was nondischargeable. 7 On July 18, 2011, the Dairy filed a fourth amended 8 complaint which restated its TAC and added a fifth claim for 9 relief requesting a declaration that Judith’s community property 10 interest was liable for the nondischargeable debt attributed to 11 her spouse. 12 The damage phase proceeded to trial on November 29 and 30, 13 and December 1, 2011. On April 6, 2012, the bankruptcy court 14 issued additional findings of fact and conclusions of law. In a 15 forty-four line item chart which listed various checks and 16 transactions, certain amounts were charged against Saccheri, 17 credited or disallowed. The court addressed each of the items, 18 ultimately finding the total nondischargeable amount was 19 $399,131.35. The court also found that the Dairy, as the 20 prevailing party, was entitled to its attorneys’ fees and costs 21 under the terms of the Settlement Agreement. In its conclusions 22 of law, the bankruptcy court found that Judith’s community 23 assets were liable for the damages. Also, due to Debtor’s 24 fraudulent conduct, the bankruptcy court applied the doctrine of 25 unclean hands and found Debtor was not entitled to the benefit 26 of doubt on the issues of damages. The bankruptcy court noted 27 that Debtor had deceived people who had trusted him over a 28 substantial period of time.
-7- 1 The Dairy then submitted its application for attorneys’ 2 fees and costs seeking $59,382.50 in fees and $2,737.50 in costs 3 for a total of $62,120. The Dairy attached detailed time 4 records to the application. 5 On May 2, 2012, Debtor filed an opposition to the fee 6 application. Relying on Itule v. Metlease, Inc. (In re Itule), 7 114 B.R. 206, 213 (9th Cir. BAP 1990); Grove v. Fulwiler 8 (In re Fulwiler), 624 F.2d 908, 910 (9th Cir. 1980); and 9 AT&T Universal Card Servs. v. Bonnifield (In re Bonnifield), 10 154 B.R. 743, 745 (Bankr. N.D. Cal. 1993), Debtor argued that 11 the attorneys’ fees and costs should not be awarded because the 12 attorneys’ fees provision in the Settlement Agreement was 13 conditioned on an action that was brought for the purpose of 14 enforcing the agreement or pursuing a breach thereof. Debtor 15 asserted that the Dairy was not seeking to enforce the 16 Settlement Agreement or the notes in the adversary, instead 17 choosing to litigate issues related to fraud, not contract. 18 Debtor also objected to the amount of fees requested because 19 they were unreasonable. 20 In reply, the Dairy argued that the adversary was “simply 21 the enforcement of the subject Settlement Agreement. In such 22 matters, attorney[s]’ fees are permissible.” The Dairy, citing 23 Transought v. Johnson, 931 F.2d 1505 (11th Cir. 1991), asserted 24 the general rule that attorneys’ fees are properly awarded to a 25 creditor prevailing on a bankruptcy claim if there exists a 26 statute or valid contract authorizing the fees. 27 On May 7, 2012, the bankruptcy court issued further 28 findings of fact and conclusions of law. The court found that
-8- 1 the amount of damages listed as $399,131.35 was incorrect. The 2 bankruptcy court noted that the correct amount of damages was 3 $492,006.57. Citing Fleishmann Distilling Corp. v. Maier 4 Brewing Co., 386 U.S. 714, 717 (1967), the bankruptcy court 5 noted that attorneys’ fees are not ordinarily recoverable in the 6 absence of a statute or enforceable contract providing for such 7 fees. The court concluded that the Settlement Agreement clearly 8 provided for allowance of attorneys’ fees. The court also 9 observed that Cal. Code Civ. P. § 1021 provided for attorneys’ 10 fees by agreement, express or implied. In the end, the 11 bankruptcy court decided that the requested fees were reasonable 12 and awarded them in full. 13 On May 7, 2012, the bankruptcy court filed the judgment 14 finding $492,006.57 plus attorneys’ fees of $59,382.50 and costs 15 of $2,737.50 nondischargeable under § 523(a)(2)(A) and (4). On 16 May 8, 2012, the bankruptcy court entered the judgment. Debtor 17 timely filed a notice of appeal. 18 II. JURISDICTION 19 The bankruptcy court had jurisdiction over this proceeding 20 under 28 U.S.C. §§ 1334 and 157(b)(2)(I). We have jurisdiction 21 under 28 U.S.C. § 158. 22 III. ISSUES 23 A. Whether the bankruptcy court erred in concluding that 24 the Dairy proved the elements for nondischargeability under 25 § 523(a)(2)(A); 26 B. Whether the bankruptcy court erred in concluding that 27 the Dairy proved the elements for embezzlement under 28 § 523(a)(4);
-9- 1 C. Whether the bankruptcy court erred in finding that 2 Debtor was a fiduciary within the meaning of § 523(a)(4); 3 D. Whether the bankruptcy court erred in its calculation 4 of damages; and 5 E. Whether the bankruptcy court erred in awarding the 6 Dairy its attorneys’ fees.7 7 IV. STANDARDS OF REVIEW 8 In the context of an appeal from a nondischargeability 9 judgment, we review the bankruptcy court’s findings of fact 10 under the clearly erroneous standard and its conclusions of law 11 de novo. Honkanen v. Hopper (In re Honkanen), 446 B.R. 373, 382 12 (9th Cir. BAP 2011). However, the ultimate question of whether 13 a particular debt is dischargeable is a mixed question of fact 14 and law that we review de novo. Id.; see also Searles v. Riley 15 (In re Searles), 317 B.R. 368, 373 (9th Cir. BAP 2004) (stating 16 that mixed questions are reviewed de novo when they require the 17 court “to consider legal concepts and exercise judgment about 18 values animating legal principles.”). 19 “The determination of justifiable reliance [under 20 § 523(a)(2)(A)] is a question of fact subject to the clearly 21 erroneous standard of review.” Eugene Parks Law Corp. Defined 22 Benefit Pension Plan v. Kirsh (In re Kirsh), 973 F.2d 1454, 1456 23 (9th Cir. 1992) (per curiam). 24 The bankruptcy court’s factual findings regarding the 25 7 26 Debtor lists twenty-one issues for purposes of this appeal. The majority of the issues pertain to the bankruptcy 27 court’s factual findings, most of which relate to the court’s calculation of damages. We address Debtor’s factual errors 28 arguments below.
-10- 1 amount of damages are also reviewed under a clearly erroneous 2 standard. Lundell v. Ulrich (In re Ulrich), 236 B.R. 720, 723 3 (9th Cir. BAP 1999). 4 A bankruptcy court’s factual findings are clearly erroneous 5 if they are illogical, implausible, or without support from 6 inferences that may be drawn from the record. United States v. 7 Hinkson, 585 F.3d 1247, 1259–61 (9th Cir. 2009) (en banc). It 8 is well settled that “review under the ‘clearly erroneous 9 standard’ is significantly deferential, requiring a ‘definite 10 and firm conviction that a mistake has been committed.’” 11 Concrete Pipe & Prods. of Cal., Inc. v. Constr. Laborers Pension 12 Trust for So. Cal., 508 U.S. 602, 622 (1993). We are required 13 to uphold any determination of the bankruptcy court that falls 14 within a broad range of permissible conclusions. Cooter & Gell 15 v. Hartmarx Corp., 496 U.S. 384, 400 (1990). 16 The issue of whether a relationship is “fiduciary” within 17 the meaning of § 532(a)(4) is a question of law, Runnion v. 18 Pedrazzini (In re Pedrazzini), 644 F.2d 756, 758 (9th Cir. 19 1981), which we review de novo. Ragsdale v. Haller, 780 F.2d 20 794 (9th Cir. 1986). 21 We review the bankruptcy court’s evidentiary rulings for 22 abuse of discretion. See Johnson v. Neilson (In re Slatkin), 23 525 F.3d 805, 811 (9th Cir. 2008). We also “review for abuse of 24 discretion the bankruptcy court’s award of prejudgment interest, 25 but review de novo whether an award of prejudgment interest is 26 authorized under state or federal law.” Id. at 820. 27 Under the abuse of discretion standard of review, we first 28 “determine de novo whether the [bankruptcy] court identified the
-11- 1 correct legal rule to apply to the relief requested.” Hinkson, 2 585 F.3d at 1262. And if the bankruptcy court identified the 3 correct legal rule, we then determine under the clearly 4 erroneous standard whether its factual findings and its 5 application of the facts to the relevant law were illogical, 6 implausible, or without support in inferences that may be drawn 7 from the facts in the record. Id. 8 “Awards of attorney[s’] fees are generally reviewed for an 9 abuse of discretion. However, we only arrive at discretionary 10 review if we are satisfied that the correct legal standard was 11 applied and that none of the [bankruptcy court’s] findings of 12 fact were clearly erroneous. We review questions of law de 13 novo.” Rickley v. Cnty. of L.A., 654 F.3d 950, 953 (9th Cir. 14 2011). To the extent the issue is whether California law allows 15 the award of attorneys’ fees, our review is de novo. Fry v. 16 Dinan (In re Dinan), 448 B.R. 775, 783 (9th Cir. BAP 2011). 17 V. DISCUSSION 18 On appeal, Debtor argues that the bankruptcy court erred in 19 concluding that the debt owed to the Dairy was nondischargeable 20 under § 523(a)(2)(A) and (4) due to mistakes of fact and law. 21 Debtor alleges numerous factual errors, contending that the 22 bankruptcy court improperly found the element of justifiable 23 reliance was met under § 523(a)(2)(A) and charged or failed to 24 give him credit for certain amounts when it calculated the 25 damage award. Debtor also asserts that he was not a fiduciary 26 within the meaning of § 523(a)(4). Finally, Debtor contends 27 that the bankruptcy court erred in awarding attorneys’ fees to 28 the Dairy because the issues litigated in the adversary
-12- 1 proceeding fell outside the scope of the attorneys’ fee clause 2 in the Settlement Agreement. 3 Before addressing Debtor’s contentions of law, we address 4 his asserted factual errors which are listed under his issues on 5 appeal. As appellant, Debtor had the “responsibility to file an 6 adequate record, and the burden of showing that the bankruptcy 7 court’s findings of fact are clearly erroneous. [Debtor] should 8 know that an attempt to reverse the trial court’s findings of 9 fact will require the entire record relied upon by the trial 10 court be supplied for review.” Kritt v. Kritt (In re Kritt), 11 190 B.R. 382, 387 (9th Cir. BAP 1995) (citing Burkhart v. FDIC 12 (In re Burkhart), 84 B.R. 658, 660-61 (9th Cir. BAP 1988)). 13 Debtor has provided us with only select portions of the 14 relevant transcripts. Moreover, Debtor refers to trial exhibits 15 which are ostensibly included under Tab Y; however, the 16 documents under Tab Y do not have exhibit numbers on them, 17 making it nearly impossible for us to match the exhibits with 18 testimony. To compound the problem, it does not appear that 19 Debtor included all the exhibits from trial in the record. Due 20 to the incomplete record, effective appellate review of factual 21 errors under the clearly erroneous standard will be difficult if 22 not impossible.8 23 “The settled rule on transcripts in particular is that 24 25 8 BAP Rule 8006-1 provides: “The excerpts of the record 26 shall include the transcripts necessary for adequate review in light of the standard of review to be applied to the issues 27 before the Panel. The Panel is required to consider only those portions of the transcript included in the excerpts of the record 28 . . . .”
-13- 1 failure to provide a sufficient transcript may, but need not, 2 result in dismissal or summary affirmance and that the appellate 3 court has discretion to disregard the defect and decide the 4 appeal on the merits.” Kyle v. Dye (In re Kyle), 317 B.R. 390, 5 393-94 (9th Cir. BAP 2004), aff’d, 170 Fed.Appx. 457 (9th Cir. 6 2006). Having obtained the partial transcripts and some 7 exhibits, although unnumbered, we exercise our discretion to 8 review Debtor’s alleged factual errors on the merits. 9 We first observe that Debtor failed to match the majority 10 of the asserted factual errors with any of the elements under 11 § 523(a)(2)(A) or (a)(4). Indeed, the only element Debtor 12 discusses in his brief pertaining to § 523(a)(2)(A) is 13 justifiable reliance, which we address below. From what we can 14 tell, some of the factual errors alleged relate to the nature 15 and extent of Debtor’s fraudulent conduct. 16 Specifically, Debtor contends that the bankruptcy court 17 erroneously found his compensation was $30,000 per year9 when he 18 testified that his compensation package was later modified with 19 board approval to include management fees, health insurance, and 20 other expenses. Hr’g Tr. at 315-17, 5/10/11. However, the 21 bankruptcy court did not believe Debtor’s testimony regarding 22 his modified compensation package and there was no written 23 evidence to support his testimony. 24 Debtor also takes issue with the bankruptcy court’s factual 25 9 26 James Kozera testified that the directors allowed this salary although it was never discussed. Kozera also testified 27 that this salary had not changed. Hr’g Tr. at 152, 162-63, 5/9/11. Montgomery testified that he remembered Debtor’s annual 28 compensation as $32,000. Hr’g Tr. at 91, 5/9/11.
-14- 1 finding that Montgomery and the other directors were not aware 2 of the $350,000 loan between the Dairy and Yankee Farm Credit 3 until 2007. The record shows there were numerous documents 4 pertaining to the loan, including a guarantee by Montgomery, 5 that Montgomery signed. Montgomery testified that he did not 6 read or understand the documentation that he signed authorizing 7 the $350,000 loan and did not learn about it until he received 8 the letter from Yankee Farm Credit that the taxes were not being 9 paid on the property. Debtor contends that Montgomery’s 10 testimony should not have been believed because Montgomery was 11 an educated man and experienced buyer of real estate. Debtor 12 maintains that Montgomery’s testimony is “beyond the realm of 13 possibility.” 14 The record shows that the bankruptcy court found otherwise 15 based on the relationship between Debtor and Montgomery. 16 Montgomery testified that he trusted Debtor and that he did not 17 read legal papers, instead referring them to Debtor, his 18 attorney for twenty years. The court found Montgomery’s 19 testimony believable. The bankruptcy court also believed the 20 testimony of the Kozeras that they did not know about the loan 21 and would never have authorized it. 22 On this record we cannot say that the court’s factual 23 findings in connection with the board’s discovery of the Yankee 24 Farm Credit loan are illogical, implausible, or without support 25 from inferences drawn from the record. Hinkson, 585 F.3d at 26 1259-61. In addition, findings based on determinations 27 regarding the credibility of witnesses “demand[] even greater 28 deference to the trial court’s findings; for only the trial
-15- 1 judge can be aware of the variations in demeanor and tone of 2 voice that bear so heavily on the listener’s understanding of 3 and belief in what is said.” Anderson v. City of Bessemer City, 4 N.C., 470 U.S. 564, 575 (1985). 5 We also point out that the outcome of this appeal does not 6 stand or fall on these alleged factual errors regarding Debtor’s 7 fraud. The record shows Debtor committed multiple frauds by 8 writing unauthorized checks on the Dairy’s bank account for his 9 personal use none of which were evidenced by independent 10 director approval, board authorization, or any directors’ 11 meeting minutes. Debtor admitted his liability on many of these 12 unauthorized transactions: he admitted to borrowing $81,525 13 from the Dairy to repay monies that he had taken from the 14 Palmira Marando Trust,10 to taking unauthorized ATM charges of 15 $61,444.63 (with an offset of $1,531.48), to making payments on 16 his home totaling $34,418.52, and he did not dispute charges 17 against him for the 2004 checks totaling $60,530.78, the 2005 18 checks totaling $72,300, the 2006 checks totaling $42,850, and 19 the 2007 checks totaling $44,625. Thus, there is ample evidence 20 to show Debtor engaged in fraud and a continuing course of 21 deceptive conduct. 22 Debtor asserts numerous factual errors with respect to the 23 bankruptcy court’s calculation of damages. Again, the record 24 10 In addition, the record shows that Debtor was not 25 authorized to borrow $152,504.44 from the Dairy to repay monies 26 he had taken from the Trenhaile Estate. Although Debtor testified that he was authorized to borrow the money for the 27 repayment to the Trenhaile Estate, the bankruptcy court did not find his testimony believable nor was there any documentation to 28 support his contentions.
-16- 1 reveals that Debtor submitted no corporate minutes or other 2 writings conclusively establishing that he had obtained 3 authorization from any director or the board for the 4 transactions involved in this appeal.11 The lack of 5 documentation made it difficult for the bankruptcy court to 6 evaluate the numerous alleged charges and credits and calculate 7 the damages with any type of precision. 8 Where a ‘defendant by his own wrong has prevented a more precise computation . . . [the factfinder] may 9 make a just and reasonable estimate of the damage based on relevant data, and render its verdict 10 accordingly. Any other rule would enable the wrongdoer to profit by his wrongdoing at the expense 11 of his victim. It would be an inducement to make wrongdoing so effective and complete in every case as 12 to preclude any recovery, by rendering the measure of damages uncertain.’ 13 14 In re Ulrich, 236 B.R. at 723. In the end, Debtor’s financial 15 machinations coupled with the lack of documentation were a major 16 problem for him, especially in light of the fact that he was an 17 attorney who had practiced law for decades. The bankruptcy 18 court found “[b]y education and by professional experience as an 19 20 11 The bankruptcy court found there was no “clear evidence” 21 to support Debtor’s contention that he should receive $10,000 credit for the purchase of the Dairy’s stock. The bankruptcy 22 court also requested documentation showing that Debtor was 23 entitled to a credit of the dividends that he received on stock that he never validly purchased. The record shows that Debtor 24 never pointed to any documentation regarding this credit. With respect to the charges for Dr. Lee, the record shows that Debtor 25 never explained why Dr. Lee would “loan” money to the Dairy nor 26 did he provide any documentation to support such a loan. Likewise, with Debtor’s remaining challenges to the bankruptcy 27 court’s factual findings on damages, Debtor points to no documents in the record that would support his testimony or 28 asserted errors on appeal.
-17- 1 attorney, Defendant was well aware that he should document 2 everything, especially when involved in self-dealing efforts, he 3 did not.” 4 Without conclusive documentation, the bankruptcy court was 5 not compelled to believe Debtor’s self-serving testimony, which 6 in most instances, the court did not find credible. We do not 7 disturb the “quintessentially factual determination” of 8 credibility “in the absence of clear error.” United States v. 9 Lummi Indian Tribe, 841 F.2d 317, 319 (9th Cir. 1988). Debtor 10 has pointed to no evidence in the record that suggests the 11 bankruptcy court’s assessments of witness credibility were so 12 blatantly wrong as to require reversal. 13 Moreover, under the doctrine of unclean hands, Debtor must 14 come into court with clean hands or he will be denied relief, 15 regardless of the merits of his claim. Precision Instrument 16 Mfg. Co. v. Auto. Maint. Mach. Co., 324 U.S. 806, 814–15 (1945); 17 Republic Molding Corp. v. B.W. Photo Utils., 319 F.2d 347, 350 18 (9th Cir. 1963) (plaintiff’s unclean hands weigh in the 19 equitable balance that underlies the design of a remedy). Here, 20 the bankruptcy court applied the doctrine of unclean hands 21 finding that Debtor was not entitled to the benefit of doubt 22 regarding the charges or credits with respect to the calculation 23 of the damages because he had deceived people who had trusted 24 him over a substantial period of time.12 25 12 26 Generally, the application of the equitable doctrine of unclean hands is within the discretion of the trial court and is 27 reviewed for abuse of that discretion. See TransWorld Airlines, Inc. v. Am. Coupon Exch., Inc., 913 F.2d 676, 694 (9th Cir. 28 (continued...)
-18- 1 On this record, we conclude that the bankruptcy court’s 2 factual findings Debtor challenges on appeal fell within the 3 broad range of permissible conclusions. Cooter & Gell, 496 U.S. 4 at 400. Therefore, the bankruptcy court’s factual findings were 5 not clearly erroneous. 6 A. Debtor’s Liability Under § 523(a)(2)(A) 7 To establish that a debt is nondischargeable under 8 § 523(a)(2)(A), a creditor must establish five elements: 9 (1) misrepresentation, fraudulent omission or deceptive conduct 10 by the debtor; (2) knowledge of the falsity or deceptiveness of 11 the statement or conduct; (3) an intent to deceive; 12 (4) justifiable reliance by the creditor on the debtor’s 13 statement or conduct; and (5) damage to the creditor proximately 14 caused by its reliance on the debtor’s statement or conduct. 15 Turtle Rock Meadows Homeowners Ass’n v. Slyman (In re Slyman), 16 234 F.3d 1081, 1085 (9th Cir. 2000). The Dairy had the burden 17 of proving the various elements by a preponderance of the 18 evidence. Id. “The burden of showing something by a 19 ‘preponderance of the evidence,’ . . . ‘simply requires the 20 trier of fact to believe that the existence of a fact is more 21 probable than its nonexistence before [he] may find in favor of 22 the party who has the burden to persuade the [judge] of the 23 12 24 (...continued) 1990). Debtor does not raise any issue with respect to the 25 court’s application of the doctrine on appeal. Nonetheless, we 26 mention the court’s application of the doctrine because it clearly relates to the court’s credibility assessment of Debtor’s 27 testimony on damages. Findings based on determinations regarding the credibility of witnesses “demand[] even greater deference to 28 the trial court’s findings . . . .” Anderson, 470 U.S. at 575.
-19- 1 fact’s existence.’” Concrete Pipe & Prods. of Cal., Inc., 2 508 U.S. at 622. 3 Debtor’s Fraud 4 As described above, Debtor’s deceptive conduct amounted to 5 multiple frauds, some of which he admitted. 6 Knowledge and Intent to Deceive 7 Debtor does not identify errors of fact or law with any 8 degree of specificity regarding the elements of knowledge and 9 intent to deceive. Rather, Debtor makes a blanket statement 10 that the bankruptcy court’s conclusion that Debtor was liable 11 under § 523(a)(2)(A) was erroneous. To the extent Debtor’s 12 assignment of error is directed at the knowledge and intent to 13 deceive elements, we reject it. 14 Debtor’s knowledge and intent to deceive may be inferred by 15 circumstantial evidence and from Debtor’s conduct. Edelson v. 16 Comm’r, 829 F.2d 828, 832 (9th Cir. 1987) (“A court may infer 17 fraudulent intent from various kinds of circumstantial 18 evidence.”); Donaldson v. Hayes (In re Ortenzo Hayes), 315 B.R. 19 579, 587 (Bankr. C.D. Cal. 2004) (“Knowledge may be proven by 20 circumstantial evidence and inferred from the debtor’s course of 21 conduct.”). 22 Here, the bankruptcy court found numerous transactions by 23 the Debtor with the Dairy were unauthorized by the board. The 24 court further found that during Debtor’s tenure as president, he 25 prepared all of the financial books and records of the Dairy, 26 had control of the checkbooks, and concealed the unauthorized 27 “loans” under the NC Trust. In addition, the bankruptcy court 28 observed that Debtor had been an attorney for over twenty years,
-20- 1 and as an experienced attorney, he would have known the 2 importance of documenting financial arrangements with others. 3 Yet, Debtor did not document any of the loans he allegedly 4 received from plaintiff. 5 These factual findings are not independent of each other 6 but show a continuing pattern of wrongful conduct. Therefore, 7 the bankruptcy court could reasonably infer that Debtor had 8 knowledge of his deceptive conduct and the intent to deceive. 9 The Directors’ Justifiable Reliance 10 Debtor argues that the bankruptcy court erred in finding 11 that the Kozeras and Montgomery justifiably relied on Debtor’s 12 misrepresentations and/or deceptive conduct. The bankruptcy 13 court found that the directors had no reason not to believe 14 Debtor. The court properly considered that Debtor had been both 15 the Kozeras’ and Montgomery’s attorney for years and their 16 trusted friend. See In re Kirsch, 973 F.2d at 1458 (“In 17 considering whether reliance is justifiable, the court must take 18 into account ‘the knowledge and relationship of the parties.’”). 19 In addition, the bankruptcy court found that the financial 20 documents “all looked good” as they were made to conceal the 21 money that Debtor had been taking through the line item on the 22 balance sheet showing his alleged “loans” as “other assets” 23 under what he called North Country Trust or NC Trust. The 24 NC Trust supposedly held money that the Dairy had not expended, 25 but it actually reflected the money Debtor had taken from the 26 Dairy in unauthorized “loans.” 27 Debtor contends the bankruptcy court erred in finding that 28 the Dairy justifiably relied on his misrepresentations because
-21- 1 the statute of limitations on the Dairy’s fraud claims had 2 expired by June 30, 2007.13 Debtor argues that by June 30, 2004, 3 when Montgomery had finished signing all the loan documents, the 4 Dairy knew or should have known or should have discovered the 5 facts on which the Dairy bases it claims for relief. 6 We are not persuaded by Debtor’s statute of limitations 7 defense. First, the only place we see the statute of 8 limitations mentioned is in Debtor’s answer to the TAC. It does 9 not appear from the record that Debtor argued the issue at trial 10 in the bankruptcy court. See Barnes v. Belice (In re Belice), 11 461 B.R. 564, 569 n.4 (9th Cir. BAP 2011) (holding that 12 arguments not raised in the bankruptcy court can be deemed 13 waived for appeal purposes). 14 Second, under California law, the Dairy’s cause of action 15 for fraud did not “accrue[ ] until the discovery . . . of the 16 facts constituting the fraud or mistake.” Cal. Code Civ. P. 17 § 338(d). As noted above, the bankruptcy court believed 18 Montgomery that he did not learn of the Debtor’s fraud until 19 2007 when he received the letter from Yankee Farm Credit stating 20 that the property taxes were not being paid on the property in 21 New York. 22 Third, Debtor limits the “discovery” of his fraud as 23 relating only to the unauthorized $350,000 Yankee Farm Credit 24 loan. However, Debtor obtained numerous other unauthorized 25 “loans” from the Dairy which the record shows were discovered by 26 13 27 Since the gravamen of the Dairy’s complaint is based on fraud, California’s three year statute of limitation under Cal. 28 Code Civ. P. § 338 would apply.
-22- 1 the Kozeras and Montgomery only after the CPA they hired 2 examined the Dairy’s books and records. 3 For these reasons, we conclude that the bankruptcy court’s 4 finding on the justifiable reliance element was not clearly 5 erroneous. 6 Damages 7 As noted, the record supports the bankruptcy court’s 8 factual findings regarding an award of damages. We discuss the 9 bankruptcy court’s award of prejudgment interest and attorneys’ 10 fees in further detail below. 11 In sum, on the record provided, we discern no error with 12 the bankruptcy court’s conclusion that the Dairy had proved all 13 the elements for § 523(a)(2)(A) by a preponderance of the 14 evidence. 15 B. Debtor’s Liability Under Section 523(a)(4) 16 Section 523(a)(4) prohibits the discharge of debts “for 17 fraud or defalcation while acting in a fiduciary capacity, 18 embezzlement, or larceny.” 19 The elements for embezzlement are (1) property rightfully 20 in the possession of a nonowner; (2) nonowner’s appropriation of 21 the property to a use other than that for which it was 22 entrusted; and (3) circumstances indicating fraud. Transamerica 23 Commercial Fin. Corp. v. Littleton (In re Littleton), 942 F.2d 24 551, 555 (9th Cir. 1991). Again, Debtor does not address errors 25 of fact or law specifically related to these elements in his 26 briefs. 27 The bankruptcy court found that the Dairy’s money was 28 rightfully in the possession of Debtor, but then he
-23- 1 “appropriated it to his own use by spending it or paying his 2 bills and obligations which was not known or authorized by the 3 Plaintiffs . . . and it was done with a fraudulent intent.” The 4 record amply supports the bankruptcy court’s findings of fact 5 and conclusions of law regarding the elements for embezzlement. 6 Therefore, we do not disturb the court’s decision on appeal. 7 To prevail on a claim arising from “fraud or defalcation 8 while acting in a fiduciary capacity”, the creditor must prove 9 not only the debtor’s fraud or defalcation, but also that the 10 debtor was acting in a fiduciary capacity when the debtor 11 committed the fraud or defalcation. Citing the Fifth Circuit 12 case of Moreno v. Ashworth (In re Moreno), 892 F.2d 417 (5th 13 Cir. 1990), the bankruptcy court found Debtor was acting as a 14 fiduciary because he was the president of a private corporation 15 entrusted with funds for a particular purpose. On appeal, 16 Debtor maintains that he was not a fiduciary for purposes of 17 § 523(a)(4) citing Cal-Micro, Inc. v. Cantrell (In re Cantrell), 18 329 F.3d 1119, 1125-1128 (9th Cir. 2003). We agree that the 19 holding in Cantrell applies to these facts. 20 In Cantrell, the Ninth Circuit reiterated that the term 21 “fiduciary” is construed narrowly for purposes of § 523(a)(4). 22 Id. at 1125. Under this narrow construction, the fiduciary 23 relationship must arise from an express or technical trust. Id. 24 (“‘The broad, general definition of fiduciary—a relationship 25 involving confidence, trust and good faith—is inapplicable in 26 the dischargeability context.”) (citing Ragsdale v. Haller 27 (In re Haller), 780 F.2d 794, 796 (9th Cir. 1986)). 28 Bankruptcy courts look to state law to determine whether an
-24- 1 express trust relationship exists. In re Cantrell, 329 F.3d at 2 1125. Under California corporations law, corporate officers and 3 directors are not fiduciaries within the meaning of § 523(a)(4). 4 Id. at 1127. The Cantrell court explained, “although officers 5 and directors [under California law] are imbued with the 6 fiduciary duties of an agent and certain duties of a trustee, 7 they are not trustees with respect to corporate assets.” Id. at 8 1126 (emphasis added). Cantrell relied on Bainbridge v. Stoner, 9 106 P.2d 423 (Cal. 1940), which explicitly held that the 10 relationship in California between a director on the one hand 11 and the corporation and its shareholders on the other hand, 12 strictly speaking, was one of agency and not trust. 13 In re Cantrell, 329 F.3d at 1126 (citing Bainbridge, 106 P.2d at 14 426). 15 The Dairy recognizes that California law draws a 16 distinction between the fiduciary duties of corporate officers 17 and directors who are viewed as agents and the fiduciary duties 18 of a trustee. Nonetheless, the Dairy argues that Debtor was a 19 trustee because he was entrusted with the bank accounts of the 20 Dairy and had virtually “unlimited sway over them.” We are not 21 persuaded. In the Fifth Circuit case of In re Moreno, the 22 debtor, an officer, did not dispute that he was a fiduciary 23 under Texas law which is inapposite to California law. 24 In re Moreno, 892 F.2d at 421. Moreover, although Debtor was in 25 a relationship with the board members that involved confidence, 26 trust and good faith, this general definition of fiduciary is 27 inapplicable in the dischargeability context. Accordingly, we 28 conclude that the bankruptcy court erred in finding that Debtor
-25- 1 was a fiduciary within the meaning of § 523(a)(4). 2 However, because the court’s embezzlement finding was 3 correct, the bankruptcy court’s conclusion that the damages were 4 nondischargeable under § 523(a)(4) will not be disturbed on 5 appeal. 6 C. Other Damages 7 Prejudgment Interest 8 Debtor asserts that the bankruptcy court erred in charging 9 him for interest in the amount of $47,464.22 on the promissory 10 notes on two grounds: first, Debtor maintains that there was no 11 testimony to support how the Dairy calculated the interest on 12 the notes and second, Debtor argues that the notes form a part 13 of the Settlement Agreement and release and the Dairy did not 14 state a claim for breach of the Settlement Agreement in the 15 adversary proceeding, instead pursuing claims based on fraud. 16 In its findings, the bankruptcy court noted that it was 17 reluctant to award the interest claims as set forth in the 18 Settlement Agreement and two promissory notes but that there was 19 no other way to compensate the Dairy for its loss of property 20 and money except by allowing interest. The court further found 21 that since no other interest calculations were offered by either 22 party, it “seems reasonable to allow the interest that the 23 parties agreed upon in the [notes].”14 24 The award of prejudgment interest in nondischargeability 25 26 14 Although Debtor contends that there was no testimony to 27 support how the Dairy calculated the interest on the notes, this argument cannot form a basis for reversal on appeal when we do 28 not have the complete transcripts in the record.
-26- 1 proceedings is authorized under Cohen v. de la Cruz, 523 U.S. 2 213, 223 (1998), where the United States Supreme Court concluded 3 that the text of § 523(a)(2)(A) “encompasses any liability 4 arising from money, property, etc., that is fraudulently 5 obtained, including treble damages, attorney’s fees and other 6 relief that may exceed the value obtained by the debtor.” 7 In awarding prejudgment interest, the bankruptcy court did 8 not specifically state what law it was applying when it awarded 9 the prejudgment interest. Under federal law, courts may allow 10 prejudgment interest even though a governing statute is silent 11 regarding such interest. Frank Music Corp. v. 12 Metro–Goldwyn–Mayer, Inc., 886 F.2d 1545, 1550 (9th Cir. 1989), 13 cert. denied, 494 U.S. 1017 (1990). “[T]he award of prejudgment 14 interest in a case under federal law is a matter left to the 15 sound discretion of the trial court. Awards of prejudgment 16 interest are governed by considerations of fairness and are 17 awarded when it is necessary to make the wronged party whole.” 18 Acequia Inc. v. Clinton (In re Acequia, Inc.), 34 F.3d 800 (9th 19 Cir. 1994) (determining that an award of prejudgment interest in 20 a § 548(a) case is left to the sound discretion of the trial 21 court and is awarded when necessary to make the wronged party 22 whole). 23 Where a debt that is found to be nondischargeable arose 24 under state law, “the award of prejudgment interest on that debt 25 is also governed by state law.” Otto v. Niles (In re Niles), 26 106 F.3d 1456, 1463 (9th Cir. 1997). Under California law, the 27 court may award prejudgment interest in actions other than 28 contract in its discretion. Cal. Civ. Code § 3288 (“In an
-27- 1 action for the breach of an obligation not arising from 2 contract, and in every case of oppression, fraud, or malice, 3 interest may be given, in the discretion of the jury.”).15 4 Here, the parties entered into a Settlement Agreement on 5 June 25, 2008, agreeing that the Diary’s claim against Debtor 6 was $375,000. Since that time —— and actually well before — the 7 Debtor has had possession and use of the Dairy’s money. Thus, 8 the underlying purpose justifying an award of prejudgment 9 interest is present —— compensation to the Dairy for its loss of 10 the use of its money that Debtor “loaned” himself without 11 authorization. Additionally, because the parties did not offer 12 any other interest calculations, the bankruptcy court found it 13 “reasonable” to use the interest rate agreed to by the parties 14 in the promissory notes. See Blau v. Lehman, 368 U.S. 403, 414 15 (1962) (“[I]nterest is not recovered according to a rigid theory 16 of compensation for money withheld, but is given in response to 17 considerations of fairness”). Without contrary evidence, the 18 bankruptcy court properly exercised its discretion by selecting 19 15 20 California law also provides that prejudgment interest is a matter of right where there is a vested right to recover 21 “damages certain as of a particular day.” Cal. Civil Code § 3287(a). “[T]he certainty requirement of [Civil Code] section 22 3287, subdivision (a) has been reduced to two tests: (1) whether 23 the debtor knows the amount owed or (2) whether the debtor would be able to compute the damages.” Fireman’s Fund Ins. Co. v. 24 Allstate Ins. Co., 234 Cal.App.3d 1154, 1173 (Cal. Ct. App. 1991). It is equally possible that the bankruptcy court was 25 awarding prejudgment interest as a matter of right rather than by 26 exercising its discretion. After all, the parties had liquidated the amount of damages owed in the Settlement Agreement. The fact 27 that the amount may have later increased due to charges, credits or disallowances did not make the amount of the damages less 28 certain.
-28- 1 the rate of interest set forth in the promissory notes.16 2 Accordingly, we conclude that the bankruptcy court did not abuse 3 its discretion in awarding the Dairy prejudgment interest. 4 Attorneys’ Fees and Costs 5 Debtor contends that the bankruptcy court erred in awarding 6 the Dairy attorneys’ fees in this proceeding because the issues 7 litigated were based on fraud and nondischargeability and thus 8 not within the scope of the attorneys’ fee provision in the 9 Settlement Agreement. We agree. 10 Attorneys’ fees may be awarded and declared 11 nondischargeable in an action to determine dischargeability of 12 debt. Cohen, 523 U.S. at 223. However, before attorneys’ fees 13 are awarded, two requirements must be met: (1) an underlying 14 contract or nonbankruptcy law must provide a right to recover 15 attorneys’ fees, and (2) the issues litigated in the 16 dischargeability action must fall within the scope of the 17 contractual or statutory attorneys’ fees provision. See 18 In re Dinan, 448 B.R. at 785 (9th Cir. BAP 2011) (“under Cohen, 19 the determinative question for awarding attorneys’ fees is 20 whether the creditor would be able to recover the fee outside of 21 bankruptcy under state or federal law”). 22 The Dairy contends that the award of attorneys’ fees was 23 appropriate and cites the Eleventh Circuit case Transouth, 24 931 F.2d 1505, which, in turn, cited Fleishmann Distilling 25 Corp., 386 U.S. at 717, in support of its position. These cases 26 27 16 If the trial court had selected the California Judgment 28 rate of interest of 10%, the award would have been much higher.
-29- 1 simply stand for the proposition that attorneys’ fees are 2 properly awarded to a creditor prevailing on a bankruptcy claim 3 if there exists a statute or valid contract that authorizes the 4 fees. However, these cases do not address the remaining 5 question for the award of attorneys’ fees in nondischargeability 6 actions: whether the issues litigated in the dischargeability 7 action fall within the scope of the contractual or statutory 8 attorneys’ fees provision. 9 In the bankruptcy court, the Dairy asserted that the 10 “present issue before the court is simply the enforcement of the 11 subject Settlement Agreement. In such matters, attorney’s fees 12 are permissible.” The Dairy distinguished the cases of 13 In re Fulwiler, 624 F.2d 908, and In re Bonnifield, 154 B.R. 14 743, contending that in those cases “dischargeability was at 15 issue” and not the enforcement of a Settlement Agreement. 16 Exactly. The Dairy’s claims in the nondischargeability 17 proceeding were not brought to enforce the terms of the 18 agreement or to pursue a breach. The Dairy did not plead that 19 Debtor was liable under the Settlement Agreement nor did it 20 litigate that Debtor had breached the agreement. Rather, the 21 action pursued the remedy of nondischargeability based on the 22 tort claims of fraud, breach of fiduciary duty and embezzlement 23 for purposes of § 523(a)(2)(A) and (a)(4). Moreover, the 24 attorneys’ fees clause was in an agreement that was not even in 25 existence at the time the acts which led to nondischargeability 26 occurred. The adversary proceeding concerned those acts, not 27 the Settlement Agreement. Therefore, the attorneys’ fee clause 28 in the agreement was inapplicable to the claims litigated.
-30- 1 Accordingly, we conclude that the bankruptcy court erred in 2 awarding the attorneys’ fees. 3 VI. CONCLUSION 4 For the reasons stated, we AFFIRM the bankruptcy court’s 5 decision finding that the debt was nondischargeable under 6 § 523(a)(2) and (a)(4)(embezzlement), except for the award of 7 attorneys’ fees which we REVERSE. We remand this proceeding to 8 the bankruptcy court to enter a judgment consistent with this 9 disposition. 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
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