Plyam v. Precision Development, LLC (In Re Plyam)
530 B.R. 456
| 9th Cir. BAP | 2015Background
- Yuri formed Precision Development, LLC (Nevada LLC) in 2005; he was initially sole member/manager. Precision raised ~ $26.3M from the Bronfmans and acquired multiple parcels for development.
- The Debtors (Yuri and Natalia Plyam) caused three Precision parcels to be deeded to them (the Transferred Properties) and later transferred a fourth property; these were used as collateral for construction loans and later foreclosed.
- The Bronfmans obtained control of Precision and sued the Debtors in California state court for misuse of Precision funds and diversion of assets. An 18-day jury trial produced a special verdict finding breach of fiduciary duty and malice/oppression/fraud, awarding ~$10.1M in compensatory and $200,000 in punitive damages; the state judgment was affirmed on appeal and is final.
- Debtors filed Chapter 7. Precision sued in bankruptcy court seeking nondischargeability of the state judgment under 11 U.S.C. § 523(a)(4) (fraud or defalcation while acting in a fiduciary capacity) and § 523(a)(6) (willful and malicious injury).
- Bankruptcy court granted summary judgment to Precision based on issue preclusion from the state court judgment: as to Yuri for § 523(a)(4) and (a)(6); as to Natalia only for § 523(a)(6). Debtors appealed.
Issues
| Issue | Plaintiff's Argument (Precision) | Defendant's Argument (Plyams) | Held |
|---|---|---|---|
| Whether state-court punitive-damages findings preclude relitigation of § 523(a)(6) willfulness | The CC § 3294 punitive-damages finding (malice/oppression/fraud) shows willful intent and thus satisfies § 523(a)(6) willfulness | The jury’s disjunctive finding may be based on conscious disregard/ oppression/despicable malice (recklessness), which is insufficient for § 523(a)(6) willfulness | Vacated: punitive-damages finding in disjunctive insufficient to establish § 523(a)(6) willfulness because conscious disregard/despicable malice/ oppression can reflect recklessness, not the subjective intent/substantial-certainty Geiger requires |
| Whether the state-court breach-of-fiduciary-duty judgment precludes relitigation that a fiduciary (express/technical trust) existed for § 523(a)(4) | The state breach finding establishes fiduciary status and breach; operating agreement and manager status suffice to show fiduciary/ trust relationship | The requisite § 523(a)(4) fiduciary status is a narrow federal question requiring an express or technical trust imposed before the wrongdoing; Nevada law (governing the LLC) does not clearly create such a trust here | Vacated: record insufficient to conclude, as a matter of law, an express or technical trust existed under Nevada law; issue preclusion inappropriate on § 523(a)(4) fiduciary element |
| Whether breach-of-fiduciary duty judgment alone establishes § 523(a)(6) willfulness | Breach + punitive damages indicate culpable state of mind | Breach of fiduciary duty under California law has no subjective-intent-to-harm requirement and therefore cannot alone satisfy Geiger willfulness | Vacated: breach-of-fiduciary judgment without more does not establish the subjective intent/substantial-certainty necessary for § 523(a)(6) |
| Whether bankruptcy court properly applied California issue-preclusion law to except the state judgment from discharge | Issue preclusion should be applied to final state judgment elements | Where state findings are disjunctive or rest on standards (objective/reckless) that differ from the federal § 523 standards, preclusion is improper | Vacated and remanded for further proceedings; preclusion unavailable on the § 523(a)(6) willfulness issue and on the § 523(a)(4) fiduciary trust issue without further factual/legal determination |
Key Cases Cited
- Kawaauhau v. Geiger, 523 U.S. 57 (1998) (§ 523(a)(6) requires a deliberate intent to cause injury or substantial certainty of injury)
- Barboza v. New Form, Inc. (In re Barboza), 545 F.3d 702 (9th Cir. 2008) (discussing § 523(a)(6) standards)
- Jercich v. Petralia (In re Jercich), 238 F.3d 1202 (9th Cir. 2001) (maliciousness and willfulness elements under § 523(a)(6))
- Su v. Carrillo (In re Su), 290 F.3d 1140 (9th Cir. 2002) (objective standards incompatible with § 523(a)(6) subjective intent)
- Bullock v. BankChampaign, N.A., 133 S. Ct. 1754 (2013) (for § 523(a)(4) defalcation, gross recklessness may suffice under federal common law)
- Ragsdale v. Haller, 780 F.2d 794 (9th Cir. 1986) (§ 523(a)(4) fiduciary status requires express or technical trust)
- Lucido v. Superior Court, 51 Cal.3d 335 (1990) (California issue preclusion elements and public-policy limitation)