FILED
DEC 09 2016
SUSAN M. SPRAUL, CLERK
1 NOT FOR PUBLICATION U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT
2
3
UNITED STATES BANKRUPTCY APPELLATE PANEL
4
OF THE NINTH CIRCUIT
5
6 In re: ) BAP No. CC-16-1104-KiFD
)
7 ROBERT LEONARD KAPLAN, ) Bk. No. 2:11-bk-60249-RK
)
8 Debtor. ) Adv. No. 2:12-ap-01415-RK
)
9 )
ROBERT LEONARD KAPLAN, )
10 )
Appellant, )
11 )
v. ) M E M O R A N D U M1
12 )
RENEWABLE RESOURCES COALITION,)
13 INC.; ARTHUR HACKNEY; )
HACKNEY & HACKNEY, Inc., )
14 )
Appellees. )
15 ______________________________)
16 Argued and Submitted on November 17, 2016,
at Pasadena, California
17
Filed - December 9, 2016
18
Appeal from the United States Bankruptcy Court
19 for the Central District of California
20 Honorable Robert N. Kwan, Bankruptcy Judge, Presiding
21
Appearances: Leslie A. Cohen argued for appellant Robert Leonard
22 Kaplan; Stephen W. Cusick of Nielsen, Haley &
Abbott LLP argued for appellees Renewable Resources
23 Coalition, Inc., Arthur Hackney and Hackney &
Hackney, Inc.
24
25
26
27 1
This disposition is not appropriate for publication.
Although it may be cited for whatever persuasive value it may
28 have, it has no precedential value. See 9th Cir. BAP Rule 8024-1.
-1-
1 Before: KIRSCHER, FARIS and DUNN,2 Bankruptcy Judges.
2 Appellant Robert Leonard Kaplan ("Debtor") appeals a judgment
3 determining that the debt of appellees was nondischargeable under
4 § 523(a)(4) and (a)(6).3 The bankruptcy court applied issue
5 preclusion to a prepetition arbitration award obtained by
6 appellees and found that it and certain undisputed facts in the
7 record established the elements of both claims. Thus, the court
8 granted appellees summary judgment. Debtor also appeals the order
9 denying his cross-motion for summary judgment and the order
10 denying his motion to dismiss appellees' second amended complaint.
11 We AFFIRM the judgment entered pursuant to § 523(a)(6).4
12 I. FACTUAL BACKGROUND AND PROCEDURAL HISTORY
13 A. Prepetition events
14 1. Events leading up to the arbitration
15 The instant dispute arises out of an arbitration award in
16 which Debtor's corporation was found to have misappropriated
17 Appellees’ confidential client documents by selling them to their
18
2
19 Hon. Randall L. Dunn, Bankruptcy Judge for the District of
Oregon, sitting by designation.
20
3
Unless specified otherwise, all chapter, code and rule
21 references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and
the Federal Rules of Bankruptcy Procedure, Rules 1001-9037. The
22 Federal Rules of Civil Procedure are referred to as "Civil Rules."
23 4
Debtor, not through counsel, filed a letter, dated
December 1, 2016, in this appeal, which is identified as
24 Document 24. Debtor requests that the Panel consider his letter
as a Request for Judicial Notice, although it appears to provide
25 facts and argument. At oral argument, the Panel did not request
Debtor to file any post-argument submission or any other document.
26 The Panel declines to consider Debtor’s Document 24, given that
the appeal was deemed submitted for decision on November 17, 2016,
27 and Debtor, through counsel, had the opportunity to present his
argument through written and oral presentations based on the
28 submitted record.
-2-
1 opponents. Debtor is a professional fund-raiser in California for
2 political campaigns. Fund Raising, Inc. ("FRI") is a California
3 corporation through which Debtor conducted his fund-raising
4 business. Debtor is the president, sole shareholder and sole
5 employee of FRI. Appellee Renewable Resources Coalition, Inc.
6 ("RRC") is a non-profit corporation based in Alaska. It conducts
7 education, research, publicity and fund-raising efforts in
8 opposition to the proposed development of Pebble Mine – a large,
9 open pit mine in Alaska. Appellee Arthur Hackney is a political
10 consultant who helped manage the campaign in opposition to Pebble
11 Mine. Appellee Hackney & Hackney, Inc. is a corporation through
12 which Hackney conducts his political consulting business
13 ("Hackney," together with RRC, "Appellees").
14 In April 2008, FRI executed a Consulting Agreement with RRC,
15 Hackney and others to provide fund-raising services for RRC's
16 anti-Pebble campaign, which included a high-profile campaign in
17 support of an Alaskan ballot initiative known as the Clean Water
18 Initiative. The Consulting Agreement did not name Debtor as a
19 party, but he did sign it for and on behalf of FRI. Debtor/FRI
20 was copied with the campaign's internal correspondence so that his
21 pitch for donations would accurately track the arguments being
22 asserted elsewhere in the campaign. Because FRI was paid a
23 commission on amounts donated, Debtor/FRI was also provided copies
24 of RRC's bank deposit records, showing donations to RRC and the
25 name of the person or entity making the donation. RRC also
26 provided Debtor/FRI with RRC's donor and membership lists for
27 purposes of solicitation. RRC considered its donation and
28 membership information to be highly confidential and expressed
-3-
1 this to staff and board members.
2 Under the Consulting Agreement, FRI agreed that it would,
3 "with respect to any information designated by Client or its
4 member organizations as confidential, hold such information in
5 confidence and use same only in connection with the services
6 provided hereunder." Debtor testified that he was a member of the
7 Board of Directors of the American Association of Political
8 Consultants, and considered himself bound by its Code of Ethics,
9 which provides, in part:
10 I will respect the confidence of my clients and not
reveal confidential or privileged information obtained
11 during our professional relationship.
12 Ultimately, the Clean Water Initiative failed in the August 2008
13 election, thereby paving the way for the Pebble Mine project to
14 continue.
15 Unhappy with FRI's fund-raising efforts, board member Richard
16 Jameson, on behalf of RRC and the other parties to the Consulting
17 Agreement, emailed Debtor/FRI in September 2008 to advise that
18 they were electing to terminate the Consulting Agreement effective
19 October 4, 2008. In response, Debtor on behalf of FRI sent two
20 emails on October 1 and 30, 2008. In the October 1 email, Debtor
21 asserted that amounts remained due under the contract and stated
22 that the parties needed "a simple resolution" of his claim given
23 "all the focus on Alaska by the national media and all those
24 reporters running around looking for almost anything interesting
25 to write about" and "APOC’s5 review of the campaign's finances
26 . . . ." In the October 30 email, Debtor quoted a number of
27
5
APOC, the Alaskan Public Officials Commission, is a state
28 regulatory body that oversees campaign finance issues in Alaska.
-4-
1 internal campaign communications and suggested that RRC was set up
2 illegally to "veil contributors" or as a "pass through" for
3 contributions from Bob Gillam (a significant contributor to the
4 campaign effort). Debtor further referred to "anonymous
5 discussions with APOC" that suggested that RRC's position was
6 "problematic."
7 2. The arbitration and APOC proceeding
8 a. FRI files the demand for arbitration.
9 In October 2008, FRI initiated an arbitration proceeding as
10 provided in the Consulting Agreement. FRI asserted several claims
11 against RRC, Jameson and others. Retired Judge G. Keith Wisot
12 presided over the matter.
13 While the arbitration action was pending, in early January
14 2009, California attorney Allan Kaplan, Debtor's brother, acting
15 as counsel for Debtor and FRI, contacted Alaska attorney Thomas
16 Amodio, who had represented Pebble Mine interests during the
17 campaign. Amodio confirmed that the topic of the initial contact
18 concerned reaching some agreement by which Amodio's Pebble clients
19 might acquire documentation with which to pursue an APOC complaint
20 for violations of campaign finance laws against opponents Gillam,
21 RRC and Americans For Job Security.6
22 Debtor on behalf of FRI met with Amodio in California on
23 February 2, 2009, to show Amodio documents FRI had obtained in its
24 work for the non-profits opposing the Pebble Mine. Amodio did not
25
26 6
Amodio had filed a prior APOC complaint against these
anti-Pebble Mine parties, but the complaint was dismissed due to
27 lack of evidence. However, Amodio believed the internal documents
Debtor/FRI acquired while working as a fund-raiser for RRC would
28 vindicate that complaint.
-5-
1 recall any discussion of the merits of the arbitration; to Amodio,
2 the whole point of the meeting was to raise Amodio's clients'
3 interest in the documents held by Debtor/FRI. At that meeting,
4 Debtor on behalf of FRI asked Amodio whether he could provide FRI
5 with either legal representation in the California arbitration
6 proceeding or financial support for the arbitration.7
7 At some point in February 2009, before a second meeting with
8 Debtor on March 1, 2009, both Amodio and Matthew Singer — a second
9 Alaska attorney whose firm also represented Pebble Mine interests
10 – told Debtor they would not represent FRI in the California
11 arbitration. In an email to Debtor dated February 23, 2009,
12 Amodio confirmed that no ongoing attorney-client relationship
13 existed between him and Debtor or FRI, but Amodio did confirm that
14 the documents Debtor showed him on February 2 remained
15 confidential and protected by the attorney-client privilege,
16 because FRI had approached him for purposes of seeking legal
17 advice.
18 In February 2009 phone discussions with Singer, Debtor on
19 behalf of FRI asked for $450,000 for the documents; Singer offered
20
21 7
A February 23, 2009 email from Debtor/FRI to Amodio
appears to reveal that Debtor/FRI also sought Amodio's assistance
22 for filing their own APOC complaint against FRI's former clients.
This email contained a draft letter authored by Debtor to a John
23 Shively, a Pebble entity officer, regarding the RRC documents FRI
had in its possession. In what seems to be Debtor's seeking of
24 approval from Amodio for the content of the letter, Debtor's
proposed pitch to Shively was:
25
You can evaluate the millions of dollars in campaign and
26 other costs to be saved in the next few years if you are able
to call attention to the actions of your opponents through an
27 APOC complaint. You know these same opponents caused you and
your colleagues to spend many millions of campaign and public
28 education dollars to protect your interests.
-6-
1 $34,000; they agreed to $50,000.
2 On March 1, 2009, Debtor on behalf of FRI met with Alaska
3 attorneys Amodio and Singer in California. Debtor had organized
4 the documents with tabs identifying what he thought were various
5 violations of Alaska campaign laws. During the meeting, Amodio,
6 at Singer’s request, removed from the set of documents any that
7 were marked as "confidential." The $50,000 check Singer gave to
8 Debtor was documented in an engagement letter with Singer's firm
9 as a fee for FRI to be a consulting expert in the case Singer
10 would file with APOC. Debtor signed the engagement letter; Singer
11 took with him the documents not marked confidential, including
12 donor lists, bank account information and contact lists obtained
13 from RRC.
14 b. The APOC Complaint is filed.
15 In March 2009, Singer filed a complaint before APOC on behalf
16 of the Pebble parties against RRC, Gillam and others. The gist of
17 the charge was that the non-profits, including RRC, had been set
18 up or used to shield from public view the fact that substantial
19 contributions in support of the Clean Water Initiative were being
20 made by Gillam, whose home is near Pebble Mine. The APOC
21 Complaint stated in a footnote that "the exhibits [attached to the
22 complaint] marked as 'Doc #000001—000132' were provided by Robert
23 Kaplan, who has served as a consultant in this matter."
24 Jameson recognized the 132 exhibits to the APOC Complaint as
25 RRC documents provided to Debtor on behalf of FRI during FRI’s
26 retention, which included multiple internal campaign planning
27 communications. The exhibits also included bank deposit detail
28 from RRC for April through July 2008, which were unredacted and
-7-
1 showed the names of all contributors, be they members or donors to
2 RRC, during that time and the amounts of contributions.
3 Ultimately, the APOC matter was settled, as memorialized in a
4 Consent Decree filed in February 2010. All charges against
5 Hackney were dismissed for lack of a legal and factual basis. The
6 remaining respondents agreed to pay $100,000 to the State of
7 Alaska, which was half of the investigation cost. The Consent
8 Decree recited that it "shall not constitute a formal finding on
9 the merits of the complaints or of any other violation of any
10 statute," and that "nothing [in it] constitutes any acknowledgment
11 of any wrongdoing by any party."
12 c. Counterclaims filed in the arbitration
13 As a result of Debtor/FRI's sale of FRI's former clients'
14 documents to its political opponents, RRC brought four
15 counterclaims in the arbitration against both Debtor and FRI,
16 alleging professional negligence, breach of contract, interference
17 with prospective economic advantage, and unjust enrichment.
18 Hackney brought similar counterclaims. RRC and Hackney alleged
19 they suffered damages as a result of Debtor and FRI's actions,
20 including loss of income, loss of grants, loss of public support
21 and great public embarrassment. Although RRC and Hackney named
22 Debtor individually as a counter-respondent, the arbitrator ruled
23 that as a nonparty to the Consulting Agreement, which governed the
24 arbitration, Debtor could not be made a party to the arbitration,
25 and respondents had not sufficiently alleged any alter-ego theory
26 to order a nonparty to participate in arbitration.
27
28
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1 d. Discovery, briefing and pretrial orders in the
arbitration
2
3 During his deposition, Debtor testified that he had met on
4 behalf of FRI with Alaska attorneys Amodio and Singer in late
5 February or early March 2009, before the APOC Complaint was filed,
6 but only to determine whether those attorneys might either
7 represent FRI in its arbitration or help cover the cost of that
8 litigation. Debtor testified on behalf of FRI that Singer gave
9 him a check made payable to FRI on Singer’s law firm’s account for
10 $50,000 at the meeting for the sole purpose of helping cover FRI's
11 costs in prosecuting the arbitration. Debtor further testified:
12 • he never conveyed any documents to Singer in exchange for the
$50,000, nor did he authorize release of those documents to
13 Singer’s firm;
14 • he did not know how his client’s documents got into APOC’s
hands and wound up as exhibits to the APOC Complaint; and
15
• he did not know why he was described in the APOC Complaint as
16 a consultant, because he was never paid anything as a
consultant and he never authorized anyone to so describe him.
17
18 Allan, Debtor's brother and attorney representing Debtor and FRI,
19 gave similar testimony.
20 In August 2010, the arbitrator entered "Order #2," wherein he
21 made various findings, including that no attorney-client privilege
22 existed between Debtor and FRI and the Alaska attorneys based on
23 the crime-fraud exception. The arbitrator also found that in the
24 months leading up to March 4, 2009, Debtor on behalf of FRI and
25 Allan, in efforts to settle the fee dispute in the arbitration,
26 repeatedly threatened the arbitration respondents with the
27 following statements: "that all respondents had conspired to
28 violate Alaska election laws;" "that this information, if it
-9-
1 became known to [APOC], would result in great embarrassment and
2 possible ethics investigations of the entities and individuals
3 involved;" that Debtor and Allan "had talked with a
4 politically-motivated attorney (Amonio) [sic] who represented
5 mining interests and were adverse to respondents in the 2008
6 campaign concerning Pebble Mine;" which attorney "would love to
7 use the damaging email correspondence from FRI’s campaign to
8 further prosecute election law violations;" that "Mr. Gillam, the
9 primary contributor to the Pebble Mine campaign, had 'a lot of
10 reasons' why he would not want the FRI emails to be made public;"
11 and that the Kaplans' terms for settlement better "be accepted, or
12 [those] dire consequences . . . would follow." Many of the
13 arbitrator's findings here were based on an exhibit submitted by
14 RRC, which consisted of a March 4, 2009 email drafted by RRC
15 attorney, Tung Khuu, reflecting his contemporaneous notes as to
16 what happened earlier that day in a settlement negotiating meeting
17 with Allan and Debtor/FRI. This exhibit has been referred to as
18 "Exhibit X" and was offered in support of Appellees' motion for
19 summary judgment. The arbitrator's findings made in Order #2 were
20 later incorporated into the final award.
21 e. The final arbitration award
22 The arbitrator issued his Final Award ("Arbitration Award")
23 on January 6, 2012, just after Debtor filed his bankruptcy case.
24 In support of his decision that RRC had proven claims for
25 (1) conversion, (2) misappropriation of trade secrets and (3)
26 unjust enrichment, the arbitrator found that RRC's donor lists,
27 email listings and bank information were trade secrets and were
28 specifically discussed with Debtor as highly confidential
-10-
1 information by Jameson. When Debtor sold the proprietary
2 information of his clients, he breached his fiduciary duties and
3 the duty of loyalty inherent in his Consulting Agreement, which
4 duties continued after the contract termination. The arbitrator
5 rejected FRI's argument that the confidentiality clause in its
6 Consulting Agreement provided confidentiality only to documents
7 "marked confidential" by the client.
8 In addition, the arbitrator found that Debtor committed
9 perjury in the arbitration on at least three material topics;
10 Allan was intentionally untruthful in his testimony with respect
11 to one topic. Specifically, the arbitrator found that Debtor on
12 behalf of FRI and Allan were each intentionally untruthful in
13 their hearing testimony and depositions regarding their reasons
14 for contacting attorneys Amodio and Singer and the purpose for
15 meeting them. Both asserted that their purpose was to seek legal
16 representation for the arbitration. Debtor, on behalf of FRI,
17 continued to so assert even with respect to the March 1, 2009
18 meeting, after the Alaskan attorneys had already made it clear in
19 February that neither of their firms would do so.
20 The arbitrator found that not only should Debtor, advised by
21 his attorney brother Allan, know that sharing documents with
22 counsel for clients adverse to FRI's former clients was not a
23 report to the proper authorities, but Debtor persisted to the
24 point of committing perjury in the falsehood that he had contacted
25 Amodio and Singer for representation in the arbitration and
26 engaged in privileged discussions with them. Thus, found the
27 arbitrator, the purpose of the meetings was not to consult counsel
28 for representation in the arbitration, but rather to pursue
-11-
1 Debtor’s threats to expose Gillam and the arbitration respondents
2 to public and regulatory review and attempt extortion in ongoing
3 settlement talks.
4 The arbitrator found that Debtor had also committed perjury
5 in testifying he was "surprised" at being listed as a consultant
6 for Singer and the Pebble parties in the APOC Complaint. Debtor
7 on behalf of FRI had received, modified, returned and signed an
8 engagement letter to act in precisely that capacity and had so
9 acted by spending several hours reviewing the documents with
10 Singer. The arbitrator found that this evidence supported
11 respondents' defense of unclean hands and also established their
12 causes of action for breach of fiduciary duty, interference with
13 prospective economic advantage and unjust enrichment.
14 Damages were assessed against FRI as follows: the arbitrator
15 awarded RRC (1) $50,000 for unjust enrichment (the amount FRI
16 received for its misappropriation of RRC's confidential
17 documents), (2) the $3,169 RRC spent in attorney's fees to redact
18 documents in trying to salvage confidentiality after they were
19 delivered to APOC, (3) $386,330 for a lost grant caused by the
20 impact of the APOC Complaint and public investigation, as reported
21 in the Alaska press and other public communications, and
22 (4) $156,804 for attorney's fees and $32,704 for expenses incurred
23 in the arbitration as a prevailing party enforcing the terms of
24 the Consulting Agreement; Hackney was awarded (1) $1,011,681.68
25 for lost clients and revenues "resulting from the APOC Complaint
26 with its FRI documents" and $56,120.30 for the attorney's fees
27 incurred in responding to the APOC investigation (for total
28 compensatory damages of $1,070,301.98), and (2) $675,758.76 for
-12-
1 attorney's fees and $69,768.77 for expenses incurred in the
2 arbitration as a prevailing party enforcing the terms of the
3 Consulting Agreement.
4 The arbitrator also awarded RRC and Hackney each $1,000,000
5 for punitive damages, "arising from the tort causes of action, and
6 perjury of FRI/Kaplan." Thus, RRC was awarded a total of
7 $1,628,977; Hackney was awarded a total of $2,815,829.51. These
8 amounts were doubled per the Consulting Agreement when FRI failed
9 to pay within 30 days.
10 FRI's efforts to vacate the Arbitration Award failed. The
11 federal district court confirmed the Arbitration Award on July 31,
12 2012. The Arbitration Award is final.
13 B. Postpetition events
14 Debtor filed his chapter 7 bankruptcy case on December 9,
15 2011. He listed his 100% ownership interest in FRI in his
16 Schedule B with a value of $0. He also listed FRI's debts owed to
17 RRC and Hackney in his Schedule F.
18 Appellees filed their first amended complaint ("FAC") against
19 Debtor on July 31, 2012, seeking to except the Arbitration Award
20 debt from discharge under § 523(a)(4) – for defalcation while
21 acting in a fiduciary capacity – and § 523(a)(6).8 Debtor's
22 answer denied generally Appellees' allegations.
23
24
25
26
27
8
The original complaint for these same claims was filed on
28 March 19, 2012.
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1 1. Appellees' motion for summary judgment and Debtor's
cross-motion for summary judgment9
2
a. The initial briefing on the cross-motions
3
Appellees moved for summary judgment on their § 523(a)(4) and
4
(a)(6) claims on April 15, 2013, on the basis of issue preclusion,
5
contending that Debtor was precluded from relitigating the
6
arbitrator's findings ("MSJ"). Appellees contended that privity —
7
an element for purposes of issue preclusion — was the basis for
8
which the bankruptcy court could impose personal liability for the
9
Arbitration Award on Debtor.
10
Even though Appellees had pleaded in the FAC a claim under
11
§ 523(a)(4) based on Debtor's alleged defalcation, they now argued
12
that the Arbitration Award established a § 523(a)(4) claim for
13
embezzlement.10 Appellees contended the following findings by the
14
arbitrator supported their claims:
15
• that Debtor actively identified, sought out and expressly
16 induced the Alaska lawyers for his clients' opponents to
purchase the confidential documents for use against his
17 clients;
18 • that Debtor had demonstrated awareness that the documents
were proprietary and that his acts were wrongful by the
19 extraordinary lengths to which he and his brother went to
avoid detection of the fact that they had transferred those
20 documents to those opponents at all. Such efforts included:
21
22
9
The parties filed no less than 25 briefs in connection
23 with their cross-motions for summary judgment, Appellees' motion
for leave to amend the FAC and Debtor's motion to dismiss
24 Appellees' second amended complaint. We focus on those issues
still relevant to this appeal.
25
10
Appellees conceded that a fund-raiser/client relationship
26 might not rise to a level of a formal fiduciary relationship
needed to support a finding of "defalcation while acting in a
27 fiduciary capacity." Embezzlement, on the other hand, does not
require a fiduciary relationship between the parties. Bullock v.
28 BankChampaign, N.A., 133 S. Ct. 1754, 1760 (2013).
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1 • setting up a bogus claim to attorney-client privilege to
shield the transfer, by including in the discussions an
2 illogical request that Alaskan lawyers represent FRI in
an arbitration in Los Angeles under California law;
3
• falsely testifying that they contacted those Alaskan
4 attorneys solely for the purpose of obtaining such
representation, or a contribution to their fight against
5 now-common opponents;
6 • meeting those lawyers surreptitiously, without FRI's
clients’ knowledge or permission, and transferring the
7 client documents to them for $50,000; and
8 • falsely testifying (i) that Debtor never transferred the
documents to the clients’ opponents, (ii) that they had
9 no knowledge how those documents came to appear as
exhibits to the APOC Complaint, and (iii) that Debtor
10 had never agreed to become a consultant for the Pebble
parties.
11
12 Appellees contended the awards for attorney's fees and expenses
13 and punitive damages were also excepted from discharge.11
14 Debtor opposed the MSJ. He disputed Appellees' privity
15 argument as a means to hold him personally liable for the
16 Arbitration Award. Alternatively, Appellees had not pleaded a
17 claim for embezzlement in the FAC, but rather for defalcation.
18 Thus, argued Debtor, they could not have summary judgment on an
19 unpleaded claim. Debtor's statement of genuine issues filed in
20 support of his opposition did not respond to Appellees' forty-
21 three proffered uncontroverted facts as required under Local Rule
22 7056-1(b)(2), but rather raised thirty separate issues of his own
23 that he believed were in dispute.
24 In reply, Appellees noted that none of their forty-three
25
26 11
Appellees conceded that only the single award of damages
of $4,444,806.51 was nondischargeable as opposed to the doubled
27 amount of $8,889,613.02, since the doubling was the result of
FRI's nonpayment within 30 days as required under the Consulting
28 Agreement and not the result of Debtor's tortious conduct.
-15-
1 proffered uncontroverted facts had been disputed by Debtor. As
2 for embezzlement, Appellees argued they had pleaded all of the
3 facts on which they now based their embezzlement claim in the
4 original complaint and FAC, even though they had not specifically
5 alleged that the facts showed "embezzlement" under the alternative
6 ground set forth in § 523(a)(4). Appellees argued, under the rule
7 of notice pleading, that the same alleged facts could constitute
8 embezzlement would not have been a surprise to Debtor's
9 experienced bankruptcy counsel.
10 At the first hearing on the MSJ, the bankruptcy court decided
11 to defer ruling on it and to grant Debtor's request for more time
12 for limited discovery, considering the large dollar amount being
13 sought against him and the parties' dispute regarding privity and
14 the applicability of issue preclusion.
15 After taking further discovery (depositions of Hackney,
16 Gillam and Jameson), Debtor filed his own motion for summary
17 judgment and statement of uncontroverted facts containing
18 112 proffered facts ("Cross-MSJ"). Debtor contended he was
19 entitled to summary judgment on Appellees' claim under § 523(a)(4)
20 for defalcation in a fiduciary capacity, a legal theory which
21 Appellees were no longer pursuing. Debtor contended he was also
22 entitled to summary judgment on Appellees' § 523(a)(6) claim;
23 Appellees had provided no evidence that it was Debtor's specific
24 intention to cause the harms alleged by Appellees. At best,
25 argued Debtor, the arbitrator's findings established only a
26 deliberate act of turning over documents which eventually led to
27
28
-16-
1 the APOC Complaint which "allegedly"12 harmed RRC and Hackney's
2 business. Debtor also contended he was entitled to summary
3 judgment because no Appellee could identify any actions by Debtor
4 that caused them harm and no evidence existed to support recovery.
5 At minimum, Debtor contended he was entitled to summary judgment
6 on all claims as to Hackney because Hackney's deposition testimony
7 demonstrated that the dischargeability action was proceeding
8 without his knowledge or involvement.
9 Appellees opposed the Cross-MSJ, responding to each of
10 Debtor's 112 proffered uncontroverted facts. Appellees argued
11 that Hackney's involvement, or lack thereof, in the
12 dischargeability action did not matter; his underlying claims
13 against Debtor at issue had already been litigated to a final
14 judgment. As for Debtor's assertion that no Appellee could
15 identify any actions by Debtor that caused them harm, the action
16 by Debtor — selling his clients' documents to his clients'
17 opponents for use against them for $50,000 — had been litigated,
18 adjudicated, found to have happened, and confirmed in a final
19 judgment. Moreover, much evidence existed to support Appellees'
20 claims: the same evidence that was submitted in the arbitration.
21 Nonetheless, Debtor was still stating, under oath, things already
22 found to constitute perjury by him, or that were opposite of what
23 the evidence showed and what was adjudicated: (1) that he only
24 contacted the Alaskan attorneys for representation in the
25
12
Debtor continues to use the words "alleged" or "allegedly"
26 throughout his brief on appeal. However, with respect to findings
made by the arbitrator, those findings are no longer "alleged" but
27 proven and are final and cannot now be disputed. Neither can
Debtor dispute the uncontroverted facts established in the summary
28 judgment proceeding before the bankruptcy court.
-17-
1 arbitration; (2) that he never served as a consultant for Singer
2 or the Pebble parties; and (3) that he never released documents
3 designated as confidential. Appellees contended that Debtor was
4 not entitled to summary judgment on either claim in the FAC,
5 because the evidence clearly established both claims, particularly
6 Debtor's intent to injure.
7 In reply, Debtor disputed that issue preclusion applied:
8 (1) the issues in the two proceedings were different; (2) the
9 issues presented here were not actually litigated or necessarily
10 decided in the arbitration; and (3) Debtor was not in privity with
11 FRI.
12 b. "Seven question" briefing for the cross-motions and
hearing
13
14 During the proceedings on the cross-motions, the bankruptcy
15 court posed seven questions to the parties and directed further
16 briefing on them before ruling. Those briefs were filed.
17 A hearing on the seven questions was held on February 19,
18 2014. There, the bankruptcy court raised the issue of Debtor's
19 failure to respond to Appellees' forty-three proffered
20 uncontroverted facts. The court and counsel for the parties then
21 proceeded to review all forty-three proffered facts and determine
22 which ones Debtor disputed. Subject to some amendments made on
23 the record by Debtor's counsel (e.g., reference to acts by Debtor
24 were reworded to read "Debtor on behalf of FRI" and some facts
25 were reworded to say "the arbitrator found" as opposed to any
26 admission by Debtor), the parties agreed and the court determined
27 that forty-two of Appellees' forty-three proffered facts were
28
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1 undisputed.13 (The court later deemed the forty-third fact also
2 undisputed.). Ultimately, the court decided that further briefing
3 was necessary on the cross-motions based on the now uncontroverted
4 facts.
5 c. Briefing for the cross-motions based on joint
uncontroverted facts
6
7 The parties filed their Joint Uncontroverted Facts ("JUF")
8 for the cross-motions as agreed at the February 19 hearing.
9 Curiously, the JUF contained a disclaimer by Debtor stating that
10 he did not agree with any of Appellees' forty-three proffered
11 facts and was reserving his right to dispute them with contrary
12 evidence. The parties then filed four more briefs for the cross-
13 motions based on the JUF. One major point of contention was
14 whether Debtor could or could not be found personally liable for
15 the Arbitration Award debt through either the doctrine of alter-
16 ego or privity, or both, or neither.
17 d. Crawford briefing
18 The bankruptcy court held another hearing on September 23,
19 2014, after the JUF briefs were filed. In response to Debtor's
20 counsel's comment that Debtor was reserving his right to present
21 contrary evidence to the JUF, as stated in the JUF, the court
22 stated that it had already ruled that the facts in the JUF were
23 undisputed at the February 19, 2014 hearing. The court then
24 ordered further briefing based on Crawford v. Gould, 56 F.3d 1162,
25 1168 (9th Cir. 1995), which Debtor argued prevented the court from
26 granting summary judgment to Appellees on their embezzlement claim
27
13
Debtor's 112 proffered uncontroverted facts were deemed
28 undisputed at a later hearing on September 23, 2014.
-19-
1 under § 523(a)(4), when no allegations of embezzlement were
2 pleaded in the FAC.
3 In their opening Crawford brief, Appellees argued that the
4 case was distinguishable, but in any event suggested they could
5 seek leave to amend under Civil Rule 15(a) to add the embezzlement
6 claim. Appellees announced their intent to move to amend the FAC,
7 which could be heard before the final hearing on the cross-motions
8 scheduled in February 2015.
9 2. Appellees' motion for leave to amend the FAC
10 Appellees moved to amend the FAC under Civil Rule 15(a)(2) on
11 December 8, 2014, to add what they contended was the legal theory
12 of embezzlement under § 523(a)(4), which was related to the same
13 facts already pleaded. Appellees attached a copy of the proposed
14 second amended complaint ("SAC").
15 Debtor opposed the motion for leave, arguing that it was
16 impermissible in the Ninth Circuit to amend a complaint while a
17 motion for summary judgment is pending. In addition, Appellees
18 waiting 28 months before seeking leave to amend the FAC for a
19 claim which they knew about constituted undue delay. Debtor
20 argued he would be unduly prejudiced by Appellees amending at this
21 late date; adding new claims would necessitate reopening
22 discovery, which had closed 18 months ago, the filing of an answer
23 and the revision of his Cross-MSJ to address the new grounds of
24 the SAC, all of which would create more expense and delay.
25 In reply, Appellees argued that no "bright-line" rule existed
26 in the Ninth Circuit that no amendments can be made to a complaint
27 once a motion for summary judgment has been filed. Appellees
28 further argued that no undue prejudice existed because the parties
-20-
1 had already litigated the test for embezzlement in their
2 cross-motions, and the claim was first raised before Debtor had
3 requested further time for discovery. In any event, no further
4 discovery was needed because the asserted claim for embezzlement
5 arose from the same exact transaction alleged to have constituted
6 a "defalcation in a fiduciary capacity." In short, Appellees
7 argued that given the nature of the specification Debtor demanded
8 for the embezzlement claim and the extent to which the claim had
9 already been litigated, it was more efficient to give Debtor the
10 more specific pleading he insisted upon and remove that ground for
11 objection or appeal going forward.
12 Determining that under Ninth Circuit authority it had
13 discretion to grant leave to amend even with a summary judgment
14 motion pending, the bankruptcy court granted Appellees' motion to
15 amend their § 523(a)(4) claim for embezzlement. Debtor's counsel
16 indicated that a new answer would be filed within 15 days. To
17 give Debtor time to file anything else he felt necessary based on
18 the SAC, the hearing on the cross-motions was continued to March
19 5, 2015.14 An amended order granting leave to amend was entered on
20 January 14, 2015.
21 3. Debtor's motion to dismiss the SAC
22 Rather than filing an answer, Debtor moved to dismiss the SAC
23 ("MTD"). He contended the amendments made in the SAC exceeded the
24 leave granted by the court. Appellees were allowed to amend only
25 the embezzlement claim, yet they amended the § 523(a)(6) claim as
26
27 14
On March 4, 2015, the bankruptcy court entered a tentative
ruling stating that it would decide the pending MSJ, Cross-MSJ and
28 MTD on the briefs. As a result, the final hearing was vacated.
-21-
1 well. Second, the claims in the SAC were time barred.15 Finally,
2 Debtor argued that Appellees had failed to present sufficient
3 facts to establish embezzlement.
4 Appellees opposed the MTD, contending the allegations in the
5 SAC did not go beyond assertions made in the FAC and in the MSJ.
6 4. More briefing on the cross-motions based on the SAC
7 Meanwhile, the parties filed supplemental briefing for the
8 cross-motions based on the SAC. Debtor made the following
9 arguments: (1) that the MSJ was now moot because it was based on
10 the FAC, which was now moot due to Appellees' filing of the SAC;
11 (2) that the SAC raised issues on which Debtor had not been
12 permitted to take discovery; (3) that Appellees failed to provide
13 sufficient uncontroverted facts to establish either a § 523(a)(4)
14 or (a)(6) claim; (4) that Appellees had failed to show that issue
15 preclusion, particularly privity, applied to the Arbitration
16 Award; (5) that even if the MSJ could proceed and established a
17 viable theory for summary judgment, Appellees’ damages were
18 limited to $50,000, the amount awarded for misappropriation of
19 trade secrets.
20 Appellees argued that while some courts have held that
21 amending a complaint "ordinarily" moots a motion for summary
22 judgment noticed on the prior operative complaint, "ordinarily"
23 does not mean "necessarily." Debtor had not cited any case that
24 provides an absolute bar to a court's consideration of a summary
25 judgment motion after an amended complaint has been filed. As for
26
27 15
The bankruptcy court ruled against Debtor on the statute
of limitations argument. Debtor does not dispute that ruling on
28 appeal.
-22-
1 additional discovery, Debtor had never identified any specific
2 discovery he would need to undertake despite being given several
3 opportunities to do so.
4 After the bankruptcy court took the MSJ, Cross-MSJ and MTD
5 under submission, the parties filed seven additional briefs.
6 5. Bankruptcy court's ruling on the MSJ, Cross-MSJ and MTD
7 The bankruptcy court entered its Memorandum Decision, Order
8 and Judgment respecting the MSJ, Cross-MSJ and MTD on April 1,
9 2016. As a threshold matter, the court ruled that Appellees' MSJ
10 did not become moot because of the filing of the SAC.
11 Next, the court determined that issue preclusion applied to
12 the Arbitration Award, ruling that Debtor was in privity with FRI,
13 and that the arbitrator's findings combined with the
14 uncontroverted facts established the elements for Appellees' claim
15 for embezzlement under § 523(a)(4) and claim for a willful and
16 malicious injury under § 523(a)(6). The court further determined
17 that because damages under the Arbitration Award were based on
18 Debtor's malicious and fraudulent conduct, the amounts awarded to
19 RRC and Hackney representing actual damages, including punitives,
20 but not the doubled amounts due to late payment, were
21 nondischargeable under § 523(a)(4) and (a)(6).
22 Accordingly, because Appellees were entitled to summary
23 judgment as a matter of law, Debtor's Cross-MSJ was denied.
24 Because the SAC pleaded sufficient facts upon which relief for
25 embezzlement could be granted, the court also denied Debtor's MTD.
26 An exception to discharge judgment was entered in favor of RRC for
27 $1,628,977.00 and in favor of Hackney for $2,815,829.51. This
28 timely appeal followed.
-23-
1 II. JURISDICTION
2 The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334
3 and 157(b)(2)(I). We have jurisdiction under 28 U.S.C. § 158.16
4 III. ISSUES
5 1. Did the bankruptcy court abuse its discretion in granting
6 Appellees leave to amend the FAC to include the embezzlement
7 claim?
8 2. Did the bankruptcy court err in determining that issue
9 preclusion was available, and did it abuse its discretion in
10 applying it to the Arbitration Award?
11 3. Did the bankruptcy court err in granting summary judgment to
12 Appellees determining that the debt was excepted from discharge
13 under § 523(a)(4) and (a)(6)?
14 4. Did the bankruptcy court err in denying the Cross-MSJ or the
15 MTD?
16 IV. STANDARDS OF REVIEW
17 We review for abuse of discretion the bankruptcy court’s
18
19 16
Debtor also appeals the bankruptcy court's decision to
deny his Cross-MSJ and his MTD. The Panel lacks jurisdiction to
20 hear appeals from interlocutory orders, such as an order denying a
motion to dismiss an adversary proceeding, Morrison-Knudsen Co.,
21 Inc. v. CHG Int’l, Inc., 811 F.2d 1209, 1214 (9th Cir. 1987), and
an order denying a motion for summary judgment, Comsource Indep.
22 Foodservice Cos., Inc. v. Union Pac. R.R. Co., 102 F.3d 438,
441-42 (9th Cir. 1996). However, because the bankruptcy court
23 decided these matters conclusively in its Memorandum Decision,
Order and Judgment, the interlocutory orders denying the Cross-MSJ
24 and MTD merged into the final appealable order granting the MSJ.
The Panel may review on appeal all earlier interlocutory orders
25 that merge in the final appealed order. Fear v. U.S. Tr.
(In re Ruiz), 541 B.R. 892, 895 n.7 (9th Cir. BAP 2015). See also
26 Am. Ironworks & Erectors Inc. v. N. Am. Constr. Corp., 248 F.3d
892, 897-98 (9th Cir. 2001) ("A necessary corollary to the final
27 judgment rule is that a party may appeal interlocutory orders
after entry of final judgment because those orders merge into that
28 final judgment.").
-24-
1 decision whether to grant leave to amend the complaint. See
2 Zadrozny v. Bank of N.Y. Mellon, 720 F.3d 1163, 1167 (9th Cir.
3 2013); Reddy v. Litton Indus., Inc., 912 F.2d 291, 296 (9th Cir.
4 1990).
5 We review summary judgment determinations de novo. See
6 Fresno Motors, LLC v. Mercedes Benz USA, LLC, 771 F.3d 1119, 1125
7 (9th Cir. 2014); Shahrestani v. Alazzeh (In re Alazzeh), 509 B.R.
8 689, 692-93 (9th Cir. BAP 2014). In reviewing a bankruptcy
9 court's determination of an exception to discharge, we review its
10 findings of fact for clear error and its conclusions of law de
11 novo. Oney v. Weinberg (In re Weinberg), 410 B.R. 19, 28 (9th
12 Cir. BAP 2009).
13 We review de novo the preclusive effect of a judgment;
14 whether issue preclusion is available is a mixed question of law
15 and fact. Stephens v. Bigelow (In re Bigelow), 271 B.R. 178, 183
16 (9th Cir. BAP 2001). If issue preclusion is available, the
17 bankruptcy court's decision to apply it is reviewed for abuse of
18 discretion. Lopez v. Emergency Serv. Restoration, Inc.
19 (In re Lopez), 367 B.R. 99, 104 (9th Cir. BAP 2007). Under that
20 standard, we reverse where the bankruptcy court applied an
21 incorrect legal rule or where its application of the law to the
22 facts was illogical, implausible or without support in inferences
23 that may be drawn from the record. Ahanchian v. Xenon Pictures,
24 Inc., 624 F.3d 1253, 1258 (9th Cir. 2010) (citing United States v.
25 Hinkson, 585 F.3d 1247, 1262 (9th Cir. 2009) (en banc)).
26 V. DISCUSSION
27 Resolution of this appeal requires the Panel to apply several
28 legal standards to the bankruptcy court's decision: summary
-25-
1 judgment, issue preclusion and exception to discharge under
2 § 523(a)(4) and (a)(6). In particular, we must determine if the
3 Arbitration Award is entitled to preclusive effect and, if so,
4 whether any disputed material facts remained which prevented the
5 bankruptcy court from granting summary judgment to Appellees for
6 an exception to discharge under either § 523(a)(4) or (a)(6).
7 A. Even if the bankruptcy court had not granted leave to amend
the FAC to include the embezzlement claim, Appellees were
8 entitled to summary judgment on their § 523(a)(6) claim.
9 Debtor contends the bankruptcy court should have denied leave
10 to amend the FAC because the MSJ and Cross-MSJ had been pending
11 for years and that the liberal amendment rules were not intended
12 to allow a party to circumvent the effects of summary judgment by
13 amending the complaint, citing Acri v. International Association
14 of Machinists & Aerospace Workers, 595 F. Supp. 326, 334 (N.D.
15 Cal. 1984). Debtor also cites Ninth Circuit authority, where the
16 court has expressed that a pending summary judgment motion and
17 completed discovery weigh heavily against allowing leave to amend.
18 M/V Am. Queen v. San Diego Marine Constr. Corp., 708 F.2d 1483,
19 1492 (9th Cir. 1983); Schlacter-Jones v. Gen. Tel. of Cal.,
20 936 F.2d 435, 443 (9th Cir. 1991), overruled on other grounds by
21 Cramer v. Consol. Freightways, Inc., 255 F.3d 683, 692 (9th Cir.
22 2001).
23 We disagree with Debtor. The Ninth Circuit has affirmatively
24 held that amendments for the purpose of adding new claims are
25 clearly permitted by Civil Rule 15 and may be introduced and
26 considered during the pendency of a motion for summary judgment.
27 William Inglis & Sons Baking Co. v. ITT Cont'l Baking Co.,
28 668 F.2d 1014, 1053 n.68 (9th Cir. 1981) (citing 6 Moore's Federal
-26-
1 Practice ¶ 56.10 (2d ed. 1976)). However, we need not reach the
2 merits of the bankruptcy court's decision to grant leave to amend
3 the FAC to include the embezzlement claim, because the FAC
4 supported Appellees' claim for a willful and malicious injury
5 under § 523(a)(6).17 As we are not reaching the merits on the
6 bankruptcy court’s decision to grant leave to amend the FAC, we
7 are also not reaching the merits of its decision respecting the
8 § 523(a)(4) claim, even though sufficient facts and conclusions by
9 the court exist in the record to satisfy the elements of an
10 embezzlement claim.
11
B. The bankruptcy court did not err in determining that issue
12 preclusion was available or abuse its discretion in applying
it to the Arbitration Award.
13
1. Issue preclusion standards
14
The doctrine of issue preclusion applies to dischargeability
15
proceedings under § 523(a). Grogan v. Garner, 498 U.S. 279, 284
16
n.11 (1991). The question of whether California or federal issue
17
preclusion law applied to the Arbitration Award was a subject of
18
much debate because the award, although based entirely on state
19
20
17
We reject Debtor's argument that he was denied the
21 opportunity to file an answer to the SAC. Debtor chose instead to
file the MTD. We also reject Debtor's contention that the
22 bankruptcy court erred in granting the MSJ because the MSJ was
rendered moot by the filing of the SAC, citing Mink v. Suthers,
23 482 F.3d 1244, 1254 (10th Cir. 2007), and other out-of-circuit
cases. The bankruptcy court rejected this argument as "hyper-
24 technical" and "lack[ing] legal support." Mem. Dec. at 10.
Specifically, the court noted that Debtor had not cited, nor had
25 the court found, any binding authority that required, as a per se
rule, the court to treat Appellees' MSJ as moot because of the
26 filing of the SAC. Id. at 9. In any event, once the SAC was
filed, the parties engaged in further briefing and filed no less
27 than nine briefs for the cross-motions based on the SAC. Thus,
Debtor had more than sufficient opportunity to brief his defenses
28 to Appellees' claims, whether based on the FAC or SAC.
-27-
1 law claims, had been affirmed by a federal district court
2 conducted under diversity jurisdiction. Ultimately, the
3 bankruptcy court decided that California law applied; we agree.
4 In California, issue preclusion prevents parties from
5 relitigating issues already decided in prior proceedings. Lucido
6 v. Super. Ct., 51 Cal. 3d 335, 341 (1990). Application of issue
7 preclusion requires that: (1) the issue sought to be precluded
8 must be identical to that decided in the former proceeding;
9 (2) the issue must have been actually litigated in the former
10 proceeding; (3) the issue must have been necessarily decided in
11 the former proceeding; (4) the decision in the former proceeding
12 must be final and on the merits; and (5) the party against whom
13 issue preclusion is sought must be the same as, or in privity
14 with, the party to the former proceeding. Harmon v. Kobrin
15 (In re Harmon), 250 F.3d 1240, 1245 (9th Cir. 2001) (citing
16 Lucido, 51 Cal. 3d at 341). The party asserting preclusion bears
17 the burden of establishing the threshold requirements. Id.
18 Even if all five requirements are satisfied, however,
19 California places an additional limitation on issue preclusion:
20 courts may give preclusive effect to a judgment if it would be
21 fair and consistent with sound public policy to impose issue
22 preclusion in the particular setting. Khaligh v. Hadaegh
23 (In re Khaligh), 338 B.R. 817, 824-25 (9th Cir. BAP 2006). Under
24 this sixth element, when applying issue preclusion based on a
25 confirmed arbitration award, the court must examine "whether the
26 underlying arbitration followed basic elements of adjudicatory
27 procedure and was, thus, 'adjudicatory in nature.'" Id. at 828
28 (quoting Kelly v. Vons Cos., 67 Cal. App. 4th 1329, 1336 (1998)).
-28-
1 Finally, in the case where issue preclusion is applied offensively
2 to preclude a defendant from relitigating an issue the defendant
3 previously litigated and lost, the courts consider whether the
4 party against whom the earlier decision is asserted had a "full
5 and fair" opportunity to litigate the issue. Roos v. Red,
6 130 Cal. App. 4th 870, 879 (2005).
7 2. Analysis
8 Debtor does not challenge that the confirmed Arbitration
9 Award was final and on the merits, or that the issues were
10 necessarily decided in the arbitration proceeding. He takes issue
11 primarily with the bankruptcy court's finding of privity, the
12 identity of issues, whether the issues were actually litigated and
13 whether the court's application of issue preclusion was fair and
14 consistent with public policy.
15 a. Whether the arbitration proceeding was adjudicatory
in nature
16
17 As a threshold matter, the bankruptcy court considered
18 whether the arbitration proceeding was sufficiently adjudicatory
19 in nature for issue preclusion to apply to the Arbitration Award —
20 part of the sixth element under California law. After thoroughly
21 analyzing the issue, which was not raised by the parties, the
22 court determined that the arbitration proceeding was sufficiently
23 adjudicatory in nature to give issue preclusive effect to the
24 arbitrator's findings, assuming the other five elements of issue
25 preclusion were also satisfied.
26 On appeal, Debtor contends the bankruptcy court erred in
27 determining that the arbitration proceeding was sufficiently
28 adjudicatory in nature to give issue preclusive effect to the
-29-
1 arbitrator's findings for a variety of reasons: (1) it was not a
2 judicial-like proceeding; (2) the court failed to consider whether
3 the burdens of proof applied by the arbitrator to the claims in
4 arbitration were identical to standards for § 523; (3) the
5 arbitrator did not apply any legal rules to the facts in making
6 his determinations on the various claims at issue; and (4) the
7 arbitrator made sua sponte determinations of conversion and
8 misappropriation. Except for the last issue, Debtor never raised
9 any of these arguments before the bankruptcy court in his
10 multitude of briefs opposing the MSJ. Therefore, we will not
11 address them on appeal. See Ezra v. Seror (In re Ezra), 537 B.R.
12 924, 932 (9th Cir. BAP 2015) ("Ordinarily, federal appellate
13 courts will not consider issues not properly raised in the trial
14 courts.").
15 As for the arbitrator's "sua sponte" determination that the
16 facts established claims for conversion and misappropriation of
17 trade secrets, those claims were raised by Appellees in their
18 closing briefs in the arbitration and opposed by Debtor in his
19 unsuccessful efforts to vacate the Arbitration Award. But more
20 importantly, Debtor's challenges to the underlying determinations
21 made by the arbitrator, which he makes frequently throughout his
22 appeal brief, come too late and before the wrong court. See
23 Molina v. Seror (In re Molina), 228 B.R. 248, 250 (9th Cir. BAP
24 1998) (confirmation of an arbitration award is a final judgment,
25 even if clearly erroneous, and must be given full faith and credit
26 by federal courts). Accordingly, for this and the reasons set
27 forth in the Memorandum Decision, the bankruptcy court did not err
28 in finding that the arbitration proceeding was sufficiently
-30-
1 adjudicatory in nature for issue preclusion to apply to the
2 Arbitration Award.
3 b. Whether Debtor was in privity with FRI and whether
Debtor had a full and fair opportunity to litigate
4
5 Under California law, in the claim and issue preclusion
6 context, "privity" refers:
7 [T]o a mutual or successive relationship to the same
rights of property, or to such an identification in
8 interest of one person with another as to represent the
same legal rights and, more recently, to a relationship
9 between the party to be estopped and the unsuccessful
party in the prior litigation which is “sufficiently
10 close” so as to justify application of the doctrine of
collateral estoppel. “This requirement of identity of
11 parties or privity is a requirement of due process of
law.” “Due process requires that the nonparty have had an
12 identity or community of interest with, and adequate
representation by, the . . . party in the first action.
13 The circumstances must also have been such that the
nonparty should reasonably have expected to be bound by
14 the prior adjudication . . . .”
15 Citizens for Open Access to Sand and Tide, Inc. v. Seadrift Ass'n,
16 60 Cal. App. 4th 1053, 1069-70 (1998) (internal citations
17 omitted).
18 The bankruptcy court found that Debtor was in privity with
19 FRI. Based on the undisputed facts, the court found that at the
20 time of FRI’s retention under the Consulting Agreement and
21 throughout the arbitration proceeding, Debtor had a sufficiently
22 close relationship with FRI, because he was the president, sole
23 shareholder and sole employee of FRI. In addition, Debtor worked
24 from his home to carry out FRI’s business and offered no evidence
25 in arbitration that he maintained any corporate formalities.
26 Moreover, as a due process matter, the bankruptcy court found that
27 Debtor, who had counsel throughout the proceeding (in fact, his
28 own brother), should reasonably have expected to be bound by the
-31-
1 Arbitration Award. First, Appellees had brought intentional tort
2 claims against FRI. Second, under California law, corporate
3 officers are liable to persons they tortiously injure even though
4 the corporation may be liable, and an officer is not relieved of
5 personal liability for misappropriating property of another merely
6 because he or she did it on behalf of his or her corporate
7 principal.
8 As further support for finding Debtor was in privity with
9 FRI, which somewhat overlaps with the fairness and public policy
10 considerations found in element six because Debtor was a nonparty
11 to the arbitration,18 the bankruptcy court found that Debtor had a
12 full and fair opportunity to litigate in the arbitration. The
13 arbitration proceeding was conducted in a judicial-like adversary
14 proceeding before a retired judge that featured at least seven
15 status conferences, motions in limine, taking of testimony of
16 witnesses (including Debtor) with cross-examination, a briefing
17 schedule for written closing arguments, the submission of
18 deposition transcripts, a twenty-six page final award that
19 included detailed findings of fact and conclusions of law, and
20 citations to witness testimony under oath. Further, nothing in
21 the record suggested that Debtor had no incentive to vigorously
22 litigate the issues in the prior action. To the contrary, it was
23 Debtor, through FRI, who initiated the arbitration proceeding.
24
18
See Nein v. HostPro, Inc., 174 Cal. App. 4th 833, 846
25 (2009) (nonparty should reasonably be expected to be bound if he
had in reality contested the prior action even if he did not make
26 a formal appearance, for example, by controlling it; privity
appertains "against one who did not actually appear in the prior
27 action . . . where the unsuccessful party in the first action
might fairly be treated as acting in a representative capacity for
28 a nonparty").
-32-
1 Moreover, Debtor had an opportunity to defend his interests and
2 had consented to the arbitration through his wholly owned entity,
3 FRI. Finally, the court found that even though Debtor was a
4 non-party as a matter of form, he was a signatory party as a
5 matter of substance; no one besides Debtor and his attorney were
6 present at the arbitration proceeding on FRI’s behalf.
7 Debtor first contends that the bankruptcy court's decision
8 that he was in privity with FRI is wrong because (1) the court
9 relied exclusively on facts derived from the Arbitration Award to
10 find privity, and (2) reliance on the Arbitration Award is
11 insufficient because the arbitrator declined to make any finding
12 of alter-ego, and so Debtor's relationship to FRI was neither
13 litigated nor established in the arbitration. Debtor's blatant
14 misrepresentation of the record is alarming. The bankruptcy court
15 did not rely exclusively on facts derived from the Arbitration
16 Award to find privity (which are final in any event); it relied
17 almost entirely on the uncontroverted facts to determine privity,
18 which were supported by Debtor's deposition, his resume and his
19 bankruptcy schedules. Secondly, Debtor's relationship to FRI did
20 not have to be litigated or established in the arbitration for the
21 bankruptcy court to determine whether privity applied to Debtor in
22 this proceeding.
23 In arguing that the bankruptcy court failed adequately to
24 consider due process, Debtor contends he did not have, and should
25 not have had, any expectation whatsoever to be bound by the
26 Arbitration Award; he was not a party to the Consulting Agreement,
27 and the arbitrator refused to hold him personally liable for the
28 Arbitration Award against FRI without a litigated finding of
-33-
1 alter-ego. The standard is not whether Debtor had any expectation
2 to be bound by the Arbitration Award, but rather whether he had a
3 reasonable expectation to be bound. The bankruptcy court's
4 findings as to Debtor's incentive to litigate on behalf of FRI and
5 his control over that litigation, which we do not find clearly
6 erroneous, belie Debtor's argument. Further, Debtor is
7 sophisticated enough to know that he cannot commit intentional
8 torts and perjury behind the shield of his corporation without
9 encountering adverse consequences. His reasonable expectation to
10 be bound by the Arbitration Award is also evidenced by his
11 immediate bankruptcy filing after the arbitration had concluded
12 and the fact that he listed the Arbitration Award debt in his
13 bankruptcy schedules. Finally, as noted above, a finding of
14 alter-ego was not needed in this proceeding to find Debtor
15 personally liable for the Arbitration Award like it was in the
16 arbitration proceeding.
17 Accordingly, the bankruptcy court did not clearly err in
18 finding that Debtor was in privity with FRI.
19 c. Whether the issues are identical
20 "The 'identical issue' requirement addresses whether
21 'identical factual allegations' are at stake in the two
22 proceedings, not whether the ultimate issues or dispositions are
23 the same." Lucido, 51 Cal. 3d at 342 (citing People v. Sims,
24 32 Cal. 3d 468, 485 (1982)). To determine whether issues in prior
25 and subsequent proceedings are identical for purposes of applying
26 issue preclusion, a court examines whether the requirements for
27 proving the issue at stake in the subsequent proceeding "closely
28 mirror" requirements of proving issues presented in the prior
-34-
1 action. See Nourbakhsh v. Gayden (In re Nourbakhsh), 162 B.R.
2 841, 844 (9th Cir. BAP 1994).
3 Debtor raises a host of arguments here, but his primary
4 complaint is that the issues in the adversary proceeding were not
5 identical to those in the arbitration, and the arbitrator did not
6 make any express findings of Debtor's intent, fraud or malice to
7 provide a basis for the bankruptcy court's determination that the
8 issues in the arbitration were identical to those in the adversary
9 proceeding. We disagree.
10 The bankruptcy court determined that the Arbitration Award
11 included factual findings that were identical to the elements
12 required to establish willful and malicious injury under
13 § 523(a)(6). First, the award and uncontroverted facts
14 established that Debtor made multiple implied threats to Appellees
15 about revealing the confidential documents. The court determined
16 that this factual finding, combined with other undisputed facts
17 proving that Debtor later sold those confidential documents to
18 Singer, demonstrated that Debtor had a "subjective motive to
19 inflict injury" to Appellees, which was identical to the issue of
20 whether Debtor acted willfully. The court further determined that
21 the Debtor's act of misappropriating FRI's former clients'
22 documents, which was the causal event that contributed to the loss
23 of grant funds of $386,300 by RRC and the $1,070.301.68 in lost
24 revenues to Hackney, was identical to the issue of whether
25 Debtor's wrongful and intentional act necessarily caused injury to
26 Appellees.
27 Here, Debtor argues that in determining whether the issue of
28 his willfulness was identical to the issues in the arbitration,
-35-
1 the bankruptcy court pointed only to uncontroverted fact 21, which
2 concerned Debtor's "alleged" email threats about revealing
3 confidential RRC documents and was based exclusively on the self-
4 serving Exhibit X — the email between counsel for Appellees. Not
5 only does Debtor fail to state why this was erroneous if true, it
6 is not true. In determining that Debtor's willfulness was at
7 issue in the arbitration, the bankruptcy court relied not only on
8 uncontroverted fact 21, but also on the other undisputed fact that
9 Debtor later sold the confidential documents to Singer, which
10 confirmed Debtor's subjective intent to injure Appellees in the
11 precise way he did. In addition, Debtor fails to mention his
12 October 1 and October 30 emails to Appellees, wherein he made
13 similar threats to expose his former clients' confidential
14 documents to their opponents.
15 Accordingly, we see no clear error in the bankruptcy court's
16 finding that the issues were identical. While the causes of
17 actions alleged may have been different in the arbitration — not
18 willful and malicious injury — the factual allegations respecting
19 Debtor's conduct were identical.
20 d. Whether the issues were actually litigated
21 An issue is "actually litigated" when the issue was raised,
22 actually submitted for determination, and determined. Baker v.
23 Hull, 191 Cal. App. 3d 221, 226 (1987). The bankruptcy court
24 found that based on the Arbitration Award’s detailed findings of
25 fact as to Debtor's conduct (whether his misappropriation of RRC's
26 confidential documents and subsequent perjury about that conduct
27 constituted embezzlement or inflicted a willful and malicious
28 injury on Appellees) and the other arbitration proceeding
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1 documents presented by the parties, the issues were actually
2 litigated in the prior proceeding.
3 Debtor contends that nothing in the record demonstrates that
4 the required elements for embezzlement or willful and malicious
5 injury were ever considered, applied or actually litigated. In
6 addition, Debtor contends that his intent or fraud was not
7 litigated in the arbitration.
8 The elements of a state law cause of action are rarely
9 identical to those proving a claim under § 523(a)(4) or (a)(6).
10 However, issue preclusion will apply if the findings of fact
11 actually and necessarily litigated in the arbitration meet the
12 bankruptcy-law definitions for those claims. The bankruptcy court
13 determined that the arbitrator's findings met the bankruptcy-law
14 definitions for willful and malicious injury, as stated more fully
15 above, which we conclude is correct. Thus, the bankruptcy court
16 did not err in determining that the identical issues were actually
17 litigated in the prior proceeding.
18 Therefore, because all of the necessary elements for applying
19 issue preclusion to the Arbitration Award were met here, the
20 bankruptcy court did not err in determining that issue preclusion
21 was applicable to the Arbitration Award.
22 C. The bankruptcy court did not err in granting summary judgment
to Appellees for their claim under § 523(a)(6).
23
24 1. Summary judgment standards
25 Summary judgment may be granted by the trial court "if the
26 pleadings, the discovery and disclosure materials on file, and any
27 affidavits show that there is no genuine issue as to any material
28 fact and that the movant is entitled to judgment as a matter of
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1 law." Civil Rule 56(a), as incorporated by Rule 7056; Barboza v.
2 New Form, Inc. (In re Barboza), 545 F.3d 702, 707 (9th Cir. 2008).
3 Summary judgment should not be entered when there are disputes
4 over facts that may affect the outcome of the suit under the
5 governing law. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249
6 (1986). The moving party bears the initial burden of showing that
7 no material factual dispute exists. Celotex Corp. v. Catrett,
8 477 U.S. 317, 322-23 (1986). When ruling on a motion for summary
9 judgment, a court must view all the evidence in the light most
10 favorable to the nonmoving party. Cty. of Tuolumne v. Sonora
11 Cmty. Hosp., 236 F.3d 1148, 1154 (9th Cir. 2001).
12 2. The elements for a willful and malicious injury
under § 523(a)(6) were met.
13
14 Section 523(a)(6) excepts from discharge debts "for willful
15 and malicious injury by the debtor to another entity or to the
16 property of another entity." Both willfulness and maliciousness
17 must be proven in order to apply § 523(a)(6). Ormsby v. First Am.
18 Title Co. of Nev. (In re Ormsby), 591 F.3d 1199, 1206 (9th Cir.
19 2010). "A 'willful' injury is a 'deliberate or intentional
20 injury, not merely a deliberate or intentional act that leads to
21 injury.'" In re Barboza, 545 F.3d at 706 (quoting Kawaauhau v.
22 Geiger, 523 U.S. 57, 61 (1998) (emphasis in original)). The
23 willful injury requirement under § 523(a)(6) "is met only when the
24 debtor has a subjective motive to inflict injury or when the
25 debtor believes that injury is substantially certain to result
26 from his own conduct." In re Ormsby, 591 F.3d at 1206. "A
27 malicious injury involves (1) a wrongful act, (2) done
28 intentionally, (3) which necessarily causes injury, and (4) is
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1 done without just cause or excuse. Malice may be inferred based
2 on the nature of the wrongful act." Id. at 1207.
3 Debtor's primary contention here is that his intent was not
4 litigated or determined in the arbitration, and Appellees had
5 failed to present any evidence of Debtor's intent here or in the
6 arbitration. Apparently, Debtor needs to review the record and
7 the uncontroverted facts.
8 The undisputed facts established that Debtor made various
9 threats implying he would reveal RRC's documents if Appellees
10 refused to settle his fee dispute arising from the Consulting
11 Agreement to his satisfaction. On March 1, 2009, Debtor sold
12 various RRC documents, including donor lists, bank account
13 information and contact lists to Singer. In sum, Debtor
14 threatened RRC with harm in an attempt to coerce RRC to pay him,
15 and then carried through on his threats when Appellees did not
16 cooperate. On these facts, the bankruptcy court determined that
17 Debtor acted willfully within the meaning of § 523(a)(6) because
18 he had a "subjective motive to inflict injury." Mem. Dec. at 28.
19 The undisputed facts showed that: (1) Debtor was provided
20 with the documents during his retention by RRC to enable him to
21 perform his contractual duties; (2) Jameson had specifically
22 discussed with Debtor that the subject documents were highly
23 confidential; (3) RRC designated its membership and donor
24 information as confidential to staff and on its website; (4) FRI
25 had contracted with RRC to keep the documents in confidence and to
26 use the documents only in connection with the services to be
27 provided under the contract; (5) Debtor, as a professional
28 political consultant, considered himself ethically bound to not
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1 reveal confidential information obtained during his professional
2 relationship; and (6) despite all of the foregoing, Debtor sold
3 the confidential documents for $50,000 to Singer, who then used
4 those confidential documents in the APOC Complaint against RRC,
5 Hackney, Gilliam and others. On these facts, the bankruptcy court
6 determined that Debtor's act was wrongful. Mem. Dec. at 29.
7 The undisputed facts showed that Debtor's act of selling the
8 confidential documents to Singer was done intentionally. Debtor
9 made threats implying he would reveal RRC’s information and that
10 if his terms for settlement were not accepted, dire consequences
11 would follow. On these facts, the bankruptcy court found that
12 Debtor's wrongful act was intentional.
13 The undisputed facts further showed that Debtor's act of
14 selling the confidential documents to Singer necessarily caused
15 injury. The arbitrator found an "inescapable inference" that the
16 APOC Complaint, which incorporated the confidential documents and
17 public investigation, was a causal event that contributed to the
18 cancellation of $386,300 in grant funds to RRC and loss of clients
19 and revenues to Hackney, for which the arbitrator awarded
20 $1,070,301.68. In addition, the record reflects that the prior
21 APOC complaint Amodio filed against Appellees was unsuccessful,
22 and that the second one resulted in an investigation of Appellees
23 only because of the confidential RRC documents Debtor sold to
24 Singer. Accordingly, the bankruptcy court found that Debtor's act
25 necessarily caused injury to Appellees.
26 Finally, the bankruptcy court determined that Debtor's act of
27 selling FRI's former clients’ confidential documents to their
28 political opponents for use against them was done without just
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1 cause or excuse. Although Debtor portrayed himself as an
2 altruistic whistle blower in the arbitration, the arbitrator found
3 that Debtor and his attorney brother Allan should have known that
4 sharing documents with counsel for clients adverse to FRI's former
5 clients was not a report to the proper authorities, and certainly
6 not for a fee of $50,000 (although Debtor wanted $450,000). The
7 bankruptcy court also found that Debtor's perjury regarding his
8 act of selling the documents evidenced that he himself did not
9 believe he had a just cause or excuse for doing so.
10 In short, Debtor sold his former clients’ confidential
11 materials to their Pebble Mine opponents, and he did so to help
12 the Pebble Mine parties in their efforts to take out Appellees in
13 their role as the organized opposition to the Pebble Mine. Debtor
14 articulated that plan both in written communications to Appellees
15 and to the Alaska attorneys representing the Pebble parties,
16 thereby documenting his intent to injure Appellees in precisely
17 that manner. He then repeatedly testified, falsely, that he had
18 never transferred those materials at all. Clearly, the undisputed
19 facts show that Debtor inflicted a willful and malicious injury on
20 Appellees.
21 Accordingly, with no genuine issues of material fact in
22 dispute and the elements satisfied, the bankruptcy court did not
23 err in granting summary judgment to Appellees on their § 523(a)(6)
24 claim. We now consider whether the damages awarded were
25 appropriate.
26 3. The bankruptcy court did not err in determining that all
damages awarded to Appellees in the Arbitration Award
27 were nondischargeable.
28 The bankruptcy court determined that all of the damages the
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1 arbitrator awarded to RRC and Hackney, including punitive damages,
2 were nondischargeable under § 523(a)(4) and (a)(6), because they
3 flowed from Debtor's malicious and fraudulent conduct, which had
4 been actually litigated and was necessary to the Arbitration
5 Award.
6 To recap, the arbitrator awarded RRC: (1) the $50,000 FRI
7 received for its misappropriation of RRC's confidential documents;
8 (2) $3,169 RRC spent in attorney's fees to redact documents in
9 trying to salvage confidentiality after they were delivered to
10 APOC; (3) $386,330 for a lost grant caused by the impact of the
11 APOC Complaint and public investigation; and (4) $156,804 for
12 attorney's fees and $32,704 for expenses incurred in the
13 arbitration as a prevailing party on the Consulting Agreement.
14 Hackney was awarded: (1) $1,011,681.68 for lost clients and
15 revenues "resulting from the APOC Complaint with its FRI
16 documents" and $56,120.30 for the attorney's fees incurred in
17 responding to the APOC investigation; and (2) $675,758.76 for
18 attorney's fees and $69,768.77 for expenses incurred in the
19 arbitration as a prevailing party on the Consulting Agreement.
20 It is clear by the arbitrator's findings that the course of
21 misconduct by Debtor — his selling of RRC confidential documents
22 which resulted in the APOC Complaint and investigation and his
23 lying about his actions — was the direct cause of Appellees'
24 actual damages. Thus, these damages are nondischargeable. Cohen
25 v. de la Cruz, 523 U.S. 213, 220 (1998). Likewise, the attorney's
26 fees and expenses awarded to RRC and Hackney for the arbitration
27 proceeding, which were awardable based on the Consulting
28
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1 Agreement, are part of the nondischargeable debt.19 Id. at 223.
2 Cohen stands for the general proposition that any liability duly
3 imposed as a direct, but-for result of the defendant's
4 nondischargeable conduct constitutes a nondischargeable debt,
5 including attorney's fees and costs. See also Suarez v. Barrett
6 (In re Suarez), 400 B.R. 732, 738-39 (9th Cir. BAP 2009) (applying
7 Cohen to affirm bankruptcy court's determination under § 523(a)(6)
8 that attorney's fees and costs were nondischargeable, even though
9 no compensatory damages were awarded); Roussos v. Michaelides
10 (In re Roussos), 251 B.R. 86, 94 (9th Cir. BAP 2000) (attorney's
11 fees and costs, if awardable under state law, are also part of the
12 nondischargeable debt).
13 The arbitrator also awarded RRC and Hackney each $1,000,000
14 for punitive damages, "arising from the tort causes of action, and
15 perjury of FRI/Kaplan." For an award of punitive damages in
16 California under Cal. Civ. Code § 3294(a),20 clear and convincing
17 evidence of either malice, oppression or fraud must be presented.
18 Debtor contends the Arbitration Award is devoid of any express
19 findings of malice, oppression or fraud, and none of these were
20
21
19
The attorney's fees clause in the Consulting Agreement is
22 very broad, to include an award of fees and costs to the
prevailing party not only for proceedings to enforce or interpret
23 the contract, but also "to resolve any other dispute or
controversy between the Parties[.]"
24
20
Cal. Civ. Code § 3294(a) provides:
25
In an action for the breach of an obligation not arising from
26 contract, where it is proven by clear and convincing evidence
that the defendant has been guilty of oppression, fraud, or
27 malice, the plaintiff, in addition to the actual damages, may
recover damages for the sake of example and by way of
28 punishing the defendant.
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1 elements of any claims determined in the award. We have held that
2 an award of punitive damages, even absent specific findings of
3 malice or oppression or fraud, is entitled to preclusive effect in
4 a nondischargeability action. See In re Roussos, 251 B.R. at 94;
5 In re Molina, 228 B.R. at 250-51 (if legal test for award of
6 punitive damages for malice, oppression or fraud is the same legal
7 test as would be applied under § 523(a)(6), then punitive damages
8 are given preclusive effect). Cal. Civ. Code § 3294(c) defines
9 "malice" as "conduct which is intended by the defendant to cause
10 injury to the plaintiff . . . ." This statutory definition of
11 malice, which must be proven by the more onerous clear and
12 convincing evidence standard, comports with the "willful and
13 malicious injury" elements of § 523(a)(6), which need be proven
14 only by a preponderance of the evidence, and which the bankruptcy
15 court correctly found were established here. Thus, the punitive
16 damages awarded to RRC and Hackney are nondischargeable under
17 § 523(a)(6).
18 Accordingly, the bankruptcy court did not err in giving
19 preclusive effect to the Arbitration Award damages and determining
20 that all were nondischargeable.
21 D. The bankruptcy court did not err in denying the Cross-MSJ or
the MTD.
22
23 Because we conclude that Appellees were entitled to summary
24 judgment as a matter of law on their § 523(a)(6) claim for a
25 willful and malicious injury, we conclude that Debtor was not
26 entitled to summary judgment. Alternatively, even if the
27 bankruptcy court abused its discretion in allowing Appellees to
28 amend the FAC, which we conclude it did not, their claim under
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1 § 523(a)(6) would stand even with the FAC as the operative
2 complaint. Thus, it would still have been proper for the court to
3 deny Debtor's Cross-MSJ on that claim. Along this same vein,
4 because the SAC alleged a plausible and timely claim for exception
5 to discharge under § 523(a)(6), the court did not err in denying
6 the MTD.
7 VI. CONCLUSION
8 For the foregoing reasons, we AFFIRM the judgment entered
9 under § 523(a)(6), and conclude that given this affirmance, it is
10 unnecessary to reach the merits on the other issues.
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