- 9th Cir. Bankruptcy Appellate Case No. CC-14-1362-TaDPa (May 5, 2015)
- The 9th Circuit Bankruptcy Appellate Panel ("BAP") ruled that a bankruptcy court may relay on the issue preclusion effect of an existing state court judgment; however, the bankruptcy court must apply the forum's state law of issue preclusion. Even though Yuri did not specifically challenge the 11 U.S.C. Sec. 523(a)(6) judgment against him, the BAP determined exceptional circumstances were present to include Yuri. The state court judgment for punitive damages based on despicable malice or oppression does not establish the intent required for 11 U.S.C. Sec. 523(a)(6). Without additional support, a judgment for breach of fiduciary duty pursuant to California law does not support the willful determination under 11 U.S.C. Sec. 523(a)(6). The BAP further held that as a matter of law it could not conclude that a technical trust existed under Nevada law to give preclusive effect to summary judgment pursuant to 11 U.S.C. Sec. 523(a)(4). The summary judgment was vacated and remanded to the bankruptcy court for further proceedings.
- Procedural context:
- The Debtors (Yuri and Natalia) appeal from the bankruptcy court's summary judgment excepting a state court judgment from discharge pursuant to 11 U.S.C. Sec. 523(a)(4) and (a)(6) as to Yuri and 11 U.S.C. Sec. 523(a)(6) as to Natalia. The bankruptcy court based its summary judgment pursuant to issue preclusion and the state court's award of actual and punitive damages for breach of fiduciary duty.
- Yuri formed Precision Development, LLC ("Precision"), a Nevada limited liability company, for the purposes of developing real property in California. Precision obtained significant investment capital from Clare and Sara Bronfman ("Bronfmans"). Precision acquired numerous parcels of real property; however, Precision's funds ran out before any development was completed or any of the parcels were sold. Precision's Operating Agreement provided that it would hold all real property acquired with Precision's funds. However, Precision transferred 3 parcels of real property to Yuri and Natalia, who in turn pledged the parcels as collateral for a construction loan. Precision also transferred a fourth parcel of real property that eventually was titled in the name of Yuri and Natalia's family trust. The Bronfmans discovered the financial state of Precision and obtained control of Precision in an effort to remedy the situation. Precision sued Yuri and Natalia in California state court. The jury entered a special verdict awarding both general and punitive damages based on Yuri and Natalia breaching their fiduciary duties. Yuri and Natalia appealed to the California court of appeals, and the state court judgment was affirmed. In response, Yuri and Natalia filed Chapter 7 bankruptcy.
- TAYLOR, DUNN, and PAPPAS, Bankruptcy Judges.
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