In re: Patrick Lazzari
AZ-15-1375-FLJu
| 9th Cir. BAP | Oct 13, 2016Background
- Patrick Lazzari became successor trustee of the Gloria Bassillio Revocable Trust after beneficiaries declined; he executed a grant deed transferring the San Francisco property to himself and later took a $419,000 mortgage on it.
- Michael Lazzari (Patrick’s brother) had severe medical/neurological impairments after a 2005 overdose; Michael earlier signed a durable power of attorney appointing Patrick.
- On March 9, 2006 Michael signed a Beneficiary Disclaimer renouncing his trust interest to Patrick; the next day Michael suffered a catastrophic anoxic brain injury.
- Daniel and Sally (siblings and Michael’s conservators) litigated in California, obtained orders finding Patrick had wrongfully taken and concealed Michael’s trust property, declaring the Disclaimer void ab initio, vesting the San Francisco property in Michael’s conservatorship, and awarding surcharges and fees.
- Patrick filed bankruptcy in 2010, converted to chapter 7 in 2014 and received a discharge; Daniel and Sally then sued in bankruptcy court under 11 U.S.C. § 523(a)(4) to except the conservatorship judgment (surcharge, lien value, attorneys’ fees) from discharge.
- The bankruptcy court granted summary judgment applying California issue-preclusion to the state-court findings as establishing defalcation in a fiduciary capacity; the BAP affirmed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether California conservatorship judgment precludes relitigation of elements of § 523(a)(4) (defalcation in fiduciary capacity) | Daniel & Martinez: state court’s findings that Patrick breached fiduciary duties, that the Disclaimer was void, and that Patrick acted in bad faith establish defalcation and an express trust, so debt is nondischargeable | Patrick: default judgment not actually litigated; lacked service or incentive to fully litigate; conservatorship didn’t decide Michael’s competence or Disclaimer validity | Issue preclusion applies under California law; state court determined the elements of defalcation and express trust; bankruptcy court properly excepted specified debt from discharge under § 523(a)(4) |
| Whether the California default judgment was "actually litigated" and "on the merits" for collateral estoppel purposes | Plaintiff: state court made detailed findings on fiduciary breach—thus actually litigated and on merits | Patrick: he did not meaningfully participate after 2010, the judgment was by default, service may have been defective, so no full and fair opportunity to litigate | Court: California law gives collateral-estoppel effect to default judgments with express findings; service and participation arguments waived or unsupported; issues were actually litigated and necessarily decided |
| Whether Patrick had adequate incentive to litigate in state court (full and fair opportunity) | Plaintiff: Patrick’s chapter 13 plan depended on the property; he had incentive to litigate | Patrick: he hoped to discharge obligations in bankruptcy and thus lacked incentive to contest state action fully | Court: Patrick had clear incentive (property central to his bankruptcy plan); foreseeability supports preclusion; no inequity in applying collateral estoppel |
| Whether state-court findings could substitute for § 523(a)(4) fraud element or for claims under § 523(a)(2) or (a)(6) | Plaintiff sought nondischargeability under multiple subsections including fraud and willful injury | Court held state findings supported defalcation under (a)(4) but did not satisfy elements for (a)(2) or (a)(6); parties did not appeal those portions | Held: preclusion supports defalcation finding under § 523(a)(4) only; (a)(2) and (a)(6) not established by state order |
Key Cases Cited
- Hedlund v. Educ. Res. Inst. Inc., 718 F.3d 848 (9th Cir.) (standards for reviewing bankruptcy court legal and factual findings)
- Miller v. Cardinale (In re DeVille), 361 F.3d 539 (9th Cir.) (appeals standard for bankruptcy findings)
- Bullock v. BankChampaign, N.A., 133 S. Ct. 1754 (2013) (defalcation requires misconduct such as bad faith or intentional wrong)
- Grogan v. Garner, 498 U.S. 279 (1991) (dischargeability litigation may rely on preclusive effect of prior judgments)
- Marrese v. Am. Acad. of Orthopaedic Surgeons, 470 U.S. 373 (1985) (full faith and credit requires applying preclusion law of the rendering state)
- Lucido v. Superior Court, 51 Cal.3d 335 (1990) (five-factor test for issue preclusion under California law)