In re: Wallace Steffen ( 2023 )

FILED
JUL 18 2023
NOT FOR PUBLICATION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-22-1240-SFL
WALLACE STEFFEN,
Debtor. Bk. No. 8:18-bk-14425-SC
WALLACE STEFFEN, Adv. No. 8:19-ap-01107-SC
Appellant,
v. MEMORANDUM*
LINDA STEFFEN,
Appellee.
Appeal from the United States Bankruptcy Court
for the Central District of California
Scott C. Clarkson, Bankruptcy Judge, Presiding
Before: SPRAKER, FARIS, and LAFFERTY, Bankruptcy Judges.
INTRODUCTION
Chapter 71 debtor Wallace Steffen appeals from the bankruptcy
court’s judgment excepting from discharge under § 523(a)(4) his debt to
* This disposition is not appropriate for publication. Although it may be cited for
whatever persuasive value it may have, see Fed. R. App. P. 32.1, it has no precedential
value, see 9th Cir. BAP Rule 8024-1.
1
Unless specified otherwise, all chapter and section references are to the
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.
Linda Steffen arising from his conduct while serving as successor trustee of
his deceased father’s trust. The bankruptcy court granted summary
judgment based on the findings of fact and conclusions of law set forth in
the Ohio Probate Court’s final decision holding Mr. Steffen liable for
breach of trust. On appeal, Mr. Steffen only challenges the preclusive effect
of the Probate Court’s state of mind findings. Mr. Steffen claims that he
should have been given the opportunity to present evidence that he had
relied on the advice of his trust counsel to negate any finding that he
harbored a culpable mental state. However, Mr. Steffen’s mental state was
actually litigated in the Probate Court and necessary to the imposition of
his liability. He cannot collaterally attack the Probate Court’s intent
findings now by presenting evidence in the bankruptcy court that he relied
on advice of counsel.
Accordingly, we AFFIRM.
FACTS2
Ms. Steffen and Mr. Steffen are siblings. Their father, Wallace Steffen
Sr., established a revocable living trust in 2004 (“Trust”). Upon the father’s
death, the Trust’s assets were to be equally distributed between the
siblings. As of June 2010, the father was incapacitated by dementia until his
passing in March 2015. Mr. Steffen served as the successor trustee under
2
We exercise our discretion to take judicial notice of documents electronically
filed in the underlying bankruptcy case and adversary proceeding. See Atwood v. Chase
Manhattan Mortg. Co. (In re Atwood), 293 B.R. 227, 233 n.9 (9th Cir. BAP 2003).
2
the Trust from June 2010 through at least February 2018. During his tenure
as trustee, Mr. Steffen engaged in numerous transactions involving the
Trust’s assets for his own benefit. This ultimately led to Ms. Steffen suing
Mr. Steffen in the Ohio Probate Court in June 2015 for breach of trust and
avoidance of loans he made to himself while serving as trustee.
A. Trial in the Ohio Probate Court.
Ms. Steffen alleged that Mr. Steffen failed to account for the Trust’s
assets and after becoming trustee moved into his father’s house, which was
property of the Trust, without paying rent. But of greater concern were the
loans Mr. Steffen made to himself while serving as trustee. According to
Ms. Steffen, prior to their father’s incapacitation, Mr. Steffen borrowed
roughly $90,000. After becoming the successor trustee, Mr. Steffen
borrowed no less than another $250,000. By way of her complaint,
Ms. Steffen sought an accounting, avoidance of all the loans, distribution to
herself of all remaining assets, and recovery of her attorney fees and costs
in pursuing the Probate Court action.
After a three-day bench trial in December 2016, the Probate Court
rendered an interlocutory judgment in the form of a twenty-page “Journal
Entry” in favor of Ms. Steffen and against Mr. Steffen for $165,174.52, plus
interest. The Probate Court reserved the issue of Ms. Steffen’s attorney fees
and costs for further hearing. The Probate Court held that Mr. Steffen
became indebted to the trust for $550,898.05 as a result of his transactions
involving the Trust’s assets. The court then offset the value of the
3
remaining assets awarded solely to Ms. Steffen against Mr. Steffen’s debt.
This left a deficiency balance of $165,174.52 that Mr. Steffen needed to pay
Ms. Steffen in order to complete “her proper Trust Share.”
The Probate Court rendered numerous findings of fact and
conclusions law in support of Mr. Steffen’s liability. Relevant to
Ms. Steffen’s challenge to the dischargeability of the debt, the Probate
Court determined:
1) [Mr. Steffen’s] Pre-2013 Self-Transfers were
transactions not in the best interest of [his father], and therefore
violated Sections 3.2 and 9.1 of the Trust Agreement.
2) [Mr. Steffen’s] Pre-2013 Self-Transfers were
transactions not in accordance with the purpose of the Trust, or
the interests of [his father], and therefore violated [Mr.
Steffen’s] duty to administer the Trust in accordance with its
purpose, under R.C. 5808.01.
3) [Mr. Steffen’s] Pre-2013 Self-Transfers were
transactions not in the interest of [his father], and therefore
violated [Mr. Steffen’s] duty to administer the Trust solely in
the interest of the beneficiary under R.C. 5808.02.
4) Through his various distributions of Trust property
after [his father’s] death, [Mr. Steffen] failed to act impartially
in the management and distribution of Trust property, and
therefore violated his duty of impartiality to [Ms. Steffen] under
R.C. 5808.03.
More importantly for our purposes, the Trust included an
“exoneration clause” that absolved the trustee from personal liability for
4
actions taken while serving as trustee “if the actions (or inactions) of the
Trustee are taken in good faith, and without gross negligence or willful
misconduct.” The record does not include transcripts from the trial in the
Probate Court. Yet, the Journal Entry recognized the significance of the
exoneration clause and addressed it when considering whether Mr. Steffen
was liable to Ms. Steffen. Based on the evidence presented at trial, the
Probate Court found that Mr. Steffen could “not limit [his] liability . . .
because [his] pre-2013 Self-Transfers, as well as his conduct after [his
father’s] death, was not mere negligence, but rather, constituted bad faith,
gross negligence, willful misconduct and reckless indifference to the
purposes of the Trust and . . . interests of [his father] and [Ms. Steffen].”
The court further found that Mr. Steffen’s actions “constituted an
intentional pattern of self-dealing over several years in contravention of the
purposes of the Trust and the interests of [his father] and [Ms. Steffen], as
well as a negligent mismanagement of the whole Trust.” This led the
Probate Court to conclude that:
The forgoing indebtedness owed by [Mr. Steffen] to the Trust [the
entire $550,898.05 Mr. Steffen owed the trust—before offsetting the
remaining trust assets solely awarded to Ms. Steffen] arises from his
failure to meet his obligations, including financial obligations, to the
Trust while serving in a fiduciary capacity; the misappropriation of
trust funds or money while held in a fiduciary capacity; and his
failure to properly account for such funds. [Mr. Steffen] knew that his
conduct as a fiduciary was improper, or he consciously disregarded
or was willfully blind to a substantial risk that his conduct would
turn out to violate his fiduciary duties, and this risk was a gross
5
deviation from the standard of conduct that a law-abiding person
would observe under the circumstances.
B. Mr. Steffen’s bankruptcy and the adversary proceeding.
At the time Mr. Steffen commenced his chapter 7 bankruptcy in
December 2018, the Probate Court’s Journal Entry was still interlocutory—
awaiting the award of fees and costs to Ms. Steffen. In May 2019, the
bankruptcy court granted relief from stay to permit the parties to complete
the Probate Court litigation. The Probate Court entered final judgment in
March 2020 granting Ms. Steffen fees of $209,502 and costs of $3,198.83.
Mr. Steffen then appealed the final judgment, but the Ohio Court of
Appeals affirmed on procedural grounds.
In the meantime, in June 2019, Ms. Steffen commenced her
nondischargeability action under § 523(a)(4), while the Probate Court
action was still pending. In April 2020, just after the Probate Court’s entry
of final judgment, Ms. Steffen moved for summary judgment. Based on the
parties’ agreement, the bankruptcy court held the adversary proceeding
and Ms. Steffen’s summary judgment motion in abeyance pending the
exhaustion of all appeals arising from the Probate Court action.
Ms. Steffen’s adversary complaint stated two claims for relief under
§ 523(a)(4)—one for fiduciary defalcation and the other for embezzlement.
But she sought summary judgment only on the fiduciary defalcation claim.
In her summary judgment motion, she pointed out that Mr. Steffen
admitted in his answer that the Trust was an express trust and that “at all
6
times relevant . . . [Mr. Steffen ] acted in a fiduciary capacity as successor
trustee of the Trust.” As Ms. Steffen explained, the only disputed issue was
whether Mr. Steffen committed defalcation while serving as successor
trustee of the Trust. According to her, the issue preclusive effect of the
Probate Court judgment conclusively established Mr. Steffen’s fiduciary
defalcation within the meaning of § 523(a)(4). She further posited that the
entire judgment amount the Probate Court awarded arose from
Mr. Steffen’s fiduciary defalcation, so the entire amount of the judgment
debt was nondischargeable, per Cohen v. de la Cruz, 523 U.S. 213, 219–21
(1998).
Mr. Steffen raised several arguments in opposition to the summary
judgment motion, but on appeal he exclusively challenges the requisite
state of mind for fiduciary defalcation under § 523(a)(4). He contended that
he could not have harbored the required intent or reckless disregard as
articulated in Bullock v. BankChampaign, N.A., 569 U.S. 267, 273–74 (2013),
because he acted under the advice of counsel. Mr. Steffen acknowledged in
his summary judgment opposition that the Probate Court made some
intent findings. He even admitted that “[w]ithout more,” the Probate
Court’s intent findings “would seemingly provide the intent element under
11 U.S.C. Sec. 523(a)(4).” But he reasoned that issue preclusion could not be
applied to the intent issue because nothing in the Journal Entry specifically
addressed or rejected his advice of counsel allegations.
At the hearing on the summary judgment motion, Mr. Steffen refined
7
his advice of counsel argument. He stated that there was no evidence in the
record that his reliance on the advice of his trust counsel was addressed at
all in the Probate Court. He insisted that he was entitled to have it
addressed for the first time in the bankruptcy court as an affirmative
defense to the nondischargeability action. He also posited that issue
preclusion should not apply because the mental states required for liability
under the Trust and for nondischargeability under § 523(a)(4) were not
exactly the same.
The bankruptcy court ruled that the issue of Mr. Steffen’s intent was
necessary to the Probate Court’s decision. As the court explained, the
Trust’s exoneration clause freed him from liability unless he acted
intentionally and knowing that his acts or omissions constituted a breach of
trust. Or, alternately, to be liable despite the exoneration clause, his acts or
omissions had to be in reckless disregard of his duties under the Trust. As
the bankruptcy court noted, the Probate Court held that the exoneration
clause did not apply because of Mr. Steffen’s mental state. In other words,
the bankruptcy court determined that the Probate Court’s state of mind
findings conclusively established that Mr. Steffen harbored the requisite
culpable mental state for fiduciary defalcation under § 523(a)(4).
The bankruptcy court rejected the argument that because the Probate
Court’s Journal Entry did not specifically address Mr. Steffen’s advice of
counsel allegations, there could be no issue preclusion regarding the issue
of his state of mind. According to the bankruptcy court, Mr. Steffen could
8
have presented his advice of counsel evidence as part of the Probate Court
proceedings. Having failed to do so, however, he could not collaterally
attack the Probate Court’s judgment by asserting new evidence to negate
the Probate Court’s intent findings. Alternately, the bankruptcy court ruled
that Mr. Steffen failed to present any evidence demonstrating a genuine
issue of material fact regarding his reliance on the advice of his counsel.
The bankruptcy court entered summary judgment against Mr. Steffen
on the fiduciary defalcation claim on November 29, 2022. Mr. Steffen
timely appealed.
JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and
157(b)(2)(I). We have jurisdiction under 28 U.S.C. § 158.
ISSUES
1. Whether the bankruptcy court correctly determined that the issue
preclusive effect of the Probate Court’s intent findings barred Mr. Steffen
from litigating in the bankruptcy court whether he acted in reliance on the
advice of counsel.
2. Whether the bankruptcy court abused its discretion when it denied
the request Mr. Steffen made in his summary judgment opposition for
additional time to conduct discovery.
STANDARDS OF REVIEW
We review de novo the bankruptcy court’s grant of summary
judgment. Plyam v. Precision Dev., LLC (In re Plyam), 530 B.R. 456, 461 (9th
9
Cir. BAP 2015). We also review de novo the bankruptcy court’s
determination that issue preclusion is available. Lopez v. Emerg. Serv.
Restoration, Inc. (In re Lopez), 367 B.R. 99, 103 (9th Cir. BAP 2007). When we
review an issue under the de novo standard of review, “we consider [the]
matter anew, as if no decision had been rendered previously.” Kashikar v.
Turnstile Cap. Mgmt., LLC (In re Kashikar), 567 B.R. 160, 164 (9th Cir. BAP
2017).
We review the bankruptcy court’s denial of further discovery before
granting summary judgment for an abuse of discretion. Marciano v. Fahs (In
re Marciano), 459 B.R. 27, 35 (9th Cir. BAP 2011) (citing Mackey v. Pioneer
Nat'l Bank, 867 F.2d 520, 523 (9th Cir.1989)), aff'd, 708 F.3d 1123 (9th Cir.
2013). The bankruptcy court abused its discretion if it applied an incorrect
legal rule or its factual findings were illogical, implausible, or without
support in the record. TrafficSchool.com v. Edriver Inc., 653 F.3d 820, 832 (9th
Cir. 2011).
DISCUSSION
Mr. Steffen specifically and distinctly makes only two arguments. He
contends that the bankruptcy court incorrectly applied issue preclusion to
bar his advice of counsel defense for his fiduciary defalcation because there
was no evidence that the defense was tried or resolved by the Probate
Court. Mr. Steffen’s second argument also concerns his advice of counsel
defense. He maintains that the bankruptcy court should have continued the
summary judgment proceeding so that he could conduct discovery on his
10
advice of counsel defense.
A. Summary judgment and issue preclusion standards.
Under Civil Rule 56(a), made applicable in adversary proceedings by
Rule 7056, the court shall grant summary judgment when “the movant
shows that there is no genuine dispute as to any material fact and the
movant is entitled to judgment as a matter of law.” A factual dispute is
genuine if, on the record presented, a reasonable trier of fact could find in
favor of the non-moving party. Far Out Prods., Inc. v. Oskar, 247 F.3d 986,
992 (9th Cir. 2001) (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248–49
(1986)). A fact is material if it might affect the outcome of the case. Id. Once
the moving party has met its initial burden, the non-moving party must
show specific facts establishing the existence of genuine issues of fact for
trial. Anderson, 477 U.S. at 256.
Under full faith and credit principles, see 28 U.S.C. § 1738, we must
give the Probate Court judgment the same preclusive effect Ohio courts
would. See Markowitz v. Campbell (In re Markowitz), 190 F.3d 455, 461 (6th
Cir. 1999); see also Pemstein v. Pemstein (In re Pemstein), 492 B.R. 274, 281 (9th
Cir. BAP 2013) (same articulation of full faith and credit principles under
Ninth Circuit law). Courts in Ohio consider four factors before deciding
whether a prior judgment should be given issue preclusive effect:
1) A final judgment on the merits in the previous case after a
full and fair opportunity to litigate the issue; 2) The issue must
have been actually and directly litigated in the prior suit and
must have been necessary to the final judgment; 3) The issue in
11
the present suit must have been identical to the issue in the
prior suit; 4) The party against whom estoppel is sought was a
party or in privity with the party to the prior action.
Sill v. Sweeney (In re Sweeney), 276 B.R. 186, 189 (6th Cir. BAP 2002) (quoting
Gonzalez v. Moffitt (In re Moffitt), 252 B.R. 916, 921 (6th Cir. BAP 2000)).
B. The Probate Court’s decision established damages for defalcation
while acting in a fiduciary capacity under § 523(a)(4).
To prove a claim for relief for fiduciary defalcation under § 523(a)(4),
a plaintiff must allege and demonstrate that (1) there was an express trust;
(2) a debt arose from the debtor’s defalcation; and (3) the debtor was acting
as a fiduciary to the creditor at the time the debt arose. Otto v. Niles (In re
Niles), 106 F.3d 1456, 1459 (9th Cir. 1997), abrogated on other grounds by
Bullock v. BankChampaign, N.A., 569 U.S. 267, 274 (2013). Whether Mr.
Steffen was acting as a fiduciary within the meaning of § 523(a)(4) and
whether his actions qualify as a defalcation are determined by federal law.
Newman v. Lee (In re Newman), 2022 WL 2100905, at *5 (9th Cir. BAP June
10, 2022) (citing Mele v. Mele (In re Mele), 501 B.R. 357, 363 (9th Cir. BAP
2013)).
A defendant qualifies as a fiduciary within the meaning of § 523(a)(4)
when his or her fiduciary duties arise “from an express or technical trust
that was imposed before, and without reference to, the wrongdoing that
caused the debt . . . .” Honkanen v. Hopper (In re Honkanen), 446 B.R. 373,
378-79 (9th Cir. BAP 2011). Defalcation under § 523(a)(4) typically occurs
when the defendant trustee knows that his or her conduct is improper or
12
“consciously disregards (or is willfully blind to) a substantial and
unjustifiable risk that his conduct will turn out to violate a fiduciary duty.”
Bullock, 569 U.S. at 274 (internal quotation marks omitted).
The Probate Court actually, directly, and necessarily determined that
Mr. Steffen breached his fiduciary duties while acting as trustee of his
father’s trust. Consequently, the court held him liable for $165,174.52 and
subsequently awarded Ms. Steffen attorney fees and costs. The Probate
Court’s findings conclusively establish the existence of an express trust.
Mr. Steffen does not challenge the preclusive effect of this finding.
Ms. Steffen’s claims for breach of trust did not depend on a culpable
state of mind and would not, by themselves, support nondischargeability
for defalcation under § 523(a)(4). But the Probate Court was required to
decide whether the exoneration clause in the Trust freed Mr. Steffen from
the liability otherwise arising from his breach of the Trust. The Journal
Entry details the Probate Court’s finding that Mr. Steffen either knowingly
breached his fiduciary duties or was willfully blind to the substantial risk
that his conduct violated his fiduciary duties. Based on his culpable state of
mind, the Probate Court held that the exoneration clause did not apply,
and Mr. Steffen was liable to Ms. Steffen for his breaches of his fiduciary
duties. The Probate Court’s findings are almost a verbatim quote of the
state of mind required for § 523(a)(4) fiduciary defalcation. See Bullock, 569
U.S. at 273–74. On appeal, Mr. Steffen does not challenge that the parties
actually, directly, and necessarily litigated his state of mind as part of Ms.
13
Steffen’s claims.
As to the third requirement for fiduciary defalcation under
§ 523(a)(4), Mr. Steffen argued in his summary judgment opposition that
the Probate Court did not determine that he was acting as a fiduciary for
Ms. Steffen (rather than, or in addition to, the father) at the time of his
defalcation. Mr. Steffen did not specifically and distinctly make this
argument in his opening appeal brief. He mentioned it in passing in his
summary of argument, but he never developed the issue.3 Consequently,
he has forfeited this argument. Christian Legal Soc'y v. Wu, 626 F.3d 483,
487–88 (9th Cir. 2010); Brownfield v. City of Yakima, 612 F.3d 1140, 1149 n.4
(9th Cir. 2010).
Even if we were to attempt to address this argument, the Probate
Court unequivocally found Mr. Steffen liable to Ms. Steffen for breach of
his fiduciary duties—both before and after their father passed away. The
Probate Court’s conclusions of law referenced multiple fiduciary duties
that Mr. Steffen owed but violated.4 It neither stated nor suggested any
3
According to Mr. Steffen’s counsel at oral argument, the discussion of his
fiduciary duty to Ms. Steffen in his opening brief is limited to a single statement that the
bankruptcy court erred “when it concluded that Wallace’s denial that he owed Linda a
fiduciary duty during the relevant period had been both litigated and decided . . . based
solely on a finding which said Linda had interests which were affected but not that
Wallace had a duty to protect those interests.”
4 The Probate Court cited multiple provisions of R.C. § 5808.01, et seq. that
Mr. Steffen violated. Those provisions codify ”the long and ancient basic common law
of fiduciary duty.” Bryan v. Chytil, 2021 WL 5356205, *11 (Ohio Ct. App. Nov. 10, 2021)
(quoting Daniel R. Griffith, Directed Trusts and Administrative Trustees: Not Your
Grandfather's Fiduciary, 23 No. 6 Ohio Prob. L.J. NL 5 (July/Aug. 2013)).
14
other grounds for holding Mr. Steffen liable to Ms. Steffen other than the
breach of his fiduciary duties. 5 Thus, Mr. Steffen’s bald claim that he owed
no fiduciary duty to Ms. Steffen is wholly at odds with the Probate Court’s
decision. Without the development of any factual or legal reasoning, Mr.
Steffen has not demonstrated that the bankruptcy court erred in finding a
nondischargeable fiduciary defalcation under § 523(a)(4).
In sum, the Probate Court held Mr. Steffen liable to Ms. Steffen for
damages that arose from the debtor’s defalcation while acting as a
fiduciary to an express trust. The Probate Court entered its judgment after
the same parties actually and directly litigated the identical issues on the
merits resulting in a final judgment. Under Ohio law, the bankruptcy court
properly recognized that Mr. Steffen was precluded from relitigating these
issues in the adversary proceeding to except the judgment from discharge
5
We are aware of R.C. § 5806.03, which provides in relevant part: “During the
lifetime of the settlor of a revocable trust, whether or not the settlor has capacity to
revoke the trust, the rights of the beneficiaries are subject to the control of the settlor,
and the duties of the trustee . . . are owed exclusively to the settlor.” Yet, the Probate
Court’s judgment is final and entitled to full faith and credit by the bankruptcy court.
Moreover, it appears to be consistent with Ohio law. See Cartwright v. Batner, 15 N.E.3d
401, 404-05, 415 (Ohio Ct. App. 2014) (plaintiff beneficiary of a formerly revocable trust
permitted to sue the defendant trustee after the settlor died for breach of fiduciary
duties associated with the trustee’s misuse of a power of attorney during the lifetime of
the settlor); see generally Alan Newman, George G. Bogert & George T. Bogert, The Law
of Trusts and Trustees § 964 (3d ed. 2010) (“[M]any courts have allowed other
beneficiaries to pursue breach of duty claims after the settlor’s death, related to the
administration of the trust during the settlor’s lifetime, when, for example, there are
allegations that the trustee breached its duty during the settlor’s lifetime and that the
settlor had lost capacity, was under undue influence, or did not approve or ratify the
trustee’s conduct.”).
15
under § 523(a)(4). 6
C. Mr. Steffen cannot relitigate his liability to provide new evidence
that he relied on advice of counsel.
Mr. Steffen argues that his advice of counsel allegations are not
barred by issue preclusion because the issue was not actually litigated in
the Probate Court. He contends that issue preclusion “does not apply to
issues which could have been litigated in that proceeding but were not.”
This argument belies a fundamental misunderstanding of the relevant
issue precluded and the nature of his “defense.” The Probate Court’s final
judgment precludes relitigation of Mr. Steffen’s culpable state of mind.
That issue was actually, directly, and necessarily decided to impose
liability on Mr. Steffen for his breaches of fiduciary duty while acting as
trustee. It is simply too late to advance a new argument concerning his
state of mind under the guise of litigating the defalcation necessary to
6
Mr. Steffen also argues that the bankruptcy court erred by applying claim
preclusion rather than issue preclusion. This argument is based on two isolated
statements made by the bankruptcy court. The court, quoting Italiano v. Commercial
Financial Corp., 772 N.E.2d 1215, 1220 (Ohio Ct. App. 2022), stated: “Moreover, issue
preclusion ‘is applicable to defenses which, although not raised, could have been raised
in the prior action.’ Accordingly, if a defendant previously neglected to assert the
defense, he is precluded from raising it subsequently by virtue of the existence of the
judgment rendered in the former action.” However, the Ohio court was specifically
referring to claim preclusion. In the next paragraph, the bankruptcy court made a
similar statement. Regardless, these isolated comments are immaterial to our analysis
and decision which concludes that (1) the relevant issue was Mr. Steffen’s state of mind
– not advice of counsel, and (2) advice of counsel is not a complete defense to either a
federal fiduciary defalcation action under § 523(a)(4) or an Ohio breach of trust cause of
action.
16
prove Ms. Steffen’s claim for nondischargeability under § 523(a)(4).
Moreover, Mr. Steffen miscomprehends the nature of his argument.
He refers to his alleged reliance on the advice of counsel as a defense to his
culpable mental state. But reliance on counsel is not usually an absolute bar
to liability on claims requiring scienter. In most instances, “counsel’s advice
is merely evidence to be considered in appraising the client’s state of
mind.” Restatement (Third) Law Governing Lawyers § 29, cmt. c (2000)
(citations omitted). While advice of counsel may well have been probative
in determining the application of the exoneration clause, Mr. Steffens
cannot relitigate his mental state within the nondischargeability action.
The law governing objection to discharge actions supports this
distinction. The Ninth Circuit has stated that advice of counsel is not
recognized as an affirmative defense in the objection to discharge context.
Maring v. PG Alaska Crab Inv. Co. (In re Maring), 338 F. App’x 655, 658 (9th
Cir. 2009) (citing Bisno v. United States, 299 F.2d 711, 719 (9th Cir. 1961)).
(applying § 727(a)(4)). Even so, in determining whether a debtor harbored
the culpable mental state required to deny the discharge, the debtor’s
reliance on the advice of counsel may be a significant factor. See First
Beverly Bank v. Adeeb (In re Adeeb), 787 F.2d 1339, 1343 (9th Cir. 1986) (citing
Hultman v. Tevis, 82 F.2d 940, 941 (9th Cir. 1936)) (applying § 727(a)(2)(A)).
But when a debtor has admitted or already has been found to have acted
with the requisite culpable state of mind, allegations of reliance on the
advice of counsel cannot help the debtor. They do not negate the admitted
17
or previously determined scienter. Id. As Adeeb aptly explained:
In this case, the bankruptcy court found that both Cooper and Adeeb
“knew that the purpose of the transfers was to hinder or delay
creditors of the debtor.” Such a finding precludes the defense of good
faith reliance on the advice of an attorney even if the client is
otherwise innocent of any improper purpose.
Id. Accord, Rawson v. Cain (In re Rawson), 734 F. App’x 507, 509 (9th Cir.
2018); see also Sachs v. Adeli (In re Adeli), 2009 WL 7809009, at *10 (9th Cir.
BAP Mar. 24, 2009) (“[B]ecause Adeli admitted that both she and her New
York counsel knew the purpose of the transfers was to protect her assets
from Sachs and hinder or delay his collection efforts, she cannot assert the
advice of counsel defense to negate her intent under section 727(a)(2)(A)”),
aff'd, 384 F. App’x 599 (9th Cir. 2010). 7
In the context of both § 523(a)(4) and (6), this Panel has upheld
7
Similarly, we have not found any Ohio authority suggesting that advice of
counsel is a complete defense to a breach of trust claim. To the contrary, Ohio case law
indicates that it is not. See In re Butler’s Est., 28 N.E. 2d 186, 191 (Ohio 1940) (“[T]he
advice of counsel cannot be a complete shield for the action of a trustee or a fiduciary.”);
see also In re Guardianship of McPheter, 642 N.E.2d 690, 695 (Ohio Ct. App 1994)
(following In re Butler’s Estate). In Ohio, reliance on advice of counsel can be presented
to show that the defendant acted with reasonable prudence, or to negate an inference
that the defendant harbored a culpable mental state. See, e.g., Miller v. Proctor, 20 Ohio
St. 442, 448–49 (1870). But alleged reliance on the advice of counsel is just one factor the
court may consider in deciding whether to infer a culpable state of mind. See Mancz v.
McHenry, 2021 WL 141496, at *18 (Ohio Ct. App. Jan. 15, 2021) (“Without more, the
mere assertion that the [defendants] acted on the advice of counsel did nothing to dispel
an inference of fraud.”); In re Butler's Est., 28 N.E.2d at 191 (“[T]he fact that an executor
has had the advice of counsel as to any matter is only one factor entering into the
question as to whether he has exercised due care in connection therewith. Other factors
may indicate a contrary course of action.”).
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bankruptcy court decisions declining to give preclusive effect to intent
findings that would exclude advice of counsel allegations. See CWB
Holdings, LLC v. Anderson (In re Anderson), 2017 WL 5163443, at *8-9 (9th
Cir. BAP Nov. 7, 2017); Campbell v. Spencer (In re Spencer), 2017 WL 3470996,
at *4-6 (9th Cir. BAP Aug. 11, 2017), aff'd, 752 F. App’x 510 (9th Cir. 2019).
In Anderson, the creditor was awarded damages on a claim for debtors
wrongfully recording a lis pendens. In re Anderson, 2017 WL 5163443, at *3
In Spencer, the court entered judgment on the creditor’s claims for, among
other things, breach of contract, breach of fiduciary duty, accounting, and
constructive fraud. In re Spencer, 2017 WL 3470996, at *2. In those cases it
was unclear whether and to what extent the debtor’s mental state was
actually, directly, and necessarily litigated in the prior litigation. See In re
Anderson, 2017 WL 5163443, at *8 (“[A]s far as we can tell from the record
on appeal, the state court did not explicitly find that the Andersons knew
(rather than had reason to know) that the lis pendens were improper.”); In
re Spencer, 2017 WL 3470996, at *5 (“Given these contradictory findings
[regarding defendant’s state of mind], the bankruptcy court did not abuse
its discretion in declining to apply issue preclusion to the arbitrator's
findings on intent. It did not need to give issue preclusive effect to an
unclear or ambiguous decision[.]”). Though Anderson and Spencer reached
results contrary to the one we reach here, they are consistent with the
general proposition that where it has been conclusively established that the
debtor’s mental state was sufficiently culpable to meet the requirements for
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nondischargeability, the debtor may not later relitigate that issue by
interposing allegations of reliance on the advice of counsel.
Here, the Probate Court’s state of mind findings were actually and
directly litigated, and were necessary to the imposition of liability on
Mr. Steffens. The court’s findings precisely mirror those required for
nondischargeability under § 523(a)(4). Other than his desire to relitigate his
state of mind to raise a new argument, Mr. Steffen has offered us no basis
for concluding that the Probate Court’s intent findings are not binding and
conclusive. Ohio law—and full faith and credit—preclude him from doing
so.
D. The court did not err by denying Mr. Steffen additional time to
conduct discovery.
Because the bankruptcy court properly precluded Mr. Steffen’s
advice of counsel allegations from further litigation, we also reject
Mr. Steffen’s contention that the bankruptcy court should have given him
additional time to conduct discovery regarding advice of counsel. Because
his intent already had been established by operation of the preclusive effect
of the Probate Court’s decision, Mr. Steffen’s advice of counsel
allegations—and any discovery relevant thereto—were not material to the
resolution of the § 523(a)(4) fiduciary defalcation claim for relief.
CONCLUSION
For the reasons set forth above, we AFFIRM.
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