In re: Michael Paul Newman ( 2022 )

FILED
JUN 10 2022
SUSAN M. SPRAUL, CLERK
NOT FOR PUBLICATION U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT
UNITED STATES BANKRUPTCY APPELLATE PANEL
OF THE NINTH CIRCUIT
In re: BAP No. CC-21-1228-GTL
MICHAEL PAUL NEWMAN, BAP No. CC-21-1250-GTL
Debtor. (Cross-Appeals)
Bk. No. 6:21-bk-11329-SC
MICHAEL PAUL NEWMAN,
Appellant/Cross-Appellee, Adv. No. 6:21-ap-01071-SC
v. MEMORANDUM*
CHLOE LEE, Trustee of the Sang Hoon
Lee Living Trust,
Appellee/Cross-Appellant.
Appeal from the United States Bankruptcy Court
for the Central District of California
Scott C. Clarkson, Bankruptcy Judge, Presiding
Before: GAN, TAYLOR, and LAFFERTY, Bankruptcy Judges.
INTRODUCTION
Appellant and chapter 7 1 debtor Michael Paul Newman seeks
reversal of the bankruptcy court’s grant of partial summary judgment
* This disposition is not appropriate for publication. Although it may be cited for
whatever persuasive value it may have, see Fed. R. App. P. 32.1, it has no precedential
value, see 9th Cir. BAP Rule 8024-1.
1 Unless specified otherwise, all chapter and section references are to the
excepting from discharge a state court judgment for conversion
(“Conversion Judgment”). The bankruptcy court granted summary
judgment on creditor Sang Hoon Lee’s2 claims for defalcation under
§ 523(a)(4) and for willful and malicious injury under § 523(a)(6) but denied
summary judgment on Lee’s claim for embezzlement under § 523(a)(4). In
the related cross-appeal, Lee seeks reversal of the bankruptcy court’s denial
of summary judgment on the embezzlement claim.
Applying the doctrine of issue preclusion, the bankruptcy court
concluded that the issues involved in the nondischargeability claims were
determined by the Conversion Judgment. Although conversion is a strict-
liability tort under California law, the bankruptcy court relied on the state
court’s additional finding that Newman acted “intentionally and
wrongfully in acquiring and retaining Lee’s money” to satisfy the
culpability requirements of nondischargeability.
But, because a conversion claim under California law does not
require a culpable state of mind, any finding of culpability was entirely
unnecessary to the Conversion Judgment and, thus, not entitled to
Bankruptcy Code, 11 U.S.C. §§ 101–1532, all “Rule” references are to the Federal Rules
of Bankruptcy Procedure, and all “Civil Rule” references are to the Federal Rules of
Civil Procedure.
2 After filing the adversary complaint and motion for summary judgment, Mr.
Lee died in August 2021. The bankruptcy court entered an order substituting as plaintiff
Chloe Lee, trustee of the Sang Hoon Lee Living Trust and Mr. Lee’s daughter. We refer
to them collectively as “Lee.”
2
preclusive effect. Without undisputed facts sufficient to establish
Newman’s culpable state of mind, summary judgment was inappropriate.
The bankruptcy court erred by applying issue preclusion to establish
defalcation and willful and malicious injury, but it correctly denied
summary judgment on Lee’s embezzlement claim because the Conversion
Judgment did not establish “circumstances indicating fraud.” Accordingly,
we VACATE and REMAND the grant of partial summary judgment and
AFFIRM the court’s denial of summary judgment on the embezzlement
claim.
FACTS 3
A. Prepetition Events
In December 2014, Sang Hoon Lee suffered serious injuries from a
job-related transportation accident while driving as an independent
contractor for Arms Trans dba Arms Logistics and Caravan (“Arms”). The
other driver, who was also on the job when the accident occurred, was at
fault.
Lee was unable to work because of his injuries, and he discussed his
options with Arms in early 2015. Concerned that Lee might sue for
misclassifying him as an independent contractor, Arms offered to pay Lee
3
Lee filed a request for judicial notice consisting of pleadings and a transcript
from a Washington state court proceeding which was given preclusive effect in an
unrelated bankruptcy case. Pursuant to Fed. R. Evid. 201(a), we may take judicial notice
only of adjudicative facts. Because the documents presented by Lee do not contain
adjudicative facts relevant to this appeal, we deny the request.
3
a salary, provide translation and transportation services, and provide the
legal services of Newman, a newly admitted attorney recently hired as in-
house counsel for Arms.
Through 2015, Newman unsuccessfully tried to negotiate a
settlement of Lee’s claim. In 2016, Newman had Lee, who was a native
Korean speaker and did not fluently speak English, sign a retainer
agreement, without explanation and without providing a translator. In the
agreement, Newman left his fee blank because he wanted Arms to
determine his fee.
According to Newman, he later reached an agreement with Arms to
be paid 15% of any settlement. Newman then coordinated with Arms to
have Lee sign an amended retainer agreement reflecting a 15% contingency
fee. Newman never spoke to Lee about the fee and never confirmed that
Lee agreed to it.
In March 2016, Newman settled the case for $1,000,000. While the
settlement was being approved, Arms negotiated a separate deal with Lee
under which Lee would waive claims against Arms and pay Arms $130,000
as reimbursement for the services it provided Lee. Arms claimed that it
reached an agreement with Newman that he receive a $20,000 flat fee from
the expected 15% contingency and Arms would receive the remaining
$130,000. When Arms asked Newman if he needed to amend the retainer
agreement which stated a fee of 15%, Newman responded, “I wouldn’t
have taken the 15% anyways, better to [sic] leave to show discount.”
4
After receiving the settlement funds, Newman informed Lee that he
would have to pay Newman $150,000 and pay Arms an additional
$130,000. Lee told Newman not to disburse the funds and confirmed with
Arms that the $150,000 fee was intended to cover both Newman’s fee and
the agreed reimbursement to Arms.
Newman refused to meet with Lee and Arms to discuss the confusion
over the fee and instead immediately resigned as in-house counsel. He then
paid himself $150,000 from the settlement proceeds and delivered a final
check to Lee in August 2016. After learning that Newman did not pay
Arms, Lee paid the $130,000 reimbursement to Arms. Newman refused to
answer Lee’s questions, refused to refund the $130,000, and instead
referred Lee to fee arbitration with the state bar.
B. The State Court Judgment And Appeal
In 2017, Lee sued Newman in state court for conversion, fraud, and
legal malpractice. He alleged that he did not agree to pay Newman a 15%
contingency fee, and he sought to avoid the retainer agreement. After a
bench trial, the state court granted Newman’s motion for nonsuit on Lee’s
malpractice claim because it was barred by the statute of limitations.
The state court then found that Lee failed to prove his fraud claim,
but because Lee proved that Newman agreed to accept a flat fee of $20,000,
the state court held that Newman converted $130,000 of Lee’s settlement
funds. In this context, the court determined that Newman “acted
intentionally and wrongfully in acquiring and retaining Lee’s money,” and
5
it entered judgment in favor of Lee in the amount of $130,000 plus pre-
judgment interest.
Newman appealed the Conversion Judgment, and Lee cross-
appealed the denial of the fraud claim. The California Court of Appeal
affirmed the trial court on both appeals.
C. The Motion For Summary Judgment And The Court’s Ruling
After the Conversion Judgment was affirmed on appeal, Newman
filed his chapter 7 petition. Lee filed an adversary complaint, seeking to
except the Conversion Judgment from discharge under § 523(a)(4) for
defalcation while acting in a fiduciary capacity, embezzlement, and
larceny, and under § 523(a)(6) for willful and malicious injury.
Lee then filed a motion for summary judgment and argued that the
elements of his nondischargeability claims were established by the
Conversion Judgment. 4 Lee attached the Conversion Judgment and the
appellate decision to the motion but did not offer any other facts or
evidence in support of the motion.
Newman opposed the motion and argued that because conversion is
a strict-liability tort under California law, the Conversion Judgment did not
establish the requisite “culpable state of mind” on the § 523(a)(4)
defalcation claim, or a “willful and malicious” injury under § 523(a)(6). He
4
Lee sought summary judgment on his claims for defalcation and embezzlement
under § 523(a)(4) and for willful and malicious injury under § 523(a)(6) but not on his
claim for larceny under § 523(a)(4). After the court entered partial summary judgment,
6
also maintained that the Conversion Judgment did not establish
embezzlement, which requires “circumstances indicating fraud,” and
argued that because the state court denied Lee’s fraud claim, Lee should be
precluded from relitigating the issue of whether Newman subjectively
intended to injure Lee.
The bankruptcy court granted summary judgment on the § 523(a)(4)
defalcation claim and the § 523(a)(6) claim but denied summary judgment
on the § 523(a)(4) embezzlement claim. It held that the state court’s finding
that Newman acted “intentionally and wrongfully” was sufficient to
establish defalcation, which requires “intentional improper conduct” or
conduct in which a fiduciary is “willfully blind to or consciously
disregard[s] a substantial and unjustifiable risk.” The bankruptcy court also
relied on the state court’s finding that Newman acted intentionally and
wrongfully to establish willfulness and malice.
In denying summary judgment on the embezzlement claim, the
bankruptcy court reasoned that the state court’s denial of the fraud claim
was not preclusive of the existence of “circumstances indicating fraud.”
The bankruptcy court held that Lee did not present any evidence to prove
that the issue was actually litigated or necessarily decided by the state
court.
the parties stipulated to dismiss, with prejudice, the remaining claim for larceny.
7
The bankruptcy court entered a written order granting partial
summary judgment. Newman timely appealed, and Lee timely cross-
appealed the court’s denial of summary judgment for embezzlement.
JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and
157(b)(2)(I). We have jurisdiction over Newman’s appeal under 28 U.S.C.
§ 158. We granted Lee’s motion for leave to appeal an interlocutory order
and therefore have jurisdiction over Lee’s cross-appeal under 28 U.S.C.
§ 158(a)(3).
ISSUES
Did the bankruptcy court err by applying issue preclusion to grant
summary judgment for defalcation under § 523(a)(4)?
Did the bankruptcy court err by applying issue preclusion to grant
summary judgment for willful and malicious injury under § 523(a)(6)?
Did the bankruptcy court err by denying summary judgment on
Lee’s claim for embezzlement under § 523(a)(4)?
STANDARDS OF REVIEW
We review de novo the bankruptcy court’s grant or denial of
summary judgment. Fresno Motors, LLC v. Mercedes Benz USA, LLC, 771
F.3d 1119, 1125 (9th Cir. 2014). We also review de novo the bankruptcy
court’s determination that issue preclusion is available. Lopez v. Emergency
Serv. Restoration, Inc. (In re Lopez), 367 B.R. 99, 103 (9th Cir. BAP 2007).
Under de novo review, “we consider a matter anew, as if no decision had
8
been made previously.” Francis v. Wallace (In re Francis), 505 B.R. 914, 917
(9th Cir. 2014).
DISCUSSION
A. Legal Standards For Summary Judgment And Issue Preclusion
Civil Rule 56(a), made applicable by Rule 7056, provides
that summary judgment is appropriate when “there is no genuine dispute
as to any material fact and the movant is entitled to judgment as a matter of
law.” The moving party bears the initial burden of demonstrating an
absence of a genuine issue of material fact. See Matsushita Elec. Indus. Co. v.
Zenith Radio Corp., 475 U.S. 574, 586 n.10 (1986). We must view the evidence
in the light most favorable to the non-moving party and draw all justifiable
inferences in its favor. Fresno Motors, 771 F.3d at 1125.
Lee’s motion for summary judgment is based solely on issue
preclusion; there are no disputed facts. Consequently, summary judgment
is appropriate here only if issue preclusion is available and the elements of
Lee’s nondischargeability claims are established as a matter of law by the
Conversion Judgment.
The doctrine of issue preclusion applies to actions to except debts
from discharge under § 523(a). Grogan v. Garner, 498 U.S. 279, 284 n.11
(1991). In applying issue preclusion, the bankruptcy court “must give to a
state-court judgment the same preclusive effect as would be given that
judgment under the law of the State in which the judgment was rendered.”
Migra v. Warren City Sch. Dist. Bd. of Educ., 465 U.S. 75, 81 (1984). The party
9
asserting issue preclusion bears the burden of establishing the threshold
elements, Harmon v. Kobrin (In re Harmon), 250 F.3d 1240, 1245 (9th Cir.
2001), and must prove the criteria for its application by providing a
sufficient record to reveal the controlling facts and issues litigated in the
first suit. Kelly v. Okoye (In re Kelly), 182 B.R. 255, 258 (9th Cir. BAP 1995),
aff’d, 100 F.3d 110 (9th Cir. 1996).
To determine the issue preclusive effect of the California judgment,
we apply California’s issue preclusion law, which requires:
(1) the issue sought to be precluded from relitigation is
identical to that decided in a former proceeding; (2) the issue
was actually litigated in the former proceeding; (3) the issue
was necessarily decided in the former proceeding; (4) the
decision in the former proceeding is final and on the merits;
and (5) the party against whom preclusion is sought was the
same as, or in privity with, the party to the former proceeding.
Plyam v. Precision Dev., LLC (In re Plyam), 530 B.R. 456, 462 (9th Cir. BAP
2015) (citing Lucido v. Super. Ct., 51 Cal. 3d 335, 341 (1990)). The court must
additionally assess “whether imposition of issue preclusion in the
particular setting would be fair and consistent with sound public policy.”
Khaligh v. Hadaegh (In re Khaligh), 338 B.R. 817, 824-25 (9th Cir. BAP 2006),
aff’d, 506 F.3d 956 (9th Cir. 2007) (citing Lucido, 51 Cal. 3d at 341-43).
B. The Bankruptcy Court Erred By Applying Issue Preclusion To
Grant Summary Judgment.
Newman argues that conversion is a strict-liability tort and, therefore,
the culpable mental state required for nondischargeability was neither
10
actually litigated nor necessary to the judgment. He suggests that the state
court’s finding that he acted intentionally and wrongfully pertains only to
Newman’s volitional act and is insufficient to establish either defalcation or
willfulness and malice.
To determine whether issue preclusion is available in this
nondischargeability action, we must compare the elements required to
establish liability in the Conversion Judgment with the elements required
for nondischargeability under § 523(a)(4) and (6).
The elements of conversion under California law are: “(1) the
plaintiff’s ownership or right to possession of the property; (2) the
defendant’s conversion by a wrongful act or disposition of property rights;
and (3) damages.” L.A. Fed. Credit Union v. Madatyan, 209 Cal. App. 4th
1383, 1387 (2012). “The act must be knowingly or intentionally done, but a
wrongful intent is not necessary.” Taylor v. Forte Hotels Int’l, 235 Cal. App.
3d 1119, 1124 (1991).
1. Issue Preclusion Is Not Available For Defalcation.
A debt is nondischargeable under § 523(a)(4) if: (1) there is an express
trust; (2) the debt is created by fraud or defalcation; and (3) the debtor
acted as a fiduciary to the creditor when the debt was created. Otto v. Niles
(In re Niles), 106 F.3d 1456, 1459 (9th Cir. 1997), abrogated on other grounds by
Bullock v. BankChampaign, N.A., 569 U.S. 267, 274 (2013). Whether Newman
was a fiduciary for purposes of § 523(a)(4) and whether his actions
11
constituted defalcation are governed by federal law. Mele v. Mele (In re
Mele), 501 B.R. 357, 363 (9th Cir. BAP 2013).
The attorney-client relationship between the parties is sufficient to
establish the first and third elements of the claim because the state court
found that Newman converted Lee’s funds from a client trust account. See
Banks v. Gill Distrib. Ctrs., Inc., 263 F.3d 862 (9th Cir. 2001) (holding that an
express trust and fiduciary relationship are satisfied when an attorney
deposits a client’s funds into his trust account).
But defalcation requires a “culpable state of mind.” Bullock, 569 U.S.
at 269. To establish defalcation, a movant must show: (1) bad faith, moral
turpitude, or other immoral conduct; or (2) an intentional wrong. Id. at 273-
74. A fiduciary’s conduct is intentional if he knows the conduct is improper
or he “consciously disregards (or is willfully blind to) a substantial and
unjustifiable risk.” Id. at 274 (cleaned up).
The record in this case does not show that Newman’s culpable
mental state was actually litigated or necessary to the Conversion
Judgment. “An issue is actually litigated when it is properly raised, by the
pleadings or otherwise, and is submitted for determination, and is
determined.” Wabakken v. Cal. Dep’t of Corr. & Rehab., 801 F.3d 1143, 1148
(9th Cir. 2015) (cleaned up). The “necessarily decided” element requires
that the issue is not “‘entirely unnecessary’ to the judgment in the initial
proceeding.” Samara v. Matar, 5 Cal.5th 322, 327 (2018) (quoting Lucido, 51
Cal. 3d at 342).
12
Lee has the burden of proving the elements of issue preclusion, but
without a sufficient record, we cannot determine whether Newman’s
culpability was properly raised in the pleadings or submitted for
determination. See In re Harmon, 250 F.3d at 1245; In re Kelly, 182 B.R. at 258.
Although the state court determined that Newman acted “intentionally
and wrongfully,” we cannot say with sufficient certainty whether
Newman’s culpability was determined by the court. The state court’s
finding may refer merely to the fact that Newman intended the act of
retaining the funds, which was a wrongful dominion, and may have no
relevance to whether Newman knew the conduct was wrong or whether he
consciously disregarded a substantial and unjustifiable risk. We must
resolve any ambiguity about what the state court decided against
application of issue preclusion. In re Kelly, 182 B.R. at 259.
Moreover, even if we could conclude that Newman’s culpable mental
state was actually litigated, it was not necessarily decided. See In re Harmon,
250 F.3d at 1248 n.9 (“An issue may actually have been litigated without its
determination having been necessary to the court’s decision.”). Because
conversion in California is a strict-liability tort, “[t]he foundation of the
action rests neither in the knowledge nor the intent of the defendant.
Instead, the tort consists in the breach of an absolute duty; the act of
conversion itself is tortious. Therefore, questions of the defendant’s good
faith, lack of knowledge, and motive are ordinarily immaterial.” L.A. Fed.
Credit Union, 209 Cal. App. 4th at 1387 (citation omitted). The Conversion
13
Judgment is just for conversion. There is no evidence that punitive
damages were sought or awarded, and we see no other basis for the state
court’s finding that Newman acted “intentionally and wrongfully.” To the
extent that the finding is intended to be a determination of Newman’s
culpable mental state in converting Lee’s property, it is entirely
unnecessary to the judgment and not entitled to preclusive effect.
Issue preclusion is not available to establish Newman’s culpable state
of mind and the bankruptcy court erred by granting summary judgment on
the defalcation claim.
2. Issue Preclusion Is Not Available To Establish Willful and
Malicious Injury.
Section 523(a)(6) excepts from discharge any debt arising from
“willful and malicious injury by the debtor to another entity or to the
property of another entity.” A creditor must prove both willfulness and
malice. Ormsby v. First Am. Title Co of Nev. (In re Ormsby), 591 F.3d 1199,
1206 (9th Cir. 2010).
The “willful injury requirement is met only when the debtor has a
subjective motive to inflict injury or when the debtor believes that injury is
substantially certain to result from his own conduct.” Carillo v. Su (In re Su),
290 F.3d 1140, 1142 (9th Cir. 2002). This requires an inquiry into the
debtor’s subjective state of mind. See id. at 1145-46. It is not enough to
prove that the debtor acted intentionally and caused an injury. Kawaauhau
v. Geiger, 523 U.S. 57, 61 (1998).
14
“A malicious injury involves (1) a wrongful act, (2) done
intentionally, (3) which necessarily causes injury, and (4) is done without
just cause or excuse.” Petralia v. Jercich (In re Jercich), 238 F.3d 1202, 1209
(9th Cir. 2001) (cleaned up).
A judgment for conversion under California law decides only that a
defendant has engaged in wrongful dominion over a plaintiff’s property; it
does not decide that a defendant caused “willful and malicious” injury.
Peklar v. Ikerd (In re Peklar), 260 F.3d 1035, 1039 (9th Cir. 2001). Accordingly,
“[a] judgment for conversion under California law . . . does not, without
more, establish that a debt arising out of that judgment is non-
dischargeable under § 523(a)(6).” Id.
To prevail on a § 523(a)(6) claim arising from a California conversion
judgment, a creditor must “first establish that a conversion has occurred
under California law, and second that the conversion is willful and
malicious.” Comcast of L.A., Inc. v. Sandoval (In re Sandoval), 341 B.R. 282, 295
(Bankr. C.D. Cal. 2006); see also Thiara v. Spycher Bros. (In re Thiara), 285 B.R.
420, 429 (9th Cir. BAP 2002) (“Even though a conversion occurred,
[creditor] still had to prove that Debtor converted the proceeds with
‘wrongful intent.’”).
As discussed above, the record provided by Lee does not evidence
that Newman’s mental state was actually litigated or necessarily decided
by the Conversion Judgment. And although the bankruptcy court may rely
on circumstantial evidence to find willfulness, In re Su, 290 F.3d at 1146 n.6,
15
and malice may be inferred from the nature of the wrongful act if it is
willful, In re Thiara, 285 B.R. at 434, Lee relied exclusively on issue
preclusion grounds and did not provide any other evidence in support of
the motion. Issue preclusion is not available here to establish the requisite
mental state necessary to find willfulness and malice, and the bankruptcy
court erred by granting summary judgment on Lee’s § 523(a)(6) claim.
C. The Bankruptcy Court Correctly Denied Summary Judgment On
Lee’s Embezzlement Claim.
In the cross-appeal, Lee argues that the bankruptcy court erred by
denying summary judgment on the § 523(a)(4) claim for embezzlement.
Lee contends that the state court’s factual findings are sufficient to establish
“circumstances indicating fraud.” In response, Newman maintains that
because the state court denied Lee’s fraud claim, Lee should be precluded
from litigating whether “circumstances indicating fraud” existed.
Embezzlement for purposes of § 523(a)(4) is governed by federal
law. First Del. Life Ins. Co. v. Wada (In re Wada), 210 B.R. 572, 576 (9th Cir.
BAP 1997). Embezzlement is defined as “the fraudulent appropriation of
property by a person to whom such property has been [e]ntrusted or into
whose hands it has lawfully come.” Id. (citation omitted). Embezzlement
“requires a showing of wrongful intent.” Bullock, 569 U.S. at 274.
To prevail on a claim for embezzlement, a creditor must prove:
(1) the property was rightfully in the possession of a non-owner; (2) the
non-owner appropriated the property to a use other than which it was
16
entrusted; and (3) circumstances indicating fraud. Transamerica Com. Fin.
Corp. v. Littleton (In re Littleton), 942 F.2d 551, 555 (9th Cir. 1991).
The bankruptcy court did not err by denying summary judgment on
Lee’s embezzlement claim. It properly determined that the existence of
circumstances indicating fraud was not an issue actually litigated or
necessarily decided in the state court action.
And contrary to Newman’s argument, circumstances indicating
fraud, as an element of embezzlement, is not coterminous with an intent to
defraud, as an element of Lee’s state court fraud claim.5 See Phillips v.
Arnold (In re Phillips), BAP No. WW-15-1178-TaKuJu, 2016 WL 7383964, at
*5 (9th Cir. BAP Dec. 16, 2016) (“The finding required for a determination
of § 523(a)(4) embezzlement is that Debtor’s actions indicated fraud. Such a
determination is not synonymous with an intent to defraud . . . “).
Essentially, Lee asks us to look at the totality of the state court’s
factual findings and conclude that Newman’s actions involved
circumstances indicating fraud. Our role as an appellate tribunal is limited;
5 Furthermore, the state court denied Lee’s fraud claim but did not make specific
findings as to each element. The elements of fraud under California law are:
(1) misrepresentation (false representation, concealment, or nondisclosure);
(2) knowledge that the representation is false; (3) intent to defraud; (4) justifiable
reliance; and (5) resulting damages. Lazar v. Sup. Ct., 12 Cal. 4th 631, 638 (1996). The
Conversion Judgment is preclusive of whether Newman defrauded Lee, but because
denial of the fraud claim could be based on insufficient proof of any, or all, elements,
we cannot determine if the state court decided whether Newman intended to defraud
Lee. See In re Kelly, 182 B.R. at 259 (“Any reasonable doubt as to what was decided by a
prior judgment should be resolved against allowing the [issue preclusive] effect.”).
17
we do not find facts or weigh evidence. Lee cites Cornell v. U.S. Energy
Corp. (In re Cornell), BAP No. NV-04-1398-SKP, 2006 WL 6810931 (9th Cir.
BAP Feb. 23, 2006), and Thoroughman v. Savittieri, 323 F. App’x 548 (9th Cir.
2009), for the proposition that we can infer circumstances indicating fraud
from the record without weighing evidence.
These cases involve appellate courts affirming nondischargeability
judgments based on inferences from evidence presented to the bankruptcy
court. But Lee did not present any evidence in support of summary
judgment and instead relied solely on the doctrine of issue preclusion. And
the bankruptcy court did not make any factual findings. It merely applied
issue preclusion. Thus, our review is limited to whether issue preclusion is
available to establish the elements of nondischargeability as a matter of
law.
The bankruptcy court correctly determined that the existence of
circumstances indicating fraud was neither actually litigated nor
necessarily decided by the state court. The court did not err by denying
Lee’s motion for summary judgment on the § 523(a)(4) embezzlement
claim.
CONCLUSION
Based on the foregoing, we VACATE the bankruptcy court’s grant of
summary judgment on Lee’s § 523(a)(4) defalcation claim and § 523(a)(6)
willful and malicious injury claim. We AFFIRM the court’s denial of
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summary judgment on Lee’s § 523(a)(4) embezzlement claim, and we
REMAND for further proceedings consistent with this disposition.
19