490 B.R. 390
Bankr. D. Ariz.2013Background
- PMM Investments contributed $1,000,000 to LML for Bali Watergardens; LML’s initial structure had Kurth and Campbell as managers with PMM, NHV, and JQC as members; PMM’s funds were deposited into LML’s account controlled by Campbell; Kurth engaged in self-dealing withdrawals and transfers to his entities; attempts to finalize the project failed and Rosen’s property purchase was unresolved; the court held a trial and later ruled on §523(a)(2)(A) and §523(a)(4) claims, denying §523(a)(2)(A) relief but granting embezzlement relief under §523(a)(4) against Campbell and possibly the community property; trial evidence showed Campbell’s lack of disclosure and participation in misappropriation; the court ultimately determined liability for the community property of the Debtors and the sole-and-separate property of Mr. Campbell in connection with PMM’s $1,000,000 investment
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether PMM’s debt is nondischargeable under §523(a)(2)(A) | PMM asserts Campbell made false representations/omissions to induce PMM investment | Campbell contends no genuine intent to defraud and information withheld was not intentionally deceitful | Denied relief under §523(a)(2)(A) |
| Whether the debt is nondischargeable under §523(a)(4) for embezzlement | Funds entrusted to LML were misappropriated by Campbell with Kurth’s involvement | Campbell argues lack of direct embezzlement evidence and defenses to fraud | Held liable under §523(a)(4) for embezzlement by Campbell (with community-liability implications) |
| Extent of liability, including community property versus Mr. Campbell’s separate property | PMM seeks liability against both community assets and Campbell personally | Campbell argues limited liability and argues only his separate property liability | Campbell and the community property liable; Ms. Campbell not held liable for PMM obligation |
Key Cases Cited
- In re Sabban, 600 F.3d 1219 (9th Cir. 2010) (nondischargeability test under §523(a)(2)(A) involves five factors; assignment of intent inferred from circumstantial evidence)
- Grogan v. Garner, 498 U.S. 279 (U.S. 1991) (preponderance standard for dischargeability determinations)
- In re Diamond, 285 F.3d 822 (9th Cir. 2002) (necessity of proving actual intent to defraud under §523(a)(2)(A))
- In re Wada, 210 B.R. 572 (9th Cir. BAP 1997) (emphasizes elements of embezzlement for nondischargeability)
- Moore v. United States, 160 U.S. 268 (1885) (definition of embezzlement as fraudulent appropriation by entrusted person)
- In re Tsurukawa, 258 B.R. 192 (9th Cir. BAP 2001) (intent to defraud may be inferred from surrounding circumstances)
- In re Rollinson, 322 B.R. 879 (Bankr. D. Ariz. 2005) (community liability principles in bankruptcy nondischargeability)