Case Type:
Case Status:
BAP No. CC-21-1271-GLS; Bk. NO. 1:16-bk-11671-MT; Adv. No. 1:16-ap-01119-MT (9th Circuit, Dec 02,2022) Not Published
The bankruptcy court did not abuse its discretion by admitting evidence of the state court's judgment as preclusive in an adversary proceeding nor commit clear error by finding that such evidence demonstrated that the Debtor's conduct demonstrated a culpable mind for finding the debts non-dischargeable under § 523(a)(4).
Procedural context:
Debtor had a business arrangement with a partner (the "Partner") where the Debtor would sell clothing items that the Partner acquired at liquidation sales for a 40-60 split of profits. Debtor refused to pay Partner, claiming that he did not profit. Partner sued Debtor in state court for actions related to fraudulently taking the money and others. The state court entered a judgment against Debtor for the claims of breach of contract, open book account, account stated, unjust enrichment, negligent misrepresentation, and dishonored checks with a final judgment of $1,269,497.50 in damages, costs, and prejudgment interest. The Debtor's conduct included falsifying documents, passing bad checks, refusing to pay, and making false statements of material fact. After the judgment, Debtor filed for chapter 7. The Partner filed an adversary compliant to hold the judgment debt non-dischargeable, and the action proceeded under §§ 523(a)(4) for "fraud or defalcation while acting in a fiduciary capacity." After trial, the bankruptcy court held that $779,841 of the debt plus interest would be non-dischargeable as a result of the Debtor's breach of fiduciary duty that were described in the state court action.
The BAP reviewed the bankruptcy court's decision for abuse of discretion for admitting the state court's judgment and clear error for the finding that the Debtor acted with fraud or defalcation while acting in a fiduciary capacity. A bankruptcy court “must give to a state-court judgment the same preclusive effect as would be given that judgment under the law of the State in which the judgment was rendered.” Migra v. Warren City Sch. Dist. Bd. of Educ., 465 U.S. 75, 81 (1984). Issue preclusion requires a showing of (1) identical issues, (2) actually litigated, (3) necessarily decided,(4) on the merits, and (5) against the same party. See In re Plyam, 530 B.R. at 462 (citing Lucido v. Super. Ct., 51 Cal. 3d 335, 341 (1990)). The Debtor disputed that the issue was actually litigated or necessarily decided. While the state court did not have a claim for defalcation, the claims of breach of contract by failing to pay the Partner for the merchandise were identical to the elements of defalcation. Accordingly, the facts required to prove defalcation were actually litigated and necessarily decided. In addition, the court found the Debtor acted with requisite culpability by finding the Debtor's testimony not credible at trial and properly weighted other testimony of the Debtor's intent as more persuasive. Because the record supported the court's decision, the BAP did not find clear error in the court's determination of evidence.

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