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In re Plyam

United States Bankruptcy Appellate Panel of the Ninth Circuit

May 5, 2015

In re: YURI PLYAM and NATALIA PLYAM, Debtors.
v.
PRECISION DEVELOPMENT, LLC, Appellee. YURI PLYAM; NATALIA PLYAM, Appellants, Bk. No. 2:13-bk-15020-BB Adv. No. 2:13-ap-01558-BB

Argued and Submitted on January 22, 2015 at Pasadena, California

Appeal from the United States Bankruptcy Court for the Central District of California Honorable Sheri Bluebond, Chief Bankruptcy Judge, Presiding .

Dennis P. Riley of Mesisca Riley & Kreitenberg, LLP argued for appellants

Yuri Plyam and Natalia Plyam; Leo Daniel Plotkin of Levy, Small & Lallas argued for appellee Precision Development, LLC.

Before: TAYLOR, DUNN, and PAPPAS, Bankruptcy Judges.

OPINION

TAYLOR, Bankruptcy Judge

Debtors Yuri Plyam and Natalia Plyam appeal from the bankruptcy court's summary judgment excepting a state court judgment from discharge pursuant to § 523(a)(4)[1] and (a)(6), as to Yuri, [2] and pursuant to § 523(a)(6), as to Natalia.

The bankruptcy court granted summary judgment based on issue preclusion and the state court judgment's award of actual and punitive damages for breach of fiduciary duty. We determine that the bankruptcy court erred as the state court judgment did not include a finding equivalent to willfulness as required for § 523(a)(6) nondischargeability, notwithstanding its award of punitive damages under California Civil Code § 3294. The state court judgment also failed to establish the existence of an express or technical trust as required for § 523(a)(4) nondischargeability.

As a result, we VACATE the judgment and REMAND to the bankruptcy court for further proceedings consistent with this opinion.

BACKGROUND

In 2005, Yuri formed Precision Development, LLC, a Nevada limited liability company ("Precision"), for the purpose of developing residential real property in Southern California. Initially, he was its sole member and manager.

Precision obtained significant investment capital from Clare Bronfman and Sara Bronfman (jointly, the "Bronfmans"). According to the Bronfmans, they eventually invested approximately $26.3 million.

Between 2005 and 2007, Precision acquired numerous parcels of real property. Yuri's separate business entity oversaw their development; it did not go well. Precision's funds ran out in 2007 before it successfully completed development of or sold any of the properties.

Precision's operating agreement provided that it would hold title to all real property acquired with Precision funds. The Debtors, however, caused Precision to deed them three parcels of real property (the "Transferred Properties"). And once they acquired title, the Debtors alleged ownership of the Transferred Properties in loan documents and used the Transferred Properties as collateral for construction loans. The Debtors later also transferred a fourth property from Yuri's business entity to Precision and then from Precision to their family trust.

Eventually, the Bronfmans discovered Precision's dire state; few of its developments were close to completion. Indeed, some remained vacant land. The only projects with significant development were the Transferred Properties. And, the Debtors lost even the Transferred Properties to foreclosure by their construction lender.

The Bronfmans attempted to remedy the situation. They subsequently obtained control of Precision and caused it to sue the Debtors in California state court. The complaint alleged that the Debtors misused Precision funds and diverted its assets.

Following an 18-day trial, a jury entered a special verdict finding that "Yuri Plyam or Natasha [sic] Plyam" breached their fiduciary duties to Precision and that "Yuri or Natasha [sic] Plyam" acted with malice, oppression, or fraud. The jury awarded $10, 100, 000 in general damages and $200, 000 in punitive damages (the "State Court Judgment"). The Debtors appealed to the California court of appeal, which affirmed the State Court Judgment. See Precision Dev., LLC v. Plyam, 2013 WL 5801759 (Cal.Ct.App. Oct. 29, 2013). The State Court Judgment is now final.

The Debtors responded with a chapter 7 bankruptcy, and Precision then commenced an adversary proceeding seeking to except the State Court Judgment from discharge pursuant to § 523(a)(4) (for fraud or defalcation) and (a)(6).[3] It subsequently moved for summary judgment or, in the alternative, partial summary judgment. It based its motion solely on the State Court Judgment's alleged issue preclusive effect.

The Debtors opposed. They defended against the § 523(a)(4) claim by arguing that Natalia never owed a fiduciary duty to Precision and that Yuri was not a fiduciary during the time of the alleged acts of defalcation. On the § 523(a)(6) claim, they generally contested the sufficiency of evidence and argued, in particular, that triable issues of fact existed as to the justification or excuse for their actions in relation to the Transferred Properties and the later transfer of the fourth property to their family trust. The Debtors also argued that the State Court Judgment's punitive damages award did not satisfy the elements for § 523(a)(6) nondischargeability.

Following arguments at the hearing, the bankruptcy court relied on issue preclusion and granted summary judgment in part and denied it in part. It determined that Natalia did not owe a fiduciary duty; thus, it granted summary judgment against her only under § 523(a)(6). As to Yuri, it granted summary judgment on both the § 523(a)(4) and (a)(6) claims.

The bankruptcy court subsequently entered a judgment excepting the State Court Judgment, in the total amount of $10, 497, 843.24, from discharge. The Debtors timely appealed.

JURISDICTION

The bankruptcy court had jurisdiction pursuant to 28 U.S.C. §§ 1334 and 157(b)(2)(I). We have jurisdiction under 28 U.S.C. § 158.

ISSUE

Did the bankruptcy court err in granting summary judgment to Precision by giving issue preclusive effect to the State Court Judgment as to the § 523(a)(4) and (a)(6) nondischargeability claims?

STANDARDS OF REVIEW

We review de novo the bankruptcy court's decisions to grant summary judgment and to except a debt from discharge under § 523(a)(4) and (a)(6). See Boyajian v. New Falls Corp. (In re Boyajian), 564 F.3d 1088, 1090 (9th Cir. 2009); Black v. Bonnie Springs Family Ltd. P'ship (In re Black), 487 B.R. 202, 210 (9th Cir. BAP 2013); see also Carrillo v. Su (In re Su), 290 F.3d 1140, 1142 (9th Cir. 2002) (nondischargeability presents mixed issues of law and fact and is reviewed de novo).

We also review de novo the bankruptcy court's determination that issue preclusion was available. In re Black, 487 B.R. at 210. If issue preclusion was available, we then review the bankruptcy court's application of issue preclusion for an abuse of discretion. Id. A bankruptcy court abuses its discretion if it applies the wrong legal standard, misapplies the correct legal standard, or if its factual findings are illogical, implausible, or without support in inferences that may be drawn from the facts in the record. See TrafficSchool.com, Inc. v. Edriver Inc., 653 F.3d 820, 832 (9th Cir. 2011) (citing United States v. Hinkson, 585 F.3d 1247, 1262 (9th Cir. 2009) (en banc)).

DISCUSSION

Summary judgment is appropriate where the movant shows that there is no genuine dispute of material fact and the movant is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(a) (applicable in adversary proceedings under Rule 7056). The bankruptcy court must view the evidence in the light most favorable to the non-moving party when determining whether genuine disputes of material fact exist and whether the movant is entitled to judgment as a matter of law. See Fresno Motors, LLC v. Mercedes Benz USA, LLC, 771 F.3d 1119, 1125 (9th Cir. 2014). And, it must draw all justifiable inferences in favor of the non-moving party. See id. (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986)).

A bankruptcy court may rely on the issue preclusive effect of an existing state court judgment as the basis for granting summary judgment. See Khaligh v. Hadaegh (In re Khaligh), 338 B.R. 817, 831-32 (9th Cir. BAP 2006). In so doing, the bankruptcy court must apply the forum state's law of issue preclusion. Harmon v. Kobrin (In re Harmon), 250 F.3d 1240, 1245 (9th Cir. 2001); see also 28 U.S.C. § 1738 (federal courts must give "full faith and credit" to state court judgments). Thus, we apply California preclusion law.

In California, application of issue preclusion requires that: (1) the issue sought to be precluded from relitigation is identical to that decided in a former proceeding; (2) the issue was actually litigated in the former proceeding; (3) the issue was necessarily decided in the former proceeding; (4) the decision in the former proceeding is final and on the merits; and (5) the party against whom preclusion is sought was the same as, or in privity with, the party to the former proceeding. Lucido v. Super. Ct., 51 Cal.3d 335, 341 (1990). California further places an additional limitation on issue preclusion: courts may give preclusive effect to a judgment "only if application of preclusion furthers the public policies underlying the doctrine." In re Harmon, 250 F.3d at 1245 (citing Lucido, 51 Cal.3d at 342-43); see also In re Khaligh, 338 B.R. at 824-25.

The party asserting preclusion bears the burden of establishing the threshold requirements. In re Harmon, 250 F.3d at 1245. This means providing "a record sufficient to reveal the controlling facts and pinpoint the exact issues litigated in the prior action." Kelly v. Okoye (In re Kelly), 182 B.R. 255, 258 (9th Cir. BAP 1995), aff'd, 100 F.3d 110 (9th Cir. 1996). Ultimately, "[a]ny reasonable doubt as to ...


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