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1 NOT FOR PUBLICATION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
15
