In re: Kamal Zeeb ( 2019 )

FILED
AUG 9 2019
NOT FOR PUBLICATION
SUSAN M. SPRAUL, CLERK
U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT
UNITED STATES BANKRUPTCY APPELLATE PANEL
OF THE NINTH CIRCUIT
In re: BAP No. CC-19-1019-SKuTa
KAMAL ZEEB, Bk. No. 8:13-bk-14883-CB
Debtor. Adv. No. 8:13-ap-01301-CB
KAMAL ZEEB,
Appellant,
v. MEMORANDUM*
SAMUEL FARAH,
Appellee.
Argued and Submitted on July 18, 2019
at Pasadena, California
Filed – August 9, 2019
Appeal from the United States Bankruptcy Court
for the Central District of California
*
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
Honorable Catherine E. Bauer, Bankruptcy Judge, Presiding
Appearances: Andrew Edward Smyth argued for appellant; Jeffrey
Valentine Weber of Briggs and Alexander, APC argued
for appellee.
Before: SPRAKER, KURTZ, and TAYLOR, Bankruptcy Judges.
INTRODUCTION
This is the third time we have considered an appeal arising from the
above-referenced adversary proceeding. We dismissed chapter 71 debtor
Kamal Zeeb’s first appeal as interlocutory because the summary judgment
on appeal only addressed and disposed of creditor Samuel Farah’s
§ 523(a)(6) claim (“Zeeb I”). After our dismissal, the parties stipulated to
dismiss all other claims for relief set forth in Farah’s complaint. In Zeeb’s
second appeal, we vacated the summary judgment in an unpublished
memorandum decision. Zeeb v. Farah (In re Zeeb), BAP No.
CC–15–1012–FKiKu, 2015 WL 6720934 (9th Cir. BAP Nov. 3, 2015) (“Zeeb
II”). We held in Zeeb II that Farah’s state court judgment did not establish
the willfulness and maliciousness required for non-dischargeability under
1
Unless specified otherwise, all chapter and section references are to the
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
§ 523(a)(6).
Zeeb now appeals the bankruptcy court’s judgment after trial
excepting the debt he owes to Farah from discharge under § 523(a)(6). The
two arguments Zeeb raises on appeal have no merit. Zeeb first argues that
the state court jury’s award of zero damages on the conversion cause of
action conclusively established that Farah suffered no damages from the
tortious conduct. We disagree. Though the jury awarded Farah no damages
on his conversion claims, it also found that he had proven all the elements
of conversion, including harm. Moreover, the state court ultimately entered
judgment for Farah on his conversion claims. Given the conflict between
the award of no damages on the one hand, and the finding of harm and
entry of judgment on the conversion claims on the other, issue preclusion
did not prevent the bankruptcy court from determining damages in the
nondischargeability action.
Zeeb’s second argument concerns the sufficiency of the evidence
before the bankruptcy court. He contends that the evidence was
insufficient to support a finding that he willfully injured Farah within the
meaning of § 523(a)(6). Again, we disagree. The trial record, when
combined with the state court jury’s findings regarding Zeeb’s conduct in
misappropriating inventory and cash from Farah’s company, was sufficient
to support the bankruptcy court’s inferences regarding willfulness.
Accordingly, we AFFIRM.
3
FACTS
Farah and Zeeb worked together in two businesses: Storm
Distribution, Inc. (“Storm Distribution”) and JSSA Enterprises, Inc.
(“JSSA”). Both businesses concerned the importation and sale of hookahs
and related accessories. Farah managed the sales and accounts, while Zeeb
managed the facilities and employees. Farah claimed Storm Distribution as
his wholly owned business. JSSA was a partnership between Farah, Zeeb,
and Ahmed Shamekh.
When Farah traveled abroad for a vacation in September 2010, he left
Zeeb in charge of all aspects of Storm Distribution. According to Farah,
while he was traveling Zeeb misappropriated the inventory and cash of
both Storm Distribution and JSSA. Farah sued Zeeb and others in the
Superior Court for Orange County, California. Farah’s first amended
complaint stated thirteen causes of action, but only four of the causes of
action are relevant to this appeal. Farah stated two causes of action for
conversion – one pertaining to Storm Distribution and the other to JSSA –
and two corresponding causes of action for breach of contract. All four of
these causes of action relied on the allegations that Zeeb misappropriated
the assets of Storm Distribution and JSSA as the grounds for relief.
In May 2013, the state court held a jury trial on Farah’s first amended
complaint. The jury rendered a special verdict that found, in relevant part,
that Farah and Zeeb entered into a contract pursuant to which Zeeb agreed
4
to oversee Storm Distribution. The jury also found that Zeeb breached that
contract, which caused Farah to suffer $330,514.25 in damages. As for the
conversion cause of action pertaining to Storm Distribution, the jury found
that:
1. Farah had a right to possess Storm Distribution’s inventory and
funds.
2. Zeeb intentionally and substantially interfered with Farah’s property
by taking possession of Storm Distribution’s inventory and funds.
3. Farah did not consent to Zeeb’s taking possession.
4. Farah was harmed thereby.
5. Zeeb’s conduct was a substantial factor in causing Farah’s harm.
6. As a result of that harm, Farah suffered $0 in damages.
7 Zeeb engaged in the conduct with malice, oppression or fraud.
8. Farah was entitled to a punitive damages award of $50,000.
The jury’s breach of contract and conversion findings pertaining to
JSSA were substantially similar to the above-referenced findings, except
that the jury awarded $101,091.45 in compensatory damages for the breach
of contract pertaining to JSSA.
Zeeb filed his chapter 7 case in June 2013. In August 2013, the
bankruptcy court granted Farah relief from stay to enter judgment in the
state court action. Notwithstanding the jury verdict awarding punitive
damages, the state court entered a minute order striking the jury’s punitive
5
damages awards. The state court reasoned, in part, that the jury had not
awarded Farah any tort damages. As the state court explained:
The Special Verdict and the evidence do not support an award
for punitive damages. CC 3294(a) provides for punitive
damages “In an action for the breach of an obligation not
arising from contract.” Plaintiff's success on the breach of
contract action does not support punitive damages. Plaintiff
must prove compensatory tort damages to support [punitive]
damages. Additionally, Plaintiff did not introduce evidence of
defendant's financial condition. See Simon v. San Paolo U.S.
Holding Co., Inc. (2009) 35 Cal. 4th 1159, 1185. Without this
evidence the jury cannot calculate a proper award of punitive
damages.
Zeeb II, 2015 WL 6720934, at *2 (quoting Minute Order, Orange Cnty. Sup.
Ct. Case No. 30-2011-00529564-CU-NP-CJC (Sept. 9, 2013)).
Because the jury verdict did not award Farah any compensatory tort
damages, the state court’s original judgment entered in September 2013
provided that judgment was not awarded on the conversion causes of
action. The state court originally entered judgment against Farah and in
favor of Zeeb on the conversion claims.
On September 16, 2013, Farah commenced his adversary proceeding
seeking, among other things, to except the judgment debts from discharge
under § 523(a)(6). Farah also filed a motion in the state court to amend the
underlying judgment to recognize that he had prevailed on the conversion
claims. The state court agreed with Farah. In February 2014, the state court
6
entered a minute order granting Farah’s motion to amend the judgment.
The state court held that Farah was the “prevailing party” on both
conversion causes of action even though the jury verdict and the judgment
awarded him $0 in damages on those causes of action.
The state court entered its amended judgment in February 2014. The
amended judgment provided in relevant part as follows:
1. On the cause of action for breach of contract regarding Storm
Distribution by Samuel Farah against Kamal Zeeb judgment is
awarded in favor of Samuel Farah against Kamal Zeeb in the
amount of $330,514.24[.]
* * *
3. On the cause of action for conversion regarding Storm
Distribution by Samuel Farah against Kamal Zeeb, including a
prayer for punitive damages, judgment is awarded in favor of
Samuel Farah against Kamal Zeeb in the amount of $0.00 in
compensatory damages and $0.00 in punitive damages.
4. On the cause of action for breach of contract regarding JSSA
Enterprises, Inc. by Samuel Farah against Kamal Zeeb and
against Zeeb Brothers, Inc. judgment is awarded in favor of
Samuel Farah jointly and severally against Kamal Zeeb and
against Zeeb Brothers, Inc. in the amount of $101,091.45[.]
* * *
6. On the cause of action for conversion regarding JSSA
Enterprises, Inc. by Samuel Farah against Kamal Zeeb and
against Zeeb Brothers, Inc., including a prayer for punitive
7
damages, judgment is awarded in favor of Samuel Farah jointly
and severally against Kamal Zeeb and against Zeeb Brothers,
Inc. in the amount of $0.00 in compensatory damages and $0.00
in punitive damages.
7. Pursuant to the election of remedies, Samuel Farah has
elected to take the remedies awarded under breach of contract.
The aggregate judgment award to Samuel Farah, therefore, is
$431.605.69, of which the entire amount is enforceable against
Kamal Zeeb and of which $10l,091.45 is enforceable against
Zeeb Brothers, Inc.
In May 2014, Farah moved for summary judgment in the
nondischargeability action. He argued that the state court judgment
conclusively established that Zeeb had willfully and maliciously injured
him within the meaning of § 523(a)(6). The bankruptcy court agreed with
Farah and entered summary judgment on his § 523(a)(6) claim for relief. On
appeal, however, we vacated the summary judgment in favor of Farah. We
held that, as a matter of settled Ninth Circuit law, the preclusive effect of
the state court’s conversion judgment did not establish the requisite mental
state for finding a willful injury under § 523(a)(6). We also held that the
conversion judgment did not establish three of the four elements necessary
to establish a malicious injury. As for the effect of the award of $0 in
conversion damages, we stated:
Mr. Zeeb argues that the jury’s award of zero dollars
necessarily means that the jury did not find for Mr. Farah on
the conversion claims. The fact that the judgment is for zero
8
dollars on the conversion claims raises the question of whether
there is in fact a “debt” that could be nondischargeable.
However, the bankruptcy court did not address this question,
and the parties only tangentially raised this issue in their briefs.
We make no determination on this question and will leave it for
the bankruptcy court to consider on remand.
Zeeb II, 2015 WL 6720934, at *5 n.5
On remand, the bankruptcy court held a one-day bench trial.2 The
court took direct testimony by declaration. Farah’s testimony was
consistent with the allegations he made in his state court complaint. Farah
testified that, in September 2010, he was the sole owner of Storm
Distribution, which sold hookahs and hookah-related accessories.
According to Farah, Storm Distribution stored its inventory in a warehouse
in Anaheim, California. Farah further testified that Zeeb worked for him as
a manager of Storm Distribution. When Farah took his overseas vacation in
September 2010, he left Zeeb in charge of all aspects of this business.
However, Farah maintained, soon after he left the country, Zeeb removed
all of the inventory from the Storm Distribution warehouse and removed
all of the cash from Storm Distribution’s bank accounts. Farah also
maintained that Zeeb removed these items and used them for his own
purposes, rather than for Storm Distribution’s business, without Farah’s
knowledge or consent. Farah concluded that, as a result of his loss of Storm
2
After our remand, Farah filed a second summary judgment motion, which the
bankruptcy court denied. The denial of that motion is beyond the scope of this appeal.
9
Distribution’s inventory and cash, he was forced to close this business
down.
As for JSSA, Farah testified that he invested $101,091.45 in JSSA
consisting of cash and inventory. According to Farah, during his September
2010 vacation, Zeeb wrongfully took all of JSSA’s inventory and other
assets and used them for his own purposes rather than for JSSA’s business.
Farah maintained that, as a result of Zeeb’s actions, he lost the full value of
his $101,091.45 investment.
The court also heard the testimony of Fasi Ali Khan, who worked in
Storm Distribution’s warehouse in 2010. He testified that, while Farah was
out of the country in September 2010, Zeeb was left in charge of Storm
Distribution. According to Khan, shortly after Farah left the country, Zeeb
contacted Khan and asked him to help move all of the inventory in the
Storm Distribution warehouse to a location in downtown Los Angeles. In
accordance with Zeeb’s request, Khan stated that he helped move the
inventory, which he only later learned was moved without Farah’s
knowledge or consent. Around the same time, Khan started receiving calls
on the warehouse telephone from bill collectors indicating that Storm
Distribution’s bills were not being paid, including its rent payments for the
warehouse. According to Khan, when he asked Zeeb about the unpaid bills
and the rent payments, Zeeb told him it was not Zeeb’s problem and he did
not care because the warehouse was not in his name.
10
Zeeb’s testimony told a different story. Zeeb claimed that he and
Farah were business partners in Storm Distribution and that it was agreed
between them that Storm Distribution’s inventory could be “marketed”
from whatever outlet they chose. He further claimed that all transfers and
transactions he made were in furtherance of his partnership agreement.
But he never specifically said that Farah agreed that all of Storm
Distribution’s inventory should be moved prior to sale or stored
somewhere else.
After trial, the bankruptcy court issued a statement of decision. The
court held that Farah was entitled to a judgment excepting Zeeb’s debt
from discharge under § 523(a)(6). In support of that holding, the court
recognized the state court’s amended judgment and then found that Zeeb’s
conduct was both willful and malicious within the meaning of § 523(a)(6).
The bankruptcy court more specifically found with respect to Storm
Distribution that, in late 2010, while Farah was out of the country, he left
Zeeb in charge. According to the court, without Farah’s knowledge, Zeeb
moved substantially all of Storm Distribution’s inventory to various stores
in downtown Los Angeles. And he wrote checks on Storm Distribution’s
bank account to himself or to cash. Based on these facts, the court
determined that “Debtor had to know and believe that what he had done
was substantially certain to cause Farah to lose his businesses and his
Money.” Statement of Decision after Trial (Dec. 21, 2018) at 6:4-5.
11
During trial, Zeeb argued that the state court award of zero damages
on Farah’s conversion causes of action precluded the bankruptcy court
from excepting the debt from discharge under § 523(a)(6). The bankruptcy
court rejected this argument. In its recitation of facts, the court emphasized
that Farah had elected to recover on his contract claim. The bankruptcy
court then explained:
Debtor’s counsel makes much of the fact that the Amended
Judgment had awards of $0 on the causes of action for
conversion. He claims that the lack of money awards on the
conversion causes of action means this Court cannot find in
favor of Farah in this action. This argument has no merit. The
Amended Judgement [sic] did rule in favor of Farah on the
conversion causes of action on the merits. The fact that Farah
chose to receive the damage awards under breach of contract
was merely for the sake of avoiding duplicative awards of
damages. Farah could have elected damages pursuant to the
conversion causes of action.
Statement of Decision after Trial (Dec. 21, 2018) at 6:11-14. (Emphasis in
original).
On January 24, 2019, the bankruptcy court entered judgment
excepting from discharge under § 523(a)(6) the state court judgment debt in
the amount of $431,605.69. Zeeb timely appealed.
JURISDICTION
The bankruptcy court had jurisdiction pursuant to 28 U.S.C. §§ 1334and 157(b)(2)(I). We have jurisdiction under 28 U.S.C. § 158.
12
ISSUES
1. Did issue preclusion bar the bankruptcy court from determining that
Zeeb’s debt arose from tortious conduct?
2. Was there sufficient evidence to support the bankruptcy court’s
finding that Zeeb willfully injured Farah?
STANDARDS OF REVIEW
“Because the bankruptcy court entered its judgment after trial, we
review the bankruptcy court’s findings of fact for clear error, and its
conclusions of law de novo.” Thiara v. Spycher Brothers (In re Thiara), 285
B.R. 420, 426-427 (9th Cir. BAP 2002) (citing Carrillo v. Su (In re Su), 290 F.3d
1140, 1142 (9th Cir. 2002)). The bankruptcy court’s factual findings are
clearly erroneous if they are illogical, implausible, or without support in
the record. United States v. Hinkson, 585 F.3d 1247, 1261–62 & n.21 (9th Cir.
2009) (en banc).
We also review de novo the bankruptcy court’s determination as to
whether the threshold elements for the application of issue preclusion have
been satisfied. Plyam v. Precision Dev., LLC (In re Plyam), 530 B.R. 456, 461
(9th Cir. BAP 2015). When we engage in de novo review, we consider the
matter anew, as if the bankruptcy court did not address it. Francis v. Wallace
(In re Francis), 505 B.R. 914, 917 (9th Cir. BAP 2014).
When issue preclusion is available, we review the bankruptcy court’s
decision whether to apply it for an abuse of discretion. In re Plyam, 530 B.R.
13at 461. The bankruptcy court abuses its discretion when it applies the
wrong rule of law, misapplies the correct rule of law, or if its factual
findings are illogical, implausible, or without support in the record. See
TrafficSchool.com, Inc. v. Edriver Inc., 653 F.3d 820, 832 (9th Cir.2011) (citing
Hinkson, 585 F.3d at 1262).
DISCUSSION
In Zeeb II, we set forth at length the legal principles governing
nondischargeability under § 523(a)(6) and the doctrine of issue preclusion.
We reiterate a number of these principles here to emphasize their
importance to our decision.
A. Nondischargeability Under § 523(a)(6).
Generally speaking, § 523(a)(6) excepts from discharge debts arising
from willful and malicious injuries to the creditor or the creditor’s
property. In re Plyam, 530 B.R. at 463. A debtor’s conduct is willful if he or
she had a subjective intent to harm or subjectively believed that harm was
substantially certain to occur as a result of his or her conduct. In re Su, 290
at 1144–45. As for maliciousness: “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.’” Id. at 1146–47 (citations
omitted). Though the requirements for proving a willful and malicious
injury are simple enough, application of the statute is not always so
straightforward.
14
For instance, to properly apply § 523(a)(6) to a debt, the injury from
which the debt arises not only must be willful and malicious but also
tortious. Lockerby v. Sierra, 535 F.3d 1038, 1040–41 (9th Cir. 2008) (citing
Petralia v. Jercich (In re Jercich), 238 F.3d 1202, 1205 (9th Cir. 2001)). More
specifically, a debt arising from a breach of contract can qualify as
nondischargeable only under certain circumstances. Lockerby, 535 F.3d at1040–41. The breach of contract must be “accompanied by malicious and
willful tortious conduct.” Id. at 1040 (citing In re Jercich, 238 F.3d at 1205)
[emphasis omitted]. A debtor’s conduct is intentionally tortious if that
conduct would constitute an intentional tort under state law. Id. at 1041-42.
There are at least two relevant ways a creditor may take a judgment
consisting of damages for breach of contract and prove that it is
nondischargeable under § 523(a)(6). The first would be to establish that the
breach of contract also constituted a tort such as conversion that the debtor
undertook willfully and maliciously within the meaning of § 523(a)(6). See
In re Thiara, 285 B.R. 430-32 (citing Del Bino v. Bailey (In re Bailey), 197 F.3d
997, 1000 (9th Cir. 1999)). In California, “[t]he elements of a conversion are
the [creditor’s] ownership or right to possession of the property at the time
of the conversion; the [debtor’s] conversion by a wrongful act or
disposition of property rights; and damages.” Farmers Ins. Exch. v. Zerin, 53
Cal. App. 4th 445, 451 (1997). As we explained in Zeeb II, damages from
conversion in California need not be from a willful or malicious injury, so a
15
creditor seeking to except a debt from discharge under § 523(a)(6) must
also prove that the conversion was undertaken willfully and maliciously.
Zeeb II, 2015 WL 6720934 at *5-6.
Alternatively, the creditor could prove a “tortious breach of
contract.” But to do so, the creditor would need to show not only tortious
conduct, but also that the debtor’s conduct violated “a fundamental public
policy of the state.” Coastal Indus. Partners, LLC v. Lawson (In re Lawson),
BAP No. NC–14–1153–TaPaJu, 2015 WL 1291366, at *4 (9th Cir. BAP Mar.
20, 2015) (quoting In re Jercich, 238 F.3d at 1206) (emphasis supplied by In re
Lawson).
B. Issue Preclusion.
Zeeb does not challenge the amended judgment. In fact, he cannot.
Under full faith and credit principles, bankruptcy courts must give state
court judgments the same issue preclusive effect that the state court would
give them. Harmon v. Kobrin (In re Harmon), 250 F.3d 1240, 1245 (9th Cir.
2001) (citing 28 U.S.C. § 1738). Instead, Zeeb contends that because the jury
awarded Farah no damages on the conversion claims, Farah was precluded
from relitigating his damages in the nondischargeability action. As Zeeb
points out, damages are an essential element of Farah’s conversion causes
of action. Zerin, 53 Cal. App. 4th at 451. Without damages, Zeeb maintains,
Farah cannot prove the underlying conversion claim necessary to prevail
16
under § 523(a)(6).3 And herein lies the problem with Zeeb’s preclusion
argument; the jury awarded Farah zero damages, but at the same time it
specifically found all of the elements for conversion, including harm. To
determine the effect of the amended state court judgment, we begin with
the elements of issue preclusion.
When applicable and appropriate, issue preclusion can be applied in
nondischargeability actions. Grogan v. Garner, 498 U.S. 279, 284–85 (1991).
“In California, issue preclusion prevents parties from relitigating issues
already decided in prior proceedings.” Zeeb II, 2015 WL 6720934, at * 4
(citing Lucido v. Super. Ct., 51 Cal.3d 335, 341 (1990)). For issue preclusion to
apply to a California judgment, five elements must be met: (1) identical
issues decided in the prior proceeding; (2) the issues were actually
litigated; (3) the issues were necessarily decided; (4) the prior proceeding
ended in a final decision on the merits; and (5) the party to be precluded
must be identical to or in privity with a party in the prior proceeding.
Lucido, 51 Cal.3d at 341.
Even when the threshold elements are satisfied, this means only that
3
Citing Civil Rule 8(c) and Blonder-Tongue Labs., Inc. v. Univ. of Ill. Found., 402
U.S. 313, 350 (1971), Farah argues that defensive issue preclusion is an affirmative
defense that must be plead or is deemed waived. Farah thus contends that Zeeb waived
his issue preclusion defense. Assuming without deciding that issue preclusion based on
a prior state court judgment must be plead as an affirmative defense, the bankruptcy
court nonetheless considered the merits of the defense and substantively rejected it.
Because Farah did not file a cross-appeal, we decline to consider whether the court
erred in considering the merits of Zeeb’s issue preclusion argument.
17
issue preclusion is “available.” The decision to apply issue preclusion to a
California judgment is discretionary. In exercising that discretion, the
bankruptcy court is obliged to consider whether application would
advance one or more of the policy considerations underlying issue
preclusion: preservation of the integrity of the judicial system, promotion
of judicial economy, and protection of parties from vexatious litigation. Id.
at 342-43; see also 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) (there is an “‘additional’
inquiry into whether imposition of issue preclusion in the particular setting
would be fair and consistent with sound public policy.”).
The party asserting issue preclusion bears the burden to establish the
threshold requirements. In re Harmon, 250 F.3d at 1245 (citing Lucido, 51
Cal. 3d at 341). Thus, the proponent must provide “a record sufficient to
reveal the controlling facts and pinpoint the exact issues litigated in the
prior action.” Kelly v. Okoye (In re Kelly), 182 B.R. 255, 258 (9th Cir. BAP
1995), aff'd, 100 F.3d 110 (9th Cir. 1996). Ultimately, “[a]ny reasonable
doubt as to what was decided by a prior judgment should be resolved
against allowing the [issue preclusive] effect.” Id.; see also In re Khaligh, 338
B.R. at 825 (“[T]he proponent bears the risk of nonpersuasion.”).
To start with, the bankruptcy court was required to discern what
exactly was decided by the state court judgment, and then to give it effect.
Obviously, there is no dispute that the jury awarded Farah zero dollars on
18
his conversion claims. Standing alone, the jury’s award of no damages for
the conversion claims could reasonably be viewed as a determination that
Farah did not suffer any damages from the conversion. However, this
finding does not stand alone. Rather, it is directly at odds with the jury’s
specific finding that Zeeb’s conversion harmed Farah. Zeeb’s construction
of the amended judgment is also contrary to the state court’s amended
judgment holding that Farah prevailed on his conversion claims.
The bankruptcy court rejected Zeeb’s interpretation of the jury’s
findings and the amended judgment. Rather than construing the award of
zero damages on the conversion causes of action as evidence that Farah
suffered no damages, the bankruptcy court determined that the jury
awarded zero damages simply to avoid an award of duplicative damages
for different causes of action based on the same conduct. This finding is
supported by the state court’s jury instructions on this issue. The state court
gave the jury the following instruction, which was included in one or more
of Farah’s requests for judicial notice filed in the bankruptcy court:
Samuel Farah has made claims against Kamal Zeeb . . . and
Zeeb Brothers, Inc., for breach of contract and the torts of
conversion and fraud. If you decide that Samuel Farah has
proved both the contract and at least one tort claim, the same
damages that resulted from these claims can be awarded only
once.
19
Pl.’s Req. For Jud. Notice (July 1, 2014) at p. 5 of 6.4
We find no error in the bankruptcy’s court’s construction of the
amended judgment. It is consistent with the jury’s specific findings on the
conversion claims. Indeed, it is the only view that reconciles the otherwise
contradictory actions by the jury and state court, culminating with entry of
the amended judgment holding that Farah prevailed on his conversion
claims. Zeeb’s interpretation of the amended judgment cannot be
reconciled with the jury’s specific findings and the amended judgment. It
would require the bankruptcy court to elevate one finding over another,
while ignoring the jury instruction on double recovery and the state court’s
determination that Farah had prevailed on his conversion claims.
Given the conflicting interpretations of the jury’s decision, Zeeb
failed to prove each of the elements necessary for issue preclusion. The
parties actually litigated Farah’s conversion claims, and the jury necessarily
decided that Zeeb converted Farah’s property. In doing so, the jury
4
The above-quoted jury instruction apparently is derived from the first
paragraph of a form jury instruction used in California civil trials. Judicial Council Of
California Civil Jury Instruction (“CACI”) 3934 provides basic instruction to jurors
when the plaintiff seeks “damages on multiple legal theories.” The first paragraph of
CACI 3934 provides:
[Name of plaintiff] seeks damages from [name of defendant] under more
than one legal theory. However, each item of damages may be awarded
only once, regardless of the number of legal theories alleged.
CACI 3934.
20
necessarily, and specifically, found that the conversion harmed Farah. But
the jury had already awarded damages to Farah under his breach of
contract claim. Given the jury instruction that it could only award damages
once, it became unnecessary that the jury award damages on Farah’s
conversion claims.
This lead the bankruptcy court to find that the “damage awards
under breach of contract was [sic] merely for the sake of avoiding
duplicative awards of damages.” The court’s finding is well supported in
the record, and is the only one that reconciles the jury’s findings and the
amended judgment. Accordingly, the issue of conversion damages was not
necessarily decided by the state court judgment because the jury had
awarded damages for breach of contract. Nor was the issue of the
conversion damages identical to the issue before the bankruptcy court in
the nondischargeability case as the jury was instructed not to award
duplicative damages.
This case is strikingly analogous to In re Lawson, 2015 WL 1291366. In
Lawson, the creditor obtained a state court judgment confirming an
arbitration award of damages for breach of contract, fees and costs, and
conversion. The underlying acts were the same for both causes of action. Id.
at *2. The judgment awarded separate damages for each cause of action;
roughly $92,000 for breach of contract together with $72,000 in fees and
costs, and $51,000 for conversion. Id. at *3.
21
After the debtor filed for bankruptcy, the creditor sought to except
from discharge the entirety of the state court judgment under § 523(a)(6).
Id. The bankruptcy court on summary judgment determined that the
damages awarded for conversion were excepted from discharge under
§ 523(a)(6), but the remaining damages were not. Id. The bankruptcy court
reasoned that the contract damages did not arise from the debtor’s tortious
conduct and that “even the worst breaches of contract do not result in a
nondischargeable debt absent some fundamental public policy.” Id. (citing
In re Jercich, 238 F.3d at 1206). The bankruptcy court therefore granted
partial summary judgment to the debtor based on the issue preclusive
effect of the sate court judgment. Id. at *2-3.
On appeal, the sole issue in Lawson was whether the bankruptcy
court erred when it applied issue preclusion and granted partial summary
judgment based on its determination that, as a matter of law, the
arbitration award’s compensatory contract damages could not be excepted
from discharge under § 523(a)(6). Id. at *4. We acknowledged that, under In
re Jercich and California law, a breach of contract is not considered tortious
unless the breach violated some independent duty under state tort law and
also violated state public policy. Nonetheless, we held that the bankruptcy
court erred when it determined that the breach of contract damages could
not be excepted from discharge under § 523(a)(6) as a matter of law.
As in the present case, the creditor in Lawson “did not just prevail on
22
a breach of contract claim; it also prevailed on a tort claim based on
conversion.” Id. at *5. Lawson explained that the record from the state
arbitration proceedings indicated that the breach of contract damages were
equally recoverable under both the tort of conversion and the breach of
contract. In contrast, the state court judgments in Jercich, Lockerby, and their
progeny were not “based on both breach of contract and tort; instead, those
cases involved solely a breach of contract claim.” Id. Furthermore, nothing
in Lawson indicated that the arbitrator duplicated any amount of damages
awarded under the two causes of action. Therefore, we concluded that In re
Jercich’s limitations for tortious breaches of contract did not apply. Rather,
we held that, where a creditor prevails on both contract and tort causes of
action, the fact that the judgment ultimately awards damages on the
contract claim does not preclude a later determination in a subsequent
§ 523(a)(6) action that the damages also flowed from the tortious conduct.
Id. at *4. As Lawson put it:
Resort to a Jercich analysis [and its requirement of conduct
against public policy] . . . is unnecessary where the debt that a
creditor seeks to except from discharge under § 523(a)(6)
involves duplicative damages on account of both tort and
breach of contract theories. In that context, the damages for tort
independently support nondischargeability under § 523(a)(6),
and there is no need to determine whether the breach of
contract was tortious.
Id.
23
Farah prevailed in his prior state court action on both his contract
and tort claims based on the same conduct. As in Lawson, the fact that
compensatory damages were awarded only on his breach of contract
claims did not preclude Farah from litigating his § 523(a)(6) claim based
upon conversion. Because the jury was instructed not to award duplicative
damages, and had already awarded damages on the breach of contract
claim, Zeeb did not prove the state court judgment necessarily decided the
identical issue on damages. As a result, the bankruptcy court was not
bound to the state court’s determination to award Farah no damages on his
conversion claim, and correctly permitted Farah to litigate his claims under
§ 523(a)(6).
C. Zeeb’s Sufficiency Of The Evidence Argument.
The only other argument Zeeb has raised on appeal concerns the
sufficiency of the evidence. He asserts that the bankruptcy should not have
found willfulness within the meaning of § 523(a)(6) based on the record
before the bankruptcy court. More specifically, he points to certain trial
testimony, which he claims should have caused the bankruptcy court to
conclude that Zeeb did not intend to harm Farah and did not subjectively
believe he would harm Farah when he moved all of Storm Distribution’s
assets.5
5
Zeeb failed to specifically and distinctly argue that the bankruptcy court
(continued...)
24
Section 523(a)(6)'s willful injury requirement requires proof of a
subjective intent to injure or a subjective belief that injury is substantially
certain to occur. Ormsby v. First Am. Title Co. of Nev. (In re Ormsby), 591 F.3d
1199, 1206 (9th Cir. 2010) (quoting In re Su, 290 F.3d at 1142). But “[t]he
[d]ebtor is charged with the knowledge of the natural consequences of his
actions.” Id. And, in addition to what the debtor might admit to knowing,
“the bankruptcy court may consider circumstantial evidence that tends to
establish what the debtor must have actually known when taking the
injury-producing action.” In re Su, 290 F.3d at 1146, n.6. This is exactly
what the bankruptcy court did here.
While the parties presented conflicting evidence, Zeeb simply has not
persuaded us that the bankruptcy court’s inference of willfulness was
illogical, implausible, or unreasonable on this record. Therefore, the
bankruptcy court’s wilfulness finding was not clearly erroneous. Hinkson,
585 F.3d at 1261–62 & n.21.
CONCLUSION
For the reasons set forth above, we AFFIRM the bankruptcy court's
5
(...continued)
committed any error with respect to its finding of malicious injury. Nor did Zeeb make
any sufficiency of the evidence arguments pertaining to JSSA. Accordingly, he has
forfeited these arguments. See Leigh v. Salazar, 677 F.3d 892, 897 (9th Cir. 2012) (issues
not specifically and distinctly argued in appellant's opening appeal brief are forfeited);
Dietz v. Ford (In re Dietz), 469 B.R. 11, 22 (9th Cir. BAP 2012), aff'd and adopted, 760 F.3d
1038 (9th Cir. 2014) (same).
25
nondischargeability judgment under § 523(a)(6).
26