In re: Jan Mary Wallace

• Court: United States Bankruptcy Appellate Panel for the Ninth Circuit
• Decided: October 14, 2016
• Docket: AZ-15-1319-LJuF
• Status: Unpublished

Opinion

FILED OCT 14 2016 1 NOT FOR PUBLICATION SUSAN M. SPRAUL, CLERK U.S. BKCY.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. AZ-15-1319-LJuF ) 6 JAN MARY WALLACE, ) Bk. No. 2:13-bk-17237-PS ) 7 Debtor. ) Adv. No. 2:14-ap-00332-PS ) 8 ) JAN MARY WALLACE, ) 9 ) Appellant, ) 10 ) MEMORANDUM* v. ) 11 ) THOMAS & WONG GENERAL ) 12 CONTRACTORS, INC., ) ) 13 Appellee. ) ) 14 Argued and Submitted on September 23, 2016 15 at Phoenix, Arizona 16 Filed - October 14, 2016 17 Appeal from the United States Bankruptcy Court for the District of Arizona 18 Honorable Paul Sala, Bankruptcy Judge, Presiding 19 ________________________ 20 Appearances: Ryan Jefferson Works of McDonald Carano Wilson LLP argued for Appellant Jan Wallace; Bryan Francis 21 Murphy of Burch & Cracchiolo, P.A. argued for Appellee Thomas & Wong General Contractors, Inc. 22 ________________________ 23 Before: LAFFERTY, JURY, and FARIS, 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 8024-1. 1 I. INTRODUCTION 2 Debtor Jan Wallace arranged a $1.5 million loan from 3 Appellee Thomas & Wong General Contractors, Inc. (“Thomas & 4 Wong”) to BDV Investments, LLC (“BDV”). Although Wallace agreed 5 to act as Thomas & Wong’s agent in the transaction, she did not 6 disclose to Thomas & Wong several material facts, including that 7 she had a financial interest in seeing that the transaction was 8 consummated; that one of the guarantors for the loan had an 9 outstanding $1.9 million judgment against him and was thus not a 10 good credit risk; and that she had authorized the release of 11 certain loan proceeds without Thomas & Wong’s approval. Wallace 12 also misled Thomas & Wong concerning whether she had personally 13 inspected the primary collateral for the loan. 14 After BDV defaulted on the loan, Thomas & Wong was able to 15 collect a portion of the debt by realizing on its collateral, but 16 much of the collateral turned out to be worthless, and much of 17 the debt remained unpaid. Thereafter, Thomas & Wong sued BDV and 18 affiliated parties and obtained default judgments but was unable 19 to collect anything from them. Thomas & Wong then sued Wallace 20 in state court for breach of fiduciary duty. The state court 21 ultimately found in favor of Thomas & Wong, entering a judgment 22 against Wallace of $1,306,144 plus interest and costs. 23 After Wallace filed the instant bankruptcy, Thomas & Wong 24 sought a determination from the bankruptcy court that the state 25 court judgment against Wallace was nondischargeable under 26 27 28

-2- 1 §§ 523(a)(2), (4), and (6).1 2 Although this appeal presents unusual facts and convoluted 3 relationships, the primary issues presented are fairly 4 straightforward: did Wallace fail to disclose to Thomas & Wong 5 material facts that she had a duty to disclose, and was her 6 failure the proximate cause of damage to Thomas & Wong? After a 7 three-day trial, in which the bankruptcy court found most of 8 Wallace’s testimony not credible due to her selective memory, the 9 bankruptcy court found the entirety of the state court judgment 10 to be nondischargeable under § 523(a)(2)(A) and partially 11 nondischargeable under § 523(a)(4). 12 On appeal, Wallace challenges the bankruptcy court’s factual 13 findings, including that Wallace was Thomas & Wong’s agent, that 14 her failures to disclose were material, that she intended to 15 deceive Thomas & Wong, and that her actions were the proximate 16 cause of damage to Thomas & Wong. Wallace also challenges the 17 bankruptcy court’s legal conclusion that a fiduciary relationship 18 existed for purposes of § 523(a)(4). In addition, Wallace 19 questions Thomas & Wong’s standing, and argues that the 20 bankruptcy court erred in finding that the § 523(a)(2)(A) claim 21 was not time-barred. 22 Finding no error of fact or law in the bankruptcy court’s 23 decision, we AFFIRM. 24 25 1 26 Unless otherwise indicated, all chapter and section references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532. 27 “Rule” references are to the Federal Rules of Bankruptcy Procedure, and “Civil Rule” references are to the Federal Rules 28 of Civil Procedure.

-3- 1 II. FACTUAL BACKGROUND 2 The background facts necessary to understand this case are 3 lengthy and discursive, reflecting a complex transaction 4 involving numerous entities, some of which were only peripherally 5 involved in the central events. Because this is a failure to 6 disclose case, it is necessary to examine facts on the penumbra 7 to give context and establish materiality. We therefore explain 8 the background of the main protagonists and their relationships 9 before delving into the chronology of events. 10 A. Jan Wallace 11 Debtor Jan Wallace was a self-described venture capitalist 12 who assisted in funding and management of start-up companies. 13 Wallace and Kelly Black formed an LLC called Wallace Black, LLC 14 in 2005, but the two had done business together since 1998. 15 B. John Beardmore and his entities 16 Black introduced Wallace to John Beardmore in December 2002. 17 Beardmore has several relevant roles and relationships in this 18 matter. He was the principal of BDV; he also owned a company 19 called Beardmore Investments, Inc. Beardmore was negotiating 20 with a private lender, Dumaine Consulting, to obtain financing. 21 Although the ostensible purpose of the financing was to fund 22 BDV’s check cashing business, Beardmore had an immediate need for 23 cash to retire debts he owed to Lake Bank. Beardmore owned an 24 interest in the entity that owned Lake Bank, and the outstanding 25 debts were causing regulatory problems. Wallace was brought in 26 to advise Black and another individual regarding proposed bridge 27 financing for BDV. In return, Black promised Wallace a 28 commission of one percent of the funds raised through such a

-4- 1 facility. 2 During a December 2002 meeting that included Wallace, 3 Beardmore, Black, and two other individuals, Wallace learned, 4 among other things, that Beardmore was a judgment debtor on a 5 $1.9 million judgment and that he needed funding to resolve loan 6 issues with Lake Bank to ensure that it was in compliance with 7 its banking regulations. At or around the same time, Wallace 8 also contracted with Beardmore to sell MW Asia, LLC, a publically 9 traded shell company, to Beardmore Investments, Inc. for 10 $250,000. A $50,000 deposit was to be paid by January 31, 2003, 11 and Wallace was to receive an interest in a publicly traded 12 company after Beardmore merged an operating company into the 13 shell. Although the MW Asia transaction was a separate 14 transaction from the bridge loan, the funds for the $50,000 15 deposit were ultimately paid to Wallace from proceeds of the 16 bridge loan that is the subject of this appeal. 17 C. Edward Tarapaski 18 Edward Tarapaski was employed by Thomas & Wong, a 19 construction company headquartered in Brunei. Tarapaski met 20 Wallace in February 2003 during a visit to Arizona. Because of 21 problems with his hotel arrangements, Tarapaski stayed in 22 Wallace’s guest house for some period of time. While there, 23 Tarapaski learned that Wallace was working with Beardmore on 24 obtaining a bridge loan for Beardmore’s company. 25 D. Negotiations regarding the bridge loan 26 Tarapaski was interested in learning more about the 27 transaction and potentially arranging a bridge loan from Thomas & 28 Wong to BDV. Wallace introduced Tarapaski to Beardmore in a

-5- 1 meeting at the Marriott Shadows Mountain Resort. At the meeting, 2 Tarapaski learned that the $1.5 million loan was necessary to pay 3 off a loan that Beardmore had taken from Lake Bank so that Lake 4 Bank would be in compliance with banking regulations. Tarapaski 5 was advised that the collateral for the 60-day loan would be gold 6 doré, an unrefined gold product. Tarapaski advised Beardmore 7 that he needed assurances about the value of the gold doré and 8 that he wanted possession of the gold to have it tested before 9 making a loan. Beardmore indicated that possession would not be 10 possible, so Tarapaski advised Beardmore and Wallace that there 11 was no basis to move forward. 12 Two or three days later, Tarapaski met with Beardmore and 13 William Cortegiano, a vice president of BDV, at Houston’s 14 Restaurant. Wallace did not attend that meeting. At the 15 Houston’s meeting, Tarapaski was offered as additional security 16 the collateral that Lake Bank held for the loan to Beardmore–-a 17 second mortgage on Beardmore’s Phoenix home, an interest in a 18 stock fund, an interest in shares of stock in a financial 19 company, a car, and a boat. Tarapaski then indicated an interest 20 in moving forward with the transaction. 21 E. Wallace’s role in the bridge loan transaction 22 After the Houston’s meeting, Wallace advised Tarapaski of 23 her experience and expertise in business transactions and that 24 she would assist him in putting the transaction together. 25 Tarapaski and Wallace prepared a checklist of items required 26 before approval of the loan. The loan checklist included due 27 diligence items, including the viewing of the gold doré, 28 obtaining safekeeping receipts from a bonded warehouse in favor

-6- 1 of Thomas & Wong to prevent movement of the gold doré, securing 2 an insurance certificate for the gold, confirmation of other 3 items of collateral, and appointing Wallace to the board of 4 directors of BDV to protect Thomas & Wong’s interest with respect 5 to the loan transaction. Thereafter Wallace attended numerous 6 meetings and took numerous actions as an advisor to Tarapaski and 7 ultimately acted as an agent for Thomas & Wong, in certain 8 specific instances, described below. 9 F. Loan terms and documentation 10 On March 1, 2003, Wallace and Tarapaski met with Gary Blume, 11 a lawyer with whom Wallace had worked on other transactions. At 12 that meeting Tarapaski, Wallace, and Blume discussed the 13 transaction, including a February 26, 2003 opinion letter from 14 the law firm of DeConcini McDonald Yetwin & Lacy (a copy of which 15 Wallace had obtained), regarding the gold doré. That letter was 16 addressed to A-MARK Precious Metals, Inc. and was in reference to 17 a proposed $35 million loan to BDV. The letter stated the law 18 firm’s opinion that BDV held unencumbered title to six containers 19 of precious metal doré, which were warehoused in Lordsburg, New 20 Mexico. 21 On March 6, 2003, another meeting was held at Blume’s office 22 with Tarapaski, Wallace, Beardmore, and Blume in attendance. The 23 parties discussed the transaction and the Lake Bank security that 24 Thomas & Wong would obtain. They agreed that the loan would be 25 for $1.5 million with a flat interest rate of 25 percent, due in 26 60 days. They also discussed that Thomas & Wong would obtain an 27 interest in an office condominium in Minneapolis, and that 28 Wallace would join the board of BDV to protect Thomas & Wong’s

-7- 1 interest. Blume suggested that a promissory note was the best 2 way to protect Thomas & Wong, and Blume was charged with 3 preparing the note. As explained below, the “note” he prepared 4 was not a straight promissory note, but was more akin to a loan 5 agreement. 6 G. The promissory notes 7 On March 8, 2003, Wallace, Tarapaski, and Beardmore again 8 met with Blume at his office to pick up the $1.5 million note for 9 execution. The note was signed by the obligor and the guarantors 10 before a notary public at Bank of America later that day. 11 The note contained various covenants and requirements beyond 12 a mere promise to pay. The covenants provided that the loan 13 proceeds would be used to purchase the secured position of Lake 14 Bank in the above-described collateral and to purchase the office 15 condominium. The note contained a grant of a security interest 16 in gold doré and referenced an insurance certificate that would 17 name Thomas & Wong as loss payee. It also referenced the 18 Articles of Incorporation of BDV and an opinion letter of 19 counsel, all of which were to be attached to the note.2 However, 20 21 2 The note provides, in relevant part: 22 BDV represents to the Lender that the proceeds 23 from this loan will be used by BDV to purchase the position of The Lake Bank, N.A. of Two Harbors, 24 Minnesota and the purchase of certain real property describe [sic] as 660 North Second Street, Minneapolis, 25 Minnesota under the terms of a Promissory Note attached 26 as Attachment A, which assets collateralizing the current loan at The Lake Bank will be assigned to BDV. 27 BDV hereby grants to the Lender, and this 28 (continued...)

-8- 1 the exhibits referenced in the note were not attached when Blume 2 gave the note to Tarapaski, Wallace and Beardmore. The note also 3 required BDV to provide copies of the sale documents for the 4 office condo and a safekeeping certificate for the gold doré 5 before any funds would be disbursed. However, no safekeeping 6 certificate was ever provided to Thomas & Wong, and no opinion 7 letter appears to have been prepared at the time the note was 8 executed.3 9 The $1.5 million note also contained the personal guarantees 10 2 11 (...continued) Promissory Note is in all things secured by precious 12 metals described on the attached Exhibit A. Attached hereto as Exhibit B is the insurance policy and 13 certificate of insurance (attached in their entirety), insuring the collateral described in Exhibit A and BDV 14 shall cause the Lender to be named as a loss payee on 15 such policy. Attached as Exhibit C to this Promissory Note are the Articles of Incorporation and Certificate 16 of Incorporation of BDV. BDV represents to the Lender that it continues in good standing as a corporation 17 under the laws of the State of Minnesota and will during all relevant times to the completion of the 18 obligations under this Promissory Note. In addition, 19 this Promissory Note is executed in reliance on the attached Opinion Letter of Counsel (Attachment B). 20 The safekeeping receipt (for the Collateral) shall be 21 in the name of Lender which shall be provided prior to 22 delivery of funds. BDV shall take whatever steps are necessary to insure this transfer is complete. BDV 23 shall provide copies of its Articles of Incorporation, all amendment [sic] thereto, current Bylaws and all 24 minutes of shareholder and board meetings. BDV shall also provide copies of all sale documents for the sale 25 of the real property at 660 North Second Street, 26 Minneapolis, Minnesota. 3 27 The note does not specify the subject matter of the opinion letter, and Wallace testified at trial that she could not 28 remember the letter’s purpose.

-9- 1 of Beardmore and Cortegiano. 2 A separate $275,000 note in favor of Thomas & Wong was also 3 executed by BDV. This second note is puzzling in that the 4 $275,000 to purchase the office condo was part of the obligation 5 represented by the $1.5 million note, so its purpose is unclear. 6 Additionally, the creator of the note was unknown. Blume 7 testified that he did not create the $275,000 note although it 8 looked like his form. The $275,000 note contained a provision 9 that BDV’s interest in real property would be automatically 10 transferred to Thomas & Wong if the note was not paid within 11 60 days. The note also provided that L Trust LLC (“L Trust”), a 12 Minnesota limited liability company – the owner of the office 13 condo – consents to the transfer of real property in the event of 14 a default. Unlike the $1.5 million note that was signed on 15 March 8, the $275,000 note did not provide for any guarantees by 16 Beardmore or Cortegiano and did not provide a notary block for 17 any signature. Wallace contends that the $275,000 note was 18 “incorporated” into the $1.5 million note. Although the 19 $1.5 million note referenced an attached promissory note 20 containing the terms under which the office condo was to be 21 purchased, no such note was attached, and Tarapaski never saw the 22 $275,000 note during this time period. 23 After the execution of the $1.5 million promissory note, 24 Tarapaski and Wallace participated in a series of meetings and 25 telephone conversations about completing the remaining items 26 necessary to satisfy the conditions in the note and on the 27 checklist. As explained below, some of those conditions were 28 never satisfied.

-10- 1 H. The Cane O’Neill account 2 After the March 1, 2003, meeting with Tarapaski and Blume, 3 Wallace set up an account in her name at Cane O’Neill, a Nevada 4 law firm with which Wallace had a relationship, to hold in trust 5 the funds to be wired from Thomas & Wong. Wallace was the client 6 to whom Cane O’Neill associated the account and the person to 7 whom Cane O’Neill looked for instructions. Wallace agreed to act 8 as Thomas & Wong’s agent with regard to releasing the funds from 9 the Cane O’Neill trust account; she was therefore not authorized 10 to release any of those funds without Thomas & Wong’s approval. 11 On March 5, 2003, Thomas & Wong wired $549,980 into the Cane 12 O’Neill account; two days later, it wired another $249,980 into 13 the account, for a total of $799,960. 14 I. Wallace joins BDV’s board of directors. 15 On March 6, 2003, BDV held a board meeting at The Villages 16 Restaurant in Scottsdale, which was attended by Beardmore, 17 Cortegiano, Wallace and Victor Lee Wark, another BDV board 18 member. Tarapaski did not attend. At this board meeting Wallace 19 was appointed to the BDV board for the purpose of protecting 20 Thomas & Wong’s interest in the loan transaction, which was 21 understood by Tarapaski, Beardmore, and Cortegiano. Thereafter 22 Wallace participated in the meeting as a board member. 23 J. BDV provides opinion letter regarding primary loan. 24 On March 9, 2003, Tarapaski met with Wallace, Beardmore, and 25 Clark Griffith, the attorney for BDV, to request an opinion 26 letter from Griffith that BDV’s multimillion dollar loan from a 27 company named Dumaine Consulting was on track. Tarapaski 28 understood that the funds from the Dumaine transaction would be

-11- 1 used by BDV to pay back Thomas & Wong. On March 11, 2003, 2 Griffith sent correspondence to Tarapaski and Wallace confirming 3 that the Dumaine transaction was proceeding forward. 4 K. Lake Bank confirms assignment of collateral. 5 Following at least two conversations between Wallace, 6 Tarapaski and Tom Kell, the president of Lake Bank, on March 12, 7 2003, a representative of Lake Bank sent a fax to Wallace 8 confirming that Lake Bank would assign to BDV its liens on 9 Beardmore’s home, his 1999 Mercedes, his 2000 18-foot Mystic ski 10 boat, a 22 percent interest in Founders Mezzanine stock fund and 11 stock in Superior Financial Holdings so that BDV could use those 12 assets as collateral for the Thomas & Wong note. 13 L. Wallace convinces Tarapaski to move ahead with the loan. 14 Sometime between March 10 and March 12, 2003, Tarapaski 15 discussed with Wallace whether to move forward with the 16 transaction given that the gold doré had not yet been viewed. 17 Wallace advised Tarapaski that she thought the transaction should 18 go forward and that Thomas & Wong was protected by a safekeeping 19 receipt, the DeConcini opinion letter and insurance certificates. 20 At the time, however, no safekeeping receipt existed in favor of 21 Thomas & Wong, the DeConcini opinion letter was not in favor of 22 Thomas & Wong, and no insurance certificate was ever issued. 23 On March 12, 2003, Tarapaski agreed to move forward with the 24 transaction and signed a letter to Michael Cane of Cane O’Neill 25 authorizing Wallace to release the funds from the Cane O’Neill 26 trust account. Thereafter Wallace sent an instruction to Cane 27 O’Neill to transfer $500,000 from the trust account to Lake Bank. 28 Tarapaski left the United States for business in Korea on

-12- 1 March 17, 2003. Wallace told Tarapaski that she would monitor 2 developments on behalf of Thomas & Wong and would remain in 3 contact with him. Wallace thereafter faxed Tarapaski to reassure 4 him that the permanent loan from Dumaine Consulting was on track 5 for funding. 6 M. The viewing of the gold doré 7 Tarapaski and Wallace were to accompany Beardmore to view 8 the gold doré in New Mexico on March 10, 2003, but the viewing 9 did not occur that day. When Tarapaski left Arizona in 10 mid-March, Wallace agreed to view the gold doré for Thomas & 11 Wong. In a telephone conversation in late March 2003, Wallace 12 told Tarapaski the gold had been viewed. Tarapaski understood 13 Wallace’s comments to mean that she viewed the gold as she had 14 agreed to do. However, Wallace had not attended the viewing. 15 Instead, representatives of BDV viewed sealed barrels that were 16 never opened at a storage warehouse in Chandler, Arizona.4 17 Wallace did not disclose this fact to Tarapaski. 18 N. Tarapaski authorizes the release of the remaining loan 19 funds. 20 Based upon his belief that Wallace had viewed the gold, 21 Tarapaski authorized the release of the remaining $700,000 22 provided for in the $1.5 million note. That $700,000 was wired 23 directly to BDV or Lake Bank by Thomas & Wong and did not go 24 through the Cane O’Neill trust account. Thereafter Wallace faxed 25 a handwritten note to Thomas & Wong’s office manager, telling her 26 27 4 As noted previously, the DeConcini opinion letter 28 indicated the gold doré was stored in Lordsburg, New Mexico.

-13- 1 that it was imperative that $300,000 be wired to Lake Bank no 2 later than March 31, 2003. The $300,000 transfer and the 3 remainder of the funding for the $1.5 million loans were advanced 4 by the end of April 2003. 5 O. Wallace authorizes the release of funds without Thomas & 6 Wong’s knowledge or authority. 7 On three occasions during the relevant time period, Wallace 8 authorized the release of funds from the Cane O’Neill account 9 without authorization from Thomas & Wong. On March 6, 2003, 10 after Wallace was elected to the BDV board, she instructed her 11 assistant to request $275,000 be wired from the Cane O’Neill 12 account to Lake Bank, ostensibly to purchase or pay off the 13 office condominium. No loan had been approved by Thomas & Wong 14 at this point, and Tarapaski and Thomas & Wong had no knowledge 15 of the $275,000 note or of the transfer of the funds. The 16 transfer occurred the next day, March 7, 2003. At the March 8 17 meeting in Blume’s office, Beardmore asked Wallace if funds could 18 be released from the Cane O’Neill account to purchase the condo. 19 Tarapaski, who was part of the conversation, refused to release 20 any of the funds, stating that Thomas & Wong was not interested 21 in doing a “condo only” loan. Wallace did not tell Tarapaski 22 that she had already released the $275,000. 23 Next, on March 21, 2003, Wallace sent an email to Susan 24 Johnson at Cane O’Neill authorizing the release of $20,000 of the 25 Cane O’Neill trust account money to an account titled to L Trust. 26 L Trust was owned by Sokim Lach, Beardmore’s girlfriend, who 27 later became his wife. Tarapaski did not know her at the time. 28 L Trust was the entity that had signed the $275,000 note agreeing

-14- 1 in the event of a default to assign its interest in the property 2 to Thomas & Wong. Tarapaski was unaware of this transfer to 3 L Trust, and neither he nor anyone else at Thomas & Wong ever 4 approved the transfer. 5 Finally, in August 2003, after BDV had defaulted on the 6 bridge loan, Wallace transferred to Cane O’Neill, without 7 authority from Tarapaski or Thomas & Wong, the remaining $4,960 8 in the Cane O’Neill account to cover attorney’s fees. 9 P. Wallace received $50,000 from the Thomas & Wong loan funds. 10 According to Beardmore’s testimony,5 $50,000 of the funds 11 borrowed from Thomas & Wong were used to pay Wallace the deposit 12 to purchase the shell corporation, MW Asia. This payment was not 13 disclosed to Tarapaski. Although Wallace testified that the 14 MW Asia contract terminated when Beardmore did not pay the 15 $50,000 deposit by the January 31, 2003 deadline, she 16 acknowledged receiving the $50,000 from Lake Bank in April 2003. 17 Q. Default and collection efforts 18 On May 6, 2003, the $1.5 million note came due and was not 19 paid. Tarapaski authorized Blume and Wallace to take action on 20 Thomas & Wong’s behalf to enforce the note. Although Wallace 21 advised Tarapaski that the gold doré had been melted and sold, no 22 gold was ever located, and Thomas & Wong received no funds from 23 the gold. Thomas & Wong thereafter sued BDV and affiliated 24 parties and took default judgments against them. 25 Wallace assisted Thomas & Wong in efforts to sell the 26 5 27 Beardmore did not testify in person at trial. The court admitted Beardmore’s deposition testimony from the state court 28 litigation.

-15- 1 judgments to a Richard Kirby for approximately $4.5 million, a 2 transaction that would have netted Wallace $250,000. It is not 3 clear why the offer was so high given that the judgments were 4 against defunct or insolvent companies. The transaction also 5 required certain fees, including an up-front processing fee of 6 $10,000 that was to be paid to Kirby. Tarapaski refused to pay 7 the $10,000. He again refused when Wallace negotiated it down to 8 $5,000 but ultimately consented to pay a $1,500 processing fee to 9 Kirby. However, nothing ever came of the Kirby transaction, and 10 the default judgments were not sold. 11 Thomas & Wong sought to recover on its Lake Bank collateral. 12 Thomas & Wong recovered approximately $433,000 from the sale of 13 Beardmore’s Paradise Valley residence and approximately $20,000 14 from the sale of some personal property in New Mexico and 15 additional unknown amounts in a lawsuit against Blume. 16 Beardmore’s home also contained furniture and personal items that 17 Wallace was able to sell on Thomas & Wong’s behalf for 18 approximately $5,000, but Wallace kept those funds over 19 Tarapaski’s objection. The shares of the Founders Mezzanine and 20 Superior Financial Holdings Company were worthless. Thomas & 21 Wong received nothing on the office condominium, which was never 22 titled to BDV, and L Trust had apparently encumbered the property 23 with liens to other creditors. 24 R. Thomas & Wong obtains a judgment against Wallace. 25 On July 12, 2005, Thomas & Wong instituted litigation 26 against Wallace and Blume in Maricopa County Superior Court for 27 breach of fiduciary duty. On February 7, 2008, the jury returned 28 a verdict in favor of Thomas & Wong. After post-trial motions

-16- 1 and an appeal to the Arizona Court of Appeals, on January 10, 2 2011, the trial court entered a Judgment Subsequent to Appeal 3 against Wallace, awarding Thomas & Wong $1,306,144 plus taxable 4 costs of $4,026.90 and interest at 10 percent per annum on all 5 sums awarded from February 8, 2008 until paid. 6 S. Wallace files for bankruptcy. 7 Wallace filed this chapter 7 proceeding on October 2, 2013. 8 Thomas & Wong filed a timely complaint seeking to except its 9 claim from discharge under §§ 523(a)(2), (4), and (6). After a 10 three-day trial, the court ruled that the claim was 11 nondischargeable under § 523(a)(2), partly nondischargeable under 12 § 523(a)(4), but dischargeable under § 523(a)(6). 13 Wallace timely appealed the judgment against her under 14 §§ 523(a)(2) and (4). 15 III. JURISDICTION 16 The bankruptcy court had jurisdiction pursuant to 28 U.S.C. 17 §§ 1334 and 157(b)(2)(I). We have jurisdiction under 28 U.S.C. 18 § 158. 19 IV. ISSUES 20 1. Did Thomas & Wong have standing to sue Wallace in the 21 bankruptcy court? 22 2. Is Thomas & Wong’s § 523(a)(2)(A) claim barred by any 23 applicable statute of limitations? 24 3. Did the bankruptcy court err in determining that the debt 25 to Thomas & Wong was excepted from discharge under 26 § 523(a)(2)(A)? 27 4. Did the bankruptcy court err in determining that a 28 portion of the debt to Thomas & Wong was excepted from discharge

-17- 1 under § 523(a)(4)? 2 V. STANDARD OF REVIEW 3 We review the bankruptcy court’s findings of fact for clear 4 error, and its conclusions of law de novo. Carrillo v. Su 5 (In re Su), 290 F.3d 1140, 1142 (9th Cir. 2002). A finding is 6 clearly erroneous “when although there is evidence to support it, 7 the reviewing court on the entire evidence is left with the 8 definite and firm conviction that a mistake has been committed.” 9 Anderson v. City of Bessemer City, N.C., 470 U.S. 564, 573 (1985) 10 (citation omitted). Where two permissible views of the evidence 11 exist, the factfinder's choice between them cannot be clearly 12 erroneous. Id. at 574.6 We are to give “due regard to the trial 13 court’s opportunity to judge the witnesses’ credibility.” Civil 14 Rule 52(a)(6) (incorporated via Rule 7052). We also give 15 deference to inferences drawn by the trial court. Beech Aircraft 16 Corp. v. United States, 51 F.3d 834, 838 (9th Cir. 1995). 17 The bankruptcy court’s conclusions of law regarding 18 nondischargeability, as well as its interpretation of state law, 19 are reviewed de novo. Thiara v. Spycher Bros. (In re Thiara), 20 285 B.R. 420, 426-27 (9th Cir. BAP 2002). The bankruptcy court’s 21 6 At trial, the bankruptcy court admitted several exhibits 22 that Wallace did not include in the excerpts of record. 23 Appellants bear the responsibility to file an adequate record, and the burden of showing that the bankruptcy court’s findings of 24 fact are clearly erroneous. Kritt v. Kritt (In re Kritt), 190 B.R. 382, 387 (9th Cir. BAP 1995). An attempt to reverse the 25 trial court’s findings of fact requires the entire record relied 26 upon by the trial court be supplied for review. Id. We are entitled to conclude that the missing excerpts are not helpful to 27 Wallace. See Gionis v. Wayne (In re Gionis), 170 B.R. 675, 680–81 (9th Cir. BAP 1994), aff’d, 92 F.3d 1192 (9th Cir. 1996) 28 (table).

-18- 1 findings on fraudulent intent, reliance, proximate causation and 2 materiality are all subject to review for clear error. Candland 3 v. Ins. Co. of N. Am. (In re Candland), 90 F.3d 1466, 1469 (9th 4 Cir. 1996). 5 VI. DISCUSSION 6 A. Preliminary matters 7 1. Thomas & Wong has standing. 8 In both the state court litigation and in the bankruptcy 9 court, Wallace has raised various arguments concerning Thomas & 10 Wong’s existence and its standing to litigate the pertinent 11 issues. The Arizona Court of Appeals rejected Wallace’s argument 12 that Thomas & Wong lacked standing to sue in state court because 13 it was a foreign corporation that had not sought authority to 14 transact business in Arizona, as required under Arizona state 15 law, finding that the transactions conducted by Thomas & Wong 16 were exempt from the applicable state statutes. 17 In the bankruptcy court and this appeal, Wallace argued that 18 Thomas & Wong is a “nonexistent entity” and that the bankruptcy 19 court erred in precluding Wallace from arguing or introducing 20 evidence to that effect. Wallace notes that the receipts for the 21 wire transfers into the Cane O’Neill account show the originator 22 of the funds as “Wong Kai Min. Chong S. Yen,” not Thomas & Wong. 23 Wallace states in her opening brief: 24 It remains unclear why Thomas & Wong did not initiate the First Wire Transfer and Second Wire Transfer--as it 25 was the plaintiff in the State Court Action, Bankruptcy Adversary and now Appellee in this appeal, yet it has 26 no apparent financial stake in this matter calling into question its standing. 27 28 However, it is undisputed that the state court judgment that

-19- 1 is the basis for the nondischargeability judgment was entered in 2 favor of Thomas & Wong. In fact, the parties stipulated in their 3 Second Amended Joint Pretrial Statement that 4 Thomas & Wong is a judgment creditor of Wallace pursuant to the Judgment Subsequent to Appeal filed 5 January 10, 2011, in proceedings captioned Thomas & Wong General Contractor, Inc., vs. Blume Law Firm, 6 P.C., et al., No. 2 CV2005-05l325 in the Superior Court of Maricopa County, Arizona. 7 Moreover, the bankruptcy court did not disallow testimony or 8 argument on this point. Rather, after Thomas & Wong’s counsel 9 objected to Wallace’s counsel’s questions regarding the location 10 and business of Thomas & Wong on relevance and foundational 11 grounds, and the bankruptcy court questioned relevance, Wallace’s 12 counsel withdrew the question and did not make any offer of 13 proof, nor did he return to that line of questioning later in the 14 trial. Trial Transcript, February 26, 2015, pages 144-46. 15 Accordingly, he waived any objection to Thomas & Wong’s standing. 16 See In re Mercury Interactive Corp. Sec. Litig., 618 F.3d 988, 17 992 (9th Cir. 2010) (“an issue will generally be deemed waived on 18 appeal if the argument was not raised sufficiently for the trial 19 court to rule on it”). 20 2. Thomas & Wong’s § 523(a)(2)(A) claim is not time barred. 21 On the first day of trial, Wallace’s bankruptcy counsel 22 orally moved to dismiss the § 523(a)(2)(A) claim on statute of 23 limitations grounds. The bankruptcy court denied the motion, 24 noting that the issue had not been raised in the parties’ Pre- 25 Trial Statement and had not been briefed.7 The bankruptcy court 26 27 7 Under Civil Rule 16(d), a pretrial order “controls the 28 (continued...)

-20- 1 indicated that it would consider a properly noticed and briefed 2 motion, but nothing in the record indicates that Wallace’s 3 counsel pursued the issue further. 4 On appeal, Wallace argues that, despite controlling Ninth 5 Circuit authority, the bankruptcy court erred in entering a 6 judgment on the § 523(a)(2)(A) claim because Thomas & Wong did 7 not assert any state law fraud claims during the applicable state 8 law limitations period. Wallace argues that it is unfair for a 9 creditor to be able to assert a fraud claim in bankruptcy many 10 years after the state statute of limitations has expired, when no 11 fraud judgment was previously obtained. Under these 12 circumstances, she contends, witnesses’ memories have faded and 13 documents have disappeared, giving an advantage to the “savvy 14 creditor.” 15 In Banks v. Gill Distribution Centers, Inc. (In re Banks), 16 263 F.3d 862, 868 (9th Cir. 2001), the court held that where a 17 creditor filed a timely state court claim for breach of a 18 settlement agreement – even where the claim had not been reduced 19 to judgment – the creditor was not barred from asserting in the 20 bankruptcy court a timely nondischargeability action for fraud, 21 22 7 (...continued) 23 course of the action unless the court modifies it.” Thus, “a party may not offer evidence or advance theories at the trial 24 which are not included in the order or which contradict its terms.” El-Hakem v. BJY Inc., 415 F.3d 1068, 1077 (9th Cir. 25 2005)(citing United States v. First Nat’l Bank of Circle, 26 652 F.2d 882, 886 (9th Cir. 1981)). Rule 7016-1 of the Local Bankruptcy Rules for the District of Arizona requires the parties 27 to file a pretrial statement, which we construe as the equivalent of a pretrial order for purposes of controlling the issues to be 28 tried.

-21- 1 breach of fiduciary duty, and willful and malicious injury, even 2 though the state statutes of limitations had expired. See also 3 Lee-Benner v. Gergely (In re Gergely), 110 F.3d 1448, 1454 (9th 4 Cir. 1997) (“The state limitations period for fraud actions is 5 irrelevant to the dischargeability of an established debt.”) 6 Here, it is undisputed that the nondischargeability 7 complaint was timely filed under Rule 4007 and that the state 8 court action for breach of fiduciary duty was also timely filed. 9 Although the passage of time may make it more difficult to try 10 the nondischargeability claim, the timing was tied to the filing 11 of Wallace’s bankruptcy. 12 B. Merits 13 1. The bankruptcy court did not err in finding the 14 judgment nondischargeable under § 523(a)(2)(A). 15 Section 523(a)(2)(A) excepts from discharge debts for money, 16 property, or services obtained by “false pretenses, a false 17 representation, or actual fraud, other than a statement 18 respecting the debtor’s or an insider’s financial condition.” A 19 creditor seeking to except a debt from discharge based on fraud 20 must establish by a preponderance of the evidence each of five 21 elements: (1) misrepresentation, fraudulent omission or deceptive 22 conduct; (2) knowledge of the falsity or deceptiveness of such 23 representation(s) or omission(s); (3) an intent to deceive; 24 (4) justifiable reliance by the creditor on the representation(s) 25 or conduct; and (5) damage to the creditor proximately caused by 26 its reliance on such representation(s) or conduct. Ghomeshi v. 27 Sabban (In re Sabban), 600 F.3d 1219, 1222 (9th Cir. 2010). 28 A debtor’s failure to disclose material facts constitutes a

-22- 1 fraudulent omission under § 523(a)(2)(A) if the debtor had a duty 2 to disclose and the debtor’s omission was motivated by an intent 3 to deceive. See Citibank (South Dakota), N.A. v. Eashai 4 (In re Eshai), 87 F.3d 1082, 1089-90 (9th Cir. 1996). In 5 determining the duty to disclose in the context of fraud under 6 § 523(a)(2)(A), we look to the common law. Apte v. Japra 7 (In re Apte), 96 F.3d 1319, 1324 (9th Cir. 1996) (citing Field v. 8 Mans, 516 U.S. 59, 68-70 (1995)). Under the common law as set 9 forth in the Restatement (Second) of Torts § 551 (1977): 10 (2) One party to a business transaction is under a duty to exercise reasonable care to disclose to the other 11 before the transaction is consummated, 12 (a) matters known to him that the other is entitled to know because of a fiduciary or 13 other similar relation of trust and confidence between them; and 14 (b) matters known to him that he knows to be 15 necessary to prevent his partial or ambiguous statement of the facts from being misleading; 16 and 17 (c) subsequently acquired information that he knows will make untrue or misleading a 18 previous representation that when made was true or believed to be so; and 19 (d) the falsity of a representation not made 20 with the expectation that it would be acted upon, if he subsequently learns that the 21 other is about to act in reliance upon it in a transaction with him; and 22 (e) facts basic to the transaction, if he 23 knows that the other is about to enter into it under a mistake as to them, and that the 24 other, because of the relationship between them, the customs of the trade or other 25 objective circumstances, would reasonably expect a disclosure of those facts. 26 27 a. Wallace is a debtor under § 523(a)(2)(A). 28 Wallace argues initially that she is not a “debtor” under

-23- 1 § 523(a) because the loan was made to BDV, not Wallace. 2 Section 523 provides that a bankruptcy discharge does not 3 discharge an individual debtor from certain enumerated debts. 4 The Bankruptcy Code defines the word “debtor” as a “person or 5 municipality concerning which a case under this title has been 6 commenced.” § 101(13). There is no question that Wallace is a 7 “debtor” as that term is used in § 523. In a similar vein, 8 Wallace argues that she never received a commission from the sale 9 of the public shell corporation and thus did not commit fraud. 10 Accordingly, we interpret this argument to be that Wallace did 11 not benefit by her deceptive conduct. 12 As noted above, testimony at trial established that Wallace 13 received $50,000 of the proceeds from the Thomas & Wong loan. 14 More importantly, liability under § 523(a)(2)(A) is not limited 15 to situations in which the debtor received a benefit from his or 16 her fraudulent activity. Rather, § 523(a)(2)(A) prevents the 17 discharge of all liability arising from fraud. Cohen v. De la 18 Cruz, 523 U.S. 213, 215 (1998); see also In re Sabban, 600 F.3d 19 at 1222 (“[T]here is no requirement that the debtor have received 20 a direct or indirect benefit from his or her fraudulent activity 21 in order to make out a violation of § 523(a)(2)(A).”). 22 b. The bankruptcy court did not err in finding that Wallace’s failures to disclose amounted to 23 fraudulent misrepresentations. 24 As detailed above, Wallace failed to disclose numerous facts 25 to Tarapaski, including that: 26 • Wallace had an agreement with Kelly Black to receive a 27 commission for arranging the bridge financing. 28 • Beardmore had an outstanding $1.9 million judgment

-24- 1 against him. 2 • A separate $275,000 promissory note related to the 3 purchase of the office condo was prepared and executed. 4 • Wallace authorized the release of $275,000 from the 5 Cane O’Neill account without Thomas & Wong’s 6 authorization. 7 • Wallace authorized the release of an additional $20,000 8 and $4,960 from the Cane O’Neill account without Thomas 9 & Wong’s authorization. 10 • Wallace had a contract with Beardmore to sell him a 11 shell corporation, MW Asia, and Wallace received 12 $50,000 from the loan proceeds as a down payment on 13 that contract. 14 Wallace also misrepresented facts: 15 • Wallace told Tarapaski that Thomas & Wong was protected 16 by a safekeeping receipt, opinion letter, and insurance 17 certificate. 18 • Wallace stated that “the gold had been viewed” when she 19 did not personally view the gold doré. 20 The bankruptcy court found that Wallace had a duty to 21 disclose to Tarapaski and Thomas & Wong material facts regarding 22 the loan transaction arising out of an agency relationship. 23 Agency is the fiduciary relationship that arises when one party, 24 a principal, manifests assent to another person, an agent, that 25 the agent shall act on the principal’s behalf and subject to the 26 principal’s control, and the agent manifests assent or otherwise 27 consents to so act. Goodman v. Physical Engineering Inc., 28 270 P.3d 852, 856 (Ariz. Ct. App. 2011) (citing Restatement

-25- 1 (Third) of Agency § 1.01 (2006)). An agent holds express 2 authority if there is evidence that the principal has delegated 3 authority by oral or written words that authorize the agent to 4 act or do a certain act or series of acts. Id. The bankruptcy 5 court found that Wallace was Thomas & Wong’s agent (1) when 6 Wallace agreed to hold the funds in the Cane O’Neill trust 7 account and to not disburse the funds without Thomas & Wong’s 8 consent; (2) when Wallace became a member of the BDV board for 9 the stated purpose of looking after Thomas & Wong’s interest; and 10 (3) when Wallace agreed to view the gold on behalf of Thomas & 11 Wong. 12 The bankruptcy court found that as an agent, Wallace had a 13 duty to disclose material information to Thomas & Wong, including 14 that she stood to benefit from the transaction from the 15 commission agreement she had with Kelly Black and from the sale 16 of the public shell company. The bankruptcy court also found 17 that Wallace had a duty to disclose that Beardmore had a 18 $1.9 million judgment against him, that Wallace had released the 19 $275,000 to Lake Bank without Tarapaski’s or Thomas & Wong’s 20 consent, that she released the $20,000 to the L Trust without 21 Thomas & Wong’s consent, that she did not view the gold when 22 clearly Tarapaski believed that she had, and that she released 23 the last of the initial funds to pay the Cane O’Neill fees. 24 Wallace argues that the bankruptcy court erred in finding 25 that Wallace was an agent of Thomas & Wong. Wallace contends 26 that Thomas & Wong’s “refusal” to demonstrate its corporate 27 existence means that there can be no finding that Wallace was an 28 agent of or defrauded Thomas & Wong. Wallace cites no authority

-26- 1 for this argument, nor was this issue properly raised in the 2 bankruptcy court; thus, it is waived. See In re Mercury 3 Interactive Corp. Sec. Litig., 618 F.3d at 992. As noted above, 4 in the bankruptcy court, the parties stipulated that Thomas & 5 Wong holds a judgment against Wallace and is a creditor in the 6 bankruptcy, and at trial, Wallace’s former counsel withdrew his 7 question regarding Thomas & Wong’s corporate existence. Further, 8 the state court memorandum decision notes that Wallace admitted 9 to being Thomas & Wong’s agent for the purpose of releasing funds 10 from the Cane O’Neill account. Wallace’s testimony in the 11 bankruptcy court was consistent with this finding. See Trial 12 Transcript, February 26, 2015, at 118:18-120:7. 13 Wallace also argues (1) that the premature transfer of the 14 $275,000 was not material and that Thomas & Wong ratified that 15 transfer; (2) the only evidence of Wallace’s knowledge of the 16 $1.9 million judgment was a handwritten note stating “$1.960”; 17 and (3) that Wallace was not required to view the gold doré 18 pursuant to the checklist. 19 The ratification argument was not raised at trial and is 20 thus waived. In any event, there is no basis to conclude that 21 Tarapaski ratified the premature transfer. As discussed below, 22 the bankruptcy court found that Tarapaski would not have 23 authorized the transaction had he known some of the funds had 24 been released without permission. “Ratification requires intent 25 to ratify plus full knowledge of all the material facts.” United 26 Bank v. Mesa N. O. Nelson Co., Inc., 590 P.2d 1384, 1386 (Ariz. 27 1979). Here, Tarapaski did not have full knowledge of all the 28 material facts: he authorized the release of funds based on

-27- 1 misrepresentations by Wallace that Thomas & Wong was protected by 2 a safekeeping receipt, the DeConcini opinion letter and insurance 3 certificates. Wallace does not challenge the bankruptcy court’s 4 finding that these representations were false. 5 The finding that Wallace had knowledge of the $1.9 million 6 judgment against Beardmore was not clearly erroneous; at trial 7 Wallace identified a note in her own handwriting made after the 8 December 2002 meeting and conceded that the “$1.960” notation 9 therein referred to the Minnesota judgment against Beardmore; but 10 she also claimed that she could not recall whether she had told 11 Tarapaski about the judgment. Trial Transcript, February 26, 12 2015, at 45:24-46:7. We note that the bankruptcy court did not 13 find credible much of Wallace’s testimony. 14 The bankruptcy court’s finding that Wallace agreed to view 15 the gold doré for Thomas & Wong is not clearly erroneous. 16 Tarapaski testified that Wallace said she would view the gold to 17 verify its existence and represent Thomas & Wong in Tarapaski’s 18 absence. Trial Transcript, February 25, 2015, at 61:7-18. 19 Wallace herself testified that she was supposed to participate in 20 the viewing of the gold. Trial Transcript, February 26, 2015, at 21 70:23-71:2. In any event, the issue is not whether Wallace was 22 contractually required to view it, but that she misled Tarapaski 23 into believing that she had personally viewed it. We find no 24 clear error in the bankruptcy court’s finding on this issue. 25 c. The bankruptcy court’s findings that Wallace knew 26 her failures to disclose were deceptive and that she intended to deceive Tarapaski were not clearly 27 erroneous. 28 Intent to deceive may be inferred from the totality of

-28- 1 circumstances. Tallant v. Kaufman (In re Tallant), 218 B.R. 58, 2 66 (9th Cir. BAP 1996). The bankruptcy court found that Wallace 3 knew of the deceptiveness of her failures to disclose, and that 4 she intended to deceive Tarapaski “most glaringly” when she did 5 not advise him during the March 8 meeting where Tarapaski refused 6 to authorize the release of $275,000 that she had already 7 authorized disbursement of those funds. The bankruptcy court’s 8 finding of intent to deceive was based on the underlying findings 9 that Wallace stood to benefit from the transaction, that Wallace 10 failed to inform Tarapaski of the $1.9 million judgment against 11 Beardmore, that Wallace had prematurely authorized the release of 12 $275,000, and that she misled Tarapaski into believing that she 13 had viewed the gold doré. These findings support the conclusion 14 that Wallace intended to deceive Tarapaski. 15 Wallace argues that she did not intend to deceive Tarapaski 16 or Thomas & Wong and that she had no motivation to do so because 17 she did not stand to gain anything from doing so. Wallace relies 18 on the bankruptcy court’s finding regarding § 523(a)(6) that 19 “[t]here is not a sufficient showing here that Wallace intended 20 specifically to hurt Thomas & Wong. What the testimony seemed to 21 establish is that Wallace wanted for whatever reasons this deal 22 to move forward.” However, the cited finding is not that Wallace 23 did not intend to deceive, but that she did not necessarily 24 intend to injure Thomas & Wong. These are two distinct issues; 25 intent to injure is not a required element of a § 523(a)(2)(A) 26 claim. 27 In her reply brief, Wallace argues that because the contract 28 to sell MW Asia was with Beardmore Investments rather than BDV,

-29- 1 the MW Asia contract did not create a financial incentive for 2 Wallace to deceive Tarapaski to convince him to authorize release 3 of the bridge loan funds. However, Wallace testified at trial 4 that she had a profit motive in securing financing for BDV, 5 including selling the public shell. Trial Transcript, 6 February 26, 2015, 61:4-7. Additionally, Beardmore testified 7 that the Thomas & Wong loan was the only source of payment of the 8 $50,000 deposit (regardless of the fact that the contract was 9 with Beardmore Investments), and Wallace was paid $50,000 from 10 those funds. 11 Wallace also disputes the bankruptcy court’s finding that 12 Tarapaski did not know about the MW Asia contract and that 13 Wallace would receive a commission for arranging the bridge 14 financing from Thomas & Wong. Wallace points to the first two 15 pages of Trial Exhibit 73, which is a September 2, 2005 statement 16 Tarapaski prepared for the Department of Homeland Security in 17 which Tarapaski stated: 18 During the course of my stay there [at Wallace’s home] I overheard several conversations she had with someone 19 named John Beardmore. I asked her if there was anything I could do to help. She said he owned a bank 20 in Minnesota and was in urgent need of a short term bridge loan and was offering gold dorey [sic] bars as 21 security. In return for arranging this she would be paid a commission. 22 . . . . 23 I discussed the loan with Jan Wallace and learned that 24 the Lake Bank would be put into a public company shell that she owned and listed on a stock exchange. She 25 told me there would be a good profit in the shares and we could share that. I told her I knew nothing about 26 starting or running public companies and whatever she made was her deal. 27 28 The bankruptcy court did not admit these statements into

-30- 1 evidence.8 Even if it did, the 2005 statements do not impeach 2 Tarapaski’s testimony regarding his knowledge at the time he 3 authorized the loan. To the extent he was aware of a pending 4 transaction regarding the shell corporation, nothing in the 5 statement indicates that Tarapaski understood the details of the 6 transaction or that part of the loan proceeds would be used as a 7 deposit on the sale. 8 At trial, Tarapaski testified that at the time he authorized 9 the release of the loan proceeds on March 12, 2003, he did not 10 know of the commission or the MW Asia contract. Trial 11 Transcript, February 25, 2015, at 64:22-65:16. The bankruptcy 12 court found Tarapaski’s testimony credible. 13 In her reply brief, Wallace complains that, in its brief, 14 Thomas & Wong conflated her contractual relationships with BDV 15 and Beardmore Investments. She points out that the contract to 16 sell the shell corporation was with Beardmore Investments, not 17 BDV. Even if Thomas & Wong misstated in its brief that the sale 18 of the shell corporation was to BDV, that statement is not 19 relevant to our review of the bankruptcy court’s finding that 20 $50,000 of the funds were paid to Wallace as a deposit on the 21 22 23 8 24 The bankruptcy court explicitly admitted only page 3 of this statement. Trial Transcript, February 25, 2015, at 30:6-7. 25 On the last day of trial the bankruptcy court stated that 26 Exhibit 73 was admitted by stipulation. Based on the prior explicit admission of page 3 only and the fact that witnesses 27 were not questioned about any other portion of the exhibit, we conclude that the bankruptcy court intended to admit only that 28 page.

-31- 1 purchase of the shell corporation.9 2 Wallace also complains that Thomas & Wong incorrectly states 3 that Wallace had “an interest in a company that would get a 4 commission if the Thomas & Wong loan funded.” Wallace argues 5 that the only evidence of a commission is the one percent 6 promised to Wallace for advising Black regarding Beardmore 7 Investments. She contends that the undisclosed profit conduit 8 was Wallace & Black, LLC, which did not exist in 2003, and that 9 Wallace did not own an interest in Premier Funding, the 10 predecessor to Wallace Black. Thus, in Wallace’s mind, she had 11 no financial incentive to push the loan through. 12 However, Wallace testified that she had an agreement with 13 Black whereby Black would share commissions with Wallace in 14 exchange for Wallace’s advice. And although Wallace claimed that 15 she was not entitled to a commission with respect to the Thomas & 16 Wong loan, she also testified in response to the question whether 17 she had a profit interest in getting financing for BDV, 18 “[b]ecause I was giving Kelly Black and Casey Strunk advice, 19 Kelly Black told me that she would give me a half of two percent 20 or half of one percent.” Trial Transcript, February 26, 2015, at 21 49:16-21. As we have repeatedly noted, the bankruptcy court did 22 not find Wallace’s testimony credible. 23 Wallace has not shown clear error in the bankruptcy court’s 24 25 9 At trial in the bankruptcy court, Thomas & Wong’s counsel 26 introduced excerpts of Wallace’s state court trial testimony that BDV was her client with respect to the shell corporation. 27 Wallace asserted that she had been mistaken in her prior testimony. Trial Transcript, February 26, 2015, at 52:2-23; 28 53:20-54-9.

-32- 1 finding of intent to deceive. 2 d. The bankruptcy court did not clearly err in finding that Tarapaski justifiably relied on 3 Wallace’s misrepresentations or that those misrepresentations were the proximate cause of 4 injury to Thomas & Wong. 5 Nondisclosure of a material fact that one has a duty to 6 disclose establishes the requisite reliance and causation for 7 actual fraud under § 523(a)(2)(A). In re Apte, 96 F.3d at 1323. 8 Thus, “[p]ositive proof of reliance is not a prerequisite to 9 recovery. All that is necessary is that the facts withheld be 10 material . . . . This obligation to disclose and this 11 withholding of a material fact establish the requisite element of 12 causation in fact.” Id. (quoting Affiliated Ute Citizens v. 13 United States, 406 U.S. 128, 153-54 (1972)). 14 As previously discussed, the bankruptcy court correctly 15 found that Wallace had a duty to disclose and that she failed to 16 disclose to Tarapaski several material facts about the loan 17 transaction. Under the applicable legal standard, these findings 18 are sufficient to establish justifiable reliance and causation. 19 Moreover, the bankruptcy court found that Tarapaski would not 20 have committed Thomas & Wong to the loan transaction had he been 21 told of the $1.9 million judgment against Beardmore or that the 22 $275,000 had been released without his consent. 23 Wallace argues that Tarapaski did not justifiably rely on 24 Wallace’s nondisclosures and that the nondisclosures were not the 25 proximate cause of damages to Thomas & Wong because Tarapaski 26 ratified the release of the $275,000 and authorized release of 27 the remaining funds without all of the required documentation, 28 and because he did not conduct an appropriate level of due

-33- 1 diligence which would have revealed the judgment against 2 Beardmore. As discussed above, Tarapaski did not ratify the 3 release of funds because he was not aware of all the material 4 facts. Moreover, as shown previously, under the reliance 5 standard applicable to cases involving nondisclosure, the 6 bankruptcy court needed to find only that Wallace failed to 7 disclose material facts. In re Apte, 96 F.3d at 1323. In any 8 event, a person is justified in relying on a representation of 9 fact “although he might have ascertained the falsity of the 10 representation had he made an investigation.” Field, 516 U.S. at 11 70 (quoting Restatement (Second) of Torts § 540 (1976)). 12 e. The bankruptcy court did not err in not reducing the amount of the judgment to “credit” Wallace for 13 sums collected on the BDV obligation. 14 Regarding damages, Wallace contends that the bankruptcy 15 court should have given Wallace credit for the amounts collected 16 and turned over to Thomas & Wong from the liquidation of 17 collateral. However, the amount of the debt was established in 18 the state court judgment, and no evidence was presented that any 19 further payments were made on that debt after entry of the 20 judgment. 21 2. The bankruptcy court did not err in finding that $799,960 of the state court judgment was 22 nondischargeable under § 523(a)(4). 23 Section 523(a)(4) excepts from discharge debts that arise 24 from fraud or defalcation while acting in a fiduciary capacity. 25 To prevail on a claim under § 523(a)(4), a plaintiff must prove 26 by a preponderance of the evidence not only the debtor’s fraud or 27 defalcation but also that the debtor was acting in a fiduciary 28 capacity when the debtor committed the fraud or defalcation. The

-34- 1 Ninth Circuit has adopted a narrow definition of “fiduciary.” To 2 fit within § 523(a)(4), the fiduciary relationship must be one 3 arising from an express or technical trust that was imposed 4 before, and without reference to, the wrongdoing that caused the 5 debt, as opposed to a trust ex maleficio, constructively imposed 6 because of the act of wrongdoing from which the debt arose. 7 Honkanen v. Hopper (In re Honkanen), 446 B.R. 373, 378-79 (9th 8 Cir. BAP 2011) (citing Ragsdale v. Haller, 780 F.2d 794, 796 (9th 9 Cir. 1986); additional citations omitted). 10 While the scope of the term “fiduciary capacity” is a 11 question of federal law, the Ninth Circuit has considered state 12 law to ascertain whether the requisite trust relationship exists. 13 Ragsdale, 780 F.2d at 796. For a trust relationship under 14 § 523(a)(4) to be established, the applicable state law must 15 clearly define fiduciary duties and identify trust property. 16 In re Honkanen, 446 B.R. at 379. 17 Under Arizona law, “the essential elements of a trust are a 18 competent settlor and a trustee, clear and unequivocal intent to 19 create a trust, ascertainable trust res, and sufficiently 20 identifiable beneficiaries.” Golleher v. Horton, 715 P.2d 1225, 21 1231 (Ariz. Ct. App. 1985). The bankruptcy court found that 22 there was an express trust and a clear and unequivocal intent to 23 create a trust relationship: the settlor of the trust was Thomas 24 & Wong, which wired $799,960 into the Cane O’Neill trust account 25 that was in Wallace’s name; the trustee was Wallace, who agreed 26 that she would not authorize disbursement of funds without Thomas 27 & Wong’s consent. The bankruptcy court found that the trust res 28 was the $799,960 in the Cane O’Neill trust account, and that the

-35- 1 sufficiently identifiable beneficiary was Thomas & Wong, for 2 whose benefit Wallace was acting. 3 Based on its § 523(a)(2)(A) fraud finding, the bankruptcy 4 court found that Wallace committed fraud while acting in a 5 fiduciary capacity.10 Accordingly, the bankruptcy court 6 concluded that the debt was nondischargeable under § 523(a)(4), 7 but only as to the $799,960 that was held in the Cane O’Neill 8 account. 9 Wallace contends that the bankruptcy court incorrectly 10 applied Arizona state law in determining that a trust existed.11 11 Wallace asserts that a written trust document was required to 12 create a trust, but there is no such requirement under Arizona 13 law. Wallace also asserts that the trustee of the Cane O’Neill 14 10 15 The bankruptcy court also concluded that Wallace’s conduct amounted to fraud under Arizona state law, citing Echols 16 v. Beauty Built Homes, Inc., 647 P.2d 629, 631 (Ariz. 1982) (elements of fraud under Arizona law are (1) a representation; 17 (2) its falsity; (3) its materiality; (4) the speaker’s knowledge of its falsity or ignorance of its truth; (5) the speaker’s 18 intent that it be acted upon by the recipient in the manner 19 reasonably contemplated; (6) the hearer’s ignorance of its falsity; (7) the hearer’s reliance on its truth; (8) the right to 20 rely on it; and (9) his consequent and proximate injury) and Madisons Chevrolet, Inc. v. Donald, 505 P.2d 1039, 1042 (Ariz. 21 1973) (fraudulent concealment may support a finding of fraudulent 22 misrepresentation). 11 23 Wallace seems to be arguing that the court should have looked to federal law to determine whether a trust existed. She 24 cites Thornton v. Thornton (In re Thornton), 544 F.2d 1005, 1007 (9th Cir. 1976), which recites the elements of an express trust 25 as (1) sufficient words to create a trust; (2) a definite 26 subject; and (3) a certain and ascertained object or res (citing to 89 C.J.S. Trusts § 22). To the extent Thornton suggests a 27 federal standard is applied in determining whether a trust exists, that case was clarified in subsequent Ninth Circuit 28 decisions. See, e.g., Ragsdale, 780 F.2d at 796.

-36- 1 account was the law firm, not Wallace, but she overlooks the fact 2 that the account was in her name and that she agreed not to 3 authorize disbursement of those funds without the consent of 4 Thomas & Wong. Wallace also points out that the loan funds were 5 wired into the Cane O’Neill account from an entity other than 6 Thomas & Wong but fails to explain how that changes the parties’ 7 agreement or understanding, especially where Thomas & Wong was 8 named as the obligee in the $1.5 million promissory note. In 9 short, Wallace has not shown clear error in any of the bankruptcy 10 court’s findings with respect to the existence of a fiduciary 11 relationship for purposes of § 523(a)(4). 12 Wallace also argues that there was no intent to defraud and 13 again refers to the bankruptcy court’s finding that there was 14 insufficient evidence to conclude that Wallace intended to harm 15 Thomas & Wong. As noted, this finding is irrelevant to the 16 determination of fraudulent intent. 17 Finally, the bankruptcy court correctly concluded that only 18 the $799,960 deposited into the Cane O’Neill trust account was 19 nondischargeable under § 523(a)(4), as that is the only 20 identifiable trust res. 21 VII. CONCLUSION 22 Wallace has not shown that the bankruptcy court clearly 23 erred in its factual findings or application of legal standard to 24 those findings. Accordingly, we AFFIRM the bankruptcy court’s 25 judgment of nondischargeability under §§ 523(a)(2)(A) and (a)(4). 26 27 28

-37-