FILED
AUG 24 2012
1
SUSAN M SPRAUL, CLERK
U.S. BKCY. APP. PANEL
2 O F TH E N IN TH C IR C U IT
3 UNITED STATES BANKRUPTCY APPELLATE PANEL
4 OF THE NINTH CIRCUIT
5
6 In re: ) BAP Nos. SC-11-1344-MkDJu
) SC-11-1377-MkDJu
7 ADOLFO CASTILLO, JR., and )
ANA CASTILLO, ) Bk. No. 09-02350
8 )
Debtors. ) Adv. No. 09-90301
9 ______________________________)
)
10 ANA CASTILLO, )
)
11 Appellant and Cross-Appellee, )
)
12 v. ) MEMORANDUM*
)
13 GREGORY AKERS, Chapter 7 )
Trustee of the Bankruptcy )
14 Estate of William Juarez, )
)
15 Appellee and Cross-Appellant. )
)
16
Submitted Without Oral Argument
17 On May 1, 2012**
18 Filed: August 24, 2012
19 Appeal From The United States Bankruptcy Court
for the Southern District of California
20
Honorable James W. Meyers, Bankruptcy Judge, Presiding
21
22
23 Before: MARKELL, DUNN and JURY, Bankruptcy Judges.
24
*
25 This disposition is not appropriate for publication.
Although it may be cited for whatever persuasive value it may
26 have (see Fed. R. App. P. 32.1), it has no precedential value.
See 9th Cir. BAP Rule 8013-1.
27
**
On March 5, 2012, the Panel unanimously determined that
28 oral argument was unnecessary and granted Appellee’s motion to
submit on the briefs.
1 INTRODUCTION
2 Ana Castillo’s step-father filed a chapter 71 bankruptcy,
3 and his chapter 7 trustee Gregory Akers obtained a fraudulent
4 transfer judgment against both Ms. Castillo and her husband
5 Adolfo. The Castillos then filed their own bankruptcy, so Mr.
6 Akers filed a complaint in the Castillos’ bankruptcy case
7 objecting to their discharge under § 727(a) and seeking to except
8 his judgment against the Castillos from discharge under
9 § 523(a).2
10 After trial, the bankruptcy court granted relief under
11 § 523(a)(4) as against Ms. Castillo only, but denied any relief
12 under § 727(a). Both sides appealed. While we AFFIRM the
13 court’s § 727(a) ruling, we VACATE and REMAND the bankruptcy
14 court’s § 523(a)(4) ruling for the reasons stated below.
15 FACTS3
16 Monica and William Juarez are Ms. Castillo’s elderly mother
17 and step-father. In or around 2004, the Juarezes sold their home
18
19 1
Unless specified otherwise, all chapter and section
references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and
20
all Rule references are to the Federal Rules of Bankruptcy
21 Procedure, Rules 1001-9037. All Civil Rule references are to the
Federal Rules of Civil Procedure.
22
2
Mr. Akers, who is the appellee and cross-appellant herein,
23 is not your garden-variety judgment creditor. As a chapter 7
trustee, he had a statutory obligation to collect and reduce to
24
money all assets of the bankruptcy estate, including the
25 judgment. See § 704(a)(1).
3
26 Unless otherwise indicated, the facts set forth herein are
undisputed, and many are drawn from the bankruptcy court’s
27 memorandum decision entered in Akers v. Castillo (In re Juarez),
Adv. No. 07-90901 (Feb. 5, 2009) (“Fraudulent Transfer Action”).
28
2
1 in San Diego, California to the Castillos for a purchase price of
2 $400,000. The net sale proceeds of $155,000 (“Proceeds”) were
3 deposited in a joint bank account (“Joint Account”) in which the
4 Juarezes and Ms. Castillo were named account holders.
5 Mr. Juarez had a gambling problem. By way of the sale, the
6 Juarezes hoped to prevent Mr. Juarez from gambling away the
7 equity in his home. The Juarezes and the Castillos intended to
8 use the Proceeds to construct an additional rental unit on the
9 same lot on which the home was located. They all hoped to
10 generate enough rental income from the additional unit to make
11 monthly payments on the mortgage the Castillos took out when they
12 purchased the home and to cover the Juarezes’ future living
13 expenses.4
14 However, in addition to using some of the Proceeds to begin
15 work on the rental unit, the Proceeds also were used to make
16 mortgage payments, to pay monies owed to relatives, or as gifts
17 to other relatives. On May 31, 2006, after Mr. Juarez withdrew
18 some of the Proceeds from the Joint Account to gamble, Ms.
19 Castillo transferred (“May 31 Transfer”) the remaining balance of
20 the Proceeds, $92,000, from the Joint Account to another bank
21 account solely in her name (“Castillo Account”).
22 The rental unit was never built. After the May 31 Transfer,
23 Ms. Castillo paid most of the remaining proceeds to the
24 Castillos’ mortgage lender, to other relatives, and to
25
4
26 The Castillos and the Juarezes intended that the Juarezes
would continue to live in the home, and the Juarezes did continue
27 to live there after the sale closed. For a time, the Juarezes
paid $500 per month in rent to the Castillos.
28
3
1 contractors to pay for remodeling and redecorating the home.
2 Of the $92,000, roughly $13,000 was used to pay off some of Mr.
3 Juarez’s creditors. Ms. Castillo declined to pay other creditors
4 of Mr. Juarez from the remaining Proceeds, which ultimately led
5 Mr. Juarez to file an individual chapter 7 case in March 2007.
6 Mr. Akers was appointed to serve as the chapter 7 trustee in
7 Mr. Juarez’s bankruptcy case. Mr. Akers demanded that Ms.
8 Castillo turn over the $14,000 in Proceeds remaining at the time
9 Mr. Juarez filed bankruptcy, which she did. Mr. Akers also
10 commenced the Fraudulent Transfer Action against the Castillos,
11 in which he alleged that the sale of the home and the disposition
12 of the Proceeds constituted both intentional and constructive
13 fraudulent transfers.
14 After trial, the bankruptcy court issued its memorandum
15 decision in February 2009, in which it ruled that none of the
16 alleged transfers were made with the intent to hinder, delay or
17 defraud Mr. Castillo’s creditors and that the sale of the home
18 was not a constructive fraudulent transfer. However, the court
19 also ruled that the May 31 Transfer was a constructive fraudulent
20 transfer. According to the court the May 31 Transfer rendered
21 Mr. Juarez insolvent.
22 The bankruptcy court credited against the $92,000
23 transferred into the Castillo Account the $13,000 paid to Mr.
24 Juarez’s creditors prepetition and the $14,000 paid over to Mr.
25 Akers postpetition. However, the court refused to give the
26 Castillos any credit for mortgage payments, payments to relatives
27 and payments to contractors. According to the court, the
28
4
1 mortgage payments and the contractor payments primarily
2 benefitted the Castillos because they now owned the home. Based
3 on these rulings, the court entered judgment in favor of Mr.
4 Akers and against the Castillos in the approximate amount of
5 $65,000, plus interest (“Fraudulent Transfer Judgment”). Neither
6 side appealed the Fraudulent Transfer Judgment.
7 Within days of entry of the Fraudulent Transfer Judgment,
8 the Castillos filed their own chapter 7 bankruptcy case, and
9 Gerald Davis was appointed as their chapter 7 trustee.5 In July
10 2009, Mr. Akers commenced an adversary proceeding objecting to
11 the Castillos’ discharge under §§ 727(a)(2), (a)(3), (a)(4)(A),
12 (a)(4)(D) and (a)(5), and also claiming that the Fraudulent
13 Transfer Judgment should be excepted from discharge under
14 §§ 523(a)(2), (a)(4) and (a)(6) (“Discharge Action”).6
15 In relevant part, with respect to the § 523(a)(4) claim, Mr.
16 Akers alleged that “the indebtedness owed to Trustee Akers [on
17 account of the Fraudulent Transfer Judgment] in whole or in part
18 constitutes funds of an express trust and arises from a
19
20 5
The Castillos’ converted their chapter 7 case to chapter 13
21 in March 2010, but the case was reconverted to chapter 7 in
January 2011.
22
6
The § 523(a)(4) claim only named Ms. Castillo as a
23 defendant. The record arguably suggests that Mr. Akers abandoned
his two claims under § 523(a)(2) and (a)(6), but the court never
24 entered a final judgment disposing of these latter two claims.
25 Instead, the court’s amended judgment entered on April 17, 2012,
only explicitly disposed of the § 727(a) claims and the
26 § 523(a)(4) claim. The amended judgment also contained a
statement pursuant to Civil Rule 54(b) indicating that there was
27 no just cause for delay in entering a final judgment disposing of
the § 727(a) claims and the § 523(a)(4) claim.
28
5
1 defalcation of fiduciary duty and failure to turnover and account
2 for such funds.” Complaint Objecting to Discharge and
3 Dischargeability of Debt (Jul. 27, 2009) at ¶ 48.
4 With respect to the § 727(a) claims, Mr. Akers alleged that
5 the Castillos: (1) were slow to produce and/or failed to produce
6 critical financial records despite numerous requests; (2) made a
7 number of asset transfers to their relatives, for which they
8 received no value in exchange; (3) failed to disclose any of
9 these transfers in their bankruptcy schedules and statement of
10 financial affairs; (4) concealed some of these transfers despite
11 being questioned under oath at their § 341(a) meeting of
12 creditors; and (5) engaged in all of the above conduct with the
13 intent to hinder, delay or defraud Mr. Akers as their creditor.
14 Shortly before trial in the Discharge Action, the bankruptcy
15 court issued a notice in which it framed the issues for trial and
16 tentatively stated its view of Mr. Akers’ documentary evidence
17 submitted in advance of trial.7 Among other things, the court
18 indicated that, in large part, Mr. Akers’ case was based upon the
19 prior Fraudulent Transfer Judgment. Specifically with respect to
20 the § 523(a)(4) claim, the court stated:
21 The final claim is to except [the Fraudulent Transfer
Judgment] from discharge under § 523(a)(4). After
22 presiding at the trial [in the Fraudulent Transfer
Action], this Court is familiar with the underlying
23 facts and the resulting judgment. The funds Ana
Castillo moved from the joint account with William
24 Juarez to her individual account was money held in
trust for William Juarez. The issues remaining for
25 trial on that claim will focus on whether there was a
defalcation by Ana Castillo in her role as the trustee
26 of that trust.
27
7
28 The same bankruptcy judge who presided over the Fraudulent
Transfer Action presided over the trial of the Discharge Action.
6
1 Notice of Intended Trial Procedure (Jan. 21, 2011) at 2:17-24
2 (emphasis added).
3 The bankruptcy court conducted a one-day trial on January
4 26, 2011, during which it heard testimony from various witnesses
5 and various exhibits were offered and admitted into evidence. We
6 do not know what testimony was given or which exhibits
7 specifically were offered into evidence because neither of the
8 parties obtained the transcript from January 26, 2011.
9 But we have been provided with a transcript of the
10 bankruptcy court’s January 27, 2011 oral rulings immediately
11 following trial. The bankruptcy court held that it was going to
12 overrule Mr. Akers’ objections to the Castillos’ discharge under
13 § 727(a). In so holding, the court expressly stated that it was
14 “convinced” by the Castillos' testimony that any errors or
15 omissions by them in their chapter 7 case were the result of
16 “innocent oversight and that they did not intend to deceive in
17 any way.” Trial Trans. (Jan. 27, 2011) at 3:23-25.
18 On the other hand, the court also ruled that it was inclined
19 to grant Mr. Akers relief on his § 523(a)(4) claim. The court
20 expressed a willingness to consider additional legal argument on
21 the § 523(a)(4) claim because the relevant legal issues had not
22 been adequately addressed in either the Fraudulent Transfer
23 Action or in the Discharge Action, and because the Castillos did
24 not have legal representation.
25 But the bankruptcy court opined that the evidentiary record
26 from the Fraudulent Transfer Action appeared factually sufficient
27 to support the § 523(a)(4) claim and that it was leaning toward
28 holding that the Fraudulent Transfer Judgment was
7
1 nondischargeable as a defalcation by Ms. Castillo while acting in
2 a fiduciary capacity:
3 I think the facts are there, pretty much, so what I'm
inclined to do is continue this hearing on just the 523
4 for six weeks and allow the parties, especially the
debtors, to consult counsel and to see whether they
5 would like to make – file a further pleading, that
would have to be filed at least two weeks before the
6 next hearing, indicating that they have any argument
based on the record from the previous trial that [the
7 Fraudulent Transfer Judgment] should not be excluded
under 523 as a defalcation; in other words, it was
8 monies held in trust, while they may or may not have
been accounted for, they were not returned and,
9 therefore, they would be excepted from the discharge.
10 * * *
11 The only question left is whether the actual debt as
evidenced by the [Fraudulent Transfer Judgment] should
12 be excepted from the discharge. At this point, I think
on this record, where we really haven't spent that much
13 time dealing [with] that question, I'd be inclined to
say it is excepted on the face of it. But I'd be glad
14 to hear further argument.
15 Trial Trans. (Jan. 27, 2011) at 4:17-5:3, 10:22-11:3 (emphasis
16 added).
17 While the bankruptcy court was focused on additional legal
18 argument, it also left open the possibility that it might hold a
19 further evidentiary hearing: “And we'd have further argument on
20 this. And it might even involve scheduling a short hearing on
21 any further evidence that might come up.” Trial Trans. (Jan. 27,
22 2011) at 5:5-7. The court later reiterated that it ultimately
23 might decide to hold another evidentiary hearing in a scheduling
24 order entered on May 2, 2011. In that order, the court further
25 indicated that all § 523(a)(4) issues, including the fiduciary
26 capacity and defalcation issues, were still open issues:
27 As stated in the Notice of Intended Trial Procedure
issued on January 21, 2011, it appeared to the Court
28 that the funds Ana Castillo moved from the joint
8
1 account with William Juarez to her individual account
was money held in trust for William Juarez. However,
2 the trust issues and any defalcation by Ana Castillo as
trustee were not adequately addressed at the trial
3 conducted in January, and the Court continued the case
to allow the parties time to brief and present further
4 evidence on the § 523(a)(4) issues.
5 Order Setting Deadlines and Scheduling Final Pre-trial Conference
6 on § 523(a)(4) issues (May 2, 2011) at 2:7-14 (emphasis added).
7 In her supplemental brief, Ms. Castillo argued: (1) that she
8 had never served in a fiduciary capacity within the meaning of
9 § 523(a)(4); and (2) that a defalcation had not occurred because
10 she disbursed the funds in the Castillo account only with the
11 express consent of Ms. Juarez, Mr. Juarez or both.
12 Additionally, Ms. Castillo attempted to offer new evidence in the
13 form of written declarations from both of the Juarezes, as well
14 as excerpts from their deposition testimony.
15 In response, Mr. Akers objected to the new evidence on a
16 number of different grounds. Among other things, he pointed out
17 that the Castillos had not identified either of the Juarezes as
18 witnesses despite having a duty to do so during discovery and
19 later during pretrial proceedings. Mr. Akers also claimed that,
20 even though he had previously taken the Juarezes’ depositions in
21 the Fraudulent Transfer Action, that action did not deal with
22 § 523(a)(4), so he would be prejudiced by the admission of
23 testimony from the Juarezes. Mr. Akers further argued that the
24 Juarezes’ prior deposition testimony was wholly inconsistent with
25 their new declaration testimony. According to Mr. Akers, in the
26 former, the Juarezes had testified to not knowing how Ms.
27 Castillo had disbursed the proceeds. In contrast, in the latter,
28 the Juarezes claimed that Ms. Castillo had requested and obtained
9
1 their express approval for the amounts disbursed from the
2 Proceeds.
3 Mr. Akers also asserted, based largely on the undisputed
4 facts set forth above, that Ms. Castillo had admitted in the
5 Fraudulent Transfer Action that she was a trustee of an express
6 trust, in which she held the Proceeds for the benefit Mr. Juarez,
7 for the express purpose of building the additional rental unit.
8 As Mr. Akers put it, Ms. Castillo’s disbursal of the Proceeds for
9 any other purpose violated the terms of the express trust.
10 The bankruptcy court held its final hearing, which the court
11 had designated as a pretrial conference, on June 3, 2011. After
12 giving the parties the opportunity to discuss the arguments they
13 had made in their briefs, the court stated that it would not
14 benefit from hearing the additional evidence Ms. Castillo
15 proposed to offer. Instead, the court ruled based on the
16 evidence adduced and judgment entered in the Fraudulent Transfer
17 Action that the Fraudulent Transfer Judgment would be excepted
18 from Ms. Castillo’s discharge under § 523(a)(4). According to
19 the bankruptcy court:
20 The judgment entered in the [Fraudulent Transfer
Action] of 65,000 represents a series of transactions,
21 and that judgment stands. I haven't –
22 At this point the evidence [has] suggested that the
[Fraudulent Transfer Judgment] should be excepted from
23 the discharge; that there was a defalcation from
someone in a position of trust; and they have not
24 accounted for the use of these funds in any way that
would absolve them. In other words, the funds were, to
25 my eye and this record, were used for their personal
benefit, even though it might, as a subsidiary matter,
26 be to their parents. The long and the short of it is
that I have to declare, at this point, that the debt is
27 excepted from the discharge.
28 Hr’g Trans. (June 3, 2011) at 35:1-13. In so ruling, the court
10
1 apparently reasoned: (1) that the evidence from the Fraudulent
2 Transfer Action was sufficient to establish that Ms. Castillo was
3 a fiduciary, (2) that a fiduciary may never receive a benefit at
4 the expense of the trust property, and (3) that for a trustee to
5 receive such a benefit constituted defalcation per se. In the
6 process, the court excluded the additional evidence Ms. Castillo
7 had sought to offer and disregarded her claim that her
8 disbursement of the proceeds had been authorized by the Juarezes.
9 The court entered a judgment denying Mr. Akers any relief on
10 his § 727(a) claims, but declaring the Fraudulent Transfer
11 Judgment excepted from discharge under § 523(a)(4). Ms. Castillo
12 appealed the bankruptcy court’s ruling on the § 523(a)(4) claim,
13 and Mr. Akers cross-appealed the court’s ruling on the § 727(a)
14 claims.
15 JURISDICTION
16 The bankruptcy court had jurisdiction pursuant to 28 U.S.C.
17 §§ 1334 and 157(b)(2)(I) and (J). We have jurisdiction under 28
18 U.S.C. § 158.
19 ISSUES
20 1. Did the bankruptcy court err when it granted a judgment
21 in favor of Akers on his § 523(a)(4) Claim?
22 2. Did the bankruptcy court err when it denied relief to
23 Akers on his § 727 Claims?
24 STANDARDS OF REVIEW
25 In the context of an appeal from a nondischargeability
26 judgment, we review the bankruptcy court's findings of fact under
27 the clearly erroneous standard and its conclusions of law de
28 novo. Honkanen v. Hopper (In re Honkanen), 446 B.R. 373, 382
11
1 (9th Cir. BAP 2011). But the ultimate question of whether a
2 particular debt is dischargeable is a mixed question of fact and
3 law that we review de novo. Id.; see also Searles v. Riley (In
4 re Searles), 317 B.R. 368, 373 (9th Cir. BAP 2004) (stating that
5 mixed questions are reviewed de novo when they require the court
6 “to consider legal concepts and exercise judgment about values
7 animating legal principles.”).
8 We review the bankruptcy court's evidentiary rulings for
9 abuse of discretion. See Johnson v. Neilson (In re Slatkin),
10 525 F.3d 805, 811 (9th Cir. 2008) (citing Latman v. Burdette, 366
11 F.3d 774, 786 (9th Cir. 2004)). “We afford broad discretion to a
12 district court's evidentiary rulings. To reverse such a ruling,
13 we must find that the district court abused its discretion and
14 that the error was prejudicial. A reviewing court should find
15 prejudice only if it concludes that, more probably than not, the
16 lower court's error tainted the verdict.” Harper v. City of Los
17 Angeles, 533 F.3d 1010, 1030 (9th Cir. 2008)(citations and
18 internal quotation marks omitted).
19 Under the abuse of discretion standard of review, we first
20 "determine de novo whether the [bankruptcy] court identified the
21 correct legal rule to apply to the relief requested." United
22 States v. Hinkson, 585 F.3d 1247, 1262 (9th Cir. 2009) (en banc).
23 And if the bankruptcy court identified the correct legal rule, we
24 then determine under the clearly erroneous standard whether its
25 factual findings and its application of the facts to the relevant
26 law were: "(1) illogical, (2) implausible, or (3) without support
27 in inferences that may be drawn from the facts in the record."
28 Id. (internal quotation marks omitted).
12
1 As for judgments on objections to discharge, “(1) the
2 court's determinations of the historical facts are reviewed for
3 clear error; (2) the selection of the applicable legal rules
4 under § 727 is reviewed de novo; and (3) the application of the
5 facts to those rules requiring the exercise of judgments about
6 values animating the rules is reviewed de novo.” In re Searles,
7 317 B.R. at 373.
8 DISCUSSION
9 A. Section 523 (a)(4) nondischargeability ruling.
10 1. Section 523(a)(4), generally.
11 In pertinent part, § 523(a)(4) excepts from discharge debts
12 incurred for “for fraud or defalcation while acting in a
13 fiduciary capacity.” § 523(a)(4). The term “fiduciary” is
14 narrowly defined for purposes of § 523(a)(4). In re Honkanen,
15 446 B.R. at 378 (citing Cal–Micro, Inc. v. Cantrell (In re
16 Cantrell), 329 F.3d 1119, 1125 (9th Cir. 2003)). In order for
17 there to be liability under § 523(a)(4), the debtor’s fiduciary
18 capacity “must arise from an express or technical trust that was
19 imposed before, and without reference to, the wrongdoing that
20 caused the debt . . . .” In re Cantrell, 329 F.3d at 1125
21 (citing Lewis v. Scott (In re Lewis), 97 F.3d 1182, 1185 (9th
22 Cir. 1996)). A trust “ex maleficio” will not suffice. In re
23 Honkanen, 446 B.R. at 379. Moreover, “[t]he broad, general
24 definition of fiduciary - a relationship involving confidence,
25 trust and good faith - is inapplicable in the dischargeability
26 context.” In re Cantrell, 329 F.3d at 1125 (quoting Ragsdale v.
27 Haller, 780 F.2d 794, 796 (9th Cir. 1986)).
28 Meanwhile, for purposes of § 523(a)(4), “defalcation” means
13
1 either a “misappropriation of trust funds or money held in any
2 fiduciary capacity” or a “failure to properly account for such
3 funds.” Blyler, et al. v. Hemmeter (In re Hemmeter), 242 F.3d
4 1186, 1190 (9th Cir. 2001).
5 2. Exclusion of Ms. Castillo’s additional evidence.
6 Both in the bankruptcy court and on appeal, Ms. Castillo has
7 argued that she did not have the type of fiduciary relationship
8 with respect to the Proceeds that would qualify her as a
9 fiduciary within the meaning of § 523(a)(4). She also has argued
10 that there was no defalcation within the meaning of § 523(a)(4).
11 In support of her arguments, her opening appeal brief largely
12 relies on the additional evidence she sought to offer in the
13 bankruptcy court, particularly the declaration of Monica Juarez.
14 Liberally construing her appeal brief,8 Ms. Castillo in essence
15 claims that the bankruptcy court erred when it declined to
16 consider her additional evidence. In his responsive brief on
17 appeal, Mr. Akers argued at length that Ms. Castillo’s additional
18 evidence, particularly the Juarezes’ declarations, were
19 irreconcilably inconsistent with the evidence presented in the
20 Fraudulent Transfer Action. He also reiterated that Ms. Castillo
21 did not identify the Juarezes as witnesses during discovery or
22 pretrial in the Discharge Action.
23 But the bankruptcy court did not exclude Ms. Castillo’s
24 additional testimony on any of the grounds articulated by Mr.
25 Akers. Instead, the court simply ruled: “I do not believe the
26
27 8
See Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699
28 (9th Cir. 1990) (holding that pro se appellate briefs should be
liberally construed).
14
1 court would benefit from hearing other evidence.” Hr’g Trans.
2 (June 3, 2011) at 34:17-18. Based on this statement and our
3 reading of the entire June 3, 2011 hearing transcript, we presume
4 the court meant that Ms. Castillo’s additional evidence was
5 irrelevant in light of the grounds on which the court based its
6 resolution of the fiduciary capacity and defalcation issues.9
7 a. Relevancy of additional evidence to defalcation
issue.
8
9 We will first look at the bankruptcy court’s resolution of
10 the defalcation issue and whether the court properly excluded the
11 additional evidence on relevancy grounds in light of the court’s
12 defalcation ruling.
13 The bankruptcy court held that, regardless of whether the
14 Proceeds had been accounted for and regardless of whether the
15 Juarezes had authorized Ms. Castillo’s use of the Proceeds for
16 her own benefit, defalcation necessarily occurred because she
17 used the Proceeds for her own benefit. While ordinarily a
18 nondischargeable defalcation occurs when a trustee retains trust
19 funds for his or her own benefit, see, e.g., Banks v. Gill
20 Distribution Centers, Inc. (In re Banks), 263 F.3d 862, 865 (9th
21 Cir. 2001); Lovell v. Stanifer (In re Stanifer), 236 B.R. 709,
22 719 (9th Cir. BAP 1999), there may be no defalcation if the
23 retention was authorized, either by the terms of the trust or the
24 consent of the beneficiaries. See RESTATEMENT (THIRD ) OF TRUSTS
25
26 9
When the basis for the court’s evidentiary ruling is not
fully articulated, we may infer the basis from the court’s
27
statements and the surrounding circumstances. See, e.g., Obrey
28 v. Johnson, 400 F.3d 691, 694 (9th Cir. 2005); U.S. v.
Cruz-Garcia, 344 F.3d 951, 955-57 & n.2 (9th Cir. 2003).
15
1 § 78, comments c(2) and c(3) (2007).
2 Simply put, if the Juarezes duly authorized Ms. Castillo to
3 keep the funds and use them for her own benefit, then there was
4 no misappropriation, and hence no defalcation.
5 To analyze this proposition, we start with the dictionary
6 definition of misappropriation. The dictionary definition that
7 meshes best with § 523(a)(4) is the broadest one – “a wrong
8 use.”10 The bankruptcy court in essence decided that any use of
9 trust funds for the benefit of the trustee constituted a misuse
10 and hence a misappropriation. But we simply cannot agree with
11 the bankruptcy court’s premise that a trustee automatically
12 misuses trust funds whenever that trustee uses such funds for his
13 or her own benefit, even when the settlor or the beneficiary has
14 duly authorized that particular use. As we have indicated, under
15 appropriate circumstances, the law of trusts permits either a
16 settlor or a beneficiary to authorize a trustee to benefit from
17 trust property. See RESTATEMENT (THIRD ) OF TRUSTS § 78, cmts. c(2)
18 and c(3) (2007).11
19
20 10
We derive this definition from the Oxford English
21 Dictionary, which defines misappropriation as “Appropriation of
(something) for a wrong use; spec. the action or an instance of
22 taking (funds, etc.) fraudulently or unfairly.” (Emphasis added.)
23 11
Indeed, a person may serve both as a trustee and a
24 beneficiary under the same trust. See RESTATEMENT (THIRD ) OF TRUSTS
§ 78 (referring to “[t]he common situation in which one or more
25 of a trust's beneficiaries are selected or authorized by the
settlor to serve as trustee or co-trustee”); see also RESTATEMENT
26 (THIRD) OF TRUSTS § 32, comment b (“settlors often select
beneficiaries as trustees or co-trustees, and the existence of
27
conflicting interests is not ordinarily a basis for a court to
28 remove (or deny appointment to) a trustee of the settlor's
choice.”)
16
1 Moreover, the Ninth Circuit has held that the meaning of
2 defalcation for purposes of § 523(a)(4) does not include a
3 diminution of trust assets resulting from actions the trustee
4 explicitly was authorized to take. Blyler, et al. v. Hemmeter
5 (In re Hemmeter), 242 F.3d 1186, 1191 (9th Cir. 2001). In
6 Hemmeter, pension plan participants commenced an adversary
7 proceeding against the debtor, alleging that losses suffered by
8 the plans were nondischargeable debts of the debtor under
9 § 523(a)(4). Id. at 1189. The employee plan participants
10 further alleged that the plan losses resulted from the debtor’s
11 investment of plan funds in the stock of the employer company
12 that had established the pension plans. Id. at 1191. In
13 affirming the bankruptcy court’s Civil Rule 12(b)(6) dismissal,
14 the Hemmeter court pointed out that the plans specifically
15 authorized plan fiduciaries to invest plan funds in the employer
16 company’s stock. Id. According to Hemmeter, the loss of the
17 plan funds under the alleged circumstances, as a matter of law,
18 could not have constituted a defalcation for purposes of
19 § 523(a)(4) because the plans explicitly authorized the
20 transactions that led to the losses. Id.12
21 Based on the Restatement and Hemmeter, we hold that the
22 bankruptcy court erred as a matter of law when it declined to
23 consider whether Ms. Castillo was authorized to use the Proceeds
24 in the ways that she did. As a result, the court also erred when
25 it excluded Ms. Castillo’s additional evidence on relevancy
26
12
Accord, Destfino v. Bockting, 2012 WL 258408 (9th Cir.
27
Mem. Dec. Jan 30, 2012); see also In re Banks, 263 F.3d at 870
28 (indicating that beneficiary of trust may by agreement authorize
the trustee to keep trust funds for the trustee’s own benefit).
17
1 grounds. The Juarezes’ declarations spoke directly to the issue
2 of whether either or both of them had authorized Ms. Castillo to
3 use the Proceeds for her own benefit. Accordingly, the
4 bankruptcy court erred when it concluded that the additional
5 evidence was irrelevant to the defalcation issue.13
6 b. Relevancy of additional evidence to fiduciary
capacity issue.
7
The bankruptcy court relied upon the facts drawn from the
8
Fraudulent Transfer Action to infer that Ms. Castillo was a
9
fiduciary. Based on these facts, the court ruled that “there was
10
a defalcation from someone in a position of trust.” (emphasis
11
added).14 The court did not explain why it considered Ms.
12
13
13
Mr. Akers has asserted that Ms. Juarez had no authority to
14 direct Ms. Castillo regarding the use of the Proceeds because
they were solely Mr. Juarez’s property. Assuming without
15 deciding that the Proceeds were Mr. Juarez’s sole and separate
16 property, he still may have authorized Ms. Juarez, as his agent,
to direct Ms. Castillo as to how the Proceeds should be used.
17 The undisputed facts on which both parties rely could support an
inference of such authorization. On remand, the bankruptcy court
18 will be free to address the ownership and authorization issues.
19 14
On its face, this solitary statement is ambiguous as to
20 the specific type of fiduciary the court found Ms. Castillo to
be. It would have been relatively easy for the court simply to
21 have stated that Ms. Castillo was the trustee of an express trust
consisting of the Proceeds, which she held for Mr. Juarez’s
22 benefit. That is precisely what Mr. Akers alleged and argued
throughout the Discharge Action. But the court used no such
23 language. Instead, the court used language sounding more like a
24 reference to a “position of trust and confidence” which in
California can cause a generic fiduciary relationship to arise.
25 See, e.g., Lewis v. LeBaron, 61 Cal.Rptr. 903, 911 (Cal. Ct. App.
1967); Sime v. Malouf, 212 P.2d 946, 955 (Cal. Ct. App. 1949).
26 These types of generic fiduciary relationships do not by
themselves give rise to liability under § 523(a)(4). As the
27
Ninth Circuit has repeatedly held, “[t]he broad, general
28 definition of fiduciary - a relationship involving confidence,
(continued...)
18
1 Castillo’s additional evidence irrelevant to this issue. As set
2 forth above, the court merely stated “I do not believe the court
3 would benefit from hearing other evidence.” Hr’g Trans. (June 3,
4 2011) at 34:17-18.
5 We disagree with the bankruptcy court. If it had considered
6 and credited the statements in the Juarezes’ declarations
7 regarding their directions on the use of the Proceeds, those
8 facts would have tended to undermine Mr. Akers’ claim that Ms.
9 Castillo was the Trustee of an express trust.
10 To explain why this is so, we must look at the substantive
11 law of trusts. In California, an express trust requires a
12 settlor by acts or words to objectively manifest an intent to
13 create a trust. See Lonely Maiden Prods., LLC v. GoldenTree
14 Asset Mgmt, LP, 135 Cal. Rptr. 3d 69, 78 (Cal. Ct. App. 2011);
15 Chang v. Redding Bank of Commerce, 35 Cal. Rptr. 2d 64, 70 (Cal.
16 Ct. App. 1994); Petherbridge v. Prudential Sav. & Loan Ass'n, 145
17 Cal. Rptr. 87, 93 (Cal. Ct. App. 1978). The trustor’s acts or
18 words also must establish what property is subject to the trust,
19 the trust’s purpose, and the trust’s beneficiary. See Chang, 35
20 Cal. Rptr. 2d at 70; Abrams v. Crocker–Citizens Nat'l Bank, 114
21 Cal. Rptr. 913, 915 (Cal. Ct. App. 1974).
22 Most importantly, in ascertaining the settlor’s intent, all
23 of the circumstances surrounding the transaction ordinarily
24 should be considered. See Lonely Maiden Prods., 135 Cal. Rptr.
25 3d at 78; Petherbridge, 145 Cal. Rptr. at 93. The Juarezes’
26
14
(...continued)
27
trust and good faith - is inapplicable in the dischargeability
28 context.” See In re Cantrell, 329 F.3d at 1125 (quoting Ragsdale
v. Haller, 780 F.2d 794, 796 (9th Cir. 1986)).
19
1 various statements about what the Proceeds were supposed to be
2 used for are directly relevant to the issue of the alleged
3 trust’s purpose and, indeed, whether Mr. Juarez intended to
4 create a trust at all.15 Moreover, even if we were to assume
5 that a trust was created in the first instance, it also is
6 possible that Mr. Juarez as settlor later modified or revoked the
7 trust, either by directly authorizing alternate uses of the
8 Proceeds, or indirectly through Ms. Juarez as his representative
9 or agent.16 Such modifications would not be unusual or unexpected
10 when, as here, the trust allegedly was created through oral
11 statements, and not by a written instrument.
12 Unless inadmissible on some other grounds, all relevant
13 evidence generally is admissible. See Fed. R. Evid. 402; Shad v.
14 Dean Witter Reynolds, Inc., 799 F.2d 525, 529 (9th Cir. 1986).
15 Evidence is considered relevant if it has “any tendency to make a
16
15
17 See generally id. at 97-98 (stating that the parties’
conduct is often the most probative evidence of the intent to
18 create a trust and holding that the parties’ conduct was
inconsistent with a trust relationship and the attendant legal
19
consequences).
20 16
On the settlor’s power to revoke or modify an inter vivos
21 trust, see generally RESTATEMENT (THIRD ) OF TRUSTS § 63 (2003).
Akers strenuously and at length has asserted that the
22 Juarezes’ later statements regarding the use of the Proceeds were
inconsistent with their earlier testimony, going so far as to
23 characterize the later statements as a fraud on the court.
24 However, notwithstanding Mr. Akers’ presentation, it still is
conceivable that the Juarezes might have been able to reconcile
25 or at least explain the differences in their various statements
if they had been given the opportunity to testify at a further
26 evidentiary hearing. The bankruptcy court as the trier of fact
needed to find whether the Juarezes’ various statements regarding
27
the Proceeds were credible. In other words, the issue of the
28 Juarezes’ veracity went to the weight and credibility that should
be given to their declarations and not to their admissibility.
20
1 [material] fact more or less probable than it would be without
2 the evidence." Fed. R. Evid. 401 (emphasis added); see also
3 Shad, 799 F.2d at 529. Here, as explained above, Ms. Castillo’s
4 additional evidence was relevant to both the defalcation and
5 fiduciary capacity issues. Consequently, the bankruptcy court
6 erred when it excluded Ms. Castillo’s additional evidence on
7 relevancy grounds.
8 3. Harmless error.
9 Having determined that the bankruptcy court abused its
10 discretion in excluding Ms. Castillo’s additional evidence as
11 irrelevant, we still must determine whether Ms. Castillo was
12 prejudiced by the court’s abuse of discretion. Harper, 533 F.3d
13 at 1030; In re Slatkin, 525 F.3d at 811. An appellant has been
14 prejudiced by the trial court’s erroneous evidentiary ruling if
15 it is more probable than not that the error tainted the trial
16 court’s decision. Molina v. Astrue, 674 F.3d 1104, 1119 (9th
17 Cir. 2012); Harper, 533 F.3d at 1030.
18 In determining whether the error was prejudicial, we must
19 look at the circumstances of the particular case. See Shinseki
20 v. Sanders, 556 U.S. 396, 407-08, 129 S.Ct. 1696, 1704-05, 173
21 L.Ed.2d 532 (2009). More specifically, we must look at factors
22 such as whether the evidence erroneously excluded was either
23 tangential or cumulative, and also whether the overall strength
24 of the case against Ms. Castillo was so great as to render the
25 erroneously excluded evidence inconsequential. Molina, 674 F.3d
26 at 1119. While the harmless error analysis sometimes may require
27 a review of the entire record, the surrounding circumstances of
28 the case often will make it clear to the appellate court “that
21
1 the ruling, if erroneous, was harmful and nothing further need be
2 said.” Shinseki, 556 U.S. at 410, 129 S.Ct. at 1706.
3 This is one of those cases where the prejudice to the
4 appellant from the erroneous evidentiary ruling is rather
5 obvious. As our above discussion of relevancy demonstrates, Ms.
6 Castillo’s additional evidence cannot be characterized as
7 tangential. Nor can it be characterized as cumulative.
8 "Cumulative evidence" is evidence which replicates other admitted
9 evidence. U.S. v. Ives, 609 F.2d 930, 933 (9th Cir. 1979).
10 Here, Mr. Akers’ oft-repeated argument that the additional
11 evidence was inconsistent with the evidence adduced in the
12 Fraudulent Transfer Action belies any notion that the additional
13 evidence could be considered cumulative.
14 Moreover, our view of the overall strength of Mr. Akers’
15 case persuades us that his position was not so strong as to
16 render Ms. Castillo’s additional evidence inconsequential. The
17 undisputed facts on which he relied to establish the existence of
18 an express trust are not necessarily inconsistent with a mere
19 agency relationship.17 But an agency would have been
20 insufficient by itself to impose liability under § 523(a)(4); as
21 we previously stated, a debtor is not a fiduciary within the
22 meaning of § 523(a)(4) unless he or she is trustee of an express
23 or technical trust. In re Cantrell, 329 F.3d at 1125.
24 Indeed, our doubts regarding Mr. Akers’ case are amplified
25 by the apparent tension between the bankruptcy court’s
26 Fraudulent Transfer Judgment and its fiduciary capacity ruling.
27
17
28 On the distinctions between trusts, agencies and agency-
trusts, see generally Chang, 35 Cal. Rptr. 2d at 70-71.
22
1 If Ms. Castillo held the Proceeds pursuant to an express trust
2 for Mr. Juarez’s benefit, Mr. Juarez still held that beneficial
3 interest in the Proceeds notwithstanding the May 31 Transfer. In
4 other words, to the extent an express trust existed, the May 31
5 Transfer did not transfer anything of value from Mr. Juarez to
6 Ms. Castillo. Simply put, it is difficult to reconcile Mr.
7 Akers’ case for an express trust with the bankruptcy court’s
8 prior Fraudulent Transfer Judgment.
9 Given the above-referenced circumstances, we conclude that
10 Ms. Castillo was prejudiced by the bankruptcy court’s erroneous
11 exclusion of her additional evidence. Accordingly, we must
12 VACATE the bankruptcy court’s § 523(a)(4) ruling and REMAND for
13 further proceedings.18
14 B. Section 727(a) objection to discharge ruling.
15 In his cross-appeal, Mr. Akers has asked this Panel to
16 review the “facts and evidence in this case” and to hold that the
17 bankruptcy court erred in denying him any relief on his § 727(a)
18 claims. See Aple. Opn. Brf. (Sept. 27, 2011) at p. 31. Mr.
19 Akers in essence has argued on appeal that the record does not
20
21
18
Mr. Akers also argued that we should have dismissed Ms.
22 Castillo’s appeal because she did not provide us with all
necessary transcripts. While there is no question that Ms.
23 Castillo should have provided us with the missing transcripts and
24 that such transcripts would have facilitated our review, we
decline to dismiss on this basis because we were able to conduct
25 a meaningful review without the transcripts. See Kyle v. Dye (In
re Kyle), 317 B.R. 390, 393-94 (9th Cir. BAP 2004), aff'd, 170
26 Fed. Appx. 457 (9th Cir. 2006) (holding that, so long as record
permits meaningful review, failure to provide all required
27
transcripts need not result in dismissal or summary affirmance,
28 and the appellate court has discretion to disregard the defect
and decide the appeal on the merits).
23
1 support the bankruptcy court’s dispositive findings that the
2 Castillos’ testimony was credible and that any errors or
3 omissions by the Castillos in their bankruptcy case resulted from
4 inadvertence rather than intentional deceit.
5 Because Mr. Akers’ cross-appeal challenged the bankruptcy
6 court’s dispositive factual findings, it was incumbent upon him
7 to demonstrate how those findings were clearly erroneous, and he
8 needed to provide us with the bankruptcy court's findings and all
9 evidence upon which those findings were based. Burkhart v. Fed.
10 Dep. Ins. Corp. (In re Burkhart), 84 B.R. 658, 660 (9th Cir. BAP
11 1988). Failure to provide necessary transcripts may be grounds
12 for dismissal or summary affirmance of the appeal. See, e.g.,
13 Jones v. City of Santa Monica, 382 F.3d 1052, 1057 (9th Cir.
14 2004) (dismissing portion of appeal dependent on hearing
15 transcripts not provided); Syncom Capital Corp. v. Wade, 924 F.2d
16 167, 169 (9th Cir. 1991) (dismissing appeal based on appellant's
17 failure to provide necessary trial transcript); see also In re
18 Kyle, 317 B.R. at 393 (stating that “failure to provide a
19 sufficient record to support informed review of trial-court
20 determinations may, but need not, lead either to dismissal of the
21 appeal or to affirmance for inability to demonstrate error.”).
22 While we often attempt to conduct some measure of review in
23 the absence of necessary transcripts, see, e.g., In re Kyle, 317
24 B.R. at 393-94, we cannot do so here. Mr. Akers’ only assignment
25 of error in his cross-appeal concerns the bankruptcy court’s
26 dispositive findings on the § 727(a) claims, and we simply cannot
27 meaningfully consider those findings without the January 26, 2011
28 trial transcript.
24
1 Under appropriate circumstances, when we are confronted with
2 a materially incomplete record, including the absence of
3 essential transcripts, we may either dismiss the appeal or
4 summarily affirm. Id. We acknowledge that, before we do so, we
5 typically consider whether some judicial action short of
6 dismissal or summary affirmance is justified in light of the
7 circumstances presented. See Ehrenberg v. Cal. State Fullerton
8 (In re Beachport Enter.), 396 F.3d 1083, 1087 (9th Cir. 2005).
9 When considering what action to take, we ordinarily look at the
10 impact of the sanction and the possibility of employing alternate
11 sanctions. Id. We also assess whether the appellant or his or
12 her counsel is more responsible for the procedural noncompliance.
13 Id.
14 However, as Beachport itself pointed out, when the
15 noncompliance with procedural rules is “egregious” an explicit
16 discussion of alternative sanctions is unnecessary. Id. at 1087.
17 “Egregious” is precisely how we would describe Mr. Akers’ failure
18 to supply the January 26, 2011 trial transcript. Mr. Akers was
19 well aware of the requirement to provide necessary transcripts.
20 In fact, he argued on appeal that Ms. Castillo’s failure to
21 provide such transcripts should result in dismissal of her
22 appeal.19 Less than two pages earlier, he had argued in his
23 appellate brief that we should overturn the bankruptcy court’s
24 § 727(a) ruling, which hinged solely on the court’s findings
25 regarding the Castillos’ credibility and their intent. We simply
26
19
As it turned out, we were able to conduct a meaningful
27
merits review of her appeal without all of the requisite
28 transcripts. See n.17, supra. The same cannot be said for our
ability to conduct a merits review of Mr. Akers’ appeal.
25
1 cannot fathom how Mr. Akers expected us to address the merits of
2 his appellate argument without the January 26, 2011 trial
3 transcript.
4 Furthermore, we explicitly warned both parties in an order
5 we issued on December 29, 2011, that the failure of either party
6 to provide us with necessary transcripts could result in
7 dismissal or summary affirmance of either or both of the
8 cross-appeals. Yet Mr. Akers still took no action to provide us
9 with the transcript we needed to address his cross-appeal from
10 the § 727(a) ruling.
11 Under these circumstances, we consider it appropriate to
12 summarily affirm the bankruptcy court’s § 727(a) ruling.
13 CONCLUSION
14 For the reasons set forth above, we VACATE AND REMAND the
15 bankruptcy court’s § 523(a)(4) ruling, and we AFFIRM the court’s
16 § 727(a) ruling.
17
18
19
20
21
22
23
24
25
26
27
28
26