In re: Jan Mary Wallace ( 2016 )

FILED
OCT 14 2016
1 NOT FOR PUBLICATION
SUSAN M. SPRAUL, CLERK
U.S. BKCY. APP. PANEL
2 OF THE NINTH CIRCUIT
3 UNITED STATES BANKRUPTCY APPELLATE PANEL
4 OF THE NINTH CIRCUIT
5 In re ) BAP No. AZ-15-1319-LJuF
)
6 JAN MARY WALLACE, ) Bk. No. 2:13-bk-17237-PS
)
7 Debtor. ) Adv. No. 2:14-ap-00332-PS
)
8 )
JAN MARY WALLACE, )
9 )
Appellant, )
10 ) MEMORANDUM*
v. )
11 )
THOMAS & WONG GENERAL )
12 CONTRACTORS, INC., )
)
13 Appellee. )
)
14
Argued and Submitted on September 23, 2016
15 at Phoenix, Arizona
16 Filed - October 14, 2016
17 Appeal from the United States Bankruptcy Court
for the District of Arizona
18
Honorable Paul Sala, Bankruptcy Judge, Presiding
19 ________________________
20 Appearances: Ryan Jefferson Works of McDonald Carano Wilson LLP
argued for Appellant Jan Wallace; Bryan Francis
21 Murphy of Burch & Cracchiolo, P.A. argued for
Appellee Thomas & Wong General Contractors, Inc.
22 ________________________
23 Before: LAFFERTY, JURY, and FARIS, Bankruptcy Judges.
24
25
26 *
This disposition is not appropriate for publication.
27 Although it may be cited for whatever persuasive value it may
have (see Fed. R. App. P. 32.1), it has no precedential value.
28 See 9th Cir. BAP Rule 8024-1.
1 I. INTRODUCTION
2 Debtor Jan Wallace arranged a $1.5 million loan from
3 Appellee Thomas & Wong General Contractors, Inc. (“Thomas &
4 Wong”) to BDV Investments, LLC (“BDV”). Although Wallace agreed
5 to act as Thomas & Wong’s agent in the transaction, she did not
6 disclose to Thomas & Wong several material facts, including that
7 she had a financial interest in seeing that the transaction was
8 consummated; that one of the guarantors for the loan had an
9 outstanding $1.9 million judgment against him and was thus not a
10 good credit risk; and that she had authorized the release of
11 certain loan proceeds without Thomas & Wong’s approval. Wallace
12 also misled Thomas & Wong concerning whether she had personally
13 inspected the primary collateral for the loan.
14 After BDV defaulted on the loan, Thomas & Wong was able to
15 collect a portion of the debt by realizing on its collateral, but
16 much of the collateral turned out to be worthless, and much of
17 the debt remained unpaid. Thereafter, Thomas & Wong sued BDV and
18 affiliated parties and obtained default judgments but was unable
19 to collect anything from them. Thomas & Wong then sued Wallace
20 in state court for breach of fiduciary duty. The state court
21 ultimately found in favor of Thomas & Wong, entering a judgment
22 against Wallace of $1,306,144 plus interest and costs.
23 After Wallace filed the instant bankruptcy, Thomas & Wong
24 sought a determination from the bankruptcy court that the state
25 court judgment against Wallace was nondischargeable under
26
27
28
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1 §§ 523(a)(2), (4), and (6).1
2 Although this appeal presents unusual facts and convoluted
3 relationships, the primary issues presented are fairly
4 straightforward: did Wallace fail to disclose to Thomas & Wong
5 material facts that she had a duty to disclose, and was her
6 failure the proximate cause of damage to Thomas & Wong? After a
7 three-day trial, in which the bankruptcy court found most of
8 Wallace’s testimony not credible due to her selective memory, the
9 bankruptcy court found the entirety of the state court judgment
10 to be nondischargeable under § 523(a)(2)(A) and partially
11 nondischargeable under § 523(a)(4).
12 On appeal, Wallace challenges the bankruptcy court’s factual
13 findings, including that Wallace was Thomas & Wong’s agent, that
14 her failures to disclose were material, that she intended to
15 deceive Thomas & Wong, and that her actions were the proximate
16 cause of damage to Thomas & Wong. Wallace also challenges the
17 bankruptcy court’s legal conclusion that a fiduciary relationship
18 existed for purposes of § 523(a)(4). In addition, Wallace
19 questions Thomas & Wong’s standing, and argues that the
20 bankruptcy court erred in finding that the § 523(a)(2)(A) claim
21 was not time-barred.
22 Finding no error of fact or law in the bankruptcy court’s
23 decision, we AFFIRM.
24
25
1
26 Unless otherwise indicated, all chapter and section
references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532.
27 “Rule” references are to the Federal Rules of Bankruptcy
Procedure, and “Civil Rule” references are to the Federal Rules
28 of Civil Procedure.
-3-
1 II. FACTUAL BACKGROUND
2 The background facts necessary to understand this case are
3 lengthy and discursive, reflecting a complex transaction
4 involving numerous entities, some of which were only peripherally
5 involved in the central events. Because this is a failure to
6 disclose case, it is necessary to examine facts on the penumbra
7 to give context and establish materiality. We therefore explain
8 the background of the main protagonists and their relationships
9 before delving into the chronology of events.
10 A. Jan Wallace
11 Debtor Jan Wallace was a self-described venture capitalist
12 who assisted in funding and management of start-up companies.
13 Wallace and Kelly Black formed an LLC called Wallace Black, LLC
14 in 2005, but the two had done business together since 1998.
15 B. John Beardmore and his entities
16 Black introduced Wallace to John Beardmore in December 2002.
17 Beardmore has several relevant roles and relationships in this
18 matter. He was the principal of BDV; he also owned a company
19 called Beardmore Investments, Inc. Beardmore was negotiating
20 with a private lender, Dumaine Consulting, to obtain financing.
21 Although the ostensible purpose of the financing was to fund
22 BDV’s check cashing business, Beardmore had an immediate need for
23 cash to retire debts he owed to Lake Bank. Beardmore owned an
24 interest in the entity that owned Lake Bank, and the outstanding
25 debts were causing regulatory problems. Wallace was brought in
26 to advise Black and another individual regarding proposed bridge
27 financing for BDV. In return, Black promised Wallace a
28 commission of one percent of the funds raised through such a
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1 facility.
2 During a December 2002 meeting that included Wallace,
3 Beardmore, Black, and two other individuals, Wallace learned,
4 among other things, that Beardmore was a judgment debtor on a
5 $1.9 million judgment and that he needed funding to resolve loan
6 issues with Lake Bank to ensure that it was in compliance with
7 its banking regulations. At or around the same time, Wallace
8 also contracted with Beardmore to sell MW Asia, LLC, a publically
9 traded shell company, to Beardmore Investments, Inc. for
10 $250,000. A $50,000 deposit was to be paid by January 31, 2003,
11 and Wallace was to receive an interest in a publicly traded
12 company after Beardmore merged an operating company into the
13 shell. Although the MW Asia transaction was a separate
14 transaction from the bridge loan, the funds for the $50,000
15 deposit were ultimately paid to Wallace from proceeds of the
16 bridge loan that is the subject of this appeal.
17 C. Edward Tarapaski
18 Edward Tarapaski was employed by Thomas & Wong, a
19 construction company headquartered in Brunei. Tarapaski met
20 Wallace in February 2003 during a visit to Arizona. Because of
21 problems with his hotel arrangements, Tarapaski stayed in
22 Wallace’s guest house for some period of time. While there,
23 Tarapaski learned that Wallace was working with Beardmore on
24 obtaining a bridge loan for Beardmore’s company.
25 D. Negotiations regarding the bridge loan
26 Tarapaski was interested in learning more about the
27 transaction and potentially arranging a bridge loan from Thomas &
28 Wong to BDV. Wallace introduced Tarapaski to Beardmore in a
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1 meeting at the Marriott Shadows Mountain Resort. At the meeting,
2 Tarapaski learned that the $1.5 million loan was necessary to pay
3 off a loan that Beardmore had taken from Lake Bank so that Lake
4 Bank would be in compliance with banking regulations. Tarapaski
5 was advised that the collateral for the 60-day loan would be gold
6 doré, an unrefined gold product. Tarapaski advised Beardmore
7 that he needed assurances about the value of the gold doré and
8 that he wanted possession of the gold to have it tested before
9 making a loan. Beardmore indicated that possession would not be
10 possible, so Tarapaski advised Beardmore and Wallace that there
11 was no basis to move forward.
12 Two or three days later, Tarapaski met with Beardmore and
13 William Cortegiano, a vice president of BDV, at Houston’s
14 Restaurant. Wallace did not attend that meeting. At the
15 Houston’s meeting, Tarapaski was offered as additional security
16 the collateral that Lake Bank held for the loan to Beardmore–-a
17 second mortgage on Beardmore’s Phoenix home, an interest in a
18 stock fund, an interest in shares of stock in a financial
19 company, a car, and a boat. Tarapaski then indicated an interest
20 in moving forward with the transaction.
21 E. Wallace’s role in the bridge loan transaction
22 After the Houston’s meeting, Wallace advised Tarapaski of
23 her experience and expertise in business transactions and that
24 she would assist him in putting the transaction together.
25 Tarapaski and Wallace prepared a checklist of items required
26 before approval of the loan. The loan checklist included due
27 diligence items, including the viewing of the gold doré,
28 obtaining safekeeping receipts from a bonded warehouse in favor
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1 of Thomas & Wong to prevent movement of the gold doré, securing
2 an insurance certificate for the gold, confirmation of other
3 items of collateral, and appointing Wallace to the board of
4 directors of BDV to protect Thomas & Wong’s interest with respect
5 to the loan transaction. Thereafter Wallace attended numerous
6 meetings and took numerous actions as an advisor to Tarapaski and
7 ultimately acted as an agent for Thomas & Wong, in certain
8 specific instances, described below.
9 F. Loan terms and documentation
10 On March 1, 2003, Wallace and Tarapaski met with Gary Blume,
11 a lawyer with whom Wallace had worked on other transactions. At
12 that meeting Tarapaski, Wallace, and Blume discussed the
13 transaction, including a February 26, 2003 opinion letter from
14 the law firm of DeConcini McDonald Yetwin & Lacy (a copy of which
15 Wallace had obtained), regarding the gold doré. That letter was
16 addressed to A-MARK Precious Metals, Inc. and was in reference to
17 a proposed $35 million loan to BDV. The letter stated the law
18 firm’s opinion that BDV held unencumbered title to six containers
19 of precious metal doré, which were warehoused in Lordsburg, New
20 Mexico.
21 On March 6, 2003, another meeting was held at Blume’s office
22 with Tarapaski, Wallace, Beardmore, and Blume in attendance. The
23 parties discussed the transaction and the Lake Bank security that
24 Thomas & Wong would obtain. They agreed that the loan would be
25 for $1.5 million with a flat interest rate of 25 percent, due in
26 60 days. They also discussed that Thomas & Wong would obtain an
27 interest in an office condominium in Minneapolis, and that
28 Wallace would join the board of BDV to protect Thomas & Wong’s
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1 interest. Blume suggested that a promissory note was the best
2 way to protect Thomas & Wong, and Blume was charged with
3 preparing the note. As explained below, the “note” he prepared
4 was not a straight promissory note, but was more akin to a loan
5 agreement.
6 G. The promissory notes
7 On March 8, 2003, Wallace, Tarapaski, and Beardmore again
8 met with Blume at his office to pick up the $1.5 million note for
9 execution. The note was signed by the obligor and the guarantors
10 before a notary public at Bank of America later that day.
11 The note contained various covenants and requirements beyond
12 a mere promise to pay. The covenants provided that the loan
13 proceeds would be used to purchase the secured position of Lake
14 Bank in the above-described collateral and to purchase the office
15 condominium. The note contained a grant of a security interest
16 in gold doré and referenced an insurance certificate that would
17 name Thomas & Wong as loss payee. It also referenced the
18 Articles of Incorporation of BDV and an opinion letter of
19 counsel, all of which were to be attached to the note.2 However,
20
21 2
The note provides, in relevant part:
22
BDV represents to the Lender that the proceeds
23 from this loan will be used by BDV to purchase the
position of The Lake Bank, N.A. of Two Harbors,
24 Minnesota and the purchase of certain real property
describe [sic] as 660 North Second Street, Minneapolis,
25 Minnesota under the terms of a Promissory Note attached
26 as Attachment A, which assets collateralizing the
current loan at The Lake Bank will be assigned to BDV.
27
BDV hereby grants to the Lender, and this
28 (continued...)
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1 the exhibits referenced in the note were not attached when Blume
2 gave the note to Tarapaski, Wallace and Beardmore. The note also
3 required BDV to provide copies of the sale documents for the
4 office condo and a safekeeping certificate for the gold doré
5 before any funds would be disbursed. However, no safekeeping
6 certificate was ever provided to Thomas & Wong, and no opinion
7 letter appears to have been prepared at the time the note was
8 executed.3
9 The $1.5 million note also contained the personal guarantees
10
2
11 (...continued)
Promissory Note is in all things secured by precious
12 metals described on the attached Exhibit A. Attached
hereto as Exhibit B is the insurance policy and
13 certificate of insurance (attached in their entirety),
insuring the collateral described in Exhibit A and BDV
14 shall cause the Lender to be named as a loss payee on
15 such policy. Attached as Exhibit C to this Promissory
Note are the Articles of Incorporation and Certificate
16 of Incorporation of BDV. BDV represents to the Lender
that it continues in good standing as a corporation
17 under the laws of the State of Minnesota and will
during all relevant times to the completion of the
18
obligations under this Promissory Note. In addition,
19 this Promissory Note is executed in reliance on the
attached Opinion Letter of Counsel (Attachment B).
20
The safekeeping receipt (for the Collateral) shall be
21 in the name of Lender which shall be provided prior to
22 delivery of funds. BDV shall take whatever steps are
necessary to insure this transfer is complete. BDV
23 shall provide copies of its Articles of Incorporation,
all amendment [sic] thereto, current Bylaws and all
24 minutes of shareholder and board meetings. BDV shall
also provide copies of all sale documents for the sale
25 of the real property at 660 North Second Street,
26 Minneapolis, Minnesota.
3
27 The note does not specify the subject matter of the
opinion letter, and Wallace testified at trial that she could not
28 remember the letter’s purpose.
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1 of Beardmore and Cortegiano.
2 A separate $275,000 note in favor of Thomas & Wong was also
3 executed by BDV. This second note is puzzling in that the
4 $275,000 to purchase the office condo was part of the obligation
5 represented by the $1.5 million note, so its purpose is unclear.
6 Additionally, the creator of the note was unknown. Blume
7 testified that he did not create the $275,000 note although it
8 looked like his form. The $275,000 note contained a provision
9 that BDV’s interest in real property would be automatically
10 transferred to Thomas & Wong if the note was not paid within
11 60 days. The note also provided that L Trust LLC (“L Trust”), a
12 Minnesota limited liability company – the owner of the office
13 condo – consents to the transfer of real property in the event of
14 a default. Unlike the $1.5 million note that was signed on
15 March 8, the $275,000 note did not provide for any guarantees by
16 Beardmore or Cortegiano and did not provide a notary block for
17 any signature. Wallace contends that the $275,000 note was
18 “incorporated” into the $1.5 million note. Although the
19 $1.5 million note referenced an attached promissory note
20 containing the terms under which the office condo was to be
21 purchased, no such note was attached, and Tarapaski never saw the
22 $275,000 note during this time period.
23 After the execution of the $1.5 million promissory note,
24 Tarapaski and Wallace participated in a series of meetings and
25 telephone conversations about completing the remaining items
26 necessary to satisfy the conditions in the note and on the
27 checklist. As explained below, some of those conditions were
28 never satisfied.
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1 H. The Cane O’Neill account
2 After the March 1, 2003, meeting with Tarapaski and Blume,
3 Wallace set up an account in her name at Cane O’Neill, a Nevada
4 law firm with which Wallace had a relationship, to hold in trust
5 the funds to be wired from Thomas & Wong. Wallace was the client
6 to whom Cane O’Neill associated the account and the person to
7 whom Cane O’Neill looked for instructions. Wallace agreed to act
8 as Thomas & Wong’s agent with regard to releasing the funds from
9 the Cane O’Neill trust account; she was therefore not authorized
10 to release any of those funds without Thomas & Wong’s approval.
11 On March 5, 2003, Thomas & Wong wired $549,980 into the Cane
12 O’Neill account; two days later, it wired another $249,980 into
13 the account, for a total of $799,960.
14 I. Wallace joins BDV’s board of directors.
15 On March 6, 2003, BDV held a board meeting at The Villages
16 Restaurant in Scottsdale, which was attended by Beardmore,
17 Cortegiano, Wallace and Victor Lee Wark, another BDV board
18 member. Tarapaski did not attend. At this board meeting Wallace
19 was appointed to the BDV board for the purpose of protecting
20 Thomas & Wong’s interest in the loan transaction, which was
21 understood by Tarapaski, Beardmore, and Cortegiano. Thereafter
22 Wallace participated in the meeting as a board member.
23 J. BDV provides opinion letter regarding primary loan.
24 On March 9, 2003, Tarapaski met with Wallace, Beardmore, and
25 Clark Griffith, the attorney for BDV, to request an opinion
26 letter from Griffith that BDV’s multimillion dollar loan from a
27 company named Dumaine Consulting was on track. Tarapaski
28 understood that the funds from the Dumaine transaction would be
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1 used by BDV to pay back Thomas & Wong. On March 11, 2003,
2 Griffith sent correspondence to Tarapaski and Wallace confirming
3 that the Dumaine transaction was proceeding forward.
4 K. Lake Bank confirms assignment of collateral.
5 Following at least two conversations between Wallace,
6 Tarapaski and Tom Kell, the president of Lake Bank, on March 12,
7 2003, a representative of Lake Bank sent a fax to Wallace
8 confirming that Lake Bank would assign to BDV its liens on
9 Beardmore’s home, his 1999 Mercedes, his 2000 18-foot Mystic ski
10 boat, a 22 percent interest in Founders Mezzanine stock fund and
11 stock in Superior Financial Holdings so that BDV could use those
12 assets as collateral for the Thomas & Wong note.
13 L. Wallace convinces Tarapaski to move ahead with the loan.
14 Sometime between March 10 and March 12, 2003, Tarapaski
15 discussed with Wallace whether to move forward with the
16 transaction given that the gold doré had not yet been viewed.
17 Wallace advised Tarapaski that she thought the transaction should
18 go forward and that Thomas & Wong was protected by a safekeeping
19 receipt, the DeConcini opinion letter and insurance certificates.
20 At the time, however, no safekeeping receipt existed in favor of
21 Thomas & Wong, the DeConcini opinion letter was not in favor of
22 Thomas & Wong, and no insurance certificate was ever issued.
23 On March 12, 2003, Tarapaski agreed to move forward with the
24 transaction and signed a letter to Michael Cane of Cane O’Neill
25 authorizing Wallace to release the funds from the Cane O’Neill
26 trust account. Thereafter Wallace sent an instruction to Cane
27 O’Neill to transfer $500,000 from the trust account to Lake Bank.
28 Tarapaski left the United States for business in Korea on
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1 March 17, 2003. Wallace told Tarapaski that she would monitor
2 developments on behalf of Thomas & Wong and would remain in
3 contact with him. Wallace thereafter faxed Tarapaski to reassure
4 him that the permanent loan from Dumaine Consulting was on track
5 for funding.
6 M. The viewing of the gold doré
7 Tarapaski and Wallace were to accompany Beardmore to view
8 the gold doré in New Mexico on March 10, 2003, but the viewing
9 did not occur that day. When Tarapaski left Arizona in
10 mid-March, Wallace agreed to view the gold doré for Thomas &
11 Wong. In a telephone conversation in late March 2003, Wallace
12 told Tarapaski the gold had been viewed. Tarapaski understood
13 Wallace’s comments to mean that she viewed the gold as she had
14 agreed to do. However, Wallace had not attended the viewing.
15 Instead, representatives of BDV viewed sealed barrels that were
16 never opened at a storage warehouse in Chandler, Arizona.4
17 Wallace did not disclose this fact to Tarapaski.
18
N. Tarapaski authorizes the release of the remaining loan
19 funds.
20 Based upon his belief that Wallace had viewed the gold,
21 Tarapaski authorized the release of the remaining $700,000
22 provided for in the $1.5 million note. That $700,000 was wired
23 directly to BDV or Lake Bank by Thomas & Wong and did not go
24 through the Cane O’Neill trust account. Thereafter Wallace faxed
25 a handwritten note to Thomas & Wong’s office manager, telling her
26
27
4
As noted previously, the DeConcini opinion letter
28 indicated the gold doré was stored in Lordsburg, New Mexico.
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1 that it was imperative that $300,000 be wired to Lake Bank no
2 later than March 31, 2003. The $300,000 transfer and the
3 remainder of the funding for the $1.5 million loans were advanced
4 by the end of April 2003.
5
O. Wallace authorizes the release of funds without Thomas &
6 Wong’s knowledge or authority.
7 On three occasions during the relevant time period, Wallace
8 authorized the release of funds from the Cane O’Neill account
9 without authorization from Thomas & Wong. On March 6, 2003,
10 after Wallace was elected to the BDV board, she instructed her
11 assistant to request $275,000 be wired from the Cane O’Neill
12 account to Lake Bank, ostensibly to purchase or pay off the
13 office condominium. No loan had been approved by Thomas & Wong
14 at this point, and Tarapaski and Thomas & Wong had no knowledge
15 of the $275,000 note or of the transfer of the funds. The
16 transfer occurred the next day, March 7, 2003. At the March 8
17 meeting in Blume’s office, Beardmore asked Wallace if funds could
18 be released from the Cane O’Neill account to purchase the condo.
19 Tarapaski, who was part of the conversation, refused to release
20 any of the funds, stating that Thomas & Wong was not interested
21 in doing a “condo only” loan. Wallace did not tell Tarapaski
22 that she had already released the $275,000.
23 Next, on March 21, 2003, Wallace sent an email to Susan
24 Johnson at Cane O’Neill authorizing the release of $20,000 of the
25 Cane O’Neill trust account money to an account titled to L Trust.
26 L Trust was owned by Sokim Lach, Beardmore’s girlfriend, who
27 later became his wife. Tarapaski did not know her at the time.
28 L Trust was the entity that had signed the $275,000 note agreeing
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1 in the event of a default to assign its interest in the property
2 to Thomas & Wong. Tarapaski was unaware of this transfer to
3 L Trust, and neither he nor anyone else at Thomas & Wong ever
4 approved the transfer.
5 Finally, in August 2003, after BDV had defaulted on the
6 bridge loan, Wallace transferred to Cane O’Neill, without
7 authority from Tarapaski or Thomas & Wong, the remaining $4,960
8 in the Cane O’Neill account to cover attorney’s fees.
9 P. Wallace received $50,000 from the Thomas & Wong loan funds.
10 According to Beardmore’s testimony,5 $50,000 of the funds
11 borrowed from Thomas & Wong were used to pay Wallace the deposit
12 to purchase the shell corporation, MW Asia. This payment was not
13 disclosed to Tarapaski. Although Wallace testified that the
14 MW Asia contract terminated when Beardmore did not pay the
15 $50,000 deposit by the January 31, 2003 deadline, she
16 acknowledged receiving the $50,000 from Lake Bank in April 2003.
17 Q. Default and collection efforts
18 On May 6, 2003, the $1.5 million note came due and was not
19 paid. Tarapaski authorized Blume and Wallace to take action on
20 Thomas & Wong’s behalf to enforce the note. Although Wallace
21 advised Tarapaski that the gold doré had been melted and sold, no
22 gold was ever located, and Thomas & Wong received no funds from
23 the gold. Thomas & Wong thereafter sued BDV and affiliated
24 parties and took default judgments against them.
25 Wallace assisted Thomas & Wong in efforts to sell the
26
5
27 Beardmore did not testify in person at trial. The court
admitted Beardmore’s deposition testimony from the state court
28 litigation.
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1 judgments to a Richard Kirby for approximately $4.5 million, a
2 transaction that would have netted Wallace $250,000. It is not
3 clear why the offer was so high given that the judgments were
4 against defunct or insolvent companies. The transaction also
5 required certain fees, including an up-front processing fee of
6 $10,000 that was to be paid to Kirby. Tarapaski refused to pay
7 the $10,000. He again refused when Wallace negotiated it down to
8 $5,000 but ultimately consented to pay a $1,500 processing fee to
9 Kirby. However, nothing ever came of the Kirby transaction, and
10 the default judgments were not sold.
11 Thomas & Wong sought to recover on its Lake Bank collateral.
12 Thomas & Wong recovered approximately $433,000 from the sale of
13 Beardmore’s Paradise Valley residence and approximately $20,000
14 from the sale of some personal property in New Mexico and
15 additional unknown amounts in a lawsuit against Blume.
16 Beardmore’s home also contained furniture and personal items that
17 Wallace was able to sell on Thomas & Wong’s behalf for
18 approximately $5,000, but Wallace kept those funds over
19 Tarapaski’s objection. The shares of the Founders Mezzanine and
20 Superior Financial Holdings Company were worthless. Thomas &
21 Wong received nothing on the office condominium, which was never
22 titled to BDV, and L Trust had apparently encumbered the property
23 with liens to other creditors.
24 R. Thomas & Wong obtains a judgment against Wallace.
25 On July 12, 2005, Thomas & Wong instituted litigation
26 against Wallace and Blume in Maricopa County Superior Court for
27 breach of fiduciary duty. On February 7, 2008, the jury returned
28 a verdict in favor of Thomas & Wong. After post-trial motions
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1 and an appeal to the Arizona Court of Appeals, on January 10,
2 2011, the trial court entered a Judgment Subsequent to Appeal
3 against Wallace, awarding Thomas & Wong $1,306,144 plus taxable
4 costs of $4,026.90 and interest at 10 percent per annum on all
5 sums awarded from February 8, 2008 until paid.
6 S. Wallace files for bankruptcy.
7 Wallace filed this chapter 7 proceeding on October 2, 2013.
8 Thomas & Wong filed a timely complaint seeking to except its
9 claim from discharge under §§ 523(a)(2), (4), and (6). After a
10 three-day trial, the court ruled that the claim was
11 nondischargeable under § 523(a)(2), partly nondischargeable under
12 § 523(a)(4), but dischargeable under § 523(a)(6).
13 Wallace timely appealed the judgment against her under
14 §§ 523(a)(2) and (4).
15 III. JURISDICTION
16 The bankruptcy court had jurisdiction pursuant to 28 U.S.C.
17 §§ 1334 and 157(b)(2)(I). We have jurisdiction under 28 U.S.C.
18 § 158.
19 IV. ISSUES
20 1. Did Thomas & Wong have standing to sue Wallace in the
21 bankruptcy court?
22 2. Is Thomas & Wong’s § 523(a)(2)(A) claim barred by any
23 applicable statute of limitations?
24 3. Did the bankruptcy court err in determining that the debt
25 to Thomas & Wong was excepted from discharge under
26 § 523(a)(2)(A)?
27 4. Did the bankruptcy court err in determining that a
28 portion of the debt to Thomas & Wong was excepted from discharge
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1 under § 523(a)(4)?
2 V. STANDARD OF REVIEW
3 We review the bankruptcy court’s findings of fact for clear
4 error, and its conclusions of law de novo. Carrillo v. Su
5 (In re Su), 290 F.3d 1140, 1142 (9th Cir. 2002). A finding is
6 clearly erroneous “when although there is evidence to support it,
7 the reviewing court on the entire evidence is left with the
8 definite and firm conviction that a mistake has been committed.”
9 Anderson v. City of Bessemer City, N.C., 470 U.S. 564, 573 (1985)
10 (citation omitted). Where two permissible views of the evidence
11 exist, the factfinder's choice between them cannot be clearly
12 erroneous. Id. at 574.6 We are to give “due regard to the trial
13 court’s opportunity to judge the witnesses’ credibility.” Civil
14 Rule 52(a)(6) (incorporated via Rule 7052). We also give
15 deference to inferences drawn by the trial court. Beech Aircraft
16 Corp. v. United States, 51 F.3d 834, 838 (9th Cir. 1995).
17 The bankruptcy court’s conclusions of law regarding
18 nondischargeability, as well as its interpretation of state law,
19 are reviewed de novo. Thiara v. Spycher Bros. (In re Thiara),
20 285 B.R. 420, 426-27 (9th Cir. BAP 2002). The bankruptcy court’s
21
6
At trial, the bankruptcy court admitted several exhibits
22
that Wallace did not include in the excerpts of record.
23 Appellants bear the responsibility to file an adequate record,
and the burden of showing that the bankruptcy court’s findings of
24 fact are clearly erroneous. Kritt v. Kritt (In re Kritt),
190 B.R. 382, 387 (9th Cir. BAP 1995). An attempt to reverse the
25 trial court’s findings of fact requires the entire record relied
26 upon by the trial court be supplied for review. Id. We are
entitled to conclude that the missing excerpts are not helpful to
27 Wallace. See Gionis v. Wayne (In re Gionis), 170 B.R. 675,
680–81 (9th Cir. BAP 1994), aff’d, 92 F.3d 1192 (9th Cir. 1996)
28 (table).
-18-
1 findings on fraudulent intent, reliance, proximate causation and
2 materiality are all subject to review for clear error. Candland
3 v. Ins. Co. of N. Am. (In re Candland), 90 F.3d 1466, 1469 (9th
4 Cir. 1996).
5 VI. DISCUSSION
6 A. Preliminary matters
7 1. Thomas & Wong has standing.
8 In both the state court litigation and in the bankruptcy
9 court, Wallace has raised various arguments concerning Thomas &
10 Wong’s existence and its standing to litigate the pertinent
11 issues. The Arizona Court of Appeals rejected Wallace’s argument
12 that Thomas & Wong lacked standing to sue in state court because
13 it was a foreign corporation that had not sought authority to
14 transact business in Arizona, as required under Arizona state
15 law, finding that the transactions conducted by Thomas & Wong
16 were exempt from the applicable state statutes.
17 In the bankruptcy court and this appeal, Wallace argued that
18 Thomas & Wong is a “nonexistent entity” and that the bankruptcy
19 court erred in precluding Wallace from arguing or introducing
20 evidence to that effect. Wallace notes that the receipts for the
21 wire transfers into the Cane O’Neill account show the originator
22 of the funds as “Wong Kai Min. Chong S. Yen,” not Thomas & Wong.
23 Wallace states in her opening brief:
24 It remains unclear why Thomas & Wong did not initiate
the First Wire Transfer and Second Wire Transfer--as it
25 was the plaintiff in the State Court Action, Bankruptcy
Adversary and now Appellee in this appeal, yet it has
26 no apparent financial stake in this matter calling into
question its standing.
27
28 However, it is undisputed that the state court judgment that
-19-
1 is the basis for the nondischargeability judgment was entered in
2 favor of Thomas & Wong. In fact, the parties stipulated in their
3 Second Amended Joint Pretrial Statement that
4 Thomas & Wong is a judgment creditor of Wallace
pursuant to the Judgment Subsequent to Appeal filed
5 January 10, 2011, in proceedings captioned Thomas &
Wong General Contractor, Inc., vs. Blume Law Firm,
6 P.C., et al., No. 2 CV2005-05l325 in the Superior Court
of Maricopa County, Arizona.
7
Moreover, the bankruptcy court did not disallow testimony or
8
argument on this point. Rather, after Thomas & Wong’s counsel
9
objected to Wallace’s counsel’s questions regarding the location
10
and business of Thomas & Wong on relevance and foundational
11
grounds, and the bankruptcy court questioned relevance, Wallace’s
12
counsel withdrew the question and did not make any offer of
13
proof, nor did he return to that line of questioning later in the
14
trial. Trial Transcript, February 26, 2015, pages 144-46.
15
Accordingly, he waived any objection to Thomas & Wong’s standing.
16
See In re Mercury Interactive Corp. Sec. Litig., 618 F.3d 988,
17
992 (9th Cir. 2010) (“an issue will generally be deemed waived on
18
appeal if the argument was not raised sufficiently for the trial
19
court to rule on it”).
20
2. Thomas & Wong’s § 523(a)(2)(A) claim is not time barred.
21
On the first day of trial, Wallace’s bankruptcy counsel
22
orally moved to dismiss the § 523(a)(2)(A) claim on statute of
23
limitations grounds. The bankruptcy court denied the motion,
24
noting that the issue had not been raised in the parties’ Pre-
25
Trial Statement and had not been briefed.7 The bankruptcy court
26
27
7
Under Civil Rule 16(d), a pretrial order “controls the
28 (continued...)
-20-
1 indicated that it would consider a properly noticed and briefed
2 motion, but nothing in the record indicates that Wallace’s
3 counsel pursued the issue further.
4 On appeal, Wallace argues that, despite controlling Ninth
5 Circuit authority, the bankruptcy court erred in entering a
6 judgment on the § 523(a)(2)(A) claim because Thomas & Wong did
7 not assert any state law fraud claims during the applicable state
8 law limitations period. Wallace argues that it is unfair for a
9 creditor to be able to assert a fraud claim in bankruptcy many
10 years after the state statute of limitations has expired, when no
11 fraud judgment was previously obtained. Under these
12 circumstances, she contends, witnesses’ memories have faded and
13 documents have disappeared, giving an advantage to the “savvy
14 creditor.”
15 In Banks v. Gill Distribution Centers, Inc. (In re Banks),
16 263 F.3d 862, 868 (9th Cir. 2001), the court held that where a
17 creditor filed a timely state court claim for breach of a
18 settlement agreement – even where the claim had not been reduced
19 to judgment – the creditor was not barred from asserting in the
20 bankruptcy court a timely nondischargeability action for fraud,
21
22 7
(...continued)
23 course of the action unless the court modifies it.” Thus, “a
party may not offer evidence or advance theories at the trial
24 which are not included in the order or which contradict its
terms.” El-Hakem v. BJY Inc., 415 F.3d 1068, 1077 (9th Cir.
25 2005)(citing United States v. First Nat’l Bank of Circle,
26 652 F.2d 882, 886 (9th Cir. 1981)). Rule 7016-1 of the Local
Bankruptcy Rules for the District of Arizona requires the parties
27 to file a pretrial statement, which we construe as the equivalent
of a pretrial order for purposes of controlling the issues to be
28 tried.
-21-
1 breach of fiduciary duty, and willful and malicious injury, even
2 though the state statutes of limitations had expired. See also
3 Lee-Benner v. Gergely (In re Gergely), 110 F.3d 1448, 1454 (9th
4 Cir. 1997) (“The state limitations period for fraud actions is
5 irrelevant to the dischargeability of an established debt.”)
6 Here, it is undisputed that the nondischargeability
7 complaint was timely filed under Rule 4007 and that the state
8 court action for breach of fiduciary duty was also timely filed.
9 Although the passage of time may make it more difficult to try
10 the nondischargeability claim, the timing was tied to the filing
11 of Wallace’s bankruptcy.
12 B. Merits
13
1. The bankruptcy court did not err in finding the
14 judgment nondischargeable under § 523(a)(2)(A).
15 Section 523(a)(2)(A) excepts from discharge debts for money,
16 property, or services obtained by “false pretenses, a false
17 representation, or actual fraud, other than a statement
18 respecting the debtor’s or an insider’s financial condition.” A
19 creditor seeking to except a debt from discharge based on fraud
20 must establish by a preponderance of the evidence each of five
21 elements: (1) misrepresentation, fraudulent omission or deceptive
22 conduct; (2) knowledge of the falsity or deceptiveness of such
23 representation(s) or omission(s); (3) an intent to deceive;
24 (4) justifiable reliance by the creditor on the representation(s)
25 or conduct; and (5) damage to the creditor proximately caused by
26 its reliance on such representation(s) or conduct. Ghomeshi v.
27 Sabban (In re Sabban), 600 F.3d 1219, 1222 (9th Cir. 2010).
28 A debtor’s failure to disclose material facts constitutes a
-22-
1 fraudulent omission under § 523(a)(2)(A) if the debtor had a duty
2 to disclose and the debtor’s omission was motivated by an intent
3 to deceive. See Citibank (South Dakota), N.A. v. Eashai
4 (In re Eshai), 87 F.3d 1082, 1089-90 (9th Cir. 1996). In
5 determining the duty to disclose in the context of fraud under
6 § 523(a)(2)(A), we look to the common law. Apte v. Japra
7 (In re Apte), 96 F.3d 1319, 1324 (9th Cir. 1996) (citing Field v.
8 Mans, 516 U.S. 59, 68-70 (1995)). Under the common law as set
9 forth in the Restatement (Second) of Torts § 551 (1977):
10 (2) One party to a business transaction is under a duty
to exercise reasonable care to disclose to the other
11 before the transaction is consummated,
12 (a) matters known to him that the other is
entitled to know because of a fiduciary or
13 other similar relation of trust and
confidence between them; and
14
(b) matters known to him that he knows to be
15 necessary to prevent his partial or ambiguous
statement of the facts from being misleading;
16 and
17 (c) subsequently acquired information that he
knows will make untrue or misleading a
18 previous representation that when made was
true or believed to be so; and
19
(d) the falsity of a representation not made
20 with the expectation that it would be acted
upon, if he subsequently learns that the
21 other is about to act in reliance upon it in
a transaction with him; and
22
(e) facts basic to the transaction, if he
23 knows that the other is about to enter into
it under a mistake as to them, and that the
24 other, because of the relationship between
them, the customs of the trade or other
25 objective circumstances, would reasonably
expect a disclosure of those facts.
26
27 a. Wallace is a debtor under § 523(a)(2)(A).
28 Wallace argues initially that she is not a “debtor” under
-23-
1 § 523(a) because the loan was made to BDV, not Wallace.
2 Section 523 provides that a bankruptcy discharge does not
3 discharge an individual debtor from certain enumerated debts.
4 The Bankruptcy Code defines the word “debtor” as a “person or
5 municipality concerning which a case under this title has been
6 commenced.” § 101(13). There is no question that Wallace is a
7 “debtor” as that term is used in § 523. In a similar vein,
8 Wallace argues that she never received a commission from the sale
9 of the public shell corporation and thus did not commit fraud.
10 Accordingly, we interpret this argument to be that Wallace did
11 not benefit by her deceptive conduct.
12 As noted above, testimony at trial established that Wallace
13 received $50,000 of the proceeds from the Thomas & Wong loan.
14 More importantly, liability under § 523(a)(2)(A) is not limited
15 to situations in which the debtor received a benefit from his or
16 her fraudulent activity. Rather, § 523(a)(2)(A) prevents the
17 discharge of all liability arising from fraud. Cohen v. De la
18 Cruz, 523 U.S. 213, 215 (1998); see also In re Sabban, 600 F.3d
19 at 1222 (“[T]here is no requirement that the debtor have received
20 a direct or indirect benefit from his or her fraudulent activity
21 in order to make out a violation of § 523(a)(2)(A).”).
22 b. The bankruptcy court did not err in finding that
Wallace’s failures to disclose amounted to
23 fraudulent misrepresentations.
24 As detailed above, Wallace failed to disclose numerous facts
25 to Tarapaski, including that:
26 • Wallace had an agreement with Kelly Black to receive a
27 commission for arranging the bridge financing.
28 • Beardmore had an outstanding $1.9 million judgment
-24-
1 against him.
2 • A separate $275,000 promissory note related to the
3 purchase of the office condo was prepared and executed.
4 • Wallace authorized the release of $275,000 from the
5 Cane O’Neill account without Thomas & Wong’s
6 authorization.
7 • Wallace authorized the release of an additional $20,000
8 and $4,960 from the Cane O’Neill account without Thomas
9 & Wong’s authorization.
10 • Wallace had a contract with Beardmore to sell him a
11 shell corporation, MW Asia, and Wallace received
12 $50,000 from the loan proceeds as a down payment on
13 that contract.
14 Wallace also misrepresented facts:
15 • Wallace told Tarapaski that Thomas & Wong was protected
16 by a safekeeping receipt, opinion letter, and insurance
17 certificate.
18 • Wallace stated that “the gold had been viewed” when she
19 did not personally view the gold doré.
20 The bankruptcy court found that Wallace had a duty to
21 disclose to Tarapaski and Thomas & Wong material facts regarding
22 the loan transaction arising out of an agency relationship.
23 Agency is the fiduciary relationship that arises when one party,
24 a principal, manifests assent to another person, an agent, that
25 the agent shall act on the principal’s behalf and subject to the
26 principal’s control, and the agent manifests assent or otherwise
27 consents to so act. Goodman v. Physical Engineering Inc.,
28 270 P.3d 852, 856 (Ariz. Ct. App. 2011) (citing Restatement
-25-
1 (Third) of Agency § 1.01 (2006)). An agent holds express
2 authority if there is evidence that the principal has delegated
3 authority by oral or written words that authorize the agent to
4 act or do a certain act or series of acts. Id. The bankruptcy
5 court found that Wallace was Thomas & Wong’s agent (1) when
6 Wallace agreed to hold the funds in the Cane O’Neill trust
7 account and to not disburse the funds without Thomas & Wong’s
8 consent; (2) when Wallace became a member of the BDV board for
9 the stated purpose of looking after Thomas & Wong’s interest; and
10 (3) when Wallace agreed to view the gold on behalf of Thomas &
11 Wong.
12 The bankruptcy court found that as an agent, Wallace had a
13 duty to disclose material information to Thomas & Wong, including
14 that she stood to benefit from the transaction from the
15 commission agreement she had with Kelly Black and from the sale
16 of the public shell company. The bankruptcy court also found
17 that Wallace had a duty to disclose that Beardmore had a
18 $1.9 million judgment against him, that Wallace had released the
19 $275,000 to Lake Bank without Tarapaski’s or Thomas & Wong’s
20 consent, that she released the $20,000 to the L Trust without
21 Thomas & Wong’s consent, that she did not view the gold when
22 clearly Tarapaski believed that she had, and that she released
23 the last of the initial funds to pay the Cane O’Neill fees.
24 Wallace argues that the bankruptcy court erred in finding
25 that Wallace was an agent of Thomas & Wong. Wallace contends
26 that Thomas & Wong’s “refusal” to demonstrate its corporate
27 existence means that there can be no finding that Wallace was an
28 agent of or defrauded Thomas & Wong. Wallace cites no authority
-26-
1 for this argument, nor was this issue properly raised in the
2 bankruptcy court; thus, it is waived. See In re Mercury
3 Interactive Corp. Sec. Litig., 618 F.3d at 992. As noted above,
4 in the bankruptcy court, the parties stipulated that Thomas &
5 Wong holds a judgment against Wallace and is a creditor in the
6 bankruptcy, and at trial, Wallace’s former counsel withdrew his
7 question regarding Thomas & Wong’s corporate existence. Further,
8 the state court memorandum decision notes that Wallace admitted
9 to being Thomas & Wong’s agent for the purpose of releasing funds
10 from the Cane O’Neill account. Wallace’s testimony in the
11 bankruptcy court was consistent with this finding. See Trial
12 Transcript, February 26, 2015, at 118:18-120:7.
13 Wallace also argues (1) that the premature transfer of the
14 $275,000 was not material and that Thomas & Wong ratified that
15 transfer; (2) the only evidence of Wallace’s knowledge of the
16 $1.9 million judgment was a handwritten note stating “$1.960”;
17 and (3) that Wallace was not required to view the gold doré
18 pursuant to the checklist.
19 The ratification argument was not raised at trial and is
20 thus waived. In any event, there is no basis to conclude that
21 Tarapaski ratified the premature transfer. As discussed below,
22 the bankruptcy court found that Tarapaski would not have
23 authorized the transaction had he known some of the funds had
24 been released without permission. “Ratification requires intent
25 to ratify plus full knowledge of all the material facts.” United
26 Bank v. Mesa N. O. Nelson Co., Inc., 590 P.2d 1384, 1386 (Ariz.
27 1979). Here, Tarapaski did not have full knowledge of all the
28 material facts: he authorized the release of funds based on
-27-
1 misrepresentations by Wallace that Thomas & Wong was protected by
2 a safekeeping receipt, the DeConcini opinion letter and insurance
3 certificates. Wallace does not challenge the bankruptcy court’s
4 finding that these representations were false.
5 The finding that Wallace had knowledge of the $1.9 million
6 judgment against Beardmore was not clearly erroneous; at trial
7 Wallace identified a note in her own handwriting made after the
8 December 2002 meeting and conceded that the “$1.960” notation
9 therein referred to the Minnesota judgment against Beardmore; but
10 she also claimed that she could not recall whether she had told
11 Tarapaski about the judgment. Trial Transcript, February 26,
12 2015, at 45:24-46:7. We note that the bankruptcy court did not
13 find credible much of Wallace’s testimony.
14 The bankruptcy court’s finding that Wallace agreed to view
15 the gold doré for Thomas & Wong is not clearly erroneous.
16 Tarapaski testified that Wallace said she would view the gold to
17 verify its existence and represent Thomas & Wong in Tarapaski’s
18 absence. Trial Transcript, February 25, 2015, at 61:7-18.
19 Wallace herself testified that she was supposed to participate in
20 the viewing of the gold. Trial Transcript, February 26, 2015, at
21 70:23-71:2. In any event, the issue is not whether Wallace was
22 contractually required to view it, but that she misled Tarapaski
23 into believing that she had personally viewed it. We find no
24 clear error in the bankruptcy court’s finding on this issue.
25
c. The bankruptcy court’s findings that Wallace knew
26 her failures to disclose were deceptive and that
she intended to deceive Tarapaski were not clearly
27 erroneous.
28 Intent to deceive may be inferred from the totality of
-28-
1 circumstances. Tallant v. Kaufman (In re Tallant), 218 B.R. 58,
2 66 (9th Cir. BAP 1996). The bankruptcy court found that Wallace
3 knew of the deceptiveness of her failures to disclose, and that
4 she intended to deceive Tarapaski “most glaringly” when she did
5 not advise him during the March 8 meeting where Tarapaski refused
6 to authorize the release of $275,000 that she had already
7 authorized disbursement of those funds. The bankruptcy court’s
8 finding of intent to deceive was based on the underlying findings
9 that Wallace stood to benefit from the transaction, that Wallace
10 failed to inform Tarapaski of the $1.9 million judgment against
11 Beardmore, that Wallace had prematurely authorized the release of
12 $275,000, and that she misled Tarapaski into believing that she
13 had viewed the gold doré. These findings support the conclusion
14 that Wallace intended to deceive Tarapaski.
15 Wallace argues that she did not intend to deceive Tarapaski
16 or Thomas & Wong and that she had no motivation to do so because
17 she did not stand to gain anything from doing so. Wallace relies
18 on the bankruptcy court’s finding regarding § 523(a)(6) that
19 “[t]here is not a sufficient showing here that Wallace intended
20 specifically to hurt Thomas & Wong. What the testimony seemed to
21 establish is that Wallace wanted for whatever reasons this deal
22 to move forward.” However, the cited finding is not that Wallace
23 did not intend to deceive, but that she did not necessarily
24 intend to injure Thomas & Wong. These are two distinct issues;
25 intent to injure is not a required element of a § 523(a)(2)(A)
26 claim.
27 In her reply brief, Wallace argues that because the contract
28 to sell MW Asia was with Beardmore Investments rather than BDV,
-29-
1 the MW Asia contract did not create a financial incentive for
2 Wallace to deceive Tarapaski to convince him to authorize release
3 of the bridge loan funds. However, Wallace testified at trial
4 that she had a profit motive in securing financing for BDV,
5 including selling the public shell. Trial Transcript,
6 February 26, 2015, 61:4-7. Additionally, Beardmore testified
7 that the Thomas & Wong loan was the only source of payment of the
8 $50,000 deposit (regardless of the fact that the contract was
9 with Beardmore Investments), and Wallace was paid $50,000 from
10 those funds.
11 Wallace also disputes the bankruptcy court’s finding that
12 Tarapaski did not know about the MW Asia contract and that
13 Wallace would receive a commission for arranging the bridge
14 financing from Thomas & Wong. Wallace points to the first two
15 pages of Trial Exhibit 73, which is a September 2, 2005 statement
16 Tarapaski prepared for the Department of Homeland Security in
17 which Tarapaski stated:
18 During the course of my stay there [at Wallace’s home]
I overheard several conversations she had with someone
19 named John Beardmore. I asked her if there was
anything I could do to help. She said he owned a bank
20 in Minnesota and was in urgent need of a short term
bridge loan and was offering gold dorey [sic] bars as
21 security. In return for arranging this she would be
paid a commission.
22
. . . .
23
I discussed the loan with Jan Wallace and learned that
24 the Lake Bank would be put into a public company shell
that she owned and listed on a stock exchange. She
25 told me there would be a good profit in the shares and
we could share that. I told her I knew nothing about
26 starting or running public companies and whatever she
made was her deal.
27
28 The bankruptcy court did not admit these statements into
-30-
1 evidence.8 Even if it did, the 2005 statements do not impeach
2 Tarapaski’s testimony regarding his knowledge at the time he
3 authorized the loan. To the extent he was aware of a pending
4 transaction regarding the shell corporation, nothing in the
5 statement indicates that Tarapaski understood the details of the
6 transaction or that part of the loan proceeds would be used as a
7 deposit on the sale.
8 At trial, Tarapaski testified that at the time he authorized
9 the release of the loan proceeds on March 12, 2003, he did not
10 know of the commission or the MW Asia contract. Trial
11 Transcript, February 25, 2015, at 64:22-65:16. The bankruptcy
12 court found Tarapaski’s testimony credible.
13 In her reply brief, Wallace complains that, in its brief,
14 Thomas & Wong conflated her contractual relationships with BDV
15 and Beardmore Investments. She points out that the contract to
16 sell the shell corporation was with Beardmore Investments, not
17 BDV. Even if Thomas & Wong misstated in its brief that the sale
18 of the shell corporation was to BDV, that statement is not
19 relevant to our review of the bankruptcy court’s finding that
20 $50,000 of the funds were paid to Wallace as a deposit on the
21
22
23
8
24 The bankruptcy court explicitly admitted only page 3 of
this statement. Trial Transcript, February 25, 2015, at 30:6-7.
25 On the last day of trial the bankruptcy court stated that
26 Exhibit 73 was admitted by stipulation. Based on the prior
explicit admission of page 3 only and the fact that witnesses
27 were not questioned about any other portion of the exhibit, we
conclude that the bankruptcy court intended to admit only that
28 page.
-31-
1 purchase of the shell corporation.9
2 Wallace also complains that Thomas & Wong incorrectly states
3 that Wallace had “an interest in a company that would get a
4 commission if the Thomas & Wong loan funded.” Wallace argues
5 that the only evidence of a commission is the one percent
6 promised to Wallace for advising Black regarding Beardmore
7 Investments. She contends that the undisclosed profit conduit
8 was Wallace & Black, LLC, which did not exist in 2003, and that
9 Wallace did not own an interest in Premier Funding, the
10 predecessor to Wallace Black. Thus, in Wallace’s mind, she had
11 no financial incentive to push the loan through.
12 However, Wallace testified that she had an agreement with
13 Black whereby Black would share commissions with Wallace in
14 exchange for Wallace’s advice. And although Wallace claimed that
15 she was not entitled to a commission with respect to the Thomas &
16 Wong loan, she also testified in response to the question whether
17 she had a profit interest in getting financing for BDV,
18 “[b]ecause I was giving Kelly Black and Casey Strunk advice,
19 Kelly Black told me that she would give me a half of two percent
20 or half of one percent.” Trial Transcript, February 26, 2015, at
21 49:16-21. As we have repeatedly noted, the bankruptcy court did
22 not find Wallace’s testimony credible.
23 Wallace has not shown clear error in the bankruptcy court’s
24
25 9
At trial in the bankruptcy court, Thomas & Wong’s counsel
26 introduced excerpts of Wallace’s state court trial testimony that
BDV was her client with respect to the shell corporation.
27 Wallace asserted that she had been mistaken in her prior
testimony. Trial Transcript, February 26, 2015, at 52:2-23;
28 53:20-54-9.
-32-
1 finding of intent to deceive.
2 d. The bankruptcy court did not clearly err in
finding that Tarapaski justifiably relied on
3 Wallace’s misrepresentations or that those
misrepresentations were the proximate cause of
4 injury to Thomas & Wong.
5 Nondisclosure of a material fact that one has a duty to
6 disclose establishes the requisite reliance and causation for
7 actual fraud under § 523(a)(2)(A). In re Apte, 96 F.3d at 1323.
8 Thus, “[p]ositive proof of reliance is not a prerequisite to
9 recovery. All that is necessary is that the facts withheld be
10 material . . . . This obligation to disclose and this
11 withholding of a material fact establish the requisite element of
12 causation in fact.” Id. (quoting Affiliated Ute Citizens v.
13 United States, 406 U.S. 128, 153-54 (1972)).
14 As previously discussed, the bankruptcy court correctly
15 found that Wallace had a duty to disclose and that she failed to
16 disclose to Tarapaski several material facts about the loan
17 transaction. Under the applicable legal standard, these findings
18 are sufficient to establish justifiable reliance and causation.
19 Moreover, the bankruptcy court found that Tarapaski would not
20 have committed Thomas & Wong to the loan transaction had he been
21 told of the $1.9 million judgment against Beardmore or that the
22 $275,000 had been released without his consent.
23 Wallace argues that Tarapaski did not justifiably rely on
24 Wallace’s nondisclosures and that the nondisclosures were not the
25 proximate cause of damages to Thomas & Wong because Tarapaski
26 ratified the release of the $275,000 and authorized release of
27 the remaining funds without all of the required documentation,
28 and because he did not conduct an appropriate level of due
-33-
1 diligence which would have revealed the judgment against
2 Beardmore. As discussed above, Tarapaski did not ratify the
3 release of funds because he was not aware of all the material
4 facts. Moreover, as shown previously, under the reliance
5 standard applicable to cases involving nondisclosure, the
6 bankruptcy court needed to find only that Wallace failed to
7 disclose material facts. In re Apte, 96 F.3d at 1323. In any
8 event, a person is justified in relying on a representation of
9 fact “although he might have ascertained the falsity of the
10 representation had he made an investigation.” Field, 516 U.S. at11 70 (quoting Restatement (Second) of Torts § 540 (1976)).
12 e. The bankruptcy court did not err in not reducing
the amount of the judgment to “credit” Wallace for
13 sums collected on the BDV obligation.
14 Regarding damages, Wallace contends that the bankruptcy
15 court should have given Wallace credit for the amounts collected
16 and turned over to Thomas & Wong from the liquidation of
17 collateral. However, the amount of the debt was established in
18 the state court judgment, and no evidence was presented that any
19 further payments were made on that debt after entry of the
20 judgment.
21 2. The bankruptcy court did not err in finding that
$799,960 of the state court judgment was
22 nondischargeable under § 523(a)(4).
23 Section 523(a)(4) excepts from discharge debts that arise
24 from fraud or defalcation while acting in a fiduciary capacity.
25 To prevail on a claim under § 523(a)(4), a plaintiff must prove
26 by a preponderance of the evidence not only the debtor’s fraud or
27 defalcation but also that the debtor was acting in a fiduciary
28 capacity when the debtor committed the fraud or defalcation. The
-34-
1 Ninth Circuit has adopted a narrow definition of “fiduciary.” To
2 fit within § 523(a)(4), the fiduciary relationship must be one
3 arising from an express or technical trust that was imposed
4 before, and without reference to, the wrongdoing that caused the
5 debt, as opposed to a trust ex maleficio, constructively imposed
6 because of the act of wrongdoing from which the debt arose.
7 Honkanen v. Hopper (In re Honkanen), 446 B.R. 373, 378-79 (9th
8 Cir. BAP 2011) (citing Ragsdale v. Haller, 780 F.2d 794, 796 (9th
9 Cir. 1986); additional citations omitted).
10 While the scope of the term “fiduciary capacity” is a
11 question of federal law, the Ninth Circuit has considered state
12 law to ascertain whether the requisite trust relationship exists.
13 Ragsdale, 780 F.2d at 796. For a trust relationship under
14 § 523(a)(4) to be established, the applicable state law must
15 clearly define fiduciary duties and identify trust property.
16 In re Honkanen, 446 B.R. at 379.
17 Under Arizona law, “the essential elements of a trust are a
18 competent settlor and a trustee, clear and unequivocal intent to
19 create a trust, ascertainable trust res, and sufficiently
20 identifiable beneficiaries.” Golleher v. Horton, 715 P.2d 1225,
21 1231 (Ariz. Ct. App. 1985). The bankruptcy court found that
22 there was an express trust and a clear and unequivocal intent to
23 create a trust relationship: the settlor of the trust was Thomas
24 & Wong, which wired $799,960 into the Cane O’Neill trust account
25 that was in Wallace’s name; the trustee was Wallace, who agreed
26 that she would not authorize disbursement of funds without Thomas
27 & Wong’s consent. The bankruptcy court found that the trust res
28 was the $799,960 in the Cane O’Neill trust account, and that the
-35-
1 sufficiently identifiable beneficiary was Thomas & Wong, for
2 whose benefit Wallace was acting.
3 Based on its § 523(a)(2)(A) fraud finding, the bankruptcy
4 court found that Wallace committed fraud while acting in a
5 fiduciary capacity.10 Accordingly, the bankruptcy court
6 concluded that the debt was nondischargeable under § 523(a)(4),
7 but only as to the $799,960 that was held in the Cane O’Neill
8 account.
9 Wallace contends that the bankruptcy court incorrectly
10 applied Arizona state law in determining that a trust existed.11
11 Wallace asserts that a written trust document was required to
12 create a trust, but there is no such requirement under Arizona
13 law. Wallace also asserts that the trustee of the Cane O’Neill
14
10
15 The bankruptcy court also concluded that Wallace’s
conduct amounted to fraud under Arizona state law, citing Echols
16 v. Beauty Built Homes, Inc., 647 P.2d 629, 631 (Ariz. 1982)
(elements of fraud under Arizona law are (1) a representation;
17 (2) its falsity; (3) its materiality; (4) the speaker’s knowledge
of its falsity or ignorance of its truth; (5) the speaker’s
18
intent that it be acted upon by the recipient in the manner
19 reasonably contemplated; (6) the hearer’s ignorance of its
falsity; (7) the hearer’s reliance on its truth; (8) the right to
20 rely on it; and (9) his consequent and proximate injury) and
Madisons Chevrolet, Inc. v. Donald, 505 P.2d 1039, 1042 (Ariz.
21 1973) (fraudulent concealment may support a finding of fraudulent
22 misrepresentation).
11
23 Wallace seems to be arguing that the court should have
looked to federal law to determine whether a trust existed. She
24 cites Thornton v. Thornton (In re Thornton), 544 F.2d 1005, 1007
(9th Cir. 1976), which recites the elements of an express trust
25 as (1) sufficient words to create a trust; (2) a definite
26 subject; and (3) a certain and ascertained object or res (citing
to 89 C.J.S. Trusts § 22). To the extent Thornton suggests a
27 federal standard is applied in determining whether a trust
exists, that case was clarified in subsequent Ninth Circuit
28 decisions. See, e.g., Ragsdale, 780 F.2d at 796.
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1 account was the law firm, not Wallace, but she overlooks the fact
2 that the account was in her name and that she agreed not to
3 authorize disbursement of those funds without the consent of
4 Thomas & Wong. Wallace also points out that the loan funds were
5 wired into the Cane O’Neill account from an entity other than
6 Thomas & Wong but fails to explain how that changes the parties’
7 agreement or understanding, especially where Thomas & Wong was
8 named as the obligee in the $1.5 million promissory note. In
9 short, Wallace has not shown clear error in any of the bankruptcy
10 court’s findings with respect to the existence of a fiduciary
11 relationship for purposes of § 523(a)(4).
12 Wallace also argues that there was no intent to defraud and
13 again refers to the bankruptcy court’s finding that there was
14 insufficient evidence to conclude that Wallace intended to harm
15 Thomas & Wong. As noted, this finding is irrelevant to the
16 determination of fraudulent intent.
17 Finally, the bankruptcy court correctly concluded that only
18 the $799,960 deposited into the Cane O’Neill trust account was
19 nondischargeable under § 523(a)(4), as that is the only
20 identifiable trust res.
21 VII. CONCLUSION
22 Wallace has not shown that the bankruptcy court clearly
23 erred in its factual findings or application of legal standard to
24 those findings. Accordingly, we AFFIRM the bankruptcy court’s
25 judgment of nondischargeability under §§ 523(a)(2)(A) and (a)(4).
26
27
28
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