Vohariwatt v. Matson

• Court: District Court, S.D. California
• Decided: September 10, 2019
• Docket: 3:18-cv-02168
• Status: Unknown

Opinion

| FILED 1 — ! oy SEP 10 on | 3 } CLERK USDISiRICT COURT | | BOUTHERN eC oF SEPUTY |

5 6 . 7 8 UNITED STATES DISTRICT COURT 9 SOUTHERN DISTRICT OF CALIFORNIA 10 11 || JANET VOHARIWATT and Case No.: 3:18-cv-02168-BEN-BGS PAUL VOHARIWATT, Bankruptcy No.: 16-00658-LA7 Appellants, 13 Pp"! ORDER

15 KEITH MATSON and JOANNE MATSON, 16 Appellees. 17 18 19 Appellants Janet and Paul Vohariwatt appeal the Bankruptcy Court’s September 4, 20 |/2018 Judgment on Remand. The Judgment is AFFIRMED. 21 I. BACKGROUND 22 A. The Foreclosure 23 In 2006, Appellants Janet and Paul Vohariwatt purchased real estate located at 31 24 Sandpiper Strand. In December 2008, the Vohariwatts contracted to rent the property to 25 |/tenants. The tenants paid $60,000 to rent the property for one year, as well as a $10,000 26 ||“pet deposit” and a $5,000 security deposit. The tenants began living at the property in 27 ||May 2009. In January 2010, the Vohariwatts and the tenants agreed to extend the lease 28 || until June 20, 2011 for another $60,000. The tenants made a $50,000 rent payment in May

1 ||2010, and the parties agreed that the pet deposit would be used to cover the remaining ||$10,000 ofrentowed, 3 Notices of Default for the Property were recorded in August 2009 and July 2010, 4 ||and Notices of Trustee’s Sale for the Property were recorded in November 2009 and 5 ||October 2010. On February 3, 2011, Keith and Joanne Matson purchased the 31 Sandpiper 6 || Strand property at a foreclosure auction. The Vohariwatts did not learn of the foreclosure 7 auction until February 4, 2011. Between February 4, 2011 and February 23, 2011, the 8 || Matsons requested that the Vohariwatts turn over the rent money prepaid by the tenants for 9 ||the period of February 3, 2011 (the day the Matsons took ownership of the property) 10 j|through June 20, 2011 (the end of the rental period). The Vohariwatts refused. ll B. State Court Proceedings 12 On March 30, 2011, the Vohariwatts brought suit for wrongful foreclosure against 13 ||the Matsons in the Superior Court, County of San Diego. On October 7, 2011, the Superior 14 {|Court dismissed the Vohariwatts’ wrongful foreclosure suit. On that day, the Matsons 15 |/ again requested that the Vohariwatts turn over the prepaid rent, and the Vohariwatts again 16 ||refused. 17 The Matsons then brought suit against the Vohariwatts in the Superior Court, County 18 |) of San Diego for (1) wrongful institution of civil proceedings for their wrongful foreclosure 19 || suit against the Matsons and (2) for conversion of the prepaid rent. After a two-day trial 20 January 2013, the Superior Court found for the Matsons on both claims, entering 21 ||judgment against the Vohariwatts for $23,587.55 on the wrongful institution of civil 22 proceedings claim and for $22,520.55 on the conversion claim. In finding for the Matsons 23 the conversion claim, the Superior Court stated: 24 The Vohariwatts kept the rent money attributable to February 3, 2011 to June 25 20, 2011 despite no longer owning [the property]. The conversion occurred on February 3, 2011. Mr. Matson and Mrs. Vohariwatt both testified that Mr. 26 Matson requested the prepaid rent money on October 7, 2011. The 07 Vohariwatts refused to give them the money. 28

1 At the rental rate of $5,000 per month multiplied by twelve months, and then divided by 365 days, the daily rental rate is $164.38. February 3, 2011 to June 2011 was 137 days. Therefore, the amount of the Matsons’ personal 3 property that the Vohariwatts converted is $22,520.55. 4 6-9 at p. 29 (2/5/2013 Superior Court Judgment). 5 C. First Bankruptcy Proceeding 6 In February 2016, the Vohariwatts filed for Chapter 7 bankruptcy. On April 28, 7 |/2016, the Matsons filed a complaint in the Bankruptcy Court seeking a determination that 8 two debts owed under the Superior Court’s judgment against the Vohariwatts were 9 || nondischargeable under 11 U.S.C. § 523(a)(6). On January 24, 2017, the Matsons moved 10 a summary judgment order declaring that the judgment debts were exempt from the 11 |) Vohariwatts’ discharge. The Bankruptcy Court granted the Matsons’ motion as to the debt 12 owed for wrongful institution of civil proceedings. However, the Bankruptcy Court denied 13 Matsons’ motion as to the debt owed for the conversion judgment, finding that 14 || particular debt to be dischargeable because it did not satisfy § 523(a)(6). In so holding, the 15 ||Bankruptcy Court reasoned that the Matsons were collaterally estopped from arguing § 16 ||523(a)(6)’s nondischargeability exception applied because of the Superior Court’s 17 |)judgment that the conversion occurred on February 3, 2011. Specifically, the Bankruptcy 18 |/Court determined that because the Superior Court found the conversion occurred on 19 February 3, 2011, and the Vohariwatts did not learn about the foreclosure sale until after 20 ||February 3, 2011, their conversion on February 3, 2011 could not be “willful and 21 ||malicious,” as required by § 523(a)(6)’s nondischargeability exception. 22 D. First Appeal of Bankruptcy Judgment 23 On June 19, 2017, the Matsons appealed to this Court the parts of the Bankruptcy. 24 |/Court’s judgment declaring that the judgment debt attributable to conversion was 25 || discharged and ordering that the interest would accrue at the federal judgment rate. On 26 appeal, this Court held that “the Bankruptcy Court erred when it applied the doctrine of 27 |\collateral estoppel to conclude that the Conversion did not include acts that occurred after 28 ||February 3, 2011” because “[t]he Superior Court had no reason to decide whether or not

1 ||the Conversion included events that occurred after that date.” 12/18/17 Order at p. 6. As 2 _||relevant to the instant appeal, this Court further held: 3 In this case, principles of collateral estoppel require this Court to accept the 4 Superior Court’s conclusion that the Conversion had begun to occur by February 3, 2011... The Vohariwatts! have yet to transfer the Prepaid Rent 5 to the Matsons. Consequently, the Conversion has continued from February 6 3, 2011 until the present. The Conversion includes “any act[s] of dominion” over the Prepaid Rent committed by the Vohariwatts during that period of | 7 time. Igauye v. Howard, 249 P.2d 558, 561 (Cal. Ct. App. 1952). 8 The Court remands this case to the Bankruptcy Court to determine whether 9 the Vohariwatts committed acts of dominion over the Prepaid Rent after 10 February 3, 2011. Having determined the acts that make up the Conversion, the Bankruptcy Court must determine whether the Conversion Debt is “for 11 willful and malicious injury by the [Vohariwatts] to [the Matsons]” and 2 therefore [non]dischargeable under 11 U.S.C. § 523(a)(6). 13 || 12/18/17 Order at p. 7. 14 E. Bankruptcy Proceedings Following Remand 15 On remand, the Bankruptcy Court held a hearing during which it asked, “[W]ith 16 |lrespect to additional hearings to understand whether there’s a commission of acts of 17 ||dominion after February 3, 2011, and if there is a conversion, that conversion was willful 18 malicious, what are you anticipating you might have to do?” Doc. 149 at p. 4. Both 19 || parties stated their wish to brief the issues, and the Court set a briefing schedule. See id. 20 || The Court additionally requested a full transcript of the Superior Court trial, which the 21 ||parties agreed to provide, and noted, “We will determine whether or not, after the 22 || conclusion of the briefing — that the Court is satisfied that no further evidence is required.” 23 at p. 10. 24 When the Vohariwatts filed their opposition brief on remand, they attached a 25 || declaration with more than 100 pages of new exhibits showing “improvements” they made 26 27 ! The Court has modified the quoted language from the 12/18/17 Order to reflect 8 || the correct spelling of the Vohariwatts’ name.

1 || to the property prior to the February 3, 2011 foreclosure. At the August 23, 2018 hearing remand, the Bankruptcy Court issued _a “tentative ruling ... sustain[ing] the Matsons’. 3 |j evidence objection to strike the Vohariwatts’ post-trial evidence as untimely and irrelevant 4 |} and took under submission to explain in writing the basis for her decision on remand that 5 ||(1) the Vohariwatts’ conversion of the prepaid rent began on February 3, 2011 and has 6 ||continued until the present; and (2) the resulting conversion debt is for a ‘willful and 7 ||malicious injury’ that is nondischargeable under 11 U.S.C. § 523(a)(6).” Doc. 9-1 at p. 81; 8 || see also Doc. 9-1 at p. 78 (“Tentative Ruling”). The Bankruptcy Court later issued a five- 9 || page written order reaffirming its tentative ruling. Doc. 9-1 at p. 81. This appeal followed. 10 Il. DISCUSSION lt The Vohariwatts raise two issues on appeal. First, they argue that the Bankruptcy 12 || Court erred by using the “substantial certainty” standard for “willful injury” adopted by Jn 13 ||re Jercich, 238 F.3d 1202 (9th Cir. 2002). Second, they contend that even if the 14 ||Bankruptcy Court applied the correct standard, it did not apply it correctly, including 15 || because it improperly struck the Vohariwatts’ pre-foreclosure improvements evidence. For 16 reasons discussed below, the Court rejects both grounds for appeal and affirms the 17 || Bankruptcy Court’s judgment. 18 A. The Bankruptcy Court Properly Followed Jercich and Geiger 19 Section 523(a)(6) prevents the discharge of any debt arising from “willful and 20 ||/malicious injury by the debtor to another entity or to the property of another entity[.]” § 21 523(a)(6). The Vohariwatts contend that the Bankruptcy Court applied the wrong standard 22 ||for § 523(a)(6)’s “willful” injury requirement because it relied upon the Ninth Circuit’s 23 ||decision in Jercich.2 According to the Vohariwatts, Jercich “misconstrued (and then 24 overlooked)” the Supreme Court’s prior decision in Kawaauhau v. Geiger, 523 U.S. 57 25 ||(1998), by applying a “substantial certainty” test for willfulness. Doc. 8 at p. 19. 26 27 28 The Vohariwatts do not appeal the Bankruptcy Court’s “malicious” injury finding, and thus, the Court addresses only the “willful” injury prong of § 523(a)(6).

1 The Court reviews de novo the Bankruptcy Court’s construction of § 523(a)(6). See Su, 290 F.3d 1140, 1142 (9th Cir. 2002) (stating that a conclusion of law is reviewed. 3 nove). In its 2018 decision, the Bankruptcy Appellate Panel (“BAP”) considered and 4 rejected the same arguments raised by the Vohariwatts. See In re Hamilton, 584 B.R. 310 5 || (9th Cir. BAP 2019), pending appeal, 2019 WL 1259164 (9th Cir. Apr. 19, 2019). As the 6 || BAP recently explained, “[Geiger and Jerich] are not at odds” with one another.’ Jd. at 7 (emphasis added). In Geiger, the Supreme Court considered whether a debtor-doctor’s 8 ||debt arising from a medical malpractice claim against him fell within the “willful and 9 || malicious injury” exception to discharge. The Supreme Court expressly declined to expand 10 definition of “willful” to include the debtor’s negligent or reckless medical care, 11 || explaining: 12 The word “willful” in § 523(a)(6) modifies the word “injury,” indicating that 3 nondischargeability takes a deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury. Had Congress meant to 14 exempt debts resulting from unintentionally inflicted injuries, it might have 15 described instead “willful acts that cause injury.” 16 || Jd. at 61 (emphasis in original). 17 Three years after Geiger, the Ninth Circuit decided Jercich and declined to find that, 18 || under Geiger, the willfulness prong necessarily requires a “specific intent” to cause injury. 19 || Jercich, 238 F.3d at 1207. In so holding, the Jercich court reasoned that Geiger “clarified 20 || that it is insufficient under § 523(a)(6) to show that the debtor acted willfully and that the 21 j/injury was negligently or recklessly inflicted; instead, it must be shown not only that the 22 || debtor acted willfully, but also that the debtor inflicted the injury willfully and maliciously 23 ||rather than recklessly or negligently.” Jd. (emphasis in original). Jercich concluded that 24 Geiger did not, however, “answer .. . the precise state of mind required to satisfy § 25 523(a)(6)’s ‘willful standard.” Jd. The Ninth Circuit went on to follow the Fifth and Sixth 26 27 > This Court’s reasoning follows the BAP’s reasoning in Hamilton, 584 B.R. at 318- 320.

1 || Circuits in holding that, “under Geiger, the willful injury requirement of § 523(a)(6) is met 2 || when it is shown either that the debtor had a subjective motive to inflict the injury or that. 3 ||the debtor believed that the injury was substantially certain to occur as a result of his 4 ||conduct.” Jd. Thus, as the BAP confirmed, Jercich remains good law that this Court must 5 follow. See Hamilton, 583 B.R. at 320 (rejecting arguments identical to those raised by 6 ||the Vohariwatts). 7 The Vohariwatts’ reliance on Hawkins v. Franchise Tax Board of California, 769 8 || F.3d 662 (9th Cir. 2014), to show that willfulness requires “specific intent” fares no better. 9 || Hawkins is distinguishable because it concerned only tax debts under § 523(a)(1)(A) within 10 |) “the bankruptcy tax context,” not a conversion judgment within the context of a willful and 11 ||}malicious injury under § 523(a)(6), as is the case here. See also Hamilton, 584 B.R. at 320 12 (rejecting debtors’ reliance upon Hawkins on same grounds). Thus, contrary to the 13 || Vohariwatts’ argument, Hawkins did not “implicitly overrule Jercich.” Id. 14 Having rejected the Vohariwatts’ arguments and construed the test for willfulness 15 jJunder § 523(a){6), the Court considers next whether the Bankruptcy Court applied the 16 |icorrect standard for willfulness. It did. The Bankruptcy Court properly grounded its 17 construction of the willfulness standard in Geiger, Jercich, and In re Su, 290 F.3d 1140 18 Cir. 2002), by using the “substantial certainty” standard adopted in Jercich. See Doc. 19 ||9-1 at p. 82-83. Accordingly, the Bankruptcy Court did not err in its construction of § 20 || 523(a)(6). 21 B. The Bankruptcy Court Correctly Applied the Willfulness Standard 22 Next, the Vohariwatts contend that even if Jercich is good law, the Bankruptcy Court 23 |/incorrectly applied its “substantial certainty” standard to the facts of this case by finding § 24 523(a)(6)’s willful injury requirement was satisfied. To make that determination, the 25 || Bankruptcy Court necessarily made factual findings about the Vohariwatts’ mental state. 26 || Thus, the Court reviews those factual findings for clear error. See Hamilton, 584 B.R. at 27 |}318 (“The clear error standard applies to the bankruptcy court’s factual findings about the 28

1 ||}Debtors’ mental state.”). The Bankruptcy Court made the following findings on 2 || willfulness: □□ 3 The Vohariwatts acted with a willful intent when they took the injury- 4 producing action of asking the tenants to remain in possession without paying any rent to the Matsons, while simultaneously retaining the prepaid rent 3 instead of transferring it to the Matsons. The necessary consequence of this 6 action is that the Matsons could not re-rent the property, or possess the property for themselves, or receive the rental income from the property to pay 7 their mortgage and other debts. 8 Additionally, the Vohariwatts’ willful intent is evidenced by their retention of 9 the prepaid rent after the state court dismissed their foreclosure action against 10 the Matsons, and after the Matsons demanded payment of the rent in October 2011. It is further evidenced by the Vohariwatts’ continued retention of the 11 prepaid rent after the Matsons filed the state court action against them for 2 malicious prosecution and conversion of the prepaid rent, and after the Matsons had obtained a judgment against them on both claims. The natural 13 consequence of the Vohariwatts’ continued retention of prepaid rent is to 14 deprive the Matsons of their use of these rental monies in violation of their clear ownership rights. 15 16 || Doc. 9-1 at p. 83. 17 As previously discussed, the willful injury requirement is met when the debtor 18 || knows that the injury is substantially certain to occur as a result of his conduct. See 19 || Jercich, 238 F.3d at 1208. The court may infer intent “from the totality of the 20 circumstances and the conduct of the person accused.” In re Ormsby, 591 F.3d 1199, 21 (9th Cir. 2010). In addition, the “court may consider circumstantial evidence 22 tends to establish what the debtor must have actually known when taking the 23 |Hnjury-producing action.” Su, 290 F.3d at 1146, n. 6. “The [dJebtor is charged with 24 knowledge of the natural consequences of his actions,” Ormsby, 591 F.3d at 25 || 1206, and the court is not required to “take the debtor’s word for his state of mind,” 26 || Su, 390 F.3d at 1146, n. 6. 27 The Vohariwatts argue that the Bankruptcy Court improperly assumed the 28 ||conversion judgment was nondischargeable without identifying and considering the

I ||requisite “nexus” between their conduct and the end result. That argument lacks merit. ||The Bankruptcy Court not base its finding of intent_merely_on the Vohariwatts’. 3 ||retention of the prepaid rent, as the Vohariwatts contend. Rather, the Bankruptcy Court 4 j|relied upon the Vohariwatts’ undisputed acts of interference with the property’s tenants. 5 || As the Bankruptcy Court found, the post-February 3, 2011 “injury-producing” conduct was 6 || the Vohariwatts’ “asking the renters to remain in possession without paying any rent to the 7 |j Matsons, while simultaneously retaining the prepaid rent instead of transferring it to the 8 Matsons.” Doc. 9-1 at p. 83. The Bankruptcy Court further found that the Vohariwatts 9 || knew their actions would cause substantial injury to the Matsons because “[t]he necessary 10 || consequence of this action is that the Matsons could not re-rent the property, or possess the 11 ||property for themselves, or receive the rental income from the property to pay their 12 |}mortgage and other debts.” /d. Thus, in contrast to the Vohariwatts’ characterization, the 13 Bankruptcy Court’s decision was not based on the existence of the conversion judgment, 14 |;alone. Instead, the record reflects that the Bankruptcy Court properly considered the 15 |i parties’ arguments and the evidence offered at trial to come to its conclusions regarding 16 ||the Vohariwatts’ knowledge and intent—conclusions that are logical, plausible, and 17 || supported by the record. 18 Next, the Vohariwatts contend that because they used the prepaid rent funds to pay 19 || for “improvements” to the property prior to the foreclosure sale on February 3, 2011, the 20 || Matsons “actually had ownership of all the funds received from the prepaid rents” that they 21 |} were owed pursuant to the Superior Court’s conversion judgment. Doc. 8 at p. 22; see also 22 9-3 (7/11/2018 Declaration and attached exhibits). Thus, the Vohariwatts theorize, 23 Bankruptcy Court erred by “conclud[ing] that the Vohariwatts knew the natural 24 ||consequences of continued retention of prepaid rent [wa]s to deprive the Matsons of their 25 |/use’” because the Matsons were not, in fact, injured. Doc. 8 at p. 22 (citing Doc. 9-1 at p. 26 The Vohariwatts are incorrect. The Vohariwatts’ late-filed evidence of pre- 27 ||foreclosure improvements to the property, accompanied by their new theory that the 28 ||Matsons were somehow reimbursed for the prepaid rent by purchasing the property with

1 ||the pre-foreclosure improvements, is not only illogical, but it contradicts issues already 2 ||resolved by the Superior Court, which in turn, the Bankruptcy Court and this Court were. 3 ||required to accept. See 12/17/18 Order (“Under California law, collateral estoppel . . . 4 || applies to issues that ‘have been necessarily decided in the former proceeding.””). In the 5 ||first appeal, this Court held that collateral estoppel applied to three issues necessarily 6 ||resolved by the Superior Court: “(1) whether the Matsons had a right to the Prepaid Rent 7 || ‘at the time of the conversion,’ (2) whether the Vohariwatts converted the Prepaid Rent ‘by 8 wrongful act,’ and (3) the amount of damages owed to the Matsons.” 12/18/17 Order at 9 6. Accordingly, the Vohariwatts are collaterally estopped from using their late-filed 10 evidence to challenge either the extent of the Matsons’ financial damage or whether the 11 || Vohariwatts converted the prepaid rent on February 3, 2011. 12 Nonetheless, the Vohariwatts contend that the Bankruptcy Court erred by striking 13 || their pre-foreclosure improvements evidence.* That decision, however, was not an abuse 14 || of discretion. The Court has reviewed the Vohariwatts’ declaration and exhibits and agrees 15 || with the Bankruptcy Court that the evidence was both untimely and not relevant to the 16 || willfulness finding, for the reasons discussed supra. 17 18 19 20 21 4 The Court is likewise not persuaded that the Bankruptcy Court’s evidentiary ruling denied due process to the Vohariwatts. First, the Vohariwatts offer no evidence in the 23 ||record showing that they did not have an opportunity to respond, particularly when the Bankruptcy Court held a hearing on August 23, 2018 to address the parties’ briefing. The Court notes that the Vohariwatts neglected to file the transcript of that hearing as part of 25 appeal, and thus, the Court is unable to consider it. In light of the tentative ruling issued by the Bankruptcy Court during that hearing, the Court is skeptical that the 26 evidentiary issue was not at least raised during the hearing. Moreover, there is no evidence 27 ||in the record suggesting the Vohariwatts took any further steps to be heard on the matter, 0g e.g., by filing a motion to reconsider or for leave to file a sur-reply to the Matsons’ reply brief. 10

1 Further, even if the Bankruptcy Court had considered the pre-foreclosure ||improvements evidence—which it may have*°—the outcome would be the same. First, the 3 || Vohariwatts’ declaration does not assert their subjective belief that the Matsons were 4 || already reimbursed by virtue of purchasing the foreclosed property with the pre-foreclosure 5 ||improvements. Indeed, there is no direct evidence of the Vohariwatts’ beliefs on that point; 6 |/rather, their alleged belief is evidenced only by implication. See Doc. 9-3 (7/11/2018 7 || Declaration). 8 Second, even considering the Vohariwatts’ new theory within the “totality of the 9 circumstances,” a court is not required to accept it as true, particularly in the face of 10 || evidence to the contrary. See, e.g., Ex. 29; App. 133 (2012 email from the Vohariwatts to 11 ||third party stating, “I do not think they have the right [to the prepaid rent]... 1. Because 12 || we have not dropped the wrongful foreclosure case. 2. These are money we used to pay the 13 || mortgage and reinstate the loan.”); see also Su, 390 F.3d at 1146, n. 6 (noting that the court 14 |lis not required to “take the debtor’s word for his state of mind.”). For example, during 15 || direct examination at trial, counsel asked, “What did you do with the rent and the security 16 || deposit you received,” and the Vohariwatts responded, “We use[d] it to pay mortgage.” 17 P. 89:26-28; App. 460. Thus, even considering the pre-foreclosure improvements 18 || evidence, the Bankruptcy Court’s finding that the Vohariwatts interfered with the Matsons’ 19 income, as well as refused to reimburse them, would still be logical, plausible, and 20 supported by the record. See In re Retz, 606 F.3d 1189, 1196 (9th Cir. 2010) (“A court’s 21 || factual determination is clearly erroneous if it is illogical, implausible, or without support 22 the record.”). 23 24 25 ©)”

27 > See Doc. 9-1 at p. 84 (“Even if the Vohariwatts had already spent these funds prior 28 to February 3, 2011 as they claim, they still had sufficient funds at various times after February 3, 2011 to pay this debt but chose to direct their funds elsewhere.”). 11

] For the previous reasons, the Bankruptcy Court properly construed “willfulness” 2 § 523(a)(6), properly applied Jercich’s substantial certainty standard to the facts, and 3 not abuse its discretion by striking the pre-foreclosure improvements evidence. 4 TH. CONCLUSION 5 The Bankruptcy Court’s Judgment dated September 4, 2018 is AFFIRMED, and 6 appeal is dismissed. 7 IT IS SO ORDERED. ele 3 9 |IDATED: September G- 2019 Yl fa 10 HOM ROGER T. BENITEZ " United States Distryx# Judge 11 12 13 14 □ 15 □

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