In re: William Roger Utnehmer and Marie Claire Utnehmer

FILED OCT 10 2013 1 SUSAN M. SPRAUL, CLERK U.S. BKCY. APP. PANEL 2 OF THE NINTH CIRCUIT 3 UNITED STATES BANKRUPTCY APPELLATE PANEL 4 OF THE NINTH CIRCUIT 5 In re: ) BAP No. NC-12-1362-PaDJu ) 6 WILLIAM ROGER UTNEHMER and ) Bk. No. 11-12159 MARIE CLAIRE UTNEHMER, ) 7 ) Adv. No. 11-01239 Debtors. ) 8 ______________________________) ) 9 WILLIAM ROGER UTNEHMER; ) MARIE CLAIRE UTNEHMER, ) 10 ) Appellants, ) 11 vs. ) O P I N I O N ) 12 PATRICK CRULL; MARY CRULL, ) ) 13 Appellees. ) _____________________________ 14 Argued and Submitted on September 20, 2013 15 at San Francisco, California 16 Filed - October 10, 2013 17 Appeal from the United States Bankruptcy Court for the Northern District of California 18 Hon. Alan Jaroslovsky, Chief Bankruptcy Judge, Presiding 19 _______________________ 20 Appearances: William Roger Utnehmer argued pro se. Steven Marc Olson argued for appellees Patrick and Mary 21 Crull. _________________________ 22 23 Before: PAPPAS, DUNN and JURY, Bankruptcy Judges. 24 25 26 27 28 1 PAPPAS, Bankruptcy Judge: 2 3 Chapter 71 debtors William Roger Utnehmer (“William”)2 and 4 Marie Claire Utnehmer (“Marie” and together, “Debtors”) appeal 5 pro se3 the judgment of the bankruptcy court awarding creditors 6 Patrick (“Patrick”) and Mary Crull (together, “Crulls”) $100,000 7 plus interest, and determining that the judgment debt is 8 excepted from discharge under § 523(a)(4). We REVERSE. 9 FACTS 10 John Kwan (“John”) and William did business as CW 11 Development Partners (“CWDP”), a general partnership involved in 12 real estate development in California. In February 2005, CWDP 13 purchased a property in Venice, California (the “Property”) for 14 $1,250,000, which the partners intended to develop as a “spec 15 house” by tearing down the existing structure and building a new 16 luxury residence for resale. Title to the Property was taken in 17 Debtors’ individual names because John’s credit was not as good 18 as theirs. However, both William and John always considered the 19 20 1 Unless otherwise indicated, all chapter and section references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and 21 “Rule” references are to the Federal Rules of Bankruptcy 22 Procedure. Civil Rule references are to the Federal Rules of Civil Procedure. 23 2 We refer to several of the parties by their first names 24 for clarity; no disrespect is intended. 25 3 While appearing pro se in this appeal, Debtors were 26 represented in the bankruptcy court by counsel. The record indicates that William has in the past been a member of the 27 California bar. 28 -2- 1 Property to be owned by CWDP. 2 Crulls were long-term acquaintances of John. Sometime in 3 2005, John offered Crulls “an opportunity to get in on this 4 particular project.” Trial Tr. 69:16-17, June 12, 2012. In 5 June 2005, there was a telephone conversation between William 6 and Patrick. The record is unclear as to who initiated the call 7 and the specifics of the conversation. After the conversation, 8 William sent Crulls a packet of documents, including the 9 following: 10 1. A transmission letter addressed to Mary4 Crull, indicating that a “cover letter, loan 11 agreement/note and the private offering was attached.” 12 2. A cover letter from William to Crulls. The 13 letter contained the following statement: “Until the formal operating agreement is drafted and 14 executed pursuant to the terms of the Private Offering, John and I will be executing promissory 15 notes with you for the amount of your equity contribution.” 16 3. A “Loan Agreement” proposing a $100,000 loan from 17 Crulls to CWDP, including the following material terms: 18 (A) The loan was to be for a term of not more 19 than twelve months. The interest rate was twelve percent per annum, payable monthly. 20 The entire balance of principal and interest was due upon sale of the property, or at the 21 end of the twelfth month, whichever was sooner. The loan could be paid off at any 22 time without any penalty for prepayment. 23 (B) The loan was to be secured by a trust deed on the Property. 24 (C) The loan proceeds were to be used by CWDP at 25 26 4 In their dealings with one another, and in submissions to 27 the courts, the parties occasionally refer to Marie as Mary. 28 -3- 1 their sole discretion. 2 (D) CWDP would procure liability, property and worker’s compensation insurance as required, 3 and name Lender [Crulls] as loss payee for an amount equal to the loan. 4 (E) The Parties agreed that $50,000 of the 5 initial $100,000 loan was intended to be super[s]eded by execution of a formal 6 operating agreement which would recharacterize this $50,000 of the lenders’ 7 interest as an investors’ equity interest in a limited liability company to be formed, 8 with a 10% annual preferred return, and 35% participation in profits on a prorated 9 basis. The documents for formation of the limited liability company, and the operating 10 agreement, were supposedly being drafted. 11 3. A promissory note (“Note”) to be executed by William and John consistent with the Loan 12 Agreement. However, the Note makes no reference to the Loan Agreement’s provision for 13 recharacterizing $50,000 of the money to be loaned as an equity interest at some later time. 14 4. A twelve-page “Private Offering,” describing the 15 Property and the investment opportunity. 16 On or about June 15, 2005, Crulls wire-transferred $100,000 17 to the CWDP Partnership Account at Bank of America. On June 15, 18 2005, William signed the Note evidencing the loan from Crulls. 19 William and John expected, and had informed Crulls of their 20 intention, to complete the Property project within ten months. 21 However, significant delays were experienced resulting from 22 design changes. Over the next two years, Debtors obtained 23 several additional loans to finance the construction project, 24 which loans were secured, at least in part, by the Property.5 25 26 5 For example, in November 2005, Debtors borrowed $1.025 million from Bay Area Financial Corporation. In June 2006, 27 Debtors borrowed another $200,000 from Bay Area Financial 28 Corporation, secured in part by the Property. In the fall of (continued...) -4- 1 Patrick testified at trial that Crulls were never informed about 2 these refinancings of the Property. Trial Tr. 71:13 (“We had no 3 idea there was refinancings at all.”). This is not disputed by 4 Debtors. 5 The check ledger for the Property project reflects that 6 $25,175.00 in interest payments were paid to Crulls from mid- 7 2006 to mid-2008. Although the Loan Agreement with Crulls by 8 its terms ended on June 15, 2007, the principal balance was not 9 repaid. 10 By early 2008, the Property project had been completed. 11 Crulls retained counsel to attempt to enforce their rights. On 12 April 7, 2008, their attorney sent a letter to Debtors, 13 confirming the parties’ intention “to modify the [Loan] 14 agreement.” Those revisions provided that Debtors would pay 15 Crulls $50,000 by April 28, 2008, plus $2,000 per month until 16 the remaining balance due on the Note of $50,000 had been 17 repaid. Notably, the modified terms of the parties’ agreement 18 included the following: 19 When the Property sells, the remaining $50,000 principal sum of the Note shall be re-characterized as 20 an investor’s equity interest in the Property and the Crulls shall be paid first, their initial $50,000 21 equity, second 10% preferred return thereon, third their pro rata 35% share of the net sales proceeds. 22 23 5 (...continued) 24 2006, Debtors obtained a $2,083,000 construction loan from Anchor Loans for development of the Property. The loan cleared existing 25 encumbrances against the Property, including a first and second deed of trust of Countrywide Mortgage held on the Property, and 26 made a partial payment of the loans held by Bay Area Financial Corporation. In Summer 2007, Debtors borrowed another $110,000 27 from a Mr. Propp, using the Property in part as collateral. In 28 Autumn 2007, Debtors refinanced the construction loan from Anchor Loans with a $2,550,000 loan from Loan Oak Fund. -5- 1 William signed the modification, consenting to the revision of 2 the Loan Agreement on April 8, 2008. Debtors made only one 3 $4,000 payment on the obligations created in the revisions to 4 the Loan Agreement. 5 In June 2008, the Property was sold for $3,725,000. All 6 creditors on the Property project were paid in full from the 7 proceeds, but no payment was made to Crulls. Crulls asserted 8 that William informed them that he was unable to pay the debt 9 from the proceeds of sale. 10 On September 30, 2009, Crulls filed a complaint against 11 William in Los Angeles Superior Court, to collect the balance 12 due on the Note. Crull v. Utnehmer, Case no. SC105077. When 13 William did not respond, a default judgment was entered in favor 14 of Crulls against him on June 28, 2010, in the amount of 15 $213,645.17. 16 Debtors filed a chapter 7 bankruptcy petition on June 6, 17 2011. On their Schedule F and Statement of Financial Affairs, 18 they listed a contingent, unliquidated, disputed debt owed to 19 Crulls for $220,259.43 for the default judgment. 20 Crulls filed an adversary complaint against Debtors on 21 September 12, 2011. In it, they requested that their claim 22 against Debtors be excepted from discharge under § 523(a)(2) and 23 (a)(6), alleging that William made numerous false statements on 24 which they relied in connection with the Loan Agreement and to 25 persuade them to refrain from objecting to the closure of escrow 26 for the sale of the Property. Debtors answered the complaint on 27 October 1, 2011, generally denying the allegations in the 28 complaint. -6- 1 A trial in the adversary proceeding was held on June 12, 2 2012. Early in the trial, the bankruptcy court indicated that 3 it had read the parties’ proposed findings of fact and 4 conclusions of law that had been submitted earlier, and that it 5 was not convinced that Crulls could establish any fraud or 6 malice sufficient for exception to discharge under § 523(a)(2) 7 or (a)(6). However, the court “saw that there may be liability 8 under [§] 523(a)(4) . . . if a partnership arrangement is 9 shown.” Trial Tr. 10:12-14.6 10 John, William and Patrick testified at the trial. At the 11 close of testimony, the bankruptcy court repeated its conclusion 12 that Crulls had not established that any fraud or malicious 13 actions occurred to support an exception to discharge under 14 § 523(a)(2) or (a)(6). Addressing Crulls’ counsel, the court 15 stated that “Your case, if at all, is based on your client’s 16 status as a partner . . . . If your client was a fiduciary in 17 relation to the venture and cannot account for the proceeds, I 18 think that that’s enough to establish defalcation.” Trial Tr. 19 78:3-5, 82:18-20. 20 The bankruptcy court took the issues under submission and, 21 on June 18, 2012, entered a Memorandum after Trial. In it, the 22 court dismissed Crulls’ § 523(a)(2) and (a)(6) claims because 23 6 24 Though Crulls at no time asked to amend their complaint, significantly, the parties offered no formal objection to the 25 bankruptcy court proceeding with a trial on a claim for an exception to discharge under § 523(a)(4), even though a right to 26 relief under this Code provision had not been pled in Crulls’ complaint. They also do not cite the bankruptcy court’s decision 27 to adjudicate the issues based on this new theory as error on 28 appeal. Accordingly, we, also, will examine the merits of the parties’ arguments concerning that claim under § 523(a)(4). -7- 1 there was no evidence to show fraud in the inducement, or 2 willful and malicious conversion, by Debtors. Crulls have not 3 appealed this aspect of the court’s decision. 4 The bankruptcy court, however, made other factual findings 5 regarding the original Loan Agreement: 6 The parties memorialized their transaction in a “loan agreement.” Under the terms of this agreement, the 7 $100,000 was to be paid in full when the property was sold, or after 12 months, whichever came first. 8 However, they also agreed that “$50,000 of this initial $100,000 is intended to be super[s]eded by 9 execution of [a] formal operating agreement which will re-characterize $50,000 of the lender’s interest to an 10 investor’s equity interest with a 10% annual preferred return and 35% participation in profits on the equity 11 contribution on a prorated basis.” 12 Based on these findings, the bankruptcy court concluded that 13 Crulls were entitled to an exception to discharge under 14 § 523(a)(4) because the Loan Agreement was: 15 sufficient to make Utnehmer a partner of Crulls in the project. A partner has the responsibilities of a 16 fiduciary within the meaning of § 523(a)(4) as to partnership property. Ragsdale v. Haller, 780 F.2d 17 794, 796-97 (9th Cir. 1986). Since Utnehmer took title to the project in his own name and refinanced 18 several times without involving the Crulls, he has the burden of accounting for all of the proceeds as well 19 as the costs and expenditures relating to the venture; failure to do so is defalcation, notwithstanding lack 20 of demonstrated intent to harm or cheat his partners. In re Lewis, 97 F.3d 1182, 1186-87 (9th Cir. 1996). 21 Utnehmer has not met his fiduciary duties. His accounting is not professional[ly] prepared and 22 admittedly contains expenses not attributable to the partnership. He has not met his burden of showing 23 that nothing is due to the Crulls. 24 On June 25, 2012, the bankruptcy court entered judgment for 25 Crulls against William, and the community property interest of 26 Marie,7 for the $100,000 in principal owed under the Note, plus 27 7 The bankruptcy court at trial had indicated its 28 willingness to grant Debtors’ request to dismiss Crulls’ claims (continued...) -8- 1 interest from April 1, 2008. The judgment declared this debt 2 excepted from discharge under § 523(a)(4). 3 Debtors filed a timely appeal on July 7, 2012. 4 JURISDICTION 5 The bankruptcy court had jurisdiction over this proceeding 6 under 28 U.S.C. §§ 1334 and 157(b)(2)(I). We have jurisdiction 7 under 28 U.S.C. § 158. 8 ISSUES 9 1. Whether the bankruptcy court erred in determining that a 10 partnership relationship existed between William and 11 Crulls. 12 2. Whether the bankruptcy court erred in determining that the 13 debt owed by Debtors to Crulls was excepted from discharge 14 pursuant to § 523(a)(4). 15 STANDARDS OF REVIEW 16 “In bankruptcy discharge appeals, the Panel reviews the 17 bankruptcy court’s findings of fact for clear error and 18 conclusions of law de novo, and applies de novo review to ‘mixed 19 questions’ of law and fact that require consideration of legal 20 concepts and the exercise of judgment about the values that 21 animate the legal principles.” Oney v. Weinberg (In re 22 Weinberg), 410 B.R. 19, 28 (9th Cir. BAP 2009), aff’d 407 Fed. 23 Appx. 176 (9th Cir. 2010), citing Wolkowitz v. Beverly (In re 24 Beverly), 374 B.R. 221, 230 (9th Cir. BAP 2007), aff’d in part & 25 dismissed in part, 551 Fed. Appx. 1092 (9th Cir. 2008), citing 26 27 7 (...continued) against Marie personally, but her interest in the community 28 property could be liable for exception to discharge. Trial Tr. 6:21-24. -9- 1 Murray v. Bammer (In re Bammer), 131 F.3d 788, 791-92 (9th Cir. 2 1997). 3 The bankruptcy court’s determination that a partnership 4 existed between the parties under California law was based on 5 its interpretation of the Loan Agreement. A trial court’s 6 interpretation of the terms of a contract is reviewed de novo. 7 Ameron Int’l Corp. v. Ins. Co. of State of Pa., 242 P.3d 1020, 8 1024 (Cal. 2010). 9 DISCUSSION 10 Applying California law to the facts of this case, we 11 conclude that the bankruptcy court erred when it decided that a 12 partnership existed between William and Crulls based upon the 13 Loan Agreement. Since there was no partnership, William owed no 14 fiduciary obligations to Crulls and, as a result, the bankruptcy 15 court also erred in determining that William’s debt to Crulls 16 should be excepted from discharge as a defalcation by a 17 fiduciary pursuant to § 523(a)(4). We therefore REVERSE. 18 The exception to discharge relied upon by the bankruptcy 19 court, § 523(a)(4), provides that: 20 (a) A discharge under section 727 [discharge in a chapter 7 case such as this one] . . . does not 21 discharge any debtor from any debt — . . . (4) for fraud or defalcation while acting in a fiduciary 22 capacity, embezzlement, or larceny[.]” 23 Case law makes clear that the broad, general definition of 24 fiduciary - a relationship involving confidence, trust and good 25 faith - is inapplicable in the context of exception to a 26 bankruptcy discharge. Ragsdale v. Haller, 780 F.2d 794, 796 27 (9th Cir. 1986). Whether the debtor was acting in a fiduciary 28 capacity within the meaning of § 523(a)(4) is a question of -10- 1 federal law. Lewis v. Scott (In re Lewis), 97 F.3d 1182, 1185 2 (9th Cir. 1996). A debt is nondischargeable under § 523(a)(4) 3 only “where (1) an express trust existed, (2) the debt was 4 caused by fraud or defalcation, and (3) the debtor acted as a 5 fiduciary to the creditor at the time the debt was created.” 6 Otto v. Niles (In re Niles), 106 F.3d 1456, 1459 (9th Cir. 7 1997). Thus, § 523(a)(4)’s exception to discharge results only 8 where, among other things, the fiduciary relationship between 9 the debtor and the creditor arises in relation to an express or 10 technical trust that pre-dates the alleged defalcation. In re 11 Lewis, 97 F.3d at 1185. 12 State law determines whether the requisite trust 13 relationship exists. Id. Under California law, “all partners 14 [are] trustees over the assets of the partnership.” Ragsdale, 15 780 F.2d at 796; see CAL. CORP. CODE § 16404(b)(1) (partner has a 16 duty to hold as trustee any “property, profit, or benefit 17 derived” from partnership business or use of partnership 18 property). Accordingly, “California partners are fiduciaries 19 within the meaning of § 523(a)(4).” Ragsdale 780 F.2d at 20 796-97. Thus, the determination by a bankruptcy court that a 21 partnership existed between William and the Crulls under 22 California law would establish one important component of the 23 proof required for an exception to discharge under § 523(a)(4). 24 However, even if a fiduciary relationship existed, the 25 bankruptcy court must also find that William committed a 26 “defalcation.” As that term was understood in the Ninth Circuit 27 at the time the bankruptcy court entered its judgment, a 28 defalcation was a “misappropriation of trust funds or money held -11- 1 in any fiduciary capacity; [the] failure to properly account for 2 such funds.” In re Lewis, 97 F.3d at 1186 (quoting BLACK’S LAW 3 DICTIONARY 417 (6th ed. 1990)). 4 The court also ruled in Lewis that, for purposes of 5 § 523(a)(4), a defalcation “includes the innocent default of a 6 fiduciary who fails to account fully for money received. . . . 7 In the context of section 523(a)(4), the term ‘defalcation’ 8 includes innocent, as well as intentional or negligent defaults 9 so as to reach the conduct of all fiduciaries who were short in 10 their accounts.” Id. at 1186 (internal citations ommitted). 11 But in this respect, In re Lewis is no longer good law. 12 In May 2013, after the bankruptcy court entered its 13 judgment, the United States Supreme Court decided Bullock v. 14 BankChampaign, N.A., 133 S. Ct. 1754 (2013). Bullock 15 effectively abrogated that part of In re Lewis holding that a 16 debtor who failed to account to another need not possess any 17 particular state of mind to except a debt from discharge based 18 on fiduciary defalcation under § 523(a)(4). To the contrary, in 19 Bullock, the Supreme Court interpreted § 523(a)(4) to require 20 that, in order to except a debt for a defalcation by a 21 fiduciary, the debtor must possess “a culpable state of mind 22 . . . akin to that which accompanies application of the other 23 terms in the same statutory phrase. We describe that state of 24 mind as one involving knowledge of, or gross recklessness in 25 respect to, the improper nature of the relevant fiduciary 26 behavior.” Id. at 1757. 27 Based upon the Supreme Court’s holding in Bullock, the 28 bankruptcy court erred when it concluded that William committed -12- 1 a defalcation “notwithstanding [his] lack of demonstrated intent 2 to harm or cheat his partners. In re Lewis, 97 F.3d [at 1186- 3 87].” Memorandum after Trial at 3, June 16, 2012. As the 4 Crulls acknowledged at oral argument, at a minimum, then, the 5 bankruptcy court’s judgment must be vacated and the matter 6 remanded to the bankruptcy court to address the intent 7 requirement for a defalcation under Bullock. 8 But there is a more consequential error in the bankruptcy 9 court’s decision which requires reversal, not merely remand. As 10 discussed above, a bankruptcy court’s determination that a 11 California partnership was formed by the parties would 12 ordinarily allow us to conclude that the requisite fiduciary 13 relationship was established for § 523(a)(4) purposes. In this 14 case, though, the bankruptcy court simply ruled, without 15 explanation, that 16 The court somewhat reluctantly agrees with the Crulls that there is liability under § 523(a)(4). The ‘Loan 17 Agreement’ is sufficient to make Utnehmer a partner of the Crulls in the project. A partner has the 18 responsibilities of a fiduciary within the meaning of § 523(a)(4) as to partnership property. Ragsdale v. 19 Haller, 780 F.2d 794, 796-97 (9th Cir. 1986)). 20 Memorandum after Trial at 2. 21 We disagree that, without more, the Loan Agreement’s terms 22 were sufficient under California law to create a partnership 23 agreement at the time the Loan Agreement was executed. We 24 therefore must reverse the bankruptcy court’s conclusions that a 25 partnership existed based on the Loan Agreement and was 26 effective at the time the Loan Agreement was signed. 27 In this appeal, Crulls argue strenuously that the 28 bankruptcy court’s decision that a partnership existed was a -13- 1 finding of fact which may only be reversed for clear error, a 2 highly deferential standard.8 While, as noted above, the 3 bankruptcy court’s decision construing the parties’ contract is 4 reviewed de novo, even if the clear error standard applied, it 5 would not protect a finding based on “an erroneous view of the 6 law.” Power v. Union P.R. Co., 655 F.2d 1380, 1382-83 (9th Cir. 7 1981) (“We may regard a finding of fact as clearly erroneous 8 . . . if it was induced by an erroneous view of the law. . . . 9 The question, then, is whether the [trial] court’s findings and 10 conclusions are based on a proper view of [] state law[.]”). 11 Indeed, the Supreme Court has cautioned that the clear error 12 rule is not a shield for a fact finding that is inconsistent 13 with underlying law: 14 But Rule 52(a) [applicable in bankruptcy adversary proceedings via Rule 7052] does not inhibit an 15 appellate court’s power to correct errors of law, including . . . a finding of fact that is predicated 16 on a misunderstanding of the governing rule of law. 17 Bose Corp. v. Consumers Union of United States, Inc., 466 U.S. 18 485, 501 (1984); see also, Inwood Labs., Inc. v. Ives Labs., 19 Inc., 456 U.S. 844, 855 n.15 (1982); United States v. Singer 20 Mfg. Co., 374 U.S. 174, 194 n.9 (1963). 21 As we discuss below, the bankruptcy court’s finding that 22 there was a partnership established by the Loan Agreement was 23 inconsistent with the governing law applicable in this case, the 24 California law of partnerships. Moreover, since at bottom we 25 8 26 At oral argument, William also seemed to agree that, based on the testimony at trial, the parties considered 27 themselves partners at all times. However, as reflected in its decision, the bankruptcy court’s finding that a partnership 28 existed was based solely on documentary evidence, and in particular the Loan Agreement, and not on testimony at trial. -14- 1 are determining whether William’s debt to Crulls should be 2 discharged, we review the bankruptcy court’s determination of 3 that question as a mixed question of law and fact de novo and 4 not as a simple fact determination for clear error. In re 5 Weinberg, 410 B.R. at 28. 6 To determine whether the Loan Agreement established a 7 partnership, its legal effect, we look first to the terms of the 8 Loan Agreement as directed by the California courts. Kersch v. 9 Taber, 67 Cal. App. 2d 499, 501 (Cal. Ct. App. 1945) (“The 10 question of the existence of a partnership should be determined 11 primarily by ascertaining the intention of the parties, and 12 where they have entered into a written agreement such intention 13 should be determined chiefly from the terms of the writing.”). 14 In examining the written agreement, we are obliged to follow a 15 plain meaning analysis: 16 The fundamental rules of contract interpretation are based on the premise that the interpretation of a 17 contract must give effect to the mutual intention of the parties. Under statutory rules of contract 18 interpretation, the mutual intention of the parties at the time the contract is formed governs 19 interpretation. Such intent is to be inferred, if possible, solely from the written provisions of the 20 contract. The clear and explicit meaning of these provisions, interpreted in their ordinary and popular 21 sense, unless used by the parties in a technical sense or a special meaning is given to them by usage, 22 controls judicial interpretation. . . . An agreement is not ambiguous merely because the parties (or 23 judges) disagree about its meaning. Taken in context, words still matter. 24 25 In re Installment Fee Cases, 211 Cal. App. 4th 1395, 1409 (Cal. 26 Ct. App. 2013). 27 As noted above, the Loan Agreement is composed of five 28 paragraphs. The first four paragraphs clearly reflect the terms -15- 1 of what appears to be a loan of money from Crulls to CWDP; they 2 make no reference to the creation or existence of a partnership 3 between the parties. The only paragraph in the Loan Agreement 4 that could arguably serve as the foundation of a partnership is 5 paragraph 5, which provides: 6 The Parties agree that $50,000 of this initial $100,000 loan is intended to be super[s]eded by 7 execution of a formal operating agreement which will recharacterize $50,000 of the lender’s interest to an 8 investor’s equity interest with a 10% annual preferred return and 35% participation in profits on the equity 9 contribution on a prorated basis. Said operating agreement and formation of a Limited Liability Company 10 is being drafted. 11 There can be no dispute about the plain meaning of this 12 paragraph: it contemplates that, at some future point in time 13 (i.e., upon the “execution of a formal operating agreement” for 14 a yet-to-be formed limited liability company), a portion of the 15 Crulls’ loan would be “recharacterized” as an equity interest in 16 the Property project entitling them, thereafter, to participate 17 in the profits of the venture. There is nothing in the Loan 18 Agreement to indicate any intent to form a partnership or LLC at 19 the time of signing the Loan Agreement, nor at any point before 20 the execution of the operating agreement or LLC formation. As 21 we discuss below, this would be an essential element for 22 defalcation under § 523(a)(4), because if the partnership was 23 not in existence before any alleged wrongful behavior, there was 24 no fiduciary duty and therefore there cannot be defalcation 25 under § 523(a)(4). 26 Although the bankruptcy court’s reasoning was perhaps not 27 fully presented in its decision, we assume that the court relied 28 upon the Loan Agreement’s provisions for sharing profits by the -16- 1 parties as an indication that the parties intended to form a 2 partnership. But if this was the court’s conclusion, it is 3 inconsistent with the requirements of California law regarding 4 formation of partnerships. Simply stated, “where the parties 5 purport to establish a partnership to engage in business at a 6 future time or upon the happening of a contingency, the 7 partnership does not come into being until the time specified or 8 until the contingency is removed.” Solomont v. Polk Development 9 Co., 245 Cal. App. 2d 488, 496 (Cal. Ct. App. 1966) [2d Dist.]; 10 Kersch v. Taber, 67 Cal. App. 2d at 504 [3d Dist.]; Taylor v. 11 Nelson, 26 Cal. App. 681, 682 (Cal. Ct. App. 1915) [1st Dist.]; 12 accord Hollis v. Rock Creek Pack Station, 594 F. Supp. 156, 160 13 (D. Ariz. 1984) (applying California law: “where parties purport 14 to establish a partnership to engage in business upon the 15 happening of a contingency, the partnership does not come into 16 being until the contingency has occurred.”). We have located no 17 California case law varying the rule that an agreement to form a 18 partnership in the future, upon fulfillment of a contingency, 19 does not, at the time of entry of the agreement, create a 20 partnership. 21 In this case, if no partnership between William and Crulls 22 was formed at the time they executed the Loan Agreement then, 23 under California law, no fiduciary duty by William to Crulls 24 arose at that time. If there was no partnership, no trust 25 relationship existed between the parties, and no fiduciary duty 26 was imposed upon William at the time of execution of the Loan 27 Agreement. And any subsequent behavior, whether or not 28 accompanied by bad intent, would not be a fiduciary breach -17- 1 triggering exception to discharge under § 523(a)(4). In re 2 Lewis, 97 F.3d at 1185 (holding that an express trust [i.e., a 3 partnership] must exist before any defalcation). 4 Other concerns arise from the bankruptcy court’s reasoning 5 that a partnership arose from the Loan Agreement. As discussed 6 above, the court apparently considered a future agreement to 7 share profits as an indication of partnership. It is true that 8 an agreement to share profits may be evidence of a partnership 9 agreement. Holmes v. Lerner, 74 Cal. App. 4th 442, 453-54 (Cal. 10 Ct. App. 1999); Bank of Cal. v. Connolly, 36 Cal. App. 3d 350, 11 364 (Cal. Ct. App. 1973). However, the presence of profit 12 sharing does not support a presumption of the existence of the 13 partnership unless there was also an actual sharing of the 14 profits. CAL. CORP. CODE § 16202 (2013)(“A person who receives a 15 share of the profits of a business is presumed to be a partner 16 in the business.”)(emphasis added). Here, the facts are 17 undisputed that no limited liability company was ever formed, no 18 operating agreement was ever executed, and there was no actual 19 sharing of profits between William and Crulls. 20 Moreover, profit-sharing is not considered the most 21 important indicia of a partnership under California law. The 22 existence of a partnership is ordinarily evidenced by some 23 degree of participation by alleged partners in the management 24 and control of the business. Sperske v. Rosenberg, 2013 WL 25 3817067, at *2 (C.D. Cal. 2013); Fredianelli v. Jenkins, 2013 WL 26 1087653 (N.D. Cal. 2013); Dickinson v. Samples, 104 Cal. App.2d 27 311, 315 (Cal. Ct. App. 1951) (“To participate to some extent in 28 the management of a business is a primary element in partnership -18- 1 organization, and it is virtually essential to a determination 2 that such a relationship existed.”). Here, the Loan Agreement 3 grants Crulls no rights to participate in the management of the 4 Property project, and in particular in paragraph 4, reserves the 5 right to decide how the loan proceeds will be used solely to 6 CWDP. Consistent with these terms, at trial, Patrick 7 acknowledged that he was not consulted concerning management 8 decisions, nor about the multimillion dollar financing 9 arrangements made concerning the Property: “we had no idea 10 there was refinancings at all.” Trial Tr. 71:13. 11 Perhaps in recognition of the deficiencies in the 12 bankruptcy court’s conclusion concerning the existence of a 13 partnership, on appeal, Crulls raise the alternative argument 14 that because the Crulls detrimentally relied on William’s 15 promise to form a limited liability company, he should be 16 estopped from denying the existence of such a promise. They 17 urge that, under California law, since a manager of an LLC owes 18 a fiduciary duty to members, we should hold that William was a 19 fiduciary to Crulls when he “helped himself to millions of 20 dollars from refinancing the partnership’s Abbot Kinney 21 property.” 22 Our review of the record satisfies us that Crulls did not 23 properly raise this argument in the bankruptcy court. An 24 appellate court in this circuit will not consider arguments that 25 “were not properly raised in the trial court.” O’Rourke v. 26 Seabord Sur. Co. (In re E.R. Fegert, Inc.), 887 F.2d 955, 957 27 (9th Cir. 1989); see also In re Cybernetic Servs., Inc., 252 28 F.3d 1039, 1045 n.3 (9th Cir. 2001) (stating that the appellate -19- 1 court will not explore ramifications of an argument because it 2 was not raised in the bankruptcy court and therefore waived). 3 Not only was the promissory estoppel argument not made in 4 the bankruptcy court, Crulls have not properly raised it in this 5 appeal. Crulls cite no authority for their argument that the 6 manager of an LLC has the fiduciary duties as contemplated by 7 § 523(a)(4) to other members of the LLC.9 And in their brief, 8 Crulls do not explain how a fiduciary duty that may arise in an 9 LLC that does not come into existence until sometime in the 10 future does not suffer from the same infirmity as a future 11 partnership (i.e., defalcation under § 523(a)(4) requires the 12 fiduciary duty to arise before any alleged wrongdoing takes 13 place). 14 For these reasons, we conclude that the bankruptcy court 15 erred in its determination that a partnership was formed by the 16 Loan Agreement. At best, the parties agreed to form an LLC 17 based upon events to occur in the future, events that never came 18 to pass. Since no partnership existed between the parties 19 during their dealings, we conclude that, as a matter of law, 20 William was not a fiduciary as to Crulls for purposes of 21 § 523(a)(4), and that the bankruptcy court erred in excepting 22 the debt from discharge under that provision of the Bankruptcy 23 Code. 24 9 25 Even if this were so, since no LLC was ever formed and no operating agreement ever drafted, there is no evidence that 26 William would be the managing member with a fiduciary duty to other members. Additionally, we observe that the Ragsdale rule 27 that a California partnership implies the fiduciary duty for defalcation purposes under § 523(a)(4) only applies to a 28 partnership. We have found no case law that applies the Ragsdale rule to a California LLC. -20- 1 CONCLUSION 2 The bankruptcy court erred in ruling that it need not find 3 that William acted with bad intent toward Crulls to conclude 4 that the debt was excepted from discharge under § 523(a)(4). 5 The Supreme Court’s recent decision in Bullock overrules prior 6 Ninth Circuit authority allowing such a conclusion. Therefore, 7 at best, a remand to the bankruptcy court would be required to 8 examine William’s intent under the Bullock standard. 9 However, in this case, no remand is necessary because we 10 conclude that the bankruptcy court erred when it decided that a 11 partnership existed between Crulls and CWDP based on the Loan 12 Agreement. Since no partnership was created, and no fiduciary 13 duty existed, we REVERSE the decision of the bankruptcy court 14 excepting William’s debt to Crulls from discharge under 15 § 523(a)(4). 16 17 18 19 20 21 22 23 24 25 26 27 28 -21-