In re: Terrance Alexander Tomkow Zafar David Khan

FILED
JAN 05 2017
1 NOT FOR PUBLICATION
2 SUSAN M. SPRAUL, CLERK
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. CC-16-1075-TaFMc
)
6 TERRANCE ALEXANDER TOMKOW, ) Bk. No. 2:13-bk-19712-WB
)
7 Debtor. ) Adv. No. 2:13-ap-01751-WB
______________________________)
8 )
TERRANCE ALEXANDER TOMKOW; )
9 )
Appellant, )
10 )
v. )
11 )
KENNETH BARTON, )
12 )
Appellee. )
13 ______________________________)
)
14 In re: ) BAP No. CC-16-1076-TaFMc
)
15 ZAFAR DAVID KHAN, ) Bk. No. 2:13-bk-19713-WB
)
16 Debtor. ) Adv. No. 2:13-ap-01752-WB
______________________________)
17 )
ZAFAR DAVID KHAN, )
18 )
Appellant, )
19 )
v. ) MEMORANDUM*
20 )
KENNETH BARTON, )
21 )
Appellee. )
22 ______________________________)
23 Argued and Submitted on October 21, 2016
at Pasadena, California
24
Filed – January 5, 2017
25
26 *
This disposition is not appropriate for publication.
27 Although it may be cited for whatever persuasive value it may
have (see Fed. R. App. P. 32.1), it has no precedential value.
28 See 9th Cir. BAP Rule 8024-1(c)(2).
1 Appeal from the United States Bankruptcy Court
for the Central District of California
2
Honorable Julia Wagner Brand, Bankruptcy Judge, Presiding
3
4 Appearances: Lewis R. Landau on behalf of appellants Terrance
Alexander Tomkow and Zafar David Khan; Patrick C.
5 McGarrigle of McFarrigle, Kenney & Zampiello, APD
on behalf of appellee Kenneth Barton.
6
7 Before: TAYLOR, FARIS, and MCKITTRICK,** Bankruptcy Judges.
8
INTRODUCTION
9
Appellants1 Terrance Tomkow and Zafar Khan appeal from two
10
orders: (1) an order granting summary judgment in favor of
11
Kenneth Barton determining that a California state court
12
judgment against them was nondischargeable under § 523(a)(2)(A)2
13
and (a)(6); and (2) an order denying their subsequent motion for
14
direct appeal certification to the Ninth Circuit.
15
Binding Ninth Circuit authority controls our decision here;
16
we AFFIRM the bankruptcy court’s orders.
17
18
**
The Hon. Peter C. McKittrick, United States Bankruptcy
19 Judge for the District of Oregon, sitting by designation.
20 1
Appellants submitted two separate briefs on appeal. The
21 briefs are identical, save for an additional paragraph in
Tomkow’s brief at page 19, lines 7-22.5 (and references to
22 Appellant’s name and record citation). As discussed in this
memorandum, we conclude that the argument addressed in that
23
paragraph lacks merit. We address both appeals in this
24 memorandum. The BAP Clerk of Court is instructed to enter this
disposition in both appeals.
25
2
Unless otherwise indicated, all chapter and section
26 references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532.
27 All “Rule” references are to the Federal Rules of Bankruptcy
Procedure. All “Civil Rule” references are to the Federal Rules
28 of Civil Procedure.
2
1 FACTS
2 During the late 1990s, Appellants and Barton co-founded
3 start-up companies including RIL, which owned or controlled
4 various patents relating to authentication and verification of
5 emails and electronic payments. Barton later suffered a stroke
6 and was sidelined from active involvement in the businesses.
7 Afterward, his relationship with Appellants deteriorated to the
8 point that he commenced state court litigation seeking unpaid
9 compensation and reimbursement of expenses.
10 During that litigation, Barton discovered that Appellants
11 had taken control of his 6,016,500 common stock shares in RIL
12 and returned them to the company treasury, thereby divesting him
13 of an equity interest in the company. In response, he commenced
14 a second action against Appellants and RIL, among others, in
15 California state court alleging causes of action including
16 conversion and fraud.
17 The state court ruled in Barton’s favor on both the
18 conversion and fraud causes of action and against Appellants and
19 RIL. It determined that Appellants had acted with malice,
20 oppression, and fraud and, thus, that Barton was entitled to
21 punitive damages. The state court then conducted a second phase
22 of trial to quantify punitive damages.
23 Following the parties’ submission of the punitive damages
24 issue to the state court, Appellants each filed a chapter 13
25 petition.
26 In a revised statement of decision and ruling on punitive
27 damages, the state court awarded Barton the value of his
28
3
1 converted stock in RIL.3 It ultimately entered an amended
2 judgment awarding Barton compensatory damages in the amount of
3 $2,840,060, damages for emotional distress, and $880,021.91 in
4 prejudgment interest. For punitive damages, the state court
5 awarded $250,000 against Khan and $150,000 against Tomkow. In
6 so doing, it found that Khan and Tomkow acted with malice,
7 oppression, and fraud. Appellants appealed from the state court
8 judgment to the California Court of Appeal.
9 In the meantime, Barton filed an adversary complaint
10 against Appellants in the bankruptcy court, seeking a
11 nondischargeability determination under § 523(a)(2)(A), (a)(4),
12 and (a)(6) based on the state court judgment.
13 The California Court of Appeal subsequently affirmed the
14 state court’s determination of Appellants’ liability based on
15 conversion. But, because the determination of liability was
16 supported by substantial evidence, it did “not consider whether
17 [Appellants] were additionally liable under theories of fraud,
18 breach of fiduciary duty and unfair competition.” It affirmed
19 the punitive damages award based on a finding of malice and
20 deceit. The California Supreme Court denied Appellants’
21 petition for review of the appellate court’s decision. Thus,
22 that decision is now final. In response, Barton moved for
23 summary judgment on his nondischargeability complaint in the
24 bankruptcy court.
25
26 3
Based on stipulations between Barton and Appellants, the
27 bankruptcy court entered orders granting stay relief to proceed
in the state court action. See 2:13-bk-19713-WB, Dkt. Nos. 9,
28 16; 2:13-bk-19712-WB, Dkt. Nos. 9, 16.
4
1 Appellants opposed the motion. They asserted primarily
2 that pursuant to Zevnik v. Superior Court, 159 Cal. App. 4th 76
3 (2008), where a trial court decided a case based on alternate
4 grounds and the court of appeal affirmed on only one of those
5 grounds, issue preclusion was available only on the ground
6 affirmed by the appellate court. Appellants pointed out that
7 the California Court of Appeal had affirmed the state court
8 judgment only on Barton’s conversion claim under California law;
9 thus, they argued, the state court judgment was not entitled to
10 issue preclusion based on the state court’s ruling of fraud or
11 breach of fiduciary duty in relation to the § 523(a)(2)(A) or
12 (a)(4) claims. At best, Appellants contended, the state court
13 judgment for conversion potentially supported a claim under
14 § 523(a)(6). But, even then, they asserted, Barton barely
15 addressed the conversion claim in his motion for summary
16 judgment. And, they noted, conversion under California law did
17 not establish a § 523(a)(6) claim conclusively. Appellants also
18 argued that the punitive damages award on the conversion claim,
19 to the extent affirmed on appeal, fell short of establishing a
20 § 523(a)(6) claim. Finally, Tomkow argued that Barton neglected
21 to address the fact that, with respect to the punitive damages
22 award, there was a difference in liability between Khan and
23 Tomkow; namely, the amount of damages assessed against
24 Appellants reflected a difference in the level of culpability.
25 In response, Barton argued that binding Ninth Circuit
26 precedent - DiRuzza v. County of Tehama, 323 F.3d 1147 (9th Cir.
27 2003) - established that the California Court of Appeal’s
28 affirmance of any ground contained in the state court judgment
5
1 implicitly ratified all of the trial court’s reasoning in the
2 judgment.
3 At the hearing, the bankruptcy court determined that the
4 state court judgment was entitled to issue preclusive effect for
5 the § 523(a)(2)(A) and (a)(6) claims and, thus, granted summary
6 judgment in Barton’s favor on them. It, however, denied the
7 motion as to the § 523(a)(4) claim. In response, Appellants’
8 counsel requested direct appeal certification to the Ninth
9 Circuit. The bankruptcy court agreed that additional briefing
10 and a hearing on Appellants’ request were warranted.
11 The bankruptcy court then entered judgments determining
12 that, with the exception of the damages award for emotional
13 distress, the state court judgment was excepted from Appellants’
14 discharges under § 523(a)(2)(A) and (a)(6). Appellants timely
15 appealed.
16 Appellants made good on their request and filed a motion
17 for direct appeal certification. They stated that the
18 bankruptcy court “understandably rejected application of the
19 Zevnik rule based on a Ninth Circuit decision [DiRuzza]
20 predating Zevnik and that applied the 1865 California Supreme
21 Court’s Skidmore case.” As a result of DiRuzza, they urged the
22 bankruptcy court to certify the appeal directly to the Ninth
23 Circuit under 28 U.S.C. § 158(d)(2)(A); they opined that the
24 Ninth Circuit could and would then certify the question to the
25 California Supreme Court.
26 Barton opposed the motion, and the bankruptcy court agreed
27 with him. It concluded at a subsequent hearing that Appellants
28 had not satisfied 28 U.S.C. § 152(d)’s requirements for direct
6
1 appeal certification. It believed that the law in the Ninth
2 Circuit was clear and that there was no dispute requiring
3 resolution among the California courts. The bankruptcy court
4 noted that the Ninth Circuit had considered and rejected the
5 Zevnik analysis in DiRuzza and that the California Supreme Court
6 also had, but declined, the opportunity to revisit the issue.
7 The bankruptcy court subsequently entered an order denying
8 Appellants’ motion. Appellants amended their notice of appeal
9 to include this order.
10 JURISDICTION
11 The bankruptcy court had jurisdiction pursuant to 28 U.S.C.
12 §§ 1334 and 157(b)(2)(I). We have jurisdiction under 28 U.S.C.
13 § 158.
14 ISSUES
15 1. Whether the bankruptcy court erred in granting summary
16 judgment in Barton’s favor on his § 523(a)(2)(A) claim based on
17 the issue preclusive effect of the fraud claim in the state
18 court judgment, given that the California Court of Appeal
19 affirmed that judgment on another ground.
20 2. Whether the bankruptcy court erred in granting summary
21 judgment in Barton’s favor on his § 523(a)(6) claim based on the
22 issue preclusive effect of the state court judgment.
23 3. Whether the bankruptcy court erred in denying
24 Appellants’ motion for direct appeal certification to the Ninth
25 Circuit.
26 STANDARDS OF REVIEW
27 We review de novo the bankruptcy court’s decisions to grant
28 summary judgment and to except a debt from discharge under
7
1 § 523(a). See Ghomeshi v. Sabban (In re Sabban), 600 F.3d 1219,
2 1221–22 (9th Cir. 2010); Oney v. Weinberg (In re Weinberg),
3 410 B.R. 19, 28 (9th Cir. BAP 2009); see also Carrillo v. Su
4 (In re Su), 290 F.3d 1140, 1142 (9th Cir. 2002)
5 (nondischargeability presents mixed issues of law and fact and
6 is reviewed de novo).
7 We also review de novo the bankruptcy court’s determination
8 that issue preclusion was available. Black v. Bonnie Springs
9 Family Ltd. P’Ship (In re Black), 487 B.R. 202, 210 (9th Cir.
10 BAP 2013). If issue preclusion was available, we then review
11 the bankruptcy court’s application of issue preclusion for an
12 abuse of discretion. Id. A bankruptcy court abuses its
13 discretion if it applies the wrong legal standard or misapplies
14 the correct legal standard, or if its factual findings are
15 illogical, implausible, or without support in inferences that
16 may be drawn from the facts in the record. See
17 TrafficSchool.com, Inc. v. Edriver Inc., 653 F.3d 820, 832 (9th
18 Cir. 2011) (citing United States v. Hinkson, 585 F.3d 1247, 1262
19 (9th Cir. 2009) (en banc)).
20 We may affirm the decision of the bankruptcy court on any
21 basis supported by the record. See Hooks v. Kitsap Tenant
22 Support Servs., Inc., 816 F.3d 550, 554 (9th Cir. 2016).
23 DISCUSSION
24 A. Standards
25 Summary judgment. Summary judgment is appropriate where
26 the movant shows that there is no genuine dispute of material
27 fact and the movant is entitled to judgment as a matter of law.
28 Fed. R. Civ. P. 56(a) (applicable in adversary proceedings under
8
1 Rule 7056). The bankruptcy court must view the evidence in the
2 light most favorable to the non-moving party when determining
3 whether genuine disputes of material fact exist and whether the
4 movant is entitled to judgment as a matter of law. See Fresno
5 Motors, LLC v. Mercedes Benz USA, LLC, 771 F.3d 1119, 1125 (9th
6 Cir. 2014). And, it must draw all justifiable inferences in
7 favor of the non-moving party. See id. (citing Anderson v.
8 Liberty Lobby, Inc., 477 U.S. 242, 255 (1986)).
9 Issue preclusion in a nondischargeability proceeding. The
10 bankruptcy court may give issue preclusive effect to a state
11 court judgment as the basis for excepting a debt from discharge.
12 Harmon v. Kobrin (In re Harmon), 250 F.3d 1240, 1245 (9th Cir.
13 2001). The party asserting preclusion bears the burden of
14 establishing the threshold requirements. Id. This means
15 providing “a record sufficient to reveal the controlling facts
16 and pinpoint the exact issues litigated in the prior action.”
17 Kelly v. Okoye (In re Kelly), 182 B.R. 255, 258 (9th Cir. BAP
18 1995), aff’d, 100 F.3d 110 (9th Cir. 1996). Ultimately, “[a]ny
19 reasonable doubt as to what was decided by a prior judgment
20 should be resolved against allowing the [issue preclusive]
21 effect.” Id.
22 We apply the forum state’s law of issue preclusion when
23 determining if issue preclusion is appropriate based on a state
24 court judgment. In re Harmon, 250 F.3d at 1245. Here we must
25 apply California law.
26 California issue preclusion. California permits
27 application of issue preclusion to an existing judgment:
28 (1) after final adjudication; (2) of an identical issue;
9
1 (3) actually litigated in the former proceeding; (4) necessarily
2 decided in the former proceeding; and (5) asserted against a
3 party in the former proceeding or someone in privity with a
4 party. See DKN Holdings LLC v. Faerber, 61 Cal. 4th 813, 825
5 (2015). In addition, the court must determine that issue
6 preclusion “furthers the public policies underlying the
7 doctrine.” In re Harmon, 250 F.3d at 1245 (citing Lucido v.
8 Super. Ct., 51 Cal. 3d 335, 342—42 (1990)); see also Khaligh v.
9 Hadaegh (In re Khaligh), 338 B.R. 817, 824–25 (9th Cir. BAP
10 2006).
11 B. Based on binding Ninth Circuit authority, the bankruptcy
court appropriately gave issue preclusive effect to the
12 fraud claim in the state court judgment; thus, it did not
err in granting summary judgment in Barton’s favor on his
13 § 523(a)(2)(A)4 claim.
14 Appellants focus the majority of their appellate arguments
15 on one narrow issue: whether the bankruptcy court could give
16 issue preclusive effect to the state court judgment’s fraud
17 determination, given that the California Court of Appeal did not
18 review that aspect of the judgment on appeal. They acknowledge
19 that under Ninth Circuit authority, DiRuzza, the entire judgment
20 is subject to issue preclusion. They contend, however, that the
21 law in California has developed in the past 15 years such that
22 the Ninth Circuit’s decision no longer correctly reflects
23 California law.
24 Based on an early California Supreme Court case, DiRuzza
25 adhered to the “general California rule” that, “even if the
26
4
27 The elements for actual fraud under California law match
those of § 523(a)(2)(A). See Tobin v. Sans Souci Ltd. P’ship
28 (In re Tobin), 258 B.R. 199, 203 (9th Cir. BAP 2001).
10
1 appellate court refrains from considering one of the grounds
2 upon which the [trial court’s] decision . . . rests, an
3 affirmance of the decision below extends legal effects to the
4 whole of the lower court’s determination, with attendant
5 collateral estoppel effect.” 323 F.3d at 1156. We acknowledge
6 that subsequent California Courts of Appeal decisions have
7 disagreed with DiRuzza and make compelling arguments in support
8 of their position to the contrary. That said, DiRuzza remains
9 controlling precedent in our circuit. Consequently, we conclude
10 that issue preclusion was available and that the bankruptcy
11 court did not abuse its discretion in giving preclusive effect
12 to the fraud determination in the state court judgment.
13 1. The general California (or traditional) rule.
14 At the outset, we note that an unpublished federal district
15 court case - Flying J, Inc. v. Pistacchio, 2008 WL 906396, at
16 *33-43 (E.D. Cal. Mar. 31, 2008), aff’d, 351 F. App’x 236 (9th
17 Cir. 2009) - provides a highly detailed overview of the
18 pertinent cases, including DiRuzza, People v. Skidmore, 27 Cal.
19 287 (1865), and the three California Courts of Appeal cases that
20 Appellants contend have changed the legal landscape in
21 California: Zevnik, 159 Cal. App. 4th 76; Newport Beach Country
22 Club, Inc. v. Founding Members of Newport Beach Country Club,
23 140 Cal. App. 4th 1120 (2006); and Butcher v. Truck Insurance
24 Exchange, 77 Cal. App. 4th 1442 (2000).
25 A brief description of these cases as they relate to the
26 general California rule follows.
27 DiRuzza. The Ninth Circuit examined whether issues decided
28 by a California trial court and crucial to its decision were
11
1 entitled to preclusive effect after the court of appeal affirmed
2 on different grounds. 323 F.3d at 1153. The Ninth Circuit
3 acknowledged that California case law addressing the issue was
4 sparse but that Skidmore, a venerable California Supreme Court
5 case, “support[ed] the conclusion that an appellate court’s
6 affirmance for any reason implicitly ratifie[d] all reasoning
7 given in the court below.” Id. In doing so, it noted that “a
8 nebulous exception to the rule and a recent California appellate
9 decision [Butcher] cut against the timeworn precedent and may
10 counsel in favor of more selective application of collateral
11 estoppel principles.” Id. It concluded, however, that Skidmore
12 was controlling because the California Supreme Court had not
13 “undermin[ed] the authority of its early holding” and
14 notwithstanding Butcher’s analysis. Id.
15 Skidmore. As explained in DiRuzza, Skidmore involved a
16 judgment in favor of defendant. On initial appeal, the
17 California Supreme Court “affirmed the judgment, but relied upon
18 a procedural issue—misjoinder[—]in reaching its decision.” This
19 issue was corrected and the case made its way to the court a
20 second time, for a determination as to whether the plaintiff
21 could pursue the action again. “The court determined that,
22 regardless of its previous opinion’s reliance on the misjoinder
23 issue, the . . . [underlying recommendation] report and
24 resulting judgment, which reached the merits of the case, had
25 been affirmed by the judgment accompanying [its] previous
26 opinion.” Id. at 1154. Thus, the California Supreme Court
27 determined, the plaintiff was precluded from bringing the action
28 a second time, “as the merits of the case had already been
12
1 adjudicated . . . .” Id. The Ninth Circuit quoted the
2 following language from Skidmore:
3 The Court, in examining the judgment in connection
with the errors assigned, found that there was at
4 least one ground upon which the judgment could be
justified, and therefore very properly refrained from
5 considering it in connection with the other errors.
But the affirmance, still, was an affirmance to the
6 whole extent of the legal effect of the judgment at
the time when it was entered in the court below. The
7 Supreme Court found no error in the record, and
therefore not only allowed it to stand, but affirmed
8 it as an entirety, and by direct expression.
9 Id. at 1154–55 (quoting 27 Cal. at 292–93).
10 Subsequent courts have referred to this rule as the general
11 California rule, the Skidmore rule, or the traditional rule.
12 Skidmore’s “progeny.” Following Skidmore, two decisions
13 were issued that bear mention based on subsequent case law
14 discussion: Bank of America National Trust & Savings Association
15 v. McLaughlin Land & Livestock Co. (“McLaughlin”), 40 Cal. App.
16 2d 620 (1940), and Natural Soda Products Co. v. City of Los
17 Angeles, 109 Cal. App. 2d 440 (1952).
18 As noted by Flying J, 2008 WL 906396 at *35, McLaughlin
19 reached the same conclusion as Skidmore, although it did not
20 refer to Skidmore. Instead, McLaughlin relied on a rule
21 expounded in the Corpus Juris Secundum (“CJS”), providing that
22 “[a] general affirmance of a judgment on appeal makes it res
23 judicata as to all the issues, claims, or controversies involved
24 in the action and passed upon by the court below, although the
25 appellate court does not consider or decide upon all of them.”
26 40 Cal. App. 2d at 628–29 (quoting 34 C.J. 773). Thus, the
27 McLaughlin panel determined that, where the ruling of the
28 district court (sitting as the bankruptcy court) was predicated
13
1 on two alternate grounds and the Ninth Circuit affirmed the
2 decision on the first ground, the district court’s entire
3 decision was entitled to preclusive effect. Id. at 629.
4 Natural Soda reiterated the general rule delineated by
5 Skidmore and McLaughlin. In doing so, however, it stated that
6 “the rule [was] not without exceptions, and where a finding
7 [was] unnecessary and immaterial the rule of collateral estoppel
8 [did] not operate.” 109 Cal. App. 2d at 446.
9 As the Ninth Circuit in DiRuzza observed, “[a]fter Natural
10 Soda, all was generally quiet on the [issue preclusion] front in
11 the courts of California for almost fifty years.” 323 F.3d at
12 1156. Enter Butcher.
13 The trilogy of recent California Courts of Appeal cases and
14 the “modern” rule.
15 Butcher. As noted by DiRuzza, 323 F.3d at 1156, Butcher
16 made no reference to Skidmore at all. There, a panel of the
17 Second District Court of Appeal examined the preclusive effect
18 of a federal court judgment based on diversity jurisdiction in
19 an insurance coverage action. It noted that there were two
20 lines of cases: (1) cases following “the rule that the appellate
21 court in the prior action determines the preclusive effect of
22 its judgment, i.e., the judgment [was] conclusive on the []
23 ground” affirmed by the appellate court, as reflected in Moran
24 Towing & T. Co. v. Navigazione Libera Triestina, S.A., 92 F.2d
25 37 (2d Cir. 1937), and the Restatement (Second) of Judgments;
26 and (2) cases holding “that it [was] the judgment of the trial
27 court, which [was] affirmed, that governs the preclusive effect,
28 i.e., the judgment [was] conclusive on both grounds,” as
14
1 reflected in McLaughlin. 77 Cal. App. 4th at 1456.
2 The first line of cases relies heavily on the Restatement
3 (Second) of Judgments § 275 and embodies the “modern” approach
4 approved of by the three California Courts of Appeal decisions.
5 The Butcher panel observed that the rule cited by the McLaughlin
6 panel, based on the CJS, was subsequently abandoned in favor of
7 the rule followed by the Second Restatement. It, thus,
8 “conclude[d] [that] the reasoning of the McLaughlin court has
9 not withstood the test of time, and it would be unwise to follow
10 a rule that looks only to the judgments, without taking account
11 of the reasons for those judgments as stated in the appellate
12 courts’ opinions.” Id. at 1460.
13 The Ninth Circuit, in DiRuzza, concluded that while
14 Butcher advance[d] plausible arguments against the
general California rule, . . . it [came] from an
15 intermediate appellate court which failed to
acknowledge that the California Supreme Court, in
16 Skidmore, had addressed the subject. Until we receive
a definitive indication that Skidmore no longer
17 represents the law of California, we will adhere to
that case’s precepts.
18
19 323 F.3d at 1156. The Ninth Circuit, thus, rejected the Butcher
20 panel’s analysis.
21 Newport Beach Country Club. Newport Beach, decided by a
22 panel of the Fourth District Court of Appeal, was issued three
23 years after DiRuzza. The Newport Beach panel held that, where
24
5
25 The Restatement (Second) of Judgments § 27 comment o
(1982) provides that when “a judgment rendered by a court of
26 first instance is reversed by the appellate court and a final
27 judgment is entered by the appellate court (or by the court of
first instance in pursuance of the mandate of the appellate
28 court), this latter judgment is conclusive between the parties.”
15
1 “a trial court judgment decide[d] a case on two alternate
2 grounds, and the appellate court affirm[ed] based on one ground,
3 the judgment [was] binding under principles of res judicata and
4 collateral estoppel only on the ground addressed by the
5 appellate court.” 140 Cal. App. 4th at 1123. The Newport Beach
6 panel, thus, “decline[d] to follow [Skidmore] because subsequent
7 developments in California law and the trend of decisions ha[d]
8 weakened that case’s authority to the point where [it could]
9 conclude it no longer reflect[ed] the views of the California
10 Supreme Court.” Id.
11 After examining Skidmore, McLaughlin, DiRuzza, Butcher,
12 Moran Towing, and the Second Restatement, the Newport Beach
13 panel expressly rejected what it referred to as the
14 “traditional” Skidmore rule in favor of the “modern” rule
15 established in the Second Restatement. It agreed with Butcher’s
16 observation that Skidmore “ha[d] not withstood the test of
17 time.” 140 Cal. App. 4th at 1130. Although Skidmore was a
18 California Supreme Court case, the Newport Beach panel did not
19 believe it controlled for several reasons. First, it stated
20 that since Skidmore was decided, “the law of res judicata ha[d]
21 undergone tremendous change culminating in the Restatement
22 Second of Judgments.” Id. at 1131. And it noted that “[t]he
23 California Supreme Court ha[d] expressed approval of . . . [and]
24 cited approvingly to section 27 and the comments to it.”
25 Second, it stated that the Skidmore rule was inconsistent with
26 its duty as an appellate court under the California state
27 constitution, which required that it “set forth its decisions in
28 writing ‘with the reasons stated.’” Id. at 1132. It concluded
16
1 with its belief that if the California Supreme Court were
2 presented with the issue again, it would adopt the modern rule
3 as expressed in the Second Restatement. Id.
4 Zevnik. In the most recent case, a panel in another
5 division of the Second District Court of Appeal agreed with
6 Newport Beach and Butcher, concluding “that the governing rule
7 of law [was] that if a trial court relie[d] on alternative
8 grounds to support its decision and an appellate court
9 affirm[ed] the decision based on fewer than all of those
10 grounds, only the grounds relied on by the appellate court
11 [could] establish collateral estoppel.” 159 Cal. App. 4th
12 at 79. In doing so, it also examined the cadre of cases
13 discussed above.
14 In a departure from Newport Beach, however, the Zevnik
15 panel concluded that it “need not decide whether Skidmore
16 retain[ed] viability because [it] read the opinion narrowly to
17 apply only to res judicata, not collateral estoppel.” Id.
18 at 88.
19 2. Analysis.
20 Against this extensive backdrop of case law, we conclude,
21 as did the bankruptcy court, that DiRuzza remains good law and
22 thus binds the Panel. Although Appellants make compelling
23 arguments based on recent cases by panels of the California
24 Courts of Appeal, we cannot turn a blind eye to binding
25 precedent from the Ninth Circuit. Nor is this a situation where
26 the Ninth Circuit’s reasoning or theory in DiRuzza is clearly
27 irreconcilable with a decision of the California Supreme Court,
28 the only intervening higher authority on a matter of California
17
1 state law. See Rodriguez v. AT & T Mobility Servs. LLC,
2 728 F.3d 975, 979 (9th Cir. 2013) (“[T]he relevant court of last
3 resort must have undercut the theory or reasoning underlying the
4 prior circuit precedent in such a way that the cases are clearly
5 irreconcilable. But it is not enough for there to be some
6 tension between the intervening higher authority and the prior
7 circuit precedent.”) (internal quotation marks and citation
8 omitted); Miller v. Gammie, 335 F.3d 889, 893 (9th Cir. 2003)(en
9 banc).
10 Here, the California Supreme Court has neither overruled
11 Skidmore nor adopted the modern rule announced in Butcher,
12 Newport Beach, and Zevnik. In the absence of a decision by the
13 California Supreme Court contrary to the Skidmore rule, we
14 remain bound by DiRuzza.6 In Flying J, the district court
15
6
16 Some justices of the California Courts of Appeal no
longer follow Skidmore. As stated, we are bound by Ninth
17 Circuit authority; thus, we, without question, follow DiRuzza
18 and, as a result, Skidmore.
The Appellants, no doubt, will urge the Ninth Circuit to
19 directly certify this question for review by the California
Supreme Court or to reconsider DiRuzza en banc. We acknowledge
20 that the Ninth Circuit implicitly rejected such a request in
21 Flying J. In anticipation of such a renewed request, however,
we note our concerns as bankruptcy judges.
22 Decisions regarding dischargeability are weighty ones. The
failure to discharge a debt may leave a debtor incapable of a
23 normal future financial life. And bankruptcy courts frequently
24 consider the issue preclusive effect of California judgments in
determining whether a debtor can discharge a debt.
25 In cases involving California judgments that have gone
through appeal, the bankruptcy courts need certainty regarding
26 the law we must apply; DiRuzza currently supplies this
27 certainty.
Given the impact of our dischargeability decisions,
28 (continued...)
18
1 arrived at the same conclusion, stating that:
2 Because the California Supreme Court’s decision in
Skidmore and the Ninth Circuit’s decision in DiRuzza
3 are binding law of the state and Ninth Circuit,
respectively, and a federal trial court does not have
4 the authority to change the state law of California
even if a Supreme Court decision is criticized and not
5 followed by more recent intermediate California
appellate decisions, see Butcher, Newport Beach, and
6 Zevnik, the rule of Skidmore applies.
7 2008 WL 906396, at *41. We note that the Ninth Circuit affirmed
8 the district court in Flying J in 2009, although its memorandum
9 decision does not refer to the DiRuzza/Skidmore issue. See
10 351 F. App’x 236.
11 We also recognize certain limitations in the precedential
12
13
6
(...continued)
14 however, we also should know the assumptions of the California
15 Court of Appeal panel reviewing a California judgment. In order
to do justice, we need to know either that the panel jurists
16 assume that issues they do not decide will have preclusive
effect, as is the rule articulated in Skidmore, or that the
17 panel jurists assume that issues not decided are not entitled to
18 preclusive effect in other proceedings. Given the current state
of law, we do not have complete certainty that our
19 interpretation of a specific California Court of Appeal decision
is consistent with the interpretation of the jurists who decided
20 the matter on appeal. We do not know whether a failure to
21 address a claim means that the panel agreed that the state court
below correctly decided the issue or whether the panel detected
22 error but did not raise it given that the judgment could be
affirmed on another basis. In situations where only an issue
23 not decided on appeal subsequently supports a nondischargeable
24 judgment, as may be the case here, the current disconnect
between Skidmore and certain jurists of the California Courts of
25 Appeal may lead to inequitable results.
We acknowledge that this is a problem that neither the
26 Ninth Circuit nor the BAP nor the trial courts can solve in any
27 absolute sense. It apparently will require that the California
Supreme Court either reiterate its holding in Skidmore or state
28 that it is no longer the law.
19
1 value of decisions of the California Courts of Appeal. For
2 example, the judges of the Courts of Appeal — divided into six
3 geographical districts — are not bound by decisions of either
4 sister districts or even panels within the same district. See
5 Froyd v. Cook, 681 F. Supp. 669, 673 n.9 (E.D. Cal. 1988)
6 (collecting cases). And it is well established that
7 “[d]ecisions of every division of the District Courts of Appeal
8 are binding . . . upon all the superior courts of this state,
9 and this is so whether or not the superior court is acting as a
10 trial or appellate court.” Auto Equity Sales, Inc. v. Super.
11 Ct. of Santa Clara Cty., 57 Cal. 2d 450, 455 (1962). That said,
12 where California Courts of Appeal decisions conflict, the
13 superior court “can and must make a choice between the
14 conflicting decisions.” Id. at 456.
15 Here, Butcher, Newport Beach, and Zevnik theoretically bind
16 the California trial courts, but the trial courts clearly remain
17 bound by Skidmore. See Auto Equity Sales, Inc., 57 Cal. 2d at
18 455 (“The decisions of [the California Supreme] [C]ourt are
19 binding upon and must be followed by all the state courts of
20 California.”). Further, the precedential value of Court of
21 Appeal decisions do not extend to another panel within the same
22 appellate district, let alone to another appellate district in
23 California. As the case law reflects, appellate panels in the
24 Second and Fourth District Courts of Appeal did not follow
25 Skidmore; it remains to be seen whether other panels of the
26
27
28
20
1 California Courts of Appeal will follow suit.7
2 Appellants do not argue that the other elements of
3 California issue preclusion were not satisfied as to Barton’s
4 § 523(a)(2)(A) claim. On this record, we conclude that issue
5 preclusion was available with respect to the fraud claim based
6 on the state court judgment and that the bankruptcy court did
7 not abuse its discretion in applying issue preclusion to the
8 state court judgment. As that left no genuine dispute of
9 material fact for the bankruptcy court to adjudicate, it did not
10 err in granting summary judgment in Barton’s favor on his
11 § 523(a)(2)(A) claim.
12 C. The bankruptcy court properly granted summary judgment on
Barton’s § 523(a)(6) claim.
13
14 Section 523(a)(6) excepts from discharge debts arising from
15 a debtor’s “willful and malicious” injury to another person or
16 to the property of another. Barboza v. New Form, Inc.
17 (In re Barboza), 545 F.3d 702, 706 (9th Cir. 2008). The
18 “willful” and “malicious” requirements are conjunctive and
19 subject to separate analysis. Id.; In re Su, 290 F.3d at
20 1146–47.
21 A “malicious” injury requires: “(1) a wrongful act,
22 (2) done intentionally, (3) which necessarily causes injury, and
23
7
24 For example, in People ex rel. Brown v. Tri Union
Seafoods, LLC, 171 Cal. App. 4th 1549, 1574 (2009), one panel in
25 the First District Court of Appeal appears to approve the
position advanced by Newport Beach. In an unpublished case,
26 however, another panel in the First District Court of Appeal
27 distinguished Newport Beach. See Borrette Lane Estates, LLC v.
Warren, 2010 WL 292754, at *5 & n.4 (Cal. Ct. App. Jan. 26,
28 2010).
21
1 (4) is done without just cause or excuse.” Petralia v. Jercich
2 (In re Jercich), 238 F.3d 1202, 1209 (9th Cir. 2001).
3 The willful injury requirement speaks to the state of mind
4 necessary for nondischargeability. An exacting requirement, it
5 is satisfied when a debtor harbors “either a subjective intent
6 to harm, or a subjective belief that harm is substantially
7 certain.” In re Su, 290 F.3d at 1144; see also In re Jercich,
8 238 F.3d at 1208. The injury must be deliberate or intentional,
9 “not merely a deliberate or intentional act that leads to
10 injury.” Kawaauhau v. Geiger, 523 U.S. 57, 61 (1998) (emphasis
11 in original). Thus, “debts arising from recklessly or
12 negligently inflicted injuries do not fall within the compass of
13 § 523(a)(6).” Id. at 64. Under California law, an award of
14 punitive damages under California Civil Code (“CC”) § 3294
15 requires a finding of fraud, malice, or oppression. Only fraud
16 and one aspect of malice, as that term is defined for the
17 purposes of the California punitive damages statute, satisfy the
18 willful injury requirement of § 523(a)(6). Plyam v. Precision
19 Development, LLC (In re Plyam), 530 B.R. 456 (9th Cir. BAP
20 2015).
21 Appellants contend that the bankruptcy court erred in
22 determining that the fraud finding in the punitive damages award
23 of the state court judgment established the willful and
24 malicious injury requirements necessary for nondischargeability
25 under § 523(a)(6). More specifically, they contend that the
26 bankruptcy court erred because the California Court of Appeal
27 “did not carry the [state court judgment’s] conjunctive findings
28 [of fraud, malice, and oppression] forward into its [d]ecision.”
22
1 Instead, the Court of Appeal’s decision “affirmed the award of
2 punitive damages based solely on the finding of there being
3 substantial evidence of ‘malice and deceit’ with no reference to
4 fraud.” Under Plyam, Appellants contend that “malice” by itself
5 in a punitive damages award under CC § 3294 does not, without an
6 accompanying finding of “intentional malice,” establish the
7 willful injury requirement under § 523(a)(6). They similarly
8 argue that under California law, “deceit” may include negligent
9 misrepresentation, which does not require an intent to defraud.
10 Issue preclusion was available. First, the state court’s
11 ruling on conversion and punitive damages satisfied
12 § 523(a)(6)’s requirement of an underlying tort and “malicious”
13 injury. And there is no dispute that this aspect of the state
14 court judgment was affirmed by the California Court of Appeal.
15 Conversion under California law does not per se establish the
16 necessary state of mind for § 523(a)(6) nondischargeability
17 because intent is not a necessary element. But there is no
18 question that it establishes a tort that can support a
19 § 523(a)(6) nondischargeability claim and a wrongful act that
20 necessarily causes injury as required for a finding of
21 § 523(a)(6) malicious injury. And there is also no question
22 that the acts of conversion were intentional and without just
23 cause or excuse. The California Court of Appeal as well as the
24 trial court made clear findings that Tomkow and Khan harmed
25 Barton intentionally, with malice, and through deceit. On this
26 record, then, § 523(a)(6) malice was established through
27 specific findings at both the trial court and appellate court
28 level.
23
1 Second, given the foregoing discussion of DiRuzza and
2 Skidmore, we similarly conclude that the bankruptcy court
3 appropriately gave issue preclusive effect to the state court’s
4 punitive damages award, which was based on findings of fraud,
5 malice, and oppression; this satisfies § 523(a)(6)’s willfulness
6 requirement.
7 The trickier issue is one we need not decide: whether, if
8 issue preclusion is based only on the appellate court’s
9 affirming the conversion determination (i.e., the modern trend),
10 rather than the entirety of the trial court’s decision (i.e.,
11 Skidmore), a willful injury is established. The California
12 Court of Appeal’s decision gives us pause in two respects.
13 First, a determination of conversion, even if intentional, does
14 not necessarily establish an intent to injure or a substantial
15 certainty that injury will occur. Thus, the California Court of
16 Appeal’s decision, in isolation, may not establish § 523(a)(6)
17 willfulness. Second, the Court of Appeal limited its affirmance
18 of the punitive damages award to “malice” and “deceit,” which
19 could differ in substance from the trial court’s finding of
20 fraud, malice, and oppression for the purposes of CC § 3294.
21 We acknowledge that the labels used by the California Court
22 of Appeal may not be sufficient for a § 523(a)(6) willfulness
23 determination. Given the extensive comment that underscores
24 these conclusions, however, this is a close call. As we
25 acknowledge, we must draw all justifiable inferences in favor of
26 the Appellants. Accordingly, we decline to affirm on this
27 basis. Instead, we affirm because binding Ninth Circuit
28 authority, as the bankruptcy court recognized, compels this
24
1 result notwithstanding any limitations in the basis for
2 affirmance. Thus, the bankruptcy court appropriately gave issue
3 preclusive effect to the punitive damages award, and it did not
4 err in granting summary judgment in Barton’s favor on his
5 § 523(a)(6) claim.
6 D. Even though lesser punitive damages were assessed against
him, Tomkow was equally complicit in willfully injuring
7 Arnold.
8 Tomkow alleges that both the California state court and the
9 Court of Appeal recognized that his conduct was less egregious
10 than that of Khan’s for purposes of the punitive damages award.
11 He contends that they found that he was complicit in the
12 conversion and, thus, that his liability was imputed based on
13 Khan’s acts. Tomkow asserts that a subjective state of mind
14 cannot be imputed for the purposes of § 523(a)(6).
15 Tomkow’s argument is unavailing. First, the Ninth Circuit
16 has imputed the knowledge and intent of a business partner to a
17 debtor for the purposes of § 523(a)(6). See Impulsora Del
18 Territorio Sur, S.A. v. Cecchini (In re Cecchini), 780 F.2d 1440
19 (9th Cir. 1986). As this Panel has recognized, however, that
20 decision predates the United States Supreme Court’s decision in
21 Geiger and, thus, “the continued efficacy of Cecchini as
22 precedent on related questions is compromised.” See Cal.
23 Capital Ins. Co. v. Riley (In re Riley), BAP No. CC-15-1379-
24 TaLKi, 2016 WL 3351397, at *7 (9th Cir. BAP June 8, 2016).
25 Second, the California state court and Court of Appeal
26 determined that both Khan and Tomkow engaged in conversion. In
27 its initial statement of decision, the state court found:
28 Tomkow and Khan determined that Barton was making
25
1 little or no contributions to the success of [RIL].
Tomkow provided the idea and technical savvy and Khan
2 proved to be a skilled fundraiser to keep the company
afloat. What was Barton’s role they wondered, and if
3 indeed he was not even providing legal counsel, why
should he continue as a shareholder of [RIL]? . . .
4 The manner by which Khan and Tomkow attempted to
separate him from that ownership gives rise to a
5 proper claim for punitive damages.
6 The state court made no distinction between Khan and Tomkow.
7 True, in its revised decision, the state court found that
8 Tomkow’s conduct was less onerous and that he was “complicit in
9 the conversion of [Barton’s] shares.” That said, the finding
10 does not impact or negate the state court’s prior finding of
11 intent.
12 The California Court of Appeal then reaffirmed that
13 “Barton’s harm resulted from Kahn and Tomkow’s malice and
14 deceit, not mere accident.” (Emphasis added.) That Tomkow’s
15 conduct was less egregious than Khan’s is reflected in the
16 reduced amount of punitive damages assessed individually against
17 Tomkow. This distinction, however, does not change the analysis
18 of the § 523(a)(6) willful injury requirement.
19 E. The bankruptcy court did not err in denying Appellants’
motion for direct appeal certification.
20
21 Appellants also contend that the bankruptcy court erred by
22 denying their application for direct appeal certification to the
23 Ninth Circuit pursuant to Rule 8006 and 28 U.S.C.
24 § 158(d)(2)(A)(i)–(iii). They urge us to reverse the bankruptcy
25 court’s ruling.
26 Although the case law on this issue is sparse, it does not
27 appear that a denial of an application for direct appeal
28 certification under Rule 8006 and 28 U.S.C.
26
1 § 158(d)(2)(A)(i)–(iii) is a final order. For example, denial
2 of a 28 U.S.C. § 1292(b) certification is not appealable. See
3 May v. Warner Amex Cable Commc’ns, 871 F.2d 1088 (6th Cir. 1989)
4 (table); see also McCall v. Deeds, 849 F.2d 1259 (9th Cir. 1988)
5 (denial of Civil Rule 54(b) certification is not appealable);
6 Mem’l Hosp. for McHenry Cty. v. Shadur, 664 F.2d 1058 (7th Cir.
7 1981) (court of appeals reviewed matter by petition for writ of
8 mandamus after denial of 28 U.S.C. § 1292(b) certification).
9 Even if such an order is final and subject to review when
10 joined with the final decision on summary judgment, for the
11 reasons discussed above, we conclude that the bankruptcy court
12 did not err in denying the application. As stated, the
13 bankruptcy court correctly determined that it was bound by
14 DiRuzza and Skidmore. As a result, whether it believed that the
15 matter was of public importance or required resolution of
16 conflicting decisions is irrelevant. Finally, even if the
17 bankruptcy court erred in denying Appellants’ application —
18 something that we do not determine — Appellants now have a
19 direct path of appeal to the Ninth Circuit without the need for
20 a Rule 8006 certification. Reversing the bankruptcy court on
21 this point would be impractical and a waste of judicial
22 resources.
23 CONCLUSION
24 Based on the foregoing, we AFFIRM.
25
26
27
28
27