In re: Mehran Shahverdi ( 2013 )

FILED
JUN 07 2013
1
SUSAN M SPRAUL, CLERK
U.S. BKCY. APP. PANEL
2 OF THE NINTH CIRCUIT
UNITED STATES BANKRUPTCY APPELLATE PANEL
3
OF THE NINTH CIRCUIT
4
5 In re: ) BAP No. CC-12-1287-MkTaPa
)
6 MEHRAN SHAHVERDI, ) Bk. No. 08-20205-MT
)
7 Debtor. ) Adv. No. 09-0119-MT
______________________________ )
8 )
MEHRAN SHAHVERDI, )
9 )
Appellant, )
10 )
v. ) MEMORANDUM*
11 )
WILLIAM HABLINSKI ARCHITECTURE,)
12 a California Partnership, )
)
13 Appellee. )
_______________________________)
14
Argued and Submitted on May 16, 2013
15 at Pasadena, California
16 Filed – June 7, 2013
17 Appeal from the United States Bankruptcy Court
for the Central District of California
18
Honorable Maureen Tighe, Bankruptcy Judge, Presiding
19
20 Appearances: Barry R. Wegman of the Law Offices of David A.
Tilem argued for Appellant Mehran Shahverdi; John
21 D. Faucher of Faucher & Associates argued for
Appellee William Hablinski Architecture, a
22 California partnership.
23
Before: MARKELL, TAYLOR, and PAPPAS, Bankruptcy Judges.
24
25
26 *
This disposition is not appropriate for publication.
27 Although it may be cited for whatever persuasive value it may
have (see Fed. R. App. P. 32.1), it has no precedential value.
28 See 9th Cir. BAP Rule 8013-1.
1
1 INTRODUCTION1
2 This case involves an individual Chapter 13 debtor and his
3 former employer. The bankruptcy court rendered summary judgment
4 in favor of the debtor’s former employer under Sections
5 523(a)(2)(A) and 523(a)(4) on the basis of the issue preclusive
6 effect of an arbitral award. We vacate the bankruptcy court’s
7 judgment and remand.
8 STATEMENT OF FACTS
9 A. The Pre-bankruptcy Proceedings
10 1. Debtor’s Employment at William Hablinski Architecture
(“WHA”).
11
12 Mehran Shahverdi, the debtor/Appellant (“Debtor”) came to
13 the United States from Iran on a student visa in 1984. As early
14 as 1988, Debtor had done architectural design work for Daniel
15 Elihu. The Elihu family owned a construction company, Amir
16 Construction. Debtor testified2 that he had never worked for
17 Amir Construction, even though he included the company on his
18 resume.
19 In 1997, Debtor received his Bachelor of Architecture from
20 the University of Southern California, and became an American
21 citizen.
22
1
23 Unless specified otherwise, all chapter and section
references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and
24 all Rule references are to the Federal Rules of Bankruptcy
Procedure, Rules 1001-9037. All Civil Rule references are to the
25 Federal Rules of Civil Procedure and are abbreviated as “FRCP”.
26 2
All references to any party’s testimony are drawn from the
27 arbitration: William Hablinski Architecture v. Shahverdi, Case
No.: 03-4412-RWT (Sept. 7, 2010) [hereinafter “Arbitration
28 Award”].
2
1 Appellee WHA is an architecture firm that designs and
2 supervises the construction of high-end custom homes. In
3 approximately May 2000, WHA hired the Debtor as a “Job Captain.”
4 Debtor’s job involved production and low level management
5 activities. When WHA hired Debtor, the firm required him to sign
6 the firm’s Employee Handbook. The Employee Handbook contained
7 articles that addressed the following: (1) conflicts of interest,
8 secondary employment,3 and confidentiality. Under WHA’s Employee
9 Handbook’s provisions, personal use of the office computers was
10 expressly prohibited.
11 The Job Captain position required that Debtor work under a
12 Project Manager’s supervision while assisting in the production
13 of construction drawings, coordinating with consultants, and
14 developing the project’s ultimate details. In order to
15 facilitate this process, WHA employs a computer system that
16 allows its employees to develop a full set of documents for use
17 by all parties to a project, including consultants. Thus,
18 employees such as Debtor would use the computer system to
19 generate and then transmit parts of designs and drawings to
20 various consultants. In order to send work documents to third
21 parties, a Job Captain needed a supervisor’s prior authorization.
22
23
3
24 Richard Manion (“Manion”), a partner at WHA, testified that
under Article 31, an employee could not work on non-firm projects
25 in the office or use office resources. While there was no policy
prohibiting moonlighting, any secondary employment could not be
26
detrimental to an employee’s performance or conflict with any
27 other company policy. To the extent that an employee engaged in
secondary work, the employee was prohibited from doing it at the
28 Hablinski office.
3
1 WHA gave Debtor access to the firm’s project design
2 software, AutoCADD, and WHA’s servers. Because Debtor had access
3 to WHA’s servers, Debtor also had access to WHA’s company files,
4 including its computer design library files (“Design Library”).
5 The Design Library provided its users with a resource that:
6 (1) could help identify for clients a variety of certain design
7 styles and characteristics, (2) had books on a variety of styles
8 of architecture, and (3) contained AutoCADD proprietary files,
9 drawings, hard copy drawings, and designs from WHA’s previous
10 projects. WHA considers the Design Library to be an internal
11 document that is not available to anyone outside the firm.
12 Indeed, William Hablinski testified that the Design Library was a
13 trade secret because its contents were not known to competitors,
14 and would be of economic value to WHA’s competitors were they
15 known.
16 Among other projects,4 Debtor was assigned to the Unity
17 Family Trust project for the Sands family. The client was fairly
18 demanding, required a lot of attention, and was responsible for
19 making changes requiring the Unity Family Trust project to grow
20 from what was a 14,000 square foot house to the 20,000 square
21 foot house it came to be. Under WHA’s project identification
22 system, WHA denominated the Unity Family Trust project as project
23 number 9930. This meant that it was the 30th project of the year
24 1999.
25
4
Debtor testified that in addition to the Unity Family trust
26
Project he worked on the 77 Beverly Park project, “Lot 58 Beverly
27 Park project, the Sycamore project, 0031 Cabana, a copy of the
Westbury House, [and] two projects in San Marino along with other
28 smaller projects.” Arbitration Award (Sept. 7, 2010) at 25.
4
1 2. Marilyn Drive House.
2 One month after WHA hired Debtor in May 2000, Debtor
3 contacted the Elihus seeking a profit sharing arrangement on any
4 design projects the Elihus might send him. On January 1, 2001,
5 one of the Elihus asked Debtor to submit a proposal to build the
6 Marilyn Drive house. On March 1, 2001, Debtor submitted a
7 proposal and was selected to do the design. In a letter to the
8 Elihus, Debtor wrote, “I see this project as a 12,500 square foot
9 high-end Tuscany Villa in Beverly Hills.” Arbitration Award
10 (Sept. 7, 2010) at 38. Over seven to eight months, Debtor spent
11 approximately 850 hours on the Marilyn Drive house. Debtor
12 testified that without access to the WHA library, he would have
13 spent an additional 50 to 100 hours.
14 In April 2003, WHA became aware that Debtor was involved in
15 another project. Apparently, Debtor’s immediate supervisor,
16 David Michael Hogan, along with another WHA employee, discovered
17 the “Marilyn Way house” when they were on their way to showrooms
18 in nearby Hollywood. Mr. Hogan testified that the Marilyn Way
19 house was strikingly similar to that of the Unity Family Trust
20 project. After subsequently obtaining a permitted set of
21 drawings from the city of Beverly Hills, Mr. Hogan noted a number
22 of similarities. Among them were: (1) the copyright statement
23 which was identical to the WHA copyright statement; (2) the
24 project used the same title sheet WHA uses; (3) the Unity Family
25 Trust label which is unique to the Unity Family Trust; and (4) a
26 reference to another WHA project that WHA included on the Sands
27 project designs so builders could see the qualifications detail
28 that WHA required. The Marilyn Way house featured a number of
5
1 design elements that were essentially the same as used on the
2 Sands project, in addition to design elements taken from other
3 WHA projects. The Marilyn Way house drawings indicated that
4 Debtor authored the project.
5 Following WHA’s discovery of the Marilyn Way house, and the
6 similarities it shared with the Unity Family Trust Project, WHA
7 asked all of the employees to bring their personal laptop
8 computers into work. WHA told its employees that they wanted to
9 update their employees’ computers. Debtor complied, and it was
10 then that WHA searched his hard drive to find, among other
11 things, the following items: (1) the same directory structure
12 that the WHA firm used to organize its library, (2) job numbers
13 that matched the WHA job numbers, (3) twenty to thirty projects
14 that WHA had completed years earlier, and (4) certain design
15 features of the Sands project. WHA also discovered time sheets
16 on Debtor’s hard drive indicating that Debtor was spending
17 significant amounts of time on the Marilyn Way house along with
18 other non-WHA projects. Indeed one of WHA’s partners concluded
19 that the “time sheets reflected that [Debtor was either] not
20 sleeping or was superhuman.”
21 Debtor admitted that he downloaded certain software and
22 files to facilitate his working on WHA projects from his home.
23 Apparently, WHA did allow its employees to do work at home with
24 permission, but that would not justify the scope of projects
25 Debtor had on his hard drive – Debtor had no prior association
26 with most of them. Further, employees were not permitted to keep
27 designs on their computers.
28
6
1 3. WHA’s Termination of Debtor.
2 After concluding that Debtor had violated several of WHA’s
3 Employee Handbook policies, including those dealing with
4 conflicts of interest, secondary employment, and confidentiality,
5 WHA terminated him. William Hablinski testified that regardless
6 of the fact that the Employee Handbook allowed an employee to opt
7 for arbitration over litigation, Mr. Hablinski wanted to file a
8 lawsuit against Debtor. Mr. Hablinski further testified that he
9 wanted to go public with his claims against Debtor. Apparently,
10 when Debtor’s supervisors at WHA terminated him, one of WHA’s
11 partners reassured him that WHA was “going to keep it private and
12 won’t tell anyone if you want to look for a job.” Arbitration
13 Award (Sept. 7, 2010) at 28:15-16.
14 Following Debtor’s termination, the police contacted him,
15 though ultimately no criminal complaint was filed; WHA, however,
16 filed a complaint with the California State Architectural Board;
17 and the facts surrounding Debtor’s termination were featured in
18 the press.
19 4. The State Court Proceedings.
20 On June 18, 2003, WHA filed a lawsuit against Debtor for
21 tortious interference with contract, trespass to chattels,
22 conversion, misappropriation of trade secrets, and negligent
23 misrepresentation, among other claims, in the Los Angeles
24 Superior Court (the “State Court Proceeding”). All of the
25 participating parties were represented by counsel. On August 20,
26 2003, Debtor filed a motion to compel arbitration. On
27 September 20, 2003, the State Court granted the motion,
28 dismissing the State Court Proceeding with prejudice. On appeal,
7
1 the California Court of Appeals ruled that notwithstanding the
2 dismissal with prejudice, the State Court could later confirm any
3 arbitration award issued from the private contractual
4 arbitration.
5 a. The Arbitration.
6 The arbitration hearing commenced on December 16, 2008
7 (stayed later that same day due to Debtor’s filing of bankruptcy)
8 and continued for several sessions until final submission in late
9 July 30, 2010.5 The case was heard as a binding arbitration by
10 the Hon. Robert W. Thomas, retired Judge of the Los Angeles
11 Superior Court (the “Arbitrator”). WHA sought relief for
12 thirteen causes of action which included: conversion, trespass to
13 chattels, unjust enrichment, promissory estoppel,
14 misappropriation of trade secrets, unfair competition, common law
15 unfair competition, breach of confidential relationship, false
16 promise (fraud), and negligent misrepresentation. On August 23,
17 2010, the Arbitrator issued his fifty-five-page Arbitration Award
18 in favor of the Appellees. In doing so, the Arbitrator made
19 extensive factual findings and conclusions of law, including the
20 following:
21 ...[Debtor] took computer drawings from the
Unity Family Trust (Sands) plans and used them
22 on the Elihu Marilyn Drive house. The nature,
amount and legal importance of what was copied
23 and used was disputed. It is found that the
Unity Trust files were copied onto [Debtor’s]
24 personal files.
25
5
On April 16, 2009, Appellants filed an adversary complaint
26
against Debtor seeking a judgment of nondischargeability under
27 Sections 523(a)(2) and (a)(4). On May 4, 2009, the bankruptcy
court granted WHA’s motion for relief from the automatic stay to
28 continue the Arbitration.
8
1 Arbitration Award(Sept. 7, 2010) at 47:14-17.
2 * * * * *
3 [Debtor] took documents from more than just
the Sands project. ...[Debtor] also took
4 aspects of WHA computer files for a number of
other residential projects as well as portions
5 of the computer detail library. [Debtor] even
had plans on his computer for projects that he
6 did not ever work on...[totaling] over thirty
WHA projects on [Debtor’s] personal computer.
7
8 Id. at 47:19-25.
9 * * * * *
10 [Debtor’s] actions constituted a taking of WHA
property and converting it to his own use.
11 This property consisted of AutoCadd files,
drawings, design library elements, hard copy
12 drawings and designs.... this conduct was a
Breach of Fiduciary Duty [Debtor] owed to his
13 employer FHA. ...[Debtor’s] actions were also
a Breach of Employment Contract between the
14 parties.
15 Id. at 47:27-32.
16 * * * * *
17 ...[Debtor’s] actions constitute an improper
download of WHA trade secrets, copyright and
18 other material that clearly belonged to WHA.
This material was used for [Debtor’s]
19 financial benefit. This material was intended
to be used on WHA projects, not the Marilyn
20 Drive house. This was in conflict with
[Debtor’s] obligations to WHA.
21
22 Id. at 47:34-38.
23 * * * * *
24 ...[Debtor’s] actions constituted fraud. He
broke his Employee Handbook promise to WHA not
25 to unlawfully take and use trade Secret and/or
Design Library material for his personal use
26 and benefit. ...[Debtor] engaged in his own
business activities in conflict with his
27 obligations to WHA.
28 Id. at 47-48.
9
1 * * * * *
2 ...WHA employees were not to use the [Design
Library] for their own purposes. ...The Design
3 Library itself can qualify as a trade secret.
This [Design Library] was found to have been
4 misappropriated by [Debtor].
5 Id. at 49:17-20.
6 * * * * *
7 ...[Debtor] violated the Confidentiality
policy in the Employee Handbook by using Unity
8 Family Trust material on the Elihu project.
The Sands project was a confidential WHA
9 project.
10 Id. at 50:12-14.
11 * * * * *
12 ...[WHA’s] belief that [Debtor] was in a
conspiracy with the Elihu group as his
13 partners was unsubstantiated. The evidence of
a joint venture was insufficient. There was
14 no direct evidence presented at the
Arbitration to support this theory.
15
16 Id. at 50:17-20.
17 * * * * *
18 [WHA directed] that a Superior Court Complaint
be filed, [and that the State Court Case]
19 received publicity. [Doing so] was improper
and a violation of [WHA’s] own rules....
20
21 Id. at 53:9-12.
22 Within the Arbitrator’s discussion of damages, he pointed to
23 several possible bases for WHA’s damages. Those included the
24 following:
25 While the Arbitrator has found that [Debtor]
is liable for damages to WHA for his actions,
26 placing a value on them is difficult. There
is no precise measurement available.
27
28 Id. at 50:23-25.
10
1 * * * * *
2 [While] Mr. Hablinski testified that [Debtor]
caused him to spend “enormous” amounts of
3 money on legal fees [valued in the range of
$1.6 - $3 million]...[and Debtor’s actions]
4 caused WHA reputation damage[,] [t]here is no
estimation of value put on that statement.
5 The Arbitrator believes that the situation did
cause reputation damage to WHA.
6
7 Id. at 50:28-32.
8 * * * * *
9 WHA states that for Conversion, the measure of
recovery is the value of the converted
10 property plus a “fair compensation for time
and money properly expended in pursuit of the
11 property.” [WHA said] the value of the
converted property was in excess of $600,000.
12
13 Id. at 51.
14 * * * * *
15 WHA [claims that it] has incurred costs and
expenses in recovering its stolen property in
16 the amount of $410,000 [including $30,000 in
forensic expert fees and $380,000 in legal
17 fees].
18 Id. at 51:25-28.
19 * * * * *
20 [WHA seeks] between $800,000 and $1.2 million
for loss of contracts [because as a result of
21 Debtor’s actions, the Sands stopped referring
clients].6
22
23 Id. at 51:30-32.
24 Finally, the Arbitrator awarded damages as follows:
25
6
The Arbitrator found that “losing referrals from Fred Sands
26
has value. It is impossible to state just how much...What is
27 known is that Mr. Sands would not refer anyone to WHA after the
Elihu Marilyn Drive house was discovered.” Arbitration Award
28 (Sept. 7, 2010) at 63:36-40.
11
1 [T]he full value of the Claimant WHA [sic]
claims against [Debtor are] $950,000 which
2 includes the $50,000 unjust enrichment
amount. A total punitive damage award of
3 $100,000 will also be awarded on Fraud and
Conversion Causes of Action.7
4
5 Id. at 52:24-25.
6 The recovery to be awarded Claimant WHA under
all remaining Causes of Action are subsumed
7 in a single legal theory which encompasses
Fraud. The same give rise to the finding in
8 favor of [WHA] and against [Debtor] on all
theories.
9
10 Id. at 52:27-29.
11 * * * * *
12 [$100,000 to Debtor for his] Emotional
Distress Claim].
13
14 Id. at 54:6-7.
15 The Arbitrator then netted the offsetting awards, granting WHA
16 a total award of $950,000. Finally, the Arbitrator added that he
17 did “not intend to entertain any request for additional attorney’s
18 fees from either side...the Arbitrator requires submission of
19 authority for the award of any additional fees.” Id. at 55:4-7.
20 b. Confirming The Arbitration Award.
21 On November 18, 2010, the California Superior Court granted
22 WHA’s petition to confirm the arbitration award against Debtor, and
23 a Judgment issued in conformity with the arbitration award as
24 follows:
25
26 7
The Arbitrator earlier explained that the punitive damages
27 award was measured by “$50,000 for the Fraud Cause of Action and
$50,000 for the Conversion Cause of Action.” Arbitration Award
28 (Sept. 7, 2010) at 63:22-23.
12
1 JUDGMENT BE ENTERED IN FAVOR OF PETITIONER,
William Hablinski Architecture, and against
2 respondent, Mehren Shahverdi, in the amount of
Nine Hundred and Fifty Thousand Dollars
3 ($950,000.00), plus
4 (a) Pre-judgment interest in the amount
of $14,314.85, calculated at a rate
5 of 10% per annum (260.27 per day)
from August 23, 2010 to October 18,
6 2010;
7 (b) Post-judgment interest at a legal
rate of 10% per annum from the date
8 the judgment is entered until the
judgment is paid in full; and
9
(c) Costs of suit.
10
11 California Superior Court Confirmation of Arbitration Award
12 (Nov. 18, 2010) at 1-2.
13 No appeal was taken, and the time to appeal the state court
14 Judgment against Debtor has passed.
15 5. Debtor’s Bankruptcy Case.
16 On December 16, 2008, Debtor filed a Chapter 13 bankruptcy
17 petition. On April 16, 2009, WHA filed an adversary complaint
18 against Debtor seeking a judgment of nondischargeability under
19 Sections 523(a)(2) and (a)(4). On May 4, 2009, the bankruptcy
20 court granted WHA’s motion for relief from the automatic stay to
21 continue the Arbitration. Following the conclusion of the
22 Arbitration proceedings, on March 19, 2011, WHA filed its Motion
23 for Summary Judgment against Debtor based on WHA’s
24 Sections 523(a)(2) and (a)(4) claims.
25 On July 6, 2011, the bankruptcy court held a hearing on
26 Appellant’s Motion for Summary Judgment. During that hearing the
27 bankruptcy court indicated that it was prepared to find that the
28 Arbitration Award was issue preclusive as to Appellee’s
13
1 Section 523(a)(4) embezzlement claim. However, the bankruptcy
2 court also had reservations about finding that the Arbitration
3 Award was issue preclusive as to both the Appellee’s
4 Section 523(a)(2) fraud claim and the Arbitral Award of Damages.
5 The Section 523(a)(2) claim troubled the bankruptcy court
6 because, as a matter of California law, fraud is a broad concept,
7 whereas under Section 523(a)(2) fraud “is a very narrow, very
8 clearly defined cause of action.” Tr. of Oral Arg. (Nov. 18,
9 2010) at 8:19-22. The bankruptcy court emphasized that while
10 fraud under Section 523(a)(2) requires a misrepresentation and
11 then a reliance on that misrepresentation, the Arbitrator’s
12 findings did not appear to anywhere identify that Debtor actually
13 represented to WHA that by signing the Employment Agreement, “I’m
14 not going to take these secret designs but I’m really planning on
15 doing it....” Id. at 16:12-17.
16 In response, Debtor’s counsel sought to distinguish the
17 facts the Arbitrator found with respect to the elements of
18 embezzlement under Section 523(a)(4) from those of fraud under
19 Section 523(a)(2). He did this on the basis of the Arbitrator’s
20 lack of a finding that Debtor knowingly misrepresented his
21 intentions respecting use of the Design Library when Debtor
22 signed the Employment Agreement. The problem with the “ongoing
23 misrepresentation” theory, he argued, was that such a theory
24 failed to distinguish between Debtor’s broken promise and
25 Debtor’s false promise:
26 “because any time anybody has made a promise,
if every time they show up, it’s a restating
27 of that promise and they later develop the
intent to do what they shouldn’t be doing, its
28 going to be fraud, and there’s...no such thing
14
1 as just a straight broken promise. It’s
always going to be fraud, and we don’t have
2 that under the law....”
3 (Id. at 18-19).
4 The bankruptcy court determined that Debtor had knowingly
5 engaged in deceptive conduct at the time he signed his employment
6 agreement based on two facts: (1) at the time he signed his
7 employment agreement, he had already been in contact with the
8 Elihus with the hope of getting a contract to build a “high-end
9 Tuscany villa,”8 and (2) it could easily be inferred that the
10 arbitrator found that Debtor engaged in deceptive conduct when he
11 violated his employment agreement by copying WHA’s files into his
12 personal computer and used them for his benefit. Ultimately, the
13 bankruptcy court found that the Arbitration Award was issue
14 preclusive as to WHA’s Section 523(a)(2) fraud claim.
15 During the July 6, 2012, hearing on WHA’s Motion for Summary
16 Judgment, the bankruptcy court also indicated that it was having
17
8
Of course this does not align with either the testimony or
18 the findings in the Arbitration Award. For example, Debtor
19 testified that while he was hired in May 2000, he contacted the
Elihus in June 2000, seeking a profit sharing arrangement on any
20 design projects they might send him. Debtor further testified
that it was not until March 1, 2001, that Debtor submitted a
21 proposal on the Marilyn Drive house and that he stated that he
saw the project as a “high-end Tuscany villa.” Moreover, the
22
Arbitrator specifically found that:
23
[WHA’s] belief that [Debtor] was in a
24 conspiracy with the Elihu group as his
partners was unsubstantiated. The evidence of
25 a joint venture was insufficient. There was
26 no direct evidence presented at the
Arbitration to support this theory.
27
Arbitration Award (Sept. 07, 2010) at 62:17-20 (emphasis
28 added).
15
1 significant trouble finding that the Arbitration Award had issue
2 preclusive effect as to damages. The bankruptcy court stated
3 that “whatever the arbitrator found were the damages, that’s it.
4 He doesn’t have to explain how he broke it down.” Tr. of Oral
5 Arg. (Nov. 18, 2010) at 10:18-20. Further, the bankruptcy court
6 emphasized that:
7 I don’t know if it’s clear or not for issue
preclusion in that what is this $950,000. We
8 know that $50,000 of it is unjust enrichment.
Is the rest the fees he didn’t collect from
9 Sands or the value of the trade secrets or
legal fees and expert fees Hablinski spent
10 chasing him down? Where does it come from?
11 Id. at 10:4-9. Finally, the bankruptcy court added that “what
12 was that amount based on? How does he get to that number?” Id.13 at 6:23-24.
14 In response, WHA stated: “Well, obviously, the...arbitrator
15 wasn’t clear enough.” Id. at 10:10-11. However, later in its
16 Supplemental Brief on Damages, WHA argued that the entire damages
17 amount constituted actual damages due to embezzlement based on
18 the fact that:
19 [T]he arbitrator found that the full value of
the [WHA] claims against [Debtor] to be
20 $950,000 which includes the $50,000 unjust
enrichment amount.... The recovery awarded
21 [WHA] under all remaining Causes of Action are
subsumed in a single legal theory which
22 encompasses Fraud. The same facts giving rise
to the finding in favor of [WHA] and against
23 [Debtor] on all theories.
24 Plaintiff’s Supplemental Brief on Damages (Aug. 17, 2011) at
25 2:9-14 (quotations and citations omitted). WHA essentially
26 reasoned that the “single theory” was embezzlement which
27 “subsumed” fraud.
28
16
1 In contrast, Debtor argued that one of the problems with the
2 causes of action before the Arbitrator was that one of those
3 causes was for negligent misrepresentation which could also be
4 construed as fraud. Later in his Supplemental Brief on Damages,
5 Debtor emphasized that the Arbitrator failed to specify his
6 measure of damages allocation based on each of WHA’s causes of
7 action. On this basis, Debtor argued that it was therefore
8 impossible to determine that amount of damages which would fall
9 within the realm of nondischargeability.
10 Ultimately, the bankruptcy court granted summary judgment in
11 favor of WHA on the basis of the Arbitration Award’s finding of
12 damages. After briefly reviewing the California Uniform Trade
13 Secrets Act’s damages provisions as a basis for awarding summary
14 judgment in favor of WHA the bankruptcy court stated:
15 While the basis for the arbitration award was
detailed, the damages awarded for each cause
16 of action were combined into one award on all
causes of action. The arbitrator found “the
17 full value of the Claimant WHA claims...to be
$950,000 which includes the $50,000 unjust
18 enrichment amount.” As the amount for unjust
enrichment is dischargeable, that amount will
19 be deducted from the total award on the
dischargeability action, reducing WHA’s award
20 to $900,000. The arbitration award also
stated, “A total punitive damage award of
21 $100,000 will also be awarded on the Fraud and
Conversion Causes of Action.”
22
...The $950,000 award already included WHA’s
23 attorney’s fees, so nothing further will be
awarded for fees.
24
Memorandum of Decision (Apr. 24, 2012) at 12-13. Thus, the
25
bankruptcy court found that $900,000 was nondischargeable.
26
Debtor timely filed his appeal.
27
28
17
1 JURISDICTION
2 The bankruptcy court had jurisdiction pursuant to 28 U.S.C.
3 §§ 1334 and 157(b)(2)(I). We have jurisdiction under 28 U.S.C.
4 § 158(a)(1).
5 ISSUES
6 1. Did the bankruptcy court commit reversible error when it
7 found that the $900,000 of the Arbitration Award’s lump sum
8 damages against Debtor was issue preclusive as to
9 nondischargeability?
10 2. Did the bankruptcy court commit reversible error when it
11 found the measure of damages for the misappropriation of a
12 trade secret includes the value of the property
13 misappropriated, where the Plaintiff was never deprived of
14 the use or title of the property?9
15 STANDARDS OF REVIEW
16 We review de novo the bankruptcy court’s decision to grant
17 summary judgment. Boyajian v. New Falls Corp. (In re Boyajian),
18 564 F.3d 1088, 1090 (9th Cir. 2009); Lopez v. Emergency Serv.
19 Restoration, Inc. (In re Lopez), 367 B.R. 99, 103 (9th Cir. BAP
20 2007). Viewing the evidence in the light most favorable to the
21 non-moving party (i.e., Debtor), we determine whether the
22 bankruptcy court correctly found that there are no genuine issues
23 of material fact and that the moving party (i.e., WHA) is
24 entitled to judgment as a matter of law. Jesinger v. Nev. Fed.
25 Credit Union, 24 F.3d 1127, 1130 (9th Cir. 1994); Gertsch v.
26
27
9
Because we resolve this appeal entirely under the first
28 issue, we decline to reach this second issue on appeal.
18
1 Johnson & Johnson (In re Gertsch), 237 B.R. 160, 165 (9th Cir.
2 BAP 1999). We review the bankruptcy court's legal conclusions
3 de novo and its factual findings for clear error. Wolfe v.
4 Jacobson (In re Jacobson), 676 F.3d 1193, 1198 (9th Cir. 2012).
5 The availability of issue preclusion is a question of law
6 the BAP reviews de novo. In re Jacobson, 676 F.3d at 1198(citing
7 Dias v. Elique, 436 F.3d 1125, 1128 (9th Cir. 2006)). If issue
8 preclusion is available, the decision to apply it is reviewed for
9 abuse of discretion. Dias v. Elique, 436 F.3d 1125, 1128 (9th
10 Cir. 2006).
11 When state preclusion law controls, such discretion is
12 exercised in accordance with applicable state law. Gayden v.
13 Nourbakhsh (In re Nourbakhsh), 67 F.3d 798, 800-01 (9th Cir.
14 1995). A bankruptcy court abuses its discretion when it applies
15 the incorrect legal rule or its application of the correct legal
16 rule is “(1) illogical, (2) implausible, or (3) without support
17 in inferences that may be drawn from the facts in the record.”
18 United States v. Loew, 593 F.3d 1136, 1139 (9th Cir. 2010)
19 (quoting United States v. Hinkson, 585 F.3d 1247, 1261–62 (9th
20 Cir. 2009)(en banc)) (internal quotation marks omitted).
21 To the extent that questions of fact cannot be separated
22 from questions of law, we review these questions as mixed
23 questions of law and fact, applying a de novo standard. Ratanasen
24 v. Cal. Dep't of Health Servs., 11 F.3d 1467, 1469 (9th Cir.
25 1993). A mixed question of law and fact occurs when the
26 historical facts are established, the rule of law is undisputed,
27 and the issue is whether the facts satisfy the legal rule.
28 Pullman–Standard v. Swint, 456 U.S. 273, 289 n.19 (1982).
19
1 DISCUSSION
2 For the reasons set forth below, we reverse the bankruptcy
3 court’s entry of summary judgment in favor of the WHA, and remand
4 with instructions.
5 A. The Record.
6 Our efforts to substantively review this case are hampered
7 by the failure of both parties to fully comply with the Federal
8 Rules of Appellate Procedure and the Bankruptcy Appellate Panel
9 Rules. Fed. R. App. P. 10(b)(2) provides that,
10 [i]f the appellant intends to urge on appeal
that a finding or conclusion is unsupported
11 by the evidence or is contrary to the
evidence, the appellant shall include in the
12 record a transcript of all evidence relevant
to such finding or conclusion.
13
14 (Emphasis added).
15 Stated simply, an appellant has the burden of ensuring the
16 record provided to the Panel is adequate to support the Panel’s
17 consideration and determination of the issues presented by the
18 appeal.10 Burkhart v. Fed. Deposit Ins. Corp. (In re Burkhart),
19 84 B.R. 658, 660 (9th Cir. BAP 1988) (responsibility to file an
20 adequate record rests with an appellant); Torez v. Torez
21 (In re Torrez), 63 B.R. 751, 753 (9th Cir. BAP 1986), aff'd
22 827 F.2d 1299 (9th Cir. 1987).
23 As a preliminary matter, it is difficult to determine from
24 the record precisely the number of causes of action that WHA
25 brought before the Arbitrator. In its Memorandum of Decision on
26
10
27 Appellees likewise must ensure that the evidentiary
materials essential to supporting the bankruptcy court’s findings
28 upon which they rely are in the record.
20
1 Summary Judgment, the bankruptcy court indicated that “WHA
2 pursued thirteen causes of action in the arbitration proceedings:
3 conversion, trespass to chattels, unjust enrichment, promissory
4 estoppel, misappropriation of trade secrets, unfair competition
5 under Business and Professions Code § 17200, common law unfair
6 competition, breach of confidential relationship, false promise
7 (fraud), and negligent misrepresentation.” Memorandum of
8 Decision (Apr, 24, 2012) at 2:13-16 (emphasis added). But this
9 enumeration features only ten of the apparent thirteen causes of
10 action.
11 Debtor’s Opening Brief on appeal is similarly lacking in
12 that while it asserts that “WHA arbitrated claims under
13 13 different causes of action...”, Appellant’s Opening Brief
14 (Aug. 14, 2012) at 4, it cites only to the bankruptcy court’s
15 Memorandum of Decision, which in turn does not cite to the
16 Arbitration Award or any other document in the record. Moreover,
17 a look further back in the record reveals that in Debtor’s
18 Opposition to Motion for Summary Judgment, Debtor asserted that
19 “...all 17 of the claims for relief were considered during a
20 lengthy arbitration.” Opposition (June 8, 2011) at 4:20-22
21 (referencing WHA’s Complaint for Determination of
22 Nondischargeability)(emphasis added).
23 On mere cursory inspection of WHA’s Complaint for
24 Determination of Nondischargeability, we note that it lists
25 seventeen causes of action. However, the last three causes of
26 action are as follows: (15) Exception to Discharge-Fraud
27 [11 U.S.C. Section 523(a)(2)]; (16) Exception to
28 Discharge–Embezzlement [Cal. Penal Code § 508; 11 U.S.C.
21
1 Section 523(a)(4)]; and (17) Petition to Compel the Continuation
2 of the Arbitration. It is difficult to imagine that an
3 arbitrator would “consider” these causes of action, given the
4 bankruptcy court’s exclusive jurisdiction to determine
5 nondischargeability, and the mootness of the cause of action
6 seeking to compel the very arbitration the Arbitrator was
7 considering.
8 WHA sheds very little additional light in that its Reply to
9 Defendant’s Opposition to Motion for Summary Judgment states
10 that:
11 Once the [Bankruptcy] Court granted [WHA]
relief from the automatic stay to pursue
12 arbitration...all [WHA] needed to litigate in
the adversary proceeding was the question of
13 how bankruptcy law would apply to the issues
WHA expected to resolve in the arbitration.
14 And so WHA agreed to dismiss counts 1 through
14, and count 17, in the adversary proceeding
15 - precisely because they would be litigated in
the arbitration, not in the Bankruptcy court.
16
17 Opposition (June 8, 2011) at 3-4. Counts one through fourteen in
18 WHA’s Adversary Complaint track precisely those in WHA’s State
19 Court Proceeding Complaint.
20 Finally, the Arbitration Award does not expressly identify
21 all of the causes of action WHA brought before the Arbitrator.
22 Instead, it lists only ten causes of action – the very same ten
23 causes of action the bankruptcy court enumerated in its
24 Memorandum of Decision. Moreover, the tenth cause of action the
25 Arbitration Award enumerated was the thirteenth cause, Negligent
26 Misrepresentation, in what one may only assume was included in
27 the original complaint before the Arbitrator.
28
22
1 Because the bankruptcy court appears to have found that the
2 arbitrator considered only thirteen causes of action, and because
3 the bankruptcy court enumerated only ten of them, we cannot
4 adequately determine the precise nature of the causes of action
5 the Arbitrator considered when he determined that “all remaining
6 Causes of Action are subsumed in a single legal theory which
7 encompasses Fraud.” Arbitration Award (Sept. 7, 2010) at
8 52:27-28.
9 B. Bankruptcy Court’s Use of Issue Preclusion.
10 Appellant argues the bankruptcy court improperly applied
11 issue preclusion concepts below when it gave deference to the
12 Arbitration Award findings related to the damage calculation.
13 For reasons discussed below, we hold that issue preclusion
14 applies as to the finding of non-dischargeability under
15 Sections 523(a)(2) and (a)(4). We determine, however, that issue
16 preclusion cannot be used to establish the damages allocable to
17 these non-dischargeable claims.
18 The doctrine of issue preclusion applies to dischargeability
19 proceedings under Section 523(a). Grogan v. Garner, 498 U.S.
20 279, 284-85 (1991). Issue preclusion, or collateral estoppel,
21 bars a party from relitigating any issue necessarily included in
22 a prior, final judgment. Malkoskie v. Option One Mortg. Corp.,
23 188 Cal.App.4th 968, 115 Cal.Rptr.3d 821, 825 n.4 (Cal.App. Dist.
24 2010) (citing Rice v. Crow, 81 Cal.App.4th 725, 97 Cal.Rptr.2d
25 110, 116–17 (Cal.App. 2000)). The burden of establishing the
26 doctrine rests on the party asserting it. Ferraro v.
27 Camarlinghi, 161 Cal.App.4th 509, 529, 75 Cal.Rptr.3d 19, 36
28 (Cal.App. 2008)(citing Vella v. Hudgins, 20 Cal.3d 251, 257,
23
1 142 Cal.Rptr. 414, 572 P.2d 28 (1977)). Accord, Lopez v.
2 Emergency Service Restoration (In re Lopez), 367 B.R. 99, 108
3 (9th Cir. BAP 2007).
4 “To meet this burden, the moving party must have pinpointed
5 the exact issues litigated in the prior action and introduced a
6 record revealing the controlling facts. Reasonable doubts about
7 what was decided in the prior action should be resolved against
8 the party seeking to assert preclusion.“ Honkanen v. Hopper
9 (In re Honkanen), 446 B.R. 373, 382 (9th Cir. BAP 2011) (internal
10 citations omitted).
11 When determining the preclusive effect of a state court
12 judgment, we must apply, as a matter of full faith and credit,11
13 that state's issue preclusion principles. In re Nourbakhsh,
14 67 F.3d at 800.
15 Under California law, issue preclusion applies only if all
16 of the following elements have been satisfied:
17 (1) The issue sought to be precluded
must be identical to that decided in
18 the former proceeding;
19 (2) The issue must have been
actually litigated in the former
20 proceeding;
21
22 11
Pursuant to 28 U.S.C. § 1738, “[f]ederal courts must give
23 the same preclusive effect to state court judgments that those
judgments would be given in that state's own courts.” Duarte v.
24 Bardales, 526 F.3d 563, 577 n.4 (9th Cir.), reh’g denied,
530 F.3d 1151 (2008) (quoting Clements v. Airport Auth. of Washoe
25 Cnty., 69 F.3d 321, 326 (9th Cir. 1995)); see also Grogan v.
Garner, 498 U.S. 279, 284 (1991)(“[A] bankruptcy court could
26
properly give collateral estoppel effect to those elements of the
27 claim that are identical to the elements required for discharge
and which were actually litigated and determined in the prior
28 action.”).
24
1 (3) The issue must have been
necessarily decided in the former
2 proceeding;
3 (4) The decision in the former
proceeding must be final and on the
4 merits;
5 (5) The party against whom issue
preclusion is sought must be the
6 same as, or in privity with, the
party to the former proceeding.
7
(6) Whether imposition of issue
8 preclusion in the particular setting
would be fair and consistent with
9 sound public policy.
10
Khaligh v. Hadaegh (In re Khaligh), 338 B.R. 817, 824-25 (9th
11
Cir. BAP 2006), aff’d, 506 F.3d 956 (9th Cir. 2007) (citing
12
Lucido v. Super. Ct., 51 Cal.3d 335, 341-43, 272 Cal.Rptr. 767,
13
795 P.2d 1223, 1225-27 (1990)).
14
Here, four of the elements of issue preclusion are
15
undisputably satisfied: (1) the issues of fraud and embezzlement
16
were actually litigated in the Arbitration, (2) the issues of
17
fraud and embezzlement were necessarily decided in the
18
Arbitration, (3) the parties in the Arbitration and in the
19
nondischargeability action are the same, and (4) the bankruptcy
20
court gave adequate consideration in its finding that the
21
Arbitration met the adjudicatory standards required in order to
22
be fair and consistent with sound public policy.
23
Debtor contends that the damages finding was not on the
24
merits. However, this argument is incorrect. The Ninth Circuit
25
has expressly provided that “[a] final judgment is an order by
26
the court and is classically a decision made on the merits of the
27
case.” Self v. Gen. Motors Corp., 588 F.2d 655, 660 (9th Cir.
28
25
1 1978)(emphasis added). Under California’s statutes, when a
2 California state court confirms an arbitral award, the judgment
3 becomes final. Cal. Civ. Proc. Code § 1287.4; see also Khaligh,
4 338 B.R. at 824.
5 In this case, Debtor compelled arbitration in the first
6 instance, and neither party disputes that the Arbitrator
7 considered all of the available evidence, the parties’ arguments,
8 and the law applicable to the parties’ respective claims. The
9 Arbitration Award is a fifty-five page decision, conducted in an
10 inherently adjudicatory fashion, and, as discussed above, was
11 confirmed in the California Superior Court. Therefore, the
12 decision is final and on the merits.
13 The remaining element in dispute is whether the issue sought
14 to be precluded from litigation in the adversarial proceeding is
15 identical to that decided in the Arbitration Award.
16 1. Identity of issues under Section 523(a)(2)(A)
17 Section 523(a)(2)(A) provides that a discharge does not
18 include any debt for money, property, or services "to the extent
19 obtained by false pretenses, a false representation, or actual
20 fraud...." 11 U.S.C. § 523(a)(2)(A). In order to establish that
21 the debt had been obtained through fraud and is nondischargeable
22 under Section 523(a)(2)(A), the plaintiff must demonstrate that:
23 (1) The debtor made false representations;
24 (2) The debtor knew the representations were
false when he made them;
25
(3) The debtor made the representations with
26 the intent and purpose of deceiving the
creditor;
27
(4) The creditor relied on such
28 representations; and
26
1
(5) The creditor sustained the alleged loss
2 and damage as a proximate result of these
representations.
3
Ghomeshi v. Sabban (In re Sabban), 600 F.3d 1219, 1222 (9th Cir.
4
2010).
5
The elements of fraud under Section 523(a)(2)(A) “‘mirror
6
the elements of common law fraud’ and match those for actual
7
fraud under California law, which requires that the plaintiff
8
show: (1) misrepresentation; (2) knowledge of the falsity of the
9
representation; (3) intent to induce reliance; (4) justifiable
10
reliance; and (5) damages.” Tobin v. Sans Souci Ltd. P'ship
11
(In re Tobin), 258 B.R. 199, 203 (9th Cir. BAP 2001)(quoting
12
Younie v. Gonya (In re Younie), 211 B.R. 367, 373–74 (9th Cir.
13
BAP 1997), aff'd, 163 F.3d 609 (9th Cir. 1998)(table decision)).
14
“The ‘identical issue’ requirement addresses whether
15
‘identical factual allegations’ are at stake in the two
16
proceedings, not whether the ultimate issues or dispositions are
17
the same.” Lucido, 51 Cal.3d at 342, 795 P.2d at 1225 (citing
18
People v. Sims, 32 Cal.3d 468, 485, 186 Cal.Rptr. 77, 651 P.2d
19321 (1982)). To determine whether issues in prior and subsequent
20
proceedings are identical, for purposes of applying issue
21
preclusion, a court examines whether the requirements of proving
22
the issue at stake in the subsequent proceeding “closely mirror”
23
requirements of proving issues presented in the prior action.
24
In re Nourbakhsh, 162 B.R. at 844; Stevens v. Briles
25
(In re Briles), 228 B.R. 462, 466 (Bankr. S.D. Cal. 1998), aff’d,
26
16 Fed.Appx. 698 (9th Cir. 2001)(unpublished).
27
28
27
1 Here, the bankruptcy court found that WHA sustained damage
2 resulting from its reliance that Debtor would follow the
3 provisions in the Employee Handbook. However, the amount of
4 damages the bankruptcy court found was limited only to the
5 Arbitration Award of “punitive damages for fraud because [the
6 Arbitrator] found that [Debtor’s] actions damaged [WHA’s]
7 reputation.” Memorandum of Decision (Apr. 24, 2012) at 7:20-21.
8 The bankruptcy court did not make any additional findings of fact
9 suggesting the amount of damages, if any, the Arbitration Award
10 allocated to fraud.
11 As discussed above, the Arbitration Award of punitive
12 damages for fraud was limited to $50,000. This suggests that the
13 remaining $850,000 in damages would have to flow from
14 nondischargeability under Subsection 523(a)(4) for embezzlement.
15 2. Identity of Issues under 523(a)(4)
16 As the bankruptcy court noted, federal law and not state law
17 controls the definition of embezzlement for purposes of
18 Section 523(a)(4). In re Wada, 210 B.R. 572, 576 (9th Cir. BAP
19 1997); see also Fraternal Order of Eagles, Aerie 1490 v. Mercer
20 (In re Mercer), 169 B.R. 694, 697 (Bankr. W.D. Wash. 1994);
21 In re Schultz, 46 B.R. 880, 890 (Bankr. D.Nev. 1985). Thus,
22 under Section 523(a)(4), embezzlement requires three elements:
23 “(1) property rightfully in the possession of a nonowner; (2) a
24 nonowner's appropriation of the property to a use other than
25 which [it] was entrusted; and (3) circumstances indicating
26 fraud.” In re Littleton, 942 F.2d 551, 555 (9th Cir. 1991).
27 The bankruptcy court found that the Arbitration Award met
28 all of the facts establishing the elements of embezzlement under
28
1 Section 523(a)(4). Specifically, the bankruptcy court found that
2 “[t]he facts establishing elements of conversion and embezzlement
3 were raised as the second and seventeenth causes of action in the
4 adversary complaint.” Memorandum of Decision (Apr. 24, 2012) at
5 11:20-21. As discussed above, the seventeenth cause of action in
6 the Adversary Complaint was a “Petition To Compel The
7 Continuation Of The Arbitration” (“Seventeenth Cause of Action”).
8 Adversary Complaint (Apr. 16, 2009) at 38. Contrary to the
9 bankruptcy court’s finding, we can find no facts in the
10 Seventeenth Cause of Action establishing any of the elements of
11 embezzlement.
12 The second cause of action was for “Conversion.” Id. at 22.
13 However, “conversion” does not by itself require any particular
14 mens rea, rather it is merely a wrongful taking.12 While in the
15 instant case, the taking was a breach of the duty that Debtor
16 owed to his employer, conversion by itself does not provide an
17 adequate basis for finding the mens rea necessary to support
18 embezzlement under Section 523(a)(4). Upon a careful review of
19 the Arbitration Award, we cannot locate the Arbitrator’s use of
20 the term embezzlement. While the Arbitration Award’s findings of
21
22 12
See Oakdale Vill. Grp. v. Fong, 43 Cal. App. 4th 539,
23 543-44, 50 Cal. Rptr. 2d 810, 812 (1996)(stating “Conversion is
the wrongful exercise of dominion over the property of another.
24 The elements of a conversion are the plaintiff's ownership or
right to possession of the property at the time of the
25 conversion; the defendant's conversion by a wrongful act or
disposition of property rights; and damages. It is not necessary
26
that there be a manual taking of the property; it is only
27 necessary to show an assumption of control or ownership over the
property, or that the alleged converter has applied the property
28 to his own use.”).
29
1 punitive damages and fraud might be sufficient to support a
2 finding of embezzlement under Section 523(a)(4), the bankruptcy
3 court’s basis for finding embezzlement requires further findings
4 tying the necessary mens rea to the elements of conversion.
5 Moreover, as a measure of the damages of the property Debtor
6 embezzled, the bankruptcy court found only that the
7 “...arbitrator awarded punitive damages based on these causes of
8 actions.” Memorandum of Decision (Apr. 24, 2012) at 11:27-28
9 (emphasis added).13 Thus, the only specific finding the
10 bankruptcy court made with respect to damages under
11 Section 523(a)(4) flowed from the punitive damages award. As
12 discussed previously, the punitive damages award featured $50,000
13 for fraud and $50,000 for conversion.
14 Thus, the bankruptcy court specifically allocated $100,000
15 in punitive damages as between its finding of non-
16 dischargeability under Sections 523(a)(2) and (a)(4). However,
17 $800,000 of the damages the bankruptcy court found
18 nondischargeable still remains without any identifiable
19
20
13
21 Determining what “these causes of actions” were is
difficult, if not impossible. This is because earlier in the
22 same paragraph the bankruptcy court states that: “The facts
establishing elements of conversion and embezzlement were raised
23 as the second and seventeenth causes of action in the adversary
24 proceeding complaint.” Id. at 11:20-22. However, reference back
to the Adversary Complaint shows that while the second cause of
25 action was for conversion, the seventeenth cause of action was a
“Petition to Compel the Continuation of the Arbitration.” Id. at
26 38. Thus, the bankruptcy court’s reference to “these causes of
action” refers to at least one cause of action having nothing to
27 do with embezzlement.
28
30
1 allocation to specific factual issues giving rise to nondischargeability.
2 3. The bankruptcy court committed reversible error when it
found that the $900,000 of the Arbitration Award’s lump
3 sum damages against Debtor was issue preclusive as to
nondischargeability.
4
5 The sufficiency of a court’s factual findings are assessed
6 under Rule 52(a). Icicle Seafoods, Inc. v. Worthington, 475 U.S.
7 709, 713 (1986). The ultimate test of the adequacy of a trial
8 judge’s findings of fact under FRCP 52(a) is whether they are
9 explicit enough to give the appellate court a clear understanding
10 of the basis of the trial court's decision, and to enable it to
11 determine the ground on which the trial court reached its
12 decision. Alpha Distrib. Co. of Cal., Inc. v. Jack Daniel
13 Distillery, 454 F.2d 442, 453 (9th Cir. 1972). Even when a
14 bankruptcy court does not make formal findings, however, the BAP
15 may conduct appellate review “if a complete understanding of the
16 issues may be obtained from the record as a whole or if there can
17 be no genuine dispute about omitted findings.” Veal v. Am. Home
18 Mortg. Serv., Inc. (In re Veal), 450 B.R. 897, 919-20 (9th Cir.
19 BAP 2011) (quoting Gardenhire v. Internal Revenue Serv.
20 (In re Gardenhire), 220 B.R. 376, 380 (9th Cir. BAP 1998), rev'd
21 on other grounds, 209 F.3d 1145 (9th Cir.2000)). However, if
22 after such a review the record lacks a clear basis for the
23 court’s ruling, we must vacate the court’s order and remand for
24 further proceedings. Veal, 450 B.R. at 920 (citing Alpha
25 Distributing, 454 F.2d at 452-53).
26 In Alpha Distributing, the plaintiff alleged that the
27 defendants engaged in efforts to hamper a competitor distributor.
28 Id. at 452-53. However, the district court’s findings of fact
31
1 focused almost entirely on the plaintiff’s breach of contract
2 claim to the virtual exclusion of all but the most peripheral
3 references to the factual issues presented on the antitrust
4 claims. Id. at 453. The district court’s conclusion of law on
5 the antitrust claims found only that the defendants were entitled
6 to judgment on those claims. Id. In reversing the district
7 court, the Court of Appeals reasoned that on the basis of the
8 lack of findings on the antitrust claims, there was “no way of
9 knowing whether the district court’s decision in favor of
10 defendants on those claims was based on resolution of the
11 determinative facts in their favor.” Id.12 We have reviewed the record and nothing there establishes
13 that the bankruptcy court’s finding that $900,000 in damages
14 necessarily flows from factual issues giving rise to
15 nondischargeability. Like the court in Alpha Distributing, the
16 bankruptcy court’s findings focused almost entirely on the fraud
17 and conversion causes of action determined in the Arbitration
18 Award. However, as presented, there were at least two causes of
19 action the Arbitrator identified that are dischargeable: trespass
20 to chattels, and negligent misrepresentation.
21 Illustrative of the bankruptcy court’s error is its
22 dismissal of Jamgotchian v. Slender, 170 Cal. App. 4th 1384, 1400
23 (2009), a case Debtor relied on to distinguish trespass to
24 chattels from conversion. The bankruptcy court chided Debtor for
25 his reliance on the case because it discussed trespass to
26 chattels. Indeed, the bankruptcy court stated that “[a]lthough
27 the case distinguishes trespass to chattels with conversion, a
28 piece of chattel property is not the same as the intellectual
32
1 property (trade secrets) in this case.” Memorandum of Decision
2 (Apr. 24, 2012) at 10:19-23.
3 Thus, the bankruptcy court in its own terms identified a
4 cause of action at issue in the Arbitration, while failing to
5 recognize its significance in identifying the amount of damages
6 allocable to dischargeable debt. The record is consistent with
7 the bankruptcy court’s holding that the Arbitrator combined the
8 trespass to chattel cause with the other causes of action at
9 issue, including fraud and conversion, and then awarded lump sum
10 “damages [] for each cause of action....” Id. at 12:26-27.
11 However, this holding is not adequate to support the entire
12 $900,000 as nondischargeable damages because it fails to
13 disaggregate and distinguish the factual findings which lead to
14 nondischargeable debt from those Arbitrator’s factual findings
15 which lead to dischargeable debt.
16 C. The Bankruptcy Court Abused its Discretion When It Found
Nondischargeability Under the California Uniform Trade
17 Secrets Act.
18 For reasons that are not entirely clear, the bankruptcy
19 court’s damages discussion begins with a reference to the
20 California Uniform Trade Secrets Act (“CUTSA”) Cal. Civ. Code
21 § 3426.3 (West) as an apparently independent cause of action
22 giving rise to nondischargeability. Memorandum of Decision
23 (Apr. 24, 2012) at 12:16-17. This is the first time the CUTSA
24 was mentioned by the bankruptcy court. After giving a brief
25 recitation of the elements of CUTSA, the bankruptcy court
26 concluded the following:
27 While the basis for the arbitration award
was detailed, the damages awarded for each
28 cause of action were combined into one award
33
1 on all causes of action. The arbitrator
found “the full value of the Claimant WHA
2 claims...to be $950,000 which includes the
$50,000 unjust enrichment amount.” As the
3 amount for unjust enrichment is
dischargeable, that amount will be deducted
4 from the total award on the dischargeability
action, reducing WHA’s award to $900,000.
5 The arbitration award also stated, “A total
punitive damage award of $100,000 will also
6 be awarded on the Fraud and Conversion
Causes of Action.”
7
...The $950,000 award already included WHA’s
8 attorney’s fees, so nothing further will be
awarded for fees.
9
10 Id. at 12-13. Thus, it appears that the bankruptcy court found
11 that $900,000 was nondischargeable, although there was no effort
12 made to connect this amount with the nondischargeable claims for
13 relief. In addition, notably absent from this discussion is any
14 reference of CUTSA, the apparent starting point of the damages
15 discussion.
16 Even if the CUTSA references are ignored, however, the
17 bankruptcy court’s analysis provided no connection between its
18 summary judgment analysis and its conclusions of
19 nondischargeability under Sections 523(a)(2) and (a)(4).
20 Moreover, this analysis provide no guidance as to whether the
21 inclusion of attorney’s fees in the damages award flowed only
22 from the arbitrator’s factual findings giving rise to
23 nondischargeable debt. In short, as a reviewing court, we cannot
24 connect the many types of damages discussed (unjust enrichment,
25 conversion, attorney’s fees and the like) to the nondischargeable
26 claims for relief alleged. This requires reversal.
27
28
34
1 CONCLUSION
2 The bankruptcy court’S findings did not adequately support
3 its decision to allocate the damages awarded to WHA to the debts
4 excepted from discharge. We therefore must VACATE the bankruptcy
5 court’s judgment and REMAND this matter with instructions that
6 the bankruptcy court determine the proper allocation of the
7 Arbitrator’s damage award between dischargeable and
8 nondischargeable claims.
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
35