530 B.R. 456
9th Cir. BAP2015Background
- Yuri formed Precision Development, LLC (Nevada LLC) in 2005; he was initially sole member/manager. Precision obtained about $26.3M from investors (the Bronfmans) and acquired development parcels.
- The Debtors (Yuri and Natalia Plyam) caused three Precision parcels to be deeded to them (the Transferred Properties) and later transferred a fourth property; some parcels were used as collateral and foreclosed.
- The Bronfmans gained control of Precision and sued the Plyams in California state court for misuse/diversion of company assets; after an 18-day trial a jury found breach of fiduciary duty and malice/ oppression/ fraud and awarded general and punitive damages. The California Court of Appeal affirmed and the judgment became final.
- Precision filed a Chapter 7 adversary proceeding seeking nondischargeability under 11 U.S.C. § 523(a)(4) and (a)(6), and moved for summary judgment based solely on issue preclusion from the state court judgment.
- The bankruptcy court applied issue preclusion and excepted the state-court award from discharge against Yuri under § 523(a)(4) and (a)(6), and against Natalia under § 523(a)(6); debtors appealed.
Issues
| Issue | Plaintiff's Argument (Precision) | Defendant's Argument (Plyam) | Held |
|---|---|---|---|
| Whether the state-court punitive-damages finding (CC § 3294) precludes relitigation of § 523(a)(6) willfulness | Jury’s punitive award (malice/ oppression/ fraud) shows willful and malicious injury for § 523(a)(6) | The § 3294 finding is disjunctive and may be based on "conscious disregard" or oppression (recklessness), which is insufficient for § 523(a)(6) willfulness | Vacated: punitive-damages finding could be based on conscious disregard/ oppression (recklessness) so it cannot preclude the specific subjective-intent (willfulness) element of § 523(a)(6) unless the state judgment expressly rested on intentional malice or fraud |
| Whether state-court breach-of-fiduciary-duty judgment precludes relitigation of fiduciary status/defalcation under § 523(a)(4) as to Yuri | The state judgment established fiduciary breach and thus supports preclusion for § 523(a)(4) defalcation | Federal law requires an express or technical trust (narrow fiduciary definition) arising before the wrongdoing; Nevada law governs the LLC and does not clearly create such a trust here | Vacated: record does not establish an express or technical trust under Nevada law; issue preclusion was improperly applied on § 523(a)(4) fiduciary element |
| Whether the bankruptcy court properly applied issue preclusion overall | State-court findings are final and should have preclusive effect | State findings do not necessarily resolve the distinct federal mens rea and trust-type questions required by §§ 523(a)(6) and (a)(4) | Vacated and remanded for further proceedings (bankruptcy court must determine willfulness and fiduciary-trust status) |
Key Cases Cited
- Kawaauhau v. Geiger, 523 U.S. 57 (1998) (§ 523(a)(6) requires a deliberate or intentional injury; mere recklessness insufficient)
- In re Jercich, 238 F.3d 1202 (9th Cir. 2001) (discusses willfulness and maliciousness under § 523(a)(6))
- In re Su, 290 F.3d 1140 (9th Cir. 2002) (objective standards cannot substitute for the debtor’s subjective willfulness in § 523(a)(6))
- Bullock v. BankChampaign, N.A., 133 S. Ct. 1754 (2013) (for § 523(a)(4) defalcation, gross recklessness can suffice under certain fiduciary contexts)
- Lucido v. Superior Court, 51 Cal.3d 335 (1990) (California issue-preclusion requirements)
- Ragsdale v. Haller, 780 F.2d 794 (9th Cir. 1986) (§ 523(a)(4) fiduciary definition is narrow; requires express or technical trust)