Krystal v. Haynie, 621 B.R. 456

Krystal and Haynie formed a business relationship beginning in 2002 and agreed in written "Deal Points" (signed Dec. 2003) that Krystal would own 30% and Haynie 70% of a to‑be‑formed LLC; Krystal loaned funds to the venture.
Haynie formed Stat Network Solutions, LLC in June 2003 as a one‑member LLC (Haynie) and later purchased Sanswire through Stat; Krystal was not made a member and did not receive promised financial records.
Haynie sold 50% of Stat in 2004 and repaid Diversified (Krystal’s company) loans; Krystal sued in Washington state court (2007).
The state court issued two judgments after bifurcated trials: a 2009 judgment finding Krystal never had membership, and a 2012 default/judgment on damages (Second State Judgment) awarding Krystal $798,141.94.
In this bankruptcy adversary Krystal sought nondischargeability under § 523(a)(2)(A), (4), and (6); the bankruptcy court held the Second State Judgment preclusive and excepted the debt from discharge under § 523(a)(2)(A) and (a)(6), but not (a)(4); costs were allowed but attorney fees were denied.

Issue	Plaintiff's Argument	Defendant's Argument	Held
Preclusive effect of Second State Judgment	Second State Judgment should have collateral‑estoppel effect here	Haynie says he lacked notice of the 2012 trial & First State Judgment controls	Second State Judgment is preclusive (last‑in‑time rule; Haynie participated earlier; record sufficient; he had full and fair opportunity)
§523(a)(2)(A) — fraud/false representation	Haynie knowingly misrepresented intent to include Krystal and to cure formation errors; Krystal relied and was damaged	Haynie denies fraudulent intent/contends actions were not fraudulent	Court found intentional misrepresentations and reliance; debt nondischargeable under §523(a)(2)(A)
§523(a)(4) — fraud/defalcation in fiduciary capacity	Joint‑venture/fiduciary duties make Haynie a fiduciary; defalcation exception applies	No express or technical trust; fiduciary for §523(a)(4) must be narrow (express/technical trust)	Claim fails; §523(a)(4) not satisfied (no express/technical trust)
§523(a)(6) — willful and malicious injury	Haynie’s intentional fraud and appropriation of profits was tortious, willful, malicious	Characterizes dispute as contract breach only	Court finds willful (subjective intent/substantial certainty) and malicious conduct; debt nondischargeable under §523(a)(6)

Grogan v. Garner, 498 U.S. 279 (1991) (standard for nondischargeability actions and preclusion in bankruptcy)
Cal‑Micro, Inc. v. Cantrell (In re Cantrell), 329 F.3d 1119 (9th Cir. 2003) (narrow, federal definition of fiduciary for §523(a)(4))
Harmon v. Kobrin (In re Harmon), 250 F.3d 1240 (9th Cir. 2001) (elements for §523(a)(2)(A))
Kawaauhau v. Geiger, 523 U.S. 57 (1998) (willful element under §523(a)(6) requires deliberate injury)
In re Riso, 978 F.2d 1151 (9th Cir. 1992) (intentional breach alone insufficient for §523(a)(6) without tortious, malicious conduct)
Robi v. Five Platters, Inc., 838 F.2d 318 (9th Cir. 1988) (last‑in‑time rule when inconsistent judgments exist)
Americana Fabrics, Inc. v. L & L Textiles, Inc., 754 F.2d 1524 (9th Cir. 1985) (support for last‑in‑time res judicata rule)
In re Daily, 47 F.3d 365 (9th Cir. 1995) (issue preclusion may apply to judgments entered after substantial participation)
United States v. Gottheiner (In re Gottheiner), 703 F.2d 1136 (9th Cir. 1983) (collateral estoppel may apply where party had extensive participation before default)
Carillo v. Su (In re Su), 290 F.3d 1140 (9th Cir. 2002) (subjective knowledge/substantial‑certainty test for willfulness in §523(a)(6))