In re: Richard Jay Blaskey

• Court: United States Bankruptcy Appellate Panel for the Ninth Circuit
• Decided: February 27, 2015
• Docket: CC-14-1340-KuDKi
• Status: Unpublished

Opinion

FILED FEB 27 2015 1 NOT FOR PUBLICATION SUSAN M. SPRAUL, CLERK U.S. BKCY.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. CC-14-1340-KuDKi ) 6 RICHARD JAY BLASKEY, ) Bk. No. 11-21187 ) 7 Debtor. ) Adv. No. 11-01462 ______________________________) 8 ) BARTON PROPERTIES, INC.; ) 9 STEPHEN SELINGER, ) ) 10 Appellants, ) ) 11 v. ) MEMORANDUM* ) 12 RICHARD JAY BLASKEY, ) ) 13 Appellee. ) ______________________________) 14 Argued and Submitted on February 19, 2015 15 at Los Angeles, California 16 Filed – February 27, 2015 17 Appeal from the United States Bankruptcy Court for the Central District of California 18 Honorable Erithe A. Smith, Bankruptcy Judge, Presiding 19 20 Appearances: Anthony A. Patel argued for appellants Barton Properties, Inc. and Stephen Selinger.** 21 22 Before: KURTZ, DUNN and KIRSCHER, Bankruptcy Judges. 23 24 * This disposition is not appropriate for publication. 25 Although it may be cited for whatever persuasive value it may 26 have (see Fed. R. App. P. 32.1), it has no precedential value. See 9th Cir. BAP Rule 8024-1. 27 ** Appellee Richard Jay Blaskey did not actively participate 28 in this appeal. 1 INTRODUCTION 2 Plaintiffs Barton Properties, Inc. and Stephen Selinger 3 obtained a judgment against their former attorney Richard Jay 4 Blaskey for roughly $1 million. After Blaskey filed bankruptcy, 5 the plaintiffs commenced an adversary proceeding seeking to have 6 the judgment debt declared nondischargeable under 11 U.S.C. 7 §§ 523(a)(2)(A), (4) and (6).1 After trial, the bankruptcy court 8 entered judgment against the plaintiffs, holding that the 9 plaintiffs had not met their burden of proof to establish that 10 the damages they incurred resulted from nondischargeable conduct. 11 The bankruptcy court correctly identified a preponderance of 12 the evidence as the applicable burden of proof standard but also 13 indicated that, in the nondischargeability context, this standard 14 of proof was subject to a special gloss or spin that required the 15 court to view the evidence “in the light most favorably” to 16 Blaskey. We disagree. The preponderance of the evidence 17 standard must be applied in nondischargeability proceedings the 18 same as it would be applied in any other type of proceedings. 19 If the court had applied the preponderance of the evidence 20 standard correctly, it might have ruled differently on 21 plaintiffs’ §§ 523(a)(2)(A) and (6) claims. We must VACATE the 22 bankruptcy court’s ruling on these claims and REMAND so it can 23 apply the preponderance of the evidence standard correctly. 24 On the other hand, on this record, no reasonable trier of 25 26 1 Unless specified otherwise, all chapter and section 27 references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and all "Rule" references are to the Federal Rules of Bankruptcy 28 Procedure, Rules 1001-9037.

2 1 fact could have found either embezzlement or fiduciary 2 defalcation within the meaning of § 523(a)(4) even if the 3 preponderance of the evidence standard had been applied 4 correctly. Therefore, the court’s incorrect application of the 5 preponderance of the evidence standard was harmless error with 6 respect to the plaintiffs’ § 523(a)(4) claim. We AFFIRM the 7 bankruptcy court’s ruling on that claim on this basis. 8 FACTS 9 The plaintiffs retained Blaskey in 2004. Among other legal 10 matters, the parties agreed that Blaskey would represent them in 11 three unrelated lawsuits, which the plaintiffs refer to as the 12 underlying actions. The underlying actions included one lawsuit 13 brought by Luba and Vladmir Tomalveska against Barton Properties 14 (LASC Case No. SC085977) and two lawsuits brought by Barton 15 Properties, one against the City of Los Angeles and the other 16 against Geosystems, Inc. (LASC Case Nos. BC311407 and BC312631). 17 In 2007, the plaintiffs discovered that Blaskey had been 18 derelict in representing them in the underlying actions to such 19 an extent that the state court presiding over the underlying 20 actions had entered adverse orders and judgments against Barton 21 Properties. As a result, in 2008, Barton Properties sued Blaskey 22 in state court for legal malpractice, breach of contract, fraud 23 and breach of fiduciary duty. The state court ultimately entered 24 a default judgment against Blaskey in 2010. 25 Blaskey commenced his bankruptcy case in August 2011, and 26 the plaintiffs filed their nondischargeability adversary 27 proceeding shortly thereafter. The plaintiffs alleged three 28 distinct clams for relief, one under § 523(a)(2)(A), another

3 1 under § 523(a)(4) and another under § 523(a)(6). 2 The court held the trial on the plaintiffs’ three claims in 3 March 2014. The plaintiffs offered into evidence only a handful 4 of exhibits and presented the testimony of only one witness: 5 Selinger, who at all relevant times was the president of Barton 6 Properties. Selinger testified that, in 2006, Blaskey led him to 7 believe that Blaskey was taking care of all of the litigation and 8 settlement tasks that needed taking care of in the underlying 9 actions and that, if he (Selinger) had known the truth – that 10 Blaskey was derelict in his duties – Barton Properties would not 11 have paid Blaskey’s 2006 invoices for legal fees to the tune of 12 roughly $50,000. Selinger also testified that, if Blaskey had 13 not lied to him about the performance of his duties, he would 14 have hired new counsel, who might have had opportunities to 15 prevent or have set aside some or all of the adverse orders and 16 judgments entered in the underlying actions. 17 Notably, however, Selinger’s testimony contained virtually 18 no specifics about what Blaskey reported to him about the status 19 of the underlying actions, when Blaskey made particular reports, 20 when Barton Properties made payments to Blaskey and how much was 21 paid in each instance. Furthermore, Selinger offered no 22 specifics regarding the remedial opportunities available at the 23 time but later lost because Barton Properties was relying on 24 Blaskey’s misstatements. 25 The plaintiffs offered two distinct types of evidence to 26 demonstrate the amount of damages they suffered. First, there 27 was Selinger’s testimony. Selinger gave a generalized account of 28 damages, broken down by underlying action. According to

4 1 Selinger, as a result of Blaskey’s conduct, Barton Properties 2 suffered roughly $470,000 in damages in the Geosystems action, 3 roughly $60,000 in the Tomalveska action and $450,000 in the City 4 of Los Angeles action. For the most part, Selinger did not offer 5 specific details concretely demonstrating how Blaskey’s 6 nondischargeable conduct caused Barton Properties’ damages in the 7 underlying actions. 8 The second type of evidence the plaintiffs offered at trial 9 to establish their damages was documentary. Specifically, the 10 plaintiffs offered as exhibits the complaint filed and the 11 $1 million default judgment entered in their state court action 12 against Blaskey. The plaintiffs in essence asserted that issue 13 preclusion applied and that these two documents established their 14 damages of $1 million. But plaintiffs’ issue preclusion argument 15 went further. According to plaintiffs, the state court judgment 16 not only conclusively established Blaskey’s liability for 17 $1 million but also conclusively established that Blaskey’s 18 $1 million judgment debt was nondischargeable – that Blaskey was 19 precluded from arguing in the adversary proceeding that the 20 $1 million in damages resulted from anything other than 21 nondischargeable conduct. 22 After the conclusion of the trial, the bankruptcy court 23 announced its findings of fact and conclusions of law at a 24 hearing held in May 2014. As a threshold matter, the bankruptcy 25 court rejected the plaintiffs’ assertion that they were entitled 26 to issue preclusion based on the state court judgment. The 27 bankruptcy court pointed out that issue preclusion was not 28 available unless the issues in question were the subject of

5 1 explicit findings by the state court or, alternately, implicit 2 findings on those issues were essential to support the state 3 court’s judgment. 4 The bankruptcy court further pointed out that the state 5 court judgment was not supported by any explicit findings and 6 that it was impossible to tell on which causes of action the 7 plaintiffs had prevailed. As the bankruptcy court explained, the 8 state court judgment did not specify whether the $1 million in 9 damages were awarded based on breach of contract, fraud, legal 10 malpractice, breach of fiduciary duty, or some combination 11 thereof. All of these causes of action were set forth in the 12 state court complaint but none were referenced in the state court 13 judgment. Consequently, the bankruptcy court held, it could not 14 apply issue preclusion to determine the dischargeability of 15 Blaskey’s $1 million judgment debt because the plaintiffs had not 16 satisfied the “necessarily decided” element for issue preclusion. 17 The court next addressed the trial record and whether the 18 plaintiffs had made a sufficient showing that the $1 million 19 judgment debt, or any portion thereof, should be declared 20 nondischargeable under §523(a)(2)(A). The court found that the 21 plaintiffs had not established by a preponderance of the evidence 22 that their damages resulted from fraudulent conduct. According 23 to the court, there was either no evidence or insufficient 24 evidence connecting any particular misrepresentations Blaskey 25 made either to the $50,000 in legal fees the plaintiffs paid 26 Blaskey or to the roughly $1 million in damages the plaintiffs 27 apparently suffered in the underlying actions. 28 The court further explained that the plaintiffs’ evidentiary

6 1 deficiencies were exacerbated by the lack of any documentation to 2 support the amounts Blaskey billed them or the amounts the 3 plaintiffs actually paid. The court also pointed out that the 4 plaintiffs’ lack of specificity regarding when representations 5 were made, precisely what was said, when they paid Blaskey, and 6 how much they paid Blaskey all worked against them proving their 7 nondischargeability claims by a preponderance of the evidence. 8 As for the plaintiffs’ § 523(a)(4) claim, the bankruptcy 9 court found there was no evidence of any express or technical 10 trust as to any of the monies the plaintiffs paid to Blaskey and 11 there was insufficient evidence of a defalcation within the 12 meaning of the statute.2 And as for the plaintiffs’ §523(a)(6) 13 claim, the bankruptcy court found there was insufficient evidence 14 that Blaskey subjectively intended to injure the plaintiffs. 15 During its ruling, the bankruptcy court stated multiple 16 times that the plaintiffs bore the burden of proof to establish 17 all of the nondischargeability elements by a preponderance of the 18 evidence. However, the bankruptcy court also made a couple of 19 statements indicating that the preponderance of the evidence 20 standard has a special meaning or gloss in nondischargeability 21 litigation. For instance, the bankruptcy court stated: 22 What is relevant is that the evidence support the claims by a preponderance of the evidence and I must 23 apply the standard that I’m required to apply by the U.S. Supreme Court and, that is, that I am required to 24 25 2 The record reflects that, in 2004, the plaintiffs paid a 26 retainer to Blaskey in an amount somewhere between $2,000 and $5,000. Concerning the retainer, the bankruptcy court ruled that 27 there was no evidence indicating that the retainer could be declared nondischargeable under § 523(a)(4) or on any other 28 grounds.

7 1 view the evidence strictly against the creditor and liberally in favor of the debtor. That is the 2 standard. 3 Hr’g Tr. (May 6, 2014) at 17:16-21 (emphasis added). The 4 bankruptcy court further stated that it was required to view the 5 evidence “in the light most favorably to the defendant and 6 strictly against the plaintiff.” Hr’g Tr. (May 6, 2014) at 7 21:9-11 (emphasis added). 8 On June 20, 2014, the bankruptcy court entered judgment in 9 favor of Blaskey and against the plaintiffs. The plaintiffs 10 timely appealed. 11 JURISDICTION 12 The bankruptcy court had jurisdiction pursuant to 28 U.S.C. 13 §§ 1334 and 157(b)(2)(I). We have jurisdiction under 28 U.S.C. 14 § 158. 15 ISSUES 16 Did the bankruptcy court err when it ruled that issue 17 preclusion did not apply to the plaintiffs’ state court judgment? 18 Did the bankruptcy court err in its application of the 19 preponderance of the evidence standard? 20 Did the bankruptcy court err when it ruled that the 21 plaintiffs had not satisfied their burden of proof at trial? 22 STANDARDS OF REVIEW 23 We review de novo the bankruptcy court’s determination as to 24 whether issue preclusion is available. Honkanen v. Hopper 25 (In re Honkanen), 446 B.R. 373, 378 (9th Cir. BAP 2011). 26 We also review de novo questions concerning what standard of 27 proof must be applied. W. Wire Works, Inc. v. Lawler 28 (In re Lawler), 141 B.R. 425, 428 (9th Cir. BAP 1992).

8 1 We review under the clearly erroneous standard the 2 bankruptcy court’s factual findings. In re Honkanen, 446 B.R. at 3 378. 4 We can affirm on any ground supported by the record. 5 Thompson v. Paul, 547 F.3d 1055, 1058–59 (9th Cir. 2008). 6 DISCUSSION 7 When the bankruptcy court declares a debt nondischargeable 8 under § 523(a), the debtor continues to bear part of the 9 financial burden that drove the debtor to file bankruptcy in the 10 first place; § 523(a) thus stands in tension with the fundamental 11 bankruptcy goal of providing debtors with a fresh start. Willms 12 v. Sanderson, 723 F.3d 1094, 1099-1100 (9th Cir. 2013). For this 13 reason, § 523(a) is narrowly construed against the objecting 14 creditor and in favor of the debtor. Snoke v. Riso 15 (In re Riso), 978 F.2d 1151, 1154 (9th Cir. 1992). Similarly, 16 this is why the Supreme Court has stated that exceptions to 17 discharge “should be confined to those plainly expressed.” 18 Bullock v. BankChampaign, N.A., 133 S. Ct. 1754, 1760-61 (2013). 19 The bankruptcy court here indicated that the policy in 20 nondischargeability litigation favoring discharge of the debtor 21 extended beyond the construction of § 523(a) to the determination 22 of factual issues. We disagree. This notion is inconsistent 23 with Grogan v. Garner, 498 U.S. 279, 291 (1991), which held that 24 the “ordinary” preponderance of the evidence standard applied to 25 claims for relief under § 523(a). Id. While Grogan did not 26 elaborate on the metes and bounds of the ordinary preponderance 27 of the evidence standard, it is well established that this 28 standard requires a party bearing the burden of proof to

9 1 establish that each element of its claim or defense “more likely 2 than not” exists. See, e.g., Guglielmino v. McKee Foods Corp., 3 506 F.3d 696, 699, 701 (9th Cir. 2007); Metro. Stevedore Co. v. 4 Rambo, 521 U.S. 121, 137 n.9 (1997). 5 In relevant part, Grogan explained that its holding would 6 permit virtually any state court fraud judgment to be declared 7 nondischargeable under § 523(a)(2)(A) via the application of 8 issue preclusion regardless of whether the state court in the 9 prior action applied the preponderance of the evidence standard 10 or the more demanding clear and convincing evidence standard. 11 Grogan, 498 U.S. at 290; see also id. at 283-85. 12 It is impossible to reconcile Grogan with the bankruptcy 13 court’s position here that there is a special, higher gloss on 14 the preponderance of the evidence standard in nondischargeability 15 litigation. If that were the case, prior state court fraud 16 judgments based on the ordinary preponderance of the evidence 17 standard no longer would be readily subject to 18 nondischargeability in subsequent bankruptcy cases as 19 contemplated by the Supreme Court in Grogan. 20 Even so, our determination that the bankruptcy court 21 incorrectly applied the preponderance of the evidence standard 22 does not end our analysis. To the extent the plaintiffs did not 23 present any evidence in support of one or more of the elements 24 for nondischargeability, they could not possibly have prevailed 25 after trial regardless of how the bankruptcy court applied the 26 preponderance of the evidence standard. 27 But before we look at the underlying elements for the 28 plaintiffs’ nondischargeability claims and the evidence

10 1 presented, we first note that the bankruptcy court correctly 2 declined to apply issue preclusion to the plaintiffs’ state court 3 judgment. While issue preclusion can and does apply in 4 nondischargeability proceedings, Grogan, 498 U.S. at 284-85 n.11, 5 a litigant seeking to offer a California state court judgment as 6 preclusive on one or more issues must establish all of the 7 elements that California courts require before giving the 8 judgment issue preclusive effect. See Cal–Micro, Inc. v. 9 Cantrell (In re Cantrell), 329 F.3d 1119, 1123 (9th Cir. 2003). 10 When the litigant seeks to invoke issue preclusion with respect 11 to a California default judgment, he or she must show, among 12 other things, that the state court in the prior proceeding made 13 an express finding on the issues in question or, alternately, 14 that implicit findings on those issues were essential to the 15 court’s judgment. See In re Cantrell, 329 F.3d at 1124-25 (9th 16 Cir. 2003); Harmon v. Kobrin (In re Harmon), 250 F.3d 1240, 1248 17 (9th Cir. 2001). 18 Here, the bankruptcy court correctly determined that there 19 was no express finding of fraud or other nondischargeable conduct 20 in the state court judgment against Blaskey. Nor was an implicit 21 finding of fraud or other nondischargeable conduct essential to 22 the judgment, inasmuch as the state court did not specify which 23 of the several causes of action stated in the plaintiffs’ 24 complaint served as the basis for the judgment. While some of 25 those causes of action may have necessitated a finding of 26 27 28

11 1 nondischargeable conduct, others would not have.3 2 Having correctly determined that issue preclusion did not 3 apply, the bankruptcy court focused on the evidence presented at 4 trial and whether the plaintiffs had met their burden of proof. 5 As set forth above, the court erred because it applied a standard 6 of proof more demanding than the ordinary preponderance of the 7 evidence standard. Nonetheless, to the extent the plaintiffs 8 failed to present any evidence in support of one or more 9 essential elements of their claims, we can affirm based on this 10 absence of evidence. Under those circumstances, the court as 11 the trier of fact could not have found in favor of the plaintiffs 12 regardless of what standard of proof applied. See Ellsworth v. 13 Lifescape Medical Assocs., P.C. (In re Ellsworth), 455 B.R. 904, 14 919 (9th Cir. BAP 2011) (holding that any error regarding the 15 bankruptcy court’s application of the burden of proof was 16 harmless when the factual issue in question only could have been 17 resolved one way in light of the evidence presented); see also 18 Van Zandt v. Mbunda (In re Mbunda), 484 B.R. 344, 355 (9th Cir. 19 BAP 2012) (holding that the Panel must ignore harmless error). 20 With respect to the plaintiffs’ §§ 523(a)(2)(A) and (6) 21 claims for relief, we have reviewed the trial record, and we have 22 23 3 The plaintiffs argued that the bankruptcy court should have 24 applied at least partial issue preclusion by apportioning their damages between those that arose from dischargeable conduct and 25 those that arose from nondischargeable conduct. This argument is 26 meritless. The state court judgment did not make any such apportionment, and any attempt by the bankruptcy court to apply 27 partial issue preclusion by doing so would have been inconsistent with In re Cantrell and In re Harmon and the California issue 28 preclusion cases on which those two decisions are based.

12 1 considered all of the elements necessary to establish claims for 2 relief under §§ 523(a)(2)(A) and (6). To support their 3 § 523(a)(2)(A) claim, the plaintiffs needed to show: 4 (1) misrepresentation, fraudulent omission or deceptive conduct by the debtor; (2) knowledge of the falsity or 5 deceptiveness of his statement or conduct; (3) an intent to deceive; (4) justifiable reliance by the 6 creditor on the debtor's statement or conduct; and (5) damage to the creditor proximately caused by its 7 reliance on the debtor's statement or conduct. 8 Ghomeshi v. Sabban (In re Sabban), 384 B.R. 1, 5 (9th Cir. BAP 9 2008), aff'd, 600 F.3d 1219, 1222 (9th Cir. 2010). 10 To support their § 523(a)(6) claim, the plaintiffs needed to 11 show that the injury they incurred was both willful and 12 malicious. Barboza v. New Form, Inc. (In re Barboza), 545 F.3d 13 702, 706 (9th Cir. 2008). Under § 523(a)(6), a debtor has acted 14 willfully only if he acted with the subjective intent to cause 15 harm or with the subjective knowledge that harm was substantially 16 certain to occur from his actions. Carrillo v. Su (In re Su), 17 290 F.3d 1140, 1144-45 (9th Cir. 2002). And a malicious injury 18 requires: “(1) a wrongful act, (2) done intentionally, (3) which 19 necessarily causes injury, and (4) is done without just cause or 20 excuse.” In re Barboza, 545 F.3d at 706. 21 While we agree with the bankruptcy court that the evidence 22 presented at trial was quite thin, we cannot say that no 23 reasonable trier of fact could have found for the plaintiffs on 24 each of the elements necessary to establish nondischargeability 25 under §§ 523(a)(2)(A) and (a)(6) if the ordinary preponderance of 26 evidence standard had been applied. Put another way, if the 27 bankruptcy court had applied the preponderance of the evidence 28 standard correctly, it might have made different findings

13 1 regarding whether plaintiffs’ damages were incurred as a result 2 of conduct within the scope of either or both § 523(a)(2)(A) and 3 (a)(6). 4 We are not saying that, on remand, the bankruptcy court must 5 make different findings. We express no opinion on what findings 6 the bankruptcy court ultimately should make on remand. Instead, 7 we are merely saying that, before we can review the bankruptcy 8 court’s findings, we need to ensure that the bankruptcy court 9 applied the ordinary preponderance of the evidence standard. 10 The plaintiffs’ § 523(a)(4) claim is a different matter. In 11 conjunction with their § 523(a)(4) claim for relief, the 12 plaintiffs asserted that Blaskey committed defalcation while 13 acting in a fiduciary capacity. However, the only type of 14 fiduciary covered within the scope of § 523(a)(4) is the trustee 15 of an express trust or a technical trust imposed before and 16 without reference to any alleged wrongdoing by the debtor. 17 In re Honkanen, 446 B.R. at 378-79. In California, unless an 18 attorney holds funds in his or her client trust account on behalf 19 of a client, the attorney is not a fiduciary within the meaning 20 of § 523(a)(4). See Banks v. Gill Distrib. Ctrs., Inc. 21 (In re Banks), 263 F.3d 862, 870-71 (9th Cir. 2001). Here, the 22 plaintiffs presented no evidence indicating that any of the funds 23 they paid to Blaskey were held in trust in Blaskey’s client trust 24 account. 25 Alternately, the plaintiffs asserted that Blaskey committed 26 nondischargeable embezzlement, which also is covered by 27 § 523(a)(4). For purposes of the nondischargeability statute, a 28 claim based on embezzlement requires proof of:

14 1 (1) property rightfully in the possession of a nonowner; (2) nonowner's appropriation of the property 2 to a use other than which it was entrusted, and (3) circumstances indicating fraud. 3 4 Transam. Comm’l Fin. Corp. v. Littleton (In re Littleton), 5 942 F.2d 551, 555 (9th Cir. 1991). Here, the plaintiffs 6 presented no evidence indicating that they intended to retain 7 ownership of the funds they paid to Blaskey or that he used the 8 funds for a purpose other than that which the plaintiffs intended 9 the funds to be used. 10 In short, the plaintiffs did not present any evidence in 11 support of essential elements of their § 523(a)(4) claim, and we 12 can affirm the bankruptcy court’s ruling in favor of Blaskey on 13 the § 523(a)(4) claim on that basis. 14 CONCLUSION 15 For the reasons set forth above, we AFFIRM the bankruptcy 16 court’s ruling on the plaintiffs’ § 523(a)(4) claim. However, 17 we VACATE the bankruptcy court’s ruling on the plaintiffs’ 18 §§ 523(a)(2)(A) and (6) claims, and we REMAND this matter for 19 further proceedings consistent with this memorandum decision. 20 21 22 23 24 25 26 27 28