Van Zandt v. Mbunda (In Re Mbunda)

FILED
1 DEC 14 2012
SUSAN M SPRAUL, CLERK
2 U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT
3 UNITED STATES BANKRUPTCY APPELLATE PANEL
4 OF THE NINTH CIRCUIT
5 In re: ) BAP No. NC-11-1653-MkHPa
)
6 WILEHARDA KILIAN MBUNDA, ) Bk. No. 10-34095
)
7 Debtor. ) Adv. No. 10-03267
_______________________________)
8 )
THOMAS VAN ZANDT, Executor for )
9 the Estate of Evaline Jeanne )
Malis, )
10 )
Appellant, )
11 )
v. ) OPINION
12 )
WILEHARDA KILIAN MBUNDA, )
13 )
Appellee. )
14 _______________________________)
15
16 Argued and Submitted on October 18, 2012
at San Francisco, California
17
Filed – December 14, 2012
18 ______________
19 Appeal from the United States Bankruptcy Court
for the Northern District of California
20
Honorable Dennis Montali, Bankruptcy Judge, Presiding
21
22 Appearances: Appellant Thomas Van Zandt, Esq. argued on his own
behalf as executor for the estate of Evaline Jeanne Malis; and
23 Stephen D. Finestone, Esq. argued for Appellee Wileharda Kilian
Mbunda.
24
25
26 Before: MARKELL, HOLLOWELL, and PAPPAS, Bankruptcy Judges.
27
28
1 MARKELL, Bankruptcy Judge:
2
3 INTRODUCTION
4 Appellant Thomas Van Zandt (“Thomas”), as executor for the
5 estate of Evaline Jeanne Malis (“Malis”),1 sued debtor Wileharda
6 Kilian Mbunda (“Mbunda”) seeking to declare that a debt Mbunda
7 owed to Malis’s probate estate was nondischargeable. The
8 bankruptcy court initially dismissed without leave to amend all
9 but one of Thomas’s claims for relief. At trial, the court
10 granted Mbunda’s motion for a judgment on partial findings at the
11 close of Thomas’s case, and entered judgment in favor of Mbunda.
12 We AFFIRM.
13 FACTS
14 Mbunda filed her chapter 72 bankruptcy case in October 2010.
15 In her schedules, Mbunda listed a debt to Malis in the amount of
16 $165,000 (“Debt”). According to Mbunda’s schedules, the Debt
17 arose from business loans made by Malis to Mbunda in September
18 and November 2005. These loans were made to Mbunda as the sole
19 proprietor of an art and jewelry store known as the Twiga
20 Gallery.
21 Thomas filed his nondischargeability complaint against
22
1
23 Because some of the key players in this appeal share the
same surname, we refer to them by their first name for ease of
24 reference. No disrespect is intended.
25 2
Unless specified otherwise, all chapter and section
26 references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and
all “Rule” references are to the Federal Rules of Bankruptcy
27 Procedure, Rules 1001-9037. All “Civil Rule” references are to
the Federal Rules of Civil Procedure. All “Evidence Rule”
28 references are to the Federal Rules of Evidence.
2
1 Mbunda in December 2010. Thomas alleged that the Debt was
2 nondischargeable under § 523(a)(2)(A), (4) and (6). Consistent
3 with Mbunda’s bankruptcy schedules, the complaint referred to the
4 transactions from which the Debt arose as a $100,000 loan from
5 Malis to Mbunda in September 2005 and a second $100,000 loan from
6 Malis to Mbunda in November 2005. According to the complaint,
7 Malis refinanced her home in order to loan the $200,000 to
8 Mbunda.
9 In pertinent part, Thomas also alleged that Mbunda made the
10 following misrepresentations in order to induce Malis to loan
11 Mbunda the $200,000:
12 1. Mbunda would use the loan proceeds to purchase artistic
13 materials for the art gallery, “including antique beads
14 and quantities of gold, ivory and precious and semi-
15 precious gemstones” (collectively, “Raw Materials”).
16 2. Malis would have a security interest in the Raw
17 Materials and in other real and personal property
18 Mbunda owned.
19 3. Malis also would have a security interest in the Twiga
20 Gallery (collectively with the Raw Materials and the
21 other real and personal property allegedly promised as
22 security, the “Collateral”).3
23
3
24 The complaint repeatedly refers to the Debt as a loan, and
repeatedly refers to the security allegedly promised for the
25 loan. In two places, however, the complaint refers to the
26 underlying transaction as something other than a loan secured by
real and personal property security. First, it alleged that
27 Mbunda induced Malis “to invest” in the Twiga Gallery. Complaint
(Dec. 14, 2010) at ¶ 6. Second, it states that Mbunda told Malis
28 (continued...)
3
1 4. Mbunda would execute transaction documentation
2 memorializing the Debt and Malis’s security interest in
3 the Collateral.
4 5. Mbunda would make monthly payments sufficient to cover
5 the increased amount of Malis’s monthly mortgage
6 payments resulting from Malis’s home refinancing.
7 Mbunda moved to dismiss Thomas’s complaint. In response,
8 the bankruptcy court dismissed without leave to amend Thomas’s
9 § 523(a)(4) claim to the extent it did not deal with larceny, as
10 well as his § 523(a)(6) claim. The bankruptcy court granted
11 Thomas leave to amend his § 523(a)(2)(A) claim and that portion
12 of his § 523(a)(4) claim alleging that the Debt was a debt
13 arising from larceny.
14 Thomas filed an amended complaint. Mbunda again filed a
15 motion to dismiss. The bankruptcy court granted Mbunda’s motion
16 in part, dismissing Thomas’s remaining § 523(a)(4) claim without
17 leave to amend. It then set the sole remaining claim under
18 § 523(a)(2)(A) for trial.4
19
20 3
(...continued)
that the Debt would be “secured by an ownership interest” in the
21 Twiga Gallery. Complaint (Dec. 14, 2010) at ¶ 8. Thomas
22 referred to these two allegations when trying to establish that
the loan was really some other form of transaction, such as a
23 partnership, in order to state a claim under § 523(a)(4). We
address this argument later in this opinion.
24
4
Thomas had originally attempted to state a claim under
25 § 523(a)(4) for, among other things, embezzlement and larceny.
26 These were among the claims initially dismissed. Thomas has not
challenged the dismissal of his § 523(a)(4) action alleging these
27 acts. As a result, he has waived any argument relating to those
theories. See Brownfield v. City of Yakima, 612 F.3d 1140, 1149
28 (continued...)
4
1 On November 2, 2011, the trial on Thomas’s § 523(a)(2)(A)
2 claim commenced. After Thomas presented his case in chief,
3 Mbunda moved under Civil Rule 52(c)5 for a judgment on partial
4 findings. The bankruptcy court granted that motion and, on
5 November 10, 2011, entered a final judgment in Mbunda’s favor.
6 Thomas timely filed a notice of appeal on November 15, 2011.6
7 DISCUSSION
8 During the course of the adversary proceeding, the
9 bankruptcy court ruled against Thomas on each of his three claims
10 for relief. We address each claim for relief in turn.
11 1. Section 523(a)(2)(A).
12 Section 523(a)(2)(A) excepts from discharge debts incurred
13 under false pretenses, based on false representations, or based
14 on actual fraud. In particular, to establish fraud under
15 § 523(a)(2)(A), the creditor must prove each of the following
16 five elements by a preponderance of the evidence:
17 (1) the debtor made a representation;
18
19 4
(...continued)
n.4 (9th Cir. 2010); Golden v. Chicago Title Ins. Co. (In re
20
Choo), 273 B.R. 608, 613 (9th Cir. BAP 2002).
21 5
Rule 7052 makes Civil Rule 52(c) applicable in adversary
22 proceedings. Civil Rule 52(c) provides in relevant part:
23 Judgment on Partial Findings. If a party has been fully
heard on an issue during a nonjury trial and the court
24
finds against the party on that issue, the court may
25 enter judgment against the party on a claim or defense
that, under the controlling law, can be maintained or
26 defeated only with a favorable finding on that issue.
27 6
The bankruptcy court had jurisdiction pursuant to 28 U.S.C.
§§ 1334 and 157(b)(2)(I). We have jurisdiction under 28 U.S.C.
28
§ 158.
5
1 (2) the debtor knew the representation was false at the
2 time he or she made it;
3 (3) the debtor made the representation with the intent
4 to deceive;
5 (4) the creditor justifiably relied on the
6 representation; and
7 (5) the creditor sustained damage as a proximate result
8 of the misrepresentation having been made.
9 Ghomeshi v. Sabban (In re Sabban), 600 F.3d 1219, 1222 (9th Cir.
10 2010). When, as here, the bankruptcy court has resolved the
11 matter under Civil Rule 52(c), we review the “‘court’s findings
12 of fact for clear error and its legal conclusions de
13 novo.’ . . . . The same standard applies to the district court’s
14 involuntary dismissal of a claim under [Civil] Rule 52(c).’” Lee
15 v. W. Coast Life Ins. Co., 688 F.3d 1004, 1009 (9th Cir. 2012)
16 (quoting Price v. U.S. Navy, 39 F.3d 1011, 1021 (9th Cir. 1994)).
17 When deciding a motion under Civil Rule 52(c), as incorporated by
18 Rule 7052, the bankruptcy court is “‘not required to draw any
19 inferences in favor of the non-moving party; rather, the district
20 court may make findings in accordance with its own view of the
21 evidence.’” Id. (quoting Ritchie v. United States, 451 F.3d 1019,
22 1023 (9th Cir. 2006)). Accordingly, we review Thomas’s
23 contentions that the bankruptcy court did not correctly find an
24 absence of essential elements of the fraud claim under the
25 clearly erroneous standard. See Candland v. Ins. Co. of N. Am.
26 (In re Candland), 90 F.3d 1466, 1469 (9th Cir. 1996); Am. Express
27 Travel Related Servs. Co. v. Vee Vinhnee (In re Vee Vinhnee), 336
28 B.R. 437, 443 (9th Cir. BAP 2005) (citing Anastas v. Am. Sav.
6
1 Bank (In re Anastas), 94 F.3d 1280, 1283 (9th Cir. 1996)).
2 Here, in support of its Civil Rule 52(c) ruling, the
3 bankruptcy court determined that there was no admissible evidence
4 from which it could find that Thomas had proved the first or
5 second elements of his § 523(a)(2)(A) claim: that Mbunda had made
6 any knowingly false representations. In particular, the court
7 found that Thomas presented no admissible evidence that Mbunda
8 had made any affirmative misrepresentations regarding: the
9 provision of security or collateral for the Debt; the execution
10 of particular documentation for the Debt; or the timing or amount
11 of monthly payments on the Debt.
12 While the bankruptcy court acknowledged that Mbunda had
13 testified that she had told Malis of her need to repay certain
14 debts around the time of the original transaction, the court
15 found that what Mbunda generally told Malis did not amount to a
16 representation that the loan proceeds would be used only to pay
17 those debts. Furthermore, the court also found that what Mbunda
18 generally told Malis was consistent with Mbunda’s actual use of
19 the proceeds. According to the court, Mbunda’s uncontradicted
20 testimony reflected that she used most of the proceeds to pay her
21 debts, including those she owed to her landlord and to certain
22 consignors of goods.
23 The bankruptcy court further found that Mbunda’s promise to
24 repay the Debt was not false when made. It instead found that
25 Mbunda intended to repay the loan at the time she borrowed the
26 $200,000 from Malis. In support of this finding, the court
27 relied on the exhibits, offered by Thomas and admitted into
28 evidence, reflecting that Mbunda had made payments on the Debt of
7
1 at least $40,000, and perhaps as much as $50,000. According to
2 the court, these payments “completely undermined” any notion that
3 Mbunda did not intend to repay the Debt at the time she incurred
4 it. This finding was not clearly erroneous, as it is not
5 illogical, implausible, or without support in the record. United
6 States v. Hinkson, 585 F.3d 1247, 1262 (9th Cir. 2009)(en banc).
7 Perhaps because of the high standard of review, Thomas did
8 not argue in his opening brief that the bankruptcy court’s
9 findings were clearly erroneous. Instead, he argued that the
10 bankruptcy court committed reversible error by excluding certain
11 evidence. Of the evidence the bankruptcy court excluded, the
12 most significant is Thomas’s testimony regarding what Malis
13 supposedly told him about the Debt before she passed away.
14 This is also a difficult argument for any appellant, as we
15 review a bankruptcy court’s evidentiary rulings for abuse of
16 discretion, and then only reverse if any error would have been
17 prejudicial to the appellant. See Johnson v. Neilson (In re
18 Slatkin), 525 F.3d 805, 811 (9th Cir. 2008) (citing Latman v.
19 Burdette, 366 F.3d 774, 786 (9th Cir. 2004)). “We afford broad
20 discretion to a district court’s evidentiary rulings. To reverse
21 such a ruling, we must find that the district court abused its
22 discretion and that the error was prejudicial. A reviewing court
23 should find prejudice only if it concludes that, more probably
24 than not, the lower court’s error tainted the verdict.” Harper
25 v. City of Los Angeles, 533 F.3d 1010, 1030 (9th Cir. 2008)
26 (citations and internal quotation marks omitted); see also S.E.C.
27 v. Jasper, 678 F.3d 1116, 1122 (9th Cir 2012) (stating that a
28 trial court’s evidentiary rulings should not be disturbed absent
8
1 a “clear abuse of discretion” and prejudice).
2 Here, the record makes clear the content of Thomas’s
3 proposed testimony. We have the record of Thomas’s arguments
4 made at trial, his offers of proof, and a declaration that he
5 filed in support of his opposition to Mbunda’s motion in limine
6 to exclude such evidence. These portions of the record reflect
7 that, according to Thomas, Malis told him in 2009 and 2010 that
8 Mbunda had made the following representations regarding the Debt:
9 1. that “the loan was an investment”;
10 2. that the loan would be used to purchase “valuable art
11 items including antique beads, gold and silver, ivory,
12 and gems . . .”;
13 3. that the Raw Materials purchased with the loan proceeds
14 would be used to produce art works that would be sold
15 at a profit;
16 4. that, if Mbunda could not produce or sell such art
17 works, she would resell the Raw Materials purchased to
18 repay the loan;
19 5. that Mbunda would make monthly payments large enough to
20 pay off the Debt within five years;
21 6. that, as an investor, Malis would receive a percentage
22 of the profits from the sale of the artworks;
23 7. that Mbunda and Malis were partners;
24 8. that Mbunda had many valuable things she could sell to
25 repay the Debt; and
26 9. that Mbunda would execute documentation memorializing
27 all that they had agreed to.
28 See Plaintiff’s Decl. (Oct. 31, 2011) at pp. 2-3.
9
1 The bankruptcy court ruled that Thomas’s proposed testimony
2 was inadmissible hearsay. See Evidence Rules 801, 802. Thomas
3 first challenges the bankruptcy court’s characterization of the
4 proposed testimony as hearsay: he argues that Malis’s out-of-
5 court statements were not being offered to prove the truth of the
6 matter asserted. If correct, admission of the statements would
7 not violate the hearsay rule. Evidence Rule 801(c)(2)
8 (statements are hearsay only if “a party offers [them] in
9 evidence to prove the truth of the matter asserted in the
10 statement.”). According to Thomas, he offered the statements to
11 establish that Malis thought she had security, or alternatively
12 thought she was in a partnership with Mbunda. Once Malis’s
13 mental state was established, Thomas would then be able to argue
14 that the court could infer that representations by Mbunda – about
15 the collateral and the existence of something other than a loan –
16 had caused Malis’s state of mind.
17 Thomas’s argument, however, confuses and conflates the
18 proffered testimony. The excluded testimony contained two levels
19 of out-of-court statements: (1) what Mbunda told Malis, and (2)
20 what Malis told Thomas. Had Malis been available to testify at
21 trial as to what Mbunda had told her, the first level statements
22 – what Mbunda supposedly told Malis – could have been admitted
23 either because they would have been the admission of a party
24 opponent, Evidence Rule 801(d)(2), or they could have been
25 testimony not about the truth of Mbunda’s statements, but about
26 the terms of the contract between them. 5-801 Weinstein’s Federal
27 Evidence § 801.11[3] (2012) (“the rule against hearsay does not
28 exclude relevant evidence as to what the contracting parties said
10
1 or wrote with respect to the making or the terms of an
2 agreement.”); see also United States v. Montana, 199 F.3d 947,
3 950 (7th Cir. 1999).
4 But Malis was deceased. Thomas was thus blocked at the
5 second level in attempting to admit what Malis had told him about
6 what Mbunda had told Malis. As a result, Thomas attempted to
7 testify regarding what Malis had told him in 2009 and 2010 about
8 what Mbunda had told Malis about a transaction that occurred back
9 in 2005.
10 This convoluted argument shows that Thomas was not trying to
11 establish Malis’s mental state. He was attempting to offer
12 Malis’s statements to prove the truth of what Malis allegedly had
13 told him about her discussions with Mbunda. As such, Thomas’s
14 statements were inadmissible hearsay, Evidence Rule 801, 802,
15 805, and their exclusion was not an abuse of discretion. In re
16 Slatkin, 525 F.3d at 811.
17 Anticipating that he would not prevail on his hearsay
18 characterization argument, Thomas next argues that Malis’s
19 statements were excepted from the rule against hearsay by
20 Evidence Rule 803(3). That rule excepts from the hearsay rule
21 “statement[s] of memory or belief to prove the fact remembered or
22 believed” if those statements relate “to the validity or terms of
23 the declarant’s will.” Evidence Rule 803(3). According to
24 Thomas, Malis initially shared with him some of her memories
25 regarding the Debt in the midst of a discussion regarding whether
26 she needed a will.
27 But Thomas’s reading of this exception to the hearsay rule
28 is overbroad. The Advisory Committee Notes accompanying this
11
1 rule make clear that this exception is limited to statements
2 concerning “the execution, revocation, identification, or terms
3 of declarant’s will.” Evidence Rule 803, Advisory Committee Note
4 to para. 3 (citing Annotation: Admissibility of testator’s
5 declarations upon issue of genuineness or due execution of
6 purported will, 62 A.L.R.2d 855 (1958)). Malis’s supposed
7 memories about her discussions with Mbunda regarding the Debt
8 simply are beyond the scope of this exception. As one treatise
9 explains:
10 The “exception” for wills cases is created by special
language in the state-of-mind exception creating an
11 exception to the limit that otherwise applies, and
“backing in” to a new hearsay exception of such breadth
12 seems out of proportion to the language chosen.
Pre-Rules state cases did not allow such broad use of
13 the exception, which reinforces the proposition that
the minimal approach taken in the language of the Fed.
14 R. Evid. 803(3) did not completely change practice by
opening the door broadly to statements proving behavior
15 by others.
16 Christopher B. Mueller and Laird C. Kirkpatrick, 4 FED. EVID.
17 § 8:74 (3d ed. 2012). Again, the bankruptcy court’s refusal to
18 allow these statements into evidence was not an abuse of
19 discretion as it was a straightforward and correct application of
20 Evidence Rule 803(3). Slatkin, 525 F.3d at 811.
21 Thomas next argues that the bankruptcy court should have
22 applied Evidence Rule 807(a)’s “residual exception” to admit his
23 statements. Again, this is a difficult argument on appeal; a
24 trial court’s decision that evidence did not meet the
25 requirements of Evidence Rule 807 is reviewed under the abuse of
26 discretion standard. United States v. Shryock, 342 F.3d 948, 982
27 (9th Cir. 2003). Indeed the Ninth Circuit has recently noted
28 that:
12
1 Our research has disclosed only one instance where a
circuit court reversed a district court to require
2 admission of a statement under [Evidence Rule] 807.
See U.S. v. Sanchez-Lima, 161 F.3d 545, 547-48 (9th
3 Cir. 1998). However, the hearsay statements in that
case were videotaped and under oath, and thus had
4 indicators of trustworthiness that Anderson’s
statements do not.
5
6 United States v. Bonds, 608 F.3d 495, 501 (9th Cir. 2010).
7 Thomas nevertheless contends that the bankruptcy court ruled
8 that the residual exception was inapplicable because Thomas’s
9 hearsay testimony failed to qualify for any of the specifically
10 listed hearsay exceptions. But that argument mischaracterizes
11 the import and meaning of the bankruptcy court’s ruling. A fair
12 reading of the entire record persuades us that the bankruptcy
13 court declined to apply the residual exception because it
14 concluded that Malis’s out-of-court statements regarding the Debt
15 did not satisfy the rule’s requirements. In particular, in order
16 to apply the residual exception, the bankruptcy court would have
17 needed to determine, among other things, that the offered
18 statements had “circumstantial guarantees of trustworthiness”
19 equivalent to those associated with the hearsay exceptions set
20 forth in Evidence Rules 803 and 804. See, e.g., United States v.
21 Leal-Del Carmen, 697 F.3d 964, 974 (9th Cir. 2012) (indicia of
22 trustworthiness included fact that witness’s statement was on
23 videotape, thus allowing trier of fact to assess demeanor, and
24 that statements were made under oath).
25 Here, the record supports the bankruptcy court’s finding
26 that Malis’s statements lack the required circumstantial
27 guarantees. The statements were not made under oath nor were
28 they recorded in any way. There was no showing that Malis was
13
1 under any obligation or incentive to tell the truth.
2 Indeed, the evidence in the record can be easily read to
3 show a lack of the required circumstantial guaranties. This
4 other evidence tended to establish that in 2009-2010, when the
5 statements allegedly were made, Malis not only was quite elderly
6 but also was unwell. Thomas’s proposed testimony further
7 indicated that during this period Malis was no longer able to
8 fully manage her own financial affairs. Additionally, the
9 relevant statements from Malis related to circumstances that were
10 already four years old at the time she spoke with Thomas.
11 The lack of detail extended to crucial factual points: it is
12 impossible to tell from the excluded statements when Malis
13 thought Mbunda allegedly made the representations. Without
14 specifics as to time, the statements left open the possibility
15 that the alleged representations were made after Mbunda incurred
16 the Debt, calling causation into question, as well as whether
17 Malis actually relied upon them in making the loans.7
18 Accordingly, because the bankruptcy court had more than an
19 adequate basis to find that Malis’s statements did not have the
20 requisite “circumstantial guarantees of trustworthiness,” it did
21 not abuse its discretion when it declined to apply the residual
22 exception to the hearsay rule.
23 Thomas’s evidentiary ruling challenges do not end there. He
24
25
7
It seems quite possible that Malis developed her
26 understanding of her rights in relation to the Debt after the
Debt was incurred. The record suggests that Malis’s discussions
27
with Mbunda regarding Mbunda’s financial situation were ongoing
28 and fluid, rather than static and limited to a single point in
time.
14
1 also sought to offer his own testimony, and that of his son
2 Patrick Van Zandt (“Patrick”), that Malis did not draft the
3 promissory note that Thomas had agreed could be admitted in
4 evidence (“Note”). The relevance of this proffered testimony was
5 not that the Note failed to correctly state the terms of the
6 Debt, but that Mbunda had forged it, thus undermining her
7 credibility.
8 Thomas relied on Evidence Rule 701 to justify admission of
9 this testimony, which Thomas stated would have consisted of lay
10 opinion that Malis would never have drafted something like the
11 Note. The bankruptcy court expressed two concerns about this
12 offered testimony. First, the court was concerned that Evidence
13 Rule 701 would not permit such testimony. The note was
14 apparently typed, and there was no issue as to Mbunda’s
15 signature. Second, even if admissible, the court doubted
16 Thomas’s explanation regarding what this testimony would prove
17 and why this testimony was relevant.
18 Like the bankruptcy court, we are also perplexed as to why
19 Thomas stipulated to the Note’s admission into evidence without
20 reservation in light of the arguments regarding the Note that he
21 anticipated making. If the Note were not genuine, it should not
22 have been admitted into evidence to establish the existence of
23 the Debt. But setting our perplexity aside, even if we were to
24 assume that the bankruptcy court incorrectly ruled regarding the
25 admissibility of Thomas’s and Patrick’s Note-related testimony,
26 that ruling was, at most, harmless error. Nothing in Thomas’s
27 account of his and Patrick’s excluded testimony reasonably could
28 have altered the bankruptcy court’s dispositive finding: that
15
1 there was no evidence from which the bankruptcy court could
2 conclude Mbunda made affirmative misrepresentations regarding the
3 Debt.
4 Generally speaking, we ignore harmless error. See Litton
5 Loan Serv’g, LP v. Garvida (In re Garvida), 347 B.R. 697, 704
6 (9th Cir. BAP 2006) (citing 28 U.S.C. § 2111, Rule 9005, Civil
7 Rule 61, and Donald v. Curry (In re Donald), 328 B.R. 192, 203–04
8 (9th Cir. BAP 2005)). Specifically with respect to erroneous
9 evidentiary rulings, such rulings do not constitute reversible
10 error unless it is more likely than not that the rulings changed
11 the outcome of the lawsuit. See Harper, 533 F.3d at 1030.
12 Simply put, Thomas’s and Patrick’s Note-related testimony
13 could not have altered the outcome of the underlying adversary
14 proceeding even if that testimony had been admitted. The outcome
15 of the adversary proceeding hinged on the absence of evidence
16 from which the bankruptcy court, as the trier of fact, could find
17 that Mbunda made affirmative misrepresentations when she incurred
18 the Debt. The same is true for the handful of other evidentiary
19 items that Thomas complains the bankruptcy court should not have
20 excluded.8 None of these other items of excluded evidence would
21 have enabled the court to find that Mbunda made the requisite
22 misrepresentations necessary to support Thomas’s § 523(a)(2)(A)
23 claim for relief.
24
8
25 Thomas argues that the bankruptcy court should not have
prevented him from: eliciting testimony from Mbunda regarding
26 certain alleged patterns in her business-related expenditures;
eliciting testimony from Mbunda regarding how many bank accounts
27 she has used at various times; and requiring Mbunda to read aloud
the contents of the Note. We do not find that any of these
28
rulings constitute an abuse of discretion.
16
1 2. Section 523(a)(4).
2 Thomas also challenges the bankruptcy court’s dismissal of
3 his § 523(a)(4) claim without leave to amend. Dismissals under
4 Civil Rule 12(b)(6) are reviewed de novo. See AlohaCare v. Haw.,
5 Dept. of Human Servs., 572 F.3d 740, 744 n.2 (9th Cir. 2009).
6 Under that standard, “‘[d]ismissal without leave to amend is
7 improper, unless it is clear, upon de novo review, that the
8 complaint could not be saved by any amendment.’” Intri-Plex
9 Techs., Inc. v. Crest Grp., Inc., 499 F.3d 1048, 1056 (9th Cir.
10 2007) (quoting In re Daou Sys., Inc., Sec. Litig., 411 F.3d 1006,
11 1013 (9th Cir. 2005)).
12 In pertinent part, § 523(a)(4) excepts from discharge debts
13 incurred for “for fraud or defalcation while acting in a
14 fiduciary capacity.” § 523(a)(4). The term “fiduciary” is
15 narrowly defined for purposes of § 523(a)(4). Honkanen v. Hopper
16 (In re Honkanen), 446 B.R. 373, 378 (9th Cir. BAP 2011) (citing
17 Cal–Micro, Inc. v. Cantrell (In re Cantrell), 329 F.3d 1119, 1125
18 (9th Cir. 2003)). In order for there to be nondischargeability
19 under § 523(a)(4), the debtor’s fiduciary capacity “must be
20 arising from an express or technical trust that was imposed
21 before, and without reference to, the wrongdoing that caused the
22 debt . . . .” In re Cantrell, 329 F.3d at 1125 (quoting Lewis v.
23 Scott (In re Lewis), 97 F.3d 1182, 1185 (9th Cir. 1996)). A
24 trust “ex maleficio” – that is, a trust imposed by law as a
25 remedy for malfeasance or wrongful actions – will not suffice.
26 In re Honkanen, 446 B.R. at 379. Moreover, “[t]he broad, general
27 definition of fiduciary - a relationship involving confidence,
28 trust and good faith - is inapplicable in the dischargeability
17
1 context.” In re Cantrell, 329 F.3d at 1125 (quoting Ragsdale v.
2 Haller, 780 F.2d 794, 796 (9th Cir. 1986)).
3 Despite these uncontested principles, Thomas in essence
4 claims that the bankruptcy court should have given him the
5 opportunity to amend his § 523(a)(4) claim to add allegations
6 regarding the existence of a partnership.9 As Thomas pointed
7 out, partners in California have the type of fiduciary duty with
8 respect to partnership assets that § 523(a)(4) covers. See
9 Ragsdale 780 F.2d at 796-97.
10 But we are convinced that any amendment to the complaint
11 attempting to fix the defects in the § 523(a)(4) claim would have
12 been futile. When amendment would be futile, the bankruptcy
13 court does not abuse its discretion in dismissing the complaint
14 without leave to amend. Dougherty v. City of Covina, 654 F.3d
15 892, 901 (9th Cir. 2011); Albrecht v. Lund, 845 F2d 193, 195 (9th
16 Cir. 1988). Amendment is futile when “‘allegation of other facts
17 consistent with the challenged pleading could not possibly cure
18 the deficiency.’” Id. (quoting Schreiber Distrib. Co. v.
19
20 9
In this regard, Thomas argued on appeal:
21
While it appears clear from the record that the Court
22 below was aware that Appellant believed that there were
sufficient factual allegations that he could make that
23 would support the existence of a partnership and hence
a fiduciary duty in order to state a claim under
24 § 523(a)(4), the Court below seems to be attempting to
25 protect Appellant’s interests by dissuading Appellant
from pleading a partnership . . . .
26
Aplt. Opn’ng Br. (Feb. 3, 2012) at 11:19-24. As set forth below,
27 the record actually reveals that Thomas admitted in open court
that he had no other facts to allege regarding the existence of a
28
partnership.
18
1 Serv-Well Furniture Co., 806 F.2d 1393, 1401 (9th Cir. 1986)).
2 Thomas admitted at the hearing on Mbunda’s first motion to
3 dismiss that he had no other facts to allege regarding the
4 existence of a partnership:
5 THE COURT: You’ve simply pled the statute [§ 523(a)(4)].
You haven’t — what fact on page 3 of the complaint have
6 you done — established anything that might fit this
fiduciary preexisting partnership relationship?
7
MR. VAN ZANDT: Well, but the partnership perhaps, if —
8 if there is one, was established at that time —
9 THE COURT: I just asked where you’ve mentioned it in
the paper. Thats all.
10
MR. VAN ZANDT: Oh, I don’t — I do not mention that
11 there's a partnership, because I have no information
that a partnership was formed, other than the facts of
12 what happened.
13 THE COURT: You haven’t even mentioned that a
partnership was intended.
14
MR. VAN ZANDT: I don’t know that one was.
15
16 Hr’g Trans. (Feb. 25, 2011) at 18:3-16.
17 Nor has Thomas identified on appeal any additional facts he
18 was prepared to allege to shore up his partnership claim. See
19 Dougherty, 654 F.3d at 901 (relying on a similar failure to
20 identify additional allegations in affirming dismissal without
21 leave to amend). A complaint must contain more than “a formulaic
22 recitation of the elements of a cause of action.” Bell Atl.
23 Corp. v. Twombly, 550 U.S. 544, 555 (2007). It must contain
24 “enough facts to state a claim to relief that is plausible on its
25 face.” Id. at 570 (emphasis added). The facts alleged must nudge
26 the plaintiff’s claims “across the line from conceivable to
27 plausible.” Id. Thomas, by his own admission, could not do that
28 here. Accordingly, the bankruptcy court did not err in
19
1 dismissing the § 523(a)(4) claim without leave to amend.
2 3. Section 523(a)(6).
3 Thomas also challenges the bankruptcy court’s dismissal of
4 his § 523(a)(6) claim without leave to amend. Section 523(a)(6)
5 excepts from discharge debts arising from willful and malicious
6 injury. Ormsby v. First Am. Title Co. of Nev. (In re Ormsby),
7 591 F.3d 1199, 1206 (9th Cir. 2010). In prosecuting its case, a
8 creditor must separately plead and prove both willfulness and
9 maliciousness. Albarran v. New Form. Inc. (In re Barboza), 545
10 F.3d 702, 706 (9th Cir. 2008). When, as here, the bankruptcy
11 court dismissed the claim without leave to amend, the standard of
12 review is the same as for similar dismissals under § 523(a)(4):
13 “‘[d]ismissal without leave to amend is improper, unless it is
14 clear, upon de novo review, that the complaint could not be saved
15 by any amendment.’” Intri-Plex Techs., 499 F.3d at 1056 (quoting
16 In re Daou Sys., 411 F.3d at 1013).
17 As to the individual elements of a § 523(a)(6) claim, “[a]
18 ‘willful’ injury is a ‘deliberate or intentional injury, not
19 merely a deliberate or intentional act that leads to injury.’” In
20 re Barboza, 545 F.3d at 706 (quoting Kawaauhau v. Geiger, 523
21 U.S. 57, 61 (1998)) (emphasis in original). In order to
22 establish a willful injury, a creditor must plead and prove that
23 the debtor had a “subjective motive to inflict injury” or a
24 subjective belief that injury was “substantially certain to
25 result” from the debtor’s conduct. In re Ormsby, 591 F.3d at26 1206 (citing Carrillo v. Su (In re Su), 290 F.3d 1140, 1142 (9th
27 Cir. 2002)).
28 As an aid to determining the debtor’s motives, cases under
20
1 § 523(a)(6) presume the debtor knows the natural consequences of
2 his or her actions. In re Ormsby, 591 F.3d at 1206; see also In
3 re Su, 290 F.3d at 1146 n.6 (“In addition to what a debtor may
4 admit to knowing, the bankruptcy court may consider
5 circumstantial evidence that tends to establish what the debtor
6 must have actually known when taking the injury-producing
7 action.”).
8 With respect to the second element, malicious injury, “‘[a]
9 malicious injury involves (1) a wrongful act, (2) done
10 intentionally, (3) which necessarily causes injury, and (4) is
11 done without just cause or excuse.’” Ormsby, 591 F.3d at 1207
12 (quoting Petralia v. Jercich (In re Jercich), 238 F.3d 1202, 1209
13 (9th Cir. 2001)).
14 Thomas argues that he meets both the malicious and wilful
15 elements of a 523(a)(6) claim for relief because he adequately
16 pled (or could have adequately pled) a claim for elder abuse
17 under Cal. Welfare & Insts. Code § 15610.30 (“W&I § 15610.30”).
18 He contends that a well-pled claim under W&I § 15610.30 is co-
19 extensive with a willful and malicious injury under § 523(a)(6).
20 In other words, according to Thomas, if he pled (or could have
21 pled) the elements for elder abuse under W&I § 15610.30, he
22 necessarily would have pled (or could have pled) the elements for
23 a nondischargeable debt under § 523(a)(6).
24 This is simply wrong. W&I § 15610.30 in relevant part
25 provides that a person or entity commits financial abuse of an
26 elder or dependent adult when they do any of the following:
27 (1) Takes, secretes, appropriates, obtains, or retains
real or personal property of an elder or dependent
28
21
1 adult for a wrongful use or with intent to defraud, or
both.
2
(2) Assists in taking, secreting, appropriating,
3 obtaining, or retaining real or personal property of an
elder or dependent adult for a wrongful use or with
4 intent to defraud, or both.
5 (3) Takes, secretes, appropriates, obtains, or retains,
or assists in taking, secreting, appropriating,
6 obtaining, or retaining, real or personal property of
an elder or dependent adult by undue influence, as
7 defined in Section 1575 of the Civil Code.10
8 Under the plain language of W&I § 15610.30, a claim for
9 elder abuse must include: (1) a wrongful use; (2) an undue
10 influence/unfair advantage; or (3) an intent to defraud. The
11 first two types of conduct covered – wrongful use and undue
12 influence/unfair advantage – do not require any motive to injure
13 or any belief that injury will occur. See Cal. Civ. Code § 1575;
14 Stebley v. Litton Loan Serv., LLP, 134 Cal. Rptr. 3d 604, 608
15 (Cal. App. 2011).
16 But a creditor such as Thomas must plead and prove a
17 “subjective motive to inflict injury” or a subjective belief that
18
19 10
Cal. Civ. Code § 1575 provides that taking or obtaining of
20 an unfair advantage is an essential component of undue influence.
As set forth in full, Cal. Civ. Code § 1575 states as follows:
21
Undue influence, what. Undue influence consists:
22
1. In the use, by one in whom a confidence is reposed
23
by another, or who holds a real or apparent authority
24 over him, of such confidence or authority for the
purpose of obtaining an unfair advantage over him;
25
2. In taking an unfair advantage of another’s weakness
26 of mind; or,
27
3. In taking a grossly oppressive and unfair advantage
28 of another’s necessities or distress.
22
1 injury was “substantially certain to result” from the debtor’s
2 conduct in order to succeed on a § 523(a)(6) claim. In re
3 Ormsby, 591 F.3d at 1206 (citing In re Su, 290 F.3d at 1142).
4 Thus, even were it true that Thomas could have pled a W&I
5 § 15610.30 claim based upon Mbunda’s wrongful use or upon some
6 undue influence/unfair advantage Mbunda employed against Malis,
7 Thomas could not have stated a § 523(a)(6) claim because neither
8 of these types of conduct would have been sufficient to establish
9 the requisite willfulness. As a consequence, even if Thomas
10 could establish a claim under those parts of W&I § 15610.30, it
11 would not necessarily be nondischargeable under § 523(a)(6).
12 By process of elimination, that only leaves us with the
13 possibility that Thomas could have pled a W&I § 15610.30 claim
14 based on an intent to defraud. Thomas, however, was allowed to
15 proceed to trial on his fraud theories in connection with his
16 § 523(a)(2)(A) claim for relief. And he lost; the bankruptcy
17 court correctly found (as we held above) that Thomas lacked any
18 factual or evidentiary basis to support his fraud theories. At
19 no time either on appeal or before the bankruptcy court has
20 Thomas suggested that he had any facts or evidence in support of
21 his fraud theories other than what he already stated in his
22 complaint and at trial. These circumstances inexorably lead us
23 to two alternate conclusions: (1) allowing Thomas to amend his
24 § 523(a)(6) claim would have been futile; or (2) not allowing
25 Thomas to amend his § 523(a)(6) claim was harmless error. Under
26
27
28
23
1 either conclusion, Thomas can not prevail.11
2 4. Due Process
3 Finally, Thomas argues that the bankruptcy court deprived
4 him of due process in the course of the trial on his
5 § 523(a)(2)(A) claim. We review due process issues de novo.
6 Price v. Lehtinen (In re Lehtinen), 564 F.3d 1052, 1058 (9th Cir.
7 2009).
8 Thomas’s due process argument is twofold. First, according
9 to Thomas, the cumulative effect of all of the bankruptcy court’s
10 adverse evidentiary rulings at trial was to deprive him of a
11 meaningful opportunity to be heard. Second, Thomas complains
12 that the court rushed through the scheduled one-day trial simply
13 for the purpose of completing the trial as scheduled, which also
14 deprived him of a meaningful opportunity to be heard.
15 An appellant, however, must show prejudice to support a due
16 process claim. See Rosson v. Fitzgerald (In re Rosson), 545 F.3d
17 764, 776 (9th Cir. 2008). Here, Thomas has not shown any. To
18 the contrary, the merits analysis set forth above demonstrates
19 that Thomas lost not because of any due process violations; he
20 lost because he was unable to offer admissible evidence to
21 establish his claim. There was no cumulative effect of adverse
22 rulings because, as we set forth above, there were no incorrect
23 evidentiary rulings. And no amount of additional time could fix
24 that problem. In short, the absence of any prejudice shows no
25
26 11
The bankruptcy court dismissed Thomas’s § 523(a)(6) claim
on different grounds, but we may affirm on any basis reasonably
27
found in the record. Caviata Attached Homes, LLC v. U.S. Bank,
28 N.A., 481 B.R. 34, 44 (9th Cir. BAP 2012).
24
1 abuse of discretion, and thus is fatal to Thomas’s due process
2 claim.
3 CONCLUSION
4 For all of the reasons set forth above, we AFFIRM the
5 bankruptcy court’s judgment in favor Mbunda on Thomas’s
6 nondischargeability complaint.
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