FILED 1 ORDERED PUBLISHED MAY 05 2015
2 SUSAN M. SPRAUL, CLERK U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT 3 UNITED STATES BANKRUPTCY APPELLATE PANEL 4 OF THE NINTH CIRCUIT 5 6 In re: ) BAP No. CC-14-1362-TaDPa ) 7 YURI PLYAM and NATALIA PLYAM, ) Bk. No. 2:13-bk-15020-BB ) 8 Debtors. ) Adv. No. 2:13-ap-01558-BB ______________________________) 9 ) YURI PLYAM; NATALIA PLYAM, ) 10 ) Appellants, ) 11 ) v. ) O P I N I O N 12 ) PRECISION DEVELOPMENT, LLC, ) 13 ) Appellee. ) 14 ) 15 Argued and Submitted on January 22, 2015 at Pasadena, California 16 Filed - May 5, 2015 17 Appeal from the United States Bankruptcy Court 18 for the Central District of California 19 Honorable Sheri Bluebond, Chief Bankruptcy Judge, Presiding 20 21 Appearances: Dennis P. Riley of Mesisca Riley & Kreitenberg, LLP argued for appellants Yuri Plyam and Natalia 22 Plyam; Leo Daniel Plotkin of Levy, Small & Lallas argued for appellee Precision Development, LLC. 23 24 Before: TAYLOR, DUNN, and PAPPAS, Bankruptcy Judges. 25 26 27 28 1 TAYLOR, Bankruptcy Judge: 2 3 Debtors Yuri Plyam and Natalia Plyam appeal from the 4 bankruptcy court’s summary judgment excepting a state court 5 judgment from discharge pursuant to § 523(a)(4)1 and (a)(6), as 6 to Yuri,2 and pursuant to § 523(a)(6), as to Natalia. 7 The bankruptcy court granted summary judgment based on 8 issue preclusion and the state court judgment’s award of actual 9 and punitive damages for breach of fiduciary duty. We determine 10 that the bankruptcy court erred as the state court judgment did 11 not include a finding equivalent to willfulness as required for 12 § 523(a)(6) nondischargeability, notwithstanding its award of 13 punitive damages under California Civil Code § 3294. The state 14 court judgment also failed to establish the existence of an 15 express or technical trust as required for § 523(a)(4) 16 nondischargeability. 17 As a result, we VACATE the judgment and REMAND to the 18 bankruptcy court for further proceedings consistent with this 19 opinion. 20 BACKGROUND 21 In 2005, Yuri formed Precision Development, LLC, a Nevada 22 limited liability company (“Precision”), for the purpose of 23 developing residential real property in Southern California. 24 Initially, he was its sole member and manager. 25 1 26 Unless otherwise indicated, all chapter and section references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532. 27 2 We refer to the parties hereafter by their first names 28 for sake of clarity; we intend no disrespect.
2 1 Precision obtained significant investment capital from 2 Clare Bronfman and Sara Bronfman (jointly, the “Bronfmans”). 3 According to the Bronfmans, they eventually invested 4 approximately $26.3 million. 5 Between 2005 and 2007, Precision acquired numerous parcels 6 of real property. Yuri’s separate business entity oversaw their 7 development; it did not go well. Precision’s funds ran out in 8 2007 before it successfully completed development of or sold any 9 of the properties. 10 Precision’s operating agreement provided that it would hold 11 title to all real property acquired with Precision funds. The 12 Debtors, however, caused Precision to deed them three parcels of 13 real property (the “Transferred Properties”). And once they 14 acquired title, the Debtors alleged ownership of the Transferred 15 Properties in loan documents and used the Transferred Properties 16 as collateral for construction loans. The Debtors later also 17 transferred a fourth property from Yuri’s business entity to 18 Precision and then from Precision to their family trust. 19 Eventually, the Bronfmans discovered Precision’s dire 20 state; few of its developments were close to completion. 21 Indeed, some remained vacant land. The only projects with 22 significant development were the Transferred Properties. And, 23 the Debtors lost even the Transferred Properties to foreclosure 24 by their construction lender. 25 The Bronfmans attempted to remedy the situation. They 26 subsequently obtained control of Precision and caused it to sue 27 the Debtors in California state court. The complaint alleged 28 that the Debtors misused Precision funds and diverted its
3 1 assets. 2 Following an 18-day trial, a jury entered a special verdict 3 finding that “Yuri Plyam or Natasha [sic] Plyam” breached their 4 fiduciary duties to Precision and that “Yuri or Natasha [sic] 5 Plyam” acted with malice, oppression, or fraud. The jury 6 awarded $10,100,000 in general damages and $200,000 in punitive 7 damages (the “State Court Judgment”). The Debtors appealed to 8 the California court of appeal, which affirmed the State Court 9 Judgment. See Precision Dev., LLC v. Plyam, 2013 WL 5801759 10 (Cal. Ct. App. Oct. 29, 2013). The State Court Judgment is now 11 final. 12 The Debtors responded with a chapter 7 bankruptcy, and 13 Precision then commenced an adversary proceeding seeking to 14 except the State Court Judgment from discharge pursuant to 15 § 523(a)(4) (for fraud or defalcation) and (a)(6).3 It 16 subsequently moved for summary judgment or, in the alternative, 17 partial summary judgment. It based its motion solely on the 18 State Court Judgment’s alleged issue preclusive effect. 19 The Debtors opposed. They defended against the § 523(a)(4) 20 claim by arguing that Natalia never owed a fiduciary duty to 21 Precision and that Yuri was not a fiduciary during the time of 22 the alleged acts of defalcation. On the § 523(a)(6) claim, they 23 24 3 In the adversary complaint, Precision also sought 25 nondischargeability under § 523(a)(2)(A). As relevant to this appeal, it obtained summary judgment only as to the § 523(a)(4) 26 and (a)(6) claims. The bankruptcy court dismissed with prejudice the § 523(a)(2)(A) claim against both of the Debtors, 27 the § 523(a)(4) claim for defalcation against Natalia, and the § 523(a)(4) claim for embezzlement and/or larceny against both 28 of the Debtors. No appeal was taken from those decisions.
4 1 generally contested the sufficiency of evidence and argued, in 2 particular, that triable issues of fact existed as to the 3 justification or excuse for their actions in relation to the 4 Transferred Properties and the later transfer of the fourth 5 property to their family trust. The Debtors also argued that 6 the State Court Judgment’s punitive damages award did not 7 satisfy the elements for § 523(a)(6) nondischargeability. 8 Following arguments at the hearing, the bankruptcy court 9 relied on issue preclusion and granted summary judgment in part 10 and denied it in part. It determined that Natalia did not owe a 11 fiduciary duty; thus, it granted summary judgment against her 12 only under § 523(a)(6). As to Yuri, it granted summary judgment 13 on both the § 523(a)(4) and (a)(6) claims. 14 The bankruptcy court subsequently entered a judgment 15 excepting the State Court Judgment, in the total amount of 16 $10,497,843.24, from discharge. The Debtors timely appealed. 17 JURISDICTION 18 The bankruptcy court had jurisdiction pursuant to 28 U.S.C. 19 §§ 1334 and 157(b)(2)(I). We have jurisdiction under 28 U.S.C. 20 § 158. 21 ISSUE 22 Did the bankruptcy court err in granting summary judgment 23 to Precision by giving issue preclusive effect to the State 24 Court Judgment as to the § 523(a)(4) and (a)(6) 25 nondischargeability claims? 26 STANDARDS OF REVIEW 27 We review de novo the bankruptcy court’s decisions to grant 28 summary judgment and to except a debt from discharge under
5 1 § 523(a)(4) and (a)(6). See Boyajian v. New Falls Corp. (In re 2 Boyajian), 564 F.3d 1088, 1090 (9th Cir. 2009); Black v. Bonnie 3 Springs Family Ltd. P’ship (In re Black), 487 B.R. 202, 210 (9th 4 Cir. BAP 2013); see also Carrillo v. Su (In re Su), 290 F.3d 5 1140, 1142 (9th Cir. 2002) (nondischargeability presents mixed 6 issues of law and fact and is reviewed de novo). 7 We also review de novo the bankruptcy court’s determination 8 that issue preclusion was available. In re Black, 487 B.R. at 9 210. If issue preclusion was available, we then review the 10 bankruptcy court’s application of issue preclusion for an abuse 11 of discretion. Id. A bankruptcy court abuses its discretion if 12 it applies the wrong legal standard, misapplies the correct 13 legal standard, or if its factual findings are illogical, 14 implausible, or without support in inferences that may be drawn 15 from the facts in the record. See TrafficSchool.com, Inc. v. 16 Edriver Inc., 653 F.3d 820, 832 (9th Cir. 2011) (citing United 17 States v. Hinkson, 585 F.3d 1247, 1262 (9th Cir. 2009) (en 18 banc)). 19 DISCUSSION 20 Summary judgment is appropriate where the movant shows that 21 there is no genuine dispute of material fact and the movant is 22 entitled to judgment as a matter of law. Fed. R. Civ. P. 56(a) 23 (applicable in adversary proceedings under Rule 7056). The 24 bankruptcy court must view the evidence in the light most 25 favorable to the non-moving party when determining whether 26 genuine disputes of material fact exist and whether the movant 27 is entitled to judgment as a matter of law. See Fresno Motors, 28 LLC v. Mercedes Benz USA, LLC, 771 F.3d 1119, 1125 (9th Cir.
6 1 2014). And, it must draw all justifiable inferences in favor of 2 the non-moving party. See id. (citing Anderson v. Liberty 3 Lobby, Inc., 477 U.S. 242, 255 (1986)). 4 A bankruptcy court may rely on the issue preclusive effect 5 of an existing state court judgment as the basis for granting 6 summary judgment. See Khaligh v. Hadaegh (In re Khaligh), 338 7 B.R. 817, 831-32 (9th Cir. BAP 2006). In so doing, the 8 bankruptcy court must apply the forum state’s law of issue 9 preclusion. Harmon v. Kobrin (In re Harmon), 250 F.3d 1240, 10 1245 (9th Cir. 2001); see also 28 U.S.C. § 1738 (federal courts 11 must give “full faith and credit” to state court judgments). 12 Thus, we apply California preclusion law. 13 In California, application of issue preclusion requires 14 that: (1) the issue sought to be precluded from relitigation is 15 identical to that decided in a former proceeding; (2) the issue 16 was actually litigated in the former proceeding; (3) the issue 17 was necessarily decided in the former proceeding; (4) the 18 decision in the former proceeding is final and on the merits; 19 and (5) the party against whom preclusion is sought was the same 20 as, or in privity with, the party to the former proceeding. 21 Lucido v. Super. Ct., 51 Cal. 3d 335, 341 (1990). California 22 further places an additional limitation on issue preclusion: 23 courts may give preclusive effect to a judgment “only if 24 application of preclusion furthers the public policies 25 underlying the doctrine.” In re Harmon, 250 F.3d at 1245 26 (citing Lucido, 51 Cal. 3d at 342-43); see also In re Khaligh, 27 338 B.R. at 824–25. 28 The party asserting preclusion bears the burden of
7 1 establishing the threshold requirements. In re Harmon, 250 F.3d 2 at 1245. This means providing “a record sufficient to reveal 3 the controlling facts and pinpoint the exact issues litigated in 4 the prior action.” Kelly v. Okoye (In re Kelly), 182 B.R. 255, 5 258 (9th Cir. BAP 1995), aff’d, 100 F.3d 110 (9th Cir. 1996). 6 Ultimately, “[a]ny reasonable doubt as to what was decided by a 7 prior judgment should be resolved against allowing the [issue 8 preclusive] effect.” Id. 9 The Debtors do not challenge the bankruptcy court’s 10 determination that the State Court Judgment is final and against 11 the Debtors. Consequently, we do not review this determination 12 on appeal. 13 A. The bankruptcy court erred in granting summary judgment to 14 Precision on its § 523(a)(6) claim based on the issue 15 preclusive effect of the State Court Judgment. 16 1. Exceptional circumstances justify our review of the 17 propriety of issue preclusion as to both Yuri and 18 Natalia. 19 Yuri and Natalia filed a joint opening brief on appeal that 20 requests de novo review of the availability of issue preclusion 21 in connection with the § 523(a)(6) judgment, but named only 22 Natalia when discussing this portion of the summary judgment. 23 Precision, thus, argues that Yuri did not specifically challenge 24 the § 523(a)(6) judgment against him and that he cannot obtain 25 relief from that portion of the summary judgment on appeal. We 26 acknowledge that a technical waiver exists. Nonetheless, based 27 on the circumstances of this case and the nature of our ultimate 28 conclusion, we determine that exceptional circumstances exist,
8 1 and we exercise our discretion and extend review as to Yuri as 2 well. See Mano-Y&M, Ltd. v. Field (In re Mortg. Store, Inc.), 3 773 F.3d 990, 998 (9th Cir. 2014) (appellate court may exercise 4 discretion to consider waived issues based on exceptional 5 circumstances). 6 Here, the Debtors share an attorney and filed a joint 7 appellate brief, which squarely challenges the bankruptcy 8 court’s § 523(a)(6) determination. Our de novo review and 9 resulting conclusion is based on a strictly legal point. While 10 the Debtors do not argue this point directly as to Yuri in their 11 opening brief, they do argue in their discussion of § 523(a)(4) 12 that the State Court Judgment did not necessarily decide that 13 Yuri acted with gross recklessness, a less culpable state of 14 mind than that required for § 523(a)(6) willfulness. We, thus, 15 determine that vacating the judgment solely as to Natalia would 16 be manifestly unjust. 17 Section 523(a)(6) excepts from discharge debts arising from 18 a debtor’s “willful and malicious” injury to another person or 19 to the property of another. Barboza v. New Form, Inc. (In re 20 Barboza), 545 F.3d 702, 706 (9th Cir. 2008). The “willful” and 21 “malicious” requirements are conjunctive and subject to separate 22 analysis.4 Id.; In re Su, 290 F.3d at 1146-47. 23 24 4 A “malicious” injury requires: “(1) a wrongful act, 25 (2) done intentionally, (3) which necessarily causes injury, and (4) is done without just cause or excuse.” Petralia v. Jercich 26 (In re Jercich), 238 F.3d 1202, 1209 (9th Cir. 2001). The Debtors do not challenge the bankruptcy court’s application of 27 issue preclusion as to § 523(a)(6) maliciousness. As a result, that issue is deemed waived. See Padgett v. Wright, 587 F.3d 28 983, 985 n.2 (9th Cir. 2009).
9 1 2. The State Court Judgment did not satisfy the element 2 of willful injury as required for § 523(a)(6) 3 nondischargeability. 4 Under § 523(a)(6), the willful injury requirement speaks to 5 the state of mind necessary for nondischargeability. An 6 exacting requirement, it is satisfied when a debtor harbors 7 “either a subjective intent to harm, or a subjective belief that 8 harm is substantially certain.” In re Su, 290 F.3d at 1144; see 9 also In re Jercich, 238 F.3d at 1208. The injury must be 10 deliberate or intentional, “not merely a deliberate or 11 intentional act that leads to injury.” Kawaauhau v. Geiger, 523 12 U.S. 57, 61 (1998) (emphasis in original). Thus, “debts arising 13 from recklessly or negligently inflicted injuries do not fall 14 within the compass of § 523(a)(6).” Id. at 64. 15 The terms “willful” and “malicious,” first appearing in the 16 Bankruptcy Act of 1898,5 seemingly derive in some measure from 17 the common law concepts of malice in fact and malice in law, 18 respectively. 19 California, for example, defines malice in law as an 20 “intent to do a wrongful act, established either by proof or 21 presumption of law . . . from the intentional doing of the act 22 without justification or excuse or mitigating circumstances.” 23 In re V.V., 51 Cal. 4th 1020, 1028 (2011) (citing Davis v. 24 Hearst, 160 Cal. 143 (1911); Cal. Penal Code §§ 7(4), 450(e); 25 1 Witkin & Epstein, Cal. Criminal Law § 11) (internal quotation 26 marks omitted); see also Tinker v. Colwell, 193 U.S. 473, 485-86 27 28 5 30 Stat. 544, ch. II § 17(2) (1898) (repealed 1978).
10 1 (1904) (“Malice, in common acceptation, means ill will against a 2 person, but in its legal sense it means a wrongful act, done 3 intentionally, without just cause or excuse.” (emphasis added) 4 (quoting Bromage v. Prosser, 4 Barn. & Cress. 247, 107 Eng. Rep. 5 1051 (K.B. 1825) (internal quotation marks omitted)), superseded 6 by statute, Pub. L. No. 95-598, 92 Stat. 2549 (1978); Maynard v. 7 Fireman’s Fund Ins. Co., 34 Cal. 48, 53 (1867) (same). Thus, 8 malice in law squares cleanly with § 523(a)(6) maliciousness. 9 In contrast, malice in fact is defined as “a state of mind 10 arising from hatred or ill-will, evidencing a willingness to 11 vex, annoy, or injure another person.” Davis v. Hearst, 160 12 Cal. at 160 (emphasis added); In re V.V., 51 Cal. 4th at 1028 13 (“Malice in fact — defined as ‘a wish to vex, annoy, or injure’ 14 . . . — consists of actual ill will or intent to injure.”) 15 (emphasis added). 16 This background, highlights two points critical to any 17 § 523(a)(6) willfulness determination. First, by holding that 18 the requisite state of mind was an actual intent to injure (or 19 substantial certainty regarding injury), the Supreme Court in 20 Geiger effectively adopted a narrow construction and the most 21 blameworthy state of mind included within the common 22 understanding of malice in fact. As relevant here, under 23 California law, the general definition of malice in fact 24 encompasses less reprehensible states of mind. 25 Second, as the Supreme Court clarified in Geiger, 26 recklessly inflicted injuries do not satisfy the § 523(a)(6) 27 willfulness requirement. See 523 U.S. at 61-62. This 28 necessarily includes all degrees of reckless conduct, whether
11 1 arising from recklessness simple, heightened, or gross; conduct 2 that is reckless merely requires an intent to act, rather than 3 an intent to cause injury as required under Geiger. See H.R. 4 Rep. 95-595, at 365 (1977) (“‘Willful’ means deliberate or 5 intentional. To the extent that Tinker v. Colwell, 193 U.S. 473 6 [1904], held that a looser standard is intended, and to the 7 extent that other cases have relied on Tinker to apply a 8 ‘reckless disregard’ standard, they are overruled.”) (emphasis 9 added); Restatement (Second) of Torts § 500 cmt. f (1965). But 10 see Bullock v. BankChampaign, N.A., 133 S. Ct. 1754, 1757 (2013) 11 (holding that, for the purposes of § 523(a)(4), the state of 12 mind for “defalcation” includes gross recklessness). 13 Here, the State Court Judgment provided two possible bases 14 for the application of issue preclusion: the findings in the 15 punitive damages award and the determination of breach of 16 fiduciary duty under state law. Neither basis supported an 17 application of issue preclusion on the issue of § 523(a)(6) 18 willfulness. 19 3. The punitive damages award was an insufficient basis 20 for issue preclusion.6 21 The jury’s punitive damages award against both of the 22 Debtors was based on a disjunctive finding of malice, 23 oppression, or fraud. The “malice, oppression or fraud” finding 24 25 6 The Debtors make much of the fact that the jury finding 26 was made in the alternative; that is, Yuri or Natalia. But, as the bankruptcy court noted, the punitive damages award was 27 entered against both of the Debtors, which necessarily required a finding of malice, oppression, or fraud against each 28 individual.
12 1 arises from California Civil Code § 3294 (“CC § 3294”), which 2 provides for the recovery of punitive damages in non-contract 3 breach civil cases. Each finding supplies an independent basis 4 for a punitive damages award under CC § 3294. See Coll. Hosp. 5 Inc. v. Super. Ct., 8 Cal. 4th 704, 721 (1994). 6 Civil Code § 3294 provides statutory definitions of these 7 terms.7 “Malice” is defined as either: (1) conduct that the 8 defendant intends to cause injury to the plaintiff (“Intentional 9 Malice”); or (2) despicable conduct carried on by the defendant 10 with a willful and conscious disregard of the rights or safety 11 of others (“Despicable Malice”). Cal. Civ. Code § 3294(c)(1).8 12 “Oppression” means “despicable conduct that subjects a person to 13 cruel and unjust hardship in conscious disregard of that 14 person’s rights.” Id. § 3294(c)(2). And, “fraud” refers to “an 15 intentional misrepresentation, deceit, or concealment of a 16 material fact known to the defendant with the intention on the 17 part of the defendant of thereby depriving a person of property 18 or legal rights or otherwise causing injury.” Id. § 3294(c)(3). 19 20 7 Although enacted in 1872, CC § 3294 remained largely 21 unaltered until amendment in 1980. Civil Code § 3294 was previously amended in 1901 (deemed unconstitutional and void in 22 Lewis v. Dunne, 134 Cal. 291 (1901)) and 1905. Prior to 1980, although the statute required a finding of 23 malice, oppression, or fraud to recover punitive damages, it did 24 not expressly define those categories. The 1980 amendment added the statutory definitions. 25 8 In 1987, the California legislature amended CC § 3294 26 and added the “despicable” adjective to the type of conduct necessary for Despicable Malice and oppression. It also 27 qualified Despicable Malice with the requirement that a defendant willfully and consciously disregard the rights or 28 safety of another.
13 1 Only Intentional Malice, see Brandstetter v. Derebery (In 2 re Derebery), 324 B.R. 349, 356 (Bankr. C.D. Cal. 2005), and 3 fraud expressly require an intent to cause injury. As a result, 4 only those findings satisfy the § 523(a)(6) willfulness 5 requirement for the purposes of issue preclusion. Conversely, 6 Despicable Malice and oppression, which arise from acts in 7 conscious disregard of another’s rights or safety, fail to 8 satisfy the requisite state of mind for § 523(a)(6) willfulness. 9 As discussed in further detail below, conscious disregard is 10 akin to recklessness. 11 a. A punitive damages award under California law can 12 be based on acts in conscious disregard. 13 As defined by the California Supreme Court, a person acts 14 with a conscious disregard of another’s rights or safety when he 15 is aware of the probable dangerous consequences of his conduct 16 and he willfully and deliberately fails to avoid those 17 consequences. Taylor v. Super. Ct., 24 Cal. 3d 890, 895-96 18 (1979); see also Jud. Council of Cal. Civ. Jury Instruction 19 (CACI) 3940, 3941; Cal. Civ. Jury Instructions (BAJI) 14.71, 20 14.72.1. 21 The conscious disregard requirement found in CC § 3294 22 appears to track the Taylor decision. In Taylor, the California 23 Supreme Court examined whether the act of driving while 24 intoxicated constituted malice for the purposes of a CC § 3294 25 punitive damages award. Previously, some California courts held 26 that reckless conduct did not establish malice as required for a 27 punitive damages award. See G.D. Searle & Co. v. Super. Ct., 49 28 Cal. App. 3d 22 (1975); see also Ebaugh v. Rabkin, 22 Cal. App.
14 1 3d 891, 896 (1972); Gombos v. Ashe, 158 Cal. App. 2d 517 (1958). 2 Contra Nolin v. Nat’l Convenience Stores, Inc., 95 Cal. App. 3d 3 279, 285-88 (1979) (gross recklessness supported punitive 4 damages award under CC § 3294). In an earlier case, the 5 California Supreme Court, however, used the term “reckless 6 misconduct” in dicta. See Donnelly v. S. Pac. Co., 18 Cal. 2d 7 863, 869-70 (1941). 8 The Taylor court held that “a conscious disregard of the 9 safety of others [could] constitute malice within the meaning of 10 [CC § 3294].” 24 Cal. 3d at 895. It also stated that to the 11 extent Gombos v. Ashe was inconsistent with its holding, that 12 case was disapproved. Id. at 900. Gombos previously held that 13 drunk driving, while reckless, wrongful, and illegal, did not 14 constitute malice within the meaning of CC § 3294. 158 Cal. 15 App. 2d at 527. The Taylor court never expressly excluded 16 recklessness as a basis for an award of punitive damages; it 17 thus kept the door open to punitive damages based on a state of 18 mind other than actual intent to injure. 19 Within a year of the Taylor decision, CC § 3294 was amended 20 to require conscious disregard with respect to Despicable Malice 21 and oppression. In so amending the statute, the California 22 legislature included the two types of malice that exist 23 currently: Intentional Malice and Despicable Malice. Clearly, 24 it did not intend to include two identical forms of malice in 25 the statutory definition. Thus, conscious disregard begins to 26 take shape as a state of mind less malicious than an intent to 27 injure. 28 ///
15 1 i. Conscious disregard is the equivalent of 2 reckless conduct. 3 In the continuum of states of mind supporting a judgment 4 based on tort, recklessness rests between negligence, requiring 5 no intent, and intentional misconduct, requiring both a 6 deliberate act and the desire to cause the consequences of the 7 act. In Donnelly v. S. Pac. Co., 18 Cal. 2d 863 (1941), the 8 California Supreme Court considered whether existing law 9 precluded a personal injury action based on negligence. It 10 examined the contours of negligence and intentional torts and 11 identified the existence of a third, intermediary category of 12 tort law: “[a] tort having some of the characteristics of both 13 negligence and willfulness occur[ed] when a person with no 14 intent to cause harm intentionally perform[ed] an act so 15 unreasonable and dangerous that he kn[ew], or should [have] 16 know[n], it [was] highly probable that harm [would] result.” 17 Id. at 869 (emphasis added). Noting the various terms employed 18 by the courts to describe this category of tort, it adopted with 19 approval the term “wanton and reckless misconduct.” Id. 20 This type of tort, the California Supreme Court explained, 21 “involve[d] no intention, as [did] willful misconduct, to do 22 harm, and i[t] differ[ed] from negligence in that it . . . 23 involve[d] an intention to perform an act that the actor [knew], 24 or should [have] know[n], [would] very probably cause harm.” 25 Id. Importantly, it recognized that “wanton and reckless 26 misconduct” was more closely akin to willful misconduct than to 27 negligence and, “[t]hus, it justifie[d] an award of punitive 28 damages.” Id. at 869-70.
16 1 The Donnelly court’s analysis on this point is dicta, but 2 it is also consistent with the Restatement of Torts discussion 3 of reckless conduct.9 The Restatement explains that one type of 4 recklessness involves the situation where a person knows, or has 5 reason to know (based on an objective person standard),10 of 6 facts creating a high degree of risk of physical harm to 7 another, and deliberately proceeds to act, or fails to act, in 8 conscious disregard of, or indifference to, that risk. 9 Restatement (Second) of Torts § 500 cmt. a (1965) (emphasis 10 added).11 The person must know (or have reason to know of) the 11 facts creating an unreasonable risk. Id. 12 The critical difference between intentional and reckless 13 misconduct is the necessary state of mind; for conduct to be 14 reckless, the person must intend the reckless act but need not 15 intend to cause the resulting harm. Id., cmt. f. To establish 16 recklessness, it is sufficient that the person realizes (or 17 should realize) the “strong probability that harm may result, 18 even though he hopes or even expects that his conduct will prove 19 harmless.” Id. But, a strong probability is not equivalent to 20 9 We refer to the Restatement (Second) of Torts, in 21 deference to the Supreme Court’s discussion of the Restatement Second in Geiger and the Ninth Circuit’s decisions in In re 22 Jercich and In re Su. The Restatement (Third) of Torts: Liability for Phys. & Emot. Harm §§ 1 (Intent) (2010) and 2 23 (Recklessness) (2010) do not contain substantive differences 24 that change our analysis. 10 25 See Restatement (Second) of Torts § 12(1) (1965). 11 26 The Restatement Second also points out a second type of reckless conduct: where the person knows (or has reason to know) 27 of the facts but does not realize or appreciate the high degree of risk involved, although a reasonable man in his position 28 would do so. Restatement (Second) of Torts § 500 cmt. a (1965).
17 1 substantial certainty. See id. (“[A] strong probability is a 2 different thing from the substantial certainty without which he 3 cannot be said to intend the harm in which his act results.”); 4 id. § 8A cmt. b. Thus, “[a]s the probability that [injurious] 5 consequences will follow decreases, and becomes less than 6 substantial certainty, the [person’s] conduct loses the 7 character of intent, and becomes mere recklessness.” Id. § 8A 8 cmt. b. 9 Comparing the explanations of reckless conduct provided by 10 the Donnelly court and the Restatement of Torts with the 11 definition of conscious disregard, it becomes clear that 12 conscious disregard proceeds from reckless conduct. The common 13 factor between conscious disregard and reckless conduct is the 14 accompanying state of mind; both require solely an intent to act 15 and the focus lies there, rather than on an intent to cause the 16 consequences of the act as required by Geiger. Degrees of 17 recklessness may exist; but, again, whether recklessness is 18 heightened or gross, it is insufficient for a determination of 19 § 523(a)(6) willfulness. 20 In defining conscious disregard, the California Supreme 21 Court in Taylor employed a description consistent with reckless 22 conduct. As stated, acting with a conscious disregard within 23 the meaning of CC § 3294 requires: (1) being aware of the 24 probable dangerous consequences of one’s own conduct; and 25 (2) willfully and deliberately failing to avoid those 26 consequences. Taylor, 24 Cal. 3d at 895-96. 27 First, to be aware of probable dangerous consequences, a 28 person must first know or have reason to know of the facts
18 1 giving rise to a high degree of risk of harm to another. 2 Knowledge of such facts is an essential element of recklessness. 3 See Restatement (Second) of Torts § 500 cmt. a. 4 Second, whether consequences are “dangerous” relates to the 5 character of a person’s unreasonable conduct and the necessarily 6 high degree of risk that serious harm will result from that 7 conduct. See id., cmts. a, c. 8 Third, the probability factor of dangerous consequences 9 also relates to reckless conduct. See id., cmt. a. Even a 10 strong probability that consequences may result, however, is not 11 equivalent to substantial certainty for the purposes of intent. 12 See id., cmt. f; id. § 8A cmt. b. In this context, probable 13 means more likely than not, while substantial certainty requires 14 near certainty. 15 Fourth, the terms “willfully” and “deliberately” mean only 16 that the person failed, by design, to avoid the consequences of 17 his wrongful act. His intent is focused on the act of being 18 unsuccessful in preventing potential bad consequences, rather 19 than on the actual consequences of his act. See id. § 500 20 cmt. b (“Conduct cannot be in reckless disregard of the safety 21 of others unless the act or omission is itself intended[.]”). 22 The Supreme Court’s decision in Bullock, although involving 23 a different exception to discharge and federal common law rather 24 than California state law, also strengthens the connection 25 between conscious disregard and recklessness. There, the 26 Supreme Court held that the term “defalcation,” within the 27 meaning of § 523(a)(4), included a state of mind involving gross 28 recklessness with respect to improper fiduciary behavior. 133
19 1 S. Ct. at 1757. In doing so, it concluded that “[w]here actual 2 knowledge of wrongdoing is lacking, we consider conduct as 3 equivalent if the fiduciary ‘consciously disregards’ (or is 4 willfully blind to) ‘a substantial and unjustifiable risk’ that 5 his conduct will turn out to violate a fiduciary duty.” Id. at 6 1759 (quoting Model Penal Code § 2.02(2)(c) (1985)) (emphasis 7 added). 8 In sum, conscious disregard within the meaning of CC § 3294 9 is consistent with reckless conduct as discussed by California 10 cases, the Restatement of Torts, and Bullock. 11 ii. California statutory authority and case law 12 otherwise support that conscious disregard 13 proceeds from reckless conduct. 14 A statutory analogue lends significant support to the 15 determination that conscious disregard arises from reckless 16 conduct. California law provides for enhanced remedies in cases 17 of elder abuse. See Cal. Welf. & Inst. Code § 15657. In order 18 to claim these enhanced statutory remedies, a defendant must be 19 found guilty of recklessness, oppression, fraud, or malice in 20 the commission of abuse. See id. For the purposes of an elder 21 abuse act claim, recklessness is defined as “a ‘deliberate 22 disregard’ of the ‘high degree of probability’ that an injury 23 will occur.” Delaney v. Baker, 20 Cal. 4th 23, 31 (1999) 24 (citing Cal. Civ. Jury Instructions (BAJI) 12.77, defining 25 “recklessness” for intentional infliction of emotional distress; 26 Restatement (Second) of Torts § 500)). Thus, recklessness 27 “rises to the level of a conscious choice of a course of action 28 . . . with knowledge of the serious danger to others involved in
20 1 it.” Id. at 31-32 (citing Restatement (Second) of Torts § 500 2 cmt. g). 3 The descriptions of recklessness for the purpose of an 4 elder abuse claim and conscious disregard within the meaning of 5 CC § 3294 are substantively similar. Indeed, the California 6 Supreme Court has held that a plaintiff alleging an elder abuse 7 claim must allege conduct “essentially equivalent” to conduct 8 necessary to support a CC § 3294 punitive damages award. See 9 Covenant Care, Inc. v. Super. Ct., 32 Cal. 4th 771, 789 (2004). 10 It, thus, implicitly recognized that an award of CC § 3294 11 punitive damages can be based on reckless conduct. 12 Moreover, various California courts have recognized the 13 availability of CC § 3294 punitive damages for nonintentional 14 torts when the offensive conduct is a conscious disregard of the 15 rights or safety of others. See Peterson v. Super. Ct., 31 Cal. 16 3d 147, 158 (1982) (“Nonintentional torts may [] form the basis 17 for punitive damages when the conduct constitutes conscious 18 disregard of the rights or safety of others.”); Potter v. 19 Firestone Tire & Rubber Co., 6 Cal. 4th 965, 1004 (1993) 20 (“[P]unitive damages sometimes may be assessed in unintentional 21 tort actions under [CC §] 3294.”). Nonintentional torts, 22 including those predicated on reckless conduct, require only an 23 intent to act. See, e.g., Peterson, 31 Cal. 3d at 158-59 24 (Punitive damages are available to punish “[n]onintentional 25 conduct . . . when a party intentionally performs an act from 26 which he knows, or should know, it is highly probable that harm 27 will result.”) (emphasis added). 28 ///
21 1 iii. That “willful” is an additional requirement 2 for Despicable Malice does not change the 3 outcome of the analysis. 4 As stated, Despicable Malice is defined as despicable 5 conduct done willfully and in conscious disregard of the rights 6 or safety of another; oppression, notably, requires only a 7 conscious disregard. Cal. Civ. Code § 3294(c)(1)-(2). The 8 additional “willful” requirement in Despicable Malice, however, 9 does not change the outcome of the analysis. 10 In the context of CC § 3294, the term “willful” refers only 11 to the deliberate conduct committed by a person in a despicable 12 manner. The statute, thus, employs the dictionary definition of 13 “willful.” See Geiger, 523 U.S. at 61 n.3 (noting that Black’s 14 Law Dictionary defined “willful” as “voluntary” or 15 “intentional”). There is no indication that “willful” refers to 16 a subjective intent to injure or a subjective belief that injury 17 is substantially certain to result. And, this interpretation 18 makes practical sense; to read the statute otherwise would 19 render the inclusion of Intentional Malice in CC § 3294 20 superfluous. 21 b. Determining that conscious disregard is 22 insufficient to satisfy the § 523(a)(6) 23 willfulness requirement is consistent with 24 existing precedent. 25 Construing conscious disregard as a form of reckless 26 conduct is consistent with Geiger and its progeny, including the 27 Ninth Circuit’s decisions in In re Jercich and In re Su. As the 28 Supreme Court recognized in Geiger, expanding § 523(a)(6) to
22 1 include reckless conduct “would obviate the need for 2 § 523(a)(9), which specifically exempts ‘debts for death or 3 personal injury caused by the debtor’s operation of a motor 4 vehicle if such operation was unlawful because the debtor was 5 intoxicated from using alcohol, a drug, or another substance.’” 6 Geiger, 523 U.S. at 62 (quoting 11 U.S.C. § 523(a)(9)). 7 Yet, the availability of punitive damages for injuries 8 caused while driving intoxicated was exactly the issue before 9 the California Supreme Court in Taylor. It was this issue that 10 caused the California Supreme Court to determine that conscious 11 disregard could constitute malice. Not long after, the 12 California legislature codified the inclusion of conscious 13 disregard into CC § 3294. 14 We cannot reconcile the rationale supplied by the Supreme 15 Court in Geiger in regards to § 523(a)(9) with the factual 16 circumstances giving rise to the conscious disregard standard in 17 Taylor. Thus, consistent with Geiger, we must reject the 18 attempt to give issue preclusive effect to findings based on 19 conscious disregard in the context of § 523(a)(6) willfulness. 20 As recognized in Geiger, a determination to the contrary would 21 render superfluous § 523(a)(9) in nondischargeability 22 proceedings. 23 c. Despicable conduct, as also required for 24 Despicable Malice and oppression, is based on an 25 objective person standard. 26 In addition to conscious disregard, both Despicable Malice 27 and oppression require conduct that is despicable. Cal. Civ. 28 Code § 3294(c)(1)-(2). Conduct is despicable when it is so
23 1 vile, base, contemptible, miserable, wretched, or loathsome that 2 ordinary decent people would look down upon and despise it. 3 Coll. Hosp. Inc., 8 Cal. 4th at 725 (describing despicable as 4 circumstances that are “base,” “vile,” or “contemptible.”); Jud. 5 Council of Cal. Civ. Jury Instruction (CACI) 3940, 3941; Cal. 6 Civ. Jury Instructions (BAJI) 14.71, 14.72.1. 7 Whether conduct is despicable is measured by an objective 8 person standard. See In re Derebery, 324 B.R. at 356. But, an 9 objective, reasonable person standard is not allowed in the 10 § 523(a)(6) willfulness analysis. See In re Su, 290 F.3d at 11 1145 (“By its very terms, the objective standard disregards the 12 particular debtor’s state of mind and considers whether an 13 objective, reasonable person would have known that the actions 14 in question were substantially certain to injure the 15 creditor.”). Thus, a punitive damages award based on Despicable 16 Malice or oppression does not establish the subjective intent 17 required for § 523(a)(6) willfulness. 18 d. The disjunctive findings in the punitive damages 19 award included Despicable Malice and oppression. 20 Here, the CC § 3294 findings in the punitive damages award 21 were stated in the disjunctive: that Yuri and Natalia each acted 22 with malice or oppression or fraud. On this record, we cannot 23 ascertain the exact basis for the jury’s findings. Because the 24 punitive damages award may have been based only on a finding of 25 Despicable Malice or oppression, issue preclusion was 26 unavailable on the issue of § 523(a)(6) willfulness. 27 To be clear, our holding does not eviscerate a bankruptcy 28 court’s ability or opportunity to apply issue preclusion to a
24 1 state court jury’s findings pursuant to CC § 3294. To the 2 extent the findings are clearly and solely based on a finding of 3 Intentional Malice, fraud, or both, such findings are sufficient 4 to meet the willfulness requirement of § 523(a)(6). And, of 5 course, a state court judgment based on an intentional tort may 6 independently satisfy the § 523(a)(6) willfulness requirement. 7 But, to the extent that CC § 3294 findings are stated in 8 the disjunctive or based on Despicable Malice or oppression or 9 both, those findings prevent the use of issue preclusion as to 10 § 523(a)(6) willfulness. Even then, however, those particular 11 findings are not without value to a creditor seeking 12 nondischargeability under § 523(a)(6). The creditor is still 13 entitled to seek issue preclusion on other issues based on 14 findings of Despicable Malice or oppression, including the 15 maliciousness requirement of § 523(a)(6). Under those 16 circumstances, the bankruptcy court need only try the singular 17 issue of the debtor’s intent for the purposes of § 523(a)(6) 18 willfulness; that is, whether the debtor subjectively intended 19 to cause injury or was substantially certain that injury would 20 follow. It need not retry the entire state court case a second 21 time. 22 4. The breach of fiduciary duty determination under 23 California law was an insufficient basis for issue 24 preclusion on the issue of § 523(a)(6) willfulness. 25 In California, the elements for a breach of fiduciary duty 26 are the existence of a fiduciary relationship, breach of that 27 fiduciary duty, and damages. Oasis W. Realty, LLC v. Goldman, 28 51 Cal. 4th 811, 820 (2011). There is no particular scienter
25 1 requirement, let alone a requirement of a subjective intent to 2 injure. See Correia-Sasser v. Rogone (In re Correia-Sasser), 3 2014 WL 4090837, at *8 (9th Cir. BAP Aug. 19, 2014). As a 4 result, without more, a judgment for breach of fiduciary duty 5 under California law cannot support a willfulness determination 6 under § 523(a)(6). 7 B. The bankruptcy court erred in granting summary judgment to 8 Precision on its § 523(a)(4) claim against Yuri based on 9 the issue preclusive effect of the State Court Judgment. 10 Section 523(a)(4) excepts from discharge debts for fraud or 11 defalcation while acting in a fiduciary capacity. Whether a 12 debtor is a fiduciary for the purposes of § 523(a)(4) is a 13 question of federal law. Lewis v. Scott (In re Lewis), 97 F.3d 14 1182, 1185 (9th Cir. 1996). The definition is construed 15 narrowly, requiring that the fiduciary relationship arise from 16 an express or technical trust that was imposed prior to the 17 wrongdoing that caused the debt. Ragsdale v. Haller, 780 F.2d 18 794, 796 (9th Cir. 1986) (“The broad, general definition of 19 fiduciary—a relationship involving confidence, trust and good 20 faith—is inapplicable in the dischargeability context.”); see 21 also Otto v. Niles (In re Niles), 106 F.3d 1456, 1459 (9th Cir. 22 1997). 23 1. Express or technical trust 24 State law determines whether the requisite trust 25 relationship exists. See In re Lewis, 97 F.3d at 1185; Mele v. 26 Mele (In re Mele), 501 B.R. 357, 365 (9th Cir. BAP 2013). The 27 Debtors argue that here an express trust did not exist because 28 the elements for a trust were not satisfied under California
26 1 law. They maintain that, at best, the 2005 operating agreement 2 required that Yuri hold the properties in trust for Precision; 3 but, because Yuri was the sole member of Precision from 2005 to 4 2008, the duty to hold the properties in trust was effectively a 5 duty to himself. 6 In response, Precision argues that the Debtors ignore 7 Yuri’s status as its manager, which independently established 8 fiduciary duties owed to the company. In any event, it contends 9 that, based on the 2008 amendment, the Bronfmans’ membership 10 interests in Precision were deemed issued as of the date of the 11 2005 operating agreement. And, it argues that pursuant to 12 former California Corporations Code § 17153, a manager of a 13 limited liability company is subject to the same fiduciary 14 duties as a partner in a partnership; thus, by extension and 15 pursuant to Ragsdale, a manager is a trustee of the limited 16 liability company. 17 Something that neither party addresses is that Precision is 18 a Nevada limited liability company. Pursuant to the 2005 19 operating agreement, Precision was organized under the laws of 20 Nevada. Former California Corporations Code § 17450(a),12 in 21 effect at the time of the underlying events and the state court 22 action, established that: “[t]he laws of the state . . . under 23 which a foreign limited liability company is organized shall 24 govern its organization and internal affairs and the liability 25 and authority of its managers and members.” Emphasis added. 26 The 2008 amendment to the Precision operating agreement 27 12 The new version, California Corporations Code 28 § 17708.01, provides for the same.
27 1 states that: “[n]otwithstanding a conflict of [l]aws, the 2 operating agreement may be enforced in the Courts of the State 3 of California and or in the Courts of the State of New York, 4 including the Federal District Courts of California and/or New 5 York.” Enforcing the operating agreement in a California or New 6 York court, however, does not alter the law under which the 7 agreement arose or by which it is governed. Thus, it appears 8 that, for the purposes of § 523(a)(4), we look to Nevada law to 9 determine whether an express or technical trust existed such 10 that Yuri was a fiduciary to Precision. 11 a. An express trust did not exist. 12 Under Nevada law, an express trust requires that: 13 (1) “[t]he settlor properly manifest[] an intention to create a 14 trust; and [(2)] [t]here is trust property . . . .” Nev. Rev. 15 Stat. § 163.003. There are various methods to create a trust, 16 including a declaration by the owner of property that he or she 17 holds the property as trustee or a transfer of property by the 18 owner during his or her lifetime to another person as trustee. 19 Id. § 163.002. Nevada also permits the creation of a business 20 trust. See Nev. Rev. Stat. §§ 88A.010-88A.930 (2003). To 21 create a business trust, a party must file with the Nevada 22 secretary of state a certificate of trust. See id. § 88A.210 23 (2005). 24 Here, there is no indication that an express trust existed. 25 Neither the 2005 operating agreement nor the 2008 amendment 26 satisfied the requirements for an express trust. Nor is there 27 anything else in the record that suggests the creation of an 28 express trust during the time that Yuri was manager of
28 1 Precision. Similarly, nothing in the record before us evidences 2 the creation of a business trust. Thus, the next issue is 3 whether a technical trust existed under Nevada law. 4 b. On this record, we cannot determine whether a 5 technical trust existed. 6 Nevada law does not define a technical trust. In the 7 absence of a definition under state law, we construe a technical 8 trust as one imposed by law. See In re Mele, 501 B.R. at 365; 9 see also Teamsters Local 533 v. Schultz (In re Schultz), 46 B.R. 10 880, 885 (Bankr. D. Nev. 1985) (“[A technical] trust . . . may 11 arise by operation of a state statute which imposes trust-like 12 obligations on those entering into certain kinds of 13 contracts.”). 14 Our review of the Nevada Revised Statutes (“NRS”) reflects 15 that a Nevada limited liability company does not necessarily 16 involve a trust relationship between a manager or member and the 17 limited liability company. One exception — NRS § 86.391 — 18 provides that “[a] member holds as trustee for the company 19 specific property stated in the articles of organization or 20 operating agreement as contributed by the member, but which was 21 not so contributed.” Nev. Rev. Stat. § 86.391(2) (emphasis 22 added). And, NRS § 86.311 establishes that “[r]eal and personal 23 property owned or purchased by a company must be held and owned, 24 and conveyance made, in the name of the company.” 25 Unlike California, Nevada does not have a statute equating 26 the fiduciary duties of a manager in a limited liability company 27 context to those of a partner in a partnership. Therefore, 28 duties under partnership law are irrelevant. Instead, Nevada
29 1 law establishes that, in addition to a limited liability 2 company’s articles of organization, the operating agreement, if 3 any,13 is central to defining the contours of the fiduciary 4 relationship. And, parties to an operating agreement have 5 significant latitude in expanding or limiting fiduciary duties. 6 See Nev. Rev. Stat. § 86.286 (2013). 7 Here, the 2005 operating agreement does not expressly 8 establish the existence or the non-existence of fiduciary duties 9 owed to Precision by its manager. Nor does it provide that Yuri 10 contributed any property to the company, the only manner in 11 which Nevada law expressly creates a fiduciary duty to a limited 12 liability company. See Nev. Rev. Stat. § 86.391(2). The 13 operating agreement, however, provides that “[n]o real or other 14 property of the LLC shall be deemed to be owned by any Member 15 individually, but shall be owned by and title shall be vested 16 solely in the LLC.” While that provision and NRS § 86.311 17 created duties owed to Precision, we cannot determine whether 18 either appropriately relates to a technical trust, rather than 19 to a constructive or resulting trust. The latter trusts, of 20 course, are insufficient to support § 523(a)(4) 21 nondischargeability. See Ragsdale, 780 F.2d at 796. 22 Other documents and evidence may also exist that fill the 23 lacuna here; for example, Precision’s articles of organization, 24 required to create a limited liability company under Nevada law. 25 See Nev. Rev. Stat. § 86.151(1)(a) (2003). Such document may or 26 27 13 In Nevada, “[a] limited-liability company may, but is not required to, adopt an operating agreement.” Nev. Rev. Stat. 28 § 86.286.
30 1 may not establish that a trust relationship existed between Yuri 2 and Precision. These determinations, however, must be made by 3 the bankruptcy court, rather than the Panel, in the first 4 instance. 5 On this record, we cannot conclude that, as a matter of 6 law, a technical trust existed under Nevada law. The bankruptcy 7 court, thus, abused its discretion in giving preclusive effect 8 to the State Court Judgment on the issue of whether there 9 existed a fiduciary relationship in relation to a technical 10 trust for the purposes of § 523(a)(4) nondischargeability.14 11 C. Judgment amount excepted from discharge 12 Finally, the Debtors argue that the bankruptcy court was 13 required to conduct a separate inquiry into the measure of 14 damages attributable to the specific tortious conduct at issue 15 in the state court action. They contend that there were 16 multiple breaches of fiduciary duty alleged and to the extent 17 any of the breaches do not constitute a breach under federal 18 law, any damages flowing from such breach are dischargeable. 19 They also contend that only a damages judgment for fraud is 20 subject to issue preclusion without further analysis by the 21 bankruptcy court. 22 Based on our conclusions on both the § 523(a)(6) and (a)(4) 23 issues, we need not address this argument on appeal. 24 CONCLUSION 25 Given the unavailability of issue preclusion, the 26 bankruptcy court erred in granting summary judgment in favor of 27 14 Given our conclusion, we do not address the other issues 28 related to the § 523(a)(4) nondischargeability judgment.
31 1 Precision based on the preclusive effects of the State Court 2 Judgment. Therefore, we VACATE the summary judgment and REMAND 3 to the bankruptcy court for further proceedings consistent with 4 this opinion. 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28