In re: Ma Kazaz ( 2022 )

FILED
DEC 5 2022
NOT FOR PUBLICATION SUSAN M. SPRAUL, CLERK
U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT
UNITED STATES BANKRUPTCY APPELLATE PANEL
OF THE NINTH CIRCUIT
In re: BAP No. CC-22-1028-GTS
MA KAZAZ,
Debtor. Bk. No. 6:20-bk-13807-SC
NEXTGEAR CAPITAL, INC., Adv. No. 6:20-ap-01153-SC
Appellant,
v. MEMORANDUM*
MA KAZAZ; HOWARD B. GROBSTEIN,
Chapter 7 Trustee,
Appellees.
Appeal from the United States Bankruptcy Court
for the Central District of California
Scott C. Clarkson, Bankruptcy Judge, Presiding
Before: GAN, TAYLOR, and SPRAKER, Bankruptcy Judges.
INTRODUCTION
Appellant NextGear Capital, Inc. (“NextGear”) appeals the
bankruptcy court’s order entering judgment in favor of chapter 71 debtor
*
This disposition is not appropriate for publication. Although it may be cited for
whatever persuasive value it may have, see Fed. R. App. P. 32.1, it has no precedential
value, see 9th Cir. BAP Rule 8024-1.
1 Unless specified otherwise, all chapter and section references are to the
Bankruptcy Code, 11 U.S.C. §§ 101–1532, all “Rule” references are to the Federal Rules
of Bankruptcy Procedure, all “Civil Rule” references are to the Federal Rules of Civil
Procedure, and all “LBR” references are to the Local Bankruptcy Rules for the Central
District of California Bankruptcy Court.
Ma Kazaz (“Debtor”) on NextGear’s claims for nondischargeability. After
trial, the bankruptcy court determined that NextGear failed to prove its
claims under § 523(a)(2), (a)(4), and (a)(6). On appeal, NextGear argues that
the court erred by finding no evidence for nondischargeability and by
denying NextGear’s request to read Debtor’s deposition testimony into the
record.
We are troubled by the circumstantial evidence of fraud in this case;
it is apparent that Debtor or others close to Debtor engaged in wrongdoing.
But NextGear bears the burden of proving the elements of its claims. The
bankruptcy court properly evaluated the evidence produced by NextGear
and concluded that it did not establish the requisite elements of
nondischargeability. Our review of the bankruptcy court’s factual findings
is limited to whether the court clearly erred, and although the bankruptcy
court made overbroad pronouncements of law, NextGear has not
demonstrated reversible error. We AFFIRM.
FACTS
A. Prepetition Events
NextGear is a finance company that provides credit line floor
financing for independent automobile dealers. In September 2019,
NextGear began a lending relationship with Kar Max, a California
corporation owned by Debtor. Kar Max executed a promissory note (“Loan
Agreement”) under which NextGear would make credit advances to Kar
Max for the purchase of motor vehicles. Kar Max granted NextGear a
2
security interest on all its assets, including all vehicles and inventory, and
all of Kar Max’s accounts, documents, and records. NextGear perfected its
security interest by filing a UCC-1 financing statement. Debtor also signed
a personal guaranty of Kar Max’s obligation, and a power of attorney on
behalf of Kar Max and in favor of NextGear.
Between September 24, 2019, and December 2, 2019, Kar Max
purchased twenty-nine vehicles using credit advances from NextGear.
Pursuant to the Loan Agreement, NextGear held the titles to each vehicle,
and it released the titles upon Kar Max’s sale of each vehicle. Kar Max used
NextGear’s online dealer portal to indicate sales of vehicles and initiate
electronic payments. NextGear’s process was to release each title upon
receipt of a payment corresponding to a sale of that vehicle, or if requested
by Kar Max in connection with a financed purchase.
According to NextGear, between November 27, 2019, and December
3, 2019, Kar Max made seventeen payments totaling $735,770.56 for
twenty-six vehicles which it purportedly sold. In response to the online
payments, NextGear released the titles to the vehicles. However, the initial
payment was not honored by Kar Max’s bank due to insufficient funds,
and NextGear asserts that it received notice from Kar Max’s bank that stop
payment orders were requested by Kar Max on all seventeen payments.
Consequently, none of the payments were processed.
3
NextGear declared the note in default on December 4, 2019, but it
was unable to immediately locate the vehicles allegedly sold by Kar Max.2
Kar Max did not repay the amounts advanced under the Loan Agreement,
and NextGear filed suit in state court.
B. The Adversary Complaint and Trial
After Debtor filed a chapter 7 petition in May 2020, NextGear filed an
adversary complaint seeking a nondischargeable judgment under
§ 523(a)(2), (4), and (6), for the amounts due under the Loan Agreement.
NextGear alleged that Debtor engaged in a fraudulent scheme and
had no intention of repaying the advances made by NextGear. It asserted
that Debtor sold the vehicles, intentionally placed the stop payment orders,
and retained the proceeds for his own benefit. NextGear claimed that
Debtor had sole control over Kar Max’s proceeds and, instead of paying
those proceeds to NextGear, embezzled the funds. Finally, NextGear
asserted that Debtor’s misappropriation of the proceeds constituted a
willful and malicious injury.
The bankruptcy court conducted a one-day trial on February 10, 2022.
NextGear called three witnesses: notary Sylvia Garkow, Chase Bank
representative Jaime Cuevas, and Eric Stephens, a portfolio manager for
NextGear. Ms. Garkow testified that she notarized Debtor’s signature on
the power of attorney. 3 Mr. Cuevas explained the Kar Max bank account
2
NextGear ultimately located and repossessed one vehicle.
3
The other loan documents were not notarized, but appear to be electronically
4
transactions involving stop payment orders and returns of payments for
insufficient funds. He also testified that Debtor had signatory authority on
Kar Max’s bank account and that Debtor added his brother, Marouf Kazaz,
as an authorized signer in July 2018 but later removed that authority.
The bankruptcy court questioned Mr. Cuevas about whether the stop
payment orders could be correlated to specific payments made by Kar
Max, but neither the witness nor NextGear’s counsel could establish a
connection.4
Mr. Stephens then testified generally about NextGear’s business
practices and specifically about his interactions with Debtor, the Loan
Agreement, and NextGear’s transactions with Kar Max. Regarding the
Loan Agreement, Mr. Stephens could not verify that Debtor electronically
signed on behalf of Kar Max. But he stated that in September 2019, he met
with Debtor at Kar Max’s location, obtained his identification, and
explained how the loan process would work.
Mr. Stephens testified that after NextGear declared a default on
December 3, 2019, he returned to Kar Max’s location but found no vehicles
signed by Debtor on behalf of Kar Max.
4 After questioning Mr. Cuevas and engaging in a colloquy with NextGear’s
counsel, the court asked:
THE COURT: But you don’t have any evidence that those stop payments
reflected anything to do with checks provided to NextGear?
COUNSEL: No.
THE COURT: With respect to this testimony?
COUNSEL: Not with this witness.
5
on the lot. He requested Kar Max’s business records but was unable to
obtain them from Marouf Kazaz or the landlord of the property. The office
where Kar Max had operated was empty, and a new dealership had taken
over the property.
After examining the witnesses, counsel for NextGear proposed to
read excerpts from Debtor’s deposition transcript into the record. The
bankruptcy court confirmed with NextGear’s attorney that the transcript
had been lodged with the court, but that NextGear did not designate
specific portions which it sought to introduce as evidence or serve the
marked transcript on Debtor, and it did not include the transcript on its
exhibit list.
Debtor objected to admission of the transcript and argued that he
was never provided with a copy of the deposition transcript or given the
opportunity to read and sign it. The bankruptcy court then asked counsel
for NextGear: “Did you give the deponent a copy of this written transcript
with both your questions and his answers, and give him an opportunity to
review . . . his answers and make any changes? Did you do that?” Counsel
for NextGear replied, “I don’t believe so, your Honor,” and, after further
discussion, acknowledged that he did not have proof that the transcript
was delivered to Debtor or his counsel. The court denied NextGear’s
request to read portions of the transcript into the record.
After the court’s ruling, NextGear stated that it had no other
witnesses. Debtor did not call any witnesses and closed his case.
6
C. The Court’s Ruling and NextGear’s Motion for Reconsideration
At the conclusion of trial, the bankruptcy court questioned
NextGear’s attorney about what evidence had been produced to establish a
misrepresentation as part of its § 523(a)(2)(A) claim. After counsel asserted
that the misrepresentations were the payments made to obtain a release of
the vehicle titles, the court replied:
The misrepresentation has to occur at the time he entered into
the contract . . . . The misrepresentation or the omission has to
take place when he signed the contract, not later on when he
failed to pay, or sent an insufficient fund check. This action
that you have sued him on is for liability of a promissory note
and security agreement that he originally signed. For you to
prevail on a 523(a)(2)(A) action, you need to demonstrate to
me a misrepresentation that was made to induce your client to
enter into the agreement, not later activities. That may come
under 523(a)(6), but it certainly doesn’t come under
523(a)(2)(A).
Hr’g Tr. (Feb. 10, 2022) at 137:23-138:15.
The bankruptcy court then orally ruled that NextGear did not prove
its claims for nondischargeability. The court held that NextGear failed to
present any evidence of a fraudulent misrepresentation or deceptive
conduct by Debtor at the time the financing was obtained. The court
reasoned that NextGear did not present evidence that Debtor actually
signed the agreement on behalf of Kar Max, or that the stop payment
orders and notices of insufficient funds were correlated with specific
payments made by Kar Max.
7
The court further held that NextGear did not present evidence that
Debtor initiated the payments or stop payment orders with an intent to
obtain the titles, stating: “I have no evidence that [Debtor] did it. Anyone
with the passwords, I suspect, could have gotten in. But I have no evidence
today that he did that.” And the court determined that NextGear failed to
present evidence that Debtor knew the representations were false or that he
had an intent to deceive. It noted that the focus must be on the totality of
the circumstances and whether they create the overall impression of a
deceitful debtor, but stated: “Again, I could speculate. I could postulate. I
could—But I can’t find evidence for that, and that’s not the role that we
take.” The court also determined that NextGear did not present evidence of
justifiable reliance on—or damages proximately caused by—Debtor’s
conduct. The evidence merely supported activities undertaken by Kar Max.
Regarding § 523(a)(4), the court held that, although Kar Max may
have held the vehicles in trust, NextGear did not prove that Debtor was
acting in a fiduciary capacity. NextGear did not present evidence of larceny
or embezzlement because it did not establish that Debtor took property
belonging to NextGear. The court reasoned that NextGear failed to show
that Debtor took the proceeds or even that Kar Max was no longer in
possession of the vehicles or proceeds, stating: “That’s the problem with
the evidence that I have in front of me, which is the only thing I can operate
on. I don’t know how [Debtor] stole, defalcated, took the money. You told
8
me that Kar Max somehow benefitted, but you haven’t connected the
dots.”
Finally, the court ruled that NextGear did not prove its claim under
§ 523(a)(6) because it presented no evidence to establish that Debtor acted
willfully and maliciously or committed a wrongful act.
On February 16, 2022, the bankruptcy court issued an order entering
judgment in favor of Debtor. The order incorporated the court’s oral
rulings and further supplemented its reasoning. In addition to its stated
reasons for denying NextGear’s use of the deposition transcript, the court
cited NextGear’s failure to comply with LBR 7030-1(b), which sets forth the
requirements for offering deposition testimony as evidence.5 The court also
reiterated that, with respect to deceptive conduct by Debtor, NextGear did
5
LBR 7030-1(b) provides:
Unless otherwise ordered by the court, each party intending to offer any
evidence by way of deposition testimony pursuant to F. R. Civ. P. 32 and F. R. Evid. 803
or 804 must:
(1) Lodge the original deposition transcript and a copy pursuant to this rule with
the clerk at least 7 days before the hearing or trial at which it is to be offered;
(2) Identify on the copy of the transcript the testimony the party intends to offer
by bracketing in the margins the questions and answers that the party intends to offer at
trial. The opposing party must likewise countermark any testimony that it plans to
offer. The parties must agree between themselves on a separate color to be used by each
party which must be used consistently by that party for all depositions marked in the
case;
(3) Mark objections to the proffered evidence of the other party in the margins of
the deposition by briefly stating the ground for the objection; and
(4) Serve and file notice of the portions of the deposition marked or
countermarked by stating the pages and lines so marked, objections made, and the
grounds indicated therefor. The notice must be served and filed within 7 days after the
party has marked, countermarked, or objects to the deposition evidence.
9
not establish a sufficient link between the non-sufficient funds and stop
payment charges on Kar Max’s bank account and the payments made to
NextGear. As to whether Debtor initiated the payments and stop payment
orders, the court noted that NextGear elicited testimony that Debtor’s
brother was an authorized signer on the Kar Max account, but it failed to
provide evidence of when he was removed from the account.
On February 24, 2022, NextGear filed a motion for a new trial, to alter
or amend the judgment, or for relief from the judgment, pursuant to Civil
Rules 59 and 60(b)(3), made applicable by Rules 9023 and 9024 (the
“Reconsideration Motion”). NextGear argued that Debtor and his counsel
misled the court by claiming that they did not receive the deposition
transcript. It attached a declaration from the court reporting company that
arranged Debtor’s deposition which evidenced that Debtor’s counsel was
emailed a copy of the transcript and that he confirmed receipt of the
transcript in a telephone conversation. NextGear argued that exclusion of
the deposition transcript prevented it from fully and fairly presenting its
case and claimed that the transcript would establish: (1) facts about Debtor
and his business; (2) that Debtor had sole control over Kar Max; (3) that
Debtor was the sole signer on the Kar Max bank account; and (4) that
Debtor destroyed Kar Max’s business records. It also maintained that
excluding the transcript was an overly harsh sanction for its failure to
comply with LBR 7030-1.
10
On March 4, 2022, the bankruptcy court denied the Reconsideration
Motion. NextGear timely appealed.
JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and
157(b)(2)(I). We have jurisdiction under 28 U.S.C. § 158.
ISSUES
Did the bankruptcy court err by finding that NextGear failed to
establish nondischargeability under § 523(a)(2), (a)(4), or (a)(6)?
Did the bankruptcy court err by excluding Debtor’s deposition
transcript as evidence?
STANDARDS OF REVIEW
The ultimate question of whether a claim is nondischargeable is a
mixed question of law and fact, which we review de novo. Carillo v. Su (In
re Su), 290 F.3d 1140, 1142 (9th Cir. 2002). However, when the appellant
challenges the bankruptcy court’s factual findings, we review those
findings for clear error. 6 Id.6
NextGear describes its issues on appeal as: “Whether Appellant made a prima
facie case that Appellee’s debt to Appellant should be excepted from discharge” under
§ 523(a)(2)(A), (4), & (6). Although the bankruptcy court ruled that there was no
evidence to prove the nondischargeability claims, it entered its findings of fact and
conclusions of law on the record at the conclusion of the trial, pursuant to Civil Rule
52(a), made applicable by Rule 7052. And even if Debtor had made a motion for a
directed verdict at the close of NextGear’s case, which is appropriately considered a
motion for judgment based on partial findings under Civil Rule 52(c), see Kuan v. Lund
(In re Lund), 202 B.R. 127, 129 (9th Cir. BAP 1996), and even if the court had ruled on
such a motion, we would still review the court’s decision for clear error. Id. at 130 (“On
a motion under [Civil Rule 52(c)], ‘[t]he judge is the trier of fact and may weigh and
11
Factual findings are clearly erroneous if they are illogical,
implausible, or without support in the record. Retz v. Samson (In re Retz),
606 F.3d 1189, 1196 (9th Cir. 2010). “Where there are two permissible views
of the evidence, the factfinder’s choice between them cannot be clearly
erroneous.” Anderson v. City of Bessemer City, 470 U.S. 564, 574 (1985).
A bankruptcy court’s decision to exclude deposition testimony is an
evidentiary ruling which we review for abuse of discretion. See Nationwide
Life Ins., Co. v. Richards, 541 F.3d 903, 909 (9th Cir. 2008). To reverse an
evidentiary ruling, we must conclude both that there was an abuse of
discretion and that the error was prejudicial. Van Zandt v. Mbunda (In re
Mbunda), 484 B.R. 344, 351 (9th Cir. BAP 2012), aff’d, 604 F. App’x 552 (9th
Cir. 2015). A bankruptcy court abuses its discretion if it applies an incorrect
legal standard or its factual findings are illogical, implausible, or without
support in the record. TrafficSchool.com v. Edriver, Inc., 653 F.3d 820, 832 (9th
Cir. 2011).
consider the evidence and sustain defendant’s motion though plaintiff’s evidence
establishes a prima facie case that would have precluded a directed verdict for
defendant in a jury case.’” (quoting Stone v. Millstein, 804 F.2d 1434, 1437 (9th Cir.
1986))); Prado v. Stearman (In re Stearman), 256 B.R. 788, 791-92 (9th Cir. BAP 2000) (“We
review a finding made under Rule 7052(c) for clear error . . . [T]he focus is not on
whether [creditor] made a prima facie case with respect to [debtor’s] (alleged) intent to
deceive, for even if she had, the court could have still ruled on [debtor’s] motion as it
did. Instead, the focus concerns the court’s dispositive finding of the fact that [debtor]
lacked the intent to deceive.”).
12
DISCUSSION
A. The Bankruptcy Court Did Not Clearly Err by Finding Insufficient
Evidence to Establish Nondischargeability.
We disagree with the bankruptcy court’s ruling that NextGear
presented no evidence to prove nondischargeability; the record clearly
contains circumstantial evidence of Debtor’s wrongful conduct. But we
reverse the bankruptcy court’s factual findings only if they are clearly
erroneous, and we do not substitute our judgment for that of the
bankruptcy court. See Legal Serv. Bureau, Inc. v. Orange Cnty. Bail Bonds, Inc.
(In re Orange Cnty. Bail Bonds, Inc.), 638 B.R. 137, 149 (9th Cir. BAP 2022).
NextGear has not demonstrated that the bankruptcy court’s finding—that
NextGear failed to establish the elements of its claims—is illogical,
implausible, or without support in the record.
1. Section 523(a)(2)(A)
To prevail on a nondischargeability claim under § 523(a)(2)(A),
NextGear had to prove, by a preponderance of the evidence:
(1) misrepresentation, fraudulent omission, or deceptive conduct by
Debtor; (2) knowledge of the falsity or deceptiveness of his statement or
conduct; (3) an intent to deceive; (4) justifiable reliance on Debtor’s
statement or conduct; and (5) damage proximately caused by its reliance on
the statement or conduct. Turtle Rock Meadows Homeowners Ass’n v. Slyman
(In re Slyman), 234 F.3d 1319, 1323 (9th Cir. 1996). A fraudulent omission of
a material fact may constitute a false representation if the debtor is under a
13
duty to disclose. Apte v. Japra, M.D., F.A.C.C., Inc. (In re Apte), 96 F.3d 1319,
1323 (9th Cir. 1996). In such cases, reliance and causation are established
and need not be separately proven. Id.; see also Citibank (South Dakota), N.A.
v. Eashai (In re Eashai), 87 F.3d 1082, 1089 (9th Cir. 1996)).
“[A] promise made with a positive intent not to perform or without a
present intent to perform satisfies § 523(a)(2)(A).” Rubin v. West (In re
Rubin), 875 F.2d 755, 759 (9th Cir. 1989). Additionally, a promise can be
fraudulent “where the promisor knew or should have known of his
prospective inability to perform.” McCrary v. Barrack (In re Barrack), 217
B.R. 598, 606 (9th Cir. BAP 1996) (citation omitted). In determining whether
a debtor had no intention to perform, the bankruptcy court may look to all
surrounding facts and circumstances. Id. at 607.
NextGear does not allege a fraudulent omission by Debtor; it argues
that Debtor made affirmative misrepresentations by entering the payments
on behalf of Kar Max with the intent to place stop payment orders.
In rejecting NextGear’s argument, the bankruptcy court held that the
misrepresentation or omission had to occur when Debtor signed the
contract, not when he later failed to pay. But, under the type of revolving
credit line at issue here, nondischargeability claims are not limited to
misrepresentations made at the inception of the agreement. Subsequent
credit advances may be nondischargeable if they are made in justifiable
reliance upon a debtor’s subsequent misrepresentations, fraudulent
omissions, or deceptive conduct. For example, if the payments increased
14
available credit by reducing the outstanding balance, thereby inducing
NextGear to make further advances, or if the payments induced NextGear
to release vehicle titles, NextGear may have a cognizable claim under
§ 523(a)(2)(A) if it can prove resulting damage.
We agree with the bankruptcy court that NextGear did not prove
fraud at the time of the Loan Agreement.7 Notwithstanding the bankruptcy
court’s overly restrictive pronouncement of law, we also agree that
NextGear failed to prove a claim for damages resulting from Debtor’s
alleged fraud in making the payments.
The debt NextGear seeks to make nondischargeable is Kar Max’s full
contractual obligation, which Debtor guaranteed. Advances made prior to
November 27, 2019, when Debtor purportedly made the first fraudulent
payment, could not have been obtained by that fraud. See New Falls Corp. v.
Boyajian (In re Boyajian), 367 B.R. 138, 147 (9th Cir. BAP 2007) (“For
purposes of § 523(a)(2), . . . the timing of the fraud and the elements to
prove fraud focus on the time when the lender made the extension of credit
7
On appeal, NextGear suggests that because the Loan Agreement included
Borrower’s representations that payments would be made from an account with
immediately available funds sufficient to cover electronic payments—and Debtor
signed the Loan Agreement as president of Kar Max—he made express representations
of good funds at loan inception. NextGear did not present evidence of Debtor’s intent to
defraud at the time of the Loan Agreement, and it did not prove that Debtor was
making representations in his individual capacity by signing on behalf of Kar Max.
Moreover, in the bankruptcy court and on appeal, NextGear argues that Debtor made
misrepresentations by making payments with the intent to place stop payment orders
after NextGear released the titles.
15
to the Debtor.” (cleaned up)); see also Reingold v. Shaffer (In re Reingold), BAP
Nos. CC-12-1112-PaDKi, CC-12-1141-PaDKi, 2013 WL 1136546, at *5 (9th
Cir. BAP Mar. 19, 2013) (“misrepresentations made by a debtor to a creditor
after the credit has been extended have no effect upon the discharge of the
debt.”) (citations omitted)); 4 COLLIER ON BANKRUPTCY ¶ 523.08 [1] (Alan N.
Resnick & Henry J. Sommer, eds. 16th ed. rev. 2020) (“If the property or
services were obtained before the making of any false representation,
subsequent misrepresentations will have no effect on dischargeability.”).
It is possible that advances made after November 27, 2019, were
obtained by fraud. But NextGear did not argue in the bankruptcy court or
on appeal that it was induced to make subsequent advances by the
allegedly fraudulent payments. Additionally, the record appears to
indicate that NextGear made advances exceeding the credit limit prior to
the November 27, 2019 payment.
Furthermore, while it may be possible that fraudulent payments
induced NextGear to release the vehicle titles, NextGear does not articulate
how releasing the titles caused it any damage. Sales of the vehicles would
be effective between Kar Max and buyers even if NextGear withheld the
titles. See Brasher’s Cascade Auto Auction v. Valley Auto Sales & Leasing, 119
Cal. App. 4th 1038, 1063-64 (2004). Similarly, NextGear’s security interests
were not contingent on holding the titles because the vehicles were Kar
Max’s inventory, and thus, the validity and perfection of NextGear’s
security interests was exclusively controlled by the California Commercial
16
Code. See Cal. Veh. Code § 5907; Simon v. Chrysler Credit Corp. (In re
Babaeian Transp. Co.), 206 B.R. 536, 545 (Bankr. C.D. Cal. 1997).
Whether or not NextGear released the titles, its security interests
would continue in sale proceeds, and would ordinarily continue in the
vehicles unless they were sold to “buyers in the ordinary course of
business.” See Cal. Com. Code §§ 9315; 9320(a). NextGear did not prove
that Kar Max sold the vehicles or that its security interests did not continue
in the vehicles notwithstanding the purported sales. And it failed to show
that Kar Max was not in possession of proceeds which would be subject to
its security interests.
Though the record contains circumstantial evidence that Debtor or
someone close to Debtor may have engaged in fraud, we do not find the
bankruptcy court’s factual findings illogical, implausible, or without
support in the record. The court did not clearly err by denying relief under
§ 523(a)(2)(A).
2. Section 523(a)(4)
Section 523(a)(4) excepts from discharge debts “for fraud or
defalcation while acting in a fiduciary capacity, embezzlement, or larceny.”
NextGear does not allege fraud or defalcation by a fiduciary; it alleges that
Debtor committed embezzlement or larceny.
Embezzlement for purposes of § 523(a)(4) is governed by federal law.
First Del. Life Ins. Co. v. Wada (In re Wada), 210 B.R. 572, 576 (9th Cir. BAP
1997). Embezzlement is defined as “the fraudulent appropriation of
17
property by a person to whom such property has been [e]ntrusted or into
whose hands it has lawfully come.” Id. (citation omitted). Embezzlement
“requires a showing of wrongful intent.” Bullock v. BankChampaign, N.A.,
569 U.S. 267, 274 (2013).
To prevail on a claim for embezzlement, a creditor must prove:
(1) the property was rightfully in the possession of a non-owner; (2) the
non-owner appropriated the property to a use other than which it was
entrusted; and (3) circumstances indicating fraud. Transamerica Com. Fin.
Corp. v. Littleton (In re Littleton), 942 F.2d 551, 555 (9th Cir. 1991).
Larceny is the “felonious taking of another’s personal property with
intent to convert it or deprive the owner of the same.” Ormsby v. First Am.
Title Co. of Nev. (In re Ormsby), 591 F.3d 1199, 1205 (9th Cir. 2010) (citation
omitted). Essentially, the difference between embezzlement and larceny is
whether the defendant initially had the right to possess the property. See
Peltier v. Van Loo Fiduciary Servs., LLC (In re Peltier), 643 B.R. 349, 360 (9th
Cir. BAP 2022).
NextGear argues that Debtor committed either embezzlement or
larceny by inducing it to release titles and failing to repay the credit
advances. It suggests that Debtor then either received payment from
buyers or fraudulently transferred the vehicles to third parties.
NextGear fails to identify any property belonging to NextGear which
Debtor wrongfully took. The funds advanced under the Loan Agreement
and the vehicles that Kar Max purchased belonged to Kar Max, not
18
NextGear. The vehicles were subject to NextGear’s security interest and
Kar Max had contractual obligations regarding disposition of the vehicles
which it apparently breached, but NextGear does not explain why that
constitutes embezzlement or larceny by Debtor. In other words, NextGear
does not identify any of its property that was entrusted to Debtor, and it
does not demonstrate that Debtor wrongfully appropriated it.
NextGear argues that under California law, “a lien constitutes a
property interest which may be converted.” Farmers Ins. Exchange v. Zerin,
53 Cal. App. 4th 445, 451 (1997). Consequently, “one who wrongfully
withholds personal property from one who is entitled to it under a security
agreement may be liable for conversion.” Thiara v. Spycher Bros. (In re
Thiara), 285 B.R. 420, 428 (9th Cir. BAP 2002). The record does not establish
that Debtor withheld the vehicles or sale proceeds, or even that the vehicles
were actually sold. And as discussed above, NextGear failed to show that
its security interests did not continue in the vehicles and proceeds if the
vehicles were sold. The bankruptcy court did not clearly err by
determining that NextGear failed to prove nondischargeability under
§ 523(a)(4).
3. Section 523(a)(6)
Section 523(a)(6) excepts from discharge debts arising from willful
and malicious injuries to an entity or its property. In re Ormsby, 591 F.3d at
1206. The willfulness and malice elements are legally distinct and require
separate consideration. In re Su, 290 F.3d at 1146-47.
19
Under § 523(a)(6), a debt arises from a “willful” injury when the
debtor subjectively intended to cause injury to the creditor or subjectively
believed that injury was substantially certain to occur. In re Ormsby, 591
F.3d at 1206. A debt arises from a “malicious” injury when it is based on:
“(1) a wrongful act, (2) done intentionally, (3) which necessarily causes
injury, and (4) is done without just cause or excuse.” Id. at 1207 (quoting
Petralia v. Jercich (In re Jercich), 238 F.3d 1202, 1209 (9th Cir. 2001)).
According to NextGear, Debtor caused willful and malicious injury
by taking possession of NextGear’s collateral and refusing to turn over the
vehicles after default. It argues that Debtor converted the vehicles, and
conversion under state law can support nondischargeability under
§ 523(a)(6).
But again, NextGear did not prove that Debtor had possession of the
vehicles or that he refused to turn them over upon default. NextGear
merely elicited testimony that its representative did not see the vehicles at
Kar Max’s lot on December 3, 2019. While this is circumstantial evidence of
potential wrongdoing by someone associated with Kar Max, it is not
conclusive of Debtor’s wrongdoing.
Moreover, conversion under California law decides only that a
defendant has engaged in wrongful dominion over a plaintiff’s property; it
does not decide that a defendant caused “willful and malicious” injury.
Peklar v. Ikerd (In re Peklar), 260 F.3d 1035, 1039 (9th Cir. 2001). To prevail on
a § 523(a)(6) claim based on conversion under California law, NextGear
20
had to “first establish that a conversion has occurred under California law,
and second that the conversion is willful and malicious.” Comcast of L.A.,
Inc. v. Sandoval (In re Sandoval), 341 B.R. 282, 295 (Bankr. C.D. Cal. 2006); see
also In re Thiara, 285 B.R. at 429 (“Even though a conversion occurred,
[creditor] still had to prove that Debtor converted the proceeds with
‘wrongful intent.’”).
The bankruptcy court determined that NextGear did not present
sufficient evidence to establish either that Debtor committed a wrongful
act, or that he had the requisite subjective state of mind to make his
conduct willful and malicious. The court’s finding was not clearly
erroneous.
B. The Bankruptcy Court did not Abuse its Discretion by Precluding
Deposition Testimony.
Pursuant to Civil Rule 32(a), made applicable by Rule 7032, all or part
of a transcript may be used against a party if: (1) the party was present or
represented at the deposition, (2) the transcript is used to the extent it
would be admissible under the Federal Rules of Evidence if the deponent
were present, and (3) its use is allowed by Civil Rule 32(a)(2) through (8).
Civil Rule 32(a)(3) provides that an adverse party may use the deposition
of a party “for any purpose.”
Bankruptcy courts “enjoy significant discretion in deciding whether
to admit party deposition transcripts used by the adverse party.” Tejeda v.
Velasquez (In re Tejeda), BAP No. CC-18-1227-SFL, 2019 WL 1212354, at *6
21
(9th Cir. BAP Mar. 12, 2019) (citing Nationwide Life Ins. Co., 541 F.3d at 914;
Mark IV Props., Inc. v. Club Dev. & Mgmt. Corp., 12 B.R. 854, 859 (Bankr. S.D.
Cal. 1981); Hub v. Sun Valley Co., 682 F.2d 776, 778 (9th Cir. 1982)). The
bankruptcy court is in the best position to decide whether to admit a prior
deposition because “the underlying objective is efficiency at trial without
jeopardizing accurate fact finding.” Sun Valley Co., 682 F.2d at 778. Thus, if
the court applies the correct legal standards, “we will not normally
substitute our judgment on the admissibility of a prior deposition.” Id.NextGear argues the bankruptcy court erred by refusing to admit the
deposition testimony because Debtor’s counsel falsely represented that
Debtor was never given the opportunity to read or sign the transcript. It
maintains that by excluding the testimony, the bankruptcy court prevented
it from establishing Debtor’s fraudulent conduct, and without the
transcript, it was unable to present its case against Debtor fully and fairly.
We disagree.
The bankruptcy court did not abuse its discretion by excluding the
transcript at trial. Given NextGear’s admitted noncompliance with LBR
7031-1(b), and the unresolved question about whether Debtor received the
transcript, the court properly exercised its discretion to exclude the
deposition transcript in favor of live testimony. See, e.g., C. Wright & A.
Miller, 8A FEDERAL PRACTICE AND PROCEDURE, CIVIL, § 2142 (3d ed. 2022)
(describing the “long-established principle that testimony by deposition is
less desirable than oral testimony”); 7 James W. Moore et al., MOORE’S
22
FEDERAL PRACTICE, CIVIL §32.02[1][a] (2022) (discussing the “strong
preference of Anglo-American courts for live testimony”); Napier v. Bossard,
102 F.2d 467, 469 (2d Cir. 1939) (Learned Hand, J.) (“The deposition has
always been, and still is, treated as a substitute, a second-best, not to be
used when the original is at hand.”).
It its Reconsideration Motion, NextGear provided evidence that
Debtor’s counsel misinformed the court at trial; Debtor did receive a copy
of the transcript. In denying the Reconsideration Motion, the court held
that, notwithstanding Debtor’s false statement about receipt of the
transcript, it would have excluded the transcript based on NextGear’s
noncompliance with LBR 7031-1(b), and NextGear’s failure to lodge a
transcript that satisfied Civil Rule 30(e)(2).8
On appeal, NextGear argues that the bankruptcy court abused its
discretion by excluding the transcript as a sanction for its failure to comply
with technical provisions of the local bankruptcy rules.
“The bankruptcy court has broad discretion to apply its local rules
strictly or to overlook any transgressions.” Nunez v. Nunez (In re Nunez),
196 B.R. 150, 157 (9th Cir. BAP 1996); see also Qualls v. Blue Cross of Cal., Inc.,
22 F.3d 839, 842 n.2 (9th Cir. 1994) (“Only in rare cases will we question the
exercise of discretion in connection with application of the local rules.”).
8 Civil Rule 30(e)(2) requires the deposition officer to provide a certification
prescribed by Civil Rule 30(f)(1), indicate whether the deponent requested a review of
the transcript, and if so, attach any changes made by the deponent. The transcript
lodged by NextGear did not include a certification by the deposition officer.
23
But when the court sanctions a party based on a failure to comply
with local rules, its discretion is narrow, and must meet strict criteria.
Zambrano v. City of Tustin, 885 F.2d 1473, 1477 (9th Cir. 1989) (requiring
sanctions for violation of local rules to be: (1) consistent with governing
statutes and court rules; (2) necessary for the court to conduct its business;
and (3) closely connected to the need to preserve the integrity of the court’s
docket.) Sanctions based on local rule violations also require a level of
culpability higher than mere negligence. See Olomi v. Tukhi (In re Tukhi), 568
B.R. 107, 112 (9th Cir. BAP 2017).
In denying the Reconsideration Motion, the bankruptcy court
explained that its decision to exclude the transcript was based on
NextGear’s failure to comply with LBR 7030-1 and its repeated and
continued failures to follow applicable local rules and court orders
throughout the case. It concluded that even if the exclusion of the transcript
was case-dispositive, the factors enumerated in Malone v. U.S. Postal Serv.,
833 F.2d 128, 130 (9th Cir. 1987) 9 warranted the sanction.
NextGear has not demonstrated that the court abused its discretion
by excluding the deposition transcript, but even if it did, we do not reverse
9
In Malone, the Ninth Circuit held that dismissal for failure to comply with court
orders required evaluation of five factors: “(1) the public’s interest in expeditious
resolution of litigation; (2) the court’s need to manage its docket; (3) the risk of prejudice
to the defendants; (4) the public policy favoring disposition of cases on their merits; and
(5) the availability of less drastic sanctions.” 833 F.2d at 130.
24
a bankruptcy court’s evidentiary decision absent a showing of prejudice.
See In re Mbunda, 484 B.R. at 351.
NextGear has not made a credible showing of prejudice. It included
Debtor on its pretrial witness list and Debtor was present at trial and
available to testify. Yet, after the court denied its request to read the
deposition transcript, NextGear chose not to call Debtor as a witness. See
Brazos River Authority v. GE Ionics, Inc., 469 F.3d 416, 434 (5th Cir. 2006)
(“[D]istrict courts are reluctant to allow the reading into evidence of [a]
deposition if the witness is available to testify at trial, and such exclusion is
usually deemed harmless error.” (cleaned up)); Dhyne v. Meiners Thriftway,
Inc., 184 F.3d 983, 990 (8th Cir. 1999) (“[T]hough arguably inconsistent with
the language of [Civil] Rule 32(a)(2), precluding a party from reading the
deposition testimony of an available adverse party is at worst harmless
error.”).
NextGear argues that it was deprived of a full and fair opportunity to
establish Debtor’s fraudulent conduct, but we see no reason why the
testimony it adduced at Debtor’s deposition could not be adduced at trial
through live testimony. The bankruptcy court did not abuse its discretion
by excluding Debtor’s deposition testimony and NextGear has not shown
any prejudice by the exclusion.
C. NextGear’s Other Arguments
NextGear argues that if Debtor’s brother Marouf Kazaz was the party
who engaged in the alleged fraudulent conduct, Debtor should be liable for
25
the debt under principles of estoppel and ratification. Essentially, it claims
that Debtor should be estopped from denying his brother’s alleged fraud
because he did nothing to prevent the theft, did not assist NextGear in
recovering the collateral, and allegedly destroyed Kar Max’s business
records. Alternatively, NextGear argues that Debtor ratified the actions of
his brother because Debtor had control of Kar Max’s bank account yet
remained silent about any unauthorized use of the account.
These arguments are meritless. NextGear made no allegation of
estoppel or ratification in its complaint and presented no evidence at trial
to support such liability. Moreover, estoppel is akin to implied waiver and
can be employed only for defensive purposes. See Peasley v. Verizon Wireless
(VAW) LLC, 364 F.Supp.2d 1198, 1200-01 (S.D. Cal. 2005) (citing Matsuo
Yoshida v. Liberty Mut. Ins. Co., 240 F.2d 824, 829-30 (9th Cir. 1957)).
Estoppel and waiver can preclude the assertion of legal rights but cannot
be used to impose legal duties. Id. at 1201 (quoting Groves v. Prickett, 420
F.2d 1119, 1125-26 (9th Cir. 1970).
If Debtor’s brother made payments or sold vehicles on behalf of Kar
Max, ratification would merely make Kar Max liable for the actions of its
unauthorized agent. See Rakestraw v. Rodrigues, 8 Cal. 3d 67, 72-74 (1973)
(discussing the effect of ratification under California law). NextGear does
not articulate a legal basis for a nondischargeable judgment against Debtor
based on these theories.
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CONCLUSION
Based on the foregoing, we AFFIRM the bankruptcy court’s order
denying NextGear’s claims for nondischargeability.
27