In re: YURI PLYAM and NATALIA PLYAM, Debtors. YURI PLYAM; NATALIA PLYAM, Appellants, v. PRECISION DEVELOPMENT, LLC, Appellee.
BAP No. CC-14-1362-TaDPa
Bk. No. 2:13-bk-15020-BB
Adv. No. 2:13-ap-01558-BB
UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE NINTH CIRCUIT
May 5, 2015
ORDERED PUBLISHED
Argued and Submitted on January 22, 2015 at Pasadena, California
Filed - May 5, 2015
Appeal from the United States Bankruptcy Court for the Central District of California
Honorable Sheri Bluebond, Chief Bankruptcy Judge, Presiding
Appearances:
Before: TAYLOR, DUNN, and PAPPAS, Bankruptcy Judges.
O P I N I O N
TAYLOR, Bankruptcy Judge:
Debtors Yuri Plyam and Natalia Plyam appeal from the bankruptcy court‘s summary judgment excepting a state court judgment from discharge pursuant to
The bankruptcy court granted summary judgment based on issue preclusion and the state court judgment‘s award of actual and punitive damages for breach of fiduciary duty. We determine that the bankruptcy court erred as the state court judgment did not include a finding equivalent to willfulness as required for
As a result, we VACATE the judgment and REMAND to the bankruptcy court for further proceedings consistent with this opinion.
BACKGROUND
In 2005, Yuri formed Precision Development, LLC, a Nevada limited liability company (“Precision“), for the purpose of developing residential real property in Southern California. Initially, he was its sole member and manager.
Precision obtained significant investment capital from Clare Bronfman and Sara Bronfman (jointly, the “Bronfmans“). According to the Bronfmans, they eventually invested approximately $26.3 million.
Between 2005 and 2007, Precision acquired numerous parcels of real property. Yuri‘s separate business entity oversaw their development; it did not go well. Precision‘s funds ran out in 2007 before it successfully completed development of or sold any of the properties.
Precision‘s operating agreement provided that it would hold title to all real property acquired with Precision funds. The Debtors, however, caused Precision to deed them three parcels of real property (the “Transferred Properties“). And once they acquired title, the Debtors alleged ownership of the Transferred Properties in loan documents and used the Transferred Properties as collateral for construction loans. The Debtors later also transferred a fourth property from Yuri‘s business entity to Precision and then from Precision to their family trust.
Eventually, the Bronfmans discovered Precision‘s dire state; few of its developments were close to completion. Indeed, some remained vacant land. The only projects with significant development were the Transferred Properties. And, the Debtors lost even the Transferred Properties to foreclosure by their construction lender.
The Bronfmans attempted to remedy the situation. They subsequently obtained control of Precision and caused it to sue the Debtors in California state court. The complaint alleged that the Debtors misused Precision funds and diverted its
assets.
Following an 18-day trial, a jury entered a special verdict finding that “Yuri Plyam or Natasha [sic] Plyam” breached their fiduciary duties to Precision and that “Yuri or Natasha [sic] Plyam” acted with malice, oppression, or fraud. The jury awarded $10,100,000 in general damages and $200,000 in punitive damages (the “State Court Judgment“). The Debtors appealed to the California court of appeal, which affirmed the State Court Judgment. See Precision Dev., LLC v. Plyam, 2013 WL 5801759 (Cal. Ct. App. Oct. 29, 2013). The State Court Judgment is now final.
The Debtors responded with a chapter 7 bankruptcy, and Precision then commenced an adversary proceeding seeking to except the State Court Judgment from discharge pursuant to
The Debtors opposed. They defended against the
generally contested the sufficiency of evidence and argued, in particular, that triable issues of fact existed as to the justification or excuse for their actions in relation to the Transferred Properties and the later transfer of the fourth property to their family trust. The Debtors also argued that the State Court Judgment‘s punitive damages award did not satisfy the elements for
Following arguments at the hearing, the bankruptcy court relied on issue preclusion and granted summary judgment in part and denied it in part. It determined that Natalia did not owe a fiduciary duty; thus, it granted summary judgment against her only under
The bankruptcy court subsequently entered a judgment excepting the State Court Judgment, in the total amount of $10,497,843.24, from discharge. The Debtors timely appealed.
JURISDICTION
The bankruptcy court had jurisdiction pursuant to
ISSUE
Did the bankruptcy court err in granting summary judgment to Precision by giving issue preclusive effect to the State Court Judgment as to the
STANDARDS OF REVIEW
We review de novo the bankruptcy court‘s decisions to grant summary judgment and to except a debt from discharge under
We also review de novo the bankruptcy court‘s determination that issue preclusion was available. In re Black, 487 B.R. at 210. If issue preclusion was available, we then review the bankruptcy court‘s application of issue preclusion for an abuse of discretion. Id. A bankruptcy court abuses its discretion if it applies the wrong legal standard, misapplies the correct legal standard, or if its factual findings are illogical, implausible, or without
DISCUSSION
Summary judgment is appropriate where the movant shows that there is no genuine dispute of material fact and the movant is entitled to judgment as a matter of law.
A bankruptcy court may rely on the issue preclusive effect of an existing state court judgment as the basis for granting summary judgment. See Khaligh v. Hadaegh (In re Khaligh), 338 B.R. 817, 831-32 (9th Cir. BAP 2006). In so doing, the bankruptcy court must apply the forum state‘s law of issue preclusion. Harmon v. Kobrin (In re Harmon), 250 F.3d 1240, 1245 (9th Cir. 2001); see also
In California, application of issue preclusion requires that: (1) the issue sought to be precluded from relitigation is identical to that decided in a former proceeding; (2) the issue was actually litigated in the former proceeding; (3) the issue was necessarily decided in the former proceeding; (4) the decision in the former proceeding is final and on the merits; and (5) the party against whom preclusion is sought was the same as, or in privity with, the party to the former proceeding. Lucido v. Super. Ct., 51 Cal. 3d 335, 341 (1990). California further places an additional limitation on issue preclusion: courts may give preclusive effect to a judgment “only if application of preclusion furthers the public policies underlying the doctrine.” In re Harmon, 250 F.3d at 1245 (citing Lucido, 51 Cal. 3d at 342-43); see also In re Khaligh, 338 B.R. at 824-25.
The party asserting preclusion bears the burden of
establishing the threshold requirements. In re Harmon, 250 F.3d at 1245. This means providing “a record sufficient to reveal the controlling facts and pinpoint the exact issues litigated in the prior action.” Kelly v. Okoye (In re Kelly), 182 B.R. 255, 258 (9th Cir. BAP 1995), aff‘d, 100 F.3d 110 (9th Cir. 1996). Ultimately, “[a]ny reasonable doubt as to what was decided by a prior judgment should be resolved against allowing the [issue preclusive] effect.” Id.
The Debtors do not challenge the bankruptcy court‘s determination that the State Court Judgment is final and against the Debtors. Consequently, we do not review this determination on appeal.
A. The bankruptcy court erred in granting summary judgment to Precision on its § 523(a)(6) claim based on the issue preclusive effect of the State Court Judgment.
1. Exceptional circumstances justify our review of the propriety of issue preclusion as to both Yuri and Natalia.
Yuri and Natalia filed a joint opening brief on appeal that requests de novo
and we exercise our discretion and extend review as to Yuri as well. See Mano-Y&M, Ltd. v. Field (In re Mortg. Store, Inc.), 773 F.3d 990, 998 (9th Cir. 2014) (appellate court may exercise discretion to consider waived issues based on exceptional circumstances).
Here, the Debtors share an attorney and filed a joint appellate brief, which squarely challenges the bankruptcy court‘s
Section
2. The State Court Judgment did not satisfy the element of willful injury as required for § 523(a)(6) nondischargeability.
Under
The terms “willful” and “malicious,” first appearing in the Bankruptcy Act of 1898,5 seemingly derive in some measure from the common law concepts of malice in fact and malice in law, respectively.
California, for example, defines malice in law as an “intent to do a wrongful act, established either by proof or presumption of law . . . from the intentional doing of the act without justification or excuse or mitigating circumstances.” In re V.V., 51 Cal. 4th 1020, 1028 (2011) (citing Davis v. Hearst, 160 Cal. 143 (1911);
(1904) (“Malice, in common acceptation, means ill will against a person, but in its legal sense it means a wrongful act, done intentionally, without just cause or excuse.” (emphasis added) (quoting Bromage v. Prosser, 4 Barn. & Cress. 247, 107 Eng. Rep. 1051 (K.B. 1825) (internal quotation marks omitted)), superseded by statute, Pub. L. No. 95-598, 92 Stat. 2549 (1978); Maynard v. Fireman‘s Fund Ins. Co., 34 Cal. 48, 53 (1867) (same). Thus, malice in law squares cleanly with
In contrast, malice in fact is defined as “a state of mind arising from hatred or ill-will, evidencing a willingness to vex, annoy, or injure another person.” Davis v. Hearst, 160 Cal. at 160 (emphasis added); In re V.V., 51 Cal. 4th at 1028 (“Malice in fact — defined as ‘a wish to vex, annoy, or injure’ . . . — consists of actual ill will or intent to injure.“) (emphasis added).
This background, highlights two points critical to any
Second, as the Supreme Court clarified in Geiger, recklessly inflicted injuries do not satisfy the
arising from recklessness simple, heightened, or gross; conduct that is reckless merely requires an intent to act, rather than an intent to cause injury as required under Geiger. See H.R. Rep. 95-595, at 365 (1977) (“‘Willful’ means deliberate or intentional. To the extent that Tinker v. Colwell, 193 U.S. 473 [1904], held that a looser standard is intended, and to the extent that other cases have relied on Tinker to apply a ‘reckless disregard’ standard, they are overruled.“) (emphasis added); Restatement (Second) of Torts § 500 cmt. f (1965). But see Bullock v. BankChampaign, N.A., 133 S. Ct. 1754, 1757 (2013) (holding that, for the purposes of
Here, the State Court Judgment provided two possible bases for the application of issue preclusion: the findings in the punitive damages award and the determination of breach of fiduciary duty under state law. Neither basis supported an application of issue preclusion on the issue of
3. The punitive damages award was an insufficient basis for issue preclusion.6
The jury‘s punitive damages award against both of the Debtors was
arises from
Civil Code § 3294 provides statutory definitions of these terms.7 “Malice” is defined as either: (1) conduct that the defendant intends to cause injury to the plaintiff (“Intentional Malice“); or (2) despicable conduct carried on by the defendant with a willful and conscious disregard of the rights or safety of others (“Despicable Malice“).
Only Intentional Malice, see Brandstetter v. Derebery (In re Derebery), 324 B.R. 349, 356 (Bankr. C.D. Cal. 2005), and fraud expressly require an intent to cause injury. As a result, only those findings satisfy the
a. A punitive damages award under California law can be based on acts in conscious disregard.
As defined by the California Supreme Court, a person acts with a conscious disregard of another‘s rights or safety when he is aware of the probable dangerous consequences of his conduct and he willfully and deliberately fails to avoid those consequences. Taylor v. Super. Ct., 24 Cal. 3d 890, 895-96 (1979); see also Jud. Council of Cal. Civ. Jury Instruction (CACI) 3940, 3941; Cal. Civ. Jury Instructions (BAJI) 14.71, 14.72.1.
The conscious disregard requirement found in CC § 3294 appears to track the Taylor decision. In Taylor, the California Supreme Court examined whether the act of driving while intoxicated constituted malice for the purposes of a CC § 3294 punitive damages award. Previously, some California courts held that reckless conduct did not establish malice as required for a punitive damages award. See G.D. Searle & Co. v. Super. Ct., 49 Cal. App. 3d 22 (1975); see also Ebaugh v. Rabkin, 22 Cal. App. 3d 891, 896 (1972);
Gombos v. Ashe, 158 Cal. App. 2d 517 (1958). Contra Nolin v. Nat‘l Convenience Stores, Inc., 95 Cal. App. 3d 279, 285-88 (1979) (gross recklessness supported punitive damages award under CC § 3294). In an earlier case, the California Supreme Court, however, used the term “reckless misconduct” in dicta. See Donnelly v. S. Pac. Co., 18 Cal. 2d 863, 869-70 (1941).
The Taylor court held that “a conscious disregard of the safety of others [could] constitute malice within the meaning of [CC § 3294].” 24 Cal. 3d at 895. It also stated that to the extent Gombos v. Ashe was inconsistent with its holding, that case was disapproved. Id. at 900. Gombos previously held that drunk driving, while reckless, wrongful, and illegal, did not constitute malice within the meaning of CC § 3294. 158 Cal. App. 2d at 527. The Taylor court never expressly excluded recklessness as a basis for an award of punitive damages; it thus kept the door open to punitive damages based on a state of mind other than actual intent to injure.
Within a year of the Taylor decision, CC § 3294 was amended to require conscious disregard with respect to Despicable Malice and oppression. In so amending the statute, the California legislature included the two types of malice that exist currently: Intentional Malice and Despicable Malice. Clearly, it did not intend to include two identical forms of malice in the statutory definition. Thus, conscious disregard begins to take shape as a state of mind less malicious than an intent to injure.
i. Conscious disregard is the equivalent of reckless conduct.
In the continuum of states of mind supporting a judgment based on tort, recklessness rests between negligence, requiring no intent, and intentional misconduct, requiring both a deliberate act and the desire to cause the consequences of the act. In Donnelly v. S. Pac. Co., 18 Cal. 2d 863 (1941), the California Supreme Court considered whether existing law precluded a personal injury action based on negligence. It examined the contours of negligence and intentional torts and identified the existence of a third, intermediary category of tort law: “[a] tort having some of the characteristics of both negligence and willfulness occur[ed] when a person with no intent to cause harm intentionally perform[ed] an act so unreasonable and dangerous that he kn[ew], or should [have] know[n], it [was] highly probable that harm [would] result.” Id. at 869 (emphasis added). Noting the various terms employed by the courts to describe this category of tort, it adopted with approval the term “wanton and reckless misconduct.” Id.
This type of tort, the California Supreme Court explained, “involve[d] no intention, as [did] willful misconduct, to do harm, and i[t] differ[ed] from negligence in that it . . . involve[d] an intention to perform an act that the actor [knew], or should [have] know[n], [would] very probably cause harm.” Id. Importantly, it recognized that “wanton and reckless misconduct” was more closely akin to willful misconduct than to negligence and, “[t]hus, it justifie[d] an award of punitive damages.” Id. at 869-70.
The Donnelly court‘s analysis on this point is dicta, but it is also consistent with the Restatement of Torts discussion of reckless conduct.9 The Restatement explains
The critical difference between intentional and reckless misconduct is the necessary state of mind; for conduct to be reckless, the person must intend the reckless act but need not intend to cause the resulting harm. Id., cmt. f. To establish recklessness, it is sufficient that the person realizes (or should realize) the “strong probability that harm may result, even though he hopes or even expects that his conduct will prove harmless.” Id. But, a strong probability is not equivalent to
substantial certainty. See id. (“[A] strong probability is a different thing from the substantial certainty without which he cannot be said to intend the harm in which his act results.“); id. § 8A cmt. b. Thus, “[a]s the probability that [injurious] consequences will follow decreases, and becomes less than substantial certainty, the [person‘s] conduct loses the character of intent, and becomes mere recklessness.” Id. § 8A cmt. b.
Comparing the explanations of reckless conduct provided by the Donnelly court and the Restatement of Torts with the definition of conscious disregard, it becomes clear that conscious disregard proceeds from reckless conduct. The common factor between conscious disregard and reckless conduct is the accompanying state of mind; both require solely an intent to act and the focus lies there, rather than on an intent to cause the consequences of the act as required by Geiger. Degrees of recklessness may exist; but, again, whether recklessness is heightened or gross, it is insufficient for a determination of
In defining conscious disregard, the California Supreme Court in Taylor employed a description consistent with reckless conduct. As stated, acting with a conscious disregard within the meaning of CC § 3294 requires: (1) being aware of the probable dangerous consequences of one‘s own conduct; and (2) willfully and deliberately failing to avoid those consequences. Taylor, 24 Cal. 3d at 895-96.
First, to be aware of probable dangerous consequences, a person must first know or have reason to know of the facts
giving rise to a high degree of risk of harm to another. Knowledge of such facts is an essential element of recklessness. See Restatement (Second) of Torts § 500 cmt. a.
Second, whether consequences are “dangerous” relates to the character of a person‘s unreasonable conduct and the necessarily high degree of risk that serious harm will result from that conduct. See id., cmts. a, c.
Fourth, the terms “willfully” and “deliberately” mean only that the person failed, by design, to avoid the consequences of his wrongful act. His intent is focused on the act of being unsuccessful in preventing potential bad consequences, rather than on the actual consequences of his act. See id. § 500 cmt. b (“Conduct cannot be in reckless disregard of the safety of others unless the act or omission is itself intended[.]“).
The Supreme Court‘s decision in Bullock, although involving a different exception to discharge and federal common law rather than California state law, also strengthens the connection between conscious disregard and recklessness. There, the Supreme Court held that the term “defalcation,” within the meaning of
S. Ct. at 1757. In doing so, it concluded that “[w]here actual knowledge of wrongdoing is lacking, we consider conduct as equivalent if the fiduciary ‘consciously disregards’ (or is willfully blind to) ‘a substantial and unjustifiable risk’ that his conduct will turn out to violate a fiduciary duty.” Id. at 1759 (quoting Model Penal Code § 2.02(2)(c) (1985)) (emphasis added).
In sum, conscious disregard within the meaning of CC § 3294 is consistent with reckless conduct as discussed by California cases, the Restatement of Torts, and Bullock.
ii. California statutory authority and case law otherwise support that conscious disregard proceeds from reckless conduct.
A statutory analogue lends significant support to the determination that conscious disregard arises from reckless conduct. California law provides for enhanced remedies in cases of elder abuse. See
it.” Id. at 31-32 (citing Restatement (Second) of Torts § 500 cmt. g).
The descriptions of recklessness for the purpose of an elder abuse claim and conscious disregard within the meaning of
///
iii. That “willful” is an additional requirement for Despicable Malice does not change the outcome of the analysis.
As stated, Despicable Malice is defined as despicable conduct done willfully and in conscious disregard of the rights or safety of another; oppression, notably, requires only a conscious disregard.
In the context of
b. Determining that conscious disregard is insufficient to satisfy the § 523(a)(6) willfulness requirement is consistent with existing precedent.
Construing conscious disregard as a form of reckless conduct is consistent with Geiger and its progeny, including the Ninth Circuit‘s decisions in In re Jercich and In re Su. As the Supreme Court recognized in Geiger, expanding
Yet, the availability of punitive damages for injuries caused while driving intoxicated was exactly the issue before the California Supreme Court in Taylor. It was this issue that caused the California Supreme Court to determine that conscious disregard could constitute malice. Not long after, the California legislature codified the inclusion of conscious disregard into
We cannot reconcile the rationale supplied by the Supreme Court in Geiger in regards to
c. Despicable conduct, as also required for Despicable Malice and oppression, is based on an objective person standard.
In addition to conscious disregard, both Despicable Malice and oppression require conduct that is despicable.
Whether conduct is despicable is measured by an objective person standard. See In re Derebery, 324 B.R. at 356. But, an objective, reasonable person standard is not allowed in the
d. The disjunctive findings in the punitive damages award included Despicable Malice and oppression.
Here, the
To be clear, our holding does not eviscerate a bankruptcy court‘s ability or opportunity to apply issue preclusion to a state court jury‘s findings pursuant to
But, to the extent that
4. The breach of fiduciary duty determination under California law was an insufficient basis for issue preclusion on the issue of § 523(a)(6) willfulness.
In California, the elements for a breach of fiduciary duty are the existence
B. The bankruptcy court erred in granting summary judgment to Precision on its § 523(a)(4) claim against Yuri based on the issue preclusive effect of the State Court Judgment.
Section 523(a)(4) excepts from discharge debts for fraud or defalcation while acting in a fiduciary capacity. Whether a debtor is a fiduciary for the purposes of
1. Express or technical trust
State law determines whether the requisite trust relationship exists. See In re Lewis, 97 F.3d at 1185; Mele v. Mele (In re Mele), 501 B.R. 357, 365 (9th Cir. BAP 2013). The Debtors argue that here an express trust did not exist because the elements for a trust were not satisfied under California law. They maintain that, at best, the 2005 operating agreement required that Yuri hold the properties in trust for Precision; but, because Yuri was the sole member of Precision from 2005 to 2008, the duty to hold the properties in trust was effectively a duty to himself.
In response, Precision argues that the Debtors ignore Yuri‘s status as its manager, which independently established fiduciary duties owed to the company. In any event, it contends that, based on the 2008 amendment, the Bronfmans’ membership interests in Precision were deemed issued as of the date of the 2005 operating agreement. And, it argues that pursuant to former
Something that neither party addresses is that Precision is a Nevada limited liability company. Pursuant to the 2005 operating agreement, Precision was organized under the laws of Nevada. Former
The 2008 amendment to the Precision operating agreement states that: “[n]otwithstanding a conflict of [l]aws, the operating agreement may be enforced in
a. An express trust did not exist.
Under Nevada law, an express trust requires that: (1) “[t]he settlor properly manifest[] an intention to create a trust; and [(2)] [t]here is trust property . . . .”
Here, there is no indication that an express trust existed. Neither the 2005 operating agreement nor the 2008 amendment satisfied the requirements for an express trust. Nor is there anything else in the record that suggests the creation of an express trust during the time that Yuri was manager of Precision. Similarly, nothing in the record before us evidences the creation of a business trust. Thus, the next issue is whether a technical trust existed under Nevada law.
b. On this record, we cannot determine whether a technical trust existed.
Nevada law does not define a technical trust. In the absence of a definition under state law, we construe a technical trust as one imposed by law. See In re Mele, 501 B.R. at 365; see also Teamsters Local 533 v. Schultz (In re Schultz), 46 B.R. 880, 885 (Bankr. D. Nev. 1985) (“[A technical] trust . . . may arise by operation of a state statute which imposes trust-like obligations on those entering into certain kinds of contracts.“).
Our review of the Nevada Revised Statutes (“NRS“) reflects that a Nevada limited liability company does not necessarily involve a trust relationship between a manager or member and the limited liability company. One exception —
Unlike California, Nevada does not have a statute equating the fiduciary duties of a manager in a limited liability company context to those of a partner in a partnership. Therefore, duties under partnership law are irrelevant. Instead, Nevada law establishes that, in addition to a limited liability company‘s articles of organization, the operating agreement, if any,13 is central
Here, the 2005 operating agreement does not expressly establish the existence or the non-existence of fiduciary duties owed to Precision by its manager. Nor does it provide that Yuri contributed any property to the company, the only manner in which Nevada law expressly creates a fiduciary duty to a limited liability company. See
Other documents and evidence may also exist that fill the lacuna here; for example, Precision‘s articles of organization, required to create a limited liability company under Nevada law. See
On this record, we cannot conclude that, as a matter of law, a technical trust existed under Nevada law. The bankruptcy court, thus, abused its discretion in giving preclusive effect to the State Court Judgment on the issue of whether there existed a fiduciary relationship in relation to a technical trust for the purposes of
C. Judgment amount excepted from discharge
Finally, the Debtors argue that the bankruptcy court was required to conduct a separate inquiry into the measure of damages attributable to the specific tortious conduct at issue in the state court action. They contend that there were multiple breaches of fiduciary duty alleged and to the extent any of the breaches do not constitute a breach under federal law, any damages flowing from such breach are dischargeable. They also contend that only a damages judgment for fraud is subject to issue preclusion without further analysis by the bankruptcy court.
Based on our conclusions on both the
CONCLUSION
Given the unavailability of issue preclusion, the bankruptcy court erred in granting summary judgment in favor of Precision based on the preclusive effects of the State Court Judgment. Therefore, we VACATE the summary judgment and REMAND to the bankruptcy court for further proceedings consistent with this opinion.