In re: Lisa M. Garcia ( 2020 )

FILED
NOT FOR PUBLICATION SEP 1 2020
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-19-1214-SGF
BAP No. CC-19-1232-SGF
LISA M. GARCIA, (Cross-Appeals)
Debtor.
Bk. No. 6:18-bk-10058-SC
LISA M. GARCIA, Adv. No. 6:18-ap-01065-SC
Appellant/Cross-Appellee,
v. MEMORANDUM*
SAMEH FAWZY,
Appellee/Cross-Appellant.
Appeal from the United States Bankruptcy Court
for the Central District of California
Scott C. Clarkson, Bankruptcy Judge, Presiding
Before: SPRAKER, GAN, and FARIS, Bankruptcy Judges.
INTRODUCTION
The bankruptcy court entered judgment excepting from discharge an
Arizona state court judgment that creditor Sameh Fawzy obtained against
*
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.
Chapter 71 debtor Lisa Garcia. The state court judgment was based on
conversion and constructive fraud. The bankruptcy court granted Fawzy
relief under § 523(a)(6) but denied him relief under § 523(a)(2)(A). Garcia
appeals from the § 523(a)(6) ruling. Fawzy cross-appeals from the
§ 523(a)(2)(A) ruling.
Both rulings hinged on whether Garcia’s state of mind, as found by
the Arizona jury, was the same as that required for nondischargeability
under either § 523(a)(6) or § 523(a)(2)(A). The bankruptcy court answered
this question in the affirmative for § 523(a)(6) but in the negative for
§ 523(a)(2)(A). With respect to § 523(a)(6), nothing in the state court record
demonstrates that the jury actually found, or needed to find, that Garcia
harbored an intent to injure Fawzy or subjectively believed that injury was
substantially certain to occur as a result of her conduct.
As for § 523(a)(2)(A), the bankruptcy court correctly declined to
apply issue preclusion to satisfy the fraud element of intent to deceive. The
record from the state court trial did not establish that the jury actually and
necessarily decided that Garcia intended to deceive Fawzy.
The record arguably suggests that the bankruptcy court may have
intended to alternately grant judgment on the § 523(a)(6) claim based on
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
the parties’ stipulated facts and other evidence presented at the bankruptcy
court trial. But the bankruptcy court did not render a specific finding of fact
on the willfulness element. On this record, we only can speculate as to
what the bankruptcy court intended with respect to the evidence it
admitted at trial and what it believed this evidence established. Therefore,
we will remand the § 523(a)(6) claim for the bankruptcy court to clarify
whether, in the absence of issue preclusion, the admissible evidence
presented at the bankruptcy court trial, including specific parts of the state
court trial transcript, established that Garcia acted willfully and maliciously
within the meaning of § 523(a)(6).
Consequently, we AFFIRM the bankruptcy court’s § 523(a)(2)(A)
ruling, but we VACATE its § 523(a)(6) ruling and REMAND for further
proceedings.
FACTS
Fawzy and Garcia met in 2000 and were engaged in 2003. At the time
of their engagement, the couple lived in Tennessee, where Fawzy had
purchased and operated a grocery store. Garcia loaned Fawzy $48,878.23 to
help fund the grocery store purchase. In 2004, however, Garcia moved to
New York to attend a two-year physician’s assistants program. Around this
same time, Fawzy enlisted in the United States Army. Before deploying to
Iraq, Fawzy executed a general power of attorney which enabled Garcia to
manage his financial affairs. He also leased the grocery store to a third
3
party for a one-year term. At the end of the lease term, the third party
purchased the grocery store from Fawzy. During Garcia’s time in
Tennessee and New York, Fawzy financially supported her.
Fawzy returned from his Iraq deployment in late 2005 or early 2006,
with several injuries requiring treatment. During the first half of 2006,
while Fawzy still was convalescing, Garcia withdrew a total of $76,134.10
from the couple’s joint bank accounts, without Fawzy’s knowledge or
approval. Of this amount, Garcia originally transferred $10,900.00 from
Fawzy’s separate business bank account to one of the couple’s joint
accounts, from which she later withdrew it.
Additionally, Fawzy owned a Toyota 4Runner that Garcia had been
using for years. When Fawzy moved to Tennessee to open his grocery
store, he left the 4Runner with Garcia so she could use it. But he remained
the owner of record. When Garcia moved to Tennessee, she drove the
vehicle there from California, where she formerly lived. She next took the
4Runner with her to New York. In April 2006, she changed title to the
vehicle into her own name, without telling Fawzy. She signed Fawzy’s
name on the documentation transferring title, instead of signing her own
name and using her power of attorney. In September 2006, after taking
Fawzy to the Walter Reed Medical Hospital for further treatment, she
drove the vehicle to California, where she again relocated.
Sometime in 2006, the couple ended their relationship. Afterwards,
4
Fawzy unsuccessfully attempted to recover from Garcia his 4Runner and
his cash. Then, in 2007, Garcia again relocated – this time to Arizona. In late
2007, Fawzy filed a complaint in Arizona state court against Garcia seeking
to recover the vehicle and the cash.
Garcia filed an answer and counterclaim. According to Garcia, when
Fawzy bought the grocery store, she became his partner by funding
roughly half of its purchase price. She also claimed that she worked full
time at the grocery store in 2003 and 2004, but she never received any
compensation for doing so. In contrast, she asserted that Fawzy paid
himself at least $4,000 per month over the same time period. She also
claims he withdrew thousands of dollars from their joint bank accounts for
his individual purposes and benefit. In October 2008, while the state court
lawsuit was pending, Garcia transferred back to Fawzy title to and
possession of the 4Runner.
The state court held a jury trial in 2009. The jury found that Garcia
converted the 4Runner and the $10,900.00 she transferred from Fawzy’s
business bank account. The jury awarded Fawzy $7,400.00 for conversion
of the 4Runner but awarded no damages for conversion of the $10,900.00. 2
2
The jury appears to have awarded zero damages for conversion of the
$10,900.00 because it instead compensated Fawzy for that loss as part of his constructive
fraud damages for Garcia’s withdrawals from the couple’s joint accounts. Because
Garcia initially transferred the $10,900.00 to one of the couple’s joint bank accounts, and
later withdrew these and other funds from the joint accounts (which was the basis for
(continued...)
5
The jury next found that Garcia was liable for $76,134.10 plus interest for
constructive fraud, arising from her withdrawals from the couple’s joint
checking accounts in 2006. The jury also awarded Fawzy punitive damages
of $40,000.00, plus attorney’s fees. In addition to the jury verdicts granting
Fawzy relief, the jury denied Garcia relief on her breach of contract,
partnership, and conversion counterclaims.
The punitive damages award against Garcia was based on the jury’s
finding that Garcia “acted with an evil mind and committed fraud against
Mr. Fawzy.” The state court instructed the jury in detail regarding what
constitutes an evil mind under Arizona law. It instructed the jury that any
of the following could support an evil mind finding: “1, intent to cause
injury; Or 2, wrongful conduct motivated by spite or ill will; Or 3,
Ms. Garcia acted to serve her own interests having reason to know and
consciously disregarding a substantial risk that [her] conduct may
significantly injure the rights of others.”
In contrast, the jury was not given a jury instruction regarding what
it generally means to “commit fraud.” The only fraud-related claim on
which the court instructed the jury was constructive fraud. The
constructive fraud jury instruction made it clear that intent to deceive was
2
(...continued)
the constructive fraud claim), the jury only could award the $10,900.00 in damages one
time in order to avoid double-counting these funds in Fawzy’s damages award.
6
not required in order to establish liability for constructive fraud. Indeed,
the constructive fraud jury instruction advised the jury that “intent of the
party charged” was irrelevant to the constructive fraud cause of action.3
After the jury rendered its verdict in favor of Fawzy, the court
awarded $25,000.00 for attorney’s fees, prejudgment interest of $15,456.27,
and court costs and jury fees of $10,331.61. It then entered final judgment in
June 2009 in the aggregate amount of $174,321.98.
Subsequently, Garcia commenced her bankruptcy case by filing a
voluntary chapter 7 petition. Fawzy timely filed a complaint seeking to
except the judgment debt from discharge under §§ 523(a)(2)(A) and (a)(6).
He then filed a motion for summary judgment based on the § 523(a)(6)
claim and the asserted issue preclusive effect of the state court judgment.
The bankruptcy court denied the summary judgment motion. According to
the court, the jury’s findings did not establish the requisite state of mind for
nondischargeability under § 523(a)(6).
3
The state court’s punitive damages instruction stated: “If you decide that
Ms. Garcia intended to defraud Mr. Fawzy in regard to the bank withdrawals, you must
decide whether that conduct justifies an award of punitive damages.” At oral argument,
we asked Fawzy’s counsel whether the reference to “intended to defraud” in the
punitive damages jury instruction might provide an alternate ground for the
application of issue preclusion to the state of mind issue. In response, Fawzy’s counsel
candidly acknowledged that intent to defraud was neither actually litigated nor
necessarily decided in the state court action. In light of this concession, we do not
consider whether the “intended to defraud” reference in the punitive damages jury
instruction could have supported the application of issue preclusion to the state of mind
issue.
7
Prior to trial, the parties stipulated to numerous admitted facts,
including many of the facts set forth above. The court approved the parties’
amended joint pretrial stipulation and set the matter for trial, with all direct
testimony to be submitted by declaration. At the pretrial conference, the
parties discussed the admission and use of the state court trial transcript as
an exhibit. The court indicated that the state court transcript would be
admitted but that any party seeking to use it to prove the truth of the
matter testified to would need to make the witness who previously testified
available at the bankruptcy court trial for potential additional cross-
examination.
Fawzy presented a half-page declaration at the bankruptcy court trial
and relied on the admitted facts from the pretrial stipulation. He also
argued that the state court judgment, jury verdict, and state court trial
transcript demonstrated his entitlement to issue preclusion on all elements
necessary for relief under both §§ 523(a)(2)(A) and (a)(6). At the conclusion
of trial, the court rendered oral findings of fact and conclusions of law. The
court concluded that issue preclusion applied to establish all of the
elements for nondischargeability under § 523(a)(6) but not under
§ 523(a)(2)(A).
The bankruptcy court supplemented its oral findings of fact and
conclusions of law with a memorandum decision after trial. With respect to
§ 523(a)(2)(A), the bankruptcy court stated that nothing in the state court
8
jury instructions or jury verdict established that the jury found Garcia acted
with an intent to deceive. As for § 523(a)(6), the court relied on the state
court jury findings to reach its conclusion that Garcia willfully injured
Fawzy.
The bankruptcy court entered its nondischargeability judgment on
August 27, 2019. Garcia timely appealed and Fawzy timely cross-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.
ISSUES
1. Did the bankruptcy court commit reversible error when it applied
issue preclusion to establish Garcia’s state of mind for purposes of
§ 523(a)(6)?
2. Did the bankruptcy court commit reversible error when it admitted
into evidence the state court trial transcript?
3. Did the bankruptcy court commit reversible error when it held that
issue preclusion could not be applied to establish Garcia’s state of
mind for purposes of § 523(a)(2)(A)?
STANDARDS OF REVIEW
We review de novo the bankruptcy court’s determination that issue
preclusion was available. Tomkow v. Barton (In re Tomkow), 563 B.R. 716, 722
(9th Cir. BAP 2017); Plyam v. Precision Dev., LLC (In re Plyam), 530 B.R. 456,
9
461 (9th Cir. BAP 2015). “De novo review requires that we consider a
matter anew, as if no decision had been made previously.” Francis v.
Wallace (In re Francis), 505 B.R. 914, 917 (9th Cir. BAP 2014). (citations
omitted).
When issue preclusion is available, the bankruptcy court’s decision to
actually apply it is reviewed for abuse of discretion. In re Tomkow, 563 B.R.
at 722; In re Plyam, 530 B.R. at 461. “A bankruptcy court abuses its
discretion if it applies the wrong legal standard or misapplies the correct
legal standard, or if its factual findings are illogical, implausible, or without
support in inferences that may be drawn from the facts in the record.” In re
Tomkow, 563 B.R. at 722.
We review a bankruptcy court’s evidentiary rulings for abuse of
discretion, and then only reverse if any error would have been prejudicial
to the appellant. Mbunda v. Van Zandt (In re Mbunda), 484 B.R. 344, 351 (9th
Cir. BAP 2012), aff'd, 604 F. App’x 552 (9th Cir. 2015).
DISCUSSION
A. Appeal from § 523(a)(6) Ruling.
1. Application of issue preclusion in nondischargeability
actions.
The doctrine of issue preclusion applies in nondischargeability
proceedings. Grogan v. Garner, 498 U.S. 279, 284–85 n.11 (1991). Federal
courts must give full faith and credit to state court judgments. 28 U.S.C.
10
§ 1738. This means that the bankruptcy court was required to give the
Arizona state court’s judgment the same preclusive effect it would be given
by Arizona courts. See Far Out Prods., Inc. v. Oskar, 247 F.3d 986, 993 (9th
Cir.2001). Thus, Arizona law determines the preclusive effect of the state
court judgment. In Arizona, issue preclusion cannot be applied unless:
(1) the issue or fact to be litigated was actually litigated in a
previous suit,
(2) a final judgment was entered, and
(3) the party against whom the doctrine is to be invoked had a
full opportunity to litigate the matter,
(4) and actually did litigate it, [and]
(5) such issue or fact was essential to the prior judgment.
Child v. Foxboro Ranch Estates, LLC (In re Child), 486 B.R. 168, 172-73 (9th Cir.
BAP 2013) (emphases omitted) (quoting Chaney Bldg. Co. v. City of Tucson,
716 P.2d 28, 30 (Ariz. 1986)). An issue is actually litigated when it “is
properly raised by the pleadings or otherwise, and is submitted for
determination, and is determined . . . .” Kopp v. Physician Grp. of Ariz., Inc.,
421 P.3d 149, 152 (Ariz. 2018) (quoting Chaney Bldg. Co., 716 P.2d at 30). An
issue is essential to the judgment when the prior decision could not have
been rendered without it. See Fuller v. Hartford Accident & Indem. Co., 601
P.2d 1360, 1362–63 (Ariz. Ct. App. 1979), cited with approval in Farmers Ins.
11
Co. of Ariz. v. Vagnozzi, 675 P.2d 703, 705 (Ariz. 1983).4
“The party asserting issue preclusion bears the burden of proof as to
all elements and must introduce a sufficient record to reveal the controlling
facts and the exact issues litigated.” In re Child, 486 B.R. at 172 (emphasis
added). “Any reasonable doubt as to what was decided by a prior
judgment should be resolved against allowing the collateral estoppel
effect.” Kelly v. Okoye (In re Kelly), 182 B.R. 255, 258 (9th Cir. BAP 1995),
aff'd, 100 F.3d 110 (9th Cir. 1996).
2. Legal standards governing § 523(a)(6).
Section 523(a)(6) excepts from discharge debts arising from willful
and malicious injuries to an entity or its property. Ormsby v. First Am. Title
Co. of Nev. (In re Ormsby), 591 F.3d 1199, 1206 (9th Cir. 2010); Barboza v. New
Form, Inc. (In re Barboza), 545 F.3d 702, 706 (9th Cir. 2008). The willfulness
and malice elements are legally distinct and require separate consideration.
Carrillo v. Su (In re Su), 290 F.3d 1140, 1146-47 (9th Cir. 2002). Under
§ 523(a)(6), a debt arises from a “willful” injury when the debtor
4
Even when the threshold requirements for issue preclusion are met, Arizona
courts may decline to apply issue preclusion when the underlying policies of judicial
economy and avoidance of inconsistent results are outweighed by other competing
policy concerns. Hullett v. Cousin, 63 P.3d 1029, 1035 (Ariz. 2003); see also Ferris v.
Hawkins, 660 P.2d 1256, 1258 (Ariz. Ct. App. 1983) (“Principles of issue preclusion
should not be applied, however, where ‘there is some overriding consideration of
fairness to a litigant, which the circumstances of the particular case would
dictate.”(quoting Di Orio v. City of Scottsdale, 408 P.2d 849, 852 (Ariz. Ct. App. 1965))).
12
subjectively intended to cause injury to the creditor or subjectively believed
that injury was substantially certain to occur. In re Ormsby, 591 F.3d at 1206;
In re Su, 290 F.3d at 1144-46. A debt arises from a “malicious” injury when
it is based on: “(1) a wrongful act, (2) done intentionally, (3) which
necessarily causes injury, and (4) is done without just cause or excuse.” In
re Ormsby, 591 F.3d at 1207 (quoting Petralia v. Jercich (In re Jercich), 238 F.3d
1202, 1209 (9th Cir. 2001)).
3. Analysis.
a. Issue preclusion argument.
Garcia principally argues on appeal that the state of mind required
for relief under § 523(a)(6) was not actually litigated or essential to the
judgment in the Arizona lawsuit. To support this argument, Garcia points
out that no particular state of mind is required for conversion or
constructive fraud. This is a correct statement of Arizona law. See Miller v.
Hehlen, 104 P.3d 193, 203 (Ariz. Ct. App. 2005) (stating elements for
conversion); see also Liberty Life Ins. Co. v. Myers, Case No. CV
10–2024–PHX–JAT, 2013 WL 530317, at *13 (D. Ariz. Feb. 12, 2013) (same);
McManus v. Am. Express Tax & Bus. Servs., Inc., 67 F. Supp. 2d 1083, 1089 (D.
Ariz. 1999) (“To establish constructive fraud, all elements of actual fraud
except the element of intent must be established.” (emphasis added)).
The bankruptcy court did not rely on the state court jury’s verdict for
conversion or constructive fraud to establish Garcia’s intent to injure.
13
Instead, the court relied on the jury’s finding that she acted with an evil
mind required to impose punitive damages. Yet Garcia asserts that to
award punitive damages, the state court jury neither found, nor needed to
find, the state of mind required for relief under § 523(a)(6). The jury was
instructed that to find that Garcia acted with an evil mind, it had to find:
1, intent to cause injury;
Or 2, wrongful conduct motivated by spite or ill will;
Or 3, Ms. Garcia acted to serve her own interests having reason
to know and consciously disregarding a substantial risk that
[her] conduct may significantly injure the rights of others.
This instruction is consistent with Arizona case law holding that “[a]
tortfeasor manifests an ‘evil mind’ if he either ‘intended to injure the
plaintiff’ or ‘consciously pursued a course of conduct knowing that it
created a substantial risk of significant harm to others.’”Quintero v. Rogers,
212 P.3d 874, 879 (Ariz. Ct. App. 2009) (quoting Gurule v. Ill. Mut. Life &
Cas. Co., 734 P.2d 85, 87 (Ariz. 1987))
As Garcia notes, this standard is stated in the disjunctive and the last
of the three disjunctive requirements sets forth a less culpable mental state
than that required under § 523(a)(6). Garcia reasons that in finding that she
acted with an “evil mind,” the jury did not necessarily find that she
intended to injure Fawzy or that she believed injury to Fawzy was
substantially certain to occur.
14
It is beyond cavil that a conscious disregard of substantial risk is
insufficient to qualify as a willful intent to injure under § 523(a)(6). The
Arizona standard focuses on creating a substantial risk of harm. Quintero,
212 P.3d at 879. In contrast, the willfulness component of § 523(a)(6)
requires proof that the debtor had a subjective intent to injure or a
subjective belief that injury was substantially certain to occur. In re Plyam,
530 B.R. at 463 (citing In re Su, 290 F.3d at 1144). We made clear in Plyam
that any level of risk below a substantial certainty is insufficient for
§ 523(a)(6) purposes. As we observed in Plyam, “[e]ven a strong probability
that consequences may result, however, is not equivalent to substantial
certainty for the purposes of intent.”5 Id. at 468 (citing Restatement
5
The following comment from the Restatement (Second) of Torts emphasizes this
point by explaining the differing levels of risk associated with different levels of
culpability:
All consequences which the actor desires to bring about are intended, as
the word is used in this Restatement. Intent is not, however, limited to
consequences which are desired. If the actor knows that the consequences
are certain, or substantially certain, to result from his act, and still goes
ahead, he is treated by the law as if he had in fact desired to produce the
result. As the probability that the consequences will follow decreases, and
becomes less than substantial certainty, the actor’s conduct loses the
character of intent, and becomes mere recklessness, as defined in § 500. As
the probability decreases further, and amounts only to a risk that the
result will follow, it becomes ordinary negligence, as defined in § 282. All
three have their important place in the law of torts, but the liability
attached to them will differ.
(continued...)
15
(Second) of Torts § 500 cmt. f (1965)).
A conscious disregard of risk was, therefore, an insufficient state of
mind to establish § 523(a)(6) willfulness. The bankruptcy court nonetheless
applied issue preclusion. It reasoned that, notwithstanding the disjunctive
legal standard for evil mind, the jury actually litigated and needed to find
that Garcia intended to injure Fawzy. According to the bankruptcy court,
this conclusion logically followed from Fawzy’s testimony during the state
court trial that Garcia admitted to him she had withdrawn the funds from
the couple’s joint accounts for the purpose of hurting him.
There are several problems with the bankruptcy court’s application
of issue preclusion to establish a willful injury. As a threshold matter,
Fawzy’s testimony only related to the withdrawn funds. There is nothing
in the record that ties this testimony to the 4Runner.
More importantly, however, we cannot know whether the jury relied
on Fawzy’s testimony that Garcia wanted to injure him because it was not
essential to the jury’s evil mind finding. It is just as plausible that the jury
relied on conscious disregard in making this finding. In other words, intent
5
(...continued)
Restatement (Second) of Torts § 8A, cmt. b (1965). In Plyam we explained that: “Degrees
of recklessness may exist; but, again, whether recklessness is heightened or gross, it is
insufficient for a determination of § 523(a)(6) willfulness.” In re Plyam, 530 B.R. at 467.
Because conscious disregard of substantial risk falls below the standard for intent to
injure under §523(a)(6), we need not, and do not, express any opinion where Arizona’s
alternate basis for an evil mind of spite or ill will might fall on this continuum.
16
to injure was not necessary for the jury to find that Garcia acted with an
evil mind. While the testimony cited by the bankruptcy court could have
supported a finding of intent to injure, that possibility did not make it
essential for purposes of issue preclusion. See In re Plyam, 530 B.R. at 470;
see also W. Cable v. Indus. Comm'n of Ariz., 698 P.2d 759, 763 (Ariz. Ct. App.
1985) (holding that finding of disability was not essential to the judgment
for issue preclusion purposes because it was not necessary for the
judgment awarded).
The state court gave the jury three separate bases to find that Garcia
had acted with an evil mind. At least one of these bases did not require an
intent to injure. There is no means to determine which of these the jury
used. Accordingly, the bankruptcy court simply had no logical or legal
basis to find that the Arizona jury based its determination of evil mind on
an intent to injure. On this record, there is significant reason to doubt that
the evil mind finding was based on an implicit finding of intent to injure.
The bankruptcy court, therefore, erred in applying issue preclusion to
conclusively establish the requisite state of mind for willfulness under
§ 523(a)(6).6
6
Neither the bankruptcy court nor the parties focused much on the
maliciousness elements required under § 523(a)(6). For purposes of this decision, we
also express no opinion regarding the applicability of issue preclusion to § 523(a)(6)’s
maliciousness elements.
17
b. Section 523(a)(6) judgment in the absence of issue
preclusion.
In light of our holding that the bankruptcy court erred in its
application of issue preclusion, we next must consider whether the court’s
§ 523(a)(6) judgment may be affirmed without the application of issue
preclusion. As part of the trial, the parties presented the bankruptcy court
with admitted facts, and the court accepted into evidence a significant
amount of additional evidence, including the entirety of the state court trial
transcript. We also acknowledge that, in its memorandum decision, the
bankruptcy court noted that it was relying on both the admitted facts and
evidence presented during the bankruptcy court trial, in addition to issue
preclusion, to find that Garcia had willfully and maliciously intended to
injure Fawzy. Even so, in both the bankruptcy court’s oral ruling and in its
memorandum decision, when the bankruptcy court specifically discussed
willfulness, it relied exclusively on issue preclusion. It never stated that it
was independently finding willfulness based on the evidence presented
during the bankruptcy court trial.
Under Civil Rule 52(a)(1), made applicable in adversary proceedings
by Rule 7052, “the court must find the facts specially and state its
conclusions of law separately.” Thus, the bankruptcy court needed to make
a specific finding of fact on willfulness. It did not. Indeed, the bankruptcy
court made no specific findings of fact with respect to any of the § 523(a)(6)
18
elements. This, by itself, justifies remand in this matter. “In the absence of
complete findings, we may vacate a judgment and remand the case to the
bankruptcy court to make the required findings.” First Yorkshire Holdings,
Inc. v. Pacifica L 22, LLC (In re First Yorkshire Holdings, Inc.), 470 B.R. 864, 871
(9th Cir. BAP 2012) (citing United States v. Ameline, 409 F.3d 1073 (9th Cir.
2005)); see also Simeonoff v. Hiner, 249 F.3d 883, 891, 894 (9th Cir. 2001)
(holding that remand is required when a “full understanding” of the trial
court’s decision is not possible without additional findings).
In sum, though we can affirm on any basis supported by the record,
Lakhany v. Khan (In re Lakhany), 538 B.R. 555, 559 (9th Cir. BAP 2015), we
cannot make findings on the bankruptcy court’s behalf in the first instance,
In re First Yorkshire Holdings, Inc., 470 B.R. at 871. Because the bankruptcy
court incorrectly applied issue preclusion to establish the willfulness
element and did not specifically find that Garcia willfully injured Fawzy,
we must remand so that the bankruptcy court can determine whether it
wants to find willfulness based on the trial record presented.
c. Evidentiary arguments.
Finally, we address a number of evidentiary arguments raised by
Garcia. These arguments relate to the court’s admission and use of the state
court trial transcript in the nondischargeability trial. The bankruptcy court
stated that it was admitting the state court trial transcript for the truth of
matters asserted. Indeed, the memorandum decision points out that the
19
“transcript is now part of this Court’s record pursuant to Defendant’s non-
objection to the admission into evidence of the State Court Trial
Transcript.” Garcia contends that she did object to the admission of the
transcript as substantive evidence, and that the bankruptcy court
erroneously denied her cross-examination on testimony presented in the
state court trial.
i. The transcript was neither introduced as a
declaration nor authenticated.
Garcia initially contends that the state court trial transcript
constituted “testimony” and that the bankruptcy court’s admission of it as
testimony violated its own order that all trial testimony needed to be
submitted by declaration. But the court’s self-imposed restriction regarding
presentation of direct testimony by declaration specifically did not apply to
the transcript. The court made this abundantly clear at the pretrial hearing.
Nor can Garcia claim that she suffered from any legitimate confusion
regarding the court’s decision at the pretrial hearing to admit the state
court transcript.
Garcia also contends that Fawzy failed to authenticate the transcript.
This argument similarly has no merit. The certified copy of the transcript
the bankruptcy court admitted was self-authenticating. See Fed. R. Evid.
902(4); Ball v. A.O. Smith Corp., 321 B.R. 100 (N.D.N.Y. 2005) (holding that
trial transcripts are self-authenticating under Rule 902(4), where transcripts
20
contained court reporter’s certification).7
ii. The transcript constitutes inadmissable hearsay.
Garcia next argues that the admission of the transcript violated the
rule against hearsay. Garcia did not raise a hearsay objection at trial when
Fawzy presented the transcript for admission into evidence. As a result,
Fawzy asserted – and the bankruptcy court concluded – that Garcia
waived her hearsay objection. See Fed. R. Evid. Rule 103(a); see also De
Saracho v. Custom Food Mach., Inc., 206 F.3d 874, 879-80 (9th Cir. 2000).
We disagree that Garcia waived her hearsay objection. When the
court pressed Garcia to stipulate to admission into evidence of the entire
state court trial transcript at the pre-trial conference, Garcia demurred
citing hearsay as the specific basis for her demurrer. The court then stated
that,“[t]here’s no hearsay. It’s a trial record. It’s a court document. So,
there’s no – there’s a lot of exceptions to the hearsay rule with respect to
transcripts of trials . . . .” Pretrial Hr’g Tr. (Mar. 20 , 2019) 11:8-12.
After Garcia attempted to re-frame her objection, the court
concluded:
But I’m telling you that the trial transcripts are coming in. . . . If
he is going to introduce the trial transcripts of the 2009 trial that
7
Garcia further claimed that the admission of the trial transcript violated Civil
Rule 32(a) regarding the use of deposition transcripts against a party at trial. But none of
the authority that Garcia relies on dealt with the use of a trial transcript from a prior
court proceeding.
21
resulted in a judgment . . . that train has left the station.
* * *
There is – and mark it down right now that you can appeal.
That I said that that trial transcript is coming in and I will
review it. . . . [T]he point is there are innumerous exceptions to
the hearsay rule with respect to trial transcripts that have
occurred.
Pretrial Hr’g Tr. (Mar. 20 , 2019) 12:24-13:23.
Garcia sufficiently raised her hearsay objection to the admission of
the transcripts to preserve her objection for appeal. “Once the court makes
a definitive ruling on the record admitting or excluding evidence, either at
or before trial, a party need not renew an objection or offer of proof to
preserve a claim of error for appeal.” United States v. Sepulveda-Barraza, 645
F.3d 1066, 1070 (9th Cir. 2011) (quoting Fed. R. Evid. 103); see also Palmerin
v. City of Riverside, 794 F.2d 1409, 1413 (9th Cir. 1986). This is because “[t]he
purpose of requiring a party to timely object is to ensure that the district
court has an opportunity to cure any potential errors in the first instance.”
United States v. Palmer, 3 F.3d 300, 304 (9th Cir. 1993) (citation omitted). No
legitimate interest is served by requiring an objecting party to subsequently
renew its objection to the admission of evidence when the court clearly was
aware of the specific objection and already explicitly and definitively ruled
on it. Id. The bankruptcy court explicitly and definitively rejected Garcia’s
hearsay objection to admission of the trial transcript at the pre-trial
22
conference. Garcia did not need to renew the hearsay objection at trial in
order to preserve it.
As to the substance of the objection, we are concerned with
evidentiary rulings only to the extent they are prejudicial. Fed. R. Evid.
103(a). Harmless errors in evidentiary rulings must be ignored. See, e.g.,
Nautilus Marine Enters., Inc. v. Exxon Mobile Corp. (In re Exxon Valdez), 745 F.
App’x 262, 264-65 (9th Cir. 2018); In re Mbunda, 484 B.R. at 355.
Furthermore, to the extent the bankruptcy court sought to rely on state
court trial testimony to find willfulness, affording Garcia with an
opportunity to cross-examine witnesses on the relevant trial testimony
informs our hearsay analysis and our harmless error analysis. In other
words, the availability of a full and fair opportunity to cross-examine might
either except or exclude the former testimony from the rule against hearsay
or might render any error with respect thereto harmless. See Fed. R. Evid.
103(a), 801(d)(1), 804(b)(1).
Here, we cannot meaningfully review the bankruptcy court’s hearsay
ruling or determine whether any error with respect to its hearsay ruling
was harmless. Nor can we meaningfully assess the impact of cross-
examination on the hearsay and harmless error analyses. In order to make
a reasoned ruling on a hearsay objection to the admission of prior hearing
testimony, the court needed to identify what portion(s) of the testimony it
was considering and to specify for what purpose(s) the testimony was
23
being allowed into evidence. See, e.g., United States v. Innamorati, 996 F.2d
456, 475 (1st Cir. 1993); United States v. Burreson, 643 F.2d 1344, 1349 (9th
Cir. 1981); see also United States v. Coplan, 703 F.3d 46, 85 (2d Cir. 2012)
(affirming district court’s decision to admit selective portions of deposition
transcripts but refusing to admit them in their entirety).
Thus, on remand, to the extent the bankruptcy court intended to find
that Garcia willfully injured Fawzy, it will need to identify which portions
(if any) of the state court trial transcript it is relying on in making that
finding. It also may wish to supplement or amend its hearsay ruling to
clarify why the rule against hearsay did not bar admission of the particular
state court trial testimony relied on. In the event of an appeal after remand,
this additional information should enable us to render the necessary
review of any lingering hearsay and cross-examination issues, as well as
assess whether any related error was harmless.8
8
We recognize that the bankruptcy court admitted the state court trial transcript
primarily to aid its determination of what the jury considered and what it found for
purposes of establishing the availability of issue preclusion. It is axiomatic that a party
advocating for issue preclusion can and must present an adequate record from the prior
court proceeding to establish exactly which issues actually were litigated in the prior
proceeding. See In re Child, 486 B.R. at 172 (citing In re Kelly, 182 B.R. at 258). Such an
adequate record sometimes may require submission of a transcript from the prior court
proceeding. The use of the transcript for this purpose is not in violation of the rule
against hearsay because the proponent is not offering the prior testimony to prove the
truth of what the declarant stated but rather to prove which issues were addressed and
resolved in the prior proceeding. See Tremont LLC v. Halliburton Energy Servs., Inc., 696 F.
(continued...)
24
B. Cross-Appeal From § 523(a)(2)(A) Ruling.
1. Legal standards governing § 523(a)(2)(A).
Generally speaking, § 523(a)(2)(A) excepts from discharge debts
incurred by false pretenses, a false representation, or actual fraud. Oney v.
Weinberg (In re Weinberg), 410 B.R. 19, 35 (9th Cir. BAP 2009). The requisite
fraud typically is established when the creditor establishes the following
five elements:
(1) misrepresentation, fraudulent omission or deceptive
conduct by the debtor; (2) knowledge of the falsity or
deceptiveness of his statement or conduct; (3) an intent to
deceive; (4) justifiable reliance by the creditor on the debtor's
statement or conduct; and (5) damage to the creditor
proximately caused by its reliance on the debtor's statement or
conduct.
Id. (quoting Turtle Rock Meadows Homeowners Ass'n v. Slyman (In re Slyman),
234 F.3d 1081, 1085 (9th Cir. 2000)) (emphasis added). 9
8
(...continued)
Supp. 2d 741, 752 n.8 (S.D. Tex. 2010).
9
Fawzy believes that, under Husky International Electronics, Inc. v. Ritz, 136 S. Ct.
1581, 1586-88 (2016), intent to deceive no longer is necessary to establish a claim for
relief under § 523(a)(2)(A). We disagree with Fawzy’s attempts to extend Husky to his
dispute with Garcia. Husky does not bring Fawzy’s garden-variety conversion and
constructive fraud damages within the ambit of § 523(a)(2)(A). Indeed, Husky
recognized that § 523(a)(2)(A) only covers “actual fraud” and not “implied fraud.” Id. at
1486. However broad Husky might be interpreted, we will not construe it as implicitly
overruling decades of Ninth Circuit nondischargeability law generally requiring proof
of intent to deceive to support a claim under § 523(a)(2)(A). See Am. Express Travel
(continued...)
25
2. Analysis.
In Arizona, a claim of fraud requires the plaintiff to establish by clear
and convincing evidence:
(1) A representation; (2) its falsity; (3) its materiality; (4) the
speaker’s knowledge of its falsity or ignorance of its truth;
(5) his intent that it should be acted upon by the person and in
the manner reasonably contemplated; (6) the hearer’s ignorance
of its falsity; (7) his reliance on its truth; (8) his right to rely
thereon; (9) his consequent and proximate injury.
Nielson v. Flashberg, 419 P.2d 514, 517-18 (Ariz. 1966). These elements meet
or exceed what is required for nondischargeable fraud under
§ 523(a)(2)(A).
However, the state court jury only was instructed to consider
conversion and constructive fraud. The state court jury did not consider –
and did not need to consider – actual fraud. Neither the conversion claim,
nor the constructive fraud claim, required Fawzy to establish that Garcia
harbored any particular state of mind. See Blau v. Am.'s Servicing Co., No.
CV-08-773-PHX-MHM, 2009 WL 3174823, at *3 (D. Ariz. Sept. 29, 2009)
(citing Dawson v. Withycombe, 163 P.3d 1034, 1057-58 (Ariz. Ct. App. 2007));
Miller, 104 P.3d at 203.
Fawzy contends that, during the state court trial, he proved that
9
(...continued)
Related Servs. Co. v. Hashemi (In re Hashemi), 104 F.3d 1122, 1125 (9th Cir. 1996) (citing
Britton v. Price (In re Britton), 950 F.2d 602, 604 (9th Cir. 1991)).
26
Garcia concealed her cash withdrawals and her transfer of ownership of
the 4Runner. Fawzy additionally insists that the jury found concealment as
part of its verdicts on conversion and constructive fraud. According to
Fawzy, concealment is equivalent to an intent to deceive. Assuming
without deciding that the jury found concealment, we still disagree with
Fawzy. Under both Arizona law and federal bankruptcy law, the scienter
of the defendant is a separate and distinct element from the defendant’s act
of misrepresenting or concealing facts. See Oney, 410 B.R. at 35; Nielson, 419
P.2d at 517–18. Simply put, Garcia’s conduct and her state of mind are
neither factual nor legal equivalents.
Fawzy only attacks the bankruptcy court’s holding that issue
preclusion should not be applied. He does not specifically and distinctly
make any other arguments on appeal. As a result, there is nothing else we
need to address to dispose of his cross-appeal. See Brownfield v. City of
Yakima, 612 F.3d 1140, 1149 n.4 (9th Cir. 2010). Because Fawzy’s issue
preclusion argument lacks merit, we AFFIRM the bankruptcy court’s
§ 523(a)(2)(A) ruling.
CONCLUSION
For the reasons set forth above, we AFFIRM in part and VACATE in
part the bankruptcy court’s nondischargeability judgment. Additionally,
we REMAND for further proceedings consistent with this decision.
27